U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2005.
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES AND
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM_____ TO_____ .
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, NJ 07508
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code: (973) 427-5333
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [_]
The number of shares of Common Stock, par value $.01 per share, outstanding as
of the latest practicable date: As of August 15, 2005, there were 142,954,467
shares outstanding.
TECH LABORATORIES, INC.
FORM 10-QSB
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
Balance Sheets......................................................... 1 - 2
Statements of Operations .............................................. 3
Statements of Cash Flows............................................... 4
Notes to Financial Statements.......................................... 5 - 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................................. 7
Item 3. Controls and Procedures................................................ 8
PART II OTHER INFORMATION
Item 1. Legal Proceedings...................................................... 9
Item 2. Changes in Securities.................................................. 9
Item 3. Defaults by the Company Upon its Senior Securities..................... 9
Item 4. Submission of Matters to a Vote of Security Holders.................... 9
Item 5. Other Information...................................................... 9
Item 6. Exhibits and Reports on Form 8-K....................................... 9
SIGNATURES............................................................................... 10
TECH LABORATORIES, INC.
BALANCE SHEETS
(UNAUDITED)
ASSETS
June 30, December 31,
2005 2004
----------------- -----------------
Current Assets:
Cash $ 4,063 $ 106,283
Accounts receivable, net of allowance of $1,000 11,541 10,679
Inventories 1,072,342 907,030
Prepaid expense 46,875 59,376
----------------- -----------------
Total current assets 1,134,821 1,083,368
----------------- -----------------
Certificate of deposit (restricted) 35,135 36,499
----------------- -----------------
Property, plant and equipment, at cost
Leasehold improvements 2,247 2,247
Machinery, equipment, and instruments 608,917 608,917
Furniture and fixtures 109,584 109,584
----------------- -----------------
720,748 720,748
Less accumulated depreciation and amortization 452,344 442,570
----------------- -----------------
Net property, plant and equipment 268,404 278,178
----------------- -----------------
Other 14,420 14,420
----------------- -----------------
Total Assets $ 1,452,780 $ 1,412,465
================= =================
See notes to financial statements.
1
TECH LABORATORIES, INC.
BALANCE SHEETS
(UNAUDITED)
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
June 30, December 31,
2005 2004
----------------- -----------------
Current liabilities:
Convertible notes $ 958,264 $ 828,885
Note payable 34,444 34,444
Accounts payable and accrued expenses 467,603 352,457
----------------- -----------------
Total current liabilities 1,460,311 1,215,786
----------------- -----------------
Stockholders' equity:
Common stock, $.01 par value;
195,000,000 shares authorized:
142,954,467 shares issued in 2005;
88,161,612 shares issued in 2004 1,429,545 881,616
Less: 15,191 shares reacquired and held in treasury (113) (113)
----------------- -----------------
1,429,432 881,503
Capital contributed in excess of par value 4,919,634 5,417,562
Accumulated deficit (6,356,597) (6,102,386)
----------------- -----------------
Total stockholders' equity (7,531) 196,679
----------------- -----------------
Total liabilities and stockholders' equity $ 1,452,780 $ 1,412,465
================= =================
See notes to financial statements.
2
TECH LABORATORIES, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
--------------------------------------- -------------------------------------
2005 2004 2005 2004
------------------- ----------------- ------------------ -----------------
Sales $ 17,166 $ 13,565 $ 91,280 $ 65,266
------------------- ----------------- ------------------ -----------------
Costs and expenses:
Cost of sales 4,261 9,053 30,557 38,864
Selling, general, and administrative
expense 175,130 157,141 250,067 310,073
------------------- ----------------- ------------------ -----------------
179,391 166,194 280,624 348,937
------------------- ----------------- ------------------ -----------------
Income (loss) from Operations (162,225) (152,629) (189,344) (283,671)
------------------- ----------------- ------------------ -----------------
Other expenses 53,707 358,906 64,867 388,641
------------------- ----------------- ------------------ -----------------
Income (loss) before income taxes (215,932) (511,535) (254,211) (672,312)
Provision for income taxes - - - -
------------------- ----------------- ------------------ -----------------
Net income (loss) (215,932) (511,535) (254,211) (672,312)
(Accumulated deficit), Beg Qtr. (6,140,665) (4,903,853) (6,102,386) (4,743,076)
------------------- ----------------- ------------------ -----------------
(Accumulated deficit), End Qtr. (6,356,597) (5,415,388) (6,356,597) (5,415,388)
------------------- ----------------- ------------------ -----------------
Net loss per share, basic and diluted $ - $ (0.01) $ - $ (0.02)
=================== ================= ================== =================
Weighted average number of common
shares and equivalents, basic and diluted 128,668,753 47,233,919 109,596,451 37,173,640
=================== ================= ================== =================
See notes to financial statements.
3
TECH LABORATORIES, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the
Six Months Ended
June 30,
-----------------------------------
2005 2004
---------------- ----------------
Cash flow from (for) operating activities:
Net (loss) from operations $(254,211) $ (672,312)
Add (deduct) items not affecting cash:
Depreciation/amortization 9,774 9,774
Capitalized interest 19,380 -
Expenses paid with the issuance of stock - 620,278
Changes in operating assets and liabilities
Accounts receivable (862) 112
Inventories (165,312) (179,095)
Accounts payable and accrued expenses 115,146 (76,277)
Other assets 12,501 89,024
---------------- ----------------
Net cash flow from (for) operating activities (263,584) (208,496)
---------------- ----------------
Cash flows from (for) investing activities
Decrease in restricted certificate of deposit 1,364 -
Sale of machinery and equipment - 1,610
---------------- ----------------
Net cash flow from (for) investing activities 1,364 1,610
---------------- ----------------
Cash flows from (for) financing activities:
Proceeds of convertible note 160,000 175,000
Payment of note payable to bank - (700)
---------------- ----------------
Net cash flow from (for) financing activities 160,000 174,300
---------------- ----------------
Net (decrease) in cash (102,220) (32,586)
Cash balance beginning of year 106,283 165,308
---------------- ----------------
Cash balance - end of second quarter $ 4,063 $ 132,722
================ ================
Supplemental schedule of noncash investing and
financing activities:
Conversion of debt to common stock $ 50,000 $1,437,995
See notes to financial statements.
4
TECH LABORATORIES, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE QUARTER ENDED JUNE 30, 2005
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited financial statements of Tech Laboratories, Inc.
("the Company") have been prepared in accordance with generally accepted
accounting principles for interim financial information and with Item
310(b) of Regulation SB. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management,
all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for
the three months ended, March 31, 2005 are not necessarily indicative of
the results that may be expected for the year ended December 31, 2004.
These unaudited financial statements should be read in conjunction with the
audited financial statements and footnotes thereto included in the
Company's Form 10-KSB for the year ended, December 31, 2004, as filed with
the Securities and Exchange Commission.
Certain prior year balances have been reclassified to conform to the
current year presentation.
2. LONG-TERM CONVERTIBLE DEBT
On October 13, 2000, Tech Labs completed a $1.5 million financing of 6.5%
convertible promissory notes due October 15, 2002. Interest is payable
quarterly in cash or in shares of common stock at the option of the
noteholders. Tech Labs disclosed all terms of this financing on Form 8-K
filed on October 18, 2000. As of June 30, 2005, $986,913 of principal and
interest on the 6.5% 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 this long-term debt. An Event of Default, as defined
in the 6.5% convertible notes, occurred on January 25, 2002, when Tech Labs
was unable to make the first payment of $750,000 to the holders of the
notes.
On April 19, 2002, Tech Labs successfully negotiated a cure of the default
referenced above. This cure required that Tech Labs' registration
statement, filed with the Securities and Exchange Commission on April 5,
2002, covering the shares underlying the 6.5% convertible notes, to have
been declared effective on or before June 29, 2002. If the registration
statement was declared effective by such date and Tech Labs made certain
payments described in the Tech Labs' report on Form 8-K filed April 25,
2002, the maturity date of the 6.5% convertible notes would have been
extended from October 13, 2002 to December 30, 2002.
On August 2, 2002, the Company announced that an Event of Default occurred
on the 6.5% convertible notes. The Company was unable to have its
registration statement declared effective by June 29, 2002, and was unable
to reach a new agreement with the holders of the 6.5% convertible notes
prior to the expiration of the waiver the Company had been granted by the
holders of the notes, which had been granted in order to permit the parties
time to negotiate a new agreement. The Company continued to seek a cure for
the default with the holders of the 6.5% convertible notes, and in October
2003, a cure was successfully negotiated and is described in the Company's
8-K filed in October, 2003.
5
TECH LABORATORIES, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE QUARTER ENDED JUNE 30, 2005
(UNAUDITED)
2. LONG-TERM CONVERTIBLE DEBT (Cont'd)
On May 18, 2004, the Company issued an additional $250,000 convertible
debenture at a rate of 5.0% due on May 18, 2007. On April 22, 2005, the
convertible debt of $250,000 was renegotiated with an additional $160,000
plus accrued interest for a total amount of $420,514. The interest rate is
5% per annum and is due upon demand. In connection with this transaction,
the Company issued 50,000,000 shares of common stock to be held in escrow,
as collateral, for the transaction. On April 22, 2005, the Company issued
warrants to Montgomery Equity Partners, Ltd. to purchase 100,000 shares of
common stock at the par value of $.0001 per share.
3. SUBSEQUENT EVENT
On July 11, 2005, (the "Effective Date"), the Company finalized a
Settlement Agreement and Release (the "Agreement") with Bernard Ciongoli
and Earl Bjorndal (the "Settlement Parties"). In connection with the
Agreement, Mr. Ciongoli resigned from his positions as President, Chief
Executive Officer, Chief Financial Officer and member of the Board of
Directors of the Company, and agreed to the cancellation of 17,931,806 of
his shares of our common stock. Earl Bjorndal resigned from his positions
as Vice President and member of the Board of Directors of the Company, and
agreed to the cancellation of 8,044,445 of his shares of our common stock.
The parties agreed to the transfer of all of the Company's assets,
including all technologies and product lines, to the Settlement Parties in
exchange for the cancellation of all outstanding obligations owed to the
Settlement Parties, including past due salaries and loans due to them, the
cancellation of the above mentioned shares, and the assumption of certain
liabilities of the Company and the lease by the Settlement Parties. The
Agreement grants the Company a seven-year license in the transferred
technology, pursuant to which the Company shall have the right to sell the
products developed for the DynaTrax technology as a dealer to its customers
at a dealer price of 25% off list price. The Company will also receive a
royalty of 5% of the profits per year for the sale of DynaTrax products.
6
TECH LABORATORIES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS
OF OPERATIONS
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. DynaTraX(TM) is a
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.
On April 22, 2005, the Company completed a financing agreement for $160,000 with
Montgomery Equity Partners, Ltd. (the "Investor"). Under the agreement the
Company issued a $420,514 secured convertible debenture with a 5% interest rate
to the Investor, pursuant to the $160,000 funding and the purchase of a $260,514
note from Cornell Capital. The debenture is convertible into common shares of
the Company at a conversion price of $0.002 per share. The Company
simultaneously issued to the Investor a Warrant to purchase 100,000 shares of
the Company's common stock at an exercise price of $0.001. The Company is
committed to filing an SB-2 Registration Statement with the SEC within 30 days
of funding. There are penalty provisions for the Company should the filing not
become effective within 90 days of filing.
RESULTS OF OPERATIONS
Quarter ending June 30, 2005, compared to Quarter ending June 30, 2004
----------------------------------------------------------------------
Sales were $17,166 for the second quarter of 2005 as compared to $13,565
for the similar period of 2004. The increase in sales was due to increased
orders for traditional products.
Cost of sales of $4,261 for the second quarter of 2005 decreased by $4,792
compared to the same period of 2004, primarily due to the sales of lower
cost products.
Selling, general, and administrative expenses increased by $17,989 compared
to the same period of 2004. The increase was primarily due to an increase
in professional fees.
Loss from operations of $162,225 increased $9,596 compared to a loss of
$152,629 for the prior period as a direct result of increased operating
expenses.
Six Months Ending June 30, 2005 Compared to Six Months Ending June 30, 2004
---------------------------------------------------------------------------
Sales were $91,280 for the six months ended, June 30, 2005, as compared to
$65,266 for the similar period of 2004. This was due to increased orders
for traditional products.
Cost of sales of $30,557 for the six months ended June 30, 2005 decreased
by $8,307 compared to the same period of 2004, primarily due to the sales
of lower cost products.
Selling, general, and administrative expenses decreased by $60,006 compared
to the same period of 2004 due to the curtailment of marketing activities.
Loss from operations of $189,344 decreased $94,327 compared to a loss of
$283,671 for the prior period as a direct result of the decreased selling,
general, and administrative expenses.
SIGNIFICANT CHANGES
None
LIQUIDITY AND CAPITAL RESOURCES
The Company's operating activities utilized cash of $102,220 during the six
months ended, June 30, 2005, as compared to $32,586 during the three months
ended, June 30, 2004.
As a result of the continuing operating losses and negative cash flow
experienced during 2003, 2004 and the first half of 2005, Tech Labs has a
tenuous liquidity position. If sales do not improve or alternative
financing is not obtained, substantial doubt exists about Tech Labs'
ability to continue as a going concern.
SUBSEQUENT EVENTS
On July 11, 2005 (the "Effective Date"), the Company finalized a Settlement
Agreement and Release (the "Agreement") with Bernard Ciongoli and Earl Bjorndal
(the "Settlement Parties"). In connection with the Agreement, Mr. Ciongoli
resigned from his positions as President, Chief Executive Officer, Chief
Financial Officer, and member of the Board of Directors of the Company, and
agreed to the cancellation of 17,931,806 of his shares of our common stock. Earl
Bjorndal resigned from his positions as Vice President and member of the Board
of Directors of the Company, and agreed to the cancellation of 8,044,445 of his
shares of our common stock. The parties agreed to the transfer of all of the
Company's assets, including all technologies and product lines, to the
Settlement Parties in exchange for the cancellation of all outstanding
obligations owed to the Settlement Parties, including past due salaries and
loans due to them, the cancellation of the above mentioned shares, and the
assumption of certain liabilities of the Company and the lease by the Settlement
Parties. As part of the Agreement, we agreed to transfer of all of the issued
and outstanding shares of common stock of Tech Logistics, Inc., our subsidiary
to Bernard Ciongoli.
Pursuant to the Agreement, the Settlement Parties granted the Company a seven
year license in the transferred technology, pursuant to which the Company shall
have the right to sell the products developed from the DynaTraX technology as a
dealer to its customers at a dealer price of 25% off list price. The Company
will also receive a royalty of 5% of the profits per year for the sale of
DynaTrax products. In exchange for all of the Company's assets, the Settlement
Parties agreed to the cancellation of all outstanding obligations owed to the
Settlement Parties, including past due salaries and loans due to them; the
cancellation of the above mentioned shares; and the assumption of certain
liabilities of the Company and the lease by the Settlement Parties.
On July 11, 2005, Bernard Ciongoli resigned from his positions as President,
Chief Executive Officer, Chief Financial Officer, and member of the Board of
Directors of the Company. Also on July 11, 2005, Earl Bjorndal resigned from his
positions as Vice President and member of the Board of Directors of the Company.
Such resignation was in accordance with the terms of an Agreement and is not due
to any disagreement with the Company on any matter relating to the Company's
operations, policies or practice. On July 11, 2005, Donna Silverman was
appointed as the Company's President, Chief Executive Officer, and Chief
Financial Officer and to the Board of Directors of the Company.
We are now seeking a merger candidate for the purpose of a merger. Although we
have begun preliminary negotiations with several candidates, we have not entered
into any letters of intent to date.
7
TECH LABORATORIES, INC.
Item 3. Controls and Procedures
(a) Evaluation of disclosure controls and procedures.
Our Chief Executive Officer and Chief Financial Officer (collectively
the "Certifying Officers") maintain a system of disclosure controls
and procedures that is designed to provide reasonable assurance that
information, which is required to be disclosed, is accumulated and
communicated to management timely.
Under the supervision and with the participation of management, the
Certifying Officers evaluated the effectiveness of the design and
operation of our disclosure controls and procedures (as defined in
Rule [13a-14(c)/15d-14(c)] under the Exchange Act) within 90 days
prior to the filing date of this report. Based upon that evaluation,
the Certifying Officers concluded that our disclosure controls and
procedures are effective in timely alerting them to material
information relative to our company required to be disclosed in our
periodic filings with the SEC.
(b) Changes in internal controls.
Our Certifying Officers have indicated that there were no significant
changes in our internal controls or other factors that could
significantly affect such controls subsequent to the date of their
evaluation, and there were no such control actions with regard to
significant deficiencies and material weaknesses.
8
TECH LABORATORIES, INC.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
On July 31, 2002, Tawfik Khalil and Amneh Khalil filed a lawsuit in the Superior
Court of Passaic County, New Jersey, against Glen Venza, a Company part-time
employee, Tech Labs, and certain other parties for property damages and personal
injuries. The case arose from a car accident involving Mr. Venza and the
plaintiffs, which occurred while Mr. Venza was performing certain duties for
Tech Labs in a vehicle Mr. Venza borrowed from a third party. Tech Labs has only
been named as a party to the personal injuries, and not for property damages,
and believes it is covered for the accident by its insurance policy.
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 as set forth in our answer.
Item 2. Changes in Securities.
None.
Item 3. Defaults Upon Senior Securities.
Not Applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
None.
Item 6. Exhibits and Reports of Form 8-K
None
9
TECH LABORATORIES, INC.
TECH LABORATORIES, INC.
SIGNATURES
Pursuant to the requirements 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.
Date: August 15, 2005
TECH LABORATORIES, INC.
By: /s/ Donna Silverman
-------------------
Donna Silverman
Chief Executive Officer, Chief Financial
Officer and President
10