SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-KSB/A {X} Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Fiscal Year Ended December 31, 2003 {_} Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Commission File Number 000-27592 TECH LABORATORIES, INC. (Exact name of Small Business issuer in its charter) New Jersey 22-1436279 ------------------------------ ------------------------------------ (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 955 Belmont Avenue, North Haledon, New Jersey 07508 --------------------------------------------- ----- (Address of principal executive offices) (Zip code) Issuer's telephone number, including area code: (973) 427-5333 Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.01 par value Check whether the issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes {X} No {_} Check if there is no disclosure of delinquent filers pursuant to Item 405 of Regulation S-B contained in this form and no disclosure will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of the Form 10-KSB or any amendment to this Form 10-KSB. {_} State issuer's revenues for its most recent fiscal year: $ 236,107 State the aggregate market value of the voting stock held by non-affiliates computed by reference to the price at which the stock was sold, or the average bid and ask prices of such stock, as of a specified date within the last 60 days. On April 12, 2004, the aggregate market value of voting stock held by non-affiliates, based on the closing price as quoted on the OTC Bulletin Board under the symbol "TCHL", was $3,527,335.95. The number of shares of common stock outstanding as of April 12, 2004: 33,682,719 Transitional Small Business Disclosure Format (check one): Yes {_} No {X} TECH LABORATORIES, INC. FORM 10-KSB/A Table of Contents Page Part I ..................................................................... 1 Item 1. Description of Business ..................................... 1 Item 2. Description of Property...................................... 6 Item 3. Legal Proceedings............................................ 7 Part II..................................................................... 7 Item 4. Submission of Matters to a Vote of Securityholders........... 7 Item 5. Market for Common Equity and Related Shareholder Matters..... 7 Item 6. Management's Discussion and Analysis or Plan of Operation.... 9 Item 7. Financial Statements......................................... 11 Item 8. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure....................... III-1 Part III.............................................. .................. III-1 Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the Exchange Act ............................................. III-1 Item 10. Executive Compensation.................................... III-1 Item 11. Security Ownership of Certain Beneficial Owners and Management ............................................... III-1 Item 12. Certain Relationships and Related Transactions............ III-1 Item 13. Exhibits and Reports on Form 8-K.......................... III-1 Item 14. Evaluation of Disclosure Controls and Procedures ......... III-4 TECH LABORATORIES, INC. Form 10-KSB/A Forward-looking Statements Statements made in this Form 10-KSB/A 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/A. 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 BUSINESS General Tech Laboratories, Inc. ("Tech Labs" or the "Company") manufactures and sells various electrical and electronic components. During 2003, we marketed and continued to develop DynaTraX(TM) high-speed digital switch matrix system, an electronic switching unit for network management and security. This equipment manages video and data transmissions on a network. Historical Business We also manufacture and sell standard and customized transformers, and rotary switches, the latter of which products permits an electrical signal to be diverted from point A to point B. Approximately 10% of our products are manufactured for military applications. We sell our switch and transformer products in the electronics and electrical industries, primarily as a contract manufacturer for other companies or for inclusion in OEM products. We market our products in these industries in the United States. This is a mature market. Competition is on the basis of price and service. Pricing of our products is based upon obtaining a margin above cost of production. The margin we will accept varies with quantity and the channels of distribution. Industry DynaTraX(TM) Networking Management and Maintenance Technology Tech Labs manufactures, markets, and sells a product, which it believes will create a new paradigm on automating and securing high-tech networks at the physical layer. Our product, DynaTraX(TM), a patented, high-speed digital matrix cross-connect switch with a dynamic new technology, can significantly reduce network downtime and achieve substantial cost savings in data and telecommunications networking environments. DynaTraX(TM) has the ability to create a critical and meaningful solution to stop hackers from intruding into networks and, thereby, to thwart cyber- terrorists. DynaTraX(TM) electronically disconnects a hacker, detected by Intrusion Detection Software, and reconnects the hacker to a simulated network within 60 - 90 nanoseconds and allows the user to hold and trace the hacker. On September 19, 2002, the United States Patent and Trademark Office published our patent application for the use of our DynaTraX(TM) technology to provide Positive Network Access Security control to prevent hacker attacks from causing extensive harm to network services and systems. Employing this physical layer security solution allows the user/system to automatically disconnect circuits under attack from an unauthorized user by quickly rerouting the hacker to a honey pot (track, trace & locate) simulator network system to capture the intruder. The ability to automate creates a self-healing environment for next generation robust high-tech communication network. The DynaTraX(TM) switch provides network administrators with the unique capability to remotely manage and maintain the "physical level" (the actual physical connectivity) of their networks from virtually any computer with a few clicks of a mouse on a user-friendly graphical user interface (GUI). This technology allows administrators to quickly and efficiently perform physical changes electronically to repair networking problems (such as loss of connectivity resulting in the need to move a cable to a different hub), or to perform network reconfigurations (moves, adds or changes) to distribution equipment such as computers and telecommunications devices. No longer does a technician have to be dispatched to a telecommunication closet to resolve most networking problems, or to provide changes to users' existing services on the network. 1 Examples of where the DynaTraX(TM) has been found to be particularly cost effective include: (1) active large remote corporate locations with minimal or no IT personnel where expensive outside technicians must often be dispatched to resolve problems or other requests; and (2) locations where very frequent movement of personnel occurs, such as in the military or at a convention center where network reconfigurations are frequently required. Reconfigurations are expensive with costs ranging from $50 to $200 on-site, and two to ten times that for off-site reconfigurations, versus virtually no cost if a DynaTraX(TM) is utilized. These figures do not include potential losses in productivity and revenues associated with extended downtimes. DynaTraX(TM) is also equipped with two key complementary products - a Test Card and a Data Base Management System. The Test Card enables administrators to effectively locate and resolve cable fault problems on the distribution portion of the network. Customers state that the Test Card is far superior to alternative methods for diagnosing problems such as traditional cable test equipment, which typically involves using technicians to search throughout the entire network, moving equipment and possibly interfering with the performance of the network. DynaTraX's(TM) Database Management System documents every event that occurs within the network, assuring that all reconfigurations and other adaptations to the network are reflected on the DynaTraX's(TM) GUI. Given the maze of wires, plugs, and jacks that are typically found in a telecommunications closet, administrators are notorious for not properly noting changes made to the network, resulting in cabling connections errors and significant loss of productivity from unforeseen downtime. With most network problems originating on the physical level, the Test Card and Data Base Management System make the DynaTraX(TM) a complete tool for managing and ensuring the integrity of data networks. Since launching its marketing campaign on a limited basis in early 2001, the DynaTraX(TM) has been reviewed favorably, particularly from the U.S. military which frequently moves personnel and performs routine networking changes for security purposes. DynaTraX(TM) has been tested and purchased by the U.S. Air Force and the U.S. Navy for inclusion in government projects. Prominent commercial users of the DynaTraX(TM) include Global Crossing Inc, Nortel Networks, Allied Irish Bank, Sanko Telecom of Japan, and Blue Cross of Florida. Tech Labs' long-term growth strategy includes development of DynaTraX's(TM) technological capabilities, and, concurrently, product integration and establishment of strategic partnerships with world-class software and hardware vendors (especially enterprise management software providers in the short term). With the use of our newly developed API (Application Programmable Interface), vendors can write scripts to DynaTraX(TM) allowing automatic reconfiguration. Tech Labs has established relationships with key businesses in this field, including Computer Associates Inc. and EMC2 Inc., particularly in relation to the DynaTraX(TM) Enterprise Management Solution "DEMS". DEMS elevates the current DynaTraX(TM) electronic patching system to an interactive intelligent enterprise management "Virtual Technician" system. The Virtual Technician dramatically reduces the need for on-site technicians to perform physical layer tasks, which can now be performed electronically from a remote location (i.e., remotely testing network circuits, reconnecting equipment and circuits, rapidly recovering from a critical network failure, capturing and trapping hackers). Our goal is to further enhance the DEMS technology beyond the Virtual Technician application to a system that will perform "self healing" (self-repair) network functions. Current and future products derived from the DynaTraX(TM) will position the Company, we believe, as a provider of state-of-the-art network enterprise management solution systems. We believe we will expand from this base to become a recognized provider of enhanced networks and integrated (voice/data/video) Internet (IP) compatible, private customer-premise all-digital Automatic Call Directors, and PBX systems and networks. There are at least four companies that have products that compete with the DynaTraX(TM) product. However, we believe none of these competitors offer a product with all of the features or capabilities of DynaTraX(TM). We continue to believe that competition in the sale of our DynaTraX(TM) products will be on the basis of price, features, service and technical support. Pricing of our products is based upon obtaining a margin above cost of production. The margin we will accept varies with quantity and the channels of distribution. Competition for network management products comes from several different sources. One source of 2 competition is the designated employees of large organizations, which have been hired to manage and maintain their internal networks. However, we believe the growing need to control and reduce costs by using technology such as DynaTraX(TM) to automate tasks otherwise performed by expensive technical labor, will provide Tech Labs with market opportunities. Another group of competitors, which produces products to manage and maintain the network physical layer, consists of NHC, RIT and Cyteck. Of these three companies, NHC is the only one that offers a product comparable to DynaTrax(TM), but which is not as fast as DynaTraX(TM). In addition, V-LAN switching, which is a technology utilized by a number of companies, can be regarded as a competing technology. However, V-LAN switching is limited to a specific type of network, i.e., Ethernet, and not able to support many tasks which our DynaTraX(TM) technology is designed to complete. These tasks are: o rearranging network physical layer connections, e.g. moves, adds, and changes of equipment such as computer terminals; fax machines; and printers; o testing circuits; o managing and maintaining end-to-end network configuration, which is the connection between different points on a network from the telecommunications closet to the user outlet; and o maintaining asset inventory records We regard V-LAN as complementary to DynaTraX(TM) circuit switching since they can work together to provide a more comprehensive network management/maintenance solution. The four competitors all have greater financial and other resources and currently account for substantially all of the existing market. Infrared Intrusion Detection System or "IDS" As of January 2003, Tech Labs no longer has the exclusive right to manufacture and sell in the U.S., Canada, and South America the IDS products. Tech Labs, however, continues to sell its existing inventory of IDS products to the security and anti-terrorist industry. Marketing Strategies Marketing Subject to available resources, we will employ a marketing program consisting of: Typical Resale Channel Partners These are technically qualified networking systems integration, implementation and management type companies, in the business of providing network project-management consulting services and/or on-site implementation, installation and maintenance support services. The companies Tech Labs deals with will be working in the markets (commercial or government) the Company has targeted and already established a customer base. Building Sales and Sales Leads In addition to the already existing networks of existing and potential clients known by the Company's managers and resale channel partners, Tech Labs will also embark on a promotion program consisting of advertising in trade journals, trade show participation and mailing campaigns. The Company is establishing itself as a certified approved partner of large Enterprise Management systems providers, as well as large networking equipment companies where there is a fit for integrating the Company's technology with these companies' technologies and products. 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. 3 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. 4 Source of Supply Current inventory component purchases for all our products are made from OEMs, brokers, and other vendors. We typically have multiple sources of supply for each part, component, or service, and during the years ended December 31, 2003 and 2002, cannot characterize any particular company as being our "largest" supplier. We have no long-term agreements with any of our suppliers. Order Backlog The backlog of written firm orders for our products and services as of December 31, 2003, was $37,296. Patents In connection with our acquisition of the DynaTraX(TM) assets, we acquired certain patents and pending patent applications. Four patents have been granted in Great Britain, which are listed below: o Patent title: User Interface for Local Area Network. This patent covers technology, which allows communication between the user and the equipment controlling the network. This patent expires in 2013. o Patent title: Token Ring. This patent covers technology, which transmits information between devices on a network. This patent expires in 2013. o Patent title: Half Duplex Circuit for Local Area Network. This patent covers technology, which allows one-way communication either to or from the Local Area Network. This patent expires in 2013. o Patent title: Matrix Switch Arrangement. This patent covers 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 eight part-time workers, one of whom performs clerical services and the others as production workers. Item 2. Description of Property Our corporate headquarters and manufacturing facility is located in North Haledon, New Jersey. Our primary manufacturing and office facility is a one-story building that is adequate for our current needs. We lease this facility of 8,000 square feet, from a non-affiliated person, under a lease that ends in April, 2007. The annual base rent is $56,400 until April 2004, $57,600 from May 2004 until April 2006, and $58,800 from May 2006 until April 2007, and includes property taxes and other adjustments. We believe our premises are adequate for our current needs and that if and when additional space is required, it would be available on acceptable terms. We are an integrated manufacturer and, accordingly, except for plastic moldings and extrusions, produce nearly all major subassemblies and components of our devices from raw materials. We purchase certain components from outside sources 5 and maintain an in-house, light machine shop allowing fabrication of a variety of metal parts and castings, complete tool room for making and repairing dies, a stamping shop and an assembly shop with light assembly presses. Our test lab checks and tests our products at various stages of assembly and each finished product undergoes a complete test prior to shipment. We anticipate that we will either manufacture any new products ourselves or subcontract their manufacture, in whole or in part, to others. We believe that personnel, equipment, and/or subcontractors will be readily available as and when needed. Item 3. Legal Proceedings Litigation On July 31, 2002, Tawfik Khalil and Amneh Khalil filed a lawsuit in the Superior Court of Passaic County, New Jersey, against Glen Venza, a Company part-time employee, Tech Labs, and certain other parties for property damages and personal injuries. The case arose from a car accident involving Mr. Venza and the plaintiffs, which occurred while Mr. Venza was performing certain duties for Tech Labs in a vehicle Mr. Venza borrowed from a third party. Tech Labs has only been named as a party to the personal injuries, and not for property damages, and believes it is covered for the accident by its insurance policy. On July 30, 2003, a former director, Salvatore Grisafi, and a former employee, Edward Branca, filed a joint lawsuit in Superior Court of New Jersey, Passaic County, against Tech Labs for consulting fees and expenses, respectively. In the same lawsuit, W.T. Sports filed a claim for a commission on sales due under a licensing agreement with the company. Tech Labs filed a response and counter-claim. The claims by the former director and former employee were about $10,000. The claims have been settled and satisfied. With regard to W.T. Sports, the agreement had a provision for arbitration in case of any dispute. We believed we had a counterclaim, which was far in excess of the amount the plaintiff claimed Tech Labs owed for the licensing fee. On November 11, 2004 an arbitration hearing took place. On December 21, 2004 the arbitrator awarded $31,000 to W.T. Sports for commission owed by Tech labs. Under the licensing agreement Tech labs can compete with the plaintiff after December 17, 2004. On June 30, 2004, the law firm of Stursberg & Veith, former counsel to Tech Labs filed a lawsuit in the United States District Court for the Southern District of New York claiming that the plaintiff delivered certain good and valuable services to Tech labs and is owed $161,179.26 plus interest, costs, and disbursements for each cause of action, and other and further relief as the court may deem necessary. The complaint alleges four causes of action including an unpaid account stated, breach of contract, quantum merit, and unjust enrichment. We disagree with the amount of the unpaid balance owed to the plaintiff. We are in the process of negotiating a settlement with the plaintiff. No agreement has been made as of January 6, 2005. 6 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 First Quarter .55 .06 As of January 7, 2005, there were 406 holders of record of our common stock. The transfer agent for our common stock is: Olde Monmouth Stock Transfer Co., Inc. 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 2002 and 2003, and their approximate percentage contribution to revenues for the period indicated: PRODUCT TYPE 2002 % of Revenue 2003 % of Revenue ------------------ ---- ------------ ----- ------------ Switches $ 112,786 27.6% 68,036 28.8% IDS Sensors 256,711 62.9% 109,719 46.5% Transformers/Coils 35,357 8.6% 40,527 17.2% Contract Manufacturing 3,404 0.9% 17,825 7.5% ------ ---- Totals $ 408,258 100.0% $ 236,107 100.0% ========= ====== ========= ====== The following table sets forth the percentages of gross profit for each of our major business activities in 2002 and 2003. 7 Year Ended December 31, PRODUCT TYPE 2002 2003 Net Change ------------ ---- ---- ---------- Switches 75.4% 68.5% (6.9%) IDS Sensors 57.4% 57.0% (0.4%) Transformers/Coils 54.4% 47.8% (6.6%) Contract Manufacturing * 49.6% 49.6% Unallocated company expenses, including physical inventory adjustments factory overhead and Inventory Write-Down (165.2%) (142.1%) 23.1% Total company gross profit % * (83.9%) (47.1%) * - Negative Percentage We have continued to shift out of the subcontracting and transformer business, which provides low gross profit margins, for higher gross profit margin products. While rotary switches produce high gross profits, demand for rotary switches is low. We have gradually shifted our product offering from less profitable to more profitable proprietary products. Results of Operations Sales were $236,107 for 2003 as compared to $408,258 for the year ended 2002. The decline in sales of (42.2%) was a direct result of the economic downturn. Cost of sales of $434,264 for the year ended 2003 compared to $828,194 for the year ended 2002 due to the volume decrease. The Company's gross profit percentage was negative in 2003 and 2002 due to inventory write-offs of slow moving and obsolete inventory totaling $250,000 in 2003 and $500,000 in 2002. Selling, general, and administrative expenses decreased by $2,130 in 2003 as compared to the prior period. This decrease was due to the Company's continuing efforts to reduce these expenses during this economic downturn. Other Income decreased $154,464 due to the increased interest expense. Losses from operations of $899,493 in 2003 were a direct result of volume declines as well as the inventory write-off and consulting fees. Liquidity and Capital Resources During 2000 we completed two significant transactions that improved our liquidity. On May 3, 2000 we completed an offering of our common stock to the public pursuant to a registration statement on Form SB-2. We sold to the public an aggregate of 293,379 shares for gross proceeds of $2,273,723. Subsequently, on October 13, 2000 we completed a private placement, pursuant to Rule 506 of Regulation D, of convertible promissory notes for gross proceeds of $1,500,000. During 2003, as a result of the economic downturn, we suffered severe operating losses and negative cash flows, which impaired our liquidity position and caused a default on an underlying conversion and redemption agreement related to the convertible notes issued in October 2000. In 2003, Tech Labs' negative cash flow was primarily caused by operating losses plus the buildup of inventory in anticipation of increased sales of our high margin proprietary products, which did not occur. During 2003, our inventories increased in order to meet demand for our IDS sensor and DynaTraX(TM) products. In order that we are able to meet any anticipated purchase orders from the military, non-military governmental agencies and private industry, we must carry sufficient inventory. During 2004, the company is seeking to negotiate contacts with major computer technology companies. We believe that long-term agreements with these companies will provide future growth in our product DYNATRAX. 8 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. 10 Item 7. Financial Statements Report of Independent Registered Public Accounting Firm .....................F-1 Consolidated Balance Sheet as of December 31, 2003......................F-2, F-3 Consolidated Statements of Operations for the years ended December 31, 2003 and 2002...................................................F-4 Consolidated Statements of Shareholders' Equity for the years ended December 31, 2003 and 2002...................................................F-5 Consolidated Statements of Cash Flows for the years ended December 31, 2003 and 2002 .................................................F-6 Notes to Consolidated Financial Statements............................F-7 - F-12 11 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Shareholders of Tech Laboratories, Inc., We have audited the accompanying consolidated balance sheet of Tech Laboratories, Inc. as of December 31, 2003 and the related consolidated statements of operations, changes in shareholders' equity, and cash flows for each of the two years than ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Tech Laboratories, Inc. as of December 31, 2003 and the results of their operations and cash flows for each of the two years than ended in conformity with accounting principles generally accepted in the United States of America. /s/DEMETRIUS & COMPANY, L.L.C. Wayne, New Jersey January 5, 2005 F-1 TECH LABORATORIES, INC. Consolidated BALANCE SHEET as of DECEMBER 31, 2003 ASSETS 2003 ---------- Current Assets: Cash (Including restricted cash) 165,308 Accounts Receivable, Net of Allowance of $1,000 10,107 Inventories 1,249,777 Prepaid Expense 1,074 ---------- Total Current Assets $1,426,266 ---------- Property, Plant and Equipment at Cost Leasehold Improvements 2,247 Machinery, Equipment and Instruments 607,987 Furniture and Fixtures 110,893 ---------- 721,127 Less: Accumulated Depreciation & Amortization 427,909 ---------- Net, Property, Plant and Equipment 293,218 ---------- Other 12,063 ---------- Total Assets $1,731,547 ========== The accompanying notes are an integral part of these financial statements F-2 TECH LABORATORIES, INC. Consolidated BALANCE SHEET as of DECEMBER 31, 2003 LIABILITIES AND SHAREHOLDERS' INVESTMENT 2003 ----------- Current Liabilities: Defaulted Convertible Notes $ 1,480,785 Note Payable 34,444 Accounts Payable and Accrued Expenses 300,712 Other Liabilities 3,271 ----------- Total Current Liabilities 1,819,212 ----------- Shareholders' Investment: Common Stock, $.01 Par Value; 25,000,000 Shares Authorized 18,045,376 Shares Issued 175,143 Less: 15,191 Shares Reacquired and and Held in Treasury (113) ----------- 175,030 Capital Contributed in Excess of Par Value 4,480,381 Accumulated Deficit (4,743,076) ----------- (87,665) Total Liabilities and Shareholders' Investment $ 1,731,547 ----------- The accompanying notes are an integral part of these financial statements. F-3 TECH LABORATORIES, INC. Consolidated STATEMENTS OF OPERATIONS For the years ended DECEMBER 31, 2002 and 2003 2002 2003 ----------- ----------- Sales $ 408,258 $ 236,107 ----------- ----------- Costs and Expenses: Cost of Sales 828,194 434,264 Selling, General and Administrative Expenses 756,568 701,336 ----------- ----------- 1,584,762 1,135,600 Income (Loss) From Operations $(1,176,504) $ (899,493) ----------- ----------- Other Income (Expenses): Interest Income $ 12,398 $ 113 Interest Expense (77,554) (220,313) ----------- ----------- (65,756) (220,200) Loss Before Income Taxes $(1,241,660) $(1,119,693) Income Taxes Benefit -- 193,770 ----------- ----------- Net Loss $(1,241,660) $ (925,923) Accumulated Deficit Beg. of Year (2,575,492) (3,817,153) ----------- ----------- Accumulated Deficit End of Year $(3,817,153) $(4,743,076) ----------- ----------- Loss per share, basic and diluted $ (0.24) $ (0.12) Basic and diluted weighted average shares outstanding 6,156,679 7,926,675 The accompanying notes are an integral part of these financial statements. F-4 TECH LABORATORIES, INC. Consolidated STATEMENT OF SHAREHOLDERS' EQUITY For the years ended DECEMBER 31, 2002 and 2003 Capital in Common Stock Excess of Accumulated Shares Amount Par Value Deficit Total -------------------------------------------------------------------- Balance January 1, 2002 5,106,607 $ 47,723 $ 4,508,428 $(2,575,493) $ 1,980,658 Stock Issued 415,809 2,012 (63,153) -- (61,141) Net Loss -- -- -- (1,241,660) (1,241,660) ---------- ----------- ----------- ----------- ----------- Balance December 31, 2002 5,522,416 49,735 4,445,275 (3,817,152 677,858 Stock Issued 5,000,000 50,000 -- -- 50,000 (for services) Stock Issued 7,522,960 75,295 35,106 -- 110,401 Net Loss -- -- -- (890,775) (890,775) ---------- ----------- ----------- ----------- ----------- Balance December 31, 2003 18,045,376 $ 175,030 $ 4,480,381 $(4,743,676) $ (87,665) The accompanying notes are an integral part of these financial statements. F-5 TECH LABORATORIES, INC. Consolidated STATEMENTS OF CASH FLOWS For the years ended DECEMBER 31, 2002, AND 2003 2002 2003 ----------- ----------- Cash Flows From (For) Operating Activities: Net Income (Loss) From Operations $(1,241,660) (925,923) Add/(Deduct) Items Not Affecting Cash: Depreciation/Amortization 29,201 (24,808) Doubtful accounts expense -- (48,000) Stock Compensation -- 50,000 Inventory write-down 500,000 250,000 Changes in Operating Assets and Liabilities: Accounts Receivable 106,056 (4,349) Inventories (160,154) 235,856 Accounts Payable and Accrued Expenses 59,691 157,182 Other Assets and Liabilities 69,360 (68,426) ----------- ----------- Net Cash Flows For Operating Activities (637,506) (328,852) ----------- ----------- Cash Flows From (For) Investing Activities: Purchase of Equipment (88,959) (9,529) ----------- ----------- Cash Flows From (For) Financing Activities: Acquisition (Repayment) of Short Term Debt (304,503) 324,945 Issuance of Common Stock 167,308 110,401 ----------- ----------- Net Cash Flows From (For) Financing Activities (137,195) 435,346 ----------- ----------- Net Increase (Decrease) in Cash (863,660) 96,965 Cash Balance, Beginning of Year 932,003 68,343 ----------- ----------- Cash Balance, End of Year $ 68,343 $ 165,308 ----------- ----------- Non-cash Transaction: Issuance of common stock to pay back payroll The accompanying notes are an integral part of these financial statements. F-6 TECH LABORATORIES, INC. NOTES TO Consolidated FINANCIAL STATEMENTS Note 1 - Nature of Operations Tech Laboratories, Inc. ("Tech Labs" or the "Company") manufactures and sells various electrical and electronic components and systems. During 2003, we continued to develop DynaTraX(TM) high-speed digital switch matrix system, an electronic switching unit for network management and security. This equipment manages video and data transmissions on a network. We also manufacture and sell standard and customized transformers, and rotary switches and intrusion detection systems. Note 2 - Summary of Significant Accounting Policies Principles of Consolidation The financial statements include the accounts of the Company and its wholly owned subsidiary, Tech Logistics, Inc., formed in 1997. All of Tech Logistics' accounts and transactions are consolidated on the tech laboratories, Inc. financial statements. Accounts Receivable Trade accounts receivable is recorded net of allowance for expected losses. The allowance is estimated from historical performance and projections of trends. Inventories Inventories are stated at the lower of cost (first-in, first-out) or market. Inventories at December 31, 2003 consisted of the following, net of write-down of $250,000 for obsolete and slow moving items: 2003 ---------- Raw Materials & Finished Components $ 463,824 Work in Process & Finished Goods $ 785,953 ---------- $1,249,777 ---------- Property and Equipment Depreciation Depreciation is provided for by straight-line methods over the estimated useful lives of the assets, which vary from five to seven years. Cost of repairs and maintenance are charged to operations in the period incurred. Earnings per Share Basic EPS is computed by dividing net income or net loss by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution from the exercise or conversion of other securities into common stock, but only if dilutive. Cash and Cash Equivalents The Company considers all short-term deposits with a maturity of three months or less to be cash equivalents. F-7 Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Long-lived Assets The company records impairment losses on long-lived assets used in operations when events and circumstances indicate that the assets might be impaired and the undiscounted cash flows estimated to be generated by those assets are less than the carrying amounts of those assets. Revenue Recognition The Company recognizes product revenue at the time of shipment. Research and Development Research and development expenditures are expensed as incurred. Income Taxes The Company uses the liability method to determine its income tax expense as required under Statement of Financial Accounting Standards No. 109 (SFAS 109). Under SFAS 109, deferred tax assets and liabilities are computed based on differences between financial reporting and tax basis of assets and liabilities, and are measured Fair Value of Financial Instruments The carrying values of cash, accounts receivable, accounts payable, accrued expenses and other current liabilities are representative of their fair value due to the short-term maturity of these instruments. The carrying value of the Company's long-term debt is considered to approximate its fair value, based on current market rates and conditions. Advertising Costs Advertising costs are reported in selling, general and administrative expenses, and include advertising, marketing and promotional programs. These costs are charged to expense in the year in which they are incurred. Advertising costs for the years ended December 31, 2003 and 2003 were nominal. Stock-based Compensation On October 10, 2003 6,000,000 shares of Tech Laboratories, Inc. stock was issued to Messrs. Ciongoli and Bjorndal, President and Vice-President, respectively in consideration for assignment to Triple Crown Consulting of back payroll owed for services rendered to the Company in 2001, 2002 and 2003. Warranties The Company offers warranties on all products, including parts and labor that ranges from one (1) to five (5) years depending on the type of product. The Company passes along any OEM warranty to the end user if applicable. The Company charges operations with warranty expenses as incurred. F-8 Segment Information Sales of switches and IDS sensors made up 75% and 90% of our revenues in 2003 and 2002 respectively. FASB issued Statement of Financial Accounting Standards No. 131, "Disclosure About Segments of an Enterprise and Related Information" (Statement 131"), that establishes standards for the reporting by public business enterprises of financial and descriptive information about reportable operating segments in annual financial statements and interim financial reports issued to shareholders. The Company primarily provides products and services for various test and security control systems. The company considers all of its operations as one segment because expenses support multiple products and services. Management uses one measurement of profitability and does not disaggregate its business for internal reporting. Recent Pronouncements In December 2003, The Financial Accounting Standards Board (FASB) issued a revised Interpretation No. 46, "Consolidation of Variable Interest Entities" (FIN 46R). FIN 46R addresses consolidation by business enterprises of variable interest entities and significantly changes the consolidation application of consolidation policies to variable interest entities and, thus improves comparability between enterprises engaged in similar activities when those activities are conducted through variable interest entities. The Company does not hold any variable interest entities. Note 3 - Lease Obligations Lease expenses consisting principally of office and warehouse rentals, totaled $56,000 for the years ended December 31, 2003 and 2002, respectively. At December 31, 2003 the Company's future minimum lease payments under operating leases with initial or remaining non-cancelable lease terms in excess of one year are presented in the table below: Year ending December 31: Total ------ 2004 $ 57,000 2005 57,000 2006 58,000 2007 19,000 ------ Total $191,000 F-9 Note 4 - Income Taxes The income tax benefit for the year ended December 31, 2003 and 2002 includes the following: 2002 2003 ----------- ----------- Current Federal $ -- $ -- State -- 193,770 ----------- ----------- $ -- $ 193,770 Deferred Federal $ -- $ -- State -- -- ----------- ----------- $ -- $ 193,770 The components of the deferred tax accounts as of December 31, 2003 and 2002 are as follows: 2002 2003 ----------- ----------- Deferred tax assets Net operating loss carryforward $ 1,527,000 $ 1,855,000 Other -- -- ----------- ----------- Subtotal $ 1,527,000 $ 1,855,000 Valuation Allowance ($1,527,000) ($1,855,000) ----------- ----------- Net deferred tax assets $ -- $ -- =========== =========== The net change in the valuation allowance was an increase of $328,000 in 2003. The reconciliation of estimated income taxes attributed to operations at the statutory tax rates to the reported income tax benefit is as follows: 2002 2003 --------- --------- Expected federal tax at statutory rate $(422,000) $(436,680) State taxes, net of federal tax rate (75,000) (85,090) Change in valuation allowance 497,000 328,000 --------- --------- $ -- (193,770) ========= ========= At December 31, 2003 the company had a net operating loss carryforward of $5,224,216, which can be utilized to offset future taxable income. These operating loss carry-forwards begin to expire in 2014. F-10 TECH LABORATORIES, INC. NOTES TO Consolidated FINANCIAL STATEMENTS Note 5 - Notes Payable This consists of a note payable to Hudson United Bank, with a balance of $34,444 due on demand, with an annual interest rate of prime + 1.5%. The note is secured by a certificate of deposit in the amount of $40,000. Note 6 - LONG-TERM CONVERTIBLE DEBT On October 13, 2000 Tech Labs completed a $1.5 million dollar financing of 6.5% convertible promissory notes due October 15, 2002. Interest is payable quarterly in cash or in shares of common stock at the option of the note holders. Tech Labs disclosed all terms of this financing on Form 8-K filed on October 18, 2000. As of December 31, 2002, $373,730 of principal on the convertible notes has been converted into shares of Tech Labs' common stock. On January 11, 2002, Tech Labs entered into a conversion and redemption agreement concerning the Long- Term Debt referenced in Note (9). An Event of Default, as defined in the 6.5% convertible notes Tech Labs issued in October 2000, occurred on January 25, 2002, when Tech Labs was unable to make the first payment of $750,000 to the holders of the notes. On April 19, 2002, Tech Labs successfully negotiated a cure of the default referenced above. This cure required that Tech Labs' registration statement, filed with the Securities and Exchange Commission on April 5, 2002,covering the shares underlying the 6.5% convertible notes, to have been declared effective on or before June 29, 2002. If the registration statement was declared effective by such date and Tech Labs made certain payments described in Tech Labs' report on Form 8-K filed April 25, 2002, the maturity date of the 6.5% convertible notes would have been extended from October 13, 2002 to December 30, 2002. On August 2, 2002, the Company announced that an Event of Default occurred on the Convertible Notes. The Company was unable to have its registration statement declared effective by June 29, 2002, and was unable to reach a new agreement with the holders of the Convertible Notes prior to the expiration of the waiver the Company had been granted by the note holders, which had been granted in order to permit the parties time to negotiate a new agreement. The Company continued to seek a cure for the default with the holders of the Convertible Notes, and in October, 2003 a cure was successfully negotiated and is described in the Company's 8-K filed in October, 2003. As of December 31, 2003, an aggregate of $ 373,730 of Convertible Long term Debt was converted into Common Stock. Note 7 - EMPLOYEE CONTRACT The Company has an employment contract with its chief operating officer. The agreement is for a term of five (5) years with Mr. Ciongoli, dated as of August 1, 2001, which agreement supersedes the employment agreement that was in effect with Mr. Ciongoli dated October 1, 1998, as amended June 18, 1999, and February 21, 2001. Mr. Ciongoli is compensated under the terms of the employment agreement at the base salary rate of $150,000 per annum. Mr. Ciongoli is also entitled to receive two percent (2%) of our sales in excess of $1,000,000 during any year he is employed by us. In addition, Mr. Ciongoli was granted an option, exercisable for five (5) years from the date of grant, to purchase up to 500,000 shares of stock at $.43 per share, which option vests in increments of 100,000 shares every six (6) months since February 1, 2002. 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. F-11 Note 8 - Subsequent Events On November 15, 2004, a three-year option to purchase common stock of Tech Laboratories, inc. was granted by the majority members of the Board of Directors of Tech Laboratories, inc. to certain directors and employees at $.005 per share. The closing price of TCHL stock on November 15th, 2004 was $.01 per share. The total number of options granted was 12,500,000. The Company had a dispute with W.T. Sports, LTD, et al over a certain agreement. The matter was arbitrated and on December 27, 2004 the arbitrator awarded WT Sports LTD the amount of $35,148. This amount is payable by January 31, 2005 and has been accrued on the accompanying financial statements. Item 8. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. 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. F-12 Part III Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the Exchange Act NAME AGE TITLE ----------------------- --- ------------------------------------------ Bernard M. Ciongoli 56 President, Chief Executive Officer, Chief Financial Officer and Director Earl M. Bjorndal 52 Vice President and Director Carmine O. Pellosie, Jr. 60 Secretary and Director Each director is elected for a period of one year and until his successor is duly elected by shareholders and qualified. Bernard M. Ciongoli became our president and a director in late 1992, and became Treasurer in 1998. From 1990 through 1991 he served as president of HyTech Labs, a company engaged in sales and servicing of electronic test equipment. During the years of 1987 to 1990, he acted as the principal owner and President of Bernco Developers, a real estate developer. Mr. Ciongoli holds a degree in electronic engineering from Paterson Institute of Technology. Earl M. Bjorndal has been with us in various capacities since 1981. He has been a director since 1985, and became a vice president in 1992. He is a graduate of the New Jersey Institute of Technology with both bachelor's and master's degrees in industrial engineering. Carmine O. Pellosie, Jr. has been a director since the formation of Tech Logistics, Inc. in 1997 and has been our secretary since April 1999. Since January 1, 1999, he has been the Controller of the Passaic County Department of Health and Human Services. Prior to January 1999, he was, for more than five years, president of International Logistics, Inc. Tech Labs' success depends, to a large extent, upon the continued efforts of Bernard M. Ciongoli, our president and chief executive officer. Mr. Ciongoli has an intricate understanding of Tech Labs, its business operations, and the technology underlying its products. It would be very difficult for Tech Labs to replace Mr. Ciongoli, and, accordingly, the loss of his services would be detrimental to our operations. We do not have key-man life insurance on Mr. Ciongoli. We do, though, have an employment agreement with Mr. Ciongoli. Expansion of our business, upon resources becoming available, will require additional managers and employees with industry experience. In general, only highly qualified managers have the necessary skills to develop and market our products and provide our services. Competition for skilled management personnel in the industry is intense, which may make it more difficult and expensive to attract and retain qualified managers and employees. Expansion of our business, upon available resources, will likely also require additional non-employee board members with business and industry experience. We do not, however, have directors' and officers' liability insurance, which may limit our ability to attract qualified non-employee board members. Compliance with Section 16(a) of the Exchange Act Section 16(a) of the Securities Exchange Act of 1934 requires the Company's directors and officers and persons who own more than ten percent (10%) of its equity securities to file reports of ownership and changes in ownership with the Securities and Exchange Commission (the "SEC"). Directors, officers, and greater than ten percent (10%) shareholders are required by SEC regulations to furnish the Company with copies of all Section 16(a) reports filed. To the best of the Company's knowledge, all filing requirements applicable to its officers, directors, and greater than ten percent (10%) shareholders were complied with in a timely manner with the exception of Form 4 and an amended Schedule 13D filed late on behalf of the Company's president, Bernard Ciongoli, which were required to be filed to reflect the vesting of certain stock options which had been previously granted to Mr. Ciongoli. 12 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 $100,000 in any recent fiscal year. SUMMARY COMPENSATION TABLE ANNUAL COMPENSATION LONG-TERM COMPENSATION SHARES OF COMMON STOCK NAME AND 2003 ISSUABLE UPON EXERCISE PRINCIPAL POSITION YEAR SALARY($) BONUS($) OF OPTIONS ------------------------------------------------------------------------------------------------------- Bernard M. Ciongoli 2003 * 0 0 President, CEO, CFO 2002 $132,000* 0 0 2001 $135,000 0 600,000 * Pursuant to the terms of Mr. Ciongoli's employment agreement with the Company, Mr. Ciongoli was entitled to a salary of $150,000 in 2002 and 2003. Because of the Company's financial difficulties, Mr. Ciongoli elected not to receive all of his salary in 2002. Since January 1, 2003 Mr. Ciongoli, 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 2003 No options were granted to any named executive officer of Tech Labs in 2002. Tech Labs has entered into an employment agreement for a term of five (5) years with Mr. Ciongoli, dated as of August 1, 2001, which agreement supersedes the employment agreement that was in effect with Mr. Ciongoli dated October 1, 1998, as amended June 18, 1999, and February 21, 2001. Mr. Ciongoli is compensated under the terms of the employment agreement at the base salary rate of $150,000 per annum. Mr. Ciongoli is also entitled to receive two percent (2%) of our sales in excess of $1,000,000 during any year he is employed by us. In addition, Mr. Ciongoli was granted an option, exercisable for five (5) years from the date of grant, to purchase up to 500,000 shares of stock at $.43 per share, which option vests in increments of 100,000 shares every six (6) months since February 1, 2002. The agreement is automatically renewable for three (3) years unless either party terminates the agreement in writing at least 180 days prior to the expiration of the initial term period. In addition, in 2001, we granted to Mr. Ciongoli an option to purchase up to 100,000 shares under our 1996 stock option plan exercisable for five (5) years at $0.9625 per share which vest over a period of two (2) years. In 2000, we granted to Mr. Ciongoli (i) a non-plan option in consideration and in recognition of his services to Tech Labs to purchase up to 139,000 shares exercisable over five (5) years at $2.4375, which vests over the course of three (3) years from the date of grant; and (ii) an option to purchase up to 111,000 shares of common stock under our 1996 stock option plan exercisable for five (5) years at $2.68125 per share, which vests over a period of three (3) years. We do not have employment agreements with any other named executive officers. Our directors are not presently compensated. 13 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 9,625,500 28.58% Earl Bjorndal 3,370,684 10.01% Carmine O. Pellosie, Jr. 40,000 * Phoenix Capital 1,750,000 5.20% Partners, LLC All officers and Directors as a group (3 persons) 13,036,184 38.70% * Less than one (1%) percent Pursuant to the rules and regulations of the Securities and Exchange Commission, shares of common stock that an individual or entity has a right to acquire within 60 days pursuant to the exercise of options or warrants are deemed to be outstanding for the purposes of computing the percentage ownership of such individual or entity, but are not deemed to be outstanding for the purposes of computing the percentage ownership of any other person or entity shown in the table. Item 12. Certain Relationships and Related Transactions None. Item 13. Exhibits and Reports on Form 8-K (a) Exhibits EXHIBIT INDEX 31.1 Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32.1 Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350 (b) Reports on Form 8-K On June 11, 2003, the Company filed a Current Report (Item V) on Form 8-K reporting that the Company Tech Laboratories, Inc. received a notice of non-payment and default on May 27, 2003 from two holders of its 6.5% convertible notes issued on October 13, 2000. The Notice of Non-payment and Default states that the maturity date of the Notes was October 13, 2002; that the Company is in default under the terms of the Notes and the subscription agreement entered into by and between the Company and the Note holders; that $380,000 of principal was presently outstanding and owed to each of the two Note holders; that in accordance with the terms of the Subscription Agreement, $129,700 of liquidated damages will be owed to each of the two Note holders as of May 31, 2003; and that $32,499 of interest is due and owed to each of the two Note holders. On October 27, 2003, the Company filed a current report (Item V) on Form 8-K reporting that Tech Laboratories, Inc. (the "Company") issued a press release on October 24, 2003, announcing that it had entered into a Security Agreement and Collateral Agent Agreement dated September 25, 2003 (the "Security Agreement "), pursuant to which it obtained a waiver and thereby cured the existing Event of Default under its outstanding 6.5% convertible promissory notes with the Lenders set forth in such notes ("Lenders". In consideration for the waiver and cure of the Event of Default existing under the notes, the Company agreed to grant the Lenders a security interest in the Company's inventory ("Collateral") as well as additional consideration. 14 Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES Audit Fees We were billed a total of $15,000 by our principal accountant for audit fees for the years 2003 and 2002. All Other Fees The Company did not incur any other fees related to services rendered by our principal accountant for the fiscal year ended December 31, 2003. Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. TECH LABORATORIES, INC. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has caused this Form 10-KSB to be signed on its behalf by the undersigned, thereunto duly authorized. Date: January 19, 2005 TECH LABORATORIES, INC. By: /s/ Bernard M. Ciongoli ----------------------------- Bernard M. Ciongoli President As required by the Securities Exchange Act of 1934, this report has been signed by the following persons in the capacities and on the dates indicated. Signature Title Date /s/Bernard M. Ciongoli President, CEO, CFO January 19, 2005 ---------------------- and Director Bernard M. Ciongoli /s/ Earl M. Bjorndal Vice President and Director January 19, 2005 -------------------- Earl M. Bjorndal 15