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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________________ to _________________
Commission file number: 0-28602
Pro Tech Communications, Inc.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Florida 59-3281593
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
4492 Okeechobee Road, Fort Pierce, FL 34947
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(772) 464-5100
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
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. /X/ Yes / / No
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). / / Yes /X/ No
The number of shares of the registrant's common stock, par value $.001 per
share, outstanding as of November 1, 2004, was 73,390,133 shares.
Table of Contents
Page
Part I Financial Information
Item 1. Financial Statements:
Condensed Balance Sheets at December 31, 2003 and September 30, 2004
(Unaudited) 3
Condensed Statements of Operations (Unaudited) for the Three and Nine
Months Ended September 30, 2003 and 2004 4
Condensed Statements of Cash Flows (Unaudited) for the Nine Months
Ended September 30, 2003 and 2004 5
Notes to the Condensed Financial Statements (Unaudited) 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 15
Item 3. Quantitative and Qualitative Disclosures About Market Risk 21
Item 4. Controls and Procedures 21
Part II Other Information
Item 6. Exhibits 22
Signatures 23
2
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PRO TECH COMMUNICATIONS, INC.
CONDENSED BALANCE SHEETS
December 31, September 30,
2003 2004
-------------- ---------------
ASSETS (Unaudited)
Current assets:
Cash and cash equivalents $ 21,193 $ 47,991
Accounts receivable, less allowance for doubtful accounts
of $31,437 and $20,178, respectively 88,769 153,646
Inventories, net of reserves (Note 4) 493,555 496,638
Due from officer/stockholder (Note 14) 66,044 -
Other current assets (Note 5) 17,571 41,447
-------------- ---------------
Total current assets 687,132 739,722
Property and equipment, net (Note 6) 449,672 339,829
Intangible assets, net of accumulated amortization of $2,277,398
and $2,421,848, respectively (Note 7) 2,530,094 2,660,664
Other assets 6,138 9,016
-------------- ---------------
$ 3,673,036 $ 3,749,231
============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 231,282 $ 209,456
Accrued expenses (Note 8) 195,201 170,221
Current portion of capital lease obligations 10,434 11,009
Due to factor and other liabilities (Note 9) 11,117 63,875
Note payable 2,385 2,578
Note payable to stockholder (Note 14) 142,001 49,241
Preferred stock subject to mandatory conversion into
a variable number of shares of common stock (Note 10) 742,459 704,030
-------------- ---------------
Total current liabilities 1,334,879 1,210,410
Noncurrent note payable 4,076 2,117
Noncurrent notes payable due to affiliates (Note 14) 1,824,540 1,944,200
Capital lease obligations 21,333 13,028
-------------- ---------------
Total liabilities 3,184,828 3,169,755
-------------- ---------------
Commitments
Stockholders' equity (Notes 11 and 12):
Preferred stock, $.01 par value, authorized 998,000 shares, none
issued and outstanding - -
Common stock, $.001 par value, authorized 300,000,000 shares,
issued and outstanding 33,200,311 and 73,390,133 shares, respectively 33,200 73,390
Additional paid-in capital 18,427,668 19,357,332
Accumulated deficit (17,972,660) (18,851,246)
-------------- ---------------
Total stockholders' equity 488,208 579,476
-------------- ---------------
$ 3,673,036 $ 3,749,231
============== ===============
The accompanying notes are an integral part of the condensed financial
statements.
3
PRO TECH COMMUNICATIONS, INC.
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
----------------------------- --------------------------------
2003 2004 2003 2004
------------- ------------- ------------- ----------------
Net sales $ 324,639 $ 300,307 $ 936,318 $ 837,121
Cost of goods sold 102,983 101,661 292,882 268,675
------------- ------------- ------------- ----------------
Gross profit 221,656 198,646 643,436 568,446
Selling, general and administrative expenses 319,883 311,264 997,113 965,005
NCT Hearing and affiliates charges (Note 14) 64,918 185,774 259,923 402,818
------------- ------------- ------------- ----------------
Loss before other income (expense) (163,145) (298,392) (613,600) (799,377)
Other income (expense):
Interest income 739 3 2,192 734
Interest expense (4,265) (3,861) (20,082) (14,002)
Interest expense - NCT Hearing (Note 14) (15,457) (18,768) (41,152) (52,238)
Interest expense - convertible preferred stock (Note 10) (5,545) (5,273) (5,545) (15,958)
Miscellaneous income (expense), net (677) - 2,945 2,255
------------- ------------- ------------- ----------------
Net loss (188,350) (326,291) (675,242) (878,586)
Adjustments attributable to preferred stock (Note 10):
Preferred stock dividend - - 10,911 -
------------- ------------- ------------- ----------------
Net loss attributable to common stockholders $ (188,350) $ (326,291) $ (686,153) $ (878,586)
============= ============= ============= ================
Basic and diluted loss per share $ (0.00) $ (0.00) $ (0.02) $ (0.01)
============= ============= ============= ================
Weighted average common shares outstanding - basic and diluted 33,200,311 73,390,133 33,200,311 58,679,692
============= ============= ============= ================
The accompanying notes are an integral part of the condensed financial
statements.
4
PRO TECH COMMUNICATIONS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
For the Nine Months
Ended September 30,
----------------------------------------
2003 2004
------------------ ------------------
Cash flows from operating activities:
Net loss $ (675,242) $ (878,586)
Adjustments to reconcile net loss to net
cash used in operating activities:
Notes payable issued for services received 246,433 586,402
Depreciation and amortization 253,957 258,038
Provision for doubtful accounts 2,446 4,718
Provision for obsolete inventory (5,000) -
Interest expense related to preferred stock dividend 5,545 15,958
Changes in operating assets and liabilities:
Increase in accounts receivable (13,310) (69,595)
Decrease (increase) in inventories, net 98,069 (3,083)
Decrease (increase) in other assets 3,676 (26,754)
Decrease in accounts payable (198,511) (21,826)
Decrease in accrued expenses (3,048) (24,592)
Increase (decrease) in other liabilities 59,204 (10,015)
------------------ ------------------
Net cash used in operating activities $ (225,781) $ (169,335)
------------------ ------------------
Cash flows from investing activities:
Capital expenditures (4,375) (3,765)
Net change in due from officer/stockholder (2,193) (731)
------------------ ------------------
Net cash used in investing activities $ (6,568) $ (4,496)
------------------ ------------------
Cash flows from financing activities:
Proceeds from:
Notes payable - NCT Hearing (Note 14) 217,000 267,000
Cash advances - NCT Hearing (Note 14) 40,000 -
Payment made on:
Notes payable (23,841) (28,138)
Notes payable due to affiliates - (30,503)
Capital lease obligations (7,208) (7,730)
------------------ ------------------
Net cash provided by financing activities $ 225,951 $ 200,629
------------------ ------------------
Net (decrease) increase in cash and cash equivalents $ (6,398) $ 26,798
Cash and cash equivalents - beginning of period 13,624 21,193
------------------ ------------------
Cash and cash equivalents - end of period $ 7,226 $ 47,991
================== ==================
Supplemental disclosures of cash flow information:
Cash paid during the period for interest $ 19,082 $ 13,614
================== ==================
Supplemental disclosures of non-cash investing and financing activities:
Dividends on Series A and Series B preferred stock $ 10,911 $ -
================== ==================
Reversal of redemption penalty on Series B preferred stock $ 125,000 $ -
================== ==================
Adjustment of monetary value on Series A and Series B preferred stock
upon adoption of SFAS No. 150 effective July 1, 2003 $ 137,500 $ -
================== ==================
Note receivable from director offset with note payable from stockholder $ - $ 66,775
================== ==================
Issuance of common stock for payment of notes payable $ - $ 640,466
================== ==================
Issuance of common stock for expansion of license agreement $ - $ 275,000
================== ==================
Issuance of common stock upon conversion of Series B
preferred stock and dividends $ - $ 44,388
================== ==================
The accompanying notes are an integral part of the condensed financial
statements.
5
PRO TECH COMMUNICATIONS, INC.
NOTES TO THE CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
1. Basis of Presentation:
Throughout this document, Pro Tech Communications, Inc. is referred to as
"we," "us," "our" or "Pro Tech." The accompanying condensed financial statements
are unaudited but, in the opinion of management, contain all adjustments
(consisting of those of a normal recurring nature) considered necessary to
present fairly the condensed financial position and the results of operations
and cash flows for the periods presented in conformity with accounting
principles generally accepted in the United States of America applicable to
interim periods. The results of operations for the three and nine months ended
September 30, 2004 and cash flows for the nine months ended September 30, 2004
are not necessarily indicative of the results that may be expected for any other
interim period or the full year. These condensed financial statements should be
read in conjunction with the audited financial statements and notes thereto for
the year ended December 31, 2003 contained in our Annual Report on Form 10-K for
the year ended December 31, 2003.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires us to
make estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from these
estimates. Certain amounts for 2003 have been reclassified to conform with the
2004 classifications.
2. Loss Per Share:
We report loss per common share in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 128, "Earnings Per Share." The effect of
potential common shares such as options, warrants and convertible preferred
stock at September 30, 2003 and 2004 was not included in the net loss per share
calculations for the interim periods then ended, as the effect would be
antidilutive.
3. Stock Options:
We have elected to apply the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation," as amended by SFAS No. 148,
"Accounting for Stock-Based Compensation - Transition and Disclosure."
Accordingly, we account for stock-based compensation transactions with employees
using the intrinsic value method prescribed in Accounting Principles Board
("APB") Opinion No. 25, "Accounting for Stock Issued to Employees" and related
interpretations. Under APB No. 25, no compensation costs are recognized if the
option exercise price is equal to or greater than the fair market price of the
common stock on the date of the grant. Under SFAS No. 123, stock options are
valued at grant date using the Black-Scholes option pricing model and
compensation costs are recognized ratably over the vesting period. No
stock-based employee compensation cost is reflected in our net loss attributable
to common stockholders, as options granted under our plan have an exercise price
equal to or greater than the market value of the underlying common stock on the
date of grant.
No options were issued during the three or nine months ended September 30,
2003. No options were issued during the three months ended September 30, 2004.
On March 9, 2004, 635,000 stock options were issued to officers and employees.
No compensation expense was recorded for these
6
options, in accordance with APB No. 25. The following table illustrates the
effect on net loss attributable to common stockholders and net loss per share if
we had applied the fair value recognition provisions of SFAS No. 123, as amended
by SFAS 148, to stock-based employee compensation.
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
------------------------------- --------------------------------
2003 2004 2003 2004
------------- --------------- ------------- ----------------
Net loss attributable to common
stockholders, as reported $ (188,350) $ (326,291) $ (686,153) $ (878,586)
Stock-based employee costs based on fair
value method, net of related taxes (1,926) (473) (3,738) (6,639)
------------- --------------- ------------- ----------------
Net loss attributable to common
stockholders, pro forma $ (190,276) $ (326,764) $ (689,891) $ (885,225)
============= =============== ============= ================
Basic and diluted loss per common share:
As reported $ (0.00) $ (0.00) $ (0.02) $ (0.01)
============= =============== ============= ================
Pro forma $ (0.00) $ (0.00) $ (0.02) $ (0.02)
============= =============== ============= ================
4. Inventories, net:
Inventories, net consisted of the following:
December 31, September 30,
2003 2004
----------------------- ------------------------
Finished goods $ 295,346 $ 292,987
Raw materials 179,179 189,688
Work in progress 24,030 18,963
----------------------- ------------------------
Gross inventories 498,555 501,638
Less: reserve for obsolete inventory 5,000 5,000
----------------------- ------------------------
Total Inventories, net $ 493,555 $ 496,638
======================= ========================
5. Other Current Assets:
Other current assets consisted of the following:
December 31, September 30,
2003 2004
----------------- -----------------
Prepaid inventory purchases $ 11,632 $ 35,508
Deposits on leases 5,939 5,939
----------------- -----------------
Total Other current assets $ 17,571 $ 41,447
================= =================
7
6. Property and Equipment, net:
Property and equipment, net consisted of the following:
December 31, September 30,
2003 2004
---------------- ----------------
Production molds $ 455,440 $ 455,440
Office equipment 149,568 151,377
Production equipment 39,514 39,514
Leased equipment 83,188 83,188
Leasehold improvements 315,050 315,050
Vehicles 12,414 12,414
Marketing displays 16,160 18,116
----------------- ----------------
Total cost 1,071,334 1,075,099
Less accumulated depreciation
and amortization 621,662 735,270
---------------- ---------------
Total Property and equipment, net $ 449,672 $ 339,829
================= ================
Depreciation expense for the nine months ended September 30, 2003 and 2004
was $116,953 and $113,608, respectively.
7. Intangible Assets:
On April 21, 2004, we obtained an expansion of our existing, exclusive
worldwide technology license from NCT Hearing Products, Inc., our parent
company, in exchange for 9,821,429 newly issued shares of our common stock. The
license covers over 50 patents, patents pending and innovations relating to
active noise reduction ("ANR") and noise and echo cancellation, and with this
expansion, now encompasses all styles of headsets (an expansion from
lightweight, portable styles) including headphones, earmuffs, earbuds and
earplugs, as well as all markets (an expansion from cellular, multimedia and
telephony) including consumer audio, industrial safety, spectator racing,
two-way radio communications and aviation. In addition, the expanded license
permits us to use NCT Hearing's existing brand names including NoiseBuster(R)
ANR lightweight consumer audio and communications headsets, ProActive(R) ANR
industrial safety earmuffs and two-way radio headsets including aviation and
ClearSpeech(R) noise and echo cancellation algorithm-based products.
The license expansion was valued at $275,000 and was added to the cost
basis of the intangible assets included in our condensed balance sheet. The
license expansion will be amortized over 13.75 years (the remaining life of the
original license) on a straight-line basis.
8
8. Accrued Expenses:
Accrued expenses consisted of the following:
December 31, September 30,
2003 2004
-------------- -----------------
Warranty expense $ 41,687 $ 29,723
Payroll and related expenses 119,937 97,471
Vacation payable 12,245 18,882
Lease payable 16,723 12,407
Other 4,609 11,738
-------------- ----------------
Total Accrued expenses $ 195,201 $ 170,221
============== =================
9. Due to Factor and Other Liabilities:
Due to factor and other liabilities consisted of the following:
December 31, September 30,
2003 2004
-------------- -----------------
Due to factor $ 11,117 $ 1,102
Due to NCT Hearing Products, Inc. - 62,773
-------------- -----------------
Total Due to factor and other liabilities $ 11,117 $ 63,875
============== =================
On March 26, 2001, we entered into a factoring agreement. At September 30,
2004, outstanding accounts receivable factored under this agreement were $2,000,
of which $1,102 had been received by the factor under recourse provisions. Total
fees incurred under this agreement amounted to $822 and $291 during the three
months ended September 30, 2003 and 2004, respectively; and $3,937 and $1,054
during the nine months ended September 30, 2003 and 2004, respectively. Interest
expense incurred under this agreement amounted to $212 and $163 during the three
months ended September 30, 2003 and 2004, respectively; and $1,795 and $597
during the nine months ended September 30, 2003 and 2004, respectively.
During the nine months ended September 30, 2004, NCT Hearing advanced cash
to us in anticipation of the receipt of funds from outstanding accounts
receivable. These advances are non-interest bearing and are payable within 35
days. As of September 30, 2004, outstanding cash advances to us from NCT Hearing
under this arrangement were $62,773 (see Note 14 - Related Party Transactions).
NCT Hearing is not obligated to provide any additional cash advances to us.
9
10. Preferred Stock Subject to Mandatory Conversion into a Variable Number of
Shares of Common Stock:
We had two series of preferred stock outstanding as of September 30, 2004:
our series A convertible preferred stock ("Series A") and our series B
convertible preferred stock ("Series B"). Each share of Series A has a par value
of $0.01 and a stated value of $1,000. There were 1,500 shares authorized and 50
shares issued and outstanding as of December 31, 2003 and September 30, 2004.
The Series A has a mandatory conversion date of March 31, 2005. Each share of
Series B has a par value of $0.01 and a stated value of $1,000. There were 500
shares authorized, issued and outstanding as of December 31, 2003. As of
September 30, 2004, there were 500 shares authorized and 460 shares issued and
outstanding. The Series B has a mandatory conversion date of March 31, 2006. The
Series A and Series B are classified as current liabilities on our condensed
balance sheet in accordance with SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity."
SFAS No. 150 also requires us to record any payments or accruals of
payments to holders of such instruments as interest costs. Therefore, effective
July 1, 2003, the 4% cumulative dividend earned by holders of Series A and
Series B are recorded as interest expense in our condensed statements of
operations; whereas, previously they were recorded as a reduction of additional
paid-in capital. The interest expense recorded for Series A and Series B for the
three months ended September 30, 2004 was $504 and $4,769, respectively; and
$1,501 and $14,457 for the nine months ended September 30, 2004, respectively.
The interest expense recorded for Series A and Series B for each of the three
and nine months ended September 30, 2003 was $504 and $5,041, respectively. The
reduction of additional paid-in capital, calculated for purposes of determining
net loss attributable to common stockholders, on the Series A and Series B for
the nine months ended September 30, 2003 was $991 and $9,920, respectively.
The Series A is carried on our balance sheet as of September 30, 2004 at
its monetary value of $70,522, which is comprised of the fair value of the
shares of $62,500, plus the cash value of the accrued dividends of $8,022. We
would have to issue approximately 2.2 million shares of our common stock if
settlement of the stated value of the Series A had occurred as of September 30,
2004. We have the option to settle the accrued dividends in cash or common
stock. As of September 30, 2004, settlement in common stock for the accrued
dividends on the Series A would require issuance of approximately 0.4 million
shares of our common stock. There is no limit on the number of shares that we
could be required to issue upon conversion of the Series A. No shares of the
Series A were converted or exchanged during the nine months ended September 30,
2004.
The Series B is carried on our balance sheet as of September 30, 2004 at
its monetary value of $633,508, which is comprised of the fair value of the
shares of $575,000, plus the cash value of the accrued dividends of $58,508. We
would have to issue approximately 20.5 million shares of our common stock if
settlement of the stated value of the Series B had occurred as of September 30,
2004. We have the option to settle the accrued dividends in cash or common
stock. As of September 30, 2004, settlement in common stock for the accrued
dividends on the Series B would require issuance of approximately 2.6 million
shares of our common stock.
10
There is no limit on the number of shares that we could be required to issue
upon conversion of the Series B. On April 27, 2004, 40 shares of Series B (plus
applicable dividends) were converted into 2,522,042 shares of our common stock.
11. Stockholders' Equity:
The changes in stockholders' equity during the nine months ended September
30, 2004, were as follows:
Common Stock Additional Accumulated
Shares Amount Paid-in capital Deficit Total
------------------------------- -------------------- ------------------ ---------------
Balance at December 31, 2003 33,200,311 $ 33,200 $ 18,427,668 $ (17,972,660) $ 488,208
Issuance of common stock:
Conversion of Notes Payable 27,846,351 27,846 612,620 - 640,466
License Agreement Amendment 9,821,429 9,822 265,178 - 275,000
Conversion of Preferred Stock 2,522,042 2,522 41,866 - 44,388
Net Loss - - - (878,586) (878,586)
Other - - 10,000 - 10,000
------------------------------- ------------------- ------------------ ---------------
Balance at September 30, 2004 73,390,133 $ 73,390 $ 19,357,332 $ (18,851,246) $ 579,476
=============================== ==================== ================== ===============
12. Common Stock:
During the nine months ended September 30, 2004, we issued 40,189,822
shares of our common stock in various transactions. On April 5, 2004, we issued
27,846,351 shares in connection with the conversion of $640,466 of outstanding
notes payable due to NCT Hearing (see Note 14 - Related Party Transactions). On
April 21, 2004, we issued 9,821,429 shares in connection with an expanded
license we obtained from NCT Hearing (see Note 7 - Intangible Assets). On April
27, 2004, we issued 2,522,042 shares in connection with the conversion of 40
shares (plus applicable dividends) of our series B convertible preferred stock
(see Note 10 - Preferred Stock Subject to Mandatory Conversion into a Variable
Number of Shares of Common Stock).
At September 30, 2004, we were required to reserve approximately 36.9
million shares of our common stock for issuance, including shares issuable upon
exercise of outstanding options and warrants and upon conversion of our series A
and series B convertible preferred stock.
13. Business Divisions Results:
Pro Tech is divided into the following three business divisions:
Products: Our Products division develops and distributes communications
headset products and systems into the call center, fast-food restaurant,
cellular/mobile telephone and multimedia markets. This division currently offers
headsets, amplifiers, hands-free telephones and multimedia accessories. The
Products division recently introduced the next generation NoiseBuster active
noise reduction headphone into the consumer audio market and is developing the
next generation ProActive noise reduction headsets for use in industrial
markets.
11
Telecommunications Systems Integration: Our Telecommunications Systems
Integration division sells and installs simple to sophisticated analog, digital
and Internet Protocol phone systems that provide telecommunications systems
integration support to small office and large corporate call center clients.
Call Center Operations: In 2001, we formed a Call Center Operations
division to provide a full service call center to customers. In December 2001,
we suspended operations in the Call Center Operations division due to poor
performing contracts. After reorganizing this division, we resumed limited
operations during the third quarter of 2002, and continue to develop this
business.
As of September 30, 2004, these divisions are not deemed to be reportable
segments in accordance with SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information."
Business division data is as follows:
Division
------------------------------------------------------
Telecom
Systems Call Center
Products Integration Operations Total
-----------------------------------------------------------------------
For the three months ended September 30, 2004:
- ---------------------------------------------
Sales to external customers $ 285,951 14,356 - $ 300,307
Loss before other income (expense) $ (291,484) (2,812) (4,096) $ (298,392)
For the three months ended September 30, 2003:
- ---------------------------------------------
Sales to external customers $ 287,670 35,997 972 $ 324,639
Loss before other income (expense) $ (157,031) (3,279) (2,835) $ (163,145)
For the nine months ended September 30, 2004:
- --------------------------------------------
Sales to external customers $ 759,943 77,178 - $ 837,121
Loss before other income (expense) $ (794,810) (2,606) (1,961) $ (799,377)
For the nine months ended September 30, 2003:
- --------------------------------------------
Sales to external customers $ 848,538 86,808 972 $ 936,318
Loss before other income (expense) $ (589,310) (15,015) (9,275) $ (613,600)
12
14. Related Party Transactions:
NCT Hearing and Affiliates
- --------------------------
NCT Hearing and their affiliates charge us for labor, parent company
expenses and health benefits. These charges are included in NCT Hearing and
affiliates charges on our condensed statements of operations. The following
table summarizes the approximate charges by NCT Hearing and their affiliates
during the three and nine months ended September 30, 2003 and 2004.
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
----------------------------- ----------------------------
2003 2004 2003 2004
------------- ------------- ------------- ------------
Labor $ 26,000 $ 143,000 $ 107,000 $ 289,000
Expenses 29,000 35,000 92,000 88,000
Health Benefits 10,000 8,000 61,000 26,000
------------- ------------- ------------- ------------
$ 65,000 $ 186,000 $ 260,000 $ 403,000
============= ============= ============= ============
On March 29, 2004, we issued a secured promissory note to NCT Hearing,
bearing interest at the prime rate and due on April 1, 2005, for $200,000 in
exchange for cash advanced to us by NCT Hearing. This note was cancelled and the
amount outstanding was consolidated into a new note dated June 30, 2004 (see
below).
On March 31, 2004, we issued a secured promissory note to NCT Hearing,
bearing interest at the prime rate and due on April 1, 2005, for $121,387 in
exchange for services provided to us by NCT Hearing and its affiliates. This
note was discharged on April 5, 2004 (see below).
On April 5, 2004, we entered into an agreement with NCT Hearing, whereby
NCT Hearing converted an aggregate of $640,466 of our secured promissory notes
payable into 27,846,351 shares of our common stock. NCT Hearing converted the
full amount outstanding (plus accrued interest) of the December 31, 2003 and
March 31, 2004 notes payable, $284,069 and $121,454, respectively. In addition,
NCT Hearing converted $234,943 of the total amount outstanding of the June 30,
2003 note payable. Subsequent to the conversion, $1,324,794 remained outstanding
under the June 30, 2003 note. This note was cancelled and the remaining amount
outstanding was consolidated into a new note dated June 30, 2004 (see below).
This transaction decreased noncurrent notes payable due to affiliates by
$640,466, increased common stock by $27,846 and increased additional paid-in
capital by $612,620.
On June 30, 2004, we issued a secured promissory note to NCT Hearing,
bearing interest at prime (4.75% at September 30, 2004) and due on April 1,
2006, for $1,672,666 in exchange for services provided to us by NCT Hearing and
its affiliates and the consolidation of the amounts outstanding on notes dated
March 29, 2004 and June 30, 2003.
13
On September 17, 2004, we issued a secured promissory note to NCT Hearing,
bearing interest at prime (4.75% at September 30, 2004) and due on April 1,
2006, for $35,000 in exchange for cash advanced to us by NCT Hearing.
On September 30, 2004, we issued a secured promissory note to NCT Hearing,
bearing interest at prime (4.75% at September 30, 2004) and due on October 1,
2006, for $218,617 in exchange for services provided to us by NCT Hearing and
its affiliates during the three months ended September 30, 2004.
NCT Hearing provided cash advances to us in the amount of $40,000 and
$35,000 for the three-month period ended September 30, 2003 and 2004,
respectively; and $257,000 and $267,000 for the nine-month period ended
September 30, 2003 and 2004, respectively.
As of December 31, 2003 and September 30, 2004, we owed an aggregate of
$1,824,540 and $2,006,975, respectively, to NCT Hearing. As of September 30,
2004, $1,944,200 is included in Noncurrent notes payable and the remaining
$62,773 is included in Due to factor and other liabilities (see Note 9 - Due to
Factor and Other Liabilities) on our condensed balance sheet.
Other Related Party Transactions
- --------------------------------
On April 1, 2004, we assigned the rights to all outstanding amounts
receivable due under a promissory note ($66,775) from Keith Larkin, a director
of Pro Tech, to a stockholder who holds a promissory note issued by us. In
consideration for this assignment, the stockholder agreed to apply $66,775
against our June 27, 2003 note payable to the stockholder. This transaction
reduced to zero the current asset Due from officer/stockholder and reduced by
$66,775 the current liability Note payable to stockholder.
We renegotiated our June 27, 2003 note payable to stockholder, which was
due on June 27, 2004. The new $62,009 note, dated June 27, 2004, represented
principal of $61,621 plus accrued interest of $388 from the matured note. The
new note bears interest at 8.5% and is payable in installments of $3,500 due on
the last day of each month starting on June 30, 2004 through May 31, 2005, with
the remaining balance due on June 27, 2005. The balance of this note outstanding
as of September 30, 2004 was $49,241.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements
This report contains forward-looking statements, in accordance with Section
27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended, that reflect our current estimates,
expectations and projections about our future results, performance, prospects
and opportunities. Forward-looking statements include all statements that are
not historical facts. These statements are often identified by words such as
"anticipate," "believe," "could," "estimate," "expect," "intend," "plan," "may,"
"should," "will," "would" and similar expressions. These forward-looking
statements are based on information currently available to us and are subject to
numerous risks and uncertainties that could cause our actual results,
performance, prospects or opportunities to differ materially from those
expressed in, or implied by, the forward-looking statements we make in this
report. Important factors that could cause our actual results to differ
materially from the results referred to in the forward-looking statements we
make in this report include:
o our ability to generate sufficient revenues to sustain our current
level of operations and to execute our business plan;
o our ability to obtain additional financing if and when necessary;
o the level of demand for our products and services;
o the level and intensity of competition in our industry;
o difficulties or delays in manufacturing;
o our abilitiy to develop new products and the market's acceptance of
these products;
o our ability to maintain and expand our strategic relationships;
o our ability to protect our intellectual property license;
o our ability to effectively manage our operating costs; and
o our ability to attract and retain key personnel.
You should not place undue reliance on any forward-looking statements.
Except as otherwise required by federal securities laws, we undertake no
obligation to publicly update or revise any forward-looking statements, whether
as a result of new information, future events, changed circumstances or any
other reason after the date of this report.
Description of Business
Pro Tech primarily develops and distributes communications headset products
and systems into the call center, fast-food restaurant, cellular/mobile
telephone and multimedia markets. We currently offer headsets, amplifiers,
hands-free telephones and multimedia accessories. In September 2004, we entered
the consumer audio market with our introduction of the NoiseBuster(R) NB-FX
active noise reduction headphones. The NoiseBuster is a personal audio headphone
that electronically reduces low frequency background noise using active noise
reduction technology, while leaving speech and music clearly audible. We also
have limited operations in the telecommunications systems integration and call
center operations businesses.
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We plan to continue to pursue new product development. Through an expanded
license from NCT Hearing Products, Inc. ("NCT Hearing"), we have access to over
50 patents as well as patents pending and other innovations and marketing rights
to three award-winning brands. This expanded license enables us to address
additional markets of opportunity including consumer audio, personal hearing
protection, spectator racing, two-way radio communications, aviation and
military. We intend to enter many of these markets through the introduction of
an extensive new ProActive(R) line of active noise reduction products as well as
passive products designed for higher noise settings. The first of these products
is expected to be ProActive(R) safety earmuff. This earmuff will provide
industrial hearing protection for use in high-noise environments by combining
passive hearing protection with advanced active noise reduction technology. We
expect to commercially introduce this product during the first quarter of 2005.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires estimates and
assumptions that affect the reported amounts of assets and liabilities, revenues
and expenses and related disclosures of contingent assets and liabilities in our
financial statements and accompanying notes. Several of our accounting policies
involve significant judgments and uncertainties. On an on-going basis, our
management evaluates its estimates and judgments, including those related to
allowance for doubtful accounts, adjustments to inventory valuations, asset
impairment and accrual for warranty expense. Our management bases its estimates
on historical experience, observable trends and various other assumptions that
are believed to be reasonable under the circumstances. Our management uses this
information to make judgments about the carrying values of assets and
liabilities that are not readily apparent from other sources. Management
believes that the accounting estimates employed are appropriate and resulting
balances are reasonable; however, actual results could differ from the original
estimates, requiring adjustments to these balances in future periods.
Results of Operations
Three months ended September 30, 2004 compared to three months ended September
30, 2003
Net loss. Net loss for the three months ended September 30, 2004 increased
approximately $138,000, or 73%, compared to the same three-month period in 2003.
This increase was due to an increase of approximately $121,000 in NCT Hearing
and affiliates charges and a decrease of approximately $24,000 in net sales,
partially offset by a decrease of approximately $9,000 in selling, general and
administrative expenses.
Net sales. Net sales for the three months ended September 30, 2004
decreased approximately $24,000, or 7%, compared to the three months ended
September 30, 2003. This decrease was due mainly to the impact of hurricanes
Frances and Jeanne which caused a major disruption in normal customer shipments
along with our inability to complete and invoice telecommunications system
integration projects. These storms caused widespread power outages and
destruction of property, and as a result, our operations were shut down for ten
business days.
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Sales from our fast-food market decreased approximately $45,000 due to two
factors: (1) delayed shipments representing approximately $18,000 due to the
local impact of hurricanes Frances and Jeanne; and (2) the impact of market
competition from Far East manufacturers which resulted in decreased purchases of
our fast-food headsets. Fast-food headset units sold decreased to approximately
5,000 units for the three months ended September 30, 2004 from approximately
7,000 units during the same period in 2003.
Telephone headset units sold increased approximately 300 units for the
three months ended September 30, 2004 as compared to the same three-month period
in 2003 which translated into an increase of approximately $12,000 for the three
months ended September 30, 2004 compared to the same three-month period in 2003.
For the three months ended September 30, 2004, we generated sales of
approximately $27,000 from our entrance into the consumer audio market. We
entered this market in September 2004 with the introduction of our
NoiseBuster(R) Active Noise Reduction headphones.
Sales for our telecommunications system integration division decreased
approximately $22,000 for the three months ended September 30, 2004 compared to
the same three-month period in 2003. This decrease was due to our inability to
complete installations because of the severe hurricanes that hit Florida during
September 2004.
Cost of goods sold. For the three months ended September 30, 2004, cost of
goods sold decreased approximately $1,000, or 1%, compared to the same
three-month period in 2003. This decrease was attributable to the decrease in
sales volume for telecommunication system integrations for the three months
ended September 30, 2004 when compared to the same three months in 2003,
partially offset by an increase in cost of good sold related to a change in the
mix of headset units sold.
Gross profit. Gross profit margin decreased to 66.1% for the three months
ended September 30, 2004 from 68.3% for the three months ended September 30,
2003. This decrease was the result of a change in the mix of products sold.
Fast-food headsets with higher margins accounted for approximately 67% of
headset units sold for the three months ended September 30, 2004 as compared to
approximately 83% for the same three months in 2003.
Selling, general and administrative expenses. For the three months ended
September 30, 2004, selling, general and administrative expenses decreased
approximately $9,000, or 3%, compared to the same three-month period in 2003.
This decrease was due mainly to a $17,000 decrease in payroll and related
expenses.
NCT Hearing and affiliates charges. For the three months ended September
30, 2004, NCT Hearing and affiliates charges increased approximately $121,000,
or 186%, compared to the same three-month period in 2003. This increase was due
mainly to the additional work performed by their engineering and marketing staff
in connection with our next generation NoiseBuster headphones released in
September 2004 and the anticipated release of our ProActive safety earmuff in
the first quarter of 2005.
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Nine months ended September 30, 2004 compared to nine months ended September 30,
2003
Net loss. Net loss for the nine months ended September 30, 2004 increased
approximately $203,000, or 30%, compared to the same nine-month period in 2003.
This increase was due to the combination of a decrease of approximately $99,000
in net sales, an increase of approximately $143,000 in NCT Hearing and
affiliates charges and an increase of approximately $15,000 in total interest
expense. Partially offsetting these increases was a decrease of approximately
$32,000 in selling, general and administrative expenses.
Net sales. Net sales for the nine months ended September 30, 2004 decreased
approximately $99,000, or 11%, compared to the nine months ended September 30,
2003. This decrease was primarily due to reductions in sales to our fast-food
and telephone markets, partially offset by an increase related to our entrance
into the consumer audio market.
Sales from our fast-food market decreased approximately $66,000 due mainly
to reduced purchases by one of our major distributors of fast-food parts. The
number of units sold in the fast-food market, including both headsets and parts,
decreased to approximately 21,000 units for the nine months ended September 30,
2004 from approximately 28,000 units during the same period in 2003. This
decrease was primarily the result of continued market competition from Far-East
manufacturers.
Sales from our telephone market decreased approximately $58,000 for the
nine months ended September 30, 2004 compared to the same nine-month period in
2003 due mainly to reduced purchases by one of our major distributors. Telephone
headset purchases by this distributor decreased approximately $50,000 for the
nine months ended September 30, 2004 compared to the same nine-month period in
2003.
For the nine months ended September 30, 2004, we generated sales of
approximately $27,000 from our entrance into the consumer audio market. We
entered this market in September 2004 with the introduction of our
NoiseBuster(R) Active Noise Reduction headphones.
Cost of goods sold. For the nine months ended September 30, 2004, cost of
goods sold decreased approximately $24,000, or 8%, compared to the same
nine-month period in 2003. This decrease was due mainly to the decrease in sales
volume for the first nine months of 2004 as compared to the same nine months in
2003, partially offset by an increase in costs due to a credit of $15,000
received from a vendor during the prior year nine-month period.
Gross profit. Gross profit margin decreased to 67.9% for the nine months
ended September 30, 2004 from 68.7% for the nine months ended September 30,
2003. As noted above, during the nine months ended September 30, 2003, we
received a $15,000 credit from a vendor. Without this credit, the gross profit
margin for the nine months ended September 30, 2003 would have been 67.1%.
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Selling, general and administrative expenses. For the nine months ended
September 30, 2004, selling, general and administrative expenses decreased
approximately $32,000, or 3%, compared to the same nine-month period in 2003.
This decrease was due to: (1) a decrease of approximately $96,000 in payroll and
related expenses; (2) a decrease of approximately $11,000 in professional fees
and expenses; and (3) a decrease of approximately $24,000 in insurance expenses
and miscellaneous fees. These decreases resulted from our continued costs
savings through work force reductions and tighter controls over expenditures.
Partially offsetting these decreases were: (1) an increase of $46,000 in
consulting expenses related to investor communications and public relations; and
(2) an increase of approximately $39,000 in marketing expenses related to the
introduction of our NoiseBuster headphones.
NCT Hearing and affiliates charges. For the nine months ended September 30,
2004, NCT Hearing and affiliates charges increased approximately $143,000, or
55%, compared to the same nine-month period in 2003. This increase was due
mainly to the additional work performed by their engineering staff in connection
with our next generation NoiseBuster headphones released in September 2004 and
the anticipated release of our ProActive safety earmuff in the first quarter of
2005.
Interest expense. Interest expense - NCT Hearing for the nine months ended
September 30, 2004 increased approximately $33,000 compared to the same period
in 2003. These charges were incurred on the outstanding notes payable to NCT
Hearing, which represent amounts owed to NCT Hearing for services provided to us
by NCT Hearing and its affiliated companies, as well as cash advances. As of
September 30, 2004, the balance of the outstanding notes payable, including
interest, was $1,944,200 compared to $1,573,006 as of September 30, 2003.
Liquidity and Capital Resources
We have experienced net losses from operations since our inception. These
losses have been funded primarily from product sales, the sale of convertible
preferred stock and advances from NCT Hearing and its affiliates. During the
nine months ended September 30, 2004, we funded working capital requirements
with continued use of our short-term financing arrangement and advances from NCT
Hearing and its affiliates. We have taken steps to reduce working capital
requirements, including the reduction of work force levels in all areas of
product operations and the institution of tighter controls over all
expenditures. As a result of the reduction in work force and continued controls
over expenditures, management believes we will have sufficient funds to meet
anticipated working capital requirements for the next 12 months. However, our
liquidity is affected by many factors, including, among others, the level of
product sales, capital expenditures, the level of new product development
efforts and other factors related to the uncertainties of our industry and the
economy in general. Accordingly, we may be required to seek additional financing
during the next 12 months. Management can give no assurance that any additional
financing, including from NCT Hearing, will be available to us on commercially
reasonable terms, or at all. The failure to obtain any needed financing could
have a material adverse effect on us.
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At September 30, 2004, cash and cash equivalents were $47,991.
The current ratio (current assets to current liabilities) was .61 to 1.00
at September 30, 2004, as compared to .51 to 1.00 at December 31, 2003. At
September 30, 2004, our working capital deficit was $470,688 compared to a
working capital deficit of $647,747 at December 31, 2003. This decrease in
working capital deficit of approximately $177,000 was due mainly to: (1) an
increase in accounts receivable, net of approximately $65,000; (2) an increase
in prepaid inventory purchases of $24,000; and (3) a decrease in amounts due
from stockholder and due to stockholder (note payable), net of approximately
$27,000, during the nine months ended September 30, 2004.
For the nine months ended September 30, 2004, net cash used in operating
activities was $169,335 compared to $225,781 for the nine months ended September
30, 2003. This decrease of approximately $56,000 was due primarily to a decrease
in the funds used to reduce the outstanding accounts payable, partially offset
by an increase in funds used by an increase in inventories, net. For the nine
months ended September 30, 2004, the outstanding accounts payable was reduced by
approximately $22,000 compared to approximately $199,000 for the same period in
2003. Our inventories, net increased approximately $3,000 during the nine months
ended September 30, 2004 compared to a decrease of approximately $98,000 during
the same nine-month period in 2003.
For the nine months ended September 30, 2004, net cash provided by
financing activities was $200,629 compared to $225,951 for the nine months ended
September 30, 2003. This decrease of approximately $25,000 was due to an
increase of $35,000 in cash payments made on notes payable, partially offset by
an increase of $10,000 in cash advances received from NCT Hearing during the
nine months ended September 30, 2004. Cash advances totaling $267,000 were
received from NCT Hearing during the nine months ended September 30, 2004 in
exchange for noncurrent notes payable.
We have no lines of credit with banks or other lending institutions.
Capital expenditures
There were no material commitments for capital expenditures as of September
30, 2004. In connection with the proposed release of a new product, the
ProActive safety earmuff, we have been in detailed discussions with the
manufacturer and anticipate incurring approximately $110,000 in tooling costs
(for the mold needed for the product) payable as follows: 25% at the beginning
of production, 25% with the first shipment of product and the remainder based
upon unit production, not to exceed 12 months. We expect to finance these costs
from working capital. In the event that our working capital is not sufficient,
we will seek additional funding from NCT Hearing.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
Our primary market risk exposures are fluctuations in interest rates. We
are exposed to short-term interest rate risk on certain debts and trade accounts
receivable sales. We do not use derivative financial instruments to hedge cash
flows for these obligations. In the normal course of business, we employ
established policies and procedures to manage these risks.
Based upon a hypothetical 10% proportionate increase in interest rates from
the average level of interest rates during the last twelve months, and taking
into consideration commissions paid to selling agents, growth of new business
and the expected borrowing level of variable-rate debt, the expected effect on
net income related to our financial instruments would be immaterial.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures.
Our management, with the participation of our President and Chief Financial
Officer, evaluated the effectiveness of our disclosure controls and procedures
(as defined in Rule 13a-15(e) under the Securities Act of 1934, as amended) as
of September 30, 2004. Based on that evaluation, the President and Chief
Financial Officer concluded that our disclosure controls and procedures as of
September 30, 2004 were effective in ensuring that information required to be
disclosed by us in reports that we file or submit under the Securities Exchange
Act of 1934, as amended, is recorded, processed, summarized and reported within
the time periods specified in the Securities and Exchange Commission's rules and
forms. Management believes that a control system, no matter how well designed
and operated, cannot provide absolute assurance that the objectives of the
control system are met, and no evaluation of controls can provide absolute
assurance that all control issues and instances of fraud, if any, could be
detected within a company.
(b) Changes in internal controls.
There were no changes in our internal control over financial reporting that
occurred during the quarter ended September 30, 2004 that have materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting.
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PART II
OTHER INFORMATION
ITEM 6. Exhibits
31(a) Certification of principal executive officer pursuant to Rule
13a-14(a) under the Securities Exchange Act of 1934.
31(b) Certification of principal financial officer pursuant to Rule
13a-14(a) under the Securities Exchange Act of 1934.
32 Certification of principal executive officer and chief financial
officer pursuant to Rule 13a-14(b) under the Securities Exchange
Act of 1934 and 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
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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.
PRO TECH COMMUNICATIONS, INC.
By: /s/ RICHARD HENNESSEY
---------------------
Richard Hennessey
President
By: /s/ MARY CHRISTIAN-HEIN
-----------------------
Mary Christian-Hein
Chief Financial Officer
Dated: November 2, 2004
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