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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_____________
FORM 10-Q
_____________
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 2005
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
incorporation or organization) Identification No.)
4492 Okeechobee Road, Fort Pierce, Florida 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 outstanding as of May 9,
2005 was 75,234,140 shares.
1
Table of Contents
Page
Part I Financial Information
Item 1. Financial Statements:
Condensed Balance Sheets at December 31, 2004 and March 31, 2005
(Unaudited) 3
Condensed Statements of Operations (Unaudited) for the Three Months
Ended March 31, 2004 and 2005 4
Condensed Statements of Cash Flows (Unaudited) for the Three Months
Ended March 31, 2004 and 2005 5
Notes to the Condensed Financial Statements (Unaudited) 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations 12
Item 3. Quantitative and Qualitative Disclosures About Market Risk 15
Item 4. Controls and Procedures 15
Part II Other Information
Item 6. Exhibits 16
Signatures 17
2
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PRO TECH COMMUNICATIONS, INC.
CONDENSED BALANCE SHEETS
December 31, March 31,
2004 2005
--------------- ---------------
ASSETS (Unaudited)
Current assets:
Cash and cash equivalents $ 59,097 $ 26,401
Accounts receivable, less allowance for doubtful accounts
of $28,277 and $29,545, respectively 137,396 171,525
Inventories, net of reserves (Note 3) 343,847 342,488
Other current assets (Note 4) 35,886 40,112
--------------- ---------------
Total current assets 576,226 580,526
Property and equipment, net (Note 5) 306,398 323,377
Intangible assets, net of accumulated amortization of $375,331
and $425,511, respectively 2,610,484 2,560,303
Other assets 5,939 115
--------------- ---------------
$ 3,499,047 $ 3,464,321
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY (CAPITAL DEFICIT)
Current liabilities:
Accounts payable $ 158,698 $ 152,886
Accrued expenses 229,145 229,685
Current portion of capital lease obligations 11,492 11,342
Other liabilities (Notes 6 and 13) 61,864 70,617
Current portion of note payable (Note 7) 2,646 3,016
Note payable to stockholder 39,728 29,993
Preferred stock subject to mandatory conversion into
a variable number of shares of common stock (Note 8) 709,041 642,552
--------------- ---------------
Total current liabilities 1,212,614 1,140,091
Note payable (Note 7) 1,430 14,425
Notes payable due to affiliates (Notes 9 and 13) 2,207,255 2,615,485
Capital lease obligations 9,841 7,221
--------------- ---------------
Total liabilities 3,431,140 3,777,222
--------------- ---------------
Commitments
Stockholders' equity (capital deficit) (Notes 10 and 11):
Preferred stock, $.01 par value, 1,000,000 shares authorized
Series A convertible preferred, 4% cumulative dividend, stated value
$1,000 per share, issued and outstanding, 50 and zero shares,
respectively (Note 8)
Series B convertible preferred, 4% cumulative dividend,
stated value $1,000 per share, issued and outstanding, 460 shares (Note 8) - -
Common stock, $.001 par value, authorized 300,000,000 shares,
issued and outstanding 73,390,133 and 75,234,140 shares, respectively 73,390 75,234
Additional paid-in capital 19,357,332 19,426,996
Accumulated deficit (19,362,815) (19,815,131)
--------------- ---------------
Total stockholders' equity (capital deficit) 67,907 (312,901)
--------------- ---------------
$ 3,499,047 $ 3,464,321
=============== ===============
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
Ended March 31,
----------------------------------
2004 2005
--------------- ---------------
Net sales $ 267,017 $ 319,068
Costs and expenses:
Cost of goods sold 82,875 103,371
Selling, general and administrative expenses 324,157 395,639
NCT Hearing and affiliates charges (Note 13) 78,542 236,271
--------------- ---------------
485,574 735,281
Loss before other income (expense) (218,557) (416,213)
Other income (expense):
Interest expense, net (5,415) (4,530)
Interest expense - NCT Hearing (18,328) (30,015)
Interest expense - convertible preferred stock (Note 8) (5,485) (5,019)
Miscellaneous income, net 140 3,461
--------------- ---------------
Net loss $ (247,645) $ (452,316)
=============== ===============
Basic and diluted net loss per share $ (0.01) $ (0.01)
=============== ===============
Weighted average common shares outstanding -
basic and diluted 33,200,311 73,390,133
=============== ===============
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 Three Months
Ended March 31,
----------------------------------
2004 2005
--------------- ---------------
Cash flows from operating activities:
Net loss $ (247,645) $ (452,316)
Adjustments to reconcile net loss to net
cash used in operating activities:
Notes payable issued for services received 150,452 293,230
Depreciation and amortization 83,840 81,978
Provision for doubtful accounts 7,119 1,268
Preferred stock dividends as interest 5,485 5,019
Changes in operating assets and liabilities:
Increase in accounts receivable (36,210) (35,397)
Decrease in inventories 17,905 1,359
(Increase) decrease in other assets (4,615) 1,598
Decrease in accounts payable (3,896) (5,812)
Increase in accrued expenses 6,578 540
(Decrease) increase in other liabilities (7,778) 11,381
--------------- ---------------
Net cash used in operating activities $ (28,765) $ (97,152)
--------------- ---------------
Cash flows from investing activities:
Capital expenditures (1,730) (31,175)
--------------- ---------------
Net cash used in investing activities $ (1,730) $ (31,175)
--------------- ---------------
Cash flows from financing activities:
Proceeds from:
Notes payable - NCT Hearing 232,000 115,000
Payment made on:
Notes payable (8,150) (13,971)
Notes payable - NCT Hearing - (2,628)
Capital lease obligations (2,516) (2,770)
--------------- ---------------
Net cash provided by financing activities $ 221,334 $ 95,631
--------------- ---------------
Net increase (decrease) in cash and cash equivalents $ 190,839 $ (32,696)
Cash and cash equivalents - beginning of period 21,193 59,097
--------------- ---------------
Cash and cash equivalents - end of period $ 212,032 $ 26,401
=============== ===============
Supplemental disclosures of cash flow information:
Cash paid during the period for interest $ 6,146 $ 4,530
=============== ===============
Supplemental disclosures of non-cash investing and financing activities:
Asset acquired with note payable $ - $ 17,601
=============== ===============
Issuance of common stock upon conversion of series A
preferred stock and dividends $ - $ 59,008
=============== ===============
Adjustment of monetary value on series A preferred stock
upon conversion $ - $ 12,500
=============== ===============
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 months ended March 31,
2005 and cash flows for the three months ended March 31, 2005 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, 2004 contained in our Annual Report on Form 10-K for the year
ended December 31, 2004.
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 2004 have been reclassified to conform to the
2005 classifications.
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 March 31, 2004 and 2005 was not included in the net loss per share
calculations for the interim periods then ended, as the effect would be
antidilutive.
Recent Accounting Pronouncements
In November 2004, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 151, "Inventory Costs--an amendment of ARB No. 43," which is the result
of its efforts to converge U.S. accounting standards for inventories with
International Accounting Standards. SFAS No. 151 requires idle facility
expenses, freight, handling cost and wasted material (spoilage) costs to be
recognized as current-period charges. It also requires that allocation of fixed
production overhead to the costs of conversion be based on the normal capacity
of the production facilities. SFAS No. 151 will be effective for us beginning
January 1, 2006. We are evaluating and have not yet determined the impact, if
any, that the adoption if SFAS No. 151 will have on our financial position,
results of operations or cash flows.
In December 2004, the FASB issued SFAS No. 123 (Revised 2004) "Share-Based
Payment" that prescribes the accounting for share-based payment transactions in
which a company receives employee services in exchange for (a) equity
instruments of the company or (b) liabilities that are based on the fair value
of the company's equity instruments or that may be settled by the issuance of
such equity instruments. SFAS No. 123R addresses all forms of share-based
payment awards, including shares issued under employee stock purchase plans,
stock options, restricted stock and stock appreciation rights. SFAS No. 123R
eliminates the ability to account for share-based compensation transactions
using APB Opinion No. 25, "Accounting for Stock Issued to Employees," that was
previously allowed under SFAS No. 123 as originally issued. Under SFAS No. 123R,
companies are required to record compensation expense for all share based
payment award transactions measured at fair value. In April 2005, the Securities
and Exchange Commission ("SEC") delayed the effective date of SFAS No. 123R.
Accordingly, this statement is effective for us beginning January 1, 2006. We
have not yet determined the impact, if any, that the adoption of SFAS No. 123R
will have on our financial position, results of operations or cash flows.
In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary
Assets--an amendment of APB Opinion No. 29" that amends Opinion No. 29 to
eliminate the exception for nonmonetary exchanges of similar productive assets
and replaces it with a general exception for exchanges of nonmonetary assets
that do not
6
have commercial substance. A nonmonetary exchange has commercial substance if
the future cash flows of the entity are expected to change significantly as a
result of the exchange. The provisions of this statement are effective for
non-monetary asset exchanges for us beginning July 1, 2005. We do not anticipate
that the adoption of SFAS 153 will have a material impact on our financial
position, results of operations or cash flows.
2. 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 an
amendment to FASB Statement No. 123," and continue to apply Accounting
Principles Board ("APB") Opinion No. 25 and related interpretations in
accounting for our stock-based compensation plans. 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, as options granted under our plans have an exercise price equal
to or greater than the market value of the underlying common stock on the date
of grant. Had compensation costs been determined as prescribed by SFAS No. 123,
our net loss and net loss per share would have been the pro forma amounts
indicated below:
For the Three Months
Ended March 31,
------------------------------
2004 2005
------------- -------------
Net loss, as reported $ (247,645) $ (452,316)
Stock-based employee costs based on fair
value method, net of related taxes (4,498) -
------------- -------------
Net loss, pro forma $ (252,143) $ (452,316)
============= =============
Basic and diluted loss per common share:
As reported $ (0.01) $ (0.01)
============= =============
Pro forma $ (0.01) $ (0.01)
============= =============
3. Inventories
Inventories, net consisted of the following:
December 31, March 31,
2004 2005
------------- -------------
Finished goods $ 268,012 $ 272,790
Components 174,726 169,341
Work in progress 19,640 18,888
------------- -------------
Gross inventory 462,378 461,019
Less: reserve for obsolete inventory 118,531 118,531
------------- -------------
$ 343,847 $ 342,488
============= =============
7
4. Other Current Assets
Other current assets consisted of the following:
December 31, March 31,
2004 2005
------------- -------------
Prepaid insurance $ 15,922 $ 11,381
Prepaid inventory purchases 4,843 17,433
Other 15,121 11,298
------------- -------------
$ 35,886 $ 40,112
============= =============
5. Property and Equipment
Property and equipment, net consisted of the following:
December 31, March 31,
2004 2005
------------- -------------
Production molds $ 454,303 $ 483,798
Office equipment 171,582 171,582
Production equipment 39,140 39,140
Leasehold improvements 315,050 315,050
Vehicles 12,414 19,281
Marketing displays 18,116 18,116
------------- -------------
1,010,605 1,046,967
Less accumulated depreciation
and amortization 708,946 727,495
------------- -------------
301,659 319,472
------------- -------------
Assets under capital lease:
Cost 61,893 61,893
Less accumulated amortization 57,154 57,988
------------- -------------
4,739 3,905
------------- -------------
$ 306,398 $ 323,377
============= =============
Total depreciation and amortization expense, with respect to property and
equipment, was $38,660 and $31,797, for the three months ended March 31, 2004
and 2005, respectively.
6. Other Liabilities
Other liabilities consisted of the following:
December 31, March 31,
2004 2005
------------- -------------
Due to factor $ 4,017 $ 15,398
Due to NCT Hearing Products, Inc. 57,847 55,219
------------- -------------
$ 61,864 $ 70,617
============= =============
At March 31, 2005, accounts receivable factored and still outstanding were
$39,693, of which $33,739 was under recourse provisions. Total factoring fees
amounted to $415 and $1,109 for the three months ended March 31, 2004 and 2005,
respectively. Interest expense incurred under this agreement amounted to $316
and $553 for the three months ended March 31, 2004 and 2005, respectively.
8
During the three months ended March 31, 2005, NCT Hearing Products, Inc.
("NCT Hearing"), our parent company, 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 March 31, 2005,
outstanding cash advances to us from NCT Hearing under this arrangement were
$55,219 (see Note 13).
7. Notes Payable
On January 20, 2005, we obtained a bank loan of $17,601. The loan, secured
by a vehicle, provides for equal monthly payments of approximately $358,
including interest at 8.0%, maturing on February 10, 2010. As of March 31, 2005,
the balance outstanding was $17,441. As of March 31, 2005, $3,016 is included in
current portion of note payable and $14,425 is included in note payable on our
condensed balance sheet.
8. Preferred Stock Subject to Mandatory Conversion into a Variable Number of
Shares of Common Stock
Series A Convertible Preferred Stock
On March 31, 2005, 50 shares of our series A preferred stock plus accrued
dividends were automatically converted into 1,844,007 shares of our common
stock. No shares of our series A preferred stock were outstanding at March 31,
2005. Dividends classified as interest expense for series A preferred stock were
$499 and $482, for the three months ended March 31, 2004 and 2005, respectively.
Series B Convertible Preferred Stock
No shares of our series B preferred stock were converted or exchanged
during the three months ended March 31, 2005. Dividends classified as interest
expense for series B preferred stock were $4,986 and $4,537, for the three
months ended March 31, 2004 and 2005, respectively.
Our series B preferred stock is carried on our balance sheet as of March
31, 2005 at its monetary value of $642,552, which is comprised of the fair value
of the shares of $575,000, plus the cash value of the accrued dividends of
$67,552. We would have to issue approximately 14.4 million shares of our common
stock if settlement of the stated value of our series B preferred stock had
occurred as of March 31, 2005. We have the option to settle the accrued
dividends in cash or common stock. As of March 31, 2005, settlement in common
stock for the accrued dividends on our series B preferred stock would require
issuance of approximately 2.1 million shares. There is no limit on the number of
shares that we could be required to issue upon conversion of the series B
preferred stock.
9. Notes Payable Due to Affiliates
During the three months ended March 31, 2005, we issued an aggregate of
$378,215 of secured promissory notes to NCT Hearing Products, Inc., our parent
company, as consideration for $115,000 of cash advanced and $263,215 of services
provided.
As of March 31, 2005, we owed $2,615,485 to NCT Hearing under the following
secured promissory notes, bearing interest at the prime rate (5.75% at March 31,
2005):
Original issue date of note: Maturing: Principal Interest Total
- ---------------------------- ----------------- ----------------- ----------------- -----------------
June 30, 2004 April 1, 2006 $ 1,671,843 $ 62,818 $ 1,734,661
September 17, 2004 April 1, 2006 35,000 976 35,976
September 30, 2004 October 1, 2006 218,617 5,723 224,340
December 31, 2004 October 1, 2006 238,758 3,226 241,984
February 25, 2005 April 1, 2007 30,000 156 30,156
March 16, 2005 April 1, 2007 35,000 82 35,082
March 22, 2005 April 1, 2007 50,000 71 50,071
March 31, 2005 April 1, 2007 263,215 - 263,215
----------------- ----------------- -----------------
$ 2,542,433 $ 73,052 $ 2,615,485
================= ================= =================
9
10. Stockholders' Equity (Capital Deficit)
The changes in stockholders' equity (capital deficit) during the three
months ended March 31, 2005, were as follows:
Common Stock Additional Accumulated
Shares Amount Paid-in capital Deficit Total
------------------------- --------------- --------------- --------------
Balance at December 31, 2004 73,390,133 $ 73,390 $ 19,357,332 $ (19,362,815) $ 67,907
Issuance of common stock:
Conversion of Preferred Stock 1,844,007 1,844 57,164 - 59,008
Net Loss - - - (452,316) (452,316)
Other - - 12,500 - 12,500
------------------------- --------------- --------------- --------------
Balance at March 31, 2005 75,234,140 $ 75,234 $ 19,426,996 $ (19,815,131) $ (312,901)
========================= =============== =============== ==============
11. Common Stock
On March 31, 2005, we issued 1,844,007 shares upon automatic conversion of
50 shares plus accrued dividends of our series A convertible preferred stock
(see Note 8).
At March 31, 2005, we were required to reserve approximately 24.6 million
shares of our common stock for issuance, including shares issuable upon exercise
of outstanding options and upon conversion of our series B convertible preferred
stock.
12. Business Divisions Results
Products Business: Our Products Business develops, manufactures and
distributes headphone and communications headset products and systems into the
contact center, quick service restaurant, cellular/mobile telephone and consumer
audio markets. Our current products include Apollo headsets and amplifiers for
use in contact centers, ProCom headsets for use in quick-service restaurants and
NoiseBuster active noise reduction consumer audio headphones.
Telecommunications Systems Integration Business: Our Telecommunications
Systems Integration Business sells and installs simple to sophisticated analog,
digital and Internet Protocol phone systems providing telecommunications system
integration support to the small office and the large corporate call center
clients.
Call Center Operations Business: Our Call Center Operations Business
performed outbound telemarketing and information gathering services. The extent
of our commercial activities for this business during 2004 was insignificant and
management had decided to let the operations runoff. The net income from this
business division for the three months ended March 31, 2004 and 2005 was $2,173
and zero, respectively, and has been reclassified, for the periods presented,
under our Products Business division.
As of March 31, 2005, these divisions were not deemed to be reportable
segments in accordance with SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information."
10
Business division data is as follows:
Division
--------------------------------------------------
Telecom Systems Total
Products Integration Divisions
--------------- --------------- --------------
For the three months ended March 31, 2005:
Sales to external customers $ 298,191 $ 20,877 $ 319,068
Net loss (441,064) (11,252) (452,316)
For the three months ended March 31, 2004:
Sales to external customers $ 232,320 $ 34,697 $ 267,017
Net (loss) income (249,341) 1,696 (247,645)
13. Related Party Transactions
NCT Hearing and Affiliates
NCT Hearing and its affiliates charge us for labor and overhead which 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 its affiliates during the three months ended March 31, 2004 and
2005.
For the Three Months
Ended March 31,
------------------------------
2004 2005
------------- -------------
Labor $ 54,000 $ 208,000
Overhead 25,000 28,000
------------- -------------
$ 79,000 $ 236,000
============= =============
As of December 31, 2004 and March 31, 2005, we owed an aggregate of
$2,265,102 and $2,670,704, respectively, to NCT Hearing. As of March 31, 2005,
$2,615,485 is included in notes payable due to affiliates and the remaining
$55,219 is included in other liabilities (see Note 6) on our condensed balance
sheet.
11
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 industries;
o difficulties or delays in manufacturing;
o our ability 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 rights;
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 headphone and communications
headset products and systems into the contact center, quick service restaurant,
cellular/mobile telephone and consumer audio markets. We currently offer
headphones, headsets, amplifiers, hands-free telephones and accessories. We also
have limited operations in the telecommunications systems integration business.
We intend to continue to pursue new product development. Under a license
agreement with our parent company, NCT Hearing Products, Inc., we have access to
over 50 patents, patents pending and innovations relating to active noise
reduction and noise and echo cancellation. Though an expansion of this license,
we now have the ability to address additional markets of opportunity, including
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 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 the ProActive safety earmuff. This
earmuff is designed to 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 second quarter of 2005.
Critical Accounting Policies and Estimates
The preparation of our financial statements requires our management to make
estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses and related disclosures of contingent
12
assets and liabilities. 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, the results of which form the basis of
judgments made about the carrying values of assets and liabilities that are not
readily apparent from other sources. Our 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.
A summary of our critical accounting policies and estimates is included in
Management's Discussion and Analysis of Financial Condition and Results of
Operations contained in our Annual Report on Form 10-K for the year ended
December 31, 2004. There have been no changes to these policies since December
31, 2004.
Results of Operations
Three months ended March 31, 2005 compared to three months ended March 31, 2004
Net loss. Net loss for the three months ended March 31, 2005 increased
approximately $205,000, or 83%, compared to the same three-month period in 2004.
This increase was due to increases of approximately $158,000 in NCT Hearing and
affiliates charges and of approximately $71,000 in selling, general and
administrative expenses, partially offset by an increase of approximately
$52,000 in net sales.
Net sales. Net sales for the three months ended March 31, 2005 increased
approximately $52,000, or 19%, compared to the three months ended March 31,
2004. The increase was primarily due to an increase in sales from our consumer
audio and telephone markets, partially offset by a reduction in sales from our
quick service restaurant market.
Sales from our quick service restaurant market decreased approximately
$26,000 for the three months ended March 31, 2005 as compared to the same
three-month period in 2004. This decrease was due to the continuing impact of
market competition from Far East headset manufacturers and increased industry
use of equipment maintanance support contractors, who provide a wide range of
restaurant equipment, thereby eliminating the need for owners and franchisees to
purchase headset products from individual manufacturers, which resulted in
decreased purchases of our quick service restaurant headsets.
Sales from our telephone market increased approximately $36,000 for the
three months ended March 31, 2005 as compared to the same three-month period in
2004. This increase was due to increased sales of our Apollo line of products,
some of which have been re-engineered over the past twelve months.
Sales from our consumer audio market were approximately $59,000 for the
three months ended March 31, 2005. We had not yet entered this market during the
three months ended March 31, 2004.
Cost of goods sold. For the three months ended March 31, 2005, cost of
goods sold increased approximately $20,000, or 25%, compared to the same
three-month period in 2004. This increase was attributable to the increase in
sales volume for our consumer audio and telephone markets and related to a
change in the mix of headset units sold.
Gross profit percentage. Gross profit on net sales before depreciation and
amortization, as a percentage of net sales, decreased to 67.6% for the three
months ended March 31, 2005 from 69.0% for the three months ended March 31,
2004. This decrease was the result of a change in the mix of products sold.
Selling, general and administrative expenses. For the three months ended
March 31, 2005, selling, general and administrative expenses increased
approximately $71,000, or 22%, compared to the same three-month period in 2004.
This increase was due mainly to increases of $37,000 in payroll and related
expenses and $18,000 in marketing expenses reflecting increased spending related
to our consumer audio headset, the NoiseBuster.
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NCT Hearing and affiliates charges. For the three months ended March 31,
2005, NCT Hearing and affiliates charges increased approximately $158,000, or
201%, compared to the same three-month period in 2004. This increase was due
mainly to the additional work performed by their (1) engineering staff in
connection with the re-engineering of our Apollo amplifier and product
development of the ProActive safety earmuff and (2) marketing staff in
connection with the continued support related to our consumer audio headset, the
NoiseBuster.
Liquidity and Capital Resources
We have experienced net losses 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 three months ended
March 31, 2005, we funded working capital requirements with continued use of our
short-term financing arrangement and advances from NCT Hearing and its
affiliates. 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.
At March 31, 2005, cash and cash equivalents were $26,401.
The current ratio (current assets to current liabilities) was .58 to 1.00
at March 31, 2005, as compared to .48 to 1.00 at December 31, 2004. At March 31,
2005, our working capital deficit was $559,565 compared to a working capital
deficit of $636,388 at December 31, 2004. This decrease in working capital
deficit of approximately $77,000 was due primarily to a decrease in current
liabilities of approximately $72,000 related to the mandatory conversion of our
series A convertible preferred stock into shares of our common stock.
For the three months ended March 31, 2005, net cash used in operating
activities was $97,152 compared to $28,765 for the three months ended March 31,
2004. This increase of approximately $68,000 was due primarily to funding the
net loss of $452,000, as adjusted to reconcile net cash.
For the three months ended March 31, 2005, net cash used in investing
activities was $31,175 compared to $1,730 for the three months ended March 31,
2004. This increase of approximately $29,000 was due primarily to the purchase
of tooling equipment for the ProActive line of products.
For the three months ended March 31, 2005, net cash provided by financing
activities was $95,631 compared to $221,334 for the three months ended March 31,
2004. This decrease of approximately $126,000 was due to an decrease of $117,000
in net cash received from NCT Hearing during the three months ended March 31,
2005. Cash advances totaling $115,000 were received from NCT Hearing during the
three months ended March 31, 2005 in exchange for long-term 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 March 31,
2005 and no material commitments are expected in the near future. In connection
with the proposed release of our new ProActive safety earmuff, we have incurred
25% of the approximate $110,000 in tooling costs and anticipate incurring the
remaining tooling costs (for the mold needed for the product) payable as
follows: 25% with the first shipment of product and the 50% 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 include fluctuations in interest rates.
We are exposed to short-term interest rate risk on certain debt obligations 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
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 Exchange Act of 1934, as
amended) as of March 31, 2005. Based on that evaluation, our President and Chief
Financial Officer concluded that our disclosure controls and procedures as of
March 31, 2005 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. We believe 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.
Changes in internal controls
There were no changes in our internal control over financial reporting that
occurred during the quarter ended March 31, 2005 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
31.1 Certification of President pursuant to Rule 13a-14(a) under the Securities
Exchange Act of 1934.
31.2 Certification of Chief Financial Officer pursuant to Rule 13a-14(a) under
the Securities Exchange Act of 1934.
32.1 Certification of President 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: May 13, 2005
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