UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------
FORM 10-Q
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/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 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 Exchange Act). /_/ Yes /X/ No
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). / / Yes /X/ No
The number of shares of the registrant's common stock outstanding as of November
8, 2005 was 75,234,140 shares.
Table of Contents
Page
Part I Financial Information
Item 1. Financial Statements:
Condensed Balance Sheets at December 31, 2004 and September 30, 2005
(Unaudited) 3
Condensed Statements of Operations (Unaudited) for the Three and Nine Months
Ended September 30, 2004 and 2005 4
Condensed Statements of Cash Flows (Unaudited) for the Three and Nine Months
Ended September 30, 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 13
Item 3. Quantitative and Qualitative Disclosures About Market Risk 17
Item 4. Controls and Procedures 17
Part II Other Information
Item 6. Exhibits 18
Signatures 19
2
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PRO TECH COMMUNICATIONS, INC.
CONDENSED BALANCE SHEETS
December 31, September 30,
2004 2005
---------------- ----------------
ASSETS (Unaudited)
Current assets:
Cash and cash equivalents $ 59,097 $ 46,192
Accounts receivable, less allowance for doubtful accounts
of $28,277 and $18,967, respectively 137,396 155,863
Inventories, net of reserves (Note 3) 343,847 375,105
Other current assets (Note 4) 35,886 15,494
---------------- ----------------
Total current assets 576,226 592,654
Property and equipment, net (Note 5) 306,398 265,674
Intangible assets, net of accumulated amortization of $375,331
and $525,871, respectively 2,610,484 2,459,944
Other assets 5,939 115
---------------- ----------------
$ 3,499,047 $ 3,318,387
================ ================
LIABILITIES AND STOCKHOLDERS' EQUITY (CAPITAL DEFICIT)
Current liabilities:
Accounts payable $ 158,698 $ 272,546
Accrued expenses 229,145 201,742
Current portion of capital lease obligations 11,492 11,260
Other liabilities (Notes 6 and 13) 61,864 18,548
Current portion of note payable (Note 7) 2,646 3,139
Note payable to stockholder (Note 7) 39,728 14,956
Preferred stock subject to mandatory conversion into
a variable number of shares of common stock (Note 8) 709,041 651,777
---------------- ----------------
Total current liabilities 1,212,614 1,173,968
Note payable and note payable to stockholder (Note 7) 1,430 14,572
Notes payable due to affiliates (Notes 9 and 13) 2,207,255 3,426,555
Capital lease obligations 9,841 2,216
---------------- ----------------
Total liabilities 3,431,140 4,617,311
---------------- ----------------
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) (20,801,154)
---------------- ----------------
Total stockholders' equity (capital deficit) 67,907 (1,298,924)
---------------- ----------------
$ 3,499,047 $ 3,318,387
================ ================
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,
--------------------------------- ---------------------------------
2004 2005 2004 2005
--------------- --------------- --------------- ---------------
Net sales $ 300,307 $ 316,346 $ 837,121 $ 947,111
Costs and expenses:
Cost of goods sold 101,661 107,885 268,675 308,121
Selling, general and administrative expenses 319,610 436,292 990,389 1,200,601
NCT Hearing and affiliates charges (Note 13) 177,428 269,725 377,434 738,320
--------------- --------------- --------------- ---------------
598,699 813,902 1,636,498 2,247,042
Loss before other income (expense) (298,392) (497,556) (799,377) (1,299,931)
Interest expense, net (3,858) (3,930) (13,268) (12,583)
Interest expense - NCT Hearing (18,768) (47,983) (52,238) (116,511)
Interest expense - convertible preferred stock (Note 8) (5,273) (4,637) (15,958) (14,244)
Miscellaneous income, net - (68) 2,255 4,930
--------------- --------------- --------------- ---------------
Net loss $ (326,291) $ (554,174) $ (878,586) $ (1,438,339)
=============== =============== =============== ===============
Basic and diluted net loss per share $ (0.00) $ (0.01) $ (0.01) $ (0.02)
=============== =============== =============== ===============
Weighted average common shares outstanding -
basic and diluted 73,390,133 75,234,140 58,679,692 74,621,714
=============== =============== =============== ===============
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,
-----------------------------------------
2004 2005
------------------ ------------------
Cash flows from operating activities:
Net loss $ (878,586) $ (1,438,339)
Adjustments to reconcile net loss to net
cash used in operating activities:
Notes payable issued for services received 586,402 1,034,028
Depreciation and amortization 258,038 247,176
Provision for doubtful accounts 4,718 (9,310)
Preferred stock dividends as interest 15,958 14,244
Changes in operating assets and liabilities:
Increase in accounts receivable (69,595) (9,157)
Increase in inventories (3,083) (31,258)
(Increase) decrease in other assets (27,485) 26,216
(Decrease) increase in accounts payable (21,826) 113,848
Decrease in accrued expenses (24,592) (27,403)
(Decrease) increase in other liabilities (10,015) 14,531
------------------ ------------------
Net cash used in operating activities $ (170,066) $ (65,424)
------------------ ------------------
Cash flows from investing activities:
Capital expenditures (3,765) (38,311)
------------------ ------------------
Net cash used in investing activities $ (3,765) $ (38,311)
------------------ ------------------
Cash flows from financing activities:
Proceeds from:
Notes payable - NCT Hearing 267,000 130,053
Payment made on:
Notes payable (28,138) (28,738)
Notes payable - NCT Hearing (30,503) (2,628)
Capital lease obligations (7,730) (7,857)
------------------ ------------------
Net cash provided by financing activities $ 200,629 $ 90,830
------------------ ------------------
Net increase (decrease) in cash and cash equivalents $ 26,798 $ (12,905)
Cash and cash equivalents - beginning of period 21,193 59,097
------------------ ------------------
Cash and cash equivalents - end of period $ 47,991 $ 46,192
================== ===================
Supplemental disclosures of cash flow information:
Cash paid during the period for interest $ 13,614 $ 12,528
================== ==================
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
================== ==================
Principal on notes payable refinanced $ 1,489,641 $ 2,274,590
================== ==================
Interest on notes payable refinanced $ 61,611 $ 113,352
================== ==================
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 intangible assets $ 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. Organization and Basis of Presentation
Throughout this document, Pro Tech Communications, Inc. is referred to as
"we," "us," "our" or "Pro Tech." Pro Tech engineers, designs and distributes
audio and communication solutions and other products for consumers, business
users and industrial users. We are a majority-owned subsidiary of NCT Hearing
Products, Inc. ("NCT Hearing"), a wholly-owned subsidiary of NCT Group, Inc.
("NCT"). As of September 30, 2005, NCT Hearing owned approximately 83% of our
outstanding common stock.
We have experienced recurring net losses ($20,801,154 through September 30,
2005) since our inception. These losses, which include the cost for development
of products and an impairment charge of $11,500,000 on our intangible assets,
have been funded primarily from product sales, the sale of common stock and
convertible preferred stock, and advances directly and indirectly from NCT (our
ultimate parent company) and its affiliates. In addition, we had a working
capital deficit of $581,314 at September 30, 2005. We continue to closely
monitor all our expenditures. We received advances for the nine months ended
September 30, 2005 from NCT Hearing to assist us in funding our working capital
needs during 2005 (see Note 9). Management believes we will have sufficient
funds to meet our estimated anticipated working capital requirements through
September 30, 2006. In the event that our operations do not generate sufficient
cash, we would attempt to reduce our level of discretionary spending, if any,
and attempt to raise additional funds.
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, 2005 and cash flows for the nine
months ended September 30, 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 September 30, 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 do not anticipate that the adoption of SFAS No. 151 will
have a material impact on our financial position, results of operations or cash
flows.
6
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 May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections--A Replacement of APB Opinion No. 20 and FASB Statement No. 3." SFAS
No. 154 requires retrospective application to prior periods' financial
statements for changes in accounting principle, unless it is impracticable to
determine either the period-specific effects or the cumulative effect of the
change. SFAS No. 154 also requires that retrospective application of a change in
accounting principle be limited to the direct effects of the change. Indirect
effects of a change in accounting principle, such as a change in
non-discretionary profit-sharing payments resulting from an accounting change,
should be recognized in the period of the accounting change. SFAS No. 154 also
requires that a change in depreciation, amortization, or depletion method for
long-lived non-financial assets be accounted for as a change in accounting
estimate affected by a change in accounting principle. SFAS No. 154 is effective
for accounting changes and corrections of errors made in fiscal years beginning
after December 15, 2005. The provisions of this statement are effective for us
beginning January 1, 2006. We do not anticipate that the adoption of SFAS No.
154 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 For the Nine Months
Ended September 30, Ended September 30,
------------------------------ ------------------------------
2004 2005 2004 2005
------------- -------------- --------------- -------------
Net loss, as reported $ (326,291) $ (554,174) $ (878,586) $ (1,438,339)
Stock-based employee costs based on fair
value method, net of related taxes (473) - (6,639) -
------------- -------------- --------------- -------------
Net loss, pro forma $ (326,764) $ (554,174) $ (885,225) $ (1,438,339)
============= ============== =============== =============
Basic and diluted loss per common share:
As reported $ (0.00) $ (0.01) $ (0.01) $ (0.02)
============= ============== =============== =============
Pro forma $ (0.00) $ (0.01) $ (0.02) $ (0.02)
============= ============== =============== =============
7
3. Inventories
Inventories, net consisted of the following:
December 31, September 30,
2004 2005
--------------- ---------------
Finished goods $ 268,012 $ 273,540
Components 174,726 184,869
Work in progress 19,640 35,227
--------------- ---------------
Gross inventory 462,378 493,636
Less: reserve for obsolete inventory 118,531 118,531
--------------- ---------------
$ 343,847 $ 375,105
=============== ===============
4. Other Current Assets
Other current assets consisted of the following:
December 31, September 30,
2004 2005
--------------- ---------------
Prepaid insurance $ 15,922 $ 4,448
Prepaid inventory purchases 4,843 108
Other 15,121 10,938
--------------- ---------------
$ 35,886 $ 15,494
=============== ===============
5. Property and Equipment
Property and equipment, net consisted of the following:
December 31, September 30,
2004 2005
--------------- ---------------
Production molds $ 454,303 $ 490,934
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 1,054,103
Less accumulated depreciation
and amortization 708,946 790,667
--------------- ---------------
301,659 263,436
--------------- ---------------
Assets under capital lease:
Cost 61,893 61,893
Less accumulated amortization 57,154 59,655
--------------- ---------------
4,739 2,238
--------------- ---------------
$ 306,398 $ 265,674
=============== ===============
Total depreciation and amortization expense, with respect to property and
equipment, was $113,608 and $96,636, for the nine months ended September 30,
2004 and 2005, respectively.
8
6. Other Liabilities
Other liabilities consisted of the following:
December 31, September 30,
2004 2005
--------------- ---------------
Due to factor $ 4,017 $ 18,548
Due to NCT Hearing Products, Inc. 57,847 -
--------------- ---------------
$ 61,864 $ 18,548
=============== ===============
Total factoring fees amounted to $1,054 and $2,667 for the nine months
ended September 30, 2004 and 2005, respectively. Interest expense incurred under
this agreement amounted to $597 and $1,442 for the nine months ended September
30, 2004 and 2005, respectively.
During the nine months ended September 30, 2005, 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 September 30, 2005, there were no outstanding cash
advances to us from NCT Hearing under this arrangement (see Note 13).
7. Note Payable and Note Payable to Stockholder
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 September 30,
2005, the balance outstanding was $15,963; of which $3,139 is included in
current portion of note payable and $12,824 is included in note payable and note
payable to stockholder on our condensed balance sheet.
On June 1, 2005, we refinanced $23,396 in principal from a note payable to
a stockholder, which was due to mature on June 27, 2005, into a new note. The
new note bore interest at 8.5% and provided for monthly payments including
interest of $3,500 through November 30, 2005, with the remaining balance due on
December 30, 2005. On August 1, 2005, we refinanced the remaining principal of
$16,704 from the June 1, 2005 note with a modification of terms. The debt
instruments were deemed not to be substantially different in accordance with
Emerging Issues Task Force Issue No. 96-19 "Debtor's Accounting for a
Modification or Exchange of Debt Instruments." The new note bears interest at
12% and provides for monthly payments including interest of $1,500 from November
2005 through September 2006, with the remaining balance due on October 15, 2006.
As of September 30, 2005, the balance outstanding was $16,704; of which $14,956
is included in note payable to stockholder and $1,748 is included in note
payable and note payable to stockholder 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, the remaining outstanding 50 shares of our series A
preferred stock plus accrued dividends were automatically converted into
1,844,007 shares of our common stock. As a result, no shares of our series A
preferred stock are outstanding. Dividends classified as interest expense for
series A preferred stock were $1,501 and $482, for the nine months ended
September 30, 2004 and 2005, respectively.
Series B Convertible Preferred Stock
No shares of our series B preferred stock were converted or exchanged
during the nine months ended September 30, 2005. Dividends classified as
interest expense for series B preferred stock were $14,457 and $13,762, for the
nine months ended September 30, 2004 and 2005, respectively.
9
Our series B preferred stock is carried on our balance sheet as of
September 30, 2005 at its monetary value of $651,777, which is comprised of the
fair value of the shares of $575,000, plus the cash value of the accrued
dividends of $76,777. We would have to issue approximately 28.8 million shares
of our common stock if settlement of the stated value of our series B preferred
stock had occurred as of September 30, 2005. We have the option to settle the
accrued dividends in cash or common stock. As of September 30, 2005, settlement
in common stock for the accrued dividends on our series B preferred stock would
require issuance of approximately 4.8 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 nine months ended September 30, 2005, we issued an aggregate of
$3,380,358 of secured promissory notes to NCT Hearing, our parent company, as
consideration for $115,000 of cash advanced, $917,516 of services provided and
the refinancing of $2,234,490 of principal and $113,352 of interest for notes
consolidated in advance of maturity.
As of September 30, 2005, we owed $3,426,555 to NCT Hearing under the
following secured promissory notes, bearing interest at the prime rate (6.75% at
September 30, 2005):
Original issue date of note: Maturing: Principal Interest Total
- ---------------------------- ------------------ ----------------- ---------------- ----------------
February 25, 2005 April 1, 2007 $ 30,000 $ 1,101 $ 31,101
March 16, 2005 April 1, 2007 35,000 1,181 36,181
March 22, 2005 April 1, 2007 50,000 1,640 51,640
March 31, 2005 April 1, 2007 263,215 8,249 271,464
June 30, 2005 October 1, 2007 2,083,704 33,922 2,117,626
September 22, 2005 October 1, 2007 70,272 104 70,376
September 30, 2005 April 1, 2008 848,167 - 848,167
----------------- ---------------- ----------------
$ 3,380,358 $ 46,197 $ 3,426,555
================= ================ ================
10. Stockholders' Equity (Capital Deficit)
The changes in stockholders' equity (capital deficit) during the nine
months ended September 30, 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 - - - (1,438,339) (1,438,339)
Other - - 12,500 - 12,500
------------------------- ---------------- ---------------- -------------
Balance at September 30, 2005 75,234,140 $ 75,234 $ 19,426,996 $ (20,801,154) $(1,298,924)
========================= ================ ================ =============
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 September 30, 2005, we were required to reserve approximately 48.5
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.
10
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. In June 2005, we
also announced the introduction of our NoiseBuster safety earmuff.
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 loss before other
income (expense) from this business division for the three and nine months ended
September 30, 2004 was $4,096 and $1,961, respectively, and has been
reclassified, for the periods presented, under our Products Business division.
The net (loss) income before other income (expense) from this business division
for each of the three and nine months ended September 30, 2005 was zero.
As of September 30, 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."
Business division data is as follows:
Telecom Systems Total
Products Integration Divisions
---------------- ---------------- ----------------
For the three months ended September 30, 2005:
Sales to external customers $ 295,201 $ 21,145 $ 316,346
Loss before other income (expense) (483,668) (13,888) (497,556)
For the three months ended September 30, 2004:
Sales to external customers $ 285,951 $ 14,356 $ 300,307
Loss before other income (expense) (295,580) (2,812) (298,392)
For the nine months ended September 30, 2005:
Sales to external customers $ 881,474 $ 65,637 $ 947,111
Loss before other income (expense) (1,270,576) (29,355) (1,299,931)
For the nine months ended September 30, 2004:
Sales to external customers $ 759,943 $ 77,178 $ 837,121
Loss before other income (expense) (796,771) (2,606) (799,377)
11
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 and nine months ended September 30,
2004 and 2005.
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
-------------------------------- --------------------------------
2004 2005 2004 2005
--------------- --------------- --------------- ---------------
Labor $ 143,000 $ 241,000 $ 289,000 $ 654,000
Overhead 34,000 29,000 88,000 84,000
--------------- --------------- --------------- ---------------
$ 177,000 $ 270,000 $ 377,000 $ 738,000
=============== =============== =============== ===============
In addition, NCT Hearing charged us for expenses incurred on our behalf of
approximately $41,000 and $98,000 during the three months ended September 30,
2004 and 2005, respectively, and approximately $114,000 and $179,000 during the
nine months ended September 30, 2004 and 2005, respectively, which are included
in selling, general and administrative expenses on our condensed statements of
operations.
As of December 31, 2004 and September 30, 2005, we owed an aggregate of
$2,265,102 and $3,426,555, respectively, to NCT Hearing (see Note 9).
12
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
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 introduced the NoiseBuster safety earmuff in late June 2005. 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 produce this
product during the last quarter of 2005. We intend to continue to pursue new
product development utilizing the license with our parent company, NCT Hearing,
under which we have access to over 50 patents, patents pending and innovations
relating to active noise reduction and noise and echo cancellation. We plan to
address additional markets of opportunity, including spectator racing, two-way
radio communications and aviation.
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 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
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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 September 30, 2005 Compared to Three Months Ended September
30, 2004
Net loss. Net loss for the three months ended September 30, 2005 increased
approximately $228,000, or 70%, compared to the same three-month period in 2004.
This increase was due to increases of approximately $117,000 in selling, general
and administrative expenses, approximately $92,000 in NCT Hearing and affiliates
charges and approximately $29,000 in interest expense - NCT Hearing, partially
offset by an increase of approximately $16,000 in net sales.
Net sales. Net sales for the three months ended September 30, 2005
increased approximately $16,000, or 5%, compared to the three months ended
September 30, 2004. The increase was primarily due to an increase in sales from
our quick service restaurant and consumer audio markets, partially offset by a
reduction in sales from our telephone markets. The increase in net sales from
the quick service restaurant market for the three months ended September 30,
2005 primarily resulted from the fact that for the three months ended September
30, 2004, delayed shipments representing $18,000 due to the local impact of
hurricanes Frances and Jeanne decreased net sales. We do not expect the increase
experienced this quarter to continue in the quick service restaurant market. The
increase in net sales from the consumer audio market was primarily due to
selling in this market for the full quarter in 2005 while we had entered this
market toward the end of the quarter in 2004.
Gross profit percentage. Gross profit on net sales before depreciation and
amortization, as a percentage of net sales, remained steady at approximately 66%
for the three months ended September 30, 2005 compared to the three months ended
September 30, 2004.
Selling, general and administrative expenses. For the three months ended
September 30, 2005, selling, general and administrative expenses increased
approximately $117,000, or 37%, compared to the same three-month period in 2004.
This increase was due mainly to an increase of $61,000 in professional fees, an
increase of $34,000 in payroll and related expenses and an increase of $28,000
in engineering fees and expenses related to our NoiseBuster safety earmuff and
anticipated new products. The majority of the increase in professional fees was
related to our July 2005 conversion to the same accounting system as NCT, our
ultimate parent company. The majority of the increase in payroll and related
expenses was for sales support of our products.
NCT Hearing and affiliates charges. For the three months ended September
30, 2005, NCT Hearing and affiliates charges increased approximately $92,000, or
52%, compared to the same three-month period in 2004. This increase was due
primarily to the additional work performed by their engineering staff in
connection with product development of the NoiseBuster safety earmuff and
anticipated new products.
Interest expense. For the three months ended September 30, 2005, interest
expense - NCT Hearing increased approximately $29,000, or 156%, compared to the
same three-month period in 2004. The increase was due principally to the
increased amount of 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, and the increase in the prime interest rate.
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Nine Months Ended September 30, 2005 Compared to Nine Months Ended September 30,
2004
Net loss. Net loss for the nine months ended September 30, 2005 increased
approximately $560,000, or 64%, compared to the same nine-month period in 2004.
This increase was due to increases of approximately $361,000 in NCT Hearing and
affiliates charges, approximately $210,000 in selling, general and
administrative expenses and approximately $64,000 in interest expense - NCT
Hearing, partially offset by an increase of approximately $110,000 in net sales.
Net sales. Net sales for the nine months ended September 30, 2005 increased
approximately $110,000, or 13%, compared to the nine months ended September 30,
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
$21,000 for the nine months ended September 30, 2005 as compared to the same
nine-month period in 2004. This decrease was due to the continuing impact of
market competition from Far East headset manufacturers and the implementation of
wireless headsets into this market, which reduces the marketability of our
headset solutions.
Sales from our telephone market increased approximately $52,000 for the
nine months ended September 30, 2005 as compared to the same nine-month period
in 2004. The increase was due to increased sales of our Apollo line of products.
Sales from our consumer audio market increased approximately $115,000 for
the nine months ended September 30, 2005 as compared to the same nine-month
period in 2004. We entered this market during the three months ended September
30, 2004.
Cost of goods sold. For the nine months ended September 30, 2005, cost of
goods sold increased approximately $39,000, or 15%, compared to the same
nine-month period in 2004. This increase was commensurate with the increase in
product sales.
Gross profit percentage. Gross profit on net sales before depreciation and
amortization, as a percentage of net sales, remained steady at approximately 68%
for the nine months ended September 30, 2005 and September 30, 2004.
Selling, general and administrative expenses. For the nine months ended
September 30, 2005, selling, general and administrative expenses increased
approximately $210,000, or 21%, compared to the same nine-month period in 2004.
This increase was due mainly to increases of: (1) $78,000 in payroll and related
expenses; (2) $84,000 in professional fees and (3) $67,000 in engineering of our
Apollo amplifier, NoiseBuster safety earmuff and anticipated new products. The
increase in payroll and related expenses for the nine months ended September 30,
2005 primarily resulted from increased sales support of our products and the
fact that for the nine months ended September 30, 2004, an officer voluntarily
accepted a reduction in salary of approximately $23,000. The majority of the
increase in professional fees, or $63,000, was related to our conversion to the
same accounting system as NCT, our ultimate parent company.
NCT Hearing and affiliates charges. For the nine months ended September 30,
2005, NCT Hearing and affiliates charges increased approximately $361,000, or
96%, compared to the same nine-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 NoiseBuster safety earmuff and (2) marketing staff in
connection with the continued support related to our NoiseBuster line of
products.
Interest expense. For the nine months ended September 30, 2005, interest
expense - NCT Hearing increased approximately $64,000, or 123%, compared to the
same nine-month period in 2004. The increase was due to the increased amount of
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,
and the increase in the prime interest rate during this period. As of September
30, 2005, the balance of the outstanding notes payable, including interest, was
$3,426,555 compared to $1,944,200 as of September 30, 2004.
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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 nine months ended
September 30, 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.
On June 1, 2005, we refinanced our $23,396 outstanding note payable to
Westek Electronics, a stockholder, into a note payable bearing interest at 8.5%
and payable in monthly installments of $3,500 through November 30, 2005, with
the remaining balance maturing on December 30, 2005. On August 1, 2005, we
refinanced the remaining $16,704 principal amount outstanding under the June 1,
2005 note into a note payable bearing interest at 12% and payable in monthly
installments of $1,500 from November 2005 through September 2006, with the
remaining balance maturing on October 15, 2006.
At September 30, 2005, cash and cash equivalents were $46,192.
The current ratio (current assets to current liabilities) was .50 to 1.00
at September 30, 2005, as compared to .48 to 1.00 at December 31, 2004. At
September 30, 2005, our working capital deficit was $581,314 compared to a
working capital deficit of $636,388 at December 31, 2004. This decrease in
working capital deficit of approximately $55,000 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 and approximately $58,000 related to the conversion of NCT Hearing 35 day
notes payable into long-term notes payable, partially offset by an increase of
approximately $86,000 in accounts payable and accrued expenses.
For the nine months ended September 30, 2005, net cash used in operating
activities was $65,000 compared to $170,000 for the nine months ended September
30, 2004. This decrease of approximately $105,000 was due primarily to the
increase in notes payable issued for services rendered of $448,000 and an
increase in accounts payable of $136,000, substantially offset by the increase
in net loss of $560,000.
For the nine months ended September 30, 2005, net cash used in investing
activities was $38,000 compared to $4,000 for the nine months ended September
30, 2004. This increase of approximately $34,000 was due primarily to the
purchase of tooling equipment for the NoiseBuster line of products.
For the nine months ended September 30, 2005, net cash provided by
financing activities was $91,000 compared to $201,000 for the nine months ended
September 30, 2004. This decrease of approximately $110,000 was due to a
decrease of approximately $137,000 in net cash received from NCT Hearing during
the nine months ended September 30, 2005 as compared to the same period in 2004.
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, 2005 and no material commitments are expected in the near future. In
connection with the introduction of our new NoiseBuster 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 commercially produced 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 September 30, 2005. Based on that evaluation, our President and
Chief Financial Officer concluded that our disclosure controls and procedures as
of September 30, 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 September 30, 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: November 10, 2005
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