ITEM 1. BUSINESS.
Pro-Tech Industries was incorporated in the State of Nevada on April 4, 2007 (originally named Meltdown Massage and Body Works, Inc.), and was a development stage.
ENTRY INTO A MATERIAL DEFINITIVE AGREEMENT
On December 31, 2008, we executed an agreement with Pro-Tech Fire Protection Systems Corp (“Pro-Tech”), and our Company (the "Agreement"), whereby pursuant to the terms and conditions of that Agreement, Pro-Tech shareholders acquired ten million (10,100,000) shares of our common stock, whereby Pro-Tech would become a wholly owned subsidiary of the Company. This issuance of stock did not involve any public offering, general advertising or solicitation. At the time of the issuance, Pro-Tech had fair access to and was in possession of all available material information about our company. The shares were issued with a restrictive transfer legend in accordance with Rule 144 under the Securities Act. The issuance of the securities above were effected in reliance on the exemptions for sales of securities not involving a public offering, as set forth in Rule 506 promulgated under the Securities Act of 1933, as amended (the "Securities Act") and in Section 4(2) and Section 4(6) of the Securities Act and/or Rule 506 of Regulation D.
PRO-TECH FIRE PROTECTION SYSTEMS CORP
Pro-Tech Fire Protection Systems Corp. (“Pro-Tech”) was incorporated on May 4, 1995 under the laws of the State of California to engage in any lawful corporate undertaking, including, but not limited to; installation, repair and inspections of fire protection systems in commercial, military and industrial settings.
Pro-Tech Fire Protection Systems is a full-service contractor serving the western United States, with offices in California and Nevada. Services include estimating, designing, fabricating, and installing all types of standard and specialty water-based fire protection systems. In addition, the company offers “Day Work” services, including inspecting, testing, repairing and servicing of same.
We serve the new construction market, as well as customers retro-fitting, upgrading or repairing their existing facilities, bringing existing facilities to current standards (for example, installing sprinklers at a customer’s expanded storage warehouse, etc.). Since current codes require fire protection systems, work load remains fairly constant. Management believes that with this diversity of services, future prospects remain strong.
Most jobs are won by negotiation or by standard bidding practices from a variety of sources, including repeat customers, referrals, and multiple media resources (trade-specific marketing services, internet links, phone book ads, etc.). We routinely work with many regular customers participating in numerous MACC programs (Multiple Award Construction Contracts for government projects).
Upon award, we design most projects with in-house NICET (National Institute for Certification in Engineering) certified project managers and designers. We also maintain close relationships with outside design firms and engineers to manage occasional overflow workloads. Design development typically includes close coordination with the prime contractor, as well as other sub-contractors.
Material is procured from a number of local and nation-wide fire protection suppliers. Fabricated materials are likewise obtained from these, as well as independent, fab shops. Both fabricated and loose materials are readily available from many excellent long-standing vendors there is no need to perform routine in-house fabrication, allowing us to keep overhead low.
Most installation work begins after a building is enclosed with walls and a roof, minimizing weather-related risks or delays. Regular site visits ensure smooth installation progress. Quality control is strictly maintained by site foremen, superintendents, and construction, project, and area managers. Additionally, work must pass inspection and testing requirements of project and fire department officials, providing the final seal-of-approval.
“Day Work” jobs typically wrap up in a matter of days, involving tenant improvements, repairs, etc. With 24-hour service, we can handle emergency needs for commercial and residential customers needing repairs, service, system restoration, etc. Inspections make up a recurring source of work and revenue, as systems are required by law to be inspected and professionally maintained. Inspections usually involve visual verification of system component status, and some operating of valves, so operating risk is negligible.
In summary, Pro-Tech’s business model is well-founded, with long-established relationships with superb customers and vendors, providing for a strong future in the near and long term.
While government regulations are always changing, Pro-Tech is able to work within the rules of local, regional, state and federal guidelines to meet compliance in all areas of the job, whether it is related to prevailing wage, environmental or fire codes. Most costs of compliance are considered when bidding a job and therefore do not generally have a large impact on us.
Pro-Tech services include:
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Commercial, Special Hazards, and Industrial Overhead Wet Pipe, Dry Pipe, Pre-Action, Deluge and Foam
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New Installations, Retro-Fits, Upgrades, Repairs, Design, Consultations and Analysis
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Pumps, Hydrants, Backflow Preventers, Underground, Design and Consultation
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5 Year Certification, Inspections and Testing
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24 Hour Service
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Alarm & Detection installation and monitoring, inspections and repairs
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Electrical Services including design build, new construction, repairs, inspections and maintenance
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Network cabling, system and structure testing and data networking and design
Management estimates that we have grown over twenty-fold in the 13 plus years that we have been serving our customers. With more than 150 years of combined fire protection experience among its staff and management, management believes that we deliver high quality service in the most economic manner, with a high degree of integrity, excellence and innovation within the fire protection industry.
We believe that the addition of the additional disciplines will help strengthen relationships with current customers as well as help us to establish ourselves with new customers with the ability to bid multiple disciplines on a project, while allowing us to more efficiently cover overhead costs.
Pro-Tech Telecommunications Segment
Pro-Tech Telecommunications provides inside/outside plant installation/implementation services, telecommunications hardware/software deployment (voice systems), maintenance support services, on-site technicians for telecommunications upgrades and cable system design services. In addition, Pro-Tech Telecommunications also has a full data networking group that can design, configure and deploy custom data networking solutions based on individual client needs. Pro-Tech Telecommunications provides the following services to commercial, government and other business enterprises.
Services Offered:
Infrastructure Systems/Services
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Building Riser and Campus Systems
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Cabinet and Rack Installation
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Cable Tagging and Documentation
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Communications Rooms, MDF, IDF
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Optical and Copper Cable Installation
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Raceway Systems
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Wireless Connectivity Solutions
Low Voltage Systems
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Security Systems
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Fire Alarm
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Card Access Control
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CATV
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Video Surveillance
Network Systems
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Enterprise architecture strategy
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Systems integration
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IT infrastructure, implementation and support
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Network security and remote access solutions
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Authentication
Voice Systems
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PBX
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Key system
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VoIP
We differentiate ourselves through our commitment to the highest degree of structure, efficiency and quality practices. We consider ourselves experts at providing solutions that precisely fit our client's needs. We do not manufacture equipment and are vendor agnostic when providing equipment solutions (i.e. we will install customer or vendor owned/provided equipment). Our mission is to provide cost-effective, high quality services and solutions to enhance the competitive position of our clients, using creative and innovative approaches. In pursuit of these goals, Pro-Tech Telecommunications adheres to the following fundamental principles:
Clients as Partners
We strive to build "lifetime" relationships with our clients by providing them with the highest quality services, advanced technology and added value in order to earn and maintain their respect, trust and loyalty. We believe our contribution to this relationship is our expertise in providing the best possible services to our clients. Our services are based on professionalism, competence, integrity and openness.
Our People
Pro-Tech Telecommunications is an organization of individuals. We place a very high value on the skills, experience and creativity that our employees bring to the group. We believe that our professionals are among the best in our industry and we are completely confident in their ability to meet or exceed the expectations of our clients.
Integrity
We adhere to a strict code of business conduct, ensuring that our people employ the highest standards of business ethics in all dealings with clients, suppliers, fellow employees and with the general public.
Quality
Pro-Tech Telecommunications continuously strives for excellence by providing high-quality, high-value deliverables to our clients. By achieving this goal, we believe that ensure that our clients remained satisfied with the work we have delivered for years to come and that they value Pro-Tech Telecommunications their technology partner of choice.
Contract Process
A fair amount of Pro-Tech Telecommunication’s past business success was based on negotiated/relationship driven work. The current trend is more traditional bid work (i.e. blue print take offs and submitting price quotes to general contractors on bid day). With this, we are typically responding to formal “Request for Proposals” (RFPs) and looking for existing “Master Service Agreements” (MSAs) to amend our services too. We are always seeking out strategic partnerships to provide our customers with an overall integrated solution (i.e. equipment suppliers with our installation services).
Market Opportunity
According to the-infoshop.com (http://www.the-infoshop.com/study/ftm53024-cabling-sys.html), the total US Structured Cabling Systems (SCS) Market is forecasted to grow at a rate of 18.6%, from $6.8 billion in 2007 to $15.9 billion by 2012. This growth is higher than previously reported, as newer network applications (i.e. VOIP, data centers and video over IP) are expected to grow dramatically in the future. SCS cabling architecture is evolving to a universal enterprise network consisting of the current primary installed LAN networks supporting newer IP sub nets, such as voice with VOIP, data for the data centers and video via video over IP.
As the SCS market is expected to grow, Pro-Tech Telecommunications will recognize significant revenue growth from the following industry segments and forecasted opportunities:
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System Integrators - Negotiated bid work (i.e. existing relationships on current projects)
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Commercial builders/developers - Bid work with strategic business partners (i.e. electrical and general contractors)
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Modular furniture designers/builders - Office build outs, preferred vendor list, etc.
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Commercial/industrial property management companies - Tenant improvement work, new and/or old shell build outs, etc.
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Telecommunication/wireless vendors - Infrastructure upgrades, DEMARC extensions, etc.
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Federal government contractors - Strategic partnerships, negotiated jobs, etc.
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Federal, State, and local municipalities - GSA work, 8-A set aside, Multiple award schedules, cabling service contracts, etc.
Targeted Markets
Pro-Tech Telecommunications goal is to become a market leader in the design/build communication infrastructure products and services industry. We are well positioned in the following vertical markets and will use the following methods to expand and to increase our new areas of doing business:
Vertical Markets
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System Integrators
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Commercial builders/developers
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Modular furniture designers/builders
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Commercial/industrial property management companies
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Telecommunication/wireless vendors
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Federal government contractors
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Federal, State, and local municipalities
Contract Vehicles
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Existing supplier and “Master Service” agreements
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Negotiated bid work
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Request for Proposals (RFP)
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General Service Administration (GSA) Schedules
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CALNET II (State of California)
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CA Multiple Award Schedule (CMAS)
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Pre-qualification process
Business Development Philosophy
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Build on existing relationships (i.e. negotiated work)
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Subscribe to online bid tools
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Form strategic partnerships with Disabled Veteran Owned Enterprise (DVBE) companies
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Work with certified contractors
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Define geographic growth territories
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Join applicable trade organizations
Strategy and Positioning
The Company’s internal growth strategy relies mostly on building and maintaining positive customer relationships. The Company also plans to grow externally, through strategic acquisition and alliance activities. There are four key elements in the Company’s overall growth strategy:
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Expand portfolio of services through growth of A&D, telecommunications and electrical services
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Focus on internal growth and development
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Focus on expanding operating efficiencies
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Pursue strategic acquisitions and partnerships
Expansion of portfolio of services allows us to offer a “one stop shop” and offer our customers the ability to coordinate multiple disciplines with one contact, minimizing time and energy spent in coordination where multiple vendors might have been used for all of these disciplines. This allows both us and our customers to more efficiently use overhead resources.
In slow economic times, such as what we are currently experiencing, we feel that by developing our current associates to be able to cover more diverse functions, allows us to keep our seasoned employees. We can develop and cross train employees, within their respective disciplines, so that when the economy begins to grow, we will have a strong well trained staff to lead us. We also believe the expansion of our market, most recently to Reno and Las Vegas Nevada, puts us in strategic locations by covering the Northern and Southern California and Nevada markets, as well as giving us bases to access Arizona and Utah.
Focusing on expanding operating efficiencies is a focus we plan by having a corporate staff helping all disciplines with their billing, receiving, payables, payroll, insurance, benefits and human resource functions. We will be able to leverage a single corporate location to help cover all of our locations and disciplines and spread out the cost of overhead. We also feel there are economies of scale in insurance and benefit costs that a company with a larger employee base can afford.
We also plan to use this slow economic time to pursue strategic relationships with our customers, while watching for opportunities to pick up strategic acquisitions in some of our newer markets and business segments. We feel working to strengthen alliances during the hard times will put us in a stronger position to move forward and build our business when the economy begins to turn. Likewise there are many companies who are feeling the pinch of the current economics. There may be opportunities to merge, acquire or form strategic partnerships with these companies, which can in turn lead to additional growth in our current markets. This could also allow us to move into other markets we feel would add positive growth to the Company.
Client List
In addition to providing services directly to federal, state and local governments and Fortune 500 companies, the company has also established strong customer relationships with the following companies:
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Aerojet
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Hensel Phelps
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RQ Construction
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RA Birch
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Raley’s
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Soltek Pacific
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SouthWestern Dakotah
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Roebellen Construction
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Howard S. Wright Construction
Competitive Landscape
The competition is divided among many entities in our four markets. The market is highly fragmented and there is not a dominate player in any of the markets. Two of the larger competitors are as follows:
Cosco - Cosco is a multifaceted, full service fire protection contractor, providing design, fabrication, installation service and inspection of a wide variety of automatic fire suppression systems. The company specializes in large construction projects including hospitals, high-rise structures, hotels, large office and manufacturing facilities. The company maintains experienced staff including engineers, designers, project managers and installers. Cosco has offices in Los Angeles, San Francisco, Seattle, Fresno, San Diego, and Anchorage.
Tyco/Grinnell (NYSE: TYC) - Tyco International, Ltd. operates as a diversified manufacturing and services company. The company, through its subsidiaries, designs, manufactures, and distributes electronic security and fire protection systems; electrical and electronic components; and medical devices and supplies, imaging agents, pharmaceuticals, and adult incontinence and infant care products. Tyco’s fire and security products and services include electronic security systems, fire detection systems and suppression systems, as well as fire extinguishers and related products. The company’s electrical and electronic components comprise electronic/electrical connector systems; fiber optic components; and wireless devices, such as private radio systems, heat shrink products, circuit protection devices, and magnetic devices.
Annual Meeting
On May 8, 2009, the Company’s stockholders approved a name change from Meltdown Massage and Body Works, Inc. to Pro-Tech Industries, Inc. which became effective with the filing of an amendment to the our Articles of Incorporation on May 11, 2009. The Company is now known as Pro-Tech Industries, Inc. and the new ticker symbol is “PTCK”. The shareholders also ratified RBSM, LLP as the Company’s auditors as well as re-elected Mr. Gordon, Mr. Engelbrecht, and Mr. Crane as members of the board of directors.
The Company was unable to hold Its annual meeting in 2010. We plan to have our meeting to take care of corporate governance in 2011, which would include the ratification of our public accountants and the re-election of our Board of Directors.
Employees
The Company has approximately 85 full time employees including 17 executive and administrative staff, 5 in engineering, 6 in sales and marketing, with the balance working in the field as superintendents, foreman, journeyman or apprentices.
WHERE YOU CAN FIND MORE INFORMATION
You are advised to read this Form 10-K in conjunction with other reports and documents that we file from time to time with the SEC. In particular, please read our Quarterly Reports on Form 10-Q and Current Reports on Form 8-K that we file from time to time. You may obtain copies of these reports directly from us or from the SEC at the SEC’s Public Reference Room at 100 F. Street, N.E. Washington, D.C. 20549, and you may obtain information about obtaining access to the Reference Room by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains information for electronic filers at its website http://www.sec.gov.
ITEM 1A.
ITEM 1A. RISK FACTORS
We will require financing to fund our development activities and to support our operations. However, we may be unable to obtain such financing. We are also subject to risks factors specific to our business strategy and the wireless retail industry. Rapid changes in industry standards for wireless phones and services may require us to introduce new products and services before we can attain profitable operations. We may be unable to introduce new products and services on a timely basis. Moreover, there is no guarantee that any such products will allow us to achieve profitable operations in the future.
We have updated or restated the risk factors previously disclosed in our prior reports with the Securities and Exchange Commission. We consider the following to be the material risks to an investor in us. We should be viewed as a high-risk investment and speculative in nature. An investment in our common stock may result in a complete loss of the invested amount.
Because we bear the risk of cost overruns in most of our contracts, we may experience reduced profits or, in some cases, losses under these contracts if costs increase above our estimates.
Our contract prices are established largely upon estimates and assumptions of our projected costs. These include assumptions about future economic conditions, prices, including commodities prices, and availability of labor, including the costs of providing labor, equipment, materials and other factors outside our control. If our estimates or assumptions prove to be inaccurate, if circumstances change in a way that renders our assumptions and estimates inaccurate or we fail to execute the work cost overruns may occur, and we could experience reduced profits or a loss for projects. For instance, unanticipated technical problems may arise, we could have difficulty obtaining permits or approvals, local laws or labor conditions could change, bad weather could delay construction, raw materials prices could increase, our suppliers' or subcontractors' may fail to perform as expected, or site conditions may be different than we expected. Additionally, in certain circumstances, we guarantee project completion or the achievement of certain acceptance and performance testing levels by a scheduled date. Failure to meet schedule or performance requirements typically results in additional costs to us, and in some cases we may also be liable for consequential and liquidated damages. Performance problems for existing and future projects could cause our actual results of operations to differ materially from those we anticipate as well as damaging our reputation within our industry and our customer base.
Many of the markets we do work in are currently experiencing an economic downturn that may materially and adversely affect our business because our business is dependent on levels of construction activity.
The demand for our services is dependent upon the existence of construction projects and service requirements within the markets in which we operate. Any period of economic recession affecting a market or industry in which we transact business is likely to adversely impact our business. Many of the projects we work on have long lifecycles from conception to completion, and the bulk of our performance generally occurs late in a construction project's lifecycle. We experience the results of economic trends well after an economic cycle begins. Accordingly, we believe that our business has yet to experience many of the adverse effects of the current economic recessionary cycle.
We cannot predict the severity or length of the current recession. We believe that the current uncertainty about economic conditions caused by the ongoing recession means that many of our customers are likely to postpone spending while credit markets remain, in large part, closed to funding commercial and industrial developments. The industries and markets we operate in have always been and will continue to be vulnerable to these general macroeconomic downturns because they are cyclical in nature. The current recession is causing a drop off in the demand for projects within our markets and industries, which will likely lead to greater price competition as well as decreased revenue and profit. The current recession is also likely to increase economic instability with our vendors, subcontractors, developers, and general contractors, which could cause us greater liability exposure and could result in us not being able to be paid, as well as decreased revenue and profit. Further, to the extent our vendors, subcontractors, developers, or general contractors seek bankruptcy protection, the bankruptcy will likely force us to incur additional costs in attorneys' fees, as well as other professional consultants, and will result in decreased revenue and profit.
Our backlog is subject to unexpected adjustments and a cancellation, which means that amounts included in our backlog may not result in actual revenue or translate into profits.
The revenue projected from our backlog may not be realized, or, if realized, may not result in profits. Projects may remain in our backlog for an extended period of time or project cancellations or scope adjustments may occur with respect to contracts reflected in our backlog. The revenue projected from our backlog may not be realized or, if realized, may not result in profits.
A significant portion of our business depends on our ability to provide surety bonds. Current difficulties in the financial and surety markets may adversely affect our bonding capacity and availability.
In the past we have expanded and it is possible we will continue to expand the number of total contract dollars that require an underlying bond. Surety market conditions are currently difficult as a result of significant losses incurred by many surety companies and the current recession. Consequently, less overall bonding capacity is available in the market and terms have become more expensive and restrictive. We may not be able to maintain a sufficient level of bonding capacity in the future, which could preclude our ability to bid for certain contracts or successfully contract with some customers. Additionally, even if we are able to access bonding capacity to sufficiently bond future work, we may be required to post collateral to secure bonds, which would decrease the liquidity we would have available for other purposes. Our surety providers are under no commitment to guarantee our access to new bonds in the future; thus, our ability to access or increase bonding capacity is at the sole discretion of our surety providers. If our surety companies were to limit or eliminate our access to bonds, our alternatives would include seeking bonding capacity from other surety companies, increasing business with clients that do not require bonds and posting other forms of collateral for project performance, such as letters of credit or cash. We may be unable to secure these alternatives in a timely manner, on acceptable terms, or at all. As such, if we were to experience an interruption or reduction in the availability of bonding capacity, it is likely we would be unable to compete for or work on certain projects.
The Report Of Our Independent Registered Public Accounting Firm Contains Explanatory Language That Substantial Doubt Exists About Our Ability To Continue As A Going Concern
The independent auditor’s report on our financial statements contains explanatory language that substantial doubt exists about our ability to continue as a going concern specifically in Note C to the financial statements. The report states that we depend on the continued contributions of our executive officers to develop profitable operations and to obtain additional funding sources and for our company’s ability to explore potential strategic relationships to provide capital and other resources for the further development and marketing of its products business, financial condition, and results of operations. If we are unable to obtain sufficient financing in the near term or achieve profitability, then we would, in all likelihood, experience severe liquidity problems and may have to curtail our operations. If we curtail our operations, we may be placed into bankruptcy or undergo liquidation, the result of which will adversely affect the value of our common shares.
Our use of the percentage-of-completion method of accounting could result in a reduction or reversal of previously recorded revenues or profits.
A material portion of our revenue is recognized using the percentage-of-completion method of accounting, which results in our recognizing contract revenues and earnings ratably over the contract term in the proportion that our actual costs bear to our estimated contract costs. The earnings or losses recognized on individual contracts are based on estimates of contract revenue, costs and profitability. We review our estimates of contract revenue, costs and profitability on an ongoing basis. Prior to contract completion, we may adjust our estimates on one or more occasions as a result of change orders to the original contract, collection disputes with the customer on amounts invoiced or claims against the customer for increased costs incurred by us due to customer-induced delays and other factors. Contract losses are recognized in the fiscal period when the loss is determined. Contract profit estimates are also adjusted in the fiscal period in which it is determined that an adjustment is required. As a result of the requirements of the percentage-of-completion method of accounting, the possibility exists, for example, that we could have estimated and reported a profit on a contract over several periods and later determined, usually near contract completion, that all or a portion of such previously estimated and reported profits were overstated. If this occurs, the full aggregate amount of the overstatement will be reported for the period in which such determination is made, thereby eliminating all or a portion of any profits from other contracts that would have otherwise been reported in such period or even resulting in a loss being reported for such period. On a historical basis, we believe that we have made reasonably reliable estimates of the progress towards completion on our long-term contracts. However, given the uncertainties associated with these types of contracts, it is possible for actual costs to vary from estimates previously made, which may result in reductions or reversals of previously recorded revenue and profits.
Intense competition in our industry could reduce our market share and our profit.
The markets we serve are highly competitive. Our industry is characterized by many small companies whose activities are geographically concentrated. We compete on the basis of our technical expertise and experience, financial and operational resources, nationwide presence, industry reputation and dependability. While we believe our customers consider a number of these factors in awarding available contracts, a large portion of our work is awarded through a bid process. Consequently, price is often the principal factor in determining which contractor is selected, especially on smaller, less complex projects. Smaller competitors are sometimes able to win bids for these projects based on price alone due to their lower cost and financial return requirements. We expect competition to intensify in our industry, presenting us with significant challenges in our ability to maintain strong growth rates and acceptable profit margins. If we are unable to meet these competitive challenges, we will lose market share to our competitors and experience an overall reduction in our profits.
If we are unable to attract and retain qualified managers and employees, we will be unable to operate efficiently, which could reduce our profitability.
Our business is labor intensive, and many of our operations experience a high rate of employment turnover. At times of low unemployment rates in the United States, it will be more difficult for us to find qualified personnel at low cost in some geographic areas where we operate. Additionally, our business is managed by a small number of key executive and operational officers. We may be unable to hire and retain the sufficient skilled labor force necessary to operate efficiently and to support our growth strategy. Our labor expenses may increase as a result of a shortage in the supply of skilled personnel. Labor shortages, increased labor costs or the loss of key personnel could reduce our profitability and negatively impact our business.
If we experience delays and/or defaults in customer payments, we could be unable to recover all expenditures.
Because of the nature of our contracts, at times we commit resources to projects prior to receiving payments from the customer in amounts sufficient to cover expenditures on projects as they are incurred. Delays in customer payments may require us to make a working capital investment. If a customer defaults in making their payments on a project in which we have devoted resources, it could have a material negative effect on our results of operations.
Actual and potential claims, lawsuits and proceedings could ultimately reduce our profitability and liquidity and weaken our financial condition.
We are likely to continue to be named as a defendant in legal proceedings claiming damages from us in connection with the operation of our business. Most of the actions against us arise out of the normal course of our performing services on project sites. We also are and are likely to continue to be a plaintiff in legal proceedings against customers, in which we seek to recover payment of contractual amounts we are owed as well as claims for increased costs we incur. When appropriate, we establish provisions against possible exposures, and we adjust these provisions from time to time according to ongoing exposure. If our assumptions and estimates related to these exposures prove to be inadequate or wrong, we could experience a reduction in our profitability and liquidity and a weakening of our financial condition. In addition, claims, lawsuits and proceedings may harm our reputation or divert management resources away from operating our business.
Our recent and future acquisitions may not be successful.
We expect to continue pursuing selective acquisitions of businesses. We cannot assure you that we will be able to locate acquisitions or that we will be able to consummate transactions on terms and conditions acceptable to us, or that acquired businesses will be profitable. Acquisitions may expose us to additional business risks different than those we have traditionally experienced. We also may encounter difficulties integrating acquired businesses and successfully managing the growth we expect to experience from these acquisitions.
We may choose to finance future acquisitions with debt, equity, cash or a combination of the three. We can give no assurances that any future acquisitions will not dilute earnings or disrupt the payment of a stockholder dividend. To the extent we succeed in making acquisitions, a number of risks will result, including:
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The assumption of material liabilities (including for environmental-related costs);
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Failure of due diligence to uncover situations that could result in legal exposure or to quantify the true liability exposure from known risks;
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The diversion of management's attention from the management of daily operations to the integration of operations;
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Difficulties in the assimilation and retention of employees and difficulties in the assimilation of different cultures and practices, as well as in the assimilation of broad and geographically dispersed personnel and operations, as well as the retention of employees generally;
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The risk of additional financial and accounting challenges and complexities in areas such as tax planning, treasury management, financial reporting and internal controls; and
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We may not be able to realize the cost savings or other financial benefits we anticipated prior to the acquisition.
The failure to successfully integrate acquisitions could have an adverse effect on our business, financial condition and results of operations.
If we do not effectively manage our growth, our existing infrastructure may become strained, and we may be unable to increase revenue growth.
Our past and any future growth that we have experienced, and in the future may experience, may provide challenges to our organization, requiring us to expand our personnel and our operations. Future growth may strain our infrastructure, operations and other managerial and operating resources. If our business resources become strained, our earnings may be adversely affected and we may be unable to increase revenue growth. Further, we may undertake contractual commitments that exceed our labor resources, which could also adversely affect our earnings and our ability to increase revenue growth.
Failure or circumvention of our disclosure controls and procedures or internal controls over financial reporting could seriously harm our financial condition, results of operations, and our business.
We plan to continue to maintain and strengthen internal controls and procedures to enhance the effectiveness of our disclosure controls and internal controls over financial reporting. Any system of controls, however well designed and operated, is based in part on certain assumptions and can provide only reasonable, and not absolute, assurances that the objectives of the system are met. Any failure of our disclosure controls and procedures or internal controls over financial reporting could harm our financial condition and results of operations.
Conflicts of interest
Certain of our officers and directors will also serve as directors of other companies or have significant shareholdings in other companies that may be in a similar business. To the extent that such other companies participate in ventures in which we may participate, or compete for prospects or financial resources with us, these officers and directors of will have a conflict of interest in negotiating and concluding terms relating to the extent of such participation. In the event that such a conflict of interest arises at a meeting of the board of directors, a director who has such a conflict must disclose the nature and extent of his interest to the board of directors and abstain from voting for or against the approval of such participation or such terms.
In accordance with the laws of the State of Nevada, our directors are required to act honestly and in good faith with a view to the best interests of our shareholders. In determining whether or not we will participate in a particular program and the interest therein to be acquired by it, the directors will primarily consider the degree of risk to which we may be exposed and its financial position at that time.
The regulation of penny stocks by SEC and FINRA may discourage the tradability of the company’s securities.
The Company is a "penny stock" company. None of its securities currently trade in any market and, if ever available for trading, will be subject to a Securities and Exchange Commission rule that imposes special sales practice requirements upon broker-dealers who sell such securities to persons other than established customers or accredited investors. For purposes of the rule, the phrase "accredited investors" means, in general terms, institutions with assets in excess of $5,000,000, or individuals having a net worth in excess of $1,000,000 or having an annual income that exceeds $200,000 (or that, when combined with a spouse's income, exceeds $300,000). For transactions covered by the rule, the broker-dealer must make a special suitability determination of the purchaser and receive the purchaser's written agreement to the transaction prior to the sale. Effectively, this discourages broker-dealers from executing trades in penny stocks. Consequently, the rule will affect the ability of purchasers in this offering to sell their securities in any market that might develop, because it imposes additional regulatory burdens on penny stock transactions.
In addition, the Securities and Exchange Commission has adopted a number of rules to regulate "penny stocks". Such rules include Rules 3a51-1, 15g-1, 15g-2, 15g-3, 15g-4, 15g-5, 15g-6, 15g-7, and 15g-9 under the Securities and Exchange Act of 1934, as amended. Because our securities constitute “penny stocks" within the meaning of the rules, the rules would apply to us and to our securities. The rules will further affect the ability of owners of shares to sell their securities in any market that might develop for them because it imposes additional regulatory burdens on penny stock transactions.
Shareholders should be aware that, according to Securities and Exchange Commission, the market for penny stocks has suffered in recent years from patterns of fraud and abuse. Such patterns include (i) control of the market for the security by one or a few broker-dealers that are often related to the promoter or issuer; (ii) manipulation of prices through prearranged matching of purchases and sales and false and misleading press releases; (iii) "boiler room" practices involving high-pressure sales tactics and unrealistic price projections by inexperienced sales persons; (iv) excessive and undisclosed bid-ask differentials and markups by selling broker-dealers; and (v) the wholesale dumping of the same securities by promoters and broker-dealers after prices have been manipulated to a desired level, leaving investors with losses. Our management is aware of the abuses that have occurred historically in the penny stock market. Although we do not expect to be in a position to dictate the behavior of the market or of broker-dealers who participate in the market, management will strive within the confines of practical limitations to prevent the described patterns from being established with respect to the Company's securities.
Certain Nevada Corporation Law Provisions Could Prevent A Potential Takeover, Which Could Adversely Affect The Market Price Of Our Common Stock.
We are incorporated in the State of Nevada. Certain provisions of Nevada corporation law could adversely affect the market price of our common stock. Because Nevada corporation law requires board approval of a transaction involving a change in our control, it would be more difficult for someone to acquire control of us. Nevada corporate law also discourages proxy contests making it more difficult for you and other shareholders to elect directors other than the candidate or candidates nominated by our board of directors.
We do not pay cash dividends
We do not pay cash dividends. We have not paid any cash dividends since inception and have no intention of paying any cash dividends in the foreseeable future. Any future dividends would be at the discretion of our board of directors and would depend on, among other things, future earnings, our operating and financial condition, our capital requirements, and general business conditions. Therefore, shareholders should not expect any type of cash flow from their investment.
Rule 144 sales in the future may have a depressive effect on the Company’s stock price.
All of the outstanding shares of common stock held by the present officers, directors, and affiliate stockholders are "restricted securities" within the meaning of Rule 144 under the Securities Act of 1933, as amended. As restricted shares, these shares may be resold only pursuant to an effective registration statement or under the requirements of Rule 144 or other applicable exemptions from registration under the Act and as required under applicable state securities laws. Officers, directors and affiliates will be able to sell their shares if this Registration Statement becomes effective. Rule 144 provides in essence that a person who is an affiliate or officer or director who has held restricted securities for six months may, under certain conditions, sell every three months, in brokerage transactions, a number of shares that does not exceed the greater of 1.0% of a company's outstanding common stock. There is no limit on the amount of restricted securities that may be sold by a non-affiliate after the owner has held the restricted securities for a period of six months if the company is a current, reporting company under the '34 Act. A sale under Rule 144 or under any other exemption from the Act, if available, or pursuant to subsequent registration of shares of common stock of present stockholders, may have a depressive effect upon the price of the common stock in any market that may develop. In addition, if we are deemed a shell company pursuant to Section 12(b)-2 of the Act, our "restricted securities", whether held by affiliates or non-affiliates, may not be re-sold for a period of 12 months following the filing of a Form 10 level disclosure or registration pursuant to the Act.
The Company’s investors may suffer future dilution due to issuances of shares for various considerations in the future.
There may be substantial dilution to the Company's shareholders purchasing in future offerings as a result of future decisions of the Board to issue shares without shareholder approval for cash, services, or acquisitions.
Because We Are Quoted On The OTCBB Instead Of An Exchange Or National Quotation System, Our Investors May Have A Tougher Time Selling Their Stock Or Experience Negative Volatility On The Market Price Of Our Stock.
Our common stock is traded on the OTCBB. The OTCBB is often highly illiquid, in part because it does not have a national quotation system by which potential investors can follow the market price of shares except through information received and generated by a limited number of broker-dealers that make markets in particular stocks. There is a greater chance of volatility for securities that trade on the OTCBB as compared to a national exchange or quotation system. This volatility may be caused by a variety of factors, including the lack of readily available price quotations, the absence of consistent administrative supervision of bid and ask quotations, lower trading volume, and market conditions. Investors in our common stock may experience high fluctuations in the market price and volume of the trading market for our securities. These fluctuations, when they occur, have a negative effect on the market price for our securities. Accordingly, our stockholders may not be able to realize a fair price from their shares when they determine to sell them or may have to hold them for a substantial period of time until the market for our common stock improves.
The stock will in all likelihood be thinly traded and as a result, investors may be unable to sell at or near ask prices or at all if they need to liquidate shares.
Our shares of common stock may be thinly-traded on the OTC Bulletin Board, meaning that the number of persons interested in purchasing our common shares at or near ask prices at any given time may be relatively small or non-existent. This situation is attributable to a number of factors, including the fact that it is a small company which is relatively unknown to stock analysts, stock brokers, institutional investors and others in the investment community that generate or influence sales volume, and that even if the Company came to the attention of such persons, they tend to be risk-averse and would be reluctant to follow an unproven, early stage company such as ours or purchase or recommend the purchase of any of our Securities until such time as it became more seasoned and viable. As a consequence, there may be periods of several days or more when trading activity in the Company's Securities is minimal or non-existent, as compared to a seasoned issuer which has a large and steady volume of trading activity that will generally support continuous sales without an adverse effect on the Securities price. We cannot give investors any assurance that a broader or more active public trading market for the Company's common securities will develop or be sustained, or that any trading levels will be sustained. Due to these conditions, we can give investors no assurance that they will be able to sell their shares at or near ask prices or at all if they need money or otherwise desire to liquidate their securities of the Company.
Failure To Achieve And Maintain Effective Internal Controls In Accordance With Section 404 Of The Sarbanes-Oxley Act Could Have A Material Adverse Effect On Our Business And Operating Results.
It may be time consuming, difficult and costly for us to develop and implement the additional internal controls, processes and reporting procedures required by the Sarbanes-Oxley Act. We may need to hire additional financial reporting, internal auditing and other finance staff in order to develop and implement appropriate additional internal controls, processes and reporting procedures. If we are unable to comply with these requirements of the Sarbanes-Oxley Act, we may not be able to obtain the independent accountant certifications that the Sarbanes-Oxley Act requires of publicly traded companies.
If we fail to comply in a timely manner with the requirements of Section 404 of the Sarbanes-Oxley Act regarding internal control over financial reporting or to remedy any material weaknesses in our internal controls that we may identify, such failure could result in material misstatements in our financial statements, cause investors to lose confidence in our reported financial information and have a negative effect on the trading price of our common stock.
Pursuant to Section 404 of the Sarbanes-Oxley Act and current SEC regulations, beginning with our annual report on Form 10-K for our fiscal period ending December 31, 2007, we have been required to prepare assessments regarding internal controls over financial reporting and beginning with our annual report on Form 10-K for our fiscal period ending December 31, 2010, furnish a report by our management on our internal control over financial reporting. Failure to achieve and maintain an effective internal control environment or complete our Section 404 certifications could have a material adverse effect on our stock price.
In addition, in connection with our on-going assessment of the effectiveness of our internal control over financial reporting, we may discover “material weaknesses” in our internal controls as defined in standards established by the Public Company Accounting Oversight Board, or the PCAOB. A material weakness is a significant deficiency, or combination of significant deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. The PCAOB defines “significant deficiency” as a deficiency that results in more than a remote likelihood that a misstatement of the financial statements that is more than inconsequential will not be prevented or detected.
In the event that a material weakness is identified, we will employ qualified personnel and adopt and implement policies and procedures to address any material weaknesses that we identify. However, the process of designing and implementing effective internal controls is a continuous effort that requires us to anticipate and react to changes in our business and the economic and regulatory environments and to expend significant resources to maintain a system of internal controls that is adequate to satisfy our reporting obligations as a public company. We cannot assure you that the measures we will take will remediate any material weaknesses that we may identify or that we will implement and maintain adequate controls over our financial process and reporting in the future.
Any failure to complete our assessment of our internal control over financial reporting, to remediate any material weaknesses that we may identify or to implement new or improved controls, or difficulties encountered in their implementation, could harm our operating results, cause us to fail to meet our reporting obligations or result in material misstatements in our financial statements. Any such failure could also adversely affect the results of the periodic management evaluations of our internal controls and, in the case of a failure to remediate any material weaknesses that we may identify, would adversely affect the annual auditor attestation reports regarding the effectiveness of our internal control over financial reporting that are required under Section 404 of the Sarbanes-Oxley Act. Inadequate internal controls could also cause investors to lose confidence in our reported financial information, which could have a negative effect on the trading price of our common stock.
Climate change and related regulatory responses may impact our business.
Climate change as a result of emissions of greenhouse gases is a significant topic of discussion and may generate U.S. federal and other regulatory responses in the near future. It is impracticable to predict with any certainty the impact of climate change on our business or the regulatory responses to it, although we recognize that they could be significant. However, it is too soon for us to predict with any certainty the ultimate impact, either directionally or quantitatively, of climate change and related regulatory responses.
To the extent that climate change increases the risk of natural disasters or other disruptive events in the areas in which we operate, we could be harmed. While we maintain business recovery plans that are intended to allow us to recover from natural disasters or other events that can be disruptive to our business, our plans may not fully protect us from all such disasters or events.
Compliance with changing regulation of corporate governance and public disclosure will result in additional expenses and pose challenges for our management.
Changing laws, regulations and standards relating to corporate governance and public disclosure, including the Dodd-Frank Wall Street Reform and Consumer Protection Act and the rules and regulations promulgated thereunder, the Sarbanes-Oxley Act and SEC regulations, have created uncertainty for public companies and significantly increased the costs and risks associated with accessing the U.S. public markets. Our management team will need to devote significant time and financial resources to comply with both existing and evolving standards for public companies, which will lead to increased general and administrative expenses and a diversion of management time and attention from revenue generating activities to compliance activities.
SHOULD ONE OR MORE OF THE FOREGOING RISKS OR UNCERTAINTIES MATERIALIZE, OR SHOULD THE UNDERLYING ASSUMPTIONS PROVE INCORRECT, ACTUAL RESULTS MAY DIFFER SIGNIFICANTLY FROM THOSE ANTICIPATED, BELIEVED, ESTIMATED, EXPECTED, INTENDED OR PLANNED.
ITEM 1B.
ITEM 1B. UNRESOLVED STAFF COMMENTS
This Item is not applicable to us as we are not an accelerated filer, a large accelerated filer, or a well-seasoned issuer.
ITEM 2.
ITEM 2. DESCRIPTION OF PROPERTY
Facilities
PTI’s headquarters are currently located in two facilities totaling 22,000 square feet in Sacramento, California. This building is shared jointly with the fire protection and telecommunications segments. We also have branch offices in Oceanside, CA and Las Vegas and Reno, NV. The bulk of the workforce is out in the field.
The Company signed a 3 year lease with a two year option beginning December 2009. The monthly lease cost is $5,550 per month for the two buildings and ends in December 2012.
We are currently 1 year into a 3 year lease in our Oceanside office. We extended our lease late in 2010 which allowed us to gain more favorable terms over the extension than the rate remaining on the lease had we finished the one year remaining on the old lease. The monthly lease cost is $3,787 per month.
Our Reno office is also in a month to month lease and we are assessing the opportunity to renegotiate the lease. The monthly lease cost is $1,000 per month.
Our Las Vegas office was opened in a 2,800 square foot building in North Las Vegas. We have a 40 month lease in this facility. The monthly lease cost is $2,545 per month and ends in December 2011.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS.
We are not a party to any legal proceedings, there are no known judgments against the Company, nor are there any known actions or suits filed or threatened against it or its officers and directors, in their capacities as such. We are not aware of any disputes involving the Company and the Company has no known claim, actions or inquiries from any federal, state or other government agency. We are not aware of any claims against the Company or any reputed claims against it at this time, except as follows:
In September 2010, a law suit was filed against the Company and others by Falcon Technologies, Inc. and its subsidiaries. The essence of the plaintiff’s suit is that the Company actions allegedly violated a merger agreement between Falcon and other parties and, consequently, was party to defrauding Falcon. The Company believes there is currently a settlement in place for these allegations in which no party admitted to any wrong doing, and, in addition, denies the allegations and will vigorously defend the action. It is also the Company’s position that this lawsuit is without merit and will seek all remedies available to it under the aforementioned settlement agreement.
ITEM 4.
ITEM 4. REMOVED AND RESERVED.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Shares of our common stock commenced trading on January 30 2009, on the National Association of Securities Dealers Inter-dealer Quotation System Over The Counter Bulletin Board under the symbol “MMBW.OB” and was subsequently changed to “PTCK.OB” in May 2009. For the periods indicated, the following table sets forth the high and low bid prices per share of common stock, as reported by the Over the Counter Bulletin Board. These prices represent inter-dealer quotations without retail markup, markdown, or commission and may not necessarily represent actual transactions.
Fiscal Year 2008 (not traded prior to Jan 2009)
On March 29, 2011, the closing bid price of our common stock was $0.25.
Holders
As of December 31, 2010, there were 18,832,808 shares of our common stock issued and outstanding and held by 36 holders of record. We believe many of the shares of our common stock are held in “street name” and, therefore, we believe the actual number of shareholders is slightly higher.
Dividends
We may never pay any dividends to our shareholders. We did not declare any dividends for the year ended December 31, 2010. Our Board of Directors does not intend to distribute dividends in the near future. The declaration, payment and amount of any future dividends will be made at the discretion of the Board of Directors, and will depend upon, among other things, the results of our operations, cash flows and financial condition, operating and capital requirements, and other factors as the Board of Directors considers relevant. There is no assurance that future dividends will be paid, and if dividends are paid, there is no assurance with respect to the amount of any such dividend.
Transfer Agent
Island Stock Transfer, 100 Second Avenue South, Suite 705S, St Petersburg, FL 33701 acts as transfer agent for our common stock.
Securities Authorized for Issuance Under Equity Compensation Plans
There are no outstanding options or warrants to purchase, or securities convertible into, shares of our common stock, and we do not have any equity compensation plans.
As a result, we did not have any options, warrants or rights were outstanding as of December, 2010.
RECENT SALES OF UNREGISTERED SECURITIES.
During the past three years, we have sold or issued securities which were not registered as follows:
On December 31, 2008, the Company issued 10,100,000 shares to Pro-Tech Fire Protection Systems Corp. (“Pro-Tech”) as part of a merger, whereby Pro-Tech would become a wholly owned subsidiary of the Company. This issuance of stock did not involve any public offering, general advertising or solicitation. At the time of the issuance, Pro-Tech had fair access to and was in possession of all available material information about our company. The shares bear a restrictive transfer legend in accordance with Rule 144 under the Securities Act.
On January 16, 2009, the Company issued 3,000,000 shares to shareholders of Conesco, Inc. (“Conesco”) as part of a merger, whereby Conesco would become a wholly owned subsidiary of the Company. This issuance of stock did not involve any public offering, general advertising or solicitation. At the time of the issuance, Conesco had fair access to and was in possession of all available material information about our company. The shares bear a restrictive transfer legend in accordance with Rule 144 under the Securities Act.
On January 19, 2009 the Company issued 1,000,000 shares to key employees of the Company as an incentive bonus. This issuance of stock did not involve any public offering, general advertising or solicitation. At the time of the issuance, Pro-Tech had fair access to and was in possession of all available material information about our company. The shares bear a restrictive transfer legend in accordance with Rule 144 under the Securities Act. The shares will vest 1/36th every month beginning January 31, 2009 until fully vested on December 31, 2011. The employee must be employed on date of vesting in order to receive the shares.
In April 2010, we sold 23,000 shares of our Series A Convertible Redeemable Preferred Stock in a private placement at a price of $25 per share. The total purchase price was $575,000 and the proceeds to our company, net of commissions paid to our investment advisor, were approximately $523,125. The investors received 575,000 warrants to purchase common stock. Each warrant is exercisable for a period of five years, with an exercise price of $0.50. In July 2010, the Company amended the purchase and warrant agreement to amend the strike price on the warrants from $0.50 to $0.35 per share. All other terms remained the same. This amendment increased the warrants by 321,429 to a total of 821,429 warrants.
As part of the capital raise the Company paid 133,928 shares of its common stock as commissions.
On November 3, 2010 the Company issued 300,000 shares to key employees of the Company as an incentive bonus. This issuance of stock did not involve any public offering, general advertising or solicitation. At the time of the issuance, Pro-Tech had fair access to and was in possession of all available material information about our company. The shares bear a restrictive transfer legend in accordance with Rule 144 under the Securities Act. The shares will vest 1/12th every three months beginning January 31, 2011. The employee must be employed on date of vesting in order to receive the shares.
ITEM 6.
ITEM 6. SELECT FINANCIAL DATA.
This section is not applicable since we are a small reporting company.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS PLAN OF OPERATION
The following discussion and analysis should be read in conjunction with our consolidated financial statements and related notes thereto included elsewhere in this annual report. Portions of this document that are not statements of historical or current fact are forward-looking statements that involve risk and uncertainties, such as statements of our plans, objectives, expectations and intentions. The cautionary statements made in this annual report should be read as applying to all related forward-looking statements wherever they appear in this annual report. From time to time, we may publish forward-looking statements relative to such matters as anticipated financial performance, business prospects, technological developments and similar matters. The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements. All statements other than statements of historical fact included in this section or elsewhere in this report are, or may be deemed to be, forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Important factors that could cause actual results to differ materially from those discussed in such forward-looking statements include, but are not limited to, the following: changes in the economy or in specific customer industry sectors; changes in customer procurement policies and practices; changes in product manufacturer sales policies and practices; the availability of product and labor; changes in operating expenses; the effect of price increases or decreases; the variability and timing of business opportunities including acquisitions, alliances, customer agreements and supplier authorizations; our ability to realize the anticipated benefits of acquisitions and other business strategies; the incurrence of debt and contingent liabilities in connection with acquisitions; changes in accounting policies and practices; the effect of organizational changes within the Company; the emergence of new competitors, including firms with greater financial resources than ours; adverse state and federal regulation and legislation; and the occurrence of extraordinary events, including natural events and acts of God, fires, floods and accidents.
The following discussion and analysis of our plan of operations should be read in conjunction with our financial statements and related notes appearing elsewhere in this annual report. This discussion and analysis contain forward-looking statements that involve risks, uncertainties and assumptions. Actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors, including, but not limited to, those presented under the heading of “Risk Factors” and elsewhere in this annual report.
RESULTS OF OPERATIONS
Fiscal Year Ended December 31, 2010, Compared to Fiscal Year Ended December 31, 2009
Revenue
Revenues were $13,890,892 for the year ended December 31, 2010, an increase of $266,906, or 2%, from revenues of $13,623,986 for the year ended December 31, 2009. The increase was pretty flat compared to prior year and represents the results of a slow economy. The increase came primarily from our Fire Life Safety division offset by a decrease in our Telecommunications division.
Fire Life Safety segment revenue for the year ended December 31, 2010 and 2009 were approximately $10,681,000 or 77% and $9,342,000 or 69% of total revenue, respectively. The increase in revenue was hard work and diligence by our sales group in mining new markets and customers previously not worked with. We hope to continue looking and winning opportunities in these markets, as well as expansion in to some other related market segments. Management believes, but cannot guarantee, that this segment’s revenues will increase steadily in the following quarters.
Telecommunication segment revenue for the year ended December 31, 2010 and 2009 was approximately $3,209,000 or 23% and $4,282,000 or 31% of total revenue, respectively. The large contract that has supported this group is starting to wind down. While there could be additional opportunities with this customer, management is reviewing how to gain traction into other areas where this segment has specialized licensing opportunities that some of the competition does not have at its disposable. Management is exploring the means to leverage these opportunities and relationships in these trying times.
Cost of Revenue
Cost of revenue consists of direct costs on contracts such as direct labor, design, materials, third party subcontractors, and certain other direct overhead costs. Our cost of revenue was $9,119,909 or 66% of revenue for the year ended December 31, 2010, compared to $8,064,534 or 59% for the same period of the prior year. The dollar increase in our total cost of revenue is due primarily to the corresponding increase in the percentage of cost of sales during the year ended December 31, 2010. The cost of revenue percentage is expected to vary depending on our mix of project revenue and segment revenue. The cost increase is representative of current economic conditions tightening margins, especially on contract type jobs. The Company feels it is imperative that they be competitive without underbidding to win jobs.
Fire Life Safety segment cost of revenue and cost of revenue as a percentage of revenue for the year ended December 31, 2010 and 2009 was approximately $6,117,000 and 57% and $4,789,000 and 51%, respectively. The dollar increase in our cost of revenue is primarily due to the corresponding increase in revenues during the year ended December 31, 2010, as well as an increase in dollars due to higher cost of sales as a percentage of sales. The change in cost of revenue as a percentage of revenue was due to the blend of project revenue attributable to our existing operations and the more competitive bid environment reducing the margins available on work won.
Telecommunication segment cost of revenue and cost of revenue as a percentage of revenue for the year ended December 31, 2010 and 2009 was approximately $3,002,000 and 94% and $3,276,000 and 77%, respectively. The dollar decrease in cost of revenue is primarily due to the reduction in sales. The increase in cost of revenue as a percentage of revenue was due to the blend of project revenue attributable to our existing operations, plus the cost of initial expansion into additional segments of the telecommunications market. The division is also review some cost recuperation credits with two of its subcontractors in relation to incorrect billings during 2010. We are also addressing recuperating costs from a major customer in relation to billing and cost issues on a project. Management hopes to solve some of these issues during the first and second quarters of 2011. Management believes, but cannot guarantee, that some of the administrative costs should be better leveraged as this division grows.
Selling, general and administrative
Selling, general and administrative expenses were $4,314,596 for the year ended December 31, 2010 compared to $5,821,543 for the year ended December 31, 2009, a reduction of $1,506,947. The selling, general and administrative cost related to revenues decreased to 31% for year ended December 31, 2010 as compared to 43% for the year ended December 31, 2009. The Company is working hard on keeping these costs controlled in order to keep leveraged as revenues increased. We also recognize the importance of being staffed appropriately to allow for timely and accurate distribution of information to allow management to properly do their jobs.
The decrease is primarily a result of a decrease in legal and accounting expense of approximately $144,000 due to defense of the union and bank lawsuits, for which the union suit has been settled and decrease in accounting fees associated with review and reporting requirements. Prior to the merger, we were not required to have annual audits or quarterly reviews, causing extra costs the reviews and audits of 2009 to catch up the past reporting periods. The remainder of the decrease was primarily attributable to salaries and benefits of reduced staffing levels, consolidation of rents and an older fleet which has reduced our vehicle leasing costs.
Depreciation and amortization
Depreciation and amortization expense increased to $263,784 for the year ended December 31, 2010 compared to $245,090 in the year ended December 31, 2009. The increase came primarily from the amortization related to deferred finance costs of the capital raise in April 2010, plus increase in depreciation due to the leasehold improvements from 2009, offset by the reduction in the amortization of the intangibles from the Conesco purchase. This amortization finalized in August 2010.
Interest
Net interest expense increased to $139,351 for the year ended December 31, 2010 compared expense of $94,900 for the year ended December 31, 2009. This change was primarily due to the increase in interest expense due to full use of the line of credit for working capital purposes, notes payable and fees and costs of late payments due to tight cash constraints.
Income Tax
Income tax benefit decreased to $80,490 for the year ended December 31, 2010 from $174,901 for the year ended December 31, 2009. This is a $94,411 decrease in benefit due mainly to the movement of the section 481a adjustment of $424,814 from deferred status at December 31, 2009 to current at December 31, 2010.
Critical Accounting Policies
The preparation of financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”) requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities. A summary of the critical accounting policies and the judgments that we make in the application of those policies is presented in Note C to our consolidated financial statements.
Our consolidated financial statements are based on the selection of accounting policies and the application of accounting estimates, some of which require management to make significant assumptions. Actual results could differ materially from the estimated amounts. The following accounting policies are critical to understanding and evaluating our reported financial results:
Revenue Recognition
We recognizes revenues from fixed-price and modified fixed-price construction contracts on the percentage-of-completion method, measured by the percentage of cost incurred to date to estimated total cost for each contract. That method is used because management considers total cost to be the best available measure of progress on the contracts. Because of inherent uncertainties in estimating costs, it is at least reasonably possible that the estimates used will change within the near term. We also recognizes revenue from non-fixed price (time and materials) contracts. The revenue from these contracts is billed monthly and is based on actual time and material costs which have occurred on the job for the billing period.
Contract costs include all direct material and labor costs and those indirect costs related to contract performance, such as indirect labor, supplies, tools, repairs, and depreciation. Selling, general, and administrative costs are charged to expense as incurred. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined. Changes in job performance, job conditions, and estimated profitability may result in revisions to costs and income, which are recognized in the period in which the revisions are determined. Changes in estimated job profitability resulting from job performance, job conditions, contract penalty provisions, claims, change orders, and settlements, are accounted for as changes in estimates in the current period.
Revenue on contracts can be derived from different disciplines and is accounted for on a consolidated basis by job to see overall performance, as well as the ability to break the job down by discipline to see how each contributes to the overall performance of the job.
The asset, “Costs and estimated earnings in excess of billings on uncompleted contracts”, represents revenues recognized in excess of amounts billed. The liability, “Billings in excess of costs and estimated earnings on uncompleted contracts,” or “accruals on uncompleted contracts” represents billings in excess of revenues recognized.
Stock Based Compensation
We adopted the fair value recognition provisions Accounting Standard Codification sub-topic 718-10 (ASC 718-10) Compensation, to account for compensation costs under our stock option plans. In adopting ASC 718-10, we elected to use the modified prospective method to account for the transition from the intrinsic value method to the fair value recognition method. Under the modified prospective method, compensation cost is recognized from the adoption date forward for all new stock options granted and for any outstanding unvested awards as if the fair value method had been applied to those awards as of the date of grant. We had no outstanding unvested awards at the adoption date or earlier period. We used the fair value method for equity instruments granted to non-employees and uses the Black Scholes model for measuring the fair value. The stock based fair value compensation is determined as of the date of the grant or the date at which the performance of the services is completed (measurement date) and is recognized over the periods in which the related services are rendered.
Derivative financial instruments
On October 1, 2010, we adopted Accounting Standards Codification subtopic 815-10, Derivatives and Hedging (“ASC 815-10”), which requires that all derivative instruments be recognized in the financial statements at fair value. The adoption of ASC 815-10 did not have a significant impact on the results of operations, financial position or cash flows during the periods ended December 31, 2010 and 2009.
We used derivative financial instruments for trading purposes also. Credit risk related to the derivative financial instrument is managed by periodic settlements. Changes in fair value of derivative financial instruments are recorded as adjustments to the assets or liabilities being hedged in the statement of operations or in accumulated other comprehensive income (loss), depending on whether the derivative is designated and qualifies for hedge accounting, the type of hedge transaction represented and the effectiveness of the hedge.
Effect of Related Prospective Accounting Pronouncement
Accounting Standards Codification subtopic 815-40, Derivatives and Hedging; Contracts in Entity’s own Equity (“ASC 815-40”) became effective for the us on October 1, 2009. The Company’s Series A (convertible) Preferred Stock has certain reset provisions that require the us to reduce the conversion price of the Series A (convertible) Preferred Stock if we issues equity at a price less than the conversion price. Upon the effective date, the provisions of ASC 815-40 required a reclassification to liability based on the reset feature of the agreements if the we sells equity at a price below the conversion price of the Series A Preferred Stock. Along with Preferred Stock, Warrant were also issued, which also has certain reset provisions that require us to reduce the exercise price of the warrants on certain conditions.
Therefore, in accordance with ASC 815-40, we determined the fair value of the initial reset provision of $453,711 at April 15, 2010 on Preferred Stock and Warrants, using the Black-Scholes formula assuming no dividends, a risk-free interest rate of 4.00%, expected volatility of 176.1%, and expected life of 1 year and 5 years. The net value of the reset provision at the date of adoption of ASC 815-40 was recorded as a reset derivative liability on the balance sheet in the amount of $453,711 and a reduction to series A convertible redeemable preferred stock. Changes in fair value are recorded as non-operating, non-cash income or expense at each reporting date. We issued additional warrants which increased the reset provision by $59,944 in August 2010. The addition was used in the calculation for the reset values at December 31, 2010.
The fair value of the reset provision of $547,472 at December 31, 2010 was determined using the Black Scholes Option Pricing Model with the following assumptions:
The change in fair value of the Warrant and Preferred stock derivative liability resulted in a current year non-operating income to operations of $33,818.
Financial Instruments Measured at Fair Value
ASC 825-10 defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required or permitted to be recorded at fair value, we considers the principal or most advantageous market in which it would transact and considers assumptions that market participants would use when pricing the asset or liability, such as inherent risk, transfer restrictions, and risk of nonperformance. ASC 825-10 establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. ASC 825-10 establishes three levels of inputs that may be used to measure fair value:
Level 1 - Quoted prices in active markets for identical assets or liabilities.
Level 2 - Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which all significant inputs are observable or can be derived principally from or corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 - Unobservable inputs to the valuation methodology that are significant to the measurement of fair value of assets or liabilities.
To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes, the level in the fair value hierarchy within which the fair value measurement is disclosed is determined based on the lowest level input that is significant to the fair value measurement.
Level 3 Liabilities are comprised of the fair value of issued warrants with reset provisions and the Series A convertible redeemable preferred stock with reset provisions.
Inflation
We believe that inflation has not had, and is not expected to have, a material effect on our operations.
Climate Change
We believe that neither climate change, nor governmental regulations related to climate change, have had, or are expected to have, any material effect on our operations.
LIQUIDITY AND CAPITAL RESOURCES
Fiscal Year Ended December 31, 2010, Compared to Fiscal Year Ended December 31, 2009
For the twelve months ended December 31, 2010, we experienced a net loss of $2,559,004. At December 31, 2010, we had $323,472 in cash. Accounts receivable, net of allowances for doubtful accounts, were $2,471,505 at the end of 2010, which at 68% of total assets is approximately 30% higher than at December 31, 2009. The increase as a percent of total assets is primarily due to the reduced asset base following the write off of assets from discontinued operations.
At December 31, 2010, we had negative working capital from continuing operations of $517,524 compared to negative working capital from continuing operations of $43,222 at December 31, 2009. The ratio of current assets to current liabilities of continuing operations stayed was 0.87:1 at December 31, 2010 compared to 0.98:1 at December 31, 2009. Cash flow provided by operations during 2010 was $342,689 compared to $1,015,010 at December 31, 2009. Management feels the working capital number is somewhat misleading as the Company is currently carrying approximately $547,000 in warrant and derivative liabilities that will not lead to actual cash disbursements. We believe there will be an improvement in the working capital during the first quarter of 2011. Management anticipates that its existing capital resources will be adequate to satisfy its capital requirements for the foreseeable future.
Our principal liquidity at December 31, 2010 included cash of $323,472, and $2,471,505 net accounts receivable. Management believes that our liquidity position remains sufficient enough to support on-going general administrative expense, strategic positioning, and the garnering of contracts and relationships.
Cash Flow
For year ended December 31, 2010, we generated $342,689 from our continuing operating activities, primarily as a result of our net income from continuing operations of $99,925, increase in billing in excess of cost of $211,715, depreciation and amortization of $192,670, bad debt allowance and write offs of $104,668 and by increase in accounts payable of $280,479, reduction for gain on fair value change of warrants of $33,818, primarily offset by an increase in contracts receivable of $536,717, an increase in costs in excess of billings of $224,069, and decrease in deferred tax liabilities of $80,490. By comparison, net cash provided by continuing operating activities was $1,015,010 for the year ended December 31, 2009. This was primarily driven by a large decrease in receivables due to collection of retention and reduced sales. This was offset primarily by an increase in inventory, billings in excess of costs and a reduction of payables of $151,395, $613,885, and $635,007, respectively.
There was limited investing activity from continuing operations during for the period ended December 31, 2010. The activity consisted of upgrading security monitors at the Sacramento offices. The investing activity during 2009 consisted of the purchase of computers and equipment, and the build out of the Company’s new offices of approximately $278,455.
Financing activity from continuing operations for 2010 consisted of payments on long term debt obligations of $118,690 offset by line of credit borrowings of $50,000 and the sale of Series A preferred stock with gross proceeds of $575,000 and short term notes of $17,500. For 2009, financing activity from continuing operations consisted of payments on long term debt obligations of $938 offset by line of credit borrowings of $244,500.
Our business does not require significant amounts of investment in long-term fixed assets. The substantial majority of the capital used in our business is working capital that funds our costs of labor materials deployed in project work until our customers pay us. Our average job duration generally allows us to complete the realization of revenue and earnings in cash within a few months of invoicing.
Accordingly, we believe cash flow, by encompassing our acquisition efforts, profit margins and the use of working capital over our approximately three month working capital cycle, is an effective measure of operating effectiveness and efficiency when considered in light of our business plan for acquisitions and regional growth. Management anticipates positive cash flows from operations beginning the second quarter of 2011.
Our registered independent certified public accountants have stated in their report dated April 15, 2011 that we have incurred operating losses in the last two years, and that we are dependent upon the management’s ability to develop profitable operations. These factors among others may raise substantial doubt about our ability to continue as a going concern. This statement in the accountants’ report may make it more difficult to obtain future financing.
Line of Credit Facility
The line of credit facility is primarily used to fund short-term changes in working capital. The total capacity of the facility at December 31, 2010 was $950,000. Our management believes that sufficient liquidity exists but may seek approval to increase the facility or find other funding sources to increase the facility to $1.5 million in the future. Our management believes an increased line of credit facility would help to provide adequate liquidity and financial flexibility to support our expected growth beginning in the second quarter of 2011 and beyond.
The facility contains customary financial covenants requiring us to maintain certain financial ratios, including an asset coverage ratio and dollars, debt to equity ratio and a tangible net worth requirement. Non-compliance with any of these ratios or a violation of other covenants could result in an event of default and reduce availability under the facility. We are currently not in compliance with our covenants, but have full availability under the facility.
Effective October 13, 2010, our company executed a new credit facility decreasing the line to $975,000. The interest rate remains at .5% less than the lender’s index rate, currently 4.5% and the maturity date was reset to September 30, 2011. With the renewal of this credit facility the lender reset customary financial covenants requiring us to maintain certain financial ratios, including an asset coverage ratio and dollars, debt to equity ratio and a tangible net worth requirement. As part of the new agreement, we were required to pay down $25,000 by December 31, 2010 and an additional $25,000 by March 31, 2011. The bank has waived the covenants through June 30, 2011, provided the payments are made in accordance with the extension.
Should the current financing arrangements prove to be insufficient for our current needs; we are willing to go to the capital markets to raise the necessary capital to meet these needs.
Long Term Notes
Long term notes with original principal balances totaling $900,000, were issued through our bank on February 3, 2007 ($650,000) and December 31, 2008, ($250,000). The notes were are payable over 5 years and will be paid off on or about February 1, 2012 and December 31, 2013, respectively. The notes carry interest rates of 7.76% and 5.5%, respectively. These notes are held by the same bank the Company uses for its banking and where the line of credit is held. The current balances at December 31, 2010 on these two notes are $174,576 and $158,006, respectively.
During the year ended December 31, 2010, the Company executed notes with two vendors to replace outstanding invoices and allow payments over time. The Company is paying between 5-6% on these obligations and it has proven to help keep a positive relationship with these vendors. The notes are payable over 8 and 18 months, respectively. These notes are classified under Long Term Liabilities Discontinued Operations.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements
ITEM 7A.
ITEM 7A. QUANITITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risk primarily related to potential adverse changes in interest rates as discussed below. We are actively involved in monitoring exposure to market risk and continue to develop and utilize appropriate risk management techniques. We are not exposed to any other significant financial market risks including commodity price risk, foreign currency exchange risk or interest rate risks from the use of derivative financial instruments. We do not use derivative financial instruments.
We have limited exposure to changes in interest rates under our revolving credit facility. We have a debt facility under which we may borrow funds in the future. We do not currently foresee any borrowing needs. Our debt with fixed interest rates consists of notes to former owners of acquired companies.
The following table presents principal amounts (stated in thousands) and related average interest rates by year of maturity for our debt obligations from continuing operations and their indicated value at December 31, 2010:
For the twelve months ended December 31,
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
PRO-TECH INDUSTRIES, INC.
RBSM LLP
Certified Public Accountants
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Pro-Tech Industries, Inc.
Sacramento, California
We have audited the accompanying consolidated balance sheets of PRO-TECH INDUSTRIES, INC., (the “Company”) as of December 31, 2010 and 2009 and the related consolidated statement of operations, (deficiency) in stockholders’ equity, and cash flows for each of the two years in the period ended December 31, 2010. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based upon our audits.
We have conducted our audits in accordance with standards of the Public Company Accounting Oversight Board (United States of America). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatements. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2010 and 2009, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2010, in conformity with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note C to the consolidated financial statements, the Company has incurred significant losses and has a working capital and capital deficiencies as of December 31, 2010. These factors, among others, raise substantial doubt about the Company's ability to continue as a going concern. Management's plans, with respect to these matters are also described in Note C to the consolidated financial statements. The consolidated financial statements do not include any adjustments that might result should the Company be unable to continue as a going concern
/s/RBSM LLP
New York, New York
April 15, 2011
PRO-TECH INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2010 AND 2009
See accompanying notes to these consolidated financial statements
PRO-TECH INDUSTRIES, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009
See accompanying notes to these consolidated financial statements
PRO-TECH INDUSTRIES, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE TWO YEARS ENDED DECEMBER 31, 2010
The accompanying notes are an integral part of these consolidated financial statements
PRO-TECH INDUSTRIES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009
See accompanying notes to these consolidated financial statements
PRO-TECH INDUSTRIES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009
(continued)
The accompanying notes are an integral part of these consolidated financial statements
PRO-TECH INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010 AND 2009
NOTE A - BUSINESS DESCRIPTION
A summary of the significant accounting policies applied in the preparation of the accompanying consolidated financial statements follows.
Business and Basis of Presentation
The Company was originally incorporated under the laws of the State of Nevada on April 4, 2007 under the name Meltdown Massage and Body Works, Inc. (“Meltdown”) and formerly operated as a development stage company. On December 31, 2008, Meltdown merged with and into Pro-Tech Fire Protection Systems Corp. (“Pro-Tech”). On May 8, 2009, the Company’s stockholders approved a name change from Meltdown Massage and Body Works, Inc. to Pro-Tech Industries, Inc. which became effective with the filing of an amendment to the Company Articles of Incorporation on May 11, 2009. The Company is now known as Pro-Tech Industries, Inc. (“PTI”) and the ticker symbol is PTCK.
The consolidated financial statements include the accounts of PTI, Pro-Tech and Conesco, Inc., the operating subsidiaries (collectively, the “Company”).
Pro-Tech Fire Protection Systems Corp. (“Pro-Tech”) was incorporated on May 4, 1995 under the laws of the State of California to engage in any lawful corporate undertaking, including, but not limited to; installation, repair and inspections of fire protection systems in commercial, military and industrial settings.
Pro-Tech Fire Protection Systems is a full-service contractor serving the western United States, with offices in California and Nevada. Services include estimating, designing, fabricating, and installing all types of standard and specialty water-based fire protection systems. In addition, the company offers “Day Work” services, including inspecting, testing, repairing and servicing of same. The Company serves the new construction market, as well as customers retro-fitting, upgrading or repairing their existing facilities, bringing existing facilities to current standards (for example, installing sprinklers at a customer’s expanded storage warehouse, etc.).
In late third quarter and fourth quarter 2008, the Company expanded its services to include electrical and telecommunications. The client base is the same as the fire sprinkler services. These groups were not a significant part of the business reported in the 2008 consolidated financial statements.
On January 16, 2009, the Company acquired Conesco, Inc. (“Conesco”) in a stock for stock exchange. Conesco has been a provider of commercial flooring products, installation, maintenance and design consultation services to businesses throughout Northern California since 1993
On July 31, 2010, the Company entered into a letter of intent to sell the stock of Conesco, Inc. to its prior owner upon the terms and subject to the conditions of a definitive agreement. The final terms of the definitive agreement are in the process of being finalized and management projects to complete the sale in the second quarter of 2011. The letter of intent is non-binding and either side may terminate with written notice. These consolidated financial statements include disclosure of the results of operations for Conesco, for all periods presented, as discontinued operations. All significant inter-company accounts and transactions have been eliminated in consolidation.
In October 2010, due to economic conditions and capital constraints, Pro-Tech decided to shut down its electrical division. Pro-Tech was unable to penetrate the market and felt it was in the best interest of the company to concentrate on its core fire protection division as well as the telecommunications division, which have been more successful in finding and retaining business. These consolidated financial statements include disclosure of the results of operations for the Electrical division, for all periods presented, as discontinued operations. All significant inter-company accounts and transactions have been eliminated in consolidation.
All significant intercompany balances and transactions have been eliminated in consolidation.
NOTE B - REVERSE MERGER AND CORPORATE RESTRUCTURE
On December 31, 2008, the Company consummated a reverse merger by entering into a share exchange agreement (the “Share Exchange”) with the stockholders of Pro-Tech, pursuant to which the stockholders of Pro-Tech exchanged all of the issued and outstanding capital stock of Pro-Tech for 10,100,000 shares of common stock of the Company representing approximately 74% of the Company’s outstanding capital stock, Meltdown shareholders retained the 3,500,000 shares of previously issued shares of common stock.
As a result of the Share Exchange, there was a change in control of the Company. In accordance with Accounting Standards Codification Subtopic 850-10, Business Combination (“ASC 805-10”), the Company was the acquiring entity. In substance, the Share Exchange is a recapitalization of the Company’s capital structure rather than a business combination. For accounting purposes, the Company accounted for the transaction as a reverse acquisition with the Pro-Tech as the surviving entity. The total purchase price and carrying value of net assets acquired was $-0-. The Company did not recognize goodwill or any intangible assets in connection with the transaction. Prior to the Share Exchange, the Company was an inactive corporation with no significant assets and liabilities.
All reference to Common Stock shares and per share amounts have been retroactively restated to effect the reverse acquisition as if the transaction had taken place as of the beginning of the earliest period presented.
The total consideration paid was $3,500 and the significant components of the transaction are as follows:
In accordance with Statement of Position 98-5 (“SOP 98-5”), the Company expensed $3,500 as organization costs.
The Company has entered into a LOI with the former owner of Conesco, Inc. to buy all of the outstanding shares of Conesco. The accompanying consolidated financial statements include the historical financial condition, results of operations and cash flows of Pro-Tech showing Conesco as a discontinued operation through July 31, 2010.
NOTE C - SUMMARY OF ACCOUNTING POLICIES
Revenue Recognition
The Company recognizes revenues from fixed-price and modified fixed-price construction contracts on the percentage-of-completion method, measured by the percentage of cost incurred to date to estimated total cost for each contract. That method is used because management considers total cost to be the best available measure of progress on the contracts. Because of inherent uncertainties in estimating costs, it is at least reasonably possible that the estimates used will change within the near term. The Company also recognizes revenue from non-fixed price (time and materials) contracts. The revenue from these contracts is billed monthly and is based on actual time and material costs which have occurred on the job for the billing period.
Contract costs include all direct material and labor costs and those indirect costs related to contract performance, such as indirect labor, supplies, tools, repairs, and depreciation. Selling, general, and administrative costs are charged to expense as incurred. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined. Changes in job performance, job conditions, and estimated profitability may result in revisions to costs and income, which are recognized in the period in which the revisions are determined. Changes in estimated job profitability resulting from job performance, job conditions, contract penalty provisions, claims, change orders, and settlements, are accounted for as changes in estimates in the current period.
Revenue on contracts can be derived from different disciplines and is accounted for on a consolidated basis by job to see overall performance, as well as the ability to break the job down by discipline to see how each contributes to the overall performance of the job.
The asset, “Costs and estimated earnings in excess of billings on uncompleted contracts”, represents revenues recognized in excess of amounts billed. The liability, “Billings in excess of costs and estimated earnings on uncompleted contracts,” or “accruals on uncompleted contracts” represents billings in excess of revenues recognized.
Contract Receivables
Contract receivables are recorded when invoices are issued and are presented in the balance sheet net of the allowance for doubtful accounts. Contract receivables are written off when they are determined to be uncollectible. The allowance for doubtful accounts is estimated based on the Company’s historical losses, the existing economic conditions in the construction industry, and the financial stability of its customers.
Inventory
The Company maintains an inventory which primarily consists of small parts such as sprinkler heads, gaskets, pipe joints, junction boxes, outlets, etc. which comes from closed jobs or economical buying opportunities. They get used for repair work or filler when jobs run short. The inventory on hand was $59,948 and $151,394 at December 31, 2010 and December 31, 2009, respectively.
Advertising
The Company follows the policy of charging the costs of advertising to expenses incurred. The Company incurred $22,084 and $29,034 of advertising costs for the twelve months ended December 31, 2010 and 2009, respectively.
Income Taxes
In accordance with Accounting Standards Codification subtopic 740-10, Income Taxes (“ASC 740-10”) deferred income taxes are the result of the expected future tax consequences of temporary differences between the financial statement and tax basis of assets and liabilities. Generally, deferred income taxes are classified as current or non-current in accordance with the classification of the related asset or liability. Items that are not related to an asset or liability are classified as current or non-current depending on the periods in which the temporary differences are expected to reverse. A valuation allowance is provided against deferred income tax assets in circumstances where management believes the recoverability of a portion of the assets is not reasonably assured. Losses incurred, if any, are carried forward as applicable Accounting Standards Codification subtopic 740-10, Income Taxes (“ASC 740-10”) and the Internal Revenue Code and potentially may be used to offset taxable net income generated in the future. The Company had previously elected to be treated as a subchapter “S” corporation for federal tax purposes. The reverse merger caused the Company to lose its subchapter “S” corporation status. The Company became responsible for $849,628 in deferred income that carried forward from 2007 when Pro-Tech was forced to change from cash to accrual based taxpayer. Pro-Tech took a 481a election to spread the acceleration over 4 years. The Company provides for income taxes based on pre-tax earnings reported in the consolidated financial statements. Certain items such as depreciation are recognized for tax purposes in periods other than the period they are reported in the consolidated financial statements. Following the reverse merger status, beginning, January 1, 2009, the Company became a C-Corp and subject to standard quarterly taxes provisions. Results of operations may not be comparable to prior results.
Cash Equivalents
For purposes of the Statements of Cash Flows, the Company considers all highly liquid debt instruments purchased with a maturity date of three months or less to be cash equivalents.
Property and Equipment
Property and equipment are stated at cost and depreciated over their estimated useful lives of 3 to 10 years using the straight-line method as follows:
Construction equipment
5-7 years
Automobiles
5 years
Computer Software
3 years
Office equipment and furniture
3-7 years
Leasehold improvements
life of the lease agreement where appropriate
Maintenance and repairs to automobiles, equipment, furniture and computers is expensed as incurred. There is no reevaluation of useful life as most of the assets are short term in nature and the repairs or maintenance are in the normal course of the operating life of the asset. Upon disposal of assets, the Company reduces the asset account and the accumulated depreciation account for the balances at that point in time. The difference between the amounts received greater than the book value is recognized as a gain and if the amount is less than the book value is recognized as a loss. Depreciation is not included in cost of goods sold.
Long-Lived Assets
The Company has adopted ASC 360-10-15-3 “Impairment of Disposal of long-lived Assets”. The Statement requires that long-lived assets and certain identifiable intangibles held and used by the Company be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Events relating to recoverability may include significant unfavorable changes in business conditions, recurring losses, or a forecasted inability to achieve break-even operating results over an extended period. The Company evaluates the recoverability of long-lived assets based upon forecasted undiscounted cash flows. Should any impairment in value be indicated, the carrying value of intangible assets will be adjusted, based on estimates of future discounted cash flows resulting from the use and ultimate disposition of the asset. ASC 360-10 also requires assets to be disposed of be reported at the lower of the carrying amount or the fair value less costs to sell.
Concentrations of Credit Risk
Financial instruments and related items, which potentially subject the Company to concentrations of credit risk, consist primarily of cash, cash equivalents and receivables. The Company places its cash and temporary cash investments with credit quality institutions. At times, such investments may be in excess of the FDIC insurance limit. The Company periodically reviews its contract receivables in determining its allowance for doubtful accounts. The allowance for doubtful accounts was $100,000 and $50,000 as of December 31, 2010 and December 31, 2009, respectively.
Basic and Diluted Earnings (Loss) Per Share
Basic and diluted income or loss per common share is based upon the weighted average number of common shares outstanding during the periods ended December 31, 2010 and 2009, under the provisions of Accounting Standards Codification subtopic 260-10, Earnings Per Share (“ASC 260-10”), “Earnings Per Share” and as amended/superseded in “Compensation” (“ASC 718-10”). As the Company reported a net loss for the periods ended December 31, 2010 and 2009, the effects of the shares issuable upon exercise of outstanding warrants, options and convertible securities as of December 31, 2010 and 2009 have not been considered in the diluted net loss per common share since these dilutive securities would reduce the loss per common share and become anti-dilutive. Non-vested shares have been excluded as common stock equivalents in the diluted earnings per share because they are either anti-dilutive, or their effect is not material.
The following reconciliation of net income and share amounts was used in the computation of income (loss) per share for the period ended December 31, 2010:
The weighted average shares outstanding used in the basic net income per share computations for period ended December 31, 2010 was 18,209,335. In determining the number of shares used in computing diluted loss per share, the Company added approximately 2,943,000 potentially dilutive securities for the period ended December 31, 2010. The potentially dilutive securities added were mostly attributable to unvested grants, the warrants, and convertible preferred shares outstanding. As a result, the diluted loss per share for the period ended December 31, 2010 was $0.00.
Derivative financial instruments
On October 1, 2010, the Company adopted Accounting Standards Codification subtopic 815-10, Derivatives and Hedging (“ASC 815-10”), which requires that all derivative instruments be recognized in the financial statements at fair value. The adoption of ASC 815-10 did not have a significant impact on the results of operations, financial position or cash flows during the periods ended December 31, 2010 and 2009.
The Company uses derivative financial instruments for trading purposes also. Credit risk related to the derivative financial instrument is managed by periodic settlements. Changes in fair value of derivative financial instruments are recorded as adjustments to the assets or liabilities being hedged in the statement of operations or in accumulated other comprehensive income (loss), depending on whether the derivative is designated and qualifies for hedge accounting, the type of hedge transaction represented and the effectiveness of the hedge.
Effect of Related Prospective Accounting Pronouncement
Accounting Standards Codification subtopic 815-40, Derivatives and Hedging,; Contracts in Entity’s own Equity (“ASC 815-40”) became effective for the Company on October 1, 2009. The Company’s Series A (convertible) Preferred Stock has certain reset provisions that require the Company to reduce the conversion price of the Series A (convertible) Preferred Stock if the Company issues equity at a price less than the conversion price. Upon the effective date, the provisions of ASC 815-40 required a reclassification to liability based on the reset feature of the agreements if the Company sells equity at a price below the conversion price of the Series A Preferred Stock. Along with preferred stock, warrants were issued which carry a certain reset provision that require us to reduce the exercise price of the warrants on certain conditions.
Therefore, in accordance with ASC 815-40, the Company determined the fair value of the initial reset provision of $453,711 at April 15, 2010 on preferred stock and warrants using the Black-Scholes formula assuming no dividends, a risk-free interest rate of 4.00%, expected volatility of 176.1%, and expected life of 1 and 5 years. The net value of the reset provision at the date of adoption of ASC 815-40 was recorded as a reset derivative liability on the balance sheet in the amount of $453,711 and a reduction to series A convertible redeemable preferred stock. Changes in fair value are recorded as non-operating, non-cash income or expense at each reporting date. The Company issued additional warrants which increased the reset provision by $59,944 in August 2010. The addition was used in the calculation for the reset values at December 31, 2010.
The fair value of the reset provision of $547,472 at December 31, 2010 was determined using the Black Scholes Option Pricing Model with the following assumptions:
The change in fair value of the warrant and preferred stock derivative liability resulted in a current year non-operating income to operations of $33,818.
Stock Based Compensation
The Company adopted the fair value recognition provisions Accounting Standard Codification sub-topic 718-10 (ASC 718-10) Compensation, to account for compensation costs under our stock option plans. In adopting ASC 718-10, the Company elected to use the modified prospective method to account for the transition from the intrinsic value method to the fair value recognition method. Under the modified prospective method, compensation cost is recognized from the adoption date forward for all new stock options granted and for any outstanding unvested awards as if the fair value method had been applied to those awards as of the date of grant. The Company had no outstanding unvested awards at the adoption date or earlier period. The Company uses the fair value method for equity instruments granted to non-employees and uses the Black Scholes model for measuring the fair value. The stock based fair value compensation is determined as of the date of the grant or the date at which the performance of the services is completed (measurement date) and is recognized over the periods in which the related services are rendered.
Segment Information
Accounting Standards Codification subtopic Segment Reporting 280-10 (“ASC 280-10”) establishes standards for reporting information regarding operating segments in annual financial statements and requires selected information for those segments to be presented in interim financial reports issued to stockholders. ASC 280-10 also establishes standards for related disclosures about products and services and geographic areas. Operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the chief operating decision maker, or decision-making group, in making decisions how to allocate resources and assess performance. The information disclosed herein materially represents all of the financial information related to the Company’s principal operating segment.
Use of Estimates
The consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America ("GAAP"), which require management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amount of revenues and expenses during the reporting period. Certain of the Company's accounting policies require higher degrees of judgment than others in their application. These include the recognition of revenue and earnings from construction contracts under the percentage-of-completion method. Management continually evaluates all of its estimates and judgments based on available information and experience; however, actual amounts could differ from those estimates.
Fair Value
In January 2008, the Company adopted the Accounting Standards Codification subtopic 825-10, Financial Instruments (“ASC 825-10”) which defines fair value for accounting purposes, establishes a framework for measuring fair value and expands disclosure requirements regarding fair value measurements. The Company’s adoption of ASC 825-10 did not have a material impact on its consolidated financial statements. Fair value is defined as an exit price, which is the price that would be received upon sale of an asset or paid upon transfer of a liability in an orderly transaction between market participants at the measurement date. The degree of judgment utilized in measuring the fair value of assets and liabilities generally correlates to the level of pricing observability. Financial assets and liabilities with readily available, actively quoted prices or for which fair value can be measured from actively quoted prices in active markets generally have more pricing observability and require less judgment in measuring fair value. Conversely, financial assets and liabilities that are rarely traded or not quoted have less price observability and are generally measured at fair value using valuation models that require more judgment. These valuation techniques involve some level of management estimation and judgment, the degree of which is dependent on the price transparency of the asset, liability or market and the nature of the asset or liability. The Company did have financial assets measured at fair value on a recurring basis, refer to note T.
Reclassifications
Certain reclassifications have been made to confirm prior period data to the current presentation. These reclassifications had no effect on reported income.
Going Concern Matters
The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. As shown in the accompanying consolidated financial statements during year ended December 31, 2010, the Company incurred net losses attributable to common shareholders of $2,559,004 and used $443,664 in cash for operating activities during year ended December 31, 2010. At December 31, 2010, the Company had a working capital deficit The Company is in default in covenant on Line of Credit. These factors among others may indicate that the Company will be unable to continue as a going concern for a reasonable period of time.
The Company’s existence is dependent upon management’s ability to develop profitable operations and to obtain additional funding sources. Management is devoting substantially all of its efforts to increase its business profitability, as well as raising additional debt or equity financing. The Company is continuing to explore potential strategic relationships to provide capital and other resources for the further development and marketing of its products. There can be no assurance that the Company’s business or financing efforts will result in profitable operations or the resolution of the Company’s liquidity problems. The accompanying statements do not include any adjustments that might result should the Company be unable to continue as a going concern.
New Accounting Pronouncements
In March 2010, the FASB issued new accounting guidance, under ASC Topic 605 on Revenue Recognition. This standard provides that the milestone method is a valid application of the proportional performance model for revenue recognition if the milestones are substantive and there is substantive uncertainty about whether the milestones will be achieved. Determining whether a milestone is substantive requires judgment that should be made at the inception of the arrangement. To meet the definition of a substantive milestone, the consideration earned by achieving the milestone (1) would have to be commensurate with either the level of effort required to achieve the milestone or the enhancement in the value of the item delivered, (2) would have to relate solely to past performance, and (3) should be reasonable relative to all deliverables and payment terms in the arrangement. No bifurcation of an individual milestone is allowed and there can be more than one milestone in an arrangement. The standard is effective for interim and annual periods beginning on or after June 15, 2010. The Company is currently evaluating the impact the adoption of this guidance will have on its consolidated financial statements.
In February 2010, the FASB issued ASU No. 2010-09, which updates the guidance in ASC 855, Subsequent Events, such that companies that file with the SEC will no longer be required to indicate the date through which they have analyzed subsequent events. This updated guidance became effective immediately upon issuance and was adopted as of the first quarter of 2010.
In February 2010 the FASB issued Update No. 2010-08 Technical Corrections to Various Topics (“2010-08”). 2010-08 represents technical corrections to SEC paragraphs within various sections of the Codification. Management is currently evaluating whether these changes will have any material impact on its financial position, results of operations or cash flows.
In January 2010 the FASB issued Update No. 2010-06 Fair Value Measurements and Disclosures-Improving Disclosures about Fair Value Measurements (“2010-06”). 2010-06 requires new disclosures regarding significant transfers between Level 1 and Level 2 fair value measurements, and disclosures regarding purchases, sales, issuances and settlements, on a gross basis, for Level 3 fair value measurements. 2010-06 also calls for further disaggregation of all assets and liabilities based on line items shown in the statement of financial position. This amendment is effective for fiscal years beginning after December 15, 2010 and interim periods within those fiscal years. The Company is currently evaluating whether adoption of this standard will have a material impact on its consolidated financial position, results of operations or cash flows.
In January 2010 the FASB issued Update No. 2010-05 Compensation-Stock Compensation-Escrowed Share Arrangements and Presumption of Compensation (“2010-05”). 2010-05 re-asserts that the Staff of the Securities Exchange Commission (the “SEC Staff”) has stated the presumption that for certain shareholders escrowed share represent a compensatory arrangement. 2010-05 further clarifies the criteria required to be met to establish a position different from the SEC Staff’s position. The Company does not believe this pronouncement will have any material impact on its consolidated financial position, results of operations or cash flows.
In January 2010 the FASB issued Update No. 2010-04 Accounting for Various Topics-Technical Corrections to SEC Paragraphs (“2010-04”). 2010-04 represents technical corrections to SEC paragraphs within various sections of the Codification. Management is currently evaluating whether these changes will have any material impact on its consolidated financial position, results of operations or cash flows.
In January 2010 the FASB issued Update No. 2010-02 Accounting and Reporting for Decreases in Ownership of a Subsidiary-a Scope Clarification (“2010-02”) an update of ASC 810 Consolidation 2010-02 clarifies the scope of ASC 810 with respect to decreases in ownership in a subsidiary to those of a subsidiary or group of assets that are a business or nonprofit, a subsidiary that is transferred to an equity method investee or joint venture, and an exchange of a group of assets that constitutes a business or nonprofit activity to a non-controlling interest including an equity method investee or a joint venture. Management does not expect adoption of this standard to have any material impact on its consolidated financial position, results of operations or operating cash flows. Management does not intend to decrease its ownership in any of its wholly-owned subsidiaries.
In January 2010 the FASB issued Update No. 2010-01 Accounting for Distributions to Shareholders with Components of Stock and Cash-a consensus of the FASB Emerging Issues Task Force (“2010-03”) an update of ASC 505 Equity . 2010-03 clarifies the treatment of stock distributions as dividends to shareholders and their effect on the computation of earnings per shares. Management does not expect adoption of this standard to have any material impact on its consolidated financial position, results of operations or operating cash flows.
Other recent accounting pronouncements issued by the FASB (including its Emerging Issues Task Force), the AICPA, and the SEC did not, or are not believed by management to, have a material impact on the Company’s present or future consolidated financial statements.
NOTE D - DISCONTINUED OPERATIONS
Effective October 1, 2010 after having carefully evaluated all options, Pro-Tech determined to abandon our electrical division as we no longer consider the business to be economically viable due to economic conditions and capital constraints. The proposed electrical division was compromised by inefficient operations and cost overruns on three of its four most recent projects. We feel that the investment needed and the tough economic conditions do not make it prudent to continue on with this division. Accordingly, we have determined that our best course of action was to preserve value of the remaining divisions of Pro-Tech by winding down the electrical operations which we have done on an orderly basis. The historical operations and costs of the electrical division and its assets and liabilities at December 31, 2010 and 2009 are classified as discontinued operations in the accompanying consolidated financial statements.
On July 31, 2010, the Company entered into a letter of intent to sell the stock of Conesco, Inc. to its prior owner upon the terms and subject to the conditions of a definitive agreement. The final terms of the definitive agreement are in the process of being finalized and management projects to complete the sale in the second quarter of 2011. The letter of intent is non-binding and either side may terminate with written notice. These consolidated financial statements include disclosure of the results of operations for Conesco, for all periods presented, as discontinued operations. All significant inter-company accounts and transactions have been eliminated in consolidation.
Loss from discontinued operations:
Assets and liabilities of discontinued operations:
NOTE E - CONTRACT RECEIVABLES
Contract receivables at December 31, 2010 and December 31, 2009 consist of the followings:
NOTE F - UNCOMPLETED CONTRACTS
At December 31, 2010 and December 31, 2009, costs, estimated earnings, and billings on uncompleted contracts are summarized as follows:
NOTE G - BACKLOG
The following schedule summarizes changes in backlog on contracts from January 1, 2009 through December 31, 2010. Backlog represents the amount of revenue the Company expects to realize from work to be performed on uncompleted contracts in progress at year end and from contractual agreements on which work has not yet begun.
NOTE H - PROPERTY AND EQUIPMENT
Major classes of property and equipment at December 31, 2010 and December 31, 2009 consist of the followings:
Depreciation expense was $90,121 and $63,659 for the years ended December 31, 2010 and 2009, respectively.
No assets were disposed of during the years ended December 31, 2010 and 2009.
NOTE I - INTANGIBLE ASSETS AND GOODWILL
Total identifiable intangible assets acquired and their carrying values at December 31, 2009 are:
Total identifiable intangible assets acquired and their carrying values at December 31, 2010 are:
Total amortization expense charged to operations for the year ended December 31, 2010 and 2009 was $102,548 and $181,431, respectively. There is no amortization remaining.
The Company does not amortize goodwill. The Company recorded goodwill in the amount of $331,075 as a result of the acquisitions of Conesco, Inc. during the year ended December 31, 2010. The Company evaluates goodwill for impairment based on the fair value of the operating business units to which this goodwill relates at least once a year. The Company generally determines the fair value of a reporting unit using a combination of the income approach, which is based on the present value of estimated future cash flows, and the market approach, which compares the business unit's multiples to its competitors. At December 31, 2010, the Company has determined that the value of Conesco’s goodwill should be written off due to the pending disposal. There is no remaining value to this line item and it has been written off as part of the cost of discontinued operations.
On January 16, 2009, the Company entered in to an agreement for the exchange of common stock (“merger”) with the shareholders of Conesco (“Conesco Shareholders”) and Conesco, Inc. (“Conesco”). The Company issued 3,000,000 restricted shares of its common stock valued at $381,000 in exchange for all outstanding shares of Conesco. Conesco became a wholly owned subsidiary of the Company.
The total purchase price and carrying value of net assets acquired was $381,000. The Company recognized customer list as intangible assets in connection with the transaction. At the time of the acquisition, there was no active market for the Company’s common stock. As a result, the Company’s management estimated the fair value of the shares issued based on a valuation model, which management believes approximates the fair value of the net assets acquired.
In accordance with Financial Accounting Standard (SFAS) No. 141, Business Combinations, the total purchase price was allocated to the estimated fair value of assets acquired and liabilities assumed. The estimate of fair value of the assets acquired was based on management’s estimates. The Company plans to utilize a valuation specialist to re-estimate these values in the near future and accordingly, these value estimates may change in the near future. The total purchase price was allocated to the assets and liabilities acquired as follows:
Intangibles of $615,054 represented the excess of the purchase price over the fair value of the net tangible assets acquired. The Company amortized the intangibles over 18 months and they were fully amortized during the quarter ended September 30, 2010.
NOTE J - ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities at December 31, 2010 and December 31, 2009:
NOTE K - BANK LINE OF CREDIT
The Company has a line of credit with Westamerica Bank in the amount of $1,000,000. The line of credit is secured by substantially all of the assets of the Company and guaranteed by the Company’s principal stockholders. In addition, entities owned and controlled by the Company’s principal stockholders are co-makers of the line of credit and have pledged substantially all of the assets as security for the line of credit (see Note P). The line of credit bears interest at the Bank rate minus 0.5%, per annum, with interest due and payable monthly and expires on December 31, 2010. The balance outstanding under the line of credit at December 31, 2010 and December 31, 2009 amounted to $950,000 and $900,000 respectively, leaving a balance available on the line of $0 and $100,000, respectively. The Company is required to maintain certain bank loan covenants. At December 31, 2010 and December 31, 2009, the Company was not in compliance with certain bank loan covenants. On October 12, 2010, the Company executed an extension to June 30, 2011 on the line of credit. As part of the agreement, the line was reduced to $975,000 effective on the date of signing. The Company is required to make additional pay downs by December 31, 2010 and March 31, 2011, of $25,000 each. The bank has waived the covenants through June 30, 2011, provided the payments are made in accordance with the extension.
NOTE L - NOTES PAYABLE
Notes payable at December 31, 2010 and December 31, 2009 are as follows:
Aggregate maturities of long-term debt as of December 31, 2010 are as follows:
NOTE M - PREFERRED STOCK
We have designated 40,000 shares of preferred stock as Series A convertible redeemable preferred stock $0.001 par value, which may be issued in one or more sub-series, and have authorized the issuance of 23,000 shares of Series A convertible redeemable preferred stock. The Series A Preferred Stock is convertible into shares of our common stock at a conversion price of $0.50 per share, subject to adjustment for customary anti-dilution provisions. Holder may redeem the Series A Preferred Stock partially or in full at the purchase price subject to the holder’s conversion rights or redemption rights. The Series A Preferred Stock accrues dividends at an annual rate of 10% per annum, payable quarterly, either in cash or, at our election, shares of our common stock.
During April 2010, we sold 23,000 shares in a private placement at a price of $25 per share. The total purchase price was $575,000 and the proceeds to our company, net of commissions paid to our investment advisor, were approximately $523,125. The investors received 575,000 warrants to purchase common stock. Each warrant is exercisable for a period of five years, with an exercise price of $0.50. Since the Series A convertible redeemable preferred stock may ultimately be redeemed at the option of the holder, the carrying value of the preferred stock, net of discount and accumulated dividends, has been classified as temporary equity on the balance sheet at December 31, 2010.
As part of the raise the Company paid cash commission of $51,875 as well as issuing 133,928 shares of its common stock, valued at the time of issuance at $51,875, which was shown as deferred finance costs. During the twelve month period ending December 31, 2010 the Company amortized $71,114.
In July 2010, the Company amended the purchase and warrant agreement to amend the conversion price on preferred stock and the strike price on the warrants from $0.50 to $0.35 per share. All other terms remained the same. This amendment increased the warrants by 321,429 to a total of 821,429 warrants.
In accordance with Emerging Issues Task Force (“EITF”) No.00-27, “Application of EITF Issue No. 98-5, ‘Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Rates’, to Certain Convertible Instruments ”, a portion of the proceeds were allocated to the warrants based on their relative fair value, which totaled $264,730 using the Black Scholes option pricing model. Further, we attributed a beneficial conversion feature of $248,924 to the Series A preferred shares based upon the difference between the effective conversion price of those shares and the closing price of our common shares on the date of issuance. The assumptions used in the Black Scholes model are as follows: (1) dividend yield of 0%; (2) expected volatility of 176.1%, (3) weighted average risk-free interest rate of 4%, and (4) expected life of 1 year as the conversion feature and warrants are immediately exercisable. The expected term of the warrants represents the estimated period of time until exercise and is based on historical experience of similar awards and giving consideration to the contractual terms. The amounts attributable to the warrants and beneficial conversion feature, aggregating $513,655, have been recorded as a discount and deducted from the face value of the preferred stock. Since the preferred stock is classified as temporary equity, we are amortizing the discount over the period of one year (the initial redemption date) as a charge to additional paid-in capital (since there is a deficit in retained earnings). The charge to additional paid in capital for the year ended December 31, 2010 was $357,208.
For the year ended December 31, 2010 the Company has accrued dividends of $40,856. The accrued dividends have been charged to retained earnings and added to carrying value of preferred stock.
NOTE N - CAPITAL STOCK
The Company is authorized to issue 70,000,000 shares of common stock with $0.001 par value per share. As of December 31, 2010 and December 31, 2009, the Company had 18,832,808 and 18,593,880 shares of common stock issued and outstanding respectively. During the twelve months ended December 31, 2010, the Company recorded compensation cost of approximately $37,039 relating to shares issued during the year ended December 31, 2009 and vested during the twelve months ended December 31, 2010, after adjustments for termination and service changes etc.
On January 16, 2009, the Company issued 3,000,000 shares of restricted common stock valued at $381,000 for the purchase of Conesco, Inc.
On January 19, 2009, the Company issued 1,000,000 shares of restricted common stock valued at $144,000 as compensation to key employees. The shares vest on a monthly basis over 36 months, beginning January 31, 2009.
On May 28, 2009, the Company issued 30,000 shares of restricted common stock to its board of directors valued at $97,500 as compensation. The shares were fully vested on December 31, 2009.
In August 2010, the Company issued 133,928 shares of restricted common stock to its investment banker for commissions on a successful capital raise.
In December 2010, the board issued 300,000 shares of restricted common stock to certain key employees. The shares will vest over twelve quarterly installments beginning January 31, 2011. The employee must be employed on the vesting date in order to receive the vested shares. The price of the stock on the day of issuance was $0.15 per share.
NOTE O - WARRANTS
Transactions involving our warrant issuances are summarized as follows:
The number and weighted average exercise price of our options and warrants outstanding as of December 31, 2010 is as follows:
NOTE P - RELATED PARTY TRANSACTIONS
Two primary stockholders of the Company are co-owners of an entity that provides charter air services, and on occasion, the Company utilizes this entity for air travel services in connection with the Company’s contracting. During the twelve months ended December 31, 2010 and 2009, the Company incurred and charged to operations $15,533 and $103,376, respectively, in connection with air travel services provided by the entities to the Company. There were no payables owed to the entities at December 31, 2010 and 2009, respectively.
The entities are co-makers of a line of credit and a note payable and have pledged substantiality all of their assets to secure the line of credit (See Note K) and Note payable (see Note L).
NOTE Q - COMMITMENTS AND CONTINGENCIES
Operating Lease Commitments
The Company leases office space under non-cancelable operating leases that expire through December 2012. The Company also leases vehicles from Enterprise Fleet Services under non-cancelable operating leases expiring through March 2013.
Future minimum lease payments for the above leases over the next four years are as follows:
For the twelve months ended December 31, 2010 and 2009, rent expense was $157,882 and $176,239, respectively.
Litigation
In September 2010, a law suit was filed against the Company and others by Falcon Technologies, Inc. and its subsidiaries (“Falcon”). The essence of the plaintiff’s suit is that Company actions allegedly violated a merger agreement between Falcon and other parties and, consequently, was party to defrauding Falcon. The Company believes there is currently a settlement in place for these allegations in which no party admitted to any wrong doing, and, in addition, denies the allegations and will vigorously defend the action. It is also the Company’s position that this lawsuit is without merit and will seek all remedies available to it under the aforementioned settlement agreement.
Surety Bonds
A certain number of our construction projects require us to maintain a surety bond. The bond surety company requires additional guarantees for issuance of the bonds. The two officers (former owners) of Pro-Tech have both personally guaranteed these bonds. There is currently not remuneration to the officers for these guarantees.
NOTE R - SEGMENT INFORMATION
The Company is managed by specific lines of business including fire protection and alarm and detection, electrical, telecommunications and flooring. The Company’s management makes financial decisions and allocates resources based on the information it receives from its internal management system on each of its lines of business. Certain other expenses associated with the public company status are reported at the Meltdown parent company level, not within the subsidiaries. These expenses are reported separately in this footnote. The Company’s management relies on the internal management system to provide sales and cost information by line of business. Refer to note A.
Summarized financial information by line of business for the twelve months ended December 31, 2010 and 2009, as taken from the internal management system previously discussed, is listed below.
NOTE S - MAJOR CUSTOMERS AND SUPPLIERS
The Company had two customers accounting for 23% and 22% of the total revenue for the period ended December 31, 2010 and two customers which accounted for 35% and 15% of the total revenue for the period ended December 31, 2009. The Company often has multiple jobs running under some customers, but the jobs will have different owners and therefore should not necessarily be considered one customer from the standpoint of concentration of risk.
Purchases from the Company’s largest vendor accounted for 55% of material purchases for the period ended December 31, 2010 and from its three largest vendors were approximately 38%, 19% and 13% for the period ended December 31, 2009. There are multiple vendors available to get materials and the Company does not run a risk of shortage due to the loss of any of the vendors.
NOTE T - EMPLOYEE BENEFITS PLAN
The Company sponsors a defined contribution 401(k) plan covering substantially all full-time employees, which provides for the Company matching the participant's elective deferral up to 3% of their annual gross income. The Company's expense for the plan was $13,708 and $72,049, for the twelve months ended December 31, 2010 and 2009, respectively. In April 2010, the Company temporarily suspended the matching portion of the 401(k) plan.
NOTE U - FAIR VALUE
ASC 825-10 defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required or permitted to be recorded at fair value, the Company considers the principal or most advantageous market in which it would transact and considers assumptions that market participants would use when pricing the asset or liability, such as inherent risk, transfer restrictions, and risk of nonperformance. ASC 825-10 establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. ASC 825-10 establishes three levels of inputs that may be used to measure fair value:
Level 1 - Quoted prices in active markets for identical assets or liabilities.
Level 2 - Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which all significant inputs are observable or can be derived principally from or corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 - Unobservable inputs to the valuation methodology that are significant to the measurement of fair value of assets or liabilities.
To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes, the level in the fair value hierarchy within which the fair value measurement is disclosed is determined based on the lowest level input that is significant to the fair value measurement.
Items recorded or measured at fair value on a recurring basis in the accompanying consolidated financial statements consisted of the following items as of December 31, 2010:
(A)
Fair value is estimated based on internally-developed models or methodologies utilizing significant inputs that are unobservable from objective sources.
Level 3 Liabilities comprised of our bifurcated reset provision contained within our Series A convertible redeemable preferred stock and the fair value of issued warrants with reset provisions.
The following table provides a summary of changes in fair value of the Company’s Level 3 financial liabilities as of December 31, 2010:
NOTE V - DEFERRED TAXES
ASC 740-10 requires the recognition of deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statement or tax returns. Under this method, deferred tax liabilities and assets are determined based on the difference between financial statements and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse.
On January 1, 2007, the Pro-Tech changed from cash basis to accrual basis for the recognition of income taxes. The Company elected to pro-rate the initial tax catch up over 4 years as allowed by Section 481. At December 31, 2010 and 2009, the Company had for federal and state income tax purposes a net deferred tax asset and a net deferred tax liability of $40,000 and $80,490, respectively.
Components of the net deferred tax liability are as follows:
The federal and state income tax provision (benefit) is as follows:
At December 31, 2010 and December 31, 2009, Pro-Tech Industries has reportable Net Operating Losses of $154,000 and $375,000, respectively. For 2010, Pro-Tech Fire will file as a member of consolidated income tax returns with its parent Pro-Tech Industries, The consolidated NOL’s are not listed as deferred tax assets as such would be subject to 100% valuation reserves. Conesco will not participate in the consolidated filings and its reportable NOL’s will remain with the company upon execution of the impending ownership change.
NOTE W - SUBSEQUENT EVENTS
On March 10, 2011 the Company entered into an agreement with Legend Merchant Services to represent it as its investment banker. Legend will receive 150,000 common shares of stock for its services. The shares will be issued as follows: 50,000 upon execution of the agreement and 50,000 shares in each of the following two months beginning 30 days after execution of the agreement. The Company has already issued 50,000 shares on the execution of the agreement.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
ITEM 9A.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures. Under the supervision and with the participation of our management, including our President, Chief Financial Officer and Secretary, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)) as of the end of the period covered by this report. Based upon that evaluation, our President, Chief Financial Officer and Secretary concluded that our disclosure controls and procedures as of the end of the period covered by this report were effective such that the information required to be disclosed by us in reports filed under the Securities Exchange Act of 1934 is (i) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (ii) accumulated and communicated to our management to allow timely decisions regarding disclosure. A controls system cannot provide absolute assurance, however, that the objectives of the controls system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Our disclosure controls and procedures were designed to provide reasonable assurance that the controls and procedures would meet their objectives. As required by SEC Rule 13a-15(b), our Chief Executive Officer and Chief Financial Officer carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level.
Management’s Annual Report on Internal Control over Financial Reporting
Our Chief Executive Officer and Chief Financial Officer are responsible for establishing and maintaining adequate internal control over our financial reporting. In order to evaluate the effectiveness of internal control over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act, management has conducted an assessment, including testing, using the criteria in Internal Control - Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Our system of internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Management has used the framework set forth in the report entitled Internal Control-Integrated Framework published by the Committee of Sponsoring Organizations of the Treadway Commission, known as COSO, to evaluate the effectiveness of our internal control over financial reporting. Based on this assessment, our Chief Executive Officer and Chief Financial Officer have concluded that our internal control over financial reporting was effective as of December 31, 2010.This Annual Report does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting. Our internal control over financial reporting was not subject to attestation by our independent registered public accounting firm pursuant to temporary rules of the SEC that permit us to provide only management’s report in this Annual Report.
There has been no change in our internal controls over financial reporting during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.
Changes in Internal Controls
There have been no changes in our internal controls over financial reporting or in other factors that could materially affect, or are reasonably likely to affect, our internal controls over financial reporting during the year ended December 31, 2010. There have not been any significant changes in the Company's critical accounting policies identified since the Company filed its Form 10-K as of December 31, 2010
ITEM 9B.
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS.
The following table sets forth the names and ages of our current directors and executive officers, the principal offices and positions held by each person and the date such person became a director or executive officer. Our executive officers are elected annually by the Board of Directors. The directors serve one year terms until their successors are elected. The executive officers serve terms of one year or until their death, resignation or removal by the Board of Directors. Unless described below, there are no family relationships among any of the directors and officers.
Management
Name
Age
Positions and Offices Held
Donald Gordon
CEO, Director
Michael Walsh
CFO
Tim Crane
Director
Jan Engelbrecht
Director
Kent Misemer
Director
Donald Gordon - CEO, co-founder of Pro-Tech Fire Protection Systems Corp.
Mr. Gordon, President and co-founder, brings 32 years of experience in all aspects of fire protection and construction company experience. In 1995, Mr. Gordon, along with Mark Whittaker, formed Pro-Tech Fire Protection and continues to run financial, as well as, day to day operations. Mr. Gordon's experience includes general management, project management, sales, and field work. Mr. Gordon remains active in the development of new business opportunities and fostering long-term business relationships with key clients.
Michael Walsh - Chief Financial Officer
Michael Walsh, CFO, brings over 25 years of experience in Accounting and Finance in both private and public sectors, with established and startup companies. Mr. Walsh has been a member of the Pro-Tech Fire Protection team since 2006. From September 2005- December 2006, Mr. Walsh was with Falcon Technology Holdings, Inc. acting as its Chief Financial Officer. From January 2004 - September 2005, Mr. Walsh was the CFO of IQ Biometrix, Inc. a forensic software startup. The Company merged with Wherify Wireless, Inc. and on close of the merger Mr. Walsh became Corporate Controller. Mr. Walsh holds a Master's degree as well as a bachelor's degree in Business Administration.
Jan Engelbrecht - Director
Jan F. Engelbrecht is a newly appointed Board member as of January 2009. Mr. Engelbrecht has served in the finance and technology industries for 25 years. As a CPA, Mr. Engelbrecht lead audit and consulting engagements for Arthur Anderson and Price Waterhouse in various industries including Banking, Oil & Gas, Real Estate, and High Technology. For the past ten years, Mr. Engelbrecht has served as a Software Client Executive for a world-wide technology company.
Tim Crane - Director
Tim Crane has been in the insurance industry for 29 years. He joined InterWest Insurance Services in 1990 as a sales producer. In 1996 he was promoted to Vice President and became a partner in the firm. In 2005 he was elected to the board of directors, a position he continues to serve on. Tim holds a Bachelor of Science in Business Administration from Northeastern University. He has been involved in volunteer work for the United Cerebral Palsy, IBA West, American Cancer Society and several church and school groups.
Kent Misemer - Director
From 2003 through 2009, Mr. Misemer was the Chief Executive Officer and President of Liberty Propane, LLC, a portfolio company of Sterling Capital Partners, an independent retail propane company, which was sold in December, 2009. Previously, Mr. Misemer was the President and Chief Executive Officer of Propane Continental. Mr. Misemer has over 30 years of executive management experience in the propane industry supply chain as well as other industries. In addition to being a co-founder of Liberty Propane, Mr. Misemer was also involved in the creation of Propane Continental and Tri-Power Fuels, Inc. Mr. Misemer also serves as a director and member of the Audit Committee of Cornerstone Records Management, LLC, a data storage and offsite data Management Company. Mr. Misemer received his Bachelors Business Administration from the Ottawa University in Ottawa, Kansas.
Audit Committee Financial Expert
The Company's By-Laws authorize the Board of Directors to appoint committees having the authority to perform such duties as the Board may determine.
The Board of Directors has appointed the Audit Committee to serve the purposes set forth in this Charter, and has delegated the duties and responsibilities set forth in this Charter to the Audit Committee. The Audit Committee will report to the Board of Directors as provided in its Charter. The Audit Committee is made up of Jan Engelbrecht and Tim Crane.
The Board of Directors has appointed the Compensation Committee to serve the purposes set forth in this Charter, and has delegated the duties and responsibilities set forth in this Charter to the Compensation Committee. The Compensation Committee will report to the Board of Directors as provided in its Charter. The Compensation Committee is made up of Tim Crane and Jan Engelbrecht.
Indemnification of Officers and Directors
As permitted by Nevada law, our Articles of Incorporation provide that we will indemnify its directors and officers against expenses and liabilities they incur to defend, settle, or satisfy any civil or criminal action brought against them on account of their being or having been Company directors or officers unless, in any such action, they are adjudged to have acted with gross negligence or willful misconduct.
Pursuant to the foregoing provisions, we have been informed that, in the opinion of the Securities and Exchange Commission, such indemnification is against public policy as expressed in that Act and is, therefore, unenforceable.
Exclusion of Liability
The Nevada Business Corporation Act excludes personal liability for directors for monetary damages based upon any violation of their fiduciary duties as directors, except as to liability for any breach of the duty of loyalty, acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, acts in violation of the Nevada Business Corporation Act, or any transaction from which a director receives an improper personal benefit. This exclusion of liability does not limit any right that a director may have to be indemnified and does not affect any director's liability under federal or applicable state securities laws.
Code of Conduct and Ethics
We are committed to maintaining the highest standards of business conduct and ethics. We have adopted a code of conduct and ethics applicable to our directors, officers and employees. The code of conduct and ethics reflects our values and the business practices and principles of behavior that support this commitment. The code of conduct and ethics satisfies SEC rules for a “code of ethics” required by Section 406 of the Sarbanes-Oxley Act of 2002, as well as the American Stock Exchange rules for a “code of conduct and ethics.” A form of the code of conduct and ethics was filed as Exhibit 14.1 to the Annual Report on Form 10-K for December 31, 2009.
Compliance with Section 16(a) of the Securities Exchange Act of 1934
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the Company's directors and executive officers and persons who own more than 10% of a registered class of the Company's equity securities to file various reports with the Securities and Exchange Commission concerning their holdings of, and transactions in, securities of the Company. Copies of these filings must be furnished to the Company.
Mr. Donald Gordon, our President, Chief Executive Officer and director, Mr. Michael P Walsh, our Chief Financial Officer and Tim Crane and Jan Engelbrecht, directors, were required to file Form 3’s.
CONFLICTS OF INTEREST
There are no conflicts of interest with any officers, directors or executive staff.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION.
Summary Compensation Table
The following table sets forth for the year ended December 31, 2010 and 2009 compensation awarded to, paid to, or earned by our other most highly compensated executive officers whose total compensation during each fiscal year exceeded $100,000, if any.
2010 SUMMARY COMPENSATION TABLE
*Mr McGuire and Mr Walsh’s 2009 shares vest on a monthly basis over 3 years and were part of the stock awarded key employees as summarized in the following two tables. Their 2010 award will vest in 12 quarterly installments beginning January 31, 2011.
2010 and 2009 OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END TABLE
2010 and 2009 OPTION EXERCISES AND STOCK VESTED TABLE
2010 and 2009 PENSION BENEFITS TABLE
2010 and 2009 NONQUALIFIED DEFERRED COMPENSATION TABLE
2010 DIRECTOR COMPENSATION TABLE
2010 ALL OTHER COMPENSATION TABLE
2010 PERQUISITES TABLE
2010 POTENTIAL PAYMENTS UPON TERMINATION OR CHANGE IN CONTROL TABLE
*
List each applicable type of benefit in a separate row, e.g., severance pay, bonus payment, stock option vesting acceleration, health care benefits continuation, relocation benefits, outplacement services, financial planning services or tax gross-ups.
Compensation of Directors
We currently have three directors. Directors are paid $100 per meeting attended and were awarded 10,000 shares of our common stock each for serving as a member of the Board of Directors for the fiscal year ended December 31, 2010. The Board of Directors will review its compensation package on annual basis. The directors voted to temporarily stop payments until a determined date.
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS, CONFLICTS OF INTEREST
No retirement, pension, profit sharing, stock option or insurance programs or other similar programs have been adopted by us for the benefit of its employees.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table lists stock ownership of our Common Stock as of December 31, 2010. The information includes beneficial ownership by (i) holders of more than 5% of our Common Stock, (ii) each of three directors and executive officers and (iii) all of our directors and executive officers as a group. Except as noted below, to our knowledge, each person named in the table has sole voting and investment power with respect to all shares of our Common Stock beneficially owned by them.
DESCRIPTION OF SECURITIES
Our authorized capital stock consists of 70,000,000 shares of Common Stock, par value $.001 per share. The following statements relating to the capital stock set forth the material terms of our securities; however, reference is made to the more detailed provisions of, and such statements are qualified in their entirety by reference to, the Certificate of Incorporation, amendment to the Certificate of Incorporation and the By-laws, copies of which are filed as exhibits to this registration statement.
COMMON STOCK
Holders of shares of common stock are entitled to one vote for each share on all matters to be voted on by the stockholders. Holders of common stock do not have cumulative voting rights. Holders of common stock are entitled to share ratably in dividends, if any, as may be declared from time to time by the Board of Directors in its discretion from funds legally available therefore. In the event of a liquidation, dissolution or winding up of the Company, the holders of common stock are entitled to share pro rata all assets remaining after payment in full of all liabilities. All of the outstanding shares of common stock are fully paid and non-assessable. Holders of common stock have no preemptive rights to purchase our common stock. There are no conversion or redemption rights or sinking fund provisions with respect to the common stock.
The Board of Directors does not at present intend to seek stockholder approval prior to any issuance of currently authorized stock, unless otherwise required by law or stock exchange rules.
PREFERRED STOCK
The Company is authorized to issue 5,000,000 shares of Preferred Stock, $0.001 par value, of which 40,000 shares have been designated Series A Convertible Redeemable and issued 23,000 of these Series A shares as of December 31, 2010. The Board of Directors may issue such shares of Preferred Stock in one or more series, with such voting powers, designations, preferences and rights or qualifications, limitations or restrictions thereof as shall be stated in the resolution or resolutions.
DIVIDENDS
Dividends, if any, will be contingent upon our revenues and earnings, if any, capital requirements and financial conditions. The payment of dividends, if any, will be within the discretion of our Board of Directors. We presently intend to retain all earnings, if any, for use in its business operations and accordingly, the Board of Directors does not anticipate declaring any dividends prior to a business combination.
INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Neither our Articles of Incorporation nor Bylaws prevent us from indemnifying our officers, directors and agents to the extent permitted under the Nevada Revised Statute ("NRS"). NRS Section 78.502, provides that a corporation shall indemnify any director, officer, employee or agent of a corporation against expenses, including attorneys' fees, actually and reasonably incurred by him in connection with any the defense to the extent that a director, officer, employee or agent of a corporation has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to Section 78.502(1) or 78.502(2), or in defense of any claim, issue or matter therein.
NRS 78.502(1) provides that a corporation may indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, except an action by or in the right of the corporation, by reason of the fact that he is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses, including attorneys' fees, judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with the action, suit or proceeding if he: (a) is not liable pursuant to NRS 78.138; or (b) acted in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful.
NRS Section 78.502(2) provides that a corporation may indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the corporation to procure a judgment in its favor by reason of the fact that he is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against expenses, including amounts paid in settlement and attorneys' fees actually and reasonably incurred by him in connection with the defense or settlement of the action or suit if he: (a) is not liable pursuant to NRS 78.138; or (b) acted in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the corporation. Indemnification may not be made for any claim, issue or matter as to which such a person has been adjudged by a court of competent jurisdiction, after exhaustion of all appeals there from, to be liable to the corporation or for amounts paid in settlement to the corporation, unless and only to the extent that the court in which the action or suit was brought or other court of competent jurisdiction determines upon application that in view of all the circumstances of the case, the person is fairly and reasonably entitled to indemnity for such expenses as the court deems proper.
NRS Section 78.747 provides that except as otherwise provided by specific statute, no director or officer of a corporation is individually liable for a debt or liability of the corporation, unless the director or officer acts as the alter ego of the corporation. The court as a matter of law must determine the question of whether a director or officer acts as the alter ego of a corporation.
No pending material litigation or proceeding involving our directors, executive officers, employees or other agents as to which indemnification is being sought exists, and we are not aware of any pending or threatened material litigation that may result in claims for indemnification by any of our directors or executive officers.
Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers or persons controlling us pursuant to the foregoing provisions, we have been informed that, in the opinion of the Securities and Exchange Commission, such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, we will, unless in the opinion of our counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by us is against public policy as expressed hereby in the Securities Act and we will be governed by the final adjudication of such issue.
Amendment of our Bylaws
Our bylaws may be adopted, amended or repealed by the affirmative vote of a majority of our outstanding shares. Subject to applicable law, our bylaws also may be adopted, amended or repealed by our Board of Directors.
Item 13.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
Related Party Transactions
Two stockholders of the Company are co-owners of an entity that provides charter air services, and on occasion, the Company utilizes this entity for air travel services in connection with the Company’s contracting. During the years ended December 31, 2010 and 2009, the Company incurred and charged to operations $15,533 and $103,376, respectively, in connection with air travel services provided by the entities to the Company. There were no payables owed to the entities at December 31, 2010 and 2009, respectively.
Director Independence
One of our directors, Donald Gordon, is an employee and would not be classified as “independent” under the rules of the Securities and Exchange Commission. The other three would be considered “independent”.
Item 14.
Item 14. Principal Accountant Fees and Services
On February 17, 2009, RBSM, LLP ("RBSM") was appointed as the independent auditor for Pro-Tech Industries, Inc. (the "Company") commencing with the year ending December 31, 2009, and Arshad M Farooq, JD, CPA ("FAROOQ") was dismissed as the independent auditors for the Company as of February 10, 2009.
(1)
Audit fees represent fees for professional services provided in connection with the audit of our financial statements and review of our quarterly financial statements.
(2)
Tax fees represent fees for professional services provided in connection with the preparation of corporate tax returns.
The audit committee has reviewed and discussed with the Company's management and independent registered public accounting firm the audited consolidated financial statements of the Company contained in the Company's Annual Report on Form 10-K for the Company's 2009 fiscal year. The audit committee has also discussed with the auditors the matters required to be discussed, which includes, among other items, matters related to the conduct of the audit of the Company's consolidated financial statements.
Based on the review and discussions referred to above, the Board approved the inclusion of the audited consolidated financial statements be included in the Company's Annual Report on Form 10-K for its 2009 fiscal year for filing with the SEC.
Pre-Approval Policies
The audit committee's policy is now to pre-approve all audit services and all permitted non-audit services (including the fees and terms thereof) to be provided by the Company's independent registered public accounting firm; provided, however, pre-approval requirements for non-audit services are not required if all such services (1) do not aggregate to more than five percent of total revenues paid by the Company to its accountant in the fiscal year when services are provided; (2) were not recognized as non-audit services at the time of the engagement; and (3) are promptly brought to the attention of the Board and approved prior to the completion of the audit.
The Board pre-approved all fees described above.
PART IV
ITEM 15.
ITEM 15. FINANCIAL STATEMENTS AND EXHIBITS
Exhibits
3.1
Articles of Incorporation (1)
3.2
Bylaws of the Corporation (1)
14.1
Code of Ethics (2)
Subsidiaries (3)
31.1
Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act. (3)
31.2
Certification of Principal Financial and Accounting Officer Pursuant to Section 302 of the Sarbanes-Oxley Act. (3)
32.1
Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act. (3)
32.2
Certification of Chief Accounting Officer Pursuant to Section 906 of the Sarbanes-Oxley Act. (3)
(1)
Incorporated by reference to the same exhibit filed with the Company’s Registration Statement on Form SB2 (Commission File No. 333-144076).
(2)
Incorporated by reference to the same exhibit filed with Amendment No. 3 to the Company’s Registration Statement on Form SB2 (Commission File No. 333-137170).
(3)
Filed herewith.
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Company caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following person on behalf of the Registrant in the capacities indicated, on April 15, 2011.
By:
/s/ Donald Gordon
Donald Gordon, President, Chief Executive
Officer and Director
By:
/s/ Jan Engelbrecht
Jan Engelbrecht, Director