U.S. Securities and Exchange Commission


Washington, D.C. 20549





FORM 10-Q







(Mark One)


x  Quarterly Report Pursuant to Section 13 or 15(d) of


the Securities Exchange Act of 1934


For the quarterly period ended March 31, 2011





 ̈  Transition Report Pursuant to Section 13 or 15(d)


of the Securities Exchange Act


For the transition period from N/A to N/A





Commission File No.000-53013





Pro-Tech Industries, Inc.


(Name of small business issuer as specified in its charter)


Nevada
90-0579362State of Incorporation
IRS Employer Identification No.


8550 Younger Creek DR, #2


Sacramento, CA 95828


(Address of principal executive offices)





(916) 388-0255


(Issuer’s telephone number)





(Former name or Former Address if Changes Since Last Report)





Securities registered under Section 12(b) of the Exchange Act:


None


Securities registered under Section 12(g) of the Exchange Act:


Common Stock, $0.001 par value per share


(Title of Class)








Indicate by check mark whether the Registrant (1) has filed all reports required by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days:  Yes  x     No   ̈




Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes  ̈ No x




Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non–accelerated filer. See definition of “accelerated filer large accelerated filer” and “Smaller reporting company”in Rule 12b–2 of the Exchange Act. (Check one):





Large accelerated filer   ̈      Accelerated filer   ̈      Non–Accelerated filer   ̈ Smaller reporting companyx





Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b–2 of the Exchange Act).  Yes   ̈    No  x





Transitional Small Business Disclosure Format (check one): Yes o No x





Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.


Class

Outstanding at  May 16, 2011Common stock, $0.001 par value

19,084,278









PRO-TECH INDUSTRIES, INC.





INDEX TO FORM 10-Q FILING


March 31, 2011





TABLE OF CONTENTS





PART I


FINANCIAL INFORMATION





Page

NumbersPART I - FINANCIAL INFORMATIONItem 1.

Condensed Consolidated Financial Statements (unaudited)

3Item 2.

Management Discussion & Analysis of Financial Condition and Results of Operations

24Item 3

Quantitative and Qualitative Disclosures About Market Risk

32Item 4.

Controls and Procedures

32PART II - OTHER INFORMATIONItem1

Legal Proceedings

33Item1A

Risk Factors

33Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

39Item 3.

Defaults Upon Senior Securities

40Item 4.

Removed and Reserved

40Item 5

Other information

40Item 6.

Exhibits

40Signature

41CERTIFICATIONSExhibit 31 – Management certificationExhibit 32 – Sarbanes-Oxley Act




2


PART I                FINANCIAL INFORMATION





Item 1.
Interim Unaudited Condensed Consolidated Financial Statements and Notes to Interim Unaudited Condensed Consolidated Financial Statements




General




The accompanying reviewed interim consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q.  Therefore, they do not include all information and footnotes necessary for a complete presentation of financial position, results of operations, cash flows, and stockholders' equity in conformity with generally accepted accounting principles.  Except as disclosed herein, there has been no material change in the information disclosed in the notes to the consolidated financial statements included in the Company's annual report on Form 10-K for the year ended December 31, 2010.  In the opinion of management, all adjustments considered necessary for a fair presentation of the results of operations and financial position have been included and all such adjustments are of a normal recurring nature.  Operating results for the three months ended March 31, 2011 are not necessarily indicative of the results that can be expected for the year ending December 31, 2011.




Index to Financial Statements





PageCondensed Consolidated Balance Sheets as of March 31, 2011 (Unaudited) and December 31, 2010

4Unaudited Condensed Consolidated Statements of Operations for the three months ended March 31, 2011 and 2010

5Unaudited Condensed Consolidated Statement of Cash Flows for the three months  ended March 31, 2011 and 2010

6 - 7Notes to Unaudited Condensed Consolidated Financial Statements

8 - 23





3


PRO-TECH INDUSTRIES, INC.


CONDENSED CONSOLIDATED BALANCE SHEETS





March 31, 2011


December 31,(unaudited)


2010ASSETSCurrent Assets:Cash and cash equivalents

$
290,999


$
323,472Contract receivable, net of allowance for doubtful accounts  as of  March 31, 2011 and December 31, 2010, of $80,000 and $100,000, respectively  (Note D)


2,778,822



2,471,505Costs and estimated earnings in excess of billings  (Note E)


556,253



347,254Inventory


56,366



59,948Other current assets


105,237



127,399Deferred financing cost, net


3,979



30,130Total current assets


3,791,656



3,359,708Property plant and equipment, net (Note F)


273,909



282,183Other Assets:Deposits


10,856



10,856Total assets

$
4,076,421


$
3,652,747LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)Current Liabilities:Accounts payable and accrued expenses (Note H)

$
2,587,930


$
1,821,676Short term note payable


17,500



26,658Notes payable – current portion (Note J)


205,375



214,872Accruals on uncompleted projects  (Note E)


172,429



310,082Reserve for loss on uncompleted contracts


6,838



6,472Line of credit  (Note I)


925,000



950,000Warrant and preferred stock derivative liability


456,368



547,472Discontinued operations (Note C)


146,648



554,114Total current liabilities


4,518,088



4,431,346Long -Term Liabilities:Notes payable- others  – long term portion (Note J)


140,564



183,530Discontinued Operations (Note C)


71,418



123,526Total Long Term Liabilities


211,982



307,056Series A 10% convertible redeemable preferred stock,  $0.001 par value, 40,000 shares authorized; 23,000 issued and outstanding, (net) at March 31, 2011 and December 31, 2010, respectively (face value $575,000, respectively)


602,079



459,411Stockholders' Equity (Deficit):Preferred stock, undesignated, $0.001 par value; 4,960,000 shares authorized, no shares issued and outstanding


-



-Common Stock, $0.001 par value; 70,000,000 shares authorized;  18,894,474 and 18,832,808  shares issued and outstanding at March 31, 2011 and December 31, 2010,  respectively


18,894



18,833Additional paid in capital


1,046,939



1,152,934Accumulated deficit


(2,321,561
)


(2,716,833
)Total stockholders’ equity (deficit)


(1,255,728
)


(1,545,066
)Total liabilities and stockholders' equity (deficit)

$
4,076,421


$
3,652,747




See accompanying notes to these unaudited condensed consolidated financial statements


4


PRO-TECH INDUSTRIES, INC.


CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS


(UNAUDITED)





Three months Ended

March 31, 2011


Three months Ended

March 31, 2010Net revenue

$
3,549,362


$
2,807,467Less: Cost of sales


2,209,933



1,998,567Gross profit


1,339,429



808,900Operating Expenses:Depreciation and amortization (Note F & G)


51,068



75,677Selling, general and administrative


1,308,223



1,182,430Total Operating Expenses


1,359,291



1,258,107Income (Loss) from Operations


(19,862
)


(449,207
)Other Income (Expense):Gain (loss) on change in fair value of derivative liability


91,104



-Interest expense, net


(21,472
)


(33,737
)Total Other Income (Expense)


69,632



(33,737
)Income (loss) income before income taxes


49,770



(482,944
)Income tax benefit (expense)


-



80,490Income(loss) from continuing operations


49,770



(402,454
)Income(loss) from discontinued operations


359,679



(650,162
)Net Income(Loss)


409,449



(1,052,616
)Preferred stock dividends and amortized discount


154,689



-Net Income(loss) attributable to common shareholders

$
254,760


$
(1,052,616
)Net income (loss) per share  from continuing operations:Basic

$
0.00


$
(0.02
)Diluted

$
0.00


$
(0.02
)Net income (loss) per share:Basic

$
0.02


$
(0.06
)Diluted

$
0.02


$
(0.06
)Net income (loss) per share attributable to common shareholder:Basic

$
0.01


$
(0.06
)Diluted

$
0.01


$
(0.06
)Weighted average common shares outstanding (Note A):Basic


18,398,574



18,022,600Diluted


21,263,353



18,022,600




See accompanying notes to these unaudited condensed consolidated financial statements


5





PRO-TECH INDUSTRIES, INC.


CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS


(UNAUDITED)





Three months ended March 31,2011


2010Cash Flows From Operating Activities:Net income (loss) from operations

$
409,449


$
(1,052,617
)Income (loss) from discontinued operations


359,679



(650,162
)Income (loss) from continuing operations


49,770



(402,455
)Adjustments to reconcile net  income (loss) to net cash provided by operating activities:Depreciation and amortization


24,918



75,677Amortization of deferred financing costs paid by stock


26,151



-Bad debt write off


5,474



35,314Accrual for bad debt allowance


(25,000
)


50,000Change in fair value of warrant and Preferred stock derivative liability


(91,104
)


-Amortization of deferred compensation


10,057



11,400Issuance of stock for services


12,500



-Accruals (reversal) of loss against uncompleted contracts


366



-Deferred tax liability (asset)


-



(80,490
)(Increase) decrease in:Contract receivable


(287,791
)


(233,718
)Inventory


3,583



(38,844
)Other current assets, net


22,162



(3,152
)Costs and estimated earnings in excess of billings


(208,999
)


(152,716
)Billings in excess of costs and estimated earnings


(137,653
)


219,457Increase (decrease) in:Accounts payable and accrued expenses, net


757,095



597,476Net Cash Provided by in Continuing Operating Activities


161,529



77,949Net Cash Used in Discontinued Operating Activities


(39,193
)


(237,754
)Net Cash Provided by (Used in) Operating Activities


122,336



(159,805
)Cash Flows From (Used By) Investing Activities:Purchase of property and equipment


(16,644
)


210Net Cash Provided by (Used In) Continuing Investing Activities


(16,644
)


210Net Cash Provided by Discontinued Investing Activities


-



-Net Cash Provided by (Used In) Investing Activities


(16,644
)


210Cash Flows From (Used By) Financing Activities:Payments of long term debt


(61,058
)


(44,990
)Proceeds from (payments on) line of credit


(25,000
)


100,000Net Cash Provided by (Used in) Continuing Financing Activities


(86,058
)


55,010Net Cash (Used in) Discontinued Financing Activities


(52,107
)


(7,221
)Net Cash Provided (Used) by Financing Activities


(138,165
)


47,789Net (decrease) in Cash And Cash Equivalents


(32,473
)


(111,806
)Cash and cash equivalents at beginning of period


323,472



186,894Cash and cash equivalents at the end of period

$
290,999


$
75,088




See accompanying notes to these unaudited condensed consolidated financial statements


6


PRO-TECH INDUSTRIES, INC.


CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS


(unaudited)


(continued)





Three months ended

March 31,2011


2010Supplemental Disclosures of Cash Flow Information:Cash paid during period for interest

$
21,472


$
46,060Cash paid during period for taxes

$
-


$
-Preferred stock dividend – non-cash

$
14,178


$
-Amortization of BCF transferred to additional paid in capital

$
135,516


$
-Common stock issued for preferred dividend

$
7,026


$
-




The accompanying notes are an integral part of these unaudited condensed consolidated financial statements




7


PRO-TECH INDUSTRIES, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


March 31, 2011


(UNAUDITED)





NOTE A - BUSINESS DESCRIPTION





General





The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q.  Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.





In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. However, the results from operations for the three months period ended March 31, 2011, are not necessarily indicative of the results that may be expected for the year ended December 31, 2011. These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated December 31, 2010 financial statements and footnotes thereto included in the Company's Form 10-K filed with the Securities and Exchange Commission (the “SEC”).





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. 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” or “Pro-Tech”) and the ticker symbol is PTCK.





The consolidated unaudited condensed 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. 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 Corp. 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 or third quarter of 2011. The letter of intent is non-binding and either side may terminate with written notice. These unaudited condensed 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.




8


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 - 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 $56,366 and $59,948 at March 31, 2011 and December 31, 2010, respectively.





Advertising





The Company follows the policy of charging the costs of advertising to expenses incurred. The Company incurred $2,587 and $10,166 of advertising costs for the three months ended March 31, 2011 and 2010, respectively.




9




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, 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 yearsAutomobiles
5 yearsComputer Software
3 yearsOffice equipment and furniture
3-7 yearsLeasehold 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 for interest bearing accounts. The Federal Depository Insurance Corporation (FDIC) insures interest bearing accounts at each institution up to $250,000. The Company periodically reviews its contract receivables in determining its allowance for doubtful accounts. The allowance for doubtful accounts was $80,000 and $100,000 as of March 31, 2011 and December 31, 2010, respectively.


10





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 three months ended March 31, 2011 and 2010, 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 three months ended March 31, 2011 and 2010, the effects of the shares issuable upon exercise of outstanding warrants, options and convertible securities as of March 31, 2011 and 2010 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 used in the computation of income (loss) per share for the three months ended March 31, 2011:





Three months ended

March 31, 2011Net income from continuing operations used in computing basic net income

$
49,770Less: Preferred stock dividend and amortized warrant and  discount


(154,689
)Net loss from continuing operations in computing diluted net loss per share

$
(104,919
)




The weighted average shares outstanding used in the basic net income per share computations for the three months ended March 31, 2011 was 18,398,574.  In determining the number of shares used in computing diluted loss per share, the Company added approximately 2,865,000 potentially dilutive securities for the three months ended March 31, 2011. The potentially dilutive securities added were mostly attributable to the warrants, and convertible preferred shares outstanding.  As a result, the diluted loss per share from continuing operations for the three months ended March 31, 2011 was $0.00.





Derivative financial instruments





On October 1, 2001, 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 three month period ended March 31, 2011 and 2010.





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.





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 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 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 March 31, 2011.





The fair value of the reset provision of $456,368 at March 31, 2011 was determined using the Black Scholes Option Pricing Model with the following assumptions:





Dividend yield:


0
%Volatility


264.1
%Risk free rate:


0.30% - 2.24
%




11





The change in fair value of the warrant and preferred stock derivative liability resulted in a current quarter non-operating income to operations of $91,104.





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, 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. 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 preparation of these unaudited condensed consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Accordingly actual results 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 conform prior period data to the current presentation. These reclassifications had no effect on reported income.





Going Concern Matters





The accompanying unaudited condensed 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 unaudited condensed consolidated financial statements during quarter ended March 31, 2011, the Company incurred net losses attributable to common shareholders of $254,760 and provided $122,335 in cash for operating activities during the quarter  ended March 31, 2011. As shown in the audited consolidated financial statements for the 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 March 31, 2011 and 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.


12





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 onRevenue 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. 2010-08Technical 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. 2010-06Fair 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. 2010-05Compensation—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. 2010-04Accounting 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. 2010-02Accounting and Reporting for Decreases in Ownership of a Subsidiary—a Scope Clarification  (“2010-02”) an update of ASC 810Consolidation . 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.


13





In January 2010 the FASB issued Update No. 2010-01Accounting 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 505Equity . 2010-03 clarifies the treatment of stock distributions as dividends to shareholders and their affect 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 C – 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. The Company believes that the investment needed and the tough economic conditions do not make it prudent to continue on with this division. Accordingly, the Company has determined that the best course of action was to preserve value of the remaining divisions of Pro-Tech by winding down the electrical operations which the Company has done on an orderly basis. The historical operations and costs of the electrical division and its assets and liabilities 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 or third 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:March 31, 2011


March 31, 2010Gain (loss) from discontinued operations

$
(7,094
)

$
(650,162
)Gain on abandonment of liabilities


366,773



-Transaction costs incurred


-



-Total loss on disposal/abandonment of discontinued operations

$
359,679


$
(650,162
)





Assets and liabilities of discontinued operations:March 31, 2011


December 31, 2010Assets:Cash

$
-


$
-Receivables


-



-Other current assets


-



-Current assets of discontinued operations


-



-Property, plant and equipment:


-



-Non-current assets of discontinued operations


-



-Total assets of discontinued operations

$
-


$
-Liabilities:Accounts payable

$
37,797


$
436,669Current portion of note payable


108,850



-Note payable


71,418



240,971Total liabilities of discontinued operations

$
218,065


$
677,640




14




NOTE D – CONTRACT RECEIVABLES




Contracts receivable consist of the following:





March 31, 2011


December 31, 2010Contracts receivables

$
2,551,101


$
2,265,904Retention receivables


307,721



305,601Allowance for doubtful accounts


(80,000
)


(100,000
)$
2,778,822


$
2,471,505




NOTE E – UNCOMPLETED CONTRACTS




Costs, estimated earnings, and billings on uncompleted contracts are summarized as follows:





March 31, 2011


December 31, 2010Costs incurred to date on uncompleted contracts

$
6,236,223


$
7,983,803Estimated earnings


2,992,072



3,669,5919,228,295



11,653,394Less: billed revenue to date


8,844,468



11,615,722Under (over) billings, net

$
383,827


$
37,672Costs and estimated earnings in excess of billings

$
556,254


$
347,754Less: accruals on uncompleted contracts


172,428



310,082Under (over) billings, net

$
383,826


$
37,672




NOTE F – PROPERTY AND EQUIPMENT




Major classes of property and equipment consist of the following:





March 31, 2011


December 31, 2010Vehicles

$
272,405


$
262,768Leasehold improvements


238,897



237,013Office equipment


216,213



213,090Tools and other equipment


230,672



228,672958,187



941,543Less: accumulated depreciation


684,278



659,360Net Property and Equipment

$
273,909


$
282,183





Depreciation expense was $24,917 and $28,347 for the three months ended March 31, 2011 and 2010, respectively.


NOTE G – INTANGIBLE ASSETS AND GOODWILL





Intangibles consist of a non-compete agreement and the customer list.





The following summarizes intangible assets at March 31, 2011 and December 31, 2010:





March 31, 2011


December 31, 2010Intangibles: Customer List

$
283,979


$
283,979Less: accumulated amortization


283,979



283,979Net Intangibles

$
-


$
-





On January 16, 2009, the Company entered into 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.


15





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 Accounting Standards Codification 805-10, Business Combinations (ASC 805-10), 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:





Cash and other current assets

$
338,435Equipment and other assets


6,505Intangible assets


615,054Liabilities


(578,994
)Total purchase price

$
381,000





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 are fully amortized.  Goodwill valued at $331,075 was written off as part of discontinued operations on December 31, 2010.





Amortization expense was $0 and $47,330 for the three months ended March 31, 2011 and 2010, respectively.




NOTE H – ACCOUNTS PAYABLE AND ACCRUED LIABILITIES





Accounts payable and accrued liabilities:




March 31, 2011


December 31,2010Accounts payable

$
2,334,141


$
1,699,335Accrued payroll and vacation


111,687



49,934Accrued payroll taxes


42,016



3,026Other liabilities


100,086



69,381Total

$
2,587,930


$
1,821,676




NOTE I – BANK LINES 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 N). The line of credit bears interest at the Bank rate minus 0.5%, per annum, with interest due and payable monthly and expires on June 30, 2011. The balance outstanding under the line of credit at March 31, 2011 and December 31, 2010 amounted to $925,000 and $950,000 respectively, leaving a balance available on the line of $0 and $0, respectively. The Company is required to maintain certain bank loan covenants. At March 31, 2011 and December 31, 2010, 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 and made additional pay downs on December 31, 2010 and March 31, 2011, of $25,000 each. These payments were made in accordance with the agreement. The bank has waived the covenants through June 30, 2011, provided the payments were made in accordance with the extension.




16




NOTE J – NOTES PAYABLE





Notes payable are as follows:


March 31, 2011


December 31, 2010Note payable to Bank, interest at 7.76% per annum; secured by substantially all of the Company’s assets; with monthly principal and interest payments of $13,090.68, due February, 2012. The Note is guaranteed by the Company’s principal stockholders. In addition, entities owned and controlled by the Company’s principal stockholders are co-makers of the Note and have pledged substantially all of their assets as security for the Note (see Note N).

$
138,477


$
174,576Note payable to Bank, interest at 5.5% per annum; secured by substantially all of the Company’s assets; with monthly principal and interest payments of $4,776.33, due December, 2013. The Note is guaranteed by the Company’s principal stockholders. In addition, entities owned and controlled by the Company’s principal stockholders are co-makers of the Note and have pledged substantially all of their assets as security for the Note (see Note N).


145,794



158,006Note payable to Ford Motor credit, 0% interest; secured by 2011Ford Escape. Payments of $678.16 monthly for 48 months.


30,499



32,552Note payable to Ford Motor credit, 0% interest; secured by 2010 Ford Fusion. Payments of $693.09 monthly for 48 months.


31,169



33,268Total notes payable


345,939



398,402Less: current portion


205,375



214,872Notes payable – long term

$
140,564


$
183,530




Aggregate maturities of long-term debt as of March 31, 2011 are as follows:





Twelve months ended:

AmountMarch 31, 2012

$
205,375March 31, 2013


69,800March 31, 2014


58,460March 31, 2015


12,304Total

$
345,939




NOTE K – PREFERRED STOCK




We have designated 40,000 shares of preferred stock as Series A convertible redeemable preferred stock no 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 $0.35 per share, subject to adjustment for customary anti-dilution provisions. Holders 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. Amortization of deferred finance cost was $26,150 and $0 for the three months ended March 31, 2011 and 2010, respectively





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.




17




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 and for three months ended March 31, 2011 was $135,516.





For the three months ended March 31, 2011 and 2010 the Company has accrued dividends of $14,178 and $0, respectively. The accrued dividends have been charged to retained earnings and added to carrying value of preferred stock.  In March and April 2011 the company issued restricted common stock as payment of accrued dividends through March 31. (See Footnote U)





NOTE L – CAPITAL STOCK





The Company is authorized to issue 70,000,000 shares of common stock with $0.001 par value per share. As of March 31, 2011 and December 31, 2010, the Company had 18,894,474 and 18,832,808 shares of common stock issued and outstanding respectively. During the three months ended March 31, 2011 and 2010, the Company recorded compensation expense of approximately $10,057 and $11,400, respectively relating to shares issued during the periods ended December 31, 2010 and 2009, respectively and vested during the three months ended March 31, 2011 and 2010, after adjustments for termination and service changes.





On March 17, 2011, the Company issued 50,000 shares of restricted common stock to Legend Merchant Group as part of its agreement signed on March 10, 2011. The Company entered into the agreement with Legend Merchant Services to represent it as its investment banker. Legend will receive an aggregate of 150,000 common shares of stock for its services. The shares will be issued as follows: 50,000 upon execution of the agreement (issued on March 17, 2011) and 50,000 shares in each of the following two months beginning 30 days after execution of the agreement.





On March 31, 2011, the Company issued 20,666 shares of restricted common stock to one of its Preferred Series A shareholders for accrued dividends of $7,026 through March 31, 2011.





NOTE M – WARRANTS





Transactions involving our warrant issuances are summarized as follows:





2011


2010Number


Weighted

Average

Exercise Price


Number


Weighted

Average

Exercise PriceOutstanding at beginning of the period


821,429


$
0.35



-


$
-Granted during the period


-



-



-



-Exercised during the period


-



-



-



-Terminated during the period


-



-



-



-Outstanding at end of the period


821,429


$
0.35



-


$
-Exercisable at end of the period


821,429


$
0.35



-


$
-




18





The number and weighted average exercise prices of our options and warrants outstanding as of March 31, 2011 is as follows:





Range of Exercise Prices


Remaining

Number

Outstanding

Weighted Average

Contractual Life

(Years)

Weighted Average

Exercise Price$
0.35



821,429

4.00

$
0.35




NOTE N - 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 three months ended March 31, 2011 and 2010, the Company incurred and charged to operations $1,916 and $2,311, respectively, in connection with air travel services provided by the entities to the Company. There were no payables owed to the entities at March 31, 2011 and March 31, 2010, respectively.





The entities are co-makers of a line of credit and a note payable and have pledged substantially all of their assets to secure the line of credit (See Note J) and note payable (see Note K).





The Company’s CEO is the license holder of an entity through which Pro-Tech Fire Protection Systems Corp  is the subcontractor.  His wife’s company is the owner of the entity which holds all of the stock of this entity.  The entity is considered a minority woman owned small business.  Pro-Tech Fire Protection Systems Corp  management are trying to use this designation to help it win contract awards as well as develop additional telecommunications segment revenue.





NOTE O - COMMITMENTS AND CONTINGENCIES





Operating Lease Commitments





The Company leases office space under non-cancelable operating leases that expire through December 2011.  The Company also leases vehicles from Enterprise Fleet Services under non-cancelable operating leases expiring through March 2013 as well as office equipment extending to February 2016.





Future minimum lease payments for the above leases over the next five years are as follows:


Amount2012

$
188,1042013


108,4072014


20,9962015


16,0082016


13,340Total

$
346,855




For the three months ended March 31, 2011 and 2010, rent expense was $36,569 and $35,892, respectively.  For the three months ended March 31, 2011 and 2010, vehicle lease expense was $22,696 and $30,686, respectively.




Litigation





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.





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.


19




NOTE P – 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 Pro-Tech Industries, Inc. 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 three months ended March 31, 2011 and 2010, as taken from the internal management system previously discussed, is listed below.




Revenue

Three months endedMarch 31, 2011


March 31, 2010Fire Protection/Alarm & Detection

$
2,773,000


$
1,562,000Telecommunications


776,000



1,245,000Total

$
3,549,000


$
2,807,000





Gross Profit

Three months endedMarch 31, 2011


March 31, 2010Fire Protection/Alarm & Detection

$
818,000


$
551,000Telecommunications


521,000



258,000Total

$
1,339,000


$
809,000





Operating Income (Loss)

Three months endedMarch 31, 2011


March 31, 2010Fire Protection/Alarm & Detection

$
120,000


$
(145,000
)Telecommunications


281,000



139,000Corporate


(421,000
)


(443,000
)Total

$
(20,000
)

$
(449,000
)
  Depreciation/Amortization

Three months endedMarch 31, 2011


March 31, 2010Fire Protection/Alarm & Detection

$
2,000


$
7,000Telecommunications


4,000



5,000Corporate


45,000



64,000Total

$
51,000


$
76,000
  Interest (Income)Expense

Three months endedMarch 31, 2011


March 31, 2010Fire Protection/Alarm & Detection

$
3,000


$
-Telecommunications


-



-Corporate


18,000



34,000Total

$
21,000


$
34,000





Assets


March 31, 2011


December 31, 2010Fire Protection/Alarm & Detection

$
3,002,000


$
2,799,000Telecommunications


849,000



548,000Corporate


225,000



306,000TOTAL

$
4,076,000


$
3,653,000





Capital Expenditures


March 31, 2011


March 31, 2010Fire Protection/Alarm & Detection

$
9,637


$
-Telecommunications


-



-Corporate


7,007



210TOTAL

$
16,644


$
210




20




NOTE Q - MAJOR CUSTOMERS AND SUPPLIERS




The Company had two customers (18% and 13%) accounting for 31% of the total revenue for the three months ended March 31, 2011 and two customers (22% and 30%) which accounted for 52% of the total revenue for the three months ended March 31, 2010.  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 two largest vendors (24% and 12%) accounted for 36% of materials purchases for the three months ended March 31, 2011 and from its two largest vendors (50% and 13%) were approximately 63% for the three months ended March 31, 2010. 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 R – 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 $0 and $13,298, for the three months ended March 31, 2011 and 2010, respectively.  In April 2010, the Company temporarily suspended the matching portion of the 401(k) plan.





NOTE S — 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 March 31, 2011:





Derivative Liabilities

Total


Quoted

Prices in

Active

Markets for

Identical

Instruments

Level 1


Significant

Other

Observable

Inputs

Level 2


Significant

Unobservable

Inputs

Level 3 (A)Warrant derivative  liability

$
(178,916
)


-



-


$
(178,916
)Preferred stock derivative liability


(277,452
)


-



-



(277,452
)Total

$
(456,368
)

$
-


$
-


$
(456,368
)


21





Level 3 Liabilities comprised of our bifurcated reset provision contained within our Series C 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 March 31, 2011:




Warrant Liability


Reset DerivativeBalance, December 31, 2010

$
271,646


$
275,826Total (gains) lossesWarrants issued with Redeemable Preferred Series A


-



-Convertible Redeemable Preferred Series A


-



-Mark-to-market at March 31, 2011:- Series A Preferred Stock Reset Derivative


-



1,626- Warrants issued with Convertible Redeemable Preferred Series A


(92,730
)


-Transfers in and/or out of Level 3


—



—Balance, March 31, 2011

$
178,916


$
277,452Total gain (loss) for the three month period included in earnings relating to the liabilities held at March 31, 2011

$
92,730


$
(1,626
)




NOTE T – 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 liability of $40,000 and $80,490, respectively.





Components of the net deferred tax liability are as follows:





March 31, 2011


Year Ended(unaudited)


December 31, 2010Deferred tax assetsAllowance for bad debt

$
32,000


$
40,000Timing difference on amortization of intangibles


-



-Total gross deferred tax assets


32,000



40,000Deferred tax liabilitiesSection 481 carryforward


-



-Total gross deferred tax liabilities


-



-Net deferred tax asset (liability)

$
32,000


$
40,000




22




The federal and state income tax provision (benefit) is as follows:





March 31, 2011


Year Ended(unaudited)


December 31, 2010Current:Federal

$
(28,474
)

$
(52,457
)State


(5,025
)


(9,257
)Total current


(33,499
)


(61,714
)Deferred:Federal


(27,200
)


(34,000
)State


(4,800
)


(6,000
)Total deferred


(32,000
)


(40,000
)Total tax provision (benefit)


(65,499
)


(101,714
)Valuation Allowance


65,499



101,714Net

$
-


$
-




At December 31, 2010, Pro-Tech Industries had a reportable Net Operating Losses of approximately $154,000.  For 2010, Pro-Tech Fire Protection Systems Corp. 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.





At March 31, 2011, Pro-Tech Industries had a reportable Net Operating Losses of approximately $63,700.  For 2011, Pro-Tech Fire Protection Systems Corp. 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 U - SUBSEQUENT EVENTS





On April 17, 2011 the Company issued 50,000 shares of restricted common stock to Legend Merchant Group as part of its agreement signed on March 10, 2011. The Company entered into the agreement with Legend Merchant Services to represent it as its investment banker.





In April 2011, the Company issued 139,804 shares of restricted common stock in payment of accrued dividends through March 31, 2011 on its Series A Redeemable Convertible Preferred stock.  The accrued dividends amounted to $47,533 on this date.


23


Unless otherwise noted, references in this Form 10-Q to “Pro-Tech”, “we”, “us”, “our”, and the “Company” means Pro-Tech Industries, Inc., a Nevada corporation.  Our principal place of business is located at 8550 Younger Creek Drive #2, Sacramento, CA 95828.  Our telephone number is (916) 388-0255.




ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS





The following discussion and analysis should be read in conjunction with our consolidated financial statements and related notes thereto included elsewhere in this registration statement. 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 registration statement should be read as applying to all related forward-looking statements wherever they appear in this registration statement. 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.





Forward-looking statements involve risks, uncertainties and other factors, which may cause our actual results, performance or achievements to be materially different from those expressed or implied by such forward-looking statements. Factors and risks that could affect our results and achievements and cause them to materially differ from those contained in the forward-looking statements include those identified in the section titled “Risk Factors” in the Company’s Annual Report on Form 10-K for the period ended December 31, 2010, as well as other factors that we are currently unable to identify or quantify, but that may exist in the future.





In addition, the foregoing factors may affect generally our business, results of operations and financial position. Forward-looking statements speak only as of the date the statement was made. We do not undertake and specifically decline any obligation to update any forward-looking statements.





OVERVIEW





On December 31, 2008, we executed an agreement with Pro-Tech Fire Protection Systems Corp (“Pro-Tech Fire Protection Systems Corp”), 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 Fire Protection Systems Corp 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 Fire Protection Systems Corp 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 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.




24




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:


·
Commercial, Special Hazards, and Industrial Overhead Wet Pipe, Dry Pipe, Pre-Action, Deluge and Foam


·
New Installations, Retro-Fits, Upgrades, Repairs, Design, Consultations and Analysis


·
Pumps, Hydrants, Backflow Preventers, Underground, Design and Consultation


·
5 Year Certification, Inspections and Testing


·
24 Hour Service


·
Alarm & Detection installation and monitoring, inspections and repairs


·
Electrical Services including design build, new construction, repairs, inspections and maintenance


·
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.




25




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




·
Building Riser and Campus Systems


·
Cabinet and Rack Installation


·
Cable Tagging and Documentation


·
Communications Rooms, MDF, IDF


·
Optical and Copper Cable Installation


·
Raceway Systems


·
Wireless Connectivity Solutions




Low Voltage Systems


·
Security Systems


·
Fire Alarm


·
Card Access Control


·
CATV


·
Video Surveillance





Network Systems


·
Enterprise architecture strategy


·
Systems integration


·
IT infrastructure, implementation and support


·
Network security and remote access solutions


·
Authentication


Voice Systems


·
PBX


·
Key system


·
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.




26





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:




·
System Integrators – Negotiated bid work (i.e. existing relationships on current projects)


·
Commercial builders/developers – Bid work with strategic business partners (i.e. electrical and general contractors)


·
Modular furniture designers/builders -  Office build outs, preferred vendor list, etc.


·
Commercial/industrial property management companies -  Tenant improvement work, new and/or old shell build outs, etc.


·
Telecommunication/wireless vendors – Infrastructure upgrades, DEMARC extensions, etc.


·
Federal government contractors – Strategic partnerships, negotiated jobs, etc.


·
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




·
System Integrators


·
Commercial builders/developers


·
Modular furniture designers/builders


·
Commercial/industrial property management companies


·
Telecommunication/wireless vendors


·
Federal government contractors


·
Federal, State, and local municipalities




27




Contract Vehicles




·
Existing supplier and “Master Service” agreements


·
Negotiated bid work


·
Request for Proposals (RFP)


·
General Service Administration (GSA) Schedules


·
CALNET II (State of California)


·
CA Multiple Award Schedule (CMAS)


·
Pre-qualification process




Business Development Philosophy




·
Build on existing relationships (i.e. negotiated work)


·
Subscribe to online bid tools


·
Form strategic partnerships with Disabled Veteran Owned Enterprise (DVBE) companies


·
Work with certified contractors


·
Define geographic growth territories


·
Join applicable trade organizations




Strategy and Positioning




Our 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:




§
Expand portfolio of services through growth of A&D, telecommunications and electrical services
 §
Focus on internal growth and development
 §
Focus on expanding operating efficiencies
 §
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:





§
Aerojet


§
Hensel Phelps


§
RQ Construction




28




§
RA Birch


§
Raley’s


§
Soltek Pacific


§
SouthWestern Dakotah


§
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





Employees





We have approximately 65 full time employees including 10 executive and administrative staff, 6 in engineering, 6 in sales and marketing, with the balance working in the field as superintendents, foreman, journeyman or apprentices.





Recent Developments


None





Results of Operations





Three Months Ended March 31, 2011 Compared to Three Months Ended March 31, 2010





Revenue




Revenues were $3,549,362 for the three months ended March 31, 2011; an increase of $741,895, or 26%, from revenues of $2,807,467 for the three months ended March 31, 2010. This increase was primarily driven by increases in the fire protection segment, offset by a decrease in the telecommunications segments.  Management is optimistic about the results in the fire segment, but the slow economy is still being watched as we try to increase revenues throughout all of our segments.  Pro-Tech is concentrating on its service arm in the hopes of garnering additional revenue from its current customer base.





Fire Life Safety segment revenue for the three months ended March 31, 2011 and 2010 were approximately $2,773,000 or 78% and $1,562,000 or 56% of total revenue, respectively.  The increase in revenue was due to jobs starting that had been waiting in backlog.  This segment continues to make headway in garnering contracts and has had a recent increase in bid activity in this segment.  Management believes, but cannot guarantee, that this segment’s revenues will increase steadily in the following quarters.





Telecommunication segment revenue for the three months ended March 31, 2011 and 2010 was approximately $776,000 or 22% and $1,245,000 or 44% of total revenue, respectively.  The decrease in revenue was due primarily to the winding down of the State project this segment has been working on.  Management is reviewing how to gain traction into areas where this segment has specialized licensing opportunities that some of the competition does not have at its disposable. Management hopes, but cannot guarantee, that they will be able to increase revenues for this segment through these means.




29




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 $2,209,933 or 62% of revenue for the three months ended March 31, 2011, compared to $1,998,568 or 71% for the same period of the prior year.  The decrease as a percentage of revenue is due to the blend of project revenue attributable to our existing operations and the fire protection segment becoming a larger piece of the revenue.    The current economy is not allowing companies to produce margins from the past and we are no exception.  We are seeking out other segments of the market to allow us to try and increase our margins.  All segments of our company are being monitored closely to keep margins in line with management’s expectations.





Fire Life Safety segment cost of revenue and cost of revenue as a percentage of revenue for the three months ended March 31, 2011 and 2010 was approximately $1,955,000 and 71% and $1,011,000 and 65%, respectively.  The dollar increase in our cost of revenue is due to the corresponding increase in revenue during the three months ended March 31, 2011, as well as the increase in cost of revenue as a percentage of revenue was due to the blend of project revenue attributable to our existing operations representing the tightening economy.


Telecommunications segment cost of revenue and cost of revenue as a percentage of revenue for the three months ended March 31, 2011 and 2010 was approximately $255,000 and 33% and $987,000 and 79%, respectively.  The dollar decrease in our cost of revenue is due to the corresponding decrease in revenue during the three months ended March 31, 2011.  The decrease in cost of revenue as a percentage of revenue was due to the blend of project revenue attributable to our existing operations and the cost of initial expansion into additional segments of the telecommunications market.  The segment also received a credit from its prime source of labor for issues settled over apparent incorrect billings. This segment started new business lines and has incurred heavy startup costs. We are starting to see opportunities come in due to the high grades of previous work, which management intends to try and take advantage of.  Management hopes but cannot assure these costs should start to normalize as the revenues increase and wash out the startup costs.





Selling, general and administrative




Selling, general and administrative expenses were $1,308,223 for the three months ended March 31, 2011 compared to $1,182,430 for the three months ended March 31, 2010. The selling, general and administrative cost related to revenues decreased to 36.9% for three months ended March 31, 2011 as compared to 42.1% for the three months ended March 31, 2010.





The increase is primarily a result of an increase in fuel, benefits and accounting and legal services.  Accounting and legal increase is primarily a timing issue, in order to minimize the fluctuations. Management is looking at accruing for these services to flatten the ups and downs currently hitting the financials. Management has taken a hard look at these costs and continues to make cuts and adjustments to keep these costs in line as we continue to increase revenue and margin levels.





Management continues to monitor costs in these difficult economic times in order to remove unnecessary overhead.





Depreciation and amortization




Depreciation and amortization expense decreased to $51,068 for the three months ended March 31, 2011 compared to $75,677 in the three months ended March 31, 2010.  The decrease came primarily from the end of intangible amortization related to discontinued operations.  This amortization finalized in August 2010.  It was partially offset by the amortization of the financing costs of the Series A preferred stock.





Interest




Net interest expense decreased to $21,472 for the three months ended March 31, 2011 compared expense of $33,737 for the three months ended March 31, 2010. This decrease was primarily reduction the reduction in the line of credit and notes payable charges due to slow pay of invoices and timeliness of payments to vendors.





Income Tax




There was no income tax benefit or expense for the three months ended March 31, 2011 compared to an income of $80,490 for the three months ended March 31, 2010. This is due to the net loss position of the Company and no subsequent realization of any deferred tax assets until positive earnings are gained.





Liquidity and Capital Resources





Liquidity:





For the three months ended March 31, 2011, we experienced a net income from continuing operations of $49,770 and income of $359,679 from discontinued operations.  At March 31, 2011, we had $290,999 in cash.  Accounts receivable, net of allowances for doubtful accounts, were $2,778,822 at March 31, 2011.





30




At March 31, 2011, we had negative working capital from continuing operations of $579,784, compared to negative working capital from continuing operations of $517,524 at December 31, 2010. The ratio of current assets to current liabilities decreased to .84:1 at March 31, 2011 compared to .87:1 at December 31, 2010.  Cash provided by continuing operations during the three months ended March 31, 2011 was $161,528 as compared to cash provided by continuing operations of $77,950 for the three months ended March 31, 2010. Management feels the working capital number is somewhat misleading as the Company is currently carrying approximately $456,000 in warrant and derivative liabilities that likely will not lead to actual cash disbursements by the Company. We believe there will be an improvement in the working capital during the second and third quarters of 2011 as overhead cost cutting and market penetration strategies being implemented take effect. Management anticipates that its existing capital resources will be adequate to satisfy its capital requirements for the foreseeable future.


Our principal liquidity at March 31, 2011 included cash of $290,999 and $2,778,822 of net accounts receivable. Our management believes, but can provide no assurances, that 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 the three months ended March 31, 2011, we had cash provided of $161,528 from our continuing operating activities, primarily as a result of our net income from continuing operations of $49,770, an increase in costs in excess of billings of $208,999, decrease in billing in excess of cost of $137,653, add back depreciation and amortization of $51,069, reduction for net bad debt allowance and write offs of $19,526, use of prepaid items $25,745 and an increase of $287,791 of accounts receivable and an increase in accounts payable of $757,095.  By comparison, net cash provided by continuing operating activities was $77,950 for the three months ended March 31, 2010.





There was limited investing activity from continuing operations during the three months ended March 31, 2011. This activity was related primarily to computer replacements and the addition of two vans to support our expansion of the extinguisher service department. There was no significant investing activity during 2010.





Financing activity from continuing operations for 2011 consisted of payments on long term debt obligations of $61,057 and payments on the line of credit facility of $25,000.  For 2010, financing activity from continuing operations consisted of payments on long term debt obligations of $44,990 offset by line of credit borrowings of $100,000.





With recent cuts in branch corporate and selling, general and administrative costs as well as investment in market penetration strategies, management anticipates, but can provide no assurances, that our cash flow will be positive for the remainder 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.





Capital Resources:





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 March 31, 2011 was $925,000. 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 $1.250 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 June 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 March 31, 2011.  These payments were made in accordance with the agreement.




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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.  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 March 31, 2011 on these two notes are $138,477 and $145,794, respectively.





During the fourth quarter of 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 pay able over 8 and 18 months.





Critical Accounting Estimates and Recently Issued Accounting Standards





Please refer to Note C to the financial statements.





Inflation





In the opinion of management, inflation will not have an impact on our company’s financial condition and results of its operations.





Off-Balance Sheet Arrangements





We do not have any off balance sheet arrangements that are reasonably likely to have a current or future effect on our financial condition, revenues, and results of operations, liquidity or capital expenditures.





Other Considerations





There are numerous factors that affect the business and the results of its operations.  Sources of these factors include general economic and business conditions, federal and state regulation of business activities, the level of demand for product services, the level and intensity of competition in the media content industry, and the ability to develop new services based on new or evolving technology and the market's acceptance of those new services, our ability to timely and effectively manage periodic product transitions, the services, customer and geographic sales mix of any particular period, and our ability to continue to improve our infrastructure including personnel and systems to keep pace with our anticipated rapid growth.





Additional Information





We file reports and other materials with the Securities and Exchange Commission.  These documents may be inspected and copied the Commission’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the Commission at 1-800-SEC-0330.  The Commission maintains a web site at http://www.sec.gov that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the Commission.








ITEM 3.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK





We do not hold any derivative instruments and do not engage in any hedging activities.




ITEM 4.  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.




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b) Changes in Internal Control over Financial Reporting.





During the Quarter ended March 31, 2011, there was no change in our internal control over financial reporting (as such term is defined in Rule 13a-15(f) under the Exchange Act) that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.





PART II – OTHER INFORMATION





ITEM 1. LEGAL PROCEEDINGS





We are not a party to any other 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 1A - Risk Factors




You should carefully consider the following risk factors together with the other information contained in this Interim Report on Form 10-Q, and in prior reports pursuant to the Securities Exchange Act of 1934, as amended and the Securities Act of 1933, as amended.  If any of the risks factors actually occur, our business, financial condition or results of operations could be materially adversely affected. In such cases, the trading price of our common stock could decline. We believe there are no changes that constitute material changes from the risk factors previously disclosed in the prior reports pursuant to the Securities Exchange Act of 1934, as amended and the Securities Act of 1933 and include or reiterate the following risk factors:




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.




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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.




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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.




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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:





•
The assumption of material liabilities (including for environmental-related costs);


•
Failure of due diligence to uncover situations that could result in legal exposure or to quantify the true liability exposure from known risks;


•
The diversion of management's attention from the management of daily operations to the integration of operations;


•
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;


•
The risk of additional financial and accounting challenges and complexities in areas such as tax planning, treasury management, financial reporting and internal controls; and


•
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.




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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.





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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.




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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 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS SECURITIES





On March 10, 2011, the Company entered into an agreement with Legend Merchant Services to represent it as its investment banker. Legend will receive an aggregate of 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. The Company incurred an expense of $12,500 related to this issuance.





The above offering and sale was made in reliance upon the exemption from registration under Rule 506 of Regulation D promulgated under the Securities Act of 1933 and/or Section 4(2) of the Securities Act of 1933, based on the following: (a) the investors confirmed to us that they were “accredited investors,” as defined in Rule 501 of Regulation D promulgated under the Securities Act of 1933 and had such background, education and experience in financial and business matters as to be able to evaluate the merits and risks of an investment in the securities; (b) there was no public offering or general solicitation with respect to the offering; (c) the investors were provided with certain disclosure materials and all other information requested with respect to our company; (d) the investors acknowledged that all securities being purchased were “restricted securities” for purposes of the Securities Act of 1933, and agreed to transfer such securities only in a transaction registered under the Securities Act of 1933 or exempt from registration under the Securities Act; and (e) a legend was placed on the certificates representing each such security stating that it was restricted and could only be transferred if subsequent registered under the Securities Act of 1933or transferred in a transaction exempt from registration under the Securities Act of 1933.




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ITEM 3.  DEFAULTS UPON SENIOR SECURITIES





There were no defaults upon senior securities during the period ended March 31, 2011.





ITEM 4.  REMOVED AND RESERVED





ITEM 5.  OTHER INFORMATION




None.




ITEM 6.  EXHIBITS




3.1

Certificate of Incorporation (1)3.2

Bylaws of Pro-Tech Industries, Inc. (1)14.1

Code of Ethics (2)31.1

Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act(3)31.2

Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act.(3)32.2

Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act.(3)32.2

Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act.(3)





1)   Incorporated by reference to the Company’s filing on Form SB-2, as filed with the Securities and Exchange Commission on June 27, 2007.





(2)   Incorporated by reference to the Company’s filing on Form 10-K, as filed with the Securities and Exchange Commission on April 15, 2011.





(3)  Filed herein.


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SIGNATURES





Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934 the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.





Registrant

Pro-Tech Industries, Inc.Date: May 16, 2011

By: /s/ Donald GordonDonald GordonChief Executive Officer




Registrant

Pro-Tech Industries, Inc.Date: May 16, 2011

By: /s/ Michael WalshMichael WalshChief Financial Officer (Principal Financial Officer)


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