UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: April 30, 2006
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________to________________
--------------------------------------------
Commission File:# 0-14754
ELECTRIC & GAS TECHNOLOGY, INC.
(Exact Name of Registrant as specified in its Charter)
TEXAS 75-2059193
(State or other Jurisdiction of (I R S. Employer
incorporation or organization) Identification No.)
3233 West Kingsley Road, Garland, Texas 75041
(Address of Principal Executive Offices) (Zip Code)
(972) 840-3223
(Issuer's telephone number)
Indicate by check mark whether the issuer (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Act of 1934 during the past 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 is an accelerated filer (as
defined in Rule 12-2 of the Exchange Act). Yes [_] No [X]
The number of shares outstanding of each of the Issuer's Classes of Common
Stock, as of April 30, 2006:
Common - $0.01 Par Value - 8,282,461
ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES
Index to Form 10-QSB
For the Quarter Ended April 30, 2006
Part I - Financial Information Page
Item 1. Condensed Consolidated Financial Statements:
(a) Condensed Consolidated Balance Sheets at April 30, 2006
(unaudited) and July 31, 2005 3
(b) Condensed Consolidated Statements of Operations for the
three and nine months ended April 30, 2006 (unaudited) and
April 30, 2005 (unaudited) 4
(c) Condensed Consolidated Statement of Changes in Stockholders'
Equity for the nine months ended April 30, 2006 (unaudited) 5
(d) Condensed Consolidated Statements of Cash Flows for the nine
months ended April 30, 2006 (unaudited) and April 30, 2005
(unaudited) 6
(e) Notes to Condensed Consolidated Financial Statements
(unaudited) 7-13
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 14-18
Item 3. Controls and Procedures 18
Part II - Other Information
Item 1. Legal Proceedings 19
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 19
Item 3. Defaults Upon Senior Securities 20
Item 4. Submission of Matters to Vote of Security Holders 20
Item 5. Other Information 20
Item 6. Exhibits and Reports on Form 8-K 21
Signature (Pursuant to General Instruction E) 21
All other items called for by the instructions are omitted as they are either
not applicable, not required, or the information is included in the Condensed
Financial Statements or Notes thereto.
2
ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
April 30, 2006 July 31, 2005
-------------- --------------
(Unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 1,121 $ 200,455
Accounts receivable, net 1,778,443 1,038,591
Inventories 2,819,343 1,476,209
Prepaid expenses 136,565 40,714
Other assets - current 64,806 --
-------------- --------------
Total current assets 4,800,278 2,755,969
-------------- --------------
PROPERTY, PLANT AND EQUIPMENT, net 1,656,810 1,628,364
-------------- --------------
OTHER ASSETS
Certificates of deposit, pledged 100,000 101,970
Assets held for sale 413,025 408,650
Due from affiliates - net 602,536 664,533
Other assets 148,208 126,718
-------------- --------------
Total other 1,263,769 1,301,871
-------------- --------------
TOTAL ASSETS $ 7,720,857 $ 5,686,204
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable $ 1,516,466 $ 974,259
Accounts payable 2,499,195 1,186,075
Accrued liabilities 509,638 310,252
Customer deposits 130,000 --
Payable to officers 25,460 38,876
Current maturities of long-term obligations 474,747 491,221
Current portion of minimum pension liability 160,634 160,634
Liabilities of discontinued operations 71,608 71,608
-------------- --------------
Total current liabilities 5,387,748 3,232,925
-------------- --------------
LONG-TERM OBLIGATIONS
Long-term obligations, less current maturities 996,379 1,124,167
Minimum pension liability 1,122,012 1,069,012
-------------- --------------
Total long-term obligations 2,118,391 2,193,179
-------------- --------------
Minority interest in subsidiary 5,283 3,206
-------------- --------------
STOCKHOLDERS' EQUITY
Preferred stock, $10 par value, 5,000,000 shares authorized,
none issued
Common stock, $.01 par value, 30,000,000 shares authorized,
issued 8,282,461 and 7,326,979 shares respectively 82,825 73,270
Additional paid-in capital 10,226,578 9,655,826
Accumulated deficit (8,870,322) (8,242,556)
Accumulated comprehensive losses (1,229,646) (1,229,646)
-------------- --------------
Total stockholders' equity 209,435 256,894
-------------- --------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 7,720,857 $ 5,686,204
============== ==============
See accompanying notes to the condensed consolidated financial statements.
3
ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three months ended Nine months ended
April 30, April 30,
--------------------------------------------------------
2006 2005 2006 2005
--------------------------------------------------------
Sales $ 4,407,431 $ 2,024,000 $ 9,108,838 $ 6,634,915
Cost of goods sold 4,446,277 1,237,991 7,635,940 4,457,115
--------------------------------------------------------
Gross profit (loss) (38,846) 786,009 1,472,898 2,177,800
Selling, general and administrative expenses 624,944 795,014 2,131,333 1,901,109
--------------------------------------------------------
Income (loss) from operations (663,790) (9,005) (658,435) 276,691
--------------------------------------------------------
Other income (expense)
Interest (99,630) (58,317) (232,943) (162,856)
Gain on sale of assets 73,281 -- 73,281 --
Settlement of civil action -- -- 170,000 (49,000)
Loss on investments -- -- (1,970) --
Other income, net 24,760 24,688 24,378 50,978
--------------------------------------------------------
Total other income (expense) (1,589) (33,629) 32,746 (160,878)
--------------------------------------------------------
Income (loss) from continuing operations before
minority interest (665,379) (42,634) 32,746 115,813
Minority interest in subsidiary 11,229 44,262 (2,077) (8,630)
Income (loss) from continuing operations (654,150) 1,628 (627,766) 107,183
Discontinued operations, net of tax -- -- -- 39,372
--------------------------------------------------------
Net income (loss) $ (654,150) $ 1,628 $ (627,766) $ 146,555
Basic earnings (loss) per common share:
Income (loss) from continuing operations $ (0.09) $ 0.00 $ (0.08) $ 0.02
Net income (loss) $ (0.09) $ 0.00 $ (0.08) $ 0.02
========================================================
Diluted earnings (loss) per common share:
Income (loss) from continuing operations $ (0.08) N/A $ (0.08) N/A
Net income (loss) $ (0.08) N/A $ (0.08) N/A
========================================================
See accompanying notes to condensed consolidated financial statements.
4
ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
For the nine months ended April 30, 2006
(Unaudited)
Accumulated
Common stock Paid-in Accumulated comprehensive
Shares Amount capital deficit losses Total
----------- ----------- ----------- ----------- ----------- -----------
Balance at July 31, 2005 7,326,979 $ 73,270 $ 9,655,826 $(8,242,556) $(1,229,646) $ 256,894
Common stock issued for interest on notes 25,000 250 18,025 -- -- 18,275
Common stock issued for cash and warrants 375,000 3,750 209,682 -- -- 213,432
Warrants issued for cash -- -- 11,568 -- -- 11,568
Common stock issued for services 363,175 3,632 207,535 -- -- 211,167
Common stock issued for payment on note 192,307 1,923 123,942 -- -- 125,865
Net income (loss) -- -- -- (627,766) -- (627,766)
----------- ----------- ----------- ----------- ----------- -----------
Balance at April 30, 2006 8,282,461 $ 82,825 $10,226,578 $(8,870,322) $(1,229,646) $ 209,435
=========== =========== =========== =========== =========== ===========
See accompanying notes to condensed consolidated financial statements.
5
ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine months ended April 30,
2006 2005
------------ ------------
Cash flows from operating activities:
Net income (loss) $ (627,766) $ 146,555
Discontinued operations, net of tax -- (39,372)
------------ ------------
Net income (loss) from continuing operations (627,766) 107,183
Adjustments to reconcile net income (loss) to
net cash used in operating activities:
Depreciation of property, plant and equipment 266,708 214,132
Common stock issued for services 211,167 --
Loss on lawsuit -- 49,000
Changes in operating assets and liabilities:
Accounts receivable (739,852) 15,532
Inventories (1,343,134) (320,027)
Prepaid expenses (95,851) (10,736)
Other assets (86,296) (23,766)
Accounts payable 1,313,120 (110,173)
Customer deposits 130,000 --
Accrued liabilities 199,386 (539,408)
Accrued pension plan 53,000 (130,581)
------------ ------------
Net cash used in operating activities (719,518) (748,844)
------------ ------------
Cash flows from investing activities:
Purchase of property, plant and equipment (295,154) (603,071)
Investments in affiliates 61,997 (7,280)
Idle facility (4,375) (6,290)
Certificates of deposits 1,970 326,523
------------ ------------
Net cash used in investing activities (235,562) (290,118)
------------ ------------
Cash flows from financing activities:
Proceeds for issuance of common stock and warrants 225,000 --
Proceeds from officer (13,416) 18,280
Payments on long-term obligations (122) (17,861)
Net change in notes payable 542,207 (16,491)
Minority interest in subsidiary 2,077 8,630
------------ ------------
Net cash provided by (used in) financing activities 755,746 (7,442)
------------ ------------
Net cash provided by discontinued operations -- 1,264,260
------------ ------------
Net increase (decrease) in cash and cash equivalents (199,334) 217,856
Cash and cash equivalents - beginning of period 200,455 37,139
------------ ------------
Cash and cash equivalents - end of period $ 1,121 $ 254,995
============ ============
Supplemental disclosures of cash flow information:
Cash paid during the period for interest $ 232,985 $ 170,033
------------ ------------
Common stock issued for payment of long term debt $ 144,140 $ --
------------ ------------
See accompanying notes to condensed consolidated financial statements.
6
ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES
NOTE A - BUSINESS AND BASIS OF PRESENTATION
Business
Electric & Gas Technology, Inc.("the Company" or "ELGT") was organized as a
corporation under the laws of the State of Texas on March 18, 1985, to serve as
a holding company for operating subsidiary corporations. The Company continued
in this manner until 2004, at which time the decision was made for the corporate
entity to become more actively involved in the management of subsidiary
operations. The ultimate objective of this change is a more coordinated use of
management expertise, technical resources and operating capabilities that
support a strategy of long term growth in shareholder value. Near the end of
fiscal 2004, the Company relocated all operations, including corporate staff,
into a single 144,000 square foot facility, which was occupied by the contract
manufacturing segment. In addition to achieving improvements in communications
and utilization of resources, this also allowed the Company to proceed with the
listing of two commercial properties for sale.
The Company presently is the owner of 100% of Reynolds Equipment, Inc.
(Reynolds) and 98.1% of Logic Metals Technology, Inc. (LMT). Through these
subsidiaries, the Company operates in two distinct business segments: (1)
Utilities Products and (2) Contract Manufacturing.
Reynolds, operating in the Utilities Products segment, designs, manufactures and
markets products for natural gas measurement, metering and odorization primarily
for municipalities and publicly owned utility companies. Materials consist of
proprietary circuit boards utilizing industry standard components, probes and
hardware. The manufacturability of the boards is readily available through a
large number of local low cost circuit board assembly operations. All other
items are available through multiple vending sources. The products are primarily
marketed directly by Reynolds employees and, to a lesser degree, through
manufacturers' representatives.
LMT, operating in the Contract Manufacturing segment, provides precision sheet
metal fabrication and assembly for a diverse customer base, including telecom
and networking cabinetry, electrical controls and other functional and aesthetic
sheet metal applications. LMT has primarily grown the revenue from existing
customers, but has added a manufacturers' representative to expand the customer
base. Raw material generally consists of standard sheet metal and general
purpose fittings and connectors available from general hardware and steel
distributors. Currently, LMT has two customers that each represents
approximately 25% of the Company's total revenue for the 9 months ended April
30, 2006.
The Company has employed a strategy to merge operational functions wherever
possible with the short term objective of operating a single manufacturing group
serving both owned proprietary products and external customers through a common
organization. Consolidation of the organizations has been completed and
migration of the manufacturing systems into one common system is an ongoing
effort.
Interim Financial Statements
The accompanying condensed consolidated financial statements have been prepared
in accordance with the regulations of the Securities and Exchange Commission
("SEC") for inclusion in the Company's quarterly report on Form 10-QSB. The
7
ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES
NOTE A - BUSINESS AND BASIS OF PRESENTATION (continued)
accompanying financial statements reflect all adjustments of a normal recurring
nature, which are, in the opinion of management, necessary for a fair statement
of the results of operations for the interim periods.
The statements were prepared using accounting principles generally accepted in
the United States of America. As permitted by the SEC, the statements depart
from generally accepted accounting disclosure principles in that certain data is
combined, condensed or summarized that would otherwise be reported separately.
NOTE B - EARNINGS PER SHARE
Basic earnings per share amounts are computed by dividing net income available
to common stockholders by the weighted average number of common stock shares
outstanding during the periods. Diluted earnings per share amounts take into
consideration all potentially dilutive common shares such as options and
convertible securities.
For basic earnings per share purposes, for the nine months ended April 30, 2006
and 2005, weighted average common stock shares outstanding totaled 7,630,825 and
6,997,034, respectively. For diluted earnings per share purposes, for the nine
months ended April 30, 2006, weighted average common stock shares outstanding
totaled 8,174,328 and included shares relating to the assumed exercise of stock
warrants.
NOTE C - INVENTORIES
Inventories are comprised as follows:
April 30, 2006 July 31, 2005
-------------- --------------
Raw materials $ 1,045,207 $ 527,134
Work in process 778,581 302,122
Finished goods 995,555 646,953
-------------- --------------
Total inventory $ 2,819,343 $ 1,476,209
============== ==============
Inventories, consisting of raw materials, work-in-process and finished goods,
are stated at the lower of cost or market as determined by the first-in,
first-out method. The Company reviews inventory usage by line item at least
annually, and accents material as potentially slow moving when usage for the
prior 12 months is less than the current "on-hand" quantity. In subsequent
review, alternative and substitute uses are identified, and the slow moving
quantity is adjusted. The carrying value of excess inventory is adjusted for
financial reporting purposes. Obsolete inventory is identified when a product
will no longer be produced or supported by the Company. Customers are notified
of final opportunity to purchase the product and spares, and the inventory is
subsequently destroyed and/or sold as scrap.
8
ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES
NOTE D- NOTES PAYABLE AND LONG-TERM OBLIGATIONS
On October 4, 2005, the Company entered into an agreement to borrow $125,000
bearing interest at 12%, maturing on April 4, 2006 from an individual third
party accredited investor. The Company also issued 15,000 shares of the
Company's common stock and 15,000 warrants to purchase common restricted shares
of Form 144 stock for $1.50 per share. This note was satisfied in full with the
issuance of 192,307 shares of the Company's common stock on March 22, 2006.
On November 7, 2005, the Company entered into two separate agreements to borrow
$50,000 each, bearing interest at 12%, maturing on May 1, 2006 from two
individual third party accredited investors. The Company also issued 5,000
shares of the Company's common stock for each agreement. The Company exercised
the extension on these agreements.
NOTE E - IMPAIRMENT OF LONG-LIVED ASSETS AND ASSETS HELD FOR SALE
The Company reviews for impairment, long-lived assets and certain identifiable
intangibles whenever events or changes in circumstances indicate that the
carrying amount of any asset may not be recoverable. In the event of impairment,
the asset is written down to its fair market value.
Assets to be disposed of are recorded at the lower of net book value or fair
market value less cost to sell, at the date management commits to a plan of
disposal and are classified as assets held for sale.
During 2005, the Company sold its former executive offices at 13636 Neutron
Road, Dallas, Texas, a 7,800 sq. ft. one story building. The Company is holding
for sale the former Reynolds occupied and owned building situated on 40,000
square feet of land in Garland, Texas. The plant is a one story, concrete
building containing approximately 15,500 square feet of floor space, which
includes approximately 2,000 feet of office space. The building has a remaining
mortgage of $346,991 with a local bank. The Company has replacement value
insurance on the building. As the building is being held for sale, it is not
being depreciated. However, prior depreciation for federal income tax and
financial reporting was previously over a 40 year period on the straight line
method. In addition, the Company also has included in assets held for sale, an
idle facility located in Paris, Texas.
The total carrying value of the assets held for sale as of April 30, 2006 is the
net book value of $413,025 and is included in long-term assets. Based on
appraisals and independent comparative sales reports, the Company believes that
the fair market value for these assets exceeds $400,000.
The following is the carrying value of assets held for sale and the
corresponding liabilities at April 30, 2006. During the fiscal year ended July
31, 2005, the Company transferred $125,000 of equity value, in the form of a
secondary lien, in the real estate related to the Paris, Texas building to the
Retech Pension Plan, as described in Note F.
Carrying Current Long-term Total
value liabilities liabilities Liabilities
----------- ----------- ----------- -----------
Paris building $ 326,485 $ 22,174 $ 252,729 $ 274,903
Garland building 86,540 16,597 330,394 346,991
----------- ----------- ----------- -----------
Total $ 413,025 $ 38,771 $ 583,123 $ 621,894
=========== =========== =========== ===========
9
ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES
NOTE F - CONTINGENCIES
The sale of the Company's former subsidiary Superior Switchboard and Devices
Inc. (Superior) was completed in 1996. Consideration received from this sale
included a note receivable of approximately $1,250,000. The surviving business
of Superior, renamed Retech, Inc., continued to own an 80,000 square foot
manufacturing facility in Paris, Texas and continued to be responsible for the
frozen Defined Benefit Pension Plan for Bargaining Employees (the "Plan") that
covered all of its hourly employees. The Plan called for benefits to be paid to
eligible employees at retirement based upon years of service and compensation
rates near retirement.
The maker defaulted on the $1.25 million note. The Company sued for collection
and subsequently entered into a Settlement Agreement. Again the maker failed to
perform under this Agreement and has caused the Company to pursue further
recourse. During the nine months ended April 30, 2006 the Company recorded and
received the funds of a $170,000 settlement that was reached.
Failure to collect on the note previously had, in part, impaired the Company's
ability to meet minimum funding requirements as a portion of the proceeds would
have been used by the Company to support the Plan. The entire note was written
off by the Company during FY 2002 and no portion of it was ever booked as an
asset of the Plan.
The Plan began experiencing deficiencies when its asset values were diminished
by poor stock market conditions and a steady decline in interest rates. Poor
financial performance of the Company over consecutive years also contributed to
the condition of the Plan. Since 2001, the Company has struggled to keep the
Plan in line with minimum funding requirements. As the result of Retech's
non-liquid status, it has been unable to currently fund the annual pension
liability. The Company has recognized a minimum pension liability for the
under-funded plan. The minimum liability is equal to the excess of the projected
benefit obligation over plan assets. A corresponding amount is recognized as
either an intangible asset or reduction of stockholders' equity. The Plan's
pension liability as of July 31, 2005, the date of the last actuarial valuation,
was $1,229,646, resulting in a stockholders' equity reduction of $1,229,646. The
Company has accrued $67,000 for the current year, through the quarter ended
April 30, 2006.
Current management recognized the condition of the Plan and worked with the IRS
to enter into a Closing Agreement executed April 15, 2005 that brought the plan
into acceptable funding status. An important element to the Agreement was the
transfer of equity of $125,000 in the Paris, TX building and 20 acres to the
Plan as a contribution. The transfer of equity into the Plan had no material
affect on the financial position of ELGT.
The Company is committed to restoring the plan to full compliance. This is a
stepwise process, focused first on the Closing Agreement and meeting current
minimum funding requirement. Now that this step has been completed the Company
will address other matters of compliance related to the Plan. Whereas the
Company believes that it will be able to resolve these matters in a satisfactory
manner, failure to do so could have a negative impact on the Company's future
performance.
10
ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES
NOTE G - INDUSTRY SEGMENT DATA
The Company's current business is primarily comprised of two industry segments:
(i) The Utilities Products segment, where Reynolds designs, manufactures and
markets products for natural gas measurement, metering and odorization primarily
for municipalities and publicly owned utility companies and (ii) The Contract
Manufacturing segment, where LMT provides precision sheet metal fabrication and
assembly for a diverse customer base, including telecom and networking
cabinetry, electrical controls, and other functional and aesthetic sheet metal
applications.
Three months ended Nine months ended
April 30, April 30,
-------------------------- --------------------------
2006 2005 2006 2005
----------- ----------- ----------- -----------
Operating revenues:
Utility Products $ 533,264 $ 505,148 $ 1,565,137 $ 1,561,757
Contract Manufacturing 3,874,167 1,518,852 7,543,701 5,073,158
----------- ----------- ----------- -----------
Total sales $ 4,407,431 $ 2,024,000 $ 9,108,838 $ 6,634,915
=========== =========== =========== ===========
Operating income (loss):
Utility Products $ (150,981) $ (72,293) $ (321,923) $ (115,545)
Contract Manufacturing (370,997) 243,189 325,692 701,173
----------- ----------- ----------- -----------
Income (loss) from operations (521,978) 170,896 3,769 585,628
General corporate expenses (141,812) (179,901) (662,204) (308,937)
Minority interest in subsidiary 11,229 44,262 (2,077) (8,630)
Other income (expense), net (1,589) (33,629) 32,746 (160,878)
----------- ----------- ----------- -----------
Income (loss) from continuing
operations (654,150) 1,628 (627,766) 107,183
Discontinued operations, net of tax -- -- -- 39,372
----------- ----------- ----------- -----------
Net income (loss) $ (654,150) $ 1,628 $ (627,766) $ 146,555
=========== =========== =========== ===========
NOTE H - RELATED PARTY TRANSACTIONS
The following is a summary of advances to and from affiliated companies included
in other assets at April 30, 2006 and July 31, 2005:
April 30, 2006 July 31, 2005
-------------- --------------
Net Due To/From Affiliates - Interfederal Capital, Inc. $ 602,536 $ 664,533
============== ==============
Net Payable to Officers $ (25,460) $ (38,876)
============== ==============
11
ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES
NOTE H - RELATED PARTY TRANSACTIONS (continued)
Interfederal Capital, Inc. (Interfederal), a Texas corporation, is managed under
a voting trust by S. Mort Zimmerman and ownership is held by his wife and four
(4) children. The Company leased facilities owned by Interfederal at a rate of
$30,000 per month.
Interfederal, S. Mort Zimmerman individually and/or Daniel A. Zimmerman
individually have guaranteed certain of the Company's lines of credit, real
estate and equipment loans.
S. Mort Zimmerman, IFC Industries, M&M Trans Exchange, Comtec, Inc. and Glauber
Management have agreed to consolidate their balances into the account of
Interfederal Capital, Inc. for the purpose of legal offset. The consolidated
balance of $602,536 due to the Company from Interfederal Capital, Inc. is
recoverable when, and if, it exercises its option to purchase the real estate it
currently leases from Interfederal, as described in Capital Expenditures. The
offset occurred during the fiscal year ended July 31, 2005. The balance of
$602,536 due from Interfederal is a payment by the Company toward the purchase
of the facility it leases from Interfederal. Should the Company not be able to
finance said purchase on or before the option expiration date, the amount of the
offset due the Company will be recovered against lease payments due.
The Company has a payable of $25,460 that is due to Daniel A. Zimmerman as of
April 30, 2006, compared to a $38,876 payable due as of July 31, 2005. These
amounts were used to fund various payables of the Company.
The Company has pledged a certificate of deposit in the amount of $100,000 for a
loan in the name of DOL Resources, Inc., a publicly held corporation in which
Electric & Gas Technology, Inc. owns a 19.9% equity interest. The note is
currently being serviced by Glauber Management, an affiliate of DOL, and the
Company believes that Glauber has sufficient resources to continue servicing the
debt. The carrying value on the balance sheet for DOL is $1 at April 30, 2006
and July 31, 2005.
NOTE I - REVENUE RECOGNITION POLICIES
The Company recognizes revenue when title passes to its customers upon shipment
of its products for final delivery. The Company ships goods and performs
services only after receiving purchase orders from customers or authorization to
charge a credit card and the credit card is validated. Revenue for shipments to
customers delivered by company truck is recognized when a signed receiving
document is returned to the plant. Shipments made by common carrier and by
freight forwarders are FOB manufacturing plant, and the customer is charged for
shipping expense. The revenue is recognized when the carrier has signed for
possession of the goods. The Company does not utilize stocking distributors and
ships to "end use" customers. No right of return exists in regard to stocking
levels or lack of requirement. Defective products can be exchanged or repaired
at the Company's discretion.
12
ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES
NOTE J - SUBSEQUENT EVENTS
On May 30, 2006, the Company filed its SB-2 Registration of Common Stock and
Warrants. The application was accepted by the SEC on June 14, 2006. Included in
the Registration Statement are 2,000,000 shares of "shelf stock" which the
company will reserve for future "time to time" sale of equity and or for
prospective acquisitions.
NOTE K - DISCONTINUED OPERATIONS
On July 30, 2004, the Company consummated the sale of assets of its wholly owned
subsidiary located in Canada, Hydel Enterprises, Inc. The sale included current
assets and plant, property and equipment. The proceeds were transferred to the
Company on August 5, 2004, and the liabilities were paid. In accordance with APB
Opinion No. 30, as amended by SFAS No. 144, the assets and liabilities of Hydel
have been disclosed separately in the balance sheets as assets and liabilities
of discontinued operations.
As the result of a settlement of litigation, the Company agreed to transfer its
91.5% ownership of AWT, Inc. and its associated intellectual property to the
plaintiff, with no physical assets or liabilities. In accordance with APB
Opinion No. 30, as amended by SFAS No. 144, the assets and liabilities of AWT
have been disclosed separately in the balance sheets as assets and liabilities
of discontinued operations.
NOTE L - INCOME TAXES
The Company accounts for corporate income taxes in accordance with SFAS No. 109
- - Accounting for Income Taxes. Under SFAS No. 109, deferred tax assets and
liabilities are recognized for the estimated future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. In addition,
future tax benefits, such as those from net operating loss carry forwards, are
recognized to the extent that realization of such benefits is more likely than
not. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized as set forth below
in the period that includes the enactment date.
The Company does not have any other significant deferred tax assets or
liabilities. The net operating loss carry-forwards are available to offset
future taxable income of the Company. These net operating losses expire from
2015 through 2018.
13
ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The Company, through its subsidiaries, operates within two industries. These are
(i) the Utilities Products segment, in which the Company designs, manufactures
and markets products for natural gas measurement, metering and odorization and
(ii) the Contract Manufacturing segment, in which the Company provides metals
fabrication and assembly for a diverse customer base, including telecom and
networking cabinetry, electrical controls, and other functional and aesthetic
fabricated metal applications.
The Company has employed a strategy to merge operational functions wherever
possible with the short term objective of operating a single manufacturing group
serving both owned proprietary products and external customers through a common
organization.
Results of operations
Summary. The Company reported revenues of $4,407,431 and $9,108,838 for the
three and nine months ended April 30, 2006, respectively. This compares to
revenues of $2,024,000 and $6,634,915 for the same periods in 2005. The increase
in revenue is primarily attributed to an increase in customer demand, especially
in the Contract Manufacturing segment, including a $2.5 million contract that
was recognized as in revenue during the nine months ended April 30, 2006.
Gross margins for the Company decreased from 38.83% and 32.82% for the three and
nine months ended April 30, 2005, respectively, to (0.88%) and 16.17% for the
three and nine months ended April 30, 2006, respectively. Gross margins
decreased primarily as the result of losses incurred on the $2.5 million
contract.
Selling, general and administrative expenses as a percent of revenues decreased
from 39.28% and 28.65% for the three and nine months ended April 30, 2005,
respectively to 14.18% and 23.40% for the three and nine months ended April 30,
2006, respectively. The change is a result of additional efforts to reduce
selling, general and administrative expenses to offset the losses incurred on
the $2.5 million contract.
Total other income (expense) of ($1,589) and $32,746 for the three and nine
months ended April 30, 2006, respectively, was reported by the Company. This
compares to the total other expense of $33,629 and $160,878 for the same periods
in 2005. The significant increase in total other income the nine months ended
April 30, 2006 is due primarily to a gain on a settlement of a civil action
during the first quarter of 2006.
The Company reported a net loss from continuing operations of $654,150 and
$627,766 for the three and nine months ended April 30, 2006, respectively. This
compares to a net income from continuing operations of $1,628 and $107,183 for
the same periods in 2005. The loss is primarily due to a $2.5 million dollar
contract that was a significant loss to the Company. The Company entered into
the contract at minimal margins to gain the business. After the contract was
finalized, significant raw material costs increased 30% or more. The Company was
unable to terminate the contract when it was determined that the Company would
sustain significant losses. The losses were compounded when production fell
behind schedule due to material shortages and overtime was required to meet the
contract demands.
14
ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES
Inventories have increased in raw materials, work in process and finished goods
during the nine months ended April 30, 2006. The increase in inventories is a
result of the Company's increased efforts to reduce its manufacturing and
delivery lead times based on customer demands. The Company's stock of frequently
used material has been increased so that production may start when an order is
placed and finished goods have been increased to allow immediate delivery on
contract parts. Another factor for the increase in inventory as of April 30,
2006 is that the Company began manufacturing of a large cabinet order during the
nine months ended April 30, 2006 that did not begin shipping until May.
The following table represents the changes [increase/(decrease)] in operating
revenues, operating income/(loss) and income/(loss) from continuing operations
by the respective industry segments when compared to the same periods in the
previous year:
Three months ended Nine months ended
April 30, 2006 April 30, 2006
------------------------ -----------------------
Increase/ Increase/
(Decrease) Percent (Decrease) Percent
---------- ---------- ---------- ---------
Operating revenue:
Utility Products $ 28,116 5.57% $ 3,380 0.22%
Contract Manufacturing 2,355,315 155.07% 2,470,543 48.70%
---------- ---------- ---------- ---------
Total sales $2,383,431 117.76% $2,473,923 37.29%
========== ========== ========== =========
Operating income (loss):
Utility Products $ (78,688) NA $ (206,378) NA
Contract Manufacturing (614,186) NA (375,481) NA
---------- ---------- ---------- ---------
Income from operations (692,874) NA (581,859) NA
General corporate expenses (38,089) NA 353,267 NA
Minority interest in subsidiary (33,033) NA 6,553 NA
Other income, net 32,040 NA 193,624 NA
---------- ---------- ---------- ---------
Net income (loss) from continuing
operations (655,778) NA (734,949) NA
---------- ---------- ---------- ---------
Discontinued operations, net of tax -- NA (39,372) NA
Net income (loss) $ (655,778) NA $ (774,321) NA
========== ========== ========== =========
15
ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES
Utilities Products - This segment reported an increase in revenue of $28,116 and
$3,380 with operating income being reduced by $78,688 and $206,378 for the three
and nine months ending April 30, 2006, respectively. The increase in revenue is
the result of an increase in customer demand concentrated in the three months
ended April 30, 2006. The decrease in operating profit is primarily due to
increased engineering activities to develop new products.
This segment acquired a product line that it has branded Co-Pilot (TM). This
product is used in combination with the segment's other instrumentation to allow
a gas utility operator to remotely monitor and control pressure and flow in a
gas pipeline. It also commercialized one of its product research and development
efforts, introducing a new gas odorization system branded Smart Drip (TM).
Contract Manufacturing - In this segment, revenues increased $2,355,315 and
$2,470,543 while operating profit decreased by $614,186 and $375,481 for the
three and nine months ended April 30, 2006, respectively. This is a result of a
$2.5 million dollar contract that was a significant loss to the contract
manufacturing segment. The Company entered into the contract at minimal margins
to gain the business. After the contract was finalized, significant raw material
costs increased 30% or more. The Company was unable to terminate the contract
when it was determined that the Company would sustain significant losses. The
losses were compounded when production fell behind schedule due to material
shortages and overtime was required to meet the contract demands.
On October 12, 2005, this segment was awarded a contract to manufacture and sell
Election Supply Cabinets (ESC) for a fixed price of $2,470,000. These cabinets
will be used in conjunction with new electronic voting systems recently
purchased by a major U.S. metropolitan county elections authority.
This segment has begun an initiative to enhance its sales effectiveness and
broaden its range of services offered. It is exploring opportunities to develop
or acquire proprietary products. Current facilities and capital equipment base
will support substantial increases in business.
Corporate overhead expenses increased (decreased) by ($38,089) and $353,267 for
the three and nine months ended April 30, 2006 (respectively), relative to the
corresponding three and nine month periods respectively in the prior year. The
increase in the nine months ended April 30, 2006 is primarily the result of
stock issued to employees. The reduction in overhead in the three months ended
April 30, 2006 is due to a significant effort to reduce selling, general and
administrative expenses throughout the Company.
Other income increased by $32,040 and $193,624 for the three and nine months
ended April 30, 2006 (respectively), relative to the same periods in the prior
year. The net increase is due primarily to a gain on investment the Company
recorded during the nine months ended April 30, 2006.
During the fiscal year ending July 31, 2005, the Company accepted 11,915,712
shares of Logic Metals Technology, Inc. common stock in satisfaction of debt at
a rate of $0.13 per share. This increased the position of the Company from 80%
to 98.1% ownership of Logic Metals Technology, Inc.
16
ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES
Liquidity and Capital Resources
The Company's current assets are $4,800,278 at April 30, 2006, as compared to
$2,755,969 at July 31, 2005, which is an increase of $2,044,309. Current
liabilities increased from July 31, 2005 to April 30, 2006 by $2,154,823,
contributing to a decrease in working capital (current assets less current
liabilities) to ($587,470) at April 30, 2006 as compared to ($476,956) at July
31, 2005. This is primarily the result of a significant increase in inventories
with minimal increase to current liabilities.
During fiscal year ending 2005, the IRS approved the transfer of equity of
$125,000 in the Paris, TX building and 20 acres to the Retech pension plan as a
contribution. See Note F for additional information.
The Company may seek additional private placement of its public equity.
Management believes that, if required, it can attract investment capital of up
to $2,000,000 based on the Company's business strategy. The amount of equity the
Company would offer would depend in part on share/conversion price, discount or
premium on current market share price and dilution prospects. While management
believes that, if needed, the Company could obtain the above funding, there is
no assurance that this would occur. Failure to do so could slow the growth of
the Company.
Capital Expenditures
For fiscal 2006, the Company anticipates capital expenditures in the Contract
Manufacturing segment as additional capacity is required to meet customer
requirements. The Company has budgeted approximately $200,000 for these
expenditures. During the three months ended April 30, 2006 the Company has made
approximately $100,000 in capital expenditures. The capital expenditures include
software for our existing machinery, a plasma welder and Fabrivision Quality
Laser.
The Company leases its primary facility from Interfederal. The lease agreement
includes the option for the Company to purchase the facility, which it intends
to do on or before the expiration date of the option. The terms of the option
are the purchase price is $3,600,000 and the closing costs are to be paid by the
seller exclusive of the purchaser's financing costs and the FMV appraisal. The
expiration date of the option is January 31, 2006. The option was not exercised
by the Company prior to January 31, 2006, but a six month extension was granted
by Interfederal. The Company is currently in discussions with a financing
institution to obtain financing for the purchase of the facility.
Dividend Policy
The Company's Board of Directors has declared no cash dividends since the
Company's inception. The Company does not contemplate paying cash dividends on
its common stock in the foreseeable future since it intends to utilize it cash
flow to invest in its businesses.
Other Business Matters
Inflation. The Company does not expect inflation to have an adverse effect on
its operations in the foreseeable future.
17
ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES
Information regarding and factors affecting forward-looking statements.
Forward-looking statements include statements concerning plans, objectives,
goals, strategies, future events or performances and underlying assumption and
other statements, which are other than statements of historical facts. Certain
statements contained herein are forward-looking statements and, accordingly,
involve risks and uncertainties, which could cause actual results or outcomes to
differ materially from those expressed in the forward-looking statements. The
Company's expectations, beliefs and projections are expressed in good faith and
are believed by the Company to have a reasonable basis, including without
limitations, management's examination of historical operating trends, data
contained in the Company's records and other data available from third parties,
but there can be no assurance that management's expectations, beliefs or
projections will result, or be achieved, or accomplished.
ITEM 3. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures.
The Company's principal executive and financial officers have conducted an
evaluation of the effectiveness of the Company's disclosure controls and
procedures pursuant to Rule 13a-15(b) under the Securities Exchange Act of 1934
as of a date (the "Evaluation Date") the end of the period. Based upon that
evaluation, the Company's principal executive and financial officers have
concluded that, as of the Evaluation Date, the Company's disclosure controls and
procedures were effective in ensuring that all material information relating to
the Company required to be filed in this quarterly report has been made known to
them in a timely manner.
(b) Changes in internal controls.
There have been no significant changes made in the Company's internal controls
or in other factors that has or will likely materially affect internal controls
over financial reporting.
18
ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES
PART II
ITEM 1. LEGAL PROCEEDINGS
Electric & Gas Technology, Inc., Retech, Inc. and Hydel Enterprises, Inc.
(Plaintiffs) vs. Nathan Mazurek, American Circuit Breaker Corp. and Provident
Group, Inc. (Defendants). Plaintiffs allege the non-payment of a note to Retech,
Inc. and unpaid accounts receivable to Hydel Enterprises, Inc. A settlement
agreement was reached but the defendant did not perform. Subsequently, on
November 10, 2005, the matter had been decided in a Delaware court, and the
Company has settled for $170,000. These funds were received by the Company
during the nine months ended April 30, 2006.
ELGT encourages all interested parties to use public access sources such as
PACER (http://pacer.psc.uscourts.gov/) to confirm facts related to these and any
legal proceeding.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
On January 12, 2006, the Company sold and issued three hundred seventy five
thousand (375,000) shares of Common Stock at a price of $0.60 per share and a
Warrant for the purchase of one million one hundred twenty five thousand
(1,125,000) shares of Common Stock to Vision Opportunity Master Fund, Ltd. for
the purpose of increasing working capital. These securities were issued without
registration in reliance upon the exemption provided by Section 4(2) of the
Securities Act of 1933.
The Warrant provides for the purchase of three hundred seventy five thousand
(375,000) shares of Common Stock at an exercise price of $1.00 (the Class A
Warrant), three hundred seventy five thousand (375,000) shares of Common Stock
at an exercise of $1.38 (the Class B Warrant) and three hundred seventy five
thousand (375,000) shares of Common Stock at an exercise price of $1.75 (the
Class C Warrant). All warrants have a term expiring three (3) years from the
date of issuance
In addition, an Over-Allotment Option was issued to Vision Opportunity Master
Fund, Ltd., allowing the Holder the right to acquire, (a) up to an additional
357,000 shares of Common Stock (subject to adjustment as a result of stock
splits, stock dividends and other similar events) at a price per share of $0.60
and (b) a warrant to purchase a number of shares of Common Stock equal to the
number of Additional Shares acquired upon exercise of such right at an exercise
price of $1.38 per share. The Holder may exercise such right, in whole or in
part, at any time during the period commencing on the Closing Date and ending on
the date that is four (4) months after the date that the registration statement
covering the Warrant Stock and the shares of capital stock of the Company issued
pursuant to the Purchase Agreement is declared effective.
On March 24, 2006, the Company issued one hundred ninety two thousand three
hundred seven (192,307) shares of Common Stock as full satisfaction of a bridge
loan. These securities were issued without registration in reliance upon the
exemption provided by Section 4(2) of the Securities Act of 1933.
19
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
20
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 31.1 - Certification of President and Chief Executive Officer of
Electric & Gas Technology, Inc. and Subsidiaries required by Rule 13a - 14(1) or
Rule 15d - 14(a) of the Securities Exchange Act of 1934, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
Exhibit 31.2 - Certification of Chief Financial Officer of Electric & Gas
Technology, Inc. and Subsidiaries required by Rule 13a - 14(1) or Rule 15d -
14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
Exhibit 32.1 -- Certification of President and Chief Executive Officer of
Electric & Gas Technology, Inc. and Subsidiaries pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 and Section 1350 of 18 U.S.C. 63.
Exhibit 32.2 -- Certification of Chief Financial Officer of Electric & Gas
Technology, Inc. and Subsidiaries pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 and Section 1350 of 18 U.S.C. 63.
(b) Reports on Form 8-K.
On March 24, 2006, the Company issued one hundred ninety two thousand three
hundred seven (192,307) shares of Common Stock as full satisfaction of a bridge
loan. These securities were issued without registration in reliance upon the
exemption provided by Section 4(2) of the Securities Act of 1933.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ELECTRIC & GAS TECHNOLOGY, INC.
/s/ Daniel A. Zimmerman
- -----------------------
Daniel A. Zimmerman
President and
Chief Executive Officer
Dated: June 19, 2006
21