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: January 31, 2007
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 January 31, 2007:
Common - $0.01 Par Value - 8,599,461
ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES
Index to Form 10-QSB
For the Quarter Ended January 31, 2007
Part I - Financial Information
The accompanying condensed consolidated financial statements have not
been reviewed by our auditors.
Item 1. Condensed Consolidated Financial Statements: Page
(a) Condensed Consolidated Balance Sheets at January 31, 2007
(unaudited) and July 31, 2006 3
(b) Condensed Consolidated Statements of Income for the three and
six months ended January 31, 2007 (unaudited) and January 31, 2006
(unaudited) 4
(c) Condensed Consolidated Statement of Changes in Stockholders'
Deficit for the six months ended January 31, 2007 (unaudited) 5
(d) Condensed Consolidated Statements of Cash Flows for the six
months ended January 31, 2007 (unaudited) and January 31, 2006
(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 14-17
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 19
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
Certifications 22-25
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
(Unaudited)
January 31, 2007 July 31, 2006
---------------- -------------
(Unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 1,934 $ 536,723
Accounts receivable, net 984,978 1,774,113
Inventories 2,131,010 2,197,959
Prepaid expenses 49,952 111,958
Other assets - current 23,894 -
------------- ------------
Total current assets 3,191,768 4,620,753
------------- ------------
PROPERTY, PLANT AND EQUIPMENT, net 4,674,104 5,122,453
------------- ------------
OTHER ASSETS
Certificates of deposit, pledged 100,000 100,000
Assets held for sale 349,149 344,831
Other assets 302,886 152,449
------------- ------------
Total other 752,035 597,280
------------- ------------
TOTAL ASSETS $ 8,617,907 $ 10,340,486
============= ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Notes payable $ 860,898 $ 1,473,533
Accounts payable 1,627,354 2,293,119
Accrued liabilities 735,072 674,400
Note payable to affiliate 411,432 493,595
Payable to officers 67,100 -
Current maturities of long-term obligations 311,054 324,003
Current portion of minimum pension liability 288,499 288,499
Liabilities of discontinued operations 71,608 71,608
------------- -----------
Total current liabilities 4,373,017 5,618,757
------------- -----------
LONG-TERM OBLIGATIONS
Long-term obligations, less current maturities 4,271,391 4,411,430
Minimum pension liability 925,043 898,043
------------- -----------
Total long-term obligations 5,196,434 5,309,473
------------- -----------
STOCKHOLDERS' DEFICIT
Preferred stock, $10 par value, 5,000,000 shares authorized, none
issued
Common stock, $.01 par value, 30,000,000 shares authorized,
issued 8,599,461 and 8,242,461 shares respectively 85,995 82,425
Additional paid-in capital 10,365,959 10,242,469
Accumulated deficit (10,243,956) (9,753,096)
Accumulated comprehensive losses (1,159,542) (1,159,542)
-------------- ------------
Total stockholders' deficit (951,544) (587,744)
-------------- ------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 8,617,907 $10,340,486
============== ============
See accompanying notes to the condensed consolidated financial statements.
3
ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three months ended Six months ended
January 31, January 31,
--------------------------------------------------------------------
2007 2006 2007 2006
------------ ------------ ------------ ------------
Sales $ 1,887,292 $ 2,780,294 $ 4,016,096 $ 4,701,407
Cost of goods sold 1,504,546 1,584,940 3,111,058 3,189,663
--------------------------------------------------------------------
Gross profit 382,746 1,195,354 905,038 1,511,744
Selling, general and administrative expenses 536,845 887,489 1,225,579 1,506,389
--------------------------------------------------------------------
Income from operations (154,099) 307,865 (320,541) 5,355
--------------------------------------------------------------------
Other income (expense)
Interest (81,051) (71,246) (180,304) (133,313)
Settlement of civil action - - - 170,000
Other income (expense), net 3,025 (1,970) (10,430) (2,352)
--------------------------------------------------------------------
Total other income (expense) (78,026) (73,216) (169,874) 34,335
--------------------------------------------------------------------
Net income(loss) from continuing operations before minority
interest (232,125 ) 234,649 (490,415) 39,690
Minority interest in subsidiary - (16,512) - (13,306)
--------------------------------------------------------------------
Net income(loss) $ (232,125) $ 218,137 $ (490,415) $ 26,384
====================================================================
Basic earnings per common share:
Net income(loss) $ (0.03) $ 0.03 $ (0.06) $
====================================================================
Weighted average common shares outstanding 8,599,461 7,399,588 8,420,961 7,399,588
====================================================================
See accompanying notes to condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
For the six months ended January 31, 2007
(Unaudited)
Common Accumulated
Stock Other
Shares Common Paid-in Accumulated Comprehensive
Issued stock Capital Deficit Losses Total
--------- --------- ---------- ----------- ------------- ------------
Balance at July 31, 2006 8,242,461 $ 82,425 $10,242,469 $ (9,753,096) $(1,159,542) $ (587,744)
Stock issued for cash 357,000 3,570 210,630 - - 214,200
Net loss - - - (490,415) - (490,415)
--------- -------- ----------- ------------- ------------ ------------
Balance at January 31, 2007 8,599,461 $ 85,995 $10,453,099 $(10,243,956) $(1,159,542) $ (951,544)
========= ======== =========== ============= ============ ============
See accompanying notes to condensed consolidated financial statements.
4
ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six months ended January 31,
Cash flows from operating activities: 2007 2006
--------------- ---------------
Net income $ (490,415) $ 26,384
Discontinued operations, net of tax - -
--------------- ---------------
Net income(loss) from continuing operations (490,415) 26,384
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation of property, plant and equipment 234,705 175,678
Common stock issued for interest on notes - 18,275
Common stock issued for services - 131,750
Changes in operating assets and liabilities:
Accounts receivable 789,135 (864,190)
Inventories 66,949 (1,573,151)
Prepaid expenses 38,112 (45,475)
Other assets (150,437) (88,153)
Accounts payable (452,566) 1,124,821
Customer deposits - 434,004
Accrued liabilities 34,272 157,523
Accrued pension plan 27,000 26,000
--------------- ---------------
Net cash used in operating activities 96,755 (476,534)
--------------- ---------------
Cash flows from investing activities:
Purchase of equipment - (130,404)
Investments in affiliates (82,163) 43,708
Certificates of deposits - 1,970
--------------- ---------------
Net cash used in investing activities (82,163) (84,726)
--------------- ---------------
Cash flows from financing activities:
Proceeds for issuance of common stock and warrants 126,460 225,000
Proceeds from officer 67,100 (20,135)
Payments on long-term obligations (152,988) (22,382)
Net change on notes payable (612,635) 265,729
Minority interest in subsidiary - 13,306
--------------- ---------------
Net cash provided by (used in) financing activities (572,063) 461,518
--------------- ---------------
Net cash provided by discontinued operations - -
--------------- ---------------
Net increase (decrease) in cash and cash equivalents (534,789) (99,742)
Cash and cash equivalents - beginning of period 536,723 200,455
--------------- ---------------
Cash and cash equivalents - end of period $ 1,934 $ 354,689
=============== ===============
Supplemental disclosures of cash flow information:
Cash paid during the period for interest $ 180,304 $ 149,816
--------------- ---------------
See accompanying notes to condensed consolidated financial statements.
5
ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES
NOTE A - BUSINESS AND BASIS OF PRESENTATION
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 its operations, including corporate
staff, into a single facility containing 144,000 square feet, which it already
occupied. 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.
The Company presently is the owner of 100% of Reynolds Equipment, Inc.
(Reynolds) and 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, industry
standard 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 the Company and, to a lesser degree,
through some manufacturers' representatives.
LMT, operating in the Contract Manufacturing sector, 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. The Company uses some manufacturer's representatives,
but has primarily grown the revenue from existing customers. Raw material
generally consists of standard sheet metal and general purpose fittings and
connectors available from general hardware and steel distributors. Currently,
the Company has two customers that represented over 39% and 16% of its total
revenue for the six months ended January 31, 2007.
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
accompanying financial statements reflect all adjustments of a
6
ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES
NOTE A - BUSINESS AND BASIS OF PRESENTATION (continued)
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 - INVENTORIES
Inventories are comprised as follows:
January 31, 2007 July 31, 2006
---------------- -------------
Raw materials $ 740,343 $ 939,848
Work in process 202,403 220,717
Finished goods 1,378,264 1,197,394
-------------- --------------
Allowance for obsolescence (190,000) (160,000)
-------------- --------------
Total inventory $ 2,131,010 $ 2,197,959
============== ==============
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.
7
ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES
On September 20, 2006, the Company entered into an agreement to borrow $125,000
bearing interest at 12%, maturing on March 20, 2007 from an individual third
party accredited investor.
NOTE C - 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.
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 $322,389 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.
The total carrying value of the assets held for sale as of January 31, 2007 is
the net book value of $344,831 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. As of March 22, 2007,
the Company has a contract for the sale of the building located at 410 South
Kirby Street, in Garland, Texas. The offered price is $447,000, and the Company
expects expenses to be approximately $77,000. This contract is cancelable, and
the buyer may not perform, or may not be able to secure financing to complete
the transaction.
The following is the carrying value of assets held for sale and the
corresponding liabilities at January 31, 2007.
Carrying Current Long-term Total
value liabilities liabilities Liabilities
-------- ----------- ----------- -----------
Paris building $ 324,234 $ 22,761 $ 236,558 $ 259,319
Garland building 20,597 9,861 316,441 326,302
------------ ----------- ------------- ------------
Total $ 344,831 $ 32,622 $ 552,999 $ 585,621
============ =========== ============= ============
NOTE D - 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.
8
ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES
NOTE D - CONTINGENCIES (continued)
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 three months ended October 31, 2005 the Company recorded
and subsequently received $170,000 in settlement.
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, 2006, the date of the last actuarial valuation,
was $898,043, resulting in a stockholders' equity reduction of $1,159,542.
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.
9
ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES
NOTE E - 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 Six months ended
January 31, January 31,
2007 2006 2007 2006
------------- ------------- ------------- -------------
Operating revenues:
Utility Products $ 243,974 $ 513,146 $ 716,997 $ 1,031,973
Contract Manufacturing 1,644,464 2,267,188 3,300,245 3,669,534
------------- ------------- ------------- -------------
Total sales $ 1,888,438 $ 2,780,294 $ 4,017,242 $ 4,701,407
============= ============= ============= =============
Operating income (loss):
Utility Products $ (111,297) $ (152,687) $ (113,970) $ (170,942)
Contract Manufacturing 356,428 838,439 403,463 696,689
------------- ------------- ------------- -------------
Income from operations 245,131 685,752 289,493 525,747
General corporate expenses (345,235) (377,887) (556,039) (520,392)
Minority interest in subsidiary - (16,512) - (13,306)
Total other income (expense) (232,125) (73,216) (223,869) 34,335
------------- ------------- ------------- -------------
Net income $ (232,125) $ 218,137 $ (490,415) $ 26,384
============= ============= ============= =============
NOTE F - RELATED PARTY TRANSACTIONS
The following is a summary of advances to and from affiliated companies included
in other assets at January 31, 2007 and July 31, 2006:
January 31, 2007 July 31, 2006
---------------- -------------
Net Due To Affiliates -
Interfederal Capital, Inc. $ 411,432 $ 493,595
========== ==========
Net Payable to Officers $ 67,100 -
========== ==========
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.
10
ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES
NOTE F - RELATED PARTY TRANSACTIONS (continued)
The following is a summary of advances to and from affiliated companies included
in other assets at October 31, 2006 and July 31, 2006:
October 31, 2006 July 31, 2006
---------------- -------------
Net Due To Affiliates -
Interfederal Capital, Inc. $ 411,432 $ 493,595
========== ==========
Net Payable to Officers $ 67,100 $ -
========== ==========
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. Interfederal has loaned the Company $493,595 as of July 31, 2006.
Interfederal, S. Mort Zimmerman individually and/or Daniel A. Zimmerman
individually have guaranteed the Company's lines of credit, real estate and
equipment loans that were obtained during the years ended July 31, 2003, 2005
and 2006.
The Company has a payable of $67,100 that is due to Daniel A. Zimmerman as of
January 31, 2007 which was 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 January 31, 2007
and July 31, 2006.
NOTE G - 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.
11
ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES
NOTE H - SUBSEQUENT EVENTS
None.
NOTE I - 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.
12
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 $1,888,438 and $4,017,242 for the
three and six months ended January 31, 2007, respectively. This compares to
revenues of $2,780,334 and $4,701,507 for the same periods in 2006. The decrease
in revenue is primarily attributed to an decrease in customer demand in both
segments of the business.
Total other expense of $132,021 and $223,869 for the three and six months ended
January 31, 2007, respectively, was reported by the Company. This compares to
the total other income (expense) of ($73,216) and $34,335 for the same periods
in 2006. The significant increase in the six months ended January 31, 2007 is
due primarily to a gain on a one time settlement of a civil action during the
first quarter of 2006.
The Company reported a net loss from continuing operations of $232,125 and
$490,415 for the three and six months ended January 31, 2007, respectively. This
compares to a net income from continuing operations of $218,137 and $26,384 for
the same periods in 2006. The decreases in income from continuing operations is
due primarily to a decrease in revenues during the period.
Gross margins for the Company decreased from 42.99% and 32.16% for the three and
six months ended January 31, 2006, respectively, to 20.28% and 22.59% for the
three and six months ended January 31, 2007, respectively. Gross margins
decreased as the result of receiving orders with lower gross margin.
13
ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES
Selling, general and administrative expenses as a percent of revenues decreased
from 31.92% and 32.04% for the three and six months ended January 31, 2006,
respectively to 28.45% and 30.49% for the three and six months ended January 31,
2007, respectively. The change for the six months is a result of an decrease in
expenses due to the issuance of stock to employees in 2006, while none was
issued in 2007.
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 previous period:
Three months ended Six months ended
January 31, 2007 January 31, 2007
Increase/ Percent Increase/ Percent
(Decrease) (Decrease)
--------------- --------------- --------------- ---------------
Operating revenue:
Utility Products $ (269,172) (52.46%) $ (314,976) (30.52%)
Contract Manufacturing (622,724) (27.47%) (369,289) (10.06%)
--------------- --------------- --------------- ---------------
Total sales $ (891,896) (32.08%) $ (684,265) (14.55%)
=============== =============== =============== ===============
Operating income (loss):
Utility Products $ 41,390 27.11% $ 56,972 (33.33%)
Contract Manufacturing (482,011) (57.49%) (293,226) (42.06%)
--------------- --------------- --------------- ---------------
Income from operations (440,621) (64.25%) (236,254) (44.94%)
General corporate expenses 32,652 8.64% (35,647) 6.85%
Minority interest in subsidiary 16,512 - 13,306 -
Other income, net (58,805) 80.32% (258,204) (752.01%)
--------------- --------------- --------------- ---------------
Net income (loss) $ (450,262) (206.41%) $ (516,799) (1,958.76%)
=============== =============== =============== ===============
Utilities Products - This segment reported a decrease in revenue of $269,172 and
$314,976 with operating income being reduced by $41 and ($127,690) for the three
and six months ending January 31, 2006, respectively. The increase in revenue
for the three months ended was the result of an increase in customer demand
concentrated in the three months ended January 31, 2006. The decrease in
operating profit is primarily due to increased engineering activities to develop
new products.
14
ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES
Contract Manufacturing - In this segment, revenues decreased $622,724 and
$369,289 while operating loss increased by $482,011 and $293,226 for the three
and six months ended January 31, 2007, respectively. The decreases in revenue
were due primarily to the reduction in revenue from the $2.5 million contract
awarded to this segment in 2006, of which, $0.8 million in revenues was
recognized during the three months ended January 31, 2006.
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 ($32,652) and $35,647 for
the three and six months ended January 31, 2007 (respectively), relative to the
corresponding three and six month periods respectively in the prior year. These
changes reflect the reduction in staff, offset by the cost of the building and
contract manufacturing management costs in the corporate entity.
Other income decreased by $58,805 and $258,204 for the three and six months
ended January 31, 2007 (respectively), relative to the same periods in the prior
year. The net decrease is due primarily to a gain on investment the Company
recorded during the six months ended January 31, 2006 which was a one time
opportunity.
Liquidity and Capital Resources
The Company's current assets are $3,191,768 at January 31, 2007, as compared to
$4,620,753 at July 31, 2006, which is an decrease of $1,428,985. Current
liabilities decreased from July 31, 2006 to January 31, 2007 by $1,245,740,
contributing to a decrease in working capital (current assets less current
liabilities) to ($1,181,249) at January 31, 2007 as compared to ($998,004) at
July 31, 2006. This is primarily the result of increases in losses.
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.
15
ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES
Capital Expenditures
For fiscal 2007, the Company anticipates no significant capital expenditures.
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.
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.
16
ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES
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.
17
ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES
PART II
ITEM 1. LEGAL PROCEEDINGS
None.
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 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
18
ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES
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 January 12, 2006, the Company filed a form 8-K disclosing that is had
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.
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: March 23, 2007
19