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, 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 April 30, 2007: Common - $0.01 Par Value - 8,599,461 ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES Index to Form 10-QSB For the Quarter Ended April 30, 2007 Part I - Financial Information Page The accompanying condensed consolidated financial statements have not been reviewed by our auditors. Item 1. Condensed Consolidated Financial Statements: (a) Condensed Consolidated Balance Sheets at April 30, 2007 (unaudited)and July 31, 2006 3 (b) Condensed Consolidated Statements of Income for the three and nine months ended April 30, 2007 (unaudited) and April 30, 2006 (unaudited) 4 (c) Condensed Consolidated Statement of Changes in Stockholders' Deficit for the nine months ended April 30, 2007 (unaudited) 5 (d) Condensed Consolidated Statements of Cash Flows for the nine months ended April 30, 2007 (unaudited) and April 30, 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 19 Item 5. Other Information 19 Item 6. Exhibits and Reports on Form 8-K 20 Signature (Pursuant to General Instruction E) 20 Certifications 21-24 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) April 30, 2007 July 31, 2006 -------------- ------------- ASSETS (Unaudited) CURRENT ASSETS Cash and cash equivalents $ -- $ 536,723 Accounts receivable, net 809,239 1,774,113 Inventories 1,703,311 2,197,959 Prepaid expenses 43,814 111,958 Other assets - current 5,557 -- ------------- ------------- Total current assets 2,561,921 4,620,753 ------------- ------------- PROPERTY, PLANT AND EQUIPMENT, net 4,900,948 5,122,453 OTHER ASSETS Certificates of deposit, pledged -- 100,000 Assets held for sale 324,235 344,831 Other assets 284,989 152,449 ------------- ------------- Total other 609,224 597,280 ------------- ------------- TOTAL ASSETS $ 8,072,093 $ 10,340,486 LIABILITIES AND STOCKHOLDERS' DEFICIT ============= ============= CURRENT LIABILITIES Notes payable $ 701,849 $ 1,473,533 Accounts payable 1,937,237 2,293,119 Accrued liabilities 904,332 674,400 Note payable to affiliate 456,849 493,595 Current maturities of long-term obligations 307,140 324,003 Current portion of minimum pension liability 288,499 288,499 Liabilities of discontinued operations 71,608 71,608 ------------- ------------- Total current liabilities 4,667,514 5,618,757 LONG-TERM OBLIGATIONS ------------- ------------- Long-term obligations, less current maturities 3,903,566 4,411,430 Minimum pension liability 952,043 898,043 ------------- ------------- Total long-term obligations 4,855,609 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 10,453,099 10,242,469 Accumulated deficit (10,830,582) (9,753,096) Accumulated comprehensive losses (1,159,542) (1,159,542) ------------- ------------- Total stockholders' deficit (1,451,030) (587,744) ------------- ------------- TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 8,072,093 $ 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 Nine months ended April 30, April 30, 2007 2006 2007 2006 -------------------------------------------------------- Sales $ 1,508,294 $ 4,407,431 $ 5,524,390 $ 9,108,838 Cost of goods sold 1,839,746 4,446,277 4,950,804 7,635,940 -------------------------------------------------------- Gross profit (331,452) (38,846) 573,586 1,472,898 Selling, general and administrative expenses 514,142 624,944 1,739,721 2,131,333 -------------------------------------------------------- Income from operations (845,594) (663,790) (1,166,135) (658,435) -------------------------------------------------------- Other income (expense) Interest (104,781) (99,630) (285,085) (232,943) Gain on sale of assets 369,827 73,281 369,827 73,281 Settlement of civil action -- -- -- 170,000 Loss on investments -- (1,9710) Other income (expense), net (6,523) 24,760 3,907 24,378 -------------------------------------------------------- Total other income (expense) 258,523 (1,589) 88,649 32,745 -------------------------------------------------------- Net income(loss) from continuing operations before minority interest minority interest (587,071) (665,379) (1,077,486) 32,746 Minority interest in subsidiary -- 11,229 -- (2,077) -------------------------------------------------------- Net income(loss) $ (587,071) $ (654,150) $(1,077,486) $ (627,766) ======================================================== Basic earnings per common share: Loss from continuing operations N/A $ (0.09) N/A $ (0.08) Net income(loss) $ (0.07) $ (0.09) $ (0.13) $ (0.08) ======================================================== 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, 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 -- -- -- (1,077,486) -- (1,077,486) ------------ ------------ ------------ ------------ ------------ ------------ Balance at April 30, 2007 8,599,461 $ 85,995 $ 10,453,099 $(10,830,582) $ (1,159,542) $ (1,451,030) ============ ============ ============ ============ ============ ============ 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, --------------------------- Cash flows from operating activities: 2007 2006 ------------ ----------- Net income $(1,077,486) $ (627,766) Adjustments to reconcile net income to net cash used in operating activities: Depreciation of property, plant and equipment 353,720 266,708 Gain on sale of assets (369,827) -- Common stock issued for services -- 211,167 Changes in operating assets and liabilities: Accounts receivable 964,874 (739,852) Inventories 494,648 (1,343,134) Prepaid expenses 62,587 (95,851) Other assets (132,540) (86,296) Accounts payable (355,882) 1,313,120 Customer deposits -- 130,000 Accrued liabilities 229,932 199,386 Accrued pension plan 54,000 53,000 ------------ ----------- Net cash used in operating activities (224,026) (719,518) ------------ ----------- Cash flows from investing activities: Purchase of equipment (132,215) (295,154) Proceeds from sale of Kirby Building 390,423 -- Investments in affiliates (36,746) 61,997 Idle facility -- (4,375) Certificates of deposits 100,000 1,970 ------------ ----------- Net cash used in investing activities 321,462 (235,562) ------------ ----------- Cash flows from financing activities: Proceeds for issuance of common stock and warrants 214,200 225,000 Proceeds from officer -- (13,416) Payments on long-term obligations (524,727) (122) Net change on notes payable (771,684) 542,207 Minority interest in subsidiary -- 2,077 Net cash provided by (used in) financing activities (1,082,211) 755,746 ------------ ----------- Net increase (decrease) in cash and cash equivalents (536,723) (199,334) Cash and cash equivalents - beginning of period 536,723 200,455 ============ =========== Cash and cash equivalents - end of period $ -- $ 1,121 ============ =========== Supplemental disclosures of cash flow information: Cash paid during the period for interest $ 285,085 $ 232,985 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 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 three customers that represented over 45%, 8% and 6% of its total revenue for the quarter ended April 30, 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 normal recurring nature, which are, in the opinion of management, necessary for a fair statement of the results of operations for the interim periods. 7 ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES NOTE A - BUSINESS AND BASIS OF PRESENTATION (continued) 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, 2007 and 2006, weighted average common stock shares outstanding totaled 8,480,461 and 7,630,825, respectively. NOTE C - INVENTORIES Inventories are comprised as follows: April 30, 2007 July 31, 2006 -------------- ------------- Raw materials $ 651,188 $ 939,848 Work in process 278,474 220,717 Finished goods 853,649 1,197,394 -------------- ------------- Allowance for obsolescence (80,000) (160,000) -------------- ------------- Total inventory $ 1,703,311 $ 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. In the quarter ended April 30, 2007 the amount of $359,219 was written off as obsolete or slow moving and subsequently destroyed and or sold for scrap. Additional write downs will be recorded in the fourth quarter. 8 ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES NOTE D- NOTES PAYABLE AND LONG-TERM OBLIGATIONS 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 has sold the former Reynolds occupied and owned building situated on 40,000 square feet of land in Garland, Texas. The building was sold for $475,000 providing a gain on sale of $369,827 and paying the balance on a note for which the building was held as security. The total carrying value of the assets held for sale as of April 30, 2007 is the net book value of $324,235 and is included in other assets. Based on appraisals and independent comparative sales reports, the Company believes that the fair market value for these assets exceeds $350,000. As of April 30, 2007, the Company is in default on the SBA loan on the property located in Paris, Texas and expects the value of the land to be approximately the value of the note in default. The following is the carrying value of assets held for sale and the corresponding liabilities at April 30, 2007. Carrying Current Long-term Total value liabilities liabilities Liabilities ----------- ----------- ----------- ----------- Paris building $ 324,235 $ 22,761 $ 243,264 $ 266,025 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 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. 9 ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES 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. 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, 2007 2006 2007 2006 ----------- ----------- ----------- ----------- Operating revenues: Utility Products $ 348,301 $ 533,264 $ 1,065,298 $ 1,565,137 Contract Manufacturing 1,158,847 3,874,167 4,459,092 7,543,701 ----------- ----------- ----------- ----------- Total sales $ 1,507,148 $ 4,407,431 $ 5,524,390 $ 9,108,838 =========== =========== =========== =========== Operating income (loss): Utility Products $ (361,955) $ (150,981) $ (475,890) $ (321,923) Contract Manufacturing (233,955) (370,997) 169,508 325,692 ----------- ----------- ----------- ----------- Income from operations (595,875) (521,978) (306,382) 3,769 General corporate expenses (249,719) (141,812) (859,753) (662,204) Minority interest in subsidiary -- 11,229 -- (2,077) Total other income (expense) 258,523 (1,589) 88,649 32,746 ----------- ----------- ----------- ----------- Net income $ (587,071) $ (654,150) $(1,077,486) $ (627,766) =========== =========== =========== =========== NOTE H - RELATED PARTY TRANSACTIONS The following is a summary of advances to and from affiliated companies included in other assets at April 30, 2007 and July 31, 2006: April 30, 2007 July 31, 2006 Net Due To Affiliates - Interfederal Capital, Inc. $ 456,849 $ 493,595 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. 11 ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES 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 $456,849 as of April 30, 2007. 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 had 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 was being serviced by Glauber Management, an affiliate of DOL. The note was paid during the period ending April 30, 2007. 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. NOTE J - SUBSEQUENT EVENTS 12 ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES NOTE K - 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 $1,507,148 and $4,017,242 for the three and nine months ended April 30, 2007, respectively. This compares to revenues of $4,407,431 and $9,108,838 for the same periods in 2006. The increase in revenue is primarily attributed to an increase in customer demand, especially in the Contract Manufacturing segment. Total other income of $258,523 and $88,649 for the three and nine months ended April 30, 2007, respectively, was reported by the Company. This compares to the total other income (expense) of $(1,589) and $32,746 for the same periods in 2006. The significant increase in the three and nine months ended April 30, 2007 is due primarily to a gain on the sale of the building and land on Kirby Street. The Company reported a net loss of $587,071 and $1,077,486 for the three and nine months ended April 30, 2007, respectively. This compares to a net loss of $654,150 and $627,766 for the same periods in 2006. The three month decrease in loss is due to the gain on sale of the building on Kirby street offset by a write down of excess and obsolete inventory of $359,219. The increase in loss for the nine months is due primarily to the write down for excess and obsolete inventory, increased selling, general and administrative expenses offset by the gain on sale of building on Kirby Street. Gross margins for the Company decreased from (0.88%) and 16.17% for the three and nine months ended April 30, 2007, respectively, to (21.98%) and 10.38% for the three and nine months ended April 30, 2007, respectively. Gross margins decreased as the result of the write down of inventory for excess and obsolescence of approximately $359,219. Inventories have decreased in raw materials, and finished goods during the nine months ended April 30, 2007. The decrease in inventories is a result of a $359,219 write down of inventory to allow for excess and obsolescence. 14 ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES Selling, general and administrative expenses as a percent of revenues increased from 14.18% and 23.40% for the three and nine months ended April 30, 2007, respectively to 34.09% and 31.49% for the three and nine months ended April 30, 2007, respectively. The change for the nine months is a result of the significant decrease in sales. 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 Nine months ended April 30, 2007 April 30, 2007 Increase/ (Decrease) Percent Increase/ (Decrease) Percent ------------- ------------- ------------- ------------- Operating revenue: Utility Products $ (184,963) (34.69%) $ (499,839) (31.94%) Contract Manufacturing (2,714,174) (70.06%) (3,084,609) (40.89%) ------------- ------------- ------------- ------------- Total sales $ (2,899,137) (65.78%) $ (3,584,448) (39.35%) ============= ============= ============= ============= Operating income (loss): Utility Products $ (210,939) NA $ (153,967) NA Contract Manufacturing 137,042 NA (156,184) NA ------------- ------------- ------------- ------------- Income from operations (73,897) NA (310,151) NA General corporate expenses 107,907 NA 310,151 NA Minority interest in subsidiary (11,229) NA 2,077 NA Other income, net 260,112 NA 55,903 NA ------------- ------------- ------------- ------------- Net income (loss) $ 67,079 NA $ (118,543) NA ============= ============= ============= ============= Utilities Products - This segment reported a decrease in revenue of $184,963 and $499,839 with operating income being reduced by $210,939 and $153,967 for the three and nine months ending April 30, 2007, respectively. The decrease in revenue was the result of a decrease in customer demand due to changes in the existing product end markets. The decrease in operating profit is due primarily to decreased sales and write off of inventory for salability and obsolescence. 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). 15 ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES Contract Manufacturing - In this segment, revenues decreased $2,714,174 and $3,084,609 while operating profit increased/(decreased) by $137,042 and ($156,184) for the three and nine months ended April 30, 2007, respectively. These decreases in revenue were due primarily to the additional revenue from the $2.5 million contract awarded to this segment, of which, $0.8 million in revenues was recognized during the three months ended April 30, 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 by $107,907 and $197,549 for the three and nine months ended April 30, 2007 respectively, in comparison to the corresponding three and six month periods in the prior year. This increase is primarily the result of requirements of the Sarbanes-Oxley act. Other income increased by $260,112 and $55,903 for the three and nine months ended April 30, 2007 respectively, relative to the same periods in the prior year. The net increase is due primarily to a gain on the sale of the building on Kirby street, offset by increased interest expense during the nine months ended April 30, 2007. During the fiscal year ending July 31, 2006, the Company accepted the outstanding shares of Logic Metals Technology, Inc. common stock in exchange for 60,000 shares of the Company's common stock. This increased the position of the Company from 98.1% to 100.0% ownership of Logic Metals Technology, Inc. Liquidity and Capital Resources The Company's current assets are $2,561,921 at April 30, 2007, as compared to $4,620,753 at July 31, 2006, which is a decrease of $2,058,832. Current liabilities decreased from July 31, 2006 to April 30, 2007 by $951,243, contributing to a decrease in working capital (current assets less current liabilities) to ($2,105,493) at April 30, 2007 as compared to ($998,004) at July 31, 2006. This is primarily the result of a significant decrease in current assets consisting of decreases in cash and equivalents, accounts receivable and inventories with a smaller decrease to current liabilities. 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. 16 ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES Capital Expenditures For fiscal 2007, the Company anticipates no additional 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. 17 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. 18 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 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS None. ITEM 3. DEFAULTS UPON SENIOR SECURITIES The Compnay has received notice of default on a loan secured by the Paris. Texas property. The principal and interest due at April 30, 2007 is $266,000. The Company is negotiating with two interested third parties and the lender to sell the property. In the event that a sale is not consummated the Company will write off the carrying value of the property in the fourth quarter. An unsecured promissory note in the amount of $125,000 from an accredited investor matured on March 18, 2007. The principal and interest is past due. The company is endeavoring to restructure the note to the satisfaction of the lender. ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS None. ITEM 5. OTHER INFORMATION None. 19 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: June 19, 2007 20