================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended JUNE 30, 2008
or
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from _______________ to _______________
Commission file number 000-51859
ELECTRONIC SENSOR TECHNOLOGY, INC.
(Exact name of registrant as specified in its charter)
NEVADA 98-0372780
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1077 Business Center Drive
Newbury Park, California 91320
(Address of principal executive offices)
(805) 480-1994
(Issuer's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer,
an accelerated filer, a non-accelerated filer, or a smaller reporting company.
See the definitions of "large accelerated filer," "accelerated filer" and
"smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer [ ] Accelerated filer [ ]
Non-accelerated filer [ ] Smaller reporting company [X]
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
155,853,385 shares of commonstock as of August 7, 2008
================================================================================
Certain statements in this quarterly report on Form 10-Q, including those
relating to the company's plans regarding business and product development;
product sales and distribution; market demands and developments in the homeland
security, analytical instrumentation/quality control and environmental
monitoring markets; and the sufficiency of the company's resources to satisfy
operation cash requirements are forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. These forward-looking statements
may contain the words "believe," "anticipate," "expect," "predict," "estimate,"
"project," "will be," "will continue," "will likely result," or other similar
words and phrases. Risks and uncertainties exist that may cause results to
differ materially from those set forth in these forward-looking statements.
Factors that could cause the anticipated results to differ from those described
in the forward-looking statements include: risks related to changes in
technology, our dependence on key personnel, our ability to protect our
intellectual property rights, emergence of future competitors, changes in our
largest customer's business and government regulation of homeland security
companies. The forward-looking statements speak only as of the date they are
made. We do not undertake to update forward-looking statements to reflect
circumstances or events that occur after the date the forward-looking statements
are made.
PART I.
FINANCIAL INFORMATION
Item 1. Financial Statements.
INDEX TO FINANCIAL STATEMENTS
Consolidated Balance Sheet (Unaudited) as of June 30, 2008 F-1
Consolidated Statements of Operations (Unaudited) for the
Three and Six Months Ended June 30, 2008 and 2007 F-2
Consolidated Statements of Cash Flows (Unaudited) for the
Three and Six Months Ended June 30, 2008 and 2007 F-3
Notes to Consolidated Financial Statements (unaudited) F-4
1
ELECTRONIC SENSOR TECHNOLOGY, INC.
CONSOLIDATED BALANCE SHEET
June 30, December 31,
2008 2007
------------ ------------
(Unaudited) (Audited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,347,286 $ 248,587
Certificate of deposit-restricted 12,384 12,384
Accounts receivable, net 189,237 281,400
Prepaid expenses 195,618 80,761
Inventories 879,022 818,989
------------ ------------
TOTAL CURRENT ASSETS 2,623,547 1,442,121
------------ ------------
DEFERRED FINANCING COSTS, net - 347,967
PROPERTY AND EQUIPMENT, net 142,448 174,111
SECURITY DEPOSITS 12,817 12,817
------------ ------------
$ 2,778,812 $ 1,977,016
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 747,652 $ 520,685
Deferred revenues 16,667 41,667
Derivative liabilities - 2,376,543
Convertible debentures - current portion - 2,333,333
Obligation under capital lease due within
one year 18,919 17,875
------------ ------------
TOTAL CURRENT LIABILITIES 783,238 5,290,103
------------ ------------
CONVERTIBLE DEBENTURES - long-term portion, net
of unamortized discount 1,945,323 2,527,777
LONG-TERM OBLIGATION UNDER CAPITAL LEASE 26,879 36,607
------------ ------------
TOTAL LIABILITIES 2,755,440 7,854,487
------------ ------------
STOCKHOLDERS' EQUITY
Preferred stock, $.001 par value 50,000,000
shares authorized, none issued and outstanding - -
Common stock, $.001 par value 200,000,000 shares
authorized, 155,853,385 issued and outstanding 155,854 56,756
Additional paid-in capital 15,133,341 8,939,562
Accumulated deficit (15,265,823) (14,873,789)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 23,372 (5,877,471)
------------ ------------
$ 2,778,812 $ 1,977,016
============ ============
See unaudited notes to consolidated financial statements
F-1
ELECTRONIC SENSOR TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Six Months Ended Three Months Ended
June 30, June 30,
------------------------------ ------------------------------
2008 2007 2008 2007
------------- ------------- ------------- -------------
REVENUES $ 759,642 $ 1,167,778 $ 366,109 $ 690,504
COST OF SALES 460,644 585,105 232,503 331,262
------------- ------------- ------------- -------------
GROSS PROFIT 298,998 582,673 133,606 359,242
OPERATING EXPENSES:
Research and development 348,937 411,109 171,614 192,322
Selling, general and administrative 1,140,705 1,386,748 652,943 609,289
------------- ------------- ------------- -------------
TOTAL OPERATING EXPENSES 1,489,642 1,797,857 824,557 801,611
------------- ------------- ------------- -------------
LOSS FROM OPERATIONS (1,190,644) (1,215,184) (690,951) (442,369)
------------- ------------- ------------- -------------
OTHER INCOME (EXPENSE)
Other income-derivative 323,210 459,043 - 332,013
Gain from extinguishment of debt 1,261,864 - - -
Other income (expense) - 1,751 - (103)
Interest (expense) (786,466) (1,429,452) (52,197) (719,954)
------------- ------------- ------------- -------------
TOTAL OTHER INCOME (EXPENSE) 798,608 (968,658) (52,197) (388,044)
------------- ------------- ------------- -------------
NET (LOSS ) $ (392,036) $ (2,183,842) $ (743,148) $ (830,413)
============= ============= ============= =============
Loss per share, basic $ (0.00) $ (0.04) $ (0.00) $ (0.02)
============= ============= ============= =============
Weighted average number of shares, basic 109,764,305 54,173,745 155,690,885 54,173,745
============= ============= ============= =============
Loss per share, diluted $ (0.01) $ (0.05) $ (0.00) $ (0.02)
============= ============= ============= =============
Weighted average number of shares, diluted 109,764,305 54,173,745 155,690,885 54,173,745
============= ============= ============= =============
See unaudited notes to consolidated financial statements
F-2
ELECTRONIC SENSOR TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
June 30,
--------------------------
2008 2007
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) $ (392,036) $(2,183,841)
Adjustments to reconcile net loss to net
cash provided by (used in) operating activities:
Depreciation and amortization 24,167 26,184
Decrease in allowance for doubtful accounts - (4,784)
Issuance of shares for payment of interest 280,000 -
Stock based compensation 21,931 72,357
Amortization of debt discount 586,269 1,166,667
Amortization of deferred financing costs 45,387 90,774
Gain on extinguishment of debt (1,261,864) -
Decrease in fair value of derivative liability (323,210) (450,293)
Changes in assets and liabilities:
Accounts receivable 92,163 (227,855)
Inventories (60,032) 124,173
Prepaid expenses (114,857) 28,249
Accounts payable and accrued expenses 226,970 482,083
Deferred revenues (25,000) (25,000)
----------- -----------
Net cash provided by (used in) operating activities (900,112) (901,286)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in certificate of deposit - (21,000)
Proceeds from sale of property and equipment 9,884 -
Purchase of property and equipment (2,389) (63,675)
----------- -----------
Net cash provided by (used in) investing activities 7,495 (84,675)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Decrease in capital lease obligation (8,684) -
Proceeds from issuance of 9% convertible debentures 2,000,000 -
Proceeds from issuance of equity 3,500,000 -
Repayment of 8% convertible debentures (3,500,000) -
----------- -----------
Net cash provided by financing activities 1,991,316 -
----------- -----------
NET INCREASE (DECREASE) IN CASH 1,098,699 (985,961)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 248,587 1,094,141
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,347,286 $ 108,180
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for interest $ 4,482 $ 281,790
=========== ===========
NONCASH FINANCING AND INVESTING ACTIVITY:
Reclassification of derivative liability to paid-in-capital $ 2,053,333 $ -
=========== ===========
Conversion of 8% convertible debentures into equity $ 500,000 $ -
=========== ===========
Debt discount related to 9% convertible debentures $ 54,678 $ -
=========== ===========
See unaudited notes to consolidated financial statements.
F-3
ELECTRONIC SENSOR TECHNOLOGY, INC.
Notes to Consolidated Financial Statements
(Unaudited)
June 30, 2008
1) Basis of Presentation
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial statements and with the instructions to Form 10-Q and
Item 10 of Regulation S-K. Accordingly, they do not include all the
information and disclosures required for annual financial statements. These
financial statements should be read in conjunction with the consolidated
financial statements and related footnotes for the year ended December 31,
2007, included in the Annual Report filed on Form 10-KSB for the year then
ended.
In the opinion of the management of Electronic Sensor Technology, Inc. (the
"Company"), all adjustments (consisting of normal recurring accruals)
necessary to present fairly the Company's financial position as of June 30,
2008, and the results of operations and cash flows for the six month period
ending June 30, 2008 have been included. The results of operations for the
six month period ended June 30, 2008 are not necessarily indicative of the
results to be expected for the full year. For further information, refer to
the consolidated financial statements and footnotes thereto included in the
Company's Annual Report filed on Form 10-KSB as filed with the Securities
and Exchange Commission for the year ended December 31, 2007.
2) Basis of Consolidation
The accompanying financial statements include the accounts of the Company
and its wholly owned subsidiaries. All intercompany balances and
transactions have been eliminated in consolidation.
3) Nature of Business and Summary of Significant Accounting Policies
a) Nature of Business
The Company develops and manufactures electronic devices used for
vapor analysis. It markets its products through distribution channels
in over 20 countries.
b) Cash and Cash Equivalents
The Company considers highly liquid financial instruments with
maturities of three months or less at the time of purchase to be cash
equivalents.
c) Certificate of Deposit - Restricted
The Company's credit card liability is secured and collateralized with
a certificate of deposit in the amount of approximately $12,000.
d) Allowance for Doubtful Accounts
The allowance for doubtful accounts is based on the Company's
assessment of the collectibility of customer accounts and the aging of
the accounts receivable. If there is a deterioration of a major
customer's credit worthiness or actual defaults are higher than the
Company's historical experience, the Company's estimates of the
recoverability of amounts due it could be adversely affected. The
Company regularly reviews the adequacy of the Company's allowance for
doubtful accounts through identification of specific receivables where
it is expected that payments will not be received. The Company also
establishes an unallocated reserve that is applied to all amounts that
are not specifically identified. In determining specific receivables
where collections may not
F-4
be received, the Company reviews past due receivables and gives
consideration to prior collection history and changes in the
customer's overall business condition. The allowance for doubtful
accounts reflects the Company's best estimate as of the reporting
dates. Changes may occur in the future, which may require the Company
to reassess the collectibility of amounts and at which time the
Company may need to provide additional allowances in excess of that
currently provided.
e) Revenue Recognition
The Company records revenue from direct sales of products to end-users
when the products are shipped, collection of the purchase price is
probable and the Company has no significant further obligations to the
customer. Costs of remaining insignificant Company obligations, if
any, are accrued as costs of revenue at the time of revenue
recognition. Cash payments received in advance of product shipment or
service revenue are recorded as deferred revenue.
f) Shipping and Handling
The Company accounts for shipping and handling costs as a component of
"Cost of Sales".
g) Inventories
Inventories are comprised of raw materials, work in process, and
finished goods. Inventories are stated at the lower of cost or market
and are determined using the first-in, first-out method.
h) Deferred Financing Costs
Deferred financing costs consist of direct costs incurred by the
Company in connection with the issuance of its 8% convertible
debentures. The direct costs include cash payments and fair value of
warrants issued to the placement agent, which secured the financing.
Deferred financing costs are amortized over 48 months using the
effective interest rate method. On March 31, 2008, $3.5 million of the
$7.0 million 8% convertible debentures was retired and the remaining
$3.5 million was converted into equity. As such, the unamortized
deferred financing costs related to the 8% convertible debentures were
fully amortized at March 31, 2008.
i) Property and Equipment
Property and equipment are stated at cost, net of accumulated
depreciation. Depreciation is computed using the straight-line method
over the estimated useful lives of five years.
j) Research and Development
Research and development costs are charged to operations as incurred
and consists primarily of salaries and related benefits, raw materials
and supplies.
k) Use of Estimates
The preparation of the financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosures of contingent assets and liabilities
at the date of the financial statements and the recorded amounts of
revenues and expenses during the reporting period. Actual results
could differ from those estimates.
l) Fair Value of Financial Instruments
The fair value of certain financial instruments, including accounts
receivable, accounts payable and accrued liabilities, approximate
their carrying values due to the short maturity of these
F-5
instruments. The fair value as of June 30, 2008 of the 9% convertible
debentures issued by the Company on March 28, 2008 amounts to
$2,000,000, based on the Company's incremental borrowing rate.
m) Long-lived Assets
The Company reviews long-lived assets, such as property and equipment,
to be held and used or disposed of, for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. If the sum of the expected cash flows,
undiscounted and without interest, is less than the carrying amount of
the asset, an impairment loss is recognized as the amount by which the
carrying amount of the asset exceeds its fair value. At June 30, 2008
no assets were impaired.
n) Capital Lease
On June 28, 2007, the Company entered into a capital lease under which
the present value of the minimum lease payments amounted to $59,200.
The present value of the minimum lease payments was calculated using a
discount rate of 11.41%. The principal balance of the capital lease
obligation amounted to approximately $45,800 at June 30, 2008,
including approximately $18,900 in the current portion of capital
lease obligations in the accompanying consolidated balance sheet.
o) Derivative Liabilities
The Company accounts for its liquidated damages pursuant to FASB Staff
Position No. EITF 00-19-2 "Accounting for Registration Payment
Arrangements" ("FSP 00-19-2"). FSP 00-19-2 provides that the
contingent obligation to make future payments or otherwise transfer
consideration under a registration payment arrangement, should be
separately recognized and measured in accordance with FASB Statement
No.5, "Accounting for Contingencies". The registration statement
payment arrangement should be recognized and measured as a separate
unit of account from the financial instrument(s) subject to that
arrangement. If the transfer of consideration under a registration
payment arrangement is probable and can be reasonably estimated at
inception, such contingent liability is included in the allocation of
proceeds from the related financing instrument. The Company had
registered all shares underlying the 8% convertible debentures as well
as all shares underlying the warrants related to the 8% convertible
debentures, but no longer maintains such registration, in light of the
partial conversion and partial cancellation of the debentures and a
portion of the warrants.
The Company accounts for its embedded conversion features and
freestanding warrants pursuant to SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities", which requires a
periodic valuation of their fair value and a corresponding recognition
of liabilities associated with such derivatives. The recognition of
derivative liabilities related to the issuance of shares of common
stock is applied first to the proceeds of such issuance, at the date
of issuance, and the excess of derivative liabilities over the
proceeds is recognized as other expense in the accompanying
consolidated financial statements. The recognition of derivative
liabilities related to the issuance of convertible debt is applied
first to the proceeds of such issuance as a debt discount, at the date
of issuance, and the excess of derivative liabilities over the
proceeds is recognized as other expense in the accompanying
consolidated financial statements. Any subsequent increase or decrease
in the fair value of the derivative liabilities, which are measured at
the balance sheet date, are recognized as other expense or other
income, respectively.
p) Basic and Diluted Earnings Per Share
Basic earnings per share are calculated by dividing income available
to stockholders by the weighted-average number of common shares
outstanding during each period. Diluted earnings per share are
computed by dividing income available to stockholders, adjusted for
interest savings on the convertible debenture and changes in income or
loss associated with the derivative contract
F-6
that would result if the contract had been recorded as an equity
instrument for accounting purposes during the period, by the weighted
average number of common shares outstanding during the period plus the
net effect of stock options and warrants, effect of the convertible
debentures, and embedded conversion features.
The outstanding options, warrants and shares equivalent issuable
pursuant to embedded conversion features and warrants at June 30, 2008
are excluded from the loss per share computation for that period due
to their antidilutive effect.
The following sets forth the computation of basic and diluted earnings
per share at June 30:
2008 2007
------------ ------------
Numerator:
Net (loss) $ (392,036) $ (2,183,842)
Net other (income)/expense associated with
derivative contracts (323,210) (459,043)
Interest expense in convertible debentures - -
------------ ------------
Net income (loss) for diluted earnings per share
purposes $ (715,246) $ (2,642,885)
============ ============
Denominator:
Denominator for basic earnings per share-
Weighted average shares outstanding 109,764,305 54,173,745
Effect of dilutive stock options and warrants,
determined under the treasury stock method - -
Assume issued common shares for convertible
debentures, determined under the if-converted
method - -
------------ ------------
Denominator for diluted earnings per share-
Weighted average shares outstanding 109,764,305 54,173,745
============ ============
Basic earnings (loss) per share $ 0.00 $ (0.04)
============ ============
Diluted earnings (loss) per share $ (0.01) $ (0.05)
============ ============
q) Stock Based Compensation
The Company adopted SFAS No. 123R, "Share Based Payments." SFAS No.
123R requires companies to expense the value of employee stock options
and similar awards and applies to all outstanding and vested
stock-based awards.
In computing the impact, the fair value of each option is estimated on
the date of grant based on the Black-Scholes options-pricing model
utilizing certain assumptions for a risk free interest rate;
volatility; and expected remaining lives of the awards. The
assumptions used in calculating the fair value of share-based payment
awards represent management's best estimates, but these estimates
involve inherent uncertainties and the application of management
judgment. As a result, if factors change and the Company uses
different assumptions, the Company's stock-based compensation expense
could be materially different in the future. In addition, the Company
is required to estimate the expected forfeiture rate and only
recognize expense for those shares expected to vest. In estimating the
Company's forfeiture rate, the Company analyzed its historical
forfeiture rate, the remaining lives of unvested options, and the
amount of vested options as a percentage of total options outstanding.
If the Company's actual forfeiture rate is materially different from
its estimate, or if the Company reevaluates the forfeiture rate in the
future, the stock-based compensation expense could be significantly
different from what we have recorded in the current period. The impact
of applying SFAS No. 123R approximated $22,000 in additional
compensation
F-7
expense during for the six month period ended June 30, 2008. Such
amount is included in general and administrative expenses on the
statement of operations.
r) Recently Issued Accounting Pronouncements
SFAS No. 159
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option
for Financial Assets and Financial Liabilities -- including an
amendment of FAS 115 ("SFAS No. 159"). SFAS No. 159 allows companies
to choose, at specified election dates, to measure eligible financial
assets and liabilities at fair value that are not otherwise required
to be measured at fair value. Unrealized gains and losses shall be
reported on items for which the fair value option has been elected in
earnings at each subsequent reporting date. SFAS No. 159 also
establishes presentation and disclosure requirements. SFAS No. 159 is
effective for fiscal years beginning after November 15, 2007 and will
be applied prospectively. The Company is currently evaluating the
impact of adopting SFAS No. 159 on our consolidated financial
position, results of operations and cash flows.
FASB Statement Number 141 (revised 2007)
In December 2007, the FASB issued FASB Statement No. 141 (revised
2007), Business Combinations. This Statement replaces FASB Statement
No. 141, Business Combinations. This Statement retains the fundamental
requirements in Statement 141 that the acquisition method of
accounting (which Statement 141 called the purchase method) be used
for all business combinations and for an acquirer to be identified for
each business combination. This Statement defines the acquirer as the
entity that obtains control of one or more businesses in the business
combination and establishes the acquisition date as the date that the
acquirer achieves control. This Statement's scope is broader than that
of Statement 141, which applied only to business combinations in which
control was obtained by transferring consideration. By applying the
same method of accounting--the acquisition method--to all transactions
and other events in which one entity obtains control over one or more
other businesses, this Statement improves the comparability of the
information about business combinations provided in financial reports.
This Statement requires an acquirer to recognize the assets acquired,
the liabilities assumed, and any noncontrolling interest in the
acquiree at the acquisition date, measured at their fair values as of
that date, with limited exceptions specified in the Statement. That
replaces Statement 141's cost-allocation process, which required the
cost of an acquisition to be allocated to the individual assets
acquired and liabilities assumed based on their estimated fair values.
This Statement applies to all transactions or other events in which an
entity (the acquirer) obtains control of one or more businesses (the
acquirer), including those sometimes referred to as "true mergers" or
"mergers of equals" and combinations achieved without the transfer of
consideration, for example, by contract alone or through the lapse of
minority veto rights. This Statement applies to all business entities,
including mutual entities that previously used the
pooling-of-interests method of accounting for some business
combinations. It does not apply to: (a) The formation of a joint
venture, (b) The acquisition of an asset or a group of assets that
does not constitute a business, (c) A combination between entities or
businesses under common control, (d) A combination between
not-for-profit organizations or the acquisition of a for-profit
business by a not-for-profit organization.
This Statement applies prospectively to business combinations for
which the acquisition date is on or after the beginning of the first
annual reporting period beginning on or after December 15, 2008. An
entity may not apply it before that date. Management believes this
Statement will have no impact on the financial statements of the
Company once adopted.
F-8
FASB Statement Number 160
In December 2007, the FASB issued FASB Statement No. 160 -
Noncontrolling Interests in Consolidated Financial Statements - an
amendment of ARB No. 51. This Statement applies to all entities that
prepare consolidated financial statements, except not-for-profit
organizations, but will affect only those entities that have an
outstanding noncontrolling interest in one or more subsidiaries or
that deconsolidate a subsidiary. Not-for-profit organizations should
continue to apply the guidance in Accounting Research Bulletin No. 51,
Consolidated Financial Statements, before the amendments made by this
Statement, and any other applicable standards, until the Board issues
interpretative guidance.
This Statement amends ARB 51 to establish accounting and reporting
standards for the noncontrolling interest in a subsidiary and for the
deconsolidation of a subsidiary. It clarifies that a noncontrolling
interest in a subsidiary is an ownership interest in the consolidated
entity that should be reported as equity in the consolidated financial
statements. Before this Statement was issued, limited guidance existed
for reporting noncontrolling interests. As a result, considerable
diversity in practice existed. So-called minority interests were
reported in the consolidated statement of financial position as
liabilities or in the mezzanine section between liabilities and
equity. This Statement improves comparability by eliminating that
diversity.
A noncontrolling interest, sometimes called a minority interest, is
the portion of equity in a subsidiary not attributable, directly or
indirectly, to a parent. The objective of this Statement is to improve
the relevance, comparability, and transparency of the financial
information that a reporting entity provides in its consolidated
financial statements by establishing accounting and reporting
standards that require: (a) The ownership interests in subsidiaries
held by parties other than the parent be clearly identified, labeled,
and presented in the consolidated statement of financial position
within equity, but separate from the parent's equity, (b) The amount
of consolidated net income attributable to the parent and to the
noncontrolling interest be clearly identified and presented on the
face of the consolidated statement of income, (c) Changes in a
parent's ownership interest while the parent retains its controlling
financial interest in its subsidiary be accounted for consistently. A
parent's ownership interest in a subsidiary changes if the parent
purchases additional ownership interests in its subsidiary or if the
parent sells some of its ownership interests in its subsidiary. It
also changes if the subsidiary reacquires some of its ownership
interests or the subsidiary issues additional ownership interests. All
of those transactions are economically similar, and this Statement
requires that they be accounted for similarly, as equity transactions,
(d) When a subsidiary is deconsolidated, any retained noncontrolling
equity investment in the former subsidiary be initially measured at
fair value. The gain or loss on the deconsolidation of the subsidiary
is measured using the fair value of any noncontrolling equity
investment rather than the carrying amount of that retained
investment, (e) Entities provide sufficient disclosures that clearly
identify and distinguish between the interests of the parent and the
interests of the noncontrolling owners.
This Statement is effective for fiscal years, and interim periods
within those fiscal years, beginning on or after December 15, 2008
(that is, January 1, 2009, for entities with calendar year-ends).
Earlier adoption is prohibited. This Statement shall be applied
prospectively as of the beginning of the fiscal year in which this
Statement is initially applied, except for the presentation and
disclosure requirements. The presentation and disclosure requirements
shall be applied retrospectively for all periods presented. Management
believes this Statement will have no impact on the financial
statements of the Company once adopted.
FASB 161 - Disclosures about Derivative Instruments and Hedging
Activities
In March 2008, the FASB issued FASB Statement No. 161, which amends
and expands the disclosure requirements of FASB Statement No. 133 with
the intent to provide users of financial statements with an enhanced
understanding of; how and why an entity uses derivative instruments,
how the derivative instruments and the related hedged items are
accounted for and how the related
F-9
hedged items affect an entity's financial position, performance and
cash flows. This Statement is effective for financial statements for
fiscal years and interim periods beginning after November 15, 2008.
Management believes this Statement will have no impact on the
financial statements of the Company once adopted.
FASB 161 - The Hierarchy of Generally Accepted Accounting Principles
In May 2008, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 162, "The
Hierarchy of Generally Accepted Accounting Principles." The new
standard is intended to improve financial reporting by identifying a
consistent framework, or hierarchy, for selecting accounting
principles to be used in preparing financial statements that are
presented in conformity with U.S. generally accepted accounting
principles (GAAP) for non-governmental entities. We are currently
evaluating the effects, if any, that SFAS No. 162 may have on our
financial reporting.
4) Convertible debentures
8% Convertible Debentures
During December 2005, we issued in a private offering, $7,000,000 aggregate
principal amount of 8% convertible debentures due December 7, 2009. The
convertible debentures were convertible at any time on or prior to the
maturity date at the option of the debenture holder at a conversion price
of $0.4544, which was subsequently reduced to $0.4000 as per a Forbearance
and Amendment Agreement, dated September 7, 2006, with the holders of the
convertible debentures and can be redeemed at the lesser of $0.4000 or 90%
of the average of the volume weighted average price for the 20 consecutive
trading days immediately prior to the conversion date. Interest on the
convertible debentures was payable in cash or stock, at the Company's
option.
In connection with the issuance of the convertible debentures, the Company
issued five-year warrants to purchase 12,130,314 shares of common stock at
an exercise price of $0.4761 per share, which was subsequently reduced to
$0.4300 per share as per a Forbearance and Amendment Agreement, dated
September 7, 2006, with the holders of the warrants.
We paid professional fees of approximately $592,000 and issued 485,213
warrants with a fair value of approximately $136,000 relating to the
issuance of the convertible debentures and warrants. The payments of
professional fees and the fair value of the warrants, aggregating
approximately $729,000, were recorded as deferred financing costs.
A Conversion and Termination Agreement was entered into with the debentures
holders on February 26, 2008. Pursuant to the agreement, the convertible
debentures holders agreed that in exchange for $3,500,000, the debenture
holders would convert $3,500,000 of the principal amount of their 8%
convertible debentures, together with accrued interest thereon, at a
conversion price of $0.35 per share of Common Stock. Upon receipt of the
foregoing sum and the conversion shares of Common Stock, the debenture
holders agreed to cancel the remainder of their 8% convertible debentures
and 50% of the shares of Common Stock underlying warrants. With respect to
the remaining 6,065,157 shares of Common Stock underlying the warrants,
they will otherwise continue in full force and effect in accordance with
their terms. On March 31, 2008, we remitted $3,500,000 in cash and
transferred 10,400,000 shares of common stock to the debenture holders to
completely retire the 8% convertible debentures.
The extinguishment of the convertible debentures resulted in a gain of
approximately $1,261,900, which included the write off of related
unamortized deferred financing costs of approximately $302,600.
F-10
9% Convertible Debentures
On March 28, 2008, we received $5,500,000 from an investor, $3,500,000 of
which was for Common Stock of the Company, and $2,000,000 for a convertible
debenture bearing an interest rate of 9%, payable semi-annually in cash.
The common stock shares were issued at a price of $0.0405 per share. The 9%
convertible debenture has a five (5)-year term, and the conversion rate of
the debenture is $0.0486. The difference between the conversion rate of the
debenture and the closing price of the Company's common stock on the date
of issuance resulted in a note discount of approximately $58,000. The note
discount will be amortized over the term of the convertible debenture.
A condition of the new investment required the Company to use $3,500,000 to
extinguish the 8% convertible debentures and this event occurred on March
31, 2008.
5) Derivative Liabilities
In connection with the issuance of the 8% convertible debentures in
December 2005, the Company determined that the conversion feature of the
convertible debentures represents an embedded derivative since the
debentures are convertible into a variable number of shares upon
conversion. Because there is no explicit number of shares that are to be
delivered upon satisfaction of the convertible debentures and that there is
no cap on the number of shares to be delivered upon expiration of the
contract to a fixed number, the Company is unable to assert that it had
sufficient authorized and unissued shares to settle its obligations under
the convertible debentures and therefore, net-share settlement is not
within the control of the Company. Accordingly, the convertible debentures
are not considered to be conventional debt under EITF 00-19 and the
embedded conversion feature must be bifurcated from the debt host and
accounted for as a derivative liability.
A Conversion and Termination Agreement was entered into with the 8%
convertible debenture holders on February 26, 2008. Pursuant to the
agreement, the convertible debenture holders agreed that in exchange for
$3,500,000, the debenture holders would convert $3,500,000 of the principal
amount of their 8% convertible debentures, together with accrued interest
thereon, at a conversion price of $0.35 per share of Common Stock. Upon
receipt of the foregoing sum and the conversion shares of Common Stock, the
debenture holders agreed to cancel the remainder of their 8% convertible
debentures and 50% of the shares of Common Stock underlying warrants. With
respect to the remaining shares of Common Stock underlying the warrants,
they will otherwise continue in full force and effect in accordance with
their terms. On March 31, 2008, we remitted $3,500,000 in cash and
transferred 10,400,000 shares of Common Stock to the debenture holders.
As a result of the satisfaction of the Company's obligations under its 8%
convertible debentures, the Company reclassified the derivative liabilities
balance outstanding at March 31, 2008 from liability to equity. The amount
of derivative liabilities that was reclassified to equity approximated
$2,053,000.
6) Stockholders' Equity
Options
In 2005, the Board of Directors adopted the Electronic Sensor Technology,
Inc. 2005 Stock Incentive Plan. The purpose of the Stock Incentive Plan is
to attract and retain the services of experienced and knowledgeable
individuals to serve as our employees, consultants and directors. On the
date the Stock Incentive Plan was adopted, the total number of shares of
common stock subject to it was 5,000,000. The Stock Incentive Plan is
currently administered by the Board of Directors, and may be administered
by any Committee authorized by the Board of Directors, so long as any such
Committee is made up of Non-Employee Directors, as that term is defined in
Rule 16(b)-3(b) of the Securities Exchange Act of 1934.
The Stock Incentive Plan is divided into two separate equity programs: the
Discretionary Option Grant Program and the Stock Issuance Program. Under
the Discretionary Option Grant Program, eligible persons
F-11
may, at the discretion of the administrator, be granted options to purchase
shares of common stock and stock appreciation rights. Under the Stock
Issuance Program, eligible persons may, at the discretion of the
administrator, be issued shares of common stock directly, either through
the immediate purchase of such shares or as a bonus for services rendered
for Electronic Sensor Technology (or a parent or subsidiary of Electronic
Sensor Technology).
Pursuant to the terms of the Discretionary Option Grant Program, the
exercise price per share is fixed by the administrator, but may not be less
than 85% of the fair market value of the common stock on the date of grant,
unless the recipient of a grant owns 10% or more of Electronic Sensor
Technology's common stock, in which case the exercise price of the option
must not be less than 110% of the fair market value. An option grant may be
subject to vesting conditions. Options may be exercised in cash, with
shares of the common stock of Electronic Sensor Technology already owned by
the person or through a special sale and remittance procedure, provided
that all applicable laws relating to the regulation and sale of securities
have been complied with. This special sale and remittance procedure
involves the optionee concurrently providing irrevocable written
instructions to: (i) a designated brokerage firm to effect the immediate
sale of the purchased shares and remit to Electronic Sensor Technology, out
of the sale proceeds available on the settlement date, sufficient funds to
cover the aggregate exercise price payable for the purchased shares plus
all applicable federal, state and local income and employment taxes
required to be withheld by Electronic Sensor Technology by reason of such
exercise and (ii) Electronic Sensor Technology to deliver the certificates
for the purchased shares directly to such brokerage firm in order to
complete the sale. The term of an option granted pursuant to the
Discretionary Option Grant Program may not be more than 10 years.
The Discretionary Option Grant Program also allows for the granting of
Incentive Options to purchase common stock, which may only be granted to
employees, and are subject to certain dollar limitations. Any options
granted under the Discretionary Option Grant Program that are not Incentive
Options are considered Non-Statutory Options and are governed by the
aforementioned terms. The exercise price of an Incentive Option must be no
less than 100% of the fair market value of the common stock on the date of
grant, unless the recipient of an award owns 10% or more of Electronic
Sensor Technology's common stock, in which case the exercise price of an
incentive stock option must not be less than 110% of the fair market value.
The term of an Incentive Option granted may not be more than five years if
the option is granted to a recipient who owns 10% or more of Electronic
Sensor Technology's common stock, or 10 years for all other recipients of
Incentive Options. Incentive Options are otherwise governed by the general
terms of the Discretionary Option Grant Program.
Pursuant to the terms of the Stock Issuance Program, the purchase price per
share of common stock issued is fixed by the administrator, but may not be
less than 85% of the fair market value of the common stock on the issuance
date, unless the recipient of a such common stock owns 10% or more of
Electronic Sensor Technology's common stock, in which case the purchase
price must not be less than 100% of the fair market value. Common stock may
be issued in exchange for cash or past services rendered to Electronic
Sensor Technology (or any parent or subsidiary of Electronic Sensor
Technology). Common stock issued may be fully and immediately vested upon
issuance or may vest in one or more installments, at the discretion of the
administrator.
Management used Black Scholes methodology to determine the fair value of
the options on the date of issue based on the following assumptions. The
expected volatility was based on the average historical volatility of
comparable publicly-traded companies.
Exercise price $ 0.19 - $ 0.24
Market value $ 0.19 - $ 0.24
Expected dividend yield 0%
Expected volatility 36% - 39%
Risk free interest rate 4.03% - 4.54%
Expected life of option 5 years
F-12
The fair value of the granted stock options shares was approximately
$237,000 or $0.09 per share. Approximately $114,000 and $22,000 were
charged to compensation expense in 2007 and in the six month period ended
June 30, 2008, respectively. The remaining amount will be amortized to
compensation expense over future periods based on the vesting schedule of
the respective stock option shares. The total compensation cost related to
nonvested awards not yet recognized amounted to approximately $90,000 at
June 30, 2008. This compensation cost will be recognized over the weighted
average period of the remaining terms of the stock options, unless the
options are terminated sooner.
The following tables summarize all stock option grants to employees and
non-employees as of June 30, 2008:
Weighted
Average
Number of Exercise
Stock Options Options Price
-------------------------------------- ---------- ----------
Balance at December 31, 2006 1,219,500 $ 0.93
Granted 2,657,950 $ 0.22
Exercised - $ -
Forfeited (439,500) $ 0.73
---------- ----------
Balance at December 31, 2007 3,437,950 $ 0.41
Granted - $ -
Exercised - $ -
Forfeited (422,600) $ 0.48
---------- ----------
Balance at June 30, 2008 3,015,350 $ 0.40
========== ==========
Options exercisable at June 30, 2008 2,031,275 $ 0.48
========== ==========
Weighted average fair value of options
granted during 2008 - $ -
========== ==========
A summary of the status of the Company's nonvested shares as of June 30,
2008, and changes during the fiscal year then ended as presented below.
Weighted
Average
Grant Date
Nonvested Shares Shares Fair Value
-------------------------------------- ---------- ----------
Nonvested at December 31, 2006 - $ -
Granted 2,657,950 $ 0.22
Vested (898,250) $ 0.09
Cancelled (161,500) $ 0.09
---------- ----------
Nonvested at December 31, 2007 1,598,200 $ 0.09
Granted - $ -
Vested (495,525) $ 0.22
Cancelled (118,600) $ 0.24
---------- ----------
Nonvested at June 30, 2008 984,075 $ 0.21
========== ==========
F-13
Options Outstanding Options Exercisable
----------------------------------------------------- -------------------------
Weighted
Number Average Weighted Number Weighted
Outstanding Remaining Average Exercisable Average
Exercise as of June Contractual Exercise at June 30, Exercise
Price 30, 2008 Years Price 2008 Price
----------- ----------- ----------- ----------- ----------- -----------
$ 0.19 262,750 8.67 $ 0.19 262,750 $ 0.19
$ 0.20 1,000,000 9.00 $ 0.20 325,000 $ 0.20
$ 0.24 947,100 8.58 $ 0.24 638,025 $ 0.24
$ 0.64 250,000 7.33 $ 0.64 250,000 $ 0.64
$ 1.00 555,500 6.58 $ 1.00 555,500 $ 1.00
----------- ----------- ----------- ----------- -----------
3,015,350 8.24 $ 0.40 2,031,275 $ 0.52
=========== =========== =========== =========== ===========
7) Subsequent Event
On July 25, 2008, the board of directors accepted Barry S. Howe's
resignation as President and Chief Executive Officer and a director of the
company. The terms of Mr. Howe's resignation are described in the Severance
Agreement and Mutual Release attached to our current report on Form 8-K
filed with the Securities and Exchange Commission on July 29, 2008. The
Severance Agreement provides for payment of five and one-third months'
salary (totaling $82,171) as severance to Mr. Howe. The severance to Mr.
Howe is included in our financial statements for June 30, 2008.
F-14
Item 2. Management's Discussion and Analysis or Plan of Operation.
You should read the following discussion and analysis of our financial condition
and results of operations together with our interim financial statements and the
related notes appearing at the beginning of this report. The interim financial
statements and this Management's Discussion and Analysis of Financial Condition
and Results of Operations should be read in conjunction with the financial
statements and notes thereto for the year ended December 31, 2007 and the
related Management's Discussion and Analysis of Financial Condition and Results
of Operations, both of which are contained in our Annual Report on Form 10-KSB
filed with the Securities and Exchange Commission.
--------------------------------------------------------------------------------
Overview
The Company is engaged in the development, manufacturing, and sales of a
patented product called zNose(R); a device designed to detect and analyze
chemical odors and vapors, or, in other words, an electronic "nose." We believe
the zNose(R) is superior to other electronic "noses" because of its speed,
specificity and sensitivity. The zNose(R) is capable of measuring and
quantifying the chemistry of any compound, fragrance, vapor or odor with parts
per trillion sensitivity in 10 seconds. We also believe the zNose(R) has the
unique ability to quantify and speciate the subject chemical vapor by creating
visual olfactory images. This enables the measured odor or vapor to be easily
identified by the user.
We believe that our products will have broad applications in the homeland
security, analytical instrumentation/quality control, and environmental
monitoring and detection markets. The Company is involved in ongoing product
research and development efforts in that regard. The Company has also
concentrated its efforts on further product development, testing and proving and
continuing to expand our sales and support organization.
The Company was originally incorporated under the laws of the state of Nevada as
"Bluestone Ventures, Inc." on July 12, 2000. From inception until February 1,
2005, we engaged in the business of acquiring, exploring and developing certain
mining properties in Ontario, Canada. Upon acquisition of Electronic Sensor
Technology, L.P. ("ELP"), we abandoned our mining business and adopted ELP's
business of developing, manufacturing and selling the vapor analysis device. On
January 26, 2005, we changed our name to "Electronic Sensor Technology, Inc."
Our executive offices are located at 1077 Business Center Circle, Newbury Park,
California 91320 and our telephone number is (805) 480-1994.
Critical Accounting Policies
The Company records revenue from direct sales of products to end-users when the
products are shipped, collection of the purchase price is probable and the
Company has no significant further obligations to the customer. Costs of
remaining insignificant Company obligations, if any, are accrued as costs of
revenue at the time of revenue recognition. Cash payments received in advance of
product shipment or service revenue are recorded as deferred revenue.
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the recorded amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
The Company reviews long-lived assets, such as property and equipment, to be
held and used or disposed of, for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. If the sum of the expected cash flows, undiscounted and without
interest, is less than the carrying amount of the asset, an impairment loss is
recognized as the amount by which the carrying amount of the asset exceeds its
fair value. At June 30, 2008 no assets were impaired.
2
Plan of Operations
Over the course of the next 12 months, we intend to execute our business plan
and focus our business development efforts in the following key areas:
o By diversifying our product offerings to enhance the usefulness of our
solutions for customers who will have already adopted one or more
products;
o By enhancing our product lines and developing new products to attract
new customers; and
o By developing partnering relationships with wide-ranging sales and
distribution channel leaders already serving our vertical market space
in a way that assists them in developing new revenue streams and
opportunities through improved technical and sales support and
customer services.
Results of Operations
The following tables sets forth, in $ and as a percentage of revenues, certain
items included in the Company's Income Statements (see Financial Statements and
Notes) for the periods indicated:
Six Months Ended
June 30
---------------------
Statement of Operations Data: 2008 2007
--------------------------------------------- -------- --------
Revenues .................................... 100% 100%
Cost of Sales ............................... 61% 50%
Gross Profit ................................ 39% 50%
Operating Expenses .......................... 196% 154%
(Loss) From Operations ...................... (157%) (104%)
Other Income (Expense) ...................... 105% (83%)
Net (Loss) .................................. (52%) (187%)
Six Months Ended June 30, 2008 Compared to Six Months Ended June 30, 2007
Revenues are derived from product sales and product support services. For the
six months ending June 30, 2008, revenues were $760,000 which was $408,000 less
than for the same period in 2007. For the quarter, revenues were $325,000 below
second quarter 2007. The decreases in revenues resulted from 9 and 15 fewer
instruments shipped in the quarter and year to date, respectively. Performance
continues to be severely impacted by a significant drop in business from our
Chinese distributor whose year-to-date purchases are 70% below that of last
year. The combined revenues from all other geographical markets, excluding
China, are approximately even with last year with growth in the domestic market,
offsetting a decrease in the European market.
Cost of Sales consist of product costs and expenses associated with product
support services. For the three and six month periods ending June 30, 2008, cost
of sales were $233,000 and $461,000, compared to $331,000 and $585,000 in 2007.
For the same periods, cost of sales, as a percentage of revenues, were 64% and
61%, respectively, versus 48% and 50%, in 2007. Cost of sales continues to be
negatively impacted by overhead spending and labor variances totaling $69,000
for the six month period, compared to $9,000 in 2007. The variances were caused
by a slow down in production to reflect lower sales activities and to work-off
on-hand inventory. Excluding the impact of the variances, cost of sales for the
first six months of 2008 would be 52% of revenues or 3% worse than last year.
Gross profit was $299,000 or 39% of sales for the six months ending June 30,
2008, compared to $583,000 or 50% of sales for the same period in 2007. The
decrease in gross margin over last year is attributed to lower sales volume and
to the labor and overhead variances written off to cost of sales as noted above.
Excluding the impact of the variances, gross margin is 3% worse than last year
due to an unfavorable sales mix for ancillary items for our products.
3
Research and Development costs for the six months ending June 30, 2008 were
$349,000 versus $411,000 for the same period in 2007. The $62,000 improvement is
attributed to lower personnel expenses due to reduction of census ($51,000), and
to non-recurring patent attorney expenses incurred in 2007.
Selling, General and Administrative expenses for the six months ending June 30,
2008 were $1,141,000, compared to $1,387,000 for the same period in 2007. The
$246,000 decrease resulted from a reduction of personnel expenses due to
reduction of census ($142,000), net reduction of outside services ($30,000),
reduction of operating expenses ($53,000), and net difference between severance
amounts paid in 2007 ($116,000) and in 2008 ($82,000), offset by an increase in
promotional expenses ($13,000).
Interest expense for the six months ending June 30, 2008 was $786,000, as
compared to $1,429,000 for the same period in 2007. The $643,000 reduction in
interest expense is due to retirement of the $7.0 million 8% convertible
debentures, and related debt discount, on March 31, 2008. Previously, interest
expense included both interest accrued on the 8% convertible debentures as well
as amortization of the related debt discount. During the second quarter,
interest expense pertains mostly to the interest accrued on the $2.0 million
convertible debenture, which was issued on March 28, 2008.
Other income-derivatives primarily consist of the decrease in the fair value of
derivative liabilities between the measurement dates which are the balance sheet
dates. On March 31, 2008, we satisfied our obligations under the 8% convertible
debentures and as a result, the Company can assert that it has a sufficient
amount of authorized and unissued shares to settle its obligations which can be
settled in shares. Accordingly, the Company reclassified all contracts,
warrants, and other convertible instruments outstanding at March 31, 2008 from
liability to equity (see Note 5).
Gain on extinguishment of debt is the gain realized from the early retirement of
the 8% convertible debentures on March 31, 2008 (see Note 4).
Liquidity and Capital Resources
For the six months ending June 30, net cash used by the Company for operating
activities were $900,112 and $901,286 for 2008 and 2007 respectively. Cash used
for the six months ending June 30, 2008 was comprised of the net loss for the
period of $392,036, less net non-cash items (including depreciation and
amortization expenses of $24,167, issuance of common shares for payment of
interest of $280,000, amortization of debt discount of $586,269, amortization of
deferred financing costs of $45,387, stock based compensation of $21,931, less
decrease in fair value of derivative liability of $323,210, gain on early
retirement of debt of $1,261,864) of $627,320 plus the net change in operating
assets and liabilities of $119,244. Cash used in operations during the same six
months of 2007 was comprised of the net loss for the period of $2,183,841, plus
net non-cash expenses (including depreciation and amortization expenses of
$26,184, stock based compensation of $72,357, amortization of debt discount of
$1,166,667, amortization of deferred financing costs of $90,774, less decrease
in fair value of derivative liability of $450,293, decrease in allowance for
doubtful accounts of $4,784) of $900,905, and plus the net change in operating
assets and liabilities of $381,650.
Investing activities provided cash of $7,495 in the first six months of 2008 and
used cash of $84,675 during the same period in 2007. For the period, cash of
$9,884 was provided from the sale of property and equipment and $2,389 was used
to purchase capital equipment. In 2007, there was an increase in our certificate
of deposit of $21,000 and $63,675 was used to purchase capital equipment.
Financing activities for the first six months of 2008 provided cash of
$1,991,316 which included $2,000,000 received from the issuance of 9%
convertible debentures to an investor, $3,500,000 from the issuance of equity to
the same investor, less $3,500,000 used to retire the 8% convertible debentures
and a decrease in capital lease obligation of $8,684. There were no financing
activities for the first six months of 2007.
On June 30, 2008 the Company's cash (including cash equivalents) was $1,347,300,
compared to $108,200 on June 30, 2007. The Company had a working capital on June
30, 2008 of $1,840,300. The Company's working deficit at June 30, 2007 was
$2,606,000 - excluding derivative liabilities; working capital would be
$300,200.
4
Seasonality and Quarterly Results
We have not experienced and do not foresee any seasonality to our revenues or
our results of operations.
Inflation
Although we currently use a limited number of sources for most of the supplies
and services that we use in the manufacturing of our vapor detection and
analysis technology, our raw materials and finished products are sourced from
cost-competitive industries. While prices for our raw materials may vary
significantly based on market trends, we have not experienced and do not foresee
any material inflationary trends for our product sources.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
This Item is not applicable to smaller reporting companies.
Item 4T. Controls and Procedures.
The company's Chief Executive Officer and Chief Financial Officer, after
evaluating the effectiveness of the company's disclosure controls and procedures
(as defined in Rules 13a-15(e) under the Securities Exchange Act of 1934, as
amended) as of the end of the period covered by this quarterly report on Form
10-Q, have concluded that, based on such evaluation, the company's disclosure
controls and procedures were effective to ensure that material information
relating to the company is recorded, processed, summarized, and reported in a
timely matter. In designing and evaluating the disclosure controls and
procedures, the company's management recognized that any controls and
procedures, no matter how well designed and operated, can provide only
reasonable assurance of achieving the desired control objectives, and the
company's management necessarily was required to apply its judgment in
evaluating the cost-benefit relationship of possible controls and procedures.
There were no changes in the company's internal control over financial reporting
that occurred during the period covered by this quarterly report that have
materially affected, or are reasonably likely to materially affect, the
company's internal control over financial reporting.
5
PART II.
OTHER INFORMATION
Item 1. Legal Proceedings.
We are not a party to any pending material legal proceedings and are not aware
of any threatened or contemplated proceeding by any governmental authority
against us.
Item 1A. Risk Factors.
This Item is not applicable to smaller reporting companies.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
We did not sell any unregistered equity securities or repurchase any of our
equity securities during the three months ended June 30, 2008.
Item 3. Defaults Upon Senior Securities.
During the three months ended June 30, 2008, there were no material defaults
upon senior securities.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
None.
Item 6. Exhibits.
Exhibit
No. Description
------ ----------------------------------------------------------------------
31.1 Certification of Chief Executive Officer Pursuant to Section 302 of
the Sarbanes-Oxley Act.
31.2 Certification of Principal Financial and Accounting Officer Pursuant
to Section 302 of the Sarbanes-Oxley Act.
32.1 Certification of Chief Executive Officer Pursuant to Section 906 of
the Sarbanes-Oxley Act.
32.2 Certification of Principal Financial and Accounting Officer Pursuant
to Section 906 of the Sarbanes-Oxley Act.
6
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
ELECTRONIC SENSOR TECHNOLOGY, INC.
Dated: August 13, 2008 By: /s/ Teong Lim
--------------------------------
Name: Teong Lim
Title: President and
Chief Executive Officer
(Principal Executive Officer)
Dated: August 13, 2008 By: /s/ Philip Yee
--------------------------------
Name: Philip Yee
Title: Secretary, Treasurer and
Chief Financial Officer
(Principal Financial and
Accounting Officer)