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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
----------
FORM 10-QSB/A
[X] AMENDMENT NO. 1 TO QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2006
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from _____________ to ___________
Commission file number 333-87224
ELECTRONIC SENSOR TECHNOLOGY, INC.
(Exact Name of Small Business Issuer as Specified in Its Charter)
NEVADA 98-0372780
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
1077 Business Center Drive
Newbury Park, California 91320
(Address of Principal Executive Offices)
(805) 480-1994
(Issuer's Telephone Number, Including Area Code)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act 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 [ ] No [X](*)
----------
(*) We were not required to file reports pursuant to Section 13 or 15(d) of the
Securities Exchange Act during the past 12 months because (i) our registered
common stock was registered under the Securities Act during such period and was
not registered under the Exchange Act, (ii) we did not have any registration
statement that became effective during such period and (iii) we had less than
300 shareholders of record throughout such period. Although we were not required
to do so, we voluntarily filed such reports with the Securities and Exchange
Commission during such period. On March 24, 2006 we filed a registration
statement on Form 10-SB to register our common stock pursuant to the Exchange
Act, which we subsequently withdrew pursuant to the request of the Securities
and Exchange Commission until our registration statement on Form SB-2, for which
an amendment was last filed on May 1, 2006, is declared effective. Once our
registration statement on Form SB-2 is declared effective, we plan to file
another registration statement on Form 10-SB to register our common stock
pursuant to the Exchange Act. Once our registration statement on Form 10-SB is
effective, we will be subject to the filing requirements of the Securities
Exchange Act.
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date. 54,173,745 shares of common
stock as of September 7, 2006
Transitional Small Business Disclosure Format Yes [ ] No [X]
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EXPLANATORY NOTE
We are filing this amended quarterly report on Form 10-QSB/A for the
three months ended June 30, 2006 to restate our unaudited consolidated balance
sheet at June 30, 2006 and the consolidated statement of operations and the
consolidated statement of cash flows for the period ended June 30, 2005 in order
to properly reflect the carry forward impact of certain restatements to our
financial statements for the interim periods ending March 31, 2005, June 30,
2005, September 30, 2005 and March 31, 2006 and the fiscal year ended
December 31, 2005.
The following Items of this amended quarterly report on Form 10-QSB/A
for the period ended June 30, 2006 are amended and restated herein:
Part I Financial Information:
o Item 1. Financial Statements--Consolidated Balance Sheet as of
June 30, 2006 (unaudited), Consolidated Statements of Operations
for the Six Months Ended June 30, 2005 (unaudited), Consolidated
Statements of Cash Flows for the Six Months Ended June 30, 2005
(unaudited) and Notes to Consolidated Financial Statements as of
June 30, 2006 (unaudited); and
o Item 2. Management Discussion and Analysis of Operations or Plan
of Operations.
Part II Other Information:
o Item 6. Exhibits--Exhibits 31.1, 31.2, 32.1 and
32.2--currently-dated certifications from our President and Chief
Executive Officer and Treasurer and Vice President of Finance and
Administration, as required by Section 302 and 906 of the
Sarbanes-Oxley Act of 2002.
The remaining Items are unaffected by the correction in classification, have not
been updated from the disclosure originally contained in our quarterly report on
Form 10-QSB for the period ended June 30, 2006 filed with the Securities and
Exchange Commission on August 16, 2006 and are not reproduced in this Form
10-QSB/A. This amended quarterly report on Form 10-QSB/A for the period ended
June 30, 2006 does not reflect events occurring after the filing of the
quarterly report on Form 10-QSB filed with the Commission on August 16, 2006,
nor does it modify or update the disclosures contained in the quarterly report
on Form 10-QSB filed with the Commission on August 16, 2006, other than as
described above and to correct typographical errors contained therein.
1
PART I.
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ELECTRONIC SENSOR TECHNOLOGY, INC.
CONSOLIDATED BALANCE SHEET
JUNE 30, 2006
(Restated)
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 3,735,141
Certificate of deposit-restricted 250,000
Accounts receivable, net of allowance for doubtful accounts 280,149
of $17,700
Prepaid expenses 36,721
Inventories 1,164,020
-----------
TOTAL CURRENT ASSETS 5,466,031
-----------
DEFERRED FINANCING COSTS, net of amortization of $121,079 607,282
PROPERTY AND EQUIPMENT, net of accumulated depreciation
of $935,874 162,950
SECURITY DEPOSITS 12,817
-----------
$ 6,249,079
===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 454,726
Credit line borrowings 370,000
Deferred revenues 116,667
Derivative liabilities 4,087,959
-----------
TOTAL CURRENT LIABILITIES 5,029,352
-----------
CONVERTIBLE DEBENTURES, net of unmortized discount
of $5,638,889 1,361,111
-----------
TOTAL LIABILITIES 6,390,463
-----------
STOCKHOLDERS' DEFICIT:
Preferred stock, $.001 par value 50,000,000 shares authorized,
none issued and outstanding -
Common stock, $.001 par value, 200,000,000 shares authorized,
54,173,745 issued and outstanding 54,174
Additional paid-in capital 8,516,354
Accumulated deficit (8,711,912)
-----------
TOTAL STOCKHOLDERS' DEFICIT (141,384)
-----------
$ 6,249,079
===========
See notes to consolidated financial statements
2
ELECTRONIC SENSOR TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Six Months Ended Three Months Ended
June 30, June 30,
---------------------------- ----------------------------
2006 2005 2006 2005
------------ ------------ ------------ ------------
(Restated)
REVENUES $ 1,154,224 $ 651,652 $ 621,407 $ 432,141
COST OF SALES 592,714 375,086 291,122 224,800
------------ ------------ ------------ ------------
GROSS PROFIT 561,510 276,566 330,285 207,341
OPERATING EXPENSES:
Research and development 416,144 331,285 204,345 191,113
Selling, general and administrative 1,436,961 1,103,030 656,651 535,163
------------ ------------ ------------ ------------
TOTAL OPERATING EXPENSES 1,853,105 1,434,315 860,996 726,276
------------ ------------ ------------ ------------
LOSS FROM OPERATIONS (1,291,595) (1,157,749) (530,711) (518,935)
------------ ------------ ------------ ------------
OTHER INCOME AND EXPENSE:
Other income - derivative 1,683,119 4,263,950 462,922 4,144,400
Other expense - derivative - (2,205,642) - -
Gain (loss) on sale of property and equipment - 9,287 - (3,970)
Interest expense (1,416,279) (34,271) (685,887) (13,706)
------------ ------------ ------------ ------------
TOTAL OTHER INCOME AND EXPENSE 266,840 2,033,324 (222,965) 4,126,724
------------ ------------ ------------ ------------
NET INCOME (LOSS) $ (1,024,755) $ 875,576 $ (753,676) $ 3,607,789
============ ============ ============ ============
Earnings (loss) per share, basic $ (0.02) $ 0.02 $ (0.01) $ 0.07
============ ============ ============ ============
Weighted average number of shares, basic 54,159,945 53,304,475 54,173,745 53,968,643
============ ============ ============ ============
Earnings (loss) per share, diluted $ (0.02) $ (0.02) $ (0.01) $ 0.07
============ ============ ============ ============
Weighted average number of shares, diluted 54,159,945 53,304,475 54,173,745 53,968,643
============ ============ ============ ============
See notes to consolidated financial statements
3
ELECTRONIC SENSOR TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
June 30,
----------------------------
2006 2005
------------- -----------
(Restated)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (1,024,755) $ 875,576
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 18,865 5,605
Issuance of shares for services 21,000 -
Amortization of debt discount 1,166,667 -
Amortization of deferred financing costs 103,782 -
Recognition of derivative liabilities - 2,205,642
Decrease in fair value of derivative liability (1,683,119) (4,263,950)
Changes in assets and liabilities:
Accounts receivable 185,625 (98,020)
Inventories (224,400) (12,502)
Prepaid expenses 33,214 (9,361)
Security deposits - 140
Accounts payable and accrued expenses (26,072) 46,842
Deferred revenues (25,000) (25,000)
Due to related party - (60,000)
Interest payable - (26,961)
Other current liabilities - (2,626)
------------- -----------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (1,454,193) (1,364,616)
------------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Decrease (increase) in restricted security deposit 668,678 -
Proceeds from sale of property and equipment - 30,280
Purchase of property and equipment (69,265) (77,780)
------------- -----------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (559,413) (47,500)
------------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease in line of credit 370,000 (200,000)
Repayment of partners' loans payable - (110,000)
Proceeds from issuance of common stock - 3,811,708
------------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 370,000 3,501,708
------------- -----------
NET INCREASE (DECREASE) IN CASH (484,780) 2,089,592
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 4,219,921 26,430
------------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 3,735,141 $ 2,116,022
============= ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest $ 282,236 $ 40,870
============= ===========
NON-CASH FINANCING ACTIVITIES
Fair value of derivative liabilities issued in connection
with issuance of shares of common stock $ - $ -
============= ===========
See notes to consolidated financial statements.
4
ELECTRONIC SENSOR TECHNOLOGY, INC.
Notes to Financial Statements
(Unaudited)
June 30, 2006
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-QSB and
Article 10 of Regulation S-B. 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,
2005, included in the Annual Report filed on Form 10-KSB/A 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, 2006, and the results of operations and cash flows for the six-month
period ending June 30, 2006 have been included. The results of operations
for the six-month period ended June 30, 2006 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/A as
filed with the Securities and Exchange Commission for the year ended
December 31, 2005.
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. The Company did not have any cash equivalents at June 30,
2006.
c) LINE OF CREDIT
The Company has a revolving line of credit agreement for borrowings up
to $500,000. The line of credit is secured and collateralized with a
certificate of deposit in the amount of $250,000. The line of credit
had borrowings of $370,000 against it at June 30, 2006. The line of
credit expires on March 31, 2007.
d) 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
5
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.
e) SHIPPING AND HANDLING
The Company accounts for shipping and handling costs as a component of
"Cost of Sales".
f) 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.
g) DEFERRED FINANCING COSTS
Deferred financing costs consist of direct costs incurred by the
Company in connection with the issuance of its 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.
h) 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.
i) 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.
j) 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.
k) 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 instruments.
l) 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, 2006
no assets were impaired.
6
m) DERIVATIVE LIABILITIES
In June 2005, the Financial Accounting Standard Board issued EITF
05-04. EITF 05-04 addresses the question as to whether liquidated
damages pursuant to a registration rights agreement should be combined
as a unit with the underlying financial instruments and be evaluated
as a single instrument. EITF 05-04 does not reach a consensus on this
matter and allows for the treatment as a combined unit (Views A and B)
as well as separate freestanding financial instruments (View C). On
September 15, 2005, the FASB staff postponed further discussion of
EITF 05-04. As of May 31, 2006, the FASB still has not rescheduled
EITF 05-04 for further discussion.
In connection with the issuance of a convertible debentures and
related warrants, we granted liquidated damages pursuant to a separate
registration right agreement. The Company adopted View C of EITF
05-04. Accordingly, the liquidated damages pursuant to this
registration right agreement were evaluated as a stand alone financial
instrument. This treatment did not have a significant different effect
than if the Company would have adopted View A or B, because the
classification of the warrants and certain embedded features of the
convertible debentures were classified as derivative liabilities. The
Company believes that should the FASB staff reach a consensus on EITF
05-04 and select combined treatment (View A or B), the embedded
conversion features and the warrants will have to be evaluated as a
combined unit with the liquidated damages pursuant to the registration
rights agreement, and accordingly, be evaluated as derivative
liabilities. The Company does not believe that its measurement of the
derivative liabilities under View A or View B would significantly
differ from its measurement of the derivative liabilities under View C
in these circumstances.
The Company accounts for liquidated damages granted pursuant to
registration rights which are not included in a separate registration
right agreement as a combined unit with the warrants which are
contemporaneously issued with the registration rights pursuant to SFAS
133 "Accounting for Derivative and Hedging Activities" and EITF 00-19.
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.
n) 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 using the weighted average number of common and dilutive
common share equivalents outstanding during the period. Dilutive
common share equivalents consist of shares issuable upon the exercise
of stock options and warrants embedded conversion features (calculated
using the reverse treasury stock method). The outstanding options,
warrants and shares equivalent issuable pursuant to embedded
conversion features amounted to 66,982,944 and 5,576,871 at June 30,
2006 and 2005, respectively. The outstanding options, warrants and
shares equivalent issuable pursuant to embedded conversion features
and warrants at June 30, 2006 and 2005, respectively, are excluded
from the loss per share computation for that period due to their
antidilutive effect. The Company adjusted the numerator for any
changes in income or loss that would result if the
7
contract had been recorded as an equity instrument for accounting
purposes during the period. However, the Company did not adjust the
numerator for interest charges during the period on the convertible
debentures because it would have been anti-dilutive.
The following sets forth the computation of basic and diluted earnings
per share at June 30:
2006 2005
--------------- ---------------
(Restated)
Numerator:
Net income (loss) $ (1,024,755) $ 875,576
Net other income (expense) associated with
derivative contracts 1,683,119 2,058,308
--------------- ---------------
Net income (loss) for diluted earnings per share
purposes $ (2,707,874) $ (1,182,732)
=============== ===============
Denominator:
Denominator for basic earnings per share-
Weighted average shares outstanding 54,159,945 53,304,475
Effect of dilutive warrants, embedded
conversion features and liquidated
damages - -
--------------- ---------------
Denominator for diluted earnings per share-
Weighted average shares outstanding 54,159,945 53,304,475
=============== ===============
Basic earnings (loss) per share $ (0.02) $ 0.02
=============== ===============
Diluted earnings (loss) per share $ (0.02) $ (0.02)
=============== ===============
4) CONVERTIBLE DEBENTURES
During December 2005, we issued in a private offering, $7,000,000 aggregate
principal amount of convertible debentures due December 7, 2009. The
convertible debentures are 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 and can be redeemed at the lesser of $0.4544 or 90% of the
average of the volume weighted average price for the 20 consecutive trading
days immediately prior to the conversion date. The Company received
$7,000,000 in cash as consideration. The convertible debentures bear
interest at 8%, payable in cash or stock, at the Company's option, and are
required to be redeemed in 9 equal quarterly payments commencing January 1,
2008, in cash or stock, at the Company's option. If the Company chooses to
pay interest on or redeem the debentures in shares of the Company's common
stock, rather than in cash, the conversion rate for such stock payment is
the lesser of $0.4544 and 90% of the average of the volume weighted average
price for the 20 consecutive trading days immediately prior to the interest
payment or redemption date, as applicable.
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. Furthermore, the Company granted
liquidated damages pursuant to a registration rights agreement.
The convertible debentures and related agreements provide, among other
things, for:
1) Liquidated damages amounting to 2% per month of the outstanding
principal amount, payable in cash or stock, to the debenture
holders in the event that a registration statement covering the
shares underlying the convertible debentures is not declared
effective within 150 days of the date the debentures were issued
(although a registration statement covering the shares underlying
the convertible debentures has not been declared effective as of
June 30, 2006, no claims for liquidated damages have been
received from the debenture holders). The liquidated damages are
payable in cash monthly or if unpaid, bear interest at 18% per
annum. If unpaid by January 1,
8
2008 and thereafter, they may be converted in shares of common
stock at the same prevailing rate as the remaining principal
amount of the convertible debentures;
2) Default interest rate of 18% and a default premium of 30% of the
principal amount of the debentures, payable in cash or stock.
Events of default include, among other things, if a payment,
whether cash or stock is not paid on time and cured within three
days, if the Company's common stock is not quoted for trading for
at least five trading days, if a registration is not effective
within 180 days after December 7, 2005 (although a registration
statement covering the shares underlying the convertible
debentures has not been declared effective as of June 30, 2006,
no claims for liquidated damages have been received from the
debenture holders). The default interest rate and the default
premium may be converted in shares of common stock at the same
prevailing rate as the remaining principal amount of the
convertible debentures;
3) A reset feature of the conversion price in the event of a
subsequent equity or convertible financing with an effective
price lower than the debenture conversion price, whereby the
aforementioned variable conversion price of the convertible
debentures is adjusted to the new lower effective price of the
subsequent equity or convertible financing;
4) A prepayment premium amounting to 30% of the principal balance of
the convertible debentures in the event that the Company, at its
sole option, prepays the convertible debentures before its due
date. The prepayment is payable in cash only; and
5) The warrants require that the Company reimburse any holder of a
warrant in respect of any trading loss resulting from the failure
of the Company to timely deliver shares issued pursuant to the
exercise of warrants. This compensation may be paid in shares of
common stock or cash. The exercise price of the warrants, which
is $0.4761 per share at the date of the agreement, may be reduced
to $0.001 per share, at a monthly rate $0.03 per share if the
registration statement we are required to file at the request of
the warrant holders with respect to the common stock underlying
the warrants is not declared effective within six months of the
date of issuance of the warrants.
In connection with the issuance of the convertible debentures, we issued
485,213 warrants to a company in partial consideration for financial
advisory services. The warrants have the same terms as those granted to the
debenture holders. The fair value of the warrants (at the time of their
issuance) and related professional fees pertaining to the issuance of the
convertible debentures have been recorded as deferred financing costs. The
deferred financing costs are amortized over the term of the convertible
debentures. See Note 5 - Derivative Liabilities for further information on
the accounting and measurement of the derivative liabilities associated
with the issuance of the convertible debentures and related agreements.
5) DERIVATIVE LIABILITIES
FEBRUARY 2005 TRANSACTION
During February 2005, we recognized derivative liabilities of approximately
$6.0 million pursuant to the issuance of 3,985,000 freestanding warrants
and granting certain registration rights which provided for liquidated
damages in the event of failure to timely register the shares in connection
with the issuance of shares of common stock and the related warrants.
There are no liquidated damages provided for untimely effectiveness of the
registration of shares pursuant to piggy-back registration rights. The
Company intends to register all shares and warrants pursuant to the
subscriber piggy-back registration rights.
The agreement pursuant to which the warrants were issued and the
registration rights were granted provided for liquidated damages pursuant
to demand registration rights in the event of a failure to timely register
the shares after demand is made by the holders of a majority of the
warrants and shares of common stock issued
9
pursuant to such agreement. The demand registration rights of these
investors are such that if the Company fails to register the investors
shares, including the shares underlying the warrants, the Company will pay
a cash penalty amounting to 1% of the amount invested per month, $39,850,
if the registration statement is not filed within 60 days of demand or is
not declared effective within 150 days from the date of initial filing. The
maximum liability associated with the liquidated damages amounts to 49% of
the gross proceeds associated with the issuance of shares of common stock,
which amounts to $1,952,650. The percentage of liquidated damages amounts
to the difference between 60 months, which is the inherent time limitation
under which the underlying shares would be free-trading (three year term
and two year holding period) and 11 months, which is the grace period for
registering the shares (no demand permitted for four months, two-month
period to file and five-month period to become effective), times the
penalty percentage, which is 1%. The Company believes that the likelihood
that it will incur any liabilities resulting from the liquidated damages
pursuant to the demand registration rights is remote considering that it
will register the shares and the shares underlying the warrants pursuant to
piggy-back registration rights, which do not contain liquidated damages.
Because the registration rights were not granted under a separate
registration rights agreement, we considered those features in evaluating
whether the associated warrants should be classified as derivative
liabilities. Considering that the amount of the maximum penalty is 49%, the
Company cannot conclude that that this discount represents a reasonable
approximation of the difference between registered and unregistered shares
under paragraph 16 of EITF 00-19. Accordingly, the warrants issued in
connection with the February 2005 transaction are considered derivative
liabilities.
The fair value of the warrants issued in connection with the February 2005
transaction at the date of issuance of the warrants and the granting of
registration rights and at June 30, 2006 is as follows:
At issuance At June 30, 2006
--------------- ---------------------
Freestanding warrants $6,017,350 $ 0
The Company used the following assumptions, using the Black Scholes Model
to measure the identified derivatives as follows:
Freestanding warrants
At issuance At June, 30, 2006
--------------- ---------------------
Market price: $2.40 $0.19
Exercise price: $1.00 $1.00
Term: 3 years 1.58 years
Volatility: 39% 39%
Risk-free interest rate: 2.78% 5.13%
Number of warrants: 3,985,000 3,985,000
December 2005 Transaction
During December 2005, in connection with the issuance of the convertible
debentures, 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
10
00-19 and the embedded conversion feature must be bifurcated from the debt
host and accounted for as a derivative liability.
The embedded conversion features are as follows:
Default Interest Rate and Premium: The default interest rate is 18% while
the stated rate of the convertible debentures is 8%. Additionally, the
Company is liable to pay for a premium amounting to 30% of the principal
amount of the convertible debentures in the event of default. This embedded
derivative could at least double the investor's initial rate of return on
the host contract and could also result in a rate of return that is at
least twice what otherwise would be the market return for a contract that
has the same terms as the host contract and that involves a debtor with
similar credit quality. Furthermore, the default interest rate may be
triggered by certain events of defaults which are not related to
credit-risk-related covenants or the Company's creditworthiness (e.g., if a
registration statement is not effective within 180 days after December 7,
2005). The default provisions are effective, at the holders' option, upon
an event of default. Although a registration statement covering the shares
underlying the convertible debentures has not been declared effective as of
June 30, 2006, the debenture holders have not notified the Company of an
election to accelerate the debentures, nor have any claims for liquidated
damages been received.
Reset Feature Following Subsequent Financing: The debenture provides for a
reset feature of the conversion price in the event of a subsequent equity
or convertible financing with an effective price lower than the debenture
conversion price, whereby the aforementioned variable conversion price of
the convertible debentures is adjusted to the new lower effective price of
the subsequent equity or convertible financing , which amounts to 10% of
the shares issuable pursuant to the convertible debentures, which is the
effective discount to market value we would offer in the event we provide
for a subsequent private placement financing. This reset does not
constitute a standard anti-dilution provision and is indexed to an
underlying other than an interest rate or credit risk.
Conversion Rate: The convertible debentures are convertible at a variable
conversion price, which is the lesser of $0.4544 or 90% of the average of
the volume weighted average price for the 20 consecutive trading days
immediately prior to the conversion date. The convertible debentures are
convertible at any time on or prior to the maturity date at the option of
the debenture holder. The implied conversion embedded feature amounts to a
conversion discount of 10% to market.
The Company believes that the aforementioned embedded derivatives meet the
criteria of SFAS 133, including Implementation issue No. B16 and EITF
00-19, when appropriate, and should be accounted for as derivatives with a
corresponding value recorded as a liability.
In connection with the issuance of the convertible debentures, the Company
issued warrants to the debenture holders. The related warrants require that
the Company reimburse any holder of a warrant in respect of any trading
loss resulting from the failure of the Company to timely deliver shares
issued pursuant to the exercise of warrants. This compensation may be paid
in shares of common stock or cash. Accordingly, we have accounted for such
warrants as derivatives.
In connection with the issuance of the convertible debentures, the Company
granted liquidated damages pursuant to a registration rights agreement. The
liquidated damages amount to 2% per month of the outstanding principal
amount, payable in cash or stock, to the debenture holders in the event
that a registration statement covering the shares underlying the
convertible debentures is not declared effective within 150 days of the
date the debentures were issued (although a registration statement covering
the shares underlying the convertible debentures has not been declared
effective as of June 30, 2006, no claims for liquidated damages have been
received from the debenture holders). The liquidated damages are payable in
cash monthly or if unpaid, bear interest at 18% per annum. If unpaid by
January 1, 2008 and thereafter, they may be converted in shares of common
stock at the same prevailing rate as the remaining principal amount of the
convertible debentures. Pursuant to View C of EITF 05-04 the liquidated
damages are accounted for as a separate derivative. While the liquidated
damages may be settled in stock if unpaid
11
by January 1, 2008, the Company determined that it was more likely that
they would be paid in cash shortly after their occurrence and has used such
assumption in measuring the fair value of the derivative liability
associated with the liquidated damages. The maximum liability associated
with the liquidated damages amount to 38% of the gross proceeds associated
with the issuance of the convertible debentures, which amounts to
$2,660,000.
Additionally, because there is no explicit number of shares that are to be
delivered upon satisfaction of the convertible debentures, the Company is
unable to assert that it had sufficient amount of authorized and unissued
shares to settle its obligations under the convertible debentures.
Accordingly, all of the Company's previously issued and outstanding
instruments, such as warrants, as well as those issued in the future, would
be classified as liabilities as well, effective with the issuance of the
convertible debentures and until the Company is able to assert that it has
a sufficient amount of authorized and unissued shares to settle its
obligations under all outstanding instruments. At the date of the issuance
of the convertible debentures, the Company had 1,941,871 warrants
outstanding which were classified as derivatives.
The fair value of the derivative liabilities at the date of issuance of the
convertible debentures and at June 30, 2006 are as follows:
At Issuance At June 30, 2006
------------ ------------------
Freestanding warrants $ 3,532,348 $ 504,621
Embedded conversion features 3,463,542 3,390,838
Liquidated damages 192,500 192,500
Other outstanding warrants 143,268 0
The Company used the following methodology to value the embedded conversion
features and liquidated damages:
It estimated the discounted cash flows payable by the Company, using
probabilities and likely scenarios, for event of defaults triggering the
30% penalty premium and 18% interest accrual, subsequent financing reset,
and liquidated damages, such as the untimely effectiveness of a
registration statement. If the additional cash consideration was payable in
cash or stock, it determined the amount of additional shares that would be
issuable pursuant to its assumptions. The Company will revisit the weight
of probabilities and the likelihood of scenarios at each of the measurement
dates of the derivative liabilities, which are the balance sheet dates.
The Company used the following assumptions to measure the identified
derivatives, using the Lattice valuation model, as follows:
Embedded conversion features
At issuance At June 30, 2006
------------ -----------------
Market price: $ 0.4880 $ 0.19
Conversion price: $ 0.4544 $ 0.17
Term: 4 years 3.42 years
Volatility: 39% 39%
Risk-free interest rate: 4.39% 5.13%
Freestanding warrants
The derivative liability amounts to the fair value of the warrants issuable
upon exercise, assuming that the underlying shares will not be timely
registered. We computed the fair value of this embedded derivative using
the Black Scholes valuation model with the following assumptions:
12
At issuance At June 30, 2006
------------ ------------------
Market price: $ 0.488 $ 0.19
Exercise price: $ 0.4761 $ 0.34
Term: 5 years 4.42 years
Volatility: 39% 39%
Risk-free interest rate: 4.39% 5.13%
We adjusted the effective exercise price to reflect the contractual
adjustment assuming that the warrants will most likely be registered during
the fourth quarter of 2006.
Liquidated damages
The liquidated damages, payable in cash, are valued using the weighting
probabilities and likely scenarios to estimate the amount of liquidated
damages and were valued at approximately $192,500 at the date of the grant
of the registration rights and at June 30, 2006.
The aggregate fair value of the derivative liabilities associated with the
warrants, embedded conversion features, and liquidated damages in
connection with the issuance of the convertible debentures and related
agreements amounted to approximately $7.05 million at the date of issuance
which exceeded the principal amount of the convertible debentures by
approximately $50,000. The Company recognized $7,000,000 as debt discount
and the excess amount has been recorded as other expenses. Additionally,
approximately $136,000 of the fair value of the warrants was recorded as
deferred financing costs.
The aggregate fair value of all derivative liabilities upon issuance of the
various debt and equity instruments amounted to $13.3 million, of which
$10.7 million was allocated to the net proceeds of the issuance of common
stock and convertible debentures, $2.4 million was allocated to other
expenses and approximately $136,000 was allocated to deferred financing
costs.
The decrease in fair value of the derivative liabilities between
measurement dates, which are the date of issuance of the various debt and
equity instruments and the balance sheet date, which is June 30, 2006
amounted to approximately $8.7 million and has been recorded as other
income.
6) RESTATEMENT OF INTERIM FINANCIAL STATEMENTS
13
After amending our financial statements for the interim periods ended March
31, 2005, June 30, 2005, September 30, 2005 and March 31, 2006; and for the
year ended December 31, 2005 to properly account for certain liquidated
damages associated with the $3.985 million private placement of warrants
and shares of our common stock, and the $7,000,000 private offering of
convertible debentures and warrants, management determined that the carry
forward impact of some of the restatements were not properly reflected in
the financial statements for the interim period ended June 30, 2006. Proper
carry forward of the restated amounts would affect following figures in our
quarterly financial statements:
Balance sheet: decrease in deferred financing costs ($101,894), accumulated
deficit ($10,568,028); and an increase in additional paid-in capital
($10,466,134).
Statement of income for the six-month period ended June 30, 2005: decrease
in other expense-derivatives ($92,860), earnings per share-diluted ($0.03);
and an increase in net income ($92,860), earnings per share-basic ($0.01).
Statement of cash flows for the six-month period ended June 30, 2005:
decrease in recognition of derivative liabilities ($92,860); and an
increase in net income ($92,860).
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
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, 2005 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/A
filed with the Securities and Exchange Commission.
The following discussion and other parts of this Form 10-QSB contain
forward-looking statements that involve risks and uncertainties. Forward-looking
statements can be identified by words such as "anticipates," "expects,"
"believes," "plans," and similar terms. Our actual results could differ
materially from any future performance suggested in this report as a result of
factors, including the risk factors discussed in Exhibit 99.1 hereto, which is
incorporated herein by reference, and factors discussed elsewhere in this report
and in our Annual Report on Form 10-KSB/A for the fiscal year ended December 31,
2005. All forward-looking statements are based on information currently
available to the Company and we assume no obligation to update such
forward-looking statements, except as required by law. Service marks, trademarks
and trade names referred to in this Form 10-QSB are the property of their
respective owners.
--------------------------------------------------------------------------------
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, environmental and laboratory instrumentation 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 assembling a 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.
Prior to the closing of the mergers, as discussed in the footnotes to the
financial statements, 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 or service revenue are recorded as deferred revenue.
15
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, 2006 no assets were impaired.
We account for liquidated damages pursuant to Emerging Issue Task Force ("EITF")
05-04, View C, "The Effect of a Liquidated Damages Clause on a Freestanding
Financial Instrument", subject to EITF Issue No. 00-19, "Accounting for
Derivative Financial Instruments Indexed to, and Potentially Settled in, a
Company's Own Stock". Pursuant to EITF 05-04, View C, liquidated damages payable
in cash or stock are accounted for as a separate derivative, which requires a
periodical valuation of its fair value and a corresponding recognition of
liabilities associated with such derivative. We also account for our 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 is
recognized as other expense or other income, respectively. The valuation of such
derivatives requires significant judgment. We exercise our judgment in
determining the maximum liabilities associated with such derivatives as well as
the expected volatility related to their fair value. We base our estimate of the
maximum liabilities on our interpretation of the agreements related the
derivatives.
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.
16
RESULTS OF OPERATIONS
The following tables sets forth, in $ and as a percentage of revenues, certain
items included in our Income Statements (see Financial Statements and Notes) for
the periods indicated:
SIX MONTHS ENDED JUNE 30
--------------------------
2006 2005
------ ----------
(Restated)
STATEMENTS OF OPERATIONS DATA:
Revenues............................... 100% 100%
Cost of Sales.......................... 51% 58%
Gross Profit........................... 49% 42%
Operating Expenses..................... 161% 220%
(Loss) From Operations................. (112%) (178%)
Other Income .......................... 23% 312%
Net Income (loss)...................... (89%) 134%
SIX MONTHS ENDED JUNE 30, 2006 COMPARED TO SIX MONTHS ENDED JUNE 30, 2005
Revenues are derived from product sales and product support services. For the
six months ended June 30, 2006 revenues were $1,154,224, compared to $651,652 in
2005. The 77% increase in revenues results mainly from an increase in the number
of zNose(R) units shipped from 19 units in 2005 to 32 units in 2006 for the
six-month period. Also contributing to the increase in revenues was a slight
increase in sales from product support services.
Cost of Sales consist of product costs and expenses associated with product
support services. For the six-month period, cost of sales was $592,714 for 2006
as compared to $375,086 in 2005. The increase in cost of sales was due to a
greater volume of products shipped in the current year as compared to last year.
The improvement in cost of sales as a percent of revenues, from 58% of 2005
revenues to 51% of 2006 revenues, is attributed to production efficiencies and
production economies of scales resulting in overhead being spread over a greater
volume of production - all of which contributed to a lower manufacture cost per
unit.
Gross profit was $561,510 for the six months ending June 30, 2006, compared to
$276,566 for the same period in 2005. The increase in gross profit was due to
greater sales volume, and an increase in high-margin support services revenues
over 2005. The improvement in 2006 gross profit from 42% in 2005 to 49% of
revenues is attributed to greater labor utilization, which improved labor
productivity and lowered the direct labor cost per manufactured unit.
Research and Development costs for the first six months of 2006 were $416,144
versus $331,285 for 2005. The increase of $84,859 in current year expenditures
over 2005 were mainly for greater personnel related expenses incurred for
enhancement of existing products and development of the Model 4300, the
company's newest zNose(R) product that was introduced to market in June 2006.
Selling, General and Administrative expenses for the six months ending June 30,
2006 were $1,436,961, compared to $1,103,030 for 2005. The $333,931 increase was
due to increased staffing required to support the growth of the company,
incurrence of necessary expenses associated with being a public company,
expansion of marketing activities including increased personnel staffing and
participation in a greater number of industry trade shows and conferences.
Interest expense for the first six months of 2006 was $1,416,279, as compared to
$34,271 in 2005. The increase in interest expense is primarily due to the
amortization of debt discount and stated interest associated with our $7,000,000
convertible debentures, which were issued in December 2005.
Other income-derivatives primarily consist of the decrease in the fair value of
derivative liabilities between the measurement dates. The increase in other
income during the six-month period ending June 30, 2006 when compared to prior
period is primarily attributable to a decrease in the quoted price of our common
stock. Please refer to Note 5
17
of our accompanying financial statements for further explanation of the origin
and nature of such income. We are unable to determine whether we will record
further decreases in the fair value of derivative liabilities in the foreseeable
future, which would be recorded as other income-derivatives. Such decreases
would be generally triggered by a decrease in the fair value of our stock price,
upon satisfaction of liquidated damages pursuant to registration rights, or,
possibly, upon satisfaction of our convertible debentures.
Other expense-derivatives primarily consist of the recognition of derivative
liabilities we issued during the three-month period ended March 31, 2005. No
derivatives were issued during the three-month period ended June 30, 2005 nor
were any derivatives issued in 2006. Please refer to Notes 5 of our accompanying
financial statements for further explanation of the origin and nature of such
expenses.
LIQUIDITY AND CAPITAL RESOURCES
For the six-month period, net cash used by the company for operating activities
were $1,454,193 and $1,364,616 for 2006 and 2005 respectively. Cash used in the
first six months of 2006 was comprised of the net loss for the period of
$1,024,755, less net non-cash items (including depreciation and amortization
expenses of $18,865, issuance of common shares for services of $21,000,
amortization of debt discount of $1,166,667, amortization of deferred financing
costs of $103,782, less decrease in fair value of derivative liability of
$1,683,119) of $372,805 minus the net change in operating assets and liabilities
of $56,633. Cash used in operations during the same six months of 2005 was
comprised of the net income for the period of $875,576, less net non-cash
expenses of $2,052,703 (including depreciation and amortization expenses of
$5,605, recognition of derivative liabilities of $2,205,642, less decrease in
fair value of derivative liability of $4,263,950), less the net change in
operating assets and liabilities of $187,488.
Investing activities provided cash of $599,413 in the first six months of 2006
and used $47,500 during the same period in 2005. Cash of $69,265 in 2006 and
$77,780 in 2005 were used to purchase of capital equipment. In 2005, $30,280 was
received from the sales of property and equipment. Whereas in 2006, $668,678 was
provided due to a reduction in the amount of collateral required for the
company's line of credit.
Cash provided from financing activities for the first six months of 2006
consisted of $370,000 from an increase in the line of credit the company has in
place with its bank. The funds from the credit line were used for operating
expenses. In 2005, financing activities provided cash of $3,501,708 primarily
from the issuance of common stock in February.
On June 30, 2006 the company's cash (including cash equivalents) was $3,735,141,
compared to $1,209,424 on June 30, 2005. The company had a working capital on
June 30, 2006 of $436,679. The working capital includes $4,087,959 for
derivative liabilities - excluding this amount from current liabilities, the
company's working capital would be $4,524,638. The company's working deficit at
June 30, 2005 was $1,220,398 - excluding derivative liabilities of $1,753,400,
working capital would be $533,011.
The company has a credit facility in place with East West Bank for $500,000. The
line of credit had borrowings of $370,000 against it at June 30, 2006. The funds
from the line of credit was used for operating expenses. The line of credit
expires on March 31, 2007.
Although the company possesses a bank operating line of credit, there can be no
assurance that these proceeds will be adequate for our future capital needs.
There can be no assurance that any required or desired financing will be
available through any other bank borrowings, debt, or equity offerings, or
otherwise, on acceptable terms. If future financing requirements are satisfied
through the issuance of equity securities, investors may experience significant
dilution in the net book value per share of common stock and there is no
guarantee that a market will exist for the sale of the company's shares.
The company's primary capital needs are to fund its growth strategy, which
includes a sales and marketing staff to support the marketing, advertising and
selling of the zNose(R) family of chemical detection products, increasing
18
distribution channels both in the domestic and foreign markets, introducing new
products, improving existing product lines and development of a strong corporate
infrastructure.
SEASONALITY AND QUARTERLY RESULTS
We 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 do not foresee any material
inflationary trends for our product sources.
OFF-BALANCE SHEET ARRANGEMENTS
We do not have any off-balance sheet arrangements.
19
PART II
OTHER INFORMATION
ITEM 6. EXHIBITS
Exhibit
No. Description
------- -----------------------------------------------------------------
31.1 Certification of Chief Executive Officer Pursuant to Rule
13a-14(a)/15d-14(a) of the Exchange Act.
31.2 Certification of Principal Financial and Accounting Officer
Pursuant to Rule 13a-14(a)/15d-14(a) of the Exchange Act.
32.1 Certification of Chief Executive Officer Pursuant to Rule
13a-14(b) or 15d-14(b) of the Exchange Act and 18 U.S.C. 1350.
32.2 Certification of Principal Financial and Accounting Officer
Pursuant to Rule 13a-14(b) or 15d-14(b) of the Exchange Act and
18 U.S.C. 1350.
99.1 Risk Factors (previously filed).
--------------------------------------------------------------------------------
20
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this amended report to be signed on its behalf by the undersigned, thereunto
duly authorized.
ELECTRONIC SENSOR TECHNOLOGY, INC.
Dated September 26, 2006 By: /s/ Teong C. Lim
--------------------------------------
Name: Teong C. Lim
Title: President and Chief Executive Officer
(Principal Executive Officer)
Dated September 26, 2006 By: /s/ Francis Chang
--------------------------------------
Name: Francis Chang
Title: Secretary, Treasurer
and Vice President of
Finance and Administration
(Principal Accounting Officer)