NOTES TO FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION
The financial statements of Electronic Systems Technology, Inc. (the "Company") presented in this Form 10Q are unaudited and reflect, in the opinion of Management, a fair presentation of operations for the three and six-month periods ended June 30, 2018 and June 30, 2017. All adjustments of a normal recurring nature and necessary for a fair presentation of the results for the periods covered have been made. Certain information and footnote disclosure normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to the applicable rules and regulations of the Securities and Exchange Commission. In preparation of the financial statements, certain amounts and balances have been reformatted from previously filed reports including classification of components of cash and cash equivalents to conform to the format of this quarterly presentation. These financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Company's Form 10K for the year ended December 31, 2017, as filed with Securities and Exchange Commission.
In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-09 Revenue Recognition, replacing guidance currently codified in Subtopic 605-10 Revenue Recognition-Overall with various SEC Staff Accounting Bulletins providing interpretive guidance. The new ASU establishes a new five step principles-based framework in an effort to significantly enhance comparability of revenue recognition practices across entities, industries, jurisdictions, and capital markets. In August 2015, the FASB issued ASU No. 2015-14 Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date. ASU No. 2015-14 defers the effective date of ASU No. 2014-09 until annual and interim reporting periods beginning after December 15, 2017. The Company has performed an assessment of the impact of implementation of ASU No. 2014-09, and concluded it will not change the timing of revenue recognition or amounts of revenue recognized compared to how revenue is recognized under current policies. ASU No. 2014-09 will require additional disclosures, where applicable, on (i) contracts with customers, (ii) significant judgments and changes in judgments in determining the timing of satisfaction of performance obligations and the transaction price, and (iii) assets recognized for costs to obtain or fulfill contracts. See Note 5.
In February 2016, the FASB issued ASU No. 2016-02 Leases (Topic 842). The update modifies the classification criteria and requires lessees to recognize the assets and liabilities on the balance sheet for most leases. The update is effective for fiscal years beginning after December 15, 2018, with early adoption permitted. The Company is currently evaluating the potential impact of implementing this update on the financial statements.
In August 2016, the FASB issued ASU No. 2016-15 Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. The update provides guidance on classification for cash receipts and payments related to eight specific issues. The update is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years, with early adoption permitted. The Company determined the impact of implementing this update is immaterial.
In November 2016, the FASB issued ASU No. 2016-18 Statement of Cash Flows (Topic 230): Restricted Cash. The update requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. The update is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years, with early adoption permitted. The adoption of this standard did not have a material impact on the financial statements.
In January 2017, the FASB issued ASU No. 2017-01 Business Combinations (Topic 805): Clarifying the Definition of a Business. The update clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The update is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The Company will apply the provisions of the update to potential future acquisitions occurring after January 1, 2018.
The Company estimates that for 2018 the anticipated effective annual federal income tax rate will be 0%.
Other accounting standards that have been issued or proposed by FASB that do not require adoption until a future date are not expected to have a material impact on the financial statements upon adoption.
The results of operations for the six-month period ended June 30, 2018 are not necessarily indicative of the results expected for the full fiscal year or for any other fiscal period.
6
ELECTRONIC SYSTEMS TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
NOTE 2 - INVENTORIES
Inventories are stated at lower of direct cost or net realizable value with cost determined using the FIFO (first in, first out) method. Inventories consist of the following:
|
|
| |
|
|
June 30,
2018
|
December 31,
2017
|
|
Parts
|
$ 122,420
|
$ 143,452
|
|
Work in progress
|
200,696
|
201,526
|
|
Finished goods
|
314,146
|
417,539
|
|
|
$ 637,262
|
$ 762,517
|
NOTE 3 - INCOME (LOSS) PER SHARE
Basic income (loss) per share excludes dilution and is computed by dividing income (loss) available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted income (loss) per share reflects potential dilution occurring if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the Company. The diluted weighted average number of common shares outstanding for the three-month period ended June 30, 2018 and 2017 was 4,994,212 and 5,040 803, respectively. The primary weighted average number of common shares outstanding for the six months ended June 30, 2018 and 2017 was 4,986,048 and 5,038,043 respectively.
NOTE 4 - STOCK OPTIONS
As of June 30, 2018, the Company had outstanding stock options which have been granted periodically to individual employees and directors with no less than three years of continuous tenure with the Company. The Board of Directors did not issue stock options during the first six-months ended June 30, 2018.
A summary of option activity during the six months ended June 30, 2018 is as follows:
|
|
|
|
| |
|
|
Number Outstanding
|
Weighted-Average
Exercise Price Per
Share
|
Weighted-Average
Remaining Life
(Years)
|
Approximate
Aggregate
Intrinsic Value
|
|
Outstanding and Exercisable at December 31, 2017
|
150,000
|
$0.40
|
|
|
|
Expired
|
(30,000)
|
0.40
|
|
|
|
Outstanding and Exercisable at June 30, 2018
|
120,000
|
$0.40
|
2.1
|
$2,400
|
7
ELECTRONIC SYSTEMS TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
NOTE 5 - ASU No. 2014-09 DISCLOSURE
In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-09 Revenue Recognition, replacing guidance currently codified in Subtopic 605-10 Revenue Recognition-Overall. The new ASU establishes a new five step principles-based framework in an effort to significantly enhance comparability of revenue recognition practices across entities, industries, jurisdictions, and capital markets. In August 2015, the FASB issued ASU No. 2015-14 Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date. ASU No. 2015-14 deferred the effective date of ASU No. 2014-09 until annual and interim reporting periods beginning after December 15, 2017. We adopted ASU No. 2014-09 as of January 1, 2018 using the modified-retrospective transition approach. The impact of adoption of the update to our financial statements for the six months ended June 30, 2018 would have not been material.
We performed an assessment of the impact of implementation of ASU No. 2014-09, and concluded it does not change the timing of revenue recognition or amounts of revenue recognized compared to how we recognize revenue under our current policies. Our revenues involve a relatively limited number of types of contracts and customers. In addition, our revenue contracts do not involve multiple types of performance obligations. Revenues from product sales are recognized, and the transaction price is known, when the goods are shipped or delivered, and title and risk of loss passes to the customer.
Adoption of ASU No. 2014-09 involves additional disclosures, where applicable, on (i) contracts with customers, (ii) significant judgments and changes in judgments in determining the timing of satisfaction of performance obligations and the transaction price, and (iii) assets recognized for costs to obtain or fulfill contracts.
For product sales, the performance obligation is met, the transaction price can be reasonably estimated, and revenue is recognized generally at the time of shipment. We have determined the performance obligation is met and title is transferred to the customer upon shipment of products because, at that time, 1) legal title is transferred to the customer, 2) the customer has accepted the product and obtained the ability to realize all of the benefits from the product, 3) the product specifications are known, have been communicated to the customer, and the customer has the significant risks and rewords of ownership to it, 4) it is very unlikely the product will be rejected by a customer upon physical receipt, and 5) we have the right to payment for the product. Revenues from site support and engineering services are recognized as the Company performs the services, which is when the performance obligation is determined to be met.
Sales and accounts receivable for product sales are recorded net of charges for certain sales incentives and discounts, and applicable state and local sales taxes, which represent components of the transaction price. Charges are estimated by us upon shipment of the product based on contractual terms, and actual charges typically do not vary materially from our estimates.
The Company does not generally sell its products with the right of return. Therefore, returns are accounted for when they occur and are accepted.
The Company warrants its products as free of manufacturing defects and provides a refund of the purchase price, repair or replacement of the product for a period of one year from the date of installation by the first user/customer. No allowance for estimated warranty repairs or product returns has been recorded. Warranty expenses are immaterial based on the Company’s historical warranty experience.
Our trade accounts receivable balance related to sales to customers was $171,406 at June 30, 2018 and $98,941 at December 31, 2017 and included no allowance for doubtful accounts.
We have determined our sales do not include a significant financing component, as payment is received at the time the performance obligation is satisfied.
We do not incur significant costs to obtain sales, nor costs to fulfill sales orders which are not addressed by other standards. Therefore, we have not recognized an asset for such costs as of June 30, 2018 or December 31, 2017.
NOTE 6 - COMMITMENTS and CONTINGENCIES
The Company leases its facilities from a port authority for $5,445 per month for three years, expiring in September 2020, with annual increases based upon the Consumer Price Index.
8
ELECTRONIC SYSTEMS TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
NOTE 7 - SEGMENT REPORTING
Segment information is prepared on the same basis that the Company's management reviews financial information for operational decision making purposes.
During the quarter ended June 30, 2018, Domestic customers represented approximately 95% of total net revenues. Domestic product and Site Support sales revenues increased to $446,589 for the quarter ended June 30, 2018 compared to $309,556 for the quarter ended June 30, 2017. Year to date domestic sales revenues increased to $749,176 as of June 30, 2018 compared to $610,038 for the same period of 2017. Foreign customers represented approximately 5% of total net revenues.
Foreign sales revenues decreased to $25,325 for the quarter ended June 30, 2018 compared to $71,057 for the quarter ended June 30, 2017. Year to date foreign sales revenues decreased to $30,565 as of June 30, 2018 compared to $149,361 for the same period of 2017. During the three and six-months ended June 30, 2018, sales to three customers comprised more than 10% of the Company’s sales revenues and one customer respectively.
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|
| |
|
|
For the three month period ended
June 30, 2018
|
For the six month period ended
June 30, 2018
|
|
Customer A:
|
27%
|
25%
|
|
Customer B:
|
15%
|
-
|
|
Customer C:
|
12%
|
-
|
Revenues from foreign countries during the second quarter and six-months of 2018 consist primarily of revenues from product sales to Columbia, Bolivia and Ireland.
NOTE 8 – STOCK REPURCHASE
On January 13, 2016, the Company’s Board of Directors approved a resolution authorizing the repurchase of up to $100,000 of the Company’s common stock at the price of $0.38 per share. The Company’s share repurchase program does not obligate it to acquire any specific number of shares. On March 2, 2016, the Company’s Board of Director approved a resolution authorizing the repurchase of an additional $150,000 of the Company’s common stock at the price of $0.38 per share. Under the program (the “Stock Repurchase Plan”), shares may be repurchased in open market transactions, complying with Rule 10b5-1 and Rule 10b-18 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Shares repurchased are retired. As of June 30, 2018, $184,405 remains of $250,000 approved by the board. 97,764 and 74,885 shares were repurchased in 2016 and 2017 respectively, bringing the total number of shares repurchased to 172,619. During the six-month period ended June 30, 2018, there were no shares repurchased.
9
