NOTES TO FINANCIAL STATEMENTS
1.
Organization and Summary of Significant Accounting Policies
Business Organization
The Company was incorporated under the laws of the State of Washington on February 10, 1984, primarily to develop, produce, sell and distribute wireless modems that will allow communication between peripherals via radio frequency waves.
Effective September 13, 2007, the Company announced their establishment of a “doing business as” or dba structure, based on the Company’s registered trade name of ESTeem® Wireless Modems.
Accounting Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Estimates used in the accompanying financial statements include the allowance for doubtful accounts receivable, inventory obsolescence, useful lives of depreciable assets, share-based compensation, and deferred income taxes. Actual results could differ from those estimates.
Concentrations and Credit Risks
The Company places its cash with three major financial institutions. During the period, the Company had cash balances that were in excess of federally insured limits.
The Company purchases certain key components necessary for the production of its products from a limited number of suppliers. The components provided by the suppliers could be replaced or substituted by other products. It is possible that if this action became necessary, an interruption of production and/or material cost expenditures could take place.
Revenue Recognition
The Company accounts for revenue in accordance with Accounting Standards Codification (ASC) Topic 606: Revenue from Contracts with Customers. Under Topic 606, a performance obligation is a promise in a contract with a customer to transfer a distinct good or service to the customer. Our contracts with customers contain a single performance obligation, A contract's transaction price is recognized as revenue when, or as, the performance obligation is satisfied.
The Company considers the contractual consideration payable by the customer when determining the transaction price of each contract. Revenue is 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. Shipping estimates are determined by utilizing shipping costs provided by the various service providers websites based on number of packages, weight and destination. Shipping costs are included in the cost of goods sold as the revenue is captured in total sales.
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ELECTRONIC SYSTEMS TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS
1.
Organization and Summary of Significant Accounting Policies - (Continued)
Revenue Recognition - (Continued)
The Company receives payments from customers based on the terms established in our contracts. When amounts are billed and collected before the services are performed, they are included in deferred revenues. The Company does not generally sell its products with the right of return. Therefore, returns are accounted for when they occur and are accepted. Products sold to foreign customers are shipped after payment is received in U.S. funds, unless an established distributor relationship exists, or the customer is a foreign branch of a U.S. company.
Performance obligations for product sales are satisfied as of a point in time. Revenue is recognized when control of the product transfers to the customer, generally upon product shipment. Performance obligations for site support and engineering services are satisfied over-time if the customer receives the benefits as we perform work and we have a contractual right to payment. Revenue recognized on an over-time basis is based on costs incurred to date relative to milestones and total estimated costs at completion to measure progress.
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.
Financial Instruments
The Company’s financial instruments are cash, money market funds, and certificates of deposit. The recorded values of cash, money market funds and certificates of deposit approximate their fair values based on their short-term nature.
Cash and Cash Equivalents
Cash and cash equivalents consist primarily of cash and money market funds purchased with original maturities of three months or less.
Allowance for Uncollectible Accounts
The Company uses the allowance method to account for estimated uncollectible accounts receivable. Accounts receivable are presented net of an allowance for doubtful accounts. As of December 31, 2018 and 2017, the Company’s estimate of doubtful accounts was zero. The Company’s policy for writing off past due accounts receivable is based on the amount, time past due, and response received from the subject customer.
Inventories
Inventories are stated at lower of direct cost or market. Cost is determined on an average cost basis that approximates the first-in, first-out (FIFO) method. Market is determined based on net realizable value and consideration is given to obsolescence.
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ELECTRONIC SYSTEMS TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS
1.
Organization and Summary of Significant Accounting Policies - (Continued)
Reclassifications
Certain prior year amounts have been reclassified for consistency with the current period presentation. These reclassifications had no effect on the reported statement of operations.
Property and Equipment
Property and equipment is carried at cost. Major betterments are capitalized and de minimis purchases are expensed. Depreciation is computed using the straight-line method over the estimated useful lives of the assets. The useful life of property and equipment for purposes of computing depreciation is three to seven years. When the Company sells or otherwise disposes of property and equipment a gain or loss is recorded in the statement of operations. The cost of improvements that extend the life of property and equipment is capitalized. The Company periodically reviews its long-lived assets for impairment and, upon indication that the carrying value of such assets may not be recoverable, recognizes an impairment loss by a charge against current operations.
Certificates of Deposit
Certificates of deposit with original maturities ranging from one month to twelve months were $900,000 and $1,000,000 at December 31, 2018 and 2017, respectively.
Software Costs
Software purchased and used by the Company is capitalized as property and equipment based on its cost, and amortized over its useful life, usually not exceeding five years.
The Company capitalizes the costs of creating a software product to be sold, leased or otherwise marketed, for which technological feasibility has been established. Amortization of the software product, on a product-by-product basis, begins on the date the product is available for distribution to customers and continues over the estimated revenue-producing life, not to exceed five years.
Income Taxes
The provision (benefit) for income taxes is computed on the pretax income (loss) based on the current tax law. Deferred income taxes are recognized for the tax consequences in future years of differences between the tax basis of assets and liabilities and their financial reporting amounts at each year-end based on enacted tax laws and statutory tax rates. The Company evaluates positive and negative information when estimating the valuation allowance for deferred tax assets. For tax positions that meet the more likely than not recognition threshold a deferred tax asset is recognized.
Research and Development
Research and development costs are expensed as operating expenses when incurred. Research and development expenditures for new product development and improvements of existing products by the Company for 2018 and 2017 were $179,413 and $252,411, respectively.
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ELECTRONIC SYSTEMS TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS
1.
Organization and Summary of Significant Accounting Policies - (Continued)
Advertising Costs
Costs incurred for producing and communicating advertising are expensed as operating expenses when incurred. Advertising costs for the years ended December 31, 2018 and 2017 were $9,403 and $9,832, respectively.
Earnings Per Share
The Company is required to have dual presentation of basic earnings per share (“EPS”) and diluted EPS. Basic EPS is computed as net income (loss) divided by the weighted average number of common shares outstanding for the period. Diluted EPS is calculated based on the weighted average number of common shares outstanding during the period plus the effect of potentially dilutive common stock equivalents.
Potentially dilutive common stock equivalents consist of 120,000 and 150,000 stock options outstanding as of December 31, 2018 and 2017, respectively. As of December 31, 2018 and 2017, the potentially dilutive stock options were not included in the calculation of the diluted weighted average number of shares outstanding or diluted EPS as their effect would have been anti-dilutive.
Share-Based Compensation
Share-based payments to employees, including grants of employee stock options, are measured at fair value and expensed in the statement of operations over the vesting period. See Note 7 for additional information. In addition to the recognition of expense in the financial statements, any excess tax benefits received upon exercise of options will be presented as a financing activity inflow rather than an adjustment of operating activity in the statement of cash flows.
Fair Value Measurements
For fair value measurements, the Company maximize s the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The Company follows a fair value hierarchy based on the level of independent, objective evidence surrounding the inputs used to measure fair value. A financial instrument's categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. Inputs are prioritized into three levels that may be used to measure fair value:
Level 1: Level 1 applies to assets or liabilities for which there are quoted prices in active markets for identical assets or liabilities.
Level 2: Level 2 applies to assets or liabilities for which there are inputs other than quoted prices that are observable for the asset or liability such as quote prices for similar assets or liabilities in active markets; quoted prices for identical assets in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which significant inputs are observable or can be derived principally from, or corroborated by, observable market data.
Level 3: Level 3 applies to assets or liabilities for which there are unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of the assets or liabilities.
25
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ELECTRONIC SYSTEMS TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS
1.
Organization and Summary of Significant Accounting Policies - (Continued)
At December 31, 2018 and 2017, the Company has no assets or liabilities subject to fair value measurements on a recurring basis.
New Accounting Pronouncements
Accounting Standards Updates Adopted
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 adoption of the update did not impact our existing method of recognizing revenue and had no impact on 2018 or previously issued financial statements. Additional disclosures required by the update have been included in Note 9.
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 adoption of this update on January 1, 2018 had minimal impact on the Company’s financial statements.
Accounting Standards Updates to Become Effective in Future Periods
In February 2016, the 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 2018, the FASB issued ASU No. 2018-13 Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement. The update removes, modifies and makes additions to the disclosure requirements on fair value measurements. The update is effective for fiscal years beginning after December 15, 2019, with early adoption permitted. The Company is currently evaluating the impact of this update on our fair value measurement disclosures.
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Table of Contents
ELECTRONIC SYSTEMS TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS
2.
Inventories
Inventories consist of the following:
|
|
2018
|
2017
|
|
Parts
|
$ 133,809
|
$ 143,452
|
|
Work in progress
|
243,081
|
201,526
|
|
Finished goods
|
338,105
|
417,539
|
|
|
$ 714,995
|
$ 762,517
|
3.
Property and Equipment
Property and equipment consist of the following:
|
|
2018
|
2017
|
|
Laboratory equipment
|
$ 580,452
|
$ 580,452
|
|
Software purchased
|
35,028
|
35,028
|
|
Furniture and fixtures
|
16,310
|
16,561
|
|
Dies and molds
|
130,176
|
130,176
|
|
|
761,966
|
762,217
|
|
Accumulated depreciation and amortization
|
(741,598)
|
(730,773)
|
|
|
$ 20,368
|
$ 31,444
|
4.
Income Taxes
For the year ended December 31, 2018, the Company did not have an income tax benefit nor provision because of continuing losses. The Company recognized a deferred income tax provision for the year ended December 31, 2017 of $244,092 when it established a full valuation allowance against deferred tax assets.
The components of net deferred tax assets at December 31, were as follows:
|
|
|
2018
|
2017
|
|
Accrued liabilities
|
|
$ 2,400
|
3,700
|
|
Inventories
|
|
16,400
|
9,600
|
|
Other
|
|
1,400
|
800
|
|
Federal income tax credits
|
|
66,000
|
66,000
|
|
Net operating loss carryforwards
|
|
175,000
|
160,700
|
|
Less valuation allowance
|
|
(261,200)
|
(240,800)
|
|
Total deferred tax assets, net
|
|
$ 0
|
$ 0
|
Realization of the deferred tax asset is dependent on generating sufficient taxable income prior to expiration of the loss carryforwards and the income tax carryforwards. Management determined that it does not believe it is more likely than not that all of the net deferred tax assets will be
27
Table of Contents
ELECTRONIC SYSTEMS TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS
realized. Therefore, a valuation allowance has been recorded for the full net deferred tax asset at December 31, 2018 and 2017.
4.
Income Taxes - (Continued)
At December 31, 2018, the Company had approximately $66,000 of research and development income tax credits available to reduce federal income taxes in future periods. The credits expire from 2033-2036. In addition, at December 31, 2018, the Company had approximately $835,000 of net operating loss carryforwards, $750,000 of which will expire between 2033 and 2036. The remaining balance of $85,000 will never expire but whose utilization is limited to 80% of taxable income in any future year.
The differences between the provision (benefit) for federal income taxes and federal income taxes computed using the U.S. statutory federal income tax rate (21% for 2018 and 35% for 2017) were as follows:
|
|
|
2018
|
2017
|
|
Amount computed using the statutory rate
|
|
$ (24,381)
|
$ (69,900)
|
|
Other
|
|
3,981
|
3,394
|
|
Research and development credits
|
|
-
|
(3,062)
|
|
Impact of change in federal tax rate
|
|
-
|
102,439
|
|
Change in valuation allowance
|
|
20,400
|
211,221
|
|
Provision (benefit) for federal income taxes
|
|
$ -
|
$ 244,092
|
On December 22, 2017, the United States enacted the Tax Cuts and Jobs Act (the “Act”) resulting in significant modifications to existing law. We have completed the accounting for the effects of the Act during the quarter ended December 31, 2017. Our financial statements for the year ended December 31, 2017 reflect certain effects of the Act which includes a reduction in the corporate tax rate from 35% to 21% as well as other changes. As a result of the changes to tax laws and tax rates under the Act, we incurred incremental income tax expense of $102,439 during the year ended December 31, 2017, which consisted primarily of the remeasurement of deferred tax assets and liabilities from 35% to 21% and application of a full valuation allowance.
Should the Company have future accrued interest expense and penalties related to uncertain income tax positions, they will recognize those expenses in income tax expense.
The Company files federal income tax returns in the United States only. The Company is no longer subject to federal income tax examination by tax authorities for years before 2015. The Company has evaluated all tax positions for open years and has concluded that they have no material unrecognized tax benefits or penalties.
28
Table of Contents
ELECTRONIC SYSTEMS TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS
5.
Profit Sharing Salary Deferral 401-K Plan
The Company sponsors a Profit Sharing Plan and Salary Deferral 401-K Plan and Trust. All employees over the age of twenty-one are eligible. On January 1, 2006, the Company adopted a four percent salary matching provision. The Company contributed $15,742 and $15,149 to the plan for the years ended December 31, 2018 and 2017 respectively.
6.
Employee Bonus Program
The Board of Directors establishes Sales and Net Income thresholds at the start of each year that are used in calculating the amount of Bonuses that may be awarded. If these thresholds are not achieved, there will be no bonus issued. There was no accrual or expense recorded for 2018 or 2017.
7.
Share-Based Compensation
The Company grants stock options to individual employees and directors with three years continuous tenure. After termination of employment, stock options may be exercised within ninety days, after which they are subject to forfeiture. There were no option grants during 2018 and 2017.
In the years ended December 31, 2018 and 2017, the Company recognized $0 and $0 respectively, in share-based compensation expense. No non-vested share-based compensation arrangements existed as of December 31, 2018 and 2017.
A summary of option activity follows:
|
|
Number Outstanding
|
Weighted Average Exercise Price Per Option
|
Weighted Average Remaining Contractual Term (Years)
|
|
Balance at December 31, 2016
|
220,000
|
0.40
|
2.8
|
|
Granted
|
-0-
|
-0-
|
|
|
Expired/Forfeited
|
(70,000)
|
0.38
|
|
|
Balance at December 31, 2017
|
150,000
|
0.40
|
2.6
|
|
Granted
|
-0-
|
-0-
|
|
|
Expired/Forfeited
|
(30,000)
|
0.40
|
|
|
Balance at December 31, 2018
|
120,000
|
0.40
|
1.6
|
|
Outstanding and Exercisable at December 31, 2018
|
120,000
|
$ 0.40
|
1.6
|
The aggregate intrinsic value of the options outstanding and exercisable at December 31, 2018, was $0.
29
Table of Contents
ELECTRONIC SYSTEMS TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS
8.
Leases
The Company leases its facilities from a port authority for three years, expiring in September 2020, with annual increases based upon the Consumer Price Index. The lease expense for the years ended December 31, 2018 and 2017 was $65,633 and $65,341 respectively. The lease expense commitment through the year ended December 31, 2020 is expected to be approximately $66,800 per year.
9.
Revenue
The Company product revenue includes industrial wireless products and accessories such as antennas, power supplies and cable assemblies. The Company also provides direct site support and engineering services to customers, such as repair and upgrade of its products. During the years ended December 31, 2018 and 2017, the Company’s revenue from products sales was $1,374,810 and $1,358,203, respectively. Revenue from site support and engineering services was $20,220 and $ 66,925 respectively, over the same periods.
The Company’s customers, to which trade credit terms are extended, consist of United States and local governments and foreign and domestic companies. Domestic sales for the fiscal year were $1,298,447 compared to $1,198,674 in 2017. Sales to foreign customers for the fiscal year were $96,583 compared to $226,454 in 2017.
During 2018, sales to one customer represented more than 10% of total revenue. Sales to this domestic customer totaled $260,944 and were for products only. No such customer had sale greater than 10% of total revenue in 2017.
As of December 31, 2018 and 2017, the Company had a sales order backlog of $3,780 and $6,677, respectively.
10.
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 December 30, 2018, $184,291 remains of $250,000 approved by the board. The Company repurchased 97,764, 74,855 and 300 shares in 2016, 2017 and 2018 respectively, bringing the total number of shares repurchased to 172,919. On January 15, 2019 an additional 39,246 shares were repurchased.
30
Table of Contents
ELECTRONIC SYSTEMS TECHNOLOGY, INC.
DBA ESTEEM WIRELESS MODEMS
SUPPLEMENTAL SCHEDULE
31
Table of Contents
|
ELECTRONIC SYSTEMS TECHNOLOGY, INC.
DBA ESTEEM WIRELESS MODEMS
SUPPLEMENTAL SCHEDULE OF OPERATING EXPENSES
FOR THE YEARS ENDED DECEMBER 31, 2018 AND 2017
|
|
|
|
2018
|
2017
|
|
|
|
|
|
|
Advertising
|
|
$ 9,403
|
$ 9,832
|
|
Dues and subscriptions
|
|
3,275
|
3,850
|
|
Depreciation
|
|
11,076
|
19,939
|
|
Insurance
|
|
11,538
|
12,526
|
|
Materials and supplies
|
|
8,898
|
9,583
|
|
Office and administration
|
|
7,813
|
8,623
|
|
Printing
|
|
2,897
|
1,194
|
|
Professional services
|
|
134,485
|
146,051
|
|
Rent and utilities
|
|
73,528
|
73,805
|
|
Repair and maintenance
|
|
1,281
|
1,676
|
|
Salaries and benefits
|
|
585,761
|
694,467
|
|
Taxes, licenses & health
insurance
|
|
160,532
|
180,473
|
|
Telephone
|
|
8,309
|
9,158
|
|
Trade shows
|
|
22,820
|
29,306
|
|
Travel expenses
|
|
29,495
|
37,720
|
|
|
|
|
|
|
|
|
1,071,111
|
1,238,203
|
|
|
|
|
|
|
Expenses allocated to cost of sales
|
|
(217,483)
|
(241,315)
|
|
|
|
|
|
|
Total Operating Expenses
|
|
$ 853,628
|
$ 996,888
|
32
Table of Contents
PART III
Item 10. Directors, Executive Officers and Corporate Governance.
IDENTIFICATION OF DIRECTORS:
The following table sets forth the names and ages of all directors of the Company as of December 31, 2018 as well as the term in office and principal occupation of each director.
|
Name of Director
|
Term in Office
|
Age
|
Principal Occupation
|
|
T.L. Kirchner
|
06/02/17 – 06/05/20
|
70
|
Former President of the Company
|
|
Vern Kornelsen
|
06/02/17 – 06/05/20
|
86
|
General Partner of EDCO
|
|
Thomas Schaefer
|
06/01/2018 – 06/01/2021
|
57
|
President of Phoenix Digital Corp
|
|
Donald Siecke
|
06/01/2018 – 06/01/2021
|
78
|
President of Kelmore Development Corp.
|
|
Michael W. Eller
|
06/04/16-06/06/19
|
58
|
President of Electronic Systems Technology, Inc.
|
Management believes that there are no agreements or understanding between the directors and suppliers or contractors of the Company.
Audit Committee
The Audit Committee of the Board of Directors as of December 31, 2018 is comprised of Don Siecke (Chairman) and Tom Schaefer. The Audit Committee met on one occasion in 2018. The Board of Directors has determined that Mr. Siecke is an “audit committee financial expert” as defined in Item 407(d)(5) of Regulation S-K promulgated by the SEC. The Board’s conclusions regarding the qualifications of Mr. Siecke as an audit committee financial expert were based on his experience as a certified public accountant and his degree in accounting.
The Board has also adopted a charter for the Audit Committee. The charter for the audit committee is available on our website at
www.esteem.com
. The audit committee charter is also available in print to any shareholder who requests it.
Compensation Committee
There is no Compensation Committee of the Board of Directors. The Board of Directors did establish an Employee/Director Stock Option Committee consisting of all Directors. The committee existed for the sole purpose of recommending the recipients and amounts of the Company awarded stock options during 2018. There is no charter for the Employee/Director Stock Option Committee.
Code of Ethics
On June 2, 2005, the Company's Board of Directors adopted a Code of Ethics for the Company. The Codes of Ethics, and any subsequent amendments thereto, (other than technical, administrative or non-substantive amendments), and any waivers of a provision of the Code of Ethics for directors or executive officers, are available on our website at
www.esteem.com
.
IDENTIFICATION OF EXECUTIVE OFFICERS
The following table sets forth the names and ages of all executive officers of the Company as of December 31, 2018; all positions by such persons; term of office and the period during which he has served as such; and any arrangement or understanding between him and any other person(s) pursuant to which he was elected as an officer:
|
Name of Officer
|
Age
|
Position
|
Term of Office
|
Period of Service
|
|
Michael Eller
|
58
|
President/CEO/Principal Accounting Officer
|
Employed at will
|
9/7/12- Present
|
The following is a brief description of the business experience during the last five years of each director and/or executive officer of the Company.
34
Table of Contents
T.L. KIRCHNER. Mr. Kirchner is founder, Past President and a Director of the Company. Mr. Kirchner does not serve as a director for any other company registered under the Securities Exchange Act.
VERN D. KORNELSEN. Mr. Kornelsen is the General Partner of EDCO Partners LLLP. Mr. Kornelsen formerly practiced as a certified public accountant in Denver, CO for many years and is a financial consultant to several early stage companies. He was a director of Valleylab for 10 years, and led an investor group that provided a portion of its initial funding. Mr. Kornelsen has been a director and participated in the capitalizing of a number of early stage companies, and is currently a director and audit-committee member of a publicly-held company, Encision Inc. of Boulder, CO. He is also the Chairman, Secretary, Director, and CFO of Lifeloc Technologies, Inc., a publicly-held company located in Wheat Ridge, CO.
THOMAS J. SCHAEFER: Mr. Schaefer is the President of Phoenix Digital Corporation a privately held company based in Scottsdale, AZ that provides redundant mission critical networking technology for industrial automation systems. Prior to working at PDC, Mr. Schaefer spent 30 years at Rockwell Automation. His last assignment was the Global Industry Manager for Rockwell’s Water Industry focus. During Mr. Schaefer’s tenure at Rockwell he held various positions that included P&L responsibility for the Service business unit, Sales and Marketing for Software/MES, and Sales and Application responsibility for the Drive Systems/Power Products group.
DONALD E. SIECKE. Mr. Siecke practiced as a certified public accountant in the state of Colorado from 1963 to 1976. He has been president of Kelmore Development Corp., a real estate development company, since 1981, and serves as the chairman of Redstone Bank, a Colorado bank of which he was a founding director. He is a director of several privately held companies, metropolitan districts, and charitable organizations. He received a BS degree in business administration from the University of Denver in 1961, having majored in accounting. In determining
MICHAEL W. ELLER. Mr. Eller is the President and Principal Accounting Officer. During the last five years Mr. Eller has been a full time employee of the Company. Previous experience, Macys Logistics and Operations where he was employed as the Vice President of Operations and Director of Finances. Mr. Eller does not serve as a director for any other company registered under the Securities Exchange Act.
Family Relationships
None.
Section 16(A) Beneficial Ownership Reporting Compliance
During the year ended December 31, 2018 to the knowledge of Management, there was no director, officer, or beneficial owner of more than 10% any class of equity securities of the registrant who failed to file on a timely basis the required disclosure form as required by Section 16(a) of the Securities and Exchange Act of 1934.
Indemnification
The Company’s By-Laws address indemnification of Directors and Officers. Washington Law provides that Washington corporations may include within their Articles of Incorporation provisions eliminating or limiting the personal liability of their directors and officers in shareholder actions brought to obtain damages for alleged breaches of fiduciary duties, as long as the alleged acts or omissions did not involve intentional misconduct, fraud, a knowing violation of law or payment of dividends in violation of the Washington statutes. Washington law also allows Washington corporations to include in their Articles of Incorporation or Bylaws provisions to the effect that expenses of officers and directors incurred in defending a civil or criminal action must be paid by the corporation as they are incurred, subject to an undertaking on behalf of the officer or director that he or she will repay such expenses if it is ultimately determined by a court of competent jurisdiction that such officer or director is not entitled to be indemnified by the corporation because such officer or director did not act in good faith and in a manner reasonably believed to be in or not opposed to the best interests of the corporation. The Company’s Articles of Incorporation provide that a director or officer is not personally liable to the Company or its shareholders for damages for any breach of fiduciary duty as a director or officer, except for liability for (i) acts or omissions which involve intentional misconduct, fraud or a knowing violation of law, or (ii) the payment of distribution in violation of Washington Business Corporation Act.
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Table of Contents
Related Person Transactions Policy and Procedures
As set forth in the written charter of the Audit Committee, any related person transaction involving a Company director or executive officer must be reviewed and approved by the Audit Committee. Any member of the Audit Committee who is a related person with respect to a transaction under review may not participate in the deliberations or vote on the approval or ratification of the transaction. Related persons include any director or executive officer, certain shareholders and any of their “immediate family members” (as defined by SEC regulations).
Item 11. Executive Compensation.
The Company’s principal executive officer and principal accounting officer is Michael W. Eller.
Information concerning the compensation of the Company’s principal executive officer and principal accounting officer, as well as any other compensated employees of the Registrant's whose total compensation exceeded $100,000 during 2018 and 2017 is provided in the following Summary Compensation Table (collectively, the “Named Executive Officers” or “NEOs”):
|
SUMMARY COMPENSATION TABLE
|
|
|
|
Name and
Principal
Position
(a)
|
Year
(b)
|
Salary
($)
(c)
|
Bonus
($)(1)
(d)
|
Stock
Awards
($)
(e)
|
Option
Awards
($)(2)
(f)
|
Non-Equity
Incentive Plan
Compensation ($)
(g)
|
Change in
Pension Value
and Non-
qualified
Deferred
Compensation
Earnings ($)
(h)
|
All Other
Compen-
sation
($)(3)
(i)
|
Total
($)
(j)
|
|
Michael W. Eller
President CEO/Principal Accounting Officer
|
2018
|
$115,300
|
-
|
-
|
-
|
-
|
-
|
$21,305
|
$136,605
|
|
2017
|
$111,900
|
-
|
-
|
-
|
-
|
-
|
$20,833
|
$132,733
|
(1)
Includes amounts paid under the Non-qualified Employee Profit Sharing Bonus.
(2)
Amount represents the dollar amount recognized for financial statement reporting purposes Assumptions made in the valuation of stock option awards are disclosed in Note 7 of the Notes to the Consolidated Financial Statements in this Form 10-K.
(3)
All Other Compensation consists of premiums paid for Severance pay, Group Health Insurance, Accrued Vacation Pay and Company paid 401(k) matching amounts.
The information specified concerning the stock options of the named executive officers during the fiscal year ended December 31, 2018 is provided in the following Option/SAR Grants in the Last Fiscal Year Table:
|
OPTION/SAR GRANTS IN LAST FISCAL YEAR
|
|
Individual Grants (5)
|
|
(a)
|
(b)
|
(c)
|
(d)
|
(e)
|
|
Name
|
Number of Securities
Underlying
Options/SARs
Granted # (5)
|
% of Total
Options/SARs Granted
to Employees in Fiscal
Year
|
Exercise or base price
($/Share)
|
Expiration Date
|
|
Michael W. Eller
|
-0-
|
0%
|
$0.00
|
n/a
|
(5)
This table does not include Stock Options granted previously.
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Table of Contents
The information specified concerning the stock options of the named executive officers during the fiscal year ended December 31, 2018 is provided in the following Aggregated Option/SAR Exercises in Last Fiscal Year and Fiscal Year-End Options/SAR Values Table:
|
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END
|
|
Option Awards
|
Stock Awards
|
|
Name
|
Number of
Securities
Underlying
Unexercised
Options (#)
Exercisable
|
Number of
Securities
Underlying
Unexercised
Options (#)
Unexercisable
|
Equity
Incentive Plan
Awards:
Number of
Securities
Underlying
Unexercised
Unearned
Options (#)
|
Option
Exercised
Price ($)
|
Option
Expiration
Date
|
Number
of Shares
or Units
of Stock
That
Have Not
Vested
(#)
|
Market
Value of
Shares or
Units of
Stock
That
Have Not
Vested
($)
|
Equity
Incentive
Plan
Awards:
Number of
Unearned
Shares,
Units or
Other
Rights
That Have
Not Vested
(#)
|
Equity
Incentive
Plan
Awards:
Market or
Payout
Value of
Unearned
Shares,
Units or
Other
Rights That
Have Not
Vested ($)
|
|
(a)
|
(b)
|
(c)
|
(d)
|
(e)
|
(f)
|
(g)
|
(h)
|
(i)
|
(j)
|
|
Michael W.
Eller
|
35,000
|
0
|
0
|
$0.40
|
8/6/20
|
0
|
0
|
0
|
0
|
The Company does not currently have a Long-Term Incentive Plan (“LTIP”).
Compensation to outside directors is limited to reimbursement of out-of-pocket expenses that are incurred in connection with the directors’ duties associated with the Company's business. The Board of Directors approved a stipend for members that are not employed by the company in the amount of $375 per quarter of service on the Board of Directors. There is currently no other compensation arrangements for the Company’s directors. (See “Security Ownership of Certain Beneficial Owners and Management” for Stock Options granted in previous years.) The information specified concerning items of Director Compensation for the fiscal year ended December 31, 2018 is provided in the following Director Compensation Table:
|
DIRECTOR COMPENSATION
|
|
Name
(1)
|
Fees
Earned
or Paid
in Cash
($)(2)
|
Stock
Awards
($)
|
Option
Awards
($)(3)
|
Non-Equity
Incentive Plan
Compensation
($)
|
Nonqualified
Deferred
Compensation
($)
|
All Other
Compensation
($)(4)
|
Total ($)
|
|
(a)
|
(b)
|
(c)
|
(d)
|
(e)
|
(f)
|
(g)
|
(h)
|
|
Theodore Deinard
|
$850
|
$0
|
$0
|
$0
|
$0
|
$0
|
$850
|
|
T.L. Kirchner
|
$1,350
|
$0
|
$0
|
$0
|
$0
|
$0
|
$1,350
|
|
Barry Knott
|
$850
|
$0
|
$0
|
$0
|
$0
|
$0
|
$850
|
|
Vern Kornelsen
|
$1,350
|
$0
|
$0
|
$0
|
$0
|
$0
|
$1,350
|
|
Thomas Schaefer
|
$500
|
$0
|
$0
|
$0
|
$0
|
$0
|
$500
|
|
Donald Siecke
|
$500
|
$0
|
$0
|
$0
|
$0
|
$0
|
$500
|
|
Michael W. Eller
|
$0
|
$0
|
$0
|
$0
|
$0
|
$0
|
$0
|
(1) Compensation information for Michael Eller, President and Principal Accounting Officer is contained in the Executive Compensation Summary Compensation Table.
(2) Amount represents the Director Stipend paid in 2018.
(3) Amount represents the dollar amount recognized for financial statement reporting purposes. Assumptions made in the valuation of stock option awards are disclosed in Note 7 of the Notes to the Consolidated Financial Statements in this Form 10-K.
(4) Amounts represent reimbursement of out-of-pocket expenses related to directors’ duties associated with the Company's business (ie. travel expenses for attending Company Director’s Meetings).
The Company currently does not hold any Employment Contracts or Change of Control Arrangements with any parties.
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Table of Contents
Option Exercises
During our fiscal year ended December 31, 2018, there were no options exercised by our NEO’s or Directors.
We do not currently have a Long-Term Incentive Plan (“LTIP”).
Summary of Executive Employment Agreements
There are no executive employment agreements with any officer.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following table sets forth, as of December 31, 2018, the amount and percentage of the Common Stock of the Company, which according to information supplied by the Company, is beneficially owned by each person who, to the best knowledge of the Company, is the beneficial owner (as defined below) of more than five (5%) of the outstanding common stock.
|
Title of Class
|
Name & Address of
Beneficial Owner (1)
|
Amount & Nature of
Beneficial Ownership
|
Percent of Class
|
|
Common
|
EDCO Partners LLLP
4605 Denice Drive
Englewood CO 80111
|
1,553,500
|
31.2%
|
|
Common
|
T.L. Kirchner
415 N. Quay St.
Kennewick WA 99336
|
403,488
|
8.1%
|
|
Common
|
Zeff Capital, LP
1601 Broadway, 12
th
Floor
New York NY 10019
|
602,181
|
12.1%
|
(1)
Under Rule 13d-3, issued by the Securities and Exchange Commission, a person is, in general, deemed to "Beneficially own" any shares if such person directly or indirectly, through any contract, arrangement, understanding, relationship or otherwise, has or shares (a) voting power, which includes the power to vote or to direct the voting of those shares and/or (b) investment power, which included the power to dispose, or to direct the disposition of those securities. The foregoing table gives effect to shares deemed beneficially owned under Rule 13d-3 based on the information supplied to the Company. To the knowledge of the Company, the persons named in the table have sole voting power and investment power with respect to all shares of Common Stock beneficially owned by them.
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Table of Contents
SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth, as of February 5, 2018, amount and percentage of the Common Stock of the Company, which according to information supplied by the Company, is beneficially owned by Management, including officers and directors of the Company.
|
Name/Address of
Beneficial Owner (1)
|
Title of
Class
|
Amount & Nature of
Beneficial Ownership
|
Percent of
Class
|
|
T.L. Kirchner (Director)/415 N. Quay St., Bldg B1 Kennewick, WA
|
Common
|
403,488
|
8.1%
|
|
Vern Kornelsen (Director)/415 N. Quay St., Bldg B1 Kennewick, WA
|
Common
|
1,553,500
|
31.2%
|
|
Thomas Schaefer (Director)/415 N. Quay St., Bldg B1 Kennewick, WA
|
Common
|
-
|
-
|
|
Donald Siecke (Director)/415 N. Quay St., Bldg B1 Kennewick, WA
|
Common
|
-
(2)
|
-
|
|
Michael W. Eller (Officer)/415 N. Quay St., Bldg B1 Kennewick, WA
|
Common
|
35,000
(1)
|
0.7%
|
|
All Officers and Directors as a group
|
Common
|
1,991,988
|
40.0%
|
(1)
Includes 35,000 stock options issued 8/7/2015.
(2)
Mr. Siecke does not own any shares directly. However, EDCO Partners LLLC, of which Mr. Siecke is a limited partner, holds 498,916 shares on his behalf.
On various dates, the Company's Board of Directors has approved Stock Option Bonuses for Directors and Employees. The following is a summary of the Stock Option bonuses currently outstanding: Options are exercisable at fixed prices. Options may not be exercised in blocks of less than 5,000 shares. Options not exercised expire five years after approval date or 30 days following termination of employment/board membership, whichever occurs first. In the event of acquisition, merger, recapitalization or similar events of the Company, the optionee will receive equivalent shares if one of the foregoing events occurs or will have a 10-day window in which to exercise the options. Option grants are not transferable or assignable except to the optionee's estate in the event of the optionee's death.
Recipients of Stock Options currently unexpired as of December 31, 2018 were as follows:
|
Name
|
Option Shares
|
Exercise Price
Per Share ($)
|
|
Grant Date: 8-7-2015
|
|
Alan B. Cook
|
25,000
|
0.40
|
|
Eric P. Marske
|
30,000
|
0.40
|
|
Michael Eller
|
35,000
|
0.40
|
|
Dan Tolley
|
30,000
|
0.40
|
|
Total
|
120,000
|
0.40
|
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Table of Contents
Stock options must be exercised within 90 days after termination of employment/board membership. During 2018, 30,000 options were forfeited, no options were granted and no shares under option were exercised. At December 31, 2018, there were 120,000 options outstanding and exercisable.
Changes in Control:
The Board of Directors is aware of no circumstances which may result in a change of control of the Company.
Certain Business Relationships:
There have been no unusual business relationships during the last fiscal year of the Registrant between the Company and affiliates as described in Item 404 (b) (1-6) of Regulation S-K.
Indebtedness of Management:
No Director or executive officer or nominee for Director, or any member of the immediate family of such has been indebted to the Company during the past year.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
TRANSACTIONS WITH MANAGEMENT AND OTHERS
None.
Item 14. Principal Accounting Fees and Services.
AUDIT AND NON-AUDIT FEES
The following table presents fees billed to us during December 31, 2017 and 2016, for professional services provided by DeCcoria Maichel & Teague.
|
Year Ended
|
December 31, 2018
|
December 31, 2017
|
|
Audit fees (1)
|
$38,000
|
$38,000
|
|
Audit-related fees (2)
|
-
|
-
|
|
Tax fees (3)
|
2,700
|
2,700
|
|
All other fees (4)
|
1,150
|
-
|
|
Total Fees
|
$41,850
|
$40,700
|
(1) Audit fees consist of fees billed for professional services provided in connection with the audit of the Company’s financial statements and reviews of our quarterly financial statements.
(2) Audit-related fees consist of assurance and related services that include, but are not limited to, internal control reviews, attest services not required by statute or regulation and consultation concerning financial accounting and reporting standards.
(3) Tax fees consist of the aggregate fees billed for professional services for tax compliance, tax advice, and tax planning. These services include preparation of federal income tax returns.
(4) All other fees consist of fees billed for products and services other than the services reported above.
Our Audit Committee reviewed the audit and tax services rendered by DeCoria Maichel & Teague and concluded that such services were compatible with maintaining the auditors’ independence. All audit, non-audit, tax services, and other services performed by our independent accountants are pre-approved by our Audit Committee to assure that such services do not impair the auditors’ independence from us. We do not use DeCoria Maichel & Teague for financial information system design and implementation. These services, which include designing or implementing a system that aggregates source data underlying the financial statements or generates information that is significant to our financial statements, are provided internally. We do not engage DeCoria Maichel & Teague to provide compliance outsourcing services.
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Table of Contents
