NOTES TO FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION
The financial statements, including notes, of Electronic Systems Technology, Inc. (the "Company") are representations of the Company’s management, which is responsible for their integrity and objectivity. The accompanying unaudited financial statements have been prepared by the Company in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information, as well as the instructions to Form 10-Q. Accordingly, the financial statements do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, the accompanying unaudited financial statements contain all adjustments, consisting of only normal recurring adjustments, necessary for a fair statement of its financial position as of June 30, 2021, and its results of operations, cash flows, and changes in stockholders’ equity for the three months and six months ended June 30, 2021 and 2020. The balance sheet at December 31, 2020 was derived from audited annual financial statements but does not contain all of the footnote disclosures from the annual financial statements. All amounts presented are in U.S. dollars. For further information, refer to the financial statements and footnotes thereto in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020.
The results of operations for the three month and six-month period ended June 30, 2021 are not necessarily indicative of the results expected for the full fiscal year or for any other fiscal period. The Company estimates that for 2021 the anticipated effective annual federal income tax rate will be 0%.
Accounting Standards Updates Adopted
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 adoption of this update on January 1, 2020 had no impact on the financial statements.
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.
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,
2021
|
December 31,
2020
|
|
Parts
|
$ 96,570
|
$ 99,303
|
|
Work in progress
|
195,053
|
275,230
|
|
Finished goods
|
200,150
|
257,174
|
|
Total inventory
|
$ 491,773
|
631,707
|
6
ELECTRONIC SYSTEMS TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
NOTE 3 - EARNINGS (LOSS) PER SHARE
Basic earnings (loss) per share excludes dilution and is computed by dividing income (loss) available to common stockholders by the weighted-average number of shares of Common Stock outstanding for the period. Diluted earnings (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. At June 30, 2021 and 2020, the Company had 180,000 outstanding stock options, respectively, that could have a dilutive effect on future periods’ net income. The stock options were not included in the calculation of diluted earnings per share for either period as they were anti-dilutive.
NOTE 4 - STOCK OPTIONS
The Company has outstanding stock options, which have been granted periodically to individual employees and directors. On March 13, 2020, the Board of Directors canceled all 120,000 outstanding stock options that were granted on August 7, 2017 and due to expire on August 6, 2020. In addition, on that date, the Board of Directors granted 180,000 options to employees. The new options have an exercise price of $0.40, a term of 5 years, and vested immediately. The fair value of the options was determined using the Black-Scholes model using the following variables: stock price of $0.40, volatility of 79.27%, expected term of 5 years with a forfeiture rate of 95%, and a discount factor of 0.72%. Share based compensation of $2,282 was recognized during the six month period ended June 30, 2020.
No stock options have been issued in 2021. As of June 30, 2021, there were 180,000 options outstanding with a weighted average exercise price of $0.40 per share, a weighted average remaining life of 3.7 years and no intrinsic value.
NOTE 5 – 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 three month period ended June 30, 2021 and 2020, the Company’s revenue from products sales was $448,403 and $244,397, respectively. Revenue from site support and engineering services was $8,600 and $1,100 respectively, over the same periods.
During the six month period ended June 30, 2021 and 2020, the Company’s revenue from products sales was $870,079 and $497,364, respectively. Revenue from site support and engineering services was $11,700 and $22,100 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 three month period ended June 30, 2021 and June 30, 2020 were $432,215 and $212,264, respectively. Sales to foreign customers for the three month period ended June 30, 2021 and June 30, 2020 were $24,788 and $33,233, respectively.
Domestic sales for the six month period ended June 30, 2021 and June 30, 2020 were $794,330 and $454,239, respectively. Sales to foreign customers for the six month period ended June 30, 2021 and June 30, 2020 were $87,449 and $65,225, respectively.
For the three-month period ended June 30, 2021, sales to three customers represented more than 10% of total revenue, three customers represented more than 10% of total revenue for the same period in 2020.
7
ELECTRONIC SYSTEMS TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
|
|
2021 Sales
|
2021 %age of Total Sales
|
2020 Sales
|
2020%age of Total Sales
|
|
Domestic customer A
|
$ 76,947
|
17%
|
$ 28,384
|
12%
|
|
Domestic customer B
|
64,968
|
14%
|
27,802
|
11%
|
|
Domestic customer C
|
62,080
|
14%
|
24,473
|
10%
|
For the six-month period ended June 30, 2021, sales to two customers represented more than 10% of total revenue, one customer represented more than 10% of total revenue for the same period in 2020.
|
|
2021 Sales
|
2021 %age of Total Sales
|
2020 Sales
|
2020 %age of Total Sales
|
|
Domestic customer A
|
$133,118
|
15%
|
$57,702
|
11%
|
|
Domestic customer B
|
129,798
|
15%
|
-
|
-
|
As of June 30, 2021 and 2020, the Company had a sales order backlog of $17,143 and $4,118, respectively.
NOTE 6 - LEASES
On September 23, 2020, the Company signed a new two-year lease for its facilities. The base lease is $3,162 and $3,267 per month for years one and two, respectively. There is a leasehold tax applied to the base lease at 12.84%. The Company has the right to terminate the lease with 90 days’ notice. There is no renewal clause contained in the current lease. Upon signing the lease, the Company recognized a lease liability and right of use asset of $74,005 based on the two-year payment stream discounted using an estimated incremental borrowing rate of 4.0%. At June 30, 2021, the remaining lease term is fifteen months.
Prior to the new lease on September 23, 2020, the Company’s lease for its facilities was for $5,639 per month.
For the three month and six-month periods ended June 30, 2021 and 2020, lease expenses of $10,862 and $16,918, and $21,724 and $33,836 respectively, are included in the following expense classifications on the statement of operations:
|
|
For the three-month period ending June 30,
|
|
|
2021
|
|
2020
|
|
|
Cost of sales
|
Operating expenses
|
Total
|
|
Cost of sales
|
Operating expenses
|
Total
|
|
Base rent pursuant to lease agreement
|
$ 5,396
|
$ 4,248
|
$ 9,644
|
|
$ 2,998
|
$ 11,995
|
$ 14,993
|
|
Variable lease costs
|
682
|
536
|
1,218
|
|
385
|
1,540
|
1,925
|
|
Total lease costs
|
$ 6,078
|
$ 4,784
|
$ 10,862
|
|
$ 3,383
|
$ 13,535
|
$ 16,918
|
|
|
For the six-month period ending June 30,
|
|
|
2021
|
|
2020
|
|
|
Cost of sales
|
Operating expenses
|
Total
|
|
Cost of sales
|
Operating expenses
|
Total
|
|
Base rent pursuant to lease agreement
|
$ 10,793
|
$ 8,495
|
$ 19,288
|
|
$ 5,996
|
$ 23,990
|
$ 29,986
|
|
Variable lease costs
|
1,363
|
1,073
|
2,436
|
|
770
|
3,080
|
3,850
|
|
Total lease costs
|
$ 12,156
|
$ 9,568
|
$ 21,724
|
|
$ 6,766
|
$ 27,070
|
$ 33,836
|
8
ELECTRONIC SYSTEMS TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
As of June 30, 2021, total future lease payments are as follows:
|
For the 12 months ending June 30, 2022 and 2023
|
|
2022
|
$
|
38,893
|
|
2023
|
|
10,277
|
|
Total
|
|
49,170
|
|
Less imputed interest
|
|
(1,281)
|
|
Net lease liability
|
|
47,889
|
|
Current portion
|
|
38,439
|
|
Long-term portion
|
$
|
9,450
|
NOTE 7 – 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. Since inception of the Stock Repurchase Plan, the Company has repurchased 212,165 shares for a total of $80,622 through June 30, 2020 and $169,378 of the original $250,000 approved by the board remains.
On April 23, 2020 repurchases were suspended indefinitely.
NOTE 8 – CARES ACT LOANS PAYABLE
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security (the “CARES Act”) Act was signed into United States law.
In April 2020, the Company received a loan of $171,712 pursuant to the Paycheck Protection Program (the “PPP”) under Division A, Title I, Section 1102 and 1106 of the CARES Act. The loan, which was in the form of a promissory note, has a maturity date of April 13, 2022 and bears interest at a rate of 1% per annum. $150,118 of this loan was forgiven in June 2021, leaving a balance due of $21,594. As of June 30, 2021, the balance remaining was $19,618. Monthly payments of $1,994 are due for the next ten months.
In February 2021, the Company received a second loan of $130,255 pursuant to the Paycheck Protection Program (the “PPP”) under Division A, Title I, Section 1102 and 1106 of the CARES Act. The loan, which was in the form of a promissory note, has a maturity date of February 21, 2023 and bears interest at a rate of 1% per annum. The Note may be prepaid by the Company at any time prior to maturity with no prepayment penalties.
Under the terms of the PPP, certain amounts of the loan may be forgiven if they are used for qualifying expenses as described in the CARES Act. Qualifying expenses include payroll costs, costs used to continue group health care benefits, mortgage payments, rent, and utilities. As of June 30, 2021, the Company has used funds from the loan to pay qualifying expenses. The Company believes it has used the entire loan amount for qualifying expenses, but there is no guarantee that the loan will be forgiven.
9
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION
Management's discussion and analysis is intended to be read in conjunction with the Company's unaudited financial statements and the integral notes thereto for the quarter ended June 30, 2020. The following statements may be forward looking in nature and actual results may differ materially.
A.RESULTS OF OPERATIONS
REVENUES: Total revenues from sales increased to $457,003 for the second quarter of 2021 as compared to $245,497 in the second quarter of 2020, reflecting an increase of 86.2%. Management believes the increase in sales revenues is due to the impact of the orders delayed due to the impact of COVID-19 stay at home orders in same quarter of 2020. Year to date total revenues from sales increased to $881,779 in 2021 as compared to $519,464 in 2020, reflecting an increase of 69.7%. Management believes the increase in sales revenues is due to the impact of the COVID-19 stay at home orders when compared with the same period of 2020.
The Company's revenues have historically fluctuated from quarter to quarter due to timing factors such as product shipments to customers, customer order placement, customer buying trends, and changes in the general economic environment. The procurement process regarding plant and project automation, or project development, which usually surrounds the decision to purchase ESTeem products, can be lengthy. This procurement process may involve bid activities unrelated to the ESTeem products, such as additional systems and subcontract work, as well as capital budget considerations on the part of the customer. Because of the complexity of this procurement process, forecasts with regard to the Company's revenues are difficult to predict.
The COVID-19 situation represented a significant disruption to operations in most of 2020. During the six month period ending June 30, 2021, we have seen orders for projects that we believe were delayed due to the impact of the restrictions related to preventing the spread of COVID-19 in 2020. We are experiencing some disruptions in the supply chain, but at this point do not see it having a material impact on sales.
A percentage breakdown of the Company’s market segments of Domestic and Foreign Export sales for the three and six month periods ended June 30, 2021 and 2020 are as follows:
|
|
Three Months ended June 30, 2021
|
Three Months ended June 30, 2020
|
Six Months ended June 30, 2021
|
Six Months ended June 30, 2020
|
|
Domestic Sales
|
95%
|
87%
|
90%
|
87%
|
|
Export Sales
|
5%
|
13%
|
10%
|
13%
|
BACKLOG:
As of June 30, 2021, the Company had a sales order backlog of $17,143. The Company’s customers generally place orders on an "as needed basis". Shipment for most of the Company’s products is generally made within 1 to 5 working days after receipt of customer orders, with the exception of ongoing, scheduled projects, and custom designed equipment.
COST OF SALES:
Cost of sales percentages for the second quarters of 2021 and 2020 were 47% and 54% of respective net sales. The cost of sales percentage decreased in the second quarter of 2021 is the result of the product mix sold during the same quarter of 2020. Cost of sales percentages for the six month periods ended June 30, 2021 and 2020 were 45% and 54%. The cost of sales percentage decrease in the second quarter of 2021 is the result of the product mix sold during the same period of 2020.
10
OPERATING EXPENSES:
The following is a delineation of operating expenses:
|
|
Three Months Ended
|
|
Six Month Ended
|
|
|
|
June 30,
2021
|
June 30,
2020
|
Increase
(Decrease)
|
June 30,
2021
|
June 30,
2020
|
Increase
(Decrease)
|
|
General and administrative
|
$ 66,452
|
$ 69,957
|
$ (3,505)
|
$ 159,955
|
$ 165,670
|
$ (5,715)
|
|
Research and development
|
54,249
|
50,213
|
4,036
|
106,949
|
105,110
|
1,839
|
|
Marketing and sales
|
127,419
|
86,295
|
41,124
|
221,634
|
174,191
|
47,443
|
|
Total operating expenses
|
$ 248,120
|
$ 206,465
|
$ 41,655
|
$ 488,538
|
$ 444,971
|
$ 43,567
|
General and administrative: For the second quarter of 2021, general and administrative expenses decreased $3,505 to $66,452, due to decreased wages when compared with the same quarter of 2020. For the six-month period, general and administrative expenses decreased by $5,715 to $159,955, due to decreased wages.
Research and development: Research and development expenses increased $4,036 to $54,249 during the second quarter of 2021 due to increased expenses related to prototype build costs when compared with the same quarter of 2020. For the six-month period, research and development expenses increased by $1,839 to $106,949, due to increased prototype build costs.
Marketing and sales: During the second quarter of 2021, marketing and sales expenses increased $41,124 to $127,419 when compared with the same period of 2020, due to increased payroll. For the six-month period, marketing and sales expenses increased by $47,433 to $221,634, due to increased payroll.
OTHER INCOME:
The Company earned $566 in interest income during the quarter ended June 30, 2021 and $1,427 for the six-month period. Sources of this income were money market accounts and certificates of deposit. In 2021, the Company recognized a gain on forgiveness of debt in the amount of $150,118 for the first CARES Act loan (PPP round 1), compared to a government grant under the CARES Act in the amount of $9,000 for COVID relief in 2020.
NET LOSS:
The Company had net income of $146,370 for the second quarter of 2021 compared to a net loss of $81,875 for the same quarter of 2020. For the six-month period ended June 30, 2021, the Company recorded net income of $151,052 compared with a net loss of $192,181 for the same period of 2020. The increase in net income during 2021 is the result of increased sales revenues, gross profit and the forgiveness of $150,118 forgiveness of debt related to the first CARES Act loan (PPP round 1).
B.FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
The Corporation's current asset to current liabilities ratio at June 30, 2021 was 11.2 compared to 20.7 at December 31, 2020. The decrease in current ratio is due to the increase of wages and commissions payable at June 30, 2021 as compared to December 31, 2020.
At June 30, 2021, the Company had cash and cash equivalents of $1,035,311 as compared to cash and cash equivalent of $308,110 at December 31, 2020.
11
Cash provided from operating activities increased by $550,696 for the six-month period ended June 30, 2021 when compared to the same period in 2020. The increase is attributable to an increase in net income for the period being $343,233 greater than the same period in 2020. The reduction in the change in accounts receivable and inventory balances contributed $104,031 and $120,643 respectively.
Net cash provided from investing was $249,999 due to the redemption of certificates of deposits maturing during the first half of 2021. Cash provided from financing activities was $128,280, which were the proceeds of the CARES Act loan (round 2) received during the six-month period ended June 30, 2021 less that principal paid on the CARES Act loan (round 1). We believe that the entire loan (round 2) will be forgiven.
In management's opinion, the Company's cash and cash equivalents and other working capital at June 30, 2021 is sufficient to satisfy requirements for operations, capital expenditures, and other expenditures as may arise during 2021.
FORWARD LOOKING STATEMENTS: The above discussion may contain forward looking statements that involve a number of risks and uncertainties. In addition to the factors discussed above, among other factors that could cause actual results to differ materially are the following: competitive factors such as rival wireless architectures and price pressures; availability of third party component products at reasonable prices; inventory risks due to shifts in market demand and/or price erosion of purchased components; change in product mix, and risk factors that are listed in the Company's reports and registration statements filed with the Securities and Exchange Commission.
OFF-BALANCE SHEET ARRANGEMENTS
The Company has no significant off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to its stockholders.