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`UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2023

 

OR

 

☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

 

From ________________ to ________________

 

 

ELECTRONIC SYSTEMS TECHNOLOGY, INC.

(Exact name of registrant as specified in its charter)

 

Washington 000-27793 91-1238077
(State or other jurisdiction of incorporation) (Commission File  Number) (IRS Employer Identification No.)

 

415 N. Roosevelt St. STE B1 Kennewick WA   99336
(Address of principal executive offices)   (Zip Code)

 

 

(509) 735-9092

(Registrant's telephone number, including area code)

 

N/A

(Former name, former address & former fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant (1) has filed all documents and reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filings for the past 90 days. Yes ☒  NO ☐

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes ☒  NO ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act:

 

  Large Accelerated Filer   ☐   Accelerated Filer  ☐

Non-Accelerated Filer ☐

(Do not check if a smaller reporting company)

Small Reporting Company ☒

Emerging Growth Company ☐

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the 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 ☒

 

APPLICABLE ONLY TO CORPORATE ISSUERS:

 

As of April, 19 2023, the number of the Company's shares of common stock par value $0.001, outstanding was 4,946,502.

 

 
 
 

PART I

FINANCIAL INFORMATION

 

Item 1. Financial Statements.

 

ELECTRONIC SYSTEMS TECHNOLOGY, INC.
CONDENSED BALANCE SHEETS
(Unaudited)

 

         
   March 31,   December 31, 
   2023   2022 
ASSETS          
Current assets          
Cash and cash equivalents  $592,417   $751,118 
Certificates of deposit   251,699    251,699 
Accounts receivable, net   107,770    141,394 
Inventories   729,308    725,478 
Prepaid expenses   36,896    42,627 
Employee retention tax credit receivable (NOTE 7)   63,000    63,000 
Accrued interest receivable   682    808 
Total current assets   1,781,772    1,976,124 
           
Property and equipment, net of depreciation   9,876    914 
           
Right to use – Lease, net of amortization (NOTE 6)   59,984    69,419 
           
   Total assets  $1,851,632   $2,046,457 
           
LIABILITIES and STOCKHOLDERS' EQUITY          
Current liabilities          
Accounts payable  $64,084   $138,996 
Accrued wages   2,904    24,777 
Operating lease liability, current portion (NOTE 6)   40,100    39,120 
Accrued vacation pay   22,220    16,846 
Other accrued liabilities   6,900    8,913 
Total current liabilities   136,208    228,652 
           
Long-Term Liabilities          
         Operating lease liability (NOTE 6)   20,200    30,457 
           
   Total liabilities   156,408    259,109 
           
Stockholders' equity          
Common stock, $0.001 par value 50,000,000 shares authorized 4,946,502 and 4,946,502 shares issued and outstanding respectively   4,947    4,947 
Additional paid-in capital   932,412    932,412 
Retained earnings   757,865    849,989 
Total stockholders' equity   1,695,224    1,787,348 
   Total liabilities and stockholders' equity  $1,851,632   $2,046,457 

 

 

 

 

See Notes to Financial Statements.

 

2 
 
 


ELECTRONIC SYSTEMS TECHNOLOGY, INC.

CONDENSED STATEMENTS OF OPERATIONS

(Unaudited)

 

         
   Three Months Ended 
   March 31,   March 31, 
   2023   2022 
         
SALES - NET  $305,089   $472,143 
COST OF SALES   (139,560)   (209,883)
GROSS PROFIT   165,529    262,260 
           
OPERATING EXPENSES          
     General and administrative   84,765    84,776 
     Research and development   28,663    45,777 
     Marketing and sales   148,227    137,159 
Total operating expenses   261,655    267,712 
OPERATING LOSS   (96,126)   (5,452)
           
OTHER INCOME          
     Interest income   4,002    491 
Total other income   4,002    491 
           
NET LOSS BEFORE INCOME TAX   (92,124)   (4,961)
     Benefit (provision) for income tax   —      —   
NET LOSS  $(92,124)  $(4,961)
           
Earnings (loss) per share – basic and diluted  $(0.02)  $0.00 
           
Weighted average shares – basic and diluted   4,946,502    4,946,502 

 

 

  

 

See Notes to Financial Statements.

 

 

3 
 
 

 

 

ELECTRONIC SYSTEMS TECHNOLOGY, INC.

CONDENSED STATEMENTS OF CASH FLOWS

(Unaudited)

 

       
   Three Months Ended 
   March 31,   March 31, 
   2023   2022 
         
CASH FLOWS FROM OPERATING ACTIVITIES:          
           
Net loss  $(92,124)  $(4,961)
           
Noncash items included in net loss:          
     Depreciation   38    111 
           
Changes in operating assets and liabilities:          
     Accounts receivable, net   33,624    24,977 
     Inventories   (3,830)   66,997 
     Accrued interest receivable   126    (270)
     Prepaid expenses   5,731    (16,508)
     Accounts payable   (74,912)   (20,983)
     Other accrued liabilities, accrued wages and accrued vacation pay   (18,354)   1,653 
NET CASH PROVIDED (USED) IN OPERATING ACTIVITIES   (149,701)   51,016 
           
           
CASH FLOWS FROM INVESTING ACTIVITIES:          
    Certificates of deposit redeemed   300,000    150,000 
     Certificates of deposit purchases   (300,000)   —   
    Purchase of equipment   (9,000)   —   
NET CASH PROVIDED (USED) FROM INVESTING ACTIVITIES   (9,000)   150,000 
           
CASH FLOWS USED IN FINANCING ACTIVITIES:          
    Principal payments on CARES Act loan payable (round 1)   —      (5,968)
NET CASH USED IN FINANCING ACTIVITIES   —      (5,968)
           
NET INCREASE(DECREASE) IN CASH AND CASH EQUIVALENTS   (158,701)   195,048 
Cash and cash equivalents at beginning of period   751,118    655,616 
Cash and cash equivalents at end of period  $592,417   $850,664 

 

 

 

See Notes to Financial Statements.

 

 

 

4 
 
 

 

 

ELECTRONIC SYSTEMS TECHNOLOGY, INC.

DBA ESTEEM WIRELESS MODEMS

 

CONDENSED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(Unaudited)

 

 

                          
   Shares   Amount   Additional
Paid-In
Capital		   Retained
Earnings		   Total 
                     
Balances, January 1, 2022   4,946,502   $4,947   $932,412   $703,458   $1,640,817 
                          
   Net income (loss)   —      —      —      (4,961)   (4,961)
                          
BALANCES AT March 31, 2022   4,946,502   $4,947   $932,412   $698,497   $1,635,856 
                          
Balances, January 1, 2023   4,946,502   $4,947   $932,412   $849,989   $1,787,348 
                          
   Net income (loss)   —      —      —      (92,124)   (92,124)
                          
BALANCES AT MARCH 31, 2023   4,946,502   $4,947   $932,412   $757,865   $1,695,224 

 

 

  

 

See Notes to Financial Statements.

 

5 
 
 

 

ELECTRONIC SYSTEMS TECHNOLOGY, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 1 - BASIS OF PRESENTATION

 

The condensed 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 condensed 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 condensed financial statements contain all adjustments, consisting of only normal recurring adjustments, necessary for a fair statement of its financial position as of March 31, 2023, and its results of operations, cash flows, and changes in stockholders’ equity for the three months ended March 31, 2023 and 2022. The balance sheet at December 31, 2022 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, 2022.

 

The results of operations for the three-month period ended March 31, 2023 are not necessarily indicative of the results expected for the full fiscal year or for any other fiscal period. The Company estimates that for 2023 the anticipated effective annual federal income tax rate will be 0%.

 

New Accounting Pronouncements

 

Accounting standards that have been issued by the Financial Accounting Standards Board 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:

 

          
   March 31,
2023		   December 31,
2022		 
Parts  $146,628   $172,190 
Work in progress   247,223    336,298 
Finished goods   335,457    216,990 
Total inventory  $729,308   $725,478 

 

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 common shares 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 March 31, 2023 and 2022, the Company had 180,000 and 240,000 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.

 

6 
 
 

 

 

NOTE 4 - STOCK OPTIONS

 

The Company has outstanding stock options, which have been granted periodically to individual employees and directors. No shared based compensation was recognized during the three-month periods ended March 31, 2023 and 2022.

 

As of March 31, 2023 and 2022, there were 180,000 and 240,000 options outstanding respectively with a weighted average exercise price of $0.40 per share, a weighted average remaining life of 2.3 and 3.4 years respectively 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 March 31, 2023 and 2022, the Company’s revenue from products sales was $297,589 and $461,843, respectively. Revenue from site support and engineering services was $7,500 and $10,300 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 March 31, 2023 and March 31, 2022 were $293,908 and $436,670, respectively. Sales to foreign customers for the three-month period ended March 31, 2023 and March 31, 2022 were $11,181 and $35,473, respectively.

 

For the three-month period ended March 31, 2023 and 2022, sales to individual customers representing more than 10% of total revenue were as follows:

 

                    
   For the three-month period ended March 31, 
   2023   2022 
   Sales   %age of Total Sales   Sales   %age of Total Sales 
Domestic customer A  $70,090    23%  $75,505    16%
Domestic customer B   —      —      72,683    15%
Domestic customer C   —      —      53,625    11%

 

As of March 31, 2023 Domestic customer A’s accounts receivable balance was $43,019.

 

As of March 31, 2023 and 2022, the Company had a sales order backlog of $162,396 and $116,461, respectively.

 

7 
 
 

 

NOTE 6 - LEASES

 

On September 23, 2022, the Company signed a new two-year lease for its facilities. The base lease is $3,373 and $3,478 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 $78,757 based on the two-year payment stream discounted using an estimated incremental borrowing rate of 4.125%. At March 31, 2023, the remaining lease term is 18 months. As of March 31, 2023, future payments on this lease of $30,671 and $31,304 will be paid in 2023 and 2024 respectively.

 

For the three-month periods ended March 31, 2023 and 2022, lease expense of $11,576 and $10,903, respectively, are included in the following expense classifications on the statements of operations:

 

                              
   2023   2022 
   Cost of sales   Operating expenses   Total   Cost of sales   Operating expenses   Total 
Base rent pursuant to lease agreement  $5,751   $4,526   $10,277   $5,397   $4,247   $9,644 
Variable lease costs   727    572    1,299    704    555    1,259 
Total lease costs  $6,478   $5,098   $11,576   $6,101   $4,802   $10,903 

 

 

NOTE 7 - Cares Act Retention Credit

 

As at December 31, 2022 and March 31, 2023, the Company has an employee retention tax credit due of $63,000. The amount to be received is a refund of qualified payroll taxes the Company paid in connection with employee payroll during the COVID 19 pandemic. The Company expects to receive the credit in 2023.

 

 

 

8 
 
 

 

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 March 31, 2023. The following statements may be forward looking in nature and actual results may differ materially.

 

A.       RESULTS OF OPERATIONS

 

REVENUES: Total revenues from sales decreased to $305,089 for the first quarter of 2023 as compared to $472,143 in the first quarter of 2022, reflecting a decrease of 35.4%. Management believes the decrease in sales revenues is due to decreased product demand due to supply chain issues for the Domestic market during the first quarter of 2023 when compared with the same quarter of 2022.

 

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.

 

A percentage breakdown of the Company’s market segments of Domestic and Foreign Export sales for the first quarter of 2023 and 2022 are as follows:

 

  2023 2022
Domestic Sales 96% 93%
Export Sales 4% 7%

 

BACKLOG:

 

As of March 31, 2023, the Company had a sales order backlog of $162,396. 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 first quarters of 2023 and 2022 were 46% and 44% of respective net sales and are calculated excluding site support expenses of $4,541 and $6,312 respectively. The cost of sales percentage increase in the first quarter of 2023 is the result of the product mix sold during the same quarter of 2022.

 

 

9 
 
 

OPERATING EXPENSES:

 

Operating expenses for the first quarter of 2023 decreased $6,057 from first quarter of 2022 levels. The following is a delineation of operating expenses:

 

   March 31,
2023		   March 31,
2022		   Increase
(Decrease)		 
General and administrative  $84,765   $84,776   $(11)
Research and development   28,663    45,777    (17,114)
Marketing and sales   148,227    137,159    11,068 
Total operating expenses  $261,655   $267,712   $(6,057)

 

General and administrative: For the first quarter of 2023, general and administrative expenses decreased $11 to $84,765, due to decreased payroll related expenses and were offset by increased purchased services when compared with the same quarter of 2022.

 

Research and development: Research and development expenses decreased $17,114 to $28,663 during the first quarter of 2023 due to decreased expenses related to engineering services when compared with the same quarter of 2022.

 

Marketing and sales: During the first quarter of 2023, marketing and sales expenses increased $11,068 to $148,227 when compared with the same period of 2022, due to increased payroll, taxes and benefits during the first quarter of 2023.

 

INTEREST INCOME:

 

The Company earned $4,002 in interest income during the quarter ended March 31, 2023 compared to $491 during the same period in 2022. Sources of this income were money market accounts and certificates of deposit.

 

NET INCOME (LOSS):

 

The Company had a net loss of ($92,124) for the first quarter of 2023 compared to a net loss of ($4,961) for the same quarter of 2022. The increase in net loss during 2023 is the result of decreased sales.

 

B.       FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES

 

The Company's current asset to current liabilities ratio at March 31, 2023 was 13.1:1 compared to 8.6:1 at December 31, 2022. The increase in current ratio is due to the decrease in accounts payable liability at March 31, 2023 as compared to December 31, 2022.

 

At March 31, 2023, the Company had cash and cash equivalents of $592,417 as compared to cash and cash equivalent of $751,118 at December 31, 2022, primarily reflecting decreases in Accounts Payable and the increase in net loss.

 

For the three-month period ended March 31, 2023, cash used by operating activities was $149,701 compared to cash provided of $51,016 for the same period in 2022. This change was driven by a net loss of $92,124 during the three months ended March 31, 2023 compared to a net of $4,961 in the three months ended March 31, 2022. Change in operating assets and liabilities was $57,615 during the three-month period ended March 31, 2023 compared to $55,866 in 2022.

 

Cash used for investing was $9,000 due to the purchase of a new website design for an E-Commerce interface during the first quarter of 2023 with the expectations that the website will be completed in April.

 

In management's opinion, the Company's cash and cash equivalents and other working capital at March 31, 2023 is sufficient to satisfy requirements for operations, capital expenditures, and other expenditures as may arise during 2023.

 

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.

 

10 
 
 

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

 

There is no established market for trading the common stock of the Company. The market for the Company’s common stock is limited, and as such shareholders may have difficulty reselling their shares when desired or at attractive market prices. The Common Stock is not regularly quoted in the automated quotation system of a registered securities system or association. Our common stock, par value $0.001 per share, is quoted on the OTC Markets Group QB (OTCQB) under the symbol “ELST”. The OTCQB is a network of security dealers who buy and sell stock. The dealers are connected by a computer network which provides information on current “bids” and “asks” as well as volume information. The OTCQB is not considered a “national exchange”. The “over-the-counter” quotations do not reflect inter-dealer prices, retail mark-ups commissions or actual transactions. The Company’s common stock has continued to trade in low volumes and at low prices. Some investors view low-priced stocks as unduly speculative and therefore not appropriate candidates for investment. Many institutional investors have internal policies prohibiting the purchase or maintenance of positions in low-priced stocks.

 

Item 4. Controls and Procedures

 

An evaluation has been performed under the supervision and with the participation of our management, including our Chief Executive Officer and Principal Accounting Officer, of the effectiveness of the design and the operation of our "disclosure controls and procedures" (as such term is defined in Rules 13a-15(e) under the Securities Exchange Act of 1934) as of March 31, 2023. Based on that evaluation, our principal executive officer and our principal financial officer concluded that the design and operation of our disclosure controls and procedures were effective as of March 31, 2023.

 

The design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote. However, management believes that our system of disclosure controls and procedures are designed to provide a reasonable level of assurance that the objectives of the system will be met.

 

Changes in Internal Control Over Financial Reporting

 

There have not been any changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

11 
 
 

 

 

 

PART II—OTHER INFORMATION

 

Item 5. Other Information

 

None

 

Item 6. Exhibits

 

EXHIBIT  NUMBER DESCRIPTION
31.1 Section 302 Certification, CEO
31.2 Section 302 Certification, CFO
32.1 Section 906 Certification, CEO
32.2 Section 906 Certification, CFO
101.INS XBRL Instance Document
101.SCH XBRL Taxonomy Extension Schema Document
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF XBRL Taxonomy Extension Definition Linkbase Document
101.LAB XBRL Taxonomy Extension Label Linkbase Document
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document

 

 

 

12 
 
 

 

 

SIGNATURES

 

In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

ELECTRONIC SYSTEMS TECHNOLOGY, INC.

 

 

 

By: /s/ Daniel M. Tolley

 

Date:  April 28, 2023 Name:  Daniel M. Tolley
  Title:  President
(Principal Executive Officer)

 

 

 

 

By: /s/ Michael W. Eller

 

Date:  April 28, 2023 Name:  Michael W. Eller
  Title:  President
(Principal Accounting Officer)

 

 

 

 

 

 

 

13 
 
 

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