UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2019
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)
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Washington
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000-27793
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91-1238077
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(State or other jurisdiction of incorporation)
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(Commission File Number)
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(IRS Employer Identification No.)
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415 N. Quay St. Bldg B1 Kennewick WA
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99336
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(Address of principal executive offices)
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(Zip Code)
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(509) 735-9092
(Registrant's telephone number, including area code)
N/A
(Former name, former address & former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(g) of the Act:
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Title of Each Class
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Trading Symbol(s)
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Name of Each Exchange on Which Registered
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Common Stock, $0.001 par value
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ELST
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OTCQB
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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 x 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 x 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:
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Large Accelerated Filer ¨
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Accelerated Filer ¨
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Non-Accelerated Filer ¨
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Small Reporting Company x
Emerging Growth Company £
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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 x
APPLICABLE ONLY TO CORPORATE ISSUERS:
As of October 11, 2019, the number of the Company's shares of common stock par value $0.001, outstanding was 4,946,502.
1
ELECTRONIC SYSTEMS TECHNOLOGY, INC.
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 September 30, 2019, and its results of operations, cash flows, and changes in stockholders’ equity for the three months and nine months ended September 30, 2019 and 2018. The balance sheet at December 31, 2018 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, 2018.
The results of operations for the three month and nine month period ended September 30, 2019 are not necessarily indicative of the results expected for the full fiscal year or for any other fiscal period. The Company estimates that for 2019 the anticipated effective annual federal income tax rate will be 0%.
Accounting Standards Updates Adopted
In February 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("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 adopted the update on January 1, 2019. Upon implementation of the new guidance, the Company recognized a liability and right-of-use asset of $91,637 as of January 1, 2019 for its one operating lease. The Company elected the transition option to apply the new guidance at the effective date without adjusting comparative periods presented. (See Note 6).
Accounting Standards Updates to Become Effective in Future Periods
In August 2018, the FASB issued ASU No. 2018-13 Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement. The update removes, modifies and makes additions to the disclosure requirements on fair value measurements. The update is effective for fiscal years beginning after December 15, 2019, with early adoption permitted. The Company is currently evaluating the impact of this update on our fair value measurement disclosures.
Other accounting standards that have been issued or proposed by FASB that do not require adoption until a future date are not expected to have a material impact on the financial statements upon adoption.
6
ELECTRONIC SYSTEMS TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
NOTE 2 - INVENTORIES
Inventories are stated at lower of direct cost or net realizable value with cost determined using the FIFO (first in, first out) method. Inventories consist of the following:
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September 30,
2019
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December 31,
2018
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Parts
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$ 127,049
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$ 133,809
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Work in progress
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289,679
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243,081
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Finished goods
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294,919
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338,105
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Total inventories
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$ 711,647
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$ 714,995
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NOTE 3 - EARNINGS (LOSS) PER SHARE
Basic and diluted earnings per share are calculated by dividing net income (loss) by the weighted average number of common shares outstanding–basic and diluted. For the nine month period ending September 30, 2019 and the three and nine month periods ending September 30, 2018, all outstanding stock options (Note 4) were excluded from the computation of diluted loss per share because they were anti-dilutive due to net losses in those periods. For the three month period ending September 30, 2019, the calculation of the weighted average number of common shares outstanding–diluted included the common stock equivalents of the outstanding stock options.
NOTE 4 - STOCK OPTIONS
As of September 30, 2019, the Company had outstanding stock options which have been granted periodically to individual employees and directors with no less than three years of continuous tenure with the Company. The Board of Directors did not issue stock options during the nine month period ended September 30, 2019.
A summary of option activity during the quarter ended September 30, 2019 is as follows:
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Number Outstanding
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Weighted-Average Exercise Price Per Share
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Weighted-Average Remaining Life
(Years)
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Approximate Aggregate Intrinsic Value
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Outstanding and Exercisable at December 31, 2018
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120,000
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$0.40
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Granted
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-
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-
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Expired
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-
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-
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Outstanding and Exercisable at September 30, 2019
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120,000
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$0.40
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1.1
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$2,400
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NOTE 5 – REVENUE
The Company’s product revenues are derived from sales of 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 September 30, 2019 and 2018, the Company’s revenues from products sales were $369,615 and $293,154, respectively. Revenues from site support and engineering services were $2,300 and $5,849 respectively, over the same periods. As of September 30, 2019, year to date sales from products increased to $1,106,066 as compared to $1,062,346 as of September 30, 2019 and 2018. Revenues from site support and engineering services for the nine months ended September 30, 2019 and 2018, were $35,277 and $16,398, respectively.
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ELECTRONIC SYSTEMS TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
NOTE 5 – REVENUE (Cont.)
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 September 30, 2019 were $348,419 compared to $271,976 in 2018. Sales to foreign customers for the three-month period ended September 30, 2019 were $23,496 compared to $27,027 in 2018. Domestic sales for the nine-month period ended September 30, 2019 were $978,290 compared to $1,021,153 in 2018. Sales to foreign customers for the nine-month period ended September 30, 2019 were $163,053 compared to $57,591 in 2018.
For the three-month period ended September 30, 2019, sales to two customers represented more than 10% of total revenue; three customers represented more than 10% of total revenue for the same period in 2018.
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2019 Sales
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2019 % of Total Sales
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2018 Sales
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2018 % of Total Sales
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Domestic customer A
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$70,035
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20%
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$43,616
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15%
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Domestic customer B
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$44,341
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12%
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For the nine-month period ended September 30, 2019, sales to one customer represented more than 10% of total revenue, one customer represented more than 10% of total revenue for the same period in 2018.
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2019 Sales
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2019 % of Total Sales
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2018 Sales
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2018 % of Total Sales
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Domestic customer A
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152,450
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13%
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240,659
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22%
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As of September 30, 2019 and 2018, the Company had a sales order backlog of $6,691 and $425, respectively.
NOTE 6 - LEASES
In February 2016, the FASB issued ASU No. 2016-02 Leases (Topic 842). The update modifies the classification criteria and requires lessees to recognize the assets and liabilities on the balance sheet for most leases. The update is effective for fiscal years beginning after December 15, 2018, with early adoption permitted. The Company implemented this standard effective January 1, 2019. Upon implementation of the new guidance, the Company recognized a liability and right-of-use asset of $91,637 as of January 1, 2019 for its one operating lease. To calculate the liability and right to use asset, the Company utilized a 4.0% incremental borrowing rate to discount the future rent payments and remaining lease term of 1.75 years.
The Company leases its facilities from a port authority for $5,542 per month for three years, expiring in September 2020, with annual increases based upon the Consumer Price Index.
The original lease was effective October 1, 2014 and contained a three-year renewal option and a provision for an annual increase of 2% per year, plus Leasehold Tax of 12.84%. On September 5, 2017, the Company exercised the three-year option. The first year of this option was not subject to the 2% increase. The current lease does not contain the option to extend the lease. However, the Company believes that a new lease agreement will be signed prior to the expiration of the current lease. At September 30, 2019, the remaining lease term is one year.
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ELECTRONIC SYSTEMS TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
NOTE 6 – LEASES (Cont.)
For the three month and nine-month periods ended September 30, 2019 and 2018, lease expenses of $16,627 and $16,335, and $49,880 and $49,005 respectively, are included in the following expense classifications on the statement of operations:
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Three Months ended September 30, 2019
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Three Months ended September 30, 2018
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Nine Months ended September 30, 2019
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Nine Months ended September 30, 2018
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Cost of sales
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$ 3,325
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$ 3,267
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$ 9,976
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$ 9,801
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General and administrative
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3,325
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3,267
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9,976
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9,801
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Research and development
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3,325
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3,267
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9,976
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9,801
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Marketing and sales
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6,652
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6,534
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19,952
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19,602
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Total
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$ 16,627
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$ 16,335
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$ 49,880
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$ 49,005
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As of September 30, 2019, total future lease payments are as follows:
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For the 12 months ended September 30,
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2019
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$
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14,993
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2020
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44,981
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Total
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59,974
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Less imputed interest
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(7,119)
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Net lease liability
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52,885
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Current portion
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52,885
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Long-term portion
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$
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-
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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. During the three-month period ended September 30, 2019 and 2018, no shares were repurchased. During the nine-month period ended September 30, 2019, the Company repurchased 39,246 shares for $14,920; no shares were repurchased in the nine month period ended September 30, 2018. Since inception of the Stock Repurchase Plan, the Company has repurchased 212,165 shares for a total of $80,622 through September 30, 2019 and $169,378 of the original $250,000 approved by the board remains to be utilized for share repurchases.
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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 September 30, 2019. The following statements may be forward looking in nature and actual results may differ materially.
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.
A.RESULTS OF OPERATIONS
REVENUES: Total revenues from sales increased to $371,915 for the third quarter of 2019 as compared to $299,003 in the third quarter of 2018, reflecting an increase of 24%. Management believes the increase in sales revenues is due to increased domestic sales during third quarter of 2019 when compared with the same quarter of 2018. Year to date total revenues from sales increased to $1,141,343 in 2019 as compared to $1,078,744 in 2018, reflecting an increase of 6%. Management believes the increase in sales revenues is due to increased foreign sales demand, driven by larger automation projects during nine-month period ended September 30, 2019 when compared with the same period of 2018.
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 three and nine-month periods ended September 30, 2019 and 2018 are as follows:
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Three Months ended September 30, 2019
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Three Months ended September 30, 2018
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Nine Months ended September 30, 2019
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Nine Months ended September 30, 2018
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Domestic Sales
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94%
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91%
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86%
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95%
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Export Sales
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6%
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9%
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14%
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5%
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BACKLOG:
As of September 30, 2019, the Company had a sales order backlog of $6,991. The Company’s customers generally place orders on an "as needed basis". Shipment for most of the Company’s products is generally made within 1 to 5 working days after receipt of customer orders, with the exception of ongoing, scheduled projects, and custom designed equipment.
10
COST OF SALES:
Cost of sales percentages for the third quarters of 2019 and 2018 were 44% and 47% of respective net sales. The cost of sales percentage decrease in the third quarter of 2019 is the result of the product mix sold during the same quarter of 2018. Cost of sales percentages for the nine-month periods ended September 30, 2019 and 2018 were 46% and 48% of respective net sales. The cost of sales percentage decrease in the third quarter of 2019 is the result of the product mix sold during the same period of 2018.
OPERATING EXPENSES:
Operating expenses for the third quarter and the first nine months of 2019 increased from third quarter of 2018 levels. The following is a delineation of operating expenses:
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Three Months Ended
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Nine Month Ended
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September 30, 2019
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September 30, 2018
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Increase
(Decrease)
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September 30, 2019
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September 30, 2018
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Increase
(Decrease)
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General and administrative
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$ 64,756
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$ 67,171
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$ (2,415)
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$ 227,450
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$ 215,330
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$ 12,120
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Research and development
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48,445
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42,965
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5,480
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165,397
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134,392
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31,005
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Marketing and sales
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89,414
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85,121
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4,293
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286,621
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290,125
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(3,504)
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Total operating expenses
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$ 202,615
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$ 195,257
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$ 7,358
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$ 679,468
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$ 639,847
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$ 39,621
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General and administrative: For the third quarter of 2019, general and administrative expenses decreased $2,415 to $64,756, due to decreased professional services when compared with the same quarter of 2018. For the nine-month period, general and administrative expenses increased by $12,120 to $227,450, due to increased wages and professional services.
Research and development: Research and development expenses increased $5,480 to $48,445 during the third quarter of 2019 due to increased expenses related to payroll and decreased prototype build costs when compared with the same quarter of 2018. For the nine-month period, research and development expenses increased by $31,005 to $165,397, due to increased wages and prototype build costs.
Marketing and sales: During the third quarter of 2019, marketing and sales expenses increased $4,293 to $89,414 when compared with the same period of 2018, due to decreased payroll and increased travel expense related to sales efforts during the third quarter of 2018. For the nine-month period, marketing and sales expenses decreased by $3,504 to $286,621, due to decreased wages and an increase in travel and trade shows in 2018.
INTEREST INCOME:
The Company earned $5,510 in interest income during the quarter ended September 30, 2019 and $17,265 for the nine-month period. Sources of this income were money market accounts and certificates of deposit.
NET LOSS:
The Company had net income of $11,769 for the third quarter of 2019 compared to net loss of $33,535 for the same quarter of 2018. For the nine-month period ended September 30, 2019, the Company recorded a net loss of $49,275 compared with a net loss of $68,450 for the same period of 2018. The decrease in net loss during 2019 is the result of increased sales revenues and increased operating expenses offset by increase in interest income.
11
B.FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
The Corporation's current asset to current liabilities ratio at September 30, 2019 was 20.7 compared to 20.8 at December 31, 2018. The decrease in current ratio is due to the current portion of lease liability at September 30, 2019 as compared to December 31, 2018.
At September 30, 2019, the Company had cash and cash equivalents of $199,615 as compared to cash and cash equivalent of $323,667 at December 31, 2018, primarily reflecting cash used in operating activities.
Cash used in operating activities increased by $257,438 for the nine-month period ended September 30, 2019 when compared to the same period in 2018. The increase is attributable to more cash being utilized in paying accounts payable during the period as compared to prior year, an increase of $99,766. The change in accounts receivable increased by $96,765 during the same period as compared to the prior year.
Cash provided from investing was $100,000 due to the net redemption of CD’s maturing during the first nine months of 2019. Cash used in financing activities was $14,920 for the repurchase of the Company’s common stock during the nine-month period ended September 30, 2019.
In Management's opinion, the Company's cash and cash equivalents and other working capital at September 30, 2019 is sufficient to satisfy requirements for operations, capital expenditures, and other expenditures as may arise during 2019.
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.
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 September 30, 2019. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer have determined that there was a material weakness affecting our internal control over financial reporting and, as a result of that weakness, our disclosure controls and procedures were not effective as of September 30, 2019.
The material weakness is as follows:
We did not maintain effective controls to ensure appropriate segregation of duties as the same officer and employee was responsible for the initiating and recording of transactions, thereby creating segregation of
12
duties weaknesses. Due to the (1) significance of segregation of duties to the preparation of reliable financial statements; (2) the significance of potential misstatement that could have resulted due to the deficient controls; and, (3) the absence of sufficient other mitigating controls; we determined that this control deficiency resulted in more than a remote likelihood that a material misstatement or lack of disclosure within the annual or interim financial statements will not be prevented or detected.
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.
PART II—OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Unregistered Sales of Securities
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not Applicable
Item 5. Other Information
On June 25, 2019, Molex opted to terminate the MDA that was executed on June 13, 2017 and an 8K filed on June 17, 2017. Sales for neither party were material. The Company had immaterial expenses related to this agreement and had not invested any capital resources to fulfill its obligations to the agreement.
Item 6. Exhibits
13
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.
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By: /s/ Michael W. Eller
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Date: October 25, 2019
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Name: Michael W. Eller
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Title: President
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(Principal Executive Officer)
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By: /s/ Michael W. Eller
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Date: October 25, 2019
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Name: Michael W. Eller
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|
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Title: President
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(Principal Accounting Officer)
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14
