ELECTRONIC SYSTEMS TECHNOLOGY INC - Quarter Report: 2021 September (Form 10-Q)
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, 2021
OR
oTRANSITION 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)
Securities registered pursuant to Section 12(g) of the Act:
Title of Each Class | Trading Symbol(s) | Name of Each Exchange on Which Registered |
Common Stock, $0.001 par value | ELST | OTCQB |
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 o
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 o
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 o | Accelerated Filer o |
Non-Accelerated Filer x
| 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. o
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 22, 2021, the number of the Company's shares of Common Stock par value $0.001, outstanding was 4,946,502.
1
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
ELECTRONIC SYSTEMS TECHNOLOGY, INC. BALANCE SHEETS (Unaudited) | |||
| September 30, |
| December 31, |
| 2021 |
| 2020 |
| |||
ASSETS |
|
|
|
Current assets |
|
|
|
Cash and cash equivalents | $ 946,320 |
| $ 308,110 |
Certificates of deposit | 250,000 |
| 499,999 |
Accounts receivable | 91,390 |
| 288,884 |
Inventories | 534,278 |
| 631,707 |
Prepaid expenses | 30,298 |
| 28,087 |
Accrued interest receivable | 1,192 |
| 4,659 |
Total current assets | 1,853,478 |
| 1,761,446 |
|
|
|
|
Property and equipment, net of depreciation | 1,578 |
| 5,445 |
|
|
|
|
Right to use – Lease, net of amortization (NOTE 6) | 38,372 |
| 65,230 |
|
|
|
|
Total assets | $ 1,893,428 |
| $ 1,832,121 |
|
|
|
|
LIABILITIES and STOCKHOLDERS' EQUITY |
|
|
|
Current liabilities |
|
|
|
Accounts payable | $ 80,140 |
| $ 21,113 |
Accrued wages and bonus | 24,907 |
| 2,699 |
Accrued vacation pay | 20,872 |
| 17,631 |
Lease liability, current (NOTE 6) | 39,005 |
| 36,753 |
Other accrued liabilities | 6,736 |
| 6,720 |
CARES Act loan payable, current portion (NOTE 8) | 13,911 |
| - |
Total current liabilities | 185,571 |
| 84,916 |
|
|
|
|
Long-term liabilities |
|
|
|
CARES Act loan payable (NOTE 8) | - |
| 171,712 |
Operating lease liability (NOTE 6) | - |
| 28,635 |
Total Long-term liabilities | - |
| 200,347 |
|
|
|
|
Total liabilities | 185,571 |
| 285,263 |
|
|
|
|
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 |
| 931,442 |
Retained earnings | 770,498 |
| 610,469 |
Total stockholders' equity | 1,707,857 |
| 1,546,858 |
Total liabilities and stockholders' equity | $ 1,893,428 |
| $ 1,832,121 |
See Notes to Financial Statements.
2
ELECTRONIC SYSTEMS TECHNOLOGY, INC. STATEMENTS OF OPERATIONS (Unaudited) | ||||||||
|
|
|
|
|
|
|
|
|
|
| Three Months Ended September 30, 2021 |
| Three Months Ended September 30, 2020 |
| Nine Months Ended September 30, 2021 |
| Nine Months Ended September 30, 2020 |
|
|
|
| |||||
SALES - NET |
| $ 256,069 |
| $ 202,869 |
| $ 1,137,848 |
| $ 722,333 |
COST OF SALES |
| (152,834) |
| (105,410) |
| (546,568) |
| (387,035) |
GROSS PROFIT |
| 103,235 |
| 97,459 |
| 591,280 |
| 335,298 |
|
|
|
|
|
|
|
|
|
Operating Expenses |
|
|
|
|
|
|
|
|
General and administrative |
| 55,574 |
| 55,761 |
| 215,528 |
| 221,431 |
Research and development |
| 46,534 |
| 49,739 |
| 153,483 |
| 154,850 |
Marketing and sales |
| 122,960 |
| 90,229 |
| 344,594 |
| 264,420 |
TOTAL OPERATING EXPENSE |
| 225,068 |
| 195,729 |
| 713,605 |
| 640,701 |
|
|
|
|
|
|
|
|
|
OPERATING INCOME (LOSS) |
| (121,833) |
| (98,270) |
| (122,325) |
| (305,403) |
|
|
|
|
|
|
|
|
|
OTHER INCOME |
|
|
|
|
|
|
|
|
Grant income (NOTE 8) |
| - |
| - |
| - |
| 9,000 |
Gain on forgiveness of CARES Act loan |
| 130,255 |
| - |
| 280,373 |
| - |
Interest income |
| 555 |
| 2,444 |
| 1,981 |
| 8,396 |
TOTAL OTHER INCOME |
| 130,810 |
| 2,444 |
| 282,354 |
| 17,396 |
|
|
|
|
|
|
|
|
|
NET INCOME (LOSS) BEFORE INCOME TAX |
| 8,977 |
| (95,826) |
| 160,029 |
| (288,007) |
Benefit (provision) for income tax |
| - |
| - |
| - |
| - |
NET INCOME (LOSS) |
| $ 8,977 |
| $ (95,826) |
| $ 160,029 |
| $ (288,007) |
|
|
|
|
|
|
|
|
|
Basic and diluted earnings per share |
| $0.00 |
| ($0.02) |
| $0.03 |
| ($0.06) |
|
|
|
|
|
|
|
|
|
Basic and diluted weighted average shares used in computing income (loss) per share: |
| 4,946,502 |
| 4,946,502 |
| 4,946,502 |
| 4,946,502 |
See Notes to Financial Statements.
3
ELECTRONIC SYSTEMS TECHNOLOGY, INC. STATEMENTS OF CASH FLOWS (Unaudited)
| |||
| Nine Months Ended | ||
| September 30, |
| September 30, |
| 2021 |
| 2020 |
| |||
CASH FLOWS FROM OPERATING ACTIVITIES: |
|
|
|
|
|
|
|
Net income (loss) | $ 160,029 |
| $ (288,007) |
|
|
|
|
Noncash items included in net loss: |
|
|
|
Depreciation | 3,867 |
| 5,214 |
Share based compensation | 970 |
| 2,282 |
Gain on forgiveness of CARES Act loan | (280,373) |
| - |
|
|
|
|
Changes in operating assets and liabilities: |
|
|
|
Accounts receivable, net | 197,494 |
| (39,425) |
Inventories | 97,428 |
| 41,003 |
Accrued interest receivable | 3,467 |
| (477) |
Prepaid expenses | (2,209) |
| (5,150) |
Accounts payable | 59,027 |
| (79,713) |
Other accrued liabilities | 20,231 |
| 10,964 |
NET CASH PROVIDED (USED) IN OPERATING ACTIVITIES | 259,931 |
| (353,309) |
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES: |
|
|
|
Certificates of deposit redeemed | 249,999 |
| 600,001 |
Certificates of deposit purchased | - |
| (550,000) |
NET CASH PROVIDED FROM INVESTING ACTIVITIES | 249,999 |
| 50,001 |
|
|
|
|
CASH FLOWS USED IN FINANCING ACTIVITIES: |
|
|
|
Principal payments on CARES Act loan payable (round 1) | (1,975) |
| - |
Proceeds from CARES Act loan payable (rounds 1 and 2) | 130,255 |
| 171,712 |
NET CASH PROVIDED (USED) IN FINANCING ACTIVITIES | 128,280 |
| 171,712 |
|
|
|
|
NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS | 638,210 |
| (131,596) |
Cash and cash equivalents at beginning of period | 308,110 |
| 274,936 |
Cash and cash equivalents at end of period | $ 946,320 |
| $ 143,340 |
|
|
|
|
See Notes to Financial Statements.
4
ELECTRONIC SYSTEMS TECHNOLOGY, INC. DBA ESTEEM WIRELESS MODEMS
STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (Unaudited)
| ||||||||
| Common Stock |
| Additional Paid-In | Retained |
|
| ||
| Shares |
| Amount |
| Capital | Earnings |
| Total |
|
|
| ||||||
Balances, January 1, 2020 | 4,946,502 | $ | 4,947 | $ | 929,159 | $ 813,188 | $ | 1,747,294 |
|
|
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|
|
|
|
|
|
Net income (loss) | - |
| - |
| - | (110,306) |
| (110,306) |
|
|
|
|
|
|
|
|
|
Stock based compensation | - |
| - |
| 2,282 | - |
| 2,282 |
|
|
|
|
|
|
|
|
|
Balance at March 31, 2020 | 4,946,502 | $ | 4,947 | $ | 931,441 | $ 702,882 | $ | 1,639,270 |
|
|
|
|
|
|
|
|
|
Net income (loss) | - |
| - |
| - | (81,875) |
| (81,875) |
|
|
|
|
|
|
|
|
|
Balance at June 30, 2020 | 4,946,502 | $ | 4,947 | $ | 931,441 | $ 621,007 | $ | 1,557,395 |
|
|
|
|
|
|
|
|
|
Net income (loss) | - |
| - |
| - | (95,826) |
| (95,826) |
|
|
|
|
|
|
|
|
|
Balance at September 30, 2020 | 4,946,502 | $ | 4,947 | $ | 931,441 | $ 525,181 | $ | 1,461,569 |
|
|
|
|
|
|
|
|
|
Balances, January 1, 2021 | 4,946,502 | $ | 4,947 | $ | 931,442 | $ 610,469 | $ | 1,546,858 |
|
|
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|
|
|
|
|
|
Net income (loss) | - |
| - |
| - | 4,682 |
| 4,682 |
|
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|
|
|
|
|
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Balance at March 31, 2021 | 4,946,502 | $ | 4,947 | $ | 931,442 | $ 615,151 | $ | 1,551,540 |
|
|
|
|
|
|
|
|
|
Net income (loss) | - |
| - |
| - | 146,370 |
| 146,370 |
|
|
|
|
|
|
|
|
|
Balance at June 30, 2021 | 4,946,502 | $ | 4,947 | $ | 931,442 | $ 761,521 | $ | 1,697,910 |
|
|
|
|
|
|
|
|
|
Net income (loss) | - |
| - |
| - | 8,977 |
| 8,977 |
|
|
|
|
|
|
|
|
|
Stock based compensation | - |
| - |
| 970 | - |
| 970 |
|
|
|
|
|
|
|
|
|
Balance at September 30, 2021 | 4,946,502 | $ | 4,947 | $ | 932,412 | 770,498 | $ | 1,707,857 |
See Notes to Financial Statements.
5
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, 2021, and its results of operations, cash flows, and changes in stockholders’ equity for the three months and nine months ended September 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 nine-month period ended September 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
In August 2020, the Financial Accounting Standards Board (FASB) issued (Accounting Standards Update (ASU) No. 2019-12 Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity. The update is to address issues identified as a result of the complexity associated with applying generally accepted accounting principles for certain financial instruments with characteristics of liabilities and equity. The update is effective for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years and with early adoption permitted. Management does not expect adoption of this update to have a material impact on the Company’s 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:
September 30, 2021 | December 31, 2020 | |
Parts | $ 84,001 | $ 99,303 |
Work in progress | 194,713 | 275,230 |
Finished goods | 255,564 | 257,174 |
Total inventory | $ 534,278 | 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 September 30, 2021 and 2020, the Company had 240,000 and 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 nine-month period ended September 30, 2020.
On September 2, 2021, the Board of Directors granted 60,000 options to employees. The new options have an exercise price of $0.40, a term of 5 years, and vest 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 107.7%, expected term of 5 years with a forfeiture rate of 95%, and a discount factor of 0.77%. Share based compensation of $970 was recognized during the three and nine month periods ended September 30, 2021.
As of September 30, 2021, there were 240,000 options outstanding with a weighted average exercise price of $0.40 per share, a weighted average remaining life of 3.9 years and had intrinsic value of $14,400.
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 September 30, 2021 and 2020, the Company’s revenue from products sales was $230,869 and $195,119, respectively. Revenue from site support and engineering services was $25,200 and $7,750 respectively, over the same periods.
During the nine-month period ended September 30, 2021 and 2020, the Company’s revenue from products sales was $1,100,948 and $692,483, respectively. Revenue from site support and engineering services was $36,900 and $29,850 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 of products and services for the three-month period ended September 30, 2021 and September 30, 2020 were $227,001 and $193,158, respectively. Sales to foreign customers for the three-month period ended September 30, 2021 and September 30, 2020 were $29,068 and $9,711, respectively.
7
ELECTRONIC SYSTEMS TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
NOTE 5 – REVENUE (continued)
Domestic sales for the nine-month period ended September 30, 2021 and September 30, 2020 were $1,021,331 and $647,397, respectively. Sales to foreign customers for the nine-month period ended September 30, 2021 and September 30, 2020 were $116,517 and $74,936, respectively.
For the three-month period ended September 30, 2021, sales to one customer represented more than 10% of total revenue, four customers 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 | $ 70,505 | 28% | $ 26,875 | 13% |
Domestic customer B | - | - | 25,640 | 13% |
Domestic customer C | - | - | 24,864 | 12% |
Domestic customer D | - | - | 22,093 | 11% |
For the nine-month period ended September 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 | $203,623 | 18% | $82,566 | 11% |
Domestic customer B | 129,798 | 11% | - | - |
As of September 30, 2021 and 2020, the Company had a sales order backlog of $93,059 and $3,400, 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 September 30, 2021, the remaining lease term is twelve 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 nine-month periods ended September 30, 2021 and 2020, lease expenses of $10,862 and $16,918, and $32,586 and $50,934 respectively, are included in the following expense classifications on the statement of operations:
8
ELECTRONIC SYSTEMS TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
NOTE 6 – LEASES (continued)
| For the three-month period ending September 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 nine-month period ending September 30, | ||||||
| 2021 |
| 2020 | ||||
Cost of sales | Operating expenses | Total |
| Cost of sales | Operating expenses | Total | |
Base rent pursuant to lease agreement | $ 16,190 | $ 12,742 | $ 28,932 |
| $ 8,996 | $ 36,163 | $ 45,159 |
Variable lease costs | 2,045 | 1,609 | 3,654 |
| 1,155 | 4,620 | 5,775 |
Total lease costs | $ 18,235 | $ 14,351 | $ 32,586 |
| $ 10,151 | $ 40,783 | $ 50,934 |
As of September 30, 2021, total future lease payments are as follows:
For the 12 months ending September 30, 2021 and 2022 | ||
2021 | $ | 9,802 |
2022 |
| 29,407 |
Total |
| 39,209 |
Less imputed interest |
| (204) |
Net lease liability |
| 39,005 |
Current portion |
| 39,005 |
Long-term portion | $ | - |
9
ELECTRONIC SYSTEMS TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
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 September 30, 2021 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 which was recognized as a gain on forgiveness of CARES Act loan in the second quarter of 2021. A balance of $21,594 remained after the forgiveness. As of September 30, 2021, the balance remaining was $13,911. Monthly payments of $1,994 are due for the next seven 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 September 30, 2021, the Company has used funds from the loan to pay qualifying expenses. The second loan was forgiven and the Company recognized gain on forgiveness of CARES Act loan of $130,255 during the three month period ended September 30, 2021.
10
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, 2021. 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 $256,069 for the third quarter of 2021 as compared to $202,869 in the third quarter of 2020, reflecting an increase of 26.2%. 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 $1,137,848 in 2021 as compared to $722,333 in 2020, reflecting an increase of 57.5%. 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 nine-month period ending September 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 nine-month periods ended September 30, 2021, and 2020 are as follows:
| Three Months ended September 30, 2021 | Three Months ended September 30, 2020 | Nine Months ended September 30, 2021 | Nine Months ended September 30, 2020 |
Domestic Sales | 89% | 95% | 90% | 90% |
Export Sales | 11% | 5% | 10% | 10% |
BACKLOG:
As of September 30, 2021, the Company had a sales order backlog of $93,059. 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 third quarters of 2021 and 2020 were 60% and 52% of respective net sales. The cost of sales percentage increased in the third quarter of 2021 is the result of the product mix sold during the same quarter of 2020. Cost of sales percentages for the nine-month periods ended September 30, 2021, and 2020 were 48% and
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COST OF SALES (Cont.):
54%. The cost of sales percentage increase in the first nine-months of 2021 is the result of the product mix sold during the same period of 2020.
OPERATING EXPENSES:
The following is a delineation of operating expenses:
| Three Months Ended |
| Nine Month Ended |
| ||
| Sept.30, 2021 | Sept. 30, 2020 | Increase (Decrease) | Sept. 30, 2021 | Sept. 30, 2020 | Increase (Decrease) |
General and administrative | $ 55,574 | $ 55,761 | $ (187) | $ 215,528 | $ 221,431 | $ (5,903) |
Research and development | 46,534 | 49,739 | (3,205) | 153,483 | 154,850 | (1,367) |
Marketing and sales | 122,960 | 90,229 | 32,731 | 344,594 | 264,420 | 80,174 |
Total operating expenses | $ 225,068 | $ 195,729 | $ 29,339 | $ 713,605 | $ 640,701 | $ 72,904 |
General and administrative: For the third quarter of 2021, general and administrative expenses decreased $187 to $55,574, due to decreased wages when compared with the same quarter of 2020. For the nine-month period, general and administrative expenses decreased by $5,903 to $215,528 due to decreased wages.
Research and development: Research and development expenses decreased $3,205 to $46,534 during the third quarter of 2021 due to decreased expenses related to prototype build costs when compared with the same quarter of 2020. For the nine-month period, research and development expenses decreased by $1,367 to $153,483, due to decreased prototype build costs.
Marketing and sales: During the third quarter of 2021, marketing and sales expenses increased $32,731 to $122,960 when compared with the same period of 2020, due to increased payroll. For the nine-month period, marketing and sales expenses increased by $80,175 to $344,594, due to increased payroll.
OTHER INCOME:
The Company earned $555 in interest income during the quarter ended September 30, 2021 and $1,981 for the nine-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 $280,373 for the first CARES Act loan (PPP round 1 & 2), 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 $8,977 for the third quarter of 2021 compared to a net loss of $95,826 for the same quarter of 2020. For the nine-month period ended September 30, 2021, the Company recorded net income of $160,029 compared with a net loss of $288,007 for the same period of 2020. The increase in net income during 2021 is the result of increased sales revenues, gross profit and the $280,373 gain on forgiveness of debt related to the first CARES Act loan (PPP rounds 1 and 2).
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B.FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
The Corporation's current asset to current liabilities ratio at September 30, 2021 was 10.0 compared to 20.7 at December 31, 2020. The decrease in current ratio is due to the increase of wages and commissions payable at September 30, 2021 as compared to December 31, 2020.
At September 30, 2021, the Company had cash and cash equivalents of $946,320 as compared to cash and cash equivalent of $308,110 at December 31, 2020.
Cash provided from operating activities increased by $613,240 for the nine-month period ended September 30, 2021 when compared to the same period in 2020. The increase is attributable to an increase in net income for the period being $448,036 greater than the same period in 2020. The reduction in the change in accounts receivable and accounts payable balances contributed $236,919 and $138,740 respectively.
Net cash provided from investing was $249,999 due to the redemption of certificates of deposits maturing during the nine months of 2021. Cash provided from financing activities was $128,280, which were the proceeds of the CARES Act loan (round 2) received during the nine-month period ended September 30, 2021 less that principal paid on the CARES Act loan (round 1).
In management's opinion, the Company's cash and cash equivalents and other working capital at September 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.
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.
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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, 2021. 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, 2021.
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 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
None.
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Item 6. Exhibits
EXHIBIT NUMBER | DESCRIPTION |
31.1 | |
31.2 | |
32.1 | |
32.2 | |
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 |
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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/ Michael W. Eller
|
Date: October 29, 2021 | Name: Michael W. Eller |
| Title: President |
(Principal Executive Officer) |
| By: /s/ Michael W. Eller
|
Date: October 29, 2021 | Name: Michael W. Eller |
| Title: President |
(Principal Accounting Officer) |
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