ELECTRONIC SYSTEMS TECHNOLOGY INC - Quarter Report: 2023 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

For the quarterly period ended September 30, 2023

OR

From ________________ to ________________

ELECTRONIC SYSTEMS TECHNOLOGY INC

(Exact name of registrant as specified in its charter)

(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:

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:

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 26, 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

See Notes to Condensed Financial Statements.

See Notes to Condensed Financial Statements.

See Notes to Condensed Financial Statements.

See Notes to Condensed Financial Statements.

ELECTRONIC SYSTEMS TECHNOLOGY, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1 - BASIS OF PRESENTATION

The unaudited 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 September 30, 2023 and its results of operations, cash flows, and changes in stockholders’ equity for the three and nine months ended September 30, 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 and nine-month period ended September 30, 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:

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, 2023 and 2022, the Company had 225,000 and 210,000 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

On June 9, 2023, the Board of Directors granted 45,000 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 $0.24, volatility of 104.1%, expected term of 5 years with a forfeiture rate of 95%, and a discount factor of 3.92%. Share based compensation of $693 ($534 in marketing and sales and $159 in general and administrative in the condensed statement of operations) was recognized during the nine-month period ended September 30, 2023.

As of September 30, 2023, there were 225,000 options outstanding with a weighted average exercise price of $0.40 per share, a weighted average remaining life of 2.0 years and had intrinsic value of nil.

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 periods ended September 30, 2023 and 2022, the Company’s revenue from products sales was $336,621 and $480,260, respectively. Revenue from site support and engineering services was $6,100 and $6,900 respectively, over the same periods.

During the nine-month periods ended September 30, 2023 and 2022, the Company’s revenue from products sales was $1,209,516 and $1,351,495, respectively. Revenue from site support and engineering services was $23,500 and $24,700 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 September 30, 2023 and September 30, 2022 were $338,948 and $419,164, respectively. Sales to foreign customers for the three-month period ended September 30, 2023 and September 30, 2022 were $3,773 and $67,996, respectively.

Domestic sales for the nine-month period ended September 30, 2023 and September 30, 2022 were $1,208,539 and $1,234,793, respectively. Sales to foreign customers for the nine-month period ended September 30, 2023 and September 30, 2022 were $24,477 and $141,402, respectively.

For the three-month period ended September 30, 2023, sales to three customers represented more than 10% of total revenue, three customers represented more than 10% of total revenue for the same period in 2022.

For the nine-month period ended September 30, 2023, sales to one customer represented more than 10% of total revenue, two customers represented more than 10% of total revenue for the same period in 2022.

As of September 30, 2023 and 2022, the Company had a sales order backlog of $124,125 and $141,066, respectively.

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 September 30, 2023, the remaining lease term is 12 months. As of September 30, 2023, future payments on this lease of $10,435 and $31,304 will be paid in 2023 and 2024 respectively.

For the three and nine-month periods ended September 30, 2023 and 2022, lease expenses of $11,576 and $11,616 and $34,727 and $34,849, respectively, are included in the following expense classifications on the statement of operations:

NOTE 7 - CARES ACT RETENTION CREDIT

As of December 31, 2022, 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 credit was received in July 2023.

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

REVENUES: Total revenues from sales decreased to $342,721 for the third quarter of 2023 as compared to $487,160 in the third quarter of 2022, reflecting a decrease of 29.6%. Management believes the decrease in sales revenues is due to the decrease in customer demand. Year to date total revenues from sales decreased to $1,233,016 in 2023 as compared to $1,376,195 in 2022, reflecting a decrease of 10.4%. Management believes the decrease in sales revenues is due to a decrease in customer demand and the ability to ship orders in a timely manner. Although the inventory levels have increased compared to last year, ancillary goods are being impacted by delays in the supply chain resulting in a $124K backlog.

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, 2023 and 2022 are as follows:

BACKLOG:

As of September 30, 2023, the Company had a sales order backlog of $124,125. 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 2023 and 2022 were 52.1% and 43.1% of respective net sales. Cost of sales percentages for the nine-month periods ended September 30, 2023 and 2022 were 47.6% and 44.4%, respectively. The cost of sales percentage increase for the nine-month period ended September 30, 2023 is the result of the product mix sold during the same period of 2022.

OPERATING EXPENSES:

The following is a delineation of operating expenses:

General and administrative: For the third quarter of 2023, general and administrative expenses decreased $4,955 to $55,829, due to decreased wages when compared with the same quarter of 2022. For the nine-month period ended September 30, 2023, general and administrative expenses decreased by $10,222, to $202,086, due to decreased payroll and increased services purchased. General and administrative expenses were 16.3% compared to 12.5% of sales revenue for the third quarter of 2023 and 2022 respectively and 16.4% compared to 15.4% of sales revenue for nine-month period ended September 30, 2023 and 2022 respectively.

Research and development: Research and development expenses decreased $13,915 to $26,114 during the third quarter of 2023 due to decreased services purchased expenses when compared with the same quarter of 2022. For the nine-month period, research and development expenses decreased by $48,864 to $82,798, due to decreased services purchased. Research and development expense was 7.6% compared to 8.2% of sales revenue for the third quarter of 2023 and 2022 respectively and 6.7% compared to 9.6% of sales revenue for nine-month period ended September 30, 2023 and 2022 respectively.

Marketing and sales: During the third quarter of 2023, marketing and sales expenses increased $28,930 to $133,223 when compared with the same period of 2022, due to increased payroll, benefits expense, and travel. For the nine-month period, marketing and sales expenses increased by $81,125 to $454,819, due to increased payroll, benefits, and travel expenses. Marketing and sales expenses were 38.9% compared to 21.4% of sales revenue for the third quarter of 2023 and 2022 respectively and 36.9% compared to 27.3 % of sales revenue for the nine-month period ended September 30, 2023 2022 respectively.

OTHER INCOME:

The Company earned $8,375 in interest income during the quarter ended September 30, 2023 and $17,559 for the nine-month period. Sources of this income were money market accounts, certificates of deposit, and interest from the U.S. Treasury. The interest from the U.S. Treasury was for the delay in issuing the check for the tax credit.

NET LOSS:

The Company had a net loss of $42,505 for the third quarter of 2023 compared to net income of $73,371 for the same quarter of 2022. For the nine-month period ended September 30, 2023, the Company recorded a net loss of $75,759 compared with net income of $49,614 for the same period of 2022. The decrease in net income during 2023 is the result of increased operating expenses and lower sales.

B.       FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES

The Corporation's current asset to current liabilities ratio at September 30, 2023 was 16.0 compared to 8.6 at December 31, 2022. The increase in current ratio is due to the decrease of accounts payable and increase in inventory at September 30, 2023 as compared to December 31, 2022.

At September 30, 2023, the Company had cash and cash equivalents including certificates of deposit of $821,493 as compared to cash and cash equivalent of $1,002,817 at December 31, 2022.

Cash used from operating activities decreased by $74,096 for the nine-month period ended September 30, 2023 when compared to the same period in 2022. The decrease is attributable to a decrease in net income for the period being $125,373 less than the same period in 2022. The increase in the change in accounts receivable, accounts payable, and inventory balances contributed $41,572, $(61,611) and $(27,798) respectively.

In management's opinion, the Company's cash and cash equivalents and other working capital at September 30, 2023 is sufficient to satisfy requirements for operations, capital expenditures, and other expenditures as may arise during 2023 and into the first half of 2024.

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 1. 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, 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 September 30, 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.

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.

Item 6. Exhibits

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.