Electronic Systems Technology

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM 10-Q


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

For the quarterly period ended June 30, 2017


OR


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

From ________________ to ________________



ELECTRONIC SYSTEMS TECHNOLOGY, INC.

(Exact name of registrant as specified in its charter)


Washington

000-27793

91-1238077

(State or other jurisdiction of incorporation)

(Commission File  Number)

(IRS Employer Identification No.)


415 N. Quay St. Bldg B1 Kennewick WA

 

99336

(Address of principal executive offices)

 

(Zip Code)



                 (509) 735-9092                  

(Registrant's telephone number, including area code)


                                             N/A                                            

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


Indicate by check mark whether the registrant (1) has filed all documents and reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filings for the past 90 days.  YES 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 or a smaller reporting company.  


Large Accelerated Filer   ¨

Accelerated Filer  ¨

Non-Accelerated Filer    ¨

(Do not check if a smaller reporting company)

Small Reporting Company    x

Emerging Growth Company  ¨


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


Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes ¨  No x


APPLICABLE ONLY TO CORPORATE ISSUERS:


As of June 30, 2017, the number of the Company's shares of common stock par value $0.001, outstanding was 5,006,577.



1



ELECTRONIC SYSTEMS TECHNOLOGY, INC.



FORM 10-Q

June 30, 2017

Index


PART I - FINANCIAL INFORMATION

3


Item 1.  Financial Statements.

3


Balance Sheets

3


Statements of Operations

4


Statements of Cash Flows

5


Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations.

9


Item 3.  Quantitative and Qualitative Disclosures About Market Risk.

11


Item 4.  Evaluation of Disclosure Controls and Procedures.

12


PART II - OTHER INFORMATION

13


Item 1 Legal Proceedings

13


Item 2 Unregistered Sales of Equity Securities and Use of Proceeds

13


Item 3 Defaults Upon Senior Securities

13


Item 4 Mine Safety Disclosure

13


Item 5 Other Information

13


Item 6.  Exhibits

13








2



PART I - FINANCIAL INFORMATION


Item 1.  Financial Statements.


ELECTRONIC SYSTEMS TECHNOLOGY, INC.

BALANCE SHEETS

 

June 30, 2017

(Unaudited)

 

December, 31,

2016

ASSETS

 

 

 

Current assets

 

 

 

Cash and cash equivalents

$           387,115

 

$       502,971

Certificates of deposit investments

1,000,000

 

1,000,000

Accounts receivable

133,711

 

71,202

Inventories

703,799

 

703,147

Accrued interest receivable

3,547

 

6,903

Prepaid expenses

14,534

 

8,405

          Total current assets

2,242,706

 

2,292,628

 

 

 

 

Property and equipment, net

41,413

 

51,383

 

 

 

 

Deferred income tax asset, net

244,092

 

244,092

               Total assets

$        2,528,211

 

$      2,588,103

 

 

 

 

LIABILITIES & STOCKHOLDERS' EQUITY

 

 

 

Current liabilities

 

 

 

Accounts payable

$             72,127

 

$          15,114

Accrued liabilities

23,599

 

22,693

Refundable deposits

3,622

 

4,527

    Total current liabilities

99,348

 

42,334

               Total liabilities

99,348

 

42,334

 

 

 

 

COMMITMENTS and CONTINGENCIES (NOTE 6)

 

 

 

 

 

 

 

Stockholders’ equity

 

 

 

Common stock, $0.001 par value 50,000,000 shares authorized 5,006,577 and 5,060,903 shares issued and outstanding, respectively

5,007

 

5,061

Additional paid-in capital

951,969

 

972,609

Retained earnings

1,471,887

 

1,568,099

          Total stockholders’ equity

2,428,863

 

2,545,769

               Total liabilities and stockholders’ equity

$        2,528,211

 

$    2,588,103


(See "Notes to Financial Statements")




3





ELECTRONIC SYSTEMS TECHNOLOGY, INC.

STATEMENTS OF OPERATIONS

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30, 2017

 

Three Months Ended June 30, 2016

 

Six Months Ended June 30, 2017


Six Months Ended June 30, 2016

SALES, NET

 

$         365,468

 

$         437,882

 

$        726,890

 

$        857,594

     SITE SUPPORT

 

15,145

 

23,237

 

32,509

 

71,176

     COST OF SALES

 

(164,895)

 

(191,463)

 

(348,210)

 

(391,600)

GROSS PROFIT

 

215,718

 

269,656

 

411,189

 

537,170

 

 

 

 

 

 

 

 

 

Operating Expenses

 

 

 

 

 

 

 

 

     General and administrative

 

65,302

 

74,285

 

153,436

 

165,955

     Research and development

 

56,310

 

76,475

 

136,325

 

145,610

     Marketing and Sales

 

108,678

 

125,071

 

223,177

 

244,093

TOTAL OPERATING EXPENSE

 

230,290

 

275,831

 

512,938

 

555,658

 

 

 

 

 

 

 

 

 

OPERATING INCOME (LOSS)

 

(14,572)

 

(6,175)

 

(101,749)

 

(18,488)

 

 

 

 

 

 

 

 

 

OTHER INCOME

 

 

 

 

 

 

 

 

     Interest income

 

2,848

 

2,984

 

5,538

 

5,871

TOTAL OTHER INCOME

 

2,848

 

2,984

 

5,538

 

5,871

 

 

 

 

 

 

 

 

 

NET INCOME (LOSS) BEFORE

   INCOME TAX

 

(11,724)

 

(3,191)

 

(96,211)

 

(12,617)

     Benefit (provision) for income tax

 

-

 

400

 

-

 

-

NET INCOME (LOSS)

 

$       (11,724)

 

$       (2,791)

 

$        (96,211)

 

$        (12,617)

 

 

 

 

 

 

 

 

 

Basic and diluted earnings per share

 

Nil

 

Nil

 

($0.02)

 

Nil

 

 

 

 

 

 

 

 

 

Weighted average shares used in computing income (loss) per share:

 

 

 

 

 

 

 

 

Basic and diluted

 

5,040,803

 

5,081,108

 

5,038,043

 

5,105,123






(See "Notes to Financial Statements")






4





ELECTRONIC SYSTEMS TECHNOLOGY, INC.

STATEMENTS OF CASH FLOWS

(Unaudited)

 

 

 

 

 

Six Months Ended June 30, 2017

 

Six Months Ended June 30, 2016

CASH FLOWS PROVIDED (USED) BY OPERATING ACTIVITIES:

 

 

 

Net loss

$            (96,211)

 

$            (12,617)

Noncash items included in net loss:

 

 

 

      Depreciation

9,969

 

13,145

      Share based compensation

-

 

1,841

Changes in operating assets and liabilities:

 

 

 

      Accounts receivable

(62,509)

 

(46,744)

      Inventories

(653)

 

18,255

      Accrued interest receivable

3,356

 

3,633

      Prepaid expenses

(6,126)

 

(9,779)

      Accounts payable

57,012

 

42,854

      Accrued liabilities

906

 

10,878

      Refundable deposits

(905)

 

-

NET CASH FLOWS PROVIDED (USED) BY OPERATING ACTIVITIES

(95,161)

 

21,466


CASH FLOWS PROVIDED (USED) IN INVESTING ACTIVITIES:

 

 

 

Certificates of deposit redeemed

-

 

202,625

NET CASH FLOWS PROVIDED (USED) BY INVESTING ACTIVITIES

-

 

202,625

 

 

 

 

CASH FLOWS USED IN FINANCING ACTIVITIES:

 

 

 

Repurchase of Shares

(20,695)

 

(29,472)

NET CASH USED IN FINANCING ACTIVITIES

(20,695)

 

(29,472)


NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

(115,856)

 

194,619

Cash and cash equivalents at beginning of period

502,971

 

618,060


Cash and cash equivalents at end of period

$           387,115

 

$           812,679





(See "Notes to Financial Statements")





5


ELECTRONIC SYSTEMS TECHNOLOGY, INC.

NOTES TO FINANCIAL STATEMENTS

(Unaudited)


NOTE 1 - BASIS OF PRESENTATION

 

The financial statements of Electronic Systems Technology, Inc. (the "Company"), presented in this Form 10Q are unaudited and reflect, in the opinion of Management, a fair presentation of operations for the three and six month periods ended June 30, 2017 and June 30, 2016.  All adjustments of a normal recurring nature and necessary for a fair presentation of the results for the periods covered have been made. Certain information and footnote disclosure normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to the applicable rules and regulations of the Securities and Exchange Commission. These financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Company's Form 10K for the year ended December 31, 2016 as filed with Securities and Exchange Commission.


The results of operations for the three and six months ended June 30, 2017 and June 30, 2016, are not necessarily indicative of the results expected for the full fiscal year or for any other fiscal period.


New Accounting Pronouncements


In July of 2015 the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) 2015-11 “Simplifying the Measurement of Inventory” an update to Inventory Topic 330. The ASU simplifies the concept of lower of cost or market to the low of cost and net realizable value and more closely align the measurement of inventory in Generally Accepted Accounting Principles (“GAAP”) with the measurement of inventory in International Financial Reporting Standards (“IFRS”).


Certain prior period amounts have been reclassified for consistency with the current period presentation. These reclassifications had no effect on the reported results of operations, cash flows or financial position of prior period amounts.


NOTE 2 - INVENTORIES


Inventories are stated at lower of direct cost or market with cost determined using the FIFO (first in, first out) method.  Inventories consist of the following:


 

June 30,  

2017

December 31,

2016

Parts

$ 115,046

$       185,911

Work in progress

255,658

216,859

Finished goods

333,095

300,377

 

$ 703,799

703,147


NOTE 3 - INCOME (LOSS) PER SHARE


Basic income (loss) per share excludes dilution and is computed by dividing income (loss) available to common stockholders by the weighted-average number of common shares outstanding for the period.  Diluted income (loss) per share reflects potential dilution occurring if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the Company.  At June 30, 2017, the Company had 150,000 outstanding stock options that could have a dilutive effect on future periods.  However, at June 30, 2017 there was no dilutive effect of stock options on earnings per share or weighted average shares outstanding.  


NOTE 4 - STOCK OPTIONS


As of June 30, 2017, 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 has not awarded stock options during the six months ended June 30, 2017. The Board of Directors may consider issuing stock options later in 2017. Shareholders approved the 2015 Stock Incentive Plan on June 3, 2016, for 250,000 stock options. 150,000 of the approved amount were granted to certain management employees as part of the 2015 Stock Incentive Plan. The options were dated effective August 7, 2015 and have a five year exercise period. The company booked an expense of $1,841 for the quarter ending June 30, 2016 in which the options were approved by the Shareholders.



6


ELECTRONIC SYSTEMS TECHNOLOGY, INC.

NOTES TO FINANCIAL STATEMENTS

(Unaudited)


NOTE 4 - STOCK OPTIONS, Continued


The fair value of each option award is estimated on the date of the grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in 2015 and approved by the Shareholders in 2016.


 


2015

Dividend yield

0.00%

Expected volatility

68%

Risk-free interest rate

1.08%

Expected term (in years)

5

Estimated Fair Value per Option Granted

$0.23


The Company uses historical data to estimate option exercise rates.  The option exercise rate for option grants in 2005 through 2016 was 5.2%.  


A summary of option activity during the six months ended June 30, 2017 is as follows:


 


Number Outstanding

Weighted-Average

Exercise Price Per

Share

Weighted-Average

Remaining Life

(Years)

Approximate

Aggregate

Intrinsic Value

Outstanding and Exercisable at December 31, 2016

220,000

$0.40

 

 

Granted (Approved)

-0-

 

 

 

Expired

(70,000)

0.41

 

 

Outstanding and Exercisable at June 30, 2017

150,000

$0.40

3.4

$0



NOTE 5 - RELATED PARTY TRANSACTIONS

 

During the quarter ended June 30, 2017, the Company accrued total directors’ fees of $1,200, or $300 per director for board meetings attended. For the six-month period ending June 30, 2017, the Company paid or accrued a total of $2,400 for directors’ fees.


NOTE 6 - COMMITMENTS and CONTINGENCIES


The Company leases its facilities from a port authority for $5,445 per month for three years, expiring in September 2017, with annual increases based upon the Consumer Price Index. The Company has a three year option to extend the lease which it intends to exercise at the end of the current lease.


NOTE 7 - SEGMENT REPORTING


Segment information is prepared on the same basis that the Company's management reviews financial information for operational decision making purposes.    

  

During the quarter ended June 30, 2017, Domestic customers represented approximately 81% of total net revenues. Domestic sales revenues decreased to $309,556 for the quarter ended June 30, 2017 compared to $388,415 for the quarter ended June 30, 2016. Year to date domestic sales revenues decreased to $610,038 as of June 30, 2017 compared to $745,122 for the same period of 2016.  Foreign customers represented approximately 19% of total net revenues.  Foreign sales revenues decreased to $71,057 for the quarter ended June 30, 2017 compared to $72,704 for the quarter ended June 30, 2016. Year to date foreign sales revenues decreased to $149,361 as of June 30, 2017 compared to $183,648 for the same period of 2016.  During the quarter ended June 30, 2017, sales to one customer comprised more than 10% of the Company’s sales revenues.  Revenues from foreign countries during the second quarter of 2017 consist primarily of revenues from product sales to Mexico, Peru, Hungary and Columbia.



7



ELECTRONIC SYSTEMS TECHNOLOGY, INC.

NOTES TO FINANCIAL STATEMENTS

(Unaudited)


NOTE 8 – 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. On March 2nd, 2016, the Company’s Board of Directors approved a resolution authorizing the repurchase of up to an additional $150,000 of the Company’s common stock at the price of $0.38 per share. As of June 30, 2017, $192,206 remains of $250,000 approved by the board. 97,764 shares were repurchased in 2016, bringing the total number of shares repurchased to 152,090. The Company’s share repurchase program does not obligate it to acquire any specific number of shares. The following table shows the Company’s activity and related information for the six-month period ending June 30, 2017: The following table shows the Company’s activity and related information for the six-month period ended June 30, 2017:


 

Purchase Period End Date

Number of Shares

Average Repurchase Price Per Share

Amount (1)

January 2017

January 31, 2017

1,000

$0.38

$      390

March 2017

March 31, 2017

7,725

$0.38

$   2,962

April 2017

April 30, 2017

45,601

$0.38

$ 17,343

Total

 

54,326

$0.38

$ 20,695


(1)  Amount includes commissions paid of $51.


The trading price of the Company’s shares as of June 30 2017, was $0.38.








8



Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations.


MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATION

 

Management’s discussion and analysis is intended to be read in conjunction with the Company’s unaudited financial statements and the integral notes thereto for the quarter ended June 30, 2016.  The following statements may be forward looking in nature and actual results may differ materially.


A.  Results of Operations

 

REVENUES:


Total revenues from the sale of the Company’s ESTeem wireless modem products and services decreased to $380,613 for the second quarter of 2017, compared to $461,119 for the second quarter of 2016.  Gross revenues, including interest income, decreased to $383,461 for the quarter ended June 30, 2017, from $464,103 for the same quarter of 2016.  Year to date sales decreased to $759,399 as of June 30, 2017, as compared to $928,770 as of June 30, 2016. Year to date gross revenues, including interest income, decreased to $764,936 as of June 30, 2017, compared to $934,641 as of June 30, 2016.  Management believes the increase in quarterly and year to date sales revenues is due to decreased engineering services and related product sales.


The Company's revenues have historically fluctuated from quarter to quarter due to timing factors such as customer order placement and product shipments to customers, as well as 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 in regard to the Company's revenues become difficult to predict.


A percentage breakdown of EST's Domestic and Export Sales, for the second quarter of 2017 and 2016 are as follows:


 

For the second quarter of

 

2017

2016

Domestic Sales

81%

84%

Export Sales

19%

16%



Domestic Revenues


During the quarter ended June 30, 2017, the Company’s domestic operations represented 81% of the Company’s total sales revenues.  Domestic operations sell ESTeem modem products, accessories and service primarily through domestic resellers, as well as directly to end users of the Company’s products.  Domestic sales revenues decreased to $309,556 for the quarter ended June 30, 2017 compared to $388,415 for the quarter ended June 30, 2016.  Management believes the decrease in sales revenues is due to decreased domestic sales for water/waste water and mining industrial automation projects during the first six months of 2017.  During the quarter ended June 30, 2017, one customer, comprised more than 10% of the Company’s sales revenues.  


For the six-month period ended June 30, 2017, the Company’s domestic operations represented 80% of the Company’s total sales revenues.  Year to date domestic sales revenues decreased to $610,038 as of June 30, 2017 compared to $745,122 for the same period of 2016. Management believes the increase in year to date sales revenues is due to decreased engineering services and related product sales during the first half of 2017.  


Foreign Revenues


The Company’s foreign operating segment represented 19% of the Company’s total net revenues for the quarter ended June 30, 2017.  The foreign operating segment is based wholly in the United States and maintains no assets outside of the United States.  The foreign operating segment sells ESTeem modem products, accessories and service primarily through foreign resellers, as well as directly to end customers of the Company’s products located outside the United States.  




9


During the quarter ended June 30, 2017, the Company had $71,057 in foreign export sales, amounting to 19% of total net revenues of the Company for the quarter, compared with foreign export sales of $80,672 for the same quarter of 2016.  Management believes the decrease in foreign sales revenues was due to decreased automation needs to lower operating expenses in Oil & Gas and Mining industries.  Revenues from foreign countries during the second quarter of 2017 consist primarily of revenues from product sales to Mexico, Peru, Hungary and Colombia.  No foreign sales to a single customer comprised 10% or more of the Company's product sales for the quarter ended June 30, 2017.  Products purchased by foreign customers were used primarily in industrial automation applications.  We believe the majority of foreign export sales are the results of the Company’s Latin American sales staff, EST foreign reseller activity, and the Company’s internet website presence.


For the six-month period ended June 30, 2017, the Company had $149,361 in foreign export sales, amounting to 20% of total sales revenues of the Company for the period, compared with foreign export sales of $183,648 for the same period of 2016. Management believes the decrease in foreign sales revenues is due end of life product purchases in 2016 to Croatia.


BACKLOG:


The Corporation had a sales order backlog of approximately $12,626 as of June 30, 2017.  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 15 working days after receipt of customer orders, with the exception of ongoing, scheduled projects, and custom designed equipment.


COST OF SALES:


Cost of sales percentage for the second quarter of 2017 and 2016 was 41% and 39%, respectively. The cost of sales increase for the second quarter of 2017 is the result of the product mix for items sold during the period.


OPERATING EXPENSES:


Operating expenses for the second quarter of 2017 decreased $45,540 from the second quarter of 2016.  The following is an outline of operating expenses:


For the quarter ended:

 

June 30, 2017

 

June 30, 2016

 

Increase (Decrease)

General and Administrative

 

$             65,302

 

$             74,285

 

($8,983)

Research/Development

 

56,310

 

76,475

 

(20,165)

Marketing and Sales

 

108,678

 

125,071

 

(16,393)

Total Operating Expenses

 

$           230,290

 

$           275,831

 

($45,540)


GENERAL AND ADMINISTRATIVE:


During the second quarter of 2017, general and administrative expenses decreased $8,983 to $65,302 from the same quarter of 2016, due to decreased professional services and bank fees.


RESEARCH AND DEVELOPMENT:


Research and development expenses decreased $20,165 to $56,310 during the second quarter of 2017 when compared with the same period in 2016 due to fees paid for type acceptance and prototype builds of new product.


MARKETING AND SALES:


During the second quarter of 2017, marketing and sales expenses decreased $16,393 to $108,678 from the same period in 2016, due to decreased services purchased.


INTEREST AND DIVIDEND INCOME:


The Corporation earned $2,848 in interest and dividend income during the quarter ended June 30, 2017.  Sources of this income were money market accounts and certificates of deposit.



10



NET INCOME (LOSS):


The Company had a net loss of $11,724 for the second quarter of 2017, compared to a net loss of $2,971 for the same quarter of 2016.  For the six-month period ended June 30, 2017, the Company recorded a net loss of $96,211, compared with a net loss of $12,617 for the same period of 2016.  The increase in the Company’s net loss is the result of decreased sales revenues, decreased gross margins and reduced operating expenses during the second quarter of 2017.


TAXES:


The Company has estimated valuation allowance of $114,424 to reduce the value of the Deferred Tax Asset (non-current) to reflect the amount that may not be realizable in future periods.


B.  Financial Condition, Liquidity and Capital Resources

 

The Corporation's current asset to current liabilities ratio at June 30, 2017 was 22.6:1 compared to 54:1 at December 31, 2016.  For the quarter ended June 30, 2017, the Company had cash and cash equivalents of $387,115; compared to cash and cash equivalent holdings of $502,971 at December 31, 2016.  The Company had certificates of deposit investments in the amount of $1,000,000 at June 30, 2017 and $1,000,000 at December 31, 2016.


Accounts receivable increased to $133,711 as of June 30, 2017, from December 31, 2016 levels of $71,202, due to sales revenue timing differences between the second quarter of 2017 and year-end 2016.  Inventories increased to $703,799 as of June 30, 2017, from December 31, 2016 levels of $703,147, due primarily to an increase of finished goods.  The Company's fixed assets, net of depreciation, decreased to $41,413 as of June 30, 2017, from December 31, 2016 levels of $51,383.


As of June 30, 2017, the Company’s accounts payable balance was $72,127 as compared with $15,114 at December 31, 2016, and reflects amounts owed for inventory items, contracted services, and state tax liabilities.  Accrued liabilities and refundable deposits as of June 30, 2017 were $23,599 compared with $22,692 at December 31, 2016, and reflect items such as accrued vacation benefits and payroll tax liabilities        


In Management's opinion, the Company's cash and cash equivalent reserves, and working capital at June 30, 2017 is sufficient to satisfy requirements for operations, capital expenditures, and other expenditures as may arise during the remainder of 2017.


The Company did not declare or issue any cash dividends during 2016 or 2017.



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.


Item 3.  Quantitative and Qualitative Disclosures About Market Risk.


Not applicable



11



Item 4.  Evaluation of Disclosure Controls and Procedures.


The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting.  The Company’s internal control over financial reporting is a process designed under the supervision of its President and Treasurer to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Company’s financial statements for external reporting in accordance with accounting principles generally accepted in the United States of America.*  Management evaluates the effectiveness of the Company’s internal control over financial reporting using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control – “Integrated Framework.”


Management, under the supervision and with the participation of the Company’s President and Chief Financial Officer, assessed the effectiveness of the Company’s internal control over financial reporting as of June 30, 2017, and concluded that it is ineffective in assuring that the financial reports of the Company are free from material errors or misstatements.


*This quarterly report does not include an attestation report of the Company's registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by its registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report.


Management has identified the following material weakness and is taking action to remedy and remove the weakness in its internal controls over financial reporting:


·

Inappropriate Segregation of Duties, as the same officer and director was responsible for initiating and recording transactions, thereby creating segregation of duties weakness.


Management’s Remediation Initiatives.


Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within the Company have been detected.  These inherent limitations include the realities that judgments in decision making can be faulty and that breakdowns can occur because of simple error or mistake.  The design of any system of controls is based in part on 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.  Projections of any evaluation of controls effectiveness to future periods are subject to risks.


The Company clearly recognizes, and continues to recognize, the importance of implementing and maintaining disclosure controls and procedures and internal controls over financial reporting and is working to implement an effective system of controls.  Management is currently evaluating avenues for mitigating the Company's internal controls weaknesses, but mitigating controls that are practical and cost effective may not be found based on the size, structure, and future existence of the organization. Management, within the confines of its budgetary resources, will engage its outside accounting firm to assist with an assessment of the Company’s internal controls over financial reporting as of June 30, 2017.


Changes in internal control over financial reporting.


There have been no changes during the quarter ended June 30, 2017 in the Company’s internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, internal controls over financial reporting.




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PART II - OTHER INFORMATION


Item 1 Legal Proceedings


The Company is not involved in any material current of pending legal proceedings


Item 2 Unregistered Sales of Equity Securities and Use of Proceeds


None


Item 3 Defaults Upon Senior Securities


None


Item 4 Mine Safety Disclosure


Not Applicable


Item 5 Other Information


None


Item 6.  Exhibits



EXHIBIT  NUMBER


DESCRIPTION

31.1

Section 302 Certification, CEO

31.2

Section 302 Certification, CFO

32.1

Section 906 Certification, CEO

32.2

Section 906 Certification, CFO

101.INS

XBRL Instance Document

101.SCH

XBRL Taxonomy Extension Schema Document

101.CAL

XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF

XBRL Taxonomy Extension Definition Linkbase Document

101.LAB

XBRL Taxonomy Extension Label Linkbase Document

101.PRE

XBRL Taxonomy Extension Presentation Linkbase Document














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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.

 

 

 

 

Date:   July 21, 2017

/s/ Michael W. Eller

Name:  Michael Eller

Title: Director/President

(Chief Executive Officer)

 

 

 

 

Date:   July 21, 2017

/s/ Michael W. Eller

Name:  Michael Eller

Title: Director/President

(Principal Accounting Officer)













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