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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 September 30, 2012


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)

Smaller reporting company     

x


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 November 1, 2012, the number of the Company's shares of common stock par value $0.001 outstanding was 5,158,667.




1




FORM 10-Q

TABLE OF CONTENTS


PART I - FINANCIAL INFORMATION

4

Item 1.  Financial Statements.

4

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

10

Item 3.  Quantitative and Qualitative Disclosures About Market Risk.

14

Item 4.  Controls and Procedures.

14

PART II - OTHER INFORMATION

16

Item 1A. Risk Factors

16

Item 5. Other Information

16

Item 6.  Exhibits

16









2





PART I - FINANCIAL INFORMATION


Item 1.  Financial Statements.



ELECTRONIC SYSTEMS TECHNOLOGY, INC.

BALANCE SHEETS

 (as prepared by Management)

 

September 30, 2012

(Unaudited)


December 31, 2011

 

 

 

ASSETS

 

 

   Current assets

 

 

     Cash and cash equivalents

 $                 728,446

 $            1,227,490

     Short term  certificate of deposit investments

1,407,000

1,033,000

     Accounts receivable, net of allowance for uncollectables

160,840

104,166

     Inventories

521,528

471,314

     Federal income tax receivable

11,909

47,663

     Prepaid expenses

59,035

29,694

     Deferred income tax asset

56,100

54,000

          Total current assets

2,944,858

2,967,327

 

 

 

Property & equipment, net of depreciation

45,836

54,358

 

 

 

Vendor deposits

35,980

1,675

              Total assets

 $              3,026,674

 $            3,023,360

 

 

 

LIABILITIES & STOCKHOLDERS' EQUITY

 

 

 

 

 

Current liabilities

 

 

     Accounts payable

 $                   58,921

 $                 16,104

     Accrued liabilities

37,558

34,707

     Refundable deposits

48,094

49,303

          Total current liabilities

144,573

100,114

 

 

 

     Deferred income tax liability

6,200

7,800

               Total liabilities

150,773

107,914

 

 

 

Stockholders’ equity

 

 

     Common stock,  $0.001 par value 50,000,000 shares authorized

        5,158,667 shares issued and outstanding

5,159

5,159

     Additional paid-in capital

1,003,903

1,001,648

     Retained earnings

1,866,839

1,908,639

Total stockholders’ equity

2,875,901

2,915,446

Total liabilities and stockholders’ equity

 $              3,026,674

 $            3,023,360





(See "Notes to Financial Statements")



3







ELECTRONIC SYSTEMS TECHNOLOGY, INC.

STATEMENTS OF OPERATIONS

(as prepared by Management)

(Unaudited)

 

Three Months Ended

Nine Months Ended

September 30,

 2012

September 30,

 2011

September 30,

2012

September 30,

2011

 

 

 

 

 

Revenue:

 

 

 

 

     Sales

$     551,205

$     487,161

$   1,460,944

$   1,332,765

     Cost of sales

233,796

234,236

654,155

598,708

          Gross Profit

317,409

252,925

806,789

734,057

 

 

 

 

 

Operating expenses

 

 

 

 

     General and administrative

66,419

64,999

220,147

220,663

     Research and development

55,210

70,600

203,248

207,025

     Marketing

110,049

123,946

353,792

407,824

     Customer service

28,756

26,438

92,313

84,593

          Total operating expense

260,434

285,983

869,500

920,105

Operating income (loss)

56,975

(33,058)

(62,711)

(186,048)

 

 

 

 

 

Other income

 

 

 

 

     Uncollectible amounts recovered

--

--

--

4,166

     Interest income

1,830

2,177

5,302

7,536

          Total other income

1,830

2,177

5,302

11,702

 

Income (loss) before income tax

58,805

(30,881)

(57,409)

(174,346)

     (Provision) benefit for income tax

(22,090)

10,800

15,609

48,700

Net income (loss)

$       36,715

$       (20,081)

$      ( 41,800)

$ ( 125,646)

 

 

 

 

 

 

 

 

 

 

Basic and diluted earnings  (loss) per share

 $            0.01

 $       (   0.00)

 $     (   0.01)

 $     (   0.02)

 

 

 

 

 

Weighted average shares used in computing

 

 

 

 

     net income (loss) per share:

 

 

 

 

Basic and diluted

5,158,667

5,158,667

5,158,667

5,158,667











(See "Notes to Financial Statements")



4









ELECTRONIC SYSTEMS TECHNOLOGY, INC.

STATEMENTS OF CASH FLOWS

(as prepared by Management)

(Unaudited)

 

Nine Months Ended

September 30,

 

2012

2011

 

 

 

Cash flows provided (used) in operating activities:

 

 

     Net income (loss)

$           (41,800)

$       (125,646)

     Noncash items included in income:

          Depreciation

11,401

16,250

          Deferred income tax

(3,700)

9,300

          Share based compensation

2,255

2,565

 

 

 

     Change in:

 

 

          Accounts receivable net

(56,674)

17,199

          Inventory

(50,214)

(52,454)

          Prepaid expenses

(29,341)

(25,754)

          Vendor deposits

(34,305)

(40,193)

          Federal income taxes receivable

35,754

(58,000)

          Accounts payable and accrued liabilities

45,668

(23,258)

          Refundable deposits

(1,209)

165

          Accrued federal income taxes

--

(77,171)

               Net cash flows provided (used) in operating activities

(122,165)

(316,804)

 

 

 

Cash flows provided (used) in investing activities:

 

 

     Certificates of deposit redeemed (purchased)

(374,000)

171,000

     Additions to property and equipment

(2,879)

(32,059)

              Net cash flows provided (used) in investing activities

(376,879)

138,941

 

 

 

Cash flows provided (used) in financing activities:

 

 

     Cash distribution to shareholders

--

(51,587)

              Net cash flows provided (used) in financing activities

--

(91,780)

 

 

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

(499,044)

(269,643)

Cash and cash equivalents at beginning of period

1,227,490

1,133,720

Cash and cash equivalents at ending of period

$        728,446

$        864,077

 

 

 









(See "Notes to Financial Statements)



5



ELECTRONIC SYSTEMS TECHNOLOGY, INC.

NOTES TO FINANCIAL STATEMENTS

(as prepared by Management)

(Unaudited)




NOTE 1 - BASIS OF PRESENTATION


The financial statements of Electronic Systems Technology, Inc. (the “Company”), presented in this Form 10-Q are unaudited and reflect, in the opinion of Management, a fair presentation of operations for the three and nine month periods ended September 30, 2012 and September 30, 2011. 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 principals have been condensed or omitted pursuant to the applicable rules and regulations of the Securities and Exchange Commission. In preparation of the financial statements, certain amounts and balances have been restated from previously filed reports to conform to the format of this quarterly presentation.  These financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Company's Form 10-K for the year ended December 31, 2011, as filed with Securities and Exchange Commission.


The results of operations for the three and nine month periods ended September 30, 2012, are not necessarily indicative of the results expected for the full fiscal year or for any other fiscal period.


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:


 

September 30,

 2012

December 31,

2011

Parts

$301,605

$228,012

Work in progress

104,154

74,992

Finished goods

115,769

168,310

Total Inventory

$521,528

$471,314


NOTE 3 – EARNINGS (LOSS) PER SHARE (EPS)


Basic EPS 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 EPS 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, 2012 the Company had 610,000 outstanding stock options that could have a dilutive effect on future periods.


NOTE 4 - STOCK OPTIONS


As of September 30, 2012, 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.  On February 10, 2012, additional stock options to purchase shares of the Company's common stock were granted to individual employees and directors with no less than three years continuous tenure.  The options granted on February 10, 2012 totaled 220,000 shares under option and have an exercise price of $0.37 per share.


The options granted on February 10, 2012 may be exercised any time during the period from February 10, 2012 through February 9, 2015.  The Company's Form 8-K filed February 3, 2012, is incorporated herein by reference.  All outstanding stock options must be exercised within 90 days after termination of employment.



6



ELECTRONIC SYSTEMS TECHNOLOGY, INC.

NOTES TO FINANCIAL STATEMENTS

(as prepared by Management)

(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:


 

2012

2011

Dividend yield

2.70%

0.00%

Expected volatility

68%

74%

Risk-free interest rate

0.36%

1.40%

Expected term (in years)

3

3

Estimated Fair Value per Option Granted

$0.145

$0.21


The Company uses historical data to estimate option exercise rates.  The option exercise rate for option grants in 2011 through 2005 was 7.07%.


A summary of option activity during the nine months ended September 30, 2012, is as follows:


 


Number Outstanding

Weighted-Average

Exercise Price

Per Share

Outstanding at December 31, 2011

590,000

$0.40

Granted

220,000

0.37

Exercised

--

--

Canceled

(200,000)

0.32

Outstanding at September 30, 2012

610,000

$                     0.43


NOTE 5 - RELATED PARTY TRANSACTIONS


For the three and nine-month period ended September 30, 2012 services in the amount of $18,330 and $71,883 respectively were contracted with Manufacturing Services, Inc., of which the current owner, Michael S. Brown and the former owner, Melvin H. Brown, are both currently members of the Board of Directors of Electronic Systems Technology Inc.


NOTE 6 – SEGMENT REPORTING


Segment information is prepared on the same basis that the Company's management reviews financial information for operational decision making purposes.  The Company has two reportable segments, domestic and foreign, based on the geographic location of the customers.  Both segments sell radio modem products (requiring an FCC license or license free Ethernet products), related accessories for radio modem products for industrial automation projects, and mobile data computer products.  The foreign segment sells the Company's products and services outside the United States.


During the quarter ended September 30, 2012, Domestic customers represented approximately 77% of total sales. Foreign customers represented approximately 23% of total sales.  Sales to one customer, accounted for more than 10% of the Company’s sales revenues for the quarter ended September 30, 2012.  No other sales to a single customer comprised 10% or more of the Company's sales revenues for the quarter ended September 30, 2012.  Revenues from foreign countries consisted primarily of revenues from Peru, Croatia, Columbia and Mexico.  


During the first nine months of 2012, Domestic customers represented approximately 77% of total net revenues.  Foreign customers represented approximately 23% of total net revenues.  No single customer comprised more than 10% of sales revenues for the first nine months of 2012.  Revenues from foreign countries during the nine months of 2012 consist primarily of revenues from product sales to Mexico, Columbia, Canada and Peru.



7



ELECTRONIC SYSTEMS TECHNOLOGY, INC.

NOTES TO FINANCIAL STATEMENTS

(as prepared by Management)

(Unaudited)




NOTE 6 – SEGMENT REPORTING, Continued:


Management evaluates performance based on net revenues and operating expenses.  Administrative functions such as finance and information systems are centralized.  Where applicable, portions of the administrative function expenses are allocated between the operating segments.  The operating segments share the same manufacturing and distributing facilities.  Costs of operating the manufacturing plant, equipment, inventory, and accounts receivable are allocated directly to each segment.


Summary financial information for the three reportable segments for the third quarter and the first nine months of 2012 and 2011 is as follows:


 


Domestic


Foreign

Unallocated

Corporate


Total

Three months ended September 30, 2012

 

 

 

 

Total sales

$423,307

$127,898

$        -

$551,205

Total other income

1,830

-

-

1,830

Earnings (loss) before tax

73,744

51,481

(66,420)

58,805

Depreciation

3,471

-

364

3,385

Identifiable assets

696,461

48,315

2,281,898

3,026,674

Net capital expenditures

433

-

2,446

2,879

 

 

 

 

 

Three months ended September 30, 2011

 

 

 

 

Total sales

$357,895

$129,266

$        -

$487,161

Total other income

2,177

-

-

2,177

Earnings (loss) before tax

(11,619)

45,737

(64,999)

(30,881)

Depreciation

5,105

-

600

5,705

Identifiable assets

581,460

66

2,418,472

2,999,998

Net capital expenditures

2,160

-

-

2,160

 

Nine months ended September 30, 2012

 

 

 

 

Total sales

$1,122,889

$338,055

$        -

$1,460,944

Total other income

5,302

-

-

5,302

Earnings (loss) before tax

65,403

97,335

(220,147)

(57,409)

Depreciation

10,412

-

989

11,401

Identifiable assets

696,461

48,315

2,281,898

3,026,674

Net capital expenditures

433

-

2,446

2,879

 

Nine months ended September 30, 2011

 

 

 

 

Total sales

$843,719

$489,046

$        -

$1,332,765

Total other income

7,536

-

4,166

11,702

Earnings (loss) before tax

(141,875)

188,192

(220,663)

(174,346)

Depreciation

14,478

-

1,772

16,250

Identifiable assets

581,460

66

2,418,472

2,999,998

Net capital expenditures

32,059

-

-

32,059






8






ITEM 2.  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 ending September 30, 2012.  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 systems, accessories, and services increased to $551,205 for the third quarter of 2012 as compared to $487,161 in the third quarter of 2011.  As of September 30, 2012, year to date sales increased to $1,460,944 as compared to $1,332,765 as of September 30, 2011.  Management believes the increase in quarterly and year to date sales revenues is due to increased orders received for all domestic market segments including industrial automation.  Management believes the continued fragile economic recovery in the United States has resulted in delayed or canceled funding of projects involving the Company’s products, however Q3 results show a modest improvement of the macro economic conditions that impact the core business.  Management believes the fragile economic situation in the United States will continue to make sales revenues difficult to predict and prone to potential fluctuation.     


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 third quarter of 2012 and 2011 are as follows:


 

For the third quarter of

 

2012

2011

Domestic Sales

77%

73%

Export Sales

23%

27%


OPERATING SEGMENTS


Segment information is prepared on the same basis that the Company’s Management reviews financial information for operational decision-making purposes.  The Company’s operating segment information is contained in “Financial Statements, Notes to Financial Statements, Note 6 – Segment Reporting”.


Domestic Revenues


During the quarter ended September 30, 2012, the Company’s domestic operations represented 77% of the Company’s total net 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 increased to $423,307 for the quarter ended September 30, 2012, compared to $357,895 for the quarter ended September 30, 2011.   


Industrial Networking Solutions a domestic customer comprised more than 10% of the Company's sales revenues for the quarter ended September 30, 2012.

  

Domestic segment operating income was $73,744 for the quarter ended September 30, 2012 as compared with a segment operating loss of $11,619 for the same quarter of 2011, due to increased sales revenues and flat expenses for the segment during the third quarter of 2012.



9






For the nine-month period ended September 30, 2012, the Company’s domestic operations represented 77% of the Company’s total net revenues.  Year to date domestic sales revenues increased to $1,122,889 as of September 30, 2012, compared to $843,719 for the same period of 2011.  Management believes the increase in quarterly sales revenues is due to improved macro economic conditions for its domestic customer base Management believes the continued fragile economic recovery in the United States will continue to make sales revenues difficult to predict and prone to potential fluctuation.  


The domestic segment recorded operating income of $65,403 for the nine month period ended September 30, 2012 as compared with a segment an operating loss of $141,875 for the same period of 2011.  The increase in profitability is due to increased sales revenues and managed expenses for the segment during the first nine months of 2012.


Foreign Revenues


The Company’s foreign operating segment represented 23% of the Company’s total sales for the quarter ended September 30, 2012.  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 use customers of the Company’s products located outside the United States.  


During the quarter ended September 30, 2012, the Company had $127,898 in foreign export sales, amounting to 23% of total sales of the Company for the quarter, compared with foreign export sales of $129,266 for the same quarter of 2011.  Management believes the slight decrease in foreign sales revenues is due to reduced demand for industrial automation projects using the Company’s products in Latin America. Revenues from foreign countries consisted primarily of revenues from Peru, Croatia, Colombia and Mexico.  Products purchased by foreign customers were used primarily in industrial automation applications.  No one foreign customer accounted for 10% of the Company’s sales revenues for the quarter ended September 30, 2012.  


Operating income for the foreign segment increased to $51,481 for the quarter ended September 30, 2012 as compared with an operating income of $45,737 for the same period of 2011 due to managed expenses for flat sales revenues for the segment.


For the nine-month period ended September 30, 2012, the Company had $338,055 in foreign export sales, amounting to 23% of total net revenues of the Company for the period, compared with foreign export sales of $489,046 for the same period of 2011.  We believe the year to date decrease in foreign sales revenues is due to decreased orders for industrial automation and communication backbone applications in the Peru, Colombia, Morocco, Mexico and Canada, caused by continued stagnant economic conditions.    Management believes the majority of foreign export sales are the result of the Company’s Latin American sales staff, EST foreign reseller activity, and the Company’s internet website presence.


Year to date foreign segment operating income decreased to $97,335 for the period ended September 30, 2012 as compared with a segment operating income of $188,192 for the same period of 2011, due to decreased year to date sales revenues.


Unallocated Corporate


Unallocated corporate expenses relate to functions, such as accounting, corporate management and administration that support but are not attributable to the Company’s domestic or foreign operating segments, including salaries, wages and other expenses related to the performance of these support functions.  Unallocated corporate expenses increased during the quarter ended September 30, 2012 to $66,419 as compared with $64,999 for the same quarter of 2011, and represented expense to total sales revenue percentages of 12% and 13% for the third quarters of 2012 and 2011, respectively.


Year to date unallocated corporate expenses increased for the period ended September 30, 2012 to $220,147 as compared with $220,663 for the same period of 2011 and represented expense to total sales revenue percentages of 15% and 17% for the first nine months of 2012 and 2011, respectively.




10






BACKLOG:


The Company had minimal backlog as of September 30, 2012.  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 percentages of gross sales for the third quarters of 2012 and 2011 were 42% and 48%, respectively. The cost of sales decrease for the third quarter of 2012 is the result the product mix for items sold during the quarter having a mor favorable profit margin.


OPERATING EXPENSES:


Operating expenses for the third quarter of 2012 decreased $25,549 when compared with the third quarter of 2011.  The following is a delineation of operating expenses:


For the quarter ended:

September 30,

2012

September 30,

2011

Increase(Decrease)

General and Administrative

$   66,419

$   64,999

$            1,420

Research and Development

55,210

70,600

   (15,390)

Marketing

110,049

123,946

(13,897)

Customer Service

28,756

26,438

     2,318

Total Operating Expenses

$ 260,434

$ 285,983

$       (25,549)


GENERAL AND ADMINISTRATIVE:


During the third quarter of 2012 General and Administrative expenses increased $1,420 when compared with the third quarter of 2011 due to increased department wages.  


RESEARCH AND DEVELOPMENT:


During the third quarter of 2012, Research and Development expenses decreased $15,390 when compared with the third quarter of 2011.  The decrease is due to decreased subcontracted engineering expertise and research and development related wages when compared with the same period of 2011.


MARKETING:


Marketing expenses decreased $13,897, during the third quarter of 2012 when compared with the third quarter of 2011 due to decreased marketing related wages, trade show and travel expenses.


CUSTOMER SERVICE:


Customer service expenses for the third quarter of 2012 increased $2,318, when compared with the third quarter of 2011 due to a increased amount of engineering and customer support services being billed directly to customers.              


INTEREST AND INVESTMENT INCOME:


The Company earned $1,830 in investment and interest income for the quarter ended September 30, 2012. Sources of this income were money market accounts and certificates of deposit.  




11





NET INCOME (LOSS):


The Company recorded net income of $36,715 for the third quarter of 2012, compared to a net loss of $20,081 for the third quarter of 2011.  The increased in profitability is the result of increased sales revenues and decreased expenses during the third quarter of 2012 when compared with the third quarter of 2011.  Year to date, the Company has a net loss of $41,800 for the nine months ended September 30, 2012, compared with a net loss of $125,646 for the same period of 2011.  The increase in the Company’s year to date profitability is the result of increased sales revenues and decreased expenses during the first nine months of 2012 when compared with the same period of 2011.


B.  Financial Condition, Liquidity and Capital Resources


The Corporation's current asset to current liabilities ratio at September 30, 2012 was 20.0:1 compared to 29.1:1 at December 31, 2011. At September 30, 2012, the Company had cash and cash equivalent holdings of $728,446 as compared to cash and cash equivalent holdings of $1,227,490 at December 31, 2011.  The Company had certificates of deposit investments in the amount of $1,407,000 as of September 30, 2012 as compared to $1,033,000 as of December 31, 2011, due to timing differences in certificate of deposit maturities and cash requirements of the Company.  

 

Accounts receivable, net increased to $160,840 as of September 30, 2012, from December 31, 2011 levels of $104,166, due to sales revenues and collections timing differences. Inventory increased to $521,528 at September 30, 2012, from December 31, 2011 levels of $471,314, due to increased product sales during the first nine months of 2012.  The Company's fixed assets, net of depreciation, decreased to $45,836 as of September 30, 2012, from December 31, 2011 levels of $54,358 due capital expenditures of $2,879 for research related test equipment and by depreciation of $11,401.  Prepaid expenses increased to $59,035 as of September 30, 2012 from December 31, 2011 amounts of $29,694 due to recent renewal of annual insurance policies, Netsuite network services, and prepaid tradeshow and travel expenses. For the quarter ending September 30, 2012 the Company paid deposits to vendors providing long lead time, off-shore inventory in the amount of $35,980, which is included in vendor deposits on the Company’s balance sheets.


Since January 1, 2005, the Company has contracted with Netsuite Inc. to provide the Company’s customer relationship management and accounting software and related network infrastructure services.  The prepaid Netsuite Inc. services as of September 30, 2012 are reflected in “prepaid expenses” on the Company’s balance sheet in the amount of $26,807.  


As of September 30, 2012, the Company’s trade accounts payable balance was $58,921 as compared with $16,104 at December 31, 2011, and reflects amounts owed for purchases of inventory items and contracted services.  Accrued liabilities as of September 30, 2012 were $37,558, compared with $34,707 at December 31, 2011, and reflect items such as accrued vacation benefits, and quarterly payroll and excise tax liabilities.  Federal income tax receivable as of September 30, 2012 decreased to $11,909 compared with federal income tax receivable of $47,663 at December 31, 2011 due to increased profitability during the first nine months of 2012.

  

It is Management’s opinion the Company’s cash, cash equivalent reserves, and working capital at September 30, 2012 are sufficient to satisfy requirements for operations, capital expenditures, and other expenditures as may arise in the short term.


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.



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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.  Our Common Stock is not regularly quoted in the automated quotation system of a registered securities system or association.  The Common Stock  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.


The Company’s Management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. The Company’s internal control over financial reporting is a process to provide reasonable assurance regarding the reliability of our financial reporting for external purposes in accordance with accounting principles generally accepted in the United States of America. Internal control over financial reporting includes maintaining records that in reasonable detail accurately and fairly reflect our transactions; providing reasonable assurance that transactions are recorded as necessary for preparation of our financial statements; providing reasonable assurance that receipts and expenditures of Company assets are made in accordance with Management authorization; and providing reasonable assurance that unauthorized acquisition, use or disposition of Company assets that could have a material effect on our financial statements would be prevented or detected on a timely basis. Because of its inherent limitations, internal control over financial reporting is not intended to provide absolute assurance that a misstatement of our financial statements would be prevented or detected.


An evaluation has been performed under the supervision and with the participation of our Management, including our Chief Executive Officer and Manager of Finance and Administration, 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, 2012.  Based on this evaluation, our Chief Executive Officer and Manager of Finance and Administration 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, 2012.  


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.


Management has evaluated and continues to evaluate, avenues for mitigating our internal controls weaknesses, but mitigating controls have been deemed to be impractical and prohibitively costly due to the size of our organization at the current time.  Management does not foresee implementing a cost effective method of mitigating our internal control weaknesses in the near term.   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



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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.

Changes in internal control over financial reporting.


There have been no changes during the quarter ended September 30, 2012 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.




PART II - OTHER INFORMATION


ITEM 1A. RISK FACTORS


There have been no material changes from the Risk Factors we previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2011 filed with the Securities and Exchange Commission on March 23, 2012.


Item 5. Other Information


Jon Correio, Vice President of Finance/Administration and Director of the Company, resigned for personal reasons effective September 7, 2012.  Mr. Correio served as Vice President of Finance since 2002, and had been with Company since 1992.  


Effective August 28, 2012, Mike Eller was hired as Manger of Finance and Administration.  On November 13, 2012, the Board of Directors unanimously appointed Mr. Eller as the Company’s Principal Financial Officer.  


Mr. Eller has over thirteen years of experience in accounting, financial controls and strategic planning.  Most recently, he was employed by Macy’s the past eleven years.  In the past five years, he served as the Director of Business Planning (Macy’s NW), Director of Finance and Vice President of Operations in Portland, TN (Macy’s Logistics and Operations).  He chose to leave Macy’s to move closer to family in Washington State.  Mr. Eller is a graduate of Washington State University with a Bachelor’s in Business Administration (emphasis in accounting and finance).



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(1)

XBRL Instance Document

101.SCH(1)

XBRL Taxonomy Extension Schema Document

101.CAL(1)

XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF(1)

XBRL Taxonomy Extension Definition Linkbase Document

101.LAB(1)

XBRL Taxonomy Extension Label Linkbase Document

101.PRE(1)

XBRL Taxonomy Extension Presentation Linkbase Document


(1)  

Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933 or Section 18 of the Securities Act of 1934 and otherwise are not subject to liability.



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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: November 16, 2012

/s/ T. L. Kirchner

 

Name:  T.L. Kirchner

Title: Director/President                                      

(Principal Executive Officer)

 

 

Date: November 16, 2012

/s/ Michael Eller

 

Name:  Michael Eller

Title: Manager, Finance & Administration

(Principal Financial Officer)
















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