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, 20172019

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)

(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.  YESx  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).

YESxNO¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or 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¨ Nox

APPLICABLE ONLY TO CORPORATE ISSUERS:

As of September 30, 2017,October 11, 2019, the number of the Company's shares of common stock par value $0.001, outstanding was 4,986,048.4,946,502.

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"), presented 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 thisaccordance 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 10Q are unaudited10-Q. Accordingly, the financial statements do not include all of the information and reflect, infootnotes required by U.S. GAAP for complete financial statements. In the opinion of Management, a fair presentationmanagement, the accompanying unaudited financial statements contain all adjustments, consisting of operations for the three and nine month periods ended September 30, 2017 and September 30, 2016.  All adjustments of aonly normal recurring nature andadjustments, necessary for a fair presentationstatement of its financial position as of September 30, 2019, and its results of operations, cash flows, and changes in stockholders’ equity for the three months and nine months ended September 30, 2019 and 2018.  The balance sheet at December 31, 2018 was derived from audited annual financial statements but does not contain all of the results forfootnote disclosures from the periods covered have been made. Certainannual financial statements. All amounts presented are in U.S. dollars. For further information, and footnote disclosure normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuantrefer 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 notesfootnotes thereto included in the Company'sCompany’s Annual Report on Form 10K10-K for the year ended December 31, 2016 as filed with Securities and Exchange Commission.2018.  

The results of operations for the three month and nine monthsmonth period ended September 30, 2017 and September 30, 2016,2019 are not necessarily indicative of the results expected for the full fiscal year or for any other fiscal period.  The Company estimates that for 2019 the anticipated effective annual federal income tax rate will be 0%.

New Accounting PronouncementsStandards Updates Adopted

In July of 2015February 2016, the Financial Accounting Standards Board (“FASB”("FASB") issued Accounting StandardStandards Update (“ASU”("ASU") 2015-11 “SimplifyingNo. 2016-02 Leases (Topic 842). The update modifies the classification criteria and requires lessees to recognize the assets and liabilities on the balance sheet for most leases. The update is effective for fiscal years beginning after December 15, 2018, with early adoption permitted.  The Company adopted the update on January 1, 2019.   Upon implementation of the new guidance, the Company recognized a liability and right-of-use asset of $91,637 as of January 1, 2019 for its one operating lease.  The Company elected the transition option to apply the new guidance at the effective date without adjusting comparative periods presented. (See Note 6).

Accounting Standards Updates to Become Effective in Future Periods

In August 2018, the FASB issued ASU No. 2018-13 Fair Value Measurement of Inventory” an update to Inventory Topic 330. The ASU simplifies the concept of lower of cost or market(Topic 820):  Disclosure Framework - Changes to the lowerDisclosure Requirements for Fair Value Measurement.  The update removes, modifies and makes additions to the disclosure requirements on fair value measurements.  The update is effective for fiscal years beginning after December 15, 2019, with early adoption permitted.  The Company is currently evaluating the impact of cost and net realizablethis update on our fair 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”). This update was adopted and diddisclosures.

Other accounting standards that have been issued or proposed by FASB that do not materiallyrequire adoption until a future date are not expected to have a material impact on the financial statements.statements upon adoption.

ELECTRONIC SYSTEMS TECHNOLOGY, INC.

NOTES TO FINANCIAL STATEMENTS

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.(Unaudited)

NOTE 2 - INVENTORIES

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

NOTE 3 - INCOMEEARNINGS (LOSS) PER SHARE

Basic and diluted earnings per share are calculated by dividing net income (loss) per share excludes dilution and is computed by dividing income (loss) available to common stockholders by the weighted-averageweighted average number of common shares outstanding foroutstanding–basic and diluted.  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.  Atnine month period ending September 30, 2017,2019 and the Company had 150,000three and nine month periods ending September 30, 2018, all outstanding stock options that could have a dilutive effect on future(Note 4) were excluded from the computation of diluted loss per share because they were anti-dilutive due to net losses in those periods. However, atFor the three month period ending September 30, 2017 there was no dilutive effect2019, the calculation of stock options on earnings per share orthe weighted average number of common shares outstanding.  outstanding–diluted included the common stock equivalents of the outstanding stock options. 

6

ELECTRONIC SYSTEMS TECHNOLOGY, INC.

NOTES TO FINANCIAL STATEMENTS

(Unaudited)

NOTE 4 - STOCK OPTIONS

As of September 30, 2017,2019, the Company had outstanding stock options which have been granted periodically to individual employees and directors with no less than three years of continuous tenure with the Company.  The Board of Directors hasdid not awardedissue stock options during the nine monthsmonth period ended September 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 recognized an expense of $1,841 for the quarter ending September 30, 2016 in which the options were approved by the Shareholders and were fully vested at that time.2019.

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.

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 quarter ended September 30, 2019 is as follows:

NOTE 5 – REVENUE

The Company’s product revenues are derived from sales of industrial wireless products and accessories such as antennas, power supplies and cable assemblies. The Company also provides direct site support and engineering services to customers, such as repair and upgrade of its products.    During the three-month period ended September 30, 2019 and 2018, the Company’s revenues from products sales were $369,615 and $293,154, respectively.  Revenues from site support and engineering services were $2,300 and $5,849 respectively, over the same periods. As of September 30, 2019, year to date sales from products increased to $1,106,066 as compared to $1,062,346 as of September 30, 2019 and 2018. Revenues from site support and engineering services for the nine months ended September 30, 2017 is as follows:2019 and 2018, were $35,277 and $16,398, respectively.

ELECTRONIC SYSTEMS TECHNOLOGY, INC.

NOTES TO FINANCIAL STATEMENTS

(Unaudited)

NOTE 5 - RELATED PARTY TRANSACTIONS– REVENUE (Cont.)

DuringThe 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 quarterthree-month period ended September 30, 2017,2019 were $348,419 compared to $271,976 in 2018.  Sales to foreign customers for the Company accruedthree-month period ended September 30, 2019 were $23,496 compared to $27,027 in 2018.Domestic sales for the nine-month period ended September 30, 2019 were $978,290 compared to $1,021,153 in 2018.  Sales to foreign customers for the nine-month period ended September 30, 2019 were $163,053 compared to $57,591 in 2018.

For the three-month period ended September 30, 2019, sales to two customers represented more than 10% of total directors’ feesrevenue; three customers represented more than 10% of $1,200, or $300 per directortotal revenue for board meetings attended. the same period in 2018.

For the nine-month period endingended September 30, 2017,2019, sales to one customer represented more than 10% of total revenue, one customer represented more than 10% of total revenue for the same period in 2018.

As of September 30, 2019 and 2018, the Company paid or accruedhad a totalsales order backlog of $3,600 for directors’ fees.$6,691 and $425, respectively.

NOTE 6 - COMMITMENTSLEASES

In February 2016, the FASB issued ASU No. 2016-02 Leases (Topic 842). The update modifies the classification criteria and requires lessees to recognize the assets and liabilities on the balance sheet for most leases. The update is effective for fiscal years beginning after December 15, 2018, with early adoption permitted. The Company implemented this standard effective January 1, 2019. Upon implementation of the new guidance, the Company recognized a liability and right-of-use asset of $91,637 as of January 1, 2019 for its one operating lease.  To calculate the liability and right to use asset, the Company utilized a 4.0% incremental borrowing rate to discount the future rent payments and remaining lease term of 1.75 years.

The Company leases its facilities from a port authority for $5,445$5,542 per month for three years, expiring in September 2020, with annual increases based upon the Consumer Price Index.

The original lease was effective October 1, 2014 and contained a three-year renewal option and a provision for an annual increase of 2% per year, plus Leasehold Tax of 12.84%.  On September 5, 2017, the Company exercised the three-year option. The first year of this option was not subject to the 2% increase. The current lease does not contain the option to extend the lease.  However, the Company believes that a new lease agreement will be signed prior to the expiration of the current lease.   At September 30, 2019, the remaining lease term is one year.

ELECTRONIC SYSTEMS TECHNOLOGY, INC.

NOTES TO FINANCIAL STATEMENTS

(Unaudited)

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.    6 – LEASES (Cont.)

DuringFor the quarterthree month and nine-month periods ended September 30, 2017, Domestic customers represented approximately 88%2019 and 2018, lease expenses of total net revenues. Domestic sales revenues increased to $283,239 for$16,627 and $16,335, and $49,880 and $49,005 respectively, are included in the quarter ended September 30, 2017 compared to $275,709 forfollowing expense classifications on the quarter ended September 30, 2016. Year to date domestic sales revenues decreased to $893,277 asstatement of operations:

As of September 30, 2017 compared to $1,020,831 for the same period of 2016.  Foreign customers represented approximately 12% of2019, total net revenues.  Foreign sales revenues decreased to $39,523 for the quarter ended September 30, 2017 compared to $45,759 for the quarter ended September 30, 2016. Year to date foreign sales revenues decreased to $188,884future lease payments are as of September 30, 2017 compared to $229,407 for the same period of 2016.  During the quarter ended September 30, 2017, sales to one customer comprised more than 10% of the Company’s sales revenues.  Revenues from foreign countries during the third quarter of 2017 consist primarily of revenues from product sales to Mexico, Peru, India.follows:

NOTE 7 – STOCK REPURCHASE

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 2, 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 September 30, 2017, $184,405 remains of $250,000 approved by the board. 97,764 shares were repurchased for $37,191 in 2016, bringing the total number of shares repurchased to 172,619 through September 30, 2017. The Company’s share repurchase program does not obligate it to acquire any specific number of shares. The following table showsOn March 2, 2016, the Company’s activityBoard 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 related information forRule 10b-18 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Shares repurchased are retired. During the three-month period ended September 30, 2019 and 2018, no shares were repurchased. During the nine-month period endingended September 30, 2017.

⁽¹⁾  Amount includes commissions paid of $79.

The trading price2019, the Company repurchased 39,246 shares for $14,920; no shares were repurchased in the nine month period ended September 30, 2018. Since inception of the Company’sStock Repurchase Plan, the Company has repurchased 212,165 shares asfor a total of $80,622 through September 30, 2017, was $0.59.

NOTE 9 – Income Taxes

No Income Tax has been recognized due2019 and $169,378 of the original $250,000 approved by the board remains to the net operating loss. The current year’s net operating loss tax impact has been reserved, as the estimated effective tax ratebe utilized for 2017 will be zero.share repurchases.

The Deferred Tax asset that is recognized on the Balance Sheets consists primarily of prior years’ net operating loss and R&D credits. We believe that the Company will be generate net operating income and utilize the asset in future periods.

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’sManagement's discussion and analysis is intended to be read in conjunction with the Company’sCompany's unaudited financial statements and the integral notes thereto for the quarter ended September 30, 2016.2019.  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 increased to $322,763 for the third quarter of 2017, compared to $321,468 for the third quarter of 2016.  Gross revenues, including interest income, increased to $325,721 for the quarter ended September 30, 2017, from $324,514 for the same quarter of 2016.  Year to date sales decreased to $1,082,161 as of September 30, 2017, as compared to $1,250,238 as of September 30, 2016. Year to date gross revenues, including interest income, decreased to $1,090,657 as of September 30, 2017, compared to $1,259,155 as of September 30, 2016.  Management believes the increase in quarterly sales revenues is due to increased demand for the new products introduced at the beginning of 2017.

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 2017 and 2016 are as follows:

Domestic Revenues

During the quarter ended September 30, 2017, the Company’s domestic operations represented 88% 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 increased to $283,239 for the quarter ended September 30, 2017 compared to $275,709 for the quarter ended September 30, 2016.  Management believes the increase in sales revenues is due to increased domestic sales for water/waste water and mining industrial automation projects during the three-month period ending September 30, 2017.  During the quarter ended September 30, 2017, one customer, comprised more than 10% of the Company’s sales revenues.  

For the nine-month period ended September 30, 2017, the Company’s domestic operations represented 83% of the Company’s total sales revenues.  Year to date domestic sales revenues decreased to $893,277 as of September 30, 2017 compared to $1,020,831 for the same period of 2016. Management believes the decrease 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 12% of the Company’s total net revenues for the quarter ended September 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.  

During the quarter ended September 30, 2017, the Company had $39,522 in foreign export sales, amounting to 12% of total net revenues of the Company for the quarter, compared with foreign export sales of $45,759 for the same quarter of 2016.  Management believes the decrease in foreign sales revenues was due to decreased automation needs in Oil & Gas and Mining industries.  Revenues from foreign countries during the third quarter of 2017 consist primarily of revenues from product sales to Mexico, Peru and India.  No foreign sales to a single customer comprised 10% or more of the Company's product sales for the quarter ended September 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 nine-month period ended September 30, 2017, the Company had $188,884 in foreign export sales, amounting to 17% of total sales revenues of the Company for the period, compared with foreign export sales of $229,407 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 and slow acceptance of product released in 2017 in Latin America.

BACKLOG:

The Corporation had a sales order backlog of approximately $22,707 as of September 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 third quarter of 2017 and 2016 was 40% and 36%, respectively. The cost of sales increase for the third quarter of 2017 is the result of the product mix for items sold during the period.

OPERATING EXPENSES:

Operating expenses for the third quarter of 2017 decreased $10,857 from the third quarter of 2016.  The following is an outline of operating expenses:

GENERAL AND ADMINISTRATIVE:

During the third quarter of 2017, general and administrative expenses decreased $8,425 to $59,367 from the same quarter of 2016, due to decreased professional services and bank fees.

RESEARCH AND DEVELOPMENT:

Research and development expenses decreased $4,113 to $55,511 during the third 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 third quarter of 2017, marketing and sales expenses increased $1,681 to $114,092 from the same period in 2016, due to increased services purchased.

INTEREST AND DIVIDEND INCOME:

The Corporation earned $2,958 in interest and dividend income during the quarter ended September 30, 2017.  Sources of this income were money market accounts and certificates of deposit.

NET INCOME (LOSS):

The Company had a net loss of $37,781 for the third quarter of 2017, compared to a net loss of $42,497 for the same quarter of 2016.  For the nine-month period ended September 30, 2017, the Company recorded a net loss of $133,992, compared with a net loss of $55,114 for the same period of 2016. The decrease in the Company’s net loss is the result of increased sales revenues, decreased gross margins and reduced operating expenses during the third quarter of 2017.

B.  Financial Condition, Liquidity and Capital Resources

The Corporation's current asset to current liabilities ratio at September 30, 2017 was 24.6:1 compared to 54:1 at December 31, 2016. At September 30, 2017, the Company had cash and cash equivalents of $257,112; 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 September 30, 2017 and $1,000,000 at December 31, 2016.

Accounts receivable increased to $94,506 as of September 30, 2017 from December 31, 2016 levels of $71,202, due to sales revenue timing differences between the third quarter of 2017 and year-end 2016.  Inventories increased to $813,970 as of September 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 $36,428 as of September 30, 2017, from December 31, 2016 levels of $51,383.

As of September 30, 2017, the Company’s accounts payable balance was $54,709 as compared with $15,114at December 31, 2016, and reflects amounts owed for inventory items, contracted services, and state tax liabilities.  Accrued liabilities and refundable deposits as of September 30, 2017 were $34,252 compared with $27,220at 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 September 30, 2017 is sufficient to satisfy requirements for operations, capital expenditures, and other expenditures as may arise during the next 12 months.

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’sCompany's reports and registration statements filed with the Securities and Exchange Commission.

A.RESULTS OF OPERATIONS

REVENUES: Total revenues from sales increased to $371,915 for the third quarter of 2019 as compared to $299,003 in the third quarter of 2018, reflecting an increase of 24%.  Management believes the increase in sales revenues is due to increased domestic sales during third quarter of 2019 when compared with the same quarter of 2018. Year to date total revenues from sales increased to $1,141,343 in 2019 as compared to $1,078,744 in 2018, reflecting an increase of 6%.  Management believes the increase in sales revenues is due to increased foreign sales demand, driven by larger automation projects during nine-month period ended September 30, 2019 when compared with the same period of 2018.   

The Company's revenues have historically fluctuated from quarter to quarter due to timing factors such as product shipments to customers, customer order placement, customer buying trends, and changes in the general economic environment.  The procurement process regarding plant and project automation, or project development, which usually surrounds the decision to purchase ESTeem products, can be lengthy.  This procurement process may involve bid activities unrelated to the ESTeem products, such as additional systems and subcontract work, as well as capital budget considerations on the part of the customer.  Because of the complexity of this procurement process, forecasts with regard to the Company's revenues are difficult to predict.

A percentage breakdown of the Company’s market segments of Domestic and Foreign Export sales for the three and nine-month periods ended September 30, 2019 and 2018 are as follows:

BACKLOG:

As of September 30, 2019, the Company had a sales order backlog of $6,991.   The Company’s customers generally place orders on an "as needed basis".  Shipment for most of the Company’s products is generally made within 1 to 5 working days after receipt of customer orders, with the exception of ongoing, scheduled projects, and custom designed equipment.  

COST OF SALES:

Cost of sales percentages for the third quarters of 2019 and 2018 were 44% and 47% of respective net sales. The cost of sales percentage decrease in the third quarter of 2019 is the result of the product mix sold during the same quarter of 2018. Cost of sales percentages for the nine-month periods ended September 30, 2019 and 2018 were 46% and 48% of respective net sales. The cost of sales percentage decrease in the third quarter of 2019 is the result of the product mix sold during the same period of 2018.

OPERATING EXPENSES:

Operating expenses for the third quarter and the first nine months of 2019 increased from third quarter of 2018 levels.  The following is a delineation of operating expenses:

General and administrative:  For the third quarter of 2019, general and administrative expenses decreased $2,415 to $64,756, due to decreased professional services when compared with the same quarter of 2018.For the nine-month period, general and administrative expenses increased by $12,120 to $227,450, due to increased wages and professional services.

Research and development:  Research and development expenses increased $5,480 to $48,445 during the third quarter of 2019 due to increased expenses related to payroll and decreased prototype build costs when compared with the same quarter of 2018. For the nine-month period, research and development expenses increased by $31,005 to $165,397, due to increased wages and prototype build costs.

Marketing and sales:During the third quarter of 2019, marketing and sales expenses increased $4,293 to $89,414 when compared with the same period of 2018, due to decreased payroll and increased travel expense related to sales efforts during the third quarter of 2018. For the nine-month period, marketing and sales expenses decreased by $3,504 to $286,621, due to decreased wages and an increase in travel and trade shows in 2018.

INTEREST INCOME:

The Company earned $5,510 in interest income during the quarter ended September 30, 2019 and $17,265 for the nine-month period.  Sources of this income were money market accounts and certificates of deposit.

NET LOSS:

The Company had net income of $11,769 for the third quarter of 2019 compared to net loss of $33,535 for the same quarter of 2018.  For the nine-month period ended September 30, 2019, the Company recorded a net loss of $49,275 compared with a net loss of $68,450 for the same period of 2018.  The decrease in net loss during 2019 is the result of increased sales revenues and increased operating expenses offset by increase in interest income.

B.FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES

The Corporation's current asset to current liabilities ratio at September 30, 2019 was 20.7 compared to 20.8 at December 31, 2018.  The decrease in current ratio is due to the current portion of lease liability at September 30, 2019 as compared to December 31, 2018.

At September 30, 2019, the Company had cash and cash equivalents of $199,615 as compared to cash and cash equivalent of $323,667 at December 31, 2018, primarily reflecting cash used in operating activities.

Cash used in operating activities increased by $257,438 for the nine-month period ended September 30, 2019 when compared to the same period in 2018. The increase is attributable to more cash being utilized in paying accounts payable during the period as compared to prior year, an increase of $99,766. The change in accounts receivable increased by $96,765 during the same period as compared to the prior year.

Cash provided from investing was $100,000 due to the net redemption of CD’s maturing during the first nine months of 2019. Cash used in financing activities was $14,920 for the repurchase of the Company’s common stock during the nine-month period ended September 30, 2019.

In Management's opinion, the Company's cash and cash equivalents and other working capital at September 30, 2019 is sufficient to satisfy requirements for operations, capital expenditures, and other expenditures as may arise during 2019.

OFF-BALANCE SHEET ARRANGEMENTS

The Company has no significant off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to its stockholders.

Item 3.  Quantitative and Qualitative Disclosures About Market Risk.

Not applicableThere is no established market for trading the common stock of the Company. The market for the Company’s common stock is limited, and as such shareholders may have difficulty reselling their shares when desired or at attractive market prices.  The Common Stock is not regularly quoted in the automated quotation system of a registered securities system or association.  Our common stock, par value $0.001 per share, is quoted on the OTC Markets Group QB (OTCQB) under the symbol “ELST”.  The OTCQB is a network of security dealers who buy and sell stock. The dealers are connected by a computer network which provides information on current “bids” and “asks” as well as volume information. The OTCQB is not considered a “national exchange”.  The “over-the-counter” quotations do not reflect inter-dealer prices, retail mark-ups commissions or actual transactions.  The Company’s common stock has continued to trade in low volumes and at low prices. Some investors view low-priced stocks as unduly speculative and therefore not appropriate candidates for investment. Many institutional investors have internal policies prohibiting the purchase or maintenance of positions in low-priced stocks.

Item 4.  Evaluation of Disclosure Controls and Procedures.

Conclusions of Management Regarding Effectiveness of Disclosure Controls and Procedures

At the end of the period covered by this Quarterly Report on Form 10-Q, anAn evaluation was carried outhas been performed under the supervision and with the participation of the Company'sour management, including the Presidentour Chief Executive Officer and Principal ExecutiveAccounting Officer, ("PEO") and Principal Financial Officer ("PFO"), of the effectiveness of the design and operationsthe operation of the Company's disclosureour "disclosure controls and proceduresprocedures" (as such term is defined in Rule 13a – 15(e) and Rule 15d – 15(e)Rules 13a-15(e) under the Securities Exchange Act).Act of 1934) as of September 30, 2019.  Based on this evaluation, our Chief Executive Officer and Chief Financial Officer have determined that evaluation, the PEOthere was a material weakness affecting our internal control over financial reporting and, the PFO have concludedas a result of that as of the end of the period covered by this report, the Company'sweakness, our disclosure controls and procedures were not effective as itof September 30, 2019.  

The material weakness is as follows:

We did not maintain effective controls to ensure appropriate segregation of duties as the same officer and employee was determinedresponsible 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 there were material weaknesses affecting our disclosure controls and procedures. 

Management of the company believes that these material weaknesses arecould have resulted due to the small sizedeficient controls; and, (3) the absence of the company's accounting staff. The small sizesufficient other mitigating controls; we determined that this control deficiency resulted in more than a remote likelihood that a material misstatement or lack of the company's accounting staff may prevent adequate controls in the future, such as segregation of duties, due to the cost/benefit of such remediation. To mitigate the current limited resources and limited employees, we rely heavily on direct management oversight of transactions, along with the use of external legal and accounting professionals. As the Company grows, management expects to increase the number of employees, which will enable us to implement adequate segregation of dutiesdisclosure within the internal control framework.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.

There have been no changesreporting (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) during the most recent fiscal quarter ended September 30, 2017 in the Company’s internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal controlscontrol over financial reporting.

PART II - II—OTHER INFORMATION

Item 11.  Legal Proceedings

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

Item 22. Unregistered Sales of Equity Securities and Use of Proceeds

NoneNone.

Item 33. Defaults Upon Senior Securities

NoneNone.

Item 44. Mine Safety DisclosureDisclosures

Not Applicable

Item 55.  Other Information

NoneOn June 25, 2019, Molex opted to terminate the MDA that was executed on June 13, 2017 and an 8K filed on June 17, 2017. Sales for neither party were material. The Company had immaterial expenses related to this agreement and had not invested any capital resources to fulfill its obligations to the agreement.

Item 6.  Exhibits

SIGNATURES

In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

ELECTRONIC SYSTEMS TECHNOLOGY, INC.

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