UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended SeptemberJune 30, 20172020

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,July 12, 2020, the number of the Company's shares of common stockCommon Stock par value $0.001, outstanding was 4,986,048.4,946,502.

ELECTRONIC SYSTEMS TECHNOLOGY, INC.

FORM 10-Q

September 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

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 June 30, 2020, and its results of operations, cash flows, and changes in stockholders’ equity for the three months and six months ended June 30, 2020 and 2019.  The balance sheet at December 31, 2019 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.2019.  

The results of operations for the three month and nine monthssix-month period ended SeptemberJune 30, 2017 and September 30, 2016,2020 are not necessarily indicative of the results expected for the full fiscal year or for any other fiscal period. The Company estimates that for 2020 the anticipated effective annual federal income tax rate will be 0%.

New Accounting PronouncementsStandards Updates Adopted

In July of 2015August 2018, the Financial Accounting Standards Board (“FASB”)FASB issued Accounting Standard Update (“ASU”) 2015-11 “Simplifying theASU 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 adoption 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”). Thisthis update was adopted and did not materiallyon January 1, 2020 had no impact on the financial statements.

Certain prior period amountsOther accounting standards that have been reclassified for consistency with the current period presentation. These reclassifications had no effectissued or proposed by FASB that do not require adoption until a future date are not expected to have a material impact on the reported results of operations, cash flows or financial position of prior period amounts.statements upon adoption.

NOTE 2 - INVENTORIES

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

ELECTRONIC SYSTEMS TECHNOLOGY, INC.

NOTES TO FINANCIAL STATEMENTS

(Unaudited)

NOTE 3 - INCOMEEARNINGS (LOSS) PER SHARE

Basic incomeearnings (loss) per share excludes dilution and is computed by dividing income (loss) available to common stockholders by the weighted-average number of common shares of Common Stock outstanding for the period.  Diluted incomeearnings (loss) per share reflects potential dilution occurring if securities or other contracts to issue common stockCommon Stock were exercised or converted into common stockCommon Stock or resulted in the issuance of common stockCommon Stock that then shared in the earnings of the Company.  At SeptemberJune 30, 2017,2020 and 2019, the Company had 150,000180,000 and 120,000 outstanding stock options, respectively, that could have a dilutive effect on future periods.periods’ net income.  However, at September 30, 2017 there was no dilutive effect of stock options ondiluted earnings per share or weighted average shares outstanding.  are not presented because their effect would be antidilutive due to Company’s losses.

6

ELECTRONIC SYSTEMS TECHNOLOGY, INC.

NOTES TO FINANCIAL STATEMENTS

(Unaudited)

NOTE 4 - STOCK OPTIONS

As of SeptemberJune 30, 2017,2020, 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.  TheOn March 13, 2020, the Board of Directors has not awardedcanceled all 120,000 outstanding stock options duringthat were granted on August 7, 2017 and due to expire on August 6, 2020.    In addition, the nine months ended September 30, 2017. The Board of Directors may consider issuing stockgranted 180,000 options later in 2017. Shareholders approved the 2015 Stock Incentive Plan on June 3, 2016 for 250,000 stock options. 150,000to employees. The new options have an exercise price of the approved amount were granted to certain management employees as part$0.40, a term of the 2015 Stock Incentive Plan. The options were dated effective August 7, 20155 years, 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.

immediately.    The fair value of each option award is estimated on the date of the grantoptions was determined using the Black-Scholes option-pricing model withusing the following weighted-average assumptions used for grants in 2015variables:   stock price of $0.40, volatility of 79.27%, expected term of 5 years with a forfeiture rate of 95%, and approved bya discount factor of 0.72%. Share based compensation of $2,282 was recognized during the Shareholders in 2016.six-month period ended June 30, 2020.

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 nine monthssix-month period ended SeptemberJune 30, 20172020 is as follows:

ELECTRONIC SYSTEMS TECHNOLOGY, INC.

NOTES TO FINANCIAL STATEMENTS

(Unaudited)

NOTE 5 - RELATED PARTY TRANSACTIONS– REVENUE

DuringThe Company derives revenues from the quartersales 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.  The Company’s customers, to which trade credit terms are extended, consist of United States and local governments and foreign and domestic companies.  

For the three-month period ended SeptemberJune 30, 2017,2020, sales to three customers represented more than 10% of total revenue, three customers represented more than 10% of total revenue for the same period in 2019.

For the six-month period ended June 30, 2020, sales to one customer represented more than 10% of total revenue, two customers represented more than 10% of total revenue for the same period in 2019.

As of June 30, 2020 and 2019, the Company accrued total directors’ feeshad a sales order backlog of $1,200, or $300 per director for board meetings attended. For the nine-month period ending September 30, 2017, the Company paid or accrued a total of $3,600 for directors’ fees.$4,118 and $3,307, respectively.

ELECTRONIC SYSTEMS TECHNOLOGY, INC.

NOTES TO FINANCIAL STATEMENTS

(Unaudited)

NOTE 6 - COMMITMENTSLEASES

The Company leases its facilities from a port authority for $5,445$5,639 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 June 30, 2020, the remaining lease term is .25 years

For the three month and six-month periods ended June 30, 2020 and 2019, lease expenses of $16,918 and $16,627, and $33,836 and $33,254 respectively, are included in the following expense classifications on the statement of operations:

As of June 30, 2020, total future lease payments are as follows:

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.    

During the quarter ended September 30, 2017, Domestic customers represented approximately 88% of total net revenues. 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. 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.  Foreign customers represented approximately 12% of 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 $188,884 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.

NOTE 87 – Stock RepurchaseSTOCK 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 stockCommon 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 activity and related information forBoard of Director approved a resolution authorizing the nine-month period ending September 30, 2017.

⁽¹⁾  Amount includes commissions paidrepurchase of $79.

The trading pricean additional $150,000 of the Company’s Common Stock at the price of $0.38 per share. Under the program (the “Stock Repurchase Plan”), shares may be repurchased in open market transactions, complying with Rule 10b5-1 and Rule 10b-18 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Shares repurchased are retired. During the six-month period ended June 30, 2020, no shares were repurchased; 39,246 shares for $14,920 were repurchased in the six-month period ended June 30, 2019. Since inception of Septemberthe Stock Repurchase Plan, the Company has repurchased 212,165 shares for a total of $80,622 through June 30, 2017, was $0.59.2020 and $169,378 of the original $250,000 approved by the board remains.

On April 23, 2020 repurchases were suspended indefinitely.

NOTE 98 – Income TaxesCARES ACT LOANS PAYABLE

No Income Tax has been recognized dueOn March 27, 2020, the Coronavirus Aid, Relief, and Economic Security (the “CARES Act”) Act was signed into United States law.   

In April 2020, the Company received a loan of $171,712 pursuant to the net operating loss.Paycheck Protection Program (the “PPP”) under Division A, Title I, Section 1102 and 1106 of the CARES Act.  The current year’s net operating loss tax impact has been reserved,loan, which was in the form of a promissory note, as amended, dated April 13, 2020 issued by the estimated effective taxCompany (the “Note”); the Note matures on April 13, 2022 and bears interest at a rate of 1% per annum, payable monthly commencing on August 13, 2021. The Note may be prepaid by the Company at any time prior to maturity with no prepayment penalties. Under the terms of the PPP, certain amounts of the loan may be forgiven if they are used for 2017qualifying expenses as described in the CARES Act. Qualifying expenses include payroll costs, costs used to continue group health care benefits, mortgage payments, rent, and utilities. The Company intends to use the entire loan amount for qualifying expenses, but there is no guarantee that the loan will be zero.forgiven.

The Deferred Tax asset that is recognized onDuring the Balance Sheets consists primarily of prior years’ net operating loss and R&D credits. We believe thatthree months ended June 30, 2020, the Company will be generate net operatingreceived $9,000 under Division A, Title I, Section 1110 of the CARES Act.    The Company is not required to pay this amount back and thus recognized $9,000 as government grant income and utilizeduring the asset in future periods.period.

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 SeptemberJune 30, 2016.2020.  The following statements may be forward looking in nature and actual results may differ materially.

A.  ResultsRESULTS OF OPERATIONS

As a result of OperationsCOVID-19, and governmental responses thereto, are experiencing some negative impacts to our business, primarily as a result of reductions in staffing by our customers, and their customers, which is lengthening our normal sales cycles. Many of our customers are also restricting visits from vendors. All of our planned trade shows and sales presentations have been canceled or postponed as a result of the risks associated with face to face meetings. We have utilized various platforms to provide current customers and potential customers with presentations about our products and services. We have also experienced some delays in our supply chain but none of these COVID-19 related disruptions, to the supply chain, has been significant at this point.

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$245,497 for the second quarter of September 30, 2017,2020 as compared to $1,250,238 as$395,262 in the second quarter of September 30, 2016. Year to date gross revenues, including interest income, decreased to $1,090,657 as2019, reflecting a decrease of September 30, 2017, compared to $1,259,155 as of September 30, 2016.38%.  Management believes the increasedecrease in quarterly sales revenues is due to increased demand for the new products introducedimpact of the COVID-19 stay at home orders when compared with the beginningsame quarter of 2017.2019. Year to date total revenues from sales decreased to $519,464 in 2020 as compared to $769,428 in 2019, reflecting a decrease of 32.5%.  Management believes the decrease in sales revenues is due to the impact of the COVID-19 stay at home orders when compared with the same period of 2019.   

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 ascustomer 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 inwith regard to the Company's revenues becomeare difficult to predict.predict.

Although the COVID-19 situation represents a significant disruption to operations in 2020, we have taken steps intended to keep our staff safe. Staff, whose jobs allow, are telecommuting.  Those whose jobs require specialized equipment continue to work on site and are keeping safe distances to minimize the potential to contract or spread the virus. We are observing social distancing for those employees that remain on-site. Masks have been provided to all employees to minimize the risk of exposure. Daily monitoring of temperatures as well as adding sanitizers have also been instituted.

A percentage breakdown of EST'sthe Company’s market segments of Domestic and Foreign Export Sales,sales for the third quarter of 2017three and 2016six month periods ended June 30, 2020 and 2019 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 CorporationAs of June 30, 2020, the Company had a sales order backlog of approximately $22,707 as of September 30, 2017.$4,118.   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 155 working days after receipt of customer orders, with the exception of ongoing, scheduled projects, and custom designed equipment.

COST OF SALES:

Cost of sales percentagepercentages for the third quartersecond quarters of 20172020 and 2016 was 40%2019 were 54% and 36%, respectively.48% of respective net sales. The cost of sales percentage increase forin the thirdsecond quarter of 20172020 is the result of the product mix for items sold during the period.same quarter of 2019. Cost of sales percentages for the six month periods ended June 30, 2020 and 2019 were 54% and 47%. The cost of sales percentage increase in the second quarter of 2020 is the result of the product mix sold during the same period of 2019.

OPERATING EXPENSES:

Operating expenses for the thirdsecond quarter of 20172020 decreased $10,857$11,425 from the thirdsecond quarter of 2016.2019 levels.  The following is an outlinea delineation of operating expenses:

GENERAL AND ADMINISTRATIVE:

DuringGeneral and administrative:  For the thirdsecond quarter of 2017,2020, general and administrative expenses decreased $8,425increased $769 to $59,367 from$69,957, due to increased wages when compared with the same quarter of 2016,2019. For the six-month period, general and administrative expenses increased by $2,976 to $165,670, due to decreasedincreased wages and professional servicesservices.

Research and bank fees.

RESEARCH AND DEVELOPMENT:

development:  Research and development expenses decreased $4,113$1,265 to $55,511$50,213 during the thirdsecond quarter of 20172020 due to decreased expenses related to prototype build costs when compared with the same quarter of 2019. For the six-month period, research and development expenses decreased by $11,842 to $105,110, due to decreased prototype build costs.

Marketing and sales: During the second quarter of 2020, marketing and sales expenses decreased $10,929 to $86,295 when compared with the same period in 2016of 2019, due to fees paid for type acceptancedecreased payroll and prototype buildsdecreased travel expense related to cancelation of new product.

MARKETING AND SALES:

Duringtrade shows during the thirdsecond quarter of 2017,2020. For the six-month period, marketing and sales expenses increased $1,681decreased by $23,016 to $114,092 from the same period in 2016,$174,191, due to increased services purchased.decreased travel and trade shows.

INTEREST AND DIVIDENDOTHER INCOME:

The CorporationCompany earned $2,958$2,488 in interest and dividend income during the quarter ended SeptemberJune 30, 2017.2020 and $5,951 for the six-month period.  Sources of this income were money market accounts and certificates of deposit. The Company received a government grant under the CARES Act in the amount of $9,000 for COVID relief.

NET INCOME (LOSS):LOSS:

The Company had a net loss of $37,781$81,875 for the thirdsecond quarter of 2017,2020 compared to a net loss of $42,497$6,219 for the same quarter of 2016.2019.  For the nine-monthsix-month period ended SeptemberJune 30, 2017,2020, the Company recorded a net loss of $133,992,$192,181 compared with a net loss of $55,114$61,044 for the same period of 2016.2019.  The decreaseincrease in the Company’s net loss during 2020 is the result of increaseddecreased sales revenues decreasedand gross margins and reduced operating expenses during the third quarter of 2017.income.

B.  Financial Condition, Liquidity and Capital ResourcesFINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES

The Corporation's current asset to current liabilities ratio at SeptemberJune 30, 20172020 was 24.6:125.4 compared to 54:111.8 at December 31, 2016. 2019.  The increase in current ratio is due to the reduction in accounts payable and the current portion of lease liability at June 30, 2020 as compared to December 31, 2019.

At SeptemberJune 30, 2017,2020, the Company had cash and cash equivalents of $257,112;$394,875 as compared to cash and cash equivalent holdings of $502,971$274,936 at December 31, 2016.2019, primarily reflecting cash provided in investing and financing activities.

Cash used in operating activities increased by $118,357 for the six-month period ended June 30, 2020 when compared to the same period in 2019. 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 primarilyincrease is attributable to an increase in net loss for the period being $131,137 greater than the same period in 2019.  

Net cash provided from investing was $150,001 due to the redemption of finished goods.  The Company's fixed assets, netcertificates of depreciation, decreaseddeposits maturing during the first half of 2020. Cash provided from financing activities was $171,712, which were the proceeds of the CARES Act loan received during the six-month period ended June 30, 2020. We believe that the entire loan will be forgiven based on recent amendments to $36,428 as of September 30, 2017, from December 31, 2016 levels of $51,383.the CARES Act for forgiveness.

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'smanagement's opinion, the Company's cash and cash equivalent reserves,equivalents and other working capital at SeptemberJune 30, 20172020 is sufficient to satisfy requirements for operations, capital expenditures, and other expenditures as may arise during 2020.

As a result of COVID-19, and governmental responses thereto, we are experiencing some negative impacts to our business, primarily as a result of reductions in staffing by our customers, and their customers, which is lengthening our normal sales cycles. Many of our customers are also restricting visits from vendors. All of our planned trade shows and sales presentations have been canceled or postponed as a result of the next 12 months.risks associated with face to face meetings. We have utilized various platforms to provide current customers and potential customers with presentations about our products and services. We have also experienced some delays in our supply chain but none of these COVID-19 related disruptions has been significant at this point.

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.

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 June 30, 2020.  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 June 30, 2020.  

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

NoneNone.

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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