`UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

For the quarterly period ended March 31,September 30, 2022

OR

From ________________ to ________________

ELECTRONIC SYSTEMS TECHNOLOGY INC.INC

(Exact name of registrant as specified in its charter)

(509) 735-9092

(Registrant's telephone number, including area code)

N/A

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

Securities registered pursuant to Section 12(g) of the Act:

Indicate by check mark whether the registrant (1) has filed all documents and reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filings for the past 90 days. Yes YESx ☒  NO ☐o

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 YESx ☒  NO ☐o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act:

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ☐  Yes NOo ☒Nox

APPLICABLE ONLY TO CORPORATE ISSUERS:

As of April, 19October 22, 2022, the number of the Company's shares of common stockCommon Stock par value $0.001, outstanding was 4,946,502.

PART I

FINANCIAL INFORMATION

Item 1. Financial Statements.Statements

See Notes to Financial Statements.

See Notes to Financial Statements.

See Notes to Financial Statements.

See Notes to Financial Statements.

ELECTRONIC SYSTEMS TECHNOLOGY, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1 - BASIS OF PRESENTATION

The condensed financial statements, including notes, of Electronic Systems Technology, Inc. (the "Company") are representations of the Company’s management, which is responsible for their integrity and objectivity. The accompanying unaudited condensed financial statements have been prepared by the Company in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information, as well as the instructions to Form 10-Q. Accordingly, the financial statements do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, the accompanying unaudited condensed financial statements contain all adjustments, consisting of only normal recurring adjustments, necessary for a fair statement of its financial position as of March 31,September 30, 2022, and its results of operations, cash flows, and changes in stockholders’ equity for the three months and nine months ended March 31,September 30, 2022 and 2021. The balance sheet at December 31, 2021 was derived from audited annual financial statements but does not contain all of the footnote disclosures from the annual financial statements. All amounts presented are in U.S. dollars. For further information, refer to the financial statements and footnotes thereto in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.

The results of operations for the three-monththree month and nine-month period ended March 31,September 30, 2022 are not necessarily indicative of the results expected for the full fiscal year or for any other fiscal period. The Company estimates that for 2022 the anticipated effective annual federal income tax rate will be 0%.

New Accounting Pronouncements

Accounting standards that have been issued by the Financial Accounting Standards Board that do not require adoption until a future date are not expected to have a material impact on the financial statements upon adoption.

NOTE 2 - INVENTORIES

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

NOTE 3 - EARNINGS (LOSS) PER SHARE

Basic earnings (loss) per share excludes dilution and is computed by dividing income (loss) available to common stockholders by the weighted-average number of common shares of Common Stock outstanding for the period. Diluted earnings (loss) per share reflects potential dilution occurring if securities or other contracts to issue common 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 March 31,September 30, 2022 and 2021, the Company had 240,000210,000 and 180,000240,000 outstanding stock options, respectively, that could have a dilutive effect on future periods’ net income. The stock options were not included in the calculation of diluted earnings per share for either period as they were anti-dilutive.

NOTE 4 - STOCK OPTIONS

The Company has outstandingNo stock options which have been granted periodically to individual employeeswere issued, exercised and directors. On September 2, 2021, the Board of Directors granted 60,00030,000 options to employees. The new options have an exercise price of $0.40, a term of 5 years, and vest immediately. The fair value of the options was determined using the Black-Scholes model using the following variables: stock price of $0.40, volatility of 107.7%, expected term of 5 years with a forfeiture rate of 95%, and a discount factor of 0.77%. Share based compensation of $970 was recognizedshares expired during the year ended December 31, 2021. NaN shared based compensation was recognized during the threenine month periods ended March 31, 2022 and 2021.

September 30, 2022. As of March 31,September 30, 2022, there were 240,000210,000 options outstanding with a weighted average exercise price of $0.40 per share, a weighted average remaining life of 3.4 2.7years and 0no intrinsic value.

NOTE 5 – REVENUE

The CompanyCompany’s product revenue includes industrial wireless products and accessories such as antennas, power supplies and cable assemblies. The Company also provides direct site support and engineering services to customers, such as repair and upgrade of its products. During the three monththree-month period ended March 31,September 30, 2022 and 2021, the Company’s revenue from products sales was $461,843480,260 and $421,675230,869, respectively. Revenue from site support and engineering services was $10,3006,900 and $3,10025,200 respectively, over the same periods.

During the nine-month period ended September 30, 2022 and 2021, the Company’s revenue from products sales was $1,351,495 and $1,100,948, respectively. Revenue from site support and engineering services was $24,700 and $36,900 respectively, over the same periods.

The Company’s customers, to which trade credit terms are extended, consist of United States and local governments and foreign and domestic companies. Domestic sales of products and services for the three monththree-month period ended March 31,September 30, 2022 and March 31,September 30, 2021 were $436,670419,164 and $362,115227,001, respectively. Sales to foreign customers for the three monththree-month period ended March 31,September 30, 2022 and March 31,September 30, 2021 were $35,47367,996 and $62,66029,068, respectively.

Domestic sales for the nine-month period ended September 30, 2022 and September 30, 2021 were $1,234,793and $1,021,331, respectively. Sales to foreign customers for the nine-month period ended September 30, 2022 and September 30, 2021 were $141,402 and $116,517, respectively.

NOTE 5 – REVENUE (continued)

For the three monththree-month period ended March 31,September 30, 2022, and 2021, sales to three customers representingrepresented more than 10% of total revenue, were as follows:one customer represented more than 10% of total revenue for the same period in 2021.

For the nine-month period ended September 30, 2022, sales to two customers represented more than 10% of total revenue, two customers represented more than 10% of total revenue for the same period in 2021.

As of March 31,September 30, 2022 and 2021, the Company had a sales order backlog of $116,461141,066 and $91,06493,059, respectively.

NOTE 6 - LEASES

On September 23, 2020,19, 2022, the Company signed a new two-year lease for its facilities. The base lease is $3,1623,373 and $3,2673,478 per month for years one and two, respectively. There is a leasehold tax applied to the base lease at 12.84%. The Company has the right to terminate the lease with 90 days’ notice. There is no renewal clause contained in the current lease. Upon signing the lease, the Company recognized a lease liability and right of use asset of $74,00578,757 based on the two-year payment stream discounted using an estimated incremental borrowing rate of 4.0%4.125%. At March 31,September 30, 2022, the remaining lease term is sixtwenty four months. As of March 31,

Prior to the new lease on September 19, 2022, future payments on thisthe Company’s lease offor its facilities was for $19,6043,267 will be paid in 2022.per month.

For the three month and nine-month periods ended March 31,September 30, 2022 and 2021, lease expenseexpenses of $10,90311,616 and $10,86110,862, and $34,839 and $32,586 respectively, are included in the following expense classifications on the statementsstatement of operations:

NOTE 6 – LEASES (continued)

As of September 30, 2022, total future lease payments are as follows:

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

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATION

Management's discussion and analysis is intended to be read in conjunction with the Company's unaudited financial statements and the integral notes thereto for the quarter ended March 31,September 30, 2022. The following statements may be forward looking in nature and actual results may differ materially.

A.       RESULTS OF OPERATIONS

REVENUES: Total revenues from sales increased to $472,143$487,160 for the firstthird quarter of 2022 as compared to $424,775$256,069 in the firstthird quarter of 2021, reflecting an increase of 11.2%90.2%. Management believes the increase in sales revenues is due to the improvement of supply chain deliveries   of materials needed by our customers to compete projects. Year to date total revenues from sales increased product demand fromto $1,376,195 in 2022 as compared to $1,137,848 in 2021, reflecting an increase of 20.9%. Management believes the Domestic market duringincrease in sales revenues is due the first quarter of 2022 when compared withCompany increased inventory level and the same quarter of 2021.ability to ship orders in a timely manner.

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.

During the three month period ending March 31, 2022, orders have not been impacted by COVID-19. We are experiencing some disruptions in the supply chain, but at this point do not see it having a material impact on sales.

A percentage breakdown of the Company’s market segments of Domestic and Foreign Export sales for the first quarter ofthree- and nine-month periods ended September 30, 2022, and 2021 are as follows:

BACKLOG:

As of March 31,September 30, 2022, the Company had a sales order backlog of $116,461.$141,066. 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 firstthird quarters of 2022 and 2021 were 44%43% and 42%60% of respective net sales and are calculated excluding site support expenses of $6,312 and $2,079 respectively.sales. The cost of sales percentage increasedecreased in the firstthird quarter of 2022 is the result of the product mix sold during the same quarter of 2021. Cost of sales percentages for the nine-month periods ended September 30, 2022 and 2021 were 44% and 48%. The cost of sales percentage increase in the first nine-months of 2022 is the result of the product mix sold during the same period of 2021.

OPERATING EXPENSES:

Operating expenses for the first quarter of 2022 increased $27,294 from first quarter of 2021 levels. The following is a delineation of operating expenses:

General and administrative: For the firstthird quarter of 2022, general and administrative expenses decreased $8,727increased $5,210 to $84,776,$60,785, due to decreased professional services and purchased servicesincreased wages when compared with the same quarter of 2022. For the nine-month period, general and administrative expenses decreased by $3,220 to $212,308 due to decreased professional services. General and administrative expenses were 12.5% of sales revenue for the third quarter of 2022 compared to 21.7% in the same period 2021 and 15.4% of sales revenue for nine-month period ended September 30, 2022compared to 18.9% in the same period 2021.

Research and development: Research and development expenses decreased $6,923$6,505 to $45,777$40,029 during the firstthird quarter of 2022 due to decreased expenses related to prototype build costsconsulting services when compared with the same quarter of 2021. For the nine-month period, research and development expenses decreased by $21,821 to $131,662, due to decreased prototype build costs. Research and development expenses were 8.2% of sales revenue for the third quarter of 2022 compared to 18.2% in the same period 2021 and 9.6% of sales revenue for nine-month period ending September 30, 2022 compared to 13.5% in the same period 2021.

Marketing and sales: During the firstthird quarter of 2022, marketing and sales expenses increased $42,944decreased $18,668 to $137,159$104,293 when compared with the same period of 2021, due to decreased payroll. For the nine-month period, marketing and sales expenses increased payroll, taxesby $29,100 to $373,594, due to increased payroll. Marketing and benefits duringsales expenses were 21.4% of sales revenue for the firstthird quarter of 2022.2022 compared to 48.0% in the same period 2021 and 27.2% of sales revenue for nine-month period ended September 30, 2022 compared to 30.3% in the same period 2021.

INTERESTOTHER INCOME:

The Company earned $491$1,373 in interest income during the quarter ended March 31,September 30, 2022 compared to $861duringand $2,459 for the same period in 2021.nine-month period. Sources of this income were money market accounts and certificates of deposit. During the quarter and nine-months ended September 30, 2021, the Company recognized a gain on forgiveness of debt in the amount of $130,555 and $280,373, respectively, for CARES Act loans.

NET INCOME (LOSS)INCOME(LOSS):

The Company had a net lossincome of ($4,961)$73,731 for the firstthird quarter of 2022 compared to net income of $4,682$8,977 for the same quarter of 2021. For the nine-month period ended September 30, 2022, the Company recorded net income of $49,614 compared with net income of $160,029 for the same period of 2021. The decreaseincrease in net profitsincome during 2022 is the result of increased payroll in Marketingsales revenues and Sales due to adding one additional person.gross profit.

B.       FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES

The Company'sCorporation's current asset to current liabilities ratio at March 31,September 30, 2022 was 16.716.0 compared to 12.7 at December 31, 2021. The increase in current ratio is due to the decrease inof accounts payable liability at March 31,September 30, 2022 as compared to December 31, 2021.

At March 31,September 30, 2022, the Company had cash and cash equivalents of $850,664$561,605 as compared to cash and cash equivalent of $655,616 at December 31, 2021, primarily reflecting decreases in Accounts Receivable, Certificates of Deposit, and Inventory.2021.

For

Cash provided from operating activities decreased by $347,389 for the three-monthnine-month period ended March 31,September 30, 2022 cash provided by operating activities was $51,016when compared to cash provided of $106,370 for the same period in 2021. This change was driven byThe decrease is attributable to a net loss of $4,961 during the three months ended March 31, 2022 compared todecrease in net income of $4,682for the period being $110,415 lower than the same period in 2021. The reduction from the nine-month period ended September 30, 2021 in the three months ended March 31, 2021. Changechange in operating assetsaccounts receivable and liabilities was $55,866 duringaccounts payable balances contributed ($193,850) and ($103,830), respectively, to the three month period ended March 31, 2022 compared to 100,400 in 2021.decrease.

Cash provided fromNet cash used in investing was $150,000$250,583 due to the redemptionpurchase and rollover of a Certificatecertificates of depositdeposits maturing during the first quarternine months of 2022. With 12 month yields currently at a rate comparable to rates offered by Money Market accounts, maturing CDs are being deposited in these type of accounts.Cash use from financing activities was $5,968, which were payments paid on the CARES Act loan (round 1).

In management's opinion, the Company's cash and cash equivalents and other working capital at March 31,September 30, 2022 is sufficient to satisfy requirements for operations, capital expenditures, and other expenditures as may arise during 2022.2022 and through 2023.

FORWARD LOOKING STATEMENTS: The above discussion may contain forward looking statements that involve a number of risks and uncertainties. In addition to the factors discussed above, among other factors that could cause actual results to differ materially are the following: competitive factors such as rival wireless architectures and price pressures; availability of third party component products at reasonable prices; inventory risks due to shifts in market demand and/or price erosion of purchased components; change in product mix, and risk factors that are listed in the Company's reports and registration statements filed with the Securities and Exchange Commission.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.OFF-BALANCE SHEET ARRANGEMENTS

There isThe Company has no established market for trading the common stocksignificant 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 the Company. The market for the Company’s common stock is limited, and as such shareholders may have difficulty reselling their shares when desiredoperations, liquidity, capital expenditures 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 dealerscapital resources that 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 continuedmaterial 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.its stockholders.

Item 4.3. Controls and Procedures

An evaluation has been performed underUnder the supervision and with the participation of our management, including our Chief Executive Officerprincipal executive officer and Principal Accounting Officer, of the effectivenessprincipal financial officer, we conducted an evaluation of the design and the operation of our "disclosuredisclosure controls and procedures" (asprocedures, as such term is defined inunder Rules 13a-15(e)13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934)1934, as amended (the Exchange Act), as of March 31,September 30, 2022. Based on thisthat evaluation, our Chief Executive Officerprincipal executive officer and Chief Financial Officer have determinedour principal financial officer concluded that there was a material weakness affecting our internal control over financial reportingthe design and as a resultoperation of that weakness, our disclosure controls and procedures were not effective as of March 31,September 30, 2022.

The material weaknessdesign of any system of controls is as follows:

We did not maintain effective controls to ensure appropriate segregationbased in part upon certain assumptions about the likelihood of duties as the same officerfuture events, and employee was responsible for the initiating and recordingthere can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless 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 misstatementhow remote. However, management believes 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 lackour system of disclosure withincontrols and procedures are designed to provide a reasonable level of assurance that the annual or interim financial statementsobjectives of the system will not be prevented or detected.met.

Changes in Internal Control Over Financial Reporting

There have not been any changes inDuring the most recent fiscal quarter, the Company added additional personnel that allows for appropriate segregation of duties. Management has determined that this change to our internal control over financial reporting (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) duringmitigated the most recent fiscal quartermaterial weakness that have materially affected, or are reasonably likely to materiallyexisted and, as such, had a material affect on our internal control over financial reporting.

PART II—OTHER INFORMATION

Item 1. Legal Proceedings

None.

Item 2. Unregistered Sales of Securities

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not Applicable

Item 5. Other Information

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.