UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

For the quarterly period ended JuneSeptember 30, 2022

OR

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. 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 x NO o

YES☒ NO ☐

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 ☐ oNo ☒x

APPLICABLE ONLY TO CORPORATE ISSUERS:

As of July 20,October 22, 2022, the number of the Company's shares of Common Stock par value $0.001, outstanding was 4,946,502.

PART I

FINANCIAL INFORMATION

Item 1. Financial 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 FINANCIAL STATEMENTS

(Unaudited)

NOTE 1 - BASIS OF PRESENTATION

The 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 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 financial statements contain all adjustments, consisting of only normal recurring adjustments, necessary for a fair statement of its financial position as of JuneSeptember 30, 2021,2022, and its results of operations, cash flows, and changes in stockholders’ equity for the three months and sixnine months ended JuneSeptember 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 month and six-monthnine-month period ended JuneSeptember 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 adoptionadoption.

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 - 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 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 Stock were exercised or converted into Common Stock or resulted in the issuance of Common Stock that then shared in the earnings of the Company. At JuneSeptember 30, 2022 and 2021, the Company had 210,000 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

No stock options were issued, exercised orand 30,000 shares expired during the sixnine month periods ended JuneSeptember 30, 2022 and 2021. During the same periods, 30,000 and 0 nil options were forfeited in 2022 and 2021 respectively.2022. As of JuneSeptember 30, 2022, there were 210,000 options outstanding with a weighted average exercise price of $0.40 per share, a weighted average remaining life of 2.92.7 years 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 month periodsthree-month period ended JuneSeptember 30, 2022 and 2021, the Company’s revenue from products sales was $409,392480,260 and $448,403230,869, respectively. Revenue from site support and engineering services was $7,5006,900 and $8,60025,200 respectively, over the same periods.

During the six month periodsnine-month period ended JuneSeptember 30, 2022 and 2021, the Company’s revenue from products sales was $871,2351,351,495 and $870,0791,100,948, respectively. Revenue from site support and engineering services was $17,80024,700 and $11,70036,900 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 JuneSeptember 30, 2022 and JuneSeptember 30, 2021 were $378,959419,164 and $432,215227,001, respectively. Sales to foreign customers for the three monththree-month period ended JuneSeptember 30, 2022 and JuneSeptember 30, 2021 were $37,93367,996 and $24,78829,068, respectively.

Domestic sales for the six monthnine-month period ended JuneSeptember 30, 2022 and JuneSeptember 30, 2021 were $815,6291,234,793and $794,3301,021,331, respectively. Sales to foreign customers for the six monthnine-month period ended JuneSeptember 30, 2022 and JuneSeptember 30, 2021 were $73,406141,402 and $87,449116,517, respectively.

NOTE 5 – REVENUE (continued)

For the three-month period ended JuneSeptember 30, 2022, sales to three customers represented more than 10% of total revenue, three customersone customer represented more than 10% of total revenue for the same period in 2021.

ELECTRONIC SYSTEMS TECHNOLOGY, INC.

NOTES TO FINANCIAL STATEMENTS

(Unaudited)

For the six-monthnine-month period ended JuneSeptember 30, 2022, sales to threetwo 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 JuneSeptember 30, 2022 and 2021, the Company had a sales order backlog of $24,857141,066 and $17,14393,059, 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 JuneSeptember 30, 2022, the remaining lease term is three months over which payments of $9,737 will be paid.

ELECTRONIC SYSTEMS TECHNOLOGY, INC.

NOTES TO FINANCIAL STATEMENTS

(Unaudited)twenty four months.

Prior to the new lease on September 19, 2022, the Company’s lease for its facilities was for $3,267 per month.

For the three month and six-monthnine-month periods ended JuneSeptember 30, 2022 and 2021, lease expenses of $10,90311,616 and $10,862, and $21,80534,839 and $21,72432,586, respectively, are included in the following expense classifications on the statement 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 JuneSeptember 30, 2020.2022. The following statements may be forward looking in nature and actual results may differ materially.

REVENUES: Total revenues from sales decreasedincreased to $416,892$487,160 for the secondthird quarter of 2022 as compared to $457,003$256,069 in the secondthird quarter of 2021, reflecting a decreasean increase of 8.8%90.2%. Management believes the decreaseincrease in sales revenues is due to the impactimprovement of supply chain delays todeliveries   of materials needed by our customers to compete projects. Year to date total revenues from sales increased to $889,035$1,376,195 in 2022 as compared to $881,779$1,137,848 in 2021, reflecting an increase of 0.8%20.9%. Management believes the increase in sales revenues is due the companyCompany increased inventory level and the 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.

A percentage breakdown of the Company’s market segments of Domestic and Foreign Export sales for the threethree- and six monthnine-month periods ended JuneSeptember 30, 2022, and 2021 are as follows:

BACKLOG:

BACKLOG:

As of JuneSeptember 30, 2022, the Company had a sales order backlog of $24,857.$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 secondthird quarters of 2022 and 2021 were 46%43% and 47%60% of respective net sales. The cost of sales percentage decreased in the secondthird quarter of 2022 is the result of the product mix sold during the same quarter of 2021. Cost of sales percentages for the six monthnine-month periods ended JuneSeptember 30, 2022 and 2021 were 45.1%44% and 44.7%, respectively.48%. The cost of sales percentage increase in the second quarterfirst nine-months of 2022 is the result of the product mix sold during the same period of 2021.

OPERATING EXPENSES:

The following is a delineation of operating expenses:

General and administrative: For the secondthird quarter of 2022, general and administrative expenses increased $295$5,210 to $66,747,$60,785, due to increased wages when compared with the same quarter of 2021.2022. For the six-monthnine-month period, general and administrative expenses decreased by $8,433$3,220 to $151,522,$212,308 due to decreased services purchased.professional services. General and administrative expense was 16.0% compared to 14.5%expenses were 12.5% of sales revenue for the secondthird quarter of 2022 and 17.0% compared to 18.1%21.7% in the same period 2021 and 15.4% of sales revenue for six monthnine-month period ended JuneSeptember 30, 2022.2022compared to 18.9% in the same period 2021.

Research and development: Research and development expenses decreased $8,393$6,505 to $45,856$40,029 during the secondthird quarter of 2022 due to decreased payroll expenses related to consulting services when compared with the same quarter of 2021. For the six-monthnine-month period, research and development expenses decreased by $15,316$21,821 to $91,633,$131,662, due to decreased payroll expenses.prototype build costs. Research and development expense was 11.0% compared to 11.9%expenses were 8.2% of sales revenue for the secondthird quarter of 2022 and 10.3% compared to 12.1%18.2% in the same period 2021 and 9.6% of sales revenue for six monthnine-month period ending JuneSeptember 30, 2022.2022 compared to 13.5% in the same period 2021.

Marketing and sales: During the secondthird quarter of 2022, marketing and sales expenses increased $4,823decreased $18,668 to $132,242$104,293 when compared with the same period of 2021, due to increased benefits expenses and travel.decreased payroll. For the six-monthnine-month period, marketing and sales expenses increased by $47,767$29,100 to $269,401,$373,594, due to increased payroll. Marketing and sales expense was 31.7% compared to 27.9%expenses were 21.4% of sales revenue for the secondthird quarter of 2022 and 30.3% compared to 25.1%48.0% in the same period 2021 and 27.2% of sales revenue for six monthnine-month period ended JuneSeptember 30, 2022.2022 compared to 30.3% in the same period 2021.

OTHER INCOME:

The Company earned $594$1,373 in interest income during the quarter ended JuneSeptember 30, 2022 and $1,085$2,459 for the six-monthnine-month period. Sources of this income were money market accounts and certificates of deposit. InDuring the quarter and nine-months ended September 30, 2021, the Company recognized a gain on forgiveness of debt in the amount of $150,118$130,555 and $280,373, respectively, for the first CARES Act loan (PPP round 1).loans.

NET LOSS:INCOME(LOSS):

The Company had a net lossincome of 18,796$73,731 for the secondthird quarter of 2022 compared to a net income of $146,370$8,977 for the same quarter of 2021. For the six-monthnine-month period ended JuneSeptember 30, 2022, the Company recorded a net lossincome of $23,757$49,614 compared with net income of $151,052$160,029 for the same period of 2021. The decreaseincrease in net income during 2022 is the result of increased operating expensessales revenues and no CARES Act forgiveness.gross profit.

B.       FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES

The Corporation's current asset to current liabilities ratio at JuneSeptember 30, 2022 was 21.016.0 compared to 12.7 at December 31, 2021. The increase in current ratio is due to the decrease of accounts payable and short-term leases payable at JuneSeptember 30, 2022 as compared to December 31, 2021.

At JuneSeptember 30, 2022, the Company had cash and cash equivalents of $579,021$561,605 as compared to cash and cash equivalent of $655,616 at December 31, 2021.

Cash provided from operating activities decreased by $419,549$347,389 for the six-monthnine-month period ended JuneSeptember 30, 2022 when compared to the same period in 2021. The decrease is attributable to a decrease in net income for the period being $174,809 less$110,415 lower than the same period in 2021. The reduction from the nine-month period ended September 30, 2021 in the change in accounts receivable and inventoryaccounts payable balances contributed $120,753($193,850) and $167,186 respectively.($103,830), respectively, to the decrease.

Net cash used in investing was $250,583 due to the purchase and rollover of certificates of deposits maturing during the nine months of 2022. 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 JuneSeptember 30, 2022 is sufficient to satisfy requirements for operations, capital expenditures, and other expenditures as may arise during 2022 and into the first half ofthrough 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.

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. Controls and Procedures

Item 4. 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 JuneSeptember 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 JuneSeptember 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

None.

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.