See accompanying notes to the financial statements.
See accompanying notes to the financial statements.
See accompanying notes to the financial statements.
See accompanying notes to the financial statements.
NOTES TO FINANCIAL STATEMENTS
| |
1. |
Organization and Summary of Significant Accounting Policies |
Business Organization
The Company was incorporated under the laws
of the State of Washington on February 10, 1984, primarily to develop, produce, sell and distribute wireless modems that will allow communication
between peripherals via radio frequency waves.
Effective September 13, 2007, the Company
announced their establishment of a “doing business as” or dba structure, based on the Company’s registered trade name
of ESTeem® Wireless Modems.
Basis of Presentation and Accounting
Estimates
The preparation of financial statements
are prepared in conformity with generally accepted accounting principles in the United States which requires management to make estimates
and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Estimates used in the accompanying financial
statements include the allowance for doubtful accounts receivable, inventory obsolescence, useful lives of depreciable assets, share-based
compensation, and deferred income taxes. Actual results could differ from those estimates.
Concentrations and Credit Risks
The Company places its cash with three major
financial institutions. During the period, the Company had cash balances that were in excess of federally insured limits.
The Company purchases certain key components
necessary for the production of its products from a limited number of suppliers. The components provided by the suppliers could be replaced
or substituted by other products. It is possible that if this action became necessary, an interruption of production and/or material cost
expenditures could take place.
Revenue Recognition
The Company recognizes revenue when it has
satisfied the performance obligation required under a contract with the customer. A performance obligation is a promise in a contract
with a customer to transfer a distinct good or service to the customer. Our contracts with customers contain a single performance obligation.
A contract’s transaction price is recognized as revenue when, or as, the performance obligation is satisfied.
Performance obligations for product sales
are satisfied as of a point in time. Revenue is recognized when control of the product transfers to the customer, generally upon product
shipment. Performance obligations for site support and engineering services are satisfied over-time if the customer receives the
benefits as we perform work and we have a contractual right to payment. Revenue recognized on an over-time basis is based on costs incurred
to date relative to milestones and total estimated costs at completion to measure progress.
The Company considers the contractual consideration
payable by the customer when determining the transaction price of each contract. Revenue is recorded net of charges for certain sales
incentives and discounts, and applicable state and local sales taxes, which represent components of the transaction price. Charges are
estimated by us upon shipment of the product based on contractual terms, and actual charges typically do not vary materially from our
estimates. Shipping estimates are determined by utilizing shipping costs provided by the various service providers websites based on number
of packages, weight and destination. Shipping costs are included in the cost of goods sold as the revenue is captured in total sales.
ELECTRONIC SYSTEMS TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS
The Company receives payments from customers
based on the terms established in our contracts. When amounts are billed and collected before the services are performed, they are included
in deferred revenues. The Company does not generally sell its products with the right of return. Therefore, returns are accounted for
when they occur and are accepted. Products sold to foreign customers are shipped after payment is received in U.S. funds, unless an established
distributor relationship exists, or the customer is a foreign branch of a U.S. company.
The Company warrants its products as free
of manufacturing defects and provides a refund of the purchase price, repair or replacement of the product for a period of one year from
the date of installation by the first user/customer. No allowance for estimated warranty repairs or product returns has been recorded
due to the Company’s historical experience of repairs and product returns.
Financial Instruments
The Company’s financial instruments
are cash, money market funds, and certificates of deposit. The recorded values of cash, money market funds and certificates of deposit
approximate their fair values based on their short-term nature.
Cash and cash equivalents are cash and money
market funds purchased with original maturities of three months or less.
Allowance for Uncollectible Accounts
The Company uses the allowance method to
account for estimated uncollectible accounts receivable. Accounts receivable are presented net of an allowance for doubtful accounts.
As of December 31, 2022 and 2021, the Company’s estimate of doubtful accounts was zero. The Company’s policy for writing off
past due accounts receivable is based on the time past due and responses received from the subject customer.
Inventories
Inventories are stated at lower of direct
cost or market. Cost is determined on an average cost basis that approximates the first-in, first-out (FIFO) method. Market is determined
based on net realizable value and consideration is given to obsolescence.
Reclassifications
Certain prior year amounts have been reclassified
for consistency with the current year presentation. Reclassifications had no effect on net income), stockholders’ equity, or cash
flows as previously reported.
Property and Equipment
Property and equipment are carried at cost.
Major betterments are capitalized and de minimis purchases are expensed. Depreciation is computed using the straight-line method over
the estimated useful lives of the assets. The useful life of property and equipment for purposes of computing depreciation is three to
seven years. When the Company sells or otherwise disposes of property and equipment a gain or loss is recorded in the statement of operations.
The cost of improvements that extend the life of property and equipment is capitalized. The Company periodically reviews its long-lived
assets for impairment and, upon indication that the carrying value of such assets may not be recoverable, recognizes an impairment loss
by a charge against current operations.
ELECTRONIC SYSTEMS TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS
Certificates of Deposit
Certificates of deposit with original maturities
ranging from one month to twelve months were $251,699 and $400,000 at December 31, 2022 and 2021, respectively.
Software Costs
Software purchased and used by the Company
is capitalized as property and equipment based on its cost, and amortized over its useful life, usually not exceeding five years.
The Company capitalizes the costs of creating
a software product to be sold, leased or otherwise marketed, for which technological feasibility has been established. Amortization of
the software product, on a product-by-product basis, begins on the date the product is available for distribution to customers and continues
over the estimated revenue-producing life, not to exceed five years.
Leases
Contracts that meet the definition of a
lease are classified as operating or financing leases and are recorded on the balance sheet as both a right-of-use asset and lease liability,
calculated by discounting fixed lease payments over the lease term at the rate implicit in the lease or the Company’s incremental
borrowing rate. Lease liabilities are increased by interest and reduced by payments each period, and the right-of-use asset is amortized
over the lease term. For operating leases, interest on the lease liability and the amortization of the right-of-use asset result in straight-line
rent expense over the lease term. Variable lease expenses are recorded when incurred.
Income Taxes
The provision (benefit) for income taxes
is computed on the pretax income (loss) based on the current tax law. Deferred income taxes are recognized for the tax consequences in
future years of differences between the tax basis of assets and liabilities and their financial reporting amounts at each year-end based
on enacted tax laws and statutory tax rates. The Company evaluates positive and negative information when estimating the valuation allowance
for deferred tax assets. For tax positions that meet the more likely than not recognition threshold a deferred tax asset is recognized.
Research and Development
Research and development costs are recognized
as operating expenses when incurred. Research and development expenditures for new product development and improvements of existing products
by the Company for 2022 and 2021 were $163,189 and $212,397, respectively.
Advertising Costs
Costs incurred for producing and communicating
advertising are recognized as operating expenses when incurred. Advertising costs for the years ended December 31, 2022 and 2021were $8,895
and $7,979, respectively.
Earnings Per Share
The Company is required to have dual presentation
of basic earnings per share (“EPS”) and diluted EPS. Basic EPS is computed as net income (loss) divided by the weighted
average number of common shares outstanding for the period. Diluted EPS is calculated based on the weighted average number of common shares
outstanding during the period plus the effect of potentially dilutive common stock equivalents.
Potentially dilutive common stock equivalents
consist of 180,000 and 240,000 stock options outstanding as of December 31, 2022 and 2021, respectively. As of December 31, 2022 and 2021,
the potentially dilutive stock options were not included in the calculation of the diluted weighted average number of shares outstanding
or diluted EPS as their effect would have been anti-dilutive.
ELECTRONIC SYSTEMS TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS
Share-Based Compensation
Share-based payments to employees, including
grants of employee stock options, are measured at fair value and expensed in the statement of operations over the vesting period. In addition
to the recognition of expense in the financial statements, any excess tax benefits received upon exercise of options will be presented
as a financing activity inflow rather than an adjustment of operating activity in the statement of cash flows.
Fair Value Measurements
When required to measure assets or liabilities
at fair value, the Company uses a fair value hierarchy based on the level of independent, objective evidence surrounding the inputs used.
The Company determines the level within the fair value hierarchy in which the fair value measurements in their entirety fall. The categorization
within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. Level 1 uses
quoted prices in active markets for identical assets or liabilities, Level 2 uses significant other observable inputs, and Level 3 uses
significant unobservable inputs. The amount of the total gains or losses for the period are included in earnings that are attributable
to the change in unrealized gains or losses relating to those assets and liabilities still held at the reporting date. At December 31,
2022 and 2021, the Company has no assets or liabilities subject to fair value measurements on a recurring basis.
New Accounting Pronouncements
Accounting standards 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.
Inventories consist of the following:
| Schedule of Inventories | |
| | | |
| | |
| | |
2022 | | |
2021 | |
| Parts | |
$ | 172,190 | | |
$ | 92,751 | |
| Work in progress | |
| 336,298 | | |
| 171,705 | |
| Finished goods | |
| 216,990 | | |
| 237,377 | |
| Total | |
$ | 725,478 | | |
$ | 501,833 | |
Included in the above amounts are reserves
for obsolete inventories of $8,716 and $5,829 at December 31, 2022 and 2021, respectively.
| |
3. |
Property and Equipment |
Property and equipment consist of the following:
| Schedule of Property and Equipment | |
| | | |
| | |
| | |
2022 | | |
2021 | |
| Laboratory equipment | |
$ | 522,575 | | |
$ | 522,575 | |
| Software | |
| 35,028 | | |
| 35,028 | |
| Furniture and fixtures | |
| 16,344 | | |
| 16,344 | |
| Dies and molds | |
| 73,607 | | |
| 73,607 | |
| Property Plant and Equipment, Gross | |
| 647,554 | | |
| 647,554 | |
| Accumulated depreciation and amortization | |
| (646,640 | ) | |
| (646,196 | ) |
| Total Property Plant and Equipment, Net | |
$ | 914 | | |
$ | 1,358 | |
ELECTRONIC SYSTEMS TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS
For the years ended December 31, 2022 and
2021, the Company did not have an income tax benefit nor provision because of continuing losses.
The components of net deferred tax assets
are as follows:
| Schedule of Deferred Tax Assets and Liabilities | |
| | | |
| | |
| | |
December 31, | |
| | |
2022 | | |
2021 | |
| Deferred tax assets: | |
| | | |
| | |
| Net operating loss carryforwards | |
$ | 280,300 | | |
$ | 293,200 | |
| Accrued liabilities | |
| 3,500 | | |
| 2,900 | |
| Inventories | |
| 10,500 | | |
| 16,000 | |
| Other | |
| 1,200 | | |
| 1,400 | |
| Federal income tax credits | |
| 67,000 | | |
| 67,000 | |
| Total deferred tax assets | |
| 362,500 | | |
| 380,500 | |
| | |
| | | |
| | |
| Less valuation allowance | |
| (362,500 | ) | |
| (380,500 | ) |
| Total deferred tax assets, net | |
$ | — | | |
$ | — | |
Realization
of the deferred tax asset is dependent on generating sufficient taxable income prior to expiration of the loss carryforwards and the income
tax carryforwards. Management determined that it does not believe it is more likely than not that all of the net deferred tax assets will
be realized. Therefore, a valuation allowance has been recorded for the full net deferred tax asset at December 31, 2022 and 2021.
At December 31, 2022, the Company had approximately
$67,000 of research and development income tax credits available to reduce federal income taxes in future periods. The credits expire
from 2036-2041. In addition, at December 31, 2022, the Company had approximately $1,335,000 of net operating loss carryforwards, $685,000
of which will expire between 2035 and 2038. The remaining balance of $650,000 will never expire but whose utilization is limited to 80%
of taxable income in any future year.
The differences between the provision (benefit) for federal income
taxes and federal income taxes computed using the U.S. statutory federal income tax rate of 21% were as follows:
| Schedule of provision federal income
taxes | |
| | | |
| | |
| | |
2022 | | |
2021 | |
| Amount computed using the statutory rate | |
$ | 30,800 | | |
$ | 19,500 | |
| Non-deductible (taxable) items, net | |
| (12,900 | ) | |
| (58,500 | ) |
| Change in estimates | |
| 200 | | |
| (200 | ) |
| Change in valuation allowance | |
| 18,000 | | |
| 39,200 | |
| Provision (benefit) for federal income taxes | |
$ | — | | |
$ | — | |
Should the Company have future accrued interest
expense and penalties related to uncertain income tax positions, they will recognize those expenses in income tax expense.
The Company files federal income tax returns
in the United States only. The Company is no longer subject to federal income tax examination by tax authorities for years before 2019.
The Company has evaluated all tax positions for open years and has concluded that they have no material unrecognized tax benefits or penalties.
| |
5. |
Profit Sharing Salary Deferral 401-K Plan |
The Company sponsors a Profit-Sharing Plan
and Salary Deferral 401-K Plan and Trust. All employees over the age of twenty-one are eligible. On January 1, 2006, the Company adopted
a four percent salary matching provision. The Company contributed $20,886 and $16,660 to the plan for the years ended December 31, 2022
and 2021, respectively.
ELECTRONIC SYSTEMS TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS
| |
6. |
Employee Bonus Program |
The Board of Directors establishes
Sales and Net Income thresholds at the start of each year that are used in calculating the amount of bonuses that may be awarded. If
these thresholds are not achieved, there will be no bonus issued. Bonus expenses of $17,719
and 0 nil
was recognized during the years ended December 31, 2022 and 2021, respectively. At December 31, 2022 and 2021, accrued wages on the
balance sheet includes $17,719
and 0 nil, respectively, for accrued bonus payable.
| |
7. |
Share-Based Compensation |
The Company grants stock options to individual
employees and directors. After termination of employment, stock options may be exercised within ninety days, after which they are subject
to forfeiture. On September 1, 2021, the Board of Directors granted 60,000 options to employees. The new options have an exercise price
of $0.40, a term of 5 years, and vested 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 107.69%, expected term of 5 years with a forfeiture rate of 95%, and a discount
factor of 0.77%. Share based compensation of $970 was recognized in 2021.
In the years ended December 31, 2022 and
2021, the Company recognized $- and $970 respectively, in share-based compensation expense. No non-vested share-based compensation arrangements
existed as of December 31, 2022 and 2021.
A summary of option activity follows:
| Schedule of Stock Option Activity | |
| | | |
| | | |
| | |
| | |
Number
Outstanding | | |
Weighted
Average
Exercise Price
Per Option | | |
Weighted
Average
Remaining
Contractual
Term (Years) | |
| Balance at December 31, 2020 | |
| 180,000 | | |
| 0.40 | | |
| 4.2 | |
| Granted | |
| 60,000 | | |
| 0.40 | | |
| | |
| Balance at December 31, 2021 | |
| 240,000 | | |
$ | 0.40 | | |
| 3.6 | |
| Canceled | |
| (60,000 | ) | |
| 0.40 | | |
| | |
| Balance at December 31, 2022 | |
| 180,000 | | |
$ | 0.40 | | |
| 2.5 | |
| | |
| | | |
| | | |
| | |
| Outstanding and Exercisable at December 31, 2022 | |
| 180,000 | | |
$ | 0.40 | | |
| 2.5 | |
The aggregate intrinsic value of the options
outstanding and exercisable at December 31, 2022 was nil.
ELECTRONIC SYSTEMS TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS
On September 19, 2022, the Company signed
a new two-year lease for its facilities. The base lease is $3,373 and $3,478 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 a right of use
asset of $78,757 based on the two-year payment stream discounted using an estimated incremental borrowing rate of 4.125%. At December
31, 2022, the remaining lease term is twenty-one months.
Prior to the new lease in September 19,
2022, the Company’s lease for its facilities was for $3,806 per month.
As of December 31, 2022, total future lease payments are as follows:
| Schedule of Future Minimum Lease Payment | |
| |
| For the 12 months ended | |
| |
| December 31, 2023 | |
$ | 40,790 | |
| December 31, 2024 | |
| 31,304 | |
| Total | |
| 72,094 | |
| Less imputed interest | |
| (2,517 | ) |
| Net lease liability | |
| 69,577 | |
| Current portion | |
| 39,120 | |
| Long-term portion | |
$ | 30,457 | |
For the years ended December 31, 2022 and
2021, costs relating to the operating lease were recognized in the statement of operations as follows:
| Schedule of Cost Related to Operating Lease | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| | |
2022 | | |
2021 | |
| | |
Cost of
sales | | |
Operating
expenses | | |
Total | | |
Cost of
sales | | |
Operating
expenses | | |
Total | |
| Base rent pursuant to lease agreement | |
$ | 23,002 | | |
$ | 18,104 | | |
$ | 41,106 | | |
$ | 21,587 | | |
$ | 16,989 | | |
$ | 38,576 | |
| Variable lease costs | |
| 2,976 | | |
| 2,342 | | |
| 5,319 | | |
| 2,749 | | |
| 2,164 | | |
| 4,913 | |
| Total lease costs | |
$ | 25,978 | | |
$ | 20,446 | | |
$ | 46,425 | | |
$ | 24,336 | | |
$ | 19,153 | | |
$ | 43,489 | |
The Company derives revenues from the 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. The Company’s customers, to which
trade credit terms are extended, consist of United States and local governments and foreign and domestic companies.
| Schedule of Revenue by Products |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
For
the years ending December 31, |
|
| |
|
2022 |
|
|
2021 |
|
| |
|
Domestic Sales |
|
|
Foreign Sales |
|
|
Total Sales |
|
|
Domestic Sales |
|
|
Foreign Sales |
|
|
Total Sales |
|
| Product Sales |
|
$ |
1,668,861 |
|
|
$ |
212,800 |
|
|
$ |
1,881,661 |
|
|
$ |
1,287,587 |
|
|
$ |
170,741 |
|
|
$ |
1,458,328 |
|
| Site Support Sales |
|
|
28,400 |
|
|
|
- |
|
|
|
28,400 |
|
|
|
53,700 |
|
|
|
- |
|
|
|
53,700 |
|
| Total Sales |
|
$ |
1,697,261 |
|
|
$ |
212,800 |
|
|
$ |
1,910,061 |
|
|
$ |
1,341,287 |
|
|
$ |
170,741 |
|
|
$ |
1,512,028 |
|
For the year ended December 31, 2022 and
2021, sales to customers that are more than 10% of total revenue are as follows:
| Schedule of Revenue by Customers | |
| | | |
| | | |
| | | |
| | |
| | |
2022 Sales | | |
2022 % age of
Total
Sales | | |
2021 Sales | | |
2021 % age of
Total
Sales | |
| Domestic customer A | |
$ | 397,671 | | |
| 20.8 | % | |
$ | 242,451 | | |
| 16.0 | % |
| Domestic customer B | |
$ | 201,459 | | |
| 10.5 | % | |
| 160,385 | | |
| 10.6 | % |
ELECTRONIC SYSTEMS TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS
As of December 31, 2022 and 2021, accounts
receivable from customers that are more than 10% of the total accounts receivable balance are as follows:
| Schedule of accounts receivable | |
| | | |
| | | |
| | | |
| | |
| | |
December 31, 2022 | | |
December 31, 2021 | |
| | |
Accounts
Receivable
Balance | | |
% age of
Total Accounts
Receivable | | |
Accounts
Receivable
Balance | | |
% age of
Total Accounts
Receivable | |
| Domestic customer A | |
$ | 95,724 | | |
| 67.7 | % | |
$ | 35,421 | | |
| 21.3 | % |
| Domestic customer B | |
$ | 16,037 | | |
| 11.3 | % | |
$ | 30,587 | | |
| 18.4 | % |
As of December 31, 2022 and 2021, the Company
had a sales order backlog of $49,173 and $81,293, respectively.
| |
10. |
Cares Act Loan and Retention Credit |
On 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 Paycheck Protection Program (the
“PPP”) under Division A, Title I, Section 1102 and 1106 of the CARES Act. In June 2021, $150,118 of
this loan was forgiven and recognized as a gain on forgiveness of CARES Act loan in 2021. A balance of $21,594 remained after the forgiveness
which has been fully paid as of December 31, 2022. In February 2021, the Company received a second loan of $130,255 pursuant
to the PPP. The second loan was forgiven and the Company recognized a gain on forgiveness of CARES Act loan of $130,255 during
2021.
As at December 31, 2022, the Company has
an employee retention tax credit due for $63,000. The amount to be received is a refund of qualified payroll taxes the Company paid in
connection with employee payroll during the COVID 19 pandemic. The Company expects to receive the credit in 2023.
ELECTRONIC SYSTEMS TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS
Supplemental Information
ELECTRONIC SYSTEMS TECHNOLOGY, INC.
DBA ESTEEM WIRELESS MODEMS
SUPPLEMENTAL SCHEDULE OF OPERATING EXPENSES
FOR THE YEARS ENDED DECEMBER 31, 2022 AND 2021 |
| | |
| | | |
| | |
| | |
2022 | | |
2021 | |
| | |
| | |
| |
| Advertising | |
$ | 8,895 | | |
$ | 7,979 | |
| Dues and subscriptions | |
| 3,547 | | |
| 2,011 | |
| Depreciation | |
| 444 | | |
| 5,169 | |
| Insurance | |
| 13,485 | | |
| 13,242 | |
| Materials and supplies | |
| 10,370 | | |
| 12,668 | |
| Office and administration | |
| 4,890 | | |
| 4,097 | |
| Printing | |
| 2,658 | | |
| 3,318 | |
| Professional services | |
| 91,096 | | |
| 138,357 | |
| Services purchased in lieu of payroll | |
| 45,875 | | |
| 81,250 | |
| Rent and utilities | |
| 50,308 | | |
| 49,662 | |
| Repair and maintenance | |
| 4,259 | | |
| 8,096 | |
| Salaries and benefits | |
| 696,665 | | |
| 614,337 | |
| Taxes, licenses & health insurance | |
| 194,839 | | |
| 183,546 | |
| Telephone | |
| 5,372 | | |
| 5,968 | |
| Warranty expense | |
| 2,897 | | |
| 2,867 | |
| Trade shows | |
| 12,199 | | |
| 7,631 | |
| Travel expenses | |
| 15,984 | | |
| 18,955 | |
| | |
| | | |
| | |
| | |
| 1,163,783 | | |
| 1,159,153 | |
| | |
| | | |
| | |
| Expenses allocated to cost of sales | |
| (213,445 | ) | |
| (201,499 | ) |
| | |
| | | |
| | |
| Total Operating Expenses | |
$ | 950,338 | | |
$ | 957,654 | |
