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.
As
a result of COVID-19, and governmental responses thereto, the Company has experienced some negative impacts to its business, primarily
as a result of reductions in staffing by customers, and their customers, which is lengthened normal sales cycles. Many of customers also
restricted visits from vendors. All of planned trade shows and sales presentations were canceled or postponed as a result of the risks
associated with face to face meetings. Management utilized various platforms to provide current customers and potential customers with
presentations about products and services. The Company also experienced and continue to experience delays in its supply chain. While
many of the past negative impacts have lessened over time, if new outbreaks, or strains, of Covid-19 occur and/or if governments revert
to more restrictive measures with respect to travel and business operations which require or result in our inability to effectively market
and/or interact with customers (whether potential or actual), the Company could again experience negative impacts.
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
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, 2021 and 2020, 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 (loss), stockholders’ equity, or cash flows as previously reported.
Property
and Equipment
Property
and equipment is 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.
Certificates
of Deposit
Certificates
of deposit with original maturities ranging from one month to twelve months were 400,000 and $499,999 at December 31, 2021 and 2020,
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.
ELECTRONIC
SYSTEMS TECHNOLOGY, INC.
NOTES
TO FINANCIAL STATEMENTS
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 2021 and 2020 were $212,397 and $200,024, 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, 2021 and 2020 were $7,979 and $6,351, 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 240,000 and 180,000 stock options outstanding as of December 31, 2021 and 2020, respectively.
As of December 31, 2021 and 2020, 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.
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, 2021 and 2020, the Company has no assets or liabilities subject to fair value measurements
on a recurring basis.
ELECTRONIC
SYSTEMS TECHNOLOGY, INC.
NOTES
TO FINANCIAL STATEMENTS
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
| | |
2021 | | |
2020 | |
| Parts | |
$ | 92,751 | | |
$ | 99,303 | |
| Work
in progress | |
| 171,705 | | |
| 275,230 | |
| Finished
goods | |
| 237,377 | | |
| 257,174 | |
| Total | |
$ | 501,833 | | |
$ | 631,707 | |
Included
in the above amounts are reserves for obsolete inventories of $5,829 and $4,730 at December 31, 2021 and 2020, respectively.
Property
and equipment consist of the following:
Schedule of Property and Equipment
| | |
2021 | | |
2020 | |
| Laboratory
equipment | |
$ | 522,575 | | |
$ | 522,575 | |
| Software | |
| 35,028 | | |
| 35,028 | |
| Furniture
and fixtures | |
| 16,344 | | |
| 15,262 | |
| Dies
and molds | |
| 73,607 | | |
| 73,607 | |
| Property Plant and Equipment, Gross | |
| 647,554 | | |
| 646,472 | |
| Accumulated
depreciation and amortization | |
| (646,196 | ) | |
| (641,027 | ) |
| Total Property Plant and Equipment, Net | |
$ | 1,358 | | |
$ | 5,445 | |
For
the years ended December 31, 2021 and 2020, 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
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, 2021
and 2020.
ELECTRONIC
SYSTEMS TECHNOLOGY, INC.
NOTES
TO FINANCIAL STATEMENTS
At
December 31, 2021, 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 2035-2039. In addition, at December 31, 2021, the Company had approximately $1,400,000
of net operating loss carryforwards, $750,000 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 Effective Income Tax Rate Reconcillation
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 2018. 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 $16,660 and $15,659 to the
plan for the years ended December 31, 2021 and 2020, respectively.
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. There was no accrual or expense recorded for
2021 or 2020.
| 7. | Share-Based
Compensation |
The
Company grants stock options to individual employees and directors with three years continuous tenure. 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 employess. 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.
On
March 13, 2020, the Board of Directors canceled all 120,000 outstanding stock options that were granted on August 7, 2017 and were due
to expire on August 6, 2020. In addition, the Board of Directors granted 180,000 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 79.27%, expected term of 5 years with a forfeiture rate of 95%, and
a discount factor of 0.72%. Share based compensation of $2,283 was recognized in 2020.
In
the years ended December 31, 2021 and 2020, the Company recognized $970 and $2,283 respectively, in share-based compensation expense.
No non-vested share-based compensation arrangements existed as of December 31, 2021 and 2020.
ELECTRONIC
SYSTEMS TECHNOLOGY, INC.
NOTES
TO FINANCIAL STATEMENTS
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, 2019 | |
| 120,000 | | |
| 0.40 | | |
| 1.6 | |
| Granted | |
| 180,000 | | |
| 0.40 | | |
| | |
| Canceled | |
| (120,000 | ) | |
| 0.40 | | |
| | |
| 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 | |
| | |
| | | |
| | | |
| | |
| Outstanding
and Exercisable at December 31, 2021 | |
| 240,000 | | |
$ | 0.40 | | |
| 3.6 | |
The
aggregate intrinsic value of the options outstanding and exercisable at December 31, 2021 was nil.
On
September 23, 2020, the Company signed a new two-year lease for its facilities. The base lease is $3,162 and $3,267 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 $74,005 based on the two-year payment stream discounted using an estimated incremental
borrowing rate of 4.0%. At December 31, 2021, the remaining lease term is nine months.
Prior
to the new lease in September 23, 2020, the Company’s lease for its facilities was for $5,639 per month.
As
of December 31, 2021, total future lease payments are as follows:
Schedule of Future Minimum Lease Payment
| |
| | |
| For
the 12 months ended December 31, 2022 | |
$ | 28,922 | |
| Total | |
| 28,922 | |
| Less
imputed interest | |
| (484 | ) |
| Net
lease liability | |
| 28,438 | |
| Current
portion | |
| 28,438 | |
| Long-term
portion | |
$ | - | |
For
the years ended December 31, 2021 and 2020, costs relating to the operating lease were recognized in the statement of operations as follows:
Schedule of Cost Related to Operating Lease
| |
|
|
|
|
|
|
|
|
|
| | |
|
|
|
|
|
|
|
|
|
| |
| | |
2021 | | |
2020 | |
| | |
Cost
of
sales | | |
Operating
expenses | | |
Total | | |
Cost
of
sales | | |
Operating
expenses | | |
Total | |
| Base
rent pursuant to lease agreement | |
$ | 21,587 | | |
$ | 16,989 | | |
$ | 38,576 | | |
$ | 14,393 | | |
$ | 40,411 | | |
$ | 54,804 | |
| Variable
lease costs | |
| 2,749 | | |
| 2,164 | | |
| 4,913 | | |
| 1,836 | | |
| 5,156 | | |
| 6,992 | |
| Total
lease costs | |
$ | 24,336 | | |
$ | 19,153 | | |
$ | 43,489 | | |
$ | 16,229 | | |
$ | 45,567 | | |
$ | 61,796 | |
ELECTRONIC
SYSTEMS TECHNOLOGY, INC.
NOTES
TO FINANCIAL STATEMENTS
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 year ending December 31, | |
| | |
2021 | | |
2020 | |
| | |
Domestic Sales | | |
Foreign Sales | | |
Total Sales | | |
Domestic Sales | | |
Foreign Sales | | |
Total Sales | |
| Product Sales | |
$ | 1,287,587 | | |
$ | 170,741 | | |
$ | 1,458,328 | | |
$ | 883,144 | | |
$ | 297,878 | | |
$ | 1,181,022 | |
| Site Support Sales | |
| 53,700 | | |
| - | | |
| 53,700 | | |
| 44,350 | | |
| - | | |
| 44,350 | |
| Total
Sales | |
$ | 1,341,287 | | |
$ | 170,741 | | |
$ | 1,512,028 | | |
$ | 927,494 | | |
$ | 297,878 | | |
$ | 1,225,372 | |
For
the 12-month period ended December 31, 2021, 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 2020.
Schedule of Revenue by Customers
| | |
2021
Sales | | |
2021
% age of
Total Sales | |
2020
Sales | | |
2020
% age of
Total Sales |
| Foreign
customer A | |
$ | 41,599 | | |
2.8% | |
$ | 180,331 | | |
14.7% |
| Domestic
customer A | |
$ | 242,451 | | |
16.0% | |
$ | 158,483 | | |
12.9% |
| Domestic
customer B | |
$ | 160,385 | | |
10.6% | |
| | | |
|
As
of December 31, 2021 and 2020, the Company had a sales order backlog of $81,293 and $0, respectively.
On
January 13, 2016, the Company’s Board of Directors approved a resolution authorizing the repurchase of up to $100,000 of the Company’s
common stock at the price of $0.38 per share. The Company’s share repurchase program does not obligate it to acquire any specific
number of shares. On March 2, 2016, the Company’s Board of Director approved a resolution authorizing the repurchase of an additional
$150,000 of the Company’s common stock at the price of $0.38 per share. Under the program (the “Stock Repurchase Plan”),
shares may be repurchased in open market transactions. Shares repurchased are retired.
During
the years ended December 31, 2020, the Company did not repurchase shares of its common stock. As of December 31, 2021, the Company has
repurchased a total of 212,165 shares for a total cost of $80,629 and a balance of $169,371 remains of the original $250,000 approved
by the board. On April 23, 2020, repurchases were suspended indefinitely.
| 11. | Cares
Act Loan Payable |
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. The loan, which was in the form of a promissory note, originally had a maturity date
of April 13, 2022 and an interest rate of 1% per annum. $150,118 of this loan was forgiven in June 2021 which was recognized as a gain
on forgiveness of CARES Act loan in 2021. A balance of $21,594 remained after the forgiveness. As of December 31, 2021, the balance remaining
was $7,956 and is included in other accrued liabilities. This balance will be paid in 2022.
ELECTRONIC
SYSTEMS TECHNOLOGY, INC.
NOTES
TO FINANCIAL STATEMENTS
In
February 2021, the Company received a second loan of $130,255 pursuant to the PPP. The loan, which was in the form of a promissory note,
originally had a maturity date of February 21, 2023 and an interest rate of 1% per annum. The Note could be prepaid by the Company at
any time prior to maturity with no prepayment penalties. The second loan was forgiven and the Company recognized gain on forgiveness
of CARES Act loan of $130,255 during 2021.
Under
the terms of the PPP, certain amounts of the loans may be forgiven if they are used for qualifying 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.
As of December 31, 2021, the Company has used funds from the loans to pay qualifying expenses.
During
the year ended December 31, 2020, the Company received $9,000 under Division A, Title I, Section 1110 of the CARES Act. The Company was
not required to pay this amount back and recognized $9,000 as government grant income during 2020.
ELECTRONIC
SYSTEMS TECHNOLOGY, INC.
DBA
ESTEEM WIRELESS MODEMS
SUPPLEMENTAL
SCHEDULE
ELECTRONIC
SYSTEMS TECHNOLOGY, INC.
DBA ESTEEM WIRELESS MODEMS
SUPPLEMENTAL SCHEDULE OF OPERATING EXPENSES
FOR THE YEARS
ENDED DECEMBER 31, 2021 AND 2020 |
| | |
2021 | | |
2020 | |
| | |
| | |
| |
| Advertising | |
$ | 7,979 | | |
$ | 6,351 | |
| Dues
and subscriptions | |
| 2,011 | | |
| 4,280 | |
| Depreciation | |
| 5,169 | | |
| 6,953 | |
| Insurance | |
| 13,242 | | |
| 12,386 | |
| Materials
and supplies | |
| 12,668 | | |
| 17,630 | |
| Office
and administration | |
| 4,097 | | |
| 5,473 | |
| Printing | |
| 3,318 | | |
| 1,753 | |
| Professional
services | |
| 138,357 | | |
| 110,191 | |
| Services
Purchased in lieu of payroll | |
| 81,250 | | |
| - | |
| Rent
and utilities | |
| 49,662 | | |
| 68,760 | |
| Repair
and maintenance | |
| 8,096 | | |
| 1,643 | |
| Salaries
and benefits | |
| 614,337 | | |
| 611,880 | |
| Taxes,
licenses & health insurance | |
| 183,546 | | |
| 165,232 | |
| Telephone | |
| 5,968 | | |
| 7,090 | |
| Warranty
expense | |
| 2,867 | | |
| 929 | |
| Gain
on disposal of assets | |
| - | | |
| (785 | ) |
| Trade
shows | |
| 7,631 | | |
| 7,300 | |
| Travel
expenses | |
| 18,955 | | |
| 3,764 | |
| | |
| | | |
| | |
| | |
| 1,159,153 | | |
| 1,030,830 | |
| | |
| | | |
| | |
| Expenses
allocated to cost of sales | |
| (201,499 | ) | |
| (191,657 | ) |
| | |
| | | |
| | |
| Total
Operating Expenses | |
$ | 957,654 | | |
$ | 839,173 | |
