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PART I

FORWARD LOOKING STATEMENTS:

When used in thisThis Annual Report on Form 10-K and documents incorporated by reference, the terms “anticipates”,exhibits attached hereto contain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, as amended.  Such forward-looking statements concern the Company’s anticipated results and developments in the Company’s operations in future periods, planned exploration and development of its properties, plans related to its business and other matters that may occur in the future.  These statements relate to analyses and other information that are based on forecasts of future results, estimates of amounts not yet determinable and assumptions of management.  

Any statement that express or involve discussions with respect to predictions, expectations, beliefs, plans, projections, objectives, assumptions or future events or performance (often, but not always using words or phrases such as “believes”, “expects” or “does not expect”, “is expected”, “anticipates” or “does not anticipate”, “plans”, “estimates”, or “intends”, or stating that certain actions, events or results “may” or “could”, “would”, “might” or “will” be taken, occur or be achieved) are not statements of historical fact and similar expressions are intended to identify in certain circumstances,may be forward-looking statements.  SuchForward-looking statements are subject to a variety of known and unknown risks, uncertainties and risks thatother factors which could cause actual events or results to differ materially from those projected, includingexpressed or implied by the risks described in this Annual Report.  Given these uncertainties,forward-looking statements.

The Company cautions readers are cautioned not to place undue reliance on any such statements.forward-looking statements, which speak only as of the date made.  The Company also undertakes nodisclaims any obligation subsequently to update thoserevise any forward-looking statements.statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events, except as required by law.  The Company advises readers to carefully review the reports and documents filed from time to time with the Securities and Exchange Commission (the “SEC”), particularly the Company’s Quarterly Reports on Form 10-Q and Current Reports on Form 8-K.

Management’s Discussion and Analysis is intended to be read in conjunction with the Company’s financial statements and the integral notes (“Notes”) thereto for the fiscal year ending December 31, 2019.  The following statements may be forward-looking in nature and actual results may differ materially.  All dollar amounts in this Annual Report are expressed in U.S. dollars, unless otherwise indicated.

Item 1. Business.

For over 30 years, Electronic Systems Technology, Inc. (“EST”, “us”, “we”, “our” or the “Company”) has specializedin the development and manufacturing of digital data (non-voice) radio transceivers for use in industrial wireless networking applications.  With reliance on wireless communication in the modern world, the global modernization of industrial control systems now requires the benefits gained by use of wireless technology.  EST designs, manufactures, develops and produces these specialized, hardened products uniquely designed to operate and survive in these difficult conditions.environments in which these systems must perform.  

The Company designs, develops, manufactures and markets theCompany’s ESTeem® line of industrial wireless products and accessories.  The Company’s products provide innovative communication solutions for harsh environment applications not served or that are underutilized by conventional, commercial grade communication systems.  The Company’sOur products are part of the ESTeem® Industrial Wireless Solutions for commercial, industrial, and government arenas both domestically and internationally.  The Company’s products are marketedWe market through direct sales, sales representatives, resellers and resellers.system integrators

The CompanyEST was incorporated in the State of Washington in February 1984 and was granted a United States Patent for the “Wireless Computer Modem” in May 1987, and Canadian patent in October 1988.  The Company established a "doing business as" or "DBA" structure, basedWe registered and commenced building brand recognition on the Company's registered trade name of ESTeem®“ESTeem® Wireless ModemsModems” in 2007.  The Company continuesAfter reviewing for marketability and profitability, our strategy is to provide product improvements and enhancements tothat incorporate continuing technological developments in response to customer needs and market opportunities.  New opportunities may arisearising from changes in FCC regulations or technological developments, both of these are reviewed by management to identify both marketability and profitability.developments.

Development efforts during 2018in 2019 were focused primarily on software enhancements and hardware maintenance for the new ESTeem® Horizon Series.  These next generation industrial wireless products will improve our networking capability with higher data rates, improved security, improved support features and updates to the latest wireless standards.    

In an effort to maintain and expand our customer base in the industrial control marketplace, we team with major automation hardware vendors such as Rockwell Automation.2018 marks the 27^thanniversary of our  Our 28-year relationship with Rockwell Automation through theirAutomation’s Encompass Program.Program delivers significant benefits via increased exposure to markets that would not otherwise be available to us. Rockwell Automation has the largest market share in the United States and is a major entity in the world-wide automation and controls market place. The benefit of the Encompass program and similar partnering efforts is increased exposure to markets that would not otherwise be cost effective to have a direct marketing channel presence in.marketplace.

PRODUCTS AND MARKETS

The Company’s ESTeem® industrial wireless products provide communication links between computer networks, network enabled devices and mobile devices without cables.  The widespread use of networked computer systems in business, industry and public service and the adoption of mobile devices in all aspects of modern life has created an environment where the wireless network is no longer a convenience but a necessity.  As wireless networking proliferates through the modernization of the industrial sector the need for our products, such as the ESTeem® industrial wireless (specificallywhich are specifically designed for rigors of operation in the industrial environment) will be increasedharsh environments, is increasing dramatically.  These wirelessWireless networks will beare the backbone connections to the Internet for cloud basedcloud-based services such as the upcoming Internet of Things (“IoT”) and Industrial Internet of Things (“IIoT”).

All of the ESTeem® models come with industry standard Ethernet (Internet) communicationscommunication ports and legacy serial ports to provide the broadest range of connections for both new and legacy hardware.  The combined features such as AES 128 or AES 256 security encryption, self-healing repeaters, Meshmesh networking, long range operation and outdoor weatherproof cases make the ESTeem® products unique in our market space.

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PRODUCT APPLICATIONS

Some of the majorMajor applications and industries in which ESTeem® products are being utilized are as follows:

PRODUCT LINES

The Company manufacturesWe manufacture ten (10) models of the ESTeem® industrial wireless modems that operate in frequency from 150 MHz to 5.8 GHz and three (3) models for Molex under an agreement dated June 13^th, 2017.GHz. A wireless modem is a hardware device for sending and receiving data over a radio carrier and is the foundation of our industrial wireless solutions.solution.  Each model will fit best in a specific application based upon several factors such as distance, required data rate and Federal Communication Commission (“FCC”) licensing requirements.  Each wireless network is discussed in detail with the end customer to determine the best overall solution for their application.  No single model or frequency band can solve all applications and having a diverse product selection is critical for expanding theour customer base.  The following is a summary of the products available from the Company:our product offering.

ADDITIONAL PRODUCTS AND SERVICES

The Company offers variousVarious accessories to support the ESTeem®above products, such ase.g., antennas, power supplies and cable assemblies.  These accessoriesassemblies, are purchased from other manufacturers and resold by ESTus to support the application of ESTeem®our industrial wireless modems.  The Company provides direct services to customers, such as repairmodems for repairs and upgrade of ESTeem® products.upgrades.  To assist in the application of ESTeem industrial wireless modems, the Companywe also offersoffer professional services, including site survey testing, system start-up, and custom engineering services.engineering.

RESEARCH AND DEVELOPMENT AND NEW PRODUCTS

The Company’sOur products compete in an environment of rapidly changing technology.  This environmenttechnology which results in the necessity of the Company to be continually updatingfor continuous updates and enhancing existing products, as well as developing new products in order to remain competitive.enhancements. Research and Development expenditures for new product development and improvements of existing products by the Company for 2019 and 2018 were $210,679 and 2017 were $179,413 and $252,411.respectively.  None of the Company’sour research and development expenses were paid directly by any of the Company’sour customers.  During 2018, the Company contracted and will continue toWe contract with companies to providethird parties for software development and hardware design engineering expertise when required.  

as needed.  Development efforts during 20182019 were focused primarily on software enhancements for the ESTeem® Horizon Series 195 Narrow Band and 210 Series. These enhancements were developed based on customer needs. The Company plans continued researchthe Edge900. Research and development expenditures for development and improvement projects, as they are deemed necessary.    will continue, in order to meet our customers’ evolving needs

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MARKETING, CUSTOMERS AND SUPPORT

The majority of the Company’sour products sold during 20182019 were through the reselling efforts of non-exclusive, non-stocking distributors and resellers, of the Company’s products, withand the remainder of the Company’sour sales distributed directly from the Company’s facility throughwere direct sales to end-users of the ESTeem® products.  Customersend-users. Orders are generally place orders on an "as needed basis".  Shipping of products is generallyusually completed 1 to 15 working days after receipt of a customer order, with the exception of ongoing scheduled projects and custom designed equipment for specific customer applications.  As of December 31, 2018, the Company had aOur sales order backlog of $3,780.at year end was $34,801.

During 2018, the Company continued advertisingWe advertise in trade publications and attend trade shows specifically targeting industrial automation systems. There are approximately twenty major automation hardware manufacturers worldwide.  The Company has maintained active attendance at tradeshows targeted toward the customersWe provide support personnel and markets in which it sells products. During 2018, the Company employed sales managers and product support personal to concentrate marketing efforts in the United States automation markets.  During 2019, the Company intends to continue targeting domestic and foreign industrial automation markets.  The Company maintainsmaintain an internet web site to provide access to product and technical information for both present and potential customers of the Company’s products.  Due to existing reseller relationships, the Company has not implemented an electronic commerce internet website.  The Company providescustomers.  We provide technical support and service for ESTeem®our products and installations through phone support, field technicians and internet sources.  The Company believes highHigh quality customer support is necessary and vital to differentiate ourselves in the industrial wireless modem market.  Toour marketplace. We intend to maintain athis high level of customer support the Company hasby investing in the past, and will continue in the future, to make investments and expenditures in support of itsour customer service programs.

During the year ended December 31, 2018, one customer’s sales accounted 10% or more of total sales revenues.  See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Financial Statements”.

COMPETITION

The Company’s competition varies according to the market in which the Company's products are competing.  All of our markets are highly competitive as there are approximately twenty major automation hardware manufacturers worldwide.   Listed below are major competitors in the markets in which the Company’s products are sold are highly competitive.  Listed below are the markets in which the Company’s products compete and major competitors in those markets:we compete.

Management believes the ESTeem®We believe our products compete favorably in the market because of product choices,based on performance, price, and adaptability of the products to a wide range of applications.  The Company's major limitation in competing with other manufacturers is its limited marketing budget, which currently limits the Company’s nationwide advertisingapplications, as well as world class service and sales force presence.support.

PATENTS, TRADEMARKS, AND PROPRIETARY INFORMATION

EST was granted a United States patent in 1987 for a "Wireless Computer Modem".  In 1988, EST was granted a Canadian patent for a "Wireless Computer Modem".  Both patents had lives of 17 years and have expired.  The Company’s rights to the ESTeem® Wireless Modem trademark, in uninterrupted use by the Company since 1985, were renewed in 2014.  To protect the Company against unauthorized disclosure of proprietary information belonging to the Company, all employees, dealers, distributors, original equipment manufacturers, sales representatives and other persons having access to confidential information regarding Company products or technology are bound by non-disclosurenondisclosure agreements. Rights to the ESTeem® Wireless Modems, trademark were renewed in 2014.  The initial patents granted in 1987 and 1988 have expired and we currently have no patents on any of our products.

GOVERNMENT REGULATION

For operation in the United States, the ESTeem® industrial wireless products require FCC type acceptance. The FCC type acceptance which is granted for devices which demonstratedemonstrating operation within mandated and tested performance criteria.  All of the Company’sour products requiring FCC type acceptance have been granted such acceptance.  All ofacceptance, and all except the Company’s current ESTeem® production modelsHorizon4.9 have also been granted typesuch acceptance in Canada.  

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The ESTeem® industrial wireless products that operate in the FCC licensed frequency band require licensing under Part 90 of the FCC Rules and Regulations which must be applied for by the end user of the Company’s products.  The Company cannot guarantee customers will receive FCC licenses in the frequency spectrum for any particular application.  The Company providesuser. We provide information to customers to assist in the application for FCC consumer licenses.licenses, although we cannot guarantee FCC licenses in a given frequency spectrum for a particular application will be received.  

At the time of this filing the Company is unaware of any existing or proposed FCC regulation that would have a materially adverse effect on the Company’s operations, butWhile there can be no assurance that future FCC regulations will not have materiallymaterial adverse effects on theour operations, we are unaware of the Company.any such existing or proposed FCC regulations at this time.

SOURCE OF SUPPLY AND MANUFACTURING

The Company purchases certain components necessary for the production of the ESTeem® products from sole suppliers.  Components   including those manufactured by Hitachi, Motorola Corporation, Mitsubishi, Murata Corporation, Rakon, Toko America Inc. and Triquint, asare purchased through a number of distributors supplyand key components for the Company’s products.  The components provided bycomponent suppliers, such as Hitachi, Motorola, and others, some of which have long lead times.  Although these and other companiescomponents could be replaced or substituted by other products, if it became necessary, to do so.  If this action occurred,a significant interruption or delay in their availability could have a material interruption of production and material cost expenditures could take place during the process of locating and qualifying replacement components.adverse effect on our business.

Approximately 24%46% of the Company’s inventory at December 31, 20182019 consisted of parts having lead times ranging from 12 to 30 weeks.  Some parts are maintained at high levels to assure availability to meet production requirements, and accordingly, accountthus, accounting for a significant portion of the Company’s inventory value.  Based on past experience with component availability, distributor relationships, and inventory levels, the Company doeswe do not foresee shortages of materials used in production.materials.  However, developments in the electronic component marketplace, involving components used by the Company which are also used in cellular phones, personal technology devices and other technology devices, have the potential of creating negative availability and delivery issues for components used by the Company. The Company hasus. Although we have been able to procure parts on a timely basis as of the date of this report, however procurement cannot be guaranteed in the future.  If shortages were to occur, material interruption of production and product delivery to customers could occur.would result.   

The Company contracts with multiple companies for manufacturing of sub-assemblies and some engineering assistance services for the Company’s products.as needed.  By contracting with these companies, the Company is able to avoid staff fluctuations associated with operating its own manufacturing operation and reduced capital investments in specialized manufacturing equipment.    Management reviewsWe review the costs for the services provided by these companies and regularly submits Requests for Quotes (RFQ) to multiple suppliers of these operations.  See “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, and “Financial Statements”.

ACCESS TO COMPANY INFORMATION

The Registrant does not issue annual or quarterly reports to security holders other than the annual Form 10-K and quarterly Forms 10-Q as electronically filed with the Securities and Exchange Commission (“SEC”). and available for viewing at www.sec.gov.  Electronically filed reports may be accessed at www.sec.gov or via the Company’s website at www.esteem.com.  We make available on our website such reports as soon as reasonably practicable after such reportsthey are electronically filed with or furnished to the SEC.  

EMPLOYEES

As of December 31, 2018, the Company employed a staff of2019, we employ 9 personspersons; on a full-time basis 2(2 in sales/marketing, 1 in technical support, 5 in engineering/manufacturing, and 1 in finance and administration. There were no significant changes to key personnel in 2018.  Michael Eller was appointed as the Company’s President and Chief Accounting Officer on February 1, 2016.administration).  The Company’s operations are dependent upon key members of its engineering and management personnel.  In the event services of these key individuals werepersonnel, which, if lost to the Company, could have a material adverse effectseffect on the Company’s operations may be realized.our business.  

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Item 1A. Risk Factors.

Our common stock value and our business, results of operations, cash flows and financial condition are subject to various risks, including, but not limited to those set forth below. If any of the following risks actually occurs, our common stock, business, results of operations, cash flows and financial condition could be materially adversely affected. These risk factors should be carefully considered together with the other information in this Annual Report on Form 10-K, including the risks and uncertainties described under the heading “Forward-Looking Statements.” This list is not exhaustive of the factors that may affect the Company’s forward-looking statements.  Some of the important risks and uncertainties that could affect forward-looking statements are described further under the sections titled “Risk Factors and Uncertainties”, “Description of Business” and “Management’s Discussion and Analysis” of this Annual Report.  If any of the events described in the risk factors below actually occur, our business, financial condition or results of operations could suffer significantly. In such case, the value of your investment could decline and you may lose all or part of the money you paid to buy our common stock. Forward-looking statements are subject to a variety of known and unknown risks, uncertainties and other factors which could cause actual events or results to differ from those expressed or implied by the forward-looking statements, including, without limitation:

We cannot predict whether we will be able to sustain revenue growth, profitability or positive cash flow.  Our products are sold in highly competitive markets. Our revenues and operating results canmay be negatively affected by technology changes in our markets, economic conditions in our markets, and the level of competition in our markets.

Our marketing efforts may be unsuccessful due to limited marketing and sales capabilities.Our limited national advertising and sales coverage may result in theour markets in which our products compete not being fully penetrated.  The lack of market penetration may result in an adverse effect on our sale revenues.  We must continue to develop and maintain appropriate marketing, sales, technical, customer service and distribution capabilities, or enter into agreements with third parties to provide these services, to successfully market our products. A failure to develop these capabilities or obtain third-party agreements could adversely affect us.

We may be unable to produce products for sale if we are unable to obtain component materials.  Our products require highly specialized components, which are subject to rapid obsolescence, limited availability and design change.  Many of the components ofin our products are also used in cellular phone, pagers and other technology devices.  If we cannot obtain material to produce products, for sale our sales revenues will be negatively impacted.

Our success depends on our ability to retain key management personnel.  The success of our Company depends in large part on our ability to attract and retain highly qualified management, administrative, manufacturing, sales, and research and development personnel. Due to the specialized nature of our business, it may be difficult to locate and hire qualified personnel.  Our success is significantly dependent on the performance and continued service of key members of Management, such as Chief Executive Officer, Michael Eller, and certain other key employees.  If the services of any members of Management become unavailable for any reason, our business and prospects could be adversely affected. Although we have been successful in retaining highly capable and qualified management in the past, there can be no assurance that we will be able to do so in the future.

We may be adversely affected by government regulation.  The Federal Communication Commission (FCC) governs use of the products we sell.  If the FCC were to implement rules detrimental to our products and the markets in which they are offered, our operations would be negatively impacted.

Rapid technological changes in our industry may adversely affect us if we do not keep pace with advancing technology. The wireless communication market is characterized by rapidly advancing technology. Our success depends on our ability to keep pace with advancing technology, processes and standards, such as cellular telephone based technology. We intend to continue to develop and enhance our products to meet perceived market opportunities. However, our development efforts may be rendered obsolete by research efforts and technological advances made by others, and devices other than those we currently produce may prove more advantageous.

We have material weaknesses in our internal controls which may result in us not being able to prevent or detect a material misstatement of our financial statements, which could harm our business and result in regulatory scrutiny.  Pursuant to the requirements of Section 404 of the Sarbanes-Oxley Act of 2002 (“Section 404”), Management conducted an assessment of the effectiveness of our internal controls over financial reporting for the year ending December 31, 2018.2019. We determined that there continues to be material weakness affecting our internal control over financial reporting and, as a result of that weakness, our disclosure controls and procedures were not effective as of December 31, 2018.2019.  We have not maintained effective controls to ensure appropriate segregation of duties due to our limited number of employees in finance and administration.  The same employee is responsible for the initiating and recording of transactions, thereby creating segregation of duties weaknesses. Due to this weakness and absence of sufficient mitigating controls, we determined that this control deficiency resulted in a more than

remote likelihood that material misstatement or lack of disclosure within the annual or interim financial statements will not be prevented or detected.  Avenues for mitigating our internal control weaknesses have been evaluated but mitigating controls have

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been deemed to be impractical and prohibitively costly due to the size of our organization at the current time.  The material weakness in our internal controls may subject us to regulatory scrutiny with undetermined consequences.

The market for our common stock is limited and our shareholders may have difficulty reselling their shares when desired or at attractive market prices.  Our stock price and our listing may make it more difficult for our shareholders to resell shares when desired or at attractive prices.  Our Company stock trades on the “over-the-counter” market and is listed on OTCQB tier of the OTC Markets bulletin board. Our common stock has continued to trade in low volumes and at low prices. Some investors view low-priced stocks as unduly speculative and therefore not appropriate candidates for investment. Many institutional investors have internal policies prohibiting the purchase or maintenance of positions in low-priced stocks.

Item 1B. Unresolved Staff Comments.

None.

Item 2. Properties.

EST doesWe do not own any real property, plants, mines, or any other materially important physical properties.  The Company's administrative offices, inventory and laboratories are located in leased facilities at 415 N. Quay Street, Bldg. B1, Kennewick, Washington.  The Company leases approximately 8,600 square feet of office and laboratory space by a lease agreement with the Port of Kennewick in Kennewick, Washington.  As of December 31, 2018,2019, the total monthly lease cost, including tax, is $5,542.$5,640.  The lease covers a period of three years, expiring September 2020.

The CompanyWe also ownsown miscellaneous assets, such as computer equipment, laboratory equipment, and furnishings. The Company does not have any real estate holdings or investments in real estate.  The Company maintainsWe maintain insurance in such amounts and covering such losses, contingencies and occurrences that the Company deemsdeemed adequate to protect itsour property.  Insurance coverage includes a comprehensive liability policy covering legal liability for bodily injury or death of persons, and for property owned by, or under theour control, of the Company, as well as damage to the property of others.  The CompanyWe also maintainsmaintain fidelity insurance which provides coverage to the Company in the event of employee dishonesty.

Item 3. Legal Proceedings.

NoEST is not a party to any material legal proceedings and, to management’s knowledge, no such proceedings are identified which involve a claim for damages against the Company.threatened or contemplated.

Item 4. Mine Safety Disclosure.

Not Applicable

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PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

There is no established market for trading the common stock of the Company.  The common stock is not regularly quoted in the automated quotation system of a registered securities system or association.  The common stock of the Company is traded on the “over-the-counter” market and is listed on OTCQB tier of the OTC Markets bulletin board under the symbol of "ELST".  The following table sets forth the high and low sale prices of the Company’s common stock for the quarterly period indicated for the last two (2) fiscal years.  

The above data was compiled from information obtained from the OTC Bulletin Board quotation service.

(1)The above quotations reflect inter-dealer prices, without retail mark-up, markdown or commission and may not necessarily represent actual transactions. The closing price for our common stock on the OTCQB was $0.38$0.49 on February 1, 2019.14, 2020.

The number of holders of record of common stock of the Registrant as of February 4, 201914, 2020 was 342 persons/entities with an unknown number of additional shareholders who hold shares through brokerage firms.

Our independent stock transfer agent is Corporate Stock Transfer, Inc. at 320 Cherry Creek Drive South, Suite 435, Denver CO 80209.

The Company does not maintain any form of Equity Compensation Plan.

Stock Repurchases

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, complying with Rule 10b5-1 and Rule 10b-18 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Shares repurchased are retired.

The following table shows the Company’s activity and related information for the year ended December 31, 20182019 under the Stock Repurchase Plan.

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ISSUER PURCHASES OF EQUITY SECURITIES

Item 6. Selected Financial Data.

We are a “smaller reporting company” as defined by Regulation S-K and as such, are not providing the information contained inrequired to provide this item pursuant to Regulation S-K.information.

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Management’s discussion and analysis is provided as supplement to, and is intended to be read in conjunction with, the Company’s audited financial statements and the accompanying integral notes (“Notes”) thereto.  The following statements may be forward-looking in nature and actual results may differ materially.

RESULTS OF OPERATIONS

GENERAL:  The Company specializesGENERAL:  We specialize in the manufacturing and development of data radio products.  The Company offers product lines which provide innovative communication solutions for applications not served by existing conventional communication systems.  The Company offersWe offer product lines in markets for process automation in commercial, industrial and government arenas domestically as well as internationally.  The Company markets itsWe market our products through direct sales, sales representatives, and domestic, as well as foreign, resellers. Operations of the Company are sustained solely from revenues received through sales of its products and services.   

FISCAL YEAR 20182019 vs. FISCAL YEAR 20172018

GROSS REVENUES:REVENUES: Total revenues for the fiscal year 20182019 were $1,395,030$1,408,548 reflecting a decreasean increase of 2.1%1.0% from $1,425,128$1,395,030 in gross revenues for fiscal year 2017.2018.  During the year ended December 31, 2018,2019, one customer’s sales accounted for more than 10% of the total sales revenues.  The decreaseincrease in total revenues is the result of decreasedincreased Engineering Services during 2018.2019.  Domestic Sales for the fiscal year were $1,298,447$1,179,146 compared to $1,198,674$1,298,447 in 2017.2018. Sales to Foreign Customers for the fiscal year were $96,583$229,402 compared to $226,454$96,583 in 2017.2018. Product sales increaseddecreased to $1,374,810$1,367,171 in 2018,2019, as compared to 20172018 sales of $1,358,203,$1,374,810, reflecting an increasea decrease of 1.2%0.6%.  Management believes the increase in sales revenues is the result of increased product sales for the Company’s Domestic sales segments, specifically industrial automation.  

Interest revenues during 20182019 increased to $18,097$22,198 from 20172018 level of $11,411$18,097 due to the increased interest rates for the certificates of deposit held by the Company.

As of December 31, 2018,2019, the Company had sales backlog of $3,780.$34,801.  The Company’s customers generally place orders on an "as needed basis".  Shipment of the Company’s products is generally completed within 1 to 15 working days after receipt of customer orders, with the exception of ongoing, scheduled projects, and custom designed equipment for specific customer applications.

COST OF SALES:  Cost of Sales, as a percentage of net sales, was 48%47% and 45%48% respectively, for 20182019 and 2017.2018.  Cost of Sales variances are the result of differences in the product mix sold and occurrences of obsolete inventory expense, as well as differences in the price discounting structure for the mix of products sold during the period.

INVENTORY:INVENTORY:  The Company's year-end inventory values for 20182019 and 20172018 were as follows:

The Company's objective is to maintain inventory levels as low as possible to provide maximum cash liquidity, while at the same time meet production and delivery requirements.

OPERATING EXPENSES:EXPENSES: Operating expenses decreasedincreased to $853,628$957,438 in 2018,2019, from 20172018 levels of $996,888.$853,628.  Material changes in expenses are comprised of the following components: Wages/Payroll Taxes/Benefits $129,019, Travel,$39,039, Professional and Purchased Services decreased by $8,225$17,476. Bad Debts and $11,453Supplies increased $75,035 and $9,977, respectively. Depreciation expense decreased during 20182019 to $11,076$7,970 from 20172018 levels of $19,939$11,076 due to the Company’s decreased capital purchases.  

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FISCAL YEAR 2017 vs. FISCAL YEAR 2016

GROSS REVENUES: Revenues, for the fiscal year 2017 were $1,425,128 reflecting a decrease of 4% from $1,489,889 in revenues for fiscal year 2016.  During the year ended December 31, 2017, no one customer’s sales accounted for more than 10% of the total sales revenues.  The decrease in total revenues is the result of decreased Engineering Services during 2017.  Domestic Sales for the fiscal year were $1,198,674 compared to $1,219,493 in 2016. Sales to Foreign Customers for the fiscal year were $226,454 compared to $270,396 in 2016. Product sales decreased to $1,358,203 in 2017, as compared to 2016 sales of $1,379,530, reflecting a decrease of 1.5%.  Management believes the decrease in sales revenues is the result of decreased product sales for the Company’s foreign sales segments, specifically industrial automation.  

Interest revenues during 2017 decreased to $11,411 from 2016 level of $11,923 due to the use of cash in operations.

As of December 31, 2017, the Company had sales backlog of $6,677.  The Company’s customers generally place orders on an "as needed basis".  Shipment of the Company’s products is generally completed within 1 to 15 working days after receipt of customer orders, with the exception of ongoing, scheduled projects, and custom designed equipment for specific customer applications.

COST OF SALES:  Cost of Sales, as a percentage of net sales, was 45% and 45% respectively, for 2017 and 2016.  Cost of Sales variances are the result of differences in the product mix sold and occurrences of obsolete inventory expense, as well as differences in the price discounting structure for the mix of products sold during the period.

INVENTORY:  The Company's year-end inventory values for 2017 and 2016 were as follows:

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ELECTRONIC SYSTEMS TECHNOLOGY, INC.

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.

Accounting Estimates

The preparation of financial statements in conformity with generally accepted accounting principles 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 accounts for revenue in accordance with Accounting Standards Codification (ASC) Topic 606: Revenue from Contracts with Customers. Under Topic 606, 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,obligation. A contract's transaction price is recognized as revenue when, or as, the performance obligation is satisfied.  

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.

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NOTES TO FINANCIAL STATEMENTS

1.Organization and Summary of Significant Accounting Policies - (Continued) 

Revenue Recognition - (Continued)

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.  

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 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. Warranty expenses are immaterial based onrecorded due to the Company’s historical warranty experience.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 consist primarily of 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, 20182019, and 2017,2018, the Company’s estimate of doubtful accounts was zero.  The Company’s policy for writing off past due accounts receivable is based on the amount, time past due, and responseresponses 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.

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1.Organization and Summary of Significant Accounting Policies - (Continued) 

Reclassifications

Certain prior year amounts have been reclassified for consistency with the current period presentation. These reclassifications had no effect on the reported statement of operations.

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 $900,000$650,000 and $1,000,000$900,000 at December 31, 20182019 and 2017,2018, 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.  

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 expensedrecognized as operating expenses when incurred.  Research and development expenditures for new product development and improvements of existing products by the Company for 2019 and 2018 were $210,679 and 2017 were $179,413, and $252,411, respectively.  

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1.Organization and Summary of Significant Accounting Policies - (Continued) 

Advertising Costs

Costs incurred for producing and communicating advertising are expensedrecognized as operating expenses when incurred.  Advertising costs for the years ended December 31, 2019 and 2018 were $6,735 and 2017 were $9,403, and $9,832, 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 120,000 and 150,000120,000 stock options outstanding as of December 31, 20182019 and 2017,2018, respectively. As of December 31, 20182019 and 2017,2018, 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.  See Note 7 for additional information.  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

ForThe Company discloses the following information for each class of assets and liabilities that are measured at fair value:

1.the fair value measurements, the Company maximize s the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.  The Company follows a fair value hierarchy based on measurement;

2.the level of independent, objective evidence surrounding the inputs used to measure fair value.  A financial instrument's categorization within the fair value hierarchy is based upon the lowest level of input that is significant toin which the fair value measurement.  Inputs are prioritized into three levels that may be used to measuremeasurements in their entirety fall, segregating fair value:

Level 1:  Level 1 applies to assets or liabilities for which there arevalue measurements using quoted prices in active markets for identical assets or liabilities.liabilities (Level 1), significant other observable inputs (Level 2), and significant unobservable inputs (Level 3);

3.the amount of the total gains or losses for the period 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 and a description of where those unrealized gains or losses are reported in the statement of operations; and

4.in annual periods only, the valuation technique(s) used to measure fair value and a discussion of changes in valuation techniques, if any, during the period. 

Level 2:  Level 2 applies toAt December 31, 2019 and 2018, the Company has no assets or liabilities for which there are inputs other than quoted prices that are observable for the asset or liability such as quote prices for similar assets or liabilities in active markets; quoted prices for identical assets in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which significant inputs are observable or can be derived principally from, or corroborated by, observable market data.

Level 3:  Level 3 appliessubject to assets or liabilities for which there are unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of the assets or liabilities.measurements on a recurring basis.  

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1.Organization and Summary of Significant Accounting Policies - (Continued) 

At December 31, 2018 and 2017, the Company has no assets or liabilities subject to fair value measurements on a recurring basis.  

New Accounting Pronouncements

Accounting Standards Updates Adopted

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update ("ASU") No. 2014-09 Revenue Recognition, replacing guidance currently codified in Subtopic 605-10 Revenue Recognition-Overall.  The new ASU establishes a new five step principles-based framework in an effort to significantly enhance comparability of revenue recognition practices across entities, industries, jurisdictions, and capital markets.  In August 2015, the FASB issued ASU No. 2015-14 Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date.  ASU No. 2015-14 deferred the effective date of ASU No. 2014-09 until annual and interim reporting periods beginning after December 15, 2017.  

We adopted ASU No. 2014-09 as of January 1, 2018 using the modified-retrospective transition approach.  The adoption of the update did not impact our existing method of recognizing revenue and had no impact on 2018 or previously issued financial statements.  Additional disclosures required by the update have been included in Note 9.

In August 2016, the FASB issued ASU No. 2016-15 Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. The update provides guidance on classification for cash receipts and payments related to eight specific issues. The update is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years, with early adoption permitted. The adoption of this update on January 1, 2018 had minimal impact on the Company’s financial statements.

Accounting Standards Updates to Become Effective in Future Periods

In February 2016, the FASB issued ASU No. 2016-02 Leases (Topic 842).  The update modifiesmodified the classification criteria and requires lessees to recognize the assets and liabilities on the balance sheet for most leases.  The update iswas effective for fiscal years beginning after December 15, 2018, with early adoption permitted.  The Company is currently evaluatingadopted the potential impactguidance effective January 1, 2019 and recognized a liability and right-of-use asset of implementing this update on$91,637 as of that date for the financial statements.Company’s office lease.  The Company elected the transition option to apply the new guidance as of that effective date without adjusting comparative periods presented.  In the adoption of ASU No. 2016-02, the Company elected to not assess leases with terms less than twelve months in length.  See Note 8 for information about the lease.

Accounting Standards Updates to Become Effective in Future Periods

In August 2018, the FASB issued ASU No. 2018-13 Fair Value Measurement (Topic 820):  Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement.  The update removes, modifies and makes additions to the disclosure requirements on fair value measurements.  The update is effective for fiscal years beginning after December 15, 2019, with early adoption permitted.  The Company is currently evaluating the impact of this update on our fair value measurement disclosures.

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2.Inventories 

Inventories consist of the following:

Included in the above amounts are reserves for obsolete inventories of $7,798 and $6,457 at December 31, 2019 and 2018, respectively.

3.Property and Equipment 

Property and equipment consist of the following:

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NOTES TO FINANCIAL STATEMENTS

4.Income Taxes 

For the year ended December 31, 2019 and 2018, the Company did not have an income tax benefit nor provision because of continuing losses.   The Company recognized a deferred income tax provision for the year ended December 31, 2017 of $244,092 when it established a full valuation allowance against deferred tax assets.   

The components of net deferred tax assets at December 31, wereare as follows:

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

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realized. Therefore, a valuation allowance has been recorded for the full net deferred tax asset at December 31, 20182019 and 2017.

4.Income Taxes - (Continued)2018.

At December 31, 2018,2019, the Company had approximately $66,000 of research and development income tax credits available to reduce federal income taxes in future periods.  The credits expire from 2033-2036.2033-2037.  In addition, at December 31, 2018,2019, the Company had approximately $835,000$1,000,000 of net operating loss carryforwards, $750,000 of which will expire between 20332034 and 2036.2037.   The remaining balance of $85,000$250,000 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 (21% for 2018 and 35% for 2017)of 21% were as follows:

ELECTRONIC SYSTEMS TECHNOLOGY, INC.

On December 22, 2017, the United States enacted the Tax Cuts and Jobs Act (the “Act”) resulting in significant modifications to existing law. We have completed the accounting for the effects of the Act during the quarter ended December 31, 2017. Our financial statements for the year ended December 31, 2017 reflect certain effects of the Act which includes a reduction in the corporate tax rate from 35% to 21% as well as other changes. As a result of the changes to tax laws and tax rates under the Act, we incurred incremental income tax expense of $102,439 during the year ended December 31, 2017, which consisted primarily of the remeasurement of deferred tax assets and liabilities from 35% to 21% and application of a full valuation allowance.NOTES TO FINANCIAL STATEMENTS

4.Income Taxes - (Continued)

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 2015.2016.  The Company has evaluated all tax positions for open years and has concluded that they have no material unrecognized tax benefits or penalties.  

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5.Profit Sharing Salary Deferral 401-K Plan 

The Company sponsors a Profit SharingProfit-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 $15,742$15,854 and $15,149$15,742 to the plan for the years ended December 31, 20182019 and 20172018, respectively.  

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 Bonusesbonuses that may be awarded. If these thresholds are not achieved, there will be no bonus issued.  There was no accrual or expense recorded for 20182019 or 2017.2018.

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. There were no option grants during 20182019 and 2017.2018.

In the years ended December 31, 20182019 and 2017,2018, the Company recognized $0 and $0 respectively, in share-based compensation expense.  No non-vested share-based compensation arrangements existed as of December 31, 20182019 and 2017.2018.    

A summary of option activity follows:

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NOTES TO FINANCIAL STATEMENTS

7.Share-Based Compensation, continued