UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2017March 31, 2018

OR

¨

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

From ________________ to ________________

ELECTRONIC SYSTEMS TECHNOLOGY, INC.

(Exact name of registrant as specified in its charter)

(509) 735-9092

(Registrant's telephone number, including area code)

                                  N/A                               

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

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

YESxNO¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company or an emerging growth company.

See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act:

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

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

APPLICABLE ONLY TO CORPORATE ISSUERS:

As of September 30, 2017,April 17, 2018, the number of the Company's shares of common stock par value $0.001, outstanding was 4,986,048.

ELECTRONIC SYSTEMS TECHNOLOGY, INC.

FORM 10-Q

September 30, 2017

Index

PART I - FINANCIAL INFORMATION

3

Item 1.  Financial Statements.

3

Balance Sheets

3

Statements of Operations

4

Statements of Cash Flows

5

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

9

Item 3.  Quantitative and Qualitative Disclosures About Market Risk.

11

Item 4.  Evaluation of Disclosure Controls and Procedures.

12

PART II - OTHER INFORMATION

13

Item 1 Legal Proceedings

13

Item 2 Unregistered Sales of Equity Securities and Use of Proceeds

13

Item 3 Defaults Upon Senior Securities

13

Item 4 Mine Safety Disclosure

13

Item 5 Other Information

13

Item 6.  Exhibits

13

PART I - FINANCIAL INFORMATION

Item 1.  Financial Statements.

(See "NotesNotes to Financial Statements")Statements

(See "Notes to Financial Statements")

See Notes to Financial Statements

(

See "NotesNotes to Financial Statements")Statements

54

ELECTRONIC SYSTEMS TECHNOLOGY, INC.

NOTES TO FINANCIAL STATEMENTS

(Unaudited)

NOTE 1 - BASIS OF PRESENTATION

The financial statements of Electronic Systems Technology, Inc. (the "Company"), presented in this Form 10Q are unaudited and reflect, in the opinion of Management, a fair presentation of operations for the three and nine month periods ended September 30, 2017March 31, 2018 and September 30, 2016.March 31, 2017.  All adjustments of a normal recurring nature and necessary for a fair presentation of the results for the periods covered have been made. Certain information and footnote disclosure normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to the applicable rules and regulations of the Securities and Exchange Commission. In preparation of the financial statements, certain amounts and balances have been reformatted from previously filed reports including classification of components of cash and cash equivalents to conform to the format of this quarterly presentation.  These financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Company's Form 10K for the year ended December 31, 20162017, as filed with Securities and Exchange Commission.

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 with various SEC Staff Accounting Bulletins providing interpretive guidance. 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 defers the effective date of ASU No. 2014-09 until annual and interim reporting periods beginning after December 15, 2017. The Company has performed an assessment of the impact of implementation of ASU No. 2014-09, and concluded it will not change the timing of revenue recognition or amounts of revenue recognized compared to how revenue is recognized under current policies. ASU No. 2014-09 will require additional disclosures, where applicable, on (i) contracts with customers, (ii) significant judgments and changes in judgments in determining the timing of satisfaction of performance obligations and the transaction price, and (iii) assets recognized for costs to obtain or fulfill contracts. See Note 5

In February 2016, the FASB issued ASU No. 2016-02 Leases (Topic 842). The update modifies the classification criteria and requires lessees to recognize the assets and liabilities on the balance sheet for most leases. The update is effective for fiscal years beginning after December 15, 2018, with early adoption permitted. The Company is currently evaluating the potential impact of implementing this update on the financial statements.

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 Company determined the impact of implementing this update is immaterial.

In November 2016, the FASB issued ASU No. 2016-18 Statement of Cash Flows (Topic 230): Restricted Cash. The update requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. 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 standard did not have a material impact on the financial statements.

5

ELECTRONIC SYSTEMS TECHNOLOGY, INC.

NOTES TO FINANCIAL STATEMENTS

(Unaudited)

In January 2017, the FASB issued ASU No. 2017-01 Business Combinations (Topic 805): Clarifying the Definition of a Business. The update clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The update is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The Company will apply the provisions of the update to potential future acquisitions occurring after January 1, 2018.

The Company estimates that for 2018 the anticipated effective annual federal income tax rate will be 0%.

Other accounting standards that have been issued or proposed by FASB that do not require adoption until a future date are not expected to have a material impact on the financial statements upon adoption.

The results of operations for the three and nine monthsthree-month period ended September 30, 2017 and September 30, 2016,March 31, 2018 are not necessarily indicative of the results expected for the full fiscal year or for any other fiscal period.

New Accounting Pronouncements

In July of 2015 the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) 2015-11 “Simplifying the Measurement of Inventory” an update to Inventory Topic 330. The ASU simplifies the concept of lower of cost or market to the lower of cost and net realizable value and more closely align the measurement of inventory in Generally Accepted Accounting Principles (“GAAP”) with the measurement of inventory in International Financial Reporting Standards (“IFRS”). This update was adopted and did not materially impact the financial statements.

Certain prior period amounts have been reclassified for consistency with the current period presentation. These reclassifications had no effect on the reported results of operations, cash flows or financial position of prior period amounts.

NOTE 2 - INVENTORIES

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

NOTE 3 - INCOMEEARNINGS (LOSS) PER SHARE

Basic incomeearnings (loss) per share excludes dilution and is computed by dividing income (loss) available to common stockholders by the weighted-average number of common shares outstanding for the period.  Diluted incomeearnings (loss) per share reflects potential dilution occurring if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the Company.  At September 30,March 31, 2018 and 2017, the Company had 150,000 outstanding stock options that could have a dilutive effect on future periods.periods’ income.  However, at September 30, 2017 there was no dilutive effect of stock options ondiluted earnings per share or weighted average shares outstanding.  

are not presented because their effect would be antidilutive due to Company’s losses.

6

ELECTRONIC SYSTEMS TECHNOLOGY, INC.

NOTES TO FINANCIAL STATEMENTS

(Unaudited)

NOTE 4 - STOCK OPTIONS

As of September 30, 2017,March 31, 2018, the Company had outstanding stock options which have been granted periodically to individual employees and directors with no less than three years of continuous tenure with the Company.  The Board of Directors hasdid not awardedissue stock options during the nine monthsfirst quarter ended September 30, 2017. The Board of Directors may consider issuing stock options later in 2017. Shareholders approved the 2015 Stock Incentive Plan on June 3, 2016 for 250,000 stock options. 150,000 of the approved amount were granted to certain management employees as part of the 2015 Stock Incentive Plan. The options were dated effective August 7, 2015 and have a five year exercise period. The company recognized an expense of $1,841 for the quarter ending September 30, 2016 in which the options were approved by the Shareholders and were fully vested at that time.

The fair value of each option award is estimated on the date of the grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in 2015 and approved by the Shareholders in 2016.

The Company uses historical data to estimate option exercise rates.  The option exercise rate for option grants in 2005 through 2016 was 5.2%.  March 31, 2018.

A summary of option activity during the nine monthsquarter ended September 30, 2017March 31, 2018 is as follows:

NOTE 5 - RELATED PARTY TRANSACTIONS– ASU No. 2014-09 DISCLOSURE

DuringIn May 2014, the quarterFinancial 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 impact of adoption of the update to our financial statements for the three months ended September 30,March 31, 2017 would have not been material.

We performed an assessment of the impact of implementation of ASU No. 2014-09, and concluded it does not change the timing of revenue recognition or amounts of revenue recognized compared to how we recognize revenue under our current policies.  Our revenues involve a relatively limited number of types of contracts and customers.  In addition, our revenue contracts do not involve multiple types of performance obligations.  Revenues from product sales are recognized, and the transaction price is known, when the goods are shipped or delivered and title and risk of loss passes to the customer.

Adoption of ASU No. 2014-09 involves additional disclosures, where applicable, on (i) contracts with customers, (ii) significant judgments and changes in judgments in determining the timing of satisfaction of performance obligations and the transaction price, and (iii) assets recognized for costs to obtain or fulfill contracts.  

7

ELECTRONIC SYSTEMS TECHNOLOGY, INC.

NOTES TO FINANCIAL STATEMENTS

(Unaudited)

For product sales, the performance obligation is met, the transaction price can be reasonably estimated, and revenue is recognized generally at the time of shipment.  We have determined the performance obligation is met and title is transferred to the customer upon shipment of products because, at that time, 1) legal title is transferred to the customer, 2) the customer has accepted the product and obtained the ability to realize all of the benefits from the product, 3) the product specifications are known, have been communicated to the customer, and the customer has the significant risks and rewords of ownership to it, 4) it is very unlikely the product will be rejected by a customer upon physical receipt, and 5) we have the right to payment for the product. Revenues from site support and engineering services are recognized as the Company accrued total directors’ feesperforms the services, which is when the performance obligation is determined to be met.

Sales and accounts receivable for product sales are recorded net of $1,200,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.

The Company does not generally sell its products with the right of return.  Therefore, returns are accounted for when they occur and are accepted.  

The Company warrants its products as free of manufacturing defects and provides a refund of the purchase price, repair or $300 per directorreplacement of the product for board meetings attended. Fora period of one year from the nine-month period ending September 30,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 on the Company’s historical warranty experience.

Our trade accounts receivable balance related to sales to customers was $117,783 at March 31, 2018 and $98,941 at December 31, 2017 and included no allowance for doubtful accounts.  

We have determined our sales do not include a significant financing component, as payment is received at the Company paidtime the performance obligation is satisfied.

We do not incur significant costs to obtain sales, nor costs to fulfill sales orders which are not addressed by other standards.  Therefore, we have not recognized an asset for such costs as of March 31, 2018 or accrued a total of $3,600 for directors’ fees.December 31, 2017.

NOTE 6 - COMMITMENTS

The Company leases its facilities from a port authority for $5,445 per month for three years, expiring in September 2020, with annual increases based upon the Consumer Price Index.Index

ELECTRONIC SYSTEMS TECHNOLOGY, INC.

NOTES TO FINANCIAL STATEMENTS

(Unaudited)

NOTE 7 - SEGMENT REPORTING

Segment information is prepared on the same basis that the Company's management reviews financial information for operational decision-making purposes.    

During the quarter ended September 30, 2017, Domestic customers represented approximately 88% of total net revenues. Domestic sales revenues increased to $283,239Sales for the quarter ended September 30, 2017three-month period ending March 31, 2018, were $302,588 which was an increase of $2,106 compared to $275,709 for the quarter ended September 30, 2016. Year to date domestic sales revenues decreased to $893,277 as of September 30, 2017 compared to $1,020,831 for the same period in 2017. For the three month period ending March 31, 2018 and 2017, Site Support revenue of 2016.  Foreign customers represented approximately 12% of total net revenues.  Foreign sales revenues decreased to $39,523 for the quarter ended September 30, 2017$0 and $17,364 compared to $45,759 for the quarter ended September 30, 2016. Year to date foreign sales revenues decreased to $188,884 as of September 30, 2017 compared to $229,407 for the same period in 2017. Foreign Sales for the three-month period ending March 31, 2018 were $5,240 which was a decrease of 2016.  During$73,064 compared to the quarter ended September 30,same period in 2017. For the three month period ending March 31, 2018 and 2017, salesSite Support revenue of $2,264 and $0, respectively was recognized. Sales to one Domestic customer comprised morewas greater than 10% of the Company’stotal sales revenues.  Revenues from foreign countries duringfor the third quarter of 2017 consist primarily of revenues from product sales to Mexico, Peru, India.quarter.

8

ELECTRONIC SYSTEMS TECHNOLOGY, INC.

NOTES TO FINANCIAL STATEMENTS

(Unaudited)

NOTE 8 – Stock RepurchaseSTOCK REPURCHASE

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. On March 2, 2016, the Company’s Board of Directors approved a resolution authorizing the repurchase of up to an additional $150,000 of the Company’s common stock at the price of $0.38 per share. As of September 30, 2017, $184,405 remains of $250,000 approved by the board. 97,764 shares were repurchased for $37,191 in 2016, bringing the total number of shares repurchased to 172,619 through September 30, 2017. The Company’s share repurchase program does not obligate it to acquire any specific number of shares. The following table showsOn March 2, 2016, the Company’s activity and related information forBoard of Director approved a resolution authorizing the nine-month period ending September 30, 2017.

⁽¹⁾  Amount includes commissions paidrepurchase of $79.

The trading pricean 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. As of September 30,March 31, 2018, $184,405 remains of $250,000 approved by the board. 97,764 and 74,885 shares were repurchased in 2016 and 2017 was $0.59.

NOTE 9 – Income Taxes

No Income Tax has been recognized duerespectively, bringing the total number of shares repurchased to 172,619. During the net operating loss. The current year’s net operating loss tax impact has been reserved, as the estimated effective tax rate for 2017 will be zero.

The Deferred Tax asset that is recognized on the Balance Sheets consists primarily of prior years’ net operating loss and R&D credits. We believe that the Company will be generate net operating income and utilize the asset in future periods.

three-month period ending March 31, 2018, there were no shares repurchased.

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

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATION

Management’sManagement's discussion and analysis is intended to be read in conjunction with the Company’sCompany's unaudited financial statements and the integral notes thereto for the quarter ended September 30, 2016.March 31, 2017.  The following statements may be forward looking in nature and actual results may differ materially.

A.  Results of Operations

REVENUES:RESULTS OF OPERATIONS

REVENUES: Total revenues from the sale of the Company’s ESTeem wireless modem products and services increasedsales decreased to $322,763$307,828 for the thirdfirst quarter of 2018 as compared to $378,786 in the first quarter of 2017, compared to $321,468 for the third quarterreflecting a decrease of 2016.18.7%.  Gross revenues, including interest income, increased to $325,721 for the quarter ended September 30, 2017, from $324,514 for the same quarter of 2016.  Year to date sales decreased to $1,082,161 as of September 30, 2017, as compared to $1,250,238 as of September 30, 2016. Year to date gross revenues, including interest income, decreased to $1,090,657 as$311,559 for the quarter ended March 31, 2018, from $381,476 for the same quarter of September 30, 2017, compared to $1,259,155 as of September 30, 2016.2017.  Management believes the increasedecrease in quarterly sales revenues is due to increased demand fordecreased Foreign sales during first quarter of 2018 when compared with the new products introduced at the beginningsame quarter of 2017.

The Company's revenues have historically fluctuated from quarter to quarter due to timing factors such as customer order placement and product shipments to customers, as well ascustomer order placement, customer buying trends, and changes in the general economic environment.  The procurement process regarding plant and project automation, or project development, which usually surrounds the decision to purchase ESTeem products, can be lengthy.  This procurement process may involve bid activities unrelated to the ESTeem products, such as additional systems and subcontract work, as well as capital budget considerations on the part of the customer.  Because of the complexity of this procurement process, forecasts inwith regard to the Company's revenues becomeare difficult to predict.predict.

A percentage breakdown of EST's market segments of Domestic and Foreign Export Sales,sales, for the thirdfirst quarter of 20172018 and 20162017 are as follows:

Domestic Revenues

During the quarter ended September 30, 2017, the Company’s domestic operations represented 88% of the Company’s total sales revenues.  Domestic operations sell ESTeem modem products, accessories and service primarily through domestic resellers, as well as directly to end users of the Company’s products.  Domestic sales revenues increased to $283,239 for the quarter ended September 30, 2017 compared to $275,709 for the quarter ended September 30, 2016.  Management believes the increase in sales revenues is due to increased domestic sales for water/waste water and mining industrial automation projects during the three-month period ending September 30, 2017.  During the quarter ended September 30, 2017, one customer, comprised more than 10% of the Company’s sales revenues.  

For the nine-month period ended September 30, 2017, the Company’s domestic operations represented 83% of the Company’s total sales revenues.  Year to date domestic sales revenues decreased to $893,277 as of September 30, 2017 compared to $1,020,831 for the same period of 2016. Management believes the decrease in year to date sales revenues is due to decreased engineering services and related product sales during the first half of 2017.  

Foreign Revenues

The Company’s foreign operating segment represented 12% of the Company’s total net revenues for the quarter ended September 30, 2017.  The foreign operating segment is based wholly in the United States and maintains no assets outside of the United States.  The foreign operating segment sells ESTeem modem products, accessories and service primarily through foreign resellers, as well as directly to end customers of the Company’s products located outside the United States.  

During the quarter ended September 30, 2017, the Company had $39,522 in foreign export sales, amounting to 12% of total net revenues of the Company for the quarter, compared with foreign export sales of $45,759 for the same quarter of 2016.  Management believes the decrease in foreign sales revenues was due to decreased automation needs in Oil & Gas and Mining industries.  Revenues from foreign countries during the third quarter of 2017 consist primarily of revenues from product sales to Mexico, Peru and India.  No foreign sales to a single customer comprised 10% or more of the Company's product sales for the quarter ended September 30, 2017.  Products purchased by foreign customers were used primarily in industrial automation applications.  We believe the majority of foreign export sales are the results of the Company’s Latin American sales staff, EST foreign reseller activity, and the Company’s internet website presence.

For the nine-month period ended September 30, 2017, the Company had $188,884 in foreign export sales, amounting to 17% of total sales revenues of the Company for the period, compared with foreign export sales of $229,407 for the same period of 2016. Management believes the decrease in foreign sales revenues is due end of life product purchases in 2016 to Croatia and slow acceptance of product released in 2017 in Latin America.

BACKLOG:

The CorporationAs of March 31, 2018, the Company had a sales order backlog of approximately $22,707 as of September 30, 2017.$0.   The Company’s customers generally place orders on an "as needed basis".  Shipment for most of the Company’s products is generally made within 1 to 155 working days after receipt of customer orders, with the exception of ongoing, scheduled projects, and custom designed equipment.

COST OF SALES:

Cost of sales percentagepercentages for the third quarterfirst quarters of 2018 and 2017 were 53% and 2016 was 40%46% of respective net sales and 36%,are calculated excluding site support expenses of $1,252 and $15,476 respectively. The cost of sales percentage increase forin the thirdfirst quarter of 20172018 is the result of the product mixvolume discounts for itemsproducts sold during the period.quarter and the product mix sold during the same quarter of 2017.

OPERATING EXPENSES:

Operating expenses for the thirdfirst quarter of 2018 decreased $30,880 from first quarter of 2017 decreased $10,857 from the third quarter of 2016.levels.  The following is an outlinea delineation of operating expenses:

GENERAL AND ADMINISTRATIVE:

DuringGeneral and administrative:  For the thirdfirst quarter of 2017, general2018 General and administrative expenses decreased $8,425$5,323 to $59,367 from the same quarter of 2016,$82,811, due to decreased professional services and bank fees.when compared with the same quarter of 2017.

RESEARCH AND DEVELOPMENT:

Research and development:  Research and development expenses decreased $4,113$19,378 to $55,511$60,637 during the thirdfirst quarter of 20172018 due to reduced fees paid for FCC type acceptance testing when compared with the same quarter of 2017.

Marketing and sales:During the first quarter of 2018, marketing and sales expenses decreased $6,179 to $108,320 when compared with the same period in 2016of 2017, due to fees paid for type acceptancedecreased trade show and prototype builds of new product.

MARKETING AND SALES:

Duringtravel expenses during the thirdfirst quarter of 2017, marketing and sales expenses increased $1,681 to $114,092 from the same period in 2016, due to increased services purchased.2017.

INTEREST AND DIVIDEND INCOME:

The Corporation earned $2,958$3,731 in interest and dividend income during the quarter ended September 30, 2017.March 31, 2018.  Sources of this income were money market accounts and certificates of deposit.

NET INCOME (LOSS):LOSS:

The Company had a net loss of $37,781$103,792 for the thirdfirst quarter of 2017,2018 compared to a net loss of $42,497$84,487 for the same quarter of 2016.  For the nine-month period ended September 30, 2017, the Company recorded a2017.  The increase in net loss of $133,992, compared with a net loss of $55,114 for the same period of 2016. The decrease in the Company’s net lossduring 2018 is the result of increaseddecreased sales revenues and decreased gross marginsmargins.

The Company has $65,964 of research and reduced operating expenses during the third quarter of 2017.

development tax credits available to reduce any Federal Income taxes that may be incurred in future periods as if March 31, 2018.

B.  Financial Condition, Liquidity and Capital Resources

FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES

The Corporation's current asset to current liabilities ratio at September 30, 2017March 31, 2018 was 24.6:132:3 compared to 54:146.5 at December 31, 2016. At September 30, 2017,2017.  The decrease in current ratio is due to increased accounts payable and accrued vacation expenses at March 31, 2018 when compared with December 31, 2017.

For the quarter ended March 31, 2018, the Company had cash and cash equivalents of $257,112;$391,064 as compared to cash and cash equivalent holdings of $502,971$208,101 at December 31, 2016.  The Company had2017, primarily reflecting changes in the value of certificates of deposit investments in the amount of $1,000,000 at September 30, 2017 and $1,000,000 at December 31, 2016.deposits that were redeemed when compared with year-end 2017.    

Accounts receivable increased to $94,506$117,783 as of September 30, 2017March 31, 2018, from December 31, 20162017 levels of $71,202,$98,941 due to sales revenueand collection timing differences between the third quarter of 2017 andwhen compared with year-end 2016.  Inventories increased2017.  Inventory decreased to $813,970 as of September 30, 2017,$729,371 at March 31, 2018 from December 31, 20162017 levels of $703,147, due primarily to an increase of finished goods.$762,517.  The Company's fixed assets, net of depreciation, decreased to $36,428$28,675 as of September 30, 2017,March 31, 2018 from December 31, 20162017 levels of $51,383.$31,444, due to depreciation. Prepaid expenses decreased to $5,758 as of March 31, 2018 as compared with $8,039 for December 31, 2017 due to decreased vendor deposit when compared with year-end 2017.     

As of September 30, 2017,March 31, 2018, the Company’strade accounts payable balance was $54,709 as$33,424 compared with $15,114at$18,969 at December 31, 2016,2017, and reflectsreflect amounts owed for purchases of inventory items and contracted services, and state tax liabilities.services.  Accrued liabilities and refundable deposits as of September 30, 2017March 31, 2018 were $34,252$24,462, compared with $27,220at$21,882 at December 31, 2016,2017, and reflect items such as payroll and state tax liabilities and accrued vacation benefitsbenefits.  At March 31, 2018 and payroll taxDecember 31, 2017, the Company had refundable customer deposit liabilities of $3,937 and $3,937 respectively.

In Management's opinion, the Company's cash and cash equivalent reserves,equivalents, and other working capital at September 30, 2017March 31, 2018 is sufficient to satisfy requirements for operations, capital expenditures, and other expenditures as may arise during the next 12 months.

The Company did not declare or issue any cash dividends during 2016 or 2017.

2018.

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

Item 3.  Quantitative and Qualitative Disclosures About Market Risk.

Not applicable

Item 4.  EvaluationThere is no established market for trading the common stock of Disclosure Controlsthe Company. The market for the Company’s common stock is limited, and Procedures.as such shareholders may have difficulty reselling their shares when desired or at attractive market prices.  The Common Stock is not regularly quoted in the automated quotation system of a registered securities system or association.  Our common stock, par value $0.001 per share, is quoted on the OTC Markets Group QB (OTCQB) under the symbol “ELST”.  The OTCQB is a network of security dealers who buy and sell stock. The dealers are connected by a computer network which provides information on current “bids” and “asks” as well as volume information. The OTCQB is not considered a “national exchange”.  The “over-the-counter” quotations do not reflect inter-dealer prices, retail mark-ups commissions or actual transactions.  The Company’s common stock has 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.

Conclusions of Management Regarding Effectiveness of DisclosureItem 4.  Controls and Procedures

At the end of the period covered by this Quarterly Report on Form 10-Q, anAn evaluation was carried outhas been performed under the supervision and with the participation of the Company's management,our Management, including the Presidentour Chief Executive Officer and Principal ExecutiveAccounting Officer, ("PEO") and Principal Financial Officer ("PFO"), of the effectiveness of the design and operationsthe operation of the Company's disclosureour "disclosure controls and proceduresprocedures" (as such term is defined in Rule 13a – 15(e) and Rule 15d – 15(e)Rules 13a-15(e) under the Securities Exchange Act).Act of 1934) as of March 31, 2018.  Based on this evaluation, our Chief Executive Officer and Chief Financial Officer have determined that evaluation, the PEOthere was a material weakness affecting our internal control over financial reporting and, the PFO have concludedas a result of that as of the end of the period covered by this report, the Company'sweakness, our disclosure controls and procedures were not effective as it was determined that there were material weaknesses affecting our disclosure controls and procedures.of March 31, 2018.  

ManagementThe material weakness is as follows:

We did not maintain effective controls to ensure appropriate segregation of duties as the company believessame officer and employee was responsible for the initiating and recording of transactions, thereby creating segregation of duties weaknesses. Due to the (1) significance of segregation of duties to the preparation of reliable financial statements; (2) the significance of potential misstatement that these material weaknesses arecould have resulted due to the small sizedeficient controls; and, (3) the absence of the company's accounting staff. The small sizesufficient other mitigating controls; we determined that this control deficiency resulted in more than a remote likelihood that a material misstatement or lack of the company's accounting staff may prevent adequate controls in the future, such as segregation of duties, due to the cost/benefit of such remediation. To mitigate the current limited resources and limited employees, we rely heavily on direct management oversight of transactions, along with the use of external legal and accounting professionals. As the Company grows, management expects to increase the number of employees, which will enable us to implement adequate segregation of dutiesdisclosure within the internal control framework.annual or interim financial statements will not be prevented or detected.

Changes in Internal Control Over Financial Reporting

There have not been any changes in our internal control over financial reporting.

There have been no changesreporting (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) during the most recent fiscal quarter ended September 30, 2017 in the Company’s internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal controlscontrol over financial reporting.

PART II - OTHER INFORMATION

Item 1 Legal Proceedings

The Company is not involved in any material current of pending legal proceedingsPART II—OTHER INFORMATION

Item 2 Unregistered Sales of Equity Securities and Use of Proceeds

None

Item 3 Defaults Upon Senior Securities

None

Item 4 Mine Safety Disclosure

Not Applicable

Item 55.  Other Information

None

Item 6.  Exhibits

SIGNATURES

In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

ELECTRONIC SYSTEMS TECHNOLOGY, INC.

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