UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended June 30, 20182019

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)

Securities registered pursuant to Section 12(g) of the Act:

Indicate by check mark whether the registrant (1) has filed all documents and reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filings for the past 90 days.  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).

YESx NO¨

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 June 30, 2018,July 12, 2019, the number of the Company's shares of common stock par value $0.001, outstanding was 4,986,048.4,946,502.

ELECTRONIC SYSTEMS TECHNOLOGY, INC.

FORM 10-Q

June 30, 2018

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.

10

Item 3.  Quantitative and Qualitative Disclosures About Market Risk.

13

Item 4.  Evaluation of Disclosure Controls and Procedures.

13

PART II - OTHER INFORMATION

14

Item 1 Legal Proceedings

14

Item 2 Unregistered Sales of Equity Securities and Use of Proceeds

14

Item 3 Defaults Upon Senior Securities

14

Item 4 Mine Safety Disclosure

14

Item 5 Other Information

14

Item 6.  Exhibits

14

PART I - FINANCIAL INFORMATION

Item 1.  Financial Statements.Statements

See notesNotes to Financial Statements

See notesNotes to Financial Statements

See notesNotes to Financial Statements

5

See Notes to Financial Statements

ELECTRONIC SYSTEMS TECHNOLOGY, INC.

NOTES TO FINANCIAL STATEMENTS

(Unaudited)

NOTE 1 - BASIS OF PRESENTATION

The financial statements, including notes, of Electronic Systems Technology, Inc. (the "Company") presentedare representations of the Company’s management, which is responsible for their integrity and objectivity. The accompanying unaudited financial statements have been prepared by the Company in thisaccordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information, as well as the instructions to Form 10Q are unaudited10-Q. Accordingly, the financial statements do not include all of the information and reflect, infootnotes required by U.S. GAAP for complete financial statements. In the opinion of Management, a fair presentationmanagement, the accompanying unaudited financial statements contain all adjustments, consisting of operations for the three and six-month periods ended June 30, 2018 and June 30, 2017.  All adjustments of aonly normal recurring nature andadjustments, necessary for a fair presentationstatement of its financial position as of June 30, 2019, and its results of operations, cash flows, and changes in stockholders’ equity for the three months and six months ended June 30, 2019 and 2018.  The balance sheet at December 31, 2018 was derived from audited annual financial statements but does not contain all of the results forfootnote disclosures from the periods covered have been made. Certainannual financial statements. All amounts presented are in U.S. dollars. For further information, and footnote disclosure normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuantrefer 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 notesfootnotes thereto included in the Company'sCompany’s Annual Report on Form 10K10-K for the year ended December 31, 2017, as filed with Securities2018.  

The results of operations for the three month and Exchange Commission.six month period ended June 30, 2019 are not necessarily indicative of the results expected for the full fiscal year or for any other fiscal period.  The Company estimates that for 2019 the anticipated effective annual federal income tax rate will be 0%.

Accounting Standards Updates Adopted

In May 2014,February 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-09 Revenue Recognition, replacing2016-02 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 adopted the update on January 1, 2019.   Upon implementation of the new guidance, currently codifiedthe Company recognized a liability and right-of-use asset of $91,637 as of January 1, 2019 for its one operating lease.  The Company elected the transition option to apply the new guidance at the effective date without adjusting comparative periods presented. (See Note 6).

Accounting Standards Updates to Become Effective 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. Future Periods

In August 2015,2018, the FASB issued ASU No. 2015-14 Revenue from Contracts with Customers2018-13 Fair Value Measurement (Topic 606)820):  Deferral ofDisclosure Framework - Changes to the Effective Date. ASU No. 2015-14 defersDisclosure Requirements for Fair Value Measurement.  The update removes, modifies and makes additions to the disclosure requirements on fair value measurements.  The update is effective date of ASU No. 2014-09 until annual and interim reporting periodsfor fiscal years beginning after December 15, 2017.2019, with early adoption permitted.  The Company has performed an assessment ofis currently evaluating the impact of implementationthis update on our fair value measurement disclosures.

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.

ELECTRONIC SYSTEMS TECHNOLOGY, INC.

NOTES TO FINANCIAL STATEMENTS

(Unaudited)

NOTE 2 - INVENTORIES

Inventories are stated at lower of ASU No. 2014-09,direct cost or net realizable value with cost determined using the FIFO (first in, first out) method.  Inventories consist of the following:

NOTE 3 - EARNINGS (LOSS) PER SHARE

Basic earnings (loss) per share excludes dilution and concluded it willis computed by dividing income (loss) available to common stockholders by the weighted-average number of common shares outstanding for the period.  Diluted earnings (loss) per share reflects potential dilution occurring if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the Company.  At June 30, 2019 and 2018, the Company had 120,000 outstanding stock options, respectively, that could have a dilutive effect on future periods’ net income.  However, diluted earnings per share are not changepresented because their effect would be antidilutive due to Company’s losses.

NOTE 4 - STOCK OPTIONS

As of June 30, 2019, the timingCompany 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 did not issue stock options during the six month period ended June 30, 2019.

A summary of option activity during the quarter ended June 30, 2019 is as follows:

NOTE 5 – REVENUE

The Company product revenue recognition or amountsincludes industrial wireless products and accessories such as antennas, power supplies and cable assemblies. The Company also provides direct site support and engineering services to customers, such as repair and upgrade of its products.    During the three month period ended June 30, 2019 and 2018, the Company’s revenue recognizedfrom products sales were $367,062 and $463,629, respectively.  Revenue from site support and engineering services was $28,200 and $8,285 respectively, over the same periods. Year to date sales from products decreased to $736,451 as compared to how$769,193 as of June 30, 2019 and 2018. Revenue from site support and engineering services for the six months ended June 30, 2019 and 2018, was $32,977 and $10,548, respectively.

ELECTRONIC SYSTEMS TECHNOLOGY, INC.

NOTES TO FINANCIAL STATEMENTS

(Unaudited)

NOTE 5 – REVENUE (Cont.)

The Company’s customers, to which trade credit terms are extended, consist of United States and local governments and foreign and domestic companies.  Domestic sales for the three month period ended June 30, 2019 were $337,679 compared to $446,589 in 2018.  Sales to foreign customers for the three month period ended June 30, 2019 were $57,583 compared to $25,325 in 2018.

For the three month period ended June 30, 2019, sales to three customers represented more than 10% of total revenue, is recognized under current policies. ASU No. 2014-09 will require additional disclosures, where applicable, on (i) contracts withthree customers (ii) significant judgmentsrepresented more than 10% of total revenue for the same period in 2018.

For the six month period ended June 30, 2019, sales to two customers represented more than 10% of total revenue, one customer represented more than 10% of total revenue for the same period in 2018.

As of June 30, 2019 and changes in judgments in determining2018, the timingCompany had a sales order backlog of satisfaction of performance obligations$3,307 and the transaction price, and (iii) assets recognized for costs to obtain or fulfill contracts. See Note 5.$425, respectively.

NOTE 6 - LEASES

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 ofimplemented this standard did not have a material impact on the financial statements.

Ineffective 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 provisions1, 2019. Upon implementation 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 six-month period ended June 30, 2018 are not necessarily indicative of the results expected for the full fiscal year or for any other fiscal period.

6

ELECTRONIC SYSTEMS TECHNOLOGY, INC.

NOTES TO FINANCIAL STATEMENTS

(Unaudited)

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 - INCOME (LOSS) PER SHARE

Basic income (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 income (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. The diluted weighted average number of common shares outstanding for the three-month period ended June 30, 2018 and 2017 was 4,994,212 and 5,040 803, respectively.  The primary weighted average number of common shares outstanding for the six months ended June 30, 2018 and 2017 was 4,986,048 and 5,038,043 respectively.  

NOTE 4 - STOCK OPTIONS

As of June 30, 2018,new guidance, the Company had outstanding stock options which have been granted periodically to individual employeesrecognized a liability and directors with no less than three yearsright-of-use asset of continuous tenure with the Company.  The Board of Directors did not issue stock options during the first six-months ended June 30, 2018.

A summary of option activity during the six months ended June 30, 2018 is as follows:

7

ELECTRONIC SYSTEMS TECHNOLOGY, INC.

NOTES TO FINANCIAL STATEMENTS

(Unaudited)

NOTE 5 - ASU No. 2014-09 DISCLOSURE

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$91,637 as of January 1, 2018 using2019 for its one operating lease.  To calculate the modified-retrospective transition approach.  The impact of adoption of the update to our financial statements for the six months ended June 30, 2018 would have not been material.

We performed an assessment of the impact of implementation of ASU No. 2014-09,liability 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.  

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 asuse asset, the Company performsutilized a 4.0% incremental borrowing rate to discount the services, which is when the performance obligation is determined to be met.future rent payments and remaining lease term of 1.75 years.

Sales and accounts receivable for product sales are 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.

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 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 on the Company’s historical warranty experience.

Our trade accounts receivable balance related to sales to customers was $171,406 at June 30, 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 time 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 June 30, 2018 or December 31, 2017.

NOTE 6 - COMMITMENTS and CONTINGENCIES

The Company leases its facilities from a port authority for $5,445$5,542 per month for three years, expiring in September 2020, with annual increases based upon the Consumer Price Index.

8

The original lease was effective October 1, 2014 and contained a three year renewal option and a provision for an annual increase of 2% per year, plus Leasehold Tax of 12.84%.  On September 5, 2017, the Company exercised the three year option. The first year of this option was not subject to the 2% increase. The current lease does not contain the option to extend the lease.  However, the Company believes that a new lease agreement will be signed prior to the expiration of the current lease.   At June 30, 2019, the remaining lease term is 1.25 years

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.    6 – LEASES (Cont.)

DuringFor the quarterthree month and six month periods ended June 30, 2019 and 2018, Domestic customers represented approximately 95%lease expenses of total net revenues. Domestic product$16,627 and Site Support sales revenues increased to $446,589 for$16,335, and $33,254 and $32,670 respectively, are included in the quarter ended June 30, 2018 compared to $309,556 forfollowing expense classifications on the quarter ended June 30, 2017. Year to date domestic sales revenues increased to $749,176 asstatement of operations:

As of June 30, 2018 compared to $610,038 for the same period of 2017.  Foreign customers represented approximately 5% of2019, total net revenues.  Foreign sales revenues decreased to $25,325 for the quarter ended June 30, 2018 compared to $71,057 for the quarter ended June 30, 2017. Year to date foreign sales revenues decreased to $30,565future lease payments are as of June 30, 2018 compared to $149,361 for the same period of 2017.  During the three and six-months ended June 30, 2018, sales to three customers comprised more than 10% of the Company’s sales revenues and one customer respectively.  follows:

Revenues from foreign countries during the second quarter and six-months of 2018 consist primarily of revenues from product sales to Columbia, Bolivia and Ireland.

NOTE 87 – STOCK 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. 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. As ofDuring the three month period ended June 30, 2019 and 2018, $184,405 remainsno shares were repurchased. During the six month period ended June 30, 2019, the Company repurchased 39,246 shares for $14,920; no shares were repurchased in the six month period ended June 30, 2018.     Since inception of the Stock Repurchase Plan, the Company has repurchased 212,165 shares for a total of $80,622 through June 30, 2019 and $169,378 of the original $250,000 approved by the board. 97,764 and 74,885 shares were repurchased in 2016 and 2017 respectively, bringing the total number of shares repurchased to 172,619. During the six-month period ended June 30, 2018, there were no shares repurchased.board remains.

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 yearquarter ended December 31, 2017.June 30, 2019.  The following statements may be forward looking in nature and actual results may differ materially.

A.  Results of OperationsRESULTS OF OPERATIONS

REVENUES:

Total revenues from the sale of the Company’s ESTeem wireless modem products and services increasedsales decreased to $471,914$395,262 for the second quarter of 2018,2019 as compared to $380,613 for$471,914 in the second quarter of 2017.  Gross revenues, including interest income, increased to $476,314 for the quarter ended June 30, 2018, from $383,461 for the same quarterreflecting a decrease of 2017.  Year to date sales increased to $779,741 as of June 30, 2018, as compared to $759,399 as of June 30, 2017. Year to date gross revenues, including interest income, increased to $787,873 as of June 30, 2018, compared to $764,936 as of June 30, 2017.16%.  Management believes the increasedecrease in quarterly and year to date sales revenues is due to increased marketing effortsdecreased domestic sales during first quarter of 2019 when compared with the same quarter of 2018. Year to date total revenues from sales decreased to $769,428 in 2019 as compared to $779,741 in 2018, reflecting a decrease of 1%.  Management believes the United States.decrease in sales revenues is due to decreased domestic sales during first half of 2019 when compared with the same period of 2018.   

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'sthe Company’s market segments of Domestic and Foreign Export Sales,sales for the second quarter ofthree and six month periods ended June 30, 2019 and 2018 and 2017 are as follows:

Domestic RevenuesBACKLOG:

During the quarter ended June 30, 2018, the Company’s domestic operations represented 95% 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 $446,589 for the quarter ended June 30, 2018 compared to $309,556 for the quarter ended June 30, 2017.  Management believes the increase in sales revenues is due to increased domestic sales for water/waste water and mining industrial automation projects during the first six months of 2018.  During the quarter ended June 30, 2018, three customers, comprised more than 10% of the Company’s sales revenues.  

Customer A: 27%

Customer B: 15%

Customer C: 12%

For the six-month period ended June 30, 2018, the Company’s domestic operations represented 96% of the Company’s total sales revenues.  Year to date domestic sales revenues increased to $749,176 asAs of June 30, 2018 compared to $610,038 for2019, the same period of 2017. Management believes the increase in year to date sales revenues is due to increased marketing efforts in the United States during the first half of 2018.  

Foreign Revenues

The Company’s foreign operating segment represented 5% of the Company’s total net revenues for the quarter ended June 30, 2018.  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 June 30, 2018, the Company had $25,325 in foreign export sales, amounting to 5% of total net revenues of the Company for the quarter, compared with foreign export sales of $71,057 for the same quarter of 2017.  Management believes the decrease in foreign sales revenues was due to decreased automation needs to lower operating expenses in Oil & Gas and Mining industries.  Revenues from foreign countries during the second quarter of 2018 consist primarily of revenues from product sales to Columbia, Bolivia and Ireland.  No foreign sales to a single customer comprised 10% or more of the Company's product sales for the quarter ended June 30, 2018.  Products purchased by foreign customers were used primarily in industrial automation applications.  We believe the majority of foreign export sales are the results EST foreign reseller activity, and the Company’s internet website presence.

For the six-month period ended June 30, 2018, the Company had $30,565 in foreign export sales, amounting to 4% of total sales revenues of the Company for the period, compared with foreign export sales of $149,361 for the same period of 2017. Management believes the decrease was due to the lack of Sales staff in the countries that the Company’s products are exported to.

BACKLOG:

The Corporation had a sales order backlog of approximately $425 as of June 30, 2018.$3,307.   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 second quarterquarters of 2019 and 2018 were 46% and 2017 was 45% of respective net sales and 41%,are calculated excluding site support expenses of $20,096 and $6,561 respectively. The cost of sales increase forpercentage decrease in the second quarter of 20182019 is the result of the product mix for items sold during the period.same quarter of 2018. Cost of sales percentages for the six month periods ended June 30, 2019 and 2018 were 46% and 48% of respective net sales and are calculated excluding site support expenses of $23,622 and $7,813 respectively. The cost of sales percentage decrease in the second quarter of 2019 is the result of the product mix sold during the same period of 2018.

OPERATING EXPENSES:

Operating expenses for the second quarter of 2019 increased $25,068 from second quarter of 2018 decreased $37,468 fromlevels.  The following is a delineation of operating expenses:

General and administrative:  For the second quarter of 2017.  The following is an outline2019, general and administrative expenses increased $3,841 to $69,188, due to increased wages and professional services when compared with the same quarter of operating expenses:2018.For the six month period, general and administrative expenses increased by $14,534 to $162,694, due to increased wages, professional services and proxy related expenses.

GENERAL AND ADMINISTRATIVE:Research and development:  Research and development expenses increased $20,687 to $51,478 during the second quarter of 2019 due to increased expenses related to payroll and prototype build costs when compared with the same quarter of 2018. For the six month period, research and development expenses increased by $25,525 to $116,952, due to increased wages and prototype build costs.

Marketing and sales:During the second quarter of 2018, general2019, marketing and administrativesales expenses increased $45$540 to $65,347 from the same quarter of 2017.

RESEARCH AND DEVELOPMENT:

Research and development expenses decreased $25,519 to $30,791 during the second quarter of 2018$97,224 when compared with the same period in 2017of 2018, due to reduceddecreased payroll services purchased and supplies.

MARKETING AND SALES:

Duringincreased travel expense related to sales efforts during the second quarter of 2018,2018. For the six month period, marketing and sales expenses decreased $11,994by $7,797 to $96,684 from the same period in 2017,$197,207, due to decreased payroll.wages and an increase in travel and trade shows.

INTEREST INCOME:

The CorporationCompany earned $4,401$5,867 in interest income during the quarter ended June 30, 2018.2019 and $11,755 for the six month period.  Sources of this income were money market accounts and certificates of deposit.

NET INCOME (LOSS):LOSS:

The Company had a net loss of $6,219 for the second quarter of 2019 compared to net income of $68,878 for the second quarter of 2018, compared to a net loss of $11,724 for the same quarter of 2017.2018.  For the six-month period ended June 30, 2018, the Company recorded a net loss of $34,915,$61,044 compared with a net loss of $96,211$34,915 for the same period of 2017.2018.  The increase in the Company’s net incomeloss during 2019 is the result of increased sales revenues, decreased gross margins and reduced operating expenses during the second quarter of 2018.

TAXES:

The Company had a net income of $68,878 for the second quarter of 2018 compared to a net loss of $11,724 for the same quarter of 2017.  The increase in net income during 2018 is the result of increased sales revenues, and decreased gross margins.increased operating expenses.

The Company has $65,964 of research and development tax credits available to reduce any Federal Income taxes that may be incurred in future periods as if June 30, 2018.

B.  Financial Condition, Liquidity and Capital ResourcesFINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES

The Corporation's current asset to current liabilities ratio at June 30, 20182019 was 39.4:114.2 compared to 46.5:120.8 at December 31, 2017.  2018.  The decrease in current ratio is due to the current portion of lease liability at June 30, 2019 as compared to December 31, 2018.

At June 30, 2018,2019, the Company had cash and cash equivalents of $386,764;$225,330 as compared to cash and cash equivalent holdings of $208,101$323,667 at December 31, 2017.  The Company had certificates of deposit investments2018, primarily reflecting cash used in operating activities.

Cash used in operating activities increased by $54,754 for the amount of $850,000 atsix-month period ended June 30, 20182019 when compared to $1,000,000 at December 31, 2017.the same period in 2018. The increase is attributable net loss for the period being $26,129 greater than

the same period in 2018.  In addition, more cash was utilized in paying accounts payable during the period as compared to prior year

Accounts receivable increased to $171,406 as of June 30, 2018,Net cash provided from December 31, 2017 levels of $98,941,investing was $0 due to sales revenue timing differences betweenthe repurchase of CD’s maturing during the second quarter of 2018 and year-end 2017.  Inventories decreased to $637,262 as2019. Cash used in financing activities was $14,920 for the repurchase of the Company’s common stock during the six month period ended June 30, 2018, from December 31, 2017 levels of $762,517, due primarily to a decrease of finished goods.  The Company's fixed assets, net of depreciation, decreased to $25,906 as of June 30, 2018, from December 31, 2017 levels of $31,444.2019.

As of June 30, 2018, the Company’s accounts payable balance was $29,689 as compared with $18,969 at December 31, 2017, and reflects amounts owed for inventory items, contracted services, and state tax liabilities.  Accrued liabilities and refundable deposits as of June 30, 2018 were $22,598 compared with $21,882 at December 31, 2017, and reflect items such as accrued vacation benefits and payroll tax liabilities

In Management'smanagement's opinion, the Company's cash and cash equivalent reserves,equivalents and other working capital at June 30, 20182019 is sufficient to satisfy requirements for operations, capital expenditures, and other expenditures as may arise during the remainder of 2018.2019.

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

OFF-BALANCE SHEET ARRANGEMENTS

The Company has no significant off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to its stockholders.

Item 3.  Quantitative and Qualitative Disclosures About Market Risk.

There is no established market for trading the common stock of the Company. The market for the Company’s common stock is limited, and 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.

Item 4.  Controls and Procedures.Procedures

An evaluation has been performed under the supervision and with the participation of our Management,management, including our Chief Executive Officer and Principal Accounting Officer, of the effectiveness of the design and the operation of our "disclosure controls and procedures" (as such term is defined in Rules 13a-15(e) under the Securities Exchange Act of 1934) as of March 31, 2018.June 30, 2019.  Based on this evaluation, our Chief Executive Officer and Chief Financial Officer have determined that there was a 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 March 31, 2018.June 30, 2019.  

The material weakness is as follows:

We did not maintain effective controls to ensure appropriate segregation of duties as the same 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 could have resulted due to the deficient controls; and, (3) the absence of sufficient other mitigating controls; we determined that this

control deficiency resulted in more than a remote likelihood that a material misstatement or lack of disclosure within the 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 (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II - II—OTHER INFORMATION

Item 11.  Legal Proceedings

The Company is not involved in any material current of pending legal proceedingsNone.

Item 22. Unregistered Sales of Equity Securities and Use of Proceeds

NoneNone.

Item 33. Defaults Upon Senior Securities

NoneNone.

Item 44. Mine Safety DisclosureDisclosures

Not Applicable

Item 55.  Other Information

NoneOn June 25, 2019, Molex opted to terminate the MDA that was executed on June 13, 2017 and an 8K filed on June 17, 2017. Sales for neither party were material. The Company had immaterial expenses related to this agreement and had not invested any capital resources to fulfill its obligations to the agreement.

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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