As Of               Filer                 Filing    For·On·As Docs:Size             Issuer                      Filing Agent

 4/26/21  Elec Systems Technology Inc.      ANNLRPT     4/26/21    1:648K                                   Computerized Bo… Svcs/FA

Document/Exhibit                   Description                      Pages   Size 

 1: ANNLRPT     Electronic Systems Technology Annual Report         HTML    291K 

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.

 

Basis of Presentation and Accounting Estimates

 

The preparation of financial statements are prepared in conformity with generally accepted accounting principles in the United States which requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses.  Estimates used in the accompanying financial statements include the allowance for doubtful accounts receivable, inventory obsolescence, useful lives of depreciable assets, share-based compensation, and deferred income taxes.  Actual results could differ from those estimates.  

 

Concentrations and Credit Risks

 

The Company places its cash with three major financial institutions.  During the period, the Company had cash balances that were in excess of federally insured limits.  

 

The Company purchases certain key components necessary for the production of its products from a limited number of suppliers.  The components provided by the suppliers could be replaced or substituted by other products.  It is possible that if this action became necessary, an interruption of production and/or material cost expenditures could take place.  

 

Revenue Recognition

 

The Company recognizes revenue when it has satisfied the performance obligation required under a contract with the customer.   A performance obligation is a promise in a contract with a customer to transfer a distinct good or service to the customer. Our contracts with customers contain a single performance obligation. A contract's transaction price is recognized as revenue when, or as, the performance obligation is satisfied.  

 

Performance obligations for product sales are satisfied as of a point in time. Revenue is recognized when control of the product transfers to the customer, generally upon product shipment.   Performance obligations for site support and engineering services are satisfied over-time if the customer receives the benefits as we perform work and we have a contractual right to payment. Revenue recognized on an over-time basis is based on costs incurred to date relative to milestones and total estimated costs at completion to measure progress.   

 

The Company considers the contractual consideration payable by the customer when determining the transaction price of each contract.  Revenue is recorded net of charges for certain sales incentives and discounts, and applicable state and local sales taxes, which represent components of the transaction

---

19

---

ELECTRONIC SYSTEMS TECHNOLOGY, INC.

NOTES TO FINANCIAL STATEMENTS

---

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.

 

The Company receives payments from customers based on the terms established in our contracts.  When amounts are billed and collected before the services are performed, they are included in deferred revenues.  The Company does not generally sell its products with the right of return.  Therefore, returns are accounted for when they occur and are accepted.  Products sold to foreign customers are shipped after payment is received in U.S. funds, unless an established distributor relationship exists, or the customer is a foreign branch of a U.S. company.  

 

The Company warrants its products as free of manufacturing defects and provides a refund of the purchase price, repair or replacement of the product for a period of one year from the date of installation by the first user/customer.  No allowance for estimated warranty repairs or product returns has been recorded due to the Company’s historical experience of repairs and product returns.

 

Financial Instruments

 

The Company’s financial instruments are cash, money market funds, and certificates of deposit.  The recorded values of cash, money market funds and certificates of deposit approximate their fair values based on their short-term nature.  

 

Cash and Cash Equivalents

 

Cash and cash equivalents are cash and money market funds purchased with original maturities of three months or less.  

 

Allowance for Uncollectible Accounts

 

The Company uses the allowance method to account for estimated uncollectible accounts receivable.  Accounts receivable are presented net of an allowance for doubtful accounts. As of December 31, 2020 and 2019, the Company’s estimate of doubtful accounts was zero.  The Company’s policy for writing off past due accounts receivable is based on the time past due and responses received from the subject customer.  

 

Inventories

 

Inventories are stated at lower of direct cost or market.  Cost is determined on an average cost basis that approximates the first-in, first-out (FIFO) method.  Market is determined based on net realizable value and consideration is given to obsolescence.

---

20

---

ELECTRONIC SYSTEMS TECHNOLOGY, INC.

NOTES TO FINANCIAL STATEMENTS

---

Reclassifications

 

Certain prior year amounts have been reclassified for consistency with the current period presentation.  Reclassifications had no effect on net loss, stockholders' equity, or cash flows as previously reported.

 

Property and Equipment

 

Property and equipment is carried at cost.  Major betterments are capitalized and de minimis purchases are expensed.  Depreciation is computed using the straight-line method over the estimated useful lives of the assets.  The useful life of property and equipment for purposes of computing depreciation is three to seven years.    When the Company sells or otherwise disposes of property and equipment a gain or loss is recorded in the statement of operations. The cost of improvements that extend the life of property and equipment is capitalized.  The Company periodically reviews its long-lived assets for impairment and, upon indication that the carrying value of such assets may not be recoverable, recognizes an impairment loss by a charge against current operations.

 

Certificates of Deposit

 

Certificates of deposit with original maturities ranging from one month to twelve months were

$499,999 and $650,000 at December 31, 2020 and 2019, 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 recognized as operating expenses when incurred.  Research and development expenditures for new product development and improvements of existing products by the Company for 2020 and 2019 were $200,024 and $210,679, respectively.  

---

21

---

ELECTRONIC SYSTEMS TECHNOLOGY, INC.

NOTES TO FINANCIAL STATEMENTS

---

Advertising Costs

 

Costs incurred for producing and communicating advertising are recognized as operating expenses when incurred.  Advertising costs for the years ended December 31, 2020 and 2019 were $6,351 and $6,735, respectively.  

 

Earnings Per Share

 

The Company is required to have dual presentation of basic earnings per share (“EPS”) and diluted EPS.  Basic EPS is computed as net income (loss) divided by the weighted average number of common shares outstanding for the period. Diluted EPS is calculated based on the weighted average number of common shares outstanding during the period plus the effect of potentially dilutive common stock equivalents.

 

Potentially dilutive common stock equivalents consist of 180,000 and 120,000 stock options outstanding as of December 31, 2020 and 2019, respectively. As of December 31, 2020 and 2019, the potentially dilutive stock options were not included in the calculation of the diluted weighted average number of shares outstanding or diluted EPS as their effect would have been anti-dilutive.

 

Share-Based Compensation

 

Share-based payments to employees, including grants of employee stock options, are measured at fair value and expensed in the statement of operations over the vesting period.  In addition to the recognition of expense in the financial statements, any excess tax benefits received upon exercise of options will be presented as a financing activity inflow rather than an adjustment of operating activity in the statement of cash flows.  

 

Fair Value Measurements

 

When required to measure assets or liabilities at fair value, the Company uses a fair value hierarchy based on the level of independent, objective evidence surrounding the inputs used. The Company determines the level within the fair value hierarchy in which the fair value measurements in their entirety fall. The categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. Level 1 uses quoted prices in active markets for identical assets or liabilities, Level 2 uses significant other observable inputs, and Level 3 uses significant unobservable inputs. The amount of the total gains or losses for the period are included in earnings that are attributable to the change in unrealized gains or losses relating to those assets and liabilities still held at the reporting date.  At December 31, 2020 and 2019, the Company has no assets or liabilities subject to fair value measurements on a recurring basis.  

---

22

---

ELECTRONIC SYSTEMS TECHNOLOGY, INC.

NOTES TO FINANCIAL STATEMENTS

---

New Accounting Pronouncements

 

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 adoption of this update on January 1, 2020 had no impact on the financial statements.  

 

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.

 

2.Inventories 

 

Inventories consist of the following:

	2020	2019
Parts	$      99,303	$     116,843
Work in progress	275,230	379,987
Finished goods	257,174	325,989
	$     631,707	$     822,819

 

Included in the above amounts are reserves for obsolete inventories of $4,730 and $7,798 at December 31, 2020 and 2019, respectively.

 

3.Property and Equipment 

 

Property and equipment consist of the following:

 

	2020	2019
Laboratory equipment	$     522,575	$     531,999
Software	35,028	35,028
Furniture and fixtures	15,262	16,312
Dies and molds	73,607	73,607
	646,472	656,946
Accumulated depreciation and amortization	(641,027)	(644,548)
	$       5,445	$       12,398

---

23

---

ELECTRONIC SYSTEMS TECHNOLOGY, INC.

NOTES TO FINANCIAL STATEMENTS

---

4.Income Taxes 

 

For the year ended December 31, 2020 and 2019, the Company did not have an income tax benefit nor provision because of continuing losses.

 

The components of net deferred tax assets are as follows:

		December 31,
		2020	2019
Deferred tax assets:
Net operating loss carryforwards		$255,900	$214,200
Accrued liabilities		3,700	2,400
Inventories		15,500	15,600
Other		-	300
Federal income tax credits		67,000	66,000
Total deferred tax assets		342,100	298,500
Deferred tax liability:
Property and equipment		(600)	(2,000)
Other		(200)	-
		(800)	(2,000)
Deferred tax assets, net		341,300	296,500
Less valuation allowance		(341,300)	(296,500)
Total deferred tax assets, net		$-	$-

 

Realization of the deferred tax asset is dependent on generating sufficient taxable income prior to expiration of the loss carryforwards and the income tax carryforwards. Management determined that it does not believe it is more likely than not that all of the net deferred tax assets will be realized. Therefore, a valuation allowance has been recorded for the full net deferred tax asset at December 31, 2020 and 2019.

 

At December 31, 2020, the Company had approximately $67,000 of research and development income tax credits available to reduce federal income taxes in future periods.  The credits expire from 2034-2038.  In addition, at December 31, 2020, the Company had approximately $1,200,000 of net operating loss carryforwards, $750,000 of which will expire between 2034 and 2037.   The remaining balance of $450,000 will never expire but whose utilization is limited to 80% of taxable income in any future year.

 

The differences between the provision (benefit) for federal income taxes and federal income taxes computed using the U.S. statutory federal income tax rate of 21% were as follows:

 

		2020	2019
Amount computed using the statutory rate		$       (42,600)	$(40,100)
Non-deductible (taxable) items, net		(1,800)	450
Change in estimates		(400)	4,350
Change in valuation allowance		44,800	35,300
Provision (benefit) for federal income taxes		$                   -	$-

---

24

---

ELECTRONIC SYSTEMS TECHNOLOGY, INC.

NOTES TO FINANCIAL STATEMENTS

---

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 2017.  The Company has evaluated all tax positions for open years and has concluded that they have no material unrecognized tax benefits or penalties.  

 

5.Profit Sharing Salary Deferral 401-K Plan 

 

The Company sponsors a Profit-Sharing Plan and Salary Deferral 401-K Plan and Trust.  All employees over the age of twenty-one are eligible.  On January 1, 2006, the Company adopted a four percent salary matching provision.  The Company contributed $15,659 and $15,854 to the plan for the years ended December 31, 2020 and 2019, 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 bonuses that may be awarded. If these thresholds are not achieved, there will be no bonus issued.  There was no accrual or expense recorded for 2020 or 2019.

 

7.Share-Based Compensation 

 

The Company grants stock options to individual employees and directors with three years continuous tenure.  After termination of employment, stock options may be exercised within ninety days, after which they are subject to forfeiture. On March 13, 2020, the Board of Directors canceled all 120,000 outstanding stock options that were granted on August 7, 2017 and were due to expire on August 6, 2020.    In addition, the Board of Directors granted 180,000 options to employees. The new options have an exercise price of $0.40, a term of 5 years, and vested immediately.    The fair value of the options was determined using the Black-Scholes model using the following variables:   stock price of $0.40, volatility of 79.27%, expected term of 5 years with a forfeiture rate of 95%, and a discount factor of 0.72%. Share based compensation of $2,283 was recognized in 2020.

 

In the years ended December 31, 2020 and 2019, the Company recognized $2,283 and $0 respectively, in share-based compensation expense.  No non-vested share-based compensation arrangements existed as of December 31, 2020 and 2019.    

---

25

---

ELECTRONIC SYSTEMS TECHNOLOGY, INC.

NOTES TO FINANCIAL STATEMENTS

---

A summary of option activity follows:

 

	Number Outstanding	Weighted Average Exercise Price Per Option	Weighted Average Remaining Contractual Term (Years)
Balance at December 31, 2018	120,000	$      0.40	1.6
Granted	-	-
Expired/Forfeited	-	-
Balance at December 31, 2019	120,000	0.40	1.6
Granted	180,000	0.40	4.2
Expired/Forfeited/Cancelled	(120,000)	0.40
Balance at December 31, 2020	180,000	$      0.40	4.2
Outstanding and Exercisable at December 31, 2020	180,000	$      0.40	4.2

 

The aggregate intrinsic value of the options outstanding and exercisable at December 31, 2020 was nil.  

 

8.Leases 

 

On September 23, 2020, the Company signed a new two-year lease for its facilities.  The base lease is $3,162 and $3,267 per month for years one and two, respectively. There is a leasehold tax applied to the base lease at 12.84%. The Company has the right to terminate the lease with 90 days’ notice. There is no renewal clause contained in the current lease.  Upon signing the lease, the Company recognized a lease liability and right of use asset of $74,005 based on the two-year payment stream discounted using an estimated incremental borrowing rate of 4.0%. At December 31, 2020, the remaining lease term is eighteen months.

 

Prior to the new lease in September 23, 2020, the Company’s lease for its facilities was for $5,639 per month.

 

As of December 31, 2020, total future lease payments are as follows:

 

For the 12 months ended December 31,
2021	$	38,260
2022		29,407
Total		67,667
Less imputed interest		(2,279)
Net lease liability		65,388
Current portion		36,753
Long-term portion	$	28,635

---

26

---

ELECTRONIC SYSTEMS TECHNOLOGY, INC.

NOTES TO FINANCIAL STATEMENTS

---

For the years ended December 31, 2020 and 2019, costs relating to the operating lease were recognized in the statement of operations as follows:

 

	2020				2019
	Cost of sales	Operating expenses	Total		Cost of sales	Operating expenses	Total
Base rent pursuant to lease agreement	$ 14,393	$   40,411	$ 54,804		$ 11,840	$   47,359	$ 59,199
Variable lease costs	1,836	5,156	6,992		1,520	6,081	7,601
Total lease costs	$ 16,229	$   45,567	$ 61,796		$ 13,360	$ 53,440	$ 66,800

 

9.Revenue 

 

The Company derives revenues from the sales of industrial wireless products and accessories such as antennas, power supplies and cable assemblies. The Company also provides direct site support and engineering services to customers, such as repair and upgrade of its products.  The Company’s customers, to which trade credit terms are extended, consist of United States and local governments and foreign and domestic companies.  

 

	For the year ending December 31,
	2020				2019
	Domestic Sales	Foreign Sales	Total Sales		Domestic Sales	Foreign Sales	Total Sales
Product Sales	$ 883,144	$ 297,878	$1,181,022		$1,137,769	$ 229,402	$1,367,171
Site Support Sales	44,350	-	44,350		41,377	-	41,377
Total Sales	$ 927,494	$ 297,878	$1,225,372		$1,179,146	$  229,402	$1,408,548

 

For the 12-month period ended December 31, 2020, sales to two customers represented more than 10% of total revenue.  Two customers represented more than 10% of total revenue for the same period in 2019.

 

	2020 Sales	2020 %age of Total Sales	2019 Sales	2019%age of Total Sales
Foreign customer A	$     180,331	14.7%	$                -	0.0%
Domestic customer A	$     158,483	12.9%	$    199,795	14.22%

 

As of December 31, 2020 and 2019, the Company had a sales order backlog of $0 and $34,801, respectively.

 

10.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. Shares repurchased are retired.

---

27

---

ELECTRONIC SYSTEMS TECHNOLOGY, INC.

NOTES TO FINANCIAL STATEMENTS

---

During the years ended December 31, 2020 and 2019, the Company repurchased 0 and 39,246 shares of its common stock for $0 and $14,920, respectively.   As of December 31, 2020, the Company has repurchased a total of 212,165 shares for a total cost of $80,629 and a balance of $169,371 remains of the original $250,000 approved by the board. On April 23, 2020, repurchases were suspended indefinitely.

 

11.Cares Act Loan Payable 

 

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security (the “CARES Act”) Act was signed into United States law.   

 

In April 2020, the Company received a loan of $171,712 pursuant to the Paycheck Protection Program (the “PPP”) under Division A, Title I, Section 1102 and 1106 of the CARES Act.   The loan, which was in the form of a promissory note, as amended, dated April 13, 2020 issued by the Company (the “Note”); the Note matures on April 13, 2022 and bears interest at a rate of 1% per annum. The Note may be prepaid by the Company at any time prior to maturity with no prepayment penalties. Under the terms of the PPP, certain amounts of the loan may be forgiven if they are used for qualifying expenses as described in the CARES Act. Qualifying expenses include payroll costs, costs used to continue group health care benefits, mortgage payments, rent, and utilities. As of December 31, 2020, the Company has used funds from the loan to pay qualifying expenses.  The Company has applied for forgiveness of the loan. If and when approved, grant income of $171,712 will be recognized.

 

During the year ended December 31, 2020, the Company received $9,000 under Division A, Title I, Section 1110 of the CARES Act.    The Company is not required to pay this amount back and recognized $9,000 as government grant income during the year.

---

28

---

---

ELECTRONIC SYSTEMS TECHNOLOGY, INC.

DBA ESTEEM WIRELESS MODEMS

 

SUPPLEMENTAL SCHEDULE

---

29

---

---

ELECTRONIC SYSTEMS TECHNOLOGY, INC. DBA ESTEEM WIRELESS MODEMS   SUPPLEMENTAL SCHEDULE OF OPERATING EXPENSES FOR THE YEARS ENDED DECEMBER 31, 2020 AND 2019
		2020	2019
Advertising		$          6,351	$          6,735
Dues and subscriptions		4,280	3,175
Depreciation		6,953	7,970
Insurance		12,386	13,053
Materials and supplies		17,630	18,875
Office and administration		5,473	7,351
Printing		1,753	3,513
Professional services		110,191	117,243
Rent and utilities		68,760	75,071
Repair and maintenance		1,643	2,404
Salaries and benefits		611,880	622,708
Taxes, licenses & health insurance		165,232	161,720
Telephone		7,090	8,444
Warranty expense		929	1,891
Write off of uncollectible account receivable		-	75,035
Gain on disposal of assets		(785)	-
Trade shows		7,300	21,010
Travel expenses		3,764	32,428
		1,030,830	1,178,626
Expenses allocated to cost of sales		(191,657)	(221,188)
Total Operating Expenses		$     839,173	$     957,438

---

30

---

---

Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure.

 

None

 

Item 9A. Controls and Procedures.

 

Disclosure Controls and Procedures.

 

Under the supervision and with the participation of our Management, including the Chief Executive Officer and Principal Accounting Officer, these positions are currently held by the same individual, we have evaluated the effectiveness of our disclosure controls and procedures (as such terms are defined under Rule 13a-15(e) and Rule 15d-15(e) promulgated under the Exchange Act) as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Principal Accounting Officer have concluded that there was a material weakness affecting our internal control over financial reporting and, as a result of this weakness, our disclosure controls and procedures were not effective as of December 31, 2020.

 

Management’s Annual Report on Internal Control over Financial Reporting.

 

The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. The Company’s internal control over financial reporting is a process to provide reasonable assurance regarding the reliability of our financial reporting for external purposes in accordance with accounting principles generally accepted in the United States of America. Internal control over financial reporting includes maintaining records that in reasonable detail accurately and fairly reflect our transactions; providing reasonable assurance that transactions are recorded as necessary for preparation of our financial statements; providing reasonable assurance that receipts and expenditures of company assets are made in accordance with management authorization; and providing reasonable assurance that unauthorized acquisition, use or disposition of company assets that could have a material effect on our financial statements would be prevented or detected on a timely basis. Because of its inherent limitations, internal control over financial reporting is not intended to provide absolute assurance that a misstatement of our financial statements would be prevented or detected.

 

As of December 31, 2020, management conducted an assessment of the effectiveness of the Company’s internal control over financial reporting based on the criteria for effective internal control over financial reporting established in “Internal Control — Integrated Framework,” (2013) issued by the Committee of Sponsoring Organizations (COSO) of the Treadway Commission. Management, under the supervision and with the participation of the Company’s Chief Executive Officer and Principal Accounting Officer, assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2020 and concluded that it is ineffective in assuring that the financial reports of the Company are free from material errors or misstatements. 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.

 

Management’s Remediation Initiatives

 

Management has evaluated and continues to evaluate, avenues for mitigating our internal controls weaknesses, but mitigating controls have been deemed to be impractical and cost prohibitive due to the size of our organization at the current time.  Management does not foresee implementing a cost effective method of mitigating our internal control weaknesses in the near term.  Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within the Company have been detected.  These inherent limitations include the realities that judgments in decision making can be faulty and that breakdowns can occur because of simple error or mistake.  The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Projections of any evaluation of controls effectiveness to future periods are subject to risks.

---

31

---

---

Changes in internal control over financial reporting.

 

During the quarter ended December 31, 2020, there were no changes in the Company’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

Item 9B. Other Information.

 

None

 

PART III

Item 10. Directors, Executive Officers and Corporate Governance.

 

IDENTIFICATION OF DIRECTORS:

 

The following table sets forth the names and ages of all directors of the Company as of December 31, 2019 as well as the term in office and principal occupation of each director.

 

Name of  Director	Term in Office	Age	Principal  Occupation
T.L. Kirchner	06/05/20 – 06/02/23	72	Former President of the Company
Vern Kornelsen	06/05/20 – 06/02/23	88	General Partner of EDCO
Thomas Schaefer	06/01/2018 – 06/01/2021	60	Vice President of Online Development Inc.
Donald Siecke	06/01/2018 – 06/01/2021	80	President of Kelmore Development Corp.
Michael W. Eller	06/07/2019-06/03/2022	60	President of Electronic Systems Technology, Inc.

 

Management believes that there are no agreements or understanding between the directors and suppliers or contractors of the Company.

 

Audit Committee

 

The Audit Committee of the Board of Directors as of December 31, 2020 is comprised of Don Siecke (Chairman) and Tom Schaefer. The Audit Committee met on one occasion in 2020.  The Board of Directors has determined that Mr. Siecke is an “audit committee financial expert” as defined in Item 407(d)(5) of Regulation S-K promulgated by the SEC. The Board’s conclusions regarding the qualifications of Mr. Siecke as an audit committee financial expert were based on his experience as a certified public accountant and his degree in accounting. 

 

The Board has also adopted a charter for the Audit Committee. The charter for the audit committee is available on our website at www.esteem.com . The audit committee charter is also available in print to any shareholder who requests it.

 

Compensation Committee

 

There is no Compensation Committee of the Board of Directors. The Board of Directors did establish an Employee/Director Stock Option Committee consisting of all Directors.  The committee existed for the sole purpose of recommending the recipients and amounts of the Company awarded stock options during 2020. There is no charter for the Employee/Director Stock Option Committee.

 

Code of Ethics

 

On September 22, 2020, the Company's Board of Directors adopted a Code of Ethics for the Company.  The Codes of Ethics, and any subsequent amendments thereto, (other than technical, administrative, or non-substantive amendments), and any waivers of a provision of the Code of Ethics for directors or executive officers, are available on our website at www.esteem.com.

 

IDENTIFICATION OF EXECUTIVE OFFICERS

 

The following table sets forth the names and ages of all executive officers of the Company as of December 31, 2020; all positions by such persons; term of office and the period during which he has served as such; and any arrangement or understanding between him and any other person(s) pursuant to which he was elected as an officer:

---

32

---

---

Name of  Officer	Age	Position	Term of Office	Period of Service
Michael Eller	60	President/CEO/Principal Accounting Officer	Employed at will	9/7/12- Present

 

The following is a brief description of the business experience during the last five years of each director and/or executive officer of the Company.

 

T.L. KIRCHNER.  Mr. Kirchner is founder, Past President and a Director of the Company.  Mr. Kirchner does not serve as a director for any other company registered under the Securities Exchange Act.

 

VERN D. KORNELSEN.  Mr. Kornelsen is the General Partner of EDCO Partners LLLP.  Mr. Kornelsen formerly practiced as a certified public accountant in Denver, CO for many years and is a financial consultant to several early stage companies.  He was a director of Valleylab for 10 years and led an investor group that provided a portion of its initial funding.  Mr. Kornelsen has been a director and participated in the capitalizing of a number of early stage companies, and is currently a director and audit-committee member of a publicly-held company, Encision Inc. of Boulder, CO.  He is also the Chairman, Secretary, Director, and CFO of Lifeloc Technologies, Inc., a publicly-held company located in Wheat Ridge, CO.

THOMAS J. SCHAEFER: Mr. Schaefer is Vice President of Online Development Inc. a division of Softing AG based in Munich, Germany.  He is responsible for business development activities and the integration of new business acquisitions.  Prior to his current position Tom was President of Phoenix Digital Corporation a privately held company based in Scottsdale, AZ that provides redundant mission critical networking technology for industrial automation systems.  Mr. Schaefer also spent 30 years at Rockwell Automation.  His last assignment, at Rockwell, was the Global Industry Manager for Rockwell’s Water Industry focus.  During Mr. Schaefer’s tenure at Rockwell he held various positions that included P&L responsibility for the Service business unit, Sales and Marketing for Software/MES, and Sales and Application responsibility for the Drive Systems/Power Products group.

 

DONALD E. SIECKE.  Mr. Siecke practiced as a certified public accountant in the state of Colorado from 1963 to 1976. He has been president of Kelmore Development Corp., a real estate development company, since 1981, and serves as the chairman of Redstone Bank, a Colorado bank of which he was a founding director. He is a director of several privately held companies, metropolitan districts, and charitable organizations. He received a BS degree in business administration from the University of Denver in 1961, having majored in accounting.

 

MICHAEL W. ELLER.  Mr. Eller is the President and Principal Accounting Officer.  During the last five years Mr. Eller has been a full-time employee of the Company. Prior to joining EST Mr. Eller was employed at Macys Logistics and Operations where he was employed as the Vice President of Operations and Director of Finances.  Mr. Eller does not serve as a director for any other company registered under the Securities Exchange Act.

 

Family Relationships

 

None.

 

Section 16(A) Beneficial Ownership Reporting Compliance

 

During the year ended December 31, 2020 to the knowledge of Management, there was no director, officer, or beneficial owner of more than 10% any class of equity securities of the registrant who failed to file on a timely basis the required disclosure form as required by Section 16(a) of the Securities and Exchange Act of 1934.

 

Indemnification

 

The Company’s By-Laws address indemnification of Directors and Officers. Washington Law provides that Washington corporations may include within their Articles of Incorporation provisions eliminating or limiting the personal liability of their directors and officers in shareholder actions brought to obtain damages for alleged breaches of fiduciary duties, as long as the alleged acts or omissions did not involve intentional misconduct, fraud, a knowing violation of law or payment of dividends in violation of the Washington statutes. Washington law also allows Washington corporations to include in their Articles of Incorporation or Bylaws provisions to the effect that expenses of officers and directors incurred in defending a civil or criminal action must be paid by the corporation as they are incurred, subject to an undertaking on behalf of the officer or director that he or she will repay such expenses if it is ultimately determined by a court of competent jurisdiction that such officer or director is not entitled to be indemnified by the corporation because such officer or director did not act in good faith and in a manner

---

33

---

---

reasonably believed to be in or not opposed to the best interests of the corporation. The Company’s Articles of Incorporation provide that a director or officer is not personally liable to the Company or its shareholders for damages for any breach of fiduciary duty as a director or officer, except for liability for (i) acts or omissions which involve intentional misconduct, fraud or a knowing violation of law, or (ii) the payment of distribution in violation of Washington Business Corporation Act.

 

Related Person Transactions Policy and Procedures

 

As set forth in the written charter of the Audit Committee, any related person transaction involving a Company director or executive officer must be reviewed and approved by the Audit Committee. Any member of the Audit Committee who is a related person with respect to a transaction under review may not participate in the deliberations or vote on the approval or ratification of the transaction. Related persons include any director or executive officer, certain shareholders and any of their “immediate family members” (as defined by SEC regulations).

 

Item 11. Executive Compensation.

 

The Company’s principal executive officer and principal accounting officer is Michael W. Eller.

 

Information concerning the compensation of the Company’s principal executive officer and principal accounting officer, as well as any other compensated employees of the Registrant's whose total compensation exceeded $100,000 during 2020 and 2019 is provided in the following Summary Compensation Table (collectively, the “Named Executive Officers” or “NEOs”):

 

SUMMARY COMPENSATION TABLE
Name and Principal Position         (a)	Year             (b)	Salary ($)           (c)	Bonus ($)(1)           (d)	Stock Awards ($)         (e)	Option Awards ($)(2)         (f)	Non-Equity Incentive Plan Compensation ($)   (g)	Change in Pension Value and Non- qualified Deferred Compensation Earnings ($) (h)	All Other Compen- sation ($)(3)       (i)	Total ($)           (j)
Michael W. Eller President CEO/Principal Accounting Officer	2020	$121,700	-	-	-	-	-	$24,200	$145,900
	2019	$118,400	-	-	-	-	-	$21,562	$139,962

 

(1)Includes amounts paid under the Non-qualified Employee Profit Sharing Bonus.   

(2)Amount represents the dollar amount recognized for financial statement reporting purposes.  

(3)All Other Compensation consists of Group Health Insurance, Accrued Vacation Pay and Company paid 401(k) matching amounts. 

 

The information specified concerning the stock options of the named executive officers during the fiscal years ended December 31, 2019 and 2020 is provided in the following Option/SAR Grants in the Last Fiscal Year Table:

 

OPTION/SAR GRANTS IN 2020
Individual Grants (5)
(a)	(b)	(c)	(d)	(e)
Name	Number of Securities Underlying Options/SARs Granted # (5)	% of Total Options/SARs Granted to Employees in Fiscal Year	Exercise or base price ($/Share)	Expiration Date
Michael W. Eller	-0-	0%	$0.00	n/a

 

(5)This table does not include Stock Options granted previously.   

---

34

---

---

The information specified concerning the stock options of the named executive officers during the fiscal year ended December 31, 2020 is provided in the following Aggregated Option/SAR Exercises in Last Fiscal Year and Fiscal Year-End Options/SAR Values Table:

 

OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END
Option Awards						Stock Awards
Name	Number of Securities Underlying Unexercised Options (#) Exercisable	Number of Securities Underlying Unexercised Options (#) Unexercisable	Equity Incentive Plan Awards: Number of Securities Underlying Unexercised Unearned Options (#)	Option Exercise Price ($)	Option Expiration Date	Number of Shares or Units of Stock That Have Not Vested (#)	Market Value of Shares or Units of Stock That Have Not Vested ($)	Equity Incentive Plan Awards: Number of Unearned Shares, Units or Other Rights That Have Not Vested (#)	Equity Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units or Other Rights That Have Not Vested ($)
(a)	(b)	(c)	(d)	(e)	(f)	(g)	(h)	(i)	(j)
Michael W. Eller	40,000	0	0	$0.40	3/13/25	0	0	0	0

 

The Company does not currently have a Long-Term Incentive Plan (“LTIP”).

 

Compensation to outside directors is limited to reimbursement of out-of-pocket expenses that are incurred in connection with the directors’ duties associated with the Company's business. The Board of Directors approved a stipend for members that are not employed by the company in the amount of $375 per quarter of service on the Board of Directors.  There is currently no other compensation arrangements for the Company’s directors.  (See “Security Ownership of Certain Beneficial Owners and Management” for Stock Options granted in previous years.)  The information specified concerning items of Director Compensation for the fiscal year ended December 31, 2020 is provided in the following Director Compensation Table:

 

DIRECTOR COMPENSATION
Name (1)	Fees Earned or Paid in Cash ($)(2)	Stock Awards ($)	Option Awards ($)(3)	Non-Equity Incentive Plan Compensation ($)	Nonqualified Deferred Compensation ($)	All Other Compensation ($)(4)	Total ($)
(a)	(b)	(c)	(d)	(e)	(f)	(g)	(h)
T.L. Kirchner	$1,500	$0	$0	$0	$0	$0	$1,500
Vern Kornelsen	$1,500	$0	$0	$0	$0	$0	$1,500
Thomas Schaefer	$1,500	$0	$0	$0	$0	$0	$1,500
Donald Siecke	$1,500	$0	$0	$0	$0	$0	$1,500
Michael W. Eller	$0	$0	$0	$0	$0	$0	$0

 

(1) Compensation information for Michael Eller, President and Principal Accounting Officer is contained in the Executive Compensation Summary Compensation Table.

(2) Amount represents the Director Stipend paid in 2020.

(3) Amount represents the dollar amount recognized for financial statement reporting purposes. Assumptions made in the valuation of stock option awards are disclosed in Note 7 of the Notes to the Financial Statements in this Form 10-K.

(4) Amounts represent reimbursement of out-of-pocket expenses related to directors’ duties associated with the Company's business (ie. travel expenses for attending Company Director’s Meetings).

 

The Company currently does not hold any Employment Contracts or Change of Control Arrangements with any parties.

---

35

---

---

Option Exercises

 

During our fiscal year ended December 31, 2020, there were no options exercised by our executive officer or Directors.

 

Summary of Executive Employment Agreements

 

There are no executive employment agreements with any officer.

 

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

 

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS

 

The following table sets forth, as of December 31, 2020, the amount and percentage of the Common Stock of the Company, which according to information supplied by the Company, is beneficially owned by each person who, to the best knowledge of the Company, is the beneficial owner (as defined below) of more than five (5%) of the outstanding common stock.

 

Title of Class	Name & Address of Beneficial Owner (1)	Amount & Nature of Beneficial Ownership	Percent of Class
Common	EDCO Partners LLLP 4605 Denice Drive Englewood  CO  80111	1,797,700	36.3%
Common	T.L. Kirchner 415 N. Roosevelt St. Kennewick  WA  99336	403,488	8.2%

 

 

(1)Under Rule 13d-3, issued by the Securities and Exchange Commission, a person is, in general, deemed to "Beneficially own" any shares if such person directly or indirectly, through any contract, arrangement, understanding, relationship or otherwise, has or shares (a) voting power, which includes the power to vote or to direct the voting of those shares and/or (b) investment power, which included the power to dispose, or to direct the disposition of those securities.  The foregoing table gives effect to shares deemed beneficially owned under Rule 13d-3 based on the information supplied to the Company.  To the knowledge of the Company, the persons named in the table have sole voting power and investment power with respect to all shares of Common Stock beneficially owned by them. 

 

SECURITY OWNERSHIP OF MANAGMENT

 

The following table sets forth, as of February 13, 2021, amount and percentage of the Common Stock of the Company, which according to information supplied by the Company, is beneficially owned by Management, including officers and directors of the Company.

 

Name/Address of Beneficial Owner  (1)	Title of Class	Amount & Nature of Beneficial Ownership		Percent of Class
T.L. Kirchner (Director)/415 N. Roosevelt St., STE B1 Kennewick, WA	Common		403,488		8.2%
Vern Kornelsen (Director)/415 N. Roosevelt St., STE B1 Kennewick, WA	Common		1,797,700		36.3%
Thomas Schaefer (Director)/415 N. Roosevelt St., STE B1 Kennewick, WA	Common		-		-
Donald Siecke (Director)/415 N. Roosevelt St., STE B1 Kennewick, WA	Common		-(2)		-
Michael W.  Eller (Officer)/415 N. Roosevelt St., STE B1 Kennewick, WA	Common		40,000 (1)		0.8%
All Officers and Directors as a group	Common		2,241,188		45.3%

 

(1)Includes 40,000 stock options issued 3/15/2020. 

(2)Mr. Siecke does not own any shares directly. However, EDCO Partners LLLC, of which Mr. Siecke is a limited partner, holds 498,916 shares on his behalf. 

---

36

---

---

On various dates, the Company's Board of Directors has approved Stock Option Bonuses for Directors and Employees.  The following is a summary of the Stock Option bonuses currently outstanding: Options are exercisable at fixed prices.  Options may not be exercised in blocks of less than 5,000 shares.  Options not exercised expire five years after approval date or 30 days following termination of employment/board membership, whichever occurs first.  In the event of acquisition, merger, recapitalization or similar events of the Company, the optionee will receive equivalent shares if one of the foregoing events occurs or will have a 10-day window in which to exercise the options.  Option grants are not transferable or assignable except to the optionee's estate in the event of the optionee's death.

 

Recipients of Stock Options currently unexpired as of December 31, 2020 were as follows:

 

Name	Option Shares	Exercise Price Per Share ($)
Grant Date: 3-15-2020
Alan B. Cook	25,000	0.40
Neil Helfeldt	25,000	0.40
Eric P. Marske	30,000	0.40
Dan Tolley	30,000	0.40
Ajay Nagadeep Muniyappa	30,000	0.40
Michael Eller	40,000	0.40
Total	180,000	0.40

 

Stock options must be exercised within 90 days after termination of employment/board membership. On March 13, 2020, the Board of Directors canceled all 120,000 outstanding stock options that were granted on August 7, 2017 and were due to expire on August 6, 2020.    In addition, the Board of Directors granted 180,000 options to employees. The new options have an exercise price of $0.40, a term of 5 years, and vested immediately. At December 31, 2020, there were 180,000 options outstanding and exercisable.

 

Changes in Control:

 

The Board of Directors is aware of no circumstances which may result in a change of control of the Company.

 

Certain Business Relationships:

 

There have been no unusual business relationships during the last fiscal year of the Registrant between the Company and affiliates as described in Item 404 (b) (1-6) of Regulation S-K.

 

Indebtedness of Management:

 

No Director or executive officer or nominee for Director, or any member of the immediate family of such has been indebted to the Company during the past year.

 

Item 13. Certain Relationships and Related Transactions, and Director Independence.

 

TRANSACTIONS WITH MANAGEMENT AND OTHERS

None.

---

37

---

---

Item 14. Principal Accounting Fees and Services.

 

AUDIT AND NON-AUDIT FEES

 

The following table presents fees billed to us during December 31, 2020 and 2019 for professional services provided by Assure CPA (formerly DeCoria Maichel & Teague).

 

Year Ended	December 31, 2020	December 31, 2019
Audit fees (1)	$39,450	$39,950
Audit-related fees (2)	-	-
Tax fees (3)	3,000	3,000
All other fees (4)	-	-
Total Fees	$42,450	$42,950

 

(1) Audit fees consist of fees billed for professional services provided in connection with the audit of the Company’s financial statements and reviews of our quarterly financial statements.

 

(2) Audit-related fees consist of assurance and related services that include, but are not limited to, internal control reviews, attest services not required by statute or regulation and consultation concerning financial accounting and reporting standards.

 

(3) Tax fees consist of the aggregate fees billed for professional services for tax compliance, tax advice, and tax planning.  These services include preparation of federal income tax returns.

 

(4) All other fees consist of fees billed for products and services other than the services reported above.

 

Our Audit Committee reviewed the audit and tax services rendered by Assure CPA (formerly DeCoria Maichel & Teague) and concluded that such services were compatible with maintaining the auditors’ independence.  All audit, non-audit, tax services, and other services performed by our independent accountants are pre-approved by our Audit Committee to assure that such services do not impair the auditors’ independence from us.  We do not use Assure CPA (formerly DeCoria Maichel & Teague)

for financial information system design and implementation.  These services, which include designing or implementing a system that aggregates source data underlying the financial statements or generates information that is significant to our financial statements, are provided internally.  We do not engage Assure CPA (formerly DeCoria Maichel & Teague) to provide compliance outsourcing services.

---

38

---

---

PART IV

 

Item 15. Exhibits and Financial Statement Schedules.

 

Documents filed as part of this report on Form 10-K or incorporated by reference:

 

(1)Our financial statements can be found in Item 8 of this report.  

 

(2)Financial Statement Schedules (omitted because they are either not required, are not applicable, or the required information is disclosed in the notes to the financial statements or related notes).  

 

The following exhibits are filed with this Annual Report on Form 10-K.  Certain exhibits have been previously filed with the Securities and Exchange Commission and are incorporated by reference.

 

EXHIBIT  NUMBER	DESCRIPTION
3.1	Articles of Incorporation filed as Exhibit 2.1 to Form S-18, Registration Statement No. 2-92949-S, filed November 5, 1984 **
3.2	Amended Articles of Incorporation of the Registrant, filed as Exhibit (c) to Form 8-K, filed March 15, 1985 **
3.3	By-Laws filed as Exhibit 2.1 to Form S-18, Registration Statement No. 2-92949-S,  filed November 5, 1984 **
3.4	Amendments to By-Laws filed as Exhibit (c) to Form 8-K, filed March 15, 1985 **
4	Instrument defining the rights of security holders including indentures. Exhibit II Form S-18 Registration Statement No. 2-92949-S is incorporated herein by reference. Form 8A Registration Statement, 000-27793, dated October 25, 1999 **
31.1	Section 302 Certification, CEO
31.2	Section 302 Certification, CFO
32.1	Section 906 Certification, CEO
32.2	Section 906 Certification, CFO
101.INS	XBRL Instance Document
101.SCH	XBRL Taxonomy Extension Schema Document
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document
101.LAB	XBRL Taxonomy Extension Label Linkbase Document
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document

 

 

**Incorporated by reference  

---

39

---

---

SIGNATURES

 

In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant has caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

ELECTRONIC SYSTEMS TECHNOLOGY, INC.

 

By:   /s/ Michael W. Eller                                                 

        Michael W. Eller, President

       (Principal Executive Officer, Director)

Date:  March 2, 2021

 

By:  /s/ Michael W. Eller                                                 

       Michael W. Eller, President

       (Principal Accounting Officer)

Date:  March 2, 2021

 

In accordance with the Exchange Act, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

 

Signature	Title	Date
/s/ T.L. KIRCHNER	Director	March 2, 2021
T.L. Kirchner
/s/ VERN KORNELSEN	Director	March 2, 2021
Vern D. Kornelsen
/s/ THOMAS SCHAEFER	Director	March 2, 2021
Thomas Schaefer
/s/ DONALD SIECKE	Director	March 2, 2021
Don Siecke

---

40

---

---

ELECTRONIC SYSTEMS TECHNOLOGY                            2020 ANNUAL REPORT

 

 

 

 

CORPORATE DIRECTORY

 

 

DIRECTORSINDEPENDENT AUDITORS 

 

Michael W. EllerAssure CPA, LLC 

President7307 N. Division, Ste. 222 

Electronic Systems Technology, Inc. Spokane, Washington 99208 

 

Tommy L. KirchnerTRANSFER AGENT 

Past President

Electronic Systems Technology Inc.EQ Shareowner Services 

1110 Centre Pointe Curve, Suite 101 

Vern D. KornelsenMendota Heights, MN, 5120 

General Partner

EDCO Partners LLLPThe Transfer Agent should be contacted for questions 

regarding changes in address, name, or ownership, lost 

Thomas J. Schaefercertificates, and consolidation of account.  When 

Vice Presidentcorresponding with the Transfer Agent, shareholders 

Online Development Inc. a division of Softing AGshould state the exact name(s) in which the stock is 

registered and certificate number of the certificate(s). 

Donald E. Siecke

President, Kelmore Development Corp. CORPORATE AND INVESTOR INFORMATION 

 

Please direct inquiries to: 

EXECUTIVE OFFICERSInvestor Relations Department 

Electronic Systems Technology, Inc. 

Michael W. Eller415 N. Roosevelt Street, STE. B1 

PresidentKennewick, Washington 99336 

Chief Executive Officer

Principal Accounting Officer

 

Vern D. Kornelsen

Secretary

 

CORPORATE HEADQUARTERS

 

Electronic Systems Technology, Inc.

415 N. Roosevelt Street, STE B1

Kennewick, Washington 99336

(509) 735-9092

(509) 783-5475 (Facsimile)

 

---

 

---

41

 

  As Of               Filer                 Filing    For·On·As Docs:Size             Issuer                      Filing Agent

 3/09/21  Elec Systems Technology Inc.      10-K       12/31/20   73:1.9M                                   Computerized Bo… Svcs/FA
10/25/99  Elec Systems Technology Inc.      8-A12G                 1:8K