UNITED STATES SECURITIES AND EXCHANGE COMMISSIONWASHINGTON D.C. 20549

FORM 10-QSB

 

[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the quarterly period ended September 30, 2006 

[  ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF1934For the transition period from _________ to _______

| **Commission File Number:**000-27793**ELECTRONIC SYSTEMS TECHNOLOGY, INC.(A Washington Corporation)******I.R.S. Employer Identification no.**91-1238077**415 N. Quay St., Building B1Kennewick WA 99336(509) 735-9092**
 

Check whether the issuer (1) has filed all reports required to be filed by Section 13or 15(d) of the Exchange Act during the past 12 months (or for such shorter period thatthe registrant was required to file such reports), and (2) has been subject to such filingrequirements for the past 90 days. Yes [ X ] No [ ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule12b-2 of the Exchange Act). Yes [ ] No [ X ]

State the number of shares outstanding of each of the issuer’s classes of commonequity, as of the latest practicable date: As of September 30, 2006: 5,153,667 shares ofcommon $0.001 par value.

Transitional Small Business Disclosure Format (check one): Yes [  ] No [ X ].
**PART I - FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS.

ELECTRONIC SYSTEMS TECHNOLOGY, INC.(as prepared by Management)(Unaudited)****
SELECTED FINANCIAL DATA

 
Nine Months Ended
September 30, 2006
September 30, 2005Sales
$ 1,764,334
$ 1,780,378Other Revenues
35,072
27,393Gross Profit
1,014,106
954,104 Net Income (Loss) Before Taxes 
101,487
139,823Net Income (Loss) After Taxes
62,979
86,193 Earnings (Loss) Per Share Before TaxesBasic
$ 0.02
$ 0.03Diluted
0.02
0.03 Earnings (Loss) Per Share After TaxesBasic
$ 0.01
$ 0.02Diluted
0.01
0.02 Weighted Average Shares Outstanding Primary
5,152,733
5,148,667Diluted
5,169,484
5,227,891 Total Assets
$ 3,015,468
$ 2,978,294 Long-Term Debt and Capital Lease Obligations
$ 0
$ 0 Shareholders' Equity
$ 2,795,587
$ 2,735,351 Shareholders' Equity Per Share
$ 0.54
$ 0.53 Working Capital
$ 2,648,987
$ 2,540,385 Current Ratio
16.3:1
15.5:1 Equity To Total Assets
93%
92%
 

1**ELECTRONIC SYSTEMS TECHNOLOGY, INC.BALANCE SHEETS(as prepared by Management)(Unaudited)****
September 30,    2006
December 31,    2005ASSETSCURRENT ASSETS Cash and Cash Equivalents
$ 1,755,243
$ 651,265 Short Term Certificates of Deposit    Investments
180,000
449,613Available for Sale Marketable    Securities
--
921,029Accounts Receivable, Net of    Allowance for Uncollectibles
230,581
222,982 Inventory
608,096
485,257 Accrued Interest
1,549
2,758Prepaid Expenses
47,099
31,985Total Current Assets
2,822,568
2,764,889PROPERTY & EQUIPMENT, Net of    Depreciation
166,822
184,025OTHER ASSETS
10,978
25,067Deferred Income Tax Benefit
15,100
20,600TOTAL ASSETS
$ 3,015,468
$ 2,994,581LIABILITIES & STOCKHOLDERS'    EQUITYCURRENT LIABILITIESAccounts Payable
83,959
41,377Refundable Deposits
--
72Accrued Liabilities
34,849 
54,109 Federal Income Taxes Payable
54,773
80,579Total Current Liabilities 
173,581
176,137Deferred Income Taxes
46,300
59,300STOCKHOLDERS' EQUITY    Common Stock, $.001 Par Value 50,000,000 Shares Authorized 5,153,667 Shares Issued And    Outstanding 
5,154
5,149 Additional Paid-in Capital
974,163
966,184 Retained Earnings
1,816,270
1,804,828Accumulated Other Comprehensive    Gain (Loss)
--
(17,017)
2,795,587
2,759,144TOTAL LIABILITIES AND    STOCKHOLDERS' EQUITY
$ 3,015,468
$ 2,994,581 
(See "Notes to Financial Statements")2**ELECTRONIC SYSTEMS TECHNOLOGY, INC.STATEMENTS OF OPERATIONS(as prepared by Management)(Unaudited)**** 
Three Months    Ended
Nine Months    Ended
September 30,    2006September 30,    2005September 30,     2006September 30,    2005SALES
$ 635,531
$ 650,195
$ 1,764,334$ 1,780,378COST OF SALES
253,710
277,890
750,228
826,274Gross Profit
381,821
372,305
1,014,106
954,104 OPERATING EXPENSESFinance/Administration
49,362
43,044
193,840
181,743Research & Development
100,381
66,934
276,911
203,285Marketing
107,649
129,057
358,437
363,823Customer Service
30,577
22,324
93,991
78,552Total Operating Expense
287,969
261,359
923,179
827,403OPERATING INCOME (LOSS)
93,852
110,946
90,927
126,701 Other Income (Expenses)Interest/Investment Income
12,137
11,259
31,915
27,393Realized Loss on Marketable Securities
(16,385)
--
(19,343)
(7,140)Management Fee, Marketable Securities
(647)
(2,344)
(5,075)
(6,999)Uncollectible Amounts Recovered
--
--
3,157
--Loss on Asset Disposal
(94)
--
(94)
(132)Net Other Income (Expense)
(4,989)
8,915
10,560
13,122 INCOME (LOSS) BEFORE TAX
88,863
119,861
101,487
139,823Provision For Income Tax
(35,139)
(38,914)
(38,508)
(53,630) NET INCOME (LOSS)
$ 53,724
$ 80,947
$ 62,979
$ 86,193 Basic Earnings (Loss) Per Share    Before Tax
$    0.02
$    0.02
$    0.02
$    0.03Basic Earnings (Loss) Per Share    After Tax
$ 0.01
$ 0.02
$    0.01
$    0.02 Diluted Earnings (Loss) Per Share    Before Tax
$    0.02
$    0.02
$    0.02
$    0.03Diluted Earnings (Loss) Per Share    After Tax
$    0.01
$    0.02
$    0.01
$    0.02
(See "Notes to Financial Statements") 3**STATEMENTS OF COMPREHENSIVE INCOME (LOSS)(as prepared by Management)(Unaudited)
 
Three Months    Ended
Nine Months    Ended
September 30,    2006
September 30,    2005
September 30,    2006
September 30,    2005NET INCOME (LOSS)
$ 53,724
$ 80,947
$ 62,979
$ 86,193 OTHER COMPREHENSIVE GAIN (LOSS):Unrealized gain (loss) on securities arising    during period (net of tax effect)
--
( 2,080)
--
( 2,829)COMPREHENSIVE INCOME (LOSS)
$ 53,724
$ 78,867
$ 62,979$ 83,364
 

 

 

 

 

 

 

 

 

 
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 **
(See "Notes To Financial Statements")4**ELECTRONIC SYSTEMS TECHNOLOGY, INC.STATEMENTS OF CASH FLOWS(as prepared by Management)(Unaudited)****Nine Months Ended
September    30, 2006
September 30,    2005CASH FLOWS PROVIDED    (USED) IN OPERATING ACTIVITIES:Net Income (Loss)$62,979$86,193Noncash items included    in income:Depreciation44,14553,178Amortization1,0902,138Loss on Disposition of    Assets94132Loss on Marketable    Securities19,3437,140Provision for Federal    Income Taxes(8,765)(969)Deferred Income Tax
(7,500)(5,600)Accrued Interest1,209(4,065)Shared Based    Compensation
5,984--DECREASE (INCREASE) IN    CURRENT ASSETS:Accounts Receivable    Net
(7,599)(54,886)Certificates of    Deposit Redeemed (Purchased)270,000(720,000)Marketable Securities    Investments Purchased
(402,000)--Marketable Securities    Investments Sold
1,329,081685,028Inventory
(122,839)17,887
Prepaid Software and Network Services12,999(18,104)Prepaid Expenses(15,114)(13,511)DECREASE (INCREASE) IN    LONG TERM ASSETS:Prepaid Software and    Network Services
--(27,884)INCREASE (DECREASE) IN    CURRENT LIABILITIES:Accounts Payable and    Accrued Expenses 
23,322(59,428)Refundable Deposits
(72)4,037Accrued Federal Income    Taxes
(25,806)20,999
1,180,551(27,715)CASH FLOWS PROVIDED    (USED) IN INVESTING ACTIVITIES:Deposits Applied to    Property and Equipment
----Additions To Property    And Equipment(27,036)(17,050)
(27,036)(17,050)CASH FLOWS PROVIDED    (USED) IN FINANCING ACTIVITIES:Stock Options    Exercised2,000--Cash Distribution Paid    to Shareholders
(51,537)(51,487)
(49,537)(51,487)NET INCREASE    (DECREASE) IN CASH AND    CASH EQUIVALENTS1,103,978(96,252)Cash And Cash    Equivalents At Beginning Of Period
651,265488,480Cash And Cash    Equivalents At Ending of Period $ 1,755,243$    392,228SUPPLEMENTAL    DISCLOSURES OF CASH FLOWS INFORMATION:Cash Paid Year To    Date:Interest$ 0$ 0Federal Income Taxes$ 80,579$    39,201Cash And Cash    Equivalents:Cash$ 31,091$ 9,194Money Market Accounts1,724,152383,034
$ 1,755,243$    392,228
(See "Notes to Financial Statements)5**ELECTRONIC SYSTEMS TECHNOLOGY, INC.

NOTES TO FINANCIAL STATEMENTS(as prepared by Management)(Unaudited)**NOTE 1 - BASIS OF PRESENTATION**
The financial statements of Electronic Systems Technology, Inc. (the"Company"), presented in this Form 10QSB are unaudited and reflect, in theopinion of Management, a fair presentation of operations for the three and nine monthperiods ended September 30, 2006 and September 30, 2005. Certain information and footnotedisclosures normally included in financial statements prepared in accordance withgenerally accepted accounting principals have been condensed or omitted pursuant to theapplicable rules and regulations of the Securities and Exchange Commission. Thesefinancial statements should be read in conjunction with the audited financial statementsand notes thereto included in the Company's Form 10KSB for the year ended December 31,2005 as filed with Securities and Exchange Commission.

The results of operation for the three and nine month periods ended September 30, 2006and September 30, 2005, are not necessarily indicative of the results expected for thefull fiscal year or for any other fiscal period.
**NOTE 2 - INVENTORIES**
Inventories are stated at lower of cost or market with cost determined using the FIFO(first in, first out) method. Inventories consist of the following:

September 302006
December 312005Parts
$272,098
$293,077Work in progress
90,117
14,518Finished goods
245,881
177,662
$608,096
$485,257
 
**NOTE 3 – EARNINGS (LOSS) PER SHARE**
Basic Earnings Per Share (EPS) excludes dilution and is computed bydividing income available to common stockholders by the weighted-average number of commonshares outstanding for the period. Diluted EPS reflects potential dilution occurring ifsecurities or other contracts to issue common stock were exercised or converted intocommon stock or resulted in the issuance of common stock that then shared in the earningsof the Company. The primary weighted average number of common shares outstanding was5,152,733 and 5,148,667 for the nine months ended September 30, 2006 and 2005respectively. The primary weighted average number of common shares outstanding for thethree month period ended September 30, 2006 was 5,153,667.

For the Nine Months Ended    September 30, 2006 
Income(Numerator)
Shares(Denominator)
Per-ShareAmount
Basic EPS

Income available to common stockholders
    $62,979
    5,152,733
    $0.01
Diluted EPS

Income available to common stockholders + assumed conversions
    $62,979
    5,169,484
    $0.01** 

6**NOTE 4 - STOCK OPTIONS**
Effective January 1, 2006, the Company adopted the provisions of Financial AccountingStandards Board (FASB) Statement No. 123R, "Share-Based Payment", (FAS 123R) forits share-based compensation plan. The Company previously accounted for these plans underthe recognition and measurement principles of Accounting Principles Board (APB) OpinionNo. 25, "Accounting for Stock Issued to Employees", (APB 25) and relatedinterpretations and disclosure requirements established by FAS 123, "Accounting forStock-Based Compensation". The Company adopted FAS 123R using the modifiedprospective method and, accordingly, results for prior periods have not been restated.

As of September 30, 2006, the Company had outstanding stock options that have beengranted periodically to individual employees and directors with no less than three yearsof continuous tenure with the Company. On February 10, 2006, additional stock options topurchase shares of the Company's common stock were granted to individual employees anddirectors with no less than three years continuous tenure. The options granted on February10, 2006 totaled 215,000 shares under option and have an exercise price of $0.68 pershare. The options granted on February 10, 2006 may be exercised any time during theperiod from February 10, 2006 through February 9, 2009. The Company's Form 8-K datedFebruary 10, 2006, as filed with the Securities and Exchange Commission is included hereinby reference. All outstanding stock options must be exercised within 90 days aftertermination of employment.

The fair value of each option award is estimated on the date of the grant using theBlack-Scholes option-pricing model with the following weighted-average assumptions usedfor grants in:
 
2006
2005
2004
2003Dividend yield
1.43%
1.25%
1.15%
3.49%Expected volatility
49%
63%
65%
73%************************ |
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