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 1934

> 
For the quarterly period ended March 31, 2006

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[  ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES  EXCHANGE ACT OF 1934  For 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 filedby Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorterperiod that the registrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days. Yes [ X ] No [ ]

Indicate by check mark whether the registrant is a shell company (asdefined in Rule 12b-2 of the Exchange Act). Yes [ ] No [ X ]

State the number of shares outstanding of each of the issuer’sclasses of common equity, as of the latest practicable date: As of March 31, 2006:5,153,667 shares of common $0.001 par value.

Transitional Small Business Disclosure Format (check one): Yes [ ] No [X ].

 
**PART IFINANCIAL INFORMATION

Item 1. Financial Statements.**
ELECTRONIC SYSTEMS TECHNOLOGY, INC.SELECTED FINANCIAL DATA(as prepared by Management)(Unaudited)
Three Months Ended
Mar. 31, 2006
Mar. 31, 2005Sales
$ 487,833
$ 583,006Other Revenues
$ 11,430
$ 6,324Gross Profit
$ 246,895
$ 316,090 Net Income (Loss) Before Taxes 
$ ( 55,148)
$ 37,325Net Income (Loss) 
$ ( 30,000)
$ 24,719 Earnings (Loss) Per Share Before TaxesBasic
$ ( 0.01)
$ 0.01Diluted
$ ( 0.01)
$ 0.01 Earnings (Loss) Per Share Basic
$ ( 0.01)
$ 0.01Diluted
$ ( 0.01)
$ 0.01 Weighted Average Shares Outstanding (Basic)Primary
5,150,834
5,148,667Diluted
5,190,259
5,253,050 Total Assets
$ 3,007,539
$ 2,951,679 Long-Term Debt and Capital Lease    Obligations
$ 0
$ 0 Shareholders' Equity
$ 2,741,912
$ 2,724,669 Shareholders' Equity Per Share
$ 0.53
$ 0.53 Working Capital
$ 2,572,081
$ 2,496,897 Current Ratio
13.2:1
17.5:1 Equity To Total Assets
91 %
92 %
 

 

1

ELECTRONIC SYSTEMS TECHNOLOGY, INC.BALANCE SHEET(as prepared by Management)(Unaudited)
 
Mar. 31, 2006
Dec. 31 ,2005ASSETSCURRENT ASSETS Cash and Cash Equivalents
$ 888,144
$ 651,265 Short Term    Certificates of Deposit Investments
90,000
449,613Available for Sale    Marketable Securities
1,034,936
921,029Accounts Receivable,    net of allowance for uncollectibles
206,615
222,982Inventory
509,735
485,257 Accrued Interest
991
2,758Provision for Federal Income Taxes
14,633
--Prepaid Expenses
37,754
31,985Total Current Assets
2,782,808
2,764,889 PROPERTY &    EQUIPMENT net of depreciation 
181,267
184,025 OTHER ASSETS
21,264
25,067DEFERRED INCOME TAX BENEFIT
22,200
20,600TOTAL ASSETS
$ 3,007,539
$ 2,994,581 LIABILITIES & STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts Payable
140,562
41,377Refundable Deposits 
27,844
72Federal Income Taxes Payable
--
80,579Accrued Liabilities
42,321
54,109 Total Current Liabilities 
210,727
176,137 DEFERRED INCOME TAXES 
54,900
59,300 STOCKHOLDERS' EQUITYCommon Stock, $.001    Par Value 50,000,000 Shares Authorized 5,153,667 Shares Issued And Outstanding
5,154
5,149 Additional Paid-in Capital
970,184
966,184 Retained Earnings
1,774,828
1,804,828 Accumulated other comprehensive    loss
(8,254)
(17,017) 
2,741,912
2,759,144 TOTAL LIABILITIES AND    STOCKHOLDERS' EQUITY
$    3,007,539
$ 2,994,581 
See Notes To Financial Statements

2

ELECTRONIC SYSTEMS TECHNOLOGY, INC.STATEMENTS OF INCOME (LOSS)(as prepared by Management)(Unaudited)
Three Months Ended
Mar. 31, 2006
Mar. 31, 2005 SALES
$    487,833
$ 583,006 COST OF SALES
240,938
266,916Gross Profit
246,895
316,090 OPERATING EXPENSESFinance/Administration
77,518
76,004Research & Development
85,121
66,692Marketing
108,246
105,033Customer Service
31,538
29,262Total Operating Expense
302,423
276,991OPERATING INCOME (LOSS)
( 55,528)
39,099 Other Income (expenses)Interest Income
8,273
6,324Uncollectible Accounts Recovered
3,157
--Realized Loss on Marketable Securities
(8,942)
(5,642)Management Fee, Marketable Securities
(2,108)
(2,324)Loss on Asset Disposal
--
(132)Net Other Income (expense)
380
(1,774)NET INCOME (LOSS) BEFORE TAX
(55,148)
37,325Provision For Income Tax
25,148
( 12,606)NET INCOME (LOSS) 
$ ( 30,000)
$ 24,719 Basic Earnings (Loss)    Per Share Before Tax
$ ( 0.01)
$ 0.01Basic Earnings (Loss)    Per Share After Tax
$ ( 0.01)
$ 0.01 Diluted Earnings    (Loss) Per Share Before Tax
$ ( 0.01)
$ 0.01Diluted Earnings    (Loss) Per Share After Tax
$ ( 0.01)
$ 0.01
See Notes To Financial Statements

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ELECTRONIC SYSTEMS TECHNOLOGY, INC.STATEMENTS OF COMPREHENSIVE INCOME (LOSS)(as prepared by Management)(Unaudited)
Three Months Ended
Mar. 31, 2006
Mar. 31, 2005NET INCOME (LOSS)
$ ( 30,000)
$ 24,719 OTHER COMPREHENSIVE LOSS:Unrealized gain (loss) on securities arising    during period (net of tax effect)
2,088
(2,535)COMPREHENSIVE INCOME (LOSS)
$ ( 27,912)
$ 22,184
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See Notes To Financial Statements

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ELECTRONIC SYSTEMS TECHNOLOGY, INC.STATEMENT OF CASH FLOWS(as prepared by Management)(Unaudited)
Three Months Ended
Mar. 31, 2006
Mar. 31, 2005CASH FLOWS PROVIDED    (USED) IN OPERATING ACTIVITIES:Net Income (Loss)
$ ( 30,000)
$ 24,719Noncash items included    in income:Depreciation
14,391
17,678Amortization
370
713Loss on Disposition of Assets
--
132Loss on Marketable Securities
8,942
5,642Provision for Federal Income Taxes
( 19,147)
( 612)Accrued Interest 
1,767
( 943)Deferred Income Tax
( 6,000)
1,900Share Based Compensation
2,004
--DECREASE (INCREASE) IN    CURRENT ASSETS:Accounts Receivable Net
16,367
27,554Certificates of Deposit Redeemed    (Purchased)
360,000
( 360,000)Marketable Securities Investments    Purchased
( 402,000)
--Marketable Securities Investments    Sold
292,042
325,028Inventory
( 24,478)
2,791Prepaid Software and Network    Services
3,433
( 16,306)Prepaid Expenses
( 5,769)
( 6,654)DECREASE (INCREASE) IN    LONG TERM ASSETS:Prepaid Software and Network    Services
--
( 32,611)INCREASE (DECREASE) IN    CURRENT LIABILITIES:Accounts Payable and Accrued    Expenses 
87,397
( 32,587)Refundable Deposits
27,772
2,944Accrued Federal Income Taxes
( 80,579)
( 27,882)
246,512 
( 68,494) CASH FLOWS PROVIDED    (USED) IN INVESTING ACTIVITIES:Additions To Property And    Equipment
( 11,633)
( 15,705)
( 11,633)
( 15,705)CASH FLOWS PROVIDED    (USED) IN FINANCING ACTIVITIES:Stock option exercise
2,000
--
2,000
--NET INCREASE (DECREASE) IN CASH    AND EQUIVALENTS
236,879
(84,199) Cash and Equivalents At Beginning    Of Period
651,265
488,480Cash and Equivalents At Ending of    Period 
$ 888,144
$ 404,281SUPPLEMENTAL    DISCLOSURES OF CASH FLOWS INFORMATION:Cash Paid Year To    Date:Interest
0
0Federal Income Taxes
$ 80,579
$ 39,201Cash and Equivalents:Cash
$ 10,086
$ 10,560Money Market Accounts
878,058
393,721
$ 888,144
$ 404,281
See Notes To Financial Statements5

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 month periods endedMarch 31, 2006 and March 31, 2005. Certain information and footnote disclosure normallyincluded in financial statements prepared in accordance with generally accepted accountingprincipals have been condensed or omitted pursuant to the applicable rules and regulationsof the Securities and Exchange Commission. In preparation of the financial statements,certain amounts and balances have been restated from previously filed reports to conformto the format of this quarterly presentation. These financial statements should be read inconjunction with the audited financial statements and notes thereto included in theCompany's Form 10K for the year ended December 31, 2005 as filed with Securities andExchange Commission.

The results of operation for the three-month periods ended March 31, 2006 and March 31,2005 are not necessarily indicative of the results expected for the full fiscal year orfor 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:
 
March 31 2006
December 31 2005Parts
$ 228,198
$ 293,077Work in progress
150,950
14,518Finished goods
130,587
177,662 
$ 509,735
$ 485,257**NOTE 3 - EARNINGS (LOSS) PER SHARE**
Basic and diluted loss per share is computed by dividing loss availableto common stockholders by the weighted-average number of common shares outstanding for theperiod, excluding equivalent shares from possible stock option exercises so as to avoiddecreasing the net loss per share amount. The primary weighted average number of commonshares outstanding was 5,150,834 and 5,148,667 for the quarters ended March 31, 2006 and2005 respectively. 
**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 March 31, 2006, the Company had outstanding stock options, which 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

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individual employees and directors with no less than three years continuous tenure. Theoptions granted on February 10, 2006 totaled 215,000 shares under option and have anexercise price of $0.68 per share.

The options granted on February 10, 2006 may be exercised any time during the periodfrom February 10, 2006 through February 9, 2009. The Company's Form 8-K dated February 10,2006, as filed with the Securities and Exchange Commission is included herein byreference. 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%Risk-free interest rate
4.67%
3.65%
2.25%
2.04%Expected term (in years)
3
3
3
3
The Company uses historical data to estimate option exercise rates. The option exerciserate for option grants in 2006 through 2003 was twelve percent.

A summary of option activity during the quarter ended March 31, 2006 is as follows: 
 
    Number Outstanding
Weighted-Average Exercise    Price Per ShareOutstanding at January 1, 2006
545,000
$0.68Granted 
215,000
0.68Exercised
(5,000)
0.40Canceled
(150,000)
0.40Outstanding at March 31, 2006 
605,000
0.75
For the first quarter of 2006, compensation expense charged against income for thefirst time for stock options was $2,004 ($1,323 after tax). No non-vested share-basedcompensation arrangements existed as of March 31, 2006.
**NOTE 5 - OTHER COMPREHENSIVE INCOME (LOSS)**
For the quarter ended March 31, 2006, the Company’s only item ofother comprehensive income (loss) was unrealized gains on marketable securitiesinvestments, net of tax in the amount $2,088. During the quarter ended March 31, 2005, theonly item of other comprehensive income (loss) was unrealized losses on marketablesecurities investments, net of tax in the amount of $2,535. 
**NOTE 6 - RELATED PARTY TRANSACTIONS**
For the quarter ended March 31, 2006, services in the amount of $13,310were contracted with Manufacturing Services, Inc., of which the owner/president is amember of the Board of Directors of EST.
**NOTE 7 - SEGMENT REPORTING**
Segment information is prepared on the same basis that the Company'smanagement reviews financial information for operational decision making purposes. TheCompany has two reportable segments, domestic and foreign, based on the geographiclocation of the customers. Both segments sell radio modem products (requiring an FCClicense or license free Ethernet products), related accessories for radio modem productsfor industrial automation projects, and mobile data computer products. The foreign segmentsells the Company's products and services outside the United States.

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During the quarter March 31, 2006, Domestic customers representedapproximately 70% of total net revenues. Foreign customers represented approximately 30%of total net revenues. During the quarter ended March 31, 2006 sales to the AWElectronica, a reseller of the Company’s products to Latin America, consisted of 13%of the Company’s sales revenues. Sales to ADSI and IndustrialEnet, both domesticresellers of the Company’s products, represented 12% and 10% of the Company's salesrevenues, respectively. No other sales to a single customer comprised 10% or more of theCompany's product sales. Revenues from foreign countries, consist primarily of revenuesfrom Canada and South American countries including Mexico. 

The accounting policies of the segments are the same as those describedin the summary of significant accounting policies, Note 1. Management evaluatesperformance based on net revenues and operating expenses. Administrative functions such asfinance and information systems are centralized. However, where applicable, portions ofthe administrative function expenses are allocated between the operating segments. Theoperating segments share the same manufacturing and distributing facilities. Costs ofoperating the manufacturing plant, equipment, inventory, and accounts receivable areallocated directly to each segment. 
**ELECTRONIC    SYSTEMS TECHNOLOGY, INC.**Segment    Reporting Summary financial information for the two    reportable segments for the first quarter of 2005 and 2006 is as follows:  ****** |
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