ELST Q3 report out yesterday
Things are improving,,,My target should get hit soon.
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Form 10QSB for ELECTRONIC SYSTEMS TECHNOLOGY INC
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14-Nov-2005
Quarterly Report
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION
Management's discussion and analysis is intended to be read in conjunction with the company's unaudited financial statements and the integral notes thereto for the quarter ending September 30, 2005. The following statements may be forward looking in nature and actual results may differ materially.
A. RESULTS OF OPERATIONS
REVENUES:
Total revenues from the sale of the Company's ESTeem wireless modem systems, accessories, and services increased to $650,195 for the third quarter of 2005 as compared to $457,485 in the third quarter of 2004, reflecting an increase of 42% from the previous year's quarter. Gross revenues increased to $661,454 for the quarter ending September 30, 2005, from $463,482 for the third quarter of 2004, reflecting an increase of 43% from the previous year. Management believes the increase in sales revenue is due to strong domestic and foreign export Industrial Automation product sales for the quarter when compared with relatively soft performance from these market segments during the same quarter of 2004. Management believes the increase in foreign export sales is the result of the comparatively strong third quarter 2005 sales into the countries of Colombia, Croatia and Canada for Industrial Automation projects, when compared with the third quarter of 2004. Management is of the opinion that domestic sales increased due to strong sales of the Company's ESTeem 195Eg Ethernet modem product and related accessories for Ethernet based Industrial Automation projects when compared with the same quarter of 2004.
As of September 30, 2005, revenues from the sale of the Company's products and services decreased to $1,780,378 for the first nine months of 2005, as compared to $1,789,944 for the same period of 2004. Management believes the decrease in revenues year-to-date, is the result of increased product and price competition in the industrial automation market, which negatively impacted revenues during 2004 and the first half of 2005. Not withstanding third quarter results, Management is cautious that 2005 sales revenues as a whole will be negatively impacted by these competitive and economic factors. The Company continues to counter these competitive and economic factors by increasing salesperson activity to enhance relationships with resellers of the Company's products and to maintain tradeshow attendance specifically targeted to markets of the Company's products.
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 as 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 in regard to the Company's revenues become difficult to predict.
The Company's revenues fall into four major customer categories, Domestic, Export, Mobile Data Computer (MDCS) and U.S. Government Sales. Domestic commercial sales increased to $376,546 in the third quarter of 2005 as compared to $295,566 for the third quarter of 2004. Foreign export sales for the third quarter of 2005 increased to $180,282 as compared to the $80,441 in the same quarter of 2004, due to strong sales to Colombia, Croatia and Canada when compared with the same period of 2004. MDCS sales for public safety entities increased to $81,710 in the third quarter of 2005, as compared to $66,651 for the same period of 2004. In September 2005, the Company received a commitment from Mississippi State Highway Patrol to purchase MDCS related products of approximately $210,000 through a reseller of the Company's products. As of September 30, 2005, the Company had completed delivery of $30,000 in products for this project, and expects to complete delivery by the end of the first quarter of 2006. However completion is dependent upon order release from the reseller and integration scheduling on the part of the Mississippi State Highway Patrol. U.S. Government sales decreased slightly to $11,657 in the third quarter of 2005, from third quarter 2004 levels of $14,827. Due to the uncertain nature of U.S. Government purchasing, Management does not base profitability or liquidity projections on expected U.S. Government sales.
No sale to a single customer comprised 10% or more of the Company's product and service sales for the quarter ending September 30, 2005.
A percentage breakdown of EST's major customer categories of Domestic, Export and U.S. Government Sales, for the third quarter of 2005 and 2004 is as follows:
For the third quarter of 2005 2004 Domestic Sales 58% 64% Export Sales 28% 18% Mobile Data Computer Sales 12% 15% U.S. Government Sales 2% 3%
A percentage breakdown of EST's product sales categories for the third quarter of 2005 and 2004 are as follows:
For the Quarter Ended September 30 2005 2004 ESTeem Model 192 (Licensed and non-Ethernet Spread Spectrum Modems) 39% 48%
ESTeem Model 192E and 195Eg (Ethernet Modems) 42% 26%
ESTeem Accessories 13% 18%
Factory Services 2% 2%
Site Support 4% 6%
Sales for the third quarter of 2005 and 2004 include foreign export sales as follows:
Three Months Ended September 30, 2005 September 30, 2004 Export sales $ 180,282 $ 80,442 Percent of sales 28% 18%
The geographic distribution of foreign sales for the third quarter of 2005 and 2004 is as follows:
Percent of Foreign Sales
COUNTRY September 30, 2005 September 30, 2004
Colombia 25% --
Canada 18% 42%
Croatia 17% --
Mexico 15% 12%
Chile 11% 9%
Puerto Rico 5% Nil
Peru 5% 10%
Singapore 2% --
Jordan 2% --
Brazil Nil 15%
Ecuador -- 10%
Egypt -- 2%
The majority of the Company's domestic and foreign sales for the third quarter of 2005 were used in Industrial Automation applications It is Management's opinion that the majority of the Company's sales will continue to be in Industrial Automation applications for the foreseeable future. Industrial Automation applications for the Company's products will be augmented by sales of MDCS for public safety entities. During the third quarter of 2005, MDCS sales accounted for 12% of the Company's sales and service revenues.
BACKLOG:
The Company had a backlog of $198,400 at September 30, 2005, which was comprised of orders placed late in September and ongoing MDCS projects. Customers generally place orders on an as needed basis. Shipment for most of the Company's products is generally made within 1 to 15 working days after receipt of customer orders, with the exception of ongoing, scheduled projects, and custom designed equipment.
COST OF SALES:
Cost of sales percentages of gross sales for the third quarters of 2005 and 2004 were 43% and 48%, respectively. The cost of sales decrease during the third quarter of 2005 is the result a favorable change in product mix of items sold and pricing discounts on those products, when compared with the same period of 2004.
OPERATING EXPENSES:
Operating expenses for the third quarter of 2005 increased $15,539 when compared
with the third quarter of 2004. The following is a delineation of operating
expenses:
For the quarter ended: September 30, September 30, Increase (Decrease)
2005 2004
Finance/Administration $ 43,044 $ 40,379 $ 2,665
Research/Development 66,934 85,858 (18,924)
Marketing 129,057 94,702 34,355
Customer Service 22,324 24,882 (2,558)
Total Operating Expenses $ 261,359 $ 245,821 $ 15,538
FINANCE AND ADMINISTRATION:
During the third quarter of 2005 Finance and Administration expenses increased to $43,044 when compared with the third quarter of 2004. The increase is the result of increased professional services required by the Company for government compliance and administration when compared the same quarter of 2004.
RESEARCH AND DEVELOPMENT:
During the third quarter of 2005, Research and Development expenses decreased $18,924 when compared with the third quarter of 2004. The decrease is the result of decreased subcontracted engineering expertise and development related material when compared with the same quarter of 2004, which had strong development activity for the ESTeem 195Eg product.
MARKETING:
Marketing expenses increased $34,355 during the third quarter of 2005 when compared with the third quarter of 2004 due to increased department related salaries, travel and tradeshow expenses. The increase is due to the hiring of an additional sales manager during 2005, increased sales related travel and increased tradeshow attendance by the Company during the third quarter of 2005.
CUSTOMER SERVICE:
Customer service expenses for the third quarter of 2005 decreased $2,558 when compared with the third quarter of 2004. The decrease is due to decreased department related travel expenses, and increased proportion of department costs being billed directly to customers for engineering services when compared with the same quarter of 2004.
INTEREST AND INVESTMENT INCOME:
The Company earned $11,259 in investment and interest income for the quarter ended September 30, 2005. Sources of this income were money market accounts, certificates of deposit and marketable securities investments.
NET INCOME (LOSS):
The Company recorded a net income of $80,947 for the third quarter of 2005, compared to a net loss of $3,536 for the third quarter of 2004. The increase is the result of increased sales revenues during the third quarter of 2005 when compared with the third quarter of 2004. Year to date, the Company has net income of $86,193 for the nine months ended September 30, 2005, compared with $144,151 for the same period of 2004. The decreased year to date net income is the result of decreased sales revenues and increased operating expenses negatively effecting year to date profitability when compared with the same period of 2004.
B. Financial Condition, Liquidity and Capital Resources
The Corporation's current asset to current liabilities ratio at September 30, 2005 was 15.5:1 compared to 13:1 at December 31, 2004. The increase in current ratio is due to decreased accounts payable liabilities as of September 30, 2005 when compared with December 31, 2004 amounts. Management views that this trend is likely to continue for the year as a whole.
For the quarter ending September 30, 2005, the Company had cash and cash equivalent holdings of $392,228 as compared to cash and cash equivalent holdings of $488,480 at December 31, 2004. Available for sale marketable securities decreased to $925,934 compared to $1,344,619 at December 31, 2004 as the result of restructuring of the Company's investments to include certificates of deposit. The Company had certificates of deposit investments in the amount of $449,370 as of September 30, 2005. Certain components of investments held by the Company, if sold as of September 30, 2005, would have presented a realized loss net of tax, of $13,940, compared with a potential loss net of tax, of $15,824 as of December 31, 2004. The contingency for these items is reflected in the Balance Sheets as Accumulated Other Comprehensive Gain (Loss), and the Statements of Comprehensive Income (Loss), respectively, as of September 30, 2005.
Accounts receivable increased to $311,966 as of September 30, 2005, from December 31, 2004 levels of $257,080, due to strong late third quarter 2005 sales activity. Inventory decreased to $587,272 at September 30, 2005, from December 31, 2004 levels of $605,159, due to increased product sales during the third quarter of 2005. The Company's fixed assets, net of depreciation, decreased to $217,196 as of September 30, 2005, from December 31, 2004 levels of $253,456 due to capital expenditures of $17,050 for fixed assets and being offset by depreciation of $53,178, and loss on asset disposition of $132. Prepaid expenses increased to $26,089 as of September 30, 2005 from December 31, 2004 amounts of $12,578 due to recent renewal of annual insurance policies and increased prepaid tradeshow expenses.
As of January 1, 2005, the Company entered into a 39-month agreement with Netsuite Inc. to provide the Company's customer relationship management and accounting software and related network infrastructure services. The current portion of the prepaid Netsuite Inc. services as of September 30, 2005, is reflected as prepaid software/network services and amounted to $18,104. The long-term portion of the prepaid Netsuite Inc. services as of September 30, 2005 is reflected as prepaid software/network services and is classified a long-term asset for the Company.
As of September 30, 2005, the Company's trade accounts payable balance was $68,827 as compared with $96,949 at December 31, 2004, and reflects amounts owed for purchases of inventory items, contracted services and capital expenditures. Refundable deposit liability was $7,667 for the quarter ended September 30, 2005, and reflects prepaid amounts for foreign export orders received in late September 2005. Accrued liabilities as of September 30, 2005 were $37,949, compared with $69,255 at December 31, 2004, and reflect items such as accrued vacation benefits, and quarterly payroll and excise tax liabilities. Federal Income Taxes payable increased to $60,200 as of September 30, 2005 as a result of the Company's year-to-date profitability and estimated tax liabilities.
It is Management's opinion the Company's cash, cash equivalent reserves, and working capital at September 30, 2005 are sufficient to satisfy requirements for operations, capital expenditures, and other expenditures as may arise in the short term.
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's reports and registration statements filed with the Securities and Exchange Commission.
ITEM III
CONTROLS & PROCEDURES
a. Evaluation of Disclosure Controls and Procedures. An evaluation has been performed under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial 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 September 30, 2005. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that the disclosure controls and procedures are reasonably designed and effective to ensure that (i) information required to be disclosed by us in the reports we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and (ii) such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
b. Changes in Internal Controls. There were no significant changes in the Company's internal controls or in other factors that could significantly affect the Company's disclosure controls and procedures subsequent to the Evaluation Date, nor any significant deficiencies or material weaknesses in such disclosure controls and procedures requiring corrective actions. |
