Executive Summary

Q3 2014 deteriorated materially: revenue fell to $380,407 and ELST posted a net loss of $(93,806), or $(0.02) per share, versus $574,507 revenue and $0.01 EPS in Q3 2013; gross margin compressed and operating loss widened, driven by lower volumes and mix .
Sequentially, revenue declined from $532,262 in Q2 2014 to $380,407 and profitability reversed from $12,912 net income to a $(93,806) net loss, reflecting deleveraging of fixed costs and a less favorable mix .
Management attributed the downturn to decreased core product sales and continuing economic concerns in foreign markets; export sales dropped to 3% of revenue (vs. 17% a year ago), and two domestic customers accounted for 15.5% and 11.5% of quarterly sales, highlighting concentration risk .
Balance sheet remains debt-free with cash rising to $952,484 and current ratio improving to 61.4x; no dividend declared; no formal guidance issued .

What Went Well and What Went Wrong

What Went Well

Strengthened liquidity and no long-term debt: cash and equivalents increased to $952,484; current assets of $2,896,149 vs. current liabilities of $47,168 (61.4x current ratio); long-term debt: -0- .
Operating discipline on marketing: marketing expense decreased slightly YoY ($111,456 vs. $114,188) as management curtailed travel, though total OpEx rose on R&D and G&A .
Management investing for product roadmap: inventories increased partly to support new ESTeem 210 and 195 products; R&D up due to subcontracted engineering and payroll to support development .

Quote: “Management believes the decrease in quarterly and year to date sales revenues is due to decreased core products and continuing economic concerns in foreign markets.”

What Went Wrong

Topline weakness and deleverage: revenue declined 33.8% YoY and 28.5% QoQ; operating swung to a $(98,956) loss (vs. $59,254 profit in Q3 2013 and $10,835 profit in Q2 2014) as fixed costs were not leveraged .
Margin pressure: cost of sales percentage increased versus prior periods; management cited product mix and unleveraged manufacturing overhead; gross profit fell to $190,280 from $319,333 a year ago .
Export weakness and concentration risk: export sales were just 3% of net revenue vs. 17% last year; two domestic customers comprised 15.5% and 11.5% of sales; backlog remained small at ~$12,274 .

Financial Results

Note: Minor rounding differences exist between the 8-K press release and 10-Q (e.g., sales $380,408 vs. $380,407; net loss $(93,804) vs. $(93,806)). Calculations below use 10-Q amounts .

Metric	Q3 2013	Q2 2014	Q3 2014
Revenue (Sales + Site Support) ($)	$574,507	$532,262	$380,407
Gross Profit ($)	$319,333	$302,276	$190,280
Operating Income (Loss) ($)	$59,254	$10,835	$(98,956)
Net Income (Loss) ($)	$51,956	$12,912	$(93,806)
EPS (Basic/Diluted) ($)	$0.01	Nil ($0.00)	$(0.02)
Gross Margin (%)	55.6% (calc)	56.8% (calc)	50.0% (calc)
Operating Margin (%)	10.3% (calc)	2.0% (calc)	(26.0%) (calc)
Cost of Sales % (Mgmt view)	41%	39%	47%

Change vs. prior periods (Q3 2014 reference):

Vs Q3 2013: Revenue −33.8%; Gross Profit −40.4%; Operating Income −$158,210; EPS −$0.03 (calc; sources above) .
Vs Q2 2014: Revenue −28.5%; Gross Profit −37.1%; Operating Income −$109,791; EPS −$0.02 (calc; sources above) .

Segment revenue mix (Domestic/Foreign):

Segment	Q3 2013	Q2 2014	Q3 2014
Domestic Revenue ($)	$479,644	$434,192	$367,657
Foreign Revenue ($)	$94,863	$98,070	$12,750
Domestic Mix (%)	83%	82%	97%
Foreign Mix (%)	17%	18%	3%

KPIs and balance sheet/liquidity:

KPI	Q1 2014	Q2 2014	Q3 2014
Backlog ($)	$27,873	$14,895	$12,274
Cash & Equivalents ($)	$681,952	$880,715	$952,484
Current Ratio (x)	57.8x	51.6x	61.4x
Long-term Debt	-0-	-0-	-0-
Inventory ($)	$720,664	$706,403	$715,650
Top Customer Concentration	Two customers = 21.6% (10.8%/10.8%)	None >10%	Two customers = 27.0% (15.5%/11.5%)

Guidance Changes

No formal financial guidance was provided. No dividends declared in 2014.

Metric	Period	Previous Guidance	Current Guidance	Change
Revenue	FY/Q4 2014	None	None	Maintained (no guidance)
Margins	FY/Q4 2014	None	None	Maintained (no guidance)
OpEx	FY/Q4 2014	None	None	Maintained (no guidance)
OI&E	FY/Q4 2014	None	None	Maintained (no guidance)
Tax rate	FY/Q4 2014	None	None	Maintained (no guidance)
Dividend	FY 2014	None	None	Maintained (no dividend)

Earnings Call Themes & Trends

No Q3 2014 earnings call transcript was available; themes below reflect MD&A and press release commentary.

Topic	Previous Mentions (Q1 2014)	Previous Mentions (Q2 2014)	Current Period (Q3 2014)	Trend
Foreign demand (Latin America/EMEA)	Export 19%; weakness in Latin America cited	Export 18%; YoY decline; Hungary/Peru mix	Export 3%; YoY decline; Mexico/Peru mix; economic concerns	Deteriorating
Product mix/margins	COS 41% (GM ~59%); mix effects	COS 39% (GM ~61%); favorable mix	COS 47%; unleveraged overhead; mix headwinds	Worsening
Domestic end-markets	Industrial automation demand improvement	Water/wastewater, mining strength cited	Decreased domestic sales cited as driver of decline	Softening
R&D and engineering services	R&D up modestly; product development	Engineering services and core products drove growth	R&D up on subcontracted engineering/payroll	Continuing investment
Backlog/ordering pattern	~$27.9K; “as needed” ordering	~$14.9K; “as needed” ordering	~$12.3K; “as needed” ordering	Low/declining
Internal controls	Material weakness (segregation of duties)	Material weakness persists	Material weakness persists	Unchanged

Management Commentary

“Management believes the decrease in quarterly and year to date sales revenues is due to decreased core products and continuing economic concerns in foreign markets.”
“During the quarter ended September 30, 2014, the Company had $12,750 in foreign export sales… compared with $94,863 for the same quarter of 2013.”
“Cost of sales percentage for the third quarter of 2014 and 2013 was 47% and 41%, respectively. The cost of sales increase… is the result of the product mix… and manufacturing overhead that was not leveraged.”
“Research and Development expenses increased $16,684… due to increased subcontracted engineering expertise and payroll.”
“The Corporation had a sales order backlog of approximately $12,274 as of September 30, 2014… customers generally place orders on an ‘as needed basis.’”

Q&A Highlights

No earnings call/Q&A was available for Q3 2014; no management Q&A clarifications disclosed in filings or press release .

Estimates Context

Wall Street consensus estimates from S&P Global for ELST were unavailable for Q3 2014 (no mapping/coverage). As a result, we cannot provide vs-consensus comparisons for revenue or EPS this quarter.
Given the lack of coverage and microcap status, estimates are unlikely to anchor near-term trading; investors should focus on order trends, mix, and domestic end-market recovery (see Financial Results and Themes) .

Key Takeaways for Investors

Volume and mix drove a sharp earnings reversal: revenue down 28.5% QoQ and 33.8% YoY with gross margin contraction to ~50%, yielding a $(0.02) loss; sustained recovery requires rebuilding volume and mix quality .
Export markets were a notable drag (3% of sales vs. 17% LY) amid macro softness; focus shifts to domestic pipeline and timing of project-based orders .
Fixed-cost deleverage was evident: operating loss of $(98,956) on $289,237 OpEx; near-term profitability hinges on volume/mix and OpEx control .
Liquidity is solid and debt-free, providing flexibility through a downturn; cash rose to $952,484 and current ratio to 61.4x, though backlog is modest ($12,274) .
Watch product transition and R&D spend tied to ESTeem 210/195; success could improve mix and margins, but costs must be monitored .
Internal control material weakness remains (segregation of duties); not cash-impacting but a governance overhang to monitor .
Without Street estimates, catalysts will be order wins, customer concentration risk (two customers = 27% of Q3 sales), and any stabilization in export demand .

ELECTRONIC SYSTEMS TECHNOLOGY INC (ELST)·Q3 2014 Earnings Summary