S

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

Form 10-Q

 

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2019

 

Or

 

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from ______ to ______

 

Commission File Number 000-09587

 

ELECTRO-SENSORS, INC.

(Exact name of registrant as specified in its charter)

 

Minnesota

41-0943459

(State or other jurisdiction of incorporation or organization)

(IRS Employer Identification No.)

 

6111 Blue Circle Drive
Minnetonka, Minnesota 55343-9108

(Address of principal executive offices)

 

(952) 930-0100

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:


Title of each class Trading Symbol(s) Name of each exchange on which registered
Common stock ELSE Nasdaq Capital Market


Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 of 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

 

1


Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer  

Accelerated filer ☐

 

Non-accelerated filer

☐ 

Smaller reporting company ☒

 

 

 

Emerging growth company ☐

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

 

The number of shares outstanding of the registrant’s common stock, $0.10 par value, on August 9, 2019 was 3,395,521.

 

 

 

2


 

ELECTRO-SENSORS, INC.

Form 10-Q

For the Periods Ended June 30, 2019

 

TABLE OF CONTENTS

PART I – FINANCIAL INFORMATION 4
   
Item 1. Financial Statements (unaudited): 4
   
Condensed Balance Sheets – As of June 30, 2019 and December 31, 2018 4
Condensed Statements of Comprehensive Income (Loss) – For the Three and Six Months ended June 30, 2019 and June 30, 2018 5
Condensed Statements of Changes in Stockholders' Equity – For the Three and Six Months ended June 30, 2019 and June 30, 2018 6
Condensed Statements of Cash Flows – For the  Six Months ended June 30, 2019 and June 30, 2018 7
Notes to Condensed Financial Statements 8
   
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 12
Item 3. Quantitative and Qualitative Disclosures About Market Risk 16
Item 4. Controls and Procedures 16
   
PART II – OTHER INFORMATION 17
   
Item 1. Legal Proceedings 17
Item 1A. Risk Factors 17
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 17
Item 3. Defaults Upon Senior Securities 17
Item 4. Mine Safety Disclosures 17
Item 5. Other Information 17
Item 6. Exhibits 17
   
SIGNATURES 18
   

 

3


PART I. FINANCIAL INFORMATION
Item 1. Financial Statements

ELECTRO-SENSORS, INC.

CONDENSED BALANCE SHEETS

(in thousands except share and per share amounts)

 

 

June 30,
2019

 

 

December 31,
2018

 

 

 

(unaudited)

 

 

 

 

ASSETS 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current assets 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents 

 

$

1,025

 

 

$

1,057

 

Investments

 

 

7,752

 

 

 

7,742

 

Trade receivables, less allowance for doubtful accounts of $11


1,295

 

 

 

896

 

Inventories

 

 

1,712

 

 

 

1,618

 

Other current assets

 

 

155

 

 

 

155

 

 

 

 

 

 

 

 

 

 

Total current assets

 

 

11,939

 

 

 

11,468

 

 

 

 

 

 

 

 

 

 

Deferred income tax asset, net

 

 

203

 

 

 

192

 

 

 

 

 

 

 

 

 

 

Intangible assets, net

 

 

457

 

 

 

565

 

 

 

 

 

 

 

 

 

 

Property and equipment, net

 

 

1,065

 

 

 

1,050

 

 

 

 

 

 

 

 

 

 

Total assets

 

$

13,664

 

 

$

13,275

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current maturities of financing lease

 

$

5

 

 

$

5

 

Accounts payable

 

 

241

 

 

 

116

 

Accrued expenses

 

 

555

 

 

 

405

 

Accrued income tax

32


0

 

 

 

 

 

 

 

 

 

Total current liabilities

 

 

833

 

 

 

526

 

 

 

 

 

 

 

 

 

 

Long-term liabilities 







    Financing lease, net of current maturities

21


24

   

 

 

 

 

 

 

 

 

Total long-term liabilities

21


24

 

 

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

   

 

 

 

 

 

 

 

 

Stockholders’ equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock par value $0.10 per share; authorized 10,000,000 shares; 3,395,521 shares issued and outstanding

 

 

339

 

 

 

339

 

Additional paid-in capital

 

 

2,024

 

 

 

2,019

 

Retained earnings

 

 

10,407

 

 

 

10,335

 

Accumulated other comprehensive gain (unrealized gain on available-for-sale securities, net of income tax)

 

 

40

 

 

32

 

 

 

 

 

 

 

 

 

Total stockholders’ equity

 

 

12,810

 

 

 

12,725

 

 

 

 

 

 

 

 

 

 

Total liabilities and stockholders’ equity 

 

$

13,664

 

 

$

13,275

 

See accompanying notes to unaudited condensed financial statements

4


ELECTRO-SENSORS, INC.

CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(in thousands except share and per share amounts)  

(unaudited)  

    Three Months Ended
June 30,
 

Six Months Ended

June 30


    2019     2018  
2019

2018
   
           







Net sales   $ 2,260     $ 1,780

$

4,268



$ 3,496
Cost of goods sold     1,025    
808  

1,966


1,608
                                  
Gross profit  
1,235    
972  

2,302


1,888
                                  
Operating expenses                







Selling and marketing     516       401  

1,001


836
General and administrative     418       424  

890


956
Research and development  
213    
222  

409


452
                                  
Total operating expenses   
1,147    
1,047  

2,300


2,244
                                  
Operating income (loss)     88     (75 )

2


(356 )
                                  
Non-operating income (expense)                







Interest expense

(1 )

0


(1 )

0
Interest income     41       24  

85


47
Other income  
3    
3  

5


5
                                  
Total non-operating income, net  
43    
27  

89


52
                                  
Income (loss) before income tax expense (benefit)     131     (48 )

91


(304 )
                                  
Provision for (benefit of) income tax     28  
(5 )

19


(59 )
                                  
Net income (loss)   $ 103   $
(43
$ 72

$ (245 )
                                  
Other comprehensive income                







Change in unrealized value of available-for-sale securities, net of income tax $ 7   $ 8
$ 8

$ 7
Other comprehensive income     7       8

8


7
                                  
Net comprehensive income (loss)   $
110   $ (35
$ 80

$ (238 )
                                  
Net income (loss) per share data:                







                                  
Basic                







Net income (loss) per share   $ 0.03   $ (0.01 )
$ 0.02
$ (0.07 )
Weighted average shares     3,395,521       3,395,521  

3,395,521


3,395,521
                                  
Diluted                







Net income (loss) per share   $
0.03   $
(0.01 )
$ 0.02
$ (0.07 )
Weighted average shares     3,395,521       3,395,521  

3,395,521


3,395,521

See accompanying notes to unaudited condensed financial statements

5


ELECTRO-SENSORS, INC.

CONDENSED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(in thousands except share and per share amounts)

For the three months ended June 30 













 

Common Stock Issued

 

 

Additional
Paid-in
Capital

 

 

Retained
Earnings

 

 

Accumulated
Other
Comprehensive
Income

 

 

Total
Stockholders’

Equity

 

 

Shares

 

 

Amount

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2019
3,395,521

$ 339

$ 2,022

$ 10,304

$ 33

$ 12,698

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income
















7


7
Stock-based compensation expense








2










2
Net income 












103






103

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance June 30, 2019 (unaudited)
3,395,521

$ 339

$ 2,024

$ 10,407

$ 40

$ 12,810

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2018 
3,395,521

$ 339

$ 2,008

$ 10,143

$ 18

$ 12,508

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income
















8


8
Stock-based compensation expense








2










2
Net loss












(43 )





(43 )

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance June 30, 2018 (audited)
3,395,521

$ 339

$ 2,010

$ 10,100

$ 26

$ 12,475

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the six months ended June 30























Common Stock Issued

Additional
Paid-in

Capital




Retained 

Earnings



Accumulated

Other

Comprehensive

Income



Total

Stockholders'

Equity




Shares


Amount








 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2018

 

3,395,521

 

 

$

339

 

 

$

2,019

 

 

$

10,335

 

 

$

32

 

$

12,725

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

8

 

 

8

Stock-based compensation expense

 

 

 

 

 

 

 

 

 

5

 

 

 

 

 

 

 

 

 

 

 

5

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

72

 

 

 

 

 

 

72

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, June 30, 2019 (unaudited)
3,395,521


339


2,024


10,407


40


12,810

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 30, 2017

 

3,395,521

 

 

 

339

 

 

 

2,004

 

 

 

10,352

 

 

 

12


 

 

12,707

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

7

 

 

7

Stock-based compensation expense

 

 

 

 

 

 

 

 

 

6

 

 

 

 

 

 

 

 

 

 

 

6

 

Change in accounting policy 












(7 )

7


0

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

(245

)

 

 

 

 

 

 

(245

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, June 30, 2018 (unaudited)

 

3,395,521

 

 

$

339

 

 

$

2,010

 

 

$

10,100

 

 

$

26


 

$

12,475

 

See accompanying notes to unaudited condensed financial statements
6


ELECTRO-SENSORS, INC.

CONDENSED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

 

 

 

Six Months Ended
June 30,

 

 

 

2019

 

2018

 

Cash flows used in operating activities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

72

 

$

(245

)

 

 

 

 

 

 

 

 

 

Adjustments to reconcile net income (loss) to net cash used in operating activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

154

 

 

 

158

 

Deferred income taxes

 

 

(13

)

 

 

(3

)

Stock-based compensation expense

 

 

5

 

 

 

6

 

Interest accrued on treasury bills

 

 

(84

)

 

 

(43

)

Change in:

 

 

 

 

 

 

 

 

Trade receivables

 

 

(399

)

 

 

79

Inventories

 

 

(94

)

 

 

(88

)

Other current assets

 

 

0

 

 

16

Accounts payable

 

 

125

 

 

(25

)  

Accrued expenses

 

 

150

 

 

 

84

 

Income tax receivable/payable

 

 

32

 

 

(19

)

 

 

 

 

 

 

 

 

 

Net cash used in operating activities

 

 

(52

)

 

 

(80

)  

 

 

 

 

 

 

 

 

 

Cash flows from investing activities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Purchases of treasury bills

 

 

(6,916

)

 

 

(6,697

)

Proceeds from the maturity of treasury bills

 

 

7,000

 

 

 

6,750

 

Purchase of property and equipment

 

 

(61

)

 

 

(28

 

 

 

 

 

 

 

 

 

Net cash from investing activities

 

 

23

 

 

 

25

 

 

 

 

 

 

 

 

 

 

Cash flows used in financing activities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Payments on financing lease

(3 )

0

Payment of contingent earn-out

 

 

0

 

 

(150

)

 

 

 

 

 

 

 

 

 

Net cash used in financing activities

 

 

(3

)

 

 

(150

)

 

 

 

 

 

 

 

 

 

Net decrease in cash and cash equivalents

 

 

(32

)

 

 

(205

)

 

 

 

 

 

 

 

 

 

Cash and cash equivalents, beginning

 

 

1,057

 

 

 

963

 

Cash and cash equivalents, ending

 

$

1,025

 

 

$

758

 


 

 

 

 

 

 

 

 

Supplemental cash flow information

 

 

 

 

 

 

 

 

Cash paid for income taxes

 

$

1

 

 

$

0

 

Cash paid for interest
$ 1

$ 0

 

See accompanying notes to unaudited condensed financial statements

7


ELECTRO-SENSORS, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

FOR THE PERIOD ENDED JUNE 30, 2019

(in thousands except share and per share amounts)

(unaudited)

 

Note 1. Basis of Presentation

 

The accompanying unaudited financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions and regulations of the Securities and Exchange Commission to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements.

 

This report should be read together with the Company’s Annual Report on Form 10-K for the year ended December 31, 2018, including the audited financial statements and footnotes therein.

 

Management believes that the unaudited financial statements include all adjustments, consisting of normal recurring accruals, necessary to fairly state the financial position and results of operations as of June 30, 2019 and for the three and six-month periods then ended in accordance with accounting principles generally accepted in the United States of America. The results of interim periods may not be indicative of results to be expected for the year.

 

Nature of Business

 

Electro-Sensors, Inc. manufactures and markets a complete line of monitoring and control systems for a variety of industrial machinery. The Company uses leading-edge technology to continuously improve its products and expand the number of applications they can be used in, with the goal of manufacturing the industry-preferred product for every market served. The Company sells these products through an internal sales staff, manufacturers’ representatives, and distributors to a wide variety of industries that use the products in a variety of applications to monitor process machinery operations. The Company markets its products to customers located throughout the United States, Canada, Latin America, Europe, and Asia.

 

Revenue Recognition

 

At contract inception, the Company assesses the goods and services promised to a customer and identifies a performance obligation for each distinct promised good or service. We also determine the transaction price for each performance obligation at contract inception. Our contracts, generally in the form of a purchase order, specify the product or service that is promised to the customer. The typical contract life is less than one month and contains a single performance obligation, to provide conforming goods or services to the customer. On some contracts, we have a second performance obligation which, typically, is the initialization of the HazardPRO product. For contracts that have multiple performance obligations, we allocate the transaction price to each performance obligation using the relative stand-alone selling price. We generally determine stand-alone selling prices based on the observable stand-alone prices charged to customers. We recognize product revenue at the point in time when control of the product is transferred to the customer, which typically occurs when we ship the products. We recognize service revenue at the point in time when we have provided the service. 


Fair Value Measurements 

 

The carrying value of trade receivables, accounts payable, and other financial working capital items approximates fair value at June 30, 2019 and December 31, 2018, due to the short maturity nature of these instruments.


8


ELECTRO-SENSORS, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

FOR THE PERIOD ENDED JUNE 30, 2019

(in thousands except share and per share amounts)

(unaudited)

 


Stock-Based Compensation

 

The Company records compensation expense for stock options based on the estimated fair value of the options on the date of grant using the Black-Scholes-Merton (“BSM”) option pricing model. The Company uses historical data, among other factors, to estimate the expected price volatility, the expected option life, and the expected forfeiture rate. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant for the estimated life of the option. 


As of June 30, 2019, there was approximately $20 of unrecognized compensation expense related to unvested stock options. The Company expects to recognize this expense over the next three years.

 

Use of Estimates

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Significant estimates, including the underlying assumptions, consist of economic lives of long-lived assets, realizability of trade receivables, valuation of deferred tax assets/liabilities, inventory, investments, contingent earn-out, and stock compensation expense. It is at least reasonably possible that these estimates may change in the near term.

  

Net Income (Loss) per Common Share


Basic and diluted net income (loss) per common share is determined by dividing net income (loss) attributable to common stockholders by the weighted-average common shares outstanding during the period. For the three and six-month periods ended June 30, 2019 and 2018, the common shares underlying stock options have been excluded from the calculation because their effect would be anti-dilutive. Therefore, the weighted-average shares outstanding used to calculate both basic and diluted loss per common shares are the same.

 

For the three and six months ended June 30, 2019 and 2018 options to purchase 295,000 and 287,500 weighted average common shares, respectively, have been excluded from the computations of diluted weighted-average shares outstanding because their effect would be anti-dilutive.


9


ELECTRO-SENSORS, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

FOR THE PERIOD ENDED JUNE 30, 2019

(in thousands except share and per share amounts)

(unaudited)

 

Note 2. Investments

 

The Company has investments in commercial paper, Treasury Bills, and common equity securities of a private U.S. company. The commercial paper investment is in U.S. debt with ratings of A-1+, P-1, and F1+. The Treasury Bills have remaining terms ranging from one month to six months at June 30, 2019


The Company classifies its investments in commercial paper and Treasury Bills as available-for-sale, accounted for at fair value with unrealized gains and losses recognized in accumulated other comprehensive gain on the balance sheet.

 

Prior to January 1, 2018, the Company accounted for equity securities at fair value with unrealized gains and losses recognized in accumulated other comprehensive gain on the balance sheet. Realized gains and losses on equity securities sold or impaired were recognized in non-operating income on the statement of comprehensive income (loss).

 

On January 1, 2018, the Company adopted ASU 2016-01, which changed how the Company accounted for equity securities. Equity securities are now measured at fair value and starting January 1, 2018 unrealized gains and losses have been recognized in non-operating income. Upon adoption, the Company reclassified $7 of net unrealized losses related to equity securities from accumulated other comprehensive gain to retained earnings. 


The cost and estimated fair value of the Company’s investments are as follows:

 

 

 

Cost

 

 

Gross
unrealized
gain

 

 

Gross
unrealized
loss

 

 

Fair
value

 

June 30, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial Paper

 

$

722

 

 

$

0

 

 

$

0

 

 

$

722

 

Treasury Bills

 

 

7,656

 

 

 

51

 

 

 

0

 

 

 

7,707

 

Equity Securities

 

 

45

 

 

 

0

 

 

 

0

 

 

45

 

 

 

 

8,423

 

 

 

51

 

 

 

0

 

 

8,474

 

Less Cash Equivalents

 

 

722

 

 

 

0

 

 

 

0

 

 

 

722

 

Total Investments, June 30, 2019

 

$

7,701

 

 

$

51

 

 

$

0

 

$

7,752

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial Paper

 

$

667

 

 

$

0

 

 

$

0

 

 

$

667

 

Treasury Bills

 

 

7,656

 

 

 

41

 

 

 

0

 

 

 

7,697

 

Equity Securities

 

 

45

 

 

 

0

 

 

 

0

 

 

45

 

 

 

 

8,368

 

 

 

41

 

 

 

0

 

 

8,409

 

Less Cash Equivalents

 

 

667

 

 

 

0

 

 

 

0

 

 

 

667

 

Total Investments, December 31, 2018

 

$

7,701

 

 

$

41

 

 

$

0

 

$

7,742

 

 

10


ELECTRO-SENSORS, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

FOR THE PERIOD ENDED JUNE 30, 2019

(in thousands except share and per share amounts)

(unaudited)

  

Note 3. Fair Value Measurements

 

The following table provides information on those assets and liabilities measured at fair value on a recurring basis.

 

June 30, 2019


 

Carrying amount

 

 

 

 

 

 Fair Value Measurement Using 

 

 

 

in balance sheet

 

 

Fair Value

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial paper

 

$

722

 

 

$

722

 

 

$

722

 

 

$

0

 

 

$

0

 

Treasury bills

 

 

7,707

 

 

 

7,707

 

 

 

7,707

 

 

 

0

 

 

 

0

 

Equity Securities

 

 

45

 

 

 

45

 

 

 

0

 

 

 

0

 

 

 

45

 

 

December 31, 2018


 

Carrying amount

 

 

 

 

 

 Fair Value Measurement Using 

 


 

in balance sheet

 

 

Fair Value

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Assets:


 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial paper


$

667

 

 

$

667

 

 

$

667

 

 

$

0

 

 

$

0

 

Treasury bills



7,697

 

 

 

7,697

 

 

 

7,697

 

 

 

0

 

 

 

0

 

Equity Securities



45

 

 

 

45

 

 

 

0

 

 

 

0

 

 

 

45

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The fair value of the commercial paper and treasury bills is based on quoted market prices in an active market. There is no public market for the available-for-sale equity security owned by the Company. The Company has determined the fair value for this equity security based on financial and other factors that are considered level 3 inputs in the fair value hierarchy.


The change in level 3 liabilities at fair value on a recurring basis for the six months ended June 302018 are as follows:

 

  Six Months Ended June 30, 2018
 
     
Beginning Balance
$ 150  

Change in Fair Value


  0

Payments


  (150 )
Ending Balance
$ 0  

 

11


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

FORWARD-LOOKING STATEMENTS

 

This Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including statements regarding our expectations, beliefs, intentions or strategies regarding the future. Forward-looking statements include, but are not limited to, statements relating to our marketing efforts; our efforts to accelerate future growth or income; our business development activities; our efforts to maintain or reduce production costs; our expected use of cash on hand; our cash requirements; and the sufficiency of our cash flows. Any statement that is not based solely upon historical facts, including our strategies for the future and the outcome of events that have not yet occurred, is a forward-looking statement.

 

All forward-looking statements in this document are based on information available to us as of the date of this Form 10-Q, and we assume no obligation to update any of these forward-looking statements, other than as required by law. Our actual results could differ materially from those projected or indicated in these forward-looking statements. These forward-looking statements are subject to certain risks and uncertainties that could cause future results to differ materially from our recent results or those projected in the forward-looking statements, including the accuracy of management’s assumptions with respect to industry trends, fluctuations in industry conditions, the accuracy of management’s assumptions regarding expenses and our cash needs and those listed under the heading “Cautionary Statements” under “Item 1—Business,” in our Annual Report on Form 10-K for the year ended December 31, 2018.

 

CRITICAL ACCOUNTING ESTIMATES

 

The preparation of our financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make decisions based upon estimates, assumptions, and factors it considers relevant to the circumstances. These decisions include the selection of applicable accounting principles and the use of judgment in their application, and affect reported amounts and disclosures. Changes in economic conditions or other business circumstances may affect the outcomes of management’s estimates and assumptions. An in-depth description of our accounting estimates can be found in the interim financial statements included in this report and in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018. We have not developed new estimates subsequent to those discussed in our Annual Report.


12


SELECTED FINANCIAL INFORMATION

 

The following table contains selected financial information, for the periods indicated, from our statements of comprehensive loss expressed as a percentage of net sales.

 

 

 

Three Months Ended June 30,



Six Months Ended June 30,

 

 

2019


 

 

2018

 



2019


2018

Net sales

 

 

100.0


%

 

 

100.0

 

%

100.0
%

100.0
%

Cost of goods sold

 

 

45.4


 

 

 

45.4

 




46.1



46.0

Gross profit

 

 

54.6


 

 

 

54.6

 




53.9



54.0

 

 

 

 


 

 

 

 

 












Operating expenses

 

 

 


 

 

 

 

 












     Selling and marketing

 

 

22.8


 

 

 

22.5

 




23.4



23.9

     General and administrative

 

 

18.5


 

 

 

23.8

 




20.9



27.3

     Research and development

 

 

9.4


 

 

 

12.5

 




9.6



12.9

Total operating expenses

 

 

50.7


 

 

 

58.8

 




53.9



64.1

 

 

 

 


 

 

 

 

 












Operating income (loss)

 

 

3.9


 

 

(4.2

)


0.0



(10.1 )

 

 

 

 


 

 

 

 

 












Non-operating income (expense)

 

 

 


 

 

 

 

 












     Interest income

 

 

1.8


 

 

 

1.3

 




2.0



1.3

     Other income

 

 

0.1


 

 


0.2

 




0.1



0.1

Total non-operating income, net

 

 

1.9


 

 

 

1.5

 




2.1



1.4

 

 

 

 


 

 

 

 

 












Income (loss) before income tax expense (benefit)

 

 

5.8


 

 

(2.7

)


2.1



(8.7 )

 

 

 

 


 

 

 

 

 












Provision for (benefit from) income taxes

 

 

1.2

  

 


(0.3

)


0.4



(1.7 )

 

 

 

 


 

 

 

 

 












Net income (loss)

 

 

4.6

%

 

 

(2.4

) % 

1.7
%

(7.0 ) %


The following paragraphs discuss the Company’s performance for the three and six months ended June 30, 2019 and 2018.

 

RESULTS OF OPERATIONS (in thousands) 

 

Net Sales

 

Net sales for the second quarter of 2019 were $2,260, an increase of $480, or 27.0%, from $1,780 during the same period in 2018.  Net sales for the six months ended June 30, 2019 were $4,268, an increase of $772, or 22.1%, over the same period in 2018.  During the quarter, we experienced increases in both our traditional monitoring products and HazardPRO wireless systems.  The increase was partially due to increases in sales into the grain, feed, and milling markets.  International sales during the second quarter of 2019 increased significantly to 13.8% of sales from 7.4% of sales in 2018, primarily driven by stronger sales in Brazil.

 

Gross Profit

 

Gross profit for the second quarter of 2019 increased $263, or 27.1%, over the same period in 2018. Gross profit for the six months ended June 30, 2019 increased $414, or 21.9%, over the same period in 2018Gross margin in the second quarter of 2019 and 2018 was 54.6%. Gross margin decreased slightly in the six months ended June 30, 2019 to 53.9%, versus 54.0% in the same period in 2018

13


Operating Expenses

 

Total operating expenses increased $100, or 9.6%, for the second quarter of 2019 compared to the same period in 2018, but decreased as a percentage of net sales to 50.7% from 58.8%. Total operating expenses increased $56, or 2.5%, for the six months ended June 30, 2019 compared to the same period in 2018, but decreased as a percentage of net sales to 53.9% from 64.1%. 

 

 

Selling and marketing expenses in the second quarter of 2019 increased $115, or 28.7%, from the same period in 2018, and increased as a percentage of net sales to 22.8% from 22.5%. Selling and marketing expenses in the six months ended June 30, 2019 increased $165, or 19.7%, from the same period in 2018, but decreased as a percentage of net sales to 23.4% from 23.9%. The increase for both periods resulted primarily from higher internal sales staff compensation due to increased sales and changes in compensation plans.

 

 

General and administrative expenses decreased $6, or 1.4%, for the second quarter of 2019 compared to the same period in 2018, and decreased as a percentage of net sales to 18.5% from 23.8%. General and administrative expenses decreased $66, or 6.9%, for the six months ended June 30, 2019 compared to the same period in 2018, and decreased as a percentage of net sales to 20.9% from 27.3%. The decrease in the second quarter was due primarily to lower compensation costs due to a decrease in headcount in 2019.  The decrease for the six-month period was due primarily to lower legal fees and lower compensation costs due to a decrease in headcount in 2019, partially offset by higher expenses related to computer supplies, software, and testing.

 

 

Research and development expenses decreased $9, or 4.1%, in the second quarter of 2019 from the same period in 2018, and decreased as a percentage of net sales to 9.4% from 12.5%. Research and development expenses decreased $43, or 9.5%, in the six months ended June 30, 2019 from the same period in 2018, and decreased as a percentage of net sales to 9.6% from 12.9%. The decrease in the second quarter was due to higher lab testing and certification expenses for new products in the second quarter of 2018, partially offset by higher 2019 contract engineering costs related to product enhancements.  The decrease in the six-month period was due to decreased lab testing and certification expenses and lab material for new products compared to the first half of last year.

 

Non-Operating Income (Net)

 

Net non-operating income increased by $16, or 59.3%, for the second quarter of 2019 compared to the same period in 2018. Net non-operating income increased by $37, or 71.2%, for the six months ended of June 30, 2019 compared to the same period in 2018. The increase was primarily due to higher interest income primarily the result of higher interest rates on Treasury Bills.

 

Income (Loss) Before Income Tax Expense (Benefit)


Income before income tax expense was $131 for the second quarter of 2019, representing an increase in the second quarter income of $179, or 372.9%, compared to a loss before income tax benefit of $48 for the same period in 2018. Income before income tax expense was $91 for the six months ended June 30, 2019, representing an increase in income of $395, or 129.9%, compared to a loss before income tax benefit of $304 for the same period in 2018. The increase in the income was primarily the result of higher net sales as discussed above.

 

Income Taxes

 

The Company's income tax expense percentage increased to 21.4% for the second quarter of 2019 from 10.4% of income tax benefit in the second quarter of 2018. The Company's income tax expense percentage increased to 20.9% for the six months ended June 30, 2019 from 19.4% of income tax benefit in the six months ended June 30, 2018.

 

14


LIQUIDITY AND CAPITAL RESOURCES

 

Cash and cash equivalents were $1,025 at June 30, 2019 and $1,057 at December 31, 2018. The decrease was primarily the result of cash used in operating activities to increased trade receivables related to the timing of sales during the 2019 second quarter. 

 

Cash used in operating activities was $52 and $80 for the six months ended June 30, 2019 and 2018, respectively. The $28 decrease in cash used was due to net income in 2019 compared to a net loss in 2018 and an increase in accounts payable in 2019, partially offset by an increase in trade receivables in 2019. The 2019 net income, as compared to the prior year net loss, was primarily due to increased revenue. The increase in accounts payable is due to timing of payments. The increase in trade receivables is due to the timing of sales and collections on accounts.  

 

Cash generated from investing activities was $23 and $25 for the six months ended June 30, 2019 and 2018, respectively. During the six months ended June 30, 2019 and 2018, the Company had net proceeds of Treasury Bills with a maturity date of more than three months of $84 and $53, respectively. In addition, we purchased $61 and $28 of property and equipment during the six months ended 2019 and 2018, respectively.


Cash used in financing activities in the six months ended June 30, 2019 and 2018 was $3 and $150, respectively. The cash used in 2019 was for principal payments on a financing lease on right-to-use assets. The cash used in 2018 was for the final payment on the contingent earn-out owed for the technology purchased from Harvest Engineering, Inc. in 2014.


Our ongoing cash requirements will be primarily for capital expenditures, research and development, working capital, and growth initiatives. Management believes that our cash on hand and any cash generated from operations will be sufficient to meet our cash requirements through at least the next 12 months.

 

Future Business Development Activities

 

The Company continues to seek growth opportunities, both internally through the Company’s existing portfolio of products, technologies and markets, as well as externally through technology partnerships or related-product acquisitions. 


Off-balance Sheet Arrangements

 

As of June 30, 2019, the Company had no off-balance sheet arrangements or transactions.

 

15


 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

Not Applicable.

 

Item 4. Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

Based on an evaluation with the participation of the Company’s management, the Company’s principal executive officer and principal financial officer has concluded that the Company’s disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (“Exchange Act”), were effective as of June 30, 2019.


Changes in Internal Control Over Financial Reporting


There were no changes in the Company’s internal control over financial reporting during the second quarter of 2019 that were identified in connection with management’s evaluation required by paragraph (d) of Rules 13a-15 and 15d-15 under the Exchange Act, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. 


16




PART II – OTHER INFORMATION
 
Item 1. Legal Proceedings – None
Item 1A. Risk Factors – Not Applicable
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds – None
Item 3. Defaults Upon Senior Securities – None
Item 4. Mine Safety Disclosures – Not Applicable 
Item 5. Other Information – None
Item 6. Exhibits


Exhibit

 

Description

 

 

 

31.1

 

Certification of CEO and CFO Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

 

32.1

 

Certification of CEO and CFO Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

 

101

 

The following financial information from Electro-Sensors, Inc.’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2019, formatted in eXtensible Business Reporting Language XBRL: (i) Condensed Balance Sheets as of June 30, 2019 and December 31, 2018, (ii) Condensed Statements of Comprehensive Income (Loss) for the three and six months ended June 30, 2019 and June 30, 2018, (iii) Condensed Statements of Cash Flows for the six months ended June 30, 2019 and June 30, 2018, (iv) Condensed Statements of Changes in Stockholders' Equity for the three and six months ended June 30, 2019 and June 30, 2018, and (v) Notes to Financial Statements. 

 

17


 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

Electro-Sensors, Inc.

 

 

August 12, 2019

/s/ David L. Klenk

 

David L. Klenk

 

Chief Executive Officer and Chief Financial Officer

(Principal Executive Officer and Principal Financial Officer)

  


18

 EXHIBIT 31.1

 

CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES OXLEY-ACT OF 2002

 

I, David L. Klenk, certify that:

 

1. I have reviewed this report on Form 10-Q of Electro-Sensors Inc.;

 

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4. I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

(a)       Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under my supervision, to ensure that material information relating to the registrant is made known to me by others within those entities, particularly during the period in which this report is being prepared;

 

(b)       Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under my supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

(c)       Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report my conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

(d)       Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5. I have disclosed, based on my most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

(a)       All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

(b)        Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

August 12, 2019 /s/ David L. Klenk
  David L. Klenk
  Chief Executive Officer and Chief Financial Officer

 

19

 

EXHIBIT 32.1

 

CERTIFICATION PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

 

In connection with the Quarterly Report of Electro-Sensors, Inc. (the “Company”) on Form 10-Q for the quarter ended June 30, 2019 as filed with the Securities and Exchange Commission (the “Report”), I, David L. Klenk, Chief Executive Officer and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that:

 

(1)  The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

 

(2)  The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.  

   
August 12, 2019 /s/ David L. Klenk
  David L. Klenk
  Chief Executive Officer and Chief Financial Officer

 

20

v3.19.2
Document And Entity Information - shares
6 Months Ended
Jun. 30, 2019
Aug. 09, 2019
Document And Entity Information [Abstract]    
Document Type 10-Q  
Amendment Flag false  
Document Period End Date Jun. 30, 2019  
Document Fiscal Year Focus 2019  
Document Fiscal Period Focus Q2  
Entity Filer Category Non-accelerated Filer  
Entity Registrant Name ELECTRO SENSORS INC  
Entity Central Index Key 0000351789  
Current Fiscal Year End Date --12-31  
Entity Current Reporting Status Yes  
Entity Small Business true  
Entity Common Stock, Shares Outstanding   3,395,521
Entity Emerging Growth Company false  
v3.19.2
Condensed Balance Sheets - USD ($)
$ in Thousands
Jun. 30, 2019
Dec. 31, 2018
Current assets    
Cash and cash equivalents $ 1,025 $ 1,057
Investments 7,752 7,742
Trade receivables, less allowance for doubtful accounts of $11 1,295 896
Inventories 1,712 1,618
Other current assets 155 155
Total current assets 11,939 11,468
Deferred income tax asset, net 203 192
Intangible assets, net 457 565
Property and equipment, net 1,065 1,050
Total assets 13,664 13,275
Current liabilities    
Current maturities of financing lease 5 5
Accounts payable 241 116
Accrued expenses 555 405
Accrued income tax 32 0
Total current liabilities 833 526
Long-term liabilities    
Finance lease, net of current maturities 21 24
Total long-term liabilities 21 24
Commitments and contingencies
Stockholders' equity    
Common stock par value $0.10 per share; authorized 10,000,000 shares; 3,395,521 shares issued and outstanding 339 339
Additional paid-in capital 2,024 2,019
Retained earnings 10,407 10,335
Accumulated other comprehensive gain (unrealized gain on available-for-sale securities, net of income tax) 40 32
Total stockholders' equity 12,810 12,725
Total liabilities and stockholders' equity $ 13,664 $ 13,275
v3.19.2
Condensed Balance Sheets (Parenthetical) - USD ($)
$ in Thousands
Jun. 30, 2019
Dec. 31, 2018
Balance Sheets [Abstract]    
Trade receivables, allowance for doubtful accounts $ 11 $ 11
Common stock, par value $ 0.10 $ 0.10
Common stock, shares authorized 10,000,000 10,000,000
Common stock, shares issued 3,395,521 3,395,521
Common stock, shares outstanding 3,395,521 3,395,521
v3.19.2
Condensed Statements Of Comprehensive Income (Loss) - USD ($)
$ in Thousands
3 Months Ended 6 Months Ended
Jun. 30, 2019
Jun. 30, 2018
Jun. 30, 2019
Jun. 30, 2018
Statements Of Comprehensive Income (Loss) [Abstract]        
Net sales $ 2,260 $ 1,780 $ 4,268 $ 3,496
Cost of goods sold 1,025 808 1,966 1,608
Gross profit 1,235 972 2,302 1,888
Operating expenses        
Selling and marketing 516 401 1,001 836
General and administrative 418 424 890 956
Research and development 213 222 409 452
Total operating expenses 1,147 1,047 2,300 2,244
Operating income (loss) 88 (75) 2 (356)
Non-operating income (expense)        
Interest expense (1) 0 (1) 0
Interest income 41 24 85 47
Other income 3 3 5 5
Total non-operating income, net 43 27 89 52
Income (loss) before income tax expense (benefit) 131 (48) 91 (304)
Provision for (benefit of) income tax 28 (5) 19 (59)
Net income (loss) 103 (43) 72 (245)
Other comprehensive income        
Change in unrealized value of available-for-sale securities, net of income tax 7 8 8 7
Other comprehensive income 7 8 8 7
Net comprehensive income (loss) $ 110 $ (35) $ 80 $ (238)
Basic        
Net income (loss) per share $ 0.03 $ (0.01) $ 0.02 $ (0.07)
Weighted average shares 3,395,521 3,395,521 3,395,521 3,395,521
Diluted        
Net income (loss) per share $ 0.03 $ (0.01) $ 0.02 $ (0.07)
Weighted average shares 3,395,521 3,395,521 3,395,521 3,395,521
v3.19.2
Condensed Statements Of Changes In Stockholders' Equity - USD ($)
$ in Thousands
Total
Common Stock Issued [Member]
Additional Paid-in Capital [Member]
Retained Earnings [Member]
Accumulated Other Comprehensive Income (Loss) [Member]
Beginning Balance at Dec. 31, 2017 $ 12,707 $ 339 $ 2,004 $ 10,352 $ 12
Beginning Balance, Shares at Dec. 31, 2017   3,395,521      
Other comprehensive income 7       7
Stock-based compensation expense 6   6    
Change in accounting policy 0     (7) 7
Net income (loss) (245)     (245)  
Ending Balance at Jun. 30, 2018 12,475 $ 339 2,010 10,100 26
Ending Balance, Shares at Jun. 30, 2018   3,395,521      
Beginning Balance at Mar. 31, 2018 12,508 $ 339 2,008 10,143 18
Beginning Balance, Shares at Mar. 31, 2018   3,395,521      
Other comprehensive income 8       8
Stock-based compensation expense 2   2    
Net income (loss) (43)     (43)  
Ending Balance at Jun. 30, 2018 12,475 $ 339 2,010 10,100 26
Ending Balance, Shares at Jun. 30, 2018   3,395,521      
Beginning Balance at Dec. 31, 2018 12,725 $ 339 2,019 10,335 32
Beginning Balance, Shares at Dec. 31, 2018   3,395,521      
Other comprehensive income 8       8
Stock-based compensation expense 5   5    
Net income (loss) 72     72  
Ending Balance at Jun. 30, 2019 12,810 $ 339 2,024 10,407 40
Ending Balance, Shares at Jun. 30, 2019   3,395,521      
Beginning Balance at Mar. 31, 2019 12,698 $ 339 2,022 10,304 33
Beginning Balance, Shares at Mar. 31, 2019   3,395,521      
Other comprehensive income 7       7
Stock-based compensation expense 2   2    
Net income (loss) 103     103  
Ending Balance at Jun. 30, 2019 $ 12,810 $ 339 $ 2,024 $ 10,407 $ 40
Ending Balance, Shares at Jun. 30, 2019   3,395,521