false true Non-accelerated Filer true 0000351789 ELECTRO SENSORS INC MN MN NASDAQ 3395521 3395521 false false 2020 Q3 --12-31 false 332500 0000351789 2020-01-01 2020-09-30 0000351789 2019-12-31 0000351789 2020-09-30 0000351789 us-gaap:CommonStockMember 2018-12-31 0000351789 us-gaap:CommonStockMember 2019-06-30 0000351789 us-gaap:AdditionalPaidInCapitalMember 2018-12-31 0000351789 us-gaap:AdditionalPaidInCapitalMember 2019-06-30 0000351789 us-gaap:RetainedEarningsMember 2018-12-31 0000351789 us-gaap:CommercialPaperMember us-gaap:FairValueInputsLevel1Member 2020-09-30 0000351789 us-gaap:CommercialPaperMember us-gaap:FairValueInputsLevel2Member 2020-09-30 0000351789 us-gaap:CommercialPaperMember us-gaap:FairValueInputsLevel3Member 2020-09-30 0000351789 us-gaap:USTreasurySecuritiesMember us-gaap:FairValueInputsLevel1Member 2020-09-30 0000351789 us-gaap:USTreasurySecuritiesMember us-gaap:FairValueInputsLevel2Member 2020-09-30 0000351789 us-gaap:USTreasurySecuritiesMember us-gaap:FairValueInputsLevel3Member 2020-09-30 0000351789 us-gaap:RetainedEarningsMember 2019-06-30 0000351789 us-gaap:FairValueInputsLevel1Member else:LimitedMarketableCompanyMember 2020-09-30 0000351789 us-gaap:FairValueInputsLevel3Member else:LimitedMarketableCompanyMember 2020-09-30 0000351789 us-gaap:FairValueInputsLevel2Member else:LimitedMarketableCompanyMember 2020-09-30 0000351789 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2018-12-31 0000351789 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2019-06-30 0000351789 2018-12-31 0000351789 us-gaap:AdditionalPaidInCapitalMember 2020-01-01 2020-09-30 0000351789 us-gaap:RetainedEarningsMember 2020-01-01 2020-09-30 0000351789 us-gaap:CommonStockMember 2020-09-30 0000351789 us-gaap:AdditionalPaidInCapitalMember 2020-09-30 0000351789 us-gaap:RetainedEarningsMember 2020-09-30 0000351789 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2020-09-30 0000351789 srt:MinimumMember 2020-01-01 2020-09-30 0000351789 srt:MaximumMember 2020-01-01 2020-09-30 0000351789 us-gaap:CommercialPaperMember 2020-09-30 0000351789 us-gaap:USTreasurySecuritiesMember 2020-09-30 0000351789 us-gaap:EquitySecuritiesMember 2020-09-30 0000351789 2019-06-30 0000351789 else:DebtAndEquitySecuritiesMember 2020-09-30 0000351789 us-gaap:CashAndCashEquivalentsMember 2020-09-30 0000351789 us-gaap:CommercialPaperMember us-gaap:FairValueInputsLevel1Member 2019-12-31 0000351789 us-gaap:CommercialPaperMember us-gaap:FairValueInputsLevel2Member 2019-12-31 0000351789 us-gaap:CommercialPaperMember us-gaap:FairValueInputsLevel3Member 2019-12-31 0000351789 us-gaap:CommercialPaperMember 2020-09-30 0000351789 us-gaap:USTreasurySecuritiesMember us-gaap:FairValueInputsLevel1Member 2019-12-31 0000351789 us-gaap:USTreasurySecuritiesMember us-gaap:FairValueInputsLevel2Member 2019-12-31 0000351789 us-gaap:USTreasurySecuritiesMember us-gaap:FairValueInputsLevel3Member 2019-12-31 0000351789 us-gaap:USTreasurySecuritiesMember 2020-09-30 0000351789 else:LimitedMarketableCompanyMember us-gaap:FairValueInputsLevel1Member 2019-12-31 0000351789 else:LimitedMarketableCompanyMember us-gaap:FairValueInputsLevel2Member 2019-12-31 0000351789 else:LimitedMarketableCompanyMember us-gaap:FairValueInputsLevel3Member 2019-12-31 0000351789 else:LimitedMarketableCompanyMember 2020-09-30 0000351789 us-gaap:CashAndCashEquivalentsMember 2019-12-31 0000351789 us-gaap:CommercialPaperMember 2019-12-31 0000351789 us-gaap:USTreasurySecuritiesMember 2019-12-31 0000351789 else:LimitedMarketableCompanyMember 2019-12-31 0000351789 us-gaap:CommercialPaperMember 2019-12-31 0000351789 us-gaap:USTreasurySecuritiesMember 2019-12-31 0000351789 us-gaap:EquitySecuritiesMember 2019-12-31 0000351789 else:DebtAndEquitySecuritiesMember 2019-12-31 0000351789 us-gaap:CommonStockMember 2019-12-31 0000351789 us-gaap:AdditionalPaidInCapitalMember 2019-12-31 0000351789 us-gaap:RetainedEarningsMember 2019-12-31 0000351789 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2019-12-31 0000351789 2020-07-01 2020-09-30 0000351789 2019-07-01 2019-09-30 0000351789 2019-01-01 2019-09-30 0000351789 2020-06-30 0000351789 us-gaap:CommonStockMember 2020-06-30 0000351789 us-gaap:AdditionalPaidInCapitalMember 2020-06-30 0000351789 us-gaap:RetainedEarningsMember 2020-06-30 0000351789 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2020-06-30 0000351789 us-gaap:AdditionalPaidInCapitalMember 2020-07-01 2020-09-30 0000351789 us-gaap:RetainedEarningsMember 2020-07-01 2020-09-30 0000351789 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2019-07-01 2019-09-30 0000351789 us-gaap:AdditionalPaidInCapitalMember 2019-07-01 2019-09-30 0000351789 us-gaap:RetainedEarningsMember 2019-07-01 2019-09-30 0000351789 us-gaap:CommonStockMember 2019-09-30 0000351789 us-gaap:AdditionalPaidInCapitalMember 2019-09-30 0000351789 us-gaap:RetainedEarningsMember 2019-09-30 0000351789 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2019-09-30 0000351789 2019-09-30 0000351789 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2019-01-01 2019-09-30 0000351789 us-gaap:AdditionalPaidInCapitalMember 2019-01-01 2019-09-30 0000351789 us-gaap:RetainedEarningsMember 2019-01-01 2019-09-30 0000351789 2020-11-11 xbrli:shares iso4217:USD iso4217:USD xbrli:shares
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 September 30, 2020

 

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 November 11, 2020 was 3,395,521.

 

 

 

2


 

ELECTRO-SENSORS, INC.

Form 10-Q

For the Periods Ended September 30, 2020

 

TABLE OF CONTENTS

PART I – FINANCIAL INFORMATION 4
   
Item 1. Financial Statements (unaudited): 4
   
Condensed Balance Sheets – As of September 30, 2020 and December 31, 2019 4
Condensed Statements of Comprehensive Income (Loss) – For the Three and Nine Months ended September 30, 2020 and September 30, 2019 5
Condensed Statements of Changes in Stockholders' Equity – For the Three and Nine Months ended September 30, 2020 and September 30, 2019 6
Condensed Statements of Cash Flows – For the Nine Months ended September 30, 2020 and September 30, 2019 7
Notes to Condensed Financial Statements 8
   
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 13
Item 3. Quantitative and Qualitative Disclosures About Market Risk 18
Item 4. Controls and Procedures 18
   
PART II – OTHER INFORMATION 19
   
Item 1. Legal Proceedings 19
Item 1A. Risk Factors 19
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 19
Item 3. Defaults Upon Senior Securities 19
Item 4. Mine Safety Disclosures 19
Item 5. Other Information 19
Item 6. Exhibits 19
   
SIGNATURES 20
   

  

3


PART I. FINANCIAL INFORMATION
Item 1. Financial Statements

ELECTRO-SENSORS, INC.

CONDENSED BALANCE SHEETS

(in thousands except share and per share amounts)

 

 

September 30,
2020

 

 

December 31,
2019

 

 

 

(unaudited)

 

 

 

 

ASSETS  

 

 

 

 

 

 

Current assets 

 

 

 

 

 

 

 

 

Cash and cash equivalents 

 

$

7,062

 

 

$

8,785

 

Investments

 

 

2,041

 

 

 

45

 

Trade receivables, less allowance for doubtful accounts of $11


1,039

 

 

 

1,036

 

Inventories

 

 

1,659

 

 

 

1,695

 

Other current assets

 

 

196

 

 

 

159

 

Income tax receivable

23


0

Total current assets

 

 

12,020

 

 

 

11,720

 

Deferred income tax asset, net

 

 

227

 

 

 

203

 

Intangible assets, net

 

 

294

 

 

 

489

 

Property and equipment, net

 

 

1,010

 

 

 

1,063

 

Total assets

 

$

13,551

 

 

$

13,475

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

Current maturities of financing lease

 

$

6

 

 

$

5

 

Accounts payable

 

 

181

 

 

 

129

 

Accrued expenses

 

 

573

 

 

 

431

 

Total current liabilities

 

 

760

 

 

 

565

 










Long-term liabilities 







    Financing lease, net of current maturities

14


19









Total long-term liabilities

14


19









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

 

 

2,035

 

 

 

2,030

 

Retained earnings

 

 

10,403

 

 

 

10,522

 










Total stockholders’ equity

 

 

12,777

 

 

 

12,891

 










Total liabilities and stockholders’ equity 

 

$

13,551

 

 

$

13,475

 

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
September 30,
 

Nine Months Ended

September 30,


    2020     2019  
2020

2019
   
           







Net sales   $ 1,899     $ 2,049

$ 5,914

$ 6,317
Cost of goods sold     907    
975  

2,825


2,941
                  







Gross profit   
992    
1,074  

3,089


3,376
                  







Operating expenses                







Selling and marketing     417       494  

1,318


1,495
General and administrative     420       404  

1,325


1,294
Research and development  
209    
194  

622


603
                  







Total operating expenses   
1,046    
1,092  

3,265


3,392
                  







Operating loss     (54 )     (18 )

(176 )

(16 )
                  







Non-operating income (expense)                







Loss on investment

0

0


(3 )

0
Interest expense

(2 )

0


(3 )

(1 )
Interest income     2       41  

35


126
Other income  
0    
2  

2


7
                  







Total non-operating income, net  
0    
43  

31


132
                  







Income (loss) before income tax expense (benefit)     (54 )     25

(145 )

116
                  







Provision for (benefit of) income tax     (8 )  
6

(26 )

25
                  







Net income (loss)   $ (46 )   $
19
$ (119 )
$ 91
                  







Other comprehensive income                







Change in unrealized value of available-for-sale securities, net of income tax $ 0   $ 2
$ 0

$ 10
Other comprehensive income     0       2

0


10
                  







Net comprehensive income (loss)   $
(46 )   $ 21
$ (119 )
$ 101
                  







Net income (loss) per share data:                







                  







Basic                







Net income (loss) per share   $ (0.01 )   $ 0.01
$ (0.04 )
$
0.03
Weighted average shares     3,395,521       3,395,521  

3,395,521


3,395,521
                  







Diluted                







Net income (loss) per share   $
(0.01 )   $
0.01
$ (0.04 )
$ 0.03
Weighted average shares     3,395,521       3,398,533  

3,395,521


3,397,385

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 September 30













  

Common Stock Issued

 

 

Additional
Paid-in
Capital

 

 

Retained
Earnings

 

 

Accumulated
Other
Comprehensive
Income

 

 

Total
Stockholders’

Equity

 

   

Shares

 

 

Amount

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2020 (unaudited) 
3,395,521


$ 339

$ 2,034

$ 10,449

$ 0

$ 12,822

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation expense







1










1
Net loss











(46 )





(46 )

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance September 30, 2020 (unaudited) 3,395,521

$ 339

$ 2,035

$ 10,403

$ 0

$ 12,777

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2019 (unaudited)   3,395,521

$ 339

$ 2,024

$ 10,407

$ 40

$ 12,810

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income















2


2
Stock-based compensation expense







3










3
Net income  











19





19

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

$ 339

$ 2,027

$ 10,426

$ 42

$ 12,834

For the nine months ended September 30













 

Common Stock Issued

 

 

Additional
Paid-in
Capital

 

 

Retained
Earnings

 

 

Accumulated
Other
Comprehensive
Income

 

 

Total
Stockholders’

Equity

 

   

Shares

 

 

Amount

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2019  3,395,521

$ 339

$ 2,030

$ 10,522

$ 0

$ 12,891

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation expense 







5










5
Net loss











(119 )





(119 )

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance September 30, 2020 (unaudited) 3,395,521

$ 339

$ 2,035

$ 10,403

$ 0

$ 12,777

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2018   3,395,521

$ 339

$ 2,019

$ 10,335

$ 32

$ 12,725

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income















10


10
Stock-based compensation expense







8










8
Net income 











91






91

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

$ 339

$ 2,027

$ 10,426

$ 42

$ 12,834
See accompanying notes to unaudited condensed financial statements
6


ELECTRO-SENSORS, INC.

CONDENSED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited) 

 

 

Nine Months Ended
September 30,

 

 

 

2020

 

2019

 

Cash flows from operating activities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

(119

)

 

$

91


 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

272

 

 

 

231

 

Deferred income taxes

 

 

(24

)

 

 

(6

)

Stock-based compensation expense

 

 

5

 

 

 

8

 

Interest accrued on treasury bills

 

 

(2

)

 

 

(120

)
Loss on investments

3


0

Change in:

 

 

 

 

 

 

 

 

Trade receivables

 

 

(3

)

 

 

(69

)

Inventories

 

 

36

 

 

(101

)

Other current assets

 

 

(37

)

 

 

(39

)

Accounts payable

 

 

52

 

 

80

Accrued expenses

 

 

142

  

 

 

105

 

Income tax receivable/payable

 

 

(23

)

 

 

30

 

 

 

 

 

 

 

 

 

Net cash from operating activities

 

 

302

 

 

210

 

 

 

 

 

 

 

 

 

Cash flows from (used in) investing activities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Purchases of treasury bills

 

 

(7,747

)

 

 

(7,662

)

Proceeds from the maturity of treasury bills

 

 

5,750

 

 

 

9,750

 

Purchase of intangible asset

0


(150 )

Purchase of property and equipment

 

 

(24

)

 

 

(84

 

 

 

 

 

 

 

 

 

Net cash from (used in) investing activities

 

 

(2,021

)

 

 

1,854

 

 

 

 

 

 

 

 

 

 

Cash flows used in financing activities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  

 

Payments on financing lease

(4 )

(4 )
Proceeds from loans

645


0
Repayment of loan principal

(645 )

0

 

 

 

 

 

 

 

 

 

Net cash used in financing activities

 

 

(4

)

 

 

(4

)

 

 

 

 

 

 

 

 

Net increase (decrease) in cash and cash equivalents

 

 

(1,723

)

 

 

2,060

 

 

 

 

 

 

 

 

 

Cash and cash equivalents, beginning

 

 

8,785

 

 

 

1,057

 

Cash and cash equivalents, ending

 

$

7,062

 

 

$

3,117

 


 

 

 

 

 

 

 

 

Supplemental cash flow information

 

 

 

 

 

 

 

 

Cash paid for income taxes

 

$

20

 

 

$

1

 

Cash paid for interest
$ 3

$ 1

 

See accompanying notes to unaudited condensed financial statements

7


ELECTRO-SENSORS, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

FOR THE PERIOD ENDED SEPTEMBER 30, 2020

(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, 2019, 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 September 30, 2020 and for the three and nine-month periods ended September 30, 2020 and 2019,  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, with the ultimate 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 HazardPROTM 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 September 30, 2020 and December 31, 2019, due to the short maturity nature of these instruments.


8


ELECTRO-SENSORS, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

FOR THE PERIOD ENDED SEPTEMBER 30, 2020

(in thousands except share and per share amounts)

(unaudited)

 

Intangibles


Intangible assets are comprised of the HazardPRO technology and a technology license.  The Company amortizes the cost of these intangible assets on a straight-line method over their estimated useful lives.


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 September 30, 2020, there was approximately $10 of unrecognized compensation expense related to unvested stock options. The Company expects to recognize this expense over the next two 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, stock compensation expense, and the potential estimated impact on operations due to the COVID-19 pandemic as it relates to disruptions to our supply chain and customer demand. 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 nine-month periods ended September 30, 2020, 332,500 weighted average common shares for underlying stock options have been excluded from the calculation because their effect would be anti-dilutive.  For the three and nine-month periods ended September 30, 2019, 329,488 and 330,636 respectively, weighted average common shares for underlying stock options have been excluded from the calculation because their effect would be anti-dilutive. 


9


ELECTRO-SENSORS, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

FOR THE PERIOD ENDED SEPTEMBER 30, 2020

(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 four months at September 30, 2020. 


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.

 

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

 

 

 

Cost

 

 

Gross
unrealized
gain

 

 

Gross
unrealized
loss

 

 

Fair
value

 

September 30, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial Paper

 

$

866

 

 

$

0

 

 

$

0

 

 

$

866

 

Treasury Bills

 

 

7,748

 

 

 

1

 

 

 

0

 

 

 

7,749

 

Equity Securities

 

 

54

 

 

 

0

 

 

 

(12

)

 

 

42

 

 

 

 

8,668

 

 

 

1

 

 

 

(12

)

 

 

8,657

 

Less Cash Equivalents

 

 

6,616

 

 

 

0

 

 

 

0

 

 

 

6,616

 

Total Investments, September 30, 2020

 

$

2,052

 

 

$

1

 

 

$

(12

)

 

$

2,041

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial Paper

 

$

797

 

 

$

0

 

 

$

0

 

 

$

797

 

Treasury Bills

 

 

7,734

 

 

 

0

 

 

 

0

 

 

 

7,734

 

Equity Securities

 

 

54

 

 

 

0

 

 

 

(9

)

 

 

45

 

 

 

 

8,585

 

 

 

0

 

 

 

(9

)

 

 

8,576

 

Less Cash Equivalents

 

 

8,531

 

 

 

0

 

 

 

0

 

 

 

8,531

 

Total Investments, December 31, 2019

 

$

54

 

 

$

0

 

 

$

(9

)

 

$

45

 

 

10


ELECTRO-SENSORS, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

FOR THE PERIOD ENDED SEPTEMBER 30, 2020

(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.

 

September 30, 2020


 

Carrying amount

 

 

 

 

 

 Fair Value Measurement Using 

 

 

 

in balance sheet

 

 

Fair Value

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial paper

 

$

866

 

 

$

866

 

 

$

866

 

 

$

0

 

 

$

0

 

Treasury bills

5,750


5,750


5,750


0


0

Treasury bills

 

 

1,999

 

 

 

1,999

 

 

 

1,999

 

 

 

0

 

 

 

0

 

Equity Securities

 

 

42

 

 

 

42

 

 

 

0

 

 

 

0

 

 

 

42

 

 

December 31, 2019


 

Carrying amount

 

 

 

 

 

 Fair Value Measurement Using 

 


 

in balance sheet

 

 

Fair Value

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Assets:


 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial paper


$

797

 

 

$

797

 

 

$

797

 

 

$

0

 

 

$

0

 

   Treasury bills



7,734

 

 

 

7,734

 

 

 

7,734

 

 

 

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 assets at fair value on a recurring basis are as follows:  

 

 
Nine Months Ended September 30,


2020


2019

 




     
Beginning Balance 
$ 45

$ 45  

Change in Fair Value



(3 )
  0
Ending Balance
$ 42

$ 45  

 

11


ELECTRO-SENSORS, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

FOR THE PERIOD ENDED SEPTEMBER 30, 2020

(in thousands except share and per share amounts)

(unaudited)

Note 4. Inventories


Inventories used in the determination of cost of goods sold are as follows: 


September 30, 

2020



December 31, 

2019






Raw Materials $ 993

$ 973
Work In Process
333


383

Finished Goods


353


359
Reserve for Obsolescence 
(20 )

(20 )
Total Inventories $ 1,659

$ 1,695


12


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 about the success of 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, 2019, as any effect that the COVID-19 pandemic may have on the efficiency of our business operations, our customer base and the domestic or worldwide economy.

 

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, 2019. We have developed one new estimate, subsequent to those discussed in our Annual Report, related to the potential estimated impact on operations due to the COVID-19 pandemic as it relates to disruptions to our supply chain and customer demand.


13


SELECTED FINANCIAL INFORMATION

 

The following table contains selected financial information, for the periods indicated, from our Statements of Comprehensive Income (Loss) expressed as a percentage of net sales.

 

 

 

Three Months Ended September 30,



Nine Months Ended September 30,

 

 

2020


 

 

2019

 




2020



2019

Net sales

 

 

100.0


%

 

 

100.0

 

%

100.0
%

100.0
%

Cost of goods sold

 

 

47.8


 

 

 

47.6

 




47.8



46.6

Gross profit

 

 

52.2


 

 

 

52.4

 




52.2



53.4

 

 

 

 


 

 

 

 

 












Operating expenses

 

 

 


 

 

 

 

 












     Selling and marketing

 

 

22.0


 

 

 

24.1

 




22.2



23.6

     General and administrative

 

 

22.1


 

 

 

19.7

 




22.4



20.5

     Research and development

 

 

11.0


 

 

 

9.5

 




10.5



9.5

Total operating expenses

 

 

55.1


 

 

 

53.3

 




55.1



53.6

 

 

 

 


 

 

 

 

 












Operating income loss

 

 

(2.9

)

 

 

(0.9

)


(2.9 )


(0.2 )

 

 

 

 


 

 

 

 

 












Non-operating income (expense)

 

 

 


 

 

 

 

 












     Interest expense

(0.1

)


0.0



(0.1 )


0.0

     Interest income

 

 

0.1


 

 

 

2.0

 




0.6



2.0

     Other income

 

 

0.0


 

 


0.1

 




0.0



0.1

Total non-operating income, net

 

 

0.0


 

 

 

2.1

 




0.5



2.1

 

 

 

 


 

 

 

 

 












Income (loss) before income tax expense (benefit)

 

 

(2.8

)

 

 

1.2




(2.4 )


1.9

 

 

 

 


 

 

 

 

 












Provision for (benefit of) income taxes

 

 

(0.5

)

  

 


0.3




(0.4 )


0.4

 

 

 

 


 

 

 

 

 












Net income (loss)

 

 

(2.4

)

%

 

 

0.9

% 

(2.0 ) %

1.5
%

The following paragraphs discuss the Company’s performance for the three and nine months ended September 30, 2020 and 2019.

 

RESULTS OF OPERATIONS (in thousands) 

 

Net Sales

 

Net sales for the three-month period ended September 30, 2020 were $1,899, a decrease of $150, or 7.3%, from $2,049 during the comparable period in 2019.  Net sales for the nine months ended September 30, 2020 were $5,914, a decrease of $403, or 6.4%, over the same period in 2019. Sales during the quarter continued to be negatively impacted by the COVID-19 pandemic.  The pandemic has caused customers to slow their spending due to the economic uncertainty, and has significantly limited our ability to travel and visit customers.  The sales impacts were most significant to our HazardPRO products, which generally require greater interaction with customers during the sales process.

Gross Profit

 

Gross profit for the third quarter of 2020 decreased $82, or 7.6%, over the same period in 2019. Gross profit for the nine months ended September 30, 2020 decreased $287, or 8.5%, over the same period in 2019Gross margin decreased in the third quarter of 2020 to 52.2% from 52.4% during the same period in 2019. Gross margin for the nine months ended September 30, 2020 decreased to 52.2% from 53.4% over the same period in 2019.The decrease in gross margin percentage for both periods was primarily due to a change in product mix.

14


Operating Expenses

 

Total operating expenses decreased $46, or 4.2%, for the third quarter of 2020 compared to the same period in 2019, but increased as a percentage of net sales to 55.1% from 53.3%. Total operating expenses decreased $127, or 3.7%, for the nine months ended September 30, 2020 compared to the same period in 2019, but increased as a percentage of net sales to 55.1% from 53.6% due to lower net sales in the 2020 period. 

 

 

Selling and marketing expenses in the third quarter of 2020 decreased $77, or 15.6%, from the same period in 2019 and decreased as a percentage of net sales to 22.0% from 24.1%. Selling and marketing expenses in the nine months ended September 30, 2020 decreased $177, or 11.8%, from the same period in 2019 and decreased as a percentage of net sales to 22.2% from 23.6%. The decrease in both periods resulted primarily from lower outside sales representative compensation due to changes in commission plans and lower net sales, as well as a decrease in travel expenses due to the continuing COVID-19 pandemic.  The nine-month period also had a decrease in trade show expenses due to cancelled shows due to the continuing COVID-19 pandemic.

 

 

General and administrative expenses increased $16, or 4.0%, for the third quarter of 2020 compared to the same period in 2019 and increased as a percentage of net sales to 22.1% from 19.7%. General and administrative expenses increased $31, or 2.4%, for the nine months ended September 30, 2020 compared to the same period in 2019 and increased as a percentage of net sales to 22.4% from 20.5%. The increase in the third quarter was due primarily to amortization of the communication technology that began in October 2019, higher shareholder communication and stock handling fees due to the 2020 annual meeting held in July 2020 compared with April 2019, and higher wages due to increased paid time off accrual. The increase for the nine months was due primarily to the noted amortization, higher director fees and higher wages due to increased paid time off accrual, partially offset by decreased expenses related to computer supplies, software, and training due to an enterprise software upgrade in 2019. 

 

 

Research and development expenses increased $15, or 7.7%, in the third quarter of 2020 from the same period in 2019 and increased as a percentage of net sales to 11.0% from 9.5%. Research and development expenses increased $19, or 3.2%, in the nine months ended September 30, 2020 from the same period in 2019 and increased as a percentage of net sales to 10.5% from 9.5%. The increase for the quarter was due to higher wages due to increased paid time off accrualThe increase for the nine months was due to the noted wage increase and third-party product certification costs, partially offset by lower 2020 contract engineering costs related to product enhancements.

 

Non-Operating Income (Net)

 

Net non-operating income decreased by $43, or 100.0%, for the third quarter of 2020 compared to the same period in 2019. Net non-operating income decreased by $101, or 76.5%, for the nine months ended of September 30, 2020 compared to the same period in 2019.  The decrease in both periods was primarily a result of less interest income earned as a result of lower interest rates on Treasury Bills.

 

Income (Loss) Before Income Tax Expense (Benefit)


Loss before income tax benefit was $54 for the third quarter of 2020, representing a decrease of $79, or 316.0%, compared to an income before income tax expense of $25 for the same period in 2019. Loss before income tax benefit was $145 for the nine months ended September 30, 2020, representing a decrease of $261, or 225.0%, compared to an income before income tax expense of $116 for the same period in 2019. The decrease for both periods was primarily the result of the lower net sales and lower gross margins discussed above.

 

Income Tax Benefit

 

The Company's income tax benefit increased to $8, or 0.4% of net sales, in the third quarter of 2020 compared to an expense of $6, or 0.3% of net sales, in the third quarter of 2019. The Company's income tax benefit was $26, or 0.4% of net sales, for the nine months ended September 30, 2020 compared to an expense of $25, or 0.4% of net sales, for the nine months ended September 30, 2019.

 

15


LIQUIDITY AND CAPITAL RESOURCES

 

Cash and cash equivalents were $7,062 at September 30, 2020 and $8,785 at December 31, 2019. The decrease was primarily the result of cash used to purchase treasury bills considered as available-for-sale securities.  At December 31, 2019, all of the treasury bills were reported as cash equivalents and as of September 30, 2020, two of the treasury bills were reported as investments.

 

Cash generated from operating activities was $302 for the nine months ended September 30, 2020 as compared to $210 for the nine months ended September 30, 2019. The $92 increase in cash generated from operations was due to a decrease in inventory and trade receivables partially offset by increases in our net loss and in income tax receivable.  The decrease in inventory was due to decreased purchases due to lower net sales.  The decrease in trade receivables was due to decreased net sales and the timing of collections on accounts.  The increase in net loss was due to decreased net sales and gross profit.  The increase in the income tax receivable was due to the increased net loss.

 

Cash used in investing activities was $2,021 for the nine months ended September 30, 2020 as compared to cash generated from investing activities of $1,854 for the nine months ended September 30, 2019. During the nine months ended September 30, 2020, the Company had net purchases of treasury bills of $1,997 compared to net proceeds from maturities of treasury bills of $2,088 during the nine months ended September 30, 2019. In addition, the Company purchased $24 and $234 of property, equipment, and intangibles during the nine months ended September 30, 2020 and September 30, 2019, respectively.


Cash used in financing activities in the nine months ended September 30, 2020 and 2019 was $4. The cash used in both periods was for principal payments on a financing lease on right-to-use assets.  In addition, during the second quarter of 2020, the Company received and subsequently repaid a Payroll Protection Loan of $645 from the Small Business Administration, as discussed in the next paragraph.


As previously disclosed, on May 5, 2020, we entered into a U.S. Small Business Administration Paycheck Protection Program promissory note in the principal amount of $645 (the “PPP Loan”). The PPP Loan was unsecured and was evidenced by a note in favor of US Bank National Association as the lender. Subsequent to receipt of the loan, our Board of Directors continued to monitor both our ongoing performance and the routinely issued clarifying guidance provided by the government. As a result of this review, the Board determined that given the strength of our operations and the government issued clarifications, we would repay the entire amount of the PPP Loan. We repaid the PPP Loan in full on June 4, 2020. There were no prepayment penalties in connection with this voluntary repayment.


Subject to the following section, entitled COVID-19 Pandemic Discussion, the Company believe its 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.

 

16



COVID-19 Pandemic Discussion

 

As a result of the COVID-19 pandemic, we experienced weaker than anticipated performance in the first three quarters of 2020.  Due to the ongoing uncertainty about the severity and duration associated with the COVID-19 pandemic, we considered furloughing or eliminating employees and taking other measures to reduce operating costs until there was more certainty about the short-term and long-term effects of the COVID-19 pandemic on the nation’s economy and the Company’s business.


As of the end of September 2020, we have reduced our staff by four employees from its peak earlier in 2020.  We expect our 2020 fourth quarter financial results to be negatively affected, potentially to a material degree, as the effects of the pandemic continue to permeate the economy.  We have not been able to offset reductions in our net sales with a comparable or proportional decrease in expense, as we continue to incur cost related to employee compensation and operating expenses we believe are necessary to ensure the quality of our products and our ability to maintain or increase sales, resulting in a negative effect on the relationship between our net sales and expenses, resulting in a net loss.  


We typically have multiple sources for components.  Although we have experienced some extended delivery times as vendors have difficulty sourcing components, we continue to believe we have adequate sources for our key components to meet anticipated demand.

 

As of the date of this filing, we expect our business will continue to be negatively affected, but cannot currently determine the significance and duration of the pandemic on our business.


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 September 30, 2020, the Company had no off-balance sheet arrangements or transactions.

 

17


 

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 September 30, 2020.


Changes in Internal Control Over Financial Reporting


There were no changes in the Company’s internal control over financial reporting during the third quarter of 2020 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. 


18



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 September 30, 2020, formatted in iXBRL (Inline Extensible Business Reporting Language), (i) Condensed Balance Sheets as of September 30, 2020 and December 31, 2019, (ii) Condensed Statements of Comprehensive Income (Loss) for the three and nine months ended September 30, 2020 and September 30, 2019 (iii) Condensed Statements of Changes in Stockholders' Equity for the three and nine months ended September 30, 2020 and September 30, 2019, (iv) Condensed Statements of Cash Flows for the nine months ended September 30, 2020 and September 30, 2019, and (v) Notes to Financial Statements. 

 

19


 

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.

 

 

November 12, 2020

/s/ David L. Klenk

 

David L. Klenk

 

Chief Executive Officer and Chief Financial Officer

(Principal Executive Officer and Principal Financial Officer)

  


20