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 March 31, 2021

 

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 ☐

 

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 May 12, 2021 was 3,395,521.

 

 

 

ELECTRO-SENSORS, INC.

Form 10-Q

For the Periods Ended March 31, 2021

 

  

ELECTRO-SENSORS, INC.

(in thousands except share and per share amounts) 

See accompanying notes to unaudited condensed financial statements

ELECTRO-SENSORS, INC.

(in thousands except share and per share amounts)  

(unaudited)  

See accompanying notes to unaudited condensed financial statements

ELECTRO-SENSORS, INC.

(in thousands except share and per share amounts)

ELECTRO-SENSORS, INC.

(in thousands)

(unaudited) 

 

See accompanying notes to unaudited condensed financial statements

ELECTRO-SENSORS, INC.

FOR THE PERIOD ENDED MARCH 31, 2021

(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 five months at March 31, 2021. 

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
March 31, 2021
Commercial Paper		$	719			$	0			$	0			$	719
Treasury Bills			7,998				2				0				8,000
Equity Securities			54				0				(12	)			42
			8,771				2				(12	)			8,761
Less Cash Equivalents			719				0				0				719
Total Investments, March 31, 2021		$	8,052			$	2			$	(12	)		$	8,042
December 31, 2020
Commercial Paper		$	718			$	0			$	0			$	718
Treasury Bills			7,998				1				0				7,999
Equity Securities			54				0				(12	)			42
			8,770				1				(12	)			8,759
Less Cash Equivalents			718				0				0				718
Total Investments, December 31, 2020		$	8,052			$	1			$	(12	)		$	8,041

 

ELECTRO-SENSORS, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

FOR THE PERIOD ENDED MARCH 31, 2021

(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.

 

March 31, 2021

		Carrying amount								Fair Value Measurement Using
		in balance sheet				Fair Value				Level 1				Level 2				Level 3
Assets:
Cash equivalents
Commercial paper		$	719			$	719			$	719			$	0			$	0
Treasury bills			8,000				8,000				8,000				0				0
Equity Securities			42				42				0				0				42

 

December 31, 2020

		Carrying amount								Fair Value Measurement Using
		in balance sheet				Fair Value				Level 1				Level 2				Level 3
Assets:
Cash equivalents
Commercial paper		$	718			$	718			$	718			$	0			$	0
Treasury bills			7,999				7,999				7,999				0				0
Equity Securities			42				42				0				0				42

 

The fair value of the commercial paper and treasury bills is based on quoted market prices in an active market.  The equity securities owned by the Company are investments in two non-publicly traded companies.  There is an undeterminable market for each of these two companies and the Company has determined the fair value 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:  

 

		Three Months Ended March 31,
		2021				2020
Beginning Balance		$	42			$	45
Change in Fair Value			0				(3	)
Ending Balance		$	42			$	42

 

ELECTRO-SENSORS, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

FOR THE PERIOD ENDED MARCH 31, 2021

(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: 

	March 31,  2021				December 31,  2020
Raw Materials	$	953			$	922
Work In Process		315				292
Finished Goods		305				363
Reserve for Obsolescence		(5	)			(5	)
Total Inventories	$	1,568			$	1,572

 

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, 2020, as well as any effect the COVID-19 pandemic may have on the efficiency of our business operations, our customer base and the domestic or worldwide economy.

Based on rapidly changing dynamics in global supply chains of materials and components, we may experience both price increases and difficulty in sourcing materials and components.  In addition, we may experience changes in transportation and freight availability that may make it difficult to have materials and components shipped to us or our products shipped to customers in a timely manner. 

 

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, 2020. 

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.

 

The following paragraphs discuss the Company’s performance for the three months ended March 31, 2021 and 2020.

 

RESULTS OF OPERATIONS (in thousands) 

 

Net Sales

 

Net sales for the three-month period ended March 31, 2021 were $1,901, a decrease of $22, or 1.1%, from $1,923 during the comparable period in 2020.  While the COVID-19 pandemic continues to negatively affect some areas of our business, this negative impact was partially offset during the 2021 first quarter by an improvement in international sales and increased sales of our HazardPRO wireless hazard monitoring systems.  Furthermore, reduced travel restrictions have improved our ability to engage at customer facilities, which is beneficial for our system sales. 

Gross Profit

 

Gross profit for the first quarter of 2021 decreased $9, or 0.9%, over the same period in 2020. Gross margin increased slightly in the first quarter of 2021 to 52.1% from 52.0% during the same period in 2020. The slight increase in gross margin percentage was primarily due to a change in product mix.

Operating Expenses

 

Total operating expenses decreased $146, or 12.8%, for the first quarter of 2021 compared to the same period in 2020 and decreased as a percentage of net sales to 52.3% from 59.3%.

 

 

 

 

Non-Operating Income

 

Net non-operating income decreased by $29, or 93.5%, for the first quarter of 2021 compared to the same period in 2020. The decrease was primarily a result of less interest income earned due to lower interest rates on Treasury Bills.

 

Loss Before Income Tax Benefit.

Loss before income tax benefit was $2 for the first quarter of 2021, representing an improvement of $108, or 98.2%, compared to a loss before income tax benefit of $110 for the same period in 2020. The improvement was primarily the result of the lower operating expenses, partially offset by lower interest income.

 

Income Tax Benefit

 

The income tax benefit decreased to $0, in the first quarter of 2021 compared to a benefit of $19, or 1.0% of net sales, in the first quarter of 2020.  The decrease is due a lower loss before income tax benefit.

 

LIQUIDITY AND CAPITAL RESOURCES

 

Cash and cash equivalents were $1,045 at March 31, 2021 and $1,090 at December 31, 2020. The decrease was primarily the result of an increase in cash used in operations discussed below.  

 

Cash used in operating activities was $45 for the three months ended March 31, 2021 as compared to cash generated from operations of $66 for the three months ended March 31, 2020. The $111 decrease in cash generated from operations was due to an increase in trade receivables, partially offset by an increase in accrued expenses.  The increase in trade receivables was due to the timing of shipments and collections on accounts.  The increase in accrued expenses was due to increased customer deposits and accrued paid time off.

 

Cash generated from investing activities was $1 for the three months ended March 31, 2021 as compared to cash used in investing activities of $999 for the three months ended March 31, 2020. The increase was due to an increase in proceeds from Treasury Bill maturities classified as investments.  During the first quarter of 2020, all maturities of Treasury Bills were classified as cash and cash equivalents.

Cash used in financing activities in the three months ended March 31, 2021 and 2020 was $1 and $2, respectively. The cash used was for principal payments on a financing lease on right-to-use assets.  

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.

 

---

COVID-19 Pandemic Discussion

 

As a result of the COVID-19 pandemic, we experienced weaker than anticipated sales performance in the 2021 first quarter. To partially offset lower net sales, we decreased our operating expenses, leading to a smaller net loss in the first quarter of 2021 than in the first quarter of 2020.  Based on continued uncertainty regarding the duration of the pandemic, and a staggered reopening of the US and global economies, our 2021 financial results may continue to be negatively affected, potentially to a material degree.  

 

We typically have robust sources for production components and materials.  However, we are increasingly experiencing disruptions in our supply chain, resulting in difficulty sourcing parts. Additionally, we are experiencing price increases for many of the components utilized in our products. We are also seeing delays in shipping and transportation services, which may impact our ability to make timely deliveries to our customers.  Furthermore, the labor market for employees able to fill our production positions is very challenging and we may struggle to fill open positions.  While we continue to closely manage our workforce, lead times, and deliveries of components, our actions may not be successful and may result in negative impacts to our sales and profit margins.

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 March 31, 2021, the Company had no off-balance sheet arrangements or transactions.

 

 

 

Not Applicable.

 

 

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 March 31, 2021.

Changes in Internal Control Over Financial Reporting

There were no changes in the Company’s internal control over financial reporting during the first quarter of 2021 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.