Company Quick10K Filing
Electro Sensors
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$0.00 3 $14
10-Q 2019-11-12 Quarter: 2019-09-30
10-Q 2019-08-12 Quarter: 2019-06-30
10-Q 2019-05-13 Quarter: 2019-03-31
10-K 2019-03-20 Annual: 2018-12-31
10-Q 2018-11-13 Quarter: 2018-09-30
10-Q 2018-08-14 Quarter: 2018-06-30
10-Q 2018-05-10 Quarter: 2018-03-31
10-K 2018-03-20 Annual: 2017-12-31
10-Q 2017-11-13 Quarter: 2017-09-30
10-Q 2017-08-10 Quarter: 2017-06-30
10-Q 2017-05-11 Quarter: 2017-03-31
10-K 2017-03-29 Annual: 2016-12-31
10-Q 2016-11-10 Quarter: 2016-09-30
10-Q 2016-08-12 Quarter: 2016-06-30
10-Q 2016-05-12 Quarter: 2016-03-31
10-K 2016-03-14 Annual: 2015-12-31
10-Q 2015-11-10 Quarter: 2015-09-30
10-Q 2015-08-11 Quarter: 2015-06-30
10-Q 2015-05-14 Quarter: 2015-03-31
10-K 2015-03-18 Annual: 2014-12-31
10-Q 2014-11-12 Quarter: 2014-09-30
10-Q 2014-08-13 Quarter: 2014-06-30
10-Q 2014-05-13 Quarter: 2014-03-31
10-K 2014-03-21 Annual: 2013-12-31
10-Q 2013-11-12 Quarter: 2013-09-30
10-Q 2013-08-09 Quarter: 2013-06-30
10-Q 2013-05-09 Quarter: 2013-03-31
10-K 2013-03-22 Annual: 2012-12-31
10-Q 2012-11-09 Quarter: 2012-09-30
10-Q 2012-08-10 Quarter: 2012-06-30
10-Q 2012-05-11 Quarter: 2012-03-31
10-K 2012-03-29 Annual: 2011-12-31
10-Q 2011-11-10 Quarter: 2011-09-30
10-Q 2011-08-12 Quarter: 2011-06-30
10-Q 2011-05-12 Quarter: 2011-03-31
10-K 2011-03-17 Annual: 2010-12-31
10-Q 2010-11-12 Quarter: 2010-09-30
10-Q 2010-08-13 Quarter: 2010-06-30
10-Q 2010-05-11 Quarter: 2010-03-31
10-K 2010-03-09 Annual: 2009-12-31
8-K 2019-04-24 Shareholder Vote
8-K 2018-04-25 Shareholder Vote
ELSE 2019-09-30
Part I. Financial Information
Item 1. Financial Statements
Note 1. Basis of Presentation
Note 2. Investments
Note 3. Fair Value Measurements
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
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
EX-31.1 ex311_1.htm
EX-32.1 ex321_2.htm

Electro Sensors Earnings 2019-09-30

ELSE 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

Comparables ($MM TTM)
Ticker M Cap Assets Liab Rev G Profit Net Inc EBITDA EV G Margin EV/EBITDA ROA
DYSL 17 32 10 43 16 1 2 18 36% 8.1 2%
IKNX 14 17 4 18 6 -0 0 16 32% 60.8 -3%
BNSO 14 22 7 0 0 0 0 9 0%
ELSE 14 14 1 8 4 0 1 13 54% 17.8 2%
TRT 11 37 12 39 9 2 4 5 23% 1.1 4%
CETX 10 73 42 81 31 -12 -4 10 38% -2.3 -16%
SMIT 10 10 1 14 5 -1 -1 8 36% -8.3 -12%
ARTW 9 21 9 19 3 -3 -2 12 15% -6.6 -15%
VJET 8 69 0 0 0 0 8 0%
TBLT 8 6 5 13 4 -23 -23 7 29% -0.3 -376%

else-20190930.htm
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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, 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 November 11, 2019 was 3,395,521.

 

 

 

2


 

ELECTRO-SENSORS, INC.

Form 10-Q

For the Periods Ended September 30, 2019

 

TABLE OF CONTENTS

PART I – FINANCIAL INFORMATION 4
   
Item 1. Financial Statements (unaudited): 4
   
Condensed Balance Sheets – As of September 30, 2019 and December 31, 2018 4
Condensed Statements of Comprehensive Income (Loss) – For the Three and Nine Months ended September 30, 2019 and September 30, 2018 5
Condensed Statements of Changes in Stockholders' Equity – For the Three and Nine Months ended September 30, 2019 and September 30, 2018 6
Condensed Statements of Cash Flows – For the Nine Months ended September 30, 2019 and September 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


ELECTRO-SENSORS, INC.

CONDENSED BALANCE SHEETS

(in thousands except share and per share amounts)

 

 

September 30,
2019

 

 

December 31,
2018

 

 

 

(unaudited)

 

 

 

 

ASSETS 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current assets 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents 

 

$

3,117

 

 

$

1,057

 

Investments

 

 

5,786

 

 

 

7,742

 

Trade receivables, less allowance for doubtful accounts of $11


965

 

 

 

896

 

Inventories

 

 

1,719

 

 

 

1,618

 

Other current assets

 

 

194

 

 

 

155

 

 

 

 

 

 

 

 

 

 

Total current assets

 

 

11,781

 

 

 

11,468

 

 

 

 

 

 

 

 

 

 

Deferred income tax asset, net

 

 

196

 

 

 

192

 

 

 

 

 

 

 

 

 

 

Intangible assets, net

 

 

555

 

 

 

565

 

 

 

 

 

 

 

 

 

 

Property and equipment, net

 

 

1,063

 

 

 

1,050

 

 

 

 

 

 

 

 

 

 

Total assets

 

$

13,595

 

 

$

13,275

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current maturities of financing lease

 

$

5

 

 

$

5

 

Accounts payable

 

 

196

 

 

 

116

 

Accrued expenses

 

 

510

 

 

 

405

 

Accrued income tax

30


0

 

 

 

 

 

 

 

 

 

Total current liabilities

 

 

741

 

 

 

526

 

 

 

 

 

 

 

 

 

 

Long-term liabilities 







    Financing lease, net of current maturities

20


24

   

 

 

 

 

 

 

 

 

Total long-term liabilities

20


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

 

 

2,027

 

 

 

2,019

 

Retained earnings

 

 

10,426

 

 

 

10,335

 

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

 

 

42

 

 

32

 

 

 

 

 

 

 

 

 

Total stockholders’ equity

 

 

12,834

 

 

 

12,725

 

 

 

 

 

 

 

 

 

 

Total liabilities and stockholders’ equity 

 

$

13,595

 

 

$

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
September 30,
 

Nine Months Ended

September 30


    2019     2018  
2019

2018
   
           







Net sales   $ 2,049     $ 2,146

$

6,317



$ 5,642
Cost of goods sold     975    
951  

2,941


2,559
                                  
Gross profit  
1,074    
1,195  

3,376


3,083
                                  
Operating expenses                







Selling and marketing     494       406  

1,495


1,242
General and administrative     404       414  

1,294


1,370
Research and development  
194    
176  

603


628
                                  
Total operating expenses   
1,092    
996  

3,392


3,240
                                  
Operating income (loss)     (18 )     199

(16 )

(157 )
                                  
Non-operating income (expense)                







Interest expense

0

0


(1 )

0
Interest income     41       36  

126


83
Other income  
2    
2  

7


7
                                  
Total non-operating income, net  
43    
38  

132


90
                                  
Income (loss) before income tax expense (benefit)     25     237

116


(67 )
                                  
Provision for (benefit of) income tax     6  
50

25


(9 )
                                  
Net income (loss)   $ 19   $
187  
$ 91

$ (58 )
                                  
Other comprehensive income                







Change in unrealized value of available-for-sale securities, net of income tax $ 2   $ 0
$ 10

$ 7
Other comprehensive income     2       0

10


7
                                  
Net comprehensive income (loss)   $
21   $ 187  
$ 101

$ (51 )
                                  
Net income (loss) per share data:                







                                  
Basic                







Net income (loss) per share   $ 0.01   $ 0.06
$ 0.03
$ (0.02 )
Weighted average shares     3,395,521       3,395,521  

3,395,521


3,395,521
                                  
Diluted                







Net income (loss) per share   $
0.01   $
0.06
$ 0.03
$ (0.02 )
Weighted average shares     3,398,533       3,398,238  

3,397,385


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 September 30 













 

Common Stock Issued

 

 

Additional
Paid-in
Capital

 

 

Retained
Earnings

 

 

Accumulated
Other
Comprehensive
Income

 

 

Total
Stockholders’

Equity

 

   

Shares

 

 

Amount

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2019  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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2018   3,395,521

$ 339

$ 2,010

$ 10,100

$ 26

$ 12,475

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income















0


0
Stock-based compensation expense







1










1
Net income











187





187

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

$ 339

$ 2,011

$ 10,287

$ 26

$ 12,663

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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, 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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2017

3,395,521

 

 

 $

339

 

 

$

2,004

 

 

$

10,352

 

 

$

12


 

$

12,707

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

7

 

 

7

Stock-based compensation expense

 

 

 

 

 

 

 

 

7

 

 

 

 

 

 

 

 

 

 

 

7

 

Change in accounting policy 











(7 )

7


0

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

(58

)

 

 

 

 

 

 

(58

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, September 30, 2018 (unaudited)

3,395,521

 

 

$

339

 

 

$

2,011

 

 

$

10,287

 

 

$

26


 

$

12,663

 

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,

 

 

 

2019

 

2018

 

Cash flows from (used in) operating activities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

91

 

$

(58

)

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

231

 

 

 

238

 

Deferred income taxes

 

 

(6

)

 

 

0

Stock-based compensation expense

 

 

8

 

 

 

7

 

Interest accrued on treasury bills

 

 

(120

)

 

 

(78

)

Change in:

 

 

 

 

 

 

 

 

Trade receivables

 

 

(69

)

 

 

(142

)

Inventories

 

 

(101

)

 

 

(52

)

Other current assets

 

 

(39

)

 

 

(30

)

Accounts payable

 

 

80

 

 

15

Accrued expenses

 

 

105

 

 

 

45

 

Income tax receivable/payable

 

 

30

 

 

28

 

 

 

 

 

 

 

 

 

Net cash from (used in) operating activities

 

 

210

 

 

(27

)

 

 

 

 

 

 

 

 

 

Cash flows from investing activities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Purchases of treasury bills

 

 

(7,662

)

 

 

(10,654

)

Proceeds from the maturity of treasury bills

 

 

9,750

 

 

 

10,750

 

Purchase of intangible asset

(150 )

0

Purchase of property and equipment

 

 

(84

)

 

 

(29

 

 

 

 

 

 

 

 

 

Net cash from investing activities

 

 

1,854

 

 

 

67

 

 

 

 

 

 

 

 

 

 

Cash flows used in financing activities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  

 

Payments on financing lease

(4 )

0

Payment of contingent earn-out

 

 

0

 

 

(150

)

 

 

 

 

 

 

 

 

 

Net cash used in financing activities

 

 

(4

)

 

 

(150

)

 

 

 

 

 

 

 

 

 

Net increase (decrease) in cash and cash equivalents

 

 

2,060

 

 

(110

)

 

 

 

 

 

 

 

 

 

Cash and cash equivalents, beginning

 

 

1,057

 

 

 

963

 

Cash and cash equivalents, ending

 

$

3,117

 

 

$

853

 


 

 

 

 

 

 

 

 

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 SEPTEMBER 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 September 30, 2019 and for the three and nine-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 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, 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 SEPTEMBER 30, 2019

(in thousands except share and per share amounts)

(unaudited)

 

Intangibles


Intangible assets are comprised of a non-compete agreement, 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.


On September 30, 2019, the Company purchased a royalty-free, perpetual technology license for wireless communication technologies for $150.


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, 2019, there was approximately $17 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 nine-month periods ended September 30, 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 nine months ended September 30, 2019, options to purchase 329,488 and 330,636 weighted-average common shares, respectively, have been excluded from the computations of diluted weighted-average shares outstanding because their effect would be anti-dilutive.   For the three and nine months ended September 30, 2018, options to purchase 304,783 and 307,500 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 SEPTEMBER 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 three months at September 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

 

September 30, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial Paper

 

$

810

 

 

$

0

 

 

$

0

 

 

$

810

 

Treasury Bills

 

 

7,684

 

 

 

56

 

 

 

0

 

 

 

7,740

 

Equity Securities

 

 

45

 

 

 

0

 

 

 

0

 

 

45

 

 

 

 

8,539

 

 

 

56

 

 

 

0

 

 

8,595

 

Less Cash Equivalents

 

 

2,809

 

 

 

0

 

 

 

0

 

 

 

2,809

 

Total Investments, September 30, 2019

 

$

5,730

 

 

$

56

 

 

$

0

 

$

5,786

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 SEPTEMBER 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.

 

September 30, 2019


 

Carrying amount

 

 

 

 

 

 Fair Value Measurement Using 

 

 

 

in balance sheet

 

 

Fair Value

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial paper

 

$

810

 

 

$

810

 

 

$

810

 

 

$

0

 

 

$

0

 

Treasury bills

1,999


1,999


1,999


0


0

Treasury bills

 

 

5,741

 

 

 

5,741

 

 

 

5,741

 

 

 

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 nine months ended September 302018 relate to the Harvest Engineering contingent earn-out and are as follows:

 

  Nine Months Ended September 30, 2018
 
     
Beginning Balance
$ 150  

Change in Fair Value


  0

Payments


  (150 )
Ending Balance
$ 0  

 

11


 

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 income (loss) expressed as a percentage of net sales.

 

 

 

Three Months Ended September 30,



Nine Months Ended September 30,

 

 

2019


 

 

2018

 



2019


2018

Net sales

 

 

100.0


%

 

 

100.0

 

%

100.0
%

100.0
%

Cost of goods sold

 

 

47.6


 

 

 

44.3

 




46.6



45.4

Gross profit

 

 

52.4


 

 

 

55.7

 




53.4



54.6

 

 

 

 


 

 

 

 

 












Operating expenses

 

 

 


 

 

 

 

 












     Selling and marketing

 

 

24.1


 

 

 

18.9

 




23.6



22.0

     General and administrative

 

 

19.7


 

 

 

19.3

 




20.5



24.3

     Research and development

 

 

9.5


 

 

 

8.2

 




9.5



11.1

Total operating expenses

 

 

53.3


 

 

 

46.4

 




53.6



57.4

 

 

 

 


 

 

 

 

 












Operating income (loss)

 

 

(0.9

)

 

 

9.3




(0.2 )


(2.8 )

 

 

 

 


 

 

 

 

 












Non-operating income (expense)

 

 

 


 

 

 

 

 












     Interest income

 

 

2.0


 

 

 

1.7

 




2.0



1.5

     Other income

 

 

0.1


 

 


0.0

 




0.1



0.1

Total non-operating income, net

 

 

2.1


 

 

 

1.7

 




2.1



1.6

 

 

 

 


 

 

 

 

 












Income (loss) before income tax expense (benefit)

 

 

1.2


 

 

11.0




1.9



(1.2 )

 

 

 

 


 

 

 

 

 












Provision for (benefit from) income taxes

 

 

0.3

  

 


2.3




0.4



(0.2 )

 

 

 

 


 

 

 

 

 












Net income (loss)

 

 

0.9

%

 

 

8.7

% 

1.5
%

(1.0 ) %

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

 

RESULTS OF OPERATIONS (in thousands) 

 

Net Sales

 

Net sales for the three-month period ended September 30, 2019 were $2,049, a decrease of $97, or 4.5%, from $2,146 during the comparable period in 2018.  Net sales for the nine months ended September 30, 2019 were $6,317, an increase of $675, or 12.0%, over the corresponding period in 2018.   The year-to-date sales increase has been primarily driven by increased sales of HazardPRO wireless monitoring systems.  Additionally, international sales increased by 51% for the nine-month period, reaching 14.5% of sales as compared to 10.5% during the similar period in 2018, primarily driven by higher sales into Canada. 

Gross Profit

 

Gross profit for the third quarter of 2019 decreased $121, or 10.1%, over the same period in 2018. Gross profit for the nine months ended September 30, 2019 increased $293, or 9.5%, over the same period in 2018Gross margin decreased in the third quarter of 2019 to 52.4% from 55.7% during the same period in 2018. Gross margin decreased in the nine months ended September 30, 2019 to 53.4%, versus 54.6% in the same period in 2018.  The decrease in the gross margin percentage for both periods was primarily due to a change in product mix and higher material costs resulting from the increase in government tariff charges.

13


Operating Expenses

 

Total operating expenses increased $96, or 9.6%, for the third quarter of 2019 compared to the same period in 2018 and increased as a percentage of net sales to 53.3% from 46.4%. Total operating expenses increased $152, or 4.7%, for the nine months ended September 30, 2019 compared to the same period in 2018 but decreased as a percentage of net sales to 53.6% from 57.4%. 

 

 

Selling and marketing expenses in the third quarter of 2019 increased $88, or 21.7%, from the same period in 2018 and increased as a percentage of net sales to 24.1% from 18.9%. Selling and marketing expenses in the nine months ended September 30, 2019 increased $253, or 20.4%, from the same period in 2018 and increased as a percentage of net sales to 23.6% from 22.0%. The increase for both periods resulted primarily from increased headcount, higher internal sales staff compensation due to increased sales and changes in compensation plans.

 

 

General and administrative expenses decreased $10, or 2.4%, for the third quarter of 2019 compared to the same period in 2018 but increased slightly as a percentage of net sales to 19.7% from 19.3%. General and administrative expenses decreased $76, or 5.5%, for the nine months ended September 30, 2019 compared to the same period in 2018 and decreased as a percentage of net sales to 20.5% from 24.3%. The decrease in the third quarter was due primarily to decreased expenses related to computer supplies, software, and training and lower compensation costs due to a decrease in headcount in 2019, partially offset by an increase in legal fees related to 2019 business development activities.  The decrease for the nine-month period was due primarily to lower legal fees and lower compensation costs due to a decrease in headcount in 2019.

 

 

Research and development expenses increased $18, or 10.2%, in the third quarter of 2019 from the same period in 2018 and increased as a percentage of net sales to 9.5% from 8.2%. Research and development expenses decreased $25, or 4.0%, in the nine months ended September 30, 2019 from the same period in 2018 and decreased as a percentage of net sales to 9.5% from 11.1%. The increase in the third quarter was due to higher 2019 contract engineering costs related to product enhancements.  The decrease in the nine-month period was due to decreased lab testing, certification and lab material expenses for new products compared to the first nine months of last year.

 

Non-Operating Income (Net)

 

Net non-operating income increased by $5, or 13.2%, for the third quarter of 2019 compared to the same period in 2018. Net non-operating income increased by $42, or 46.7%, for the nine months ended of September 30, 2019 compared to the same period in 2018. The increase was primarily due to higher interest income earned from higher interest rates on Treasury Bills.

 

Income (Loss) Before Income Tax Expense (Benefit)


Income before income tax expense was $25 for the third quarter of 2019, representing a decrease in the third quarter income of $212, or 89.5%, compared to $237 for the same period in 2018. Income before income tax expense was $116 for the nine months ended September 30, 2019, representing an increase in income of $183, or 273.1%, compared to a loss before income tax benefit of $67 for the same period in 2018. The decrease in income in the 2019 three-month period was primarily the result of lower third quarter net sales, while the increase in the nine-month period was primarily the result of higher 2019 net sales, in each case as discussed above.

 

Income Taxes

 

The Company's income tax expense percentage increased to 24.0% for the third quarter of 2019 from 21.1% of income tax benefit in the third quarter of 2018. The Company's income tax expense percentage increased to 21.6% for the nine months ended September 30, 2019 from 13.4% of income tax benefit in the nine months ended September 30, 2018.

 

14


LIQUIDITY AND CAPITAL RESOURCES

 

Cash and cash equivalents were $3,117 at September 30, 2019 and $1,057 at December 31, 2018. The increase was primarily the result of cash generated from investing activities due to the maturity of treasury bills.  Some of the treasury bills purchased during the third quarter of 2019 were considered cash equivalents.

 

Cash generated from operating activities was $210 for the nine months ended September 30, 2019 as compared to cash used in operating activities of $27 for the nine months ended September 30, 2018. The $237 increase in cash from operations was due to net income in 2019 compared to a net loss in 2018, a decrease in trade receivables, an increase in accounts payable, and an increase in accrued expenses, partially offset by an increase in inventory. The 2019 net income, as compared to the prior year net loss, was primarily due to increased net sales.  The decrease in trade receivables is due the timing of sales and collections on accounts.  The increase in accounts payable is due to timing of payments.  The increase in accrued expenses is due to increased headcount and changes in compensation plans.  The increase in inventory is due to the timing of purchases.

 

Cash generated from investing activities was $1,854 and $67 for the nine months ended September 30, 2019 and 2018, respectively. During the nine months ended September 30, 2019 and 2018, the Company had net proceeds from maturities of Treasury Bills of $2,088 and $96, respectively. In addition, we purchased $234 and $29 of property, equipment, and intangibles during the nine months ended 2019 and 2018, respectively.


Cash used in financing activities in the nine months ended September 30, 2019 and 2018 was $4 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 September 30, 2019, the Company had no off-balance sheet arrangements or transactions.

 

15


 

 

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 September 30, 2019.


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 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