ELECTRO SENSORS INC - Quarter Report: 2008 June (Form 10-Q)

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Operating Expenses

Total operating expenses increased $83,000, or 11.0%, for the three months ended June 30, 2008 when compared to the same period of 2007. Of this increase, the Controls Division contributed an increase of $88,000, or 13.8%, offset by a decrease in ADS of $5,000, or 4.3%.

For the six months ended June 30, 2008 when compared to the same period of 2007, operating expenses increased $204,000, or 13.3%. Of this increase, the Controls Division contributed an increase of $198,000, or 15.1%, and ADS had an increase of $6,000, or 2.6%.

Selling and marketing costs increased $51,000, or 15.4%, for the three months ended June 30, 2008 when compared to the same period in 2007. For the six months ended June 30, 2008, selling and marketing costs increased $122,000, or 18.3%, when compared to the same period in 2007. Of the increase for the three months ended June 30, 2008, the Controls Division contributed an increase of $50,000, or 17.2%, and ADS had an increase of $1,000, or 2.4%. Of the increase for the six months ended June 30, 2008, the Controls Division contributed an increase of $108,000, or 18.2%, and ADS had an increase of $14,000, or 17.5%. Sales representative commissions, advertising, sales literature, travel, tradeshow, salaries and wages for new hires, benefit expenses – offset by decreases in contract personnel which were replaced by new hires – and product launch expenses are the predominant expenses that increased in the Controls Division. The increase in selling and marketing costs at ADS is due to increased wages due to additional personnel, offset by reduced expenses in website development.

General and administrative costs increased $15,000, or 5.2%, for the three months ended June 30, 2008 compared to the same period in 2007. For the six months ended June 30, 2008, general and administrative costs increased $49,000, or 8.5%, when compared to the same period in 2007. Of the increase for the three months ended June 30, 2008, the Controls Division contributed an increase of $18,000, or 6.9%, offset by a decrease in ADS of $3,000, or 11.5%. The increase for the six months ended June 30, 2008 is driven by an increase in costs of $57,000, or 10.9%, from the Controls Division that was offset by a decrease in ADS costs of $8,000, or 16.0%. The increase in general and administrative costs from the Controls Division was due to increases in depreciation on the upgrade of the enterprise software and related hardware, salaries and wages for new hires, charitable contributions, computer supplies, and legal and professional fees, offset by decreases in contract personnel which were replaced by new hires and a decline in allowance for doubtful accounts. The decrease in ADS is due to decreases in contract personnel expenses, legal and professional fees, and a decline in the allowance for doubtful accounts, offset by an increase in computer supplies and maintenance.

Research and development costs increased $17,000, or 12.5%, for the three months ended June 30, 2008 compared to the same period in 2007. For the six months ended June 30, 2008, research and development costs increased $33,000, or 11.4%, when compared to the same period in 2007. Of the increase for the three months ended June 30, 2008, the Controls Division contributed an increase of $20,000, or 23.2%, offset by a decrease in ADS of $3,000, or 6.1%. Of the increase for the six months ended June 30, 2008, the Controls Division contributed $33,000, or 17.5%; there was no change in costs for ADS. The increase in the Controls Division is due to lab materials, prototypes, legal fees related to trademark/patents, and increases in wages and benefits, offset by a decrease in lab testing fees for product certification.

Non-Operating Income

Non-operating income decreased by $79,000, or 117.9%, for the three-month period ended June 30, 2008 compared to the same period for 2007. For the six months ended June 30, 2008, non-operating income decreased $90,000, or 75.6%, when compared to the same period in 2007. The decrease for both the three and six-month periods ended June 30, 2008 is driven by a decrease in interest income and INV’s recognized loss on a $35,000 investment in Minn Shares, Inc. (MSHS). Minn Shares, Inc. has been liquidated and we do not believe that we will receive any additional return of our investment.

Interest income decreased $54,000, or 73.9%, when comparing the three months ended June 30, 2008 to the same period in 2007. For the six months ended June 30, 2008, interest income decreased $65,000, or 52.4%, when compared to the same period in 2007. These decreases were due to the decreased interest rate on Treasury Bills, which was 1.675% at June 30, 2008, compared to 4.56% at June 30, 2007.

Income Before Income Taxes

Income before income taxes decreased $118,000, or 33.5%, to an income before tax of $234,000 for the three-month period ended June 30, 2008 compared to the same period in 2007. For the six-month period ended June 30, 2008 income before income tax decreased $57,000, or 9.5%, when compared to the same period in 2007.

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The Controls Division had income before income taxes of $302,000 for the three months ended June 30, 2008 compared to $371,000 for the same period in 2007, a decrease of $69,000, or 18.6%. For the six months ended June 30, 2008, the Controls Division had income before income taxes of $635,000 compared to $623,000 for the same period in 2007, an increase of $12,000, or 1.9%. The decrease in income before income taxes for the three months ended June 30, 2008 is mainly due to a decrease in gross margin, an increase in the percentage of operating expenses to net sales (from 42.6% of net sales in 2007 to 46.1% of net sales in 2008), and a decrease in interest income. The increase in net income before income taxes for the six months ended June 30, 2008 is primarily due to increased net sales. Gross margin is the same for the six-month periods ended June 30, 2008 and June 30, 2007. Although there has been an increase in the percentage of operating expenses to net sales, the change is not as significant for the six-month periods (from 44.7% of net sales in 2007 to 45.8% of net sales in 2008).

 

ADS had income before income taxes of $2,000 for the three months ended June 30, 2008 compared to a net loss before income taxes of $16,000 for same period in 2007, an increase of $18,000, or 112.5%. For the six months ended June 30, 2008, ADS had income before income taxes of $1,000 compared to loss before income taxes of $9,000 for the same period in 2007, an increase of $10,000, or 111.1%. This increase in income before income taxes is due primarily to an increase in sales.

 

INV’S income before taxes decreased from a loss of $3,000 for the three-month period ended June 30, 2007 to a loss of $70,000 for the three-month period ended June 30, 2008. INV’s income before taxes decreased $81,000 to a loss before income taxes of $90,000 for the six months ended June 30, 2008 compared to the same period in 2007. This decrease is primarily due to a decrease in interest rates on Treasury Bills and the recognized loss on an investment held by the Company (see “Non-Operating Income”).

 

LIQUIDITY AND CAPITAL RESOURCES

 

Cash and cash equivalents were $5,507,000 at June 30, 2008, $5,779,000 at December 31, 2007, and $5,475,000 at June 30, 2007.

 

Cash used in operating activities was $9,000 for the six months ended June 30, 2008 and cash provided by operating activities was $298,000 for the same period in 2007. The decrease is primarily a result of our net operating income adjusted for depreciation expense on capital assets, accounts receivable, inventories, accounts payable, accrued income tax activity, and realized loss on an investment.

 

Cash provided by investing activities was $3,000 for the six-month period ended June 30, 2008 and cash used in investing activities was $36,000 for the same period in 2007.  The increase is primarily due to purchases of property and equipment of $36,000 in 2007, while there were no purchases in 2008.

 

Cash used in financing activities was $266,000 and $238,000 for the six months ended June 30, 2008 and 2007, respectively. During the six-month periods ended June 30, 2008 and 2007, the Company paid aggregate dividends of $269,000 in each period. In 2007, an officer exercised a stock option which provided cash of $32,000. There were no such exercises of stock options in 2008. During the six-month periods ended June 30, 2008 and 2007, the Company had $ 3,000 in stock purchases under the Employee Stock Purchase Plan in each period.

 

Our ongoing cash requirements will be primarily for capital expenditures, acquisitions, research and development in both the production monitoring and character recognition divisions, and working capital. Management believes that cash on hand and any cash provided by operations will be sufficient to meet our cash requirements through at least the next 12 months.

 

INV’s primary investments are 343,267 shares of Rudolph Technologies, Inc., listed on the Nasdaq stock market and 551,759 shares of PPT Vision, Inc, listed on the OTC Bulletin Board. The PPT Vision investment is accounted for under the equity method of accounting. These stocks are subject to fluctuations in market price and could have a negative effect on our liquidity.

 

Off-balance Sheet Arrangements

 

As of June 30, 2008, the Company had no off-balance sheet arrangements or transactions.

 

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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 the expected timing of the first customer installations of our Controls Division’s new integrated sensors; our ongoing development of additional sales channel partners; our expectation to continue adding sales partners in key locations; management’s intention that we not become an investment company; 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 strategies for the future and the outcome of events that have not yet occurred, is considered a forward-looking statement.

 

All forward-looking statements in this document are based on information available to us as of the date hereof, and we assume no obligation to update any such forward-looking statements, other than as required by law. It is important to note that our actual results could differ materially from those in such forward-looking statements. The forward-looking statements we make in this Quarterly Report 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 those detailed in the Company’s Annual Report on Form 10-KSB for the year ended December 31, 2007, filed with the Securities and Exchange Commission.

 

Item 3.  Quantitative and Qualitative Disclosures About Market Risk

 

Not Applicable.

 

Item 4(T).  Controls and Procedures

 

Based on an evaluation under the supervision and with the participation of the Company’s management, the Company’s principal executive officer and principal financial officer have concluded that the Company’s disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (“Exchange Act”) were effective as of June 30, 2008 to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms and (ii) accumulated and communicated to the Company’s management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

 

Changes in Internal Control Over Financial Reporting

 

There were no changes in the Company’s internal control over financial reporting during the second quarter of 2008, which 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.

 

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.

 

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Item 4.  Submission of Matters to a Vote of Security Holders

 

At the Annual Meeting of Shareholders held on April 23, 2008, we submitted to a vote of our shareholders the following matters, which received the indicated votes.

 

 

1.	Approving setting the number of members of the Board of Directors at five (5):

 

 

For:

3,061,783

Against:

0

Abstain:

26,145

 

 

2.	Election of Directors:

 

Director	For	Withheld
Bradley D. Slye	3,075,757	12,397
Peter R. Peterson	3,075,005	13,149
Geoffrey W. Miller	3,076,257	11,897
Joseph A. Marino	3,073,943	14,211
Robert W. Heller	3,075,057	13,097

 

 

3.	Ratification of the selection of Boulay, Heutmaker, Zibell & Co. P.L.L.P. as independent auditors for the Company for the fiscal year ending December 31, 2008:

 

For:

3,061,611

Against:

6,833

Abstain:

19,485

 

Item 5.  Other Information - None.

 

Item 6.  Exhibits

(a)

Exhibits - See Exhibit Index following signature page.

 

 

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SIGNATURES

 

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

 

	Electro-Sensors, Inc.
August 13, 2008	/s/ Bradley D. Slye
	Bradley D. Slye
	Chief Executive Officer and Chief Financial Officer

 

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EXHIBIT INDEX

 

ELECTRO-SENSORS, INC.

 

FORM 10-Q FOR QUARTER ENDED JUNE 30, 2008

 

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

 

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