ELECTRO SENSORS INC - Annual Report: 2018 (Form 10-K)

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

Form 10-K

 

ELECTRO-SENSORS, INC.

(Exact name of registrant as specified in its charter)

 

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act. Yes ☐ No ☒

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 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 if disclosure of delinquent filers in response to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☐

 

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.

 

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 aggregate market value of the voting stock held by non-affiliates (persons other than officers, directors, or holders of more than 5% of the outstanding stock) of the registrant was approximately $9,000,000 based upon the closing price of its common stock as reported on The Nasdaq Stock Market® on June 30, 2018.

 

The number of shares outstanding of the registrant’s Common Stock, $0.10 par value, on March 19, 2019 was 3,395,521.

 

DOCUMENTS INCORPORATED BY REFERENCE

Certain information called for by Part III of this Form 10-K is incorporated by reference from the registrant’s Definitive Proxy Statement, which will be filed pursuant to Regulation 14A not later than 120 days after the end of the fiscal year covered by this report.

 

 

 

ELECTRO-SENSORS, INC.
Form 10-K for the Year Ended December 31, 2018

 

 

PART I

 

 

Introduction

 

Electro-Sensors, Inc. (“we,” “us,” “our,” the “Company” or “ESI”) manufactures and sells industrial production monitoring and process control systems.

 

In addition, we may periodically make strategic investments in other businesses and companies, including investments that we believe would facilitate the development of technology complementary to our existing products or investments that we believe present good opportunities for the Company and its shareholders.  Our primary focus is to remain an operating company and we do not intend to become an investment company.

 

ESI was incorporated in Minnesota in July 1968. Our executive offices are located at 6111 Blue Circle Drive, Minnetonka, Minnesota, 55343-9108. Our telephone number is (952) 930-0100.

 

Products

 

We manufacture and sell a variety of monitoring systems that measure machine production and operation rates, as well as systems that regulate the speed of related machines in production processes.

 

Our goal is to develop meaningful annual updates to our standard products.

 

We have a sales agreement with Motrona GmbH, a German control and interface devices manufacturer, under which we have the right to distribute Motrona products in the United States. These products interface with our products on various applications for motion monitoring.

 

      Speed Monitoring Systems

Our speed monitoring systems compare revolutions per minute or speed against acceptable rates as determined by our customers. These systems vary in complexity, from simple systems that detect slow-downs or stoppages, to more sophisticated systems that warn of deviations from precise tolerances and that permit various subsidiary operations to be determined through monitoring the shaft speed.

 

Our speed monitoring systems also include a line of products that measure production counts or rates, such as parts, gallons per minute, or board feet. These speed monitoring systems also include alarm systems, tachometers, and other devices that translate impulses from the sensors into alarm signals, computer inputs, or digital displays that are usable by the customer.

 

We have several products used in drive control systems that regulate the speed of motors on related machines in a production sequence to ensure that the performances of various operations are coordinated. The products consist of a line of digital control products for motors that require a complete closed loop PID (Proportional Integral Derivative) control. The closed loop controllers coordinate production speed among process motors and reduce waste.

 

      Temperature Application Products

 

Our main temperature applications include bearing, gear box, and motor temperature monitoring sensors.  These sensors alert an operator when the temperature exceeds or is less than a specified temperature.

 

 

      Position Application Products

 

We also offer production monitoring devices that include a belt alignment and slide gate position monitor.  The belt alignment monitor is used to determine if a belt is tracking correctly.  The slide gate position monitor is used in plant operations to provide feedback of the position of a slide gate.  It is also used to provide feedback of the position of a valve or control arm.

 

     Vibration Monitoring Products 

 

A vibration monitor alerts an operator when the vibration of a machine in a production system exceeds or is less than a specified level.  

 

      Tilt Switches

 

A tilt switch is designed to alert the operator when a storage bin or production system reaches a certain capacity. 

 

      Hazard Monitoring Systems 

 

Electro-Sentry We offer the Electro-Sentry 1 and Electro-Sentry 16 hazard monitoring systems, which integrate our sensors for monitoring temperature, belt misalignment, and shaft speed with programmable control logic and LED display interface to create a complete system for hazard monitoring. These systems enable our customers to locate which part of their material handling system is operating incorrectly, typically in less than ten seconds, by using visual indication on the LED displays. 

 

HazardPRO^TM We market our wireless hazard technology monitoring system under the HazardPRO product name. This integrated hazard monitoring system captures and displays key information in an intuitive format allowing the user to quickly and comprehensively understand the status and history of its processes.  The simple but powerful interface gives the user insight into its operations as it strives to maximize safety and facility runtime, while minimizing costs associated with unscheduled maintenance and unplanned downtime. We offer Class II Division I, the industry standard for dust environments, intrinsically safe nodes and sensors that are certified for use in hazardous environments.

 

The HazardPRO software includes a large site system manager link used to efficiently collect data from sensors placed across a widely dispersed area that has been deployed in sites covering greater than 50 acres.  We have also added a complete antenna pair mounting system to the product line for easy and accurate customer installation.

 

We expect to continue to expend resources to develop new products and to market new and existing products for use in a wide variety of monitoring applications.

 

Our corporate website, www.electro-sensors.com, provides significant product application information for our existing and prospective customers and our sales partners. Information on our website is not incorporated by reference herein and is not a part of this Form 10-K.

 

Marketing and Distribution

 

We sell our products primarily through both our internal sales team and a number of manufacturer’s representatives and distributors located throughout the United States, Canada, Mexico, Bolivia, Chile, Colombia, Guatemala, Peru, United Kingdom, Ukraine, Egypt, Saudi Arabia, India, Indonesia, Australia, New Zealand, China, Taiwan, Korea, Vietnam, Malaysia, Philippines, and Singapore. Sales to customers outside the United States represented approximately 11% of our 2018 sales. We sell our products under the Electro-Sensors, Inc. brand as a range of products from simple sensors to complex integrated monitoring systems.  Our customers are businesses in a wide variety of industries, including grain/feed/milling, bulk materials, manufacturing, food products, ethanol, power generation, and other processing industries.

 

 

We continue to explore new industries and applications within the current industries we serve to expand sales and may also consider acquiring compatible businesses or product lines as part of our growth strategy.  In addition, we may make investments that we believe present good opportunities for the Company and its shareholders.

 

We believe that a wide variety of organizations could achieve significant savings in both time and materials by adding production monitoring and drive control technology to existing processes to coordinate the operation of related machines. We sell our products into both the “retro-fit” market and into new manufacturing or processing systems.

 

We advertise in national industrial periodicals that cover a range of industrial products and attend several local, national and international industry tradeshows throughout the year. We also use our corporate website and other related industry websites for advertising and marketing purposes.

 

Competition

We face substantial competition in the sale of our production monitoring systems from a broad range of industrial and commercial businesses. Many of these competitors are well established and have greater sales volume. Among our larger competitors are Danaher Controls, Red Lion Controls, 4B Elevator Components Ltd., and Durant Corporation. We believe our competitive advantages include our products superior design and quality, the fact that we sell our products as ready-to-install units, and the fact that our products can be used in a wide range of applications. Our major disadvantages include the fact that our major competitors are larger, have a broader range of sensing instruments, and have larger sales forces and established names.

Suppliers

 

We purchase parts and materials for our systems from various manufacturers and distributors. In some instances, these materials are manufactured in accordance with our proprietary designs. Multiple sources of these parts and materials are generally available, and we do not depend on any single source for these supplies and materials. We have not experienced any significant problem of short supply or delays from our suppliers.

 

Customers

 

We do not depend upon a single or a few customers for a material (10% or more) portion of our sales.

 

Patents, Trademarks and Licenses

 

The Company relies on a combination of patent, trademark, and trade secret laws to establish proprietary right in its products.

 

We have registered the name “Electro-Sensors” as a trademark with the U.S. Patent and Trademark Office (“USPTO”), Reg. No. 1,142,310. We believe this trademark has been and will continue to be useful in developing and protecting market recognition for our products. We established the HazardPRO trademark in the first quarter of 2014 and intend to register this trademark.

 

We hold six patents relating to our production monitoring systems. We believe strongly in protecting our intellectual property and have a long history of obtaining patents, when available, in connection with our research and product development programs. We also rely upon trade secrets and proprietary know-how.

 

We seek to protect our trade secrets and proprietary intellectual property, including know-how, in part, through confidentiality agreements with employees, consultants, and other parties. We cannot ensure, however, that these agreements will not be breached, that we would have adequate remedies for any breach, or that our trade secrets will not otherwise become known or independently developed by competitors.

 

 

Seasonality

 

Generally, the Company experiences seasonality in the sale of its products with the second and third calendar quarters historically the strongest.

 

Business Development Activities

 

We continue to seek growth opportunities, both internally through our existing portfolio of products, technologies and markets, as well as externally through technology partnerships or related-product acquisitions.  In addition, we may make investments that we believe present good opportunities for the Company and its shareholders.

 

Governmental Approvals

 

Although we are not required to obtain governmental approval of our products, we choose to obtain certain third party certifications to meet our customers’ needs. These certifications may expand our market opportunities in certain industries.

 

Effect of Governmental Regulations

 

We do not believe that any existing or proposed governmental regulations will have a material effect on our business.

 

Research and Development 

 

We invest in research and development programs to develop new products and to integrate state-of-the-art technology into our existing products. We undertake development projects based upon the identified specific needs of the markets we serve.  Our "Management's Discussion and Analysis of Financial Condition and Results of Operations” section describes the nature and amount of our Research and Development expenditures.

 

Our future success depends in part upon our ability to develop new products in our varying segments. Difficulties or delays in our ability to develop, produce, test and market new products could have a material adverse effect on future sales growth.

 

Compliance with Environmental Laws

 

Compliance with federal, state and local environmental laws has only a nominal effect on current or anticipated capital expenditures and has had no material effect on earnings or on our competitive position.

 

Employees 

 

As of March 19, 2019, we had 33 employees, all of whom are full-time. We believe that our relations with our employees are good. None of our employees are members of unions.

 

Our ability to maintain a competitive position and to continue to develop and market new products depends, in part, on our ability to retain key employees and qualified personnel. If we are unable to retain our key employees, or recruit and train others, our product development, marketing and sales could be adversely affected.

 

Fluctuations in Operating Results.

 

We have experienced fluctuations in our past operating results, and expect to experience fluctuations in the future.  These fluctuations may affect the market price of our common stock. Sales can fluctuate as a result of a variety of factors, many of which are beyond our control. These factors include: product competition and acceptance, timing of customer orders, cancellation of orders, the mix of products sold, downturns in the markets we serve and economic disruptions. Because fluctuations may occur, we caution investors that results of our operations for recent periods may not accurately predict how we will perform in the future. We cannot ensure that we will achieve revenue or earnings growth.

 

 

Expending Funds for Changes in Industry Standards, Customer Preferences or Technology.

 

Our business depends on periodically introducing new and enhanced products and solutions for customer needs. Our product development efforts require us to commit financial resources, personnel and time, usually in advance of significant market demand for these products. In order to compete, we must anticipate both future demand and the technology available to meet that demand. We cannot ensure that our research and development efforts will lead to new products or product innovations that can be made available to or will be accepted by the market.

 

Forward-Looking Statements

 

The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements made by us or on our behalf. We have made, and may continue to make, forward-looking statements with respect to our business and financial matters, including statements contained in this document, other filings with the Securities and Exchange Commission, and reports to shareholders. Forward-looking statements generally include discussion of current expectations or forecasts of future events and can be identified by the use of terminology such as “believe,” “estimate,” “expect,” “intend,” “may,” “could,” “will,” and similar words or expressions. Any statement that does not relate solely to historical fact should be considered forward-looking.

 

Our forward-looking statements generally relate to our growth strategy, future financial results, product development and sales efforts. We make forward-looking statements throughout this Annual Report, but primarily in this Item 1 and Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations. These include statements relating to our beliefs and expectations and intentions with respect to (i) our growth and profitability, (ii) our marketing and product development, (iii) the value of our intellectual property, (iv) our competitive position in the marketplace, (v) the effect of governmental regulations on our business, (vi) our employee relations, (vii) the adequacy of our facilities, (viii) our intention to develop new products, (ix) the possibility of us acquiring compatible businesses or product lines as part of our growth strategy, and (x) our future cash requirements and use of cash.

 

Forward-looking statements cannot be guaranteed and our actual results may vary materially due to the uncertainties and risks, known and unknown, associated with these statements, including our ability to successfully develop new products and manage our cash requirements. We undertake no obligations to update any forward-looking statements. We wish to caution investors that the following important factors, among others, in some cases have affected and in the future could affect our actual results of operations and cause these results to differ materially from those anticipated in forward-looking statements made in this document and elsewhere by us or on our behalf. We cannot foresee or identify all factors that could cause actual results to differ from expected or historical results. As such, investors should not consider any list of these factors to be an exhaustive statement of all risks, uncertainties or potentially inaccurate assumptions. These factors include our ability to:

 

 

 

 

 

 

 

 

 

This item is not required for smaller reporting companies, but above under “Forward-Looking Statements,” we discuss some of the risk factors that are relevant to our business and operating results.

 

 

We own and occupy a 25,400 square foot facility at 6111 Blue Circle Drive, Minnetonka, Minnesota 55343-9108. All our operations are conducted within this facility. The facility is in excellent condition and we continue to maintain and update the facility as necessary. We believe the facility will be adequate for our needs in 2019.

 

 

We are not the subject of any legal proceedings as of the date of this filing. We are not aware of any threatened litigation.

 

 

Not applicable. 

PART II

 

 

Our common stock trades on the Nasdaq Capital Market of The Nasdaq Stock Market® under the symbol “ELSE.”

 

Based on data provided by our transfer agent, as of February 26, 2019, we had 72 shareholders of record who held 879,052 shares of the Company’s common stock. In addition, nominees held an additional 2,516,469 shares for approximately 694 shareholders holding shares in street name.

 

From time to time, we may be required to repurchase some of our equity securities as a result of obligations described in Note 10 to our 2018 financial statements. We did not repurchase any equity securities during the years ended December 31, 2018 and 2017.

 

The information required by Item 201(d) of SEC Regulation S-K is set forth in Item 12 of this Form 10-K.

 

 

Not required for smaller reporting companies

 

 

 

The following discussion should be read in conjunction with our financial statements and related notes. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated due to various factors discussed under “Forward-Looking Statements” elsewhere in this Annual Report on Form 10-K.

 

RESULTS OF OPERATIONS

 

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.

 

 

The following paragraphs discuss the Company’s performance for years ended December 31, 2018 and 2017.

 

Comparison of 2018 vs. 2017 (dollars in thousands)

 

Net Sales

 

Net sales for 2018 were $7,495, a decrease of $345, or 4.4%, from $7,840 in 2017.  Although year- over -year quarterly net sales increased in each 2018 quarter except the second, those increases were more than offset by the decline in the second quarter.  The decline in the second quarter was across all product lines and geographies, as we saw general softness in our primary markets.  Overall 2018 net sales of our traditional product lines were relatively flat as compared to 2017, while we saw a decrease in net sales of HazardPRO products.  Net sales internationally increased slightly in 2018 to 11% of total net sales.

 

 

Gross Profit

 

Gross profit for 2018 decreased $252, or 5.9%, to $4,047 from $4,299 in 2017.  Our gross profit margin for 2018 was 54.0% compared to 54.8% in 2017. The slight decrease in the gross margin was primarily due to product mix.

 

Operating Expenses

 

Total operating expenses increased $303, or 7.8%, to $4,192 in 2018 from $3,889 in 2017, and increased as a percentage of net sales to 55.9% from 49.6%.  The increases in operating expenses was due to additional personnel, legal and professional expenses, and increased expenditures in computer supplies and software.

 

 

 

 

Operating Income (Loss)

 

The Company had an operating loss of $145 in 2018 compared to operating income of $410 in 2017, a decrease of $555 or 135.4% and decreased as a percentage of net sales to -1.9% from 5.2%, due primarily to lower revenues and increased operating expenses as discussed above.

 

Non-Operating Income (Expense)

 

Non-operating income increased $79 to $127 in 2018 from $48 in 2017, primarily as a result of increased interest income due to higher interest rates on investments.

 

Available-for-sale equity securities are stated at fair value, and unrealized holding gains and losses are reported in our statement of comprehensive income in the non-operating income (expense) section.  All other available-for-sale securities are stated at fair value, and unrealized holding gains and losses, net of the related deferred tax effect, are reported as a separate component of stockholders’ equity.

 

Realized gains and losses, including losses from declines in value of specific securities determined by management to be other-than-temporary, are included in the statement of comprehensive income (loss). Realized gains and losses are determined on the basis of the specific securities sold.

 

Income Taxes

 

Income tax benefit was $8, or (0.1)%, of 2018 net sales compared to income tax expense of $163, or 2.1%, of 2017 net sales. The decrease was due primarily to decreased profitability.  In addition, in 2017, we recognized a decrease in our deferred tax asset due a decrease in the corporate federal tax rate from 35% to 21%. In December 2017, the Tax Jobs and Cuts Act of 2017 was enacted decreasing the highest corporate federal tax rate to 21%. Detailed information on our income taxes are described in Note 11 to our financial statements.

 

 

Net Income (Loss) After Tax

 

We reported a net loss of $10 in 2018 compared to net income of $295 in 2017, a decrease of $305, or 103.4%. Basic and diluted loss per share were $0.00 in 2018, compared to basic and diluted earnings per share of $0.09 in 2017.

 

OFF-BALANCE SHEET ARRANGEMENTS

 

We are not a party to any off-balance sheet transactions, arrangements or obligations that have, or are reasonably likely to have, a material effect on our financial condition, changes in the financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

 

LIQUIDITY AND CAPITAL RESOURCES

 

Cash and cash equivalents were $1,057 and $963 at December 31, 2018 and 2017, respectively. The increase was mainly due to net cash generated from investing activities, as described below. Working capital was $10,942 at December 31, 2018 compared to $10,651 at December 31, 2017.

 

Cash generated from operating activities in 2018 and 2017 was $130 and $468, respectively, resulting in a $338 decrease in cash from operating activities. The decrease was primarily due to a net loss in 2018 compared to 2017 net income. The 2018 net loss is due to decreased revenue and higher operating expenses.  

 

Cash generated from investing activities in 2018 was $115, compared to a use of cash of  $345 in 2017. The decrease was due to greater investment maturities and $82 less in capital expenditures in 2018.

 

Cash used in financing activities during 2018 was $151. There was no cash provided by or used in financing activities during 2017.  The cash used in 2018 was primarily due to making the final payment on the Harvest Engineering, Inc. contingent earn-out in the 2018 first quarter.  In addition, the Company entered into a financing lease for three office copiers during 2018 reported as right-to-use assets.  The lease is for 63 months and we had $1 in principal payments on the lease in 2018.  Detailed information on our financing lease is described in Note 8 to our 2018 financial statements.

 

Our ongoing cash usage requirements will be primarily used for capital expenditures, potential acquisitions, investments we believe present good opportunities for the Company and its shareholders, research and development, 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.

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. Those decisions include the selection of applicable accounting principles and the use of judgment in their application, the results of which impact reported amounts and disclosures. Changes in economic conditions or other business circumstances may affect the outcomes of management’s estimates and assumptions.

 

Significant estimates, including the underlying assumptions, consist of the 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.

 

Economic lives of long-lived assets

We estimate the economic useful life of long-lived assets used in the business. Expected asset lives may be shortened or an impairment may be recorded based on a change in the expected use of the asset. If the expected life of an asset is shortened or an impairment recorded, it could result in an additional charge to depreciation expense.

 

Realizability of trade receivables

We estimate our allowance for doubtful accounts based on prior history and the aging of our trade receivables. We are unable to predict which, if any, of our customers will be unable to pay their open invoices at a future date. If an account becomes uncollectible and we are required to write off the balance, we would recognize the amount of the additional expense within general and administrative expenses.

 

Valuation of deferred tax assets/liabilities

We estimate our deferred tax assets and liabilities based on current tax laws and rates. The tax laws and rates could change in the future to either disallow the deductions or increase/decrease the tax rates. We recognize changes in deferred tax assets and liabilities in the period in which the tax law changes become effective. Any change in our deferred tax assets or liabilities could have a material negative or positive effect on our income tax expense.

 

Valuation of inventory

We purchase inventory based on estimated demand of products. It is possible that the inventory we have purchased will not be used in the products that our customers need or will not meet future technological requirements. If we are unable to use the inventory in our products and it does not meet future technological requirements, we would be required to remove the items from inventory and expense the amount in cost of goods sold.

 

Valuation of investments

Our investments in available-for-sale securities are valued at market prices in an open market. The prices are subject to the normal fluctuations that could be either negative or positive. Changes in value of our equity securities affect our profitability as the value fluctuates.  Any change in the value of our equity securities could have a material negative or positive effect on our profitability.  Changes in the value of our treasury bills do not affect our profitability until the treasury bill is sold.  At the time of sale, we recognize the interest earned on the treasury bill.

 

Valuation of stock-based compensation expense

We estimate the expected life and forfeiture rates of stock options granted when calculating the value of options using the Black-Scholes-Merton model. The actual life and forfeiture rate could differ from what we estimated. Changes in the life or forfeiture rate of stock options could have a negative or positive impact on our stock-based compensation.

 

Valuation of the contingent earn-out

We estimated the probability of meeting the revenue targets over the measurement period to determine the fair value of the contingent liability. The actual payout could be more or less than what we have estimated. If the payout or projected payout is more than the recorded value, we would recognize an additional charge to general and administrative expense. If the payout or projected payout is less than the recorded value, we would recognize a decrease in expense to general and administrative expense.  There were no contingent earn-outs as of December 31, 2018.

 

Additional information regarding our significant accounting policies is provided below in Part II, Item 8, Financial Statements and Supplementary Data – Notes to Financial Statements, Note 1, Nature of Business and Significant Accounting Policies.

 

 

Not applicable.

 

 

INDEX TO FINANCIAL STATEMENTS

​

 

 

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors and Stockholders of
Electro-Sensors, Inc.

 

Opinion on the Financial Statements

 

We have audited the accompanying balance sheets of Electro-Sensors, Inc. (the Company) as of December 31, 2018 and 2017, and the related statements of comprehensive income (loss), changes in stockholders’ equity, and cash flows for each of the years in the two-year period ended December 31, 2018, and the related notes (collectively referred to as the financial statements).  In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2018, in conformity with accounting principles generally accepted in the United States of America.

 

Change in Accounting Principle

 

As discussed in Note 1 to the financial statements, the Company has changed its method of accounting for revenue in 2018 due to the adoption of FASB Accounting Standards Codification (Topic 606), Revenue from Contracts with Customers.

 

Basis for Opinion

 

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. 

 

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. 

 

/s/ Boulay PLLP

We have served as the Company's auditor since 2006.

 

Minneapolis, Minnesota

March 20, 2019

ELECTRO-SENSORS, INC.

BALANCE SHEETS

(in thousands except share and per share amounts) 

See Notes to Financial Statements

ELECTRO-SENSORS, INC.
STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(in thousands except share and per share amounts)

See Notes to Financial Statements

 

ELECTRO-SENSORS, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(in thousands except share and per share amounts)

 

See Notes to Financial Statements

 

 

ELECTRO-SENSORS, INC.
STATEMENTS OF CASH FLOWS

(in thousands)

See Notes to Financial Statements