ELECTRO SENSORS INC - Quarter Report: 2018 March (Form 10-Q)

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

Form 10-Q

 

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2018

 

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)

 

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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yes ☒ No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting 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	☐ (Do not check if a smaller reporting company)	Smaller reporting company ☒
			Emerging growth company ☐

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

 

The number of shares outstanding of the registrant’s common stock, $0.10 par value, on May 9, 2018 was 3,395,521.

 

 

 

ELECTRO-SENSORS, INC.

Form 10-Q

For the Periods Ended March 31, 2018

 

 

ELECTRO-SENSORS, INC.

(in thousands except share and per share amounts)

See accompanying notes to unaudited financial statements

ELECTRO-SENSORS, INC.

(in thousands except share and per share amounts)

(unaudited)

 

 

See accompanying notes to unaudited financial statements

 

ELECTRO-SENSORS, INC.

(in thousands)

(unaudited)

 

 

See accompanying notes to unaudited financial statements

 

ELECTRO-SENSORS, INC.

FOR THE PERIOD ENDED MARCH 31, 2018

(in thousands except share and per share amounts)

(unaudited)

 

 

ELECTRO-SENSORS, INC.

NOTES TO FINANCIAL STATEMENTS

FOR THE PERIOD ENDED MARCH 31, 2018

(in thousands except share and per share amounts)

(unaudited)

 

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 or our efforts to accelerate growth; 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, 2017.

 

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, 2017. We have not developed new estimates subsequent to those discussed in our Annual Report.

SELECTED FINANCIAL INFORMATION

The following table contains selected financial information, for the periods indicated, from our statements of comprehensive loss expressed as a percentage of net sales.

 

The following paragraphs discuss the Company’s performance for the three months ended March 31, 2018 and 2017.

 

RESULTS OF OPERATIONS (in thousands) 

 

Net Sales

 

Net sales for the 2018 first quarter were $1,716, an increase of $46, or 2.8% over the same period in 2017.  This increase in sales was primarily due to increased HazardPRO product sales and system orders, led by increased sales into Canada.  

 

Gross Profit

 

Gross profit for the 2018 first quarter increased $17, or 1.9%, over the same period in 2017. Gross margin, as a percentage of net sales, decreased slightly in the 2018 first quarter to 53.4%, versus 53.8% in the same period in 2017. The slight decrease in gross margin percentage during the 2018 first quarter was due to a fluctuation in product mix.

 

Operating Expenses

 

Total operating expenses increased $155, or 14.9%, for the 2018 first quarter compared to the same period in 2017 and increased as a percentage of net sales to 69.7% from 62.5%. 

 

 

 

Non-Operating Income

 

Non-operating income increased by $14, or 127.3%, for the 2018 first quarter compared to the same 2017 period. The increase was primarily due to higher interest income, primarily the result of higher interest rates on Treasury Bills.

 

Loss Before Income Taxes

 

Loss before income taxes was $256 for the 2018 first quarter, representing a decrease of $124, or 93.9%, when compared to the same period in 2017. The decrease for the period was the result of higher operating expenses as discussed above.

Income Taxes

The Company's income tax expense percentage decreased to 21.1% from 36.4% due to the enactment of the Tax Jobs and Cuts Act (the "Act") of 2017 in December 2017.  The Act decreased the highest corporate rate to 21% from 39%.

LIQUIDITY AND CAPITAL RESOURCES

 

Cash and cash equivalents were $601 at March 31, 2018 and $963 at December 31, 2017. The decrease was mainly the result of an increase in cash used in operating activities and the payment of the contingent earn-out.

 

Cash used in operating activities was $235 and $171 for the three months ended March 31, 2018 and 2017, respectively. The $64 decrease was due to the higher net loss; partially offset by a decrease in trade receivables. The increase in net loss is primarily due to increased operating expenses.  The decrease in trade receivables is due to the timing of sales and collections on accounts.  The increase in income tax receivables is due to an increase in the net loss for the first quarter of 2018 compared to the same period in 2017.

 

Cash generated from investing activities was $23 and $1 for the three months ended March 31, 2018 and 2017, respectively.  During the three months ended March 31, 2018 and 2017, the Company had net proceeds of Treasury Bills with a maturity date of more than three months of $27 and $13, respectively. In addition, we purchased $4 and $12 of property and equipment during the first quarter of 2018 and 2017, respectively.

Cash used in financing activities in the three months ended March 31, 2018 was $150 to pay the contingent earn-out for the technology purchased from Harvest Engineering, Inc. (Harvest) in 2014.  This was the final payment due to Harvest for the technology.  There was no cash used or provided by financing activities in the three months ended March 31, 2017.  

 

Our ongoing cash requirements will be primarily for capital expenditures, the contingent earn-out payment, research and development, and working capital.  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.

 

Off-balance Sheet Arrangements

 

As of March 31, 2018, the Company had no off-balance sheet arrangements or transactions.

 

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.  Although the Company is continuing to explore these external opportunities, it currently has no agreements or understandings with any third parties.

 

 

 

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 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 March 31, 2018

Changes in Internal Control Over Financial Reporting

 

There were no changes in the Company’s internal control over financial reporting during the first quarter of 2018, 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.

 

 

 

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.
May 10, 2018	/s/ David L. Klenk
	David L. Klenk
	Chief Executive Officer and Chief Financial Officer (Principal Executive Officer and Principal Financial Officer)