ELECTRO SENSORS INC - Quarter Report: 2019 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, 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)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 of 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.

	Large accelerated filer	☐	Accelerated filer ☐
	Non-accelerated filer	☐	Smaller reporting company ☒
			Emerging growth company ☐

 

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

 

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

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

 

The number of shares outstanding of the registrant’s common stock, $0.10 par value, on May 10, 2019 was 3,395,521.

 

 

 

ELECTRO-SENSORS, INC.

Form 10-Q

For the Periods Ended March 31, 2019

 

 

ELECTRO-SENSORS, INC.

(in thousands except share and per share amounts)

See accompanying notes to unaudited condensed financial statements

ELECTRO-SENSORS, INC.

(in thousands except share and per share amounts)  

(unaudited)

  

See accompanying notes to unaudited condensed financial statements

ELECTRO-SENSORS, INC.

(in thousands except share and per share amounts)

ELECTRO-SENSORS, INC.

(in thousands)

(unaudited)

 

 

See accompanying notes to unaudited condensed financial statements

ELECTRO-SENSORS, INC.

FOR THE PERIOD ENDED MARCH 31, 2019

(in thousands except share and per share amounts)

(unaudited)

 

 

ELECTRO-SENSORS, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

FOR THE PERIOD ENDED MARCH 31, 2019

(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; 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.

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, 2019 and 2018.

 

RESULTS OF OPERATIONS (in thousands) 

 

Net Sales

 

Net sales for the period ending March 31, 2019 were $2,008, an increase of $292, or 17.0%, from $1,716 in 2018.  This increase was driven by a more than 50% increase in sales from large orders, which we define as orders over $5, as during the period customers moved forward with a number of large projects related to capacity expansion or facility modernization.

 

Gross Profit

 

Gross profit for the first quarter of 2019 increased $151, or 16.5%, over the same period in 2018. Gross margin, as a percentage of net sales, decreased slightly in the first quarter of 2019 to 53.1%, versus 53.4% in the same period in 2018. The change in the gross margin percentage was primarily due to a change in product mix.

Operating Expenses

 

Total operating expenses decreased $44, or 3.7%, for the first quarter of 2019 compared to the same period in 2018, and also decreased as a percentage of net sales to 57.4% from 69.7%. 

 

 

 

 

Non-Operating Income

 

Non-operating income, consisting primarily of interest income, increased by $21, or 84.0%, for the first quarter of 2019 compared to the same period in 2018. The increase was primarily due to higher interest income primarily the result of higher interest rates on Treasury Bills.

 

Loss Before Income Tax Benefit

Loss before income tax benefit was $40 for the first quarter of 2019, representing a decrease in the first quarter loss of $216, or 84.4%, compared to a loss of $256 for the same period in 2018. The decrease in the loss was the result of higher net sales and lower operating expenses as discussed above.

 

Income Taxes

 

The Company's income tax benefit percentage increased to 22.5% for the first quarter of 2019 from 21.1% in the first quarter of 2018.

 

LIQUIDITY AND CAPITAL RESOURCES

 

Cash and cash equivalents were $954 at March 31, 2019 and $1,057 at December 31, 2018. The decrease was primarily the result of cash used in operating activities due to increased trade receivables due to the timing of sales during the quarter. 

 

Cash used in operating activities was $112 and $235 for the three months ended March 31, 2019 and 2018, respectively. The $123 decrease in cash used was due to the lower net loss in 2019 compared to 2018 and an increase in accounts payable, partially offset by an increase in trade receivables. The lower net loss in 2019, as compared to the prior year net loss, was primarily due to increased revenue and lower operating expenses for the three-month period. The increase in accounts payable is due to timing of payments. The increase in trade receivables is due to the timing of sales and collections on accounts.  

 

Cash generated from investing activities was $10 and $23 for the three months ended March 31, 2019 and 2018, respectively. During the three months ended March 31, 2019 and 2018, the Company had net proceeds of Treasury Bills with a maturity date of more than three months of $55 and $27, respectively. In addition, we purchased $45 and $4 of property and equipment during the three months ended of 2019 and 2018, respectively.

Cash used in financing activities in the three months ended March 31, 2019 and 2018 was $1 and $150, respectively. The cash used in 2019 was principal payments on the financing lease on right-to-use assets. The cash used in 2018 was 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 March 31, 2019, the Company had no off-balance sheet arrangements or transactions.

 

 

 

Not Applicable.

 

 

Evaluation of Disclosure Controls and Procedures

 

Based on an evaluation with the participation of the Company’s management, the Company’s principal executive officer and principal financial officer 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, 2019.

Remediation of Previously Disclosed Material Weakness in Internal Control over Financial Reporting

 

As previously disclosed in Item 9A of our Annual Report on Form 10-K for the year ended December 31, 2018, management identified a material weakness as of that date. The identified material weakness was in connection with our controls over revenue recognition around period cut off. In response to the material weakness, with the oversight of the Audit Committee, we implemented changes to our internal control over financial reporting, which consisted primarily of training our personnel to properly adhere to our existing controls over revenue recognition around period cut off. We have completed documentation of these corrective actions and, based on the evidence obtained in validating the design effectiveness of the implemented control, we have concluded that the previously disclosed material weakness has been remediated as of March 31, 2019. 

Changes in Internal Control Over Financial Reporting

The change described under “Remediation of Previously Disclosed Material Weakness in Internal Control over Financial Reporting” above represents a change in our internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f)) during the three months ended March 31, 2019 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

Other than this change, there were no changes in the Company’s internal control over financial reporting during the first quarter of 2019 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.  As noted above, the material weakness in our controls over revenue recognition around period cutoff reported in our annual report at December 31, 2018 has been fully remediated as of March 31, 2019.