ELECTRO SENSORS INC - Quarter Report: 2020 September (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 September 30, 2020
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
(Exact name of registrant as specified in its charter)
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41-0943459 |
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(State or other jurisdiction of incorporation or organization) |
(IRS Employer Identification No.) |
6111 Blue Circle Drive
Minnetonka, 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 |
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.
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Large accelerated filer |
☐ |
Accelerated filer ☐ |
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☐ |
Smaller reporting company |
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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 ☐ ☒
The number of shares outstanding of the registrant’s common stock, $0.10 par value, on November 11, 2020 was 3,395,521.
| 2 |
ELECTRO-SENSORS, INC.
Form 10-Q
For the Periods Ended September 30, 2020
| 3 |
ELECTRO-SENSORS, INC.
(in thousands except share and per share amounts)
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September 30, |
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December 31, |
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(unaudited) |
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ASSETS |
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Current assets |
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Cash and cash equivalents |
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$ |
7,062 |
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|
$ |
8,785 |
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Investments |
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2,041 |
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45 |
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Trade receivables, less allowance for doubtful accounts of $11 |
1,039 |
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1,036 |
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Inventories |
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1,659 |
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1,695 |
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Other current assets |
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196 |
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159 |
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| Income tax receivable | 23 | 0 | ||||||
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Total current assets |
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12,020 |
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11,720 |
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Deferred income tax asset, net |
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227 |
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203 |
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Intangible assets, net |
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294 |
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489 |
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Property and equipment, net |
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1,010 |
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1,063 |
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Total assets |
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$ |
13,551 |
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$ |
13,475 |
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LIABILITIES AND STOCKHOLDERS’ EQUITY |
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Current liabilities |
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Current maturities of financing lease |
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$ |
6 |
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$ |
5 |
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Accounts payable |
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181 |
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129 |
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Accrued expenses |
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573 |
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431 |
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Total current liabilities |
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760 |
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565 |
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| Long-term liabilities | ||||||||
| Financing lease, net of current maturities | 14 | 19 | ||||||
| Total long-term liabilities | 14 | 19 | ||||||
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Commitments and contingencies |
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Stockholders’ equity |
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Common stock par value $0.10 per share; authorized 10,000,000 shares; 3,395,521 shares issued and outstanding |
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339 |
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339 |
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Additional paid-in capital |
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2,035 |
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2,030 |
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Retained earnings |
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10,403 |
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10,522 |
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Total stockholders’ equity |
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12,777 |
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12,891 |
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Total liabilities and stockholders’ equity |
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$ |
13,551 |
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$ |
13,475 |
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See accompanying notes to unaudited condensed financial statements
| 4 |
ELECTRO-SENSORS, INC.
(in thousands except share and per share amounts)
(unaudited)
| Three Months Ended September 30, |
Nine Months Ended September 30, |
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| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| Net sales | $ | 1,899 | $ | 2,049 | $ | 5,914 | $ | 6,317 | ||||||||
| Cost of goods sold | 907 | 975 | 2,825 | 2,941 | ||||||||||||
| Gross profit | 992 | 1,074 | 3,089 | 3,376 | ||||||||||||
| Operating expenses | ||||||||||||||||
| Selling and marketing | 417 | 494 | 1,318 | 1,495 | ||||||||||||
| General and administrative | 420 | 404 | 1,325 | 1,294 | ||||||||||||
| Research and development | 209 | 194 | 622 | 603 | ||||||||||||
| Total operating expenses | 1,046 | 1,092 | 3,265 | 3,392 | ||||||||||||
| Operating loss | (54 | ) | (18 | ) | (176 | ) | (16 | ) | ||||||||
| Non-operating income (expense) | ||||||||||||||||
| Loss on investment | 0 | 0 | (3 | ) | 0 | |||||||||||
| Interest expense | (2 | ) | 0 |
(3 | ) | (1 | ) | |||||||||
| Interest income | 2 | 41 | 35 | 126 | ||||||||||||
| Other income | 0 | 2 | 2 | 7 | ||||||||||||
| Total non-operating income, net | 0 | 43 | 31 | 132 | ||||||||||||
| Income (loss) before income tax expense (benefit) | (54 | ) | 25 | (145 | ) | 116 | ||||||||||
| Provision for (benefit of) income tax | (8 | ) | 6 | (26 | ) | 25 | ||||||||||
| Net income (loss) | $ | (46 | ) | $ |
19 | $ | (119 | ) | $ | 91 | ||||||
| Other comprehensive income | ||||||||||||||||
| Change in unrealized value of available-for-sale securities, net of income tax | $ | 0 | $ | 2 | $ | 0 | $ | 10 | ||||||||
| Other comprehensive income | 0 | 2 | 0 | 10 | ||||||||||||
| Net comprehensive income (loss) | $ |
(46 | ) | $ | 21 | $ | (119 | ) | $ | 101 | ||||||
| Net income (loss) per share data: | ||||||||||||||||
| Basic | ||||||||||||||||
| Net income (loss) per share | $ | (0.01 | ) | $ | 0.01 | $ | (0.04 | ) | $ |
0.03 | ||||||
| Weighted average shares | 3,395,521 | 3,395,521 | 3,395,521 | 3,395,521 | ||||||||||||
| Diluted | ||||||||||||||||
| Net income (loss) per share | $ |
(0.01 | ) | $ |
0.01 | $ | (0.04 | ) | $ | 0.03 | ||||||
| Weighted average shares | 3,395,521 | 3,398,533 | 3,395,521 | 3,397,385 | ||||||||||||
See accompanying notes to unaudited condensed financial statements
| 5 |
ELECTRO-SENSORS, INC.
(in thousands except share and per share amounts)
| For the three months ended September 30 |
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Common Stock Issued |
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Additional |
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Retained |
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Accumulated |
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Total Equity |
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Shares |
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Amount |
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| June 30, 2020 (unaudited) |
3,395,521
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$ | 339 | $ | 2,034 | $ | 10,449 | $ | 0 | $ | 12,822 | |||||||||||
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| Stock-based compensation expense | 1 | 1 | ||||||||||||||||||||
| Net loss | (46 | ) | (46 | ) | ||||||||||||||||||
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| Balance September 30, 2020 (unaudited) | 3,395,521 | $ | 339 | $ | 2,035 | $ | 10,403 | $ | 0 | $ | 12,777 | |||||||||||
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| June 30, 2019 (unaudited) | 3,395,521 | $ | 339 | $ | 2,024 | $ | 10,407 | $ | 40 | $ | 12,810 | |||||||||||
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| Other comprehensive income | 2 | 2 | ||||||||||||||||||||
| Stock-based compensation expense | 3 | 3 | ||||||||||||||||||||
| Net income | 19 | 19 | ||||||||||||||||||||
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| Balance September 30, 2019 (unaudited) | 3,395,521 | $ | 339 | $ | 2,027 | $ | 10,426 | $ | 42 | $ | 12,834 | |||||||||||
| For the nine months ended September 30 |
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Common Stock Issued |
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Additional |
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Retained |
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Accumulated |
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Total Equity |
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Shares |
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Amount |
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| December 31, 2019 | 3,395,521 | $ | 339 | $ | 2,030 | $ | 10,522 | $ | 0 | $ | 12,891 | |||||||||||
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| Stock-based compensation expense | 5 | 5 | ||||||||||||||||||||
| Net loss | (119 | ) | (119 | ) | ||||||||||||||||||
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| Balance September 30, 2020 (unaudited) | 3,395,521 | $ | 339 | $ | 2,035 | $ | 10,403 | $ | 0 | $ | 12,777 | |||||||||||
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| December 31, 2018 | 3,395,521 | $ | 339 | $ | 2,019 | $ | 10,335 | $ | 32 | $ | 12,725 | |||||||||||
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| Other comprehensive income | 10 | 10 | ||||||||||||||||||||
| Stock-based compensation expense | 8 | 8 | ||||||||||||||||||||
| Net income | 91 | 91 | ||||||||||||||||||||
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| Balance September 30, 2019 (unaudited) | 3,395,521 | $ | 339 | $ | 2,027 | $ | 10,426 | $ | 42 | $ | 12,834 | |||||||||||
| 6 |
ELECTRO-SENSORS, INC.
(in thousands)
(unaudited)
|
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Nine Months Ended |
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2020 |
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2019 |
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Cash flows from operating activities |
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Net income (loss) |
|
$ |
(119 |
) |
|
$ |
91 |
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|
|
|
|
|
|
|
|
|
|
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Adjustments to reconcile net income (loss) to net cash from operating activities: |
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|
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|
|
|
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|
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Depreciation and amortization |
|
|
272 |
|
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|
231 |
|
|
Deferred income taxes |
|
|
(24 |
) |
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|
(6 |
) |
|
Stock-based compensation expense |
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|
5 |
|
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|
8 |
|
|
Interest accrued on treasury bills |
|
|
(2 |
) |
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|
(120 |
) |
| Loss on investments | 3 | 0 | ||||||
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Change in: |
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|
|
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Trade receivables |
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(3 |
) |
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|
(69 |
) |
|
Inventories |
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36 |
|
|
(101 |
) | |
|
Other current assets |
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|
(37 |
) |
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(39 |
) |
|
Accounts payable |
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52 |
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|
80 |
||
|
Accrued expenses |
|
|
142 |
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|
105 |
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Income tax receivable/payable |
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(23 |
) |
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30 |
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Net cash from operating activities |
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|
302 |
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|
210 |
||
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Cash flows from (used in) investing activities |
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Purchases of treasury bills |
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|
(7,747 |
) |
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(7,662 |
) |
|
Proceeds from the maturity of treasury bills |
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|
5,750 |
|
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|
9,750 |
|
| Purchase of intangible asset | 0 | (150 | ) | |||||
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Purchase of property and equipment |
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(24 |
) |
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|
(84 |
) |
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Net cash from (used in) investing activities |
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(2,021 |
) |
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|
1,854 |
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Cash flows used in financing activities |
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| Payments on financing lease | (4 | ) | (4 | ) | ||||
| Proceeds from loans | 645 | 0 | ||||||
| Repayment of loan principal | (645 | ) | 0 | |||||
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Net cash used in financing activities |
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(4 |
) |
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(4 |
) |
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Net increase (decrease) in cash and cash equivalents |
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(1,723 |
) |
|
|
2,060 |
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Cash and cash equivalents, beginning |
|
|
8,785 |
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|
1,057 |
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Cash and cash equivalents, ending |
|
$ |
7,062 |
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$ |
3,117 |
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Supplemental cash flow information |
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Cash paid for income taxes |
|
$ |
20 |
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|
$ |
1 |
|
| Cash paid for interest | $ | 3 | $ | 1 | ||||
See accompanying notes to unaudited condensed financial statements
| 7 |
ELECTRO-SENSORS, INC.
FOR THE PERIOD ENDED SEPTEMBER 30, 2020
(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, 2019, 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, 2020 and for the three and nine-month periods ended September 30, 2020 and 2019, 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, with the ultimate 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, 2020 and December 31, 2019, due to the short maturity nature of these instruments.
| 8 |
ELECTRO-SENSORS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
FOR THE PERIOD ENDED SEPTEMBER 30, 2020
(in thousands except share and per share amounts)
(unaudited)
Intangibles
Intangible assets are comprised of 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.
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, 2020, there was approximately $10 of unrecognized compensation expense related to unvested stock options. The Company expects to recognize this expense over the next two 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, stock compensation expense, and the potential estimated impact on operations due to the COVID-19 pandemic as it relates to disruptions to our supply chain and customer demand. 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, 2020, 332,500 weighted average common shares for underlying stock options have been excluded from the calculation because their effect would be anti-dilutive. For the three and nine-month periods ended September 30, 2019, 329,488 and 330,636 respectively, weighted average common shares for underlying stock options have been excluded from the calculation because their effect would be anti-dilutive.
| 9 |
ELECTRO-SENSORS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
FOR THE PERIOD ENDED SEPTEMBER 30, 2020
(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 four months at September 30, 2020.
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.
The cost and estimated fair value of the Company’s investments are as follows:
|
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Cost |
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Gross |
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Gross |
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Fair |
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||||
|
September 30, 2020 |
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Paper |
|
$ |
866 |
|
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
866 |
|
|
Treasury Bills |
|
|
7,748 |
|
|
|
1 |
|
|
|
0 |
|
|
|
7,749 |
|
|
Equity Securities |
|
|
54 |
|
|
|
0 |
|
|
|
(12 |
) |
|
|
42 |
|
|
|
|
|
8,668 |
|
|
|
1 |
|
|
|
(12 |
) |
|
|
8,657 |
|
|
Less Cash Equivalents |
|
|
6,616 |
|
|
|
0 |
|
|
|
0 |
|
|
|
6,616 |
|
|
Total Investments, September 30, 2020 |
|
$ |
2,052 |
|
|
$ |
1 |
|
|
$ |
(12 |
) |
|
$ |
2,041 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Paper |
|
$ |
797 |
|
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
797 |
|
|
Treasury Bills |
|
|
7,734 |
|
|
|
0 |
|
|
|
0 |
|
|
|
7,734 |
|
|
Equity Securities |
|
|
54 |
|
|
|
0 |
|
|
|
(9 |
) |
|
|
45 |
|
|
|
|
|
8,585 |
|
|
|
0 |
|
|
|
(9 |
) |
|
|
8,576 |
|
|
Less Cash Equivalents |
|
|
8,531 |
|
|
|
0 |
|
|
|
0 |
|
|
|
8,531 |
|
|
Total Investments, December 31, 2019 |
|
$ |
54 |
|
|
$ |
0 |
|
|
$ |
(9 |
) |
|
$ |
45 |
|
| 10 |
ELECTRO-SENSORS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
FOR THE PERIOD ENDED SEPTEMBER 30, 2020
(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, 2020
|
|
Carrying amount |
|
|
|
|
|
Fair Value Measurement Using |
|
||||||||||||
|
|
|
in balance sheet |
|
|
Fair Value |
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|||||
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Cash equivalents |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial paper |
|
$ |
866 |
|
|
$ |
866 |
|
|
$ |
866 |
|
|
$ |
0 |
|
|
$ |
0 |
|
| Treasury bills | 5,750 | 5,750 | 5,750 | 0 | 0 | |||||||||||||||
|
Treasury bills |
|
|
1,999 |
|
|
|
1,999 |
|
|
|
1,999 |
|
|
|
0 |
|
|
|
0 |
|
|
Equity Securities |
|
|
42 |
|
|
|
42 |
|
|
|
0 |
|
|
|
0 |
|
|
|
42 |
|
December 31, 2019
|
|
Carrying amount |
|
|
|
|
|
Fair Value Measurement Using |
|
||||||||||||
|
|
in balance sheet |
|
|
Fair Value |
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
||||||
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Cash equivalents |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
Commercial paper |
$ |
797 |
|
|
$ |
797 |
|
|
$ |
797 |
|
|
$ |
0 |
|
|
$ |
0 |
|
|
|
Treasury bills |
7,734 |
|
|
|
7,734 |
|
|
|
7,734 |
|
|
|
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 assets at fair value on a recurring basis are as follows:
| Nine Months Ended September 30, | ||||||||
| 2020 |
2019 |
|||||||
| Beginning Balance | $ | 45 | $ | 45 | ||||
|
Change in Fair Value |
(3 | ) | 0 | |||||
| Ending Balance | $ | 42 | $ | 45 | ||||
| 11 |
ELECTRO-SENSORS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
FOR THE PERIOD ENDED SEPTEMBER 30, 2020
(in thousands except share and per share amounts)
(unaudited)
Note 4. Inventories
|
September 30, 2020 |
December 31, 2019 |
||||||
| Raw Materials | $ | 993 | $ | 973 | |||
| Work In Process | 333 | 383 | |||||
|
Finished Goods |
353 | 359 | |||||
| Reserve for Obsolescence | (20 | ) | (20 | ) | |||
| Total Inventories | $ | 1,659 | $ | 1,695 | |||
| 12 |
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 about the success of 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, 2019, as any effect that the COVID-19 pandemic may have on the efficiency of our business operations, our customer base and the domestic or worldwide economy.
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, 2019. We have developed one new estimate, subsequent to those discussed in our Annual Report, related to the potential estimated impact on operations due to the COVID-19 pandemic as it relates to disruptions to our supply chain and customer demand.
| 13 |
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, |
|||||||||||||||||
|
|
|
2020 |
|
|
2019 |
|
2020 | 2019 | ||||||||||||
|
Net sales |
|
|
100.0 |
% |
|
|
100.0 |
|
% | 100.0 | % | 100.0 | % | |||||||
|
Cost of goods sold |
|
|
47.8 |
|
|
|
47.6 |
|
47.8 | 46.6 | ||||||||||
|
Gross profit |
|
|
52.2 |
|
|
|
52.4 |
|
52.2 | 53.4 | ||||||||||
|
|
|
|
|
|
|
|
|
|
||||||||||||
|
Operating expenses |
|
|
|
|
|
|
|
|
||||||||||||
|
Selling and marketing |
|
|
22.0 |
|
|
|
24.1 |
|
22.2 | 23.6 | ||||||||||
|
General and administrative |
|
|
22.1 |
|
|
|
19.7 |
|
22.4 | 20.5 | ||||||||||
|
Research and development |
|
|
11.0 |
|
|
|
9.5 |
|
10.5 | 9.5 | ||||||||||
|
Total operating expenses |
|
|
55.1 |
|
|
|
53.3 |
|
55.1 | 53.6 | ||||||||||
|
|
|
|
|
|
|
|
|
|
||||||||||||
|
Operating income loss |
|
|
(2.9 |
) |
|
|
(0.9 |
) | (2.9 | ) | (0.2 | ) | ||||||||
|
|
|
|
|
|
|
|
|
|
||||||||||||
|
Non-operating income (expense) |
|
|
|
|
|
|
|
|
||||||||||||
| Interest expense |
(0.1 |
) | 0.0 | (0.1 | ) | 0.0 | ||||||||||||||
|
Interest income |
|
|
0.1 |
|
|
|
2.0 |
|
0.6 | 2.0 | ||||||||||
|
Other income |
|
|
0.0 |
|
|
|
0.1 |
|
0.0 | 0.1 | ||||||||||
|
Total non-operating income, net |
|
|
0.0 |
|
|
|
2.1 |
|
0.5 | 2.1 | ||||||||||
|
|
|
|
|
|
|
|
|
|
||||||||||||
|
Income (loss) before income tax expense (benefit) |
|
|
(2.8 |
) |
|
|
1.2 |
(2.4 | ) | 1.9 | ||||||||||
|
|
|
|
|
|
|
|
|
|
||||||||||||
|
Provision for (benefit of) income taxes |
|
|
(0.5 |
) |
|
|
|
0.3 |
(0.4 | ) | 0.4 | |||||||||
|
|
|
|
|
|
|
|
|
|
||||||||||||
|
Net income (loss) |
|
|
(2.4 |
) |
% |
|
|
0.9 |
% | (2.0 | ) | % | 1.5 | % | ||||||
The following paragraphs discuss the Company’s performance for the three and nine months ended September 30, 2020 and 2019.
RESULTS OF OPERATIONS (in thousands)
Net Sales
Net sales for the three-month period ended September 30, 2020 were $1,899, a decrease of $150, or 7.3%, from $2,049 during the comparable period in 2019. Net sales for the nine months ended September 30, 2020 were $5,914, a decrease of $403, or 6.4%, over the same period in 2019. Sales during the quarter continued to be negatively impacted by the COVID-19 pandemic. The pandemic has caused customers to slow their spending due to the economic uncertainty, and has significantly limited our ability to travel and visit customers. The sales impacts were most significant to our HazardPRO products, which generally require greater interaction with customers during the sales process.
Gross Profit
Gross profit for the third quarter of 2020 decreased $82, or 7.6%, over the same period in 2019. Gross profit for the nine months ended September 30, 2020 decreased $287, or 8.5%, over the same period in 2019. Gross margin decreased in the third quarter of 2020 to 52.2% from 52.4% during the same period in 2019. Gross margin for the nine months ended September 30, 2020 decreased to 52.2% from 53.4% over the same period in 2019.The decrease in gross margin percentage for both periods was primarily due to a change in product mix.
| 14 |
Operating Expenses
Total operating expenses decreased $46, or 4.2%, for the third quarter of 2020 compared to the same period in 2019, but increased as a percentage of net sales to 55.1% from 53.3%. Total operating expenses decreased $127, or 3.7%, for the nine months ended September 30, 2020 compared to the same period in 2019, but increased as a percentage of net sales to 55.1% from 53.6% due to lower net sales in the 2020 period.
|
|
● |
Selling and marketing expenses in the third quarter of 2020 decreased $77, or 15.6%, from the same period in 2019 and decreased as a percentage of net sales to 22.0% from 24.1%. Selling and marketing expenses in the nine months ended September 30, 2020 decreased $177, or 11.8%, from the same period in 2019 and decreased as a percentage of net sales to 22.2% from 23.6%. The decrease in both periods resulted primarily from lower outside sales representative compensation due to changes in commission plans and lower net sales, as well as a decrease in travel expenses due to the continuing COVID-19 pandemic. The nine-month period also had a decrease in trade show expenses due to cancelled shows due to the continuing COVID-19 pandemic. |
|
|
● |
General and administrative expenses increased $16, or 4.0%, for the third quarter of 2020 compared to the same period in 2019 and increased as a percentage of net sales to 22.1% from 19.7%. General and administrative expenses increased $31, or 2.4%, for the nine months ended September 30, 2020 compared to the same period in 2019 and increased as a percentage of net sales to 22.4% from 20.5%. The increase in the third quarter was due primarily to amortization of the communication technology that began in October 2019, higher shareholder communication and stock handling fees due to the 2020 annual meeting held in July 2020 compared with April 2019, and higher wages due to increased paid time off accrual. The increase for the nine months was due primarily to the noted amortization, higher director fees and higher wages due to increased paid time off accrual, partially offset by decreased expenses related to computer supplies, software, and training due to an enterprise software upgrade in 2019. |
|
|
● |
Research and development expenses increased $15, or 7.7%, in the third quarter of 2020 from the same period in 2019 and increased as a percentage of net sales to 11.0% from 9.5%. Research and development expenses increased $19, or 3.2%, in the nine months ended September 30, 2020 from the same period in 2019 and increased as a percentage of net sales to 10.5% from 9.5%. The increase for the quarter was due to higher wages due to increased paid time off accrual. The increase for the nine months was due to the noted wage increase and third-party product certification costs, partially offset by lower 2020 contract engineering costs related to product enhancements. |
Non-Operating Income (Net)
Net non-operating income decreased by $43, or 100.0%, for the third quarter of 2020 compared to the same period in 2019. Net non-operating income decreased by $101, or 76.5%, for the nine months ended of September 30, 2020 compared to the same period in 2019. The decrease in both periods was primarily a result of less interest income earned as a result of lower interest rates on Treasury Bills.
Income (Loss) Before Income Tax Expense (Benefit)
Loss before income tax benefit was $54 for the third quarter of 2020, representing a decrease of $79, or 316.0%, compared to an income before income tax expense of $25 for the same period in 2019. Loss before income tax benefit was $145 for the nine months ended September 30, 2020, representing a decrease of $261, or 225.0%, compared to an income before income tax expense of $116 for the same period in 2019. The decrease for both periods was primarily the result of the lower net sales and lower gross margins discussed above.
Income Tax Benefit
The Company's income tax benefit increased to $8, or 0.4% of net sales, in the third quarter of 2020 compared to an expense of $6, or 0.3% of net sales, in the third quarter of 2019. The Company's income tax benefit was $26, or 0.4% of net sales, for the nine months ended September 30, 2020 compared to an expense of $25, or 0.4% of net sales, for the nine months ended September 30, 2019.
| 15 |
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents were $7,062 at September 30, 2020 and $8,785 at December 31, 2019. The decrease was primarily the result of cash used to purchase treasury bills considered as available-for-sale securities. At December 31, 2019, all of the treasury bills were reported as cash equivalents and as of September 30, 2020, two of the treasury bills were reported as investments.
Cash generated from operating activities was $302 for the nine months ended September 30, 2020 as compared to $210 for the nine months ended September 30, 2019. The $92 increase in cash generated from operations was due to a decrease in inventory and trade receivables partially offset by increases in our net loss and in income tax receivable. The decrease in inventory was due to decreased purchases due to lower net sales. The decrease in trade receivables was due to decreased net sales and the timing of collections on accounts. The increase in net loss was due to decreased net sales and gross profit. The increase in the income tax receivable was due to the increased net loss.
Cash used in investing activities was $2,021 for the nine months ended September 30, 2020 as compared to cash generated from investing activities of $1,854 for the nine months ended September 30, 2019. During the nine months ended September 30, 2020, the Company had net purchases of treasury bills of $1,997 compared to net proceeds from maturities of treasury bills of $2,088 during the nine months ended September 30, 2019. In addition, the Company purchased $24 and $234 of property, equipment, and intangibles during the nine months ended September 30, 2020 and September 30, 2019, respectively.
Cash used in financing activities in the nine months ended September 30, 2020 and 2019 was $4. The cash used in both periods was for principal payments on a financing lease on right-to-use assets. In addition, during the second quarter of 2020, the Company received and subsequently repaid a Payroll Protection Loan of $645 from the Small Business Administration, as discussed in the next paragraph.
As previously disclosed, on May 5, 2020, we entered into a U.S. Small Business Administration Paycheck Protection Program promissory note in the principal amount of $645 (the “PPP Loan”). The PPP Loan was unsecured and was evidenced by a note in favor of US Bank National Association as the lender. Subsequent to receipt of the loan, our Board of Directors continued to monitor both our ongoing performance and the routinely issued clarifying guidance provided by the government. As a result of this review, the Board determined that given the strength of our operations and the government issued clarifications, we would repay the entire amount of the PPP Loan. We repaid the PPP Loan in full on June 4, 2020. There were no prepayment penalties in connection with this voluntary repayment.
Subject to the following section, entitled COVID-19 Pandemic Discussion, the Company believe its 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.
| 16 |
COVID-19 Pandemic Discussion
As a result of the COVID-19 pandemic, we experienced weaker than anticipated performance in the first three quarters of 2020. Due to the ongoing uncertainty about the severity and duration associated with the COVID-19 pandemic, we considered furloughing or eliminating employees and taking other measures to reduce operating costs until there was more certainty about the short-term and long-term effects of the COVID-19 pandemic on the nation’s economy and the Company’s business.
As of the end of September 2020, we have reduced our staff by four employees from its peak earlier in 2020. We expect our 2020 fourth quarter financial results to be negatively affected, potentially to a material degree, as the effects of the pandemic continue to permeate the economy. We have not been able to offset reductions in our net sales with a comparable or proportional decrease in expense, as we continue to incur cost related to employee compensation and operating expenses we believe are necessary to ensure the quality of our products and our ability to maintain or increase sales, resulting in a negative effect on the relationship between our net sales and expenses, resulting in a net loss.
We typically have multiple sources for components. Although we have experienced some extended delivery times as vendors have difficulty sourcing components, we continue to believe we have adequate sources for our key components to meet anticipated demand.
As of the date of this filing, we expect our business will continue to be negatively affected, but cannot currently determine the significance and duration of the pandemic on our business.
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, 2020, the Company had no off-balance sheet arrangements or transactions.
| 17 |
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, 2020.
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 2020 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.
| 18 |
|
Exhibit |
|
Description |
|
|
|
|
|
|
Certification of CEO and CFO Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
|
|
|
|
|
Certification of CEO and CFO Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|
|
|
|
|
|
101 |
|
The following financial information from Electro-Sensors, Inc.’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2020, formatted in iXBRL (Inline Extensible Business Reporting Language), (i) Condensed Balance Sheets as of September 30, 2020 and December 31, 2019, (ii) Condensed Statements of Comprehensive Income (Loss) for the three and nine months ended September 30, 2020 and September 30, 2019 (iii) Condensed Statements of Changes in Stockholders' Equity for the three and nine months ended September 30, 2020 and September 30, 2019, (iv) Condensed Statements of Cash Flows for the nine months ended September 30, 2020 and September 30, 2019, and (v) Notes to Financial Statements. |
| 19 |
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. |
|
|
|
|
November 12, 2020 |
/s/ David L. Klenk |
|
|
David L. Klenk |
|
|
Chief Executive Officer and Chief Financial Officer (Principal Executive Officer and Principal Financial Officer) |
| 20 |