ELECTRO SENSORS INC - Quarter Report: 2020 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, 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

 

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)

 

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

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 ☒

 

The number of shares outstanding of the registrant’s common stock, $0.10 par value, on May 8, 2020 was 3,395,521.

 

 

 

ELECTRO-SENSORS, INC.

Form 10-Q

For the Periods Ended March 31, 2020

 

  

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, 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 ten months at March 31, 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:

 

		Cost				Gross unrealized gain				Gross unrealized loss				Fair value
March 31, 2020
Commercial Paper		$	763			$	0			$	0			$	763
Treasury Bills			7,749				0				0				7,749
Equity Securities			45				0				(3	)			42
			8,557				0				(3	)			8,554
Less Cash Equivalents			7,513				0				0				7,513
Total Investments, March 31, 2020		$	1,044			$	0			$	(3	)		$	1,041
December 31, 2019
Commercial Paper		$	797			$	0			$	0			$	797
Treasury Bills			7,734				0				0				7,734
Equity Securities			45				0				0				45
			8,576				0				0				8,576
Less Cash Equivalents			8,531				0				0				8,531
Total Investments, December 31, 2019		$	45			$	0			$	0			$	45

 

ELECTRO-SENSORS, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

FOR THE PERIOD ENDED MARCH 31, 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.

 

March 31, 2020

 

December 31, 2019

 

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:  

 

		Three Months Ended March 31,
		2020				2019
Beginning Balance		$	45			$	45
Change in Fair Value			(3	)			0
Ending Balance		$	42			$	45

 

ELECTRO-SENSORS, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

FOR THE PERIOD ENDED MARCH 31 2020

(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, 2019.

 

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 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, 2020 and 2019.

 

RESULTS OF OPERATIONS (in thousands) 

 

Net Sales

 

Net sales for the three-month period ended March 31, 2020 were $1,923, a decrease of $85, or 4.2%, from $2,008 during the comparable period in 2019.  As the quarter progressed, sales became less predictable as many of our customers were increasingly impacted by the COVID-19 pandemic.  During March 2020, several of our customers identified Electro-Sensors as an essential supplier, in part due to the use of our products in the agricultural production segment of the American economy, requiring us to remain fully operational to continue to supply critical infrastructure industries.

Gross Profit

 

Gross profit for the first quarter of 2020 decreased $68, or 6.4%, over the same period in 2019. Gross margin decreased in the first quarter of 2020 to 52.0% from 53.1% during the same period in 2019. The decrease in the gross margin percentage was primarily due to a change in product mix and higher material costs resulting from the increase in government tariff charges that started during the second half of 2019.

Operating Expenses

 

Total operating expenses decreased $13, or 1.1%, for the first quarter of 2020 compared to the same period in 2019 and increased as a percentage of net sales to 59.2% from 57.4%.

 

 

 

 

Non-Operating Income (Net)

 

Net non-operating income decreased by $15, or 32.6%, for the first quarter of 2020 compared to the same period in 2019, primarily a result of decreased interest income earned as a result of lower interest rates on Treasury Bills.

 

Loss Before Income Tax Benefit

Loss before income tax benefit was $110 for the first quarter of 2020, representing an increase of $70, or 175.0%, compared to a loss before income tax benefit of $40 for the same period in 2019. The increase was primarily the result of lower net sales discussed above.

 

Income Tax Benefit

 

The Company's income tax benefit increased to $19, or 1.0% of net sales, in the first quarter of 2020 compared to a benefit of $9, or 0.4% of net sales, in the first quarter of 2019.

 

LIQUIDITY AND CAPITAL RESOURCES

 

Cash and cash equivalents were $7,850 at March 31, 2020 and $8,785 at December 31, 2019. The decrease was primarily the result of cash used to purchase treasury bills.  One of the treasury bills purchased during the first quarter of 2020 was considered an available-for-sale security.

 

Cash generated from operating activities was $66 for the three months ended March 31, 2020 as compared to cash used in operating activities of $112 for the three months ended March 31, 2019. The $178 increase in cash from operations was due to a decrease in trade receivables partially offset by an increase in other current assets and a decrease in accrued expenses. The decrease in trade receivables was due to decreased net sales and the timing of collections on accounts.  The increase in other current assets was due to increased deposits for computers, trade shows, and travel.  The decrease in accrued expenses was due to changes in accrued compensation due to modifications of outside and inside commission plans.  

 

Cash used in investing activities was $999 for the three months ended March 31, 2020 as compared to cash generated from investing activities of $10 for the three months ended March 31, 2019. During the three months ended March 31, 2020 the Company had net purchases of treasury bills of $999 compared to net proceeds from maturities of treasury bills of $55 during the three months ended March 31, 21019. In addition, the Company purchased $45 of property, equipment, and intangibles during the three months ended March 31, 2019.

Cash used in financing activities in the three months ended March 31, 2020 and 2019 was $2 and $1, respectively. The cash used in both periods was for principal payments on a financing lease on right-to-use assets.

Subject to the following section, 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.

COVID-19 Pandemic and PPP Loan

 

During the quarter ended March 31, 2020, the Company’s net sales and gross profit decreased, which caused its net loss to increase.  The Company also experienced a softening in sales prospects late in the first quarter and net sales remain unpredictable into the second quarter.  Due to the ongoing uncertainty about the severity and duration associated with the COVID-19 pandemic, the Company considered furloughing or eliminating employees and taking other measures to reduce operating costs until there is 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.

 

On May 5, 2020, the Company received $645 in support from the U.S. federal government in the form of a Paycheck Protection Program Loan (“PPP Loan”) established as part of the Coronavirus Aid, Relief, and Economic Security Act.  The PPP Loan is unsecured and is evidenced by a note in favor of US Bank National Association.  See Part II, Item 5, Other Information, of this Form 10-Q. 

16

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COVID-19 Pandemic Discussion

As a result of the COVID-19 pandemic, we experienced a weaker than anticipated first quarter of 2020 and we expect these results may continue.  We currently expect our second quarter financial results will be negatively impacted, potentially to a material degree.  Reductions in net sales have not been offset by a proportional decrease in expense, as we continue to incur cost such as compensation, administrative expenses, and depreciation and amortization, resulting in a negative effect on the relationship between our costs and net sales.  The impact may be partially offset by the application of PPP loan forgiveness.  However, at this time we are unable to determine the effect of the offset as final guidance has not yet been published regarding the PPP loan forgiveness and related tax impacts.

We believe the pandemic will slow larger orders as customers delay projects in order to conserve cash, which will slow the demand for our products.

 

We, typically, have multiple sources for components.  However, we are starting to experience extended delivery times as vendors have difficulty either sourcing components or were closed for a period of time.

 

As of the date of this filing, we expect our business will continue to be negatively impacted, 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 March 31, 2020, 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 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 March 31, 2020.

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 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.