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, 20122015
TABLE OF CONTENTS
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Introduction
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Introduction
Electro-Sensors, Inc. (“we”, “us”, “our”,we,” “us,” “our,” the “Company” or “ESI”) is engaged in the manufacturemanufacturing and distribution ofselling industrial production monitoring and process control systems.
In addition, through our former subsidiary ESI Investment Company, we periodically makemade strategic investments in other businesses and companies, primarily when we believebelieved that suchthese investments willwould facilitate the development of technology complementary to our existing products. AlthoughDuring 2015, we investsold substantially all our remaining investments in other businesses and companies through our subsidiary ESI Investment Company, we do not intend to become an investment company and intend to remain primarily an operating company. Our primary investment is 273,267 shares of Rudolph Technologies, Inc., which is accounted for using the available-for-sale method.
Unless indicated otherwise, the terms “Company” and “ESI” when used herein, include Electro-Sensors, Inc. and its consolidated subsidiaries. As ofcompanies. Effective December 31, 2012, ESI had two consolidated subsidiaries:2015, we merged ESI Investment Company and Senstar Corporation. Senstar Corporation, does not have anya subsidiary with no business operations.operations, into the parent company Electro-Sensors, Inc.
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 several different types of monitoring systems that measure actual machine production and operation rates, as well as systems that regulate the speed of related machines in production processes.
Our original products—speed monitoring systems—systems compare machine revolutions per minute or speed against acceptable rates as determined by thea customer. The monitors generally have the same relative operating principle and use a non-contacting sensing head that translates the speed of a rotating shaft into analog readouts. The systems include a signal-generating pulser disc or wrap that attaches to a rotating shaft, the sensing device, and a control unit. The systems vary in complexity, from a simple system that detects 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.
The speed monitoring systems also include a line of digital products that translate sensor impulses from its production monitoring systems into digital readouts indicatingmeasure production counts or rates, such as parts, gallons, or board feet. The 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.
ThreeWe also offer production monitoring devices that do not operate by measuring shaft speeds are also in the speed monitoring systems product line. These devices are theinclude a tilt switch, vibration monitor, and slide gate position monitor. A tilt switch is designed to alert the operator when a storage bin or production system reaches a certain capacity (e.g., when grain fills a silo). A vibration monitor will alert an operator when the vibration of a machine in a production system exceeds or is belowless than a specified level. The slide gate position monitor is used in plant operations to provide feedback of the position of a slide gate. As part of our Electro-Sentry Hazard Monitoring system, we also have temperature sensors that are used to monitor bearing temperature and belt misalignment.
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.
We have a sales agreement with Motrona GmbH, (the Westa German manufacturer of control and interface devices), giving us rightsdevices manufacturer, under which we have the right to distribute Motrona products in the United States the products manufactured by Motrona GmbH.States. These products interface with our products on various applications.
We believe that manufacturing companies can achieve significant savings in both time and materials by adding production monitoring and drive control technology to existing manufacturing processes to coordinate operation of related machines. We intend to continue to market our products to this “retro-fit” market and also to companies building new manufacturing machinery or processing systems.
In 2008, we introduced our Electro-Sentry Hazard Monitoring System,1 hazard monitoring system, which integrates our sensors for bearingmonitoring temperature, belt misalignment, and shaft speed with a programmable logic controller and touch screen interface to create a complete system for hazard monitoring. By doing this, we are enablingThe system enables our customercustomers to locate which part of thetheir material handling system is operating incorrectly, typically in less than ten seconds. This is doneseconds, by using visual diagrams on thea touch screen.
We expect to continue to expend resources in new product development and the marketing of new and existing products for use in production monitoring applications. We continue to expand our line of hazard monitoring products with new system displays and sensors to meet the requirements of a wider customer base. In 2012, we introduced the Electro-Sentry 16 hazard monitoring system and added new features to the Electro-Sentry 1 system. Other
In 2013, the Company added ION Frequency/Discrete-In, a product that allows users to measure up to 12 shaft speeds and/or signal frequencies from pulse-frequency-output sensors. This is our third ION product, completing the ION product line to support all ESI sensor products and providing the customer high-speed/accuracy signal acquisition at low cost and saved wiring costs. The Company also expanded the Series 18 shaft speed sensors to include additional housings and connection options to reach a broader range of installations. In addition, in 2013 we also introduced product upgrades for sensing capability and ruggedness on our Hall-effect sensors.
In 2014, we introduced a process meter for analog output sensors, such as our TT420, temperature sensors, ST420, speed sensors, and SG1000, slide gate position monitor.
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Additionally, in 2014, the Company purchased the Insta-Link wireless hazard technology monitoring system and product family, together with related technology and intellectual property rights, from Harvest Engineering Inc., a privately held Illinois-based corporation, and its affiliated parties and owners (“Harvest”). The Company is marketing the wireless hazard monitoring products under its new HazardPROTM product line and manufacturing and servicing these products at its Minnetonka, Minnesota facility. The Company agreed to pay $1,200,000 for the product line, of which $400,000 was paid at closing, and additional payments of $400,000 will be paid on each of the first and second anniversary of the closing. The final payment of $400,000 was made on February 18, 2016. Harvest may earn up to an additional $550,000 of purchase price, depending upon the achievement of revenue measures during the four calendar years following the closing.
We expect to continue to expend resources to develop new products includedand to market new and existing products for use in a new ST420 shaft tachometer and several sensor mounting products.wide variety of monitoring applications.
Our customers have diverse applications for our products in the grain, feed, bio-fuels, power generation, water utilities and waste water treatment, mining, chemical, and other processing areas. We are continuingcontinue to look for new industries to expand sales and may also consider acquiring compatible businesses as part of our growth strategy. We believe that a wide variety of organizations can 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. Our products are sold into both the “retro-fit” market and into new manufacturing or processing systems.
Our corporate web site provides significant information and product application knowledge to existing and prospective customers and also direct knowledge to 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 home officeboth our internal sales people who deal directly with customersteam and a number of manufacturer’s representatives and distributors located throughout the United States, Canada, Mexico, Chile, Colombia, Guatemala, Peru, United Kingdom, Ukraine, Egypt, Saudi Arabia, Australia, China, Canada, Chile, Bolivia, Colombia,Korea, Vietnam, Malaysia, Singapore, Great Britain, Australia, Egypt, El Salvador, Guatemala, Korea, Puerto Rico, Taiwan,Philippines, and Turkey.Singapore. Sales to customers outside the United States represent approximately 13% of sales in 2015. The sensing and control units are sold under the Electro-Sensors, Inc. brand as a range of products from simple sensors to complex motor speed controllers. These products are sold to businesses in all major standard industrial classifications,a wide variety of industries, including grain,agriculture, grain-handling, feed, biofuels, food processing, chemicals, agricultural, mining, utility, forest products, steel, tire, glass and electronics. Any business that uses machinery with a rotating shaft is a potential customer.
We advertise in national industrial periodicals that cover a wide range of industrial products and attend several local, national and international tradeshows designated for the industry throughout the year. AWe also use our corporate website and other related industry websites are also used for advertising and marketing purposes.
Competition
Competition for
We face substantial competition in the sale of our production monitoring products arisessystems from a broad range of industrial and commercial businesses. Design, quality and multiplicity of application, rather than price, are the focus of competition in selling these products. We face substantial competition for our production monitoring systems. Many of these competitors are well established and larger than us in terms of totalhave greater sales volume. Among our larger competitors are Danaher Controls, Red Lion Controls, Control Concepts, 4B Elevator Components Ltd., and Durant Corporation, and Contrex, Inc.Corporation. We believe our competitive advantages include our products superior design and quality, the fact that our products are sold as ready-to-install units, and that our products havethey can be used in a wide range of applications. Our major disadvantages include the fact that our major competitors are much larger, have a broader variety of sensing instruments, and have larger sales forces and established names.
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Suppliers
We purchase partspurchaseparts and materials for our production monitoring systems from various manufacturers and distributors. In some instances, these materials are manufactured in accordance with our proprietary designs. Multiple sources of these suppliesparts and materials are readilygenerally available, and we are not dependent 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 are not dependent 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” isas a trademark registered with the U.S. Patent and Trademark Office as(“USPTO”), Reg. No. 1,142,310. We believe ourthis trademark has been and will continue to be useful in developing and protecting market recognition for our products. We established the HazardPROTM trademark in the first quarter of 2014 and intend to register the trademark with the USPTO during 2016.
We hold six patents relating to our production monitoring systems. PursuantThe Company believes strongly in protecting its intellectual property and has a long history of obtaining patents, when available, in connection with its research and product development programs. The Company also relies upon trade secrets and proprietary know-how.
The Company seeks to a sales agreementprotect its trade secrets and proprietary intellectual property, including know-how, in part, through confidentiality agreements with Motrona GmbH, a West-German manufactureremployees, consultants, and other parties. We cannot ensure, however, that these agreements will not be breached, that the Company would have adequate remedies for any breach, or that the Company’s trade secrets will not otherwise become known or independently developed by competitors.
Business Development Activities
We continue to seek growth opportunities, both internally through our existing portfolio of controlproducts, technologies and interface devices, we hold rights to distribute in the United States the products manufactured by Motrona GmbH.markets, as well as externally through technology partnerships or related-product acquisitions.
Table of ContentsGovernmental Approvals
Governmental Approvals
WeAlthough, we are not required to obtain governmental approval of our products.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 (in thousands)
We invest in research and development programs to develop new products in related markets and to integrate state of the artstate-of-the-art technology into our existing products. We incurred research and development expenses attributable to our production monitoring systems of $443,000approximately $753 and $437,000$810 during 20122015 and 2011,2014, respectively. OurWe undertake development projects are undertaken based upon the identified specific needs of our customer base.the markets we serve.
Our future success is dependentdepends 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.
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Employees
As of March 22, 2013,9, 2016, we had 2936 employees, all of which 28whom are full-time and one is part-time.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 and/our key employees, or recruit key employees,and train others, our product development, marketing and sales could be negatively impacted.
Fluctuations in Operating Results.
We have experienced fluctuations in our past operating results, in the past, and mayexpect to experience fluctuations in the future, which 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. Some of theseThese factors are:include: product competition and acceptance, timing of customer orders, cancellation of orders, the mix of products sold, downturns in the marketmarkets we serve and economic disruptions. Because fluctuations can happen, we caution investors that results of our operations for precedingrecent periods may not be indicative ofaccurately predict how we will perform in the future. There can be no assuranceWe cannot ensure that we will experience continuedrevenue or earnings growth.
Further, investments held by our subsidiary, ESI Investment Company, are subject to significant positive and negative changes in value. In particular, our significant investment in Rudolph Technologies, Inc. has experienced substantial value fluctuations, both negative and positive, which are expected to continue. Our current intention is to continue to gradually liquidate our investment securities to finance our working capital needs as required.
Expending Funds for Changes in Industry Standards, Customer Preferences or Technology.
Our business depends upon periodically introducing new and enhanced products and solutions for customer needs. TheOur product development of products requires us to commit financial resources, personnel and time, usually in advance of significant market demand for suchthese products. In order to compete, we must anticipate both future demand and the technology available to meet that demand. There can be no assuranceWe 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.
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Cautionary 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 toshareholders. 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. Forward-looking statementsare made 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, and include statements relating to management’s intentions that we not become an investment company, our expectations and intentions with respect to growth, statements relating to management’s beliefs with respect to our marketing and product development, our expectations and beliefs with respect to the value of our intellectual property, our beliefs with respect to our competitive position in the marketplace, our beliefs with respect to the effect of governmental regulations on our business, our beliefs with respect to our employee relations, our intention with respect to gradually liquidating our investment securities to finance working capital needs, our expectations and beliefs with respect to the future performance of our investment securities, the adequacy of our facilities, expansion of theour number of our manufacturer’s representatives and exclusive distributors, our intention to develop new products, the possibility of acquiring compatible businesses as part of our growth strategy, and our expectations with respect to our cash requirements and use of cash.
Forward-looking statementscannot be guaranteed and our actual results may vary materially due to the uncertainties and risks, known and unknown, associated with suchthese statements,, including our ability to successfully develop new products and manage our cash requirements.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 suchthese results to differ materially from those anticipated in forward-looking statements made in this document and elsewhere by us or on our behalf. It is not possible toWe 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 suchthese factors to be an exhaustive statement of all risks, uncertainties or potentially inaccurate assumptions. These factors include:include our ability to:
| · | successfully use our cash and liquid assets to develop or acquire new or complementary products to increase our revenue and profitability; |
| · | successfully integrate the wireless hazard technology and product line we purchased in February 2014; |
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Risk Factors. |
Not applicable.required for smaller reporting companies.
Properties. |
We own and occupy a 25,400 square foot facility at 6111 Blue Circle Drive, Minnetonka, Minnesota 55343-9108. All operations are conducted within this facility. The facility is in excellent condition and we continue to maintain and update the facility as necessary. TheWe believe the facility is anticipated towill be adequate for our needs in 2013.2016.
Legal Proceedings. |
We are not the subject of any legal proceedings as of the date of this filing. We are not aware of any threatened litigation.
| Item 4. | Mine Safety Disclosures. |
Not applicable.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. |
Our Common Stockcommon stock trades on the Nasdaq Capital Market of The Nasdaq Stock Market® under the symbol “ELSE”.“ELSE.��� The following table sets forth the quarterly high and low reported last sales prices for our Common Stockcommon stock for each period indicated as reported on the Nasdaq system.
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| $ | 4.37 |
| $ | 3.59 |
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| $ | 4.40 |
| $ | 3.99 |
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| $ | 4.20 |
| $ | 3.29 |
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| $ | 4.11 |
| $ | 3.61 |
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| $ | 5.14 |
| $ | 4.12 |
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| $ | 4.76 |
| $ | 4.14 |
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| $ | 4.63 |
| $ | 3.30 |
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| $ | 4.38 |
| $ | 3.31 |
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| 2015 | First Quarter | $ | 4.38 | $ | 3.64 | ||||
| Second Quarter | $ | 4.56 | $ | 3.84 | |||||
| Third Quarter | $ | 4.40 | $ | 3.53 | |||||
| Fourth Quarter | $ | 4.02 | $ | 3.55 | |||||
| 2014 | First Quarter | $ | 4.33 | $ | 3.94 | ||||
| Second Quarter | $ | 4.42 | $ | 3.86 | |||||
| Third Quarter | $ | 4.25 | $ | 3.42 | |||||
| Fourth Quarter | $ | 4.20 | $ | 3.09 | |||||
Based on data provided by our transfer agent, management believes that as of March 21, 2013, the number of share owner accounts9, 2016, we had 76 shareholders of record waswho held 903,331 shares of the Company’s common stock. In addition, nominees held an additional 2,492,190 shares for approximately 92.299 shareholders holding shares in street name.
We paid annual cash dividends on our Common Stock of $0.16 per share in 2012 and 2011.
From time to time, we may be required to repurchase some of our equity securities as a result of obligations described in Note 912 to our 20122015 consolidated financial statements. We did not repurchase any equity securities during the years ended December 31, 20122015 and 2011.2014.
The information required by Item 201(d) is set forth in Item 12 of this Form 10-K.
Selected Financial Data. |
Not applicable.required for smaller reporting companies.
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Management’s Discussion and Analysis of Financial Condition and Results of Operations. |
The following discussion should be read in conjunction with our consolidated 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” and 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 consolidated statements of comprehensive income expressed as a percentage of net sales.
| Year Ended December 31, | ||||||||
| 2015 | 2014 | |||||||
| Net Sales | 100.0 | % | 100.0 | % | ||||
| Cost of Goods Sold | 44.7 | 42.0 | ||||||
| Gross Profit | 55.3 | 58.0 | ||||||
| Operating Expenses | ||||||||
| Selling and marketing | 20.4 | 22.1 | ||||||
| General and administrative | 21.3 | 18.9 | ||||||
| Research and development | 9.9 | 11.5 | ||||||
| Total Operating Expenses | 51.6 | 52.5 | ||||||
| Operating Income | 3.7 | 5.5 | ||||||
| Non-operating Income (Expense) | ||||||||
| Interest expense | (0.1 | ) | (0.2 | ) | ||||
| Gain on sale of available-for-sale securities | 19.0 | 16.5 | ||||||
| Interest income | 0.0 | 0.0 | ||||||
| Other income | 0.2 | 0.2 | ||||||
| Total Non-operating Income, Net | 19.1 | 16.5 | ||||||
| Income before Income Taxes | 22.8 | 22.0 | ||||||
| Income Taxes | 6.9 | 6.5 | ||||||
| Net Income | 15.9 | % | 15.5 | % | ||||
The following paragraphs discuss the Company’s performance for years ended December 31, 2015 and 2014.
Comparison of Fiscal Year 20122015 vs. Fiscal Year 20112014 (in thousands)
Net RevenuesSales
Net revenues for 2012 increased $383,000 to $6,498,000, or 6.3%, when compared to net revenues for 2011.The increase was spread across a broad range of our sensors and control products in the industrial markets that we serve and was driven largely by increased customer demand in connection with capacity expansion and plant retro-fit projects.
Cost of Sales
Our cost of sales increased $245,000$595 or 8.5%, to $7,636 in 2015 from $2,613,000 to $2,858,000, or 9.4%, when comparing fiscal year 2012 to fiscal year 2011.$7,041 in 2014. This increase was primarily driven by sales of HazardPRO wireless hazard monitoring systems following our receipt in early 2015 of third-party certification for installing HazardPRO systems into certain hazardous environments. These HazardPRO systems are now deployed in a resultwide–range of increased salesagricultural and increased costs of materialsindustrial applications, including grain handling and labor. milling, animal nutrition and hardwood processing.
We continue to see steady demand for our effortsbroad line of shaft speed switches and sensors as well as sensors for monitoring sliding gates and valves. These sensors and switches are highly desired for their durability, safety and long-term value. On a geographic basis, we experienced a 20% growth in sales to maintain or reduce production costs by manufacturing productscustomers in the most cost effective manner.South Central U.S. International markets remain an important part of our business, providing over 13% of our 2015 revenue from shipments into 45 countries.
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Gross MarginsProfit
Gross profit for 2015 increased $140, or 3.4%, to $4,226 from $4,086 in 2014. Gross margin for 20122015 was 56.0%55.3% compared to 57.3% for the prior year.58.0% in 2014. The slight decrease in the gross margin was primarily due to higher manufacturing costs on the initial HazardPRO products. We expect HazardPRO manufacturing costs to continue to decrease through production efficiencies and increased cost of materials and labor.purchasing volume.
Operating Expenses
Total operating expenses increased by $47,000,$241, or 1.7%6.5%, when comparing 2012 to 2011.
Selling and marketing costs decreased by $25,000, or 1.8%, when comparing 2012$3,936 in 2015 compared to 2011. The decrease$3,695 in 2014. This increase was due to a decrease in advertising and marketing expenses resulting from a change in the mix of direct advertising and tradeshows, offset by increases in wages and benefit expense (due to changes in the compensation package and higher commissions due to increased sales), travel (due to attendance at additional tradeshows and increased customer visits), trade shows (due to additional local and regional shows) and outside sales representatives’ commissions related to the increase in sales.following:
General and administrative costs increased by $66,000, or 6.9%, in 2012 compared to 2011. The increase was primarily due to an increase in expanded XBRL reporting requirements and depreciation expense due to upgrades in our enterprise software and related hardware. These increases were offset by decreases in expenses relating to repairs and maintenance of our building.
| · | Selling and marketing expenses were relatively unchanged in 2015 compared to 2014, but decreased as a percentage of sales to 20.4% from 22.1%. Increased travel costs related to promoting HazardPRO and personnel expenses were partially offset by a decrease in commissions paid to manufacturer’s representatives. |
| · | General and administrative expenses increased $296, or 22.3%, to $1,625 in 2015 compared to $1,329 in 2014, and increased as a percentage of sales to 21.3% from 18.9%. The increase was due primarily to amortization of the intangible assets related to the February 2014 acquisition of the HazardPRO technology and wages and benefits related to additional personnel. Amortization expense on the HazardPRO technology for 2015 was approximately $211 compared to approximately $71 in 2014. |
| · | Research and development expenses decreased $57, or 7.0%, to $753 in 2015 compared to $810 in 2014, and decreased as a percentage of sales to 9.9% from 11.5%. The 2015 decrease was the result of lower wages and benefits due to reduced staffing levels and costs incurred in 2014 for prototype and development of the HazardPRO product line. |
Research and development costs increased $6,000, or 1.4%, in 2012 when compared with 2011. The increase in research and development costs was due to an increase in lab testing fees for product testing and approval for hazardous locations and legal expenses related to patent applications, offset by decreases in the cost of lab materials and contract engineering expenses (due to the development and installation of the Electro-Sentry 1 system in 2011).
Operating Income
Operating income increaseddecreased $101 or 25.8%, to $290 in 2015 from $391 in 2014, and decreased as a percentage of sales to 3.7% from 5.5%, due primarily to lower 2015 gross margin, which was slightly offset by $91,000 in 2012 from $740,000 to $831,000, an increase of 12.3% compared to 2011. The increase inlower operating income was mainly due to the increase in net sales.expenses discussed above.
Non-Operating Income
ESI Investment Company continues to provide us with an alternative source of earnings through investments in available-for-sale securities and other investments; however, our intent is to remain an operations-based company. Our investments in available-for-sale securities are subject to significant positive and negative changes in value. In addition to income from the sale of investments, we also realize interest income from our short-term holdings.
Non-operating income for fiscal year 2012 increased by $742,000$291 to $811,000. The increase was driven$1,454 in 2015 from $1,163 in 2014, primarily by an increase in the gainas a result of additional realized gains on the salesales of investments. Inshares of Rudolph Technologies, Inc. (“Rudolph”). As of December 2012,31, 2015, the Company started liquidating its investmenthas fully liquidated all holdings in Rudolph Technology, which resulted in a gain of $794,000. In December 2011, the Company’s investment in PPT Vision was liquidated, which resulted in a gain of $72,000. The 2011 gain from investments was offset by a loss of $18,000 on disposal of property and equipment related to building maintenance. There was no such loss on disposal of property in 2012.stock.
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. Dividends on marketable equity securities are recognized in income when declared.
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. Realized gains and losses are determined on the basis of the specific securities sold.
Interest income decreased $2,000, or 33.3%, when comparing fiscal year 2012 to the same period in 2011.
For the years ended December 31, 2012 and 2011, the Company recorded as other income earn-out payments related to the sale of the AutoData Systems Division to Auto Data Inc. of $13,000 and $3,000, respectively.
Loss From Discontinued Operations
On September 16, 2011, the Company sold its entire interest in its AutoData Systems Division to Auto Data Inc. (ADI). The purchase price will be paid as an earn-out based on three percent of the software, hardware, and maintenance contracts that ADI sells over the next five years (four percent while ADI continues to occupy our building). The transaction was intended to allow us to focus on our core markets.
For the year ended December 31, 2011 the AutoData Systems Division had an operating loss, net of income taxes, of $50,000.
Net Income After Tax
We reported net income after tax for 2012 of $1,086,000,$1,214 in 2015 as compared to net income of $548,000$1,094 in 2011,2014, an increase of $538,000,$120, or 98.2%11.0%. Basic and diluted earnings per share from continuing operations were $0.32$0.36 and $0.31,$0.33, respectively, in 2012,2015, compared to basic and diluted earnings per share from continuing operations of $0.17$0.32 and $0.30, respectively, in 2011.2014.
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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 $1,102,000$569 and $5,476,000$1,190 at December 31, 20122015 and 2011,2014, respectively. The decrease was mainly due to investingnet cash used in operating activities, as described below. Working capital was $9,941 at December 31, 2015 compared to $10,132 at December 31, 2014.
Cash used in operating activities in 2015 was $306, compared to cash generated from operating activities of $732,000 for the year ended December 31, 2012 was primarily$263 in 2014, resulting in a resultdecrease of our net income adjusted for the gain on the salecash from operating activities of investments,$569. The decrease resulted, in part, from an increase in inventories and changesa decrease in accounts receivable, inventories,accrued expenses and income tax activity. Cash from operating activities increased $423,000 for the year ended December 31, 2012 when compared to the year ended December 31, 2011 due to anpayable. The inventory increase in net income of $538,000. The net change in trade receivables was due a decrease of $57,000 in the balance at December 31, 2012 compared to the prior year and an increase of $118,000 in the balance at December 31, 2011 when compared to the prior year. This was due to a decrease in outstanding accounts receivable balances as of December 31, 2012, partiallyis primarily due to the 2011 balance including a $71,000 receivablebuild-up of inventory for the sale of PPT Vision stock.anticipated HazardPRO system orders. The net changedecrease in inventories wasaccrued expenses is due to an increase of $102,000changes in the balance at December 31, 2012 compared to the prior year and an increase of $188,000compensation plans. The decrease in the balance at December 31, 2011 when compared to the prior year. The increase as of December 31, 2012 was smaller than the increase as of December 31, 2011income tax accruals is due to the typetiming of new products introducedincome tax payments.
Cash generated from investing activities in 20122015 was $66, compared to 2011.$581 cash used in 2014 investing activities. The net change in income taxes wasincrease is primarily due to an increase in the payable balancereceipt of $330,000 at December 31, 2012$1,467 for sales of available-for-sale securities during 2015 compared to $1,178 during 2014. In addition, the prior yearCompany acquired the Harvest wireless hazard monitoring technology in February 2014 for $400,000 and an increasefinanced the remaining purchase price through a seller-financed note.
We used cash of $381 in the receivable balance of $37,000 at December 31, 2011 when compared to the prior year. The increase in the net payable was due to taxes due on gain on sale of investments. These increases were offset by the change in the gain on sale of investments. The gain on sale of investment was $794,000 for the year ended December 31, 2012 and $73,000 for the year ended December 31, 2011, a change in the adjustment to net income of $721,000.
Cash used in investing2015 financing activities was $4,571,000 for the year ended December 31, 2012, compared to cash from investing activities of $5,106,000 for the year ended December 31, 2011. The significant increase$3 generated in cash used in investing activities was due to an increase in net purchases of Treasury Bills with maturity dates of more than three months, with only a purchase of $5,249,000 during 2012, compared to net proceeds of $5,200,000 during 2011.2014. During 2011,2015, we had $9,500,000 in Treasury Bills mature and purchased $4,300,000 in Treasury Bills. We purchased $169,000 and $82,000 of property and equipment in the years ended December 31, 2012 and 2011, respectively. We received $874,000paid $381 on the sale of investments during 2012 comparedlong-term note owed to $2,000 during 2011.Harvest, which was the first installment under the note payable agreement. The final $400 installment on the note payable was paid on February 18, 2016.
Cash used in financing activities was $535,000 and $522,000 for the years ended December 31, 2012 and 2011, respectively. During the years ended December 31, 2012 and 2011, we paid aggregate dividends of $543,000 each year. During the years ended December 31, 2012 and 2011, we had $8,000 and $10,000, respectively, in stock purchases under our 1996 Employee Stock Purchase Plan. Also, in the year ended December 31, 2011, $11,000 in stock options were exercised.
We intend that ourOur ongoing cash usage requirements will be primarily used for capital expenditures, researching potential acquisitions, acquisitions, 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.
Our primary investment is 273,267 and 343,267 shares
| 11 |
CRITICAL ACCOUNTING ESTIMATES
The preparation of our consolidated 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. SuchThose 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 property and equipment,long-lived assets, realizability of accounts receivable, andtrade receivables, valuation of deferred tax assets/liabilities, inventory, investments, contingent earn-out, and investments.stock compensation expense. It is at least reasonably possible that these estimates may change in the near term.
Economic lives of property and equipmentlong-lived assets
We estimate the economic useful life of property and equipmentlong-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.
Realizability of accounts receivabletrade receivables
We estimate our allowance for doubtful accounts based on prior history and the aging of our accounts receivable.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.
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.
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.
Valuation of investments
Our investments in equity 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.
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-Sholes-Merton model. The actual life and forfeiture rate could differ from what we estimated.
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.
Additional information regarding our significant accounting policies is provided below in Part II, Item 8,Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements, Note 1, Nature of Business and Significant Accounting Policies.
Quantitative and Qualitative Disclosures About Market Risk. |
Not applicable.
| 12 |
Item 8. Financial Statements and Supplementary Data.
| |
|
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
| ||
Financial Statements | ||
| ||
Consolidated Statements of |
| |
Consolidated Statements of Changes in |
| |
| ||
|
| 13 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors
Electro-Sensors, Inc. and Subsidiaries
Minnetonka, Minnesota
We have audited the accompanying consolidated balance sheets ofElectro-Sensors, Inc. and Subsidiaries (the Company) as of December 31, 2012,2015 and 2011,2014, and the related consolidated statements of operations and comprehensive income, changes in stockholders’ equity, and cash flows for each of the years in the two-year period ended December 31, 2012. Electro-Sensors, Inc. and Subsidiaries’2015. The Company’s management is responsible for these consolidated financial statements. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company’sCompany’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position ofElectro-Sensors, Inc. and Subsidiaries as of December 31, 20122015 and 2011,2014, and the results of theirits operations and theirits cash flows for each of the years in the two-year period ended December 31, 20122015, in conformity with accounting principles generally accepted in the United States of America.
/s/ Boulay PLLP |
|
| ||
| ||||
| Minneapolis, Minnesota | ||||
| ||||
| ||||
| 14 |
ELECTRO-SENSORS, INC. AND SUBSIDIARIES
(in thousands except share and per share amounts)
|
|
|
|
|
|
|
|
|
| December 31 |
| ||||
|
| 2012 |
| 2011 |
| ||
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
| $ | 1,102 |
| $ | 5,476 |
|
Treasury bills |
|
| 5,248 |
|
| 0 |
|
Available-for-sale securities |
|
| 3,677 |
|
| 3,181 |
|
Trade receivables, less allowance for doubtful accounts of $10 and $9, |
|
| 602 |
|
| 731 |
|
Inventories |
|
| 1,330 |
|
| 1,228 |
|
Income tax receivable |
|
| 0 |
|
| 17 |
|
Other current assets |
|
| 75 |
|
| 116 |
|
|
|
|
|
|
|
|
|
Total current assets |
|
| 12,034 |
|
| 10,749 |
|
|
|
|
|
|
|
|
|
Property and equipment, net |
|
| 1,304 |
|
| 1,179 |
|
|
|
|
|
|
|
|
|
Total assets |
| $ | 13,338 |
| $ | 11,928 |
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable |
| $ | 94 |
| $ | 110 |
|
Accrued expenses |
|
| 227 |
|
| 214 |
|
Income tax payable |
|
| 313 |
|
| 0 |
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
| 634 |
|
| 324 |
|
|
|
|
|
|
|
|
|
Deferred income tax liability |
|
| 1,455 |
|
| 1,225 |
|
|
|
|
|
|
|
|
|
Commitments and contingencies |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock par value $0.10 per share; authorized 10,000,000 shares; |
|
| 339 |
|
| 339 |
|
Additional paid-in capital |
|
| 1,575 |
|
| 1,561 |
|
Retained earnings |
|
| 7,113 |
|
| 6,570 |
|
Accumulated other comprehensive income (unrealized gain on available-for-sale |
|
| 2,222 |
|
| 1,909 |
|
|
|
|
|
|
|
|
|
Total stockholders’ equity |
|
| 11,249 |
|
| 10,379 |
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders’ equity |
| $ | 13,338 |
| $ | 11,928 |
|
| December 31 | ||||||||
| 2015 | 2014 | |||||||
| ASSETS | ||||||||
| Current assets | ||||||||
| Cash and cash equivalents | $ | 569 | $ | 1,190 | ||||
| Treasury bills | 7,872 | 6,542 | ||||||
| Available-for-sale securities | 0 | 1,256 | ||||||
| Trade receivables, less allowance for doubtful accounts of $8 and $10, respectively | 689 | 738 | ||||||
| Inventories | 1,564 | 1,224 | ||||||
| Other current assets | 170 | 163 | ||||||
| Deferred income tax asset, current | 14 | 0 | ||||||
| Total current assets | 10,878 | 11,113 | ||||||
| Deferred income tax asset | 170 | 0 | ||||||
| Intangible assets, net | 1,270 | 1,505 | ||||||
| Property and equipment, net | 1,103 | 1,146 | ||||||
| Total assets | $ | 13,421 | $ | 13,764 | ||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current liabilities | ||||||||
| Current maturities of note payable | $ | 390 | $ | 381 | ||||
| Accounts payable | 136 | 126 | ||||||
| Accrued expenses | 396 | 392 | ||||||
| Income tax payable | 4 | 82 | ||||||
| Total current liabilities | 926 | 981 | ||||||
| Long-term liabilities | ||||||||
| Note payable – long term | 0 | 390 | ||||||
| Contingent earn-out | 455 | 472 | ||||||
| Deferred income tax liability | 0 | 391 | ||||||
| Total long-term liabilities | 455 | 1,253 | ||||||
| Commitments and contingencies | ||||||||
| Stockholders’ equity | ||||||||
| Common stock par value $0.10 per share; authorized 10,000,000 shares; 3,395,521 shares issued and outstanding | 339 | 339 | ||||||
| Additional paid-in capital | 1,879 | 1,816 | ||||||
| Retained earnings | 9,855 | 8,641 | ||||||
| Accumulated other comprehensive income (loss) (unrealized gain (loss) on available-for-sale securities, net of income tax) | (33 | ) | 734 | |||||
| Total stockholders’ equity | 12,040 | 11,530 | ||||||
| Total liabilities and stockholders’ equity | $ | 13,421 | $ | 13,764 | ||||
See Notes to Consolidated Financial Statements
| 15 |
ELECTRO-SENSORS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(in thousands except share and per share amounts)
|
|
|
|
|
|
|
|
|
| Years ended December 31, |
| ||||
|
| 2012 |
| 2011 |
| ||
Net Sales |
| $ | 6,498 |
| $ | 6,115 |
|
Cost of Goods Sold |
|
| 2,858 |
|
| 2,613 |
|
|
|
|
|
|
|
|
|
Gross Profit |
|
| 3,640 |
|
| 3,502 |
|
|
|
|
|
|
|
|
|
Operating Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and marketing |
|
| 1,344 |
|
| 1,369 |
|
General and administrative |
|
| 1,022 |
|
| 956 |
|
Research and development |
|
| 443 |
|
| 437 |
|
|
|
|
|
|
|
|
|
Total Operating Expenses |
|
| 2,809 |
|
| 2,762 |
|
|
|
|
|
|
|
|
|
Operating Income |
|
| 831 |
|
| 740 |
|
|
|
|
|
|
|
|
|
Non-operating Income (Expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on sale of investment securities |
|
| 794 |
|
| 73 |
|
Interest income |
|
| 4 |
|
| 6 |
|
Loss on disposal of fixed assets |
|
| 0 |
|
| (18 | ) |
Other income |
|
| 13 |
|
| 8 |
|
|
|
|
|
|
|
|
|
Total Non-operating Income |
|
| 811 |
|
| 69 |
|
|
|
|
|
|
|
|
|
Income from Continuing Operations before Income Taxes |
|
| 1,642 |
|
| 809 |
|
|
|
|
|
|
|
|
|
Income Taxes |
|
| 556 |
|
| 211 |
|
Income before Discontinued Operations |
|
| 1,086 |
|
| 598 |
|
Loss from Discontinued Operations, Net of Income Taxes |
|
| 0 |
|
| (50 | ) |
|
|
|
|
|
|
|
|
Net Income |
|
| 1,086 |
|
| 548 |
|
|
|
|
|
|
|
|
|
Other Comprehensive Income: |
|
|
|
|
|
|
|
Change in Unrealized Value of Investments, Net of Tax |
|
| 313 |
|
| 218 |
|
Total Comprehensive Income |
| $ | 1,399 |
| $ | 766 |
|
|
|
|
|
|
|
|
|
Net Income (Loss) per share data |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
|
|
|
|
|
Net income per share continuing operations |
| $ | 0.32 |
| $ | 0.17 |
|
Net loss per share discontinued operations |
|
| 0.00 |
|
| (0.01 | ) |
Net income per share |
|
| 0.32 |
|
| 0.16 |
|
Weighted average shares |
|
| 3,391,332 |
|
| 3,387,192 |
|
|
|
|
|
|
|
|
|
Diluted |
|
|
|
|
|
|
|
Net income per share continuing operations |
| $ | 0.31 |
| $ | 0.17 |
|
Net loss per share discontinued operations |
|
| 0.00 |
|
| (0.01 | ) |
Net income per share |
|
| 0.31 |
|
| 0.16 |
|
Weighted average shares |
|
| 3,412,288 |
|
| 3,405,738 |
|
|
|
|
|
|
|
|
|
Dividends paid per common share | $ | 0.16 |
| $ | 0.16 |
| |
Years ended December 31, | ||||||||
| 2015 | 2014 | |||||||
| Net Sales | $ | 7,636 | $ | 7,041 | ||||
| Cost of Goods Sold | 3,410 | 2,955 | ||||||
| Gross Profit | 4,226 | 4,086 | ||||||
| Operating Expenses | ||||||||
| Selling and marketing | 1,558 | 1,556 | ||||||
| General and administrative | 1,625 | 1,329 | ||||||
| Research and development | 753 | 810 | ||||||
| Total Operating Expenses | 3,936 | 3,695 | ||||||
| Operating Income | 290 | 391 | ||||||
| Non-operating Income (Expense) | ||||||||
| Interest expense | (11 | ) | (17 | ) | ||||
| Gain on sale of available-for-sale securities | 1,449 | 1,163 | ||||||
| Interest income | 0 | 2 | ||||||
| Other income | 16 | 15 | ||||||
| Total Non-operating Income, Net | 1,454 | 1,163 | ||||||
| Income before Income Taxes | 1,744 | 1,554 | ||||||
| Income Taxes | 530 | 460 | ||||||
| Net Income | 1,214 | 1,094 | ||||||
| Other Comprehensive Loss | ||||||||
| Change in unrealized value of available-for-sale securities, net of income tax | 131 | (176 | ) | |||||
| Reclassification of gains included in net income, net of income tax | (898 | ) | (721 | ) | ||||
| Other Comprehensive Loss | (767 | ) | (897 | ) | ||||
| Net Comprehensive Income | $ | 447 | $ | 197 | ||||
| Net Income per share data | ||||||||
| Basic | ||||||||
| Net income per share | $ | 0.36 | $ | 0.32 | ||||
| Weighted average shares | 3,395,521 | 3,395,510 | ||||||
| Diluted | ||||||||
| Net income per share | $ | 0.33 | $ | 0.30 | ||||
| Weighted average shares | 3,653,021 | 3,654,382 | ||||||
See Notes to Consolidated Financial Statements
| 16 |
ELECTRO-SENSORS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(in thousands except share and per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Common Stock Issued |
| Additional |
|
|
| Accumulated |
| Total |
| ||||||||
|
| Shares |
| Amount |
| paid-in |
| Retained |
| comprehensive |
| Stockholders’ |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, January 1, 2011 |
|
| 3,381,999 |
| $ | 338 |
| $ | 1,541 |
| $ | 6,565 |
| $ | 1,691 |
| $ | 10,135 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of stock options |
|
| 4,500 |
|
| 1 |
|
| 10 |
|
|
|
|
|
|
|
| 11 |
|
Unrealized gains on investments, net of taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
| 218 |
|
| 218 |
|
Stock issued through the employee stock purchase plan |
|
| 3,078 |
|
| 0 |
|
| 10 |
|
|
|
|
|
|
|
| 10 |
|
Dividend on common stock |
|
|
|
|
|
|
|
|
|
|
| (543 | ) |
|
|
|
| (543 | ) |
Net income |
|
|
|
|
|
|
|
|
|
|
| 548 |
|
|
|
|
| 548 | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2011 |
|
| 3,389,577 |
|
| 339 |
|
| 1,561 |
|
| 6,570 |
|
| 1,909 |
|
| 10,379 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gains on investments, net of taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
| 313 |
|
| 313 |
|
Stock issued through the employee stock purchase plan |
|
| 2,335 |
|
| 0 |
|
| 8 |
|
|
|
|
|
|
|
| 8 |
|
Stock option expense |
|
|
|
|
|
|
|
| 6 |
|
|
|
|
|
|
|
| 6 |
|
Dividend on common stock |
|
|
|
|
|
|
|
|
|
|
| (543 | ) |
|
|
|
| (543 | ) |
Net income |
|
|
|
|
|
|
|
|
|
|
| 1,086 |
|
|
|
|
| 1,086 | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2012 |
|
| 3,391,912 | $ | 339 | $ | 1,575 | $ | 7,113 | $ | 2,222 | $ | 11,249 | ||||||
| Common Stock Issued | Additional | Accumulated other | Total | |||||||||||||||||||||
| Shares | Amount | paid-in capital | Retained earnings | comprehensive income (loss) | Stockholders’ equity | |||||||||||||||||||
| Balance, December 31, 2013 | 3,394,707 | $ | 339 | $ | 1,746 | $ | 7,547 | $ | 1,631 | $ | 11,263 | |||||||||||||
| Other comprehensive loss | (897 | ) | (897 | ) | ||||||||||||||||||||
| Stock issued through the employee stock purchase plan | 814 | 0 | 3 | 3 | ||||||||||||||||||||
| Stock-based compensation expense | 67 | 67 | ||||||||||||||||||||||
| Net income | 1,094 | 1,094 | ||||||||||||||||||||||
| Balance, December 31, 2014 | 3,395,521 | 339 | 1,816 | 8,641 | 734 | 11,530 | ||||||||||||||||||
| Other comprehensive loss | (767 | ) | (767 | ) | ||||||||||||||||||||
| Stock-based compensation expense | 63 | 63 | ||||||||||||||||||||||
| Net income | 1,214 | 1,214 | ||||||||||||||||||||||
| Balance, December 31, 2015 | 3,395,521 | $ | 339 | $ | 1,879 | $ | 9,855 | $ | (33) | $ | 12,040 | |||||||||||||
See Notes to Consolidated Financial Statements
| 17 |
ELECTRO-SENSORS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
|
|
|
|
|
|
|
|
|
| Years ended |
| ||||
|
| 2012 |
| 2011 |
| ||
Cash flows from (used in) operating activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income |
| $ | 1,086 |
| $ | 548 |
|
|
|
|
|
|
|
|
|
Adjustments to reconcile net income to net cash from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation |
|
| 71 |
|
| 57 |
|
Realized gain on sale of investment securities |
|
| (794 | ) |
| (73 | ) |
Interest accrued on investments |
|
| 1 |
|
| (3 | ) |
Loss on disposal of fixed assets |
|
| 0 |
|
| 18 |
|
Change in allowance for doubtful accounts |
|
| 1 |
|
| 0 |
|
Deferred income taxes |
|
| 38 |
|
| 14 |
|
Stock option expense |
|
| 6 |
|
| 0 |
|
Changes in: |
|
|
|
|
|
|
|
Trade receivables |
|
| 57 |
|
| (118 | ) |
Inventories |
|
| (102 | ) |
| (188 | ) |
Other current assets |
|
| 41 |
|
| (35 | ) |
Accounts payable |
|
| (16 | ) |
| 35 |
|
Accrued expenses |
|
| 13 |
|
| 29 |
|
Deferred revenue |
|
| 0 |
|
| (12 | ) |
Accrued income taxes |
|
| 330 |
|
| 37 |
|
|
|
|
|
|
|
|
|
Net cash from operating activities |
|
| 732 |
|
| 309 |
|
|
|
|
|
|
|
|
|
Cash flows from (used in) investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from sale of available-for-sale securities |
|
| 874 |
|
| 2 |
|
Purchase of treasury bills |
|
| (5,249 | ) |
| (4,300 | ) |
Proceeds from the maturity of treasury bills |
|
| 0 |
|
| 9,500 |
|
Amount paid on the sale of the AutoData Systems Division |
|
| 0 |
|
| (14 | ) |
Purchase of property and equipment |
|
| (196 | ) |
| (82 | ) |
|
|
|
|
|
|
|
|
Net cash from (used in) investing activities |
|
| (4,571 | ) |
| 5,106 |
|
|
|
|
|
|
|
|
|
Cash flows from (used in) financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of stock |
|
| 8 |
|
| 21 |
|
Dividends paid |
|
| (543 | ) |
| (543 | ) |
|
|
|
|
|
|
|
|
Net cash used in financing activities |
|
| (535 | ) |
| (522 | ) |
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents |
|
| (4,374 | ) |
| 4,893 |
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, beginning |
|
| 5,476 |
|
| 583 |
|
Cash and cash equivalents, ending |
| $ | 1,102 |
| $ | 5,476 |
|
|
|
|
|
|
|
|
|
Supplemental schedule of non-cash investing and financing activities |
|
|
|
|
|
|
|
Net change in unrealized gain on investments, net of tax |
| $ | 313 |
| $ | 218 |
|
|
|
|
|
|
|
|
|
Supplemental cash flow information |
|
|
|
|
|
|
|
Cash paid during the year for income taxes |
| $ | 207 |
| $ | 152 |
|
| Years ended December 31, | ||||||||
| 2015 | 2014 | |||||||
| Cash flows from (used in) operating activities | ||||||||
| Net Income | $ | 1,214 | $ | 1,094 | ||||
| Adjustments to reconcile net income to net cash from (used in) operating activities: | ||||||||
| Depreciation and amortization | 348 | 209 | ||||||
| Realized gain on sale of available-for-sale securities | (1,449 | ) | (1,163 | ) | ||||
| Deferred income taxes | (104 | ) | (81 | ) | ||||
| Change in contingent earn-out fair value | (17 | ) | 0 | |||||
| Stock-based compensation expense | 63 | 67 | ||||||
| Other | (1 | ) | 1 | |||||
| Changes in operating assets and liabilities, net of acquisition: | ||||||||
| Trade receivables | 51 | 6 | ||||||
| Inventories | (340 | ) | (164 | ) | ||||
| Other current assets | (7 | ) | 18 | |||||
| Accounts payable | 10 | 67 | ||||||
| Accrued expenses | 4 | 127 | ||||||
| Accrued income taxes | (78 | ) | 82 | |||||
| Net cash from (used in) operating activities | (306 | ) | 263 | |||||
| Cash flows from (used in) investing activities: | ||||||||
| Proceeds from sale of available-for-sale securities | 1,467 | 1,178 | ||||||
| Purchase of treasury bills | (12,674 | ) | (14,184 | ) | ||||
| Proceeds from the maturity of treasury bills | 11,343 | 12,871 | ||||||
| Cash paid for acquisition | 0 | (400 | ) | |||||
| Purchase of property and equipment | (70 | ) | (46 | ) | ||||
| Net cash from (used in) investing activities | 66 | (581 | ) | |||||
| Cash flows from (used in) financing activities: | ||||||||
| Proceeds from issuance of common stock | 0 | 3 | ||||||
| Payments on long-term debt | (381 | ) | 0 | |||||
| Net cash from (used in) financing activities | (381 | ) | 3 | |||||
| Net decrease in cash and cash equivalents | (621 | ) | (315 | ) | ||||
| Cash and cash equivalents, beginning | 1,190 | 1,505 | ||||||
| Cash and cash equivalents, ending | $ | 569 | $ | 1,190 | ||||
| Supplemental cash flow information | ||||||||
| Cash paid during the year for income taxes | $ | 712 | $ | 462 | ||||
| Cash paid during the year for interest | $ | 19 | $ | 0 | ||||
| Supplemental disclosures of non-cash investment and financing activities | ||||||||
| Note payable issued to fund acquisition, net of discount | $ | 0 | $ | 771 | ||||
| Contingent earn-out recorded at fair value in connection with the acquisition | $ | 0 | $ | 472 | ||||
See Notes to Consolidated Financial Statements
| 18 |
ELECTRO-SENSORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 20122015 AND 20112014
(in thousands except share and per share amounts)
Note 1. Nature of Business and Significant Accounting Policies
Nature of business:
The accompanying consolidated financial statements include the accounts of Electro-Sensors, Inc. and its wholly-owned subsidiaries, ESI Investment Company and Senstar Corporation. Senstar has no assets or operations. As of December 31, 2015, these two subsidiaries were merged into the Electro-Sensors, Inc. parent company. Intercompany accounts, transactions and earnings have been eliminated in consolidation. The consolidated entity is referred to as “the Company” or “ESI”.“ESI.”
Electro-Sensors, Inc. manufactures and markets a complete line of speed monitoring and motor control systems for a variety of industrial machinery. The Company utilizesuses leading-edge technology to continuously improve its products and make them easier to use, with the ultimate goal of manufacturing the industry-preferred product for every market served. The Company’sCompany sells these products are sold through an internal sales staff, manufacturer’s representatives, and distributors to a wide variety of manufacturers, OEM’s and processorsindustries that use the products in a range of applications to monitor process machinery operations. The Company markets its products to a numbervariety of different industries located throughout the United States, Asia, CentralCanada, Mexico, Latin America, Canada,Europe, and Europe.Asia.
In addition, through itsour former subsidiary ESI Investment Company, the Companywe periodically makesmade strategic investments in other businesses, and companies, primarily when the Company believeswe believed that suchthese investments willwould facilitate the development of technology complementary to the Company’sour existing products. Although ESI, through its subsidiary ESI Investment Company, investsDuring 2015, we sold substantially all our remaining investments in other businesses or companies, ESI does not intend to become an investment company and intends to remain primarily an operating company. The Company’s primary investment is 273,267 shares of Rudolph Technologies, Inc. (“Rudolph”) which is accounted for using the available-for-sale method.companies. See Note 23 for additional information regarding itsthe Company’s investments. The Company’s investments in securities are subject to normal market risks.
Significant accounting policies of the Company are summarized below:
Use of estimates
The preparation of the consolidated financial statements in accordance with accounting principles generally accepted in the United States of America (US GAAP) requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. Significant estimates, including the underlying assumptions, consist of the economic lives of property and equipment,long lived assets, realizability of accounts receivable,trade receivables, valuation of deferred tax assets/liabilities, inventory, investments, contingent earn-out, and investments.stock compensation expense. It is at least reasonably possible that these estimates may change in the near term.
Cash and cash equivalents
The Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents. Cash equivalents are invested in commercial paper, money market accounts and may, also, be invested in three month Treasury Bills. Cash equivalents are carried at cost plus accrued interest which approximates fair value.
The Company maintains its cash and cash equivalents in primarily one bank deposit account, which, at times, may exceed federally insured limits. The Company has not experienced any losses on suchthese accounts. The Company believes it is not exposed to any significant credit risk on cash.
Trade receivables and credit policies
Accounts receivable
Trade receivables are uncollateralized customer obligations due under normal trade terms generally requiring payment within 30 days from the invoice date. AccountsTrade receivables are stated at the amount billed to the customer. Customer account balances with invoices over 90 days are considered delinquent. The Company does not accrue interest on delinquent accounts receivable.trade receivables.
Payments of accounts receivabletrade receivables are allocated to the specific invoices identified on the customer’s remittance advice or, if unspecified, are applied to the earliest unpaid invoices.
| 19 |
ELECTRO-SENSORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2015 AND 2014
(in thousands except share and per share amounts)
The carrying amount of accounts receivabletrade receivables is reduced by an allowance for doubtful accounts that reflects management’s best estimate of the amounts that will not be collected. Management individually reviews all accountstrade receivable balances that exceed 90 days from the invoice date and based on an assessment of current creditworthiness, estimates the portion, if any, of the balance that willmay not be collected. Management uses this information to estimate the allowance.
Available-for-sale securities
Available-for-sale securitiesThe
The Company’s investments consisthave traditionally consisted of equity securities, primarily common stocks and government debt securities, commercial paper, and money market funds.securities. The estimated fair value of publicly traded equity securities is based on quotedreported market prices or management’s reasonable market price when quoted prices are not available, and therefore subject to the inherent risk of market fluctuations.
Management determines the appropriate classification of securities at the date individual investments are acquired, and evaluates the appropriateness of suchthis classification at each balance sheet date.
Since the Company generally does not buy and sellmake investments with the objectivein anticipation of generating profits on short-term fluctuations in market price, the Company classifies its investments in marketable equity securities have been classifiedand treasury bills as available-for-sale. Available-for-sale securities with readily determinable values 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 and within accumulated other comprehensive income. Dividends on marketable equity securities are recognized in income on the ex-dividend date.(loss).
Realized gains and losses on securities, 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. Realized gains and losses are determined on the basis of the specific securities sold. There were no other-than-temporary impairments recognized in the years ended December 31, 2015 and 2014. The Company sold substantially all of its available-for-sale securities during 2015.
Fair Value Measurementsvalue measurements
The Company’s policies incorporate the guidance for accounting for fair value measurements of financial assets and financial liabilities and for fair value measurements of nonfinancial items that are recognized or disclosed at fair value in the consolidated financial statements on a recurring basis. The Company’sThese policies also incorporate the guidance for fair value measurement related to nonfinancial items that are recognized and disclosed at fair value in the consolidated financial statements on a nonrecurring basis. The guidance establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to measurements involving significant unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are as follows:
| · | ||
| Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date. |
| Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset or liability. |
| Level 3 inputs are unobservable inputs for the asset or liability. |
The level in the fair value hierarchy within which a fair measurement in its entirety falls is based on the lowest level input that is significant to the fair value measurement in its entirety. The Company currently has no nonfinancial or financial items that are measured on a nonrecurring basis.
The carrying value of cash and cash equivalents, treasury bills, commercial paper, money market funds, trade receivables, accounts payable, and other financial working capital items approximate fair value at December 31, 20122015 and 20112014 due to the short term maturity nature of these instruments.
Inventories
Inventories include material, labor and overhead and are valued at the lower of cost (first-in, first-out) or market.
| 20 |
ELECTRO-SENSORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2015 AND 2014
(in thousands except share and per share amounts)
Property and equipment
Property and equipment are stated at cost. Depreciation is provided over estimated useful lives by use of the straight linestraight-line method. Maintenance and repairs are expensed as incurred. Major improvements and betterments are capitalized.
Long-lived assets, such as property and equipment and intangible assets, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If circumstances require a long-lived asset be tested for possible impairment, the Company first compares undiscounted cash flows expected to be generated by an asset to the carrying value of the asset. If the carrying value of the long-lived asset is not recoverable on an undiscounted cash flow basis, the Company recognizes impairment is recognized to the extent that the carrying value of an asset exceeds its fair value. Fair value is determined through various valuation techniques including, but not limited to, discounted cash flow models, quoted market values and third-party independent appraisals.
Estimated useful lives are as follows
| Years | |
| Equipment | 3-10 |
| Furniture and Fixtures | 3-10 |
| Building | 7-40 |
Intangible assets
Intangible assets are comprised of a noncompete agreement and the HazardPROTM technology.The Company amortizes the cost of these intangible assets on a straight-line method over the estimated useful lives.
Revenue recognition
The Company recognizes revenue from the sale of its production monitoring equipment when persuasive evidence of an arrangement exists, the product has been delivered,picked up by common carrier, the fee is fixed and determinable and collection of the resulting receivable is reasonably assured. Product revenues are recognized upon shipment because the contracts generally do not include post-shipment obligations. The Company may offer discounts to its distributors or quantity discounts that are recordedit records at the time of sale. The Company recognizes revenue on products sold to customers and distributors upon shipment because the contracts do not include post-shipment obligations. In addition to exchanges and warranty returns, customers have limited refund rights. Our standard products are used in a wide variety of industries,Historically, returns arehave been minimal and insignificantimmaterial to the consolidated financial statements and are generally recognized when the returned product is received by the Company. In some situations, the Company receives advance payments from its customers. RevenueThe Company defers the recognition of revenue associated with these advance payments is deferred until the product is shipped or services performed.ships.
Advertising costs
The Company expenses advertising costs as incurred. Total advertising expense was $89,000$56 and $184,000 for the years ended December 31, 2012$57 in fiscal 2015 and 2011,2014, respectively.
Research and development
Expenditures for research and development are expensed as incurred. WeThe Company incurred expenses of $443,000$753 and $437,000 during the years ended December$810 in fiscal 2015 and 2014, respectively.
| 21 |
ELECTRO-SENSORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 20122015 AND 2014
(in thousands except share and 2011, respectively.per share amounts)
Depreciation
Income taxes
The cost of property and equipment is depreciated on the straight-line method over the estimated useful lives.
Estimated useful lives are as follows
| ||||
|
| |||
|
| |||
|
| |||
Depreciation expense for the years ended December 31, 2012 and 2011 was $71,000 and $57,000, respectively.
Income taxes
DeferredCompany presents deferred income taxes are provided on an asset and liability approach to financial accounting and reporting for income taxes. The Company annually determines the difference between the financial statementreporting and tax bases of assets and liabilities is determined annually. Deferredliabilities. The Company computes deferred income tax assets and liabilities are computed for those differences that have future tax consequences using the currently enacted tax laws and rates that apply to the periods in which theythese laws are expected to affect taxable income. Income tax expense is the current tax payable or refundable for the period plus or minus the net change in the deferred tax assets and liabilities, excluding the portion of the deferred asset or liability allocated to other comprehensive income.income (loss). Deferred taxes are reduced by a valuation allowance to the extent that realization of the related deferred tax asset is not assured. No valuation allowance was deemed necessary at December 31, 2015 and 2014.
The Company recognizes the effect of income tax positions only if those positions are more likely than not to be sustained. RecognizedThe Company recognized income tax positions are measured at the largest amount that is greatermore likely than 50% likelynot to be realized. ChangesThe Company reflects changes in recognition or measurement are reflected in the period in which the change in judgment occurs.
The Company records interest and penalties related to unrecognized tax benefits in income tax expense.
Net income per common share
EPS
Basic earnings per share (EPS) excludes dilution and is determined by dividing net income by the weighted average number of common shares outstanding during the period. Diluted EPS reflects the potential dilution that could occur if securities and other contracts to issue common stock were exercised or converted into common stock.
The following information presents the Company’s computations of basic and diluted EPS for the periods presented in the statements of operations.comprehensive income.
|
|
|
|
|
|
|
|
|
|
|
|
| Income |
| Shares |
| Per share amount |
| |||
|
|
|
|
|
|
|
|
|
|
|
2012: |
|
|
|
|
|
|
|
|
|
|
Basic EPS from continuing operations |
| $ | 1,086,000 |
|
| 3,391,332 |
| $ | 0.32 |
|
Effect of dilutive employee and director stock options |
|
|
|
|
| 20,956 |
|
|
|
|
Diluted EPS from continuing operations |
| $ | 1,086,000 |
|
| 3,412,288 |
| $ | 0.31 |
|
|
|
|
|
|
|
|
|
|
|
|
2011: |
|
|
|
|
|
|
|
|
|
|
Basic EPS from continuing operations |
| $ | 598,000 |
|
| 3,387,192 |
| $ | 0.17 |
|
Effect of dilutive employee and director stock options |
|
|
|
|
| 18,546 |
|
|
|
|
Diluted EPS from continuing operations |
| $ | 598,000 |
|
| 3,405,738 |
| $ | 0.17 |
|
| Income | Shares | Per share amount | |||||||
| 2015: | |||||||||
| Basic EPS | $ | 1,214 | 3,395,521 | $ | 0.36 | ||||
| Effect of dilutive stock options | 257,500 | (0.03 | ) | ||||||
| Diluted EPS | $ | 1,214 | 3,653,021 | $ | 0.33 | ||||
| 2014: | |||||||||
| Basic EPS | $ | 1,094 | 3,395,510 | $ | 0.32 | ||||
| Effect of dilutive stock options | 258,872 | (.02 | ) | ||||||
| Diluted EPS | $ | 1,094 | 3,654,382 | $ | 0.30 | ||||
Stock
Stock-Based Compensation
The Company records compensation expense for employee stock options based on the estimated fair value of the options on the date of grant using the Black-Scholes-Merton (“BSM”) model with the assumptions included in the table below.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 rate is based on the U.S. Treasury yield curve in effect at the time of grant for the estimated life of the option. At December 31, 2012,2015, the Company had onetwo stock-based employee compensation plan. On July 18, 2012, the Company granted each of its four outside directors options to purchase 2,500 shares of common stock, recognizing compensation expense of approximately $6,000 based on the grant date fair value.plans.
The assumptions made in estimating the fair value of the options on the 2012 grant date based upon the BSM option-pricing model are as follows:
|
|
| ||
|
|
| ||
|
|
| ||
|
| 22 |
The Company calculates expected volatility for stock options and awards using historical volatility as the Company believes the expected volatility will approximate historical volatility.
There were no options granted in the year ended December 31, 2011. During the year ended December 31, 2011, two employees exercised options to purchase a total of 4,500 shares of common stock. During the year ended December 31, 2012, one outside director forfeited options to purchase 5,000 shares of common stock.
ELECTRO-SENSORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2015 AND 2014
(in thousands except share and per share amounts)
Recently Issued Accounting Pronouncements
Inventory Measurement (Evaluating)
In July 2015, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2015-11, which amended Inventory (Topic 330) Related to Simplifying the Measurement of Inventory of the Accounting Standards Codification. The amended guidance applies to all inventory except that which is measured using last-in, first-out (LIFO) or the retail inventory method. Inventory measured using first-in, first-out (FIFO) or average cost is included in the new amendments. Inventory within the scope of the new guidance should be measured at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. Subsequent measurement is unchanged for inventory measured using LIFO or the retail inventory method. The amendments will take effect for public business entities for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. For all other entities, the amendments in this update are effective for fiscal years beginning after December 15, 2016, and interim periods within fiscal years beginning after December 15, 2017. The new guidance should be applied prospectively, and earlier application is permitted as of the beginning of an interim or annual reporting period. The Company does not expect this standard to have a material effect on its consolidated financial statements.
Contract Revenue Recognition (Evaluating)
In May 2014, the FASB issued Accounting Standards Update (ASU) No. 2014-09 which was amended in August 2015. This standard amended the Revenue from Contracts with Customers (Topic 606) of the Accounting Standards Codification. The core principle of the new guidance is that an entity should recognize revenue to reflect the transfer of goods and services to customers in an amount equal to the consideration the entity receives or expects to receive. The guidance will be effective for the Company for reporting periods beginning after December 15, 2017. The Company will apply the guidance using a modified retrospective approach. The Company does not expect this standard to have a material effect on its consolidated financial statements.
Note 2. Business Combination
On February 18, 2014, the Company acquired Harvest Engineering, Inc.’s wireless hazard monitoring technology system and Insta-Link product family, together with related technology and intellectual property rights, for a total purchase price of $1,643.
The fair value of the consideration transferred on the acquisition date consisted of the following:
| Cash consideration | $ | 400 | ||
| Note payable issued to seller (Note 9) | 771 | |||
| Contingent earn-out liability | 472 | |||
| Total consideration | $ | 1,643 |
The transaction was recorded as a business combination and the results of operations have been included in the consolidated statement of comprehensive income since the date of acquisition. Acquisition fees of approximately $15 incurred in connection with the transaction were recorded in operating expenses in 2014.
In connection with the acquisition, the Company is obligated to pay an earn-out of up to $550 based upon the level of revenues generated from the acquired products during the four calendar years following closing. At the time of acquisition, the Company recorded a contingent liability of $472 representing the fair value estimate of the earn-out based uponthe Company’s projected likelihood of meeting the revenue targets.
The following table summarizes the estimated fair value of the assets acquired at the acquisition date:
| In process research and development | $ | 1,478 | ||
| Noncompete agreement | 120 | |||
| Deferred service costs | 45 | |||
| Total assets acquired | $ | 1,643 |
The noncompete agreement is being amortized over a five-year period. The fair value of the noncompete agreement was estimated using a discounted cash flow model. The unobservable inputs are considered Level 3 inputs in the fair value hierarchy.
| 23 |
ELECTRO-SENSORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2015 AND 2014
(in thousands except share and per share amounts)
Note 3. Investments
The cost and estimated fair value of the investments are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Cost |
| Gross |
| Gross |
| Fair |
| ||||
December 31, 2012 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Money Market Funds |
| $ | 804,000 |
| $ | 0 |
| $ | 0 |
| $ | 804,000 |
|
Commercial Paper |
|
| 200,000 |
|
| 0 |
|
| 0 |
|
| 200,000 |
|
Treasury Bills |
|
| 5,249,000 |
|
| 0 |
|
| (1,000 | ) |
| 5,248,000 |
|
Equity Securities |
|
| 92,000 |
|
| 3,639,000 |
|
| (54,000 | ) |
| 3,677,000 |
|
|
|
| 6,345,000 |
|
| 3,639,000 |
|
| (55,000 | ) |
| 9,929,000 |
|
Less Cash Equivalents |
|
| 1,004,000 |
|
| 0 |
|
| 0 |
|
| 1,004,000 |
|
Total Investments, December 31, 2012 |
| $ | 5,341,000 |
| $ | 3,639,000 |
| $ | (55,000 | ) | $ | 8,925,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2011 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Paper |
| $ | 5,373,000 |
| $ | 0 |
| $ | 0 |
| $ | 5,373,000 |
|
Equity Securities |
|
| 101,000 |
|
| 3,134,000 |
|
| (54,000 | ) |
| 3,181,000 |
|
|
|
| 5,474,000 |
|
| 3,134,000 |
|
| (54,000 | ) |
| 8,554,000 |
|
Less Cash Equivalents |
|
| 5,373,000 |
|
| 0 |
|
| 0 |
|
| 5,373,000 |
|
Total Investments, December 31, 2011 |
| $ | 101,000 |
| $ | 3,134,000 |
| $ | (54,000 | ) | $ | 3,181,000 |
|
| Cost | Gross unrealized gain | Gross unrealized loss | Fair value | |||||||||||||
| December 31, 2015 | ||||||||||||||||
| Money Market Funds | $ | 246 | $ | 0 | $ | 0 | $ | 246 | ||||||||
| Commercial Paper | 247 | 0 | 0 | 247 | ||||||||||||
| Treasury Bills | 7,876 | 0 | (4 | ) | 7,872 | |||||||||||
| Equity Securities | 54 | 0 | (54 | ) | 0 | |||||||||||
| 8,423 | 0 | (58 | ) | 8,365 | ||||||||||||
| Less Cash Equivalents | 493 | 0 | 0 | 493 | ||||||||||||
| Total Investments, December 31, 2015 | $ | 7,930 | $ | 0 | $ | (58 | ) | $ | 7,872 | |||||||
| December 31, 2014 | ||||||||||||||||
| Money Market Funds | $ | 510 | $ | 0 | $ | 0 | $ | 510 | ||||||||
| Commercial Paper | 345 | 0 | 0 | 345 | ||||||||||||
| Treasury Bills | 6,542 | 0 | 0 | 6,542 | ||||||||||||
| Equity Securities | 72 | 1,238 | (54 | ) | 1,256 | |||||||||||
| 7,469 | 1,238 | (54 | ) | 8,653 | ||||||||||||
| Less Cash Equivalents | 855 | 0 | 0 | 855 | ||||||||||||
| Total Investments, December 31, 2014 | $ | 6,614 | $ | 1,238 | $ | (54 | ) | $ | 7,798 | |||||||
Realized gains and losses on investments are as follows:
|
|
|
|
|
|
|
|
|
| Years Ended December 31, |
| ||||
|
| 2012 |
| 2011 |
| ||
|
|
|
|
|
|
|
|
Gross Realized Gains |
| $ | 794,000 |
| $ | 73,000 |
|
Gross Realized Losses |
|
| 0 |
|
| 0 |
|
Net Realized Gain |
| $ | 794,000 |
| $ | 73,000 |
|
| Years Ended December 31, | ||||||||
| 2015 | 2014 | |||||||
| Gross Realized Gains | $ | 1,449 | $ | 1,163 | ||||
| Gross Realized Losses | 0 | 0 | ||||||
| Net Realized Gain | $ | 1,449 | $ | 1,163 | ||||
At December 31, 2012 and 2011,2014, the Company’s significant investment in equity securities is 273,267 and 343,267, respectively,was 122,649 shares of Rudolph Technologies, (Rudolph),Inc. (“Rudolph”) accounted for under the available-for-sale method. As of December 31, 2012 and 2011,2014, the aggregate value of the Company’s Rudolph shares as reported on the Nasdaq Stock Exchange (ticker symbol RTEC) was approximately $3,673,000 and $3,134,000, respectively,$1,254, with an approximate cost of $36,000$16. During fiscal 2015 and $45,000, respectively. During the year ended December 31, 2012,2014, the Company sold 70,000122,649 and 108,687 shares, respectively, of Rudolph stock and reported a gain of $794,000$1,447 and $1,163, respectively, in other income.
As of December 30, 2011, the shareholders of PPT Vision (PPT) voted to accept an offer to merge with Datalogic Scanning Holdings, Inc. (Datalogic). The terms of the merger required Datalogic to purchase all of the shares outstanding. Electro-Sensors, Inc. recognized a $72,000 gain on the sale of its PPT shares to Datalogic. The Company received the funds for their shares of PPT in January 2012.
| 24 |
Changes
ELECTRO-SENSORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2015 AND 2014
(in Accumulated Other Comprehensive Incomethousands except share and per share amounts)
Changes in Accumulated Other Comprehensive Income (Loss)
Changes in Accumulated Other Comprehensive Income (Loss) are as follows:
|
|
|
|
|
|
|
|
|
| December 31, |
| ||||
|
| 2012 |
| 2011 |
| ||
|
|
|
|
|
|
|
|
Unrealized Gains |
|
|
|
|
|
|
|
Unrealized Holding Gains arising during the Period |
| $ | 1,299,000 |
| $ | 425,000 |
|
Less: reclassification of gains included in net income |
|
| (794,000 | ) |
| (73,000 | ) |
|
|
| 505,000 |
|
| 352,000 |
|
|
|
|
|
|
|
|
|
Deferred Taxes on Unrealized Gains: |
|
|
|
|
|
|
|
Increase in Deferred Taxes on Unrealized Gains arising during the Period |
|
| 494,000 |
|
| 161,000 |
|
Less: Reclassification of taxes on gains included in net income |
|
| (302,000 | ) |
| (27,000 | ) |
|
|
| 192,000 |
|
| 134,000 |
|
|
|
|
|
|
|
|
|
Net Change in Accumulated Other Comprehensive Income |
| $ | 313,000 |
| $ | 218,000 |
|
| December 31, | ||||||||
| 2015 | 2014 | |||||||
| Unrealized Gains (Losses) | ||||||||
| Unrealized holding gains (losses) arising during the period | $ | 211 | $ | (284 | ) | |||
| Less: Reclassification of gains included in net income | (1,449 | ) | (1,163 | ) | ||||
| (1,238 | ) | (1,447 | ) | |||||
| Deferred Taxes on Unrealized Gains (Losses): | ||||||||
| Increase (decrease) in deferred taxes on unrealized gains (losses) arising during the period | 80 | (108 | ) | |||||
| Less: Reclassification of taxes on gains included in net income | (551 | ) | (442 | ) | ||||
| (471 | ) | (550 | ) | |||||
| Net Change in Accumulated Other Comprehensive Income (Loss) | $ | (767 | ) | $ | (897 | ) | ||
Note 3.4. Fair Value Measurements
The following table provides information on those assets and liabilities measured at fair value on a recurring basis.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Carrying amount |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
| Fair Value |
| Fair Value Measurement Using |
| ||||||||||
|
|
|
| Level 1 |
| Level 2 |
| Level 3 |
| |||||||
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money Market Funds |
| $ | 804,000 |
| $ | 804,000 |
| $ | 804,000 |
| $ | 0 |
| $ | 0 |
|
Commercial Paper |
|
| 200,000 |
|
| 200,000 |
|
| 200,000 |
|
| 0 |
|
| 0 |
|
Treasury Bills |
|
| 5,248,000 |
|
| 5,248,000 |
|
| 5,248,000 |
|
| 0 |
|
| 0 |
|
Available-for-sale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Small Cap Technology Sector |
|
| 3,677,000 |
|
| 3,677,000 |
|
| 3,677,000 |
|
| 0 |
|
| 0 |
|
December 31, 2015
| Carrying | ||||||||||||||||||||
| amount in | ||||||||||||||||||||
| consolidated | Fair Value Measurement Using | |||||||||||||||||||
| balance sheet | Fair Value | Level 1 | Level 2 | Level 3 | ||||||||||||||||
| Assets: | ||||||||||||||||||||
| Cash and cash equivalents: | ||||||||||||||||||||
| Money market | $ | 246 | $ | 246 | $ | 246 | $ | 0 | $ | 0 | ||||||||||
| Commercial paper | 247 | 247 | 247 | 0 | 0 | |||||||||||||||
| Treasury bills | 7,872 | 7,872 | 7,872 | 0 | 0 | |||||||||||||||
| Liabilities: | ||||||||||||||||||||
| Contingent earn-out | 455 | 455 | 0 | 0 | 455 | |||||||||||||||
December 31, 2014
| Carrying | ||||||||||||||||||||
| amount in | ||||||||||||||||||||
| consolidated | Fair Value Measurement Using | |||||||||||||||||||
| balance sheet | Fair Value | Level 1 | Level 2 | Level 3 | ||||||||||||||||
| Assets: | ||||||||||||||||||||
| Cash and cash equivalents: | ||||||||||||||||||||
| Money market | $ | 510 | $ | 510 | $ | 510 | $ | 0 | $ | 0 | ||||||||||
| Commercial paper | 345 | 345 | 345 | 0 | 0 | |||||||||||||||
| Treasury bills | 6,542 | 6,542 | 6,542 | 0 | 0 | |||||||||||||||
| Available for sale: | ||||||||||||||||||||
| Equities | ||||||||||||||||||||
| Small cap technology sector | 1,256 | 1,256 | 1,256 | 0 | 0 | |||||||||||||||
| Liabilities: | ||||||||||||||||||||
| Contingent earn-out | 472 | 472 | 0 | 0 | 472 | |||||||||||||||
| 25 |
ELECTRO-SENSORS, INC. AND SUBSIDIARIES Carrying amount Fair Value Fair Value Measurement Using Level 1 Level 2 Level 3 Assets: Cash and cash equivalents: Commercial Paper $ 5,373,000 $ 5,373,000 $ 5,373,000 $ 0 $ 0 Available-for-sale: Equities: Small Cap Technology Sector 3,181,000 3,181,000 3,181,000 0 0
in consolidated
balance sheet
December 31, 2011
December 31, 2011
YEARS ENDED DECEMBER 31, 2015 AND 2014
(in thousands except share and per share amounts)
The fair value of the money market funds, commercial paper, and treasury bills areis based on quoted market prices in an active market. Available for saleAvailable-for-sale securities include equity securities, except for the limited-marketable company, that are traded in an active market. Closing stock prices are readily available from active markets and are used as being representative of fair value. The Company classifies these securities as level 1.
Table There is an insignificant market for the limited-marketable company and the Company has determined the value based on financial and other factors, which are considered level 3 inputs in the fair value hierarchy. Management estimated the probability of Contentsmeeting the revenue targets over the measurement period to determine the fair value of the contingent earn-out, which is considered a level 3 input in the fair value hierarchy.
The change in level 3 liabilities at fair value on a recurring basis is summarized as follows:
| Years Ended December 31, | ||||||||
| 2015 | 2014 | |||||||
| Beginning Balance | $ | 472 | $ | 0 | ||||
| Additions (Note 2) | 0 | 472 | ||||||
| Charge to earnings | (17 | ) | 0 | |||||
| Ending Balance | $ | 455 | $ | 472 | ||||
The decrease in the contingent earn-out, in 2015, reflects the Company’s expectation of moderately lower future contingent payments due to delays in releasing the product due to development and obtaining third-party certifications.
Note 4.5. Inventories
Inventories used in the determination of cost of goods sold are as follows:
|
|
|
|
|
|
|
|
|
| December 31, |
| ||||
|
| 2012 |
| 2011 |
| ||
Raw Materials |
| $ | 835,000 |
| $ | 791,000 |
|
Work In Process |
|
| 283,000 |
|
| 247,000 |
|
Finished Goods |
|
| 212,000 |
|
| 190,000 |
|
Total Inventories |
| $ | 1,330,000 |
| $ | 1,228,000 |
|
| December 31, | ||||||||
| 2015 | 2014 | |||||||
| Raw Materials | $ | 956 | $ | 729 | ||||
| Work In Process | 297 | 263 | ||||||
| Finished Goods | 311 | 232 | ||||||
| Total Inventories | $ | 1,564 | $ | 1,224 | ||||
Note 5.6. Property and Equipment, Net
The following is a summary of property and equipment:
|
|
|
|
|
|
|
|
|
| December 31, |
| ||||
|
| 2012 |
| 2011 |
| ||
Equipment |
| $ | 259,000 |
| $ | 260,000 |
|
Construction in Progress |
|
| 0 |
|
| 14,000 |
|
Furniture and Fixtures |
|
| 382,000 |
|
| 393,000 |
|
Building |
|
| 1,365,000 |
|
| 1,360,000 |
|
Land |
|
| 415,000 |
|
| 415,000 |
|
|
|
| 2,421,000 |
|
| 2,442,000 |
|
Less Accumulated Depreciation |
|
| 1,117,000 |
|
| 1,263,000 |
|
Total Property and Equipment |
| $ | 1,304,000 |
| $ | 1,179,000 |
|
| December 31, | ||||||||
| 2015 | 2014 | |||||||
| Equipment | $ | 285 | $ | 266 | ||||
| Furniture and Fixtures | 410 | 380 | ||||||
| Building | 1,365 | 1,365 | ||||||
| Land | 415 | 415 | ||||||
| 2,475 | 2,426 | |||||||
| Less Accumulated Depreciation | 1,372 | 1,280 | ||||||
| Total Property and Equipment | $ | 1,103 | $ | 1,146 | ||||
Depreciation expense for the years ended December 31, 2015 and 2014 was $113 and $116, respectively.
| 26 |
ELECTRO-SENSORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2015 AND 2014
(in thousands except share and per share amounts)
Note 7. Net Intangible Assets
Intangible assets include the following:
| December 31, 2015 | ||||||||||||||||
| Average Useful Lives | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | |||||||||||||
| Noncompete | 5 Years | $ | 120 | $ | 46 | $ | 74 | |||||||||
| Technology | 7 Years | 1,478 | 282 | 1,196 | ||||||||||||
| Net Intangible Assets | $ | 1,598 | $ | 328 | $ | 1,270 | ||||||||||
| December 31, 2014 | ||||||||||||||||
| Average Useful Lives | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | |||||||||||||
| Noncompete | 5 Years | $ | 120 | $ | 22 | $ | 98 | |||||||||
| Technology | 7 Years | 1,478 | 71 | 1,407 | ||||||||||||
| Net Intangible Assets | $ | 1,598 | $ | 93 | $ | 1,505 | ||||||||||
Amortization expense for the years ended December 31, 2015 and 2014 was $235 and $93, respectively.
Estimated amortization expense over the next five years is as follows:
| 2016 | $ | 235 | ||
| 2017 | 235 | |||
| 2018 | 235 | |||
| 2019 | 213 | |||
| 2020 | 211 |
Note 6.8. Accrued Expenses
Accrued expenses include the following:
|
|
|
|
|
|
|
|
|
| December 31, |
| ||||
|
| 2012 |
| 2011 |
| ||
Wages and Commissions |
| $ | 147,000 |
| $ | 163,000 |
|
Other |
|
| 80,000 |
|
| 51,000 |
|
Total Accrued Expenses |
| $ | 227,000 |
| $ | 214,000 |
|
| December 31, | ||||||||
| 2015 | 2014 | |||||||
| Wages and Commissions | $ | 272 | $ | 276 | ||||
| Other | 124 | 116 | ||||||
| Total Accrued Expenses | $ | 396 | $ | 392 | ||||
| 27 |
Note 7. CommitmentsTable of Contents
ELECTRO-SENSORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2015 AND 2014
(in thousands except share and per share amounts)
Note 9. Note Payable
The note payable consists of the following:
| December 31, | ||||||||
| 2015 | 2014 | |||||||
| Note payable to seller | $ | 400 | $ | 800 | ||||
| Payable in annual installments of principal of $400, with a maturity date of February 2016. This note is non-interest bearing and unsecured. | ||||||||
| Less: Discount of note payable listed above | (10 | ) | (29 | ) | ||||
| Net note payable | 390 | 771 | ||||||
| Less: Current maturities | 390 | 381 | ||||||
| Note Payable – Long Term | $ | 0 | $ | 390 | ||||
Note 10. Commitments
Lease commitments
The Company is leasing office equipment under an operating leaseslease expiring at various dates through 2013.in 2017.
Minimum lease payments required under non-cancelable operating leases are as follows:
|
|
|
|
|
Year |
| Amount |
| |
|
|
|
|
|
2013 |
| $ | 8,000 |
|
| Year | Amount | |||||
| 2016 | $ | 8 | ||||
| 2017 | 3 | |||||
| Total Minimum Lease Payments | $ | 11 | ||||
Rental expense charged to operations was $27,000$8 and $21 for each of the years ended December 31, 20122015 and 2011.2014, respectively.
Note 8.11. Common Stock Options and Stock Purchase Plan
Stock options
The 1997 Stock Option Plan includes(the “1997 Plan”) and 2013 Equity Incentive Plan (the “2013 Plan”) authorize the issuance of both nonqualified and incentive stock options. Payment for the shares may be made in cash, shares of the Company’s Common Stockcommon stock or a combination thereof. Under the terms of the plan,plans, incentive stock options and non-qualified stock options are granted at a minimum of 100% of fair market value on the date of grant and may be exercised at various times depending upon the terms of the option. The nonqualified stock options were granted to directors to purchase shares of the Company’s Common Stock. All existing options expire 10 years from the date of grant or one year from the date of death.
| 28 |
ELECTRO-SENSORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2015 AND 2014
(in thousands except share and per share amounts)
Stock-based compensation
Pursuant to the 2013 Plan, the Company is authorized to grant options to purchase up to 300,000 shares of its common stock. As of December 31, 2015, options to purchase an aggregate of 250,000 shares were outstanding, 165,000 shares were exercisable under the 2013 Plan, and 50,000 shares were available for issuance pursuant to awards that may be granted under the plan in the future.
Pursuant to the 1997 Plan, the Company was authorized to grant options to purchase up to 450,000 shares of its common stock. As of December 31, 2015, options to purchase an aggregate of 7,500 shares were outstanding and exercisable under the 1997 Plan. The board terminated the plan in 2014. The existing grants may be exercised according to the terms of the grant agreements but no additional options will be granted under the 1997 Plan.
During the year ended December 31, 2014, options to purchase 11,980 shares of common stock expired for four employees.
The following table summarizes the activity for outstanding incentive stock options under the 2013 Plan to employees of the company:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Options Outstanding |
| ||||||||||
|
| Number of |
| Weighted- |
| Weighted- |
| Aggregate |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January 1, 2011 |
|
| 16,480 |
| $ | 3.06 |
|
| 2.2 |
|
|
|
|
Granted |
|
| 0 |
|
|
|
|
|
|
|
|
|
|
Exercised |
|
| 4,500 |
|
| 2.37 |
|
|
|
|
|
|
|
Canceled/forfeited/expired |
|
| 0 |
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2011 |
|
| 11,980 |
|
| 4.16 |
|
| 2.6 |
|
|
|
|
Granted |
|
| 0 |
|
|
|
|
|
|
|
|
|
|
Exercised |
|
| 0 |
|
|
|
|
|
|
|
|
|
|
Canceled/forfeited/expired |
|
| 0 |
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2012 |
|
| 11,980 |
| $ | 4.16 |
|
| 1.6 |
|
| 0 |
|
Vested and exercisable as of December 31, 2012 |
|
| 11,980 |
| $ | 4.16 |
|
| 1.6 |
|
| 0 |
|
| Options Outstanding | |||||||||||||
| Number of Shares | Weighted- Average Exercise Price | Weighted- Average Remaining Contractual Term (in years) | Aggregate Intrinsic Value (1) | ||||||||||
| Balance at January 1, 2014 | 61,980 | $ | 4.20 | 9.7 | |||||||||
| Granted | 0 | ||||||||||||
| Exercised | 0 | ||||||||||||
| Canceled/forfeited/expired | (11,980 | ) | (4.16 | ) | |||||||||
| Balance at December 31, 2014 | 50,000 | 4.21 | 8.6 | ||||||||||
| Granted | 0 | ||||||||||||
| Exercised | 0 | ||||||||||||
| Canceled/forfeited/expired | 0 | ||||||||||||
| Balance at December 31, 2015 | 50,000 | $ | 4.21 | 7.6 | |||||||||
| Vested and exercisable as of December 31, 2015 | 50,000 | $ | 0 | ||||||||||
| (1) | ||
| The aggregate intrinsic value is calculated as approximately the difference between the weighted average exercise price of the underlying awards and the Company’s estimated current fair market value at December 31, |
During the second quarter of 2014, the Company granted one outside director options to purchase 25,000 shares of common stock. The options were priced above fair market value and vested 20% on the grant date, with an additional 20% vesting on the first four anniversaries of the grant date. The options expire ten years from the date of grant.
During the year ended December 31, 2014, one former outside director forfeited options to purchase 2,500 shares of common stock.
| 29 |
ELECTRO-SENSORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2015 AND 2014
(in thousands except share and per share amounts)
The following table summarizes the activity for outstanding director stock options:options under both plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Options Outstanding |
| ||||||||||
|
| Number of |
| Weighted- |
| Weighted- |
| Aggregate |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January 1, 2011 |
|
| 5,000 |
| $ | 5.36 |
|
| 6.3 |
|
|
|
|
Granted |
|
| 0 |
|
|
|
|
|
|
|
|
|
|
Exercised |
|
| 0 |
|
|
|
|
|
|
|
|
|
|
Canceled/forfeited/expired |
|
| 0 |
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2011 |
|
| 5,000 |
|
| 5.36 |
|
| 5.3 |
|
|
|
|
Granted |
|
| 10,000 |
|
| 4.15 |
|
|
|
|
|
|
|
Exercised |
|
| 0 |
|
|
|
|
|
|
|
|
|
|
Canceled/forfeited/expired |
|
| 5,000 |
|
| 5.36 |
|
|
|
|
|
|
|
Balance at December 31, 2012 |
|
| 10,000 |
| $ | 4.15 |
|
| 9.5 |
|
| 0 |
|
Vested and exercisable as of December 31, 2012 |
|
| 10,000 |
| $ | 4.15 |
|
| 9.5 |
|
| 0 |
|
| Options Outstanding | ||||||||||||||
| Number of Shares | Weighted- Average Exercise Price | Weighted- Average Remaining Contractual Term (in years) | Aggregate Intrinsic Value (1) | |||||||||||
| Balance at January 1, 2014 | 185,000 | $ | 4.64 | 9.5 | ||||||||||
| Granted | 25,000 | 4.39 | 10.0 | |||||||||||
| Exercised | 0 | |||||||||||||
| Canceled/forfeited/expired | (2,500 | ) | (4.15 | ) | ||||||||||
| Balance at December 31, 2014 | 207,500 | 4.62 | 8.4 | |||||||||||
| Granted | 0 | |||||||||||||
| Exercised | 0 | |||||||||||||
| Canceled/forfeited/expired | 0 | |||||||||||||
| Balance at December 31, 2015 | 207,500 | $ | 4.62 | 7.4 | ||||||||||
| Vested and exercisable as of December 31, 2015 | 122,500 | $ | 0 | |||||||||||
(1) The aggregate intrinsic value is calculated as approximately the difference between the weighted average exercise price of the underlying awards and the Company’s estimated current fair market value at December 31, 2015.
The weighted average grant date fair value of options granted during the year ended December 31, 2014 was $35. The Company recognized compensation expense of approximately $63 and $67 during the years ended December 31, 2015 and 2014, respectively, in connection with the issuance of the options.
The assumptions made in estimating the fair value of the options on the grant date based upon the BSM option-pricing model for the year ended December 31, 2014 are as follows:
| Dividend Yield | 0.00 | % | |
| Expected Volatility | 44.11 | % | |
| Risk Free Interest Rate | 2.02 | % | |
| Expected Life | 6 Years |
The Company calculates expected volatility for stock options and other awards using historical volatility as the Company believes the expected volatility will approximate historical volatility.
There were no options exercised during the years ended December 31, 2015 and 2014.
(1)
The aggregate intrinsic value is calculated as approximately the difference between the weighted average exercise price of the underlying awards and the Company’s estimated current fair market value at December 31, 2012.
As of December 31, 2012 and 2011, respectively2015, there was noapproximately $109 of unrecognized compensation cost relatedexpense under the 2013 Plan. The Company expects to stock options that is expected to be recognizedrecognize this expense over a period of 1-2the next three years. To the extent the forfeiture rate is different than we have anticipated, stock-based compensation related to these awards will be different from our expectations.
| 30 |
Stock-based compensationTable of Contents
Pursuant to the 1997 Stock Option Plan (the “Option Plan”), the Company is authorized to grant options to purchase up to 450,000 shares of its Common Stock. As of December
ELECTRO-SENSORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2012, options to purchase an aggregate of 21,980 shares were outstanding2015 AND 2014
(in thousands except share and exercisable under the Option Plan, and 250 shares were available for issuance pursuant to awards that may be granted under the Option Plan in the future.per share amounts)
Stock purchase plan
The 1996 Employee Stock Purchase Plan (the “ESPP”) allowsallowed employees to set aside up to 10% of their earnings for the purchase of shares of the Company’s Common Stock.common stock. The purchase price iswas the lower of 85% of the market value at the date of the grant or the exercise date, which iswas six months from the date of the grant. Under the ESPP, the Company iswas authorized to sell and issue up to 150,000 shares of its Common Stockcommon stock to its full-time employees. During 2012 and 2011, 2,335There were 81,653 shares and 3,078 shares, respectively, were issued under the ESPP. At December 31, 2012, 71,956 shares were available for future issuance pursuant to the ESPP.
Table of Contentsplan. The plan was terminated effective January 1, 2014.
Note 9.12. Benefit Plans
Employee stock ownership plan
The Company sponsors an employee stock ownership plan (“ESOP”) that covers substantially all employees who work 1,000 or more hours during the year. The ESOP has, at various times, secured financing from the Company to purchase the Company’s shares on the open market. When the Plan purchases shares with the proceeds of the Company loans, the shares are pledged as collateral for its debt.these loans. The shares are maintained in a suspense account until released and allocated to participant accounts. The Plan owns 148,382153,457 shares of the Company’s stock at December 31, 2012.2015. All shares held by the Plan have been released and allocated. TheNo dividends were paid byduring the Company on shares held by the Plan are allocated to the participant accounts.years ended December 31, 2015 and 2014. The Plan had no debt to the Company at December 31, 2012.2015 or 2014.
The Company hadrecognized compensation expense for contributions of $18,000$24 and $18, respectively, to the ESOP plan for the years ended December 31, 2012in 2015 and 2011.2014.
In the event a terminated ESOP participant desires to sell his or her shares of the Company’s stock and the shares are not readily tradable, the Company may be required to purchase the shares from the participant at their fair market value. In addition, the Company may distribute the ESOP’s shares to the terminated participant at the Company’s election. At December 31, 2012, 148,3822015, 153,457 shares of the Company’s stock, with an aggregate fair market value of approximately $559,000,$549, are held by ESOP participants who, if terminated, would be subject tohave rights under the repurchase requirement.provisions. The Company believes that the market for its shares meets the ESOP requirements and that there would not be a current obligation to repurchase shares.
Profit sharing plan and savings plan
The Company has a salary reduction and profit sharing plan whichthat conforms to IRS provisions for 401(k) plans. The Company may make profit sharing contributions with the approval of the Board of Directors. The Board of Directors approvedThere were no profit sharing contributions by the Company contributions of $18,000 and $0 for the years ended December 31, 2012 and 2011, respectively, in addition to its matching of 401(k) salary reductions, which totaled $61,000 and $64,000 for 2012 and 2011, respectively.2015 or 2014.
| 31 |
ELECTRO-SENSORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2015 AND 2014
(in thousands except share and per share amounts)
Note 10. Discontinued Operations
On September 16, 2011, the Company sold its entire interest in its AutoData Systems Division to Auto Data Inc. (ADI). The purchase price will be paid as an earn-out based on three percent of the software, hardware, and maintenance contracts that ADI sells over the next five years (four percent while ADI continues to occupy our building). As of December 30, 2012 and 2011, ADI owed the Company approximately $0 and $3,000, respectively, under the earn-out. The amount is included in other assets on the balance sheet.
For the years ended December 31, 2012 and 2011, the Company recognized approximately $13,000 and $3,000, respectively, as other income from ADI under the earn-out agreement.
The division, a separate operating segment as described in Note 12, designed and marketed desktop software based systems that read hand printed characters, checkmarks and bar code information from scanned or faxed forms, in addition to collecting and reporting data from web forms.
The financial results of the discontinued operation are as follows:
|
|
|
|
|
|
| Year Ended |
| |
|
|
|
|
|
Net sales |
| $ | 246,000 |
|
Expenses |
|
| (314,000 | ) |
Net loss before income taxes |
|
| (68,000 | ) |
Income tax benefit |
|
| 18,000 |
|
Net loss of discontinued operations |
| $ | (50,000 | ) |
The effect of the discontinued operation on the financial position of the Company, as of December 31, 2011, is as follows:
|
|
|
|
|
Property and equipment |
| $ | 2,000 |
|
Inventories |
|
| 17,000 |
|
Accounts receivable |
|
| 35,000 |
|
Net assets disposed |
| $ | 54,000 |
|
|
|
|
|
|
Accrued expenses |
| $ | 10,000 |
|
Deferred revenue |
|
| 58,000 |
|
Net liabilities disposed |
| $ | 68,000 |
|
|
|
|
|
|
Net cash paid to ADI |
| $ | 14,000 |
|
Note 11.13. Income Taxes
The components of the income tax provision for the years ended December 31, 20122015 and 20112014 are as follows:
|
|
|
|
|
|
|
|
|
| 2012 |
| 2011 |
| ||
|
|
|
|
|
|
|
|
Current: |
|
|
|
|
|
|
|
Federal |
| $ | 513,000 |
| $ | 179,000 |
|
State |
|
| 5,000 |
|
| 0 |
|
Deferred: |
|
|
|
|
|
|
|
Federal |
|
| 31,000 |
|
| 12,000 |
|
State |
|
| 7,000 |
|
| 2,000 |
|
Total Federal and State Income Taxes |
| $ | 556,000 |
| $ | 193,000 |
|
| 2015 | 2014 | |||||||
| Current: | ||||||||
| Federal | $ | 633 | $ | 540 | ||||
| State | 1 | 1 | ||||||
| Deferred: | ||||||||
| Federal | (101 | ) | (60 | ) | ||||
| State | (3 | ) | (21 | ) | ||||
| Total Federal and State Income Taxes | $ | 530 | $ | 460 | ||||
The provision for income taxes for the years ended December 31, 20122015 and 20112014 differs from the amount obtained by applying the U.S. federal income tax rate to pretax income due to the following:
|
|
|
|
|
|
|
|
|
| 2012 |
| 2011 |
| ||
|
|
|
|
|
|
|
|
Computed “Expected” Federal Tax Expense |
| $ | 560,000 |
| $ | 251,000 |
|
Increase (Decrease) in Taxes Resulting From: |
|
|
|
|
|
|
|
State Income Taxes, net of Federal Benefit |
|
| 26,000 |
|
| 12,000 |
|
Credits |
|
| (16,000 | ) |
| (51,000 | ) |
Domestic Production Activities Deduction |
|
| (20,000 | ) |
| (22,000 | ) |
Permanent Differences |
|
| 6,000 |
|
| 3,000 |
|
Total Federal and State Income Taxes |
| $ | 556,000 |
| $ | 193,000 |
|
| 2015 | 2014 | |||||||
| Computed “Expected” Federal Tax Expense | $ | 601 | $ | 529 | ||||
| Increase (Decrease) in Taxes Resulting From: | ||||||||
| State Income Taxes, net of Federal Benefit | 10 | 10 | ||||||
| Credits | (43 | ) | (47 | ) | ||||
| Domestic Production Activities Deduction | (22 | ) | (17 | ) | ||||
| Permanent Differences | 5 | 4 | ||||||
| Other | (21 | ) | (19 | ) | ||||
| Total Federal and State Income Taxes | $ | 530 | $ | 460 | ||||
The components of the net deferred tax liabilityasset (liability) consist of:
|
|
|
|
|
|
|
|
|
| 2012 |
| 2011 |
| ||
|
|
|
|
|
|
|
|
Deferred Tax Assets: |
|
|
|
|
|
|
|
Vacation Disallowance |
| $ | 26,000 |
| $ | 24,000 |
|
Allowance for Doubtful Accounts |
|
| 4,000 |
|
| 4,000 |
|
State Carryforward R&D Credit |
|
| 0 |
|
| 3,000 |
|
Total Deferred Tax Assets |
| $ | 30,000 |
| $ | 31,000 |
|
|
|
|
|
|
|
|
|
Deferred Tax Liabilities: |
|
|
|
|
|
|
|
Prepaid Expenses |
| $ | 23,000 |
| $ | 26,000 |
|
Depreciation |
|
| 100,000 |
|
| 60,000 |
|
Net Unrealized Gain on Investments |
|
| 1,362,000 |
|
| 1,170,000 |
|
Total Deferred Tax Liabilities |
| $ | 1,485,000 |
| $ | 1,256,000 |
|
|
|
|
|
|
|
|
|
Net Deferred Tax Liability |
| $ | (1,455,000 | ) | $ | (1,225,000 | ) |
| 2015 | 2014 | |||||||
| Deferred Tax Assets: | ||||||||
| Vacation accrual | $ | 34 | $ | 33 | ||||
| Allowance for doubtful accounts | 3 | 4 | ||||||
| Stock compensation | 102 | 80 | ||||||
| Bonus | 10 | 0 | ||||||
| Depreciation and amortization | 1 | 0 | ||||||
| Net unrealized loss on investments | 21 | 0 | ||||||
| State carryforward R&D credit | 46 | 31 | ||||||
| Total Deferred Tax Assets | 217 | 148 | ||||||
| Deferred Tax Liabilities: | ||||||||
| Prepaid expenses | 33 | 35 | ||||||
| Depreciation and amortization | 0 | 54 | ||||||
| Net unrealized gain on investments | 0 | 450 | ||||||
| Total Deferred Tax Liabilities | 33 | 539 | ||||||
| Net Deferred Tax Asset (Liability) | $ | 184 | $ | (391 | ) | |||
| 32 |
ELECTRO-SENSORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2015 AND 2014
(in thousands except share and per share amounts)
Deferred assets and liabilities are reported on the balance sheet as follows:
| 2015 | 2014 | |||||||
| Deferred Tax Assets: | ||||||||
| Current | $ | 14 | $ | 0 | ||||
| Long-term | 170 | 0 | ||||||
| Total Deferred Tax Assets | $ | 184 | $ | 0 | ||||
| Deferred Tax Liabilities: | ||||||||
| Long-term | $ | 0 | $ | 391 | ||||
The Company is subject to the following material taxing jurisdictions: U.S. and Minnesota. The tax years that remain open to examination by the Internal Revenue Service and state jurisdictions are 20092012 through 2012. The tax years that remain open to examination by the Minnesota Department of Revenue are 2008 through 2012.2015. We have no accrued interest or penalties related to uncertain tax positionstaxpositions as of January 1, 20122015 or December 31, 2012.2015 and uncertain tax positions are not significant.
| 33 |
ELECTRO-SENSORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2015 AND 2014
(in thousands except share and per share amounts)
Note 12.14. Segment Information
Prior to September 16, 2011, the Company had three reportable operating segments based on the nature of its product lines: Production Monitoring, AutoData Systems, and Investments. The AutoData Systems segment was sold on September 16, 2011 as described in Note 10. The operations of that segment are presented as discontinued operations in the accompanying financial statements and are excluded from the presentation of segment information from continuing operations in this note. The reclassification of AutoData Systems to discontinued operations had no impact on the results of operations presented for the Production Monitoring or Investments segments.
As of December 31, 2012,2015, the Company has two reportable operating segments: Production Monitoring and Investments. The Production Monitoring Division manufactures and markets a complete line of production monitoring equipment, in particular speed monitoring and motor control systems for industrial machinery. ESI Investment Company holds investments in marketable and non-marketable securities.
The accounting policies of the segments are the same as those described in Note 1. In evaluating segment performance, management focuses on sales and income before taxes. The Company has no inter-segment sales.
The following is financial information relating to the continuing operating segments:
|
|
|
|
|
|
|
|
|
| 2012 |
| 2011 |
| ||
|
|
|
|
|
|
|
|
Net revenues |
|
|
|
|
|
|
|
Production Monitoring |
| $ | 6,498,000 |
| $ | 6,115,000 |
|
ESI Investment Company |
|
| 0 |
|
| 0 |
|
Total |
|
| 6,498,000 |
|
| 6,115,000 |
|
Sales in foreign countries |
|
|
|
|
|
|
|
Production Monitoring |
|
| 809,000 |
|
| 633,000 |
|
ESI Investment Company |
|
| 0 |
|
| 0 |
|
Total |
|
| 809,000 |
|
| 633,000 |
|
Interest income |
|
|
|
|
|
|
|
Production Monitoring |
|
| 1,000 |
|
| 2,000 |
|
ESI Investment Company |
|
| 3,000 |
|
| 4,000 |
|
Total |
|
| 4,000 |
|
| 6,000 |
|
Depreciation expense |
|
|
|
|
|
|
|
Production Monitoring |
|
| 71,000 |
|
| 57,000 |
|
ESI Investment Company |
|
| 0 |
|
| 0 |
|
Total |
|
| 71,000 |
|
| 57,000 |
|
Capital purchases |
|
|
|
|
|
|
|
Production Monitoring |
|
| 196,000 |
|
| 82,000 |
|
ESI Investment Company |
|
| 0 |
|
| 0 |
|
Total |
|
| 196,000 |
|
| 82,000 |
|
Total assets |
|
|
|
|
|
|
|
Production Monitoring |
|
| 3,016,000 |
|
| 2,488,000 |
|
ESI Investment Company |
|
| 10,322,000 |
|
| 9,440,000 |
|
Total |
|
| 13,338,000 |
|
| 11,928,000 |
|
Income before income taxes |
|
|
|
|
|
|
|
Production Monitoring |
|
| 845,000 |
|
| 736,000 |
|
ESI Investment Company |
|
| 797,000 |
|
| 73,000 |
|
Total |
| $ | 1,642,000 |
| $ | 809,000 |
|
| 2015 | 2014 | |||||||
| Net revenues | ||||||||
| Production Monitoring | $ | 7,636 | $ | 7,041 | ||||
| Total | 7,636 | 7,041 | ||||||
| Sales in foreign countries | ||||||||
| Production Monitoring | 972 | 973 | ||||||
| Total | 972 | 973 | ||||||
| Interest income | ||||||||
| Production Monitoring | 0 | 0 | ||||||
| ESI Investment Company | 0 | 2 | ||||||
| Total | 0 | 2 | ||||||
| Depreciation and amortization expense | ||||||||
| Production Monitoring | 348 | 209 | ||||||
| Total | 348 | 209 | ||||||
| Interest expense | ||||||||
| Production Monitoring | 11 | 17 | ||||||
| Total | 11 | 17 | ||||||
| Capital purchases | ||||||||
| Production Monitoring | 70 | 46 | ||||||
| Total | 70 | 46 | ||||||
| Total assets | ||||||||
| Production Monitoring | 4,998 | 4,945 | ||||||
| ESI Investment Company | 8,423 | 8,819 | ||||||
| Total | 13,421 | 13,764 | ||||||
| Income before income taxes | ||||||||
| Production Monitoring | 295 | 389 | ||||||
| ESI Investment Company | 1,449 | 1,165 | ||||||
| Total | $ | 1,744 | $ | 1,554 | ||||
Note 13.15. Subsequent Events
On January 23, 2013, the Company declared a $.04 dividend on its common stock, payable on February 22, 2013 to shareholders of record as of February 8, 2013.
During the first quarter of 2013, the Company has sold 7,500 shares of Rudolph Technology stock for proceeds of $104,000 resulting in a gain on the sale of $103,000.
On March 18, 2013,9, 2016, the Board of Directors approved a stock option grant of 50,000 shares for the Company’s president. The options vest 20% immediately and 20% on each of the Company authorized and approvednext four anniversaries of the Electro-Sensors, Inc. 2013 Equity Incentive Plan (the “2013 Plan”), subject to approval bygrant. The options were priced at the stockholdersfair market value on or before March 18, 2014.the date of grant.
| 34 |
Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure.
| |
|
None.
| |
|
Item 9A. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
The person serving as our principal executive officer and principal financial officer evaluated the effectiveness of our 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”). Based on this evaluation, the person serving as the Company’s principal executive officer and principal financial officer has concluded that the Company’s disclosure controls and procedures were effective as of December 31, 20122015 to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms and (ii) accumulated and communicated to the Company’s management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
Management’s Report on Internal Control over Financial Reporting
Under Section 404 of the Sarbanes-Oxley Act of 2002, our management is required to assess the effectiveness of the Company’s internal control over financial reporting as of the end of each fiscal year and report, based on that assessment, whether the Company’s internal control over financial reporting is effective.
Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting. The Company’s internal control over financial reporting is designed to provide reasonable assurance as to the reliability of the Company’s financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
Internal control over financial reporting, no matter how well designed, has inherent limitations. Therefore, internal control over financial reporting determined to be effective can provide only reasonable assurance with respect to financial statement preparation and may not prevent or detect all misstatements. Moreover, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
The Company’s management has assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2012.2015. In making this assessment, the Company used the criteria established by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in “Internal“Internal Control-Integrated Framework.Framework (2013).” These criteria are in the areas of control environment, risk assessment, control activities, information and communication, and monitoring. The Company’s assessment included extensive documenting, evaluating and testing the design and operating effectiveness of its internal control over financial reporting. Based on this evaluation, the person serving as the Company’s principal executive officer and principal financial officer has concluded that the Company’s internal controls were effective as of December 31, 2012.2015.
Changes in Internal Control over Financial Reporting
There werehave been no changes in the Company’s internal control over financial reporting that occurred during the fourth quarter of 2012,fiscal year 2015, 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.
None.
Certain information required by Part III is incorporated by reference to the Company’s Definitive Proxy Statement pursuant to Regulation 14A (the “Proxy“2016 Proxy Statement”) for its Annual Meeting of Shareholders to be held April 24, 201320, 2016 (“Annual Meeting”).
Item 10. Directors, Executive Officers and Corporate Governance.
| |
|
The information required by Item 10401 under Regulation S-K, to the extent applicable to the Company’s directors, will be set forth under the caption “Election of Directors” in the 2016 Proxy Statement and is incorporated herein by referencereference. The information required with respect to the sections entitledCompany sole executive officer, who is also a director, will be set forth under the caption “Election of Directors,Directors.”
The information required by Item 405 regarding compliance with Section 16 (a) will be set forth under the caption “Section 16(a) Beneficial Ownership Reporting Compliance,” “Corporate Governance – Compliance” in the 2016 Proxy Statement, and is incorporated herein by reference.
Code of Ethics and Business Conduct”Conduct
The Company has adopted the Electro-Sensors Code of Ethics and “Corporate Governance – Audit Committee” that appear inBusiness Conduct (the “Code of Conduct”) applicable to all officers of the Company as well as certain other key accounting personnel. A copy of the Code of Conduct can be obtained free of charge upon written request directed to the Company’s Definitive Proxy Statement for its Annual Meeting. Information concerningSecretary at the Company’s executive officers is included in the sections referredoffices. Any amendment to, above.or waiver from, a provision of our Code of Conduct will be posted to our website.
| |
|
The information required by Item 11407 regarding corporate governance will be set forth under the caption “Corporate Governance” in the 2016 Proxy Statement and is incorporated herein by reference toreference.
Item 11. Executive Compensation.
The information called for by Item 402 under Regulation S-K, will be set forth under the section entitledcaption “Executive Compensation” that appears in the Company’s Definitive2016 Proxy Statement for its Annual Meeting.
|
The information required by Item 12 relating to security ownership of certain beneficial owners and management is incorporated herein by reference toreference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The information called for by Item 403 under Regulation S-K will be set forth under the section entitledcaptions “Security Ownership of Certain Beneficial Owners and Management” that appears in the Company’s Definitive2016 Proxy Statement, for its Annual Meeting.and is incorporated herein by reference.
The following table provides information as of December 31, 20122015 about the Company’s equity compensation plans.
Equity Compensation Plan Information
|
|
|
|
|
|
|
|
|
|
|
|
| Number of securities to |
| Weighted average |
| Number of securities remaining |
| |||
| ||||||||||
|
| (a) |
| (b) |
| (c) |
| |||
Equity compensation plans approved by security holders |
|
| 21,980 |
| $4.16 |
|
|
| 72,206(1) |
|
|
|
|
|
|
|
|
|
|
|
|
Equity compensation plans not approved by security holders |
|
| — |
| — |
|
|
| — |
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
| 21,980 |
| $4.16 |
|
|
| 72,206(1) |
|
Number of securities to be issued upon exercise of outstanding options, warrants and rights | Weighted average exercise price of outstanding options, warrants and rights | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) | |
| (a) | (b) | (c) | |
Equity compensation plans approved by security holders | 257,500 | $4.54 |
|
Equity compensation plans not approved by security holders | — | — | — |
| Total | 257,500 | $4.54 | 50,000(1) |
(1)Includes 250 shares Shares issuable pursuant to the 1997 Stock Option Plan2013 Equity Incentive Plan.
| 36 |
Item 13. Certain Relationships and 71,956 shares issuable pursuant to the 1996 Employee Stock Purchase Plan.Related Transactions, and Director Independence.
| |
|
The information required by Item 13 is incorporated herein by reference to404 under Regulation S-K will be set forth under the sections entitled “Corporate Governance – Independence,” “Election of Directors” andcaption “Transactions with Related Persons, Promoters and Certain Control Persons” that appear in the Company’s Definitive2016 Proxy Statement, for its Annual Meeting.and is incorporated herein by reference.
The information required by Item 14 relating to principalof Form 10-K and 9(e) of Schedule 14A will be set forth under the caption “Ratification of independent registered public accounting feesfirm services” in the Company’s 2016 Proxy Statement, and services is incorporated herein by reference to the section entitled “Disclosure of Fees Paid to Independent Auditors” that appears in the Company’s Definitive Proxy Statement for its Annual Meeting of Shareholders.reference.
| |
|
Item 15. Exhibits and Financial Statement Schedules.
Financial Statements.
Reference is made to the Index to Consolidated Financial Statements appearing on Page 1113 hereof.
Financial Statement Schedules.
The Financial Statement Schedules have been omitted either because they are not required or because the information has been included in the consolidated financial statements or the notes thereto included in this Annual Report.
Exhibits.
See “Exhibit Index” on the page following the signatures.
| 37 |
Pursuant to the requirements of Section 13 or 15(d) 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. (“Registrant”) | |||||
| /s/ DAVID L. KLENK | ||||
|
| David L. Klenk | |||
| |||||
President, Chief Executive Officer, and Chief Financial Officer | |||||
| Date: | March 14, 2016 | ||||
| By: | /s/ GLORIA M. GRUNDHOEFER | ||||
Gloria M. Grundhoefer Controller | |||||
| Date: | March 14, 2016 | ||||
Date:
March 22, 2013
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
(Power of Attorney)
Each person whose signature appears below constitutes and appoints BRADLEY D. SLYEDAVID L. KLENK as his true and lawful attorney-in-fact and agent, with full power of substitution and re-substitution, for him and in his name, place and stead, in any and all capacities, to sign any or all amendments to this Annual Report on Form 10-K and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agent, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all said attorney-in-fact and agents, or his substitute or substitutes, may lawfully do or cause to be done by virtue thereof.
| Signature | Title | Date | ||
|
|
| ||
/s/ |
| March | ||
/s/ Joseph A. Marino | Chairman and Director | March | ||
/s/ | Director | March | ||
/s/ Michael C. Zipoy | Director | March | ||
/s/ Jeffrey D. Peterson | Director | March | ||
| 38 |
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
EXHIBIT INDEX TO FORM 10-K
For the Fiscal Year Ended | Commission File No. |
| Exhibit Number | Exhibit Description | |
|
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| ^3.1 | ||
| Registrant’s Restated Articles of Incorporation, as amended—incorporated by reference to Exhibit 3.1 to the Company’s 1991 Form 10-KSB | |
^3.2 | Registrant’s Bylaws, as amended to date—incorporated by reference to Exhibit 3.2 to the Company’s 1997 Form 10-KSB | |
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^*10.1 | Electro-Sensors, Inc. | |
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^* |
| |
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| ^*10.5 |
| |
| 23.1 |
| |
24.1 | Power of Attorney (see Signature page) | |
31.1 | Certification of Chief Executive Officer and Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
32.1 | Certification of Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
99.1 | Letter to Shareholders dated March | |
99.2 | Investor Information | |
101 | The following financial information from Electro-Sensors, Inc.’s Annual Report on Form 10-K for the annual period ended December 31, |
^ | Incorporated by reference to a previously filed report or document—SEC File No. |
| * | Management contract or compensatory plan or arrangement |
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34
| 39 |