S

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

Form 10-Q

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended SeptemberJune 30, 20172020

Or

☐ TRANSITION REPORT PURSUANTPURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the transition period from ______ to ______

Commission File Number 000-09587

ELECTRO-SENSORS, INC.

(Exact name of registrant as specified in its charter)

Minnesota

41-0943459

(State or other jurisdiction of incorporation or organization)

(IRS Employer Identification No.)

6111 Blue Circle Drive

Minnetonka, Minnesota 55343-9108

(Address of principal executive offices)

(952) 930-0100

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:


Title of each classTrading Symbol(s)Name of each exchange on which registered
Common stockELSENasdaq Capital Market


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

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

1

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

Large accelerated filer  

☐

Accelerated filer ☐

Non-accelerated filer

☐ (Do not check if a smaller reporting company)☒

Smaller reporting company☒

Emerging growth company ☐

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

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


The number of shares outstanding of the registrant’s common stock, $0.10 par value, on November 10, 2017August 12, 2020 was 3,395,521.3,395,521.

 

12


ELECTRO-SENSORS, INC.

Form 10-Q

For the Periods Ended SeptemberJune 30, 20172020

TABLE OF CONTENTS

PART I – FINANCIAL INFORMATION34
Item 1. Financial Statements (unaudited):34
Condensed Balance Sheets – As of SeptemberJune 30, 20172020 and December 31, 2016201934
Condensed Statements of Comprehensive Income (Loss) – For the Three and Nine MonthsSix Months ended SeptemberJune 30, 20172020 and SeptemberJune 30, 2016201945
Condensed Statements of Changes in Stockholders' Equity – For the Three and Six Months ended June 30, 2020 and June 30, 20196
Condensed Statements of Cash Flows – For the NineSix Months ended SeptemberJune 30, 20172020 and SeptemberJune 30, 2016201957
Notes to Condensed Financial Statements68
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations1013
Item 3. Quantitative and Qualitative Disclosures About Market Risk1318
Item 4. Controls and Procedures1318
PART II – OTHER INFORMATION1319
Item 1. Legal Proceedings1319
Item 1A. Risk Factors1319
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds1319
Item 3. Defaults Upon Senior Securities1319
Item 4. Mine Safety Disclosures1319
Item 5. Other Information1319
Item 6. Exhibits1319
SIGNATURES1420

23


PART I. FINANCIAL INFORMATION
Item 1. Financial Statements

ELECTRO-SENSORS, INC.

CONDENSED BALANCE SHEETS

(in thousands except share and per share amounts)

 

 

September 30,
2017

 

 

December 31,
2016

 

 

 

(unaudited)

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

1,185

 

 

$

840

 

Treasury bills

 

 

7,420

 

 

 

7,427

 

Trade receivables, less allowance for doubtful accounts of $8


1,042

 

 

 

770

 

Inventories

 

 

1,528

 

 

 

1,515

 

Other current assets

 

 

177

 

 

 

174

 

Income tax receivable

 

 

0

 

 

 

66

 

 

 

 

 

 

 

 

 

 

Total current assets

 

 

11,352

 

 

 

10,792

 

 

 

 

 

 

 

 

 

 

Deferred income tax asset, net

 

 

254

 

 

 

198

 

 

 

 

 

 

 

 

 

 

Intangible assets, net

 

 

858

 

 

 

1,035

 

 

 

 

 

 

 

 

 

 

Property and equipment, net

 

 

992

 

 

 

1,033

 

 

 

 

 

 

 

 

 

 

Total assets

 

$

13,456

 

 

$

13,058

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current maturities of contingent earn-out

 

$

142

 

 

$

0

 

Accounts payable

 

 

133

 

 

 

239

 

Accrued expenses

 

 

439

 

 

 

304

 

Accrued income tax

 

 

73

 

 

 

0

 

 

 

 

 

 

 

 

 

 

Total current liabilities

 

 

787

 

 

 

543

 

 

 

 

 

 

 

 

 

 

Long-term liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Contingent earn-out, net of current maturities

 

 

0

 

 

 

195

 

 

 

 

 

 

 

 

 

 

Total long-term liabilities

 

 

0

 

 

 

195

 

 

 

 

 

 

 

 

 

 

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

 

 

2,001

 

 

 

1,953

 

Retained earnings

 

 

10,348

 

 

 

10,057

 

Accumulated other comprehensive loss (unrealized loss on available-for-sale securities, net of income tax benefit)

 

 

(19

)

 

 

(29

) 

 

 

 

 

 

 

 

 

 

Total stockholders’ equity

 

 

12,669

 

 

 

12,320

 

 

 

 

 

 

 

 

 

 

Total liabilities and stockholders’ equity

 

$

13,456

 

 

$

13,058

 

 

 

June 30,
2020

 

 

December 31,
2019

 

 

 

(unaudited)

 

 

 

 

ASSETS  

 

 

 

 

 

 

Current assets 

 

 

 

 

 

 

 

 

Cash and cash equivalents 

 

$

2,262

 

 

$

8,785

 

Investments

 

 

6,790

 

 

 

45

 

Trade receivables, less allowance for doubtful accounts of $11


1,054

 

 

 

1,036

 

Inventories

 

 

1,735

 

 

 

1,695

 

Other current assets

 

 

163

 

 

 

159

 

Income tax receivable

11


0

Total current assets

 

 

12,015

 

 

 

11,720

 

Deferred income tax asset, net

 

 

221

 

 

 

203

 

Intangible assets, net

 

 

359

 

 

 

489

 

Property and equipment, net

 

 

1,024

 

 

 

1,063

 

Total assets

 

$

13,619

 

 

$

13,475

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

Current maturities of financing lease

 

$

6

 

 

$

5

 

Accounts payable

 

 

144

 

 

 

129

 

Accrued expenses

 

 

632

 

 

 

431

 

Total current liabilities

 

 

782

 

 

 

565

 










Long-term liabilities 







    Financing lease, net of current maturities

15


19









Total long-term liabilities

15


19









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

 

 

2,034

 

 

 

2,030

 

Retained earnings

 

 

10,449

 

 

 

10,522

 










Total stockholders’ equity

 

 

12,822

 

 

 

12,891

 










Total liabilities and stockholders’ equity 

 

$

13,619

 

 

$

13,475

 

See accompanying notes to unaudited condensed financial statements

34

ELECTRO-SENSORS, INC.

CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(in thousands except share and per share amounts)

(unaudited)

  Three Months Ended
September 30,		  Nine Months Ended
September 30,		 
  2017  2016  2017  2016 
                 
Net sales $2,054
  $1,837
  $6,005
  $5,562
 
Cost of goods sold  920
   835
   2,648
   2,452
 
                 
Gross profit  1,134
   1,002
   3,357
   3,110 
                 
Operating expenses                
Selling and marketing  342
   387
   1,127
   1,262
 
General and administrative  402
   386
   1,225
   1,199
 
Research and development  168
   200
   590
   561
 
                 
Total operating expenses  912
   973
   2,942
   3,022 
                 
Operating income  222
   29
   415
   88
 
                 
Non-operating income (expense)                
Interest expense  0   0
  0  (1)
Interest income  9
   3
   22
   18
 
Other income  3
   3
   8
   12
 
                 
Total non-operating income, net  12
   6
   30
   29
 
                 
Income before income taxes  234
   35
   445
   117
 
                 
Provision for income taxes  82
   12
   154
   43
 
                 
Net income $152
  $23
  $291
  $74
 
                 
Other comprehensive income                
Change in unrealized value of available-for-sale securities, net of income tax $6
  $2
  $10
  $6
 
Other comprehensive income  6
   2

  10
   6

                 
Net comprehensive income $158
  $25
  $301
  $80
 
                 
Net income per share data:                
                 
Basic                
Net income per share $0.04  $0.01
  $0.09  $0.02
 
Weighted average shares  3,395,521   3,395,521   3,395,521   3,395,521
 
                 
Diluted                
Net income per share $0.04  $0.01  $0.09  $0.02
 
Weighted average shares  3,400,988   3,396,776
   3,396,899   3,396,102
 
  Three Months Ended
June 30,		 

Six Months Ended

June 30,


  2020  2019 
2020

2019
  
      







Net sales $2,092  $2,260

$4,015

$4,268
Cost of goods sold  994  
1,025 

1,918


1,966
          







Gross profit  
1,098  
1,235 

2,097


2,302
          







Operating expenses        







Selling and marketing  443   516 

901


1,001
General and administrative  440   418 

905


890
Research and development 
196  
213 

413


409
          







Total operating expenses  
1,079  
1,147 

2,219


2,300
          







Operating income (loss)  19  88

(122)

2
          







Non-operating income (expense)        







Loss on investment

0

0


(3)

0
Interest expense

(1)

(1
)

(1)

(1)
Interest income  1   41 

33


85
Other income 
0  
3 

2


5
          







Total non-operating income, net 
0  
43 

31


89
          







Income (loss) before income tax expense (benefit)  19  131

(91)

91
          







Provision for (benefit of) income tax  1 
28

(18)

19
          







Net income (loss) $18 $
103
$(73)
$72
          







Other comprehensive income        







Change in unrealized value of available-for-sale securities, net of income tax$0 $7
$0

$8
Other comprehensive income  0   7

0


8
          







Net comprehensive income (loss) $
18 $110
$(73)
$80
          







Net income (loss) per share data:        







          







Basic        







Net income (loss) per share $0.01 $0.03
$(0.02)
$
0.02
Weighted average shares  3,395,521   3,395,521 

3,395,521


3,395,521
          







Diluted        







Net income (loss) per share $
0.01 $
0.03
$(0.02)
$0.02
Weighted average shares  3,395,521   3,395,521 

3,395,521


3,395,521

See accompanying notes to unaudited condensed financial statements

45


ELECTRO-SENSORS, INC.

CONDENSED STATEMENTS OF CASH FLOWSCHANGES IN STOCKHOLDERS’ EQUITY

(in thousands)

(unaudited)

 

 

Nine Months Ended
September 30,

 

 

 

2017

 

 

2016

 

Cash flows from (used in) operating activities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

291

  

 

$

74

  

 

 

 

 

 

 

 

 

 

Adjustments to reconcile net income to net cash from operating activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

233

 

 

 

235

 

Deferred income taxes

 

 

(62

)

 

 

(26

) 

Stock-based compensation expense

 

 

48

 

 

 

66

 

Change in contingent earn-out fair value

 

 

(53

)

 

 

(72

) 

Other

 

 

(21

)

 

 

(18

)

Change in:

 

 

 

 

 

 

 

 

Trade receivables

 

 

(272

)

 

 

(149

)

Inventories

 

 

(13

)

 

 

47

 

Other current assets

 

 

(3

)

 

 

(17

)

Accounts payable

 

 

(106

)

 

 

21

 

Accrued expenses

 

 

135

 

 

 

11

 

Income tax receivable/accrued income taxes

 

 

139

  

 

 

(21

)

 

 

 

 

 

 

 

 

 

Net cash from operating activities

 

 

316

 

 

151

 

 

 

 

 

 

 

 

 

 

Cash flows from (used in) investing activities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Purchases of treasury bills

 

 

(5,956

)

 

 

(7,425

)

Proceeds from the maturity of treasury bills

 

 

6,000

 

 

 

7,889

 

Purchase of property and equipment

 

 

(15

)

 

 

(2

) 

 

 

 

 

 

 

 

 

 

Net cash from investing activities

 

 

29

 

 

 

462

 

 

 

 

 

 

 

 

 

 

Cash flows used in financing activities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Payments on long-term debt

 

 

0

 

 

(390

)

 

 

 

 

 

 

 

 

 

Net cash used in financing activities

 

 

0

 

 

(390

)

 

 

 

 

 

 

 

 

 

Net increase in cash and cash equivalents

 

 

345

 

 

223

 

 

 

 

 

 

 

 

 

Cash and cash equivalents, beginning

 

 

840

 

 

 

569

 

Cash and cash equivalents, ending

 

$

1,185

 

 

$

792

 

 

 

 

 

 

 

 

 

 

Supplemental cash flow information

 

 

 

 

 

 

 

 

Cash paid for income taxes

 

$

125

 

 

$

90

 

Cash paid for interest

 

$

0

 

 

$

10

 

See accompanying notes to unaudited financial statements

5

ELECTRO-SENSORS, INC.

NOTES TO FINANCIAL STATEMENTS

FOR THE PERIOD ENDED SEPTEMBER 30, 2017

(in thousands except share and per share amounts)















For the three months ended June 30













 

Common Stock Issued

 

 

Additional
Paid-in
Capital

 

 

Retained
Earnings

 

 

Accumulated
Other
Comprehensive
Income

 

 

Total
Stockholders’

Equity

 

   

Shares

 

 

Amount

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2020 (unaudited) 3,395,521

$339

$2,033

$10,431

$0

$12,803

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation expense







1










1
Net income











18





18

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance June 30, 2020 (unaudited)3,395,521

$339

$2,034

$10,449

$0

$12,822

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2019 (unaudited)  3,395,521

$339

$2,022

$10,304

$33

$12,698

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income















7


7
Stock-based compensation expense







2










2
Net income  











103





103

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance June 30, 2019 (unaudited)3,395,521

$339

$2,024

$10,407

$40

$12,810

For the six months ended June 30













 

Common Stock Issued

 

 

Additional
Paid-in
Capital

 

 

Retained
Earnings

 

 

Accumulated
Other
Comprehensive
Income

 

 

Total
Stockholders’

Equity

 

   

Shares

 

 

Amount

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2019 3,395,521

$339

$2,030

$10,522

$0

$12,891

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation expense 







4










4
Net loss











(73)





(73)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance June 30, 2020 (unaudited)3,395,521

$339

$2,034

$10,449

$0

$12,822

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2018  3,395,521

$339

$2,019

$10,335

$32

$12,725

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income















8


8
Stock-based compensation expense







5










5
Net income











72






72

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance June 30, 2019 (unaudited)3,395,521

$339

$2,024

$10,407

$40

$12,810

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


 

See accompanying notes to unaudited condensed financial statements
6

ELECTRO-SENSORS, INC.

CONDENSED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

 

 

Six Months Ended
June 30,

 

 

 

2020

 

2019

 

Cash flows from (used in) operating activities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

(73

)

 

$

72


 

 

 

 

 

 

 

 

 

Adjustments to reconcile net income (loss) to net cash from (used in) operating activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

181

 

 

 

154

 

Deferred income taxes

 

 

(18

)

 

 

(13

)

Stock-based compensation expense

 

 

4

 

 

 

5

 

Interest accrued on treasury bills

 

 

0

 

 

(84

)
Loss on investments

3


0

Change in:

 

 

 

 

 

 

 

 

Trade receivables

 

 

(18

)

 

 

(399

)

Inventories

 

 

(40

)

 

 

(94

)

Other current assets

 

 

(4

)

 

 

0

Accounts payable

 

 

15

 

 

125

Accrued expenses

 

 

201

  

 

 

150

 

Income tax receivable/payable

 

 

(11

)

 

 

32

 

 

 

 

 

 

 

 

 

Net cash from (used in) operating activities

 

 

240

 

 

(52

)

 

 

 

 

 

 

 

 

 

Cash flows from (used in) investing activities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Purchases of treasury bills

 

 

(6,748

)

 

 

(6,916

)

Proceeds from the maturity of treasury bills

 

 

0

 

 

 

7,000

 

Purchase of property and equipment

 

 

(12

)

 

 

(61

) 

 

 

 

 

 

 

 

 

 

Net cash from (used in) investing activities

 

 

(6,760

)

 

 

23

 

 

 

 

 

 

 

 

 

 

Cash flows used in financing activities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  

 

Payments on financing lease

(3)

(3)
Proceeds from loans

645


0
Repayment of loan principal

(645)

0

 

 

 

 

 

 

 

 

 

Net cash used in financing activities

 

 

(3

)

 

 

(3

)

 

 

 

 

 

 

 

 

Net decrease in cash and cash equivalents

 

 

(6,523

)

 

 

(32

)

 

 

 

 

 

 

 

 

 

Cash and cash equivalents, beginning

 

 

8,785

 

 

 

1,057

 

Cash and cash equivalents, ending

 

$

2,262

 

 

$

1,025

 


 

 

 

 

 

 

 

 

Supplemental cash flow information

 

 

 

 

 

 

 

 

Cash paid for income taxes

 

$

11

 

 

$

1

 

Cash paid for interest
$1

$1

 

See accompanying notes to unaudited condensed financial statements

7

ELECTRO-SENSORS, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

FOR THE PERIOD ENDED JUNE 30, 2020

(in thousands except share and per share amounts)

(unaudited)

Note 1.1. Basis of Presentation

The accompanying unaudited financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions and regulations of the Securities and Exchange Commission to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements.

This report should be read together with the Company’s Annual Report on Form 10-K for the year ended December 31, 2016,2019, including the audited financial statements and footnotes therein.

Management believes that the unaudited financial statements include all adjustments, consisting of normal recurring accruals, necessary to fairly state the financial position and results of operations as of SeptemberJune 30, 20172020 and for the three and nine-monthsix-month periods then ended June 30, 2020 and 2019,  in accordance with accounting principles generally accepted in the United States of America. The results of interim periods may not be indicative of results to be expected for the year.

Nature of Business

Electro-Sensors, Inc. manufactures and markets a complete line of monitoring and control systems for a variety of industrial machinery. The Company uses leading-edge technology to continuously improve its products, and make them easier to use, with the ultimate goal of manufacturing the industry-preferred product for every market served. The Company sells these products through an internal sales staff, manufacturers’ representatives, and distributors to a wide variety of industries that use the products in a variety of applications to monitor process machinery operations. The Company markets its products to customers located throughout the United States, Canada, Latin America, Europe, and Asia.

Revenue Recognition

At contract inception, the Company assesses the goods and services promised to a customer and identifies a performance obligation for each distinct promised good or service. We also determine the transaction price for each performance obligation at contract inception. Our contracts, generally in the form of a purchase order, specify the product or service that is promised to the customer. The typical contract life is less than one month and contains a single performance obligation, to provide conforming goods or services to the customer. On some contracts, we have a second performance obligation, which typically is the initialization of the HazardPROTM product. For contracts that have multiple performance obligations, we allocate the transaction price to each performance obligation using the relative stand-alone selling price. We generally determine stand-alone selling prices based on the observable stand-alone prices charged to customers. We recognize product revenue at the point in time when control of the product is transferred to the customer, which typically occurs when we ship the products. We recognize service revenue at the point in time when we have provided the service. 


Fair Value Measurements

The carrying value of trade receivables, accounts payable, and other financial working capital items approximates fair value at SeptemberJune 30, 20172020 and December 31, 2016,2019, due to the short maturity nature of these instruments.


8

ELECTRO-SENSORS, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

FOR THE PERIOD ENDED JUNE 30, 2020

(in thousands except share and per share amounts)

(unaudited)

Intangibles


Intangible assets are comprised of the HazardPRO technology and a technology license.  The Company amortizes the cost of these intangible assets on a straight-line method over their estimated useful lives.


Stock-Based Compensation

The Company records compensation expense for stock options based on the estimated fair value of the options on the date of grant using the Black-Scholes-Merton (“BSM”) option pricing model. The Company uses historical data, among other factors, to estimate the expected price volatility, the expected option life, and the expected forfeiture rate. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant for the estimated life of the option.


As of June 30, 2020, there was approximately $11 of unrecognized compensation expense related to unvested stock options. The Company expects to recognize this expense over the next three years.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Significant estimates, including the underlying assumptions, consist of economic lives of long-lived assets, realizability of trade receivables, valuation of deferred tax assets/liabilities, inventory, investments, contingent earn-out, and stock compensation expense.expense, and the potential estimated impact on operations due to the COVID-19 pandemic as it relates to disruptions to our supply chain and customer demand. It is at least reasonably possible that these estimates may change in the near term.term.

Net Income (Loss) per Common Share


Basic and diluted net income (loss) per common share is determined by dividing net income (loss) attributable to common stockholders by the weighted-average common shares outstanding during the period. For the three and six month periods ended June 30, 2020 and 2019, 332,500 weighted average common shares for underlying stock options have been excluded from the calculation because their effect would be anti-dilutive. Therefore, the weighted-average shares outstanding used to calculate both basic and diluted income (loss) per common shares are the same.


69


ELECTRO-SENSORS, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

FOR THE PERIOD ENDED SEPTEMBERJUNE 30, 20172020

(in thousands except share and per share amounts)

(unaudited)

Note 2. Investments

The Company has investments in commercial paper, Treasury Bills, and common equity securities of a private U.S. company. The commercial paper investment is in U.S. debt with ratings of A-1+, P-1, and F1+. The Treasury Bills have remaining terms ranging from one month to seven months at June 30, 2020. 


The Company classifies its investments in commercial paper and Treasury Bills as available-for-sale, accounted for at fair value with unrealized gains and losses recognized in accumulated other comprehensive gain on the balance sheet.

The cost and estimated fair value of the Company’s investments are as follows:

 

 

Cost

 

 

Gross
unrealized
gain

 

 

Gross
unrealized
loss

 

 

Fair
value

 

June 30, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial Paper

 

$

765

 

 

$

0

 

 

$

0

 

 

$

765

 

Treasury Bills

 

 

7,748

 

 

 

0

 

 

 

0

 

 

 

7,748

 

Equity Securities

 

 

54

 

 

 

0

 

 

 

(12

)

 

 

42

 

 

 

 

8,567

 

 

 

0

 

 

 

(12

)

 

 

8,555

 

Less Cash Equivalents

 

 

1,765

 

 

 

0

 

 

 

0

 

 

 

1,765

 

Total Investments, June 30, 2020

 

$

6,802

 

 

$

0

 

 

$

(12

)

 

$

6,790

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial Paper

 

$

797

 

 

$

0

 

 

$

0

 

 

$

797

 

Treasury Bills

 

 

7,734

 

 

 

0

 

 

 

0

 

 

 

7,734

 

Equity Securities

 

 

54

 

 

 

0

 

 

 

(9

)

 

 

45

 

 

 

 

8,585

 

 

 

0

 

 

 

(9

)

 

 

8,576

 

Less Cash Equivalents

 

 

8,531

 

 

 

0

 

 

 

0

 

 

 

8,531

 

Total Investments, December 31, 2019

 

$

54

 

 

$

0

 

 

$

(9

)

 

$

45

 

10

 

 

Cost

 

 

Gross
unrealized
gain

 

 

Gross
unrealized
loss

 

 

Fair
value

 

September 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial Paper

 

$

693

 

 

$

0

 

 

$

0

 

 

$

693

 

Treasury Bills

 

 

7,396

 

 

 

24

 

 

 

0

 

 

 

7,420

 

Equity Securities

 

 

54

 

 

 

0

 

 

 

(54

)

 

 

0

 

 

 

 

8,143

 

 

 

24

 

 

 

(54

)

 

 

8,113

 

Less Cash Equivalents

 

 

693

 

 

 

0

 

 

 

0

 

 

 

693

 

Total Investments, September 30, 2017

 

$

7,450

 

 

$

24

 

 

$

(54

)

 

$

7,420

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial Paper

 

$

348

 

 

$

0

 

 

$

0

 

 

$

348

 

Treasury Bills

 

 

7,419

 

 

 

8

 

 

 

0

 

 

 

7,427

 

Equity Securities

 

 

54

 

 

 

0

 

 

 

(54

)

 

 

0

 

 

 

 

7,821

 

 

 

8

 

 

 

(54

)

 

 

7,775

 

Less Cash Equivalents

 

 

348

 

 

 

0

 

 

 

0

 

 

 

348

 

Total Investments, December 31, 2016

 

$

7,473

 

 

$

8

 

 

$

(54

)

 

$

7,427

 

7

ELECTRO-SENSORS, INC.

ELECTRO-SENSORS, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

FOR THE PERIOD ENDED SEPTEMBERJUNE 30,, 2017 2020

(in thousands except share and per share amounts)

(unaudited)

Note 3. Fair Value Measurements

The following tabletable provides informationinformation on those assets and liabilities measured at fair value on a recurring basis.

June 30, 2020

September 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

Carrying amount

 

 

 

 Fair Value Measurement Using 

 

 

Carrying amount

 

 

 

 

 Fair Value Measurement Using 

 

 

in balance sheet

 

Fair Value

 

Level 1

 

Level 2

 

Level 3

 

 

in balance sheet

 

Fair Value

 

 

Level 1

 

Level 2

 

 

Level 3

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial paper

 

$

693

 

$

693

 

$

693

 

$

0

 

$

0

 

 

$

765

 

$

765

 

 

$

765

 

$

0

 

 

$

0

 

Treasury bills

 

7,420

 

7,420

 

7,420

 

0

 

0

 



1,000

1,000


1,000

0


0

Treasury bills

 

 

6,748

 

 

6,748

 

 

 

6,748

 

 

0

 

 

 

0

 

Equity Securities

 

0

 

0

 

0

 

0

 

0

 

 

 

42

 

 

42

 

 

 

0

 

 

0

 

 

 

42

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

Contingent earn-out

 

142

 

142

 

0

 

0

 

142

 

December 31, 20162019

 

 

Carrying amount

 

 

 

 

 

 Fair Value Measurement Using 

 

 

 

in balance sheet

 

 

Fair Value

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial paper

 

$

348

 

 

$

348

 

 

$

348

 

 

$

0

 

 

$

0

 

Treasury bills

 

 

7,427

 

 

 

7,427

 

 

 

7,427

 

 

 

0

 

 

 

0

 

Equity Securities

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Contingent earn-out

 

 

195

 

 

 

195

 

 

 

0

 

 

 

0

 

 

 

195

  


 

Carrying amount

 

 

 

 

 

 Fair Value Measurement Using 

 


 

in balance sheet

 

 

Fair Value

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Assets:


 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial paper


$

797

 

 

$

797

 

 

$

797

 

 

$

0

 

 

$

0

 

   Treasury bills



7,734

 

 

 

7,734

 

 

 

7,734

 

 

 

0

 

 

 

0

 

Equity Securities



45

 

 

 

45

 

 

 

0

 

 

 

0

 

 

 

45

 

The fair value of the commercial paper and treasury bills is based on quoted market prices in an active market. There is not a significantno public market for the available-for-sale equity security owned by the Company. The Company has determined the fair value for this equity security based on financial and other factors that are considered level 3 inputs in the fair value hierarchy.


The contingent earn-out relates to the 2014 acquisition of the HazardPROTM product line. Management estimated the probability of meeting 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 liabilitiesassets at fair value value on a recurringrecurring basis in the 2017 and 2016 three and nine-month periods is summarizedare as follows:


  Three Months

Ended September 30

 

Nine Months

 Ended September 30

 
Six Months Ended June 30,
  2017   2016 2017  2016 
2020

2019

     

 
Beginning Balance$142 $383 $195  $455 
$45

$45 

Change in Fair Value

 0  0  (53)  (72)

(3)
 0
Ending Balance$142 $383 $142  $383 
$42
$45 


Both the 2017 and 2016 decreases in the contingent liability reflect the Company's expectation of lower future contingent payments due to lower anticipated sales during the remaining term of the earn-out period.

811


ELECTRO-SENSORS, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

FOR THE PERIOD ENDED SEPTEMBERJUNE 30,, 2017 2020

(in thousands except share and per share amounts)

(unaudited)

Note 4. Stock-Based CompensationInventories

During


Inventories used in the first quarterdetermination of 2016, the Company granted its Chief Executive Officer options to purchase 50,000 sharescost of common stock. The options were priced at 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.

The assumptions made in estimating the fair value of the options on the grant date based upon the BSM option-pricing model for the nine months ended September 30, 2016goods sold are as follows:

follows: 

Dividend Yield

0.00

%

Expected Volatility

36.17

%

Risk Free Interest Rate

1.31

%

Expected Life

6 Years


As of September 30, 2017, there was approximately $20 of unrecognized compensation expense related to unvested stock options. The Company expects to recognize this expense over the next three years.


June 30, 

2020



December 31, 

2019






Raw Materials$962

$973
Work In Process
410


383

Finished Goods


383


359
Reserve for Obsolescence 
(20)

(20)
Total Inventories$1,735

$1,695

9


12

Item 2.2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

FORWARD-LOOKING STATEMENTS

This Form 10-Q contains forward-looking statements within the meaning of Section 27A27A of the Securities Act of 1933 and Section 21E21E of the Securities Exchange Act of 1934,, including statements regarding our expectations, beliefs, intentions or strategies regarding the future. Forward-looking statements include, but are not limited to, statements relating toabout the success of our marketing efforts orefforts; our efforts to accelerate growth;future growth or income; our business development activities; our efforts to maintain or reduce production costs; our expected use of cash on hand; our cash requirements; and the sufficiency of our cash flows. Any statement that is not based solely upon historical facts, including our strategies for the future and the outcome of events that have not yet occurred, is a forward-looking statement.

All forward-looking statements in this document are based on information available to us as of the date of this Form 10-Q, and we assume no obligation to update any of these forward-looking statements, other than as required by law. Our actual results could differ materially from those projected or indicated in these forward-looking statements. These forward-looking statements are subject to certain risks and uncertainties that could cause future results to differ materially from our recent results or those projected in the forward-looking statements, including the accuracy of management’s assumptions with respect to industry trends, fluctuations in industry conditions, the accuracy of management’s assumptions regarding expenses and our cash needs and those listed under the heading “Cautionary Statements” under “Item 1—1—Business,” in our Annual Report on Form 10-K for the year ended December 31, 2016.2019, as any effect that the COVID-19 pandemic may have on the efficiency of our business operations, our customer base and he domestic or worldwide economy.

CRITICAL ACCOUNTING ESTIMATES


The preparation of our financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make decisions based upon estimates, assumptions, and factors it considers relevant to the circumstances. These decisions include the selection of applicable accounting principles and the use of judgment in their application and affect reported amounts and disclosures. Changes in economic conditions or other business circumstances may affect the outcomes of management’s estimates and assumptions. An in-depth description of our accounting estimates can be found in the interim financial statements included in this report and in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016.2019. We have not developed new estimates subsequent to those discussed in our Annual Report.


13

SELECTED FINANCIAL INFORMATION

 

The following table contains selected financial information, for the periods indicated, from our statementsStatements of comprehensive incomeComprehensive Income (Loss) expressed as a percentage of net sales.

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Net sales

 

 

100.0

%

 

 

100.0

%

 

 

100.0

%

 

 

100.0

%

Cost of goods sold

 

 

44.8

 

 

 

45.5

 

 

 

44.1

 

 

 

44.1

 

Gross profit

 

 

55.2

 

 

 

54.5

 

 

 

55.9

 

 

 

55.9

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

     Selling and marketing

 

 

16.7

 

 

 

21.1

 

 

 

18.8

 

 

 

22.7

 

     General and administrative

 

 

19.5

 

 

 

21.0

 

 

 

20.4

 

 

 

21.5

 

     Research and development

 

 

8.2

 

 

 

10.9

 

 

 

9.8

 

 

 

10.1

 

Total operating expenses

 

 

44.4

 

 

 

53.0

 

 

 

49.0

 

 

 

54.3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

 

10.8

 

 

 

1.5

 

 

 

6.9


 

 

1.6


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-operating income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

     Interest income

 

 

0.4

 

 

 

0.2

 

 

 

0.4

 

 

 

0.3

 

     Other income

 

 

0.2

 

 

 

0.2

 

 

 

0.1

 

 

 

0.2

 

Total non-operating income, net

 

 

0.6

 

 

 

0.4

 

 

 

0.5

 

 

 

0.5

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income before income taxes

 

 

11.4

 

 

 

1.9

 

 

 

7.4


 

 

2.1


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Provision for income taxes

 

 

4.0

 

 

 

0.7

 

 

 

2.6


 

 

0.8


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

7.4

% 

 

 

1.2

%

 

 

4.8

%

 

 

1.3

%

 

 

Three Months Ended June 30,



Six Months Ended June 30,

 

 

2020


 

 

2019

 




2020



2019

Net sales

 

 

100.0


%

 

 

100.0

 

%

100.0
%

100.0
%

Cost of goods sold

 

 

47.5


 

 

 

45.4

 




47.8



46.1

Gross profit

 

 

52.5


 

 

 

54.6

 




52.2



53.9

 

 

 

 


 

 

 

 

 












Operating expenses

 

 

 


 

 

 

 

 












     Selling and marketing

 

 

21.2


 

 

 

22.8

 




22.4



23.4

     General and administrative

 

 

21.0


 

 

 

18.5

 




22.5



20.9

     Research and development

 

 

9.4


 

 

 

9.4

 




10.3



9.6

Total operating expenses

 

 

51.6


 

 

 

50.7

 




55.2



53.9

 

 

 

 


 

 

 

 

 












Operating income (loss)

 

 

0.9


 

 

3.9




(3.0)


0.0

 

 

 

 


 

 

 

 

 












Non-operating income (expense)

 

 

 


 

 

 

 

 












     Interest income

 

 

0.0


 

 

 

1.8

 




0.8



2.0

     Other income

 

 

0.0


 

 


0.1

 




0.0



0.1

Total non-operating income, net

 

 

0.0


 

 

 

1.9

 




0.8



2.1

 

 

 

 


 

 

 

 

 












Income (loss) before income tax expense (benefit)

 

 

0.9


 

 

5.8




(2.2)


2.1

 

 

 

 


 

 

 

 

 












Provision for (benefit of) income taxes

 

 

0.0

  

 


1.2




(0.4)


0.4

 

 

 

 


 

 

 

 

 












Net income (loss)

 

 

0.9

%

 

 

4.6

% 

(1.8)%

1.7
%

10

The following paragraphs discuss the Company’sperformance for thethree and ninesix months ended SeptemberJune 30, 20172020 and 20162019.

RESULTS OF OPERATIONS (in thousands)

Net Sales

Net sales for the three-monththree-month period ended SeptemberJune 30, 20172020 were $2,054$2,092, a decrease of $168, or 7.4%, an increasefrom $2,260 during the comparable period in 2019.  Net sales for the six months ended June 30, 2020 were $4,015, a decrease of $217253, or 11.85.9%, over the same period in 20162019. Net salesThe second calendar quarter of 2020 represents the first full quarter impacted by the COVID-19 pandemic, and we believe much of the revenue decrease during the period relates to reduced spending by our customers due to the impact of the pandemic on their business.  While customers continued to place orders for smaller projects and maintenance items; many larger capital projects have been paused due to continued uncertainty surrounding the pandemic and its related effects.

Gross Profit

Gross profit for the nine-month period ended September 30, 2017 were $6,005, an increasesecond quarter of $443,2020 decreased $137, or 8.0%11.1%, over the same period in 20162019. GrowthGross profit for the three-monthsix months endedJune 30, 2020 decreased $205, or 8.9%, over the same period in 2019. Gross margin decreased in the second quarter of 2020 to 52.5% from 54.6% during the same period in 2019. Gross margin for the six months ended June 30, 2020 decreased to 52.2% from 53.9% over the same period in 2019.The decrease in gross margin percentage for both periods was primarily due to ana change in product mix and higher material costs largely driven by the increase in government tariff charges that began to be assessed during the average sizesecond half of large orders, which we define as orders over five thousand dollars.  The increase drove growth in both2019.  

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Operating Expenses

Total operating expenses decreased $68, or 5.9%, for the HazardPRO Wireless Monitoring system and legacy product families.  Furthermore, international sales were a significant contributor to our growth and were up 34% in the 2017 nine-month period assecond quarter of 2020 compared to the same period in 2016.  In addition, the Company benefitted from significant growth in sales into the bulk material handling and OEM markets as compared to the same three-month period in 2016.

Gross Profit

Gross profit for the three months ended September 30, 20172019, but increased $132, or 13.2%, over the same period in 2016. Gross profit for the nine months ended September 30, 2017 increased $247, or 7.9%, over the same period in 2016.  Both the three and nine-month gross profit increases were due to the higher level of sales.  Gross margin, as a percentage of net sales increasedto 55.2% in the 2017 three-month period51.6% from 54.5% in the prior year, but remained constant at 55.9% in the 2017 and 2016 nine-month periods. The slight increase in gross margin percentage during the 2017 third quarter was due to a change in product mix.

Operating Expenses

50.7%. Total operating expenses decreased $6181, or 6.33.5%, for the threesix months ended SeptemberJune 30, 20172020 compared to the same period in 2016 and decreased2019, but increased as a percentage of net sales to 44.455.2% from 53.053.9%. Total operating expenses decreased $80, or 2.6%, for the nine months ended September 30, 2017 compared to the same period in 2016 and decreased as a percentage of sales to 49.0% from 54.3%.  The decreases in operating expenses as a percentage of sales were primarily due to increased revenues.

●

Selling and marketing expenses in the 2017 thirdsecond quarter of 2020 decreased $45, $73, or 11.6%14.1%, from the 2016 third quarter, decreasingsame period in 2019 and decreased as a percentage of net sales to 16.7%21.2% from 21.1%22.8%. Selling and marketing expenses in the six months ended June 30, 2020 decreased $135100, or 10.710.0%, from the same period in the 2017 nine-month period over the prior year period, decreasing2019 and decreased as a percentage of net sales to 18.822.4% from 22.723.4%. The decrease for both the three and nine-month periods resulted primarily from the Company using fewer outside sales representatives in 2017.  The decrease in the three-month period was partially offset by an increasesecond quarter resulted primarily from lower outside sales representative compensation due to changes in commission plans and decreased net sales demo expenses.  Theand a decrease in travel expenses due to the COVID-19 pandemic.  The decrease in the nine-month period also reflectedsix months resulted primarily from lower outside sales representative compensation due to changes in commission plans, decreased net sales, and fewer manufacturer representatives and decreases in travel expenses; partially offset by an increase in wages and benefits.trade show expenses due to cancelled shows both due to the COVID-19 pandemic.

●

General and administrative expenses increased $16, $22, or 4.1%5.3%, for the 2017 three-month periodsecond quarter of 2020 compared to the same period in 2016 but decreased2019 and increased as a percentage of net sales to 19.5%21.0% from 21.0%18.5%. For the 2017 nine-month period, generalGeneral and administrative expenses increased $2615, or 2.21.7%, for the six months ended June 30, 2020 compared to the 2016same period in 2019and decreasedincreased as a percentage of net sales to 20.422.5% from 21.520.9%. The increase in the second quarter was due primarily to amortization of the communication technology that began in October 2019 and higher legal fees. The increase for the three and nine-month periodssix months was due primarily to a smaller reversal of the HazardPRO contingent earn-out liability in 2017.  The Company noted amortization and legal fees, partially offset by decreased the accrual for the HazardPRO contingent payment by $53 in the 2017 nine-month periodexpenses related to computer supplies, software, and by $72 in the 2016 nine-month period.training. 

●

Research and development expenses decreased $32, $17, or 16.0%8.0%, in the 2017 three-month periodsecond quarter of 2020 from the same period in 20162019 and was unchanged as a percentage of net sales at 9.4%. Research and development expenses increased $4, or 1.0%, in the six months endedJune 30, 2020 from the same period in 2019and decreasedincreased as a percentage of net sales to 8.210.3% from 10.99.6%. For the 2017 nine-month period, research and development expenses increased $29, or 5.2%, over the 2016 period, but decreased as a percentage of net sales to 9.8% from 10.1%. The decrease for the three-month periodquarter was due to a decrease inlower contract engineering lab testing and certification expenses for our HazardPROcosts related to product line.  enhancements.  The increase for the nine-month periodsix months was the result of increaseddue to third party product certification costs, partially offset by lower 2020 contract engineering feescosts related to product enhancements; partially offset by a decrease in lab testing and certification expenses for our HazardPRO product line.enhancements.

Non-Operating Income (Expense)(Net)

Non-operatingNet non-operating income increaseddecreased by $6,$43, or 100.0%100.0%, for the 2017 three-month period compared to the same 2016 period. Non-operating income increased $1, or 3.4%, in the nine months ended September 30, 2017, whensecond quarter of 2020 compared to the same period in 2016. The increase for both periods was primarily due to an increase in interest income.

Income Before Income Taxes

Income before2019. Net non-operating income taxes wasdecreased by $23458, or 65.2%, for the threesix months ended Septemberof June 30, 2017, representing an increase of $199, or 568.6%, when2020 compared to the same period in 2016.  2019.  The decrease in both periods was primarily a result of less interest income earned as a result of lower interest rates on Treasury Bills.

Income (Loss) Before Income Tax Expense (Benefit)


Income before income taxestax expense was $445$19 for the nine months ended September 30, 2017,second quarter of 2020, representing an increasea decrease of $328,$112, or 280.3%85.5%, when compared to $131 for the same period in 20162019. Loss before income tax benefit was $91 for the six months ended June 30, 2020, representing a decrease of $182, or 200.0%, compared to an income before income tax expense of $91 for the same period in 2019.The increasedecrease for both 2017 periods was primarily the result of the lower net sales and higher 2017 gross profit, primarily due to increased revenues, and a decrease in operating expenses.cost of sales discussed above.


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Income TaxesTax Benefit


The Company's income tax expense percentage remained relatively constant at 35.0% and 34.6%decreased to $1, or 0.0% of net sales, in the respective three and nine-month periodssecond quarter of 2020 compared to 34.3% and 36.8%an expense of $28, or 1.2% of net sales, in the comparable 2016 three and nine-month periods.second quarter of 2019. The Company's income tax benefit was $18, or 0.4% of net sales, for the six months ended June 30, 2020 compared to an expense of $19, or 0.4% of net sales, for the six months ended June 30, 2019.


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LIQUIDITY AND CAPITAL RESOURCES

Cash and cash equivalents were $1,185$2,262 at SeptemberJune 30, 20172020 and $840$8,785 at December 31, 2016.2019. The increasedecrease was mainlyprimarily the result of an increase in cash generated from operating activities.used to purchase treasury bills considered as available-for-sale securities.  At December 31, 2019, all of the treasury bills were reported as cash equivalents and as of June 30, 2020, all but one of the treasury bills were reported as investments.

Cash generated from operating activities was $316 and $151$240 for the ninesix months ended SeptemberJune 30, 2017 and 2016, respectively.2020 as compared to cash used in operating activities of $52 for the six months ended June 30, 2019. The $165$292 increase in cash generated from operations was due to the increasea decrease in net income and accrued expenses;trade receivables partially offset by an increase in trade receivables and a decrease in accounts payable. The increasedecrease in net income istrade receivables was due to higher gross profitdecreased net sales and decreased expenses.  The increase in accrued expenses is due to increased payroll related expenses.the timing of collections on accounts.  The increase in accounts receivable ispayable was due to increased sales in the 2017 third quarter.  The decrease in accounts payable is due to the timing of inventory purchases and vendor payments.

Cash used in investing activities was $6,760 for the six months ended June 30, 2020 as compared to cash generated from investing activities was $29 and $462of $23 for the ninesix months ended SeptemberJune 30, 2017 and 2016, respectively.2019.During the ninesix months ended SeptemberJune 30, 2017 and 2016,2020, the Company had net purchases of treasury bills of $6,748 compared to net proceeds from maturities of Treasury Bills with a maturity datetreasury bills of more than three$84 during the six months of $44 and $464, respectively.ended June 30, 2019. In addition, wethe Company purchased $15$12 and $2$61 of property and equipment during the nine-month periods of 2017 six months ended June 30, 2020and 2016,June 30, 2019, respectively.



There was no cashCash used or provided byin financing activities in the ninesix months ended SeptemberJune 30, 2017.  Cash 2020 and 2019 was $3. The cash used in both periods was for principal payments on a financing activities was $390lease on right-to-use assets.  In addition, during the second quarter of 2020, the Company received and subsequently repaid a Payroll Protection Loan of $645 from the Small Business Administration, as discussed in the nine months ended September 30, 2016next paragraph.


As previously disclosed, on May 5, 2020, we entered into a U.S. Small Business Administration Paycheck Protection Program promissory note in the principal amount of $645 (the “PPP Loan”). The PPP Loan was unsecured and was evidenced by a note in favor of US Bank National Association as the lender. Subsequent to makereceipt of the final paymentloan, our Board of Directors continued to monitor both our ongoing performance and the routinely issued clarifying guidance provided by the government. As a result of this analysis, the Board determined that given the strength of our operations and the government issued clarifications, we would repay the entire amount of the PPP Loan. We repaid the PPP Loan in full on June 4, 2020. There were no prepayment penalties in connection with this voluntary repayment.


Subject to the long-term debt owed to Harvest Engineering, Inc. forfollowing section, the technology purchased in February 2014. 

OurCompany believe its ongoing cash requirements will be primarily for capital expenditures, the contingent earn-out payment, research and development, working capital, and working capital. growth initiatives. Management believes that our cash on hand and any cash generated from operations will be sufficient to meet our cash requirements through at least the next 12 months.

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COVID-19 Pandemic Discussion

 

Off-balance Sheet ArrangementsAs a result of the COVID-19 pandemic, we experienced weaker than anticipated performance in the first and second quarters of 2020.  Due to the ongoing uncertainty about the severity and duration associated with the COVID-19 pandemic, we considered furloughing or eliminating employees and taking other measures to reduce operating costs until there was more certainty about the short-term and long-term effects of the COVID-19 pandemic on the nation’s economy and the Company’s business.


As of September 30, 2017, the Company had no off-balance sheet arrangements or transactions.end of July 2020, however, we have not furloughed any employees.  We expect our third quarter financial results to continue to be negatively affected, potentially to a material degree, as the effects of the pandemic continue to permeate the economy.Reductions in net sales have not been offset by a proportional decrease in expense, as we continue to incur cost related to employee compensation and operating expenses, resulting in a negative effect on the relationship between our costs and net sales.  


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

We, typically, have multiple sources for components.  Although we have experienced some extended delivery times as vendors have difficulty sourcing components, we continue to believe we have adequate sources for our key components to meet anticipated demand.

As of the date of this filing, we expect our business will continue to be negatively affected, but cannot currently determine the significance and duration of the pandemic on our business.


Future Business Development Activities

The Company continues to seek growth opportunities, both internally through the Company’s existing portfolio of products, technologies and markets, as well as externally through technology partnerships or related-product acquisitions. Although


Off-balance Sheet Arrangements

As of June 30, 2020, the Company is continuing to explore these external opportunities, it currently hashad no agreementsoff-balance sheet arrangements or understandings with any third parties.transactions.

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Item 3.3. Quantitative and Qualitative Disclosures About Market Risk

Not Applicable.

Item 4.4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Based on an evaluation under the supervision and with the participation of the Company’s management, the Company’s principal executive officer and principal financial officer has concluded that the Company’s disclosure controls and procedures as defined in Rules 13a-15(e)13a-15(e) and 15d-15(e)15d-15(e) under the Securities Exchange Act of 1934,, as amended (“Exchange Act”), were effective as of SeptemberJune 30, 2017 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.2020.


Changes in Internal Control Over Financial Reporting


There were no changes in the Company’s internal control over financial reporting during the thirdsecond quarter of 2017, which2020 that were identified in connection with management’s evaluation required by paragraph (d)of Rules 13a-1513a-15 and 15d-1515d-15 under the Exchange Act, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.


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PART II – OTHER INFORMATION
 
Item 1. Legal Proceedings – None
Item 1A. Risk Factors – Not Applicable
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds – None
Item 3. Defaults Upon Senior Securities – None
Item 4. Mine Safety Disclosures – Not Applicable 
Item 5. Other Information–None



Item 6. Exhibits




Exhibit

Description

31.1

Certification of CEO and CFO Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1

Certification of CEO and CFO Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101

The following financial information from Electro-Sensors, Inc.’s Quarterly Report on Form 10-Q for the quarterly period ended SeptemberJune 30, 20172020, formatted in eXtensibleiXBRL (Inline Extensible Business Reporting Language XBRL:Language), (i) Condensed Balance Sheets as of SeptemberJune 30, 20172020 and December 31, 20162019, (ii) Condensed Statements of Comprehensive Income (Loss) for the three and ninesix months ended SeptemberJune 30, 20172020 and SeptemberJune 30, 20162019 (iii) Condensed Statements of Changes in Stockholders' Equity for the three and six months ended June 30, 2020 and June 30, 2019, (iii)(iv) Condensed Statements of Cash Flows for the ninesix months ended SeptemberJune 30, 20172020 and SeptemberJune 30, 20162019, and (iv)(v) Notes to Financial Statements. 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Electro-Sensors, Inc.

NovemberAugust 13, 20172020

/s/ David L. Klenk

David L. Klenk

Chief Executive Officer and Chief Financial Officer

November 13, 2017

/s/ Gloria M. Grundhoefer(Principal Executive Officer and Principal Financial Officer)

Gloria M. Grundhoefer

Controller


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