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 June 30, 2016

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ______ to ______

Commission File Number 000-9587

 

 

ELECTRO-SENSORS, INC.

(Exact name of registrant as specified in its charter)

 

Minnesota			41-0943459
(State or other jurisdiction of incorporation or organization)			(IRS Employer Identification No.)
6111 Blue Circle Drive Minnetonka, Minnesota 55343-9108
(Address of principal executive offices)
(952) 930-0100
(Registrant’s telephone number, including area code)

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

 

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 o

 

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

 

Large accelerated filer o	Accelerated filer o
Non-accelerated filer   o (Do not check if a smaller reporting company)	Smaller reporting company ☒

 

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

 

The number of shares outstanding of the registrant’s common stock, $0.10 par value, on August 9, 2016 was 3,395,521.

 

 

ELECTRO-SENSORS, INC.

Form 10-Q

For the Periods Ended June 30, 2016

 

TABLE OF CONTENTS

 

PART I – FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited):
Consolidated Balance Sheets – As of June 30, 2016 and December 31, 2015	3
Consolidated Statements of Comprehensive Income– For the Three and Six Months ended June 30, 2016 and June 30, 2015	4
Consolidated Statements of Cash Flows – For the Six Months ended June 30, 2016 and June 30, 2015	5
Notes to Consolidated Financial Statements	6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	11
Item 3. Quantitative and Qualitative Disclosures About Market Risk	14
Item 4. Controls and Procedures	14
PART II – OTHER INFORMATION
Item 1. Legal Proceedings	15
Item 1A. Risk Factors	15
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	15
Item 3. Defaults Upon Senior Securities	15
Item 4. Mine Safety Disclosures	15
Item 5. Other Information	15
Item 6. Exhibits	15
SIGNATURES	16
EXHIBITS	17

 

 

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

ELECTRO-SENSORS, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands except share and per share amounts) 

		June 30, 2016				December 31, 2015
		(unaudited)
ASSETS
Current assets
Cash and cash equivalents		$	560			$	569
Treasury bills			7,488				7,872
Trade receivables, less allowance for doubtful accounts of $8			1,035				689
Inventories			1,517				1,564
Other current assets			130				170
Deferred income tax asset, current			16				14
Total current assets			10,746				10,878
Deferred income tax asset			189				170
Intangible assets, net			1,153				1,270
Property and equipment, net			1,065				1,103
Total assets		$	13,153			$	13,421
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Current maturities of note payable		$	0			$	390
Accounts payable			178				136
Accrued expenses			398				396
Accrued income tax			51				4
Total current liabilities			627				926
Long-term liabilities
Contingent earn-out			383				455
Total long-term liabilities			383				455
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			1,927				1,879
Retained earnings			9,906				9,855
Accumulated other comprehensive loss (unrealized loss on available-for-sale securities, net of income tax benefit)			(29	)			(33	)
Total stockholders’ equity			12,143				12,040
Total liabilities and stockholders’ equity		$	13,153			$	13,421

 

See accompanying notes to unaudited consolidated financial statements

 

 

ELECTRO-SENSORS, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands except share and per share amounts)

(unaudited)

 

		Three Months Ended June 30,								Six Months Ended June 30,
		2016				2015				2016				2015
Net sales		$	2,009			$	2,048			$	3,725			$	3,933
Cost of goods sold			835				922				1,617				1,745
Gross profit			1,174				1,126				2,108				2,188
Operating expenses
Selling and marketing			448				411				875				818
General and administrative			331				399				813				805
Research and development			188				189				361				405
Total operating expenses			967				999				2,049				2,028
Operating income			207				127				59				160
Non-operating income (expense)
Interest expense			0				(2	)			(1	)			(6	)
Gain on sale of available-for-sale securities			0				634				0				1,449
Interest income			4				1				15				2
Other income			6				4				9				7
Total non-operating income, net			10				637				23				1,452
Income before income taxes			217				764				82				1,612
Income taxes			77				268				31				563
Net income		$	140			$	496			$	51			$	1,049
Other comprehensive income (loss)
Change in unrealized value of available-for-sale securities, net of income tax			4				63				4				132
Reclassification of gains included in net income, net of income tax			0				(394	)			0				(899	)
Other comprehensive income (loss)			4				(331	)			4				(767	)
Net comprehensive income		$	144			$	165			$	55			$	282
Net income per share data:
Basic
Net income per share		$	0.04			$	0.15			$	0.01			$	0.31
Weighted average shares			3,395,521				3,395,521				3,395,521				3,395,521
Diluted
Net income per share		$	0.04			$	0.14			$	0.01			$	0.29
Weighted average shares			3,692,032				3,653,021				3,703,021				3,653,021

  

See accompanying notes to unaudited consolidated financial statements

 

 

ELECTRO-SENSORS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

 

		Six Months Ended June 30,
		2016				2015
Cash flows from (used in) operating activities
Net income		$	51			$	1,049
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization			157				177
Realized gain on sale of available-for-sale securities			0				(1,449	)
Deferred income taxes			(21	)			(11	)
Stock-based compensation expense			48				31
Change in contingent earn-out fair value			(72	)			(17	)
Other			(15	)			(4	)
Change in:
Trade receivables			(346	)			(268	)
Inventories			47				(234	)
Other current assets			40				33
Accounts payable			42				151
Accrued expenses			2				40
Accrued income taxes			47				198
Net cash used in operating activities			(20	)			(304	)
Cash flows from (used in) investing activities
Proceeds from sale of available-for-sale securities			0				1,467
Purchases of treasury bills			(3,440	)			(5,641	)
Proceeds from the maturity of treasury bills			3,843				6,043
Purchase of property and equipment			(2	)			(15	)
Net cash from investing activities			401				1,854
Cash flows used in financing activities
Payments on long-term debt			(390	)			(381	)
Net cash used in financing activities			(390	)			(381	)
Net increase (decrease) in cash and cash equivalents			(9	)			1,169
Cash and cash equivalents, beginning			569				1,190
Cash and cash equivalents, ending		$	560			$	2,359
Supplemental cash flow information
Cash paid for income taxes		$	5			$	377
Cash paid for interest		$	10			$	19

  

See accompanying notes to unaudited consolidated financial statements

  

 

ELECTRO-SENSORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE PERIOD ENDED JUNE 30, 2016

(in thousands except share and per share amounts)

(unaudited)

 

Note 1. Basis of Presentation

 

The accompanying unaudited consolidated 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, 2015, including the audited consolidated 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 June 30, 2016 and for the three and six-month periods then ended 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.

 

Fair Value Measurements

 

The carrying value of cash equivalents, treasury bills, trade receivables, accounts payable, and other financial working capital items approximates fair value at June 30, 2016 and December 31, 2015, due to the short maturity nature of these instruments.

 

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.

 

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 consolidated 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. It is at least reasonably possible that these estimates may change in the near term.

 

 

ELECTRO-SENSORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE PERIOD ENDED JUNE 30, 2016

(in thousands except share and per share amounts)

(unaudited)

  

Note 2. Investments

 

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, 2016
Money Market		$	240			$	0			$	0			$	240
Commercial Paper			105				0				0				105
Treasury Bills			7,478				10				0				7,488
Equity Securities			54				0				(54	)			0
			7,877				10				(54	)			7,833
Less Cash Equivalents			345				0				0				345
Total Investments, June 30, 2016		$	7,532			$	10			$	(54	)		$	7,488
December 31, 2015
Money Market		$	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

 

During the three-month period ended June 30, 2015, the Company sold 49,066 shares of Rudolph Technologies, Inc. (ticker symbol RTEC) stock and reported gains of $632 in non-operating income. During the six-month period ended June 30, 2015, the Company sold 122,649 shares of RTEC stock and reported gains of $1,447 in non-operating income. As of June 30, 2016, the Company held no shares of RTEC stock.

 

 

ELECTRO-SENSORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE PERIOD ENDED JUNE 30, 2016

(in thousands except share and per share amounts)

(unaudited)

 

Note 3. Fair Value Measurements

 

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

 

June 30, 2016

		Carrying amount in consolidated balance sheet
										Fair Value Measurement Using
						Fair Value				Level 1				Level 2				Level 3
Assets:
Cash equivalents
Money market funds		$	240			$	240			$	240			$	0			$	0
Commercial paper			105				105				105				0				0
Treasury bills			7,488				7,488				7,488				0				0
Equity securities			0				0				0				0				0
Liabilities:
Contingent earn-out			383				383				0				0				383

 

December 31, 2015 

		Carrying amount in consolidated balance sheet
										Fair Value Measurement Using
						Fair Value				Level 1				Level 2				Level 3
Assets:
Cash equivalents
Money market funds		$	246			$	246			$	246			$	0			$	0
Commercial paper			247				247				247				0				0
Treasury bills			7,872				7,872				7,872				0				0
Equity securities			0				0				0				0				0
Liabilities:
Contingent earn-out			455				455				0				0				455

 

The fair value of the money market funds, commercial paper and treasury bills is based on quoted market prices in an active market. The available-for-sale security is a limited-marketable company. There is an insignificant market for the limited-marketable company and the Company has determined its value based on financial and other factors, which are considered level 3 inputs in the fair value hierarchy. 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 liabilities at fair value on a recurring basis is summarized as follows:

 

		Period Ended June 30,
		2016				2015
Beginning Balance		$	455			$	472
Credit to earnings			(72	)			(17	)
Ending Balance		$	383			$	455

 

The decrease in the contingent liability reflects the Company’s expectation of moderately lower future contingent payments throughout the four year earn-out period.

 

 

ELECTRO-SENSORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE PERIOD ENDED JUNE 30, 2016

(in thousands except share and per share amounts)

(unaudited)

 

Note 4. Note Payable

 

The note payable consists of the following:

 

		December 31, 2015
Note payable to seller		$	400
Payable in annual installments of principal of $400. The note was paid off in February 2016.  This note is non-interest bearing and unsecured.
Less: Discount of note payable listed above			(10	)
Net note payable			390
Less: Current maturities			390
Note Payable – Long Term		$	0

 

Note 5. Stock-Based Compensation

 

During the first quarter of 2016, the Company granted its Chief Executive Officer options to purchase 50,000 shares 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 six months ended June 30, 2016 are as follows:

 

Dividend yield	0.00%
Expected volatility	36.17%
Risk free interest rate	1.31%
Expected life	6 years

 

As of June 30, 2016, there was approximately $124 of unrecognized compensation expense. The Company expects to recognize this expense over the next four years.

 

 

ELECTRO-SENSORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE PERIOD ENDED JUNE 30, 2016

(in thousands except share and per share amounts)

(unaudited)

 

Note 6. Segment Information

 

As of January 1, 2016, the Company has one reportable operating segment: Production Monitoring. During 2015, the Company had two reportable operating segments: Production Monitoring and Investments. The Production Monitoring Division manufactures and markets a complete line of production monitoring equipment. ESI Investment Company held investments in marketable and non-marketable securities.

 

The accounting policies of the segments are the same as those described in Note 1 of the Notes to Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015. In evaluating segment performance, management focuses on sales and income before income taxes. The Company had no inter-segment sales.

 

The following is financial information relating to the continuing operating segments:

 

		Three Months Ended June 30,								Six Months Ended June 30,
		2016				2015				2016				2015
External sales
Production monitoring		$	2,009			$	2,048			$	3,725			$	3,933
Total		$	2,009			$	2,048			$	3,725			$	3,933
Income before income taxes
Production monitoring		$	217			$	129			$	82			$	161
Investments			0				635				0				1,451
Total		$	217			$	764			$	82			$	1,612

 

 

Item 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 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including statements regarding our expectations, beliefs, intentions or strategies regarding the future. Forward-looking statements include, but are not limited to, statements relating to our marketing efforts or our efforts to accelerate growth; 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. We consider 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, as 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 in these forward-looking statements. The forward-looking statements we make in this Quarterly Report are subject to certain risks and uncertainties that could cause future results to differ materially from our recent results or those projected in the forward-looking statements, including the accuracy of management’s assumptions with respect to industry trends, fluctuations in industry conditions, the accuracy of management’s assumptions regarding expenses and our cash needs and those listed under the heading “Cautionary Statements” under “Item 1—Business,” in our Annual Report on Form 10-K for the year ended December 31, 2015.

 

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. 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, 2015. No new estimates exist other than those discussed in our Annual Report.

  

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.

 

		Three Months Ended June 30								Six Months Ended June 30
		2016				2015				2016				2015
Net sales			100.0	%			100.0	%			100.0	%			100.0	%
Cost of goods sold			41.6				45.0				43.4				44.4
Gross profit			58.4				55.0				56.6				55.6
Operating expenses
Selling and marketing			22.3				20.1				23.5				20.8
General and administrative			16.5				19.5				21.8				20.4
Research and development			9.3				9.2				9.7				10.3
Total operating expenses			48.1				48.8				55.0				51.5
Operating income			10.3				6.2				1.6				4.1
Non-operating income (expense)
Interest expense			0.0				(0.1	)			(0.0	)			(0.2	)
Gain on sale of available-for-sale securities			0.0				31.0				0.0				36.8
Interest income			0.2				0.0				0.4				0.1
Other income			0.3				0.2				0.2				0.2
Total non-operating income, net			0.5				31.1				0.6				36.9
Income before income taxes			10.8				37.3				2.2				41.0
Income taxes			3.8				13.1				0.8				14.3
Net income			7.0	%			24.2	%			1.4	%			26.7	%

 

 

The following discusses the Company’s performance for the three and six months ended June 30, 2016 and 2015.

 

RESULTS OF OPERATIONS (in thousands)

 

Net Sales

 

Net sales for the three-month period ended June 30, 2016 decreased $39 or 1.9% over the same period in 2015. Net sales for the six-month period ended June 30, 2016 decreased $208 or 5.3% over the same period in 2015. The second quarter decrease primarily resulted from lower sales in the north central US and overseas territories, each area declining 26% over the corresponding 2015 three-month period. These decreases were partially offset by a 51% increase in large-order performance. In addition, plant upgrades and expansions in the animal feed industry resulted in the Company achieving strong results in our analog sensor product line.

 

Gross Profit

 

Gross profit for the three months ended June 30, 2016 increased $48, or 4.3%, over the same period in 2015. Gross profit for the six months ended June 30, 2016 decreased $80, or 3.7%, over the same period in 2015 due to lower revenue in the 2016 period. Gross margin, as a percentage of net sales, increased to 58.4% in the 2016 three-month period from 55.0% in the prior year, and increased to 56.6% in the 2016 six-month period compared to 55.6% in the prior year. Gross margin percentages were higher in the 2016 periods due to production efficiencies.

 

Operating Expenses

 

Total operating expenses decreased $32, or 3.2%, for the three months ended June 30, 2016 when compared to the same period in 2015 and decreased as a percentage of sales from 48.8% to 48.1%. Total operating expenses increased $21, or 1.0%, for the six months ended June 30, 2016 when compared to the same period in 2015 and increased as a percentage of sales from 51.5% to 55.0%.

 

·

Selling and marketing expenses increased $37, or 9.0%, in the 2016 three-month period over the prior year, and increased as a percentage of net sales to 22.3% from 20.1%. Selling and marketing expenses increased $57, or 7.0%, in the 2016 six-month period over the prior year period, and increased as a percentage of net sales to 23.5% from 20.8%. The increase in expense dollars for the 2016 three-month period resulted from an increase in wages and benefits due to hiring of additional personnel. The increase for the 2016 six-month period resulted from an increase in wages and benefits due to additional personnel, the cost of providing system demonstrations to potential customers and increased travel. The six month increase is partially offset by a decrease in commission paid to outside manufacturers’ representatives due to lower sales volume.

 

·

General and administrative expenses decreased $68, or 17.0%, for the 2016 three-month period compared to the same period in 2015 and decreased as a percentage of net sales to 16.5% from 19.5%. For the 2016 six-month period, general and administrative expenses increased $8, or 1.0%, compared to the 2015 period and increased as a percentage of net sales to 21.8% from 20.4%. The decrease for the 2016 three-month period was due to a decrease in the accrual for the contingent earn-out liability related to the HazardPRO acquisition and the expensing of post-closing deliverables related to the HazardPRO acquisition in 2015. The increase for the 2016 six-month period was due to an increase in wages and benefits and stock compensation expense due to an option granted to the Chief Executive Officer in February 2016. The six month increase was partially offset by a decrease in depreciation expense, the decrease in the contingent earn-out liability related to the HazardPRO acquisition and the 2015 expensing of post-closing deliverables related to the HazardPRO acquisition. During the second quarter of 2016, the Company decreased the contingent earn-out by $72 compared to a decrease of $17 in the same period for 2015.

 

·

Research and development expenses decreased $1, or 0.1%, in the 2016 three–month period from the same period in 2015 but increased as a percentage of net sales to 9.3% from 9.2%. For the 2016 six–month period, research and development expenses decreased $44, or 10.9%, over the 2015 period, and decreased as a percentage of net sales to 9.7% from 10.3%. The percentage increase for the 2016 three-month period was due to lower sales in 2016 than in 2015. For the 2016 six-month period, the decrease was the result of lower wages and benefits due to reduced staffing levels in 2016 and costs incurred in 2015 related to lab testing fees for the HazardPRO product line. The decrease was partially offset by an increase in contract engineering related to the HazardPRO product line.

 

 

Operating Income

 

Three-month operating income grew 63.0% to $207 from $127 due to the 2016 higher gross margin and lower operating expenses while six-month operating revenue decreased 63.1% to $59 from $160, due primarily to lower fiscal 2016 first quarter revenue.

 

Non-Operating Income

 

Non-operating income decreased by $627, or 98.4%, for the 2016 three-month period compared to the same 2015 period. Non-operating income decreased $1,429, or 98.4%, in the six months ended June 30, 2016, when compared to the same period in 2015. This decrease was due to the liquidation of shares in Rudolph Technologies, Inc. in the second quarter of 2015. During the 2015 second quarter, we sold 49,066 shares of Rudolph Technologies, Inc. stock and recognized gain on the sales of $632. During the six-month period ended June 30, 2015, we sold 122,649 shares of Rudolph Technologies, Inc. stock and recognized gain on the sales of $1,447.

Income Before Income Taxes

 

Income before income taxes was $217 for the three months ended June 30, 2016, representing a decrease of $547, or 71.6%, when compared to the same period in 2015. Income before income taxes was $82 for the six months ended June 30, 2016, representing a decrease of $1,530, or 94.9%, when compared to the same period in 2015.

 

The decrease for both periods in 2016 was the result of a decrease in the sale of available-for-sale securities recognized in 2016. During the six-month period ended June 30, 2015, we recognized $1,449 of gain on sale of available-for-sale securities (see “Non-Operating Income (Expense)”).

 

LIQUIDITY AND CAPITAL RESOURCES

 

Cash and cash equivalents were $560 at June 30, 2016, and $569 at December 31, 2015. The Company maintains a small cash balance and invests the majority of its available funds in United States Treasury securities.

 

Cash used in operations was favorably impacted by a decrease in inventories, and an increase in operating income, net of income taxes. For the 2016 six-month period we used $284 less cash in operations compared to the 2015 six-month period. In the 2016 period, the Company had a small decrease in inventories due to increased sales late in the 2016 second quarter. The increase in operating income, net of income taxes, is due to increased tax expense in 2015 due to the sales of available-for-sale securities.

 

Cash generated from investing activities was $401 and $1,854 for the six months ended June 30, 2016 and 2015, respectively. During the 2016 and 2015 six-month periods, the Company had net proceeds of Treasury Bills with a maturity date of more than three months of $403 and $402, respectively. In addition, the Company generated $1,467 in proceeds on the sale of available-for-sale securities during 2015 from the sale of Rudolph stock.

 

Cash used in financing activities was $390 and $381 for respective 2016 and 2015 six-month periods. During the six months ended June 30, 2016 and 2015, we paid $390 and $381, respectively, on the long-term debt owed to Harvest Engineering, Inc. (“Harvest”) for the technology purchased in February 2014. As of June 30, 2016, the note payable to Harvest has been paid in full.

 

Our ongoing cash requirements will be primarily for capital expenditures, 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.

  

Off-balance Sheet Arrangements

 

As of June 30, 2016, the Company had no off-balance sheet arrangements or transactions.

 

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 the Company is continuing to explore these external opportunities, it currently has no agreements or understandings with any third parties. 

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

Not Applicable.

 

Item 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) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (“Exchange Act”) were effective as of June 30, 2016 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.

 

Changes in Internal Control Over Financial Reporting

 

There were no changes in the Company’s internal control over financial reporting during the second quarter of 2016, 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.

 

 

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

     (a)          Exhibits - See Exhibit Index following signature page.

 

 

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.
August 12, 2016	/s/ David L. Klenk
	David L. Klenk
	Chief Executive Officer and Chief Financial Officer
August 12, 2016	/s/ Gloria M. Grundhoefer
	Gloria M. Grundhoefer
	Controller

 

 

EXHIBIT INDEX

 

ELECTRO-SENSORS, INC.

 

FORM 10-Q FOR QUARTER ENDED JUNE 30, 2016

 

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 June 30, 2016, formatted in eXtensible Business Reporting Language (XBRL): (i) Consolidated Balance Sheets as of June 30, 2016 and December 31, 2015, (ii) Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2016 and June 30, 2015, (iii) Consolidated Statements of Cash Flows for the six months ended June 30, 2016 and June 30, 2015, and (iv) Notes to Consolidated Financial Statements.