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 September 30, 2021
Or
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______ to ______
Commission File Number 000-09587
ELECTRO-SENSORS, INC.
(Exact name of registrant as specified in its charter)
Minnesota | 41-0943459 |
(State or other jurisdiction of incorporation or organization) | (IRS Employer Identification No.) |
6111 Blue Circle Drive
Minnetonka, Minnesota 55343-9108
(Address of principal executive offices)
(952) 930-0100
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
| Common stock | ELSE | Nasdaq Capital Market |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 of 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☐ | Accelerated filer ☐ |
| Non-accelerated filer | ☒ | Smaller reporting company ☒ |
| | | Emerging growth company ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The number of shares outstanding of the registrant’s common stock, $0.10 par value, on November 4, 2021 was 3,395,521.
ELECTRO-SENSORS, INC.
Form 10-Q
For the Periods Ended September 30, 2021
FORWARD-LOOKING STATEMENTS
This Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including statements regarding our expectations, beliefs, intentions or strategies regarding the future. Forward-looking statements include, but are not limited to, statements about the success of our marketing efforts; our efforts to accelerate future growth or income; our business development activities; our efforts to maintain or reduce production costs; our expected use of cash on hand; our cash requirements; and the sufficiency of our cash flows. Any statement that is not based solely upon historical facts, including our strategies for the future and the outcome of events that have not yet occurred, is a forward-looking statement.
All forward-looking statements in this document are based on information available to us as of the date of this Form 10-Q, and we assume no obligation to update any of these forward-looking statements, other than as required by law. Our actual results could differ materially from those projected or indicated in these forward-looking statements. These forward-looking statements are subject to certain risks and uncertainties that could cause future results to differ materially from our recent results or those projected in the forward-looking statements, including the accuracy of management’s assumptions with respect to industry trends, fluctuations in industry conditions, the accuracy of management’s assumptions regarding expenses and our cash needs and those listed under the heading “Cautionary Statements” under “Item 1—Business,” in our Annual Report on Form 10-K for the year ended December 31, 2020, as well as any effect the COVID-19 pandemic may have on the efficiency of our business operations, our customer base and the domestic or worldwide economy.
Based on rapidly changing dynamics in global supply chains of materials and components, we may experience both price increases and difficulty in sourcing materials and components. In addition, we may experience changes in transportation and freight availability that may make it difficult to have materials and components shipped to us or our products shipped to customers in a timely manner.
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, 2020.
SELECTED FINANCIAL INFORMATION
The following table contains selected financial information, for the periods indicated, from our Statements of Comprehensive Income (Loss) expressed as a percentage of net sales.
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| 2021 |
| | | 2020 | |
|
| 2021 |
|
|
| 2020 |
|
|
Net sales | | 100.0 |
| % | | | 100.0 | | % |
| 100.0 |
| % |
| 100.0 |
| % |
Cost of goods sold | | 44.1 |
| | | | 47.8 | |
|
| 45.2 |
|
|
| 47.8 |
|
|
Gross profit | | 55.9 |
| | | | 52.2 | |
|
| 54.8 |
|
|
| 52.2 |
|
|
| | | | | | | | | |
|
|
|
|
|
|
|
|
|
Operating expenses | | |
| | | | | |
|
|
|
|
|
|
|
|
|
Selling and marketing | | 17.4 |
| | | | 22.0 | |
|
| 16.6 |
|
|
| 22.2 |
|
|
General and administrative | | 28.8 |
| | | | 22.1 | |
|
| 23.3 |
|
|
| 22.4 |
|
|
Research and development | | 8.8 |
| | | | 11.0 | |
|
| 10.4 |
|
|
| 10.5 |
|
|
Total operating expenses | | 55.0 |
| | | | 55.1 | |
|
| 50.3 |
|
|
| 55.1 |
|
|
| | | | | | | | | |
|
|
|
|
|
|
|
|
|
Operating income (loss) | | 0.9 | |
| | | (2.9 | ) |
|
| 4.5 |
|
|
| (2.9 | ) |
|
| | | | | | | | | |
|
|
|
|
|
|
|
|
|
Non-operating income | | |
| | | | | |
|
|
|
|
|
|
|
|
|
| Interest expense |
| 0.0 |
|
|
|
| (0.1 | ) |
|
| 0.0 |
|
|
| (0.1 | ) |
|
Interest income | | 0.1 |
| | | | 0.1 | |
|
| 0.1 |
|
|
| 0.6 |
|
|
Total non-operating income, net | | 0.1 |
| | | | 0.0 | |
|
| 0.1 |
|
|
| 0.5 |
|
|
| | | | | | | | | |
|
|
|
|
|
|
|
|
|
Income (loss) before income tax expense (benefit) | | 1.0 | |
| | | (2.9 | ) |
|
| 4.6 |
|
|
| (2.4 | ) |
|
| | | | | | | | | |
|
|
|
|
|
|
|
|
|
Provision for (benefit of) income taxes | | 0.2 | | | |
| (0.5 | ) |
|
| 0.9 |
|
|
| (0.4 | ) |
|
| | | | | | | | | |
|
|
|
|
|
|
|
|
|
Net income (loss) | | 0.8 | | %
| | | (2.4 | ) | % |
| 3.7 |
| % |
| (2.0 | ) | % |
The following paragraphs discuss the Company’s performance for the three and nine months ended September 30, 2021 and 2020.
RESULTS OF OPERATIONS (in thousands)
Net Sales
Net sales for the three-month period ended September 30, 2021 were $2,154, an increase of $255, or 13.4%, from $1,899 during the comparable period in 2020. Net sales for the nine months ended September 30, 2021 were $6,517, an increase of $603, or 10.2%, from $5,914 during the comparable period in 2020. The increase was primarily a result of increased sales to domestic customers in the agricultural industry.
Gross Profit
Gross profit for the third quarter of 2021 increased $212, or 21.4%, over the same period in 2020. Gross profit for the nine months ended September 30, 2021 increased $481, or 15.6%, over the same period in 2020. Gross margin increased in the third quarter of 2021 to 55.9% from 52.2% during the same period in 2020. Gross margin for the nine months ended September 30, 2021 increased to 54.8% from 52.2% over the same period in 2020. The increase in gross margin percentage for both periods was primarily due to improved factory utilization resulting from higher levels of manufacturing and sales. In addition, the nine-month period was favorably affected by product mix.
Operating Expenses
Total operating expenses increased $138, or 13.2%, for the third quarter of 2021 compared to the same period in 2020, but decreased as a percentage of net sales to 55.0% from 55.1%. Total operating expenses increased $18, or 0.6%, for the nine months ended September 30, 2021 compared to the same period in 2020, and decreased as a percentage of net sales to 50.3% from 55.1%.
| ● | Selling and marketing expenses in the third quarter of 2021 decreased $42, or 10.1%, from the same period in 2020 and decreased as a percentage of net sales to 17.4% from 22.0%. Selling and marketing expenses in the nine months ended September 30, 2021 decreased $231, or 17.5%, from the same period in 2020 and decreased as a percentage of net sales to 16.6% from 22.2%. The decrease in expense dollars in both the three and nine-month periods ending September 30, 2021 was primarily due to lower internal and external sales headcount, partially offset by an increase in tradeshow related expenses. The 2021 tradeshow expense increase occurred because a majority of 2020 tradeshows were cancelled due to the COVID-19 pandemic. |
| ● | General and administrative expenses increased $200, or 47.6%, in the third quarter of 2021 compared to the same period in 2020 and increased as a percentage of net sales to 28.8% from 22.1%. General and administrative expenses increased $196, or 14.8%, for the nine months ended September 30, 2021 compared to the same period in 2020 and increased as a percentage of net sales to 23.3% from 22.4%. The increase in both periods was primarily due to increased legal and other professional fees related to the Company's corporate and business development activities. |
| ● | Research and development expenses decreased $20, or 9.6%, in the third quarter of 2021 from the same period in 2020 and decreased as a percentage of net sales to 8.8% from 11.0%. Research and development expenses increased $53, or 8.5%, in the nine months ended September 30, 2021 from the same period in 2020, but decreased as a percentage of net sales to 10.4% from 10.5%. The decrease in the quarter was due to lower 2021 contract engineering costs related to product enhancements while the increase in the nine-month period was due to higher 2021 contract engineering costs related to product enhancements. |
Non-Operating Income
Net non-operating income decreased by $28, or 90.3%, for the nine months ended September 30, 2021 compared to the same period in 2020. The decrease in was primarily a result of less interest income earned due to lower interest rates on Treasury Bills.
Income (Loss) Before Income Tax Benefit.
Income before income tax expense was $21 for the third quarter of 2021, representing an increase of $75, or 138.9%, compared to a loss before income tax benefit of $54 for the same period in 2020. Income before income tax expense was $290 for the nine months ended of September 30, 2021, representing an increase of $435, or 300.0%, compared to a loss before income tax benefit of $145 for the same period in 2020. The increase for both periods was primarily the result of higher sales and gross profit.
Income Tax Expense (Benefit)
Income tax expense increased to $4, or 0.2% of net sales in the third quarter of 2021 compared to a benefit of $8 or 0.5%, in the third quarter of 2020. Income tax expense increased to $61, or 0.9% of net sales, in the nine months ended September 30, 2021 compared to a benefit of $26, or 0.4% of net sales, for the nine months ended September 30, 2020. The increase for both periods is due to net income before income tax expense in 2021 compared to a loss before income tax benefit in 2020.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents were $4,620 at September 30, 2021 and $1,090 at December 31, 2020. The increase was primarily the result of an increase in cash generated from investment maturities discussed below.
Cash generated from operating activities was $547 for the nine months ended September 30, 2021 as compared to $302 for the nine months ended September 30, 2020. The $245 increase in cash generated from operations was due primarily to an increase in net income, accrued expenses, and income tax payable, partially offset by an increase in trade receivables. The increase in net income was primarily due to higher sales and gross profit. The increase in accrued expenses is due to an increase in accrued bonuses and legal fees. The increase in income tax payable was due to net income in 2021 compared to a net loss in 2020. The increase in trade receivables was due to the timing of shipments and collections on accounts.
Cash from investing activities was $2,987 for the nine months ended September 30, 2021 as compared to cash used in investing activities of $2,021 for the nine months ended September 30, 2020. The increase in cash from investing activities was due to an increase in proceeds from Treasury Bill maturities classified as investments during 2021 and new purchases of Treasury Bills classified as cash and cash equivalents. During the first nine months of 2020, the majority of maturities of Treasury Bills were classified as cash and cash equivalents.
Cash used in financing activities in the nine months ended September 30, 2021 and 2020 was $4 for both periods.
Subject to the following section, entitled "COVID-19 Pandemic Discussion", the Company believe its ongoing cash requirements will be primarily for capital expenditures, research and development, working capital, and corporate and business development initiatives and that cash on hand and any cash generated from operations will be sufficient to meet these cash requirements through at least the next 12 months.
COVID-19 Pandemic Discussion
The COVID-19 pandemic continues to affect our operations, including limiting our ability to travel and fully engage customers at their facilities. While many regions of the US have reduced the severe restrictions implemented during 2020, many customers continue to operate under modified restrictions based on the number of COVID-19 cases. The uncertainty surrounding the ongoing fluctuations in regional case counts creates uncertainty in our business and may negatively affect our 2021 financial results.
We typically have robust sources for production components and materials. However, we are increasingly experiencing significant disruptions in our supply chain, resulting in difficulty sourcing parts. Additionally, we are experiencing price increases for many of the components used in our products. In certain situations, we are modifying product designs to accommodate new components that are more readily available. There is no guarantee that we will continue to be successful in updating these designs and sourcing alternative components, and we could experience significant delays or run out of certain components and materials. We are also seeing delays in shipping and transportation services, which may adversely affect our ability to make timely deliveries to our customers. Furthermore, the labor market for qualified employees able to fill our production positions is challenging and may result in delays in filling open positions. While we continue to closely manage each of these activities, our actions may not be successful and may result in a negative effect on our sales and profit margins.
Future Corporate and Business Development Activities
On an ongoing basis, the Company seeks business and corporate development opportunities. This includes expansion of the Company's existing portfolio of products, technologies, and markets via partnerships or acquisitions, and the exploration of possible strategic corporate alternatives.
Off-balance Sheet Arrangements
As of September 30, 2021, the Company had no off-balance sheet arrangements or transactions.
Not Applicable.
Evaluation of Disclosure Controls and Procedures
Based on an evaluation with the participation of the Company’s management, the Company’s principal executive officer and principal financial officer has concluded that the Company’s disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (“Exchange Act”), were effective as of September 30, 2021.
Changes in Internal Control Over Financial Reporting
There were no changes in the Company’s internal control over financial reporting during the third quarter of 2021 that were identified in connection with management’s evaluation required by paragraph (d) of Rules 13a-15 and 15d-15 under the Exchange Act, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
