10-K 1 electro160946_10k.htm FORM 10-K FOR FISCAL YEAR ENDED DECEMBER 31, 2015

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

Form 10-K

 

 

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

 

For the fiscal year ended December 31, 2015

or

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
   
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, including zip code)
     
(952) 930-0100
(Registrant’s telephone number)
     

Securities registered under Section 12(b) of the Exchange Act:

Common Stock, $0.10 par value, registered on the NASDAQ Capital Market

Securities registered under Section 12(g) of the Exchange Act: None

 

 

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act. Yes ☐ No ☒

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 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 ☐

 

Indicate by check mark if disclosure of delinquent filers in response to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☒

 

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 ☐   Accelerated filer ☐
  Non-accelerated filer   ☐ (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 ☒ No

 

The aggregate market value of the voting stock held by non-affiliates (persons other than officers, directors, or holders of more than 5% of the outstanding stock) of the registrant was approximately $6,700,000 based upon the closing price of its common stock as reported on The Nasdaq Stock Market® on June 30, 2015.

 

The number of shares outstanding of the registrant’s Common Stock, $0.10 par value, on March 9, 2016 was 3,395,521.

 

DOCUMENTS INCORPORATED BY REFERENCE

Certain information called for by Part III of this Form 10-K is incorporated by reference from the registrant’s Definitive Proxy Statement, which will be filed pursuant to Regulation 14A not later than 120 days after the end of the fiscal year covered by this report.

  

 

 

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ELECTRO-SENSORS, INC.
Form 10-K for the Year Ended December 31, 2015
TABLE OF CONTENTS

 

   
PART I  
Item 1. Business 3
Item 1A. Risk Factors 7
Item 2. Properties 7
Item 3. Legal Proceedings 7
Item 4. Mine Safety Disclosures 8
     
PART II  
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 8
Item 6. Selected Financial Data 8
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 9
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 12
Item 8. Financial Statements and Supplementary Data 13
Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure 35
Item 9A Controls and Procedures 35
Item 9B. Other Information 35
     
PART III  
Item 10. Directors, Executive Officers and Corporate Governance 36
Item 11. Executive Compensation 36
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 36
Item 13. Certain Relationships and Related Transactions, and Director Independence 37
Item 14. Principal Accountant Fees and Services 37
     
PART IV  
Item 15. Exhibits and Financial Statement Schedules 37
     
SIGNATURES 38

 

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PART I

 

Item 1.          Business.

 

Introduction

 

Electro-Sensors, Inc. (“we,” “us,” “our,” the “Company” or “ESI”) is engaged in manufacturing and selling industrial production monitoring and process control systems.

 

In addition, through our former subsidiary ESI Investment Company, we periodically made strategic investments in other businesses and companies, primarily when we believed that these investments would facilitate the development of technology complementary to our existing products. During 2015, we sold substantially all our remaining investments in other businesses and companies. Effective December 31, 2015, we merged ESI Investment Company and Senstar Corporation, a subsidiary with no business operations, into the parent company Electro-Sensors, Inc.

 

ESI was incorporated in Minnesota in July 1968. Our executive offices are located at 6111 Blue Circle Drive, Minnetonka, Minnesota, 55343-9108. Our telephone number is (952) 930-0100.

 

Products

 

We manufacture and sell several different types of monitoring systems that measure actual machine production and operation rates, as well as systems that regulate the speed of related machines in production processes.

 

Our speed monitoring systems compare revolutions per minute or speed against acceptable rates as determined by a customer. The systems vary in complexity, from a simple system that detects slow-downs or stoppages, to more sophisticated systems that warn of deviations from precise tolerances and that permit various subsidiary operations to be determined through monitoring the shaft speed.

 

The speed monitoring systems also include a line of products that measure production counts or rates, such as parts, gallons, or board feet. The speed monitoring systems also include alarm systems, tachometers, and other devices that translate impulses from the sensors into alarm signals, computer inputs, or digital displays that are usable by the customer.

 

We also offer production monitoring devices that include a tilt switch, vibration monitor, and slide gate position monitor. A tilt switch is designed to alert the operator when a storage bin or production system reaches a certain capacity (e.g., when grain fills a silo). A vibration monitor will alert an operator when the vibration of a machine in a production system exceeds or is less than a specified level. The slide gate position monitor is used in plant operations to provide feedback of the position of a slide gate. As part of our Electro-Sentry Hazard Monitoring system, we also have temperature sensors that are used to monitor bearing temperature and belt misalignment.

 

We have several products used in drive control systems that regulate the speed of motors on related machines in a production sequence to ensure that the performances of various operations are coordinated. The products consist of a line of digital control products for motors that require a complete closed loop PID (Proportional Integral Derivative) control. The closed loop controllers coordinate production speed among process motors and reduce waste.

 

We have a sales agreement with Motrona GmbH, a German control and interface devices manufacturer, under which we have the right to distribute Motrona products in the United States. These products interface with our products on various applications.

 

In 2008, we introduced our Electro-Sentry 1 hazard monitoring system, which integrates our sensors for monitoring temperature, belt misalignment, and shaft speed with a programmable logic controller and touch screen interface to create a complete system for hazard monitoring. The system enables our customers to locate which part of their material handling system is operating incorrectly, typically in less than ten seconds, by using visual diagrams on a touch screen. In 2012, we introduced the Electro-Sentry 16 hazard monitoring system and added new features to the Electro-Sentry 1 system.

 

In 2013, the Company added ION Frequency/Discrete-In, a product that allows users to measure up to 12 shaft speeds and/or signal frequencies from pulse-frequency-output sensors. This is our third ION product, completing the ION product line to support all ESI sensor products and providing the customer high-speed/accuracy signal acquisition at low cost and saved wiring costs. The Company also expanded the Series 18 shaft speed sensors to include additional housings and connection options to reach a broader range of installations. In addition, in 2013 we also introduced product upgrades for sensing capability and ruggedness on our Hall-effect sensors.

 

In 2014, we introduced a process meter for analog output sensors, such as our TT420, temperature sensors, ST420, speed sensors, and SG1000, slide gate position monitor.

 

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Additionally, in 2014, the Company purchased the Insta-Link wireless hazard technology monitoring system and product family, together with related technology and intellectual property rights, from Harvest Engineering Inc., a privately held Illinois-based corporation, and its affiliated parties and owners (“Harvest”). The Company is marketing the wireless hazard monitoring products under its new HazardPROTM product line and manufacturing and servicing these products at its Minnetonka, Minnesota facility. The Company agreed to pay $1,200,000 for the product line, of which $400,000 was paid at closing, and additional payments of $400,000 will be paid on each of the first and second anniversary of the closing. The final payment of $400,000 was made on February 18, 2016. Harvest may earn up to an additional $550,000 of purchase price, depending upon the achievement of revenue measures during the four calendar years following the closing.

 

We expect to continue to expend resources to develop new products and to market new and existing products for use in a wide variety of monitoring applications.

 

Our customers have diverse applications for our products in the grain, feed, bio-fuels, power generation, water utilities and waste water treatment, mining, chemical, and other processing areas. We continue to look for new industries to expand sales and may also consider acquiring compatible businesses as part of our growth strategy. We believe that a wide variety of organizations can achieve significant savings in both time and materials by adding production monitoring and drive control technology to existing processes to coordinate the operation of related machines. Our products are sold into both the “retro-fit” market and into new manufacturing or processing systems.

 

Our corporate web site provides significant information and product application knowledge to existing and prospective customers and also direct knowledge to our sales partners. Information on our website is not incorporated by reference herein and is not a part of this Form 10-K.

  

Marketing and Distribution

 

We sell our products primarily through both our internal sales team and a number of manufacturer’s representatives and distributors located throughout the United States, Canada, Mexico, Chile, Colombia, Guatemala, Peru, United Kingdom, Ukraine, Egypt, Saudi Arabia, Australia, China, Korea, Vietnam, Malaysia, Philippines, and Singapore. Sales to customers outside the United States represent approximately 13% of sales in 2015. The sensing and control units are sold under the Electro-Sensors, Inc. brand as a range of products from simple sensors to complex motor speed controllers. These products are sold to businesses in a wide variety of industries, including agriculture, grain-handling, feed, biofuels, food processing, chemicals, mining, utility, forest products, steel, tire, glass and electronics. Any business that uses machinery with a rotating shaft is a potential customer.

 

We advertise in national industrial periodicals that cover a range of industrial products and attend several local, national and international tradeshows designated for the industry throughout the year. We also use our corporate website and other related industry websites for advertising and marketing purposes.

 

Competition

 

We face substantial competition in the sale of our production monitoring systems from a broad range of industrial and commercial businesses. Many of these competitors are well established and have greater sales volume. Among our larger competitors are Danaher Controls, Red Lion Controls, 4B Elevator Components Ltd., and Durant Corporation. We believe our competitive advantages include our products superior design and quality, the fact that our products are sold as ready-to-install units, and they can be used in a wide range of applications. Our major disadvantages include the fact that our major competitors are much larger, have a broader variety of sensing instruments, and have larger sales forces and established names.

 

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Suppliers

 

We purchase parts and materials for our systems from various manufacturers and distributors. In some instances, these materials are manufactured in accordance with our proprietary designs. Multiple sources of these parts and materials are generally available, and we are not dependent on any single source for these supplies and materials. We have not experienced any significant problem of short supply or delays from our suppliers.

 

Customers

 

We are not dependent upon a single or a few customers for a material (10% or more) portion of our sales.

 

Patents, Trademarks and Licenses

 

The Company relies on a combination of patent, trademark, and trade secret laws to establish proprietary right in its products.

 

We have registered the name “Electro-Sensors” as a trademark with the U.S. Patent and Trademark Office (“USPTO”), Reg. No. 1,142,310. We believe this trademark has been and will continue to be useful in developing and protecting market recognition for our products. We established the HazardPROTM trademark in the first quarter of 2014 and intend to register the trademark with the USPTO during 2016.

 

We hold six patents relating to our production monitoring systems. The Company believes strongly in protecting its intellectual property and has a long history of obtaining patents, when available, in connection with its research and product development programs. The Company also relies upon trade secrets and proprietary know-how.

 

The Company seeks to protect its trade secrets and proprietary intellectual property, including know-how, in part, through confidentiality agreements with employees, consultants, and other parties. We cannot ensure, however, that these agreements will not be breached, that the Company would have adequate remedies for any breach, or that the Company’s trade secrets will not otherwise become known or independently developed by competitors.

 

Business Development Activities

 

We continue to seek growth opportunities, both internally through our existing portfolio of products, technologies and markets, as well as externally through technology partnerships or related-product acquisitions.

 

Governmental Approvals

 

Although, we are not required to obtain governmental approval of our products, we choose to obtain certain third party certifications to meet our customers’ needs. These certifications may expand our market opportunities in certain industries.

 

Effect of Governmental Regulations

 

We do not believe that any existing or proposed governmental regulations will have a material effect on our business.

 

Research and Development (in thousands)

 

We invest in research and development programs to develop new products in related markets and to integrate state-of-the-art technology into our existing products. We incurred research and development expenses of approximately $753 and $810 during 2015 and 2014, respectively. We undertake development projects based upon the identified specific needs of the markets we serve.

 

Our future success depends in part upon our ability to develop new products in our varying segments. Difficulties or delays in our ability to develop, produce, test and market new products could have a material adverse effect on future sales growth.

 

Compliance with Environmental Laws

 

Compliance with federal, state and local environmental laws has only a nominal effect on current or anticipated capital expenditures and has had no material effect on earnings or on our competitive position.

 

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Employees

 

As of March 9, 2016, we had 36 employees, all of whom are full-time. We believe that our relations with our employees are good. None of our employees are members of unions.

 

Our ability to maintain a competitive position and to continue to develop and market new products depends, in part, on our ability to retain key employees and qualified personnel. If we are unable to retain our key employees, or recruit and train others, our product development, marketing and sales could be negatively impacted.

 

Fluctuations in Operating Results.

 

We have experienced fluctuations in our past operating results, and expect to experience fluctuations in the future, which may affect the market price of our Common Stock. Sales can fluctuate as a result of a variety of factors, many of which are beyond our control. These factors include: product competition and acceptance, timing of customer orders, cancellation of orders, the mix of products sold, downturns in the markets we serve and economic disruptions. Because fluctuations can happen, we caution investors that results of our operations for recent periods may not accurately predict how we will perform in the future. We cannot ensure that we will experience revenue or earnings growth.

 

Expending Funds for Changes in Industry Standards, Customer Preferences or Technology.

 

Our business depends upon periodically introducing new and enhanced products and solutions for customer needs. Our product development requires us to commit financial resources, personnel and time, usually in advance of significant market demand for these products. In order to compete, we must anticipate both future demand and the technology available to meet that demand. We cannot ensure that our research and development efforts will lead to new products or product innovations that can be made available to or will be accepted by the market.

 

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Cautionary Statements

 

The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements made by us or on our behalf. We have made, and may continue to make, forward-looking statements with respect to our business and financial matters, including statements contained in this document, other filings with the Securities and Exchange Commission, and reports to shareholders. Forward-looking statements generally include discussion of current expectations or forecasts of future events and can be identified by the use of terminology such as “believe,” “estimate,” “expect,” “intend,” “may,” “could,” “will,” and similar words or expressions. Any statement that does not relate solely to historical fact should be considered forward-looking.

 

Our forward-looking statements generally relate to our growth strategy, future financial results, product development and sales efforts. Forward-looking statements are made throughout this Annual Report, but primarily in this Item 1 and Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations, and include statements relating to management’s intentions that we not become an investment company, our expectations and intentions with respect to growth, statements relating to management’s beliefs with respect to our marketing and product development, our expectations and beliefs with respect to the value of our intellectual property, our beliefs with respect to our competitive position in the marketplace, our beliefs with respect to the effect of governmental regulations on our business, our beliefs with respect to our employee relations, our expectations and beliefs with respect to the future performance of our investment securities, the adequacy of our facilities, expansion of our number of manufacturer’s representatives and exclusive distributors, our intention to develop new products, the possibility of acquiring compatible businesses as part of our growth strategy, and our expectations with respect to our cash requirements and use of cash.

 

Forward-looking statements cannot be guaranteed and our actual results may vary materially due to the uncertainties and risks, known and unknown, associated with these statements, including our ability to successfully develop new products and manage our cash requirements. We undertake no obligations to update any forward-looking statements. We wish to caution investors that the following important factors, among others, in some cases have affected and in the future could affect our actual results of operations and cause these results to differ materially from those anticipated in forward-looking statements made in this document and elsewhere by us or on our behalf. We cannot foresee or identify all factors that could cause actual results to differ from expected or historical results. As such, investors should not consider any list of these factors to be an exhaustive statement of all risks, uncertainties or potentially inaccurate assumptions. These factors include our ability to:

 

·successfully use our cash and liquid assets to develop or acquire new or complementary products to increase our revenue and profitability;

 

·successfully integrate the wireless hazard technology and product line we purchased in February 2014;

 

·quickly and successfully adapt to changing industry technological standards;

 

·comply with existing and changing industry regulations;

 

·attract and retain new quality manufacturer’s representatives and distributors;

 

·attract and retain key personnel, including senior management;

 

·adapt to changing economic conditions and manage downturns in the economy in general; and

 

·keep pace with competitors, some of whom are much larger and have substantially greater resources than us.

 

Item 1A.Risk Factors.

 

Not required for smaller reporting companies.

 

Item 2.Properties.

 

We own and occupy a 25,400 square foot facility at 6111 Blue Circle Drive, Minnetonka, Minnesota 55343-9108. All operations are conducted within this facility. The facility is in excellent condition and we continue to maintain and update the facility as necessary. We believe the facility will be adequate for our needs in 2016.

 

Item 3. Legal Proceedings.

 

We are not the subject of any legal proceedings as of the date of this filing. We are not aware of any threatened litigation.


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Item 4.Mine Safety Disclosures.

 

Not applicable.

 

PART II

 

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

 

Our common stock trades on the Nasdaq Capital Market of The Nasdaq Stock Market® under the symbol “ELSE.” The following table sets forth the quarterly high and low reported last sales prices for our common stock for each period indicated as reported on the Nasdaq system.

 

    Period   High   Low  
               
2015   First Quarter   $ 4.38   $ 3.64  
    Second Quarter   $ 4.56   $ 3.84  
    Third Quarter   $ 4.40   $ 3.53  
    Fourth Quarter   $ 4.02   $ 3.55  
                   
2014   First Quarter   $ 4.33   $ 3.94  
    Second Quarter   $ 4.42   $ 3.86  
    Third Quarter   $ 4.25   $ 3.42  
    Fourth Quarter   $ 4.20   $ 3.09  

 

Based on data provided by our transfer agent, as of March 9, 2016, we had 76 shareholders of record who held 903,331 shares of the Company’s common stock. In addition, nominees held an additional 2,492,190 shares for approximately 299 shareholders holding shares in street name.

 

From time to time, we may be required to repurchase some of our equity securities as a result of obligations described in Note 12 to our 2015 consolidated financial statements. We did not repurchase any equity securities during the years ended December 31, 2015 and 2014.

 

The information required by Item 201(d) is set forth in Item 12 of this Form 10-K.

 

Item 6. Selected Financial Data.

 

Not required for smaller reporting companies.

 

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

The following discussion should be read in conjunction with our consolidated financial statements and related notes. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated due to various factors discussed under “Forward-Looking Statements” elsewhere in this Annual Report on Form 10-K.

 

RESULTS OF OPERATIONS

 

The following table contains selected financial information, for the periods indicated, from our consolidated statements of comprehensive income expressed as a percentage of net sales.

 

   Year Ended December 31,  
   2015      2014  
Net Sales   100.0%   100.0%
Cost of Goods Sold   44.7    42.0 
Gross Profit   55.3    58.0 
           
Operating Expenses          
Selling and marketing   20.4    22.1 
General and administrative   21.3    18.9 
Research and development   9.9    11.5 
Total Operating Expenses   51.6    52.5 
           
Operating Income   3.7    5.5 
           
Non-operating Income (Expense)          
           
Interest expense   (0.1)   (0.2)
Gain on sale of available-for-sale securities   19.0    16.5 
Interest income   0.0    0.0 
Other income   0.2    0.2 
Total Non-operating Income, Net   19.1    16.5 
           
Income before Income Taxes   22.8    22.0 
           
Income Taxes   6.9    6.5 
           
Net Income   15.9%   15.5%

 

The following paragraphs discuss the Company’s performance for years ended December 31, 2015 and 2014.

 

Comparison of 2015 vs. 2014 (in thousands)

 

Net Sales

 

Net sales increased $595 or 8.5%, to $7,636 in 2015 from $7,041 in 2014. This increase was primarily driven by sales of HazardPRO wireless hazard monitoring systems following our receipt in early 2015 of third-party certification for installing HazardPRO systems into certain hazardous environments. These HazardPRO systems are now deployed in a wide–range of agricultural and industrial applications, including grain handling and milling, animal nutrition and hardwood processing.

 

We continue to see steady demand for our broad line of shaft speed switches and sensors as well as sensors for monitoring sliding gates and valves. These sensors and switches are highly desired for their durability, safety and long-term value. On a geographic basis, we experienced a 20% growth in sales to customers in the South Central U.S. International markets remain an important part of our business, providing over 13% of our 2015 revenue from shipments into 45 countries.

 

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Gross Profit

 

Gross profit for 2015 increased $140, or 3.4%, to $4,226 from $4,086 in 2014. Gross margin for 2015 was 55.3% compared to 58.0% in 2014. The slight decrease in the gross margin was primarily due to higher manufacturing costs on the initial HazardPRO products. We expect HazardPRO manufacturing costs to continue to decrease through production efficiencies and increased purchasing volume.

 

Operating Expenses

 

Total operating expenses increased $241, or 6.5%, to $3,936 in 2015 compared to $3,695 in 2014. This increase was due to the following:

 

·Selling and marketing expenses were relatively unchanged in 2015 compared to 2014, but decreased as a percentage of sales to 20.4% from 22.1%. Increased travel costs related to promoting HazardPRO and personnel expenses were partially offset by a decrease in commissions paid to manufacturer’s representatives.

 

·General and administrative expenses increased $296, or 22.3%, to $1,625 in 2015 compared to $1,329 in 2014, and increased as a percentage of sales to 21.3% from 18.9%. The increase was due primarily to amortization of the intangible assets related to the February 2014 acquisition of the HazardPRO technology and wages and benefits related to additional personnel. Amortization expense on the HazardPRO technology for 2015 was approximately $211 compared to approximately $71 in 2014.

 

·Research and development expenses decreased $57, or 7.0%, to $753 in 2015 compared to $810 in 2014, and decreased as a percentage of sales to 9.9% from 11.5%. The 2015 decrease was the result of lower wages and benefits due to reduced staffing levels and costs incurred in 2014 for prototype and development of the HazardPRO product line.

 

Operating Income

 

Operating income decreased $101 or 25.8%, to $290 in 2015 from $391 in 2014, and decreased as a percentage of sales to 3.7% from 5.5%, due primarily to lower 2015 gross margin, which was slightly offset by lower operating expenses discussed above.

 

Non-Operating Income

 

Non-operating income increased $291 to $1,454 in 2015 from $1,163 in 2014, primarily as a result of additional realized gains on sales of shares of Rudolph Technologies, Inc. (“Rudolph”). As of December 31, 2015, the Company has fully liquidated all holdings in Rudolph stock.

 

Available-for-sale securities are stated at fair value, and unrealized holding gains and losses, net of the related deferred tax effect, are reported as a separate component of stockholders’ equity.

 

Realized gains and losses, including losses from declines in value of specific securities determined by management to be other-than-temporary, are included in the statement of comprehensive income. Realized gains and losses are determined on the basis of the specific securities sold.

 

Net Income After Tax

 

We reported net income of $1,214 in 2015 as compared to net income of $1,094 in 2014, an increase of $120, or 11.0%. Basic and diluted earnings per share were $0.36 and $0.33, respectively, in 2015, compared to basic and diluted earnings per share of $0.32 and $0.30, respectively, in 2014.

 

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OFF-BALANCE SHEET ARRANGEMENTS

 

We are not a party to any off-balance sheet transactions, arrangements or obligations that have, or are reasonably likely to have, a material effect on our financial condition, changes in the financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

 

LIQUIDITY AND CAPITAL RESOURCES

 

Cash and cash equivalents were $569 and $1,190 at December 31, 2015 and 2014, respectively. The decrease was mainly due to net cash used in operating activities, as described below. Working capital was $9,941 at December 31, 2015 compared to $10,132 at December 31, 2014.

 

Cash used in operating activities in 2015 was $306, compared to cash generated from operating activities of $263 in 2014, resulting in a decrease of cash from operating activities of $569. The decrease resulted, in part, from an increase in inventories and a decrease in accrued expenses and income tax payable. The inventory increase is primarily due to the build-up of inventory for anticipated HazardPRO system orders. The decrease in accrued expenses is due to changes in compensation plans. The decrease in income tax accruals is due to the timing of income tax payments.

 

Cash generated from investing activities in 2015 was $66, compared to $581 cash used in 2014 investing activities. The increase is primarily due to the receipt of $1,467 for sales of available-for-sale securities during 2015 compared to $1,178 during 2014. In addition, the Company acquired the Harvest wireless hazard monitoring technology in February 2014 for $400,000 and financed the remaining purchase price through a seller-financed note.

 

We used cash of $381 in 2015 financing activities compared to cash of $3 generated in 2014. During 2015, we paid $381 on the long-term note owed to Harvest, which was the first installment under the note payable agreement. The final $400 installment on the note payable was paid on February 18, 2016.

 

Our ongoing cash usage requirements will be primarily used for capital expenditures, potential acquisitions, research and development, and working capital. Management believes that cash on hand and any cash provided by operations will be sufficient to meet our cash requirements through at least the next 12 months.

 

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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. Those decisions include the selection of applicable accounting principles and the use of judgment in their application, the results of which impact reported amounts and disclosures. Changes in economic conditions or other business circumstances may affect the outcomes of management’s estimates and assumptions.

 

Significant estimates, including the underlying assumptions, consist of the economic lives of 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.

 

Economic lives of long-lived assets 

We estimate the economic useful life of long-lived assets used in the business. Expected asset lives may be shortened or an impairment may be recorded based on a change in the expected use of the asset.

 

Realizability of trade receivables 

We estimate our allowance for doubtful accounts based on prior history and the aging of our trade receivables. We are unable to predict which, if any, of our customers will be unable to pay their open invoices at a future date.

 

Valuation of deferred tax assets/liabilities 

We estimate our deferred tax assets and liabilities based on current tax laws and rates. The tax laws and rates could change in the future to either disallow the deductions or increase/decrease the tax rates.

 

Valuation of inventory 

We purchase inventory based on estimated demand of products. It is possible that the inventory we have purchased will not be used in the products that our customers need or will not meet future technological requirements.

 

Valuation of investments 

Our investments in equity securities are valued at market prices in an open market. The prices are subject to the normal fluctuations that could be either negative or positive.

 

Valuation of stock-based compensation expense 

We estimate the expected life and forfeiture rates of stock options granted when calculating the value of options using the Black-Sholes-Merton model. The actual life and forfeiture rate could differ from what we estimated.

 

Valuation of the contingent earn-out 

We estimated the probability of meeting the revenue targets over the measurement period to determine the fair value of the contingent liability. The actual payout could be more or less than what we have estimated.

 

Additional information regarding our significant accounting policies is provided below in Part II, Item 8, Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements, Note 1, Nature of Business and Significant Accounting Policies.

 

Item 7A.Quantitative and Qualitative Disclosures About Market Risk.

 

Not applicable.

 

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Item 8.            Financial Statements and Supplementary Data.

 

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS 

 

Report of Independent Registered Public Accounting Firm 14
Financial Statements  
Consolidated Balance Sheets 15
Consolidated Statements of Comprehensive Income 16
Consolidated Statements of Changes in Stockholders’ Equity 17
Consolidated Statements of Cash Flows 18
Notes to Consolidated Financial Statements 19

 

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Table of Contents

 

(BOULAY LOGO)

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

Board of Directors
Electro-Sensors, Inc. and Subsidiaries 

Minnetonka, Minnesota

 

We have audited the accompanying consolidated balance sheets of Electro-Sensors, Inc. and Subsidiaries (the Company) as of December 31, 2015 and 2014, and the related consolidated statements of comprehensive income, changes in stockholders’ equity, and cash flows for each of the years in the two-year period ended December 31, 2015. The Company’s management is responsible for these consolidated financial statements. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Electro-Sensors, Inc. and Subsidiaries as of December 31, 2015 and 2014, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2015, in conformity with accounting principles generally accepted in the United States of America. 

 

/s/ Boulay PLLP 

 
 
Minneapolis, Minnesota  
March 14, 2016  

 

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ELECTRO-SENSORS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in thousands except share and per share amounts)

         
   December 31 
   2015   2014 
ASSETS          
           
Current assets          
           
Cash and cash equivalents  $569   $1,190 
Treasury bills   7,872    6,542 
Available-for-sale securities   0    1,256 
Trade receivables, less allowance for doubtful accounts of $8 and $10, respectively   689    738 
Inventories   1,564    1,224 
Other current assets   170    163 
Deferred income tax asset, current   14    0 
           
Total current assets   10,878    11,113 
           
Deferred income tax asset   170    0 
           
Intangible assets, net   1,270    1,505 
           
Property and equipment, net   1,103    1,146 
           
Total assets  $13,421   $13,764 
           
LIABILITIES AND STOCKHOLDERS’ EQUITY          
           
Current liabilities          
           
Current maturities of note payable  $390   $381 
Accounts payable   136    126 
Accrued expenses   396    392 
        Income tax payable   4    82 
           
Total current liabilities   926    981 
           
Long-term liabilities          
           
Note payable – long term   0    390 
Contingent earn-out   455    472 
Deferred income tax liability   0    391 
           
Total long-term liabilities   455    1,253 
           
Commitments and contingencies          
           
Stockholders’ equity          
           
Common stock par value $0.10 per share; authorized 10,000,000 shares; 3,395,521 shares issued and outstanding
   339    339 
Additional paid-in capital   1,879    1,816 
Retained earnings   9,855    8,641 
Accumulated other comprehensive income (loss) (unrealized gain (loss) on available-for-sale securities, net of income tax)   (33)   734 
           
Total stockholders’ equity   12,040    11,530 
           
Total liabilities and stockholders’ equity  $13,421   $13,764 

 

See Notes to Consolidated Financial Statements

 

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ELECTRO-SENSORS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME 

(in thousands except share and per share amounts) 

 

  

Years ended December 31, 

 
   2015  

2014 

 
         
Net Sales  $7,636   $7,041 
Cost of Goods Sold   3,410    2,955 
           
Gross Profit   4,226    4,086 
           
Operating Expenses          
           
Selling and marketing   1,558    1,556 
General and administrative   1,625    1,329 
Research and development   753    810 
           
Total Operating Expenses   3,936    3,695 
           
Operating Income   290    391 
           
Non-operating Income (Expense)          
           
Interest expense   (11)   (17)
Gain on sale of available-for-sale securities   1,449    1,163 
Interest income   0    2 
Other income   16    15 
           
Total Non-operating Income, Net   1,454    1,163 
           
Income before Income Taxes   1,744    1,554 
           
Income Taxes   530    460 
           
Net Income   1,214    1,094 
           
Other Comprehensive Loss          
Change in unrealized value of available-for-sale securities, net of income tax   131    (176)
Reclassification of gains included in net income, net of income tax   (898)   (721)
           
Other Comprehensive Loss   (767)   (897)
Net Comprehensive Income  $447   $197 
           
Net Income per share data          
           
Basic          
Net income per share  $0.36   $0.32 
Weighted average shares   3,395,521    3,395,510 
           
Diluted          
Net income per share  $0.33   $0.30 
Weighted average shares   3,653,021    3,654,382 

 

See Notes to Consolidated Financial Statements

 

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ELECTRO-SENSORS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY 

(in thousands except share and per share amounts)  

                               
   Common Stock Issued   Additional       Accumulated
other
   Total 
   Shares   Amount   paid-in
capital
   Retained
earnings
   comprehensive
income (loss)
   Stockholders’
equity
 
                               
Balance, December 31, 2013   3,394,707   $339   $1,746   $7,547   $1,631   $11,263 
                               
Other comprehensive loss                       (897)   (897)
Stock issued through the employee stock purchase plan
   814    0    3              3 
Stock-based compensation expense
             67              67 
Net income                  1,094         1,094 
                               
Balance, December 31, 2014   3,395,521    339    1,816    8,641    734    11,530 
                               
Other comprehensive loss                       (767)   (767)
Stock-based compensation expense
             63              63 
Net income                  1,214         1,214 
                               
Balance, December 31, 2015   3,395,521   $339   $1,879   $9,855   $(33)   $12,040 

  

See Notes to Consolidated Financial Statements

 

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ELECTRO-SENSORS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS 

(in thousands)

 

   Years ended December 31, 
   2015   2014 
Cash flows from (used in) operating activities          
           
Net Income  $1,214   $1,094 
           
Adjustments to reconcile net income to net cash from (used in) operating activities:          
           
Depreciation and amortization   348    209 
Realized gain on sale of available-for-sale securities   (1,449)   (1,163)
Deferred income taxes   (104)   (81)
Change in contingent earn-out fair value   (17)   0 
Stock-based compensation expense   63    67 
Other   (1)   1 
Changes in operating assets and liabilities, net of acquisition:          
    Trade receivables   51    6 
    Inventories   (340)   (164)
    Other current assets   (7)   18 
    Accounts payable   10    67 
    Accrued expenses   4    127 
    Accrued income taxes   (78)   82 
           
Net cash from (used in) operating activities   (306)   263 
           
Cash flows from (used in) investing activities:          
           
Proceeds from sale of available-for-sale securities   1,467    1,178 
Purchase of treasury bills   (12,674)   (14,184)
Proceeds from the maturity of treasury bills   11,343    12,871 
Cash paid for acquisition   0    (400)
Purchase of property and equipment   (70)   (46)
           
Net cash from (used in) investing activities   66    (581)
           
Cash flows from (used in) financing activities:          
           
Proceeds from issuance of common stock   0    3 
Payments on long-term debt   (381)   0 
           
Net cash from (used in) financing activities   (381)   3 
           
Net decrease in cash and cash equivalents   (621)   (315)
           
Cash and cash equivalents, beginning   1,190    1,505 
Cash and cash equivalents, ending  $569   $1,190 
           
Supplemental cash flow information          
Cash paid during the year for income taxes  $712   $462 
Cash paid during the year for interest  $19   $0 
           
Supplemental disclosures of non-cash investment and financing activities          
           
Note payable issued to fund acquisition, net of discount  $0   $771 
           
Contingent earn-out recorded at fair value in connection with the acquisition  $0   $472 

 

See Notes to Consolidated Financial Statements

 

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ELECTRO-SENSORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 

YEARS ENDED DECEMBER 31, 2015 AND 2014 

(in thousands except share and per share amounts) 

 

Note 1. Nature of Business and Significant Accounting Policies 

 

Nature of business: 

 

The accompanying consolidated financial statements include the accounts of Electro-Sensors, Inc. and its wholly-owned subsidiaries, ESI Investment Company and Senstar Corporation. Senstar has no assets or operations. As of December 31, 2015, these two subsidiaries were merged into the Electro-Sensors, Inc. parent company. Intercompany accounts, transactions and earnings have been eliminated in consolidation. The consolidated entity is referred to as “the Company” or “ESI.” 

 

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, manufacturer’s representatives, and distributors to a wide variety of industries that use the products in a range of applications to monitor process machinery operations. The Company markets its products to a variety of different industries located throughout the United States, Canada, Mexico, Latin America, Europe, and Asia. 

 

In addition, through our former subsidiary ESI Investment Company, we periodically made strategic investments in other businesses, primarily when we believed that these investments would facilitate the development of technology complementary to our existing products. During 2015, we sold substantially all our remaining investments in other businesses and companies. See Note 3 for additional information regarding the Company’s investments. The Company’s investments in securities are subject to normal market risks. 

 

Significant accounting policies of the Company are summarized below:

  

Use of estimates 

 

The preparation of consolidated financial statements in accordance with accounting principles generally accepted in the United States of America (US GAAP) requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. Significant estimates, including the underlying assumptions, consist of the economic lives of 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. 

 

Cash and cash equivalents

  

The Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents. Cash equivalents are invested in commercial paper, money market accounts and may, also, be invested in three month Treasury Bills. Cash equivalents are carried at cost plus accrued interest which approximates fair value. 

 

The Company maintains its cash and cash equivalents in primarily one bank deposit account, which, at times, may exceed federally insured limits. The Company has not experienced any losses on these accounts. The Company believes it is not exposed to any significant credit risk on cash. 

 

Trade receivables and credit policies 

  

Trade receivables are uncollateralized customer obligations due under normal trade terms generally requiring payment within 30 days from the invoice date. Trade receivables are stated at the amount billed to the customer. Customer account balances with invoices over 90 days are considered delinquent. The Company does not accrue interest on delinquent trade receivables. 

 

Payments of trade receivables are allocated to the specific invoices identified on the customer’s remittance advice or, if unspecified, are applied to the earliest unpaid invoices. 

 

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ELECTRO-SENSORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 

YEARS ENDED DECEMBER 31, 2015 AND 2014 

(in thousands except share and per share amounts) 

 

The carrying amount of trade receivables is reduced by an allowance for doubtful accounts that reflects management’s best estimate of the amounts that will not be collected. Management individually reviews all trade receivable balances that exceed 90 days from the invoice date and based on an assessment of current creditworthiness, estimates the portion, if any, of the balance that may not be collected. Management uses this information to estimate the allowance. 

 

Available-for-sale securities 

 

The Company’s investments have traditionally consisted of equity securities, primarily common stocks and government debt securities. The estimated fair value of publicly traded equity securities is based on reported market prices or management’s reasonable market price when quoted prices are not available, and therefore subject to the inherent risk of market fluctuations. 

 

Management determines the appropriate classification of securities at the date individual investments are acquired, and evaluates the appropriateness of this classification at each balance sheet date.

 

Since the Company generally does not make investments in anticipation of short-term fluctuations in market price, the Company classifies its investments in equity securities and treasury bills as available-for-sale. Available-for-sale securities with readily determinable values are stated at fair value, and unrealized holding gains and losses, net of the related deferred tax effect, are reported as a separate component of stockholders’ equity and within accumulated other comprehensive income (loss). 

 

Realized gains and losses on securities, including losses from declines in value of specific securities determined by management to be other-than-temporary, are included in the statement of comprehensive income. Realized gains and losses are determined on the basis of the specific securities sold. There were no other-than-temporary impairments recognized in the years ended December 31, 2015 and 2014. The Company sold substantially all of its available-for-sale securities during 2015. 

 

Fair value measurements 

 

The Company’s policies incorporate the guidance for accounting for fair value measurements of financial assets and financial liabilities and for fair value measurements of nonfinancial items that are recognized or disclosed at fair value in the consolidated financial statements on a recurring basis. These policies also incorporate the guidance for fair value measurement related to nonfinancial items that are recognized and disclosed at fair value in the consolidated financial statements on a nonrecurring basis. The guidance establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to measurements involving significant unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are as follows:

  

·Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.

·Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset or liability.

·Level 3 inputs are unobservable inputs for the asset or liability.

  

The level in the fair value hierarchy within which a fair measurement in its entirety falls is based on the lowest level input that is significant to the fair value measurement in its entirety. The Company currently has no nonfinancial or financial items that are measured on a nonrecurring basis.

  

The carrying value of cash equivalents, trade receivables, accounts payable, and other financial working capital items approximate fair value at December 31, 2015 and 2014 due to the short term maturity nature of these instruments.

  

Inventories

  

Inventories include material, labor and overhead and are valued at the lower of cost (first-in, first-out) or market.

 

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ELECTRO-SENSORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 

YEARS ENDED DECEMBER 31, 2015 AND 2014 

(in thousands except share and per share amounts)  

 

Property and equipment 

 

Property and equipment are stated at cost. Depreciation is provided over estimated useful lives by use of the straight-line method. Maintenance and repairs are expensed as incurred. Major improvements and betterments are capitalized.

  

Long-lived assets, such as property and equipment and intangible assets, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If circumstances require a long-lived asset be tested for possible impairment, the Company first compares undiscounted cash flows expected to be generated by an asset to the carrying value of the asset. If the carrying value of the long-lived asset is not recoverable on an undiscounted cash flow basis, the Company recognizes impairment to the extent that the carrying value of an asset exceeds its fair value. Fair value is determined through various valuation techniques including, but not limited to, discounted cash flow models, quoted market values and third-party independent appraisals.

  

Estimated useful lives are as follows

  

  Years
   
Equipment 3-10
Furniture and Fixtures 3-10
Building 7-40

  

Intangible assets

  

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

  

Revenue recognition

  

The Company recognizes revenue when persuasive evidence of an arrangement exists, the product has been picked up by common carrier, the fee is fixed and determinable and collection of the resulting receivable is reasonably assured. Product revenues are recognized upon shipment because the contracts generally do not include post-shipment obligations. The Company may offer discounts that it records at the time of sale. In addition to exchanges and warranty returns, customers have limited refund rights. Historically, returns have been minimal and immaterial to the consolidated financial statements and are generally recognized when the returned product is received by the Company. In some situations, the Company receives advance payments from its customers. The Company defers the recognition of revenue associated with these advance payments until the product ships.

 

Advertising costs

  

The Company expenses advertising costs as incurred. Total advertising expense was $56 and $57 in fiscal 2015 and 2014, respectively.

  

Research and development

  

Expenditures for research and development are expensed as incurred. The Company incurred expenses of $753 and $810 in fiscal 2015 and 2014, respectively.

 

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ELECTRO-SENSORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 

YEARS ENDED DECEMBER 31, 2015 AND 2014 

(in thousands except share and per share amounts) 

 

Income taxes

  

The Company presents deferred income taxes on an asset and liability approach to financial accounting and reporting for income taxes. The Company annually determines the difference between the financial reporting and tax bases of assets and liabilities. The Company computes deferred income tax assets and liabilities for those differences that have future tax consequences using the currently enacted tax laws and rates that apply to the periods in which these laws are expected to affect taxable income. Income tax expense is the current tax payable or refundable for the period plus or minus the net change in the deferred tax assets and liabilities, excluding the portion of the deferred asset or liability allocated to other comprehensive income (loss). Deferred taxes are reduced by a valuation allowance to the extent that realization of the related deferred tax asset is not assured. No valuation allowance was deemed necessary at December 31, 2015 and 2014.

  

The Company recognizes the effect of income tax positions only if those positions are more likely than not to be sustained. The Company recognized income tax positions at the largest amount that is more likely than not to be realized. The Company reflects changes in recognition or measurement in the period in which the change in judgment occurs.

  

The Company records interest and penalties related to unrecognized tax benefits in income tax expense.

  

Net income per common share

  

Basic earnings per share (EPS) excludes dilution and is determined by dividing net income by the weighted average number of common shares outstanding during the period. Diluted EPS reflects the potential dilution that could occur if securities and other contracts to issue common stock were exercised or converted into common stock.

  

The following information presents the Company’s computations of basic and diluted EPS for the periods presented in the statements of comprehensive income.  

                   
    Income   Shares   Per share
amount
 
                 
2015:                  
Basic EPS   $ 1,214   3,395,521   $ 0.36  
Effect of dilutive stock options         257,500     (0.03 )
Diluted EPS   $ 1,214   3,653,021   $ 0.33  
                   
2014:                  
Basic EPS   $ 1,094   3,395,510   $ 0.32  
Effect of dilutive stock options         258,872     (.02 )
Diluted EPS   $ 1,094   3,654,382   $ 0.30  

 

Stock-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”) model. The Company uses historical data, among other factors, to estimate the expected price volatility, the expected option life and the expected forfeiture rate. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant for the estimated life of the option. At December 31, 2015, the Company had two stock-based compensation plans.  

 

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ELECTRO-SENSORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 

YEARS ENDED DECEMBER 31, 2015 AND 2014 

(in thousands except share and per share amounts) 

 

Recently Issued Accounting Pronouncements 

Inventory Measurement (Evaluating) 

In July 2015, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2015-11, which amended Inventory (Topic 330) Related to Simplifying the Measurement of Inventory of the Accounting Standards Codification. The amended guidance applies to all inventory except that which is measured using last-in, first-out (LIFO) or the retail inventory method. Inventory measured using first-in, first-out (FIFO) or average cost is included in the new amendments. Inventory within the scope of the new guidance should be measured at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. Subsequent measurement is unchanged for inventory measured using LIFO or the retail inventory method. The amendments will take effect for public business entities for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. For all other entities, the amendments in this update are effective for fiscal years beginning after December 15, 2016, and interim periods within fiscal years beginning after December 15, 2017. The new guidance should be applied prospectively, and earlier application is permitted as of the beginning of an interim or annual reporting period. The Company does not expect this standard to have a material effect on its consolidated financial statements. 

 

Contract Revenue Recognition (Evaluating) 

In May 2014, the FASB issued Accounting Standards Update (ASU) No. 2014-09 which was amended in August 2015. This standard amended the Revenue from Contracts with Customers (Topic 606) of the Accounting Standards Codification. The core principle of the new guidance is that an entity should recognize revenue to reflect the transfer of goods and services to customers in an amount equal to the consideration the entity receives or expects to receive. The guidance will be effective for the Company for reporting periods beginning after December 15, 2017. The Company will apply the guidance using a modified retrospective approach. The Company does not expect this standard to have a material effect on its consolidated financial statements. 

 

Note 2. Business Combination 

 

On February 18, 2014, the Company acquired Harvest Engineering, Inc.’s wireless hazard monitoring technology system and Insta-Link product family, together with related technology and intellectual property rights, for a total purchase price of $1,643. 

 

The fair value of the consideration transferred on the acquisition date consisted of the following: 

 

Cash consideration  $400 
Note payable issued to seller (Note 9)   771 
Contingent earn-out liability   472 
Total consideration  $1,643 

 

The transaction was recorded as a business combination and the results of operations have been included in the consolidated statement of comprehensive income since the date of acquisition. Acquisition fees of approximately $15 incurred in connection with the transaction were recorded in operating expenses in 2014. 

 

In connection with the acquisition, the Company is obligated to pay an earn-out of up to $550 based upon the level of revenues generated from the acquired products during the four calendar years following closing. At the time of acquisition, the Company recorded a contingent liability of $472 representing the fair value estimate of the earn-out based upon the Company’s projected likelihood of meeting the revenue targets.

 

The following table summarizes the estimated fair value of the assets acquired at the acquisition date: 

 

In process research and development  $1,478 
Noncompete agreement   120 
Deferred service costs   45 
Total assets acquired  $1,643 

  

The noncompete agreement is being amortized over a five-year period. The fair value of the noncompete agreement was estimated using a discounted cash flow model. The unobservable inputs are considered Level 3 inputs in the fair value hierarchy.

 

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ELECTRO-SENSORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 

YEARS ENDED DECEMBER 31, 2015 AND 2014 

(in thousands except share and per share amounts)
 

Note 3. Investments

 

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

 

   Cost   Gross
unrealized
gain
   Gross
unrealized
loss
   Fair
value
 
December 31, 2015                    
Money Market Funds  $246   $0   $0   $246 
Commercial Paper   247    0    0    247 
Treasury Bills   7,876    0    (4)   7,872 
Equity Securities   54    0    (54)   0 
    8,423    0    (58)   8,365 
Less Cash Equivalents   493    0    0    493 
Total Investments, December 31, 2015  $7,930   $0   $(58)  $7,872 
                     
                     
December 31, 2014                    
Money Market Funds  $510   $0   $0   $510 
Commercial Paper   345    0    0    345 
Treasury Bills   6,542    0    0    6,542 
Equity Securities   72    1,238    (54)   1,256 
    7,469    1,238    (54)   8,653 
Less Cash Equivalents   855    0    0    855 
Total Investments, December 31, 2014  $6,614   $1,238   $(54)  $7,798 

   

Realized gains and losses on investments are as follows:

 

   Years Ended December 31, 
   2015   2014 
         
Gross Realized Gains  $1,449   $1,163 
Gross Realized Losses   0    0 
Net Realized Gain  $1,449   $1,163 

  

At December 31, 2014, the Company’s significant investment in equity securities was 122,649 shares of Rudolph Technologies, Inc. (“Rudolph”) accounted for under the available-for-sale method. As of December 31, 2014, the aggregate value of the Company’s Rudolph shares as reported on the Nasdaq Stock Exchange (ticker symbol RTEC) was approximately $1,254, with an approximate cost of $16. During fiscal 2015 and 2014, the Company sold 122,649 and 108,687 shares, respectively, of Rudolph stock and reported a gain of $1,447 and $1,163, respectively, in other income. 

 

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ELECTRO-SENSORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 

YEARS ENDED DECEMBER 31, 2015 AND 2014 

(in thousands except share and per share amounts) 

 

Changes in Accumulated Other Comprehensive Income (Loss)

 

Changes in Accumulated Other Comprehensive Income (Loss) are as follows:

 

   December 31, 
   2015   2014 
Unrealized Gains (Losses)          
Unrealized holding gains (losses) arising during the period  $211   $(284)
Less: Reclassification of gains included in net income   (1,449)   (1,163)
    (1,238)   (1,447)
           
Deferred Taxes on Unrealized Gains (Losses):          
Increase (decrease) in deferred taxes on unrealized gains (losses) arising during the period   80    (108)
Less: Reclassification of taxes on gains included in net income   (551)   (442)
    (471)   (550)
           
Net Change in Accumulated Other Comprehensive Income (Loss)  $(767)  $(897)

  

Note 4. Fair Value Measurements

 

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

 

December 31, 2015

 

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

 

December 31, 2014

 

   Carrying                 
   amount in                 
   consolidated       Fair Value Measurement Using 
   balance sheet   Fair Value   Level 1   Level 2   Level 3 
Assets:                         
Cash and cash equivalents:                         
Money market  $510   $510   $510   $0   $0 
Commercial paper   345    345    345    0    0 
Treasury bills   6,542    6,542    6,542    0    0 
Available for sale:                         
Equities                         
Small cap technology sector   1,256    1,256    1,256    0    0 
Liabilities:                         
Contingent earn-out   472    472    0    0    472 

 

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ELECTRO-SENSORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 

YEARS ENDED DECEMBER 31, 2015 AND 2014 

(in thousands except share and per share amounts) 

 

The fair value of the money market funds, commercial paper, and treasury bills is based on quoted market prices in an active market. Available-for-sale securities include equity securities, except for the limited-marketable company, that are traded in an active market. Closing stock prices are readily available from active markets and are used as being representative of fair value. The Company classifies these securities as level 1. There is an insignificant market for the limited-marketable company and the Company has determined the value based on financial and other factors, which are considered level 3 inputs in the fair value hierarchy. Management estimated the probability of 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:

 

   Years Ended December 31, 
   2015   2014 
         
Beginning Balance  $472   $0 
Additions (Note 2)   0    472 
Charge to earnings   (17)   0 
Ending Balance  $455   $472 

  

The decrease in the contingent earn-out, in 2015, reflects the Company’s expectation of moderately lower future contingent payments due to delays in releasing the product due to development and obtaining third-party certifications.

 

Note 5. Inventories

 

Inventories used in the determination of cost of goods sold are as follows:

 

   December 31, 
   2015   2014 
Raw Materials  $956   $729 
Work In Process   297    263 
Finished Goods   311    232 
Total Inventories  $1,564   $1,224 

  

Note 6. Property and Equipment, Net

 

The following is a summary of property and equipment:

  

   December 31, 
   2015   2014 
Equipment  $285   $266 
Furniture and Fixtures   410    380 
Building   1,365    1,365 
Land   415    415 
    2,475    2,426 
Less Accumulated Depreciation   1,372    1,280 
Total Property and Equipment  $1,103   $1,146 

  

Depreciation expense for the years ended December 31, 2015 and 2014 was $113 and $116, respectively.

 

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ELECTRO-SENSORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

YEARS ENDED DECEMBER 31, 2015 AND 2014

(in thousands except share and per share amounts)

 

Note 7. Net Intangible Assets

 

Intangible assets include the following:

 

      December 31, 2015  
   Average
Useful
Lives
  Gross
Carrying
Amount
    Accumulated
Amortization
     Net
Carrying
Amount
 
Noncompete   5 Years   $120  $46   $74 
Technology   7 Years    1,478   282    1,196 
Net Intangible Assets       $1,598  $328   $1,270 
                     

 

      December 31, 2014  
     Average
Useful
Lives
  Gross
Carrying
Amount
   Accumulated Amortization    Net
Carrying
Amount
 
Noncompete   5 Years   $120   $22   $98 
Technology   7 Years    1,478    71    1,407 
Net Intangible Assets       $1,598   $93   $1,505 

 

Amortization expense for the years ended December 31, 2015 and 2014 was $235 and $93, respectively.

 

Estimated amortization expense over the next five years is as follows:

 

2016  $235 
2017   235 
2018   235 
2019   213 
2020   211 

 

Note 8. Accrued Expenses

 

Accrued expenses include the following:

 

           
   December 31, 
   2015   2014 
Wages and Commissions  $272   $276 
Other   124    116 
Total Accrued Expenses  $396   $392 

 

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ELECTRO-SENSORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

YEARS ENDED DECEMBER 31, 2015 AND 2014

(in thousands except share and per share amounts)

 

Note 9. Note Payable

 

The note payable consists of the following:

 

   December 31,  
   2015      2014  
Note payable to seller  $400   $800 
Payable in annual installments of principal of $400, with a maturity date of February 2016.  This note is non-interest bearing and unsecured.          
           
Less: Discount of note payable listed above   (10)   (29)
Net note payable   390    771 
Less: Current maturities   390    381 
Note Payable – Long Term  $0   $390 

 

Note 10. Commitments

 

Lease commitments

 

The Company is leasing office equipment under an operating lease expiring in 2017.

 

Minimum lease payments required under non-cancelable operating leases are as follows:

 

Year  Amount  
2016   $8 
2017    3 
Total Minimum Lease Payments   $11 
        

Rental expense charged to operations was $8 and $21 for the years ended December 31, 2015 and 2014, respectively.

 

Note 11. Common Stock Options and Stock Purchase Plan

 

Stock options

 

The 1997 Stock Option Plan (the “1997 Plan”) and 2013 Equity Incentive Plan (the “2013 Plan”) authorize the issuance of both nonqualified and incentive stock options. Payment for the shares may be made in cash, shares of the Company’s common stock or a combination thereof. Under the terms of the plans, incentive stock options and non-qualified stock options are granted at a minimum of 100% of fair market value on the date of grant and may be exercised at various times depending upon the terms of the option. All existing options expire 10 years from the date of grant or one year from the date of death.

 

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ELECTRO-SENSORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

YEARS ENDED DECEMBER 31, 2015 AND 2014

(in thousands except share and per share amounts)

 

Stock-based compensation

 

Pursuant to the 2013 Plan, the Company is authorized to grant options to purchase up to 300,000 shares of its common stock. As of December 31, 2015, options to purchase an aggregate of 250,000 shares were outstanding, 165,000 shares were exercisable under the 2013 Plan, and 50,000 shares were available for issuance pursuant to awards that may be granted under the plan in the future.

 

Pursuant to the 1997 Plan, the Company was authorized to grant options to purchase up to 450,000 shares of its common stock. As of December 31, 2015, options to purchase an aggregate of 7,500 shares were outstanding and exercisable under the 1997 Plan. The board terminated the plan in 2014. The existing grants may be exercised according to the terms of the grant agreements but no additional options will be granted under the 1997 Plan.

 

During the year ended December 31, 2014, options to purchase 11,980 shares of common stock expired for four employees.

 

The following table summarizes the activity for outstanding incentive stock options under the 2013 Plan to employees of the company:

                      
    Options Outstanding  
       
    Number of
Shares
 Weighted-
Average
Exercise
Price
 Weighted-
Average
Remaining
Contractual
Term
(in years)
  Aggregate
Intrinsic Value
(1)
 
Balance at January 1, 2014     61,980 $ 4.20   9.7       
Granted     0               
Exercised     0               
Canceled/forfeited/expired     (11,980)  (4.16)          
Balance at December 31, 2014     50,000   4.21   8.6       
Granted     0               
Exercised     0               
Canceled/forfeited/expired     0               
Balance at December 31, 2015     50,000 $ 4.21   7.6       
Vested and exercisable as of December 31, 2015     50,000          $ 0  

 

(1)The aggregate intrinsic value is calculated as approximately the difference between the weighted average exercise price of the underlying awards and the Company’s estimated current fair market value at December 31, 2015.

 

During the second quarter of 2014, the Company granted one outside director options to purchase 25,000 shares of common stock. The options were priced above fair market value and vested 20% on the grant date, with an additional 20% vesting on the first four anniversaries of the grant date. The options expire ten years from the date of grant.

 

During the year ended December 31, 2014, one former outside director forfeited options to purchase 2,500 shares of common stock.

 

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ELECTRO-SENSORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

YEARS ENDED DECEMBER 31, 2015 AND 2014

(in thousands except share and per share amounts)

 

The following table summarizes the activity for outstanding director stock options under both plans:

 

    Options Outstanding 
    Number of
Shares
 Weighted-
Average
Exercise
Price
   Weighted-
Average
Remaining
Contractual
Term
(in years)
   Aggregate
Intrinsic Value
(1)
 
Balance at January 1, 2014   185,000 $ 4.64   9.5      
Granted   25,000   4.39   10.0       
Exercised   0               
Canceled/forfeited/expired   (2,500)  (4.15)          
Balance at December 31, 2014   207,500   4.62   8.4       
Granted   0               
Exercised   0               
Canceled/forfeited/expired   0               
Balance at December 31, 2015   207,500 $ 4.62   7.4       
Vested and exercisable as of December 31, 2015   122,500           $ 0 

 

(1) The aggregate intrinsic value is calculated as approximately the difference between the weighted average exercise price of the underlying awards and the Company’s estimated current fair market value at December 31, 2015.

 

The weighted average grant date fair value of options granted during the year ended December 31, 2014 was $35. The Company recognized compensation expense of approximately $63 and $67 during the years ended December 31, 2015 and 2014, respectively, in connection with the issuance of the options.

 

The assumptions made in estimating the fair value of the options on the grant date based upon the BSM option-pricing model for the year ended December 31, 2014 are as follows:

 

Dividend Yield  0.00%
Expected Volatility  44.11%
Risk Free Interest Rate  2.02%
Expected Life  6 Years 

 

The Company calculates expected volatility for stock options and other awards using historical volatility as the Company believes the expected volatility will approximate historical volatility.

 

There were no options exercised during the years ended December 31, 2015 and 2014.

 

As of December 31, 2015, there was approximately $109 of unrecognized compensation expense under the 2013 Plan. The Company expects to recognize this expense over the next three years. To the extent the forfeiture rate is different than we have anticipated, stock-based compensation related to these awards will be different from our expectations.

 

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ELECTRO-SENSORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 

YEARS ENDED DECEMBER 31, 2015 AND 2014 

(in thousands except share and per share amounts) 

  

Stock purchase plan

 

The 1996 Employee Stock Purchase Plan (the “ESPP”) allowed employees to set aside up to 10% of their earnings for the purchase of shares of the Company’s common stock. The purchase price was the lower of 85% of the market value at the date of the grant or the exercise date, which was six months from the date of the grant. Under the ESPP, the Company was authorized to sell and issue up to 150,000 shares of its common stock to its full-time employees. There were 81,653 shares issued under the plan. The plan was terminated effective January 1, 2014.

 

Note 12. Benefit Plans

 

Employee stock ownership plan

 

The Company sponsors an employee stock ownership plan (“ESOP”) that covers substantially all employees who work 1,000 or more hours during the year. The ESOP has, at various times, secured financing from the Company to purchase the Company’s shares on the open market. When the Plan purchases shares with the proceeds of the Company loans, the shares are pledged as collateral for these loans. The shares are maintained in a suspense account until released and allocated to participant accounts. The Plan owns 153,457 shares of the Company’s stock at December 31, 2015. All shares held by the Plan have been released and allocated. No dividends were paid during the years ended December 31, 2015 and 2014. The Plan had no debt to the Company at December 31, 2015 or 2014.

 

The Company recognized compensation expense for contributions of $24 and $18, respectively, to the ESOP plan in 2015 and 2014.

 

In the event a terminated ESOP participant desires to sell his or her shares of the Company’s stock and the shares are not readily tradable, the Company may be required to purchase the shares from the participant at fair market value. In addition, the Company may distribute the ESOP’s shares to the terminated participant at the Company’s election. At December 31, 2015, 153,457 shares of the Company’s stock, with an aggregate fair market value of approximately $549, are held by ESOP participants who, if terminated, would have rights under the repurchase provisions. The Company believes that the market for its shares meets the ESOP requirements and that there would not be a current obligation to repurchase shares.

 

Profit sharing plan and savings plan

 

The Company has a salary reduction and profit sharing plan that conforms to IRS provisions for 401(k) plans. The Company may make profit sharing contributions with the approval of the Board of Directors. There were no profit sharing contributions by the Company in 2015 or 2014.

 

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ELECTRO-SENSORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 

YEARS ENDED DECEMBER 31, 2015 AND 2014 

(in thousands except share and per share amounts)

 

Note 13. Income Taxes

 

The components of the income tax provision for the years ended December 31, 2015 and 2014 are as follows: 

 

   2015  2014
           
Current:          
Federal  $633   $540 
State   1    1 
Deferred:          
Federal   (101)   (60)
State   (3)   (21)
Total Federal and State Income Taxes  $530   $460 

 

The provision for income taxes for the years ended December 31, 2015 and 2014 differs from the amount obtained by applying the U.S. federal income tax rate to pretax income due to the following: 

 

   2015  2014
           
Computed “Expected” Federal Tax Expense  $601   $529 
Increase (Decrease) in Taxes Resulting From:          
State Income Taxes, net of Federal Benefit   10    10 
Credits   (43)   (47)
    Domestic Production Activities Deduction   (22)   (17)
    Permanent Differences   5    4 
    Other   (21)   (19)
Total Federal and State Income Taxes  $530   $460 

  

The components of the net deferred tax asset (liability) consist of:

 

   2015   2014 
           
Deferred Tax Assets:          
Vacation accrual  $34   $33 
Allowance for doubtful accounts   3    4 
Stock compensation   102    80 
Bonus   10    0 
Depreciation and amortization   1    0 
Net unrealized loss on investments   21    0 
State carryforward R&D credit   46    31 
Total Deferred Tax Assets   217    148 
           
Deferred Tax Liabilities:          
Prepaid expenses   33    35 
    Depreciation and amortization   0    54 
Net unrealized gain on investments   0    450 
Total Deferred Tax Liabilities   33    539 
           
Net Deferred Tax Asset (Liability)  $184   $(391)

  

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ELECTRO-SENSORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 

YEARS ENDED DECEMBER 31, 2015 AND 2014 

(in thousands except share and per share amounts)

 

Deferred assets and liabilities are reported on the balance sheet as follows: 

 

   2015   2014 
           
Deferred Tax Assets:          
Current  $14   $0 
Long-term   170    0 
Total Deferred Tax Assets  $184   $0 
           
Deferred Tax Liabilities:          
Long-term  $0   $391 

  

The Company is subject to the following material taxing jurisdictions: U.S. and Minnesota. The tax years that remain open to examination by the Internal Revenue Service and state jurisdictions are 2012 through 2015. We have no accrued interest or penalties related to uncertain tax positions as of January 1, 2015 or December 31, 2015 and uncertain tax positions are not significant.

 

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ELECTRO-SENSORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 

YEARS ENDED DECEMBER 31, 2015 AND 2014 

(in thousands except share and per share amounts) 

 

Note 14. Segment Information

 

As of December 31, 2015, the Company has two reportable operating segments: Production Monitoring and Investments. The Production Monitoring Division manufactures and markets a complete line of production monitoring equipment, in particular speed monitoring and motor control systems for industrial machinery. ESI Investment Company holds investments in marketable and non-marketable securities.

 

The accounting policies of the segments are the same as those described in Note 1. In evaluating segment performance, management focuses on sales and income before taxes. The Company has no inter-segment sales.

 

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

 

   2015   2014 
         
Net revenues        
Production Monitoring  $7,636   $7,041 
Total   7,636    7,041 
Sales in foreign countries          
Production Monitoring   972    973 
Total   972    973 
Interest income          
Production Monitoring   0    0 
ESI Investment Company   0    2 
Total   0    2 
Depreciation and amortization expense          
Production Monitoring   348    209 
Total   348    209 
Interest expense          
    Production Monitoring   11    17 
    Total   11    17 
Capital purchases          
Production Monitoring   70    46 
Total   70    46 
Total assets          
Production Monitoring   4,998    4,945 
ESI Investment Company   8,423    8,819 
Total   13,421    13,764 
Income before income taxes          
Production Monitoring   295    389 
ESI Investment Company   1,449    1,165 
Total  $1,744   $1,554 
           

 Note 15. Subsequent Events

 

On February 9, 2016, the Board of Directors approved a stock option grant of 50,000 shares for the Company’s president. The options vest 20% immediately and 20% on each of the next four anniversaries of the grant. The options were priced at the fair market value on the date of grant.

 

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Item 9.          Changes In and Disagreements With Accountants on Accounting and Financial Disclosure.

 

None.

 

Item 9A.        Controls and Procedures.

 

Evaluation of Disclosure Controls and Procedures

 

The person serving as our principal executive officer and principal financial officer evaluated the effectiveness of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (“Exchange Act”). Based on this evaluation, the person serving as the Company’s principal executive officer and principal financial officer has concluded that the Company’s disclosure controls and procedures were effective as of December 31, 2015 to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms and (ii) accumulated and communicated to the Company’s management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

 

Management’s Report on Internal Control over Financial Reporting

 

Under Section 404 of the Sarbanes-Oxley Act of 2002, our management is required to assess the effectiveness of the Company’s internal control over financial reporting as of the end of each fiscal year and report, based on that assessment, whether the Company’s internal control over financial reporting is effective.

 

Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting. The Company’s internal control over financial reporting is designed to provide reasonable assurance as to the reliability of the Company’s financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

 

Internal control over financial reporting, no matter how well designed, has inherent limitations. Therefore, internal control over financial reporting determined to be effective can provide only reasonable assurance with respect to financial statement preparation and may not prevent or detect all misstatements. Moreover, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

The Company’s management has assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2015. In making this assessment, the Company used the criteria established by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in “Internal Control-Integrated Framework (2013).” These criteria are in the areas of control environment, risk assessment, control activities, information and communication, and monitoring. The Company’s assessment included extensive documenting, evaluating and testing the design and operating effectiveness of its internal control over financial reporting. Based on this evaluation, the person serving as the Company’s principal executive officer and principal financial officer has concluded that the Company’s internal controls were effective as of December 31, 2015.

 

Changes in Internal Control over Financial Reporting

 

There have been no changes in the Company’s internal control over financial reporting that occurred during the fourth quarter of fiscal year 2015, which were identified in connection with management’s evaluation required by paragraph (d) of Rules 13a-15 and 15d-15 under the Exchange Act, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

Item 9B.        Other Information.

 

None.

 

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PART III

 

Certain information required by Part III is incorporated by reference to the Company’s Definitive Proxy Statement pursuant to Regulation 14A (the “2016 Proxy Statement”) for its Annual Meeting of Shareholders to be held April 20, 2016 (“Annual Meeting”).

 

Item 10.      Directors, Executive Officers and Corporate Governance.

 

The information required by Item 401 under Regulation S-K, to the extent applicable to the Company’s directors, will be set forth under the caption “Election of Directors” in the 2016 Proxy Statement and is incorporated herein by reference. The information required with respect to the Company sole executive officer, who is also a director, will be set forth under the caption “Election of Directors.”

 

The information required by Item 405 regarding compliance with Section 16 (a) will be set forth under the caption “Section 16(a) Beneficial Ownership Reporting Compliance” in the 2016 Proxy Statement, and is incorporated herein by reference.

 

Code of Ethics and Business Conduct

 

The Company has adopted the Electro-Sensors Code of Ethics and Business Conduct (the “Code of Conduct”) applicable to all officers of the Company as well as certain other key accounting personnel. A copy of the Code of Conduct can be obtained free of charge upon written request directed to the Company’s Secretary at the Company’s executive offices. Any amendment to, or waiver from, a provision of our Code of Conduct will be posted to our website.

 

The information required by Item 407 regarding corporate governance will be set forth under the caption “Corporate Governance” in the 2016 Proxy Statement and is incorporated herein by reference.

 

Item 11.      Executive Compensation.

 

The information called for by Item 402 under Regulation S-K, will be set forth under the caption “Executive Compensation” in the Company’s 2016 Proxy Statement and is incorporated herein by reference.

 

Item 12.      Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

 

The information called for by Item 403 under Regulation S-K will be set forth under the captions “Security Ownership of Certain Beneficial Owners and Management” in the Company’s 2016 Proxy Statement, and is incorporated herein by reference.

 

The following table provides information as of December 31, 2015 about the Company’s equity compensation plans.

 

Equity Compensation Plan Information 

 

 
Number of securities to
be issued upon exercise
of outstanding options,
warrants and rights

Weighted average
exercise price of
outstanding options,
warrants and rights
Number of securities remaining
available for future issuance under
equity compensation plans
(excluding securities reflected in
column (a))
       
  (a) (b) (c)
       

Equity compensation plans approved by security holders


257,500

$4.54


50,000(1)

       

Equity compensation plans not approved by security holders

       —    —   —
       
Total 257,500 $4.54 50,000(1)

 

(1) Shares issuable pursuant to the 2013 Equity Incentive Plan.

 

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Item 13.      Certain Relationships and Related Transactions, and Director Independence.

 

The information required by Item 404 under Regulation S-K will be set forth under the caption “Transactions with Related Persons, Promoters and Certain Control Persons” in the 2016 Proxy Statement, and is incorporated herein by reference.

 

The information required by Item 407(a) will be set forth in the 2016 Proxy Statement under the caption “Corporate Governance” and is incorporated herein by reference.

 

Item 14.      Principal Accountant Fees and Services.

 

The information required by Item 14 of Form 10-K and 9(e) of Schedule 14A will be set forth under the caption “Ratification of independent registered public accounting firm services” in the Company’s 2016 Proxy Statement, and is incorporated herein by reference. 

 

PART IV

 

Item 15.      Exhibits and Financial Statement Schedules.

 

Financial Statements.

 

Reference is made to the Index to Consolidated Financial Statements appearing on Page 13 hereof.

 

Financial Statement Schedules.

 

The Financial Statement Schedules have been omitted either because they are not required or because the information has been included in the consolidated financial statements or the notes thereto included in this Annual Report.

 

Exhibits.

 

See “Exhibit Index” on the page following the signatures.

 

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SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

  ELECTRO-SENSORS, INC.
(“Registrant”)
  By: /s/ DAVID L. KLENK  
    David L. Klenk
    President, Chief Executive Officer, and Chief Financial Officer
  Date: March 14, 2016
     
  By:         /s/ GLORIA M. GRUNDHOEFER
   

Gloria M. Grundhoefer

Controller 

  Date: March 14, 2016

  

Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

 

(Power of Attorney)

 

Each person whose signature appears below constitutes and appoints DAVID L. KLENK as his true and lawful attorney-in-fact and agent, with full power of substitution and re-substitution, for him and in his name, place and stead, in any and all capacities, to sign any or all amendments to this Annual Report on Form 10-K and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agent, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all said attorney-in-fact and agents, or his substitute or substitutes, may lawfully do or cause to be done by virtue thereof. 

 

Signature   Title   Date
         
/s/ David L. Klenk   President and Director (CEO and CFO)   March 14, 2016
         
/s/ Joseph A. Marino   Chairman and Director   March 14, 2016
         
/s/ Scott A. Gabbard   Director   March 14, 2016
         
/s/ Michael C. Zipoy   Director   March 14, 2016
         
/s/ Jeffrey D. Peterson   Director   March 14, 2016
         

 

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SECURITIES AND EXCHANGE COMMISSION 

Washington, DC 20549 

 

EXHIBIT INDEX TO FORM 10-K 

 

For the Fiscal Year Ended
December 31, 2015
Commission File No. 000-9587

 

Exhibit
Number
  Exhibit Description
     
^3.1   Registrant’s Restated Articles of Incorporation, as amended—incorporated by reference to Exhibit 3.1 to the Company’s 1991 Form 10-KSB
^3.2   Registrant’s Bylaws, as amended to date—incorporated by reference to Exhibit 3.2 to the Company’s 1997 Form 10-KSB
^*10.1   Electro-Sensors, Inc. 1997 Stock Option Plan —incorporated by reference to Exhibit 10.6 to the Company’s 1997 Form 10-KSB
^*10.2   Electro-Sensors, Inc. 2013 Equity Incentive Plan incorporated by reference to Appendix C of the Company’s Proxy Statement for the Company’s 2013 Annual Meeting of Shareholders
^10.3   Asset Purchase Agreement dated as of February 14, 2014 by and among Harvest Engineering Inc., Harvest Engineering, LLC, Stephen Meyer, Bruce Meyer, and Electro-Sensors, Inc. – incorporated by reference to exhibit 10.4 to the Company’s 2013 Form 10-K
^*10.4   Form of Incentive Stock Option Agreement under 2013 Equity Incentive Plan – incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed on April 29, 2013
^*10.5   Form of Non-qualified Stock Option Agreement under 2013 Equity Incentive Plan – incorporated by reference to Exhibit 10.2 to the Company’s Form 8-K filed on April 29, 2013
23.1   Consent of Independent Registered Public Accounting Firm
24.1   Power of Attorney (see Signature page)
31.1   Certification of Chief Executive Officer and Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1   Certification of Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
99.1   Letter to Shareholders dated March 7, 2016
99.2   Investor Information
101  

The following financial information from Electro-Sensors, Inc.’s Annual Report on Form 10-K for the annual period ended December 31, 2015, formatted in eXtensible Business Reporting Language (XBRL): (i) Consolidated Balance Sheets as of December 31, 2015 and 2014, (ii) Consolidated Statements of Comprehensive Income for the years ended December 31, 2015 and 2014, (iii) Consolidated Statements of Cash Flows for years ended December 31, 2015 and 2014, (iv) Consolidated Statement of Changes in Stockholders’ Equity, and (v) Notes to Consolidated Financial Statements. 

  

^Incorporated by reference to a previously filed report or document—SEC File No. 000-9587
*Management contract or compensatory plan or arrangement

 

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