10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

Form 10-Q

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

For the quarterly period ended March 31, 2017

Or

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

For the transition period from ______ to ______

Commission File Number 000-09587

ELECTRO-SENSORS, INC.

(Exact name of registrant as specified in its charter)

Minnesota	41-0943459
(State or other jurisdiction of incorporation or organization)	(IRS Employer Identification No.)

6111 Blue Circle Drive
Minnetonka, Minnesota 55343-9108

(Address of principal executive offices)

(952) 930-0100

(Registrant’s telephone number, including area code)

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

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

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 ☒
		Emerging growth company ☐

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

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

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

ELECTRO-SENSORS, INC.

Form 10-Q

For the Quarter Ended March 31, 2017

TABLE OF CONTENTS  

PART I – FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited):
Balance Sheets – As of March 31, 2017 and December 31, 2016	3
Statements of Comprehensive Loss – For the Three months ended March 31, 2017 and March 31, 2016	4
Statements of Cash Flows – For the Three months ended March 31, 2017 and March 31, 2016	5
Notes to Financial Statements	6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	10
Item 3. Quantitative and Qualitative Disclosures About Market Risk	13
Item 4. Controls and Procedures	13
PART II – OTHER INFORMATION
Item 1. Legal Proceedings	13
Item 1A. Risk Factors	13
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	13
Item 3. Defaults Upon Senior Securities	13
Item 4. Mine Safety Disclosures	13
Item 5. Other Information	13
Item 6. Exhibits	13
SIGNATURES	14
EXHIBITS	15

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

ELECTRO-SENSORS, INC.

BALANCE SHEETS

(in thousands except share and per share amounts)

	March 31, 2017			December 31, 2016
	(unaudited)
ASSETS
Current assets
Cash and cash equivalents	$	670		$	840
Treasury bills		7,422			7,427
Trade receivables, less allowance for doubtful accounts of $8		827			770
Inventories		1,550			1,515
Other current assets		176			174
Income tax receivable		80			66
Total current assets		10,725			10,792
Deferred income tax asset		233			198
Intangible assets, net		976			1,035
Property and equipment, net		1,026			1,033
Total assets	$	12,960		$	13,058
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Current maturities of contingent earn-out	$	195		$	0
Accounts payable		142			239
Accrued expenses		370			304
Total current liabilities		707			543
Long-term liabilities
Contingent earn-out, net of current maturities		0			195
Total long-term liabilities		0			195
Commitments and contingencies
Stockholders’ equity
Common stock par value $0.10 per share; authorized 10,000,000 shares; 3,395,521 shares issued and outstanding		339			339
Additional paid-in capital		1,970			1,953
Retained earnings		9,973			10,057
Accumulated other comprehensive loss (unrealized loss on available-for-sale securities, net of income tax benefit)		(29	)		(29	)
Total stockholders’ equity		12,253			12,320
Total liabilities and stockholders’ equity	$	12,960		$	13,058

See accompanying notes to unaudited financial statements

3 

ELECTRO-SENSORS, INC.

STATEMENTS OF COMPREHENSIVE LOSS

(in thousands except share and per share amounts)

(unaudited)

	Three Months Ended March 31,
	2017			2016
Net sales	$	1,650		$	1,716
Cost of goods sold		751			782
Gross profit		899			934
Operating expenses
Selling and marketing		377			427
General and administrative		444			482
Research and development		221			173
Total operating expenses		1,042			1,082
Operating loss		(143	)		(148	)
Non-operating income (expense)
Interest expense		0			(1	)
Interest income		8			11
Other income		3			3
Total non-operating income, net		11			13
Loss before income taxes		(132	)		(135	)
Benefit from income taxes		(48	)		(46	)
Net loss	$	(84	)	$	(89	)
Other comprehensive loss
Change in unrealized value of available-for-sale securities, net of income tax	$	0		$	0
Other comprehensive loss		0			0
Net comprehensive loss	$	(84	)	$	(89	)
Net loss per share data:
Basic
Net loss per share	$	(0.02	)	$	(0.03	)
Weighted average shares		3,395,521			3,395,521
Diluted
Net loss per share	$	(0.02	)	$	(0.03	)
Weighted average shares		3,395,521			3,395,521

See accompanying notes to unaudited financial statements

4 

ELECTRO-SENSORS, INC.

STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

	Three Months Ended March 31,
	2017			2016
Cash flows from (used in) operating activities
Net loss	$	(84	)	$	(89	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		78			79
Deferred income taxes		(35	)		(15	)
Stock-based compensation expense		17			29
Other		(8	)		(11	)
Change in:
Trade receivables		(57	)		(118	)
Inventories		(35	)		69
Other current assets		(2	)		3
Accounts payable		(97	)		19
Accrued expenses		66			0
Income tax receivable/accrued income taxes		(14	)		(36	)
Net cash used in operating activities		(171	)		(70	)
Cash flows from (used in) investing activities
Purchases of treasury bills		(1,987	)		(1,447	)
Proceeds from the maturity of treasury bills		2,000			1,843
Purchase of property and equipment		(12	)		0
Net cash from investing activities		1			396
Cash flows used in financing activities
Payments on long-term debt		0			(390	)
Net cash used in financing activities		0			(390	)
Net decrease in cash and cash equivalents		(170	)		(64	)
Cash and cash equivalents, beginning		840			569
Cash and cash equivalents, ending	$	670		$	505
Supplemental cash flow information
Cash paid for income taxes	$	1		$	5
Cash paid for interest	$	0		$	10

See accompanying notes to unaudited financial statements

5 

ELECTRO-SENSORS, INC.

NOTES TO FINANCIAL STATEMENTS

FOR THE PERIOD ENDED MARCH 31, 2017

(in thousands except share and per share amounts)

(unaudited)

Note 1. Basis of Presentation

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

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

Management believes that the unaudited financial statements include all adjustments, consisting of normal recurring accruals, necessary to fairly state the financial position and results of operations as of March 31, 2017 and for the three-month period then ended in accordance with accounting principles generally accepted in the United States of America. The results of interim periods may not be indicative of results to be expected for the year.

Nature of Business

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

Fair Value Measurements

The carrying value of trade receivables, accounts payable, and other financial working capital items approximates fair value at March 31, 2017 and December 31, 2016, due to the short maturity nature of these instruments.

Stock-Based Compensation

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

Use of Estimates

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

6 

ELECTRO-SENSORS, INC.

NOTES TO FINANCIAL STATEMENTS

FOR THE PERIOD ENDED MARCH 31, 2017

(in thousands except share and per share amounts)

(unaudited)

Note 2. Investments

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

	Cost		Gross unrealized gain		Gross unrealized loss			Fair value
March 31, 2017
Commercial Paper	$	361	$	0	$	0		$	361
Treasury Bills		7,414		8		0			7,422
Equity Securities		54		0		(54	)		0
		7,829		8		(54	)		7,783
Less Cash Equivalents		361		0		0			361
Total Investments, March 31, 2017	$	7,468	$	8	$	(54	)	$	7,422
December 31, 2016
Commercial Paper	$	348	$	0	$	0		$	348
Treasury Bills		7,419		8		0			7,427
Equity Securities		54		0		(54	)		0
		7,821		8		(54	)		7,775
Less Cash Equivalents		348		0		0			348
Total Investments, December 31, 2016	$	7,473	$	8	$	(54	)	$	7,427

7 

ELECTRO-SENSORS, INC.

NOTES TO FINANCIAL STATEMENTS

FOR THE PERIOD ENDED MARCH 31, 2017

(in thousands except share and per share amounts)

(unaudited)

Note 3. Fair Value Measurements

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

March 31, 2017

	Carrying amount				Fair Value Measurement Using
	in balance sheet		Fair Value		Level 1		Level 2		Level 3
Assets:
Cash equivalents
Commercial paper	$	361	$	361	$	361	$	0	$	0
Treasury bills		7,422		7,422		7,422		0		0
Equity Securities		0		0		0		0		0
Liabilities:
Contingent earn-out		195		195		0		0		195

December 31, 2016

	Carrying amount				Fair Value Measurement Using
	in balance sheet		Fair Value		Level 1		Level 2		Level 3
Assets:
Cash equivalents
Commercial paper	$	348	$	348	$	348	$	0	$	0
Treasury bills		7,427		7,427		7,427		0		0
Equity Securities		0		0		0		0		0
Liabilities:
Contingent earn-out		195		195		0		0		195

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

The contingent earn-out relates to the 2014 acquisition of the HazardPRO product line. Management estimated the probability of meeting the revenue targets over the measurement period to determine the fair value of the contingent earn-out, which is considered a level 3 input in the fair value hierarchy.

8 

ELECTRO-SENSORS, INC.

NOTES TO FINANCIAL STATEMENTS

FOR THE PERIOD ENDED MARCH 31, 2017

(in thousands except share and per share amounts)

(unaudited)

Note 4. Stock-Based Compensation

During the first quarter of 2016, the Company granted its Chief Executive Officer options to purchase 50,000 shares of common stock. The options were priced at fair market value and vested 20% on the grant date, with an additional 20% vesting on the first four anniversaries of the grant date. The options expire ten years from the date of grant.

The assumptions made in estimating the fair value of the options on the grant date based upon the BSM option-pricing model for the quarter ended March 31, 2016 are as follows:

Dividend Yield	0.00	%
Expected Volatility	36.17	%
Risk Free Interest Rate	1.31	%
Expected Life	6 Years

As of March 31, 2017, there was approximately $50 of unrecognized compensation expense. The Company expects to recognize this expense over the next three years.

9 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

FORWARD-LOOKING STATEMENTS

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

All forward-looking statements in this document are based on information available to us as of the date of this Form 10-Q, and we assume no obligation to update any of these forward-looking statements, other than as required by law. Our actual results could differ materially from those projected or indicated in these forward-looking statements. These forward-looking statements are subject to certain risks and uncertainties that could cause future results to differ materially from our recent results or those projected in the forward-looking statements, including the accuracy of management’s assumptions with respect to industry trends, fluctuations in industry conditions, the accuracy of management’s assumptions regarding expenses and our cash needs and those listed under the heading “Cautionary Statements” under “Item 1—Business,” in our Annual Report on Form 10-K for the year ended December 31, 2016.

CRITICAL ACCOUNTING ESTIMATES

The preparation of our financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make decisions based upon estimates, assumptions, and factors it considers relevant to the circumstances. These decisions include the selection of applicable accounting principles and the use of judgment in their application, and affect reported amounts and disclosures. Changes in economic conditions or other business circumstances may affect the outcomes of management’s estimates and assumptions. An in-depth description of our accounting estimates can be found in the interim financial statements included in this report and in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016. We have not developed new estimates subsequent to those discussed in our Annual Report.

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

	Three Months Ended March 31,
	2017			2016
Net sales		100.0	%		100.0	%
Cost of goods sold		45.5			45.6
Gross profit		54.5			54.4
Operating expenses
Selling and marketing		22.8			24.9
General and administrative		26.9			28.1
Research and development		13.4			10.0
Total operating expenses		63.1			63.0
Operating loss		(8.6	)		(8.6	)
Non-operating income (expense)
Interest expense		0.0			(0.1	)
Interest income		0.5			0.6
Other income		0.2			0.2
Total non-operating income, net		0.7			0.7
Loss before income taxes		(7.9	)		(7.9	)
Benefit from income taxes		(2.9	)		(2.7	)
Net loss		(5.0	)%		(5.2	)%

10 

The following paragraphs discuss the Company’s performance for the three months ended March 31, 2017 and 2016.

RESULTS OF OPERATIONS (in thousands)

Net Sales

Net sales for the 2017 first quarter decreased $66, or 3.8%, when compared to the same period in 2016. This decrease in sales was primarily due to lower sales in the northwestern and northcentral U.S. regions as well as a lower number of large orders, which the company defines as orders over five thousand dollars, as compared to the same period in the prior year. Although the Company experienced a decrease in large order performance over the comparable 2016 period, large orders increased 20% sequentially over the 2016 fourth quarter. Furthermore, we experienced growth in our international business primarily driven by system sales and OEM business in Canada. In addition, the company benefitted from growth across non-agricultural general manufacturing markets when compared to the same period of 2016.

Gross Profit

Gross profit for the 2017 first quarter decreased $35, or 3.7%, from $934 to $899. Gross margin, as a percentage of net sales, increased slightly in the 2017 first quarter to 54.5%, versus 54.4% in the same period in 2016. The slight increase in gross margin percentage was due to a favorable change in product mix.

Operating Expenses

Total operating expenses decreased $40, or 3.7%, for the 2017 fiscal quarter compared to the same period of 2016. As a percentage of net sales, operating expenses increased to 63.1% in the 2017 three-month period compared to 63.0% in the same period for 2016. The percentage increase reflects the fact that fiscal 2017 first quarter sales decreased from fiscal 2016 first quarter sales.

● Selling and marketing costs decreased $50, or 11.7%, for fiscal 2017 first quarter when compared to the same period in 2016, and decreased as a percentage of net sales to 22.8% from 24.9%. The decrease was due to lower outside sales representative commissions due to fewer outside sales representatives and lower sales in 2017 and higher expenses in support of demonstration systems at potential customers in 2016.

● General and administrative costs decreased $38, or 7.9%, for fiscal 2017 first quarter compared to the same period in 2016, and decreased as a percentage of net sales to 26.9% from 28.1%. The decrease was due to lower legal and professional fees.

● Research and development costs increased $48, or 27.7%, for fiscal 2017 first quarter compared to the same period in 2016, and increased as a percentage of net sales to 13.4% from 10.0%. The increase in research and development costs was the result of increased contract engineering fees related to product enhancements.

Non-Operating Income (Expense)

Non-operating income decreased by $2 for fiscal 2017 first quarter compared to the same period for 2016. This decrease was due to a decrease in interest income.

Loss Before Income Taxes

Loss before income taxes was $132 for the 2017 first quarter, a decrease in the loss of $3, or 2.2%, when compared to the loss before income taxes of $135 for the quarter ended March 31, 2016. The decrease was the result of lower 2017 gross profit, partially offset by a decrease in operating expenses.

11 

LIQUIDITY AND CAPITAL RESOURCES

Cash and cash equivalents were $670 at March 31, 2017 and $840 at December 31, 2016. The decrease was mainly from operating activities.

Cash used in operating activities was $171 and $70 for the three months ended March 31, 2017 and 2016, respectively. The $101 increase in cash used in operating activities was mainly due to the 2017 increase in inventories and decrease in accounts payable. The 2017 first quarter increase in inventories is due to higher purchases of inventory in the 2017 first quarter due to the timing of purchases. The decrease in accounts payable was due to the timing of payments in the 2017 first quarter.

Cash generated from investing activities was $1 and $396 for the three months ended March 31, 2017 and 2016, respectively.  During the three months ended March 31, 2017 and 2016, the Company had net proceeds of Treasury Bills with a maturity date of more than three months of $13 and $396, respectively. In addition, we purchased $12 of property and equipment during the first quarter of 2017.

Cash used in financing activities was $390 in the 2016 first quarter, as we made the final payment on the long-term debt owed to Harvest Engineering, Inc. for the technology purchased in February 2014. We had no cash used or provided by financing activities in the 2017 first quarter.

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

Off-balance Sheet Arrangements

As of March 31, 2017, the Company had no off-balance sheet arrangements or transactions.

Future Business Development Activities

The Company continues to seek growth opportunities, both internally through the Company’s existing portfolio of products, technologies and markets, as well as externally through technology partnerships or related-product acquisitions.  Although the Company is continuing to explore these external opportunities, it currently has no agreements or understandings with any third parties.

 12

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Not Applicable.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Based on an evaluation under the supervision and with the participation of the Company’s management, the Company’s principal executive officer and principal financial officer has concluded that the Company’s disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (“Exchange Act”) were effective as of March 31, 2017 to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms and (ii) accumulated and communicated to the Company’s management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control Over Financial Reporting

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

PART II – OTHER INFORMATION

Item 1. Legal Proceedings – None

Item 1A. Risk Factors – Not Applicable

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds – None

Item 3. Defaults Upon Senior Securities – None

Item 4. Mine Safety Disclosures – Not Applicable

Item 5. Other Information – None

Item 6. Exhibits

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

 13

SIGNATURES

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

	Electro-Sensors, Inc.
May 11, 2017	/s/ David L. Klenk
	David L. Klenk
	Chief Executive Officer and Chief Financial Officer

May 11, 2017	/s/ Gloria M. Grundhoefer
	Gloria M. Grundhoefer
	Controller

 14

EXHIBIT INDEX

ELECTRO-SENSORS, INC.

FORM 10-Q FOR QUARTER ENDED MARCH 31, 2017

Exhibit	Description
31.1	Certification of CEO and CFO Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification of CEO and CFO Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101	The following financial information from Electro-Sensors, Inc.’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2017, formatted in eXtensible Business Reporting Language (XBRL): (i) Balance Sheets as of March 31, 2017 and December 31, 2016, (ii) Statements of Comprehensive Loss for the three months ended March 31, 2017 and March 31, 2016, (iii) Statements of Cash Flows for the three months ended March 31, 2017 and March 31, 2016, and (iv) Notes to Financial Statements.

 15

EX-31.1

 EXHIBIT 31.1

CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES OXLEY-ACT OF 2002

I, David L. Klenk, certify that:

1. I have reviewed this report on Form 10-Q of Electro-Sensors Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under my supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to me by others within those entities, particularly during the period in which this report is being prepared;

(b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under my supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report my conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. I have disclosed, based on my most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b)        Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

May 11, 2017	/s/ David L. Klenk
	David L. Klenk
	Chief Executive Officer and Chief Financial Officer

 16

EX-32.1

EXHIBIT 32.1

CERTIFICATION PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Electro-Sensors, Inc. (the “Company”) on Form 10-Q for the quarter ended March 31, 2017 as filed with the Securities and Exchange Commission (the “Report”), I, David L. Klenk, Chief Executive Officer and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that:

(1)  The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)  The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.  

May 11, 2017	/s/ David L. Klenk
	David L. Klenk
	Chief Executive Officer and Chief Financial Officer

 17

XML

Document And Entity Information - shares	3 Months Ended
	Mar. 31, 2017	May 10, 2017
Document And Entity Information [Abstract]
Document Type	10-Q
Amendment Flag	false
Document Period End Date	Mar. 31, 2017
Document Fiscal Year Focus	2017
Document Fiscal Period Focus	Q1
Entity Filer Category	Smaller Reporting Company
Entity Registrant Name	ELECTRO SENSORS INC
Entity Central Index Key	0000351789
Current Fiscal Year End Date	--12-31
Entity Well-known Seasoned Issuer	No
Entity Current Reporting Status	Yes
Entity Voluntary Filers	No
Entity Common Stock, Shares Outstanding		3,395,521
Trading Symbol	ELSE

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Balance Sheets - USD ($) $ in Thousands	Mar. 31, 2017	Dec. 31, 2016
Current assets
Cash and cash equivalents	$ 670	$ 840
Treasury bills, fair value	7,422	7,427
Trade receivables, less allowance for doubtful accounts of $8	827	770
Inventories	1,550	1,515
Other current assets	176	174
Income tax receivable	80	66
Total current assets	10,725	10,792
Deferred income tax asset, long term	233	198
Intangible assets, net	976	1,035
Property and equipment, net	1,026	1,033
Total assets	12,960	13,058
Current liabilities
Current maturities of contingent earn-out	195	0
Accounts payable current	142	239
Accrued expenses current	370	304
Total current liabilities	707	543
Long-term liabilities
Contingent earn-out, net of current maturities	0	195
Total long-term liabilities	0	195
Commitments and contingencies
Stockholders' equity
Common stock par value $0.10 per share; authorized 10,000,000 shares; 3,395,521 shares issued and outstanding	339	339
Additional paid-in capital	1,970	1,953
Retained earnings	9,973	10,057
Accumulated other comprehensive loss (unrealized loss on available-for-sale securities, net of income tax benefit)	(29)	(29)
Total stockholders' equity	12,253	12,320
Total liabilities and stockholders' equity	$ 12,960	$ 13,058

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Balance Sheets (Parenthetical) - USD ($) $ in Thousands	Mar. 31, 2017	Dec. 31, 2016
Condensed Balance Sheets [Abstract]
Trade receivables, allowance for doubtful accounts	$ 8	$ 8
Common stock, par value	$ 0.10	$ 0.10
Common stock, shares authorized	10,000,000	10,000,000
Common stock, shares issued	3,395,521	3,395,521
Common stock, shares outstanding	3,395,521	3,395,521

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Statements Of Comprehensive Loss - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2017	Mar. 31, 2016
Statements Of Comprehensive Loss [Abstract]
Net Sales	$ 1,650	$ 1,716
Cost of Goods Sold	751	782
Gross Profit	899	934
Operating Expenses
Selling and marketing	377	427
General and administrative	444	482
Research and development	221	173
Total Operating Expenses	1,042	1,082
Operating Loss	(143)	(148)
Non-operating Income (Expense)
Interest expense	0	(1)
Interest income	8	11
Other income	3	3
Total Non-operating Income, Net	11	13
Loss before Income Taxes	(132)	(135)
Benefit from Income Taxes	(48)	(46)
Net Loss	(84)	(89)
Other Comprehensive Loss
Change in unrealized value of available-for-sale securities, net of income tax	0	0
Other Comprehensive Loss	0	0
Net Comprehensive Loss	$ (84)	$ (89)
Basic
Net loss per share	$ (0.02)	$ (0.03)
Weighted average shares	3,395,521	3,395,521
Diluted
Net loss per share	$ (0.02)	$ (0.03)
Weighted average shares	3,395,521	3,395,521

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Statements Of Cash Flows - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2017	Mar. 31, 2016
Cash flows from (used in) operating activities
Net loss	$ (84)	$ (89)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization	78	79
Deferred income taxes	(35)	(15)
Stock-based compensation expense	17	29
Other	(8)	(11)
Change in:
Trade receivables	(57)	(118)
Inventories	(35)	69
Current assets, other	(2)	3
Accounts payable	(97)	19
Accrued expenses	66	0
Income tax receivable/accrued income taxes	(14)	(36)
Net cash used in operating activities	(171)	(70)
Cash flows from (used in) investing activities
Purchases of treasury bills	(1,987)	(1,447)
Proceeds from the maturity of treasury bills	2,000	1,843
Purchase of property and equipment	(12)	0
Net cash from investing activities	1	396
Cash flows used in financing activities
Payments on long-term debt	0	(390)
Net cash used in financing activities	0	(390)
Net decrease in cash and cash equivalents	(170)	(64)
Cash and cash equivalents, beginning	840	569
Cash and cash equivalents, ending	670	505
Supplemental cash flow information
Cash paid for income taxes	1	5
Cash paid for interest	$ 0	$ 10

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Basis of Presentation

3 Months Ended

Mar. 31, 2017

Nature Of Business And Significant Accounting Policies [Abstract]

Basis Of Presentation

Note 1.  Basis of Presentation

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

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

Management believes that the unaudited financial statements include all adjustments, consisting of normal recurring accruals, necessary to fairly state the financial position and results of operations as of March 31, 2017 and for the three-month period then ended in accordance with accounting principles generally accepted in the United States of America.  The results of interim periods may not be indicative of results to be expected for the year. 

Nature of Business

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

Fair Value Measurements 

The carrying value of trade receivables, accounts payable, and other financial working capital items approximates fair value at March 31, 2017 and December 31, 2016, due to the short maturity nature of these instruments.

Stock-Based Compensation

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

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in thefinancial statements and accompanying notes.  Actual results could differ from those estimates.  Significant estimates, including the underlying assumptions, consist of economic lives of long-lived assets,realizability of trade receivables, valuation of deferred tax assets/liabilities, inventory, investments, contingent earn-out, and stock compensation expense.  It is at least reasonably possible that these estimates may change in the near term.

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Investments

3 Months Ended

Mar. 31, 2017

Investments [Abstract]

Investments

Note 2.   Investments 

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

			Gross		Gross
			unrealized		unrealized		Fair
	Cost		gain		loss		value
March 31, 2017
Commercial Paper	$	361	$	0	$	0	$	361
Treasury Bills		7,414		8		0		7,422
Equity Securities		54		0		(54)		0
		7,829		8		(54)		7,783
Less Cash Equivalents		361		0		0		361
Total Investments, March 31, 2017	$	7,468	$	8	$	(54)	$	7,422
December 31, 2016
Commercial Paper	$	348	$	0	$	0	$	348
Treasury Bills		7,419		8		0		7,427
Equity Securities		54		0		(54)		0
		7,821		8		(54)		7,775
Less Cash Equivalents		348		0		0		348
Total Investments, December 31, 2016	$	7,473	$	8	$	(54)	$	7,427

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Fair Value Measurements

3 Months Ended

Mar. 31, 2017

Fair Value Measurements [Abstract]

Fair Value Measurements

Note 3. Fair Value Measurements 

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

March 31, 2017
	Carrying amount in				Fair Value Measurement Using
	balance sheet		Fair Value		Level 1		Level 2		Level 3
Assets:
Cash equivalents
Commercial Paper	$	361	$	361	$	361	$	0	$	0
Treasury Bills		7,422		7,422		7,422		0		0
Equity Securities		0		0		0		0		0
Liabilities:
Contingent Earn-out		195		195		0		0		195
December 31, 2016
	Carrying amount in				Fair Value Measurement Using
	balance sheet		Fair Value		Level 1		Level 2		Level 3
Assets:
Cash equivalents
Commercial Paper	$	348	$	348	$	348	$	0	$	0
Treasury Bills		7,427		7,427		7,427		0		0
Equity Securities		0		0		0		0		0
Liabilities:
Contingent Earn-out		195		195		0		0		195

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

The contingent earn-out relates to the 2014 acquisition of the HazardPRO product line.  Management estimated the probability of meeting the revenue targets over the measurement period to determine the fair value of the contingent earn-out, which is considered a level 3 input in the fair value hierarchy.

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Stock-Based Compensation

3 Months Ended

Mar. 31, 2017

Stock-Based Compensation [Abstract]

Stock-Based Compensation

Note 4.  Stock-Based Compensation 

During the first quarter of 2016, the Company granted its Chief Executive Officer options to purchase 50,000 shares of common stock.  The options were priced at fair market value and vested 20% on the grant date, with an additional 20% vesting on the first four anniversaries of the grant date.  The options expire ten years from the date of grant. 

The assumptions made in estimating the fair value of the options on the grant date based upon the BSM option-pricing model for the quarter ended March 31, 2016 are as follows:

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

As of March 31, 2017, there was approximately $50 of unrecognized compensation expense.  The Company expects to recognize this expense over the next three years. 

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Basis Of Presentation (Policy)

3 Months Ended

Mar. 31, 2017

Nature Of Business And Significant Accounting Policies [Abstract]

Nature Of Business

Nature of Business

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

Fair Value Measurements

Fair Value Measurements 

The carrying value of trade receivables, accounts payable, and other financial working capital items approximates fair value at March 31, 2017 and December 31, 2016, due to the short maturity nature of these instruments.

Stock-based Compensation

Stock-Based Compensation

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

Use Of Estimates

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in thefinancial statements and accompanying notes.  Actual results could differ from those estimates.  Significant estimates, including the underlying assumptions, consist of economic lives of long-lived assets,realizability of trade receivables, valuation of deferred tax assets/liabilities, inventory, investments, contingent earn-out, and stock compensation expense.  It is at least reasonably possible that these estimates may change in the near term.

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Investments (Tables)

3 Months Ended

Mar. 31, 2017

Investments [Abstract]

Cost And Estimated Fair Value Of Investments

			Gross		Gross
			unrealized		unrealized		Fair
	Cost		gain		loss		value
March 31, 2017
Commercial Paper	$	361	$	0	$	0	$	361
Treasury Bills		7,414		8		0		7,422
Equity Securities		54		0		(54)		0
		7,829		8		(54)		7,783
Less Cash Equivalents		361		0		0		361
Total Investments, March 31, 2017	$	7,468	$	8	$	(54)	$	7,422
December 31, 2016
Commercial Paper	$	348	$	0	$	0	$	348
Treasury Bills		7,419		8		0		7,427
Equity Securities		54		0		(54)		0
		7,821		8		(54)		7,775
Less Cash Equivalents		348		0		0		348
Total Investments, December 31, 2016	$	7,473	$	8	$	(54)	$	7,427

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Fair Value Measurements (Tables)

3 Months Ended

Mar. 31, 2017

Fair Value Measurements [Abstract]

Fair Value Measurements on a Recurring Basis

March 31, 2017
	Carrying amount in				Fair Value Measurement Using
	balance sheet		Fair Value		Level 1		Level 2		Level 3
Assets:
Cash equivalents
Commercial Paper	$	361	$	361	$	361	$	0	$	0
Treasury Bills		7,422		7,422		7,422		0		0
Equity Securities		0		0		0		0		0
Liabilities:
Contingent Earn-out		195		195		0		0		195
December 31, 2016
	Carrying amount in				Fair Value Measurement Using
	balance sheet		Fair Value		Level 1		Level 2		Level 3
Assets:
Cash equivalents
Commercial Paper	$	348	$	348	$	348	$	0	$	0
Treasury Bills		7,427		7,427		7,427		0		0
Equity Securities		0		0		0		0		0
Liabilities:
Contingent Earn-out		195		195		0		0		195

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Stock-Based Compensation (Tables)

3 Months Ended

Mar. 31, 2017

Stock-Based Compensation (Valuation Assumption) [Abstract]

Schedule of Share-based Payment Award, Stock Options, Valuation Assumptions [Table Text Block]

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

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Investments (Cost And Estimated Fair Value Of Investments) (Details) - USD ($) $ in Thousands	3 Months Ended	12 Months Ended
	Mar. 31, 2017	Dec. 31, 2016	Mar. 31, 2016	Dec. 31, 2015
Schedule of Available-for-sale Securities [Line Items]
Cost	$ 7,468	$ 7,473
Gross unrealized gain	8	8
Gross unrealized loss	(54)	(54)
Fair value, investments	7,422	7,427
Cash equivalents, Carrying amount	670	840	$ 505	$ 569
Commercial Paper [Member]
Schedule of Available-for-sale Securities [Line Items]
Cost	361	348
Gross unrealized gain	0	0
Gross unrealized loss	0	0
Fair value, investments	361	348
Treasury Bills [Member]
Schedule of Available-for-sale Securities [Line Items]
Cost	7,414	7,419
Gross unrealized gain	8	8
Gross unrealized loss	0	0
Fair value, investments	7,422	7,427
Equity Securities [Member]
Schedule of Available-for-sale Securities [Line Items]
Cost	54	54
Gross unrealized gain	0	0
Gross unrealized loss	(54)	(54)
Fair value, investments	0	0
Debt and Equity Securities [Member]
Schedule of Available-for-sale Securities [Line Items]
Cost	7,829	7,821
Gross unrealized gain	8	8
Gross unrealized loss	(54)	(54)
Fair value, investments	7,783	7,775
Less Cash and Cash Equivalents [Member]
Schedule of Available-for-sale Securities [Line Items]
Gross unrealized gain	0	0
Gross unrealized loss	0	0
Cash equivalents, Carrying amount	361	348
Cash equivalents, Fair value	$ 361	$ 348

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Fair Value Measurements (Fair Value Measurements On A Recurring Basis) (Details) - USD ($) $ in Thousands	Mar. 31, 2017	Dec. 31, 2016	Mar. 31, 2016	Dec. 31, 2015
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Cash equivalents, Carrying amount	$ 670	$ 840	$ 505	$ 569
Treasury Bills, fair value	7,422	7,427
Available-for-sale Securities, Fair Value	7,422	7,427
Obligations [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Contingent Earn-out, Fair Value	195	195
Contingent Earn-out, Carrying Value	195	195
Fair Value, Inputs, Level 1 [Member] | Obligations [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Contingent Earn-out, Fair Value	0	0
Fair Value, Inputs, Level 2 [Member] | Obligations [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Contingent Earn-out, Fair Value	0	0
Fair Value, Inputs, Level 3 [Member] | Obligations [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Contingent Earn-out, Fair Value	195	195
Limited Marketable Company [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Available-for-sale Securities, Carrying amount	0	0
Available-for-sale Securities, Fair Value	0	0
Limited Marketable Company [Member] | Fair Value, Inputs, Level 1 [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Available-for-sale Securities, Fair Value	0	0
Limited Marketable Company [Member] | Fair Value, Inputs, Level 2 [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Available-for-sale Securities, Fair Value	0	0
Limited Marketable Company [Member] | Fair Value, Inputs, Level 3 [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Available-for-sale Securities, Fair Value	0	0
Commercial Paper [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Cash equivalents, Carrying amount	361	348
Cash equivalents, Fair Value	361	348
Commercial Paper [Member] | Fair Value, Inputs, Level 1 [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Cash equivalents, Fair Value	361	348
Commercial Paper [Member] | Fair Value, Inputs, Level 2 [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Cash equivalents, Fair Value	0	0
Commercial Paper [Member] | Fair Value, Inputs, Level 3 [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Cash equivalents, Fair Value	0	0
Treasury Bills [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Treasury Bills, carrying value	7,422	7,427
Treasury Bills, fair value	7,422	7,427
Treasury Bills [Member] | Fair Value, Inputs, Level 1 [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Treasury Bills, fair value	7,422	7,427
Treasury Bills [Member] | Fair Value, Inputs, Level 2 [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Treasury Bills, fair value	0	0
Treasury Bills [Member] | Fair Value, Inputs, Level 3 [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Treasury Bills, fair value	$ 0	$ 0

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Stock Based Compensation (Valuation Assumptions) (Details)	3 Months Ended
	Mar. 31, 2016
Stock-Based Compensation (Valuation Assumption) [Abstract]
Dividend Yield	0.00%
Expected Volatility	36.17%
Risk Free Interest Rate	1.31%
Expected Life	6 years

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Stock-Based Compensation (Narrative) (Details) - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2017	Mar. 31, 2016
Unrecognized Share Based Compensation	$ 50
Number of Years To Recognize Remaining Expense	3 years
Chief Executive Officer [Member]
Granted, Number of Shares		50,000
Stock Option Vesting Period		4 years
Vesting Percentage		20%
Options expiration from date of grant		10 years