S

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

Form 10-Q

 

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

 

For the quarterly period ended June 30, 2022March 31, 2023

 

Or

 

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

 

For the transition period from ______ to ______

 

Commission File Number 000-09587

 

ELECTRO-SENSORS, INC.

(Exact name of registrant as specified in its charter)

 

Minnesota

41-0943459

(State or other jurisdiction of incorporation or organization)

(IRS Employer Identification No.)

 

6111 Blue Circle Drive
Minnetonka, Minnesota 55343-9108

(Address of principal executive offices)

 

(952) 930-0100

(Registrant’s telephone number, including area code)

 

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


Title of each classTrading Symbol(s)Name of each exchange on which registered
Common stock, $0.10 par valueELSENasdaq Capital Market


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

 

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

 

1

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

 

Large accelerated filer  

☐

Accelerated filer ☐

 

Non-accelerated filer

☒

Smaller reporting company ☒

 

 

 

Emerging growth company ☐

 

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

 

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

 

The number of shares outstanding of the registrant’s common stock, $0.10 par value, on August 1, 2022May 10, 2023 was 3,403,021.3,428,021.

 

 

 

2

 

ELECTRO-SENSORS, INC.

Form 10-Q

For the PeriodsPeriod Ended June 30, 2022March 31, 2023

 

TABLE OF CONTENTS

PART I – FINANCIAL INFORMATION4
   
Item 1. Financial Statements (unaudited):4
     
Condensed Balance Sheets – As of June 30, 2022March 31, 2023 and December 31, 202120224
Condensed Statements of Comprehensive Income (Loss)Loss – For the Three and Six Months ended June 30,March 31, 2023 and March 31, 2022 and June 30, 20215
Condensed Statements of Changes in Stockholders' Equity – For the Three and Six Months ended June 30,March 31, 2023 and March 31, 2022 and June 30, 20216
Condensed Statements of Cash Flows – For the SixThree Months ended June 30,March 31, 2023 and March 31, 2022 and June 30, 20217
Notes to Condensed Financial Statements8
    
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations1614
Item 3. Quantitative and Qualitative Disclosures About Market Risk2219
Item 4. Controls and Procedures2219
     
PART II – OTHER INFORMATION2320
       
Item 1. Legal Proceedings2320
Item 1A. Risk Factors2320
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds2320
Item 3. Defaults Upon Senior Securities2320
Item 4. Mine Safety Disclosures2320
Item 5. Other Information2320
Item 6. Exhibits2320
  
SIGNATURES2421
  

  

3

PART I. FINANCIAL INFORMATION
Item 1. Financial Statements

ELECTRO-SENSORS, INC.

CONDENSED BALANCE SHEETS

(in thousands except share and per share amounts) 

 

June 30,
2022

 

December 31,
2021

 

 

March 31,
2023

 

 

December 31,
2022

 

 

(unaudited)

 

 

 

 

(unaudited)

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

6,429

 

$

6,713

 

 

$

5,540

 

 

$

7,646

 

Investments

 

3,052

 

3,056

 

 

4,023

 

 

2,036

 

Trade receivables, less allowance for doubtful accounts of $11


1,323

 

1,005

 

Trade receivables, less allowance for credit losses of $11


1,372

 

 

1,161

 

Inventories

 

1,720

 

1,663

 

 

1,779

 

 

1,745

 

Other current assets

 

 

171

 

 

188

 

 

 

215

 

 

 

214

 

Income tax receivable

81

3


0


11

Total current assets

 

 

12,776

 

 

12,628

 

 

 

12,929

 

 

 

12,813

 

Deferred income tax asset, net

 

226

 

208

 

 

306

 

 

256

 

Intangible assets, net

 

 

13

 

 

38

 

Property and equipment, net

 

 

981

 

 

1,017

 

 

 

952

 

 

 

975

 

Total assets

 

$

13,996

 

$

13,891

 

 

$

14,187

 

 

$

14,044

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

 

 

 

Current maturities of financing lease

 

$

6

 

$

6

 

 

$

4

 

 

$

6

 

Accounts payable

 

319

 

349

 

 

357

 

 

274

 

Accrued expenses

 

 

769

 

 

342

 

 

423

 

 

350

 

Accrued income taxes

37


0

Total current liabilities

 

 

1,094

 

697

 

 

 

821

 

 

630

 

Long-term liabilities


Financing lease, net of current maturities

3

6
Total long-term liabilities

3
6

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

 

Common stock par value $0.10 per share; authorized 10,000,000 shares; 3,428,021 shares issued and outstanding, respectively

 

342

 

 

342

 

Additional paid-in capital

 

2,043

 

2,041

 

 

2,163

 

 

2,163

 

Retained earnings

 

10,515

 

10,808

 

 

10,864

 

 

10,908

 

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

2

0


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

(3

)

1

Total stockholders’ equity

 

 

12,899

 

 

13,188

 

 

 

13,366

 

 

 

13,414

 

Total liabilities and stockholders’ equity

 

$

13,996

 

$

13,891

 

 

$

14,187

 

 

$

14,044

 

See accompanying notes to unaudited condensed financial statements


4

ELECTRO-SENSORS, INC.

CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)LOSS

(in thousands except share and per share amounts)  

(unaudited)  

 Three Months Ended
June 30,		 
Six Months Ended
June 30,
 Three Months Ended
March 31,		 
 2022 2021 
2022
2021
 2023 2022 
      





      
Net sales $2,564  $2,462

$4,699
$4,363
 $2,045  $2,135
Cost of goods sold   1,156  
1,086 

2,125

1,997
  1,023  
969 
      





      
Gross profit 
1,408  
1,376 

2,574

2,366
 
1,022  
1,166 
      





      
Operating expenses       





       
Selling and marketing  427   364 
873

712
  370   446 
General and administrative  1,125   458 
1,628

901
  522   503 
Research and development 
221  
283 

452

486
 
268  
231 
      





      
Total operating expenses  
1,773  
1,105 

2,953

2,099
 
1,160  
1,180 
      





      
Operating income (loss)  (365)  271

(379)

267
Operating loss  (138)  (14)
     




     
Non-operating income      




      
Interest income   7   0 

8

2
  93   1 
     




     
Total non-operating income, net 
7  
0 

8

2
 
93  
1 
      





      
Income (loss) before income tax expense (benefit) (358)  271
(371)

269
Loss before income tax benefit (45)  (13)
     




     
Income tax expense (benefit)  (74) 
57

(78)

57
Income tax benefit  (1) 
(4)
      





      
Net income (loss) $(284) $
214
$(293)
$212
Net loss $(44) $
(9)
     




     
Other comprehensive gain (loss)     




Other comprehensive loss     
Change in unrealized value of available-for-sale securities, net of income tax$2$(1)
$2
$(1)$(4)$0
Other comprehensive gain (loss)  2 (1)
2

(1)
Other comprehensive loss  (4) 0
       






       
Net comprehensive income (loss) $
(282) $213
$(291)
$211
Net comprehensive loss $
(48) $(9)
     




     
Net income (loss) per share data:









Net loss per share data:




     




     
Basic     




     
Net income (loss) per share $(0.08) $0.06
$(0.09)
$0.06
Net loss per share $(0.01) $0.00
Weighted average shares 3,395,521  3,395,521 
3,395,521
3,395,521
 3,428,021  3,395,521 
     




     
Diluted     




     
Net income (loss) per share $
(0.08) $
0.06
$(0.09)
$0.06
Net loss per share $
(0.01) $
0.00
Weighted average shares 3,395,521  3,413,444 
3,395,521
3,433,609
 3,428,021  3,395,521 

See accompanying notes to unaudited condensed financial statements

5

ELECTRO-SENSORS, INC.

CONDENSED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(in thousands except share and per share amounts)















For the three months ended June 30













    

Common Stock Issued

 

 

Additional
Paid-in
Capital

 

 

Retained
Earnings

 

 

Accumulated
Other
Comprehensive
Income

 

 

Total
Stockholders’

Equity

 

   

Shares

 

 

Amount

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 20223,395,521

$339

$2,042

$10,799

$0

$13,180

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive gain















2


2
Stock-based compensation expense







1










1
Net loss











(284)





(284)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance June 30, 2022 (unaudited) 3,395,521

$339

$2,043

$10,515

$2

$12,899

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 20213,395,521

$339

$2,037

$10,396

$1

$12,773

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive loss















(1)

(1)
Stock-based compensation expense







2










2
Net income











214





214

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance June 30, 2021 (unaudited)3,395,521

$339

$2,039

$10,610

$0

$12,988
For the three months ended March 31













    

Common Stock Issued

 

 

Additional
Paid-in
Capital

 

 

Retained
Earnings

 

 

Accumulated
Other
Comprehensive
Income (Loss)

 

 

Total
Stockholders’

Equity

 

   

Shares

 

 

Amount

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 20223,428,021

$342

$2,163

$10,908

$1

$13,414

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive loss















(4)

(4)
Net loss











(44)





(44)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance March 31, 2023 (unaudited) 3,428,021

$342

$2,163

$10,864

$(3)
$13,366

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 20213,395,521

$339

$2,041

$10,808

$0

$13,188

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation expense 







1










1
Net loss











(9)





(9)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance March 31, 2022 (unaudited)3,395,521

$339

$2,042

$10,799

$0

$13,180


For the six months ended June 30













    

Common Stock Issued

 

 

Additional
Paid-in
Capital

 

 

Retained
Earnings

 

 

Accumulated
Other
Comprehensive
Income

 

 

Total
Stockholders’

Equity

 

   

Shares

 

 

Amount

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2021
3,395,521


$339

$2,041

$10,808

$0

$13,188

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive gain















2


2
Stock-based compensation expense







2










2
Net loss











(293)





(293)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance June 30, 2022 (unaudited) 3,395,521

$339

$2,043

$10,515

$2

$12,899

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 20203,395,521

$339

$2,036

$10,398

$1

$12,774

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive loss















(1)

(1)
Stock-based compensation expense







3










3
Net income











212





212

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance June 30, 2021 (unaudited)3,395,521

$339

$2,039

$10,610

$0

$12,988

See accompanying notes to unaudited condensed financial statements

6

ELECTRO-SENSORS, INC.

CONDENSED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited) 

 

Six Months Ended
June 30,

 

 

Three Months Ended
March 31,

 

 

2022

 

2021

 

 

2023

 

2022

 

Cash flows from (used in) operating activities

 

 

 

 

 

 

 

 

Cash flows used in operating activities

 

 

 

 

 

 

 

 

Net income (loss)

 

$

(293

)

 

$

212

Net loss

 

$

(44

)

 

$

(9

)

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

 

 

 

 

 

 

 

 

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

78

 

 

 

181

 

 

 

24

 

 

 

40

 

Deferred income taxes

 

 

(18

)

 

 

(28

)

 

 

(50

)

 

 

(6

)

Stock-based compensation expense

 

 

2

 

 

 

3

 

 

 

0

 

 

 

1

 

Interest accrued on treasury bills

 

 

(2

)

 

 

(2

)

 

 

(36

)

 

 

(1

)

Change in:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Trade receivables

 

 

(318

)

 

 

(455

)

 

 

(211

)

 

 

(150

)

Inventories

 

 

(57

)

 

 

47

 

 

(34

)

 

 

(95

)

Other current assets

 

 

17

 

 

(6

)

 

 

(1

)

 

 

(21

)

Accounts payable

 

 

(30

)

 

 

137

 

 

83

 

 

(23

)

Accrued expenses

 

 

427

  

 

 

293

 

 

73

  

 

 

157

Income tax receivable/payable

 

 

(78

)

 

 

84

 

 

48

 

 

1

Net cash from (used in) operating activities

 

 

(272

)

 

 

466

Net cash used in operating activities

 

 

(148

)

 

 

(106

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash flows used in investing activities

 

 

 

 

 

 

 

 

Cash flows from (used in) investing activities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Purchases of treasury bills

 

 

(4,992

)

 

 

(8,999

)

 

 

(3,955

)

 

 

(1,999

)

Proceeds from the maturity of treasury bills

 

 

5,000

 

 

 

9,000

 

 

 

2,000

 

 

 

3,000

 

Purchase of property and equipment

(17)

(14)

(1)

(3)

Net cash used in investing activities

 

 

(9

)

 

 

(13

)

Net cash from (used in) investing activities

 

 

(1,956

)

 

 

998

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash flows used in financing activities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Payments on financing lease

(3)

(3)

(2)

(1)

Net cash used in financing activities

 

 

(3

)

 

 

(3

)

 

 

(2

)

 

 

(1

)

Net increase (decrease) in cash and cash equivalents

 

 

(284

)

 

 

450

 

 

(2,106

)

 

 

891

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents, beginning

 

 

6,713

 

 

 

1,090

 

 

 

7,646

 

 

 

6,713

 

Cash and cash equivalents, ending

 

$

6,429

 

 

$

1,540

 

 

$

5,540

 

 

$

7,604

 

Supplemental cash flow information

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash paid for income taxes

 

$

17

 

 

$

1

 

 

$

0

 

 

$

0

 

 

See accompanying notes to unaudited condensed financial statements

7

ELECTRO-SENSORS, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

FOR THE PERIOD ENDED JUNE 30MARCH 31, 20222023

(in thousands except share and per share amounts)

(unaudited)

 

Note 1. BasisBasis of PresentationPresentation 

 

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, 2021,2022, 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 June 30, 2022March 31, 2023 and for the three and six-monththree-month periods ended June 30,March 31, 2023 and 2022, and 2021, 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. (the "Company") manufactures and markets a complete line of monitoring and control systems for a wide range of industrial machine applications. The Company uses leading-edge technology to continuously improve its products, with the ultimate goal of manufacturing the industry-preferred product for each of our served markets. The Company sells these products through an internal sales staff, manufacturers’ representatives, and distributors to a wide range 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.


InformationNote 5 provides information regarding our recently announced merger agreementthe Merger Agreement we entered into on June 10, 2022 and which was terminated January 30, 2023.


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.

The carrying amount of trade receivables is presented reduced by an allowance for credit losses that reflects management’s best estimate of the amounts that will not be collected. Management assesses collectability by reviewing trade receivables on a collective and individual basis.  In determining the amount of the allowance for credit losses, we consider historical collectability and past due status and make judgements about the creditworthiness of customers based on ongoing credit evaluations.  We also consider customer-specific information and current market conditions.


8

ELECTRO-SENSORS, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

FOR THE PERIOD ENDED MARCH 31, 2023

(in Note 5. thousands except share and per share amounts)

(unaudited)

 

Revenue Recognition

 

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


8

ELECTRO-SENSORS, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

FOR THE PERIOD ENDED JUNE 30, 2022

(in thousands except share and per share amounts)

(unaudited)

Fair Value Measurements 

 

The carrying value of trade receivables, accounts payable, and other financial working capital items approximates fair value at June 30, 2022March 31, 2023 and December 31, 2021,2022, due to the short maturity nature of these instruments.


Intangibles


The intangible asset is a technology license.  The Company amortizes the cost of the intangible asset on a straight-line method over the estimated useful life.  During the first six months of 2021, the Company had amortization expense related to the HazardPRO technology, which was fully amortized in the 2021 third quarter.  


Stock-Based Compensation

 

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


As of June 30, 2022, there was approximately $1 of unrecognized compensation expense related to unvested stock options. The Company expects to recognize this expense over the next three months.

 

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. Current 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, and stock compensation expense, and the potential estimated impact on operations resulting from the COVID-19 pandemic as it relates to potential disruptions to our supply chain and customer demand.expense.  It is at least reasonably possible that these estimates may change in the near term.  

  

9

ELECTRO-SENSORS, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

FOR THE PERIOD ENDED JUNE 30, 2022MARCH 31, 2023

(in thousands except share and per share amounts)

(unaudited)

Net Income (Loss)Loss per Common Share


Basic income (loss)loss per share excludes dilution and is determined by dividing net income (loss)loss by the weighted-average number of common shares outstanding during the period. Diluted net income (loss)loss per share reflects the potential dilution that could occur if securities such as options were exercised or converted into common stock. Diluted net income (loss) per share is determined by dividing net income (loss) by the weighted-average common shares outstanding during the period.


Diluted earnings per share ("Diluted EPS") considers the impact of potentially dilutive securities except in periods in which there is a loss because the inclusion of the potential shares would have an anti-dilutive effect.  Diluted EPS also excludes the impact of common shares issuable upon the exercise of outstanding stock options in periods in which the option exercise price is greater than the average market price of our common stock during the period.

 

For the three-month periods ended June 30,March 31, 2023, and 2022, and 2021, 332,500 and 314,577, respectively, weighted average common shares for underlying stock options have been excluded from the calculation. For the six-month periods ended June 30, 2022 and 2021, 332,500300,000 and 294,412332,500 respectively, weighted average common shares for underlying stock options have been excluded from the calculation.calculation, because their effect would be anti-dilutive.   


New Accounting Standard Not Yet Adopted

 

In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) No. 2016-13, Financial Instruments-Credit Losses (Topic 326), Measurement of Credit Losses on Financial Statements. ASU 2016-13 requires a financial asset (or a group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial asset(s) to present the net carrying value at the amount expected to be collected on the financial asset.  In November 2018 the FASB issued ASU No. 2018-19, Codification Improvements to Topic 326, Financial Instruments-Credit Losses, which clarifies codification and corrects unintended application of the guidance, and in November 2019, the FASB issued ASU No. 2019-11, CodificationImprovements to Topic 326, Financial Instruments-Credit Losses, which clarifies or addresses specific issues about certain aspects of ASU 2016-13. In November 2019 the FASB issued ASU No. 2019-10, Financial Instruments—Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): Effective Dates, and in February 2020 the FASB issued ASU No. 2020-02, Financial Instruments—Credit Losses (Topic 326) and Leases (Topic 842): Amendments to SEC ParagraphsPursuant to SEC Staff Accounting Bulletin No. 119 and Update to SEC Section on Effective Date Related to Accounting Standards Update No. 2016-02, Leases(Topic 842), both of which delay the effective date of ASU 2016-13 by three years for certain Smaller Reporting Companies such as us. In March 2020, the FASB issued ASU No. 2020-03, Codification Improvements to Financial Instruments, which modifies the measurement of expected credit losses of certain financial instruments. In accordance with ASU 2019-10 and ASU 2020-02, ASU 2016-13 is effective for certain Smaller Reporting Companies for financial statements issued for fiscal years beginning after December 15, 2022 and interim periods within those fiscal years, which will be fiscal 2023 for us if we continue to be classified as a Smaller Reporting Company, with early adoption permitted. We are evaluating the potentialhas no significant impact of ASU 2016-13 on our financial statements.


10

ELECTRO-SENSORS, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

FOR THE PERIOD ENDED JUNE 30MARCH 31, 20222023

(in thousands except share and per share amounts)

(unaudited)

 

Note 2. Investments

 

The Company has investments in commercial paper, money market savings, Treasury Bills, and common equity securities of 2two private U.S. companies. The commercial paper investment is in U.S. debt with ratings of A-1+, P-1, and F1+. The Treasury Bills have remaining terms ranging from one month to fourthree months at June 30, 2022.March 31, 2023.  


The Company classifies its investments in commercial paper and Treasury Bills as available-for-sale, accounted for at fair value with unrealized gains and losses recognized in accumulated other comprehensive gain on the balance sheet.  Equity securities are stated at fair value and unrealized gains and losses, if any, are reported in our statements of comprehensive loss in non-operating income.

 

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

 

 

Cost

 

 

Gross
unrealized
gain

 

Gross
unrealized
loss

 

 

Fair
value

 

 

Cost

 

Gross
unrealized
gain

 

Gross
unrealized
loss

 

Fair
value

 

June 30, 2022

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial Paper

 

$

1,141

 

 

$

0

 

$

0

 

 

$

1,141

 

March 31, 2023

 

 

 

 

 

 

 

 

 

Money Market Savings

 

$

1,316

 

$

0

 

$

0

 

$

1,316

 

Treasury Bills

 

 

7,983

 

 

 

6

 

 

0

 

 

 

7,989

 

 

7,914

 

39

 

0

 

7,953

 

Equity Securities

 

 

54

 

 

 

2

 

 

0

 

 

56

 

 

 

54

 

 

2

 

 

0

 

 

56

 

 

 

9,178

 

 

 

8

 

 

0

 

 

9,186

 

 

9,284

 

41

 

0

 

9,325

 

Less Cash Equivalents

 

 

6,130

 

 

 

4

 

 

0

 

 

 

6,134

 

 

 

5,275

 

 

27

 

 

0

 

 

 

5,302

 

Total Investments, June 30, 2022

 

$

3,048

 

 

$

4

 

$

0

 

$

3,052

 

Total Investments, March 31, 2023

 

$

4,009

 

$

14

 

$

0

 

$

4,023

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2022

 

 

 

 

 

 

 

 

 

 

Commercial Paper

 

$

1,520

 

 

$

0

 

$

0

 

 

$

1,520

 

 

$

1,377

 

$

0

 

$

0

 

 

$

1,377

 

Treasury Bills

 

 

8,000

 

 

 

0

 

 

0

 

 

 

8,000

 

 

7,922

 

32

 

0

 

 

7,954

 

Equity Securities

 

 

54

 

 

 

2

 

 

0

 

 

56

 

 

 

54

 

 

2

 

 

0

 

 

56

 

 

 

9,574

 

 

 

2

 

 

0

 

 

9,576

 

 

9,353

 

34

 

0

 

9,387

 

Less Cash Equivalents

 

 

6,520

 

 

 

0

 

 

0

 

 

 

6,520

 

 

 

7,319

 

 

32

 

 

0

 

 

 

7,351

 

Total Investments, December 31, 2021

 

$

3,054

 

 

$

2

 

$

0

 

$

3,056

 

Total Investments, December 31, 2022

 

$

2,034

 

$

2

 

$

0

 

$

2,036

 

 

11

ELECTRO-SENSORS, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

FOR THE PERIOD ENDED JUNE 30, 2022MARCH 31, 2023

(in thousands except share and per share amounts)

(unaudited)

  

Note 3. Fair Value Measurements

 

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

 

June 30, 2022March 31, 2023


 

Carrying amount

 

 

 

 

 Fair Value Measurement Using 

 

 

Carrying amount

 

 

 

 Fair Value Measurement Using 

 

 

in balance sheet

 

Fair Value

 

 

Level 1

 

Level 2

 

 

Level 3

 

 

in balance sheet

 

Fair Value

 

Level 1

 

Level 2

 

Level 3

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial paper

 

$

1,141

 

$

1,141

 

 

$

1,141

 

$

0

 

 

$

0

 

Money Market Savings

 

$

1,316

 

$

1,316

 

$

1,316

 

$

0

 

$

0

 

Treasury bills



4,993

4,993


4,993

0


0

3,986
3,986
3,986
0
0

Treasury bills - maturity date greater than three months

 

 

2,996

 

 

2,996

 

 

 

2,996

 

 

0

 

 

 

0

 


3,967
3,967
3,967
0
0

Equity Securities

 

 

56

 

 

56

 

 

 

0

 

 

0

 

 

 

56

 

 

56

 

56

 

0

 

0

 

56

 

 

December 31, 20212022


 

Carrying amount

 

 

 

 Fair Value Measurement Using 

 

 

Carrying amount

 

 

 

 Fair Value Measurement Using 

 


 

in balance sheet

 

Fair Value

 

Level 1

 

Level 2

 

Level 3

 

 

in balance sheet

 

Fair Value

 

Level 1

 

Level 2

 

Level 3

 

Assets:


 

 

 

 

 

 

 

 

 

 


 

 

 

 

 

 

 

 

 

 

Cash equivalents


 

 

 

 

 

 

 

 

 

 

 


 

 

 

 

 

 

 

 

 

 

Commercial paper


$

1,520

 

$

1,520

 

$

1,520

 

$

0

 

$

0

 


$

1,377

 

$

1,377

 

$

1,377

 

$

0

 

$

0

 

Treasury bills


5,000

 

5,000

 

5,000

 

0

 

 

0

 


5,974

 

5,974

 

5,974

 

0

 

0

 

Treasury Bills - maturity date greater than three months
3,000
3,000
3,000
0

0
Treasury bills - maturity date greater than three months
1,980
1,980
1,980
0
0

Equity Securities



56

 

56

 

0

 

0

 

 

56

 



56

 

56

 

0

 

0

 

56

 

 

The fair value of the commercial paper and treasury bills is based on quoted market prices in an active market. The equity securities owned by the Company are investments in two non-publicly traded companies.  There is an undeterminable market for each of these two companies and the Company has determined the fair value based on financial and other factors that are considered level 3 inputs in the fair value hierarchy.  


The changes in level 3 assets measured at fair value on a recurring basis are as follows:  

 


Six Months Ended June 30,
Three Months Ended March 31,


2022


2021


2023


2022






   




   
Beginning Balance
$56

$42 
$56

$56 

Change in Fair Value



0
 0

0
 0
Ending Balance
$56

$42 
$56

$56 

 

12

ELECTRO-SENSORS, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

FOR THE PERIOD ENDED JUNE 30, 2022MARCH 31, 2023

(in thousands except share and per share amounts)

(unaudited)

 

Note 4. Inventories


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


June 30, 

2022



December 31, 

2021


March 31, 

2023



December 31, 

2022



Raw Materials$1,158

$1,129
$1,174

$1,162
Work In Process
285


257

324


278

Finished Goods


287


287

291


315
Reserve for Obsolescence
(10)

(10)
(10)

(10)
Total Inventories, net$1,720

$1,663
$1,779

$1,745


13

ELECTRO-SENSORS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
FOR THE PERIOD ENDED JUNE 30, 2022
(in thousands except share and per share amounts)
(unaudited)

 

Note 5. Merger Agreement with Mobile X Global, Inc. 

 

On June 10, 2022, Electro-Sensors, Inc. (“ELSE” or “Electro-Sensors”)the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Mobile X Newco, Inc., a Delaware corporation, a wholly owned subsidiary of ELSEthe Company (the “Merger Sub”), and Mobile X Global, Inc., a Delaware corporation (“Mobile X”) (together with ELSE and Merger Sub the “Parties”).Mobile X Global, Inc. is a new entrant in the global mobile industry founded by its CEO Peter Adderton.Mobile X plans to launch a new mobile wireless brand called Mobile X in the United States in 2022, enabled by a network agreement with a major carrier.

 

The Merger is structured as a statutory reverse triangular merger under Delaware and Minnesota law, under which Merger Sub will be merged with and into Mobile X Global, Inc., with Mobile X Global, Inc. survivingOn January 30, 2023, the Merger and becoming a wholly owned subsidiary of ELSE. In connection with the Merger, ELSE will reincorporate in Delaware, be re-named Mobile X Global, Inc., and operate both the new MobileX wireless business and the existing Electro-Sensors business. The Merger Agreement also provides that Electro-Sensors, Inc. will effect a four-for-one reverse stock split shortly before completion of the Merger, unless the Parties agree on a different reverse split ratio.

In connection with the execution of the Merger Agreement, a third-party institutional investor has entered into a commitment letter with Mobile X Global, Inc. to provide equity financing in the form of convertible preferred stock of up to $20.0 million upon closing of the Merger. The commitment is subject to diligence and definitive agreements satisfactory to the third-party institutional investor, including an agreement for a $50.0 million equity line of credit to be provided by the investor. The equity line of credit would provide significant additional liquidity, at the option of Mobile X. The commitment letter terminates on October 31, 2022.

It is anticipated that, immediately after the Merger, former Mobile X stockholders will own approximately 76% of the combined company, legacy ELSE shareholders will own approximately 11% of the combined company, and that the third-party institutional investor noted above (or an alternative investor agreed to by the Parties to the Merger Agreement) and certain other investors will own approximately 13% of the combined company, all based on current ownership of ELSECompany and Mobile X and assuming the closing of $20.0 million of equity financing on the terms contained in the commitment letter from the third-party institutional investor noted above.

ELSE expects the approximately 325,000 of currently outstanding options to acquire ELSE shares to be exercised in connection withterminated the Merger priorAgreement.  A condition to the record date of the cash dividend discussed below. Assuming this exercise, and based on the relative valuations agreed to by Mobile X and ELSE, and after giving effect to the reverse stock split at a ratio of four-for-one, the legacy ELSE shareholders would own approximately 932,005 shares, the Mobile X stockholders would own approximately 6,668,294 shares, the third-party institutional investor noted above (or an alternative investor agreed to by the Parties to the Merger Agreement) would own approximately 1,066,860 shares (on an as-converted to common basis) assuming the closing of $20.0 million of equity financing on the terms in the commitment letter, and approximately 75,851 shares would be held by others.

In addition to their continuing interest in the combined company, legacy Electro-Sensors shareholders as of a record date to be determined before the closing of the Merger would receive special cash dividends expected to be approximately $18.0 million inmerger transaction was the aggregate, withconsummation of an equity financing which the amount of the dividends possibly adjusted based on the amount of ELSE transaction expenses and its working capital balance at the closing of the Merger, and further adjusted for indebtedness, if any, and transaction bonuses, if any, approved by the ELSE board of directors. Aggregate cash dividends of $18.0 millionparties anticipated would be approximately $4.83 per share based on the current, pre-reverse split, fully diluted shares of Electro-Sensors.  

14

ELECTRO-SENSORS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
FOR THE PERIOD ENDED JUNE 30, 2022
(a PIPE investment (private investment in thousands except share and per share amounts)
(unaudited)


Closing of the Merger is subject to specified conditions, including, among other matters: (i) the approval by Mobile X stockholders and ELSE shareholders of the Merger; (ii) a registration statement becoming effective under the Securities Act of 1933, as amended, related to the shares being issued to the Mobile X stockholders in the Merger and the clearance of the proxy statement related to the approval by the ELSE shareholders of the Merger; (iii) receipt of $20.0 million in third party equity financing; (iv) listing of the combined company's common stock on Nasdaq; and (v) the filing of an amendment to ELSE 's Articles of Incorporation to increase the number of shares of common stock authorized for issuance to a number at least large enoughpublic entity).  The financing necessary to consummate the Merger, allowingmerger was pursued but was not available due to difficult conditions in the issuance of shares to former Mobile X stockholders and any third-party investors, after giving effect to the reverse stock split described above.


In connection with the execution of the Merger Agreement, Electro-Sensors' directors, officers, and certain major shareholders, who collectively own a majority of Electro-Sensors' outstanding shares, have entered into agreements with Mobile X to vote their shares in favor of the Merger at a special meeting of shareholders to be held before the closing of the Merger on a date to be announced. In addition, directors, officers and certain major stockholders of Mobile X, who collectively own a majority of Mobile X's outstanding shares, have entered into similar voting agreements. No written consents have been granted nor have any votes been cast. The Voting Agreements may be terminated in connection with a termination of the Merger Agreement. Closing will follow the special meeting of shareholders of Electro-Sensors, consent of stockholders of Mobile X Global, and satisfaction of other customary and specified closing conditions,financial markets, including the U.S. Securities and Exchange Commission ("SEC") having declared effective a registration statement, and The Nasdaq Stock Market having approved the listing of the common stock of the combined company.markets for PIPE investments.  


A full description of the terms of the Merger Agreement will be provided in a combined Form S-4 Registration Statement/Proxy Statement for the shareholders of ELSE (the “Merger Proxy Statement”) to be filed with the SEC.  ELSE urges investors, shareholders, and other interested persons to read, when available, the preliminary proxy statement as well as other documents filed with the SEC because these documents will contain important information about ELSE, Mobile X, and the proposed transaction.  The definitive Merger Proxy Statement will be mailed to ELSE shareholders as of a record date to be established for voting on the proposed transaction.  Shareholders will also be able to obtain a copy of the definitive Merger Proxy Statement (when available), without charge, by directing a request to: Electro-Sensors, Inc., 6111 Blue Circle Drive, Minnetonka MN 55343.  The preliminary and definitive proxy statement, once available, can also be obtained, without charge, at the SEC’s website (www.sec.gov).


The Company expects the Merger to close in the second half of 2022.


Note 6. Subsequent EventsContingencies


On July 15, 2022, 3 Company directors exercised their stock options. Each director had options

The Company sometimes becomes subject to purchase 2,500 shares at an exercise priceclaims against it in the ordinary course of $4.15.The total amount received bybusiness.  There are currently no pending or threatened claims against the Company for the exercisethat it believes will have a material adverse effect on its results of the options was $31.operations or liquidity.

 


1513


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 about the success of our marketing efforts; our efforts to accelerate future growth or income; our efforts to pursue and the future outcome of any business development activities;or other strategic alternatives; our efforts to maintain or reduce production costs; our ability to continue to obtain components and other raw materials for our products at reasonable prices as well as our ability to pass along any increased costs to our customers; our cash requirements; and the sufficiency of our cash flows.  Based on rapidly changing dynamics in global supply chainsflows or any other measure of materials and components, we may experience both price increases and difficulty in sourcing materials and components.  In addition, we may experience changes in transportation and freight availability that may make it difficult to have materials and components shipped to usfuture financial or our products shipped to customers in a timely manner. operational performance.  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.


This Form 10-Q also includes certain forward-looking statements concerning Electro-Sensors, Mobile X Global and the proposed transactions within the meaning of the Private Securities Litigation Reform Act of 1995, including, but not limited to, statements regarding future financial performance, future growth, and the development of future products and services; the benefits of the proposed transactions, including anticipated growth and synergies; the combined company’s plans, objectives and expectations and intentions; the expected timing of the proposed transactions; and future acquisitions. These statements are based on current expectations or beliefs and are subject to uncertainty and changes in circumstances. There can be no guarantee that the proposed transactions described in this Form 10-Q will be completed, or that they will be completed as currently proposed, or at any particular time. Actual results may vary materially from those expressed or implied by the statements here due to changes in economic, business, competitive or regulatory factors, and other risks and uncertainties affecting the operation of Electro-Sensors as well as the business of Mobile X Global. Many of these risks, uncertainties and contingencies related to Electro-Sensors are presented in Electro- Sensors’ Annual Report on Form 10-K and, from time to time, in Electro-Sensors’ other filings with the SEC. These and other risks related to the business of Mobile X Global will be presented in the proxy statement/prospectus/consent solicitation statement to be filed with the SEC.


16


The information here should be read considering these risks and the following considerations: the ability of the merger parties to obtain definitive investment documents and close on the equity investments necessary to complete the Merger; the ability of MobileX to successfully launch its business, attract subscribers, and achieve the levels of customer service, revenues and costs that it currently expects; the ability of the combined company to successfully maintain a Nasdaq Capital Market listing; the ability of the combined company to successfully access the capital markets to finance expansion and acquisitions; the ability of the combined company to identify and acquire appropriate acquisition targets and successfully integrate these companies into its operations; the ability of the combined company to achieve synergies between its legacy sensor business and its new MobileX business; the conditions to theclosing of the Merger may not be satisfied or an event, change or other circumstance could occur that could give rise to the termination of the Merger Agreement; the Merger may involve unexpected costs, liabilities or delays, resulting in the Merger not being consummated within the expected time period; risks that the announced merger may disrupt currentElectro-Sensors plans and operations or that the business or stock price of Electro-Sensors may suffer as a result of uncertainty surrounding the Merger; the outcome of any legal proceedings related to the Merger; and Electro-Sensors or Mobile X Global may be adversely affected by other economic, business, or competitive factors.  Additional information regarding the merger is available in Note 5 to the financial statements.

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 “Forward-Looking Statements” under “Item 1—Business,” in our Annual Report on Form 10-K for the year ended December 31, 2021,2022, as well as any effect the COVID-19 pandemic may have on the efficiency of our business operations, our customer base and the domestic or worldwide economy. following:


•Based on rapidly changing dynamics in global supply chains of materials and components, we may experience both price increases and difficulty in sourcing materials and components.
•We may experience changes in transportation and freight availability that may make it difficult to have materials and components shipped to us or our products shipped to customers in a timely manner.
•Supply chain dynamics may have a negative effect on the efficiency of our business operations, our customer base and the domestic or worldwide economy.
•The factors described under "Supply Chain and Labor Dynamics" in the Liquidity and Capital Resources section below.


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, 2021.2022. 


1714


SELECTED FINANCIAL INFORMATION

 

The following table contains selected financial information, for the periods indicated, from our Condensed Statements of Comprehensive Loss expressed as a percentage of net sales. 

 

Three Months Ended June 30



Six Months Ended June 30,


Three Months Ended March 31


2022


2021


2022

 

2021


2023


2022


Net sales

100.0%
100.0%

100.0

%

 

100.0

%100.0%
100.0%

Cost of goods sold

45.1
44.1

45.2

 

45.8


50.0
45.4

Gross profit

54.9
55.9

54.8

 

54.2


50.0
54.6




   




Operating expenses





 

 

 






Selling and marketing

16.7
14.8

18.5

 

16.3


18.1
20.9

General and administrative

43.9
18.6

34.6

 

20.7


25.5
23.6

Research and development

8.6
11.5

9.6

 

11.1


13.1
10.8

Total operating expenses

69.2
44.9

62.7

 

48.1


56.7
55.3




   




Operating loss

(14.3)
11.0

(7.9

)

 

6.1


Operating income (loss)

(6.7)
(0.7)





   





Non-operating income






 

 

 







Interest income

0.3

0.0

0.2

 

0.0


4.5

0.0

Total non-operating income, net

0.3

0.0

0.2

 

0.0


4.5

0.0





   





Loss before income tax benefit

(14.0)
11.0

(7.7

)

 

6.1


Income (loss) before income tax expense (benefit)

(2.2)
(0.7)





   





Income tax benefit

(2.9)
2.3

(1.7

)

 

1.3


Income tax expense (benefit)

0.0
(0.2)




   




Net loss

(11.1)%
8.7%

(6.0)

%

 

4.8

% 

Net income (loss)

(2.2)%
(0.5)%


The following paragraphs discuss the Company’sperformance for the three and six months ended June 30, 2022March 31, 2023 and 20212022.


RESULTS OF OPERATIONS (in thousands) 

Net Sales

Net sales for the three-month period ended June 30, 2022March 31, 2023 were $2,564, an increase$2,045, a decrease of $102,$90, or 4.1%4.2%, from $2,462$2,135 during the comparable period in 2021. Net2022. The decrease was a result of reduced domestic sales for the six months ended June 30, 2022 were $4,699, an increase of $336, or 7.7%, from $4,363 during the comparable period in 2021. The increased sales were driven by broad-based strength in agricultural applications, including commodity refiningboth wired and biofuels.wireless sensor products.

Gross Profit

Gross profit for the secondfirst quarter of 2022 increased $32 to 2023 was $1,4081,022, a decrease of $144 or 2.3%12.3%, over the same period in 20212022. Gross profit for the six months ended June 30, 2022 increased $208 to $2,574, or 8.8%, over the same period in 2021. Gross margin decreased in the secondfirst quarter of 20222023 to 54.950.0% from 55.9%54.6% during the same period in 20212022. Gross margin for the six months ended June 30, 2022 increased to 54.8% from 54.2% over the same period in 2021. The decrease in gross margin for the second quarter was due to a increase in raw material costs.  The increase in gross margin for the six months ended June 30, 2022period was primarily due to improved factory utilization, partially offset by increasesan increase in raw material costs.costs across all product lines.  

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Operating Expenses

 

Total operating expenses increased $668,decreased $20, or 60.5%1.7% to $1,773$1,160 for the secondfirst quarter of 20222023 compared to the same period in 2021, and2022, but increased as a percentage of net sales to 69.2%56.7% from 44.9%. Total operating expenses increased $854, or 40.7%, for the six months ended June 30, 2022 compared to the same period in 2021, and increased as a percentage of net sales to 62.7% from 48.1%55.3%. The increasechange in operating expenses was primarily due to increases in legal and professional fees directly related to the pending merger with Mobile X as discussed in Note 5 to the financial statements.  following:

 

 

●

Selling and marketing expenses in the secondfirst quarter of 2022 increased $632023 decreased $76 to $427,$370, or 17.3%17.0%, from the same period in 20212022 and increaseddecreased as a percentage of net sales to 16.7%18.1% from 14.8%20.9%. Selling and marketing expenses in the six months ended June 30, 2022 increased $161 to $873, or 22.6%, from the same period in 2021 and increased as a percentage of net sales to 18.5% from 16.3%. The increase for both periodsdecrease was primarily due to additionaldecreased sales headcount and increased travel and expenses.tradeshow related expenses.  The increase in tradeshow expenses in 2022 occurred because a majority of tradeshows in 2021 were held during the third quarter.  

 

 

●

General and administrative expenses increased $667$19 to $1,125,$522, or 145.6%3.8%, in the secondfirst quarter of 20222023 compared to the same period in 20212022 and increased as a percentage of net sales to 43.9%25.5% from 18.6%. General and administrative expenses increased $727 to $1,628, or 80.7%, for the six months ended June 30, 2022 compared to the same period in 2021 and increased as a percentage of net sales to 34.6% from 20.7%23.6%. The increase for both periods was primarily due to increasedexpenses related to the timing of printing and mailing of our Annual Report and Proxy Statement and legal and other professional fees related to the June 10, 2022 execution of the Merger Agreement and pending related filings,employment matters; partially offset by a decrease in amortization expenselegal and professional fees related to the HazardPRO technology, which was fully amortizedterminated merger.  The printing and mailing costs were expensed in the thirdsecond quarter of 2021.2022.

 

 

●

Research and development expenses decreased $62increased $37 to $221,$268, or 21.9%16.0%, in the secondfirst quarter of 2022 from2023 compared to the same period in 20212022 and decreasedincreased as a percentage of net sales to 8.6%13.1% from 11.5%. Research and development expenses decreased $34 to $452, or 7.0%, in the six months ended June 30, 2022 from the same period in 2021 and decreased as a percentage of net sales to 9.6% from 11.1%10.8%. The decreaseincrease for both periodsthe period was due to lower third partyhigher third-party engineering costs related to product development and enhancements.  

 

Non-Operating Income

 

Net non-operating income increased by $6,$92, or 300.0%9,200.0%, for the sixthree months ended June 30, 2022March 31, 2023 compared to the same period in 2021.2022.  The increase is the result of additional interest income earned as a result of higher interest rates of Treasury Bills. 

 

Income (Loss)Loss Before Income Tax Expense (Benefit)Benefit

 

Loss before income tax benefit was $358$45 for the secondfirst quarter of 2022,2023, representing a decreasean increase of $629$32 compared to an income before income tax expense of $271$13 for the same period in 20212022. Loss before income tax benefit was $371 The increase for the six months ended of June 30, 2022, representing a decrease of $640 compared to an income before income tax expense of $269 for the same period in 2021. The decrease for both periodsquarter was primarily the result of higher legal and other professional fees related to the pending merger.lower gross profit, partially offset by lower operating expenses, as discussed above.


Income Tax Expense (Benefit)Benefit

 

Income tax benefit was $74,$1 or (2.9)%0.0% of net sales in the secondfirst quarter of 20222023 compared to an income tax expense of $57,$4 or 2.3%0.2% of net sales in the secondfirst quarter of 2021. The income tax benefit was $78, or (1.7)% of net sales, in the six months ended June 30, 2022 compared to an income tax expense of $57, or 1.3% of net sales, for the six months ended June 30, 2021. The decrease in both periods is due to loss before income tax benefit in 2022 compared to a net income before income tax in 2021..  

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LIQUIDITY AND CAPITAL RESOURCES

 

Cash and cash equivalents were $6,429$5,540 at June 30, 2022March 31, 2023 and $6,713$7,646 at December 31, 2021.2022. The decrease was primarily the result of an increase in Treasury Bills classified as investments as of March 31, 2023 as compared to March 31, 2022.  Cash, cash used in operating activities discussed below.  equivalents, and investments were $9,563 at March 31, 2023 as compared to $9,682 at December 31, 2022.


Cash used in operating activities was $272$148 for the sixthree months ended June 30, 2022March 31, 2023 as compared to cash generated from operating activities of $466$106 for the sixthree months ended June 30, 2021.March 31, 2022. The $738 increase in cash used in operations$42 decrease was due primarily to an increase in the net loss.  The 20222023 net loss compared to the 20212022 net incomeloss was primarily due to the increase in legal and professional fees related to the merger expenses.decreased gross profit. 


Cash used in investing activities was $9$1,956 for the sixthree months ended June 30, 2022March 31, 2023 compared to $13cash from investing activities of $998 for the sixthree months ended June 30, 2021.March 31, 2022. The decrease in cash used in investing activitiesincrease was due to a decreasean increase in Treasury Bill purchases as compared to maturities of Treasury Bills classified as investments during 2022.investments.  


Cash used in financing activities in the sixthree months ended June 30,March 31, 2023 was $2 as compared to $1 for the three months ended March 31, 2022 and 2021 was $3 for both periods..  


Subject to the following sections,section, entitled "COVID-19 Pandemic Discussion""Supply Chain and "Supply ChainLabor Dynamics," the Company believebelieves its ongoing cash requirements will be primarily for capital expenditures, research and development, working capital, and corporate and business development initiativesand other strategic alternatives and that existing cash, on handcash equivalents, and investments and any cash generated from operations will be sufficient to meet these cash requirements through at least the next 12 months.

20


COVID-19 Pandemic Discussion


While many regions of the United States have reduced the various restrictions implemented beginning in 2020, many of our customers and potential customers continue to operate under modified and changing restrictions based on the number of local or regional COVID-19 cases.  The uncertainty surrounding the ongoing fluctuations in regional case counts creates uncertainty in our business and may negatively affect our 2022 financial results.

Supply Chain and Labor Dynamics


We traditionally have had one or more robust sources for production components and materials.  However, we are increasingly experiencing significantcontinue to experience disruptions in our supply chain, resulting in difficulty sourcing some parts. Additionally, wecomponents.  We are also experiencing price increases for many of the components used in our products. In certain situations,To meet these challenges we are modifying product designs to accommodate new components that are more readily available.available at competitive prices.  There is no guarantee that we will continue to be successful in updatingmodifying these designs and sourcing alternative components, andcomponents.  As a result, we could experience significant delays or run out ofin receiving certain components and materials. We are also seeing delays in shipping and transportation services, which may adversely affect our abilityneeded to make timely customer deliveries, to our customers.as well as increased costs that erode gross margins. Furthermore, the labor market for qualified employees able to fill our production positions is challenging and may result in delays in filling open positions.  While we continue to closely manage each of these activities, our actions may not be successful and may result in a negative effect on our sales and profit margins.


Future Corporate and Business Development Activities

 

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 or business acquisitions.  In addition, we continuedcontinue to explore other strategic investments that we believed presentedbelieve present good opportunities for the Company and its shareholders. We substantially increased these business development activities in the second half of 2021 and first half of 2022.  On June 10,13, 2022, we announced that we had entered into thea Merger Agreement with Mobile X Newco, Inc. and Mobile X Global, Inc.  On January 30, 2023, we announced that the Merger Agreement had been terminated and that the Company's Board of Directors had established a special committee to explore and pursue business development and other strategic alternatives.


Off-balance Sheet Arrangements

 

As of June 30, 2022,March 31, 2023, the Company had no off-balance sheet arrangements or transactions.

17


Non-GAAP Financial Measure

In addition to financial results reported in accordance with accounting principles generally accepted in the United States of America (“GAAP”), the Company is providing a non-GAAP financial measure in this Form 10-Q and an itemized reconciliation between Net Loss, a GAAP financial measure, and Adjusted Net Income (Loss), the non-GAAP financial measure.

The Company is using "Adjusted Net Income (Loss)" as a non-GAAP financial measure to facilitate period-to-period comparisons and analysis of its operating performance and believes it is useful to investors as a supplement to GAAP measures in analyzing, trending and benchmarking the performance and value of the Company’s business. This measure is not intended to be a substitute for, or more meaningful than, Net Loss in accordance with GAAP, but is provided as supplemental information. This measure may be different from Adjusted Net Income (Loss) or similar financial measures used by other companies, even when similar terms are used to identify these measures. 

As discussed below, to calculate Adjusted Net Income (Loss), the Company added back the costs and expenses, less estimated taxes, related to the negotiation and execution of the June 10, 2022 proposed Mobile X merger transaction to Net Loss for the three months ended March 31, 2023 and 2022.  The Company believes adding back these costs and expenses more accurately portrays the underlying results and trends of the ongoing business.

These expenses continued throughout the first quarter of 2023.  On January 30, 2023, the Company and Mobile X jointly agreed to terminate the merger agreement. Although the costs and expenses related to the Company-Mobile X Merger Agreement were incurred primarily in general and administrative expenses, the Company is not presenting any other non-GAAP information because it believes it has adequately set forth these expenses in the Management's Discussion and Analysis section of this Form 10-Q.


The Company incurred approximately $18 and $95 in legal and other professional fees for the three months ended March 31, 2023 and 2022, respectively, related to the Mobile X merger opportunity.  The following table sets forth a reconciliation of Net Loss, a GAAP financial measure,  to Adjusted Net Income (Loss) (as defined above), the non-GAAP measure, for the periods noted.

 

Three Months Ended March 31

 

 

 

2023

 

 

 

2022

 

Net Loss - GAAP

$

(44

)

 

$

(9

) 

Plus merger related expenses

 

18

 

 

 

95

 

Less income taxes on merger expenses

 

(4

)

 

 

(20

)

Adjusted Net Income (Loss)

$

(30

) 

 

$

66

 

 

2118

 

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 with the participation of the Company’s management, the Company’s principal executive officer and principal financial officer has concluded that the Company’s disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (“Exchange Act”), were effective as of June 30, 2022March 31, 2023.



Changes in Internal Control Over Financial Reporting


There were no changes in the Company’s internal control over financial reporting during the secondfirst quarter of 20222023 that were identified in connection with management’s evaluation required by paragraph (d) of Rules 13a-15 and 15d-15 under the Exchange Act, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. 


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


Item 6. Exhibits



Exhibit

 

Description




3.1
Restated Articles of Incorporation, as amended



3.2
Bylaws, as amended June 10, 2022

31.1

 

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

 

 

 

32.1

 

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

 

 

 

101

 

The following financial information from Electro-Sensors, Inc.’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2022March 31, 2023, formatted in iXBRL (Inline Extensible Business Reporting Language), (i) Condensed Balance Sheets as of June 30, 2022March 31, 2023 and December 31, 20212022, (ii) Condensed Statements of Comprehensive Income (Loss)Loss for the three and six months ended June 30,March 31, 2023 and March 31, 2022 and June 30, 2021 (iii) Condensed Statements of Changes in Stockholders' Equity for the three and six months ended June 30,March 31, 2023 and March 31, 2022, and June 30, 2021, (iv) Condensed Statements of Cash Flows for the sixthree months ended June 30,March 31, 2023 and March 31, 2022, and June 30, 2021, and (v) Notes to Financial Statements. 

 

2320

 

SIGNATURES

 

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

 

 

Electro-Sensors, Inc.

 

 

August 2, 2022May 11, 2023

/s/ David L. Klenk

 

David L. Klenk

 

Chief Executive Officer and Chief Financial Officer

(Principal Executive Officer and Principal Financial Officer)

  





2421