S

 

UNITEDUNITED STATES
SECURITIES ANDSECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

Form 10-Q

 

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

 

For the quarterly period ended March 31,September 30, 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 May 10,November 13, 2023 was 3,428,021.

 

 

 

2

 

ELECTRO-SENSORS, INC.

Form 10-Q

For the Period Ended March 31,September 30, 2023

 

TABLE OF CONTENTS

PART I – FINANCIAL INFORMATION4
   
Item 1. Financial Statements (unaudited):4
     
Condensed Balance Sheets – As of March 31,September 30, 2023 and December 31, 20224
Condensed Statements of Comprehensive LossIncome (Loss) – For the Three and Nine Months ended March 31,September 30, 2023 and March 31,September 30, 20225
Condensed Statements of Changes in Stockholders' Equity – For the Three and Nine Months ended March 31,September 30, 2023 and March 31,September 30, 20226
Condensed Statements of Cash Flows – For the ThreeNine Months ended March 31,September 30, 2023 and March 31,September 30, 20227
Notes to Condensed Financial Statements8
    
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations1416
Item 3. Quantitative and Qualitative Disclosures About Market Risk1921
Item 4. Controls and Procedures1921
     
PART II – OTHER INFORMATION2022
       
Item 1. Legal Proceedings2022
Item 1A. Risk Factors2022
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds2022
Item 3. Defaults Upon Senior Securities2022
Item 4. Mine Safety Disclosures2022
Item 5. Other Information2022
Item 6. Exhibits2022
  
SIGNATURES2123
  

  

3

PART I. FINANCIAL INFORMATION
Item 1. Financial Statements

ELECTRO-SENSORS, INC.

CONDENSED BALANCE SHEETS

(in thousands except share and per share amounts) 

 

March 31,
2023

 

 

December 31,
2022

 

 

September 30,
2023

 

 

December 31,
2022

 

 

(unaudited)

 

 

 

 

 

(unaudited)

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

Cash and cash equivalents

 

$

5,540

 

 

$

7,646

 

 

$

3,902

 

 

$

7,646

 

Investments

 

4,023

 

 

2,036

 

 

6,026

 

 

2,036

 

Trade receivables, less allowance for credit losses of $11


1,372

 

 

1,161

 


1,066

 

 

1,161

 

Inventories

 

1,779

 

 

1,745

 

 

1,836

 

 

1,745

 

Other current assets

 

 

215

 

 

 

214

 

 

 

279

 

 

 

214

 

Income tax receivable

0


11


136


11

Total current assets

 

 

12,929

 

 

 

12,813

 

 

 

13,245

 

 

 

12,813

 

Deferred income tax asset, net

 

306

 

 

256

 

 

198

 

 

256

 

Property and equipment, net

 

 

952

 

 

 

975

 

 

 

907

 

 

 

975

 

Total assets

 

$

14,187

 

 

$

14,044

 

 

$

14,350

 

 

$

14,044

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

 

 

 

 

Current maturities of financing lease

 

$

4

 

 

$

6

 

 

$

1

 

 

$

6

 

Accounts payable

 

357

 

 

274

 

 

261

 

 

274

 

Accrued expenses

 

423

 

 

350

 

 

 

559

 

 

 

350

 

Accrued income taxes

37


0

Total current liabilities

 

 

821

 

 

630

 

 

 

821

 

 

630

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ equity

 

 

 

 

 

 

 

 

 

 

 

 

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

 

342

 

 

342

 

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

 

342

 

 

342

 

Additional paid-in capital

 

2,163

 

 

2,163

 

 

2,201

 

 

2,163

 

Retained earnings

 

10,864

 

 

10,908

 

 

10,988

 

 

10,908

 

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

(3

)

1


(2

)

1

Total stockholders’ equity

 

 

13,366

 

 

 

13,414

 

 

 

13,529

 

 

 

13,414

 

Total liabilities and stockholders’ equity

 

$

14,187

 

 

$

14,044

 

 

$

14,350

 

 

$

14,044

 

See accompanying notes to unaudited condensed financial statements


4

ELECTRO-SENSORS, INC.

CONDENSED STATEMENTS OF COMPREHENSIVE LOSSINCOME (LOSS)

(in thousands except share and per share amounts)  

(unaudited)

 Three Months Ended
March 31,		  Three Months Ended
September 30,		 

Nine Months Ended
September 30,

 2023 2022  2023 2022 
2023

2022

            




Net sales $2,045  $2,135
 $2,057  $2,216

$6,239
$6,915
Cost of goods sold   1,023  
969   1,064  
1,053 

3,156

3,178
            




Gross profit 
1,022  
1,166  
993  
1,163 

3,083

3,737
            




Operating expenses              




Selling and marketing  370   446   307   357 
1,021
1,230
General and administrative  522   503   494   497 
1,458
2,125
Research and development 
268  
231  
218  
190 

724

642
            




Total operating expenses  
1,160  
1,180  
1,019  
1,044 

3,203

3,997
            




Operating loss  (138)  (14)
Operating income (loss)  (26)  119

(120)

(260)
          




Non-operating income            




Interest expense
0
(1)
(1)
(1)
Interest income   93   1   109   36 

297

44
          




Total non-operating income, net 
93  
1  
109  
35 

296

43
            




Loss before income tax benefit (45)  (13)
Income (loss) before income tax expense (benefit) 83  154
176
(217)
          




Income tax benefit  (1) 
(4)
Income tax expense (benefit)  75 
32

96

(46)
            




Net loss $(44) $
(9)
Net income (loss) $8 $
122
$80
$(171)
          





Other comprehensive loss          





Change in unrealized value of available-for-sale securities, net of income tax$(4)$0$(1)$(2)
$(3)
$0
Other comprehensive loss  (4) 0  (1) (2)
(3)

0
              





Net comprehensive loss $
(48) $(9)
Net comprehensive income (loss) $
7 $120
$77
$(171)
          




Net loss per share data:




Net income (loss) per share data:








          




Basic          






Net loss per share $(0.01) $0.00
Net income (loss) per share $0.00 $0.04
$0.02
$(0.05)
Weighted average shares 3,428,021  3,395,521  3,428,021  3,401,880 

3,428,021

3,397,664
          






Diluted          






Net loss per share $
(0.01) $
0.00
Net income (loss) per share $
0.00 $
0.04
$0.02
$(0.05)
Weighted average shares 3,428,021  3,395,521  3,428,021  3,482,996 

3,428,021

3,397,664

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 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 three months ended September 30













    

Common Stock Issued

 

 

Additional
Paid-in
Capital

 

 

Retained
Earnings

 

 

Accumulated
Other
Comprehensive
Income (Loss)

 

 

Total
Stockholders’

Equity

 

   

Shares

 

 

Amount

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 20233,428,021

$342

$2,163

$10,980

$(1)
$13,484

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive loss















(1)

(1)
Stock-based compensation expense







38










38
Net income











8





8

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance September 30, 2023 (unaudited) 3,428,021

$342

$2,201

$10,988

$(2)
$13,529

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 20223,395,521

$339

$2,043

$10,515

$2

$12,899

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Exercise of common stock options7,500


1


30










31
   Other comprehensive income















(2)

(2)
Stock-based compensation expense 







2










2
Net income











122





122

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance September 30, 2022 (unaudited)3,403,021

$340

$2,075

$10,637

$0

$13,052

 


For the nine months ended September 30













    

Common Stock Issued

 

 

Additional
Paid-in
Capital

 

 

Retained
Earnings

 

 

Accumulated
Other
Comprehensive
Income

 

 

Total
Stockholders’

Equity

 

   

Shares

 

 

Amount

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2022
3,428,021


$342

$2,163

$10,908

$1

$13,414

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive loss















(3)

(3)
Stock-based compensation expense







38










38
Net income











80





80

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance September 30, 2023 (unaudited) 3,428,021

$342

$2,201

$10,988

$(2)
$13,529

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 20213,395,521

$339

$2,041

$10,808

$0

$13,188

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Exercise of common stock options7,500


1


30








31
Stock-based compensation expense







4










4
Net loss











(171)





(171)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance September 30, 2022 (unaudited)3,403,021

$340

$2,075

$10,637

$0

$13,052


See accompanying notes to unaudited condensed financial statements 


6

ELECTRO-SENSORS, INC.

CONDENSED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited) 

 

Three Months Ended
March 31,

 

 

Nine Months Ended
September 30,

 

 

2023

 

2022

 

 

2023

 

2022

 

Cash flows used in operating activities

 

 

 

 

 

 

 

 

Cash flows from (used in) operating activities

 

 

 

 

 

 

 

 

Net loss

 

$

(44

)

 

$

(9

)

Net income (loss)

 

$

80

 

$

(171

)

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

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

24

 

 

 

40

 

 

 

69

 

 

 

117

 

Deferred income taxes

 

 

(50

)

 

 

(6

)

 

 

58

 

 

(15

)

Stock-based compensation expense

 

 

0

 

 

 

1

 

 

 

38

 

 

 

4

 

Interest accrued on treasury bills

 

 

(36

)

 

 

(1

)

Interest accrued on Treasury Bills

 

 

(163

)

 

 

(8

)

Change in:

 

 

 

 

 

 

 

 

 

 



 

 

 

 

Trade receivables

 

 

(211

)

 

 

(150

)

 

 

95

 

 

(175

)

Inventories

 

 

(34

)

 

 

(95

)

 

 

(91

)

 

 

(127

)

Other current assets

 

 

(1

)

 

 

(21

)

 

 

(65)

 

 

13

Accounts payable

 

 

83

 

 

(23

)

 

 

(13

)

 

 

(48

)

Accrued expenses

 

 

73

  

 

 

157

 

 

209

  

 

 

250

Income tax receivable/payable

 

 

48

 

 

1

 

 

(125

)

 

 

(53

)

Net cash used in operating activities

 

 

(148

)

 

 

(106

)

Net cash from (used in) operating activities

 

 

92

 

 

(213

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash flows from (used in) investing activities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Purchases of treasury bills

 

 

(3,955

)

 

 

(1,999

)

Proceeds from the maturity of treasury bills

 

 

2,000

 

 

 

3,000

 

Purchases of Treasury Bills

 

 

(13,830

)

 

 

(4,992

)

Proceeds from the maturity of Treasury Bills

 

 

10,000

 

 

 

8,000

 

Purchase of property and equipment

(1)

(3)

(1)

(17)

Net cash from (used in) investing activities

 

 

(1,956

)

 

 

998

 

 

(3,831

)

 

 

2,991

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash flows used in financing activities

 

 

 

 

 

 

 

 

Cash flows from (used in) financing activities

 

 

 

 

 

 

 

 

Proceeds from the exercise of common stock options

0


31
Payments on financing lease

(2)

(1)

(5)

(4)

Net cash used in financing activities

 

 

(2

)

 

 

(1

)

Net cash from (used in) financing activities

 

 

(5

)

 

 

27

Net increase (decrease) in cash and cash equivalents

 

 

(2,106

)

 

 

891

 

 

(3,744

)

 

 

2,805

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents, beginning

 

 

7,646

 

 

 

6,713

 

 

 

7,646

 

 

 

6,713

 

Cash and cash equivalents, ending

 

$

5,540

 

 

$

7,604

 

 

$

3,902

 

 

$

9,518

 

Supplemental cash flow information

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash paid for income taxes

 

$

0

 

 

$

0

 

 

$

164

 

 

$

22

 

Cash paid for interest
$1

$1

 

See accompanying notes to unaudited condensed financial statements


7

ELECTRO-SENSORS, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

FOR THE PERIOD ENDED MARCH 31SEPTEMBER 30, 2023

(in thousands except share and per share amounts)

(unaudited)

 

Note 1. Basisasis of Presentationesentation 

 

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, 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 March 31,September 30, 2023 and for the three-monththree and nine-month periods ended March 31,September 30, 2023 and 2022, 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.


Note 5 provides information regarding the Merger Agreement that we entered into on June 10, 2022 and whichthat 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 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 31SEPTEMBER 30, 2023

(in thousands except share and per share amounts)

(unaudited)

 

Revenue RecognitionRevenue 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.


Fair Value Measurements 

 

The carrying value of trade receivables, accounts payable, and other financial working capital items approximates fair value at March 31,September 30, 2023 and December 31, 2022, 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. 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. 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 MARCH 31,SEPTEMBER 30, 2023

(in thousands except share and per share amounts)

(unaudited)

Net LossIncome (Loss) per Common Share


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


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-monththree-month periods ended March 31,September 30, 2023, and 2022, 300,000175,000 and332,500 243,884 respectively, weighted average common shares for underlying stock options have been excluded from the calculation, because their effect would be anti-dilutiveanti-dilutive. For the nine-month periods ended.    September 30, 2023 and 2022, 175,000 and 325,000 respectively, weighted average common shares for underlying stock options have been excluded from the calculation.


In addition, for the three and nine-month periods ended September 30, 2023, 105,000 restricted stock units have been excluded from the calculation because their effect would be anti-dilutive. 


New Accounting StandardStandard Adopted

 

Accounting Standard Update (“ASU”) No. 2016-13, Financial Instruments-Credit Losses (Topic 326), Measurement of Credit Losses on Financial Statements 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. The adoption of ASU 2016-13 hason January 1, 2023 had no significant impact on our financial statements.


10

ELECTRO-SENSORS, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

FOR THE PERIOD ENDED MARCH 31SEPTEMBER 30, 2023

(in thousands except share and per share amounts)

(unaudited)

 

NoteNote 2. Investments

 

The Company has investments in commercial paper, money market savings, Treasury Bills, and common equity securities of two 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 rangingranging from one month to three months at March 31,September 30, 2023.  


The Company classifies its investments in commercial paper and Treasury Bills as available-for-sale, accounted for at fair value with unrealized gainsincome and losses recognized in accumulated other comprehensive gainincome (loss) 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 lossincome (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

 

March 31, 2023

 

 

 

 

 

 

 

 

 

September 30, 2023

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money Market Savings

 

$

1,316

 

$

0

 

$

0

 

$

1,316

 

 

$

1,694

 

$

0

 

$

0

 

 

$

1,694

 

Treasury Bills

 

7,914

 

39

 

0

 

7,953

 

 

 

7,898

 

 

47

 

 

0

 

 

 

7,945

 

Equity Securities

 

 

54

 

 

2

 

 

0

 

 

56

 

Equity Securities

 

 

54

 

 

2

 

 

0

 

 

56

 

 

9,284

 

41

 

0

 

9,325

 

 

 

9,646

 

 

49

 

 

0

 

 

9,695

 

Less Cash Equivalents

 

 

5,275

 

 

27

 

 

0

 

 

 

5,302

 

 

 

3,668

 

 

1

 

 

0

 

 

 

3,669

 

Total Investments, March 31, 2023

 

$

4,009

 

$

14

 

$

0

 

$

4,023

 

Total Investments, September 30, 2023

 

$

5,978

 

$

48

 

$

0

 

$

6,026

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2022

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial Paper

 

$

1,377

 

$

0

 

$

0

 

 

$

1,377

 

 

$

1,377

 

$

0

 

$

0

 

 

$

1,377

 

Treasury Bills

 

7,922

 

32

 

0

 

 

7,954

 

 

 

7,922

 

 

32

 

 

0

 

 

 

7,954

 

Equity Securities

 

 

54

 

 

2

 

 

0

 

 

56

 

 

 

54

 

 

2

 

 

0

 

 

56

 

 

9,353

 

34

 

0

 

9,387

 

 

 

9,353

 

 

34

 

 

0

 

 

9,387

 

Less Cash Equivalents

 

 

7,319

 

 

32

 

 

0

 

 

 

7,351

 

 

 

7,319

 

 

32

 

 

0

 

 

 

7,351

 

Total Investments, December 31, 2022

 

$

2,034

 

$

2

 

$

0

 

$

2,036

 

 

$

2,034

 

$

2

 

$

0

 

$

2,036

 

 

11

ELECTRO-SENSORS, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

FOR THE PERIOD ENDED MARCH 31,SEPTEMBER 30, 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.

 

March 31,September 30, 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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money Market Savings

 

$

1,316

 

$

1,316

 

$

1,316

 

$

0

 

$

0

 

 

$

1,694

 

$

1,694

 

$

1,694

 

$

0

 

$

0

 

Treasury bills


3,986
3,986
3,986
0
0
Treasury bills - maturity date greater than three months
3,967
3,967
3,967
0
0

Treasury Bills


1,975
1,975
1,975
0
0
Treasury Bills - maturity date greater than three months
5,970
5,970
5,970
0
0

Equity Securities

 

56

 

56

 

0

 

0

 

56

 

 

56

 

56

 

0

 

0

 

56

 

 

December 31, 2022


 

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


$

1,377

 

$

1,377

 

$

1,377

 

$

0

 

$

0

 


$

1,377

 

$

1,377

 

$

1,377

 

$

0

 

$

0

 

Treasury bills


5,974

 

5,974

 

5,974

 

0

 

0

 

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

Treasury Bills


5,974

 

5,974

 

5,974

 

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 billsTreasury 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 basis are as follows:  



Three Months Ended March 31,
Nine Months Ended September 30,


2023


2022


2023


2022






   




   
Beginning Balance
$56

$56 
$56

$56 

Change in Fair Value



0
 0

0
 0
Ending Balance
$56

$56 
Ending Balance
$56

$56 

12

ELECTRO-SENSORS,INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

FOR THE PERIOD ENDEDMARCH 31,SEPTEMBER 30, 2023

(in thousands except share and per share amounts)

(unaudited)

 

Note 4. Inventories


Inventories usedInventories used in the determinationdetermination of cost of goodsgoods sold are as follows:


March 31, 

2023



December 31, 

2022


September 30, 

2023



December 31, 

2022



Raw Materials$1,174

$1,162
$1,210

$1,162
Work In Process
324


278

317


278

Finished Goods


291


315

319


315
Reserve for Obsolescence
(10)

(10)
(10)

(10)
Total Inventories, net$1,779

$1,745
$1,836

$1,745

 

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

 

On June 10, 2022, 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 the Company (the “Merger Sub”), and Mobile X Global, Inc., a Delaware corporation (“Mobile X”).

 

On January 30, 2023, the Company and Mobile X terminated the Merger Agreement.  A condition to the closing of the merger transaction was the consummation of an equity financing whichthat the parties anticipated would be a PIPE investment (private investment in public entity).  The financing necessary to consummate the merger was pursued but was not available due to difficult conditions in the financial markets, including the markets for PIPE investments.


Note 6. Stock-Based Compensation

Stock options
The 2013 Equity Incentive Plan (the “2013 Plan”) authorizes the issuance of both nonqualified and incentive stock options. Payment for the shares may be made in cash, shares of the Company’s common stock or a combination thereof. Under the terms of the 2013 Plan, incentive stock options and non-qualified stock options are granted at a minimum of 100% of fair market value on the date of grant and may be exercised at various times depending upon the terms of the option. All existing options expire 10 years from the date of grant, subject to early termination 12 months after termination of employment or service due to death, disability, or termination other than for cause.

During the 2023 third quarter, the Company granted 25,000 non-qualified stock options to its Chief Executive Officer and to three of its four non-employee board members. The options vest 20% on the grant date, with an additional 20% vesting annually thereafter.


13

ELECTRO-SENSORS, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

FOR THE PERIOD ENDED SEPTEMBER 30, 2023

(in thousands except share and per share amounts)

(unaudited)


The assumptions made in estimating the fair value of the options on the grant date based upon the BSM option-pricing model for the three-month period ended September 30, 2023 are as follows:

Dividend Yield

0.00%


Expected Volatility

25.56%


Risk Free Interest Rate

4.35%


Expected Life

6 Years


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


The Company had 225,000 in options that expired during the quarter. There were no options exercised during the nine-month period ended September 30, 2023. There was 7,500 options exercised during the nine-months ended September 30, 2022.

The following table summarizes the activity for all stock options outstanding for the nine months ended September 30: 


 

 

2023

 

2022


 

 

Shares

 

 

Weighted Average Exercise Price

 

Shares

 


 

Weighted Average Exercise Price


Options outstanding at beginning of year

 

300,000

 


$

4.36


 

332,500

 


$

4.25


Granted

 

100,000

 


 

4.11


 

0

 


 

 


Exercised

 

0

 


 

 


 

(7,500

)

 

4.15


Expired

 

(225,000

)

 

4.57


 

0

 


 

 


Options outstanding at September 30

 

175,000

 


$

4.03


 

325,000

 


$

4.30


 

 

 

 


 

 


 

 

 


 

 


Options exercisable at September 30

 

50,000

 


$

4.21


 

320,000

 


$

4.31


 

 

 

 


 

 


 

 

 


 

 


Weighted average grant date fair for options exercised during the period

 

0

 


 

 


 

7,500

 


$

4.15



As of September 30, 2023, the total unrecognized compensation expense related to outstanding stock options was $119, which the Company expects to recognize over a period of five years. The Company recognized compensation expense in connection with the vesting of stock options of approximately $30 for the three and nine months ended September 30, 2023.


14

ELECTRO-SENSORS, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

FOR THE PERIOD ENDED SEPTEMBER 30, 2023

(in thousands except share and per share amounts)

(unaudited)


Restricted stock units

The 2013 Plan authorizes the issuance of restricted stock units.  Stock-based compensation expense is determined on the grant date based on the closing market value of our common stock. The amount of expense is calculated based on an estimate of the number of awards expected to vest at the end of each vesting period and is expensed evenly over the vesting period.  In connection with the time of vesting and issuance of shares, an eligible recipient of common stock may elect to have some shares withheld by the Company to satisfy any requirement for withholding taxes.

In September 2023, the Company granted 35,000 restricted stock units to its Chief Executive Officer and 17,500 restricted stock units to each of its four non-employee board members. The restricted stock units vest 20% on the first anniversary of the grant and 20% annually thereafter.

The following table summarizes restricted stock unit activity for the nine months ended September 30, 2023:

Unvested Restricted Stock Units


Number of SharesWeighted-Average Grant-Date Fair Value
Unvested as of December 31, 2022
0
$0
    Granted
105,000

4.11
    Vested
0

0
    Forfeited/canceled
0

0
Unvested as of September 30, 2023
105,000
$4.11

As of September 30, 2023, the total unrecognized compensation expenses related to outstanding restricted stock units is $424, which the Company expects to recognize over a period of five years. The Company recognized compensation expense in connection with the vesting of restricted stock units of approximately $8 for the three and nine months ended September 30, 2023.

Note 7. Contingencies

 

The Company sometimes becomes subject to claims against it in the ordinary course of business.  There are currently no pending or threatened claims against the Company that it believes will have a material adverse effect on its results of operations or liquidity.

 

1315


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

 

FORWARD-LOOKING STATEMENTS

 

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

Our forward-looking statements generally relate to our growth strategy, future financial results, product development and sales efforts. We make forward-looking statements throughout this Form 10-Q, contains forward-lookingbut primarily in this Management’s Discussion and Analysis of Financial Condition and Results of Operations section. These include statements within the meaning of Section 27A of the Securities Act of 1933relating to our beliefs and Section 21E of the Securities Exchange Act of 1934, including statements regardingexpectations and intentions with respect to (i) our expectations, beliefs, intentions or strategies regarding the future. Forward-looking statements include, but are not limited to, statements about the success ofgrowth and profitability, (ii) our marketing efforts; our efforts to accelerate future growth or income; our efforts to pursue and the future outcome of any businessproduct development, or other strategic alternatives; our efforts to maintain or reduce production costs;(iii) our ability to continue to obtain componentsparts and other raw materials for our products from various manufacturers and distributors in a timely manner and at reasonable prices, (iv) the value of our intellectual property, (v) our competitive position in the marketplace, (vi) the effect of governmental regulations on our business, (vii) our employee relations, (viii) the adequacy of our facilities, (ix) our intention to develop new products, (x) the possibility of us acquiring compatible businesses or product lines as well aspart of our growth strategy, and (xi) our future cash requirements and use of cash.

Forward-looking statements cannot be guaranteed and our actual results may vary materially due to the uncertainties and risks, known and unknown, associated with these statements, including our ability to pass along any increased costs to our customers;successfully develop new products and manage our cash requirements; and the sufficiency of our cash flows or any other measure of future financial or 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.


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 assumerequirements. We undertake no obligation to update any forward-looking statements. We cannot foresee or identify all factors that could cause actual results to differ from expected or historical results. As such, investors should not consider any list of these forward-looking statements, other than as required by law. Our actual results could differ materially from those projectedfactors to be an exhaustive statement of all risks, uncertainties or indicated in these forward-looking statements. potentially inaccurate assumptions.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, 2022, as well as the following:


•
  • Respond to events beyond our control such as any disruption in the economy caused by (i) a government shutdown similar to those that have occurred over the past decade or (ii) the recent October 2023 outbreak of violence in the Middle East,
  • Continue to procure components for our products, and maintain a steady and reliable workforce, as described below under "Supply Chain and Labor Dynamics".

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 endedDecember 31, 2022. 


1416


SELECTED FINANCIAL INFORMATION

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

 

Three Months Ended March 31


Three Months Ended September 30


Nine Months Ended September 30

2023


2022


2023



2022


2023
2022

Net sales

100.0%
100.0%100.0%
100.0%
100.0%
100.0%

Cost of goods sold

50.0
45.4
51.7

47.5

50.6
46.0

Gross profit

50.0
54.6
48.3

52.5

49.4
54.0














Operating expenses















Selling and marketing

18.1
20.9
14.9

16.1

16.3
17.7

General and administrative

25.5
23.6
24.0

22.4

23.4
30.7

Research and development

13.1
10.8
10.6

8.6

11.6
9.3

Total operating expenses

56.7
55.3
49.5

47.1

51.3
57.7














Operating income (loss)

(6.7)
(0.7)(1.2)
5.4
(1.9)
(3.7)















Non-operating income
















Interest income

4.5

0.0
5.3

1.6

4.8
0.6

Total non-operating income, net

4.5

0.0
5.3

1.6

4.8
0.6















Income (loss) before income tax expense (benefit)

(2.2)
(0.7)4.1
7.0
2.9
(3.1)















Income tax expense (benefit)

0.0
(0.2)3.6
1.4
1.5
(0.7)














Net income (loss)

(2.2)%
(0.5)%0.5%
5.6%
1.4%
(2.4)%


The following paragraphs discuss the Company’s performance for the three and nine months ended March 31,September 30, 2023 and 2022.

RESULTS OF OPERATIONS (in thousands) 

Net Sales

Net sales for the three-month period ended March 31,September 30, 2023 were $2,045,$2,057, a decrease of $90,$159, or 4.2%7.2%, from $2,135$2,216 during the comparable period in 2022.  Net sales for the nine months ended September 30, 2023 were $6,239, a decrease of $676, or 9.8%, from $6,915 during the comparable period in 2022.  The decrease during the three-month period was the result of decreased sales of our wired sensor products, partially offset by increased sales of HazardPROTM wireless hazard monitoring systems.  The decrease during the nine-month period was a result of reduced domesticdecreased sales forof both traditional wired products and HazardPRO wireless sensor products.hazard monitoring systems.

Gross Profit

Gross profit for the firstthird quarter of 2023 was $1,022993, adecrease of $144$170, or 12.3%14.6%, over the same period in 2022. Gross profit for the nine months ended September 30, 2023 was$3,083, a decrease of $654, or 17.5%, over the same period in 2022. Gross margin decreased in the firstthird quarter of 2023 to 50.048.3% from 54.6%52.5% during the same period in 2022. Gross margin for the nine months ended September 30, 2023 decreased to 49.4% from 54.0% over the same period in 2022. The decrease in gross margin for the periodboth periods was primarily due to an increase in materialproduct and labor costs across all product lines.  

1517

Operating Expenses

 

Total operating expenses decreased $20,$25, or 1.7%2.4%, to $1,160$1,019 for the firstthird quarter of 2023 compared to the same period in 2022 butand increased as a percentage of net sales to 56.7%49.5% from 55.3%47.1%. Total operating expenses decreased$794, or19.9%, to $3,203 for the nine monthsended September 30, 2023 compared to the same period in2022 and decreased as a percentage of net sales to 51.3% from57.7%. The changedecrease in operating expenses for both periods was primarily due to lower legal and professional fees related to the following:terminated merger agreement with Mobile X as discussed in Note 5 to the financial statements and decreased sales headcount.

 

 

●

Selling and marketing expenses in the firstthird quarter of 2023 decreased $76$50 to $370,$307, or 17.0%14.0%, from the same period in 2022 and decreased as a percentage of net sales to 18.1%14.9% from 20.9%16.1%. Selling and marketing expenses in the nine monthsended September 30, 2023decreased$209to $1,021, or17.0%, from the same period in2022anddecreased as a percentage of net sales to 16.3% from17.7%. The decrease for both periods was primarily due to decreasedlower sales headcount and travel expenses.variable compensation related to lower revenue.

 

 

●

General and administrative expenses increased $19decreased $3 to $522,$494, or 3.8%0.6%, in the firstthird quarter of 2023 compared to the same period in 2022 andbut increased as a percentage of net sales to 25.5%24.0% from 23.6%22.4%. General and administrative expensesdecreased$667to $1,458, or31.4%, in the nine monthsended September 30, 2023 compared to the same period in2022 and decreased as a percentage of net sales to 23.4% from30.7%. The increasedecrease in both periods was primarily due to expenses related to the timing of printing and mailing of our Annual Report and Proxy Statement and legal fees related to employment matters; partially offset by a decrease in legal and professional fees related to the terminated merger.  The printing and mailing costs were expensedmerger agreement, partially offset by an increase in stock-based compensation expense primarily related to the second2023 third quarter of 2022.stock option grants.

 

 

●

Research and development expenses increased $37$28 to $268,$218, or 16.0%14.7%, inin the firstthird quarter of 2023 compared to the same period in 2022 and increased as a percentage of net sales to 13.1%10.6% from 10.8%8.6%. Research and development expenses increased$82to $724, or 12.8%, in the nine monthsended September 30, 2023 compared to the same period in2022 and increased as a percentage of net sales to 11.6% from9.3%.The increase for the periodboth periods was due to higher third-partycontract engineering costs related to product development and enhancements.

 

Non-Operating Income

 

Net non-operating income increasedby $74, or 211.4%, for the three-month period ended September 30, 2023compared to the same period in 2022.Net non-operating income increased by $92,$253, or 9,200.0%588.4%, for the three monthsnine months ended March 31,September 30, 2023 compared to the same period in 2022. The increase for both periods is the result of additional interest income earned as a result of higher interest rates ofon Treasury Bills.

 

LossIncome (Loss) Before Income Tax BenefitExpense (Benefit)

 

LossIncome before income tax benefitexpense was $45$83 for the firstthird quarter of 2023, representing an increasea decrease of $32 $71 compared to $13$154 for the same period in 2022. Income before income tax expense was $176 for the nine monthsended September 30, 2023, representing an increase of $393 compared to a loss before income tax benefit of $217 for the same period in 2022.The increasedecrease for the quarterthree-month period was primarily due to lower revenues and gross margins, as discussed above.  The increase for the nine months was primarily the result of lower gross profit,operating expenses and an increase in interest income, partially offset by lower operating expenses,revenues and gross margins, as discussed above.


Income Tax BenefitExpense (Benefit)

 

Income tax benefitexpense was$175, or 0.0%3.6%, of net sales in the firstthird quarterof 2023 compared to an income tax expense of $432, or 0.2%1.4%, of net sales in the firstthird quarterof2022. Income tax expense was$96, or 1.5%, of net sales for thenine months ended September 30, 2023, compared to an income tax benefit of $46, or (0.7)%, of net sales for the nine months ended September 30, 2023.  Income tax expense in the 2023 periods was higher than federal tax rates due to the 2023 third quarter write-off of deferred tax asset related to the 2023 expired options.

 

1618


LIQUIDITY AND CAPITAL RESOURCES

Cash and cash equivalents were $5,540$3,902 at March 31,September 30, 2023 and $7,646 at December 31, 2022. The decrease was primarily the result of an increase in Treasury Bills classified as investments as of March 31,September 30, 2023 as compared to MarchDecember 31, 2022. Cash, cash equivalents, and investments were $9,563$9,928 at March 31,September 30, 2023 as compared to $9,682 at December 31, 2022.


Cash from operating activities was $92 for the nine months ended September 30, 2023 as compared to cash used in operating activities was $148of $213 for the threenine months ended March 31, 2023 as compared to $106 for the three months ended March 31,September 30, 2022. The $42 decrease$305 increase in cash from operating activities was due primarily to an increase in the net loss.income and a decrease in trade receivables.  The 2023 net lossincome compared to the 2022 net loss was primarily due to decreased gross profit.expenses related to the terminated merger agreement described in Note 5 to the financial statements and an increase in interest income, partially offset by a decrease in net revenues. The decrease in trade receivables is due to the timing of sales and collections. 


Cash used in investing activities was $1,956$3,831 for the threenine months ended March 31,September 30, 2023 compared to cash from investing activities of $998$2,991 for the threenine months ended March 31,September 30, 2022. The increase in cash used in investing activities was due to anthe 2023 increase in Treasury Billthe purchases as compared to maturities of Treasury Bills classified as investments.investments compared to maturities. 


As shown on the Statement of Cash Flows, during 2023, the Company purchased more Treasury Bills with maturity dates greater than three months to secure higher interest rates.

Cash used in financing activities in the threenine months ended March 31,September 30, 2023 was $2 as$5 compared to $1cash from investing activities of $27 for the threenine months ended March 31,September 30, 2022.  In the third quarter of 2022,.   three non-employee directors exercised a total of 7,500 stock options for a total exercise price of $31.


Subject to the following section, entitled "Supply Chain and Labor Dynamics," the Company believes its ongoing cash requirements will be primarily for capital expenditures, research and development, working capital, corporate and business development and other strategic alternatives and that existing cash, cash equivalents, and investments and any cash generated from operations will be sufficient to meet these cash requirements through at least the next 12 months.


Supply Chain and Labor Dynamics


We traditionally have hadoneor more robust sources for production components and materials. However, we continue to experience disruptions in our supply chain, resulting in difficulty sourcing some components. We are also experiencing price increases for many of the components used in our products. To meet these challenges, we are seeking additional sources for components and modifying product designs to accommodate new components that are more readily available at competitive prices. There is no guarantee that we will continue to be successful in modifying these designs and sourcing alternative components. As a result, we could experience significant delays in receiving certain components needed to make timely customer deliveries, as well as increased costs that erode gross margins. Supply chain dynamics may have an effect on the efficiency of our business operations, our customer base, and the domestic or worldwide economy.  Furthermore, the labor market for qualified employees able to fill our productionvarious open positions is challenging and may result in delays in filling openthese positions. In addition, we may experience changes in transportation and freight availability that may make it difficult to have materials and components shipped to us, or our products shipped to customers, in a timely and cost-effective manner. 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 continue to explore other strategic investmentsalternatives that we believe present good opportunities for the Company and its shareholders. On June 13, 2022, we announced that we had entered into a Merger Agreement with Mobile XNewco,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.

19

Off-balance Sheet Arrangements

As of March 31,September 30, 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,Income (Loss), a GAAP financial measure, and Adjusted Net Income, (Loss), the non-GAAP financial measure.

 

The Company is using "Adjusted Net Income (Loss)"Income" 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 LossIncome (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 LossIncome (Loss) for the three and nine months ended March 31, 2023 andSeptember 30, 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 forthdescribed these expenses in the Management's Discussion and Analysis section of this Form 10-Q.10-Q and past filings with the Securities and Exchange Commission.


The Company incurred approximately $18$79 and $95 $856 in legal and other professional fees for the three and nine months ended March 31, 2023 and September 30, 2022, respectively, related to the Mobile X merger opportunity. The following table sets forth a reconciliation of Net Loss,Income (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

 

 

Three Months Ended September 30

 


Nine Months Ended September 30

 

 

2023

 

 

 

2022

 


2023

2022

Net Income (Loss) - GAAP

$

8

 

$

122


$80

$(171)

Merger-related expenses 

 

0

 

 

79

 



0


856

Income tax benefit of merger-related expenses 

 

0

 

 

(17

)

0

(180)

Adjusted Net Income

$

8

 

$

184

 


$80

$
505

 

1820

 

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 March 31,September 30, 2023.



Changes in Internal Control Over Financial Reporting


There were no changes in the Company’s internal control over financial reporting during the firstthird quarter of 2023 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. 


1921


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




10.3
Form of Non-Qualified Stock Option Agreement under the 2013 Equity Incentive Plan, as updated August 2023



10.4
Form of Restricted Stock Unit Agreement under the 2013 Equity Incentive Plan



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,September 30, 2023, formatted in iXBRL (Inline Extensible Business Reporting Language), (i) Condensed Balance Sheets as of March 31,September 30, 2023 and December 31, 2022, (ii) Condensed Statements of Comprehensive LossIncome (Loss) for the three and nine months ended March 31,September 30, 2023 and March 31,September 30, 2022, (iii) Condensed Statements of Changes in Stockholders' Equity for the three and nine months ended March 31,September 30, 2023 and March 31,September 30, 2022, (iv) Condensed Statements of Cash Flows for the threenine months ended March 31,September 30, 2023 and March 31,September 30, 2022, and (v) Notes to Financial Statements. 

  

2022

 

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,November 14, 2023

/s/ David L. Klenk

 

David L. Klenk

 

Chief Executive Officer and Chief Financial Officer

(Principal Executive Officer and Principal Financial Officer)

 





2123