S

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

Form 10-Q

☒ QUARTERLY QUARTERLY REPORT PURSUANTPURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2017March 31, 2023

Or

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

1

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or 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-acceleratedNon-accelerated filer

☐ (Do not check if a smaller reporting company)☒

Smaller reporting company☒

Emerging growth company ☐

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

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


The number of shares outstanding of the registrant’s common stock, $0.10 par value, on NovemberMay 10, 20172023 was 3,395,521.3,428,021.

 

12


ELECTRO-SENSORS, INC.

Form 10-Q

For the Periods Period Ended September 30, 2017March 31, 2023

TABLE OF CONTENTS

PART I – FINANCIAL INFORMATION34
Item 1. Financial Statements (unaudited):34
Condensed Balance Sheets – As of September 30, 2017March 31, 2023 and December 31, 201620223
Statements of Comprehensive Income – For the Three and Nine Months ended September 30, 2017 and September 30, 20164
Condensed Statements of Comprehensive Loss – For the Three Months ended March 31, 2023 and March 31, 20225
Condensed Statements of Changes in Stockholders' Equity – For the Three Months ended March 31, 2023 and March 31, 20226
Condensed Statements of Cash Flows – For the NineThree Months ended September 30, 2017March 31, 2023 and September 30, 2016March 31, 202257
Notes to Condensed Financial Statements68
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations1014
Item 3. Quantitative and Qualitative Disclosures About Market Risk1319
Item 4. Controls and Procedures1319
PART II – OTHER INFORMATION1320
Item 1. Legal Proceedings1320
Item 1A. Risk Factors1320
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds1320
Item 3. Defaults Upon Senior Securities1320
Item 4. Mine Safety Disclosures1320
Item 5. Other Information1320
Item 6. Exhibits1320
SIGNATURES1421

23


PART I. FINANCIAL INFORMATION
Item 1.1. Financial Statements

ELECTRO-SENSORS, INC.

CONDENSED BALANCE SHEETS

(in thousands except share and per share amounts)

 

 

September 30,
2017

 

 

December 31,
2016

 

 

 

(unaudited)

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

1,185

 

 

$

840

 

Treasury bills

 

 

7,420

 

 

 

7,427

 

Trade receivables, less allowance for doubtful accounts of $8


1,042

 

 

 

770

 

Inventories

 

 

1,528

 

 

 

1,515

 

Other current assets

 

 

177

 

 

 

174

 

Income tax receivable

 

 

0

 

 

 

66

 

 

 

 

 

 

 

 

 

 

Total current assets

 

 

11,352

 

 

 

10,792

 

 

 

 

 

 

 

 

 

 

Deferred income tax asset, net

 

 

254

 

 

 

198

 

 

 

 

 

 

 

 

 

 

Intangible assets, net

 

 

858

 

 

 

1,035

 

 

 

 

 

 

 

 

 

 

Property and equipment, net

 

 

992

 

 

 

1,033

 

 

 

 

 

 

 

 

 

 

Total assets

 

$

13,456

 

 

$

13,058

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current maturities of contingent earn-out

 

$

142

 

 

$

0

 

Accounts payable

 

 

133

 

 

 

239

 

Accrued expenses

 

 

439

 

 

 

304

 

Accrued income tax

 

 

73

 

 

 

0

 

 

 

 

 

 

 

 

 

 

Total current liabilities

 

 

787

 

 

 

543

 

 

 

 

 

 

 

 

 

 

Long-term liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Contingent earn-out, net of current maturities

 

 

0

 

 

 

195

 

 

 

 

 

 

 

 

 

 

Total long-term liabilities

 

 

0

 

 

 

195

 

 

 

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock par value $0.10 per share; authorized 10,000,000 shares; 3,395,521 shares issued and outstanding

 

 

339

 

 

 

339

 

Additional paid-in capital

 

 

2,001

 

 

 

1,953

 

Retained earnings

 

 

10,348

 

 

 

10,057

 

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

 

 

(19

)

 

 

(29

) 

 

 

 

 

 

 

 

 

 

Total stockholders’ equity

 

 

12,669

 

 

 

12,320

 

 

 

 

 

 

 

 

 

 

Total liabilities and stockholders’ equity

 

$

13,456

 

 

$

13,058

 

 

 

March 31,
2023

 

 

December 31,
2022

 

 

 

(unaudited)

 

 

 

 

ASSETS  

 

 

 

 

 

 

Current assets 

 

 

 

 

 

 

 

 

Cash and cash equivalents 

 

$

5,540

 

 

$

7,646

 

Investments

 

 

4,023

 

 

 

2,036

 

Trade receivables, less allowance for credit losses of $11


1,372

 

 

 

1,161

 

Inventories

 

 

1,779

 

 

 

1,745

 

Other current assets 

 

 

215

 

 

 

214

 

Income tax receivable

0


11

Total current assets

 

 

12,929

 

 

 

12,813

 

Deferred income tax asset, net

 

 

306

 

 

 

256

 

Property and equipment, net

 

 

952

 

 

 

975

 

Total assets

 

$

14,187

 

 

$

14,044

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

Current maturities of financing lease

 

$

4

 

 

$

6

 

Accounts payable

 

 

357

 

 

 

274

 

Accrued expenses

 

 

423

 

 

 

350

 

Accrued income taxes

37


0

Total current liabilities

 

 

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

 

Additional paid-in capital

 

 

2,163

 

 

 

2,163

 

Retained earnings

 

 

10,864

 

 

 

10,908

 

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

(3

)

1

Total stockholders’ equity

 

 

13,366

 

 

 

13,414

 

Total liabilities and stockholders’ equity 

 

$

14,187

 

 

$

14,044

 

See accompanying notes to unaudited condensed financial statements


34


ELECTRO-SENSORS, INC.

CONDENSED STATEMENTS OF COMPREHENSIVE INCOMELOSS

(in thousands except share and per share amounts)

(unaudited)

  Three Months Ended
September 30,		  Nine Months Ended
September 30,		 
  2017  2016  2017  2016 
                 
Net sales $2,054
  $1,837
  $6,005
  $5,562
 
Cost of goods sold  920
   835
   2,648
   2,452
 
                 
Gross profit  1,134
   1,002
   3,357
   3,110 
                 
Operating expenses                
Selling and marketing  342
   387
   1,127
   1,262
 
General and administrative  402
   386
   1,225
   1,199
 
Research and development  168
   200
   590
   561
 
                 
Total operating expenses  912
   973
   2,942
   3,022 
                 
Operating income  222
   29
   415
   88
 
                 
Non-operating income (expense)                
Interest expense  0   0
  0  (1)
Interest income  9
   3
   22
   18
 
Other income  3
   3
   8
   12
 
                 
Total non-operating income, net  12
   6
   30
   29
 
                 
Income before income taxes  234
   35
   445
   117
 
                 
Provision for income taxes  82
   12
   154
   43
 
                 
Net income $152
  $23
  $291
  $74
 
                 
Other comprehensive income                
Change in unrealized value of available-for-sale securities, net of income tax $6
  $2
  $10
  $6
 
Other comprehensive income  6
   2

  10
   6

                 
Net comprehensive income $158
  $25
  $301
  $80
 
                 
Net income per share data:                
                 
Basic                
Net income per share $0.04  $0.01
  $0.09  $0.02
 
Weighted average shares  3,395,521   3,395,521   3,395,521   3,395,521
 
                 
Diluted                
Net income per share $0.04  $0.01  $0.09  $0.02
 
Weighted average shares  3,400,988   3,396,776
   3,396,899   3,396,102
 
   Three Months Ended
March 31,		 
   2023  2022 
          
Net sales $2,045  $2,135
Cost of goods sold   1,023  
969 
          
Gross profit 
1,022  
1,166 
          
Operating expenses        
Selling and marketing  370   446 
General and administrative  522   503 
Research and development 
268  
231 
          
Total operating expenses  
1,160  
1,180 
          
Operating loss  (138)  (14)
          
Non-operating income        
Interest income   93   1 
          
Total non-operating income, net 
93  
1 
          
Loss before income tax benefit  (45)  (13)
          
Income tax benefit  (1) 
(4)
          
Net loss $(44) $
(9)
          
Other comprehensive loss        
Change in unrealized value of available-for-sale securities, net of income tax$(4)$0
Other comprehensive loss  (4)  0
          
Net comprehensive loss $
(48) $(9)
          
Net loss per share data:







          
Basic        
Net loss per share $(0.01) $0.00
Weighted average shares  3,428,021   3,395,521 
          
Diluted        
Net loss per share $
(0.01) $
0.00
Weighted average shares  3,428,021   3,395,521 

See accompanying notes to unaudited condensed financial statements

45


ELECTRO-SENSORS, INC.

CONDENSED STATEMENTS OF CASH FLOWSCHANGES IN STOCKHOLDERS’ EQUITY

(in thousands)

(unaudited)

 

 

Nine Months Ended
September 30,

 

 

 

2017

 

 

2016

 

Cash flows from (used in) operating activities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

291

  

 

$

74

  

 

 

 

 

 

 

 

 

 

Adjustments to reconcile net income to net cash from operating activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

233

 

 

 

235

 

Deferred income taxes

 

 

(62

)

 

 

(26

) 

Stock-based compensation expense

 

 

48

 

 

 

66

 

Change in contingent earn-out fair value

 

 

(53

)

 

 

(72

) 

Other

 

 

(21

)

 

 

(18

)

Change in:

 

 

 

 

 

 

 

 

Trade receivables

 

 

(272

)

 

 

(149

)

Inventories

 

 

(13

)

 

 

47

 

Other current assets

 

 

(3

)

 

 

(17

)

Accounts payable

 

 

(106

)

 

 

21

 

Accrued expenses

 

 

135

 

 

 

11

 

Income tax receivable/accrued income taxes

 

 

139

  

 

 

(21

)

 

 

 

 

 

 

 

 

 

Net cash from operating activities

 

 

316

 

 

151

 

 

 

 

 

 

 

 

 

 

Cash flows from (used in) investing activities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Purchases of treasury bills

 

 

(5,956

)

 

 

(7,425

)

Proceeds from the maturity of treasury bills

 

 

6,000

 

 

 

7,889

 

Purchase of property and equipment

 

 

(15

)

 

 

(2

) 

 

 

 

 

 

 

 

 

 

Net cash from investing activities

 

 

29

 

 

 

462

 

 

 

 

 

 

 

 

 

 

Cash flows used in financing activities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Payments on long-term debt

 

 

0

 

 

(390

)

 

 

 

 

 

 

 

 

 

Net cash used in financing activities

 

 

0

 

 

(390

)

 

 

 

 

 

 

 

 

 

Net increase in cash and cash equivalents

 

 

345

 

 

223

 

 

 

 

 

 

 

 

 

Cash and cash equivalents, beginning

 

 

840

 

 

 

569

 

Cash and cash equivalents, ending

 

$

1,185

 

 

$

792

 

 

 

 

 

 

 

 

 

 

Supplemental cash flow information

 

 

 

 

 

 

 

 

Cash paid for income taxes

 

$

125

 

 

$

90

 

Cash paid for interest

 

$

0

 

 

$

10

 

See accompanying notes to unaudited financial statements

5

ELECTRO-SENSORS, INC.

NOTES TO FINANCIAL STATEMENTS

FOR THE PERIOD ENDED SEPTEMBER 30, 2017

(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

(unaudited)

See accompanying notes to unaudited condensed financial statements 

6

Note 1. Basis of PresentationELECTRO-SENSORS, INC.

CONDENSED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

 

 

Three Months Ended
March 31,

 

 

 

2023

 

2022

 

Cash flows used in operating activities

 

 

 

 

 

 

 

 

Net loss 

 

$

(44

)

 

$

(9

)

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

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

24

 

 

 

40

 

Deferred income taxes

 

 

(50

)

 

 

(6

)

Stock-based compensation expense 

 

 

0

 

 

 

1

 

Interest accrued on treasury bills

 

 

(36

)

 

 

(1

)

Change in:

 

 

 

 

 

 

 

 

Trade receivables

 

 

(211

)

 

 

(150

)

Inventories

 

 

(34

)

 

 

(95

)

Other current assets

 

 

(1

)

 

 

(21

)

Accounts payable

 

 

83

 

 

(23

)

Accrued expenses 

 

 

73

  

 

 

157

Income tax receivable/payable

 

 

48

 

 

1

Net cash used in operating activities

 

 

(148

)

 

 

(106

)

 

 

 

 

 

 

 

 

 

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

 

Purchase of property and equipment

(1)

(3)

Net cash from (used in) investing activities

 

 

(1,956

)

 

 

998

 

 

 

 

 

 

 

 

 

Cash flows used in financing activities

 

 

 

 

 

 

 

 

Payments on financing lease

(2)

(1)

Net cash used in financing activities

 

 

(2

)

 

 

(1

)

Net increase (decrease) in cash and cash equivalents

 

 

(2,106

)

 

 

891

 

 

 

 

 

 

 

 

 

Cash and cash equivalents, beginning

 

 

7,646

 

 

 

6,713

 

Cash and cash equivalents, ending

 

$

5,540

 

 

$

7,604

 

Supplemental cash flow information

 

 

 

 

 

 

 

 

Cash paid for income taxes

 

$

0

 

 

$

0

 

 

See accompanying notes to unaudited condensed financial statements

7

ELECTRO-SENSORS, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

FOR THE PERIOD ENDED MARCH 31, 2023

(in thousands except share and per share amounts)

(unaudited)

Note 1. Basis of Presentation 

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

This report should be read together with the Company’s Annual Report on Form 10-K for the year ended December 31, 2016,2022, 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 September 30, 2017March 31, 2023 and for the threethree-month periods ended March 31, 2023 and nine-month periods then ended2022, 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 varietywide range of industrial machinery.machine applications. The Company uses leading-edge technology to continuously improve its products, and make them easier to use, with the ultimate goal of manufacturing the industry-preferred product for every market served.each of our served markets. The Company sells these products through an internal sales staff, manufacturers’ representatives, and distributors to a wide varietyrange 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 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 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 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.


Fair Value Measurements

The carrying value of trade receivables, accounts payable, and other financial working capital items approximates fair value at September 30, 2017March 31, 2023 and December 31, 2016,2022, 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. SignificantCurrent significant estimates, including the underlying assumptions, consist of economic lives of long-lived assets, realizability of trade receivables, valuation of deferred tax assets/liabilities, inventory, investments, contingent earn-out, and stock compensation expense.  It is at least reasonably possible that these estimates may change in the near term.term.  

9

6

ELECTRO-SENSORS, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

FOR THE PERIOD ENDED SEPTEMBER 30, 2017MARCH 31, 2023

(in thousands except share and per share amounts)

(unaudited)

Net Loss per Common Share


Basic loss per share excludes dilution and is determined by dividing net loss by the weighted-average number of common shares outstanding during the period. Diluted net loss per share reflects the potential dilution that could occur if securities such as options 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-month periods ended March 31, 2023, and 2022, 300,000 and332,500respectively, weighted average common shares for underlying stock options have been excluded from the calculation, because their effect would be anti-dilutive.   


New Accounting Standard 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.  ASU 2016-13 has no significant impact on our financial statements.


10

ELECTRO-SENSORS, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

FOR THE PERIOD ENDED MARCH 31, 2023

(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 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 ranging from one month to three months at 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

 

March 31, 2023

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money Market Savings

 

$

1,316

 

 

$

0

 

 

$

0

 

 

$

1,316

 

Treasury Bills

 

 

7,914

 

 

 

39

 

 

 

0

 

 

 

7,953

 

Equity Securities

 

 

54

 

 

 

2

 

 

 

0

 

 

56

 

 

 

 

9,284

 

 

 

41

 

 

 

0

 

 

9,325

 

Less Cash Equivalents

 

 

5,275

 

 

 

27

 

 

 

0

 

 

 

5,302

 

Total Investments, March 31, 2023

 

$

4,009

 

 

$

14

 

 

$

0

 

$

4,023

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2022

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial Paper

 

$

1,377

 

 

$

0

 

 

$

0

 

 

$

1,377

 

Treasury Bills

 

 

7,922

 

 

 

32

 

 

 

0

 

 

 

7,954

 

Equity Securities

 

 

54

 

 

 

2

 

 

 

0

 

 

56

 

 

 

 

9,353

 

 

 

34

 

 

 

0

 

 

9,387

 

Less Cash Equivalents

 

 

7,319

 

 

 

32

 

 

 

0

 

 

 

7,351

 

Total Investments, December 31, 2022

 

$

2,034

 

 

$

2

 

 

$

0

 

$

2,036

 

11

 

 

Cost

 

 

Gross
unrealized
gain

 

 

Gross
unrealized
loss

 

 

Fair
value

 

September 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial Paper

 

$

693

 

 

$

0

 

 

$

0

 

 

$

693

 

Treasury Bills

 

 

7,396

 

 

 

24

 

 

 

0

 

 

 

7,420

 

Equity Securities

 

 

54

 

 

 

0

 

 

 

(54

)

 

 

0

 

 

 

 

8,143

 

 

 

24

 

 

 

(54

)

 

 

8,113

 

Less Cash Equivalents

 

 

693

 

 

 

0

 

 

 

0

 

 

 

693

 

Total Investments, September 30, 2017

 

$

7,450

 

 

$

24

 

 

$

(54

)

 

$

7,420

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial Paper

 

$

348

 

 

$

0

 

 

$

0

 

 

$

348

 

Treasury Bills

 

 

7,419

 

 

 

8

 

 

 

0

 

 

 

7,427

 

Equity Securities

 

 

54

 

 

 

0

 

 

 

(54

)

 

 

0

 

 

 

 

7,821

 

 

 

8

 

 

 

(54

)

 

 

7,775

 

Less Cash Equivalents

 

 

348

 

 

 

0

 

 

 

0

 

 

 

348

 

Total Investments, December 31, 2016

 

$

7,473

 

 

$

8

 

 

$

(54

)

 

$

7,427

 

7

ELECTRO-SENSORS, INC.

ELECTRO-SENSORS, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

FOR THE PERIOD ENDED SEPTEMBER 30, 2017MARCH 31, 2023

(in thousands except share and per share amounts)

(unaudited)

Note 3. Fair Value Measurements

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

March 31, 2023

September 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

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

 

$

693

 

$

693

 

$

693

 

$

0

 

$

0

 

Money Market Savings

 

$

1,316

 

$

1,316

 

$

1,316

 

$

0

 

$

0

 

Treasury bills

 

7,420

 

7,420

 

7,420

 

0

 

0

 


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

Equity Securities

 

0

 

0

 

0

 

0

 

0

 

 

56

 

56

 

0

 

0

 

56

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

Contingent earn-out

 

142

 

142

 

0

 

0

 

142

 

December 31, 20162022

 

 

Carrying amount

 

 

 

 

 

 Fair Value Measurement Using 

 

 

 

in balance sheet

 

 

Fair Value

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial paper

 

$

348

 

 

$

348

 

 

$

348

 

 

$

0

 

 

$

0

 

Treasury bills

 

 

7,427

 

 

 

7,427

 

 

 

7,427

 

 

 

0

 

 

 

0

 

Equity Securities

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Contingent earn-out

 

 

195

 

 

 

195

 

 

 

0

 

 

 

0

 

 

 

195

  


 

Carrying amount

 

 

 

 

 

 Fair Value Measurement Using 

 


 

in balance sheet

 

 

Fair Value

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Assets:


 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial paper


$

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

Equity Securities



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. There is not a significant market for the available-for-saleThe equity securitysecurities owned by the Company.  TheCompany 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 for this equity security based on financial and other factors that are considered level 3 inputs in the fair value hierarchy.


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


The changechanges in level 3 liabilitiesassets measured at fair value value on a recurringrecurring basis in the 2017 and 2016 three and nine-month periods is summarizedare as follows:


  Three Months

Ended September 30

 

Nine Months

 Ended September 30

 
Three Months Ended March 31,
  2017   2016 2017  2016 
2023


2022

     




   
Beginning Balance$142 $383 $195  $455 
$56

$56 

Change in Fair Value

 0  0  (53)  (72)

0
 0
Ending Balance$142 $383 $142  $383 
$56

$56 


Both the 2017 and 2016 decreases in the contingent liability reflect the Company's expectation of lower future contingent payments due to lower anticipated sales during the remaining term of the earn-out period.

812


ELECTRO-SENSORS, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

FOR THE PERIOD ENDED SEPTEMBER 30, 2017MARCH 31, 2023

(in thousands except share and per share amounts)

(unaudited)

Note 4. Stock-Based CompensationInventories


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


March 31, 

2023



December 31, 

2022






Raw Materials$1,174

$1,162
Work In Process
324


278

Finished Goods


291


315
Reserve for Obsolescence 
(10)

(10)
Total Inventories, net$1,779

$1,745

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

During the first quarter of 2016,On June 10, 2022, the Company granted its Chief Executive Officer options to purchase 50,000 sharesentered into an Agreement and Plan of common stock. The options were priced at fair market value and vested 20% on the grant date,Merger (the “Merger Agreement”) with an additional 20% vesting on the first four anniversariesMobile X Newco, Inc., a Delaware corporation, a wholly owned subsidiary of the grant date. The options expire ten years fromCompany (the “Merger Sub”), and Mobile X Global, Inc., a Delaware corporation (“Mobile X”).

On January 30, 2023, the date of grant.

The assumptions made in estimatingCompany and Mobile X terminated the fair valueMerger Agreement.  A condition to the closing of the options onmerger transaction was the grant date based uponconsummation of an equity financing which the BSM option-pricing modelparties 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 the nine months ended September 30, 2016 are as follows:

PIPE investments.  

Dividend Yield


Note 6. Contingencies

0.00

%

Expected Volatility

36.17

%

Risk Free Interest Rate

1.31

%

Expected Life

6 Years

As of September 30, 2017, there was approximately $20 of unrecognized compensation expense related to unvested stock options.

The Company expectssometimes becomes subject to recognize this expense overclaims against it in the next three years.

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.

913



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 27A27A of the Securities Act of 1933 and Section 21E21E of the Securities Exchange Act of 1934,, including statements regarding our expectations, beliefs, intentions or strategies regarding the future. Forward-looking statements include, but are not limited to, statements relating toabout the success of our marketing efforts orefforts; our efforts to accelerate growth;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 expected use of cash on hand;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.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 assume no obligation to update any of these forward-looking statements, other than as required by law. Our actual results could differ materially from those projected or indicated in these forward-looking statements. These forward-looking statements are subject to certain risks and uncertainties that could cause future results to differ materially from our recent results or those projected in the forward-looking statements, including the accuracy of management’s assumptions with respect to industry trends, fluctuations in industry conditions, the accuracy of management’s assumptions regarding expenses and our cash needs and those listed under the heading “Cautionary“Forward-Looking Statements” under “Item 1—1—Business,” in our Annual Report on Form 10-K for the year ended December 31, 2016.2022, as well as the 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, 20162022. We have not developed new estimates subsequent to those discussed in our Annual Report.


14


SELECTED FINANCIAL INFORMATION

 

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

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Net sales

 

 

100.0

%

 

 

100.0

%

 

 

100.0

%

 

 

100.0

%

Cost of goods sold

 

 

44.8

 

 

 

45.5

 

 

 

44.1

 

 

 

44.1

 

Gross profit

 

 

55.2

 

 

 

54.5

 

 

 

55.9

 

 

 

55.9

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

     Selling and marketing

 

 

16.7

 

 

 

21.1

 

 

 

18.8

 

 

 

22.7

 

     General and administrative

 

 

19.5

 

 

 

21.0

 

 

 

20.4

 

 

 

21.5

 

     Research and development

 

 

8.2

 

 

 

10.9

 

 

 

9.8

 

 

 

10.1

 

Total operating expenses

 

 

44.4

 

 

 

53.0

 

 

 

49.0

 

 

 

54.3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

 

10.8

 

 

 

1.5

 

 

 

6.9


 

 

1.6


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-operating income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

     Interest income

 

 

0.4

 

 

 

0.2

 

 

 

0.4

 

 

 

0.3

 

     Other income

 

 

0.2

 

 

 

0.2

 

 

 

0.1

 

 

 

0.2

 

Total non-operating income, net

 

 

0.6

 

 

 

0.4

 

 

 

0.5

 

 

 

0.5

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income before income taxes

 

 

11.4

 

 

 

1.9

 

 

 

7.4


 

 

2.1


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Provision for income taxes

 

 

4.0

 

 

 

0.7

 

 

 

2.6


 

 

0.8


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

7.4

% 

 

 

1.2

%

 

 

4.8

%

 

 

1.3

%

 

Three Months Ended March 31


 

2023



2022


Net sales

100.0%
100.0%

Cost of goods sold

50.0

45.4

Gross profit

50.0

54.6
  




Operating expenses






     Selling and marketing

18.1

20.9

     General and administrative

25.5

23.6

     Research and development

13.1

10.8

Total operating expenses

56.7

55.3
  




Operating income (loss)

(6.7)
(0.7)
  




Non-operating income






     Interest income

4.5

0.0

Total non-operating income, net

4.5

0.0
  




Income (loss) before income tax expense (benefit)

(2.2)
(0.7)
  




Income tax expense (benefit)

0.0
(0.2)
  




Net income (loss)

(2.2)%
(0.5)%


10

The following paragraphs discuss the Company’sperformance for thethree and ninemonths ended September 30, 2017March 31, 2023 and 20162022.

RESULTS OF OPERATIONS (in thousands)

Net Sales

Net sales for the three-monththree-month period ended September 30, 2017March 31, 2023 were $2,054$2,045, a decrease of $90, or 4.2%, an increasefrom $2,135 during the comparable period in 2022. The decrease was a result of reduced domestic sales for both wired and wireless sensor products.

Gross Profit

Gross profit for the first quarter of 2023 was $2171,022, a decrease of $144 or 11.8%12.3%, over the same period in 20162022. Net sales forGross margin decreased in the nine-month period ended September 30, 2017 were $6,005, an increasefirst quarter of $443, or 8.02023 to 50.0% overfrom 54.6% during the same period in 20162022. GrowthThe decrease in gross margin for the three-month period was primarily due to an increase in material costs across all product lines.  

15

Operating Expenses

Total operating expenses decreased $20, or 1.7% to $1,160 for the average sizefirst quarter of large orders, which we define as orders over five thousand dollars.  The increase drove growth in both the HazardPRO Wireless Monitoring system and legacy product families.  Furthermore, international sales were a significant contributor to our growth and were up 34% in the 2017 nine-month period as2023 compared to the same period in 2016.  In addition, the Company benefitted from significant growth in sales into the bulk material handling and OEM markets as compared to the same three-month period in 2016.

Gross Profit

Gross profit for the three months ended September 30, 20172022, but increased $132, or 13.2%, over the same period in 2016. Gross profit for the nine months ended September 30, 2017 increased $247, or 7.9%, over the same period in 2016.  Both the three and nine-month gross profit increases were due to the higher level of sales.  Gross margin, as a percentage of net sales increasedto 55.2%56.7% from 55.3%. The change in the 2017 three-month period from 54.5% in the prior year, but remained constant at 55.9% in the 2017 and 2016 nine-month periods. The slight increase in gross margin percentage during the 2017 third quarteroperating expenses was due to a change in product mix.the following:

Operating Expenses

Total operating expenses decreased $61, or 6.3%, for the three months ended September 30, 2017 compared to the same period in 2016 and decreased as a percentage of sales to 44.4% from 53.0%. Total operating expenses decreased $80, or 2.6%, for the nine months ended September 30, 2017 compared to the same period in 2016 and decreased as a percentage of sales to 49.0% from 54.3%.  The decreases in operating expenses as a percentage of sales were primarily due to increased revenues.

●

Selling and marketing expenses in the 2017 thirdfirst quarter of 2023 decreased $45, $76 to $370, or 11.6%17.0%, from the 2016 third quarter, decreasingsame period in 2022 and decreased as a percentage of net sales to 16.7%18.1% from 21.1%20.9%. SellingThe decrease was primarily due to decreased sales headcount and marketingtravel expenses.

●

General and administrative expenses decreased $135,increased $19 to $522, or 10.7%3.8%, in the 2017 nine-monthfirst quarter of 2023 compared to the same period over the prior year period, decreasingin 2022 and increased as a percentage of net sales to 18.8%25.5% from 22.7%23.6%. The decrease for bothincrease was primarily due to expenses related to the threetiming of printing and nine-month periods resulted primarily from the Company using fewer outside sales representatives in 2017.  The decrease in the three-month period wasmailing of our Annual Report and Proxy Statement and legal fees related to employment matters; partially offset by an increase in sales demo expenses.  Thea decrease in legal and professional fees related to the nine-month period also reflected lower travel expenses; partially offset by an increaseterminated merger.  The printing and mailing costs were expensed in wages and benefits.the second quarter of 2022.

●

GeneralResearch and administrativedevelopment expenses increased $16 $37 to $268, or 16.0%, or 4.1%, forin the 2017 three-month periodfirst quarter of 2023 compared to the same period in 2016 but decreased2022 and increased as a percentage of net sales to 19.5%13.1% from 21.0%. For the 2017 nine-month period, general and administrative expenses increased $26, or 2.2%, compared to the 2016 period and decreased as a percentage of net sales to 20.4% from 21.5%10.8%. The increase for the three and nine-month periods period was due to a smaller reversal of the HazardPRO contingent earn-out liability in 2017.  The Company decreased the accrual for the HazardPRO contingent payment by $53 in the 2017 nine-month period and by $72 in the 2016 nine-month period.

●

Research and development expenses decreased $32, or 16.0%, in the 2017 three-month period from the same period in 2016, and decreased as a percentage of net sales to 8.2% from 10.9%. For the 2017 nine-month period, research and development expenses increased $29, or 5.2%, over the 2016 period, but decreased as a percentage of net sales to 9.8% from 10.1%. The decrease for the three-month period was due to a decrease in contracthigher third-party engineering lab testing and certification expenses for our HazardPRO product line.  The increase for the nine-month period was the result of increased contract engineering feescosts related to product enhancements; partially offset by a decrease in lab testingdevelopment and certification expenses for our HazardPRO product line.enhancements.

Non-Operating Income (Expense)

Non-operatingNet non-operating income increased by $6,$92, or 100.0%9,200.0%, for the 2017 three-month period compared to the same 2016 period. Non-operating income increased $1, or 3.4%, in the nine months ended September 30, 2017, whenMarch 31, 2023 compared to the same period in 2016.2022.  The increase is the result of additional interest income earned as a result of higher interest rates of Treasury Bills. 

Loss Before Income Tax Benefit

Loss before income tax benefit was $45 for both periods was primarily due tothe first quarter of 2023, representing an increase in interest income.

Income Before Income Taxes

Income before income taxes was $234 for the three months ended September 30, 2017, representing an increaseof $199, or 568.6%, when$32 compared to $13 for the same period in 20162022. Income before income taxes was $445The increase for the nine months ended September 30, 2017, representing an increase of $328, or 280.3%, when compared to the same period in 2016. The increase for both 2017 periods quarter was primarily the result of higher 2017lower gross profit, primarily duepartially offset by lower operating expenses, as discussed above.


Income Tax Benefit

Income tax benefit was $1 or 0.0% of net sales in the first quarter of 2023 compared to increased revenues, and a decrease$4 or 0.2% of net sales in operating expenses.the first quarter of 2022.  


1116


Income Taxes


The Company's income tax expense percentage remained relatively constant at 35.0% and 34.6% in the respective three and nine-month periods compared to 34.3% and 36.8% in the comparable 2016 three and nine-month periods.


LIQUIDITY AND CAPITAL RESOURCES

Cash and cash equivalents were $1,185$5,540 at September 30, 2017March 31, 2023 and $840$7,646 at December 31, 2016.2022. The increasedecrease was mainlyprimarily the result of an increase in Treasury Bills classified as investments as of March 31, 2023 as compared to March 31, 2022.  Cash, cash generated from operating activities.equivalents, and investments were $9,563 at March 31, 2023 as compared to $9,682 at December 31, 2022.


Cash generated fromused in operating activities was $316 and $151$148 for the ninethree months ended September 30, 2017 and 2016, respectively.March 31, 2023 as compared to $106 for the three months ended March 31, 2022. The $165$42 decrease was due primarily to an increase in the net loss.  The 2023 net loss compared to the 2022 net loss was primarily due to decreased gross profit. 


Cash used in investing activities was $1,956 for the three months ended March 31, 2023 compared to cash from investing activities of $998 for the three months ended March 31, 2022. The increase was due to the increase in net income and accrued expenses; partially offset by an increase in trade receivables and a decrease in accounts payable.  The increase in net income is dueTreasury Bill purchases as compared to higher gross profit and decreased expenses.  The increase in accrued expenses is due to increased payroll related expenses.  The increase in accounts receivable is due to increased sales in the 2017 third quarter.  The decrease in accounts payable is due to the timing of payments.

Cash generated from investing activities was $29 and $462 for the nine months ended September 30, 2017 and 2016, respectively.During the nine months ended September 30, 2017 and 2016, the Company had net proceedsmaturities of Treasury Bills with a maturity date of more than three months of $44 and $464, respectively. In addition, we purchased $15 and $2 of property and equipment during the nine-month periods of 2017 and 2016, respectively.classified as investments.  



There was no cashCash used or provided byin financing activities in the ninethree months ended September 30, 2017.  Cash used in financing activitiesMarch 31, 2023 was $390 in$2 as compared to $1 for the ninethree months ended September 30, 2016March 31, 2022.  


Subject to make the final payment onfollowing section, entitled "Supply Chain and Labor Dynamics," the long-term debt owed to Harvest Engineering, Inc. for the technology purchased in February 2014. 

OurCompany believes its ongoing cash requirements will be primarily for capital expenditures, the contingent earn-out payment, research and development, working capital, corporate and working capital. Management believesbusiness development and other strategic alternatives and that ourexisting cash, on handcash equivalents, and investments and any cash generated from operations will be sufficient to meet ourthese cash requirements through at least the next 12 months.


Off-balance Sheet ArrangementsSupply Chain and Labor Dynamics


We traditionally have had one or 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 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. 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 September 30, 2017, the Company had no off-balance sheet arrangements or transactions.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

The Company continuesWe continue to seek growth opportunities, both internally through the Company’sour existing portfolio of products, technologies, and markets, as well as externally through technology partnerships or related-product or business acquisitions.  AlthoughIn addition, we continue to explore other strategic investments 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 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 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 continuingproviding 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 explorefacilitate 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 external opportunities,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 currentlybelieves it has no agreements or understandings with any third parties.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

 

1218


Item 3. Quantitative and Qualitative Qualitative Disclosures About Market Risk

Not Applicable.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Based on an evaluation under the supervision and with the participation of the Company’s management, the Company’s principal executive officer and principal financial officer has concluded that the Company’s disclosure controls and procedures as defined in Rules 13a-15(e)13a-15(e) and 15d-15(e)15d-15(e) under the Securities Exchange Act of 1934,, as amended (“Exchange Act”), were effective as of September 30, 2017 to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms and (ii) accumulated and communicated to the Company’s management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.March 31, 2023.



Changes in InternalInternal Control Over Financial Reporting


There were no changes in the Company’s internal control over financial reporting during the thirdfirst quarter of 2017, which2023 that were identified in connection with management’s evaluation required by paragraph (d)of Rules 13a-1513a-15 and 15d-1515d-15 under the Exchange Act, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.


19


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




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 September 30, 2017March 31, 2023, formatted in eXtensibleiXBRL (Inline Extensible Business Reporting Language XBRL:Language), (i) Condensed Balance Sheets as of September 30, 2017March 31, 2023 and December 31, 20162022, (ii) Condensed Statements of Comprehensive IncomeLoss for the three and ninemonths ended September 30, 2017March 31, 2023 and September 30, 2016,March 31, 2022 (iii) Condensed Statements of Changes in Stockholders' Equity for the three months ended March 31, 2023 and March 31, 2022, (iv) Condensed Statements of Cash Flows for the ninethree months ended September 30, 2017March 31, 2023 and September 30, 2016,March 31, 2022, and (iv)(v) Notes to Financial Statements. 

1320


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.

November 13, 2017May 11, 2023

/s/ David L. Klenk

David L. Klenk

Chief Executive Officer and Chief Financial Officer

November 13, 2017

/s/ Gloria M. Grundhoefer(Principal Executive Officer and Principal Financial Officer)

Gloria M. Grundhoefer

Controller





1421