UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-Q
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 20212022
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 class | Trading Symbol(s) | Name of each exchange on which registered |
| Common stock | ELSE | Nasdaq 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)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 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 August 11, 20211, 2022 was 3,395,521.3,403,021.
| 2 |
ELECTRO-SENSORS, INC.
Form 10-Q
For the Periods Ended June 30, 20212022
| 3 |
ELECTRO-SENSORS, INC.
(in thousands except share and per share amounts)
|
| June 30, |
|
| December 31, |
|
| June 30, |
| December 31, |
| |||||
|
| (unaudited) |
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| (unaudited) |
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| |||||
ASSETS |
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Current assets |
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Current assets |
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| |||||||||||
Cash and cash equivalents |
| $ | 1,540 |
|
| $ | 1,090 |
|
| $ | 6,429 |
| $ | 6,713 |
| |
Investments |
| 8,041 |
|
| 8,041 |
|
| 3,052 |
| 3,056 |
| |||||
Trade receivables, less allowance for doubtful accounts of $11 | 1,412 |
|
| 957 |
| 1,323 |
| 1,005 |
| |||||||
Inventories |
| 1,525 |
|
| 1,572 |
|
| 1,720 |
| 1,663 |
| |||||
Other current assets |
|
| 176 |
|
|
| 170 |
|
|
| 171 |
|
| 188 |
| |
| Income tax receivable | 0 | 26 | 81 | 3 | ||||||||||||
Total current assets |
|
| 12,694 |
|
|
| 11,856 |
|
|
| 12,776 |
|
| 12,628 |
| |
Deferred income tax asset, net |
| 274 |
|
| 246 |
|
| 226 |
| 208 |
| |||||
Intangible assets, net |
|
| 98 |
|
|
| 228 |
|
|
| 13 |
|
| 38 |
| |
Property and equipment, net |
|
| 952 |
|
|
| 989 |
|
|
| 981 |
|
| 1,017 |
| |
Total assets |
| $ | 14,018 |
|
| $ | 13,319 |
|
| $ | 13,996 |
| $ | 13,891 |
| |
LIABILITIES AND STOCKHOLDERS’ EQUITY |
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Current liabilities |
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Current maturities of financing lease |
| $ | 6 |
|
| $ | 6 |
|
| $ | 6 |
| $ | 6 |
| |
Accounts payable |
| 334 |
|
| 197 |
|
| 319 |
| 349 |
| |||||
Accrued expenses |
| 623 |
|
| 330 |
|
|
| 769 |
|
| 342 |
| |||
| Accrued income tax | 58 | 0 | ||||||||||||||
Total current liabilities |
|
| 1,021 |
|
| 533 |
|
|
| 1,094 |
| 697 |
| |||
| Long-term liabilities | ||||||||||||||||
| Financing lease, net of current maturities | 9 | 12 | 3 | 6 | ||||||||||||
| Total long-term liabilities | 9 | 12 | 3 | 6 | ||||||||||||
Commitments and contingencies |
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Stockholders’ equity |
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Common stock par value $0.10 per share; authorized 10,000,000 shares; 3,395,521 shares issued and outstanding |
| 339 |
|
| 339 |
|
| 339 |
| 339 |
| |||||
Additional paid-in capital |
| 2,039 |
|
| 2,036 |
|
| 2,043 |
| 2,041 |
| |||||
Retained earnings |
| 10,610 |
|
| 10,398 |
|
| 10,515 |
| 10,808 |
| |||||
| Accumulated other comprehensive gain (unrealized gain on available-for-sale securities, net of income tax) | 0 | 1 | 2 | 0 | ||||||||||||
Total stockholders’ equity |
|
| 12,988 |
|
|
| 12,774 |
|
|
| 12,899 |
|
| 13,188 |
| |
Total liabilities and stockholders’ equity |
| $ | 14,018 |
|
| $ | 13,319 |
|
| $ | 13,996 |
| $ | 13,891 |
| |
See accompanying notes to unaudited condensed financial statements
| 4 |
ELECTRO-SENSORS, INC.
(in thousands except share and per share amounts)
(unaudited)
| Three Months Ended June 30, | Six Months Ended June 30, | Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||||
| Net sales | $ | 2,462 | $ | 2,092 | $ | 4,363 | $ | 4,015 | $ | 2,564 | $ | 2,462 | $ | 4,699 | $ | 4,363 | ||||||||||||||||
| Cost of goods sold | 1,086 | 994 | 1,997 | 1,918 | 1,156 | 1,086 | 2,125 | 1,997 | ||||||||||||||||||||||||
| Gross profit | 1,376 | 1,098 | 2,366 | 2,097 | 1,408 | 1,376 | 2,574 | 2,366 | ||||||||||||||||||||||||
| Operating expenses | ||||||||||||||||||||||||||||||||
| Selling and marketing | 364 | 443 | 712 | 901 | 427 | 364 | 873 | 712 | ||||||||||||||||||||||||
| General and administrative | 458 | 440 | 901 | 905 | 1,125 | 458 | 1,628 | 901 | ||||||||||||||||||||||||
| Research and development | 283 | 196 | 486 | 413 | 221 | 283 | 452 | 486 | ||||||||||||||||||||||||
| Total operating expenses | 1,105 | 1,079 | 2,099 | 2,219 | 1,773 | 1,105 | 2,953 | 2,099 | ||||||||||||||||||||||||
| Operating income (loss) | 271 | 19 | 267 | (122 | ) | (365 | ) | 271 | (379 | ) | 267 | |||||||||||||||||||||
| Non-operating income | ||||||||||||||||||||||||||||||||
| Loss on investment | 0 | 0 | 0 | (3 | ) | |||||||||||||||||||||||||||
| Interest expense | 0 | (1 | ) | 0 | (1 | ) | ||||||||||||||||||||||||||
| Interest income | 0 | 1 | 2 | 33 | 7 | 0 | 8 | 2 | ||||||||||||||||||||||||
| Other income | 0 | 0 | 0 | 2 | ||||||||||||||||||||||||||||
| Total non-operating income, net | 0 | 0 | 2 | 31 | 7 | 0 | 8 | 2 | ||||||||||||||||||||||||
| Income (loss) before income tax expense (benefit) | 271 | 19 | 269 | (91 | ) | (358 | ) | 271 | (371 | ) | 269 | |||||||||||||||||||||
| Provision for (benefit of) income tax | 57 | 1 | 57 | (18 | ) | |||||||||||||||||||||||||||
| Income tax expense (benefit) | (74 | ) | 57 | (78 | ) | 57 | ||||||||||||||||||||||||||
| Net income (loss) | $ | 214 | $ | 18 | $ | 212 | $ | (73 | ) | $ | (284 | ) | $ | 214 | $ | (293 | ) | $ | 212 | |||||||||||||
| Other comprehensive loss | ||||||||||||||||||||||||||||||||
| Other comprehensive gain (loss) | ||||||||||||||||||||||||||||||||
| Change in unrealized value of available-for-sale securities, net of income tax | $ | (1 | ) | $ | 0 | $ | (1 | ) | $ | 0 | $ | 2 | $ | (1 | ) | $ | 2 | $ | (1 | ) | ||||||||||||
| Other comprehensive loss | (1 | ) | 0 | (1 | ) | 0 | ||||||||||||||||||||||||||
| Other comprehensive gain (loss) | 2 | (1 | ) | 2 | (1 | ) | ||||||||||||||||||||||||||
| Net comprehensive income (loss) | $ | 213 | $ | 18 | $ | 211 | $ | (73 | ) | $ | (282 | ) | $ | 213 | $ | (291 | ) | $ | 211 | |||||||||||||
| Net income (loss) per share data: | ||||||||||||||||||||||||||||||||
| Basic | ||||||||||||||||||||||||||||||||
| Net income (loss) per share | $ | 0.06 | $ | 0.01 | $ | 0.06 | $ | (0.02 | ) | $ | (0.08 | ) | $ | 0.06 | $ | (0.09 | ) | $ | 0.06 | |||||||||||||
| Weighted average shares | 3,395,521 | 3,395,521 | 3,395,521 | 3,395,521 | 3,395,521 | 3,395,521 | 3,395,521 | 3,395,521 | ||||||||||||||||||||||||
| Diluted | ||||||||||||||||||||||||||||||||
| Net income (loss) per share | $ | 0.06 | $ | 0.01 | $ | 0.06 | $ | (0.02 | ) | $ | (0.08 | ) | $ | 0.06 | $ | (0.09 | ) | $ | 0.06 | |||||||||||||
| Weighted average shares | 3,413,444 | 3,395,521 | 3,433,609 | 3,395,521 | 3,395,521 | 3,413,444 | 3,395,521 | 3,433,609 | ||||||||||||||||||||||||
See accompanying notes to unaudited condensed financial statements
| 5 |
ELECTRO-SENSORS, INC.
(in thousands except share and per share amounts)
| For the three months ended June 30 | For the three months ended June 30 | For the three months ended June 30 | ||||||||||||||||||||||||||||||||||||||||||
| Common Stock Issued |
|
| Additional |
|
| Retained |
|
| Accumulated |
|
| Total Equity |
| Common Stock Issued |
|
| Additional |
|
| Retained |
| Accumulated |
|
| Total Equity |
| |||||||||||||||||
| Shares |
| Amount |
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| Shares |
| Amount |
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| March 31, 2022 | 3,395,521 | $ | 339 | $ | 2,042 | $ | 10,799 | $ | 0 | $ | 13,180 | |||||||||||||||||||||||||||||||||
|
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| |||||||||||||||||||||||||
| Other comprehensive gain | 2 | 2 | ||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation expense | 1 | 1 | ||||||||||||||||||||||||||||||||||||||||||
| Net loss | (284 | ) | (284 | ) | ||||||||||||||||||||||||||||||||||||||||
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| |||||||||||||||||||||||||
| Balance June 30, 2022 (unaudited) | 3,395,521 | $ | 339 | $ | 2,043 | $ | 10,515 | $ | 2 | $ | 12,899 | |||||||||||||||||||||||||||||||||
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| March 31, 2021 | 3,395,521 | $ | 339 | $ | 2,037 | $ | 10,396 | $ | 1 | $ | 12,773 | 3,395,521 | $ | 339 | $ | 2,037 | $ | 10,396 | $ | 1 | $ | 12,773 | ||||||||||||||||||||||
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| ||||||
| Other comprehensive loss | (1 | ) | (1 | ) | (1 | ) | (1 | ) | ||||||||||||||||||||||||||||||||||||
| Stock-based compensation expense | 2 | 2 | 2 | 2 | ||||||||||||||||||||||||||||||||||||||||
| Net income | 214 | 214 | 214 | 214 | ||||||||||||||||||||||||||||||||||||||||
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| ||||||
| Balance June 30, 2021 (unaudited) | 3,395,521 | $ | 339 | $ | 2,039 | $ | 10,610 | $ | 0 | $ | 12,988 | 3,395,521 | $ | 339 | $ | 2,039 | $ | 10,610 | $ | 0 | $ | 12,988 | ||||||||||||||||||||||
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| March 31, 2020 | 3,395,521 | $ | 339 | $ | 2,033 | $ | 10,431 | $ | 0 | $ | 12,803 | |||||||||||||||||||||||||||||||||
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| Stock-based compensation expense | 1 | 1 | ||||||||||||||||||||||||||||||||||||||||||
| Net income | 18 | 18 | ||||||||||||||||||||||||||||||||||||||||||
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| Balance June 30, 2020 (unaudited) | 3,395,521 | $ | 339 | $ | 2,034 | $ | 10,449 | $ | 0 | $ | 12,822 | |||||||||||||||||||||||||||||||||
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| For the six months ended June 30 | For the six months ended June 30 | For the six months ended June 30 | ||||||||||||||||||||||||||||||||||||||||||
| Common Stock Issued |
|
| Additional |
|
| Retained |
| Accumulated |
|
| Total Equity |
| Common Stock Issued |
|
| Additional |
|
| Retained |
| Accumulated |
|
| Total Equity |
| ||||||||||||||||||
| Shares |
| Amount |
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| Shares |
| Amount |
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| December 31, 2020 | 3,395,521 | $ | 339 | $ | 2,036 | $ | 10,398 | $ | 1 | $ | 12,774 | |||||||||||||||||||||||||||||||||
| December 31, 2021 | 3,395,521 | $ | 339 | $ | 2,041 | $ | 10,808 | $ | 0 | $ | 13,188 | |||||||||||||||||||||||||||||||||
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| Other comprehensive gain | 2 | 2 | ||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation expense | 2 | 2 | ||||||||||||||||||||||||||||||||||||||||||
| Net loss | (293 | ) | (293 | ) | ||||||||||||||||||||||||||||||||||||||||
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| Balance June 30, 2022 (unaudited) | 3,395,521 | $ | 339 | $ | 2,043 | $ | 10,515 | $ | 2 | $ | 12,899 | |||||||||||||||||||||||||||||||||
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| December 31, 2020 | 3,395,521 | $ | 339 | $ | 2,036 | $ | 10,398 | $ | 1 | $ | 12,774 | |||||||||||||||||||||||||||||||||
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| ||||||
| Other comprehensive loss | (1 | ) | (1 | ) | (1 | ) | (1 | ) | ||||||||||||||||||||||||||||||||||||
| Stock-based compensation expense | 3 | 3 | 3 | 3 | ||||||||||||||||||||||||||||||||||||||||
| Net income | 212 | 212 | 212 | 212 | ||||||||||||||||||||||||||||||||||||||||
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| Balance June 30, 2021 (unaudited) | 3,395,521 | $ | 339 | $ | 2,039 | $ | 10,610 | $ | 0 | $ | 12,988 | 3,395,521 | $ | 339 | $ | 2,039 | $ | 10,610 | $ | 0 | $ | 12,988 | ||||||||||||||||||||||
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| December 31, 2019 | 3,395,521 | $ | 339 | $ | 2,030 | $ | 10,522 | $ | 0 | $ | 12,891 | |||||||||||||||||||||||||||||||||
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| Stock-based compensation expense | 4 | 4 | ||||||||||||||||||||||||||||||||||||||||||
| Net loss | (73 | ) | (73 | ) | ||||||||||||||||||||||||||||||||||||||||
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| Balance June 30, 2020 (unaudited) | 3,395,521 | $ | 339 | $ | 2,034 | $ | 10,449 | $ | 0 | $ | 12,822 | |||||||||||||||||||||||||||||||||
| 6 |
ELECTRO-SENSORS, INC.
(in thousands)
(unaudited)
|
| Six Months Ended |
|
| Six Months Ended |
| ||||||||||
|
| 2021 |
| 2020 |
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| 2022 |
| 2021 |
| ||||||
Cash flows from operating activities |
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Cash flows from (used in) operating activities |
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| ||||||||
Net income (loss) |
| $ | 212 |
| $ | (73 | ) |
| $ | (293 | ) |
| $ | 212 | ||
Adjustments to reconcile net income (loss) to net cash from operating activities: |
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Adjustments to reconcile net income (loss) to net cash from (used in) operating activities: |
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| ||||||||
Depreciation and amortization |
|
| 181 |
|
|
| 181 |
|
|
| 78 |
|
|
| 181 |
|
Deferred income taxes |
|
| (28 | ) |
|
| (18 | ) |
|
| (18 | ) |
|
| (28 | ) |
Stock-based compensation expense |
|
| 3 |
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|
| 4 |
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| 2 |
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| 3 |
|
Interest accrued on treasury bills |
|
| (2 | ) |
|
| 0 |
|
| (2 | ) |
|
| (2 | ) | |
| Loss on investments | 0 | 3 | ||||||||||||||
Change in: |
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Trade receivables |
|
| (455 | ) |
|
| (18 | ) |
|
| (318 | ) |
|
| (455 | ) |
Inventories |
|
| 47 |
|
| (40 | ) |
|
| (57 | ) |
|
| 47 | ||
Other current assets |
|
| (6 | ) |
|
| (4 | ) |
|
| 17 |
|
| (6 | ) | |
Accounts payable |
|
| 137 |
|
| 15 |
|
| (30 | ) |
|
| 137 | |||
Accrued expenses |
|
| 293 |
|
|
| 201 |
|
| 427 |
|
|
| 293 | ||
Income tax receivable/payable |
|
| 84 |
|
| (11 | ) |
|
| (78 | ) |
|
| 84 | ||
Net cash from operating activities |
|
| 466 |
|
| 240 | ||||||||||
Net cash from (used in) operating activities |
|
| (272 | ) |
|
| 466 | |||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows used in investing activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of treasury bills |
|
| (8,999 | ) |
|
| (6,748 | ) |
|
| (4,992 | ) |
|
| (8,999 | ) |
Proceeds from the maturity of treasury bills |
|
| 9,000 |
|
|
| 0 |
|
|
| 5,000 |
|
|
| 9,000 |
|
| Purchase of property and equipment | (14 | ) | (12 | ) | (17 | ) | (14 | ) | ||||||||
Net cash used in investing activities |
|
| (13 | ) |
|
| (6,760 | ) |
|
| (9 | ) |
|
| (13 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows used in financing activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Payments on financing lease | (3 | ) | (3 | ) | (3 | ) | (3 | ) | ||||||||
| Proceeds from Paycheck Protection Program | 0 | 645 | ||||||||||||||
| Repayment of Paycheck Protection Program loan | 0 | (645 | ) | |||||||||||||
Net cash used in financing activities |
|
| (3 | ) |
|
| (3 | ) |
|
| (3 | ) |
|
| (3 | ) |
Net increase (decrease) in cash and cash equivalents |
|
| 450 |
|
| (6,523 | ) |
|
| (284 | ) |
|
| 450 | ||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, beginning |
|
| 1,090 |
|
|
| 8,785 |
|
|
| 6,713 |
|
|
| 1,090 |
|
Cash and cash equivalents, ending |
| $ | 1,540 |
|
| $ | 2,262 |
|
| $ | 6,429 |
|
| $ | 1,540 |
|
Supplemental cash flow information |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for income taxes |
| $ | 1 |
|
| $ | 11 |
|
| $ | 17 |
|
| $ | 1 |
|
| Cash paid for interest | $ | 1 | $ | 1 | ||||||||||||
See accompanying notes to unaudited condensed financial statements
| 7 |
ELECTRO-SENSORS, INC.
FOR THE PERIOD ENDED JUNE 30, 20212022
(in thousands except share and per share amounts)
(unaudited)
Note 1.1. 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, 2020,2021, including the audited financial statements and footnotes therein.
Management believes that the unaudited financial statements include all adjustments, consisting of normal recurring accruals, necessary to fairly state the financial position and results of operations as of June 30, 20212022 and for the three and six-month periods ended June 30, 20212022 and 2020,2021, in accordance with accounting principles generally accepted in the United States of America. The results of interim periods may not be indicative of results to be expected for the year.
Nature of Business
Electro-Sensors, Inc. (the "Company") manufactures and markets a complete line of monitoring and control systems for a varietywide range of industrial machinery.machine applications. The Company uses leading-edge technology to continuously improve its products, 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.
Information regarding our recently announced merger agreement is presented in Note 5.
Revenue Recognition
At contract inception, the Company assesses the goods and services promisedto be provided to a customer and identifies a performance obligation for each distinct promised 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 promisedto 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. On someCertain contracts we have a second performance obligation, which typically is the initialization of the HazardPROTM product. For contracts that have multiple performance obligations, we allocate the transaction price to each performance obligation using the relative stand-alone selling price. We generally determine stand-alone selling prices based on the observable stand-alone prices charged to customers. We recognize product revenue at the point in time when control of the product is transferred to the customer, which typically occurs when we ship the products. We recognize service revenue at the point in time when we have provided the service.
| 8 |
ELECTRO-SENSORS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
FOR THE PERIOD ENDED JUNE 30, 2022
(in thousands except share and per share amounts)
(unaudited)
Fair Value Measurements
The carrying value of trade receivables, accounts payable, and other financial working capital items approximates fair value at June 30, 20212022 and December 31, 2020,2021, due to the short maturity nature of these instruments.
ELECTRO-SENSORS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
FOR THE PERIOD ENDED JUNE 30, 2021
(in thousands except share and per share amounts)
(unaudited)
Intangibles
Intangible assets are comprised of the HazardPRO technology andThe intangible asset is a technology license. The Company amortizes the cost of thesethe intangible assetsasset on a straight-line method over theirthe estimated useful lives.life. During the first six months of 2021, the Company had amortization expense related to the HazardPRO technology, which was fully amortized in the 2021 third quarter.
Stock-Based Compensation
The Company records compensation expense for stock options based on the estimated fair value of the options on the date of grant using the Black-Scholes-Merton (“BSM”) option pricing model. The Company uses historical data, among other factors, to estimate the expected price volatility, the expected option life, and the expected forfeiture rate. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant for the estimated life of the option.
As of June 30, 20212022, there was approximately $6$1 of unrecognized compensation expense related to unvested stock options. The Company expects to recognize this expense over the next two yearsthree months.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. 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, stock compensation expense, and the potential estimated impact on operations resulting from the COVID-19 pandemic as it relates to potential disruptions to our supply chain and customer demand. It is at least reasonably possible that these estimates may change in the near term.
| 9 |
ELECTRO-SENSORS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
FOR THE PERIOD ENDED JUNE 30, 2022
(in thousands except share and per share amounts)
(unaudited)
Net Income (Loss) per Common Share
Basic netBasic income (loss) per common share excludes dilution and is determined by dividing net income (loss) attributable to common stockholders by the weighted-average number of common shares outstanding during the period. Diluted net income (loss) per common share reflects the potential dilution that could occur if securities such as options and other contracts to issue common stock were exercised or converted into common stock. DilutedDiluted net income (loss) per common share is determined by dividing net income (loss) attributable to common stockholders by the weighted-average common shares outstanding during the period.
Diluted earnings per share ("Diluted EPS") considers the impact of potentially dilutive securities except in periods in which there is a loss because the inclusion of the potential common shares would have an anti-dilutive effect. Diluted EPS also excludes the impact of common shares issuable upon the exercise of outstanding stock options in periods in which the option exercise price is greater than the average market price of our common stock during the period.
For the three-month periods ended June 30, 2021 and 2020, 314,577 and 332,500, respectively,weighted average common shares for underlying stock options have been excluded from the calculation.For the six-month periods ended June 30, 2022 and 2021, 332,500 and 2020, 294,412 and 332,500, 314,577, respectively, weighted average common shares for underlying stock options have been excluded from the calculation. For the six-month periods ended June 30, 2022 and 2021, 332,500 and 294,412respectively, weighted average common shares for underlying stock options have been excluded from the calculation.
New Accounting Standard Not Yet Adopted
In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) No. 2016-13, Financial Instruments-Credit Losses (Topic 326), Measurement of Credit Losses on Financial Statements. ASU 2016-13 requires a financial asset (or a group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial asset(s) to present the net carrying value at the amount expected to be collected on the financial asset. In November 2018 the FASB issued ASU No. 2018-19, Codification Improvements to Topic 326, Financial Instruments-Credit Losses, which clarifies codification and corrects unintended application of the guidance, and in November 2019, the FASB issued ASU No. 2019-11, CodificationImprovements to Topic 326, Financial Instruments-Credit Losses, which clarifies or addresses specific issues about certain aspects of ASU 2016-13. In November 2019 the FASB issued ASU No. 2019-10, Financial Instruments—Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): Effective Dates, and in February 2020 the FASB issued ASU No. 2020-02, Financial Instruments—Credit Losses (Topic 326) and Leases (Topic 842): Amendments to SEC ParagraphsPursuant to SEC Staff Accounting Bulletin No. 119 and Update to SEC Section on Effective Date Related to Accounting Standards Update No. 2016-02, Leases(Topic 842), both of which delay the effective date of ASU 2016-13 by three years for certain Smaller Reporting Companies such as us. In March 2020, the FASB issued ASU No. 2020-03, Codification Improvements to Financial Instruments, which modifies the measurement of expected credit losses of certain financial instruments. In accordance with ASU 2019-10 and ASU 2020-02, ASU 2016-13 is effective for certain Smaller Reporting Companies for financial statements issued for fiscal years beginning after December 15, 2022 and interim periods within those fiscal years, which will be fiscal 2023 for us if we continue to be classified as a Smaller Reporting Company, with early adoption permitted. We are evaluating the potential impact of ASU 2016-13 on our financial statements.
ELECTRO-SENSORS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
FOR THE PERIOD ENDED JUNE 30, 20212022
(in thousands except share and per share amounts)
(unaudited)
Note 2. InvestmentsInvestments
The Company has investments in commercial paper, Treasury Bills, and common equity securities of a2 private U.S. company.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 eightfour months at June 30, 2021.2022.
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.
The cost and estimated fair value of the Company’s investments are as follows:
|
| Cost |
| Gross |
| Gross |
|
| Fair |
|
| Cost |
|
| Gross |
| Gross |
|
| Fair |
| |||||||||||
June 30, 2021 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||
June 30, 2022 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||
Commercial Paper |
| $ | 1,019 |
| $ | 0 |
| $ | 0 |
|
| $ | 1,019 |
|
| $ | 1,141 |
|
| $ | 0 |
| $ | 0 |
|
| $ | 1,141 |
| |||
Treasury Bills |
|
| 7,999 |
|
| 0 |
|
| 0 |
|
|
| 7,999 |
|
|
| 7,983 |
|
|
| 6 |
|
| 0 |
|
|
| 7,989 |
| |||
Equity Securities |
|
| 54 |
|
| 0 |
|
| (12 | ) |
|
| 42 |
|
|
| 54 |
|
|
| 2 |
|
| 0 |
|
| 56 |
| ||||
|
|
| 9,072 |
|
| 0 |
|
| (12 | ) |
|
| 9,060 |
|
|
| 9,178 |
|
|
| 8 |
|
| 0 |
|
| 9,186 |
| ||||
Less Cash Equivalents |
|
| 1,019 |
|
| 0 |
|
| 0 |
|
|
| 1,019 |
|
|
| 6,130 |
|
|
| 4 |
|
| 0 |
|
|
| 6,134 |
| |||
Total Investments, June 30, 2021 |
| $ | 8,053 |
| $ | 0 |
| $ | (12 | ) |
| $ | 8,041 |
| ||||||||||||||||||
Total Investments, June 30, 2022 |
| $ | 3,048 |
|
| $ | 4 |
| $ | 0 |
| $ | 3,052 |
| ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
December 31, 2020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||
December 31, 2021 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||
Commercial Paper |
| $ | 718 |
| $ | 0 |
| $ | 0 |
|
| $ | 718 |
|
| $ | 1,520 |
|
| $ | 0 |
| $ | 0 |
|
| $ | 1,520 |
| |||
Treasury Bills |
|
| 7,998 |
|
| 1 |
|
| 0 |
|
|
| 7,999 |
|
|
| 8,000 |
|
|
| 0 |
|
| 0 |
|
|
| 8,000 |
| |||
Equity Securities |
|
| 54 |
|
| 0 |
|
| (12 | ) |
|
| 42 |
|
|
| 54 |
|
|
| 2 |
|
| 0 |
|
| 56 |
| ||||
|
|
| 8,770 |
|
| 1 |
|
| (12 | ) |
|
| 8,759 |
|
|
| 9,574 |
|
|
| 2 |
|
| 0 |
|
| 9,576 |
| ||||
Less Cash Equivalents |
|
| 718 |
|
| 0 |
|
| 0 |
|
|
| 718 |
|
|
| 6,520 |
|
|
| 0 |
|
| 0 |
|
|
| 6,520 |
| |||
Total Investments, December 31, 2020 |
| $ | 8,052 |
| $ | 1 |
| $ | (12 | ) |
| $ | 8,041 |
| ||||||||||||||||||
Total Investments, December 31, 2021 |
| $ | 3,054 |
|
| $ | 2 |
| $ | 0 |
| $ | 3,056 |
| ||||||||||||||||||
ELECTRO-SENSORS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
FOR THE PERIOD ENDED JUNE 30, 20212022
(in thousands except share and per share amounts)
(unaudited)
Note 3. Fair Value Measurements
The following table provides information on those assets and liabilities measured at fair value on a recurring basis.
June 30, 20212022
| Carrying amount |
|
|
|
| Fair Value Measurement Using |
|
| Carrying amount |
|
|
|
| Fair Value Measurement Using |
| |||||||||||||||||||||||||
|
| in balance sheet |
| Fair Value |
|
| Level 1 |
| Level 2 |
|
| Level 3 |
|
| in balance sheet |
| Fair Value |
|
| Level 1 |
| Level 2 |
|
| Level 3 |
| ||||||||||||||
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||
Cash equivalents |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Commercial paper |
| $ | 1,019 |
| $ | 1,019 |
|
| $ | 1,019 |
| $ | 0 |
|
| $ | 0 |
|
| $ | 1,141 |
| $ | 1,141 |
|
| $ | 1,141 |
| $ | 0 |
|
| $ | 0 |
| ||||
Treasury bills |
|
| 7,999 |
|
| 7,999 |
|
|
| 7,999 |
|
| 0 |
|
|
| 0 |
| 4,993 | 4,993 | 4,993 | 0 | 0 | |||||||||||||||||
Treasury bills - maturity date greater than three months |
|
| 2,996 |
|
| 2,996 |
|
|
| 2,996 |
|
| 0 |
|
|
| 0 |
| ||||||||||||||||||||||
Equity Securities |
|
| 42 |
|
| 42 |
|
|
| 0 |
|
| 0 |
|
|
| 42 |
|
|
| 56 |
|
| 56 |
|
|
| 0 |
|
| 0 |
|
|
| 56 |
| ||||
December 31, 20202021
| 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 | $ | 718 |
| $ | 718 |
| $ | 718 |
| $ | 0 |
| $ | 0 |
| $ | 1,520 |
| $ | 1,520 |
| $ | 1,520 |
| $ | 0 |
| $ | 0 |
| ||||||||||
Treasury bills | 7,999 |
| 7,999 |
| 7,999 |
| 0 |
| 0 |
| 5,000 |
| 5,000 |
| 5,000 |
| 0 |
|
| 0 |
| |||||||||||||||||||
| Treasury Bills - maturity date greater than three months | 3,000 | 3,000 | 3,000 | 0 | 0 | |||||||||||||||||||||||||||||||||||
Equity Securities | 42 |
| 42 |
| 0 |
| 0 |
| 42 |
| 56 |
| 56 |
| 0 |
| 0 |
|
| 56 |
| |||||||||||||||||||
The fair value of the commercial paper and treasury bills is based on quoted market prices in an active market. The equity securities owned by the Company are investments in two non-publicly traded companies. There is an undeterminable market for each of these two companies and the Company has determined the fair value based on financial and other factors that are considered level 3 inputs in the fair value hierarchy.
The changechanges in level 3 assets measured at fair value on a recurring basis are as follows:
| Six Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2021 | 2020 | 2022 | 2021 | |||||||||||||
| Beginning Balance | $ | 42 | $ | 45 | $ | 56 | $ | 42 | ||||||||
Change in Fair Value | 0 | (3 | ) | 0 | 0 | |||||||||||
| Ending Balance | $ | 42 | $ | 42 | $ | 56 | $ | 42 | ||||||||
ELECTRO-SENSORS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
FOR THE PERIOD ENDED JUNE 30, 20212022
(in thousands except share and per share amounts)
(unaudited)
Note 4. Inventories
June 30, 2021 | December 31, 2020 | June 30, 2022 | December 31, 2021 | |||||||||||
| Raw Materials | $ | 928 | $ | 922 | $ | 1,158 | $ | 1,129 | ||||||
| Work In Process | 285 | 292 | 285 | 257 | ||||||||||
Finished Goods | 317 | 363 | 287 | 287 | ||||||||||
| Reserve for Obsolescence | (5 | ) | (5 | ) | (10 | ) | (10 | ) | ||||||
| Total Inventories | $ | 1,525 | $ | 1,572 | ||||||||||
| Total Inventories, net | $ | 1,720 | $ | 1,663 | ||||||||||
ELECTRO-SENSORS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
FOR THE PERIOD ENDED JUNE 30, 2022
(in thousands except share and per share amounts)
(unaudited)
On June 10, 2022, Electro-Sensors, Inc. (“ELSE” or “Electro-Sensors”) entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Mobile X Newco, Inc., a Delaware corporation, a wholly owned subsidiary of ELSE (the “Merger Sub”), and Mobile X Global, Inc., a Delaware corporation (“Mobile X”) (together with ELSE and Merger Sub the “Parties”). Mobile X Global, Inc. is a new entrant in the global mobile industry founded by its CEO Peter Adderton.Mobile X plans to launch a new mobile wireless brand called Mobile X in the United States in 2022, enabled by a network agreement with a major carrier.
The Merger is structured as a statutory reverse triangular merger under Delaware and Minnesota law, under which Merger Sub will be merged with and into Mobile X Global, Inc., with Mobile X Global, Inc. surviving the Merger and becoming a wholly owned subsidiary of ELSE. In connection with the Merger, ELSE will reincorporate in Delaware, be re-named Mobile X Global, Inc., and operate both the new MobileX wireless business and the existing Electro-Sensors business. The Merger Agreement also provides that Electro-Sensors, Inc. will effect a four-for-one reverse stock split shortly before completion of the Merger, unless the Parties agree on a different reverse split ratio.
In connection with the execution of the Merger Agreement, a third-party institutional investor has entered into a commitment letter with Mobile X Global, Inc. to provide equity financing in the form of convertible preferred stock of up to $20.0 million upon closing of the Merger. The commitment is subject to diligence and definitive agreements satisfactory to the third-party institutional investor, including an agreement for a $50.0 million equity line of credit to be provided by the investor. The equity line of credit would provide significant additional liquidity, at the option of Mobile X. The commitment letter terminates on October 31, 2022.
It is anticipated that, immediately after the Merger, former Mobile X stockholders will own approximately 76% of the combined company, legacy ELSE shareholders will own approximately 11% of the combined company, and that the third-party institutional investor noted above (or an alternative investor agreed to by the Parties to the Merger Agreement) and certain other investors will own approximately 13% of the combined company, all based on current ownership of ELSE and Mobile X, and assuming the closing of $20.0 million of equity financing on the terms contained in the commitment letter from the third-party institutional investor noted above.
ELSE expects the approximately 325,000 of currently outstanding options to acquire ELSE shares to be exercised in connection with the Merger prior to the record date of the cash dividend discussed below. Assuming this exercise, and based on the relative valuations agreed to by Mobile X and ELSE, and after giving effect to the reverse stock split at a ratio of four-for-one, the legacy ELSE shareholders would own approximately 932,005 shares, the Mobile X stockholders would own approximately 6,668,294 shares, the third-party institutional investor noted above (or an alternative investor agreed to by the Parties to the Merger Agreement) would own approximately 1,066,860 shares (on an as-converted to common basis) assuming the closing of $20.0 million of equity financing on the terms in the commitment letter, and approximately 75,851 shares would be held by others.
In addition to their continuing interest in the combined company, legacy Electro-Sensors shareholders as of a record date to be determined before the closing of the Merger would receive special cash dividends expected to be approximately $18.0 million in the aggregate, with the amount of the dividends possibly adjusted based on the amount of ELSE transaction expenses and its working capital balance at the closing of the Merger, and further adjusted for indebtedness, if any, and transaction bonuses, if any, approved by the ELSE board of directors. Aggregate cash dividends of $18.0 million would be approximately $4.83 per share based on the current, pre-reverse split, fully diluted shares of Electro-Sensors.
| 14 |
Closing of the Merger is subject to specified conditions, including, among other matters: (i) the approval by Mobile X stockholders and ELSE shareholders of the Merger; (ii) a registration statement becoming effective under the Securities Act of 1933, as amended, related to the shares being issued to the Mobile X stockholders in the Merger and the clearance of the proxy statement related to the approval by the ELSE shareholders of the Merger; (iii) receipt of $20.0 million in third party equity financing; (iv) listing of the combined company's common stock on Nasdaq; and (v) the filing of an amendment to ELSE 's Articles of Incorporation to increase the number of shares of common stock authorized for issuance to a number at least large enough to consummate the Merger, allowing the issuance of shares to former Mobile X stockholders and any third-party investors, after giving effect to the reverse stock split described above.
In connection with the execution of the Merger Agreement, Electro-Sensors' directors, officers, and certain major shareholders, who collectively own a majority of Electro-Sensors' outstanding shares, have entered into agreements with Mobile X to vote their shares in favor of the Merger at a special meeting of shareholders to be held before the closing of the Merger on a date to be announced. In addition, directors, officers and certain major stockholders of Mobile X, who collectively own a majority of Mobile X's outstanding shares, have entered into similar voting agreements. No written consents have been granted nor have any votes been cast. The Voting Agreements may be terminated in connection with a termination of the Merger Agreement. Closing will follow the special meeting of shareholders of Electro-Sensors, consent of stockholders of Mobile X Global, and satisfaction of other customary and specified closing conditions, including the U.S. Securities and Exchange Commission ("SEC") having declared effective a registration statement, and The Nasdaq Stock Market having approved the listing of the common stock of the combined company.
A full description of the terms of the Merger Agreement will be provided in a combined Form S-4 Registration Statement/Proxy Statement for the shareholders of ELSE (the “Merger Proxy Statement”) to be filed with the SEC. ELSE urges investors, shareholders, and other interested persons to read, when available, the preliminary proxy statement as well as other documents filed with the SEC because these documents will contain important information about ELSE, Mobile X, and the proposed transaction. The definitive Merger Proxy Statement will be mailed to ELSE shareholders as of a record date to be established for voting on the proposed transaction. Shareholders will also be able to obtain a copy of the definitive Merger Proxy Statement (when available), without charge, by directing a request to: Electro-Sensors, Inc., 6111 Blue Circle Drive, Minnetonka MN 55343. The preliminary and definitive proxy statement, once available, can also be obtained, without charge, at the SEC’s website (www.sec.gov).
The Company expects the Merger to close in the second half of 2022.
Note 6. Subsequent Events
On July 15, 2022, 3 Company directors exercised their stock options.Each director had options to purchase 2,500 shares at an exercise price of $4.15.The total amount received by the Company for the exercise of the options was $31.
| 15 |
FORWARD-LOOKING STATEMENTS
This Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including statements regarding our expectations, beliefs, intentions or strategies regarding the future. Forward-looking statements include, but are not limited to, statements about the success of our marketing efforts; our efforts to accelerate future growth or income; our business development activities; 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. 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. 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 manner. Any statement that is not based solely upon historical facts, including our strategies for the future and the outcome of events that have not yet occurred, is a forward-looking statement.
This Form 10-Q also includes certain forward-looking statements concerning Electro-Sensors, Mobile X Global and the proposed transactions within the meaning of the Private Securities Litigation Reform Act of 1995, including, but not limited to, statements regarding future financial performance, future growth, and the development of future products and services; the benefits of the proposed transactions, including anticipated growth and synergies; the combined company’s plans, objectives and expectations and intentions; the expected timing of the proposed transactions; and future acquisitions. These statements are based on current expectations or beliefs and are subject to uncertainty and changes in circumstances. There can be no guarantee that the proposed transactions described in this Form 10-Q will be completed, or that they will be completed as currently proposed, or at any particular time. Actual results may vary materially from those expressed or implied by the statements here due to changes in economic, business, competitive or regulatory factors, and other risks and uncertainties affecting the operation of Electro-Sensors as well as the business of Mobile X Global. Many of these risks, uncertainties and contingencies related to Electro-Sensors are presented in Electro- Sensors’ Annual Report on Form 10-K and, from time to time, in Electro-Sensors’ other filings with the SEC. These and other risks related to the business of Mobile X Global will be presented in the proxy statement/prospectus/consent solicitation statement to be filed with the SEC.
| 16 |
The information here should be read considering these risks and the following considerations: the ability of the merger parties to obtain definitive investment documents and close on the equity investments necessary to complete the Merger; the ability of MobileX to successfully launch its business, attract subscribers, and achieve the levels of customer service, revenues and costs that it currently expects; the ability of the combined company to successfully maintain a Nasdaq Capital Market listing; the ability of the combined company to successfully access the capital markets to finance expansion and acquisitions; the ability of the combined company to identify and acquire appropriate acquisition targets and successfully integrate these companies into its operations; the ability of the combined company to achieve synergies between its legacy sensor business and its new MobileX business; the conditions to theclosing of the Merger may not be satisfied or an event, change or other circumstance could occur that could give rise to the termination of the Merger Agreement; the Merger may involve unexpected costs, liabilities or delays, resulting in the Merger not being consummated within the expected time period; risks that the announced merger may disrupt currentElectro-Sensors plans and operations or that the business or stock price of Electro-Sensors may suffer as a result of uncertainty surrounding the Merger; the outcome of any legal proceedings related to the Merger; and Electro-Sensors or Mobile X Global may be adversely affected by other economic, business, or competitive factors. Additional information regarding the merger is available in Note 5 to the financial statements.
All forward-looking statements in this document are based on information available to us as of the date of this Form 10-Q, and we assume no obligation to update any of these forward-looking statements, other than as required by law. Our actual results could differ materially from those projected or indicated in these forward-looking statements. These forward-looking statements are subject to certain risks and uncertainties that could cause future results to differ materially from our recent results or those projected in the forward-looking statements, including the accuracy of management’s assumptions with respect to industry trends, fluctuations in industry conditions, the accuracy of management’s assumptions regarding expenses and our cash needs and those listed under the heading “Cautionary“Forward-Looking Statements” under “Item 1—Business,” in our Annual Report on Form 10-K for the year ended December 31, 2020,2021, as well as any effect the COVID-19 pandemic may have on the efficiency of our business operations, our customer base and the domestic or worldwide economy.
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. 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 manner.
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, 2020.2021.
SELECTED FINANCIAL INFORMATION
The following table contains selected financial information, for the periods indicated, from our Condensed Statements of Comprehensive Income (Loss)Loss expressed as a percentage of net sales.
| Three Months Ended June 30, | Six Months Ended June 30, | Three Months Ended June 30 | Six Months Ended June 30, | ||||||||||||||||||||||||
| 2021 |
| 2020 |
| 2021 | 2020 | 2022 | 2021 | 2022 |
| 2021 | |||||||||||||||||
Net sales |
| 100.0 | % |
| 100.0 |
| % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % |
| 100.0 | % | ||||||||
Cost of goods sold |
| 44.1 |
|
| 47.5 |
| 45.8 | 47.8 | 45.1 | 44.1 | 45.2 |
| 45.8 | |||||||||||||||
Gross profit |
| 55.9 |
| 52.5 |
| 54.2 | 52.2 | 54.9 | 55.9 | 54.8 |
| 54.2 | ||||||||||||||||
Operating expenses |
|
|
|
|
|
|
|
| ||||||||||||||||||||
Selling and marketing |
| 14.8 |
| 21.2 |
| 16.3 | 22.4 | 16.7 | 14.8 | 18.5 |
| 16.3 | ||||||||||||||||
General and administrative |
| 18.6 |
| 21.0 |
| 20.7 | 22.5 | 43.9 | 18.6 | 34.6 |
| 20.7 | ||||||||||||||||
Research and development |
| 11.5 |
|
| 9.4 |
| 11.1 | 10.3 | 8.6 | 11.5 | 9.6 |
| 11.1 | |||||||||||||||
Total operating expenses |
| 44.9 |
|
| 51.6 |
| 48.1 | 55.2 | 69.2 | 44.9 | 62.7 |
| 48.1 | |||||||||||||||
Operating income (loss) |
| 11.0 |
| 0.9 | 6.1 | (3.0 | ) | |||||||||||||||||||||
Operating loss | (14.3 | ) | 11.0 | (7.9 | ) |
| 6.1 | |||||||||||||||||||||
Non-operating income |
|
|
|
|
|
|
|
| ||||||||||||||||||||
Interest income |
| 0.0 |
|
| 0.0 |
| 0.0 | 0.8 | 0.3 | 0.0 | 0.2 |
| 0.0 | |||||||||||||||
Total non-operating income, net |
| 0.0 |
|
| 0.0 | 0.0 | 0.8 | 0.3 | 0.0 | 0.2 |
| 0.0 | ||||||||||||||||
Income (loss) before income tax expense (benefit) |
| 11.0 |
| 0.9 | 6.1 | (2.2 | ) | |||||||||||||||||||||
Loss before income tax benefit | (14.0 | ) | 11.0 | (7.7 | ) |
| 6.1 | |||||||||||||||||||||
Provision for (benefit of) income taxes |
| 2.3 |
|
| 0.0 | 1.3 | (0.4 | ) | ||||||||||||||||||||
Income tax benefit | (2.9 | ) | 2.3 | (1.7 | ) |
| 1.3 | |||||||||||||||||||||
Net income (loss) |
| 8.7 | % |
|
| 0.9 | % | 4.8 | % | (1.8 | ) | % | ||||||||||||||||
Net loss | (11.1) | % | 8.7 | % | (6.0) | % |
| 4.8 | % | |||||||||||||||||||
The following paragraphs discuss the Company’s performance for the three and six months ended June 30, 20212022 and 20202021.
RESULTS OF OPERATIONS (in thousands)
Net Sales
Net sales for the three-month period ended June 30, 20212022 were $2,462,$2,564, an increase of $370,$102, or 17.7%4.1%, from $2,092$2,462 during the comparable period in 2020.2021. Net sales for the six months ended June 30, 20212022 were $4,363,$4,699, an increase of $348,$336, or 8.7%7.7%, from $4,015$4,363 during the comparable period in 2020. 2021. The increase was primarily the result of increased domestic sales of products utilizedwere driven by broad-based strength in industrial automation applications.agricultural applications, including commodity refining and biofuels.
Gross Profit
Gross profit for the second quarter of 20212022 increased $278,$32 to $1,408, or 25.3%2.3%, over the same period in 20202021. Gross profit for the six months ended June 30, 20212022 increased $269,$208 to $2,574, or 12.8%8.8%, over the same period in 2020.2021. Gross margin increaseddecreased in the second quarter of 20212022 to 55.954.9% from 52.5%55.9% during the same period in 20202021. Gross margin for the six months ended June 30, 20212022 increased to 54.2%54.8% from 52.2%54.2% over the same period in 2020.2021. The decrease in gross margin for the second quarter was due to a increase in theraw material costs. The increase in gross margin percentage for both periodsthe six months ended June 30, 2022 was primarily due to a favorable changeimproved factory utilization, partially offset by increases in product mix.raw material costs.
Operating Expenses
Total operating expenses increased $26,$668, or 2.4%,60.5% to $1,773 for the second quarter of 20212022 compared to the same period in 2020, but decreased2021, and increased as a percentage of net sales to 44.9%69.2% from 51.6%44.9%. Total operating expenses decreased $120,increased $854, or 5.4%40.7%, for the six months ended June 30, 20212022 compared to the same period in 2020,2021, and decreasedincreased as a percentage of net sales to 48.1%62.7% from 55.2%48.1%.The increase in operating expenses was primarily due to increases in legal and professional fees directly related to the pending merger with Mobile X as discussed in Note 5 to the financial statements.
| ● | Selling and marketing expenses in the second quarter of |
| ● | General and administrative expenses increased |
| ● | Research and development expenses |
Non-Operating Income
Net non-operating income decreasedincreased by $29,$6, or 93.5%300.0%, for the six months ended June 30, 20212022 compared to the same period in 2020. The decrease in2021. was primarily a result of less interest income earned due to lower interest rates on Treasury Bills.
Income (Loss) Before Income Tax Benefit.Expense (Benefit)
IncomeLoss before income tax expensebenefit was $271$358 for the second quarter of 2021,2022, representing an increasea decrease of $252, or 1,326.3%,$629 compared to an income before income tax expense of $19$271 for the same period in 20202021. IncomeLoss before income tax expensebenefit was $269$371 for the six months ended of June 30, 2021,2022, representing an increasea decrease of $360, or 395.6%,$640 compared to a lossan income before income tax benefitexpense of $91$269 for the same period in 2020.2021. The increasedecrease for three-month periodboth periods was primarily the result of higher saleslegal and gross profit. The increase forother professional fees related to the six-month period was primarily the result of higher sales, gross profit, and lower operating expenses.pending merger.
Income Tax Expense (Benefit)
Income tax benefit was $74, or (2.9)% of net sales in the second quarter of 2022 compared to an income tax expense increased toof $57, or 2.3% of net sales in the second quarter of 20212021. The income tax benefit was $78, or (1.7)% of net sales, in the six months ended June 30, 2022 compared to an expense of $1, in the second quarter of 2020. The increase is due to higher income before income tax expense. The income tax expense increased toof $57, or 1.3% of net sales, infor the six months ended June 30, 2021 compared to a benefit of $18, or 0.4% of net sales, for the six months ended June 30, 2020.2021. The increasedecrease in both periods is due to net income before income tax expense in 2021 compared to a loss before income tax benefit in 2020.2022 compared to a net income before income tax in 2021.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents were $1,540$6,429 at June 30, 20212022 and $1,090$6,713 at December 31, 2020.2021. The increasedecrease was primarily the result of an increase in cash generated from operationsused in operating activities discussed below.
Cash used in operating activities was $272 for the six months ended June 30, 2022 as compared to cash generated from operating activities wasof $466 for the six months ended June 30, 2021 as compared to $240 for the six months ended June 30, 2020.2021. The $226$738 increase in cash generated fromused in operations was due primarily to an increase in the net income and accounts payable, partially offset by an increase in trade receivables. loss. The increase in2022 net loss compared to the 2021 net income was due to higher sales and gross profit. The increase in trade receivables wasprimarily due to the timing of shipments and collections on accounts. The increase in accounts payable was duelegal and professional fees related to the timing of payments.merger expenses.
Cash used in investing activities was $9 for the six months ended June 30, 2022 compared to $13 for the six months ended June 30, 2021 as compared to $6,760 for the six months ended June 30, 2020.2021. The decrease in cash used in investing activities was due to an increasea decrease in proceeds from Treasury Bill maturities classified as investments during 2021. During the first half of 2020, all maturities of Treasury Bills were classified as cash and cash equivalents. In addition, the Company purchased $14 and $12 of property and equipment during the first six months ended June 30, 2021 and 2020, respectively.2022.
Cash used in financing activities in the six months ended June 30, 20212022 and 20202021 was $3 and $3, respectively. The cash used was for principal payments on a financing lease on right-to-use assets. In addition, during the second quarter of 2020, the Company received and subsequently repaid a Payroll Protection Loan of $645 from the Small Business Administration.both periods.
Subject to the following section,sections, entitled "COVID-19 Pandemic Discussion", and "Supply Chain Dynamics," the Company believe its ongoing cash requirements will be primarily for capital expenditures, research and development, working capital, and growth initiatives. Management believescorporate and business development initiatives and that our cash on hand and any cash generated from operations will be sufficient to meet ourthese cash requirements through at least the next 12 months.
COVID-19 Pandemic Discussion
The COVID-19 pandemic continues to negatively impact our operations, including limiting our ability to travel and fully engage customers at their facilities. While many regions of the USUnited States have reduced the severevarious restrictions implemented duringbeginning in 2020, many areas are once again adding newof our customers and potential customers continue to operate under modified and changing restrictions based on increases inthe number of local or regional COVID-19 cases. The uncertainty surrounding this recent uptickthe ongoing fluctuations in casesregional case counts creates additional uncertainty in our business and may negatively affect our 20212022 financial results.
Supply Chain Dynamics
We typicallytraditionally have had one or more robust sources for production components and materials. However, we are increasingly experiencing significant disruptions in our supply chain, resulting in difficulty sourcing some parts. Additionally, we are experiencing price increases for many of the components used in our products. In certain situations, we are modifying product designs to accommodate new components that are more readily available. There is no guarantee that we will continue to be successful in updating these designs and sourcing alternative components, and we could experience significant delays or run out of certain components and materials. We are also seeing delays in shipping and transportation services, which may adversely affect our ability to make timely deliveries to our customers. Furthermore, the labor market for qualified employees able to fill our production positions is very challenging and we may struggle to fillresult in delays in filling open positions. While we continue to closely manage our workforce, lead times, and deliverieseach of components,these activities, our actions may not be successful and may result in a negative impactseffect 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. In addition, we continued to explore other strategic investments that we believed presented good opportunities for the Company and its shareholders. We substantially increased these business development activities in the second half of 2021 and first half of 2022. On June 10, 2022, we announced that we had entered into the Merger Agreement with Mobile X Global, Inc.
Off-balance Sheet Arrangements
As of June 30, 2021,2022, the Company had no off-balance sheet arrangements or transactions.
Not Applicable.
Evaluation of Disclosure Controls and Procedures
Based on an evaluation with the participation of the Company’s management, the Company’s principal executive officer and principal financial officer has concluded that the Company’s disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (“Exchange Act”), were effective as of June 30, 20212022.
Changes in Internal Control Over Financial Reporting
There were no changes in the Company’s internal control over financial reporting during the second quarter of 20212022 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.
Exhibit |
| Description |
| 3.1 | Restated Articles of Incorporation, as amended | |
| 3.2 | Bylaws, as amended June 10, 2022 | |
|
|
|
| Certification of CEO and CFO Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
|
|
|
| Certification of CEO and CFO Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
|
|
|
101 |
| The following financial information from Electro-Sensors, Inc.’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, |
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| Electro-Sensors, Inc. |
|
|
August | /s/ David L. Klenk |
| David L. Klenk |
| Chief Executive Officer and Chief Financial Officer (Principal Executive Officer and Principal Financial Officer) |