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U
NIT
ED STATES
SECUR
IT
IES A
ND EXCHANGE COMMISSION
Washington, DC 20549
Form
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended
Or
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______ to ______
Commission File Number
(Exact name of registrant as specified in its charter)
|
|
|
|
(State or other jurisdiction of incorporation or organization) |
(IRS Employer Identification No.) |
(Address of principal executive offices)
(
(Registrant’s telephone number, including area code)
Securities registered p ursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of eac h exchang e on which registered |
|
|
|
|
Indicate by check m
ark 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
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 chapt
er) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes
| 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 ☐ |
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☒ |
Smaller reporting company
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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 define
d in Rule 12
b-2 of the Ex
change Act). Yes
The number of shares ou
tstanding of the registrant’s common sto
ck, $0.10 par
value,
on
November 13, 2023
w
as
| 2 |
ELECTRO-SENSORS, INC.
Form 10-Q
For the Pe riod Ended September 30, 2023
| 3 |
ELECTRO-SENSORS, INC.
(in thousands except share and per share amounts)
|
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September 30
,
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December 31
,
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||
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(unaudited) |
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ASSETS |
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Current assets |
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Cash and cash equivalents |
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$ |
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$ |
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Investments |
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Trade receivables, less allowance for credit losses of $
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Inventories |
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Other current assets |
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| Income tax receivable |
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Total current assets |
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Deferred income tax asset, net |
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Property and equipment, net |
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Total assets |
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$ |
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$ |
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LIABILITIES AND STOCKHOLDERS’ EQUITY |
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Current liabilities |
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Current maturities of financing lease |
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$ |
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$ |
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Accounts payable |
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Accrued expenses |
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Total current liabilities |
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Commitments and contingencies |
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Stockholders’ equity |
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Common stock par value $
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Additional paid-in capital |
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Retained earnings |
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| Accumulated other comprehensive income (loss) (unrealized income (loss) on available-for-sale se curi ties, net of income tax) |
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(
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) |
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Total stockholders’ equity |
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Total liabilities and stockholders’ equity |
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$ |
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$ |
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|
See accompanying notes to unaudited condensed financial statements
ELECTRO-SENSORS, INC.
(in thousands except share and per share amounts)
(unaudited)
|
Three
Months Ended
September 30 , |
|
Nine
Mont
hs E
nded
|
||||||||||||||
| 2023 | 2022 |
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2023
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2022
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| Ne t sale s | $ |
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$ |
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$ |
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$ |
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| Cost of goods sold |
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| Gross profit |
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| Operating expenses |
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| Selling and marketing |
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| General and administrative |
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| Research and development |
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| Total operating expenses |
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|||||||||
| Oper ating income (lo ss) |
(
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(
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(
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| Non-operating income |
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| Interest expense |
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(
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(
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(
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| Interest income |
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| Total non-operating income, net |
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| Income (loss) before income tax expense (benefit) |
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(
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) | ||||||
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| Income tax expense (benefit) |
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(
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) | |||||
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|||||||||
| Net income (loss) | $ |
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$
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$ |
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$ |
(
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) | ||||
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|||||||||
| Other comprehensive loss |
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||||||||
| Change in unrealized value of available-f or-sale securities, net of income tax | $ |
(
|
) | $ |
(
|
) |
|
$ |
(
|
) |
|
$ |
|
|
||
| Other comprehensive loss |
(
|
) |
(
|
) |
|
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(
|
) |
|
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|
||||
|
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|
|||||||||
| Net comprehensive income (loss) |
$
|
|
$ |
|
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$ |
|
|
|
$ |
(
|
) | ||||
|
|
|
|
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|
|||||||||
| Net income (loss) per share data: |
|
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|||||||||
| Basic |
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||||||||
| Net income (l oss) p er share | $ |
|
$ |
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$ |
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$ |
(
|
) | ||||
| Weighted average shares |
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| Diluted |
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||||||||
| Net income (loss) per share |
$
|
|
$
|
|
|
$ |
|
|
|
$ |
(
|
) | ||||
| Weig hted aver age shares |
|
|
|
|
|
|
|
|
|
|
||||||
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
September 30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||
|
|
Common Stock Issued |
|
|
Additional
|
|
|
Retained
|
|
|
Accumulated
|
|
|
Total
Equity |
|
||||||||
|
|
Shares |
|
|
Amount |
|
|
||||||||||||||||
|
|
|
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|
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|
|
|
|
|
|
|
|
|
| June 30, 2023 |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
(
|
) |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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| Other co mprehen sive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(
|
) |
|
|
(
|
) |
| Stock-based compensation expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Balance September 30 , 2023 (unaudited) |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
(
|
) |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| June 30, 2022 |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Exercise of common stock options |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Other co mprehen sive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(
|
) |
|
|
(
|
) |
| Stock-based compensation expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net income |
|
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|
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|
|
|
|
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||
|
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|
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|
|
|
|
|
|
|
| Balance September 30 , 2022 (unaudited) |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
| For the nine months ended September 30 |
|
|
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|
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|
||||||||
|
|
Common Stock Issued |
|
|
Additional
|
|
|
Retained
|
|
|
Accumulated
|
|
|
Total
Equity |
|
||||||||
|
|
Shares |
|
|
Amount |
|
|
||||||||||||||||
|
|
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|
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|
|
|
|
|
|
|
|
| December 31, 2022 |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Other comprehe nsive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(
|
) |
|
|
(
|
) |
| Stock-based compensation expense |
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
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|
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| Net income |
|
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|
|
|
|
|
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||
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|
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|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
| Balance September 30 , 2023 (unaudited) |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
(
|
) |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| December 31, 2 021 |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Exercise of common stock options |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
| Stock-based compensation expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
(
|
) |
|
|
|
|
|
|
(
|
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Balance September 30 , 2022 (unaudited) |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
See accompanying notes to unaudited condensed financial statements
| 6 |
ELECTRO-SENSORS, INC.
(in thousands)
(unaudited)
|
|
|
Nine
Months Ended
|
|
|||||
|
|
|
2023 |
|
2022 |
|
|||
|
Cash flows from (used in) operating activities |
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
|
|
$ |
(
|
) | |
|
Adjustments to reconcile net income (loss) to net cash from (used in) operating activities: |
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
|
|
|
|
|
|
|
Deferred income taxes |
|
|
|
|
|
(
|
) | |
|
Stock-based compensation expense |
|
|
|
|
|
|
|
|
|
Interest accrued on Treasury Bills |
|
|
(
|
) |
|
|
(
|
) |
|
Change in: |
|
|
|
|
|
|
|
|
|
Trade receivables |
|
|
|
|
|
(
|
) | |
|
Inventories |
|
|
(
|
) |
|
|
(
|
) |
|
Other current assets |
|
|
(
|
) |
|
|
|
|
|
Accounts payable |
|
|
(
|
) |
|
|
(
|
) |
|
Accrued expenses |
|
|
|
|
|
|
|
|
|
Income tax receivable/payable |
|
|
(
|
) |
|
|
(
|
) |
|
Net cash from (used in) operating activities |
|
|
|
|
|
(
|
) | |
|
|
|
|
|
|
|
|
|
|
|
Cash flows from (used in) investing activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of Treasury Bills |
|
|
(
|
) |
|
|
(
|
) |
|
Proceeds from the maturity of Treasury Bills |
|
|
|
|
|
|
|
|
| Purchase of property and equipment |
|
|
(
|
) |
|
|
(
|
) |
|
Net cash from (used in) investing activities |
|
|
(
|
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from (used in) financing activities |
|
|
|
|
|
|
|
|
| Proceeds from the exercise of common stock options |
|
|
|
|
|
|
|
|
| Paym ents on finan cing lease |
|
|
(
|
) |
|
|
(
|
) |
|
Net cash from (used in) financing activities |
|
|
(
|
) |
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents |
|
|
(
|
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash an d cash equival ents, beginning |
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, ending |
|
$ |
|
|
|
$ |
|
|
|
Supplemental cash flow information |
|
|
|
|
|
|
|
|
|
Cash paid for income taxes |
|
$ |
|
|
|
$ |
|
|
| Cash paid for interest |
|
$ |
|
|
|
$ |
|
|
See accompanying notes to unaudited condensed financial statements
| 7 |
ELECTRO-SENSORS, INC.
FOR THE PERIOD ENDED SEPTEMBER 30 , 2023
(in thousands except share and per share amounts)
(unaudited)
Note 1 . B asi s of Pr ese nta tio n
The accompanying unaudited financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions and regulations of the Securities and Exchange Commission to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements.
This report should be read together with the Company’s Annual Report on Form 10-K for the year ended December 31, 2022 , including the audited financial statements and footnotes therein.
Management believes that the unaudited financial statements include all adjustments, consisting of normal recurring accruals, necessary to fairly state the financial position and results of operations as of September 30, 2023 and for the three and nine -month periods ended September 30, 2023 and 2022 , in accordance with accounting principles generally accepted in the United States of America. The results of interim periods may not be indicative of results to be expected for the year.
Nature of Business
Electro-Sensors, Inc. (the "Company") manufactures and markets a complete line of monitoring and control systems for a wide range of industrial machine applications. The Company uses leading-edge technology to continuously improve its products, with the goal of manufacturing the industry-preferred product for each of our served markets. The Company sells these products through an internal sales staff and distributors to a wide range of industries that use the products in a variety of applications to monitor process machinery operations. The Company markets its products to customers located throughout the United States, Canada, Latin America, Europe, and Asia.
Note 5 provides i nformation regarding the Merger Agreement that we entered into on June 10, 2022 and that 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 SEPTEMBER 30 , 2023
(in thousands except share and per share amounts)
(unaudited)
Re venue Rec ognition
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 HazardPRO TM 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, 2023 and December 31, 2022 , due to the short maturity nature of these instruments.
Stock-Based Compensation
The Company records compensation expense for stock options based on the estimated fair value of the options on the date of grant using the Black-Scholes-Merton (“BSM”) option pricing model. The Company uses historical data, among other factors, to estimate the expected price volatility, the expected option life, and the expected forfeiture rate. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant for the estimated life of the option.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Current significant estimates, including the underlying assumptions, consist of economic lives of long-lived assets, realizability of trade receivables, valuation of deferred tax assets/liabilities, inventory, investments, and stock compensation expense. It is at least reasonably possible that these estimates may change in the near term .
| 9 |
ELECTRO-SENSORS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
FOR THE PERIOD ENDED SEPTEMBER 30 , 2023
(in thousands except share and per share amounts)
(unaudited)
Net Income (Loss) per Common Share
Basic income (loss) per share excludes dilution and is determined by dividing net income (loss) by the weighted-average number of common shares outstanding during the period. Diluted net income (loss) per share reflects the potential dilution that could occur if securities such as options or restricted stock units were exercised or converted into common stock.
Diluted earnings per share ("Diluted EPS") considers the impact of potentially dilutive securities except in periods in which there is a loss because the inclusion of the potential shares would have an anti-dilutive effect. Diluted EPS also excludes the impact of common shares issuable upon the exercise of outstanding stock options in periods in which the option exercise price is greater than the average market price of our common stock during the period.
For the
three
-month
period
s ended
September 30, 2023
, and
2022
,
In addition, for the
three and
nine
-
month periods e
nded
Septe
mber
30
,
2023
,
New Accounting Stan dard Adopted
Accounting Standard Update (“ASU”) No. 2016 - 13 , Financial Instruments-Credit Losses (Topic 326 ), Measurement of Credit Losses on Financial Statements requires a financial asset (or a group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial asset(s) to present the net carrying value at the amount expected to be collected on the financial asset. The adoption of ASU 2016 - 13 on January 1, 2023 had no significant impact on our financial statements.
ELECTRO-SENSORS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
FOR THE PERIOD ENDED SEPTEMBER 30 , 2023
(in thousands except share and per share amounts)
(unaudited)
N ote 2 . Investments
The Company has investments in commercial paper, money market savings, Treasury Bills, and common equity securities of
The Company classifies its investments in commercial paper and Treasury Bills as available-for-sale, accounted for at fair value with unrealized income and losses recognized in accumulated other comprehensive income (loss) on the balance sheet. Equity securities are stated at fair value and unrealized gains and losses, if any, are reported in our statements of comprehensive income (loss) in non-operating income.
The cost and estimated fair value of the Company’s investments are as follows:
|
|
|
Cost |
|
|
Gross
|
|
|
Gross
|
|
|
Fair
|
|
||||
|
September 30, 2023 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money Market Savings |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Treasury Bills |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
E q uity Secu rities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less Cash Equivalents |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Investments, September 30, 2023 |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2022 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Paper |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Treasury Bills |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity Securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less Cash Equivalents |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Investments, December 31, 2022 |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
$ |
|
|
|
ELECTRO-SENSORS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
FOR THE PERIOD ENDED SEPTEMBER 30 , 2023
(in thousands except share and per share amounts)
(unaudited)
Note 3 . Fair Value Measurements
The following ta ble provides info rmation on those assets and liabilities measured at fair value on a recurring basis.
September 30, 2023
|
|
|
Carrying amount |
|
|
|
|
|
Fair Value Measurement Using |
|
|||||||||||
|
|
|
in balance sheet |
|
|
Fair Value |
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|||||
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Cash equivalents |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money Market Savings |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Treasury Bills |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Treasury Bills - maturity date greater than three months |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity Securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2022
|
|
|
Carrying amount |
|
|
|
|
|
Fair Value Measurement Using |
|
|||||||||||
|
|
|
in balance sheet |
|
|
Fair Value |
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|||||
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Cash equivalents |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial paper |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Treasury Bills |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Treasury Bills - maturity date greater than three months |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity Securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The fair value of the commercial paper and Treasury Bills is based on quoted market prices in an active market. The equity securities owned by the Company are investments in two non-publicly traded companies. There is an undeterminable market for each of these two companies and the Company has determined the fair value based on financial and other factors that are considered level 3 inputs in the fair value hierarchy.
The changes in level 3 assets measured at fair val ue on a recur ring ba sis are as follows:
|
|
Nine Months Ended September 30 , | |||||||
|
|
|
2023
|
|
|
2022
|
|
||
|
|
|
|
|
|
||||
| Beginning Balance |
|
$ |
|
|
|
$ |
|
|
|
Change in Fair Value |
|
|
|
|
|
|||
| E nding B alance |
|
$ |
|
|
|
$ |
|
|
ELECTRO-SENSORS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
FOR THE PERIOD ENDED SEPTEMBER 30 , 2023
(in thousands except share and per share amounts)
(unaudited)
Note
4
. Inventories
|
|
September 30 ,
2023
|
|
|
December 31 ,
2022
|
|
||
|
|
|
|
|
||||
| Raw Materials | $ |
|
|
|
$ |
|
|
| Work In Process |
|
|
|
|
|
|
|
|
Finished Goods
|
|
|
|
|
|
|
|
| Reserve for Obsolescence |
|
(
|
) |
|
|
(
|
) |
| Total Inventories, net | $ |
|
|
|
$ |
|
|
On June 10, 2022 , the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Mobile X Newco, Inc., a Delaware corporation, a wholly owned subsidiary of the Company (the “Merger Sub”), and Mobile X Global, Inc., a Delaware corporation (“Mobile X”).
On January 30, 2023, the Company and Mobile X terminated the Merger Agreement. A condition to the closing of the merger transaction was the consummation of an equity financing that the parties anticipated would be a PIPE investment (private investment in public entity). The financing necessary to consummate the merger was pursued but was not available due to difficult con ditions in the fina ncial markets, including the markets for PIPE investments.
Note 6 . Sto ck-B ased Compensation
ELECTRO-SENSORS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
FOR THE PERIOD ENDED SEPTEMBER 30, 2023
(in thousands except share and per share amounts)
(unaudited)
The assumptions made in estimating the fair value of the options on the grant date based upon the BSM option-pricing model for the three -month period ended September 30, 2023 are as follows:
|
Dividend Yield |
|
|
|
|
Expected Volatility |
|
|
|
|
Risk Free Interest Rate |
|
|
|
|
Expected Life |
|
|
|
The Company calculates expected volatility for stock options and other awards using historical volatility as the Company believes the expected volatility will approximate historical volatility.
The following t able summari zes the activity for all stock options outstanding for the nine months ended September 30 :
|
|
|
2023 |
|
2022 |
|
|||||||||
|
|
|
Shares |
|
|
Weighted Average Exercise Price |
|
Shares |
|
|
|
Weighted Average Exercise Price |
|
||
|
Options outstanding at beginning of year |
|
|
|
|
$ |
|
|
|
|
|
|
$ |
|
|
|
Granted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised |
|
|
|
|
|
|
|
|
(
|
) |
|
|
|
|
|
Expired |
|
(
|
) |
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding at September 30 |
|
|
|
|
$ |
|
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at September 30 |
|
|
|
|
$ |
|
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average grant date fair for options exercised during the period |
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
As of
September 30, 2023
, the total unrecognized compensation expense related to outstanding stock options was $
ELECTRO-SENSORS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
FOR THE PERIOD ENDED SEPTEMBER 30 , 2023
(in thousands except share and per share amounts)
(unaudited)
|
Unvested Restricted Stock Units
|
||||||
|
|
Number of Shares | Weighted-Average Grant-Date Fair Value | ||||
| Unvested as of December 31, 2022 |
|
|
|
$ |
|
|
| Granted |
|
|
|
|
|
|
| Vested |
|
|
|
|
|
|
| Forfeited/canceled |
|
|
|
|
|
|
| Unvested as of September 30, 2023 |
|
|
|
$ |
|
|
Note 7. Contingencies
| 15 |
FORWARD-LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements made by us or on our behalf. We have made, and may continue to make, forward-looking statements with respect to our business and financial matters, including statements contained in this document, other filings with the Securities and Exchange Commission, and reports to shareholders. Forward-looking statements generally include discussion of current expectations or forecasts of future events and can be identified by the use of terminology such as “believe,” “estimate,” “expect,” “intend,” “may,” “could,” “will,” and similar words or expressions. Any statement that does not relate solely to historical fact should be considered forward-looking.
Our forward-looking statements generally relate to our growth strategy, future financial results, product development and sales efforts. We make forward-looking statements throughout this Form 10-Q, but primarily in this Management’s Discussion and Analysis of Financial Condition and Results of Operations section. These include statements relating to our beliefs and expectations and intentions with respect to (i) our growth and profitability, (ii) our marketing and product development, (iii) our ability to continue to obtain parts and materials for our products from various manufacturers and distributors in a timely manner and at reasonable prices, (iv) the value of our intellectual property, (v) our competitive position in the marketplace, (vi) the effect of governmental regulations on our business, (vii) our employee relations, (viii) the adequacy of our facilities, (ix) our intention to develop new products, (x) the possibility of us acquiring compatible businesses or product lines as part of our growth strategy, and (xi) our future cash requirements and use of cash.
Forward-looking statements cannot be guaranteed and our actual results may vary materially due to the uncertainties and risks, known and unknown, associated with these statements, including our ability to successfully develop new products and manage our cash requirements. We undertake no obligation to update any forward-looking statements. We cannot foresee or identify all factors that could cause actual results to differ from expected or historical results. As such, investors should not consider any list of these factors to be an exhaustive statement of all risks, uncertainties or potentially inaccurate assumptions. These forward-looking statements are subject to certain risks and uncertainties that could cause future results to differ materially from our recent results listed under the heading “Forward-Looking Statements” under “Item 1—Business,” in our Annual Report on Form 10-K for the year ended December 31, 2022, as well as the following:
- Respond to events beyond our control such as any disruption in the economy caused by (i) a government shutdown similar to those that have occurred over the past decade or (ii) the recent October 2023 outbreak of violence in the Middle East,
- Continue to procure components for our products, and maintain a steady and reliable workforce, as described below under "Supply Chain and Labor Dynamics".
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, 2022 .
SELECTED FINANCIAL INFORMATION
The following table contains selected financial information, for the periods indicated, from our Condensed Statements of Comprehensive Income (Loss) expressed as a percentage of net sales.
|
|
Three Months Ended September 30 |
|
Nine Months Ended September 30 |
|
|||||||
|
|
2023 |
|
|
2022 |
|
2023 |
|
|
2022 |
|
|
|
Net sales |
100.0 | % |
|
100.0 | % |
|
100.0 | % |
|
100.0 | % |
|
Cost of goods sold |
51.7 |
|
|
47.5 |
|
|
50.6 |
|
|
46.0 |
|
|
Gross profit |
48.3 |
|
|
52.5 |
|
|
49.4 |
|
|
54.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses |
|
|
|
|
|
|
|
|
|
|
|
|
Selling and marketing |
14.9 |
|
|
16.1 |
|
|
16.3 |
|
|
17.7 |
|
|
General and administrative |
24.0 |
|
|
22.4 |
|
|
23.4 |
|
|
30.7 |
|
|
Research and development |
10.6 |
|
|
8.6 |
|
|
11.6 |
|
|
9.3 |
|
|
Total operating expenses |
49.5 |
|
|
47.1 |
|
|
51.3 |
|
|
57.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
( 1.2 | ) |
|
5.4 |
|
( 1.9 | ) |
|
( 3.7 | ) | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-operating income |
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
5.3 |
|
|
1.6 |
|
|
4.8 |
|
|
0.6 |
|
|
Total non-operating income, net |
5.3 |
|
|
1.6 |
|
|
4.8 |
|
|
0.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income tax expense (benefit) |
4.1 |
|
7.0 |
|
2.9 |
|
|
( 3.1 | ) | ||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense (benefit) |
3.6 |
|
1.4 |
|
1.5 |
|
|
( 0.7 | ) | ||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
0.5 | % |
|
5.6 | % |
|
1.4 | % |
|
( 2.4 | )% |
The following
paragraphs discuss the Company’s
performance
for t
he
three and nine
months ended
September 30, 2023
and
2022
.
RESULTS OF OPERATIONS (in thousands)
Net Sales
Net sales for the three -month period ended September 30, 2023 were $ 2,057 , a decrease of $ 159 , or 7.2 %, from $ 2,216 during the comparable period in 2022 . Net sales for the nine months ended September 30, 2023 were $ 6,239 , a decrease of $ 676 , or 9.8 %, from $ 6,915 during the comparable period in 2022 . The decrease d uring the three-month period was the result of decreased sales of our wired sensor products, partially offset by increased sales of HazardPRO TM wireless hazard monitoring systems. The decrease during the nine-month period was a result of decreased sales of both traditional wired products and HazardPRO wireless hazard monitoring systems.
Gross Profit
Gross profit for the third quarter of 2023 was $ 993 , a decrease of $ 170 , or 14.6 %, over the same period in 2022 . Gross profit for the nine months ended September 30, 2023 was $ 3,083 , a decrease of $ 654 , or 17.5 %, over the same period in 2022 . Gross margin decreased in the third quarter of 2023 to 48.3 % from 52.5 % during the same period in 2022 . Gross margin for the nine months ended September 30, 2023 decreased to 49.4 % from 54.0 % over the same period in 2022 . The decrease in gross margin for both periods was primarily due to an increase in product and labor costs across all product lines.
Operating Expenses
Total operating expenses decreased $ 25 , or 2.4 %, to $ 1,019 for the third quarter of 2023 compared to the same period in 2022 and increased as a percentage of net sales to 49.5 % from 47.1 %. Total operating expenses decreased $ 794 , or 19.9 %, to $ 3,203 for the nine months ended September 30, 2023 compared to the same period in 2022 and decreased as a percentage of net sales to 51.3 % from 57.7 %. The decrease in operating expenses for both periods was primarily due to lower legal and professional fees related to the terminated merger agreement with Mobile X as discussed in Note 5 to the financial statements and decreased sales headcount.
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● |
Selling and marketing expenses in the third quarter of 2023 decreased $ 50 to $ 307 , or 14.0 %, from the same period in 2022 and decreased as a percentage of net sales to 14.9 % from 16.1 % . Selling and marketing expenses in the nine months ended September 30, 2023 decreased $ 209 to $ 1,021 , or 17.0 %, from the same period in 2022 and decreased as a percentage of net sales to 16.3 % from 17.7 % . The decrease for both periods was primarily due to lower sales headcount and variable compensation related to lower revenue. |
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● |
General and administrative expenses decreased $ 3 to $ 494 , or 0.6 %, in the third quarter of 2023 compared to the same period in 2022 but increased as a percentage of net sales to 24.0 % from 22.4 %. General and administrative expenses decreased $ 667 to $ 1,458 , or 31.4 %, in the nine months ended September 30, 2023 compared to the same period in 2022 and decreased as a percentage of net sales to 23.4 % from 30.7 %. The decrease in both periods was primarily due to a decrease in legal and professional fees related to the terminated merger agreement, partially offset by an increase in stock-based compensation expense primarily related to the 2023 third quarter stock option grants. |
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Research and development expenses increased $ 28 to $ 218 , or 14.7 %, i n the third quarter of 2023 compared to the same period in 2022 and increased as a percentage of net sales to 10.6 % from 8.6 %. Research and development expenses increased $ 82 to $ 724 , or 12.8 %, in the nine months ended September 30, 2023 compared to the same period in 2022 and increased as a percentage of net sales to 11.6 % from 9.3 %. The increase for both periods was due to higher contract engineering costs related to product development and enhancements. |
Non-Operating Income
Net non-operating income
increased
by $
74
,
or
211.4
%
, for the
three-
month period ended
September 30, 2023
compared to the same period in
2022
.
Net non-operating income
increased
by $
253
, or
588.4
%, for the
nine
m
ont
hs ended
September 30, 2023
compared to the same period in
2022
. The increase for both periods is the result of additional interest income earned as a result of higher interest rates on Treasury Bills.
Income (Loss) Before Income Tax Expense (Benefit)
Income before income tax expense was $ 83 for the third quarter of 2023 , representing a decrease of $ 71 compared to $ 154 for the same period in 2022 . Income before income tax expense was $ 176 for the nine months ended September 30, 2023 , representing an increase of $ 393 compared to a loss before income tax benefit of $ 217 for the same period in 2022 . The decrease for the three-month period was primarily due to lower revenues and gross margins, as discussed above. The increase for the nine months was primarily the result of lower operating expenses and an increase in interest income, partially offset by lower revenues and gross margins, as discussed above.
Income Tax Expense (Benefit)
Income tax expense was $ 75 , or 3.6%, of net sales in the third quarter of 2023 compared to an income tax expense of $ 32 , or 1.4 %, of net sales in the third quarter of 2022 . Income tax expense was $ 96 , or 1.5 %, of net sales for the nine months ended September 30, 2023 , compared to an income tax benefit of $ 46 , or (0.7) %, of net sales for the nine months ended September 30, 2023 . Income tax expense in the 2023 periods was higher than federal tax rates due to the 2023 third quarter write-off of deferred tax asset related to the 2023 expired options.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents were $ 3,902 at September 30, 2023 and $ 7,646 at December 31, 2022 . The decrease was primarily the result of an increase in Treasury Bills classified as investments as of September 30, 2023 as compared to December 31, 2022 . Cash, cash equivalents, and investments were $9,928 at September 30, 2023 as compared to $ 9,682 at December 31, 2022 .
Cash from operating activities was $ 92 for the nine months ended September 30, 2023 as compared to cash used in operating activities of $ 213 for the nine months ended September 30, 2022 . The $ 305 increase in cash from operating activities was due primarily to an increase in net income and a decrease in trade receivables. The 2023 net income compared to the 2022 net loss was primarily due to decreased expenses related to the terminated merger agreement described in Note 5 to the financial statements and an increase in interest income, partially offset by a decrease in net revenues. The decrease in trade receivables is due to the timing of sales and collections.
Cash used in investing activities was $ 3,831 for the nine months ended September 30, 2023 compared to cash from investing activities of $ 2,991 for the nine months ended September 30, 2022 . The increase in cash used in investing activities was due to the 2023 increase in the purchases of Treasury Bills classified as investments compared to maturities. As shown on the Statement of Cash Flows, during 2023, the Company purchased more Treasury Bills with maturity dates greater than three months to secure higher interest rates.
Cash used in financing activities in the nine months ended September 30, 2023 was $ 5 compared to cash from investing activities of $27 for the nine months ended September 30, 2022. In the third quarter of 2022, three non-employee directors exercised a total of 7,500 stock options for a total exercise price of $31.
Subject to the following section, entitled "Supply Chain and Labor Dynamics," the Company believes its ongoing cash requirements will be primarily for capital expenditures, research and development, working capital, corporate and business development and other strategic alternatives and that existing cash, cash equivalents, and investments and any cash generated from operations will be sufficient to meet these cash requirements through at least the next 12 months.
Supply Chain and Labor Dynamics
We traditionally have 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 seeking additional sources for components and modifying product designs to accommodate new components that are more readily available at competitive prices. There is no guarantee that we will continue to be successful in modifying these designs and sourcing alternative components. As a result, we could experience significant delays in receiving certain components needed to make timely customer deliveries, as well as increased costs that erode gross margins. Supply chain dynamics may have an effect on the efficiency of our business operations, our customer base, and the domestic or worldwide economy. Furthermore, the labor market for qualified employees able to fill our various open positions is challenging and may result in delays in filling these positions. In addition, we may experience changes in transportation and freight availability that may make it difficult to have materials and components shipped to us, or our products shipped to customers, in a timely and cost-effective manner. While we continue to closely manage each of these activities, our actions may not be successful and may result in a negative effect on our sales and profit margins.
Future Corporate and Business Development Activities
We continue to seek growth opportunities, both internally through our existing portfolio of products, technologies, and markets, as well as externally through technology partnerships or related-product or business acquisitions. In addition, we continue to explore other strategic alternatives 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 September 30, 2023 , the Company had no off-balance sheet arrangements or transactions.
Non-GAAP Financial Measure
In addition to financial results reported in accordance with accounting principles generally accepted in the United States of America (“GAAP”), the Company is providing a non-GAAP financial measure in this Form 10-Q and an itemized reconciliation between Net Income (Loss), a GAAP financial measure, and Adjusted Net Income, the non-GAAP financial measure.
The Company is using "Adjusted Net Income" as a non-GAAP financial measure to facilitate period-to-period comparisons and ana l ys i s o f it s ope r a ti n g pe r f o r m an c e an d be li e v e s it is u s e f u l t o i n v e s t o r s a s a s upp l e m en t t o GAA P m ea s u r e s i n ana l yz i ng , 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 Income (Loss) in accordance with GAAP, but is provided as supplemental information. This measure may be different from Adjusted Net Income or similar financial measures used by other companies, even when similar terms are used to identify these measures.
As discussed below, to calculate Adjusted Net Income, 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 Income (Loss) for the three and nine months ended September 30, 2022 . The Company believes adding back these costs and expenses more accurately portrays the underlying results and trends of the ongoing business.
On January 30, 2023, the Company and Mobile X jointly agreed to terminate the merger agreement. Although the costs and expenses related to the Company-Mobile X Merger Agreement were incurred primarily in general and administrative expenses, the Company is not presenting any other non-GAAP information because it believes it has adequately described these expenses in the Management's Discussion and Analysis section of this Form 10-Q and past filings with the Securities and Exchange Commission .
The Company incurred approximately $79 and $856 in legal and other professional fees for the three and nine months ended September 30, 2022 , respectively, related to the Mobile X merger opportunity. The following table sets forth a reconciliation of Net Income (Loss), a GAAP financial measure, to Adjusted Net Income (as defined above), the non-GAAP measure, for the periods noted.
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Three Months Ended September 30 |
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|
Nine Months Ended September 30 | |||||||||||
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2023 |
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2022 |
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|
2023 |
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|
2022 |
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||
|
Net Income (Loss) - GAAP |
$ |
8 |
|
$ |
122 |
|
$ | 80 |
|
|
$ | ( 171 | ) | ||
|
Merger-related expenses |
|
0 |
|
|
79 |
|
|
|
0 |
|
|
|
856 |
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|
|
Income tax benefit of merger-related expenses |
|
0 |
|
|
( 17 |
) |
|
|
0 |
|
|
( 180 | ) | ||
|
Adjusted Net Income |
$ |
8 |
|
$ |
184 |
|
|
$ | 80 |
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|
$
|
505 | ||
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 13 a- 15 (e) and 15 d- 15 (e) under the Securities Exchange Act of 1934 , as amended (“Exchange Act”), were effective as of September 30, 2023 .
Changes in I
nternal Control Over Financial Reporting
There were no changes in the Company’s internal control over financial reporting during the third quarter of 2023 that were identified in connection with management’s evaluation required by paragraph (d) of Rules 13 a- 15 and 15 d- 15 under the Exchange Act, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
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Exhibit |
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Description |
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| 10.3 |
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Form of Non-Qualified Stock Option Agreement under the 2013 Equity Incentive Plan, as updated August 2023 |
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| 10.4 |
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Form of Restricted Stock Unit Agreement under the 2013 Equity Incentive Plan |
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Certification of CEO and CFO Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
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Certification of CEO and CFO Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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101 |
|
The following financial information from Electro-Sensors, Inc.’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2023 , formatted in iXBRL (Inline Extensible Business Reporting Language), (i) Condensed Balance Sheets as of September 30, 2023 and December 31, 2022 , (ii) Condensed Statements of Comprehensive Income (Loss) for the three and nine months ended September 30, 2023 and September 30, 2022 , (iii) Condensed Statements of Changes in Stockholders' Equity for the three and nine months ended September 30, 2023 and September 30, 2022 , (iv) Condensed Statements of Cash Flows for the nine months ended September 30, 2023 and September 30, 2022 , and (v) Notes to Financial Statements. |
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.
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Electro-Sensors, Inc. |
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November 14, 2023 |
/s/ David L. Klenk |
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David L. Klenk |
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Chief Executive Officer and Chief Financial Officer (Principal Executive Officer and Principal Financial Officer) |