ELECTRO SENSORS INC - Quarter Report: 2022 September (Form 10-Q)

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 September 30, 2022

☐ 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) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

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

Large accelerated filer	☐	Accelerated filer ☐
Non-accelerated filer	☒	Smaller reporting company ☒
		Emerging growth company ☐

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

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

The number of shares outstanding of the registrant’s common stock, $0.10 par value, on November 11, 2022 was 3,403,021.

ELECTRO-SENSORS, INC.

Form 10-Q

For the Periods Ended September 30, 2022

TABLE OF CONTENTS
PART I – FINANCIAL INFORMATION	4

Item 1. Financial Statements (unaudited):	4

Condensed Balance Sheets – As of September 30, 2022 and December 31, 2021	4
Condensed Statements of Comprehensive Income (Loss) – For the Three and Nine Months ended September 30, 2022 and September 30, 2021	5
Condensed Statements of Changes in Stockholders' Equity – For the Three and Nine Months ended September 30, 2022 and September 30, 2021	6
Condensed Statements of Cash Flows – For the Nine Months ended September 30, 2022 and September 30, 2021	7
Notes to Condensed Financial Statements	8

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	16
Item 3. Quantitative and Qualitative Disclosures About Market Risk	22
Item 4. Controls and Procedures	22

PART II – OTHER INFORMATION	23

Item 1. Legal Proceedings	23
Item 1A. Risk Factors	23
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	23
Item 3. Defaults Upon Senior Securities	23
Item 4. Mine Safety Disclosures	23
Item 5. Other Information	23
Item 6. Exhibits	23

SIGNATURES	24

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

ELECTRO-SENSORS, INC.

CONDENSED BALANCE SHEETS

(in thousands except share and per share amounts)

	September 30, 2022		December 31, 2021
	(unaudited)
ASSETS

Current assets

Cash and cash equivalents	$	9,518	$	6,713
Investments		56		3,056
Trade receivables, less allowance for doubtful accounts of $11		1,180		1,005
Inventories		1,790		1,663
Other current assets		175		188
Income tax receivable		56		3

Total current assets		12,775		12,628

Deferred income tax asset, net		223		208

Intangible assets, net		0		38

Property and equipment, net		955		1,017

Total assets	$	13,953	$	13,891

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities

Current maturities of financing lease	$	7	$	6
Accounts payable		301		349
Accrued expenses		592		342

Total current liabilities		900		697

Long-term liabilities
Financing lease, net of current maturities		1		6

Total long-term liabilities		1		6

Commitments and contingencies

Stockholders’ equity

Common stock par value $0.10 per share; authorized 10,000,000 shares; 3,403,021 and 3,395,521 shares issued and outstanding, respectively		340		339
Additional paid-in capital		2,075		2,041
Retained earnings		10,637		10,808
Total stockholders’ equity		13,052		13,188

Total liabilities and stockholders’ equity	$	13,953	$	13,891

See accompanying notes to unaudited condensed financial statements

ELECTRO-SENSORS, INC.

CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(in thousands except share and per share amounts)

(unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2022			2021			2022			2021

Net sales	$	2,216		$	2,154		$	6,915		$	6,517
Cost of goods sold		1,053			950			3,178			2,947

Gross profit		1,163			1,204			3,737			3,570

Operating expenses
Selling and marketing		357			375			1,230			1,087
General and administrative		497			620			2,125			1,521
Research and development		190			189			642			675

Total operating expenses		1,044			1,184			3,997			3,283

Operating income (loss)		119			20			(260	)		287

Non-operating income
Interest expense		(1	)		(1	)		(1	)		(1	)
Interest income		36			2			44			4

Total non-operating income, net		35			1			43			3

Income (loss) before income tax expense (benefit)		154			21			(217	)		290

Income tax expense (benefit)		32			4			(46	)		61

Net income (loss)	$	122		$	17		$	(171	)	$	229

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

Net comprehensive income (loss)	$	120		$	17		$	(171	)	$	228

Net income (loss) per share data:

Basic
Net income (loss) per share	$	0.04		$	0.01		$	(0.05	)	$	0.07
Weighted average shares		3,401,880			3,395,521			3,397,664			3,395,521

Diluted
Net income (loss) per share	$	0.04		$	0.00		$	(0.05	)	$	0.07
Weighted average shares		3,482,996			3,439,377			3,397,664			3,435,595

See accompanying notes to unaudited condensed financial statements

ELECTRO-SENSORS, INC.

CONDENSED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(in thousands except share and per share amounts)

For the three months ended September 30
	Common Stock Issued			Additional Paid-in Capital		Retained Earnings		Accumulated Other Comprehensive Income			Total Stockholders’ Equity
	Shares	Amount		Additional Paid-in Capital		Retained Earnings		Accumulated Other Comprehensive Income			Total Stockholders’ Equity

June 30, 2022	3,395,521	$	339	$	2,043	$	10,515	$	2		$	12,899

Exercise of common stock options	7,500		1		30							31
Other comprehensive loss									(2	)		(2	)
Stock-based compensation expense					2							2
Net income							122					122

Balance September 30, 2022 (unaudited)	3,403,021	$	340	$	2,075	$	10,637	$	0		$	13,052

June 30, 2021	3,395,521	$	339	$	2,039	$	10,610	$	0		$	12,988

Stock-based compensation expense					1							1
Net income							17					17

Balance September 30, 2021 (unaudited)	3,395,521	$	339	$	2,040	$	10,627	$	0		$	13,006

For the nine months ended September 30
	Common Stock Issued			Additional Paid-in Capital		Retained Earnings			Accumulated Other Comprehensive Income			Total Stockholders’ Equity
	Shares	Amount		Additional Paid-in Capital		Retained Earnings			Accumulated Other Comprehensive Income			Total Stockholders’ Equity

December 31, 2021	3,395,521	$	339	$	2,041	$	10,808		$	0		$	13,188

Exercise of common stock options	7,500		1		30								31
Stock-based compensation expense					4								4
Net loss							(171	)					(171	)

Balance September 30, 2022 (unaudited)	3,403,021	$	340	$	2,075	$	10,637		$	0		$	13,052

December 31, 2020	3,395,521	$	339	$	2,036	$	10,398		$	1		$	12,774

Other comprehensive loss										(1	)		(1	)
Stock-based compensation expense					4								4
Net income							229						229

Balance September 30, 2021 (unaudited)	3,395,521	$	339	$	2,040	$	10,627		$	0		$	13,006

See accompanying notes to unaudited condensed financial statements

ELECTRO-SENSORS, INC.

CONDENSED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

	Nine Months Ended September 30,
	2022			2021
Cash flows from (used in) operating activities

Net income (loss)	$	(171	)	$	229

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

Depreciation and amortization		117			254
Deferred income taxes		(15	)		(24	)
Stock-based compensation expense		4			4
Interest accrued on treasury bills		(8	)		(2	)
Loss on disposal of fixed assets		0			8
Change in:
Trade receivables		(175	)		(368	)
Inventories		(127	)		95
Other current assets		13			(37	)
Accounts payable		(48	)		(22	)
Accrued expenses		250			299
Income tax receivable/payable		(53	)		111

Net cash from (used in) operating activities		(213	)		547

Cash flows from investing activities

Purchases of treasury bills		(4,992	)		(10,999	)
Proceeds from the maturity of treasury bills		8,000			14,000
Purchase of property and equipment		(17	)		(14	)

Net cash from investing activities		2,991			2,987

Cash flows from (used in) financing activities

Proceeds from the exercise of common stock options		31			0
Payments on financing lease		(4	)		(4	)

Net cash from (used in) financing activities		27			(4	)

Net increase in cash and cash equivalents		2,805			3,530

Cash and cash equivalents, beginning		6,713			1,090
Cash and cash equivalents, ending	$	9,518		$	4,620

Supplemental cash flow information
Cash paid for income taxes	$	22		$	1
Cash paid for interest	$	1		$	1

See accompanying notes to unaudited condensed financial statements

ELECTRO-SENSORS, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

FOR THE PERIOD ENDED SEPTEMBER 30, 2022

(in thousands except share and per share amounts)

(unaudited)

Note 1. Basis of Presentation

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

This report should be read together with the Company’s Annual Report on Form 10-K for the year ended December 31, 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 September 30, 2022 and for the three and nine-month periods ended September 30, 2022 and 2021, in accordance with accounting principles generally accepted in the United States of America. The results of interim periods may not be indicative of results to be expected for the year.

Nature of Business

Electro-Sensors, Inc. (the "Company") manufactures and markets a complete line of monitoring and control systems for a wide range of industrial machine applications. The Company uses leading-edge technology to continuously improve its products, with the ultimate goal of manufacturing the industry-preferred product for each of our served markets. The Company sells these products through an internal sales staff, manufacturers’ representatives, and distributors to a wide range of industries that use the products in a variety of applications to monitor process machinery operations. The Company markets its products to customers located throughout the United States, Canada, Latin America, Europe, and Asia.

In Note 5, we have presented information regarding the Merger Agreement we entered into on June 10, 2022.

Revenue Recognition

At contract inception, the Company assesses the goods and services to be provided to a customer and identifies a performance obligation for each distinct good or service. We also determine the transaction price for each performance obligation at contract inception. Our contracts, generally in the form of a purchase order, specify the product or service that is to be provided to the customer. The typical contract life is less than one month and contains a single performance obligation, to provide conforming goods or services to the customer. Certain contracts have a second performance obligation, which typically is the initialization of the 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.

ELECTRO-SENSORS, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

FOR THE PERIOD ENDED SEPTEMBER 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 September 30, 2022 and December 31, 2021, due to the short maturity nature of these instruments.

Intangibles

The intangible asset was a technology license, which was fully amortized in September 2022. The Company amortized the cost of this intangible asset on a straight-line method over the estimated useful life. During the first eight 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 September 30, 2022, all compensation expense related to outstanding stock options has been recognized in the financial statements.

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, 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.

ELECTRO-SENSORS, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

FOR THE PERIOD ENDED SEPTEMBER 30, 2022

(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 were exercised or converted into common stock. Diluted net income (loss) per share is determined by dividing net income (loss) by the weighted-average common shares outstanding during the period.

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

For the three-month periods ended September 30, 2022 and 2021, 243,884 and 288,644, respectively, weighted average common shares for underlying stock options have been excluded from the calculation. For the nine-month periods ended September 30, 2022, and 2021, 325,000 and 292,426 respectively, 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, Codification Improvements 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 Paragraphs Pursuant 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 SEPTEMBER 30, 2022

(in thousands except share and per share amounts)

(unaudited)

Note 2. Investments

The Company has investments in commercial paper, Treasury Bills, and common equity securities of two private U.S. companies. The commercial paper investment is in U.S. debt with ratings of A-1+, P-1, and F1+. The Treasury Bills have remaining terms ranging from one month to three months at September 30, 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 unrealized gain		Gross unrealized loss		Fair value
September 30, 2022
Commercial Paper	$	1,198	$	0	$	0	$	1,198
Treasury Bills		7,956		10		0		7,966
Equity Securities		54		2		0		56
		9,208		12		0		9,220
Less Cash Equivalents		9,154		10		0		9,164
Total Investments, September 30, 2022	$	54	$	2	$	0	$	56

December 31, 2021
Commercial Paper	$	1,520	$	0	$	0	$	1,520
Treasury Bills		8,000		0		0		8,000
Equity Securities		54		2		0		56
		9,574		2		0		9,576
Less Cash Equivalents		6,520		0		0		6,520
Total Investments, December 31, 2021	$	3,054	$	2	$	0	$	3,056

ELECTRO-SENSORS, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

FOR THE PERIOD ENDED SEPTEMBER 30, 2022

(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.

September 30, 2022

	Carrying amount				Fair Value Measurement Using
	in balance sheet		Fair Value		Level 1		Level 2		Level 3
Assets:
Cash equivalents
Commercial paper	$	1,198	$	1,198	$	1,198	$	0	$	0
Treasury bills		7,966		7,966		7,966		0		0
Equity Securities		56		56		0		0		56

December 31, 2021

	Carrying amount				Fair Value Measurement Using
	in balance sheet		Fair Value		Level 1		Level 2		Level 3
Assets:
Cash equivalents
Commercial paper	$	1,520	$	1,520	$	1,520	$	0	$	0
Treasury bills		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		56		56		0		0		56

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

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

	Nine Months Ended September 30,
	2022		2021

Beginning Balance	$	56	$	42
Change in Fair Value		0		0
Ending Balance	$	56	$	42

ELECTRO-SENSORS, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

FOR THE PERIOD ENDED SEPTEMBER 30, 2022

(in thousands except share and per share amounts)

(unaudited)

Note 4. Inventories

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

	September 30, 2022			December 31, 2021
	September 30, 2022			December 31, 2021
Raw Materials	$	1,198		$	1,129
Work In Process		293			257
Finished Goods		309			287
Reserve for Obsolescence		(10	)		(10	)
Total Inventories, net	$	1,790		$	1,663

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

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

On June 10, 2022, Electro-Sensors, Inc. (“ELSE” or “Electro-Sensors”) 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 financial information in this Note 5 is stated in actual dollars, rather than thousands.

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. If the Merger does not close by January 31, 2023, either Party may terminate the Merger Agreement, subject to specific exceptions set forth in the Merger Agreement.

In connection with the execution of the Merger Agreement, a third-party institutional investor 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 additional liquidity, at the option of Mobile X. The commitment letter originally would have terminated on October 31, 2022. On September 20, 2022, Mobile X and the third-party institutional investor extended the commitment letter expiration date to January 31, 2023.

ELSE expects that the 325,000 currently outstanding options to acquire ELSE shares would 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 (11%) shares, the Mobile X stockholders would own approximately 6,668,294 (76%) 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 (12%) 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 (1%) 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.

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

Closing of the Merger is subject to specified conditions, including, among other matters: (i) the approval by Mobile X stockholders and ELSE shareholders of the Merger; (ii) a registration statement becoming effective under the Securities Act of 1933, as amended, related to the shares being issued to the Mobile X stockholders in the Merger and the clearance of the proxy statement related to the approval by the ELSE shareholders of the Merger; (iii) receipt of $20.0 million in third party equity financing; (iv) listing of the combined company's common stock on Nasdaq; and (v) the filing of an amendment to ELSE's Articles of Incorporation to increase the number of shares of common stock authorized for issuance to a number at least large 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 Minnesota 55343. The preliminary and definitive proxy statement, once available, can also be obtained, without charge, at the SEC’s website (www.sec.gov).

Electro-Sensors, Inc. originally expected the Merger to close in the second half of 2022 and now expects the Merger to close in the first half of 2023. For a description of risk and other relevant factors regarding the Merger Agreement, see Forward-looking Statements in Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

Note 6. Common Stock Options

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

Note 7. Contingencies

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

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

FORWARD-LOOKING STATEMENTS

This Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including statements regarding our expectations, beliefs, intentions or strategies regarding the future. Forward-looking statements include, but are not limited to, statements about the success of our marketing efforts; our efforts to accelerate future growth or income; our business development activities; our efforts to maintain or reduce production costs; our ability to continue to obtain components and other raw materials for our products at reasonable prices as well as our ability to pass along any increased costs to our customers; our cash requirements; and the sufficiency of our cash flows. Based on rapidly changing dynamics in global supply 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.

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 the closing 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 current Electro-Sensors plans and operations or that the business or stock price of Electro-Sensors may suffer as a result of uncertainty surrounding the Merger; the outcome of any legal proceedings related to the Merger; and Electro-Sensors or Mobile X Global may be adversely affected by other economic, business, or competitive factors. Additional information regarding the Merger is available in Note 5 to the financial statements.

All forward-looking statements in this document are based on information available to us as of the date of this Form 10-Q, and we assume no obligation to update any of these forward-looking statements, other than as required by law. Our actual results could differ materially from those projected or indicated in these forward-looking statements. These forward-looking statements are subject to certain risks and uncertainties that could cause future results to differ materially from our recent results or those projected in the forward-looking statements, including the accuracy of management’s assumptions with respect to industry trends, fluctuations in industry conditions, the accuracy of management’s assumptions regarding expenses and our cash needs and those listed under the heading “Forward-Looking Statements” under “Item 1—Business,” in our Annual Report on Form 10-K for the year ended December 31, 2021, as well as any effect the COVID-19 pandemic and supply chain dynamics may have on the efficiency of our business operations, our customer base and the domestic or worldwide economy.

CRITICAL ACCOUNTING ESTIMATES

The preparation of our financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make decisions based upon estimates, assumptions, and factors it considers relevant to the circumstances. These decisions include the selection of applicable accounting principles and the use of judgment in their application and affect reported amounts and disclosures. Changes in economic conditions or other business circumstances may affect the outcomes of management’s estimates and assumptions. An in-depth description of our accounting estimates can be found in the interim financial statements included in this report and in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021.

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,
	2022		2021		2022		2021
Net sales	100.0	%	100.0	%	100.0	%	100.0	%
Cost of goods sold	47.5		44.1		46.0		45.2
Gross profit	52.5		55.9		54.0		54.8

Operating expenses
Selling and marketing	16.1		17.4		17.7		16.6
General and administrative	22.4		28.8		30.7		23.3
Research and development	8.6		8.8		9.3		10.4
Total operating expenses	47.1		55.0		57.7		50.3

Operating income (loss)	5.4		0.9		(3.7)		4.5

Non-operating income
Interest income	1.6		0.1		0.6		0.1
Total non-operating income, net	1.6		0.1		0.6		0.1

Income (loss) before income tax expense (benefit)	7.0		1.0		(3.1)		4.6

Income tax expense (benefit)	1.4		0.2		(0.7)		0.9

Net income (loss)	5.6	%	0.8	%	(2.4)	%	3.7	%

The following paragraphs discuss the Company’s performance for the three and nine months ended September 30, 2022 and 2021.

RESULTS OF OPERATIONS (in thousands)

Net Sales

Net sales for the three-month period ended September 30, 2022 were $2,216, an increase of $62, or 2.9%, from $2,154 during the comparable period in 2021. Net sales for the nine months ended September 30, 2022 were $6,915, an increase of $398, or 6.1%, from $6,517 during the comparable period in 2021. The increase during the three-month period was primarily a result of increased sales of HazardPRO wireless hazard monitoring systems. The increase during the nine-month period was primarily a result of increased domestic sales of traditional wired products for industrial automation and agricultural applications.

Gross Profit

Gross profit for the third quarter of 2022 decreased $41 to $1,163, or 3.4%, over the same period in 2021. Gross profit for the nine months ended September 30, 2022 increased $167 to $3,737, or 4.7%, over the same period in 2021. Gross margin decreased in the third quarter of 2022 to 52.5% from 55.9% during the same period in 2021. Gross margin for the nine months ended September 30, 2022 decreased to 54.0% from 54.8% over the same period in 2021. The decrease in gross margin for both periods was primarily due to an increase in raw material costs across all product lines.

Operating Expenses

Total operating expenses decreased $140, or 11.8% to $1,044 for the third quarter of 2022 compared to the same period in 2021, and decreased as a percentage of net sales to 47.1% from 55.0%. Total operating expenses increased $714, or 21.7%, for the nine months ended September 30, 2022 compared to the same period in 2021, and increased as a percentage of net sales to 57.7% from 50.3%. The increase in operating expenses in the 2022 nine-month period 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 third quarter of 2022 decreased $18 to $357, or 4.8%, from the same period in 2021 and decreased as a percentage of net sales to 16.1% from 17.4%. Selling and marketing expenses in the nine months ended September 30, 2022 increased $143 to $1,230, or 13.2%, from the same period in 2021 and increased as a percentage of net sales to 17.7% from 16.6%. The decrease for three-month period was primarily due to decreased tradeshow related expenses, partially offset by additional sales headcount. The decrease in tradeshow expenses in 2022 occurred because a majority of tradeshows in 2021 were held during the third quarter, versus being held in earlier quarters in 2022. The increase for nine months ended September 30, 2022 was primarily due to additional sales headcount and increased travel expenses.

●

General and administrative expenses decreased $123 to $497, or 19.8%, in the third quarter of 2022 compared to the same period in 2021 and decreased as a percentage of net sales to 22.4% from 28.8%. General and administrative expenses increased $604 to $2,125, or 39.7%, for the nine months ended September 30, 2022 compared to the same period in 2021 and increased as a percentage of net sales to 30.7% from 23.3%. The decrease for three-month period was primarily due to decreased legal and other professional fees related to the June 10, 2022 execution of the Merger Agreement and related matters, described in Note 5 to the financial statements and amortization expense related to the HazardPRO technology, which was fully amortized in the third quarter of 2021. The increase for the nine months ended September 30, 2022 was primarily due to increased legal and other professional fees related to the Merger Agreement and related matters, partially offset by a decrease in amortization expense related to the HazardPRO technology.

●

Research and development expenses increased $1 to $190, or 0.5%, in the third quarter of 2022 from the same period in 2021 and decreased as a percentage of net sales to 8.6% from 8.8%. Research and development expenses decreased $33 to $642, or 4.9%, in the nine months ended September 30, 2022 from the same period in 2021 and decreased as a percentage of net sales to 9.3% from 10.4%. The decrease for the nine-month period was due to lower third-party engineering costs related to product development and enhancements.

Non-Operating Income

Net non-operating income increased by $40, or 1,333.3%, for the nine months ended September 30, 2022 compared to the same period in 2021. The increase is the result of additional interest income earned as a result of higher interest rates of Treasury Bills.

Income (Loss) Before Income Tax Expense (Benefit)

Income before income tax expense was $154 for the third quarter of 2022, representing an increase of $133 compared to income before income tax expense of $21 for the same period in 2021. Loss before income tax benefit was $217 for the nine months ended of September 30, 2022, representing a decrease of $507 compared to an income before income tax expense of $290 for the same period in 2021. The increase for third quarter was primarily the result of lower operating expenses as discussed above. The decrease for nine-month period was primarily the result of higher legal and other professional fees related to the Merger Agreement and related matters.

Income Tax Expense (Benefit)

Income tax expense was $32 or 1.4% of net sales in the third quarter of 2022 compared to $4 or 0.2% of net sales in the third quarter of 2021. The income tax benefit was $46 or (0.7)% of net sales, in the nine months ended September 30, 2022 compared to an income tax expense of $61 or 0.9% of net sales, for the nine months ended September 30, 2021. The increase in the third quarter is due to a higher income before income tax expense in 2022. The decrease in the nine-month period is due to loss before income tax benefit in 2022 compared to a net income before income tax in 2021.

LIQUIDITY AND CAPITAL RESOURCES

Cash and cash equivalents were $9,518 at September 30, 2022 and $6,713 at December 31, 2021. The increase was primarily the result of an increase in Treasury Bills classified as cash equivalents as of September 30, 2022 as compared to September 30, 2021.

Cash used in operating activities was $213 for the nine months ended September 30, 2022 as compared to cash generated from operating activities of $547 for the nine months ended September 30, 2021. The $760 increase in cash used in operations was due primarily to an increase in the net loss. The 2022 net loss compared to the 2021 net income was primarily due to the increase in legal and professional fees related to the Merger Agreement and related matters.

Cash from investing activities was $2,991 for the nine months ended September 30, 2022 compared to $2,987 for the nine months ended September 30, 2021. The increase in cash from investing activities was due to an increase in Treasury Bill maturities as compared to the purchase price for Treasury Bills classified as investments.

Cash from financing activities in the nine months ended September 30, 2022 was $27 as compared to cash used in financing activities of $4 for the nine months ended September 30, 2021. In the third quarter of 2022, three directors exercised 7,500 stock options for a total exercise price of $31.

Subject to the following sections, entitled "COVID-19 Pandemic Discussion" and "Supply Chain Dynamics," the Company believes its ongoing cash requirements will be primarily for capital expenditures, research and development, working capital, and corporate and business development initiatives and that cash on hand and any cash generated from operations will be sufficient to meet these cash requirements through at least the next 12 months.

COVID-19 Pandemic Discussion

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

Supply Chain Dynamics

We traditionally have had one or more robust sources for production components and materials. However, we are continuing to experience disruptions in our supply chain, resulting in difficulty sourcing some parts and materials. 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 challenging and may result in delays in filling open positions. While we continue to closely manage each of these activities, our actions may not be successful and may result in a negative effect on our sales and profit margins.

Future Corporate and Business Development Activities

We continue to seek growth opportunities, both internally through our existing portfolio of products, technologies, and markets, as well as externally through technology partnerships or related-product or business acquisitions. In addition, we 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 nine months of 2022. On June 10, 2022, we announced that we had entered into the Merger Agreement with Mobile X Newco, Inc. and Mobile X Global, Inc.

Off-balance Sheet Arrangements

As of September 30, 2022, the Company had no off-balance sheet arrangements or transactions.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Not Applicable.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

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

Changes in Internal Control Over Financial Reporting

There were no changes in the Company’s internal control over financial reporting during the third quarter of 2022 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.

PART II – OTHER INFORMATION

Item 1. Legal Proceedings – None

Item 1A. Risk Factors – Not Applicable

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds – None

Item 3. Defaults Upon Senior Securities – None

Item 4. Mine Safety Disclosures – Not Applicable

Item 5. Other Information – None

Item 6. Exhibits

Exhibit		Description

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

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

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

SIGNATURES

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

	Electro-Sensors, Inc.

November 14, 2022	/s/ David L. Klenk
	David L. Klenk
	Chief Executive Officer and Chief Financial Officer (Principal Executive Officer and Principal Financial Officer)

ELECTRO SENSORS INC - Quarter Report: 2022 September (Form 10-Q)

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