ELECTRO SENSORS INC - Quarter Report: 2022 March (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 March 31, 2022

 

Or

 

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from ______ to ______

 

Commission File Number 000-09587

 

ELECTRO-SENSORS, INC.

(Exact name of registrant as specified in its charter)

 

Minnesota	41-0943459
(State or other jurisdiction of incorporation or organization)	(IRS Employer Identification No.)

 

6111 Blue Circle Drive
Minnetonka, Minnesota 55343-9108

(Address of principal executive offices)

 

(952) 930-0100

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common stock	ELSE	Nasdaq Capital Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 of 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) 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 May 12, 2022 was 3,395,521.

 

 

 

ELECTRO-SENSORS, INC.

Form 10-Q

For the Periods Ended March 31, 2022

 

  

ELECTRO-SENSORS, INC.

(in thousands except share and per share amounts) 

See accompanying notes to unaudited condensed financial statements

ELECTRO-SENSORS, INC.

(in thousands except share and per share amounts)  

(unaudited)  

See accompanying notes to unaudited condensed financial statements

ELECTRO-SENSORS, INC.

(in thousands except share and per share amounts)

ELECTRO-SENSORS, INC.

(in thousands)

(unaudited) 

 

See accompanying notes to unaudited condensed financial statements

ELECTRO-SENSORS, INC.

FOR THE PERIOD ENDED MARCH 31, 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 March 31, 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
March 31, 2022
Commercial Paper		$	1,324			$	0			$	0			$	1,324
Treasury Bills			7,996				1				0				7,997
Equity Securities			54				2				0				56
			9,374				3				0				9,377
Less Cash Equivalents			7,321				0				0				7,321
Total Investments, March 31, 2022		$	2,053			$	3			$	0			$	2,056
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 MARCH 31, 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.

 

March 31, 2022

 

December 31, 2021

 

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:  

 

		Three Months Ended March 31,
		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 MARCH 31, 2022

(in thousands except share and per share amounts)

(unaudited)

 

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. Any statement that is not based solely upon historical facts, including our strategies for the future and the outcome of events that have not yet occurred, is a forward-looking statement.

 

All forward-looking statements in this document are based on information available to us as of the date of this Form 10-Q, and we assume no obligation to update any of these forward-looking statements, other than as required by law. Our actual results could differ materially from those projected or indicated in these forward-looking statements. These forward-looking statements are subject to certain risks and uncertainties that could cause future results to differ materially from our recent results or those projected in the forward-looking statements, including the accuracy of management’s assumptions with respect to industry trends, fluctuations in industry conditions, the accuracy of management’s assumptions regarding expenses and our cash needs and those listed under the heading “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 may have on the efficiency of our business operations, our customer base and the domestic or worldwide economy.

Based on rapidly changing dynamics in global supply chains of materials and components, we may experience both price increases and difficulty in sourcing materials and components.  In addition, we may experience changes in transportation and freight availability that may make it difficult to have materials and components shipped to us or our products shipped to customers in a timely manner. 

 

CRITICAL ACCOUNTING ESTIMATES

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

SELECTED FINANCIAL INFORMATION

 

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

 

The following paragraphs discuss the Company’s performance for the three months ended March 31, 2022 and 2021.

 

RESULTS OF OPERATIONS (in thousands) 

 

Net Sales

 

Net sales for the three-month period ended March 31, 2022 were $2,135, an increase of $234, or 12.3%, from $1,901 during the comparable period in 2021. The increase was a result of increased domestic sales for industrial automation and agricultural applications.

 

Gross Profit

 

Gross profit for the first quarter of 2022 increased $176 to $1,166, or 17.8%, over the same period in 2021. Gross margin increased in the first quarter of 2022 to 54.6% from 52.1% during the same period in 2021. The increase in gross margin was due to a decrease in discounting and improved factory utilization, partially offset by increases in raw material costs.

Operating Expenses

 

Total operating expenses increased $186, or 18.7% to $1,180, for the first quarter of 2022 compared to the same period in 2021, and increased as a percentage of net sales to 55.3% from 52.3%.  The increase in operating expenses was primarily due to increases in sales travel, tradeshows and legal and professional fees.

 

 

 

 

Non-Operating Income

 

Net non-operating income decreased by $1, or 50.0%, for the three months ended March 31, 2022 compared to the same period in 2021.

 

Loss Before Income Tax Benefit.

 

Loss before income tax benefit was $13 for the first quarter of 2022, representing an increase of $11 from the same period in 2021. The increase for the period was primarily the result of higher operating expenses, which increased more than gross profit. 

 

Income Tax Expense (Benefit)

 

Income tax benefit increased to $4, or 0.2% of net sales in the first quarter of 2022 compared to a benefit of $0 in the first quarter of 2021. The increase in 2022 is due to the higher loss.

LIQUIDITY AND CAPITAL RESOURCES

 

Cash and cash equivalents were $7,604 at March 31, 2022 and $6,713 at December 31, 2021. The increase was primarily the result of an increase in cash generated from investing activities discussed below.  

 

Cash used in operating activities was $106 for the three months ended March 31, 2022 as compared to $45 for the three months ended March 31, 2021. The $61 increase in cash used in operations was due primarily to an increase in inventory and increase in the net loss, partially offset by a decrease in trade receivables.  The increase in inventory was primarily due to the timing of inventory receipts.  The increase in net loss was primarily due to the increase in operating expenses.  The decrease in trade receivables was primarily due to the timing of customer orders and payments on account.

Cash from investing activities was $998 for the three months ended March 31, 2022 compared to $1 for the three months ended March 31, 2021. The increase in cash from investing activities was due to a decrease in Treasury Bill purchases classified as investments during 2022.  

Cash used in financing activities in the three months ended March 31, 2022 and 2021 was $1 for both periods. 

Subject to the following sections, entitled "COVID-19 Pandemic Discussion" and "Supply Chain Dynamics," the Company believe its ongoing cash requirements will be primarily for capital expenditures, research and development, working capital, and 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 uncertainty surrounding the ongoing fluctuations in regional case counts 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 increasingly experiencing significant disruptions in our supply chain, resulting in difficulty sourcing some parts. Additionally, we are experiencing price increases for many of the components used in our products. In certain situations, we are modifying product designs to accommodate new components that are more readily available.  There is no guarantee that we will continue to be successful in updating these designs and sourcing alternative components, and we could experience significant delays or run out of certain components and materials. We are also seeing delays in shipping and transportation services, which may adversely affect our ability to make timely deliveries to our customers. Furthermore, the labor market for qualified employees able to fill our production positions is 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 may seek other strategic investments that we believe present good opportunities for the Company and its shareholders. We substantially increased these business development activities in the last half of 2021 and first quarter of 2022.

Off-balance Sheet Arrangements

 

As of March 31, 2022, the Company had no off-balance sheet arrangements or transactions.

 

 

 

Not Applicable.

 

 

Evaluation of Disclosure Controls and Procedures

 

Based on an evaluation with the participation of the Company’s management, the Company’s principal executive officer and principal financial officer has concluded that the Company’s disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (“Exchange Act”), were effective as of March 31, 2022.

Changes in Internal Control Over Financial Reporting

There were no changes in the Company’s internal control over financial reporting during the first 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. 

 

 

 

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

 

	Electro-Sensors, Inc.
May 13, 2022	/s/ David L. Klenk
	David L. Klenk
	Chief Executive Officer and Chief Financial Officer (Principal Executive Officer and Principal Financial Officer)