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

S

 

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 ☐

 

1


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

 

Large accelerated filer  

Accelerated filer ☐

 

Non-accelerated filer

Smaller reporting company 

 

 

 

Emerging growth company 

 

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

 

Indicate by check mark whether the registrant is a shell company (as 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.

 

 

 

2


 

ELECTRO-SENSORS, INC.

Form 10-Q

For the Periods Ended March 31, 2022

 

TABLE OF CONTENTS

PART I – FINANCIAL INFORMATION 4
   
Item 1. Financial Statements (unaudited): 4
   
Condensed Balance Sheets – As of March 31, 2022 and December 31, 2021 4
Condensed Statements of Comprehensive Loss – For the Three Months ended March 31, 2022 and March 31, 2021 5
Condensed Statements of Changes in Stockholders' Equity – For the Three Months ended March 31, 2022 and March 31, 2021 6
Condensed Statements of Cash Flows – For the Three Months ended March 31, 2022 and March 31, 2021 7
Notes to Condensed Financial Statements 8
   
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 13
Item 3. Quantitative and Qualitative Disclosures About Market Risk 18
Item 4. Controls and Procedures 18
   
PART II – OTHER INFORMATION 19
   
Item 1. Legal Proceedings 19
Item 1A. Risk Factors 19
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 19
Item 3. Defaults Upon Senior Securities 19
Item 4. Mine Safety Disclosures 19
Item 5. Other Information 19
Item 6. Exhibits 19
   
SIGNATURES 20
   

  

3


ELECTRO-SENSORS, INC.

CONDENSED BALANCE SHEETS

(in thousands except share and per share amounts) 

 

 

March 31,
2022

 

 

December 31,
2021

 

 

 

(unaudited)

 

 

 

 

ASSETS  

 

 

 

 

 

 

Current assets 

 

 

 

 

 

 

 

 

Cash and cash equivalents 

 

$

7,604

 

 

$

6,713

 

Investments

 

 

2,056

 

 

 

3,056

 

Trade receivables, less allowance for doubtful accounts of $11


1,155

 

 

 

1,005

 

Inventories

 

 

1,758

 

 

 

1,663

 

Other current assets 

 

 

209

 

 

 

188

 

Income tax receivable

2


3

Total current assets

 

 

12,784

 

 

 

12,628

 

Deferred income tax asset, net

 

 

214

 

 

 

208

 

Intangible assets, net 

 

 

25

 

 

 

38

 

Property and equipment, net

 

 

993

 

 

 

1,017

 

Total assets

 

$

14,016

 

 

$

13,891

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

Current maturities of financing lease

 

$

6

 

 

$

6

 

Accounts payable

 

 

326

 

 

 

349

 

Accrued expenses

 

 

499

 

 

 

342

 

Total current liabilities

 

 

831

 

 

 

697

 

Long-term liabilities 







    Financing lease, net of current maturities

5


6
Total long-term liabilities 

5


6

Commitments and contingencies

 

 

 

 

 

 

 

 

Stockholders’ equity

 

 

 

 

 

 

 

 

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

 

 

339

 

 

 

339

 

Additional paid-in capital

 

 

2,042

 

 

 

2,041

 

Retained earnings

 

 

10,799

 

 

 

10,808

 

Total stockholders’ equity

 

 

13,180

 

 

 

13,188

 

Total liabilities and stockholders’ equity 

 

$

14,016

 

 

$

13,891

 

See accompanying notes to unaudited condensed financial statements

4

 

ELECTRO-SENSORS, INC.

(in thousands except share and per share amounts)  

(unaudited)  

     Three Months Ended
March 31,
 
     2022     2021  
                  
Net sales   $ 2,135     $ 1,901
Cost of goods sold     969    
911  
                  
Gross profit  
1,166    
990  
                  
Operating expenses                
Selling and marketing     446       348  
General and administrative     503       443  
Research and development  
231    
203  
                  
Total operating expenses   
1,180    
994  
                  
Operating loss     (14 )     (4 )
                  
Non-operating income                
Interest income      1       2  
                  
Total non-operating income, net  
1    
2  
                  
Loss before income tax benefit     (13 )     (2 )
                  
Income tax benefit     (4 )  
0
                  
Net loss   $ (9 )   $
(2 )
                  
Other comprehensive loss                
Change in unrealized value of available-for-sale securities, net of income tax $ 0 $ 0
Other comprehensive loss     0     0
                  
Net comprehensive loss   $
(9 )   $ (2 )
                  
Net loss per share data:







                  
Basic                
Net loss per share   $ 0.00   $ 0.00
Weighted average shares     3,395,521       3,395,521  
                  
Diluted                
Net loss per share   $
0.00   $
0.00
Weighted average shares     3,395,521       3,395,521  

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 March 31













    

Common Stock Issued

 

 

Additional
Paid-in
Capital

 

 

Retained
Earnings

 

 

Accumulated
Other
Comprehensive
Income

 

 

Total
Stockholders’

Equity

 

   

Shares

 

 

Amount

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2021
3,395,521


$ 339

$ 2,041

$ 10,808

$ 0

$ 13,188

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation expense







1










1
Net loss











(9 )





(9 )

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance March 31, 2022 (unaudited)  3,395,521

$ 339

$ 2,042

$ 10,799

$ 0

$ 13,180

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2020 3,395,521

$ 339

$ 2,036

$ 10,398

$ 1

$ 12,774

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation expense







1










1
Net loss











(2 )





(2 )

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance March 31, 2021 (unaudited) 3,395,521

$ 339

$ 2,037

$ 10,396

$ 1

$ 12,773

See accompanying notes to unaudited condensed financial statements

6


ELECTRO-SENSORS, INC.

(in thousands)

(unaudited) 

 

 

Three Months Ended
March 31,

 

 

 

2022

 

2021

 

Cash flows used in operating activities

 

 

 

 

 

 

 

 

Net loss 

 

$

(9

)

 

$

(2

)

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

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

40

 

 

 

90

 

Deferred income taxes

 

 

(6

)

 

 

(7

)

Stock-based compensation expense 

 

 

1

 

 

 

1

 

Interest accrued on treasury bills

 

 

(1

)

 

 

(2

)

Change in:

 

 

 

 

 

 

 

 

Trade receivables

 

 

(150

)

 

 

(252

)

Inventories

 

 

(95

)

 

 

4

Other current assets

 

 

(21

)

 

 

(36

)

Accounts payable

 

 

(23

)

 

 

(7

)

Accrued expenses 

 

 

157

  

 

 

159

Income tax receivable/payable

 

 

1

 

 

7

Net cash used in operating activities

 

 

(106

)

 

 

(45

)

 

 

 

 

 

 

 

 

 

Cash flows from investing activities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Purchases of treasury bills

 

 

(1,999

)

 

 

(4,999

)

Proceeds from the maturity of treasury bills

 

 

3,000

 

 

 

5,000

 

Purchase of property and equipment

(3 )

0

Net cash from investing activities

 

 

998

 

 

1

 

 

 

 

 

 

 

 

 

Cash flows used in financing activities

 

 

 

 

 

 

 

 

Payments on financing lease

(1 )

(1 )

Net cash used in financing activities

 

 

(1

)

 

 

(1

)

Net increase (decrease) in cash and cash equivalents

 

 

891

 

 

(45

)

 

 

 

 

 

 

 

 

 

Cash and cash equivalents, beginning

 

 

6,713

 

 

 

1,090

 

Cash and cash equivalents, ending

 

$

7,604

 

 

$

1,045

 

Supplemental cash flow information

 

 

 

 

 

 

 

 

Cash paid for income taxes

 

$

0

 

 

$

0

 

 

See accompanying notes to unaudited condensed financial statements

7


ELECTRO-SENSORS, INC.

FOR THE PERIOD ENDED MARCH 31, 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 March 31, 2022 and for the three-month periods ended March 31, 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. 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.

 

Revenue Recognition

 

At contract inception, the Company assesses the goods and services to be provided to a customer and identifies a performance obligation for each distinct good or service. We also determine the transaction price for each performance obligation at contract inception. Our contracts, generally in the form of a purchase order, specify the product or service that is to be provided to the customer. The typical contract life is less than one month and contains a single performance obligation, to provide conforming goods or services to the customer. Certain contracts have a second performance obligation, which typically is the initialization of the HazardPROTM product. For contracts that have multiple performance obligations, we allocate the transaction price to each performance obligation using the relative stand-alone selling price. We generally determine stand-alone selling prices based on the observable stand-alone prices charged to customers. We recognize product revenue at the point in time when control of the product is transferred to the customer, which typically occurs when we ship the products. We recognize service revenue at the point in time when we have provided the service.  


Fair Value Measurements 

 

The carrying value of trade receivables, accounts payable, and other financial working capital items approximates fair value at March 31, 2022 and December 31, 2021, due to the short maturity nature of these instruments.


8


ELECTRO-SENSORS, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

FOR THE PERIOD ENDED MARCH 31, 2022

(in thousands except share and per share amounts)

(unaudited)

 

Intangibles


The intangible asset is a technology license.  The Company amortizes the cost of the intangible asset on a straight-line method over the estimated useful life.  At March 31, 2021, the Company also had 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 March 31, 2022, there was approximately $2 of unrecognized compensation expense related to unvested stock options. The Company expects to recognize this expense over six months.

 

Use of Estimates

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. 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.  

  

Net Loss per Common Share


Basic earnings per share (EPS) excludes dilution and is determined by dividing net loss by the weighted average number of common shares outstanding during the period. Diluted EPS reflects the potential dilution that could occur if securities such as options were exercised or converted into common stock.

 

For the three-month periods ended March 31, 2022 and 2021, 332,500 weighted average common shares for underlying stock options have been excluded from the calculation because their effect would be anti-dilutive.


9


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 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

 

 

10


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


 

Carrying amount

 

 

 

 

 

 Fair Value Measurement Using 

 

 

 

in balance sheet

 

 

Fair Value

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial paper

 

$

1,324

 

 

$

1,324

 

 

$

1,324

 

 

$

0

 

 

$

0

 

   Treasury bills



5,997


5,997


5,997


0


0

Treasury bills - maturity date greater than three months

 

 

2,000

 

 

 

2,000

 

 

 

2,000

 

 

 

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:  

 

 
Three Months Ended March 31,


2022


2021

 




     
Beginning Balance 
$ 56

$ 42  

Change in Fair Value



0
  0
Ending Balance
$ 56

$ 42  

 

11


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 4. Inventories


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


March 31, 

2022



December 31, 

2021






Raw Materials $ 1,113

$ 1,129
Work In Process
297


257

Finished Goods


358


287
Reserve for Obsolescence 
(10 )

(10 )
Total Inventories, net $ 1,758

$ 1,663


12


 

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. 


13


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.

 

 

Three Months Ended March 31,


 

2022


 

 

2021

 


Net sales

 

100.0


%

 

 

100.0

 

%

Cost of goods sold

 

45.4


 

 

 

47.9

 


Gross profit

 

54.6


 

 

 

52.1

 


                  

Operating expenses

 

 


 

 

 

 

 


     Selling and marketing

 

20.9


 

 

 

18.3

 


     General and administrative

 

23.6


 

 

 

23.3

 


     Research and development

 

10.8


 

 

 

10.7

 


Total operating expenses

 

55.3


 

 

 

52.3

 


                  

Operating loss

 

(0.7

)

 

 

(0.2

)
                  

Non-operating income

 

 


 

 

 

 

 


     Interest income

 

0.0


 

 

 

0.1

 


Total non-operating income, net

 

0.0


 

 

 

0.1


                  

Loss before income tax benefit

 

(0.7

)

 

 

(0.1

)
                  

Income tax benefit

 

(0.2

)

  

 


0.00


                  

Net loss

 

(0.5

)

%

 

 

(0.1

) % 

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.

14


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.

 

 

Selling and marketing expenses in the first quarter of 2022 increased $98 to $446, or 28.2%, from the same period in 2021 and increased slightly as a percentage of net sales to 20.9% from 18.3%. The increase was primarily due to additional sales headcount, and increased travel and tradeshow related expenses.  The 2022 tradeshow expense increase occurred because a majority of tradeshows in 2021 were held later during the year.  

 

 

General and administrative expenses increased $60 to $503, or 13.5%, in the first quarter of 2022 compared to the same period in 2021 and increased slightly as a percentage of net sales to 23.6% from 23.3%. The increase was primarily due to increased legal and other professional fees related to increased corporate and business development activities, partially offset by a decrease in amortization expense related to the HazardPRO technology, which was fully amortized in the third quarter of 2021.

 

 

Research and development expenses increased $28 to $231, or 13.8%, in the first quarter of 2022 from the same period in 2021 and increased slightly as a percentage of net sales to 10.8% from 10.7%. The increase was due to higher contract engineering costs related to product development and enhancements. 

 

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.

15



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.

 

16



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.

 

17


 

 

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. 


18



 


 



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 March 31, 2022, formatted in iXBRL (Inline Extensible Business Reporting Language), (i) Condensed Balance Sheets as of March 31, 2022 and December 31, 2021, (ii) Condensed Statements of Comprehensive Loss for the three months ended March 31, 2022 and March 31, 2021 (iii) Condensed Statements of Changes in Stockholders' Equity for the three months ended March 31, 2022 and March 31, 2021, (iv) Condensed Statements of Cash Flows for the three months ended March 31, 2022 and March 31, 2021, and (v) Notes to Financial Statements. 

 

19


 

 

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)

  



20