ELECTRO SENSORS INC - Quarter Report: 2023 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, 2023

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)

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:

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.

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 10, 2023 was 3,428,021.

ELECTRO-SENSORS, INC.

Form 10-Q

For the Period Ended March 31, 2023

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, 2023

(in thousands except share and per share amounts)

(unaudited)

Note 2. Investments

The Company has investments in commercial paper, money market savings, 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, 2023.  

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.  Equity securities are stated at fair value and unrealized gains and losses, if any, are reported in our statements of comprehensive loss in non-operating income.

The cost and estimated fair value of the Company’s investments are as follows:

ELECTRO-SENSORS, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

FOR THE PERIOD ENDED MARCH 31, 2023

(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, 2023

December 31, 2022

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:  

ELECTRO-SENSORS, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

FOR THE PERIOD ENDED MARCH 31, 2023

(in thousands except share and per share amounts)

(unaudited)

On June 10, 2022, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Mobile X Newco, Inc., a Delaware corporation, a wholly owned subsidiary of the Company (the “Merger Sub”), and Mobile X Global, Inc., a Delaware corporation (“Mobile X”).

On January 30, 2023, the Company and Mobile X terminated the Merger Agreement.  A condition to the closing of the merger transaction was the consummation of an equity financing which the parties anticipated would be a PIPE investment (private investment in public entity).  The financing necessary to consummate the merger was pursued but was not available due to difficult conditions in the financial markets, including the markets for PIPE investments.  

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 efforts to pursue and the future outcome of any business development or other strategic alternatives; 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 or any other measure of future financial or operational performance.  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, 2022, as well as the following:

CRITICAL ACCOUNTING ESTIMATES

The preparation of our financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make decisions based upon estimates, assumptions, and factors it considers relevant to the circumstances. These decisions include the selection of applicable accounting principles and the use of judgment in their application and affect reported amounts and disclosures. Changes in economic conditions or other business circumstances may affect the outcomes of management’s estimates and assumptions. An in-depth description of our accounting estimates can be found in the interim financial statements included in this report and in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022. 

SELECTED FINANCIAL INFORMATION

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

The following paragraphs discuss the Company’s performance for the three months ended March 31, 2023 and 2022.

RESULTS OF OPERATIONS (in thousands) 

Net Sales

Net sales for the three-month period ended March 31, 2023 were $2,045, a decrease of $90, or 4.2%, from $2,135 during the comparable period in 2022. The decrease was a result of reduced domestic sales for both wired and wireless sensor products.

Gross Profit

Gross profit for the first quarter of 2023 was $1,022, a decrease of $144 or 12.3%, over the same period in 2022. Gross margin decreased in the first quarter of 2023 to 50.0% from 54.6% during the same period in 2022. The decrease in gross margin for the period was primarily due to an increase in material costs across all product lines.  

Operating Expenses

Total operating expenses decreased $20, or 1.7% to $1,160 for the first quarter of 2023 compared to the same period in 2022, but increased as a percentage of net sales to 56.7% from 55.3%. The change in operating expenses was due to the following:

Non-Operating Income

Net non-operating income increased by $92, or 9,200.0%, for the three months ended March 31, 2023 compared to the same period in 2022.  The increase is the result of additional interest income earned as a result of higher interest rates of Treasury Bills. 

Loss Before Income Tax Benefit

Loss before income tax benefit was $45 for the first quarter of 2023, representing an increase of $32 compared to $13 for the same period in 2022. The increase for the quarter was primarily the result of lower gross profit, partially offset by lower operating expenses, as discussed above.

Income Tax Benefit

Income tax benefit was $1 or 0.0% of net sales in the first quarter of 2023 compared to $4 or 0.2% of net sales in the first quarter of 2022.  

LIQUIDITY AND CAPITAL RESOURCES

Cash and cash equivalents were $5,540 at March 31, 2023 and $7,646 at December 31, 2022. The decrease was primarily the result of an increase in Treasury Bills classified as investments as of March 31, 2023 as compared to March 31, 2022.  Cash, cash equivalents, and investments were $9,563 at March 31, 2023 as compared to $9,682 at December 31, 2022.

Cash used in operating activities was $148 for the three months ended March 31, 2023 as compared to $106 for the three months ended March 31, 2022. The $42 decrease was due primarily to an increase in the net loss.  The 2023 net loss compared to the 2022 net loss was primarily due to decreased gross profit. 

Cash used in investing activities was $1,956 for the three months ended March 31, 2023 compared to cash from investing activities of $998 for the three months ended March 31, 2022. The increase was due to an increase in Treasury Bill purchases as compared to maturities of Treasury Bills classified as investments.  

Cash used in financing activities in the three months ended March 31, 2023 was $2 as compared to $1 for the three months ended March 31, 2022.  

Subject to the following section, entitled "Supply Chain and Labor Dynamics," the Company believes its ongoing cash requirements will be primarily for capital expenditures, research and development, working capital, corporate and business development and other strategic alternatives and that existing cash, cash equivalents, and investments and any cash generated from operations will be sufficient to meet these cash requirements through at least the next 12 months.

Supply Chain and Labor Dynamics

We traditionally have had one or more robust sources for production components and materials.  However, we continue to experience disruptions in our supply chain, resulting in difficulty sourcing some components.  We are also experiencing price increases for many of the components used in our products. To meet these challenges we are modifying product designs to accommodate new components that are more readily available at competitive prices.  There is no guarantee that we will continue to be successful in modifying these designs and sourcing alternative components.  As a result, we could experience significant delays in receiving certain components needed to make timely customer deliveries, as well as increased costs that erode gross margins. 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 continue to explore other strategic investments that we believe present good opportunities for the Company and its shareholders. On June 13, 2022, we announced that we had entered into a Merger Agreement with Mobile X Newco, Inc. and Mobile X Global, Inc.  On January 30, 2023, we announced that the Merger Agreement had been terminated and that the Company's Board of Directors had established a special committee to explore and pursue business development and other strategic alternatives.

Off-balance Sheet Arrangements

As of March 31, 2023, the Company had no off-balance sheet arrangements or transactions.

Non-GAAP Financial Measure

In addition to financial results reported in accordance with accounting principles generally accepted in the United States of America (“GAAP”), the Company is providing a non-GAAP financial measure in this Form 10-Q and an itemized reconciliation between Net Loss, a GAAP financial measure, and Adjusted Net Income (Loss), the non-GAAP financial measure.

The Company is using "Adjusted Net Income (Loss)" as a non-GAAP financial measure to facilitate period-to-period comparisons and analysis of its operating performance and believes it is useful to investors as a supplement to GAAP measures in analyzing, trending and benchmarking the performance and value of the Company’s business. This measure is not intended to be a substitute for, or more meaningful than, Net Loss in accordance with GAAP, but is provided as supplemental information. This measure may be different from Adjusted Net Income (Loss) or similar financial measures used by other companies, even when similar terms are used to identify these measures. 

As discussed below, to calculate Adjusted Net Income (Loss), the Company added back the costs and expenses, less estimated taxes, related to the negotiation and execution of the June 10, 2022 proposed Mobile X merger transaction to Net Loss for the three months ended March 31, 2023 and 2022.  The Company believes adding back these costs and expenses more accurately portrays the underlying results and trends of the ongoing business.

These expenses continued throughout the first quarter of 2023.  On January 30, 2023, the Company and Mobile X jointly agreed to terminate the merger agreement. Although the costs and expenses related to the Company-Mobile X Merger Agreement were incurred primarily in general and administrative expenses, the Company is not presenting any other non-GAAP information because it believes it has adequately set forth these expenses in the Management's Discussion and Analysis section of this Form 10-Q.

The Company incurred approximately $18 and $95 in legal and other professional fees for the three months ended March 31, 2023 and 2022, respectively, related to the Mobile X merger opportunity.  The following table sets forth a reconciliation of Net Loss, a GAAP financial measure,  to Adjusted Net Income (Loss) (as defined above), the non-GAAP measure, for the periods noted.

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, 2023.

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 2023 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.