10-Q 1 else-20230930.htm 10-Q else-20230930.htm
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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 September 30, 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)

 

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, $0.10 par value 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 November 13, 2023 was 3,428,021.

 

 

 

2


 

ELECTRO-SENSORS, INC.

Form 10-Q

For the Period Ended September 30, 2023

 

TABLE OF CONTENTS

PART I – FINANCIAL INFORMATION 4
    
Item 1. Financial Statements (unaudited): 4
      
Condensed Balance Sheets – As of September 30, 2023 and December 31, 2022 4
Condensed Statements of Comprehensive Income (Loss) – For the Three and Nine Months ended September 30, 2023 and September 30, 2022 5
Condensed Statements of Changes in Stockholders' Equity – For the Three and Nine Months ended September 30, 2023 and September 30, 2022 6
Condensed Statements of Cash Flows – For the Nine Months ended September 30, 2023 and September 30, 2022 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 21
Item 4. Controls and Procedures 21
      
PART II – OTHER INFORMATION 22
        
Item 1. Legal Proceedings 22
Item 1A. Risk Factors 22
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 22
Item 3. Defaults Upon Senior Securities 22
Item 4. Mine Safety Disclosures 22
Item 5. Other Information 22
Item 6. Exhibits 22
   
SIGNATURES 23
   

  

3


ELECTRO-SENSORS, INC.

(in thousands except share and per share amounts) 

 

 

September 30,
2023

 

 

December 31,
2022

 

 

 

(unaudited)

 

 

 

 

ASSETS  

 

 

 

 

 

 

Current assets 

 

 

 

 

 

 

 

 

Cash and cash equivalents 

 

$

3,902

 

 

$

7,646

 

Investments

 

 

6,026

 

 

 

2,036

 

Trade receivables, less allowance for credit losses of $11


1,066

 

 

 

1,161

 

Inventories

 

 

1,836

 

 

 

1,745

 

Other current assets 

 

 

279

 

 

 

214

 

Income tax receivable

136


11

Total current assets

 

 

13,245

 

 

 

12,813

 

Deferred income tax asset, net

 

 

198

 

 

 

256

 

Property and equipment, net

 

 

907

 

 

 

975

 

Total assets

 

$

14,350

 

 

$

14,044

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

Current maturities of financing lease

 

$

1

 

 

$

6

 

Accounts payable

 

 

261

 

 

 

274

 

Accrued expenses

 

 

559

 

 

 

350

 

Total current liabilities

 

 

821

 

 

 

630

 

Commitments and contingencies

 

 

 

 

 

 

 

 

Stockholders’ equity

 

 

 

 

 

 

 

 

Common stock par value $0.10 per share; authorized 10,000,000 shares; 3,428,021 shares issued and outstanding

 

 

342

 

 

 

342

 

Additional paid-in capital

 

 

2,201

 

 

 

2,163

 

Retained earnings

 

 

10,988

 

 

 

10,908

 

Accumulated other comprehensive income (loss) (unrealized income (loss) on available-for-sale securities, net of income tax) 

(2

)

1

Total stockholders’ equity

 

 

13,529

 

 

 

13,414

 

Total liabilities and stockholders’ equity 

 

$

14,350

 

 

$

14,044

 

See accompanying notes to unaudited condensed financial statements


4


ELECTRO-SENSORS, INC.

(in thousands except share and per share amounts)  

(unaudited)

     Three Months Ended
September 30,
 

Nine Months Ended
September 30,

     2023     2022  
2023


2022

                  







Net sales   $ 2,057     $ 2,216

$ 6,239

$ 6,915
Cost of goods sold      1,064    
1,053  

3,156


3,178
                  







Gross profit  
993    
1,163  

3,083


3,737
                  







Operating expenses                







Selling and marketing     307       357  

1,021


1,230
General and administrative     494       497  

1,458


2,125
Research and development  
218    
190  

724


642
                  







Total operating expenses   
1,019    
1,044  

3,203


3,997
                  







Operating income (loss)     (26 )     119

(120 )

(260 )
                  







Non-operating income                







Interest expense

0

(1 )

(1 )

(1 )
Interest income      109       36  

297


44
                  







Total non-operating income, net  
109    
35  

296


43
                  







Income (loss) before income tax expense (benefit)     83     154

176


(217 )
                  







Income tax expense (benefit)     75  
32

96


(46 )
                  







Net income (loss)   $ 8   $
122
$ 80

$ (171 )
                  







Other comprehensive loss                







Change in unrealized value of available-for-sale securities, net of income tax $ (1 ) $ (2 )
$ (3 )
$ 0
Other comprehensive loss     (1 )     (2 )

(3 )

0
                  







Net comprehensive income (loss)   $
7   $ 120
$ 77

$ (171 )
                  







Net income (loss) per share data:















                  







Basic                







Net income (loss) per share   $ 0.00   $ 0.04
$ 0.02

$ (0.05 )
Weighted average shares     3,428,021       3,401,880  

3,428,021


3,397,664
                  







Diluted                







Net income (loss) per share   $
0.00   $
0.04
$ 0.02

$ (0.05 )
Weighted average shares     3,428,021       3,482,996  

3,428,021


3,397,664

See accompanying notes to unaudited condensed financial statements


5


ELECTRO-SENSORS, INC.

(in thousands except share and per share amounts)

For the three months ended September 30













    

Common Stock Issued

 

 

Additional
Paid-in
Capital

 

 

Retained
Earnings

 

 

Accumulated
Other
Comprehensive
Income (Loss)

 

 

Total
Stockholders’

Equity

 

   

Shares

 

 

Amount

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2023
3,428,021


$ 342

$ 2,163

$ 10,980

$ (1 )
$ 13,484

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive loss















(1 )

(1 )
Stock-based compensation expense







38










38
Net income











8





8

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance September 30, 2023 (unaudited)  3,428,021

$ 342

$ 2,201

$ 10,988

$ (2 )
$ 13,529

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 income















(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

 


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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2022
3,428,021


$ 342

$ 2,163

$ 10,908

$ 1

$ 13,414

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive loss















(3 )

(3 )
Stock-based compensation expense







38










38
Net income











80





80

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance September 30, 2023 (unaudited)  3,428,021

$ 342

$ 2,201

$ 10,988

$ (2 )
$ 13,529

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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


See accompanying notes to unaudited condensed financial statements 


6


ELECTRO-SENSORS, INC.

(in thousands)

(unaudited) 

 

 

Nine Months Ended
September 30,

 

 

 

2023

 

2022

 

Cash flows from (used in) operating activities

 

 

 

 

 

 

 

 

Net income (loss)

 

$

80

 

$

(171

)

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

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

69

 

 

 

117

 

Deferred income taxes

 

 

58

 

 

(15

)

Stock-based compensation expense 

 

 

38

 

 

 

4

 

Interest accrued on Treasury Bills

 

 

(163

)

 

 

(8

)

Change in:

 

 



 

 

 

 

Trade receivables

 

 

95

 

 

(175

)

Inventories

 

 

(91

)

 

 

(127

)

Other current assets

 

 

(65 )

 

 

13

Accounts payable

 

 

(13

)

 

 

(48

)

Accrued expenses 

 

 

209

  

 

 

250

Income tax receivable/payable

 

 

(125

)

 

 

(53

)

Net cash from (used in) operating activities

 

 

92

 

 

(213

)

 

 

 

 

 

 

 

 

 

Cash flows from (used in) investing activities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Purchases of Treasury Bills

 

 

(13,830

)

 

 

(4,992

)

Proceeds from the maturity of Treasury Bills

 

 

10,000

 

 

 

8,000

 

Purchase of property and equipment

(1 )

(17 )

Net cash from (used in) investing activities

 

 

(3,831

)

 

 

2,991

 

 

 

 

 

 

 

 

 

Cash flows from (used in) financing activities

 

 

 

 

 

 

 

 

Proceeds from the exercise of common stock options

0


31
Payments on financing lease

(5 )

(4 )

Net cash from (used in) financing activities

 

 

(5

)

 

 

27

Net increase (decrease) in cash and cash equivalents

 

 

(3,744

)

 

 

2,805

 

 

 

 

 

 

 

 

 

Cash and cash equivalents, beginning

 

 

7,646

 

 

 

6,713

 

Cash and cash equivalents, ending

 

$

3,902

 

 

$

9,518

 

Supplemental cash flow information

 

 

 

 

 

 

 

 

Cash paid for income taxes

 

$

164

 

 

$

22

 

Cash paid for interest
$ 1

$ 1

 

See accompanying notes to unaudited condensed financial statements


7


ELECTRO-SENSORS, INC.

FOR THE PERIOD ENDED SEPTEMBER 30, 2023

(in thousands except share and per share amounts)

(unaudited)

 

Note 1. Basis of Presentatio

 

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

 

This report should be read together with the Company’s Annual Report on Form 10-K for the year ended December 31, 2022, including the audited financial statements and footnotes therein.

 

Management believes that the unaudited financial statements include all adjustments, consisting of normal recurring accruals, necessary to fairly state the financial position and results of operations as of September 30, 2023 and for the three and nine-month periods ended September 30, 2023 and 2022, in accordance with accounting principles generally accepted in the United States of America. The results of interim periods may not be indicative of results to be expected for the year.

 

Nature of Business

 

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


Note 5 provides information regarding the Merger Agreement that we entered into on June 10, 2022 and that was terminated January 30, 2023.


Trade receivables and credit policies

 

Trade receivables are uncollateralized customer obligations due under normal trade terms generally requiring payment within 30 days from the invoice date. Trade receivables are stated at the amount billed to the customer. Customer account balances with invoices over 90 days are considered delinquent. The Company does not accrue interest on delinquent trade receivables.

 

Payments of trade receivables are allocated to the specific invoices identified on the customer’s remittance advice or, if unspecified, are applied to the earliest unpaid invoices.

 

The carrying amount of trade receivables is reduced by an allowance for credit losses that reflects management’s best estimate of the amounts that will not be collected. Management assesses collectability by reviewing trade receivables on a collective and individual basis. In determining the amount of the allowance for credit losses, we consider historical collectability and past due status and make judgements about the creditworthiness of customers based on ongoing credit evaluations. We also consider customer-specific information and current market conditions.


8


ELECTRO-SENSORS, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

FOR THE PERIOD ENDED SEPTEMBER 30, 2023

(in thousands except share and per share amounts)

(unaudited)

 

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 September 30, 2023 and December 31, 2022, due to the short maturity nature of these instruments.


Stock-Based Compensation

 

The Company records compensation expense for stock options based on the estimated fair value of the options on the date of grant using the Black-Scholes-Merton (“BSM”) option pricing model. The Company uses historical data, among other factors, to estimate the expected price volatility, the expected option life, and the expected forfeiture rate. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant for the estimated life of the option.   

 

Use of Estimates

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Current significant estimates, including the underlying assumptions, consist of economic lives of long-lived assets, realizability of trade receivables, valuation of deferred tax assets/liabilities, inventory, investments, and stock compensation expense. It is at least reasonably possible that these estimates may change in the near term.  

  

9


ELECTRO-SENSORS, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

FOR THE PERIOD ENDED SEPTEMBER 30, 2023

(in thousands except share and per share amounts)

(unaudited)

 

Net Income (Loss) per Common Share


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


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

 

For the three-month periods ended September 30, 2023, and 2022, 175,000 and 243,884 respectively, weighted average common shares for underlying stock options have been excluded from the calculation because their effect would be anti-dilutive. For the nine-month periods ended September 30, 2023 and 2022, 175,000 and 325,000 respectively, weighted average common shares for underlying stock options have been excluded from the calculation.


In addition, for the three and nine-month periods ended September 30, 2023, 105,000 restricted stock units have been excluded from the calculation because their effect would be anti-dilutive. 


New Accounting Standard Adopted

 

Accounting Standard Update (“ASU”) No. 2016-13, Financial Instruments-Credit Losses (Topic 326), Measurement of Credit Losses on Financial Statements requires a financial asset (or a group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial asset(s) to present the net carrying value at the amount expected to be collected on the financial asset. The adoption of ASU 2016-13 on January 1, 2023 had no significant impact on our financial statements.


10


ELECTRO-SENSORS, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

FOR THE PERIOD ENDED SEPTEMBER 30, 2023

(in thousands except share and per share amounts)

(unaudited)

 

Note 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 September 30, 2023.  


The Company classifies its investments in commercial paper and Treasury Bills as available-for-sale, accounted for at fair value with unrealized income and losses recognized in accumulated other comprehensive income (loss) on the balance sheet.  Equity securities are stated at fair value and unrealized gains and losses, if any, are reported in our statements of comprehensive income (loss) in non-operating income.

 

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

 

 

 

Cost

 

 

Gross
unrealized
gain

 

 

Gross
unrealized
loss

 

 

Fair
value

 

September 30, 2023

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money Market Savings

 

$

1,694

 

 

$

0

 

 

$

0

 

 

$

1,694

 

Treasury Bills

 

 

7,898

 

 

 

47

 

 

 

0

 

 

 

7,945

 

Equity Securities

 

 

54

 

 

 

2

 

 

 

0

 

 

56

 

 

 

 

9,646

 

 

 

49

 

 

 

0

 

 

9,695

 

Less Cash Equivalents

 

 

3,668

 

 

 

1

 

 

 

0

 

 

 

3,669

 

Total Investments, September 30, 2023

 

$

5,978

 

 

$

48

 

 

$

0

 

$

6,026

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2022

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial Paper

 

$

1,377

 

 

$

0

 

 

$

0

 

 

$

1,377

 

Treasury Bills

 

 

7,922

 

 

 

32

 

 

 

0

 

 

 

7,954

 

Equity Securities

 

 

54

 

 

 

2

 

 

 

0

 

 

56

 

 

 

 

9,353

 

 

 

34

 

 

 

0

 

 

9,387

 

Less Cash Equivalents

 

 

7,319

 

 

 

32

 

 

 

0

 

 

 

7,351

 

Total Investments, December 31, 2022

 

$

2,034

 

 

$

2

 

 

$

0

 

$

2,036

 

 

11


ELECTRO-SENSORS, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

FOR THE PERIOD ENDED SEPTEMBER 30, 2023

(in thousands except share and per share amounts)

(unaudited)

  

Note 3. Fair Value Measurements

 

The following table provides information on those assets and liabilities measured at fair value on a recurring basis.

 

September 30, 2023


 

Carrying amount

 

 

 

 

 

 Fair Value Measurement Using 

 

 

 

in balance sheet

 

 

Fair Value

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money Market Savings

 

$

1,694

 

 

$

1,694

 

 

$

1,694

 

 

$

0

 

 

$

0

 

Treasury Bills



1,975


1,975


1,975


0


0
Treasury Bills - maturity date greater than three months

5,970


5,970


5,970


0


0

Equity Securities

 

 

56

 

 

 

56

 

 

 

0

 

 

 

0

 

 

 

56

 

 

December 31, 2022


 

Carrying amount

 

 

 

 

 

 Fair Value Measurement Using 

 


 

in balance sheet

 

 

Fair Value

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Assets:


 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial paper


$

1,377

 

 

$

1,377

 

 

$

1,377

 

 

$

0

 

 

$

0

 

Treasury Bills 



5,974

 

 

 

5,974

 

 

 

5,974

 

 

 

0

 

 

 

0

 

Treasury Bills - maturity date greater than three months

1,980


1,980


1,980


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,


2023


2022

 




     
Beginning Balance  
$ 56

$ 56  

Change in Fair Value



0
  0
Ending Balance
$ 56

$ 56  

 

12


ELECTRO-SENSORS, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

FOR THE PERIOD ENDED SEPTEMBER 30, 2023

(in thousands except share and per share amounts)

(unaudited)

 

Note 4. Inventories


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


September 30

2023



December 31

2022






Raw Materials $ 1,210

$ 1,162
Work In Process
317


278

Finished Goods


319


315
Reserve for Obsolescence 
(10 )

(10 )
Total Inventories, net $ 1,836

$ 1,745

 

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

 

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

 

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


Note 6. Stock-Based Compensation

Stock options
The 2013 Equity Incentive Plan (the “2013 Plan”) authorizes the issuance of both nonqualified and incentive stock options. Payment for the shares may be made in cash, shares of the Company’s common stock or a combination thereof. Under the terms of the 2013 Plan, incentive stock options and non-qualified stock options are granted at a minimum of 100% of fair market value on the date of grant and may be exercised at various times depending upon the terms of the option. All existing options expire 10 years from the date of grant, subject to early termination 12 months after termination of employment or service due to death, disability, or termination other than for cause.

During the 2023 third quarter, the Company granted 25,000 non-qualified stock options to its Chief Executive Officer and to three of its four non-employee board members. The options vest 20% on the grant date, with an additional 20% vesting annually thereafter.


13


 ELECTRO-SENSORS, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

FOR THE PERIOD ENDED SEPTEMBER 30, 2023

(in thousands except share and per share amounts)

(unaudited)


The assumptions made in estimating the fair value of the options on the grant date based upon the BSM option-pricing model for the three-month period ended September 30, 2023 are as follows:

 

Dividend Yield

 

0.00%


Expected Volatility

 

25.56%


Risk Free Interest Rate

 

4.35%


Expected Life

 

6 Years


 

The Company calculates expected volatility for stock options and other awards using historical volatility as the Company believes the expected volatility will approximate historical volatility.


The Company had 225,000 in options that expired during the quarter. There were no options exercised during the nine-month period ended September 30, 2023There was 7,500 options exercised during the nine-months ended September 30, 2022.

The following table summarizes the activity for all stock options outstanding for the nine months ended September 30


 

 

2023

 

2022


 

 

Shares

 

 

Weighted Average Exercise Price

 

Shares

 


 

Weighted Average Exercise Price


Options outstanding at beginning of year

 

300,000

 


$

4.36


 

332,500

 


$

4.25


Granted

 

100,000

 


 

4.11


 

0

 


 

 


Exercised

 

0

 


 

 


 

(7,500

)

 

4.15


Expired

 

(225,000

)

 

4.57


 

0

 


 

 


Options outstanding at September 30

 

175,000

 


$

4.03


 

325,000

 


$

4.30


 

 

 

 


 

 


 

 

 


 

 


Options exercisable at September 30

 

50,000

 


$

4.21


 

320,000

 


$

4.31


 

 

 

 


 

 


 

 

 


 

 


Weighted average grant date fair for options exercised during the period

 

0

 


 

 


 

7,500

 


$

4.15



As of September 30, 2023, the total unrecognized compensation expense related to outstanding stock options was $119, which the Company expects to recognize over a period of five years. The Company recognized compensation expense in connection with the vesting of stock options of approximately $30 for the three and nine months ended September 30, 2023.


14


ELECTRO-SENSORS, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

FOR THE PERIOD ENDED SEPTEMBER 30, 2023

(in thousands except share and per share amounts)

(unaudited)


Restricted stock units

The 2013 Plan authorizes the issuance of restricted stock units.  Stock-based compensation expense is determined on the grant date based on the closing market value of our common stock. The amount of expense is calculated based on an estimate of the number of awards expected to vest at the end of each vesting period and is expensed evenly over the vesting period.  In connection with the time of vesting and issuance of shares, an eligible recipient of common stock may elect to have some shares withheld by the Company to satisfy any requirement for withholding taxes.

In September 2023, the Company granted 35,000 restricted stock units to its Chief Executive Officer and 17,500 restricted stock units to each of its four non-employee board members. The restricted stock units vest 20% on the first anniversary of the grant and 20% annually thereafter.

The following table summarizes restricted stock unit activity for the nine months ended September 30, 2023:

Unvested Restricted Stock Units


Number of Shares Weighted-Average Grant-Date Fair Value
Unvested as of December 31, 2022
0
$ 0
    Granted
105,000

4.11
    Vested
0

0
    Forfeited/canceled
0

0
Unvested as of September 30, 2023
105,000
$ 4.11

As of September 30, 2023, the total unrecogniz