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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, 2024

☐ 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 ☐

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 12, 2024 was 3,428,021.

ELECTRO-SENSORS, INC.

Form 10-Q

For the Period Ended September 30, 2024

TABLE OF CONTENTS
PART I – FINANCIAL INFORMATION	4

Item 1. Financial Statements (unaudited):	4

Condensed Balance Sheets – As of September 30, 2024 and December 31, 2023	4
Condensed Statements of Comprehensive Income – For the Three and Nine Months ended September 30, 2024 and September 30, 2023	5
Condensed Statements of Changes in Stockholders' Equity – For the Three and Nine Months ended September 30, 2024 and September 30, 2023	6
Condensed Statements of Cash Flows – For the Nine Months ended September 30, 2024 and September 30, 2023	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	20
Item 4. Controls and Procedures	20

PART II – OTHER INFORMATION	21

Item 1. Legal Proceedings	21
Item 1A. Risk Factors	21
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	21
Item 3. Defaults Upon Senior Securities	21
Item 4. Mine Safety Disclosures	21
Item 5. Other Information	21
Item 6. Exhibits	21

SIGNATURES	22

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

ELECTRO-SENSORS, INC.

CONDENSED BALANCE SHEETS

(in thousands except share and per share amounts)

	September 30, 2024		December 31, 2023
	(unaudited)
ASSETS

Current assets

Cash and cash equivalents	$	10,246	$	9,870
Investments		56		56
Trade receivables, less allowance for credit losses of $11 and $11, respectively		1,182		1,283
Inventories		2,003		1,751
Other current assets		240		179
Income tax receivable		32		0

Total current assets		13,759		13,139

Deferred income tax asset, net		287		355

Property and equipment, net		911		951

Total assets	$	14,957	$	14,445

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities

Accounts payable	$	220	$	291
Accrued expenses		639		323
Accrued income taxes		0		76

Total current liabilities		859		690

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		2,328		2,230
Retained earnings		11,428		11,183
Total stockholders’ equity		14,098		13,755

Total liabilities and stockholders’ equity	$	14,957	$	14,445

See accompanying notes to unaudited condensed financial statements

ELECTRO-SENSORS, INC.

CONDENSED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands except share and per share amounts)

(unaudited)

	Three Months Ended September 30,					Nine Months Ended September 30,
	2024		2023			2024		2023

Net sales	$	2,512	$	2,057		6,973		6,239
Cost of goods sold		1,247		1,064		3,581		3,156

Gross profit		1,265		993		3,392		3,083

Operating expenses
Selling and marketing		340		307		1,044		1,021
General and administrative		517		494		1,621		1,458
Research and development		235		218		761		724

Total operating expenses		1,092		1,019		3,426		3,203

Operating income (loss)		173		(26	)	(34	)	(120	)

Non-operating income
Interest expense		0		0		0		(1	)
Interest income		117		109		342		297

Total non-operating income, net		117		109		342		296

Income before income tax expense		290		83		308		176

Income tax expense		52		75		63		96

Net income	$	238	$	8		245		80

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

Net comprehensive income	$	238	$	7		245		77

Net income per share data:

Basic
Net income per share	$	0.07	$	0.00		0.07		0.02
Weighted average shares		3,428,021		3,428,021		3,428,021		3,428,021

Diluted
Net income per share	$	0.07	$	0.00		0.07		0.02
Weighted average shares		3,434,417		3,428,021		3,440,382		3,428,021

See accompanying notes to unaudited condensed financial statements

ELECTRO-SENSORS, INC.

CONDENSED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(in thousands except 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		Additional Paid-in Capital		Retained Earnings		Accumulated Other Comprehensive Income (Loss)			Total Stockholders’ Equity

June 30, 2024	3,428,021	$	342	$	2,297	$	11,190	$	0		$	13,829

Stock-based compensation expense					31							31
Net income							238					238

Balance September 30, 2024 (unaudited)	3,428,021	$	342	$	2,328	$	11,428	$	0		$	14,098

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

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

December 31, 2023	3,428,021	$	342	$	2,230	$	11,183	$	0		$	13,755

Stock-based compensation expense					98							98
Net income							245					245

Balance September 30, 2024 (unaudited)	3,428,021	$	342	$	2,328	$	11,428	$	0		$	14,098

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

See accompanying notes to unaudited condensed financial statements

ELECTRO-SENSORS, INC.

CONDENSED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

	Nine Months Ended September 30,
	2024			2023
Cash flows from operating activities

Net income	$	245		$	80

Adjustments to reconcile net income to net cash from operating activities:

Depreciation		70			69
Deferred income taxes		68			58
Stock-based compensation expense		98			38
Change in:
Trade receivables		101			95
Inventories		(252	)		(91	)
Other current assets		(61	)		(65	)
Accounts payable		(71	)		(13	)
Accrued expenses		316			209
Income tax payable/receivable		(108	)		(125	)

Net cash from operating activities		406			255

Cash flows used in investing activities

Purchase of property and equipment		(30	)		(1	)

Net cash used in investing activities		(30	)		(1	)

Cash flows used in financing activities

Payments on financing lease		0			(5	)

Net cash used in financing activities		0			(5	)

Net increase in cash and cash equivalents		376			249

Cash and cash equivalents, beginning		9,870			9,625
Cash and cash equivalents, ending	$	10,246		$	9,874

Supplemental cash flow information
Cash paid for income taxes	$	101		$	164
Cash paid for interest		0			1

See accompanying notes to unaudited condensed financial statements

ELECTRO-SENSORS, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

FOR THE PERIOD ENDED SEPTEMBER 30, 2024

(in thousands except share and per share amounts)

(unaudited)

Note 1. Basis of Presentation

The accompanying unaudited condensed 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, 2023, 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, 2024 and for the three and nine-month periods ended September 30, 2024 and 2023, 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.

Cash and Cash Equivalents

The Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents. Cash equivalents are invested in commercial paper, money market accounts, and may also be invested in Treasury Bills with an original maturity of three months or less. Cash equivalents are carried at fair value.

The Company maintains its cash and cash equivalents primarily in two bank deposit accounts, which, at times, may exceed federally insured limits. The Company has not experienced any losses on these accounts. The Company believes it is not exposed to significant credit risk on cash.

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.

ELECTRO-SENSORS, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

FOR THE PERIOD ENDED SEPTEMBER 30, 2024

(in thousands except share and per share amounts)

(unaudited)

The Company maintains an allowance for credit losses on trade receivables, which is recorded as an offset to trade receivables. Changes in the allowance for credit losses are included as a component of operating expenses in the Statements of Comprehensive Income. The Company assesses credit losses on its entire balance of trade receivables.

The allowance is based on the credit losses expected to arise over the life of the receivable (contractual term). The Company considers historical loss rates and current economic conditions when determining the expected credit losses. Receivables deemed uncollectible are written off against the allowance for credit losses. The allowance for credit losses was $11 at September 30, 2024 and December 31, 2023.

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, which is to provide conforming goods or services to the customer. Certain contracts have a second performance obligation, which typically is the initialization of the HazardPRO^TM product. For contracts that have multiple performance obligations, we allocate the transaction price to each performance obligation using the relative stand-alone selling price. We generally determine stand-alone selling prices based on the observable stand-alone prices charged to customers. We recognize product revenue at the point in time when control of the product is transferred to the customer, which typically occurs when we ship the products. We recognize service revenue at the point in time when we have provided the service, which typically takes less than a week to provide.

Fair Value Measurements

The carrying value of cash equivalents, trade receivables, accounts payable, and other financial working capital items approximates fair value at September 30, 2024 and December 31, 2023, 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.

ELECTRO-SENSORS, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

FOR THE PERIOD ENDED SEPTEMBER 30, 2024

(in thousands except share and per share amounts)

(unaudited)

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, and 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.

Net Income per Common Share

Basic income per share excludes dilution and is determined by dividing net income by the weighted-average number of common shares outstanding during the period. Diluted net income 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, 2024, and 2023, 168,604 and 175,000, respectively, weighted-average common shares for underlying stock options have been excluded from the calculation of diluted EPS because their effect would be anti-dilutive. For the nine-month periods ended September 30, 2024 and 2023, 162,639 and 175,000, respectively, weighted average common shares for underlying stock options have been excluded from the calculation of diluted EPS because their effect would be anti-dilutive.

In addition, for each of the three and nine-month periods ended September 30, 2024 and 2023, 105,000 restricted stock units have been excluded from the calculation of diluted EPS because their effect would be anti-dilutive.

Reclassification of Prior Year Presentation

All Treasury Bills from prior periods have been reclassified to cash equivalents for consistency with the current year presentation. The reclassification had no effect on the reported results of operations. The Balance Sheet and Statement of Cash Flows have been adjusted to reflect this reclassification.

ELECTRO-SENSORS, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

FOR THE PERIOD ENDED SEPTEMBER 30, 2024

(in thousands except share and per share amounts)

(unaudited)

Note 2. Investments

The Company has investments in common equity securities of two private U.S. companies.

Equity securities are stated at estimated fair value and realized and unrealized gains and losses, if any, are reported in our Statements of Comprehensive Income 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, 2024
Equity Securities	$	54	$	2	$	0	$	56
Total Investments, September 30, 2024	$	54	$	2	$	0	$	56

December 31, 2023
Equity Securities	$	54	$	2	$	0	$	56
Total Investments, December 31, 2023	$	54	$	2	$	0	$	56

ELECTRO-SENSORS, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

FOR THE PERIOD ENDED SEPTEMBER 30, 2024

(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, 2024

	Carrying amount				Fair Value Measurement Using
	in balance sheet		Fair Value		Level 1		Level 2		Level 3
Assets:
Equity Securities	$	56	$	56	$	0	$	0	$	56

December 31, 2023

	Carrying amount				Fair Value Measurement Using
	in balance sheet		Fair Value		Level 1		Level 2		Level 3
Assets:
Equity Securities	$	56	$	56	$	0	$	0	$	56

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,
	2024		2023

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

Note 4. Inventories

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

	September 30, 2024			December 31, 2023
	September 30, 2024			December 31, 2023
Raw Materials	$	1,329		$	1,172
Work In Process		299			301
Finished Goods		385			288
Reserve for Obsolescence		(10	)		(10	)
Total Inventories, net	$	2,003		$	1,751

ELECTRO-SENSORS, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

FOR THE PERIOD ENDED SEPTEMBER 30, 2024

(in thousands except share and per share amounts)

(unaudited)

Note 5. Stock-Based Compensation

Stock options

The 2013 Equity Incentive Plan (the “2013 Plan”) authorizes the issuance of nonqualified 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, 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. The grants include a provision providing for acceleration of vesting upon a change of control in the Company.

As of September 30, 2024, the total unrecognized compensation expense related to outstanding stock options was $115, which the Company expects to recognize through April 2028. The Company recognized compensation expense in connection with the vesting of stock options of $9 and $33 for the three and nine months ended September 30, 2024, respectively. The Company recognized compensation expense in connection with the vesting of stock options of $30 for the three and nine months ended September 30, 2023.

During the second quarter of 2024, the Company granted 25,000 non-qualified stock options to one of its non-employee board members. During the third quarter of 2023, 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 all vest 20% on the grant date, with an additional 20% vesting annually thereafter. There were no stock options exercised in the nine months ended September 30, 2024 and 2023.

The assumptions made in estimating the fair value of the options on the grant date based upon the BSM option-pricing model during the nine-month period ended September 30, 2024 are as follows:

Dividend Yield	0.00%
Expected Volatility	25.07%
Risk Free Interest Rate	4.65%
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.

ELECTRO-SENSORS, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

FOR THE PERIOD ENDED SEPTEMBER 30, 2024

(in thousands except share and per share amounts)

(unaudited)

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

	2024				2023
	Shares			Weighted Average Exercise Price	Shares			Weighted Average Exercise Price
Options outstanding at beginning of year	175,000		$	4.06	300,000		$	4.36
Granted	25,000			4.13	100,000			4.11
Exercised	0				0
Expired	(25,000	)		4.39	(225,000	)		4.57
Options outstanding at September 30	175,000		$	4.04	175,000		$	4.03

Options exercisable at September 30	95,000		$	3.8	50,000		$	4.21

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 the Company's 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. The grants include a provision providing for acceleration of vesting upon a change of control in the Company.

In the third quarter of 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 all vest 20% on the first anniversary of the grant and 20% annually thereafter.

As of September 30, 2024, the total unrecognized compensation expenses related to outstanding restricted stock units is $338, which the Company expects to recognize through August 2028. The Company recognized compensation expense in connection with the vesting of restricted stock units of $22 and $65 for the three and nine months ended September 30, 2024, respectively. The Company recognized compensation expense in connection with the vesting of restricted stock units of $8 for the three and nine months ended September 30, 2023.

There were no restricted stock units granted or exercised in the nine months ended September 30, 2024. There were no restricted stock units exercised in the nine months ended September 30, 2023.

ELECTRO-SENSORS, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

FOR THE PERIOD ENDED SEPTEMBER 30, 2024

(in thousands except share and per share amounts)

(unaudited)

Note 6. Contingencies

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

Note 7. Subsequent Event

On October 24, 2024, the board granted 10,000 stock options to an employee, with an exercise price of $3.85. The options vest 20% on the date of grant and 20% annually thereafter.

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

FORWARD-LOOKING STATEMENTS

The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements made by us or on our behalf. We have made, and may continue to make, forward-looking statements with respect to our business and financial matters, including statements contained in this document, other filings with the Securities and Exchange Commission, and reports to shareholders. Forward-looking statements generally include discussion of current expectations or forecasts of future events and can be identified by the use of terminology such as “believe,” “estimate,” “expect,” “intend,” “may,” “could,” “will,” and similar words or expressions. Any statement that does not relate solely to historical fact should be considered forward-looking.

Our forward-looking statements generally relate to our growth strategy, future financial results, product development, and sales efforts. We make forward-looking statements throughout this Form 10-Q, but primarily in this Management’s Discussion and Analysis of Financial Condition and Results of Operations section. These include statements relating to our beliefs and expectations and intentions with respect to (i) our growth and profitability, (ii) our marketing and product development, (iii) our ability to continue to obtain parts and materials for our products from various manufacturers and distributors in a timely manner and at reasonable prices, (iv) the value of our intellectual property, (v) our competitive position in the marketplace, (vi) the effect of governmental regulations on our business, (vii) our employee relations, (viii) the adequacy of our facilities, (ix) our intention to develop new products, (x) the possibility of us acquiring compatible businesses or product lines as part of our growth strategy, and (xi) our future cash requirements and use of cash.

Forward-looking statements cannot be guaranteed and our actual results may vary materially due to the uncertainties and risks, known and unknown, associated with these statements, including our ability to successfully develop new products and manage our cash requirements. We undertake no obligation to update any forward-looking statements. We cannot foresee or identify all factors that could cause actual results to differ from expected or historical results. As such, investors should not consider any list of these factors to be an exhaustive statement of all risks, uncertainties, or potentially inaccurate assumptions. These forward-looking statements are subject to certain risks and uncertainties that could cause future results to differ materially from our recent results 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, 2023.

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, 2023. There have been no changes to our critical accounting estimates during the three and nine-month periods ended September 30, 2024.

SELECTED FINANCIAL INFORMATION

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

	Three Months Ended September 30				Nine Months Ended September 30
	2024		2023		2024		2023
Net sales	100.0	%	100.0	%	100.0	%	100.0	%
Cost of goods sold	49.6		51.7		51.4		50.6
Gross profit	50.4		48.3		48.6		49.4

Operating expenses
Selling and marketing	13.5		14.9		15.0		16.3
General and administrative	20.6		24.0		23.2		23.4
Research and development	9.4		10.6		10.9		11.6
Total operating expenses	43.5		49.5		49.1		51.3

Operating income (loss)	6.9		(1.2	)	(0.5)		(1.9	)

Non-operating income
Interest income	4.7		5.3		4.9		4.8
Total non-operating income, net	4.7		5.3		4.9		4.8

Income before income tax expense	11.6		4.1		4.4		2.9

Income tax expense	2.1		3.6		0.9		1.5

Net income	9.5	%	0.5	%	3.5	%	1.4	%

The following paragraphs discuss the Company’s performance for the three and nine months ended September 30, 2024 and 2023.

RESULTS OF OPERATIONS (in thousands)

Net Sales

Net sales for the third quarter of 2024 were $2,512, an increase of $455, or 22.1%, from $2,057 during the comparable period in 2023. Net sales for the nine months ended September 30, 2024 were $6,973, an increase of $734, or 11.8%, from $6,239 during the comparable period in 2023. The increases during the three and nine-month periods were driven by increased sales of our wired sensor products utilized in industrial and OEM applications, and increased sales of HazardPRO wireless hazard monitoring systems utilized in agricultural applications.

Gross Profit

Gross profit for the third quarter of 2024 was $1,265, an increase of $272, or 27.4%, over the same period in 2023. Gross profit for the nine months ended September 30, 2024 was $3,392, an increase of $309, or 10.0%, from the same period in 2023. Gross margin increased in the third quarter of 2024 to 50.4% from 48.3% during the same period in 2023. Gross margin for the nine months ended September 30, 2024 decreased to 48.6% from 49.4% over the same period in 2023. The increase in gross margin for the quarter was primarily due to an increase in average selling prices for specific items as a result of an increase in material and labor costs. The decrease in gross margin for the nine-month period was primarily due to increased material and labor costs across all product lines, partially offset by the increase in average selling prices noted.

Operating Expenses

Total operating expenses increased $73, or 7.2%, to $1,092 for the third quarter of 2024 compared to the same period in 2023, but decreased as a percentage of net sales to 43.5% from 49.5%. Total operating expenses increased $223, or 7.0%, to $3,426 for the nine months ended September 30, 2024 compared to the same period in 2023, but decreased as a percentage of net sales to 49.1% from 51.3%. The increase in operating expenses for both periods was primarily due to costs associated with additional employee and contract headcount and variable sales compensation. In addition, the increase for the nine-month period was also due to stock-based compensation related to the granting of stock options and restricted stock units in 2023 and 2024.

●

Selling and marketing expenses in the third quarter of 2024 increased $33 to $340, or 10.7%, from the same period in 2023, but decreased as a percentage of net sales to 13.5% from 14.9%. Selling and marketing expenses in the nine months ended September 30, 2024 increased $23 to $1,044, or 2.3%, from the same period in 2023, but decreased as a percentage of net sales to 15.0% from 16.3%. The increase for both periods was primarily due to higher variable compensation due to increased net sales.

●

General and administrative expenses increased $23 to $517, or 4.7%, in the third quarter of 2024 compared to the same period in 2023, but decreased as a percentage of net sales to 20.6% from 24.0%. General and administrative expenses increased $163 to $1,621, or 11.2%, in the nine months ended September 30, 2024 compared to the same period in 2023, but decreased as a percentage of net sales to 23.2% from 23.4%. The increase in the third quarter was primarily due to higher contract labor costs. The increase in the nine-month period was primarily due to an increase in stock-based compensation and contract labor costs, partially offset by a decrease in legal and professional fees.

●

Research and development expenses increased $17 to $235, or 7.8%, in the third quarter of 2024 compared to the same period in 2023, but decreased as a percentage of net sales to 9.4% from 10.6%. Research and development expenses increased $37 to $761, or 5.1%, in the nine months ended September 30, 2024 compared to the same period in 2023, but decreased as a percentage of net sales to 10.9% from 11.6%. The increase for the three-month period was due to additional headcount. The increase for the six-month period was due to additional headcount, partially offset by lower contract engineering costs related to product development and enhancements.

Non-Operating Income

Net non-operating income increased by $8, or 7.3%, for the three-month period ended September 30, 2024 compared to the same period in 2023. Net non-operating income increased by $46, or 15.5%, for the nine months ended September 30, 2024 compared to the same period in 2023. The increase for both periods is the result of additional interest income earned as a result of higher interest rates on Treasury Bills.

Income Before Income Tax Expense

Income before income tax expense was $290 for the three-month period ended September 30, 2024, representing an increase of $207 compared to $83 for the same period in 2023. Income before income tax expense was $308 for the nine months ended September 30, 2024, representing an increase of $132 compared to $176 for the same period in 2023. The increase in both periods was primarily due to higher sales, gross profit and an increase in interest income, partially offset by higher operating expenses, as discussed above.

Income Tax Expense

Income tax expense was $52, or 2.1% of net sales, in the third quarter of 2024 compared to $75, or 3.6% of net sales, in the third quarter of 2023. Income tax expense was $63, or 0.9% of net sales, for the nine months ended September 30, 2024 compared to $96, or 1.5% of net sales, for the nine months ended September 30, 2023. The effective tax rate for the nine-month period ended September 30, 2024 was 20.5% compared to 54.5% in the same period of 2023. The 2023 effective income tax rate was higher than normal due to the write-off of deferred tax assets in conjunction with the expiration of stock options in the period.

LIQUIDITY AND CAPITAL RESOURCES

Cash and cash equivalents were $10,246 at September 30, 2024 and $9,870 at December 31, 2023. The increase was primarily the result of an increase in cash from operating activities.

Cash from operating activities was $406 for the nine months ended September 30, 2024 as compared to $255 for the nine months ended September 30, 2023. The $151 increase in cash from operating activities was due primarily to an increase in net income and accrued expenses, partially offset by an increase in inventories. The increase in net income is due to increased net sales and gross profit. The increase in accrued expenses is primarily due to increased variable compensation due to increased sales and increased accrued wages due to timing of payments and additional headcount. The increase in inventories is primarily due to the timing of receipt of inventory and increased labor and material costs.

Cash used in investing activities was $30 and $1 for the nine months ended September 30, 2024 and 2023, respectively. The cash used in both periods was for the purchase of office equipment.

Cash used in financing activities in the nine months ended September 30, 2023 was $5. There was no cash flow from financing activities in the nine months ended September 30, 2024.

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 strive to have multiple sources of production components and materials. While we believe our supply chain has begun to stabilize, we still occasionally see unexpected price and delivery situations requiring us to intervene and remediate. To meet these challenges, we are seeking additional sources for components and 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. Supply chain dynamics may have an effect on the efficiency of our business operations, our customer base, and the domestic or worldwide economy. Furthermore, the labor market for qualified employees able to fill our various open positions is challenging and may result in delays in filling these positions and increased labor costs. 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 and cost-effective manner. 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 alternatives that we believe present good opportunities for the Company and its shareholders. The Company's Board of Directors has a special committee to explore and pursue business development and other strategic alternatives.

Off-balance Sheet Arrangements

As of September 30, 2024, the Company had no off-balance sheet arrangements or transactions.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Not Applicable.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Based on an evaluation with the participation of the Company’s management, the Company’s principal executive officer and principal financial officer has concluded that the Company’s disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (“Exchange Act”), were effective as of September 30, 2024.

Changes in Internal Control Over Financial Reporting

There were no changes in the Company’s internal control over financial reporting during the third quarter of 2024 that were identified in connection with management’s evaluation required by paragraph (d) of Rules 13a-15 and 15d-15 under the Exchange Act, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II – OTHER INFORMATION

Item 1. Legal Proceedings – None

Item 1A. Risk Factors – Not Applicable

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

Item 3. Defaults Upon Senior Securities – None

Item 4. Mine Safety Disclosures – Not Applicable

Item 5. Other Information – None

Item 6. Exhibits

Exhibit		Description

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

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

101		The following financial information from Electro-Sensors, Inc.’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2024, formatted in iXBRL (Inline Extensible Business Reporting Language), (i) Condensed Balance Sheets as of September 30, 2024 and December 31, 2023, (ii) Condensed Statements of Comprehensive Income for the three and nine months ended September 30, 2024 and September 30, 2023, (iii) Condensed Statements of Changes in Stockholders' Equity for the three and nine months ended September 30, 2024 and September 30, 2023, (iv) Condensed Statements of Cash Flows for the nine months ended September 30, 2024 and September 30, 2023, and (v) Notes to Financial Statements.

SIGNATURES

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

	Electro-Sensors, Inc.

November 13, 2024	/s/ David L. Klenk
	David L. Klenk
	Chief Executive Officer and Chief Financial Officer (Principal Executive Officer and Principal Financial Officer)

TABLE OF CONTENTS

ELECTRO SENSORS INC 10-Q