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~~March 3031, ~~2023~~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~~May 139, ~~2023~~2024 was 3,428,021.

ELECTRO-SENSORS, INC.

Form 10-Q

For the Period Ended ~~September~~March 3031, ~~2023~~2024

TABLE OF CONTENTS PART I – FINANCIAL INFORMATION 4 Item 1. Financial Statements (unaudited): 4 Condensed Balance Sheets – As of ~~September~~March 3031, ~~2023~~2024 and December 31, ~~2022~~2023 4 Condensed Statements of Comprehensive Income (Loss) – For the Three ~~and Nine~~ Months ended ~~September~~March 3031, ~~2023~~2024 and ~~September~~March 3031, ~~2022~~2023 5 Condensed Statements of Changes in Stockholders' Equity – For the Three ~~and Nine~~ Months ended ~~September~~March 3031, ~~2023~~2024 and ~~September~~March 3031, ~~2022~~2023 6 Condensed Statements of Cash Flows – For the ~~Nine~~Three Months ended ~~September~~March 3031, ~~2023~~2024 and ~~September~~March 3031, ~~2022~~2023 7 Notes to Condensed Financial Statements 8 Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 1615 Item 3. Quantitative and Qualitative Disclosures About Market Risk 2119 Item 4. Controls and Procedures 2119 PART II – OTHER INFORMATION 2220 Item 1. Legal Proceedings 2220 Item 1A. Risk Factors 2220 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 2220 Item 3. Defaults Upon Senior Securities 2220 Item 4. Mine Safety Disclosures 2220 Item 5. Other Information 2220 Item 6. Exhibits 2220 SIGNATURES 2321

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

ELECTRO-SENSORS, INC.

CONDENSED BALANCE SHEETS

(in thousands except share and per share amounts)

	September 30,2023			December 31,2022
	March 31,2024			December 31,2023
	(unaudited)
ASSETS
Current assets
Cash and cash equivalents	$	310,~~902~~072		$	79,~~646~~870
Investments		~~6,026~~56			~~2,036~~56
Trade receivables, less allowance for credit losses of $11		1,066			1,161
Trade receivables, less allowance for credit losses of $11 and $11, respectively		1,119			1,283
Inventories		1,~~836~~811			1,~~745~~751
Other current assets		~~279~~218			~~214~~179
Income tax receivable		136			11
Total current assets		13,276			13,139
Total current assets		13,245			12,813
Deferred income tax asset, net		336			355
Deferred income tax asset, net		198			256
Property and equipment, net		927			951
Property and equipment, net		907			975
Total assets	$	14,539		$	14,445
Total assets	$	14,350		$	14,044
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Current maturities of financing lease	$	1		$	6
Accounts payable	$	189		$	291
Accounts payable		261			274
Accrued expenses		494			323
Accrued expenses		559			350
Accrued income taxes		61			76
Total current liabilities		~~821~~744			~~630~~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,~~201~~259			2,~~163~~230
Retained earnings		1011,~~988~~194			1011,~~908~~183
Accumulated other comprehensive income (loss) (unrealized income (loss) on available-for-sale securities, net of income tax)		(2	)		1
Total stockholders’ equity		13,795			13,755
Total stockholders’ equity		13,529			13,414
Total liabilities and stockholders’ equity	$	14,539		$	14,445
Total liabilities and stockholders’ equity	$	14,350		$	14,044

See accompanying notes to unaudited condensed financial statements

ELECTRO-SENSORS, INC.

CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(in thousands except share and per share amounts)

(unaudited)

	Three Months EndedSeptember 30,						Nine Months EndedSeptember 30,
	Three Months EndedMarch 31,
	2023			2022			2023			2022
	2024			2023
Net sales	$	2,~~057~~244		$	2,~~216~~045		$	~~6,239~~		$	~~6,915~~
Cost of goods sold		1,~~064~~164			1,~~053~~023			~~3,156~~			~~3,178~~
Gross profit		~~993~~1,080			1,~~163~~022			~~3,083~~			~~3,737~~
Operating expenses
Selling and marketing		~~307~~351			~~357~~370			~~1,021~~			~~1,230~~
General and administrative		~~494~~567			~~497~~522			~~1,458~~			~~2,125~~
Research and development		~~218~~262			~~190~~268			~~724~~			~~642~~
Total operating expenses		1,~~019~~180			1,~~044~~160			~~3,203~~			~~3,997~~
Operating income (loss)		(26	)		119			(120	)		(260	)
Operating loss		(100	)		(138	)
Non-operating income
Interest expense		0			(1	)		(1	)		(1	)
Interest income		116			93
Interest income		109			36			297			44
Total non-operating income, net		116			93
Total non-operating income, net		109			35			296			43
Income (loss) before income tax expense (benefit)		16			(45	)
Income (loss) before income tax expense (benefit)		83			154			176			(217	)
Income tax expense (benefit)		5			(1	)
Income tax expense (benefit)		75			32			96			(46	)
Net income (loss)	$	11		$	(44	)
Net income (loss)	$	8		$	122		$	80		$	(171	)
Other comprehensive loss
Other comprehensive loss
Change in unrealized value of available-for-sale securities, net of income tax	$	0		$	(4	)
Change in unrealized value of available-for-sale securities, net of income tax	$	(1	)	$	(2	)	$	(3	)	$	0
Other comprehensive loss		0			(4	)
Other comprehensive loss		(1	)		(2	)		(3	)		0
Net comprehensive income (loss)	$	11		$	(48	)
Net comprehensive income (loss)	$	7		$	120		$	77		$	(171	)
Net income (loss) per share data:
Net income (loss) per share data:
Basic
Basic
Net income (loss) per share	$	0.00		$	(0.01	)
Net income (loss) per share	$	0.00		$	0.04		$	0.02		$	(0.05	)
Weighted average shares		3,428,021			3,428,021
Weighted average shares		3,428,021			3,401,880			3,428,021			3,397,664
Diluted
Diluted
Net income (loss) per share	$	0.00		$	(0.01	)
Net income (loss) per share	$	0.00		$	0.04		$	0.02		$	(0.05	)
Weighted average shares		3,428,021			3,428,021
Weighted average shares		3,428,021			3,482,996			3,428,021			3,397,664

See accompanying notes to unaudited condensed financial statements

ELECTRO-SENSORS, INC.

CONDENSED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(in thousands except share and per share amounts)

For the three months ended September 30
For the three months ended March 31
	Common Stock Issued			AdditionalPaid-inCapital		RetainedEarnings			AccumulatedOtherComprehensiveIncome (Loss)			TotalStockholders’ Equity
	Shares	Amount
June 30, 2023	3,428,021	$	342	$	2,163	$	10,980		$	(1	)	$	13,484
December 31, 2023	3,428,021	$	342	$	2,230	$	11,183		$	0		$	13,755
Other comprehensive loss										(1	)		(1	)
Stock-based compensation expense					29								29
Stock-based compensation expense					38								38
Net income							11						11
Net income							8						8
Balance March 31, 2024 (unaudited)	3,428,021	$	342	$	2,259	$	11,194		$	0		$	13,795
Balance September 30, 2023 (unaudited)	3,428,021	$	342	$	2,201	$	10,988		$	(2	)	$	13,529
December 31, 2022	3,428,021	$	342	$	2,163	$	10,908		$	1		$	13,414
June 30, 2022	3,395,521	$	339	$	2,043	$	10,515		$	2		$	12,899
Other comprehensive loss										(4	)		(4	)
Exercise of common stock options	7,500		1		30								31
Net loss							(44	)					(44	)
Other comprehensive income										(2	)		(2	)
Balance March 31, 2023 (unaudited)	3,428,021	$	342	$	2,163	$	10,864		$	(3	)	$	13,366
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			AdditionalPaid-inCapital		RetainedEarnings			AccumulatedOtherComprehensiveIncome			TotalStockholders’ 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

ELECTRO-SENSORS, INC.

CONDENSED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

	Nine Months EndedSeptember 30,
	Three Months EndedMarch 31,
	2023			2022
	2024			2023
Cash flows from (used in) operating activities
Net income (loss)	$	8011		$	(~~171~~44	)
Adjustments to reconcile net income (loss) to net cash from (used in) operating activities:
Depreciation and amortization		6924			~~117~~24
Deferred income taxes		5819			(1550	)
Stock-based compensation expense		3829			40
Interest accrued on Treasury Bills		(163	)		(8	)
Change in:
Trade receivables		95164			(~~175~~211	)
Inventories		(9160	)		(~~127~~34	)
Other current assets		(6539	)		13(1	)
Accounts payable		(13102	)		~~(48~~83	)
Accrued expenses		~~209~~171			~~250~~73
Income tax receivable/payable		(125	)		(53	)
Income tax payable		(15	)		48
Net cash from (used in) operating activities		92202			(~~213~~112	)
Cash flows from (used in) investing activities
Cash flows used in investing activities
Purchases of Treasury Bills		(13,830	)		(4,992	)
Purchase of property and equipment		0			(1	)
Proceeds from the maturity of Treasury Bills		10,000			8,000
Net cash used in investing activities		0			(1	)
Purchase of property and equipment		(1	)		(17	)
Cash flows used in financing activities
Net cash from (used in) investing activities		(3,831	)		2,991
Payments on financing lease		0			(2	)
Cash flows from (used in) financing activities
Net cash used in financing activities		0			(2	)
Proceeds from the exercise of common stock options		0			31
Net increase (decrease) in cash and cash equivalents		202			(115	)
Payments on financing lease		(5	)		(4	)
Cash and cash equivalents, beginning		9,870			9,626
Net cash from (used in) financing activities		(5	)		27
Cash and cash equivalents, ending	$	10,072		$	9,511
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~~0		$	220
Cash paid for interest	$	1		$	1

See accompanying notes to unaudited condensed financial statements

ELECTRO-SENSORS, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

FOR THE PERIOD ENDED ~~SEPTEMBER~~MARCH 3031, ~~2023~~2024

(in thousands except share and per share amounts)

(unaudited)

Note 1. Basis of Presentation

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

This report should be read together with the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2022~~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~~March 3031, ~~2023~~2024 and for the three ~~and nine~~-month periods ended ~~September~~March 3031, ~~2023~~2024 and ~~2022~~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.

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

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.

ELECTRO-SENSORS, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

FOR THE PERIOD ENDED ~~SEPTEMBER~~MARCH 3031, ~~2023~~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 (Loss). 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 are written off against the allowance for credit losses. The allowance for credit losses was $11 at March 31, 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, 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, which typically takes less than a week to provide.

Fair Value Measurements

The carrying value of trade receivables, accounts payable, and other financial working capital items approximates fair value at ~~September~~March 3031, ~~2023~~2024 and December 31, ~~2022~~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.

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.

ELECTRO-SENSORS, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

FOR THE PERIOD ENDED MARCH ~~SEPTEMBER 30~~31, ~~2023~~ 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 (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~~March 3031, ~~2023~~2024, and ~~2022~~2023, 175,000 and ~~243~~300,~~884~~000 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~~period ended ~~September~~ 30March 31, ~~2023~~2024, 105,000 restricted stock units have been excluded from the calculation because their effect would be anti-dilutive.

~~New~~Reclassification ~~Accounting~~of ~~Standard~~Prior ~~Adopted~~Year Presentation

~~Accounting~~All ~~Standard~~Treasury ~~Update~~Bills ~~(“ASU”)~~have ~~No.~~been ~~2016-13,~~reclassified ~~Financial~~to ~~Instruments-Credit~~cash ~~Losses~~equivalents ~~(Topic~~for ~~326),~~consistency ~~Measurement~~with ~~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~~current ~~amount~~year ~~expected to be collected~~presentation. The ~~allowance~~reclassification ~~for~~had ~~credit~~no ~~losses~~effect ison ~~a valuation account that is deducted from~~ the ~~amortized~~reported ~~cost~~results ~~basis~~ of ~~the financial asset(s) to present the net carrying value at the amount expected to be collected on the financial asset~~operations. The ~~adoption~~Balance ofSheet ~~ASU~~and ~~2016-13 on~~Statement ~~January~~of 1,Cash ~~2023~~Flows ~~had~~have nobeen ~~significant~~adjusted ~~impact~~to onreflect ~~our~~this ~~financial statements~~reclassification.

ELECTRO-SENSORS, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

FOR THE PERIOD ENDED ~~SEPTEMBER~~MARCH 3031, ~~2023~~2024

(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 estimated fair value and unrealized gains and losses, if any, are reported in our ~~statements~~Statements of ~~comprehensive~~Comprehensive ~~income~~Income (~~loss~~Loss) in non-operating income.

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

	Cost		Grossunrealizedgain		Grossunrealizedloss		Fairvalue
September 30, 2023
March 31, 2024
Money Market Savings	$	1,694	$	0	$	0	$	1,694
Equity Securities	$	54	$	2	$	0	$	56
Treasury Bills		7,898		47		0		7,945
Total Investments, March 31, 2024	$	54	$	2	$	0	$	56
Equity Securities		54		2		0		56
December 31, 2023
		9,646		49		0		9,695
Equity Securities	$	54	$	2	$	0	$	56
Less Cash Equivalents		3,668		1		0		3,669
Total Investments, December 31, 2023	$	54	$	2	$	0	$	56
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

ELECTRO-SENSORS, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

FOR THE PERIOD ENDED ~~SEPTEMBER~~MARCH 3031, ~~2023~~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~~March 3031, ~~2023~~2024

	Carrying amount				Fair Value Measurement Using
	in balance sheet		Fair Value		Level 1		Level 2		Level 3
Assets:
Cash equivalents
Equity Securities	$	56	$	56	$	0	$	0	$	56
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~~2023

	Carrying amount				Fair Value Measurement Using
	in balance sheet		Fair Value		Level 1		Level 2		Level 3
Assets:
Cash equivalents
Equity Securities	$	56	$	56	$	0	$	0	$	56
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,
	Three Months Ended March 31,
	2023		2022
	2024		2023
Beginning Balance	$	56	$	56
Change in Fair Value		0		0
Ending Balance	$	56	$	56

ELECTRO-SENSORS, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

FOR THE PERIOD ENDED ~~SEPTEMBER~~MARCH 3031, ~~2023~~2024

(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
	March 31, 2024			December 31, 2023
Raw Materials	$	1,~~210~~135		$	1,~~162~~172
Work In Process		~~317~~324			~~278~~301
Finished Goods		~~319~~362			~~315~~288
Reserve for Obsolescence		(10	)		(10	)
Total Inventories, net	$	1,~~836~~811		$	1,~~745~~751

Note 5. ~~Merger~~Stock-Based ~~Agreement with Mobile X Global, Inc.~~ Compensation

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

As of March 31, 2024, the total unrecognized compensation expense related to outstanding stock options was $104, which the Company expects to recognize through August 2027. The Company recognized compensation expense in connection with the vesting of stock options of approximately $8 for the three months ended March 31, 2024. There was no stock compensation expense related to stock option grants recognized in the first quarter of 2023.

There were no stock options granted or exercised in the three months ended March 31, 2024 and 2023.

ELECTRO-SENSORS, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

FOR THE PERIOD ENDED ~~SEPTEMBER~~MARCH 3031, ~~2023~~ 2024

(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, 2023. There 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.

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

InAs ~~September~~of ~~2023~~March 31, 2024, the ~~Company~~total ~~granted~~unrecognized ~~35,000~~compensation expenses related to outstanding restricted stock units tois ~~its~~$381, ~~Chief~~which ~~Executive~~the ~~Officer~~Company ~~and~~expects ~~17,500~~to recognize through August 2028. The Company recognized compensation expense in connection with the vesting of restricted stock units toof ~~each~~approximately of$21 ~~its~~for ~~four~~the ~~non-employee~~three ~~board~~months ~~members~~ended March 31, 2024. There ~~The~~was ~~restricted~~no stock ~~units~~compensation ~~vest~~expense ~~20%~~related onto ~~the~~restricted ~~first~~stock ~~anniversary~~unit ofgrants ~~the~~recognized ~~grant~~in ~~and~~the ~~20%~~first ~~annually~~quarter ~~thereafter~~of 2023.

~~The~~There ~~following~~were ~~table~~no ~~summarizes~~ restricted stock ~~unit~~units ~~activity~~granted ~~for~~or exercised in the ~~nine~~three months ended ~~September~~March 3031, 2024 and 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

Note 6. Contingencies

AsThe ofCompany ~~September~~at ~~30,~~times becomes ~~2023,~~subject ~~the total unrecognized compensation expenses related~~ to ~~outstanding~~claims ~~restricted~~against ~~stock~~it ~~units~~in ~~is $424, which~~ the ~~Company~~ordinary ~~expects~~course ~~to recognize over a period~~ of ~~five years~~business. ~~The~~ There ~~Company~~are ~~recognized~~currently ~~compensation~~no ~~expense~~pending inor ~~connection~~threatened ~~with~~claims against the ~~vesting~~Company ofthat ~~restricted~~it ~~stock~~believes ~~units~~will ofhave ~~approximately~~a $8material ~~for~~adverse ~~the~~effect ~~three~~on ~~and~~its ~~nine~~results ~~months~~of ~~ended~~operations ~~September~~or ~~30, 2023~~liquidity.

Note 7. ~~Contingencies~~Subsequent Event

~~The~~On ~~Company~~April ~~sometimes~~24, ~~becomes~~2024, ~~subject~~the toboard ~~claims~~granted ~~against~~25,000 itstock inoptions ~~the~~to ~~ordinary~~one ~~course~~ of ~~business. There~~its ~~are~~board ~~currently~~members, nowith ~~pending~~an orexercise ~~threatened~~price ~~claims~~of ~~against~~$4.13. ~~the~~The ~~Company~~options ~~that~~vest it20% ~~believes~~on ~~will~~the ~~have~~date aof ~~material~~the ~~adverse~~grant ~~effect~~and on20% ~~its~~annually ~~results of operations or liquidity~~thereafter.

1514

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, ~~2022, as well as the following:~~2023.

Respond to events beyond our control such as any disruption in the economy caused by (i) a government shutdown similar to those that have occurred over the past decade or (ii) the recent October 2023 outbreak of violence in the Middle East,

Continue to procure components for our products, and maintain a steady and reliable workforce, as described below under "Supply Chain and Labor Dynamics".

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~~2023.

1615

SELECTED FINANCIAL INFORMATION

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

	Three Months Ended September 30				Nine Months Ended September 30
	Three Months Ended March 31
	2023		2022		2023			2022
	2024		2023
Net sales	100.0	%	100.0	%		~~100.0~~	%	~~100.0~~	%
Cost of goods sold	51.79		4750.50			~~50.6~~		~~46.0~~
Gross profit	48.31		5250.50			~~49.4~~		~~54.0~~
Operating expenses
Selling and marketing	1415.96		1618.1			~~16.3~~		~~17.7~~
General and administrative	2425.03		2225.45			~~23.4~~		~~30.7~~
Research and development	1011.67		813.61			~~11.6~~		~~9.3~~
Total operating expenses	4952.56		4756.17			~~51.3~~		~~57.7~~
Operating income (loss)	(1.2	)	5.4			(1.9	)	(3.7	)
Operating loss	(4.5	)	(6.7	)
Non-operating income
Interest income	5.32		14.65			~~4.8~~		~~0.6~~
Total non-operating income, net	5.32		14.65			~~4.8~~		~~0.6~~
Income (loss) before income tax expense (benefit)	40.17		7(2.02	)		~~2.9~~		~~(3.1~~	)
Income tax expense (benefit)	30.62		1(0.40	)		~~1.5~~		~~(0.7~~	)
Net income (loss)	0.5	%	5(2.62	)%		~~1.4~~	%	~~(2.4~~	)%

The following paragraphs discuss the Company’s performance for the three ~~and nine~~ months ended ~~September~~March 3031, ~~2023~~2024 and ~~2022~~2023.

RESULTS OF OPERATIONS (in thousands)

Net Sales

Net sales for the ~~three-month~~first ~~period~~quarter ~~ended September~~of ~~30,~~2024 ~~2023~~ were $2,~~057~~244, aan ~~decrease~~increase of $~~159~~199, or 79.27%, from $2,~~216~~045 during the comparable period in ~~2022~~2023. ~~Net sales for the nine months ended September 30, 2023 were $6,239,~~The increase awas ~~decrease~~primarily ofdriven ~~$676,~~by orseveral ~~9.8%,~~larger ~~from~~orders ~~$6,915~~for ~~during~~facility ~~the~~upgrades and ~~comparable~~modernization ~~period in 2022~~projects. ~~The decrease during the three-month period was the result of decreased~~ Additionally, sales ~~of our wired sensor products, partially offset by~~ increased ~~sales~~for ~~of HazardPROTM wireless hazard monitoring systems. The decrease during the nine-month period was a result of decreased sales of~~ both our traditional wired ~~products~~sensors and ~~HazardPRO~~ wireless ~~hazard monitoring~~ HazardPRO systems.

Gross Profit

Gross profit for the ~~third~~first quarter of ~~2023~~2024 was $~~993~~1,080, aan ~~decrease~~increase of $~~170~~58, or 145.67%, over the same period in ~~2022. Gross profit for the nine months ended September 30,~~ 2023 ~~was $3,083, a decrease of $654, or 17~~.~~5%,~~ ~~over the same period in 2022.~~ Gross margin decreased in the ~~third~~first quarter of ~~2023~~2024 to 48.31% from 5250.50% during the same period in ~~2022. Gross margin for the nine months ended September 30,~~ 2023 ~~decreased to 49~~.4% ~~from 54.0% over the same period in 2022.~~ The decrease in gross margin ~~for both periods~~ was primarily due to an increase in ~~product~~material and labor costs across all product lines.

1716

Operating Expenses

Total operating expenses ~~decreased~~increased $2520, or 21.47%, to $1,~~019~~180 for the ~~third~~first quarter of ~~2023~~2024 compared to the same period in ~~2022~~2023 ~~and~~but ~~increased~~decreased as a percentage of net sales to 4952.56% from 4756.1%. Total operating expenses decreased $794, or 19.9%, to $3,203 for the nine months ended September 30, 2023 compared to the same period in 2022 and decreased as a percentage of net sales to 51.3% from 57.7%. The ~~decrease~~increase in operating expenses for ~~both~~the ~~periods~~period was primarily due to ~~lower~~stock-based ~~legal~~compensation ~~and professional fees~~ related to the ~~terminated~~granting ~~merger~~of ~~agreement~~stock ~~with~~options ~~Mobile~~and Xrestricted asstock ~~discussed~~units in ~~Note 5 to~~ the ~~financial~~third ~~statements~~quarter ~~and~~of ~~decreased sales headcount~~2023.

● Selling and marketing expenses in the ~~third~~first quarter of ~~2023~~2024 decreased $5019 to $~~307~~351, or 145.01%, from the same period in ~~2022~~2023 and decreased as a percentage of net sales to 1415.96% from 1618.1%. ~~Selling~~The ~~and~~decrease ~~marketing expenses~~ in the ~~nine months ended September 30, 2023 decreased $209 to $1,021, or 17.0%, from the same~~ period ~~in 2022 and decreased as a percentage of net sales to 16.3% from 17.7%. The decrease for both periods~~ was primarily due to lower sales headcount ~~and variable compensation related to lower revenue~~.

● General and administrative expenses ~~decreased~~increased $345 to $~~494~~567, or 08.6%, in the ~~third~~first quarter of ~~2023~~2024 compared to the same period in ~~2022~~2023 but ~~increased~~decreased as a percentage of net sales to 2425.03% from 2225.45%. ~~General~~The ~~and~~increase ~~administrative expenses decreased $667 to $1,458, or 31.4%,~~ in the ~~nine months ended September 30, 2023 compared to the same~~ period ~~in 2022 and decreased as a percentage of net sales to 23.4% from 30.7%. The decrease in both periods~~ was primarily due to aan ~~decrease~~increase in ~~legal~~stock-based compensation and ~~professional~~additional ~~fees related to the terminated merger agreement~~headcount, partially offset by ana ~~increase~~decrease in ~~stock-based~~legal ~~compensation~~and ~~expense~~professional ~~primarily related to the 2023 third quarter stock option grants~~fees.

● Research and development expenses ~~increased~~decreased $286 to $~~218~~262, or 142.72%, in the ~~third~~first quarter of ~~2023~~2024 compared to the same period in ~~2022 and increased as a percentage of net sales to 10.6% from 8.6%. Research and development expenses increased $82 to $724, or 12.8%, in the nine months ended September 30,~~ 2023 ~~compared to the same period in 2022~~ and ~~increased~~decreased as a percentage of net sales to 11.67% from 913.31%. The ~~increase~~decrease for ~~both~~the ~~periods~~period was due to ~~higher~~lower contract engineering costs related to product development and enhancements.

Non-Operating Income

Net non-operating income increased by $7423, or ~~211~~24.47%, for the three-month period ended ~~September~~March 3031, ~~2023~~2024 compared to the same period in ~~2022~~2023. ~~Net~~The ~~non-operating~~increase ~~income increased by $253, or 588.4%,~~ for the ~~nine months ended September 30, 2023 compared to the same~~ period ~~in 2022. The increase for both periods~~ is the result of additional interest income earned as a result of higher interest rates on Treasury Bills.

Income (Loss) Before Income Tax Expense (Benefit)

Income before income tax expense was $8316 for the ~~third~~first quarter of ~~2023~~2024, representing ~~a decrease of $71 compared to $154 for the same period in 2022. Income before income tax expense was $176 for the nine months ended September 30, 2023, representing~~ an increase of $~~393~~ 61 compared to a loss before income tax benefit of $~~217~~ 45 for the same period in ~~2022~~ 2023. The ~~decrease~~increase for the ~~three-month~~ period was primarily due to ~~lower~~higher revenues and ~~gross margins, as discussed above. The increase for the nine months was primarily the result of lower operating expenses and~~ an increase in interest income, partially offset by lower ~~revenues and~~ gross margins, as discussed above.

Income Tax Expense (Benefit)

Income tax expense was $755, or 30.60%, of net sales in the ~~third~~first quarter of ~~2023~~2024 compared to an income tax expense of $321, or 10.40%, of net sales in the ~~third~~first quarter of ~~2022~~2023. ~~Income~~ The effective tax ~~expense~~rate ~~was $96,~~for orthe ~~1.5%,~~first quarter of ~~net~~2024 ~~sales~~was ~~for~~31% ~~the nine months ended September 30, 2023,~~ compared to ~~an income tax benefit of $46, or (0~~2.7)2%, ofin ~~net sales for~~ the ~~nine~~first ~~months~~quarter ~~ended~~of ~~September 30,~~ 2023. ~~Income~~The ~~tax~~change ~~expense~~ in the ~~2023~~effective ~~periods was higher than federal~~ tax ~~rates~~rate is due to the ~~2023~~change ~~third~~in ~~quarter write-off of~~ deferred ~~tax asset related to the 2023 expired options~~taxes.

1817

LIQUIDITY AND CAPITAL RESOURCES

Cash and cash equivalents were $310,~~902~~072 at ~~September~~March 3031, ~~2023~~2024 and $79,~~646~~870 at December 31, ~~2022~~2023. The ~~decrease~~increase was primarily the result of an increase in ~~Treasury Bills classified as investments as of September 30, 2023 as compared to December 31, 2022. Cash,~~ cash ~~equivalents,~~from ~~and~~operating ~~investments were $9,928 at September 30, 2023 as compared to $9,682 at December 31, 2022~~activities.

Cash from operating activities was $92202 for the ~~nine~~three months ended ~~September~~March 3031, ~~2023~~2024 as compared to cash used in operating activities of $~~213~~112 for the ~~nine~~three months ended ~~September~~March 3031, ~~2022~~2023. The $~~305~~314 increase in cash from operating activities was due primarily to an increase in net income and a decrease in trade receivables. The ~~2023~~2024 net income compared to the ~~2022~~2023 net loss was primarily due to ~~decreased~~increased ~~expenses~~net ~~related~~sales ~~to the terminated merger agreement described in Note 5 to the financial statements~~ and ~~an increase in~~ interest income, partially offset by a decrease in ~~net~~gross ~~revenues~~margin. The decrease in trade receivables is due to the timing of sales and collections.

Cash used in investing activities was $~~3,831~~1 for the ~~nine months~~three ~~ended September 30, 2023 compared to cash from investing activities of $2,991 for the nine~~ months ended ~~September~~March 3031, ~~2022~~2023. ~~The~~ There ~~increase~~was inno cash ~~used~~flow infrom investing activities ~~was due to the 2023 increase~~ in the purchases of Treasury Bills classified as investments compared to maturities. As shown on the Statement of Cash Flows, during 2023, the Company purchased more Treasury Bills with maturity dates greater than three months toended ~~secure~~March ~~higher~~31, ~~interest rates~~2024.

Cash used in financing activities in the ~~nine~~three months ended ~~September~~March 3031, 2023 was $~~5 compared~~2. There towas no cash flow from ~~investing~~financing activities ofin ~~$27 for~~ the ~~nine~~three months ended ~~September~~March 3031, ~~2022~~2024. ~~In the third quarter of 2022, three non-employee directors exercised a total of 7,500 stock options for a total exercise price of $31.~~

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 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. 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. OnThe 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~~has ~~established~~ a special committee to explore and pursue business development and other strategic alternatives.

Off-balance Sheet Arrangements

As of ~~September~~March 3031, ~~2023~~2024, the Company had no off-balance sheet arrangements or transactions.

~~Non-GAAP Financial Measure~~18

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 Income (Loss), a GAAP financial measure, and Adjusted Net Income, the non-GAAP financial measure.

The Company is using "Adjusted Net Income" 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 Income (Loss) in accordance with GAAP, but is provided as supplemental information. This measure may be different from Adjusted Net Income 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, 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 Income (Loss) for the three and nine months ended September 30, 2022. The Company believes adding back these costs and expenses more accurately portrays the underlying results and trends of the ongoing business.

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 described these expenses in the Management's Discussion and Analysis section of this Form 10-Q and past filings with the Securities and Exchange Commission.

The Company incurred approximately $79 and $856 in legal and other professional fees for the three and nine months ended September 30, 2022, respectively, related to the Mobile X merger opportunity. The following table sets forth a reconciliation of Net Income (Loss), a GAAP financial measure, to Adjusted Net Income (as defined above), the non-GAAP measure, for the periods noted.

	Three Months Ended September 30					Nine Months Ended September 30
		2023		2022		2023		2022
Net Income (Loss) - GAAP	$	8	$	122		$	80	$	(171	)
Merger-related expenses		0		79			0		856
Income tax benefit of merger-related expenses		0		(17	)		0		(180	)
Adjusted Net Income	$	8	$	184		$	80	$	505

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~~March 3031, ~~2023~~2024.

Changes in Internal Control Over Financial Reporting

There were no changes in the Company’s internal control over financial reporting during the ~~third~~first quarter of ~~2023~~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.

2119

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
10.3		Form of Non-Qualified Stock Option Agreement under the 2013 Equity Incentive Plan, as updated August 2023
10.4		Form of Restricted Stock Unit Agreement under the 2013 Equity Incentive Plan
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~~March 3031, ~~2023~~2024, formatted in iXBRL (Inline Extensible Business Reporting Language), (i) Condensed Balance Sheets as of ~~September~~March 3031, ~~2023~~2024 and December 31, ~~2022~~2023, (ii) Condensed Statements of Comprehensive Income (Loss) for the three ~~and nine~~ months ended ~~September~~March 3031, ~~2023~~2024 and ~~September~~March 3031, ~~2022~~2023, (iii) Condensed Statements of Changes in Stockholders' Equity for the three ~~and nine~~ months ended ~~September~~March 3031, ~~2023~~2024 and ~~September~~March 3031, ~~2022~~2023, (iv) Condensed Statements of Cash Flows for the ~~nine~~three months ended ~~September~~March 3031, ~~2023~~2024 and ~~September~~March 3031, ~~2022~~2023, and (v) Notes to Financial Statements.

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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 14, 2023	/s/ David L. Klenk
May 10, 2024	/s/ David L. Klenk
	David L. Klenk
	Chief Executive Officer and Chief Financial Officer (Principal Executive Officer and Principal Financial Officer)

2321

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