Electro-Sensors(ELSE) - 2022 Q4 - Annual Report

Part I Item 1. Business The company manufactures and sells industrial monitoring and control systems, serving various industries while exploring strategic alternatives - ESI manufactures and sells industrial production monitoring and process control systems, including speed, temperature, position, and vibration monitors[14][16] - The company markets its wireless hazard technology monitoring system under the HazardPRO brand, which provides an integrated solution for monitoring safety and facility runtime[27] - Sales are conducted through an internal team and a network of national and international distributors, with international sales accounting for approximately 10% of total sales in 2022[31] - Key competitors include 4B Components Ltd, Maxi-Tronic, Inc, Siemens Corporation, and Ag Growth International Inc (AGI), with competitive advantages cited as superior product design and quality[35] - The company experienced supply chain disruptions in 2022, leading to difficulties in sourcing parts and price increases for components, and is modifying product designs to adapt[37] - Following the termination of a merger agreement with Mobile X Global, Inc in January 2023, the Board of Directors is exploring strategic alternatives[44] Item 1A. Risk Factors As a smaller reporting company, this section is not required - As a smaller reporting company, Electro-Sensors, Inc is not required to provide a separate Risk Factors section[64] Item 2. Properties The company owns and operates a 25,400 square foot facility in Minnetonka, Minnesota, which is adequate for its current needs - The company owns a 25,400 square foot facility in Minnetonka, Minnesota, which houses all of its operations[65] Item 3. Legal Proceedings The company is not subject to any material legal proceedings - The company reports no material legal proceedings or threatened litigation[66] Item 4. Mine Safety Disclosures This section is not applicable to the company - No mine safety disclosures are applicable to the company[67] Part II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's stock trades on Nasdaq under "ELSE", and no shares were repurchased in 2022 or 2021 - The company's common stock is traded on the Nasdaq Capital Market under the ticker symbol "ELSE"[69] - As of February 28, 2023, there were 64 shareholders of record and approximately 1,250 shareholders holding shares in street name[69] - No common stock was repurchased during the years ended December 31, 2022 and 2021[70] Item 6. Selected Financial Data As a smaller reporting company, this section is not required - As a smaller reporting company, Electro-Sensors, Inc is not required to provide selected financial data[71] Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Net sales grew 4.9% in 2022, but higher operating expenses from a terminated merger led to a significant drop in net income Results of Operations Sales grew 4.9% in 2022, but higher merger-related costs drove a 75.6% decline in net income to $100 thousand Financial Performance Comparison (2022 vs 2021) | Metric | 2022 (in thousands) | 2021 (in thousands) | Change (%) | | :--- | :--- | :--- | :--- | | Net Sales | $9,029 | $8,607 | 4.9% | | Gross Profit | $4,841 | $4,677 | 3.5% | | Gross Margin | 53.6% | 54.3% | (0.7 pts) | | Operating Income (Loss) | ($37) | $441 | (108.4%) | | Net Income | $100 | $410 | (75.6%) | | Basic EPS | $0.03 | $0.12 | (75.0%) | - The increase in operating expenses was primarily due to legal and other professional fees associated with the announced merger with Mobile X Global, Inc that was terminated in January 2023[77] Non-GAAP Adjusted Net Income Reconciliation | Description | 2022 (in thousands) | 2021 (in thousands) | | :--- | :--- | :--- | | Net Income - GAAP | $100 | $410 | | Plus merger related expenses | $875 | $304 | | Less income taxes on merger expenses | ($184) | ($64) | | Adjusted Net Income | $791 | $650 | Liquidity and Capital Resources The company's liquidity remains strong with $7.6 million in cash, despite a decrease in cash from operations Key Liquidity Metrics (as of Dec 31) | Metric | 2022 (in thousands) | 2021 (in thousands) | | :--- | :--- | :--- | | Cash and cash equivalents | $7,646 | $6,713 | | Working capital | $12,183 | $11,931 | Cash Flow Summary | Activity | 2022 (in thousands) | 2021 (in thousands) | | :--- | :--- | :--- | | Net cash from (used in) operating activities | ($147) | $769 | | Net cash from investing activities | $964 | $4,860 | | Net cash from (used in) financing activities | $116 | ($6) | - Management believes that cash on hand and cash provided by operations will be sufficient to meet cash requirements for at least the next 12 months[95] Critical Accounting Estimates Key estimates involve asset lives, receivables, deferred taxes, inventory, investments, and stock-based compensation - Significant accounting estimates include: economic lives of long-lived assets, realizability of trade receivables, valuation of deferred tax assets/liabilities, inventory valuation, investment valuation, and stock compensation expense[99] Item 7A. Quantitative and Qualitative Disclosures About Market Risk This section is not applicable to the company - No quantitative and qualitative disclosures about market risk are applicable to the company[108] Item 8. Financial Statements and Supplementary Data This section presents the audited financial statements for 2022 and 2021, with an unqualified opinion from the auditor Financial Statements Total assets grew slightly to $14.0 million in 2022, while net income decreased to $100 thousand from $410 thousand in 2021 Balance Sheet Summary (as of Dec 31, in thousands) | Account | 2022 | 2021 | | :--- | :--- | :--- | | Total Current Assets | $12,813 | $12,628 | | Total Assets | $14,044 | $13,891 | | Total Current Liabilities | $630 | $697 | | Total Liabilities | $630 | $703 | | Total Stockholders' Equity | $13,414 | $13,188 | Statement of Comprehensive Income Summary (Year Ended Dec 31, in thousands) | Account | 2022 | 2021 | | :--- | :--- | :--- | | Net Sales | $9,029 | $8,607 | | Gross Profit | $4,841 | $4,677 | | Operating Income (Loss) | ($37) | $441 | | Net Income | $100 | $410 | Notes to Financial Statements Notes detail the terminated merger, investment holdings, employee benefit plans, and income tax components - The company's investments consist primarily of commercial paper and Treasury Bills, classified as available-for-sale, with a total fair value of $9.4 million at year-end 2022[171][172] - On January 30, 2023, the company and Mobile X Global, Inc mutually terminated their merger agreement from June 10, 2022, because the required equity financing was not available[194][214] - The company sponsors an Employee Stock Ownership Plan (ESOP) which held 94,434 shares of company stock as of December 31, 2022[204] - The company has R&D tax credits of $313 thousand available to be carried forward[212] Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure The company reported no changes in or disagreements with its accountants - There were no disagreements with accountants on accounting and financial disclosure[215] Item 9A. Controls and Procedures Management concluded that disclosure controls and internal controls over financial reporting were effective as of year-end 2022 - The company's principal executive officer and principal financial officer concluded that disclosure controls and procedures were effective as of December 31, 2022[216] - Management assessed internal control over financial reporting using the COSO framework and concluded that it was effective as of December 31, 2022[220] Item 9B. Other Information No other information was reported in this section - No information was reported under this item[224] Part III Item 10. Directors, Executive Officers and Corporate Governance Information is incorporated by reference from the 2023 Proxy Statement, and the company has a Code of Ethics - Required information is incorporated by reference from the 2023 Proxy Statement[227][229] - The company has adopted the Electro-Sensors Code of Ethics and Business Conduct[228] Item 11. Executive Compensation Information regarding executive compensation is incorporated by reference from the 2023 Proxy Statement - Required information is incorporated by reference from the 2023 Proxy Statement under the caption "Executive Compensation"[230] Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Security ownership information is incorporated by reference, with details provided on equity compensation plans - Security ownership information is incorporated by reference from the 2023 Proxy Statement[231] Equity Compensation Plan Information (as of Dec 31, 2022) | Plan Category | Securities to be issued upon exercise of outstanding options (a) | Weighted-average exercise price of outstanding options (b) | Securities remaining available for future issuance (c) | | :--- | :--- | :--- | :--- | | Approved by security holders | 300,000 | $4.36 | 275,000 | | Not approved by security holders | — | — | — | | Total | 300,000 | $4.36 | 275,000 | Item 13. Certain Relationships and Related Transactions, and Director Independence Information on related transactions and director independence is incorporated by reference from the 2023 Proxy Statement - Required information is incorporated by reference from the 2023 Proxy Statement[236] Item 14. Principal Accountant Fees and Services Information on accountant fees and services is incorporated by reference from the 2023 Proxy Statement - Required information is incorporated by reference from the 2023 Proxy Statement under the caption "Ratification of Independent Registered Public Accounting Firm"[237] Part IV Item 15. Exhibits and Financial Statement Schedules This section lists the financial statements and exhibits included in the report, with schedules omitted as permitted - An index to the Financial Statements is provided on page 18 of the report[240] - Financial Statement Schedules were omitted because they were not required or the information was included in the financial statements or notes[241] Item 16. Form 10-K Summary No summary is provided under this item - No Form 10-K summary was provided[242]