Quarterly Report for Quarter Ending September 30, 2024 (Form 10-Q)

Trade receivables and credit policies

Trade receivables are uncollateralized customer obligations due under normal trade terms generally requiring payment within 30days from the invoice date. Trade receivables are stated at the amount billed to the customer. Customer account balances with invoices over 90days 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.

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ELECTRO-SENSORS, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

FOR THE PERIOD ENDED SEPTEMBER 30, 2024

(in thousands except share and per share amounts)

(unaudited)

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Note 3. Fair Value Measurements

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

September 30, 2024

December 31, 2023

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 3inputs in the fair value hierarchy.

The changesin level 3 assets measured atfair value on a recurringbasis areas follows:

NineMonths Ended

September 30,

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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 1995provides 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

Thefollowing tablecontains selected financial information, for the periods indicated, from our Condensed Statements of Comprehensive Income expressed as a percentage of net sales.

The followingparagraphs discuss the Company's performancefor 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 ninemonths ended September 30, 2024were $6,973, an increaseof $734, or 11.8%, from $6,239during 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 quarterof 2024 was $1,265, an increase of $272, or 27.4%, over the same period in 2023. Gross profit for the ninemonths ended September 30, 2024was $3,392, an increaseof $309, or 10.0%, from the same period in 2023. Gross margin increasedin the third quarterof 2024 to 50.4% from 48.3% during the same period in 2023. Gross margin for the ninemonths ended September 30, 2024 decreasedto 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 quarterof 2024 compared to the same period in 2023, but decreasedas a percentage of net sales to 43.5% from 49.5%. Total operating expenses increased$223, or 7.0%, to $3,426for the ninemonths ended September 30, 2024compared to the same period in 2023, but decreasedas 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 2023and 2024.

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 increasedby $46, or 15.5%, for the ninemonths ended September 30, 2024compared 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 $290for the three-month period ended September 30, 2024, representing an increase of$207compared to $83for the same period in 2023. Income before income tax expense was $308for the ninemonths ended September 30, 2024, representing an increaseof $132compared to $176for 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 $10,246at September 30, 2024and $9,870at 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 ninemonths ended September 30, 2024as compared to $255for the ninemonths 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 $30and $1for the ninemonths 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 ninemonths ended September 30, 2023was $5. There was no cash flow from financing activities in the ninemonths 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 12months.

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.

QualitativeDisclosures About Market Risk

Not Applicable.

Evaluation of Disclosure Controls and Procedures

Based on an evaluation with the participation of the Company's management, the Company's principal executive officer and principal financial officer has concluded that the Company's disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended ("Exchange Act"), were effective as of 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 quarterof 2024 that were identified in connection with management's evaluation required by paragraph (d) of Rules 13a-15and 15d-15under the Exchange Act, that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.