Attached files
| file | filename |
|---|---|
| EXCEL - IDEA: XBRL DOCUMENT - SIERRA MONITOR CORP /CA/ | Financial_Report.xls |
| EX-32 - EX-32 - SIERRA MONITOR CORP /CA/ | v351218_ex32.htm |
| EX-31.1 - EX-31.1 - SIERRA MONITOR CORP /CA/ | v351218_ex31-1.htm |
| EX-31.2 - EX-31.2 - SIERRA MONITOR CORP /CA/ | v351218_ex31-2.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10Q
(Mark One)
| x | Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. |
| | For the quarterly period ended June 30, 2013 |
or
| ¨ | Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. |
| | For the transition period from _____to _____ |
Commission file number 000-07441
SIERRA MONITOR CORPORATION
(Exact name of registrant as specified in its charter)
| California | 95-2481914 |
| | |
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
1991 Tarob Court
Milpitas, California 95035
(Address and zip code of principal executive offices)
(408) 262-6611
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 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 x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
| Large accelerated filer | ¨ | Accelerated filer | ¨ |
| | | | |
| Non-accelerated filer | ¨ (Do not check if a smaller reporting company) | Smaller reporting company | x |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
The number of shares outstanding of the issuer's common stock, as of August 9, 2013 was 10,104,311.
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SIERRA MONITOR CORPORATION
Condensed Balance Sheets
| | | June 30, 2013 | | December 31, | | ||
| | | (unaudited) | | 2012 | | ||
| Assets | | | | | | | |
| | | | | | | | |
| Current assets: | | | | | | | |
| Cash | | $ | 3,258,545 | | $ | 2,306,258 | |
| Trade receivables, less allowance for doubtful accounts of approximately $83,000 at June 30, 2013 and December 31, 2012, respectively | | | 2,216,502 | | | 1,913,185 | |
| Inventories, net | | | 2,506,719 | | | 2,994,804 | |
| Prepaid expenses | | | 277,680 | | | 280,363 | |
| Income tax deposits | | | 46,104 | | | 120,796 | |
| Deferred income taxes - current | | | 335,730 | | | 335,730 | |
| Total current assets | | | 8,641,280 | | | 7,951,136 | |
| | | | | | | | |
| Property and equipment, net | | | 381,374 | | | 289,505 | |
| Other assets | | | 226,449 | | | 135,393 | |
| Total assets | | $ | 9,249,103 | | $ | 8,376,034 | |
| | | | | | | | |
| Liabilities and Shareholders' Equity | | | | | | | |
| | | | | | | | |
| Current liabilities: | | | | | | | |
| Accounts payable | | $ | 789,312 | | $ | 713,973 | |
| Accrued compensation expenses | | | 537,249 | | | 259,546 | |
| Other current liabilities | | | 69,949 | | | 89,989 | |
| Total current liabilities | | | 1,396,510 | | | 1,063,508 | |
| | | | | | | | |
| Deferred tax liability | | | 59,419 | | | 59,419 | |
| Total liabilities | | | 1,455,929 | | | 1,122,927 | |
| | | | | | | | |
| Commitments and contingencies | | | | | | | |
| Shareholders' equity: | | | | | | | |
| Common stock, $0.001 par value; 20,000,000 shares authorized; 10,104,311 and 10,004,311 shares issued and outstanding at June 30, 2013 and December 31, 2012, respectively | | | 10,104 | | | 10,004 | |
| Additional paid-in capital | | | 2,980,156 | | | 2,871,898 | |
| Retained earnings | | | 4,802,914 | | | 4,371,205 | |
| Total shareholders' equity | | | 7,793,174 | | | 7,253,107 | |
| Total liabilities and shareholders’ equity | | $ | 9,249,103 | | $ | 8,376,034 | |
See accompanying notes to the unaudited interim condensed financial statements.
Page 2 of 15
SIERRA MONITOR CORPORATION
Condensed Statements of Operations
(Unaudited)
| | | Three months ended June 30, | | Six months ended June 30, | | ||||||||
| | | 2013 | | 2012 | | 2013 | | 2012 | | ||||
| Net sales | | $ | 4,787,581 | | $ | 4,665,279 | | $ | 9,144,690 | | $ | 10,867,215 | |
| Cost of goods sold | | | 1,935,866 | | | 1,960,702 | | | 3,840,811 | | | 5,003,280 | |
| Gross profit | | | 2,851,715 | | | 2,704,577 | | | 5,303,879 | | | 5,863,935 | |
| Operating expenses | | | | | | | | | | | | | |
| Research and development | | | 563,159 | | | 544,975 | | | 1,078,655 | | | 1,117,808 | |
| Selling and marketing | | | 1,022,537 | | | 1,050,539 | | | 2,087,081 | | | 2,088,740 | |
| General and administrative | | | 548,238 | | | 551,466 | | | 1,091,112 | | | 1,144,256 | |
| | | | 2,133,934 | | | 2,146,980 | | | 4,256,848 | | | 4,350,804 | |
| Income from operations | | | 717,781 | | | 557,597 | | | 1,047,031 | | | 1,513,131 | |
| Interest income | | | 93 | | | 31 | | | 2,856 | | | 89 | |
| Income before income taxes | | | 717,874 | | | 557,628 | | | 1,049,887 | | | 1,513,220 | |
| Income tax provision | | | 281,637 | | | 222,753 | | | 416,092 | | | 605,289 | |
| Net income | | $ | 436,237 | | $ | 334,875 | | $ | 633,795 | | $ | 907,931 | |
| Net income available to common shareholders per common share | | | | | | | | | | | | | |
| Basic: | | $ | 0.04 | | $ | 0.03 | | $ | 0.06 | | $ | 0.09 | |
| Diluted: | | $ | 0.04 | | $ | 0.03 | | $ | 0.06 | | $ | 0.09 | |
| Weighted average number of common shares used in per share computations | | | | | | | | | | | | | |
| Basic: | | | 10,104,311 | | | 9,901,177 | | | 10,020,978 | | | 9,901,177 | |
| Diluted: | | | 10,208,639 | | | 10,118,965 | | | 10,151,537 | | | 10,117,771 | |
See accompanying notes to the unaudited interim condensed financial statements.
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SIERRA MONITOR CORPORATION
Condensed Statements of Cash Flows
(Unaudited)
| | | Six months ended June 30, | | ||||
| | | 2013 | | 2012 | | ||
| Cash flows from operating activities: | | | | | | | |
| Net income | | $ | 633,795 | | $ | 907,931 | |
| Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | |
| Depreciation and amortization | | | 123,452 | | | 148,034 | |
| Provision for bad debt expense | | | 155 | | | 6,350 | |
| Provision for inventory loss | | | 43,189 | | | 23,356 | |
| Stock based compensation expense | | | 45,358 | | | 43,645 | |
| Changes in operating assets and liabilities: | | | | | | | |
| Trade receivables | | | (303,472) | | | (814,035) | |
| Inventories | | | 444,896 | | | 886,020 | |
| Prepaid expenses | | | 2,683 | | | (8,957) | |
| Income tax deposit | | | - | | | (162,228) | |
| Income tax payable | | | 74,692 | | | (11,362) | |
| Accounts payable | | | 75,339 | | | 178,541 | |
| Accrued compensation expenses | | | 277,703 | | | 35,056 | |
| Other current liabilities | | | (20,040) | | | (223,405) | |
| Net cash provided by operating activities | | | 1,397,750 | | | 1,008,946 | |
| | | | | | | | |
| Cash flows from investing activities: | | | | | | | |
| Purchase of property and equipment | | | (193,837) | | | (89,076) | |
| Purchase of other assets | | | (112,540) | | | - | |
| | | | | | | | |
| Net cash used in investing activities | | | (306,377) | | | (89,076) | |
| | | | | | | | |
| Cash flows from financing activities: | | | | | | | |
| Dividend payout | | | (202,086) | | | - | |
| Proceeds from exercise of stock options | | | 63,000 | | | - | |
| | | | | | | | |
| Net cash used in investing activities | | | (139,086) | | | - | |
| | | | | | | | |
| Net increase in cash | | | 952,287 | | | 919,870 | |
| Cash at beginning of period | | | 2,306,258 | | | 1,212,426 | |
| Cash at end of period | | $ | 3,258,545 | | $ | 2,132,296 | |
| Supplemental cash flow information | | | | | | | |
| Cash paid for income taxes | | $ | 345,262 | | $ | 778,893 | |
See accompanying notes to the unaudited interim condensed financial statements.
Page 4 of 15
SIERRA MONITOR CORPORATION
Notes to the Interim Condensed Financial Statements
(Unaudited)
June 30, 2013
Basis of Presentation
The accompanying unaudited interim condensed financial statements have been prepared by Sierra Monitor Corporation (the “Company”), pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been omitted pursuant to such SEC rules and regulations; nevertheless, the Company believes that the disclosures are adequate to make the information presented not misleading. Amounts related to disclosure of December 31, 2012 balances within these interim condensed financial statements were derived from the audited 2012 financial statements and notes thereto. These financial statements and the notes hereto should be read in conjunction with the financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2012, which was filed with the SEC on March 26, 2013. In the opinion of the Company, all adjustments, including normal recurring adjustments necessary to present fairly the financial position, results of operations, and cash flows of the Company for the interim period have been included. The results of operations for the interim period are not necessarily indicative of the results for any subsequent interim period or for the full year.
Summary of Business
The Company was formed in 1978 and delivers information technology for environment measurement and control by developing specialized embedded software that is deployed on proprietary hardware platforms. Embedded software enables data transfer between subsystems using protocol and physical medium translation. Proprietary hardware platforms allow the Company to increase the value proposition while protecting its intellectual property.
The Company’s hardware platforms include original equipment modules for installation in customer devices and controllers, gateway boxes generally used by integrators for machine to machine (“M2M”) protocol translation, and multi-component safety systems generally focused on gas and fire detection. Each of the hardware platforms utilize the Company’s proprietary data handling software allowing communication from lower level sensor systems through to the highest levels of Internet Protocol (“IP”) networks.
By providing an intelligent interface, the Company’s products enable various machines, devices, systems and people to reliably communicate useful information for the measurement and control of various environments including buildings, plants, factories and over the Internet. By delivering the data on various communications levels, including Ethernet, Internet, LONworks, Profibus, and others, the Company’s products make it possible for data to be accessed at more appropriate levels, such as control rooms or remote locations.
The Company’s products, including gas detection systems, environment controls for remote telephone company structures and protocol gateways, are based on complex proprietary software developed by the Company. The software, embedded in each of the Company’s product groups, provides key functions including sensor management, utilization of data for alarm and control purposes and delivery of data across various networks including the Internet.
Gas monitoring products manufactured by the Company are sold for a variety of safety applications including oil, gas and chemical processing plants, wastewater treatment facilities, alternate fuel vehicle maintenance garages and other users or producers of hazardous gases. Environment controllers, which provide management of environmental conditions in small structures such as local DSL distribution nodes and buildings at cell tower sites, are sold to telecommunications companies and their suppliers. The Company’s FieldServer products are sold generally to integration companies that implement building and plant automation projects and to manufacturers of equipment for the same industry.
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The Company’s common stock is quoted on the OTC Markets under the symbol “SRMC”.
Accounting Policies
| a) | Revenue Recognition |
A detailed discussion of our revenue recognition policies is contained in Item 2 (Management’s Discussion and Analysis of Financial Condition and Results of Operations) under Critical Accounting Policies below. The discussion is incorporated herein by reference.
| b) | Recent Accounting Pronouncements |
Recent accounting pronouncements discussed in the notes to the December 31, 2012 audited financial statements, filed previously with the SEC in our Annual Report on Form 10-K on March 26, 2013, that are required to be adopted during the year ended December 31, 2012, did not have or are not expected to have a significant impact on the Company’s 2013 financial statements.
| c) | Employee Stock-Based Compensation |
The Company initially reserved 500,000 shares of common stock for issuance under the 2006 Stock Plan of which 289,320 shares were available for grant at June 30, 2013. Options are granted under our 2006 Stock Plan at the fair market value of our common stock at the grant date, typically vest ratably over 4 years, and expire 10 years from the grant date.
All share-based payments to employees (incentive stock options) are recognized in the financial statements based on their fair values at the date of grant. The calculated fair value is recognized as expense (net of any capitalization) over the requisite service period, net of estimated forfeitures, using the straight-line method. The Company considers many factors when estimating expected forfeitures, including types of awards, employee class and historical experience. The modified prospective method of application requires compensation expense to be recognized in the financial statements for all unvested stock options beginning in the quarter of award. The cost is based on the grant date fair value of the stock option. Compensation expense recognized in future periods for share-based compensation will be adjusted for the effects of estimated forfeitures.
For the six-month periods ended June 30, 2013 and 2012, general and administrative expenses included stock based compensation expense of $45,358 and $43,645, respectively, decreasing the Company's income before provision for income taxes and net income resulting from the recognition of compensation expense associated with employee stock options. There was no material impact on the Company's basic and diluted net income per share as a result of recognizing the employee stock-based compensation expense. The Company did not modify the terms of any previously granted stock options during the six-month periods ended June 30, 2013 and 2012.
| d) | Subsequent Events |
Management has evaluated events subsequent to June 30, 2013 through the date that the accompanying condensed financial statements were filed with the Securities and Exchange Commission for transactions and other events which may require adjustment of and/or disclosure in such financial statements.
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Inventories
A summary of inventories follows:
| | | June 30, 2013 | | December 31, 2012 | | ||
| Raw materials | | $ | 1,137,241 | | $ | 1,146,675 | |
| Work-in-process | | | 842,460 | | | 1,033,329 | |
| Materials at vendor | | | 359,630 | | | 434,605 | |
| Finished goods | | | 321,973 | | | 491,591 | |
| Less: Allowance for obsolescence reserve | | | (154,585) | | | (111,396) | |
| | | $ | 2,506,719 | | $ | 2,994,804 | |
Net Income Per Share
Basic earnings per share (“EPS”) is computed using the weighted average number of common shares outstanding during the period. Diluted EPS is computed using the weighted average number of common and dilutive potential common shares outstanding during the period. Dilutive potential common shares consist of common stock issuable upon exercise of stock options using the treasury stock method. No adjustments to earnings were made for purposes of per share calculations.
At June 30, 2013 and 2012, outstanding options to acquire 394,500 and 185,000, shares of common stock, respectively, were not considered potentially dilutive common shares due to the exercise price of such options being higher than the stock price used in the EPS calculation.
The following is a reconciliation of the shares used in the computation of basic and diluted EPS for the three and six-month periods ended June 30, 2013 and 2012, respectively:
| | | Three months ended | | Six months ended | | ||||||||
| | | June 30, 2013 | | June 30, 2012 | | June 30, 2013 | | June 30, 2012 | | ||||
| Basic EPS – weighted-average number of common shares outstanding | | | 10,104,311 | | | 9,901,177 | | | 10,020,978 | | | 9,901,177 | |
| | | | | | | | | | | | | | |
| Effect of dilutive potential common shares – stock options outstanding | | | 104,328 | | | 217,788 | | | 130,559 | | | 216,594 | |
| | | | | | | | | | | | | | |
| Diluted EPS – weighted-average number of common shares and potential common shares outstanding | | | 10,208,639 | | | 10,118,965 | | | 10,151,537 | | | 10,117,771 | |
Concentrations
One customer made up more than 10% of accounts receivable at June 30, 2013 and at December 31, 2012. No customers made up more than 10% of net sales for the six-month period ended June 30, 2013. One customer made up more than 10% of net sales for the six-month period ended June 30, 2012.
The Company currently maintains substantially all of its day to day operating cash with a major financial institution. At times, cash balances may be in excess of the amounts insured by the Federal Deposit Insurance Corporation. Cash balances of approximately $2,759,000 and $1,806,000 were in excess of such insured amounts at June 30, 2013 and December 31, 2012, respectively.
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Segment Information
The Company operates in one segment, industrial instrumentation. The Company’s chief operating decision maker, the Chief Executive Officer (“CEO”), evaluates the performance of the Company and makes operating decisions based on financial data consistent with the presentation in the accompanying unaudited condensed financial statements.
In addition, the CEO reviewed the following information on revenues by product category for the following periods:
| | | Three months ended June 30, | | Six months ended June 30, | | ||||||||
| | | 2013 | | 2012 | | 2013 | | 2012 | | ||||
| Gas detection devices | | $ | 2,262,766 | | $ | 2,131,097 | | $ | 4,326,040 | | $ | 5,976,245 | |
| Environment controllers | | | 172,982 | | | 186,407 | | | 363,334 | | | 452,780 | |
| FieldServers | | | 2,351,833 | | | 2,347,775 | | | 4,455,316 | | | 4,438,190 | |
| | | $ | 4,787,581 | | $ | 4,665,279 | | $ | 9,144,690 | | $ | 10,867,215 | |
Line of Credit
The Company maintains a line of credit with its commercial bank in the maximum amount of $1,000,000. No borrowings have been made under the Company’s line of credit during the first six months of fiscal year 2013 and there were no outstanding balances at June 30, 2013 and December 31, 2012. As of June 30, 2013, the Company was in compliance with the financial covenants to which it is subject under the line of credit. The company’s line of credit matures on September 28, 2013.
Stock Option Grants
No stock options were granted during the three and six-month periods ended June 30, 2013. A total of 60,000 stock options were granted during the three and six-month periods ended June 30, 2012.
Stock Option Exercise and Expiration
A total of 100,000 stock options were exercised in the six-month period ended June 30, 2013. During the same period, 32,000 options expired.
No options were exercised in the six-month period ended June 30, 2012. During the same period, 10,000 options expired.
Commitments and Contingencies
From time to time, the Company is subject to legal proceedings and claims that arise in the normal course of business. While the outcome of these proceedings and claims cannot be predicted, we currently are not a party to any legal proceedings, the adverse outcome of which, in management’s opinion, individually or in the aggregate, is expected to have a material adverse effect on the Company’s financial position or results of operations.
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ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Statements that are not statements of historical fact may be deemed to be forward-looking statements. The words “believe,” “expect,” “intend,” “plan,” “project,” “will,” and similar words and phrases as they relate to us also identify forward-looking statements. Such forward-looking statements include any expectations of operating and non-operating expense, including research and development expense, sufficiency of resources, including cash and accounts receivable, estimates of allowances for doubtful accounts, credit lines or other financial items; any statements of the plans, strategies and objectives of management for future operations and identified opportunities; any statements concerning proposed new products, services, developments and related research and development activities; any statements related to the Company’s positioning to support current and near term levels of business; any statements of belief; and any statement of assumptions underlying any of the foregoing. Such statements reflect our current views and assumptions and are not guarantees of future performance. These statements are subject to various risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including, without limitation, those issues described under the heading “Critical Accounting Policies,” and those risk factors identified in Item1A, Risk Factors, of our Annual Report on Form 10-K for our fiscal year ended December 31, 2012, as such section may be updated in our subsequent Forms 10-K, 10-Q and 8-K filed with, or furnished to, the SEC and elsewhere. We urge you to review and consider the various disclosures made by us from time to time in our filings with the SEC that attempt to advise you of the risks and factors that may affect our future results. We expressly disclaim any obligation to release publicly any updates or revisions to any forward-looking statement to reflect any changes in expectations, or any change in events or circumstances on which those statements are based, unless otherwise required by law.
Results of Operations
For the three-month period ended June 30, 2013, Sierra Monitor Corporation (“we” or the “Company”) reported net sales of $4,787,581 compared to $4,665,279 for the three-month period ended June 30, 2012. For the six-month period ended June 30, 2013, net sales were $9,144,690 compared with $10,867,215 for the six-month period ended June 30, 2012. The sales results for the three-month period ended June 30, 2013 represent an increase of 3% compared to the same period in 2012. The sales results for the six-month period ended June 30, 2013 represent a 16% decrease compared to the same period in 2012.
Sales of our gas detection products, including industrial accounts and military sales, in the three-month period ended June 30, 2013 were approximately $2,263,000 compared to approximately $2,131,000 in the three-month period ended June 30, 2012. In the six-month period ended June 30, 2013, sales of gas detection products were approximately $4,326,000 compared to approximately $5,976,000 in the same period in 2012. The results for the three and six-month periods ended June 30, 2013 represent an increase of 6% and a decrease of 28%, respectively compared to the same periods in 2012. Our gas detection products sales for the first six months of 2012 included shipment of a single order with a value exceeding $2,500,000. The order was sold to an architectural and engineering firm (A&E) undertaking construction of a petroleum pipeline booster station in the Middle East. There was no similar order in the first six months of 2013.
Sales of Environment Controllers, which are used in the telecommunications industry, in the three-month period ended June 30, 2013 were approximately $173,000 compared to approximately $186,000 in the three-month period ended June 30, 2012. In the six-month period ended June 30, 2013, sales of Environment Controllers were approximately $363,000 compared to approximately $453,000 in the same period in 2012. The results for the three and six-month periods ended June 30, 2013 represent decreases of 7% and 20%, respectively, compared to the same periods in 2012. We made no significant telephone company infrastructure project shipments during the second quarter of 2013 and most of our sales were for spare parts and the retro-fit of older control systems.
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In the three-month period ended June 30, 2013, sales of FieldServer products were approximately $2,352,000 compared to approximately $2,348,000 in the same period in 2012, representing no significant increase. In the six-month period ended June 30, 2013, sales of our FieldServer products were approximately $4,455,000 compared to approximately $4,438,000 in the same period in 2012, representing no significant increase. FieldServer products include box products and original equipment manufacturer (“OEM”) modules. Box products provide a platform for delivery and operation of our software for building automation integration and are generally sold to integrators. Box product sales increased approximately 2% in the three-month period ended June 30, 2013 on a year-over-year basis. Box product sales increased approximately 5% in the six-month period ended June 30, 2013 compared to the same period in the prior year. OEM module sales decreased approximately 2% in the three-month period ended June 30, 2013 as compared to the same period in 2012, and decreased 3% in the six-month period ended June 30, 2013 compared to the same period in prior year. In the first six months of 2012, one customer made a single, large, end of life purchase of OEM modules. We made no individual sales of a similar magnitude during the first six months of 2013.
Gross profit for the three-month period ended June 30, 2013 was approximately $2,852,000, or 60% of net sales, compared to approximately $2,705,000, or 58% of net sales, in the same period in the previous year. Gross profit for the six-month period ended June 30, 2013 was approximately $5,304,000, or 58% of net sales, compared to approximately $5,864,000, or 54% of net sales, in the same period in the previous year. In the first six months of 2012 our gross margin was reduced below what we consider historical levels in part as a result of discounted pricing for a single large order. The discounted pricing was reflected in margins that were lower than historical levels.
Expenses for research and development, which include new product development and engineering to sustain existing products, were approximately $563,000, or 12% of net sales, for the three-month period ended June 30, 2013 compared to approximately $545,000, or 12% of net sales, in the comparable period in 2012. In the six-month periods ended June 30, 2013 and June 30, 2012, research and development expenses were approximately $1,079,000, or 12% of net sales, and approximately $1,118,000, or 10% of net sales, respectively. There have been no significant changes in engineering expenses in the three and six-month reporting periods ended June 30, 2013.
Selling and marketing expenses, which consist primarily of salaries, commissions and promotional expenses were approximately $1,023,000, or 21% of net sales, for the three-month period ended June 30, 2013, compared to approximately $1,051,000, or 23% of net sales, in the comparable period in the prior year. For the six-month periods ended June 30, 2013 and June 30, 2012, selling and marketing expenses were approximately $2,087,000, or 23% of net sales, and approximately $2,089,000, or 19% of net sales, respectively.
General and administrative expenses, which consist primarily of salaries, building rent, insurance expenses, information technology expenses and fees for professional services, were approximately $548,000, or 11% of net sales, for the three-month period ended June 30, 2013 compared to approximately $551,000, or 12% of net sales, in the three-month period ended June 30, 2012. For the six-month periods ended June 30, 2013 and June 30, 2012, general and administrative expenses were approximately $1,091,000, or 12% of net sales, and approximately $1,144,000, or 11% of net sales, respectively. There have been no significant changes in general and administrative expenses in the three and six-month reporting periods ended June 30, 2013 compared to the same periods in 2012.
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In the three-month period ended June 30, 2013, our income from operations was approximately $718,000, representing an increase of approximately $160,000 compared to our income from operations of approximately $558,000 in the three-month period ended June 30, 2012. In the six-month period ended June 30, 2013, our income from operations was approximately $1,047,000 representing a decrease of approximately $466,000 compared to our income from operations of $1,513,000 in the six-month period ended June 30, 2012. The increase in income in the second quarter of 2013 compared to the second quarter of 2012 is due primarily to the higher sales level combined with improved gross. The decrease in income from operations in the first half of 2013 compared to the first half of 2013 is due to the lower sales level.
After interest and tax provisions, our net income for the three-month period ended June 30, 2013 was approximately $436,000 compared to net income of approximately $335,000 in the same period of 2012. For the six-month period ended June 30, 2013, our net income was approximately $634,000 compared to a net income of approximately $908,000 in the same period of 2012.
Liquidity and Capital Resources
During the six months ended June 30, 2013, net cash provided by operating activities was approximately $1,398,000 compared to net cash provided by operating activities of approximately $1,009,000 for the same period in 2012. Working capital was approximately $7,245,000 at June 30, 2013, an increase of approximately $357,000 from December 31, 2012. At June 30, 2013, our balance sheet reflected approximately $3,259,000 of cash and approximately $2,217,000 of net trade receivables. At December 31, 2012, our total cash on hand was approximately $2,306,000 and our net trade receivables were approximately $1,913,000.
At June 30, 2013, we had no long term liabilities.
We maintain a $1,000,000 line of credit, secured by certain assets of the Company, with our commercial bank which matures on September 28, 2013. The line of credit requires annual renewal and compliance with certain restrictive covenants, including the requirement to maintain a quick ratio of 1.3:1.0 and a profitability test. At June 30, 2013, the Company was in compliance with the financial covenants and there were no borrowings on this line of credit. The company had $20,000 and $49,000 in encumbrances against the line of credit at December 31, 2012 and June 30, 2013, respectively.
We believe that our present resources, including cash and accounts receivable, are sufficient to fund the Company’s anticipated level of operations through at least January 1, 2014. There are no current plans for significant capital equipment expenditures and no other known demands, commitments, events or uncertainties that will result in or that are reasonably likely to result in the Company’s liquidity increasing or decreasing in any material way.
Critical Accounting Policies
The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States of America requires management to make judgments, assumptions and estimates that affect the amounts reported in the Company’s condensed financial statements and the accompanying notes. The amounts of assets and liabilities reported on our balance sheets and the amounts of revenues and expenses reported for each of our fiscal periods are affected by estimates and assumptions, which are used for, but not limited to, the accounting for revenue recognition, accounts receivable, doubtful accounts and inventories. Actual results could differ from these estimates. The following critical accounting policies are significantly affected by judgments, assumptions and estimates used in the preparation of the condensed financial statements:
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a) Revenue Recognition
The Company recognizes revenues when all of the following conditions exist: a) persuasive evidence of an arrangement exists in the form of an accepted purchase order; b) delivery has occurred, based on shipping terms, or services have been rendered; c) the Company’s price to the buyer is fixed or determinable, as documented on the accepted purchase order; and d) collectability is reasonably assured. By product and service type, revenues are recognized when the following specific conditions are met:
Gas Detection and Environment Control Products
Gas detection and environment control products are sold as off-the-shelf products with prices fixed at the time of order. Orders delivered to the Company by phone, fax, mail or email are considered valid purchase orders and once accepted by the Company are deemed to be the final understanding between us and our customer as to the specific nature and terms of the agreed-upon sale transaction. Products are shipped and are considered delivered when (a) for FOB factory orders they leave our shipping dock or (b) for FOB customer dock orders upon confirmation of delivery. The creditworthiness of customers is generally assessed prior to the Company accepting a customer’s first order. Additionally, international customers and customers who have developed a history of payment problems are generally required to prepay or pay through a letter-of-credit.
Gas Detection and Environment Control Services
Gas detection and environment control services consist of field service orders (technical support) and training, which are provided separate from product orders. Orders are accepted in the same forms as discussed for Gas Detection and Environment Control Products above with hourly prices fixed at the time of order. Revenue recognition occurs only when the service activity is completed. Such services are provided to current and prior customers, and, as noted above, creditworthiness has generally already been assessed. In cases where the probability of receiving payment is low, a credit card number is collected for immediate processing.
FieldServer Products
FieldServer products are sold in the same manner as Gas Detection and Environment Control Products (as discussed above) except that the products contain embedded software, which is integral to the operation of the device. The software embedded in FieldServer products includes two items: (a) a compiled program containing (i) the basic operating system for FieldServer products, which is common to every unit, and (ii) the correct set of protocol drivers based on the customer order (see FieldServer Services below for more information); and (b) a configuration file that identifies and links each data point as identified by the customer. The Company does not deem the hardware, operating systems with protocol drivers and configuration files to be separate units of accounting because the Company does not believe that they have value on a stand-alone basis. The hardware is useless without the software, and the software is only intended to be used in FieldServer hardware. Additionally, the software included in each sale is deemed not to require significant production, modification or customization, and therefore the Company recognizes revenues upon the shipment or delivery of products (depending on shipping terms), as described in Gas Detection and Environment Control Products above.
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FieldServer Services
FieldServer services consist of orders for custom development of protocol drivers. Generally customers place orders for FieldServer products concurrently with their order for protocol drivers. However if custom development of the protocol driver is required, the product order is not processed until development of the protocol driver is complete. Orders are received in the same manner as described in FieldServer Products above, but due to the non-recurring engineering aspect of the customized driver development the Company is more likely to have a written evidence trail of a quotation and a hard copy order. The driver development involves further research after receipt of order, preparation of a scope document to be approved by the customer and then engineering time to write, test and release the driver program. When development of the driver is complete the customer is notified and can proceed with a FieldServer product (see FieldServer Products above). Revenues for driver development are billed and recognized upon shipment or delivery of the related product that includes the developed protocol drivers (as noted in FieldServer Products above). Collectability is reasonably assured as described in FieldServer Products above.
Discounts and Allowances
Discounts are applied at time of order entry and sales are processed at net pricing. No allowances are offered to customers.
b) Accounts Receivable and Related Allowances
Our domestic sales are generally made on an open account basis unless specific experience or knowledge of the customer’s potential inability or unwillingness to meet the payment terms dictates secured payments. Our international sales are generally made based on secure payments, including cash wire advance payments and letters of credit. International sales are made on open account terms where sufficient historical experience justifies the credit risks involved. In many of our larger sales, the customers are construction contractors who are in need of our field services to complete their work and obtain payment. Management’s ability to manage the credit terms and utilize the leverage provided by the clients’ need for our services is critical to the effective application of credit terms and minimization of accounts receivable losses.
We maintain an allowance for doubtful accounts which is analyzed on a periodic basis to ensure that it is adequate. We believe that we have demonstrated the ability to make reasonable and reliable estimates of allowances for doubtful accounts based on significant historical experience.
c) Inventories
Inventories are stated at the lower of cost or estimated market, cost being determined on the first-in, first-out method. The Company uses an Enterprise Requirements Planning (“ERP”) software system which provides data upon which management relies to determine inventory trends and identify excesses. The carrying value of inventory is reduced to market for slow moving and obsolete items based on historical experience and current product demand. We evaluate the carrying value of inventory quarterly. The adequacy of carrying amounts is dependent upon management’s ability to forecast demands accurately, manage product changes efficiently, and interpret the data provided by the ERP system.
ITEM 4: CONTROLS AND PROCEDURES
Disclosure Controls and Procedures. As of the end of the period covered by this Quarterly Report on Form 10-Q, our management, with the participation of Gordon R. Arnold, our principal executive and principal financial officer, carried out an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures, pursuant to Exchange Act Rules 13a-15(e) and 15d-15(e), which includes inquiries made to certain other employees. Based upon that evaluation, Mr. Arnold concluded that, as of June 30, 2013, the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act) were effective.
Changes in Internal Control Over Financial Reporting. There have been no significant changes in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) of the Exchange Act) during the quarter ended June 30, 2013 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
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PART II: OTHER INFORMATION
| ITEM 6: | EXHIBITS |
| Exhibit | |||
| Number | Description | ||
| 3.1(1) | Articles of Incorporation of the Registrant. | ||
| 3.2(2) | Bylaws of the Registrant. | ||
| 31.1 | Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | ||
| 31.2 | Certification of Chief Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | ||
| 32 | Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | ||
| 101.INS | XBRL Instance Document. | ||
| 101.SCH | XBRL Taxonomy Extension Schema. | ||
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase. | ||
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase. | ||
| 101.LAB | XBRL Taxonomy Extension Label Linkbase. | ||
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase. |
| (1) | Incorporated by reference to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 1989. | |
| (2) | Incorporated by reference to the Company’s Quarterly Report on Form 10-QSB (File No. 000-07441) for the fiscal quarter ended June 30, 1998 filed with the SEC on August 14, 1998. |
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.
| SIERRA MONITOR CORPORATION | |||
| Registrant | |||
| Date: August 9, 2013 | By: | /s/ Gordon R. Arnold | |
| Gordon R. Arnold | |||
| President | |||
| Chief Executive Officer | |||
| Chief Financial Officer |
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Index to Exhibits
| Exhibit | |||
| Number | Description | ||
| 3.1(1) | Articles of Incorporation of the Registrant. | ||
| 3.2(2) | Bylaws of the Registrant. | ||
| 31.1 | Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | ||
| 31.2 | Certification of Chief Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | ||
| 32 | Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | ||
| 101.INS | XBRL Instance Document. | ||
| 101.SCH | XBRL Taxonomy Extension Schema. | ||
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase. | ||
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase. | ||
| 101.LAB | XBRL Taxonomy Extension Label Linkbase. | ||
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase. |
| (1) | Incorporated by reference to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 1989. | |
| (2) | Incorporated by reference to the Company’s Quarterly Report on Form 10-QSB (File No. 000-07441) for the fiscal quarter ended June 30, 1998 filed with the SEC on August 14, 1998. |
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