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EX-32 - EXHIBIT 32 - SIERRA MONITOR CORP /CA/v359057_ex32.htm
EX-31.1 - EXHIBIT 31.1 - SIERRA MONITOR CORP /CA/v359057_ex31-1.htm
EX-31.2 - EXHIBIT 31.2 - SIERRA MONITOR CORP /CA/v359057_ex31-2.htm
EXCEL - IDEA: XBRL DOCUMENT - SIERRA MONITOR CORP /CA/Financial_Report.xls

 
 
 UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10 - Q
 
(Mark One)
 
x   Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
For the quarterly period ended September 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 November 14, 2013, was 10,104,311.
 
 
 
PART I:  FINANCIAL INFORMATION
 
ITEM 1.  FINANCIAL STATEMENTS
 
SIERRA MONITOR CORPORATION
 
Condensed Balance Sheets
 
 
 
September 30,
 
December 31,
 
 
 
2013
 
2012
 
 
 
(unaudited)
 
 
 
 
Assets
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
Cash
 
$
3,505,184
 
$
2,306,258
 
Trade receivables, less allowance for doubtful accounts of approximately $80,000
     and $83,000, at September 30, 2013 and December 31, 2012 respectively
 
 
2,364,642
 
 
1,913,185
 
Inventories, net
 
 
2,730,633
 
 
2,994,804
 
Prepaid expenses
 
 
233,070
 
 
280,363
 
Income tax deposits
 
 
120,796
 
 
120,796
 
Deferred income taxes
 
 
335,730
 
 
335,730
 
Total current assets
 
 
9,290,055
 
 
7,951,136
 
 
 
 
 
 
 
 
 
Property and equipment, net
 
 
350,943
 
 
289,505
 
Other assets
 
 
265,373
 
 
135,393
 
Total assets
 
$
9,906,371
 
$
8,376,034
 
 
 
 
 
 
 
 
 
Liabilities and Shareholders' Equity
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
Accounts payable
 
$
844,866
 
$
713,973
 
Accrued compensation
 
 
454,244
 
 
259,546
 
Other current liabilities
 
 
75,878
 
 
89,989
 
Income taxes payable
 
 
236,358
 
 
-
 
Total current liabilities
 
 
1,611,346
 
 
1,063,508
 
 
 
 
 
 
 
 
 
Deferred tax liability
 
 
59,419
 
 
59,419
 
Total liabilities
 
 
1,670,765
 
 
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 September 30, 2013 and December 31, 2012, respectively
 
 
10,104
 
 
10,004
 
Additional paid-in capital
 
 
3,002,131
 
 
2,871,898
 
Retained earnings
 
 
5,223,371
 
 
4,371,205
 
Total shareholders' equity
 
 
8,235,606
 
 
7,253,107
 
 
 
 
 
 
 
 
 
Total liabilities and shareholders’ equity
 
$
9,906,371
 
$
8,376,034
 
 
See accompanying notes to the unaudited interim condensed financial statements.
 
 
Page 2 of 17

 
SIERRA MONITOR CORPORATION
 
Condensed Statements of Operations
 
(Unaudited)
 
 
 
Three months ended
 
Nine months ended
 
 
 
September 30,
 
September 30,
 
 
 
2013
 
2012
 
2013
 
2012
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net sales
 
$
4,932,632
 
$
4,040,406
 
$
14,077,322
 
$
14,907,621
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cost of goods sold
 
 
1,915,356
 
 
1,700,007
 
 
5,756,167
 
 
6,703,287
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Gross profit
 
 
3,017,276
 
 
2,340,399
 
 
8,321,155
 
 
8,204,334
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating expenses
 
 
 
 
 
 
 
 
 
 
 
 
 
Research and development
 
 
548,153
 
 
523,310
 
 
1,626,808
 
 
1,641,118
 
Selling and marketing
 
 
1,040,317
 
 
1,012,646
 
 
3,127,398
 
 
3,101,386
 
General and administrative
 
 
559,683
 
 
550,572
 
 
1,650,795
 
 
1,694,828
 
 
 
 
2,148,153
 
 
2,086,528
 
 
6,405,001
 
 
6,437,332
 
Income from operations
 
 
869,123
 
 
253,871
 
 
1,916,154
 
 
1,767,002
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest income
 
 
42
 
 
119
 
 
2,898
 
 
208
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income before income taxes
 
 
869,165
 
 
253,990
 
 
1,919,052
 
 
1,767,210
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income tax provision
 
 
347,666
 
 
101,595
 
 
763,758
 
 
706,884
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income
 
$
521,499
 
$
152,395
 
$
1,155,294
 
$
1,060,326
 
Net income available to common
     shareholders per common share
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic:
 
$
0.05
 
$
0.02
 
$
0.11
 
$
0.11
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Diluted:
 
$
0.05
 
$
0.02
 
$
0.11
 
$
0.10
 
Weighted average number of common
     shares used in per share computations
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic:
 
 
10,104,311
 
 
9,905,761
 
 
10,093,200
 
 
9,902,705
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Diluted:
 
 
10,199,785
 
 
10,118,790
 
 
10,208,472
 
 
10,148,227
 
 
See accompanying notes to the unaudited interim condensed financial statements.
 
 
Page 3 of 17

 
SIERRA MONITOR CORPORATION
 
Condensed Statements of Cash Flows
(Unaudited)
 
 
 
Nine months ended
 
 
 
September 30,
 
 
 
2013
 
2012
 
Cash flows from operating activities:
 
 
 
 
 
 
 
Net income
 
$
1,155,294
 
$
1,060,326
 
Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
 
 
 
Depreciation and amortization
 
 
189,071
 
 
222,032
 
Provision for bad debt expense
 
 
(3,479)
 
 
15,434
 
Provision for inventory losses
 
 
27,065
 
 
34,958
 
Stock based compensation expense
 
 
67,333
 
 
71,140
 
Changes in operating assets and liabilities:
 
 
 
 
 
 
 
Trade receivables
 
 
(447,978)
 
 
(456,564)
 
Inventories
 
 
237,106
 
 
940,533
 
Prepaid expenses
 
 
47,293
 
 
24,884
 
Income tax deposit
 
 
-
 
 
(170,632)
 
Income taxes payable
 
 
236,358
 
 
(11,362)
 
Accounts payable
 
 
130,893
 
 
(123,770)
 
Accrued compensation
 
 
194,698
 
 
(62,917)
 
Other current liabilities
 
 
(14,111)
 
 
(215,738)
 
Net cash provided by operating activities
 
 
1,819,543
 
 
1,328,324
 
Cash flows from investing activities:
 
 
 
 
 
 
 
Purchase of property and equipment
 
 
(215,985)
 
 
(121,751)
 
Purchase of other long-term assets
 
 
(64,504)
 
 
(10,672)
 
Other assets
 
 
(100,000)
 
 
-
 
Net cash used in investing activities
 
 
(380,489)
 
 
(132,423)
 
Cash flows from financing activities:
 
 
 
 
 
 
 
Dividends
 
 
(303,128)
 
 
-
 
Proceeds from exercise of stock options
 
 
63,000
 
 
-
 
Net cash used in financing activities
 
 
(240,128)
 
 
-
 
 
 
 
 
 
 
 
 
Net increase in cash
 
 
1,198,926
 
 
1,195,901
 
 
 
 
 
 
 
 
 
Cash at beginning of period
 
 
2,306,258
 
 
1,212,426
 
Cash at end of period
 
$
3,505,184
 
$
2,408,327
 
Supplemental cash flow information
 
 
 
 
 
 
 
Cash paid for income taxes
 
$
531,262
 
$
888,893
 
 
See accompanying notes to the unaudited interim condensed financial statements.
 
 
Page 4 of 17

 
SIERRA MONITOR CORPORATION
Notes to the Unaudited Interim Condensed Financial Statements
 
September 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 28, 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 communication 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 telecommunication 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.
 
 
Page 5 of 17

 
The Company’s common stock is quoted on the OTC Bulletin Board 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 28, 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 reserved 500,000 shares of common stock for issuance under the 2006 Stock Plan of which 299,320 shares were available for grant at September 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 and size of awards, the classification of the employee recipient and historical experience. 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 nine-month periods ended September 30, 2013 and 2012, general and administrative expenses included $67,333 and $71,140, respectively, 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 employee stock-based compensation expense. The Company did not modify the terms of any previously granted stock options during the nine-month periods ended September 30, 2013 and 2012.

Inventories

 
A summary of inventories follows:
 
 
 
September 30, 2013
 
December 31, 2012
 
 
 
 
 
 
 
 
 
Raw materials
 
$
1,131,671
 
$
1,146,675
 
Work-in-process
 
 
923,550
 
 
1,033,329
 
Material at vendor
 
 
432,447
 
 
434,605
 
Finished goods
 
 
381,426
 
 
491,591
 
Less: Allowance for obsolescence reserve
 
 
(138,461)
 
 
(111,396)
 
 
 
$
2,730,633
 
$
2,994,804
 
 
 
Page 6 of 17

 

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 shares issuable upon exercise of stock options using the treasury stock method. No adjustments to earnings were made for purposes of per share calculations.

 

At September 30, 2013 and 2012, outstanding options to acquire 163,000 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 nine-month periods ended September 30, 2013 and 2012, respectively:
 
 
 
Three months ended
 
Nine months ended
 
 
 
September 30
 
September 30
 
 
 
2013
 
2012
 
2013
 
2012
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic EPS – weighted-average number
     of common shares outstanding
 
 
10,104,311
 
 
9,905,761
 
 
10,093,200
 
 
9,902,705
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Effect of dilutive potential common
     shares – stock options outstanding
 
 
95,474
 
 
213,029
 
 
115,272
 
 
245,522
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Diluted EPS – weighted-average number of
     common shares and potential common
     shares outstanding
 
 
10,199,785
 
 
10,118,790
 
 
10,208,472
 
 
10,148,227
 

Concentrations

 
One customer made up more than 10% of accounts receivable at September 30, 2013 and one customer made up more than 10% of accounts receivable at December 31, 2012. No customer made up more than 10% of net sales for the nine-month period ended September 30, 2013 and one customer made up more than 10% of net sales for the nine-month period ended September 30, 2012. The single customer that accounted for more than 10% of accounts receivable at September 30, 2013 is the U.S. Navy and the receivable amount was not delinquent at that date.
 
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 $3,005,000 and $1,806,000 were in excess of such insured amounts at September 30, 2013 and December 31, 2012, respectively.

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:
 
Page 7 of 17

    
 
 
Three months ended
 
Nine months ended
 
 
 
September 30,
 
September 30,
 
 
 
2013
 
2012
 
2013
 
2012
 
Gas detection devices
 
$
2,544,211
 
$
1,787,364
 
$
6,869,949
 
$
7,765,755
 
Environment controllers
 
 
183,504
 
 
200,964
 
 
546,856
 
 
653,583
 
FieldServers
 
 
2,204,917
 
 
2,052,078
 
 
6,660,517
 
 
6,488,283
 
 
 
$
4,932,632
 
$
4,040,406
 
$
14,077,322
 
$
14,907,621
 

Line-of-Credit

 
The Company maintains a $1,000,000 line of credit with a commercial bank which expires in September 2014. No borrowings have been made under the Company’s line of credit during the first nine months of fiscal year 2013 and there were no outstanding balances at September 30, 2013 and December 31, 2012. As of September 30, 2013, the Company was in compliance with specified financial covenants required by the new commercial bank providing the line of credit.

Stock Option Grants 

 
No stock options were granted during the three-month and nine-month periods ended September 30, 2013. Also, no stock options were granted during the three-month period ended September 30, 2012. A total of   60,000 stock options were granted during the nine-month period ended September 30, 2012. Stock options are granted under the 2006 Stock Plan at the fair market value of the Company’s common stock at the grant date, vest ratably over 4 years, and expire 10 years from the grant date.

Stock Option Exercise and Expiration
 
In the nine-month periods ended September 30, 2013 and 2012, a total of 100,000 and 103,134 shares of common stock, respectively, were issued as a result of stock option exercises. During the same periods, 42,000 and 10,000 options expired, respectively.

Subsequent Events

 
Management has evaluated events subsequent to September 30, 2013 through the date that the accompanying interim 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.
 
 
Page 8 of 17

 
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. 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 periods ended September 30, 2013, Sierra Monitor Corporation (“we” or the “Company”) reported net sales of $4,932,632 compared to $4,040,406 for the three-month period ended September 30, 2012.  For the nine-month period ended September 30, 2013, net sales were $14,077,322 compared with $14,907,621 in the prior year nine-month period.  The sales results for the three and nine-month periods ended September 30, 2013 represent an increase of 22% and a decrease of 6%, respectively, compared to the same periods in 2012.
For the three-month period ended September 30, 2013, sales of our gas detection products were approximately $2,544,000 compared to approximately $1,787,000 in the three-month period ended September 30, 2012.  For the nine-month period ended September 30, 2013, our gas detection product sales were approximately $6,870,000 compared to approximately $7,766,000 in the same period in 2012.  These results represent a 42% year-over-year increase in the third quarter and a 12% year-over-year decrease in the year-to-date period.  Gas detection products include sales to both industrial and military accounts.  In the third quarter of 2013 our industrial gas detection sales were generally higher than the corresponding period in 2012 while our third quarter, 2013, sales to the US Navy were substantially higher than the corresponding period in 2012.  In the nine month period ended September 30, 2012 our gas detection sales included a single order valued at over $2,500,000.  Excluding this single large order in 2012, our gas detection sales in the nine-month period ended September30, 2013 are 30% higher than in the comparable nine-month period in 2012.
Sales of Environment Controllers to the telecommunications industry in the three-month period ended September 30, 2013 were approximately $184,000 compared to approximately $201,000 in the three-month period ended September 30, 2012.  In the nine-month period ended September 30, 2013, sales of Environment Controllers were approximately $547,000 compared to approximately $654,000 in the same period in 2012.   Our  sales to the telecommunications industry are largely dependent upon expansion of field infrastructure by wire phone and cable companies.  During the nin-month period ended September 30, 2013, there have been no significant infrastructure projects relevant to our business and during this period, our sales have been largely reliant upon field upgrades and retrofits.
 
Page 9 of 17

 
In the three-month period ended September 30, 2013, sales of FieldServer products were approximately $2,205,000 compared to approximately $2,052,000 in the same period in 2012. In the nine-month period ended September 30, 2013, sales of our FieldServer products were approximately $6,661,000, compared to approximately $6,488,000 in sales reported in the same period in 2012. These results represent a 7% year-over-year increase in the third quarter and a 3% year-over-year increase in the year-to-date period.
 
FieldServer sales include both box products and original equipment manufacturer (“OEM”) modules. Box products provide a platform for delivery and operation of our software for integration with building automation systems and are generally sold to building automation integrators. 
 
Box product sales decreased approximately 11% in the three-month period and 1% in the nine-month period ended September 30, 2013 on a year-over-year basis. Although box product sales to system integrators for building automation applications have remained steady, it is our belief that there have been no large multi-unit projects released for purchase during the nine-month period ended September 30, 2013. We believe that the decrease in volume of projects is due to general economic uncertainty.
 
OEM module sales increased approximately 30% in the three-month period ended September 30, 2013 as compared to the same period in 2012, and increased 6% on a year-to-date basis in 2013 compared to the prior year period.  We continue to achieve design wins with new OEM customers adding unit and revenue volume to the existing customer base.
 
Gross profit of $3,017,276 for the three-month period ended September 30, 2013 was 61% of net sales compared to $2,340,399, or 58% of net sales, in the same period in the previous year. Gross profit for the nine-month period ended September 30, 2013 was $8,321,155, or 59% of net sales, compared to $8,204,334, or 55% of net sales, in the same period in the previous year.  We believe that the increase in our gross profit for the third quarter of 2013 was a result of types of product sold and general efficiencies at the higher overall volume level. The lower margin in the same period in 2012 was primarily a result of discounted pricing for a single large order in that period.
 
Expenses for research and development, which include new product development and engineering to sustain existing products, were $548,153, or 11% of net sales, for the three-month period ended September 30, 2013 compared to $523,310, or 13% of net sales, in the comparable period in 2012. In the nine-month periods ended September 30, 2013 and September 30, 2012, research and development expenses were $1,626,808, or 12% of net sales, and $1,641,118, or 11% of net sales, respectively.  We maintain product development programs in order to increase the number and variety of products for sale in each of the product lines. We believe that the expenses for each of the nine-month and three-month periods ended September 30, 2013 are consistent with the corresponding prior year periods.
 
Selling and marketing expenses, which consist primarily of salaries, commissions and promotional expenses were $1,040,317, or 21% of net sales for the three-month period ended September 30, 2013, compared to $1,012,646, or 25% of net sales, in the comparable period in the prior year. For the nine-month periods ended September 30, 2013 and 2012, selling and marketing expenses were $3,127,398, or 22% of net sales, and $3,101,386, or 21%  of net sales, respectively.  We believe that there are no significant variations in selling and marketing expenses between the comparable reported periods.
 
 
Page 10 of 17

 
General and administrative expenses, which consist primarily of salaries, building rent, insurance expenses, information technology expenses and fees for professional services, were $559,683, or 11% of net sales, for the three-month period ended September 30, 2013 compared to $550,572, or 14% of net sales, in the three-month period ended September 30, 2012. For the nine-month periods ended September 30, 2013 and 2012, general and administrative expenses were $1,650,795, or 12% of net sales, and $1,694,828, or 11% of net sales, respectively. We believe that there were no significant changes in general and administrative expenses between the comparable reported periods.
 
In the three-month period ended September 30, 2013, our income from operations was $869,123 compared to $253,871 for the three-month period ended September 30, 2012. In the nine-month period ended September 30, 2013, our income from operations was $1,916,154 representing an increase of $149,152 compared to our income from operations of $1,767,002 in the nine-month period ended September 30, 2012. The improvement in income from operations in both the three-month and nine-month periods of 2013 was due, primarily, to our higher sales and gross profit compared to same periods in 2012, respectively.
 
In the three and nine-month periods ended September 30, 2013, tax deposits of $186,000 and $531,000, respectively, were paid to federal and state agencies for current obligations. After interest income and tax expenses, our net income for the three-month period ended September 30, 2013 was $521,499 compared to $152,395 in the same period of 2012. For the nine-month period ended September 30, 2013 our net income was $1,155,294 compared to $1,060,326 in the same period of 2012.
 
Liquidity and Capital Resources
        During the nine months ended September 30, 2013, net cash provided by operating activities was approximately $1,820,000 compared to net cash provided by operating activities of approximately $1,328,000 for the same period in 2012.  Working capital was approximately $7,679,000 at September 30, 2012, an increase of approximately $791,000 from December 31, 2012.  
        At September 30, 2013, our balance sheet reflected approximately $3,505,000 of cash, approximately $2,731,000 of inventory and approximately $2,365,000 of net trade receivables. At December 31, 2012, our total cash on hand was approximately $2,306,000, our inventory was approximately $2,995,000 and our net trade receivables were approximately $1,913,000. 
        At September 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 a commercial bank. The line of credit requires annual renewal and compliance with certain financial covenants, including the requirement to maintain a quick ratio of 1.3:1.0 and a profitability test. At September 30, 2013, the Company was in compliance with all financial covenants contained in the line of credit.  There were no borrowings on this line of credit during the nine-month period ended September 30, 2013.    
        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, except as previously disclosed in this Liquidity and Capital Resources section, that will result in or that are reasonably likely to result in the Company’s liquidity increasing or decreasing in any material way.
 
Page 11 of 17

 
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 financial statements:
 
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’s acceptance of 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 for gas detection and environment control services 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 in advance of the provision of services 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) customized 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 to not 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.
 
 
Page 12 of 17

 
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 participates in testing and provides written confirmation that the driver program meets its expectations. The customer is then able to place or release orders for FieldServer product with the new driver loaded into it (see FieldServer Products above). Revenues for driver development are billed and recognized only after the customer’s written confirmation is received. 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 dictate secured payments. Our international sales are generally made based on secure payment terms including cash wire advance payments and letters of credit. International sales are made on open account terms where sufficient historical experience justifies the assumption of customer credit risk. In many of our larger sales, our customers are frequently 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 determine adequacy. 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, with 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.
   
 
Page 13 of 17

 
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 September 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 was no change in our internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) of the Exchange Act) during the quarter ended September 30, 2013 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
 
 
Page 14 of 17

 
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 our Annual Report on Form 10-K for the fiscal year ended December 31, 1989.
 
(2)
 
Incorporated by reference to our 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.
 
 
Page 15 of 17

    
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:      November 14, 2013
 
By:
/s/ Gordon R. Arnold
 
 
 
Gordon R. Arnold
 
 
 
President
 
 
 
Chief Executive Officer
 
 
 
Chief Financial Officer
 
 
Page 16 of 17

    
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 our Annual Report on Form 10-K for the fiscal year ended December 31, 1989.
 
 
 
(2)
 
Incorporated by reference to our 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.
 
 
Page 17 of 17