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 March 31, 2014

 

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 May 13, 2014, was 10,114,311.

 

 

PART I: FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

SIERRA MONITOR CORPORATION

Condensed Balance Sheets

 

		March 31, 2014				December 31, 2013
		(unaudited)
Assets
Current assets:
Cash		$	3,568,158			$	3,421,679
Trade receivables, less allowance for doubtful accounts of approximately $76,000 and $79,000 at March 31, 2014 and December 31, 2013 respectively			1,753,182				1,943,643
Inventories, net			2,830,458				2,740,835
Prepaid expenses			431,929				311,144
Income tax deposit			116,659				106,859
Deferred income taxes - current			307,938				307,938
Total current assets			9,008,324				8,832,098
Property and equipment, net			371,163				390,755
Other assets			292,945				273,699
Total assets		$	9,672,432			$	9,496,552
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable		$	782,267			$	689,014
Accrued compensation expenses			375,032				290,589
Income taxes payable			3,250				-
Other current liabilities			82,495				71,729
Total current liabilities			1,243,044				1,051,332
Deferred tax liability			84,438				84,438
Total liabilities			1,327,482				1,135,770
Commitments and contingencies
Shareholders' equity:
Common stock, $0.001 par value; 20,000,000 shares authorized; 10,114,311 and 10,104,311 shares issued and outstanding, at March 31, 2014 and December 31, 2013, respectively			10,114				10,104
Additional paid-in capital			3,109,556				3,031,056
Retained earnings			5,225,280				5,319,622
Total shareholders' equity			8,344,950				8,360,782
Total liabilities and shareholders’ equity		$	9,672,432			$	9,496,552

 

See accompanying notes to the unaudited interim condensed financial statements.

 

  

SIERRA MONITOR CORPORATION

 

Condensed Statements of Operations

 

(Unaudited)

 

		Three months ended
		March 31,
		2014				2013
Net sales		$	4,101,258			$	4,357,109
Cost of goods sold			1,627,104				1,904,945
Gross profit			2,474,154				2,452,164
Operating expenses
Research and development			559,604				515,496
Selling and marketing			1,244,566				1,064,544
General and administrative			658,855				542,874
			2,463,025				2,122,914
Income from operations			11,129				329,250
Interest income			38				2,763
Income before income taxes			11,167				332,013
Income tax provision			4,466				134,455
Net income		$	6,701			$	197,558
Net income available to common shareholders per common share:
Basic		$	0.00			$	0.02
Diluted		$	0.00			$	0.02
Weighted average number of common shares used in per share computations:
Basic			10,107,644				10,070,978
Diluted			10,198,450				10,131,166

 

See accompanying notes to the unaudited interim condensed financial statements.

 

 

SIERRA MONITOR CORPORATION

 

Condensed Statements of Cash Flows

(Unaudited)

 

		Three months ended
		March 31,
		2014				2013
Cash flows from operating activities:
Net income		$	6,701			$	197,558
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			76,749				66,275
Provision for doubtful accounts			(3,607	)			-
Provision for inventory losses			1,527				21,764
Stock-based compensation expense			67,510				23,071
Change in operating assets and liabilities:
Trade receivables			194,068				(564,246	)
Inventories			(91,150	)			248,932
Prepaid expenses			(120,785	)			(89,859	)
Income tax deposit			(9,800	)			-
Accounts payable			93,253				(37,188	)
Accrued compensation expenses			84,443				166,140
Income taxes payable			3,250				131,451
Other current liabilities			10,766				(2,458	)
Net cash provided by operating activities			312,925				161,440
Cash flows from investing activities:
Purchases of property and equipment			(39,580	)			(50,445	)
Other long term assets			(36,823	)			(103,300	)
Net cash used in investing activities			(76,403	)			(153,745	)
Cash flows from financing activities:
Dividend payout			(101,043	)			(101,043	)
Proceeds from exercise of stock options			11,000				63,000
Net cash used in financing activities		$	(90,043	)		$	(38,043	)
Net increase (decrease) in cash and cash equivalents:			146,479				(30,348	)
Cash and cash equivalents at beginning of period:		$	3,421,679			$	2,306,258
Cash and cash equivalents at end of period:		$	3,568,158			$	2,275,910

 

See accompanying notes to the unaudited interim condensed financial statements.

  

SIERRA MONITOR CORPORATION

 

Notes to the Interim Condensed Financial Statements

(Unaudited)

March 31, 2014

 

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 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, 2013 balances within these interim condensed financial statements were derived from the audited 2013 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, 2013, which was filed with the SEC on March 27, 2014. 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

 

Sierra Monitor Corporation, formed in 1978, designs, manufactures and sells electronic communications, safety and environmental instrumentation for high reliability applications. The Company develops 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.

 

 

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, 2013 audited financial statements, filed previously with the SEC in our Annual Report on Form 10-K on March 27, 2014, that are required to be adopted during the year ended December 31, 2013, did not have or are not expected to have a significant impact on the Company’s 2014 financial statements.

 

c)

Employee Stock-Based Compensation

 

We have previously reserved 551,521 shares of common stock for issuance under the 2006 Stock Plan. On October 24, 2013 the Board of Directors authorized an additional reserve of 2,000,000 shares of common stock for issuance under the 2006 Stock Plan. On March 31, 2014, a total of 2,184,320 shares were available for grant. 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 three-month periods ended March 31, 2014 and 2013, general and administrative expenses included stock based compensation expense of $67,510 and $23,071, 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 three-month periods ended March 31, 2014 and 2013.

 

d)

Subsequent Events

 

Management has evaluated events subsequent to March 31, 2014 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.

 

 

Inventories

 

A summary of inventories are as follows:

 

		March 31, 2014				December 31, 2013
		(unaudited)
Raw materials		$	1,179,959			$	1,147,729
Work-in-process			915,196				769,359
Material at vendor			360,969				561,020
Finished goods			462,405				349,271
Less: Allowance for obsolescence reserve			(88,071	)			(86,544	)
		$	2,830,458			$	2,740,835

 

Net Income Per Share

 

Basic income 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 March 31, 2014 and 2013, outstanding options to acquire 12,000 and 177,000 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 periods ended March 31, 2014 and 2013, respectively:

 

		Three months ended
		March 31, 2014				March 31, 2013
		(unaudited)
Basic EPS – weighted-average number of common shares outstanding			10,107,644				10,070,978
Effect of dilutive potential common shares – stock options outstanding			90,806				60,188
Diluted EPS – weighted-average number of common shares and potential common shares outstanding			10,198,450				10,131,166

 

Comprehensive Income

 

The Company has no components of other comprehensive income and, accordingly, comprehensive income is the same as net income for all periods presented.

 

Concentrations

 

No customer made up more than 10% of accounts receivable at March 31, 2014 and two customers made up more than 10% of accounts receivable at March 31, 2013. No customer made up more than 10% of net sales for the three month period ended March 31, 2014 and one customer made up more than 10% of net sales for the three month period ended March 31, 2013.

 

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 $3,068,158 and $2,921,679 were in excess of such insured amounts at March 31, 2014 and December 31, 2013, respectively.

 

 

Segment Information

 

The Company operates in a single business 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 condensed financial statements.

 

In addition, the CEO reviewed the following information on revenues by product category for the periods ended March 31:

 

		Three months ended
		March 31, 2014				March 31, 2013
		(unaudited)
Gas detection devices		$	2,035,755			$	2,253,626
FieldServers			2,065,503				2,103,483
		$	4,101,258			$	4,357,109

 

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 three months of fiscal year 2014 and there were no outstanding balances at March 31, 2014 and December 31, 2013. As of March 31, 2014, the Company was in compliance with the financial covenants of the line of credit.

 

Stock Option Grants

 

No stock options were granted during the three-month periods ended March 31, 2014 and 2013.

 

Stock Option Exercises and Expirations

 

A total of 10,000 stock options were exercised and no options expired during the three-month period ended March 31, 2014. A total of 100,000 stock options were exercised and 12,000 options expired during the three-month period ended March 31, 2013.

 

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.

 

 

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, 2013, 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 months ended March 31, 2014, Sierra Monitor Corporation (“we” or the “Company”) reported net sales of $4,101,258 compared to $4,357,109 for the three months ended March 31, 2013. The results for the first quarter of fiscal 2014 represent a 6% decrease from the same period in the prior year. Net sales for the first quarter of 2013 included a single large order to a building automation customer in the United States. There was no similar large order for first quarter 2014.

 

Sales of gas detection products, including industrial accounts, military sales and environment controllers for telephone company applications decreased by approximately 10% in the first quarter of 2014 compared to the same period in 2013. Sales to industrial accounts were 30% lower, military sales were 248% higher, and sales of environmental controllers were essentially unchanged in the first quarter of 2014 compared to the same period in 2013. Net sales of gas detection products for the first quarter of 2013 included a single large order to an alternate fuels industry customer in the United States. There was no similar large order for first quarter 2014. Our sales to the U.S. Navy are dependent upon military spending and we generally experience quarterly fluctuations in military sales consistent with the change in the first quarter of 2014 compared to the first quarter of 2013.

 

Sales of our FieldServer product line decreased 2% in the first quarter of 2014 compared to the first quarter of 2013. FieldServer units 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. OEM modules are sold to companies that integrate our products into their commercial offerings. Box product sales increased approximately 10% in the three-month period ended March 31, 2014 on a year-over-year basis. OEM module sales decreased approximately 12% in the first quarter of 2014 compared to the first quarter of 2013. Many OEM modules are utilized in equipment, such as roof top air conditioners or standby power generators that are installed outdoors. We believe that the severe weather in the eastern United States during the first quarter slowed demand for OEM products.

 

 

Gross profit for the three-month period ended March 31, 2014 was $2,474,154, or 60% of net sales, compared to $2,452,164, or 56% of net sales, in the same period the previous year. Our gross margin in the first quarter of 2014 was higher than our historical levels due to product mix and the absence of significant highly-discounted project shipments in the first quarter of 2014.

 

Expenses for research and development, which include new product development and engineering to sustain existing products, were $559,604, or 14% of net sales, for the three-month period ended March 31, 2014, compared with $515,496, or 12% of net sales, in the comparable period in 2013. Our research and development expenses were higher in the first quarter of 2014 compared to the same quarter in 2013 primarily as result of extraordinary expenses of travel, materials expense and testing for a new gas detection product to be released for production in the second quarter of 2014.

 

Selling and marketing expenses, which consist primarily of salaries, commissions and promotional expenses, for the three-month period ended March 31, 2014 were $1,244,566, or 30% of net sales, compared to $1,064,544, or 24% of net sales, in the same period in the prior year. Payroll and travel cost increases related to additional sales team staffing contributed to the increase in selling and marketing expenses. The additional sales team staffing included a new Vice President of Sales and Marketing and a second Regional Sales Manager located in Dubai, UAE.

 

General and administrative expenses for the first quarter of 2014 were $658,855, or 16% of net sales, compared to $542,874, or 12% of net sales, in the same period in the prior year. Increases in stock option expensing and IT support contributed to the higher general and administrative expenses in first quarter of 2014 compared to the same period in 2013.

 

Income from operations for the three-month period ended March 31, 2014 was $11,129, or 0% of net sales, compared to $329,250, or 8% of net sales, in the same period in the prior year. The decreased income is primarily the result of lower net sales, offset by improvement in gross margin. Net income for the three-month period ended March 31, 2014 was $6,701, or approximately 0% of net sales, compared to $197,558, or approximately 5% of net sales, for the same period in the prior year.

 

Liquidity and Capital Resources

 

During the three months ended March 31, 2014, net cash provided by operating activities was approximately $313,000 compared to approximately $161,000 provided by operating activities for the same period in 2013. Working capital was approximately $7,765,000 at March 31, 2014, a decrease of approximately $16,000 from December 31, 2013. At March 31, 2014, our balance sheet reflected approximately $3,568,000 of cash and $1,753,000 of net trade receivables. At December 31, 2013, our total cash on hand was approximately $3,422,000 and our net trade receivables were approximately $1,944,000. Cash flow and balance sheet changes in the first quarter of 2014 were generally consistent with our historical levels. The difference in the cash flow and balance sheet in first quarter of 2014 compared with the first quarter of 2013 was due, primarily, to the difference in the cash and trade receivable levels related to a single large order shipped in first quarter of 2013.

 

At March 31, 2014, we had no long term liabilities.

 

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 three months of fiscal year 2014 and there were no outstanding balances at March 31, 2014 and December 31, 2013. As of March 31, 2014, the Company was in compliance with the financial covenants of the line of credit.

 

 

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, 2015. 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:

 

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) collectibility 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.

 

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). Collectibility 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 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 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 take advantage of 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, 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 these 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 officer and Tamara S. Allen, our 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 and Ms. Allen concluded that, as of March 31, 2014, 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) of the Exchange Act) during the quarter ended March 31, 2014 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

 

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.
10.1(3)		Employment Offer Letter, dated December 18, 2013, between Registrant and Anders Axelsson.
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.
32.1		Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2		Certification of 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.
(3)		Incorporated by reference to Registrant’s Current Report on Form 8-K, filed with the SEC on January 13, 2014.

 

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:	May 14, 2014	By:	/s/ Gordon R. Arnold
			Gordon R. Arnold
			President
			Chief Executive Officer
Date:	May 14, 2014	By:	/s/ Tamara S. Allen
			Tamara S. Allen
			Chief Financial Officer

 

 

Index to Exhibits

 

Exhibit
Number		Description
3.1(1)		Articles of Incorporation of the Registrant.
3.2(2)		Bylaws of the Registrant.
10.1(3)		Employment Offer Letter, dated December 18, 2013, between Registrant and Anders Axelsson.
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.
32.1		Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2		Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 350, 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.
(3)		Incorporated by reference to Registrant’s Current Report on Form 8-K, filed with the SEC on January 13, 2014.