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, 2015

 

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 14, 2015 was 10,128,311.

 

 

PART I: FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

SIERRA MONITOR CORPORATION

 

Condensed Balance Sheets

 

		June 30, 2015				December 31,
Assets		(unaudited)				2014
Current assets:
Cash		$	4,524,267			$	3,339,952
Trade receivables, less allowance for doubtful accounts
of approximately $79,000 and $72,000 at June 30, 2015 and December 31, 2014, respectively			2,287,982				2,571,994
Inventories, net			2,701,006				2,896,614
Prepaid expenses			213,069				317,269
Income tax deposits			134,433				180,306
Deferred income taxes - current			207,231				207,231
Total current assets			10,067,988				9,513,366
Property and equipment, net			285,166				277,088
Other assets			434,236				342,546
Total assets		$	10,787,390			$	10,133,000
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable		$	888,865			$	814,090
Accrued compensation expenses			677,927				471,014
Other current liabilities			78,213				74,353
Total current liabilities			1,645,005				1,359,457
Deferred tax liability			138,125				138,125
Total liabilities			1,783,130				1,497,582
Commitments and contingencies
Shareholders' equity:
Common stock, $0.001 par value; 20,000,000 shares authorized; 10,128,311 and 10,128,311 shares issued and outstanding at June 30, 2015 and December 31, 2014, respectively			10,128				10,128
Additional paid-in capital			3,588,041				3,399,179
Retained earnings			5,406,091				5,226,111
Total shareholders' equity			9,004,260				8,635,418
Total liabilities and shareholders’ equity		$	10,787,390			$	10,133,000

 

See accompanying notes to the unaudited interim condensed financial statements.

 

  

SIERRA MONITOR CORPORATION

 

Condensed Statements of Operations 

 

(Unaudited)

 

		Three months ended June 30,								Six months ended June 30,
		2015				2014				2015				2014
Net sales		$	5,016,999			$	4,752,375			$	9,944,786			$	8,853,633
Cost of goods sold			2,033,284				2,005,498				4,015,211				3,632,602
Gross profit			2,983,715				2,746,877				5,929,575				5,221,031
Operating expenses
Research and development			574,965				579,895				1,141,046				1,139,499
Selling and marketing			1,308,946				1,250,713				2,493,624				2,495,279
General and administrative			755,207				706,917				1,531,461				1,365,772
			2,639,118				2,537,525				5,166,131				5,000,550
Income from operations			344,597				209,352				763,444				220,481
Interest income			31				32				63				70
Income before income taxes			344,628				209,384				763,507				220,551
Income tax  provision			175,577				83,754				380,961				88,220
Net income		$	169,051			$	125,630			$	382,546			$	132,331
Net income available to common shareholders per common share
Basic:		$	0.02			$	0.01			$	0.04			$	0.01
Diluted:		$	0.02			$	0.01			$	0.04			$	0.01
Weighted average number of common shares used in per share computations
Basic:			10,128,311				10,114,311				10,128,311				10,110,978
Diluted:			10,144,109				10,180,344				10,140,638				10,159,674

 

See accompanying notes to the unaudited interim condensed financial statements.

 

 

SIERRA MONITOR CORPORATION

 

Condensed Statements of Cash Flows

 

(Unaudited)

 

		Six months ended June 30,
		2015				2014
Cash flows from operating activities:
Net income		$	382,546			$	132,331
Adjustments to reconcile net income to net cash  provided by (used in) operating activities:
Depreciation and amortization			212,635				156,300
Provision for bad debt expense			6,308				(6,817	)
Provision for inventory loss			47,165				15,231
Stock based compensation expense			188,862				134,160
Changes in operating assets and liabilities:
Trade receivables			277,704				(343,547	)
Inventories			148,443				(644,856	)
Prepaid expenses			104,200				(118,482	)
Income tax deposit			45,873				(16,843	)
Accounts payable			74,775				412,066
Accrued compensation expenses			206,913				260,511
Other current liabilities			3,860				(2,906	)
Net cash provided by (used in) operating activities			1,699,284				(22,852	)
Cash flows from investing activities:
Purchase of property and equipment			(128,833	)			(82,698	)
Other assets			(183,570	)			(38,423	)
Net cash used in investing activities			(312,403	)			(121,121	)
Cash flows from financing activities:
Dividend payout			(202,566	)			(202,186	)
Proceeds from exercise of stock options			-				11,000
Net cash used in financing activities			(202,566	)			(191,186	)
Net increase (decrease) in cash			1,184,315				(335,159	)
Cash at beginning of period			3,339,952				3,421,679
Cash at end of period		$	4,524,267			$	3,086,520
Supplemental cash flow information
Cash paid for income taxes		$	335,115			$	105,059

 

See accompanying notes to the unaudited interim condensed financial statements.

 

 

SIERRA MONITOR CORPORATION

Notes to the Interim Condensed Financial Statements

(Unaudited)

June 30, 2015

 

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, 2014 balances within these interim condensed financial statements were derived from the audited 2014 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, 2014, which was filed with the SEC on March 30, 2015. 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 addresses the industrial and commercial facilities management market with Internet of Things (IoT) solutions that connect and protect high-value infrastructure assets. 

 

The company’s FieldServer brand of protocol gateways is used by system integrators and OEMs to enable local and remote monitoring and control of assets and facilities.   With more than 100,000 products, supporting over 140 protocols such as BACnet, LonWorks, MODBUS, and XML, installed in commercial and industrial facilities, FieldServer is the industry’s leading multi-protocol gateway. The FieldServer multi-protocol gateway uses specialized embedded software on proprietary hardware platforms. Embedded software enables data transfer between various devices and sub-systems within a facility by bridging between different protocols and physical media, and additionally enables the devices and sub-systems in the facility to connect to the cloud over Internet Protocol (IP) networks.  Offering the embedded software on proprietary hardware platforms allows the Company to increase the value proposition while protecting its intellectual property. The FieldServer gateway is also available to OEMs as modules for installation in customer devices and controllers.

 

Sierra Monitor’s Sentry IT fire and gas detection solutions are used by industrial and commercial facilities managers to protect their personnel and assets. The solution consists of proprietary system hardware that runs embedded controller and gateway software, detector modules that sense the presence of various toxic and combustible gases and flames, connectivity between the modules and the controller, and a user interface and applications that a facility manager can interact with, either locally on site, or remotely over the Internet. The complex software embedded in the various products facilitates system-wide functions such as calibration, alarm detection, notification, and mitigation. With more than 100,000 detector modules sold, the Company’s fire and gas detection solutions are deployed in a various facilities such as oil, gas and chemical processing plants, wastewater treatment facilities, alternate fuel vehicle maintenance garages, and other sites where hazardous gases are used or produced.  The Company’s solutions are also sold to telecommunication companies and their suppliers to manage environmental conditions in small structures such as local DSL distribution nodes and buildings at cell tower sites. 

 

 

The Company was formed in 1978 and its 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, 2014 audited financial statements, filed previously with the SEC in our Annual Report on Form 10-K on March 30, 2015, that are required to be adopted during the year ended December 31, 2014, did not have or are not expected to have a significant impact on the Company’s 2015 financial statements.

 

c)

Employee Stock-Based Compensation

 

On June 30, 2015, a total of 939,320 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 six-month periods ended June 30, 2015 and 2014, general and administrative expenses included stock based compensation expense of $188,862 and $134,160, 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, 2015 and 2014.

 

d)

Subsequent Events

 

Management has evaluated events subsequent to June 30, 2015 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 follows:

		June 30, 2015				December 31, 2014
Raw materials		$	1,334,592			$	1,370,867
Work-in-process			769,170				754,942
Materials at vendor			420,263				490,907
Finished goods			365,553				421,306
Less: Allowance for obsolescence reserve			(188,572	)			(141,408	)
		$	2,701,006			$	2,896,614

 

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, 2015 and 2014, outstanding options to acquire 1,514,000 and 874,000, 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, 2015 and 2014, respectively:

 

		Three months ended								Six months ended
		June 30, 2015				June 30, 2014				June 30, 2015				June 30, 2014
Basic EPS – weighted-average number of common shares outstanding			10,128,311				10,114,311				10,128,311				10,110,978
Effect of dilutive potential common shares – stock options outstanding			15,798				66,033				12,327				48,696
Diluted EPS – weighted-average number of common shares and potential common shares outstanding			10,144,109				10,180,344				10,140,638				10,159,674

 

Concentrations

 

No customer made up more than 10% of accounts receivable at June 30, 2015 and two customers each made up more than 10% of accounts receivable at December 31, 2014. No customers made up more than 10% of net sales for the three and six-months period ended June 30, 2015 or June 30, 2014.

 

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 $4,024,267 and $2,839,952 were in excess of such insured amounts at June 30, 2015 and December 31, 2014, 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 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,
		2015				2014				2015				2014
Instrumentation		$	2,333,755			$	2,118,746			$	4,666,516			$	4,154,501
FieldServers			2,683,244				2,633,629				5,278,270				4,699,132
		$	5,016,999			$	4,752,375			$	9,944,786			$	8,853,633

 

Line of Credit

 

The Company maintained a line of credit with its commercial bank in the maximum amount of $2,000,000. No borrowings have been made under the Company’s line of credit during the first six months of fiscal year 2015 and there were no outstanding balances at June 30, 2015 and December 31, 2014. The line expired on July 23, 2015 and the Company is currently negotiating with another financial institution on a new line.

 

Stock Option Grants

 

No options were granted during the three-month period ended June 30, 2015, however, a total of 100,000 stock options were granted during the six-month period ended June 30, 2015. A total of 600,000 options were granted during the three and six-month periods ended June 30, 2014.

 

Stock Option Exercise and Expiration

 

No stock options were exercised in the six-month period ended June 30, 2015. During the same period, 32,000 options expired.

A total of 10,000 stock options were exercised in the six-month period ended June 30, 2014. During the same period, 3,000 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.

 

 

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 concerning future sales and demand for our products; 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, 2014, 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 period ended June 30, 2015, Sierra Monitor Corporation (“we” or the “Company”) reported net sales of $5,016,999 compared to $4,752,375 for the three-month period ended June 30, 2014. For the six-month period ended June 30, 2015, net sales were $9,944,786 compared with $8,853,633 for the six-month period ended June 30, 2014. The sales results for the three-month period ended June 30, 2015 represent an increase of 6% compared to the same period in 2014. The sales results for the six-month period ended June 30, 2015 represent a 12% increase compared to the same period in 2014.

 

Sales of gas detection products, including industrial accounts, military sales and environment controllers for telephone company applications increased by approximately 10% in the second quarter of 2015 compared to the same period in 2014. In the first half of 2015, sales of gas detection products were 12% higher than the same period in 2014.

 

Sales of our FieldServer product line increased 2% in the second quarter of 2015 compared to the second quarter of 2014. In the first half of 2015, sales of FieldServer products increased approximately 12% compared with the same period in 2014. 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 projects and are generally sold to integrators. OEM modules are sold to companies that integrate our products into their commercial offerings.

 

Gross profit for the three-month period ended June 30, 2015 was approximately $2,984,000, or 59% of net sales, compared to approximately $2,747,000, or 58% of net sales, in the same period in the previous year. Gross profit for the six-month period ended June 30, 2015 was approximately $5,930,000, or 60% of net sales, compared to approximately $5,221,000, or 59% of net sales, in the same period in the previous year.

 

 

Expenses for research and development, which include new product development and engineering to sustain existing products, were approximately $575,000, or 11% of net sales, for the three-month period ended June 30, 2015 compared to approximately $580,000, or 12%of net sales, in the comparable period in 2014. In the six-month periods ended June 30, 2015 and June 30, 2014, research and development expenses were approximately $1,141,000, or 11% of net sales, and approximately $1,139,000, or 13% of net sales, respectively.

 

Selling and marketing expenses, which consist primarily of salaries, commissions and promotional expenses were approximately $1,309,000, or 26% of net sales, for the three-month period ended June 30, 2015, compared to approximately $1,251,000, or 26% of net sales, in the comparable period in the prior year. For the six-month periods ended June 30, 2015 and June 30, 2014, selling and marketing expenses were approximately $2,494,000, or 25% of net sales, and approximately $2,495,000, or 28% of net sales, respectively. The higher selling expenses for the three-month period ended June 30, 2015 reflect higher travel expenses and higher amortization expenses related to product approvals.

 

General and administrative expenses, which consist primarily of salaries, building rent, insurance expenses, information technology expenses and fees for professional services, were approximately $755,000, or 15% of net sales, for the three-month period ended June 30, 2015 compared to approximately $707,000, or 15% of net sales, in the three-month period ended June 30, 2014. For the six-month periods ended June 30, 2015 and June 30, 2014, general and administrative expenses were approximately $1,531,000, or 15% of net sales, and approximately $1,366,000, or 15% of net sales, respectively. General and administrative expenses have increased 7% and 12% in the three and six-month reporting periods ended June 30, 2015 compared to the same periods in 2014, primarily due to the expansion of the management team with the addition of the new CEO and associated salary and stock option expensing.

 

In the three-month period ended June 30, 2015, our income from operations was approximately $345,000, representing an increase of approximately $135,000 compared to our income from operations of approximately $210,000 in the three-month period ended June 30, 2014. In the six-month period ended June 30, 2015, our income from operations was approximately $763,000 representing a increase of approximately $543,000 compared to our income from operations of $220,000 in the six-month period ended June 30, 2014. The increase in income in both the second quarter and first half of 2015 compared to the same periods in 2014 is due primarily to higher sales and gross margins.

 

After interest and tax provisions, our net income for the three-month period ended June 30, 2015 was approximately $169,000 compared to net income of approximately $126,000 in the same period of 2014. For the six-month period ended June 30, 2015, our net income was approximately $383,000 compared to a net income of approximately $132,000 in the same period of 2014.

 

Liquidity and Capital Resources

 

During the six months ended June 30, 2015, net cash provided by operating activities was approximately $1,699,000 compared to net cash used in operating activities of approximately $23,000 for the same period in 2014. Working capital was approximately $8,423,000 at June 30, 2015, an increase of approximately $269,000 from December 31, 2014. At June 30, 2015, our balance sheet reflected approximately $4,524,000 of cash and approximately $2,288,000 of net trade receivables. At December 31, 2014, our total cash on hand was approximately $3,340,000 and our net trade receivables were approximately $2,572,000.

 

At June 30, 2015, we had no long term liabilities except for deferred income taxes of approximately $138,000.

 

 

The Company maintained a line of credit with its commercial bank in the maximum amount of $2,000,000. No borrowings have been made under the Company’s line of credit during the first six months of fiscal year 2015 and there were no outstanding balances at June 30, 2015 and December 31, 2014. The line expired on July 23, 2015 and the Company is currently negotiating with another financial institution on a new line.

 

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, 2016. 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) 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.

 

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 Varun Nagaraj, 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. Nagaraj and Ms. Allen concluded that, as of June 30, 2015, 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 June 30, 2015 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.

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 Annual Report on Form 10-K (File No. 000-7441) for fiscal year ended December 31, 2014 filed with the SEC on March 30, 2015.

 

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 14, 2015	By:	/s/ Varun Nagaraj
			Varun Nagaraj
			President
			Chief Executive Officer
Date:	August 14, 2015	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.

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 Annual Report on Form 10-K (File No. 000-7441) for fiscal year ended December 31, 2014 filed with the SEC on March 30, 2015.