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, 2018

 

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 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, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

	Large accelerated filer [  ]	Accelerated filer [  ]
	Non-accelerated filer [  ] (Do not check if a smaller reporting company)	Smaller reporting company [X]
		Emerging growth company [  ]

 

If an emerging growth company, indicate y check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.[  ]

 

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 September 30, 2018, was 10,203,995.

 

 

 

PART I: FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

SIERRA MONITOR CORPORATION

Condensed Balance Sheets

 

		September 30, 2018				December 31, 2017
		(unaudited)
Assets
Current assets:
Cash		$	3,616,985			$	3,191,722
Trade receivables, less allowance for doubtful accounts of approximately $68,000 and $75,000 at September 30, 2018 and December 31, 2017, respectively			2,929,427				3,254,681
Inventories, net			3,769,923				3,138,261
Prepaid expenses			631,939				559,368
Income tax deposits			29,392				44,771
Total current assets			10,977,666				10,188,803
Property and equipment, net			307,916				252,143
Deferred income taxes			126,323				126,323
Other assets			82,097				83,153
Total assets		$	11,494,002			$	10,650,422
Liabilities and Shareholders’ Equity
Current liabilities:
Accounts payable		$	1,312,209			$	976,092
Accrued compensation			985,469				555,714
Other current liabilities			122,290				199,397
Total current liabilities			2,419,968				1,731,203
Total liabilities			2,419,968				1,731,203
Commitments and contingencies
Shareholders’ equity:
Common stock, $0.001 par value; 20,000,000 shares authorized; 10,203,995 shares issued and outstanding at September 30, 2018 and December 31, 2017, respectively			10,204				10,204
Additional paid-in capital			4,632,354				4,482,403
Retained earnings			4,431,476				4,426,612
Total shareholders’ equity			9,074,034				8,919,219
Total liabilities and shareholders’ equity		$	11,494,002			$	10,650,422

 

See accompanying notes to the unaudited interim condensed financial statements.

 

 

SIERRA MONITOR CORPORATION

 

Condensed Statements of Operations

 

(Unaudited)

 

		Three months ended September 30,								Nine months ended September 30,
		2018				2017				2018				2017
Net sales		$	5,994,234			$	5,177,199			$	16,695,848			$	14,539,809
Cost of goods sold			2,364,604				2,072,236				6,689,875				5,913,516
Gross profit			3,629,630				3,104,963				10,005,973				8,626,293
Operating expenses
Research and development			805,359				767,550				2,371,174				2,296,058
Selling and marketing			1,489,880				1,225,351				4,219,636				3,840,901
General and administrative			1,013,552				743,405				2,917,058				2,355,943
Non-recurring restructuring expense			-				-				-				580,425
			3,308,791				2,736,306				9,507,868				9,073,327
Income (loss) from operations			320,839				368,657				498,105				(447,034	)
Other income			-				-				316				-
Interest income			755				169				1,237				169
Income (loss) before income taxes			321,594				368,826				499,658				(446,865	)
Income tax provision (benefit)			107,735				176,349				188,674				(80,036	)
Net income (loss)		$	213,859			$	192,477			$	310,984			$	(366,829	)
Net income (loss) available to common shareholders per common share
Basic:		$	0.02			$	0.02			$	0.03			$	(0.04	)
Diluted:		$	0.02			$	0.02			$	0.03			$	(0.04	)
Weighted average number of common shares used in per share computations
Basic:			10,203,995				10,181,553				10,203,995				10,179,886
Diluted:			10,690,745				10,181,553				10,712,859				10,179,886

 

See accompanying notes to the unaudited interim condensed financial statements.

 

 

SIERRA MONITOR CORPORATION

 

Condensed Statements of Cash Flows

(Unaudited)

 

		Nine months ended September 30,
		2018				2017
Cash flows from operating activities:
Net income (loss)		$	310,984			$	(366,829	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization			233,713				207,330
Change in allowance for doubtful accounts			(6,900	)			-
Change in allowance for inventory losses			18,190				-
Stock based compensation expense			149,951				230,034
Changes in operating assets and liabilities:
Trade receivables			332,154				(88,854	)
Inventories			(649,852	)			(427,613	)
Prepaid expenses			(72,571	)			181,684
Income tax deposits			15,379				(59,710	)
Accounts payable			336,117				264,969
Accrued compensation			429,755				287,392
Other current liabilities			(77,107	)			(18,711	)
Net cash provided by operating activities			1,019,813				209,692
Cash flows from investing activities:
Purchase of property and equipment			(287,619	)			(119,612	)
Other assets			(811	)			-
Net cash used in investing activities			(288,430	)			(119,612	)
Cash flows from financing activities:
Dividends			(306,120	)			(305,439	)
Proceeds from exercise of stock options			-				16,298
Net cash used in financing activities			(306,120	)			(289,141	)
Net increase (decrease) in cash			425,263				(199,061	)
Cash at beginning of period			3,191,722				4,692,999
Cash at end of period		$	3,616,985			$	4,493,938
Supplemental cash flow information
Cash paid for income taxes		$	126,923			$	10

 

See accompanying notes to the unaudited interim condensed financial statements.

 

 

SIERRA MONITOR CORPORATION

Notes to the Unaudited Interim Condensed Financial Statements

 

September 30, 2018

 

Basis of Presentation

 

The accompanying unaudited interim condensed financial statements have been prepared by Sierra Monitor Corporation (the “Company”, “Sierra Monitor”, “we” or “us”), 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, 2017 balances within these interim condensed financial statements were derived from the audited 2018 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, 2017, which was filed with the SEC on April 2, 2018. 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

 

Founded in 1978, Sierra Monitor Corporation (OTCQB:SRMC), is a provider of Industrial Internet of Things (IIoT) solutions that address the industrial and commercial facilities management targeting facility automation and facility safety requirements, also referred to as “Connect” and “Protect”.

 

The Company’s FieldServer family of protocol gateways, routers, and network explorers targets facility automation requirements, and is used by original equipment manufacturers (“OEMs”) and system integrators to enable local and remote monitoring and control of assets and facilities. The FieldServer family of products works with the SMC Cloud portal; a cloud-based service that registers and manages FieldServer products, provides secure remote access to the local web-based applications that run on FieldServer products, and integrates with third-party applications over REST APIs. With more than 200,000 installed gateways supporting over 140 protocols such as BACnet, LonWorks, MODBUS, and XML in commercial and industrial facilities, FieldServer is the industry’s leading multi-protocol gateway brand and is delivered in a variety of form factors appropriate to the asset being interfaced. The intellectual property in FieldServer products is embodied in the proprietary embedded software that runs on a variety of customized hardware platforms with different connectivity options such as Serial, Ethernet, Wi-Fi, or cellular. In addition to bridging data protocols between various assets or devices within a facility, the embedded software includes value-added “fog” or “local application” software for monitoring, logging, alarming, and trending local field data. Additionally, the embedded software enables the assets or devices in the facility to securely connect to third-party clouds and to the Company’s own SMC Cloud portal. The SMC Cloud portal is a proprietary, secure, and scalable Software-as-a-Service product and is developed and deployed using the same core technologies and providers that are used by many of the world’s leading web sites and Internet-based services.

 

 

The Company’s Flame and Gas (F&G) detection solutions target facility safety requirements and are used by industrial and commercial facilities managers to protect their personnel and assets. The motivation for installing gas detection systems is driven, in part, by industrial safety professionals guided by the United States Occupational Safety and Health Administration, state and local governing bodies, insurance companies and various industry rule-making bodies. 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. The controller software also includes local web-based applications that simplify management of the complete solution and a gateway to integrate the flame and gas detection solution with the facility’s local supervisory system or to the Company’s SMC Cloud portal. With more than 100,000 detector modules sold, our flame and gas detection solutions are deployed in a variety of 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 and security conditions such as temperature, gas, and smoke in remote structures such as local DSL distribution nodes and buildings at cell tower sites.

 

The Company was founded in 1978 and its common stock is quoted on the OTC Bulletin Board under the symbol “SRMC”.

 

Accounting Policies

 

a)

Revenue Recognition

 

In May 2014, the Financial Accounting Standards Board (“FASB”) issued ASU 2014-09, “Revenue from Contracts with Customers” (Topic 606). ASC 606 requires the recognition of revenue when promised goods or services are transferred to customers in an amount that reflects the considerations to which the entity expects to be entitled to in exchange for those goods or services. On January 1, 2018, the Company adopted ASC 606 by using the modified retrospective method. The comparative information has not been recast and continues to be reported under the accounting standards in effect for those periods. The adoption did not have a material impact to the nature and timing of its revenues, condensed statements of operations, condensed statements cash flows and condensed balance sheets. The majority of the impact has been on sales returns and the impact has been deemed immaterial.

 

The Company’s revenues are derived from the sale of FieldServer products, FieldServer products services, Gas Detection and Environment Control products, and Gas Detection and Environment Control products services. The Company accounts for a contract with a customer when there’s approval and commitment from both parties, the rights of the parties are identified, payment terms are identified, the contract has commercial substance and collectability of consideration is probable.

 

The Company’s revenue arrangements consist of multiple performance obligations including hardware, software, and services. Determining the stand-alone selling price (“SSP”) and allocation of consideration from an arrangement to the individual performance obligations, and the appropriate timing of revenue recognition are significant judgments with respect to these arrangements.

 

The Company does not provide credits, incentives or retroactive discounts, which may be required to be accounted for as variable consideration when estimating the amount of revenue to be recognized. The Company from time to time provides a right of return to its customers and the Company uses expected value method to estimate the potential value of the customer returns to reduce the transaction price. The impact has been deemed to be immaterial, thus there is no disclosure related to sales returns, return on assets and refund liability.

 

When the Company’s products and services are sold in bundled arrangements (e.g., hardware, software, and/or services), for bundled arrangements, the Company accounts for individual products and services separately if they are distinct, that is, if a product or service is separately identifiable from other items in the bundled package and if a customer can benefit from it on its own or with other resources that are readily available to the customer. The consideration (including any discounts) is allocated between separate products or services in a bundle based on their individual SSP. The SSP is determined based on observable prices at which the Company separately sells the products and services. If an SSP is not directly observable, then the Company will estimate the SSP considering marketing conditions, entity-specific factors, and information about the customer or class of customer that is reasonably available.

 

 

The following is a description of the principal activities from which the Company generates its revenues:

 

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. The creditworthiness of customers is 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. Revenue is recognized at a point in time when control of the product is transferred to the customer, generally occurring upon the shipment or delivery dependent upon the terms of the underlying contract when (a) for FOB factory orders they leave our shipping dock or (b) for FOB customer dock orders upon confirmation of delivery.

 

Gas Detection and Environment Control Services

 

Gas detection and environment control services consist of field service orders (technical support) and training, which are provided separately 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. Revenue is recognized in the period the technical support and training are performed.

 

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 determined that the hardware, and the embedded software as defined above represent one performance obligation because the hardware is dependent upon and highly interrelated with the embedded software, and without which the hardware can’t operate. Generally, the software included in each sale does not require significant production, modification or customization and, therefore, the Company recognizes revenues at a point in time when control of the product is transferred to the customer generally occurring upon the shipment or delivery of products (depending on shipping terms), as described in Gas Detection and Environment Control Products above. If the software requires modification, refer to FieldServer Services for details.

 

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. 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. Revenues for protocol driver development are recognized at a point in time when the control of the product is transferred to the customer generally occurring upon shipment or delivery of the related product that includes the developed protocol drivers (as noted 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)

Recent Accounting Pronouncements

 

Recent accounting pronouncements discussed in the notes to the December 31, 2017 audited financial statements, filed previously with the SEC in our Annual Report on Form 10-K on April 2, 2018, that are required to be adopted during the year ended December 31, 2018, did not have or are not expected to have a significant impact on the Company’s 2018 financial statements.

 

In February 2016, the FASB issued ASU 2016-2, “Leases” (Topic 842), which is intended to improve financial reporting for lease transactions. This ASU will require organizations that lease assets, such as real estate, airplanes and manufacturing equipment, to recognize on their balance sheet the assets and liabilities for the rights to use those assets for the lease term and obligations to make lease payments created by those leases that have terms of greater than 12 months. The recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee primarily will depend on its classification as finance or operating lease. This ASU will also require disclosures to help investors and other financial statement users better understand the amount and timing of cash flows arising from leases. These disclosures will include qualitative and quantitative requirements, providing additional information about the amounts recorded in the financial statements. The ASU is effective for the Company for the year ending December 31, 2019 and interim reporting periods within that year, and early adoption is permitted. Management has not yet determined the effect of this ASU on the Company’s financial statements. The Company is currently evaluating the impact of adopting the new lease accounting standards on its financial statements. The Company is in process of creating an inventory of its leases where the Company may be a lessee to assess the potential impact to the Company’s financial statements upon adoption of the new lease accounting standards.

 

c)

Employee Stock-Based Compensation

 

In April 2016 and in May 2016, the Company’s Board of Directors and the Company’s shareholders, respectively, approved the Company’s 2016 Equity Incentive Plan (the “2016 Stock Plan”) and reserved a total of (i) 279,680 shares, plus (ii) 2,550,320 shares that remained available for issuance under the 2006 Stock Plan immediately prior to its expiration, plus (iii) any shares subject to stock options or restricted stock granted under the 2006 Stock Plan that, on or after the date the 2016 Stock Plan became effective, expired or otherwise terminated without having been exercised in full, or were forfeited to or repurchased by the Company, with the maximum number of shares to be added to the 2016 Stock Plan pursuant to clauses (ii) and (iii) equal to 2,668,320. Options granted under our 2006 Stock Plan and 2016 Stock Plan are at the fair market value of our common stock at the grant date, typically vest ratably over four years, and expire ten years from the grant date. As of September 30, 2018, a total of 1,216,000 shares were issued under the 2016 Stock Plan.

 

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 nine-month periods ended September 30, 2018 and 2017, general and administrative expenses included stock-based compensation expense of $149,951 and $230,034, respectively, decreasing the Company’s income and increasing loss 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 loss 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 nine-month periods ended September 30, 2018 and 2017.

 

d)

Subsequent Events

 

Management has evaluated events subsequent to September 30, 2018 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:

 

		September 30, 2018				December 31, 2017
Raw materials		$	1,907,943			$	1,517,932
Work-in-process			1,280,508				878,083
Materials at vendor			391,079				537,680
Finished goods			308,583				304,566
Less: Allowance for obsolescence reserve			(118,190	)			(100,000	)
		$	3,769,923			$	3,138,261

 

Net Income (Loss) Per Share

 

Basic earnings (loss) 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, 2018, outstanding options to acquire 208,000 shares of common stock 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. At September 30, 2017, there were no options to acquire shares of common stock that were considered potentially dilutive due to the net loss for the year-to-date periods.

 

 

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, 2018 and 2017, respectively:

 

		Three months ended September 30								Nine months ended September 30
		2018				2017				2018				2017
Basic EPS – weighted-average number of common shares outstanding			10,203,995				10,181,553				10,203,995				10,179,886
Effect of dilutive potential common shares – stock options outstanding			486,750				-				508,864				-
Diluted EPS – weighted-average number of common shares and potential common shares outstanding			10,690,745				10,181,553				10,712,859				10,179,886

 

Concentrations

 

No customers made up more than 10% of accounts receivable at September 30, 2018 but one customer made up more than 10% of accounts receivable at December 31, 2017. No customer made up more than 10% of net sales for each of the three or the nine-month periods ended September 30, 2018 and September 30, 2017.

 

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 $3,254,000 and $2,830,000 were in excess of such insured amounts at September 30, 2018 and December 31, 2017, 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 September 30,								Nine months ended September 30,
		2018				2017				2018				2017
Instrumentation		$	2,812,963			$	2,536,492			$	8,115,944			$	6,905,503
FieldServers			3,181,271				2,640,707				8,579,904				7,634,306
		$	5,994,234			$	5,177,199			$	16,695,848				14,539,809

 

 

Line-of-Credit

 

The Company maintains 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 nine months of fiscal year 2018 and there were no outstanding balances at September 30, 2018 and December 31, 2017. As of September 30, 2018, the Company was in compliance with the financial covenants to which it is subject under the line of credit.

 

Stock Option Grants

 

A total of 362,000 options with a fair value of $239,578 were granted during the three-month period ended September 30, 2018, and 403,000 options with a fair value of $266,802 were granted during the nine-month period ended September 30, 2018. No options were granted during the three-month period ended September 30, 2017. However, 238,000 options with a fair value of $162,554 were granted during the nine-month period ended September 30, 2017.

 

Stock Option Exercise and Expiration

 

No options were exercised in the three and nine-month period ended September 30, 2018. During the same periods, 10,000 and 11,000 options expired, respectively. In the nine-month periods ended September 30, 2017, 10,002 shares of common stock were issued as a result of stock option exercises. During the same periods, 1,103,000 and 1,106,000 options expired, respectively.

 

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 (the “Exchange Act”). Statements that are not statements of historical fact may be deemed to be forward-looking statements. The words “believe,” “anticipate,” “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, among others, any expectations of operating and non-operating expense, including research and development expense, potential litigation expense, sufficiency of resources, including cash and accounts receivable, estimates of allowances for doubtful accounts, credit lines or other financial items, our internal control environment and critical accounting policies; any statements concerning future sales levels and timing 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 our 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, general economic conditions in both foreign and domestic markets, changes in the economy and the credit market, investment and research and development plans and success, market position and penetration, strategic plans and objectives, operating margins, government and regulatory approvals or certifications, cyclical factors affecting our industry, our ability to identify, attract, motivate and retain qualified personnel, lack of growth in our end-markets, our ability to develop and manufacture, seasonality in our products, availability of components and materials used in our products, and our ability to sell both new and existing products at a profitable yet competitive price and those issues described under the heading “Critical Accounting Policies,” below, and those risk factors identified in Item1A, Risk Factors, of our Annual Report on Form 10-K for our fiscal year ended December 31, 2017, which was filed with the SEC on April 2, 2018, 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. All forward-looking statements in this document are made as of the date hereof, based on information available to us as of the date hereof, and we assume no obligation to update any forward-looking statement.

 

Results of Operations

 

For the three-month period ended September 30, 2018, Sierra Monitor Corporation (“we” or the “Company”) reported net sales of $5,994,234 compared to $5,177,199 for the three-month period ended September 30, 2017. For the nine-month period ended September 30, 2018, net sales were $16,695,848 compared with $14,539,809 in the prior year nine-month period. The sales results for the three and nine-month periods ended September 30, 2018 represent an increase of 16% and 15% compared to each of the same periods in 2017.

 

For the three-month period ended September 30, 2018, sales of our instrumentation products, including fire and gas detection, military sales and environment controllers, were approximately $2,813,000 compared to approximately $2,536,000 in the three-month period ended September 30, 2017, representing an 11% increase. For the nine-month period ended September 30, 2018, sales of our instrumentation products were approximately $8,116,000 compared to approximately $6,906,000 in the same period in 2017 representing an 18% increase.

 

In the three-month period ended September 30, 2018, sales of FieldServer products were approximately $3,181,000 compared to approximately $2,641,000 in the same period in 2017, representing a 20% increase. In the nine-month period ended September 30, 2018, sales of our FieldServer products were approximately $8,580,000, compared to approximately $7,634,000 in sales reported in the same period in 2017, representing a 12% increase.

 

 

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. Strong increases in OEM sales offset lower sales of box products.

 

Gross profit for the three-month period ended September 30, 2018 was approximately $3,630,000, or 61% of net sales, compared to approximately $3,105,000, or 60% of net sales, in the same period in the previous year. Gross profit for the nine-month period ended September 30, 2018 was approximately $10,006,000, or 60% of net sales, compared to approximately $8,626,000, or 59% of net sales, in the same period in the previous year. Our gross margins are influenced primarily by product mix and discount level based on order size and sales channels. Generally sales to OEM accounts generate lower margins.

 

Expenses for research and development, which include new product development and engineering to sustain existing products, were approximately $805,000, or 13% of net sales, for the three-month period ended September 30, 2018 compared to approximately $768,000, or 15% of net sales, in the comparable period in 2017. In the nine-month periods ended September 30, 2018 and September 30, 2017, research and development expenses were approximately $2,371,000, or 14% of net sales, and approximately $2,296,000, or 16% of net sales, respectively. Research and development expenses remain relatively constant as we continue to invest in new products for both our gas detection and our protocol gateway business.

 

Selling and marketing expenses, which consist primarily of salaries, commissions and promotional expenses were approximately $1,490,000, or 25% of net sales for the three-month period ended September 30, 2018, compared to approximately $1,225,000, or 24% of net sales, in the comparable period in the prior year. For the nine-month periods ended September 30, 2018 and 2017, selling and marketing expenses were approximately $4,220,000, or 25% of net sales, and approximately 3,841,000, or 26% of net sales, respectively. The increase in our selling expenses in the three and nine-month periods ended September 30, 2018 compared to the same period in the prior year are primarily attributed to the addition of resources.

 

General and administrative expenses, which consist primarily of salaries, building rent, insurance expenses, information technology expenses and fees for professional services, were approximately $1,014,000, or 17% of net sales, for the three-month period ended September 30, 2018 compared to approximately $743,000, or 14% of net sales, in the three-month period ended September 30, 2017. For the nine-month periods ended September 30, 2018 and September 2017, general and administrative expenses were approximately $2,917,000, or 17% of net sales, and approximately $2,356,000, or 16% of net sales, respectively. General and administrative expenses have increased 36% in the three-month period and increased 24% in the nine-month reporting periods ended September 30, 2018 compared to the same periods in 2017, primarily due to increased salary expenses and outsourced professionals.

 

In the three-month period ended September 30, 2018, our income from operations was approximately $321,000 compared to income from operations of approximately $369,000 for the three-month period ended September 30, 2017. In the nine-month period ended September 30, 2018, our income from operations was approximately $498,000 compared to a loss from operations of approximately $447,000 in the nine-month period ended September 30, 2017. The loss in the nine-month period of 2017 was due to non-recurring expenses.

 

After interest income and provision for income tax expense, our net income for the three-month period ended September 30, 2018 was approximately $214,000 compared to net income of approximately $192,000 in the same period of 2017. For the nine-month period ended September 30, 2018, our net income was approximately $311,000 compared to a net loss of approximately $367,000 in the same period of 2017.

 

 

Liquidity and Capital Resources

 

During the nine months ended September 30, 2018, net cash provided by operating activities was approximately $1,020,000 compared to approximately $210,000 for the same period in 2017. Working capital was approximately $8,558,000 at September 30, 2018, an increase of approximately $100,000 from December 31, 2017. At September 30, 2018, our balance sheet reflected approximately $3,617,000 of cash and approximately $2,929,000 of net trade receivables. At December 31, 2017, our total cash on hand was approximately $3,192,000 and our net trade receivables were approximately $3,255,000

 

At September 30, 2018 and 2017, we had no long-term liabilities.

 

We maintain a line of credit with our commercial bank in the maximum amount of $2,000,000. No borrowings have been made under our line of credit during the first nine months of fiscal year 2018 and there were no outstanding balances at September 30, 2018 and December 31, 2017. As of September 30, 2018, we were 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 our anticipated level of operations through at least December 2019. 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 our 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 our 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, inventories and inventory obsolescence. 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

 

In May 2014, the Financial Accounting Standards Board (“FASB”) issued ASU 2014-09, “Revenue from Contracts with Customers” (Topic 606). ASC 606 requires the recognition of revenue when promised goods or services are transferred to customers in an amount that reflects the considerations to which the entity expects to be entitled to in exchange for those goods or services. On January 1, 2018, the Company adopted ASC 606 by using the modified retrospective method. The comparative information has not been recast and continues to be reported under the accounting standards in effect for those periods. The adoption did not have a material impact to the nature and timing of its revenues, condensed statements of operations, condensed statements cash flows and condensed balance sheets. The majority of the impact has been on sales returns and the impact has been deemed immaterial.

 

The Company’s revenues are derived from the sale of FieldServer products, FieldServer products services, Gas Detection and Environment Control products, and Gas Detection and Environment Control products services. The Company accounts for a contract with a customer when there’s approval and commitment from both parties, the rights of the parties are identified, payment terms are identified, the contract has commercial substance and collectability of consideration is probable.

 

 

The Company’s revenue arrangements consist of multiple performance obligations including hardware, software, and services. Determining the stand-alone selling price (“SSP”) and allocation of consideration from an arrangement to the individual performance obligations, and the appropriate timing of revenue recognition are significant judgments with respect to these arrangements.

 

The Company does not provide credits, incentives or retroactive discounts, which may be required to be accounted for as variable consideration when estimating the amount of revenue to be recognized. The Company from time to time provides a right of return to its customers and the Company uses expected value method to estimate the potential value of the customer returns to reduce the transaction price. The impact has been deemed to be immaterial, thus there is no disclosure related to sales returns, return on assets and refund liability.

 

When the Company’s products and services are sold in bundled arrangements (e.g., hardware, software, and/or services), for bundled arrangements, the Company accounts for individual products and services separately if they are distinct, that is, if a product or service is separately identifiable from other items in the bundled package and if a customer can benefit from it on its own or with other resources that are readily available to the customer. The consideration (including any discounts) is allocated between separate products or services in a bundle based on their individual SSP. The SSP is determined based on observable prices at which the Company separately sells the products and services. If an SSP is not directly observable, then the Company will estimate the SSP considering marketing conditions, entity-specific factors, and information about the customer or class of customer that is reasonably available.

 

The following is a description of the principal activities from which the Company generates its revenues:

 

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. The creditworthiness of customers is 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. Revenue is recognized at a point in time when control of the product is transferred to the customer, generally occurring upon the shipment or delivery dependent upon the terms of the underlying contract when (a) for FOB factory orders they leave our shipping dock or (b) for FOB customer dock orders upon confirmation of delivery.

 

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 in advance of the provision of services for immediate processing. Revenue is recognized in the period the technical support and training are performed.

 

 

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 determined that the hardware, and the embedded software as defined above represent one performance obligation because the hardware is dependent upon and highly interrelated with the embedded software, and without which the hardware can’t operate. Generally, the software included in each sale does not require significant production, modification or customization and, therefore, the Company recognizes revenues at a point in time when control of the product is transferred to the customer generally occurring 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. 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. Revenues for protocol driver development are recognized at a point in time when the control of the product is transferred to the customer generally occurring upon shipment or delivery of the related product that includes the developed protocol drivers (as noted 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) Contract Costs

 

Applying the practical expedient, the Company recognizes the incremental costs of obtaining contracts as an expense when incurred if the amortization period of the assets that otherwise would have been recognized is one year or less. These costs mainly include the Company’s internal sales force compensation program and are included in sales and marketing expenses at the time the revenue is recognized.

 

c) Warranty

 

The Company provides a warranty on all products sold for a period of two years after the date of shipment. Warranty issues are usually resolved with repair or replacement of the product. This standard warranty is assurance type warranty and does not offer any services in addition to the assurance that the product will continue working as specified. Therefore, warranties are not considered separate performance obligations in the arrangement. Instead, estimated future warranty obligations related to products are provided by charges to condensed statements of operations in the period in which the related revenue is recognized.

 

 

d) Contract Balances

 

The Company records accounts receivable when it has an unconditional right to consideration. Contract liabilities are recorded when cash payments are received or due in advance of performance. Contract liabilities consist of only advance payments, where the Company has unsatisfied performance obligations. Contract liabilities are classified as deferred revenue and included within “Other current liabilities” on the condensed balance sheets. At times, billing may occur subsequent to revenue recognition, resulting in an unbilled receivable which represents a contract asset. The Company does not have any unbilled receivable on the condensed balance sheets.

 

Deferred Revenue for the quarter ending		Sept. 30, 2018				June 30, 2018				March 31, 2018				December 31, 2017
		(unaudited)				(unaudited)				(unaudited)
Beginning balance		$	62,639			$	62,031			$	61,673			$	64,673
Deferred revenues added			1,000				1,300				800				-
Previously deferred revenues recognized			(30,925	)			(692	)			(442	)			(3,000	)
Total, net		$	32,714			$	62,639			$	62,031			$	61,673

 

Payment terms vary by customer. The time between invoicing and when payment is due is not significant. For certain products or services and customer types, payment is required before the products or services are delivered to the customer.

 

There were no significant changes in estimates during the period that would affect the contract balances. The amounts of revenue recognized during the nine months ended September 30, 2018 and September 30, 2017 from the opening deferred revenue balances were $32,059 and $8,167, respectively. For the three and nine month periods ended September 30, 2018, and September 30, 2017 no impairment losses related to contract balances were recognized in the condensed statement of operations.

 

e) Disaggregation of Revenue

 

In the following table, net sales are disaggregated by geographic region. The Company conducts business across 5 geographic regions: United States & Canada, Latin America, Europe, Middle East and Asia.

 

		FieldServer Products								Flame & Gas Products
		Nine Months Ended Sept. 30								Nine Months Ended Sept. 30
		2018				2017				2018				2017
United States & Canada		$	7,126,000			$	6,377,000			$	6,947,000			$	5,949,000
Latin America			152,000				116,000				168,000				131,000
Europe			705,000				636,000				50,000				21,000
Middle East			319,000				346,000				621,000				238,000
Asia			278,000				159,000				330,000				567,000
		$	8,580,000			$	7,634,000			$	8,116,000			$	6,906,000

 

f) Shipping and Handling

 

The Company has elected to account for shipping and handling activities related to contracts with customers as costs to fulfill the promise to transfer the associated products.

 

g) Remaining Performance Obligations

 

Remaining performance obligations represent the transaction price allocated to performances obligations that are unsatisfied or partially unsatisfied as of the end of the reporting period. Unsatisfied and partially unsatisfied performance obligations consist of contract liabilities and non-cancellable backlog. Non-cancellable backlog includes goods and services for which customer purchase orders have been accepted that are scheduled or in the process of being scheduled for shipment. As of September 30, 2018, the remaining performance obligation is approximately $4,693,000, 51% or $2,409,000 of which is expected to be recognized in 3 months and 21% or $998,000 of which is expected to be recognized in the next fiscal year. The remainder is expected to be recognized after fiscal year 2019.

 

 

h) 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.

 

i) Inventories

 

Inventories are stated at the lower of cost or estimated market, with cost being determined on the first-in, first-out method. We use 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.

 

Off-Balance Sheet Arrangements

 

None.

 

Contractual Obligations

 

Not applicable.

 

ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Not applicable.

 

 

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 Jeffrey Brown, our principle executive officer, and Tamara S. Allen, our principal financial officer, carried out an evaluation of the effectiveness of the design and operation of our 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. Brown and Ms. Allen concluded that, as of September 30, 2018, our 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) of the Exchange Act) identified in connection with the evaluation required by Rule 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the period covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

 

PART II: OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

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 1A. RISK FACTORS

 

Please see those risk factors identified in Item1A, Risk Factors, of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2017. The Company’s risk factors have not changed materially since December 31, 2017.

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

None.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

None.

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not applicable.

 

ITEM 5. OTHER INFORMATION

 

None.

 

ITEM 6. EXHIBITS

 

A list of exhibits to this Quarterly Report on Form 10-Q is set forth on the Index to Exhibits immediately preceding such exhibits and is incorporated herein by reference.

 

 

Index to Exhibits

 

				Incorporated by Reference
Exhibit Number		Exhibit Description		Form		Exhibit Number		Date Filed
3.1		Articles of Incorporation of the Registrant.		10-K		3.1		March 23, 1990
3.2		Bylaws of the Registrant.		10-Q		3.2		August 14, 2018
31.1		Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.		Filed herewith
31.2		Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.		Filed herewith
32.1		Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.		Furnished herewith
32.2		Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.		Furnished herewith

 

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.

 

 

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, 2018	By:	/s/ Jeffrey Brown
			Jeffrey Brown
			Chief Executive Officer
			(Principal Executive Officer)
Date:	November 14, 2018	By:	/s/ Tamara S. Allen
			Tamara S. Allen
			Chief Financial Officer
			(Principal Financial Officer)