10-Q 1 v439257_10q.htm FORM 10-Q

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

xQuarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

 

For the quarterly period ended March 31, 2016

 

or

 

¨Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

 

For the transition period from _____to _____

 

Commission file number 000-07441

 

SIERRA MONITOR CORPORATION

 

(Exact name of registrant as specified in its charter)

 

California 95-2481914
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)

 

1991 Tarob Court

Milpitas, California 95035

 

(Address and zip code of principal executive offices)

 

(408) 262-6611

 

(Registrant’s telephone number, including area code)

 

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

  

Large accelerated filer ¨ Accelerated filer ¨
Non-accelerated filer   ¨
(Do not check if a smaller reporting company)
Smaller reporting company x

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

 

The number of shares outstanding of the issuer’s common stock, as of May 13, 2016, was 10,145,862.

 

 

 

 

PART I: FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

SIERRA MONITOR CORPORATION

Condensed Balance Sheets

 

Assets  March 31,
2016
(unaudited)
  

December 31,
2015

 

 
Current assets:          
Cash  $4,152,745   $4,883,373 
Trade receivables, less allowance for doubtful accounts of approximately $79,000 at March 31, 2016 and December 31, 2015   2,795,160    2,582,664 
Inventories, net   3,037,759    2,842,449 
Prepaid expenses   325,590    215,406 
Income tax deposit   25,958    11,887 
Deferred income taxes - current   308,486    308,486 
Total current assets   10,645,698    10,844,265 
           
Property and equipment, net   189,915    226,888 
Other assets   316,473    365,960 
Total assets  $11,152,086   $11,437,113 
Liabilities and Shareholders’ Equity          
Current liabilities:          
Accounts payable  $942,457   $978,838 
Accrued compensation expenses   497,992    654,609 
Other current liabilities   157,786    148,361 
Total current liabilities   1,598,235    1,781,808 
           
Deferred tax liability   164,341    164,341 
Total liabilities   1,762,576    1,946,149 
           
Commitments and contingencies
Shareholders’ equity:
          
Common stock, $0.001 par value; 20,000,000 shares authorized; 10,145,862 shares issued and outstanding, at March 31, 2016 and December 31, 2015.   10,146    10,146 
Additional paid-in capital   3,870,568    3,772,435 
Retained earnings   5,508,796    5,708,383 
Total shareholders’ equity   9,389,510    9,490,964 
Total liabilities and shareholders’ equity  $11,152,086   $11,437,113 

 

See accompanying notes to the unaudited interim condensed financial statements.

 

Page 1 of 14

 

 

SIERRA MONITOR CORPORATION

Condensed Statements of Operations

 

(Unaudited)

 

   Three months ended 
   March 31, 
   2016   2015 
Net sales  $4,540,997   $4,927,787 
Cost of goods sold   1,912,780    1,981,927 
Gross profit   2,628,217    2,945,860 
Operating expenses          
Research and development   699,921    566,081 
Selling and marketing   1,256,433    1,184,678 
General and administrative   769,139    776,254 
    2,725,493    2,527,013 
(Loss) income from operations   (97,276)   418,847 
Interest income   53    32 
(Loss) income before income taxes   (97,223)   418,879 
Income tax provision   905    205,384 
Net  (loss) income  $(98,128)  $213,495 
Net (loss) income available to common shareholders per common share:          
Basic  $(0.01)  $0.02 
Diluted  $(0.01)  $0.02 
Weighted average number of common shares used in per share computations:          
Basic   10,145,862    10,128,311 
Diluted   10,145,862    10,143,097 

 

See accompanying notes to the unaudited interim condensed financial statements.

                         

Page 2 of 14

 

 

SIERRA MONITOR CORPORATION

Condensed Statements of Cash Flows

 

(Unaudited)

 

   Three months ended 
   March 31, 
   2016   2015 
Cash flows from operating activities:          
Net (loss) income  $(98,128)  $213,495 
Adjustments to reconcile net (loss) income to net cash  (used in) provided by operating activities:          
Depreciation and amortization   92,315    108,584 
Provision for doubtful accounts   -    6,308 
Provision for inventory losses   22,500    11,165 
Stock-based compensation expense   98,133    94,582 
Change in operating assets and liabilities:          
Trade receivables   (212,496)   116,648 
Inventories   (217,810)   192,057 
Prepaid expenses   (110,184)   38,911 
Accounts payable   (36,381)   89,342 
Accrued compensation expenses   (156,617)   (15,161)
Income taxes payable   (14,071)   200,295 
Other current liabilities   9,425    8,252 
Net cash (used in) provided by operating activities   (623,314)   1,064,478 
Cash flows from investing activities:          
Purchases of property and equipment   (6,455)   (123,732)
Other long term assets   -    (96,247)
Other assets   600    (33,472)
Net cash used in investing activities   (5,855)   (253,451)
Cash flows from financing activities:          
Dividend payout   (101,459)   (101,283)
Net cash used in financing activities  $(101,459)  $(101,283)
Net (decrease) increase in cash and cash equivalents:   (730,628)   709,744 
Cash and cash equivalents at beginning of period:  $4,883,373   $3,339,952 
Cash and cash equivalents at end of period:  $4,152,745   $4,049,696 

 

 

See accompanying notes to the unaudited interim condensed financial statements.

Page 3 of 14

 

 

SIERRA MONITOR CORPORATION

 

Notes to the Interim Condensed Financial Statements

(Unaudited)

March 31, 2016

 

Basis of Presentation

 

The accompanying unaudited interim condensed financial statements have been prepared by Sierra Monitor Corporation (the “Company,” “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 (“U.S. 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, 2015 balances within these interim condensed financial statements were derived from the audited 2015 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, 2015, which was filed with the SEC on March 30, 2016. 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 solutions that connect and protect high-value infrastructure assets. 

 

The Company’s FieldServer family of protocol gateways is used by system integrators and original equipment manufacturers (“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 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 for remote monitoring, control, and analytics.  Offering 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.

 

The Company’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 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 in small 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”.

 

Page 4 of 14

 

 

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, 2015 audited financial statements, filed previously with the SEC in our Annual Report on Form 10-K on March 30, 2016, that are required to be adopted during the year ended December 31, 2016, did not have or are not expected to have a significant impact on the Company’s 2016 financial statements.

 

c)Employee Stock-Based Compensation

 

In March 2016, the Company’s 2006 Stock Plan expired. In April 2016, the Company’s board of directors 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 becomes effective, expire or otherwise terminate without having been exercised in full, or are 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. Consequently, as of March 31, 2016, no shares were available for issuance under the 2006 Stock Plan or the 2016 Stock Plan. Options are granted under our 2006 Stock Plan and 2016 Stock Plan at the fair market value of our common stock at the grant date, typically vest ratably over 4 years, and expire 10 years from the grant date.

 

All share-based payments to employees (incentive stock options) are recognized in the financial statements based on their fair values at the date of grant. The calculated fair value is recognized as expense (net of any capitalization) over the requisite service period, net of estimated forfeitures, using the straight-line method. The Company considers many factors when estimating expected forfeitures, including types of awards, employee class and historical experience. The modified prospective method of application requires compensation expense to be recognized in the financial statements for all unvested stock options beginning in the quarter of award. The cost is based on the grant date fair value of the stock option. Compensation expense recognized in future periods for share-based compensation will be adjusted for the effects of estimated forfeitures.

 

For the three-month periods ended March 31, 2016 and 2015, general and administrative expenses included stock based compensation expense of $98,133 and $94,582, respectively, decreasing the Company's income before income taxes and net income resulting from the recognition of compensation expense associated with employee stock options. There was no material impact on the Company’s basic and diluted net income per share as a result of recognizing the employee stock-based compensation expense. The Company did not modify the terms of any previously granted stock options during the three-month periods ended March 31, 2016 and 2015.

 

d)Subsequent Events

 

Management has evaluated events subsequent to March 31, 2016 through the date that the accompanying condensed financial statements were filed with the SEC for transactions and other events which may require adjustment of and/or disclosure in such financial statements.

 

Page 5 of 14

 

 

Inventories

 

A summary of inventories is as follows:

 

   March 31, 2016
(unaudited)
   December 31, 2015 
Raw materials  $1,478,932   $1,427,954 
Work-in-process   919,537    808,335 
Material at vendor   488,422    411,785 
Finished goods   370,940    391,947 
Less: Allowance for obsolescence reserve   (220,072)   (197,572)
   $3,037,759   $2,842,449 

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 March 31, 2016, there were no options to acquire shares of common stock that were considered potentially dilutive due to the net loss for the quarter. At March 31, 2015, outstanding options to acquire 1,678,500 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.

 

The following is a reconciliation of the shares used in the computation of basic and diluted EPS for the periods ended March 31, 2016 and 2015, respectively:

 

   Three months ended 
   March 31, 2016   March 31, 2015 
   (unaudited)   (unaudited) 
Basic EPS – weighted-average number of common shares outstanding   10,145,862    10,128,311 
Effect of dilutive potential common shares – stock options outstanding   -    14,786 
Diluted EPS – weighted-average number of common shares and potential common shares outstanding   10,145,862    10,143,097 

 

Concentrations

 

No customer made up more than 10% of accounts receivable at March 31, 2016 and at March 31, 2015. No customer made up more than 10% of net sales for the three-month periods ended March 31, 2016 and March 31, 2015.

 

The Company currently maintains substantially all of its day to day operating cash with a major financial institution. At times, cash balances may be in excess of the amounts insured by the Federal Deposit Insurance Corporation. Cash balances of $3,403,000 and $4,133,000 were in excess of such insured amounts at March 31, 2016 and December 31, 2015, respectively.

 

Page 6 of 14

 

 

Segment Information

 

The Company operates in a single business segment, industrial instrumentation. The Company’s chief operating decision maker, the Chief Executive Officer (“CEO”), evaluates the performance of the Company and makes operating decisions based on financial data consistent with the presentation in the accompanying condensed financial statements.

 

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

 

   Three months ended 
  

March 31, 2016

(unaudited)

  

March 31, 2015

(unaudited)

 
Instrumentation  $2,067,584   $2,332,762 
FieldServers   2,473,413    2,595,025 
   $4,540,997   $4,927,787 

 

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 three months of fiscal year 2016 and there were no outstanding balances at March 31, 2016 and December 31, 2015. As of March 31, 2016, the Company was in compliance with the financial covenants of the line of credit.

 

Stock Option Grants

 

No stock options were granted during the three-month period ended March 31, 2016 and a total of 100,000 stock options were granted during the three-month period ended March 31, 2015.

 

Stock Option Exercises and Expirations

 

No stock options were exercised and 20,500 options expired during the three-month period ended March 31, 2016. No stock options were exercised and 18,000 options expired during the three-month period ended March 31, 2015.

 

Commitments and Contingencies

 

From time to time, the Company is subject to legal proceedings and claims that arise in the normal course of business. While the outcome of these proceedings and claims cannot be predicted, we currently are not a party to any legal proceedings, the adverse outcome of which, in management’s opinion, individually or in the aggregate, is expected to have a material adverse effect on the Company’s financial position or results of operations.

 

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ITEM 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

This Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Statements that are not statements of historical fact may be deemed to be forward-looking statements. The words “believe,” “expect,” “intend,” “plan,” “project,” “will,” and similar words and phrases as they relate to us also identify forward-looking statements. Such forward-looking statements include any expectations of operating and non-operating expense, including research and development expense, sufficiency of resources, including cash and accounts receivable, estimates of allowances for doubtful accounts, credit lines or other financial items; any statements concerning future sales levels and timingand 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, 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, 2015, as such section may be updated in our subsequent Forms 10-K, 10-Q and 8-K filed with, or furnished to, the SEC. We urge you to review and consider the various disclosures made by us from time to time in our filings with the SEC that attempt to advise you of the risks and factors that may affect our future results. We expressly disclaim any obligation to release publicly any updates or revisions to any forward-looking statement to reflect any changes in expectations, or any change in events or circumstances on which those statements are based, unless otherwise required by law.

 

Results of Operations

 

For the three months ended March 31, 2016, Sierra Monitor Corporation (“we” or the “Company”) reported net sales of $4,540,997 compared to $4,927,787 for the three months ended March 31, 2015. The results for the first quarter of fiscal 2016 represent an 8% decrease from the same period in the prior year.

 

Sales of gas detection products, including industrial accounts, military sales and environment controllers for telephone company applications decreased by approximately 11% in the first quarter of 2016 compared to the same period in 2015. Sales to industrial accounts were 13% lower, military sales were 10% lower, and sales of environmental controllers were 22% higher in the first quarter of 2016 compared to the same period in 2015. Our sales to the U.S. Navy are dependent upon military spending and fluctuate as a result. The decline in industrial gas detection products was primarily due to a decline in sales in the international region.

 

Sales of our FieldServer product line decreased by 5% in the first quarter of 2016 compared to the first quarter of 2015. FieldServer units include box products and original equipment manufacturer (“OEM”) modules. Box products provide a platform for delivery and operation of our software for building automation integration and are generally sold to integrators. OEM modules are sold to companies that integrate our products into their commercial offerings. Box product sales decreased by approximately 5% in the three-month period ended March 31, 2016 on a year-over-year basis. OEM module sales decreased by approximately 8% in the first quarter of 2016 compared to the first quarter of 2015 with weakness in international sales and a slow start in the Americas.

 

Gross profit for the three-month period ended March 31, 2016 was $2,628,217, or 58% of net sales, compared to $2,945,860, or 60% of net sales, for the same period in the previous year. Our gross margin in the first quarter of 2016 is within our historical range of 56-60%.

 

Page 8 of 14

 

 

Expenses for research and development, which include new product development and engineering to sustain existing products, were $699,921, or 15% of net sales, for the three-month period ended March 31, 2016, compared with $566,081, or 11% of net sales, in the comparable period in 2015. We have increased our research and development expenses to support new product innovation required to support our planned revenue growth in 2017 and beyond.

 

Selling and marketing expenses, which consist primarily of salaries, commissions and promotional expenses, for the three-month period ended March 31, 2016 were $1,256,433, or 28% of net sales, compared to $1,184,678, or 24% of net sales, in the same period in the prior year. Selling and marketing expenses remained relatively flat compared to the first quarter of 2015 though we made changes within the sales organization to align resources with opportunities.

 

General and administrative expenses for the first quarter of 2016 were $769,139, or 17% of net sales, compared to $776,254, or 16% of net sales, in the same period in the prior year. General and administrative expenses remained relatively flat in first quarter of 2016 compared to the same period in 2015.

 

Loss from operations for the three-month period ended March 31, 2016 was $97,276, or (-2)% of net sales, compared to income of $418,847, or 8% of net sales, in the same period in the prior year. The loss is primarily the result of lower net sales. Net loss for the three-month period ended March 31, 2016 was $98,128, or approximately (-2)% of net sales, compared to net income of $213,495, or approximately 4% of net sales, for the same period in the prior year.

 

Liquidity and Capital Resources

 

During the three months ended March 31, 2016, net cash used by operating activities was approximately $623,000 compared to approximately $1,064,000 net cash provided by operating activities for the same period in 2015. Working capital was approximately $9,047,000 at March 31, 2016, a decrease of approximately $15,000 from December 31, 2015. At March 31, 2016, our balance sheet reflected approximately $4,153,000 of cash and $2,795,000 of net trade receivables. At December 31, 2015, our total cash on hand was approximately $4,883,000 and our net trade receivables were approximately $2,583,000. The difference in the cash flow and balance sheet in first quarter of 2016 compared with the first quarter of 2015 was due to a number of factors including a net loss for the period, increased net receivables, increased inventory, and decreased taxes payable.

 

At March 31, 2016, we had no long term liabilities except for deferred tax liabilities.

 

We maintain a line of credit with a commercial bank in the maximum amount of $2,000,000. No borrowings have been made under our line of credit during the first three months of fiscal year 2016 and there were no outstanding balances at March 31, 2016 and December 31, 2015. As of March 31, 2016, 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 the Company’s anticipated level of operations through at least January 1, 2017. 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 an increase or decrease to our liquidity in any material way.

 

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Critical Accounting Policies

 

The preparation of financial statements and related disclosures in conformity with U.S. GAAP 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.

 

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FieldServer Services

 

FieldServer services consist of orders for custom development of protocol drivers.  Generally customers place orders for FieldServer products concurrently with their order for protocol drivers. However, if custom development of the protocol driver is required, the product order is not processed until development of the protocol driver is complete. Orders are received in the same manner as described in FieldServer Products above, but due to the non-recurring engineering aspect of the customized driver development the Company is more likely to have a written evidence trail of a quotation and a hard copy order.  The driver development involves further research after receipt of order, preparation of a scope document to be approved by the customer and then engineering time to write, test and release the driver program.  When development of the driver is complete the customer is notified and can proceed with a FieldServer product (see FieldServer Products above).  Revenues for driver development are billed and recognized upon shipment or delivery of the related product that includes the developed protocol drivers (as noted in FieldServer Products above). Collectability is reasonably assured as described in FieldServer Products above.

 

Discounts and Allowances

 

Discounts are applied at time of order entry and sales are processed at net pricing. No allowances are offered to customers.

 

b)Accounts Receivable and Related Allowances

 

Our domestic sales are generally made on an open account basis unless specific experience or knowledge of the customer’s potential inability or unwillingness to meet the payment terms dictate secured payments. Our international sales are generally made based on secure payments, including cash wire advance payments and letters of credit. International sales are made on open account terms where sufficient historical experience justifies the credit risks involved. In many of our larger sales, the customers are frequently construction contractors who are in need of our field services to complete their work and obtain payment. Management’s ability to manage the credit terms and take advantage of the leverage provided by the clients’ need for our services is critical to the effective application of credit terms and minimization of accounts receivable losses.

 

We maintain an allowance for doubtful accounts which is analyzed on a periodic basis to determine adequacy. We believe that we have demonstrated the ability to make reasonable and reliable estimates of allowances for doubtful accounts based on significant historical experience.

 

c)Inventories

 

Inventories are stated at the lower of cost or estimated market, cost being determined on the first-in, first-out method. The Company uses an Enterprise Requirements Planning (“ERP”) software system which provides data upon which management relies to determine inventory trends and identify excesses. The carrying value of inventory is reduced to market for slow moving and obsolete items based on historical experience and current product demand. We evaluate the carrying value of inventory quarterly. The adequacy of these carrying amounts is dependent upon management’s ability to forecast demands accurately, manage product changes efficiently, and interpret the data provided by the ERP system.

 

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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 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. Nagaraj and Ms. Allen concluded that, as of March 31, 2016, 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 have been no significant changes in our internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) during the quarter ended March 31, 2016 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II: OTHER INFORMATION

 

ITEM 6. EXHIBITS

 

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-K 3.2 March 30, 2015
         
31.1 Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Filed herewith    
         
31.2 Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Filed herewith    
         
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. Furnished herewith    
         
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. 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.

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

    SIERRA MONITOR CORPORATION
    Registrant
     
Date: May 13, 2016 By: /s/ Varun Nagaraj
    Varun Nagaraj
    President
    Chief Executive Officer
     
Date: May 13, 2016 By: /s/ Tamara S. Allen
    Tamara S. Allen
    Chief Financial Officer

 

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