10-Q 1 v446427_10q.htm 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 June 30, 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 August 15, 2016 was 10,145,862.

 

 

 

 

PART I: FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

SIERRA MONITOR CORPORATION

 

Condensed Balance Sheets

 

   June 30,
2016
(unaudited)
   December 31,
2015
 
Assets          
Current assets:          
Cash  $4,327,076   $4,883,373 
Trade receivables, less allowance for doubtful accounts of approx. $79,000 at June 30, 2016 and December 31, 2015   2,570,163    2,582,664 
Inventories, net   2,877,848    2,842,449 
Prepaid expenses   285,999    215,406 
Income tax deposit   159,929    11,887 
Deferred income taxes - current   308,486    308,486 
Total current assets   10,529,501    10,844,265 
           
Property and equipment, net   187,641    226,888 
Other assets   269,098    365,960 
Total assets  $10,986,240   $11,437,113 
Liabilities and Shareholders’ Equity          
Current liabilities:          
Accounts payable  $807,866   $978,838 
Accrued compensation expenses   478,750    654,609 
Other current liabilities   145,693    148,361 
Total current liabilities   1,432,309    1,781,808 
           
Deferred tax liability   164,341    164,341 
Total liabilities   1,596,650    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 June 30, 2016 and December 31, 2015.   10,146    10,146 
Additional paid-in capital   3,967,691    3,772,435 
Retained earnings   5,411,753    5,708,383 
Total shareholders’ equity   9,389,590    9,490,964 
Total liabilities and shareholders’ equity  $10,986,240   $11,437,113 

 

See accompanying notes to the unaudited interim condensed financial statements.

 

Page 2 of 16

 

 

SIERRA MONITOR CORPORATION

 

Condensed Statements of Operations

 

(Unaudited)

 

   Three months ended June 30,   Six months ended June 30, 
   2016   2015   2016   2015 
Net sales  $4,818,592   $5,016,999   $9,359,589   $9,944,786 
Cost of goods sold   2,022,418    2,033,284    3,935,198    4,015,211 
Gross profit   2,796,174    2,983,715    5,424,391    5,929,575 
Operating expenses                    
Research and development   680,441    574,965    1,380,362    1,141,046 
Selling and marketing   1,216,580    1,308,946    2,473,013    2,493,624 
General and administrative   828,098    755,207    1,597,237    1,531,461 
    2,725,119    2,639,118    5,450,612    5,166,131 
Income (loss) from operations   71,055    344,597    (26,221)   763,444 
Interest income   150    31    203    63 
Income (loss) before income taxes   71,205    344,628    (26,018)   763,507 
Income tax  provision   66,789    175,577    67,694    380,961 
Net income (loss)  $4,416   $169,051   $(93,712)  $382,546 
Net income (loss) available to common shareholders per common share                    
Basic:  $0.00   $0.02   $(0.01)  $0.04 
Diluted:  $0.00   $0.02   $(0.01)  $0.04 
Weighted average number of common shares used in per share computations                    
Basic:   10,145,862    10,128,311    10,145,862    10,128,311 
Diluted:   10,147,539    10,144,109    10,145,862    10,140,638 

 

See accompanying notes to the unaudited interim condensed financial statements.

 

Page 3 of 16

 

 

SIERRA MONITOR CORPORATION

 

Condensed Statements of Cash Flows

 

(Unaudited)

 

   Six months ended 
   June 30, 
   2016   2015 
Cash flows from operating activities:          
Net (loss) income  $(93,712)  $382,546 
Adjustments to reconcile net (loss) income to net cash  (used in) provided by operating activities:          
Depreciation and amortization   179,505    212,635 
Provision for doubtful accounts   -    6,308 
Provision for inventory losses   (21,411)   47,165 
Stock-based compensation expense   195,256    188,862 
Change in operating assets and liabilities:          
Trade receivables   12,501    277,704 
Inventories   (13,988)   148,443 
Prepaid expenses   (70,593)   104,200 
Income tax deposit   (148,042)   45,873 
Accounts payable   (170,972)   74,775 
Accrued compensation expenses   (175,859)   206,913 
Other current liabilities   (2,668)   3,860 
Net cash (used in) provided by operating activities   (309,983)   1,699,284 
Cash flows from investing activities:          
Purchases of property and equipment   (43,996)   (128,833)
Other assets   600    (183,570)
Net cash used in investing activities   (43,396)   (312,403)
Cash flows from financing activities:          
Dividend payout   (202,918)   (202,566)
Net cash used in financing activities  $(202,918)  $(202,566)
Net (decrease) increase in cash and cash equivalents:   (556,297)   1,184,315 
Cash and cash equivalents at beginning of period:  $4,883,373   $3,339,952 
Cash and cash equivalents at end of period:  $4,327,076   $4,524,267 

 

See accompanying notes to the unaudited interim condensed financial statements.

 

Page 4 of 16

 

 

SIERRA MONITOR CORPORATION

 

Notes to the Interim Condensed Financial Statements

(Unaudited)

June 30, 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, a California corporation (the “Company”, “Sierra Monitor”, “we” or “us”), was founded in 1978. The Company addresses the industrial and commercial facilities management market with Industrial Internet of Things (IIoT) solutions that connect and protect high-value infrastructure assets. 

 

Our 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 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. 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. Embedded software also includes an application engine and several local web applications that run within the application engine, providing additional value to the devices being interfaced with the gateway. Offering embedded software on proprietary hardware platforms allows us to increase the value proposition while protecting our intellectual property.

 

The FieldServer gateway is also available to OEMs as a module for installation in customer devices and controllers under the ProtoCessor name. The FieldServer gateways work with our newly introduced FieldPoP™ solution, a cloud-based service that registers and manages FieldServers, provides secure remote access to the local applications that run on the FieldServer, and integrates with third-party business applications and advanced visualization and analytics cloud platforms. Collectively, we refer to the FieldServer gateway (including the applications that run on it), the FieldPoP service, and the third party integrations as our “IIoT On-Ramp Suite”.

 

Page 5 of 16

 

 

Our Sentry IT fire and gas detection solutions 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 fire and gas detection solution with the facility’s supervisory or management system. With more than 100,000 detector modules sold, our 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. 

 

Our 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. 

 

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. 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 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.

 

Page 6 of 16

 

 

For the six-month periods ended June 30, 2016 and 2015, general and administrative expenses included stock based compensation expense of $195,256 and $188,862, respectively, decreasing the Company's income before provision for income taxes and net income resulting from the recognition of compensation expense associated with employee stock options. There was no material impact on the Company's basic and diluted net income per share as a result of recognizing the employee stock-based compensation expense. The Company did not modify the terms of any previously granted stock options during the six-month periods ended June 30, 2016 and 2015.

 

d)Subsequent Events

 

Management has evaluated events subsequent to June 30, 2016 through the date that the accompanying condensed financial statements were filed with the Securities and Exchange Commission for transactions and other events which may require adjustment of and/or disclosure in such financial statements.

 

Inventories

 

A summary of inventories follows:

 

   June 30, 2016   December 31, 2015 
Raw materials  $1,460,856   $1,427,954 
Work-in-process   814,566    808,335 
Materials at vendor   515,590    411,785 
Finished goods   285,497    391,947 
Less: Allowance for obsolescence reserve   (198,661)   (197,572)
   $2,877,848   $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 June 30, 2016 and 2015, outstanding options to acquire 1,788,000 and 1,514,000, shares of common stock, respectively, were not considered potentially dilutive common shares due to the exercise price of such options being higher than the stock price used in the EPS calculation.

 

The following is a reconciliation of the shares used in the computation of basic and diluted EPS for the three and six-month periods ended June 30, 2016 and 2015, respectively:

 

Page 7 of 16

 

 

   Three months ended   Six months ended 
   June 30, 2016   June 30, 2015   June 30, 2016   June 30, 2015 
Basic EPS – weighted-average number of common shares outstanding   10,145,862    10,128,311    10,145,862    10,128,311 
Effect of dilutive potential common shares – stock options outstanding   1,677    15,798    -    12,327 
Diluted EPS – weighted-average number of common shares and potential common shares outstanding   10,147,539    10,144,109    10,145,862    10,140,638 

 

Concentrations

 

No customer made up more than 10% of accounts receivable at June 30, 2016 and two customers each made up more than 10% of accounts receivable at December 31, 2015. No customers made up more than 10% of net sales for the six-month period ended June 30, 2016 or June 30, 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 $3,577,000 and $4,133,000 were in excess of such insured amounts at June 30, 2016 and December 31, 2015, respectively.

 

Segment Information

 

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

 

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

 

   Three months ended June 30,   Six months ended June 30, 
   2016   2015   2016   2015 
Instrumentation  $2,199,892   $2,333,754   $4,267,476   $4,666,516 
FieldServers   2,618,700    2,683,245    5,092,113    5,278,270 
   $4,818,592   $5,016,999   $9,359,589   $9,944,786 

 

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 six months of fiscal year 2016 and there were no outstanding balances at June 30, 2016 and December 31, 2015. As of June 30, 2016, the Company was in compliance with the financial covenants to which it is subject under the line of credit.

 

Stock Option Grants

 

No options were granted during the three-month and six-month periods ended June 30, 2016. Additionally, no options were granted during the three-month period ended June 30, 2015, however, a total of 100,000 stock options were granted during the six-month period ended June 30, 2015.

 

Page 8 of 16

 

 

Stock Option Exercise and Expiration

 

No stock options were exercised in the six-month period ended June 30, 2016. During the same period, 27,500 options expired.

 

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

 

Commitments and Contingencies

 

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

 

Page 9 of 16

 

 

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 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, 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-month period ended June 30, 2016, Sierra Monitor Corporation (“we” or the “Company”) reported net sales of $4,818,592 compared to $5,016,999 for the three-month period ended June 30, 2015. For the six-month period ended June 30, 2016, net sales were $9,359,589 compared with $9,944,786 for the six-month period ended June 30, 2015. The sales results for the three-month period ended June 30, 2016 represent a decrease of 4% compared to the same period in 2015. The sales results for the six-month period ended June 30, 2016 represent a 6% decrease compared to the same period in 2015.

 

Sales of gas detection products, including industrial accounts, military sales and environment controllers for telephone company applications, decreased by approximately 6% in the second quarter of 2016 compared to the same period in 2015. In the first half of 2016, sales of gas detection products were 9% lower than the same period in 2015. During the first half of 2016, we experienced some project delays in our core North American business, and recognized lower sales in the Middle East and Latin America primarily due to reduced infrastructure investment in the oil and gas sector and increased competition.

 

Sales of our FieldServer product line decreased 2% in the second quarter of 2016 compared to the second quarter of 2015. In the first half of 2016, sales of FieldServer products decreased approximately 4% compared with the same period in 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 projects and are generally sold to integrators. OEM modules are sold to companies that integrate our products into their commercial offerings. We increased the number of new OEM design wins in the first half of 2016 relative to the number of design wins in the first half of 2015. We believe that design wins are critical to our business because they help to offset design-outs that occur from time-to-time as OEMs modify their designs or introduce alternate products. However, in the first half of 2016, revenues from design-in OEM projects did not sufficiently offset revenue losses as a result of design-outs. In the quarter ended June 30, 2016, we initiated a beta program for our FieldPoP service with our OEM customers, and intend to expand the number of participants in this program in future periods.

 

Page 10 of 16

 

 

Gross profit for the three-month period ended June 30, 2016 was approximately $2,796,000, or 58% of net sales, compared to approximately $2,984,000, or 59% of net sales, in the same period in the previous year. Gross profit for the six-month period ended June 30, 2016 was approximately $5,424,000, or 58% of net sales, compared to approximately $5,930,000, or 60% of net sales, in the same period in the previous year. Gross margins were negatively impacted by specific decisions around customer product upgrades to enhance customer loyalty for the long-term.

 

Expenses for research and development, which include new product development and engineering to sustain existing products, were approximately $680,000, or 14% of net sales, for the three-month period ended June 30, 2016 compared to approximately $575,000, or 11% of net sales, in the comparable period in 2015. In the six-month periods ended June 30, 2016 and June 30, 2015, research and development expenses were approximately $1,380,000, or 15% of net sales, and approximately $1,141,000, or 11% of net sales, respectively. Our increased research and development spending is consistent with our strategy of developing products that we anticipate will have a positive impact on revenues in future periods. We introduced the FieldPoP service in Q1 2016 and will be beta testing and enhancing the product throughout 2016. Additionally, we introduced the Red Owl line of flame detectors in Q2 2016 and are in the process of certifying them with Nationally Certified Testing Laboratories (NRTL)

 

Selling and marketing expenses, which consist primarily of salaries, commissions and promotional expenses were approximately $1,217,000, or 25% of net sales, for the three-month period ended June 30, 2016, compared to approximately 1,309,000, or 26% of net sales, in the comparable period in the prior year. For the six-month periods ended June 30, 2016 and June 30, 2015, selling and marketing expenses were approximately $2,473,000, or 26% of net sales, and approximately $2,494,000, or 25% of net sales, respectively. We maintained a flat level of spending between the first half of 2016 and the first half of 2016, while tuning our sales personnel and focus.

 

General and administrative expenses, which consist primarily of salaries, building rent, insurance expenses, information technology expenses and fees for professional services, were approximately $828,000, or 17% of net sales, for the three-month period ended June 30, 2016 compared to approximately $755,000, or 15% of net sales, in the three-month period ended June 30, 2015. For the six-month periods ended June 30, 2016 and June 30, 2015, general and administrative expenses were approximately $1,597,000, or 17% of net sales, and approximately $1,531,000, or 15% of net sales, respectively. The increase in general and administrative expenses is a result of greater investment in our IT systems for enterprise reporting and product line management as well as an increase in legal fees.

 

In the three-month period ended June 30, 2016, our income from operations was approximately $71,000, representing a decrease of approximately $274,000 compared to our income from operations of approximately $345,000 in the three-month period ended June 30, 2015. In the six-month period ended June 30, 2016, our loss from operations was approximately $26,000 representing a decrease of approximately $790,000 compared to our income from operations of $763,000 in the six-month period ended June 30, 2015. The decrease in income in both the second quarter and first half of 2016 compared to the same periods in 2015 is due primarily to lower sales and gross margins.

 

Page 11 of 16

 

 

After interest and tax provisions, our net income for the three-month period ended June 30, 2016 was approximately $4,000 compared to net income of approximately $169,000 in the same period of 2015. For the six-month period ended June 30, 2016, our net loss was approximately $94,000 compared to a net income of approximately $383,000 in the same period of 2015.

 

Liquidity and Capital Resources

 

During the six months ended June 30, 2016, net cash used by operating activities was approximately $310,000 compared to net cash provided by operating activities of approximately $1,699,000 for the same period in 2015. The change was due primarily to changes in income, income taxes payable and accrued compensation. Working capital was approximately $9,097,000 at June 30, 2016, an increase of approximately $35,000 from December 31, 2015. At June 30, 2016, our balance sheet reflected approximately $4,327,000 of cash and approximately $2,570,000 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.

 

At June 30, 2016, we had no long term liabilities except for deferred tax 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 six months of fiscal year 2016 and there were no outstanding balances at June 30, 2016 and December 31, 2015. As of June 30, 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 our 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 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 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:

 

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Gas Detection and Environment Control Products

 

Gas detection and environment control products are sold as off-the-shelf products with prices fixed at the time of order. Orders delivered to the Company by phone, fax, mail or email are considered valid purchase orders and once accepted by the Company are deemed to be the final understanding between us and our customer as to the specific nature and terms of the agreed-upon sale transaction. Products are shipped and are considered delivered when (a) for FOB factory orders they leave our shipping dock or (b) for FOB customer dock orders upon confirmation of delivery.  The creditworthiness of customers is generally assessed prior to the Company accepting a customer’s first order. Additionally, international customers and customers who have developed a history of payment problems are generally required to prepay or pay through a letter-of-credit.

 

Gas Detection and Environment Control Services

 

Gas detection and environment control services consist of field service orders (technical support) and training, which are provided separate from product orders. Orders are accepted in the same forms as discussed for Gas Detection and Environment Control Products above with hourly prices fixed at the time of order. Revenue recognition occurs only when the service activity is completed. Such services are provided to current and prior customers, and, as noted above, creditworthiness has generally already been assessed. In cases where the probability of receiving payment is low, a credit card number is collected for immediate processing.

 

FieldServer Products

 

FieldServer products are sold in the same manner as Gas Detection and Environment Control Products (as discussed above) except that the products contain embedded software, which is integral to the operation of the device.  The software embedded in FieldServer products includes two items:  (a) a compiled program containing (i) the basic operating system for FieldServer products, which is common to every unit, and (ii) the correct set of protocol drivers based on the customer order (see FieldServer Services below for more information); and (b) a configuration file that identifies and links each data point as identified by the customer. The Company does not deem the hardware, operating systems with protocol drivers and configuration files to be separate units of accounting because the Company does not believe that they have value on a stand-alone basis. The hardware is useless without the software, and the software is only intended to be used in FieldServer hardware. Additionally, the software included in each sale is deemed not to require significant production, modification or customization, and therefore the Company recognizes revenues upon the shipment or delivery of products (depending on shipping terms), as described in Gas Detection and Environment Control Products above.

 

FieldServer Services

 

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

 

Discounts and Allowances

 

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

 

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b)Accounts Receivable and Related Allowances

 

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

 

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

 

c)Inventories

 

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

 

Off-Balance Sheet Arrangements.

 

We do not have any off-balance sheet arrangements that have or are reasonably likely to have a material current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

 

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 June 30, 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 June 30, 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: August 15, 2016 By: /s/ Varun Nagaraj
      Varun Nagaraj
      President
      Chief Executive Officer
       
Date: August 15, 2016 By: /s/ Tamara S. Allen
      Tamara S. Allen
      Chief Financial Officer
       

 

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