10-K 1 v462025_10k.htm FORM 10-K

 

U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

(Mark One)

xAnnual Report under Section 13 or 15(d) of the Securities Exchange Act of 1934

For the fiscal year ended December 31, 2016.

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

For the transition period from ___________ to ______________

Commission file number 0-7441

 

 

 

Sierra Monitor Corporation

(Exact name of registrant as specified in its charter)

 

California 95-2481914
(State of incorporation) (I.R.S. Employer ID No.)

 

1991 Tarob Court

Milpitas, California 95035

(Address of principal executive offices)

 

Issuer's telephone number, including area code: (408) 262-6611

 

 

 

Securities registered under Section 12(b) of the Exchange Act: None.

Securities registered under Section 12(g) of the Exchange Act:

Common Stock, par value $0.001 per share

(Title of class)

 

 

 

Check whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. ¨ Yes x No

 

Check whether the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act. ¨ Yes x No

 

Check whether the issuer (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. x Yes ¨ 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). x Yes ¨ No

 

Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B contained in this form, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x

 

Indicate by checkmark 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.

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

 

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

 

The aggregate market value of the voting and non-voting common stock held by non-affiliates of the Registrant as of June 30, 2016 was approximately $5,389,013 based upon the last reported sale price of $1.47 per share on the Over the Counter Bulletin Board, which occurred on June 30, 2016. For purposes of this disclosure, common stock held by persons who hold more than 5% of the outstanding voting shares and common stock held by officers and directors of the Registrant have been excluded in that such persons may be deemed to be "affiliates" as that term is defined under the rules and regulations promulgated under the Securities Act of 1933. This determination is not necessarily conclusive.

 

The number of shares of the Registrant's common stock outstanding as of March 20, 2017 was 10,181,553.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Certain information required under Item 8, and information required under Items 10, 11, 12, 13 and 14 of Part III of this Annual Report on Form 10-K is incorporated by reference from the Registrant's Proxy Statement for the 2017 Annual Meeting of Shareholders to be held on or about May 31, 2017.

 

 

 

 

FORM 10-K

 

SIERRA MONITOR CORPORATION

 

TABLE OF CONTENTS

 

PART I.    
     
Item 1. Business 1
     
Item 1A. Risk Factors 5
     
Item 2. Properties 6
     
Item 3. Legal Proceedings 6
     
PART II.    
     
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 7
     
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 9
     
Item 8. Financial Statements and Supplementary Data 12
     
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 12
     
Item 9A. Controls and Procedures 12
     
Item 9B. Other Information 13
     
PART III.    
     
Item 10. Directors, Executive Officers, and Corporate Governance 14
     
Item 11. Executive Compensation 16
     
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 16
     
Item 13. Certain Relationships and Related Transactions, and Director Independence 17
     
Item 14. Principal Accounting Fees and Services 17
     
PART IV.    
     
Item 15. Exhibits and Financial Statement Schedules 18
     
SIGNATURES 20

 

 

 

 

FORWARD-LOOKING STATEMENTS

 

This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These statements may generally be identified by the use of such words as “expect,” “anticipate,” “believe,” “intend,” “plan,” “will,” or “shall,” or the negative of those terms. We have based these forward-looking statements on our current expectations and projections about future events. Actual results could differ materially from those projected in the forward-looking statements as a result of the risk factors set forth elsewhere in this report. Forward-looking statements in this report include, among others, statements regarding the sufficiency of cash and accounts receivable, potential litigation expenses, methods, estimates and judgments in accounting policies, our internal control environment, effect of inflation and fluctuation in currency exchange rates on our results of operations, critical accounting policies, our dividend policy and other matters discussed under Part I, Item 1A “Risk Factors,” and Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” below. Our future operating results may be affected by a number of factors, including 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 other matters discussed under Part I, Item 1A “Risk Factors” and Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” below. 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.

 

PART I

 

Item 1.Business.

 

General

 

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 target facility automation and facility safety requirements, also referred to as “Connect” and “Protect”.  

 

 - 1 - 

 

 

Products and Applications

 

Our 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 FieldPoP™ device 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, WiFi, 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 Sierra Monitor’s own FieldPoP device cloud. The FieldPoP device cloud portal is a proprietary, secure, and scalable Software-as-a-Service (SaaS) 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. In 2016, combined revenue from sales of our FieldServer family of products was approximately 54% of our sales compared to approximately 53% in 2015.

 

Our Sentry IT fire and gas 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 fire and gas detection solution with the facility’s local supervisory system or to Sierra Monitor’s FieldPoP device cloud portal. 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.  Revenue from gas detection products was approximately 43% of our sales in 2016, compared to 43% in 2015.

 

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. Revenue from all products sold to the telecommunications industry was approximately 3% of our sales in 2016, compared to 3% in 2015.

 

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Research and Development

 

We maintain research and development programs to develop new products and to enhance and support existing products. We use a core group of experienced engineers, supported by a dynamic network of third-party specialists with skills as needed by specific projects. Our research and development expenses, which include costs for sustaining engineering and technical support, were $2,950,651 or 15% of our sales in 2016, compared to $2,369,996 or 12% of our sales in 2015.

 

Sales and Distribution

 

We use a combination of in-region sales managers and a centralized inside sales and customer support team. Our in-region sales managers are located in western, central, and eastern regions of North America. Additionally, we have in-region sales managers in Europe and the Middle East. The inside sales and customer support team is based in Milpitas, California. In addition to supporting in-region sales managers, the inside sales and customer support team also supports our selling efforts in Latin America and Asia.

 

Our FieldServer products are sold to hundreds of OEMS and integrators who then use the product as part of their system integration projects. We target OEMs in North America and Europe and integrators worldwide through in-region sales managers supported by inside sales and customer support team at our headquarters in Milpitas, California. Our FieldServer products are also available from leading on-line catalog distributors of industrial products.

 

Our Sentry products are primarily sold to engineering and installation firms that utilize the products as part of larger fire and safety facility projects. Our in-region and headquarters-based sales teams work with a network of independent sales representatives and value-added resellers to identify and fulfill such opportunities. After-sale service is carried out by certified service partners. There are currently 25 authorized representative companies in the United States and approximately 27 international sales partners. The majority of our domestic representatives have exclusive territories and the sales agreements with each representative restrict them from representing competing products.

 

Our marketing activities include maintaining a comprehensive and search-optimized web site and social media presence, participating in relevant trade shows and events, issuing newsletters, blogging, conducting on-line seminars and other forms of communication, seeking press coverage, and developing tools to assist in the selling effort.

 

Our sales and marketing expenses for 2016 were $4,899,882 or 26% of revenue, compared to $5,030,102 or 25% of revenue in 2015.

 

We consider that we operate in one business segment. Substantially all of the revenues reported in Part II, Item 7 of this Annual Report on Form 10-K are attributable to sales to that single segment. See “Note 8: Segment Reporting” to our Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K.

 

Employees

 

At December 31, 2016, we had a total of 79 full-time employees and consultants. At that date, 57 were located in Milpitas, California, and the rest were based out of regional offices.

 

Seasonality and Customer Concentration

 

The demand for monitoring devices and other products we manufacture is typically not seasonal. There were no customers to whom sales exceeded 10% of our net sales during 2016, or 2015. Factors affecting specific industries, such as telecommunications, building automation or petro-chemical processing, could affect our sales within any of those industries. Those factors may include, but are not limited to, a general economic downturn, labor problems, and rapid shifts in technology or introduction of competing products at lower prices.

 

 - 3 - 

 

 

Backlog

 

The commercial order backlog for our products at December 31, 2016 was approximately $4,647,653 compared to approximately $4,002,000 at December 31, 2015. The backlog includes orders for which we have not yet received engineering release from the customer. Since we generally ship many of our products within the same quarter that we receive a purchase order and engineering release from the customer, we believe that our backlog at any particular time is generally not indicative of the level of future sales.

 

Competition

 

The facility management market for automation and safety applications is highly competitive and generally price sensitive. The solutions that address this market compete on reliability, ease of use, product support, price, and increasingly, the ability to enable the IIoT vision.

 

Our FieldServer family of protocol gateway products competes in the building or industrial automation industries with products or alternate methods and technologies offered by, among others, Honeywell Tridium, Contemporary Controls, HMS, Control Solutions Inc., Loytec Electronics, and in some cases protocol gateway functionality developed in-house by device or system OEMs. In application areas outside of building and industrial automation where multi-protocol translation requirements are fewer, FieldServer protocol gateways may compete with gateways provided by companies such as Dell and Advantech. Our FieldPoP device cloud may compete with cloud-based platform offerings from companies such as PTC/ThingWorx, Amazon AWS IoT, Microsoft Azure IoT, Google Cloud, and other IoT startup companies.

 

Our Sentry IT gas detection products compete with systems offered by Draeger Safety Inc., Mine Safety Appliance Company, Honeywell Life Safety, TYCO, and the Detector Electronics division of UTC. Most of these competitors in the fire and gas detection area offer broad product lines including items that do not compete with our products and have greater financial, marketing and manufacturing resources than we do.

 

Manufacturing and Suppliers

 

We purchase materials and components for use in manufacturing our products. The majority of the materials and components used in our products are standard items which can be purchased from multiple distributors or fabricated by multiple custom fabrication vendors. Components which are generally purchased from sole sources are those which require a specific consistent quality such as gas sensors. Our principal suppliers of gas sensors are City Technology, Dynament and E2V Technologies. We anticipate that the majority of components and materials used in products to be developed by us will be readily available. However, there is no assurance that the current availability of these materials will continue in the future, or if available, will be procurable at favorable prices.

 

Environmental Regulation

 

We have no significant costs associated with compliance with environmental regulations. However, there can be no assurance that we will not incur such costs in the future.

 

Major Customers

 

No customers exceeded 10% of the Company’s accounts receivable during the years ended December 31, 2016, or December 31, 2015. No customers exceeded 10% of the Company’s sales during the years ended December 31, 2016 or December 31, 2015.

 

 - 4 - 

 

 

Available Information

 

We file with the Securities Exchange Commission (SEC) annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and proxy and information statements and amendments to reports filed or furnished pursuant to Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended. The public may read and copy these materials at the SEC’s Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. The public may obtain information on the operation of the public reference room by calling the SEC at 1-800-SEC-0330. The SEC also maintains a website (http://www.sec.gov) that contains reports, proxy and information statements and other information regarding us and other companies that file materials with the SEC electronically. You may also obtain copies of reports filed with the SEC, free of charge, on our website at http://www.investor.sierramonitor.com. Information contained on our website is not incorporated by reference into this Annual Report on Form 10-K unless expressly noted. Our headquarters are located at 1991 Tarob Court, Milpitas, CA 95035. Our phone number at that address is (408) 262-6611 and our email address is sierra@sierramonitor.com.

 

Item 1A. Risk Factors.

  

We operate in a rapidly changing environment that involves numerous risks and uncertainties. The following section lists some, but not all, of these risks and uncertainties that may have a material adverse effect on our business, financial condition or results of operation.

 

Economic Conditions: Continuing uncertainty about the global economy and political landscape increases the challenges and the financial risks facing us. These risks include potential postponement of spending by commercial, industrial and municipal customers; the loss of major customers; fluctuations in currency markets; product delays and costs from increasing lead times or material prices from suppliers; and inability of customers, including commercial contractors, to obtain credit to finance projects requiring our products. Additionally, low oil prices are negatively impacting construction of new oil and gas extraction, processing, and delivery facilities, slowing down large alternative fuel projects and resulting in cautious capital spending on fire and gas solutions, and putting pressure on product margin as suppliers seek to reduce total solution costs. These risks could have a material negative effect on the demand for our products and services.

 

Competitive Industry: The industry in which we compete is highly competitive and we expect such competition to continue in the future. Many of our competitors are larger than us and have substantially greater financial, technical, marketing and manufacturing resources. While the IIoT represents an opportunity for innovation and differentiation, it also implies a greater rate of change and the possibility of new competitors, ranging from venture capital backed startups to established technology companies. Even though we continue to invest in new products, there can be no assurance that there will be adequate demand or that certain of our products will not be rendered non-competitive or obsolete by our competitors or by the emergence of alternative approaches. Further, there is no guarantee that our research and development efforts or the associated costs will lead to increased sales or additional customers, or prevent erosion of competitive position of our products. In addition, our OEM customers may “design out” our FieldServer gateway products, replacing them with internally-designed technology. In order to maintain and grow the sales of our FieldServer products, we must maintain a new design-win rate that is in excess of the design-out rate. Our business and financial results may be adversely affected if our offerings do not keep pace with the rapidly changing IIoT landscape, if we are unable to compete with alternative third-party or internally-developed products, and if we are faced with pricing pressure in international markets.

 

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Concentrated Operations: Our operations are concentrated in a two-building complex in Milpitas, California. Our operations could be interrupted by fire, earthquake, power loss, telecommunications failure and other events beyond our control. We do not have a detailed disaster recovery plan. In addition, we do not carry sufficient business interruption insurance to compensate us for all losses that may occur and any losses or damages incurred by us could have a material adverse effect on our business and financial results.

 

Strategic Transactions: We may acquire businesses and technologies, which may divert the attention of management and cause us to incur various expenses in identifying, investigating and pursuing suitable acquisitions, whether or not the acquisitions are completed. We have limited experience in acquiring other businesses, and if we acquire additional businesses, we may not be able to successfully integrate the acquired personnel, operations and technologies, or effectively manage the combined business following the acquisition. We may not be able to find and identify desirable acquisition targets or be successful in entering into an agreement with any particular target. Acquisitions could also result in dilutive issuances of equity securities or the incurrence of debt, which could adversely affect our operating results. In addition, if an acquired business fails to meet our expectations or if we are unable to successfully integrate it, our business and financial results may suffer.

 

Item 2.Properties.

 

Our principal executive, administrative, manufacturing and engineering operations are located in two buildings totaling approximately 28,000 square feet in Milpitas, California under a lease scheduled to expire on April 30, 2018.

 

Management considers that our current facilities are in good operating condition, are adequate for the present level of operations, and are adequately covered by insurance and that additional office and factory space is available in the immediate vicinity, if required.

 

Item 3.Legal Proceedings.

 

We may be involved from time to time in various claims, lawsuits, and disputes with third parties, actions involving allegations of discrimination or breach of contract actions incidental to the normal course of business operations. We are currently not involved in any such litigation or any pending legal proceedings that management believes could have a material adverse effect on our financial position or results of operations.

 

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PART II

 

Item 5.Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

 

(a) Market Information. Our common stock is quoted on the OTC Bulletin Board under the symbol "SRMC." There is not an active market for our common stock and there is only infrequent trading in limited volume. The high and low closing sales price, as reported by the OTC Bulletin Board system, of our common stock during each fiscal quarter for our last two fiscal years were as follows:

 

Common Stock Prices  High   Low 
Quarter ended December 31, 2016  $1.85   $1.38 
Quarter ended September 30, 2016  $1.75   $1.40 
Quarter ended June 30, 2016  $1.55   $1.22 
Quarter ended March 31, 2016  $2.00   $1.35 
           
Quarter ended December 31, 2015  $1.88   $1.49 
Quarter ended September 30, 2015  $1.88   $1.39 
Quarter ended June 30, 2015  $1.70   $1.44 
Quarter ended March 31, 2015  $1.70   $1.34 

 

These quotations reflect inter-dealer prices, without retail markup, markdown or commission, and may not represent actual transactions.

 

(b) Holders. As of March 21, 2017, there were approximately 126 shareholders of record of our common stock and the closing price of our common stock was $1.40. This figure does not include beneficial holders or common stock held in street names, as we cannot accurately estimate the number of these beneficial holders.

 

(c) Dividends. We adopted a dividend policy authorizing a quarterly cash dividend of $0.01 per share of common stock. Under this dividend policy, we have paid eighteen consecutive quarterly dividends of $0.01 per share of common stock. The last quarterly dividend was paid on February 15, 2017 to shareholders of record as of the close of business on February 1, 2017. This dividend represented a quarterly payout of $101,715 in aggregate, based on 10,171,551 shares outstanding. The cash dividend policy and payment of any future quarterly cash dividends will be at the discretion of the Board and will be dependent upon Sierra Monitor’s financial position, results of operations, available cash, cash flow, capital requirements and other factors deemed relevant by the Board.

 

Penny Stock

 

 Unless and until our shares of common stock qualify for inclusion in the NASDAQ system, the public trading, if any, of our common stock will be on the OTC Bulletin Board. As a result, an investor may find it more difficult to dispose of or to obtain accurate quotations as to the price of our common stock. Our common stock is subject to provisions of Section 15(h) and Rule 15g-9 of the Exchange Act, commonly referred to as the “penny stock rule.” Section 15(h) sets forth certain requirements for transactions in penny stocks, and Rule 15g-9(d) incorporates the definition of “penny stock” that is found in Rule 3a51-1 of the Exchange Act. The SEC generally defines “penny stock” to be any equity security that has a market price less than $5.00 per share, subject to certain exceptions. If our common stock is deemed to be penny stock, trading in such shares will be subject to additional sales practice requirements on broker-dealers who sell penny stock to persons other than established customers and accredited investors. “Accredited investors” are generally persons with assets in excess of $1,000,000 or annual income exceeding $200,000, or $300,000 together with their spouse and certain entities with assets in excess of pre-determined amounts. For transactions covered by these rules, broker-dealers must make a special suitability determination for the purchase of such security and must have the purchaser’s written consent to the transaction prior to the purchase. Additionally, for any transaction involving a penny stock, unless exempt, the rules require the delivery, prior to the first transaction, of a risk disclosure document, prepared by the SEC, relating to the penny stock market. A broker-dealer also must disclose the commissions payable to both the broker-dealer and the registered representative, and current quotations for the securities. Finally, monthly statements must be sent disclosing recent price information for the penny stocks held in an account and information on the limited market in penny stocks. Consequently, these rules may restrict the ability of a broker-dealer to trade and/or maintain a market in our common stock and may affect the ability of our shareholders to sell their shares.

 

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Stock Option Plan

 

In March 2016, the Company’s 2006 Stock Plan expired. 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 4 years, and expire 10 years from the grant date. On December 31, 2016, a total of 1,038,500 shares were available for grant.

 

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Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

Results of Operations - Fiscal 2016 vs. Fiscal 2015

 

For the fiscal year ended December 31, 2016, our net sales were $19,184,442 compared to net sales of $20,323,987 in the prior fiscal year ended December 31, 2015. Net sales decreased approximately 5.6% in 2016 compared to the prior year. Our income from operations before interest income and income taxes was $75,100 in 2016, compared to operating income before interest income and income taxes of $1,634,304 in 2015. Net loss in 2016 was $90,932, or $(0.01) per share, compared to net income of $887,580, or $0.09 per share, in 2015.

 

Sales of our FieldServer products decreased approximately 4% in 2016 compared to 2015. FieldServer products are primarily sold to OEMs who develop a broad range of products relevant to facility automation, such as boilers, chillers, air handlers, lighting controls, generator sets, electric sub-meters, etc. FieldServer products are also bought by system integrators looking to connect various discrete automation sub-systems to a common facility management system. The decline in sales was mostly attributable to a reduction in our international business primarily as a result of pricing pressure. In North America, which is the focus of our product development-driven pivot to take advantage of the IIoT trend, we gained more than 20 new revenue-producing “design-in” customers to add to our more than 200 existing Original Equipment Manufacturer (OEM) customers, but were also designed out by a large legacy customer as they consolidated multiple products that used the FieldServer technology under a new in-house design. We met our target of initiating 20 or more beta trials for the FieldPoP device cloud portal in 2016. With beta customers also testing our FieldServer wireless gateways, we believe that our revamped product-line is more relevant to OEMs than before, and we expect to gain new OEM customers and win new product lines within existing OEMs. In 2016, revenue from FieldServer products was approximately 54% of our sales compared to approximately 53% in 2015.

 

Our sales of Sentry gas detection products, including sales to the military, decreased by 8% in 2016 compared to 2015. Sentry products are generally sold to engineering and installation firms who utilize the products as part of larger fire and safety projects 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 decline in sales was partially attributable to low oil prices that depressed the alternative fuel market segment in North America and put pressure on our international project business. In 2017, we expect to see an increased level of activity in North America if alternative fuel and other infrastructure spending grows. We expect to derive incremental revenue from our flame detector product currently under certification testing. The projected availability of this product after agency certifications in 2017 is anticipated to improve our competitiveness in large projects that involve both fire and gas products, and has the potential to enable us to target flame-only applications within facility safety that we currently do not address. Integrating the FieldPoP device cloud with the Sentry product line bridges our automation and safety offerings and is expected to provide differentiation in the traditional safety market. We also hired a senior executive, Mike Nugent, formerly VP of North American sales for Emerson Rosemount Analytical products to drive new business development initiatives in safety. Revenue from gas detection products was approximately 43% of our sales in 2016, compared to 43% in 2015.

 

We also sell environment control products for high-value remote telecommunications buildings, including cell towers and underground vaults. Sales of environment control products for telecommunications buildings decreased by approximately 11% in 2016 compared to 2015. Sales of our products to telecommunications buildings are primarily a result of replacement and repair cycles at existing sites. Revenue from all products sold to the telecommunications industry was approximately 3% of our sales in 2016, compared to 3% in 2015.

 

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Gross profit as a percent of sales was approximately 58% in 2016 and 60% in 2015. Our gross margins vary by product mix and channel of distribution. We did not experience any significant increase in costs for materials including electronic components, fabricated materials and contract assembly in 2016 compared to 2015. The major contributor to the reduction in gross margin was an increase in warranty costs as we accelerated our product refresh cycles for certain customer sites with competitive exposure, mostly in gas detection applications.

 

Research and development expenses, which include new product development and support for existing products, were $2,950,651 or 15% of net sales in the fiscal year ended December 31, 2016, compared to $2,369,996 or 12% of net sales in the fiscal year ended December 31, 2015. The growth in R&D spending in 2016 was primarily driven by our efforts on IIoT-specific initiatives such as the FieldPoP device cloud portal and new FieldServer wireless gateways and network explorers. Our R&D efforts in 2016 also included the development of a proprietary Sentry flame detector that is expected to have superior margins relative to the third-party flame detectors that we currently resell.

 

Selling and marketing expenses were $4,899,882 or 26% of net sales in 2016 compared to $5,030,102 or 25% of net sales in the prior year. The reduction in sales and market expenses was driven by a reduction in revenues from 2015 to 2016 resulted in the reduction of sales commissions paid to our sales teams and sales partners.

 

General and administrative expenses, which include professional fees and product and general liability insurance incurred by the company, were $3,106,265 or 16% of net sales in 2016, compared to $3,107,313 or 15% of net sales in 2015. We increased IT spending as we adopted a Product Line Management (PLM) system and enhanced reporting capabilities on our legacy Manufacturing Resource Planning (MRP) system. However, higher spending on IT and other professional services was completely offset by reduced compensation.

 

Our financial results reflect a revenue decrease of $1,139,545 and a decrease in income from operations of $1,559,204 over the prior year. All of our current deferred income tax benefits have been utilized. We are currently accruing income taxes at the maximum corporate rate.

 

Liquidity and Capital Resources

 

Our working capital at December 31, 2016 was $9,079,348 compared to working capital of $9,062,457 at December 31, 2015. We undertook no significant equity or long-term debt transactions in 2016.

 

Inventories on hand at December 31, 2016 were $2,443,774, a decrease of $398,675 compared to December 31, 2015. Current inventory levels are consistent with our historical experience.

 

Our net trade receivables at December 31, 2016 were $2,502,601 compared to $2,582,664 at December 31, 2015. Trade receivables, measured by days of sales outstanding, increased to 48 days at December 31, 2016 compared to 45 days at December 31, 2015.

 

At December 31, 2016, our balance sheet reflected $4,692,999 of cash on hand compared to $4,883,373 at December 31, 2015. The decrease in cash is due to an increase in prepaid expenses from $215,406 at December 31, 2015 to $575,177 at December 31, 2016. Income taxes paid totaled $243,573 during 2016 compared with $653,715 during 2015.

 

 - 10 - 

 

 

As of December 31, 2016, the Company has a $2,000,000 line of credit, secured by substantially all assets of the Company and bears interest at the bank's prime rate (3.25% at December 31, 2016) less 0.5% or LIBOR plus 2.5%. The line of credit matures on August 1, 2017 and requires compliance with certain financial covenants including the requirement to maintain a quick ratio of 1.3:1.0 and a quarterly profitability test. At December 31, 2016 and 2015, the Company was in compliance with the financial covenants and the line of credit had no outstanding balance.

 

We believe that our present resources, including cash and accounts receivable, are sufficient to fund our anticipated level of operations through at least April, 2018. There are no current plans for significant capital equipment expenditures.

 

Inflation

 

We believe that inflation will not have a direct material effect on our results of operations.

 

The economic factors that could adversely impact our business in 2017 include, but are not limited to, currency fluctuations as we buy materials and sell products internationally and also fluctuations in materials prices.

 

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 consolidated financial statements and the accompanying notes. The amounts of assets and liabilities reported on our balance sheet 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 financial statements:

 

Revenue Recognition

 

A detailed discussion of our revenue recognition policies is contained in Note 1 (Summary of the Company and Significant Accounting Policies) of the Notes to Financial Statements below. The discussion is incorporated herein by reference.

 

Accounts Receivable

 

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 only where sufficient historical experience justifies the credit risks involved. In many of our larger sales, the customers are frequently construction contractors who need our start-up services to complete their work and obtain payment. Management’s ability to manage the credit terms and leverage the 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 insure that it is adequate to the best of management’s knowledge. We believe that we have demonstrated the ability to make reasonable and reliable estimates of product returns and of allowances for doubtful accounts based on significant historical experience. Trends of sales returns, exchanges and warranty repairs are tracked as a management review item in our International Organization for Standardization (“ISO”) quality program, and data generated from that program forms a basis for the reserve management.

 

 - 11 - 

 

 

Inventories

 

Inventories are stated at the lower of cost or market, 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 can rely to determine inventory trends and identify excesses. We consider it necessary to maintain an elevated inventory level of critical components and low inventory turns compared to typical industry benchmarks in order to mitigate potential supply disruptions and to respond to orders in a timely manner. Write-downs of slow moving and obsolete inventories are determined based on historical experience and current product demand. We evaluate the inventory for excess or obsolescence on a quarterly basis. The ultimate write-down is dependent upon management’s ability to forecast demands accurately, manage product changes efficiently, and interpret the data provided by the ERP system.

 

The market cost of our inventory is equal to the realizable value which is based on management’s forecast for sales of our products in the ensuing years. The industry in which we operate is characterized by technological advancements and change. Should demand for our products prove to be significantly less than anticipated, the ultimate realizable value of our inventory could be substantially less than the amount shown on the accompanying balance sheet.

 

Determination of Applicability of Valuation Allowance for Deferred Tax Assets

 

We determine the applicability of a valuation allowance against the accrued tax benefit by evaluating recent trends including sales levels, changes in backlog and fixed expenses. We also consider our plans for the current twelve month period regarding activities that would change the level of expenses relative to historical trends.

 

At December 31, 2016 and 2015, we determined that, based on the profitable results and full utilization of the available deferred tax benefits, no valuation allowance against the remaining deferred tax asset is required.

 

Item 8.Financial Statements and Supplementary Data.

 

Reference is made to the financial statements, including the notes thereto, together with the report thereon of Squar Milner LLP, independent registered public accounting firm, attached to this Annual Report on Form 10-K as a separate section beginning on page F-1.

 

Item 9.Changes In and Disagreements with Accountants on Accounting and Financial Disclosure.

 

There have been no disagreements with Squar Milner LLP of the type required to be reported under this Item 9 since the date of their engagement.

 

Item 9A.Controls and Procedures.

 

Disclosure Controls and Procedures

 

As of the end of the period covered by this Annual Report on Form 10-K, our management, with the participation of Varun Nagaraj, our principal executive officer and Tamara Allen, our principal financial officer carried out an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures, pursuant to Exchange Act Rules 13a-15(e) and 15d-15(e), which includes inquiries made to certain other employees. Based upon that evaluation, our principal executive officer and principal financial officer concluded that, as of December 31, 2016, our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act) were effective.

 

 - 12 - 

 

 

Management’s Report on Internal Control over Financial Reporting

 

Our management is responsible for establishing and maintaining adequate internal control over our financial reporting as defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles in the United States of America (GAAP), and includes those policies and procedures that: (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on our financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect all misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

In order to evaluate the effectiveness of internal control over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act, management conducted an evaluation of the effectiveness of our internal control over financial reporting based on the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in its report, Internal Control-Integrated Framework (1992). No material weaknesses were identified and management concluded that our internal control over financial reporting was effective as of December 31, 2016 based on the criteria set forth in COSO’s report Internal Control-Integrated Framework (1992).

 

This Annual Report on Form 10-K does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting as such report is not required for non-accelerated filers such as us.

 

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 December 31, 2016 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

Item 9B.Other Information.

 

There were no items required to be disclosed in a Form 8-K during the quarter ended December 31, 2016 that were not disclosed.

 - 13 - 

 

 

PART III

 

Item 10.Directors, Executive Officers, Corporate Governance.

 

The following table sets forth certain information with respect to the directors and executive officers of the Company as of December 31, 2016, based upon information furnished by such persons:

 

            Director or
Name   Principal Occupation or Employment   Age   Officer Since
             
Gordon R. Arnold   Director of the Company;   71   1984
    Executive Chairman and Secretary        
             
Varun Nagaraj   Director of the Company; President   51   2014
    Chief Executive Officer    
             
Tamara S. Allen   Chief Financial Officer   50   2014
             
Anders Axelsson   Vice President of Sales and Marketing   57   2014
             
Michael C. Farr   Vice President of Operations   59   1986
             
C. Richard Kramlich   Director of the Company   81   1980
             
Jay T. Last   Director of the Company   87   1977
             
Robert C. Marshall   Director of the Company   85   1998

 

All officers of the Company serve at the discretion of the Board of Directors.

 

Gordon R. Arnold joined Sierra Monitor Corporation, a California corporation (“Old Sierra”), in December 1979 as Operations Manager and Vice President.  He became President in 1984 and Chief Executive Officer in 1985.  In September 1989, Old Sierra merged into UMF Systems, Inc., a California corporation (“UMF”), and UMF changed its name to “Sierra Monitor Corporation.”  Mr. Arnold served as the Company’s President, Chief Executive Officer and Chief Financial Officer and as the Company’s Secretary until July 2014.  Mr. Arnold has served as a Director and Chairman of the Board since 1984 and he became Executive Chairman in July 2014. He is a past Chairman of the Measurement Control and Automation Association. Mr. Arnold’s specific qualifications and experience to serve as a member of our Board of Directors include his business management education, more than forty years of direct industry experience and over thirty-five years of full-time employment as an executive of the Company.

 

Varun Nagaraj joined Sierra Monitor Corporation as President and Chief Executive Officer in July 2014, from Echelon Corporation (ELON) where he was senior vice president and general manager of the Industrial Internet of Things (IIoT) division. Previously, Mr. Nagaraj served as president and chief executive officer of NetContinuum, a leading provider of web application firewalls, acquired by Barracuda Networks (“CUDA”) in 2007. Mr. Nagaraj also served as vice president of product development and marketing for Extreme Networks (“EXTR”); and as executive vice president of marketing and customer delivery for Ellacoya Networks. From 1995 to 2001, Mr. Nagaraj worked for PRTM, a leading management consulting firm focused on product and operations strategy, in various positions including associate, manager, principal and partner. He started his career in 1988 at Hewlett Packard as an engineer. Mr. Nagaraj received his Electrical Engineering degree from the Indian Institute of Technology, Bombay; a Master of Science degree from North Carolina State University; and his Master of Business Administration degree from Boston University. Mr. Nagaraj’s specific qualifications and experience to serve as an officer and a member of our Board of Directors include his technical and business management education and more than twenty-five years of experience with technology-based companies, including experience serving as an officer and a board member.

 

 - 14 - 

 

 

Tamara S. Allen has served as our Chief Financial Officer since April 2014 and has been our Controller since March 2005. Ms. Allen joined Sierra Monitor Corporation in January 1996. She holds a Bachelor of Science in Business Administration from University of Wisconsin with an emphasis in Financial Management. Prior to joining us, Ms. Allen held various finance and accounting positions at Philips Semiconductors and served on the board of directors for Horizon West Federal Credit Union. Ms. Allen’s experience and expertise in GAAP practice, financial SEC reporting, Sarbanes-Oxley, COSO, and board level financial reporting and analysis qualify her to serve as an officer of the Company.

 

Anders Axelsson joined Sierra Monitor Corporation as Vice President, Sales and Marketing in January 2014 from Echelon Corporation where he served from 2003 as senior vice president of worldwide sales, marketing and business development for Echelon’s control networking business, including its LonWorks portfolio. During his Echelon tenure Mr. Axelsson also served on LonMark International’s board of directors. Previously, he served as chief executive officer of PowerFile, Inc. and president and general manager of the Snap Division of Quantum Corporation. Mr. Axelsson worked for Honeywell/Measurex from 1992 to1999 in various senior management positions, including vice president, engineering, marketing and business development and president and managing director for EMEA sales and services. He also served in various management positions with the global engineering firm ABB where he started his career in Sweden as a software engineer. Mr. Axelsson holds a Bachelor of Science in Electrical Engineering from Jonkoping, Sweden and is a graduate of the Executive Program at the University of Michigan. Mr. Axelsson’s education, extensive industry and management experience, and officer level roles in previous employer companies qualify him to serve as an officer of the Company.

 

Michael C. Farr has served as Vice President of Operations at Sierra Monitor Corporation since 1986, having joined the company in 1983 as Operations Manager. He holds a Bachelor of Arts in Mathematics from the University of California, Los Angeles. Prior to joining us, Mr. Farr held operations management positions in Signetics Semiconductor Co. and Advanced Micro Devices. He is APICS Certified in Production and Inventory Management (“CPIM”). His strong production control and operations management background resulted in our attainment of ISO-9001 registration for our quality system and has supported our growth through multiple transitions of our supply chain process, partners, and systems. Mr. Farr’s extensive operations management experience and knowledge of our products, services and processes qualify him to serve as an officer of the Company.

 

C. Richard Kramlich has been a Director of the Company since 1980. Mr. Kramlich, who has more than thirty five years of venture capital experience, is a co-founder of New Enterprise Associates, a venture capital firm. Mr. Kramlich is presently a director of Zhone Technologies (“ZHNE”). He received a Master’s in Business Administration from the Harvard University Graduate School of Business and a Bachelor of Science in History from Northwestern University. Mr. Kramlich’s specific qualifications and experience to serve as a member of our Board of Directors include over thirty years as managing general partner of a highly successful venture capital company, his membership on numerous boards of private and public companies, and over thirty years of participation on our Board of Directors.

 

 - 15 - 

 

 

Jay T. Last has been a Director of the Company since 1977. Mr. Last, who was one of the founders of Fairchild Semiconductor, is a retired technologist and business investor. Mr. Last received a Ph.D. in Physics from Massachusetts Institute of Technology. Mr. Last’s specific qualifications and experience to serve as a member of our Board of Directors include his participation in the founding of Fairchild Semiconductor, his involvement in the management and rapid expansion of a major public industrial conglomerate, and over thirty years of participation on our Board of Directors.

 

Robert C. Marshall has been a Director of the Company since 1998. Since 1997, Mr. Marshall has been the Managing General Partner of Selby Venture Partners, a venture capital firm. Mr. Marshall received a Bachelor’s degree in Electrical Engineering from Heald Engineering and an MBA from Pepperdine University. Mr. Marshall’s specific qualifications and experience to serve as a member of our Board of Directors include his participation in the founding of the first redundant computer manufacturing company, his founding of a highly successful venture capital company, his involvement in the management and turn-around of various electronic companies and his eighteen years of participation on our Board of Directors.

 

Family Relationships

 

There are no family relationships between or among the directors, executive officers or persons nominated or charged by the Company to become directors or executive officers.

 

Involvement in Legal Proceedings

 

To our knowledge, during the past ten years, no event specified in Item 401(f) of Regulation S-K occurred with respect to a present or former director or executive officer of the Company.

 

With respect to the other information required by this Item 10, the sections entitled “Election of Directors Nominees”, “Information About Our Board of Directors – Corporate Governance” and “Section 16(a) Beneficial Ownership Reporting Compliance” of our Proxy Statement for our 2017 Annual Meeting of Shareholders to be held on or about May 31, 2017 are incorporated by reference herein.

 

The information required by this Item 10 regarding our code of business conduct is incorporated by reference herein from our Proxy Statement for our 2017 Annual Meeting of Shareholders to be held on or about May 31, 2017 under the section entitled “Corporate Governance.”

 

Item 11.Executive Compensation.

 

The information required by this Item 11 is incorporated by reference herein from our Proxy Statement for our 2017 Annual Meeting of Shareholders to be held on or about May 31, 2017 under the sections entitled “Compensation of Executive Officers” and “Compensation of Directors”.

 

Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

 

Securities Authorized for Issuance under Equity Compensation Plans.

 

The following table sets forth certain information as of December 31, 2016 with respect to compensation plans (including individual compensation arrangements) under which equity securities of the Company are authorized for issuance, aggregated as follows:

 

i.    All compensation plans previously approved by security holders; and

 

ii.   All compensation plans not previously approved by security holders.

 

 - 16 - 

 

 

Plan Category  Number of securities
to be issued upon
exercise of
outstanding options,
warrants and rights
   Weighted-average
exercise price of
outstanding options,
warrants and rights
   Number of securities
remaining available for
future issuance under equity
compensation plans
(excluding securities
reflected in column (a))
 
   (a)   (b)   (c) 
Equity compensation plans approved by security holders   1,642,000   $1.81    1,038,500 
Equity compensation plans not approved by security holders   -    -    - 
Total   1,642,000   $1.81    1,038,500 

 

The other information required by this Item 12 is incorporated by reference herein from our Proxy Statement for our 2017 Annual Meeting of Shareholders to be held on or about May 31, 2017 under the section entitled “Security Ownership of Certain Beneficial Owners and Management.”

 

Item 13.Certain Relationships and Related Transactions, and Director Independence.

 

The information required by this Item 13 is incorporated by reference herein from our Proxy Statement for our 2017 Annual Meeting of Shareholders to be held on or about May 31, 2017 under the section entitled “Certain Relationships and Related Transactions.”

 

Item 14.Principal Accounting Fees and Services.

 

The information required by this Item 14 is incorporated by reference herein from our Proxy Statement for our 2017 Annual Meeting of Shareholders to be held on or about May 31, 2017 under the section entitled “Principal Accountant Fees and Services”.

 - 17 - 

 

 

Item 15.Exhibits and Financial Statement Schedules.

 

Financial Statements.

 

See Item 8 of this Annual Report on Form 10-K.

 

Schedules.

 

Not applicable.

 

Index to Exhibits

 

Exhibit Number   Description
3.1(1)   Articles of Incorporation of the Registrant.
3.2(2)   Bylaws of the Registrant.
4.1(3)   Specimen Common Stock Certificate of the Registrant.
10.1(4)   1996 Stock Plan of Registrant.
10.2(5)   2006 Stock Plan of Registrant.
10.3(6)   Standard Industrial Lease dated April 4, 2003, by and between Sierra Monitor and Geomax.
10.4(7)   Form of Retention Agreement by and between Sierra Monitor and certain of its executive officers.
10.5(8)   Employment Offer Letter by and between Sierra Monitor and Anders B. Axelsson, dated December 18, 2013.
10.6(9)   Employment Offer Letter by and between Sierra Monitor and Varun Nagaraj, dated May 15, 2014.
10.7(9)   Transition Agreement by and between Sierra Monitor and Gordon R. Arnold, dated July 7, 2014.
10.8(10)   Form of Indemnification Agreement by and between Sierra Monitor and its directors and certain of its executive officers.
10.9(11)   Form of Restricted Stock Award Agreement.
10.10(12)   Sierra Monitor Corporation 2016 Equity Incentive Plan and forms of award agreements thereunder.
23.1   Consent of Independent Registered Public Accounting Firm.
31.1   Certification of Chief Executive Officer, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2   Certification of Chief Financial Officer, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1   Certification of Chief Executive Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2   Certification of Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS   XBRL Instance Document.
101.SCH   XBRL Taxonomy 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.

 

 - 18 - 

 

 

(1)Incorporated by reference to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 1989 filed with the SEC on March 23, 1990.
(2)Incorporated by reference to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2014 filed with the SEC on March 30, 2015.
(3)Incorporated by reference to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2003 filed with the SEC on March 25, 2004.
(4)Incorporated by reference to the Company’s Registration Statement on Form S-8 (File No. 333-85376) filed with the SEC on April 2, 2002.
(5)Incorporated by reference to the Company’s Current Report on Form 8-K filed with the SEC on May 22, 2006.
(6)Incorporated by reference to Exhibit 10.6 of the Company’s Quarterly Report on Form 10-QSB for the quarter ended September 30, 2000.
(7)Incorporated by reference to the Company’s Current Report on Form 8-K filed with the SEC on April 13, 2012.
(8)Incorporated by reference to the Company’s Current Report on Form 8-K filed with the SEC on January 13, 2014.
(9)Incorporated by reference to the Company’s Current Report on Form 8-K filed with the SEC on July 8, 2014.
(10)Incorporated by reference to the Company’s Current Report on Form 8-K filed with the SEC on May 16, 2014.
(11)Incorporated by reference to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2015 filed with the SEC on March 30, 2016.
(12)Incorporated by reference to the Company’s Current Report on Form 8-K filed with the SEC on May 20, 2016.
 - 19 - 

 

 

SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereto duly authorized.

 

  SIERRA MONITOR CORPORATION
     
Date: March 22, 2017 By: /s/  Varun Nagaraj
    Varun Nagaraj
    Chief Executive Officer

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

 

Date   Title   Signature
         
March 22, 2017   Chief Executive Officer   By: /s/  Varun Nagaraj
          Varun Nagaraj
           
March 22, 2017   Chief Financial Officer   By: /s/  Tamara S. Allen
          Tamara S. Allen
           
March 22, 2017   Director   By: /s/  Gordon R. Arnold
          Gordon R. Arnold
           
March 22, 2017   Director   By: /s/  C. Richard Kramlich
          C. Richard Kramlich
           
March 22, 2017   Director   By: /s/  Jay T. Last
          Jay T. Last
           
March 22, 2017   Director   By /s/  Robert C. Marshall
          Robert C. Marshall

 

 - 20 - 

 

 

SIERRA MONITOR CORPORATION

 

Financial Statements

 

 

 

 

SIERRA MONITOR CORPORATION

 

Index to Financial Statements

 

  Page
   
Report of Independent Registered Public Accounting Firm F-1
   
Balance Sheets F-2
   
Statements of Operations F-3
   
Statements of Shareholders’ Equity F-4
   
Statements of Cash Flows F-5
   
Notes to Financial Statements F-6

 

 

 

 

Report of Independent Registered Public Accounting Firm

 

To the Board of Directors and Shareholders

Sierra Monitor Corporation

 

We have audited the accompanying balance sheets of Sierra Monitor Corporation (the “Company”) as of December 31, 2016 and 2015, and the related statements of operations, shareholders’ equity and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company was not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Sierra Monitor Corporation as of December 31, 2016 and 2015, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.

 

/s/ Squar Milner LLP

Newport Beach, California

 

March 22, 2017

 

 F-1 

 

 

SIERRA MONITOR CORPORATION

 

Balance Sheets

 

December 31, 2016 and 2015

 

   2016   2015 
Assets          
Current assets:          
Cash  $4,692,999   $4,883,373 
Trade receivables, less allowance for doubtful accounts of approximately $75,000 in 2016 and $79,000 in 2015,  respectively   2,502,601    2,582,664 
Inventories, net   2,443,774    2,842,449 
Prepaid expenses   575,177    215,406 
Income tax deposit   68,949    11,887 
Deferred tax assets   249,967    308,486 
Total current assets   10,533,467    10,844,265 
           
Property and equipment, net   167,831    226,888 
Other assets   202,875    365,960 
           
Total assets  $10,904,173   $11,437,113 
           
Liabilities and Shareholders’ Equity          
Current liabilities:          
Accounts payable  $824,951   $978,838 
Accrued compensation expenses   460,584    654,609 
Other current liabilities   168,584    148,361 
Total current liabilities   1,454,119    1,781,808 
           
Deferred tax liability   88,802    164,341 
Total liabilities   1,542,921    1,946,149 
           
Commitments and contingencies          
           
Shareholders’ equity:          
Common stock, $0.001 par value; 20,000,000 shares authorized; 10,171,551 and 10,145,862 shares issued and outstanding at December 31, 2016 and 2015, respectively   10,172    10,146 
Additional paid-in capital   4,139,527    3,772,435 
Retained earnings   5,211,553    5,708,383 
Total shareholders’ equity   9,361,252    9,490,964 
           
Total liabilities and shareholders’ equity  $10,904,173   $11,437,113 

 

See accompanying notes to these financial statements.

 

 F-2 

 

 

SIERRA MONITOR CORPORATION

 

Statements of Operations

 

For the Years Ended December 31, 2016 and 2015

 

   2016   2015 
Net sales  $19,184,442   $20,323,987 
Cost of goods sold   8,152,544    8,182,272 
Gross profit   11,031,898    12,141,715 
Operating expenses:          
Research and development   2,950,651    2,369,996 
Selling and marketing   4,899,882    5,030,102 
General and administrative   3,106,265    3,107,313 
    10,956,798    10,507,411 
Income from operations   75,100    1,634,304 
Interest income   621    344 
Income before income tax expense   75,721    1,634,648 
Income tax expense   166,653    747,068 
Net (loss) income  $(90,932)  $887,580 
Net (loss) income attributable to common shareholders per common share:          
Basic  $(0.01)  $0.09 
Diluted  $(0.01)  $0.09 
Weighted-average number of shares used in per share computations:          
Basic   10,147,430    10,132,361 
Diluted   10,147,430    10,177,010 

 

See accompanying notes to these financial statements.

 

 F-3 

 

 

SIERRA MONITOR CORPORATION

 

Statements of Shareholders’ Equity

 

For the Years Ended December 31, 2016 and 2015

 

           Additional       Total 
   Common Stock   Paid-in   Retained   Shareholders’ 
   Shares   Amount   Capital   Earnings   Equity 
Balance as of January 1, 2015   10,128,311   $10,128   $3,399,179   $5,226,111   $8,635,418 
Stock options exercised   17,551    18    12,632        12,650 
Stock-based compensation           360,624        360,624 
Dividend paid               (405,308)   (405,308)
Net income               887,580    887,580 
Balance as of December 31, 2015   10,145,862    10,146    3,772,435    5,708,383    9,490,964 
Stock options exercised   6,272    6    5,843        5,849 
Stock-based compensation           375,857        375,857 
Restricted stock vested   19,417    20    (14,608)       (14,588)
Dividend paid               (405,898)   (405,898)
Net loss               (90,932)   (90,932)
Balance as of December 31, 2016   10,171,551   $10,172   $4,139,527   $5,211,553   $9,361,252 

 

See accompanying notes to these financial statements.

 

 F-4 

 

 

SIERRA MONITOR CORPORATION

 

Statements of Cash Flows

 

For the Years Ended December 31, 2016 and 2015

 

   2016   2015 
Cash flows from operating activities:          
Net (loss) income  $(90,932)  $887,580 
Adjustments to reconcile net (loss) income to net cash provided by operating activities:          
Depreciation   157,017    211,445 
Amortization   184,985    193,042 
Bad debt expense   (3,827)   6,308 
Provision for inventory losses   (463)   56,165 
Stock-based compensation expense   375,857    360,624 
Loss on disposal of fixed asset   -    750 
Changes in operating assets and liabilities:          
Trade receivables   83,890    (16,978)
Inventories   399,138    (2,000)
Prepaid expenses   (359,771)   101,863 
Income tax deposit   (57,062)   168,419 
Deferred taxes   (17,020)   (75,039)
Accounts payable   (153,887)   164,748 
Accrued compensation expenses   (194,025)   183,595 
Other current liabilities   20,223    74,008 
Net cash provided by operating activities   344,123    2,314,530 
           
Cash flows from investing activities:          
Purchases of property and equipment   (97,960)   (161,995)
Purchases of other assets   (21,900)   (216,456)
Net cash used in investing activities   (119,860)   (378,451)
           
Cash flows from financing activities:          
Payment of dividend   (405,898)   (405,308)
Proceeds from exercise of stock options   5,849    12,650 
Payment of minimum tax withholdings on net share settlement of restricted stock   (14,588)   - 
Net cash used in financing activities   (414,637)   (392,658)
           
Net (decrease) increase in cash and cash equivalents   (190,374)   1,543,421 
           
Cash – beginning of year   4,883,373    3,339,952 
Cash – end of year  $4,692,999   $4,883,373 
           
Supplemental disclosure of cash flow information:          
Cash paid during the year for income taxes  $243,573   $653,715 

 

See accompanying notes to these financial statements.

 

 F-5 

 

 

SIERRA MONITOR CORPORATION

 

Notes to Financial Statements

 

December 31, 2016 and 2015

 

Note 1 - Summary of the Company and Significant Accounting Policies

 

The Company

 

Sierra Monitor Corporation (the “Company”) was incorporated 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. The Company’s primary product lines include the FieldServer protocols gateways and the Sentry IT fire and gas detection systems. The Company’s headquarters are located in Milpitas, California. The Company’s stock is quoted on the OTC Bulletin Board under the symbol “SRMC.”

 

Risks and Uncertainties

 

The Company operates in a highly competitive industry that is subject to intense competition, government regulation and rapid technological change. The Company’s operations are subject to significant risks and uncertainties, including financial, operational, technological, regulatory and other business risks associated with such a company.

 

Use of Estimates

 

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates made by management are, among others, the allowance for bad debts on trade receivables, net realization of inventory, realizability of long-lived assets, provision for warranty returns and deferred income tax asset valuation.

 

Concentrations

 

We currently maintain substantially all of our day to day operating cash with a major financial institution. At times cash balances may be in excess of the amounts insured by the Federal Deposit Insurance Corporation. Cash balances of approximately $4,331,000 and $4,133,000 were in excess of such insured amounts at December 31, 2016 and 2015, respectively.

 

The Company grants credit to customers within the United States of America and generally does not require collateral. We have international sales (see Note 8) that are generally prepaid or paid through a letter of credit. Our ability to collect receivables is affected by economic fluctuations in the industrial and geographic areas served by us. Reserves for uncollectible amounts are provided, based on past experience and a specific analysis of the accounts, which management believes is sufficient. Although management expects to collect amounts due, actual collections may differ from the estimated amounts.

 

No customers exceeded 10% of the Company’s accounts receivable during the years ended December 31, 2016 and December 31, 2015. No customers exceeded 10% of the Company’s sales during the years ended December 31, 2016 or 2015.

 

 F-6 

 

 

Accounts Receivable

 

We maintain an allowance for doubtful accounts which is analyzed on a periodic basis to ensure that it is adequate to the best of management’s knowledge. We believe that we have demonstrated reliable estimates of product returns and of allowances for doubtful accounts based on significant historical experience. Trends of sales returns, exchanges and warranty repairs are tracked as a management review item in the Company’s ISO (International Organization for Standardization) quality program and data generated from that program forms a basis for the reserve management.

 

Inventories

 

Inventories are stated at the lower of cost (first-in, first-out) or market. Cost is determined on a standard cost basis that approximates the first-in, first-out method. Market is determined by comparison with recent sales or net realizable value.

 

The net realizable value is based on management’s forecasts for sales of the Company’s products or services in the ensuing years. The industry in which the Company operates is characterized by technological advancement, change and certain regulations. Should the demand for the Company’s products prove to be significantly less than anticipated, the ultimate realizable value of the Company’s inventories could be substantially less than amounts shown in the accompanying balance sheets. Management analyzes the inventory for slow-moving and obsolete parts and maintains an obsolescence reserve sufficient to cover them (see Note 2).

 

Property and Equipment

 

Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation is provided on the straight-line method over the estimated useful lives of the respective assets, generally two to five years. Leasehold improvements are amortized using the straight-line method over the shorter of the lease term or the estimated useful life of the related asset. Betterments, renewals, and extraordinary repairs that extend the lives of the assets are capitalized and other repairs and maintenance charges are expensed as incurred. The cost and related accumulated depreciation applicable to assets sold or retired are removed from the accounts, and the gain or loss on disposition is recognized in current operations.

 

Research and Development

 

Research and development is primarily comprised of engineering salaries, new product development costs, software development and maintenance costs and certain other general costs, such as depreciation on engineering equipment and sustaining engineering activities. Research and development costs are expensed as incurred. All software development and maintenance costs are expensed as incurred.

 

Long-Lived Assets

 

In accordance with the provisions of Accounting Standards Codification 360-10, Property, Plant and Equipment (“ASC 360-10”), long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable. If the cost basis of a long-lived asset is greater than the projected future undiscounted net cash flows from such asset (excluding interest), an impairment loss is recognized. Impairment losses are calculated as the difference between the cost basis of an asset and its estimated fair value. ASC 360-10 also requires companies to separately report discontinued operations and extends that reporting to a component of an entity that either has been disposed of (by sale, abandonment, or in a distribution to shareholders) or is classified as held for sale. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. At December 31, 2016 and 2015, management has determined that there were no indicators requiring review for impairment and therefore no adjustments have been made to the carrying values of long-lived assets. Also, no long-lived assets are held for sale. There can be no assurance however, that market conditions will not change or demand for the Company’s products or services will continue, which could result in impairment of long-lived assets in the future.

 

 F-7 

 

 

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 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.

 

FieldServer Products

FieldServer products are sold in the same manner as Gas Detection and Environment Control products (as discussed above). The software embedded in FieldServer products includes two items:  (a) a compiled program containing (i) the basic operating system for FieldServers, 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 to not 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.

 

 F-8 

 

 

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.

 

Deferred Revenue

When advance payments are received from customers, they are recorded as deferred revenue until the product is shipped.  At December 31, 2016 and 2015, the Company had received approximately $61,000 and $0 respectively, of such advance payments which are included in other current liabilities in the accompanying balance sheets.

 

Employee Stock-Based Compensation

 

All share-based payments to employees 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. The Company considers many factors when estimating expected forfeitures, including types of awards, employee class and historical experience.

 

For the years ended December 31, 2016 and 2015, the Company’s statements of operations reflected an increase in salaries and benefits expense of $375,857 and $360,624, respectively, with a corresponding decrease in the Company’s income from continuing operations, income before provision for income taxes and net income resulting from the recognition of compensation expense associated with employee stock-based compensation. There was no material impact on the Company’s basic and diluted net income per share.

 

Compensation expense associated with stock options is recognized on a straight-line basis over the shorter of the vesting period or the minimum required service period. At December 31, 2016, there was $450,297 of total unrecognized compensation expense related to non-vested stock options, which is expected to be recognized over the next 4 years.

 

Compensation expense associated with restricted stock is recognized on a straight-line basis over the shorter of the vesting period or the minimum required service period. On December 21, 2015 the Company issued 118,000 restricted shares with a 4 year vesting schedule. A total of 29,499 shares were vested as of December 31, 2016 and, accordingly, $42,774 in compensation expense associated with the restricted stock was recorded in 2016 and is included in stock-based compensation expense in the accompanying statement of operations. There was $150,746 of total unrecognized compensation expense related to non-vested restricted stock, which is expected to be recognized over the next 4 years.

 

 F-9 

 

 

Warranty

 

The Company provides a warranty on all electronics sold for a period of two years after the date of shipment. Warranty issues are usually resolved with repair or replacement of the product. Trends of sales returns, exchanges and warranty repairs are tracked as a management review item in the Company’s ISO (International Organization for Standardization) quality program and data generated from that program forms a basis for the reserve that management records in our financial statements. Estimated future warranty obligations related to certain products and services are provided by charges to operations in the period in which the related revenue is recognized. At December 31, 2016 and 2015, warranty reserve approximated $72,000 and $111,000, respectively, which is included in other current liabilities in the accompanying balance sheets.

 

Advertising Programs

 

The Company expenses the cost of advertising when incurred as selling and marketing expense in the accompanying statements of operations. Advertising expenses were approximately $140,000 for the year ended December 31, 2016 and approximately $173,000 for the year ended December 31, 2015.

 

Shipping and Handling Costs

 

Shipping and handling costs are included in cost of goods sold in the accompanying statements of operations in accordance with ASC 605-45, Revenue Recognition.

 

Income Taxes

 

Income taxes are accounted for using the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is established when management estimates that future taxable income will not fully utilize deferred tax assets. No valuation allowance was deemed necessary as of December 31, 2016 and 2015.

 

Earnings Per Share

 

Under ASC 260-10, Earnings Per Share, basic earnings per common share is computed by dividing net income by the weighted-average number of common shares outstanding during the period of computation. Diluted earnings per share is computed similar to basic earnings per share except that the denominator is increased to include the number of additional common shares that would have been outstanding, using the treasury stock method, if the potential common shares had been issued and if the additional common shares were dilutive.

 

 F-10 

 

 

The following is a reconciliation of the shares used in the computation of basic and diluted (loss) earnings per share for the years ended December 31, 2016 and 2015, respectively:

 

   2016   2015 
         
Basic earnings per share – weighted-average number of shares of common stock outstanding   10,147,430    10,132,361 
           
Effect of dilutive stock options       44,649 
           
Diluted earnings per share – dilutive potential common shares   10,147,430    10,177,010 

 

For the year ended December 31, 2016, all employee stock options to purchase shares of common stock were excluded from the computation of diluted net loss per share as their effect would be anti-dilutive. Additionally, for the year ended December 31, 2015, options to acquire 1,457,500 shares of common stock were not considered dilutive potential shares of common stock as their exercise prices were greater than the average market price of the Company’s common stock during the year then ended.

 

Segments of Business

 

ASC 280-10, Segment Reporting requires entity-wide disclosures about the products and services that an entity provides, the material countries in which it holds assets and reports revenues and its major customers. The Company currently operates in one segment, as disclosed in the accompanying consolidated statements of income and the Chief Executive Officer (“CEO”) reviews financial information on an entity level (see Note 8).

 

Fair Value of Financial Instruments and Certain Other Assets/Liabilities

 

ASC 825-10, Financial Instruments, requires disclosure of fair value information about financial instruments when it is practicable to estimate that value. The carrying amounts of the Company’s cash, trade receivables, accounts payable, accrued and other liabilities approximate their estimated fair values due to the short-term maturities of those financial instruments.

 

The Company does not have any assets or liabilities that are measured at fair value on a recurring basis and, during the years ended December 31, 2016 and 2015, did not have any assets or liabilities that were measured at fair value on a non-recurring basis.

 

Subsequent Events

 

Management has evaluated events subsequent to December 31, 2016 through the date that the accompanying 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.

 

Significant Recent Accounting Pronouncements

 

In May 2015, the FASB issued Accounting Standards Update (“ASU”) No. 2015-09, Revenue from Contracts with Customers: Topic 606. This ASU outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance. This accounting standard is effective for annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. Early adoption is not permitted. The Company is currently evaluating the impact this accounting standard will have on the Company’s financial position, results of operations or cash flows. Management does not believe it will have a significant impact.

 

 F-11 

 

 

In July 2015, the FASB issued ASU 2015-11, "Inventory (Topic 330) Simplifying the Measurement of Inventory". The amendments clarify that an entity should measure inventory within the scope of this update at the lower of cost and net realizable value. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. Substantial and unusual losses that result from subsequent measurement of inventory should be disclosed in the financial statements. This ASU is effective for fiscal years beginning after December 15, 2016, including interim periods within those annual periods. The amendments are to be applied prospectively with earlier application permitted as of the beginning of an interim or annual reporting period. This guidance is not expected to have a material impact on our financial statements

 

On February 25, 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.

 

Note 2 – Inventories

 

A summary of inventories as of December 31 is as follows:

 

   2016   2015 
Raw materials  $1,421,004   $1,427,954 
Work in process   954,010    1,220,120 
Finished goods   265,869    391,947 
    2,640,883    3,040,021 
Obsolescence reserve   (197,109)   (197,572)
           
   $2,443,774   $2,842,449 

 

Note 3 - Property and Equipment

 

A summary of property and equipment as of December 31 is as follows:

 

   2016   2015 
Machinery and equipment  $722,435   $671,289 
Furniture, fixtures, and leasehold improvements   1,162,125    1,118,667 
           
    1,884,560    1,789,956 
Less accumulated depreciation and amortization   (1,716,729)   (1,563,068)
           
   $167,831   $226,888 

 

Note 4 - Employee Stock Compensation Plan

 

In March 2016, the Company’s 2006 Stock Plan expired. 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 4 years, and expire 10 years from the grant date. On December 31, 2016, a total of 1,038,500 shares were available for grant.

 

 F-12 

 

 

A summary of stock option transactions for the two years ended December 31, 2016 is as follows:

 

   Options   prices  exercise price 
Balance as of January 1, 2015   1,776,500   0.60 – 2.65   1.78 
Granted   136,500   1.64   1.64 
Exercised   (17,551)  1.10 - 1.30   1.16 
Forfeited or expired   (65,449)  1.40 - 1.75   1.45 
Balance as of December 31, 2015   1,830,000   1.10 - 2.65   1.78 
Granted   -   -     
Exercised   (14,500)  1.30   1.30 
Forfeited or expired   (38,500)  1.52 - 1.65   1.67 
Balance as of December 31, 2016   1,777,000       1.78 

 

Options outstanding that have vested and are expected to vest as of December 31, 2016 are as follows:

 

   Number of
Shares
   Weighted
Average
Exercise Price
   Weighted Average
Remaining Contractual
Term in Years
 
Vested   1,303,045   $1.79    6.0 
Expected to vest   473,955    1.77    7.5 
Total   1,777,000    1.78    6.5 

 

Options outstanding that are expected to vest are net of estimated future forfeitures in accordance with the provisions of ASC 718 which are estimated when compensation costs are recognized.

 

The following table summarizes information about the Company’s stock options outstanding under the 2006 Stock Plan as of December 31, 2016:

 

   Options outstanding   Options exercisable 
       Weighted-             
       average   Weighted-       Weighted- 
       remaining   average       average 
Exercise  Number   contractual   exercise   Number   exercise 
prices  outstanding   life (years)   price   exercisable   price 
$1.30 - 2.65   1,777,000    6.5   $1.78    1,303,045   $1.79 

 

The aggregate intrinsic value of options outstanding and exercisable at December 31, 2016 and 2015 approximated $0.67 and $0.63 per share respectively. There were no options granted during the year ended December 31, 2016. The weighted average grant date fair values of options granted during the year ended December 31, 2015 was $1.45 per share. Such fair values were estimated using the Black-Scholes stock option pricing model and the following weighted average assumptions.

 

  2016   2015  
Expected life -   8 years  
Estimated volatility -   72%  
Risk-free interest rate -   1.51%  
Dividends -   $0.04  

 

 F-13 

 

 

The expected life assumption is based on the average historical life of outstanding options; the expected volatility is based on the historical volatility. The expected life of options granted is based on changes in the vesting terms and the contractual life of current option grants compared to the Company’s historical grants; and the risk-free interest rate is based on the rate for U.S. Treasury bonds with similar terms as the options.

 

The total intrinsic value of options exercised during 2016 and 2015 was $18,850 and $40,850, respectively.

 

Note 5 - Commitments and Contingencies

 

Operating Leases

 

The Company leases its facilities under non-cancelable operating lease agreements that expire at various dates through 2018. Certain leases require the payment of property taxes, utilities and insurance, and provide options to extend the lease term.

 

Our principal executive, administrative, manufacturing and engineering operations are located in a 15,800 square foot leased facility in Milpitas, California under a lease scheduled to expire on April 30, 2018. An additional 12,600 square feet are leased for warehouse, office and expansion space in an adjacent building.

 

As of December 31, 2016, future minimum lease payments are as follows:

 

Year ending    
December 31,    
     
2017   279,676 
2018   94,140 
   $373,816 

 

Rent expense was approximately $375,000 in 2016 and $381,000 in 2015, which is apportioned to the various departments in the accompanying statements of operations.

 

Legal

 

The Company may be involved from time to time in various claims, lawsuits, disputes with third parties, actions involving allegations or discrimination or breach of contracts actions incidental to the normal course of operations. The Company is currently not involved in any such litigation that management believes could have a material adverse effect on its financial position or results of operations.

 

Note 6 – Line-of-Credit

 

As of December 31, 2016, the Company has a $2,000,000 line of credit, secured by substantially all assets of the Company, and bears interest at the bank’s prime rate (3.25% at December 31, 2016) less 0.5% or LIBOR plus 2.5%. The line of credit matures on August 1, 2017 and requires compliance with certain financial covenants including the requirement to maintain a quick ratio of 1.3:1.0 and to satisfy quarterly profitability test. At December 31, 2016 and 2015, the Company was in compliance with the financial covenants and the line of credit had no outstanding balance.

 

 F-14 

 

 

Note 7 - Income Taxes

 

The components of income tax expense consist of the following for the years ended December 31:

 

   2016   2015 
         
Current:          
Federal  $128,926   $638,410 
State   54,747    183,697 
Total current   183,673    822,107 
           
Deferred:          
Federal   (9,471)   (69,058)
State   (7,549)   (5,981)
Total deferred   (17,020)   (75,039)
Total Income Tax  $166,653   $747,068 

 

At December 31, 2016 and 2015, the Company had no federal or state net operating loss carry-forwards.

 

The tax effects of temporary differences that gave rise to significant portions of net deferred tax assets at December 31, 2016 and 2015 are as follows:

 

   2016   2015 
Accruals and reserves  $233,398   $247,486 
State taxes   16,569    61,000 
Property, plant and equipment   (88,802)   (164,341)
Total Deferred Tax Assets  $161,165    144,145 

 

In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which temporary differences become deductible or includable in taxable income. Management considers projected future taxable income and tax planning strategies in making this assessment. Based upon the level of historical income and projections for future taxable income over the periods to which the deferred tax assets are applicable, management believes it is more likely than not that the Company will realize the benefits of these deductible differences.

 

The Company accounts for uncertain tax positions as required by FASB ASC Topic 740. FASB ASC Topic 740 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements by defining the criterion that an individual tax position must meet for any part of the benefit of that position to be recognized in an enterprise’s financial statements. The accounting standard prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return as well as guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. No significant income tax uncertainties have been identified by the Company and, therefore, the Company recognized no adjustment for unrecognized income tax benefits for the years ended December 31, 2016 and 2015.

 

The Company is no longer subject to U.S. federal income tax examination for years before 2012 and state and local tax examinations before 2011. However, to the extent allowed by law, the tax authorities may have the right to examine prior periods where net operating losses were generated and carried forward, and make adjustments up to the amount of the net operating loss carry-forward amount.

 

 F-15 

 

 

The total income tax expense differs from the amounts computed by applying the statutory federal income tax rate of 34% as follows:

 

   2016   2015 
         
Computed tax expense  $25,746   $555,780 
Nondeductible items and other   110,277    74,569 
Current and deferred state taxes, net of federal benefit   30,630    116,719 
           
Total Income Tax Expense  $166,653   $747,068 

 

Note 8 - Segment Reporting

 

The Company’s chief operating decision-maker is the Company’s CEO. The CEO reviews financial information presented on an entity-level basis for purposes of making operating decisions and assessing financial performance. The entity-level financial information is identical to the information presented in the accompanying statements of operations. Therefore, the Company has determined that it operates in a single operating segment: Industrial Internet of Things (IIoT) solutions.

 

In addition, the CEO reviews the following information on revenues by product category.

 

   2016   2015 
         
Gas detection devices  $8,159,916   $8,828,050 
Environmental controllers   599,492    672,161 
FieldServers   10,425,034    10,823,776 
   $19,184,442   $20,323,987 

 

The Company sells its products to companies located primarily in the United States. For the years ended December 31, 2016 and 2015, sales to international customers were 22% and 24%, respectively.

 

 F-16 

 

 

Exhibit Index.

 

Exhibit Number   Description
3.1(1)   Articles of Incorporation of the Registrant.
3.2(2)   Bylaws of the Registrant.
4.1(3)   Specimen Common Stock Certificate of the Registrant.
10.1(4)   1996 Stock Plan of Registrant.
10.2(5)   2006 Stock Plan of Registrant.
10.3(6)   Standard Industrial Lease dated April 4, 2003, by and between Sierra Monitor and Geomax.
10.4(7)   Form of Retention Agreement by and between Sierra Monitor and certain of its executive officers.
10.5(8)   Employment Offer Letter by and between Sierra Monitor and Anders B. Axelsson, dated December 18, 2013
10.6(9)   Employment Offer Letter by and between Sierra Monitor and Varun Nagaraj, dated May 15, 2014.
10.7(9)   Transition Agreement by and between Sierra Monitor and Gordon R. Arnold, dated July 7, 2014.
10.8(10)   Form of Indemnification Agreement by and between Sierra Monitor and its directors and certain of its executive officers.
10.9(11)   Form of Restricted Stock Award Agreement.
10.10(12)   Sierra Monitor Corporation 2016 Equity Incentive Plan and forms of award agreements thereunder.
23.1   Consent of Independent Registered Public Accounting Firm.
31.1   Certification of Chief Executive Officer, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2   Certification of Chief Financial Officer, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1   Certification of Chief Executive Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2   Certification of Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS   XBRL Instance Document.
101.SCH   XBRL Taxonomy Schema.
101.CAL   XBRL Taxonomy Extension Calculation Linkbase.
101.DEF   XBRL Taxonomy Extension Definition Linkbase.
101.LAB   XBRL Taxonomy Extension Label Linkbase.
101.PRE   XBRL Taxonomy Extension Presentation Linkbase.

 

(1)Incorporated by reference to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 1989 filed with the SEC on March 23, 1990.
(2)Incorporated by reference to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2014 filed with the SEC on March 30, 2015.
(3)Incorporated by reference to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2003 filed with the SEC on March 25, 2004.
(4)Incorporated by reference to the Company’s Registration Statement on Form S-8 (File No. 333-85376) filed with the SEC on April 2, 2002.
(5)Incorporated by reference to the Company’s Current Report on Form 8-K filed with the SEC on May 22, 2006.
(6)Incorporated by reference to Exhibit 10.6 of the Company’s Quarterly Report on Form 10-QSB for the quarter ended September 30, 2000.
(7)Incorporated by reference to the Company’s Current Report on Form 8-K filed with the SEC on April 13, 2012.
(8)Incorporated by reference to the Company’s Current Report on Form 8-K filed with the SEC on January 13, 2014.

 

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(9)Incorporated by reference to the Company’s Current Report on Form 8-K filed with the SEC on July 8, 2014.
(10)Incorporated by reference to the Company’s Current Report on Form 8-K filed with the SEC on May 16, 2014.
(11)Incorporated by reference to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2015 filed with the SEC on March 30, 2016.
(12)Incorporated by reference to the Company’s Current Report on Form 8-K filed with the SEC on May 20, 2016.

 

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