UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10 - Q

 

(Mark One)

 

x	Quarterly report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934.
	For the quarterly period ended September 30, 2012

 

or

 

¨	Transition report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934.
	For the transition period from           to

 

Commission file number 0-7441

 

SIERRA MONITOR CORPORATION

 

(Exact name of registrant as specified in its charter)

 

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

 

1991 Tarob Court

Milpitas, California 95035

(Address and zip code of principal executive offices)

 

(408) 262-6611

(Registrant's telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 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 last 90 days.

Yes x No ¨

 

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

 

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

 

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

 

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

 

 

The number of shares outstanding of the issuer's common stock, as of November 14, 2012, was 10,004,311.

 

PART I: FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

SIERRA MONITOR CORPORATION

Condensed Balance Sheets

 

Assets		September 30, 2012 (unaudited)				December 31, 2011
Current assets:
Cash		$	2,408,327			$	1,212,426
Trade receivables, less allowance for doubtful accounts
of approximately $80,000 and $65,000, respectively			2,089,078				1,647,948
Inventories, net			2,942,670				3,918,161
Prepaid expenses			198,478				223,362
Income tax deposits			181,287				10,655
Deferred income taxes			366,618				366,618
Total current assets			8,186,458				7,379,170
Property and equipment, net			334,143				399,558
Other assets			116,364				140,558
Total assets		$	8,636,965			$	7,919,286
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable		$	794,936			$	918,706
Accrued compensation			434,280				497,197
Other current liabilities			107,376				323,114
Income taxes payable			-				11,362
Total current liabilities			1,336,592				1,750,379
Deferred tax liability			108,337				108,337
Total liabilities			1,444,929				1,858,716
Shareholders' equity:
Common stock, $0.001 par value; 20,000,000 shares authorized; 10,004,311 and 9,901,177 shares issued and outstanding, respectively
Additional paid-in capital			10,004				9,901
Retained earnings			2,846,287				2,775,250
Total shareholders' equity			4,335,745				3,275,419
Total liabilities and shareholders’ equity			7,192,036				6,060,570
		$	8,636,965			$	7,919,286
See accompanying notes to the unaudited interim condensed financial statements.

 

 

SIERRA MONITOR CORPORATION

 

Condensed Statements of Operations

 

(Unaudited)

 

		Three months ended September 30,								Nine months ended September 30,
		2012				2011				2012				2011
Net sales		$	4,040,406			$	3,803,336			$	14,907,621			$	11,956,114
Cost of goods sold			1,700,007				1,563,419				6,703,287				4,851,546
Gross profit			2,340,399				2,239,917				8,204,334				7,104,568
Operating expenses
Research and development			523,310				552,950				1,641,118				1,648,016
Selling and marketing			1,012,646				857,828				3,101,386				2,659,782
General and administrative			550,572				526,508				1,694,828				1,588,368
			2,086,528				1,937,286				6,437,332				5,896,166
Income from operations			253,871				302,631				1,767,002				1,208,402
Interest income			119				262				208				864
Income before income taxes			253,990				302,893				1,767,210				1,209,266
Income tax provision			101,595				121,157				706,884				483,706
Net income		$	152,395			$	181,736			$	1,060,326			$	725,560
Net income available to common shareholders per common share
Basic:		$	0.02			$	0.02			$	0.11			$	0.07
Diluted:		$	0.02			$	0.02			$	0.10			$	0.07
Weighted average number of common shares used in per share computations
Basic:			9,905,761				9,901,177				9,902,705				9,898,354
Diluted:			10,118,790				10,113,651				10,148,227				10,122,507

 

See accompanying notes to the unaudited interim condensed financial statements.

 

SIERRA MONITOR CORPORATION

 

Condensed Statements of Cash Flows

 

(Unaudited)

 

		Nine months ended September 30,
		2012				2011
Cash flows from operating activities:
Net income		$	1,060,326			$	725,560
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			222,032				211,877
Provision for bad debt expense			15,434				14,157
Provision for inventory losses			34,958				35,000
Stock based compensation expense			71,140				59,885
Changes in operating assets and liabilities:
Trade receivables			(456,564	)			(141,904	)
Inventories			940,533				(492,249	)
Prepaid expenses			24,884				55,063
Income tax deposit			(170,632	)			(524,200	)
Income taxes payable			(11,362	)			465,092
Other assets			-				(5,394	)
Accounts payable			(123,770	)			(66,675	)
Accrued compensation			(62,917	)			33,011
Other current liabilities			(215,738	)			20,210
Net cash provided by operating activities			1,328,324				389,433
Cash flows from investing activities:
Purchase of property and equipment			(121,751	)			(253,790	)
Purchase of other long-term assets			(10,672	)			(49,713	)
Net cash used in investing activities			(132,423	)			(303,503	)
Net increase in cash			1,195,901				85,930
Cash at beginning of period			1,212,426				1,645,433
Cash at end of period		$	2,408,327			$	1,731,363
Supplemental cash flow information
Cash paid for income taxes		$	888,893			$	542,814

 

 

See accompanying notes to the unaudited interim condensed financial statements.

 

SIERRA MONITOR CORPORATION

 

Notes to the Unaudited Interim Condensed Financial Statements

 

September 30, 2012

Basis of Presentation

 

The accompanying unaudited interim condensed financial statements have been prepared by Sierra Monitor Corporation (the “Company”), pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted pursuant to such SEC rules and regulations; nevertheless, the Company believes that the disclosures are adequate to make the information presented not misleading. Amounts related to disclosure of December 31, 2011 balances within these interim condensed financial statements were derived from the audited 2011 financial statements and notes thereto. These financial statements and the notes hereto should be read in conjunction with the financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2011, which was filed with the SEC on March 22, 2012. In the opinion of the Company, all adjustments, including normal recurring adjustments necessary to present fairly the financial position, results of operations, and cash flows of the Company for the interim period have been included. The results of operations for the interim period are not necessarily indicative of the results for any subsequent interim period or for the full year.

 

Summary of Business

 

The Company was formed in 1978 and delivers information technology for environment measurement and control by developing specialized embedded software that is deployed on proprietary hardware platforms. Embedded software enables data transfer between subsystems using protocol and physical medium translation.  Proprietary hardware platforms allow the Company to increase the value proposition while protecting its intellectual property.

 

The Company’s hardware platforms include original equipment modules for installation in customer devices and controllers, gateway boxes generally used by integrators for machine to machine (“M2M”) protocol translation, and multi-component safety systems generally focused on gas and fire detection.  Each of the hardware platforms utilize the Company’s proprietary data handling software allowing communication from lower level sensor systems through to the highest levels of Internet Protocol (“IP”) networks.

 

By providing an intelligent interface, the Company’s products enable various machines, devices, systems and people to reliably communicate useful information for the measurement and control of various environments including buildings, plants, factories and over the Internet.  By delivering the data on various communication levels, including Ethernet, Internet, LONworks, Profibus, and others, the Company’s products make it possible for data to be accessed at more appropriate levels, such as control rooms or remote locations.

 

The Company’s products, including gas detection systems, environment controls for remote telephone company structures and protocol gateways, are based on complex proprietary software developed by the Company. The software, embedded in each of the Company’s product groups, provides key functions including sensor management, utilization of data for alarm and control purposes and delivery of data across various networks including the Internet.

 

Gas monitoring products manufactured by the Company are sold for a variety of safety applications including oil, gas and chemical processing plants, wastewater treatment facilities, alternate fuel vehicle maintenance garages and other users or producers of hazardous gases. Environment controllers, which provide management of environmental conditions in small structures such as local DSL distribution nodes and buildings at cell tower sites, are sold to telecommunication companies and their suppliers. The Company’s FieldServer products are sold generally to integration companies that implement building and plant automation projects and to manufacturers of equipment for the same industry.

 

 

The Company’s common stock is quoted on the OTC Bulletin Board under the symbol “SRMC”.

 

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.

 

a)

Revenue Recognition

 

A detailed discussion of our revenue recognition policies is contained in Item 2 (Management’s Discussion and Analysis of Financial Condition and Results of Operations) under Critical Accounting Policies below. The discussion is incorporated herein by reference.

 

b)

Recent Accounting Pronouncements

 

Recent accounting pronouncements discussed in the notes to the December 31, 2011 audited financial statements, filed previously with the SEC in our Annual Report on Form 10-K on March 22, 2012, that are required to be adopted during the year ended December 31, 2011, did not have or are not expected to have a significant impact on the Company’s 2012 financial statements.

 

c)

Employee Stock-Based Compensation

 

The Company reserved 500,000 shares of common stock for issuance under the 2006 Stock Plan of which 289,820 shares were available for grant at September 30, 2012. Options are granted under our 2006 Stock Plan at the fair market value of our common stock at the grant date, typically vest ratably over 4 years, and expire 10 years from the grant date.

 

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

 

For the nine-month periods ended September 30, 2012 and 2011, general and administrative expenses included $71,140 and $59,885, respectively, resulting from the recognition of compensation expense associated with employee stock options. There was no material impact on the Company’s basic and diluted net income per share as a result of recognizing employee stock-based compensation expense. The Company did not modify the terms of any previously granted stock options during the nine-month periods ended September 30, 2012 and 2011.

 

Inventories

 

A summary of inventories follows:

 

		September 30, 2012				December 31, 2011
Raw materials		$	1,130,542			$	1,067,504
Work-in-process			987,998				1,124,379
Material at vendor			442,424				452,261
Finished goods			492,173				1,349,526
Less: Allowance for obsolescence reserve			(110,467	)			(75,509	)
		$	2,942,670			$	3,918,161

 

Net Income Per Share

 

Basic earnings per share (“EPS”) is computed using the weighted average number of common shares outstanding during the period. Diluted EPS is computed using the weighted average number of common and dilutive potential common shares outstanding during the period. Dilutive potential common shares consist of common shares issuable upon exercise of stock options using the treasury stock method. No adjustments to earnings were made for purposes of per share calculations.

 

At September 30, 2012 and 2011, outstanding options to acquire 185,000 and 192,000, shares of common stock, respectively, were not considered potentially dilutive common shares due to the exercise price of such options being higher than the stock price used in the EPS calculation

 

The following is a reconciliation of the shares used in the computation of basic and diluted EPS for the three and nine-month periods ended September 30, 2012 and 2011, respectively:

 

		Three months ended September 30								Nine months ended September 30
		2012				2011				2012				2011
Basic EPS – weighted-average number of common shares outstanding			9,905,761				9,901,177				9,902,705				9,898,354
Effect of dilutive potential common shares – stock options outstanding			213,029				212,474				245,522				224,153
Diluted EPS – weighted-average number of common shares and potential common shares outstanding			10,118,790				10,113,651				10,148,227				10,122,507

 

Concentrations

 

One customer made up more than 10% of accounts receivable at September 30, 2012 and no customer made up more than 10% of accounts receivable at December 31, 2011. Also the same customer made up more than 10% of net sales for the nine-month period ended September 30, 2012 and no customer made up more than 10% of net sales for the nine-month period ended September 30, 2011. The single customer that made up more than 10 percent of sales and receivables is a large, financially stable architectural and engineering firm (A&E) undertaking a construction project in the Middle East. The customer is considered reliable and has previously made payment to Sierra Monitor in the correct amount and on time.

 

The Company currently maintains substantially all of its day to day operating cash with a major financial institution. At times, cash balances may be in excess of the amounts insured by the Federal Deposit Insurance Corporation. Cash balances of approximately $1,908,000 and $962,000 were in excess of such insured amounts at September 30, 2012 and December 31, 2011, respectively.

 

Segment Information

 

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

 

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

 

		Three months ended September 30,								Nine months ended September 30,
		2012				2011				2012				2011
Gas detection devices		$	1,787,364			$	1,612,406			$	7,765,755			$	5,258,136
Environment controllers			200,964				237,844				653,583				800,351
FieldServers			2,052,078				1,953,086				6,488,283				5,897,627
		$	4,040,406			$	3,803,336			$	14,907,621			$	11,956,114

 

Line-of-Credit

 

The Company allowed a $1,000,000 line of credit with its previous commercial bank to expire and received approval for a replacement $1,000,000 line of credit under substantially the same terms with a new bank until September 2013. No borrowings have been made under the Company’s line of credit during the first nine months of fiscal year 2012 and there were no outstanding balances at September 30, 2012 and December 31, 2011. As of September 30, 2012, the Company was in compliance with specified financial covenants required by the new commercial bank providing the line of credit.

 

Stock Option Grants

 

No stock options were granted during the three-month period ended September 30, 2012. A total of 60,000 stock options were granted during the nine-month period ended September 30, 2012. No stock options were granted during the three-month period ended September 30, 2011, while 143,000 stock options were granted during the nine-month period ended September 30, 2011. Stock options are granted under the 2006 Stock Plan at the fair market value of the Company’s common stock at the grant date, vest ratably over 4 years, and expire 10 years from the grant date.

 

Stock Option Exercise and Expiration

 

In the nine-month periods ended September 30, 2012 and 2011, a total of 103,134 and 4,235 shares of common stock, respectively, were issued as a result of employee net exercises of stock options. During the same periods, 9,000 and 2,000 options expired.

 

Subsequent Events

 

Management has evaluated events subsequent to September 30, 2012 through the date that the accompanying interim condensed financial statements were filed with the Securities and Exchange Commission for transactions and other events which may require adjustment of and/or disclosure in such financial statements.

 

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

 

This Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Statements that are not statements of historical fact may be deemed to be forward-looking statements. The words “believe,” “expect,” “intend,” “plan,” “project,” “will,” and similar words and phrases as they relate to us also identify forward-looking statements. Such forward-looking statements include any expectations of operating and non-operating expense, including research and development expense, sufficiency of resources, including cash and accounts receivable, estimates of allowances for doubtful accounts, credit lines or other financial items; any statements of the plans, strategies and objectives of management for future operations and identified opportunities; any statements concerning proposed new products, services, developments and related research and development activities; any statements related to the Company’s positioning to support current and near term levels of business; any statements of belief; and any statement of assumptions underlying any of the foregoing. Such statements reflect our current views and assumptions and are not guarantees of future performance. These statements are subject to various risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including, without limitation, those issues described under the heading “Critical Accounting Policies,” and those risk factors indentified in Item1A, Risk Factors, of our Annual Report on Form 10-K for our fiscal year ended December 31, 2011, as such section may be updated in our subsequent Forms 10-K, 10-Q and 8-K filed with, or furnished to, the SEC. We urge you to review and consider the various disclosures made by us from time to time in our filings with the SEC that attempt to advise you of the risks and factors that may affect our future results. We expressly disclaim any obligation to release publicly any updates or revisions to any forward-looking statement to reflect any changes in expectations, or any change in events or circumstances on which those statements are based, unless otherwise required by law.

 

Results of Operations

 

For the three-month periods ended September 30, 2012, Sierra Monitor Corporation (“we” or the “Company”) reported net sales of $4,040,406 compared to $3,803,336 for the three-month period ended September 30, 2011. For the nine-month period ended September 30, 2012, net sales were $14,907,621 compared with $11,956,114 in the prior year nine-month period. The sales results for the three and nine-month periods ended September 30, 2012 represent increases of 6% and 25%, respectively, compared to the same periods in 2011.

 

For the three-month period ended September 30, 2012, sales of our gas detection products were approximately $1,787,000 compared to $1,612,000 in the three-month period ended September 30, 2011. For the nine-month period ended September 30, 2012, our gas detection product sales were approximately $7,766,000 compared to $5,258,000 in the same period in 2011. These results represent an 11% year-over-year increase in the third quarter and a 48% year-over-year increase in the year-to-date period. In the third quarter of 2012 our industrial gas detection sales were robust compared to the same period in 2011, but in the same comparative periods our Navy sales were substantially lower. Industrial sales included new international fire and gas detection projects and larger than normal domestic spare parts sales. Navy sales that are dependent upon unpredictable military buying cycles slowed in the third quarter after relatively higher sales in the first half of the year. The increase in year-to-date gas detection product sales is primarily the result of the first quarter, 2012 shipment of a single order with a value exceeding $2,000,000. The order was sold to an architectural and engineering firm (A&E) undertaking construction of a petroleum pipeline booster station in the Middle East.

 

Sales of Environment Controllers to the telecommunications industry in the three-month period ended September 30, 2012 were approximately $201,000 compared to $238,000 in the three-month period ended September 30, 2011. In the nine-month period ended September 30, 2012, sales of Environment Controllers were approximately $654,000 compared to $800,000 in the same period in 2011. Our sales to the telecommunications industry are dependent upon expansion of field infrastructure by wire phone and cable companies. In the current year there have been no significant infrastructure projects and our sales are reliant upon field upgrades and retrofits.

 

In the three-month period ended September 30, 2012, sales of FieldServer products were approximately $2,052,000 compared to $1,953,000 in the same period in 2011. In the nine-month period ended September 30, 2012, sales of our FieldServer products were approximately $6,488,000, compared to $5,898,000 in sales reported in the same period in 2011. These results represent a 5% year-over-year increase in the third quarter and a 10% year-over-year increase in the year-to-date period.

 

FieldServer sales include both box products and original equipment manufacturer (“OEM”) modules. Box products provide a platform for delivery and operation of our software for integration with building automation systems and are generally sold to building automation integrators.

 

Box product sales increased approximately 21% in the three-month period and 3% in the nine-month period ended September 30, 2012 on a year-over-year basis. The increase in sales in the third quarter of 2012 is due, in part, to shipment of a one-time single order for a military application. In early 2011 we completed the introduction of a more competitive FieldServer box product with a lower selling price. The impact of that introduction was lower revenue, even as the unit volume increased. In the second and third quarters of 2012 the unit volume has increased sufficiently to overcome the lower selling price, resulting in a year-over-year revenue improvement.

 

OEM module sales decreased approximately 10% in the three-month period ended September 30, 2012 as compared to the same period in 2011, and increased 17% on a year-to-date basis in 2012 compared to the prior year period. While order bookings for the OEM module have continued to increase, shipment releases by key customers slowed in the third quarter. We believe that the lower shipment releases were a temporary timing issue.

 

Gross profit of $2,340,399 for the three-month period ended September 30, 2012 was 58% of net sales compared to $2,239,917, or 59% of net sales, in the same period in the previous year. Gross profit for the nine-month period ended September 30, 2012 was $8,204,334, or 55% of net sales, compared to $7,104,568, or 59% of net sales, in the same period in the previous year. The gross profit for the third quarter was consistent with our current margin expectations based on continued competitive pressure on selling prices. The gross profit for the nine month year-to-date period was lower than our historical levels as a result of discounted pricing for a single large order to the Middle East in the first quarter of 2012.

 

Expenses for research and development, which include new product development and engineering to sustain existing products, were $523,310, or 13% of net sales, for the three-month period ended September 30, 2012 compared to $552,950, or 15% of net sales, in the comparable period in 2011. In the nine-month periods ended September 30, 2012 and September 30, 2011, research and development expenses were $1,641,118, or 11% of net sales, and $1,648,016, or 14% of net sales, respectively. We maintain product development programs to continually increase the number and types of products for sale in each of the product lines. In addition, our engineering team supports third party approval programs. The expenses for each of the reported periods in 2012 are consistent with the corresponding prior year periods and reflect our ongoing commitment to continue investment in each of the product lines.

 

Selling and marketing expenses, which consist primarily of salaries, commissions and promotional expenses were $1,012,646, or 25% of net sales for the three-month period ended September 30, 2012, compared to $857,828 or 23% of net sales, in the comparable period in the prior year. For the nine-month periods ended September 30, 2012 and 2011, selling and marketing expenses were $3,101,386, or 21% of net sales, and $2,659,782, or 22% of net sales, respectively. Third quarter and year-to-date 2012 selling expenses are generally higher than the comparative periods due, primarily, to higher selling costs and our expansion of the sales team, including the early 2012 opening of new offices in Singapore and Berlin. Variable selling costs include commission payments within the sales channels that increase in correlation with the sales level.

 

General and administrative expenses, which consist primarily of salaries, building rent, insurance expenses and fees for professional services, were $550,572, or 14% of net sales, for the three-month period ended September 30, 2012 compared to $526,508, or 14% of net sales, in the three-month period ended September 30, 2011. For the nine-month periods ended September 30, 2012 and 2011, general and administrative expenses were $1,694,828, or 11% of net sales, and $1,588,368, or 13% of net sales, respectively. There were no overall significant changes in general and administrative expenses except for generally higher employee compensation expenses.

 

In the three-month period ended September 30, 2012, our income from operations was $253,871 compared to $302,631 for the three-month period ended September 30, 2011. In the nine-month period ended September 30, 2012, our income from operations was $1,767,002 representing an increase of $558,600 compared to the nine-month period ended September 30, 2011. In the third quarter of 2012 our higher gross profit compared to the same period of 2011 was offset by increases in each category of our fixed expenses resulting in lower income from operations. Our higher income in the first nine months of 2012 compared with the same period in 2011 was primarily the result of a single large order shipped in the first quarter of 2012.

 

In the three and nine-month periods ended September 30, 2012 tax deposits of $110,000 and $883,000, respectively, were paid to federal and state agencies for current obligations. After interest income and tax expenses, our net income for the three-month period ended September 30, 2012 was $152,395 compared to $181,736 in the same period of 2011. For the nine-month period ended September 30, 2012 our net income was $1,060,326 compared to $725,560 in the same period of 2011.

 

Liquidity and Capital Resources

 

During the nine months ended September 30, 2012, net cash provided by operating activities was approximately $1,328,000 compared to net cash of approximately $389,000 provided by operating activities for the same period in 2011. Working capital was approximately $6,850,000 at September 30, 2012, an increase of approximately $1,221,000 from December 31, 2011.

 

At September 30, 2012, our balance sheet reflected approximately $2,408,000 of cash, $2,943,000 of inventory and $2,089,000 of net trade receivables. At December 31, 2011, our total cash on hand was approximately $1,212,000, our inventory was $3,918,000 and our net trade receivables were $1,648,000. Our inventory was higher at December 31, 2011 in preparation for shipment of a large order to the Middle East in the first quarter of 2012.

 

At September 30, 2012, we had no long term liabilities. We maintain a $1,000,000 line of credit, secured by certain assets of the Company, with a commercial bank. The line of credit requires annual renewal and compliance with certain financial covenants, including the requirement to maintain a quick ratio of 1.3:1.0 and a profitability test. At September 30, 2012, the Company was in compliance with all financial covenants contained in the line of credit. There were no borrowings on this line of credit during the nine-month period ended September 30, 2012.

 

We believe that our present resources, including cash and accounts receivable, are sufficient to fund the Company’s anticipated level of operations through at least January 1, 2013. There are no current plans for significant capital equipment expenditures and no other known demands, commitments, events or uncertainties, except as previously disclosed in this Liquidity and Capital Resources section, that will result in or that are reasonably likely to result in the Company’s liquidity increasing or decreasing in any material way.

 

Critical Accounting Policies

 

The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States of America requires management to make judgments, assumptions and estimates that affect the amounts reported in the Company’s condensed financial statements and the accompanying notes. The amounts of assets and liabilities reported on our balance sheets and the amounts of revenues and expenses reported for each of our fiscal periods are affected by estimates and assumptions, which are used for, but not limited to, the accounting for revenue recognition, accounts receivable, doubtful accounts and inventories. Actual results could differ from these estimates. The following critical accounting policies are significantly affected by judgments, assumptions and estimates used in the preparation of the financial statements:

 

a)

Revenue Recognition

 

The Company recognizes revenues when all of the following conditions exist: a) persuasive evidence of an arrangement exists in the form of an accepted purchase order; b) delivery has occurred, based on shipping terms, or services have been rendered; c) the Company’s price to the buyer is fixed or determinable, as documented on the accepted purchase order; and d) collectability is reasonably assured. By product and service type, revenues are recognized when the following specific conditions are met:

 

Gas Detection and Environment Control Products

 

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

 

Gas Detection and Environment Control Services

 

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

 

FieldServer Products

 

FieldServer products are sold in the same manner as Gas Detection and Environment Control Products (as discussed above) except that the products contain embedded software, which is integral to the operation of the device.  The software embedded in FieldServer products includes two items:  (a) a compiled program containing (i) the basic operating system for FieldServer products, which is common to every unit, and (ii) customized protocol drivers based on the customer order (see FieldServer Services below for more information); and (b) a configuration file that identifies and links each data point as identified by the customer. The Company 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.

 

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 participates in testing and provides written confirmation that the driver program meets their expectations.  The customer is then able to place or release orders for FieldServer product with the new driver loaded into it (see FieldServer Products above).  Revenues for driver development are billed and recognized only after the customer’s written confirmation is received. Collectability is reasonably assured as described in FieldServer Products above.

 

Discounts and Allowances

 

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

 

b)

Accounts Receivable and Related Allowances

 

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

 

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

 

c)

Inventories

 

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

 

ITEM 4: CONTROLS AND PROCEDURES

 

Disclosure Controls and Procedures. As of the end of the period covered by this Quarterly Report on Form 10-Q, our management, with the participation of Gordon R. Arnold, our principal executive and principal financial officer, carried out an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures, pursuant to Exchange Act Rules 13a-15(e) and 15d-15(e), which includes inquiries made to certain other employees. Based upon that evaluation, Mr. Arnold concluded that, as of September 30, 2012, the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act) were effective.

 

Changes in internal control over financial reporting. There was no change in our internal control over financial reporting that occurred during the period covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

PART II: OTHER INFORMATION

ITEM 6.      EXHIBITS

 

	Exhibit
	Number	Description
	3.1(1)	Articles of Incorporation of the Registrant.
	3.2(2)	Bylaws of the Registrant.
	31.1	Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
	31.2	Certification of Chief Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
	32	Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
	101.INS	XBRL Instance Document.
	101.SCH	XBRL Taxonomy Extension Schema.
	101.CAL	XBRL Taxonomy Extension Calculation Linkbase.
	101.DEF	XBRL Taxonomy Extension Definition Linkbase.
	101.LAB	XBRL Taxonomy Extension Label Linkbase.
	101.PRE	XBRL Taxonomy Extension Presentation Linkbase.

 

	(1)	Incorporated by reference to our Annual Report on Form 10-K for the fiscal year ended December 31, 1989.
	(2)	Incorporated by reference to our Quarterly Report on Form 10-QSB (File No. 000-07441) for the fiscal quarter ended June 30, 1998, filed with the SEC on August 14, 1998.

 

 

 

 

 

 

 

 

 

 

 

 

SIGNATURES

 

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

 

		SIERRA MONITOR CORPORATION
		Registrant
Date:     November 14, 2012	By:	/s/ Gordon R. Arnold
		Gordon R. Arnold
		President
		Chief Executive Officer
		Chief Financial Officer

 

 

 

Index to Exhibits

	Exhibit
	Number	Description
	3.1(1)	Articles of Incorporation of the Registrant.
	3.2(2)	Bylaws of the Registrant.
	31.1	Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
	31.2	Certification of Chief Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
	32	Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
	101.INS	XBRL Instance Document.
	101.SCH	XBRL Taxonomy Extension Schema.
	101.CAL	XBRL Taxonomy Extension Calculation Linkbase.
	101.DEF	XBRL Taxonomy Extension Definition Linkbase.
	101.LAB	XBRL Taxonomy Extension Label Linkbase.
	101.PRE	XBRL Taxonomy Extension Presentation Linkbase.

 

	(1)	Incorporated by reference to our Annual Report on Form 10-K for the fiscal year ended December 31, 1989.
	(2)	Incorporated by reference to our Quarterly Report on Form 10-QSB (File No. 000-07441) for the fiscal quarter ended June 30, 1998, filed with the SEC on August 14, 1998.