U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

 

(Mark One)

x

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

For the fiscal year ended December 31, 2013.

¨

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, 2013 was approximately $5,611,700 based upon the last reported sale price of $1.50 per share on the Over the Counter Bulletin Board, which occurred on June 26, 2013. 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 25, 2014 was 10,114,311.

 

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 Annual Meeting of Shareholders to be held on May 14, 2014.

 

 

 

FORM 10-K

 

SIERRA MONITOR CORPORATION

 

TABLE OF CONTENTS

 

 

PART I.
Item 1.	Business	1
Item 1A.	Risk Factors	4
Item 2.	Properties	5
Item 3.	Legal Proceedings	5
PART II.
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and
	Issuer Purchases of Equity Securities	6
Item 7.	Management’s Discussion and Analysis of Financial Condition and
	Results of Operations	8
Item 8.	Financial Statements and Supplementary Data	11
Item 9.	Changes in and Disagreements with Accountants
	on Accounting and Financial Disclosure	11
Item 9A.	Controls and Procedures	11
Item 9B.	Other Information	12
PART III.
Item 10.	Directors, Executive Officers, and Corporate Governance	13
Item 11.	Executive Compensation	14
Item 12.	Security Ownership of Certain Beneficial Owners and Management
	and Related Stockholder Matters	14
Item 13.	Certain Relationships and Related Transactions, and Director Independence	15
Item 14.	Principal Accounting Fees and Services	15
PART IV.
Item 15.	Exhibits and Financial Statement Schedules	16
SIGNATURES		17

 

 

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, effect of inflation on our results of operations, critical accounting policies and other matters discussed under Part I, Item 1A “Risk Factors,” below. Our future operating results may be affected by a number of factors, including general economic conditions in both foreign and domestic markets, cyclical factors affecting our industry, lack of growth in our end-markets, our ability to develop, manufacture, and sell both new and existing products at a profitable yet competitive price and other matters discussed under Part I, Item 1A “Risk Factors,” 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”), founded in 1978, designs, manufactures and sells electronic safety and environmental instrumentation. The Company’s unique protocol translator product lines enable communication between disparate electronic systems overcoming protocol language barriers. By enabling communication between central building automation systems and many electronic subsystems, such as fire panels, chillers and air handlers, Sierra Monitor assists with the integration of energy saving systems. The Company’s products improve the safety and comfort of workers while contributing to climate and natural resource protection. Sierra Monitor’s intelligent hazardous gas detection systems can be found in a broad range of applications including US Navy ships, wastewater treatment facilities, refineries, offshore oil platforms, chemical plants, alternate fuel vehicle maintenance facilities, parking garages and underground telephone vaults providing 24/7 protection of personnel and facilities.

 

Our vision is to capitalize on the expanding worldwide demand for knowledge-based products and services that improve operational performance, productivity, efficiency and safety in building automation, industrial and military applications while reducing demands on resources. The Company is an established global supplier of safety and environmental instruments.

 

Products

 

By providing an intelligent interface, Sierra Monitor products enable various machines, devices, systems and people to reliably collect and communicate critical information for the measurement and control of various environments including buildings, plants and factories.

 

 

Protocol Gateways: By delivering data on multiple communication platforms, including serial, Ethernet, Lonworks and fieldbus utilizing protocols from an extensive proprietary library of over 100 protocol drivers, the Company’s products make it possible for data to be accessed at more appropriate levels, including automation controllers, network operations centers, control rooms and remote locations.

 

Machine to machine (M2M) protocol translation devices, known as communication gateways, are sold under the trade names “FieldServer” and “ProtoCessor” to equipment manufacturers and systems integrators, principally in the building automation industry where the market is driven primarily by cost efficiency and energy savings initiatives. Many industrial instruments, such as detection systems, controllers and automation systems, communicate in disparate, non-standard proprietary protocols. Communication gateways provide a means for transferring data between devices using foreign and proprietary protocols and modern open comprehensive protocol systems. In 2013, combined revenue from sales of our FieldServer and ProtoCessor products was approximately 47% of our sales compared to approximately 45% in 2012.

 

Safety Instrumentation: Intelligent gas detection safety systems that Sierra Monitor manufactures solve a variety of safety challenges ranging from applications in oil and gas processing and chemical plants to wastewater treatment, alternate fuel vehicle programs and other users or producers of hazardous gases. These systems utilize features such as recorded event information, graphical displays on central computers and web server displays to allow users to identify hazards and problems before they evolve into incidents which could cause production delays, may prompt evacuation of personnel or potentially even cause property damage and physical injury. By network-enabling smart detection systems, through the FieldServer products, data can be presented via dynamic web server for viewing by local or remote computer web browsers. The motivation for installation of 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. Revenue from gas detection products was approximately 49% of our sales in 2013, compared to 51% in 2012.

 

Sierra Monitor also supplies microprocessor-based environment control products to the telecommunications industry. The control products are used to monitor temperature, gas, smoke and other environmental and security conditions in remote structures such as broadband distribution nodes, fiber optic booster stations and cell-tower site buildings. Environment controllers integrate various functions which would otherwise require discrete controls and alarm handling. Revenue from all products sold to the telecommunications industry was approximately 4% of our sales in 2013, compared to 4% in 2012.

 

Research and Development

 

We maintain research and development programs to enhance existing products and to develop new products. Our research and development expenses, which include costs for sustaining engineering, were $2,156,322 or 12% of sales in 2013, compared $2,167,548 or 12% of sales in 2012.

 

Sales and Distribution

 

Our products are sold through a network of independent sales representatives supervised by regional managers. There are currently 29 authorized representative companies in the United States. The majority of our representatives have exclusive territories and the sales agreements with each representative restrict them from representing competing products. Our internal sales organization includes a corporate sales manager, nine regional sales managers, an outside salesperson and various inside support personnel. In addition to our primary factory and office facility in Milpitas, California and a technical support office located in Fort Myers, Florida, we have separate domestic sales offices in California, Indiana, Massachusetts, Michigan, New Jersey, Pennsylvania and Texas. We support international sales from offices in California, Texas, Johannesburg, South Africa, Berlin, Germany, Dubai, United Arab Emirates (“UAE”) and Singapore.

 

 

Products manufactured by us are sold to a broad variety of customers including original equipment manufacturers and integration contractors in the building automation industry, oil and gas drilling, refining and pipeline companies, chemical plants, waste-water treatment plants, telecommunications companies, parking garages and landfill rehabilitation projects. 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, 2013, we had a total of 59 employees, all of whom were employed on a full-time basis, of whom 7 were in research and development; 20 were in marketing, sales and service; 4 were in general administration; and 28 were in operations and manufacturing. At that date, 48 of our employees were located in Milpitas, California, and the remaining employees were located in regional sales and technical support offices. We also maintain a team of twelve engineering consultants centered in Johannesburg, South Africa.

 

Seasonality and Customer Concentration

 

The demand for monitoring devices and other products we manufacture is typically not seasonal. During 2013, there were no customers to whom sales exceeded 10% of our net sales. In 2012 one customer in the Middle East accounted for approximately 13% of our net sales. 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.

 

Backlog

 

The commercial order backlog for our products at December 31, 2013 was approximately $2,826,000, compared to approximately $3,573,000 at December 31, 2012. 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 market in which we participate is highly competitive and generally price sensitive. Most of our competitors have far greater financial, marketing and manufacturing resources than we do. The principal competitive factors in our industry are reliability, ease of use, product support and price. Our FieldServer and ProtoCessor products compete with products or alternate methods and technologies offered by, among others, HMS, Control Solutions Inc., Loytec Electronics, ProSoft Technology, Automated Logic, Cimetrics, Kalki Communications Technologies, Honeywell Tritium and TAC Schneider Electric. Our gas detection products compete with systems offered by Detector Electronics Corporation, Draeger Safety Inc., Mine Safety Appliance Company, Emerson and Honeywell Life Safety and others. Most of our competitors offer broad product lines including items that do not compete with our products.

 

 

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. Principal suppliers of major components of our ProtoCessor products include Digi International and Echelon Corporation. 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

 

Sales to one customer based in the Middle East represented 14% of the Company’s accounts receivable as of December 31, 2013, while sales of one customer represented less than 2% of the Company’s sales during the year ended December 31, 2013. No customers exceeded 10% of the Company’s sales during the year ended December 31, 2013. In 2012, one customer in the Middle East accounted for approximately 13% of our net sales.

 

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 economic uncertainty in the U.S. and worldwide increases the challenges and the financial risks facing us. These risks include potential postponement of spending by industrial and municipal customers in response to tighter credit, negative financial news, declines in income or asset values and other funding restrictions. There may be a number of follow-on effects from the economic crisis including insolvency of key suppliers resulting in product delays; inability of customers, including commercial contractors, to obtain credit to finance projects requiring our products and customer insolvencies. 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 we have invested in new products, there can be no assurance that we can continue to introduce new products on a timely basis or that certain of our products will not be rendered non-competitive or obsolete by our competitors.

 

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.

 

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, 2015. We also lease a small technical support office in Fort Myers, Florida and have sales offices near Los Angeles, California; Louisville, Kentucky; Boston, Massachusetts; Detroit, Michigan; Cherry Hill, New Jersey; Dallas, Texas; Houston, Texas; Berlin, Germany; Dubai, UAE; and Singapore. Management considers that our current facilities are in good operating condition, are adequate for the present level of operations, 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, 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.

 

 

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.OB." 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, 2013		$	2.15			$	1.60
Quarter ended September 30, 2013		$	1.60			$	1.40
Quarter ended June 30, 2013		$	1.58			$	1.00
Quarter ended March 31, 2013		$	1.90			$	1.30
Quarter ended December 31, 2012		$	1.85			$	1.31
Quarter ended September 30, 2012		$	1.85			$	1.45
Quarter ended June 30, 2012		$	1.70			$	1.30
Quarter ended March 31, 2012		$	2.35			$	1.10

 

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

 

(b) Holders. As of March 21, 2014, there were approximately 136 stockholders of record of our common stock and the closing price of our common stock was $1.67. This figure does not include beneficial holders or common stock held in street name, as we cannot accurately estimate the number of these beneficial holders.

 

(c) Dividends. The company adopted a dividend policy authorizing a quarterly cash dividend of $0.01 per share of common stock. The last quarterly dividend was paid on February 14, 2014 to shareholders of record as of the close of business on January 31, 2014. This dividend represented a quarterly payout of $101,043 in aggregate, based on 10,104,311 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 the Company’s 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.

 

Stock Option Plan

 

We have previously reserved 551,521 shares of common stock for issuance under the 2006 Stock Plan. On October 24, 2013 the Board of Directors authorized an additional reserve of 2,000,000 shares of common stock for issuance under the 2006 Stock Plan. On December 31, 2013, a total of 2,184,320 shares were available for grant. 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.

 

 

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

 

Results of Operations - Fiscal 2013 vs. Fiscal 2012

 

For the fiscal year ended December 31, 2013, our net sales were $18,345,179, compared to net sales of $18,759,030 in the prior fiscal year ended December 31, 2012. Net sales decreased approximately 2.2% in 2013 compared to the prior year. Our income from operations before interest income and income taxes was $2,218,399 in 2013, compared to operating income before interest income and income taxes of $1,954,903 in 2012. Net income in 2013 was $1,352,589, or $0.13 per share, compared to net income of $1,195,829, or $0.12 per share, in 2012.

 

Sales of our FieldServer communications bridge products increased approximately 4% in 2013 compared to 2012. FieldServer products are generally sold to integrators, generally related to building automation for energy efficiency, and to Original Equipment Manufacturers (OEM’s) for a broad range of products from lighting controls to roof-top air conditioners, window and drape controls and others. In 2013 OEM customers began purchasing production quantities of approximately twenty new ProtoCessor products while most existing customers increased their purchasing quantities.

 

Our sales of gas detection products, including industrial accounts and military sales, decreased by approximately 7% in 2013 compared to 2012. In 2012, a single large international order accounted for approximately 26% of gas detection sales. Excluding that single order, our 2013 gas detection sales were increased 26% compared to the prior year aided by strong sales of gas detection systems to the U.S. Navy.

 

We also sell environment control products for high-value remote telecommunications buildings including cell towers and underground vaults. Due to the low level of demand for new remote buildings our sales of environment control products for telecommunications buildings decreased by approximately 8% in 2013.

 

Gross profit as a percent of sales was approximately 58% in 2013 and 56% in 2012. Our gross margins vary by product mix and channel of distribution. In particular, domestic sales generate higher margins but also higher selling expenses, while international shipments are sold at a discount and have lower selling expenses. Our margins in 2013 were consistent with our historical levels but higher than 2012 primarily as the result of the higher percentage of domestic sales in 2013. We did not experience any significant increases in costs for materials including electronic components, fabricated materials and contract assembly. Increases in our labor costs were generally offset by product pricing increases.

 

Research and development expenses, which include new product development and support for existing products, were $2,156,322, or 12% of net sales, in the fiscal year ended December 31, 2013, compared to $2,167,548, or 12% of net sales, in the fiscal year ended December 31, 2012. We maintained our historical level of spending for engineering projects in an effort to continue to produce new products and product enhancements. While we continue to produce new products, generally in the form of new software programs known as protocol drivers, we also completed the introduction of new gas detection modules and continued migration of our FieldServer user tools from a textual interface to a web-browser supported graphical user interface. Additionally, we completed a project to replace a critical single-sourced component with a manufactured equivalent.

 

Selling and marketing expenses were $4,094,819, or 22% of net sales, in 2013, compared to $4,081,745, or 22% of net sales, in the prior year. Increases in sales salaries, commission expenses and advertising contributed to the increase in selling and marketing expenses. We are continuing a program to increase our sales coverage in both domestic and international markets.

 

 

General and administrative expenses, which include salaries and benefits, professional fees, and product and general liability insurance, were $2,246,301, or 12% of net sales, in 2013, compared to $2,236,415, or 12% of net sales, in 2012. Higher compensation, professional fees and IT support services were partially offset by lower depreciation and maintenance fees.

 

Our financial results reflect a revenue decrease of $413,851 and an increase in income from operations of $263,496 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, 2013 was $7,780,766, compared to working capital of $6,887,628 at December 31, 2012. We undertook no significant equity or long-term debt transactions in 2013.

 

Inventories on hand at December 31, 2013 were $2,740,835, a decrease of $253,969 compared to the end of the prior year. Current inventory levels are consistent with our historical experience.

 

At December 31, 2013, our balance sheet reflected $3,421,679 of cash on hand compared to $2,306,258 at December 31, 2012. The increase in cash is due, in part, to the increase in net profit and the reduction of inventory on hand.

 

Our net trade receivables at December 31, 2013 were $1,943,643 compared to $1,913,185 at December 31, 2012. Trade receivables measured by days of sales outstanding decreased to 36 days at December 31, 2013 compared to 42 days at December 31, 2012.

 

Income taxes paid totaled $806,262 during 2013 compared with $898,893 during 2012.

 

We maintain a $1,000,000 line of credit with our commercial bank, secured by certain assets of ours. The line of credit requires annual renewal and compliance with certain restrictive covenants, including the requirement to maintain a quick ratio of 1.3:1.0 and a profitability test. At December 31, 2013, we were in compliance with the financial covenants, and there were no borrowings on the line of credit.

 

We believe that our present resources, including cash and accounts receivable, are sufficient to fund our anticipated level of operations through at least January 1, 2015. 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 2014 include, but are not limited to, currency fluctuations as we buy materials and sell products internationally and also fluctuations in materials prices. We consider it necessary to maintain an elevated inventory level of critical components to mitigate potential supply disruptions.

 

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 are in need of 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.

 

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. 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, 2013 and 2012, 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, Peterson, Miranda & Williamson, 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, Peterson, Miranda & Williamson, 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 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 December 31, 2013, the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act) were effective.

 

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, 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 generally accepted accounting principles in the United States of America, 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 in its report, Internal Control-Integrated Framework. No material weaknesses were identified and management concluded that our internal control over financial reporting was effective as of December 31, 2013.

 

 

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

 

Changes in Internal Control Over Financial Reporting

 

There have been no significant changes in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) during the quarter ended December 31, 2013 that have materially affected, or are reasonably likely to materially affect, the Company’s 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, 2013 that were not disclosed.

 

 

 

 

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, 2013, based upon information furnished by such persons:

			Director or
Name	Principal Occupation or Employment	Age	Officer Since
Gordon R. Arnold	Director of the Company;	68	1984
	President, Chief Executive Officer, Chief Financial Officer
	and Secretary
Michael C. Farr	Vice President of Operations	56	1986
C. Richard Kramlich	Director of the Company	78	1980
Jay T. Last	Director of the Company	84	1977
Robert C. Marshall	Director of the Company	82	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 has served as the Company’s President, Chief Executive Officer and Chief Financial Officer since the merger and as the Company’s Secretary since February 1993. Mr. Arnold was also a director of Old Sierra from 1984 until the merger with UMF. Mr. Arnold’s specific qualifications and experience to serve as a member of our Board of Directors include his business management education, his thirty-four years of direct industry experience and twenty-nine years of full-time employment as CEO of the Company.

 

Michael C. Farr joined Old Sierra in December 1983 as its Operations Manager. He became Vice President, Operations in May 1986. Since the merger, Mr. Farr has served as Vice President, Operations of the Company. Mr. Farr’s specific qualifications and experience to hold his appointed position include his thirty years of operations experience in the electronics industry including twenty-seven years in his present position.

 

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 general partner and co-founder of New Enterprise Associates, a venture capital firm. Mr. Kramlich is a director of Zhone Technologies Inc., and numerous private companies. He received a Masters 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 the board of Sierra Monitor Corporation.

 

Jay T. Last has been a Director of the Company since 1977. Mr. Last, who was one of the founders of the first semiconductor manufacturing company, 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 the first semiconductor manufacturing company, his involvement in the management and rapid expansion of a major public industrial conglomerate and over thirty years participation on the board of Sierra Monitor Corporation.

 

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 currently serves on the boards of Bay Microsystems and Active-Semi, Inc. Mr. Marshall received a Bachelors 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 sixteen-year participation on the board of Sierra Monitor Corporation.

 

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” and “Section 16(a) Beneficial Ownership Reporting Compliance” of our Proxy Statement for our Annual Meeting of Shareholders to be held on May 14, 2014 are incorporated by reference herein.

 

Item 11. Executive Compensation.

 

The information required by this Item 11 is incorporated by reference herein from our Proxy Statement for our Annual Meeting of Shareholders to be held on May 14, 2014 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, 2013 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.

 

 

 

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	629,500	$1.56	194,320
Equity compensation plans not approved by security holders	-	-	-
Total	629,500	$1.56	194,320

 

The other information required by this Item 12 is incorporated by reference herein from our Proxy Statement for our Annual Meeting of Shareholders to be held on May 14, 2014 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 Annual Meeting of Shareholders to be held on May 14, 2014 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 Annual Meeting of Shareholders to be held on May 14, 2014 under the section entitled “Principal Accountant Fees and Services”.

 

 

Item 15. Exhibits and Financial Statement Schedule.

 

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 Geomax and the Registrant.
10.5(7)	Form of Retention Agreement by and between Sierra Monitor and certain of its executive officers.
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 and Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

(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 Quarterly Report on Form 10-QSB (File No. 000-07441) filed with the SEC on August 14, 1998.

(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 2, 2012.

 

 

 

SIGNATURES

 

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

 

 

	SIERRA MONITOR CORPORATION
	(Registrant)
	By:	/s/ Gordon R. Arnold
		Gordon R. Arnold Chief Executive Officer
	Dated: March 25, 2014

  

 

In accordance with the Exchange Act, 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 25, 2014	Chief Executive Officer, Chief
	Financial Officer and Director
	(Principal Executive, Financial
	and Accounting Officer)	By  /s/  Gordon R. Arnold
		Gordon R. Arnold
March 25, 2014	Director	By  /s/  C. Richard Kramlich
		C. Richard Kramlich
March 25, 2014	Director	By  /s/  Jay T. Last
		Jay T. Last
March 25, 2014	Director	By  /s/  Robert C. Marshall
		Robert C. Marshall

 

 

 

 

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 Income	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, 2013 and 2012, and the related statements of income, shareholders’ equity and cash flows for each of the two years in the period ended December 31, 2013. 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, 2013 and 2012, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2013 in conformity with accounting principles generally accepted in the United States of America.

 

/s/ Squar, Milner, Peterson, Miranda & Williamson, LLP

Newport Beach, California

 

March 25, 2014

 

 

SIERRA MONITOR CORPORATION

 

Balance Sheets

 

December 31, 2013 and 2012

 

Assets		2013				2012
Current assets:
Cash		$	3,421,679			$	2,306,258
Trade receivables, less allowance for doubtful accounts of
approximately $79,000 in 2013 and $83,000 in 2012,  respectively			1,943,643				1,913,185
Inventories, net			2,740,835				2,994,804
Prepaid expenses			311,144				280,363
Income tax deposit			106,859				120,796
Deferred tax assets			307,938				335,730
Total current assets			8,832,098				7,951,136
Property and equipment, net			390,755				289,505
Other assets			273,699				135,393
Total assets		$	9,496,552			$	8,376,034
Liabilities and Shareholders’ Equity
Current liabilities:
Accounts payable		$	689,014			$	713,973
Accrued compensation expenses			290,589				259,546
Other current liabilities			71,729				89,989
Total current liabilities			1,051,332				1,063,508
Deferred tax liability			84,438				59,419
Total liabilities			1,135,770				1,122,927
Commitments and contingencies
Shareholders’ equity:
Common stock, $0.001 par value; 20,000,000 shares authorized;
10,104,311 and 10,004,311 shares issued and outstanding at December 31, 2013 and 2012, respectively			10,104				10,004
Additional paid-in capital			3,031,056				2,871,898
Retained earnings			5,319,622				4,371,205
Total shareholders’ equity			8,360,782				7,253,107
Total liabilities and shareholders’ equity		$	9,496,552			$	8,376,034

 

See accompanying notes to these financial statements.

 

 

 

SIERRA MONITOR CORPORATION

 

Statements of Income

 

For the Years Ended December 31, 2013 and 2012

 

		2013				2012
Net sales		$	18,345,179			$	18,759,030
Cost of goods sold			7,629,338				8,318,419
Gross profit			10,715,841				10,440,611
Operating expenses:
Research and development			2,156,322				2,167,548
Selling and marketing			4,094,819				4,081,745
General and administrative			2,246,301				2,236,415
			8,497,442				8,485,708
Income from operations			2,218,399				1,954,903
Interest income			3,224				269
Income before income tax expense			2,221,623				1,955,172
Income tax expense			869,034				759,343
Net income		$	1,352,589			$	1,195,829
Net income attributable to common shareholders per common share:
Basic		$	0.13			$	0.12
Diluted		$	0.13			$	0.12
Weighted-average number of shares used in per share computations:
Basic			10,095,978				9,926,961
Diluted			10,152,270				10,139,431

 

See accompanying notes to these financial statements.

 

 

 

 

SIERRA MONITOR CORPORATION

 

Statements of Shareholders’ Equity

 

For the Years Ended December 31, 2013 and 2012

 

										Additional								Total
		Common Stock								Paid-in				Retained				Shareholders’
		Shares				Amount				Capital				Earnings				Equity
Balance as of
January 1, 2012			9,901,177			$	9,901			$	2,775,250			$	3,275,419			$	6,060,570
Stock options exercised			120,000				120				(120	)			–				–
Shares repurchased			(16,866	)			(17	)			17				–				–
Stock option compensation			–				–				96,751				–				96,751
Dividend paid			–				–				–				(100,043	)			(100,043	)
Net income			–				–				–				1,195,829				1,195,829
Balance as of
December 31, 2012			10,004,311				10,004				2,871,898				4,371,205				7,253,107
Stock options exercised			100,000				100				62,900				–				63,000
Stock option compensation			–				–				96,258				–				96,258
Dividend paid			–				–				–				(404,172	)			(404,172	)
Net income			–				–				–				1,352,589				1,352,589
Balance as of
December 31, 2013			10,104,311			$	10,104			$	3,031,056			$	5,319,622			$	8,360,782

 

See accompanying notes to these financial statements.

  

 

 

SIERRA MONITOR CORPORATION

 

Statements of Cash Flows

 

For the Years Ended December 31, 2013 and 2012

 

		2013				2012
Cash flows from operating activities:
Net income		$	1,352,589			$	1,195,829
Adjustments to reconcile net income to
net cash provided by (used in) operating activities:
Depreciation			205,537				246,234
Amortization			51,008				44,445
Deferred income taxes			52,811				(18,030	)
Bad debt expense			(3,479	)			17,934
Provision for inventory losses			(24,852	)			35,887
Stock-based compensation expense			96,258				96,751
Loss on disposal of fixed asset			6,730				1,781
Changes in operating assets and liabilities:
Trade receivables			(26,979	)			(283,171	)
Inventories			278,821				887,470
Prepaid expenses			(30,781	)			(57,001	)
Income tax deposit			13,937				(110,141	)
Other assets			(100,000	)			-
Accounts payable			(24,959	)			(204,733	)
Accrued compensation expenses			31,043				(237,651	)
Income taxes payable			-				(11,362	)
Other current liabilities			(18,260	)			(233,125	)
Net cash provided by (used in) operating activities			1,859,424				1,371,117
Cash flows from investing activities:
Purchases of property and equipment			(313,517	)			(137,962	)
Purchases of other assets			(89,314	)			(39,280	)
Net cash used in investing activities			(402,831	)			(177,242	)
Cash flows from financing activities:
Payment of dividend			(404,172	)			(100,043	)
Proceeds from exercise of stock options			63,000				-
Net cash used in financing activities			(341,172	)			(100,043	)
Net increase in cash and cash equivalents			1,115,421				1,093,832
Cash – beginning of year			2,306,258				1,212,426
Cash – end of year		$	3,421,679			$	2,306,258
Supplemental disclosure of cash flow information:
Cash paid during the year for income taxes		$	806,262			$	898,893

 

See accompanying notes to these financial statements. 

 

SIERRA MONITOR CORPORATION

 

Notes to Financial Statements

 

December 31, 2013 and 2012

 

Note 1 - Summary of the Company and Significant Accounting Policies

 

The Company

 

Sierra Monitor Corporation (the “Company”) was incorporated in 1978. The Company designs, manufactures, and markets hazardous gas monitoring devices for industrial workplaces. The Company also designs and manufactures environment controllers for the telecommunications industry, as well as a line of software-based industrial communications bridge products known as FieldServers. 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 accounting principles generally accepted in the United States of America 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 $2,922,000 and $1,806,000 were in excess of such insured amounts at December 31, 2013 and 2012, 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.

 

One customer accounted for more than 10% of accounts receivable at December 31, 2013 and one customer accounted for more than 10% of accounts receivable at December 31, 2012. No customer accounted for more than 10% of sales for the year ended December 31, 2013 while one customer accounted for 13% of sales for the previous year.

 

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.

 

 

Such 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; 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 (“ASC”) 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, 2013 and 2012, 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.

 

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) collectibility is reasonably assured. By product and service type, revenues are recognized when the following specific conditions are met:

 

Gas Detection and Environment Control Products

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

 

Gas Detection and Environment Control Services

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

 

FieldServer Products

FieldServer products are sold in the same manner as Gas Detection and Environment Control products (as discussed above) except that the products contain embedded software, which is integral to the operation of the device.  The software embedded in FieldServer products includes two items:  (a) a compiled program containing (i) the basic operating system for 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.

 

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, 2013 and 2012, the Company had received approximately $0 and 20,000, respectively, of such advance payments and they are included in other current liabilities in the accompanying balance sheet.

 

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, 2013 and 2012, the Company's statements of income reflected an increase in salaries and benefits expense of $96,258 and $96,751, 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 options. 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, 2013, there was $156,427 of total unrecognized compensation expense related to non-vested stock options, which is expected to be recognized over the next 4.1 years.

 

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, 2013 and 2012, warranty reserve approximated $63,000, which is included in other current liabilities in the accompanying balance sheets.

 

 

Advertising

 

The Company expenses the cost of advertising when incurred as selling and marketing expense in the accompanying statements of income. Advertising expenses were approximately $234,000 for each of the years ended December 31, 2013 and 2012.

 

Shipping and Handling Costs

 

Shipping and handling costs are included in cost of goods sold in the accompanying statements of income 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 bases 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, 2013 and 2012.

 

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.

 

The following is a reconciliation of the shares used in the computation of basic and diluted earnings per share for the years ended December 31, 2013 and 2012, respectively:

 

			2013				2012
Basic earnings per share  –
weighted-average  number of shares
of common stock outstanding			10,095,978				9,926,961
Effect of dilutive stock options			56,292				212,470
Diluted earnings per share  –
dilutive potential common shares			10,152,270				10,139,431

  

For purposes of calculating diluted earnings per share, there were no adjustments to net income.

 

For the years ended December 31, 2013 and December 31, 2012, options to acquire 12,000 and 182,000 shares of common stock, respectively, 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 years 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, 2013 and 2012, 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, 2013 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

 

There have been no recent accounting pronouncements that are of material significance, or have potential material significance, to the Company.

 

Note 2 – Inventories

 

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

 

		2013				2012
Raw materials		$	1,147,729			$	1,146,675
Work in process			1,330,379				1,467,934
Finished goods			349,271				491,591
			2,827,379				3,106,200
Obsolescence reserve			(86,544	)			(111,396	)
		$	2,740,835			$	2,994,804

  

Note 3 - Property and Equipment

 

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

 

		2013				2012
Machinery and equipment		$	777,328			$	771,125
Furniture, fixtures, and leasehold improvements			1,231,928				1,038,729
			2,009,256				1,809,854
Less accumulated depreciation and amortization			(1,618,501	)			(1,520,349	)
		$	390,755			$	289,505

 

Note 4 - Employee Stock Compensation Plan

 

During 2006, the shareholders adopted the 2006 Stock Plan. 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.

 

As of December 31, 2013, there were 2,184,320 shares still available for grant under the Company’s 2006 Stock Plan. A summary of stock option transactions for the two years ended December 31, 2013 is as follows:

 

										Weighted-
						Range of				average
		Options				prices				exercise price
Balance as of  January 1, 2012			730,500				0.23 – 2.65				1.17
Granted			60,000				1.52				1.52
Exercised and repurchased			(103,134	)			0.26				0.26
Forfeited or expired			(30,866	)			1.50 - 1.75				1.68
Balance as of  December 31, 2012			656,500				0.23 – 2.65				1.35
Granted			115,500				1.69				1.69
Exercised and repurchased			(100,000	)			0.63				0.63
Forfeited or expired			(42,500	)			0.23 – 2.65				1.37
Balance as of  December 31, 2013			629,500				0.60 – 2.65				1.56

 

 

 

Options outstanding that have vested and are expected to vest as of December 31, 2013 are as follows:

 

		Number of Shares				Weighted Average Exercise Price				Weighted Average Remaining Contractual Term in Years
Vested			423,844			$	1.51				5.5
Expected to vest			205,656				1.66				9.8
Total			629,500				1.56				6.3

 

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 1996 and 2006 Stock Plans as of December 31, 2013:

 

						Options outstanding												Options exercisable
										Weighted-
										average				Weighted-								Weighted-
										remaining				average								average
Exercise						Number				contractual				exercise				Number				exercise
prices						outstanding				life (years)				price				exercisable				price
$			0.60 – 1.10				53,500				1.6			$	0.91				53,500			$	0.91
$			1.30 - 2.65				576,000				6.7			$	1.62				370,344			$	1.59
							629,500				6.3			$	1.56				423,844			$	1.51

  

The aggregate intrinsic value of options outstanding and exercisable at December 31, 2013 and 2012 approximated $0.68 and $0.90 per share respectively. The weighted average grant date fair values of options granted during the years ended December 31, 2013 and 2012 were $1.41 and $1.39 per share, respectively. Such fair values were estimated using the Black-Scholes stock option pricing model and the following weighted average assumptions.

 

		2013				2012
Expected life			8 years				8 years
Estimated volatility			123	%			133	%
Risk-free interest rate			1.30	%			0.71	%
Dividends		$	0.04				None

 

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 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 2013 and 2012 was $63,000 and $31,200, 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 2015. 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, 2015. An additional 12,600 square feet are leased for warehouse, office and expansion space in an adjacent building.

 

As of December 31, 2013, future minimum lease payments are as follows:

 

Year ending
December 31,
2014			222,156
2015			74,052
		$	296,208

  

 

 

Rent expense was approximately $281,000 and $222,000 in 2013 and 2012, respectively, which is apportioned to the various departments in the accompanying statements of income.

 

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, 2013, the Company has a $1,000,000 line of credit, secured by certain assets of the Company, that bears interest at the bank's prime rate (3.25% at December 31, 2013) plus 0.5%. 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 quarterly profitability test. At December 31, 2013 and 2012, the Company was in compliance with the financial covenants and the line of credit had no outstanding balance.

 

Note 7 - Income Taxes

 

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

 

		2013				2012
Current:
Federal		$	628,635			$	614,409
State			187,585				162,964
Total current			816,220				777,373
Deferred:
Federal			44,300				(23,099	)
State			8,514				5,069
Total deferred			52,814				(18,030	)
Total Income Tax		$	869,034			$	759,343

 

At December 31, 2013 and 2012, the Company has 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, 2013 and 2012 are as follows:

 

		2013				2012
Accruals and reserves		$	246,670			$	280,686
State taxes			61,266				55,044
Property, plant and equipment			(84,436	)			(59,419	)
Total Deferred Tax Assets $			223,500				276,311

 

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 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, 2013 and 2012.

 

The Company is no longer subject to U.S. federal income tax examination for years before 2009 and state and local tax examinations before 2008. 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.

 

 

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

 

		2013				2012
Computed tax expense		$	755,352			$	664,759
Nondeductible items and other			(21,196	)			(17,319	)
Current and deferred state taxes, net of federal benefit			134,878				111,903
Credits utilized			—				—
Total Income Tax Expense		$	869,034			$	759,343

 

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 gas detection and monitoring devices.

 

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

 

		2013				2012
Gas detection devices		$	8,921,789			$	9,605,014
Environmental controllers			740,295				801,719
FieldServers			8,683,095				8,352,297
		$	18,345,179			$	18,759,030

 

The Company sells its products to companies located primarily in the United States. For the years ended December 31, 2013 and 2012, sales to international customers were 24% and 29%, respectively.

 

 

 

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 Geomax and the Registrant.
10.4(7)	Form of Retention Agreement by and between Sierra Monitor and certain of its executive officers.
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 and Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(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 Quarterly Report on Form 10-QSB (File No. 000-07441) filed with the SEC on August 14, 1998.
(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 Conpany’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 2, 2012.