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| SRMC > SEC Filings for SRMC > Form 10-Q on 10-Aug-2012 | All Recent SEC Filings |
10-Aug-2012
Quarterly Report
This Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Statements that are not statements of historical fact may be deemed to be forward-looking statements. The words "believe," "expect," "intend," "plan," "project," "will," and similar words and phrases as they relate to us also identify forward-looking statements. Such forward-looking statements include any expectations of operating and non-operating expense, including research and development expense, sufficiency of resources, including cash and accounts receivable, estimates of allowances for doubtful accounts, credit lines or other financial items; any statements of the plans, strategies and objectives of management for future operations and identified opportunities; any statements concerning proposed new products, services, developments and related research and development activities; any statements related to the Company's positioning to support current and near term levels of business; any statements of belief; and any statement of assumptions underlying any of the foregoing. Such statements reflect our current views and assumptions and are not guarantees of future performance. These statements are subject to various risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including, without limitation, those issues described under the heading "Critical Accounting Policies," and those risk factors indentified in Item1A, Risk Factors, of our Annual Report on Form 10-K for our fiscal year ended December 31, 2011, as such section may be updated in our subsequent Forms 10-K, 10-Q and 8-K filed with, or furnished to, the SEC and elsewhere. We urge you to review and consider the various disclosures made by us from time to time in our filings with the SEC that attempt to advise you of the risks and factors that may affect our future results. We expressly disclaim any obligation to release publicly any updates or revisions to any forward-looking statement to reflect any changes in expectations, or any change in events or circumstances on which those statements are based, unless otherwise required by law.
Results of Operations
For the three-month period ended June 30, 2012, Sierra Monitor Corporation ("we" or the "Company") reported net sales of $4,665,279 compared to $3,984,361 for the three-month period ended June 30, 2011. For the six-month period ended June 30, 2012, net sales were $10,867,215 compared with $8,152,778 for the six-month period ended June 30, 2011. The sales results for the three and six-month periods ended June 30, 2012 represent increases of 17% and 33%, respectively, compared to the same periods in 2011.
For the three-month period ended June 30, 2012, sales of our gas detection products, including industrial accounts and military sales, were approximately $2,131,000 compared to $1,923,000 in the three-month period ended June 30, 2011. For the six-month period ended June 30, 2012, sales of our gas detection products, including industrial accounts and military sales, were approximately $5,976,000 compared to $3,646,000 in the same period in 2011. These results represent an 11% year-over-year increase in the second quarter and a 64% year-over-year increase in the year-to-date period. The improvement in sales in the second quarter was due, in part, to an increase in military sales compared to the second quarter of the prior year. Military sales cycles are unpredictable because they are dependent upon US Navy purchases of gas detection systems for new ships and related spare part purchase cycles. The increase in sales in the first half of the year is primarily the result of the first quarter, 2012, shipment of a single order with a value exceeding $2,000,000. The order was sold to an architectural and engineering firm (A&E) undertaking construction of a petroleum pipeline booster station in the Middle East.
Sales of Environment Controllers to the telecommunications industry in the three-month period ended June 30, 2012 were approximately $186,000 compared to approximately $227,000 in the three-month period ended June 30, 2011. In the six-month period ended June 30, 2012 sales of Environment Controllers were approximately $453,000 compared to $563,000 in the same period in 2011. The results for the three and six-month periods ended June 30, 2012 represent decreases of 18% and 20%, respectively, compared to the same periods in 2011. There were no significant telephone company infrastructure project shipments during the second quarter of 2012 and most of the sales were for spare parts and the retro-fit of older control systems.
In the three-month period ended June 30, 2012, sales of FieldServer products were approximately $2,348,000 compared to $1,835,000 in the same period in 2011, representing a 28% increase. In the six-month period ended June 30, 2012, sales of our FieldServer products were approximately $4,438,000 compared to $3,945,000 in the same period in 2011, representing a 13% increase. FieldServer products include box products and original equipment manufacturer ("OEM") modules. Box products provide a platform for delivery and operation of our software for building automation integration and are generally sold to integrators. Box product sales increased approximately 7% in the three-month period ended June 30, 2012 on a year-over-year basis. Box product sales decreased approximately 5% in the six-month period ended June 30, 2012 compared to the same period in the prior year. Although year over year unit shipments of box products have increased by 15%, the introduction in 2011 of a new FieldServer product has suppressed margins and contributed to the lower year-to-date revenue. The new product is expected to have broader market acceptance resulting in ongoing unit volume increases. OEM module sales increased approximately 53% in the three-month period ended June 30, 2012 as compared to the same period in 2011, and 32% on a year-to-date basis in 2012 compared to the prior year period. The higher level of sales in each of the three and six-month periods ended June 30, 2012 reflect sustained deliveries to mature accounts, continued improvements in run rates for recent adopter customers and incremental sales to new customers.
Gross profit for the three-month period ended June 30, 2012 was approximately $2,705,000 or 58% of net sales compared to $2,356,000, or 59% of net sales, in the same period in the previous year. Gross profit for the six-month period ended June 30, 2012 was $5,864,000, or 54% of net sales, compared to $4,865,000, or 60% of net sales, in the same period in the previous year. In the first quarter of 2012 our gross margin was lower than historical levels as a result of discounted pricing for a single large order. The highly competitive selling environment for large projects commands lower selling prices. While we have increased our list prices for gas detection products, we anticipate generally lower margins due to increases in material and labor costs along with the impact of potential additional large projects.
Expenses for research and development, which include new product development and engineering to sustain existing products, were $545,000, or 12% of net sales, for the three-month period ended June 30, 2012 compared to $550,000, or 14% of net sales, in the comparable period in 2011. In the six-month periods ended June 30, 2012 and June 30, 2011, research and development expenses were $1,118,000, or 10 % of net sales, and $1,095,000, or 13% of net sales, respectively. There have been no significant changes in engineering expenses in the three and six-month reporting periods ended June 30, 2012.
Selling and marketing expenses, which consist primarily of salaries, commissions and promotional expenses were $1,051,000, or 23% of net sales for the three-month period ended June 30, 2012, compared to $918,000, or 23% of net sales, in the comparable period in the prior year. For the six-month periods ended June 30, 2012 and June 30, 2011, selling and marketing expenses were $2,089,000, or 19% of net sales, and $1,802,000, or 22% of net sales, respectively. Our ongoing selling and marketing expenses have increased as a result of the early 2012 opening and continued operation of sales offices in Berlin and Singapore. Other selling and marketing expenses, including sales commissions, are consistent with historical levels.
General and administrative expenses, which consist primarily of salaries, building rent, insurance expenses, information technology expenses and fees for professional services, were $551,000 or 12% of net sales, for the three-month period ended June 30, 2012 compared to $510,000 or 13% of net sales, in the three-month period ended June 30, 2011. For the six-month periods ended June 30, 2012 and June 30, 2011, general and administrative expenses were $1,144,000, or 11% of net sales, and $1,062,000, or 13% of net sales, respectively. Increases in depreciation expenses due to information technology upgrades, higher salary and benefit costs and higher travel expenses contributed to the increase in general and administrative expenses in both periods compared to the respective prior year periods. Our G&A expenses as a percent of net sales are lower for year to date 2012 than the same period in 2011 due to the higher level of sales.
In the three-month period ended June 30, 2012, our income from operations was $558,000, representing an increase of $180,000 compared to our income from operations of $378,000 in the three-month period ended June 30, 2011. In the six-month period ended June 30, 2012, our income from operations was $1,513,000 representing an increase of $607,000 compared to our income from operations of $906,000 in the six-month period ended June 30, 2011. The higher sales levels in both the three and six-month periods ended June 30, 2012 were sufficient to overcome lower margins and still produce improved income from operations over the corresponding periods in 2011. The lower margins were experienced primarily in the first quarter of 2012 as a result of the large single order in the Middle East.
After interest and tax provisions, our net income for the three-month period ended June 30, 2012 was $335,000 compared to net income of $227,000 in the same period of 2011. For the six-month period ended June 30, 2012, our net income was $908,000 compared to a net income of $544,000 in the same period of 2011.
Liquidity and Capital Resources
During the six months ended June 30, 2012, net cash provided by operating activities was approximately $1,009,000 compared to net cash provided of approximately $262,000 for the same period in 2011. Working capital was approximately $6,639,000 at June 30, 2012, an increase of approximately $1,011,000 from December 31, 2011. At June 30, 2012, our balance sheet reflected approximately $2,132,000 of cash and $2,456,000 of net trade receivables. At December 31, 2011, our total cash on hand was approximately $1,212,000 and our net trade receivables were $1,648,000.
At June 30, 2012, we had no long term liabilities.
We maintain a $1,000,000 line of credit, secured by certain assets of the Company, with our commercial bank which matures on September 9, 2012. 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 June 30, 2012, the Company was in compliance with the financial covenants and there were no borrowings on this line of credit.
We believe that our present resources, including cash and accounts receivable, are sufficient to fund the Company's anticipated level of operations through at least January 1, 2013. There are no current plans for significant capital equipment expenditures and no other known demands, commitments, events or uncertainties that will result in or that are reasonably likely to result in the Company's liquidity increasing or decreasing in any material way.
Critical Accounting Policies
The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States of America requires management to make judgments, assumptions and estimates that affect the amounts reported in the Company's consolidated financial statements and the accompanying notes. The amounts of assets and liabilities reported on our balance sheets and the amounts of revenues and expenses reported for each of our fiscal periods are affected by estimates and assumptions, which are used for, but not limited to, the accounting for revenue recognition, accounts receivable, doubtful accounts and inventories. Actual results could differ from these estimates. The following critical accounting policies are significantly affected by judgments, assumptions and estimates used in the preparation of the consolidated financial statements:
a) Revenue Recognition
The Company recognizes revenues when all of the following conditions exist: a) persuasive evidence of an arrangement exists in the form of an accepted purchase order; b) delivery has occurred, based on shipping terms, or services have been rendered; c) the Company's price to the buyer is fixed or determinable, as documented on the accepted purchase order; and d) collectability is reasonably assured. By product and service type, revenues are recognized when the following specific conditions are met:
Gas Detection and Environment Control Products
Gas detection and environment control products are sold as off-the-shelf products with prices fixed at the time of order. Orders delivered to the Company by phone, fax, mail or email are considered valid purchase orders and once accepted by the Company are deemed to be the final understanding between us and our customer as to the specific nature and terms of the agreed-upon sale transaction. Products are shipped and are considered delivered when (a) for FOB factory orders they leave our shipping dock or (b) for FOB customer dock orders upon confirmation of delivery. The creditworthiness of customers is generally assessed prior to the Company accepting a customer's first order. Additionally, international customers and customers who have developed a history of payment problems are generally required to prepay or pay through a letter-of-credit.
Gas Detection and Environment Control Services
Gas detection and environment control services consist of field service orders (technical support) and training, which are provided separate from product orders. Orders are accepted in the same forms as discussed for Gas Detection and Environment Control Products above with hourly prices fixed at the time of order. Revenue recognition occurs only when the service activity is completed. Such services are provided to current and prior customers, and, as noted above, creditworthiness has generally already been assessed. In cases where the probability of receiving payment is low, a credit card number is collected for immediate processing.
FieldServer Products
FieldServer products are sold in the same manner as Gas Detection and Environment Control Products (as discussed above) except that the products contain embedded software, which is integral to the operation of the device. The software embedded in FieldServer products includes two items: (a) a compiled program containing (i) the basic operating system for FieldServer products, which is common to every unit, and (ii) the correct set of protocol drivers based on the customer order (see FieldServer Services below for more information); and (b) a configuration file that identifies and links each data point as identified by the customer. The Company does not deem the hardware, operating systems with protocol drivers and configuration files to be separate units of accounting because the Company does not believe that they have value on a stand-alone basis. The hardware is useless without the software, and the software is only intended to be used in FieldServer hardware. Additionally, the software included in each sale is deemed 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 Productsabove.
FieldServer Services
FieldServer services consist of orders for custom development of protocol drivers. Generally customers place orders for FieldServer products concurrently with their order for protocol drivers. However if custom development of the protocol driver is required, the product order is not processed until development of the protocol driver is complete. Orders are received in the same manner as described in FieldServer Products above, but due to the non-recurring engineering aspect of the customized driver development the Company is more likely to have a written evidence trail of a quotation and a hard copy order. The driver development involves further research after receipt of order, preparation of a scope document to be approved by the customer and then engineering time to write, test and release the driver program. When development of the driver is complete the customer is notified and can proceed with a FieldServer product (see FieldServer Products above). Revenues for driver development are billed and recognized upon shipment or delivery of the related product that includes the developed protocol drivers (as noted in FieldServer Products above). Collectability is reasonably assured as described in FieldServer Products above.
Discounts and Allowances
Discounts are applied at time of order entry and sales are processed at net pricing. No allowances are offered to customers.
b) Accounts Receivable and Related Allowances
Our domestic sales are generally made on an open account basis unless specific experience or knowledge of the customer's potential inability or unwillingness to meet the payment terms dictates secured payments. Our international sales are generally made based on secure payments, including cash wire advance payments and letters of credit. International sales are made on open account terms where sufficient historical experience justifies the credit risks involved. In many of our larger sales, the customers are construction contractors who are in need of our field services to complete their work and obtain payment. Management's ability to manage the credit terms and utilize the leverage provided by the clients' need for our services is critical to the effective application of credit terms and minimization of accounts receivable losses.
We maintain an allowance for doubtful accounts which is analyzed on a periodic basis to ensure that it is adequate. We believe that we have demonstrated the ability to make reasonable and reliable estimates of allowances for doubtful accounts based on significant historical experience.
c) Inventories
Inventories are stated at the lower of cost or estimated market, cost being determined on the first-in, first-out method. The Company uses an Enterprise Requirements Planning ("ERP") software system which provides data upon which management relies to determine inventory trends and identify excesses. The carrying value of inventory is reduced to market for slow moving and obsolete items based on historical experience and current product demand. We evaluate the carrying value of inventory quarterly. The adequacy of carrying amounts is dependent upon management's ability to forecast demands accurately, manage product changes efficiently, and interpret the data provided by the ERP system.
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