Search the web
Welcome, Guest
[Sign Out, My Account]
EDGAR_Online

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
SRMC > SEC Filings for SRMC > Form 10-Q on 9-Aug-2013All Recent SEC Filings

Show all filings for SIERRA MONITOR CORP /CA/ | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for SIERRA MONITOR CORP /CA/


9-Aug-2013

Quarterly Report


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

This Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Statements that are not statements of historical fact may be deemed to be forward-looking statements. The words "believe," "expect," "intend," "plan," "project," "will," and similar words and phrases as they relate to us also identify forward-looking statements. Such forward-looking statements include any expectations of operating and non-operating expense, including research and development expense, sufficiency of resources, including cash and accounts receivable, estimates of allowances for doubtful accounts, credit lines or other financial items; any statements of the plans, strategies and objectives of management for future operations and identified opportunities; any statements concerning proposed new products, services, developments and related research and development activities; any statements related to the Company's positioning to support current and near term levels of business; any statements of belief; and any statement of assumptions underlying any of the foregoing. Such statements reflect our current views and assumptions and are not guarantees of future performance. These statements are subject to various risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including, without limitation, those issues described under the heading "Critical Accounting Policies," and those risk factors identified in Item1A, Risk Factors, of our Annual Report on Form 10-K for our fiscal year ended December 31, 2012, 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, 2013, Sierra Monitor Corporation ("we" or the "Company") reported net sales of $4,787,581 compared to $4,665,279 for the three-month period ended June 30, 2012. For the six-month period ended June 30, 2013, net sales were $9,144,690 compared with $10,867,215 for the six-month period ended June 30, 2012. The sales results for the three-month period ended June 30, 2013 represent an increase of 3% compared to the same period in 2012. The sales results for the six-month period ended June 30, 2013 represent a 16% decrease compared to the same period in 2012.

Sales of our gas detection products, including industrial accounts and military sales, in the three-month period ended June 30, 2013 were approximately $2,263,000 compared to approximately $2,131,000 in the three-month period ended June 30, 2012. In the six-month period ended June 30, 2013, sales of gas detection products were approximately $4,326,000 compared to approximately $5,976,000 in the same period in 2012. The results for the three and six-month periods ended June 30, 2013 represent an increase of 6% and a decrease of 28%, respectively compared to the same periods in 2012. Our gas detection products sales for the first six months of 2012 included shipment of a single order with a value exceeding $2,500,000. The order was sold to an architectural and engineering firm (A&E) undertaking construction of a petroleum pipeline booster station in the Middle East. There was no similar order in the first six months of 2013.

Sales of Environment Controllers, which are used in the telecommunications industry, in the three-month period ended June 30, 2013 were approximately $173,000 compared to approximately $186,000 in the three-month period ended June 30, 2012. In the six-month period ended June 30, 2013, sales of Environment Controllers were approximately $363,000 compared to approximately $453,000 in the same period in 2012. The results for the three and six-month periods ended June 30, 2013 represent decreases of 7% and 20%, respectively, compared to the same periods in 2012. We made no significant telephone company infrastructure project shipments during the second quarter of 2013 and most of our sales were for spare parts and the retro-fit of older control systems.

Page 9 of 15

In the three-month period ended June 30, 2013, sales of FieldServer products were approximately $2,352,000 compared to approximately $2,348,000 in the same period in 2012, representing no significant increase. In the six-month period ended June 30, 2013, sales of our FieldServer products were approximately $4,455,000 compared to approximately $4,438,000 in the same period in 2012, representing no significant 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 2% in the three-month period ended June 30, 2013 on a year-over-year basis. Box product sales increased approximately 5% in the six-month period ended June 30, 2013 compared to the same period in the prior year. OEM module sales decreased approximately 2% in the three-month period ended June 30, 2013 as compared to the same period in 2012, and decreased 3% in the six-month period ended June 30, 2013 compared to the same period in prior year. In the first six months of 2012, one customer made a single, large, end of life purchase of OEM modules. We made no individual sales of a similar magnitude during the first six months of 2013.

Gross profit for the three-month period ended June 30, 2013 was approximately $2,852,000, or 60% of net sales, compared to approximately $2,705,000, or 58% of net sales, in the same period in the previous year. Gross profit for the six-month period ended June 30, 2013 was approximately $5,304,000, or 58% of net sales, compared to approximately $5,864,000, or 54% of net sales, in the same period in the previous year. In the first six months of 2012 our gross margin was reduced below what we consider historical levels in part as a result of discounted pricing for a single large order. The discounted pricing was reflected in margins that were lower than historical levels.

Expenses for research and development, which include new product development and engineering to sustain existing products, were approximately $563,000, or 12% of net sales, for the three-month period ended June 30, 2013 compared to approximately $545,000, or 12% of net sales, in the comparable period in 2012. In the six-month periods ended June 30, 2013 and June 30, 2012, research and development expenses were approximately $1,079,000, or 12% of net sales, and approximately $1,118,000, or 10% of net sales, respectively. There have been no significant changes in engineering expenses in the three and six-month reporting periods ended June 30, 2013.

Selling and marketing expenses, which consist primarily of salaries, commissions and promotional expenses were approximately $1,023,000, or 21% of net sales, for the three-month period ended June 30, 2013, compared to approximately $1,051,000, or 23% of net sales, in the comparable period in the prior year. For the six-month periods ended June 30, 2013 and June 30, 2012, selling and marketing expenses were approximately $2,087,000, or 23% of net sales, and approximately $2,089,000, or 19% of net sales, respectively.

General and administrative expenses, which consist primarily of salaries, building rent, insurance expenses, information technology expenses and fees for professional services, were approximately $548,000, or 11% of net sales, for the three-month period ended June 30, 2013 compared to approximately $551,000, or 12% of net sales, in the three-month period ended June 30, 2012. For the six-month periods ended June 30, 2013 and June 30, 2012, general and administrative expenses were approximately $1,091,000, or 12% of net sales, and approximately $1,144,000, or 11% of net sales, respectively. There have been no significant changes in general and administrative expenses in the three and six-month reporting periods ended June 30, 2013 compared to the same periods in 2012.

Page 10 of 15

In the three-month period ended June 30, 2013, our income from operations was approximately $718,000, representing an increase of approximately $160,000 compared to our income from operations of approximately $558,000 in the three-month period ended June 30, 2012. In the six-month period ended June 30, 2013, our income from operations was approximately $1,047,000 representing a decrease of approximately $466,000 compared to our income from operations of $1,513,000 in the six-month period ended June 30, 2012. The increase in income in the second quarter of 2013 compared to the second quarter of 2012 is due primarily to the higher sales level combined with improved gross. The decrease in income from operations in the first half of 2013 compared to the first half of 2013 is due to the lower sales level.

After interest and tax provisions, our net income for the three-month period ended June 30, 2013 was approximately $436,000 compared to net income of approximately $335,000 in the same period of 2012. For the six-month period ended June 30, 2013, our net income was approximately $634,000 compared to a net income of approximately $908,000 in the same period of 2012.

Liquidity and Capital Resources

During the six months ended June 30, 2013, net cash provided by operating activities was approximately $1,398,000 compared to net cash provided by operating activities of approximately $1,009,000 for the same period in 2012. Working capital was approximately $7,245,000 at June 30, 2013, an increase of approximately $357,000 from December 31, 2012. At June 30, 2013, our balance sheet reflected approximately $3,259,000 of cash and approximately $2,217,000 of net trade receivables. At December 31, 2012, our total cash on hand was approximately $2,306,000 and our net trade receivables were approximately $1,913,000.

At June 30, 2013, 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 28, 2013. 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, 2013, the Company was in compliance with the financial covenants and there were no borrowings on this line of credit. The company had $20,000 and $49,000 in encumbrances against the line of credit at December 31, 2012 and June 30, 2013, respectively.

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, 2014. 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 condensed financial statements and the accompanying notes. The amounts of assets and liabilities reported on our balance sheets and the amounts of revenues and expenses reported for each of our fiscal periods are affected by estimates and assumptions, which are used for, but not limited to, the accounting for revenue recognition, accounts receivable, doubtful accounts and inventories. Actual results could differ from these estimates. The following critical accounting policies are significantly affected by judgments, assumptions and estimates used in the preparation of the condensed financial statements:

Page 11 of 15

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 not to require significant production, modification or customization, and therefore the Company recognizes revenues upon the shipment or delivery of products (depending on shipping terms), as described in Gas Detection and Environment Control Products above.

Page 12 of 15

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.

  Add SRMC to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for SRMC - All Recent SEC Filings
Sign Up for a Free Trial to the NEW EDGAR Online Pro
Detailed SEC, Financial, Ownership and Offering Data on over 12,000 U.S. Public Companies.
Actionable and easy-to-use with searching, alerting, downloading and more.
Request a Trial      Sign Up Now


Copyright © 2014 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.