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SRMC > SEC Filings for SRMC > Form 10-Q on 14-May-2014All Recent SEC Filings

Show all filings for SIERRA MONITOR CORP /CA/

Form 10-Q for SIERRA MONITOR CORP /CA/


14-May-2014

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, 2013, as such section may be updated in our subsequent Forms 10-K, 10-Q and 8-K filed with, or furnished to, the SEC. We urge you to review and consider the various disclosures made by us from time to time in our filings with the SEC that attempt to advise you of the risks and factors that may affect our future results. We expressly disclaim any obligation to release publicly any updates or revisions to any forward-looking statement to reflect any changes in expectations, or any change in events or circumstances on which those statements are based, unless otherwise required by law.

Results of Operations

For the three months ended March 31, 2014, Sierra Monitor Corporation ("we" or the "Company") reported net sales of $4,101,258 compared to $4,357,109 for the three months ended March 31, 2013. The results for the first quarter of fiscal 2014 represent a 6% decrease from the same period in the prior year. Net sales for the first quarter of 2013 included a single large order to a building automation customer in the United States. There was no similar large order for first quarter 2014.

Sales of gas detection products, including industrial accounts, military sales and environment controllers for telephone company applications decreased by approximately 10% in the first quarter of 2014 compared to the same period in 2013. Sales to industrial accounts were 30% lower, military sales were 248% higher, and sales of environmental controllers were essentially unchanged in the first quarter of 2014 compared to the same period in 2013. Net sales of gas detection products for the first quarter of 2013 included a single large order to an alternate fuels industry customer in the United States. There was no similar large order for first quarter 2014. Our sales to the U.S. Navy are dependent upon military spending and we generally experience quarterly fluctuations in military sales consistent with the change in the first quarter of 2014 compared to the first quarter of 2013.

Sales of our FieldServer product line decreased 2% in the first quarter of 2014 compared to the first quarter of 2013. FieldServer units 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. OEM modules are sold to companies that integrate our products into their commercial offerings. Box product sales increased approximately 10% in the three-month period ended March 31, 2014 on a year-over-year basis. OEM module sales decreased approximately 12% in the first quarter of 2014 compared to the first quarter of 2013. Many OEM modules are utilized in equipment, such as roof top air conditioners or standby power generators that are installed outdoors. We believe that the severe weather in the eastern United States during the first quarter slowed demand for OEM products.

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Gross profit for the three-month period ended March 31, 2014 was $2,474,154, or 60% of net sales, compared to $2,452,164, or 56% of net sales, in the same period the previous year. Our gross margin in the first quarter of 2014 was higher than our historical levels due to product mix and the absence of significant highly-discounted project shipments in the first quarter of 2014.

Expenses for research and development, which include new product development and engineering to sustain existing products, were $559,604, or 14% of net sales, for the three-month period ended March 31, 2014, compared with $515,496, or 12% of net sales, in the comparable period in 2013. Our research and development expenses were higher in the first quarter of 2014 compared to the same quarter in 2013 primarily as result of extraordinary expenses of travel, materials expense and testing for a new gas detection product to be released for production in the second quarter of 2014.

Selling and marketing expenses, which consist primarily of salaries, commissions and promotional expenses, for the three-month period ended March 31, 2014 were $1,244,566, or 30% of net sales, compared to $1,064,544, or 24% of net sales, in the same period in the prior year. Payroll and travel cost increases related to additional sales team staffing contributed to the increase in selling and marketing expenses. The additional sales team staffing included a new Vice President of Sales and Marketing and a second Regional Sales Manager located in Dubai, UAE.

General and administrative expenses for the first quarter of 2014 were $658,855, or 16% of net sales, compared to $542,874, or 12% of net sales, in the same period in the prior year. Increases in stock option expensing and IT support contributed to the higher general and administrative expenses in first quarter of 2014 compared to the same period in 2013.

Income from operations for the three-month period ended March 31, 2014 was $11,129, or 0% of net sales, compared to $329,250, or 8% of net sales, in the same period in the prior year. The decreased income is primarily the result of lower net sales, offset by improvement in gross margin. Net income for the three-month period ended March 31, 2014 was $6,701, or approximately 0% of net sales, compared to $197,558, or approximately 5% of net sales, for the same period in the prior year.

Liquidity and Capital Resources

During the three months ended March 31, 2014, net cash provided by operating activities was approximately $313,000 compared to approximately $161,000 provided by operating activities for the same period in 2013. Working capital was approximately $7,765,000 at March 31, 2014, a decrease of approximately $16,000 from December 31, 2013. At March 31, 2014, our balance sheet reflected approximately $3,568,000 of cash and $1,753,000 of net trade receivables. At December 31, 2013, our total cash on hand was approximately $3,422,000 and our net trade receivables were approximately $1,944,000. Cash flow and balance sheet changes in the first quarter of 2014 were generally consistent with our historical levels. The difference in the cash flow and balance sheet in first quarter of 2014 compared with the first quarter of 2013 was due, primarily, to the difference in the cash and trade receivable levels related to a single large order shipped in first quarter of 2013.

At March 31, 2014, we had no long term liabilities.

The Company maintains a line of credit with its commercial bank in the maximum amount of $1,000,000. No borrowings have been made under the Company's line of credit during the first three months of fiscal year 2014 and there were no outstanding balances at March 31, 2014 and December 31, 2013. As of March 31, 2014, the Company was in compliance with the financial covenants of the line of credit.

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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, 2015. 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:

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) 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.

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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 Servicesbelow 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.

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). Collectibility is reasonably assured as described in FieldServer Products above.

Discounts and Allowances

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

b) Accounts Receivable and Related Allowances

Our domestic sales are generally made on an open account basis unless specific experience or knowledge of the customer's potential inability or unwillingness to meet the payment terms dictate secured payments. Our international sales are generally made based on secure 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 frequently construction contractors who are in need of our field services to complete their work and obtain payment. Management's ability to manage the credit terms and take advantage of the leverage provided by the clients' need for our services is critical to the effective application of credit terms and minimization of accounts receivable losses.

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

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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 these 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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