10-Q 1 v393260_10q.htm FORM 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10 - Q

(Mark One)

Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

For the quarterly period ended September 30, 2014

Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

For the transition period from to

Commission file number 000-07441

SIERRA MONITOR CORPORATION

(Exact name of registrant as specified in its charter)

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

1991 Tarob Court

Milpitas, California 95035

(Address and zip code of principal executive offices)

(408) 262-6611

(Registrant's telephone number, including area code)

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

Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes x No ¨

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

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

Indicate by check mark whether the registrant is a shell company

(as defined in Rule 12b-2 of the Exchange Act).

Yes ¨ No x

The number of shares outstanding of the issuer's common stock, as of November 12, 2014, was 10,128,311.

PART I: FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

SIERRA MONITOR CORPORATION

Condensed Balance Sheets

Assets	September 30, 2014 (unaudited)		December 31, 2013
Current assets:
Cash	$	3,345,613	$	3,421,679
Trade receivables, less allowance for doubtful accounts
of approximately $72,000 and $79,000, at September 30, 2014 and December 31, 2013, respectively		2,312,905		1,943,643
Inventories, net		3,337,223		2,740,835
Prepaid expenses		237,229		311,144
Income tax deposits		80,768		106,859
Deferred income taxes		307,938		307,938
Total current assets		9,621,676		8,832,098

Property and equipment, net		314,323		390,755
Other assets		374,186		273,699
Total assets	$	10,310,185	$	9,496,552
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable	$	1,005,214	$	689,014
Accrued compensation		532,234		290,589
Other current liabilities		80,452		71,729
Total current liabilities		1,617,900		1,051,332

Deferred tax liability		84,438		84,438
Total liabilities		1,702,338		1,135,770
Commitments and contingencies
Shareholders' equity:
Common stock, $0.001 par value; 20,000,000 shares authorized; 10,114,311 and 10,104,311 shares issued and outstanding at September 30, 2014 and December 31, 2013, respectively		10,114		10,104
Additional paid-in capital		3,279,709		3,031,056
Retained earnings		5,318,024		5,319,622
Total shareholders' equity		8,607,847		8,360,782
Total liabilities and shareholders’ equity	$	10,310,185	$	9,496,552

See accompanying notes to the unaudited interim condensed financial statements.

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SIERRA MONITOR CORPORATION

Condensed Statements of Operations

(Unaudited)

	Three months ended September 30,				Nine months ended September 30,
	2014		2013		2014		2013
Net sales	$	5,363,086	$	4,932,632	$	14,216,719	$	14,077,322
Cost of goods sold		2,489,972		1,915,356		6,122,574		5,756,167
Gross profit		2,873,114		3,017,276		8,094,145		8,321,155
Operating expenses
Research and development		599,278		548,153		1,738,777		1,626,808
Selling and marketing		1,176,337		1,040,317		3,671,616		3,127,398
General and administrative		815,197		559,683		2,180,969		1,650,795
		2,590,812		2,148,153		7,591,362		6,405,001
Income from operations		282,302		869,123		502,783		1,916,154

Interest income		32		42		102		2,898
Income before income taxes		282,334		869,165		502,885		1,919,052

Income tax provision		112,934		347,666		201,154		763,758

Net income	$	169,400	$	521,499	$	301,731	$	1,155,294
Net income available to common shareholders per common share
Basic:	$	0.02	$	0.05	$	0.03	$	0.11
Diluted:	$	0.02	$	0.05	$	0.03	$	0.11
Weighted average number of common shares used in per share computations
Basic:		10,114,311		10,104,311		10,112,089		10,093,200
Diluted:		10,490,174		10,199,785		10,158,363		10,208,472

See accompanying notes to the unaudited interim condensed financial statements.

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SIERRA MONITOR CORPORATION

Condensed Statements of Cash Flows

(Unaudited)

	Nine months ended September 30,
	2014			2013
Cash flows from operating activities:
Net income	$	301,731		$	1,155,294
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		236,603			189,071
Provision for bad debt expense		(6,817	)		(3,479	)
Provision for inventory losses		24,824			27,065
Stock based compensation expense		237,663			67,333
Changes in operating assets and liabilities:
Trade receivables		(362,445	)		(447,978	)
Inventories		(621,212	)		237,106
Prepaid expenses		73,915			47,293
Income taxes payable		26,091			236,358
Accounts payable		316,200			130,893
Accrued compensation		241,645			194,698
Other current liabilities		8,723			(14,111	)
Net cash provided by operating activities		476,921			1,819,543
Cash flows from investing activities:
Purchase of property and equipment		(101,724	)		(215,985	)
Purchase of other long-term assets		(233,935	)		(64,504	)
Other assets		75,001			(100,000	)
Net cash used in investing activities		(260,658	)		(380,489	)
Cash flows from financing activities:
Dividends		(303,329	)		(303,128	)
Proceeds from exercise of stock options		11,000			63,000
Net cash used in financing activities		(292,329	)		(240,128	)
Net (decrease) increase in cash		(76,066	)		1,198,926
Cash at beginning of period		3,421,679			2,306,258
Cash at end of period	$	3,345,613		$	3,505,184
Supplemental cash flow information
Cash paid for income taxes	$	175,059		$	531,262

See accompanying notes to the unaudited interim condensed financial statements.

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SIERRA MONITOR CORPORATION

Notes to the Unaudited Interim Condensed Financial Statements

September 30, 2014

Basis of Presentation

The accompanying unaudited interim condensed financial statements have been prepared by Sierra Monitor Corporation (the “Company”), pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been omitted pursuant to such SEC rules and regulations; nevertheless, the Company believes that the disclosures are adequate to make the information presented not misleading. Amounts related to disclosure of December 31, 2013 balances within these interim condensed financial statements were derived from the audited 2013 financial statements and notes thereto. These financial statements and the notes hereto should be read in conjunction with the financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2013, which was filed with the SEC on March 27, 2014. In the opinion of the Company, all adjustments, including normal recurring adjustments necessary to present fairly the financial position, results of operations, and cash flows of the Company for the interim period have been included. The results of operations for the interim period are not necessarily indicative of the results for any subsequent interim period or for the full year.

Summary of Business

Sierra Monitor Corporation addresses the industrial and commercial facilities management market with Internet of Things (IoT) solutions that connect and protect high-value infrastructure assets.

The company’s FieldServer brand of protocol gateways is used by system integrators and OEMs to enable local and remote monitoring and control of assets and facilities. With more than 100,000 products, supporting over 140 protocols such as BACnet, LonWorks, MODBUS, and XML, installed in commercial and industrial facilities, FieldServer is the industry’s leading multi-protocol gateway. The FieldServer multi-protocol gateway uses specialized embedded software on proprietary hardware platforms. Embedded software enables data transfer between various devices and sub-systems within a facility by bridging between different protocols and physical media, and additionally enables the devices and sub-systems in the facility to connect to the cloud over Internet Protocol (IP) networks. Offering the embedded software on proprietary hardware platforms allows the Company to increase the value proposition while protecting its intellectual property. The FieldServer gateway is also available to OEMs as modules for installation in customer devices and controllers.

Sierra Monitor’s Sentry IT fire and gas detection solutions are used by industrial and commercial facilities managers to protect their personnel and assets. The solution consists of proprietary system hardware that runs embedded controller and gateway software, detector modules that sense the presence of various toxic and combustible gases and flames, connectivity between the modules and the controller, and a user interface and applications that a facility manager can interact with, either locally on site, or remotely over the Internet. The complex software embedded in the various products facilitates system-wide functions such as calibration, alarm detection, notification, and mitigation. With more than 100,000 detector modules sold, the Company’s fire and gas detection solutions are deployed in a various facilities such as oil, gas and chemical processing plants, wastewater treatment facilities, alternate fuel vehicle maintenance garages, and other sites where hazardous gases are used or produced. The company’s solutions are also sold to telecommunication companies and their suppliers to manage environmental conditions in small structures such as local DSL distribution nodes and buildings at cell tower sites.

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The Company was formed in 1978 and its common stock is quoted on the OTC Bulletin Board under the symbol “SRMC”.

Accounting Policies

Revenue Recognition

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

Recent Accounting Pronouncements

Recent accounting pronouncements discussed in the notes to the December 31, 2013 audited financial statements, filed previously with the SEC in our Annual Report on Form 10-K on March 27, 2014, that are required to be adopted during the year ended December 31, 2014, did not have or are not expected to have a significant impact on the Company’s 2014 financial statements.

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers: Topic 606. This ASU outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance. This accounting standard is effective for annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. Early adoption is not permitted. The Company is currently evaluating the impact this accounting standard will have on the Company's financial position, results of operations or cash flows.

Employee Stock-Based Compensation

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 September 30, 2014, a total of 1,007,320 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.

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

For the nine-month periods ended September 30, 2014 and 2013, general and administrative expenses included stock based compensation expense of $237,663 and $67,333, respectively, decreasing the Company's income before provision for income taxes and net income resulting from the recognition of compensation expense associated with employee stock options. Stock based compensation expense in the period ended September 30, 2014 resulted in lower earnings of approximately $0.02 per share basic and diluted. There was no material impact on the Company’s basic and diluted net income per share as a result of recognizing employee stock-based compensation expense for the period ended September 30, 2013. The Company did not modify the terms of any previously granted stock options during the nine-month periods ended September 30, 2014 and 2013.

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Subsequent Events

Management has evaluated events subsequent to September 30, 2014 through the date that the accompanying condensed financial statements were filed with the Securities and Exchange Commission for transactions and other events which may require adjustment of and/or disclosure in such financial statements.

Inventories

A summary of inventories follows:

	September 30, 2014			December 31, 2013
Raw materials	$	1,340,730		$	1,147,729
Work-in-process		1,271,239			769,359
Material at vendor		430,071			561,020
Finished goods		406,551			349,271
Less: Allowance for obsolescence reserve		(111,368	)		(86,544	)
	$	3,337,223		$	2,740,835

Net Income Per Share

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

At September 30, 2014 and 2013, outstanding options to acquire 1,524,000 and 162,000, shares of common stock, respectively, were not considered potentially dilutive common shares due to the exercise price of such options being higher than the stock price used in the EPS calculation.

The following is a reconciliation of the shares used in the computation of basic and diluted EPS for the three and nine-month periods ended September 30, 2014 and 2013, respectively:

	Three months ended September 30				Nine months ended September 30
	2014		2013		2014		2013
Basic EPS – weighted-average number of common shares outstanding		10,114,311		10,104,311		10,112,089		10,093,200
Effect of dilutive potential common shares – stock options outstanding		375,863		95,474		46,274		115,272
Diluted EPS – weighted-average number of common shares and potential common shares outstanding		10,490,174		10,199,785		10,158,363		10,208,472

Concentrations

One customer made up more than 10% of accounts receivable at September 30, 2014 and at December 31, 2013. No customer made up more than 10% of net sales for the nine-month period ended September 30, 2014 and one customer made up more than 10% of net sales for the nine-month period ended September 30, 2013. The single customer that accounted for more than 10% of accounts receivable at September 30, 2014 is Petrofac Emirates LLC and the receivable amount was not delinquent at that date.

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The Company currently maintains substantially all of its day to day operating cash with a major financial institution. At times, cash balances may be in excess of the amounts insured by the Federal Deposit Insurance Corporation. Cash balances of approximately $2,846,000 and $2,922,000 were in excess of such insured amounts at September 30, 2014 and December 31, 2013, respectively.

Segment Information

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

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

	Three months ended September 30,				Nine months ended September 30,
	2014		2013		2014		2013
Instrumentation	$	2,729,417	$	2,727,715	$	6,881,212	$	7,416,805
FieldServers		2,633,669		2,204,917		7,335,507		6,660,517
	$	5,363,086	$	4,932,632	$	14,216,719	$	14,077,322

Line-of-Credit

In May 2014, the Company increased the line of credit with its commercial bank to a maximum amount of $2,000,000 under substantially the same terms as the previous provision. No borrowings have been made under the Company’s line of credit during the first nine months of fiscal year 2014 and there were no outstanding balances at September 30, 2014 and December 31, 2013. As of September 30, 2014, the Company was in compliance with the financial covenants to which it is subject under the line of credit.

Stock Option Grants

A total of 600,000 options and 1,200,000 options were granted during the three and nine-month periods ended September 30, 2014, respectively. No stock options were granted during the three and nine-month periods ended September 30, 2013.

Stock Option Exercise and Expiration

In the nine-month periods ended September 30, 2014 and 2013, a total of 10,000 and 100,000 shares of common stock, respectively, were issued as a result of stock option exercises. During the same periods, 23,000 and 42,000 options expired, respectively.

Commitments and Contingencies

From time to time, the Company is subject to legal proceedings and claims that arise in the normal course of business. While the outcome of these proceedings and claims cannot be predicted, we currently are not a party to any legal proceedings, the adverse outcome of which, in management’s opinion, individually or in the aggregate, is expected to have a material adverse effect on the Company’s financial position or results of operations.

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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-month periods ended September 30, 2014, Sierra Monitor Corporation (“we” or the “Company”) reported net sales of $5,363,086 compared to $4,932,632 for the three-month period ended September 30, 2013. For the nine-month period ended September 30, 2014, net sales were $14,216,719 compared with $14,077,322 in the prior year nine-month period. The sales results for the three and nine-month periods ended September 30, 2014 represent an increase of 9% and an increase of 1%, respectively, compared to the same periods in 2013.

For the three-month period ended September 30, 2014, sales of our instrumentation products, including fire and gas detection, military sales and environment controllers were approximately $2,729,000 compared to approximately $2,728,000 in the three-month period ended September 30, 2013. For the nine-month period ended September 30, 2014, sales of our instrumentation products were approximately $6,881,000 compared to approximately $7,417,000 in the same period in 2013. There was no change in the sales levels in the third quarter of 2014 compared to 2013. The results for the year to date period represent a 7% year-over-year decrease. While industrial gas detection sales increased in both periods in 2014, lower military sales and lower environment controller sales contributed to the overall decrease in sales.

In the three-month period ended September 30, 2014, sales of FieldServer products were approximately $2,634,000 compared to approximately $2,205,000 in the same period in 2013. In the nine-month period ended September 30, 2014, sales of our FieldServer products were approximately $7,336,000, compared to approximately $6,661,000 in sales reported in the same period in 2013. These results represent a 19% year-over-year increase in the third quarter and a 10% year-over-year increase in the year-to-date period.

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

Gross profit for the three-month period ended September 30, 2014 was approximately $2,873,000, or 54% of net sales, compared to approximately $3,017,000, or 61% of net sales, in the same period in the previous year. Gross profit for the nine-month period ended September 30, 2014 was approximately $8,094,000, or 57% of net sales, compared to approximately $8,321,000, or 59% of net sales, in the same period in the previous year. Our gross margins are influenced primarily by discounts for large orders and by product mix. Generally sales to OEM accounts generate lower margins. In the quarter ended September 30, 2014 OEM sales represented a higher percentage of overall sales and we two international fire and gas detection projects were sold at discounts which negatively influenced our gross margin for the three month and nine month periods.

Expenses for research and development, which include new product development and engineering to sustain existing products, were approximately $599,000, or 11% of net sales, for the three-month period ended September 30, 2014 compared to approximately $548,000, or 11% of net sales, in the comparable period in 2013. In the nine-month periods ended September 30, 2014 and September 30, 2013, research and development expenses were approximately $1,739,000, or 12% of net sales, and approximately $1,627,000, or 12% of net sales, respectively. Increases in engineering expenses have been, in part, related to development and testing of a new toxic gas sensor module that enables us to compete for additional projects in the Middle East.

Selling and marketing expenses, which consist primarily of salaries, commissions and promotional expenses were approximately $1,176,000, or 22% of net sales for the three-month period ended September 30, 2014, compared to approximately $1,040,000, or 21% of net sales, in the comparable period in the prior year. For the nine-month periods ended September 30, 2014 and 2013, selling and marketing expenses were approximately $3,672,000, or 26% of net sales, and approximately $3,127,000, or 22% of net sales, respectively. The increases in selling costs in both the three month and year to date periods in 2014 compared to the same periods in 2013 are due, primarily, to salary and benefits expenses related to the addition of professional sales and marketing management at the beginning of 2014.

General and administrative expenses, which consist primarily of salaries, building rent, insurance expenses, information technology expenses and fees for professional services, were approximately $815,000, or 15% of net sales, for the three-month period ended September 30, 2014 compared to approximately $560,000, or 11% of net sales, in the three-month period ended September 30, 2013. For the nine-month periods ended September 30, 2014 and September 2013, general and administrative expenses were approximately $2,181,000, or 15% of net sales, and approximately $1,651,000, or 12% of net sales, respectively. General and administrative expenses have increased 46% and 32% in the three and nine-month reporting periods ended September 30, 2014 compared to the same periods in 2013, primarily due to salary and stock option expenses related to the addition of new corporate management.

In the three-month period ended September 30, 2014, our income from operations was approximately $282,000 compared to income from operations of approximately $869,000 for the three-month period ended September 30, 2013. In the nine-month period ended September 30, 2014, our income from operations was approximately $503,000 compared to income from operations of $1,916,000 in the nine-month period ended September 30, 2013. The decrease in income in the third quarter of 2014 compared to the third quarter of 2013 is due to lower gross margins and higher selling and administration expenses.

After interest and provision for tax expense our net income for the three-month period ended September 30, 2014 was approximately $169,000 compared to net income of approximately $521,000 in the same period of 2013. For the nine-month period ended September 30, 2014, our net income was approximately $302,000 compared to a net income of approximately $1,155,000 in the same period of 2013.

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Liquidity and Capital Resources

During the nine months ended September 30, 2014, net cash provided by operating activities was approximately $477,000 compared to approximately $1,820,000 for the same period in 2013. Working capital was approximately $8,004,000 at September 30, 2014, an increase of approximately $223,000 from December 31, 2013. At September 30, 2014, our balance sheet reflected approximately $3,346,000 of cash and approximately $2,313,000 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.

At September 30, 2014, we had no long term liabilities except for deferred income taxes.

The Company maintains a line of credit with its commercial bank in the maximum amount of $2,000,000. No borrowings have been made under the Company’s line of credit during the first nine months of fiscal year 2014 and there were no outstanding balances at September 30, 2014 and December 31, 2013. As of September 30, 2014, the Company was in compliance with the financial covenants of the 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, 2015. There are no current plans for significant capital equipment expenditures and no other known demands, commitments, events or uncertainties, except as previously disclosed in this Liquidity and Capital Resources section, that will result in or that are reasonably likely to result in the Company’s liquidity increasing or decreasing in any material way.

Critical Accounting Policies

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

Revenue Recognition

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

Gas Detection and Environment Control Products

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

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Gas Detection and Environment Control Services

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

FieldServer Products

FieldServer products are sold in the same manner as Gas Detection and Environment Control Products (as discussed above) except that the products contain embedded software, which is integral to the operation of the device. The software embedded in FieldServer products includes two items: (a) a compiled program containing (i) the basic operating system for FieldServer products, which is common to every unit, and (ii) customized protocol drivers based on the customer order (see FieldServer Services below for more information); and (b) a configuration file that identifies and links each data point as identified by the customer. The Company does not deem the hardware, operating systems with protocol drivers and configuration files to be separate units of accounting because the Company does not believe that they have value on a stand-alone basis. The hardware is useless without the software, and the software is only intended to be used in FieldServer hardware. Additionally, the software included in each sale is deemed to not require significant production, modification or customization, and therefore the Company recognizes revenues upon the shipment or delivery of products (depending on shipping terms), as described in Gas Detection and Environment Control Products above.

FieldServer Services

FieldServer services consist of orders for custom development of protocol drivers. Generally customers place orders for FieldServer products concurrently with their order for protocol drivers. However if custom development of the protocol driver is required, the product order is not processed until development of the protocol driver is complete. Orders are received in the same manner as described in FieldServer Products above, but due to the non-recurring engineering aspect of the customized driver development, the Company is more likely to have a written evidence trail of a quotation and a hard copy order. The driver development involves further research after receipt of order, preparation of a scope document to be approved by the customer and then engineering time to write, test and release the driver program. When development of the driver is complete the customer participates in testing and provides written confirmation that the driver program meets its expectations. The customer is then able to place or release orders for FieldServer product with the new driver loaded into it (see FieldServer Products above). Revenues for driver development are billed and recognized only after the customer’s written confirmation is received. Collectability is reasonably assured as described in FieldServer Products above.

Discounts and Allowances

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

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Accounts Receivable and Related Allowances

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

Inventories

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

ITEM 4: CONTROLS AND PROCEDURES

Disclosure Controls and Procedures. As of the end of the period covered by this Quarterly Report on Form 10-Q, our management, with the participation of Varun Nagaraj, our principal executive officer and Tamara S. Allen, our 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. Nagaraj and Ms. Allen concluded that, as of September 30, 2014, the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act) were effective.

Changes in internal control over financial reporting. There was no change in our internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) of the Exchange Act) during the quarter ended September 30, 2014 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II: OTHER INFORMATION

ITEM 6. EXHIBITS

Exhibit
Number	Description

3.1⁽¹⁾	Articles of Incorporation of the Registrant.
3.2⁽²⁾	Bylaws of the Registrant.
10.1⁽³⁾	Form of Indemnification Agreement, as amended, between Registrant and its directors and certain of its executive officers.
10.2⁽⁴⁾	Employment Offer Letter, dated May 15, 2014, between Registrant and Varun Nagaraj.
10.3⁽⁴⁾	Transition Agreement, dated July 7, 2014 between Registrant and Gordon R. Arnold.
10.4⁽⁴⁾	Form of Change of Control and Severance Agreement, between Registrant and certain of its executive officers.
31.1	Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of Chief Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS	XBRL Instance Document.
101.SCH	XBRL Taxonomy Extension Schema.
101.CAL	XBRL Taxonomy Extension Calculation Linkbase.
101.DEF	XBRL Taxonomy Extension Definition Linkbase.
101.LAB	XBRL Taxonomy Extension Label Linkbase.
101.PRE	XBRL Taxonomy Extension Presentation Linkbase.

(1)	Incorporated by reference to our Annual Report on Form 10-K for the fiscal year ended December 31, 1989.
(2)	Incorporated by reference to our Quarterly Report on Form 10-QSB (File No. 000-07441) for the fiscal quarter ended June 30, 1998, filed with the SEC on August 14, 1998.
(3)	Incorporated by reference to the Company’s Current Report on 8-K, filed with the SEC on May 16, 2014.
(4)	Incorporated by reference to the Company’s Current Report on 8-K filed with the SEC on July 8, 2014.

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SIGNATURES

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

		SIERRA MONITOR CORPORATION
		Registrant

Date: November 14, 2014	By:	/s/ Varun Nagaraj
		Varun Nagaraj
		President
		Chief Executive Officer

Date: November 14, 2014	By:	/s/ Tamara S. Allen
		Tamara S. Allen
		Chief Financial Officer

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Index to Exhibits

Exhibit
Number	Description

3.1⁽¹⁾	Articles of Incorporation of the Registrant.
3.2⁽²⁾	Bylaws of the Registrant.
10.1⁽³⁾	Form of Indemnification Agreement, as amended, between Registrant and its directors and certain of its executive officers.
10.2⁽⁴⁾	Employment Offer Letter, dated May 15, 2014, between Registrant and Varun Nagaraj.
10.3⁽⁴⁾	Transition Agreement, dated July 7, 2014 between Registrant and Gordon R. Arnold.
10.4⁽⁴⁾	Form of Change of Control and Severance Agreement, between Registrant and certain of its executive officers.
31.1	Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of Chief Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS	XBRL Instance Document.
101.SCH	XBRL Taxonomy Extension Schema.
101.CAL	XBRL Taxonomy Extension Calculation Linkbase.
101.DEF	XBRL Taxonomy Extension Definition Linkbase.
101.LAB	XBRL Taxonomy Extension Label Linkbase.
101.PRE	XBRL Taxonomy Extension Presentation Linkbase.

(1)	Incorporated by reference to our Annual Report on Form 10-K for the fiscal year ended December 31, 1989.
(2)	Incorporated by reference to our Quarterly Report on Form 10-QSB (File No. 000-07441) for the fiscal quarter ended June 30, 1998, filed with the SEC on August 14, 1998.
(3)	Incorporated by reference to the Company’s Current Report on 8-K, filed with the SEC on May 16, 2014.
(4)	Incorporated by reference to the Company’s Current Report on 8-K filed with the SEC on July 8, 2014.

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