10-Q 1 form10q.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended June 30, 2018

[ ]	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 every Interactive Data File required to be submitted 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 such files). Yes [X] No [ ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth 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]
Emerging growth company [ ]

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]

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 August 14, 2018 was 10,203,995.

PART I: FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

SIERRA MONITOR CORPORATION

Condensed Balance Sheets

	June 30, 2018		December 31, 2017
		(unaudited)
Assets
Current assets:
Cash	$	2,730,511	$	3,191,722
Trade receivables, less allowance for doubtful accounts of approx. $70,000 and $75,000 at June 30, 2018 and December 31, 2017		2,957,167		3,254,681
Inventories, net		3,584,264		3,138,261
Prepaid expenses		585,563		559,368
Income tax deposit		49,214		44,771
Total current assets		9,906,719		10,188,803

Property and equipment, net		276,061		252,143
Deferred income taxes		126,323		126,323
Other assets		89,421		83,153
Total assets	$	10,398,524	$	10,650,422
Liabilities and Shareholders’ Equity
Current liabilities:
Accounts payable	$	679,439	$	976,092
Accrued compensation expenses		669,452		555,714
Other current liabilities		143,603		199,397
Total current liabilities		1,492,494		1,731,203

Commitments and contingencies
Shareholders’ equity:
Common stock, $0.001 par value; 20,000,000 shares authorized; 10,203,995 shares issued and outstanding, at June 30, 2018 and December 31, 2017.		10,204		10,204
Additional paid-in capital		4,576,169		4,482,403
Retained earnings		4,319,657		4,426,612
Total shareholders’ equity		8,906,030		8,919,219
Total liabilities and shareholders’ equity	$	10,398,524	$	10,650,422

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 June 30,					Six months ended June 30,
	2018		2017			2018		2017
Net sales	$	5,550,598	$	4,835,420		$	10,701,614	$	9,362,610
Cost of goods sold		2,340,709		2,048,474			4,325,271		3,841,280
Gross profit		3,209,889		2,786,946			6,376,343		5,521,330
Operating expenses
Research and development		791,387		768,212			1,565,815		1,528,508
Selling and marketing		1,343,392		1,260,339			2,729,756		2,615,550
General and administrative		988,794		824,726			1,903,506		1,612,538
Non-recurring restructuring expense		-		580,425			-		580,425
		3,123,573		3,433,702			6,199,077		6,337,021
Income (loss) from operations		86,316		(646,756	)		177,266		(815,691	)
Other income		316		-			316		-
Interest income		174		-			482		-
Income (loss) before income taxes		86,806		(646,756	)		178,064		(815,691	)
Income tax provision (benefit)		40,942		(221,292	)		80,939		(256,385	)
Net income (loss)	$	45,864	$	(425,464	)	$	97,125	$	(559,306	)
Net income (loss) available to common shareholders per common share
Basic:	$	0.00	$	(0.04	)	$	0.01	$	(0.05	)
Diluted:	$	0.00	$	(0.04	)	$	0.01	$	(0.05	)
Weighted average number of common shares used in per share computations
Basic:		10,203,995		10,181,553			10,203,995		10,179,053
Diluted:		10,328,108		10,181,553			10,328,108		10,179,053

See accompanying notes to the unaudited interim condensed financial statements.

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SIERRA MONITOR CORPORATION

Condensed Statements of Cash Flows

(Unaudited)

	Six months ended
	June 30,
	2018			2017
Cash flows from operating activities:
Net income (loss)	$	97,125		$	(559,306	)
Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities:
Depreciation and amortization		114,128			140,507
Provision for bad debt expense		(4,689	)		-
Provision for inventory losses		60,000			-
Stock-based compensation expense		93,766			165,792
Change in operating assets and liabilities:
Trade receivables		302,203			(136,828	)
Inventories		(506,003	)		(80,524	)
Prepaid expenses		(26,195	)		289,292
Income tax deposit		(4,443	)		(236,870	)
Accounts payable		(296,653	)		28,758
Accrued compensation expenses		113,738			72,586
Other current liabilities		(55,794	)		500,250
Net cash (used in) provided by operating activities	$	(112,817	)	$	183,657
Cash flows from investing activities:
Purchases of property and equipment		(144,314	)		(49,964	)
Net cash used in investing activities	$	(144,314	)	$	(49,964	)
Cash flows from financing activities:
Dividend payout		(204,080	)		(203,532	)
Proceeds from exercise of stock options		-			16,298
Net cash used in financing activities	$	(204,080	)	$	(187,234	)
Net decrease in cash and cash equivalents:		(461,211	)		(53,541	)
Cash and cash equivalents at beginning of period:	$	3,191,722		$	4,692,999
Cash and cash equivalents at end of period:	$	2,730,511		$	4,639,458

See accompanying notes to the unaudited interim condensed financial statements.

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SIERRA MONITOR CORPORATION

Notes to the Interim Condensed Financial Statements

(Unaudited)

June 30, 2018

Basis of Presentation

The accompanying unaudited interim condensed financial statements have been prepared by Sierra Monitor Corporation (the “Company,” “we,” or “us”) 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 (“U.S. 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, 2017 balances within these interim condensed financial statements were derived from the audited 2017 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, 2017, which was filed with the SEC on April 2, 2018. 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

Founded in 1978, Sierra Monitor Corporation (OTCQB:SRMC), is a provider of Industrial Internet of Things (IIoT) solutions that address the industrial and commercial facilities management targeting facility automation and facility safety requirements, also referred to as “Connect” and “Protect”.

The Company’s FieldServer family of protocol gateways, routers, and network explorers targets facility automation requirements, and is used by original equipment manufacturers (“OEMs”) and system integrators to enable local and remote monitoring and control of assets and facilities. The FieldServer family of products works with the SMC Cloud portal; a cloud-based service that registers and manages FieldServer products, provides secure remote access to the local web-based applications that run on FieldServer products, and integrates with third-party applications over REST APIs. With more than 200,000 installed gateways supporting over 140 protocols such as BACnet, LonWorks, MODBUS, and XML in commercial and industrial facilities, FieldServer is the industry’s leading multi-protocol gateway brand and is delivered in a variety of form factors appropriate to the asset being interfaced. The intellectual property in FieldServer products is embodied in the proprietary embedded software that runs on a variety of customized hardware platforms with different connectivity options such as Serial, Ethernet, Wi-Fi, or cellular. In addition to bridging data protocols between various assets or devices within a facility, the embedded software includes value-added “fog” or “local application” software for monitoring, logging, alarming, and trending local field data. Additionally, the embedded software enables the assets or devices in the facility to securely connect to third-party clouds and to the Company’s own SMC Cloud portal. The SMC Cloud portal is a proprietary, secure, and scalable Software-as-a-Service product and is developed and deployed using the same core technologies and providers that are used by many of the world’s leading web sites and Internet-based services.

The Company’s Flame and Gas (F&G) detection solutions target facility safety requirements and are used by industrial and commercial facilities managers to protect their personnel and assets. The motivation for installing gas detection systems is driven, in part, by industrial safety professionals guided by the United States Occupational Safety and Health Administration, state and local governing bodies, insurance companies and various industry rule-making bodies. 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. The controller software also includes local web-based applications that simplify management of the complete solution and a gateway to integrate the flame and gas detection solution with the facility’s local supervisory system or to the Company’s SMC Cloud portal. With more than 100,000 detector modules sold, our flame and gas detection solutions are deployed in a variety of 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.

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The Company’s solutions are also sold to telecommunication companies and their suppliers to manage environmental and security conditions such as temperature, gas, and smoke in remote structures such as local DSL distribution nodes and buildings at cell tower sites.

Accounting Policies

a) Revenue Recognition

In May 2014, the Financial Accounting Standards Board (“FASB”) issued ASU 2014-09, “Revenue from Contracts with Customers” (Topic 606). ASC 606 requires the recognition of revenue when promised goods or services are transferred to customers in an amount that reflects the considerations to which the entity expects to be entitled to in exchange for those goods or services. On January 1, 2018, the Company adopted ASC 606 by using the modified retrospective method. The comparative information has not been recast and continues to be reported under the accounting standards in effect for those periods. The adoption did not have a material impact to the nature and timing of its revenues, condensed statements of operations, condensed statements cash flows and condensed balance sheets. The majority of the impact has been on sales returns and the impact has been deemed immaterial.

The Company’s revenues are derived from the sale of FieldServer products, FieldServer products services, Gas Detection and Environment Control products, and Gas Detection and Environment Control products services. The Company accounts for a contract with a customer when there’s approval and commitment from both parties, the rights of the parties are identified, payment terms are identified, the contract has commercial substance and collectability of consideration is probable.

The Company’s revenue arrangements consist of multiple performance obligations including hardware, software, and services. Determining the stand-alone selling price (“SSP”) and allocation of consideration from an arrangement to the individual performance obligations, and the appropriate timing of revenue recognition are significant judgments with respect to these arrangements.

The Company does not provide credits, incentives or retroactive discounts, which may be required to be accounted for as variable consideration when estimating the amount of revenue to be recognized. The Company from time to time provides a right of return to its customers and the Company uses expected value method to estimate the potential value of the customer returns to reduce the transaction price. The impact has been deemed to be immaterial, thus there is no disclosure related to sales returns, return on assets and refund liability.

When the Company’s products and services are sold in bundled arrangements (e.g., hardware, software, and/or services), for bundled arrangements, the Company accounts for individual products and services separately if they are distinct, that is, if a product or service is separately identifiable from other items in the bundled package and if a customer can benefit from it on its own or with other resources that are readily available to the customer. The consideration (including any discounts) is allocated between separate products or services in a bundle based on their individual SSP. The SSP is determined based on observable prices at which the Company separately sells the products and services. If an SSP is not directly observable, then the Company will estimate the SSP considering marketing conditions, entity-specific factors, and information about the customer or class of customer that is reasonably available.

The following is a description of the principal activities from which the Company generates its revenues:

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. The creditworthiness of customers is 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. Revenue is recognized at a point in time when control of the product is transferred to the customer, generally occurring upon the shipment or delivery dependent upon the terms of the underlying contract when (a) for FOB factory orders they leave our shipping dock or (b) for FOB customer dock orders upon confirmation of delivery.

Gas Detection and Environment Control Services

Gas detection and environment control services consist of field service orders (technical support) and training, which are provided separately 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. Revenue is recognized in the period the technical support and training are performed.

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 determined that the hardware, and the embedded software as defined above represent one performance obligation because the hardware is dependent upon and highly interrelated with the embedded software, and without which the hardware can’t operate. Generally, the software included in each sale does not require significant production, modification or customization and, therefore, the Company recognizes revenues at a point in time when control of the product is transferred to the customer generally occurring upon the shipment or delivery of products (depending on shipping terms), as described in Gas Detection and Environment Control Products above. If the software requires modification, refer to FieldServer Services for details.

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. 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. Revenues for protocol driver development are recognized at a point in time when the control of the product is transferred to the customer generally occurring upon shipment or delivery of the related product that includes the developed protocol drivers (as noted 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) Recent Accounting Pronouncements

Recent accounting pronouncements discussed in the notes to the December 31, 2017 audited financial statements, filed previously with the SEC in our Annual Report on Form 10-K on April 2, 2018, that are required to be adopted during the year ended December 31, 2018, did not have or are not expected to have a significant impact on the Company’s 2018 financial statements.

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In February 2016, the FASB issued ASU 2016-2, “Leases” (Topic 842), which is intended to improve financial reporting for lease transactions. This ASU will require organizations that lease assets, such as real estate, airplanes and manufacturing equipment, to recognize on their balance sheet the assets and liabilities for the rights to use those assets for the lease term and obligations to make lease payments created by those leases that have terms of greater than 12 months. The recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee primarily will depend on its classification as finance or operating lease. This ASU will also require disclosures to help investors and other financial statement users better understand the amount and timing of cash flows arising from leases. These disclosures will include qualitative and quantitative requirements, providing additional information about the amounts recorded in the financial statements. The ASU is effective for the Company for the year ending December 31, 2019 and interim reporting periods within that year, and early adoption is permitted. Management has not yet determined the effect of this ASU on the Company’s financial statements.

c) Employee Stock-Based Compensation

In April 2016 and in May 2016, the Company’s Board of Directors and the Company’s shareholders, respectively, approved the Company’s 2016 Equity Incentive Plan (the “2016 Stock Plan”) and reserved a total of (i) 279,680 shares, plus (ii) 2,550,320 shares that remained available for issuance under the 2006 Stock Plan immediately prior to its expiration, plus (iii) any shares subject to stock options or restricted stock granted under the 2006 Stock Plan that, on or after the date the 2016 Stock Plan became effective, expired or otherwise terminated without having been exercised in full, or were forfeited to or repurchased by the Company, with the maximum number of shares to be added to the 2016 Stock Plan pursuant to clauses (ii) and (iii) equal to 2,668,320. Options granted under our 2006 Stock Plan and 2016 Stock Plan are at the fair market value of our common stock at the grant date, typically vest ratably over four years, and expire ten years from the grant date. As of June 30, 2018, a total of 1,154,000 shares were issued under the 2016 Stock Plan.

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. Compensation expense recognized in future periods for share-based compensation will be adjusted for the effects of estimated forfeitures.

For the six-month periods ended June 30, 2018 and 2017, general and administrative expenses included stock-based compensation expense of $93,766 and $165,792, respectively, decreasing the Company’s income and increasing loss before provision for income taxes and resulting from the recognition of compensation expense associated with employee stock options. There was no material impact on the Company’s basic and diluted net loss per share as a result of recognizing the employee stock-based compensation expense. The Company did not modify the terms of any previously granted stock options during the six-month periods ended June 30, 2018 and 2017.

d) Subsequent Events

Management has evaluated events subsequent to June 30, 2018 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. In that regard, management has identified the following subsequent events:

The Company appointed Ross DeMont as a member of the Company’s Board of Directors effective July 25, 2018.

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Further, the Company amended the Bylaws of the Company (the “Amended Bylaws”), in order to increase the size of the board of directors from five directors to six directors effective immediately in connection with the appointment of Mr. DeMont.

Inventories

Summary of inventories:

	June 30, 2018			December 31, 2017
Raw materials	$	1,725,806		$	1,517,932
Work-in-process		1,704,738			1,415,763
Finished goods		313,720			304,566
Less: Allowance for obsolescence reserve		(160,000	)		(100,000	)
	$	3,584,264		$	3,138,261

Net Loss Per Share

Basic loss 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 stock issuable upon exercise of stock options using the treasury stock method. No adjustments to losses were made for purposes of per share calculations.

At June 30, 2018, outstanding options to acquire 808,000 shares of common stock 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. At June 30, 2017, there were no options to acquire shares of common stock that were considered potentially dilutive due to the net loss for the year-to-date periods

The following is a reconciliation of the shares used in the computation of basic and diluted EPS for the three and six-month periods ended June 30, 2018 and 2017, respectively:

	Three months ended				Six months ended
	June 30, 2018		June 30, 2017		June 30, 2018		June 30, 2017
Basic EPS – weighted-average number of common shares outstanding		10,203,995		10,181,553		10,203,995		10,179,053
Effect of dilutive potential common shares – stock options outstanding		124,113		-		124,113		-
Diluted EPS – weighted-average number of common shares and potential common shares outstanding		10,328,108		10,181,553		10,328,108		10,179,053

Concentrations

No customer made up more than 10% of accounts receivable at June 30, 2018 and two customers made up more than 10% of accounts receivable at December 31, 2017. Additionally, no customers made up more than 10% of net sales for each of the three or six-month periods ended June 30, 2018 or June 30, 2017.

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 $2,301,000 and $2,830,000 were in excess of such insured amounts at June 30, 2018 and December 31, 2017, respectively

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Segment Information

The Company operates in a single business 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 June 30,				Six months ended June 30,
	2018		2017		2018		2017
Instrumentation	$	2,809,646	$	2,291,828	$	5,301,112	$	4,369,427
FieldServers		2,740,952		2,543,592		5,400,502		4,993,183
	$	5,550,598	$	4,835,420	$	10,701,614	$	9,362,610

Line of Credit

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 six months of fiscal year 2018 and there were no outstanding balances at June 30, 2018 or December 31, 2017. As of June 30, 2018, the Company was in compliance with the financial covenants of the line of credit.

Stock Option Grants

No options were granted during the three-month period ending June 30, 2018 and 41,000 options with a fair value of $27,224 were granted during the six-month period ended June 30, 2018. A total of 238,000 options with a fair value of $162,554 were granted during the three month and six-month periods ended June 30, 2017.

Stock Option Exercise and Expiration

No stock options were exercised in the six-month period ended June 30, 2018 and 1,000 options expired during the three-month period ended June 30, 2018.

A total of 135,000 stock options were exercised in the six-month period ended June 30, 2017 for total proceeds of $16,298. During the same period, 1,500 options expired.

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 (the “Exchange Act”). Statements that are not statements of historical fact may be deemed to be forward-looking statements. The words “believe,” “anticipate,” “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, among others, any expectations of operating and non-operating expense, including research and development expense, potential litigation expense, sufficiency of resources, including cash and accounts receivable, estimates of allowances for doubtful accounts, credit lines or other financial items, our internal control environment and critical accounting policies; any statements concerning future sales levels and timing and demand for our products; 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 our 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, general economic conditions in both foreign and domestic markets, changes in the economy and the credit market, investment and research and development plans and success, market position and penetration, strategic plans and objectives, operating margins, government and regulatory approvals or certifications, cyclical factors affecting our industry, our ability to identify, attract, motivate and retain qualified personnel, lack of growth in our end-markets, our ability to develop and manufacture, seasonality in our products, availability of components and materials used in our products, and our ability to sell both new and existing products at a profitable yet competitive price and those issues described under the heading “Critical Accounting Policies,” below, and those risk factors identified in Item1A, Risk Factors, of our Annual Report on Form 10-K for our fiscal year ended December 31, 2017, which was filed with the SEC on April 2, 2018, 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. All forward-looking statements in this document are made as of the date hereof, based on information available to us as of the date hereof, and we assume no obligation to update any forward-looking statement.

Results of Operations

For the three-month period ended June 30, 2018, Sierra Monitor Corporation (“we” or the “Company”) reported net sales of $5,550,598 compared to $4,835,420 for the three-month period ended June 30, 2017. For the six-month period ended June 30, 2018, net sales were $10,701,614 compared with $9,362,610 for the six-month period ended June 30, 2017.

Sales of gas detection products, including industrial accounts, military sales and environment controllers for telephone company applications, increased by approximately 23% in the second quarter of 2018 compared to the same period in 2017. As of the second quarter of 2018, sales of gas detection products were 21% higher compared to the same period in 2017. Increased shipments in our military segment were a significant contributor to our increases in the second quarter of 2018 and year-to-date revenue for 2018.

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Sales of our FieldServer product line increased by 8% in the second quarter of 2018 compared to the second quarter of 2017. As of the second quarter of 2018, sales of FieldServer products increased by 8% compared to the same period in 2017. 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 projects and are generally sold to integrators. OEM modules are sold to companies that integrate our products into their commercial offerings. Our OEM module sales increased by 11% as of the second quarter of 2018 compared to the same period in 2017.

Gross profit for the three-month period ended June 30, 2018 was approximately $3,210,000, or 58% of net sales, compared to approximately $2,787,000, or 58% of net sales, in the same period in 2017. Gross profit for the six-month period ended June 30, 2018 was approximately $6,376,000, or 60% of net sales, compared to approximately $5,521,000, or 59% of net sales, in the same period in 2017. The margins in each of the first half and second quarter of 2018 are generally consistent with our historical results.

Expenses for research and development, which include new product development and engineering to sustain existing products, were approximately $791,000, or 14% of net sales, for the three-month period ended June 30, 2018 compared to approximately $768,000, or 16% of net sales, in the comparable period in 2017. In the six-month periods ended June 30, 2018 and June 30, 2017, research and development expenses were approximately $1,566,000, or 15% of net sales, and approximately $1,529,000, or 16% of net sales, respectively. Our slightly increased research and development spending is consistent with our strategy of developing products that we anticipate will have a positive impact on revenues in future periods.

Selling and marketing expenses, which consist primarily of salaries, commissions and promotional expenses were approximately $1,343,000, or 24% of net sales, for the three-month period ended June 30, 2018, compared to approximately $1,260,000, or 26% of net sales, in the comparable period in the prior year. For the six-month periods ended June 30, 2018 and June 30, 2017, selling and marketing expenses were approximately $2,730,000, or 26% of net sales, and approximately $2,616,000, or 28% of net sales, respectively. Selling expenses have increased in the three and six-month periods ending June 30, 2018 primarily because we added a Regional Sales Manager for Asia and Canada as well as a Regional Sales Manager for Latin America.

General and administrative expenses, which consist primarily of salaries, building rent, insurance expenses, information technology expenses and fees for professional services, were approximately $989,000, or 18% of net sales, for the three-month period ended June 30, 2018 compared to approximately $825,000, or 17% of net sales, in the three-month period ended June 30, 2017. For the six-month periods ended June 30, 2018 and June 30, 2017, general and administrative expenses were approximately $1,904,000, or 18% of net sales, and approximately $1,613,000, or 17% of net sales, respectively. Our general and administrative expenses have acclimated to a higher run-rate in 2018 primarily due to technology upgrades to key customer and delivery focused systems.

There were no non-recurring costs for the three-month and six-month period of 2018. In the second quarter of 2017, costs of approximately $580,000 related to compensation expense were incurred as a result of the departure of Varun Nagaraj as CEO and President and Anders Axelsson as Vice President of Sales and Marketing.

In the three-month period ended June 30, 2018, our income from operations was approximately $86,000, representing an increase of approximately $733,000 compared to our loss from operations of approximately $647,000 in the three-month period ended June 30, 2017. In the six-month period ended June 30, 2018, our income from operations was approximately $177,000 representing an increase of approximately $993,000 compared to our loss from operations of $816,000 in the six-month period ended June 30, 2017. The increase in income in both the second quarter and first half of 2018 compared to the same periods in 2017 is due primarily to the non-recurring expense for separation packages for our two former senior executives.

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After interest and tax provisions, our net income for the three-month period ended June 30, 2018 was approximately $46,000 compared to a net loss of approximately $425,000 in the same period of 2017. For the six-month period ended June 30, 2018, our net income was approximately $97,000 compared to a net loss of approximately $559,000 in the same period of 2017.

In July 2018, the Board of Directors also increased the size of the Board of Directors from five to six members and appointed Ross DeMont as a member of the Board of Directors.

Liquidity and Capital Resources

During the six months ended June 30, 2018, net cash used by operating activities was approximately $113,000 compared to net cash provided by operating activities of approximately $184,000 for the same period in 2017. As summarized below, the cash provided during the six months ended June 30, 2017 was due primarily to cash received by a potential strategic partner offset by changes in income. Working capital was approximately $8,414,000 at June 30, 2018, a decrease of approximately $43,000 from December 31, 2017. At June 30, 2018, our balance sheet reflected approximately $2,731,000 of cash and approximately $2,957,000 of net trade receivables. At December 31, 2017, our total cash on hand was approximately $3,192,000 and our net trade receivables were approximately $3,255,000.

In connection with the Company’s discussions regarding potential alternative strategic transactions, on April 10, 2017, the Company received $1,000,000 in cash from a potential strategic partner. Of the total cash received, $500,000 was an expense reimbursement for some of the out-of-pocket costs the Company had incurred in connection with its consideration of strategic alternatives. The other $500,000 was a fully refundable amount which the Company returned to the payer in August 2017.

At June 30, 2018 and 2017, we had no long-term liabilities.

We maintain a line of credit with our commercial bank in the maximum amount of $2,000,000. No borrowings have been made under our line of credit during the first six months of fiscal year 2018 and there were no outstanding balances at June 30, 2018 or December 31, 2017. As of June 30, 2018, we were 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 our anticipated level of operations through at least September 2019. 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 our liquidity increasing or decreasing in any material way.

Critical Accounting Policies

The preparation of financial statements and related disclosures in conformity with U.S. Generally Accepted Accounting Principles (“GAAP”) 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 receivable and inventories and inventory obsolescence. 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:

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a) Revenue Recognition

The following is a description of the principal activities from which the Company generates its revenues:

Gas Detection and Environment Control Products

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Gas Detection and Environment Control Services

FieldServer Products

FieldServer Services

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) Contract Costs

Applying the practical expedient, the Company recognizes the incremental costs of obtaining contracts as an expense when incurred if the amortization period of the assets that otherwise would have been recognized is one year or less. These costs mainly include the Company’s internal sales force compensation program and are included in sales and marketing expenses at the time the revenue is recognized.

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c) Warranty

The Company provides a warranty on all products sold for a period of two years after the date of shipment. Warranty issues are usually resolved with repair or replacement of the product. This standard warranty is assurance type warranty and does not offer any services in addition to the assurance that the product will continue working as specified. Therefore, warranties are not considered separate performance obligations in the arrangement. Instead, estimated future warranty obligations related to products are provided by charges to condensed statements of operations in the period in which the related revenue is recognized.

d) Contract Balances

The Company records accounts receivable when it has an unconditional right to consideration. Contract liabilities are recorded when cash payments are received or due in advance of performance. Contract liabilities consist of only advance payments, where the Company has unsatisfied performance obligations. Contract liabilities are classified as deferred revenue and included within “Other current liabilities” on the condensed balance sheets. At times, billing may occur subsequent to revenue recognition, resulting in an unbilled receivable which represents a contract asset. The Company does not have any unbilled receivable on the condensed balance sheets.

Deferred Revenue for the quarter ending	June 30, 2018			March 31, 2018			December 31, 2017
		(unaudited)			(unaudited)
Beginning balance	$	62,031		$	61,673		$	64,673
Deferred revenues added		1,300			800			-
Previously deferred revenues recognized		(692	)		(442	)		(3,000	)
Total, net	$	62,639		$	62,031		$	61,673

Payment terms vary by customer. The time between invoicing and when payment is due is not significant. For certain products or services and customer types, payment is required before the products or services are delivered to the customer.

There were no significant changes in estimates during the period that would affect the contract balances. The amounts of revenue recognized during the six months ended June 30, 2018 and June 30, 2017 from the opening deferred revenue balances were $1,133 and $2,708, respectively. For the periods ended June 30, 2018, and June 30, 2017 no impairment losses related to contract balances were recognized in the condensed statement of operations.

e) Disaggregation of Revenue

In the following table, net sales are disaggregated by geographic region. The Company conducts business across 5 geographic regions: United States & Canada, Latin America, Europe, Middle East and Asia.

	FieldServer Products				Flame & Gas Products
	Six Months Ended June 30				Six Months Ended June 30
	2018		2017		2018		2017
United States & Canada	$	4,480,000	$	4,049,000	$	4,376,000	$	3,735,000
Latin America		115,000		98,000		142,000		75,000
Europe		437,000		380,000		41,000		17,000
Middle East		221,000		286,000		483,000		110,000
Asia		148,000		181,000		259,000		432,000
	$	5,401,000	$	4,994,000	$	5,301,000	$	4,369,000

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f) Shipping and Handling

The Company has elected to account for shipping and handling activities related to contracts with customers as costs to fulfill the promise to transfer the associated products.

g) Remaining Performance Obligations

Remaining performance obligations represent the transaction price allocated to performances obligations that are unsatisfied or partially unsatisfied as of the end of the reporting period. Unsatisfied and partially unsatisfied performance obligations consist of contract liabilities and non-cancellable backlog. Non-cancellable backlog includes goods and services for which customer purchase orders have been accepted that are scheduled or in the process of being scheduled for shipment. As of June 30, 2018, the remaining performance obligation is approximately $4,386,000, 60% or $2,617,000 of which is expected to be recognized in 3 months and 80% or $3,497,000 of which is expected to be recognized within six months. The remainder is expected to be recognized after fiscal year 2018.

h) 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 determine whether 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.

i) Inventories

Inventories are stated at the lower of cost or net realizable value, 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 net realizable value 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.

Off-Balance Sheet Arrangements.

None.

Contractual Obligations

Not applicable.

ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.

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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 Jeffrey Brown, our principle executive officer, and Tamara S. Allen, our principal financial officer, carried out an evaluation of the effectiveness of the design and operation of our 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. Brown and Ms. Allen concluded that, as of June 30, 2018, our 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) of the Exchange Act) identified in connection with the evaluation required by Rule 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the period covered by this Quarterly Report on Form 10-Q 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 1. LEGAL PROCEEDINGS

ITEM 1A. RISK FACTORS

Please see those risk factors identified in Item1A, Risk Factors, of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2017. The Company’s risk factors have not changed materially since December 31, 2017.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS

A list of exhibits to this Quarterly Report on Form 10-Q is set forth on the Index to Exhibits immediately preceding such exhibits and is incorporated herein by reference.

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Index to Exhibits

		Incorporated by Reference
Exhibit Number	Exhibit Description	Form	Exhibit Number	Date Filed
3.1	Articles of Incorporation of the Registrant.	10-K	3.1	March 23, 1990

3.2	Bylaws of the Registrant.	Filed herewith

31.1	Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.	Filed herewith

31.2	Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.	Filed herewith

32.1	Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.	Furnished herewith

32.2	Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.	Furnished herewith

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.

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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: August 14, 2018	By:	/s/ Jeffrey Brown
		Jeffrey Brown
		Chief Executive Officer

Date: August 14, 2018	By:	/s/ Tamara S. Allen
		Tamara S. Allen
		Chief Financial Officer
		(Principal Financial Officer)

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