SIERRA MONITOR CORP /CA/ - FORM 10-Q

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EX-32 - SIERRA MONITOR CORP /CA/	v231104_ex32.htm
EX-31.2 - SIERRA MONITOR CORP /CA/	v231104_ex31-2.htm
EX-31.1 - SIERRA MONITOR CORP /CA/	v231104_ex31-1.htm
EXCEL - IDEA: XBRL DOCUMENT - SIERRA MONITOR CORP /CA/	Financial_Report.xls

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 June 30, 2011

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 0-7441

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 o

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 o

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.

Large accelerated filer o	Accelerated filer o
Non-accelerated filer o (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 o No x

The number of shares outstanding of the issuer's common stock, as of August 10, 2011 was 9,901,177.

Page 1 of 17

PART I: FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

SIERRA MONITOR CORPORATION

Condensed Balance Sheets

	June 30, 2011		December 31,
Assets	(unaudited)		2010
Current assets:
Cash	$	1,628,276	$	1,645,433
Trade receivables, less allowance for doubtful accounts
of approximately $93,000 and $82,000, respectively		1,746,550		1,708,886
Inventories, net		2,450,853		2,115,003
Prepaid expenses		136,059		178,819
Income tax deposits		459,200		-
Deferred income taxes - current		298,410		298,410
Total current assets		6,719,348		5,946,551

Property and equipment, net		424,814		294,424
Other assets		170,860		154,816

Total assets	$	7,315,022	$	6,395,791
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable	$	588,436	$	704,539
Accrued compensation expenses		514,182		432,127
Other current liabilities		98,998		72,888
Income taxes payable		364,814		20,879
Total current liabilities		1,566,430		1,230,433

Deferred tax liability		54,095		54,095
Total liabilities		1,620,525		1,284,528

Commitments and contingencies
Shareholders' equity:
Common stock, $0.001 par value; 20,000,000 shares authorized; 9,901,177 and 9,896,942 shares issued and outstanding, respectively		9,901		9,897
Additional paid-in capital		2,734,300		2,694,894
Retained earnings		2,950,296		2,406,472
Total shareholders' equity		5,694,497		5,111,263
Total liabilities and shareholders’ equity	$	7,315,022	$	6,395,791

See accompanying notes to the unaudited interim condensed financial statements.

Page 2 of 17

SIERRA MONITOR CORPORATION

Condensed Statements of Operations

(Unaudited)

	Three months ended June 30,				Six months ended June 30,
	2011		2010		2011		2010
Net sales	$	3,984,361	$	3,517,732	$	8,152,778	$	6,420,812
Cost of goods sold		1,628,853		1,432,443		3,288,127		2,656,485
Gross profit		2,355,508		2,085,289		4,864,651		3,764,327
Operating expenses
Research and development		549,992		503,908		1,095,066		986,930
Selling and marketing		917,515		842,514		1,801,954		1,674,490
General and administrative		509,643		489,104		1,061,860		975,343
		1,977,150		1,835,526		3,958,880		3,636,763
Income from operations		378,358		249,763		905,771		127,564
Interest income		312		900		602		1,947
Income before income taxes		378,670		250,663		906,373		129,511
Income tax provision		151,467		99,851		362,549		51,805
Net income	$	227,203	$	150,812	$	543,824	$	77,706
Net income available to common shareholders per common share
Basic:	$	0.02	$	0.01	$	0.05	$	0.01
Diluted:	$	0.02	$	0.01	$	0.05	$	0.01
Weighted average number of common shares used in per share computations
Basic:		9,896,942		11,448,045		9,896,942		11,443,129
Diluted:		10,141,609		11,602,565		10,134,794		11,606,530

See accompanying notes to the unaudited interim condensed financial statements.

Page 3 of 17

SIERRA MONITOR CORPORATION

Condensed Statements of Cash Flows

(Unaudited)

	Six months ended June 30,
	2011			2010
Cash flows from operating activities:
Net income	$	543,824		$	77,706
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization		138,378			126,162
Provision for bad debt expense		11,157			15,000
Provision for inventory loss		20,000			5,000
Stock based compensation expense		39,410			53,146
Changes in operating assets and liabilities:
Trade receivables		(48,821	)		(733,690	)
Inventories		(355,850	)		(18,929	)
Prepaid expenses		42,760			71,218
Other assets		(5,394	)		-
Income tax deposit		(459,200	)		(5,848	)
Income tax payable		343,935			11,347
Accounts payable		(116,103	)		14,327
Accrued compensation expenses		82,055			96,844
Other current liabilities		26,110			26,598
Net cash provided by (used in) operating activities		262,261			(261,119	)
Cash flows from investing activities:
Purchase of property and equipment		(234,206	)		(147,112	)
Purchase of other assets		(45,212	)		-
Net cash used in investing activities		(279,418	)		(147,112	)
Net decrease in cash		(17,157	)		(408,231	)
Cash at beginning of period		1,645,433			2,203,018
Cash at end of period	$	1,628,276		$	1,794,787
Supplemental cash flow information
Cash paid for income taxes	$	459,200		$	41,258

See accompanying notes to the unaudited interim condensed financial statements.

Page 4 of 17

SIERRA MONITOR CORPORATION

Notes to the Interim Condensed Financial Statements

(Unaudited)

June 30, 2011

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, 2010 balances within these interim condensed financial statements were derived from the audited 2010 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, 2010, which was filed with the SEC on March 25, 2011. 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

The Company was formed in 1978 and delivers information technology for environment measurement and control by developing specialized embedded software that is deployed on proprietary hardware platforms. Embedded software enables data transfer between subsystems using protocol and physical medium translation. Proprietary hardware platforms allow the Company to increase the value proposition while protecting its intellectual property.

The Company’s hardware platforms include original equipment modules for installation in customer devices and controllers, gateway boxes generally used by integrators for machine to machine (“M2M”) protocol translation, and multi-component safety systems generally focused on gas and fire detection. Each of the hardware platforms utilize the Company’s proprietary data handling software allowing communication from lower level sensor systems through to the highest levels of Internet Protocol (“IP”) networks.

By providing an intelligent interface, the Company’s products enable various machines, devices, systems and people to reliably communicate useful information for the measurement and control of various environments including buildings, plants, factories and over the Internet. By delivering the data on various communications levels, including Ethernet, Internet, LONworks, Profibus, and others, the Company’s products make it possible for data to be accessed at more appropriate levels, such as control rooms or remote locations.

The Company’s products, including gas detection systems, environment controls for remote telephone company structures and protocol gateways, are based on complex proprietary software developed by the Company. The software, embedded in each of the Company’s product groups, provides key functions including sensor management, utilization of data for alarm and control purposes and delivery of data across various networks including the Internet.

Gas monitoring products manufactured by the Company are sold for a variety of safety applications including oil, gas and chemical processing plants, wastewater treatment facilities, alternate fuel vehicle maintenance garages and other users or producers of hazardous gases. Environment controllers, which provide management of environmental conditions in small structures such as local DSL distribution nodes and buildings at cell tower sites, are sold to telecommunications companies and their suppliers. The Company’s FieldServer products are sold generally to integration companies that implement building and plant automation projects and to manufacturers of equipment for the same industry.

Page 5 of 17

The Company’s common stock is quoted on the OTC Bulletin Board under the symbol “SRMC.OB”.

Accounting Policies

Revenue Recognition

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

Gas Detection and Environment Control Products

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

Gas Detection and Environment Control Services

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

FieldServer Products

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

Page 6 of 17

FieldServer Services

FieldServer services consist of orders for custom development of protocol drivers. Generally customers place orders for FieldServer products concurrently with their order for protocol drivers. However, if custom development of the protocol driver is required, the product order is not processed until development of the protocol driver is complete. Orders are received in the same manner as described in FieldServer Products above, but due to the non-recurring engineering aspect of the customized driver development the Company is more likely to have a written evidence trail of a quotation and a hard copy order. The driver development involves further research after receipt of order, preparation of a scope document to be approved by the customer and then engineering time to write, test and release the driver program. When development of the driver is complete the customer is notified and can proceed with a FieldServer product (see FieldServer Products above). Revenues for driver development are billed and recognized upon shipment or delivery of the related product that includes the developed protocol drivers (as noted in FieldServer Products above). Collectability is reasonably assured as described in FieldServer Products above.

Discounts and Allowances

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

Recent Accounting Pronouncements

Recent accounting pronouncements discussed in the notes to the December 31, 2010 audited financial statements, filed previously with the SEC in our Annual Report on Form 10-K on March 25, 2011, that are required to be adopted during the year ended December 31, 2010, did not have or are not expected to have a significant impact on the Company’s 2011 financial statements.

Employee Stock-Based Compensation

As of June 30, 2011, the Company had one approved stock-based employee compensation plan for issuing stock options, the 2006 Stock Plan. The Company’s 1996 Stock Plan expired by its terms in March 2006, but the 1996 Stock Plan will continue to govern awards previously granted thereunder that have not expired or otherwise terminated.

Under the 2006 Stock Plan, the Company initially reserved 500,000 shares of common stock for issuance. Stock options are granted under the 2006 Stock Plan at the fair market value of the Company's common stock at the grant date, vest ratably over 4 years, and expire 10 years from the grant date. Prior to January 1, 2006, stock-based compensation cost related to stock options was not recognized in net income since the stock options underlying those plans had exercise prices greater than or equal to the market value of the underlying stock on the date of the grant.

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.

Page 7 of 17

For the six-month periods ended June 30, 2011 and 2010, general and administrative expenses included $39,410 and $53,146, respectively, 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 income 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, 2011 and 2010.

Inventories

A summary of inventories follows:

	June 30, 2011			December 31, 2010
Raw materials	$	985,305		$	798,986
Work-in-process		863,087			700,264
Material at vendor		321,062			394,677
Finished goods		403,465			323,142
Less: Allowance for obsolescence reserve		(122,066	)		(102,066	)
	$	2,450,853		$	2,115,003

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

At June 30, 2011 and 2010, outstanding options to acquire 192,000 and 233,500, 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 six-month periods ended June 30, 2011 and 2010, respectively:

	Three months ended				Six months ended
	June 30, 2011		June 30, 2010		June 30, 2011		June 30, 2010
Basic EPS – weighted-average number of common shares outstanding		9,896,942		11,448,045		9,896,942		11,443,129
Effect of dilutive potential common shares – stock options outstanding		244,667		154,520		237,852		163,401
Diluted EPS – weighted-average number of common shares and potential common shares outstanding		10,141,609		11,602,565		10,134,794		11,606,530

Concentrations

No customer accounted for more than 10% of accounts receivable at June 30, 2011 and at December 31, 2010. No customer individually made up more than 10% of net sales for the three and six-month periods ended June 30, 2011 or June 30, 2010.

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 $1,378,000 and $1,395,000 were in excess of such insured amounts at June 30, 2011 and December 31, 2010, respectively.

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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 June 30,				Six months ended June 30,
	2011		2010		2011		2010
Gas detection devices	$	1,922,967	$	1,498,549	$	3,645,726	$	2,775,988
Environment controllers		226,833		226,429		562,506		484,616
FieldServers		1,834,561		1,792,754		3,944,546		3,160,208
	$	3,984,361	$	3,517,732	$	8,152,778	$	6,420,812

Line of Credit

The Company maintains a line of credit with its commercial bank in the maximum amount of $1,000,000. No borrowings have been made under the Company’s line of credit during the first six months of fiscal year 2011 and there were no outstanding balances at June 30, 2011 and December 31, 2010. As of June 30, 2011, the Company was in compliance with covenants required by the line of credit.

Stock Option Grants

A total of 143,000 stock options were granted during the three and six-month periods ended June 30, 2011. No stock options were granted during the three and six-month periods ended June 30, 2010.

Stock Option Exercise and Expiration

In the six-month period ended June 30, 2011, a total of 4,235 shares of common stock were issued as a result of employee net exercises of stock options. During the same period, 2,000 options expired.

In the six-month period ended June 30, 2010, a total of 7,864 shares of common stock were issued as a result of employee net exercises of stock options. During the same period, 15,500 options expired.

Page 9 of 17

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 indentified in Item1A, Risk Factors, of our Annual Report on Form 10-K for our fiscal year ended December 31, 2010, as such section may be updated in our subsequent Forms 10-K, 10-Q and 8-K filed with, or furnished to, the SEC and elsewhere. We urge you to review and consider the various disclosures made by us from time to time in our filings with the SEC that attempt to advise you of the risks and factors that may affect our future results. We expressly disclaim any obligation to release publicly any updates or revisions to any forward-looking statement to reflect any changes in expectations, or any change in events or circumstances on which those statements are based, unless otherwise required by law.

Results of Operations

For the three-month period ended June 30, 2011, Sierra Monitor Corporation (“we” or the “Company”) reported net sales of $3,984,361 compared to $3,517,732 for the three-month period ended June 30, 2010. For the six-month period ended June 30, 2011, net sales were $8,152,778 compared with $6,420,812 for the six-month period ended June 30, 2010. The sales results for the three and six-month periods ended June 30, 2011 represent increases of 13% and 27%, respectively, compared to the same periods in 2010.

For the three-month period ended June 30, 2011, sales of our gas detection products, including industrial accounts and military sales, were approximately $1,923,000 compared to $1,499,000 in the three-month period ended June 30, 2010. For the six-month period ended June 30, 2011, sales of our gas detection products, including industrial accounts and military sales, were approximately $3,646,000 compared to $2,776,000 in the same period in 2010. These results represent a 28% year-over-year increase in the second quarter and a 31% year-over-year increase in the year-to-date period. The increase in sales of gas detection products is due, in part to a higher level of military shipments. Military sales cycles are unpredictable because they are dependent upon US Navy purchases of gas detection systems for new ships and related spare part purchase cycles. Our industrial account sales also increased as a result of generally stronger demand for our smart gas detection modules that can be used for stand-alone applications or for integration into larger gas detection systems.

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Sales of Environment Controllers to the telecommunications industry in the three-month period ended June 30, 2011 were approximately $227,000 compared to approximately $226,000 in the three-month period ended June 30, 2010. In the six-month period ended June 30, 2011 sales of Environment Controllers were approximately $563,000 compared to $485,000 in the same period in 2010. The improvement in sales to the telecommunications industry is due to a small increase in the number of environment controllers sold for new underground telecommunications vaults combined with improved demands for retro-fit controllers for older telecommunications vaults.

In the three-month period ended June 30, 2011, sales of FieldServer products were approximately $1,835,000, representing a 2% increase, compared to $1,793,000 in the same period in 2010. In the six-month period ended June 30, 2011, sales of our FieldServer products were approximately $3,945,000, representing a 25% increase, compared to $3,160,000 in the same period in 2010. FieldServer products include box products and original equipment manufacturer (“OEM”) modules. Box products provide a platform for delivery and operation of our software for building automation integration and are generally sold to integrators. Box product sales decreased approximately 12% in the three-month period ended June 30, 2011 on a year-over-year basis. In the second quarter of 2010 box product sales were significantly higher primarily due to a single international order; there was no comparable order in the second quarter of 2011.Box product sales decreased approximately 12% in the three-month period ended June 30, 2011 on a year-over-year basis. The decrease in sales of box products is due, primarily, to single order for over $150,000 in 2010 for a major fire panel integration project in Saudi Arabia. OEM module sales increased approximately 27% in the three-month period ended June 30, 2011 as compared to the same period in 2010, and 58% on a year-to-date basis in 2011 compared to the prior year period. The higher level of sales in each of the three and six-month periods ended June 30, 2011 reflect sustained deliveries to mature accounts, continued improvements in run rates for recent adopter customers and incremental sales to new customers.

Gross profit for the three-month period ended June 30, 2011 was $2,355,508 or 59% of sales compared to $2,085,289, or 59% of sales, in the same period in the previous year. Gross profit for the six-month period ended June 30, 2011 was $4,864,651, or 60% of sales, compared to $3,764,327, or 59% of sales, in the same period in the previous year. Although gross profit varies by product group and by the channel of distribution, the range of gross profit between 59% and 60% is consistent with our historical experience. There have been no major changes in selling prices and no significant changes in materials or labor costs during calendar year 2010 and year to date 2011.

Expenses for research and development, which include new product development and engineering to sustain existing products, were $549,992, or 14% of sales, for the three-month period ended June 30, 2011 compared to $503,908, or 14% of sales, in the comparable period in 2010. In the six-month periods ended June 30, 2011 and June 30, 2010, research and development expenses were $1,095,066, or 13% of sales, and $986,930, or 15% of sales, respectively. We have maintained our investments in developing new products and writing new protocol drivers. Increases in professional labor expense and facility rent combined with costs related to building prototypes of new products contributed to the higher expenses for research and development. There have been no other significant changes in engineering expenses in the three and six-month reporting periods ended June 30, 2011.

Selling and marketing expenses, which consist primarily of salaries, commissions and promotional expenses were $917,515, or 23% of sales for the three-month period ended June 30, 2011, compared to $842,514, or 24% of sales, in the comparable period in the prior year. For the six-month periods ended June 30, 2011 and June 30, 2010, selling and marketing expenses were $1,801,954, or 22% of sales, and $1,674,490, or 26% of sales, respectively. Sales labor expenses increased in the current year due to a return to full staffing level of the sales team. Commission expenses for independent sales representatives increased consistent with the increase in gas detection products sales levels.

General and administrative expenses, which consist primarily of salaries, building rent, insurance expenses and fees for professional services, were $509,643 or 13% of sales, for the three-month period ended June 30, 2011 compared to $489,104 or 14% of sales, in the three-month period ended June 30, 2010. For the six-month periods ended June 30, 2011 and June 30, 2010, general and administrative expenses were $1,061,860, or 13% of sales, and $975,343, or 15% of sales, respectively. Higher wage and salary expenses due to headcount increases combined with higher depreciation and higher Information Technology (IT) expenses contributed to the overall increase in general and administrative expenses in both the three-month and six-month periods of 2011.

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In the three-month period ended June 30, 2011, our income from operations was $378,358, representing an increase of $128,595 compared to our income from operations of $249,763 in the three-month period ended June 30, 2010. In the six-month period ended June 30, 2011, our income from operations was $905,771, representing an increase of $778,207 compared to our income from operations of $127,564 in the six-month period ended June 30, 2010. The increased income in the three and six-month periods ended June 30, 2011 is due to higher sales levels without compromise to gross margins or fixed expenses.

After interest and tax provisions, our net income for the three-month period ended June 30, 2011 was $227,203 compared to net income of $150,812 in the same period of 2010. For the six-month period ended June 30, 2011, our net income was $543,824 compared to a net income of $77,706 in the same period of 2010.

Liquidity and Capital Resources

During the six months ended June 30, 2011, net cash provided by operating activities was approximately $262,000 compared to net cash consumed of approximately $261,000 for the same period in 2010. Working capital was approximately $5,153,000 at June 30, 2011, an increase of approximately $437,000 from December 31, 2010. At June 30, 2011, our balance sheet reflected approximately $1,628,000 of cash and $1,747,000 of net trade receivables. At December 31, 2010, our total cash on hand was approximately $1,645,000 and our net trade receivables were $1,709,000.

At June 30, 2011, we had no long term liabilities.

We maintain a $1,000,000 line of credit, secured by certain assets of the Company, with our commercial bank which matures on September 10, 2011. The line of credit requires annual renewal and compliance with certain restrictive covenants, including the requirement to maintain a quick ratio of 1.3:1.0 and a profitability test. At June 30, 2011, the Company was in compliance with the financial covenants and there were no borrowings on this line of credit.

We believe that our present resources, including cash and accounts receivable, are sufficient to fund the Company’s anticipated level of operations through at least January 1, 2012. There are no current plans for significant capital equipment expenditures and no other known demands, commitments, events or uncertainties that will result in or that are reasonably likely to result in the Company’s liquidity increasing or decreasing in any material way.

Critical Accounting Policies

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

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Revenue Recognition

Gas Detection and Environment Control Products

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

Gas Detection and Environment Control Services

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

FieldServer Products

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FieldServer Services

FieldServer services consist of orders for custom development of protocol drivers. Generally customers place orders for FieldServer products concurrently with their order for protocol drivers. However if custom development of the protocol driver is required, the product order is not processed until development of the protocol driver is complete. Orders are received in the same manner as described in FieldServer Products above, but due to the non-recurring engineering aspect of the customized driver development the Company is more likely to have a written evidence trail of a quotation and a hard copy order. The driver development involves further research after receipt of order, preparation of a scope document to be approved by the customer and then engineering time to write, test and release the driver program. When development of the driver is complete the customer is notified and can proceed with a FieldServer product (see FieldServer Products above). Revenues for driver development are billed and recognized upon shipment or delivery of the related product that includes the developed protocol drivers (as noted in FieldServer Products above). Collectability is reasonably assured as described in FieldServer Products above.

Discounts and Allowances

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

Accounts Receivable and Related Allowances

Our domestic sales are generally made on an open account basis unless specific experience or knowledge of the customer’s potential inability or unwillingness to meet the payment terms dictate secured payments. Our international sales are generally made based on secure payments, including cash wire advance payments and letters of credit. International sales are made on open account terms where sufficient historical experience justifies the credit risks involved. In many of our larger sales, the customers are frequently construction contractors who are in need of our field services to complete their work and obtain payment. Management’s ability to manage the credit terms and take advantage of the leverage provided by the clients’ need for our services is critical to the effective application of credit terms and minimization of accounts receivable losses.

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

Inventories

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

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ITEM 4: CONTROLS AND PROCEDURES

Evaluation of disclosure controls and procedures. Our management evaluated, with the participation of Gordon R. Arnold, our principal executive and principal financial officer, the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on this evaluation, Mr. Arnold has concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report to ensure that information we are required to disclose in reports that we file or submit under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms.

Changes in internal control over financial reporting. There was no change in our internal control over financial reporting 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.

Inherent Limitations of Internal Controls. Our management, including our principal executive and principal financial officer, does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent or detect all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. The design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Further, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within us have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving our stated goals under all potential future conditions. Projections of any evaluation of the effectiveness of controls to future periods are subject to risks. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

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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.
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		Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

(1)

Incorporated by reference to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 1989.

(2)

Incorporated by reference to the Company’s 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.

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 10, 2011	By:	/s/ Gordon R. Arnold
		Gordon R. Arnold
		President
		Chief Executive Officer
		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.
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		Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

(1)

Incorporated by reference to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 1989.

(2)

Incorporated by reference to the Company’s 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.

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SIERRA MONITOR CORP /CA/ - FORM 10-Q - August 10, 2011

Attached files

SIERRA MONITOR CORP /CA/ Reports