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 September 30, 2009



or



[  ]

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 past 12 months (or for such shorter period that the registrant was required to filed such reports), and (2) has been subject to such filing requirements for the last 90 days.                                                                                       Yes [X]    No [  ]



Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).                                Yes [  ]    No [  ]



Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See the definitions of large accelerated filer,  accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.

|                                                                                                                                                                            
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Large accelerated filer [  ]
Accelerated filer                [   ]
Non-accelerated filer   [  ] (Do not check if a smaller reporting company)
Smaller reporting company [X]



Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes [  ]   No [X]



The number of shares outstanding of the registrants common stock, par value $0.001 per share, was 11,438,212, as of November 12, 2009.



Page 1 of 21

---







PART I:  FINANCIAL INFORMATION

|                                                                                 
|---------------------------------------------------------------------------------
|ITEM 1.  FINANCIAL STATEMENTS
SIERRA MONITOR CORPORATION
Condensed Balance Sheets



|                                                                                                                                    |  |   |                                |  |   |                  
|----------------------------------------------------------------------------------------------------------------------------------- |  | - | ------------------------------ |  | - | -----------------
|Assets                                                                                                                              |  |   | September 30,
2009
(unaudited) |  |   | December 31,
2008
|Current assets:                                                                                                                     |  |   |                                |  |   |                  
|Cash                                                                                                                                |  | $ | 1,764,026                      |  | $ | 1,338,647        
|Trade receivables, less allowance for doubtful accounts of                                                                          |  |   |                                |  |   |                  
|approximately $82,000 in 2009 and $89,000 in 2008,
respectively,                                                                    |  |   | 1,703,137                      |  |   | 1,661,846        
|Inventories, net                                                                                                                    |  |   | 1,852,116                      |  |   | 1,968,006        
|Prepaid expenses                                                                                                                    |  |   | 190,725                        |  |   | 189,389          
|Income tax deposits                                                                                                                 |  |   | 79,550                         |  |   | 48,295           
|Deferred income taxes - current                                                                                                     |  |   | 297,442                        |  |   | 299,421          
|Total current assets                                                                                                                |  |   | 5,886,996                      |  |   | 5,505,604        
|Property and equipment, net                                                                                                         |  |   | 275,190                        |  |   | 380,987          
|Other assets                                                                                                                        |  |   | 170,916                        |  |   | 185,015          
|Total assets                                                                                                                        |  | $ | 6,333,102                      |  | $ | 6,071,606        
|Liabilities and Shareholders Equity                                                                                                |  |   |                                |  |   |                  
|Current liabilities:                                                                                                                |  |   |                                |  |   |                  
|Accounts payable                                                                                                                    |  | $ | 569,881                        |  | $ | 521,823          
|Accrued compensation expenses                                                                                                       |  |   | 369,139                        |  |   | 385,306          
|Other current liabilities                                                                                                           |  |   | 102,424                        |  |   | 98,332           
|Income taxes payable                                                                                                                |  |   | 60,730                         |  |   | 6,272            
|Total current liabilities                                                                                                           |  |   | 1,102,174                      |  |   | 1,011,733        
|Deferred tax liability                                                                                                              |  |   | 42,498                         |  |   | 42,498           
|Total liabilities                                                                                                                   |  |   | 1,144,672                      |  |   | 1,054,231        
|                                                                                                                                    |  |   |                                |  |   |                  
|Commitments and contingencies
Shareholders' equity:                                                                                 |  |   |                                |  |   |                  
|Common stock, $0.001 par value; 20,000,000 shares authorized;
11,438,212 and 11,428,212 shares issued and outstanding,
respectively |  |   | 11,438                         |  |   | 11,428           
|Additional paid-in capital                                                                                                          |  |   | 3,568,543                      |  |   | 3,485,964        
|Retained earnings                                                                                                                   |  |   | 1,608,449                      |  |   | 1,519,983        
|Total shareholders' equity                                                                                                          |  |   | 5,188,430                      |  |   | 5,017,375        
|Total liabilities and shareholders equity                                                                                          |  | $ | 6,333,102                      |  | $ | 6,071,606        
|See accompanying notes to the unaudited interim condensed financial statements.                                                     |  |  



Page 2 of 21

---







SIERRA MONITOR CORPORATION

Condensed Statements of Operations

(Unaudited)



|                                                                                |                        |                                  |           |                                 |           |            |           |            |          
|------------------------------------------------------------------------------- | ---------------------- | -------------------------------- | --------- | ------------------------------- | --------- | ---------- | --------- | ---------- | ---------
|                                                                                |                        | Three months ended
September 30, |           | Nine months ended
September 30,
|                                                                                |                        | 2009                             |           | 2008                            |           | 2009       |           | 2008      
|Net sales                                                                       | $                      | 3,323,758                        | $         | 3,831,832                       | $         | 9,530,536  | $         | 10,435,056
|Cost of goods sold                                                              |                        | 1,289,377                        |           | 1,659,692                       |           | 3,895,118  |           | 4,326,116 
|                                                                                | Gross profit           |                                  | 2,034,381 |                                 | 2,172,140 |            | 5,635,418 |            | 6,108,940
|Operating expenses                                                              |                        |                                  |           |                                 |           |            |           |           
|Research and development                                                        |                        | 516,794                          |           | 485,446                         |           | 1,500,472  |           | 1,452,992 
|Selling and marketing                                                           |                        | 825,279                          |           | 880,050                         |           | 2,526,805  |           | 2,516,384 
|General and administrative                                                      |                        | 473,180                          |           | 522,600                         |           | 1,460,697  |           | 1,499,854 
|                                                                                |                        |                                  | 1,815,253 |                                 | 1,888,096 |            | 5,487,974 |            | 5,469,230
|                                                                                | Income from operations |                                  | 219,128   |                                 | 284,044   |            | 147,444   |            | 639,710  
|Income tax  provision                                                           |                        | 87,651                           |           | 114,364                         |           | 58,978     |           | 269,762   
|                                                                                | Net income             | $                                | 131,477   | $                               | 169,680   | $          | 88,466    |            | 369,948  
|Net income available to common shareholders per common share                    |                        |                                  |           |                                 |           |            |           |           
|Basic:                                                                          | $                      | 0.01                             | $         | 0.02                            | $         | 0.01       | $         | 0.03      
|Diluted:                                                                        | $                      | 0.01                             | $         | 0.01                            | $         | 0.01       | $         | 0.03      
|Weighted average number of common shares used in per share computations         |                        |                                  |           |                                 |           |            |           |           
|Basic:                                                                          |                        | 11,438,212                       |           | 11,423,212                      |           | 11,432,656 |           | 11,291,199
|Diluted:                                                                        |                        | 11,764,928                       |           | 11,849,025                      |           | 11,767,161 |           | 11,915,070
|See accompanying notes to the unaudited interim condensed financial statements.



Page 3 of 21

---







| |  |  |  |  |  |  |  |  | 
| |  |  |  |  |  |  |  |  | 

SIERRA MONITOR CORPORATION

Condensed Statements of Cash Flows

(Unaudited)





|                                                                                |                                                                                             |                                              |          |                                 |           |          
|------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------- | -------------------------------------------- | -------- | ------------------------------- | --------- | ---------
|                                                                                |                                                                                             |                                              |          | Nine months ended
September 30,
|                                                                                |                                                                                             |                                              |          | 2009                            |           | 2008     
|Cash flows from operating activities:                                           |                                                                                             |                                              |          |                                
|                                                                                | Net income                                                                                  | $                                            | 88,466   | $                               | 369,948  
|                                                                                | Adjustments to reconcile net income to net cash provided by (used in) operating activities: |                                              |          |                                 |          
|                                                                                |                                                                                             | Depreciation and amortization                |          | 214,666                         |           | 188,773  
|                                                                                |                                                                                             | Provision for bad debt expense               |          | 23,081                          |           | (1,625)  
|                                                                                |                                                                                             | Allowance for inventory obsolescence         |          | (8,000)                         |           | -        
|                                                                                |                                                                                             | Stock based compensation expense             |          | 76,589                          |           | 80,574   
|                                                                                |                                                                                             | Loss on disposal of assets                   |          | 1,737                           |           | -        
|                                                                                |                                                                                             | Changes in operating assets and liabilities: |          |                                 |           |          
|                                                                                |                                                                                             | Trade receivables                            |          | (64,372)                        |           | 134,721  
|                                                                                |                                                                                             | Inventories                                  |          | 123,890                         |           | 32,281   
|                                                                                |                                                                                             | Prepaid expenses and other current assets    |          | (1,336)                         |           | (225)    
|                                                                                |                                                                                             | Income tax deposit                           |          | (31,255)                        |           | (158,286)
|                                                                                |                                                                                             | Deferred income taxes                        |          | 1,979                           |           | (2,558)  
|                                                                                |                                                                                             | Accounts payable                             |          | 48,058                          |           | 220,338  
|                                                                                |                                                                                             | Accrued compensation expenses                |          | (16,167)                        |           | 286,743  
|                                                                                |                                                                                             | Income taxes payable                         |          | 54,457                          |           | (80,726) 
|                                                                                |                                                                                             | Other current liabilities                    |          | 4,093                           |           | (22,406) 
|                                                                                |                                                                                             | Net cash provided by operating activities    |          | 515,886                         |           | 1,047,552
|Cash flows from investing activities:                                           |                                                                                             |                                              |          |                                
|                                                                                | Property and equipment                                                                      |                                              | (96,507) |                                 | (270,886)
|                                                                                |                                                                                             | Net cash used in investing activities        |          | (96,507)                        |           | (270,886)
|Cash flows from financing activities:                                           |                                                                                             |                                              |          |                                
|                                                                                | Proceeds from exercise of stock options                                                     |                                              | 6,000    |                                 | 6,550    
|                                                                                |                                                                                             | Net cash provided by financing activities    |          | 6,000                           |           | 6,550    
|Net increase in cash                                                            |                                                                                             | 425,379                                      |          | 783,216                        
|Cash at beginning of period                                                     |                                                                                             | 1,338,647                                    |          | 675,108                        
|Cash at end of period                                                           | $                                                                                           | 1,764,026                                    | $        | 1,458,324                      
|Supplemental cash flow information                                              |                                                                                             |                                              |          |                                
|Cash paid for income taxes                                                      | $                                                                                           | 31,248                                       | $        | 101,000                        
|Cash paid for interest                                                          | $                                                                                           | -                                            | $        | -                              
|See accompanying notes to the unaudited interim condensed financial statements. |                                                                                             |                                             



Page 4 of 21

---







SIERRA MONITOR CORPORATION

Notes to the Unaudited Interim Condensed Financial Statements



September 30, 2009

Basis of Presentation

The accompanying unaudited 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 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, 2008 balances within these condensed financial statements were derived from the audited 2008 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, 2008, which was filed with the SEC on March 26, 2009.  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 communication 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.



Page 5 of 21

---







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 telecommunication 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.

The Companys common stock is quoted on the OTC Bulletin Board under the symbol SRMC.OB.

Accounting Policies

a)

Revenue Recognition

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



Gas Detection and Environment Control Products

Gas Detection and Environment Control products are sold as off-the-shelf products with prices fixed at the time of order. Orders delivered to the Company by phone, fax, mail or email are considered valid purchase orders and once accepted by the Company are deemed to be the final understanding between us and our customer as to the specific nature and terms of the agreed-upon sale transaction.  Products are shipped and are considered delivered when (a) for FOB factory orders, they leave our shipping dock or (b) for FOB customer dock orders, upon confirmation of delivery.  The creditworthiness of customers is generally assessed prior to the Company accepting a customers first order. The Company purchases credit insurance through the Export-Import Bank of the United States to insure payment of small international orders that are released on open credit.  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 in advance of the provision of services for immediate processing.



Page 6 of 21

---







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 FieldServers, 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.



FieldServer Services

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

Discounts and Allowances

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

b)

Significant Recent Accounting Pronouncements

Effective September 30, 2009, the Company adopted the FASBs new Accounting Standard Codification (ASC) as a single source of authoritative accounting guidance under the Generally Accepted Accounting Principles Topic.  The ASC does not create new accounting and reporting guidance, rather it reorganizes GAAP pronouncements into approximately 90 topics within a consistent structure.  All guidance in the ASC carries an equal level of authority.  Relevant portions of authoritative content, issued by the SEC, for SEC registrants, have been included in the ASC.  After the effective date of the ASC, all non-grandfathered, non-SEC accounting literature not included in the ASC is superseded and deemed non-authoritative.  Adoption of the ASC also changed how the Company references GAAP in its financial statements.



Page 7 of 21

---







Recent accounting pronouncements discussed in the notes to the Companys December 31, 2008 audited financial statements, filed previously with the SEC on Form 10-K on March 26, 2009, that are required to be adopted during the year ending December 31, 2009, did not have or are not expected to have a significant impact on the Companys 2009 financial statements, except for the following:

Effective June 30, 2009, the Company adopted new guidance to the Subsequent Events Topic of the FASB ASC.  The Subsequent Events Topic establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued.  Management is required to disclose the date through which subsequent events were evaluated as well as the date the financial statements were issued or available to be issued.  Adoption of this guidance did not have any impact on the Companys condensed financial statements.   The Company evaluated subsequent events through November 12, 2009, the filing date of this quarterly report on Form 10-Q with the SEC.



c)

Employee Stock-Based Compensation



At September 30, 2009, the Company had one approved stock-based employee compensation plan, 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.



Effective January 1, 2006, all share-based payments to employees 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 adoption. No adjustments have been made to periods prior to January 1, 2006. Under this transition method, compensation expense for share-based awards granted prior to January 1, 2006, but not yet vested as of January 1, 2006, is recognized in the Company's financial statements over their remaining service period. The cost is based on the grant date fair value and compensation expense recognized in future periods for share-based compensation granted prior to adoption of the standard will be adjusted for the effects of estimated forfeitures.



For the nine-month periods ended September 30, 2009 and 2008, general and administrative expenses had an increase of $76,589 and $80,574, respectively, with a corresponding decrease in the Company's income from continuing operations, income before provision for income taxes and net income 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. The Company did not modify the terms of any previously granted stock options during the nine-month periods ended September 30, 2009 and 2008.



Page 8 of 21

---







Inventories

A summary of inventories at September 30, 2009 follows:



|                                 |  |   |                    |  |   |                  
|-------------------------------- |  | - | ------------------ |  | - | -----------------
|                                 |  |   | September 30,
2009 |  |   | December 31,
2008
|Raw materials                    |  | $ | 813,269            |  | $ | 809,507          
|Work-in-process                  |  |   | 730,941            |  |   | 742,478          
|Material at vendor               |  |   | 214,179            |  |   | 290,557          
|Finished goods                   |  |   | 202,900            |  |   | 234,637          
|Less: Allowance for obsolescence |  |   | (109,173)          |  |   | (109,173)        
|                                 |  | $ | 1,852,116          |  | $ | 1,968,006        



Net Income Per Share

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

For the year-to-date period ended September 30, 2009, options to acquire 17,000 common shares were not considered dilutive potential common shares as their exercise prices were greater than the average market price of the Companys common stock during that same period.

For the year-to-date period ended September 30, 2008, no options to acquire common shares were excluded from the diluted potential common shares as the average market price of the Companys common stock was greater than all exercise prices during that same period.

The following is a reconciliation of the shares used in the computation of basic and diluted EPS for the three and nine month periods ended September 30, 2009 and 2008, respectively:



|                                                                                               |  |                                       |  |                                       |  |                                      |  |                                     
|---------------------------------------------------------------------------------------------- |  | ------------------------------------- |  | ------------------------------------- |  | ------------------------------------ |  | ------------------------------------
|                                                                                               |  | Three months
ended
September 30,
2009 |  | Three months
ended
September 30,
2008 |  | Nine months
ended
September 30,
2009 |  | Nine months
ended
September 30,
2008
|Basic EPS  weighted-average number of common shares outstanding                               |  | 11,438,212                            |  | 11,423,212                            |  | 11,432,656                           |  | 11,291,199                          
|Effect of dilutive potential common shares  stock options outstanding                         |  | 326,716                               |  | 425,813                               |  | 334,505                              |  | 623,871                             
|Diluted EPS  weighted-average number of common shares and potential common shares outstanding |  | 11,764,928                            |  | 11,849,025                            |  | 11,767,161                           |  | 11,915,070                          

Comprehensive Income

The Company has no significant components of other comprehensive income and accordingly, comprehensive income is the same as net income for all periods presented.



Page 9 of 21

---







Concentrations

One customer accounted for more than 10% of accounts receivable at September 30, 2009 and no customers accounted for more than 10% of accounts receivable at December 31, 2008.  No customers contributed more than 10% of sales for each of the three and nine-month periods ended September 30, 2009.  One customer, a division of Sinopec, China, contributed approximately 19% of net sales for the three-month period ended September 30, 2008.

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 $1,515,000 and $1,090,000 were in excess of such insured amounts at September 30, 2009 and December 31, 2008, respectively.



Segment Information



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

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



|                      |                         |  |                                  |           |                                 |   |           |           |      |           |           |   |           |            |  |  |  |  |  |  |  |  |  |  |  |  |  | 
|--------------------- | ----------------------- |  | -------------------------------- | --------- | ------------------------------- | - | --------- | --------- | ---- | --------- | --------- | - | --------- | ---------- |  |  |  |  |  |  |  |  |  |  |  |  |  | 
|                      |                         |  | Three months ended
September 30, |           | Nine months ended
September 30,
|                      |                         |  | 2009                             |           | 2008                            |   | 2009      |           | 2008
|Gas detection devices |                         |  | $                                | 1,531,507 |                                 | $ | 2,206,012 |           | $    | 4,800,952 |           | $ | 5,585,220
|                      | Environment controllers |  |                                  |           | 236,540                         |   |           | 311,489   |      |           | 574,604   |   |           | 782,046   
|                      | FieldServers            |  |                                  |           | 1,555,712                       |   |           | 1,314,331 |      |           | 4,154,980 |   |           | 4,067,790 
|                      |                         |  |                                  | $         | 3,323,758                       |   | $         | 3,831,832 |      | $         | 9,530,536 |   | $         | 10,435,056

Line-of-Credit

In August 2009, the Company extended the term of its $1,000,000 line of credit with a commercial bank until September 2010 under substantially the same terms.  No borrowings have been made under the Companys line of credit during the first nine months of fiscal year 2009 and there were no outstanding balances at September 30, 2009 and December 31, 2008.  As of September 30, 2009, the Company was in compliance with covenants required by the line of credit.

Stock Option Grants

No stock options were granted during the three and nine-month periods ended September 30, 2009.  During the nine-month period ended September 30, 2008, a total of 14,000 stock options were granted under the Companys 2006 Stock Plan with an exercise price of $1.50 per share.  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.  Such stock options had a per-share grant date fair value of $1.48, as calculated by the Black-Scholes option pricing model using the following assumptions: expected life of 8 years; estimated volatility of 177%; risk-free interest rate of 2.8%; and no expected dividends.  Stock-based compensation expense related to these 14,000 stock options was immaterial for the nine months ended September 30, 2008 and is included in the previously disclosed amount of employee stock-based compensation.



Page 10 of 21

---







Stock Option Exercise and Expiration

In the nine-month period ended September 30, 2009, stock options to purchase an aggregate of 10,000 shares of the Companys common stock were exercised by employees resulting in cash proceeds to the Company of $6,000.    During the same period, stock options to purchase an aggregate of 3,000 shares of the Companys common stock expired.



In the nine-month period ended September 30, 2008, stock options to purchase an aggregate of 10,000 shares of the Companys common stock were exercised by employees resulting in cash proceeds to the Company of $6,550.  In addition, a total of 263,020 shares of common stock were issued as a result of employee net exercises of stock options.  During the same period, stock options to purchase an aggregate of 27,750 shares of the Companys common stock expired.



Page 11 of 21

---







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, 2008, 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 September 30, 2009, Sierra Monitor Corporation (we or the Company) reported net sales of $3,323,758 compared to $3,831,832 for the three-month period ended September 30, 2008.  For the nine-month period ended September 30, 2009, net sales were $9,530,536 compared with $10,435,056 in the prior year nine-month period.  The sales results for the three and nine-month periods ended September 30, 2009 represent decreases of 13% and 9%, respectively, compared to the same periods in 2008.

For the three-month period ended September 30, 2009, sales of our gas detection products were approximately $1,532,000 compared to $2,206,000 in the three-month period ended September 30, 2008.  For the nine-month period ended September 30, 2009, our gas detection product sales were approximately $4,801,000 compared to $5,585,000 in the same period in 2008.  These results represent a 31% year-over-year decrease in the third quarter and a 14% year-over-year decrease in the year-to-date period.  During the third quarter of 2008, we shipped a single large order of approximately $700,000 to a division of Sinopec, China.  The reduction in sales of gas detection systems in both the third quarter and year to date periods of 2009, compared to the same periods in 2008, is primarily due to the fact that there was no equivalent order sold in the third quarter of 2009.

Sales of Environment Controllers to the telecommunications industry in the three-month period ended September 30, 2009 were approximately $237,000 compared to $311,000 in the three-month period ended September 30, 2008.  In the nine-month period ended September 30, 2009, sales of Environment Controllers were approximately $575,000 compared to $782,000 in the same period in 2008.  During 2008, we sold equipment and services to a project to upgrade and expand a monitoring system for a major cable communications company.  The reduction in sales of Environment Controllers in both the third quarter and year to date periods of 2009, compared to the same periods in 2008, is in part due to the fact that there was no equivalent project sold during the first nine months of 2009.  In addition, sales of spare parts and upgrades for our existing customers were lower in 2009 as maintenance budgets and personnel have been reduced in the major US telecommunications companies.



Page 12 of 21

---







In the three-month period ended September 30, 2009, sales of FieldServer products were approximately $1,556,000, compared to $1,314,000 in the same period in 2008. In the nine-month period ended September 30, 2009, sales of our FieldServer products were approximately $4,155,000, compared to $4,068,000 in sales reported in the same period in 2008. These results represent an 18% year-over-year increase in the third quarter and a 2% year-over-year increase in the year-to-date period.

FieldServer sales include box products generally sold to building automation integrators and electronic modules sold directly to original equipment manufacturers (OEM).  Sales of box products have been generally lower in 2009 compared with 2008 due to weakness in the U.S. building automation market. Sales of OEM modules increased approximately 90% in the three-month period ended September 30, 2009 as compared to the same period in 2008, and 24% on a year-to-date basis in 2009 compared to the prior year period.  The higher level of OEM sales in each of the three and nine-month periods ended September 30, 2009 reflect, in part, the launch of a program to supply modules to a major U.S. manufacturer of controls for mid to large size air-conditioning systems.  Box product sales include shipment in the third quarter of 2009 of an order valued at more than $275,000 for the KAUST University in Saudi Arabia.

Gross profit of $2,034,381 for the three-month period ended September 30, 2009 was 61% of sales compared to $2,172,140, or 57% of sales, in the same period in the previous year.  Gross profit for the nine-month period ended September 30, 2009 was $5,635,418, or 59% of sales, compared to $6,108,940, or 59% of sales, in the same period in the previous year.  In the third quarter of 2009, the gross margin was lower than historical levels as a result of the low profit margin on the large sale of gas detection products to a division of Sinopec, China discussed above.  Margins in the third quarter and year to date periods in 2009 are approximately at our target levels.

Expenses for research and development, which include new product development and engineering to sustain existing products, were $516,794, or 16% of sales, for the three-month period ended September 30, 2009 compared to $485,446, or 13% of sales, in the comparable period in 2008.  In the nine-month periods ended September 30, 2009 and September 30, 2008, research and development expenses were $1,500,472, or 16% of sales, and $1,452,992, or 14% of sales, respectively.  We have continued our investment in new product development including a new central controller for gas detection systems to be introduced in the first quarter of 2010 and several new FieldServer and ProtoCessor products.  The increase in research and development expenses is due, primarily to the cost of projects related to the new product development.  We currently plan to continue the higher level of research and development activity to capitalize on identified opportunities.

Selling and marketing expenses, which consist primarily of salaries, commissions and promotional expenses were $825,279, or 25% of sales for the three-month period ended September 30, 2009, compared to $880,050, or 23%, in the comparable period in the prior year.  For the nine-month periods ended September 30, 2009 and 2008, selling and marketing expenses were $2,526,805, or 27% of sales, and $2,516,384, or 24% of sales, respectively.  In both the three and nine-month periods ended September 30, 2009, increased salary and benefit expenses due to an increase in the number of sales professionals were offset by lower commissions to representatives and lower marketing expenses.  The lower expenses were also partially offset by a one time employee relocation expense incurred in the third quarter of 2009.  Additionally, we have reduced our advertising and trade show participation and continued a transition toward increased Internet advertising.

General and administrative expenses, which consist primarily of salaries, building rent, insurance expenses and fees for professional services, were $473,180 or 14% of sales, for the three-month period ended September 30, 2009 compared to $522,600 or 14% of sales, in the three-month period ended September 30, 2008.  For the nine-month periods ended September 30, 2009 and 2008, general and administrative expenses were $1,460,697, or 15% of sales, and $1,499,854, or 14% of sales, respectively.  The lower general and administrative expenses in both the three and nine-month periods ended September 30, 2009, compared to the same period in the prior year, are the result of a combination of lower variable salary expense, lower professional fees and lower investor relations expenses.



Page 13 of 21

---





In the three-month period ended September 30, 2009, our income from operations was $219,128 representing a decrease of $64,916 compared to the three-month period ended September 30, 2008.  In the nine-month period ended September 30, 2009, our income from operations was $147,444 representing a decrease of $492,266 compared to the nine-month period ended September 30, 2008.  The decrease in operating income in both the three and nine-month periods ended September 30, 2009 is due, primarily, to the lower sales levels in both periods.  During difficult market conditions in the first nine months of 2009, we maintained our factory capacity levels, increased the number of sales professionals and continued engineering activities.  We believe that our actions position the Company to be able to support current and near term levels of business.

After interest and tax expenses, our net income for the three-month period ended September 30, 2009 was $131,477 compared to $169,680 in the same period of 2008.  For the nine-month period ended September 30, 2009 our net income was $88,466 compared to $369,948 in the same period of 2008.

Liquidity and Capital Resources

During the nine months ended September 30, 2009, net cash provided by operating activities was approximately $516,000 compared to approximately $1,048,000 provided by operating activities for the same period in 2008.  Working capital was approximately $4,785,000 at September 30, 2009, an increase of approximately $291,000 from December 31, 2008. At September 30, 2009, our balance sheet reflected approximately $1,764,000 of cash and $1,703,000 of net trade receivables. At December 31, 2008, our total cash on hand was approximately $1,339,000 and our net trade receivables were $1,662,000. Cash improved as a result of a net reduction in depreciation and capital expenditures of $120,000 and lower inventory levels of $124,000 for the year-to-date period.

At September 30, 2009, 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. 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 September 30, 2009, the Company was in compliance with the financial covenants and there were no borrowings on this line of credit during the nine-month period ended September 30, 2009.

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 September 30, 2010. There are no current plans for significant capital equipment expenditures and no other known demands, commitments, events or uncertainties that will result in or that are reasonably likely to result in the Companys liquidity increasing or decreasing in any material way.

Critical Accounting Policies

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

a)

Revenue Recognition

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





Page 14 of 21

---





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



FieldServer Products

FieldServer products are sold in the same manner as Gas Detection and Environment Control Products (as discussed above) except that the products contain embedded software, which is integral to the operation of the device.  The software embedded in FieldServer products includes two items:  (a) a compiled program containing (i) the basic operating system for FieldServer products, which is common to every unit, and (ii) 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.



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 Productsabove).  Revenues for driver development are billed and recognized upon shipment or delivery of the related product that includes the developed protocol drivers (as noted in FieldServer Products above). Collectibility is reasonably assured as described in FieldServer Products above.



Page 15 of 21

---







Discounts and Allowances

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

b)

Accounts Receivable and Related Allowances

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

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

c)

Inventories

Inventories are stated at the lower of cost or estimated market, with cost being determined on the first-in, first-out method.  The Company uses an Enterprise Requirements Planning (ERP) software system which provides data upon which management can rely 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.

d)

Fair Value Measurement

The Companys financial instruments include cash, accounts receivable, prepaid expenses, security deposits, accounts payable and accrued expenses.  Management believes that the fair value of these financial instruments approximates their carrying amounts based on current market indicators, such as prevailing interest rates and the short-term maturities of such financial instruments.

The Company does not have any assets or liabilities that are measured at fair value on a recurring basis, and during the nine months ended September 30, 2009 and the year ended December 31, 2008, did not have any assets or liabilities that were measured at fair value on a nonrecurring basis.



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 15(d)-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 provide reasonable assurance 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.



Page 16 of 21

---





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 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.



32

Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

(1)

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

(2)

Incorporated by reference to our Quarterly Report on Form 10-QSB (File No. 000-07441) for the fiscal quarter ended June 30, 1998 filed with the SEC on August 14, 1998.



SIGNATURES



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



SIERRA MONITOR CORPORATION

Registrant



Date:

November 12, 2009

By:

/s/ Gordon R. Arnold

Gordon R. Arnold

President

Chief Executive Officer

Chief Financial Officer





Page 17 of 21

---





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 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.



32

Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

(1)

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

(2)

Incorporated by reference to our Quarterly Report on Form 10-QSB (File No. 000-07441) for the fiscal quarter ended June 30, 1998 filed with the SEC on August 14, 1998.



Page 18 of 21