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 March 31,
2010





or





o
            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 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 o  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
            oNon-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 oNo x




The
number of shares outstanding of the issuer's common stock, as of May 12, 2010
was 11,438,212.




Page 1 of
16




PART I:  FINANCIAL
INFORMATION




ITEM 1.  FINANCIAL
STATEMENTS




SIERRA MONITOR
CORPORATION




Condensed Balance
Sheets




March
      31,
              
              
              December
      31,Assets
              
              2010
              
              
              2009(unaudited)Current
      assets:Cash
              
              $
              1,800,765
              
              
              $
              2,203,018Trade receivables, less allowance
      for doubtful accountsof
      approximately $83,000 and $70,000 respectively
              
              
              1,621,709
              
              
              
              1,354,775Inventories,
      net
              
              
              2,136,694
              
              
              
              1,892,313Prepaid
      expenses
              
              
              227,047
              
              
              
              240,204Income tax
      deposit
              
              
              5,048
              
              
              
              -Deferred income taxes -
      current
              
              
              314,108
              
              
              
              259,855Total current
      assets
              
              
              6,105,371
              
              
              
              5,950,165Property
      and equipment, net
              
              
              217,153
              
              
              
              238,377Other
      assets
              
              
              151,480
              
              
              
              167,615Total
      assets
              
              $
              6,474,004
              
              
              $
              6,356,157Liabilities and
      Shareholders' EquityCurrent
      liabilities:Accounts
      payable
              
              $
              699,093
              
              
              $
              523,763Accrued compensation
      expenses
              
              
              353,305
              
              
              
              372,035Other current
      liabilities
              
              
              114,745
              
              
              
              73,351Income taxes
      payable
              
              
              -
              
              
              
              34,251Total current
      liabilities
              
              
              1,167,143
              
              
              
              1,003,400Deferred tax
      liability
              
              
              14,575
              
              
              
              14,575Total
      liabilities
              
              $
              1,181,718
              
              
              $
              1,017,975Commitments
      and contingenciesShareholders'
      equity:Common stock, $0.001 par value;
      20,000,000 shares authorized;11,438,212 and 11,438,212 shares
      issued and outstanding,respectively
              
              
              11,438
              
              
              
              11,438Additional paid-in
      capital
              
              
              3,622,412
              
              
              
              3,595,202Retained
      earnings
              
              
              1,658,436
              
              
              
              1,731,542Total shareholders'
      equity
              
              
              5,292,286
              
              
              
              5,338,182Total liabilities and
      shareholders’equity
              
              $
              6,474,004
              
              
              $
              6,356,157




See
accompanying notes to the unaudited interim condensed financial
statements.




Page 2 of
16




SIERRA MONITOR
CORPORATION




Condensed Statements of
Operations




(Unaudited)




For
      the three months endedMarch
      31,
              2010
            
            
            March
      31,
              2009Net
      sales
            
            $
            2,903,080
            
            
            $
            3,270,056Cost
      of goods sold
            
            
            1,224,042
            
            
            
            1,419,469Gross
      profit
            
            
            1,679,038
            
            
            
            1,850,587Operating
      expensesResearch
      and development
            
            
            483,022
            
            
            
            480,502Selling
      and marketing
            
            
            831,976
            
            
            
            861,021General
      and administrative
            
            
            486,239
            
            
            
            502,2921,801,237
            
            
            
            1,843,815Income
      (loss) from operations
            
            
            (122,199
            )
            
            
            6,772Interest
      income
            
            
            1,047
            
            
            
            -Income
      (loss) before income taxes
            
            
            (121,152
            )
            
            
            6,772Income
      tax provision (benefit)
            
            
            (48,046
            )
            
            
            2,709Net  income
      (loss)
            
            $
            (73,106
            )
            
            $
            4,063Net
      income (loss) available to common shareholders per common shareBasic
            
            $
            (0.01
            )
            
            $
            0.00Diluted
            
            $
            (0.01
            )
            
            $
            0.00Weighted
      average number of common shares used in per share
      computations:Basic
            
            
            11,438,212
            
            
            
            11,428,212Diluted
            
            
            11,438,212
            
            
            
            11,774,366See
      accompanying notes to the unaudited interim condensed financial
      statements.




Page 3 of
16




SIERRA MONITOR
      CORPORATION




Condensed Statements
      of Cash Flows




(Unaudited)





For
      the three months endedMarch
      31,
              2010
            
            
            March
      31,
              2009Cash
      flows from operating activities:Net
      income (loss)
            
            $
            (73,106
            )
            
            $
            4,063Adjustments
      to reconcile net income(loss) to net cash  used in operating
      activities:Depreciation
      and amortization
            
            
            64,882
            
            
            
            76,386Allowance
      for doubtful accounts
            
            
            (13,000
            )
            
            
            2,500Provision
      for inventory losses
            
            
            -
            
            
            
            (8,000
            )Deferred
      income taxes
            
            
            (54,253
            )
            
            
            -Stock-based
      compensation expense
            
            
            27,210
            
            
            
            25,602Change
      in operating assets and liabilities:Trade
      receivables
            
            
            (253,934
            )
            
            
            (431,522
            )Inventories
            
            
            (244,381
            )
            
            
            21,158Prepaid
      expenses and other current assets
            
            
            13,157
            
            
            
            12,997Income
      tax deposit
            
            
            (5,048
            )
            
            
            (1,894
            )Accounts
      payable
            
            
            175,330
            
            
            
            96,425Income
      taxes payable
            
            
            (34,251
            )
            
            
            3,633Accrued
      compensation expenses
            
            
            (18,730
            )
            
            
            82,707Other
      current liabilities
            
            
            41,394
            
            
            
            (7,588
            )Net
      cash used in operating activities
            
            
            (374,730
            )
            
            
            (123,533
            )Cash
      flows from investing activities:Property
      and equipment
            
            
            (27,523
            )
            
            
            (21,858
            )Other
      assets
            
            
            -
            
            
            
            (5,100
            )Net
      cash used in investing activities
            
            
            (27,523
            )
            
            
            (26,958
            )Net
      decrease in cash
            
            
            (402,253
            )
            
            
            (150,491
            )Cash
      at beginning of period
            
            
            2,203,018
            
            
            
            1,338,647Cash
      at end of period
            
            $
            1,800,765
            
            
            $
            1,188,156




Supplemental
cash flow information:


Cash
      paid for income taxes
            
            $
            40,458
            
            
            $
            2,420Cash
      paid for interest
            
            $
            –
            
            
            $
            –




See
accompanying notes to the unaudited interim condensed financial
statements.




Page 4 of
16




SIERRA MONITOR
CORPORATION




Notes to
the Interim Condensed Financial Statements


(Unaudited)


March 31,
2010




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 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, 2009
balances within these interim condensed financial statements were derived from
the audited 2009 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, 2009, which was filed with the SEC
on March 25, 2010.  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
16




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 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
16





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.




Discounts and
Allowances




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




b)
            Recent
      Accounting Pronouncements




Recent
accounting pronouncements discussed in the notes to the December 31, 2009
audited financial statements, filed previously with the SEC in our Annual Report
on Form 10-K on March 25, 2010, 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 2010 financial statements.




c)
            Employee
      Stock-Based Compensation




As of
March 31, 2010, 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
16




For the
three-month periods ended March 31, 2010 and 2009, general and administrative
expenses included $27,210 and $25,602, respectively, decreasing (increasing) the
Company's income (loss) from continuing operations, income (loss) before
provision (benefit) for income taxes and net income (loss) 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 three-month periods ended March 31, 2010 and 2009.







Inventories




A summary
of inventories are as follows:


March
      31, 2010
            
            
            December
      31, 2009Raw
      materials
            
            $
            817,635
            
            
            $
            823,789Work-in-process
            
            
            808,526
            
            
            
            655,205Material
      at vendor
            
            
            277,054
            
            
            
            271,635Finished
      goods
            
            
            342,652
            
            
            
            250,857Less:
      Allowance for obsolescence reserve
            
            
            (109,173
            )
            
            
            (109,173
            )$
            2,136,694
            
            
            $
            1,892,313




Net Income (Loss) Per
Share




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




At March
31, 2010, outstanding options to acquire 56,000 shares of common stock were not
considered potentially dilutive common shares due to the exercise price of such
options being higher than the stock price used in the EPS
calculation.  At March 31, 2009, outstanding options to acquire 17,000
shares of common stock were not considered potentially dilutive common shares
due to the exercise price of such options being higher than the stock price used
in the EPS calculation.




The
Company has reported a net loss for the three-month period ended March 31,
2010.  As a result, 314,719 shares of common stock issuable upon exercise
of stock options have been excluded from the calculation of diluted loss per
share for the three-month period ended March 31, 2010, because their inclusion
would be anti-dilutive.




The
following is a reconciliation of the shares used in the computation of basic and
diluted EPS for the periods ended March 31, 2010 and 2009,
respectively:


Three months endedMarch 31, 2010
            
            
            March 31, 2009Basic
      EPS – weighted-average number of common shares outstanding
            
            
            11,438,212
            
            
            
            11,428,212Effect
      of dilutive potential common shares – stock options
      outstanding
            
            
            -
            
            
            
            346,154Diluted
      EPS – weighted-average number of common shares and potential common shares
      outstanding
            
            
            11,438,212
            
            
            
            11,774,366




Comprehensive Income
(Loss)




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




Page 8 of
16




Concentrations




No
customers made up more than 10% of accounts receivable at March 31, 2010, while
one customermade
up  more than 10% of accounts receivable at December 31, 2009. 
Also, no customers individually made up more than 10% of net sales for the three
month periods ended March 31, 2010 and March 31, 2009.




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 $1,551,000 and $1,953,000
were in excess of such insured amounts at March 31, 2010 and December 31, 2009,
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 periods ended March 31:





Three months endedMarch
      31, 2010
            
            
            March
      31, 2009Gas
      detection devices
            
            $
            1,277,440
            
            
            $
            1,837,637Environment
      controllers
            
            
            258,186
            
            
            
            202,509FieldServers
            
            
            1,367,454
            
            
            
            1,229,910$
            2,903,080
            
            
            $
            3,270,056




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 three months of fiscal year 2010 and
there were no outstanding balances at March 31, 2010 and December 31,
2009.  As of March 31, 2010, the Company is in compliance with
covenants required by the line of credit.




Stock Option
Grants




No stock
options were granted during the three-month periods ended March 31, 2010 and
2009.




Stock Option Exercises and
Expirations




No stock
options were exercised by employees and no stock options expired during the
three-month period ended March 31, 2010.  During the three-month
period ended March 31, 2009, no stock options were exercised by employees and
1,000 stock options expired.




Page 9 of
16




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, 2009, 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 months ended March 31, 2010, Sierra Monitor Corporation (“we” or the
“Company”) reported net sales of $2,903,080 compared to $3,270,056 for the three
months ended March 31, 2009.  The results for the first quarter of
fiscal 2010 represent an 11% decrease from the same period in the prior
year.  Our overall sales were lower primarily because we entered the
quarter with a lower backlog than our levels in the corresponding period of
2009.  Although we were not able to convert all new orders to
shipments within the quarter, our backlog (including released orders and longer
term blanket orders) grew by approximately $900,000 during the first quarter of
2010.




Our sales
of gas detection products, including industrial accounts and military sales,
decreased by approximately 30% in the first quarter of 2010 compared to the same
period in 2009.  Sales to industrial accounts were 31% lower and
military sales were 26% lower in the first quarter of 2010 compared to the same
period in 2009.  Gas detection system sales were generally weaker in
the first quarter of 2010 reflecting the slow economy and longer ordering cycles
for large projects.  In the first quarter of 2009, we shipped two
large single orders to a power plant project in Saudi Arabia and a waste
treatment plant in New York.  There were no similar orders shipped in
the first quarter of 2010.  Our sales to the U.S. Navy are dependent
upon military spending and we generally experience quarterly fluctuations in
military sales consistent with the change in the first quarter of 2010 compared
to the first quarter of 2009.




In the
first quarter of 2010, our sales of environmental controllers to the
telecommunications industry were 27% higher compared to the first quarter of
2009.  Sales of environment controllers depend on deployment of new
remote structures and purchases of spare parts by AT&T, Verizon and other
carriers and currently represent approximately 9% of our total net
sales.




Page 10
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Sales of
our FieldServer products increased approximately 11% in the first quarter of
2010 compared to the first quarter of 2009.  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.  While domestic demand for box products in the first
quarter of 2010 remained relatively flat compared to the same period in 2009,
international sales were stronger partially as a result of continued sales of
products and services to the KAUST University project in Saudi Arabia and also
due to improving demand from a Taiwan customer building semiconductor tooling
equipment.




Gross
profit for the three-month period ended March 31, 2010 was $1,679,038, or 58% of
net sales, compared to $1,850,587, or 57% of net sales, in the same period in
the previous year.  In both of the reported quarters our gross margin
was lower than our historical levels.  Gross profit is impacted
primarily by product mix, channel of distribution and price
discounting.  We did not experience significant increases in material
costs or labor.




Expenses
for research and development, which include new product development and
engineering to sustain existing products, were $483,022 or 17% of net sales, for
the three-month period ended March 31, 2010, compared with $480,502 or 15% of
net sales, in the comparable period in 2009.  We are continuing
engineering efforts to upgrade existing products through printed circuit board
re-design, development of new products and additional software programs known as
protocol drivers.   Our engineering expenses are consistent with
historical levels and the percent of sales fluctuates due to the change in net
sales.




Selling
and marketing expenses, which consist primarily of salaries, commissions and
promotional expenses, for the three-month period ended March 31, 2010 were
$831,976, or 29% of net sales, compared to $861,021, or 26% of net sales, in the
same period in the prior year.  The lower sales and marketing expenses
in the first quarter of 2010 compared to the same period last year are due,
primarily, to lower sales commission expenses resulting from the lower net sales
level.




General
and administrative expenses for the first quarter of 2010 were $486,239, or 17%
of net sales, compared to $502,292, or 15% of net sales, in the same period in
the prior year.  Lower general and administrative expenses in the first
quarter of 2010 compared with the same period last year are the result of lower
depreciation expenses and lower professional support expenses, particularly SOX
testing, investor relations expenses and legal expenses.




Our loss
from operations for the three-month period ended March 31, 2010 was $122,199, or
-4.2% of net sales, compared to income from operations of $6,772, or 0.2% of net
sales, in the same period in the prior year.  The decreased income is
primarily the result of lower net sales.




Net loss
for the three-month period ended March 31, 2010 was $73,106, or approximately
-2.5% of net sales, compared to net income of $4,063, or approximately 0.1% of
net sales, for the same period in the prior year.  The increase in net
loss is primarily the result of lower net sales.




Liquidity and Capital
Resources




During
the three months ended March 31, 2010, net cash consumed by operating activities
was approximately $375,000 compared to approximately $124,000 for the same
period in 2009.  Working capital was approximately $4,938,000 at March
31, 2010, a decrease of approximately $9,000 from December 31,
2009.  At March 31, 2010, our balance sheet reflected approximately
$1,801,000 of cash and $1,622,000 of net trade receivables. At December 31,
2009, our total cash on hand was approximately $2,203,000 and our net trade
receivables were $1,355,000.




At March
31, 2010, we had no long term liabilities.




Page 11
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We
maintain a $1,000,000 line of credit, secured by certain assets of the Company,
with our commercial bank which matures on July 10, 2010. 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 March 31, 2010, 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, 2011. There are no current plans for significant capital
equipment expenditures and no other known demands, commitments, events or
uncertainties that will result in or that are reasonably likely to result in the
Company’s liquidity increasing or decreasing in any material way.




Critical Accounting
Policies




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




a)
              Revenue
      Recognition




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





Gas Detection and
Environment Control Products




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





Gas Detection and
Environment Control Services




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




Page 12
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FieldServer
Products




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




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.




Page 13
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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, 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.




ITEM 4T:  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
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.




Page 14
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PART II:  OTHER
INFORMATION




ITEM
6.EXHIBITS




ExhibitNumber
              Description3.1(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
      toSection 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
      toSection 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 CORPORATIONRegistrantDate:
      May 12, 2010
              By:
              /s/ Gordon
      R. ArnoldGordon
      R. ArnoldPresidentChief
      Executive OfficerChief
      Financial Officer






Page 15
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Index to
Exhibits




ExhibitNumber
              Description3.1(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
      toSection 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
      toSection 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.
  Page 16
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