U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K10-K/A

(Amendment No. 1)

(Mark One)

Commission file number 0-7441

Sierra Monitor Corporation

(Exact name of registrant as specified in its charter)

1991 Tarob Court

Milpitas, California 95035

(Address of principal executive offices)

Issuer’s telephone number, including area code: (408) 262-6611

Securities registered under Section 12(b) of the Exchange Act: None.

Securities registered under Section 12(g) of the Exchange Act:

Common Stock, par value $0.001 per share

(Title of class)

Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

[  ] Yes [X] No

Indicate by check mark whether the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act.

[  ] Yes [X] No

Indicate by check mark whether the issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

[X]X ] Yes [  ] 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). [X] Yes [  ] No

Indicate by check mark if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B contained in this form, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X]

Indicate by checkmark 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.

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). [  ] Yes [X] No

The aggregate market value of the voting and non-voting common stock held by non-affiliates of the Registrant as of June 30, 2018 was approximately $5,055,867 based upon the last reported sale price of $1.41 per share on the Over the Counter Bulletin Board, which occurred on June 28,29, 2018. For purposes of this disclosure, common stock held by persons who hold more than 5% of the outstanding voting shares and common stock held by officers and directors of the Registrant have been excluded in that such persons may be deemed to be “affiliates” as that term is defined under the rules and regulations promulgated under the Securities Act of 1933. This determination is not necessarily conclusive.

The number of shares of the Registrant’s common stock outstanding as of March 25,April 22, 2019 was 10,242,418.

DOCUMENTS INCORPORATED BY REFERENCE

Certain information required under Item 8, and information required under Items 10, 11, 12, 13 and 14 of Part III of this Annual Report on Form 10-K is incorporated by reference from the Registrant’s Proxy Statement for the 2019 Annual Meeting of Shareholders.None.

FORM 10-K

SIERRA MONITOR CORPORATION

TABLE OF CONTENTS

FORWARD-LOOKING STATEMENTSEXPLANATORY NOTE

This report contains forward-looking statementsAmendment No. 1 to Form 10-K (this “Amendment”), amends the Annual Report on Form 10-K for the fiscal year ended December 31, 2018 originally filed April 1, 2019 (the “Original Filing”), by Sierra Monitor Corporation, a California corporation (“SMC”). Unless otherwise indicated, references to “we”, “us”, “our” and the “Company” refer to SMC, its subsidiaries and its predecessors. We are filing this Amendment solely to present the information required by Items 10, 11, 12, 13 and 14 of Part III of Form 10-K as we will not file our definitive proxy statement within the meaning of Section 27A120 days of the Securities Actend of 1933 and Section 21E ofour fiscal year ended December 31, 2018.

As required by Rule 12b-15 under the Securities Exchange Act of 1934, as amended, (the “Exchange Act”). These statements may generally be identified bythis Amendment includes as exhibits the usecertifications required of such words as “expect,” “anticipate,” “believe,” “intend,” “plan,” “will,” or “shall,” or the negative of those terms. We have based these forward-looking statements on our current expectationsprincipal executive officer and projections about future events. Actual results could differ materially from those projected in the forward-looking statements as a resultprincipal financial officer under Section 302 of the risk factors set forth elsewhereSarbanes-Oxley Act of 2002. Because no financial statements have been included in this report. Forward-looking statements inAmendment and this report include, among others, statements regardingAmendment does not contain or amend any disclosure with respect to Items 307 and 308 of Regulation S-K, paragraphs 3, 4 and 5 of the sufficiencycertifications have been omitted. In addition, this Amendment restates Item 15 of cash and accounts receivable, potential litigation expenses, methods, estimates and judgments in accounting policies, our internal control environment, effectPart IV of inflation and fluctuation in currency exchange rates on our results of operations, critical accounting policies, our dividend policy andthe Original Filing.

Except as described above, no other matters discussed under Part I, Item 1A “Risk Factors,” and Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” below. Our future operating results may be affected by a number of factors, including general economic conditions in both foreign and domestic markets, changes inhave been made to the economy and the credit market, investment and research and development plans and success, market position and penetration, strategic plans and objectives, operating margins, government and regulatory approvals or certifications, cyclical factors affecting our industry, our abilityOriginal Filing. The Original Filing continues to identify, attract, motivate and retain qualified personnel, lack of growth in our end-markets, our ability to develop and manufacture, seasonality in our products, availability of components and materials used in our products, and our ability to sell both new and existing products at a profitable yet competitive price and other matters discussed under Part I, Item 1A “Risk Factors” and Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” below. All forward-looking statements in this document are madespeak as of the date hereof, based on information available to us as of the date hereof,Original Filing, and we assume no obligationhave not updated the disclosures contained therein to updatereflect any forward-looking statement.

PART I

General

Sierra Monitor Corporation,events which occurred at a California corporation (the “Company”, “Sierra Monitor”, “we”date subsequent to the filing of the Original Filing other than as expressly indicated in this Amendment. Accordingly, this Amendment should be read in conjunction with the Original Filing and the Company’s other filings made with the Securities and Exchange Commission, or “us”), was founded in 1978. The Company addresses the industrial and commercial facilities management market with Industrial Internet of Things (“IIoT”) solutions that target facility automation and facility safety requirements, also referredSEC, on or subsequent to as “Connect” and “Protect”.April 1, 2019.

On March 28, 2019, the Company signed a definitive agreement to be acquired bySMC entered into an Agreement and Plan of Merger (the “Merger Agreement”) with MSA Safety Incorporated, (MSA)a Pennsylvania corporation (“MSA”), and MSA’s indirect, wholly owned subsidiary, Gateway Merger Sub, Inc., a global safety equipment manufacturer. Under terms ofCalifornia corporation (“Merger Sub”). Pursuant to the agreement, Sierra Monitor CorporationMerger Agreement, Merger Sub will becomemerge with and into SMC, with SMC surviving the Merger as an indirect wholly owned subsidiary of MSA Safety.(the “Merger”). Upon closing,completion of the Merger, each share of common stock, $0.001 par value per share, of SMC, issued and outstanding shareimmediately prior to the effective time of SMC common stockthe Merger (the “Effective Time”), (other than (i) shares owned or held in the treasury of the Company or owned, directly or indirectly, by SMC)MSA or Merger Sub immediately prior to the Effective Time, (ii) shares held by shareholders who properly exercise and perfect their dissenters’ rights prescribed in Chapter 13 of the California Corporations Code, as amended and (iii) shares granted under SMC’s 2006 Equity Incentive Plan or SMC’s 2016 Equity Incentive Plan that is subject to time-based, performance or other vesting conditions that is outstanding immediately before the Effective Time) will be cancelled and automatically converted into the right to receive $3.25 in cash. Under the Merger Agreement, at the effective time of the Merger, MSA Safety will assume vested or unvested and outstanding SMC stock options and restricted stock awards granted to SMC employees.

Products and Applications

Our FieldServer family of protocol gateways, routers, and network explorers targets facility automation requirements, and is used by original equipment manufacturers (“OEMs”) and system integrators to enable local and remote monitoring and control of assets and facilities. The FieldServer family of products works with the FieldPoP™ device cloud portal; a cloud-based service that registers and manages FieldServer products, provides secure remote access to the local web-based applications that run on FieldServer products, and integrates with third-party applications over REST APIs. With more than 200,000 installed gateways supporting over 140 protocols such as BACnet, LonWorks, MODBUS, and XML in commercial and industrial facilities, FieldServer is the industry’s leading multi-protocol gateway brand and is delivered in a variety of form factors appropriate to the asset being interfaced. The intellectual property in FieldServer products is embodied in the proprietary embedded software that runs on a variety of customized hardware platforms with different connectivity options such as Serial, Ethernet, WiFi, or cellular. In addition to bridging data protocols between various assets or devices within a facility, the embedded software includes value-added “fog” or “local application” software for monitoring, logging, alarming, and trending local field data. Additionally, the embedded software enables the assets or devices in the facility to securely connect to third-party clouds and to Sierra Monitor’s own FieldPoP device cloud. The FieldPoP device cloud portal is a proprietary, secure, and scalable Software-as-a-Service (SaaS) product and is developed and deployed using the same core technologies and providers that are used by many of the world’s leading web sites and Internet-based services. In 2018, combined revenue from sales of our FieldServer family of products was approximately 52% of our sales compared to approximately 51% in 2017.

Our Sentry IT fire and gas detection solutions target facility safety requirements, and are used by industrial and commercial facilities managers to protect their personnel and assets. The motivation for installing gas detection systems is driven, in part, by industrial safety professionals guided by the United States Occupational Safety and Health Administration, state and local governing bodies, insurance companies and various industry rule-making bodies. The solution consists of proprietary system hardware that runs embedded controller and gateway software, detector modules that sense the presence of various toxic and combustible gases and flames, connectivity between the modules and the controller, and a user interface and applications that a facility manager can interact with, either locally on site or remotely over the Internet. The complex software embedded in the various products facilitates system-wide functions such as calibration, alarm detection, notification, and mitigation. The controller software also includes local web-based applications that simplify management of the complete solution and a gateway to integrate the fire and gas detection solution with the facility’s local supervisory system or to Sierra Monitor’s device cloud portal. With more than 100,000 detector modules sold, our fire and gas detection solutions are deployed in a variety of facilities, such as oil, gas and chemical processing plants, wastewater treatment facilities, alternate fuel vehicle maintenance garages and other sites where hazardous gases are used or produced. Revenue from gas detection products was approximately 44% of our sales in 2018, compared to 43% in 2017.

Our solutions are also sold to telecommunication companies and their suppliers to manage environmental and security conditions such as temperature, gas, and smoke in remote structures such as local DSL distribution nodes and buildings at cell tower sites. Revenue from all products sold to the telecommunications industry was approximately 5% of our sales in 2018, compared to 6% in 2017.

Research and Development

We maintain research and development programs to develop new products and to enhance and support existing products. We use a core group of experienced engineers, supported by a dynamic network of third-party specialists with skills as needed by specific projects. Our research and development expenses, which include costs for sustaining engineering and technical support, were $3,159,157 or 14% of our sales in 2018, compared to $3,073,087 or 16% of our sales in 2017.

Sales and Distribution

We use a combination of in-region sales managers and a centralized inside sales and customer support team. Our in-region sales managers are located in western, central, southern and eastern regions of North America. Additionally, we have in-region sales managers in Europe, the Middle East and Canada. The regional sales managers are supported by our inside sales and customer support team based in Milpitas, California.

Our FieldServer products are sold to hundreds of OEMS and integrators who then use the product as part of their system integration projects. We target OEMs in North America and Europe and integrators worldwide through in-region sales managers supported by inside sales and customer support team at our headquarters in Milpitas, California. Our FieldServer products are also available from leading on-line catalog distributors of industrial products.

Our Sentry products are primarily sold to engineering and installation firms that utilize the products as part of larger fire and safety facility projects. Our in-region and headquarters-based sales teams work with a network of independent sales representatives and value-added resellers to identify and fulfill such opportunities. After-sale service is carried out by certified service partners. There are currently 28 authorized representative companies in the United States and approximately 16 international sales partners. The majority of our domestic representatives have exclusive territories and the sales agreements with each representative restrict them from representing competing products.

Our marketing activities include maintaining a comprehensive and search-optimized web site and social media presence, participating in relevant trade shows and events, issuing newsletters, blogging, conducting on-line seminars and other forms of communication, seeking press coverage, and developing tools to assist in the selling effort.

Our combined sales and marketing expenses for 2018 were $5,656,137 or 26% of revenue, compared to $5,165,931 or 26% of revenue in 2017.

We consider that we operate in one business segment. Substantially all of the revenues reported in Part II, Item 7 of this Annual Report on Form 10-K are attributable to sales to that single segment. See “Note 8: Segment Reporting” to our Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K.

Employees

At December 31, 2018, we had a total of 82 full-time employees and consultants. At that date, 57 were located in Milpitas, California, and the rest were based out of regional offices.

Seasonality and Customer Concentration

The demand for monitoring devices and other products we manufacture is typically not seasonal. There were no customers to whom sales exceeded 10% of our net sales during 2018, or 2017. Factors affecting specific industries, such as telecommunications, building automation or petro-chemical processing, could affect our sales within any of those industries. Those factors may include, but are not limited to, a general economic downturn, labor problems, and rapid shifts in technology or introduction of competing products at lower prices.

Backlog

The commercial order backlog for our products at December 31, 2018 was approximately $4,296,427 compared to approximately $4,943,137 at December 31, 2017. The backlog includes orders for which we have not yet received engineering release from the customer. Since we generally ship many of our products within the same quarter that we receive a purchase order and engineering release from the customer, we believe that our backlog at any particular time is generally not indicative of the level of future sales.

Competition

The facility management market for automation and safety applications is highly competitive and generally price sensitive. The solutions that address this market compete on reliability, ease of use, product support, price, and increasingly, the ability to enable the IIoT vision.

Our FieldServer family of protocol gateway products competes in the building or industrial automation industries with products or alternate methods and technologies offered by, among others, Honeywell Tridium, Contemporary Controls, HMS, Control Solutions Inc., Loytec Electronics, and in some cases protocol gateway functionality developed in-house by device or system OEMs. In application areas outside of building and industrial automation where multi-protocol translation requirements are fewer, FieldServer protocol gateways may compete with gateways provided by companies such as Dell and Advantech. Our FieldPoP device cloud may compete with cloud-based platform offerings from companies such as PTC/ThingWorx, Amazon AWS IoT, Microsoft Azure IoT, Google Cloud, and other IoT startup companies.

Our Sentry IT gas detection products compete with systems offered by Draeger Safety Inc., Mine Safety Appliance Company, Honeywell Life Safety, TYCO, and the Detector Electronics division of UTC. Most of these competitors in the fire and gas detection area offer broad product lines including items that do not compete with our products and have greater financial, marketing and manufacturing resources than we do.

Manufacturing and Suppliers

We purchase materials and components for use in manufacturing our products. The majority of the materials and components used in our products are standard items which can be purchased from multiple distributors or fabricated by multiple custom fabrication vendors. Components which are generally purchased from sole sources are those which require a specific consistent quality such as gas sensors. Our principal suppliers of gas sensors are City Technology, Dynament and E2V Technologies. We anticipate that the majority of components and materials used in products to be developed by us will be readily available. However, there is no assurance that the current availability of these materials will continue in the future, or if available, will be procurable at favorable prices.

Environmental Regulation

We have no significant costs associated with compliance with environmental regulations. However, there can be no assurance that we will not incur such costs in the future.

Major Customers

No customers exceeded 10% of the Company’s accounts receivable at December 31, 2018, but two customers exceeded 10% of the Company’s accounts receivable at December 31, 2017. No customers exceeded 10% of the Company’s sales during the years ended December 31, 2018 or December 31, 2017.

Available Information

We file with the Securities Exchange Commission (SEC) annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and proxy and information statements and amendments to reports filed or furnished pursuant to Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended. The SEC also maintains a website (http://www.sec.gov) that contains reports, proxy and information statements and other information regarding us and other companies that file materials with the SEC electronically. You may also obtain copies of reports filed with the SEC, free of charge, on our website athttp://www.investor.sierramonitor.com.

We operate in a rapidly changing environment that involves numerous risks and uncertainties. The following section lists some, but not all, of these risks and uncertainties that may have a material adverse effect on our business, financial condition or results of operation.

Economic Conditions: Continuing uncertainty about the global economy and political landscape increases the challenges and the financial risks facing us. These risks include potential postponement of spending by commercial, industrial and municipal customers; the loss of major customers; fluctuations in currency markets; product delays and costs from increasing lead times or material prices from suppliers; and inability of customers, including commercial contractors, to obtain credit to finance projects requiring our products. Additionally, low oil prices are negatively impacting construction of new oil and gas extraction, processing, and delivery facilities, slowing down large alternative fuel projects and resulting in cautious capital spending on fire and gas solutions, and putting pressure on product margin as suppliers seek to reduce total solution costs. These risks could have a material negative effect on the demand for our products and services.

Competitive Industry: The industry in which we compete is highly competitive and we expect such competition to continue in the future. Many of our competitors are larger than us and have substantially greater financial, technical, marketing and manufacturing resources. While the IIoT represents an opportunity for innovation and differentiation, it also implies a greater rate of change and the possibility of new competitors, ranging from venture capital backed startups to established technology companies. Even though we continue to invest in new products, there can be no assurance that there will be adequate demand or that certain of our products will not be rendered non-competitive or obsolete by our competitors or by the emergence of alternative approaches. Further, there is no guarantee that our research and development efforts or the associated costs will lead to increased sales or additional customers, or prevent erosion of competitive position of our products. In addition, our OEM customers may “design out” our FieldServer gateway products, replacing them with internally-designed technology. In order to maintain and grow the sales of our FieldServer products, we must maintain a new design-win rate that is in excess of the design-out rate. Our business and financial results may be adversely affected if our offerings do not keep pace with the rapidly changing IIoT landscape, if we are unable to compete with alternative third-party or internally-developed products, and if we are faced with pricing pressure in international markets.

Concentrated Operations: Our operations are concentrated in a two-building complex in Milpitas, California. Our operations could be interrupted by fire, earthquake, power loss, telecommunications failure and other events beyond our control. We do not have a detailed disaster recovery plan. In addition, we do not carry sufficient business interruption insurance to compensate us for all losses that may occur and any losses or damages incurred by us could have a material adverse effect on our business and financial results.

Strategic Transactions: We may acquire businesses and technologies, which may divert the attention of management and cause us to incur various expenses in identifying, investigating and pursuing suitable acquisitions, whether or not the acquisitions are completed. We have limited experience in acquiring other businesses, and if we acquire additional businesses, we may not be able to successfully integrate the acquired personnel, operations and technologies, or effectively manage the combined business following the acquisition. We may not be able to find and identify desirable acquisition targets or be successful in entering into an agreement with any particular target. Acquisitions could also result in dilutive issuances of equity securities or the incurrence of debt, which could adversely affect our operating results. In addition, if an acquired business fails to meet our expectations or if we are unable to successfully integrate it, our business and financial results may suffer.

Our principal executive, administrative, manufacturing and engineering operations are located in two buildings totaling approximately 28,000 square feet in Milpitas, California under a lease scheduled to expire on April 30, 2023.

Management considers that our current facilities are in good operating condition, are adequate for the present level of operations, and are adequately covered by insurance and that additional office and factory space is available in the immediate vicinity, if required.

We may be involved from time to time in various claims, lawsuits, and disputes with third parties, actions involving allegations of discrimination or breach of contract actions incidental to the normal course of business operations. We are currently not involved in any such litigation or any pending legal proceedings that management believes could have a material adverse effect on our financial position or results of operations.

PART II

(a)Market Information. Our common stock is quoted on the OTC Bulletin Board under the symbol “SRMC.” There is not an active market for our common stock and there is only infrequent trading in limited volume. The high and low closing sales price, as reported by the OTC Bulletin Board system, of our common stock during each fiscal quarter for our last two fiscal years were as follows:

These quotations reflect inter-dealer prices, without retail markup, markdown or commission, and may not represent actual transactions.

(b)Holders. As of March 25, 2019, there were approximately 129 shareholders of record of our common stock and the closing price of our common stock was $1.88. This figure does not include beneficial holders or common stock held in street names, as we cannot accurately estimate the number of these beneficial holders.

(c)Dividends. We adopted a dividend policy authorizing a quarterly cash dividend of $0.01 per share, of common stock. Under this dividend policy, we have paid twenty-six consecutive quarterly dividends of $0.01 per share of common stock. The last quarterly dividend was paid on February 15, 2019 to shareholders of record as of the close of business on February 1, 2019. This dividend represented a quarterly payout of $102,424 in aggregate, based on 10,242,418 shares outstanding. The cash dividend policywithout interest and payment ofless any future quarterly cash dividends will be at the discretion of the Board and will be dependent upon Sierra Monitor’s financial position, results of operations, available cash, cash flow, capital requirements and other factors deemed relevant by the Board.

Penny Stock

Unless and until our shares of common stock qualify for inclusion in the NASDAQ system, the public trading, if any, of our common stock will be on the OTC Bulletin Board. As a result, an investor may find it more difficult to dispose of or to obtain accurate quotations as to the price of our common stock. Our common stock is subject to provisions of Section 15(h) and Rule 15g-9 of the Exchange Act, commonly referred to as the “penny stock rule.” Section 15(h) sets forth certain requirements for transactions in penny stocks, and Rule 15g-9(d) incorporates the definition of “penny stock” that is found in Rule 3a51-1 of the Exchange Act. The SEC generally defines “penny stock” to be any equity security that has a market price less than $5.00 per share, subject to certain exceptions. If our common stock is deemed to be penny stock, trading in such shares will be subject to additional sales practice requirements on broker-dealers who sell penny stock to persons other than established customers and accredited investors. “Accredited investors” are generally persons with assets in excess of $1,000,000 or annual income exceeding $200,000, or $300,000 together with their spouse and certain entities with assets in excess of pre-determined amounts. For transactions covered by these rules, broker-dealers must make a special suitability determination for the purchase of such security and must have the purchaser’s written consent to the transaction prior to the purchase. Additionally, for any transaction involving a penny stock, unless exempt, the rules require the delivery, prior to the first transaction, of a risk disclosure document, prepared by the SEC, relating to the penny stock market. A broker-dealer also must disclose the commissions payable to both the broker-dealer and the registered representative, and current quotations for the securities. Finally, monthly statements must be sent disclosing recent price information for the penny stocks held in an account and information on the limited market in penny stocks. Consequently, these rules may restrict the ability of a broker-dealer to trade and/or maintain a market in our common stock and may affect the ability of our shareholders to sell their shares.

Stock Option Plan

In April 2016 and in May 2016, the Company’s Board of Directors and the Company’s shareholders, respectively, approved the Company’s 2016 Equity Incentive Planrequired withholding taxes (the “2016 Stock Plan”“Merger Consideration”) and reserved a total of (i) 279,680 shares, plus (ii) 2,550,320 shares that remained available for issuance under the 2006 Stock Plan immediately prior to its expiration, plus (iii) any shares subject to stock options or restricted stock granted under the 2006 Stock Plan that, on or after the date the 2016 Stock Plan became effective, expired or otherwise terminated without having been exercised in full, or were forfeited to or repurchased by the Company, with the maximum number of shares to be added to the 2016 Stock Plan pursuant to clauses (ii) and (iii) equal to 2,668,320. Options granted under our 2006 Stock Plan and 2016 Stock Plan are at the fair market value of our common stock at the grant date, typically vest ratably over 4 years, and expire 10 years from the grant date. On December 31, 2018, a total of 505,500 shares were available for grant.

Results of Operations - Fiscal 2018 vs. Fiscal 2017

For the fiscal year ended December 31, 2018, our net sales were $22,075,409 compared to net sales of $19,770,158 in the prior fiscal year ended December 31, 2017. Net sales increased approximately 11.7% in 2018 compared to the prior year. Our income from operations before interest income and income taxes was $343,244 in 2018, compared to an operating loss before interest income and income taxes of $339,382 in 2017. Net income in 2018 was $169,760, or $0.02 per share, compared to net loss of $377,596, or $(0.04) per share, in 2017.

Sales of our FieldServer products increased approximately 14% in 2018 compared to 2017. FieldServer products are primarily sold to OEMs who develop a broad range of products relevant to facility automation, such as boilers, chillers, air handlers, lighting controls, generator sets, electric sub-meters, etc. FieldServer products are also bought by system integrators seeking to connect various discrete automation sub-systems to a common facility management system. The increase in sales was mostly attributable to an increasing number of design wins from our OEM customers coupled with growth in device sales attaching to our cloud solution. In addition, we introduced new products which were well received in the market. In 2018, revenue from FieldServer products was approximately 52% of our sales compared to approximately 51% in 2017.

Our sales of Sentry gas detection products, including sales to the military, increased approximately 14% in 2018 compared to 2017. Sentry products are generally sold to engineering and installation firms who utilize the products as part of larger fire and safety projects in a variety of facilities, such as oil, gas and chemical processing plants, wastewater treatment facilities, alternate fuel vehicle maintenance garages, and other sites where hazardous gases are used or produced. Flame and Gas sales increased primarily due to success and focus in those key markets and our total solution featuring our Sentry IT. Our focus in those markets has allowed us to expand our customer base and corresponding footprint in the product line. Revenue from gas detection products was approximately 44% of our sales in 2018 compared to 43% of our sales in 2017.

We also sell environment control products for high-value remote telecommunications buildings, including cell towers and underground vaults. Sales of environment control products for telecommunications buildings decreased by approximately 21% in 2018 compared to 2017. Sales of our products to telecommunications buildings are primarily a result of replacement and repair cycles at existing sites. Revenue from all products sold to the telecommunications industry was approximately 5% of our sales in 2018, compared to 6% in 2017.

Gross profit as a percent of sales was approximately 59% in 2018 and 60% in 2017. Our gross margins vary by product mix and channel of distribution. We did not experience any significant increase in costs for materials including electronic components, fabricated materials and contract assembly in 2018 compared to 2017. The gross profit was within our normal range.

Research and development expenses, which include new product development and support for existing products, were $3,159,157 or 14% of net sales in the fiscal year ended December 31, 2018, compared to $3,073,087 or 16% of net sales in the fiscal year ended December 31, 2017. The increase in R&D spending represents expansion of product development for Flame and Gas, FieldServer and SMC Cloud.

Selling and marketing expenses were $5,656,137 or 26% of net sales in 2018 compared to $5,165,931 or 26% of net sales in the prior year. The increase in sales and marketing expenses was driven by increased resources focused in Marketing and outreach programs to aid in sales and product awareness in our key markets.

General and administrative expenses, which include professional fees and product and general liability insurance incurred by the company, were $3,936,591 or 18% of net sales in 2018, compared to $3,277,760 or 17% of net sales in 2017. The increased costs in general and administrative expenses are primarily associated with transitions within the management team.

Our financial results reflect a revenue increase of $2,305,251 and an increase in income from operations of $682,626 over the prior year due primarily to lack of non-recurring expenses. All of our current deferred income tax benefits have been utilized. We are currently accruing income taxes at the maximum corporate rate.

Liquidity and Capital Resources

Our working capital at December 31, 2018 was $8,307,245 compared to working capital of $8,457,600 at December 31, 2017. We undertook no significant equity or long-term debt transactions in 2018.

Inventories on hand at December 31, 2018 were $4,233,787, an increase of $1,095,526 compared to December 31, 2017. As we launched new products, inventory increased to meet demand in both the new and legacy products.

Our net trade receivables at December 31, 2018 were $2,342,342 compared to $3,254,681 at December 31, 2017. Trade receivables, measured by days of salesoutstanding, decreased to 42 days at December 31, 2018 compared to 53 days at December 31, 2017.

At December 31, 2018, our balance sheet reflected $2,963,569 of cash on hand compared to $3,191,722 at December 31, 2017. The decrease in cash is due primarily to an increase in inventories of $1,143,715 offset by a reduction in trade receivables of $919,240. Income taxes paid totaled $191,923 during 2018 compared with $2,192 during 2017.

As of December 31, 2018, the Company has a $2,000,000 line of credit, secured by substantially all assets of the Company and bears interest at the bank’s prime rate (5.5% at December 31, 2018) less 0.5% or LIBOR plus 2.5%. The line of credit matures on August 1, 2019 and requires compliance with certain financial covenants including the requirement to maintain a quick ratio of 1.3:1.0 and a quarterly profitability test. At December 31, 2018 and 2017, the Company was in compliance with the financial covenants and the line of credit had no outstanding balance.

We believe that our present resources, including cash and accounts receivable, are sufficient to fund our anticipated level of operations through at least April 2020. There are no current plans for significant capital equipment expenditures.

Inflation

We believe that inflation will not have a direct material effect on our results of operations.

The economic factors that could adversely impact our business in 2019 include, but are not limited to, currency fluctuations as we buy materials and sell products internationally and also fluctuations in materials prices.

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 our consolidated financial statements and the accompanying notes. The amounts of assets and liabilities reported on our balance sheet and the amounts of revenues and expenses reported for each of our fiscal periods are affected by estimates and assumptions, which are used for, but not limited to, the accounting for revenue recognition, accounts receivable, doubtful accounts and inventories. Actual results could differ from these estimates. The following critical accounting policies are significantly affected by judgments, assumptions and estimates used in the preparation of the financial statements:

Revenue Recognition

A detailed discussion of our revenue recognition policies is contained in Note 1 (Summary of the Company and Significant Accounting Policies) of the Notes to Financial Statements below. The discussion is incorporated herein by reference.

Accounts Receivable

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 only where sufficient historical experience justifies the credit risks involved. In many of our larger sales, the customers are frequently construction contractors who need our start-up services to complete their work and obtain payment. Management’s ability to manage the credit terms and leverage the 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 to the best of management’s knowledge. We believe that we have demonstrated the ability to make reasonable and reliable estimates of product returns and of allowances for doubtful accounts based on significant historical experience. Trends of sales returns, exchanges and warranty repairs are tracked as a management review item in our International Organization for Standardization (“ISO”) quality program, and data generated from that program forms a basis for the reserve management.

Inventories

Inventories are stated at the lower of cost or net realizable value, cost being determined on the first-in, first-out method. We use an Enterprise Requirements Planning (“ERP”) software system which provides data upon which management can rely to determine inventory trends and identify excesses. We consider it necessary to maintain an elevated inventory level of critical components and low inventory turns compared to typical industry benchmarks in order to mitigate potential supply disruptions and to respond to orders in a timely manner. Write-downs of slow moving and obsolete inventories are determined based on historical experience and current product demand. We evaluate the inventory for excess or obsolescence on a quarterly basis. The ultimate write-down is dependent upon management’s ability to forecast demands accurately, manage product changes efficiently, and interpret the data provided by the ERP system.

The market cost of our inventory is equal to the realizable value which is based on management’s forecast for sales of our products in the ensuing years. The industry in which we operate is characterized by technological advancements and change. Should demand for our products prove to be significantly less than anticipated, the ultimate realizable value of our inventory could be substantially less than the amount shown on the accompanying balance sheet.

Determination of Applicability of Valuation Allowance for Deferred Tax Assets

We determine the applicability of a valuation allowance against the accrued tax benefit by evaluating recent trends including sales levels, changes in backlog and fixed expenses. We also consider our plans for the current twelve month period regarding activities that would change the level of expenses relative to historical trends.

At December 31, 2018 and 2017, we determined that, based on the profitable results and full utilization of the available deferred tax benefits, no valuation allowance against the remaining deferred tax asset is required.

Reference is made to the financial statements, including the notes thereto, together with the report thereon of Squar Milner LLP, independent registered public accounting firm, attached to this Annual Report on Form 10-K as a separate section beginning on page F-1.

There have been no disagreements with Squar Milner LLP of the type required to be reported under this Item 9 since the date of their engagement.

Disclosure Controls and Procedures

As of the end of the period covered by this Annual Report on Form 10-K, our management, with the participation of Jeffrey Brown, our principal executive officer and Tamara Allen, our principal financial officer carried out an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures, pursuant to Exchange Act Rules 13a-15(e) and 15d-15(e), which includes inquiries made to certain other employees. Based upon that evaluation, our principal executive officer and principal financial officer concluded that, as of December 31, 2018, our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act) were effective.

Management’s Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over our financial reporting as defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles in the United States of America (GAAP), and includes those policies and procedures that: (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on our financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect all misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In order to evaluate the effectiveness of internal control over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act, management conducted an evaluation of the effectiveness of our internal control over financial reporting based on the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in its report, Internal Control-Integrated Framework (1992). No material weaknesses were identified and management concluded that our internal control over financial reporting was effective as of December 31, 2018 based on the criteria set forth in COSO’s report Internal Control-Integrated Framework (1992).

This Annual Report on Form 10-K does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting as such report is not required for non-accelerated filers such as us.

Changes in Internal Control over Financial Reporting

There have been no significant changes in our internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) during the quarter ended December 31, 2018 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

There were no items required to be disclosed in a Form 8-K during the quarter ended December 31, 2018 that were not disclosed.

PART III

ITEM 10. Directors, Executive Officers and Corporate Governance.

DIRECTORS

The following table sets forthBoard of Directors of SMC (“Board”) is currently comprised of six members. The names of the six directors and certain information with respect to the directors and executive officers ofabout them is set forth below:

Jeffrey S. Brown joined the Company as of December 31, 2018, based upon information furnished by such persons:

All officersPresident and Chief Executive Officer in October 2017 from Accuris Networks, where he was the President and Chief Executive Officer from September 2014 to July 2017. While at Accuris’, he led the company’s pivot to a SaaS model and deployed a worldwide cloud solution for some of the Companylargest wireless service providers. From May 2009 to July 2014, Mr. Brown served as President and Chief Executive Officer of Kineto Wireless until it was sold to Taqua. Mr. Brown holds a Bachelor of Arts from the University of California, Berkeley, and a Master of Business Administration from Golden Gate University. His business administration education and more than thirty years of industry experience qualify him to serve at the discretionas Chief Executive Officer and as a member of the Board of Directors.our Board.

Gordon R. Arnold joined Sierra Monitor Corporation, a California corporation (“Old Sierra”), in December 1979 as Operations Manager and Vice President. He became President in 1984 and Chief Executive Officer of Old Sierra in April 1985. In September 1989, Old Sierra merged into UMF Systems, Inc., a California corporation (“UMF”), and UMF changed its name to “Sierra Monitor Corporation.” Mr. Arnold served as the Company’s President, Chief Executive Officer and Chief Financial Officer since the merger and as the Company’s Secretary since February 1993 until July 2014. Mr. Arnold has served aswas also a Director and Chairman of the Board sincedirector from 1984, and he becamebecoming Executive Chairman in July 2014. Mr. Arnold then served as interim President and Chief Executive Officer from May 2017 until October 2017, and, subsequently, Executive Advisor through October 2018. He is a past ChairmanPresident of the Measurement Control and Automation Association. Mr. Arnold’s specific qualifications and experience to serve as a member of our Board of Directors include his business management education, more than forty years of direct industry experience and over thirty-five years of full-time employment as an executive of the Company.

Jeffrey Brown joined Sierra Monitor CorporationC. Richard Kramlich has been a director of the Company since 1980. Mr. Kramlich, who has more than thirty-five years of venture capital experience, is a co-founder of New Enterprise Associates, a venture capital firm. Mr. Kramlich is presently a director of Zhone Technologies and has been since 1999. He received a Master of Business Administration from the Harvard University Graduate School of Business and a Bachelor of Science in History from Northwestern University. Mr. Kramlich’s specific qualifications and experience to serve as a member of our Board include over thirty years as managing general partner of a highly successful venture capital company, his membership on numerous boards of private and public companies, and over thirty years of participation on our Board.

Robert C. Marshall has been a director of the Company since 1998. Since 1997, Mr. Marshall has been the Managing General Partner of Selby Venture Partners, a venture capital firm. Mr. Marshall received a Bachelor’s degree in Electrical Engineering from Heald Engineering and a Master of Business Administration from Pepperdine University. Mr. Marshall’s specific qualifications and experience to serve as a member of our Board include his participation in the founding of the first redundant computer manufacturing company, his founding of a highly successful venture capital company, his involvement in the management and turn-around of various electronic companies and his seventeen-year participation on our Board.

Mr. James D. Norrod became a director of the Company in October 2017. Since October 2017, Mr. Norrod has served as the President and Chief Executive Officer in October 2017. Mr. Brown joined the company from Accuris Networks whereof Tellabs, Inc. Prior to that, he wasserved as the President and CEOChief Executive Officer of Zhone Technologies from SeptemberJuly 2014 to July 2017. He led Accuris’ pivotSeptember 2017, leading the successful merger of Zhone Technologies into DASAN Zhone Solutions Inc. From May 2013 through May 2014, Mr. Norrod served as the Executive Chairman of GreenBytes until it was acquired by Oracle. Beginning in December 2010, Mr. Norrod served as the Chairman and Chief Executive Officer of Infinite Power Solutions until it was acquired in February 2013. Mr. Norrod holds a Bachelor of Science in Economics from Oakland University and a Master of Business Administration in Marketing from the University of Detroit. Mr. Norrod’s specific qualifications and experience to serve as a SaaS modelmember of our Board include his education and deployedhis membership on numerous boards of private and public companies.

Mr. Ross DeMont joined Sierra Monitor Corporation in 2018, as a worldwide cloud solution for someDirector of the largest wireless service providers. PriorCompany. He is currently the Director of Research at Rainin Group, LLC and is responsible for the investments of $600 million of assets across a range of public and private direct investment, since September 2016. Previously, Mr. DeMont was a Portfolio Manager at Midwood Capital Management, a private investment partnership making concentrated investments in small cap public companies from 2002 to Accuris,2016. He currently serves on the Board of Directors of Desalitech, a private venture backed company selling into the industrial water treatment industry. Mr. Brown led various technology companies including KinetoWireless, RadioFrame Networks and Data Critical Corporation. Mr. Brown also held senior positions at AT&T and PacTel Cellular communications. Mr. Brown holdsDeMont graduated from Connecticut College with a BA Degree from University of California at Berkeleyin both Economics and Government and earned an MBA from Golden Gate University. His business administration educationThe Tuck School of Business at Dartmouth. Mr. DeMont has the specific qualifications and more than forty years of industry experience qualify him to serve as CEO and as a member of our Board of Directors.

EXECUTIVE OFFICERS

The names of our executive officers and certain information about them is set forth below. Our executive officers are appointed by, and serve at the discretion of, our Board of Directors.

See ITEM 10.“Directors, Executive Officers and Corporate Governance” for Mr. Brown’s biographical information.

Tamara S. Allen has served as our Chief Financial Officer since April 2014 and has been our Controller since March 2005. Ms. Allen joined Sierra Monitor Corporation in January 1996. She holds a Bachelor of Science in Business Administration from University of Wisconsin with an emphasis in Financial Management. Prior to joining us, Ms. Allen held various finance and accounting positions at Philips Semiconductors and served on the board of directors for Horizon West Federal Credit Union. Ms. Allen’s experience and expertise in GAAP practice, financial SEC reporting, Sarbanes-Oxley, COSO, and board level financial reporting and analysis qualify her to serve as an officer of the Company.

Michael C. Farr has served as Vice President of Operations at Sierra Monitor Corporation since 1986, having joined the company in 1983 as Operations Manager. He holds a Bachelor of Arts in Mathematics from the University of California, Los Angeles. Prior to joining us, Mr. Farr held operations management positions in Signetics Semiconductor Co. and Advanced Micro Devices. He is APICS Certified in Production and Inventory Management (“CPIM”). His strong production control and operations management background resulted in our attainment of ISO-9001 registration for our quality system and has supported our growth through multiple transitions of our supply chain process, partners, and systems. Mr. Farr’s extensive operations management experience and knowledge of our products, services and processes qualify him to serve as an officer of the Company.

C. Richard Kramlich has been a Director of the Company since 1980. Mr. Kramlich, who has more than thirty five years of venture capital experience, is a co-founder of New Enterprise Associates, a venture capital firm. Mr. Kramlich is presently a director of Zhone Technologies (“ZHNE”). He received a Master’s in Business Administration from the Harvard University Graduate School of Business and a Bachelor of Science in History from Northwestern University. Mr. Kramlich’s specific qualifications and experience to serve as a member of our Board of Directors include over thirty years as managing general partner of a highly successful venture capital company, his membership on numerous boards of private and public companies, and over thirty years of participation on our Board of Directors.

Robert C. Marshall has been a Director of the Company since 1998. Since 1997, Mr. Marshall has been the Managing General Partner of Selby Venture Partners, a venture capital firm. Mr. Marshall received a Bachelor’s degree in Electrical Engineering from Heald Engineering and an MBA from Pepperdine University. Mr. Marshall’s specific qualifications and experience to serve as a member of our Board of Directors include his participation in the founding of the first redundant computer manufacturing company, his founding of a highly successful venture capital company, his involvement in the management and turn-around of various electronic companies and his eighteen years of participation on our Board of Directors.

James D. Norrod joined Sierra Monitor Corporation in 2017 as a Director of the Company. Since October 2017, he has served as President and Chief Executvie Officer at Tellabs. Prior to that, he was President and CEO of Zhone Technologies until 2014 when he assisted in successfully merging Zhone Technologies into DASAN Zhone Solutions where he began serving as Co-Chief Executive Officer until 2017. In 2013 thru 2014, Mr. Norrod served as the Executive Chairman of GreenBytes until it was acquired by Oracle. Beginning in 2010, Mr. Norrod served as Chairman and CEO of Infinite Power Solutions until it was acquired in 2013. Mr. Norrod holds a BS in Economics from Oakland University and an MBA in Marketing from the University of Detroit. Being a visionary executive that served as a CEO of a number of technology companies successfully creating shareholder value through organic growth and strategic merger and acquisition activity qualifies him to serve as a member of our Board of Directors.

Mr. Ross DeMontjoined Sierra Monitor Corporation in 2018, as a Director of the Company. He is currently theDirector of Research at Rainin Group, LLC and is responsible for the investments of $600 million of assets across a range of public and private direct investment, since September 2016. Previously, Mr. DeMont was a Portfolio Manager at Midwood Capital Management, a private investment partnership making concentrated investments in small cap public companies from 2002 to 2016. He currently serves on the Board of Directors of Desalitech, a private venture backed company selling into the industrial water treatment industry. Mr. DeMont graduated from Connecticut College with a BA in both Economics and Government and earned an MBA from The Tuck School of Business at Dartmouth. Mr. DeMont has the specific qualifications and experience to serve as a member of our Board of Directors.

Family Relationships

There are no family relationships between or among the directors, executive officers or persons nominated or charged by the Company to become directors or executive officers.

Involvement in Legal Proceedings

To our knowledge, during the past ten years, no event specified in Item 401(f) of Regulation S-K occurred with respect to a present or former director or executive officer of the Company.

Family Relationships

With respect

There are no family relationships between or among the directors, executive officers or persons nominated or charged by the Company to the other information required by this Item 10, the sections entitled “Election of Directors Nominees”, “Information About Our Board of Directors – Corporate Governance” and “Sectionbecome directors or executive officers.

Section 16(a) Beneficial Ownership Reporting Compliance”Compliance

Section 16(a) of the Exchange Act requires the Company’s executive officers, directors and persons who own more than 10% of a registered class of the Company’s equity securities during fiscal year 2018 to file reports of initial ownership on Form 3 and changes in ownership on Form 4 or 5 with the SEC. Such officers, directors and 10% shareholders are also required by SEC rules to furnish the Company with copies of all Section 16(a) reports they file.

Based solely on its review of the copies of such forms received by it, or written representations from certain reporting persons that Form 5 was not required for such persons, the Company believes that, during the fiscal year ended December 31, 2018, all other Section 16(a) reports applicable to its officers, directors and 10% shareholders were timely filed.

INFORMATION ABOUT OUR BOARD

Board Leadership Structure and Role in Risk Oversight

Our Chairman, Gordon Arnold, retired as Executive Advisor in October 2018 but maintains frequent communication with our Chief Executive Officer, Jeff Brown. Mr. Kramlich receives operational updates from both Mr. Arnold and Mr. Brown and therefore functions as the lead independent director through his advice to the Company and his communication with the other directors.

The current leadership structure is appropriate due to the small size of the Company and the low number of officers (six) and independent directors (four). Due in part to the significant continuity in the Company’s leadership structure over the past fifteen years, the independent directors are satisfied that the Executive Advisor has the education, experience and judgment necessary to perform the functions of Chairman of the Board.

The members of the Board are proactive in both their formal and their informal interface with the Company. Three independent Board members (Kramlich, Marshall and DeMont) also comprise the Audit Committee. The Board and the Audit Committee meet formally on a quarterly basis. The members receive periodic briefings from the independent auditors and they require regular reports regarding the Company’s internal controls practices and third-party audits. The Board believes that maintaining the current structure of combined Executive Advisor and Chairman of the Board positions is appropriate due to its confidence in Mr. Arnold and his broad skills in investing, managing and directing numerous other public and private companies.

Risk is inherent with every business and the Board as a whole is responsible for overseeing our risk management function. The Board meets regularly to receive Audit Committee reports, as well as management reports with respect to areas of material risk to the Company, including legal, operational, financial and strategic risks. In addition, the Audit Committee oversees and reviews at least annually our policies related to risk management. In its risk oversight role, the Board has the responsibility to satisfy itself that the risk management processes designed and implemented by management are adequate and functioning as designed.

Board Meetings and Committees

The Board held five meetings during the fiscal year ended December 31, 2018. We encourage our directors to attend the Annual Meeting and a majority of our Proxy Statement fordirectors attended our 20192018 Annual Meeting of Shareholders are incorporatedShareholders. During fiscal year 2018, each then current director attended at least 75% of the aggregate of (i) the total number of meetings of the Board and (ii) the total number of meetings held by reference herein.all committees of the Board on which he served. The Board has a standing Audit Committee but does not have a standing nominating or compensation committee or any other committees performing similar functions.

Audit Committee

The Audit Committee is primarily responsible for overseeing the services performed by the Company’s independent registered public accounting firm and internal audit processes, evaluating the Company’s accounting policies and its system of internal controls and reviewing significant financial transactions. The Audit Committee met four times during fiscal year 2018. Messrs. Kramlich, Marshall and Norrod were the members of the Audit Committee until May 10, 2018 and Mr. DeMont replaced Mr. Norrod on the audit committee after his appointment to the Board on May 10, 2018.

The information requiredBoard has previously approved and adopted an Audit Committee Charter, a copy of which may be obtained at the Company’s website at http://www.investor.sierramonitor.com/essential-governance-documents.

Independence; Audit Committee Financial Expert

As stated above, while the shares of the Company’s Common Stock are traded on an over-the-counter system, the Board has elected to apply the rules of the NASDAQ Stock Market in determining director independence. The Board believes that all Audit Committee members are independent directors as defined by the rules of the SEC and under the rules of the NASDAQ Stock Market. The Board has determined that the Company has at least one audit committee financial expert serving on its Audit Committee. C. Richard Kramlich is the Company’s audit committee financial expert as defined in Item 407(d)(5) of Regulation S-K promulgated by the SEC.

Nominating Committee

The Board has no standing nominating committee nor does it have a committee performing similar functions. Furthermore, it has no nominating committee charter. In light of the relatively small size of the Company and the number of directors, the Board has determined that it is more efficient for the entire Board to consider nominees for director instead of a separate nominating committee. The Board will continue to evaluate on an ongoing basis the desirability of a separate nominating committee, and will establish such a committee when, if at all, it deems that doing so would benefit the Company.

The Board has no formal policy with regard to the consideration of any director candidates recommended by shareholders because, in its view, a shareholder that desires to nominate a person for election to the Board may do so directly by following the requirements set forth in Rule 14a-8 promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Nevertheless, the Board will consider candidates recommended by shareholders. Shareholders who wish to have their recommendations considered by the Board should direct the recommendation in writing to Sierra Monitor Corporation, 1991 Tarob Court, Milpitas, CA 95035, Attention: Secretary. The candidate recommended should possess the qualities that are necessary for any member of the Board, as described in the guidelines set forth below.

The guidelines of the Board for evaluating and identifying candidates for the Board, which are the same for any candidate regardless of whether the candidate was recommended by a shareholder or the Board, are as follows:

In addition, while we do not have a formal written policy on director diversity, the Board also considers diversity when reviewing the overall composition of the Board and considering the slate of nominees for annual election to the Board and the appointment of individual directors to the Board. Diversity, in this Item 10 regardingcontext, includes factors such as experience, specialized expertise, geographic location, cultural background, gender and ethnicity.

Corporate Governance

As part of our system of corporate governance, we adopted a code of business conduct and ethics that applies to all directors, officers and employees. Our code of business conduct and ethics is posted on our website at www.investor.sierramonitor.com (by including the foregoing Internet address link, we do not intend to incorporate by reference to this 10-K/A material not specifically referenced herein). We intend to disclose any future amendments to certain provisions of our code of business conduct is incorporatedand ethics, or waivers of such provisions, applicable to any principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions or our directors on our website identified above. The inclusion of our website address in this report does not include or incorporate by reference herein fromthe information on our Proxy Statementwebsite into this report.

Communicating with Our Directors

Shareholders may contact any or all of our directors directly by writing to them at Sierra Monitor Corporation, 1991 Tarob Court, Milpitas, CA 95035, Attn: Board of Directors.

ITEM 11. Executive Compensation

Our compensation philosophy with respect to executive officers is designed to attract, retain, motivate and reward highly qualified executives who contribute to the success of the Company and its shareholders. To achieve these goals, we strive to provide a comprehensive compensation package for each executive officer that is competitive with those offered by companies of similar type and size, in the same geographical area and whose executives perform functions similar to those performed by our 2019 Annual Meetingexecutives.

The following table shows for the fiscal years ended December 31, 2018 and 2017 the compensation of Shareholders underour named executive officers, who consist of our current Chief Executive Officer and the section entitled “Corporate Governance.”two most highly compensated executive officers other than our Chief Executive Officer:

Outstanding Equity Awards at Fiscal 2018 Year-End

The following table provides the specified information concerning the number of outstanding equity awards held by each of the executive officers named in the Summary Compensation Table during the fiscal year ended December 31, 2018:

Employment Contracts and Termination of Employment and Change-in-Control Arrangements

Retention Agreements. Effective April 2, 2012, we entered into retention agreements with certain executive officers and employees of the Company, Michael C. Farr, Vice President of Operations, and Tamara Allen, our Chief Financial Officer (together, the “Executives”). Effective October 16, 2017 we entered into a similar retention agreement with Jeff Brown, our Chief Executive Officer. Except as may be noted below, the Executives’ retention agreements (the “Retention Agreements”) have substantially the same terms and provide that in the event the Executives’ employment with the Company is terminated without “cause” (as defined in the Retention Agreements), or they resign for “good reason” (as defined in the Retention Agreements) within the period beginning three months prior to and ending 12 months following a change of control of the Company (as defined in the Retention Agreements), the Executives will receive:

The information required by this Item 11 is incorporated by reference herein from our Proxy Statement for our 2019 Annual Meeting of ShareholdersIn order to be eligible to receive benefits under the sections entitled “CompensationRetention Agreements, the Executives must sign and not revoke a release of Executive Officers”claims agreement in favor of the Company (in a form acceptable to the Company). The Retention Agreements also provide that the Executives shall comply with a 12-month non-solicitation obligation and “Compensationrequirements of Directors”.the Company’s proprietary information and inventions agreement and shall agree to not disparage the Company and its officers, directors, employees and shareholders.

Director Compensation

The following table shows, for the fiscal year ended December 31, 2018, the compensation earned by our directors, which is discussed below under “Executive Compensation and Other Matters.” During the fiscal year ended December 31, 2018, Mr. Arnold earned the compensation set forth below under “Executive Compensation and Other Matters” and a pro-rated Director fee after his retirement from Executive Advisor in October, 2018. Mr. Brown, our President and Chief Executive Officer, did not receive compensation for serving on our Board.

Securities AuthorizedITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

Non-Equity Incentive Plans

2018 Bonus Plan: On February 19, 2018, our Board approved an executive cash incentive compensation plan and target cash incentive awards for Issuancethe Company’s executive officers and its other key employees for 2018 fiscal performance (the “2018 Bonus Plan”). Payouts under the 2018 Bonus Plan are based on the Company’s achievement against certain targets for fiscal 2018 revenue.

Equity Compensation Plans.Plan Information

The following tables summarize information regarding the various stock-based compensation plans under which the Company was authorized to issue equity securities as of December 31, 2018:

Under the SEC’s rules, a person who directly or indirectly has or shares voting power or investment power with respect to a security is considered a beneficial owner of the security. Voting power is the power to vote or direct the voting of shares, and investment power is the power to dispose of or direct the disposition of shares.

The following table sets forth certain information, as of December 31, 2018 with respect to compensation plans (including individual compensation arrangements) under which equity securitiesApril 22, 2019, regarding beneficial ownership of the Company are authorized for issuance, aggregated as follows:our Common Stock by:

The other information required by this Item 12 is incorporated by reference herein from our Proxy Statement for our 2019 Annual Meeting of Shareholders under the section entitled “Security Ownership of Certain Beneficial Owners and Management.”

The information requiredon beneficial ownership in the table and the footnotes is based upon our records and the most recent Schedule 13D or 13G filed by this Item 13 is incorporatedeach such person and information supplied to us by reference herein from our Proxy Statementsuch person. Unless otherwise indicated, each person has sole voting power and sole investment power with respect to all shares beneficially owned, subject to community property laws where applicable. Shares subject to options that are exercisable within 60 days after April 22, 2019 are deemed to be outstanding and to be beneficially owned by the person holding such options for our 2019 Annual Meetingthe purpose of Shareholders undercomputing the section entitled “Certainpercentage ownership of such person, but are not deemed to be outstanding and to be beneficially owned for the purpose of computing the percentage ownership of any other person.

ITEM 13. Certain Relationships and Related Transactions.”Transactions

During our last fiscal year, there has not been, and there is not currently proposed, any transaction or series of similar transactions to which we were or will be a party in which the amount involved exceeded or will exceed 1% of the average of our total assets at the end of our fiscal years 2018 and 2017, which is $108,067, and in which any of our directors, executive officers, holders of more than 5% of our voting securities or any member of the immediate family of any of the foregoing persons had or will have a direct or indirect material interest.

Director Independence

While shares of the Company’s Common Stock are traded on an over-the-counter market, the Board uses the rules of the NASDAQ Stock Market as a benchmark in determining director independence. Based on the review by the Board of all relevant information, the Board has determined that each of our directors, other than Messrs. Arnold and Brown, are “independent” as defined under the rules of the NASDAQ Stock Market.

ITEM 14. Principal Accounting Fees and Services

The information requiredaggregate fees billed for professional accounting services by this Item 14 is incorporatedSquar Milner LLP for the fiscal years ended December 31, 2018 and 2017 are as follows:

Audit Fees

The aggregate fees billed by reference herein from our Proxy StatementSquar Milner LLP for our 2019 Annual Meetingprofessional services rendered for the reviews of Shareholdersthe condensed financial statements included in the Company’s Quarterly Reports on Form 10-Q for each of fiscal years 2018 and 2017, and for their audit of the annual financial statements for each of fiscal years ended December 31, 2018 and 2017 were $82,600 and 82,100, respectively.

Tax Fees

There were no fees billed by Squar Milner LLP for tax services in the fiscal years 2018 and 2017 as the Company engaged another firm for tax preparation/consulting.

Audit-Related Fees

The aggregate fees billed by Squar Milner LLP for audit-related services in each of fiscal years 2018 and 2017 were approximately $10,202 and $5,505, respectively.

All Other Fees

During fiscal years 2018 and 2017, the Company did not engage Squar Milner LLP to provide products or services other than those reported under the section entitled “Principal Accountant Fees and Services”.sections above.

Financial Statements.Policy on Audit Committee Pre-Approval of Audit and Permissible Non-Audit Services of Independent Registered Public Accounting Firm

See Item 8All services, whether audit or non-audit services, performed by Squar Milner LLP must be pre-approved by the Audit Committee. Pre-approval must be obtained before Squar Milner LLP performs the services but cannot be obtained more than a year before performance begins. Approval can be for general classes of thispermitted services such as “annual audit services” or “tax consulting services.” A written engagement letter, including a description of the permitted services, the dates of the engagement and the fees for such services, must be approved in accordance with these procedures before performance begins.

Percentage of Audit Fees Pre-Approved

During fiscal years 2018 and 2017, 100% of all audit and permissible non-audit services were pre-approved by the Audit Committee.

Independence of Squar Milner LLP

The Audit Committee has determined that the accounting advice provided by Squar Milner is compatible with maintaining Squar Milner’s independence.

ITEM 15. Exhibits and Financial Statements

The financial statements required to be filed in our Annual Report on Form 10-K.

Schedules.

Not applicable.

Index to Exhibits10-K are included in the Original Filing. The exhibits filed with this Amendment are following the signature.

SIGNATURESSIGNATURE

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrantRegistrant has duly caused this report to be signed on its behalf by the undersigned, theretohereunto duly authorized.

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

SIERRA MONITOR CORPORATION

Financial Statements

SIERRA MONITOR CORPORATION

Index to Financial Statements

Report of Independent Registered Public Accounting Firm

To the Shareholders and the Board of Directors of Sierra Monitor Corporation

Opinion on the Financial Statements

We have audited the accompanying balance sheets of Sierra Monitor Corporation (the Company) as of December 31, 2018 and 2017, the related statements of operations, stockholders’ equity and cash flows for the years then ended, and the related notes to the financial statements (collectively, the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

Emphasis of Matter – Acquisition of Company

As discussed in Note 9, on March 28, 2019 the Company signed a definitive agreement to be acquired by MSA Safety Incorporated.

/s/ Squar Milner LLP

We have served as the Company’s auditor since 2002.

Irvine, California

April 1, 2019

SIERRA MONITOR CORPORATION

Balance Sheets

December 31, 2018 and 2017

See accompanying notes to these financial statements.

SIERRA MONITOR CORPORATION

Statements of Operations

For the Years Ended December 31, 2018 and 2017

See accompanying notes to these financial statements.

SIERRA MONITOR CORPORATION

Statements of Shareholders’ Equity

For the Years Ended December 31, 2018 and 2017

See accompanying notes to these financial statements.

SIERRA MONITOR CORPORATION

Statements of Cash Flows

For the Years Ended December 31, 2018 and 2017

See accompanying notes to these financial statements.

SIERRA MONITOR CORPORATION

Notes to Financial Statements

December 31, 2018 and 2017

Note 1 - Summary of the Company and Significant Accounting Policies

The Company

Sierra Monitor Corporation (the “Company”) was incorporated in 1978. The Company addresses the industrial and commercial facilities management market with Industrial Internet of Things (IIoT) solutions that connect and protect high-value infrastructure assets. The Company’s primary product lines include the FieldServer protocols gateways and the Sentry IT fire and gas detection systems. The Company’s headquarters are located in Milpitas, California. The Company’s stock is quoted on the OTC Bulletin Board under the symbol “SRMC.”

Risks and Uncertainties

The Company operates in a highly competitive industry that is subject to intense competition, government regulation and rapid technological change. The Company’s operations are subject to significant risks and uncertainties, including financial, operational, technological, regulatory and other business risks associated with such a company.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates made by management are, among others, the allowance for bad debts on trade receivables, net realization of inventory, realizability of long-lived assets, provision for warranty returns and deferred income tax asset valuation.

Concentrations

We currently maintain substantially all of our day to day operating cash with a major financial institution. At times cash balances may be in excess of the amounts insured by the Federal Deposit Insurance Corporation. Cash balances of approximately $2,601,000 and $2,830,000 were in excess of such insured amounts at December 31, 2018 and 2017, respectively.

The Company grants credit to customers within the United States of America and generally does not require collateral. We have international sales (see Note 8) that are generally prepaid or paid through a letter of credit. Our ability to collect receivables is affected by economic fluctuations in the industrial and geographic areas served by us. Reserves for uncollectible amounts are provided, based on past experience and a specific analysis of the accounts, which management believes is sufficient. Although management expects to collect amounts due, actual collections may differ from the estimated amounts.

No customers exceeded 10% of the Company’s accounts receivable at December 31, 2018 but two customers exceeded 10% of the Company’s accounts receivable at December 31, 2017. No customers exceeded 10% of the Company’s sales during the years ended December 31, 2018 or 2017.

Accounts Receivable

Accounts receivable are carried at original invoice amount, less an estimate for an allowance for doubtful accounts. The allowance for doubtful accounts is analyzed on a periodic basis to ensure that it is adequate to the best of management’s knowledge. We believe that we have demonstrated reliable estimates of product returns and of allowances for doubtful accounts based on significant historical experience. Trends of sales returns, exchanges and warranty repairs are tracked as a management review item in the Company’s ISO (International Organization for Standardization) quality program and data generated from that program forms a basis for the reserve management.

Inventories

Inventories are stated at the lower of cost (first-in, first-out) or net realizable value. Cost is determined on a standard cost basis that approximates the first-in, first-out method.

Net realizable value is based on management’s forecasts for sales of the Company’s products or services in the ensuing years. The industry in which the Company operates is characterized by technological advancement, change and certain regulations. Should the demand for the Company’s products prove to be significantly less than anticipated, the ultimate realizable value of the Company’s inventories could be substantially less than amounts shown in the accompanying balance sheets. Management analyzes the inventory for slow-moving and obsolete parts and maintains an obsolescence reserve sufficient to cover them (see Note 2).

Property and Equipment

Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation is provided on the straight-line method over the estimated useful lives of the respective assets, generally two to five years. Leasehold improvements are amortized using the straight-line method over the shorter of the lease term or the estimated useful life of the related asset. Betterments, renewals, and extraordinary repairs that extend the lives of the assets are capitalized and other repairs and maintenance charges are expensed as incurred. The cost and related accumulated depreciation applicable to assets sold or retired are removed from the accounts, and the gain or loss on disposition is recognized in current operations.

Research and Development

Research and development is primarily comprised of engineering salaries, new product development costs, software development and maintenance costs and certain other general costs, such as depreciation on engineering equipment and sustaining engineering activities. Research and development costs are expensed as incurred. All software development and maintenance costs are expensed as incurred.

Long-Lived Assets

In accordance with the provisions of Accounting Standards Codification 360-10,Property, Plant and Equipment (“ASC 360-10”), long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable. If the cost basis of a long-lived asset is greater than the projected future undiscounted net cash flows from such asset (excluding interest), an impairment loss is recognized. Impairment losses are calculated as the difference between the cost basis of an asset and its estimated fair value. ASC 360-10 also requires companies to separately report discontinued operations and extends that reporting to a component of an entity that either has been disposed of (by sale, abandonment, or in a distribution to shareholders) or is classified as held for sale. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. At December 31, 2018 and 2017, management has determined that there were no indicators requiring review for impairment and therefore no adjustments have been made to the carrying values of long-lived assets. Also, no long-lived assets are held for sale. There can be no assurance however, that market conditions will not change or demand for the Company’s products or services will continue, which could result in impairment of long-lived assets in the future.

Revenue Recognition

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

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

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

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

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

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

Gas Detection and Environment Control Products

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

Gas Detection and Environment Control Services

Gas Detection and Environment Control Services consist of field service orders (technical support) and training, which are provided separately from product orders. Orders are accepted in the same forms as discussed forGas 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 services for immediate processing. Revenue is recognized in the period the technical support and training are performed.

FieldServer Products

FieldServer products are sold in the same manner asGas Detection and Environment Control Products (as discussed above) except that the products contain embedded software, which is integral to the operation of the device. The software embedded in FieldServer products includes two items: (a) a compiled program containing (i) the basic operating system for FieldServer products, which is common to every unit, and (ii) customized protocol drivers based on the customer order (seeFieldServer Services below for more information); and (b) a configuration file that identifies and links each data point as identified by the customer. The Company determined that the hardware, and the embedded software as defined above represent one performance obligation because the hardware is dependent upon and highly interrelated with the embedded software, and without which the hardware can’t operate. Generally, the software included in each sale does not require significant production, modification or customization and, therefore, the Company recognizes revenues at a point in time when control of the product is transferred to the customer generally occurring upon the shipment or delivery of products (depending on shipping terms), as described inGas 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. The driver development involves further research after receipt of order, preparation of a scope document to be approved by the customer and then engineering time to write, test and release the driver program. When development of the driver is complete the customer is notified and can proceed with a FieldServer product. Revenues for protocol driver development are recognized at a point in time when the control of the product is transferred to the customer generally occurring upon shipment or delivery of the related product that includes the developed protocol drivers (as noted inFieldServer 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.

Deferred Revenue

When advance payments are received from customers, they are recorded as deferred revenue until the product is shipped. At December 31, 2018 and 2017, the Company had received approximately $28,000 and $62,000 respectively, of such advance payments which are included in other current liabilities in the accompanying balance sheets.

Contract Costs

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

Contract Balances

The Company records accounts receivable when it has an unconditional right to consideration. Contract liabilities are recorded when cash payments are received or due in advance of performance. Contract liabilities consist of only advance payments, where the Company has unsatisfied performance obligations. Contract liabilities are classified as deferred revenue and included within “Other current liabilities” on the balance sheets. At times, billing may occur subsequent to revenue recognition, resulting in an unbilled receivable which represents a contract asset. The Company does not have any unbilled receivables at December 31, 2018 and 2017.

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

There were no significant changes in estimates during the period that would affect the contract balances. The amounts of revenue recognized during the twelve months ended December 31, 2018 and December 31, 2017 from the opening deferred revenue balances were $36,315 and $11,167, respectively. For the periods ended December 31, 2018, and December 31, 2017 no impairment losses related to contract balances were recognized in the condensed statement of operations.

Disaggregation of Revenue

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

Shipping and Handling

Shipping and handling costs are included in cost of goods sold in the accompanying statements of operations in accordance with ASC 605-45,Revenue Recognition. The Company has elected to account for shipping and handling activities related to contracts with customers as costs to fulfill the promise to transfer the associated products.

Remaining Performance Obligations

Remaining performance obligations represent the transaction price allocated to performances obligations that are unsatisfied or partially unsatisfied as of the end of the reporting period. Unsatisfied and partially unsatisfied performance obligations consist of contract liabilities and non-cancellable backlog. Non-cancellable backlog includes goods and services for which customer purchase orders have been accepted that are scheduled or in the process of being scheduled for shipment. As of December 31, 2018, the remaining performance obligation is approximately $4,196,000, 45% or $1,890,000 of which is expected to be recognized in 3 months and 28% or $1,168,000 of which is expected to be recognized in the remainder of 2019. The balance is expected to be recognized after fiscal year 2019.

Accounts Receivable and Related Allowances

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

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

Employee Stock-Based Compensation

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. The Company considers many factors when estimating expected forfeitures, including types of awards, employee class and historical experience.

For the years ended December 31, 2018 and 2017, the Company’s statements of operations reflected an increase in salaries and benefits expenseof $210,415 and $299,665, 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-based compensation. There was no material impact on the Company’s basic and diluted net income per share.

Compensation expense associated with stock options is recognized on a straight-line basis over the shorter of the vesting period or the minimum required service period. At December 31, 2018, there was $659,569 of total unrecognized compensation expense related to non-vested stock options, which is expected to be recognized over the next 4 years.

Compensation expense associated with restricted stock is recognized on a straight-line basis over the shorter of the vesting period or the minimum required service period. A total $112,748 and $54,680 in compensation expense associated with the restricted stock was recorded in 2018 and 2017, respectively, and is included in stock-based compensation expense in the accompanying statement of operations. There was $245,821 of total unrecognized compensation expense related to non-vested restricted stock, which is expected to be recognized over the next 4 years.

Warranty

The Company provides a warranty on all electronics sold for a period of two years after the date of shipment. Warranty issues are usually resolved with repair or replacement of the product. Trends of sales returns, exchanges and warranty repairs are tracked as a management review item in the Company’s ISO (International Organization for Standardization) quality program and data generated from that program forms a basis for the reserve that management records in our financial statements. Estimated future warranty obligations related to certain products and services are provided by charges to operations in the period in which the related revenue is recognized. At December 31, 2018 and 2017, warranty reserve approximated $42,000 and $72,000, respectively, which is included in other current liabilities in the accompanying balance sheets.

Advertising Programs

The Company expenses the cost of advertising when incurred as selling and marketing expense in the accompanying statements of operations. Advertising expenses were approximately $111,000 and $146,000 for the years ended December 31, 2018 and 2017, respectively.

Income Taxes

Income taxes are accounted for using the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is established when management estimates that future taxable income will not fully utilize deferred tax assets. No valuation allowance was deemed necessary as of December 31, 2018 and 2017.

Earnings Per Share

Under ASC 260-10,Earnings Per Share,basic earnings per common share is computed by dividing net income by the weighted-average number of common shares outstanding during the period of computation. Diluted earnings per share is computed similar to basic earnings per share except that the denominator is increased to include the number of additional common shares that would have been outstanding, using the treasury stock method, if the potential common shares had been issued and if the additional common shares were dilutive.

The following is a reconciliation of the shares used in the computation of basic and diluted earnings (loss) per share for the years ended December 31, 2018 and 2017, respectively:

For the year ended December 31, 2018, options to acquire 100,000 shares of common stock were not considered dilutive potential shares of common stock as their exercise prices were greater than the average market price of the Company’s common stock during the year then ended.For the year ended December 31, 2017, all employee stock options to purchase shares of common stock were excluded from the computation of diluted net loss per share as their effect would be anti-dilutive.

Segments of Business

ASC 280-10,Segment Reporting requires entity-wide disclosures about the products and services that an entity provides, the material countries in which it holds assets and reports revenues and its major customers. The Company currently operates in one segment, as disclosed in the accompanying consolidated statements of income and the Chief Executive Officer (“CEO”) reviews financial information on an entity level (see Note 8).

Fair Value of Financial Instruments and Certain Other Assets/Liabilities

ASC 825-10,Financial Instruments, requires disclosure of fair value information about financial instruments when it is practicable to estimate that value. The carrying amounts of the Company’s cash, trade receivables, accounts payable, accrued and other liabilities approximate their estimated fair values due to the short-term maturities of those financial instruments.

The Company does not have any assets or liabilities that are measured at fair value on a recurring basis and, during the years ended December 31, 2018 and 2017, did not have any assets or liabilities that were measured at fair value on a non-recurring basis.

Subsequent Events

Management has evaluated events subsequent to December 31, 2018 through the date that the accompanying financial statements were filed with the Securities and Exchange Commission for transactions and other events which may require adjustment of and/or disclosure in such financial statements (see Note 9). Please refer to our 8-K filed with the SEC on March 29, 2019 regarding a material definitive agreement and plan of merger that the company has entered into with MSA Safety.

Reclassifications

Reclassifications have been made to the prior year financial statements to conform to the current year presentation.

Significant Recent Accounting Pronouncements

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

Note 2 – Inventories

A summary of inventories as of December 31 is as follows:

Note 3 - Property and Equipment

A summary of property and equipment as of December 31 is as follows:

Note 4 - Employee Stock Compensation Plan

In April 2016 and in May 2016, the Company’s Board of Directors and the Company’s shareholders, respectively, approved the Company’s 2016 Equity Incentive Plan (the “2016 Stock Plan”) and reserved a total of (i) 279,680 shares, plus (ii) 2,550,320 shares that remained available for issuance under the 2006 Stock Plan immediately prior to its expiration, plus (iii) any shares subject to stock options or restricted stock granted under the 2006 Stock Plan that, on or after the date the 2016 Stock Plan became effective, expired or otherwise terminated without having been exercised in full, or were forfeited to or repurchased by the Company, with the maximum number of shares to be added to the 2016 Stock Plan pursuant to clauses (ii) and (iii) equal to 2,668,320. Options granted under our 2006 Stock Plan and 2016 Stock Plan are at the fair market value of our common stock at the grant date, typically vest ratably over 4 years, and expire 10 years from the grant date. On December 31, 2018, a total of 505,500 shares were available for grant.

A summary of stock option transactions for the two years ended December 31, 2018 is as follows:

Options outstanding that have vested and are expected to vest as of December 31, 2018 are as follows:

Options outstanding that are expected to vest are net of estimated future forfeitures in accordance with the provisions of ASC 718 which are estimated when compensation costs are recognized.

The following table summarizes information about the Company’s stock options outstanding under the 2006 Stock Plan and 2016 Stock Plan as of December 31, 2018:

The aggregate intrinsic value of options outstanding and exercisable at December 31, 2018 and 2017 approximated $1.46 and $0.00 per share respectively. The weighted average grant date fair values of options granted during the year ended December 31, 2018 and 2017 was $1.50 and $1.27 per share respectively. Such fair values were estimated using the Black-Scholes stock option pricing model and the following weighted average assumptions.

The expected life assumption is based on the average historical life of outstanding options; the expected volatility is based on the historical volatility. The expected life of options granted is based on changes in the vesting terms and the contractual life of current option grants compared to the Company’s historical grants; and the risk-free interest rate is based on the rate for U.S. Treasury bonds with similar terms as the options.

The total intrinsic value of options exercised during 2018 and 2017 was $0 and $12,150, respectively.

Note 5 - Commitments and Contingencies

Operating Leases

The Company leases its facilities under non-cancelable operating lease agreements that expire at various dates through 2018. Certain leases require the payment of property taxes, utilities and insurance, and provide options to extend the lease term.

Our principal executive, administrative, manufacturing and engineering operations are located in a 15,800 square foot leased facility in Milpitas, California under a lease scheduled to expire on April 30, 2023. An additional 12,600 square feet are leased for warehouse, office and expansion space in an adjacent building.

As of December 31, 2018, future minimum lease payments are as follows:

Rent expense was approximately $432,000 in 2018 and $384,000 in 2017, which is apportioned to the various categories in the accompanying statements of operations.

Legal

The Company may be involved from time to time in various claims, lawsuits, disputes with third parties, actions involving allegations or discrimination or breach of contracts actions incidental to the normal course of operations. The Company is currently not involved in any such litigation that management believes could have a material adverse effect on its financial position or results of operations.

Note 6 – Line-of-Credit

As of December 31, 2018, the Company has a $2,000,000 line of credit, secured by substantially all assets of the Company, and bears interest at the bank’s prime rate (5.5% at December 31, 2018) less 0.5% or LIBOR plus 2.5%. The line of credit matures on August 1, 2019 and requires compliance with certain financial covenants including the requirement to maintain a quick ratio of 1.3:1.0 and to satisfy quarterly profitability test. At December 31, 2018 and 2017, the Company was in compliance with the financial covenants and the line of credit had no outstanding balance.

Note 7 - Income Taxes

The components of income tax expense consist of the following for the years ended December 31:

At December 31, 2018 and 2017, the Company had no federal or state net operating loss carry-forwards.

The tax effects of temporary differences that gave rise to significant portions of net deferred tax assets at December 31, 2018 and 2017 are as follows:

In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which temporary differences become deductible or includable in taxable income. Management considers projected future taxable income and tax planning strategies in making this assessment. Based upon the level of historical income and projections for future taxable income over the periods to which the deferred tax assets are applicable, management believes it is more likely than not that the Company will realize the benefits of these deductible differences.

The Company accounts for uncertain tax positions as required by FASB ASC Topic 740. FASB ASC Topic 740 clarifies the accounting for uncertainty in income taxes in an enterprise’s financial statements by defining the criterion that an individual tax position must meet for any part of the benefit of that position to be recognized in an enterprise’s financial statements. The accounting standard prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return as well as guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. No significant income tax uncertainties have been identified by the Company and, therefore, the Company recognized no adjustment for unrecognized income tax benefits for the years ended December 31, 2018 and 2017.

Recently enacted U.S. tax reform legislation known as the Tax Cuts and Jobs Act (“Tax Act”), made significant changes to the rules applicable to the taxation of multinational corporations. The Tax Act changes included changing the corporate tax rate to a flat 21%, modifying the rules regarding limitations on certain deductions for executive compensation, introducing a capital investment deduction in certain circumstances, placing certain limitations on the interest deduction, modifying the rules regarding the usability of certain net operating losses, implementing a minimum tax on the global intangible low-taxed income of a United States shareholder of a controlled foreign corporation, modifying certain rules applicable to United States shareholders of controlled foreign corporations, imposing a deemed repatriation tax on certain earnings and adding certain anti-base erosion rules.

The Tax Act specifically subjects a U.S. corporation to tax on its global intangible low-taxed income, or GILTI. Under U.S. GAAP, a company can make an accounting policy election to either treat taxes due on the GILTI as a current period expense or factor such amounts into the measurement of deferred taxes. Given the complexity of the GILTI provisions, the Company is still evaluating its effects and has not yet determined its accounting policy.

The Company is no longer subject to U.S. federal income tax examination for years before 2014 and state and local tax examinations before 2013. However, to the extent allowed by law, the tax authorities may have the right to examine prior periods where net operating losses were generated and carried forward, and make adjustments up to the amount of the net operating loss carry-forward amount.

The total income tax expense differs from the amounts computed by applying the statutory federal income tax rate of 21% as follows:

Note 8 - Segment Reporting

The Company’s chief operating decision-maker is the Company’s CEO. The CEO reviews financial information presented on an entity-level basis for purposes of making operating decisions and assessing financial performance. The entity-level financial information is identical to the information presented in the accompanying statements of operations. Therefore, the Company has determined that it operates in a single operating segment: Industrial Internet of Things (IIoT) solutions.

In addition, the CEO reviews the following information on revenues by product category.

The Company sells its products to companies located primarily in the United States. For the years ended December 31, 2018 and 2017, sales to international customers were 23% and 21%, respectively.

Note 9 – Subsequent Events

On March 28, 2019, the Company signed a definitive agreement to be acquired by MSA Safety Incorporated (MSA), a global safety equipment manufacturer. Under terms of the agreement, Sierra Monitor Corporation will become an indirect wholly owned subsidiary of MSA Safety. Upon closing, each issued and outstanding share of SMC common stock (other than shares owned or held in treasury by SMC) will be cancelled and automatically converted into the right to receive $3.25 in cash, without interest. Under the Merger Agreement, at the effective time of the Merger, MSA Safety will assume vested or unvested and outstanding SMC stock options and restricted stock awards granted to SMC employees.