Final Results

RNS Number : 6365Y

Somero Enterprises Inc.

26 February 2013

 



Somero Enterprises, Inc.

26 February 2013

Press Announcement

For immediate release

26 February 2013

Somero Enterprises, Inc. ^®

Full year results for the twelve months to 31 December 2012

Somero Enterprises, Inc. ®, ("Somero" or the "Company") is pleased to report results for the twelve months to 31 December 2012. Somero is a North American manufacturer of patented laser guided equipment used for the spreading and leveling of high volumes of concrete for floors in the construction industry. Somero has operations worldwide and is primarily focused on the non-residential construction industry.

Financial Highlights

·      Revenue increased by 47% to US$32.2m (2011: US$21.9m)

·      Adjusted EBITDA increased by 367% to US$4.2m (2011: US$0.9m)^{1 2}

·      Pre-tax income of US$1.2m compared to a Pre-tax loss of (US$2.3m) in 2011

·      Adjusted net income/(loss) before amortization of US$3.4m (2011: US$0.0m) ³

·      EPS before amortization of US$0.06 (2011: US$0.00)

·      Basic EPS US$0.02 (2011: (US$0.04))

·      Reduced net debt to US$1.9m from US$4.6m using excess cash flow⁴

·      Returned to dividend list with a proposed 0.8 US cent per share dividend for the period ending December 31

Business Highlights

·      S-840 machine introduced in November 2011 had 2012 sales of US$7.7m

·      New S-15M mid-sized screed introduced in November 2012 had Q4 2012 sales of US$0.4m

·      Increased investment in emerging markets resulted in a 26% increase in revenue from that region

·      Escalating sales and service presence in China resulted in a 50% increase in 2012 sales over 2011

·      Russia sales increased by 363% in 2012 over 2011

·      Fully operational Chinese website enabled our Chinese customers to interact with us more effectively

1.     The Company uses non-US GAAP financial measures in order to provide supplemental information regarding the Company's operating performance. See further information regarding non-GAAP measures on pages 8 and 9.

2.     Adjusted EBITDA as used herein is a calculation of the Company's net income/(loss) plus tax provision, interest expense, interest income, foreign exchange gain/(loss), other expense, depreciation, amortization, stock based compensation and the write-down of Goodwill, as applicable.

3.     Adjusted net income/(loss) before amortization is a calculation of net income/(loss) plus amortization of intangibles.

4.     Net Debt is defined as total borrowings under bank obligations less cash and cash equivalents.

Enquiries

Canaccord Genuity Hawkpoint

Chris Robinson

Tarquin Wethered

[phone]

Canaccord Genuity

Piers Coombs

[phone]

About Somero

Somero^® designs, manufactures and sells equipment that automates the process of spreading and levelling large volumes of concrete for commercial flooring and other horizontal surfaces, such as paved parking lots. Somero's innovative, proprietary products, including the large SXP^®-D, CopperHead^®, Mini Screed^™ C, S-840 Laser Screed^®, the new S-15M Laser Screed^® and the new  STS-11m Spreader machines that employ laser-guided technology to achieve a high level of precision.

Somero's products have been sold primarily to concrete contractors for use in non-residential construction projects in over 79 countries across every time zone around the globe. Laser Screed equipment has been specified for use in constructing warehouses, assembly plants, retail centers and in other commercial construction projects requiring extremely flat concrete floors by a variety of companies, such as Costco, Home Depot, B&Q, Daimler, various Coca-Cola bottling companies, the United States Postal Service, Lowe's, Toys 'R' Us and ProLogis.

Somero's headquarters and manufacturing operations are located in Michigan, USA with executive offices in Florida, USA. It has sales and service offices in Chesterfield, England and Shanghai, China.

Somero has approximately 107 employees and markets and sells its products through a direct sales force, external sales representatives and independent dealers in North America, Latin America, Europe, the Middle East, South Africa, Asia and Australia.

Somero is listed on the Alternative Investment Market (AIM) of the London Stock Exchange (LSE) and its trading symbol is SOM.L.

Chairman's Statement

Overview

In a year where cautious optimism was the mantra, our exceptional 2012 results were welcomed by all who worked so diligently to achieve them.  With revenues up 47% over the previous year, we were able to turn our focus towards planning for a full recovery.

This strong growth gave us confidence we had made the right level of investment in China and India to help add to the Group's future progress. Investments in our people throughout the organization have also improved quality and productivity. We continue to adapt globally to offer superior service to our customers.  

People

To achieve our strong results, we had many employees traveling extensively away from home for long periods of time. In this new growth phase of the Company, existing employees will continue to contribute extensively while we add and train new, additional staff. We believe 2013 will be a pivotal year and hope to offer career advancement opportunities. The Board thanks each one of the employees for their hard work, sacrifice, dedication and loyalty. 

Markets

Our increased investment in emerging markets resulted in a 26% increase in revenue. The ramp up of sales and service staff in China resulted in a 50% increase in sales over 2011. We also invested heavily in marketing in China by adding a dedicated marketing manager and launching a new, robust website in both English and Chinese to enable our Chinese customers to interact with us more effectively.

With the completion of the legal work to open a Somero India subsidiary in 2012, we are now in a position to ramp up sales, service and marketing there. We will continue to work with our Russian representative in 2013 on sales opportunities and customer service programs.

New Product Development

The new S-840 machine released in late 2011 resulted in sales of US$7.7m. The Product Development team has been working on several upgrades to the S-840 for 2013.

In the fourth quarter, the S-15M mid-sized Laser Screed® model was introduced which resulted in Q4 2012 sales of US$0.4m. This machine was designed with simplified controls and is easy to learn. It is a fully operational screed with high production and quality values. Our target markets are customers in emerging markets who are unfamiliar with the Somero floor placement process and can be easily trained on this model and successfully place high-quality floors. The S-15M has been well received in our mature markets as well. Current customers are attracted to the smaller size and easy portability of the machine and are showing interest in adding it to their fleets.

A new topping spreader, the STS-11m was introduced in early 2013. The spreader is equipment designed to place toppings over the screeded concrete, a common practice done in Europe and other countries outside of North America. The design is a scaled down version of our STS-132 model with a lower price point. We anticipate wide acceptance of this specialty equipment worldwide. 

Product development continues to be a focus of our growth plans for 2013 and we are working on new, innovative ideas to introduce to the industry.

Current Trading & Outlook

Although the US and world economies are still in a fragile recovery, we are taking steps to shape our own future and are confident in our growth projections for 2013. We are pleased that we are in a position to return to the dividend list with a 0.8 US cent per share dividend.

Larry Horsch

Non-Executive Chairman

President and Chief Executive Officer's Statement

Overview

2012 was a very successful year in a tough economic climate.  Continued investment in Asia, a new product and a year-long, strong trading environment in most regions created a strong start to sustainable long-term growth. We saw sales growth in eight of 10 regions, led by North America, China, South America and Russia, with two down slightly from the previous period.

North America sales, up 78%, were driven by a mild winter. Pent up demand from building owners have translated into more work for concrete contractors. This increase in work has given contractors confidence to upgrade or purchase new products.

The new S-840 Laser Screed® model and SMP model grew from US$2.6m in 2011 to US$7.7m in 2012 for a 196% increase. Total Small line sales grew from US$6.2m in 2011 to US$10.1m in 2012 for a 63% increase and Large line sales grew from US$5.4m in 2011 to US$8.1m in 2012 for a 50% increase. Other, which includes 3D Profiler, refurbs and parts, grew from US$10.3m in 2011 to US$14.0m in 2012 for a 36% increase.

Product Development

In 2012, the product development team's focus was on designing equipment that could be utilized in emerging markets while remaining attractive to mature market customers interested in adding to their fleets. The introduction of the S-15M Laser Screed model targeted the Asian markets but quickly gained positive attention in other regions. The simplified control system allows an operator unfamiliar with high technology screeding equipment to become productive quickly. Our newly re-designed topping spreader, the STS-11m, was introduced at our industry tradeshow, the World of Concrete in early February 2013 and was positively received by the industry.

Emerging Markets/Geographic Growth

In 2012, we made significant investments in China. Mike Niemela, our Vice President of Customer Service and CFO, several members of management and two of our Senior Customer Service Representatives spent a significant portion of the year in China working through legal issues, training our staff and customers and supporting the build-up of the operation. We completed the legal work to transition our representative office into a Somero corporate entity, enabling us to sell and invoice customers directly. This removes layers of distribution giving us more control to sell and service our customers more effectively.

Somero China opened a new warehouse, training and office facility in Shanghai on November 1, 2012. Our staff in China grew from six people to a staff of 12, including three added sales representatives, one marketing and two customer service professionals.

We also continued to make investments in India and expect to see strong growth in 2013. The incorporation of Somero India Ltd. was completed mid-year and we have begun a search for a Managing Director and a sales representative. Our distributor has made a reasonable start developing market awareness of our products and we will continue to work with them on a regional basis.

Strong activity at our annual industry tradeshow, the World of Concrete, and increased requests for quotations indicate activity levels are increasing and make us optimistic for continued strong growth. Remaining geo/political uncertainties in some areas of the world could affect sales in some regions; however, as we approach the new year, we are confident in our projections for 2013. 

We have launched programs to enhance our customers' experience with the Company. Customer Service developed a training certification program to ensure each Somero trained customer meets our high standards of safety and operation. Operators are certified and remain in our database of certified operators. We also launched a program to identify and correct customers' "pain points" with our processes, called the Touch Point Project. A dedicated team of employees is working to survey customers to determine what their biggest source of frustration is with the company and then the team will put together an internal program to correct the issues. This project was launched in January 2013 and we are excited to work closely with our customers to improve our performance.

We developed a new tagline, "We are passionate about your success". This tagline will be used throughout the organization, on literature and products, to communicate to our customers the dedication our employees have to seeing their business succeed and thrive. As an organization we understand that our customers' success will bring us success and our employees are truly "passionate" in bringing that about.

Cashflow and balance sheet

With adjusted EBITDA¹ up by 367% to US$4.2m, Somero used its excess free cash over the financial year to reduce debt, leaving the Group with net debt² of just US$1.9m as of December 31, 2012.

Dividend

Our debt reduction efforts and a new banking facility we will be entering into, give us greater borrowing flexibility, and have put us in a position to return to the dividend list in 2013 with a 0.8 US cent per share dividend.

As Somero moves into a new growth phase, we will recruit, hire and train new staff around the globe. We will count on our long-term, talented, hard-working staff to provide this training and inspiration for our new employees to work as a team, adapt to change and take on new responsibilities in order to overcome obstacles. I thank and commend every employee for their dedication and loyalty to the Company.

Jack Cooney

President and Chief Executive Officer

1. Adjusted EBITDA as used herein is a calculation of the Company's net income/(loss) plus tax provision, interest expense, interest income, foreign exchange gain/(loss), other expense, depreciation, amortization, stock based compensation and the write-down of Goodwill, as applicable.

2. Net Debt is defined as total borrowings under bank obligations less cash and cash equivalents.

Financial Review Summary of Financial Results
	Year ended	Year ended
	December 31,	December 31,
	2012	2011
	US$ 000	US$ 000
Revenue	32,171	21,872
Cost of sales	16,511	11,656
Gross profit	15,660	10,216
Operating expenses
Selling expenses	5,301	4,402
Engineering expenses	562	580
General and administrative expenses	8,386	6,989
Total operating expenses	14,249	11,971
Operating income/(loss)	1,411	(1,755)
Other income (expense)
Interest expense	(331)	(454)
Interest income	18	1
Foreign exchange gain/(loss)	99	(120)
Other	18	13
Income/(loss) before income taxes	1,215	(2,315)
Provision for income taxes	195	19
Net income/(loss)	1,020	(2,334)
Other data
Adjusted EBITDA 1,2,4	4,210	932
Adjusted net income/(loss)before amortization 1,3,4	3,353	(1)
Depreciation expense	300	264
Amortization of intangibles	2,333	2,333
Capital expenditures	554	133

Notes: 1. Adjusted EBITDA and Adjusted net income/ (loss) Before Amortization are not measurements of the Company's financial performance under US GAAP and should not be considered as an alternative to net income/ (loss), operating income/ (loss) or any other performance measures derived in accordance with US GAAP or as an alternative to US GAAP cash flow from operating activities as a measure of profitability or liquidity. Adjusted EBITDA and Adjusted Net Income/ (loss) Before Amortization are presented herein because management believes they are useful analytical tools for measuring the profitability and cash generation of the business. Adjusted EBITDA is also used to determine pricing and covenant compliance under the Company's credit facility and as a measurement for calculation of management incentive compensation. The Company understands that although Adjusted EBITDA is frequently used by securities analysts, lenders and others in their evaluation of companies, its calculation of Adjusted EBITDA may not be comparable to other similarly titled measures reported by other companies. 2. Adjusted EBITDA as used herein is a calculation of its net income/(loss) plus tax provision, interest expense, interest income, foreign exchange gain/(loss), other expense, depreciation, amortization, and stock based compensation. 3. Adjusted Net Income/ (loss) Before Amortization as used herein is a calculation of Net Income/ (loss) plus Amortization of Intangibles. 4. The Company uses non-US GAAP financial measures in order to provide supplemental information regarding the Company's operating performance. The non-US GAAP financial measures presented herein should not be considered in isolation from, or as a substitute to, financial measures calculated in accordance with US GAAP. Investors are cautioned that there are inherent limitations associated with the use of each non-US GAAP financial measure. In particular, non-US GAAP financial measures are not based on a comprehensive set of accounting rules or principles, and many of the adjustments to the US GAAP financial measures reflect the exclusion of items that may have a material effect on the Company's financial results calculated in accordance with US GAAP.

NET INCOME/(LOSS) TO ADJUSTED EBITDA RECONCILIATION AND ADJUSTED NET INCOME/(LOSS) BEFORE AMORTIZATION RECONCILIATION 12 months ended 12 months ended 31-Dec-12 31-Dec-11 US$ 000 US$ 000 Adjusted EBITDA reconciliation Net income/(loss) 1,020 (2,334) Tax provision/(benefit) 195 19 Interest expense 331 454 Interest income (18) (1) Foreign exchange (gain)/loss (99) 120 Other expense (18) (13) Depreciation 300 264 Amortization 2,333 2,333 Stock based compensation 166 90 Adjusted EBITDA 4,210 932 Adjusted net income/(loss) before amortization reconciliation Net income/(loss) 1,020 (2,334) Amortization 2,333 2,333 Adjusted net income/(loss) before amortization reconciliation 3,353 (1) Notes: References to "Adjusted Net Income/ (loss) Before Amortization" in this document are to Somero's net income/ (loss) plus amortization of intangibles. Although Adjusted Net Income/(loss) Before Amortization is not a measure of operating income/(loss), operating performance or liquidity under US GAAP, this financial measure is included because management believes it will be useful to investors when comparing Somero's results of operations both before and after the Somero Acquisition, including by eliminating the effects of increases in amortization of intangibles that have occurred as a result of the write-up of these assets in connection with the Somero Acquisition. Adjusted Net Income/(loss) Before Amortization should not, however, be considered in isolation or as a substitute for operating income/(loss) as determined by US GAAP, or as an indicator of operating performance, or of cash flows from operating activities as determined in accordance with US GAAP. Since Adjusted Net Income/(loss) Before Amortization is not a measure determined in accordance with US GAAP and is thus susceptible to varying calculations, Adjusted Net Income/(loss) Before Amortization, as presented, may not be comparable to other similarly titled measures of other companies. A reconciliation of net income/ (loss) to Adjusted EBITDA and Adjusted Net Income/ (loss) Before Amortization is presented above. Revenues The Company's consolidated revenues increased by 47% to US$32.2 (2011: US$21.9m). Company revenues consist primarily of sales from new Large line products (the SXP-D Large Laser Screed and its predecessors), sales from new Small line products (the S-840 and the CopperHead), and other revenues, which consist of, among other things, revenue from sales of spare parts, refurbished machines, Topping Spreaders, Mini Screeds, 3D systems, S-15M and accessories. The overall increase for the year was driven by all categories - Large line sales, Small line sales and Other revenues. The following table shows the breakdown between Large line sales, Small line sales and Other revenues during the 12 months ended December 31, 2012 and 2011: 12 months ended 31 December 2012 12 months ended 31 December 2011 (US$ in millions) Percentage of net sales (US$ in millions) Percentage of net sales Large line sales 8.1 25.1% 5.4 24.7% Small line sales 10.1 31.4% 6.2 28.3% Other revenues 14.0 43.5% 10.3 47.0% Total 32.2 100.0% 21.9 100.0%

Large line sales increased to US$8.1m (2011: US$5.4m) as a result of a 39% increase in volume to 25 units (2011: 18), Small line sales increased to US$10.1m (2011: US$6.2m) as volumes increased to 136 units (2011: 112), and Other revenues, including sales of spare parts, refurbished machines, Topping Spreaders, Mini Screeds, 3D systems, S-15M and accessories, increased to US$14.0m (2010: US$10.3m). Revenue breakdown by geography  North America EMEA RoW Total US$ Millions 2012 2011 2012 2011 2012 2011 2012 2011 Large Screed 5.1 2.4 0.7 0.6 2.3 2.4 8.1 5.4 Small Screed 5.0 3.0 3.2 1.8 1.9 1.4 10.1 6.2 Other 8.0 4.8 1.9 2.7 4.1 2.8 14.0 10.3 Total 18.1 10.2 5.8 5.1 8.3 6.6 32.2 21.9

Units breakdown by geography North America EMEA RoW Total 2012 2011 2012 2011 2012 2011 2012 2011 Large Screed 16 8 2 2 7 8 25 18 Small Screed 65 52 41 30 30 30 136 112

Sales to customers located in North America contributed 56% of total revenue (2011: 47%), sales to customers in EMEA (Europe, Middle East & South Africa) contributed 18% (2011: 23%) and sales to customers in RoW (Asia, Australia, and Latin America & Pacific) contributed 26% (2011: 30%).

Sales in North America generated US$18.1m (2011: US$10.2m) which is up 78% primarily due to higher Large line (16 Large line units in 2012 vs. 8 in 2011) and higher Small line sales (65 Small line units in 2012 vs. 52 in 2011). Sales in EMEA generated US$5.8m (2011: US$5.1m) which is up 14% primarily due to higher Small line sales (41 Small line units in 2012 vs. 30 in 2011). Sales in RoW generated US$8.3m (2011: US$6.6m) which are up 26% primarily due to higher Other sales (primarily higher refurbished sales).

Gross Profit

Gross profit increased to US$15.7m (2011: US$10.2m), with gross margins increasing to 49% (2011: 47%).  

Operating Expenses

Operating expenses increased by 18% to US$14.2m (2011: US$12.0m). This increase was driven primarily by investments made in Emerging markets, bonus that was based on one half the amount employees had given up during the compensation reduction period and management bonuses and employee profit sharing. Total employment increased to 107 from 71 in 2011.

Other Income (Expense)

Other expenses were (US$0.2m) (2011: US$0.6m) consisting of interest income, interest expense, foreign exchange gains and losses and gains and losses on the disposal of assets.

Provision for Income Taxes

The provision for income taxes was (US$0.2m) in 2012 as compared to US$0.0m in 2011. Overall, Somero's effective tax rate changed from (0.9%) in 2011 to 16.1% in 2012 due to a significant increase in earnings before taxes not fully absorbed by its net operating loss carry forwards.

Net Income/(loss)

Net income increased to US$1.0m from a net loss of US$(2.3m) in 2011. The primary cause of the increase in net income was a 47% increase in revenues and higher gross margins. Basic earnings/(loss) per share represents income available to common stockholders divided by the weighted average number of shares outstanding during the period. Diluted earnings/(loss) per share reflect additional common shares that would have been outstanding if dilutive potential common shares had been issued. Potential common shares that may be issued by the Company relate to outstanding stock options. Earnings/(loss) per common share have been computed based on the following:

					2012	2011
					US$000	US$000
Net income/(loss)					1,020	(2,334)
Basic weighted shares outstanding					56,425,598	56,425,598
Net dilutive effect of stock options and RSU's (Restricted Stock Units)					5,162,101	-
Diluted weighted average shares outstanding					61,587,699	56,425,598

The Company had 56,425,598 shares outstanding at December 31, 2012.

Earnings per share at December 31, 2012 is as follows:
				US$
Basic earnings per share				0.02
Diluted earnings per share				0.02
Adjusted net income before
amortization				0.06

Consolidated Balance Sheets
As of December 31, 2012 and 2011
		2012	2011
		US$ 000	US$ 000
Assets
Current Assets:
	Cash and cash equivalents	1,167	89
	Accounts receivable - net	4,396	3,440
	Inventories	6,390	5,717
	Prepaid expenses and other assets	656	612
	Total current assets	12,609	9,858
Property, plant and equipment - net		3,765	3,551
Intangible assets - net		7,579	9,872
Goodwill		2,878	2,878
Deferred financing costs		75	135
Other assets		34	31
Total assets		26,940	26,325
Liabilities and stockholders' equity
Current liabilities:
	Notes payable - current portion	511	511
	Accounts payable	2,648	1,618
	Accrued expenses	915	866
	Income taxes payable	170	44
	Total current liabilities	4,244	3,039
Notes payable, net of current portion		2,568	4,244
Other liabilities		19	27
Total liabilities		6,831	7,310
Stockholders' equity
	Preferred stock, US$.001 par value, 50,000,000 shares authorized, no shares issued and outstanding	0	0
	Common stock, US$.001 par value, 80,000,000 shares authorized, 56,425,598 shares issued and outstanding at December 31, 2012 and 2011	26	26
	Additional paid in capital	28,331	28,165
	Accumulated deficit	(7,195)	(8,215)
	Other comprehensive loss	(1,053)	(961)
	Total stockholders' equity	20,109	19,015
Total liabilities and stockholders' equity		26,940	26,325
See notes to consolidated financial statements.

Consolidated Statements of Operations
For the years ended December 31, 2012 and 2011
		Year ended	Year ended
		December 31	December 31
		2012	2011
		US$ 000	US$ 000
		except per share data	except per share data
Revenue		32,171	21,872
Cost of sales		16,511	11,656
Gross profit		15,660	10,216
Operating expenses
	Selling expenses	5,301	4,402
	Engineering expenses	562	580
	General and administrative expenses	8,386	6,989
	Total operating expenses	14,249	11,971
Operating income/(loss)		1,411	(1,755)
Other income (expense)
	Interest expense	(331)	(454)
	Interest income	18	1
	Foreign exchange gain/(loss)	99	(120)
	Other	18	13
Income/(loss) before income taxes		1,215	(2,315)
Provision for income taxes		195	19
Net income/(loss)		1,020	(2,334)
Other comprehensive income/(loss)
	Cumulative translation adjustment	(118)	18
	Change in fair value of derivative instruments - net of income taxes	26	104
Other comprehensive income/(loss)		928	(2,212)
Earnings/(loss) per common share
	Basic	0.02	(0.04)
	Diluted	0.02	(0.04)
Weighted average number of common shares outstanding
	Basic	56,425,598	56,425,598
	Diluted	61,587,699	56,425,598
See notes to consolidated financial statements.

Consolidated  Statements of Changes in Stockholders' Equity
For the years ended December 31, 2012 and 2011
Common Stock
	Shares	Amount US$000	Additional Paid in capital US$000	Accumulated deficit	Other Comprehensive Income/ (loss)	Total Stockholders' equity
Balance - January 1, 2011	56,425,598	26	28,075	(5,881)	(1,083)	21,137
Cumulative translation adjustment	-	-	-	-	18	18
Change in fair value of derivative instruments	-	-	-	-	104	104
Net loss	-	-	-	(2,334)	-	(2,334)
Stock based compensation	-	-	90	-	-	90
Balance - December 31, 2011	56,425,598	26	28,165	(8,215)	(961)	19,015
Cumulative translation adjustment	-	-	-	-	(118)	(118)
Change in fair value of derivative instruments	-	-	-	-	26	26
Net income	-	-	-	1,020	-	1,020
Stock based compensation	-	-	166	-	-	166
Balance - December 31, 2012	56,425,598	26	28,331	(7,195)	(1,053)	20,109
See notes to consolidated financial statements.

Consolidated Statements of Cash Flows
For the years ended December 31, 2012 and 2011
	Year ended	Year ended
	December 31	December  31
	2012	2011
	US$ 000	US$ 000
Cash flows from operating activities:
Net income/(loss)	1,020	(2,334)
Adjustments to reconcile net income/(loss) to net cash provided by   operating activities:
Deferred taxes	-	4
Depreciation and amortization	2,633	2,597
Amortization of deferred financing costs	120	83
Stock based compensation	166	90
Working capital changes:
Accounts receivable	(956)	(1,264)
Inventories	(673)	676
Prepaid expenses and other assets	(44)	(45)
Other assets	(3)	(7)
Accounts payable, accrued expenses and other liabilities	1,071	428
Income taxes payable	126	329
Net cash provided by operating activities	3,460	557
Cash flows from investing activities:
Proceeds from sale of property and equipment	-	20
Property and equipment purchases	(554)	(133)
Net cash used in investing activities	(554)	(113)
Cash flows from financing activities:
Borrowings from additional financing	15,048	15,240
Loan origination fees	(60)	(203)
Repayment of notes payable	(16,724)	(15,610)
Net cash used in financing activities	(1,736)	(573)
Effect of exchange rates on cash and cash equivalents	(92)	122
Net increase/(decrease) in cash and cash equivalents	1,078	(7)
Cash and cash equivalents:
Beginning of year	89	96
End of year	1,167	89
See notes to consolidated financial statements.

Notes to the Consolidated Financial Statements

As of December 31, 2012 and 2011

1.   Organization and Description of Business

Nature of Business Somero Enterprises, Inc. (the "Company" or "Somero") designs, manufactures, refurbishes, sells and distributes concrete levelling, contouring and placing equipment, related parts and accessories, and training services worldwide. The operations are conducted from a corporate office in Houghton, Michigan, executive offices in Fort Myers, Florida, distribution offices in the United Kingdom and China, and sales offices in Canada, Germany and India.

2.   Summary of Significant Accounting Policies

Basis of Presentation The consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America. 

Principles of Consolidation The consolidated financial statements include the accounts of Somero Enterprises, Inc. and its subsidiaries. All significant intercompany transactions and accounts have been eliminated in consolidation.

Cash and Cash Equivalents Cash includes cash on hand, cash in banks, and temporary investments with a maturity of three months or less when purchased.  The Company maintains deposits primarily in one financial institution, which may at times exceed amounts covered by insurance provided by the U.S. Federal Deposit Insurance Corporation ("FDIC").  The Company has not experienced any losses related to amounts in excess of FDIC limits.

Accounts Receivable and Allowances for Doubtful Accounts Financial instruments which potentially subject the Company to concentrations of credit risk consist primarily of accounts receivable. The Company's accounts receivable are derived from revenue earned from a diverse group of customers. The Company performs credit evaluations of its commercial customers and maintains an allowance for doubtful accounts receivable based upon the expected ability to collect accounts receivable.  Allowances, if necessary, are established for amounts determined to be uncollectible based on specific identification and historical experience.  As of December 31, 2012 and 2011, the allowance for doubtful accounts was approximately US$304,000 and US$280,000, respectively. Bad debts expense was US$38,000 and US$54,000 in 2012 and 2011, respectively.

InventoriesInventories are stated at the lower of cost, using the first in, first out ("FIFO") method, or market. Provision for potentially obsolete or slow-moving inventory is made based on management's analysis of inventory levels and future sales forecasts. 

Deferred Financing CostsDeferred financing costs incurred in relation to long-term debt are reflected net of accumulated amortization and are amortized over the expected remaining term of the debt instrument.  These financing costs are being amortized using the effective interest method.

Intangible Assets and Goodwill Intangible assets consist primarily of customer relationships and patents, and are carried at their fair value when acquired, less accumulated amortization. Intangible assets are amortized using the straight-line method over a period of three to twelve years, which is their estimated period of economic benefit. Goodwill is not amortized but is subject to impairment tests on an annual basis, and the Company has chosen December 31 as its periodic assessment date.  Goodwill represents the excess cost of the business combination over the Group's interest in the fair value of the identifiable assets and liabilities. Goodwill arose from the Company's prior sale from Dover Corporation to The Gores Group in 2005.  The Company did not incur a goodwill impairment loss for the year ended December 31, 2012 or 2011. (see Note 4 for more information.)

The Company evaluates the carrying value of long-lived assets, excluding goodwill, whenever events and circumstances indicate the carrying amount of an asset may not be recoverable. For the year ended December 31, 2012, the Company did not incur a goodwill impairment loss and tested its other intangible assets including customer relationships and technology for impairment and found no impairment. The carrying value of a long-lived asset is considered impaired when the anticipated undiscounted cash flows from such asset (or asset group) are separately identifiable and less than the asset's (or asset group's) carrying value. In that event, a loss is recognized to the extent that the carrying value exceeds the fair value of the long-lived asset. Fair value is determined primarily using the anticipated cash flows discounted at a rate commensurate with the risk involved. (See Note 4 for more information.) 

Revenue Recognition The Company recognizes revenue on sales of equipment, parts and accessories when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the price is fixed or determinable, and collectability is reasonably assured.  For product sales where shipping terms are F.O.B. shipping point, revenue is recognized upon shipment.  For arrangements which include F.O.B. destination shipping terms, revenue is recognized upon delivery to the customer.  Standard products do not have customer acceptance criteria.  Revenues for training are deferred until the training is completed unless the training is deemed inconsequential or perfunctory.

Warranty Liability The Company provides warranties on all equipment sales ranging from 60 days to three years, depending on the product.  Warranty liabilities are estimated net of the warranty passed through to the Company from vendors, based on specific identification of issues and historical experience.

	2012	2011
Balance, January 1	(73,000)	(62,000)
Warranty charges	264,000	98,000
Accruals	(292,000)	(109,000)
Balance, December 31	(101,000)	(73,000)

Property, Plant and Equipment Property, plant and equipment is stated at estimated market value based on an independent appraisal at the acquisition date or at cost for subsequent acquisitions, net of accumulated depreciation and amortization. Land is not depreciated.  Depreciation is computed using the straight-line method over the estimated useful lives of the assets, which is 31.5 to 40 years for buildings (depending on the nature of the building), 15 years for improvements, and 2 to 10 years for machinery and equipment.

Income Taxes The Company determines income taxes using the asset and liability approach. Tax laws require items to be included in tax filings at different times than the items reflected in the financial statements. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis and operating loss and tax credit carry forwards. 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. Deferred tax assets are reduced by a valuation allowance, if necessary, to the extent that it appears more likely than not, that such assets will be unrecoverable.

In June 2006, the Financial Accounting Standards Board (FASB) issued accounting guidance to create a single model to address accounting for uncertainty in tax positions. This guidance clarifies that a tax position must be more likely than not of being sustained before being recognized in financial statements.  The Company evaluates tax positions that have been taken or are expected to be taken in its tax returns, and records a liability for uncertain tax positions.  This involves a two-step approach to recognizing and measuring uncertain tax positions.  First, tax positions are recognized if the weight of available evidence indicates that it is more likely than not that the position will be sustained upon examination, including resolution of related appeals or litigation processes, if any. Second, the tax position is measured as the largest amount of tax benefit that has a greater than 50% likelihood of being realized upon settlement. The Company recognizes interest and penalties related to unrecognized tax benefits in the provision/ (benefit) for income taxes in general and administrative expenses in the accompanying consolidated financial statements.  The Company is subject to a three year statute of limitations by major tax jurisdictions.

Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

Stock Based Compensation The Company recognizes the cost of employee services received in exchange for an award of equity instruments in the financial statements over the period the employee is required to perform the services in exchange for the award (presumptively the vesting period).  The Company measures the cost of employee services in exchange for an award based on the grant-date fair value of the award.   

Transactions in and Translation of Foreign Currency The functional currency for the Company's subsidiaries outside the United States is the applicable local currency.  Balance sheet amounts are translated at December 31 exchange rates and statement of operations accounts are translated at average rates.  The resulting gains or losses are charged directly to accumulated other comprehensive income/(loss).  The Company is also exposed to market risks related to fluctuations in foreign exchange rates because some sales transactions, and some assets and liabilities of its foreign subsidiaries, are denominated in foreign currencies other than the designated functional currency.  Gains and losses from transactions are included as foreign exchange gain/(loss) in the accompanying consolidated statements of operations.

Comprehensive Income/(loss)Comprehensive income/(loss), is the combination of reported net income/(loss) and other comprehensive income/(loss) ("OCI"). OCI is changes in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources not included in net income/(loss).  Total comprehensive income/(loss) was approximately US$928,000 and US$(2,212,000), for the years ended December 31, 2012 and 2011, respectively.

	2012	2011
	US$000	US$000
Net Income/(loss)	1,020	(2,334)
Cumulative Translation Adjustment	(118)	18
Change in fair value of derivative instruments - net of income taxes	26	104
Total Comprehensive Income/(loss)	928	(2,212)

Earnings/(loss) Per Share Basic earnings/(loss) per share represents income/(loss) available to common stockholders divided by the weighted average number of common shares outstanding during the year.  Diluted earnings/(loss) per share reflect additional common shares that would have been outstanding if dilutive potential common shares had been issued.  Potential common shares that may be issued by the Company relate to outstanding stock options.  All common stock equivalents were anti-dilutive as of December 31, 2011.  Earnings/(loss) per common share have been computed based on the following:

	2012 US$000	2011 US$000
Net income/(loss)	1,020	(2,334)
Basic weighted shares outstanding	56,425,598	56,425,598
Net dilutive effect of stock options and RSU's	5,162,101	-
Diluted weighted average shares outstanding	61,587,699	56,425,598

Fair Value Measurements The Company uses fair value measurements in areas that include, but are not limited to: impairment testing of goodwill and long-lived assets and stock-based compensation arrangements. The carrying values of cash and cash equivalents, accounts receivable, accounts payable, and other current assets and liabilities approximate fair value because of the short-term nature of these instruments. The carrying value of our long-term debt approximates fair value due to the variable nature of the interest rates under our Credit Facility.

The FASB has issued accounting guidance on fair value measurements. This guidance provides a common definition of fair value and a framework for measuring assets and liabilities at fair values when a particular standard prescribes it. 

This guidance also specifies a fair value hierarchy based upon the observability of inputs used in valuation techniques. These valuation techniques may be based upon observable and unobservable inputs.  Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company's market assumptions.  These two types of inputs create the following fair value hierarchy.

•  Level 1 - Quoted prices for identical instruments in active markets.

•  Level 2 - Quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; and model-derived other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets and liabilities.

•  Level 3 -Unobservable inputs for the asset or liability which are supported by little or no market activity and reflect the Company's assumptions that a market participant would use in pricing the asset or liability.

Fair Value Measurements at Reporting Date

	December 31, 2012 and 2011	Quoted Prices In Active Markets for Identical Assets (Level 1)	Significant Other Observable Inputs (Level 2)	Significant Unobservable Inputs (Level 3)
Assets:	US$000	US$000	US$000	US$000
Goodwill	2,878			2,878

      There were no changes in Level 3 assets in 2012.

New Accounting Pronouncements

In June 2011, the FASB issued new accounting guidance Accounting Standards Update (ASU) 2011-05, Presentation of Comprehensive Income, which amends various sections of ASC Topic 220 and allows an entity the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. ASU 2011-05 eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders' equity. The amendments in ASU 2011-05 do not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. ASU 2011-05 should be applied retrospectively. The amendments in ASU 2011-05 are effective for fiscal years ending after December 15, 2012, and interim periods within those years. The Company's adoption of this ASU did not have a material effect on the Company's consolidated financial statements.

In December 2011, the FASB issued new accounting guidance ASU 2011-12, Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standard Update No. 2011-05, which amends various sections of ASC Topic 220-10. The amended sections indefinitely defer the effective date of the presentation of reclassification adjustments out of accumulated other comprehensive income on the components of net income and other comprehensive income, which ASU 2011-05 would require.  All other requirements of ASU 2011-05 are unaffected by this new guidance. The amendments in ASU 2011-12 are effective concurrent with ASU 2011-05, for fiscal years ending after December 15, 2012, and interim and annual periods thereafter. The Company's adoption of this ASU did not have a material effect on the Company's consolidated financial statements.

In July 2012, the FASB issued guidance to amend Topic 350, Intangibles-Goodwill and Other. The objective of this update is to reduce the cost and complexity of performing an impairment test for indefinite-lived intangible assets by simplifying how an entity tests those assets impairment and to improve consistency in impairment testing guidance among long-lived asset categories. The amendments permit an entity to first assess qualitative factors to determine whether it is more likely  than not (more than 50%) that an indefinite-lived intangible asset is impaired as a basis for determining whether it is necessary to perform the quantitative impairment test in accordance with Subtopic 350-30, Intangibles-Goodwill and Other-General Intangibles Other than Goodwill.  This guidance is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after September 15, 2012 with earlier implementation permitted. The Company implemented this guidance when performing its impairment evaluation at December 31, 2011 and there was no impact upon its financial statements.

In February 2013, the FASB issued new accounting guidance ASU No. 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income, an amendment to FASB ASC Topic 220. ASU No. 2013-02 requires disclosure of amounts reclassified out of accumulated other comprehensive income by component. In addition, an entity is required to present either on the face of the statement of operations or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income but only if the amount reclassified is required to be reclassified to net income in its entirety in the same reporting period. For amounts not reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures that provide additional detail about those amounts. This ASU is effective prospectively for fiscal and interim periods beginning after December 15, 2013. The guidance is not expected to have a material effect on the Company's consolidated financial statements. 

3.           Inventories

              Inventories consisted of the following at December 31, 2012 and 2011:

	2012 US$ 000	2011 US$ 000
Raw materials	2,311	1,828
Finished goods and work in process	2,365	1,772
Refurbished	1,714	2,117
Total	6,390	5,717

4.           Goodwill and Intangible Assets

              Goodwill represents the excess of the cost of a business combination over the fair value of the net assets acquired. The Company is required to test goodwill for impairment, at the reporting unit level, annually and when events or circumstances indicate the fair value of a unit may be below its carrying value.

The Company adopted the amendments to Topic 350, Intangibles-Goodwill and Other, which permit an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test described in Topic 350. 

The results of the qualitative assessment indicated that Goodwill was not impaired as of December 31, 2012 and 2011, and that the value of intangible assets including customer relationships and technology was not impaired as of December 31, 2012 and 2011. Prior to December 31, 2011, there were US$13.5m in accumulated impairment losses.

The Company spent $39,000 to establish the ability for  its China subsidiary to do business during 2012 through its new legal China entity.  The costs are being treated as in Intangible asset other than goodwill and not subject to amortization.

The following table reflects Other intangible assets: 

	Weighted average Amortization Period	2012 US$000	2011 US$000
Capitalized cost
Customer relationships	8 years	6,300	6,300
Patents	12 years	18,538	18,538
Other intangibles	3 years	4	4
Intangible assets not subject to amortization	-	39	-
		24,881	24,842
Accumulated amortization
Customer relationships	8 years	5,841	5,053
Patents	12 years	11,457	9,913
Other intangibles	3 years	4	4
Intangible assets not subject to amortization	-	-	-
		17,302	14,970
Net carrying costs
Customer relationships	8 years	459	1,247
Patents	12 years	7,081	8,625
Other intangibles	3 years	0	0
Intangible assets not subject to amortization	-	39	-
		7,579	9,872

Amortization expense associated with the intangible assets in each of the years ended December 31, 2012 and 2011 was approximately US$2,333,000 and US$2,333,000, respectively. Future amortization of intangible assets is expected to be as follows for the years ended:

	December 31 US$ 000
2013	2,004
2014	1,545
2015	1,545
2016	1,545
2017	901
	7,540
Thereafter	0
	7,540

5.           Property, Plant and Equipment

              Property, plant and equipment consist of the following at December 31:

	2012 US$ 000	2011 US$ 000
Land	207	207
Buildings and improvements	3,602	3,572
Machinery and equipment	1,979	1,500
	5,788	5,279
Less: accumulated depreciation and amortization	(2,023)	(1,728)
	3,765	3,551

Depreciation expense for the years ended December 31, 2012 and 2011, was approximately US$300,000 and US$264,000, respectively.

6.   Notes Payable

  The Company's debt obligations consisted of the following at December 31:

	2012 US$ 000	2011 US$ 000
Bank debt:
30 month secured reducing revolving line of credit	666	1,782
30 month secured term loan	2,414	2,973
Less debt obligations due within one year	(511)	(511)
Obligations due after one year	2,568	4,244

The bank's revolving line of credit is collateralized by all inventories and accounts receivable

July 2012 Amended Credit Facility The Company amended its loan agreement in mid-2012. The amended agreement matures July 2014.

·    US$3,500,000 July 2014 amended, secured revolving line of credit

·    US$1,540,000 July 2014 amended, secured reducing term loan

·    US$2,500,000 July 2014 new, secured revolving line of credit

·    US$1,900,000 July 2014 new, secured reducing term loan

Interest rate on the US$3,500,000 July 2014 amended, secured revolving line of credit and the US$2,500,000 July 2014 new, secured revolving line of credit was Libor plus 3.5% or an effective rate of 3.71% as of December 31.    Interest rate on the US$1,540,000 July 2014 amended, secured reducing term loan was 3.71% and the interest rate on the US$2,500,000 July 2014 new, secured revolving line of credit was 4.21%

Future Payments The future payments by year under the Company's amended loan are as follows:

	December 31 US$ 000
2013	511
2014	2,568
Total payments	3,079

March 2013 Amended Credit Facility The Company plans to enter into an amended credit facility in March 2013. The new agreement will mature between March 2016 and March 2018.

·    US$5,000,000 March 2016 secured revolving line of credit

·    US$6,000,000 March 2018 delayed draw term loan

·    US$1,477,000 March 2018 Commercial Real Estate Mortgage

The Company will enter into a new credit facility up to a maximum of US$12,477,000. The interest rates on each of the loans will be Libor plus a percentage based upon a covenant schedule up to a maximum of Libor plus 3.5%.   The Company's new loan facility is secured by substantially all of its business assets.  The fees that will be paid to the bank are US$30,000.

              Interest 

Interest expense on the notes payable for the years ended December 31, 2012 and 2011, was approximately US$328,000 and US$454,000, respectively, related to the debt obligations.  Interest expense includes US$26,000 and US$104,000 in 2012 and 2011, respectively, related to the loss on cash flow hedges as a result of paying off interest rate swaps in 2009 that were recognized in the statements of operations as interest expense and removed from other comprehensive income/(loss).

7.  Retirement Program

The Company has a savings and retirement plan for its employees, which is intended to qualify under Section 401(k) of the Internal Revenue Code ("IRC"). This savings and retirement plan provides for voluntary contributions by participating employees, not to exceed maximum limits set forth by the IRC. The Company match vests immediately.  The Company matched 100% of the employee's contribution up to the first 6% of the employee's compensation through June 30, 2009. From July 1, 2009 through December 31, 2011, the Company suspended the match. The Company reinstated its 401k match in 2012 for employees up to 6% of their income. The Company contributed approximately US$161,000 to the savings and retirement plan during the year ended December 31, 2012 and no such contribution was made during 2011. 

8.  Operating Leases

The Company leases property, vehicles and office equipment under leases accounted for as operating leases without renewal options. Future minimum payments by year under non-cancellable operating leases with initial terms in excess of one year were as follows:

	December 31 US$ 000
2013	276
2014	229
2015	210
2016	111
Thereafter	-
Total	478

9.         Supplemental Cash Flow and Non-Cash Financing Disclosures

	2012 US$ 000	2011 US$ 000
Cash paid for interest	195	259
Cash paid/ (received) for taxes	11	(355)
Non-cash financing activities - Change in fair value of derivative instruments	(26)	(104)
Inventory received in lieu of payment	-	119

10.         Business and Credit Concentration

              The Company's line of business could be significantly impacted by, among other things, the state of the general economy, the Company's ability to continue to protect its intellectual property rights, and the potential future growth of competitors. Any of the foregoing may significantly affect management's estimates and the Company's performance.  At December 31, 2012 and 2011, the Company had two customers which represented 29% and 30% of total accounts receivables, respectively.

11.         Commitments and Contingencies

      The Company has entered into employment agreements with certain members of senior management.  The terms of these are for renewable one year periods and include non-compete and nondisclosure provisions as well as provide for defined severance payments in the event of termination or change in control.

      The Company is subject to various unresolved legal actions which arise in the normal course of its business. Although it is not possible to predict with certainty the outcome of these unresolved legal actions or the range of possible losses, the Company believes these unresolved legal actions will not have a material effect on its consolidated financial statements.

12.         Income Taxes

The Company adopted guidance from the FASB in 2007 which clarifies the accounting

for uncertainty in income taxes recognized in an enterprise's financial statements. The

guidance also 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. This pronouncement also provides guidance on derecognition,

classification, interest and penalties, accounting in interim periods, disclosures and

transition.

The Company is subject to U.S. federal income tax as well as income tax of multiple

state jurisdictions. The Company began business in 2005. The statute of limitations for

all federal, foreign and state income tax matters for tax years from 2009 forward are

still open. The Company has no federal, foreign or state income tax returns currently

under examination.

		12/31/2012	12/31/2011
		US$ 000	US$ 000
Current Income Tax
Federal		136	(24)
State		-	-
Foreign		59	43
Total current income tax provision		195	19
Deferred tax expense
Federal		-	-
State		-	-
Foreign		-	-
Total deferred tax provision/(benefit)		-	-
Total provision/(benefit)		195	19

The components of the net deferred income tax asset at December 31, 2012 and 2011 were as follows:
	12/31/2012	12/31/2011
	US$ 000	US$ 000
Deferred Tax Asset
Intangibles	1,775	1,530
Intangibles - Foreign	122	121
Goodwill	1,968	2,336
Stock-based compensation	102	43
Net Operating Loss - State	67	74
Net Operating Loss - Foreign	883	757
Net Operating Loss - Federal	-	442
Foreign Tax Credit Carryover	237	237
Other	278	216
Gross deferred tax asset	5,431	5,756
Valuation Allowance	(5,073)	(5,416)
Deferred tax asset	359	340
Deferred Tax Liability
Depreciation	(246)	(236)
Prepaids	(113)	(104)
Net deferred tax asset (liability)	-	-
Current	-	-
Non-current	-	-
Net deferred tax asset	-	-
Rate Reconciliation
Consolidated Income/(loss) before tax	1,216	(2,315)
Statutory rate	34%	34%
Statutory tax expense	413	(787)
State taxes	1	1
Revaluation of Deferred Tax Assets	30	45
Meals and Entertainment	25	22
Foreign Tax Items	122	125
Valuation Allowance	(343)	131
Other	(53)	482
Tax provision	195	19

At December 31, 2012, the Company had no net deferred tax assets. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of the deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Since realization of any future tax benefit at December 31, 2012 and 2011 was not sufficiently assured, a valuation allowance for the 2012 and 2011 net deferred tax asset was provided for.

The Company has US$4,869,368 in state loss carry forwards with varying expiration dates and US$3,395,756 in foreign loss carry forwards with indefinite expiration dates.

13.         Revenues by Geographic Region

              The Company sells its product to customers throughout the world.  The breakdown by location is as follows:

	2012 US$ 000	2011 US$ 000
United States and U.S. possessions	15,377	9,124
Canada	2,758	1,027
Rest of world	14,036	11,721
Total	32,171	21,872

              A significant portion of the Company's long-lived assets are located in the United States.

14.         Stock Based Compensation

      The Company has one stock-based compensation plan, which is described below. The compensation cost that has been charged against income/(loss) for the plan was approximately US$166,000 and US$90,000 for the years ended December 31, 2012 and 2011, respectively.  The income tax effect recognized for stock based compensation was approximately a benefit of US$32,000 in each of the years ended December 31, 2012 and 2011.

      Stock Options

An initial grant was made in February 2010 for 2.3 million stock options as replacements for grants under the old option plan, which were cancelled when the old plan was abandoned. The grants have a three year vesting and a strike price of 30p, a 100% premium over the market price on the date of grant. The remaining stock options will only be issued for new key employees and superior performance.

Options granted under the Plan have a term of up to 10 years and generally vest over a three-year period beginning on the date of the grant. Options under the Plan must be granted at a price not less than the fair market value at the date of grant.  The fair value of each option award is estimated on the date of grant using the Black-Scholes-Merton option pricing model. The risk-free interest rate is based on the U.S. Treasury rate for the expected term at the time of grant, volatility is based on the average long-term implied volatilities of peer companies as our Company has limited trading history and the expected life is based on the average of the life of the options of 10 years and an average vesting period of 3 years.  The following table illustrates the assumptions for the Black-Scholes model used in determining the fair value of options granted to employees for the years ended December 31, 2012 and 2011.  No new options were granted in 2012. 

	2012	2011
Dividend yield	-	0.00%
Risk-free interest rate	-	1.29%
Volatility	-	49.3%
Expected term	-	4.0 yrs

A summary of option activity under the stock option plan as of December 31, 2012 and 2011, and changes during the year then ended is presented below:

Options	Stock options	Weighted- Average Exercise Price	Weighted Average Remaining Contractual Term (yrs)	Aggregate Intrinsic Value
Outstanding at
January 1, 2011	3,004,630	0.56	8.73	-
Granted	62,715	0.47	9.02	-
Exercised	-	-	-	-
Forfeited	-	-	-	-
Outstanding at
December 31, 2011	3,067,345	0.56	7.76	-
Exercisable at
December 31, 2011	1,305,174	0.71	7.34	-
Outstanding at
January 1, 2012	3,067,345	0.56	7.76	-
Granted	-	-	-	-
Exercised	-	-	-	-
Forfeited	-	-	-	-
Outstanding at
December 31, 2012	3,067,345	0.56	6.76	-
Exercisable at
December 31, 2012	2,259,059	0.59	6.60	-

No stock options were granted in 2012.  The weighted-average grant-date fair value of options granted was US$0.05 for the year ended December 31, 2011.

A summary of the status of the Company's non-vested stock options as of December 31, 2012, and changes during the year then ended is presented below: 

	Stock options	Weighted Average Grant-Date Fair Value
Non-vested stock options as of December 31, 2012	1,762,171	0.06
Granted	-	-
Vested	(953,885)	0.10
Forfeited	-	-
Non-vested stock options as of December 31, 2012	808,286	0.05

As of December 31, 2012, there was US$8,000 of total unrecognized compensation cost related to non-vested stock-based compensation arrangements granted under the Company's stock option plan. Stock option expense will be recognized over 0.4 years which is the weighted average remaining vesting period. The fair value of options vested in 2012 and 2011 was US$104,000 and US$55,000, respectively.

Restricted Stock Units                                                                                      

Restricted Stock Units	RSU's	Weighted Average Grant Date Fair Market Value US$
Outstanding at January 1, 2011	-	-
Granted	2,279,349	360,154
Vested	-	-
Forfeited	-	-
Outstanding at December 31, 2011	2,279,349	360,154
Vested at December 31, 2011	-	-
Outstanding at January 1, 2012	2,279,349	360,154
Granted	21,097	10,500
Vested	-	-
Forfeited	-	-
Outstanding at December 31, 2012	2,300,446	370,654
Vested at December 31, 2012	-	-

The weighted-average grant-date fair value of restricted stock units was US$0.16 and US$0.16 in each of the years ended December 31, 2012 and 2011.                                                                                 

A summary of the status of the Company's non-vested restricted stock units as of December 31, 2012, and changes during the year then ended is presented below:                                                

	Average RSU's	Weighted Grant Date Fair Market Value
		US$
Non-vested restricted stock units as of December 31, 2011	2,279,349	0.16
Granted	21,097	0.50
Vested	-	-
Forfeited	-	-
Non-vested restricted stock units as of December 31, 2012	2,300,446	0.16

As of December 31, 2012, there was US$217,000 of total unrecognized compensation cost related to non-vested restricted stock units.  Restricted stock unit expense is being recognized over the three year vesting period.  The weighted average remaining vesting period is 1.71 years.                              

15.         Employee Compensation

In light of the very strong performance and recognizing the compensation reductions employees have taken since the beginning of 2009, management recommended the Company provide for a bonus that would be based on one half the amount employees had given up during the period. The Board approved the $228,000 bonus to be accrued for in the 2011 financial statements and to be paid out in early 2012. Also, the remaining one half of compensation reductions was approved by the Board to be paid out in July 2012.  The Company reinstated its 401k match in 2012 for employees up to 6% of their income. This will fully complete the reinstatement of the 10% compensation reduction that was implemented in July 2009.  Further, the Board approved management bonuses and profit sharing dollars totaling $472,000 to be paid out in December 2012 based upon the Company meeting certain profitability targets.

16.         Subsequent Events

In March 2013, the Company will amend its agreement with the bank, which will renew its loan facilities so that they mature between March 2016 and March 2018. In preparing the consolidated financial statements, the Company has evaluated all subsequent events and transactions for potential recognition or disclosure through February 26, 2013, the date the consolidated financial statements were available for issuance. 

Returned to the dividend list with a 0.8 US cent per share dividend for the period ending December 31, 2012, with a record date of April 26, 2013, payable on May 13, 2013.

 

END

 

 

FR UVVWROWAUUAR