Half Yearly Report

RNS Number : 9102M

Somero Enterprises Inc.

24 August 2011

 



Press Announcement

For immediate release

24 August 2011

Somero Enterprises, Inc. ®

("Somero" or "the Company" or "the Group")

Interim Results for the six months ended June 30, 2011

Somero Enterprises, Inc.®, is pleased to report its interim results for the six months to June 30, 2011. Financial Highlights ·     Group revenue of US$10.4m (H1 2010: US$10.7m) ·     Adjusted Group EBITDA of (US$0.0m) (H1 2010: US$0.6m) ·     Pre-tax loss of US$(1.5m) (H1 2010: US$(1.3m)) ·     Net debt at June 30, 2011 of US$5.6m (December 31, 2010 US$5.0m) Business Highlights ·     Continued sales growth in emerging markets (increase of 21% to compared to H1 2010) ·     Focus remains on cost control (savings of US$900k on an annualized basis) and new  products ·     19% increase in parts sales compared to H1 2010, consistent with increasing levels of customer activity ·     In our core market, Large line revenues were lower than H1 2010 as expected but  partially offset by Small line revenues which held steady as a result of the new SMP product ·     Continued commitment to increasing penetration of the India, China, SE Asia and Middle East markets Commenting, Jack Cooney, President and Chief Executive Officer of Somero, said: "Our performance in the first half was slightly weaker than anticipated. In particular, trading in April and May was slow, causing us to implement a further cost restructuring. We expect sales growth in emerging markets to continue, and our focus remains on cost control and new products. "Our customers' activity and sales are increasing but confidence levels are low, and future performance in North America and Europe is difficult to predict. We are encouraged, however, by strong enquiry levels as we enter the second half of the year."

For further information please contact:

Hawkpoint Partners Limited

Chris Robinson/Serge Rissi

[phone]

Collins Stewart Europe Limited

Piers Coombs

[phone]

About Somero 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 commercial construction industry. Expanding into new geographic markets, Somero's innovative, proprietary products help contractors worldwide achieve a high level of precision in flat floor construction which reduces construction time and improves cost savings. Somero's innovative, proprietary products, including the large SXP®-D, CopperHead® and Mini Screed™ Laser Screed® models, 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 72 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 slab floors by a variety of companies, such as Costco, Home Depot, B&Q, DaimlerChrysler, various Coca-Cola bottling companies, Westinghouse, the United States Postal Service, Lowe's and Toys 'R' Us. Somero's executive offices and training facility are located in Florida, USA. Its main operations, including manufacturing, are in Michigan, USA. There is also a sales and service office in Chesterfield, England. Somero has 72 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 of the London Stock Exchange and its trading symbol is SOM.L. Chairman's and Chief Executive Officer's Statement Overview Revenues in H1 2011 were on plan until we hit a slow period of trading in April and May. This resulted in Group Revenue for the first half totalling $10.4m, slightly below the comparative period in H1 2010. The Group retained a tight control on costs, and implemented a further cost restructuring in June. However, the slowdown in sales late on in the period impacted our profitability and resulted in a net loss for the first six months. Operational Performance US and Europe Large line revenues were lower than H1 2010 as expected but partially offset by Small line revenues which were stable as a result of the new SMP product. In H1 2011, calls and spare parts sales from US and European customers to the customer support group were up significantly, indicating that customers are using our equipment more frequently. This is also consistent with verbal customer feedback that their business has increased. However, there is still continuing uncertainty in the market and a lack of visibility for booked work in the future among our client base.  Although the increased sales inquiries have signalled potential for some optimism going forward, the slow period of trading during April and May caused us to be conservative and in June implement a reduction in our cost structure of US$0.9m on an annualized basis. Emerging Markets We achieved strong sales results from our investments in Latin and South America and Southeast Asia. China was slow to develop in H1 but we expect significant improvement in H2. We are finding that the Chinese customer base is not just new to us but often is completely new to the industry. This gives us a great opportunity to help grow the industry, in which Somero has a leading presence. A central component of our business strategy continues to be our entry into emerging international markets where construction demand is expected to recover quickly and demand for ever higher building quality standards continues to rise. We will continue to position ourselves to take advantage of these trends by adding additional resources in these markets. The rollout of our emerging markets' strategy is centred on three core aims: ·     to identify international blue chip logistics companies, development companies and building owners with a view to ensuring Western floor flatness specifications are carried through to their new markets ·     to target joint venture relationships with major western contractors and local contractors who are tendering for projects for these major international players ·     to enhance our current training program to provide a more comprehensive service offering to contractors for the complete floor/slab construction Product Development As well as focusing on emerging market opportunities, we remain committed to developing innovative, state-of-the-art, proprietary, high-margin products that meet the ever changing needs of our customers. Despite overall cost reductions, we have continued to invest 3% of sales in product development and expect to launch new products in Q4 2011. We introduced the SMP ride-on Laser Screed® machine in Q4 of 2010 and it generated US$1.4m in sales in H1 2011. We have additional new products in the development pipeline. We remain confident that the launch of these products will continue to provide growth opportunities for Somero. Liquidity There was a net cash inflow of US$0.05m during H1 2011, resulting in Group net debt of US$5.6m as of June 30, 2011. The driver for increased debt is the granting of extended terms to close specific customer sales, which we are able to offer based on our revised bank agreement. Management continues to work closely with the Group's bank to manage the Company's financing position. Current Trading and Outlook Trading for the half year to June 30, 2011 was slightly below expectations; however, all banking covenants were passed at the half year. The Company continues to focus on growing sales in emerging markets, cost reduction and containment while continuing to develop new products. An increase in customer support calls and spare parts sales is consistent with increased activity with our customers. Although this indicates an increase in activity in the mature markets, there is also great uncertainty. As this uncertainty subsides and the customers' sales and profits increase, the Company will experience improved sales. Larry Horsch Chairman Jack Cooney President and Chief Executive Officer

		For the six months ended June 30
Business and Financial Review		2011	2010
Summary of Financial Results(1)(2)(3)(4)		US$ 000	US$ 000
Revenue		10,376	10,654
Cost of sales		5,596	5,808
Gross profit		4,780	4,846
Operating expenses
Selling expenses		2,282	2,226
Engineering expenses		309	202
General and administrative expenses		3,519	3,168
Total operating expenses		6,110	5,596
Operating loss		(1,330)	(750)
Other income (expense)
Interest expense		(221)	(255)
Foreign exchange gain/(loss)		43	(331)
Other		2	0
Loss before income taxes		(1,506)	(1,336)
Provision/(Benefit) for income taxes		25	(255)
Net loss		(1,531)	(1,081)
Loss per share basic and diluted		($0.03)	($0.02)
(Loss)/earnings per share basic and diluted -
	adjusted net (loss)/income before amortization	($0.01)	$0.00
Other data
Adjusted EBITDA		2	587
Adjusted net (loss)/income before amortization		(364)	85
Depreciation expense		135	149
Amortization of intangibles		1,167	1,166
Capital expenditures		119	33

1.	References to adjusted EBITDA are to Somero's net loss plus interest income, interest expense, taxes, depreciation, amortization, foreign exchange, stock based compensation expense and other expense.
2.	References to adjusted net (loss)/income before amortization are to Somero's net loss plus amortization expense of intangibles.
3.	Adjusted EBITDA and adjusted net (loss)/income before amortization are not measurements of the Company's financial performance under GAAP and should not be considered as an alternative to net income, operating income or any other performance measures derived in accordance with GAAP or as an alternative to GAAP cash flow from operating activities as a measure of profitability or liquidity. Adjusted EBITDA and adjusted net (loss)/income 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. See reconciliation of adjusted EBITDA and adjusted net (loss)/income before amortization to net loss.
4.	(Loss)/earnings per share diluted - adjusted net (loss)/income before amortization represents loss available to shareholders divided by the weighted average shares outstanding plus additional common shares that would have been outstanding if dilutive potential common shares had been issued. All common stock equivalents were anti-dilutive for the first half of 2011. (Loss)/earnings per share diluted on net (loss)/income before amortization is not a GAAP measurement and has been presented because management believes it is a useful analytical tool.

Net loss to EBITDA reconciliation and net (loss)/income before amortization reconciliation (Unaudited)	For the six months ended June 30
	2011	2010
	US$ 000	US$ 000
Adjusted EBITDA reconciliation
Net loss	(1,531)	(1,081)
Tax provision/(benefit)	25	(255)
Interest expense	221	255
Foreign exchange (gain)/loss	(43)	331
Other	(2)	0
Depreciation	135	149
Amortization	1,167	1,166
Stock based compensation	30	22
Adjusted EBITDA	2	587
Adjusted net income/(loss) before amortization reconciliation
Net loss	(1,531)	(1,081)
Amortization	1,167	1,166
Adjusted net income/(loss) before amortization reconciliation	(364)	85

Notes References to adjusted net (loss)/income before amortization in this document are to Somero's net loss plus amortization of intangibles. Although adjusted net (loss)/income before amortization is not a measure of operating income, 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 by eliminating the effects of amortization of intangibles that have occurred as a result of the write-up of assets in connection with the Somero Acquisition. Adjusted net (loss)/income before amortization should not, however, be considered in isolation or as a substitute for operating income 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 (loss)/income before amortization is not a measure determined in accordance with US GAAP and is thus susceptible to varying calculations, adjusted net (loss)/income before amortization, as presented, may not be comparable to other similarly titled measures of other companies. A reconciliation of net loss to EBITDA and adjusted net (loss)/income before amortization is presented above. Revenues Somero's consolidated revenues for the six months ended June 30, 2011 were US$10.4m, which represented a 3% decrease from US$10.7m for the six months ended June 30, 2010. Somero's revenues consist primarily of sales of new Large Line products (the SXP-D Large Laser Screed), sales of new Small Line products (the CopperHead, PowerRake and SMP) and other revenues, which consist of, among other things, revenue from sales of services, spare parts, refurbished machines, topping spreaders, accessories, and the Mini Screed Commercial. The overall decrease in revenues for the six months ended June 30, 2011 as compared to the six months ended June 30, 2010 was driven, as expected, by reduced Large Line sales. The table below shows the breakdown between Large Line sales, Small Line sales and other revenues during the six months ended June 30, 2011 and the six months ended June 30, 2010.

	Six months ended June 30, 2011 (unaudited)		Six months ended June 30, 2010 (unaudited)
	In US$ 000	Percentage of net sales	In US$ 000	Percentage of  net sales
Large Line Sales	2,109	20.3%	2,686	25.2%
Small Line Sales	3,249	31.3%	2,659	25.0%
Other revenues	5,018	48.4%	5,309	49.8%
Total	10,376	100%	10,654	100%

Revenue by Product Line Large Line unit sales were 7 units for the period (sales of 10 units in comparable period last year). Both North America and EMEA were lower with 2 units and 1 unit sold respectively (5 units and 2 units respectively for the comparable period last year) but offset partially by ROW which had 4 units (3 units comparable period last year). Small Line unit sales were 59 for the period up from 57 for the comparable period last year. North America units were 25 and 27 for the respective periods, while EMEA contributed 15 and 14 units respectively. Other revenues, including sales of spare parts, refurbished machines, topping spreaders and accessories, decreased from US$5.3m during the six months ended June 30, 2010 to US$5.0m during the six months ended June 30, 2011.

Units by Geography	North America		EMEA		ROW		Total
	2011	2010	2011	2010	2011	2010	2011	2010
Large Screed	2	5	1	2	4	3	7	10
Small Screed	25	27	15	14	19	16	59	57

Revenue by Geography Sales in North America totaled $4.2m for the period as compared with $5.0m last year and represented 40% of total revenues (prior period was 47.2% of total). Sales in EMEA were essentially flat at $2.8m in H1 2011 and H1 2010. Gross Profit Somero's gross profit percentage for H1 2011 was 46.1% as compared to 45.5% in H1 2010.  The increase in gross profit percentage is primarily attributable to the price increase implemented in H1 2011. Operating Expenses Operating expenses excluding depreciation, amortization and stock based compensation for H1 2011 were $4.9m ($4.4m in H1 2010). The increase has been driven by the reinstatement of the salary reductions, additional hires and investments in emerging markets. The Company implemented a restructuring at the end of H1 2011 that will save $900k on an annualized basis. Debt Restructuring As discussed in Note 5, in early 2011 the Company amended and extended its loan facility until July 2013. The extension, along with simplified covenants, allowed management to focus on implementation of its strategic plan, successfully introduce new products into the market and maximize opportunities from investments in emerging markets. Loss per Share Basic loss per share represents loss available to common stockholders divided by the weighted average number of shares outstanding during the period. Diluted loss per share reflect additional common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustment to loss that would result from the assumed issuance. Potential common shares that may be issued by the Company relate to outstanding stock options. Loss per common share has been computed based on the following:

	For the six months ended June 30
	2011	2010
	US$ 000	US$ 000
Loss available to shareholders	(1,531)	(1,081)
Basic and diluted weighted average shares outstanding	56,426	56,426
	June 30, 2011	June 30, 2010
Basic and diluted loss per share	($0.03)	($0.02)
Net (loss)/income before amortization of intangibles
(loss)/income per share	($0.01)	$0.00
(See note attached to the net loss to EBITDA reconciliation and adjusted net (loss)/income before amortization table for discussion of the non-GAAP measures used.)

Somero Enterprises, Inc. and Subsidiaries Condensed Consolidated Balance Sheets (unaudited) (in thousands, except per share amounts) As of June 30, 2011 and December 31, 2010
		2011 US$ 000	2010 US$ 000
Assets
Current Assets:
	Cash and cash equivalents	142	96
	Accounts receivable - net	3,152	2,176
	Inventories	6,421	6,393
	Prepaid expenses and other assets	346	567
	Income tax receivable	0	284
	Total current assets	10,061	9,516
Property, plant and equipment - net		3,666	3,701
Intangible assets - net		11,039	12,205
Goodwill		2,878	2,878
Deferred financing costs		173	17
Deferred tax asset		4	4
Other assets		23	24
Total assets		27,844	28,345
Liabilities and stockholders' equity
Current liabilities:
	Notes payable - current portion	511	460
	Accounts payable	1,803	1,659
	Accrued expenses	593	357
	Income tax payable	46	0
	Total current liabilities	2,953	2,476
Notes payable, net of current portion		5,195	4,665
Other liabilities		48	67
Total liabilities		8,196	7,208
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 June 30, 2011 and December 31, 2010	26	26
	Additional paid in capital	28,105	28,075
	Accumulated deficit	(7,412)	(5,881)
	Other comprehensive loss	(1,071)	(1,083)
	Total stockholders' equity	19,648	21,137
Total liabilities and stockholders' equity		27,844	28,345
See notes to unaudited condensed consolidated financial statements.

Somero Enterprises, Inc. and Subsidiaries Condensed Consolidated Statements of Operations		For the six months ended June 30
(unaudited)		2011	2010
		US$ 000 except per share data	US$ 000 except per share data
Revenue		10,376	10,654
Cost of sales		5,596	5,808
Gross profit		4,780	4,846
Operating expenses
	Selling expenses	2,282	2,226
	Engineering expenses	309	202
	General and administrative expenses	3,519	3,168
	Total operating expenses	6,110	5,596
Operating loss		(1,330)	(750)
Other income (expense)
	Interest expense	(221)	(255)
	Foreign exchange gain/(loss)	43	(331)
	Other	2	0
Loss before income taxes		(1,506)	1,336
Provision/(Benefit) for income taxes		25	(250)
Net loss		(1,531)	(1,081)
Loss per common share
	Basic and Diluted	($0.03)	($0.02)
See notes to unaudited condensed consolidated financial statements

Somero Enterprises, Inc. and Subsidiaries Condensed Consolidated Statements of Changes in Stockholders' Equity (unaudited) for the six months ended June 30, 2011
	Common stock
	Shares	Amount	Additional paid in capital	Accumulated deficit	Other Compre-hensive income (loss)	Total stockholders' equity
Balance - December 31, 2010	56,425,598	26	28,075	(5,881)	(1,083)	21,137
Cumulative translation adjustment	-	-	-	-	(40)	(40)
Change in fair value of derivative instruments	-	-	-	-	52	52
Net loss	-	-	-	(1,531)	-	(1,531)
Share based compensation	-	-	30	-	-	30
Balance - June 30, 2011	56,425,598	26	28,105	(7,412)	(1,071)	19,648
See notes to unaudited condensed consolidated financial statements.

Somero Enterprises, Inc. and Subsidiaries Condensed Consolidated Statements of Cash Flows		For the six months ended June 30
(unaudited)		2011 (unaudited)	2010 (unaudited)
		US$ 000	US$ 000
Cash flows from operating activities:
	Net loss	(1,531)	(1,081)
	Adjustments to reconcile net loss to net cash used in operating activities:
	Deferred taxes	1	0
	Depreciation and amortization	1,302	1,315
	Amortization of deferred financing costs	43	(13)
	Gain on sale of assets	(2)	0
	Share based compensation	30	22
	Working capital changes:
	Accounts receivable	(976)	(419)
	Inventories	(28)	116
	Prepaid expenses and other assets	221	148
	Other assets	0	3
	Accounts payable, accrued expenses and other liabilities	360	(46)
	Income taxes receivable/payable	330	(297)
	Net cash used in operating activities	(250)	(252)
Cash flows from investing activities:
	Proceeds from sale of property and equipment	19	0
	Property and equipment purchases	(119)	(33)
	Net cash used in investing activities	(100)	(33)
Cash flows from financing activities:
	Borrowings from additional financing	9,148	0
	Repayment of notes payable	(8,567)	1,016
	Loan origination fees	(197)	0
	Net cash provided by financing activities	384	1,016
Effect of exchange rates on cash and cash equivalents		12	(29)
Net increase in cash and cash equivalents		46	702
Cash and cash equivalents:
Beginning of period		96	34
End of period		142	736
See notes to unaudited condensed consolidated financial statements.

1.	Organization and Description of Business
	Nature of Business Somero Enterprises, Inc. (the "Company" or "Somero") designs, manufactures, refurbishes, sells and distributes concrete leveling, 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, a European distribution office in the United Kingdom, and sales offices in Canada, Germany, Italy, Spain, Dubai and China.
2.	Summary of Significant Accounting Policies
	Basis of Presentation The interim financial data as of June 30, 2011 and the six months ended June 30, 2011 and June 30, 2010 is unaudited. The condensed consolidated financial statements, in the opinion of Somero management, includes all normal recurring adjustments necessary for a fair presentation of the statement of results for the interim periods. The statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("US GAAP") but do not include all of the information and note disclosures required by US GAAP. The condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in Somero's Annual Report and filing with the AIM exchange for the year ended December 31, 2010. The results for the six month period ended June 30, 2011 are not necessarily indicative of the results to be expected for the year ending December 31, 2011 or for any other interim period. 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. 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 June 30, 2011 and December 31, 2010, the allowance for doubtful accounts was approximately US$239,000 and US$225,000, respectively. Inventories Inventories 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 Costs Deferred financing costs incurred in relation to long-term debt, are reflected net of accumulated amortization and are amortized over the expected repayment term of the debt instrument, which was four years from the debt inception date. These financing costs are being amortized using the effective interest method. Intangible Assets Intangible assets consist principally of customer relationships and patents, and are carried at their fair value, 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. The Company evaluates the carrying value of long-lived assets, including goodwill, whenever events and circumstances indicate the carrying amount of an asset may not be recoverable. For the periods ended June 30, 2011 and December 31, 2010, no such events or circumstances were identified. 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. Goodwill Goodwill is not amortized but is subject to impairment tests on an annual basis or more frequently if events and circumstances indicate that the value of goodwill may not be recoverable. The Company has chosen December 31 as its periodic assessment date. The Company considers factors including continued economic developments and the overall macro-economic environment and determined that a triggering event did not occur at June 30, 2011. 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. 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. For arrangements which include ex works, revenue is recognized when goods are made available to the seller. 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 six months 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. 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 on buildings 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 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. 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. The Company uses a two-step approach to recognize and measure 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, tax positions are measured as the largest amount of tax benefit that has a greater than 50% likelihood of being realized upon settlement.  Interest expense and penalties related to unrecognized tax benefits are recorded as interest expense and penalties, respectively. Use of Estimates The preparation of financial statements in conformity with U.S. GAAP 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 accounts for its stock option issuance in accordance with guidance set out by the FASB (Financial Accounting Standards Board). This guidance requires recognition of 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 guidance also requires measurement of the cost of employee services in exchange for an award based on the grant-date fair value of the award. Compensation expense related to stock based payments was US$30,000 and US$22,000 for the six month periods ended June 30, 2011 and June 30, 2010, respectively. Transactions in and Translation of Foreign Currency The functional currency for the Company's subsidiaries outside the United States is the applicable local currency. The preparation of the consolidated financial statements requires the translation of these financial statements to USD. The assets and liabilities of these subsidiaries are translated at period end exchange rates and the statement of operations accounts are translated at average rates for the period. The resulting gains or losses are recorded directly to accumulated other comprehensive income. The Company is also exposed to market risks related to fluctuations in foreign exchange rates because it has some sales transactions, and some monetary assets and liabilities of its foreign subsidiaries, are denominated in foreign currencies other than the designated functional currency. Gains and losses from such transactions are included as foreign exchange gain/(loss) in the accompanying consolidated statements of operations. Comprehensive loss Comprehensive loss is the combination of reported net loss and other comprehensive income ("OCI"). OCI consists of 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). OCI was composed of the following for the six months ended June 30, 2011 and June 30, 2010.

	For the six months ended June 30
	2011	2010
	US$ 000	US$ 000
Net loss	(1,531)	(1,081)
Cumulative Translation Adjustment	(40)	(82)
Change in fair value of derivative instruments - net of income taxes	52	52
Total Comprehensive loss	(1,519)	(1,111)

Loss Per Share Basic loss per share represents loss available to common stockholders divided by the weighted average number of shares outstanding during the period. Diluted loss per share reflects 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 for the six months ended June 30, 2011. Loss per common share has been computed based on the following:

	For the six months ended June 30
	2011	2010
	US$ 000	US$ 000
Net loss	(1,531)	(1,081)
Basic and diluted weighted average shares outstanding	56,425,598	56,425,598

Fair Value Measurements The Company has certain assets and liabilities that may be recorded at fair value at the reporting date. The fair values 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
Assets: Unobservable June 30, 2011 and December 31, 2010	Quoted Prices in Active Markets for Identical Assets (Level 1)	Significant Other Observable Inputs (Level 2)	Significant Inputs (Level 3)
US$000	US$000	US$000	US$000
2,878			2,878

	New Accounting Pronouncements In April 2011, the FASB issued guidance to amend Transfers and Servicing (Topic 860). The main objective of this update is to improve the accounting for repurchase agreements (repos) and other agreements that both entitle and obligate a transferor to repurchase or redeem financial assets before their maturity. This amendment removes the assessment of effective control the criterion relating to the transferor's ability to repurchase or redeem financial assets on substantially the agreed terms, even in the event of default by the transferee. The guidance for this update is effective for the first interim or annual period beginning on or after December 15, 2011 and is not expected to have a material impact on the Company. In May 2011, the FASB issued guidance to amend Fair Value Measurement (Topic 820). The amendments result in common fair value measurement and disclose the requirements in U.S. GAAP and IFRS's (International Financial Reporting Standards). The amendments describe the requirements about fair value measurements. The guidance for this update is effective during interim or annual period beginning after December 15, 2011 and is not expected to have a material impact on the Company. In June 2011, the FASB issued guidance to amend Comprehensive Income (Topic 220). The main objective is to eliminate the option of presenting the components of other comprehensive income as part of the statement of changes in the stockholders equity. This guidance is effective for fiscal years and interim periods within those years, beginning after December 15, 2011 and is not expected to have a material impact on the Company.
3.	Inventories
	Inventories consisted of the following at June 30, 2011 and December 31, 2010:

	2011	2010
	US$ 000	US$ 000
Raw materials	1,614	1,713
Finished goods and work in process	2,955	2,094
Refurbished	1,852	2,586
Total	6,421	6,393

4.	Property, Plant and Equipment
	Property, plant and equipment consist of the following at June 30, 2011 and December 31, 2010:

	2011	2010
	US$ 000	US$ 000
Land	207	207
Buildings and improvements	3,572	3,572
Machinery and equipment	1,528	1,450
Sub-total	5,307	5,229
Less: accumulated depreciation and amortization	(1,641)	(1,528)
Total	3,666	3,701

	Depreciation expense for the six months ended June 30, 2011 and June 30, 2010 was approximately US$135,000 and US$149,000, respectively.
5.	Notes Payable
	The Company's debt consisted of the following at June 30, 2011 and December 31, 2010:

		2011	2010
		US$ 000	US$ 000
Credit facility:
	Five year secured reducing revolving line of credit	-	3,515
	Five year secured term loan	-	1,610
	30 month secured revolving line of credit	2,479	-
	30 month secured reducing term loan	3,227	-
	Total bank debt	5,706	5,125
Less debt due within one year		(511)	(460)
Obligations due after one year		5,195	4,665

	Amended Credit Facility The Company failed its covenants and received a waiver from its bank for the third quarter of 2010 and completed the amendment of its loan agreement in early 2011. The new agreement is valid until July 2013. ·     US$3,500,000 July 2013 amended, secured revolving line of credit ·     US$1,540,000 July 2013 amended, secured reducing term loan ·     US$2,500,000 July 2013 new, secured revolving line of credit ·     US$1,900,000 July 2013 new, secured reducing term loan The Company restructured its original revolving loan up to a maximum of US$3,500,000. The interest rate on this loan will be adjusted Libor plus 4.0%. The Company restructured its original term loan equal to US$1,540,000. The interest rate on this loan will be adjusted Libor plus 4.0%. The Company has a new maximum revolving loan facility equal to US$2,500,000 secured by substantially all of its assets and supported by the Export-Import Bank of the United States. The interest rate on this loan will be adjusted Libor plus 4.0%.  The Company has a new term loan facility equal to US$1,900,000 secured by substantially by all of its business assets and a mortgage. The interest rate on this loan will be adjusted Libor plus 4.5%. Total loan origination fees were approximately US$197,000 consisting of a US$25,000 change fee paid to the bank, US$37,500 fee paid to the Export-Import Bank of the United States US$134,500 in legal fees. Future Payments The future payments by year represent the remaining six months for 2011 and the full 12 months of each successive period for the Company's amended loan facility:

	June 30 US$ 000
2011	255
2012	511
2013	4,940
2014	-
2015	-
Total payments	5,706

	Interest Interest expense on the credit facility for the six months ended June 30, 2011 and June 30, 2010, was approximately US$129,000 and US$199,000, respectively, related to the debt obligation. Interest expense includes US$52,000 and US$52,000 in 2011 and 2010, respectively, related to the loss on cash flow hedges as a result of paying off interest rate swaps that were recognized in the statement of operations as interest expense and removed from other comprehensive income/(loss).
6.	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 represent the remaining six months for 2011 and the full 12 months of each successive period:

	June 30 US$ 000
2011	135
2012	223
2013	107
2014	9
Total payments	474

7.	Commitments and Contingencies
	The Company has entered into employment agreements with certain members of senior management. The terms of these agreements range from six months to one year and include non-compete and non-disclosure provisions as well as providing 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 financial statements.
8.	Income Taxes
	The Company's effective tax rate for the six months ended June 30, 2011 was -2% compared to the federal statutory rate of 34.0%.  The effective tax rate is based on the estimated annual effective tax rate as required by US GAAP for interim periods. The effective tax rate is lower than the statutory rate mainly due to the effect of foreign taxes and the impact of applying a valuation allowance to deferred tax assets and liabilities. The Company has provided a valuation allowance of $5,652,000 and $5,285,000 at June 30, 2011 and December 31, 2010 respectively, on the deferred tax assets. Due to economic conditions and their impact on the future, the Company believes that it is more likely than not that the benefit derived from its deferred tax assets will not be realized. As of June 30, 2011, the Company had a gross unrecognized tax benefit (including interest and penalties) of $4,000. Interest expense and penalties related to unrecognized tax benefits are recorded as interest expense and penalties, respectively. Somero is subject to US 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 2007 forward is still open. Somero has no federal, foreign or state income tax returns currently under examination.
9.	Supplemental Cash Flow Disclosures

	For the six months ended June 30
	2011	2010
	US$ 000	US$ 000
Cash paid for interest	127	198
Cash paid/(received) for taxes	(355)	2

10.	Intangible Assets
	The following table reflects intangible assets that are subject to amortization.

	Weighted average amortization period	June 30 US$ 000	December 31 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
		24,842	24,842
Accumulated amortization
Customer relationships	8 years	4,659	4,266
Patents	12 years	9,140	8,368
Other intangibles	3 years	4	3
		13,803	12,637
Net carrying costs
Customer relationships	8 years	1,641	2,034
Patents	12 years	9,398	10,170
Other intangibles	3 years	0	1
		11,039	12,205

	Amortization expense for the six months ended June 30, 2011 and June 30, 2010 was US$1,167,000 and US$1,166,000, respectively. Estimated amortization expense on intangibles for the remainder of 2011 is US$1,166,000. Future amortization of intangible assets is expected to be as follows at:

	June 30 US$ 000
2012	2,333
2013	2,004
2014	1,545
2015	1,545
	7,427
Thereafter	2,446
	9,873

 

END

 

 

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