Interim Results

RNS Number : 0038T

Somero Enterprises Inc.

21 September 2010

PRESS ANNOUNCEMENT

FOR IMMEDIATE RELEASE

21 SEPTEMBER 2010

Somero Enterprises, Inc ®

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

Interim Results for the six months ended 30 June 2010

Somero Enterprises, Inc.®, is pleased to report its interim results for the six months to 30 June 2010. 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.

Financial Highlights

· Group revenue of US$10.7m (H1 2009: US$13.4m)

· Pre-tax loss of US($1.3m) (H1 2009: US$2.0m)

· Net debt is US$6.2m (31 December 2009 US$5.9m)

Business Highlights

· Increased focus on opportunities for growth in international markets

o Investment in China and the Middle East is producing better than expected results

o Latin and South America continue to produce consistent results

· Continued focus on cost management to maximize investment for growth

· Continued commitment to increasing penetration of the India, Middle and Far East markets

Commenting, Jack Cooney, President and Chief Executive Officer of Somero, said:

"We are pleased with the Company's first half performance. Although the Company experienced only modest growth over the period in North America and Europe, we are encouraged by some early signs of improving market conditions in the emerging markets where we continue to make good progress.

Looking forward, we will continue to expand on our investment in the emerging markets and in new product development."

For further information please contact:

Hawkpoint Partners

+44 (0)20 7665 4500

Christopher Kemball / Chris Robinson

Collins Stewart

+44 (0)20 7523 8000

Piers Coombs

About Somero

Somero® designs, manufactures and sells equipment that automates the process of spreading and leveling 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® 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 60 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 68 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

While revenues in 1H 2010 were lower than the same period last year, we are pleased to confirm that they are in line with our expectations.

Operational Performance

As expected, revenues are on plan overall and we are realizing the benefits of all of our previous cost reduction programs. As a result of the Somero As-Is Program, refurbished sales increased 67% over the same period last year. Our customer support group has increased the frequency and quality of customer touches to increase the level of awareness of our customers' business in order to strategically focus sales efforts. We have been refining our newly launched website to improve our customers' experience in obtaining information and customer support.

We have also continued product development and introduced a new upgraded PowerRake® at the World of Concrete tradeshow in January. Subsequently we have added 3-D technology to the entire small line product line, including the new PowerRake, giving our customers the ability to perform three dimensional concrete paving with their small line equipment.

Emerging Markets

We have experienced strong results from our investment in China and have increased the investment with the addition of a new vice president in charge of Asia. We are pleased by the strength of Latin and South America and the Middle East.

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 centered 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 2010. We remain confident that the launch of these products will continue to provide growth opportunities for Somero over the medium and longer term.

Stock Option Plan

As previously communicated in our 2009 Annual Report, a Stock Option plan for management retention and incentivizing was authorized by the Board of Directors on 20 January 2010 and implemented 17 February 2010.

Current Trading and Outlook

2010 revenues to date are consistent with our previously indicated expectations. As stated at the time of our final results, we continue to believe our markets are at or near their bottom and we continue to focus on every sales opportunity, while maintaining tight controls on cost. We have seen some increase in sales activity in selected regions, and we have positioned the Group to benefit from a future recovery as we pursue the increasing internationalization of our business and focus on new product development. Management continues to work closely with the Group's bank to manage Somero's financing position.

Larry Horsch

Chairman

Jack Cooney

President and Chief Executive Officer

Business and Financial Review (Unaudited)
Summary of Financial Results ^(1)(2)(3)(4)
	For the six months ended 30 June
	2010	2009
	US$ 000	US$ 000
Revenue	10,654	13,429
Cost of sales	5,808	7,285

Gross profit	4,846	6,144

Operating expenses
Selling expenses	2,226	3,055
Engineering expenses	202	382
General and administrative expenses	3,168	4,174
Total operating expenses	5,596	7,611

Operating loss	(750)	(1,467)
Other income (expense)
Interest expense	(255)	(734)
Interest income	0	2
Foreign exchange gain/(loss)	(331)	150
Other	0	4

Loss before income taxes	(1,336)	(2,045)

(Benefit) for income taxes	(255)	(766)

Net loss	(1,081)	(1,279)
Loss per share diluted	US ($0.02)	US ($0.04)
(Loss)/earnings per share diluted - adjusted net (loss)/income before amortization	US $0.00	US $0.00
Other data
Adjusted EBITDA	587	101
Adjusted net (loss)/income before amortization	85	(112)
Depreciation expense	149	184
Amortization of intangibles	1,166	1,167
Capital expenditures	33	7

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. Diluted loss per share 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 at 30 June 2010. Diluted (loss)/earnings per share 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 (Unaudited)
		For the six months ended 30 June
		2010	2009
		US$ 000	US$ 000
Adjusted EBITDA reconciliation
Net loss		(1,081)	(1,279)
	Tax benefit	(255)	(766)
	Interest expense	255	734
	Interest income	0	(2)
	Foreign exchange loss/(gain)	331	(150)
	Other	0	(4)
	Depreciation	149	184
	Amortization	1,166	1,167
	Stock-based compensation	22	217
Adjusted EBITDA		587	101

Net (loss)/ income before amortization reconciliation
Net loss		(1,081)	(1,279)
Amortization		1,166	1,167
Net (loss)/income before amortization		85	(112)

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 30 June 2010 were US$10.7m, which represented a 20.1% decrease from US$13.4m in consolidated revenues for the six months ended 30 June 2009. 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 and PowerRake) 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 30 June 2010 as compared to the six months ended 30 June 2009 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 30 June 2010 and the six months ended 30 June 2009.

	Six months ended 30 June 2010 (unaudited)		Six months ended 30 June 2009 (unaudited)
	In US$ 000	Percentage of net sales	In US$ 000	Percentage of net sales
Large Line Sales	2,686	25.2%	4,106	30.6%
Small Line Sales	2,659	25.0%	3,467	25.8%
Other revenues	5,309	49.8%	5,856	43.6%
Total	10,654	100%	13,429	100%

Revenue by Product Line

Large Line unit sales were 10 units for the period (15 units comparable period last year). Both North America and EMEA were lower with five units and two units sold respectively (6 units and 6 units respectively for the comparable period last year). In addition to lower unit volumes average selling prices were lower due to larger discounts.

Small Line unit sales were 57 for the period down from 76 for the comparable period last year. North America units were 27 and 41 for the respective periods, while EMEA contributed 14 and 22 units respectively.

Other revenues, including sales of spare parts, refurbished machines, topping spreaders and accessories, decreased from US$5.9m during the six months ended 30 June 2009 to US$5.3m during the six months ended 30 June 2010.

Revenue by Geography

Sales made in North America totaled $5.0m for the period as compared with $6.9m last year and represented 47.2% of total revenues (prior period was 51.7% of total). Sales in EMEA were $2.8m in H1 2010 compared to $4.5m in H1 2009.

Gross Profit

Somero's gross profit percentage for H1 2010 was 45.5% as compared to 45.8% in H1 2009.

Operating Expenses

Operating expenses excluding depreciation, amortization and stock based compensation for H1 2010 were $4.4m ($6.2m in H1 2009). The reduction has been driven by aggressive cost cutting including the significant elimination of jobs and compensation reductions. Additionally, the management team was required to reduce costs in all other categories of expense.

Debt Restructuring

In January 2010, the Company again renegotiated its loan covenants. In return for a change in covenants, the Company agreed to a reduction in its line of credit to US$5,750,000. The new agreement temporarily suspends the funded debt ratio until December 31, 2010, replaces it with a quarterly EBITDA minimum target, and the change fee was US$30,000.

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 30 June
	2010	2009
	US$ 000	US$ 000
Loss available to shareholders	(1,081)	(1,279)
Basic and diluted weighted average shares outstanding	56,426	34,894

	30 June 2010	30 June 2009
Basic and diluted loss per share	($0.02)	($0.04)
Net (loss)/income before amortization of intangibles (loss)/income per share	$0.00	$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)
As of 30 June 2010 and 31 December 2009
(in thousands, except per share amounts)		2010	2009
		US$ 000	US$ 000
Assets
Current Assets:
	Cash and cash equivalents	736	34
	Accounts receivable - net	2,616	2,152
	Inventories	6,061	6,177
	Prepaid expenses and other assets	572	720
	Income tax receivable	1,525	1,228
	Total current assets	11,510	10,311
Property, plant and equipment - net		3,839	3,954
Intangible assets - net		13,372	14,538
Goodwill		2,878	2,878
Deferred financing costs		23	10
Deferred tax asset		4	4
Other assets		31	35
Total assets		31,657	31,730

Liabilities and stockholders' equity
Current liabilities:
	Notes Payable - current portion	460	460
	Accounts payable	1,929	1,911
	Accrued expenses	440	414
	Total current liabilities	2,829	2,785
Notes payable, net of current portion		6,510	5,493
Other liabilities		62	107
Total liabilities		9,401	8,385

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 30 June 2010 and 31 December 2009	26	26
	Additional paid in capital	28,047	28,025
	Accumulated deficit	(4,738)	(3,657)
	Other comprehensive loss	(1,079)	(1,049)
	Total stockholders' equity	22,256	23,345
Total liabilities and stockholders' equity		31,657	31,730

See notes to unaudited condensed consolidated financial statements

Somero Enterprises, Inc. and Subsidiaries
Consolidated Statements of Operations (unaudited)
For the six months ended 30 June 2010 and 30 June 2009
		For the six months ended 30 June
		2010	2009
		US$ 000	US$ 000
Revenue		10,654	13,429
Cost of sales		5,808	7,285

Gross profit		4,846	6,144

Operating expenses
	Selling expenses	2,226	3,055
	Engineering expenses	202	382
	General and administrative expenses	3,168	4,174
	Total operating expenses	5,596	7,611

Operating loss		(750)	(1,467)
Other income (expense)
	Interest expense	(255)	(734)
	Interest income	0	2
	Foreign exchange gain/(loss)	(331)	150
	Other	0	4

Loss before income taxes		(1,336)	(2,045)
(Benefit) for income taxes		(255)	(766)
Net loss		(1,081)	(1,279)

Loss per common share
	Basic and Diluted	US($0.02)	US($0.04)
See notes to unaudited condensed consolidated financial statements.

Somero Enterprises, Inc. and Subsidiaries
Consolidated Statements of Changes in Stockholders' Equity (unaudited)
For the six months ended 30 June 2010

	Common Stock		Additional paid	Retained	Comprehensive	Total stockholders
	Shares	Amount	In capital	earnings	loss	equity'
		US$ 000	US$ 000	US$ 000	US$ 000	US$ 000
Balance - 31 December 2009	56,425,598	26	28,025	(3,657)	(1,049)	23,345
Cumulative translation adjustment	-	-	-	-	(82)	(82)
Change in fair value of derivative instruments	-	-	-	-	52	52
Net loss	-	-	-	(1,081)	-	(1,081)
Stock based compensation	-	-	22	-	-	22
Balance - 30 June 2010	56,425,598	26	28,047	(4,738)	(1,079)	22,256
See notes to unaudited condensed consolidated financial statements.

Somero Enterprises, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
For the years six months ended 30 June 2010 and 30 June 2009
			Six months ended	Six months ended
			30 June 2010	30 June 2009
			(unaudited)	(unaudited)
			US$ 000	US$ 000
Cash flows from operating activities:
	Net loss		(1,081)	(1,279)
	Adjustments to reconcile net loss to net cash provided by operating activities:
		Deferred taxes	0	149
		Depreciation and amortization	1,315	1,178
		Amortization of deferred financing costs	(13)	21
		Loss/(gain) on sale of assets	0	(4)
		Stock based compensation	22	217
	Working capital changes:
		Accounts receivable	(419)	561
		Inventories	116	283
		Prepaid expenses and other assets	148	775
		Other assets	3	(6)
		Accounts payable and other liabilities	(46)	(917)
		Income taxes receivable	(297)	(737)
		Net cash provided by/(used in) operating activities	(252)	241

Cash flows from investing activities:
	Proceeds from sale of property and equipment		0	11
	Property and equipment purchases		(33)	(7)
	Net cash provided by/(used in) investing activities		(33)	4

Cash flows from financing activities:
	Repayment of notes payable		1,016	(5,818)
	Proceeds from offering of common stock, net of costs		0	5,233
	Net cash provided by/(used in) financing activities		1,016	(585)

Effect of exchange rates on cash and cash equivalents			(29)	(291)

Net increase/(decrease) in cash and cash equivalents			702	(631)

Cash and cash equivalents:
Beginning of period			34	789
End of period			736	158
See notes to unaudited condensed consolidated financial statements.

Somero Enterprises, Inc. and Subsidiaries

Notes to the Condensed Consolidated Financial Statements (unaudited)

For the six months ended 30 June 2010 and 30 June 2009

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 30 June 2010 and the six months ended 30 June 2010 and 30 June 2009 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 31 December 2009. The results for the six month period ended 30 June 2010 are not necessarily indicative of the results to be expected for the year ending 31 December 2010 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 primarily located in the United States. 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 30 June 2010 and 31 December 2009, the allowance for doubtful accounts was approximately US$226,000 and US$232,000, 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, excluding goodwill, whenever events and circumstances indicate the carrying amount of an asset may not be recoverable. For the periods ended 30 June 2010 and 31 December 2009, 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 31 December 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 30 June 2010. 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. Accrued interest and penalties related to unrecognized tax benefits are recorded as interest 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. 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$22,000 and US$217,000 for the six month periods ended 30 June 2010 and 30 June 2009, 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 30 June 2010 and 30 June 2009. Total comprehensive loss for the periods was approximately US$(1,111,000) and US$(1,146,000), respectively.

For the six months ended 30 June

	2010	2009
	US$ 000	US$ 000
Net loss	(1,081)	(1,279)
Cumulative Translation Adjustment	(82)	(156)
Change in fair value of derivative instruments - net of income taxes	52	289
Total Comprehensive loss	(1,111)	(1,146)

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 at 30 June 2010. Loss per common share has been computed based on the following:

For the six months ended 30 June	2010	2009
	US$ 000	US$ 000
Net loss	(1,081)	(1,279)
Basic and diluted weighted average shares outstanding	56,425,598	34,893,670

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 of Financial Instruments

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value estimates are made at a specific point in time, based on relevant market information about the financial instrument. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. The assumptions used have a significant effect on the estimated amounts reported. The amounts reported in the accompanying consolidated balance sheets approximate fair value due to the nature and short-term maturities of such assets and liabilities, including cash and cash equivalents, accounts receivable, accounts payable, and accrued liabilities.

New Accounting Pronouncements

The FASB issued guidance on improving disclosures about fair value measurements that are effective for periods beginning after 15 December 2009. It adds new requirements for disclosures about transfers into and out of Levels 1 and 2 and separate disclosures about purchases, sales, issuances, and settlements relating to Level 3 measurements. This guidance had little impact upon our 2010 financial position and operations.

3. Inventories

Inventories consisted of the following at 30 June 2010 and 31 December 2009:

	2010	2009
	US$ 000	US$ 000
Raw materials	1,600	1,547
Finished goods and work in process	2,532	2,486
Refurbished	1,929	2,144
Total	6,061	6,177

4. Property, Plant and Equipment

Property, plant and equipment consist of the following at 30 June 2010 and 31 December 2009:

	2010	2009
	US$ 000	US$ 000
Land	207	207
Buildings and improvements	3,572	3,572
Machinery and equipment	1,454	1,423
Sub-total	5,233	5,202
Less: accumulated depreciation and amortization	(1,394)	(1,248)
Total	3,839	3,954

Depreciation expense for the six months ended 30 June 2010 and 30 June 2009 was approximately US$149,000 and US$184,000, respectively.

5. Notes Payable

The Company's debt consisted of the following at 30 June 2010 and 31 December 2009:

		2010	2009
		US$ 000	US$ 000
Credit facility:
	Five year secured reducing revolving line of credit	5,130	3,883
	Five year secured term loan	1,840	2,070
	Total bank debt	6,970	5,953
Less debt due within one year		(460)	(460)

Obligations due after one year		6,510	5,493

Credit FacilityThe Company has a credit facility with a bank dated 16 March 2007 that has been amended multiple times and composed of the following at 30 June 2010:

US$5,750,000 five year secured reducing revolving line of credit

US$1,840,000 five year secured reducing term loan

The interest rates on the revolver and term loan are Libor 1-month and Libor 3-month, respectively, plus 4.75% per the agreed pricing schedule. The interest rates were 5.10% and 4.51% on the revolver and term loan at 30 June 2010. The credit facilities are secured by substantially all of the Company's assets and contain a number of restrictive covenants that among other things limit the ability of the Company to incur debt, issue capital stock, change ownership and dispose of certain assets.

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

	30 Jun
	US$ 000
2010	230
2011	460
2012	6,280
Total payments	6,970

Interest Interest expense on the credit facility for the six months ended 30 June 2010 and 30 June 2009 was approximately US$199,000 and US$406,000, respectively, related to the credit facility. Additionally, there was $52,000 of deferred charges recognized for the six months ended 30 June 2010 as a result of the modification to the term loan in June 2009.

6. Equity Raise

The Company successfully raised $5.5m through a private placement in June 2009. The Company incurred approximately $517,000 in costs for the equity raise which were netted against the gross proceeds.

7. 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:

	30 Jun
	US$ 000
2010	158
2011	230
2012	174
2013	82
Total	644

Total rent expense under operating leases for the periods ended 30 June 2010 and 30 June 2009 was approximately US$171,000 and US$184,000.

8. 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.

9. Income Taxes

The Company's effective tax rate for the six months ended 30 June 2010 was 19% 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 a lower effective state rate applied to deferred tax assets and liabilities. The Company has provided a valuation allowance of $4,819,000 and $4,823,000 at 30 June 2010 and 31 December 2009 respectively, on the deferred tax assets.

The Company received tax refunds from the IRS in the amount of $1,031,000 subsequent to June 30, 2010. These refunds were attributable to the NOL carry back claim related to the year ended December 31, 2009.

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. In recognition of this risk, the Company has provided a valuation allowance of $4,819,000 and $4,823,000 at 30 June 30 2010 and 31 December 2009 respectively, on the deferred tax assets.

As of 30 June 2010, the Company had a gross unrecognized tax benefit (including interest and penalties) of $4,000. Accrued interest and penalties related to unrecognized tax benefits are recorded as interest 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 and therefore the statute of limitations for all federal, foreign and state income tax matters for tax years from 2006 forward is still open. Somero has no federal, foreign or state income tax returns currently under examination.

10. Supplemental Cash Flow Disclosures

For the six months ended 30 June

	2010	2009
	US$ 00	US$ 00
Cash paid for interest	198	734
Cash paid for taxes	2	(86)

11. Intangible Assets

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

	Weighted average
	amortization	30 Jun	31 Dec
	period	US$ 000	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	3,872	3,479
Patents	12 years	7,595	6,823
Other intangibles	3 years	3	2
		11,470	10,304
Net carrying costs
Customer relationships	8 years	2,428	2,821
Patents	12 years	10,943	11,715
Other intangibles	3 years	1	2
		13,372	14,538

Amortization expense for the six months ended 30 June 2010 and 30 June 2009 was US$1,166,000 and US$1,167,000, respectively.

Estimated amortization expense on intangibles for the remainder of 2010 is US$1,167,000. Future amortization of intangible assets is expected to be as follows at: