(SOM) Somero Enterprises

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.

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.

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:

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.

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.

Inventories

Inventories consisted of the following at June 30, 2011 and December 31, 2010:

Property, Plant and Equipment

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

Depreciation expense for the six months ended June 30, 2011 and June 30, 2010 was approximately US$135,000 and US$149,000, respectively.

Notes Payable

The Company's debt consisted of the following at June 30, 2011 and December 31, 2010:

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:

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).

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:

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.

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.

Supplemental Cash Flow Disclosures

Intangible Assets

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

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: