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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
|X| Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended June 30, 2007
COMMISSION FILE NUMBER: 0-12227
SUTRON CORPORATION
(Name of small business issuer as specified in its charter)
VIRGINIA 54-1006352
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
21300 RIDGETOP CIRCLE, STERLING, VIRGINIA 20166
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(Address of principal executive offices)
703-406-2800
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(Issuer's telephone number)
SECURITIES REGISTERED UNDER SECTION 12(G) OF THE ACT: COMMON STOCK,
$.01 PAR VALUE
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or
for such shorter period that the issuer was required to file such reports); and
(2) has been subject to such filing requirements for the past 90 days. Yes |X|
No |_|
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes |_| No |X|
There were 4,515,632 outstanding shares of the issuer's only class of common
equity, Common Stock, $0.01 par value, on June 30, 2007.
Transitional Small Business Disclosure Format (check one): Yes [_] No [X]
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SUTRON CORPORATION
FORM 10-QSB QUARTERLY REPORT
FOR THE QUARTER ENDED JUNE 30, 2007
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION
Item 1. Financial Statements 2
Condensed Consolidated Balance Sheet as of June 30,
2007 and December 31, 2006 2
Condensed Consolidated Statements of Operations for
the Three Months Ended June 30, 2007 and 2006 3
Condensed Consolidated Statements of Operations for
the Six Months Ended June 30, 2007 and 2006 4
Condensed Consolidated Statements of Cash Flows for
the Six Months Ended June 30, 2007 and 2006 5
Financial Footnotes 6
Item 2. Management's Discussion and Analysis of Financial C
ondition and Results of Operations 8
Item 3. Controls and Procedures 11
PART II OTHER INFORMATION
Item 1. Legal Proceedings 14
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 6. Exhibits 15
Signatures 16
1
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
----------------------------
SUTRON CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
JUNE 30, DECEMBER 31,
2007 2006
------------ ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 628,247 $ 1,539,032
Restricted cash and cash equivalents 949,923 138,233
Accounts receivable 4,526,605 6,835,751
Inventory 4,592,147 3,402,017
Prepaid items and other assets 680,669 530,720
Deferred income taxes 324,000 333,000
------------ ------------
Total current assets 11,701,591 12,778,753
PROPERTY AND EQUIPMENT, AT COST 3,402,510 3,361,159
Less: Accumulated depreciation and amortization (2,853,441) (2,740,941)
------------ ------------
Property and equipment, net 549,069 620,218
OTHER ASSETS 101,306 50,576
------------ ------------
TOTAL ASSETS $ 12,351,966 $ 13,449,547
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,006,141 $ 1,398,285
Accrued payroll 78,157 317,974
Other accrued expenses 532,204 1,506,950
Notes payable - current 50,722 50,722
------------ ------------
Total current liabilities 1,667,224 3,273,931
LONG-TERM LIABILITIES
Notes payable, net of current maturities 9,414 37,678
Deferred income taxes 120,000 129,000
------------ ------------
TOTAL LONG-TERM LIABILITIES 129,414 166,678
------------ ------------
TOTAL LIABILITIES 1,796,638 3,440,609
------------ ------------
STOCKHOLDERS' EQUITY
Common stock 45,157 44,946
Additional paid-in capital 2,678,330 2,559,281
Retained earnings 7,851,255 7,417,878
Accumulated other comprehensive (loss) income (19,414) (13,167)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 10,555,328 10,008,938
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 12,351,966 $ 13,449,547
============ ============
See accompanying notes.
2
SUTRON CORPORTION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED JUNE 30,
2007 2006
------------ ------------
Net sales and revenues $ 4,217,871 $ 4,421,174
Cost of sales and revenues 2,572,703 2,746,675
------------ ------------
Gross profit 1,645,168 1,674,499
------------ ------------
Operating expenses:
Selling, general and administrative expenses 776,005 651,551
Research and development expenses 291,509 325,460
------------ ------------
Total operating expenses 1,067,514 977,011
------------ ------------
Operating income 577,654 697,488
Interest income (expense), net 26,752 13,244
------------ ------------
Income before income taxes 604,406 710,732
Income tax expense (benefit) 210,000 202,000
------------ ------------
Net income $ 394,406 $ 508,732
============ ============
Net income per share:
Basic income per share $ .09 $ .12
============ ============
Diluted income per share $ .08 $ .10
============ ============
See accompanying notes
3
SUTRON CORPORTION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
SIX MONTHS ENDED JUNE 30,
2007 2006
------------ ------------
Net sales and revenues $ 7,364,615 $ 8,497,282
Cost of sales and revenues 4,579,407 5,068,800
------------ ------------
Gross profit 2,785,208 3,428,482
------------ ------------
Operating expenses:
Selling, general and administrative expenses 1,617,118 1,448,181
Research and development expenses 584,861 731,729
------------ ------------
Total operating expenses 2,201,979 2,179,910
------------ ------------
Operating income 583,229 1,248,572
Interest income (expense), net 49,148 25,599
------------ ------------
Income before income taxes 632,377 1,274,171
Income taxes 199,000 406,000
------------ ------------
Net income $ 433,377 $ 868,171
============ ============
Net income per share:
Basic income per share $ .10 $ .20
============ ============
Diluted income per share $ .09 $ .18
============ ============
See accompanying notes.
4
SUTRON CORPORTION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED JUNE 30,
2007 2006
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 433,377 $ 868,171
Noncash items included in net income:
Depreciation and amortization 112,500 120,000
Deferred income taxes -- (8,000)
Stock option compensation 40,809 10,310
Changes in current assets and liabilities:
Accounts receivable 2,309,146 (716,178)
Inventory (1,190,130) (1,023,804)
Prepaid items and other assets (200,679) 15,721
Accounts payable (392,144) 151,798
Accrued expenses (1,214,563) 424,483
------------ ------------
Net Cash Provided (Used) by Operating Activities (101,684) (157,499)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Restricted cash and cash equivalents (811,690) 48,742
Purchase of property and equipment (41,351) (65,633)
------------ ------------
Net Cash Provided (Used) by Investing Activities (853,041) (16,891)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on notes payable (28,264) (22,648)
Proceeds from stock options exercised 78,451 16,570
------------ ------------
Net Cash Provided (Used) by Financing Activities 50,187 (6,078)
------------ ------------
Effect of exchange rate changes on cash (6,247) 8,043
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (910,785) (172,425)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 1,539,032 1,861,627
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 628,247 $ 1,689,202
============ ============
CASH PAID DURING THE PERIOD FOR:
Interest $ 40 $ 1,480
============ ============
Income taxes paid (received) $ 295,462 $ 217,987
============ ============
See accompanying notes
5
SUTRON CORPORATION
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 30, 2007
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Sutron Corporation (the "Company") was incorporated on December 30, 1975, under
the General Laws of the Commonwealth of Virginia. The Company operates from its
headquarters located in Sterling, Virginia. The Company has several branch
offices located throughout the United States, a branch office in India and a
wholly owned subsidiary in India. The Company is a leading provider of real-time
data collection and control products, systems software and professional services
in the hydrological, meteorological and oceanic monitoring markets. The
Company's principal products include data loggers, satellite
transmitters/loggers, water level and meteorological sensors, tides systems and
system and application software. Customers consist of a diversified base of
Federal, state, local and foreign government agencies, universities and
engineering and hydropower companies.
The financial statements included herein have been prepared, without audit,
pursuant to the rules and regulations of the Securities and Exchange Commission.
Certain information and disclosures included in financial statements prepared in
accordance with accounting principles generally accepted in the United States of
America have been condensed or omitted pursuant to such rules and regulations.
These condensed consolidated financial statements should be read in conjunction
with the financial statements and notes thereto included in the Company's Annual
Report filed on Form 10-KSB for the year ended December 31, 2006. The condensed
consolidated balance sheet as of December 31, 2006 was derived from the audited
financial statements for the year then ended.
In the opinion of the Company, all adjustments necessary to present fairly the
financial position of the Company and the results of its operations and its cash
flows have been included in the accompanying financial statements. The results
of operations for interim periods are not necessarily indicative of the expected
results for the full year.
2. SIGNIFICANT ACCOUNTING POLICIES
The preparation of condensed consolidated financial statements in conformity
with GAAP requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the condensed consolidated financial statements
and the reported amounts of revenues and expenses during the reporting period.
These judgments are difficult as matters that are inherently uncertain directly
impact their valuation and accounting. Actual results may vary from management's
estimates and assumptions.
The Company's significant accounting policies are disclosed in the Company's
Annual report on Form 10-KSB for the year ended December 31, 2006 filed with the
Securities and Exchange Commission.
STOCK COMPENSATION
The Company's Amended and Restated 1996, 1997 and 2002 Stock Option Plans (the
"Stock Option Plans") provide for the issuance of non-qualified stock options to
employees, officers and directors. The plans are administered by the
compensation committee of the Board of Directors, which selects persons to
receive awards and determines the number of shares subject to each award and the
terms, conditions,
6
performance measures and other provisions of the award. See Note 13 of the
Company's financial statements in its Annual Report on Form 10-KSB for the year
ended December 31, 2006 for additional information related to the stock option
plans.
Effective January 1, 2006, the Company adopted SFAS No. 123R ACCOUNTING FOR
STOCK BASED COMPENSATION (SFAS 123R), which requires companies to measure and
recognize compensation expense for all stock-based payments at fair value. SFAS
123R is being applied on the modified prospective transition method and
therefore the Company has not restated results for prior periods. The financial
statements for the three months and six months ended June 30, 2007 recognize
compensation cost for the portion of outstanding awards which have vested during
the period. The Company recognizes stock-based compensation costs on a
straight-line basis over the requisite service period of the award, which is
generally the option vesting term. For the three and six months ended June 30,
2007, total stock-based compensation expense of $22,424 and $40,809 was included
in operating expenses as compared to stock-based compensation of $10,310 for the
three and six months ended June 30, 2006. The weighted average fair value of
options granted during the three months and six months ended June 30, 2007 was
calculated using the Black-Scholes option pricing model with the following
valuation assumptions and weighted average fair value as follows:
Periods Ended June 30, 2007
---------------------------
Three Months Six Months
------------ ----------
Weighted average fair value of grants $7.60 $7.06
Expected volatility 30% 30%
Dividend yield 0 0
Risk-free interest rate 5.16% 4.50%
Expected term in years 10.00 10.00
The volatility factor is based on the Company's historical stock price
fluctuations. The Company has not, and does not intend to, issue dividends;
therefore, the dividend yield assumption is 0. The Company applied the risk-free
interest rate based on the U.S. Treasury yield in effect at the time of the
grant. The expected term of the option is based on the contractual period of the
options granted.
3. STOCK OPTIONS
The Company has granted stock options under the Stock Option Plans to key
employees and directors for valuable services provided to the Company. Under the
1996 Plan, the Company authorized 260,000 shares, 259,000 of which have been
granted. As of December 31, 2004, the Company authorized 60,000 shares and
400,000 shares under the 1997 and 2002 Stock Option Plans, respectively, all of
which have been granted. During 2005, the 2002 Stock Option Plan was amended to
authorize 650,000 shares, 503,333 of which have been granted. In addition, all
three plans were amended in 2005 to allow Directors to participate in the plan
and to provide that vesting schedules will be determined by the Board at the
time each individual option is granted.
Shares under all of the plans may be granted at not less than 100 percent of the
fair market value at the grant date. All options have a ten-year term from the
date of grant. Prior to the 2005 amendments, options vested ratably over five
years on each anniversary date the option was granted. The Company elected to
accelerate vesting of all outstanding options as of December 31, 2005, as
permitted under the plans. Cancelled or expired options are able to be reissued.
The following table summarizes stock option activity under the Stock Option
Plans for the six months ended June 30, 2007:
7
Number of Weighted Avg. Number of Options
Shares Exercise Price Exercisable
----------------------------------------------
Balance - December 31, 2006 554,333 $1.13 554,333
=================
Granted 65,000 7.06
Exercised 21,081 3.72
Canceled 5,000 7.60
----------------------------------------------
Balance - June 30, 2007 593,252 $1.51 593,252
==============================================
4. EARNINGS PER SHARE
The following table shows the weighted average number of shares used in
computing earnings per share and the effect on weighted average number of shares
of potential dilutive common stock.
Three Months Ended June 30,
2007 2006
----------------------------
Net income $394,406 $508,732
============================
Shares used in calculation of income per share:
Basic 4,513,005 4,306,925
Effect of dilutive options 550,530 644,865
============================
Diluted 5,063,535 4,951,790
============================
Net income per share:
Basic $.09 $.12
============================
Diluted $.08 $.10
============================
Six Month Ened June 30,
2007 2006
----------------------------
Net income $433,377 $868,171
============================
Shares used in calculation of income per share:
Basic 4,506,932 4,301,098
Effect of dilutive options 554,264 658,376
============================
Diluted 5,061,196 4,959,474
============================
Net income per share:
Basic $.10 $.20
============================
Diluted $.09 $.18
============================
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
-------------------------------------------------------------------------------
OF OPERATIONS
-------------
STATEMENTS MADE IN THIS REPORT ON FORM 10-QSB, INCLUDING WITHOUT LIMITATION THIS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND OPERATIONS,
OTHER THAN STATEMENTS OF HISTORICAL INFORMATION, ARE FORWARD LOOKING STATEMENTS
WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED, AND
SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. THESE
FORWARD-LOOKING STATEMENTS MAY SOMETIMES BE IDENTIFIED BY SUCH WORDS AS "MAY,"
"WILL," "EXPECT," "ANTICIPATE," "BELIEVE," "ESTIMATE" AND "CONTINUE" OR SIMILAR
WORDS. WE BELIEVE THAT IT IS IMPORTANT TO COMMUNICATE OUR FUTURE EXPECTATIONS TO
INVESTORS. HOWEVER, THESE FORWARD-LOOKING STATEMENTS INVOLVE MANY RISKS AND
UNCERTAINTIES. OUR ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE INDICATED
IN SUCH FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN FACTORS. WE ARE UNDER
NO DUTY TO UPDATE ANY OF THE FORWARD-LOOKING STATEMENTS AFTER THE DATE OF THIS
REPORT ON FORM 10-QSB TO CONFORM THESE STATEMENTS TO ACTUAL RESULTS.
OVERVIEW
Our primary focus is to provide real-time systems solutions, including equipment
and software, and services to our customers in the areas of hydrological
monitoring and control, meteorological monitoring
8
including airport weather systems, oceanic monitoring and hydrological services.
We design, manufacture and market these products and services to a diversified
customer base consisting of federal, state, local and foreign governments,
universities and engineering and hydropower companies. Our products and services
enable these entities to monitor and collect hydrological, meteorological and
oceanic data for the management of critical water resources, for early warning
of potentially disastrous floods, storms or tsunamis, for the optimization of
hydropower plants and for providing real-time weather conditions at airports.
Our key products are the SatLink2 Transmitter/Logger, Xpert/XLite datalogger,
Accububble Self-Contained Bubbler, Accubar Pressure Sensor, Tides Systems and
XConnect Systems Software. These are the essential components of most systems
and are provided to customers as off-the-shelf equipment or as part of a custom
system. The SatLink2 is a key product because it functions both as a transmitter
and logger. It is an price-effective solution for small systems that do not
require a significant number of sensors or communications options. The Xpert and
XLite are more powerful dataloggers that have significantly more logging
capability and communications options than the SatLink2. Our Tides Systems are
the only National Ocean Survey approved tides monitoring system in the United
States.
We anticipate that we will continue to experience significant quarterly
fluctuations in our revenues in fiscal year 2007 due to the timing of
significant project awards that are difficult to project. Operating results will
depend upon the product mix and upon the timing of project awards. International
sales constitute a significant portion of our revenues but are difficult to
project. We are aware of many significant international opportunities and we
expect international revenues to grow as a percentage of our total business. We
expect our sales and marketing, research and development and general and
administrative expenses to increase moderately in 2007 as compared to 2006.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The Company's discussion and analysis of financial condition and results of
operations are based upon the condensed financial statements, which have been
prepared in accordance with generally accepted accounting principles as
recognized in the United States of America. The preparation of these financial
statements requires that we make estimates and judgments that affect the
reported amounts of assets, liabilities, revenue and expenses, and disclosure of
contingent assets and liabilities. Our estimates include those related to
revenue recognition, the valuation of inventory, and valuation of deferred tax
assets and liabilities, useful lives of intangible assets, warranty obligations
and accruals. We base our estimates on historical experience and on various
other assumptions that management believes to be reasonable under the
circumstances. Actual results may differ from these estimates under different
assumptions or conditions. For a complete description of accounting policies,
see Note 1 to our financial statements included in the Company's Form 10-KSB for
the year ended December 31, 2006. There were no significant changes in critical
accounting estimates
RESULTS OF OPERATIONS
---------------------
THREE MONTHS ENDED JUNE 30, 2007 COMPARED TO THREE MONTHS ENDED JUNE 30, 2006
The following table sets forth for the periods indicated the percentage of total
revenues represented by certain items reflected in our statements of operations:
9
Three Months Ended
June 30,
2007 2006
------ ------
Net sales and revenues 100.0% 100.0%
Cost of sales and revenues 61.0 62.7
------ ------
Gross profit 39.0 37.3
Selling, general and administrative expenses 18.4 14.2
Research and Development expenses 6.9 7.3
------ ------
Operating income 13.7 15.8
------ ------
Interest (income) expense .6 .3
------ ------
Income before income taxes 14.3 16.1
Income taxes (benefit) 5.0 4.6
------ ------
Net income 9.3% 11.5%
====== ======
NET SALES AND REVENUES
The Company's net sales and revenues for the three months ended June 30, 2007
decreased 4.6% to $4,217,871 from $4,421,174 in 2006 primarily due to decreased
international revenues. Overall domestic revenues increased 15% to $3,316,025 in
the second quarter of 2007 versus $2,889,184 in 2007 while international
revenues decreased 41% to $901,846 in 2007 versus $1,531,990 in 2007, primarily
due to decreased revenue from project work in India. Net sales and revenues are
broken down between the Company's operating divisions or profit centers which
include the HydroMet Products Division, the Integrated Services Division which
includes Special Projects, the Hydrological Services Division, Airport Weather
Systems Division and Sutron India Operations.
The HydroMet Products Division, which is responsible for sales of standard
products, had a net sales and revenue increase of 55% to $2,248,410 from
$1,455,223 in 2006. Standard product revenues were higher in 2007 due to
increased domestic shipments of SatLink2 Transmitter/Loggers, Water Level
Sensors and Accessories. Integrated Systems Division net sales and revenues
decreased 26% to $955,239 from $1,297,400 in 2006 due primarily to decreased
India project revenues. Net sales and revenues from the Hydrological Services
Division decreased 39% to $568,437 from $926,279 in 2006 due a decrease in
project deliveries. Airport Weather Systems Division net sales and revenues
decreased 55% to $75,425 from $167,440 in 2006 as the division completed one
shipment in 2007 compared to two shipments in 2006. Sutron India Operations had
a net sales and revenue decrease of 36% to $370,360 from $574,822 in 2006 due to
the Central Water Commission (CWC) of India contract being near completion.
There was no significant change in the CWC cost estimate to complete during the
second quarter.
Customer orders for the second quarter of 2007 were approximately $12,742,000 as
compared to approximately $4,355,000 in 2006.
COST OF SALES AND REVENUES
Cost of sales as a percentage of revenues was 61% for the quarter ended June 30,
2007 as compared to 62.7% for the quarter ended June 30, 2006. The decrease in
cost of sales is attributed to changes in the product mix that resulted in
higher equipment sales and decreased project work. In 2006, substantial costs
were associated with projects such as Central Water Commission of India, India
Meteorological Department and Prime Controls. Projects do not normally carry as
high margins as stand-alone products which benefited the margins in 2007. Cost
of sales for both 2007 and 2006 include provisions for inventory obsolescence,
physical inventory adjustments and inventory valuation adjustments. The Company
continually pursues product cost reductions through continual review of
procurement sourcing, product value engineering and improvements in
manufacturing processes.
10
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased to $776,005 in 2007 from
$651,551 in 2006, an increase of $124,454 or 19%. The Company experienced
increases in selling and marketing activities due to the addition of two new
domestic salesmen who were not with the Company in the prior year, in legal
costs due to a lawsuit which the Company has filed against its former Vice
President of the Hydrological Services Division and another former HSD employee
and in letter of credit costs due to a performance bond that was provided to the
Afghanistan Ministry of Energy and Water as security on the contract.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses decreased to $291,509 in 2007 from $325,460 in
2006, a decrease of $33,951 or 10%. Product development expenses decreased
primarily due higher costs in 2006 associated with efforts to improve and
incorporate state-of-the-art technology into the Xpert datalogger consisting
primarily of subcontractor expenses. Dataloggers and water level sensors are the
primary components of hydrometeorological systems and we are continuously
improving these products as well as developing new products in order to maintain
and improve our competitive position.
INTEREST INCOME AND EXPENSE, NET
Due to the Company's cash position, the Company did not use its line of credit
during the second quarter of 2007. The Company had net interest income in 2007
of $26,752 as compared to net interest income of $13,244 in 2006.
INCOME TAXES
Income taxes increased 4% in 2007 to $210,000 from $202,000 in 2006. Taxes as a
percentage of revenue were 5.0% in 2007 as compared to 4.6% in 2006. The
provisions for income taxes represent effective tax rates of approximately 34.8%
in 2007 and 28.4% in 2006, respectively. The effective tax rate in 2007
increased over the prior year due to the exercise of non-qualified stock options
in the prior year that generated a significant 2006 tax deduction relating to
stock option compensation.
SIX MONTHS ENDED JUNE 30, 2007 COMPARED TO THREE MONTHS ENDED JUNE 30, 2006
The following table sets forth for the periods indicated the percentage of total
revenues represented by certain items reflected in our statements of operations:
Six Months Ended
June 30,
2007 2006
------ ------
Net sales and revenues 100.0% 100.0%
Cost of sales and revenues 62.2 59.7
------ ------
Gross profit 37.8 40.3
Selling, general and administrative expenses 22.0 17.0
Research and Development expenses 7.9 8.6
------ ------
Operating income 7.9 14.7
------ ------
Interest (income) expense .7 .3
------ ------
Income before income taxes 8.6 15.0
Income taxes (benefit) 2.7 4.8
------ ------
Net income 5.9% 10.2%
====== ======
11
NET SALES AND REVENUES
The Company's net sales and revenues for the six months ended June 30, 2007
decreased 13% to $7,364,615 from $8,497,282 in 2006. Overall domestic revenues
increased 19% to $5,687,038 in 2007 versus $4,798,882 in 2006 while
international revenues decreased 55% to $1,677,577 in 2007 versus $3,698,400 in
2006. Net sales and revenues are broken down between the Company's operating
divisions or profit centers which include the HydroMet Products Division, the
Integrated Services Division which includes Special Projects, the Hydrological
Services Division, Airport Weather Systems Division and Sutron India Operations.
The HydroMet Products Division had a revenue increase of 28% to $4,298,659 from
$3,365,306 in 2006 due to an increase due to increased domestic shipments of
SatLink2 Transmitter/Loggers, Water Level Sensors and Accessories. Integrated
Systems Division revenues decreased 35% to $1,630,136 from $2,559,511 in 2006
due to decreased international project revenues. Revenues from the Hydrological
Services Division decreased 30% to $980,198 from $1,401,286 in 2006 due to
decreased project activity. Airport Weather Systems Division revenues decreased
to $75,425 in 2007 as compared to $282,425 in 2006 as the division completed one
shipment in 2007 as compared to three shipments in 2006. Sutron India Operations
had a net sales and revenue decrease of 57% to $380,199 from $888,753 in 2006
due to the Central Water Commission (CWC) of India contract being near
completion and major contract expenditures being completed in prior periods.
Customer orders or bookings for 2007 were approximately $15,804,000 as compared
to approximately $8,202,000 in 2006. The Company's backlog of orders at June 30,
2007 was approximately $15,708,000 as compared with approximately $10,544,000 as
of June 30, 2006. The Company anticipates that approximately 52% of its backlog
as of June 30, 2007 will be shipped in 2007.
COST OF SALES AND REVENUES
Cost of sales as a percentage of revenues was 62.2% in 2007 as compared to 59.7%
in 2006. The increase in cost of sales was primarily due to costs exceeding
revenue for the Hydrological Services Division and due to increased CWC contract
estimated costs for the two year warranty period after system acceptance that
resulted in lower contract revenues for the period. Hydrological Services was
reorganized in December 2006 due to the resignation of the Vice President who
had managed this division since its inception in 2001. Staff has been reduced.
Management is focused on winning new projects that carry higher margins and on
executing projects profitably. The revision in the CWC cost estimate resulted in
contract costs in excess of contract revenue. Contract estimated costs were
increased due to delays in the civil works installation as approximately 30
sites were damaged by monsoons. Also, the CWC contract is the first significant
project that has been executed by our India Operations. Due to a lack of
experience on projects of this size, warranty costs (the costs to maintain the
168 stations for a period of two years from systems acceptance) were
underestimated. Although the contract estimated costs increased due to the
reasons discussed above, the CWC contract is profitable. After expiration of the
two year warranty period, we will maintain the 168 sites under a four-year
maintenance contract.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased to $1,617,118 in 2007
from $1,448,181 in 2006, an increase of $168,937 or 12%. The Company experienced
increases in selling and marketing activities due to the addition of two new
domestic salesmen who were not with the Company in the prior year, in legal
costs due to a lawsuit which the Company has filed against its former Vice
President of the Hydrological Services Division and a former HSD employee and in
letter of credit costs due to a
12
performance bond that was provided to the Afghanistan Ministry of Energy and
Water as security on the contract.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses decreased to $584,861 in 2007 from $731,729 in
2006, a decrease of $146,868 or 20%. We incurred significant subcontractor
expenses in 2006 relating to the development of our next generation Xpert/XLite
Datalogger. The contractor tasks have been completed and we anticipate that the
next generation Xpert/XLite Datalogger will be released to production in the
second quarter of 2007. Our SatLink2 Transmitter/Logger, our Xpert/XLite
Dataloggers, our Water Level Sensors and our Tides Systems are the primary
components of our hydrometeorological systems and we are continuously improving
these products as well as developing new products in order to maintain and
improve our competitive position.
INTEREST INCOME AND EXPENSE, NET
Due to the Company's cash position, the Company did not use its line of credit
during the six months ended June 30, 2007 except on one occasion. The Company
had net interest income in 2007 of $49,148 as compared to net interest income of
$25,599 in 2006.
INCOME TAXES
Income taxes decreased 51% in 2007 to $199,000 from $406,000 in 2006 due to the
decrease in operating income. Taxes as a percentage of revenue were 2.7% in 2007
as compared to 4.8% in 2006. The provisions for income taxes represent effective
tax rates of approximately 31.5% in 2007 and 31.9% in 2006, respectively.
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
Cash and cash equivalents were $628,247 at June 30, 2007 compared to $1,539,032
at December 31, 2006. Working capital increased to $10,034,367 at June 30, 2007
compared with $9,504,822 at December 31, 2006.
Net cash used by operating activities was $101,684 for the six months ended June
30, 2007 as compared to cash used by operating activities of $157,499 for the
six months ended June 30, 2006. The decrease is primarily due to the decrease in
net income.
Net cash used by investing activities was $853,041 for the six months ended June
30, 2007 as compared to cash used by investing activities of $16,891 for the six
months ended June 30, 2006, and was primarily due to an increase in restricted
cash that secured a bank guarantee to the Central Water Commission of India for
the delivery of contract equipment. We anticipate that the bank guarantee will
be released in October 2007.
Net cash provided by financing activities was $50,187 for the six months ended
June 30, 2007 as compared to net cash used by financing activities of $6,078 for
the six months ended June 30, 2006 due to the exercise of employee stock
options.
We have a revolving credit facility of $3,000,000 with BB&T Bank. We are
permitted to borrow based on accounts receivable and inventory according to
pre-established criteria. The credit facility expires on August 5, 2007 and is
secured by substantially all assets of the Company. Borrowings bear interest at
the bank's prime rate. During the first six months of 2007, there was one
borrowing on the line of credit.
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We frequently bid on and enter into international contracts that require bid and
performance bonds. At June 30, 2007 and December 31, 2006, a commercial bank had
issued standby letters of credit in the amount of $1,698,776 and $532,300 that
served as either bid or performance bonds. The amount available to borrow under
the line of credit was reduced by these amounts.
Management believes that its existing cash resources, cash flow from operations
and short-term borrowings on the existing credit line will provide adequate
resources for supporting operations during fiscal 2007. Although there can be no
assurance that our revolving credit facility will be renewed, management
believes that, if needed, it would be able to find alternative sources of funds
on commercially acceptable terms.
ITEM 3. CONTROLS AND PROCEDURES
(A) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
Our management (with the participation of our Chief Executive Officer and Chief
Financial Officer) evaluated the effectiveness of our disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934, as amended (the "Exchange Act")), as of June 30, 2007, the
end of the fiscal period covered by this report on Form 10-QSB. The Company
maintains disclosure controls and procedures that are designed to ensure that
information required to be disclosed in our Securities Exchange Act of 1934
reports are recorded, processed, summarized and reported within the time periods
specified in the SEC's rules and forms, and that such information is accumulated
and communicated to our management, including our chief executive officer and
chief financial officer, as appropriate, to allow timely decisions regarding
required disclosure. Based on this evaluation, the chief executive officer and
chief financial officer concluded that the Company's disclosure controls and
procedures are effective to ensure that information required to be disclosed by
the Company in reports that it files or submits under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
in Securities and Exchange Commission rules and forms.
(B) CHANGES IN INTERNAL CONTROLS OVER FINANCIAL REPORTING
There have been no changes in our internal control over financial reporting that
occurred during the quarter ended June 30, 2007 that have materially affected,
or are reasonably likely to materially affect, our internal control over
financial reporting.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Various legal claims can arise from time to time in the normal course of
business which, in the opinion of management, will have no material effect on
our financial statements. We have been named in a compensation claim under the
Indian Anti-Trust Law that is pending before The Monopolies and Restrictive
Trade Practices Commission in New Delhi, India. Management believes that the
case is unsubstantiated and intends to vigorously defend itself.
On May 22, 2007, we filed a lawsuit in the United States District Court,
Alexandria, Virginia Division, against Stephen Tarte, the former Vice President
of the Hydrological Services Division, and Patricia Diaz, a former HSD employee
for violation of their Conflict of Interest and Non-Competition agreements.
Damages sought in the lawsuit are $3,000,000. We believe that an award from this
lawsuit is possible however we are unable to estimate the amount.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On May 16, 2007, an Annual Meeting of Shareholders of Sutron Corporation was
held. Directors elected at the meeting were Raul S. McQuivey, Daniel W. Farrell,
Robert F. Roberts, Jr., Andrew D. Lipman and Thomas R. Porter. Thompson,
Greenspon & Co., P.C. was appointed as independent accountants for 2007. The
election of directors and the appointment of the independent accountants were
the only matters voted upon at the meeting. The number of shares eligible to
vote at the meeting was 4,512,884. The results of the voting on these matters
are shown below.
1. Election of Directors
Name Votes For Votes Withheld
---- --------- --------------
Raul S. McQuivey 3,790,647 4,200
Daniel W. Farrell 3,790,647 4,200
Robert F. Roberts, Jr. 3,790,647 4,200
Andrew D. Lipman 3,790,647 4,200
Thomas R. Porter 3,790,647 4,200
2. Appointment of Thompson, Greenspon & Co., P.C. as Independent Accountants.
For Against Abstain
--- ------- -------
3,790,247 4,500 100
ITEM 6. EXHIBITS
10.11 Stock Option Agreement between The Company and Andrew D. Lipman dated
May 16, 2007
10.12 Stock Option Agreement between The Company and Thomas R. Porter dated
May 16, 2007
10.13 Stock Option Agreement between The Company and Robert F. Roberts, Jr.
dated May 16, 2007
31.1 Certification of the President and Chief Executive Officer pursuant to
ss.302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of the Chief Financial Officer and Treasurer pursuant to
ss.302 of the Sarbanes-Oxley Act of 2002.
32 Certification of the President and Chief Executive Officer and Chief
Financial Officer and Treasurer pursuant to 18 U.S.C. ss.1350, as adopted
pursuant to ss.906 of the Sarbanes-Oxley Act of 2002.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Sutron Corporation
(Registrant)
August 13, 2007 /s/ Raul S. McQuivey
------------------- -------------------------
Date Raul S. McQuivey
President and Chief Executive Officer
(Principal Executive Officer)
August 13, 2007 /s/ Sidney C. Hooper
------------------- -------------------------
Date Sidney C. Hooper
Chief Financial Officer and Treasurer
(Principal Accounting Officer)
16