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EX-32 - 906 CERTIFICATION OF THE C.E.O. AND C.F.O. - SUTRON CORP | ex-32_16632.htm |
EX-32.1 - 302 CERTIFICATION OF THE C.F.O. - SUTRON CORP | ex31-2_16632.htm |
EX-31.1 - 302 CERTIFICATION OF THE C.E.O. - SUTRON CORP | ex31-1_16632.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
|X|
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the
quarterly period ended September 30, 2009
Commission file number:
0-12227
SUTRON
CORPORATION
(Name of
small business issuer as specified in its charter)
VIRGINIA
|
54-1006352
|
(State
or other jurisdiction
of
incorporation or organization)
|
(I.R.S.
Employer
Identification
Number)
|
22400
Davis Drive, Sterling, Virginia 20164
(Address
of principal executive offices)
703-406-2800
(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 o
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). o Yes
o
No
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check
one).
Large accelerated filer | o | Accelerated filer | o |
Non-accelerated filer | o | Smaller reporting company | o |
Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes o
No x
There
were 4,570,632 outstanding shares of the issuer's only class of common equity,
Common Stock, $0.01 par value, on November 14, 2009.
SUTRON
CORPORATION
FORM
10-Q QUARTERLY REPORT
FOR
THE QUARTER ENDED SEPTEMBER 30, 2009
TABLE
OF CONTENTS
Part
I
|
Financial
Information
|
|
Item
1.
|
Financial
Statements
|
2
|
Condensed
Consolidated Balance Sheet as of September 30, 2009 and December 31,
2008
|
2
|
|
Condensed
Consolidated Statements of Operations for the Three Months Ended September
30, 2009 and 2008
|
3
|
|
Condensed
Consolidated Statements of Operations for the Nine Months Ended September
30, 2009 and 2008
|
4
|
|
Condensed
Consolidated Statements of Cash Flows for the Nine Months Ended September
30, 2009 and 2008
|
5
|
|
Financial
Footnotes
|
6
|
|
Item
2.
|
Management's
Discussion and Analysis of Financial Condition and Results of
Operations
|
11
|
Item
3.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
16
|
Item
4T.
|
Controls
and Procedures
|
16
|
Part
II
|
Other
Information
|
|
Item
1.
|
Legal
Proceedings
|
17
|
Item
6.
|
Exhibits
|
17
|
|
||
Signatures
|
17
|
PART
I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL
STATEMENTS
SUTRON
CORPORATION
CONSOLIDATED
BALANCE SHEETS
(Unaudited)
September
30,
2009
|
(Audited)
December
31,
2008
|
|||||||
ASSETS
|
||||||||
Current
Assets:
|
||||||||
Cash
and cash equivalents
|
$ | 3,654,855 | $ | 3,705,475 | ||||
Restricted
cash and cash equivalents
|
1,458,535 | 784,920 | ||||||
Accounts
receivable, net
|
5,755,794 | 3,872,527 | ||||||
Inventory
|
3,798,136 | 4,053,788 | ||||||
Prepaid
items and other assets
|
302,657 | 302,633 | ||||||
Income
taxes receivable
|
83,454 | 983,875 | ||||||
Deferred
income taxes
|
339,000 | 308,000 | ||||||
Total Current
Assets
|
15,392,431 | 14,011,218 | ||||||
Property
and Equipment, Net
|
1,925,080 | 372,745 | ||||||
Other
Assets
|
||||||||
Goodwill
|
570,150 | 570,150 | ||||||
Other
Assets
|
131,662 | 95,057 | ||||||
Total
Assets
|
$ | 18,019,323 | $ | 15,049,170 | ||||
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
||||||||
Current
Liabilities:
|
||||||||
Accounts
payable
|
$ | 1,028,340 | $ | 1,200,721 | ||||
Accrued
payroll
|
458,288 | 129,142 | ||||||
Other
accrued expenses
|
1,124,522 | 794,307 | ||||||
Notes
payable – current
|
– | 2,765 | ||||||
Bank
credit facility
|
228,621 | – | ||||||
Billings
in excess of costs and estimated earnings
|
53,041 | 139,117 | ||||||
Total Current
Liabilities
|
2,892,812 | 2,266,052 | ||||||
Long-Term
Liabilities
|
||||||||
Deferred
rent
|
1,344,488 | – | ||||||
Deferred
income taxes
|
62,000 | 59,000 | ||||||
Total Long-term
Liabilities
|
1,406,488 | 59,000 | ||||||
Total
Liabilities
|
4,299,300 | 2,325,052 | ||||||
Stockholders’
Equity
|
||||||||
Common
stock
|
45,707 | 45,707 | ||||||
Additional
paid-in capital
|
2,888,137 | 2,778,775 | ||||||
Retained
earnings
|
10,881,897 | 10,009,105 | ||||||
Accumulated
other comprehensive loss
|
(95,718 | ) | (109,469 | ) | ||||
Total
Stockholders’ Equity
|
13,720,023 | 12,724,118 | ||||||
Total
Liabilities and Stockholders’ Equity
|
$ | 18,019,323 | $ | 15,049,170 |
See
accompanying notes.
2
SUTRON
CORPORTION
CONSOLIDATED
STATEMENTS OF OPERATIONS
(Unaudited)
Three
Months Ended September 30,
|
||||||||
2009
|
2008
|
|||||||
Net
sales and revenues
|
$ | 4,536,850 | $ | 4,395,775 | ||||
Cost
of sales and revenues
|
2,613,524 | 2,856,044 | ||||||
Gross
profit
|
1,923,326 | 1,539,731 | ||||||
Operating
expenses:
|
||||||||
Selling,
general and administrative expenses
|
905,980 | 892,955 | ||||||
Research
and product development expenses
|
443,477 | 332,133 | ||||||
Total
operating expenses
|
1,349,457 | 1,225,088 | ||||||
Operating
income
|
573,869 | 314,643 | ||||||
Interest
and other income, net
|
20,772 | 22,224 | ||||||
Income
before income taxes
|
594,641 | 336,867 | ||||||
Income
tax expense
|
187,300 | 150,000 | ||||||
Net
income
|
$ | 407,341 | $ | 186,867 | ||||
Net
income per share:
|
||||||||
Basic
income per share
|
$ | .09 | $ | .04 | ||||
Diluted
income per share
|
$ | .08 | $ | .04 |
See
accompanying notes.
3
SUTRON
CORPORTION
CONSOLIDATED
STATEMENTS OF OPERATIONS
(Unaudited)
Nine
Months Ended September 30,
|
||||||||
2009
|
2008
|
|||||||
Net
sales and revenues
|
$ | 12,898,779 | $ | 12,239,838 | ||||
Cost
of sales and revenues
|
7,645,785 | 7,865,910 | ||||||
Gross
profit
|
5,252,994 | 4,373,928 | ||||||
Operating
expenses:
|
||||||||
Selling,
general and administrative expenses
|
2,877,887 | 2,497,538 | ||||||
Research
and development expenses
|
1,215,067 | 908,376 | ||||||
Total
operating expenses
|
4,092,954 | 3,405,914 | ||||||
Operating
income
|
1,160,040 | 968,014 | ||||||
Interest
and other income, net
|
215,752 | 88,653 | ||||||
Income
before income taxes
|
1,375,792 | 1,056,667 | ||||||
Income
tax expense
|
503,000 | 364,000 | ||||||
Net
income
|
$ | 872,792 | $ | 692,667 | ||||
Net
income per share:
|
||||||||
Basic
income per share
|
$ | .19 | $ | .15 | ||||
Diluted
income per share
|
$ | .18 | $ | .14 |
See
accompanying notes.
4
SUTRON
CORPORTION
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(Unaudited)
Nine
Months Ended September 30,
|
||||||||
2009
|
2008
|
|||||||
Cash
Flows from Operating Activities:
|
||||||||
Net
income
|
$ | 872,792 | $ | 692,667 | ||||
Noncash
items included in net income:
|
||||||||
Depreciation
and amortization
|
181,362 | 160,380 | ||||||
Deferred
income taxes
|
(28,000 | ) | (28,000 | ) | ||||
Stock
option compensation
|
109,362 | 41,503 | ||||||
Gain
on disposal of property
|
(4,415 | ) | – | |||||
Changes
in current assets and liabilities:
|
||||||||
Accounts
receivable
|
(1,883,267 | ) | (79,860 | ) | ||||
Inventory
|
255,652 | 402,661 | ||||||
Prepaid
items and other assets
|
(36,629 | ) | (404,773 | ) | ||||
Income
taxes receivable
|
900,421 | – | ||||||
Accounts
payable
|
(172,381 | ) | 493,740 | |||||
Accrued
expenses
|
659,361 | (449,125 | ) | |||||
Billings
in excess of costs and estimated earnings
|
(86,076 | ) | – | |||||
Deferred
Rent
|
(46,362 | ) | – | |||||
Net
Cash Provided by Operating Activities
|
721,820 | 829,193 | ||||||
Cash
Flows from Investing Activities:
|
||||||||
Restricted
cash and cash equivalents
|
(673,615 | ) | (935,242 | ) | ||||
Purchase
of property and equipment
|
(342,847 | ) | (33,571 | ) | ||||
Proceeds
from sales of property and equipment
|
4,415 | – | ||||||
Net
Cash Used by Investing Activities
|
(1,012,047 | ) | (968,813 | ) | ||||
Cash
Flows from Financing Activities:
|
||||||||
Payments
on notes payable
|
(2,765 | ) | (31,864 | ) | ||||
Proceeds
from credit facility
|
228,621 | – | ||||||
Proceeds
from stock options exercised
|
– | 28,650 | ||||||
Net
Cash Provided (Used) by Financing Activities
|
225,856 | (3,214 | ) | |||||
Effect
of exchange rate changes on cash
|
13,751 | (50,247 | ) | |||||
Net
increase (decrease) in cash and cash equivalents
|
(50,620 | ) | (193,081 | ) | ||||
Cash
and cash equivalents at beginning of period
|
3,705,475 | 5,299,904 | ||||||
Cash
and cash equivalents at end of period
|
$ | 3,654,855 | $ | 5,106,823 | ||||
Supplemental
Schedule of Noncash
Investing
Activities:
|
||||||||
Acquisition
of leasehold improvements from lease
incentives
|
$ | 1,390,850 | $ | – |
See
accompanying notes.
5
SUTRON
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
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 (“GAAP”) have been condensed or omitted pursuant to such rules and
regulations. These 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-K for the year ended December 31, 2008.
The consolidated balance sheet as of December 31, 2008 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-K for the year ended
December 31, 2008 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, performance measures and other provisions of the award. See
Note 13 of the Company’s financial statements in its Annual Report on Form 10-K
for the year ended December 31, 2008 for additional information related to
the stock option plans.
6
The
Company measures and recognizes compensation expense for all stock-based
payments at fair value. 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. The financial statements for the three months
and nine months ended September 30, 2009 recognize stock-based compensation
costs for the portion of outstanding awards which have vested during the period.
For the three months and nine months ended September 30, 2009, total stock-based
compensation expense of $47,126 and $109,362 was included in operating expenses
as compared to stock-based compensation of $14,656 and $41,503 for the three
months and nine months ended September 30, 2008.
The
weighted average fair value of options granted during the three months and nine
months ended September 30, 2009 was calculated using the Black-Scholes option
pricing model with the following valuation assumptions and weighted average fair
value as follows:
Periods
Ended September 30, 2009
|
||||||||
Three
Months
|
Nine
Months
|
|||||||
Weighted
average fair value of grants
|
– | $ | 4.57 | |||||
Expected
volatility
|
– | 25% - 33 | % | |||||
Dividend
yield
|
– | 0 | ||||||
Risk-free
interest rate
|
– | 2.46 – 3.11 | % | |||||
Expected
term in years
|
– | 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.
New
Accounting Standards
The
following new accounting standards and amendments to standards first became
effective for the fiscal year beginning January 1, 2009:
•
|
Statement
of Financial Accounting Standard (“FAS”) No. 141 (revised 2007),
Business Combinations
(“FAS 141(R)”) and FAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements, an amendment of Accounting
Research Bulletin No. 51 (“FAS 160”). The adoption of FAS 141(R) and
FAS 160 did not have a material impact on the Company’s condensed
consolidated financial statements as of January 1, 2009. FAS 141(R)
will require the expensing of acquisition costs incurred in future
acquisitions and contingent consideration will be recorded at the
acquisition date for future acquisitions.
|
|
•
|
Financial
Accounting Standards Board (“FASB”) Staff Position No. FAS 142-3,
Determination of the
Useful Life of Intangible Assets (“FSP FAS 142-3”). The adoption of
FSP FAS 142-3 did not have an impact on the Company’s condensed
consolidated financial statements.
|
The
following new standards, amendments to standards and interpretations first
became effective for the fiscal year beginning January 1, 2009 but the
Company does not expect the adoption to have a material impact on its
consolidated financial statements.
•
|
FAS
No. 161, Disclosures about Derivative
Instruments and Hedging Activities, an amendment of FAS
No. 133.
|
|
•
|
FASB
Staff Position No. FAS 157-2, Effective Date of FASB
Statement No. 157 (“FSP FAS 157-2”), to partially defer FAS
No. 157, Fair Value
Measurements (“FAS 157”).
|
7
•
|
FASB
Staff Position No. FAS 157-4, Determining Fair Value When
the Volume and Level of Activity for the Asset or Liability Have
Significantly Decreased and Identifying Transactions That Are Not Orderly.
This FASB Staff Position provides additional guidance for
estimating fair value in accordance with FAS 157, Fair Value
Measurements, when the volume and level of activity for the asset
or liability have significantly decreased.
|
|
•
|
FASB
Staff Position No. FAS 115-2 and FAS 124-2, Recognition and Presentation
of Other-Than-Temporary Impairments. This FASB Staff Position
amends the other-than-temporary impairment guidance for debt securities to
make the guidance more operational and to improve the presentation and
disclosure of other-than-temporary impairments on debt and equity
securities in the financial
statements.
|
In May
2009, the FASB issued Statement of Financial Accounting Standards No. 165,
“Subsequent Events.” SFAS 165 establishes general standards of
accounting for and disclosure of events that occur after the balance sheet date
but before financial statements are issued or are available to be issued. SFAS
165 is effective for interim and annual periods ending after June 15, 2009. The adoption of SFAS
165 did not have a material impact on our consolidated financial
statements.
In June
2009, the FASB issued Statement of Financial Accounting Standards No. 167,
“Amendments to FASB Interpretation No. 46(R)." SFAS 167 improves financial
reporting by enterprises involved with variable interest
entities. SFAS 167 is effective for interim and annual periods ending
after November 15, 2009. Early adoption is prohibited. The
Company does not expect the adoption of SFAS 167 to have a material impact on
its consolidated financial statements.
In
June 2009, the FASB issued Statement of Financial Accounting Standards No. 168,
“The FASB Accounting Standards Codification and the Hierarchy of Generally
Accepted Accounting Principles – replacement of FASB Statement No.
162.” SFAS 168 establishes the FASB Accounting Standards Codification
which will become the source of authoritative U.S. generally accepted accounting
principles recognized by the FASB to be applied by nongovernmental
entities. SFAS 168 is effective immediately. The adoption of SFAS 168
did not have a material impact on our consolidated financial
statements.
In June
2009, the Securities and Exchange Commission issued Staff Accounting Bulletin
No. 112 (SAB 112). SAB 112 revises or rescinds portions of the interpretative
guidance included in the codification of SABs in order to make the interpretive
guidance consistent with current U.S. GAAP. The Company does not expect
the adoption of SAB 112 to have a material impact on its consolidated financial
statements.
In August
2009, the FASB issued Accounting Standards Update No. 2009-05 (ASU 2009-05),
“Fair Value Measurements and Disclosures (Topic 820) – Measuring Liabilities at
Fair Value.” ASU 2009-05 amends Subtopic 820-10, “Fair Value Measurements and
Disclosures – Overall,” and provides clarification for the fair value
measurement of liabilities. ASU 2009-05 is effective for the first reporting
period including interim period beginning after issuance. The Company does
not expect the adoption of ASU 2009-05 to have a material impact on its
consolidated financial statements.
In
October 2009, the Securities and Exchange Commission issued Release No.
33-99072, “Internal Control over Financial Reporting in Exchange Act Periodic
Reports of Non-Accelerated Filers.” Release No. 33-99072 delays the requirement
for non-accelerated filers to include an attestation report of their independent
auditor on internal control over financial reporting with their annual report
until the fiscal year ending on or after June 15, 2010.
8
In
October 2009, the FASB issued authoritative guidance on revenue recognition that
will become effective for us beginning July 1, 2010, with earlier adoption
permitted. Under the new guidance on arrangements that include software
elements, tangible products that have software components that are essential to
the functionality of the tangible product will no longer be within the scope of
the software revenue recognition guidance, and software-enabled products will
now be subject to other relevant revenue recognition guidance. Additionally, the
FASB issued authoritative guidance on revenue arrangements with multiple
deliverables that are outside the scope of the software revenue recognition
guidance. Under the new guidance, when vendor specific objective evidence or
third party evidence for deliverables in an arrangement cannot be determined, a
best estimate of the selling price is required to separate deliverables and
allocate arrangement consideration using the relative selling price method. The
new guidance includes new disclosure requirements on how the application of the
relative selling price method affects the timing and amount of revenue
recognition. We believe adoption of this new guidance will not have a material
impact on our financial statements.
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. The
vesting schedules are determined by the Board of Directors at the time each
individual option is granted. Under the 1996 Plan, the Company
authorized 260,000 shares, 259,000 of which have been
granted. The Company authorized 60,000 shares under the 1997
Plan, all of which have been granted. Under the 2002 Stock Option
Plan, the Company authorized 650,000 shares, 561,333 of which have been
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. Cancelled or
expired options are able to be reissued. The following table
summarizes stock option activity under the Stock Option Plans for the nine
months ended September 30, 2009:
Number
of Shares
|
Weighted
Avg.
Exercise
Price
|
Number
of Options Exercisable
|
||||||||||
Balance
– December 31, 2008
|
544,252 | $ | 1.80 | 498,786 | ||||||||
Granted
|
45,000 | 4.57 | ||||||||||
Exercised
|
– | – | ||||||||||
Canceled
|
– | – | ||||||||||
Balance
– September 30, 2009
|
589,252 | $ | 2.01 | 550,005 |
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 September 30,
|
||||||||
2009
|
2008
|
|||||||
Net
income
|
$ | 407,341 | $ | 186,867 | ||||
Shares
used in calculation of income per share:
|
||||||||
Basic
|
4,570,632 | 4,556,447 | ||||||
Effect
of dilutive options
|
412,791 | 408,831 | ||||||
Diluted
|
4,983,423 | 4,965,278 | ||||||
Net
income per share:
|
||||||||
Basic
|
$ | .09 | $ | .04 | ||||
Diluted
|
$ | .08 | $ | .04 |
9
Nine
Months Ended September 30,
|
||||||||
2009
|
2008
|
|||||||
Net
income
|
$ | 872,792 | $ | 692,667 | ||||
Shares
used in calculation of income per share:
|
||||||||
Basic
|
4,570,632 | 4,542,793 | ||||||
Effect
of dilutive options
|
397,371 | 435,948 | ||||||
Diluted
|
4,968,003 | 4,978,741 | ||||||
Net
income per share:
|
||||||||
Basic
|
$ | .19 | $ | .15 | ||||
Diluted
|
$ | .18 | $ | .14 |
5.
Comprehensive Income (Loss)
The
following table shows the computation of comprehensive loss income:
Three
Months Ended September 30,
|
||||||||
2009
|
2008
|
|||||||
Net
income
|
$ | 407,341 | $ | 186,867 | ||||
Other
comprehensive income (loss):
|
||||||||
Foreign
currency translation adjustments
|
4,021 | 16,088 | ||||||
Total
comprehensive income
|
$ | 411,362 | $ | 202,955 |
Nine
Months Ended September 30,
|
||||||||
2009
|
2008
|
|||||||
Net
income
|
$ | 872,792 | $ | 692,667 | ||||
Other
comprehensive income (loss):
|
||||||||
Foreign
currency translation adjustments
|
13,751 | (50,247 | ) | |||||
Total
comprehensive income
|
$ | 886,543 | $ | 642,420 |
Other
comprehensive income (loss) is primarily comprised of gains and losses on the
translation of foreign currency denominated financial statements. Adjustments
resulting from these translations are accumulated and reported as a component of
other comprehensive income (loss) in stockholders’ equity section of the balance
sheet.
6.
Lease Obligations
The
Company entered into a ten year lease for a new corporate headquarters and
operations facility in Sterling, Virginia on November 13, 2008. The
Company moved into the new facility on May 15, 2009 and lease payments commenced
on June 1, 2009. As per the lease agreement, the monthly rent for the
first year is $30,135, and thereafter increases 3 percent per
annum. The lease agreement includes additional rent payments based on
a pro rata portion of operating expenses which consist of building insurance,
real estate taxes, landscaping and other property related
expenses. The Company received a tenant improvement allowance in the
amount of $1,390,850 from the landlord. The tenant improvement
allowance was capitalized and recorded in the second quarter as a leasehold
improvement.
7.
Subsequent Events
Subsequent
events have been evaluated through November 13, 2009 which is the date that the
financial statements were issued.
10
Item 2. Management's
Discussion and Analysis of Financial Condition and Results of
Operations
Statements
made in this Quarterly Report on Form 10-Q, including without limitation this
Management's Discussion and Analysis of Financial Condition and Results of
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 including those identified in the Company’s Annual
Report on Form 10-K for the year ended December 31, 2008. 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 Quarterly
Report on Form 10-Q to conform these statements to actual results.
Overview
Our
primary focus is to provide real-time systems solutions, including equipment,
software, and services to our customers in the areas of hydrological monitoring
and control, meteorological monitoring including airport weather systems, and
oceanic monitoring. 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 dataloggers,
Accububble Self-Contained Bubbler, Accubar Pressure Sensor, Tides Systems, Ilex
Tempest DCS Software and XConnect Systems Software. These are the
essential components of most systems and are provided to customers as
off-the-shelf equipment or as components of a system. The SatLink2 is
a key product because it functions both as a transmitter and
logger. Because of its logger/transmitter functionality, it is a
cost-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 more logging capability and more
communications options than the SatLink2. Our Tides Systems are the
only National Ocean Survey approved tides monitoring system in the United
States.
International
sales, which totaled 42% of revenues for 2008 and 45% of revenues for the first
nine months of 2009, continue to constitute a significant portion of our
revenues. We anticipate that international revenues will grow as a
percentage of our total business. International sales are, however, difficult to
forecast and international awards are frequently delayed due to governmental
approvals. Our contract with the Ministry of Energy and Water in
Afghanistan could be impacted by security issues. If stations cannot
be installed in certain areas of the country due to security issues, this could
result in a reduction in the scope of work and in the contract
value. Contract backlog on this project at September 30, 2009 was
approximately $1,062,000. We are committed to our Airport Weather Systems
business which only competes internationally although we compete against
established firms with more experience.
Our
domestic business is highly dependent upon government
business. Contracts and purchase orders with Federal, state and local
government agencies represented approximately 46% of our 2008
revenues. Due to economic conditions, we believe that competition in
2009 will continue to be more price-based. We are closely following
the federal economic stimulus plan. We believe that we will benefit
from increased spending on water resources projects. We believe that
this will result in significant customer
11
orders in
2009 and 2010 from our federal and state customers. We are committed to growing
our Hydrological Services Division; however, our primary customer in Florida,
South Florida Water Management District (SFWMD), has expanded the pool of
qualified contractors on all of our contracts. We therefore must
expand our business outside of SFWMD. We also hope to sell
significantly more standard products through our Hydrological Services which was
a primary reason for setting up operations in Florida. We have added
the Ilex Division through our purchase of Ilex Engineering on December 31,
2008. We believe that Ilex will help us compete better in the
Geostationary Operational Environmental Satellite (“GOES”) data collection
market and global satellite market, both domestically and
internationally.
We are
committed in our ongoing sales, marketing and research and development
activities to sustain and grow our sales and revenues from our products and
services. Our sales and marketing, research and development and
general and administrative expenses have increased moderately in 2009 as
compared to 2008.
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-K for
the year ended December 31, 2008. There were no significant changes in critical
accounting estimates in the third quarter of 2009.
Results of
Operations
The
following table sets forth for the periods indicated the percentage of total
revenues represented by certain items reflected in our statements of
operations:
Three
Months Ended
September
30,
|
||||||||
2009
|
2008
|
|||||||
Net
sales and revenues
|
100.0 | % | 100.0 | % | ||||
Cost
of sales and revenues
|
57.6 | 65.0 | ||||||
Gross
profit
|
42.4 | 35.0 | ||||||
Selling,
general and administrative expenses
|
20.0 | 20.3 | ||||||
Research
and product development expenses
|
9.8 | 7.6 | ||||||
Operating
income
|
12.6 | 7.1 | ||||||
Interest
and other income
|
.5 | .5 | ||||||
Income
before income taxes
|
13.1 | 7.6 | ||||||
Income
taxes
|
4.1 | 3.4 | ||||||
Net
income
|
9.0 | % | 4.2 | % |
12
Three
months ended September 30, 2009 Compared to Three Months Ended September 30,
2008
Net
Sales and Revenues
Revenues
for the third quarter ended September 30, 2009 increased 3% to $4,536,850 from
$4,395,775 in 2008. Net sales and revenues are broken down between
sales of standard products and sales of systems, software and
services. Standard products had a net sales and revenue increase of
14% to $2,592,346 from $2,278,103 in 2008. Net sales and revenues for
systems, software and services decreased 8% to $1,944,504 from $2,117,672 in
2008 primarily due to decreased systems sales. Overall domestic
revenues increased 19% to $3,032,894 in the third quarter of 2009 versus
$2,546,070 in 2008 while international revenues decreased 19% to $1,503,956 in
the third quarter of 2009 versus $1,849,705 in the same period in
2008.
Customer
orders or bookings in the third quarter of 2009 were approximately $9,505,000 as
compared to approximately $5,505,000 in the third quarter of 2008, an increase
of 73%. The increase was primarily due to a significant contract
award of approximately $4,200,000 from UTE Dominion-ADASA in Spain for a
hydro-meteorological monitoring system in Venezuela.
Cost
of Sales and Revenues
Cost of
sales as a percentage of revenues was 57.6% for the third quarter of 2009 as
compared to 65% for the same period in 2008. Cost of sales for
standard products was approximately 49% in the third quarter of 2009 as compared
to 51% in 2008. The cost decrease for standard products was primarily
due to the product mix resulting in sales of higher margin
products. Cost of sales for systems, software and services was 69% in
the third quarter of 2009 as compared to 80% in the third quarter of
2008. The decrease was primarily due to higher utilization of
personnel and a foreign currency gain of approximately $4,000 in 2009 as
compared to a foreign currency loss of approximately $106,000 in
2008.
Selling,
General and Administrative Expenses
Selling,
general and administrative expenses increased to $905,980 for the third quarter
of 2009 from $892,955 for the same period in 2008. Selling, general and
administrative expenses as a percentage of revenues decreased to 20% for the
third quarter of 2009 from 20.3% for the same period in 2008.
Research
and Development Expenses
Research
and development expenses increased to $443,477 in the third quarter of 2009 from
$332,133 for the same period in 2008, an increase of $111,344 or
33.5%. Research and development expenses as a percentage of revenues
increased to 9.8% for the third quarter of 2009 from 7.6% for the same period in
2008. The increase was due to an increase in R&D personnel and
activities and lower direct bill labor by engineering personnel.
Interest
and Other Income, Net
We had
net interest income for the quarter ended September 30, 2009 of $20,772 as
compared to net interest income of $22,224 for the quarter ended September 30,
2008. Due to our cash position, we did not use our line of credit
during the third quarter of 2009 with the exception of our India
operations. They are currently performing on a contract with
Tamil Nadu Agricultural University (TNAU) and used a credit facility with YES
Bank in India to finance the project expenses during the third quarter of
2009.
13
Income
Taxes
Income
tax expense for the quarter ended September 30, 2009 was $187,300 as compared to
income tax expense of $150,000 for the quarter ended September 30,
2008. The provisions for income taxes represent an effective income
tax rate of 31.5% in 2009 and an effective income tax rate of 44.5% in
2008. The decrease in the effective income tax rate is due to an
increase in the deferred taxes relating to stock option
compensation.
Nine
months ended September 30, 2009 Compared to Nine Months Ended September 30,
2008
The
following table sets forth for the periods indicated the percentage of total
revenues represented by certain items reflected in our statements of
operations:
Nine
Months Ended
September
30,
|
||||||||
2009
|
2008
|
|||||||
Net
sales and revenues
|
100.0 | % | 100.0 | % | ||||
Cost
of sales and revenues
|
59.3 | 64.3 | ||||||
Gross
profit
|
40.7 | 35.7 | ||||||
Selling,
general and administrative expenses
|
22.3 | 20.4 | ||||||
Research
and product development expenses
|
9.4 | 7.4 | ||||||
Operating
income
|
9.0 | 7.9 | ||||||
Interest
and other income
|
1.7 | .7 | ||||||
Income
before income taxes
|
10.7 | 8.6 | ||||||
Income
taxes
|
3.9 | 3.0 | ||||||
Net
income
|
6.8 | % | 5.6 | % |
Net
Sales and Revenues
Revenues
for the nine months ended September 30, 2009 increased 5% to $12,898,779 from
$12,239,838 in 2008. Net sales and revenues are broken down between
sales of standard products and sales of systems, software and
services. Standard products had a net sales and revenue increase of
7% to $7,106,550 from $6,669,083 in 2008. Net sales and revenues for
systems, software and services increased 4% to $5,792,229 from $5,570,755 in
2008. Overall domestic revenues decreased 5% to $7,147,663 for the
nine months ended September 30, 2009 versus $7,557,168 in 2008 while
international revenues increased 23% to $5,751,116 for the nine months ended
September 30, 2009 versus $4,682,670 in 2008. The international increase was
primarily due to increased contract revenue from the Company’s project with the
Tamil Nadu Agricultural University (TNAU) located in Coimbatore, India to
provide 224 meteorological monitoring stations.
Customer
orders or bookings for the nine months ended September 30, 2009 were
approximately $22,863,000 as compared to approximately $10,401,000 in 2008, an
increase of 120%. The increase was primarily due to receipt of the
TNAU contract which was approximately $2,979,000, two orders received
from the U.S. Geological Survey which totaled approximately $3,972,000 and a
contract award from UTE Dominion/ADASA for approximately $4,200,000 for a
hydro-meteorological monitoring system in Venezuela.
14
Cost
of Sales and Revenues
Cost of
sales as a percentage of revenues was 59.3% for the nine months ended September
30, 2009 as compared to 64.3% for the same period in
2008. Standard product cost of sales as a percentage of
standard product revenues was approximately 52% for the nine months ended
September 30, 2009 as compared to 49% in 2008. The standard product
cost increase was primarily due to the product mix resulting in sales of lower
margin products. Cost of sales for systems, software and services as
a percentage of systems, software and services revenues was 69% for the nine
months ended September 30, 2009 as compared to 83% in 2008. The
decrease was primarily due to higher utilization of personnel and a net foreign
currency gain in 2009 of $23,075 as compared to a foreign currency loss in 2008
of $144,500.
Selling,
General and Administrative Expenses
Selling,
general and administrative expenses were $2,877,887 in 2009 as compared to
$2,497,538 in 2008, an increase of $380,349 or 15%. Selling, general and
administrative expenses as a percentage of revenues increased to 22.3% for the
nine months ended September 30, 2009 from 20.4% in 2008. The increase
can be attributed to higher sales and marketing costs due to the addition of our
Ilex Division as well as increases in Integrated Systems’ selling
costs. Agent commissions on several international projects for the
nine months ended September 30, 2009 increased approximately $91,000 over 2008.
GSA funding fees increased approximately $28,000 over 2008 fees due to large
orders received from the U.S. Geological Survey during the first nine months of
2009. One-time costs associated with moving into our new facility
totaled approximately $67,000 and one-time costs of stock option compensation
relating to the Ilex acquisition totaled approximately $53,000 during the first
nine months of 2009.
Research
and Development Expenses
Research
and development expenses increased to $1,215,067 in 2009 from $908,376 in 2008,
an increase of $306,691 or 34%. Research and development expenses as
a percentage of revenues increased to 9.4% for the nine months ended September
30, 2009 from 7.4% in 2008. The increase was due higher use of subcontractors
assisting on product development, an increase in R&D personnel and lower
direct bill labor by engineering personnel.
Interest
and Other Income, Net
Net
interest and other income increased to $215,752 for the nine months ended
September 30, 2009 as compared to $88,653 in 2008. In 2007, we
brought a lawsuit against a former employee. We settled the lawsuit
in January 2009 in the amount of $150,000. The settlement provided for the
immediate payment of $60,000. The remaining balance of $90,000 was
secured by a promissory note that requires monthly payments over a five year
period including interest at 4%. The Company had net interest income
in 2009 of $61,337 as compared to net interest income of $88,653 in
2008.
Due to
our cash position, we did not use our line of credit during the nine months
ended September 30, 2009 with the exception of our India
operations. Our India operations are currently performing on a
contract with TNAU and used a credit facility with YES Bank in India to finance
the project expenses during the first nine months 2009.
Income
Taxes
Income
taxes increased 38% in 2009 to $503,000 from $364,000 in 2008. The
provisions for income taxes represent an effective income tax rate of 37% in
2009 and 34% in 2008. The exercise of employee stock options during the nine
months ended September 30, 2008 resulted in tax deductible compensation which
lowered income tax expense while there were no employee stock option exercises
during the nine months ended September 30, 2009.
15
Liquidity and Capital
Resources
Cash and
cash equivalents were $3,654,855 at September 30, 2009
compared to $3,705,475 at December 31, 2008. Working capital
increased to $12,499,619 at September 30, 2009 compared with $11,745,166 at
December 31, 2008.
Net cash
provided by operating activities was $721,820 for the nine months ended
September 30, 2009 as compared to cash provided by operating activities of
$829,193 for the nine months ended September 30, 2008.
Net cash
used by investing activities was $1,012,047 for the nine months ended September
30, 2009 as compared to cash used by investing activities of $968,813 for the
nine months ended September 30, 2008. Cash used in 2009 was primarily
for the purchase of property and equipment and an increase in restricted cash
that was used to secure bid and performance bonds. Cash used in 2008
was due to an increase in restricted cash relating to a performance bond issued
to the Ministry of Energy and Water in Afghanistan.
Net cash
provided by financing activities was $225,856 for the nine months ended
September 30, 2009 as compared to net cash used by financing activities of
$3,214 for the nine months ended September 30, 2008. Cash provided by
financing activities was due to borrowings by our India subsidiary on a credit
facility with YES Bank in India to finance TNAU project expenses.
We have a
revolving credit facility of $3,000,000 with BB&T that expires on August 5,
2010. We are permitted to borrow based on accounts receivable and
inventory according to pre-established criteria. The credit facility has been
secured by substantially all assets of the Company. Borrowings bear
interest at the bank’s prime rate. During the nine months ended
September 30, 2009, there were no borrowings on the line of credit. Our India
subsidiary has a $570,000 credit facility with YES Bank. The credit
facility was established by a letter of credit issued by BB&T to YES
Bank.
We
frequently bid on and enter into international contracts that require bid and
performance bonds. At September 30, 2009 and December 31, 2008, our
bank had issued standby letters of credit in the amount of $417,742 and
$1,010,238 respectively that served as either a bid or performance
bond. 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 anticipated credit line will provide adequate
resources for supporting operations during fiscal 2009. 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. Quantitative and Qualitative Disclosures About Market Risk
For
quantitative and qualitative disclosures about market risk, see Item 7A,
“Quantitative and Qualitative Disclosures About Market Risk,” of the annual
report on Form 10-K for the fiscal year ended December 31, 2008. The
Company exposures to market risk have not changed materially since
December 31, 2008.
16
Item
4T. 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 September 30,
2009, the end of the fiscal period covered by this report on Form
10-Q. 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 controls over financial reporting that
occurred during the quarter ended September 30, 2009 that have materially
affected, or are reasonably likely to materially affect, our internal controls
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 was filed in 2005 and is still pending before The
Monopolies and Restrictive Trade Practices Commission in New Delhi,
India. We believe that the case is meritless and do not anticipate
any material losses.
Item
6. Exhibits
31.1
|
Certification
of the President and Chief Executive Officer pursuant to Rule
13a-14(a).
|
31.2
|
Certification
of the Chief Financial Officer pursuant to Rule
13a-14(a).
|
32
|
Certification
of the President and Chief Executive Officer and Chief Financial Officer
pursuant to 18 U.S.C. ss.1350, as adopted pursuant to ss.906 of the
Sarbanes-Oxley Act of 2002.
|
17
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)
|
|||
Date:
November 13, 2009
|
By:
|
/s/ Raul S. McQuivey | |
Raul S. McQuivey | |||
President and Chief Executive Officer (Principal Executive Officer) | |||
Date:
November 13, 2009
|
By:
|
/s/ Sidney C. Hooper | |
Sidney C. Hooper | |||
Chief Financial Officer and Treasurer (Principal Accounting Officer) | |||
18