10Q 2012.09.30


 
 
 
 
 
 
 
 
 
 



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549
 
FORM 10-Q

þ
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended September 30, 2012; or

o
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from ___________ to ___________
 
Commission file number:  0-12742
 
Spire Corporation
(Exact name of registrant as specified in its charter)
 
Massachusetts
 
04-2457335
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification Number)
 
One Patriots Park, Bedford, Massachusetts
 
01730-2396
(Address of principal executive offices)
 
(Zip Code)
781-275-6000
(Registrant’s telephone number including area code)
  
Indicate by check mark whether the registrant:  (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days. Yes  þ     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).  Yes þ  No o

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 definition 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 þ
 
 
(Do not check if a smaller reporting company)
 
         
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  o  No þ

The number of shares of the registrant’s common stock outstanding as of November 5, 2012 was 8,562,633. 
 
 
 
 
 
 
 
 
 
 





TABLE OF CONTENTS
 
 
 
Page
PART I.
Financial Information
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
PART II.
Other Information
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
Item 5.
 
 
 
Item 6.
 
 
 
 
 
 
 
 



PART I. FINANCIAL INFORMATION

Item 1.
Unaudited Condensed Consolidated Financial Statements

SPIRE CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
 
September 30, 2012
 
December 31, 2011
Assets
 
 
 
Current assets
 
 
 
Cash and cash equivalents
$
5,178

 
$
4,758

Restricted cash
718

 
21

Accounts receivable – trade, net
1,834

 
3,464

Inventories, net
5,354

 
7,153

Deferred cost of goods sold
94

 
180

Deposits on equipment for inventory
109

 
609

Prepaid expenses and other current assets
684

 
757

Current assets of discontinued operations and assets held for sale
—

 
694

Total current assets
13,971

 
17,636

 
 
 
 
Property and equipment, net
1,331

 
1,354

Intangible and other assets, net
417

 
490

Available-for-sale investments, at quoted market value (cost of $2,250 and $2,204 at September 30, 2012 and December 31, 2011, respectively)
2,667

 
2,405

Deposit – related party
—

 
300

Non-current assets of discontinued operations and assets held for sale
—

 
1,993

Total assets
$
18,386

 
$
24,178

Liabilities and Stockholders’ Equity
 

 
 

Current liabilities
 

 
 

Current portion of capital lease obligation
$
12

 
$
37

Revolving line of credit
1,157

 
1,157

Accounts payable
896

 
3,405

Accrued liabilities
3,239

 
3,451

Advances on contracts in progress
1,045

 
2,232

Liabilities of discontinued operations
271

 
1,654

Total current liabilities
6,620

 
11,936

 
 
 
 
Long-term portion of capital lease obligation
12

 
21

Deferred compensation
2,667

 
2,405

Other long-term liabilities
739

 
1,106

Total long-term liabilities
3,418

 
3,532

Total liabilities
10,038

 
15,468

Stockholders’ equity
 
 
 
Common stock, $0.01 par value; 20,000,000 shares authorized; 8,562,633 shares issued and outstanding on September 30, 2012 and December 31, 2011, respectively
86

 
86

Additional paid-in capital
22,672

 
22,510

Accumulated deficit
(14,827
)
 
(14,087
)
Accumulated other comprehensive income
417

 
201

Total stockholders’ equity
8,348

 
8,710

Total liabilities and stockholders’ equity
$
18,386

 
$
24,178

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

-1-


SPIRE CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share amounts)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2012
 
2011
 
2012
 
2011
Net sales and revenues


 

 
 
 
 
Sales of goods
$
1,858

 
$
6,164

 
$
11,796

 
$
33,542

Contract research and service revenues
2,370

 
2,016

 
6,527

 
6,237

          Total net sales and revenues
4,228

 
8,180

 
18,323

 
39,779

 

 

 
 
 
 
Cost of sales and revenues

 

 
 
 
 
Cost of goods sold
2,048

 
4,499

 
10,470

 
25,263

     Cost of contract research and services
1,228

 
1,230

 
3,702

 
3,608

          Total cost of sales and revenues
3,276

 
5,729

 
14,172

 
28,871

Gross margin
952

 
2,451

 
4,151

 
10,908

 
 
 
 
 
 
 
 
Operating expenses
 
 
 
 
 
 
 
      Selling, general and administrative expenses
2,934

 
3,446

 
9,338

 
11,404

      Internal research and development expenses
36

 
50

 
227

 
586

          Total operating expenses
2,970

 
3,496

 
9,565

 
11,990

Operating loss from continuing operations
(2,018
)
 
(1,045
)
 
(5,414
)
 
(1,082
)
 
 
 
 
 
 
 
 
Interest expense, net
(30
)
 
(26
)
 
(97
)
 
(91
)
Foreign exchange gain (loss)
(9
)
 
1

 
(6
)
 
(1
)
     Total other expense, net
(39
)
 
(25
)
 
(103
)
 
(92
)
 
 
 
 
 
 
 
 
Loss from continuing operations before income tax benefit (provision)
(2,057
)
 
(1,070
)
 
(5,517
)
 
(1,174
)
Income tax benefit (provision) - continuing operations
24

 
(3
)
 
2,016

 
(18
)
Loss from continuing operations
(2,033
)
 
(1,073
)
 
(3,501
)
 
(1,192
)
 
 
 
 
 
 
 
 
Loss from discontinued operations before sale of business unit
(250
)
 
(697
)
 
(680
)
 
(1,895
)
Gain on sale of business unit, net of transaction expenses
—

 
—

 
5,449

 
—

Income tax provision - discontinued operations
—

 
—

 
(2,008
)
 
—

Income (loss) from discontinued operations, net of tax
(250
)
 
(697
)
 
2,761

 
(1,895
)
 
 
 
 
 
 
 
 
Net loss
$
(2,283
)

$
(1,770
)
 
$
(740
)
 
$
(3,087
)
 

 

 
 
 
 
Basic income (loss) per share:
 
 
 
 
 
 
 
From continuing operations, net of tax
$
(0.24
)
 
$
(0.13
)
 
$
(0.41
)
 
$
(0.14
)
From discontinued operations, net of tax
(0.03
)
 
(0.08
)
 
0.32

 
(0.23
)
Basic loss per share
$
(0.27
)
 
$
(0.21
)
 
$
(0.09
)
 
$
(0.37
)
 
 
 
 
 
 
 
 
Diluted income (loss) per share:
 
 
 
 
 
 
 
    From continuing operations, net of tax
$
(0.24
)
 
$
(0.13
)
 
$
(0.41
)
 
$
(0.14
)
    From discontinued operations, net of tax
(0.03
)
 
(0.08
)
 
0.32

 
(0.23
)
    Diluted loss per share
$
(0.27
)
 
$
(0.21
)
 
$
(0.09
)
 
$
(0.37
)
 
 
 
 
 
 
 
 
Weighted average number of common and common equivalent shares outstanding – basic
8,562,633

 
8,362,633

 
8,562,633

 
8,361,891

 
 
 
 
 
 
 
 
Weighted average number of common and common equivalent shares outstanding – diluted
8,562,633

 
8,362,633

 
8,562,633

 
8,361,891

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

-2-



SPIRE CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2012
 
2011
 
2012
 
2011
Comprehensive loss:
 
 
 
 
 
 
 
Net loss
$
(2,283
)
 
$
(1,770
)
 
$
(740
)
 
$
(3,087
)
Other comprehensive income (loss):
 
 
 
 
 
 
 
     Change in unrealized gain (loss) on available for sale marketable securities, net of tax
107

 
(372
)
 
216

 
(304
)
Total comprehensive loss
$
(2,176
)
 
$
(2,142
)
 
$
(524
)
 
$
(3,391
)

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.


-3-


SPIRE CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
 
Nine Months Ended September 30,
 
2012
 
2011
Cash flows from operating activities:

 

Net loss
$
(740
)
 
$
(3,087
)
Less: Net income (loss) from discontinued operations, net of tax
2,761

 
(1,895
)
Loss from continuing operations
(3,501
)
 
(1,192
)
Adjustments to reconcile net loss to net cash used in operating activities:

 

Depreciation and amortization
641

 
794

Deferred tax benefit
(2,008
)
 
—

Deferred compensation
216

 
(304
)
Stock-based compensation
169

 
284

Provision for (reversal of) accounts receivable reserve
17

 
(24
)
Provision for inventory reserve
257

 
657

Changes in assets and liabilities:

 

Restricted cash
(697
)
 
—

Accounts receivable
1,613

 
2,807

Inventories
1,137

 
(4,770
)
Deferred cost of goods sold
86

 
(2,885
)
Deposits, prepaid expenses and other current assets
573

 
(381
)
Accounts payable, accrued liabilities and other liabilities
(2,873
)
 
(2,387
)
 Deposit - related party
300

 
—

 Advances on contracts in progress
(1,187
)
 
4,864

Net cash used in operating activities of continuing operations
(5,257
)
 
(2,537
)
Net cash provided by (used in) operating activities of discontinued operations
3,723

 
(1,083
)
Net cash used in operating activities
(1,534
)
 
(3,620
)
 
 
 
 
Cash flows from investing activities:

 

Purchase of property and equipment
(129
)
 
(153
)
Additions to intangible and other assets
(11
)
 
(57
)
Net cash used in investing activities of continuing operations
(140
)
 
(210
)
Net cash provided by (used in) investing activities of discontinued operations
2,128

 
(82
)
Net cash provided by (used in) investing activities
1,988

 
(292
)
 
 
 
 
Cash flows from financing activities:

 

 Principal payments on capital lease obligations
(34
)
 
(32
)
Proceeds from exercise of stock options
—

 
9

Net cash used in financing activities
(34
)
 
(23
)
Net increase (decrease) in cash and cash equivalents
420

 
(3,935
)
 
 
 
 
Cash and cash equivalents, beginning of period
4,758

 
6,259

Cash and cash equivalents, end of period
$
5,178

 
$
2,324

 
 
 
 
Supplemental disclosures of cash flow information:

 

Interest paid
$
97

 
$
91

 Income taxes paid (refunded), net
$
10

 
$
(31
)
Supplemental disclosures of non-cash flow information:
 
 
 
Inventory transfered to property and equipment
$
405

 
$
—

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

-4-


SPIRE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2012 and 2011

1.
Description of the Business

Spire Corporation ("Spire" or the "Company") develops, manufactures and markets highly-engineered products and services in two principal business areas: (i) capital equipment and systems for the photovoltaic solar industry and (ii) biomedical, generally bringing to bear expertise in materials technologies, surface science and thin films across both business areas, discussed below.

In the photovoltaic solar area, the Company develops, manufactures and markets specialized equipment for the production of terrestrial photovoltaic modules from solar cells and provides photovoltaic systems for grid connected applications in the commercial markets.  The Company's equipment has been installed in approximately 200 factories in 50 countries.  The equipment market is very competitive with major competitors located in Japan and Europe.  The Company's flagship product is its Sun Simulator which tests module performance.  The Company's other product offerings include turn-key module lines and to a lesser extent other individual equipment.  To compete the Company offers other services such as training and assistance with module certification.  The Company also provides turn-key services to its customers to backward integrate to solar cell manufacturing. At times, the Company supplies materials such as solar cells to certain customers.

In the biomedical area, the Company provides value-added surface treatments to manufacturers of orthopedic and other medical devices that enhance the durability, antimicrobial characteristics or other material characteristics of their products; and performs sponsored research programs into practical applications of advanced biomedical and biophotonic technologies.

On December 14, 2009, the Company completed the sale of its medical products business unit, which develops and markets coated and uncoated hemodialysis catheters and related devices for the treatment of chronic kidney disease (the “Medical Products Business Unit”), to Bard Access Systems, Inc. (“Bard”). Accordingly, the the results of operations and liabilities of the Medical Products Business Unit are being presented herein as discontinued operations. See Note 12 to the unaudited condensed consolidated financial statements.

On March 9, 2012, the Company completed the sale of its semiconductor business unit, which provides semiconductor foundry services, operates a semiconductor foundry and fabrication facility and is engaged in the business of wafer epitaxy, foundry services, and device fabrication for the defense, medical, telecommunications and consumer products markets (the “Semiconductor Business Unit”), to Masimo Corporation ("Masimo"). Accordingly, the results of operations and assets and liabilities of the Semiconductor Business Unit are being presented herein as discontinued operations. See Note 12 to the unaudited condensed consolidated financial statements.

Operating results will depend upon revenue growth and product mix, as well as the timing of shipments of higher priced products from the Company’s solar equipment line, delivery of solar systems and solar materials.  Export sales, which amounted to 29% and 57% of net sales and revenues for the three and nine months ended September 30, 2012, respectively, and 70% and 58% of net sales and revenues for the three and nine months ended September 30, 2011, respectively, continue to contribute a significant portion of the Company's net sales and revenues.

The Company has incurred operating losses from continuing operations in 2012 and 2011.  Operating loss from continuing operations was $2.0 million and $5.4 million for the three and nine months ended September 30, 2012, respectively. Operating loss from continuing operations was $1.0 million and $1.1 million for the three and nine months ended September 30, 2011, respectively. Net cash used in operating activities was $1.5 million for the nine months ended September 30, 2012, which includes $3.7 million of cash provided by operating activities of discontinued operations. Net cash used in operating activities was $3.6 million for the nine months ended September 30, 2011, which includes $1.1 million of cash used by operating activities of discontinued operations. As of September 30, 2012, the Company had unrestricted cash and cash equivalents of $5.2 million compared to $4.8 million as of December 31, 2011.  The Company has various options on how to fund future operational losses or working capital needs, including but not limited to sales of equity, bank debt, the sale or license of assets and technology, or joint ventures involving cash infusions, as it has done in the past; however, there are no assurances that the Company will be able to sell equity, obtain or access bank debt, sell or license assets or technology or enter into such joint ventures on a timely basis and at appropriate values.  The maturity date of the Company's credit facilities is December 29, 2012 and the Company has commenced preliminary discussions with the Bank with respect to the renewal and extension of the Revolving Credit Facility and the Ex-Im Facility. The Company has developed several plans including cost containment efforts and potential strategic alternatives to offset a decline in business due to global economic conditions.  Accordingly, based on the forecasts and estimates underlying

-5-


the Company's current operating plan, the financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

2.
Interim Financial Statements

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission ("SEC") regarding interim financial reporting.  Certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted in accordance with such rules and regulations. These unaudited condensed consolidated financial statements should be read in conjunction with the annual audited consolidated financial statements and notes thereto for the year ended December 31, 2011, included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission.

In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments (consisting of normal recurring adjustments) necessary to fairly present the Company’s financial position as of September 30, 2012 and December 31, 2011 and the results of its operations for the three and nine months ended September 30, 2012 and 2011. The results of operations for the three and nine months ended September 30, 2012 are not necessarily indicative of the results to be expected for the fiscal year ending December 31, 2012.  The unaudited condensed consolidated balance sheet as of December 31, 2011 has been derived from audited financial statements as of that date.  During the second quarter of 2009, the Company began pursing an exclusive sales process of its Medical Products Business Unit.  On December 14, 2009, the Company completed the sale of the Medical Products Business Unit to Bard. During the first quarter of 2012, the Company began pursing an exclusive sales process of its Semiconductor Business Unit and on March 9, 2012, the Company completed the sale of the Semiconductor Business Unit to Masimo.   Accordingly, the results of operations and assets and liabilities of the Semiconductor Business Unit and the results of operations and liabilities of the Medical Products Business Unit are being presented herein as discontinued operations.  See Note 12 to the unaudited condensed consolidated financial statements.

Summary of Significant Accounting Policies

The significant accounting policies followed by the Company are set forth in Note 2 to the Company’s consolidated financial statements in its Annual Report on Form 10-K for the year ended December 31, 2011, filed with the SEC.

New Accounting Pronouncements

In December 2011, the Financial Accounting Standards Board ("FASB") issued Accounting Standard Update ("ASU")No. 2011-11 ("ASU 2011-11"), Disclosures about Offsetting Assets and Liabilities. The update requires companies to disclose information about financial instruments that have been offset and related arrangements to enable users of their financial statements to understand the effect of those arrangements on their financial position. Companies will be required to provide both net (offset amounts) and gross information in the notes to the financial statements for relevant assets and liabilities that are offset. ASU 2011-11 is effective for fiscal years, and interim periods within those years, beginning on or after January 1, 2013. We do not expect the application of this update to have an impact on the Company's consolidated financial statements.

In June 2011, FASB issued ASU No. 2011-05 ("ASU 2011-05"), Presentation of Comprehensive Income. The update eliminates the option to present the components of other comprehensive income as part of the statement of stockholders' equity. Instead, entities must report comprehensive income in either a single continuous statement of comprehensive income which contains two sections, net income and other comprehensive income, or in two separate but consecutive statements. In December 2011, the requirement regarding the presentation of reclassification adjustments out of accumulated other comprehensive income was deferred indefinitely. ASU 2011-05 is effective for public companies for interim and annual periods beginning after December 15, 2011. The Company adopted ASU 2011-05 on January 1, 2012, which only changed the manner of comprehensive income presentation in the condensed consolidated financial statements. The application of this update did not have a material impact on the Company's condensed consolidated financial statements.
 
In May 2011, the FASB issued ASU No. 2011-04 ("ASU 2011-04"), Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards, an amendment to FASB Accounting Standards Codification (“ASC”) Topic 820, Fair Value Measurement. The update revises the application of the valuation premise of highest and best use of an asset, the application of premiums and discounts for fair value determination, as well as the required disclosures for transfers between Level 1 and Level 2 fair value measures and the highest and best use of nonfinancial assets. The update provides additional disclosures regarding Level 3 fair value measurements and clarifies certain other existing disclosure requirements. ASU 2011-04 is effective for public companies for interim and annual periods beginning

-6-


after December 15, 2011 with early adoption prohibited. The Company adopted ASU 2011-04 on January 1, 2012. The application of this update did not have a material impact on the Company's condensed consolidated financial statements.

3.
Accounts Receivable/Advances on Contracts in Progress

Net accounts receivable, trade consists of the following:
(in thousands)
September 30, 2012
 
December 31, 2011
Amounts billed
$
1,637

 
$
3,327

Accrued revenue
221

 
177

 
1,858

 
3,504

Less:  Allowance for doubtful accounts
(24
)
 
(40
)
Net accounts receivable - trade
$
1,834

 
$
3,464

Advances on contracts in progress
$
1,045

 
$
2,232

 
Accrued revenue represents revenues recognized on contracts for which billings have not been presented to customers as of the balance sheet date. These amounts are billed and generally collected within one year.

The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to pay amounts due. The Company actively pursues collection of past due receivables as the circumstances warrant. Customers are contacted to determine the status of payment and senior accounting and operations management are included in these efforts as is deemed necessary. A specific reserve will be established for past due accounts when it is probable that a loss has been incurred and the Company can reasonably estimate the amount of the loss. The Company does not record an allowance for government receivables and invoices backed by letters of credit as collection is reasonably assured. Bad debts are written off against the allowance when identified. There is no dollar threshold for account balance write-offs. While rare, a write-off is only recorded when all efforts to collect the receivable have been exhausted. The Company received payments of $10 thousand and $37 thousand for the nine months ended September 30, 2012 and 2011, respectively, against amounts which had been previously reserved for in allowance for doubtful accounts.
        
Advances on contracts in progress represent billings that have been presented to the customer, as either deposits or progress payments against future shipments, but revenue has not been recognized.

4.
Inventories and Deferred Costs of Goods Sold

Inventories, net of $1.1 million and $860 thousand of reserves at September 30, 2012 and December 31, 2011, respectively, consist of the following at: 
(in thousands)
September 30,
2012
 
December 31,
2011
Raw materials
$
1,838

 
$
2,284

Work in process
2,302

 
3,871

Finished goods
1,214

 
998

Net inventory
$
5,354

 
$
7,153

Deferred cost of goods sold
$
94

 
$
180


Deferred cost of goods sold represents costs of equipment that has shipped to the customer and title has passed.  The Company defers these costs until the related revenue is recognized.


-7-


5.
Income (Loss) Per Share

The following table provides a reconciliation of the denominators of the Company’s reported basic and diluted income (loss) per share computations for the periods ended:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2012
 
2011
 
2012
 
2011
Weighted average number of common and common equivalent shares outstanding – basic
8,562,633

 
8,362,633

 
8,562,633

 
8,361,891

Add:  Net additional common shares upon assumed exercise of common stock options
—

 
—

 
—

 
—

Adjusted weighted average number of common and common equivalents shares outstanding – diluted
8,562,633

 
8,362,633

 
8,562,633

 
8,361,891

 
For the three and nine months ended September 30, 2012, 220 and 1,335 shares of common stock, respectively, and for the nine months ended September 30, 2011, 660 shares of common stock, issuable relative to stock options were excluded from the calculation of diluted shares because their inclusion would have been anti-dilutive due to the Company’s net loss position.

In addition, for the three and nine months ended September 30, 2012, 629,446 and 619,446 shares of common stock, respectively, and for the three and nine months ended September 30, 2011, 783,107 and 773,107 shares of common stock, respectively, issuable relative to stock options were excluded from the calculation of diluted shares because their inclusion would have been anti-dilutive, due to their exercise prices exceeding the average market price of the stock for the period.

6.
Operating Segments and Related Information

The following table presents certain continuing operating division information in accordance with the provisions of ASC 280, “Segments Reporting.”
(in thousands)
Solar
 
Biomedical
 
Total
Company
For the three months ended September 30, 2012
 
 
 
 
 
Net sales and revenues
$
2,485

 
$
1,743

 
$
4,228

Operating income (loss) from continuing operations
$
(2,197
)
 
$
179

 
$
(2,018
)
 
 
 
 
 
 
For the three months ended September 30, 2011
 
 
 
 
 

Net sales and revenues
$
6,177

 
$
2,003

 
$
8,180

Operating income (loss) from continuing operations
$
(1,437
)
 
$
392

 
$
(1,045
)
 
 
 
 
 
 
For the nine months ended September, 2012
 
 
 
 
 
Net sales and revenues
$
13,219

 
$
5,104

 
$
18,323

Operating income (loss) from continuing operations
$
(5,740
)
 
$
326

 
$
(5,414
)
 
 
 
 
 
 
For the nine months ended September 30, 2011
 
 
 
 
 
Net sales and revenues
$
33,610

 
$
6,169

 
$
39,779

Operating income (loss) from continuing operations
$
(2,197
)
 
$
1,115

 
$
(1,082
)

The following table shows net sales and revenues by geographic area (based on customer location):

-8-


 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(in thousands)
2012
 
%
 
2011
 
%
 
2012
 
%
 
2011
 
%
United States
$
3,005

 
71
%
 
$
2,436

 
30
%
 
$
7,955

 
43
%
 
$
16,598

 
42
%
Europe/Africa
376

 
9

 
1,231

 
15

 
3,062

 
17

 
3,792

 
9

Asia
839

 
20

 
4,454

 
54

 
7,246

 
40

 
17,427

 
44

Rest of the world
8

 
—

 
59

 
1

 
60

 
—

 
1,962

 
5

 
$
4,228

 
100
%
 
$
8,180

 
100
%
 
$
18,323

 
100
%
 
$
39,779

 
100
%

Revenues from contracts with United States government agencies for the three months ended September 30, 2012 and 2011 were approximately $392 thousand and $90 thousand or 9% and 1% of total net sales and revenues, respectively.

Revenues from contracts with United States government agencies for the nine months ended September 30, 2012 and 2011 were approximately $1.3 million and $8.4 million or 7% and 21% of total net sales and revenues, respectively.

Revenues from the delivery of biomedical services to one customer accounted for 19% of total net sales and revenues for the three month period ended September 30, 2012.

Revenues from the delivery of solar equipment to two customers accounted for 12% and 10% , respectively, of total net sales and revenues for the nine month period ended September 30, 2012. Revenues from the delivery of biomedical services to one customer accounted for 12% of total net sales and revenues for the nine month period ended September 30, 2012.
 
Revenues from the delivery of solar equipment to two customers accounted for 30% and 14%, respectively, of total net sales and revenues for the three month period ended September 30, 2011.
           
Revenues from the delivery of solar equipment and recurring revenues from the sale of solar cell materials to the same customer account for 2% and 18%, respectively, of total net sales and revenues for the nine month period ended September 30, 2011.  Revenues from the delivery of solar equipment to two customers account for 19% and 14% of total net sales and revenues for the nine month period ended September 30, 2011.

Three customers represented approximately 18%, 11% and 11%, respectively, of net accounts receivable, trade at September 30, 2012 and three customers represented approximately 21%, 13% and 11%, respectively, of net accounts receivable, trade at December 31, 2011.

7.
Intangible and Other Assets

Patents amounted to $124 thousand and $137 thousand, net of accumulated amortization of $809 thousand and $767 thousand, at September 30, 2012 and December 31, 2011, respectively. Licenses amounted to $61 thousand and $65 thousand, net of accumulated amortization of $14 thousand and $10 thousand, at September 30, 2012 and December 31, 2011, respectively. Patent cost is primarily composed of cost associated with securing and registering patents that the Company has been awarded or that have been submitted to, and the Company believes will be approved by the government. License cost is composed of the cost to acquire rights to the underlying technology or know-how. These costs are capitalized and amortized over their useful lives or terms, ordinarily five years using the straight-line method. There are no expected residual values related to these patents.  Amortization expense, relating to patents and licenses, was approximately $44 thousand and $15 thousand for the three months ended September 30, 2012 and 2011, respectively. Amortization expense, relating to patents and licenses, was approximately $84 thousand and $47 thousand for the nine months ended September 30, 2012 and 2011, respectively.

For disclosure purposes, the table below includes future amortization expense for patents and licenses owned by the Company as well as estimated amortization expense related to patents that remain pending at September 30, 2012 of $65 thousand. This estimated expense for patents pending assumes that the patents are issued immediately, and therefore are being amortized over five years on a straight-line basis. Estimated amortization expense for the periods ending December 31, is as follows: 

-9-


(in thousands)
 
Amortization Expense
2012 remaining 3 months
 
$
21

2013
 
67

2014
 
59

2015
 
36

2016
 
22

Thereafter
 
45

 
 
$
250


Also included in other assets are refundable deposits made by the Company of approximately $167 thousand and $163 thousand at September 30, 2012 and December 31, 2011, respectively.

8.
Available-for-Sale Investments

Available-for-sale investments consist of assets held as part of the Spire Corporation Non-Qualified Deferred Compensation Plan. These investments have been classified as available-for-sale investments and are reported at fair value, with unrealized gains and losses included in accumulated other comprehensive income. The unrealized gain on these marketable securities was $417 thousand and $201 thousand as of September 30, 2012 and December 31, 2011, respectively.

(in thousands)
Accumulated Other Comprehensive Income
Balance, December 31, 2011
$
201

Net change in unrealized gain on available for sale marketable securities
216

Balance, September 30, 2012
$
417


9.
Fair Value Measurements

The hierarchy established under ASC 820-10, Fair Value Measures and Disclosures ("ASC 820-10") gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). As required by ASC 820-10, the Company's available-for-sale investments are classified within the fair value hierarchy based on the lowest level of input that is significant to the fair value measurement. The three levels of the fair value hierarchy under ASC 820-10, and its applicability to the Company's available-for-sale investments, are described below:

Level 1 - Pricing inputs are quoted prices available in active markets for identical investments as of the reporting date. As required by ASC 820-10, the Company does not adjust the quoted price for these investments, even in situations where the Company holds a large position and a sale could reasonably impact the quoted price.

Level 2 - Pricing inputs are quoted prices for similar investments, or inputs that are observable, either directly or indirectly, for substantially the full term through corroboration with observable market data. Level 2 includes investments valued at quoted prices adjusted for legal or contractual restrictions specific to these investments.

Level 3 - Pricing inputs are unobservable for the investment, that is, inputs that reflect the reporting entity's own assumptions about the assumptions market participants would use in pricing the asset or liability. Level 3 includes investments that are supported by little or no market activity.    

Valuation Techniques

Fair value is a market-based measure considered from the perspective of a market participant who would buy the asset or assume the liability rather than the Company's own specific measure. All of the Company's fixed income securities are priced using a variety of daily data sources, largely readily-available market data and broker quotes. To validate these prices, the Company compares the fair market values of the Company's fixed income investments using market data from observable and corroborated sources. The Company also performs the fair value calculations for its common stock and mutual fund securities using market

-10-


data from observable and corroborated sources. In periods of market inactivity, the observability of prices and inputs may be reduced for certain instruments. This condition could cause an instrument to be reclassified from Level 1 to Level 2 or from Level 2 to Level 3. During the three and nine months ended September 30, 2012, none of the Company's instruments were reclassified between Level 1 or Level 2.

The following table presents the financial instruments related to the Company’s available-for-sale investment carried at fair value on a recurring basis as of September 30, 2012 and December 31, 2011 by ASC 820-10 valuation hierarchy (as defined above).
(in thousands)
Balance as of
September 30, 2012
 
Level 1
 
Level 2
 
Level 3
Cash and short term investments
$
8

 
$
8

 
$
—

 
$
—

Common stock
 
 
 
 
 
 
 
Basic Materials
15

 
15

 
—

 
—

Consumer Goods
65

 
65

 
—

 
—

Energy
33

 
33

 
—

 
—

Financial
48

 
48

 
—

 
—

Healthcare
57

 
57

 
—

 
—

Industrial Goods
43

 
43

 
—

 
—

Services
22

 
22

 
—

 
—

Technology
130

 
130

 
—

 
—

Transportation
11

 
11

 
—

 
—

Utilities
22

 
22

 
—

 
—

Total Common Stock
446

 
446

 
—

 
—

Mutual Fund
 
 
 
 
 
 
 
Diversified Emerging Markets
180

 
—

 
180

 
—

Precious Metals Fund
51

 
—

 
51

 
—

Foreign Large Blend
240

 
—

 
240

 
—

Foreign Large Growth
237

 
—

 
237

 
—

Large Growth
536

 
—

 
536

 
—

Small Blend
202

 
202

 
—

 
—

Global High Yield Income Fund
78

 
—

 
78

 
—

Total Mutual Fund
1,524

 
202

 
1,322

 
—

Fixed Income
 
 
 
 
 
 
 
Domestic
671

 
—

 
671

 
—

International
18

 
—

 
18

 
—

Total Fixed Income
689

 
—

 
689

 
—

Total available-for-sale investments (1)
$
2,667

 
$
656

 
$
2,011

 
$
—

Percent of total
100
%
 
25
%
 
75
%
 
—
%

-11-




(in thousands)
Balance as of December 31, 2011
 
Level 1
 
Level 2
 
Level 3
Cash and short term investments
$
65

 
$
65

 
$
—

 
$
—

Common Stock
 
 
 
 
 
 
 
 Basic Materials
72

 
72

 
—

 
—

  Consumer Goods
18

 
18

 
—

 
—

 Financial
48

 
48

 
—

 
—

 Healthcare
53

 
53

 
—

 
—

  Industrial Goods
22

 
22

 
—

 
—

  Services
78

 
78

 
—

 
—

  Technology
151

 
151

 
—

 
—

Total Common Stock
442

 
442

 
—

 
—

Mutual Fund
 
 
 
 
 
 
 
 Diversified Emerging Markets
155

 
—

 
155

 
—

  Foreign Large Blend
123

 
—

 
123

 
—

  Foreign Large Growth
171

 
—

 
171

 
—

  Foreign Small/Mid Value
136

 
—

 
136

 
—

Value Fund
69

 
—

 
69

 
—

  Large Growth
490

 
—

 
490

 
—

  Small Blend Total
192

 
192

 
—

 
—

Total Mutual Funds
1,336

 
192

 
1,144

 
—

Fixed Income
 
 
 
 
 
 
 
Domestic
535

 
—

 
535

 
—

International
27

 
—

 
27

 
—

Total Fixed Income
562

 
—

 
562

 
—

Total available for-sale-investments (1)
$
2,405

 
$
699

 
$
1,706

 
$
—

Percent of total
100
%
 
29
%
 
71
%
 
—
%
        
(1) 
Changes in the fair value of available-for-sale investments are recorded in accumulated other comprehensive income, a component of stockholders’ equity, in the Company’s unaudited condensed consolidated balance sheets.

The carrying amounts reflected in the Company's unaudited condensed consolidated balance sheets for cash, accounts receivable, prepaid expenses and other current assets, accounts payable, accrued expenses, and capital lease obligations approximate fair value due to their short-term maturities. The fair value of the Company's revolving line of credit has been estimated by management based on the terms that it believes it could obtain in the current market for debt of the same terms and remaining maturities. Due to the short-term nature of the remaining maturities, frequency of amendments to its terms and the variable interest rates, the carrying value of the revolving line of credit approximates fair value at September 30, 2012 and December 31, 2011.

10.
Notes Payable and Credit Arrangements

The Company has two separate credit facilities with Silicon Valley Bank (the “Bank” or “SVB”): (i) a Second Amended and Restated Loan and Security Agreement (as amended to date, the “Revolving Credit Facility”) and (ii) an Amended and Restated Export-Import Bank Loan and Security Agreement (as amended to date, the “Ex-Im Facility”) pursuant to which outstanding amounts under this facility are guaranteed by the Export-Import Bank of the United States (the “EXIM Bank”). The credit facilities provide an aggregate amount of $6 million under both facilities, with up to $2 million available under the Revolving Credit Facility and up to $4 million available under the Ex-Im Facility. These credit facilities have a maturity date of December 29, 2012 and the Company has commenced preliminary discussions with the Bank with respect to the renewal and extension of the Revolving Credit Facility and the Ex-Im Facility. In addition, a guidance line has been established to support letters of credit in an aggregate amount of up to $1.5 million through December 29, 2012. If the Company achieves certain levels of liquidity, based on cash on

-12-


hand and availability under the credit facility, the Company will not be required to cash collateralize letters of credit issued under this guidance line.

The Company's obligations under these two credit facilities, as well as the guidance line, are secured by substantially all of the assets of the Company. Advances under the Revolving Credit Facility are limited to 80% of eligible receivables. Advances under the Ex-Im Facility are limited to (i) 90% of eligible receivables subject to a suitable foreign currency hedge agreement if applicable, plus (ii) 75% of all other eligible receivables billed in foreign currency, plus (iii) 50% of the value of eligible inventory, as defined. Under the Revolving Credit Facility and the Ex-Im Facility, as long as any commitment remains outstanding under the facilities, the Company must comply with a financial covenant by maintaining a minimum cash balance of $1.0 million. In addition, until all amounts under the credit facilities with the Bank are repaid, covenants under the credit facilities impose restrictions on the Company's ability to, among other things, incur additional indebtedness, create or permit liens on the Company's assets, merge, consolidate or dispose of assets (other than in the ordinary course of business), make dividend and other restricted payments, make certain debt or equity investments, make certain acquisitions, engage in certain transactions with affiliates or change the business conducted by the Company. Any failure by the Company to comply with the covenants and obligations under the credit facilities could result in an event of default, in which case the Bank may be entitled to declare all amounts owed to be due and payable immediately.

Under the credit facilities, interest on outstanding borrowings accrues at a rate per annum equal to the greater of (i) the prime rate plus 2.5% or (ii) 7.0%. In addition, if the Company achieves certain levels of liquidity, based on cash on hand and availability under the credit facility, the Company will have a 0.5% lower interest rate.

Advances outstanding under the Revolving Credit Facility were $1.0 million and zero at September 30, 2012 and December 31, 2011, respectively.  Advances outstanding under the Ex-Im Facility were $145 thousand and $1.2 million at September 30, 2012 and December 31, 2011, respectively.  As of September 30, 2012, the interest rate per annum on the Revolving Credit Facility and Ex-Im Facility was 6.0% and 6.0%, respectively. The Company has utilized $675 thousand and $1.4 million of the guidance line at September 30, 2012 and December 31, 2011, respectively. Combined availability under the Revolving Credit Facility and the Ex-Im Facility was zero as of September 30, 2012.

11.
Stock-Based Compensation and Stock Option Plan

The Company has recognized stock-based compensation expense of approximately $48 thousand and $78 thousand for the three months ended September 30, 2012 and 2011, respectively. The Company has recognized stock-based compensation expense of approximately $169 thousand and $284 thousand for the nine months ended September 30, 2012 and 2011, respectively. The total non-cash, stock-based compensation expense included in the unaudited condensed consolidated statements of operations for the periods presented is included in the following expense categories:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(in thousands)
2012
 
2011
 
2012
 
2011
 
 
 
 
 
 
 
 
Cost of contract research, services
$
6

 
$
5

 
$
16

 
$
16

Cost of goods sold
6

 
17

 
31

 
59

Administrative and selling
36

 
56

 
122

 
209

Total stock-based compensation
$
48

 
$
78

 
$
169

 
$
284


At September 30, 2012, the Company had outstanding options under two option plans: the 1996 Equity Incentive Plan (the “1996 Plan”) and the 2007 Stock Equity Plan (the “2007 Plan”, together the “Plans”).  Both Plans were approved by stockholders and provided that the Board of Directors may grant options to purchase the Company’s common stock to key employees and directors of the Company.  Incentive and non-qualified options must be granted at least at the fair market value of the common stock or, in the case of certain optionees, at 110% of such fair market value at the time of grant. The options may be exercised, subject to certain vesting requirements, for periods up to ten years from the date of issue.  The 1996 Plan expired with respect to the issuance of new grants as of December 10, 2006.  Accordingly, future grants may be made only under the 2007 Plan.

A summary of options outstanding under the Plans as of September 30, 2012 and changes during the nine month period ended September 30, 2012 is as follows:

-13-


 
Number of Shares
 
Weighted-Average Exercise Price
 
Average Remaining Contractual Life (Years)
 
Aggregate Intrinsic Value
Options Outstanding at December 31, 2011
793,107

 
$
6.40

 
 
 
 
   Granted
30,000

 
$
0.83

 
 
 
 
   Exercised
—

 
$
—

 
 
 
 
   Cancelled/expired
(183,661
)
 
$
7.25

 
 
 
 
Options Outstanding at September 30, 2012
639,446

 
$
6.28

 
6.02
 
$
—

Options Exercisable at September 30, 2012
568,196

 
$
6.44

 
5.85
 
$
—

Option vested and expected to vest at September 30, 2012
634,909

 
$
6.45

 
5.84
 
$
—


Compensation expense related to stock options to be charged in future periods amounts to approximately $153 thousand at September 30, 2012 and will be recognized over a weighted-average period of 1.5 years.

The per-share weighted-average fair value of stock options granted during the three and nine months ended September 30, 2012 was $0.55 and $0.83, respectively, and $1.29 and $2.20 for the three and nine months ended September 30, 2011, respectively, on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions:
Year
 
Expected
Dividend Yield
 
Risk-Free
Interest Rate
 
Expected
Option Life
 
Expected
Volatility Factor
2012
 
—

 
0.62%
 
5.1 years
 
92.1%
2011
 
—

 
1.54%
 
5.1 years
 
77.9%

The risk free interest rate reflects treasury yields rates over a term that approximates the expected option life.  The expected option life is calculated based on historical lives of all options issued under the Plans.  The expected volatility factor is determined by measuring the actual stock price volatility over a term equal to the expected life of the options granted.

12.
Discontinued Operations and Assets Held for Sale

In accordance with ASC 205-20, Presentation of Financial Statements - Discontinued Operations, the accompanying unaudited condensed consolidated balance sheets, statements of operations and cash flows present the results of operations and assets and liabilities of the Semiconductor Business Unit and the liabilities of the Medical Products Business Unit as discontinued operations.

Sales of Medical Products Business Unit

During the second quarter of 2009, the Company began pursuing an exclusive sales process of the Medical Products Business Unit. The Company (i) determined that the Medical Products Business Unit was a separate component of the Company's business as, historically, management reviewed separately the Medical Products Business Unit's financial results apart from the Company's ongoing continuing operations, (ii) eliminated the Medical Products Business Unit's financial results from ongoing operations and (iii) determined that the Company will have no further continuing involvement in the operations of the Medical Products Business Unit or cash flows from the Medical Products Business Unit after the sale.

On December 14, 2009, the Company completed the sale of the Medical Products Business Unit to Bard. The purchase price for the Medical Products Business Unit was $12.4 million, including (i) $9.4 million that was paid in cash to the Company at closing, (ii) $100 thousand that was paid in cash at closing to two of the Company's employees, including Mark Little, Chief Executive Officer of Spire Biomedical, as consideration for their execution of non‑competition agreements, and (iii) $2.9 million that was paid in cash to the Company in the second quarter of 2010 based on the achievement of certain milestones described below (the “Contingent Purchase Price”).

Certain of the assets were transferred to Bard at the closing, and certain other assets (the “Contingent Deferred Assets”) were transferred to Bard upon the completion of a product recall related to such assets, which occurred in the second quarter of 2010. Until the Contingent Deferred Assets were transferred by the Company, it continued to manufacture and supply to Bard certain hemodialysis catheter products under the terms of a distribution agreement (the “Transition Period”). The Contingent Deferred Assets were transferred to Bard and Bard paid $1.5 million of the Contingent Purchase Price to the Company in the second quarter of 2010. In addition, Bard paid $1.4 million of the remaining Contingent Purchase Price to the Company in the second quarter of 2010 based upon the achievement of milestones related to the manufacture and supply of certain quantities of hemodialysis catheter products under the distribution agreement. The transfer price for hemodialysis catheter products delivered

-14-


to Bard under the distribution agreement was equal to the Company's standard costs of goods, including related overhead, without mark-up and calculated in accordance with U.S. generally accepted accounting principles.

The Company initiated a voluntary recall of certain catheters based upon three field complaints of catheter malfunctions received in the third quarter of 2009. No patient injury or complications resulted from the malfunction. It was determined that under certain molding conditions, there was a possibility that insufficient bonding may occur which could cause the catheter to malfunction. As it could not be isolated to a particular lot, the Company initiated a voluntary recall of any inventory held by our distributors and their customers. As the manufacturer of record, the Company is responsible for ensuring that the product meets the product specifications and the associated product liability that may result in failure those specifications. The voluntary recall was initiated in October 2009 and in February 2010, the Company determined that it had achieved a 100% effectiveness rating based upon the recall criteria. The U.S. Food and Drug Administration advised the Company in June 2010 that the recalls were terminated.
    
During the fourth quarter of 2011, the Company received a cash payment of $2.5 million in settlement of a breach of contract dispute with a contract manufacturer and recorded a net gain on legal settlement of $2.3 million in the same quarter.

Sale of Semiconductor Business Unit

During the first quarter of 2012, the Company began pursuing an exclusive sales process of the Company's Semiconductor Business Unit. The Company (i) determined that the Semiconductor Business Unit was a separate component of the Company's business as, historically, management reviewed separately the Semiconductor Business Unit's financial results apart from the Company's ongoing continuing operations, (ii) eliminated the Semiconductor Business Unit's financial results from ongoing operations and (iii) determined that the Company will have no further continuing involvement in the operations of the Semiconductor Business Unit or cash flows from the Semiconductor Business Unit after the sale.

On March 9, 2012, the Company completed the sale of the Semiconductor Business Unit to Masimo. The asset purchase agreement provided that the aggregate purchase price for the Semiconductor Business Unit was $8.0 million plus the assumption of $500 thousand in liabilities, with the cash portion of the purchase price being reduced by retained cash, accounts receivable and liabilities assumed by Masimo in excess of the agreed upon assumed liabilities. As a result, in the first quarter of 2012 the Company received approximately $7.3 million in cash (less the escrow described below) and incurred legal and transaction related fees of $425 thousand and Masimo assumed approximately $1.2 million in liabilities. Of the purchase price, approximately $718 thousand was deposited into an indemnity escrow account for fifteen months to partially secure the Company's obligations for any indemnity claims under the asset purchase agreement. In connection with this transaction, the lease for the premises in Hudson, New Hampshire where the Semiconductor Business Unit was located, was terminated on March 9, 2012, and the Company was released from all future obligations under the lease as of such date.

Summarized Financial Information of the Discontinued Operations

The liabilities of the Semiconductor Business Unit and the Medical Products Business Unit as of September 30, 2012 and the assets and liabilities of the Semiconductor Business Unit and liabilities of the Medical Products Business Unit as of December 31, 2011 are as follows:

-15-


(in thousands)
September 30, 2012
 
December 31, 2011
Assets
 
 
 
Current Assets
 
 
 
     Accounts receivable - trade, net
$
—

 
$
307

     Inventories, net
—

 
337

     Prepaid expenses and other current assets
—

 
50

         Total current assets of discontinued operations and assets held for sale
—

 
694

Net property and equipment
—

 
1,927

Intangibles & other assets, net
—

 
66

          Total Assets of discontinued operations and assets held for sale
$
—

 
$
2,687

 
Liabilities of Discontinued Operations
 

 
 

Current liabilities of discontinued operations
 

 
 

Accounts payable
$
—

 
$
1,206

Accrued liabilities
271

 
253

Current portion of advances on contracts in progress
—

 
195

Total current liabilities of discontinued operations
271

 
1,654

   Other long-term liabilities
—

 
215

Total liabilities of discontinued operations
$
271

 
$
1,869


Condensed results of operations relating to the Medical Products Business Unit for the three months ended September 30, 2012, condensed results of operations relating to the Medical Products Business Unit and the Semiconductor Business Unit for the nine months ended September 30, 2012 and condensed results of operations relating to the Semiconductor Business Unit for the three and nine months ended September 30, 2011 are as follows:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(in thousands)
2012
 
2011
 
2012
 
2011
Net sales and revenues
$
—

 
$
763

 
$
425

 
$
2,268

Gross margin
$
—

 
$
(401
)
 
$
(296
)
 
$
(995
)
Loss from discontinued operations before sale of business unit
$
(250
)
 
$
(697
)
 
$
(680
)
 
$
(1,895
)
Gain on sale of business unit, net of transaction expenses
—

 
—

 
5,449

 
—

Income tax provision
—

 
—

 
(2,008
)
 
—

Net income (loss) from discontinued operations, net of tax
$
(250
)
 
$
(697
)
 
$
2,761

 
$
(1,895
)

13.
Subsequent Events

The Company evaluated subsequent events through the date of this filing and had no subsequent events to report.

-16-


Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations

This Management’s Discussion and Analysis of Financial Condition and Results of Operations section and other parts of this Report contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), which statements involve risks and uncertainties. These statements relate to our future plans, objectives, expectations and intentions. These statements may be identified by the use of words such as “may”, “could”, “would”, “should”, “will”, “expects”, “anticipates”, “intends”, “plans”, “believes”, “estimates”, and similar expressions. Our actual results and the timing of certain events may differ significantly from the results and timing described in the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those factors discussed or referred to in the Annual Report on Form 10-K for the year ended December 31, 2011 and in subsequent period reports filed with the Securities and Exchange Commission, including this report. The following discussion and analysis of our financial condition and results of operations should be read in light of those factors and in conjunction with our accompanying Consolidated Financial Statements, including the Notes thereto.

Overview

We develop, manufacture and market highly-engineered products and services in two principal business areas: (i) capital equipment and systems for the photovoltaic solar industry and (ii) biomedical, generally bringing to bear expertise in materials technologies, surface science and thin films across both business areas, discussed below.

In the photovoltaic solar area, we develop, manufacture and market specialized equipment for the production of terrestrial photovoltaic modules from solar cells and provides photovoltaic systems for grid connected applications in the commercial markets.  Our equipment has been installed in approximately 200 factories in 50 countries.  The equipment market is very competitive with major competitors located in Japan and Europe.  Our flagship product is our Sun Simulator which tests module performance.  Our other product offerings include turn-key module lines and to a lesser extent other individual equipment.  To compete we offer other services such as training and assistance with module certification.  We also provide turn-key services to our customers to backward integrate to solar cell manufacturing. At times, we supply materials such as solar cells to certain customers.

In the biomedical area, we provide value-added surface treatments to manufacturers of orthopedic and other medical devices that enhance the durability, antimicrobial characteristics or other material characteristics of their products; and perform sponsored research programs into practical applications of advanced biomedical and biophotonic technologies.

On March 9, 2012, we completed the sale of our semiconductor business unit, which provides semiconductor foundry services, operates a semiconductor foundry and fabrication facility and is engaged in the business of wafer epitaxy, foundry services, and device fabrication for the defense, medical, telecommunications and consumer products markets (the “Semiconductor Business Unit”), to Masimo Corporation ("Masimo"). See Note 12 to the unaudited condensed consolidated financial statements.

On December 14, 2009, we completed the sale of our Medical Products Business Unit, which develops and markets coated and uncoated hemodialysis catheters and related devices for the treatment of chronic kidney disease (the “Medical Products Business Unit”), to Bard Access Systems, Inc. (“Bard”). Accordingly, the results of operations and liabilities of the Medical Products Business Unit are being presented herein as discontinued operations. See Note 12 to the unaudited condensed consolidated financial statements.

Operating results will depend upon revenue growth and product mix, as well as the timing of shipments of higher priced products from our solar equipment line and delivery of solar systems.  Export sales, which amounted to 29% and 57% of net sales and revenues for the three and nine months ended September 30, 2012, respectively, and 70% and 58% of net sales and revenues for the three and nine months ended September 30, 2011, respectively, continue to constitute a significant portion of our net sales and revenues.


-17-


Results of Operations

The following table sets forth certain items as a percentage of net sales and revenues for the periods presented:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2012
 
2011
 
2012
 
2011
Net sales and revenues
100
 %
 
100
 %
 
100
 %
 
100
 %
Cost of sales and revenues
(78
)
 
(70
)
 
(77
)
 
(73
)
Gross margin
22

 
30

 
23

 
27

Selling, general and administrative expenses
(69
)
 
(42
)
 
(51
)
 
(29
)
Internal research and development expenses
(1
)
 
(1
)
 
(1
)
 
(1
)
 Operating loss from continuing operations
(48
)
 
(13
)
 
(29
)
 
(3
)
Other expense, net
(1
)
 
—

 
(1
)
 
—

Loss from continuing operations before income tax benefit
(49
)
 
(13
)
 
(30
)
 
(3
)
Income tax benefit - continuing operations
1

 
—

 
11

 
—

Loss from continuing operations
(48
)
 
(13
)
 
(19
)
 
(3
)
Income (loss) from discontinued operations, net of tax
(6
)
 
(9
)
 
15

 
(5
)
Net Loss
(54
)%
 
(22
)%
 
(4
)%
 
(8
)%

Overall

Our total net sales and revenues for the nine months ended September 30, 2012 were $18.3 million as compared to $39.8 million for the nine months ended September 30, 2011, which represents a decrease of $21.5 million or 54%. The decrease was primarily attributable to a $20.4 million decrease in solar revenue and a decrease of $1.1 million in biomedical revenue.

Solar Business Unit

Sales in our solar business unit decreased 61% during the nine months ended September 30, 2012 to $13.2 million as compared to $33.6 million for the nine months ended September 30, 2011. The decrease in solar business unit revenue is primarily the result of a decrease in solar cell material revenue in 2012 of $7.2 million, due to the completion of definite delivery commitments to a solar cell materials contract in the first quarter of 2011 as well as a decrease in solar module equipment revenue in 2012 of $14.2 million, partially offset by an increase in solar R&D revenue of $1.1 million in 2012.

Biomedical Business Unit

Revenues on our biomedical business unit decreased 17% during the nine months ended September 30, 2012 to $5.1 million as compared to $6.2 million for the nine months ended September 30, 2011.  The decrease was primarily attributable to a decrease in revenue from our orthopedics coating services and, to a lesser extent, a decrease in revenue from our research and development contracts.

Three and Nine Months Ended September 30, 2012 Compared to Three and Nine Months Ended September 30, 2011

Net Sales and Revenues

The following table categorizes our net sales and revenues for the periods presented:
 
Three Months Ended September 30,
 
Increase (Decrease)
(in thousands)
2012
 
2011
 
$
 
%
Sales of goods
$
1,858

 
$
6,164

 
$
(4,306
)
 
(70
)%
Contract research and services revenues
2,370

 
2,016

 
354

 
18
 %
Net sales and revenues
$
4,228

 
$
8,180

 
$
(3,952
)
 
(48
)%


-18-


The 70% decrease in sales of goods for the three months ended September 30, 2012 as compared to the three months ended September 30, 2011 was primarily due to a decrease of $4.3 million in solar module manufacturing equipment revenues. The decrease in solar module equipment sales of 74% in 2012 as compared to 2011 was primarily due to a decrease in individual module equipment units delivered in 2012.

The 18% increase in contract research and services revenues for the three months ended September 30, 2012 as compared to the three months ended September 30, 2011 is primarily attributable to an increase of $345 thousand in solar research and development revenue and an increase of $269 thousand in equipment research and development revenue, partially offset by a decrease of $260 thousand in biomedical revenue.  The increase in revenues from our solar research and development services in 2012 as compared to 2011 was a result of revenue recognized on two government funded solar research projects that started in the fourth quarter of 2011. The increase in revenues from our equipment research and development services in 2012 as compared to 2011 was a result of revenue recognized on an equipment research project that started in the second quarter of 2012. Revenues from our biomedical services decreased 13% in 2012 as compared to 2011 as a result of a decrease in the number and value of biomedical orders in 2012 along with revenue recognized on a large biomedical services customer favorably impacting 2011.

The following table categorizes our net sales and revenues for the periods presented:
 
Nine Months Ended September 30,
 
Decrease
(in thousands)
2012
 
2011
 
$
 
%
Sales of goods
$
11,796

 
$
33,542

 
$
(21,746
)
 
(65
)%
Contract research and services revenues
6,527

 
6,237

 
290

 
5
 %
Net sales and revenues
$
18,323

 
$
39,779

 
$
(21,456
)
 
(54
)%

The 65% decrease in sales of goods for the nine months ended September 30, 2012 as compared to the nine months ended September 30, 2011 was primarily due to a decrease of $14.2 million in solar module manufacturing equipment revenues, a decrease of $7.2 million in solar cell materials revenue, and a decrease of $447 thousand in solar systems revenues. The decrease in solar module equipment sales of 56% in 2012 as compared to 2011 was primarily due to a decrease in individual module equipment units delivered in 2012. The decrease in sales of solar cell materials, all to one customer, of 100% in 2012 as compared to 2011 was due to the completion of definite delivery commitments to a solar cell materials contract in the first quarter of 2011. The decrease in sales of solar systems of 87% in 2012 as compared to 2011 was primarily due to the completion of a photovoltaic system project in 2011.

The 5% increase in contract research and services revenues for the nine months ended September 30, 2012 as compared to the nine months ended September 30, 2011 is primarily attributable to an increase of $1.1 million in solar research and development revenue and an increase of $269 thousand in equipment research and development revenue, partially offset by a decrease of $1.1 million in biomedical revenue. 

The increase in revenues from our solar research and development services in 2012 as compared to 2011 was a result of revenue recognized on two government funded solar research projects that started in the fourth quarter of 2011. The increase in revenues from our equipment research and development services in 2012 as compared to 2011 was a result of revenue recognized on an equipment research project that started in the second quarter of 2012. Revenues from our biomedical services decreased 17% in 2012 as compared to 2011 as a result of a decrease in the number and value of biomedical orders in 2012.

Cost of Sales and Revenues

The following table categorizes our cost of sales and revenues for the periods presented, stated in dollars and as a percentage of related sales and revenues:
 
Three Months Ended September 30,
 
Decrease
(in thousands)
2012
 
%
 
2011
 
%
 
$
 
%
Cost of goods sold
$
2,048

 
110
%
 
$
4,499

 
73
%
 
$
(2,451
)
 
(54
)%
Cost of contract research and services
1,228

 
52
%
 
1,230

 
61
%
 
(2
)
 
—
 %
Net cost of sales and revenues
$
3,276

 
77
%
 
$
5,729

 
70
%
 
$
(2,453
)
 
(43
)%

Cost of goods sold decreased 54% for the three months ended September 30, 2012 as compared to the three months ended September 30, 2011, primarily as a result of decreased costs related to solar module equipment, partially offset by a slight increase in advances technology center costs. The decrease in solar module equipment costs of 59% in 2012 as compared to 2011 was

-19-


primarily due to a decrease in associated revenue. As a percentage of sales, cost of goods sold was 110% of sales of goods in 2012 as compared to 73% of sales of goods in 2011. This increase in the percentage of sales in 2012 is due primarily to a lower utilization of capacity.

Cost of contract research and services increased slightly for the three months ended September 30, 2012 as compared to the three months ended September 30, 2011, primarily as a result of increased costs related to solar and equipment research and development services, partially offset by a slight decrease in costs related to biomedical services. The increase in solar research and development services costs of 122% in 2012 as compared to 2011 was primarily due to an increase in associated revenue from two government funded solar research projects. Cost of contract research and services as a percentage of related revenue decreased to 52% of related revenues in 2012 from 61% in 2011, primarily due to higher margin orders in solar and equipment research and development services.

Cost of sales and revenues also includes approximately $12 thousand and $22 thousand of stock-based compensation for the three months ended September 30, 2012 and 2011, respectively.

The following table categorizes our cost of sales and revenues for the periods presented, stated in dollars and as a percentage of related sales and revenues:
 
Nine Months Ended September 30,
 
Increase (Decrease)
(in thousands)
2012
 
%
 
2011
 
%
 
$
 
%
Cost of goods sold
$
10,470

 
89
%
 
$
25,263

 
75
%
 
$
(14,793
)
 
(59
)%
Cost of contract research and services
3,702

 
57
%
 
3,608

 
58
%
 
94

 
3
 %
Net cost of sales and revenues
$
14,172

 
77
%
 
$
28,871

 
73
%
 
$
(14,699
)
 
(51
)%

Cost of goods sold decreased 59% for the nine months ended September 30, 2012 as compared to the nine months ended September 30, 2011, primarily as a result of decreased costs related to solar module equipment, solar cell materials and solar systems, partially offset by a slight increase in advances technology center costs. The decrease in solar module equipment costs of 44% in 2012 as compared to 2011 was primarily due to a decrease in associated revenue. The decrease in costs of solar cell materials, all to one customer, of 100% in 2012 as compared to 2011 was due to the completion of definite delivery commitments to a solar cell materials contract in the first quarter of 2011. The decrease of solar system costs of 56% in 2012 as compared to 2011 was primarily due to the completion of a photovoltaic system project in 2011 as compared to none in 2012. As a percentage of sales, cost of goods sold was 89% of sales of goods in 2012 as compared to 75% of sales of goods in 2011. This increase in the percentage of sales in 2012 is due primarily to a lower utilization of capacity.

Cost of contract research and services increased 3% for the nine months ended September 30, 2012 as compared to the nine months ended September 30, 2011, primarily as a result of increased costs related to solar and equipment research and development services, partially offset by decreased costs related to biomedical services. The increase in solar research and development services costs of 200% in 2012 as compared to 2011 was primarily due to an increase in associated revenue from two government funded solar research projects. The decrease in biomedical services costs of 8% in 2012 as compared to 2011 was primarily due to a decrease in associated revenue. Cost of contract research and services as a percentage of related revenue decreased slightly to 57% of related revenues in 2012 from 58% in 2011.

Cost of sales and revenues also includes approximately $47 thousand and $75 thousand of stock-based compensation for the nine months ended September 30, 2012 and 2011, respectively.

Operating Expenses

The following table categorizes our operating expenses for the periods presented, stated in dollars and as a percentage of total sales and revenues:
 
Three Months Ended September 30,
 
Decrease
(in thousands)
2012
 
%
 
2011
 
%
 
$
 
%
Selling, general and administrative
$
2,934

 
69
%
 
$
3,446

 
42
%
 
$
(512
)
 
(15
)%
Internal research and development
36

 
1
%
 
50

 
1
%
 
(14
)
 
(28
)%
Operating expenses
$
2,970

 
70
%
 
$
3,496

 
43
%
 
$
(526
)
 
(15
)%

Selling, General and Administrative Expenses


-20-


Selling, general and administrative expense decreased 15% in the three months ended September 30, 2012 as compared to the three months ended September 30, 2011, primarily as a result of a decrease in marketing and employee related expenses and a decrease in agent commissions in the solar business unit. In addition, a benefit was realized related to the change in value of the deferred compensation plan.  Selling, general and administrative expense increased to 69% of sales and revenues in 2012 as compared to 42% in 2011.  The increase was primarily due to the decrease in sales and revenues.

Selling, general and administrative expenses include approximately $36 thousand and $56 thousand of stock-based compensation for the three months ended September 30, 2012 and 2011, respectively.

Internal Research and Development

Internal research and development expense decreased 28% in the three months ended September 30, 2012 as compared to the three months ended September 30, 2011, primarily as a result of lower levels of research and development spent in the solar group.  As a percentage of sales and revenue, internal research and development expenses remained constant in 2012 when compared to 2011.

The following table categorizes our operating expenses for the periods presented, stated in dollars and as a percentage of total sales and revenues:
 
Nine Months Ended September 30,
 
Decrease
(in thousands)
2012
 
%
 
2011
 
%
 
$
 
%
Selling, general and administrative
$
9,338

 
51
%
 
$
11,404

 
29
%
 
$
(2,066
)
 
(18
)%
Internal research and development
227

 
1
%
 
586

 
1
%
 
(359
)
 
(61
)%
Operating expenses
$
9,565

 
52
%
 
$
11,990

 
30
%
 
$
(2,425
)
 
(20
)%

Selling, General and Administrative Expenses

Selling, general and administrative expense decreased 18% in the nine months ended September 30, 2012 as compared to the nine months ended September 30, 2011, primarily as a result of a decrease in marketing, rent and employee related expenses and a decrease in agent commissions in the solar business unit.  In addition, a benefit was realized related to the change in value of the deferred compensation plan. Selling, general and administrative expense increased to 51% of sales and revenues in 2012 as compared to 29% in 2011.  The increase was primarily due to the decrease in sales and revenues.

Selling, general and administrative expenses include approximately $122 thousand and $209 thousand of stock-based compensation for the nine months ended September 30, 2012 and 2011, respectively.

Internal Research and Development

Internal research and development expense decreased 61% in the nine months ended September 30, 2012 as compared to the nine months ended September 30, 2011, primarily as a result of lower levels of research and development spent in the solar group.  As a percentage of sales and revenue, internal research and development expenses remained constant in 2012 when compared to 2011.

Other Expense, Net

We incurred interest expense of $30 thousand and $26 thousand for the three months ended September 30, 2012 and 2011, respectively.  We had currency exchange losses of approximately $9 thousand and currency exchange gains of approximately $1 thousand during the three months ended September 30, 2012 and 2011, respectively.

We incurred interest expense of $97 thousand and $91 thousand for the nine months ended September 30, 2012 and 2011, respectively.  We had currency exchange losses of approximately $6 thousand and $1 thousand during the nine months ended September 30, 2012 and 2011, respectively.

Income Taxes

We recorded an income tax benefit on our loss from continuing operations of $24 thousand and $2.0 million during the three and nine months ended September 30, 2012, respectively, which was offset by a provision on our income from discontinued operations of $2.0 million during the nine months ended September 30, 2012. Gross federal net operating loss carryforwards were

-21-


approximately $14 million as of December 31, 2011 and expire at various times through 2031. We have a full valuation allowance recorded against the net deferred tax assets at September 30, 2012 due to uncertainty regarding realization of these assets in the future.

We recorded a state income tax provision of $3 thousand and $18 thousand for the three and nine months ended September 30, 2011, respectively.

Loss from Discontinued Operations

During the first quarter of 2012, we began pursuing an exclusive sales process of our Semiconductor Business Unit.
On March 9, 2012, we completed the sale of the Semiconductor Business Unit to Masimo. Accordingly, the results of operations and assets and liabilities of the Semiconductor Business Unit are being presented herein as discontinued operations.

During the second quarter of 2009, we began pursuing an exclusive sales process of our Medical Products Business Unit.  On December 14, 2009, we completed the sale of the Medical Products Business Unit to Bard Access Systems, Inc.  Accordingly, the results and liabilities of the Medical Products Business Unit are being presented herein as discontinued operations.

We recorded net loss from discontinued operations of $250 thousand and net income from discontinued operations of $2.8 million for the three and nine months ended September 30, 2012, respectively. Included in discontinued operations for the nine months ended September 30, 2012 is a gain on sale of business unit to Masimo of $5.4 million and an income tax provision of $2.0 million. Included in the gain of $5.4 million is proceeds received from Masimo of $8.0 million, less assets and liabilities assumed by Masimo of $2.1 million and legal and professional fees related to complete the sale of $425 thousand.

We recorded a loss from discontinued operations of $697 thousand and $1.9 million for the three and nine months ended September 30, 2011, respectively. See Note 12 to the unaudited condensed consolidated financial statements.

Net Income (Loss)

We reported net loss of $2.3 million and $1.8 million for the three months ended September 30, 2012 and 2011, respectively.  Net loss increased approximately $513 thousand, primarily due to a $1.5 million decline in gross margin associated with lower revenue, partially offset by a $526 thousand decline in operating expenses and reduced losses of $447 thousand from discontinued operations.

We reported net loss of $740 thousand and $3.1 million for the nine months ended September 30, 2012 and 2011, respectively. Net loss decreased approximately $2.3 million, primarily due to a $6.7 million improvement from discontinued operations before tax and $2.4 million decline in operating expenses, partially offset by $6.8 million decline in gross margin associated with lower revenue.


Liquidity and Capital Resources
 
September 30,
 
December 31,
 
Increase
(in thousands)
2012
 
2011
 
$
 
%
Cash and cash equivalents
$
5,178

 
$
4,758

 
$
420

 
9
%
Working capital
$
7,351

 
$
5,700

 
$
1,651

 
29
%
    
Cash and cash equivalents increased due to cash provided by investing activities, partially offset by cash used in operating and financing activities.  Included in operating and investing activities is one time payments received in the first quarter of 2012 totaling $6.6 million related to the sale of the Semiconductor Business Unit included in discontinued operations. The overall increase in working capital is due to an increase in cash and restricted cash and a decrease in current liabilities, primarily accounts payable, advances on contracts in progress and liabilities of discontinued operations, partially offset by a decline in accounts receivable, inventory, deposits on equipment for inventory and assets of discontinued operations. We have historically funded our operating cash requirements using operating cash flow, proceeds from the sale and licensing of technology and assets and proceeds from the sale of equity securities.

There are no material commitments by us for capital expenditures. At September 30, 2012, our accumulated deficit was approximately $14.8 million, compared to accumulated deficit of approximately $14.1 million as of December 31, 2011.


-22-


During the first quarter of 2012, we began pursuing an exclusive sales process of our Semiconductor Business Unit and on March 9, 2012, we completed the sale of the Semiconductor Business Unit to Masimo Corporation. The asset purchase agreement provided that the aggregate purchase price for the Semiconductor Business Unit was $8.0 million plus the assumption of $500 thousand in liabilities, with the cash portion of the purchase price being reduced by retained cash and liabilities assumed by Masimo in excess of $500 thousand. As a result, in the fist quarter of 2012 we received approximately $7.3 million in cash (less the escrow described below) and Masimo assumed approximately $1.2 million in liabilities. Of the purchase price, approximately $717 thousand was deposited into an indemnity escrow account for fifteen months to partially secure our obligations for any indemnity claims under the asset purchase agreement. In connection with this transaction, the lease for the premises in Hudson, New Hampshire where the Semiconductor Business Unit was located was terminated on March 9, 2012, and we were released from all future obligations under the lease as of such date. See Note 12 to the unaudited condensed consolidated financial statements.

We have various options on how to fund future operational losses or working capital needs, including but not limited to sales of equity, bank debt, the sale or license of assets and technology, or joint ventures involving cash infusions, as we have done in the past; however, there are no assurances that we will be able to sell equity, obtain or access bank debt, sell or license assets or technology or enter into such joint ventures on a timely basis and at appropriate values.  We have developed several plans including cost containment efforts and potential strategic alternatives to offset a decline in business due to global economic conditions.  Accordingly, based on the forecasts and estimates underlying our current operating plan, the financial statements do not include any adjustments that might be necessary if we are unable to continue as a going concern.

Loan Agreements

We have two separate credit facilities with Silicon Valley Bank (the “Bank” or “SVB”): (i) a Second Amended and Restated Loan and Security Agreement (as amended to date, the “Revolving Credit Facility”) and (ii) an Amended and Restated Export-Import Bank Loan and Security Agreement (as amended to date, the “Ex-Im Facility”) pursuant to which outstanding amounts under this facility are guaranteed by the Export-Import Bank of the United States (the “EXIM Bank”). The credit facilities provide an aggregate credit line of $6 million under both facilities, with up to $2 million available under the Revolving Credit Facility and up to $4 million available under the Ex-Im Facility. These credit facilities have a maturity date of December 29, 2012 and we have commenced preliminary discussions with the Bank with respect to the renewal and extension of the Revolving Credit Facility and the Ex-Im Facility. In addition, a guidance line has been established to support letters of credit in an aggregate amount of up to $1.5 million through December 29, 2012. If we achieve certain levels of liquidity, based on cash on hand and availability under the credit facility, we will not be required to cash collateralize letters of credit issued under this guidance line.

Our obligations under these two credit facilities, as well as the guidance line, are secured by substantially all of our assets. Advances under the Revolving Credit Facility are limited to 80% of eligible receivables. Advances under the Ex-Im Facility are limited to (i) 90% of eligible receivables subject to a suitable foreign currency hedge agreement if applicable, plus (ii) 75% of all other eligible receivables billed in foreign currency, plus (iii) 50% of the value of eligible inventory, as defined. Under the Revolving Credit Facility and the Ex-Im Facility, as long as any commitment remains outstanding under the facilities, we must comply with a financial covenant by maintaining a minimum cash balance of $1.0 million. In addition, until all amounts under the credit facilities with the Bank are repaid, covenants under the credit facilities impose restrictions on our ability to, among other things, incur additional indebtedness, create or permit liens on our assets, merge, consolidate or dispose of assets (other than in the ordinary course of business), make dividend and other restricted payments, make certain debt or equity investments, make certain acquisitions, engage in certain transactions with affiliates or change the business conducted by us. Any failure by us to comply with the covenants and obligations under the credit facilities could result in an event of default, in which case the Bank may be entitled to declare all amounts owed to be due and payable immediately.

Under the credit facilities, interest on outstanding borrowings accrues at a rate per annum equal to the greater of (i) the prime rate plus 2.5% or (ii) 7.0%. In addition, if we achieve certain levels of liquidity, based on cash on hand and availability under the credit facility, we will have a 0.5% lower interest rate.

Advances outstanding under the Revolving Credit Facility were $1.0 million and zero at September 30, 2012 and December 31, 2011, respectively. Advances outstanding under the Ex-Im Facility were $145 thousand and $1.2 million at September 30, 2012 and December 31, 2011, respectively. As of September 30, 2012, the interest rate per annum on the Revolving Credit Facility and the Ex-Im Facility was 6.0% and 6.0%, respectively. We have utilized $675 thousand and $1.4 million of the guidance line at September 30, 2012 and December 31, 2011, respectively. Combined availability under the Revolving Credit Facility and the Ex-Im Facility was zero as of September 30, 2012.

Foreign Currency Fluctuation


-23-


We sell almost exclusively in U.S. dollars, generally against an irrevocable confirmed letter of credit through a major United States bank. Accordingly, we are not directly affected by foreign exchange fluctuations on our current sales orders. However, fluctuations in foreign exchange rates do have an effect on our customers' access to U.S. dollars and on the pricing competition on certain pieces of equipment that we sell in selected markets. We bear the risk of any currency fluctuations that may be associated with purchase commitments. We attempt to hedge known transactions when possible to minimize foreign exchange risk. We had no hedging activity during the first nine months of 2012 and 2011. Foreign exchange gain (loss) included in other expense, net, was a loss of approximately $9 thousand and a gain of approximately $1 thousand during the three months ended September 30, 2012 and 2011, respectively, and was a loss of approximately $6 thousand and $1 thousand during the nine months ended September 30, 2012 and 2011, respectively.

Related Party Transactions

On November 30, 2007, we entered into a new Lease Agreement (the “Bedford Lease”) with SPI-Trust, a Trust of which Roger G. Little, Chairman of the Board, Chief Executive Officer and President of the Company, is the sole trustee and principal beneficiary, with respect to 144,230 square feet of space comprising the entire building in which we have occupied space since December 1, 1985. The term of the Bedford Lease commenced on December 1, 2007 and was originally set to expire on November 30, 2012. The annual rental rate for the first year of the Bedford Lease was $12.50 per square foot on a triple net basis, whereby the tenant is responsible for operating expenses, taxes and maintenance of the building. The annual rental rate increased on each anniversary by $0.75 per square foot.

On September 17, 2010, we entered into the First Amendment to Lease Agreement with SPI-Trust to amend the Bedford Lease. The term of the Bedford Lease was extended for an additional five (5) years to expire on November 30, 2017. The annual rental rate for the first year of the extended term (December 1, 2012 through November 30, 2013) is $16.00 per square foot on a triple net basis, whereby the tenant is responsible for operating expenses, taxes and maintenance of the building. After the first year of the extended term of the Bedford Lease, the annual rental rate increases on each anniversary by $0.50 per square foot. We have the right to further extend the term of the Bedford Lease for an additional five (5) year period. If we exercise this right to further extend the term of the Bedford Lease, the annual rental rate for the first year of the further extended term will be the greater of: (a) the rental rate in effect immediately preceding the commencement of the extended term; or (b) the market rate at such time, and on each anniversary of the commencement of the extended term the rental rate will increase by $0.50 per square foot. Additionally, SPITrust agreed to reimburse us up to $50 thousand for all costs incurred by us in connection with any alterations or improvements to the premises or repairs or replacements to the heating and air conditioning systems. We believe that the terms of the Bedford Lease, as amended, are commercially reasonable. Rent expense under the Bedford Lease was $578 thousand for each of the three months ended September 30, 2012 and 2011, respectively, and $1.7 million for each of the nine months ended September 30, 2012 and 2011, respectively.

On August 29, 2008, we entered into a Lease Agreement (the “Hudson Lease”) with SPI-Trust, with respect to 90 thousand square feet of space comprising the entire building in which Spire Semiconductor has occupied space since June 1, 2003. The term of the Hudson Lease commenced on September 1, 2008, and was to continue for seven (7) years until August 31, 2015. The annual rental rate for the first year of the Hudson Lease was $12.50 per square foot on a triple-net basis, whereby the tenant was responsible for operating expenses, taxes and maintenance of the building. The annual rental rate increases on each anniversary by $0.75 per square foot. In addition, we were required to deposit with SPI-Trust $300 thousand as security for performance by our company for its covenants and obligations under the Hudson Lease. SPI-Trust is responsible, at its sole expense, to make certain defined tenant improvements to the building. The Hudson Lease is classified as a related party operating lease. Rent expense under the Hudson Lease was zero and $332 thousand for the three months ended September 30, 2012 and 2011, respectively, and $253 thousand and $996 thousand for the nine months ended September 30, 2012 and 2011, respectively. In connection with sale of the Semiconductor Business Unit, the lease was terminated on March 9, 2012 and we were released from all future obligations under the lease as of that date. The security deposit of $300 thousand was used to off-set rent payments in the first quarter of 2012.

Critical Accounting Policies

The preparation of financial statements in accordance with accounting principles generally accepted in the United States requires us 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 financial statements and the reported amounts of revenues and expenses during the reporting period. Among the significant estimates affecting our consolidated financial statements are those relating to revenue recognition, reserves for doubtful accounts, reserve for excess and obsolete inventory, impairment of long-lived assets, stock-based compensation and warranty reserves. We regularly evaluate our estimates and assumptions based upon historical experience and various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. To the extent actual

-24-


results differ from those estimates, our future results of operations may be affected. We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements. Refer to Note 2 of the notes to consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2011 for a description of our significant accounting policies.

Contractual Obligations, Commercial Commitments and Off-Balance Sheet Arrangements

The following table summarizes our gross contractual obligations at September 30, 2012 and the maturity periods and the effect that such obligations are expected to have on our liquidity and cash flows in future periods:
 
 
Payments Due by Period
Contractual Obligations
 
Total
 
Less than
1 Year
 
2 - 3
Years
 
4 - 5
Years
 
More Than
 5 Years
(in thousands)
 
 
 
 
 
 
 
 
 
 
Revolving Credit Facility (SVB)
 
$
1,012

 
$
1,012

 
 
 
 
 
 
Ex-Im Facility (SVB)
 
$
145

 
$
145

 
 
 
 
 
 
Purchase obligations
 
$
1,087

 
$
1,050

 
$
36

 
$
1

 
 
Unrelated party capital leases
 
$
27

 
$
15

 
$
12

 
 
 
 
Operating leases:
 
 
 
 
 
 
 
 
 
 
Unrelated party operating leases
 
$
225

 
$
153

 
$
72

 
 
 
 
Related party operating leases
 
$
12,632

 
$
2,295

 
$
4,808

 
$
5,096

 
$
433


Purchase obligations include all open purchase orders outstanding regardless of whether they are cancelable or not. Included in purchase obligations are raw material and equipment needed to fulfill customer orders.

The Revolving Credit Facility and Ex-Im Facility does not include an interest component to the contractual obligation.
 
Outstanding letters of credit totaled $675 thousand and $1.4 million at September 30, 2012 and December 31, 2011, respectively. The letters of credit secure performance obligations and purchase commitments, and allow holders to draw funds up to the face amount of the letter of credit if we do not perform as contractually required.  At September 30, 2012, $675 thousand was secured by the Revolving Credit Facility and at December 31, 2011, $21 thousand was secured by restricted cash and $1.4 million was secured by the Revolving Credit Facility.

Item 3.
Quantitative and Qualitative Disclosures about Market Risk

Not required as we are a smaller reporting company.

Item 4.
Controls and Procedures

Evaluation of Disclosure Controls and Procedures

As of the end of the period covered by this report, an evaluation of the effectiveness of the design and operation of the our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) was performed under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of September 30, 2012 to ensure that information required to be disclosed in the reports it files and submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that information required to be disclosed under the Exchange Act is accumulated and communicated to management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting that occurred during the quarter ended September 30, 2012 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.



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PART II. OTHER INFORMATION

Item 1.
Legal Proceedings

There have been no material changes to the legal proceedings disclosure included in Part I, Item 3 (“Legal Proceedings”) of our Annual Report on Form 10-K for the year ended December 31, 2011.

Item 1A.
Risk Factors

There have been no material changes in the Risk Factors described in Part I, Item 1A (“Risk Factors”) of our Annual Report on Form 10-K for the year ended December 31, 2011.

Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3.
Defaults Upon Senior Securities

None.


Item 4.      Mine Safety Disclosures

Not applicable.

Item 5.
Other Information

None.

Item 6.
Exhibits
31.1
Certification of the Chairman of the Board, Chief Executive Officer and President pursuant to §302 of the Sarbanes-Oxley Act of 2002.
31.2
Certificationof the Chief Financial Officer and Treasurer pursuant to §302 of the Sarbanes-Oxley Act of 2002.
32.1
Certification of the Chairman of the Board, Chief Executive Officer and President pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002.
32.2
Certification of the Chief Financial Officer and Treasurer pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002.
101.INS*
XBRL Instance Document
101.SCH*
XBRL Taxonomy Extension Schema Document
101.CAL*
XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF*
XBRL Taxonomy Extension Definition Linkbase Document
101.LAB*
XBRL Taxonomy Extension Lable Linkbase Document
101.PRE*
XBRL Taxonomy Extension Presentation Linkbase Document
*
Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.

 



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SIGNATURES


Pursuant to the requirements 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.
 
 
 
Spire Corporation
 
 
 
 
Dated:
November 9, 2012
By:
/s/ Roger G. Little
 
 
 
Roger G. Little
 
 
 
Chairman of the Board, Chief Executive Officer and President
(Principal Executive Officer)
 
 
 
 
Dated:
November 9, 2012
By:
/s/ Robert S. Lieberman
 
 
 
Robert S. Lieberman
 
 
 
Chief Financial Officer and Treasurer
(Principal Financial Officer and Principal Accounting Officer)


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EXHIBIT INDEX
 
Exhibit 
Description
31.1
Certification of the Chairman of the Board, Chief Executive Officer and President pursuant to §302 of the Sarbanes-Oxley Act of 2002.
 
 
31.2
Certification of the Chief Financial Officer and Treasurer pursuant to §302 of the Sarbanes-Oxley Act of 2002
 
 
32.1
Certification of the Chairman of the Board, Chief Executive Officer and President pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002.
 
 
32.2
Certification of the Chief Financial Officer and Treasurer pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002.
 
 
101.INS*
XBRL Instance Document
101.SCH*
XBRL Taxonomy Extension Schema Document
101.CAL*
XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF*
XBRL Taxonomy Extension Definition Linkbase Document
101.LAB*
XBRL Taxonomy Extension Lable Linkbase Document
101.PRE*
XBRL Taxonomy Extension Presentation Linkbase Document
 
 
*
Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.



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