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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
|X| Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 For the quarterly period ended
March 31, 2006; or
|_| 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
(Name of small business issuer as specified in its charter)
MASSACHUSETTS 04-2457335
------------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
ONE PATRIOTS PARK
BEDFORD, MASSACHUSETTS 01730-2396
---------------------------------
(Address of principal executive offices)
781-275-6000
------------
(Issuer's telephone number)
Securities registered under Section 12(g) of the Act:
COMMON STOCK, $0.01 PAR VALUE; REGISTERED ON THE NASDAQ STOCK MARKET
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(Title of class)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports); and (2) has been subject to such filing requirements for the past 90
days.
Yes |X| No |_|
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes |_| No |X|
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date: There were 8,189,663
outstanding shares of the issuer's only class of common equity, Common Stock,
$0.01 par value, on May 1, 2006.
Transitional Small Business Disclosure Format (check one): Yes |_| No |X|
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TABLE OF CONTENTS
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Unaudited Condensed Consolidated Balance Sheet as of
March 31, 2006 ................................................... 1
Unaudited Condensed Consolidated Statements of Operations
for the Three Months Ended March 31, 2006 and 2005 ............... 2
Unaudited Condensed Consolidated Statements of Cash Flows
for the Three Months Ended March 31, 2006 and 2005 ............... 3
Notes to Unaudited Condensed Consolidated Financial Statements ... 4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations ........................................ 12
Item 3. Controls and Procedures .......................................... 20
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ................................................ 22
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds ...... 22
Item 3. Defaults Upon Senior Securities .................................. 22
Item 4. Submission of Matters to a Vote of Security Holders .............. 22
Item 5. Other Information ................................................ 22
Item 6. Exhibits ......................................................... 22
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SPIRE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED)
MARCH 31, 2006
--------------
ASSETS
Current assets
Cash and cash equivalents $ 2,805,247
Restricted cash 407,520
------------
3,212,767
Accounts receivable - trade, net 3,053,484
Inventories, net 1,856,923
Prepaid expenses and other current assets 518,440
------------
Total current assets 8,641,614
Net property and equipment 4,109,689
Intangible and other assets (less accumulated amortization of $716,198) 725,105
Available-for-sale investments at quoted market value (cost of $1,082,422) 1,163,147
Restricted cash - long-term 121,000
Deposit - related party 191,250
------------
Total assets $ 14,951,805
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Current portion of capital lease obligation $ 341,806
Current portion of capital lease obligation - related party 792,566
Accounts payable 1,163,595
Accrued liabilities 1,668,797
Advances on contracts in progress 1,044,719
------------
Total current liabilities 5,011,483
------------
Long-term portion of capital lease obligation - related party 1,302,618
Deferred compensation 1,163,147
------------
Total long-term liabilities 2,465,765
------------
Total liabilities 7,477,248
------------
Commitments and Contingencies:
Stockholders' equity
Common stock, $0.01 par value; 20,000,000 shares authorized;
7,248,487 shares issued and outstanding 72,485
Additional paid-in capital 10,963,196
Accumulated deficit (3,609,559)
Accumulated other comprehensive income 48,435
------------
Total stockholders' equity 7,474,557
------------
Total liabilities and stockholders' equity $ 14,951,805
============
See accompanying notes to unaudited condensed
consolidated financial statements.
2
SPIRE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED MARCH 31,
----------------------------
2006 2005
----------- -----------
Net sales and revenues
Contract research, service and license revenues $ 2,509,516 $ 2,732,014
Sales of goods 2,863,927 1,447,501
----------- -----------
Total net sales and revenues 5,373,443 4,179,515
----------- -----------
Costs and expenses
Cost of contract research, services and licenses 2,244,797 2,117,805
Cost of goods sold 2,353,698 1,418,760
Selling, general and administrative expenses 2,593,675 1,829,579
Internal research and development expenses 158,050
317,196
----------- -----------
Total costs and expenses 7,350,220 5,683,340
----------- -----------
Loss from operations (1,976,777) (1,503,825)
Other expense, net (27,614) (76,617)
----------- -----------
Loss before income taxes (2,004,391) (1,580,442)
Income tax benefit (expense) -- --
----------- -----------
Net loss $(2,004,391) $(1,580,442)
=========== ===========
Loss per share of common stock - basic and diluted $ (0.28) $ (0.23)
=========== ===========
Weighted average number of common and common equivalent
shares outstanding - basic and diluted 7,236,019 6,854,931
=========== ===========
See accompanying notes to unaudited condensed
consolidated financial statements.
3
SPIRE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED MARCH 31,
----------------------------
2006 2005
----------- -----------
Cash flows from operating activities:
Net loss $(2,004,391) $(1,580,442)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 527,347 623,100
Deferred compensation 23,949 (17,112)
Unearned purchase discount -- (38,203)
Stock-based compensation 59,435 --
Changes in assets and liabilities:
Restricted cash 397,025 (945,465)
Accounts receivable, net 642,927 302,455
Inventories 803,566 (1,222,351)
Prepaid expenses and other current assets 88,413 78,732
Accounts payable, accrued liabilities and other liabilities (356,736) 447,522
Advances on contracts in progress (713,760) 436,097
----------- -----------
Net cash used in operating activities (532,225) (1,915,667)
----------- -----------
Cash flows from investing activities:
Additions to property and equipment (99,793) (36,825)
Increase in intangible and other assets (75,952) (37,679)
----------- -----------
Net cash used in investing activities (175,745) (74,504)
----------- -----------
Cash flows from financing activities:
Principal payment on capital lease obligations (104,878) (97,807)
Principal payment on capital lease obligations - related parties (152,798) (39,940)
Proceeds from exercise of stock options 140,730 20,701
----------- -----------
Net cash used in financing activities (116,946) (117,046)
----------- -----------
Net decrease in cash and cash equivalents (824,916) (2,107,217)
Cash and cash equivalents, beginning of period 3,630,163 3,336,867
----------- -----------
Cash and cash equivalents, end of period $ 2,805,247 $ 1,229,650
=========== ===========
Supplemental disclosures of cash flow information: Cash paid (received) during
the period for:
Interest $ (8,863) $ 28,380
=========== ===========
Interest - related party $ 38,452 $ 16,310
=========== ===========
Income taxes $ -- $ --
=========== ===========
See accompanying notes to unaudited condensed
consolidated financial statements.
4
SPIRE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
MARCH 31, 2006
1. DESCRIPTION OF THE BUSINESS
Spire Corporation (the "Company") develops, manufactures and markets
highly-engineered products and services in four principal business areas: solar
equipment, solar systems, biomedical and optoelectronics bringing to bear
expertise in materials technologies across all four business areas.
In the solar equipment area, the Company develops, manufactures and markets
specialized equipment for the production of terrestrial photovoltaic modules
from solar cells. The Company's equipment has been installed in approximately
170 factories in 43 countries.
In the solar systems area, the Company provides custom and building
integrated photovoltaic modules, stand-alone emergency power backup and electric
power grid-connected distributed power generation systems employing photovoltaic
technology developed by the Company.
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; develops and markets hemodialysis catheters and related devices
for the treatment of chronic kidney disease; and performs sponsored research
programs into practical applications of advanced biomedical and biophotonic
technologies.
In the optoelectronics area, the Company provides compound semiconductor
foundry services on a merchant basis to customers involved in
biomedical/biophotonic instruments, telecommunications and defense applications.
Services include compound semiconductor wafer growth, other thin film processes
and related device processing and fabrication services. The Company also
provides materials testing services and performs services in support of
sponsored research into practical applications of optoelectronic technologies.
2. INTERIM FINANCIAL STATEMENTS
In the opinion of management, the accompanying unaudited condensed
consolidated financial statements contain all adjustments necessary to fairly
present the Company's financial position as of March 31, 2006 and the results of
its operations and cash flows for the three months ended March 31, 2006 and
2005. The results of operations for the three months ended March 31, 2006 are
not necessarily indicative of the results to be expected for the fiscal year
ending December 31, 2006.
The accounting policies followed by the Company are set forth in Footnote 2
to the Company's consolidated financial statements in its annual report on Form
10-KSB for the year ended December 31, 2005. As described in Footnote 10, the
Company adopted Financial Accounting Standards Board Statement No. 123(R),
Share-Based Payment, on January 1, 2006.
3. ACCOUNTS RECEIVABLE/ADVANCES ON CONTRACTS IN PROGRESS
Net accounts receivable, trade consists of the following:
March 31,
2006
----------
Amounts billed $3,001,065
Retainage 31,876
Accrued revenue 219,832
----------
3,252,773
Less: Allowance for sales returns and doubtful accounts (199,289)
----------
Net accounts receivable $3,053,484
==========
Advances on contracts in progress $1,044,719
==========
5
SPIRE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
MARCH 31, 2006
Accrued revenue represents revenue 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.
Retainage represents revenues on certain United States government sponsored
research and development contracts. These amounts, which usually represent 15%
of the Company's research fee on each applicable contract, are not collectible
until a final cost review has been performed by government auditors. Included in
retainage are amounts expected to be collected after one year, which totaled
approximately $32,000 at March 31, 2006. All other accounts receivable are
expected to be collected within one year.
All contracts with United States government agencies have been audited by
the government through December 2003. The Company has not incurred significant
losses or adjustments as a result of government audits.
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 over 60
days and over a specified amount, 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 realizeability 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 and only
in consultation with the appropriate business line manager.
In addition, the Company maintains an allowance for potential future
product returns and rebates related to current period revenues. The Company
analyzes the rate of historical returns when evaluating the adequacy of the
allowance for sales returns and allowances. Returns and rebates are charged
against the allowance when incurred.
Advances on contracts in progress represent contracts for which billings
have been presented to the customer but revenue has not been recognized.
4. INVENTORIES
Inventories consist of the following:
March 31,
2006
----------
Raw materials $1,289,209
Work in process 317,418
Finished goods 250,296
----------
$1,856,923
==========
5. LOSS PER SHARE
The following table provides a reconciliation of the denominators of the
Company's reported basic and diluted loss per share computations for the periods
ended:
Three Months
Ended March 31,
-----------------------
2006 2005
--------- ---------
Weighted average number of common and common
equivalent shares outstanding - basic 7,236,019 6,854,931
Add: Net additional common shares upon assumed
exercise of common stock options -- --
--------- ---------
Adjusted weighted average number of common and
common equivalents shares outstanding - diluted 7,236,019 6,854,931
========= =========
6
SPIRE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
MARCH 31, 2006
For the three months ended March 31, 2006 and 2005, 6,250 and 78,250
shares, respectively, of common stock issuable relative to stock options had
exercise prices per share that exceeded the average market price of the
Company's common stock and were excluded from the calculation of diluted shares
since the inclusion of such shares would be anti-dilutive.
In addition, for the three months ended March 31, 2006 and 2005, 201,254
and 193,267 shares, respectively, of common stock related to stock options were
excluded from the calculation of dilutive shares since the inclusion of such
shares would be anti-dilutive due to the Company's net loss position.
6. OPERATING SEGMENTS AND RELATED INFORMATION
The following table presents certain operating division information in
accordance with the provisions of SFAS No. 131, "Disclosure about Segments of an
Enterprise and Related Information."
Solar Solar Total
Equipment Systems Biomedical Optoelectronics Company
---------- --------- ---------- --------------- ----------
For the three months ended March 31, 2006
-----------------------------------------
Net sales and revenues $2,315,234 $ 222,873 $2,327,956 $507,380 $5,373,443
Loss from operations (82,621) (347,480) (651,491) (895,185) (1,976,777)
For the three months ended March 31, 2005
-----------------------------------------
Net sales and revenues $ 941,993 $ 53,450 $2,493,096 $690,976 $4,179,515
Loss from operations (390,106) (395,931) (137,410) (580,378) (1,503,825)
The following table shows net sales and revenues by geographic area (based
on customer location):
Three Months Ended March 31,
--------------------------------------
2006 % 2005 %
--------- ---- ---------- ----
Foreign 2,492,000 46% $ 627,000 15%
United States 2,881,000 54% 3,553,000 85%
--------- ---- ---------- ----
5,373,000 100% $4,180,000 100%
========= ==== ========== ====
Revenues from contracts with United States government agencies for the
three months ended March 31, 2006 and 2005 were approximately $620,000 and
$878,000, or 12% and 21% of consolidated net sales and revenues, respectively.
Two customers accounted for approximately 32% and one customer accounted
for approximately 12% of the Company's gross sales during the three months ended
March 31, 2006 and 2005, respectively. One customer represented 27% of trade
account receivables at March 31, 2006.
7
SPIRE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
MARCH 31, 2006
7. INTANGIBLE AND OTHER ASSETS
Patents amounted to $66,921, net of accumulated amortization of $608,735,
at March 31, 2006. Licenses amounted to $167,537, net of accumulated
amortization of $107,463 at March 31, 2006. 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 or licenses. For disclosure purposes, the table below includes future
amortization expense for licenses and patents owned by the Company as well as
$486,692 of estimated amortization expense on a five-year straight-line basis
related to patents that remain pending as of the balance sheet date. Estimated
amortization expense for the periods ending December 31, is as follows:
Amortization
Year Expense
--------------- ------------
2006 $ 143,321
2007 184,124
2008 157,077
2009 114,650
2010 and beyond 121,978
----------
$ 721,150
==========
Also included in other assets are $3,955 of refundable deposits made by the
Company.
8. AVAILABLE-FOR-SALE INVESTMENTS
Available-for-sale securities consist of the following assets held as part
of the Spire Corporation Non-Qualified Deferred Compensation Plan:
March 31, 2006
--------------
Equity investments $ 921,606
Government bonds 165,625
Cash and money market funds 75,916
----------
$1,163,147
==========
These investments have been classified as long-term available-for-sale
investments and are reported at fair value, with unrealized gains and losses
included in accumulated other comprehensive loss, net of related tax effect. As
of March 31, 2006, the net unrealized gain on these marketable securities was
approximately $48,000.
9. NOTES PAYABLE AND CREDIT ARRANGEMENTS
The Company has a $2,000,000 Loan Agreement (the "Agreement") with Citizens
Bank of Massachusetts (the "Bank"), which expires on June 27, 2006. The
Agreement provides Standby Letter of Credit Guarantees for foreign and domestic
customers, which are 100% secured with cash. At March 31, 2006, the Company had
approximately $529,000 of restricted cash associated with outstanding Letters of
Credit. Standby Letters of Credit under this Agreement bear interest at 1%. The
Agreement also provides the Company with the ability to convert to a $2,000,000
revolving line of credit, based upon eligible accounts receivable and certain
conversion covenants. Loans under this revolving line of credit bear interest at
the Bank's prime rate, as determined, plus 1/2% (8.25% at March 31, 2006.) At
March 31, 2006, the Company had not exercised its conversion option and no
amounts were outstanding under the revolving line of credit. A commitment fee of
..25% is charged on the unused portion of the borrowing base. The Agreement
contains covenants including certain financial reporting requirements. At March
31, 2006, the Company was in compliance with its financial reporting
requirements and cash balance covenants.
8
SPIRE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
MARCH 31, 2006
10. STOCK-BASED COMPENSATION
On January 1, 2006, the Company adopted the fair value recognition
provisions of Financial Accounting Standards Board ("FASB") Statement No.
123(R), Share-Based Payment ("Statement 123(R)") using the modified prospective
method. In accordance with the modified prospective method, the Company has not
restated its consolidated financial statements for prior periods. Under this
transition method, stock-based compensation expense for the first quarter of
2006 includes stock-based compensation expense for all of the Company's
stock-based compensation awards granted prior to, but not yet vested as of,
January 1, 2006, based on the grant-date fair value estimated in accordance with
the provisions of FASB Statement No. 123, Accounting for Stock-Based
Compensation ("Statement 123"). Stock-based compensation expense for all
stock-based compensation awards granted on or after January 1, 2006 will be
based on the grant-date fair value estimated in accordance with the provisions
of Statement 123(R). The impact of Statement 123(R) on the Company's results of
operations resulted in recognition of stock option expense of approximately
$60,000.
Prior to January 1, 2006, the Company accounted for share-based payments
under the recognition and measurement provisions for APB Opinion No. 25,
Accounting for Stock Issued to Employees ("APB 25"), and related
Interpretations, as permitted by Statement 123. In accordance with APB 25 no
compensation cost was required to be recognized for options granted to employees
that had an exercise price equal to the market value of the underlying common
stock on the date of grant.
The Company uses the Black-Scholes option pricing model as its method for
determining fair value of stock option grants, which was also used by the
Company for its pro forma information disclosures of stock-based compensation
expense prior to the adoption of Statement 123(R). The Company uses the
straight-line method of attributing the value of stock-based compensation
expense for all stock option grants. Stock compensation expense for all
stock-based grants and awards is recognized over the service or vesting period
of each grant or award.
Statement 123(R) requires forfeitures to be estimated at the time of grant
and revised, if necessary, in subsequent periods if actual forfeitures differ
from those estimates in order to derive the Company's best estimate of awards
ultimately expected to vest. Forfeitures represent only the unvested portion of
a surrendered option and are typically estimated based on historical experience.
Based on an analysis of the Company's historical data, the Company applied a 14%
forfeiture rate to stock options outstanding in determining its Statement 123(R)
stock compensation expense for the quarter ended March 31, 2006, which it
believes is a reasonable forfeiture estimate for the period. In the Company's
pro forma information required under Statement No. 123 for the periods prior to
2006, the Company accounted for forfeitures as they occurred.
The Company has one employee stock option plan: the 1996 Equity Incentive
Plan. This plan was approved by stockholders and provides 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.
A summary of award activity under this plan as of March 31, 2006 and
changes during the three month period is as follows:
Number of Weighted-Average
Shares Exercise Price
------- --------------
Options Outstanding at December 31, 2005 406,314 $4.38
Granted 16,250 $8.66
Exercised (25,500) $5.52
Cancelled/expired (1,500) $5.70
------- -----
Options Outstanding at March 31, 2006 395,564 $4.48
======= =====
Options Exercisable at March 31, 2006 157,645 $3.75
======= =====
9
SPIRE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
MARCH 31, 2006
The options outstanding and exercisable at March 31, 2006 were in the
following exercise price ranges:
Options Outstanding Options Exercisable
----------------------------------------------- ---------------------------------
Weighted
-Average Weighted- Weighted-
Number Remaining Average Aggregate Number Average Aggregate
Range of of Shares Contractual Exercise Intrinsic of Shares Exercise Intrinsic
Exercise Price Outstanding Life Price Value Exercisable Price Value
--------------- ----------- ----------- --------- ---------- ----------- --------- ---------
$1.78 to $ 3.11 44,374 3.98 years $2.32 $269,854 40,874 $2.29 $249,904
$3.12 to $ 3.90 127,058 5.65 years $3.89 572,734 73,379 $3.89 331,178
$3.91 to $ 4.90 153,195 8.33 years $4.33 623,095 27,140 $4.18 114,617
$4.91 to $ 6.36 42,187 8.19 years $6.09 97,542 16,252 $6.07 37,830
$6.37 to $10.74 28,750 7.70 years $8.85 5,937 -- $ -- --
------- ---------- ------- --------
395,564 7.08 years $4.48 $1,569,162 157,645 $3.75 $733,529
======= ========== ======= ========
The aggregate intrinsic value in the table above represents the total
intrinsic value, based on the Company's closing stock price of $8.40 as of March
31, 2006, which would have been received by the option holders had all option
holders exercised their options as of that date. The total intrinsic value of
options exercised during the quarter ended March 31, 2006 was $123,786.
The following table illustrates the pro forma effect on net loss and net
loss per share if the Company had applied the fair value recognition provisions
of Statement No. 123 to stock-based employee compensation, for the three month
period ended March 31, 2005. Since stock-based compensation expense for the
three months ended March 31, 2006, was calculated and recorded under the
provisions of Statement 123(R), no pro forma disclosure for that period is
presented.
Three Months Ended
March 31, 2005
--------------
Net loss, as reported $(1,580,442)
Less: Total stock-based employee compensation expense
determined under fair value based method for all awards,
net of related tax effects (81,776)
-----------
Pro forma net loss $(1,662,218)
-----------
Loss per share:
Basic - as reported $ (0.23)
-----------
Basic - pro forma $ (0.24)
-----------
Diluted - as reported $ (0.23)
-----------
Diluted - pro forma $ (0.24)
-----------
The per-share weighted-average fair value of stock options granted during
the quarters ended March 31, 2006 and 2005 was $4.34 and $3.17, respectively, on
the date of grant using the Black-Scholes option-pricing model with the
following weighted-average assumptions:
Expected Risk-Free Expected Expected
Year Dividend Yield Interest Rate Option Life Volatility Factor
---- -------------- ------------- ----------- -----------------
2006 -- 4.69% 7.5 years 48.8%
2005 -- 4.50% 5 years 77.3%
For the quarter ended March 31, 2006, 16,250 stock options were granted.
10
SPIRE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
MARCH 31, 2006
11. COMPREHENSIVE LOSS
Comprehensive loss includes certain changes in equity that are excluded
from net loss and consists of the following:
For the Three Months Ended
March 31,
--------------------------
2006 2005
----------- -----------
Net loss $(2,004,391) $(1,580,442)
Other comprehensive income (loss):
Unrealized gain (loss) on available for
sale marketable securities, net of tax 23,949 (17,112)
----------- -----------
Total comprehensive loss $(1,980,442) $(1,597,554)
=========== ===========
12. SUBSEQUENT EVENT
Private Placement of Equity
---------------------------
On April 26, 2006, the Company entered into Stock Purchase Agreements with
two accredited institutional investors in connection with the private placement
of 941,176 shares of the Company's common stock at a purchase price of $8.50 per
share. On April 28, 2006, the Company completed the private placement. The net
proceeds of the sale were approximately $7.7 million after deducting placement
fees and other closing costs.
11
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. THE COMPANY'S 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 THIS REPORT AND IN THE ANNUAL REPORT ON FORM 10-KSB FOR THE YEAR ENDED
DECEMBER 31, 2005. THE FOLLOWING DISCUSSION AND ANALYSIS OF THE COMPANY'S
FINANCIAL CONDITION AND RESULTS OF OPERATIONS SHOULD BE READ IN LIGHT OF THOSE
FACTORS AND IN CONJUNCTION WITH, THE COMPANY'S ACCOMPANYING CONSOLIDATED
FINANCIAL STATEMENTS, INCLUDING THE NOTES THERETO.
OVERVIEW
Spire Corporation (the "Company") develops, manufactures and markets
highly-engineered products and services in four principal business areas: solar
equipment, solar systems, biomedical and optoelectronics bringing to bear
expertise in materials technologies across all four business areas, discussed
below.
In the solar equipment area, the Company develops, manufactures and markets
specialized equipment for the production of terrestrial photovoltaic modules
from solar cells. The Company's equipment has been installed in approximately
170 factories in 43 countries.
In the solar systems area, the Company provides custom and building
integrated photovoltaic modules, stand-alone emergency power backup and electric
power grid-connected distributed power generation systems employing photovoltaic
technology developed by the Company.
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; develops and markets hemodialysis catheters and related devices
for the treatment of chronic kidney disease; and performs sponsored research
programs into practical applications of advanced biomedical and biophotonic
technologies.
In the optoelectronics area, the Company provides compound semiconductor
foundry services on a merchant basis to customers involved in
biomedical/biophotonic instruments, telecommunications and defense applications.
Services include compound semiconductor wafer growth, other thin film processes
and related device processing and fabrication services. The Company also
provides materials testing services and performs services in support of
sponsored research into practical applications of optoelectronic technologies.
Operating results will depend upon product mix, as well as the timing of
shipments of higher priced products from the Company's solar equipment line and
delivery of solar systems. Export sales, which amounted to 46% of net sales and
revenues for the three months ended March 31, 2006, continue to constitute a
significant portion of the Company's net sales and revenues.
12
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
March 31,
----------------
2006 2005
------ ------
Net sales and revenues 100% 100%
Cost of sales and revenues 86 85
------ ------
Gross profit 14 15
Selling, general and administrative expenses 48 44
Internal research and development expenses 3 7
------ ------
Loss from operations (37) (36)
Other expense, net -- 2
------ ------
Loss before income taxes (37) (38)
Income tax benefit (expense) -- --
------ ------
Net loss (37%) (38%)
====== ======
OVERALL
The Company's total net sales and revenues for the three months ended March
31, 2006 ("2006") increased 29% compared to the three months ended March 31,
2005 ("2005"). The increase was primarily attributable to a $1.3 million
increase in solar equipment sales.
SOLAR BUSINESS UNIT
Sales in the Company's solar business unit increased 155% during 2006 as
compared to 2005 primarily due to the 175% increase in solar equipment sales
resulting from the volume and timing of the delivery of equipment.
BIOMEDICAL BUSINESS UNIT
Revenues of the Company's biomedical business unit decreased 7% during 2006
as compared to 2005 as a result of a 32% decrease in revenue from Spire's
government funded research and development activities. This decrease was
partially offset by an 18% increase in biomedical processing services revenue.
OPTOELECTRONICS BUSINESS UNIT
Sales in the Company's optoelectronics business unit decreased 27% during
2006 primarily due to the timing of contract completion and a decrease in the
size and dollar value of customers orders.
Three Months Ended March 31, 2006 Compared to Three Months Ended March 31, 2005
-------------------------------------------------------------------------------
NET SALES AND REVENUES
The following table categorizes the Company's net sales and revenues for
the periods presented:
Three Months
Ended March 31, Increase/(Decrease)
---------------------- -------------------
2006 2005 $ %
---------- ---------- ---------- -----
Contract research, services
and license revenues $2,509,000 $2,732,000 $ (223,000) (8%)
Sales of goods 2,864,000 1,448,000 1,416,000 98%
---------- ---------- ----------
Net sales and revenues $5,373,000 $4,180,000 $1,193,000 29%
========== ========== ==========
The 8% decrease in contract research, services and license revenues for the
three months ended March 31, 2006 as compared to the three months ended March
31, 2005 is primarily attributable to a decrease in research and development
13
activities and, to a lesser extent, Bandwidth foundry services. These decreases
were partially offset by an increase in biomedical processing services. Revenues
from Spire's research and development activities decreased 32% in 2006 as
compared to 2005 primarily due to a decrease in the number and value of
contracts associated with funded research and development. In addition,
Bandwidth foundry service revenue decreased 27% primarily due to the timing of
contract completion and a decrease in the size and dollar value of customer
orders. Revenue from Spire's biomedical processing services increased 18% in
2006 compared to 2005 as a result of increased demand for Spire's IonGuard(R)
implant services among its existing customer base.
The 98% increase in sales of goods for the three months ended March 31,
2006 as compared to the three months ended March 31, 2005 was primarily due to
an increase in solar equipment revenues and, to a lesser extent, an increase in
solar systems revenues. Solar equipment sales increased 175% in 2006 as compared
to 2005 primarily due to the timing and delivery of customer orders. Solar
systems sales increased 317% due to number and volume of customer orders.
COST OF SALES AND REVENUES
The following table categorizes the Company's cost of sales and revenues
for the periods presented, stated in dollars and as a percentage of related
sales and revenues:
Three Months Ended March 31, Increase/(Decrease)
------------------------------ -------------------
2006 % 2005 % $ %
---------- --- ---------- --- ---------- ---
Cost of contract research,
services and licenses $2,245,000 90% $2,118,000 78% $ 127,000 6%
Cost of goods sold 2,354,000 82% 1,419,000 98% 935,000 66%
---------- ---------- ----------
Net cost of sales and
revenues $4,599,000 86% $3,537,000 85% $1,062,000 30%
========== ========== ==========
The $127,000 (6%) increase in cost of contract research and service
revenues in 2006 is primarily due to increased costs within the Company's
biomedical processing services and Bandwidth units. Bandwidth's costs increased
8% despite a 27% decrease in revenues primarily due to the contract mix.
Biomedical processing services' costs increased 23% resulting from its 18%
increase in revenues. Partially offsetting these increases was a 23% decrease in
costs associated with funded research and development activities resulting from
its 32% decrease in revenues. Cost of contract research, services and licenses
as a percentage of revenue increased 12% primarily due to the increased costs at
Bandwidth.
The $935,000 (66%) increase in cost of goods sold is primarily due to
increased costs within Spire's solar equipment and systems product lines. Solar
equipment costs increased 86% as a result of its 175% increase in revenues.
Solar systems costs increased 137% as a result of its 317% increase in revenues.
The decrease in cost of goods sold as a percentage of revenue is the result of
improved contribution margins in solar equipment and solar systems product
lines.
OPERATING EXPENSES
The following table categorizes the Company's operating expenses for the
periods presented, stated in dollars and as a percentage of total sales and
revenues:
Three Months Ended March 31, Increase/(Decrease)
-------------------------------- -------------------
2006 % 2005 % $ %
---------- --- ---------- --- --------- ----
Selling, general and administrative $2,594,000 48% $1,830,000 44% $ 764,000 42%
Internal research and development 158,000 3% 317,000 8% (159,000) (50%)
---------- ---------- ---------
Operating expenses $2,752,000 51% $2,147,000 51% $ 605,000 28%
========== ========== =========
INTERNAL RESEARCH AND DEVELOPMENT
The decrease in research and development costs was primarily a result of a
reduction in research and development activities at Bandwidth and, to a lesser
extent, reductions in research and development efforts within our biomedical
processing services unit and reduced efforts in the "next generation" solar
energy module manufacturing equipment. The
14
decrease in research and development expenses as a percentage of sales and
revenues was primarily due to the increase in sales and revenues and, to a
lesser extent, the decreased costs described above.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
The increase was due primarily to costs associated with sales and marketing
efforts throughout all of our product lines, ongoing litigation matters, and
increased facility related costs. The increase in selling, general and
administrative expenses as a percentage of sales and revenues was primarily due
to the 42% increase in selling, general and administration costs discussed above
offset by the 29% increase in sales and revenues.
OTHER EXPENSE, NET
The Company earned approximately $19,000 and $9,000 of interest income for
the quarters ended March 31, 2006 and 2005, respectively. The Company incurred
interest expense of approximately $48,000 and $86,000 for the quarters ended
March 31, 2006 and 2005, respectively. The interest expense is primarily
associated with interest incurred on capital leases associated with the
semiconductor foundry. In addition, the Company recognized approximately $1,000
of currency transaction income related to the conversion of a Japanese Yen
account into U.S. dollars at March 31, 2006.
INCOME TAXES
The Company did not record an income tax benefit for the three months ended
March 31, 2006. A valuation allowance has been provided against the current
period tax benefit due to uncertainty regarding the realization of the net
operating loss in the future.
NET LOSS
The Company reported a net loss for the three months ended March 31, 2006
of approximately $2,004,000, compared to a net loss of $1,580,000 in 2005. The
net loss increased approximately $424,000 primarily due to the increase in
selling, general and administrative costs outlined above partially offset by the
increase in revenues discussed above.
Liquidity and Capital Resources
-------------------------------
March 31, December 31, Increase/(Decrease)
-------------------
2006 2005 $ %
---------- ----------- -----------
Cash and cash equivalents $2,805,000 $3,630,000 $ (825,000) (23%)
Working capital 3,630,000 5,270,000 $(1,640,000) (31%)
Cash and cash equivalents decreased primarily due to cash used in operating
activities and, to a lesser extent, investments in property and equipment and
payments on capital leases. These decreases were partially offset by the
proceeds from the exercise of stock options.
The Company has historically funded its operating cash requirements using
operating cash flow and proceeds from the sale and licensing of technology. The
Company's liquidity position benefitted as a result of cash receipts of
$3,000,000 in both 2005 and 2004, arising from the sale of a hemodialysis patent
license to Bard Access Systems. The Company received its final $3,000,000
payment under this arrangement in June 2005. In addition, the Company received
JPY 400,000,000 (approximately $3.7 million) in June 2005 from the sale of a
license to the Company's solar technology.
The Company has a $2,000,000 Loan Agreement (the "Agreement") with Citizens
Bank of Massachusetts (the "Bank"), which expires on June 27, 2006. The
Agreement provides Standby Letter of Credit guarantees for certain foreign and
domestic customers, which are 100% secured with cash. At March 31, 2006, the
Company had approximately $529,000 of restricted cash associated with
outstanding Letters of Credit. Standby Letters of Credit under this Agreement
bear interest at 1%. The Agreement also provides the Company with the ability to
convert to a $2,000,000 revolving line of credit, based upon eligible accounts
receivable and certain conversion covenants. Loans under this revolving line of
credit bear interest at the Bank's prime rate as determined plus 1/2% (8.25% at
March 31, 2006.) At March 31, 2006, the Company had not exercised its conversion
option and no amounts were outstanding under the revolving line of credit. A
commitment fee of .25% is charged on the unused portion of the borrowing base.
The Agreement contains covenants including certain
15
financial reporting requirements. At March 31, 2006, the Company was in
compliance with its financial reporting requirements and cash balance covenants.
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 over 60
days and over a specified amount, 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 realizeability 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 and only
in consultation with the appropriate business line manager.
To date, there are no material commitments by the Company for capital
expenditures. At March 31, 2006, the Company's accumulated deficit was
approximately $3,610,000, compared to accumulated deficit of approximately
$1,605,000 as of December 31, 2005.
On April 26, 2006, the Company entered into Stock Purchase Agreements with
two accredited institutional investors in connection with the private placement
of 941,176 shares of the Company's common stock at a purchase price of $8.50 per
share. On April 28, 2006, the Company completed the private placement. The net
proceeds of the sale were approximately $7.7 million after deducting placement
fees and other closing costs.
The Company believes it has sufficient resources to finance its current
operations for the foreseeable future from operating cash flow and working
capital.
Impact of Inflation and Changing Prices
---------------------------------------
Historically, the Company's business has not been materially impacted by
inflation. Manufacturing equipment and solar systems are generally quoted,
manufactured and shipped within a cycle of approximately nine months, allowing
for orderly pricing adjustments to the cost of labor and purchased parts. The
Company has not experienced any negative effects from the impact of inflation on
long-term contracts. The Company's service business is not expected to be
seriously affected by inflation because its procurement-production cycle
typically ranges from two weeks to several months, and prices generally are not
fixed for more than one year. Research and development contracts usually include
cost escalation provisions.
Foreign Currency Fluctuation
----------------------------
The Company sells only in U.S. dollars, generally against an irrevocable
confirmed letter of credit through a major United States bank. Therefore the
Company is not directly affected by foreign exchange fluctuations on its current
orders. However, fluctuations in foreign exchange rates do have an effect on the
Company's customers' access to U.S. dollars and on the pricing competition on
certain pieces of equipment that the Company sells in selected markets. The
Company received Japanese yen in exchange for the sale of a license to its solar
technology. In addition, purchases made and royalties received under the
Company's Consortium Agreement with its Japanese partner will be in Japanese
yen. The Company does not believe that foreign exchange fluctuations will
materially affect its operations.
Related Party Transactions
--------------------------
The Company subleased 77,000 square-feet in a building leased by Mykrolis
Corporation, who in turn leased the building from SPI-Trust, a Trust of which
Roger Little, Chairman of the Board, Chief Executive Officer and President of
the Company, is the sole trustee and principal beneficiary. The 1985 sublease
originally was for a period of ten years, was extended for a five-year period
expiring on November 30, 2000 and was further extended for a five-year period
expiring on November 30, 2005. The sublease agreement provided for minimum
rental payments plus annual increases linked to the consumer price index.
Effective December 1, 2005, the Company entered into a two-year Extension of
Lease Agreement (the "Lease Extension") directly with SPI-Trust. The Company
assumed certain responsibilities of Mykrolis, the tenant under the former lease,
as a result of the Lease Extension including payment of all building and real
estate related expenses associated with the ongoing operations of the property.
The Company will allocate a portion of these expenses to SPI-Trust based on
pre-established formulas utilizing square footage and actual usage where
applicable. These allocated expenses will be invoiced monthly and be paid
utilizing a SPI-Trust escrow account of which the Company has sole withdrawal
authority.
16
SPI-Trust is required to maintain three (3) months of its anticipated operating
costs within this escrow account. The Company believes that the terms of the
Lease Extension are commercially reasonable. Rent expense under the Lease
Extension for the quarter ended March 31, 2006 was approximately $310,000. No
amounts were due from SPI-Trust as of March 31, 2006 for building related costs.
In conjunction with the acquisition of Bandwidth by the Company, SPI-Trust,
a Trust of which Roger G. Little, Chairman of the Board, Chief Executive Officer
and President of the Company, is sole trustee and principal beneficiary,
purchased from Stratos Lightwave, Inc. (Bandwidth's former owner) the building
that Bandwidth occupies in Hudson, New Hampshire for $3.7 million. Subsequently,
the Company entered into a lease for the building (90,000 square feet) with
SPI-Trust whereby the Company will pay $4.1 million to SPI-Trust over an initial
five-year term expiring in 2008 with a Company option to extend for five years.
In addition to the rent payments, the lease obligates the Company to keep on
deposit with SPI-Trust the equivalent of three months rent ($191,250 as of March
31, 2006.) The lease agreement does not provide for a transfer of ownership at
any point. Interest costs were assumed at 7%. For the quarter ended March 31,
2006, interest expense was approximately $38,000. This lease has been classified
as a related party capital lease and a summary of payments (including interest)
is as follows:
Rate Per Security
Year Square Foot Annual Rent Monthly Rent Deposit
--------------------------- ----------- ----------- ----------- --------
June 1, 2003 - May 31, 2004 $6.00 $ 540,000 $45,000 $135,000
June 1, 2004 - May 31, 2005 7.50 675,000 56,250 168,750
June 1, 2005 - May 31, 2006 8.50 765,000 63,750 191,250
June 1, 2006 - May 31, 2007 10.50 945,000 78,750 236,250
June 1, 2007 - May 31, 2008 13.50 1,215,000 101,250 303,750
----------
$4,140,000
==========
At March 31, 2006, approximately $793,000 and $1,303,000 are reflected as
the current and long-term portions of capital lease obligation - related party,
respectively, in the consolidated balance sheet.
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 and sales returns and allowances, reserve for excess and
obsolete inventory, impairment of long-lived assets, income taxes, 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 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 Footnote 2 of our notes to consolidated financial statements in our
Annual Report on Form 10-KSB for the year ended December 31, 2005 for a
description of our accounting policies.
17
REVENUE RECOGNITION
The Company derives its revenues from three primary sources: (1) commercial
products including, but not limited to, solar energy manufacturing equipment,
solar energy systems and hemodialysis catheters; (2) biomedical and
semiconductor processing services; and (3) United States government funded
research and development contracts.
We generally recognize product revenue upon shipment of products provided
there are no uncertainties regarding customer acceptance, persuasive evidence of
an arrangement exists, the sales price is fixed or determinable, and
collectibility is reasonably assured. These criteria are generally met at the
time of shipment when the risk of loss and title passes to the customer or
distributor, unless a consignment arrangement exists. Revenue from consignment
arrangements is recognized based on product usage indicating sales are complete.
The Company utilizes a distributor network to market and sell its
hemodialysis catheters domestically. The Company generally recognizes revenue
when the catheters are shipped to its distributors. Gross sales reflect
reductions attributable to customer returns and various customer incentive
programs including pricing discounts and rebates. Product returns are permitted
in certain sales contracts and an allowance is recorded for returns based on the
Company's history of actual returns. Certain customer incentive programs require
management to estimate the cost of those programs. The allowance for these
programs is determined through an analysis of programs offered, historical
trends, expectations regarding customer and consumer participation, sales and
payment trends, and experience with payment patterns associated with similar
programs that had been previously offered. An analysis of the sales return and
rebate activity for the three months ended March 31, 2006, is as follows:
Rebates Returns Total
------- -------- --------
Balance - December 31, 2005 $91,600 $ 19,100 $110,700
Provision 101,512 31,032 132,544
Utilization (96,955) (35,736) (132,691)
------- -------- --------
Balance - March 31, 2006 $96,157 $ 14,396 $110,553
------- -------- --------
o Credits for rebates are recorded in the month of the actual sale.
o Credits for returns are processed when the actual merchandise is
received by the Company.
o Substantially all rebates and returns are processed no later than
three months after original shipment by the Company.
The reserve percentage has been approximately 13% to 15% of inventory held
by distributors over the last two years. The Company performs various
sensitivity analyses to determine the appropriate reserve percentage to use. To
date, actual quarterly reserve utilization has approximated the amount provided.
The total inventory held by distributors covered by sales incentive programs was
approximately $720,000 at March 31, 2006.
If sufficient history to make reasonable and reliable estimates of returns
or rebates does not exist, revenue associated with such practices is deferred
until the return period lapses or a reasonable estimate can be made. This
deferred revenue will be recognized as revenue when the distributor reports to
us that it has either shipped or disposed of the units (indicating that the
possibility of return is remote).
The Company's OEM capital equipment solar energy business builds complex
customized machines to order for specific customers. Substantially all of these
orders are sold on a FOB Bedford, Massachusetts (or EX-Works Factory) basis. It
is the Company's policy to recognize revenues for this equipment as the product
is shipped to the customer, as customer acceptance is obtained prior to shipment
and the equipment is expected to operate the same in the customer's environment
as it does in the Company's environment. When an arrangement with the customer
includes future obligations or customer acceptance, revenue is recognized when
those obligations are met or customer acceptance has been achieved. The
Company's solar energy systems business installs solar energy systems on
customer-owned properties on a contractual basis. Generally, revenue is
recognized once the systems have been installed and the title is passed to the
customer. For arrangements with multiple elements, the Company allocates fair
value to each element in the contract and revenue is recognized upon delivery of
each element. If the Company is not able to establish fair value of undelivered
elements, all revenue is deferred.
The Company recognizes revenues and estimated profits on long-term
government contracts on the accrual basis where the circumstances are such that
total profit can be estimated with reasonable accuracy and ultimate realization
is reasonably assured. The Company accrues revenue and profit utilizing the
percentage of completion method using a
18
cost-to-cost methodology. A percentage of the contract revenues and estimated
profits is determined utilizing the ratio of costs incurred to date to total
estimated cost to complete on a contract by contract basis. Profit estimates are
revised periodically based upon changes and facts, and any losses on contracts
are recognized immediately. Some of the contracts include provisions to withhold
a portion of the contract value as retainage until such time as the United
States government performs an audit of the cost incurred under the contract. The
Company's policy is to take into revenue the full value of the contract,
including any retainage, as it performs against the contract since the Company
has not experienced any substantial losses as a result of audits performed by
the United States government.
IMPAIRMENT OF LONG-LIVED ASSETS
Long-lived assets, including fixed assets and intangible assets, are
continually monitored and are evaluated at least annually for impairment. The
determination of recoverability is based on an estimate of undiscounted cash
flows expected to result from the use of an asset and its eventual disposition.
The estimate of cash flows is based upon, among other things, certain
assumptions about expected future operating performance. Our estimates of
undiscounted cash flows may differ from actual cash flows due to, among other
things, technological changes, economic conditions, changes to our business
model or changes in our operating performance. If the sum of the undiscounted
cash flows (excluding interest) is less than the carrying value, we recognize an
impairment loss, measured as the amount by which the carrying value exceeds the
fair value of the asset.
STOCK-BASED COMPENSATION
On January 1, 2006, the Company adopted the fair value recognition
provisions of Financial Accounting Standards Board ("FASB") Statement No.
123(R), Share-Based Payment ("Statement 123(R)") using the modified prospective
method. In accordance with the modified prospective method, the Company has not
restated its consolidated financial statements for prior periods. Under this
transition method, stock-based compensation expense for the first quarter of
2006 includes stock-based compensation expense for all of the Company's
stock-based compensation awards granted prior to, but not yet vested as of,
January 1, 2006, based on the grant-date fair value estimated in accordance with
the provisions of FASB Statement No. 123, Accounting for Stock-Based
Compensation ("Statement 123"). Stock-based compensation expense for all
stock-based compensation awards granted on or after January 1, 2006 will be
based on the grant-date fair value estimated in accordance with the provisions
of Statement 123(R). The impact of Statement 123(R) on the Company's results of
operations resulted in recognition of stock option expense of approximately
$60,000.
Contractual Obligations, Commercial Commitments and Off-Balance Sheet
---------------------------------------------------------------------
Arrangements
------------
The following table summarizes the Company's gross contractual obligations
at March 31, 2006 and the maturity periods and the effect that such obligations
are expected to have on its liquidity and cash flows in future periods:
Payments Due by Period
-----------------------------------------------------
Less than 2-3 4-5 More Than
Contractual Obligations Total 1 Year Years Years 5 Years
---------------------------------- --------- --------- --------- ------- ---------
PURCHASE OBLIGATIONS $ 261,000 $ 261,000 $ -- $ -- $ --
CAPITAL LEASES:
Unrelated party capital lease $ 386,000 $ 386,000 $ -- $ -- $ --
Related party capital lease 2,277,000 915,000 1,362,000 -- --
OPERATING LEASES:
Unrelated party operating leases $ 271,000 $ 124,000 $ 131,000 $16,000 $ --
Related party operating lease 2,070,000 1,242,000 828,000 -- --
Purchase obligations include all open purchase orders outstanding
regardless of whether they are cancelable or not.
Capital lease obligations outlined above include both the principal and
interest components of these contractual obligations.
19
At March 31, 2006, the Company maintained a Japanese yen account that held
approximately JPY 31,607,000 (approximately $269,000). Total currency
translation income for the quarter ended March 31, 2006 of approximately $1,000
is reflected in other expense, net in the accompanying unaudited condensed
consolidated statement of operations.
Outstanding letters of credit totaled approximately $529,000 at March 31,
2006. The letters of credit principally secure performance obligations, and
allow holders to draw funds up to the face amount of the letter of credit if the
Company does not perform as contractually required. These letters of credit
expire through 2007 and are 100% secured by cash.
ITEM 3. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
------------------------------------------------
As required by Rule 13a-15 under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), the Company carried out an evaluation under the
supervision and with the participation of the Company's management, including
the Chief Executive Officer and President and the Chief Financial Officer, of
the effectiveness of the Company's disclosure controls and procedures as of
March 31, 2006. In designing and evaluating the Company's disclosure controls
and procedures, the Company and its management recognize that there are inherent
limitations to the effectiveness of any system of disclosure controls and
procedures, including the possibility of human error and the circumvention or
overriding of the controls and procedures. Accordingly, even effective
disclosure controls and procedures can only provide reasonable assurance of
achieving their desired control objectives. Additionally, in evaluating and
implementing possible controls and procedures, the Company's management was
required to apply its reasonable judgment. Furthermore, management considered
certain matters deemed by the Company's independent auditors to constitute a
material weakness in the Company's internal control over financial reporting
described below. Based upon the required evaluation, the Chief Executive Officer
and President and the Chief Financial Officer concluded that as of March 31,
2006, due to the material weakness in internal control over financial reporting
described below, the Company's disclosure controls and procedures were not
effective to ensure that information required to be disclosed by the Company in
the reports it files or submits under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the Securities and
Exchange Commission's rules and forms.
On March 21, 2006, the Company's independent auditor, Vitale, Caturano &
Company, Ltd. ("VCC") issued a letter advising management and the Audit
Committee, that, in connection with its audit of the Company's consolidated
financial statements for the year ended December 31, 2005, it noted certain
matters involving internal control and its operation that it considered to be a
material weakness under standards of the Public Company Accounting Oversight
Board. VCC noted that, since its March 2005 letter, in which VCC noted material
weaknesses in the Company's internal controls in connection with its audit of
the Company's 2004 financial statements, the Company has made significant
strides over the past year to improve its internal control structure. These
include:
o An improved reconciliation process;
o A disciplined and timely monthly close process; and
o Detailed reviews of monthly close packages by the appropriate levels
of management.
However, VCC also noted that improvements still need to be made in the
reconciliation and documentation and information flow processes. In particular,
the Company lost several key individuals who were integral to the accounting
department in general and the closing process specifically. While the finance
group was able to close the books and analyze the accounts on a timely basis,
the staff was resource constrained and the established controls, policies and
procedures could not be fully implemented during the year end close. The Company
supplemented the staff with outside assistance and the Chief Financial Officer
assumed responsibility of the reconciliations of certain accounts and various
review roles. However, VCC noted that the finance department will not be
alleviated and control structure improved until such time as the full finance
team is assembled.
In addition, VCC noted that the Company does not have sufficient internal
knowledge and expertise of its enterprise reporting system, Solomon, including
technical knowledge. The Company utilizes external consultants to help them
develop reports and troubleshoot the system; however without a fully dedicated
resource, the risk of errors being generated in or by the system is significant.
VCC noted that the Company should develop a comprehensive training program
associated with the system so that employees are aware of the system and all of
its capabilities in order to obtain the efficiencies the system
20
can provide. The full utilization and knowledge of the ERP system is critical to
the Company's internal control over financial reporting. The Company should
focus on developing the in-house knowledge of the ERP system, either through
trainings or recruiting of an experienced information technology professional
with the requisite knowledge.
The Company concurs with VCC's findings noted above and is continuing to
make changes in its internal controls and procedures. Unfortunately, the Company
was operating without a Controller, Assistant Controller and Senior Cost
Accountant during the latter half of 2005. These positions are critical to the
oversight and review of the finance group's output. As VCC noted, the Company
supplemented those functions through the use of outside consultants and through
the Chief Financial Officer assuming certain preparation and review roles.
Unfortunately, this weakens the internal control structure as the review process
is compressed and streamlined. The Company has hired a Senior Cost Accountant
and expects to have its Assistant Controller position filled during the second
quarter of 2006. The Company has had difficulty recruiting a full time
Controller and will continue to search for a replacement. The Company has made
significant strides in its monthly closing processes and expects that its
internal controls will improve once a full finance staff is in place.
Changes in Internal Control Over Financial Reporting
----------------------------------------------------
There was no change in the Company's internal control over financial
reporting that occurred during the first fiscal quarter of 2006 that has
materially affected, or is reasonably likely to materially affect, the Company's
internal control over financial reporting.
21
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
On May 10, 2006, James F. Parslow notified the Company that he would be
resigning as Chief Financial Officer and Treasurer of the Company, effective May
19, 2006, to pursue an opportunity with another company. The Company has begun
considering possible successors for these positions. Until a successor is
appointed, the Company's existing management team will handle these
responsibilities.
ITEM 6. EXHIBITS
10(q) Turn-Key Project Agreement, dated March 16, 2006. *
10(r) Wafer Supply Agreement, dated March 16, 2006. *
31.1 Certification of the Chairman of the Board, Chief Executive Officer
and President pursuant to ss.302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of the Chief Financial Officer and Treasurer pursuant
to ss.302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of the Chairman of the Board, Chief Executive Officer
and President pursuant to 18 U.S.C. ss.1350, as adopted pursuant to
ss.906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification of the Chief Financial Officer and Treasurer pursuant
to 18 U.S.C. ss.1350, as adopted pursuant to ss.906 of the
Sarbanes-Oxley Act of 2002.
* Portions of this Exhibit have been omitted pursuant to a request for
confidential treatment.
22
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: May 15, 2006 By: /s/ Roger G. Little
-----------------------------
Roger G. Little
Chairman of the Board, Chief
Executive Officer and President
Dated: May 15, 2006 By: /s/ James F. Parslow
-----------------------------
James F. Parslow
Chief Financial Officer and Treasurer
23
EXHIBIT INDEX
Exhibit Description
------- -----------
10(q) Turn-Key Project Agreement, dated March 16, 2006. *
10(r) Wafer Supply Agreement, dated March 16, 2006. *
31.1 Certification of the Chairman of the Board, Chief Executive Officer
and President pursuant to ss.302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of the Chief Financial Officer and Treasurer pursuant to
ss.302 of the Sarbanes-Oxley Act of 2002
32.1 Certification of the Chairman of the Board, Chief Executive Officer
and President pursuant to 18 U.S.C. ss.1350, as adopted pursuant to
ss.906 of the Sarbanes-Oxley Act of 2002
32.2 Certification of the Chief Financial Officer and Treasurer pursuant to
18 U.S.C. ss.1350, as adopted pursuant to ss.906 of the Sarbanes-Oxley
Act of 2002
* Portions of this Exhibit have been omitted pursuant to a request for
confidential treatment.