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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
(AMENDMENT NO. 1)
|X| Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the quarterly period ended March 31, 2008; 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
-----------------
(Exact name of registrant as specified in its charter)
MASSACHUSETTS 04-2457335
------------- ----------
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
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 "X" 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 |X| No |_|
Indicate by check mark whether the registrant is a large accelerated filer,
an accelerated filer, a non-accelerated filer or a smaller reporting company.
See definition of "large accelerated filer," "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer |_| Accelerated filer |_|
Non-accelerated filer (Do not check if a smaller reporting company) |_|
Smaller reporting company |X|
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes |_| No |X|
The number of shares of the registrant's common stock outstanding as of May
2, 2008 was 8,330,688.
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TABLE OF CONTENTS
Page
----
Explanatory Note ......................................................................................... 1
PART I. FINANCIAL INFORMATION
Item 1. Unaudited Condensed Consolidated Financial Statements:
Unaudited Condensed Consolidated Balance Sheets as of March 31, 2008 (as restated)
and December 31, 2007 (as restated) ......................................................... 3
Unaudited Condensed Consolidated Statements of Operations
for the Three Months Ended March 31, 2008 (as restated) and 2007 ............................ 4
Unaudited Condensed Consolidated Statements of Cash Flows
for the Three Months Ended March 31, 2008 (as restated) and 2007 ............................ 5
Notes to Unaudited Condensed Consolidated Financial Statements (as restated) ................ 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ....... 18
Item 3. Quantitative and Qualitative Disclosures About Market Risk .................................. 27
Item 4T. Controls and Procedures ..................................................................... 27
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ........................................................................... 29
Item 1A. Risk Factors ................................................................................ 29
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds ................................. 29
Item 3. Defaults Upon Senior Securities ............................................................. 29
Item 4. Submission of Matters to a Vote of Security Holders ......................................... 29
Item 5. Other Information ........................................................................... 29
Item 6. Exhibits .................................................................................... 29
Signatures .................................................................................. 31
EXPLANATORY NOTE
In November 2008, our management notified the Audit Committee of the Board
of Directors over a concern relating to the timing of revenue recognition with
respect to a single contract with one customer that we recognized in prior
periods. Management determined that this customer was provided a concession,
which was previously undisclosed and undocumented, with respect to upgrade
rights to a specific tool sold in conjunction with a module line delivered to
this customer. As the upgrade was not available for sale at the time when
certain elements of the contract were recognized, management determined that
revenue for the entire contract should have been deferred until the upgrade was
provided to the customer. Management informed both the Audit Committee and our
independent registered public accounting firm when the concession was
discovered. Management in concert with the Audit Committee initiated an internal
review of other solar equipment contracts to determine if other concessions or
side arrangements were timely conveyed, such that revenue was appropriately
recognized. The review revealed that, except for the one contract in question,
all customer concessions and modifications were conveyed on a timely basis and
revenue was appropriately recorded in all other cases during the period under
review.
On November 18, 2008, as a result of these investigations, the Audit
Committee concluded, in consultation with and upon the recommendation of
management, that the previously issued financial statements for the fourth
quarter and fiscal 2007 included in our Annual Report on Form 10-K for the
fiscal year ended December 31, 2007 and the previously issued financial
statements included in our Quarterly Reports on Form 10-Q for the fiscal
quarters ended March 31, 2008 (the "Original Report") and June 30, 2008 and the
related earnings releases and similar communications relating to all such fiscal
periods, should no longer be relied upon. Specifically, adjustments needed to be
made in the fourth quarter of 2007 and the first quarter of 2008.
In this Quarterly Report on Form 10-Q/A (the "Amended Report") we are
restating our condensed consolidated balance sheet as of December 31, 2007 and
March 31, 2008 and our condensed consolidated statements of operations, cash
flows and related disclosures for the three-month period ended March 31, 2008
included in the Original Report to correct this error. We are also restating the
consolidated financial statements for fiscal 2007 and condensed consolidated
financial statements for second quarter of 2008 to correct this error. We
anticipate filing on the same date as this Amended Report, an Annual Report on
Form 10-K/A for fiscal 2007 and a Quarterly Report on Form 10-Q/A for the second
quarter of 2008. We also anticipate filing our Quarterly Report on Form 10-Q for
the three and nine months ended September 30, 2008, which will also include the
effects of the restatements. We do not anticipate filing amended periodic
reports for any periods prior to the fourth quarter of 2007. For a detailed
discussion of the effect of the restatements, see Part I, Item 1, Note 2,
"Restatement of Previously Issued Financial Statements" to the unaudited
condensed consolidated financial statements.
We have identified and reported "material weaknesses" to the Audit
Committee of our Board of Directors and Vitale, Caturano & Company, Ltd., our
independent registered public accounting firm. Please see "Item 4T. Controls and
Procedures" in Part I for a description of these matters, and of the measures
that we have implemented to date, as well as additional steps we plan to take to
strengthen our controls.
We are recording adjustments affecting our previously-reported financial
statements for the fourth quarter of 2007 and for the first quarter of 2008, the
cumulative effects of which are summarized in the table below.
CUMULATIVE EFFECT OF ADJUSTMENTS ON ACCUMULATED DEFICIT
The following table presents the cumulative effect of adjustments resulting
from the reviews described above for the periods shown.
Year Ended Quarter Ended
December 31, 2007 March 31, 2008
----------------- --------------
As Restated (1)
-------------------------------
Net loss as originally reported $(1,686,000) $ (508,000)
Adjustments related to:
Revenue recognition (1,355,000) (380,000)
Cost of goods sold 1,108,000 365,000
----------- -----------
Net adjustments (247,000) (15,000)
----------- -----------
Net loss as restated $(1,933,000) $ (523,000)
=========== ===========
Cumulative effect to accumulated deficit $ 247,000 $ 262,000
=========== ===========
(1) See Note 2, to the Unaudited Condensed Consolidated Financial Statements
included in Part I, Item 1
1
For the reasons discussed above, we are filing this Amended Report in order
to amend Part I, Item 1 "Unaudited Condensed Consolidated Financial Statements,"
Part I, Item 2 "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and Part I, Item 4T "Controls and Procedures" of the
Original Report to the extent necessary to reflect the adjustments discussed
above and to reflect the results of our evaluations of disclosure controls and
procedures and internal control over financial reporting, taking into
consideration these restatements. The remaining Items of our Original Report are
not amended hereby and are repeated herein only for the reader's convenience.
In order to preserve the nature and character of the disclosures set forth
in the Original Report, except as expressly noted above, this report speaks as
of the date of the filing of the Original Report, May 14, 2008, and we have not
updated the disclosures in this report to speak as of a later date. All
information contained in this Amended Report is subject to updating and
supplementing as provided in our reports filed with the SEC subsequent to the
date of the Original Report.
2
PART I
FINANCIAL INFORMATION
ITEM 1. UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SPIRE CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
MARCH 31, DECEMBER 31,
2008 2007
------------ ------------
AS RESTATED (1)
------------------------------
ASSETS
Current assets
Cash and cash equivalents $ 2,196,000 $ 2,372,000
Restricted cash - current portion 380,000 391,000
------------ ------------
2,576,000 2,763,000
Accounts receivable - trade, net 8,738,000 11,865,000
Inventories, net 14,400,000 11,570,000
Deferred cost of goods sold 8,264,000 8,044,000
Deposits on equipment for inventory 2,003,000 2,475,000
Prepaid expenses and other current assets 631,000 542,000
------------ ------------
Total current assets 36,612,000 37,259,000
Property and equipment, net 6,277,000 6,209,000
Intangible and other assets, net 866,000 851,000
Available-for-sale investments, at quoted market value
(cost of $1,693,000 and $1,696,000 at 3/31/08 and
12/31/07, respectively) 1,693,000 1,800,000
Equity investment in joint venture 2,134,000 2,264,000
Deposit - related party 304,000 304,000
------------ ------------
Total other assets 4,997,000 5,219,000
------------ ------------
Total assets $ 47,886,000 $ 48,687,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Current portion of capital lease obligation - related party $ 190,000 $ 486,000
Current portion of equipment line of credit 1,167,000 1,167,000
Accounts payable 3,923,000 2,909,000
Accrued liabilities 6,339,000 6,057,000
Current portion of advances on contracts in progress 23,200,000 24,053,000
------------ ------------
Total current liabilities 34,819,000 34,672,000
Long-term portion of equipment line of credit 1,458,000 1,750,000
Long-term portion of advances on contracts in progress 1,765,000 1,950,000
Deferred compensation 1,693,000 1,800,000
Other long-term liabilities 72,000 60,000
------------ ------------
Total long-term liabilities 4,988,000 5,560,000
------------ ------------
Total liabilities 39,807,000 40,232,000
------------ ------------
Stockholders' equity
Common stock, $0.01 par value; 20,000,000 shares
authorized; 8,328,688 and 8,321,188 shares issued
and outstanding at March 31, 2008 and December 31,
2007, respectively 83,000 83,000
Additional paid-in capital 20,208,000 19,999,000
Accumulated deficit (12,212,000) (11,689,000)
Accumulated other comprehensive income, net -- 62,000
------------ ------------
Total stockholders' equity 8,079,000 8,455,000
------------ ------------
Total liabilities and stockholders' equity $ 47,886,000 $ 48,687,000
============ ============
See accompanying notes to unaudited condensed consolidated financial statements.
(1) See Note 2.
3
SPIRE CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31,
------------------------------
2008
AS RESTATED(1) 2007
------------- ------------
Net sales and revenues
Sales of goods $ 10,995,000 $ 4,339,000
Contract research, service and license revenues 3,543,000 2,658,000
------------ ------------
Total net sales and revenues 14,538,000 6,997,000
Costs of sales and revenues
Cost of goods sold 8,494,000 3,526,000
Cost of contract research, services and licenses 2,374,000 2,173,000
------------ ------------
Total cost of sales and revenues 10,868,000 5,699,000
------------ ------------
Gross Margin 3,670,000 1,298,000
Operating expenses
Selling, general and administrative expenses 3,778,000 3,008,000
Internal research and development expenses 111,000 45,000
------------ ------------
Total operating expenses 3,889,000 3,053,000
------------ ------------
Loss from operations (219,000) (1,755,000)
Interest income (expense), net (60,000) 18,000
Loss on equity investment in joint venture (130,000) --
Foreign exchange loss (114,000) (9,000)
------------ ------------
Total other income (expense), net (304,000) 9,000
============ ============
Net loss $ (523,000) $ (1,746,000)
============ ============
Loss per share - basic and diluted $ (0.06) $ (0.21)
============ ============
Weighted average number of common and common equivalent
shares outstanding - basic and diluted 8,322,919 8,246,691
============ ============
See accompanying notes to unaudited condensed consolidated financial statements.
(1) See Note 2.
4
SPIRE CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31,
------------------------------
2008
AS RESTATED(1) 2007
------------- ------------
Cash flows from operating activities:
-------------------------------------
Net loss $ (523,000) $ (1,746,000)
Adjustments to reconcile net loss to net cash provided
by (used in) operating activities:
Depreciation and amortization 454,000 455,000
Loss on impairment of capital equipment -- 78,000
Loss on equity investment in joint venture 130,000 --
Deferred compensation (62,000) (1,000)
Stock-based compensation 196,000 71,000
Decrease in accounts receivable reserves (21,000) (36,000)
Decrease in inventory reserves (41,000) (157,000)
Changes in assets and liabilities:
Restricted cash 11,000 (1,000)
Accounts receivable 3,148,000 987,000
Inventories (2,789,000) (3,161,000)
Deferred cost of goods sold (220,000) --
Deposits, prepaid expenses and other current assets 383,000 1,249,000
Accounts payable, accrued liabilities and other
liabilities 1,308,000 (1,275,000)
Advances on contracts in progress (1,038,000) 1,012,000
------------ ------------
Net cash provided by (used in) operating activities 936,000 (2,525,000)
------------ ------------
Cash flows from investing activities:
Proceeds from maturity of short-term investments -- 5,000,000
Purchase of property and equipment (493,000) (279,000)
Increase in intangible and other assets (44,000) (28,000)
------------ ------------
Net cash provided by (used in) investing activities (537,000) 4,693,000
------------ ------------
Cash flows from financing activities:
Principal payments on capital lease obligations -
related parties (296,000) (210,000)
Principal payments on equipment line of credit, net (292,000) --
Proceeds from exercise of stock options 13,000 104,000
------------ ------------
Net cash used in financing activities (575,000) (106,000)
------------ ------------
Net increase (decrease) in cash and cash equivalents (176,000) 2,062,000
Cash and cash equivalents, beginning of period 2,372,000 1,536,000
------------ ------------
Cash and cash equivalents, end of period $ 2,196,000 $ 3,598,000
============ ============
Supplemental disclosures of cash flow information:
Interest received $ 9,000 $ 44,000
============ ============
Interest paid $ 62,000 $ 1,000
============ ============
Interest paid - related party $ 7,000 $ 25,000
============ ============
See accompanying notes to unaudited condensed consolidated financial statements.
(1) See Note 2.
5
SPIRE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2008 AND 2007
1. DESCRIPTION OF THE BUSINESS
Spire Corporation ("Spire" or the "Company") is a Massachusetts corporation
incorporated in 1969. The Company's principal offices are located at One
Patriots Park, Bedford, Massachusetts, and its phone number is (781) 275-6000.
The Company's SEC filings are available through its website, www.spirecorp.com.
The Company's common stock trades on the Nasdaq Global Market under the symbol
"SPIR".
The Company principally develops, manufactures and markets customized
turnkey solutions for the solar industry, including manufacturing equipment and
full turnkey lines for cell and module production and testing. The Company also
offers through its subsidiary Spire Semiconductor concentrator cell and
light-emitting diode ("LED") fabrication services and through its joint venture,
Gloria Spire Solar, photovoltaic ("PV") system integration services. The Company
also operates a line of business associated with advanced biomedical
applications. The foundation for the Company's business is its industry-leading
expertise in materials technologies and surface treatments; this proprietary
knowledge enables the Company to further develop its offerings in solar
equipment, optoelectronics and biomedical products and services.
In the PV solar 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
190 factories in 50 countries.
In addition to the Company's cell and module manufacturing solutions, it
has a device fabrication facility where it produces, under contract with its
customers, gallium arsenide (GaAs) concentrator cells. Under the name Spire
Semiconductor, this division produces GaAs concentrator cells, high performance
LEDs, and other custom semiconductor foundry services for the Company's
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; develops and markets coated and uncoated 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 July 2007, the Company entered into a joint venture with Gloria Solar
Co., Ltd., a leading cell and module manufacturer in Taiwan, which designs,
sells and manages installations of photovoltaic systems. The Company's 45%
ownership stake in the joint venture, Gloria Spire Solar, LLC, was obtained
through the contribution of its building integrated photovoltaic business to
Gloria Solar. This transaction has allowed the Company to focus more of its
attention on its core solar business, while continuing to expand the Spire brand
name in the marketplace.
The Company has been in the solar business for over 30 years and has been
active in research and development in the space, with over $100 million of
research and development conducted which has led to over 60 patents granted to
date, as well as cell and module production, having been a pioneer in the early
development of solar technology. This expertise has provided the platform and
expertise for the Company's manufacturing equipment.
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. Export sales, which amounted to 62% of net sales and revenues
for the quarter ending March 31, 2008, continue to constitute a significant
portion of the Company's net sales and revenues.
The Company has incurred significant operating losses in 2008, 2007 and
2006. Loss from operations, before gain on sales of trademarks, were $6.7
million and $8.3 million in 2007 and 2006, respectively. Loss from operations
for the quarter ended March 31, 2008 was $219,000. These losses from operations
have resulted in cash losses (loss from operations excluding gain on sales of
trademark plus or minus non-cash adjustments) of approximately $6.1 million and
$5.4 million in 2007 and 2006, respectively. The Company has funded these cash
losses from cash receipts of $4.0 million from the sale of a solar PV module
line along with the transfer of technology and rights to mark the modules with
the Company's trademark in 2007 and $7.7 million from the sale of equity in
2006. For the quarter ended March 31, 2008, the cash gain (loss from operations
plus or minus non-cash adjustments) was $437,000. As of March 31, 2008, the
Company had unrestricted cash and cash equivalents of $2.2 million compared to
unrestricted cash and cash equivalents of $2.4 million as of December 31, 2007.
While the Company believes it has inherent assets and technology that it could
sell or
6
license in the near term, there is no guarantee that the Company would be able
to sell or license those assets on a timely basis and at appropriate values that
would allow the Company to continue to fund its operating losses. The Company
has developed several plans to mitigate cash losses primarily from increased
revenues and, if required, potential cost reduction efforts and outside
financing. As a result, the Company believes it has sufficient resources to
continue as a going concern through at least March 31, 2009.
2. RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS
BACKGROUND OF THE RESTATEMENT OF CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AND
REMEDIAL MEASURES. REVIEW OF ACCOUNTING FOR PHOTOVOLTAIC MODULE EQUIPMENT
TRANSACTIONS
In November 2008, management, in concert with the Audit Committee,
commenced a review of the revenue recognized during the fourth quarter of 2007
and the first quarter of 2008 with respect to a single contract due to the
existence of a previously undisclosed and undocumented side agreement. The
Company also conducted an internal review of other solar equipment contracts to
determine if other concessions or side agreements were granted and not timely
conveyed such that revenue could be appropriately recognized.
The Company conducted a review of the solar equipment contracting process
and order management activity, including a review of contract modifications. The
results of this review revealed that during the fulfillment of several customer
orders, concessions and contract modifications were made in the ordinary course
of business to reflect changing facts and circumstances but that these changes
were appropriately communicated and recorded. It was determined that the
identified contract was the only instance where revenue recognition requirements
were not met at the time revenue was initially recognized. As a result, the
Company has recorded adjustments to both the fourth quarter of 2007 and the
first quarter of 2008, by reversing the revenue recognized and associated costs
of goods sold previously recorded in those periods. The revenue associated with
this contract will be deferred until the remaining undelivered element is
supplied to the customer. These adjustments are summarized below, and generally
have the effect of deferring revenue and related cost of goods sold, previously
recognized until later periods.
CUMULATIVE EFFECT OF ADJUSTMENTS ON ACCUMULATED DEFICIT
The following table presents the cumulative effect of adjustments resulting
from the reviews described above for the periods shown.
Year Ended Quarter Ended
December 31, 2007 March 31, 2008
----------------- --------------
As Restated
--------------------------------
Net loss as originally reported $ (1,686,000) $ (508,000)
Adjustments related to:
Revenue recognition (1,355,000) (380,000)
Cost of goods sold 1,108,000 365,000
------------ ------------
Net adjustments (247,000) (15,000)
------------ ------------
Net loss as restated $ (1,933,000) $ (523,000)
============ ============
Cumulative effect to accumulated deficit $ 247,000 $ 262,000
============ ============
The tables below set forth the effect of the adjustments as of March 31, 2008
and December 31, 2007 and for the three month period ended March 31, 2008 as
applicable:
7
SPIRE CORPORATION AND SUBSIDIARIES
UNAUDITED RESTATED CONDENSED CONSOLIDATED BALANCE SHEETS
MARCH 31, 2008 DECEMBER 31, 2007
------------------------------ ------------------------------
As Reported As Restated As Reported As Restated
------------ ------------ ------------ ------------
ASSETS
Current assets
--------------
Cash and cash equivalents $ 2,196,000 $ 2,196,000 $ 2,372,000 $ 2,372,000
Restricted cash - current portion 380,000 380,000 391,000 391,000
------------ ------------ ------------ ------------
2,576,000 2,576,000 2,763,000 2,763,000
Accounts receivable - trade, net 8,738,000 8,738,000 12,766,000 11,865,000
Inventories, net 21,191,000 14,400,000 18,506,000 11,570,000
Deferred cost of goods sold -- 8,264,000 -- 8,044,000
Deposits on equipment for inventory 2,003,000 2,003,000 2,475,000 2,475,000
Prepaid expenses and other current assets 631,000 631,000 542,000 542,000
------------ ------------ ------------ ------------
Total current assets 35,139,000 36,612,000 37,052,000 37,259,000
Property and equipment, net 6,277,000 6,277,000 6,209,000 6,209,000
Intangible and other assets, net 866,000 866,000 851,000 851,000
Available-for-sale investments, at quoted market value (cost
of $1,693,000 and $1,696,000 at 3/31/08 and 12/31/07, 1,693,000 1,693,000 1,800,000 1,800,000
respectively)
Equity investment in joint venture 2,134,000 2,134,000 2,264,000 2,264,000
Deposit - related party 304,000 304,000 304,000 304,000
------------ ------------ ------------ ------------
Total other assets 4,997,000 4,997,000 5,219,000 5,219,000
------------ ------------ ------------ ------------
Total assets $ 46,413,000 $ 47,886,000 $ 48,480,000 $ 48,687,000
============ ============ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
-------------------
Current portion of capital lease obligation - related $ 190,000 $ 190,000 $ 486,000 $ 486,000
party
Current portion of equipment line of credit 1,167,000 1,167,000 1,167,000 1,167,000
Accounts payable 3,923,000 3,923,000 2,909,000 2,909,000
Accrued liabilities 6,339,000 6,339,000 6,057,000 6,057,000
Current portion of advances on contracts in progress 21,465,000 23,200,000 23,599,000 24,053,000
------------ ------------ ------------ ------------
Total current liabilities 33,084,000 34,819,000 34,218,000 34,672,000
Long-term portion of equipment line of credit 1,458,000 1,458,000 1,750,000 1,750,000
Long-term portion of advances on contracts in progress 1,765,000 1,765,000 1,950,000 1,950,000
Deferred compensation 1,693,000 1,693,000 1,800,000 1,800,000
Other long-term liabilities 72,000 72,000 60,000 60,000
------------ ------------ ------------ ------------
Total long-term liabilities 4,988,000 4,988,000 5,560,000 5,560,000
------------ ------------ ------------ ------------
Total liabilities 38,072,000 39,807,000 39,778,000 40,232,000
------------ ------------ ------------ ------------
Stockholders' equity
--------------------
Common stock, $0.01 par value; 20,000,000 shares
authorized; 8,328,688 and 8,321,188 shares issued
and outstanding at March 31, 2008 and December 31, 2007,
respectively 83,000 83,000 83,000 83,000
Additional paid-in capital 20,208,000 20,208,000 19,999,000 19,999,000
Accumulated deficit (11,950,000) (12,212,000) (11,442,000) (11,689,000)
Accumulated other comprehensive income, net -- -- 62,000 62,000
------------ ------------ ------------ ------------
Total stockholders' equity 8,341,000 8,079,000 8,702,000 8,455,000
------------ ------------ ------------ ------------
Total liabilities and stockholders' equity $ 46,413,000 $ 47,886,000 $ 48,480,000 $ 48,687,000
============ ============ ============ ============
8
SPIRE CORPORATION AND SUBSIDIARIES
UNAUDITED RESTATED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2008
---------------------------------
AS REPORTED AS RESTATED
------------ ------------
Net sales and revenues
----------------------
Sales of goods $ 11,375,000 $ 10,995,000
Contract research, service and license revenues 3,543,000 3,543,000
------------ ------------
Total net sales and revenues 14,918,000 14,538,000
Costs of sales and revenues
---------------------------
Cost of goods sold 8,859,000 8,494,000
Cost of contract research, services and licenses 2,374,000 2,374,000
------------ ------------
Total cost of sales and revenues 11,233,000 10,868,000
------------ ------------
Gross Margin 3,685,000 3,670,000
Operating expenses
------------------
Selling, general and administrative expenses 3,778,000 3,778,000
Internal research and development expenses 111,000 111,000
------------ ------------
Total operating expenses 3,889,000 3,889,000
------------ ------------
Loss from operations (204,000) (219,000)
--------------------
Interest income (expense), net (60,000) (60,000)
Loss on equity investment in joint venture (130,000) (130,000)
Foreign exchange loss (114,000) (114,000)
------------ ------------
Total other income (expense), net (304,000) (304,000)
============ ============
Net loss $ (508,000) $ (523,000)
-------- ============ ============
Loss per share - basic and diluted $ (0.06) $ (0.06)
---------------------------------- ============ ============
Weighted average number of common and common
equivalent shares outstanding - basic and diluted 8,322,919 8,322,919
============ ============
9
SPIRE CORPORATION AND SUBSIDIARIES
UNAUDITED RESTATED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2008
---------------------------------
AS REPORTED AS RESTATED
------------ ------------
Cash flows from operating activities:
-------------------------------------
Net loss $ (508,000) $ (523,000)
Adjustments to reconcile net loss to net cash provided by (used
in) operating activities:
Depreciation and amortization 454,000 454,000
Loss on impairment of capital equipment -- --
Loss on equity investment in joint venture 130,000 130,000
Deferred compensation (62,000) (62,000)
Stock-based compensation 196,000 196,000
Decrease in accounts receivable reserves (21,000) (21,000)
Decrease in inventory reserves (41,000) (41,000)
Changes in assets and liabilities:
Restricted cash 11,000 11,000
Accounts receivable 4,049,000 3,148,000
Inventories (2,644,000) (2,789,000)
Deferred cost of goods sold -- (220,000)
Deposits, prepaid expenses and other current assets 383,000 383,000
Accounts payable, accrued liabilities and other liabilities 1,308,000 1,308,000
Advances on contracts in progress (2,319,000) (1,038,000)
------------ ------------
Net cash provided by (used in) operating activities 936,000 936,000
------------ ------------
Cash flows from investing activities:
-------------------------------------
Proceeds from maturity of short-term investments -- --
Purchase of property and equipment (493,000) (493,000)
Increase in intangible and other assets (44,000) (44,000)
------------ ------------
Net cash provided by (used in) investing activities (537,000) (537,000)
------------ ------------
Cash flows from financing activities:
-------------------------------------
Principal payments on capital lease obligations - related parties (296,000) (296,000)
Principal payments on equipment line of credit, net (292,000) (292,000)
Proceeds from exercise of stock options 13,000 13,000
------------ ------------
Net cash used in financing activities (575,000) (575,000)
------------ ------------
Net increase (decrease) in cash and cash equivalents (176,000) (176,000)
Cash and cash equivalents, beginning of period 2,372,000 2,372,000
------------ ------------
Cash and cash equivalents, end of period $ 2,196,000 $ 2,196,000
============ ============
Supplemental disclosures of cash flow information:
--------------------------------------------------
Interest received $ 9,000 $ 9,000
============ ============
Interest paid $ 62,000 $ 62,000
============ ============
Interest paid - related party $ 7,000 $ 7,000
============ ============
10
3. 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 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, 2007,
included in the Company's Annual Report on Form 10-K/A filed with the Securities
and Exchange Commission.
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, 2008 and December 31,
2007 and the results of its operations and cash flows for the three months ended
March 31, 2008 and 2007. The results of operations for the three months ended
March 31, 2008 are not necessarily indicative of the results to be expected for
the fiscal year ending December 31, 2008. The condensed consolidated balance
sheet as of December 31, 2007 has been derived from audited financial statements
as of that date.
The accounting policies followed by the Company are set forth in Footnote 3
to the Company's consolidated financial statements in its Annual Report on Form
10-K/A for the year ended December 31, 2007.
New Accounting Pronouncements
-----------------------------
In December 2007, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 141R ("FAS 141R"),
BUSINESS COMBINATIONS, which revises FAS 141 and changes multiple aspects of the
accounting for business combinations. Under the guidance in FAS 141R, the
acquisition method must be used, which requires the acquirer to recognize most
identifiable assets acquired, liabilities assumed, and non-controlling interests
in the acquiree at their full fair value on the acquisition date. Goodwill is to
be recognized as the excess of the consideration transferred plus the fair value
of the non-controlling interest over the fair values of the identifiable net
assets acquired. Subsequent changes in the fair value of contingent
consideration classified as a liability are to be recognized in earnings, while
contingent consideration classified as equity is not to be re-measured. Costs
such as transaction costs are to be excluded from acquisition accounting,
generally leading to recognizing expense, and, additionally, restructuring costs
that do not meet certain criteria at acquisition date are to be subsequently
recognized as post-acquisition costs. FAS 141R is effective for business
combinations for which the acquisition date is on or after the beginning of the
first annual reporting period beginning on or after December 15, 2008. The
Company is currently evaluating the impact that this issuance will have on its
financial position and results of operation.
In December 2007, the FASB issued SFAS No. 160 ("FAS 160"), NON-CONTROLLING
INTEREST IN CONSOLIDATED FINANCIAL STATEMENTS - AN AMENDMENT OF ARB NO. 151. FAS
160 requires that a non-controlling interest in a subsidiary (i.e. minority
interest) be reported in the equity section of the balance sheet instead of
being reported as a liability or in the mezzanine section between debt and
equity. It also requires that the consolidated income statement include
consolidated net income attributable to both the parent and non-controlling
interest of a consolidated subsidiary. A disclosure must be made on the face of
the consolidated income statement of the net income attributable to the parent
and to the non-controlling interest. Also, regardless of whether the parent
purchases additional ownership interest, sells a portion of its ownership
interest in a subsidiary or the subsidiary participates in a transaction that
changes the parent's ownership interest, as long as the parent retains
controlling interest, the transaction is considered an equity transaction. FAS
160 is effective for annual periods beginning after December 15, 2008. The
Company is currently evaluating the impact, if any, that this standard will have
on its financial position and results of operations.
In March 2008, the FASB issued Statement of Financial Accounting Standards
No. 161 ("FAS 161"), DISCLOSURES ABOUT DERIVATIVE INSTRUMENTS AND HEDGING
ACTIVITIES--AN AMENDMENT OF FASB STATEMENT NO. 133. FAS 161 requires enhanced
disclosures about an entity's derivative and hedging activities. Entities are
required to provide enhanced disclosures about (a) how and why an entity uses
derivative instruments, (b) how derivative instruments and related hedged items
are accounted for under Statement No. 133 and its related interpretations, and
(c) how derivative instruments and related hedged items affect an entity's
financial position, financial performance, and cash flows. FAS161 is effective
for financial statements issued for fiscal years and interim periods beginning
after November 15, 2008, with early application encouraged. FAS 161 encourages,
but does not require, comparative disclosures for earlier periods at initial
adoption. The Company is currently evaluating the impact that this issuance will
have on its financial position and results of operation.
11
4. ACCOUNTS RECEIVABLE/ADVANCES ON CONTRACTS IN PROGRESS
Net accounts receivable, trade consists of the following:
December 31,
March 31, 2007
2008 As Restated
------------ ------------
Amounts billed $ 7,810,000 $ 11,142,000
Retainage 8,000 8,000
Accrued revenue 1,129,000 945,000
------------ ------------
8,947,000 12,095,000
Less: Allowance for sales returns and
doubtful accounts (209,000) (230,000)
------------ ------------
Net accounts receivable, trade $ 8,738,000 $ 11,865,000
============ ============
Advances on contracts in progress $ 24,965,000 $ 26,003,000
============ ============
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 $8,000 at March 31, 2008 and December 31, 2007. The government's
most recent audit was as of December 31, 2006, with no adverse impact. All other
accounts receivable are expected to be collected within one year.
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 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, either as deposits or progress payments
against future shipments, but revenue has not been recognized.
5. INVENTORIES AND DEFERRED COST OF GOODS SOLD
Inventories, net of $313,000 and $354,000 of reserves at March 31, 2008 and
December 31, 2007, respectively, consist of the following at:
March 31, December 31,
2008 2007
------------ ------------
As Restated
-----------------------------
Raw materials $ 4,860,000 $ 4,989,000
Work in process 8,142,000 4,663,000
Finished goods 1,398,000 1,918,000
------------ ------------
Net Inventory $ 14,400,000 $ 11,570,000
============ ============
Deferred cost of goods sold $ 8,264,000 $ 8,044,000
============ ============
Deferred costs of goods sold represents costs on equipment that has shipped
to the customer and title has passed. The Company defers these costs until
related revenue is recognized.
12
6. 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 March 31,
----------------------------
2008 2007
---------- ----------
Weighted average number of common and common
equivalent shares outstanding - basic 8,322,919 8,246,691
Add: Net additional common shares upon assumed
exercise of common stock options -- --
---------- ----------
Adjusted weighted average number of common and
common equivalents shares outstanding - diluted 8,322,919 8,246,691
========== ==========
For the three months ended March 31, 2008 and 2007, 208,847 and 101,050
shares, respectively, of common stock related to stock options were excluded
from the calculation of dilutive shares because the inclusion of such shares
would be anti-dilutive due to the Company's net loss position.
In addition, for the three months ended March 31, 2007, 6,250 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 their exercise prices exceeding the average market price
of the stock for the period.
7. 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."
Total
Solar Company
As Restated Biomedical Optoelectronics As Restated
----------- ---------- --------------- -----------
For the three months ended March 31, 2008
-----------------------------------------
Net sales and revenues $10,293,000 $2,808,000 $1,437,000 $14,538,000
Income (loss) from operations $ 313,000 $ (176,000) $ (356,000) $ (219,000)
Total
Solar Biomedical Optoelectronics Company
----------- ---------- --------------- -----------
For the three months ended March 31, 2007
-----------------------------------------
Net sales and revenues $ 3,594,000 $2,505,000 $ 898,000 $ 6,997,000
Loss from operations $ (583,000) $ (512,000) $ (660,000) $(1,755,000)
The following table shows net sales and revenues by geographic area (based on
customer location):
Three Months Ended March 31,
---------------------------------------------
2008
As Restated % 2007 %
----------- ------- ----------- -------
United States $ 5,470,000 38% $ 3,211,000 46%
Europe/Africa 5,219,000 36% 1,702,000 24%
Asia 3,647,000 25% 1,997,000 29%
Rest of the world 202,000 1% 87,000 1%
----------- ------- ----------- -------
$14,538,000 100% $ 6,997,000 100%
=========== ======= =========== =======
Revenues from contracts with United States government agencies for the
three months ended March 31, 2008 and 2007 were approximately $400,000 and
$254,000, or 3% and 4% of consolidated net sales and revenues, respectively.
One customer accounted for approximately 20% and three customers accounted
for approximately 50% of the Company's gross sales during the three months ended
March 31, 2008 and 2007, respectively. One customer represented 31% of trade
account receivables at March 31, 2008 and two customer represented 46% of trade
account receivables at December 31, 2007.
13
8. INTANGIBLE AND OTHER ASSETS
Patents amounted to $130,000 net of accumulated amortization of $700,000,
at March 31, 2008. Licenses amounted to $93,000, net of accumulated amortization
of $232,000 at March 31, 2008. 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
$603,000 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:
Year Amortization Expense
----------------------------------- ---------------------------
2008 remaining 9 months $ 153,000
2009 171,000
2010 166,000
2011 159,000
2012 and beyond 177,000
---------
$ 826,000
=========
Also included in other assets are approximately $40,000 of refundable
deposits made by the Company at March 31, 2008.
9. 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, 2008 December 31, 2007
-------------- -----------------
Equity investments $1,410,000 $1,411,000
Government bonds 259,000 303,000
Cash and money market funds 24,000 86,000
---------- ----------
$1,693,000 $1,800,000
========== ==========
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, 2008, the net unrealized gain on these marketable securities was
less than $1,000.
Effective January 1, 2008, the Company adopted SFAS No. 157, "Fair Value
Measurements" ("FAS 157"). In February 2008, the FASB issued FASB Staff Position
No. FAS 157-2, "Effective Date of FASB Statement No. 157," which provides a one
year deferral of the effective date of FAS 157 for non-financial assets and
non-financial liabilities, except those that are recognized or disclosed in the
financial statements at fair value at least annually. Therefore, the Company has
adopted the provisions of FAS 157 with respect to its financial assets and
liabilities only. FAS 157 defines fair value, establishes a framework for
measuring fair value, and expands disclosures about fair value measurements. The
new standard provides a consistent definition of fair value which focuses on an
exit price which is the price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market participants at
the measurement date. The standard also prioritizes, within the measurement of
fair value, the use of market-based information over entity specific information
and establishes a three-level hierarchy for fair value measurements based on the
nature of inputs used in the valuation of an asset or liability as of the
measurement date.
The hierarchy established under FAS 157 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 FAS 157, 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 FAS 157, 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 FAS
157, 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.
14
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.
The following table presents the financial instruments carried at fair
value as of March 31, 2008 by FAS 157 valuation hierarchy (as defined above).
Level 1 Level 2 Level 3 Total
----------------------------------------------
Available for sale investments $ 1,377,000 $ 316,000 -- $1,693,000
Percent of total 81% 19% -- 100%
10. NOTES PAYABLE AND CREDIT ARRANGEMENTS
The Company had a $2,000,000 Loan Agreement with Citizens Bank of
Massachusetts which expired on June 26, 2007. On May 25, 2007, the Company and
its wholly-owned subsidiary, Spire Semiconductor, LLC, entered into a Loan and
Security Agreement (the "Equipment Credit Facility") with Silicon Valley Bank
(the "Bank"). Under the Equipment Credit Facility, for a one-year period, the
Company and Spire Semiconductor could borrow up to $3,500,000 in the aggregate
to finance certain equipment purchases (including reimbursement of certain
previously-made purchases). Each advance made under the Equipment Credit
Facility would be due thirty-six (36) months from the date the advance is made.
Advances made under the Equipment Credit Facility would bear interest at the
Bank's prime rate, as determined, plus 0.5% and payable in thirty-six (36)
consecutive monthly payments following the funding date of that advance.
On March 31, 2008, the Company entered into a second Loan and Security
Agreement (the "Revolving Credit Facility") with the Bank. Under the terms of
the Revolving Credit Facility, the Bank agreed to provide the Company with a
credit line up to $5,000,000. The Company's obligations under the Equipment
Credit Facility are secured by substantially of its assets and advances under
the Revolving Credit Facility are limited to 80% of eligible receivables and the
lesser of 25% of the value of its eligible inventory, as defined, or $2,500,000
if the inventory is backed by a customer letter of credit. Interest on
outstanding borrowings accrues at a rate per annum equal to the greater of Prime
Rate plus one percent (1.0%) or seven percent (7%) (7% at March 31, 2008). In
addition, the Company agreed to pay to the Bank a collateral monitoring fee of
$750 per month in the event the Company is in default of its covenants and
agreed to the following additional terms: (i) $50,000 commitment fee; (ii) an
unused line fee in the amount of 0.75% per annum of the average unused portion
of the revolving line; and (iii) an early termination fee of 0.5% of the total
credit line if the Company terminates the Revolving Credit Facility prior to 12
months from the Revolving Credit Facility's effective date. The Revolving Credit
Facility, if not sooner terminated in accordance with its terms, expires on
March 30, 2009. In addition the Company's existing Equipment Credit Facility was
amended whereby the Bank granted a waiver for the Company's defaults for not
meeting its December 31, 2007 quarter liquidity and profit covenants and for not
meeting its January and February 2008 liquidity covenants. Further the covenants
were amended to match the new covenants contained in the Revolving Credit
Facility. The Company's interest rate under the Equipment Credit Facility was
also modified from Bank Prime plus one half percent to the greater of Bank Prime
plus one percent (1%) or seven percent (7%) (7% at March 31, 2008).
Under the terms of the Equipment Credit Facility, as long as any commitment
remains outstanding under the facility, the Company must comply with an adjusted
quick ratio covenant and a minimum quarterly net income covenant. 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 and its subsidiaries. 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. The Company's obligations under the
credit facilities are secured by substantially all of its assets.
At March 31, 2008, the Company's outstanding borrowings from the Equipment
Credit Facility amounted to $2,625,000 and there were no borrowings from the
Revolving Credit Facility. The Company was not in compliance with its covenants
as of March 31, 2008, but not in default because a Bank waiver has been
received.
15
On May 13, 2008, the Bank amended each of the Equipment Credit Facility and
the Revolving Credit Facility, modifying the Company's net income profitability
covenant requirements in exchange for a three quarters percent (0.75%) increase
in the Company's interest rate and waiver restructuring fee equal to one half
percent (.05%) of amounts outstanding under the Equipment Credit Facility and
committed under the Revolving Credit Facility. In addition, the Company's term
loan balance will be factored in when calculating the Company's borrowing base
under the Revolving Credit Facility.
11. STOCK OPTION PLAN AND STOCK-BASED COMPENSATION
On January 1, 2006, the Company adopted the fair value recognition
provisions of FASB Statement No. 123(R), Share-Based Payment ("Statement
123(R)") using the modified prospective method. Based on an analysis of the
Company's historical data, for the three months ended March 31, 2008 and 2007,
the Company applied 8% and 14% forfeiture rates, respectively, to stock options
outstanding in determining its Statement 123(R) stock-based compensation expense
which it believes are reasonable forfeiture estimates for the periods. The
impact of Statement 123(R) on the Company's results of operations resulted in
recognition of stock-based compensation expense of approximately $196,000 and
$71,000 for the three months ended March 31, 2008 and 2007, respectively. The
total non-cash, stock-based compensation expense included in the condensed
consolidated statement of operations for the periods presented is included in
the following expense categories:
Three Months Ended March 31,
----------------------------
2008 2007
-------- --------
Cost of contract research, services and
licenses $ 13,000 $ 5,000
Cost of goods sold 32,000 1,000
Selling, general and administrative 151,000 65,000
-------- --------
Total stock-based compensation $196,000 $ 71,000
======== ========
At March 31, 2008 the Company had outstanding options under two stock
option plans: the 1996 Equity Incentive Plan (the "1996 Plan") and the 2007
Stock Equity Plan (the "2007 Plan"). 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 2007 Plan and 1996 Plan as of
March 31, 2008 and changes during the three-month period is as follows:
Average
Weighted- Remaining
Number of Average Contractual Aggregate
Shares Exercise Price Life (Years) Intrinsic Value
--------- -------------- ----------- ---------------
Options Outstanding at December 31, 2007 495,177 $7.10
Granted 25,000 $12.75
Exercised (7,500) $1.78
Cancelled/expired (3,500) $9.60
-------- -------
Options Outstanding at March 31, 2008 509,177 $7.44 7.47 $4,032,549
======== =======
Options Exercisable at March 31, 2008 223,492 $5.94 5.96 $2,106,295
======== =======
16
No stock options were granted during the three months ended March 31, 2007.
The per-share weighted-average fair value of stock options granted during the
three months ended March 31, 2008 was $7.28 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
---- -------------- ------------- ----------- -----------------
2008 -- 2.42% 4.5 years 70.69%
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 plan. The expected
volatility factor is determined by measuring the actual stock price volatility
over a term equal to the expected useful life of the options granted.
12. 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,
------------------------------------
2008
As Restated 2007
----------- -----------
Net loss $ (523,000) $(1,746,000)
Other comprehensive income:
Unrealized gain on available for sale
marketable securities, net of tax -- 1,000
----------- -----------
Total comprehensive loss $ (523,000) $(1,745,000)
=========== ===========
13. SUBSEQUENT EVENTS
On May 13, 2008, the Bank amended each of the Equipment Credit Facility and
the Revolving Credit Facility, modifying the Company's net income profitability
covenant requirements in exchange for a three quarters percent (0.75%) increase
in the Company's interest rate and waiver restructuring fee equal to one half
percent (0.5%) of amounts outstanding under the Equipment Credit Facility and
committed under the Revolving Credit Facility. In addition, the Company's term
loan balance will be factored in when calculating the Company's borrowing base
under the Revolving Credit Facility.
17
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 THIS REPORT AND IN THE ANNUAL REPORT ON FORM 10-K/A FOR THE YEAR ENDED
DECEMBER 31, 2007. 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 principally develop, manufacture and market customized turnkey solutions
for the solar industry, including manufacturing equipment and full turnkey lines
for cell and module production and testing. We also offer through our subsidiary
Spire Semiconductor concentrator cell and light-emitting diode ("LED")
fabrication services and through our joint venture Gloria Spire Solar
photovoltaic ("PV") system integration services. We also operate a line of
business associated with advanced biomedical applications. The foundation for
our business is our industry-leading expertise in materials technologies and
surface treatments; this proprietary knowledge enables us to further develop our
offerings in solar equipment, optoelectronics and biomedical products and
services.
Our initial focus on high-energy physics led to the development of our
first product, the SPI-PULSE electron beam generator, to support research in
radiation effects testing. We moved into the space solar cell business after
signing a contract to develop solar cell coverslip for radiation hardening. In
addition, we began to develop a new technology based on ion implantation and
pulsed electron beam annealing of silicon solar cells. As a result of the energy
crisis in the early 1980s, which forced the United States to consider
photovoltaics for terrestrial applications, we received our first terrestrial
solar cell contract for low cost production using our ion implantation
technology. We leveraged this knowledge to develop our state-of-the-art
manufacturing equipment, in addition to our offerings in the optoelectronics and
biomaterials industries.
As photovoltaic cell and module manufacturers ramp up production to meet
increasing demand, they will first need to acquire greater quantities of turnkey
equipment in order to produce more photovoltaic cells and modules. We believe
that we are one of the world's leading suppliers of the manufacturing equipment
and technology needed to produce solar photovoltaic power systems. Our
individual manufacturing equipment products and our SPI-LINETM integrated
turnkey cell and module production lines can be highly scaled, customized, and
automated with high throughput. These systems are designed to meet the needs of
a broad range of customers ranging from manufacturers relying on mostly manual
processes, to some of the largest photovoltaic manufacturing companies in the
world.
In addition to our cell and module manufacturing solutions, we have a
device fabrication facility where we produce, under contract with our customers,
gallium arsenide (GaAs) concentrator cells. The state-of-the-art semiconductor
fabrication and foundry facility is the foundation of our solar cell process
technology for silicon, polysilicon, thin film and GaAs concentrator cells.
Under the name Spire Semiconductor, this division produces GaAs concentrator
cells, high performance LEDs, and other custom semiconductor foundry services
for our customers.
In July 2007, we entered into a joint venture with Gloria Solar Co., Ltd.,
a leading cell and module manufacturer in Taiwan, which designs, sells and
manages installations of photovoltaic systems. Our 45% ownership stake in the
joint venture, Gloria Spire Solar, LLC, was obtained through the contribution of
our building integrated photovoltaic business to Gloria Solar. This transaction
has allowed us to focus more of our attention on our core solar business, while
continuing to expand the Spire brand name in the marketplace.
Capitalizing on our expertise in surface treatments, we also have a
biomedical division which manufactures medical devices and provides advanced
medical device surface treatment processes to our customers. Our medical device
business develops, manufactures and sells premium products for vascular access
in chronic kidney disease patients. Our surface treatment business modifies the
surfaces of medical devices to improve their performance.
We have been in the solar business for over 30 years and have been active
in research and development in the space, with over $100 million of research and
development conducted which has led to over 60 patents granted to date, as well
as
18
cell and module production, having been a pioneer in the early development of
solar technology. This expertise has provided the platform and expertise for our
manufacturing equipment. We have equipment deployed in approximately 50
countries.
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. Export sales, which amounted to 62% of net sales and revenues for the
three months ended March 31, 2008, continue to constitute a significant portion
of our net sales and revenues.
Restatements
------------
We restated our previously issued consolidated financial statements as of
and for the year ended December 31, 2007 and as of and for the quarter ended
March 31, 2008 to correct errors under generally accepted accounting principles
("GAAP") in the United States relating to the recognition of revenue. We
determined that a single customer of our solar equipment business unit was
provided certain upgrade rights in connection with the sale of products, as a
result of which the revenue associated with those sales should not have been
recognized upon shipment of the products to the customers under GAAP because the
upgrade was not available at that time. We determined that revenue for the
entire contract should have been deferred until the upgrade was provided to the
customer. These orders resulted in aggregate gross revenues of approximately
$1.4 million during the fourth quarter of 2007 and $380,000 during the first
quarter of 2008. To correct this error, we reversed this revenue and the
associated cost of goods sold in each of those quarters. See Note 2 to the
unaudited condensed consolidated financial statements.
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,
-------------------------
2008
As Restated 2007
----------- ----------
Net sales and revenues 100% 100%
Cost of sales and revenues 75 81
----------- ----------
Gross margin 25 19
Selling, general and administrative expenses 26 43
Internal research and development expenses 1 1
----------- ----------
Loss from operations (2) (25)
Other income (expense), net (2) --
----------- ----------
Loss before income tax benefit (4) (25)
Income tax benefit -- --
----------- ----------
Net loss (4%) (25%)
----------- ----------
19
OVERALL
Our total net sales and revenues for the three months ended March 31, 2008
("2008") were $14,538,000 as compared to $6,997,000 for the three months ended
March 31, 2007 ("2007"), which represents an increase of $7,541,000 or 108%. The
increase was primarily attributable to a $6,699,000 increase in solar sales and
a $539,000 increase in optoelectronics sales.
SOLAR BUSINESS UNIT
Sales in our solar business unit increased 186% during 2008 to $10,293,000
as compared to $3,594,000 in 2007. The increase is the result of shipments of
solar equipment reflecting the overall increase in activity in the solar power
industry. We have focused our sales and marketing efforts on establishing
ourselves as one of the premier suppliers of equipment to the solar power
industry for the manufacture of photovoltaic power modules.
BIOMEDICAL BUSINESS UNIT
Revenues of our biomedical business unit increased 12% during 2008 to
$2,808,000 as compared to $2,505,000 in 2007. The increase reflects increased
revenues from our research and development contracts and orthopedics coatings
services offset by reduced revenues from catheter products.
OPTOELECTRONICS BUSINESS UNIT
Revenues in our optoelectronics business unit increased 60% to $1,437,000
during 2008 as compared to $898,000 in 2007. The increase reflects an overall
increase in optoelectronics activities attributable to a shift in product mix to
larger scale commercial orders compared with smaller sized research and
development projects.
Three Months Ended March 31, 2008 Compared to Three Months Ended March 31, 2007
-------------------------------------------------------------------------------
NET SALES AND REVENUES
The following table categorizes our net sales and revenues for the periods
presented:
Three Months Ended March 31, Increase
---------------------------- ----------------------
$ %
2008 ----------- ------
As Restated 2007 As Restated
----------- ---------- ----------------------
Sales of goods $10,995,000 $4,339,000 $6,656,000 153%
Contract research, services and
license revenues 3,543,000 2,658,000 885,000 33%
----------- ---------- ----------
Net sales and revenues $14,538,000 $6,997,000 $7,541,000 108%
=========== ========== ==========
The 153% increase in sales of goods for the three months ended March 31,
2008 as compared to the three months ended March 31, 2007 was primarily due to
an increase in solar equipment revenues, partially offset by a decrease in
catheter products sales. Solar equipment sales increased 198% in 2008 as
compared to 2007 primarily due to an overall increase in solar power industry
activity. Sales of catheters decreased approximately 3%.
The 33% increase in contract research, services and license revenues for
the three months ended March 31, 2008 as compared to the three months ended
March 31, 2007 is primarily attributable to an increase in orthopedics,
optoelectronics and government research and development activities. Revenue from
our optoelectonics processing services (Spire Semiconductor) increased 60% in
2008 compared to 2007 as a result of an overall increase in optoelectronics
activities attributable to a shift in product mix to larger scale commercial
orders compared with smaller sized research and development projects. Revenues
from our research and development activities increased 64% in 2008 as compared
to 2007 primarily due to an increase in the number and value of contracts
associated with funded research and development. Revenues from our orthopedic
activities increased 8% in 2008 as compared to 2007.
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:
20
Three Months Ended March 31, Increase
------------------------------------------------ ---------------------
2008 % 2007 % $ %
----------- ------- ----------- ------- -------- -------
As Restated As Restated
---------------------- ---------------------- ---------------------
Cost of goods sold $ 8,494,000 77% $ 3,526,000 81% $ 4,968,000 141%
Cost of contract research, services
and licenses 2,374,000 67% 2,173,000 82% 201,000 9%
----------- ----------- -----------
Net cost of sales and revenues $10,868,000 75% $ 5,699,000 81% $ 5,169,000 91%
=========== =========== ===========
Cost of goods sold increased 141% in 2008 as compared to 2007, primarily as
a result of the 153% increase in related revenues. As a percentage of sales,
cost of goods sold was 77% of sales of goods in 2008 as compared to 81% of sales
in 2007. This reduction in the percentage of sales in 2008 is due to higher
levels of revenue along with better utilization of solar manufacturing overhead.
Cost of contract research, services and licenses increased 9% in 2008 as
compared to 2007, primarily as a result of the 33% increase in related revenues
and increased costs at our optoelectronics facility (Spire Semiconductor) along
with increased costs of our contract research activities due to higher volumes.
Cost of contract research, services and licenses as a percentage of revenue
decreased to 67% of revenues in 2008 from 82% in 2007, primarily due to the
increase in related revenues and better utilization of biomedical and its
optoelectronic factory overhead.
Cost of sales and revenues also includes approximately $45,000 and $6,000
of stock-based compensation for the three months ending March 31, 2008 and 2007,
respectively, due to the adoption of SFAS 123(R) in 2006.
OPERATING EXPENSES
The following table categorizes the our operating expenses for the periods
presented, stated in dollars and as a percentage of total sales and revenues:
Three Months Ended March 31, Increase
------------------------------------------------ ---------------------
2008 % 2007 % $ %
----------- ------- ----------- ------- -------- -------
As Restated As Restated
---------------------- ---------------------- ---------------------
Selling, general and administrative $ 3,778,000 26% $ 3,008,000 43% $ 770,000 26%
Internal research and development 111,000 1% 45,000 1% 66,000 147%
----------- ----------- -----------
Operating expenses $ 3,889,000 27% $ 3,053,000 44% $ 836,000 27%
=========== =========== ===========
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expense increased 26% in 2008 as
compared to 2007, primarily as a result of an increase in stock-based
compensation, professional services used by us and higher head count and related
employee costs. In addition, commissions to our network of independent sales
representatives related to sales of solar equipment were up due to increased
sales and revenues. Selling, general and administrative expense decreased to 26%
of sales and revenues in 2008 as compared to 43% in 2007. The reduction was
primarily due to the 108% increase in sales and revenues partially offset by the
26% increase in expenses.
Operating expenses includes approximately $151,000 and $65,000 of
stock-based compensation for the three months ending March 31, 2008 and 2007,
respectively, due to the adoption of SFAS 123(R) in 2006.
INTERNAL RESEARCH AND DEVELOPMENT
Internal research and development expense increased 147% in 2008 as
compared to 2007, primarily as a result of our cost sharing contract with the
National Renewable Energy Laboratory ("NREL") reducing 2007 costs.
OTHER INCOME (EXPENSE), NET
We earned $9,000 and $44,000 of interest income for the quarters ended
March 31, 2008 and 2007, respectively. The decreased interest income is due to
lower cash balances held by us during 2008 compared with 2007. We incurred
interest expense of $69,000 and $26,000 for the quarters ended March 31, 2008
and 2007, respectively. The increased interest expense is due to higher interest
payments associated with the $3.5 million term loan outstanding with Silicon
Valley Bank compared with 2007 interest expenses primarily associated with
interest incurred on capital leases associated with the semiconductor foundry.
21
We recorded a $130,000 loss on equity investment in joint venture with
Gloria Solar for the quarter ended March 31, 2008.
Due to the conversion of U.S. dollars into Japanese Yen, we lost
approximately $114,000 and $9,000 during the quarters ended March 31, 2008 and
2007, respectively.
INCOME TAXES
We did not record an income tax benefit for the three months ended March
31, 2008 and 2007. 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 INCOME
We reported a net loss for the three months ended March 31, 2008 of
approximately $523,000, compared to a net loss of $1,746,000 in 2007. The net
loss decreased approximately $1,223,000 primarily due to the increase in sales
and revenues and the improvement in gross margins.
Liquidity and Capital Resources
-------------------------------
Decrease
March 31, December 31, -------------------
2008 2007 $ %
As Restated As Restated
------------------------- -------------------
Cash and cash equivalents $2,196,000 $2,372,000 $ (176,000) (7%)
Working capital $1,793,000 $2,587,000 $ (794,000) (31%)
Cash and cash equivalents decreased slightly due to cash used in investing
and financing activities, partially offset by cash provided by operating
activities. The overall reduction in working capital is due to cash losses from
operations and an additional investment in property and equipment of $493,000.
We have historically funded our operating cash requirements using operating cash
flow, proceeds from the sale and licensing of technology and proceeds from the
sale of equity securities.
We had a $2,000,000 Loan Agreement with Citizens Bank of Massachusetts
which expired on June 26, 2007. On May 25, 2007, we and our wholly-owned
subsidiary, Spire Semiconductor, LLC, entered into a Loan and Security Agreement
(the "Equipment Credit Facility") with Silicon Valley Bank (the "Bank"). Under
the Equipment Credit Facility, for a one-year period, we and Spire Semiconductor
could borrow up to $3,500,000 in the aggregate to finance certain equipment
purchases (including reimbursement of certain previously-made purchases). Each
advance made under the Equipment Credit Facility would be due thirty-six (36)
months from the date the advance is made. Advances made under the Equipment
Credit Facility would bear interest at the Bank's prime rate, as determined,
plus 0.5% and payable in thirty-six (36) consecutive monthly payments following
the funding date of that advance.
On March 31, 2008, we entered into a second Loan and Security Agreement
(the "Revolving Credit Facility") with the Bank. Under the terms of the
Revolving Credit Facility, the Bank agreed to provide us with a credit line up
to $5,000,000. Our obligations under the Equipment Credit Facility are secured
by substantially all of our assets and advances under the Revolving Credit
Facility are limited to 80% of eligible receivables and the lesser of 25% of the
value of our eligible inventory, as defined, or $2,500,000 if the inventory is
backed by a customer letter of credit. Interest on outstanding borrowings
accrues at a rate per annum equal to the greater of Prime Rate plus one percent
(1.0%) or seven percent (7%) (7% at March 31, 2008). In addition, we agreed to
pay to the Bank a collateral monitoring fee of $750 per month in the event we
are in default of our covenants and agreed to the following additional terms:
(i) $50,000 commitment fee; (ii) an unused line fee in the amount of 0.75% per
annum of the average unused portion of the revolving line; and (iii) an early
termination fee of 0.5% of the total credit line if we terminate the Revolving
Credit Facility prior to 12 months from the Revolving Credit Facility's
effective date. The Revolving Credit Facility, if not sooner terminated in
accordance with its terms, expires on March 30, 2009. In addition, our existing
Equipment Credit Facility was amended whereby the Bank granted a waiver for our
defaults for not meeting our December 31, 2007 quarter liquidity and profit
covenants and for not meeting our January and February 2008 liquidity covenants.
Further the covenants were amended to match the new covenants contained in the
Revolving Credit Facility. Our interest rate under the Equipment Credit Facility
was also modified from Bank Prime plus one half percent to the greater of Bank
Prime plus one percent (1%) or seven percent (7%) (7% at March 31, 2008).
22
Under the terms of the Equipment Credit Facility, as long as any commitment
remains outstanding under the facility, we must comply with an adjusted quick
ratio covenant and a minimum quarterly net income covenant. 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 and our subsidiaries. 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. Our
obligations under the credit facilities are secured by substantially all of our
assets.
At March 31, 2008, we had outstanding borrowings from the Equipment Credit
Facility amounting to $2,625,000 and there were no borrowings from the Revolving
Credit Facility. We were not in compliance with our covenants as of March 31,
2008, but not in default because a Bank waiver has been received.
On May 13, 2008, the Bank amended each of the Equipment Credit Facility and
the Revolving Credit Facility, modifying the our net income profitability
covenant requirements in exchange for a three quarters percent (0.75%) increase
in our interest rate and waiver restructuring fee equal to one half percent
(0.5%) of amounts outstanding under the Equipment Credit Facility and committed
under the Revolving Credit Facility. In addition, our term loan balance will be
factored in when calculating our borrowing base under the Revolving Credit
Facility.
We maintain allowances for doubtful accounts for estimated losses resulting
from the inability of our customers to pay amounts due. We 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 we can
reasonably estimate the amount of the loss. We do not record an allowance for
government receivables and invoices backed by letters of credit as realizability
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.
There are no material commitments by us for capital expenditures. At March
31, 2008, our accumulated deficit was approximately $12,212,000, compared to
accumulated deficit of approximately $11,689,000 as of December 31, 2007.
We have an effective shelf registration statement on file with the
Securities and Exchange Commission allowing us to sell up to $60 million of
common stock. We believe it is prudent to maintain shelf registration capacity
in order to facilitate future capital raising activities. To date there have
been no issuances of common stock under this shelf registration statement.
We believe we have sufficient resources to finance our current operations
for the foreseeable future from operating cash flow and working capital. We may,
however, raise additional capital through the sale of equity securities, under
the shelf registration statement or otherwise, under appropriate circumstances.
Foreign Currency Fluctuation
----------------------------
We sell only 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 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 received Japanese yen
in exchange for the sale of a license to our solar technology. In addition,
purchases made and royalties received under our Consortium Agreement with our
Japanese partner are in Japanese yen. We have committed to purchase certain
pieces of equipment from European vendors; these commitments are denominated in
Euros. We bear the risk of any currency fluctuations that may be associated with
these commitments. We do not believe that foreign exchange fluctuations will
materially affect our operations.
Related Party Transactions
--------------------------
We 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, our Chairman of the Board, Chief Executive Officer and President,
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.
23
The sublease agreement provided for minimum rental payments plus annual
increases linked to the consumer price index. Effective December 1, 2005, we
entered into a two-year Extension of Lease Agreement (the "Lease Extension")
directly with SPI-Trust.
We 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. We 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 we have sole withdrawal authority.
SPI-Trust is required to maintain three (3) months of its anticipated operating
costs within this escrow account. On December 1, 2006, we and SPI-Trust amended
the Lease Extension to include the lease of an additional 15,000 square feet
from SPI-Trust for a one-year term. The additional space was leased at a rate of
$8.06 per square foot on annual basis. The additional space was used to expand
our solar operations.
On November 30, 2007, we entered into a new Lease Agreement (the "New
Lease") with SPI-Trust, 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 New Lease commenced on December 1, 2007 and continues for five (5)
years until November 30, 2012. We have the right to extend the term of the New
Lease for an additional five (5) year period. The annual rental rate for the
first year of the Lease is $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 increases on each anniversary by $0.75 per
square foot. If we exercises our right to extend the term of the New Lease, the
annual rental rate for the first year of the 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 $0.75 per
square foot. We believe that the terms of the New Lease are commercially
reasonable. Rent expense under the New Lease for the three months ended March
31, 2008 was $505,000.
In conjunction with our acquisition of Spire Semiconductor in May 2003,
SPI-Trust purchased from Stratos Lightwave, Inc. (Spire Semiconductor's former
owner) the building that Spire Semiconductor occupies in Hudson, New Hampshire
for $3.7 million. Subsequently, we entered into a lease for the building (90,000
square feet) with SPI-Trust whereby we agreed to pay $4.1 million to the
SPI-Trust over an initial five-year term expiring in 2008 with an option for us
to extend for five years. In addition to the rent payments, the lease obligates
us to keep on deposit with SPI-Trust the equivalent of three months rent
($304,000 as of March 31, 2008.) The lease agreement does not provide for a
transfer of ownership at any point. Interest costs were assumed at 7%. Interest
expense was approximately $6,800 for the three months ended March 31, 2008. This
lease has been classified as a related party capital lease and a summary of
payments (including interest) follows:
Rate Per Annual Monthly Security
Year Square Foot Rent 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, 2008, $190,000 reflected the current portion of capital lease
obligation - related party, 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 it believes 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
24
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 3 of the notes to consolidated financial statements in our
Annual Report on Form 10-K/A for the year ended December 31, 2007 for a
description of our significant accounting policies.
REVENUE RECOGNITION
We derive our 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 recognizes 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.
We utilize a distributor network to market and sell our hemodialysis
catheters domestically. We generally recognizes revenue when the catheters are
shipped to our 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 our 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, 2008, is as follows:
Rebates Returns Total
-------- ------- --------
Balance - December 31, 2007 $ 77,000 $10,000 $ 87,000
Provision 109,000 9,000 118,000
Utilization (100,000) (9,000) (109,000)
-------- ------- --------
Balance - March 31, 2008 $ 86,000 $10,000 $ 96,000
======== ======= ========
o Credits for rebates are recorded in the month of the actual sale.
o Credits for returns are processed when we receive the actual returned
merchandise.
o Substantially all rebates and returns are processed no later than
three months after our original shipment.
The reserve percentage of inventory held by distributors over the past
quarters has increased to approximately 9% at March 31, 2008, when compared to
8% at December 31, 2007. We perform 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 was approximately $987,000 at March 31, 2008.
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).
Our OEM capital equipment solar energy business builds complex customized
machines to order for specific customers. Most of these orders are sold on a FOB
Bedford, Massachusetts (or EX-Works Factory) basis. It is our 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 our
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. For arrangements with multiple elements,
we allocate fair value to each element in the contract and revenue is recognized
upon delivery of each element. If we are not able to establish fair value of
undelivered elements, all revenue is deferred.
We recognize 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. We accrue revenue and profit utilizing the percentage of
completion method using a cost-to-cost methodology. A
25
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. Our policy
is to take into revenue the full value of the contract, including any retainage,
as we perform against the contract because we have 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, we 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, we have not restated our
consolidated financial statements for prior periods. Under this transition
method, stock-based compensation expense includes stock-based compensation
expense for all of our 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 is based
on the grant-date fair value estimated in accordance with the provisions of
Statement 123(R). The impact of Statement 123(R) on our results of operations
resulted in recognition of stock option expense of approximately $196,000 and
$71,000 for the three months ended March 31, 2008 and 2007, respectively.
Contractual Obligations, Commercial Commitments and Off-Balance Sheet
---------------------------------------------------------------------
Arrangements
------------
The following table summarizes our gross contractual obligations at March 31,
2008 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
------------------------------------------------------------------
Less than 2 - 3 4 - 5 More Than
Contractual Obligations Total 1 Year Years Years 5 Years
----------------------------------- ---------- ---------- ---------- ---------- ---------
Equipment Credit Facility (SVB) $2,841,000 $1,313,000 $1,528,000 -- --
Revolving Credit Facility (SVB) -- -- -- -- --
Purchase obligations $1,412,000 $1,405,000 $ 7,000 -- --
Capital leases:
Related party capital lease $ 192,000 $ 192,000 -- -- --
Operating leases:
Unrelated party operating leases $ 345,000 $ 135,000 $ 210,000 -- --
Related party operating lease $9,495,000 $1,839,000 $4,002,000 $3,654,000 --
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.
Capital lease and Credit Facility obligations outlined above include both
the principal and interest components of these contractual obligations.
26
We closed our Japanese yen account during the first quarter of 2008. Total
foreign exchange loss for the quarter ended March 31, 2008 of approximately
$114,000 is reflected in other income (expense), net in the accompanying
unaudited condensed consolidated statement of operations.
Outstanding letters of credit totaled approximately $250,000 at March 31,
2008. 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 we
do not perform as contractually required. These letters of credit expire through
2008 and are 100% secured by cash.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk to which we are subject consists of the risk of loss arising
from adverse changes in market interest rates and foreign exchange rates.
Exposure to market rate risk for changes in interest rates relates to our
investment portfolio. We have not used derivative financial instruments in our
investment portfolio. We seek to place our investments with high-quality issuers
and we have policies limiting, among other things, the amount of credit exposure
to any one issuer. We seek to limit default risk by purchasing only
investment-grade securities. We do not believe we have any material market risk
with respect to our financial instruments.
ITEM 4T. CONTROLS AND PROCEDURES
Restatement of Consolidated Financial Statements
------------------------------------------------
In November 2008, we detected a side arrangement of which its existence was
not taken into account when we recognized revenue on the multi-element contract.
The identified contract was partially recognized in the fourth quarter of 2007
and partially in the first quarter of 2008 under multi-element arrangement
accounting rules. As we could not establish the fair value of the undelivered
elements given under the side arrangement, we incorrectly recognized the revenue
rather than deferring all revenue until all elements were delivered.
Under the direction of the Audit Committee and with the assistance of the
Chief Operating Officer, the Company's Chief Financial Officer conducted a
review of the solar equipment contracting process and order management activity,
including a review of contract modifications. Sales personnel and key managers
in the solar equipment department who are involved with the execution of
contracts were interviewed with respect to the knowledge of internal procedures
on customer requests for concessions as well as their knowledge of any
previously granted customer concessions or modifications. Additionally, the
Company contacted a large sample of external customers to confirm the
completeness of deliverables as called for by the written contract or any other
means of communications. The review revealed that, except for the one contract
in question, all customer concessions and modifications were conveyed on a
timely basis and revenue was appropriately recorded in all other cases during
the period under review.
The error that caused the improper recognition of revenue was not timely
identified by our procedures and controls in place and $1.735 million was
incorrectly recognized as goods revenue, resulting in a material overstatement
of goods revenue for the fourth quarter of fiscal year 2007 and the first
quarter of 2008. On November 18, 2008, the Audit Committee of the Board of
Directors, in consultation with and upon recommendation of management, concluded
that due to the error in accounting for goods revenue, our previously issued
financial statements for the fourth quarter and fiscal 2007 included in the
Annual Report on Form 10-K for the fiscal year ended December 31, 2007 and our
previously issued financial statements included in the Quarterly Reports on Form
10-Q for the fiscal quarters ended March 31, 2008 and June 30, 2008 should no
longer be relied upon and should be restated. Please refer to Note 2 of the
notes to the consolidated financial statements for a quantification of the
restatement.
Evaluation of Disclosure Controls and Procedures
------------------------------------------------
Our management, under the supervision of and with the participation of the
Chief Executive Officer and Chief Financial Officer, performed an evaluation of
the effectiveness of our disclosure controls and procedures (as defined in Rules
13a-15(e) under the Securities Exchange Act of 1934 (the "Exchange Act")) as of
the end of the period covered by this report, March 31, 2008.
Based on its evaluation, and taking into consideration the material
weaknesses in internal control over financial reporting referenced below, our
management, including the Chief Executive Officer and Chief Financial Officer,
concluded that our disclosure controls and procedures were not effective as of
March 31, 2008.
27
As previously reported in our Annual Report on Form 10-K, as filed with the
Securities & Exchange Commission (SEC) on March 31, 2008, in connection with our
assessment of the effectiveness of our internal control over financial reporting
at the end of our last fiscal year, management identified material weaknesses in
the internal control over financial reporting as of December 31, 2007.
We had an ineffective control environment. This has been previously
disclosed in prior filings. Efforts to remediate deficiencies were impeded by an
evolving control environment brought on by the rapid expansion in our business
over the past twelve months. We did not maintain an effective financial
reporting process, ensure timely and accurate completion of financial statements
and we did not maintain effective monitoring controls including reconciliations
and analysis of key accounts. We did not have a sufficient level of staffing
with the necessary knowledge, experience and training to ensure the completeness
and accuracy of our financial statements. Specifically, the financial reporting
organization structure was not adequate to support the size, complexity or
activities of our Company.
This affected our ability to maintain effective monitoring controls and
related segregation of duties over automated and manual transactions processes.
Specifically, inadequate segregation of duties led to untimely identification
and resolution of accounting and disclosure matters and failure to perform
timely and effective supervision and reviews. We did not maintain effective
controls over our IT environment. Specifically, we did not perform a review of
restricted user access in our application software system and file server
critical worksheet directories. We lacked sufficient business continuity and
back up polices and procedures.
In addition to the material weaknesses discussed above, we did not maintain
effective controls to identify and monitor the existence of side agreements. In
November, we became aware of a preexisting undocumented side agreement made in
connection with a multiple element arrangement. Timely notification of the
existence of the oral agreement was not communicated to the Finance Department,
and therefore the impact of such agreement was not considered in the evaluation
of revenue recognition on the contract. As a result, our recognition of revenue
was materially misstated with respect to the fourth quarter of 2007 and the
first quarter of 2008 which required restatement of previously issued financial
statements.
In connection with the findings of our review related to the restatement,
management and the Audit Committee reviewed the additional internal control
procedures and processes that have been implemented since the original date of
the error and have identified additional remediation to address the material
weakness of untimely reporting of customer contract changes. We will be
implementing new internal controls and enhanced accounting policies, as well as
improved sales policies and procedures relating to customer contract management
and order fulfillment. In addition, we have begun to strengthen our financial
reporting competencies, develop internal controls and compliance training
programs directed towards contract management, implement personnel changes where
necessary and establish corporate policies, practices and controls which are
clear, concise and consistent.
As a result of the foregoing, management has concluded that our internal
control over financial reporting was not effective as of December 31, 2007.
Changes in Internal Control Over Financial Reporting
----------------------------------------------------
Except as described below, there have been no changes during our fiscal
quarter ended March 31, 2008 in our internal control over financial reporting
that may have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
Management is actively addressing the above noted material weaknesses and
other operational, financial and internal control remediation efforts are also
underway. New policies and procedures are being created and existing policies
and procedures are being reviewed and will be modified as part of our
documentation and testing of internal control over financial reporting.
Management believes these new internal control policies and procedures, when
fully implemented, along with the training of key personnel and testing of these
key controls will be effective in remediating these material weaknesses. In
February 2008, we hired a Director of Financial Reporting who will have the
primary responsibility for the financial close and reporting process and our
internal control and monitoring environment related to financial reporting. We
implemented new IT policies and procedures and progress was made in addressing
the controls over our IT environment.
28
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
During the second quarter of 2005 a suit was filed by Arrow International,
Inc. against Spire Biomedical, Inc., our wholly owned subsidiary, alleging
patent infringement by us. The complaint claims one of our catheter products
induces and contributes to infringement when medical professionals insert it. We
have responded to the complaint denying all allegations and have filed certain
counterclaims. The discovery process in this case has continued and is nearly
complete. We filed a motion for summary judgment, asserting patent invalidity
resulting from plaintiff's failure to follow the administrative procedures of
the U.S. Patent and Trademark Office ("USPTO") which failure has remained
uncorrected. On August 4, 2006, the Court granted our motion and dismissed this
lawsuit without prejudice. Plaintiffs applied to revive the applicable patent,
which application was granted by the USPTO in August 2006. Plaintiffs refiled
their lawsuit against us in September 2006. We have filed our answer and resumed
our defense. The parties have been working to conclude discovery. Based on
information presently available to us, we believe that we do not infringe any
valid claim of the plaintiff's patent and that, consequently, we have
meritorious legal defenses with respect to this action in the event it were to
be reinstated. The parties have agreed to limit any potential damages to us to a
pre-specified royalty rate.
In an amended complaint filed on December 28, 2006, in the Eastern Division
of the U.S. District Court for the Southern District of Ohio, the wife and
executor of the estate of Darrell Adams, deceased, alleged that the failure of a
hemodialysis catheter manufactured by us contributed to his death. In the
quarter ended March 31, 2008, the case was settled between the parties. Our
product liability insurance covered the settlement and all legal expenses, less
our deductible.
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, 2007.
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 13, 2008, the Bank amended each of the Equipment Credit Facility and
the Revolving Credit Facility, modifying the our net income profitability
covenant requirements in exchange for a three quarters percent (0.75%) increase
in our interest rate and waiver restructuring fee equal to one half percent
(0.5%) of amounts outstanding under the Equipment Credit Facility and committed
under the Revolving Credit Facility. In addition, our term loan balance will be
factored in when calculating our borrowing base under the Revolving Credit
Facility.
ITEM 6. EXHIBITS
10(z) Amended and Restated Deferred Compensation Plan with Roger G. Little
dated as of January 1, 2005, incorporated by reference to the
Company's Form 10-Q dated March 31, 2008 with the Securities and
Exchange Commission filed on May 13, 2008.
10(aa) First Loan Modification Agreement, dated March 31, 2008, to the Loan
and Security Agreement, dated May 25, 2007, among Spire Corporation,
Bandwidth Semiconductor, LLC and Silicon Valley Bank, incorporated
by reference to the Company's Form 10-Q dated March 31, 2008 with
the Securities and Exchange Commission filed on May 13, 2008.
10(ab) Loan and Security Agreement, dated March 31, 2008, among Spire
Corporation, Spire Solar, Inc., Spire Biomedical, Inc., Spire
Semiconductor, LLC and Silicon Valley Bank, incorporated by
reference to the Company's Form 10-Q dated March 31, 2008 with the
Securities and Exchange Commission filed on May 13, 2008.
29
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.
30
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 24, 2008 By: /s/ Roger G. Little
--------------------------------
Roger G. Little
Chairman of the Board, Chief
Executive Officer and President
Dated: November 24, 2008 By: /s/ Christian Dufresne
--------------------------------
Christian Dufresne, Ph. D.
Chief Financial Officer and Treasurer
31
EXHIBIT INDEX
Exhibit Description
------- -----------
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.
32