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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 June 30, 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
incorporation or organization) Identification Number)
ONE PATRIOTS PARK, BEDFORD, MASSACHUSETTS 01730-2396
------------------------------------------ ----------
(Address of principal executive offices) (Zip Code)
781-275-6000
------------
(Registrant's telephone number including area code)
Indicate by "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
August 6, 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 June 30,
2008 (as restated) and December 31, 2007 (as restated) ............ 3
Unaudited Condensed Consolidated Statements of Operations for
the Three Months Ended June 30, 2008 and 2007 and the Six
Months Ended June 30, 2008 (as restated) and 2007 ................. 4
Unaudited Condensed Consolidated Statements of Cash Flows
for the Six Months Ended June 30, 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 ......................................... 20
Item 3. Quantitative and Qualitative Disclosures About Market Risk ........ 30
Item 4T. Controls and Procedures ........................................... 30
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ................................................. 33
Item 1A. Risk Factors ...................................................... 33
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds ....... 33
Item 3. Defaults Upon Senior Securities ................................... 33
Item 4. Submission of Matters to a Vote of Security Holders ............... 33
Item 5. Other Information ................................................. 33
Item 6. Exhibits .......................................................... 33
Signatures ........................................................ 35
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 and June 30, 2008 (the "Original Report") 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
June 30, 2008 and our condensed consolidated statements of operations, cash
flows and related disclosures for the six-month period ended June 30, 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 first 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 first
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, March 31,
2007 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
(1) See Note 2, to the Unaudited Condensed Consolidated Financial Statements
included in Part I, Item 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, August 13, 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
JUNE 30, DECEMBER 31,
2008 2007
------------ ------------
AS RESTATED (1)
------------------------------
ASSETS
Current assets
--------------
Cash and cash equivalents $ 4,462,000 $ 2,372,000
Restricted cash - current portion 250,000 391,000
------------ ------------
4,712,000 2,763,000
Accounts receivable - trade, net 7,450,000 11,865,000
Inventories, net 16,239,000 11,570,000
Deferred cost of goods sold 8,445,000 8,044,000
Deposits on equipment for inventory 2,682,000 2,475,000
Prepaid expenses and other current assets 391,000 542,000
------------ ------------
Total current assets 39,919,000 37,259,000
Property and equipment, net 6,108,000 6,209,000
Intangible and other assets, net 849,000 851,000
Available-for-sale investments, at quoted market value (cost of $1,696,000 and
$1,696,000 at 6/30/08 and 12/31/07, respectively) 1,637,000 1,800,000
Equity investment in joint venture 1,911,000 2,264,000
Deposit - related party 304,000 304,000
------------ ------------
Total other assets 4,701,000 5,219,000
------------ ------------
Total assets $ 50,728,000 $ 48,687,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
-------------------
Current portion of capital lease obligation - related party $ -- $ 486,000
Current portion of equipment line of credit 1,167,000 1,167,000
Accounts payable 5,017,000 2,909,000
Accrued liabilities 5,889,000 6,057,000
Current portion of advances on contracts in progress 26,130,000 24,053,000
------------ ------------
Total current liabilities 38,203,000 34,672,000
Long-term portion of equipment line of credit 1,166,000 1,750,000
Long-term portion of advances on contracts in progress 1,624,000 1,950,000
Deferred compensation 1,637,000 1,800,000
Other long-term liabilities 126,000 60,000
------------ ------------
Total long-term liabilities 4,553,000 5,560,000
------------ ------------
Total liabilities
42,756,000 40,232,000
------------ ------------
Stockholders' equity
--------------------
Common stock, $0.01 par value; 20,000,000 shares authorized; 8,330,688 and
8,321,188 shares issued and outstanding at June 30, 2008 and
December 31, 2007, respectively 83,000 83,000
Additional paid-in capital 20,429,000 19,999,000
Accumulated deficit (12,481,000) (11,689,000)
Accumulated other comprehensive income (loss), net (59,000) 62,000
------------ ------------
Total stockholders' equity 7,972,000 8,455,000
------------ ------------
Total liabilities and stockholders' equity $ 50,728,000 $ 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 JUNE 30, SIX MONTHS ENDED JUNE 30,
------------------------------ ------------------------------
2008 2007 2008 2007
AS RESTATED (1)
------------ ------------ ------------ ------------
Net sales and revenues
----------------------
Sales of goods $ 13,510,000 $ 6,100,000 $ 24,505,000 $ 10,439,000
Contract research, service and
license revenues 3,375,000 2,479,000 6,918,000 5,137,000
------------ ------------ ------------ ------------
Total net sales and revenues 16,885,000 8,579,000 31,423,000 15,576,000
------------ ------------ ------------ ------------
Costs of sales and revenues
---------------------------
Cost of goods sold 9,068,000 5,168,000 17,562,000 8,739,000
Cost of contract research, services
and licenses 2,342,000 2,322,000 4,716,000 4,450,000
------------ ------------ ------------ ------------
Total cost of sales and revenues 11,410,000 7,490,000 22,278,000 13,189,000
Gross margin 5,475,000 1,089,000 9,145,000 2,387,000
Operating expenses
------------------
Selling, general and administrative
expenses 4,997,000 2,856,000 8,775,000 5,864,000
Internal research and development
expenses 171,000 78,000 282,000 123,000
------------ ------------ ------------ ------------
Total operating expenses 5,168,000 2,934,000 9,057,000 5,987,000
------------ ------------ ------------ ------------
Income (loss) from operations 307,000 (1,845,000) 88,000 (3,600,000)
-----------------------------
Interest income (expense), net (48,000) (15,000) (108,000) 3,000
Loss on equity investment in joint venture (234,000) -- (364,000) --
Foreign exchange loss (294,000) (4,000) (408,000) (14,000)
------------ ------------ ------------ ------------
Total other expense, net (576,000) (19,000) (880,000) (11,000)
============ ============ ============ ============
Net loss $ (269,000) $ (1,864,000) $ (792,000) $ (3,611,000)
============ ============ ============ ============
Loss per share - basic and diluted $ (0.03) $ (0.23) $ (.10) $ (0.44)
============ ============ ============ ============
Weighted average number of common
and common equivalent shares
outstanding - basic and diluted 8,330,029 8,263,571 8,326,474 8,255,178
============ ============ ============ ============
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
SIX MONTHS ENDED JUNE 30,
------------------------------
2008 2007
AS RESTATED (1)
------------ ------------
Cash flows from operating activities:
-------------------------------------
Net loss $ (792,000) $ (3,611,000)
Adjustments to reconcile net loss to net cash provided by (used
in) operating activities:
Depreciation and amortization 1,077,000 945,000
Loss on impairment of capital equipment -- 78,000
Loss on equity investment in joint venture 364,000 --
Deferred compensation (121,000) 47,000
Stock-based compensation 409,000 208,000
Decrease in accounts receivable reserves (39,000) (47,000)
Increase (decrease) in inventory reserves 93,000 (210,000)
Changes in assets and liabilities:
Restricted cash 141,000 258,000
Accounts receivable 4,454,000 (633,000)
Inventories (4,773,000) (5,596,000)
Deferred Cost of Goods Sold (401,000) (205,000)
Deposits, prepaid expenses and other current assets (56,000) 1,199,000
Accounts payable, accrued liabilities and other liabilities 2,006,000 505,000
Deposit - related party -- (68,000)
Advances on contracts in progress 1,751,000 5,704,000
------------ ------------
Net cash provided by (used in) operating activities 4,113,000 (1,426,000)
------------ ------------
Cash flows from investing activities:
-------------------------------------
Proceeds from maturity of short-term investments -- 5,000,000
Purchase of property and equipment (925,000) (508,000)
Increase in intangible and other assets (49,000) (265,000)
------------ ------------
Net cash (used in) provided by investing activities (974,000) 4,227,000
------------ ------------
Cash flows from financing activities:
-------------------------------------
Principal payments on capital lease obligations - related parties (486,000) (448,000)
Borrowings from (principal payments on) equipment line of
credit, net (584,000) 3,500,000
Proceeds from exercise of stock options 21,000 105,000
------------ ------------
Net cash (used in) provided by financing activities (1,049,000) 3,157,000
------------ ------------
Net increase in cash and cash equivalents 2,090,000 5,958,000
Cash and cash equivalents, beginning of period 2,372,000 1,536,000
------------ ------------
Cash and cash equivalents, end of period $ 4,462,000 $ 7,494,000
============ ============
Supplemental disclosures of cash flow information:
--------------------------------------------------
Interest received $ 11,000 $ 50,000
============ ============
Interest paid $ 110,000 $ --
============ ============
Interest paid - related party $ 9,000 $ 47,000
============ ============
Income taxes paid $ -- $ 7,000
============ ============
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
JUNE 30, 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 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 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 61% of net sales and
revenues for the quarter ended June 30, 2008, continue to constitute a
significant portion of the Company's net sales and revenues.
The Company has incurred significant operating losses in 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. Income from operations for the six
months ended June 30, 2008 was $88,000. Previous 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 to the joint venture in 2007 and $7.7 million from the
sale of equity in 2006. For the six months ended June 30, 2008, the cash gain
(income from operations plus or minus non-cash adjustments) was $1,871,000. As
of June 30, 2008, the Company had unrestricted cash and cash equivalents of $4.5
million compared to unrestricted cash and cash equivalents of $2.4 million as of
December 31, 2007. While the Company has had positive cash flow from operations
for the past three quarters, the Company continues to experience net losses.
While the Company has numerous options on
6
how to fund these losses, including but not limited to sales of equity or the
sale or license of assets and technology, just as it has done the past; however,
there are no assurances that the Company would be able to sell equity or sell or
license those assets on a timely basis and at appropriate values. 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 June 30, 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, March 31,
2007 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 June 30, 2008 and
December 31, 2007 and for the six month period ended June 30, 2008 as
applicable:
7
SPIRE CORPORATION AND SUBSIDIARIES
UNAUDITED RESTATED CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 30, 2008 DECEMBER 31, 2007
---------------------------- ----------------------------
As Reported As Restated As Reported As Restated
------------ ------------ ------------ ------------
ASSETS
Current assets
--------------
Cash and cash equivalents $ 4,462,000 $ 4,462,000 $ 2,372,000 $ 2,372,000
Restricted cash - current portion 250,000 250,000 391,000 391,000
------------ ------------ ------------ ------------
4,712,000 4,712,000 2,763,000 2,763,000
Accounts receivable - trade, net 7,450,000 7,450,000 12,766,000 11,865,000
Inventories, net 23,211,000 16,239,000 18,506,000 11,570,000
Deferred cost of goods sold -- 8,445,000 -- 8,044,000
Deposits on equipment for inventory 2,682,000 2,682,000 2,475,000 2,475,000
Prepaid expenses and other current assets 391,000 391,000 542,000 542,000
------------ ------------ ------------ ------------
Total current assets 38,446,000 39,919,000 37,052,000 37,259,000
Property and equipment, net 6,108,000 6,108,000 6,209,000 6,209,000
Intangible and other assets, net 849,000 849,000 851,000 851,000
Available-for-sale investments, at quoted market value (cost
of $1,696,000 and $1,696,000 at 6/30/08 and 12/31/07,
respectively) 1,637,000 1,637,000 1,800,000 1,800,000
Equity investment in joint venture 1,911,000 1,911,000 2,264,000 2,264,000
Deposit - related party 304,000 304,000 304,000 304,000
------------ ------------ ------------ ------------
Total other assets 4,701,000 4,701,000 5,219,000 5,219,000
------------ ------------ ------------ ------------
Total assets $ 49,255,000 $ 50,728,000 $ 48,480,000 $ 48,687,000
============ ============ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
-------------------
Current portion of capital lease obligation - related $ -- $ -- $ 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 5,017,000 5,017,000 2,909,000 2,909,000
Accrued liabilities 5,889,000 5,889,000 6,057,000 6,057,000
Current portion of advances on contracts in progress 24,395,000 26,130,000 23,599,000 24,053,000
------------ ------------ ------------ ------------
Total current liabilities 36,468,000 34,218,000 34,672,000 38,203,000
Long-term portion of equipment line of credit 1,166,000 1,166,000 1,750,000 1,750,000
Long-term portion of advances on contracts in progress 1,624,000 1,624,000 1,950,000 1,950,000
Deferred compensation 1,637,000 1,637,000 1,800,000 1,800,000
Other long-term liabilities 126,000 126,000 60,000 60,000
------------ ------------ ------------ ------------
Total long-term liabilities 4,553,000 4,553,000 5,560,000 5,560,000
------------ ------------ ------------ ------------
Total liabilities 41,021,000 42,756,000 39,778,000 40,232,000
------------ ------------ ------------ ------------
Stockholders' equity
--------------------
Common stock, $0.01 par value; 20,000,000
shares authorized; 8,330,688 and 8,321,188
shares issued and outstanding at June 30, 2008
and December 31, 2007, respectively 83,000 83,000 83,000 83,000
Additional paid-in capital 20,429,000 20,429,000 19,999,000 19,999,000
Accumulated deficit (12,219,000) (12,481,000) (11,442,000) (11,689,000)
Accumulated other comprehensive income, net (59,000) (59,000) 62,000 62,000
------------ ------------ ------------ ------------
Total stockholders' equity 8,234,000 7,972,000 8,702,000 8,455,000
------------ ------------ ------------ ------------
Total liabilities and stockholders' equity $ 49,255,000 $ 50,728,000 $ 48,480,000 $ 48,687,000
============ ============ ============ ============
8
SPIRE CORPORATION AND SUBSIDIARIES
UNAUDITED RESTATED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2008
----------------------------
AS REPORTED AS RESTATED
------------ ------------
Net sales and revenues
----------------------
Sales of goods $ 24,885,000 $ 24,505,000
Contract research, service and license revenues 6,918,000 6,918,000
------------ ------------
Total net sales and revenues 31,803,000 31,423,000
Costs of sales and revenues
---------------------------
Cost of goods sold 17,927,000 17,562,000
Cost of contract research, services and licenses 4,716,000 4,716,000
------------ ------------
Total cost of sales and revenues 22,643,000 22,278,000
------------ ------------
Gross Margin 9,160,000 9,145,000
Operating expenses
------------------
Selling, general and administrative expenses 8,775,000 8,775,000
Internal research and development expenses 282,000 282,000
------------ ------------
Total operating expenses 9,057,000 9,057,000
------------ ------------
Income from operations 103,000 88,000
----------------------
Interest income (expense), net (108,000) (108,000)
Loss on equity investment in joint venture (364,000) (364,000)
Foreign exchange loss (408,000) (408,000)
------------ ------------
Total other income (expense), net (880,000) (880,000)
------------ ------------
Net loss $ (777,000) $ (792,000)
============ ============
Loss per share - basic and diluted $ (0.09) $ (0.10)
============ ============
Weighted average number of common and common equivalent
shares outstanding - basic and diluted 8,326,474 8,326,474
============ ============
9
SPIRE CORPORATION AND SUBSIDIARIES
UNAUDITED RESTATED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2008
----------------------------
AS REPORTED AS RESTATED
------------ ------------
Cash flows from operating activities:
-------------------------------------
Net loss $ (777,000) $ (792,000)
Adjustments to reconcile net loss to net cash provided by (used
in) operating activities:
Depreciation and amortization 1,077,000 1,077,000
Loss on impairment of capital equipment -- --
Loss on equity investment in joint venture 364,000 364,000
Deferred compensation (121,000) (121,000)
Stock-based compensation 409,000 409,000
Decrease in accounts receivable reserves (39,000) (39,000)
Decrease in inventory reserves 93,000 93,000
Changes in assets and liabilities:
Restricted cash 141,000 141,000
Accounts receivable 5,355,000 4,454,000
Inventories (4,809,000) (4,773,000)
Deferred cost of goods sold -- (401,000)
Deposits, prepaid expenses and other current assets (56,000) (56,000)
Accounts payable, accrued liabilities and other liabilities 2,006,000 2,006,000
Advances on contracts in progress 470,000 1,751,000
------------ ------------
Net cash provided by (used in) operating activities 4,113,000 4,113,000
------------ ------------
Cash flows from investing activities:
-------------------------------------
Proceeds from maturity of short-term investments -- --
Purchase of property and equipment (925,000) (925,000)
Increase in intangible and other assets (49,000) (49,000)
------------ ------------
Net cash provided by (used in) investing activities (974,000) (974,000)
------------ ------------
Cash flows from financing activities:
-------------------------------------
Principal payments on capital lease obligations - related parties (486,000) (486,000)
Principal payments on equipment line of credit, net (584,000) (584,000)
Proceeds from exercise of stock options 21,000 21,000
------------ ------------
Net cash used in financing activities (1,049,000) (1,049,000)
------------ ------------
Net increase (decrease) in cash and cash equivalents 2,090,000 2,090,000
Cash and cash equivalents, beginning of period 2,372,000 2,372,000
------------ ------------
Cash and cash equivalents, end of period $ 4,462,000 $ 4,462,000
============ ============
Supplemental disclosures of cash flow information:
--------------------------------------------------
Interest received $ 11,000 $ 11,000
============ ============
Interest paid $ 110,000 $ 110,000
============ ============
Interest paid - related party $ 9,000 $ 9,000
============ ============
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 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 June 30, 2008 and December 31,
2007 and the results of its operations and cash flows for the three and six
months ended June 30, 2008 and 2007. The results of operations for the three and
six months ended June 30, 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, if
any, that this standard will have on its financial position and results of
operations.
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 SFAS 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. FAS 161 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, if any, that this standard will have
on its financial position and results of operations.
11
In May 2008, the FASB issued SFAS No. 162 ("FAS 162"), THE HIERARCHY OF
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES. FAS 162 identifies the sources of
accounting principles and the framework for selecting the principles to be used
in the preparation of financial statements that are presented in conformity with
generally accepted accounting principles in the United States. FAS 162 is
effective 60 days following the SEC's approval of the Public Company Accounting
Oversight Board amendments to AU Section 411, THE MEANING OF PRESENT FAIRLY IN
CONFORMITY WITH GENERALLY ACCEPTED ACCOUNTING PRINCIPLES. The Company is
currently evaluating the impact, if any, that this standard will have on its
financial position and results of operations.
4. ACCOUNTS RECEIVABLE/ADVANCES ON CONTRACTS IN PROGRESS
Net accounts receivable, trade consists of the following:
June 30, December 31,
2008 2007
As Restated
------------ ------------
Amounts billed $ 6,611,000 $ 11,142,000
Retainage 8,000 8,000
Accrued revenue 1,022,000 945,000
------------ ------------
7,641,000 12,095,000
Less: Allowance for sales returns and doubtful accounts (191,000) (230,000)
------------ ------------
Net accounts receivable, trade $ 7,450,000 $ 11,865,000
============ ============
Advances on contracts in progress $ 27,754,000 $ 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.
The government's most recent audit was as of December 31, 2006, with no adverse
impact.
Accrued revenue represents revenues recognized on contracts for which
billings have not been presented to customers as of the balance sheet date.
These amounts are billed and generally collected within one year.
The Company maintains allowances for doubtful accounts for estimated
losses resulting from the inability of its customers to pay amounts due. The
Company actively pursues collection of past due receivables as the circumstances
warrant. Customers are contacted to determine the status of payment and senior
accounting and operations management are included in these efforts as is deemed
necessary. A specific reserve will be established for past due accounts when it
is probable that a loss has been incurred and the Company can reasonably
estimate the amount of the loss. The Company does not record an allowance for
government receivables and invoices backed by letters of credit as
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
Inventories, net of $447,000 and $354,000 of reserves at June 30, 2008
and December 31, 2007, respectively, consist of the following
at:
June 30, December 31,
2008 2007
------------ ------------
As Restated
---------------------------
Raw materials $ 5,629,000 $ 4,989,000
Work in process 5,732,000 4,663,000
Finished goods 4,878,000 1,918,000
------------ ------------
Net Inventory $ 16,239,000 $ 11,570,000
============ ============
Deferred cost of goods sold $ 8,445,000 $ 8,044,000
============ ============
12
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.
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 June 30, Six Months Ended June 30,
--------------------------- ---------------------------
2008 2007 2008 2007
------------ ------------ ------------ ------------
Weighted average number of common and common
equivalent shares outstanding - basic 8,330,029 8,263,571 8,326,474 8,255,178
Add: Net additional common shares upon
assumed exercise of common stock options -- -- -- --
------------ ------------ ------------ ------------
Adjusted weighted average number of common
and common equivalents shares outstanding -
diluted 8,330,029 8,263,571 8,326,474 8,255,178
============ ============ ============ ============
For the three and six months ended June 30, 2008, 168,834 and 188,760
shares, respectively, and for the three and six months ended June 30, 2007,
125,360 and 106,230 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 and six months ended June 30, 2008, 39,500
and zero shares, respectively, and for the three and six months ended June 30,
2007, 6,250 and 91,250 shares, respectively, 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 periods.
13
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 Biomedical Optoelectronics Company
------------------------------------------------------------
For the three months ended June 30, 2008
----------------------------------------
Net sales and revenues $ 12,647,000 $ 2,858,000 $ 1,380,000 $ 16,885,000
Income (loss) from operations $ 1,127,000 $ (181,000) $ (639,000) $ 307,000
For the three months ended June 30, 2007
----------------------------------------
Net sales and revenues $ 4,975,000 $ 2,827,000 $ 777,000 $ 8,579,000
Loss from operations $ (725,000) $ (215,000) $ (905,000) $ (1,845,000)
Total
Solar Biomedical Optoelectronics Company
As Restated As Restated
------------------------------------------------------------
For the six months ended June 30, 2008
--------------------------------------
Net sales and revenues $ 22,940,000 $ 5,666,000 $ 2,817,000 $ 31,423,000
Income (loss) from operations $ 1,440,000 $ (357,000) $ (995,000) $ 88,000
For the six months ended June 30, 2007
--------------------------------------
Net sales and revenues $ 8,568,000 $ 5,353,000 $ 1,655,000 $ 15,576,000
Loss from operations $ (1,308,000) $ (726,000) $ (1,566,000) $ (3,600,000)
The following table shows net sales and revenues by geographic area (based on
customer location):
Three Months Ended June 30, Six Months Ended June 30,
------------------------------------------------ ------------------------------------------------
2008 % 2007 % 2008 % 2007 %
As Restated
------------ ------ ------------ ------ ------------ ------ ------------ ------
United States $ 6,532,000 39% $ 4,901,000 57% $ 11,967,000 38% $ 8,112,000 52%
Europe/Africa 3,104,000 18 2,047,000 24 8,323,000 27 3,749,000 24
Asia 7,100,000 42 1,425,000 17 10,747,000 34 3,422,000 22
Rest of the world 149,000 1 206,000 2 386,000 1 293,000 2
------------ ------------ ------------ ------------
$ 16,885,000 100% $ 8,579,000 100% $ 31,423,000 100% $ 15,576,000 100%
============ ============ ============ ============
Revenues from contracts with United States government agencies for the
three months ended June 30, 2008 and 2007 were approximately $353,000 and
$225,000, or 2% and 3% of consolidated net sales and revenues, respectively.
Revenues from contracts with United States government agencies for the
six months ended June 30, 2008 and 2007 were approximately $753,000 and
$520,000, or 2% and 3% of consolidated net sales and revenues, respectively.
One customer accounted for approximately 11% and two customers accounted
for approximately 37% of the Company's gross sales during the three months ended
June 30, 2008 and 2007, respectively. One customer accounted for approximately
15% and three customers accounted for approximately 41% of the Company's gross
sales during the six months ended June 30, 2008 and 2007, respectively. Two
customers represented 23% of trade account receivables at June 30, 2008 and two
customers represented 46% of trade account receivables at December 31, 2007.
8. INTANGIBLE AND OTHER ASSETS
Patents amounted to $117,000, net of accumulated amortization of
$713,000, at June 30, 2008. Licenses amounted to $83,000, net of accumulated
amortization of $242,000, at June 30, 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
14
as well as $640,000 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 6 months $ 104,000
2009 178,000
2010 173,000
2011 167,000
2012 and beyond 218,000
----------
$ 840,000
==========
Also included in other assets at June 30, 2008 are approximately $9,000
of unamortized expenses that were prepaid.
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:
June 30, December 31,
2008 2007
------------ ------------
Equity investments $ 1,363,000 $ 1,411,000
Government bonds 222,000 303,000
Cash and money market funds 52,000 86,000
------------ ------------
$ 1,637,000 $ 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. As of June 30, 2008, the
unrealized loss on these marketable securities was $59,000.
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.
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.
15
The following table presents the financial instruments carried at fair
value as of June 30, 2008 by FAS 157 valuation hierarchy (as defined above).
Level 1 Level 2 Level 3 Total
----------- ----------- ----------- ----------
Available for sale investments $ 1,372,000 $ 265,000 -- $1,637,000
Percent of total 84% 16% -- 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). 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 all 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%). 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, on March 31, 2008 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 covenants as discussed below 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%).
On May 13, 2008, the Bank amended 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 (7.75% at June 30, 2008) 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.
Under the amended terms of both credit facilities, as long as any
commitment remains outstanding under the facilities, the Company must comply
with an adjusted quick ratio covenant and a minimum monthly 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 June 30, 2008, the Company's outstanding borrowings from the
Equipment Credit Facility amounted to $2,333,000 and there were no borrowings
from the Revolving Credit Facility. The Company was in compliance with its
covenants as of June 30, 2008.
16
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 June 30, 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 $213,000 and
$137,000 for the three months ended June 30, 2008 and 2007, respectively, and
approximately $409,000 and $208,000 for the six months ended June 30, 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 June 30, Six Months Ended June 30,
--------------------------- ---------------------------
2008 2007 2008 2007
------------ ------------ ------------ ------------
Cost of contract research, services and licenses $ 14,000 $ 14,000 $ 27,000 $ 19,000
Cost of goods sold 36,000 6,000 68,000 8,000
Administrative and selling 163,000 117,000 314,000 181,000
------------ ------------ ------------ ------------
Total stock-based compensation $ 213,000 $ 137,000 $ 409,000 $ 208,000
============ ============ ============ ============
At June 30, 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
June 30, 2008 and changes during the six-month period is as follows:
Average
Weighted- Remaining Aggregate
Number of Average Contractual Intrinsic
Shares Exercise Price Life (Years) Value
------------ ------------ ------------ ------------
Options Outstanding at December 31, 2007 495,177 $ 7.10
Granted 40,000 $ 13.87
Exercised (9,500) $ 2.22
Cancelled/expired (12,000) $ 9.56
------------ ------------
Options Outstanding at June 30, 2008 513,677 $ 7.67 7.55 $ 2,589,529
============ ============
Options Exercisable at June 30, 2008 265,927 $ 6.47 6.43 $ 1,656,389
============ ============
The per-share weighted-average fair value of stock options granted
during the three and six months ended June 30, 2008 was $9.15 and $7.96,
respectively, and $6.45 for both periods in 2007, 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 -- 2.73% 4.5 years 70.6%
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.
17
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 For the Six Months Ended
June 30, June 30,
---------------------------- ----------------------------
2008 2007 2008 2007
As Restated
------------ ------------ ------------ ------------
Net loss $ (269,000) $ (1,864,000) $ (792,000) $ (3,611,000)
Other comprehensive income (loss):
Unrealized gain (loss) on available for sale
marketable securities, net of tax (59,000) 48,000 (121,000) 47,000
------------ ------------ ------------ ------------
Total comprehensive loss $ (328,000) $ (1,816,000) $ (913,000) $ (3,564,000)
============ ============ ============ ============
18
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 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
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 cell and module production, having been a pioneer in the early
development of solar technology. This expertise has
19
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 six months ended June 30, 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 quarters ended
March 31, 2008 and June 30, 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 Six Months Ended
June 30, June 30,
--------------------- ---------------------
2008 2007 2008 2007
As Restated
-------- -------- -------- --------
Net sales and revenues 100% 100% 100% 100%
Cost of sales and revenues 68 87 71 85
-------- -------- -------- --------
Gross margin 32 13 29 15
Selling, general and administrative expenses 30 34 28 37
Internal research and development expenses 1 1 1 1
-------- -------- -------- --------
Income (loss) from operations 1 (22) 0 (23)
Other expense, net (3) -- (3) --
-------- -------- -------- --------
Net loss (2%) (22%) (3%) (23%)
======== ======== ======== ========
OVERALL
Our total net sales and revenues for the six months ended June 30, 2008
were $31,423,000 as compared to $15,576,000 for the six months ended June 30,
2007, which represents an increase of $15,847,000 or 102%. The increase was
primarily attributable to a $14,372,000 increase in solar sales and a $1,162,000
increase in optoelectronics sales.
SOLAR BUSINESS UNIT
Sales in our solar business unit increased 168% during the six months
ended June 30, 2008 to $22,940,000 as compared to $8,568,000 in the six months
ended June 30, 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 6% during the six
months ended June 30, 2008 to $5,666,000 as compared to $5,353,000 in the six
months ended June 30, 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 70% to
$2,817,000 during the six months ended June 30, 2008 as compared to $1,655,000
in the six months ended June 30, 2007. The increase reflects an overall increase
in
20
optoelectronics activities attributable to a shift in product mix to larger
scale commercial orders compared with smaller sized research and development
projects.
Three and Six Months Ended June 30, 2008 Compared to Three and Six Months Ended
---------------------------------------- --------------------------------------
June 30, 2007
-------------
NET SALES AND REVENUES
The following table categorizes our net sales and revenues for the
periods presented:
Three Months Ended
June 30, Increase
--------------------------- ---------------------
2008 2007 $ %
------------ ------------ ------------ ------
Sales of goods $ 13,510,000 $ 6,100,000 $ 7,410,000 121%
Contract research, services and license revenues 3,375,000 2,479,000 896,000 36%
------------ ------------ ------------
Net sales and revenues $ 16,885,000 $ 8,579,000 $ 8,306,000 97%
============ ============ ============
The 121% increase in sales of goods for the three months ended June 30,
2008 as compared to the three months ended June 30, 2007 was primarily due to an
increase in solar equipment revenues, partially offset by a decrease in catheter
products sales. Solar equipment sales increased 150% in 2008 as compared to 2007
primarily due to an overall increase in solar power industry activity. Sales of
catheters decreased approximately 20%.
The 36% increase in contract research, services and license revenues for
the three months ended June 30, 2008 as compared to the three months ended June
30, 2007 is primarily attributable to an increase in optoelectronics and
research and development activities, partially offset by a decrease in
orthopedics. Revenue from our optoelectronics processing services (Spire
Semiconductor) increased 77% 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 110% 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 decreased slightly in 2008 as compared
to 2007.
The following table categorizes the our net sales and revenues for the
periods presented:
Six Months Ended
June 30, Increase
--------------------------- ---------------------
2008 2007 $ %
As Restated As Restated
---------------------------------------------------
Sales of goods $ 24,505,000 $ 10,439,000 $ 14,066,000 135%
Contract research, services and license revenues 6,918,000 5,137,000 1,781,000 35%
------------ ------------ ------------
Net sales and revenues $ 31,423,000 $ 15,576,000 $ 15,847,000 102%
============ ============ ============
The 135% increase in sales of goods for the six months ended June 30,
2008 as compared to the six months ended June 30, 2007 was primarily due to an
increase in solar equipment revenues, partially offset by a decrease in catheter
products sales. Solar equipment sales increased 170% in 2008 as compared to 2007
primarily due to an overall increase in solar power industry activity. Sales of
catheters decreased approximately 12%.
The 35% increase in contract research, services and license revenues for
the six months ended June 30, 2008 as compared to the six months ended June 30,
2007 is primarily attributable to an increase in orthopedics, optoelectronics
services and research and development activities. Revenues from our orthopedic
activities increased 4% in 2008 as compared to 2007. Revenue from Spire's
optoelectronics processing services (Spire Semiconductor) increased 70% in 2008
compared to 2007 as a result of increased demand for Spire Semiconductor's
services and commercial production runs of products from its development
efforts. Revenues from our research and development activities increased 84% in
2008 as compared to 2007 primarily due to an increase in the number and value of
contracts associated with funded research and development.
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:
21
Three Months Ended June 30, Increase
---------------------------------------------- ---------------------
2008 % 2007 % $ %
------------ ------ ------------ ------ ------------ ------
Cost of goods sold $ 9,068,000 67% $ 5,168,000 85% $ 3,900,000 75%
Cost of contract research, services
and licenses 2,342,000 69% 2,322,000 94% 20,000 1%
------------ ------------ ------------
Net cost of sales and revenues $ 11,410,000 68% $ 7,490,000 87% $ 3,920,000 52%
============ ============ ============
Cost of goods sold increased 75% for the three months ended June 30,
2008 as compared to the three months ended June 30, 2007, primarily as a result
of the 121% increase in related revenues. As a percentage of sales, cost of
goods sold was 67% of sales of goods in 2008 as compared to 85% of sales in
2007. This reduction in the percentage of sales in 2008 is due to a favorable
product mix with improved margins along with better utilization of solar
manufacturing overhead.
Cost of contract research, services and licenses increased 1% for the
three months ended June 30, 2008 as compared to the three months ended June 30,
2007, primarily as a result of the 36% 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 69% of revenues in 2008 from 94% in 2007, primarily due to the absorption of
overhead costs improving margins in biomedical and optoelectronic services.
Cost of sales and revenues also includes approximately $50,000 and
$20,000 of stock-based compensation for the three months ending June 30, 2008
and 2007, respectively.
The following table categorizes our cost of sales and revenues for the
periods presented, stated in dollars and as a percentage of related sales and
revenues:
Six Months Ended June 30, Increase
---------------------------------------------- ---------------------
2008 % 2007 % $ %
As Restated As Restated
---------------------------------------------- ---------------------
Cost of goods sold $ 17,562,000 72% $ 8,739,000 84% $ 8,823,000 101%
Cost of contract research, services
and licenses 4,716,000 68% 4,450,000 87% 266,000 6%
------------ ------------ ------------
Net cost of sales and revenues $ 22,278,000 71% $ 13,189,000 85% $ 9,089,000 69%
============ ============ ============
The $ 8,823,000 (101%) increase in cost of goods sold for the six months
ended June 30, 2008 as compared to the six months ended June 30, 2007 was
primarily due to increased costs within our solar equipment product line
corresponding to the 170% increase in solar equipment sales. As a percentage of
sales, cost of goods sold was 69% of sales of goods in 2008 as compared to 84%
of sales in 2007. This reduction in the percentage of sales in 2008 is due to a
favorable product mix with improved margins along with better utilization of
solar manufacturing overhead.
Cost of contract research, services and licenses increased 6% in the six
months ended June 30, 2008 as compared to the six months ended June 30, 2007,
primarily as a result of the 35% 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
68% of revenues in 2008 from 87% in 2007, primarily due to the absorption of
overhead costs improving margins in biomedical and optoelectronic services.
Cost of sales and revenues also includes approximately $95,000 and
$27,000 of stock-based compensation for the six months ending June 30, 2008 and
2007, respectively.
OPERATING EXPENSES
The following table categorizes our operating expenses for the periods
presented, stated in dollars and as a percentage of total sales and revenues:
Three Months Ended June 30, Increase
---------------------------------------------- ---------------------
2008 % 2007 % $ %
------------ ------ ------------ ------ ------------ ------
Selling, general and administrative $ 4,997,000 30% $ 2,856,000 33% $ 2,141,000 75%
Internal research and development 171,000 1% 78,000 1% 93,000 119%
------------ ------------ ------------
Operating expenses $ 5,168,000 31% $ 2,934,000 34% $ 2,234,000 76%
============ ============ ============
22
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expense increased 75% in the three
months ended June 30, 2008 as compared to the three months ended June 30, 2007,
primarily as a result of an increase in stock-based compensation, marketing
activities, 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 30%
of sales and revenues in 2008 as compared to 33% in 2007. The reduction was
primarily due to the absorption of overhead related costs by the 97% increase in
sales and revenues.
Operating expenses includes approximately $163,000 and $117,000 of
stock-based compensation for the three months ending June 30, 2008 and 2007,
respectively.
INTERNAL RESEARCH AND DEVELOPMENT
Internal research and development expense increased 119% in the three
months ended June 30, 2008 as compared to the three months ended June 30, 2007,
primarily as a result of our cost sharing contract with the National Renewable
Energy Laboratory ("NREL") reducing 2007 costs. In addition, Spire Semiconductor
had higher head count and related employee costs for the period. As a percentage
of sales and revenue, however, internal research and development expenses
remained at 1% for both periods.
The following table categorizes the our operating expenses for the
periods presented, stated in dollars and as a percentage of total sales and
revenues:
Six Months Ended June 30, Increase
---------------------------------------------- ---------------------
2008 % 2007 % $ %
------------ ------ ------------ ------ ------------ ------
Selling, general and administrative $ 8,775,000 28% $ 5,864,000 38% $ 2,911,000 50%
Internal research and development 282,000 1% 123,000 1% 159,000 129%
------------ ------------ ------------
Operating expenses $ 9,057,000 29% $ 5,987,000 38% $ 3,070,000 51%
============ ============ ============
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expense increased 50% in the six
months ended June 30, 2008 as compared to the six months ended June 30, 2007,
primarily as a result of an increase in stock-based compensation, marketing
activities, 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 28%
of sales and revenues in 2008 as compared to 38% in 2007. The reduction was
primarily due to the absorption of overhead related costs by the 104% increase
in sales and revenues.
Operating expenses includes approximately $314,000 and $181,000 of
stock-based compensation for the six months ending June 30, 2008 and 2007,
respectively.
INTERNAL RESEARCH AND DEVELOPMENT
Internal research and development expense increased 129% in the six
months ended June 30, 2008 as compared to the six months ended June 30, 2007,
primarily as a result of our cost sharing contract with the NREL reducing 2007
costs. In addition, Spire Semiconductor had higher head count and related
employee costs for the period. As a percentage of sales and revenue, however,
internal research and development expenses remained at 1% for both periods.
OTHER INCOME (EXPENSE), NET
We earned $2,000 and $9,000 of interest income for the three months
ended June 30, 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 $50,000 and $24,000 for the three months ended June 30, 2008
and 2007, respectively. The increased interest expense is due to higher interest
payments associated with the Equipment Credit Facility outstanding with Silicon
Valley Bank compared with 2007 interest expenses primarily associated with
interest incurred on capital leases associated with the semiconductor foundry.
We recorded a $234,000 loss on equity investment in joint venture with Gloria
Solar for
23
the three months ended June 30, 2008. Due to the conversion of U.S. dollars into
Japanese Yen, we lost approximately $294,000 and $4,000 during the three months
ended June 30, 2008 and 2007, respectively.
We earned $11,000 and $53,000 of interest income for the six months
ended June 30, 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 $119,000 and $50,000 for the six months ended June 30, 2008
and 2007, respectively. The increased interest expense is due to higher interest
payments associated with the Equipment Credit Facility outstanding with Silicon
Valley Bank compared with 2007 interest expenses primarily associated with
interest incurred on capital leases associated with the semiconductor foundry.
We recorded a $364,000 loss on equity investment in joint venture with Gloria
Solar for the six months ended June 30, 2008. Due to the conversion of U.S.
dollars into Japanese Yen, we lost approximately $408,000 and $13,000 during the
six months ended June 30, 2008 and 2007, respectively.
INCOME TAXES
We did not record an income tax benefit for the three and six months
ended June 30, 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 June 30, 2008 and 2007
of approximately $269,000 and $1,864,000, respectively. The net loss decreased
approximately $1,595,000 primarily due to the increase in sales and revenues and
the improvement in gross margins.
We reported a net loss for the six months ended June 30, 2008 and 2007
of approximately $792,000 and $3,611,000, respectively. The net loss decreased
approximately $2,819,000 primarily due to the increase in sales and revenues and
the improvement in gross margins.
Liquidity and Capital Resources
-------------------------------
Increase/(Decrease)
June 30, December 31, ----------------------
2008 2007 $ %
As Restated
----------------------------------------------------
Cash and cash equivalents $ 4,462,000 $ 2,372,000 $ 2,090,000 88%
Working capital 1,716,000 2,587,000 $ (871,000) (34%)
Cash and cash equivalents increased due to cash provided by operating
activities, partially offset by cash used in investing and financing activities.
The overall reduction in working capital is due to an increase in current
liabilities, partially offset by operating cash flow. 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).
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%). 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
24
addition, on March 31 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 covenants as discussed below 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%).
On May 13, 2008, the Bank amended the Equipment Credit Facility and the
Revolving Credit Facility, modifying our net income profitability covenant
requirements in exchange for a three quarters percent (0.75%) increase in our
interest rate (7.75% at June 30, 2008) 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. 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%). In addition, our term loan balance
will be factored in when calculating our borrowing base under the Revolving
Credit Facility.
Under the amended terms of both credit facilities, as long as any
commitment remains outstanding under the facilities, we must comply with an
adjusted quick ratio covenant and a minimum monthly 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 June 30, 2008, we had outstanding borrowings from the Equipment
Credit Facility amounting to $2,333,000 and there were no borrowings from the
Revolving Credit Facility. We were in compliance with our covenants as of June
30, 2008.
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 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
June 30, 2008, our accumulated deficit was approximately $12,481,000, 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 or
equity-related 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 attempt to hedge when possible known transactions to
minimize foreign exchange risk.
25
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. 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 and six months ended
June 30, 2008 was $505,000 and $1,010,000, respectively.
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 May 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 June 30, 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 $1,600 for the three months ended June 30, 2008. This
lease has been classified as a related party capital lease and a summary of
payments (including interest) follows:
Rate Per Security
Year Square Foot Annual Rent Monthly Rent Deposit
--------------------------- ----------- ----------- ------------ --------
June 1, 2003 - May 31, 2004 $6.00 $ 540,000 $ 45,000 $135,000
June 1, 2004 - May 31, 2005 7.50 675,000 56,250 168,750
June 1, 2005 - May 31, 2006 8.50 765,000 63,750 191,250
June 1, 2006 - May 31, 2007 10.50 945,000 78,750 236,250
June 1, 2007 - May 31, 2008 13.50 1,215,000 101,250 303,750
----------
$4,140,000
==========
Upon the expiration of the lease in May 2008, we did not exercise our
option to extend the lease for an additional 5 years. On May 20, 2008, we agreed
with SPI-Trust to continue the current lease, under the current terms and
conditions on a month-to-month basis for a maximum of three (3) months beyond
the current term, up to August 23, 2008.
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
26
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 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 June 30, 2008, is as follows:
Rebates Returns Total
------------ ------------ ------------
Balance - March 31, 2008 $ 86,000 $ 10,000 $ 96,000
Provision 123,000 8,000 131,000
Utilization (113,000) (9,000) (122,000)
------------ ------------ ------------
Balance - June 30, 2008 $ 96,000 $ 9,000 $ 105,000
============ ============ ============
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 10.5% at June 30, 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 $912,000 at June 30, 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
27
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 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 $213,000 and
$137,000 for the three months ended June 30, 2008 and 2007, respectively. Stock
option expense was $409,000 and $208,000 for the six months ended June 30, 2008
and 2007, respectively.
Contractual Obligations, Commercial Commitments and Off-Balance Sheet
---------------------------------------------------------------------
Arrangements
------------
The following table summarizes our gross contractual obligations at June 30,
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) $ 2,524,000 $ 1,308,000 $ 1,216,000 -- --
Revolving Credit Facility (SVB) -- -- -- -- --
Purchase obligations $ 15,249,000 $ 14,968,000 $ 281,000 -- --
Capital leases:
Related party capital lease -- -- -- -- --
Operating leases:
Unrelated party operating leases $ 314,000 $ 135,000 $ 179,000 -- --
Related party operating lease $ 9,044,000 $ 1,866,000 $ 4,056,000 $ 3,122,000 --
28
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.
Total foreign exchange loss for the quarter ended June 30, 2008 of
approximately $294,000 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 June 30,
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, June 30, 2008.
29
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
June 30, 2008.
As previously reported in our Annual Report on Form 10-K, as filed with
the Securities and 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 2008 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 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 June 30, 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. In
July 2008, we hired a Senior Financial Analyst, who will be actively involved in
the financial close and reporting process and assisting us in our remediation
efforts. We have implemented new IT policies and inventory procedures and
progress was made in addressing the controls over IT and Inventory.
30
Further, the we have hired an outside consulting firm to finish our
Sarbanes-Oxley efforts started in 2007. As a non-accelerated filer, our
management will perform an evaluation of our internal control over financial
reporting at the end of the year; however, our independent registered public
accounting firm is not required to issue an opinion on the design or
effectiveness on our internal control over financial reporting for the 2008
fiscal year.
31
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 claimed one of our catheter
products induced and contributed to infringement when medical professionals
inserted it. We responded to the complaint denying all allegations and filed
certain counterclaims. We also 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"). 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.
We have filed summary judgment motions with the Court and a hearing date on the
motions has been set for the late fall of 2008. Based on information presently
available to us, we believe we have meritorious legal defenses with respect to
this action. If we are unsuccessful in our defenses, a portion of our product
line may be enjoined or we may need to redesign certain products to avoid future
infringement. However, if the plaintiff's patent is found valid and infringed,
the parties have already agreed to a stipulated calculation of damages based on
a pre-specified royalty rate.
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
On May 22, 2008, we held a Special Meeting in Lieu of Annual Meeting
of Stockholders. At the meeting, stockholders voted on the following:
PROPOSAL NUMBER 1
The number of directors was fixed at eight, leaving one vacancy. Udo
Henseler, David R. Lipinski, Mark C. Little, Roger G. Little, Michael J.
Magliochetti, Guy L. Mayer and Roger W. Redmond were elected to the Board of
Directors to hold office until the 2009 annual meeting of the stockholders. The
results for Proposal Number 1 were as follows:
----------------------------------- ------------ -------------------------- ------------ -----------
Shares Shares Voting Against or Shares Broker
Nominee Voting For Authority Withheld Abstaining Non-Votes
----------------------------------- ------------ -------------------------- ------------ -----------
Udo Henseler 6,893,524 235,492 -- --
----------------------------------- ------------ -------------------------- ------------ -----------
David R. Lipinski 6,238,583 890,433 -- --
----------------------------------- ------------ -------------------------- ------------ -----------
Mark C. Little 6,227,827 901,189 -- --
----------------------------------- ------------ -------------------------- ------------ -----------
Roger G. Little 6,240,954 888,062 -- --
----------------------------------- ------------ -------------------------- ------------ -----------
Michael J. Magliochetti 6,897,578 231,438 -- --
----------------------------------- ------------ -------------------------- ------------ -----------
Guy L. Mayer 6,897,393 231,623 -- --
----------------------------------- ------------ -------------------------- ------------ -----------
Roger W. Redmond 6,894,193 234,823 -- --
----------------------------------- ------------ -------------------------- ------------ -----------
ITEM 5. OTHER INFORMATION
None
32
ITEM 6. EXHIBITS
10(ac) Second Loan Modification Agreement, dated May 13, 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 June 30, 2008 with the Securities and Exchange
Commission filed on August 13, 2008.
10(ad) Waiver and First Loan Modification Agreement, dated May 13,
2008, to 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
June 30, 2008 with the Securities and Exchange Commission
filed on August 13, 2008.
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.
33
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
34
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.
35