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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
|X| Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the quarterly period ended June 30, 2006; or
|_| Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the transition period from _________ to _________
Commission file number: 0-12742
SPIRE CORPORATION
(Name of small business issuer as specified in its charter)
MASSACHUSETTS 04-2457335
------------------------------- ---------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
ONE PATRIOTS PARK
BEDFORD, MASSACHUSETTS 01730-2396
(Address of principal executive offices)
781-275-6000
(Issuer's telephone number)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports); and (2) has been subject to such filing requirements for the past 90
days. Yes |X| No |_|
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes |_| No |X|
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date: There were 8,212,913
outstanding shares of the issuer's only class of common equity, Common Stock,
$0.01 par value, on August 8, 2006.
Transitional Small Business Disclosure Format (check one): Yes |_| No |X|
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TABLE OF CONTENTS
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Unaudited Condensed Consolidated Balance Sheet as of June
30, 2006............................................................ 1
Unaudited Condensed Consolidated Statements of Operations
for the Three and Six Months Ended June 30, 2006 and 2005........... 2
Unaudited Condensed Consolidated Statements of Cash Flows
for the Six Months Ended June 30, 2006 and 2005..................... 3
Notes to Unaudited Condensed Consolidated Financial Statements ..... 4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.......................................... 12
Item 3. Controls and Procedures............................................ 21
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.................................................. 23
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds........ 23
Item 3. Defaults Upon Senior Securities.................................... 23
Item 4. Submission of Matters to a Vote of Security Holders................ 23
Item 5. Other Information.................................................. 24
Item 6. Exhibits........................................................... 24
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SPIRE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED)
JUNE 30, 2006
-------------
ASSETS
Current assets
Cash and cash equivalents $ 1,905,228
Restricted cash 203,672
------------
2,108,900
Short-term investments 7,500,000
Accounts receivable - trade, net 2,460,818
Inventories, net 3,279,215
Prepaid expenses and other current assets 451,794
------------
Total current assets 15,800,727
Net property and equipment 3,626,077
Intangible and other assets (less accumulated amortization of $738,549) 794,018
Available-for-sale investments at quoted market value (cost of $1,217,481) 1,205,244
Restricted cash - long-term 121,000
Deposit - related party 236,250
------------
Total assets $ 21,783,316
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Current portion of capital lease obligation $ 235,081
Current portion of capital lease obligation - related party 859,280
Accounts payable 1,355,852
Accrued liabilities 2,224,022
Advances on contracts in progress 1,588,763
------------
Total current liabilities 6,262,998
------------
Long-term portion of capital lease obligation - related party 1,065,416
Deferred compensation 1,205,244
------------
Total long-term liabilities 2,270,660
------------
Total liabilities 8,533,658
------------
Commitments and Contingencies:
Stockholders' equity
Common stock, $0.01 par value; 20,000,000 shares authorized;
8,212,163 shares issued and outstanding 82,122
Additional paid-in capital 18,865,260
Accumulated deficit (5,690,253)
Accumulated other comprehensive deficit (7,471)
------------
Total stockholders' equity 13,249,658
------------
Total liabilities and stockholders' equity $ 21,783,316
============
See accompanying notes to unaudited condensed
consolidated financial statements.
1
SPIRE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
------------------------------ ------------------------------
2006 2005 2006 2005
------------ ------------ ------------ ------------
Net sales and revenues
----------------------
Contract research, service and
license revenues $ 2,603,470 $ 2,809,657 $ 5,112,986 $ 5,541,671
Sales of goods 1,291,319 4,537,458 4,155,246 5,984,959
------------ ------------ ------------ ------------
Total net sales and revenues 3,894,789 7,347,115 9,268,232 11,526,630
------------ ------------ ------------ ------------
Costs and expenses
Cost of contract research, services and licenses 2,259,784 2,157,660 4,504,581 4,275,465
Cost of goods sold 1,340,295 4,291,820 3,693,993 5,710,580
Selling, general and administrative expenses 2,216,557 2,057,026 4,810,232 3,886,605
Internal research and development expenses 195,204 340,873 353,254 658,069
------------ ------------ ------------ ------------
Total costs and expenses 6,011,840 8,847,379 13,362,060 14,530,719
------------ ------------ ------------ ------------
Gain on sale of licenses -- 6,319,600 -- 6,319,600
------------ ------------ ------------ ------------
Income (loss) from operations (2,117,051) 4,819,336 (4,093,828) 3,315,511
Other income (expense), net 36,358 (121,184) 8,744 (197,801)
------------ ------------ ------------ ------------
Income (loss) before income taxes (2,080,693) 4,698,152 (4,085,084) 3,117,710
Income tax expense (benefit) -- -- -- --
------------ ------------ ------------ ------------
Net income (loss) $ (2,080,693) $ 4,698,152 $ (4,085,084) $ 3,117,710
============ ============ ============ ============
Earnings (loss) per share of common stock -
basic $ (0.26) $ 0.69 $ (0.54) $ 0.45
============ ============ ============ ============
Earnings (loss) per share of common stock -
diluted $ (0.26) $ 0.67 $ (0.54) $ 0.44
============ ============ ============ ============
Weighted average number of common and
common equivalent shares outstanding -
basic 7,905,479 6,856,616 7,572,598 6,855,783
============ ============ ============ ============
Weighted average number of common and
common equivalent shares outstanding -
diluted 7,905,479 7,042,492 7,572,598 7,045,315
============ ============ ============ ============
See accompanying notes to unaudited condensed
consolidated financial statements.
2
SPIRE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED JUNE 30,
----------------------------
2006 2005
----------- -----------
Cash flows from operating activities:
Net income (loss) $(4,085,084) $ 3,117,710
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Depreciation and amortization 1,057,873 1,245,007
Gain on sale of licenses -- (6,319,600)
Deferred compensation (31,957) (23,407)
Unearned purchase discount -- (54,128)
Stock-based compensation 119,191 --
Increase in accounts receivable reserves 102,477 32,080
Interest receivable (57,438) --
Changes in assets and liabilities:
Restricted cash 600,873 (379,574)
Accounts receivable 1,133,116 742,853
Inventories (618,726) 322,891
Prepaid expenses and other current assets 212,497 (27,920)
Accounts payable and accrued liabilities 390,746 445,982
Deposit - related party (45,000) (22,500)
Advances on contracts in progress (169,716) (578,653)
----------- -----------
Net cash used in operating activities (1,391,148) (1,499,259)
----------- -----------
Cash flows from investing activities:
Purchase of short-term investments (7,500,000) --
Proceeds from sale of licenses -- 6,319,600
Additions to property and equipment (124,356) (166,719)
Restricted cash - long term -- 17,979
Increase in intangible and other assets (167,216) (5,117)
----------- -----------
Net cash provided by (used in) investing activities (7,791,572) 6,165,743
----------- -----------
Cash flows from financing activities:
Proceeds from issuance of common stock, net of offering costs 7,729,594 --
Principal payment on capital lease obligations (211,603) (197,336)
Principal payment on capital lease obligations - related parties (323,286) (250,652)
Proceeds from exercise of stock options 263,080 20,701
----------- -----------
Net cash used in financing activities (7,457,785) (427,287)
----------- -----------
Net increase (decrease) in cash and cash equivalents (1,724,935) 4,239,197
Cash and cash equivalents, beginning of period 3,630,163 3,336,867
----------- -----------
Cash and cash equivalents, end of period $ 1,905,228 $ 7,576,064
----------- -----------
Supplemental disclosures of cash flow information:
Cash paid (received) during the period for:
Interest $ (22,942) $ 11,235
----------- -----------
Interest - related party $ 74,215 $ 103,060
----------- -----------
Income taxes $ -- $ 110,064
----------- -----------
See accompanying notes to unaudited condensed
consolidated financial statements.
3
SPIRE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 30, 2006
1. DESCRIPTION OF THE BUSINESS
Spire Corporation (the "Company") develops, manufactures and markets
highly-engineered products and services in four principal business areas: solar
equipment, solar systems, biomedical and optoelectronics, bringing to bear
expertise in materials technologies across all four business areas.
In the solar equipment area, the Company develops, manufactures and markets
specialized equipment for the production of terrestrial photovoltaic modules
from solar cells. The Company's equipment has been installed in approximately
170 factories in 43 countries.
In the solar systems area, the Company provides custom and building
integrated photovoltaic modules, stand-alone emergency power backup and electric
power grid-connected distributed power generation systems employing photovoltaic
technology developed by the Company.
In the biomedical area, the Company provides value-added surface treatments
to manufacturers of orthopedic and other medical devices that enhance the
durability, antimicrobial characteristics or other material characteristics of
their products; develops and markets hemodialysis catheters and related devices
for the treatment of chronic kidney disease; and performs sponsored research
programs into practical applications of advanced biomedical and biophotonic
technologies.
In the optoelectronics area, the Company provides compound semiconductor
foundry services on a merchant basis to customers involved in
biomedical/biophotonic instruments, telecommunications and defense applications.
Services include compound semiconductor wafer growth, other thin film processes
and related device processing and fabrication services. The Company also
provides materials testing services and performs services in support of
sponsored research into practical applications of optoelectronic technologies.
2. INTERIM FINANCIAL STATEMENTS
In the opinion of management, the accompanying unaudited condensed
consolidated financial statements contain all adjustments necessary to fairly
present the Company's financial position as of June 30, 2006 and the results of
its operations and cash flows for the three and six months ended June 30, 2006
and 2005. The results of operations for the three and six months ended June 30,
2006 are not necessarily indicative of the results to be expected for the fiscal
year ending December 31, 2006.
The accounting policies followed by the Company are set forth in Footnote 2
to the Company's consolidated financial statements in its annual report on Form
10-KSB for the year ended December 31, 2005. As described in Footnote 11, the
Company adopted Financial Accounting Standards Board Statement No. 123(R),
Share-Based Payment, on January 1, 2006.
Certain prior period amounts have been reclassified to conform with the
current presentation.
3. SHORT-TERM INVESTMENTS
Short-term investments at June 30, 2006 consist of $7.5 million of
certificates of deposit with original maturity dates of eleven months. Interest
receivable on these short-term investments amounted to approximately $57,000 at
June 30, 2006, and is classified with other current assets.
4
SPIRE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
JUNE 30, 2006
4. ACCOUNTS RECEIVABLE/ADVANCES ON CONTRACTS IN PROGRESS
Net accounts receivable, trade consists of the following:
June 30, 2006
-------------
Amounts billed $2,428,026
Retainage 21,876
Accrued revenue 300,327
----------
2,750,229
Less: Allowance for sales returns and doubtful accounts (289,411)
----------
Net accounts receivable $2,460,818
==========
Advances on contracts in progress $1,588,763
==========
Accrued revenue represents revenue recognized on contracts for which
billings have not been presented to customers as of the balance sheet date.
These amounts are billed and generally collected within one year.
Retainage represents revenues on certain United States government sponsored
research and development contracts. These amounts, which usually represent 15%
of the Company's research fee on each applicable contract, are not collectible
until a final cost review has been performed by government auditors. Included in
retainage are amounts expected to be collected after one year, which totaled
approximately $22,000 at June 30, 2006. All other accounts receivable are
expected to be collected within one year.
All contracts with United States government agencies have been audited by
the government through December 2004. The Company has not incurred significant
losses or adjustments as a result of government audits.
The Company maintains allowances for doubtful accounts for estimated losses
resulting from the inability of its customers to pay amounts due. The Company
actively pursues collection of past due receivables as the circumstances
warrant. Customers are contacted to determine the status of payment and senior
accounting and operations management are included in these efforts as is deemed
necessary. A specific reserve will be established for past due accounts over 60
days and over a specified amount, when it is probable that a loss has been
incurred and the Company can reasonably estimate the amount of the loss. The
Company does not record an allowance for government receivables and invoices
backed by letters of credit as realizeability is reasonably assured. Bad debts
are written off against the allowance when identified. There is no dollar
threshold for account balance write-offs. While rare, a write-off is only
recorded when all efforts to collect the receivable have been exhausted and only
in consultation with the appropriate business line manager.
In addition, the Company maintains an allowance for potential future
product returns and rebates related to current period revenues. The Company
analyzes the rate of historical returns when evaluating the adequacy of the
allowance for sales returns and allowances. Returns and rebates are charged
against the allowance when incurred.
Advances on contracts in progress represent contracts for which billings
have been presented to the customer but revenue has not been recognized.
5. INVENTORIES
Inventories consist of the following:
June 30, 2006
-------------
Raw materials $1,389,449
Work in process 1,616,806
Finished goods 272,960
----------
$3,279,215
==========
5
SPIRE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
JUNE 30, 2006
6. EARNINGS (LOSS) PER SHARE
The following table provides a reconciliation of the denominators of the
Company's reported basic and diluted earnings (loss) per share computations for
the periods ended:
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
2006 2005 2006 2005
---------- ---------- ---------- ----------
Weighted average number of common
and common equivalent shares
outstanding - basic 7,905,479 6,856,616 7,572,598 6,855,783
Add: Net additional common shares
upon assumed exercise of common
stock options -- 185,876 -- 189,532
---------- ---------- ---------- ----------
Adjusted weighted average number of
common and common equivalents
shares outstanding - diluted 7,905,479 7,042,492 7,572,598 7,045,315
========== ========== ========== ==========
For the three and six months ended June 30, 2006, 22,500 and 16,250 shares,
respectively, and for the three and six months ended June 30, 2005, 84,568 and
84,535 shares, respectively, of common stock issuable relative to stock options
had exercise prices per share that exceeded the average market price of the
Company's common stock and were excluded from the calculation of diluted shares
since the inclusion of such shares would be anti-dilutive.
In addition, for the three and six months ended June 30, 2006, 176,680 and
189,134 shares, respectively, of common stock issuable relative to stock options
were excluded from the calculation of dilutive shares since the inclusion of
such shares would be anti-dilutive due to the Company's net loss position in the
periods.
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."
Solar Solar Total
Equipment Systems Biomedical Optoelectronics Company
--------------------------------------------------------------------------------------------------------------------------
For the three months ended June 30, 2006
Net sales and revenues $ 590,371 $ 56,277 $ 2,555,644 $ 692,497 $ 3,894,789
Loss from operations (798,450) (249,434) (300,341) (768,826) (2,117,051)
For the three months ended June 30, 2005
Net sales and revenues $ 2,437,322 $ 1,522,541 $ 2,785,042 $ 602,210 $ 7,347,115
Income (loss) from operations 2,643,812 (75,764) 2,891,836 (640,548) 4,819,336
For the six months ended June 30, 2006
Net sales and revenues $ 2,905,605 $ 279,150 $ 4,883,600 $ 1,199,877 $ 9,268,232
Loss from operations (881,071) (596,914) (951,832) (1,664,011) (4,093,828)
For the six months ended June 30, 2005
Net sales and revenues $ 3,379,315 $ 1,575,991 $ 5,278,138 $ 1,293,186 $11,526,630
Income (loss) from operations 2,253,706 (471,695) 2,754,426 (1,220,926) 3,315,511
6
SPIRE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
JUNE 30, 2006
Earnings from operations for the solar equipment and biomedical segments
include gains on the sale of licenses of $3,319,600 and $3,000,000,
respectively, for the three and six months ended June 30, 2005. These gains are
more fully described in Footnote 13.
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,
----------------------------------- -----------------------------------
2006 % 2005 % 2006 % 2005 %
---------- ---- ---------- ---- ---------- ---- ----------- ----
Foreign $ 968,000 25% $2,650,000 36% $3,460,000 37% $ 3,277,000 29%
United States 2,927,000 75% 4,697,000 64% 5,808,000 63% 8,250,000 71%
---------- ---- ---------- ---- ---------- ---- ----------- ----
$3,895,000 100% $7,347,000 100% $9,268,000 100% $11,527,000 100%
========== ==== ========== ==== ========== ==== =========== ====
Revenues from contracts with United States government agencies for the
three months ended June 30, 2006 and 2005 were $506,000 and $788,000, or 13% and
11% of consolidated net sales and revenues, respectively.
Revenues from contracts with United States government agencies for the six
months ended June 30, 2006 and 2005 were $1,126,000 and $1,681,000, or 12% and
15% of consolidated net sales and revenues, respectively.
One customer accounted for approximately 16% of the Company's gross sales
during the three months ended June 30, 2006 and four customers accounted for
approximately 51% of the Company's gross sales for the three months ended June
30, 2005. Two customers accounted for approximately 27% of the Company's gross
sales during the six months ended June 30, 2006 and one customer accounted for
approximately 15% of the Company's gross sales for the six months ended June 30,
2005. One customer represented approximately 20% of trade accounts receivable at
June 30, 2006 and one customer represented approximately 11% of trade accounts
receivable at June 30, 2005.
8. INTANGIBLE AND OTHER ASSETS
Patents amounted to $91,790 net of accumulated amortization of $616,990, at
June 30, 2006. Licenses amounted to 178,441, net of accumulated amortization of
$121,559 at June 30, 2006. Patent cost is primarily composed of cost associated
with securing and registering patents that the Company has been awarded or that
have been submitted to, and the Company believes will be approved by, the
government. License cost is composed of the cost to acquire rights to the
underlying technology or know-how. These costs are capitalized and amortized
over their useful lives or terms, ordinarily five years, using the straight-line
method. There are no expected residual values related to these patents or
licenses. For disclosure purposes, the table below includes future amortization
expense for licenses and patents owned by the Company as well as $510,933 of
estimated amortization expense on a five-year straight-line basis related to
patents that remain pending as of the balance sheet date. Estimated amortization
expense for the periods ending December 31, is as follows:
Amortization
Year Expense
-------------- ------------
2006 $ 101,997
2007 197,114
2008 170,067
2009 149,016
2010 and beyond 162,970
------------
$ 781,164
------------
Also included in other assets are $12,854 of refundable deposits and other
assets.
7
SPIRE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
JUNE 30, 2006
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, 2006
-------------
Equity investments $ 834,960
Government bonds 229,057
Cash and money market funds 141,227
------------
$ 1,205,244
============
These investments have been classified as long-term available-for-sale
investments and are reported at fair value, with unrealized gains and losses
included in accumulated other comprehensive loss, net of related tax effect. As
of June 30, 2006, the net unrealized loss on these marketable securities was
approximately $7,000.
10. NOTES PAYABLE AND CREDIT ARRANGEMENTS
The Company has a $2,000,000 Loan Agreement (the "Agreement") with Citizens
Bank of Massachusetts (the "Bank"), which expires on June 26, 2007. The
Agreement provides Standby Letter of Credit Guarantees for foreign and domestic
customers, which are 100% secured with cash. At June 30, 2006, the Company had
approximately $325,000 of restricted cash associated with outstanding Letters of
Credit. Standby Letters of Credit under this Agreement bear interest at 1%. The
Agreement also provides the Company with the ability to convert to a $2,000,000
revolving line of credit, based upon eligible accounts receivable and certain
conversion covenants. Loans under this revolving line of credit bear interest at
the Bank's prime rate, as determined, plus 1/2% (8.75% at June 30, 2006.) At
June 30, 2006, the Company had not exercised its conversion option and no
amounts were outstanding under the revolving line of credit. A commitment fee of
..25% is charged on the unused portion of the borrowing base. The Agreement
contains covenants including certain financial reporting requirements. At June
30, 2006, the Company was in compliance with its financial reporting
requirements and cash balance covenants.
11. STOCK-BASED COMPENSATION
On January 1, 2006, the Company adopted the fair value recognition
provisions of Financial Accounting Standards Board ("FASB") Statement No.
123(R), Share-Based Payment ("Statement 123(R)") using the modified prospective
method. In accordance with the modified prospective method, the Company has not
restated its consolidated financial statements for prior periods. Under this
transition method, stock-based compensation expense for the three and six months
ended June 30, 2006 includes stock-based compensation expense for all of the
Company's stock-based compensation awards granted prior to, but not yet vested
as of, January 1, 2006, based on the grant-date fair value estimated in
accordance with the provisions of FASB Statement No. 123, Accounting for
Stock-Based Compensation ("Statement 123"). Stock-based compensation expense for
all stock-based compensation awards granted on or after January 1, 2006 will be
based on the grant-date fair value estimated in accordance with the provisions
of Statement 123(R). The impact of Statement 123(R) on the Company's results of
operations resulted in recognition of stock option expense of approximately
$60,000 and $119,000 for the three and six months ended June 30, 2006. For the
three months ended June 30, 2006, approximately $47,000 of stock compensation
expense was charged to selling, general and administrative expenses and
approximately $13,000 was charged to cost of sales. For the six months ended
June 30, 2006, approximately $94,000 of stock compensation expense was charged
to selling, general and administrative expenses and $25,000 was charged to cost
of sales. Compensation expense related to stock options to be charged in future
periods amounts to approximately $773,000 at June 30, 2006, which the Company
expects to expense through June 2011.
Prior to January 1, 2006, the Company accounted for share-based payments
under the recognition and measurement provisions for APB Opinion No. 25,
Accounting for Stock Issued to Employees ("APB 25"), and related
Interpretations, as permitted by Statement 123. In accordance with APB 25 no
compensation cost was required to be recognized for options granted to employees
that had an exercise price equal to the market value of the underlying common
stock on the date of grant.
8
SPIRE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
JUNE 30, 2006
The Company uses the Black-Scholes option pricing model as its method for
determining fair value of stock option grants, which was also used by the
Company for its pro forma information disclosures of stock-based compensation
expense prior to the adoption of Statement 123(R). The Company uses the
straight-line method of attributing the value of stock-based compensation
expense for all stock option grants. Stock compensation expense for all
stock-based grants and awards is recognized over the service or vesting period
of each grant or award.
Statement 123(R) requires forfeitures to be estimated at the time of grant
and revised, if necessary, in subsequent periods if actual forfeitures differ
from those estimates in order to derive the Company's best estimate of awards
ultimately expected to vest. Forfeitures represent only the unvested portion of
a surrendered option and are typically estimated based on historical experience.
Based on an analysis of the Company's historical data, the Company applied a 14%
forfeiture rate to stock options outstanding in determining its Statement 123(R)
stock compensation expense for the quarter ended June 30, 2006, which it
believes is a reasonable forfeiture estimate for the period. In the Company's
pro forma information required under Statement No. 123 for the periods prior to
2006, the Company accounted for forfeitures as they occurred.
The Company has one employee stock option plan: the 1996 Equity Incentive
Plan. This plan was approved by stockholders and provides that the Board of
Directors may grant options to purchase the Company's common stock to key
employees and directors of the Company. Incentive and non-qualified options must
be granted at least at the fair market value of the common stock or, in the case
of certain optionees, at 110% of such fair market value at the time of grant.
The options may be exercised, subject to certain vesting requirements, for
periods up to ten years from the date of issue.
A summary of award activity under this plan as of June 30, 2006 and changes
during the six month period is as follows:
Number of Weighted-Average
Shares Exercise Price
--------- ----------------
Options Outstanding at December 31, 2005 406,314 $4.38
Granted 24,500 $8.30
Exercised (48,000) $5.48
Cancelled/expired (21,062) $5.67
-------- -----
Options Outstanding at June 30, 2006 361,752 $4.43
======== =====
Options Exercisable at June 30, 2006 206,137 $3.68
======== =====
The options outstanding and exercisable at June 30, 2006 were in the
following exercise price ranges:
Options Outstanding Options Exercisable
------------------------------------------------------ --------------------------------------
Weighted
-Average Weighted- Weighted-
Number Remaining Average Aggregate Number Average Aggregate
Range of of Shares Contractual Exercise Intrinsic of Shares Exercise Intrinsic
Exercise Price Outstanding Life Price Value Exercisable Price Value
--------------- ----------- ----------- --------- ---------- ----------- -------- ----------
$1.78 to $ 3.11 44,374 3.73 years $2.32 $ 231,248 41,374 $2.29 $216,758
$3.12 to $ 3.90 122,496 5.38 years $3.89 445,633 122,496 $3.89 445,633
$3.91 to $ 4.90 145,695 8.05 years $4.33 465,803 37,890 $4.22 125,393
$4.91 to $ 6.36 12,187 8.51 years $6.06 17,940 4,377 $5.96 6,865
$6.37 to $10.74 37,000 9.66 years $8.57 500 -- $ -- --
-------- ---------- -------- --------
361,752 6.80 years $4.43 $1,161,123 206,137 $3.68 $794,649
======== ========== ======== ========
The aggregate intrinsic value in the table above represents the total
intrinsic value, based on the Company's closing stock price of $7.53 as of June
30, 2006, which would have been received by the option holders had all option
holders exercised their options as of that date. The total intrinsic value of
options exercised during the three and six months ended June 30, 2006 was
approximately $42,000 and $166,000, respectively.
9
SPIRE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
JUNE 30, 2006
The following table illustrates the pro forma effect on net loss and net
loss per share if the Company had applied the fair value recognition provisions
of Statement No. 123 to stock-based employee compensation for the six month
period ended June 30, 2005. Since stock-based compensation expense for the three
and six months ended June 30, 2006 was calculated and recorded under the
provisions of Statement 123(R), no pro forma disclosure for that period is
presented.
Three Months Ended Six Months Ended
June 30, 2005 June 30, 2005
------------- -------------
Net income (loss), as reported $ 4,698,152 $ 3,117,710
Deduct: Total stock-based employee
compensation expense determined
under fair value based method for
all awards net of related tax
effects (76,882) (158,658)
----------- -----------
Pro forma net income (loss) $ 4,621,270 $ 2,959,052
=========== ===========
Earnings per share:
Basic - as reported $ 0.69 $ 0.45
=========== ===========
Basic - pro forma $ 0.67 $ 0.43
=========== ===========
Diluted - as reported $ 0.67 $ 0.44
=========== ===========
Diluted - pro forma $ 0.66 $ 0.42
=========== ===========
The per-share weighted-average fair value of stock options granted during
the three months and six months ended June 30, 2006 was $3.82 and $4.18,
respectively, on the date of grant using the Black-Scholes option-pricing model
with the following weighted-average assumptions:
Expected Risk-Free Expected Expected
Year Dividend Yield Interest Rate Option Life Volatility Factor
---- -------------- ------------- ----------- -----------------
2006 -- 5.08% 7.5 years 49.0%
2005 -- 3.94% 5 years 76.6%
For the three and six months ended June 30, 2006, 8,250 and 24,500 stock
options were granted.
12. COMPREHENSIVE LOSS
Comprehensive income (loss) includes certain changes in equity that are
excluded from net earnings (loss) and consists of the following:
For the Three Months For the Six Months
Ended June 30, Ended June 30,
-------------------------- --------------------------
2006 2005 2006 2005
----------- ----------- ----------- -----------
Net income (loss) $(2,080,693) $ 4,698,152 $(4,085,084) $ 3,117,710
Other comprehensive loss:
Net unrealized loss on available for
sale marketable securities, net of tax (55,906) (6,295) (31,957) (23,407)
----------- ----------- ----------- -----------
Total comprehensive income (loss) $(2,136,599) $ 4,691,857 $(4,117,041) $ 3,094,303
=========== =========== =========== ===========
10
SPIRE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
JUNE 30, 2006
13. SALE OF LICENSES
On October 2002, the Company sold an exclusive patent license for a
hemodialysis split-tip catheter to Bard Access Systems, Inc. ("Bard"), a wholly
owned subsidiary of C.R. Bard, Inc., in exchange for $5,000,000 upon the
execution of the agreement, with another $5,000,000 due upon the earlier to
occur of: (a) the date of the first commercial sale of a licensed product by
Bard; or (b) no more than 18 months after signing. The agreement further
provided for two additional contingent cash payments of $3,000,000 each upon the
completion of certain milestones by Bard in 2004 and 2005. Bard had the right to
cancel the agreement at any time subsequent to the second payment. During the
year ended December 31, 2002, the Company recorded the initial payment under the
agreement, resulting in a gain of $4,464,929, net of direct costs. Due to the
potential length of time between the first and second payments and the
cancellation provisions within the agreement, the Company did not record the
potential remaining payments at that time. During June 2003, in accordance with
the agreement, the Company received notification from Bard of the first
commercial sale, collected the $5,000,000 payment due and recorded a gain of
$4,989,150, net of direct costs. In June 2004, the Company received the first
contingent milestone payment and recorded a gain of $3,000,000. In June 2005,
the Company received the second and final contingent milestone payment and
recorded a gain of $3,000,000. There were no direct costs associated with these
payments. The 2005 gain was recorded in the accompanying unaudited condensed
consolidated statements of operations for three and six months ended June 30,
2005.
In conjunction with the sale, the Company received a sublicense, which
permits the Company to continue to manufacture and market hemodialysis catheters
for the treatment of chronic kidney disease. In addition, the Company granted
Bard a right of first refusal should the Company seek to sell the catheter
business.
On May 26, 2005, the Company entered into a global consortium agreement
(the "Agreement") with Nisshinbo Industries, Inc. (Nisshinbo) for the
development, manufacturing, and sales of solar photovoltaic module manufacturing
equipment. Under the terms of the Agreement, Nisshinbo purchased a license to
manufacture and sell the Company's module manufacturing equipment for an upfront
fee plus additional royalties based on ongoing equipment sales over a ten-year
period. In addition, the Company and Nisshinbo agreed, but are not obligated, to
pursue joint research and development, product improvement activities and sales
and marketing efforts. On June 27, 2005, the Company received JPY 400,000,000
from the sale of this permanent license. The Company has determined the fair
value of the license and royalty based on an appraisal. As a result, a
$3,319,600 gain was recognized as a gain on sale of license in the accompanying
unaudited condensed consolidated statements of operations for the three and six
months ended June 30, 2005. In addition, approximately $13,000 of royalty income
was recognized during the quarter ended June 30, 2005.
14. PRIVATE PLACEMENT OF EQUITY
On April 26, 2006, the Company entered into Stock Purchase Agreements with
two accredited institutional investors in connection with the private placement
of 941,176 shares of the Company's common stock at a purchase price of $8.50 per
share. On April 28, 2006, the Company completed the private placement. The net
proceeds of the sale were approximately $7.7 million after deducting placement
fees and other closing costs.
Under the terms of the Stock Purchase Agreements, the Company was obligated
to file a registration statement on Form S-3 with the Securities and Exchange
Commission (the "SEC") registering the resale of the shares of common stock
sold. The Company filed the Form S-3 on May 3, 2006 and the SEC declared it
effective on May 12, 2006. In the event that this registration statement ceases
to be effective and available to the investors for an aggregate period of 30
days in any 12 month period, the Company must pay liquidated damages starting on
the 61st day (in the aggregate) of any suspensions in any 12-month period, and
each 30th day thereafter until the suspension is terminated an amount equal to
1% of the aggregate purchase price paid by the investors. However, the Company
is not obligated to pay liquidation damages on shares not owned by the investors
at the time of the suspension or shares that are tradable under Rule 144(k). The
Company reviewed Emerging Issues Task Force ("EITF") 00-19 ACCOUNTING FOR
DERIVATIVE FINANCIAL INSTRUMENTS INDEXED TO, AND POTENTIALLY SETTLED IN, A
COMPANY'S OWN STOCK, and EITF 05-04 THE EFFECT OF A LIQUIDATED DAMAGES CLAUSE ON
A FREESTANDING FINANCIAL INSTRUMENT SUBJECT TO EITF ISSUE NO. 00-19, to
determine if these liquidation damages provisions require a portion of the
equity raised needs to be accounted under Financial Accounting Standards ("FAS")
No. 133: ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. It
determined that the liquidated damages provisions did not require treatment
under FAS No. 133 and therefore will treat all of the funds raised under these
agreements as additions to permanent equity.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THIS MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS SECTION AND OTHER PARTS OF THIS REPORT CONTAIN
FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES
ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND SECTION 21E OF THE
SECURITIES EXCHANGE ACT OF 1934, AS AMENDED (THE "EXCHANGE ACT"), WHICH
STATEMENTS INVOLVE RISKS AND UNCERTAINTIES. THESE STATEMENTS RELATE TO OUR
FUTURE PLANS, OBJECTIVES, EXPECTATIONS AND INTENTIONS. THESE STATEMENTS MAY BE
IDENTIFIED BY THE USE OF WORDS SUCH AS "MAY", "COULD", "WOULD", "SHOULD",
"WILL", "EXPECTS", "ANTICIPATES", "INTENDS", "PLANS", "BELIEVES", "ESTIMATES",
AND SIMILAR EXPRESSIONS. THE COMPANY'S ACTUAL RESULTS AND THE TIMING OF CERTAIN
EVENTS MAY DIFFER SIGNIFICANTLY FROM THE RESULTS AND TIMING DESCRIBED IN THE
FORWARD-LOOKING STATEMENTS. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH
DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THOSE FACTORS DISCUSSED OR REFERRED
TO IN THIS REPORT AND IN THE ANNUAL REPORT ON FORM 10-KSB FOR THE YEAR ENDED
DECEMBER 31, 2005. THE FOLLOWING DISCUSSION AND ANALYSIS OF THE COMPANY'S
FINANCIAL CONDITION AND RESULTS OF OPERATIONS SHOULD BE READ IN LIGHT OF THOSE
FACTORS AND IN CONJUNCTION WITH, THE COMPANY'S ACCOMPANYING CONSOLIDATED
FINANCIAL STATEMENTS, INCLUDING THE NOTES THERETO.
OVERVIEW
Spire Corporation (the "Company") develops, manufactures and markets
highly-engineered products and services in four principal business areas: solar
equipment, solar systems, biomedical and optoelectronics, bringing to bear
expertise in materials technologies across all four business areas, discussed
below.
In the solar equipment area, the Company develops, manufactures and markets
specialized equipment for the production of terrestrial photovoltaic modules
from solar cells. The Company's equipment has been installed in approximately
170 factories in 43 countries.
In the solar systems area, the Company provides custom and building
integrated photovoltaic modules, stand-alone emergency power backup and electric
power grid-connected distributed power generation systems employing photovoltaic
technology developed by the Company.
In the biomedical area, the Company provides value-added surface treatments
to manufacturers of orthopedic and other medical devices that enhance the
durability, antimicrobial characteristics or other material characteristics of
their products; develops and markets hemodialysis catheters and related devices
for the treatment of chronic kidney disease; and performs sponsored research
programs into practical applications of advanced biomedical and biophotonic
technologies.
In the optoelectronics area, the Company provides compound semiconductor
foundry services on a merchant basis to customers involved in
biomedical/biophotonic instruments, telecommunications and defense applications.
Services include compound semiconductor wafer growth, other thin film processes
and related device processing and fabrication services. The Company also
provides materials testing services and performs services in support of
sponsored research into practical applications of optoelectronic technologies.
Operating results will depend upon product mix, as well as the timing of
shipments of higher priced products from the Company's solar equipment line and
delivery of solar systems. Export sales, which amounted to 37% of net sales and
revenues for the six months ended June 30, 2006, continue to constitute a
significant portion of the Company's net sales and revenues.
On January 1, 2006, the Company adopted the fair value recognition
provisions of Financial Accounting Standards Board Statement No. 123(R),
Share-Based Payment ("Statement 123(R)") using the modified prospective method.
The impact of Statement 123(R) on the Company's results of operations resulted
in recognition of stock option expense of approximately $60,000 and $119,000 for
the three and six months ended June 30, 2006, respectively.
12
Results of Operations
---------------------
The following table sets forth certain items as a percentage of net sales
and revenues for the periods presented:
For the Three Months For the Six Months
Ended June 30, Ended June 30,
-------------------------- --------------------------
2006 2005 2006 2005
----------- ----------- ----------- -----------
Net sales and revenues 100% 100% 100% 100%
Cost of sales and revenues (92) (87) (88) (86)
----- ----- ----- -----
Gross profit 8 13 12 14
Selling, general and administrative expenses (57) (28) (52) (34)
Internal research and development (5) (5) (4) (6)
Gain on sale of licenses -- 86 -- 55
----- ----- ----- -----
Income (loss) from operations (54) 66 (44) 29
Other income (expense), net 1 (2) -- (2)
----- ----- ----- -----
Income (loss) before income taxes (53) 64 (44) 27
Income tax expense -- -- -- --
----- ----- ----- -----
Net income (loss) (53%) 64% (44%) 27%
===== ===== ===== =====
OVERALL
The Company's total net sales and revenues for the six months ended June
30, 2006 ("2006") decreased 20% compared to the six months ended June 30, 2005
("2005"). The decrease was primarily attributable to $1.3 million decrease in
sales of solar systems resulting from the volume and timing of the delivery of
equipment.
SOLAR EQUIPMENT UNIT
Sales in the Company's solar equipment unit decreased 13% during 2006 as
compared to 2005 primarily due to a decrease in the volume and timing of the
delivery of customer orders.
SOLAR SYSTEMS UNIT
Sales in the Company's solar systems unit decreased 82% during 2006 as
compared to 2005 primarily due to the timing of delivery of customer orders.
BIOMEDICAL BUSINESS UNIT
Revenues of the Company's biomedical business unit decreased 8% during
2006 as compared to 2005 as a result of a 26% decrease in revenue from Spire's
research and development activities and a 11% decrease in sales of medical
devices, partially offset by an 8% increase in biomedical processing services
revenue.
OPTOELECTRONICS BUSINESS UNIT
Sales in the Company's optoelectronics business unit decreased 7% during
2006 primarily due to the timing of contract completion and a decrease in the
size and dollar value of customers orders.
Three and Six Months Ended June 30, 2006 Compared to Three and Six Months
Ended June 30, 2005
NET SALES AND REVENUES
The following table categorizes the Company's net sales and revenues for
the periods presented:
Three Months Ended June 30, Decrease
-------------------------- --------------------
2006 2005 $ %
----------- ----------- ----------- ------
Contract research, service and
license revenues $ 2,604,000 $ 2,810,000 $ (206,000) (7%)
Sales of goods 1,291,000 4,537,000 (3,246,000) (72%)
----------- ----------- -----------
Net sales and revenues $ 3,895,000 $ 7,347,000 $(3,452,000) (47%)
=========== =========== ===========
13
The 7% decrease in contract research, service and license revenues for the
three months ended June 30, 2006 as compared to the three months ended June 30,
2005 is primarily attributable to a decrease in revenues from research and
development activities partially offset by a 15% increase in revenues from
Bandwidth foundry services. Revenues from biomedical research and development
activities decreased 21% in 2006 as compared to 2005 primarily due to a decrease
in the number of contracts associated with funded research and development
activities, and a 60% decrease in revenue from government funded research and
development activities associated with a cost sharing agreement with the
Department of Energy National Renewable Energy Laboratory ("NREL").
The 72% decrease in sales of goods for the three months ended June 30, 2006
as compared to the three months ended June 30, 2005 was primarily due to
decreases in solar equipment and solar systems revenues and, to a lesser extent,
a decrease in biomedical product sales. Solar equipment and solar system
revenues decreased 77% and 96%, respectively, as compared to 2005 primarily due
to the timing and delivery of customer orders. The 2005 results include the sale
of two photovoltaic module production lines versus none in 2006 and the
completion of a large solar system installation in Chicago in 2005. Biomedical
product sales decreased 12% in 2006 as compared to 2005 as a result of a
reduction in product trials by prospective customers for Spire's line of
hemodialysis catheters.
The following table categorizes the Company's net sales and revenues for
the periods presented:
Six Months Ended June 30, Decrease
-------------------------- --------------------
2006 2005 $ %
----------- ----------- ----------- ------
Contract research, service and
license revenues $ 5,113,000 $ 5,542,000 (429,000) (8%)
Sales of goods 4,155,000 5,985,000 (1,830,000) (31%)
----------- ----------- ----------
Net sales and revenues 9,268,000 $11,527,000 (2,259,000) (20%)
=========== =========== ==========
The 8% decrease in contract research, service and license revenues for the
six months ended June 30, 2006 as compared to the six months ended June 30, 2005
is primarily attributable to a decrease in research and development activities
partially offset by increases in biomedical processing services. Revenues from
Spire's research and development activities decreased 30% in 2006 as compared to
2005 primarily due to a decrease in the number of contracts associated with
funded research and development and a decrease in revenue from activities
associated with our cost sharing agreement with NREL. Revenues from biomedical
processing services increased 8% in 2006 compared to 2005 due to the timing and
delivery of customer orders.
The 31% decrease in sales of goods for the six months ended June 30, 2006
as compared to the six months ended June 30, 2005 was primarily due to decreases
in solar equipment and solar systems revenues and, to a lesser extent, a
decrease in biomedical product sales. Solar equipment and solar systems revenues
decreased 37% in 2006 as compared to 2005 due to the timing and delivery of
customer orders. Biomedical product sales decreased 11% in 2006 as compared to
2005 as a result of a reduction in product trials by prospective customers for
Spire's line of hemodialysis catheters.
COST OF SALES AND REVENUES
The following table categorizes the Company's cost of sales and revenues
for the periods presented, stated in dollars and as a percentage of related
sales and revenues:
Three Months Ended June 30, Increase/(Decrease)
---------------------------------- ------------------
2006 % 2005 % $ %
---------- ---- ---------- ---- ----------- ----
Cost of contract research, services
and licenses $2,260,000 87% $2,158,000 77% $ 102,000 5%
Cost of goods sold 1,340,000 104% 4,292,000 94% (2,952,000) (69%)
---------- ---------- -----------
Net cost of sales and revenues $3,600,000 92% $6,450,000 87% $(2,850,000) (44%)
========== ========== ===========
The $102,000 (5%) increase in cost of contract research and service
revenues in 2006 is primarily due to a 32% increase in the costs of sales of the
Company's optoelectronics business unit, due to an increase in direct costs
resulting from a 15% increase in optoelectronics revenues and changes in its
product mix in 2006 versus 2005. This was partially offset by a 39% decrease in
costs from Spire's research and development activities associated with its
decreased revenues.
14
The $2,952,000 (69%) decrease in cost of goods sold is primarily due to an
72% decrease in sales of goods. The increase in cost of goods sold as a
percentage of revenue is the result of higher absorption of indirect costs over
a decreased revenue base.
The following table categorizes the Company's cost of sales and revenues
for the periods presented, stated in dollars and as a percentage of related
sales and revenues:
Six Months Ended June 30, Increase/(Decrease)
---------------------------------- ------------------
2006 % 2005 % $ %
---------- ---- ---------- ---- ----------- ----
Cost of contract research, services
and licenses $4,505,000 88% $4,275,000 77% $ 230,000 5%
Cost of goods sold 3,694,000 89% 5,711,000 95% (2,017,000) (35%)
---------- ---------- -----------
Net cost of sales and revenues $8,199,000 88% $9,986,000 86% $(1,787,000) (18%)
========== ========== ===========
The $230,000 (5%) increase in cost of contract research and service
revenues in 2006 is primarily due to a 22% increase in the costs of sales of the
Company's optoelectronics business unit, due to an increase in direct costs
resulting from changes in its product mix in 2006 versus 2005, as well as a 12%
increase in biomedical processing services costs associated with its 8% increase
in revenue. This was partially offset by a 34% decrease in costs from Spire's
research and development activities associated with its decreased revenues.
The $2,017,000 (35%) decrease in cost of goods sold is primarily due to a
decrease in Spire's solar equipment and solar systems direct costs resulting
from its 37% decrease in sales of goods, offset by an increase in biomedical
products unit's direct costs. The decrease in cost of goods sold as a percentage
of revenue is the result of decreased direct costs in the solar equipment
segment, partially offset by an increased direct costs in our biomedical and
solar systems product lines. These changes in costs as a percentage of revenue
resulted from changes in product mix.
OPERATING EXPENSES
The following table categorizes the Company's operating expenses for the
periods presented, stated in dollars and as a percentage of net sales and
revenues:
Three Months Ended June 30, Increase/(Decrease)
---------------------------------- ------------------
2006 % 2005 % $ %
---------- ---- ---------- ---- ----------- ----
Selling, general and administrative $2,217,000 57% $2,057,000 28% $ 160,000 8%
Internal research and development 195,000 5% 341,000 5% (146,000) (43%)
---------- ---------- ----------
Operating expenses $2,412,000 62% $2,398,000 33% $ 14,000 1%
========== ========== ==========
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
--------------------------------------------
Selling, general and administrative expenses for the three months ended
June 30, 2006 increased by $160,000. The increase was primarily due to increased
costs associated with sales and marketing efforts throughout all of our product
lines, ongoing litigation matters, increased facility related costs, and stock
option compensation costs. The increase in selling, general and administrative
expenses as a percentage of sales and revenues is primarily due to the decrease
in sales and revenue.
INTERNAL RESEARCH AND DEVELOPMENT
---------------------------------
The decrease in research and development costs was primarily a result of
the Company's reduced effort in its cost-sharing contract with the NREL.
15
The following table categorizes the Company's operating expenses for the
periods presented, stated in dollars and as a percentage of net sales and
revenues:
Six Months Ended June 30, Increase/(Decrease)
---------------------------------- ------------------
2006 % 2005 % $ %
---------- ---- ---------- ---- ----------- ----
Selling, general and administrative $4,810,000 52% $3,887,000 34% $ 923,000 24%
Internal research and development 353,000 4% 658,000 6% (305,000) (46%)
---------- ---------- -----------
Operating expenses $5,163,000 56% $4,545,000 39% $ 618,000 14%
========== ========== ===========
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
--------------------------------------------
The 24% increase in selling, general and administrative expenses was
primarily due to increased costs associated with sales and marketing efforts
throughout all of our product lines, ongoing litigation matters, increased
facility related costs, and stock option compensation costs. The increase in
selling, general and administrative expenses as a percentage of sales and
revenues was primarily due to the decrease in sales and revenues.
INTERNAL RESEARCH AND DEVELOPMENT
---------------------------------
The 46% decrease in research and development costs, and the decrease in
research and development expenses as a percentage of sales and revenues, was
primarily a result of the Company's reduced effort in its cost-sharing contract
with NREL.
OTHER EXPENSE, NET
The Company earned approximately $75,000 and approximately $9,000 of
interest income for the three months ended June 30, 2006 and 2005, respectively.
The Company incurred interest expense of approximately $40,000 and approximately
$67,000 for the three months ended June 30, 2006 and 2005, respectively. The
increase in interest income is due to interest earned on investments made with
the net proceeds of approximately $7.7 million received from the private
placement of common equity in April 2006. In addition, the Company recognized
approximately $1,000 in currency translation income and approximately $63,000 of
currency translation loss for the three months ended June 30, 2006 and 2005,
respectively, associated with cash maintained in a Japanese Yen account. The
decrease in interest expense is primarily associated with interest incurred on
capital leases associated with the semiconductor foundry.
The Company earned approximately $94,000 and approximately $18,000 of
interest income for the six months ended June 30, 2006 and 2005, respectively.
The Company incurred interest expense of approximately $88,000 and approximately
$153,000 for the six months ended June 30, 2006 and 2005, respectively. The
increase in interest income is due to interest earned on investments made with
the net proceeds of approximately $7.7 million received from the private
placement of common equity in April 2006.
In addition, the Company recognized approximately $3,000 in currency
translation income and approximately $63,000 of currency transaction loss for
the six months ended June 30, 2006 and 2005, respectively, associated with cash
maintained in a Japanese Yen account.
INCOME TAXES
The Company did not record an income tax benefit for the three and six
months ended June 30, 2006, or an income tax provision for the three and six
months ended June 30, 2005. A valuation allowance has been provided against the
current period tax benefit due to uncertainly regarding the realization of the
net operating loss in the future.
NET INCOME (LOSS)
The Company reported a net loss for the three months ended June 30, 2006 of
approximately $2,081,000, compared to net income of approximately $4,698,000 in
2005. The decrease in net income in 2006 versus 2005 is primarily due to gains
on the sale of licenses in 2005 of approximately $6.3 million.
The Company reported net loss for the six months ended June 30, 2006 of
$4,085,000, compared to a net income of approximately $3,118,000 in 2005. The
decrease in net income in 2006 versus 2005 is primarily due to gains on the
16
sale of licenses in 2005 of approximately $6.3 million, and to a lesser extent,
decreased sales and increased selling, general and administrative expenses in
2006 versus 2005.
Liquidity and Capital Resources
Increase
June 30, December 31, ------------------
2006 2005 $ %
----------- ----------- ----------- ----
Cash and cash equivalents $ 1,905,000 $ 3,630,000 ($ 1,725,000) 48%
Working capital $ 9,538,000 $ 5,270,000 $ 4,268,000 81%
Cash and cash equivalents and working capital increased primarily due to
the net proceeds from a private placement of common stock. This increase was
partially offset by net operating losses incurred by the Company in 2006.
On April 26, 2006, the Company entered into Stock Purchase Agreements with
two accredited institutional investors in connection with the private placement
of 941,176 shares of the Company's common stock at a purchase price of $8.50 per
share. On April 28, 2006, the Company completed the private placement. The net
proceeds of the sale were approximately $7.7 million after deducting placement
fees and other closing costs.
The Company has a $2,000,000 Loan Agreement (the "Agreement") with Citizens
Bank of Massachusetts (the "Bank"), which expires on June 26, 2007. The
Agreement provides Standby Letter of Credit guarantees for certain foreign and
domestic customers, which are 100% secured with cash. At June 30, 2006, the
Company had approximately $325,000 of restricted cash associated with
outstanding Letters of Credit. Standby Letters of Credit under this Agreement
bear interest at 1%. The Agreement also provides the Company with the ability to
convert to a $2,000,000 revolving line of credit, based upon eligible accounts
receivable and certain conversion covenants. Loans under this revolving line of
credit bear interest at the Bank's prime rate as determined plus 1/2% (8.75% at
June 30, 2006.) At June 30, 2006, the Company had not exercised its conversion
option and no amounts were outstanding under the revolving line of credit. A
commitment fee of .25% is charged on the unused portion of the borrowing base.
The Agreement contains covenants including certain financial reporting
requirements. At June 30, 2006, the Company was in compliance with its financial
reporting requirements and cash balance covenants.
The Company maintains allowances for doubtful accounts for estimated losses
resulting from the inability of its customers to pay amounts due. The Company
actively pursues collection of past due receivables as the circumstances
warrant. Customers are contacted to determine the status of payment and senior
accounting and operations management are included in these efforts as is deemed
necessary. A specific reserve will be established for past due accounts over 60
days and over a specified amount, when it is probable that a loss has been
incurred and the Company can reasonably estimate the amount of the loss. The
Company does not record an allowance for government receivables and invoices
backed by letters of credit as realizeability is reasonably assured. Bad debts
are written off against the allowance when identified. There is no dollar
threshold for account balance write-offs. While rare, a write-off is only
recorded when all efforts to collect the receivable have been exhausted and only
in consultation with the appropriate business line manager.
To date, there are no material commitments by the Company for capital
expenditures. At June 30, 2006, the Company's accumulated deficit was
approximately $5,690,000, compared to accumulated deficit of approximately
$1,605,000 as of December 31, 2005.
Under the terms of the Stock Purchase Agreements, the Company was obligated
to file a registration statement on Form S-3 with the Securities and Exchange
Commission (the "SEC") registering the resale of the shares of common stock
sold. The Company filed the Form S-3 on May 3, 2006 and the SEC declared it
effective on May 12, 2006. In the event that this registration statement ceases
to be effective and available to the investors for an aggregate period of 30
days in any 12 month period, the Company must pay liquidated damages starting on
the 61st day (in the aggregate) of any suspensions in any 12-month period, and
each 30th day thereafter until the suspension is terminated an amount equal to
1% of the aggregate purchase price paid by the investors. However, the Company
is not obligated to pay liquidation damages on shares not owned by the investors
at the time of the suspension or shares that are tradable under Rule 144(k). The
Company reviewed Emerging Issues Task Force ("EITF") 00-19: ACCOUNTING FOR
DERIVATIVE FINANCIAL INSTRUMENTS INDEXED TO, AND POTENTIALLY SETTLED IN, A
COMPANY'S OWN STOCK, and EITF 05-04: THE EFFECT OF A LIQUIDATED DAMAGES CLAUSE
ON A FREESTANDING FINANCIAL INSTRUMENT SUBJECT TO EITF ISSUE NO. 00-19, to
determine if these liquidation damages provisions require a portion of the
equity raised needs to be accounted under Financial Accounting Standards ("FAS")
No. 133: ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. It
determined that the liquidated damages provisions did not require treatment
under FAS No. 133 and therefore will treat all of the funds raised under these
agreements as additions to permanent equity.
17
The Company believes it has sufficient resources to finance its current
operations for the foreseeable future from operating cash flow and working
capital.
Impact of Inflation and Changing Prices
---------------------------------------
Historically, the Company's business has not been materially impacted by
inflation. Manufacturing equipment and solar systems are generally quoted,
manufactured and shipped within a cycle of approximately nine months, allowing
for orderly pricing adjustments to the cost of labor and purchased parts. The
Company has not experienced any negative effects from the impact of inflation on
long-term contracts. The Company's service business is not expected to be
seriously affected by inflation because its procurement-production cycle
typically ranges from two weeks to several months, and prices generally are not
fixed for more than one year. Research and development contracts usually include
cost escalation provisions.
Foreign Currency Fluctuation
----------------------------
The Company sells only in U.S. dollars, generally against an irrevocable
confirmed letter of credit through a major United States bank. Therefore the
Company is not directly affected by foreign exchange fluctuations on its current
orders. However, fluctuations in foreign exchange rates do have an effect on the
Company's customers' access to U.S. dollars and on the pricing competition on
certain pieces of equipment that the Company sells in selected markets. The
Company received Japanese yen in exchange for the sale of a license to its solar
technology. In addition, purchases made and royalties received under the
Company's Consortium Agreement with its Japanese partner will be in Japanese
yen. The Company does not believe that foreign exchange fluctuations will
materially affect its operations.
Related Party Transactions
--------------------------
The Company subleased 77,000 square-feet in a building leased by Mykrolis
Corporation, who in turn leased the building from SPI-Trust, a Trust of which
Roger Little, Chairman of the Board, Chief Executive Officer and President of
the Company, is the sole trustee and principal beneficiary. The 1985 sublease
originally was for a period of ten years, was extended for a five-year period
expiring on November 30, 2000 and was further extended for a five-year period
expiring on November 30, 2005. The sublease agreement provided for minimum
rental payments plus annual increases linked to the consumer price index.
Effective December 1, 2005, the Company entered into a two-year Extension of
Lease Agreement (the "Lease Extension") directly with SPI-Trust. The Company
assumed certain responsibilities of Mykrolis, the tenant under the former lease,
as a result of the Lease Extension including payment of all building and real
estate related expenses associated with the ongoing operations of the property.
The Company will allocate a portion of these expenses to SPI-Trust based on
pre-established formulas utilizing square footage and actual usage where
applicable. These allocated expenses will be invoiced monthly and be paid
utilizing a SPI-Trust escrow account of which the Company has sole withdrawal
authority. SPI-Trust is required to maintain three (3) months of its anticipated
operating costs within this escrow account. The Company believes that the terms
of the Lease Extension are commercially reasonable. Rent expense under the Lease
Extension for the three and six months ended June 30, 2006 was approximately
$310,000 and $621,000, respectively . No amounts were due from SPI-Trust as of
June 30, 2006 for building related costs.
In conjunction with the acquisition of Bandwidth by the Company, SPI-Trust,
a Trust of which Roger G. Little, Chairman of the Board, Chief Executive Officer
and President of the Company, is sole trustee and principal beneficiary,
purchased from Stratos Lightwave, Inc. (Bandwidth's former owner) the building
that Bandwidth occupies in Hudson, New Hampshire for $3.7 million. Subsequently,
the Company entered into a lease for the building (90,000 square feet) with
SPI-Trust whereby the Company will pay $4.1 million to SPI-Trust over an initial
five-year term expiring in 2008 with a Company option to extend for five years.
In addition to the rent payments, the lease obligates the Company to keep on
deposit with SPI-Trust the equivalent of three months rent ($236,250 as of June
30, 2006.) The lease agreement does not provide for a transfer of ownership at
any point. Interest costs were assumed at 7%. For the six months ended June 30,
2006, interest expense was approximately $74,000. This lease has been classified
as a related party capital lease and a summary of payments (including interest)
is as follows:
18
Rate Per Security
Year Square Foot Annual Rent Monthly Rent Deposit
--------------------------- ----------- ----------- ------------ --------
June 1, 2003 - May 31, 2004 $6.00 $ 540,000 $45,000 $135,000
June 1, 2004 - May 31, 2005 7.50 675,000 56,250 168,750
June 1, 2005 - May 31, 2006 8.50 765,000 63,750 191,250
June 1, 2006 - May 31, 2007 10.50 945,000 78,750 236,250
June 1, 2007 - May 31, 2008 13.50 1,215,000 101,250 303,750
----------
$4,140,000
==========
At June 30, 2006, approximately $859,000 and $1,065,000 are reflected as
the current and long-term portions of capital lease obligation - related party,
respectively, in the consolidated balance sheet.
Critical Accounting Policies
----------------------------
The preparation of financial statements in accordance with accounting
principles generally accepted in the United States requires us to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Among the significant estimates affecting our consolidated
financial statements are those relating to revenue recognition, reserves for
doubtful accounts and sales returns and allowances, reserve for excess and
obsolete inventory, impairment of long-lived assets, income taxes, and warranty
reserves. We regularly evaluate our estimates and assumptions based upon
historical experience and various other factors that we believe to be reasonable
under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. To the extent actual results differ from
those estimates, our future results of operations may be affected. We believe
the following critical accounting policies affect our more significant judgments
and estimates used in the preparation of our consolidated financial statements.
Refer to Footnote 2 of our notes to consolidated financial statements in our
Annual Report on Form 10-KSB for the year ended December 31, 2005 for a
description of our accounting policies.
REVENUE RECOGNITION
The Company derives its revenues from three primary sources: (1) commercial
products including, but not limited to, solar energy manufacturing equipment,
solar energy systems and hemodialysis catheters; (2) biomedical and
semiconductor processing services; and (3) United States government funded
research and development contracts.
We generally recognize product revenue upon shipment of products provided
there are no uncertainties regarding customer acceptance, persuasive evidence of
an arrangement exists, the sales price is fixed or determinable, and
collectibility is reasonably assured. These criteria are generally met at the
time of shipment when the risk of loss and title passes to the customer or
distributor, unless a consignment arrangement exists. Revenue from consignment
arrangements is recognized based on product usage indicating sales are complete.
The Company utilizes a distributor network to market and sell its
hemodialysis catheters domestically. The Company generally recognizes revenue
when the catheters are shipped to its distributors. Gross sales reflect
reductions attributable to customer returns and various customer incentive
programs including pricing discounts and rebates. Product returns are permitted
in certain sales contracts and an allowance is recorded for returns based on the
Company's history of actual returns. Certain customer incentive programs require
management to estimate the cost of those programs. The allowance for these
programs is determined through an analysis of programs offered, historical
trends, expectations regarding customer and consumer participation, sales and
payment trends, and experience with payment patterns associated with similar
programs that had been previously offered. An analysis of the sales return and
rebate activity for the six months ended June 30, 2006, is as follows:
Rebates Returns Total
-------- ------- --------
Balance - December 31, 2005 $91,600 $19,100 $110,700
Provision 216,177 34,036 250,213
Utilization (187,077) (35,736) (222,813)
-------- ------- --------
Balance - June 30, 2006 $120,700 $17,400 $138,100
======== ======= ========
19
o Credits for rebates are recorded in the month of the actual sale.
o Credits for returns are processed when the actual merchandise is
received by the Company.
o Substantially all rebates and returns are processed no later than
three months after original shipment by the Company.
The reserve percentage has been approximately 13% to 15% of inventory held
by distributors over the last two years. The Company performs various
sensitivity analyses to determine the appropriate reserve percentage to use. To
date, actual quarterly reserve utilization has approximated the amount provided.
The total inventory held by distributors covered by sales incentive programs was
approximately $868,000 at June 30, 2006.
If sufficient history to make reasonable and reliable estimates of returns
or rebates does not exist, revenue associated with such practices is deferred
until the return period lapses or a reasonable estimate can be made. This
deferred revenue will be recognized as revenue when the distributor reports to
us that it has either shipped or disposed of the units (indicating that the
possibility of return is remote).
The Company's OEM capital equipment solar energy business builds complex
customized machines to order for specific customers. Substantially all of these
orders are sold on a FOB Bedford, Massachusetts (or EX-Works Factory) basis. It
is the Company's policy to recognize revenues for this equipment as the product
is shipped to the customer, as customer acceptance is obtained prior to shipment
and the equipment is expected to operate the same in the customer's environment
as it does in the Company's environment. When an arrangement with the customer
includes future obligations or customer acceptance, revenue is recognized when
those obligations are met or customer acceptance has been achieved. The
Company's solar energy systems business installs solar energy systems on
customer-owned properties on a contractual basis. Generally, revenue is
recognized once the systems have been installed and the title is passed to the
customer. For arrangements with multiple elements, the Company allocates fair
value to each element in the contract and revenue is recognized upon delivery of
each element. If the Company is not able to establish fair value of undelivered
elements, all revenue is deferred.
The Company recognizes revenues and estimated profits on long-term
government contracts on the accrual basis where the circumstances are such that
total profit can be estimated with reasonable accuracy and ultimate realization
is reasonably assured. The Company accrues revenue and profit utilizing the
percentage of completion method using a cost-to-cost methodology. A percentage
of the contract revenues and estimated profits is determined utilizing the ratio
of costs incurred to date to total estimated cost to complete on a contract by
contract basis. Profit estimates are revised periodically based upon changes and
facts, and any losses on contracts are recognized immediately. Some of the
contracts include provisions to withhold a portion of the contract value as
retainage until such time as the United States government performs an audit of
the cost incurred under the contract. The Company's policy is to take into
revenue the full value of the contract, including any retainage, as it performs
against the contract since the Company has not experienced any substantial
losses as a result of audits performed by the United States government.
IMPAIRMENT OF LONG-LIVED ASSETS
Long-lived assets, including fixed assets and intangible assets, are
continually monitored and are evaluated at least annually for impairment. The
determination of recoverability is based on an estimate of undiscounted cash
flows expected to result from the use of an asset and its eventual disposition.
The estimate of cash flows is based upon, among other things, certain
assumptions about expected future operating performance. Our estimates of
undiscounted cash flows may differ from actual cash flows due to, among other
things, technological changes, economic conditions, changes to our business
model or changes in our operating performance. If the sum of the undiscounted
cash flows (excluding interest) is less than the carrying value, we recognize an
impairment loss, measured as the amount by which the carrying value exceeds the
fair value of the asset.
STOCK-BASED COMPENSATION
On January 1, 2006, the Company adopted the fair value recognition
provisions of Financial Accounting Standards Board ("FASB") Statement No.
123(R), Share-Based Payment ("Statement 123(R)") using the modified prospective
method. In accordance with the modified prospective method, the Company has not
restated its consolidated financial statements for prior periods. Under this
transition method, stock-based compensation expense for the first quarter of
2006 includes stock-based compensation expense for all of the Company's
stock-based compensation awards granted prior to, but not yet vested as of,
January 1, 2006, based on the grant-date fair
20
value estimated in accordance with the provisions of FASB Statement No. 123,
Accounting for Stock-Based Compensation ("Statement 123"). Stock-based
compensation expense for all stock-based compensation awards granted on or after
January 1, 2006 will be based on the grant-date fair value estimated in
accordance with the provisions of Statement 123(R). The impact of Statement
123(R) on the Company's results of operations resulted in recognition of stock
option expense of approximately $60,000 and $119,000 for the three and six
months ended June 30, 2006, respectively.
Contractual Obligations, Commercial Commitments and Off-Balance Sheet
---------------------------------------------------------------------
Arrangements
------------
The following table summarizes the Company's gross contractual obligations
at June 30, 2006 and the maturity periods and the effect that such obligations
are expected to have on its liquidity and cash flows in future periods:
Payments Due by Period
-------------------------------------------------------------
Less than 2 - 3 4 - 5 More Than
Contractual Obligations Total 1 Year Years Years 5 Years
---------------------------------- ----------- ----------- ---------- -------- ---------
PURCHASE OBLIGATIONS $ 1,889,000 $ 1,837,000 $ 52,000 $ -- $ --
CAPITAL LEASES:
Unrelated party capital lease $ 277,000 $ 277,000 $ -- $ -- $ --
Related party capital lease 2,070,250 967,500 1,102,750 -- --
OPERATING LEASES:
Unrelated party operating leases $ 237,000 $ 115,000 $ 118,000 $ 4,000 $ --
Related party operating lease 1,759,000 1,242,000 517,000 -- --
Purchase obligations include all open purchase orders outstanding
regardless of whether they are cancelable or not.
Capital lease obligations outlined above include both the principal and
interest components of these contractual obligations.
At June 30, 2006, the Company maintained a Japanese yen account that held
approximately JPY 15,811,000 (approximately $138,000). Total currency
translation income for the three and six months ended June 30, 2006 of
approximately $1,000 and $3,000, respectively, is reflected in other (income)
expense, net in the accompanying unaudited condensed consolidated statement of
operations.
Outstanding letters of credit totaled approximately $451,000 at June 30,
2006. The letters of credit principally secure performance obligations, and
allow holders to draw funds up to the face amount of the letter of credit if the
Company does not perform as contractually required. These letters of credit
expire through 2007.
ITEM 3. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
------------------------------------------------
As required by Rule 13a-15 under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), the Company carried out an evaluation under the
supervision and with the participation of the Company's management, including
the Chief Executive Officer and President and the Chief Financial Officer, of
the effectiveness of the Company's disclosure controls and procedures as of June
30, 2006. In designing and evaluating the Company's disclosure controls and
procedures, the Company and its management recognize that there are inherent
limitations to the effectiveness of any system of disclosure controls and
procedures, including the possibility of human error and the circumvention or
overriding of the controls and procedures. Accordingly, even effective
disclosure controls and procedures can only provide reasonable assurance of
achieving their desired control objectives. Additionally, in evaluating and
implementing possible controls and procedures, the Company's management was
required to apply its reasonable judgment. Furthermore, management considered
certain matters deemed by the Company's independent auditors to constitute a
material weakness in the Company's internal control over financial reporting
described below. Based upon the required evaluation, the Chief Executive Officer
and President and the Chief Financial Officer concluded that as of June 30,
2006, due to the material weakness in internal control over financial reporting
described below, the Company's disclosure controls and procedures were not
effective to ensure that information required to be disclosed by the Company in
the reports it files or submits under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the Securities and
Exchange Commission's rules and forms.
21
On March 21, 2006, the Company's independent auditor, Vitale, Caturano &
Company, Ltd. ("VCC") issued a letter advising management and the Audit
Committee, that, in connection with its audit of the Company's consolidated
financial statements for the year ended December 31, 2005, it noted certain
matters involving internal control and its operation that it considered to be a
material weakness under standards of the Public Company Accounting Oversight
Board. VCC noted that, since its March 2005 letter, in which VCC noted material
weaknesses in the Company's internal controls in connection with its audit of
the Company's 2004 financial statements, the Company has made significant
strides over the past year to improve its internal control structure. These
include:
o An improved reconciliation process;
o A disciplined and timely monthly close process; and
o Detailed reviews of monthly close packages by the appropriate levels
of management.
However, VCC also noted that improvements still need to be made in the
reconciliation and documentation and information flow processes. In particular,
the Company lost several key individuals who were integral to the accounting
department in general and the closing process specifically. While the finance
group was able to close the books and analyze the accounts on a timely basis,
the staff was resource constrained and the established controls, policies and
procedures could not be fully implemented during the year end close. The Company
supplemented the staff with outside assistance and the Chief Financial Officer
assumed various review roles. However, VCC noted that the finance department
will not be alleviated and control structure improved until such time as the
full finance team is assembled.
In addition, VCC noted that the Company does not have sufficient internal
knowledge and expertise of its enterprise reporting system, Solomon, including
technical knowledge. The Company utilizes external consultants to help them
develop reports and troubleshoot the system; however without a fully dedicated
resource, the risk of errors being generated in or by the system is significant.
VCC noted that the Company should develop a comprehensive training program
associated with the system so that employees are aware of the system and all of
its capabilities in order to obtain the efficiencies the system can provide. The
full utilization and knowledge of the ERP system is critical to the Company's
internal control over financial reporting. The Company should focus on
developing the in-house knowledge of the ERP system, either through trainings or
recruiting of an experienced information technology professional with the
requisite knowledge.
The Company concurs with VCC's findings noted above and is continuing to
make changes in its internal controls and procedures. Unfortunately, the Company
was operating without a Controller, Assistant Controller and Senior Cost
Accountant during the latter half of 2005. These positions are critical to the
oversight and review of the finance group's output. As VCC noted, the Company
supplemented those functions through the use of outside consultants and through
the Chief Financial Officer assuming certain review roles. Unfortunately, this
weakens the internal control structure as the review process is compressed and
streamlined. With the recent resignation and replacement of the Chief Financial
Officer, this internal control structure has been additionally weakened. The
Company was able to close the books and analyze the accounts on a relatively
timely basis by having certain roles formally performed by the Chief Financial
Officer be performed by outside consultants. The Company has hired a Senior Cost
Accountant and did benefit from having its Assistant Controller position filled
during the second quarter of 2006. The Company has had difficulty recruiting a
full time Controller. In view of the recent change in the Chief Financial
Officer position, the Company now plans to have the Controller assume the
additional position of Chief Accounting Officer. It is actively searching for a
replacement. The Company has made significant strides in its monthly closing
processes and expects that its internal controls will improve once a full
finance staff is in place.
Changes in Internal Control Over Financial Reporting
----------------------------------------------------
Except as noted below, there was no change in the Company's internal
control over financial reporting that occurred during the second fiscal quarter
of 2006 that has materially affected, or is reasonable likely to materially
affect, the Company's internal control over financial reporting.
On May 14, 2006, the Company's Chief Financial Officer resigned. The
Company has since filled the Chief Financial Officer role internally and is
actively seeking a Controller who will take on the additional position of Chief
Accounting Officer. Until this position is filled the Company will rely on
outside consultants to provide aid to the Chief Financial Officer in maintaining
the internal control structure and with SEC filings.
22
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time, the Company is subject to legal proceedings and claims
arising from the conduct of its business operations. The Company does not expect
the outcome of these proceedings, either individually or in the aggregate, to
have a material adverse effect on its financial position, results of operations,
or cash flows.
The Company was named a defendant in 58 cases filed from August 2001 to
July 2003 in various state courts in Texas by persons claiming damages from the
use of allegedly defective mechanical heart valves coated by a process licensed
by the Company to St. Jude Medical, Inc., the heart valve manufacturer, which
has also been named as a defendant in these cases. In June 2003, a motion for
summary judgment was granted to the Company and most of these cases were
dismissed, based on the principle of federal preemption. The Texas Court of
Appeals upheld the lower court's decision, and, because these cases were not
submitted for review to the Texas Supreme Court, the judgments rendered are now
final.
Of the remaining cases (filed after August 2003), the fact situations of
seven of them make them subject, in the opinions of defendant's counsel, to the
original decision to grant the Company its motion for summary judgment.
Plaintiff's attorneys in these cases are being asked to voluntarily request the
court to dismiss these cases, but a motion for summary judgment based on the
original decision granted to the Company by the Court may be filed in all cases
where such voluntary action does not occur. One case was appealed, and a
decision is pending. One additional case is not subject to Federal preemption;
the Company and other defendant's counsel are evaluating available defense
options.
During the second quarter of 2005 a suit was filed by Arrow International,
Inc. against Spire Biomedical, Inc., a wholly owned subsidiary of the Company,
alleging patent infringement by the Company. The complaint claims one of the
Company's catheter products induces and contributes to infringement when medical
professionals insert it. The Company has responded to the complaint denying all
allegations and has filed certain counterclaims. The discovery process in this
case has continued and is nearly complete. The Company 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
which failure has remained uncorrected. On August 4, 2006, the Court granted the
Company's motion and dismissed this lawsuit without prejudice. The plaintiffs
may refile this lawsuit when the patent is revived, which is expected to occur
in calendar year 2006, although the Company cannot presently predict the precise
timing. Based on information presently available to the Company, the Company
believes that it does not infringe any valid claim of the plaintiff's patent and
that, consequently, it has meritorious legal defenses with respect to this
action in the event it were to be reinstated.
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 18, 2006, the Company held a Special Meeting in Lieu of Annual
Meeting of Stockholders.
23
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 2006 annual meeting of the stockholders. The
results for Proposal Number 1 were as follows:
Shares Voting
Shares Against or Shares Broker
Nominee Voting for Authority Withheld Abstaining Non-Votes
----------------------- ---------- ------------------ ---------- ---------
Udo Henseler 5,987,116 75,533 -- --
David R. Lipinski 5,433,575 629,074 -- --
Mark C. Little 5,993,841 68,808 -- --
Roger G. Little 5,985,448 77,201 -- --
Michael J. Magliochetti 5,987,209 75,440 -- --
Guy L. Mayer 5,987,599 75,050 -- --
Roger W. Redmond 6,005,506 57,143 -- --
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
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.
24
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: August 14, 2006 By: /s/ Roger G. Little
--------------------------------------
Roger G. Little
Chairman of the Board, Chief Executive
Officer and President
Dated: August 14, 2006 By: /s/ Christian Dufresne
--------------------------------------
Christian Dufresne
Chief Financial Officer and Treasurer
25
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