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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
|X| Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended September 30, 2007; or
|_| Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _______ to _______
Commission file number: 0-12742
SPIRE CORPORATION
-----------------
(Exact name of registrant as specified in its charter)
MASSACHUSETTS 04-2457335
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
ONE PATRIOTS PARK, BEDFORD, MASSACHUSETTS 01730-2396
----------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
781-275-6000
------------
(Registrant's telephone number including area code)
Indicate by "X" whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports); and (2) has been subject to such
filing requirements for the past 90 days.
Yes |X| No |_|
Indicate by check mark whether the registrant is a large accelerated
filer, an electronic filer, or a non-accelerated filer. See definition of
"accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange
Act. (Check one):
Large accelerated filer |_| Accelerated filer |_| Non-accelerated filer |X|
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Act). Yes |_| No |X|
The number of shares of the registrant's common stock outstanding as of
November 5, 2007 was 8,305,788.
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TABLE OF CONTENTS
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Unaudited Condensed Consolidated Financial Statements:
Unaudited Condensed Consolidated Balance Sheets as of September 30,
2007 and December 31, 2006 ........................................ 1
Unaudited Condensed Consolidated Statements of Operations
for the Three and Nine Months Ended September 30, 2007 and 2006 .. 2
Unaudited Condensed Consolidated Statements of Cash Flows
for the Nine Months Ended September 30, 2007 and 2006 ............ 3
Notes to Unaudited Condensed Consolidated Financial Statements .... 4
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations ............................................. 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk ........ 22
Item 4. Controls and Procedures ........................................... 22
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ................................................. 23
Item 1A. Risk Factors ....................................................... 23
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds ...... 23
Item 3. Defaults Upon Senior Securities ................................... 24
Item 4. Submission of Matters to a Vote of Security Holders ............... 24
Item 5. Other Information ................................................. 24
Item 6. Exhibits .......................................................... 24
Signatures ........................................................ 25
PART I
FINANCIAL INFORMATION
ITEM 1. UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SPIRE CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, DECEMBER 31,
2007 2006
------------ ------------
ASSETS
Current assets
--------------
Cash and cash equivalents $ 4,804,000 $ 1,536,000
Restricted cash 512,000 269,000
------------ ------------
5,316,000 1,805,000
Short-term investments -- 3,031,000
Restricted short-term investments -- 1,969,000
Accounts receivable - trade, net 11,610,000 4,010,000
Inventories, net 18,277,000 4,217,000
Deposits on equipment for inventory 4,960,000 2,580,000
Prepaid expenses and other current assets 552,000 737,000
------------ ------------
Total current assets 40,715,000 18,349,000
Net property and equipment 5,949,000 6,673,000
Intangible and other assets, net of accumulated amortization 861,000 844,000
Available-for-sale investments at quoted market value 1,801,000 1,461,000
Equity investment in joint venture 2,356,000 --
Restricted cash - long-term -- 121,000
Deposit - related party 303,000 236,000
------------ ------------
Total assets $ 51,985,000 $ 27,684,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
-------------------
Current portion of capital lease obligation - related party $ 779,000 $ 1,027,000
Current portion of equipment line of credit 1,167,000 --
Accounts payable 2,577,000 1,982,000
Accrued liabilities 10,087,000 5,006,000
Current portion of advances on contracts in progress 22,096,000 6,396,000
------------ ------------
Total current liabilities 36,706,000 14,411,000
------------ ------------
Long-term portion of capital lease obligation - related party -- 486,000
Long-term portion of equipment line of credit 2,042,000 --
Long-term portion of advances on contracts in progress 2,103,000 1,823,000
Deferred compensation 1,801,000 1,461,000
Deferred taxes 85,000 40,000
------------ ------------
Total long-term liabilities 6,031,000 3,810,000
------------ ------------
Total liabilities 42,737,000 18,221,000
------------ ------------
Stockholders' equity
--------------------
Common stock, $0.01 par value; 20,000,000 shares authorized; 8,286,412 shares
issued and outstanding on September 30, 2007 and 8,236,663 shares issued
and outstanding on December 31, 2006 83,000 82,000
Additional paid-in capital 19,650,000 19,077,000
Accumulated deficit (10,612,000) (9,756,000)
Accumulated other comprehensive income 127,000 60,000
------------ ------------
Total stockholders' equity 9,248,000 9,463,000
------------ ------------
Total liabilities and stockholders' equity $ 51,985,000 $ 27,684,000
============ ============
See accompanying notes to unaudited condensed consolidated financial statements.
1
SPIRE CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------ ------------------------------
2007 2006 2007 2006
------------ ------------ ------------ ------------
Net sales and revenues
----------------------
Sales of goods $ 6,343,000 $ 3,030,000 $ 16,782,000 $ 7,185,000
Contract research, service and license revenues 3,502,000 2,764,000 8,639,000 7,877,000
------------ ------------ ------------ ------------
Total net sales and revenues 9,845,000 5,794,000 25,421,000 15,062,000
------------ ------------ ------------ ------------
Costs of sales and revenues
---------------------------
Cost of goods sold 6,062,000 2,985,000 14,801,000 6,678,000
Cost of contract research, services and licenses 2,363,000 2,120,000 6,813,000 6,625,000
------------ ------------ ------------ ------------
Total cost of sales and revenues 8,425,000 5,105,000 21,614,000 13,303,000
Gross margin 1,420,000 689,000 3,807,000 1,759,000
Operating expenses
------------------
Selling, general and administrative expenses 3,388,000 2,496,000 9,252,000 7,306,000
Internal research and development expenses 96,000 194,000 219,000 547,000
------------ ------------ ------------ ------------
Total operating expenses 3,484,000 2,690,000 9,471,000 7,853,000
------------ ------------ ------------ ------------
Gain on sale of trademark 2,707,000 -- 2,707,000 --
------------ ------------ ------------ ------------
Income (loss) from operations 643,000 (2,001,000) (2,957,000) (6,094,000)
-----------------------------
Other income (expense), net (83,000) 60,000 (94,000) 68,000
------------ ------------ ------------ ------------
Income (loss) before income taxes and
-------------------------------------
extraordinary gain 560,000 (1,941,000) (3,051,000) (6,026,000)
------------------
Income tax benefit 884,000 -- 884,000 --
------------ ------------ ------------ ------------
Income (loss) before extraordinary gain $ 1,444,000 $ (1,941,000) $ (2,167,000) $ (6,026,000)
---------------------------------------
Extraordinary gain on equity investment in joint
joint venture, net of tax 1,311,000 -- 1,311,000 --
------------ ------------ ------------ ------------
Net income (loss) $ 2,755,000 $ (1,941,000) $ (856,000) $ (6,026,000)
----------------- ============ ============ ============ ============
Basic income (loss) per share:
From continuing operations after income taxes $ 0.17 $ (0.24) $ (0.26) $ (0.77)
From extraordinary gain, net of tax 0.16 -- 0.16 --
------------ ------------ ------------ ------------
Basic income (loss) per share $ 0.33 $ (0.24) $ (0.10) $ (0.77)
============ ============ ============ ============
Diluted income (loss) per share:
From continuing operations after income taxes $ 0.17 $ (0.24) $ (0.26) $ (0.77)
From extraordinary gain, net of tax 0.16 -- 0.16 --
------------ ------------ ------------ ------------
Diluted income (loss) per share $ 0.33 $ (0.24) $ (0.10) $ (0.77)
============ ============ ============ ============
Weighted average number of common and common shares
equivalent outstanding - basic 8,272,543 8,213,726 8,261,030 7,788,656
============ ============ ============ ============
Weighted average number of common and common equivalent
shares outstanding - diluted 8,341,642 8,213,726 8,261,030 7,788,656
============ ============ ============ ============
See accompanying notes to unaudited condensed consolidated financial statements.
2
SPIRE CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30,
------------------------------
2007 2006
------------ ------------
Cash flows from operating activities:
-------------------------------------
Net loss $ (856,000) $ (6,026,000)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 1,534,000 1,592,000
Loss on impairment of capital equipment 78,000 --
Loss on buy-out of capital lease -- 105,000
Gain on sale of trademark (2,707,000) --
Deferred taxes benefit (884,000) --
Extraordinary gain on equity investment in joint venture, net of tax (1,311,000) --
Deferred compensation 67,000 (2,000)
Stock-based compensation 389,000 180,000
Increase (decrease) in inventory reserves (134,000) 23,000
Increase (decrease) in accounts receivable reserves (42,000) 68,000
Changes in assets and liabilities:
Restricted cash (122,000) 473,000
Interest receivable -- (98,000)
Accounts receivable (7,558,000) 958,000
Inventories (14,061,000) (671,000)
Prepaid expenses and other current assets (2,196,000) (1,745,000)
Accounts payable, accrued liabilities and other liabilities 5,721,000 305,000
Deposit - related party (67,000) (45,000)
Advances on contracts in progress 15,980,000 4,388,000
------------ ------------
Net cash used in operating activities (6,169,000) (495,000)
------------ ------------
Cash flows from investing activities:
-------------------------------------
Purchase of short-term investments -- (7,500,000)
Proceeds from maturity of short-term investments 5,000,000 2,500,000
Proceeds from sale of trademark to joint venture 2,707,000 --
Additions to property and equipment (822,000) (1,289,000)
Increase in intangible and other assets (107,000) (237,000)
------------ ------------
Net cash provided by (used in) investing activities 6,778,000 (6,526,000)
------------ ------------
Cash flows from financing activities:
-------------------------------------
Proceeds from issuance of common stock, net of offering costs -- 7,730,000
Borrowings from equipment line of credit, net 3,209,000 --
Principal payment on capital lease obligations -- (557,000)
Principal payment on capital lease obligations - related parties (734,000) (527,000)
Proceeds from exercise of stock options 184,000 285,000
------------ ------------
Net cash provided by financing activities 2,659,000 6,931,000
------------ ------------
Net increase (decrease) in cash and cash equivalents 3,268,000 (90,000)
Cash and cash equivalents, beginning of period 1,536,000 3,630,000
------------ ------------
Cash and cash equivalents, end of period $ 4,804,000 $ 3,540,000
============ ============
Supplemental disclosures of cash flow information:
--------------------------------------------------
Cash paid during the period for:
Interest $ (16,000) $ (77,000)
============ ============
Interest - related party $ 64,000 $ 106,000
============ ============
Income taxes $ 7,000 $ 5,000
============ ============
Supplemental disclosure of non-cash investing activities:
---------------------------------------------------------
Transfer of assets to joint venture $ 160,000 $ --
============ ============
See accompanying notes to unaudited condensed consolidated financial statements.
3
SPIRE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2007
1. DESCRIPTION OF THE BUSINESS
Spire Corporation (the "Company") develops, manufactures and markets
highly-engineered products and services in three principal business areas: (i)
solar, (ii) optoelectronics and (iii) biomedical, generally bringing to bear
expertise in materials technologies across all three business areas.
In the solar area, the Company develops, manufactures and markets
specialized equipment for the production of terrestrial photovoltaic modules
from solar cells. The Company's equipment has been installed in approximately
190 factories in 46 countries. The Company also provides, directly and
indirectly through its joint venture with Gloria Solar Co., Ltd (discussed in
Note 2 below), custom and building integrated photovoltaic ("BIPV") modules,
stand-alone emergency power backup and photovoltaic systems integration services
using technology developed by the Company.
In the optoelectronics area, the Company provides custom compound
semiconductor foundry and fabrication services on a merchant basis to customers
involved in biomedical/biophotonics 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.
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.
The Company has incurred significant operating losses. Loss from
operations, before gain on sales of licenses and extinguishment of purchase
commitment, were $8.3 million and $6.6 million for the years ended December 31,
2006 and 2005, respectively. Loss from operations before gains on sales of
trademarks and formation of the joint venture for the nine months ended
September 30, 2007 was $5.7 million. These losses from operations have resulted
in cash losses (income (loss) from operations excluding non-operating gains on
sales of licenses and trademark (minus non-cash adjustments) of approximately
$5.4 million and $4.2 million in each of the years ended December 31, 2006 and
2005, respectively and approximately $3.8 million for the nine months ended
September 30, 2007. The Company has funded these cash losses from cash receipts
of $7.7 million from proceeds of a common stock offering in 2006, $6.7 million
related to the sale of certain licenses to its medical products and solar
technologies in 2005, $3.2 million of net bank borrowings in 2007 and the
receipt of $4.0 million from the sale of the certain solar system assets in
2007. As of September 30, 2007, the Company had cash and cash equivalents of
$4.8 million. While the Company believes it has inherent assets and technology
that it could sell or license in the near term, there is no guarantee that the
Company would be able to sell or license those assets on a timely basis and at
appropriate values that would allow the Company to continue to fund its
operating losses. The Company has developed several plans to mitigate cash
losses primarily from increased revenues and, if required, potential cost
reduction efforts and outside financing. The Company believes it has sufficient
resources to continue as a going concern.
2. RECENT TRANSACTIONS
Equity Investment in Joint Venture
----------------------------------
On July 31, 2007, the Company entered into contractual relationship with
Gloria Solar Co., Ltd. ("Gloria Solar") pursuant to which (i) the Company agreed
to sell to Gloria Solar certain assets belonging to the Company's solar systems
business for $4,000,000 and (ii) the Company and Gloria Solar agreed to form a
joint venture named Gloria Spire Solar, LLC, for the purpose of pursuing the
solar photovoltaic systems market within the United States. The joint venture
will design, market, sell and manage the installation of systems for the
generation of electrical power by solar photovoltaic means in primarily
commercial/industrial and utility segments of such market (the "JV Systems
Business"). Gloria Solar will own 55% of the joint venture and the Company will
own 45% of the joint venture. In connection with the formation of the joint
venture, (i) the Company agreed to contribute to the joint venture its assets
primarily relating to the JV Systems Business, including certain intellectual
property and know-how, access to information technology assets and
relationships, relationships with current and previous customers, contract
backlog and project opportunities, certain registered trademarks,
4
and employment relationships with staff members and (ii) Gloria Solar agreed to
contribute $5,000,000 in cash. This transaction closed on September 4, 2007. The
Company's initial investment was recorded at $2,356,000. The Company will use
the equity method to account for its investment in the joint venture as it has
significant influence over the investee however, lacks significant control. The
Company will be reporting the ongoing financial results of the joint venture one
quarter in arrears. As a result of applying the provisions of Accounting
Principles Board ("APB") Opinion No. 18 "THE EQUITY METHOD OF ACCOUNTING FOR
INVESTMENTS IN COMMON STOCK" to the differences between the fair value of the
assets contributed and the cost basis on the Company's books, the Company
recorded an extraordinary gain of $1,311,000, net of tax provision of $884,000.
Additional recognition of the deferential will be recorded over time to offset
the Company's ownership percentage of the amortization of the contributed
intangibles assets as recorded on the joint venture's books. If the managing
board of the joint venture determines that additional capital is required to
support the operations of the Company, the joint venture shall make a call for
additional funds. Within ten (10) days after the members have received written
notice of the call, the members shall make additional capital contributions to
the joint venture in proportion to each member's interest in the joint venture.
If a member fails to fund its pro rata portion of any capital call, the
non-defaulting member may purchase the defaulting member's shortfall; however,
in no event may the Company's or Gloria Solar's interest in the joint venture be
reduced to below 10%.
Sale of Solar System Production Line
------------------------------------
The Company sold Gloria Solar a PV module line operated by the Company's
solar system business along with the transfer of technology and rights to mark
the modules with the Company's trademark to build, design and sell specialty
BIPV and PV modules, in exchange for $4,000,000 in cash. As of September 30,
2007 the Company still had outstanding obligations to refurbish the module line
and provide some additional PV module design work. The Company believes the sale
of the trademark and the other goods and services meets the criteria of Emerging
Issues Task Force ("EITF") 00-21, "ACCOUNTING FOR REVENUE ARRANGEMENTS WITH
MULTIPLE ELEMENTS," paragraph 9(a), as each element has utility on a stand-alone
basis. Further, Question 1 to SAB Topic 13A-3f was considered as guidance for
determining if the trademark fee under the Agreement should be recognized as a
sale. As the trademark agreement has no term and is permanent in nature, the
earnings process was complete; accordingly, the Company recognized a gain on the
sale. The Company has determined the fair value of the trademark sale, the PV
module line and services based on a third party appraisal. As a result, a
$2,707,000 gain was recognized on the sale of the trademark in the accompanying
unaudited condensed consolidated statements of operations for the three and nine
months ended September 30, 2007. The Company also recognized $708,000 in service
revenue reflecting the delivery of PV technology designs to build PV modules.
The Company has sold and will continue to sell this technology to other
customers as part of its equipment business. Gloria Solar has further contracted
with the Company to sell it additional PV module equipment lines at market
prices.
3. INTERIM FINANCIAL STATEMENTS
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with the rules and regulations of the
Securities and Exchange Commission regarding interim financial reporting.
Certain information and footnote disclosures normally included in consolidated
financial statements prepared in accordance with accounting principles generally
accepted in the United States of America have been condensed or omitted in
accordance with such rules and regulations. These unaudited condensed
consolidated financial statements should be read in conjunction with the annual
audited consolidated financial statements and notes thereto for the year ended
December 31, 2006, included in our Annual Report on Form 10-KSB filed with the
Securities and Exchange Commission.
In the opinion of management, the accompanying unaudited, condensed
consolidated financial statements contain all adjustments necessary to fairly
present the Company's financial position as of September 30, 2007 and December
31, 2006 and the results of its operations and cash flows for the three and nine
months ended September 30, 2007 and 2006. The results of operations for the
three and nine months ended September 30, 2007 are not necessarily indicative of
the results to be expected for the fiscal year ending December 31, 2007. The
condensed consolidated balance sheet as of December 31, 2006 has been derived
from audited financial statements as of that date.
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, 2006.
New Accounting Pronouncements
-----------------------------
In June 2006, the Financial Accounting Standards Board ("FASB") issued
Interpretation No. 48, "Accounting for Uncertainty in Income Taxes, an
interpretation of FASB Statement 109" ("FIN 48"). This statement clarifies the
criteria
5
that an individual tax position must satisfy for some or all of the benefits of
that position to be recognized in a company's financial statements. FIN 48
prescribes a recognition threshold of more likely-than-not, and a measurement
attribute for all tax positions taken or expected to be taken on a tax return,
in order for those tax positions to be recognized in the financial statements.
Effective January 1, 2007, the Company adopted the provisions of FIN 48. The
Company has determined that no liability exists for interest and penalties
related to uncertain tax positions as of January 1, 2007 and September 30, 2007.
The Company accounts for interest and penalties related to uncertain tax
positions as part of its provision for federal and state income taxes. The
Company does not expect that the amounts of unrecognized tax benefits will
change significantly within the next 12 months.
The Company is currently subject to audit by the Internal Revenue
Service for the calendar years ended 2003, 2004, 2005 and 2006. The Company and
its subsidiaries state income tax returns are subject to audit for the calendar
years ended 2003, 2004, 2005 and 2006.
In February 2007, the FASB issued Statement of Financial Accounting
Standard ("SFAS") No. 159, "The Fair Value Option for Financial Assets and
Financial Liabilities, including an amendment of FASB Statement No. 115". SFAS
159 permits entities to choose to measure many financial instruments and certain
other items at fair value at specified election dates. This Statement applies to
all entities, including not-for-profit organizations. SFAS 159 is effective as
of the beginning of an entity's first fiscal year that begins after November 15,
2007. As such, the Company is required to adopt these provisions at the
beginning of the fiscal year ending December 31, 2008. The Company is currently
evaluating the impact of SFAS 159 on its consolidated financial statements
In September 2006, the FASB issued Statement No. 157, FAIR VALUE
MEASUREMENTS ("SFAS 157"). SFAS 157 defines fair value, establishes a framework
for measuring fair value in GAAP, and expands disclosures about fair value
measurements. SFAS 157 will be applied prospectively and will be effective for
periods beginning after November 15, 2007. The Company is currently evaluating
the effect, if any, of SFAS 157 on the Company's consolidated financial
statements.
4. ACCOUNTS RECEIVABLE/ADVANCES ON CONTRACTS IN PROGRESS
Net accounts receivable, trade consists of the following:
September 30, December 31,
2007 2006
------------ ------------
Amounts billed $ 11,661,000 $ 3,876,000
Retainage 8,000 8,000
Accrued revenue 172,000 399,000
------------ ------------
11,841,000 4,283,000
Less: Allowance for sales returns and doubtful accounts (231,000) (273,000)
------------ ------------
Net accounts receivable, trade $ 11,610,000 $ 4,010,000
============ ============
Advances on contracts in progress $ 24,199,000 $ 8,219,000
============ ============
Retainage represents revenues on certain United States government
sponsored research and development contracts. These amounts, which usually
represent 15% of the Company's research fee on each applicable contract, are not
collectible until a final cost review has been performed by government auditors.
Included in retainage are amounts expected to be collected after one year, which
totaled approximately $8,000 at September 30, 2007. 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 2005. 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.
6
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:
September 30, December 31,
2007 2006
------------ ------------
Raw materials $ 4,326,000 $ 1,519,000
Work in process 13,306,000 2,310,000
Finished goods 645,000 388,000
------------ ------------
$ 18,277,000 $ 4,217,000
============ ============
6. INCOME (LOSS) PER SHARE
The following table provides a reconciliation of the denominators of the
Company's reported basic and diluted loss per share computations for the periods
ended:
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------- -----------------------------
2007 2006 2007 2006
------------ ------------ ------------ ------------
Weighted average number of common and common
equivalent shares outstanding - basic 8,272,543 8,213,726 8,261,030 7,788,656
Add: Net additional common shares upon assumed
exercise of common stock options 69,099 -- -- --
------------ ------------ ------------ ------------
Adjusted weighted average number of common and
common0 equivalents shares outstanding - diluted 8,341,642 8,213,726 8,261,030 7,788,656
============ ============ ============ ============
For both the three and nine months ended September 30, 2007, 6,250
shares, and for the three and nine months ended September 30, 2006, 42,000 and
22,500 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 nine months ended September 30, 2007, 505,453
shares, and for the three and nine months ended September 30, 2006, 325,252 and
344,752 shares, respectively, of common stock related to stock options were
excluded from the calculation of dilutive shares since the inclusion of such
shares would be anti-dilutive due to the Company's net loss position.
7
7. OPERATING SEGMENTS AND RELATED INFORMATION
The following table presents certain operating division information in
accordance with the provisions of SFAS No. 131, "Disclosure about Segments of an
Enterprise and Related Information."
Total
Solar Biomedical Optoelectronics Company
------------------------------------------------------------------------------
For the three months ended September 30, 2007
---------------------------------------------
Net sales and revenues $ 6,208,000 $ 2,594,000 $ 1,043,000 $ 9,845,000
Income (loss) from operations $ 1,931,000 $ (362,000) $ (926,000) $ 643,000
For the three months ended September 30, 2006
---------------------------------------------
Net sales and revenues $ 2,459,000 $ 2,537,000 $ 798,000 $ 5,794,000
Loss from operations $ (1,197,000) $ (175,000) $ (629,000) $ (2,001,000)
For the nine months ended September 30, 2007
--------------------------------------------
Net sales and revenues $ 14,776,000 $ 7,948,000 $ 2,697,000 $ 25,421,000
Income (loss) from operations $ 623,000 $ (1,088,000) $ (2,492,000) $ (2,957,000)
For the nine months ended September 30, 2006
--------------------------------------------
Net sales and revenues $ 5,643,000 $ 7,422,000 $ 1,997,000 $ 15,062,000
Loss from operations $ (2,674,000) $ (1,127,000) $ (2,293,000) $ (6,094,000)
The following table shows net sales and revenues by geographic area
(based on customer location):
Three Months Ended September 30, Nine Months Ended September 30,
------------------------------------------------------ ------------------------------------------------------
2007 % 2006 % 2007 % 2006 %
------------ -------- ------------ -------- ------------ -------- ------------ --------
Foreign $ 5,822,000 59% $ 1,774,000 31% $ 13,286,00 52% $ 5,234,000 35%
United States 4,023,000 41% 4,020,000 69% 12,135,000 48% 9,828,000 65%
------------ ------------ ------------ ------------
$ 9,845,000 100% $ 5,794,000 100% $ 25,421,000 100% $ 15,062,000 100%
============ ============ ============ ============
Revenues from contracts with United States government agencies for the
three months ended September 30, 2007 and 2006 were approximately $287,000 and
$528,000, or 3% and 9% of consolidated net sales and revenues, respectively.
Revenues from contracts with United States government agencies for the
nine months ended September 30, 2007 and 2006 were approximately $724,000 and
$1,616, or 3% and 11% of consolidated net sales and revenues, respectively.
Two customers accounted for approximately 37% of the Company's gross
sales during the three months ended September 30, 2007 and one customer
accounted for approximately 36% of the Company's gross sales for the three
months ended September 30, 2006. One customer accounted for approximately 22% of
the Company's gross sales during the nine months ended September 30, 2007 and
one customer accounted for approximately 12% of the Company's gross sales for
the nine months ended September 30, 2006. Two customers represented
approximately 57% of trade accounts receivable at September 30, 2007 and one
customer represented approximately 39% of trade accounts receivable at September
30, 2006.
8. INTANGIBLE AND OTHER ASSETS
Patents amounted to approximately $104,000, net of accumulated
amortization of approximately $670,000, at September 30, 2007. Licenses amounted
to approximately $125,000, net of accumulated amortization of approximately
$200,000 at September 30, 2007. 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
approximately $632,000 of estimated amortization expense on a five-year
straight-line basis related to patents that remain pending as of the balance
sheet date.
8
Estimated amortization expense for the periods ending December 31, is as
follows:
Year Amortization Expense
----------------------------- ---------------------------
2007 remaining 3 months $58,000
2008 206,000
2009 165,000
2010 160,000
2011 155,000
Beyond 2011 117,000
---------------------------
$861,000
===========================
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:
September 30, 2007 December 31, 2006
------------------ -----------------
Equity investments $1,418,000 $1,160,000
Government bonds 275,000 262,000
Cash and money market funds 108,000 39,000
------------------ -----------------
$1,801,000 $1,461,000
================== =================
These investments have been classified as long-term available-for-sale
investments and are reported at fair value, with unrealized gains and losses
included in accumulated other comprehensive loss, net of related tax effect. As
of September 30, 2007, the net unrealized gain on these marketable securities
was approximately $212,000.
10. NOTES PAYABLE AND CREDIT ARRANGEMENTS
The Company had a $2,000,000 Loan Agreement with Citizens Bank of
Massachusetts which expired on June 26, 2007. On May 25, 2007, the Company and
its wholly-owned subsidiary, Bandwidth Semiconductor, LLC ("Bandwidth"), entered
into a Loan and Security Agreement (the "Loan Agreement") with Silicon Valley
Bank (the "Bank"). Under the Loan Agreement, for a one-year period, the Company
and Bandwidth can borrow up to $3,500,000 in the aggregate to finance certain
equipment purchases (including reimbursement of certain previously-made
purchases). Each advance made under the Loan Agreement will be due thirty-six
(36) months from the date the advance is made. Advances made under the Loan
Agreement will bear interest at the Bank's prime rate, as determined, plus 0.5%
(8.25% at September 30, 2007) and payable in thirty-six (36) consecutive monthly
payments following the funding date of that advance. At September 30, 2007, the
Company's borrowings from the line to finance certain capital equipment
purchased previously by Bandwidth amounted to $3,209,000. At September 30, 2007,
the Company was not in compliance with its profitability covenant for the third
quarter. The Company has received a waiver from the Bank with respect to this
covenant.
11. STOCK OPTION PLAN AND 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. Based on an analysis of the Company's historical data, the Company
applied 11% forfeiture rates to stock options outstanding in determining its
Statement 123(R) stock-based compensation expense which it believes is a
reasonable forfeiture estimate for the period. The impact of Statement 123(R) on
the Company's results of operations resulted in recognition of stock-based
compensation expense of approximately $181,000 and $389,000 for the three and
nine months ended September 30, 2007, respectively, and approximately $61,000
and $180,000 for the three and nine months ended September 30, 2006. The total
non-cash, stock-based compensation expense included in the condensed
consolidated statement of operations for the periods presented is included in
the following expense categories:
Three Months Ended September 30, Nine Months Ended September 30,
------------------------------- -------------------------------
2007 2006 2007 2006
------------ ------------ ------------ ------------
$ 12,000 $ 4,000 $ 31,000 $ 12,000
Cost of contract research, services and licenses
Cost of goods sold 14,000 9,000 22,000 26,000
Administrative and selling 155,000 48,000 336,000 142,000
------------ ------------ ------------ ------------
Total stock-based compensation $ 181,000 $ 61,000 $ 389,000 $ 180,000
============ ============ ============ ============
9
At September 30, 2007 the Company had outstanding options under two
stock option plans: the 1996 Equity Incentive Plan (the "1996 Plan") and the
2007 Stock Equity Plan (the "2007 Plan"). Both plans were approved by
stockholders and provided that the Board of Directors may grant options to
purchase the Company's common stock to key employees and directors of the
Company. Incentive and non-qualified options must be granted at least at the
fair market value of the common stock or, in the case of certain optionees, at
110% of such fair market value at the time of grant. The options may be
exercised, subject to certain vesting requirements, for periods up to ten years
from the date of issue. The 1996 Plan expired with respect to the issuance of
new grants as of December 10, 2006.
A summary of options outstanding under the 2007 Plan and 1996 Plan as of
September 30, 2007 and changes during the nine-month period is as follows:
Average
Weighted- Remaining Aggregate
Number of Average Contractual Intrinsic
Shares Exercise Price Life (Years) Value
------------------ -------------------- ----------------- ----------------
Options Outstanding at December 31, 2006 416,002 $5.21
Granted 151,200 $9.40
Exercised (49,749) $3.71
Cancelled/expired (12,000) $7.81
------------------ --------------------
Options Outstanding at September 30, 2007 505,453 $6.55 7.57 $3,704,000
================== ====================
Options Exercisable at September 30, 2007 204,653 $4.72 5.61 $1,875,000
================== ====================
The per-share weighted-average fair value of stock options granted
during the three and nine months ended September 30, 2007 and 2006 was $6.08 and
$6.29 in 2007, respectively, and $4.48 and $4.86 in 2006, 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
-------- ------------------ ----------------- --------------- ---------------------
2007 -- 4.50% 4.5 years 84.9%
The risk free interest rate reflects treasury yields rates over a term
that approximates the expected option life. The expected option life is
calculated based on historical lives of all options issued under the plan. The
expected volatility factor is determined by measuring the actual stock price
volatility over a term equal to the expected useful life of the options granted.
12. COMPREHENSIVE LOSS
Comprehensive loss includes certain changes in equity that are excluded
from net loss and consists of the following:
Three Months Ended September 30, Nine Months Ended September 30,
------------------------------- --------------------------------
2007 2006 2007 2006
------------ ------------ ------------ ------------
Net income (loss) $ 2,755,000 $ (1,941,000) $ (856,000) $ (6,026,000)
Other comprehensive income (loss):
Unrealized gain (loss) on available for
sale marketable securities, net of tax 20,000 30,000 67,000 (2,000)
------------ ------------ ------------ ------------
Total comprehensive income (loss) $ 2,775,000 $ (1,911,000) $ (789,000) $ (6,028,000)
============ ============ ============ ============
10
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, 2006. 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 three principal business areas: solar
equipment, biomedical and optoelectronics, bringing to bear expertise in
materials technologies across all three business areas as 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 190 factories in 46 countries. The Company also provides ,
directly and indirectly through its joint venture with Gloria Solar Co., Ltd.,
discussed below, custom and building integrated photovoltaic modules,
stand-alone emergency power backup and photovoltaic systems integration services
using technology developed by the Company.
In the optoelectronics area, the Company provides compound semiconductor
foundry and fabrication 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.
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.
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 52% of net sales and
revenues for the nine months ended September 30, 2007, continue to constitute a
significant portion of the Company's net sales and revenues.
RECENT TRANSACTIONS
Equity Investment in Joint Venture
----------------------------------
On July 31, 2007, the Company entered into contractual relationship with
Gloria Solar Co., Ltd. ("Gloria Solar") pursuant to which (i) the Company agreed
to sell to Gloria Solar certain assets belonging to the Company's solar systems
business for $4,000,000 and (ii) the Company and Gloria Solar agreed to form a
joint venture named Gloria Spire Solar, LLC, for the purpose of pursuing the
solar photovoltaic systems market within the United States. The joint venture
will design, market, sell and manage the installation of systems for the
generation of electrical power by solar photovoltaic means in primarily
commercial/industrial and utility segments of such market (the "JV Systems
Business"). Gloria Solar will own 55% of the joint venture and the Company will
own 45% of the joint venture. In connection with the formation of the joint
venture, (i) the Company agreed to contribute to the joint venture its assets
primarily relating to the JV Systems Business, including certain intellectual
property and know-how, access to information technology assets and
relationships, relationships with current and previous customers, contract
backlog and project opportunities, certain registered trademarks, and employment
relationships with staff members and (ii) Gloria Solar agreed to contribute
$5,000,000 in cash. This
11
transaction closed on September 4, 2007. The Company's initial investment was
recorded at $2,356,000. The Company will use the equity method to account for
its investment in the joint venture as it has significant influence over the
investee however, lacks significant control. The Company will be reporting the
ongoing financial results of the joint venture one quarter in arrears. As a
result of applying the provisions of Accounting Principles Board ("APB") Opinion
No. 18 "THE EQUITY METHOD OF ACCOUNTING FOR INVESTMENTS IN COMMON STOCK" to the
differences between the fair value of the assets contributed and the cost basis
on the Company's books, the Company recorded an extraordinary gain of
$1,311,000, net of tax provision of $884,000. Additional recognition of the
deferential will be recorded over time to offset the Company's ownership
percentage of the amortization of the contributed intangibles assets as recorded
on the joint venture's books. If the managing board of the joint venture
determines that additional capital is required to support the operations of the
Company, the joint venture shall make a call for additional funds. Within ten
(10) days after the members have received written notice of the call, the
members shall make additional capital contributions to the joint venture in
proportion to each member's interest in the joint venture. If a member fails to
fund its pro rata portion of any capital call, the non-defaulting member may
purchase the defaulting member's shortfall; however, in no event may the
Company's or Gloria Solar's interest in the joint venture be reduced to below
10%.
Sale of Solar System Production Line
The Company sold Gloria Solar a PV module line operated by the Company's
solar system business along with the transfer of technology and rights to mark
the modules with the Company's trademark to build, design and sell specialty
BIPV and PV modules, in exchange for $4,000,000 in cash. As of September 30,
2007 the Company still had outstanding obligations to refurbish the module line
and provide some additional PV module design work. The Company believes the sale
of the trademark and the other goods and services meets the criteria of Emerging
Issues Task Force ("EITF") 00-21, "ACCOUNTING FOR REVENUE ARRANGEMENTS WITH
MULTIPLE ELEMENTS," paragraph 9(a), as each element has utility on a stand-alone
basis. Further, Question 1 to SAB Topic 13A-3f was considered as guidance for
determining if the trademark fee under the Agreement should be recognized as a
sale. As the trademark agreement has no term and is permanent in nature, the
earnings process was complete; accordingly, the Company recognized a gain on the
sale. The Company has determined the fair value of the trademark sale, the PV
module line and services based on a third party appraisal. As a result, a
$2,707,000 gain was recognized on the sale of the trademark in the accompanying
unaudited condensed consolidated statements of operations for the three and nine
months ended September 30, 2007. The Company also recognized $708,000 in service
revenue reflecting the delivery of PV technology designs to build PV modules.
The Company has sold and will continue to sell this technology to other
customers as part of its equipment business. Gloria Solar has further contracted
with the Company to sell it additional PV module equipment lines at market
prices.
Results of Operations
The following table sets forth certain items as a percentage of net
sales and revenues for the periods presented:
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------------- ----------------------------------
2007 2006 2007 2006
--------------- --------------- --------------- ---------------
Net sales and revenues 100% 100% 100% 100%
Cost of sales and revenues 86 88 85 88
--------------- --------------- --------------- ---------------
Gross profit 14 12 15 12
Selling, general and administrative expenses 34 43 36 49
Internal research and development expenses 1 4 1 4
--------------- --------------- --------------- ---------------
Gain on sale of trademark 27 0 10 0
--------------- --------------- --------------- ---------------
Income (loss) from operations 6 (35) (12) (41)
Other income, net 0 1 0 1
--------------- --------------- --------------- ---------------
Income (loss) before income tax benefit 6 (34) (12) (40)
Income tax benefit 9 -- 3 --
--------------- --------------- --------------- ---------------
Net income (loss) 15 (34) (9) (40)
--------------- --------------- --------------- ---------------
Extraordinary gain 13 -- 5 --
--------------- --------------- --------------- ---------------
Net income (loss) after extraordinary gain 28% (34%) (4%) (40%)
=============== =============== =============== ===============
12
OVERALL
The Company's total net sales and revenues for the nine months ended
September 30, 2007 ("2007") were approximately $25,421,000 as compared to
approximately $15,062,000 for the nine months ended September 30, 2006 ("2006"),
an increase of approximately $10,359,000 or 69%. The increase was primarily
attributable to an approximate $9,901,000 increase in solar equipment sales and
an approximate $699,000 increase in optoelectronics sales. Additionally,
catheter product sales in the Company's biomedical business unit increased
approximately $852,000 in 2007 as compared with 2006, partially offset by a
decrease of approximately $788,000 in biomedical research and development
revenues.
SOLAR BUSINESS UNIT
Sales in the Company's solar business unit increased 162% during the
nine months ended September 30, 2007 to approximately $14,776,000 as compared to
approximately $5,643,000 in 2006. The increase is the result of shipments of
solar equipment reflecting the overall increase in activity in the solar power
industry. The Company has focused its sales and marketing efforts on
establishing the Company as one of the premier suppliers of equipment to the
solar power industry for the manufacture of photovoltaic power modules.
OPTOELECTRONICS BUSINESS UNIT
Revenues in the Company's optoelectronics business unit increased 35% to
approximately $2,697,000 during the nine months ended September 30, 2007 as
compared to approximately $1,997,000 in the prior year. The increase reflects an
overall increase in optoelectronics activities attributable to a shift in
product mix to larger scale commercial orders compared with smaller sized
research and development projects.
BIOMEDICAL BUSINESS UNIT
Revenues of the Company's biomedical business unit increased 7% during
the nine months ended September 30, 2007 to approximately $7,948,000 as compared
to approximately $7,422,000 for the same period in 2006. The increase reflects
increased revenues from the Company's catheter products and orthopedics coatings
services offset by reduced revenues from research and development contracts.
Three and Nine Months Ended September 30, 2007 Compared to Three and Nine Months
Ended September 30, 2006
NET SALES AND REVENUES
The following table categorizes the Company's net sales and revenues for
the periods presented:
Three Months Ended September 30, Increase/(Decrease)
------------------------------- -----------------------
2007 2006 $ %
------------ ------------ ------------ ------
Sales of goods $ 6,343,000 $ 3,030,000 $ 3,313,000 109%
Contract research, services and license revenues 3,502,000 2,764,000 738,000 27%
------------ ------------ ------------
Net sales and revenues $ 9,845,000 $ 5,794,000 $ 4,051,000 70%
============ ============ ============
The 109% increase in sales of goods for the three months ended September
30, 2007 as compared to the three months ended September 30, 2006 was primarily
due to an increase in solar equipment revenues and an increase in catheter
products sales. Solar equipment sales increased 358% in 2007 as compared to 2006
primarily due to an overall increase in solar power industry activity. Sales of
catheters increased 12% due primarily to the introduction of its heparin-coated
catheter that was introduced in the fourth quarter of 2006. This was partially
offset by an 84% reduction in Solar systems revenue from a year ago.
The 27% increase in contract research, services and license revenues for
the three months ended September 30, 2007 as compared to the three months ended
September 30, 2006 was primarily attributable a 31% increase in revenue from the
Company's optoelectronics processing services ("Bandwidth"). There was increased
demand for Bandwidth's services and commercial production runs of products from
its development efforts. In addition, the Company recognized $708,000 in
additional service revenue associated with the sale of technology services
delivered to Gloria Solar in fiscal third quarter 2007. This was offset by a
decrease in contract revenues for Spire's biomedical research and development
activities.
13
Revenues from Spire's research and development activities decreased 32% in 2007
as compared to 2006 primarily due to a decrease in the number and value of
contracts associated with funded research and development.
The following table categorizes the Company's net sales and revenues for
the periods presented:
Nine Months Ended September 30, Increase/(Decrease)
------------------------------- -----------------------
2007 2006 $ %
------------ ------------ ------------ ------
Sales of goods $ 16,782,000 $ 7,185,000 $ 9,597,000 134%
Contract research, services and license revenues 8,639,000 7,877,000 762,000 10%
------------ ------------ ------------ ------
Net sales and revenues $ 25,421,000 $ 15,062,000 $ 10,359,000 69%
============ ============ ============
The 134% increase in sales of goods for the nine months ended September
30, 2007 as compared to the nine months ended September 30, 2006 was primarily
due to an increase in solar equipment revenues and an increase in catheter
products sales. Solar equipment sales increased 268% in 2007 as compared to 2006
primarily due to an overall increase in solar power industry activity. Sales of
catheters increased 40% due primarily to the introduction of its heparin-coated
catheter that was introduced in the fourth quarter of 2006.
The 10% increase in contract research, services and license revenues for
the nine months ended September 30, 2007 as compared to the nine months ended
September 30, 2006 was primarily attributable to an increase in orthopedics and
optoelectronics services. In addition, the Company recognized $708,000 in
addition service revenue associated with the sale of technology services
delivered to Gloria Solar in fiscal third quarter. Revenue from Bandwidth
increased 35% in 2007 compared to 2006 as a result of increased demand for
Bandwidth's services and commercial production runs of products from its
development efforts. These increases were partially offset by a decrease in
government research and development activities. Revenues from Spire's research
and development activities decreased 46% in 2007 as compared to 2006 primarily
due to a decrease in the number and value of contracts associated with funded
research and development.
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 September 30, Increase
---------------------------------------------------- -----------------------
2007 % 2006 % $ %
------------ ------ ------------ ------ ------------ ------
Cost of goods sold $ 6,062,000 96% $ 2,985,000 99% $ 3,077,000 103%
Cost of contract research, services
and licenses 2,363,000 67% 2,120,000 77% 243,000 12%
------------ ------------ ------------
Net cost of sales and revenues $ 8,425,000 86% $ 5,105,000 88% $ 3,320,000 65%
============ ============ ============
The $3,077,000 (103%) increase in cost of goods sold was primarily due
to increased costs within Spire's solar equipment product line corresponding to
the 358% increase in solar equipment sales and a 12% increase in catheter
product sales. The decrease in cost of goods sold as a percentage of revenue was
the result of increased contribution margins in these product lines as increased
production volume utilized more of the available capacity.
The $243,000 (12%) increase in cost of contract research, service and
license revenues in 2007 was primarily due to Bandwidth's costs increasing by
33% as the result of increase depreciation from two new MOCVD production
reactors brought into service. In addition, the Company recorded a $32,000
charge to cost of contract research, service and license revenues, associated
with an expected loss on completing a contract with the National Renewable
Energy Laboratory ("NREL"). The loss represented the unreimbursed portion of
Spire's expected expense to complete the contract. This was offset by reductions
in the Company's government research and development activities corresponding to
the lower level of government research and development revenues and contracts.
14
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:
Nine Months Ended September 30, Increase
---------------------------------------------------- -----------------------
2007 % 2006 % $ %
------------ ------ ------------ ------ ------------ ------
Cost of goods sold $ 14,801,000 95% $ 6,678,000 93% $ 8,123,000 122%
Cost of contract research, services 88,000
and licenses 6,813,000 86% 6,625,000 84% 3%
------------ ------------ ------------
Net cost of sales and revenues $ 21,614,000 85% $ 13,303,000 88% $ 8,311,000 62%
============ ============ ============
The $8,123,000 (122%) increase in cost of goods sold was primarily due
to increased costs within Spire's solar equipment product line corresponding to
the 268% increase in solar equipment sales and a 40% increase in catheter
products sales. The decrease in cost of goods sold as a percentage of revenue is
the result of improved contribution margins in these product lines as increased
production volume utilizes more of the available capacity.
The $188,000 (3%) increase in cost of contract research, service and
license revenues in 2007 is primarily due to decreased costs within the
Company's government research and development activities corresponding to the
lower level of government research and development revenues and contracts.
Although optoelectronics revenues increased 35% from prior year level
Bandwidth's costs increased by 9%. The Company recorded a $105,000 charge, to
cost of contract research, service and license revenues, associated with an
expected loss on completing a contract with the NREL. The loss represented the
unreimbursed portion of Spire's expected expense to complete the contract.
OPERATING EXPENSES
The following table categorizes the Company's operating expenses for the
periods presented, stated in dollars and as a percentage of total sales and
revenues:
Three Months Ended September 30, Increase
---------------------------------------------------- -----------------------
2007 % 2006 % $ %
------------ ------ ------------ ------ ------------ ------
Selling, general and administrative $ 3,388,000 34% $ 2,496,000 43% $ 892,000 36%
Internal research and development 96,000 1% 194,000 3% (98,000) (51%)
------------ ------------ ------------
Operating expenses $ 3,484,000 35% $ 2,690,000 46% $ 794,000 30%
============ ============ ============
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
The increase in selling, general and administrative expense was due
primarily to commissions related to sales of solar equipment. The Company uses a
network of independent sales representatives in addition to its internal sales
personnel. The independent sales representatives are compensated on a straight
commission whereas internal sales personnel receive a base salary plus
commission. In addition, the Company has increased its sales and marketing of
its equipment business. Selling, general and administrative expense decreased to
34% of sales and revenues as compared to 43% in the prior year. The reduction
was primarily due to the 65% increase in sales and revenues compared to the 36%
increase in expenses.
INTERNAL RESEARCH AND DEVELOPMENT
The decrease in research and development costs was primarily a result of
a reduction in internal research and development activities as a result of the
Company's current cost sharing contract with NREL nearing completion.
The following table categorizes the Company's operating expenses for the
periods presented, stated in dollars and as a percentage of total sales and
revenues:
Nine Months Ended September 30, Increase
---------------------------------------------------- -----------------------
2007 % 2006 % $ %
------------ ------ ------------ ------ ------------ ------
Selling, general and administrative $ 9,252,000 36% $ 7,306,000 49% $ 1,946,000 27%
Internal research and development 219,000 1% 547,000 3% (328,000) (60%)
------------ ------------ ------------
Operating expenses $ 9,471,000 37% $ 7,853,000 52% $ 1,618,000 21%
============ ============ ============
15
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
The increase in selling, general and administrative expense was due
primarily to commissions related to sales of solar equipment. The Company uses a
network of independent sales representatives in addition to its internal sales
personnel. The independent sales representatives are compensated on a straight
commission whereas internal sales personnel receive a base salary plus
commission. In addition, the Company has increased its sales and marketing of
its equipment business. Selling, general and administrative expense decreased to
36% of sales and revenues as compared to 49% in the prior year. The reduction
was primarily due to the 69% increase in sales and revenues compared to the 27%
increase in expenses.
INTERNAL RESEARCH AND DEVELOPMENT
The decrease in research and development costs was primarily a result of
a reduction in internal research and development activities as a result of the
Company's current cost sharing contract with NREL nearing completion.
GAIN ON SALE OF TRADEMARK
The Company recorded a one-time gain of $2,707,000 on the sale of a
trademark to Gloria Solar as part of a $4,000,000 PV module line and technology
sale transaction. In addition, the Company recognized $708,000 in additional
service revenue associated with the sale of technology services delivered to
Gloria Solar in the fiscal third quarter, deferring as revenue the remaining
$585,000 until completion of additional technology services and the delivery of
the PV production equipment.
OTHER EXPENSE, NET
The Company earned approximately $5,000 and $98,000 of interest income
for the three months ended September 30, 2007 and 2006, respectively. The
Company incurred interest expense of approximately $88,000 and $36,000 for the
three months ended September 30, 2007 and 2006, respectively. The decrease in
interest income is due to lower cash balances held by the Company. Interest
expense increased due to payments on the Company's outstanding Term Loan with
Silicon Valley Bank partially offset by lower interest expense with respect to
certain capital leases. The Company incurred a loss less than $1,000 during the
three month period ending September 30, 2007, due to the conversion of Japanese
Yen into U.S. dollars as compared to a loss of $2,000 for the same period in
2006.
The Company earned approximately $58,000 and $192,000 of interest income
for the nine months ended September 30, 2007 and 2006, respectively. The Company
incurred interest expense of approximately $138,000 and $124,000 for the nine
months ended September 30, 2007 and 2006, respectively. The decrease in interest
income is due to lower cash balances held by the Company. Interest expense
decreased due to payments against the principal balance of certain capital
leases. The Company lost approximately $14,000 during the nine month period
ending September 30, 2007, due to the conversion of Japanese Yen into U.S.
dollars as compared to income of less than $1,000 for the same period in 2006.
INCOME TAXES
The Company recorded a benefit for income taxes of $884,000 for the
three and nine months ended September 30, 2007, representing the reversal of the
valuation allowance due to the expected utilization of net operating losses. The
Company did not record an income tax benefit for the three and nine months ended
September 30, 2006. A partial valuation allowance has been provided against the
deferred tax assets due to uncertainty regarding the realization of the net
operating loss in the future.
EXTRAORDINARY GAIN ON INVESTMENT IN JOINT VENTURE
The Company recorded an extraordinary gain on investment in joint
venture of $1,311,000, net of tax, based upon its 45% portion of tangible assets
in the joint venture. The Company recorded its investment of $2,356,000 under
"Equity investment in joint venture" on the consolidated balance sheet.
NET INCOME
The Company reported net income for the three months ended September 30,
2007 of approximately $2,755,000, compared to a net loss of approximately
$1,941,000 for the same period in 2006. The net increase in income of
approximately
16
$4,696,000 is primarily due to gains from the sale of assets to Gloria Solar,
and the extraordinary gain on its equity investment in its joint venture with
Gloria Solar, LLC.
The Company reported a net loss for the nine months ended September 30,
2007 of approximately $856,000, compared to a net loss of approximately
$6,026,000 for the same period in 2006. The net loss decreased approximately
$5,170,000 primarily due to gains from the sale of assets to Gloria Solar, and
the extraordinary gain on its investment in its joint venture with Gloria Solar.
Liquidity and Capital Resources
-------------------------------
Increase/(Decrease)
September 30, December 31, -----------------------
2007 2006 $ %
------------ ------------ ------------ ------
Cash and cash equivalents $ 4,804,000 $ 1,536,000 $ 3,268,000 213%
Working capital (deficit) $ 4,009,000 $ 3,938,000 $ 71,000 2%
Cash and cash equivalents increased primarily due to cash from the
Company's bank borrowings and customer advances. Cash was used to pay the
outstanding balance on capital equipment acquired in 2006 for the expansion of
the optoelectronics business unit, and to acquire inventory to fulfill future
solar equipment orders. Generally the Company will receive advances from its
solar equipment customers to fund its acquisition of inventory. The overall
increase in working capital is due to purchases of inventory. The Company has
historically funded its operating cash requirements using operating cash flow
and proceeds from the sale and licensing of technology.
On May 25, 2007, the Company and its wholly-owned subsidiary, Bandwidth
Semiconductor, LLC ("Bandwidth"), entered into a Loan and Security Agreement
(the "Loan Agreement") with Silicon Valley Bank ("SVB"). Under the Loan
Agreement, for a one-year period, the Company and Bandwidth can borrow up to
$3.5 million in the aggregate to finance certain equipment purchases (including
reimbursement of certain previously-made purchases). Each advance made under the
Loan Agreement will be due thirty-six (36) months from the date the advance is
made. Advances made under the Loan Agreement will bear interest at one half of
one percentage point (0.5%) above SVB's prime rate and payable in thirty-six
(36) consecutive monthly payments following the funding date of that advance. On
June 17, 2007 the Company did draw down the line for the full $3.5 million to
finance certain capital equipment purchased previously by Bandwidth. At
September 30, 2007, the Company's borrowings under the line amounted to
$3,209,000.
Under the terms of the Loan Agreement, as long as any commitment remains
outstanding under the facility, the Company and Bandwidth must comply with an
adjusted quick ratio covenant and a minimum quarterly net income covenant. In
addition, until all amounts under the Loan Agreement are repaid, covenants under
the Loan Agreement impose restrictions on the Company's and Bandwidth's ability
to, among other things, incur additional indebtedness, create or permit liens on
the Company's or Bandwidth's assets, merge, consolidate or dispose of assets
(other than in the ordinary course of business), make dividend and other
restricted payments, make certain debt or equity investments, make certain
acquisitions, engage in certain transactions with affiliates or change the
business conducted by the Company, Bandwidth and their subsidiaries. Any failure
by the Company or Bandwidth to comply with the covenants and obligations under
the Loan Agreement could result in an event of default, in which case SVB may be
entitled to declare all amounts owed to be due and payable immediately. The
Company's and Bandwidth's obligations under the Loan Agreement are secured by
substantially all of the Company's and Bandwidth's assets, with the exception of
any intellectual property owned or licensed by the Company or Bandwidth. At
September 30, 2007, the Company was not in compliance with its liquidity
covenant for the third quarter. The Company has received a waiver from the SVB
with respect to this covenant.
The Company had a $2,000,000 Loan Agreement (the "Prior Loan Agreement")
with Citizens Bank of Massachusetts which expired on June 27, 2007. The Prior
Loan Agreement provided Standby Letter of Credit guarantees for certain foreign
and domestic customers, which are 100% secured with cash. At September 30, 2007,
the Company had approximately $132,000 of restricted cash associated with
outstanding Letters of Credit. Standby Letters of Credit under this Prior Loan
Agreement bear interest at 1%. It has an additional $380,000 of restricted cash
associated with outstanding Letters of Credit of Credit and a certificate
deposit securing potential Company's foreign exchange contracts opened with SVB.
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
17
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.
There are no material commitments by the Company for capital
expenditures. At September 30, 2007, the Company's accumulated deficit was
approximately $10,612,000, compared to accumulated deficit of approximately
$9,756,000 as of December 31, 2006.
On July 31, 2007, the Company entered into contractual relationship with
Gloria Solar pursuant to which (i) the Company agreed to sell to Gloria Solar
certain assets belonging to the Company's solar systems business for $4,000,000
and (ii) the Company and Gloria Solar agreed to form a joint venture for the
purpose of pursuing the solar photovoltaic systems market within the United
States. This transaction closed on September 4, 2007. Gloria Solar own 55% of
the joint venture and the Company owns 45% of the joint venture. The joint
venture will design, market, sells and manage the installation of systems for
the generation of electrical power by solar photovoltaic means in primarily
commercial/industrial and utility segments of such market (the "JV Systems
Business"). In connection with the formation of the joint venture, (i) the
Company contributed to the joint venture its assets primarily relating to the JV
Systems Business, including certain intellectual property and know-how, access
to information technology assets and relationships, relationships with current
and previous customers, contract backlog and project opportunities, certain
registered trademarks, and employment relationships with staff members and (ii)
Gloria Solar contributed $5,000,000 in cash.
The Company believes it has sufficient resources to finance its current
operations for the foreseeable future from operating cash flow and working
capital.
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. On
December 1, 2006, the Company and SPI-Trust amended the Lease Extension. The
amendment increases the leased area to 91,701 square feet. Rent expense under
this lease, as extended and amended, for the three and nine month periods ended
September 30, 2007 was approximately $340,000 and $1,020,000 respectively. In
connection with this lease, the Company is invoiced and pays certain SPI-Trust
related expenses, including building maintenance and insurance. The Company
invoices SPI-Trust on a monthly basis and SPI-Trust reimburses the Company for
all such costs. The Company believes that the terms of the Lease
18
Extension, as amended, are commercially reasonable. The Company is currently
negotiating with SPI-Trust for a new lease for the entire building of 144,000 sq
ft. that would start December 1, 2007.
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 the 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 ($304,000
as of September 30, 2007.) The lease agreement does not provide for a transfer
of ownership at any point. Interest costs were assumed at 7%. For the three and
nine months ended September 30, 2007, interest expense was approximately $25,000
and $64,000 respectively. This lease has been classified as a related party
capital lease and a summary of payments (including interest) follows:
Rate Per Security
Year Square Foot Annual Rent Monthly Rent Deposit
--------------------------- ------------- -------------- -------------- ----------
June 1, 2003 - May 31, 2004 $6.00 $ 540,000 $45,000 $135,000
June 1, 2004 - May 31, 2005 7.50 675,000 56,250 168,750
June 1, 2005 - May 31, 2006 8.50 765,000 63,750 191,250
June 1, 2006 - May 31, 2007 10.50 945,000 78,750 236,250
June 1, 2007 - May 31, 2008 13.50 1,215,000 101,250 303,750
--------------
$4,140,000
==============
At September 30, 2007, the remaining balance of capital lease obligation
- related party in the amount of $779,000 is reflected as a current liability in
the Company's 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, 2006 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
19
permitted in certain sales contracts and an allowance is recorded for returns
based on the Company's history of actual returns. Certain customer incentive
programs require management to estimate the cost of those programs. The
allowance for these programs is determined through an analysis of programs
offered, historical trends, expectations regarding customer and consumer
participation, sales and payment trends, and experience with payment patterns
associated with similar programs that had been previously offered. An analysis
of the sales return and rebate activity for the three months ended September 30,
2007, is as follows:
Rebates Returns Total
------------ ------------ ------------
Balance - June 30, 2007 $ 103,400 $ 12,600 $ 116,000
Provision 57,370 20,387 77,757
Utilization (70,370) (20,587) (90,957)
------------ ------------ ------------
Balance - September 30, 2007 $ 90,400 $ 12,400 $ 102,800
============ ============ ============
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 declined to 9%, of inventory held by
distributors from approximately 15%, over the last two years. This reflects
lower rebates and returns associated with the Company's new heparin coated
catheters. 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 $1,300,000 at
September 30, 2007.
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 are 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.
20
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. In 2007, the Company recorded a $78,000 charge, to cost
of contract research, service and license revenues, for the impairment of
production equipment which based on managements assessment had no future value
to the Company. The products originally manufactured on the equipment were no
longer economical to produce.
STOCK-BASED COMPENSATION
On January 1, 2006, the Company adopted the fair value recognition
provisions of Financial Accounting Standards Board ("FASB") Statement No.
123(R), Share-Based Payment ("Statement 123(R)") using the modified prospective
method. In accordance with the modified prospective method, the Company has not
restated its consolidated financial statements for prior periods. Under this
transition method, stock-based compensation expense for the first quarter of
2006 includes stock-based compensation expense for all of the Company's
stock-based compensation awards granted prior to, but not yet vested as of,
January 1, 2006, based on the grant-date fair value estimated in accordance with
the provisions of FASB Statement No. 123, Accounting for Stock-Based
Compensation ("Statement 123"). Stock-based compensation expense for all
stock-based compensation awards granted on or after January 1, 2006 will be
based on the grant-date fair value estimated in accordance with the provisions
of Statement 123(R). The impact of Statement 123(R) on the Company's results of
operations resulted in recognition of stock option expense of approximately
$181,000 and $389,000, respectively, for the three and nine months ended
September 30, 2007.
Contractual Obligations, Commercial Commitments and Off-Balance Sheet
Arrangements
The following table summarizes the Company's gross contractual obligations at
September 30, 2007 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
---------------------------------- ------------ ------------ ------------ ------------ ------------
Equipment line of credit (SVB) $ 3,612,000 $ 1,404,000 $ 2,208,000 -- --
Purchase obligations $ 6,984,000 $ 6,818,000 $ 176,000 -- --
Capital leases:
Related party capital lease $ 779,000 $ 779,000 -- -- --
Operating leases:
Unrelated party operating leases $ 346,000 $ 117,000 $ 195,000 $ 34,000 --
Related party operating lease $ 227,000 $ 227,000 -- -- --
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 September 30, 2007, the Company maintained a Japanese yen account
that held approximately JPY 89,753 (approximately $1,000). Total currency
translation loss for the quarter ended September 30, 2007 of approximately
$4,000 is reflected in other income (expense), net in the accompanying unaudited
condensed consolidated statement of operations.
Outstanding letters of credit totaled approximately $132,000 at
September 30, 2007. 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
21
Company does not perform as contractually required. These letters of credit
expire through 2007 and are 100% secured by cash.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk to which we are subject consists of the risk of loss arising
from adverse changes in market interest rates and foreign exchange rates.
Exposure to market rate risk for changes in interest rates relates to our
investment portfolio. We have not used derivative financial instruments in our
investment portfolio. We seek to place our investments with high-quality issuers
and we have policies limiting, among other things, the amount of credit exposure
to any one issuer. We seek to limit default risk by purchasing only
investment-grade securities. We do not believe we have any material market risk
with respect to our financial instruments.
ITEM 4. 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
September 30, 2007. 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. Based upon the required evaluation,
the Chief Executive Officer and President and the Chief Financial Officer
concluded that as of September 30, 2007, the Company's disclosure controls and
procedures were 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.
Changes in Internal Control Over Financial Reporting
----------------------------------------------------
There was no change in the Company's internal control over financial
reporting that occurred during the third fiscal quarter of 2007 that has
materially affected, or is reasonably likely to materially affect, the Company's
internal control over financial reporting. During the second quarter the
Company's recently hired Chief Accounting Officer resigned to pursue other
opportunities. The Company has not replaced this position and during the most
recent quarter has used consultants to fill this role. In addition, the recent
growth in Company has strained certain internal controls. The Company as part of
its Sarbanes Oxley requirements has been testing its internal controls and is
now addressing internal weaknesses with new procedures. While it has made
progress in correcting certain deficiencies, it has not and does not expect to
correct all material weaknesses by year-end.
22
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In a complaint filed July 11, 2007 in the U.S. District Court for the
Eastern District of Pennsylvania, Medical Components, Inc. (the "Plaintiff")
alleges that the Company and its wholly-owned subsidiary, Spire Biomedical,
Inc., through the manufacture and sale of its multilumen catheter products
infringes upon one of Plaintiff's patents. The Plaintiff seeks unspecified
damages, including enhanced damages and attorneys fees and costs, and an
injunction against certain manufacturing techniques. The Company believes it has
meritorious defenses and intends to vigorously defend itself against the claim.
The Company is currently in the process of evaluating this case, and has not
concluded that a loss is probable or estimable.
ITEM 1A. RISK FACTORS
Other than as set forth below, there have been no material changes in
the Risk Factors described in Part I, Item 1A ("Risk Factors") of our Annual
Report on Form 10-KSB for the year ended December 31, 2006.
OUR JOINT VENTURE TRANSACTION WITH GLORIA SOLAR MAY NOT REALIZE ALL OF
ITS INTENDED BENEFITS.
On September 4, 2007, we closed our previously announced a contractual
relationship with Gloria Solar. Pursuant to this transaction, among other
things, we formed a joint venture, owned 55% by Gloria Solar and 45% by us, for
the purpose of pursuing the solar photovoltaic systems market within the United
States. The joint venture will design, market, sell and manage the installation
of systems for the generation of electrical power by solar photovoltaic means in
primarily commercial/industrial and utility segments of such market (the "JV
Systems Business"). In connection with the formation of the joint venture, (i)
we contributed to the joint venture our assets primarily relating to the JV
Systems Business, including certain intellectual property and know-how, access
to information technology assets and relationships, relationships with current
and previous customers, contract backlog and project opportunities, certain
registered trademarks, and employment relationships with staff members and (ii)
Gloria Solar contributed $5,000,000 in cash. In connection with the
establishment of the joint venture, we may experience:
o difficulties in integrating our and Gloria Solar's respective corporate
cultures and business objectives into the new joint venture;
o diversion of our management's time and attention from other business
concerns;
o higher than anticipated costs of integration at the joint venture;
o difficulties in retaining key employees who are necessary to manage the
joint venture; or
o difficulties in working with an entity based in Taiwan and thus remote
or inconvenient to our Bedford, Massachusetts headquarters.
For any of these reasons or as a result of other factors, we may not
realize the anticipated benefits of the joint venture, and cash flow or profits
derived from our ownership interest in the joint venture may be less than the
cash flow or profits that could have been derived had we retained the
transferred assets and continued to operate the JV Systems Business ourselves.
Either party has the right, at any time upon certain material breaches by the
other party of obligations under the joint venture documents, to acquire all of
the breaching party's interest in the joint venture at 90% fair market value. In
addition, in the event of a "change in control" of a member, the other members
may purchase such member's interest in the joint venture at fair market value.
Furthermore, our further participation in the business of the joint venture is
restricted; for a period of three (3) years, we may not mass manufacture, market
or sell solar cell modules with less than 575 watt capacity, and may do so
thereafter only outside the United States.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
23
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
2.1 Asset Purchase Agreement, dated as of July 31, 2007, by and
between the Company and Gloria Solar Co., Ltd., incorporated
by reference to Exhibit 2.1 to the Company's Form 8-K filed
with the Securities and Exchange Commission (the "SEC") on
September 10, 2007.*+
2.2 Contribution Agreement, dated as of July 31, 2007, by and
among the Company, Gloria Solar Co., Ltd. and Gloria Solar
(Delaware) Company, Ltd., incorporated by reference to Exhibit
2.2 to the Company's Form 8-K filed with the SEC on September
10, 2007.*+
10(x) Operating Agreement of Gloria Spire Solar, LLC, dated July 31,
2007, by and among the Company, Gloria Solar (Delaware)
Company, Ltd. and Gloria Spire Solar, LLC, incorporated by
reference to Exhibit 10(x) to the Company's Form 8-K filed
with the SEC on September 10, 2007.*
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: November 19, 2007 By: /s/ Roger G. Little
-------------------------------------
Roger G. Little
Chairman of the Board, Chief
Executive Officer and President
Dated: November 19, 2007 By: /s/ Christian Dufresne
-------------------------------------
Christian Dufresne, Ph. D.
Chief Financial Officer and Treasurer
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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.
26