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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, 2009;
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
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(Exact name of registrant as specified in its charter)
MASSACHUSETTS 04-2457335
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
ONE PATRIOTS PARK, BEDFORD, MASSACHUSETTS 01730-2396
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(Address of principal executive offices) (Zip Code)
781-275-6000
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(Registrant's telephone number including area code)
Indicate by check mark 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 has submitted electronically
and posted on its corporate Web site, if any, every Interactive Data File
required to be submitted and posted pursuant to Rule 405 of Regulation S-T
(ss.232.405 of this chapter) during the preceding 12 months (or for such shorter
period that the registrant was required to submit and post such files).
Yes |_| No |_|
Indicate by check mark whether the registrant is a large accelerated filer,
an accelerated filer, a non-accelerated filer or a smaller reporting company.
See definition of "large accelerated filer," "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer |_| Accelerated filer |_|
Non-accelerated filer |_| Smaller reporting company |X|
(Do not check if a smaller
reporting company)
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes |_| No |X|
The number of shares of the registrant's common stock outstanding as of
November 10, 2009 was 8,334,688.
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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, 2009 and December 31, 2008 ........................ 1
Unaudited Condensed Consolidated Statements of Operations for
the Three and Nine Months Ended September 30, 2009 and 2008 ..... 2
Unaudited Condensed Consolidated Statements of Cash Flows for
the Nine Months Ended September 30, 2009 and 2008 ............... 3
Notes to Unaudited Condensed Consolidated Financial Statements... 4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations ....................................... 17
Item 3. Quantitative and Qualitative Disclosures About Market Risk....... 30
Item 4T. Controls and Procedures ......................................... 30
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ............................................... 31
Item 1A. Risk Factors .................................................... 31
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds...... 31
Item 3. Defaults Upon Senior Securities ................................. 31
Item 4. Submission of Matters to a Vote of Security Holders ............. 31
Item 5. Other Information ............................................... 31
Item 6. Exhibits ........................................................ 32
Signatures ...................................................... 34
PART I
FINANCIAL INFORMATION
ITEM 1. UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SPIRE CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
September 30, December 31,
2009 2008
------------ ------------
ASSETS
Current assets
--------------
Cash and cash equivalents $ 4,901 $ 5,971
Restricted cash - current portion 1,382 4,167
------------ ------------
6,283 10,138
Accounts receivable - trade, net 19,449 8,098
Inventories, net 16,235 16,855
Deferred cost of goods sold 16,454 17,088
Deposits on equipment for inventory 1,722 3,419
Prepaid expenses and other current assets 741 424
Current assets of discontinued operations and assets held for sale 994 1,854
------------ ------------
Total current assets 61,878 57,876
Property and equipment, net 6,029 6,075
Intangible and other assets, net 741 480
Available-for-sale investments, at quoted market value (cost of $1,712 and $1,859 at
September 30, 2009 and December 31, 2008, respectively) 1,868 1,434
Equity investment in joint venture -- 1,473
Deposit - related party 300 300
Non-current assets of discontinued operations and assets held for sale 374 380
------------ ------------
Total other assets 3,283 4,067
------------ ------------
Total assets $ 71,190 $ 68,018
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
-------------------
Current portion of capital lease obligation $ 38 $ --
Current portion of equipment and revolving line of credit 2,375 2,667
Accounts payable 7,681 4,842
Accrued liabilities 5,181 8,150
Current portion of advances on contracts in progress 46,782 34,509
Liabilities of discontinued operations 1,703 873
------------ ------------
Total current liabilities 63,760 51,041
Long-term portion of capital lease obligation 113 --
Long-term portion of equipment line of credit -- 583
Long-term portion of advances on contracts in progress 5 1,149
Deferred compensation 1,868 1,434
Other long-term liabilities 520 293
------------ ------------
Total long-term liabilities 2,506 3,459
------------ ------------
Total liabilities 66,266 54,500
------------ ------------
Stockholders' equity
--------------------
Common stock, $0.01 par value; 20,000,000 shares authorized; 8,334,688 and
8,330,688 shares issued and outstanding on September 30, 2009 and
December 31, 2008, respectively 83 83
Additional paid-in capital 21,210 20,774
Accumulated deficit (16,525) (6,914)
Accumulated other comprehensive loss 156 (425)
------------ ------------
Total stockholders' equity 4,924 13,518
------------ ------------
Total liabilities and stockholders' equity $ 71,190 $ 68,018
============ ============
See accompanying notes to unaudited condensed consolidated financial statements.
1
SPIRE CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
------------------------------ ------------------------------
2009 2008 2009 2008
------------ ------------ ------------ ------------
Net sales and revenues
----------------------
Sales of goods $ 13,551 $ 12,714 $ 41,101 $ 35,393
Contract research, service and license revenues 3,013 3,839 9,023 10,757
------------ ------------ ------------ ------------
Total net sales and revenues 16,564 16,553 50,124 46,150
------------ ------------ ------------ ------------
Costs of sales and revenues
---------------------------
Cost of goods sold 11,692 7,934 37,677 24,171
Cost of contract research, services and licenses 2,331 2,794 6,764 7,510
------------ ------------ ------------ ------------
Total cost of sales and revenues 14,023 10,728 44,441 31,681
Gross margin 2,541 5,825 5,683 14,469
Operating expenses
------------------
Selling, general and administrative expenses 4,320 5,025 13,269 13,018
Internal research and development expenses 220 200 782 482
------------ ------------ ------------ ------------
Total operating expenses 4,540 5,225 14,051 13,500
------------ ------------ ------------ ------------
Gains on termination of contracts -- -- 1,735 --
------------ ------------ ------------ ------------
Income (loss) from operations (1,999) 600 (6,633) 969
-----------------------------
Interest expense, net (83) (49) (217) (157)
Loss on equity investment in joint venture -- (45) (1,023) (409)
Foreign exchange (loss) gain (174) 16 (35) (392)
------------ ------------ ------------ ------------
Total other expense, net (257) (78) (1,275) (958)
------------ ------------ ------------ ------------
Income (loss) from continuing operations before
-----------------------------------------------
income tax provision (2,256) 522 (7,908) 11
--------------------
Income tax provision (23) -- (64) --
------------ ------------ ------------ ------------
Net income (loss) from continuing operations (2,279) 522 (7,972) 11
Loss from discontinued operations, net of taxes (1,248) (77) (1,639) (358)
------------ ------------ ------------ ------------
Net income (loss) $ (3,527) $ 445 $ (9,611) $ (347)
----------------- ============ ============ ============ ============
Basic income (loss) per share:
From continuing operations after income taxes $ (0.27) $ 0.06 $ (0.95) $ --
From discontinued operations, net of taxes (0.15) (0.01) (0.20) (0.04)
------------ ------------ ------------ ------------
Basic income (loss) per share $ (0.42) $ 0.05 $ (1.15) $ (0.04)
----------------------------- ============ ============ ============ ============
Diluted income (loss) per share:
From continuing operations after income taxes $ (0.27) $ 0.06 $ (0.95) $ --
From discontinued operations, net of taxes (0.15) (0.01) (0.20) (0.04)
------------ ------------ ------------ ------------
Diluted income (loss) per share $ (0.42) $ 0.05 $ (1.15) $ (0.04)
------------------------------- ============ ============ ============ ============
Weighted average number of common and
common equivalent shares outstanding - basic 8,334,688 8,330,688 8,334,175 8,327,889
============ ============ ============ ============
Weighted average number of common and
common equivalent shares outstanding - diluted 8,334,688 8,425,059 8,334,175 8,327,889
============ ============ ============ ============
See accompanying notes to unaudited condensed consolidated financial statements.
2
SPIRE CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
NINE MONTHS ENDED SEPTEMBER 30,
------------------------------
2009 2008
------------ ------------
Cash flows from operating activities:
-------------------------------------
Net loss $ (9,611) $ (347)
Less: Net loss from discontinued operations (1,639) (358)
------------ ------------
Net (loss) income from continuing operations (7,972) 11
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization 1,092 1,434
Loss on equity investment in joint venture 1,023 409
Gain on sale of asset -- (60)
Deferred compensation 581 (245)
Stock-based compensation 412 594
Provision for accounts receivable reserves (23) (28)
Provision for inventory reserve 150 41
Changes in assets and liabilities:
Restricted cash 2,785 230
Accounts receivable (11,329) (4,398)
Inventories 470 (4,617)
Deferred cost of goods sold 634 (10,744)
Deposits, prepaid expenses and other current assets 1,380 876
Accounts payable, accrued liabilities and other liabilities 97 4,258
Deposit - related party -- 4
Advances on contracts in progress 11,129 15,131
------------ ------------
Net cash provided by operating activities of continuing operations 429 2,896
Net cash provided by (used in) operating activities of discontinued operations 87 (201)
------------ ------------
Net cash provided by operating activities 516 2,695
Cash flows from investing activities:
-------------------------------------
Proceeds from dissolution of joint venture 450 --
Proceeds from sale of asset -- 61
Purchase of property and equipment (869) (1,385)
Increase in intangible and other assets (284) (70)
------------ ------------
Net cash used in investing activities of continuing operations (703) (1,394)
Net cash used in investing activities of discontinued operations (29) (24)
------------ ------------
Net cash used in investing activities (732) (1,418)
Cash flows from financing activities:
-------------------------------------
Principal payments on capital lease obligations - related parties -- (486)
Principal payments on capital lease obligations, net (3) --
Principal payments on equipment line of credit (875) (875)
Proceeds from exercise of stock options 24 21
------------ ------------
Net cash used in financing activities (854) (1,340)
------------ ------------
Net decrease in cash and cash equivalents (1,070) (63)
Cash and cash equivalents, beginning of period 5,971 2,372
------------ ------------
Cash and cash equivalents, end of period $ 4,901 $ 2,309
============ ============
Supplemental disclosures of cash flow information:
--------------------------------------------------
Interest paid $ 232 $ 161
============ ============
Interest paid - related party $ -- $ 8
============ ============
Interest received $ 15 $ 12
============ ============
Income taxes paid $ 64 $ --
============ ============
Supplemental disclosures of non-cash flow information:
------------------------------------------------------
Property and equipment purchased under capital lease $ 154 $ --
See accompanying notes to unaudited condensed consolidated financial statements.
3
SPIRE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2009 AND 2008
1. DESCRIPTION OF THE BUSINESS
Spire Corporation ("Spire" or the "Company") develops, manufactures and
markets highly-engineered products and services in three principal business
areas: (i) capital equipment for the PV solar industry, (ii) biomedical and
(iii) optoelectronics, generally bringing to bear expertise in materials
technologies, surface science and thin films across all three business areas,
discussed below.
In the PV solar area, the Company develops, manufactures and markets
specialized equipment for the production of terrestrial photovoltaic modules
from solar cells. The Company's equipment has been installed in approximately
200 factories in 50 countries.
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. It also develops and markets coated and uncoated hemodialysis
catheters and related devices for the treatment of chronic kidney disease
(referred to herein as the Company's "medical products business unit"); and
performs sponsored research programs into practical applications of advanced
biomedical and biophotonic technologies. The results and assets of the Company's
medical products business unit are being presented herein as discontinued
operations and assets held for sale. See Note 14.
In the optoelectronics area, the Company provides custom 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 2007, the Company invested approximately $3.8 million in
equipment which would allow it to produce optoelectronic devices on a commercial
basis. This was in anticipation of future revenues under its Manufacturing
Agreement with Principia Lightworks who provided a non-refundable up front
payment to partially offset the Company's investment. On March 27, 2009, the
Company and Principia Lightworks agreed to terminate the Manufacturing
Agreement. See Note 12. The Company is using this equipment for its other
customers and is performing research and development of solar concentrator
cells, which it expects to be able to commercialize.
Operating results will depend upon revenue growth and product mix, as
well as the timing of shipments of higher priced products from the Company's
solar equipment line and delivery of solar systems. Export sales, which amounted
to 48% of net sales and revenues for the quarter ending September 30, 2009,
continue to constitute a significant portion of the Company's net sales and
revenues.
The Company has incurred operating losses before non-recurring gains in
2009 and 2008. Loss from continuing operations, before gains on termination of
contracts, was $2.0 million and $8.4 million for the three and nine months ended
September 30, 2009 and $267 thousand for the year ended December 31, 2008. For
the nine months ended September 30, 2009 and 2008, the cash (loss) gain
(income(loss) from operations less gains on termination of contract plus or
minus non-cash adjustments) was $(4.9) million and $3.4 million. The gain in
2008 was primarily attributed to margins from the Company's solar business unit.
As of September 30, 2009, the Company had unrestricted cash and cash equivalents
of $4.9 million compared to unrestricted cash and cash equivalents of $6.0
million as of December 31, 2008. The Company has numerous options on how to fund
future operational losses or working capital needs, including but not limited to
sales of equity, bank debt provided it renegotiates its financial covenants or
the sale or license of assets and technology, as it has done in the past;
however, there are no assurances that the Company will be able to sell equity,
obtain or access bank debt, or sell or license assets or technology on a timely
basis and at appropriate values. The Company has developed several plans
including cost containment efforts and outside financing to offset a decline in
business due to a further deepening of the current global economic recession. As
a result, the Company believes it has sufficient resources to finance its
current operations through at least September 30, 2010.
4
2. 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, 2008, included in the Company's Annual Report on Form 10-K filed
with the Securities and Exchange Commission.
In the opinion of management, the accompanying unaudited, condensed
consolidated financial statements contain all adjustments necessary to fairly
present the Company's financial position as of September 30, 2009 and December
31, 2008 and the results of its operations and cash flows for the three and nine
months ended September 30, 2009 and 2008. The results of operations for the
three and nine months ended September 30, 2009 are not necessarily indicative of
the results to be expected for the fiscal year ending December 31, 2009. The
condensed consolidated balance sheet as of December 31, 2008 has been derived
from audited financial statements as of that date. During the second quarter of
2009, the Company began pursing an exclusive sales process of our medical
product group (the "Medical Products Business Unit"). On September 4, 2009, the
Company agreed to sell the Medical Products Business Unit to Bard Access
Systems, Inc., which sale has not yet been consummated. Accordingly, the results
of the Medical Products Business Unit are being presented herein as discontinued
operations and assets held for sale. See Note 14.
The significant accounting policies followed by the Company are set
forth in Note 2 to the Company's consolidated financial statements in its Annual
Report on Form 10-K for the year ended December 31, 2008.
New Accounting Pronouncements
-----------------------------
In October 2009, the FASB issued an amendment on ASC 605, REVENUE
RECOGNITION, on the subtopic 605-25, MULTIPLE-ELEMENT ARRANGEMENTS. The
amendment impacts the determination of when the individual deliverables included
in a multiple-element arrangement may be treated as separate units of
accounting. Additionally, the amendment modifies the manner in which the
transaction consideration is allocated across the separately identified
deliverables by no longer permitting the residual method of allocating
arrangement consideration. The amendment is effective for revenue arrangement
entered or materially modified in fiscal years beginning on or after June 15,
2010, however early adoption is permitted. The Company does not expect these new
standards to significantly impact its consolidated financial statements.
Effective July 1, 2009, the Company adopted the Financial Accounting
Standards Board ("FASB") Accounting Standards Codification ("ASC or
Codification"), GENERALLY ACCEPTED ACCOUNTING PRINCIPLES ("ASC 105-10"). The
Codification, which was issued in June 2009, is the new source of authoritative
U.S. GAAP for the Securities and Exchange Commission ("SEC") registrants. The
Codification reorganizes current U.S. GAAP into a topical format that eliminates
the previous U.S. GAAP hierarchy and establishes two levels of U.S. GAAP -
authoritative and non-authoritative. The Codification superseded all existing
non-SEC accounting and reporting standards upon its effective date and carries
the same level of authority as pronouncements issued under the previous
hierarchy of U.S. GAAP. The adoption of the Codification did not have a
significant impact on the Company's Condensed Consolidated Financial Statements.
Effective July 1, 2009, the Company adopted ASC 855, SUBSEQUENT EVENTS.
The pronouncement establishes recognition and disclosure standards for events
that occur after the balance sheet date but before the financial statements are
issued or are available to be issued. This guidance is effective on a
prospective basis for interim periods ending after June 15, 2009. The adoption
of the pronouncement did not have a significant impact on the Company's
Condensed Consolidated Financial Statements.
Effective January 1, 2008, the Company adopted provisions of ASC 820-10,
FAIR VALUE MEASUREMENTS AND DISCLOSURES relative to financial assets and
liabilities. In February 2008, the FASB issued ASC paragraph 820-10-50-8A,
EFFECTIVE DATE OF ASC 820-10, which provides a one year deferral of the
effective date of ASC 820-10 for non-financial assets and non-financial
liabilities, except those that are recognized or disclosed in the financial
statements at fair value at least annually. Effective January 1, 2009, the
Company adopted the provisions of ASC 820-10 with respect to its non-financial
assets and non-financial liabilities.
In December 2007, the FASB issued an Accounting Standards Update to ASC
810, CONSOLIDATION. ASC 810 requires that a non-controlling interest in a
subsidiary (i.e. minority interest) be reported in the equity section of the
balance sheet instead of being reported as a liability or in the mezzanine
section between debt and equity. It also requires that the
5
consolidated income statement include consolidated net income attributable to
both the parent and non-controlling interest of a consolidated subsidiary. A
disclosure must be made on the face of the consolidated income statement of the
net income attributable to the parent and to the non-controlling interest. Also,
regardless of whether the parent purchases additional ownership interest, sells
a portion of its ownership interest in a subsidiary or the subsidiary
participates in a transaction that changes the parent's ownership interest, as
long as the parent retains controlling interest, the transaction is considered
an equity transaction. ASC 810 is effective for annual periods beginning after
December 15, 2008. The adoption of ASC 810 did not have an impact on the
Company's financial position or results of operations.
In March 2008, the FASB issued an Accounting Standards Update to ASC
815, DERIVATIVES AND HEDGING. The update to ASC 815 requires enhanced
disclosures about an entity's derivative and hedging activities. Entities are
required to provide enhanced disclosures about (a) how and why an entity uses
derivative instruments, (b) how derivative instruments and related hedged items
are accounted for and its related interpretations, and (c) how derivative
instruments and related hedged items affect an entity's financial position,
financial performance, and cash flows. This update is effective for financial
statements issued for fiscal years and interim periods beginning after November
15, 2008, with early application encouraged. The update to ASC 815 encourages,
but does not require, comparative disclosures for earlier periods at initial
adoption. The adoption of the update to ASC 815 did not have an impact on the
Company's financial position or results of operations.
3. ACCOUNTS RECEIVABLE/ADVANCES ON CONTRACTS IN PROGRESS
Net accounts receivable, trade consists of the following:
(in thousands) September 30, December 31,
2009 2008
------------ ------------
Amounts billed $ 19,115 $ 6,711
Accrued revenue 679 1,790
------------ ------------
19,794 8,501
Less: Allowance for doubtful accounts (345) (403)
------------ ------------
Net accounts receivable - trade $ 19,449 $ 8,098
============ ============
Advances on contracts in progress $ 46,787 $ 35,658
============ ============
Accrued revenue represents revenues recognized on contracts for which
billings have not been presented to customers as of the balance sheet date.
These amounts are billed and generally collected within one year.
The Company maintains allowances for doubtful accounts for estimated
losses resulting from the inability of its customers to pay amounts due. The
Company actively pursues collection of past due receivables as the circumstances
warrant. Customers are contacted to determine the status of payment and senior
accounting and operations management are included in these efforts as is deemed
necessary. A specific reserve will be established for past due accounts when it
is probable that a loss has been incurred and the Company can reasonably
estimate the amount of the loss. The Company does not record an allowance for
government receivables and invoices backed by letters of credit as
realizeability is reasonably assured. Bad debts are written off against the
allowance when identified. There is no dollar threshold for account balance
write-offs. While rare, a write-off is only recorded when all efforts to collect
the receivable have been exhausted and only in consultation with the appropriate
business line manager.
Advances on contracts in progress represent contracts for which billings have
been presented to the customer, either as deposits or progress payments against
future shipments, but revenue has not been recognized.
4. INVENTORIES AND DEFERRED COSTS OF GOODS SOLD
Inventories, net of $275 thousand and $154 thousand of reserves at
September 30, 2009 and December 31, 2008, respectively, consist of the following
at:
(in thousands) September 30, December 31,
2009 2008
------------ ------------
Raw materials $ 2,823 $ 3,517
Work in process 5,711 7,385
Finished goods 7,701 5,953
------------ ------------
Net inventory $ 16,235 $ 16,855
------------ ------------
Deferred cost of goods sold $ 16,454 $ 17,088
============ ============
6
Deferred costs of goods sold represents costs on equipment that has
shipped to the customer and title has passed. The Company defers these costs
until related revenue is recognized.
5. LOSS PER SHARE
The following table provides a reconciliation of the denominators of the
Company's reported basic and diluted loss per share computations for the periods
ended:
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------- -----------------------------
2009 2008 2009 2008
------------ ------------ ------------ ------------
Weighted average number of common and common
equivalent shares outstanding - basic 8,334,688 8,330,688 8,334,175 8,327,889
Add: Net additional common shares upon
assumed exercise of common stock options -- 94,371 -- --
------------ ------------ ------------ ------------
Adjusted weighted average number of common
and common equivalents shares outstanding - diluted 8,334,688 8,425,059 8,334,175 8,327,889
============ ============ ============ ============
For the three and nine months ended September 30, 2009, 37,492 and
50,773 shares, respectively, and for the three and nine months ended September
30, 2008, zero and 175,088 shares, respectively, issuable relative to stock
options were excluded from the calculation of diluted shares since their
inclusion would have been anti-dilutive.
In addition, for the three and nine months ended September 30, 2009,
568,447 and 548,447 shares, respectively, and for the three and nine months
ended September 30, 2008, 64,500 and 39,500 shares, respectively, of common
stock issuable relative to stock options were excluded from the calculation of
diluted shares because their inclusion would have been anti-dilutive, due to
their exercise prices exceeding the average market price of the stock for the
period.
7
6. OPERATING SEGMENTS AND RELATED INFORMATION
The following table presents certain continuing operating division
information in accordance with the provisions of ASC 280, "Disclosure about
Segments of an Enterprise and Related Information."
(in thousands) Total
Solar Biomedical Optoelectronics Company
--------------- --------------- --------------- ---------------
For the three months ended September 30, 2009
---------------------------------------------
Net sales and revenues $ 13,551 $ 2,341 $ 672 $ 16,564
Income (loss) from continuing operations $ (1,627) $ 331 $ (703) $ (1,999)
For the three months ended September 30, 2008
---------------------------------------------
Net sales and revenues $ 13,138 $ 2,042 $ 1,373 $ 16,553
Income (loss) from continuing operations $ 1,490 $ (62) $ (828) $ 600
For the nine months ended September 30, 2009
--------------------------------------------
Net sales and revenues $ 41,162 $ 6,750 $ 2,212 $ 50,124
Income (loss) from continuing operations $ (6,939) $ 926 $ (620) $ (6,633)
For the nine months ended September 30, 2008
--------------------------------------------
Net sales and revenues $ 36,078 $ 5,882 $ 4,190 $ 46,150
Income (loss) from continuing operations $ 2,930 $ (138) $ (1,823) $ 969
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,
-------------------------------------------------- --------------------------------------------------
(in thousands) 2009 % 2008 % 2009 % 2008 %
-------- -------- -------- -------- -------- -------- -------- --------
United States $ 8,573 52% $ 7,003 42% $ 23,314 47% $ 17,732 38%
Europe/Africa 447 3 2,839 17 14,713 29 10,897 24
Asia 7,518 45 6,617 40 11,779 23 17,363 38
Rest of the world 26 -- 94 1 318 1 158 --
-------- -------- -------- -------- -------- -------- -------- --------
$ 16,564 100% $ 16,553 100% $ 50,124 100% $ 46,150 100%
======== ======== ======== ======== ======== ======== ======== ========
Revenues from contracts with United States government agencies for the
three months ended September 30, 2009 and 2008 were approximately $5.2 million
and $2.5 million or 31% and 15% of consolidated net sales and revenues,
respectively.
Revenues from contracts with United States government agencies for the
nine months ended September 30, 2009 and 2008 were approximately $12.5 million
and $3.2 million or 25% and 7% of consolidated net sales and revenues,
respectively.
Revenues from the delivery of solar equipment module lines to two
customers account for 27% of total net sales and revenue for the three month
period ended September 30, 2009 and recurring revenue from the sale of solar
cell materials to another customer accounted for 28% of total net sales and
revenue during the same period. Revenues from the delivery of solar equipment
module lines to two customers account for 24% of total net sales and revenue for
the three month period ended September 30, 2008.
Revenues from the delivery of a solar equipment cell line to one
customer account for 21% of total net sales and revenue for the nine month
period ended September 30, 2009 and recurring revenue from the sale of solar
cell materials to another customer accounted for 22% of total net sales and
revenue during the same period. Revenues from the delivery of a solar equipment
module line to one customer account for 10% of total net sales and revenue for
the nine month period ended September 30, 2008.
One customer represented approximately 76% of trade account receivables
at September 30, 2009. This large receivable is related to a deposit for a solar
project. Two customers represented approximately 27% of trade account
receivables at December 31, 2008.
8
7. INTANGIBLE AND OTHER ASSETS
Patents amounted to $107 thousand and $68 thousand net of accumulated
amortization of $703 thousand and $680 thousand, at September 30, 2009 and
December 31, 2008, respectively. 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. 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.
Amortization expense, relating to patents, was approximately $11 thousand and $9
thousand for the three months ended September 30, 2009 and 2008, respectively,
and approximately $23 thousand and $26 thousand for the nine months ended
September 30, 2009 and 2008, respectively.
For disclosure purposes, the table below includes future amortization
expense for patents and licenses owned by the Company as well as estimated
amortization expense related to patents that remain pending at September 30,
2009 of $384 thousand. This estimated expense for patents pending assumes that
the patents are issued immediately, and therefore are being amortized over five
years on a straight-line basis. Estimated amortization expense for the periods
ending December 31, is as follows:
Amortization
(in thousands) Expense
----------------------- --------
2009 remaining 3 months $ 28
2010 112
2011 106
2012 94
2013 and beyond 151
--------
$ 491
========
Also included in other assets are approximately $250 thousand of
refundable deposits made by the Company at September 30, 2009 and $10 thousand
at December 31, 2008.
8. AVAILABLE-FOR-SALE INVESTMENTS
Available-for-sale securities consist of the following assets held as
part of the Spire Corporation Non-Qualified Deferred Compensation Plan:
(in thousands) September 30, December 31,
2009 2008
---------- ----------
Cash and short term investments $ 14 $ 74
Fixed income 392 231
Equities 1,462 1,129
---------- ----------
$ 1,868 $ 1,434
========== ==========
These investments have been classified as available-for-sale investments
and are reported at fair value, with unrealized gains and losses included in
accumulated other comprehensive loss. As of September 30, 2009, the unrealized
gain on these marketable securities was $156 thousand and as of December 31,
2008, the unrealized loss on these marketable securities was $425 thousand.
Effective January 1, 2008, the Company adopted ASC 820-10, FAIR VALUE
MEASUREMENTS AND DISCLOSURES - OVERALL. In February 2008, the FASB issued ASC
paragraph 820-10-50-8A, EFFECTIVE DATE OF ASC 820-10, which provides a one year
deferral of the effective date of ASC 820-10 for non-financial assets and
non-financial liabilities, except those that are recognized or disclosed in the
financial statements at fair value at least annually. Effective January 1, 2009,
the Company has adopted the provisions of ASC 820-10 with respect to its
non-financial assets and non-financial liabilities. ASC 820-10 defines fair
value, establishes a framework for measuring fair value, and expands disclosures
about fair value measurements. The new standard provides a consistent definition
of fair value, which focuses on an exit price, which is the price that would be
received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date. The standard
also prioritizes, within the measurement of fair value, the use of market-based
information over entity specific information and establishes a three-level
hierarchy for fair value measurements based on the nature of inputs used in the
valuation of an asset or liability as of the measurement date.
The hierarchy established under ASC 820-10 gives the highest priority to
unadjusted quoted prices in active markets for identical assets or liabilities
(Level 1) and the lowest priority to unobservable inputs (Level 3). As required
by ASC 820-10, the Company's available for sale investments are classified
within the fair value hierarchy based on the lowest level of input that is
significant to the fair value measurement. The three levels of the fair value
hierarchy under ASC 820, and its applicability to the Company's
available-for-sale investments, are described below:
9
Level 1 - Pricing inputs are quoted prices available in active
markets for identical investments as of the reporting date. As
required by ASC 820, the Company does not adjust the quoted price for
these investments, even in situations where the Company holds a large
position and a sale could reasonably impact the quoted price.
Level 2 - Pricing inputs are quoted prices for similar investments,
or inputs that are observable, either directly or indirectly, for
substantially the full term through corroboration with observable
market data. Level 2 includes investments valued at quoted prices
adjusted for legal or contractual restrictions specific to these
investments.
Level 3 - Pricing inputs are unobservable for the investment, that
is, inputs that reflect the reporting entity's own assumptions about
the assumptions market participants would use in pricing the asset or
liability. Level 3 includes investments that are supported by little
or no market activity.
The following table presents the financial instruments related to the
Company's non-qualified deferred compensation plan carried at fair value as of
September 30, 2009 by ASC 820 valuation hierarchy (as defined above).
(in thousands) Level 1 Level 2 Level 3 Total
------- ------- ------- -------
Cash and short term investments $ 14 $ -- $ -- $ 14
Fixed income -- 392 -- 392
Equities 546 916 -- 1,462
------- ------- ------- -------
Total available for-sale-investments $ 560 $ 1,308 $ -- $ 1,868
Percent of total 30% 70% -- 100%
9. NOTES PAYABLE AND CREDIT ARRANGEMENTS
On May 25, 2007, the Company and its wholly-owned subsidiary, Spire
Semiconductor, LLC, entered into a Loan and Security Agreement (the "Equipment
Credit Facility") with Silicon Valley Bank (the "Bank"). Under the Equipment
Credit Facility, for a one-year period, the Company and Spire Semiconductor
could borrow up to $3.5 million in the aggregate to finance certain equipment
purchases (including reimbursement of certain previously-made purchases).
Advances made under the Equipment Credit Facility would bear interest at the
Bank's prime rate, as determined, plus 0.5% and payable in thirty-six (36)
consecutive monthly payments following the funding date of that advance. The
Equipment Credit Facility, if not sooner terminated in accordance with its
terms, expires on June 1, 2010.
On March 31, 2008, the Company entered into a second Loan and Security
Agreement (the "Revolving Credit Facility") with the Bank. Under the terms of
the Revolving Credit Facility, the Bank agreed to provide the Company with a
credit line up to $5 million. The Company's obligations under the Equipment
Credit Facility were secured by substantially all of its assets and advances
under the Revolving Credit Facility were limited to 80% of eligible receivables
and the lesser of 25% of the value of its eligible inventory, as defined, or
$2.5 million if the inventory is backed by a customer letter of credit. Interest
on outstanding borrowings accrued at a rate per annum equal to the greater of
(i) Prime Rate plus one percent (1.0%) or (ii) seven percent (7.0%). In
addition, the Company agreed to pay to the Bank a monthly collateral monitoring
fee in the event the Company was in default of its covenants and agreed to the
following additional terms: (i) $50 thousand commitment fee; (ii) an unused line
fee in the amount of 0.75% per annum of the average unused portion of the
revolving line; and (iii) an early termination fee of 0.5% of the total credit
line if the Company terminated the Revolving Credit Facility prior to 12 months
from the Revolving Credit Facility's effective date. In addition, on March 31,
2008 the Company's existing Equipment Credit Facility was amended whereby the
Bank granted a waiver for the Company's defaults for not meeting its December
31, 2007 quarter liquidity and profit covenants and for not meeting its January
and February 2008 liquidity covenants. Further, the covenants were amended to
match the covenants, as discussed below, contained in the Revolving Credit
Facility. The Company's interest rate under the Equipment Credit Facility was
also modified from Bank Prime plus one half percent (0.5%) to the greater of
(i)Bank Prime plus one percent (1.0%) or (ii) seven percent (7.0%).
On May 13, 2008, the Bank amended the Equipment Credit Facility and the
Revolving Credit Facility, modifying the Company's net income profitability
covenant requirements in exchange for a three quarters percent (0.75%) increase
in the Company's interest rate and waiver restructuring fee equal to one half
percent (0.5%) of amounts outstanding under the Equipment Credit Facility and
committed under the Revolving Credit Facility. In addition, the Company's term
loan balance was to be factored in when calculating the Company's borrowing base
under the Revolving Credit Facility.
On March 31, 2009, the Bank extended the expiration of the Revolving
Credit Facility under the same terms in order to allow both parties the time to
negotiate an expansion of the credit limit contingent upon the Company
qualifying for an Export-Import Bank loan guarantee.
10
On June 22, 2009, the Company and its subsidiaries entered into two
separate credit facilities with the Bank providing for credit lines of up to $8
million in the aggregate: (i) an Amended and Restated Loan and Security
Agreement (the "Restated Revolving Credit Facility") pursuant to which the Bank
agreed to provide the Company with a credit line of up to $3 million and (ii) an
Export-Import Bank Loan and Security Agreement (the "Ex-Im Facility") pursuant
to which the Bank agreed to provide the Company with a credit line of up to $5
million to be guaranteed by the Export-Import Bank of the United States (the
"EXIM Bank").
Under the terms of the Restated Revolving Credit Facility, the Bank
agreed to provide the Company with a credit line of up to $3 million. The
Company's obligations under the Restated Revolving Credit Facility were secured
by substantially all of the assets of the Company and its subsidiaries. Advances
under the Restated Revolving Credit Facility were limited to 80% of eligible
receivables. Interest on outstanding borrowings accrued at a rate per annum
equal to the greater of (i) the prime rate plus 1.75% or (ii) 7.75%; provided,
however, that if the Company achieved positive net income over a trailing
3-month period, interest on outstanding borrowings would drop and accrue during
such period at a rate per annum equal to the greater of (i) the prime rate plus
0.75% or (ii) 6.75%. In addition, the Company agreed to pay the Bank a monthly
collateral monitoring fee in the event the Company is in default of its
covenants and agreed to the following additional terms: (i) $67.5 thousand
commitment fee; (ii) an unused line fee in the amount of 0.75% per annum of the
average unused portion of the revolving line; and (iii) an early termination fee
of 1.0% of the total credit line.
In addition, under the Restated Revolving Credit Facility, the Company's
existing Equipment Credit Facility with the Bank was amended whereby the Bank
and the Company agreed that there would be no additional availability under such
facility and, based on an outstanding principal amount of $1.2 million on June
22, 2009, the Company would continue to make monthly installments of principal
of $97,222 plus accrued interest until the outstanding balance was paid in full.
The Company's interest rate with respect to the outstanding balance was also
modified so that interest accrues at a rate per annum equal to the greater of
(i) the prime rate plus 1.75% or (ii) 7.75%.
Under the terms of the Ex-Im Facility, the Bank agreed to provide the
Company with a credit line up to $5 million for working capital to be guaranteed
by the EXIM Bank. The Company's obligations under the Ex-Im Facility were
secured by substantially all of the assets of the Company and its subsidiaries.
Advances under the Ex-Im Facility were limited to (i) 90% of eligible
receivables subject to a suitable foreign currency hedge agreement if
applicable, plus (ii) 75% of all other eligible receivables billed in foreign
currency, plus (iii) the lesser of 50% of the value of eligible inventory, as
defined, or $3 million. Interest on outstanding borrowings accrued at a rate per
annum equal to the greater of (i) the prime rate plus 1.75% or (ii) 7.75%;
provided, however, that if the Company achieved positive net income over a
trailing 3-month period, interest on outstanding borrowings would drop and
accrue during such period at a rate per annum equal to the greater of (i) the
prime rate plus 0.75% or (ii) 6.75%. In addition, in the event of an early
termination, the Company agreed to pay the Bank an early termination fee of 1.0%
of the total credit line.
Under the Restated Revolving Credit Facility and the Ex-Im Facility, as
long as any commitment remains outstanding under the facilities, the Company was
required to comply with a minimum tangible net worth covenant and a minimum
liquidity covenant. In addition, until all amounts under the credit facilities
with the Bank are repaid, covenants under the credit facilities impose
restrictions on the Company's ability to, among other things, incur additional
indebtedness, create or permit liens on the Company's assets, merge, consolidate
or dispose of assets (other than in the ordinary course of business), make
dividend and other restricted payments, make certain debt or equity investments,
make certain acquisitions, engage in certain transactions with affiliates or
change the business conducted by the Company and its subsidiaries. Any failure
by the Company to comply with the covenants and obligations under the credit
facilities could result in an event of default, in which case the Bank may be
entitled to declare all amounts owed to be due and payable immediately.
The Equipment Credit Facility principal balance outstanding was $875
thousand and $1.8 million at September 30, 2009 and December 31, 2008,
respectively. The principal balance outstanding under the Restated Revolving
Credit Facility (and the prior Revolving Credit Facility) was $1.5 million at
September 30, 2009 and December 31, 2008. Under the credit facilities the
Company was required to maintain a minimum tangible net worth (as defined) of
$11.0 million and minimum liquidity (as defined) of $4.0 million; the Company's
tangible net worth (as defined) and liquidity (as defined) at September 30, 2009
was $4.7 million and $7.2 million, respectively. The Company was not in
compliance with its credit facilities tangible net worth covenant as of
September 30, 2009, and was unlikely to be in compliance on a going forward
basis. Accordingly, in November 2009, the Company entered into amendment and
restatements of its two credit facilities to more closely match its business
model and which contain a waiver of any prior financial covenant defaults. The
amended and restated credit facilities are described below.
On November 16, 2009, the Company and its subsidiaries entered into two
separate amended and restated credit facilities with the Bank continuing to
provide for credit lines of up to $8 million in the aggregate: (i) a Second
Amended and Restated Loan and Security Agreement (the "Second Restated Revolving
Credit Facility") pursuant to which the Bank agreed
11
to continue to provide the Company with a credit line of up to $3 million and
(ii) an Amendment and Restated Export-Import Bank Loan and Security Agreement
(the "Restated Ex-Im Facility") pursuant to which the Bank agreed to continue to
provide the Company with a credit line of up to $5 million to be guaranteed by
the EXIM Bank. The maturity date for each of these facilities is May 31, 2010.
Under the terms of the Second Restated Revolving Credit Facility, the
Bank agreed to continue to provide the Company with a credit line of up to $3
million. The Company's obligations under the Second Restated Revolving Credit
Facility are secured by substantially all of the assets of the Company and its
subsidiaries. Advances under the Second Restated Revolving Credit Facility are
limited to 80% of eligible receivables. Interest on outstanding borrowings
accrues at a rate per annum equal to the greater of (i) the prime rate plus 3.0%
or (ii) 9.0%; provided, however, that, subject to the sale of the Medical
Products Business Unit, if the Company achieves liquidity of at least $6 million
over a multi-month period, interest on outstanding borrowings drops and accrues
during such period at a rate per annum equal to the greater of (i) the prime
rate plus 2.0% or (ii) 8.0%. In addition, if, after achieving the minimum $6
million liquidity test, the Company achieves positive net income over a trailing
3-month period, interest on outstanding borrowings drops further and accrues
during such period at a rate per annum equal to the greater of (i) the prime
rate plus 1.5% or (ii) 7.5%. Furthermore, the Company agreed to pay the Bank a
monthly collateral handling fee and agreed to the following additional terms:
(i) $20 thousand restructure fee; and (ii) in the event of an early termination,
the Company agreed to pay the Bank an early termination fee of $80 thousand.
In addition, under the Second Restated Revolving Credit Facility, with
respect to the Company's outstanding term loan with the Bank, which has a
balance of $681 thousand as of the date of the agreement, the Company must
continue to make monthly installments of principal of $97 thousand plus accrued
interest until the outstanding balance is paid in full. Interest on the term
loan continues to accrue at a rate per annum equal to the greater of (i) the
prime rate plus 1.75% or (ii) 7.75%.
Under the terms of the Restated Ex-Im Facility, the Bank agreed to
continue to provide the Company with a credit line up to $5 million for working
capital to be guaranteed by the EXIM Bank. The Company's obligations under the
Restated Ex-Im Facility are secured by substantially all of the assets of the
Company and its subsidiaries. Advances under the Restated Ex-Im Facility are
limited to (i) 90% of eligible receivables subject to a suitable foreign
currency hedge agreement if applicable, plus (ii) 75% of all other eligible
receivables billed in foreign currency, plus (iii) the 50% of the value of
eligible inventory, as defined. Interest on outstanding borrowings accrues at a
rate per annum equal to the greater of (i) the prime rate plus 3.0% or (ii)
9.0%; provided, however, that, subject to the sale of the Medical Products
Business Unit, if the Company achieves liquidity of at least $6 million over a
multi-month period, interest on outstanding borrowings drops and accrues during
such period at a rate per annum equal to the greater of (i) the prime rate plus
2.0% or (ii) 8.0%. In addition, if, after achieving the minimum $6 million
liquidity test, the Company achieves positive net income over a trailing 3-month
period, interest on outstanding borrowings drops and accrues during such period
at a rate per annum equal to the greater of (i) the prime rate plus 1.5% or (ii)
7.5%. In the event of an early termination, the Company agreed to pay the Bank
an early termination fee of $80 thousand.
Under the Second Restated Revolving Credit Facility and the Restated
Ex-Im Facility, as long as any commitment remains outstanding under the
facilities, the Company must comply with a minimum liquidity covenant. In
addition, until all amounts under the credit facilities with the Bank are
repaid, covenants under the credit facilities impose restrictions on the
Company's ability to, among other things, incur additional indebtedness, create
or permit liens on the Company's assets, merge, consolidate or dispose of assets
(other than in the ordinary course of business), make dividend and other
restricted payments, make certain debt or equity investments, make certain
acquisitions, engage in certain transactions with affiliates or change the
business conducted by the Company and its subsidiaries. Any failure by the
Company to comply with the covenants and obligations under the credit facilities
could result in an event of default, in which case the Bank may be entitled to
declare all amounts owed to be due and payable immediately.
Annual maturities of the Equipment Credit Facility and the Restated
Revolving Credit Facility as of September 30, 2009 are as follows:
12
(in thousands)
Year Ending December 31,
2009 (remaining 3 months) $ 292
2010 2,083
--------
Total equipment and revolving line of credit $ 2,375
========
10. STOCK OPTION PLAN AND STOCK-BASED COMPENSATION
The Company has recognized stock-based compensation expense of
approximately $86 thousand and $185 thousand for the three months ended
September 30, 2009 and 2008, respectively, and approximately $412 thousand and
$594 thousand for the nine months ended September 30, 2009 and 2008,
respectively. The total non-cash, stock-based compensation expense included in
the condensed consolidated statement of operations for the periods presented is
included in the following expense categories:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------- -------------------------
(in thousands) 2009 2008 2009 2008
---------- ---------- ---------- ----------
Cost of contract research, services and licenses $ 2 $ 12 $ 20 $ 39
Cost of goods sold 30 36 94 104
Selling, general and administrative 54 137 298 451
---------- ---------- ---------- ----------
Total stock-based compensation $ 86 $ 185 $ 412 $ 594
========== ========== ========== ==========
At September 30, 2009, the Company had outstanding options under the
2007 Stock Equity Plan (the "Plan"). The Plan was 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.
A summary of options outstanding under the Plan as of September 30, 2009
and changes during the nine-month period ended September 30, 2009 is as follows:
Average Aggregate
Weighted- Remaining Intrinsic
Number of Average Contractual Value
Shares Exercise Price Life (Years) (in thousands)
--------------- --------------- --------------- ---------------
Options Outstanding at December 31, 2008 606,177 $ 7.53
Granted 185,000 $ 5.86
Exercised (4,000) $ 1.78
Cancelled/expired (8,500) $ 7.78
--------------- ---------------
Options Outstanding at September 30, 2009 778,677 $ 7.16 7.29 $ 346
=============== ===============
Options Exercisable at September 30, 2009 430,837 $ 6.87 6.05 $ 317
=============== ===============
The per-share weighted-average fair value of stock options granted
during the three and nine months ended September 30, 2009 was $3.12 and $3.45,
respectively, and $5.68 and $6.97 for the three and nine months ended September
30, 2008, 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
---- --------------- --------------- --------------- ---------------
2009 -- 1.64% 4.1 years 79.4%
2008 -- 2.88% 4.5 years 71.2%
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.
13
11. COMPREHENSIVE LOSS
Comprehensive loss includes certain changes in equity that are excluded
from net loss and consists of the following:
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
-------------------------- --------------------------
(in thousands) 2009 2008 2009 2008
---------- ---------- ---------- ----------
Net income (loss) $ (3,527) $ 445 $ (9,611) $ (347)
Other comprehensive income (loss):
Unrealized gain (loss) on available for sale
marketable securities, net of tax 178 (124) 581 (245)
---------- ---------- ---------- ----------
Total comprehensive income (loss) $ (3,349) $ 321 $ (9,030) $ (592)
========== ========== ========== ==========
12. GAINS ON TERMINATION OF CONTRACTS
On August 29, 2008, the Company delivered to Principia Lightworks, Inc.
("Principia") a Notice of Breach and Pending Termination (the "Notice") of a
certain Manufacturing Agreement, dated August 29, 2006, by and between Spire
Semiconductor and Principia (the "Manufacturing Agreement"). Under the terms of
the Manufacturing Agreement, Principia made an up-front payment for nonrecurring
engineering and facility access costs and was required to make monthly facility
availability payments throughout the term of the agreement. As a result of
Principia's failure to make monthly facility availability payments in 2008, the
Company has fully reserved $225 thousand against Principia's accounts receivable
balance. The Company entered into a mutual standstill agreement with Principia,
which expired on March 15, 2009. The purpose of the standstill was to give the
parties additional time to negotiate a resolution.
On March 27, 2009, Spire Semiconductor and Principia mutually agreed to
terminate the Manufacturing Agreement for convenience and entered into a
separation and novation agreement (the "Novation Agreement"). Under the terms of
the Novation Agreement, both parties agreed to terminate technology licenses
that were granted to each other under the terms of the Manufacturing Agreement
and Spire Semiconductor was released from its production requirements to
Principia. Principia was released from paying its future facility availability
payments due under the Manufacturing Agreement but will be required to pay
facility availability payments of $300 thousand. Spire Semiconductor holds
67,500 shares of Principia stock as collateral against the outstanding facility
availability payments. During the three months ended March 31, 2009, the Company
accelerated the amortization of deferred revenue and recognized $1.54 million as
a gain on termination of contracts related to the termination of the
Manufacturing Agreement.
On June 18, 2009, the Company entered into a settlement agreement with
Marubeni Corporation with respect to the License to Manufacture and Distribute
Equipment Agreement (the "License Agreement") dated April 1, 2003 for the
license of manufacturing and distribution in Japan of the Company's solar
photovoltaic modular manufacturing equipment. Under the terms of the settlement
agreement, both parties agreed to terminate the License Agreement including but
not limited to the eighteen (18) month non-compete obligation. As a result of
the settlement, the Company received a payment and recognized a gain on
termination of contracts of $200 thousand in the second quarter of 2009.
13. LIQUIDATION OF JOINT VENTURE
In July 2007, the Company entered into a joint venture with Gloria Solar
Co., Ltd. and related entities ("Gloria Solar"), a leading cell and module
manufacturer in Taiwan, which designs, sells and manages installations of
photovoltaic systems. The Company's 45% ownership stake in the joint venture,
Gloria Spire Solar, LLC (the "Joint Venture"), was obtained through the
contribution of the Company's building integrated photovoltaic business to
Gloria Solar. Gloria Solar owns the remaining 55% of the Joint Venture. The
Joint Venture was formed for the purpose of pursuing the solar photovoltaic
systems market within the United States. On June 3, 2009, the Company entered
into a Liquidation Agreement, as amended (the "Liquidation Agreement"), with
Gloria Solar pursuant to which the parties agreed to liquidate the Joint
Venture. Under the terms of the Liquidation Agreement, the parties agreed to a
specified allocation of the remaining assets of the Joint Venture after all
liabilities have been paid, with each party receiving a share of project leads,
intellectual property and remaining cash. The Company will assume responsibility
for supporting the Joint Venture's existing client base, including the remaining
warranties. As a result of the liquidation, the Company has formed Spire Solar
Systems as a full-service organization, offering system designs and project
management to domestic markets.
Since the Joint Venture's inception, the Company has reported financial
results of the Joint Venture one quarter in arrears. Due to the liquidation of
the Joint Venture in the third quarter of 2009, the Company reported losses in
the second
14
quarter of 2009 on equity investment of its share of the Joint Venture's first
and second quarter losses in 2009 of $310 thousand and $348 thousand,
respectively. The Company recorded an impairment charge in the second quarter of
2009 of $85 thousand to reduce the value of the investment to the estimated
proceeds from the liquidation. The Company received $450 thousand in cash from
the liquidation of the Joint Venture in the third quarter of 2009.
14. DISCONTINUED OPERATIONS AND ASSETS HELD FOR SALE
In accordance with ASC 205-20 PRESENTATION OF FINANCIAL STATEMENTS -
DISCONTINUED OPERATIONS, the accompanying unaudited condensed consolidated
balance sheets, statements of operations and cash flows present the results and
assets of the Company's medical products business unit (the "Medical Products
Business Unit") as discontinued operations and assets held for sale. During the
second quarter of 2009, the Company began pursuing an exclusive sales process of
the Medical Products Business Unit. The Company has (i) determined that the
Medical Products Business Unit was a separate component of the Company's
business as, historically, management reviewed separately the Medical Products
Business Unit's financial results apart from the Company's ongoing continuing
operations, (ii) eliminated the Medical Products Business Unit's financial
results from ongoing operations and (iii) determined that the Company will have
no further continuing involvement in the operations of the Medical Products
Business Unit or cash flows from the Medical Products Business Unit after the
sale.
On September 4, 2009, the Company agreed to sell the Medical Products
Business Unit to Bard Access Systems, Inc., for a purchase price of $15.0
million, including $14.9 million payable at closing to Spire and $100,000 to be
paid to two employees of Spire, including Mark C. Little, Chief Executive
Officer of Spire Biomedical, as consideration for their execution of
non-competition agreements. The purchase price is subject to adjustment under
certain circumstances. The sale, which is subject to customary closing
conditions, has not yet been consummated.
Included in discontinued operations are reserves for inventory and
potential returns related to a voluntary recall of medical products totaling
approximately $1.1 million in the third quarter of 2009. Not included in
discontinued operations are certain indirect costs of the Medical Products
Business Unit that have been reclassified to selling, general and administrative
expense of $126 thousand and $140 thousand for the three months ended September
30, 2009 and 2008, respectively, and $360 thousand and $430 thousand for the
nine months ended September 30, 2009 and 2008, respectively.
The assets and liabilities of the Medical Products Business Unit as of
September 30, 2009 and December 31, 2008 are as follows:
(in thousands) September 30, December 31,
2009 2008
------------ ------------
ASSETS OF DISCONTINUED OPERATIONS AND ASSETS HELD FOR SALE
Current assets of discontinued operations and assets held for sale
Accounts receivable - trade, net $ 364 $ 775
Inventories, net 622 1,021
Deposits on equipment for inventory 3 14
Prepaid expenses and other current assets 5 44
------------ ------------
Total current assets of discontinued operations and assets held for sale 994 1,854
Property and equipment, net 9 14
Intangible and other assets, net 365 366
------------ ------------
Total assets of discontinued operations and assets held for sale $ 1,367 $ 2,234
============ ============
LIABILITIES OF DISCONTINUED OPERATIONS
Current liabilities of discontinued operations
Accounts payable $ 499 $ 319
Accrued liabilities 1,204 554
------------ ------------
Total current liabilities of discontinued operations 1,703 873
------------ ------------
Total liabilities of discontinued operations $ 1,703 $ 873
============ ============
Condensed results of operations relating to the Medical Products
Business Unit are as follows:
15
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- --------------------------
(in thousands) 2009 2008 2009 2008
---------- ---------- ---------- ----------
Net sales and revenues $ 632 $ 983 $ 2,226 $ 2,809
Gross margin $ (45) $ 280 $ 358 $ 1,071
Loss from discontinued operations $ (1,248) $ (77) $ (1,639) $ (358)
15. SUBSEQUENT EVENTS
On November 16, 2009, the Company and its subsidiaries entered into two
separate amended and restated credit facilities with the Bank continuing to
provide for credit lines of up to $8 million in the aggregate: (i) a Second
Amended and Restated Loan and Security Agreement (the "Second Restated Revolving
Credit Facility") pursuant to which the Bank agreed to continue to provide the
Company with a credit line of up to $3 million and (ii) an Amendment and
Restated Export-Import Bank Loan and Security Agreement (the "Restated Ex-Im
Facility") pursuant to which the Bank agreed to continue to provide the Company
with a credit line of up to $5 million to be guaranteed by the EXIM Bank. The
maturity date for each of these facilities is May 31, 2010.
Under the terms of the Second Restated Revolving Credit Facility, the
Bank agreed to continue to provide the Company with a credit line of up to $3
million. The Company's obligations under the Second Restated Revolving Credit
Facility are secured by substantially all of the assets of the Company and its
subsidiaries. Advances under the Second Restated Revolving Credit Facility are
limited to 80% of eligible receivables. Interest on outstanding borrowings
accrues at a rate per annum equal to the greater of (i) the prime rate plus 3.0%
or (ii) 9.0%; provided, however, that, subject to the sale of the Medical
Products Business Unit, if the Company achieves liquidity of at least $6 million
over a multi-month period, interest on outstanding borrowings drops and accrues
during such period at a rate per annum equal to the greater of (i) the prime
rate plus 2.0% or (ii) 8.0%. In addition, if, after achieving the minimum $6
million liquidity test, the Company achieves positive net income over a trailing
3-month period, interest on outstanding borrowings drops further and accrues
during such period at a rate per annum equal to the greater of (i) the prime
rate plus 1.5% or (ii) 7.5%. Furthermore, the Company agreed to pay the Bank a
monthly collateral handling fee and agreed to the following additional terms:
(i) $20 thousand restructure fee; and (ii) in the event of an early termination,
the Company agreed to pay the Bank an early termination fee of $80 thousand.
In addition, under the Second Restated Revolving Credit Facility, with
respect to the Company's outstanding term loan with the Bank, which has a
balance of $681 thousand as of the date of the agreement, the Company must
continue to make monthly installments of principal of $97 thousand plus accrued
interest until the outstanding balance is paid in full. Interest on the term
loan continues to accrue at a rate per annum equal to the greater of (i) the
prime rate plus 1.75% or (ii) 7.75%.
Under the terms of the Restated Ex-Im Facility, the Bank agreed to
continue to provide the Company with a credit line up to $5 million for working
capital to be guaranteed by the EXIM Bank. The Company's obligations under the
Restated Ex-Im Facility are secured by substantially all of the assets of the
Company and its subsidiaries. Advances under the Restated Ex-Im Facility are
limited to (i) 90% of eligible receivables subject to a suitable foreign
currency hedge agreement if applicable, plus (ii) 75% of all other eligible
receivables billed in foreign currency, plus (iii) the 50% of the value of
eligible inventory, as defined. Interest on outstanding borrowings accrues at a
rate per annum equal to the greater of (i) the prime rate plus 3.0% or (ii)
9.0%; provided, however, that, subject to the sale of the Medical Products
Business Unit, if the Company achieves liquidity of at least $6 million over a
multi-month period, interest on outstanding borrowings drops and accrues during
such period at a rate per annum equal to the greater of (i) the prime rate plus
2.0% or (ii) 8.0%. In addition, if, after achieving the minimum $6 million
liquidity test, the Company achieves positive net income over a trailing 3-month
period, interest on outstanding borrowings drops and accrues during such period
at a rate per annum equal to the greater of (i) the prime rate plus 1.5% or (ii)
7.5%. In the event of an early termination, the Company agreed to pay the Bank
an early termination fee of $80 thousand.
Under the Second Restated Revolving Credit Facility and the Restated
Ex-Im Facility, as long as any commitment remains outstanding under the
facilities, the Company must comply with a minimum liquidity covenant. In
addition, until all amounts under the credit facilities with the Bank are
repaid, covenants under the credit facilities impose restrictions on the
Company's ability to, among other things, incur additional indebtedness, create
or permit liens on the Company's assets, merge, consolidate or dispose of assets
(other than in the ordinary course of business), make dividend and other
restricted payments, make certain debt or equity investments, make certain
acquisitions, engage in certain transactions with affiliates or change the
business conducted by the Company and its subsidiaries. Any failure by the
Company to comply with the covenants and obligations under the credit facilities
could result in an event of default, in which case the Bank may be entitled to
declare all amounts owed to be due and payable immediately.
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THIS MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS SECTION AND OTHER PARTS OF THIS REPORT CONTAIN
FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES
ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND SECTION 21E OF THE
SECURITIES EXCHANGE ACT OF 1934, AS AMENDED (THE "EXCHANGE ACT"), WHICH
STATEMENTS INVOLVE RISKS AND UNCERTAINTIES. THESE STATEMENTS RELATE TO OUR
FUTURE PLANS, OBJECTIVES, EXPECTATIONS AND INTENTIONS. THESE STATEMENTS MAY BE
IDENTIFIED BY THE USE OF WORDS SUCH AS "MAY", "COULD", "WOULD", "SHOULD",
"WILL", "EXPECTS", "ANTICIPATES", "INTENDS", "PLANS", "BELIEVES", "ESTIMATES",
AND SIMILAR EXPRESSIONS. OUR ACTUAL RESULTS AND THE TIMING OF CERTAIN EVENTS MAY
DIFFER SIGNIFICANTLY FROM THE RESULTS AND TIMING DESCRIBED IN THE
FORWARD-LOOKING STATEMENTS. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH
DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THOSE FACTORS DISCUSSED OR REFERRED
TO IN THE ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2008 AND IN
SUBSEQUENT PERIOD REPORTS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION,
INCLUDING THIS REPORT. THE FOLLOWING DISCUSSION AND ANALYSIS OF OUR FINANCIAL
CONDITION AND RESULTS OF OPERATIONS SHOULD BE READ IN LIGHT OF THOSE FACTORS AND
IN CONJUNCTION WITH OUR ACCOMPANYING CONSOLIDATED FINANCIAL STATEMENTS,
INCLUDING THE NOTES THERETO.
OVERVIEW
We have been in the solar business for over 30 years, initially
pioneering developments in solar cell technology. Currently, we develop,
manufacture, and market customized turnkey solutions for the solar industry,
including individual pieces of manufacturing equipment and full turnkey lines
for cell and module production and testing. We have been continually active in
research and development in the space, with over $100 million of research and
development conducted and 35 issued patents. This expertise has provided the
platform for development of our manufacturing equipment and turnkey lines. We
have equipment deployed in approximately 50 countries and have among our
customers some of the world's leading solar manufacturers including First Solar,
BP Solar, Canadian Solar, Trina Solar Energy, Evergreen Solar and Solaria
Energia.
As the solar market continues to expand, and photovoltaic cell and
module manufacturers ramp production to meet increasing demand, they require
more turnkey equipment to produce additional photovoltaic cells and modules. We
believe that we are one of the world's leading suppliers of the manufacturing
equipment and technology needed to produce solar photovoltaic power systems. Our
individual manufacturing equipment products and our SPI-LINETM integrated
turnkey cell and module production lines can be highly scaled, customized, and
automated with high throughput. These systems are designed to meet the needs of
a broad customer base ranging from manufacturers relying on mostly manual
processes, to some of the largest photovoltaic manufacturing companies in the
world. With nearly 40 years since our incorporation and over 30 years in the
solar market, we have been in a good position to capitalize on the market's
growth.
In July 2007, we entered into a joint venture with Gloria Solar Co.,
Ltd. and related entities ("Gloria Solar"), a leading cell and module
manufacturer in Taiwan, which designs, sells and manages installations of
photovoltaic systems. Our 45% ownership stake in the joint venture, Gloria Spire
Solar, LLC (the "Joint Venture"), was obtained through the contribution of our
building integrated photovoltaic business to Gloria Solar. Gloria Solar owns the
remaining 55% of the Joint Venture. The Joint Venture was formed for the purpose
of pursuing the solar photovoltaic systems market within the United States. On
June 3, 2009, we entered into a Liquidation Agreement, as amended (the
"Liquidation Agreement"), with Gloria Solar pursuant to which the parties agreed
to liquidate the Joint Venture. Under the terms of the Liquidation Agreement,
the parties agreed to a specified allocation of the remaining assets of the
Joint Venture after all liabilities have been paid, with each party receiving a
share of project leads, intellectual property and remaining cash. We have taken
responsibility over supporting the Joint Venture's client base, including the
remaining warranties. As a result of the liquidation, we have formed Spire Solar
Systems as a full-service organization, offering system designs and project
management to domestic markets. See Note 13.
In addition to our cell and module manufacturing solutions, our Spire
Semiconductor subsidiary provides semiconductor foundry services and is
currently developing triple-junction gallium arsenide ("GaAs") concentrator
solar cells. This state-of-the-art semiconductor fabrication facility is the
foundation of our solar cell process technology for silicon, polysilicon,
thin-film, and GaAs concentrator cells. We also operate a small business line
associated with advanced biomedical applications. The foundation for all of our
business units is our industry-leading expertise in manufacturing, materials
technologies and surface treatments; this proprietary knowledge enables us to
further develop our offerings in each market we serve.
During the second quarter of 2009, we began pursuing an exclusive sales
process of our Medical Products Business Unit. On September 4, 2009, we agreed
to sell the Medical Products Business Unit to Bard Access Systems, Inc., which
sale has not yet been consummated. Accordingly, the results and assets of the
Medical Products Business Unit are being presented herein as discontinued
operations and assets held for sale. See Note 14.
Operating results will depend upon revenue growth and product mix, as
well as the timing of shipments of higher priced
17
products from our solar equipment line and delivery of solar systems. Export
sales, which amounted to 53% of net sales and revenues for the nine months ended
September 30, 2009, continue to constitute a significant portion of our net
sales and revenues.
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,
----------------------- -----------------------
2009 2008 2009 2008
-------- -------- -------- --------
Net sales and revenues 100% 100% 100% 100%
Cost of sales and revenues 85 65 89 69
-------- -------- -------- --------
Gross profit 15 35 11 31
Selling, general and administrative expenses (26) (30) (26) (28)
Internal research and development expenses (1) (1) (1) (1)
Gains on termination of contracts -- -- 3 --
-------- -------- -------- --------
Income (loss) from continuing operations (12) 4 (13) 2
Other expense, net (1) (1) (3) (2)
-------- -------- -------- --------
Loss from continuing operations before
income tax provision (13) 3 (16) --
Income tax provision -- -- -- --
-------- -------- -------- --------
Loss from continuing operations (13) 3 (16) --
Loss from discontinued operations, net of tax (8) -- (3) (1)
-------- -------- -------- --------
Net loss (21%) 3% (19%) (1%)
======== ======== ======== ========
OVERALL
Our total net sales and revenues for the nine months ended September 30,
2009 were $50.1 million as compared to $46.2 million for the nine months ended
September 30, 2008, which represents an increase of $3.9 million or 8.6%. The
increase was primarily attributable to a $5.1 million increase in solar sales
and a $868 thousand increase in biomedical revenues, partially offset by a $2.0
million decrease in optoelectronics sales.
SOLAR BUSINESS UNIT
Sales in our solar business unit increased 14% during the nine months
ended September 30, 2009 to $41.2 million as compared to $36.1 million in the
nine months ended September 30, 2008. The increase is the result of sales in
solar cell materials during 2009, partially offset by a decrease in solar
equipment sales. We did not sell solar cell materials during the first three
quarters of 2008.
BIOMEDICAL BUSINESS UNIT
Revenues of our biomedical business unit increased 15% during the nine
months ended September 30, 2009 to $6.8 million as compared to $5.9 million in
the nine months ended September 30, 2008. The increase reflects increased
revenues from our orthopedics coatings services partially offset by a decrease
in revenue from research and development contracts.
OPTOELECTRONICS BUSINESS UNIT
Revenues in our optoelectronics business unit decreased 47% to $2.2
million during the nine months ended September 30, 2009 as compared to $4.2
million in the nine months ended September 30, 2008. The decrease reflects an
overall decrease in optoelectronics activities attributable to a further
deepening of the current global economic recession and to a lesser extent the
termination of a contract as discussed below in Gains on Termination of
Contracts.
18
Three and Nine Months Ended September 30, 2009 Compared to Three and Nine Months
--------------------------------------------------------------------------------
Ended September 30, 2008
------------------------
NET SALES AND REVENUES
The following table categorizes our net sales and revenues for the
periods presented:
Three Months Ended
September 30, Increase/(Decrease)
--------------------- ----------------------
(in thousands) 2009 2008 $ %
-------- -------- -------- --------
Sales of goods $ 13,551 $ 12,714 $ 837 7%
Contract research, services and license revenues 3,013 3,839 (826) (22%)
-------- -------- --------
Net sales and revenues $ 16,564 $ 16,553 $ 11 --%
======== ======== ========
The 7% increase in sales of goods for the three months ended September
30, 2009 as compared to the three months ended September 30, 2008 was primarily
due to new sales in solar cell materials, partially offset by a decrease in
solar equipment revenues. New sales of solar cell materials, all to one
customer, were $4.6 million in 2009. Solar equipment sales decreased 31% in 2009
as compared to 2008 primarily due to an overall slow down in solar power
industry activity.
The 22% decrease in contract research, services and license revenues for
the three months ended September 30, 2009 as compared to the three months ended
September 30, 2008 is primarily attributable to a decrease in optoelectronics
and royalties, partially offset by an increase in orthopedics service and
research and development activities. Revenue from our optoelectronics processing
services (Spire Semiconductor) decreased 51% in 2009 compared to 2008 as a
result of an overall decrease in optoelectronics activities attributable to a
further deepening of the current global economic recession and to a lesser
extent the termination of a contract with Principia Lightworks, Inc. in March
2009 (see Gains on Termination of Contracts). Revenue from royalties decreased
100% as a result of the termination of contract with Nisshinbo Industries, Inc.
in November 2008. Revenues from our orthopedic activities increased 15% in 2009
as compared to 2008. This increase is primarily the result of revenue from a new
customer added in the third quarter of 2008. Revenues from our research and
development activities increased 15% in 2009 as compared to 2008 primarily due
to an increase in the number and value of contracts associated with funded
research and development.
Revenues from the delivery of solar equipment module lines to two
customers account for 27% of total net sales and revenue for the three month
period ended September 30, 2009 and recurring revenue from the sale of solar
cell materials to another customer accounted for 28% of total net sales and
revenue during the same period. Revenues from the delivery of solar equipment
module lines to two customers account for 24% of total net sales and revenue for
the three month period ended September 30, 2008.
The following table categorizes our net sales and revenues for the
periods presented:
Nine Months Ended
September 30, Increase/(Decrease)
--------------------- ----------------------
(in thousands) 2009 2008 $ %
-------- -------- -------- --------
Sales of goods $ 41,101 $ 35,393 $ 5,708 16%
Contract research, services and license revenues 9,023 10,757 (1,734) (16%)
-------- -------- --------
Net sales and revenues $ 50,124 $ 46,150 $ 3,974 9%
======== ======== ========
The 16% increase in sales of goods for the nine months ended September
30, 2009 as compared to the nine months ended September 30, 2008 was primarily
due to new sales in solar cell materials, partially offset by decreased solar
equipment revenues. New sales of solar cell materials, all to one customer, were
$11.0 million in 2009. Solar equipment sales decreased 14% in 2009 as compared
to 2008 primarily due to an overall slow down in solar power industry activity.
The 16% decrease in contract research, services and license revenues for
the nine months ended September 30, 2009 as compared to the nine months ended
September 30, 2008 is primarily attributable to a decrease in optoelectronics,
royalties and research and development activities, partially offset by an
increase in orthopedics service. Revenue from our optoelectronics processing
services (Spire Semiconductor) decreased 47% in 2009 compared to 2008 as a
result of an overall decrease in optoelectronics activities attributable to a
further deepening of the current global economic recession and to a lesser
extent the termination of a contract with Principia Lightworks, Inc. in March
2009 (see Gains on Termination of Contracts). Revenue from royalties decreased
100% as a result of the termination of contract with Nisshinbo Industries, Inc.
in November 2008. Revenues from our research and development activities
decreased 2% in 2009 as compared to 2008 primarily due to an increase in the
number and value of contracts associated with funded research and development.
Revenues from our orthopedic activities increased 21% in 2009 as compared to
2008. This increase is primarily the result of revenue from a new customer added
in the third quarter of 2008.
19
Revenues from the delivery of a solar equipment cell line to one
customer account for 21% of total net sales and revenue for the nine month
period ended September 30, 2009 and recurring revenue from the sale of solar
cell materials to another customer accounted for 22% of total net sales and
revenue during the same period. Revenues from the delivery of a solar equipment
module line to one customer account for 10% of total net sales and revenue for
the nine month period ended September 30, 2008.
COST OF SALES AND REVENUES
The following table categorizes our cost of sales and revenues for the
periods presented, stated in dollars and as a percentage of related sales and
revenues:
Three Months Ended September 30, Increase/(Decrease)
------------------------------------------------ ----------------------
(in thousands) 2009 % 2008 % $ %
-------- -------- -------- -------- -------- --------
Cost of goods sold $ 11,692 86% $ 7,934 62% $ 3,758 47%
Cost of contract research, services
and licenses 2,331 77% 2,794 73% (463) (17%)
-------- -------- --------
Net cost of sales and revenues $ 14,023 85% $ 10,728 65% $ 3,295 31%
======== ======== ========
Cost of goods sold increased 47% for the three months ended September
30, 2009 as compared to the three months ended September 30, 2008, primarily as
a result of costs related to solar materials and a provision for a reserve of
$369 thousand related to actual and estimated costs to complete two solar
projects. As a percentage of sales, cost of goods sold was 86% of sales of goods
in 2009 as compared to 62% of sales of goods in 2008. This increase in the
percentage of sales in 2009 is due to the provision for a reserve of $369
thousand related to estimated costs to complete two solar projects, low margins
related to a solar cell materials contract and an unfavorable utilization of
solar manufacturing overhead.
Cost of contract research, services and licenses decreased 17% for the
three months ended September 30, 2009 as compared to the three months ended
September 30, 2008, primarily as a result of decreased costs at our
optoelectronics facility (Spire Semiconductor) due to lower associated revenues
and to a lesser extent a decrease in orthopedics service costs, partially offset
by increased costs of our contract research activities due to higher volumes.
Cost of contract research, services and licenses as a percentage of revenue
increased to 77% of revenues in 2009 from 73% in 2008, primarily due to
unfavorable margin related to our optoelectronics facility, partially offset by
favorable margins in orthopedic services in 2009.
Cost of sales and revenues also includes approximately $32 thousand and
$48 thousand of stock-based compensation for the three months ended September
30, 2009 and 2008, respectively.
The following table categorizes our cost of sales and revenues for the
periods presented, stated in dollars and as a percentage of related sales and
revenues:
Nine Months Ended September 30, Increase/(Decrease)
------------------------------------------------ ----------------------
(in thousands) 2009 % 2008 % $ %
-------- -------- -------- -------- -------- --------
Cost of goods sold $ 37,677 92% $ 24,171 68% $ 13,506 56%
Cost of contract research, services
and licenses 6,764 75% 7,510 70% (746) (10%)
-------- -------- --------
Net cost of sales and revenues $ 44,441 89% $ 31,681 69% $ 12,760 40%
======== ======== ========
Cost of goods sold increased 56% for the nine months ended September 30,
2009 as compared to the nine months ended September 30, 2008, primarily as a
result of costs related to solar materials, costs related to the completion of
an automated module line and a provision for a reserve of $952 thousand related
to actual and estimated costs to complete two solar projects. As a percentage of
sales, cost of goods sold was 92% of sales of goods in 2009 as compared to 68%
of sales of goods in 2008. This increase in the percentage of sales in 2009 is
due to the provision for a reserve of $952 thousand related to actual and
estimated costs to complete two solar projects, low margin related to the
completion of an automated module line,low margins related to a solar cell
materials contract and an unfavorable utilization of solar manufacturing
overhead.
Cost of contract research, services and licenses decreased 10% for the
nine months ended September 30, 2009 as compared to the nine months ended
September 30, 2008, primarily as a result of decreased costs at our
optoelectronics facility (Spire Semiconductor) due to lower associated revenues,
partially offset by increased costs of our contract research activities due to
higher volumes. Cost of contract research, services and licenses as a percentage
of revenue increased to 75% of
20
revenues in 2009 from 70% in 2008, primarily due to unfavorable margin related
to our optoelectronics facility, partially offset by favorable margins in
orthopedic services in 2009.
Cost of sales and revenues also includes approximately $114 thousand and
$143 thousand of stock-based compensation for the nine months ended September
30, 2009 and 2008, respectively.
OPERATING EXPENSES
The following table categorizes our operating expenses for the periods
presented, stated in dollars and as a percentage of total sales and revenues:
Three Months Ended September 30, Increase/(Decrease)
------------------------------------------------ ----------------------
(in thousands) 2009 % 2008 % $ %
-------- -------- -------- -------- -------- --------
Selling, general and administrative $ 4,320 26% $ 5,025 31% $ (705) (14%)
Internal research and development 220 1% 200 1% 20 10%
-------- -------- --------
Operating expenses $ 4,540 27% $ 5,225 32% $ (685) (13%)
======== ======== ========
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expense decreased 14% in the three
months ended September 30, 2009 as compared to the three months ended September
30, 2008, primarily as a result of a decrease in lower sales commissions paid to
agents and less marketing activities, partially offset by an increase in
corporate staffing levels and related employee costs to support our overall
growth. Selling, general and administrative expense decreased to 26% of sales
and revenues in 2009 as compared to 31% in 2008. The slight decrease was
primarily due to the absorption of selling, general and administrative overhead
costs by the slight increase in sales and revenues.
Operating expenses include approximately $54 thousand and $137 thousand
of stock-based compensation for the three months ending September 30, 2009 and
2008, respectively.
INTERNAL RESEARCH AND DEVELOPMENT
Internal research and development expense increased slightly in the
three months ended September 30, 2009 as compared to the three months ended
September 30, 2008. As a percentage of sales and revenue, internal research and
development expenses remained at 1% of sales and revenues in 2009 and 2008.
The following table categorizes our operating expenses for the periods
presented, stated in dollars and as a percentage of total sales and revenues:
Nine Months Ended September 30, Increase
------------------------------------------------ ----------------------
(in thousands) 2009 % 2008 % $ %
-------- -------- -------- -------- -------- --------
Selling, general and administrative $ 13,269 26% $ 13,018 28% $ 251 2%
Internal research and development 782 2% 482 1% 300 62%
-------- -------- --------
Operating expenses $ 14,051 28% $ 13,500 29% $ 551 4%
======== ======== ========
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expense increased 2% in the nine
months ended September 30, 2009 as compared to the nine months ended September
30, 2008, primarily as a result of an increase in corporate staffing levels and
related employee costs to support our overall growth, partially offset by a
decrease in lower sales commissions paid to agents and less marketing
activities. Selling, general and administrative expense decreased to 26% of
sales and revenues in 2009 as compared to 28% in 2008. The slight decrease was
primarily due to the absorption of selling, general and administrative overhead
costs by the 9% increase in sales and revenues.
Operating expenses includes approximately $298 thousand and $451
thousand of stock-based compensation for the nine months ending September 30,
2009 and 2008, respectively.
21
INTERNAL RESEARCH AND DEVELOPMENT
Internal research and development expense increased 62% in the nine
months ended September 30, 2009 as compared to the nine months ended September
30, 2008, primarily as a result of higher levels of research and development
spent in the solar group. As a percentage of sales and revenue, internal
research and development expenses increased slightly to 2% of sales and revenues
in 2009 as compared to 1% in 2008.
GAINS ON TERMINATION OF CONTRACTS
On August 29, 2008, we delivered to Principia Lightworks, Inc.
("Principia") a Notice of Breach and Pending Termination (the "Notice") of a
certain Manufacturing Agreement, dated August 29, 2006, by and between Spire
Semiconductor and Principia (the "Manufacturing Agreement"). Under the terms of
the Manufacturing Agreement, Principia made an up-front payment for nonrecurring
engineering and facility access costs and was required to make monthly facility
availability payments throughout the term of the agreement. As a result of
Principia's failure to make monthly facility availability payments in 2008, we
have fully reserved $225 thousand against Principia's accounts receivable
balance. We entered into a mutual standstill agreement with Principia, which
expired on March 15, 2009. The purpose of the standstill was to give the parties
additional time to negotiate a resolution.
On March 27, 2009, Spire Semiconductor and Principia mutually agreed to
terminate the Manufacturing Agreement for convenience and entered into a
separation and novation agreement (the "Novation Agreement"). Under the terms of
the Novation Agreement, both parties agreed to terminate technology licenses
that were granted to each other under the terms of the Manufacturing Agreement
and Spire Semiconductor was released from its production requirements to
Principia. Principia was released from paying its future facility availability
payments due under the Manufacturing Agreement but will be required to pay
facility availability payments of $300 thousand. Spire Semiconductor holds
67,500 shares of Principia stock as collateral against the outstanding facility
availability payments. During the three months ended March 31, 2009, we
accelerated the amortization of deferred revenue and recognized $1.54 million as
a gain on termination of contract related to the termination of the
Manufacturing Agreement.
On June 18, 2009, we entered into a settlement agreement with Marubeni
Corporation with respect to The License to Manufacture and Distribute Equipment
Agreement (the "License Agreement") dated April 1, 2003 for the license of
manufacturing and distribution in Japan of our solar photovoltaic modular
manufacturing equipment. Under the terms of the settlement agreement, both
parties agreed to terminate the License Agreement including but not limited to
the eighteen (18) month non-compete obligation. As a result of the settlement,
we received a payment of $200 thousand in the second quarter of 2009.
OTHER INCOME (EXPENSE), NET
We earned $1 thousand and $1 thousand of interest income for the three
months ended September 30, 2009 and 2008, respectively. We incurred interest
expense of $84 thousand and $50 thousand for the three months ended September
30, 2009 and 2008, respectively. We recorded a loss of $45 thousand on equity
investment in joint venture with Gloria Solar for the three months ended
September 30, 2008. Due to reducing the value of the investment in joint venture
in the second quarter of 2009 to the estimated proceeds from the liquidation,
there was no gain or loss in the third quarter of 2009. See Note 13. We had a
currency exchange loss of approximately $174 thousand and a currency exchange
gain of $16 thousand during the three months ended September 30, 2009 and 2008,
respectively.
We earned $15 thousand and $12 thousand of interest income for the nine
months ended September 30, 2009 and 2008, respectively. We incurred interest
expense of $232 thousand and $169 thousand for the nine months ended September
30, 2009 and 2008, respectively. We recorded a loss of $1.02 million and $409
thousand on equity investment in joint venture with Gloria Solar for the nine
months ended September 30, 2009 and 2008, respectively. Since the Joint
Venture's inception, we have reported financial results of the Joint Venture one
quarter in arrears. Due to the liquidation of the Joint Venture in the third
quarter of 2009, we have included in our reported losses on equity investment
relating to the Joint Venture, the Joint Venture's second quarter 2009 losses of
$348 thousand, first quarter 2009 losses of $310 thousand, fourth quarter 2008
losses of $280 thousand and an impairment charge of $85 thousand to reduce the
value of the investment to the value of the proceeds received in the third
quarter of 2009. See Note 13. We had a currency exchange loss of approximately
$35 thousand and $392 thousand during the nine months ended September 30, 2009
and 2008, respectively.
22
INCOME TAXES
We recorded a provision for income taxes of $23 thousand and $64
thousand for the three and nine months ended September 30, 2009, respectively.
We did not record an income tax provision or benefit in the three or nine months
ending September 30, 2008. A valuation allowance has been provided against the
current period tax benefit due to uncertainty regarding the realization of the
net operating loss in the future.
LOSS FROM DISCONTINUED OPERATIONS
During the second quarter of 2009, we began pursuing an exclusive
sales process of our Medical Products Business Unit. On September 4, 2009, we
agreed to sell the Medical Products Business Unit to Bard Access Systems, Inc.,
which sale has not yet been consummated. Accordingly, the results and assets of
the Medical Products Business Unit are being presented herein as discontinued
operations and assets held for sale. See Note 14.
We recorded a loss from discontinued operations of $1.2 million and $77
thousand for the three months ended September 30, 2009 and 2008, respectively.
We recorded a loss from discontinued operations of $1.6 million and $358
thousand for the nine months ended September 30, 2009 and 2008, respectively.
Included in discontinued operations are reserves for inventory and potential
returns related to a voluntary recall of medical products totaling approximately
$1.1 million for the three and nine months ended September 30, 2009. Not
included in discontinued operations are certain indirect costs of the Medical
Products Business Unit that have been reclassified to selling, general and
administrative expense of $125 thousand and $140 thousand for the three months
ended September 30, 2009 and 2008, respectively, and $359 thousand and $430
thousand for the nine months ended September 30, 2009 and 2008, respectively.
See Note 14.
NET LOSS
We reported a net loss for the three months ended September 30, 2009 of
approximately $3.5 million and a net income of $445 thousand for the same period
in 2008. The net loss increased approximately $4.0 million primarily due to
lower margins in solar equipment sales and an increased loss from discontinued
operations (see Note 14), partially offset by gains on termination of contracts.
We reported a net loss for the nine months ended September 30, 2009 and
2008 of approximately $9.6 million and $347 thousand, respectively. The net loss
increased approximately $9.3 million primarily due to lower margins in solar
equipment sales and to a lesser extent an increased loss from discontinued
operations (see Note 14) and an impairment charge to reduce the value of the
equity investment in joint venture to the estimated proceeds from the
liquidation (see Note 13), partially offset by gains on termination of
contracts.
Liquidity and Capital Resources
September 30, December 31, Decrease
(in thousands) 2009 2008 $ %
---------- ---------- ---------- ----------
Cash and cash equivalents $ 4,901 $ 5,971 $ (1,070) (18%)
Working capital $ (1,882) $ 6,835 $ (8,717) (128%)
---------- ---------- ---------- ----------
Cash and cash equivalents decreased due to cash used in investing and
financing activities, partially offset by cash provided by operating activities.
The overall reduction in working capital is due primarily to a decrease in cash
and restricted cash along with an increase in liabilities of discontinued
operations primarily resulting from a voluntary recall of medical products in
the third quarter of 2009. We have historically funded our operating cash
requirements using operating cash flow, proceeds from the sale and licensing of
technology and proceeds from the sale of equity securities.
There are no material commitments by us for capital expenditures. At
September 30, 2009, our accumulated deficit was approximately $16.5 million,
compared to accumulated deficit of approximately $6.9 million as of December 31,
2008.
We have numerous options on how to fund future operational losses or
working capital needs, including but not limited to sales of equity, bank debt
or the sale or license of assets and technology, as we have done in the past;
however, there are no assurances that we will be able to sell equity, obtain or
access bank debt, or sell or license assets or technology on a timely basis and
at appropriate values. We have developed several plans including cost
containment efforts and outside financing to offset a decline in business due to
a further deepening of the current global economic recession. As a result, we
believe we
23
have sufficient resources to finance our current operations through at least
September 30, 2010.
LOAN AGREEMENTS
On May 25, 2007, we and our wholly-owned subsidiary, Spire
Semiconductor, LLC, entered into a Loan and Security Agreement (the "Equipment
Credit Facility") with Silicon Valley Bank (the "Bank"). Under the Equipment
Credit Facility, for a one-year period, we and Spire Semiconductor could borrow
up to $3.5 million in the aggregate to finance certain equipment purchases
(including reimbursement of certain previously-made purchases). Advances made
under the Equipment Credit Facility would bear interest at the Bank's prime
rate, as determined, plus 0.5% and payable in thirty-six (36) consecutive
monthly payments following the funding date of that advance. The Equipment
Credit Facility, if not sooner terminated in accordance with its terms, expires
on June 1, 2010.
On March 31, 2008, we entered into a second Loan and Security Agreement
(the "Revolving Credit Facility") with the Bank. Under the terms of the
Revolving Credit Facility, the Bank agreed to provide us with a credit line up
to $5 million. Our obligations under the Equipment Credit Facility were secured
by substantially all of our assets and advances under the Revolving Credit
Facility were limited to 80% of eligible receivables and the lesser of 25% of
the value of its eligible inventory, as defined, or $2.5 million if the
inventory is backed by a customer letter of credit. Interest on outstanding
borrowings accrued at a rate per annum equal to the greater of (i) Prime Rate
plus one percent (1.0%) or (ii) seven percent (7.0%). In addition, we agreed to
pay to the Bank a monthly collateral monitoring fee in the event we were in
default of our covenants and agreed to the following additional terms: (i) $50
thousand commitment fee; (ii) an unused line fee in the amount of 0.75% per
annum of the average unused portion of the revolving line; and (iii) an early
termination fee of 0.5% of the total credit line if we terminated the Revolving
Credit Facility prior to 12 months from the Revolving Credit Facility's
effective date. In addition, on March 31, 2008 our existing Equipment Credit
Facility was amended whereby the Bank granted a waiver for our defaults for not
meeting its December 31, 2007 quarter liquidity and profit covenants and for not
meeting our January and February 2008 liquidity covenants. Further, the
covenants were amended to match the covenants, as discussed below, contained in
the Revolving Credit Facility. Our interest rate under the Equipment Credit
Facility was also modified from Bank Prime plus one half percent (0.5%) to the
greater of (i) Bank Prime plus one percent (1.0%) or (ii) seven percent (7.0%).
On May 13, 2008, the Bank amended the Equipment Credit Facility and the
Revolving Credit Facility, modifying the our net income profitability covenant
requirements in exchange for a three quarters percent (0.75%) increase in our
interest rate and waiver restructuring fee equal to one half percent (0.5%) of
amounts outstanding under the Equipment Credit Facility and committed under the
Revolving Credit Facility. In addition, our term loan balance was to be factored
in when calculating our borrowing base under the Revolving Credit Facility.
On March 31, 2009, the Bank extended the expiration of the Revolving
Credit Facility under the same terms in order to allow both parties the time to
negotiate an expansion of the credit limit contingent upon our qualifying for an
Export-Import Bank loan guarantee.
On June 22, 2009, we entered into two separate credit facilities with
the Bank providing for credit lines of up to $8 million in the aggregate: (i) an
Amended and Restated Loan and Security Agreement (the "Restated Revolving Credit
Facility") pursuant to which the Bank agreed to provide us with a credit line of
up to $3 million and (ii) an Export-Import Bank Loan and Security Agreement (the
"Ex-Im Facility") pursuant to which the Bank agreed to provide us with a credit
line of up to $5 million to be guaranteed by the Export-Import Bank of the
United States (the "EXIM Bank").
Under the terms of the Restated Revolving Credit Facility, the Bank
agreed to provide us with a credit line of up to $3 million. Our obligations
under the Restated Revolving Credit Facility were secured by substantially all
of our assets. Advances under the Restated Revolving Credit Facility were
limited to 80% of eligible receivables. Interest on outstanding borrowings
accrued at a rate per annum equal to the greater of (i) the prime rate plus
1.75% or (ii) 7.75%; provided, however, that if we achieved positive net income
over a trailing 3-month period, interest on outstanding borrowings would drop
and accrue during such period at a rate per annum equal to the greater of (i)
the prime rate plus 0.75% or (ii) 6.75%. In addition, we agreed to pay the Bank
a monthly collateral monitoring fee in the event we are in default of our
covenants and agreed to the following additional terms: (i) $67.5 thousand
commitment fee; (ii) an unused line fee in the amount of 0.75% per annum of the
average unused portion of the revolving line; and (iii) an early termination fee
of 1.0% of the total credit line.
In addition, under the Restated Revolving Credit Facility, our existing
Equipment Credit Facility with the Bank was amended whereby we agreed with the
Bank that there would be no additional availability under such facility and,
based on an outstanding principal amount of $1.2 million on June 22, 2009, we
would continue to make monthly installments of principal of $97,222 plus accrued
interest until the outstanding balance was paid in full. Our interest rate with
respect to the outstanding balance was also modified so that interest accrues at
a rate per annum equal to the greater of (i) the prime rate plus 1.75% or (ii)
7.75%.
24
Under the terms of the Ex-Im Facility, the Bank agreed to provide us
with a credit line up to $5 million for working capital to be guaranteed by the
EXIM Bank. Our obligations under the Ex-Im Facility were secured by
substantially all of our assets. Advances under the Ex-Im Facility were limited
to (i) 90% of eligible receivables subject to a suitable foreign currency hedge
agreement if applicable, plus (ii) 75% of all other eligible receivables billed
in foreign currency, plus (iii) the lesser of 50% of the value of eligible
inventory, as defined, or $3 million. Interest on outstanding borrowings accrued
at a rate per annum equal to the greater of (i) the prime rate plus 1.75% or
(ii) 7.75%; provided, however, that if we achieved positive net income over a
trailing 3-month period, interest on outstanding borrowings would drop and
accrue during such period at a rate per annum equal to the greater of (i) the
prime rate plus 0.75% or (ii) 6.75%. In addition, in the event of an early
termination, we agreed to pay the Bank an early termination fee of 1.0% of the
total credit line.
Under the Restated Revolving Credit Facility and the Ex-Im Facility, as
long as any commitment remains outstanding under the facilities, we were
required to comply with a minimum tangible net worth covenant and a minimum
liquidity covenant. In addition, until all amounts under the credit facilities
with the Bank are repaid, covenants under the credit facilities impose
restrictions on our ability to, among other things, incur additional
indebtedness, create or permit liens on our assets, merge, consolidate or
dispose of assets (other than in the ordinary course of business), make dividend
and other restricted payments, make certain debt or equity investments, make
certain acquisitions, engage in certain transactions with affiliates or change
the business conducted by us. Any failure by us to comply with the covenants and
obligations under the credit facilities could result in an event of default, in
which case the Bank may be entitled to declare all amounts owed to be due and
payable immediately.
The Equipment Credit Facility principal balance outstanding was $875
thousand and $1.8 million at September 30, 2009 and December 31, 2008,
respectively. The principal balance outstanding under the Restated Revolving
Credit Facility (and the prior Revolving Credit Facility) was $1.5 million at
September 30, 2009 and December 31, 2008. Under the credit facilities we were
required to maintain a minimum tangible net worth (as defined) of $11.0 million
and minimum liquidity (as defined) of $4.0 million; our tangible net worth (as
defined) and liquidity (as defined) at September 30, 2009 was $4.7 million and
$7.2 million, respectively. We were not in compliance with our credit facilities
tangible net worth covenant as of September 30, 2009, and were unlikely to be in
compliance on a going forward basis. Accordingly, in November 2009, we entered
into amendment and restatements of our two credit facilities to more closely
match our business model and which contain a waiver of any prior financial
covenant defaults. The amended and restated credit facilities are described
below.
On November 16, 2009, we entered into two separate amended and restated
credit facilities with the Bank continuing to provide for credit lines of up to
$8 million in the aggregate: (i) a Second Amended and Restated Loan and Security
Agreement (the "Second Restated Revolving Credit Facility") pursuant to which
the Bank agreed to continue to provide us with a credit line of up to $3 million
and (ii) an Amendment and Restated Export-Import Bank Loan and Security
Agreement (the "Restated Ex-Im Facility") pursuant to which the Bank agreed to
continue to provide us with a credit line of up to $5 million to be guaranteed
by the EXIM Bank. The maturity date for each of these facilities is May 31,
2010.
Under the terms of the Second Restated Revolving Credit Facility, the
Bank agreed to continue to provide us with a credit line of up to $3 million.
Our obligations under the Second Restated Revolving Credit Facility are secured
by substantially all of our assets. Advances under the Second Restated Revolving
Credit Facility are limited to 80% of eligible receivables. Interest on
outstanding borrowings accrues at
25
a rate per annum equal to the greater of (i) the prime rate plus 3.0% or (ii)
9.0%; provided, however, that, subject to the sale of the Medical Products
Business Unit, if we achieve liquidity of at least $6 million over a multi-month
period, interest on outstanding borrowings drops and accrues during such period
at a rate per annum equal to the greater of (i) the prime rate plus 2.0% or (ii)
8.0%. In addition, if, after achieving the minimum $6 million liquidity test, we
achieve positive net income over a trailing 3-month period, interest on
outstanding borrowings drops further and accrues during such period at a rate
per annum equal to the greater of (i) the prime rate plus 1.5% or (ii) 7.5%.
Furthermore, we agreed to pay the Bank a monthly collateral handling fee and
agreed to the following additional terms: (i) $20 thousand restructure fee; and
(ii) in the event of an early termination, we agreed to pay the Bank an early
termination fee of $80 thousand.
In addition, under the Second Restated Revolving Credit Facility, with
respect to our outstanding term loan with the Bank, which has a balance of $681
thousand as of the date of the agreement, we must continue to make monthly
installments of principal of $97 thousand plus accrued interest until the
outstanding balance is paid in full. Interest on the term loan continues to
accrue at a rate per annum equal to the greater of (i) the prime rate plus 1.75%
or (ii) 7.75%.
Under the terms of the Restated Ex-Im Facility, the Bank agreed to
continue to provide us with a credit line up to $5 million for working capital
to be guaranteed by the EXIM Bank. Our obligations under the Restated Ex-Im
Facility are secured by substantially all of our assets. Advances under the
Restated Ex-Im Facility are limited to (i) 90% of eligible receivables subject
to a suitable foreign currency hedge agreement if applicable, plus (ii) 75% of
all other eligible receivables billed in foreign currency, plus (iii) the 50% of
the value of eligible inventory, as defined. Interest on outstanding borrowings
accrues at a rate per annum equal to the greater of (i) the prime rate plus 3.0%
or (ii) 9.0%; provided, however, that, subject to the sale of the Medical
Products Business Unit, if we achieve liquidity of at least $6 million over a
multi-month period, interest on outstanding borrowings drops and accrues during
such period at a rate per annum equal to the greater of (i) the prime rate plus
2.0% or (ii) 8.0%. In addition, if, after achieving the minimum $6 million
liquidity test, we achieve positive net income over a trailing 3-month period,
interest on outstanding borrowings drops and accrues during such period at a
rate per annum equal to the greater of (i) the prime rate plus 1.5% or (ii)
7.5%. In the event of an early termination, we agreed to pay the Bank an early
termination fee of $80 thousand.
Under the Second Restated Revolving Credit Facility and the Restated
Ex-Im Facility, as long as any commitment remains outstanding under the
facilities, we must comply with a minimum liquidity covenant. In addition, until
all amounts under the credit facilities with the Bank are repaid, covenants
under the credit facilities impose restrictions on our ability to, among other
things, incur additional indebtedness, create or permit liens on our assets,
merge, consolidate or dispose of assets (other than in the ordinary course of
business), make dividend and other restricted payments, make certain debt or
equity investments, make certain acquisitions, engage in certain transactions
with affiliates or change the business conducted by us and our subsidiaries. Any
failure by us to comply with the covenants and obligations under the credit
facilities could result in an event of default, in which case the Bank may be
entitled to declare all amounts owed to be due and payable immediately.
GAINS ON TERMINATION OF CONTRACTS
On August 29, 2008, we delivered to Principia Lightworks, Inc.
("Principia") a Notice of Breach and Pending Termination (the "Notice") of a
certain Manufacturing Agreement, dated August 29, 2006, by and between Spire
Semiconductor and Principia (the "Manufacturing Agreement"). Under the terms of
the Manufacturing Agreement, Principia made an up-front payment for nonrecurring
engineering and facility access costs and was required to make monthly facility
availability payments throughout the term of the agreement. As a result of
Principia's failure to make monthly facility availability payments in 2008, we
have fully reserved $225 thousand against Principia's accounts receivable
balance. We entered into a mutual standstill agreement with Principia, which
expired on March 15, 2009. The purpose of the standstill was to give the parties
additional time to negotiate a resolution.
On March 27, 2009, Spire Semiconductor and Principia mutually agreed to
terminate the Manufacturing Agreement for convenience and entered into a
separation and novation agreement (the "Novation Agreement"). Under the terms of
the Novation Agreement, both parties agreed to terminate technology licenses
that were granted to each other under the terms of the Manufacturing Agreement
and Spire Semiconductor was released from its production requirements to
Principia. Principia was released from paying its future facility availability
payments due under the Manufacturing Agreement but will be required to pay
facility availability payments of $300 thousand. Spire Semiconductor holds
67,500 shares of Principia stock as collateral against the outstanding facility
availability payments. During the three months ended March 31, 2009, we
accelerated the amortization of deferred revenue and recognized $1.54 million as
a gain on termination of contract related to the termination of the
Manufacturing Agreement.
In connection with our Manufacturing Agreement with Principia, during
fiscal 2007 we invested approximately $3.8 million in equipment, which would
allow us to produce optoelectronic devices on a commercial basis. This was in
anticipation of future revenues under the Manufacturing Agreement; Principia
provided a non-refundable up front payment to partially offset our investment.
Since the termination of the agreement, we are using this equipment for our
other customers and are performing research and development of solar
concentrator cells, which we expect to be able to commercialize.
On June 18, 2009, we entered into a settlement agreement with Marubeni
Corporation with respect to The License to Manufacture and Distribute Equipment
Agreement (the "License Agreement") dated April 1, 2003 for the license of
manufacturing and distribution in Japan of our solar photovoltaic modular
manufacturing equipment. Under the terms of the settlement agreement, both
parties agreed to terminate the License Agreement including but not limited to
the eighteen (18) month non-compete obligation. As a result of the settlement,
we received a payment of $200 thousand in the second quarter of 2009.
UNI-CHEM AGREEMENTS
On August 26, 2009, we entered into a Purchase and Sale Agreement for
60MW Solar Cell Production Line (the "Cell Line Agreement") to provide Uni-CHEM
Co., Ltd., a South Korean company ("Uni-Chem"), a 60 megawatt turn-key
multi-crystalline cell manufacturing line (the "Cell Line") for $21.75 million.
Assuming satisfaction of certain contingent obligations, including a down
payment, the Cell Line is expected to ship in 2010 and is subject to finalizing
various design, manufacturing and performance specifications. The down payment
has not yet been received.
In addition, on August 26, 2009, we entered into a Purchase and Sale
Agreement for 50MW Solar Module Production Line (the "Module Line Agreement") to
provide Uni-Chem a 50 megawatt turn-key module manufacturing line (the "Module
Line") for $13.25 million. Assuming satisfaction of certain contingent
obligations, including a down payment, the Module
26
Line is expected to ship in 2010 and is subject to finalizing various design,
manufacturing and performance specifications. The down payment has not yet been
received.
Finally, concurrently with the execution of the Cell Line Agreement and
the Module Line Agreement, we entered into a Project Management Agreement for
Utilities & Infrastructure Supply for Spire Cell and Module Line (the "Project
Management Agreement") under which we agreed to provide Uni-Chem with certain
utilities and infrastructure support services for the Cell Line and the Module
Line. The aggregate price for these services is $11.5 million which will be paid
over time as these services are provided.
Under a Memorandum of Agreement, Uni-Chem was to make a $2.0 million
non-refundable deposit to us creditable towards the Module Line Agreement if
Uni-Chem makes all initial down payments under the three projects noted above.
Uni-Chem has paid $1.0 million of this deposit and the parties signed
amendments, which extended the next payment due on or before November 20, 2009.
Foreign Currency Fluctuation
We sell only in U.S. dollars, generally against an irrevocable confirmed
letter of credit through a major United States bank. Accordingly, we are not
directly affected by foreign exchange fluctuations on our current orders.
However, fluctuations in foreign exchange rates do have an effect on our
customers' access to U.S. dollars and on the pricing competition on certain
pieces of equipment that we sell in selected markets. In addition, purchases
made and historic royalties received under our Consortium Agreement with
Nisshinbo are in Japanese yen. In addition, we received Japanese yen related to
the termination of the Consortium Agreement in 2008. We have committed to
purchase certain pieces of equipment from European and Japanese vendors; these
commitments are denominated in Euros and Yen, respectively. We bear the risk of
any currency fluctuations that may be associated with these commitments. We
attempt to hedge known transactions when possible to minimize foreign exchange
risk. Foreign exchange gain (loss) included in other income (expense) was $(174)
thousand and $16 thousand for the three months ended September 30, 2009 and
2008, respectively and $(35) thousand and $(392) thousand for the nine months
ended September 30, 2009 and 2008, respectively.
Related Party Transactions
On November 30, 2007, we entered into a Lease Agreement (the "Bedford
Lease") with SPI-Trust, a Trust of which Roger Little, our Chairman of the
Board, Chief Executive Officer and President, is the sole trustee and principal
beneficiary, with respect to 144,230 square feet of space comprising the entire
building in which we have occupied space since December 1, 1985. The term of the
Bedford Lease commenced on December 1, 2007 and continues for five (5) years
until November 30, 2012. We have the right to extend the term of the Bedford
Lease for an additional five (5) year period. The annual rental rate for the
first year of the Lease is $12.50 per square foot on a triple net basis, whereby
the tenant is responsible for operating expenses, taxes and maintenance of the
building. The annual rental rate increases on each anniversary by $0.75 per
square foot. If we exercise our right to extend the term of the Bedford Lease,
the annual rental rate for the first year of the extended term will be the
greater of (a) the rental rate in effect immediately preceding the commencement
of the extended term or (b) the market rate at such time, and on each
anniversary of the commencement of the extended term the rental rate will
increase by $0.75 per square foot. We believe that the terms of the Bedford
Lease are commercially reasonable. Rent expense under the Bedford Lease was $505
thousand for both the three months ended September 30, 2009 and 2008 and was
$1.5 million for both the nine months ended September 30, 2009 and 2008.
In May 2003, Spire Semiconductor leased a building (90 thousand square
feet) in Hudson, New Hampshire from SPI-Trust whereby we agreed to pay $4.1
million to SPI-Trust over an initial five-year term expiring in May 2008 with an
option for us to extend for five years. In addition to the rent payments, the
lease obligated us to keep on deposit with SPI-Trust the equivalent of three
months rent. The lease agreement did not provide for a transfer of ownership at
any point. Interest costs were assumed at 7%. Interest expense was approximately
$8.4 thousand for the nine months ended September 30, 2008. This lease was
classified as a related party capital lease and a summary of payments (including
interest) follows:
Rate Per Annual Monthly Security
Year Square Foot Rent Rent Deposit
----------------------------------------------------------- -------- --------
(in thousands, except rate per square foot)
June 1, 2003 - May 31, 2004 $ 6.00 $ 540 $ 45 $ 135
June 1, 2004 - May 31, 2005 7.50 675 56 169
June 1, 2005 - May 31, 2006 8.50 765 64 191
June 1, 2006 - May 31, 2007 10.50 945 79 236
June 1, 2007 - May 31, 2008 $ 13.50 $ 1,215 $ 101 $ 304
--------
$ 4,140
========
27
Upon the expiration of the lease in May 2008, we did not exercise our
option to extend the lease for an additional 5 years. On May 20, 2008, we agreed
with SPI-Trust to continue the current lease, under the current terms and
conditions on a month-to-month basis for a maximum of three (3) months beyond
the current term.
On August 29, 2008, we entered into a new Lease Agreement (the "Hudson
Lease") with SPI-Trust, with respect to 90 thousand square feet of space
comprising the entire building in which Spire Semiconductor has occupied space
since June 1, 2003. The term of the Hudson Lease commenced on September 1, 2008,
and continues for seven (7) years until August 31, 2015. We have the right to
extend the term of the Hudson Lease for an additional five (5) year period. The
annual rental rate for the first year of the Hudson Lease is $12.50 per square
foot on a triple-net basis, whereby the tenant is responsible for operating
expenses, taxes and maintenance of the building. The annual rental rate
increases on each anniversary by $0.75 per square foot. If we exercise our right
to extend the term of the Hudson Lease, the annual rental rate for the first
year of the extended term will be the greater of: (a) the rental rate in effect
immediately preceding the commencement of the extended term; or (b) the market
rate at such time, and on each anniversary of the commencement of the extended
term the rental rate will increase by $0.75 per square foot. In addition, we are
required to deposit with SPI-Trust $300 thousand as security for performance by
us for our covenants and obligations under the Hudson Lease. SPI-Trust is
responsible, at its sole expense, to make certain defined tenant improvements to
the building. We believe that the terms of the Hudson Lease are commercially
reasonable and reflective of market rates. The lease agreement does not provide
for a transfer of ownership at any point. The Hudson Lease is classified as a
related party operating lease. Rent expense under the Hudson Lease was $332
thousand and $111 thousand the three months ended September 30, 2009 and 2008,
respectively and $996 thousand and $111 thousand the nine months ended September
30, 2009 and 2008, respectively.
Critical Accounting Policies
----------------------------
The preparation of financial statements in accordance with accounting
principles generally accepted in the United States requires us to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Among the significant estimates affecting our consolidated
financial statements are those relating to revenue recognition, reserves for
doubtful accounts and sales returns and allowances, reserve for excess and
obsolete inventory, impairment of long-lived assets, income taxes, and warranty
reserves. We regularly evaluate our estimates and assumptions based upon
historical experience and various other factors that it believes to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. To the extent actual results differ
from those 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 Note 2 of the notes to consolidated financial statements in
our Annual Report on Form 10-K for the year ended December 31, 2008 for a
description of our significant accounting policies.
REVENUE RECOGNITION
We derive our revenues from three primary sources: (1) commercial
products including, but not limited to, solar energy manufacturing equipment
solar energy materials, 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.
Our OEM capital equipment solar energy business builds complex
customized machines to order for specific customers. Most orders are sold on a
FOB Bedford, Massachusetts (or EX-Works Factory) basis and other orders are sold
on a CIP or on rare situations a DDU basis. It is our policy to recognize
revenues for this equipment as title of the product has passed to the customer,
as customer acceptance is obtained prior to shipment and the equipment is
expected to operate the same in the customer's environment as it does in our
environment. When an arrangement with the customer includes future obligations
or customer acceptance, revenue is recognized when those obligations are met or
customer acceptance has been achieved. For arrangements with multiple elements,
we allocate fair value to each element in the contract and revenue is recognized
upon
28
delivery of each element. If we are not able to establish fair value of
undelivered elements, all revenue is deferred.
We recognize revenues and estimated profits on long-term government
contracts on the accrual basis where the circumstances are such that total
profit can be estimated with reasonable accuracy and ultimate realization is
reasonably assured. We accrue revenue and profit utilizing the percentage of
completion method using a cost-to-cost methodology. A percentage of the contract
revenues and estimated profits is determined utilizing the ratio of costs
incurred to date to total estimated cost to complete on a contract by contract
basis. Profit estimates are revised periodically based upon changes and facts,
and any losses on contracts are recognized immediately. Some of the contracts
include provisions to withhold a portion of the contract value as retainage
until such time as the United States government performs an audit of the cost
incurred under the contract. Our policy is to take into revenue the full value
of the contract, including any retainage, as we perform against the contract
because we have not experienced any substantial losses as a result of audits
performed by the United States government.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
We maintain allowances for doubtful accounts for estimated losses
resulting from the inability of our customers to pay amounts due. We actively
pursue collection of past due receivables as the circumstances warrant.
Customers are contacted to determine the status of payment and senior accounting
and operations management are included in these efforts as is deemed necessary.
A specific reserve will be established for past due accounts when it is probable
that a loss has been incurred and we can reasonably estimate the amount of the
loss. We do not record an allowance for government receivables and invoices
backed by letters of credit as realizability is reasonably assured. Bad debts
are written off against the allowance when identified. There is no dollar
threshold for account balance write-offs. While rare, a write-off is only
recorded when all efforts to collect the receivable have been exhausted and only
in consultation with the appropriate business line manager.
IMPAIRMENT OF LONG-LIVED ASSETS
Long-lived assets, such as property and equipment and amortizable
intangibles, are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. The determination of recoverability is based on fair value. If the
fair value is less than the carrying value, we recognize an impairment loss to
operations in the period in which impairment is determined. Impairment is
measured as the amount by which the carrying value exceeds the fair value of the
asset.
STOCK-BASED COMPENSATION
We account for our stock-based compensation plans in accordance with the
fair value recognition provisions of ASC 718, COMPENSATION - STOCK COMPENSATION.
We use the Black-Scholes option pricing model as our method for determining the
fair value of stock option grants. ASC 718 requires the fair value of all
share-based awards that are expected to vest to be recognized in the statements
of operations over the service or vesting period of each award. We use the
straight-line method of attributing the value of stock-based compensation
expense for all stock option grants.
We have elected to adopt the alternative transition method provided by
ASC 718 for calculating the tax effects (if any) of stock-based compensation
expense pursuant to ASC 718. The alternative transition method includes
simplified methods to establish the beginning balance of the additional paid-in
capital pool related to the tax effects of employee stock-based compensation,
and to determine the subsequent impact to the additional paid-in capital pool
and the consolidated statements of operations and cash flows of the tax effects
of employee stock-based compensation awards that are outstanding upon adoption
of ASC 718.
WARRANTY
We provide warranties on certain products and services. Our warranty
programs are described below:
Spire Solar Equipment warrants solar energy module manufacturing
equipment sold for a total of 360 days, the first 90 days of which include the
replacement of defective component parts and the labor to correct the defect and
the next 270 days of which include only the cost of defective component parts.
Spire Biomedical warrants that any of its catheter products found to be
defective will be replaced. No warranty is made that the failure of the product
will not occur, and we disclaim any responsibility for any medical
complications. Spire Biomedical warrants that its services only will meet the
agreed upon specifications.
Spire Semiconductor warrants that its products will meet the agreed upon
specifications.
29
We provide for the estimated cost of product warranties, determined
primarily from historical information, at the time product revenue is
recognized. Should actual product failure warranties differ from our estimates,
revisions to the estimated warranty liability would be required. The changes in
the product warranties for the nine months ended September 30, 2009, are as
follows:
(in thousands)
Balance at December 31, 2008 $ 495
Provision charged to income 668
Usage (427)
--------
Balance at September 30, 2009 $ 736
========
Contractual Obligations, Commercial Commitments and Off-Balance Sheet
---------------------------------------------------------------------
Arrangements
------------
The following table summarizes our gross contractual obligations at September
30, 2009 and the maturity periods and the effect that such obligations are
expected to have on our liquidity and cash flows in future periods:
Payments Due by Period
----------------------------------------------------------------------
Less than 2 - 3 4 - 5 More Than
Contractual Obligations Total 1 Year Years Years 5 Years
---------------------------------------- ---------- ---------- ---------- ---------- ----------
(in thousands)
Equipment Credit Facility (SVB) $ 904 $ 904 -- -- --
Restated Revolving Credit Facility (SVB) $ 1,500 $ 1,500 -- -- --
Purchase obligations $ 7,560 $ 7,377 $ 183 -- --
Unrelated party capital leases $ 187 $ 54 $ 106 $ 27
Operating leases:
Unrelated party operating leases $ 360 $ 170 $ 146 $ 44 --
Related party operating leases $ 14,796 $ 3,199 $ 6,926 $ 3,241 $ 1,403
Purchase obligations include all open purchase orders outstanding
regardless of whether they are cancelable or not. Included in purchase
obligations are raw material and equipment needed to fulfill customer orders.
Equipment Credit Facility obligations outlined above include both the
principal and interest components of these contractual obligations.
Outstanding letters of credit totaled $1.4 million and $4.2 million at
September 30, 2009 and December 31, 2008, respectively. The letters of credit
secure performance obligations and purchase commitments, and allow holders to
draw funds up to the face amount of the letter of credit if we do not perform as
contractually required. These letters of credit expire through 2010 and are 100%
secured by cash, short-term investments and the Restated Revolving Credit
Facility.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not required as we are a smaller reporting company.
ITEM 4T. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
------------------------------------------------
Our management, under the supervision of and with the participation of
the Chief Executive Officer and Chief Financial Officer, performed an evaluation
of the effectiveness of our disclosure controls and procedures (as defined in
Rules 13a-15(e) under the Securities Exchange Act of 1934 (the "Exchange Act"))
as of the end of the period covered by this report, September 30, 2009.
30
Based on its evaluation, and taking into consideration the material
weaknesses in internal control over financial reporting referenced below, our
management, including the Chief Executive Officer and Chief Financial Officer,
concluded that our disclosure controls and procedures were not effective as of
September 30, 2009.
As previously reported in our Annual Report on Form 10-K, as filed with
the Securities and Exchange Commission (SEC) on March 31, 2009, in connection
with our assessment of the effectiveness of our internal control over financial
reporting at the end of our last fiscal year, management identified material
weaknesses in the internal control over financial reporting as of December 31,
2008.
We have an ineffective control environment. This has been previously
disclosed in prior filings. Management has designed and implemented some
effective controls, however, these controls are not sufficient and are not
operating effectively. Efforts to remediate deficiencies were impeded by an
evolving control environment brought on by the rapid expansion in our business.
We did not maintain an effective financial reporting process, ensure timely and
accurate completion of financial statements and we did not maintain effective
monitoring controls including reconciliations and analysis of key accounts. We
did not have a sufficient level of staffing with the necessary knowledge,
experience and training to ensure the completeness and accuracy of our financial
statements. In addition, certain finance positions were staffed with individuals
who did not possess the level of accounting knowledge, experience and training
in the application of US GAAP commensurate with our financial reporting
requirements. Specifically, the financial reporting organization structure was
not adequate to support the size, complexity or activities of our Company.
This affected our ability to maintain effective monitoring controls and
related segregation of duties over automated and manual transactions processes.
Specifically, inadequate segregation of duties led to untimely identification
and resolution of accounting and disclosure matters and failure to perform
timely and effective supervision and reviews. We did not maintain effective
controls over our IT environment. Specifically, we did not perform a timely
review of restricted user access in our application software system and we did
not consistently follow our defined back up polices and procedures.
As a result of the foregoing, management concluded that our internal
control over financial reporting was not effective as of December 31, 2008.
Management is actively addressing operational and internal control
remediation efforts. New policies and procedures have been created and existing
policies and procedures have been reviewed and modified as part of our
documentation of internal control over financial reporting. Management believes
these new controls, policies and procedures, training of key personnel, and
testing of these key controls will be effective in remediating these material
weaknesses. Management reports quarterly to our Audit Committee on the status of
the remediation effort.
Management has partially addressed the need for additional experienced
staff with the addition of a Director of Financial Reporting (February 2008) who
has the primary responsibility for the financial close and reporting process and
monitoring environment related to financial reporting. We also hired a Senior
Financial Analyst, CPA (July 2008) who is actively involved in the financial
close and reporting process and assisting us in our remediation efforts. In
addition, we hired a Corporate Controller (April 2009) who adds accounting
knowledge, experience and applications of US GAAP. These positions will help us
address the identified weakness in the knowledge and experience required for
completeness and accuracy of our financial statements and will also help improve
our overall financial close and reporting process.
In connection with the findings of our review related to the November
2008 restatement of our previously issued financial statements for the fourth
quarter and fiscal 2007 included in our Annual Report on From 10-K for the
fiscal year ended December 31, 2007 and our previously issued financial
statements included in the Quarterly Report on Form 10-Q for the fiscal quarters
ended March 31, 2008 and June 30, 2008, management and the Audit Committee
reviewed the additional internal control procedures and processes that have been
implemented since the original date of the error and have identified additional
remediation steps to address the material weakness of untimely reporting of
customer contract changes. We have implemented new internal controls and
enhanced accounting policies, as well as improved sales policies and procedures
relating to customer contract management and order fulfillment.
Changes in Internal Control Over Financial Reporting
----------------------------------------------------
Except as described above, there have been no changes during our fiscal
quarter ended September 30, 2009 in our internal control over financial
reporting that may have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
During the second quarter of 2005, a suit was filed by Arrow
International, Inc. against Spire Biomedical, Inc., a wholly owned subsidiary of
the Company, alleging that Company's sales of its Pourchez RetroTM catheter
infringed U.S. Patent 6,872,198 owned by Arrow. Arrow alleged that the Company's
sales of its Pourchez RetroTM catheter infringed U.S. Patent 6,872,198 owned by
Arrow. The complaint claimed Retro catheter product induced and contributed to
infringement when medical professionals inserted it. The Company responded to
the complaint denying all allegations and filed certain counterclaims. The
Company also filed a motion for summary judgment, asserting patent invalidity
resulting from plaintiff's failure to follow the administrative procedures of
the U.S. Patent and Trademark Office ("USPTO"). On August 4, 2006, the Court
granted the Company's motion and dismissed this lawsuit without prejudice.
Plaintiffs applied to revive the applicable patent, which application was
granted by the USPTO later in August 2006. Plaintiffs refiled their lawsuit
against the Company on August 31, 2006. On July 10, 2009, the Federal District
Court for the District of Massachusetts granted summary judgment in favor of
Spire Biomedical on the ground that the asserted claims of the `198 patent were
invalid for obviousness. Arrow and Spire Biomedical have agreed that neither
party will appeal the court's ruling thereby ending the suit.
ITEM 1A. RISK FACTORS
There have been no material changes in the Risk Factors described in
Part I, Item 1A ("Risk Factors") of our Annual Report on Form 10-K for the year
ended December 31, 2008.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
UNI-CHEM AGREEMENTS
On August 26, 2009, we entered into a Purchase and Sale Agreement for
60MW Solar Cell Production Line (the "Cell Line Agreement") to provide Uni-CHEM
Co., Ltd., a South Korean company ("Uni-Chem"), a 60 megawatt turn-key
multi-crystalline cell manufacturing line (the "Cell Line") for $21.75 million.
Assuming satisfaction of certain contingent obligations, including a down
payment, the Cell Line is expected to ship in 2010 and is subject to finalizing
various design, manufacturing and performance specifications. The down payment
has not yet been received.
In addition, on August 26, 2009, we entered into a Purchase and Sale
Agreement for 50MW Solar Module Production Line (the "Module Line Agreement") to
provide Uni-Chem a 50 megawatt turn-key module manufacturing line (the "Module
Line") for $13.25 million. Assuming satisfaction of certain contingent
obligations, including a down payment, the Module Line is expected to ship in
2010 and is subject to finalizing various design, manufacturing and performance
specifications. The down payment has not yet been received.
Finally, concurrently with the execution of the Cell Line Agreement and
the Module Line Agreement, we entered into a Project Management Agreement for
Utilities & Infrastructure Supply for Spire Cell and Module Line (the "Project
Management Agreement") under which we agreed to provide Uni-Chem with certain
utilities and infrastructure support services for the Cell Line and the Module
Line. The aggregate price for these services is $11.5 million which will be paid
over time as these services are provided.
Under a Memorandum of Agreement, Uni-Chem was to make a $2.0 million
non-refundable deposit to us creditable towards the Module Line Agreement if
Uni-Chem makes all initial down payments under the three projects noted above.
Uni-Chem has paid $1.0 million of this deposit and the parties signed
amendments, which extended the next payment due on or before November 20, 2009.
31
LOAN AGREEMENTS
On November 16, 2009, we entered into two separate amended and restated
credit facilities with the Bank continuing to provide for credit lines of up to
$8 million in the aggregate: (i) a Second Amended and Restated Loan and Security
Agreement (the "Second Restated Revolving Credit Facility") pursuant to which
the Bank agreed to continue to provide us with a credit line of up to $3 million
and (ii) an Amendment and Restated Export-Import Bank Loan and Security
Agreement (the "Restated Ex-Im Facility") pursuant to which the Bank agreed to
continue to provide us with a credit line of up to $5 million to be guaranteed
by the EXIM Bank. The maturity date for each of these facilities is May 31,
2010.
Under the terms of the Second Restated Revolving Credit Facility, the
Bank agreed to continue to provide us with a credit line of up to $3 million.
Our obligations under the Second Restated Revolving Credit Facility are secured
by substantially all of our assets. Advances under the Second Restated Revolving
Credit Facility are limited to 80% of eligible receivables. Interest on
outstanding borrowings accrues at a rate per annum equal to the greater of (i)
the prime rate plus 3.0% or (ii) 9.0%; provided, however, that, subject to the
sale of the Medical Products Business Unit, if we achieve liquidity of at least
$6 million over a multi-month period, interest on outstanding borrowings drops
and accrues during such period at a rate per annum equal to the greater of (i)
the prime rate plus 2.0% or (ii) 8.0%. In addition, if, after achieving the
minimum $6 million liquidity test, we achieve positive net income over a
trailing 3-month period, interest on outstanding borrowings drops further and
accrues during such period at a rate per annum equal to the greater of (i) the
prime rate plus 1.5% or (ii) 7.5%. Furthermore, we agreed to pay the Bank a
monthly collateral handling fee and agreed to the following additional terms:
(i) $20 thousand restructure fee; and (ii) in the event of an early termination,
we agreed to pay the Bank an early termination fee of $80 thousand.
In addition, under the Second Restated Revolving Credit Facility, with
respect to our outstanding term loan with the Bank, which has a balance of $681
thousand as of the date of the agreement, we must continue to make monthly
installments of principal of $97 thousand plus accrued interest until the
outstanding balance is paid in full. Interest on the term loan continues to
accrue at a rate per annum equal to the greater of (i) the prime rate plus 1.75%
or (ii) 7.75%.
Under the terms of the Restated Ex-Im Facility, the Bank agreed to
continue to provide us with a credit line up to $5 million for working capital
to be guaranteed by the EXIM Bank. Our obligations under the Restated Ex-Im
Facility are secured by substantially all of our assets. Advances under the
Restated Ex-Im Facility are limited to (i) 90% of eligible receivables subject
to a suitable foreign currency hedge agreement if applicable, plus (ii) 75% of
all other eligible receivables billed in foreign currency, plus (iii) the 50% of
the value of eligible inventory, as defined. Interest on outstanding borrowings
accrues at a rate per annum equal to the greater of (i) the prime rate plus 3.0%
or (ii) 9.0%; provided, however, that, subject to the sale of the Medical
Products Business Unit, if we achieve liquidity of at least $6 million over a
multi-month period, interest on outstanding borrowings drops and accrues during
such period at a rate per annum equal to the greater of (i) the prime rate plus
2.0% or (ii) 8.0%. In addition, if, after achieving the minimum $6 million
liquidity test, we achieve positive net income over a trailing 3-month period,
interest on outstanding borrowings drops and accrues during such period at a
rate per annum equal to the greater of (i) the prime rate plus 1.5% or (ii)
7.5%. In the event of an early termination, we agreed to pay the Bank an early
termination fee of $80 thousand.
Under the Second Restated Revolving Credit Facility and the Restated
Ex-Im Facility, as long as any commitment remains outstanding under the
facilities, we must comply with a minimum liquidity covenant. In addition, until
all amounts under the credit facilities with the Bank are repaid, covenants
under the credit facilities impose restrictions on our ability to, among other
things, incur additional indebtedness, create or permit liens on our assets,
merge, consolidate or dispose of assets (other than in the ordinary course of
business), make dividend and other restricted payments, make certain debt or
equity investments, make certain acquisitions, engage in certain transactions
with affiliates or change the business conducted by us and our subsidiaries. Any
failure by us to comply with the covenants and obligations under the credit
facilities could result in an event of default, in which case the Bank may be
entitled to declare all amounts owed to be due and payable immediately.
ITEM 6. EXHIBITS
2.5 Asset Purchase Agreement, dated September 4, 2009, by and
among Bard Access Systems, Inc. and Spire Biomedical, Inc. and
Spire Corporation *
2.6 Extension dated September 25, 2009 of Asset Purchase
Agreement, dated September 4, 2009, by and among Bard Access
Systems, Inc. and Spire Biomedical, Inc. and Spire Corporation
*
2.7 Extension dated October 30, 2009 of Asset Purchase Agreement,
dated September 4, 2009, by and among Bard Access Systems,
Inc. and Spire Biomedical, Inc. and Spire Corporation *
32
10(ah) Waiver Agreement, dated August 13, 2009, related to the
Amended and Restated Loan and Security Agreement, dated June
22, 2009, among Spire Corporation, Spire Solar, Inc., Spire
Biomedical, Inc., Spire Semiconductor, LLC and Silicon Valley
Bank.
10(ai) Purchase and Sale Agreement for 60MW Solar Cell Production
Line, dated August 26, 2009, by and between Spire Corporation
and Uni-CHEM Co., Ltd.+
10(aj) Purchase and Sale Agreement for 50MW Solar Module Production
Line, dated August 26, 2009, by and between Spire Corporation
and Uni-CHEM Co., Ltd.+
10(ak) Project Management Agreement for Utilities & Infrastructure
Supply for Spire Cell and Module Line, dated August 26, 2009,
by and between Spire Corporation and Uni-CHEM Co., Ltd.+
10(al) Memorandum of Agreement, dated August 26, 2009, between Spire
Corporation and Uni-CHEM Co., Ltd.
10(am) Amendment No. 1 to Purchase and Sale Agreement for 60MW Solar
Cell Production Line, dated September 17, 2009, between Spire
Corporation and Uni-CHEM Co., Ltd.
10(an) Amendment No. 1 to Purchase and Sale Agreement for 50MW Solar
Module Production Line, dated September 17, 2009, between
Spire Corporation and Uni-CHEM Co., Ltd.
10(ao) Amendment No. 1 to Memorandum of Agreement, dated September
17, 2009, between Spire Corporation and Uni-CHEM Co., Ltd.
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.
* The Company agrees to furnish supplementally to the Securities and
Exchange Commission (the "Commission") a copy of any omitted schedule
or exhibit to this agreement upon request by the Commission.
+ Portions of this Exhibit have been omitted pursuant to a request for
confidential treatment.
33
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Spire Corporation
Dated: November 16, 2009 By: /s/ Roger G. Little
--------------------------------------
Roger G. Little
Chairman of the Board, Chief Executive
Officer and President
(Principal Executive Officer)
Dated: November 16, 2009 By: /s/ Christian Dufresne
-----------------------------------
Christian Dufresne, Ph. D.
Chief Financial Officer and Treasurer
(Principal Financial Officer and Chief
Accounting Officer)
34
EXHIBIT INDEX
Exhibit Description
------- -----------
2.5 Asset Purchase Agreement, dated September 4, 2009, by and among
Bard Access Systems, Inc. and Spire Biomedical, Inc. and Spire
Corporation *
2.6 Extension dated September 25, 2009 of Asset Purchase Agreement,
dated September 4, 2009, by and among Bard Access Systems, Inc. and
Spire Biomedical, Inc. and Spire Corporation *
2.7 Extension dated October 30, 2009 of Asset Purchase Agreement, dated
September 4, 2009, by and among Bard Access Systems, Inc. and Spire
Biomedical, Inc. and Spire Corporation *
10(ah) Waiver Agreement, dated August 13, 2009, related to the Amended and
Restated Loan and Security Agreement, dated June 22, 2009, among
Spire Corporation, Spire Solar, Inc., Spire Biomedical, Inc., Spire
Semiconductor, LLC and Silicon Valley Bank.
10(ai) Purchase and Sale Agreement for 60MW Solar Cell Production Line,
dated August 26, 2009, by and between Spire Corporation and
Uni-CHEM Co., Ltd.+
10(aj) Purchase and Sale Agreement for 50MW Solar Module Production Line,
dated August 26, 2009, by and between Spire Corporation and
Uni-CHEM Co., Ltd.+
10(ak) Project Management Agreement for Utilities & Infrastructure Supply
for Spire Cell and Module Line, dated August 26, 2009, by and
between Spire Corporation and Uni-CHEM Co., Ltd.+
10(al) Memorandum of Agreement, dated August 26, 2009, between Spire
Corporation and Uni-CHEM Co., Ltd.
10(am) Amendment No. 1 to Purchase and Sale Agreement for 60MW Solar Cell
Production Line, dated September 17, 2009, between Spire
Corporation and Uni-CHEM Co., Ltd.
10(an) Amendment No. 1 to Purchase and Sale Agreement for 50MW Solar
Module Production Line, dated September 17, 2009, between Spire
Corporation and Uni-CHEM Co., Ltd.
10(ao) Amendment No. 1 to Memorandum of Agreement, dated September 17,
2009, between Spire Corporation and Uni-CHEM Co., Ltd.
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.
* The Company agrees to furnish supplementally to the Securities and
Exchange Commission (the "Commission") a copy of any omitted
schedule or exhibit to this agreement upon request by the
Commission.
+ Portions of this Exhibit have been omitted pursuant to a request
for confidential treatment.
35