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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 June 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
August 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
June 30, 2009 and December 31, 2008 ............................. 1
Unaudited Condensed Consolidated Statements of Operations for
the Three and Six Months Ended June 30, 2009 and 2008 ......... 2
Unaudited Condensed Consolidated Statements of Cash Flows for
the Six Months Ended June 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 ...................................... 14
Item 3. Quantitative and Qualitative Disclosures About Market Risk....... 25
Item 4T. Controls and Procedures ........................................ 25
PART II. OTHER INFORMATION
Item 1. Legal Proceedings .............................................. 27
Item 1A. Risk Factors .................................................... 27
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds...... 27
Item 3. Defaults Upon Senior Securities ................................ 27
Item 4. Submission of Matters to a Vote of Security Holders ............ 27
Item 5. Other Information .............................................. 27
Item 6. Exhibits ....................................................... 27
Signatures ..................................................... 28
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)
June 30, December 31,
2009 2008
------------ ------------
ASSETS
Current assets
--------------
Cash and cash equivalents $ 3,463 $ 5,971
Restricted cash - current portion 1,542 4,167
------------ ------------
5,005 10,138
Accounts receivable - trade, net 5,464 8,098
Inventories, net 16,955 16,855
Deferred cost of goods sold 19,429 17,088
Deposits on equipment for inventory 2,191 3,419
Prepaid expenses and other current assets 529 424
Current assets of discontinued operations and assets held for sale 1,417 1,854
------------ ------------
Total current assets 50,990 57,876
Property and equipment, net 5,904 6,075
Intangible and other assets, net 752 480
Available-for-sale investments, at quoted market value (cost of $1,658 and
$1,859 at June 30, 2009 and December 31, 2008, respectively) 1,636 1,434
Equity investment in joint venture 450 1,473
Deposit - related party 300 300
Non-current assets of discontinued operations and assets held for sale 368 380
------------ ------------
Total other assets 3,506 4,067
------------ ------------
Total assets $ 60,400 $ 68,018
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
-------------------
Current portion of equipment and revolving line of credit $ 2,667 $ 2,667
Accounts payable 6,059 4,842
Accrued liabilities 6,901 8,150
Current portion of advances on contracts in progress 33,613 34,509
Liabilities of discontinued operations 883 873
------------ ------------
Total current liabilities 50,123 51,041
Long-term portion of equipment line of credit -- 583
Long-term portion of advances on contracts in progress 6 1,149
Deferred compensation 1,636 1,434
Other long-term liabilities 448 293
------------ ------------
Total long-term liabilities 2,090 3,459
------------ ------------
Total liabilities 52,213 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
June 30, 2009 and December 31, 2008, respectively 83 83
Additional paid-in capital 21,124 20,774
Accumulated deficit (12,998) (6,914)
Accumulated other comprehensive loss (22) (425)
------------ ------------
Total stockholders' equity 8,187 13,518
------------ ------------
Total liabilities and stockholders' equity $ 60,400 $ 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 JUNE 30, SIX MONTHS ENDED JUNE 30,
---------------------------- ----------------------------
2009 2008 2009 2008
------------ ------------ ------------ ------------
Net sales and revenues
----------------------
Sales of goods $ 19,028 $ 12,579 $ 27,550 $ 22,679
Contract research, service and license revenues 3,145 3,375 6,010 6,918
------------ ------------ ------------ ------------
Total net sales and revenues 22,173 15,954 33,560 29,597
------------ ------------ ------------ ------------
Costs of sales and revenues
---------------------------
Cost of goods sold 18,127 8,364 25,985 16,237
Cost of contract research, services and licenses 2,269 2,342 4,433 4,716
------------ ------------ ------------ ------------
Total cost of sales and revenues 20,396 10,706 30,418 20,953
Gross margin 1,777 5,248 3,142 8,644
Operating expenses
------------------
Selling, general and administrative expenses 5,182 4,603 8,949 7,993
Internal research and development expenses 251 171 562 282
------------ ------------ ------------ ------------
Total operating expenses 5,433 4,774 9,511 8,275
------------ ------------ ------------ ------------
Gains on termination of contracts 200 -- 1,735 --
------------ ------------ ------------ ------------
Income (loss) from continuing operations (3,456) 474 (4,634) 369
----------------------------------------
Interest expense, net (76) (48) (134) (108)
Loss on equity investment in joint venture (743) (234) (1,023) (364)
Foreign exchange (loss) gain (70) (294) 139 (408)
------------ ------------ ------------ ------------
Total other expense, net (889) (576) (1,018) (880)
------------ ------------ ------------ ------------
Loss from continuing operations before income tax provision (4,345) (102) (5,652) (511)
-----------------------------------------------------------
Income tax provision (14) -- (41) --
------------ ------------ ------------ ------------
Loss from continuing operations (4,359) (102) (5,693) (511)
-------------------------------
Loss from discontinued operations, net of taxes (201) (167) (391) (281)
------------ ------------ ------------ ------------
Net loss $ (4,560) $ (269) $ (6,084) $ (792)
-------- ============ ============ ============ ============
Basic and diluted loss per share:
From continuing operations after income taxes $ (0.52) $ (0.01) $ (0.68) $ (0.06)
From discontinued operations, net of taxes (0.03) (0.02) (0.05) (0.04)
------------ ------------ ------------ ------------
Loss per share - basic and diluted $ (0.55) $ (0.03) $ (0.73) $ (0.10)
---------------------------------- ============ ============ ============ ============
Weighted average number of common and common equivalent
shares outstanding - basic and diluted 8,334,688 8,330,029 8,333,915 8,326,474
============ ============ ============ ============
See accompanying notes to unaudited condensed consolidated financial statements.
2
SPIRE CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
SIX MONTHS ENDED JUNE 30,
----------------------------
2009 2008
------------ ------------
Cash flows from operating activities:
-------------------------------------
Net loss $ (6,084) $ (792)
Less: Net loss from discontinued operations (391) (281)
------------ ------------
Net loss from continuing operations (5,693) (511)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization 712 1,037
Loss on equity investment in joint venture 1,023 364
Deferred compensation 403 (121)
Stock-based compensation 326 409
Provision for accounts receivable reserves (26) (34)
Provision for inventory reserve 141 150
Changes in assets and liabilities:
Restricted cash 2,625 141
Accounts receivable 2,660 4,288
Inventories (241) (4,979)
Deferred cost of goods sold (2,341) (401)
Deposits, prepaid expenses and other current assets 1,123 (143)
Accounts payable, accrued liabilities and other liabilities 123 1,997
Advances on contracts in progress (2,039) 1,754
------------ ------------
Net cash (used in) provided by operating activities of
continuing operations (1,204) 3,951
Net cash provided by operating activities of discontinued operations 86 162
------------ ------------
Net cash (used in) provided by operating activities (1,118) 4,113
Cash flows from investing activities:
-------------------------------------
Purchase of property and equipment (529) (925)
Increase in intangible and other assets (284) (33)
------------ ------------
Net cash used in investing activities of continuing operations (813) (958
Net cash used in investing activities of discontinued operations (18) (16)
------------ ------------
Net cash used in investing activities (831) (974)
Cash flows from financing activities:
-------------------------------------
Principal payments on capital lease obligations - related parties -- (486)
Principal payments on equipment line of credit (583) (584)
Proceeds from exercise of stock options 24 21
------------ ------------
Net cash used in financing activities (559) (1,049)
------------ ------------
Net (decrease) increase in cash and cash equivalents (2,508) 2,090
Cash and cash equivalents, beginning of period 5,971 2,372
------------ ------------
Cash and cash equivalents, end of period $ 3,463 $ 4,462
============ ============
Supplemental disclosures of cash flow information:
--------------------------------------------------
Interest paid $ 149 $ 110
============ ============
Interest paid - related party $ -- $ 9
============ ============
Interest received $ 14 $ 11
============ ============
Income taxes paid $ 48 $ --
============ ============
See accompanying notes to unaudited condensed consolidated financial statements.
3
SPIRE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 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.
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 64% of net sales and revenues for the quarter ending June 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 $3.7 million and $6.4 million for the three and six months ended
June 30, 2009 and $267 thousand for the year ended December 31, 2008. For the
six months ended June 30, 2009 and 2008, the cash (loss) gain (loss/gain from
continuing operations less gains on termination of contract plus or minus
non-cash adjustments) was $(3.6) million and $2.3 million. The gain in 2008 was
primarily attributed to margins from the Company's solar business unit. As of
June 30, 2009, the Company had unrestricted cash and cash equivalents of $3.5
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
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 June 30, 2010.
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.
4
In the opinion of management, the accompanying unaudited, condensed
consolidated financial statements contain all adjustments necessary to fairly
present the Company's financial position as of June 30, 2009 and December 31,
2008 and the results of its operations and cash flows for the three and six
months ended June 30, 2009 and 2008. The results of operations for the three and
six months ended June 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 2008, the
Company began pursing an exclusive sales process of our medical product group
(the "Medical Unit"). Accordingly, the results of the Medical 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
-----------------------------
Effective January 1, 2008, the Company adopted SFAS No. 157, FAIR VALUE
MEASUREMENTS ("FAS 157") relative to financial assets and liabilities. In
February 2008, the FASB issued FASB Staff Position No. FAS 157-2, EFFECTIVE DATE
OF FASB STATEMENT NO. 157, which provides a one year deferral of the effective
date of FAS 157 for non-financial assets and non-financial liabilities, except
those that are recognized or disclosed in the financial statements at fair value
at least annually. Effective January 1, 2009, the Company adopted the provisions
of FAS 157 with respect to its non-financial assets and non-financial
liabilities.
In December 2007, the FASB issued SFAS No. 160 ("FAS 160"),
NON-CONTROLLING INTEREST IN CONSOLIDATED FINANCIAL STATEMENTS - AN AMENDMENT OF
ARB NO. 151. FAS 160 requires that a non-controlling interest in a subsidiary
(i.e. minority interest) be reported in the equity section of the balance sheet
instead of being reported as a liability or in the mezzanine section between
debt and equity. It also requires that the consolidated income statement include
consolidated net income attributable to both the parent and non-controlling
interest of a consolidated subsidiary. A disclosure must be made on the face of
the consolidated income statement of the net income attributable to the parent
and to the non-controlling interest. Also, regardless of whether the parent
purchases additional ownership interest, sells a portion of its ownership
interest in a subsidiary or the subsidiary participates in a transaction that
changes the parent's ownership interest, as long as the parent retains
controlling interest, the transaction is considered an equity transaction. FAS
160 is effective for annual periods beginning after December 15, 2008. The
adoption of FAS 160 did not have an impact on the Company's financial position
or results of operations.
In March 2008, the FASB issued SFAS No. 161 ("FAS 161"), DISCLOSURES
ABOUT DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES--AN AMENDMENT OF FASB
STATEMENT NO. 133. FAS 161 requires enhanced disclosures about an entity's
derivative and hedging activities. Entities are required to provide enhanced
disclosures about (a) how and why an entity uses derivative instruments, (b) how
derivative instruments and related hedged items are accounted for under
Statement No. 133 and its related interpretations, and (c) how derivative
instruments and related hedged items affect an entity's financial position,
financial performance, and cash flows. FAS 161 is effective for financial
statements issued for fiscal years and interim periods beginning after November
15, 2008, with early application encouraged. FAS 161 encourages, but does not
require, comparative disclosures for earlier periods at initial adoption. The
adoption of FAS 161 did not have an impact on the Company's financial position
or results of operations.
In June 2009, the FASB issued SFAS No. 168 ("FAS 168"), THE FASB
ACCOUNTING STANDARDS CODIFICATION AND THE HIERARCHY OF GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES. FAS 168 will become the single source of authoritative
nongovernmental U.S. generally accepted accounting principles ("GAAP"),
superseding existing FASB, American Institute of Certified Public Accountants,
Emerging Issues Task Force, and related accounting literature. FAS 168
reorganizes the thousands of GAAP pronouncements into roughly 90 accounting
topics and displays them using a consistent structure. Also included is relevant
Securities and Exchange Commission guidance organized using the same topical
structure in separate sections. FAS 168 will be effective for financial
statements issued for reporting periods that end after September 15, 2009. The
adoption of FAS 168 will have an impact on the Company's financial statements
disclosures since all future references to authoritative accounting literature
will be referenced in accordance with FAS 168.
5
3. ACCOUNTS RECEIVABLE/ADVANCES ON CONTRACTS IN PROGRESS
Net accounts receivable, trade consists of the following:
(in thousands) June 30, December 31,
2009 2008
------------ ------------
Amounts billed $ 5,223 $ 6,711
Accrued revenue 581 1,790
------------ ------------
5,804 8,501
Less: Allowance for doubtful accounts (340) (403)
------------ ------------
Net accounts receivable - trade $ 5,464 $ 8,098
============ ============
Advances on contracts in progress $ 33,619 $ 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 $265 thousand and $154 thousand of reserves at June
30, 2009 and December 31, 2008, respectively, consist of the following at:
(in thousands) June 30, December 31,
2009 2008
------------ ------------
Raw materials $ 2,886 $ 3,517
Work in process 5,810 7,385
Finished goods 8,259 5,953
------------ ------------
Net inventory $ 16,955 $ 16,855
============ ============
Deferred cost of goods sold $ 19,429 $ 17,088
============ ============
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:
6
Three Months Six Months
Ended June 30, Ended June 30,
--------------------- ---------------------
2009 2008 2009 2008
--------- --------- --------- ---------
Weighted average number of common and common equivalent shares
outstanding - basic 8,334,688 8,330,029 8,333,915 8,326,474
Add: Net additional common shares upon assumed exercise of common
stock options -- -- -- --
--------- --------- --------- ---------
Adjusted weighted average number of common and common equivalents
shares outstanding - diluted 8,334,688 8,330,029 8,333,915 8,326,474
========= ========= ========= =========
For the three and six months ended June 30, 2009, 76,542 and 61,544
shares, respectively, and for the three and six months ended June 30, 2008,
168,834 and 188,760 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 six months ended June 30, 2009, 528,448
and 493,947 shares, respectively, and for the three and six months ended June
30, 2008, 39,500 and zero 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.
6. OPERATING SEGMENTS AND RELATED INFORMATION
The following table presents certain continuing operating division
information in accordance with the provisions of SFAS No. 131, "Disclosure about
Segments of an Enterprise and Related Information."
(in thousands) Total
Solar Biomedical Optoelectronics Company
---------- ---------- ---------- ----------
For the three months ended June 30, 2009
----------------------------------------
Net sales and revenues $ 19,038 $ 2,252 $ 883 $ 22,173
Income (loss) from continuing operations $ (3,077) $ 238 $ (617) $ (3,456)
For the three months ended June 30, 2008
----------------------------------------
Net sales and revenues $ 12,647 $ 1,927 $ 1,380 $ 15,954
Income (loss) from continuing operations $ 1,127 $ (14) $ (639) $ 474
For the six months ended June 30, 2009
--------------------------------------
Net sales and revenues $ 27,611 $ 4,409 $ 1,540 $ 33,560
Income (loss) from continuing operations $ (5,311) $ 595 $ 82 $ (4,634)
For the six months ended June 30, 2008
--------------------------------------
Net sales and revenues $ 22,940 $ 3,840 $ 2,817 $ 29,597
Income (loss) from continuing operations $ 1,440 $ (76) $ (995) $ 369
The following table shows net sales and revenues by geographic area (based on
customer location):
Three Months Ended June 30, Six Months Ended June 30,
-------------------------------------------- --------------------------------------------
(in thousands) 2009 % 2008 % 2009 % 2008 %
-------- -------- -------- -------- -------- -------- -------- --------
United States $ 7,916 36% 5,859 37% $ 14,741 44% 10,693 36%
Europe/Africa 11,335 51 2,983 19 14,266 42 8,058 27
Asia 2,882 13 7,099 44 4,260 13 10,747 36
Rest of the world 40 -- 13 -- 293 1 99 1
-------- -------- -------- -------- -------- -------- -------- --------
$ 22,173 100% $ 15,954 100% $ 33,560 100% $ 29,597 100%
======== ======== ======== ======== ======== ======== ======== ========
Revenues from contracts with United States government agencies for the
three months ended June 30, 2009 and 2008 were approximately $5.2 million and
$353 thousand or 24% and 2% of consolidated net sales and revenues,
respectively.
Revenues from contracts with United States government agencies for the
six months ended June 30, 2009 and 2008 were approximately $7.3 million and $753
thousand or 22% and 3% of consolidated net sales and revenues, respectively.
7
Two customers accounted for approximately 69% and one customer
accounted for approximately 11% of the Company's gross sales during the three
months ended June 30, 2009 and 2008, respectively. Two customers accounted for
approximately 51% and one customer accounted for approximately 16% of the
Company's gross sales during the six months ended June 30, 2009 and 2008,
respectively. Two customers represented approximately 22% of trade account
receivables at June 30, 2009 and two customers represented approximately 27% of
trade account receivables at December 31, 2008.
7. INTANGIBLE AND OTHER ASSETS
Patents amounted to $57 thousand and $68 thousand net of accumulated
amortization of $692 thousand and $680 thousand, at June 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 $6 thousand and $8 thousand for the three
months ended June 30, 2009 and 2008, respectively, and approximately $12
thousand and $17 thousand for the six months ended June 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 June 30, 2009 of
$445 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 6 months $ 56
2010 112
2011 106
2012 94
2013 and beyond 134
------------
$ 502
============
Also included in other assets are approximately $250 thousand of
refundable deposits made by the Company at June 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:
June 30, December 31,
(in thousands) 2009 2008
------------ ------------
Equity investments $ 1,316 $ 1,170
Government bonds 280 190
Cash and money market funds 40 74
------------ ------------
$ 1,636 $ 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 June 30, 2009, the
unrealized loss on these marketable securities was $22 thousand and as of
December 31, 2008, the unrealized loss on these marketable securities was $425
thousand.
Effective January 1, 2008, the Company adopted SFAS No. 157, FAIR VALUE
MEASUREMENTS ("FAS 157"). In February 2008, the FASB issued FASB Staff Position
No. FAS 157-2, EFFECTIVE DATE OF FASB STATEMENT NO. 157, which provides a one
year deferral of the effective date of FAS 157 for non-financial assets and
non-financial liabilities, except those that are recognized or disclosed in the
financial statements at fair value at least annually. Effective January 1, 2009,
the Company has adopted the provisions of FAS 157 with respect to its
non-financial assets and non-financial liabilities. FAS 157 defines fair value,
establishes a framework for measuring fair value, and expands disclosures about
fair value measurements. The new standard provides a consistent definition of
fair value, which focuses on an exit price, which is the price that would be
received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date. The standard
also prioritizes, within the measurement of fair value, the use of market-based
information
8
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 application of FAS 157 in
situations where the market for a financial asset is not active was clarified by
the issuance of FASB Staff Position No. FAS 157-3, DETERMINING THE FAIR VALUE OF
A FINANCIAL ASSET WHEN THE MARKET FOR THAT ASSET IS NOT ACTIVE, ("FAS 157-3") in
October 2008. FAS 157-3 became effective immediately and did not significantly
impact the methods by which the Company determines the fair values of its
financial assets.
The hierarchy established under FAS 157 gives the highest priority to
unadjusted quoted prices in active markets for identical assets or liabilities
(Level 1) and the lowest priority to unobservable inputs (Level 3). As required
by FAS 157, the Company's available for sale investments are classified within
the fair value hierarchy based on the lowest level of input that is significant
to the fair value measurement. The three levels of the fair value hierarchy
under FAS 157, and its applicability to the Company's available-for-sale
investments, are described below:
Level 1 - Pricing inputs are quoted prices available in active markets
for identical investments as of the reporting date. As required by FAS
157, the Company does not adjust the quoted price for these
investments, even in situations where the Company holds a large
position and a sale could reasonably impact the quoted price.
Level 2 - Pricing inputs are quoted prices for similar investments, or
inputs that are observable, either directly or indirectly, for
substantially the full term through corroboration with observable
market data. Level 2 includes investments valued at quoted prices
adjusted for legal or contractual restrictions specific to these
investments.
Level 3 - Pricing inputs are unobservable for the investment, that is,
inputs that reflect the reporting entity's own assumptions about the
assumptions market participants would use in pricing the asset or
liability. Level 3 includes investments that are supported by little or
no market activity.
The following table presents the financial instruments related to the
Company's non-qualified deferred compensation plan carried at fair value as of
June 30, 2009 by FAS 157 valuation hierarchy (as defined above).
(in thousands) Level 1 Level 2 Level 3 Total
---------- ---------- ---------- ----------
Cash and short term investments $ 40 $ -- $ -- $ 40
Fixed income -- 331 -- 331
Equities 846 419 -- 1,265
---------- ---------- ---------- ----------
Total available for-sale-investments $ 886 $ 750 $ -- $ 1,636
Percent of total 54% 46% -- 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
Prime Rate plus one percent (1.0%) or seven percent (7%). 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 Bank
Prime plus one percent (1%) or seven percent (7%).
9
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.
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 are secured
by substantially all of the assets of the Company and its subsidiaries. Advances
under the 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 1.75% or (ii) 7.75%; provided,
however, that if 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 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 on June 10, 2010. 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 are secured
by substantially all of the assets of the Company and its subsidiaries. Advances
under the 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 lesser
of 50% of the value of eligible inventory, as defined, or $3 million. Interest
on outstanding borrowings accrues 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 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 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
must 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.
10
The Equipment Credit Facility principal balance outstanding was $1.2
million and $1.8 million at June 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 June 30, 2009 and
December 31, 2008. Under the credit facilities the Company was required to
maintain a minimum tangible net worth (as defined) of $10.0 million; the
Company's tangible net worth (as defined) at June 30, 2009 was $7.4 million. The
Company was not in compliance with its credit facilities tangible net worth
covenant as of June 30, 2009, but not in default, because a Bank waiver has been
received. More likely than not, the Company will not be in compliance with its
credit facilities tangible net worth covenant on a going forward basis.
Accordingly, the Company has entered into discussions with the Bank to
renegotiate and restructure the terms of its two credit facilities to more
closely match its business model.
Annual maturities of the Equipment Credit Facility and the Restated Revolving
Credit Facility as of June 30, 2009 are as follows:
(in thousands)
Year Ending December 31,
2009 (remaining 6 months) $ 583
2010 2,084
------------
Total equipment and revolving line of credit $ 2,667
============
10. STOCK OPTION PLAN AND STOCK-BASED COMPENSATION
In accordance with SFAS No. 123(R), SHARE-BASED PAYMENT, the Company
has recognized stock-based compensation expense of approximately $177 thousand
and $213 thousand for the three months ended June 30, 2009 and 2008,
respectively, and approximately $326 thousand and $409 thousand for the six
months ended June 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 June 30, Six Months Ended June 30,
--------------------- ---------------------
(in thousands) 2009 2008 2009 2008
-------- -------- -------- --------
Cost of contract research, services and licenses $ 11 $ 14 $ 18 $ 27
Cost of goods sold 35 36 64 68
Administrative and selling 131 163 244 314
-------- -------- -------- --------
Total stock-based compensation $ 177 $ 213 $ 326 $ 409
======== ======== ======== ========
At June 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 June 30, 2009 and
changes during the six-month period is as follows:
Average
Remaining Aggregate
Weighted- Contractual Intrinsic
Number of Average Life Value
Shares Exercise Price (Years) (in thousands)
---------- ---------- ---------- ----------
Options Outstanding at December 31, 2008 606,177 $ 7.52
Granted 175,000 $ 5.93
Exercised (4,000) $ 1.78
Cancelled/expired (8,500) $ 7.78
---------- ----------
Options Outstanding at June 30, 2009 768,677 $ 7.19 7.51 $ 307
========== ==========
Options Exercisable at June 30, 2009 399,412 $ 6.80 6.11 $ 285
========== ==========
11
The per-share weighted-average fair value of stock options granted
during the three and six months ended June 30, 2009 was $3.99 and $3.79,
respectively, and $9.15 and $7.96 for the three and six months ended June 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 -- 2.10% 4.5 years 82.8%
2008 -- 2.73% 4.5 years 70.6%
The risk free interest rate reflects treasury yields rates over a term
that approximates the expected option life. The expected option life is
calculated based on historical lives of all options issued under the plan. The
expected volatility factor is determined by measuring the actual stock price
volatility over a term equal to the expected useful life of the options granted.
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 June 30, For the Six Months Ended June 30,
---------------------------- ----------------------------
(in thousands) 2009 2008 2009 2008
------------ ------------ ------------ ------------
Net loss $ (4,560) $ (269) $ (6,084) $ (792)
Other comprehensive income (loss):
Unrealized gain (loss) on available for
sale marketable securities, net of tax 356 (59) 403 (121)
------------ ------------ ------------ ------------
Total comprehensive loss $ (4,204) $ (328) $ (5,681) $ (913)
============ ============ ============ ============
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.
12
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 expected
liquidation of the Joint Venture in the third quarter of 2009, the Company has
reported losses this quarter 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 has recorded an impairment charge of $85
thousand to reduce the value of the investment to the estimated proceeds from
the liquidation.
14. DISCONTINUED OPERATIONS AND ASSETS HELD FOR SALE
In accordance with SFAS No. 144, "ACCOUNTING FOR THE IMPAIRMENT OR
DISPOSAL OF LONG-LIVED ASSETS", 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.
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 $115 thousand and $162 thousand for the
three months ended June 30, 2009 and 2008, respectively, and $234 thousand and
$290 thousand for the six months ended June 30, 2009 and 2008, respectively.
The assets and liabilities of the Medical Products Business Unit as of
June 30, 2009 and December 31, 2008 are as follows:
(in thousands) June 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 $ 524 $ 775
Inventories, net 843 1,021
Deposits on equipment for inventory 46 14
Prepaid expenses and other current assets 4 44
---------- ----------
Total current assets of discontinued operations and assets held for sale 1,417 1,854
Property and equipment, net 9 14
Intangible and other assets, net 359 366
---------- ----------
Total assets of discontinued operations and assets held for sale $ 1,785 $ 2,234
========== ==========
LIABILITIES OF DISCONTINUED OPERATIONS
Current liabilities of discontinued operations
----------------------------------------------
Accounts payable $ 477 $ 319
Accrued liabilities 406 554
---------- ----------
Total current liabilities of discontinued operations 883 873
---------- ----------
Total liabilities of discontinued operations $ 883 $ 873
========== ==========
Condensed results of operations relating to the Medical Unit are as
follows:
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
------------------------ ------------------------
(in thousands) 2009 2008 2009 2008
---------- ---------- ---------- ----------
Net sales and revenues $ 687 $ 931 $ 1,594 $ 1,826
Gross margin $ 196 $ 389 $ 403 $ 791
Loss from discontinued operations $ (201) $ (167) $ (391) $ (281)
13
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 will be
taking responsibility over supporting the Joint Venture's existing 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. Accordingly, the results and
assets of the Medical 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 products from our solar
equipment line and delivery of solar systems. Export sales, which amounted to
64% of net sales and revenues for the six months ended June 30, 2009, continue
to constitute a significant portion of our net sales and revenues.
14
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 June 30, Six Months Ended June 30,
------------------------- -------------------------
2009 2008 2009 2008
---------- ---------- ---------- ----------
Net sales and revenues 100% 100% 100% 100%
Cost of sales and revenues 92 67 91 71
---------- ---------- ---------- ----------
Gross profit 8 33 9 29
Selling, general and administrative expenses (24) (29) (26) (27)
Internal research and development expenses (1) (1) (2) (1)
Gains on termination of contracts 1 -- 5 --
---------- ---------- ---------- ----------
Income (loss) from continuing operations (16) 3 (14) 1
Other expense, net (4) (4) (3) (3)
---------- ---------- ---------- ----------
Loss from continuing operations before
income tax provision (20) (1) (17) (2)
Income tax provision -- -- -- --
---------- ---------- ---------- ----------
Loss from continuing operations (20) (1) (17) (2)
Loss from discontinued operations, net of tax (1) (1) (1) (1)
---------- ---------- ---------- ----------
Net loss (21%) (2%) (18%) (3%)
========== ========== ========== ==========
OVERALL
Our total net sales and revenues for the six months ended June 30, 2009
were $33.6 million as compared to $29.6 million for the six months ended June
30, 2008, which represents an increase of $4 million or 13%. The increase was
primarily attributable to a $4.7 million increase in solar sales and a slight
increase in biomedical sales, partially offset by a $1.3 million decrease in
optoelectronics sales.
SOLAR BUSINESS UNIT
Sales in our solar business unit increased 20% during the six months
ended June 30, 2009 to $27.6 million as compared to $22.9 million in the six
months ended June 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 in 2008.
BIOMEDICAL BUSINESS UNIT
Revenues of our biomedical business unit increased 15% during the six
months ended June 30, 2009 to $4.4 million as compared to $3.8 million in the
six months ended June 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 45% to $1.5
million during the six months ended June 30, 2009 as compared to $2.8 million in
the six months ended June 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.
Three and Six Months Ended June 30, 2009 Compared to Three and Six Months Ended
-------------------------------------------------------------------------------
June 30, 2008
-------------
NET SALES AND REVENUES
The following table categorizes our net sales and revenues for the
periods presented:
Three Months Ended June 30, Increase/(Decrease)
----------------------- ------------------------
(in thousands) 2009 2008 $ %
---------- ---------- ---------- ----------
Sales of goods $ 19,028 $ 12,579 $ 6,449 51%
Contract research, services and license revenues 3,145 3,375 (230) (7%)
---------- ---------- ----------
Net sales and revenues $ 22,173 $ 15,954 $ 6,219 39%
========== ========== ==========
The 51% increase in sales of goods for the three months ended June 30,
2009 as compared to the three months ended June 30, 2008 was primarily due to
new sales in solar cell materials and increased solar equipment revenues. New
sales of solar cell materials was $4.6 million in 2009. Solar equipment sales
increased 16% in 2009 as compared to 2008 primarily due to revenue recognized
from the completion of an automated module line in 2009.
The 7% decrease in contract research, services and license revenues for
the three months ended June 30, 2009 as compared to the three months ended June
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 36% 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 19% 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 11% in 2009 as compared to 2008 primarily due
to an increase in the number and value of contracts associated with funded
research and development.
The following table categorizes our net sales and revenues for the
periods presented:
Six Months Ended June 30, Increase/(Decrease)
----------------------- ------------------------
(in thousands) 2009 2008 $ %
---------- ---------- ---------- ----------
Sales of goods $ 27,550 $ 22,679 $ 4,871 21%
Contract research, services and license revenues 6,010 6,918 (908) (13%)
---------- ---------- ----------
Net sales and revenues $ 33,560 $ 29,597 $ 3,963 13%
========== ========== ==========
The 21% increase in sales of goods for the six months ended June 30,
2009 as compared to the six months ended June 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 was $6.1 million in 2009. Solar
equipment sales decreased 5% in 2009 as compared to 2008 primarily due to an
overall slow down in solar power industry activity.
The 13% decrease in contract research, services and license revenues
for the six months ended June 30, 2009 as compared to the six months ended June
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 45% 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 10% 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 24% 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.
15
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 June 30, Increase/(Decrease)
------------------------------------------ -------------------
(in thousands) 2009 % 2008 % $ %
-------- -------- -------- -------- -------- --------
Cost of goods sold $ 18,127 95% $ 8,364 66% $ 9,763 117%
Cost of contract research, services
and licenses 2,269 72% 2,342 69% (73) (3%)
-------- -------- --------
Net cost of sales and revenues $ 20,396 92% $ 10,706 67% $ 9,690 91%
======== ======== ========
Cost of goods sold increased 117% for the three months ended June 30,
2009 as compared to the three months ended June 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 $279 thousand related to
estimated costs to complete a solar project. As a percentage of sales, cost of
goods sold was 95% of sales of goods in 2009 as compared to 66% of sales of
goods in 2008. This increase in the percentage of sales in 2009 is due to the
provision for a reserve of $279 thousand related to estimated costs to complete
a solar project and low margin related to the completion of an automated module
line along with an unfavorable utilization of solar manufacturing overhead.
Cost of contract research, services and licenses decreased 3% for the
three months ended June 30, 2009 as compared to the three months ended June 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 72% of revenues in 2009 from 69% 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 $46 thousand and
$50 thousand of stock-based compensation for the three months ending June 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:
Six Months Ended June 30, Increase/(Decrease)
------------------------------------------ -------------------
(in thousands) 2009 % 2008 % $ %
-------- -------- -------- -------- -------- --------
Cost of goods sold $ 25,985 94% $ 16,237 72% $ 9,748 60%
Cost of contract research, services
and licenses 4,433 74% 4,716 68% (283) (6%)
-------- -------- --------
Net cost of sales and revenues $ 30,418 91% $ 20,953 71% $ 9,465 45%
======== ======== ========
Cost of goods sold increased 60% for the six months ended June 30, 2009
as compared to the six months ended June 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 $279 thousand related to
estimated costs to complete a solar project. As a percentage of sales, cost of
goods sold was 94% of sales of goods in 2009 as compared to 72% of sales of
goods in 2008. This increase in the percentage of sales in 2009 is due to the
provision for a reserve of $279 thousand related to estimated costs to complete
a solar project and low margin related to the completion of an automated module
line along with an unfavorable utilization of solar manufacturing overhead.
Cost of contract research, services and licenses decreased 6% for the
six months ended June 30, 2009 as compared to the six months ended June 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 orthopedic services due to higher associated revenues.
Cost of contract research, services and licenses as a percentage of revenue
increased to 74% of revenues in 2009 from 68% 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 $82 thousand and
$95 thousand of stock-based compensation for the six months ending June 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:
16
Three Months Ended June 30, Increase
------------------------------------------ -------------------
(in thousands) 2009 % 2008 % $ %
-------- -------- -------- -------- -------- --------
Selling, general and administrative $ 5,182 24% $ 4,603 29% $ 579 13%
Internal research and development 251 1% 171 1% 80 47%
-------- -------- --------
Operating expenses $ 5,433 25% $ 4,774 30% $ 659 14%
======== ======== ========
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expense increased 13% in the three
months ended June 30, 2009 as compared to the three months ended June 30, 2008,
primarily as a result of an increase in corporate staffing levels and related
employee costs to support our overall growth. Selling, general and
administrative expense decreased to 24% of sales and revenues in 2009 as
compared to 29% in 2008. The decrease was primarily due to the absorption of
selling, general and administrative overhead costs by the 39% increase in sales
and revenues.
Operating expenses includes approximately $131 thousand and $163
thousand of stock-based compensation for the three months ending June 30, 2009
and 2008, respectively.
INTERNAL RESEARCH AND DEVELOPMENT
Internal research and development expense increased 47% in the three
months ended June 30, 2009 as compared to the three months ended June 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 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:
Six Months Ended June 30, Increase
----------------------------------------- -------------------
(in thousands) 2009 % 2008 % $ %
-------- -------- -------- -------- -------- --------
Selling, general and administrative $ 8,949 26% $ 7,993 27% $ 956 12%
Internal research and development 562 2% 282 1% 280 99%
-------- -------- --------
Operating expenses $ 9,511 28% $ 8,275 28% $ 1,236 15%
======== ======== ========
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expense increased 12% in the six
months ended June 30, 2009 as compared to the six months ended June 30, 2008,
primarily as a result of 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 27% in 2008. The decrease was primarily due to the absorption of
selling, general and administrative overhead costs by the 13% increase in sales
and revenues.
Operating expenses includes approximately $244 thousand and $314
thousand of stock-based compensation for the six months ending June 30, 2009 and
2008, respectively.
INTERNAL RESEARCH AND DEVELOPMENT
Internal research and development expense increased 99% in the six
months ended June 30, 2009 as compared to the six months ended June 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.
17
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 $3 thousand and $2 thousand of interest income for the three
months ended June 30, 2009 and 2008, respectively. We incurred interest expense
of $79 thousand and $50 thousand for the three months ended June 30, 2009 and
2008, respectively. We recorded a loss of $743 thousand and $234 thousand on
equity investment in joint venture with Gloria Solar for the three months ended
June 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 expected 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 losses of $310 thousand and impairment charge of $85 thousand to
reduce the value of the investment to the estimated proceeds from the
liquidation. See Note 13. We had a currency exchange loss of approximately $70
thousand and $294 thousand during the three months ended June 30, 2009 and 2008,
respectively.
We earned $14 thousand and $11 thousand of interest income for the six
months ended June 30, 2009 and 2008, respectively. We incurred interest expense
of $148 thousand and $119 thousand for the six months ended June 30, 2009 and
2008, respectively. We recorded a loss of $1.02 million and $364 thousand on
equity investment in joint venture with Gloria Solar for the six months ended
June 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 expected 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 losses of $310 thousand, fourth quarter of 2008 losses of $280
thousand and impairment charge of $85 thousand to reduce the value of the
investment to the estimated proceeds from the liquidation. See Note 13. We had a
currency exchange gain of approximately $139 thousand and a currency exchange
loss of $408 thousand during the six months ended June 30, 2009 and 2008,
respectively.
18
INCOME TAXES
We recorded a provision for income taxes of $14 thousand and $41
thousand for the three and six months ended June 30, 2009, respectively. We did
not record an income tax provision or benefit in the three or six months ending
June 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. Accordingly, the results and
assets of the Medical Products Business Unit are being presented herein as
discontinued operations and assets held for sale.
We recorded a loss from discontinued operations of $201 thousand and
$167 thousand for the three months ended June 30, 2009 and 2008, respectively.
We recorded a loss from discontinued operations of $391 thousand and $281
thousand for the six months ended June 30, 2009 and 2008, respectively. 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 $115 thousand and $162 thousand for the three months
ended June 30, 2009 and 2008, respectively, and $234 thousand and $290 thousand
for the six months ended June 30, 2009 and 2008, respectively. See Note 14.
NET LOSS
We reported a net loss for the three months ended June 30, 2009 and
2008 of approximately $4.56 million and $269 thousand, respectively. The net
loss increased approximately $4.29 million primarily due to lower margins in
solar equipment sales and to a lesser extent two quarters of losses from the
Joint Venture and an impairment charge to reduce the value of the investment to
the estimated proceeds from the liquidation (see Note 13), partially offset by
gains on termination of contracts.
We reported a net loss for the six months ended June 30, 2009 and 2008
of approximately $6.08 million and $792 thousand, respectively. The net loss
increased approximately $5.29 million primarily due to lower margins in solar
equipment sales and to a lesser extent two quarters of losses from the Joint
Venture and an impairment charge to reduce the value of the investment to the
estimated proceeds from the liquidation (see Note 13), partially offset by gains
on termination of contracts.
Liquidity and Capital Resources
-------------------------------
June 30, December 31, Decrease
(in thousands) 2009 2008 $ %
---------- ---------- ---------- ----------
Cash and cash equivalents $ 3,463 $ 5,971 $ (2,508) (42%)
Working capital $ 867 $ 6,835 $ (5,968) (87%)
Cash and cash equivalents decreased due to cash used in operating
activities, primarily the net loss, and to a lesser extent deferred cost of
sales advances on contracts in progress. The overall reduction in working
capital is due to a decrease in cash and restricted cash. 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
June 30, 2009, our accumulated deficit was approximately $13.0 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
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
have sufficient resources to finance our current operations through at least
June 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
19
purchases (including reimbursement of certain previously-made purchases).
Advances made under the Equipment Credit Facility would bear interest at the
Bank's prime rate, as determined, plus 0.5% and payable in thirty-six (36)
consecutive monthly payments following the funding date of that advance.
On March 31, 2008, we entered into a second Loan and Security Agreement
(the "Revolving Credit Facility") with the Bank. Under the terms of the
Revolving Credit Facility, the Bank agreed to provide us with a credit line up
to $5.0 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 our 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 Prime Rate plus
one percent (1.0%) or seven percent (7.0%). In addition, we agreed to pay to the
Bank a collateral monitoring fee of $750 per month 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 our December 31, 2007 quarter liquidity and profit covenants and for not
meeting our January and February 2008 liquidity covenants. Further, the
covenants were amended to match the covenants, as discussed below, contained in
the Revolving Credit Facility. Our interest rate under the Equipment Credit
Facility was also modified from Bank Prime plus one half percent (0.5%) to the
greater of Bank Prime plus one percent (1.0%) or seven percent (7.0%).
On May 13, 2008, the Bank amended the Equipment Credit Facility and the
Revolving Credit Facility, modifying our net income profitability covenant
requirements in exchange for a three quarters percent (0.75%) increase in our
interest rate and waiver restructuring fee equal to one half percent (0.5%) of
amounts outstanding under the Equipment Credit Facility and committed under the
Revolving Credit Facility. Interest on outstanding borrowings accrues at a rate
per annum equal to the greater of Prime Rate plus one percent (1.0%) or seven
percent (7.0%). 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 for an additional sixty-one days, to expire
on May 31, 2009. The purpose of the extension is 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 are secured by substantially all of
our assets. Advances under the 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 1.75% or (ii)
7.75%; provided, however, that if 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 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 on June 10, 2010. 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%.
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 are secured by substantially
all of our assets. Advances under the 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 lesser of 50% of the value of eligible inventory, as
defined, or $3 million. Interest on outstanding borrowings accrues 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 achieve positive net
20
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 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 must 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 $1.2
million and $1.8 million at June 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 June 30, 2009 and
December 31, 2008. Under the credit facilities we were required to maintain a
minimum tangible net worth (as defined) of $10.0 million; our tangible net worth
(as defined) at June 30, 2009 was $7.4 million. We were not in compliance with
our credit facilities tangible net worth covenant as of June 30, 2009, but not
in default, because a Bank waiver has been received. More likely than not, we
will not be in compliance with our credit facilities tangible net worth covenant
on a going forward basis. Accordingly, we have entered into discussions with the
Bank to renegotiate and restructure the terms of our two credit facilities to
more closely match our business model.
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.
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 royalties received under our Consortium Agreement with Nisshinbo are in
Japanese yen. In addition, we received Japanese yen related to the termination
21
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 $(70) thousand and
$(294) thousand for the three months ended June 30, 2009 and 2008, respectively
and $139 thousand and $(408) thousand for the six months ended June 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 June 30, 2009 and 2008 and was $1.0
million for both the six months ended June 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
$1.6 thousand and $8.4 thousand for the three and six months ended June 30,
2008, respectively. 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
===========
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 for the three
and six months ended June 30, 2009 was $332 thousand and $664 thousand,
respectively.
22
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 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 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.
23
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 SFAS No. 123(R), SHARE-BASED payment
("Statement 123(R)"). We use the Black-Scholes option pricing model as our
method for determining the fair value of stock option grants. Statement 123(R)
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.
On November 10, 2005, the FASB issued FASB Staff Position SFAS 123R-3,
TRANSITION ELECTION RELATED TO ACCOUNTING FOR TAX EFFECTS OF SHARE-BASED PAYMENT
AWARDS. We have elected to adopt the alternative transition method provided by
the FASB Staff Position for calculating the tax effects (if any) of stock-based
compensation expense pursuant to Statement 123(R). 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 Statement 123(R).
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.
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 six months ended June 30, 2009, are as follows:
(in thousands)
Balance at December 31, 2008 $ 495
Provision charged to income 470
Usage (248)
--------
Balance at June 30, 2009 $ 717
========
Contractual Obligations, Commercial Commitments and Off-Balance Sheet
---------------------------------------------------------------------
Arrangements
------------
The following table summarizes our gross contractual obligations at June 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:
24
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) $ 1,216 $ 1,216 -- -- --
Restated Revolving Credit Facility (SVB) $ 1,500 $ 1,500 -- -- --
Purchase obligations $ 11,983 $ 11,766 $ 217 -- --
Operating leases:
Unrelated party operating leases $ 200 $ 124 $ 76 -- --
Related party operating leases $ 15,533 $ 3,155 $ 6,838 $ 3,766 $ 1,774
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 $1.6 million and $4.2 million at
June 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 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, June 30, 2009.
Based on its evaluation, and taking into consideration the material
weaknesses in internal control over financial reporting referenced below, our
management, including the Chief Executive Officer and Chief Financial Officer,
concluded that our disclosure controls and procedures were not effective as of
June 30, 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.
25
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 will add 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 June 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.
26
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
On May 21, 2009, we held a Special Meeting in Lieu of Annual Meeting of
Stockholders. At the meeting, stockholders voted on the following:
PROPOSAL NUMBER 1
The number of directors was fixed at eight, leaving one vacancy. Udo
Henseler, David R. Lipinski, Mark C. Little, Roger G. Little, Michael J.
Magliochetti, Guy L. Mayer and Roger W. Redmond were elected to the Board of
Directors to hold office until the 2010 annual meeting of the stockholders. The
results for Proposal Number 1 were as follows:
------------------------------------------------------------------------------------------------------------------
Shares Shares Voting Against Shares Broker
Nominee Voting For or Authority Withheld Abstaining Non-Votes
------------------------------------------------------------------------------------------------------------------
Udo Henseler 6,438,987 363,503 -- --
------------------------------------------------------------------------------------------------------------------
David R. Lipinski 6,436,150 366,340 -- --
------------------------------------------------------------------------------------------------------------------
Mark C. Little 6,168,184 634,306 -- --
------------------------------------------------------------------------------------------------------------------
Roger G. Little 6,215,173 587,317 -- --
------------------------------------------------------------------------------------------------------------------
Michael J. Magliochetti 6,438,038 364,452 -- --
------------------------------------------------------------------------------------------------------------------
Guy L. Mayer 6,438,121 364,369 -- --
------------------------------------------------------------------------------------------------------------------
Roger W. Redmond 6,440,782 361,708 -- --
------------------------------------------------------------------------------------------------------------------
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
2.3 Gloria Spire Solar LLC Liquidation Agreement, dated May 29,
2009, by and among Gloria Solar (Delaware) Company, Ltd., Gloria
Solar Co., Ltd., Gloria Spire Solar, LLC and Spire Corporation.*
2.4 First Amendment to the Gloria Spire Solar, LLC Liquidation
Agreement, dated June 2, 2009, by and among Gloria Solar
(Delaware) Company, Ltd., Gloria Solar Co., Ltd., Gloria Spire
Solar, LLC and Spire Corporation.*
10(af) 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(ag) Export-Import Bank Loan and Security Agreement, dated June 22,
2009, among Spire Corporation, Spire Solar, Inc., Spire
Biomedical, Inc., Spire Semiconductor, LLC and Silicon Valley
Bank.
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.
27
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
SPIRE CORPORATION
Dated: August 14, 2009 By: /s/ Roger G. Little
---------------------------------------
Roger G. Little
Chairman of the Board,
Chief Executive Officer and
President
Dated: August 14, 2009 By: /s/ Christian Dufresne
---------------------------------------
Christian Dufresne, Ph. D.
Chief Financial Officer and Treasurer
28
EXHIBIT INDEX
Exhibit Description
------- -----------
2.3 Gloria Spire Solar LLC Liquidation Agreement, dated May 29, 2009, by
and among Gloria Solar (Delaware) Company, Ltd., Gloria Solar Co.,
Ltd., Gloria Spire Solar, LLC and Spire Corporation. *
2.4 First Amendment to the Gloria Spire Solar, LLC Liquidation Agreement,
dated June 2, 2009, by and among Gloria Solar (Delaware) Company, Ltd.,
Gloria Solar Co., Ltd., Gloria Spire Solar, LLC and Spire Corporation.
*
10(af) 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(ag) Export-Import Bank Loan and Security Agreement, dated June 22, 2009,
among Spire Corporation, Spire Solar, Inc., Spire Biomedical, Inc.,
Spire Semiconductor, LLC and Silicon Valley Bank.
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.
29