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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 March 31, 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
-----------------
(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 Identification Number)
incorporation or organization)
ONE PATRIOTS PARK, BEDFORD, MASSACHUSETTS 01730-2396
----------------------------------------- ----------
(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 May
7, 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 March 31, 2009 and December 31, 2008 .......................... 1
Unaudited Condensed Consolidated Statements of Operations
for the Three Months Ended March 31, 2009 and 2008 ............... 2
Unaudited Condensed Consolidated Statements of Cash Flows
for the Three Months Ended March 31, 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 .............................. 12
Item 3. Quantitative and Qualitative Disclosures About Market Risk ....... 21
Item 4T. Controls and Procedures .......................................... 21
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ................................................ 22
Item 1A. Risk Factors ..................................................... 22
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds ...... 23
Item 3. Defaults Upon Senior Securities .................................. 23
Item 4. Submission of Matters to a Vote of Security Holders .............. 23
Item 5. Other Information ................................................ 23
Item 6. Exhibits ......................................................... 23
Signatures ....................................................... 24
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)
March 31, December 31,
2009 2008
---------- -----------
ASSETS
Current assets
--------------
Cash and cash equivalents $ 2,329 $ 5,971
Restricted cash - current portion 4,044 4,167
---------- ----------
6,373 10,138
Accounts receivable - trade, net 8,979 8,873
Inventories, net 20,169 17,876
Deferred cost of goods sold 17,901 17,088
Deposits on equipment for inventory 3,996 3,433
Prepaid expenses and other current assets 553 468
---------- ----------
Total current assets 57,971 57,876
Property and equipment, net 6,290 6,089
Intangible and other assets, net 855 846
Available-for-sale investments, at quoted market value
(cost of $1,747 and $1,859 at March 31, 2009 and
December 31, 2008, respectively) 1,369 1,434
Equity investment in joint venture 1,193 1,473
Deposit - related party 300 300
---------- ----------
Total other assets 3,717 4,053
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Total assets $ 67,978 $ 68,018
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
-------------------
Current portion of equipment and revolving line of credit $ 2,667 $ 2,667
Accounts payable 10,176 5,161
Accrued liabilities 7,363 8,704
Current portion of advances on contracts in progress 33,520 34,509
---------- ----------
Total current liabilities 53,726 51,041
Long-term portion of equipment line of credit 292 583
Long-term portion of advances on contracts in progress 7 1,149
Deferred compensation 1,369 1,434
Other long-term liabilities 370 293
---------- ----------
Total long-term liabilities 2,038 3,459
---------- ----------
Total liabilities 55,764 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
March 31, 2009 and December 31, 2008, respectively 83 83
Additional paid-in capital 20,947 20,774
Accumulated deficit (8,438) (6,914)
Accumulated other comprehensive loss (378) (425)
---------- ----------
Total stockholders' equity 12,214 13,518
---------- ----------
Total liabilities and stockholders' equity $ 67,978 $ 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
MARCH 31,
----------------------------
2009 2008
----------- -----------
Net sales and revenues
----------------------
Sales of goods $ 9,429 $ 10,995
Contract research, service and license revenues 2,865 3,543
----------- -----------
Total net sales and revenues 12,294 14,538
----------- -----------
Costs of sales and revenues
---------------------------
Cost of goods sold 8,677 8,494
Cost of contract research, services and licenses 2,164 2,374
----------- -----------
Total cost of sales and revenues 10,841 10,868
Gross margin 1,453 3,670
Operating expenses
------------------
Selling, general and administrative expenses 4,045 3,778
Internal research and development expenses 311 111
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Total operating expenses 4,356 3,889
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Gain on termination of contract 1,535 --
----------- -----------
Loss from operations (1,368) (219)
--------------------
Interest expense, net (58) (60)
Loss on equity investment in joint venture (280) (130)
Foreign exchange gain (loss) 209 (114)
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Other expense, net (129) (304)
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Loss before income tax provision (1,497) (523)
--------------------------------
Income tax provision (27) --
----------- -----------
Net loss $ (1,524) $ (523)
-------- =========== ===========
Loss per share - basic and diluted $ (0.18) $ (0.06)
---------------------------------- =========== ===========
Weighted average number of common and common
equivalent shares outstanding - basic and diluted 8,333,132 8,322,919
=========== ===========
See accompanying notes to unaudited condensed
consolidated financial statements.
2
SPIRE CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
THREE MONTHS ENDED MARCH 31,
----------------------------
2009 2008
---------- ----------
Cash flows from operating activities:
-------------------------------------
Net loss $ (1,524) $ (523)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization 369 454
Loss on equity investment in joint venture 280 130
Deferred compensation 47 (62)
Stock-based compensation 149 196
Provision for rebates, returns and accounts receivable reserves 97 88
Provision for inventory reserve 53 5
Changes in assets and liabilities:
Restricted cash 123 11
Accounts receivable (203) 3,039
Inventories (2,346) (2,835)
Deferred cost of goods sold (813) (220)
Deposits, prepaid expenses and other current assets (648) 383
Accounts payable, accrued liabilities and other liabilities 3,751 1,308
Advances on contracts in progress (2,131) (1,038)
---------- ----------
Net cash (used in) provided by operating activities (2,796) 936
---------- ----------
Cash flows from investing activities:
-------------------------------------
Purchase of property and equipment (551) (493)
Increase in intangible and other assets (28) (44)
---------- ----------
Net cash used in investing activities (579) (537)
---------- ----------
Cash flows from financing activities:
-------------------------------------
Principal payments on capital lease obligations - related parties -- (296)
Principal payments on equipment line of credit, net (291) (292)
Proceeds from exercise of stock options 24 13
---------- ----------
Net cash used in financing activities (267) (575)
---------- ----------
Net decrease in cash and cash equivalents (3,642) (176)
Cash and cash equivalents, beginning of period 5,971 2,372
---------- ----------
Cash and cash equivalents, end of period $ 2,329 $ 2,196
========== ==========
Supplemental disclosures of cash flow information:
--------------------------------------------------
Interest paid $ 69 $ 62
========== ==========
Interest received $ 11 $ 9
========== ==========
Interest paid - related party $ -- $ 7
========== ==========
Income taxes paid $ 25 $ --
========== ==========
See accompanying notes to unaudited condensed
consolidated financial statements.
3
SPIRE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 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; develops and markets coated and uncoated hemodialysis catheters
and related devices for the treatment of chronic kidney disease; and performs
sponsored research programs into practical applications of advanced biomedical
and biophotonic technologies.
In 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
40% of net sales and revenues for the quarter ending March 31, 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 operations, before gain on termination of contract, was
$2.9 million for the three months ended March 31, 2009 and $267 thousand for the
year ended December 31, 2008. For the three months ended March 31, 2009, the
cash loss (loss from operations less gain on termination of contract plus or
minus non-cash adjustments) was $1.8 million. For the year ended December 31,
2008, the cash gain (income from operations less gain on termination of contract
plus or minus non-cash adjustments) was $4.1 million. The gain in 2008 was
primarily attributed to margins from the Company's solar business unit. As of
March 31, 2009, the Company had unrestricted cash and cash equivalents of $2.3
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 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 March 31, 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.
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 March 31, 2009 and December 31,
2008 and the
4
results of its operations and cash flows for the three months ended March 31,
2009 and 2008. The results of operations for the three months ended March 31,
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.
The significant accounting policies followed by the Company are set forth
in Note 2 to the Company's consolidated financial statements in its Annual
Report on Form 10-K for the year ended December 31, 2008.
New Accounting Pronouncements
-----------------------------
In December 2007, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 141R ("FAS 141R"),
BUSINESS COMBINATIONS, which revises FAS 141 and changes multiple aspects of the
accounting for business combinations. Under the guidance in FAS 141R, the
acquisition method must be used, which requires the acquirer to recognize most
identifiable assets acquired, liabilities assumed, and non-controlling interests
in the acquiree at their full fair value on the acquisition date. Goodwill is to
be recognized as the excess of the consideration transferred plus the fair value
of the non-controlling interest over the fair values of the identifiable net
assets acquired. Subsequent changes in the fair value of contingent
consideration classified as a liability are to be recognized in earnings, while
contingent consideration classified as equity is not to be re-measured. Costs
such as transaction costs are to be excluded from acquisition accounting,
generally leading to recognizing expense, and, additionally, restructuring costs
that do not meet certain criteria at acquisition date are to be subsequently
recognized as post-acquisition costs. FAS 141R is effective for business
combinations for which the acquisition date is on or after the beginning of the
first annual reporting period beginning on or after December 15, 2008 and will
change the accounting for business combinations on a prospective basis.
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.
5
3. ACCOUNTS RECEIVABLE/ADVANCES ON CONTRACTS IN PROGRESS
Net accounts receivable, trade consists of the following:
March 31, December 31,
(in thousands) 2009 2008
------------ ------------
Amounts billed $ 8,653 $ 7,671
Accrued revenue 838 1,790
------------ ------------
9,491 9,461
Less: Allowance for sales returns and
doubtful accounts (512) (588)
------------ ------------
Net accounts receivable - trade $ 8,979 $ 8,873
============ ============
Advances on contracts in progress $ 33,527 $ 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.
Retainage represents revenues on certain United States government sponsored
research and development contracts. These amounts, which usually represent 15%
of the Company's research fee on each applicable contract, are not collectible
until a final cost review has been performed by government auditors. The
government's most recent audit was as of December 31, 2006, with no adverse
impact.
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. The Company has increased its allowance for doubtful
accounts reserve in the year ended December 31, 2008, primarily as a result of a
customer's failure to make timely facility availability payments of $225
thousand related to a Spire Semiconductor manufacturing agreement (see Gain on
Termination of Contact).
In addition, the Company maintains an allowance for potential future
product returns and rebates related to current period revenues. The Company
analyzes the rate of historical returns when evaluating the adequacy of the
allowance for sales returns and allowances. Returns and rebates are charged
against the allowance when incurred.
Advances on contracts in progress represent contracts for which billings
have been presented to the customer, either as deposits or progress payments
against future shipments, but revenue has not been recognized.
4. INVENTORIES AND DEFERRED COSTS OF GOODS SOLD
Inventories, net of $251 thousand and $214 thousand of reserves at March
31, 2009 and December 31, 2008, respectively, consist of the following at:
March 31, December 31,
(in thousands) 2009 2008
------------ ------------
Raw materials $ 4,030 $ 4,048
Work in process 7,564 7,385
Finished goods 8,575 6,443
------------ ------------
Net inventory $ 20,169 $ 17,876
============ ============
Deferred cost of goods sold $ 17,901 $ 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.
6
5. INCOME (LOSS) PER SHARE
The following table provides a reconciliation of the denominators of the
Company's reported basic and diluted income (loss) per share computations for
the periods ended:
Three Months Ended March 31,
----------------------------
2009 2008
------------ ------------
Weighted average number of common and common
equivalent shares outstanding - basic 8,333,132 8,322,919
Add: Net additional common shares upon assumed
exercise of common stock options -- --
------------ ------------
Adjusted weighted average number of common and
common equivalents shares outstanding - diluted 8,333,132 8,322,919
============ ============
For the three months ended March 31, 2009 and 2008, 414,447 and 208,847
shares of common stock, 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 months ended March 31, 2009, 32,811 shares 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 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 March 31, 2009
-----------------------------------------
Net sales and revenues $ 8,574 $ 3,064 $ 656 $12,294
Income (loss) from operations $(2,234) $ 166 $ 700 $(1,368)
For the three months ended March 31, 2008
-----------------------------------------
Net sales and revenues $10,293 $ 2,808 $ 1,437 $14,538
Income (loss) from operations $ 313 $ (176) $ (356) $ (219)
The following table shows net sales and revenues by geographic area (based on
customer location):
Three Months Ended March 31,
-----------------------------------------
(in thousands) 2009 % 2008 %
-------- ----- -------- -----
United States $ 7,400 60% $ 5,470 38%
Europe/Africa 3,078 25% 5,219 36%
Asia 1,379 11% 3,647 25%
Rest of the world 437 4% 202 1%
-------- ----- -------- -----
$ 12,294 100% $ 14,538 100%
======== ===== ======== =====
Revenues from contracts with United States government agencies for the
three months ended March 31, 2009 and 2008 were approximately $2.1 million and
$400 thousand or 17% and 3% of consolidated net sales and revenues,
respectively.
Three customers accounted for approximately 45% and one customer accounted
for approximately 20% of the Company's gross sales during the three months ended
March 31, 2009 and 2008, respectively. Two customers represented approximately
30% of trade account receivables at March 31, 2009 and two customers represented
approximately 25% of trade account receivables at December 31, 2008.
7. INTANGIBLE AND OTHER ASSETS
Patents amounted to $142 thousand and $154 thousand net of accumulated
amortization of $767 thousand and $754 thousand, at March 31, 2009 and December
31, 2008, respectively. Licenses amounted to $60 thousand and $66 thousand, net
of accumulated amortization of $265 thousand and $259 thousand, at March 31,
2009 and December 31, 2008, respectively.
7
Patent cost is primarily composed of cost associated with securing and
registering patents that the Company has been awarded or that have been
submitted to, and the Company believes will be approved by, the government.
License cost is composed of the cost to acquire rights to the underlying
technology or know-how. These costs are capitalized and amortized over their
useful lives or terms, ordinarily five years, using the straight-line method.
There are no expected residual values related to these patents. Amortization
expense, relating to patents and licenses, was approximately $19 thousand and
$29 thousand for the three months ended March 31, 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 March 31, 2009 of
$652 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 9 months $144
2010 189
2011 182
2012 162
2013 and beyond 177
--------
$854
========
Also included in other assets are approximately $1 thousand of refundable
deposits made by the Company at March 31, 2009.
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:
March 31, December 31,
(in thousands) 2009 2008
------------ ------------
Equity investments $ 1,151 $ 1,170
Government bonds 178 190
Cash and money market funds 40 74
------------ ------------
$ 1,369 $ 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 March 31, 2009, the unrealized loss
on these marketable securities was $378 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 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
8
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
March 31, 2009 by FAS 157 valuation hierarchy (as defined above).
Level 1 Level 2 Level 3 Total
(in thousands) --------------------------------------
Cash and short term investments $ 40 $ -- $ -- $ 40
Fixed income -- 215 -- 215
Equities 733 381 -- 1,114
--------------------------------------
Total available for-sale-investments $ 773 $ 596 $ -- $1,369
Percent of total 56% 44% -- 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 are secured by substantially all of its assets and advances
under the Revolving Credit Facility are limited to 80% of eligible receivables
and the lesser of 25% of the value of its eligible inventory, as defined, or
$2.5 million if the inventory is backed by a customer letter of credit. Interest
on outstanding borrowings accrues at a rate per annum equal to the greater of
Prime Rate plus one percent (1.0%) or seven percent (7%). In addition, the
Company agreed to pay to the Bank a monthly collateral monitoring fee in the
event the Company is 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 terminates 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%).
On May 13, 2008, the Bank amended the Equipment Credit Facility and the
Revolving Credit Facility, modifying the Company's net income profitability
covenant requirements in exchange for a three quarters percent (0.75%) increase
in the Company's interest rate (7.75% at March 31, 2009) and waiver
restructuring fee equal to one half percent (0.5%) of amounts outstanding under
the Equipment Credit Facility and committed under the Revolving Credit Facility.
In addition, the Company's term loan balance will be factored in when
calculating the Company's borrowing base under the Revolving Credit Facility.
9
Under the amended terms of both credit facilities, as long as any
commitment remains outstanding under the facilities, the Company must comply
with an adjusted quick ratio covenant and a minimum monthly net income covenant.
In addition, until all amounts under the credit facilities with the Bank are
repaid, covenants under the credit facilities impose restrictions on the
Company's ability to, among other things, incur additional indebtedness, create
or permit liens on the Company's assets, merge, consolidate or dispose of assets
(other than in the ordinary course of business), make dividend and other
restricted payments, make certain debt or equity investments, make certain
acquisitions, engage in certain transactions with affiliates or change the
business conducted by the Company and its subsidiaries. Any failure by the
Company to comply with the covenants and obligations under the credit facilities
could result in an event of default, in which case the Bank may be entitled to
declare all amounts owed to be due and payable immediately. The Company's
obligations under the credit facilities are secured by substantially all of its
assets.
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.
The Equipment Credit Facility principal balance outstanding was $1.46
million and $1.75 million at March 31, 2009 and December 31, 2008, respectively.
The Revolving Credit Facility principal balance outstanding was $1.5 million at
March 31, 2009 and December 31, 2008. The Company was in compliance with its
credit facility covenants as of March 31, 2009.
Annual maturities of the Equipment Credit Facility and the Revolving Credit
Facility as of March 31, 2009 are as follows:
(in thousands)
Year Ending December 31,
2009 $ 2,376
2010 583
-------
Total equipment and revolving line of credit $ 2,959
=======
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 $149 thousand and
$196 thousand for the three months ended March 31, 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 March 31,
----------------------------
(in thousands) 2009 2008
-------- --------
Cost of contract research, services and licenses $ 7 $ 13
Cost of goods sold 29 32
Selling, general and administrative 113 151
------- -------
Total stock-based compensation $ 149 $ 196
======= =======
At March 31, 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 March 31, 2009 and
changes during the three-month period is as follows:
Average
Weighted- Remaining Aggregate
Number of Average Contractual Intrinsic
(in thousands, except share Shares Exercise Price Life (Years) Value
and per share data) --------- -------------- ------------ ---------
Options Outstanding at December 31, 2008 606,177 $ 7.52
Granted 20,000 $ 3.50
Exercised (4,000) $ 1.78
Cancelled/expired -- $ --
--------- --------
Options Outstanding at March 31, 2009 622,177 $ 7.43 7.16 $145
--------- --------
Options Exercisable at March 31, 2009 359,537 $ 6.74 6.18 $127
========= ========
10
The per-share weighted-average fair value of stock options granted during
the three months ended March 31, 2009 and 2008 was $2.18 and $7.28,
respectively, on the date of grant using the Black-Scholes option-pricing model
with the following weighted-average assumptions:
Expected Risk-Free Expected Expected
Year Dividend Yield Interest Rate Option Life Volatility Factor
------ ---------------- --------------- ------------- -------------------
2009 -- 1.64% 4.5 years 81.0%
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 March 31,
------------------------------------
(in thousands) 2009 2008
---------- ----------
Net loss $ (1,524) $ (523)
Other comprehensive income (loss):
Unrealized gain (loss) on available for sale
marketable securities, net of tax 47 (62)
-------- --------
Total comprehensive income (loss) $ (1,477) $ (585)
======== =======
12. GAIN ON TERMINATION OF CONTRACT
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 contract related to the termination of the
Manufacturing Agreement.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THIS MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS SECTION AND OTHER PARTS OF THIS REPORT CONTAIN
FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES
ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND SECTION 21E OF THE
SECURITIES EXCHANGE ACT OF 1934, AS AMENDED (THE "EXCHANGE ACT"), WHICH
STATEMENTS INVOLVE RISKS AND UNCERTAINTIES. THESE STATEMENTS RELATE TO OUR
FUTURE PLANS, OBJECTIVES, EXPECTATIONS AND INTENTIONS. THESE STATEMENTS MAY BE
IDENTIFIED BY THE USE OF WORDS SUCH AS "MAY", "COULD", "WOULD", "SHOULD",
"WILL", "EXPECTS", "ANTICIPATES", "INTENDS", "PLANS", "BELIEVES", "ESTIMATES",
AND SIMILAR EXPRESSIONS. 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.,
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, was obtained through the contribution of
our building integrated photovoltaic business to Gloria Solar. This transaction
has allowed us to focus more of our attention on our core solar business, while
continuing to expand the Spire brand name in the marketplace.
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.
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 40% of net
sales and revenues for the three months ended March 31, 2009, continue to
constitute a significant portion of our net sales and revenues.
12
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
March 31,
--------------------
2009 2008
-------- --------
Net sales and revenues 100% 100%
Cost of sales and revenues 88 75
-------- --------
Gross profit 12 25
Selling, general and administrative expenses (33) (26)
Internal research and development expenses (2) (1)
Gain on termination of contract 12 --
-------- --------
Loss from operations (11) (2)
Other loss, net (1) (2)
-------- --------
Loss before income tax provision (12) (4)
Income tax provision -- --
-------- --------
Net loss (12%) (4%)
======== ========
OVERALL
Our total net sales and revenues for the three months ended March 31, 2009
were $12.3 million as compared to $14.5 million for the three months ended March
31, 2008, which represents a decrease of $2.2 million or 15%. The decrease was
primarily attributable to a $1.7 million decrease in solar sales and a $781
thousand decrease in optoelectronics sales, partially offset by a slight
increase in biomedical sales.
SOLAR BUSINESS UNIT
Sales in our solar business unit decreased 17% during the three months
ended March 31, 2009 to $8.6 million as compared to $10.3 million in the three
months ended March 31, 2008. The decrease is the result of a slowdown of solar
equipment shipments reflecting the overall decrease in activity in the solar
power industry due to a further deepening of the current global economic
recession.
BIOMEDICAL BUSINESS UNIT
Revenues of our biomedical business unit increased 9% during the three
months ended March 31, 2009 to $3.1 million as compared to $2.8 million in the
three months ended March 31, 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 54% to $656
thousand during the three months ended March 31, 2009 as compared to $1.4
million in the three months ended March 31, 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 Gain on Termination of Contact.
Three Months Ended March 31, 2009 Compared to Three Months Ended March 31, 2008
-------------------------------------------------------------------------------
NET SALES AND REVENUES
The following table categorizes our net sales and revenues for the periods
presented:
Three Months Ended
March 31, Decrease
----------------------- --------------------
(in thousands) 2009 2008 $ %
---------- ---------- ---------- -------
Sales of goods $ 9,429 $ 10,995 $ (1,566) (14%)
Contract research, services and license revenues 2,865 3,543 (678) (19%)
---------- ---------- ---------- -------
Net sales and revenues $ 12,294 $ 14,538 $ (2,244) (15%)
========== ========== ========== =======
13
The 14% decrease in sales of goods for the three months ended March 31,
2009 as compared to the three months ended March 31, 2008 was primarily due to a
decrease in solar equipment revenues partially offset by catheter sales and new
sales of solar materials of $1.5 million in 2009. Solar equipment sales
decreased 31% in 2009 as compared to 2008 primarily due to an overall slow down
in solar power industry activity.
The 19% decrease in contract research, services and license revenues for
the three months ended March 31, 2009 as compared to the three months ended
March 31, 2008 is primarily attributable to a decrease in optoelectronics,
royalties and research and development activities, partially offset by
orthopedics service revenue. Revenue from our optoelectronics processing
services (Spire Semiconductor) decreased 54% 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 Gain on Termination of Contact). Revenue from royalties decreased 100%
as a result of the termination of contract with Nisshinbo Industries, Inc. in
November. Revenues from our research and development activities decreased 31% in
2009 as compared to 2008 primarily due to a decrease in the number and value of
contracts associated with funded research and development. Revenues from our
orthopedic activities increased 29% 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.
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 March 31, Increase/(Decrease)
------------------------------------- ---------------------
(in thousands) 2009 % 2008 % $ %
--------- ----- --------- ----- ------ -----
Cost of goods sold $ 8,677 92% $ 8,494 77% $183 2%
Cost of contract research,
services and licenses 2,164 76% 2,374 67% (210) (9%)
--------- --------- ------
Net cost of sales and revenues $10,841 88% $10,868 75% $(27) 0%
========= ========= ======
Cost of goods sold increased 2% for the three months ended March 31, 2009
as compared to the three months ended March 31, 2008, primarily as a result of
costs related to solar materials and a provision for a reserve of $504 thousand
related to estimated costs to complete two solar projects; partially offset by a
decrease in solar equipment costs related to a decrease in associated revenue.
As a percentage of sales, cost of goods sold was 92% of sales of goods in 2009
as compared to 77% of sales of goods in 2008. This increase in the percentage of
sales in 2009 is due to the provision for a reserve of $504 thousand related to
estimated costs to complete two solar projects and an unfavorable product mix
with lower margins in solar equipment sales along with an unfavorable
utilization of solar manufacturing overhead.
Cost of contract research, services and licenses decreased 9% for the three
months ended March 31, 2009 as compared to the three months ended March 31,
2008, primarily as a result of decreased costs at our optoelectronics facility
(Spire Semiconductor) due to lower associated revenues along with decreased
costs of our contract research activities due to lower volumes. Cost of contract
research, services and licenses as a percentage of revenue increased to 76% of
revenues in 2009 from 67% in 2008, primarily due to unfavorable margin related
to our optoelectronics facility, partially offset by favorable margins in
orthopedic services in 2008.
Cost of sales and revenues also includes approximately $36 thousand and $45
thousand of stock-based compensation for the three months ending March 31, 2009
and 2008, respectively.
OPERATING EXPENSES
The following table categorizes our operating expenses for the periods
presented, stated in dollars and as a percentage of total sales and revenues:
Three Months Ended March 31, Increase
------------------------------------- ----------------
(in thousands) 2009 % 2008 % $ %
--------- ----- --------- ----- ------ -----
Selling, general and administrative $ 4,045 33% $ 3,778 26% $267 7%
Internal research and development 311 2% 111 1% 200 180%
--------- --------- ------
Operating expenses $ 4,356 35% $ 3,889 27% $467 12%
========= ========= ======
14
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expense increased 7% in the three
months ended March 31, 2009 as compared to the three months ended March 31,
2008, primarily as a result of an increase in corporate staffing levels and
related employee costs to support our overall growth, partially offset by a
decrease in professional services. Selling, general and administrative expense
increased to 33% of sales and revenues in 2009 as compared to 26% in 2008. The
increase was primarily due to the under absorption of selling, general and
administrative overhead costs by the 15% decrease in sales and revenues.
Operating expenses includes approximately $113 thousand and $151 thousand
of stock-based compensation for the three months ending March 31, 2009 and 2008,
respectively.
INTERNAL RESEARCH AND DEVELOPMENT
Internal research and development expense increased 180% in the three
months ended March 31, 2009 as compared to the three months ended March 31,
2008, primarily as a result of our cost sharing contract with the National
Renewable Energy Laboratory ("NREL") reducing 2008 costs. As a percentage of
sales and revenue, internal research and development expenses remained increased
slightly to 2% of sales and revenues in 2009 as compared to 1% in 2008.
GAIN ON TERMINATION OF CONTRACT
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.
OTHER INCOME (EXPENSE), NET
We earned $11 thousand and $9 thousand of interest income for the three
months ended March 31, 2009 and 2008, respectively. We incurred interest expense
of $69 thousand for both three months ended March 31, 2009 and 2008. We recorded
a loss of $280 thousand and $130 thousand on equity investment in joint venture
with Gloria Solar for the three months ended March 31, 2009 and 2008,
respectively. We had a currency exchange gain of approximately $209 thousand and
a currency exchange loss of $114 thousand during the three months ended March
31, 2009 and 2008, respectively.
INCOME TAXES
We recorded a provision for income taxes of $27 thousand for the three
months ended March 31, 2009. We did not record an income tax provision or
benefit in the three months ending March 31, 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.
NET LOSS
We reported a net loss for the three months ended March 31, 2009 and 2008
of approximately $1.52 million and $523 thousand, respectively. The net loss
increased approximately $1.0 million primarily due to the decline in sales and
revenue and decreased margins, partially offset by a one time gain on
termination of contract.
15
Liquidity and Capital Resources
March 31, December 31, Decrease
(in thousands) 2009 2008 $ %
--------- ------------ --------- -------
Cash and cash equivalents $ 2,329 $ 5,971 $(3,642) (61%)
Working capital $ 4,245 $ 6,835 $(2,590) (38%)
--------------------------------------------------------------------------
Cash and cash equivalents decreased due to cash used in operating
activities, primarily inventories, and to a lesser extent investing and
financing activities. The overall reduction in working capital is due to a
decrease in cash and an increase in current liabilities, primarily accounts
payable, partially offset by an increase in inventories. 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 March
31, 2009, our accumulated deficit was approximately $8.4 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
March 31, 2010.
LOAN AGREEMENTS
On May 25, 2007, we and our wholly-owned subsidiary, Spire Semiconductor,
LLC, entered into a Loan and Security Agreement (the "Equipment Credit
Facility") with Silicon Valley Bank (the "Bank"). Under the Equipment Credit
Facility, for a one-year period, we and Spire Semiconductor could borrow up to
$3.5 million in the aggregate to finance certain equipment purchases (including
reimbursement of certain previously-made purchases). Advances made under the
Equipment Credit Facility would bear interest at the Bank's prime rate, as
determined, plus 0.5% and payable in thirty-six (36) consecutive monthly
payments following the funding date of that advance.
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 are secured
by substantially all of our assets and advances under the Revolving Credit
Facility are limited to 80% of eligible receivables and the lesser of 25% of the
value of our eligible inventory, as defined, or $2.5 million if the inventory is
backed by a customer letter of credit. Interest on outstanding borrowings
accrues at a rate per annum equal to the greater of Prime Rate plus one percent
(1.0%) or seven percent (7.0%). In addition, we agreed to pay to the Bank a
collateral monitoring fee of $750 per month in the event we are in default of
our covenants and agreed to the following additional terms: (i) $50 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 terminate 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 (7.75% at March 31, 2009) 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 will be factored in when calculating our borrowing base under the
Revolving Credit Facility.
16
Under the amended terms of both credit facilities, as long as any
commitment remains outstanding under the facilities, we must comply with an
adjusted quick ratio covenant and a minimum monthly net income covenant. In
addition, until all amounts under the credit facilities with the Bank are
repaid, covenants under the credit facilities impose restrictions on our ability
to, among other things, incur additional indebtedness, create or permit liens on
our assets, merge, consolidate or dispose of assets (other than in the ordinary
course of business), make dividend and other restricted payments, make certain
debt or equity investments, make certain acquisitions, engage in certain
transactions with affiliates or change the business conducted by us and our
subsidiaries. Any failure by us to comply with the covenants and obligations
under the credit facilities could result in an event of default, in which case
the Bank may be entitled to declare all amounts owed to be due and payable
immediately. Our obligations under the credit facilities are secured by
substantially all of our assets.
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.
Our Equipment Credit Facility principal balance outstanding was $1.46
million and $1.75 million at March 31, 2009 and December 31, 2008, respectively.
Our Revolving Credit Facility principal balance outstanding was $1.5 million at
March 31, 2009 and December 31, 2008. We were in compliance with our credit
facility covenants as of March 31, 2009.
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.
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
of the Consortium Agreement in 2008. We have committed to purchase certain
pieces of equipment from European vendors; these commitments are denominated in
Euros. We bear the risk of any currency fluctuations that may be associated with
these commitments. We attempt to hedge known transactions when possible to
minimize foreign exchange risk. There were no hedged amounts at March 31, 2009
and 2008. Foreign exchange gain (loss) included in other income (expense) was
$209 thousand and $(114) thousand for the three months ended March 31, 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
17
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 for the three months ended March 31, 2009 and 2008 was $505
thousand for both periods.
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
$6.8 thousand for the three months ended March 31, 2008. This lease was
classified as a related party capital lease and a summary of payments (including
interest) follows:
Rate Per Annual Monthly Security
Year Square Foot Rent Rent Deposit
--------------------------------------------------------------------------------
(in thousands, except rate per square foot)
June 1, 2003 - May 31, 2004 $ 6.00 $ 540 $ 45 $ 135
June 1, 2004 - May 31, 2005 7.50 675 56 169
June 1, 2005 - May 31, 2006 8.50 765 64 191
June 1, 2006 - May 31, 2007 10.50 945 79 236
June 1, 2007 - May 31, 2008 $13.50 $ 1,215 $ 101 $ 304
-------
$ 4,140
=======
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 year
three months ended March 31, 2009 was $332 thousand.
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.
18
REVENUE RECOGNITION
We derive our revenues from three primary sources: (1) commercial products
including, but not limited to, solar energy manufacturing equipment, solar
energy systems and hemodialysis catheters; (2) biomedical and semiconductor
processing services; and (3) United States government funded research and
development contracts.
We generally recognizes product revenue upon shipment of products provided
there are no uncertainties regarding customer acceptance, persuasive evidence of
an arrangement exists, the sales price is fixed or determinable, and
collectibility is reasonably assured. These criteria are generally met at the
time of shipment when the risk of loss and title passes to the customer or
distributor, unless a consignment arrangement exists. Revenue from consignment
arrangements is recognized based on product usage indicating sales are complete.
We utilize a distributor network to market and sell our hemodialysis
catheters domestically. We generally recognizes revenue when the catheters are
shipped to our distributors. Gross sales reflect reductions attributable to
customer returns and various customer incentive programs including pricing
discounts and rebates. Product returns are permitted in certain sales contracts
and an allowance is recorded for returns based on our history of actual returns.
Certain customer incentive programs require management to estimate the cost of
those programs. The allowance for these programs is determined through an
analysis of programs offered, historical trends, expectations regarding customer
and consumer participation, sales and payment trends, and experience with
payment patterns associated with similar programs that had been previously
offered. An analysis of the sales return and rebate activity for the three
months ended March 31, 2009, is as follows:
(in thousands) Rebates Returns Total
--------- --------- -------
Balance - December 31, 2008 $ 152 $ 10 $ 162
Provision 129 4 133
Utilization (128) (5) (133)
------- ------- -------
Balance - March 31, 2009 $ 153 $ 9 $ 162
======= ======= =======
o Credits for rebates are recorded in the month of the actual sale.
o Credits for returns are processed when we receive the actual returned
merchandise.
o Substantially all rebates and returns are processed no later than three
months after our original shipment.
The reserve percentage of inventory held by distributors over the past
quarters has increased to approximately 17.7% at March 31, 2009, when compared
to 17% at December 31, 2008. We perform various sensitivity analyses to
determine the appropriate reserve percentage to use. To date, actual quarterly
reserve utilization has approximated the amount provided. The total inventory
held by distributors was approximately $919 thousand at March 31, 2009.
If sufficient history to make reasonable and reliable estimates of returns
or rebates does not exist, revenue associated with such practices is deferred
until the return period lapses or a reasonable estimate can be made. This
deferred revenue will be recognized as revenue when the distributor reports to
us that it has either shipped or disposed of the units (indicating that the
possibility of return is remote).
Our OEM capital equipment solar energy business builds complex customized
machines to order for specific customers. Most 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.
19
ALLOWANCE FOR DOUBTFUL ACCOUNTS
We maintain allowances for doubtful accounts for estimated losses resulting
from the inability of our customers to pay amounts due. We actively pursue
collection of past due receivables as the circumstances warrant. Customers are
contacted to determine the status of payment and senior accounting and
operations management are included in these efforts as is deemed necessary. A
specific reserve will be established for past due accounts when it is probable
that a loss has been incurred and we can reasonably estimate the amount of the
loss. We do not record an allowance for government receivables and invoices
backed by letters of credit as realizability is reasonably assured. Bad debts
are written off against the allowance when identified. There is no dollar
threshold for account balance write-offs. While rare, a write-off is only
recorded when all efforts to collect the receivable have been exhausted and only
in consultation with the appropriate business line manager.
IMPAIRMENT OF LONG-LIVED ASSETS
Long-lived assets, such as property and equipment and amortizable
intangibles, are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. The determination of recoverability is based on fair value. If
the fair value is less than the carrying value, we recognize an impairment loss
to operations in the period in which impairment is determined. Impairment is
measured as the amount by which the carrying value exceeds the fair value of the
asset.
STOCK-BASED COMPENSATION
We account for our stock-based compensation plans in accordance with the
fair value recognition provisions of 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.
20
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 three months ended March 31, 2009, are as
follows:
(in thousands)
Balance at December 31, 2008 $ 495
Provision charged to income 124
Usage (106)
-------
Balance at March 31, 2009 $513
=======
Contractual Obligations, Commercial Commitments and Off-Balance Sheet
---------------------------------------------------------------------
Arrangements
------------
The following table summarizes our gross contractual obligations at March 31,
2009 and the maturity periods and the effect that such obligations are expected
to have on our liquidity and cash flows in future periods:
Payments Due by Period
------------------------------------------------------
Less than 2 - 3 4 - 5 More Than
Contractual Obligations Total 1 Year Years Years 5 Years
---------------------------------- ---------- ---------- -------- -------- ----------
(in thousands)
Equipment Credit Facility (SVB) $ 1,535 $ 1,240 $ 295 -- --
Revolving Credit Facility (SVB) $ 1,500 $ 1,500 -- -- --
Purchase obligations $15,988 $15,879 $ 109 -- --
Operating leases:
Unrelated party operating leases $ 235 $ 131 $ 104 -- --
Related party operating leases $16,292 $ 3,111 $6,750 $4,292 $2,139
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 $4.1 million and $4.2 million at
March 31, 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, March 31, 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
March 31, 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.
21
We have an ineffective control environment. This has been previously
disclosed in prior filings. Management has designed and implemented some
effective controls, however, these controls are not sufficient and are not
operating effectively. Efforts to remediate deficiencies were impeded by an
evolving control environment brought on by the rapid expansion in our business.
We did not maintain an effective financial reporting process, ensure timely and
accurate completion of financial statements and we did not maintain effective
monitoring controls including reconciliations and analysis of key accounts. We
did not have a sufficient level of staffing with the necessary knowledge,
experience and training to ensure the completeness and accuracy of our financial
statements. In addition, certain finance positions were staffed with individuals
who did not possess the level of accounting knowledge, experience and training
in the application of US GAAP commensurate with our financial reporting
requirements. Specifically, the financial reporting organization structure was
not adequate to support the size, complexity or activities of our Company.
This affected our ability to maintain effective monitoring controls and
related segregation of duties over automated and manual transactions processes.
Specifically, inadequate segregation of duties led to untimely identification
and resolution of accounting and disclosure matters and failure to perform
timely and effective supervision and reviews. We did not maintain effective
controls over our IT environment. Specifically, we did not perform a timely
review of restricted user access in our application software system and we did
not consistently follow our defined back up polices and procedures.
As a result of the foregoing, management concluded that our internal
control over financial reporting was not effective as of December 31, 2008.
Management is actively addressing operational and internal control
remediation efforts. New policies and procedures have been created and existing
policies and procedures have been reviewed and modified as part of our
documentation of internal control over financial reporting. Management believes
these new controls, policies and procedures, training of key personnel, 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 March 31, 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
There have been no material changes to any of the material legal
proceedings described in Part I, Item 3 ("Legal Proceedings") of our Annual
Report on From 10-K for the year ended December 31, 2008.
22
ITEM 1A. RISK FACTORS
There have been no material changes in the Risk Factors described in
Part I, Item 1A ("Risk Factors") of our Annual Report on Form 10-K for the year
ended December 31, 2008.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
31.1 Certification of the Chairman of the Board, Chief Executive
Officer and President pursuant to ss.302 of the Sarbanes-Oxley
Act of 2002.
31.2 Certification of the Chief Financial Officer and Treasurer
pursuant to ss.302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of the Chairman of the Board, Chief Executive
Officer and President pursuant to 18 U.S.C. ss.1350, as
adopted pursuant to ss.906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification of the Chief Financial Officer and Treasurer
pursuant to 18 U.S.C. ss.1350, as adopted pursuant to ss.906
of the Sarbanes-Oxley Act of 2002.
23
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: May 15, 2009 By: /s/ Roger G. Little
-----------------------------------
Roger G. Little
Chairman of the Board, Chief Executive
Officer and President
Dated: May 15, 2009 By: /s/ Christian Dufresne
-----------------------------------
Christian Dufresne, Ph. D.
Chief Financial Officer and Treasurer
24
EXHIBIT INDEX
Exhibit Description
------- -----------
31.1 Certification of the Chairman of the Board, Chief Executive Officer and
President pursuant to ss.302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of the Chief Financial Officer and Treasurer pursuant to
ss.302 of the Sarbanes-Oxley Act of 2002
32.1 Certification of the Chairman of the Board, Chief Executive Officer and
President pursuant to 18 U.S.C. ss.1350, as adopted pursuant to ss.906
of the Sarbanes-Oxley Act of 2002.
32.2 Certification of the Chief Financial Officer and Treasurer pursuant to
18 U.S.C. ss.1350, as adopted pursuant to ss.906 of the Sarbanes-Oxley
Act of 2002.
25