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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, 2007; or
|_| Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the transition period from _______ to _______
Commission file number: 0-12742
SPIRE CORPORATION
-----------------
(Exact name of registrant as specified in its charter)
MASSACHUSETTS 04-2457335
------------- ----------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
ONE PATRIOTS PARK
BEDFORD, MASSACHUSETTS 01730-2396
---------------------------------
(Address of principal executive offices)
781-275-6000
------------
(Registrant's telephone number including area code)
Indicate by "X" whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports); and (2) has been subject to such
filing requirements for the past 90 days.
Yes |X| No |_|
Indicate by check mark whether the registrant is a large accelerated
filer, an electronic filer, or a non-accelerated filer. See definition of
"accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange
Act. (Check one):
Large accelerated filer |_| Accelerated filer |_| Non-accelerated filer |X|
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Act). Yes |_| No |X|
The number of shares of the registrant's common stock outstanding as of May 1,
2007 was 8,189,663:
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TABLE OF CONTENTS
Page
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PART I. FINANCIAL INFORMATION
Item 1. Unaudited Condensed Consolidated Financial Statements:
Unaudited Condensed Consolidated Balance Sheets as of March 31, 2007 and December 31, 2006 ........ 1
Unaudited Condensed Consolidated Statements of Operations
for the Three Months Ended March 31, 2007and 2006 .................................................. 2
Unaudited Condensed Consolidated Statements of Cash Flows
for the Three Months Ended March 31,2007 and 2006 ................................................. 3
Notes to Unaudited Condensed Consolidated Financial Statements .................................... 4
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ............ 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk ....................................... 18
Item 4. Controls and Procedures .......................................................................... 18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ................................................................................ 19
Item 1A. Risk Factors ..................................................................................... 19
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds ...................................... 19
Item 3. Defaults Upon Senior Securities .................................................................. 19
Item 4. Submission of Matters to a Vote of Security Holders .............................................. 19
Item 5. Other Information ................................................................................ 19
Item 6. Exhibits ......................................................................................... 19
Signatures ....................................................................................... 20
PART I
FINANCIAL INFORMATION
ITEM 1. UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SPIRE CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
MARCH 31, DECEMBER 31,
2007 2006
------------ ------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 3,598,000 $ 1,536,000
Restricted cash 391,000 269,000
------------ ------------
3,989,000 1,805,000
Short-term investments -- 3,031,000
Restricted short-term investments -- 1,969,000
Accounts receivable - trade, net 3,059,000 4,010,000
Inventories, net 7,535,000 4,217,000
Deposits on equipment for inventory 1,621,000 2,580,000
Prepaid expenses and other current assets 447,000 737,000
------------ ------------
Total current assets 16,651,000 18,349,000
Net property and equipment 6,448,000 6,673,000
Intangible and other assets, net of accumulated amortization 842,000 844,000
Available-for-sale investments at quoted market value 1,469,000 1,461,000
Restricted cash - long-term -- 121,000
Deposit - related party 236,000 236,000
------------ ------------
Total assets $ 25,646,000 $ 27,684,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of capital lease obligation - related party $ 1,113,000 $ 1,027,000
Accounts payable 3,025,000 1,982,000
Accrued liabilities 2,689,000 5,006,000
Advances on contracts in progress 7,509,000 6,396,000
------------ ------------
Total current liabilities 14,336,000 14,411,000
------------ ------------
190,000
Long-term portion of capital lease obligation - related party 486,000
Long-term portion of advances on contracts in progress 1,722,000 1,823,000
Deferred compensation 1,469,000 1,461,000
Deferred taxes 39,000 40,000
------------ ------------
Total long-term liabilities 3,420,000 3,810,000
------------ ------------
Total liabilities 17,756,000 18,221,000
------------ ------------
COMMITMENTS AND CONTINGENCIES:
STOCKHOLDERS' EQUITY
Common stock, $0.01 par value; 20,000,000 shares authorized;
8,263,137 shares issued and outstanding on March 31, 2007
and 8,236,663 shares issued and outstanding on December
31, 2006 83,000 82,000
Additional paid-in capital 19,250,000 19,077,000
Accumulated deficit (11,502,000) (9,756,000)
Accumulated other comprehensive income 59,000 60,000
------------ ------------
Total stockholders' equity 7,890,000 9,463,000
------------ ------------
Total liabilities and stockholders' equity $ 25,646,000 $ 27,684,000
============ ============
See accompanying notes to unaudited condensed consolidated financial statements.
1
SPIRE CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31,
----------------------------
2007 2006
------------ ------------
NET SALES AND REVENUES
Sales of goods $ 4,339,000 $ 2,863,000
Contract research, service and license revenues 2,658,000 2,510,000
------------ ------------
Total net sales and revenues 6,997,000 5,373,000
------------ ------------
COSTS OF SALES AND REVENUES
Cost of goods sold 3,526,000 2,354,000
Cost of contract research, services and licenses 2,173,000 2,244,000
------------ ------------
Total cost of sales and revenues 5,699,000 4,598,000
Gross Margin 1,298,000 775,000
OPERATING EXPENSES
Selling, general and administrative expenses 3,009,000 2,593,000
Internal research and development expenses 45,000 158,000
------------ ------------
Total operating expenses 3,054,000 2,751,000
------------ ------------
LOSS FROM OPERATIONS (1,755,000) (1,976,000)
Other income (expense), net 9,000 (28,000)
------------ ------------
Loss before income tax benefit (1,746,000) (2,004,000)
Income tax benefit -- --
------------ ------------
Net loss $ (1,746,000) $ (2,004,000)
============ ============
LOSS PER SHARE OF COMMON STOCK - BASIC AND DILUTED $ (0.21) $ (0.28)
============ ============
Weighted average number of common and common equivalent shares outstanding -
basic and diluted 8,246,691 7,236,019
============ ============
See accompanying notes to unaudited condensed consolidated financial statements.
2
SPIRE CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31,
----------------------------
2007 2006
------------ ------------
Cash flows from operating activities:
Net loss $ (1,746,000) $ (2,004,000)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization 455,000 527,000
Loss on impairment of capital equipment 78,000 --
Deferred compensation (1,000) 24,000
Stock-based compensation 71,000 59,000
Changes in assets and liabilities:
Restricted cash (1,000) 397,000
Accounts receivable, net 951,000 643,000
Inventories (3,318,000) 804,000
Prepaid expenses and other current assets 1,249,000 88,000
Accounts payable, accrued liabilities and other liabilities (1,275,000) (357,000)
Advances on contracts in progress 1,012,000 (714,000)
------------ ------------
Net cash used in operating activities (2,525,000) (532,000)
------------ ------------
Cash flows from investing activities:
Proceeds from maturity of short-term investments 5,000,000 --
Additions to property and equipment (279,000) (100,000)
Increase in intangible and other assets (28,000) (76,000)
------------ ------------
Net cash provided by (used in) investing activities 4,693,000 (176,000)
------------ ------------
Cash flows from financing activities:
Principal payment on capital lease obligations -- (105,000)
Principal payment on capital lease obligations - related parties (210,000) (153,000)
Proceeds from exercise of stock options 104,000 141,000
------------ ------------
Net cash used in financing activities (106,000) (117,000)
------------ ------------
Net increase (decrease) in cash and cash equivalents 2,062,000 (825,000)
Cash and cash equivalents, beginning of period 1,536,000 3,630,000
------------ ------------
Cash and cash equivalents, end of period $ 3,598,000 $ 2,805,000
============ ============
Supplemental disclosures of cash flow information:
Interest received $ 44,000 $ 19,000
============ ============
Interest paid $ 1,000 $ 11,000
============ ============
Interest paid - related party $ 25,000 $ 38,000
============ ============
See accompanying notes to unaudited condensed consolidated financial statements.
3
SPIRE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007
1. DESCRIPTION OF THE BUSINESS
Spire Corporation (the "Company") develops, manufactures and markets
highly-engineered products and services in three principal business areas: (i)
solar, (ii) biomedical and (iii) optoelectronics generally bringing to bear
expertise in materials technologies across all three business areas.
In the solar area, the Company develops, manufactures and markets
specialized equipment for the production of terrestrial photovoltaic modules
from solar cells. The Company's equipment has been installed in approximately
190 factories in 46 countries. The Company also provides custom and building
integrated photovoltaic (BIPV) modules, stand-alone emergency power backup and
photovoltaic systems integration services using technology developed by the
Company.
In the biomedical area, the Company provides value-added surface
treatments to manufacturers of orthopedic and other medical devices that enhance
the durability, antimicrobial characteristics or other material characteristics
of their products; develops and markets hemodialysis catheters and related
devices for the treatment of chronic kidney disease; and performs sponsored
research programs into practical applications of advanced biomedical and
biophotonic technologies.
In the optoelectronics area, the Company provides custom compound
semiconductor foundry and fabrication services on a merchant basis to customers
involved in biomedical/biophotonics instruments, telecommunications and defense
applications. Services include compound semiconductor wafer growth, other thin
film processes and related device processing and fabrication services. The
Company also provides materials testing services and performs services in
support of sponsored research into practical applications of optoelectronic
technologies.
The Company has incurred significant operating losses. Loss from
operations, before gain on sales of licenses and extinguishment of purchase
commitment, were $8.3 million and $6.6 million in 2006 and 2005, respectively.
Loss from operations for the quarter ended March 31, 2007 was $1.8 million.
These losses from operations have resulted in cash losses (earnings (loss) from
operations excluding gain on sales of licenses plus or minus non-cash
adjustments) of approximately $5.4 million and $4.2 million in each of 2006 and
2005, respectively and $1.1 million for the quarter. The Company has funded
these cash losses from cash receipts of $7.7 million from proceeds of a common
stock offering in 2006 and $6.7 million related to the sale of certain licenses
to its medical products and solar technologies in 2005. As of March 31, 2007,
the Company had cash and cash equivalents of $3.6 million. While the Company
believes it has inherent assets and technology that it could sell or license in
the near term, there is no guarantee that the Company would be able to sell or
license those assets on a timely basis and at appropriate values that would
allow the Company to continue to fund its operating losses. The Company has
developed several plans to mitigate cash losses primarily from increased
revenues and, if required, potential cost reduction efforts and outside
financing. The Company believes it has sufficient resources to continue as a
going concern.
2. INTERIM FINANCIAL STATEMENTS
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with the rules and regulations of the
Securities and Exchange Commission regarding interim financial reporting.
Certain information and footnote disclosures normally included in consolidated
financial statements prepared in accordance with accounting principles generally
accepted in the United States of America have been condensed or omitted in
accordance with such rules and regulations. These unaudited condensed
consolidated financial statements should be read in conjunction with the annual
audited consolidated financial statements and notes thereto for the year ended
December 31, 2006, included in our Annual Report on Form 10KSB 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, 2007 and December 31,
2006 and the results of its operations and cash flows for the three months ended
March 31, 2007 and 2006. The results of operations for the three months ended
March 31, 2007 are not necessarily indicative of the results to be expected for
the fiscal year ending December 31, 2007. The condensed consolidated balance
sheet as of December 31, 2006 has been derived from
4
audited financial statements as of that date.
The accounting policies followed by the Company are set forth in
Footnote 2 to the Company's consolidated financial statements in its annual
report on Form 10-KSB for the year ended December 31, 2006. Certain items in the
prior year statement of operations have been re-classed to conform to current
year presentation.
FIRST QUARTER DISCLOSURE FOR FIN 48
In June, 2006, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 48, "Accounting for Uncertainty in Income Taxes, an
interpretation of FASB Statement 109" ("FIN 48"). This statement clarifies the
criteria that an individual tax position must satisfy for some or all of the
benefits of that position to be recognized in a company's financial statements.
FIN 48 prescribes a recognition threshold of more likely -than-not, and a
measurement attribute for all tax positions taken or expected to be taken on a
tax return, in order for those tax positions to be recognized in the financial
statements.
Effective January 1, 2007, the Company has adopted the provisions of FIN
48. The Company does not expect that the amounts of unrecognized tax benefits
will change significantly within the next 12 months.
The Company is currently subject to audit by the Internal Revenue
Service for the calendar years ended 2003, 2004, 2005 and 2006. The Company and
its Subsidiaries state income tax returns are subject to audit for the calendar
years ended 2003, 2004, 2005 and 2006.
The Company has determined that no liability exists for interest and
penalties related to uncertain tax positions as of December 31, 2006 and March
31, 2007. The Company accounts for interest and penalties related to uncertain
tax positions as part of its provision for federal and state income taxes.
3. ACCOUNTS RECEIVABLE/ADVANCES ON CONTRACTS IN PROGRESS
Net accounts receivable, trade consists of the following:
March 31, December 31,
2007 2006
---------- ----------
Amounts billed $2,930,000 $3,876,000
Retainage 8,000 8,000
Accrued revenue 358,000 399,000
---------- ----------
3,296,000 4,283,000
Less: Allowance for sales returns and
doubtful accounts (237,000) (273,000)
---------- ----------
Net accounts receivable $3,059,000 $4,010,000
========== ==========
Advances on contracts in progress $9,231,000 $8,219,000
========== ==========
Retainage represents revenues on certain United States government
sponsored research and development contracts. These amounts, which usually
represent 15% of the Company's research fee on each applicable contract, are not
collectible until a final cost review has been performed by government auditors.
Included in retainage are amounts expected to be collected after one year, which
totaled approximately $8,000 at March 31, 2007. All other accounts receivable
are expected to be collected within one year.
All contracts with United States government agencies have been audited
by the government through December 2005. The Company has not incurred
significant losses or adjustments as a result of government audits.
The Company maintains allowances for doubtful accounts for estimated
losses resulting from the inability of its customers to pay amounts due. The
Company actively pursues collection of past due receivables as the circumstances
warrant. Customers are contacted to determine the status of payment and senior
accounting and operations management are included in these efforts as is deemed
necessary. A specific reserve will be established for past due accounts over 60
days and over a specified amount, when it is probable that a loss has been
incurred and the Company can reasonably estimate the amount of the loss. The
Company does not record an allowance for government receivables and invoices
backed by letters of credit as realizeability is reasonably assured. Bad debts
are written off against the allowance when identified. There is no dollar
threshold for account balance write-offs. While rare, a write-off is only
recorded when all efforts to collect the receivable have been exhausted and only
in consultation with the appropriate business line manager.
In addition, the Company maintains an allowance for potential future
product returns and rebates related to current
5
period revenues. The Company analyzes the rate of historical returns when
evaluating the adequacy of the allowance for sales returns and allowances.
Returns and rebates are charged against the allowance when incurred.
Advances on contracts in progress represent contracts for which billings
have been presented to the customer but revenue has not been recognized.
4. INVENTORIES
Inventories consist of the following:
March 31, December 31,
2007 2006
---------- ----------
Raw materials $3,247,000 $1,519,000
Work in process 3,918,000 2,310,000
Finished goods 370,000 388,000
---------- ----------
$7,535,000 $4,217,000
========== ==========
5. LOSS PER SHARE
The following table provides a reconciliation of the denominators of the
Company's reported basic and diluted loss per share computations for the periods
ended:
Three Months Ended March 31,
---------------------------
2007 2006
--------- ---------
Weighted average number of common
and common equivalent shares
outstanding - basic 8,246,691 7,236,019
Add: Net additional common shares
upon assumed exercise of common
stock options -- --
--------- ---------
Adjusted weighted average number of
common and common equivalents shares
outstanding - diluted 8,246,691 7,236,019
========= =========
For the three months ended March 31, 2007 and 2006, 6,250 shares of
common stock issuable relative to stock options had exercise prices per share
that exceeded the average market price of the Company's common stock and were
excluded from the calculation of diluted shares since the inclusion of such
shares would be anti-dilutive.
In addition, for the three months ended March 31, 2007 and 2006, 101,050
and 201,254 shares, respectively, of common stock related to stock options were
excluded from the calculation of dilutive shares since the inclusion of such
shares would be anti-dilutive due to the Company's net loss position.
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."
Total
Solar Biomedical Optoelectronics Company
---------- ---------- --------------- -----------
For the three months ended March 31, 2007
Net sales and revenues $3,594,000 $2,505,000 $ 898,000 $ 6,997,000
Loss from operations $ (583,000) $ (512,000) $ (660,000) $(1,755,000)
For the three months ended March 31, 2006
Net sales and revenues $2,538,000 $2,328,000 $ 507,000 $ 5,373,000
Loss from operations $ (430,000) $ (652,000) $ (895,000) $(1,977,000)
6
The following table shows net sales and revenues by geographic area
(based on customer location):
Three Months Ended March 31,
-------------------------------------------
2007 % 2006 %
---------- ---- ---------- ----
Foreign $3,786,000 54% $2,492,000 46%
United States 3,211,000 46% 2,881,000 54%
---------- ---- ---------- ----
$6,997,000 100% $5,373,000 100%
========== ==== ========== ====
Revenues from contracts with United States government agencies for the
three months ended March 31, 2007 and 2006 were approximately $254,000 and
$620,000, or 4% and 12% of consolidated net sales and revenues, respectively.
Three customers accounted for approximately 50% and two customers
accounted for approximately 32% of the Company's gross sales during the three
months ended March 31, 2007 and 2006, respectively. Three customers represented
38% of trade account receivables at March 31, 2007 and one customer represented
27% of trade account receivables at March 31, 2006.
7. INTANGIBLE AND OTHER ASSETS
Patents amounted to $131,519, net of accumulated amortization of
$651,083, at March 31, 2007. Licenses amounted to $156,416, net of accumulated
amortization of $168,584 at March 31, 2007. Patent cost is primarily composed of
cost associated with securing and registering patents that the Company has been
awarded or that have been submitted to, and the Company believes will be
approved by, the government. License cost is composed of the cost to acquire
rights to the underlying technology or know-how. These costs are capitalized and
amortized over their useful lives or terms, ordinarily five years, using the
straight-line method. There are no expected residual values related to these
patents or licenses. For disclosure purposes, the table below includes future
amortization expense for licenses and patents owned by the Company as well as
$554,035 of estimated amortization expense on a five-year straight-line basis
related to patents that remain pending as of the balance sheet date.
Estimated amortization expense for the periods ending December 31, is as
follows:
Year Amortization Expense
----------------------- --------------------
2007 remaining 9 months $190,522
2008 192,340
2009 151,598
2010 146,390
2011 and beyond 161,120
--------
$841,970
========
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, 2007 December 31, 2006
-------------- -----------------
Equity investments $1,208,000 $1,160,000
Government bonds 230,000 262,000
Cash and money market funds 31,000 39,000
---------- ----------
$1,469,000 $1,461,000
========== ==========
These investments have been classified as long-term available-for-sale
investments and are reported at fair value, with unrealized gains and losses
included in accumulated other comprehensive loss, net of related tax effect. As
of March 31, 2007, the net unrealized gain on these marketable securities was
approximately $59,000.
7
9. NOTES PAYABLE AND CREDIT ARRANGEMENTS
The Company has a $2,000,000 Loan Agreement (the "Agreement") with
Citizens Bank of Massachusetts (the "Bank"), which expires on June 26, 2007. The
Agreement provides Standby Letter of Credit Guarantees for foreign and domestic
customers, which are 100% secured with cash. At March 31, 2007, the Company had
approximately $391,000 of restricted cash associated with outstanding Letters of
Credit. Standby Letters of Credit under this Agreement bear interest at 1%. The
Agreement also provides the Company with the ability to convert to a $2,000,000
revolving line of credit, based upon eligible accounts receivable and certain
conversion covenants. Loans under this revolving line of credit bear interest at
the Bank's prime rate, as determined, plus 1/2% (8.75% at March 31, 2007.) At
March 31, 2007, the Company had not exercised its conversion option and no
amounts were outstanding under the revolving line of credit. A commitment fee of
..25% is charged on the unused portion of the borrowing base. The Agreement
contains covenants including certain financial reporting requirements. At March
31, 2007, the Company was in compliance with its financial reporting
requirements and cash balance covenants.
10. STOCK OPTION PLAN AND STOCK-BASED COMPENSATION
On January 1, 2006, the Company adopted the fair value recognition
provisions of Financial Accounting Standards Board ("FASB") Statement No.
123(R), Share-Based Payment ("Statement 123(R)") using the modified prospective
method. Based on an analysis of the Company's historical data, the Company
applied 14% forfeiture rates to stock options outstanding in determining its
Statement 123(R) stock-based compensation expense which it believes is a
reasonable forfeiture estimate for the period. The impact of Statement 123(R) on
the Company's results of operations resulted in recognition of stock-based
compensation expense of approximately $71,000 and $59,000 in the periods ended
March 31, 2007 and 2006, 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,
---------------------------
2007 2006
-------- --------
Cost of contract research, services and
licenses $ 5,000 $ 4,000
Cost of goods sold 1,000 9,000
Administrative and selling 65,000 46,000
-------- --------
Total stock-based compensation $ 71,000 $ 59,000
======== ========
The Company's stock option plan: the 1996 Equity Incentive Plan, expired
for the issue of grants as of December 10, 2006. This 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. The Company shareholders will vote on a new stock option
plan at their annual meeting on May 17, 2007.
A summary of options outstanding under the 1996 Equity Incentive Plan as
of March 31, 2007 and changes during the three-month period is as follows:
Weighted- Average
Average Remaining Aggregate
Number of Exercise Contractual Intrinsic
Shares Price Life (Years) Value
--------- --------- ------------ ---------
Options Outstanding at December 31, 2006 416,002 $5.21
Granted -- --
Exercised (26,474) $3.91
Cancelled/expired (10,000) $8.83
======== =====
Options Outstanding at March 31, 2007 379,528 $5.22 6.98 $2,213,000
======== =====
Options Exercisable at March 31, 2007 185,038 $3.93 5.18 $1,317,000
======== =====
8
The per-share weighted-average fair value of stock options granted
during the quarter ended March 31, 2006 was $4.34 on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions. No options were granted during the quarter ended March 31, 2007:
Expected Risk-Free Expected Expected
Year Dividend Yield Interest Rate Option Life Volatility Factor
---- -------------- ------------- ----------- -----------------
2006 -- 4.69% 7.5 years 48.8%
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,
------------------------------------
2007 2006
----------- -----------
Net loss $(1,746,000) $(2,004,000)
Other comprehensive income (loss):
Unrealized gain on available for sale
marketable securities, net of tax 1,000 24,000
----------- -----------
Total comprehensive loss $(1,745,000) $(1,980,000)
=========== ===========
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THIS MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS SECTION AND OTHER PARTS OF THIS REPORT CONTAIN
FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES
ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND SECTION 21E OF THE
SECURITIES EXCHANGE ACT OF 1934, AS AMENDED (THE "EXCHANGE ACT"), WHICH
STATEMENTS INVOLVE RISKS AND UNCERTAINTIES. THESE STATEMENTS RELATE TO OUR
FUTURE PLANS, OBJECTIVES, EXPECTATIONS AND INTENTIONS. THESE STATEMENTS MAY BE
IDENTIFIED BY THE USE OF WORDS SUCH AS "MAY", "COULD", "WOULD", "SHOULD",
"WILL", "EXPECTS", "ANTICIPATES", "INTENDS", "PLANS", "BELIEVES", "ESTIMATES",
AND SIMILAR EXPRESSIONS. THE COMPANY'S ACTUAL RESULTS AND THE TIMING OF CERTAIN
EVENTS MAY DIFFER SIGNIFICANTLY FROM THE RESULTS AND TIMING DESCRIBED IN THE
FORWARD-LOOKING STATEMENTS. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH
DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THOSE FACTORS DISCUSSED OR REFERRED
TO IN THIS REPORT AND IN THE ANNUAL REPORT ON FORM 10-KSB FOR THE YEAR ENDED
DECEMBER 31, 2006. THE FOLLOWING DISCUSSION AND ANALYSIS OF THE COMPANY'S
FINANCIAL CONDITION AND RESULTS OF OPERATIONS SHOULD BE READ IN LIGHT OF THOSE
FACTORS AND IN CONJUNCTION WITH, THE COMPANY'S ACCOMPANYING CONSOLIDATED
FINANCIAL STATEMENTS, INCLUDING THE NOTES THERETO.
OVERVIEW
Spire Corporation (the "Company") develops, manufactures and markets
highly-engineered products and services in three principal business areas: solar
equipment, biomedical and optoelectronics bringing to bear expertise in
materials technologies across all three business areas, discussed below.
In the solar equipment area, the Company develops, manufactures and
markets specialized equipment for the production of terrestrial photovoltaic
modules from solar cells. The Company's equipment has been installed in
approximately 190 factories in 46 countries. The Company also provides custom
and building integrated photovoltaic modules, stand-alone emergency power backup
and electric power grid-connected distributed power generation systems employing
photovoltaic technology developed by the Company.
In the biomedical area, the Company provides value-added surface
treatments to manufacturers of orthopedic and other medical devices that enhance
the durability, antimicrobial characteristics or other material characteristics
of their products; develops and markets hemodialysis catheters and related
devices for the treatment of chronic kidney disease; and performs sponsored
research programs into practical applications of advanced biomedical and
biophotonic technologies.
In the optoelectronics area, the Company provides compound semiconductor
foundry services on a merchant basis to customers involved in
biomedical/biophotonic instruments, telecommunications and defense applications.
Services include compound semiconductor wafer growth, other thin film processes
and related device processing and fabrication services. The Company also
provides materials testing services and performs services in support of
sponsored research into practical applications of optoelectronic technologies.
Operating results will depend upon product mix, as well as the timing of
shipments of higher priced products from the Company's solar equipment line and
delivery of solar systems. Export sales, which amounted to 54% of net sales and
revenues for the three months ended March 31, 2007, continue to constitute a
significant portion of the Company's net sales and revenues.
Results of Operations
The following table sets forth certain items as a percentage of net
sales and revenues for the periods presented:
Three Months Ended
March 31,
------------------
2007 2006
------- -------
Net sales and revenues 100% 100%
Cost of sales and revenues 81 86
------- -------
Gross profit 19 14
Selling, general and administrative expenses 43 48
Internal research and development expenses 1 3
------- -------
Loss from operations (25) (37)
Other expense, net -- --
------- -------
Loss before income tax benefit (25) (37)
Income tax benefit -- --
------- -------
Net loss (25%) (37%)
======= =======
10
OVERALL
The Company's total net sales and revenues for the three months ended
March 31, 2007 ("2007") were $6,997,000 as compared to $5,373,000 for the three
months ended March 31, 2006 ("2006") an increase of $1,624,000 or 30%. The
increase was primarily attributable to a $1,056,000 million increase in solar
sales and a $391,000 increase in optoelectronics sales.
SOLAR BUSINESS UNIT
Sales in the Company's solar business unit increased 42% during 2007 to
$3,594,000 as compared to $2,538,000 in 2006. The increase is the result of
shipments of solar equipment reflecting the overall increase in activity in the
solar power industry. The Company has focused its sales and marketing efforts on
establishing the Company as one of the premier suppliers of equipment to the
solar power industry for the manufacture of photovoltaic power modules.
BIOMEDICAL BUSINESS UNIT
Revenues of the Company's biomedical business unit increased 8% during
2007 to $2,505,000 as compared to $2,328,000 in 2006. The increase reflects
increased revenues from the Company's catheter products and orthopedics coatings
services offset by reduced revenues from research and development contracts.
OPTOELECTRONICS BUSINESS UNIT
Revenues in the Company's optoelectronics business unit increased 77% to
$898,000 during 2007 as compared to $507,000 in the prior year. The increase
reflects an overall increase in optoelectronics activities attributable to a
shift in product mix to larger scale commercial orders compared with smaller
sized research and development projects.
Three Months Ended March 31, 2007 Compared to Three Months Ended March 31, 2006
-------------------------------------------------------------------------------
NET SALES AND REVENUES
The following table categorizes the Company's net sales and revenues for
the periods presented:
Three Months Ended March 31, Increase
---------------------------- --------------------
2007 2006 $ %
---------- ---------- ---------- -------
Sales of goods $4,339,000 $2,863,000 $1,476,000 52%
Contract research, services
and license revenues 2,658,000 2,510,000 148,000 6%
---------- ---------- ----------
Net sales and revenues $6,997,000 $5,373,000 $1,624,000 30%
========== ========== ==========
The 52% increase in sales of goods for the three months ended March 31,
2007 as compared to the three months ended March 31, 2006 was primarily due to
an increase in solar equipment revenues and an increase in catheter products
sales. Solar equipment sales increased 65% in 2007 as compared to 2006 primarily
due to an overall increase in solar power industry activity. Sales of catheters
increased 58% due primarily to the introduction of its heparin-coated catheter
which was introduced in the fourth quarter of 2006.
The 6% increase in contract research, services and license revenues for
the three months ended March 31, 2007 as compared to the three months ended
March 31, 2006 is primarily attributable to an increase in orthopedics and
optoelectronics services. These increases were partially offset by a decrease in
government research and development activities. Revenues from Spire's research
and development activities decreased 46% in 2007 as compared to 2006 primarily
due to a decrease in the number and value of contracts associated with funded
research and development. Revenue from Spire's optoelectonics processing
services (Bandwidth) increased 77% in 2007 compared to 2006 as a result of
increased demand for Bandwidth's services and commercial production runs of
products from its development efforts.
11
COST OF SALES AND REVENUES
The following table categorizes the Company's cost of sales and revenues
for the periods presented, stated in dollars and as a percentage of related
sales and revenues:
Three Months Ended March 31, Increase/(Decrease)
------------------------------------------ --------------------
2007 % 2006 % $ %
---------- ----- ---------- ----- ---------- -----
Cost of goods sold $3,526,000 80% $2,354,000 82% $1,172,000 50%
Cost of contract research, services
and licenses 2,173,000 82% 2,244,000 89% (71,000) (3%)
---------- ---------- ----------
Net cost of sales and revenues $5,699,000 81% $4,598,000 86% $1,101,000 24%
========== ========== ==========
The $1,172,000 (50%) increase in cost of goods sold is primarily due to
increased costs within Spire's solar equipment product line corresponding to the
65% increase in solar equipment sales and a 58% increase in medical product
sales. The decrease in cost of goods sold as a percentage of revenue is the
result of improved contribution margins in these product lines as increased
production volume utilizes more of the available capacity.
The $71,000 (3%) decrease in cost of contract research and service
revenues in 2007 is primarily due to decreased costs within the Company's
government research and development activities corresponding to the lower level
of government research and development revenues and contracts. Although
optoelectronics revenues increased 77% from prior year level Bandwidth's costs
were unchanged. Bandwidth production costs are largely fixed and incremental
increases in revenues can have a substantial favorable impact on operations. The
Company recorded a $78,000 charge, to cost of contract research and service
revenues, for the impairment of production equipment which based on managements
assessment had no future value to the Company. The products originally
manufactured on the equipment were no longer economical to produce. The charge
represents the value of the equipment on the Company's books at March 31, 2007,
OPERATING EXPENSES
The following table categorizes the Company's operating expenses for the
periods presented, stated in dollars and as a percentage of total sales and
revenues:
Three Months Ended March 31, Increase/(Decrease)
------------------------------------------ --------------------
2007 % 2006 % $ %
---------- ----- ---------- ----- ---------- -----
Selling, general and administrative $3,009,000 43% $2,593,000 48% $ 416,000 16%
Internal research and development 45,000 1% 158,000 3% (113,000) (72%)
---------- ---------- ----------
Operating expenses $3,054,000 44% $2,751,000 51% $ 303,000 11%
========== ========== ==========
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
The increase in selling, general and administrative expense was due
primarily to commissions related to sales of solar equipment. The Company uses a
network of independent sales representatives in addition to its internal sales
personnel. The independent sales representatives are compensated on a straight
commission whereas internal sales personnel receive a base salary plus
commission. In addition royalty expense was up due to royalties on products sold
by the Company under licensing agreements with third parties. Selling, general
and administrative expense decreased to 43% of sales and revenues as compared to
48% in the prior year. The reduction was primarily due to the 31% increase in
sales and revenues compared to the 16% increase in expenses.
INTERNAL RESEARCH AND DEVELOPMENT
The decrease in research and development costs was primarily a result of
a reduction in internal research and development activities as a result of the
Company's current cost sharing contract with NREL nearing completion
OTHER EXPENSE, NET
The Company earned approximately $44,000 and $19,000 of interest income
for the quarters ended March 31, 2007 and 2006, respectively. The Company
incurred interest expense of approximately $26,000 and $48,000 for the quarters
ended March 31, 2007 and 2006, respectively. The increase in interest income is
due to the investment of proceeds from a
12
private placement of the Company's common shares on April 28, 2006. Interest
expense decreased due to payments against the principal balance of certain
capital leases. The Company lost approximately $9,000 during the period ending
March 31, 2007, due to the conversion of Japanese Yen into U.S. dollars as
compared to income of $1,000 for the same period in 2006.
INCOME TAXES
The Company did not record an income tax benefit for the three months
ended March 31, 2007. 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
The Company reported a net loss for the three months ended March 31,
2007 of approximately $1,682,000, compared to a net loss of $2,004,000 in 2006.
The net loss decreased approximately $322,000 primarily due to the increase in
sales and revenues and the improvement in gross margins.
LIQUIDITY AND CAPITAL RESOURCES
Increase/(Decrease)
March 31, December 31, ---------------------
2007 2006 $ %
---------- ---------- ----------- -----
Cash and cash equivalents $3,598,000 $1,536,000 $ 2,062,000 134%
Working capital $2,315,000 $3,938,000 $(1,623,000) (41%)
Cash and cash equivalents increased primarily due to cash from the
Company's short-term investments as they matured. Cash was used to pay the
outstanding balance on capital equipment acquired in 2006 for the expansion of
the optoelectronics business unit, and to acquire inventory to fulfill future
solar equipment orders. Generally the Company will receive advances from its
solar equipment customers to fund its acquisition of inventory. The overall
reduction in working capital is due to cash losses from operations and
additional investment in equipment of $279,000. The Company has historically
funded its operating cash requirements using operating cash flow and proceeds
from the sale and licensing of technology.
The Company has a $2,000,000 Loan Agreement (the "Agreement") with
Citizens Bank of Massachusetts (the "Bank"), which expires on June 27, 2007. The
Agreement provides Standby Letter of Credit guarantees for certain foreign and
domestic customers, which are 100% secured with cash. At March 31, 2007, the
Company had approximately $391,000 of restricted cash associated with
outstanding Letters of Credit. Standby Letters of Credit under this Agreement
bear interest at 1%. The Agreement also provides the Company with the ability to
convert to a $2,000,000 revolving line of credit, based upon eligible accounts
receivable and certain conversion covenants. Loans under this revolving line of
credit bear interest at the Bank's prime rate as determined plus 1/2% (8.25% at
March 31, 2006.) At March 31, 2007, the Company had not exercised its conversion
option and no amounts were outstanding under the revolving line of credit. A
commitment fee of .25% is charged on the unused portion of the borrowing base.
The Agreement contains covenants including certain financial reporting
requirements. At March 31, 2007, the Company was in compliance with its
financial reporting requirements and cash balance covenants.
The Company maintains allowances for doubtful accounts for estimated
losses resulting from the inability of its customers to pay amounts due. The
Company actively pursues collection of past due receivables as the circumstances
warrant. Customers are contacted to determine the status of payment and senior
accounting and operations management are included in these efforts as is deemed
necessary. A specific reserve will be established for past due accounts over 60
days and over a specified amount, when it is probable that a loss has been
incurred and the Company can reasonably estimate the amount of the loss. The
Company does not record an allowance for government receivables and invoices
backed by letters of credit as realizeability is reasonably assured. Bad debts
are written off against the allowance when identified. There is no dollar
threshold for account balance write-offs. While rare, a write-off is only
recorded when all efforts to collect the receivable have been exhausted and only
in consultation with the appropriate business line manager.
There are no material commitments by the Company for capital
expenditures. At March 31, 2007, the Company's accumulated deficit was
approximately $11,438,000, compared to accumulated deficit of approximately
$9,756,000 as of December 31, 2006.
The Company believes it has sufficient resources to finance its current
operations for the foreseeable future from operating cash flow and working
capital.
13
IMPACT OF INFLATION AND CHANGING PRICES
Historically, the Company's business has not been materially impacted by
inflation. Manufacturing equipment and solar systems are generally quoted,
manufactured and shipped within a cycle of approximately nine months, allowing
for orderly pricing adjustments to the cost of labor and purchased parts. The
Company has not experienced any negative effects from the impact of inflation on
long-term contracts. The Company's service business is not expected to be
seriously affected by inflation because its procurement-production cycle
typically ranges from two weeks to several months, and prices generally are not
fixed for more than one year. Research and development contracts usually include
cost escalation provisions.
FOREIGN CURRENCY FLUCTUATION
The Company sells only in U.S. dollars, generally against an irrevocable
confirmed letter of credit through a major United States bank. Therefore the
Company is not directly affected by foreign exchange fluctuations on its current
orders. However, fluctuations in foreign exchange rates do have an effect on the
Company's customers' access to U.S. dollars and on the pricing competition on
certain pieces of equipment that the Company sells in selected markets. The
Company received Japanese yen in exchange for the sale of a license to its solar
technology. In addition, purchases made and royalties received under the
Company's Consortium Agreement with its Japanese partner will be in Japanese
yen. The Company does not believe that foreign exchange fluctuations will
materially affect its operations. The Company has committed to purchase certain
pieces of equipment from European vendors; these commitments are denominated in
Euros. The Company bears the risk of any currency fluctuations that may be
associated with these commitments. The Company does not believe that foreign
exchange fluctuations will materially affect its operations.
RELATED PARTY TRANSACTIONS
The Company subleased 77,000 square-feet in a building leased by
Mykrolis Corporation, who in turn leased the building from SPI-Trust, a Trust of
which Roger Little, Chairman of the Board, Chief Executive Officer and President
of the Company, is the sole trustee and principal beneficiary. The 1985
sublease, originally was for a period of ten years, was extended for a five-year
period expiring on November 30, 2000 and was further extended for a five-year
period expiring on November 30, 2005. The sublease agreement provided for
minimum rental payments plus annual increases linked to the consumer price
index. Effective December 1, 2005, the Company entered into a two-year Extension
of Lease Agreement (the "Lease Extension") directly with SPI-Trust.
The Company assumed certain responsibilities of Mykrolis, the tenant
under the former lease, as a result of the Lease Extension including payment of
all building and real estate related expenses associated with the ongoing
operations of the property. The Company will allocate a portion of these
expenses to SPI-Trust based on pre-established formulas utilizing square footage
and actual usage where applicable. These allocated expenses will be invoiced
monthly and be paid utilizing a SPI-Trust escrow account of which the Company
has sole withdrawal authority. SPI-Trust is required to maintain three (3)
months of its anticipated operating costs within this escrow account. On
December 1, 2006, the Company and SPI-Trust amended the Lease Extension. The
amendment increases the leased area to 91,701 square feet. Rent expense under
this sublease, as extended and amended, for the three month period ended March
31, 2007 was approximately $340,000. In connection with this lease, the Company
is invoiced and pays certain SPI-Trust related expenses, including building
maintenance and insurance. The Company invoices SPI-Trust on a monthly basis and
SPI-Trust reimburses the Company for all such costs. The Company believes that
the terms of the Lease Extension, as amended, are commercially reasonable.
In conjunction with the acquisition of Bandwidth by the Company,
SPI-Trust, a Trust of which Roger G. Little, Chairman of the Board, Chief
Executive Officer and President of the Company, is sole trustee and principal
beneficiary, purchased from Stratos Lightwave, Inc. (Bandwidth's former owner)
the building that Bandwidth occupies in Hudson, New Hampshire for $3.7 million.
Subsequently, the Company entered into a lease for the building (90,000 square
feet) with SPI-Trust whereby the Company will pay $4.1 million to the SPI-Trust
over an initial five-year term expiring in 2008 with a Company option to extend
for five years. In addition to the rent payments the lease obligates the Company
to keep on deposit with SPI-Trust the equivalent of three months rent ($236,000
as of March 31, 2007.) The lease agreement does not provide for a transfer of
ownership at any point. Interest costs were assumed at 7%. For the quarter ended
March 31, 2007, interest expense was approximately $25,000. This lease has been
classified as a related party capital lease and a summary of
14
payments (including interest) follows:
Rate Per Annual Monthly Security
Year Square Foot Rent Rent Deposit
--------------------------- ----------- ---------- -------- --------
June 1, 2003 - May 31, 2004 $ 6.00 $ 540,000 $ 45,000 $135,000
June 1, 2004 - May 31, 2005 7.50 675,000 56,250 168,750
June 1, 2005 - May 31, 2006 8.50 765,000 63,750 191,250
June 1, 2006 - May 31, 2007 10.50 945,000 78,750 236,250
June 1, 2007 - May 31, 2008 13.50 1,215,000 101,250 303,750
----------
$4,140,000
==========
At March 31, 2007, $1,113,000 and $190,000 are reflected as the current
and long-term portions of capital lease obligation- related party, respectively,
in the consolidated balance sheet.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in accordance with accounting
principles generally accepted in the United States requires us to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Among the significant estimates affecting our consolidated
financial statements are those relating to revenue recognition, reserves for
doubtful accounts and sales returns and allowances, reserve for excess and
obsolete inventory, impairment of long-lived assets, income taxes, and warranty
reserves. We regularly evaluate our estimates and assumptions based upon
historical experience and various other factors that we believe to be reasonable
under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. To the extent actual results differ from
those estimates; our future results of operations may be affected. We believe
the following critical accounting policies affect our more significant judgments
and estimates used in the preparation of our consolidated financial statements.
Refer to Footnote 2 of our notes to consolidated financial statements in our
Annual Report on Form 10-KSB for the year ended December 31, 2006 for a
description of our accounting policies.
REVENUE RECOGNITION
The Company derives its revenues from three primary sources: (1)
commercial products including, but not limited to, solar energy manufacturing
equipment, solar energy systems and hemodialysis catheters; (2) biomedical and
semiconductor processing services; and (3) United States government funded
research and development contracts.
We generally recognize product revenue upon shipment of products
provided there are no uncertainties regarding customer acceptance, persuasive
evidence of an arrangement exists, the sales price is fixed or determinable, and
collectibility is reasonably assured. These criteria are generally met at the
time of shipment when the risk of loss and title passes to the customer or
distributor, unless a consignment arrangement exists. Revenue from consignment
arrangements is recognized based on product usage indicating sales are complete.
15
The Company utilizes a distributor network to market and sell its
hemodialysis catheters domestically. The Company generally recognizes revenue
when the catheters are shipped to its distributors. Gross sales reflect
reductions attributable to customer returns and various customer incentive
programs including pricing discounts and rebates. Product returns are permitted
in certain sales contracts and an allowance is recorded for returns based on the
Company's history of actual returns. Certain customer incentive programs require
management to estimate the cost of those programs. The allowance for these
programs is determined through an analysis of programs offered, historical
trends, expectations regarding customer and consumer participation, sales and
payment trends, and experience with payment patterns associated with similar
programs that had been previously offered. An analysis of the sales return and
rebate activity for the three months ended March 31, 2007, is as follows:
Rebates Returns Total
-------- -------- --------
Balance - December 31, 2006 $138,000 $ 17,000 $155,000
Provision 42,765 (10,125) 32,640
Utilization (70,165) 4,425 (65,740)
-------- -------- --------
Balance - March 31, 2007 $110,600 $ 11,300 $121,900
======== ======== ========
o Credits for rebates are recorded in the month of the actual sale.
o Credits for returns are processed when the actual merchandise is
received by the Company.
o Substantially all rebates and returns are processed no later than
three months after original shipment by the Company.
The reserve percentage has declined to 11%, of inventory held by
distributors from approximately 15%, over the last two years. This reflects
lower rebates and returns associated with the Company's new heparin coated
catheters. The Company performs various sensitivity analyses to determine the
appropriate reserve percentage to use. To date, actual quarterly reserve
utilization has approximated the amount provided. The total inventory held by
distributors covered by sales incentive programs was approximately $1,100,000 at
March 31, 2007.
If sufficient history to make reasonable and reliable estimates of
returns or rebates does not exist, revenue associated with such practices is
deferred until the return period lapses or a reasonable estimate can be made.
This deferred revenue will be recognized as revenue when the distributor reports
to us that it has either shipped or disposed of the units (indicating that the
possibility of return is remote).
The Company's OEM capital equipment solar energy business builds complex
customized machines to order for specific customers. Substantially all of these
orders are sold on a FOB Bedford, Massachusetts (or EX-Works Factory) basis. It
is the Company's policy to recognize revenues for this equipment as the product
is shipped to the customer, as customer acceptance is obtained prior to shipment
and the equipment is expected to operate the same in the customer's environment
as it does in the Company's environment. When an arrangement with the customer
includes future obligations or customer acceptance, revenue is recognized when
those obligations are met or customer acceptance has been achieved. The
Company's solar energy systems business installs solar energy systems on
customer-owned properties on a contractual basis. Generally, revenue is
recognized once the systems have been installed and the title is passed to the
customer. For arrangements with multiple elements, the Company allocates fair
value to each element in the contract and revenue is recognized upon delivery of
each element. If the Company is not able to establish fair value of undelivered
elements, all revenue is deferred.
The Company recognizes revenues and estimated profits on long-term
government contracts on the accrual basis where the circumstances are such that
total profit can be estimated with reasonable accuracy and ultimate realization
is reasonably assured. The Company accrues revenue and profit utilizing the
percentage of completion method using a cost-to-cost methodology. A percentage
of the contract revenues and estimated profits are determined utilizing the
ratio of costs incurred to date to total estimated cost to complete on a
contract by contract basis. Profit estimates are revised periodically based upon
changes and facts, and any losses on contracts are recognized immediately. Some
of the contracts include provisions to withhold a portion of the contract value
as retainage until such time as the United States government performs an audit
of the cost incurred under the contract. The Company's policy is to take into
revenue the full value of the contract, including any retainage, as it performs
against the contract since the Company has not experienced any substantial
losses as a result of audits performed by the United States government.
16
IMPAIRMENT OF LONG-LIVED ASSETS
Long-lived assets, including fixed assets and intangible assets, are
continually monitored and are evaluated at least annually for impairment. The
determination of recoverability is based on an estimate of undiscounted cash
flows expected to result from the use of an asset and its eventual disposition.
The estimate of cash flows is based upon, among other things, certain
assumptions about expected future operating performance. Our estimates of
undiscounted cash flows may differ from actual cash flows due to, among other
things, technological changes, economic conditions, changes to our business
model or changes in our operating performance. If the sum of the undiscounted
cash flows (excluding interest) is less than the carrying value, we recognize an
impairment loss, measured as the amount by which the carrying value exceeds the
fair value of the asset. The Company recorded a $78,000 charge, to cost of
contract research and service revenues, for the impairment of production
equipment which based on managements assessment had no future value to the
Company. The products originally manufactured on the equipment were no longer
economical to produce.
STOCK-BASED COMPENSATION
On January 1, 2006, the Company adopted the fair value recognition
provisions of Financial Accounting Standards Board ("FASB") Statement No.
123(R), Share-Based Payment ("Statement 123(R)") using the modified prospective
method. In accordance with the modified prospective method, the Company has not
restated its consolidated financial statements for prior periods. Under this
transition method, stock-based compensation expense for the first quarter of
2006 includes stock-based compensation expense for all of the Company's
stock-based compensation awards granted prior to, but not yet vested as of,
January 1, 2006, based on the grant-date fair value estimated in accordance with
the provisions of FASB Statement No. 123, Accounting for Stock-Based
Compensation ("Statement 123"). Stock-based compensation expense for all
stock-based compensation awards granted on or after January 1, 2006 will be
based on the grant-date fair value estimated in accordance with the provisions
of Statement 123(R). The impact of Statement 123(R) on the Company's results of
operations resulted in recognition of stock option expense of approximately
$71,000 and $59,000 for the years 2007 and 2006 respectively.
CONTRACTUAL OBLIGATIONS, COMMERCIAL COMMITMENTS AND OFF-BALANCE SHEET
ARRANGEMENTS
The following table summarizes the Company's gross contractual
obligations at March 31, 2007 and the maturity periods and the effect that such
obligations are expected to have on its liquidity and cash flows in future
periods:
Payments Due by Period
-------------------------------------------------------------
Less than 2 - 3 4 - 5 More Than
Contractual Obligations Total 1 Year Years Years 5 Years
---------------------------------- ---------- ---------- --------- ------- ---------
PURCHASE OBLIGATIONS $3,905,000 $3,786,000 $ 119,000 -- --
CAPITAL LEASES:
Related party capital lease 1,362,000 1,170,000 192,000 -- --
OPERATING LEASES:
Unrelated party operating leases $ 388,000 $ 119,000 $ 194,000 75,000 --
Related party operating lease 907,000 907,000 -- -- --
Purchase obligations include all open purchase orders outstanding
regardless of whether they are cancelable or not.
Capital lease obligations outlined above include both the principal and
interest components of these contractual obligations.
At March 31, 2007, the Company maintained a Japanese yen account that
held approximately JPY 1,218,000 (approximately $10,000). Total currency
translation loss for the quarter ended March 31, 2007 of approximately $9,000 is
reflected in other expense, net in the accompanying unaudited condensed
consolidated statement of operations.
Outstanding letters of credit totaled approximately $391,000 at March
31, 2007. The letters of credit principally secure performance obligations, and
allow holders to draw funds up to the face amount of the letter of credit if the
Company does not perform as contractually required. These letters of credit
expire through 2007 and are 100% secured by cash.
17
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk to which we are subject consists of the risk of loss arising
from adverse changes in market interest rates and foreign exchange rates.
Exposure to market rate risk for changes in interest rates relates to our
investment portfolio. We have not used derivative financial instruments in our
investment portfolio. We seek to place our investments with high-quality issuers
and we have policies limiting, among other things, the amount of credit exposure
to any one issuer. We seek to limit default risk by purchasing only
investment-grade securities. We do not believe we have any material market risk
with respect to our financial instruments.
ITEM 4. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
As required by Rule 13a-15 under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), the Company carried out an evaluation under the
supervision and with the participation of the Company's management, including
the Chief Executive Officer and President and the Chief Financial Officer, of
the effectiveness of the Company's disclosure controls and procedures as of
March 31, 2007. In designing and evaluating the Company's disclosure controls
and procedures, the Company and its management recognize that there are inherent
limitations to the effectiveness of any system of disclosure controls and
procedures, including the possibility of human error and the circumvention or
overriding of the controls and procedures. Accordingly, even effective
disclosure controls and procedures can only provide reasonable assurance of
achieving their desired control objectives. Additionally, in evaluating and
implementing possible controls and procedures, the Company's management was
required to apply its reasonable judgment. Based upon the required evaluation,
the Chief Executive Officer and President and the Chief Financial Officer
concluded that as of March 31, 2007, the Company's disclosure controls and
procedures were effective to ensure that information required to be disclosed by
the Company in the reports it files or submits under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
in the Securities and Exchange Commission's rules and forms.
The Company has made significant strides in its monthly closing
processes and expects that its internal controls will continue to improve.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
There was no change in the Company's internal control over financial
reporting that occurred during the first fiscal quarter of 2007 that has
materially affected, or is reasonably likely to materially affect, the Company's
internal control over financial reporting.
18
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
No changes.
ITEM 1A. RISK FACTORS
No changes
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.
19
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, 2007 By: /s/ Roger G. Little
-------------------------------
Roger G. Little
Chairman of the Board, Chief Executive
Officer and President
Dated: May 15, 2007 By: /s/ Christian Dufresne
-------------------------------
Christian Dufresne, Ph. D.
Chief Financial Officer and Treasurer
20
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
21