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SPIR > SEC Filings for SPIR > Form 10-Q on 9-Nov-2012All Recent SEC Filings

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Form 10-Q for SPIRE CORP


9-Nov-2012

Quarterly Report


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, 2011 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 develop, manufacture and market highly-engineered products and services in two principal business areas: (i) capital equipment and systems for the photovoltaic solar industry and (ii) biomedical, generally bringing to bear expertise in materials technologies, surface science and thin films across both business areas, discussed below.

In the photovoltaic solar area, we develop, manufacture and market specialized equipment for the production of terrestrial photovoltaic modules from solar cells and provides photovoltaic systems for grid connected applications in the commercial markets. Our equipment has been installed in approximately 200 factories in 50 countries. The equipment market is very competitive with major competitors located in Japan and Europe. Our flagship product is our Sun Simulator which tests module performance. Our other product offerings include turn-key module lines and to a lesser extent other individual equipment. To compete we offer other services such as training and assistance with module certification. We also provide turn-key services to our customers to backward integrate to solar cell manufacturing. At times, we supply materials such as solar cells to certain customers.

In the biomedical area, we provide 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; and perform sponsored research programs into practical applications of advanced biomedical and biophotonic technologies.

On March 9, 2012, we completed the sale of our semiconductor business unit, which provides semiconductor foundry services, operates a semiconductor foundry and fabrication facility and is engaged in the business of wafer epitaxy, foundry services, and device fabrication for the defense, medical, telecommunications and consumer products markets (the "Semiconductor Business Unit"), to Masimo Corporation ("Masimo"). See Note 12 to the unaudited condensed consolidated financial statements.

On December 14, 2009, we completed the sale of our Medical Products Business Unit, which develops and markets coated and uncoated hemodialysis catheters and related devices for the treatment of chronic kidney disease (the "Medical Products Business Unit"), to Bard Access Systems, Inc. ("Bard"). Accordingly, the results of operations and liabilities of the Medical Products Business Unit are being presented herein as discontinued operations. See Note 12 to the unaudited condensed consolidated financial statements.

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 29% and 57% of net sales and revenues for the three and nine months ended September 30, 2012, respectively, and 70% and 58% of net sales and revenues for the three and nine months ended September 30, 2011, respectively, continue to constitute a significant portion of our net sales and revenues.

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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 September 30,         Nine Months Ended September 30,
                                              2012                 2011               2012                 2011
Net sales and revenues                        100  %               100  %             100  %               100  %
Cost of sales and revenues                    (78 )                (70 )              (77 )                (73 )
Gross margin                                   22                   30                 23                   27
Selling, general and administrative
expenses                                      (69 )                (42 )              (51 )                (29 )
Internal research and development                                                                           (1 )
expenses                                       (1 )                 (1 )               (1 )
 Operating loss from continuing                                                                             (3 )
operations                                    (48 )                (13 )              (29 )
Other expense, net                             (1 )                  -                 (1 )                  -
Loss from continuing operations before
income tax benefit                            (49 )                (13 )              (30 )                 (3 )
Income tax benefit - continuing
operations                                      1                    -                 11                    -
Loss from continuing operations               (48 )                (13 )              (19 )                 (3 )
Income (loss) from discontinued
operations, net of tax                         (6 )                 (9 )               15                   (5 )

Net Loss (54 )% (22 )% (4 )% (8 )%

Overall

Our total net sales and revenues for the nine months ended September 30, 2012 were $18.3 million as compared to $39.8 million for the nine months ended September 30, 2011, which represents a decrease of $21.5 million or 54%. The decrease was primarily attributable to a $20.4 million decrease in solar revenue and a decrease of $1.1 million in biomedical revenue.

Solar Business Unit

Sales in our solar business unit decreased 61% during the nine months ended September 30, 2012 to $13.2 million as compared to $33.6 million for the nine months ended September 30, 2011. The decrease in solar business unit revenue is primarily the result of a decrease in solar cell material revenue in 2012 of $7.2 million, due to the completion of definite delivery commitments to a solar cell materials contract in the first quarter of 2011 as well as a decrease in solar module equipment revenue in 2012 of $14.2 million, partially offset by an increase in solar R&D revenue of $1.1 million in 2012.

Biomedical Business Unit

Revenues on our biomedical business unit decreased 17% during the nine months ended September 30, 2012 to $5.1 million as compared to $6.2 million for the nine months ended September 30, 2011. The decrease was primarily attributable to a decrease in revenue from our orthopedics coating services and, to a lesser extent, a decrease in revenue from our research and development contracts.

Three and Nine Months Ended September 30, 2012 Compared to Three and Nine Months
Ended September 30, 2011

Net Sales and Revenues

The following table categorizes our net sales and revenues for the periods
presented:
                                          Three Months Ended September 30,           Increase (Decrease)
(in thousands)                                 2012                2011                $               %
Sales of goods                          $           1,858     $       6,164     $     (4,306 )         (70 )%
Contract research and services revenues             2,370             2,016              354            18  %
Net sales and revenues                  $           4,228     $       8,180     $     (3,952 )         (48 )%

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The 70% decrease in sales of goods for the three months ended September 30, 2012 as compared to the three months ended September 30, 2011 was primarily due to a decrease of $4.3 million in solar module manufacturing equipment revenues. The decrease in solar module equipment sales of 74% in 2012 as compared to 2011 was primarily due to a decrease in individual module equipment units delivered in 2012.

The 18% increase in contract research and services revenues for the three months ended September 30, 2012 as compared to the three months ended September 30, 2011 is primarily attributable to an increase of $345 thousand in solar research and development revenue and an increase of $269 thousand in equipment research and development revenue, partially offset by a decrease of $260 thousand in biomedical revenue. The increase in revenues from our solar research and development services in 2012 as compared to 2011 was a result of revenue recognized on two government funded solar research projects that started in the fourth quarter of 2011. The increase in revenues from our equipment research and development services in 2012 as compared to 2011 was a result of revenue recognized on an equipment research project that started in the second quarter of 2012. Revenues from our biomedical services decreased 13% in 2012 as compared to 2011 as a result of a decrease in the number and value of biomedical orders in 2012 along with revenue recognized on a large biomedical services customer favorably impacting 2011.

The following table categorizes our net sales and revenues for the periods presented:

                                           Nine Months Ended September 30,              Decrease
(in thousands)                                 2012                2011              $             %
Sales of goods                          $          11,796     $      33,542     $ (21,746 )        (65 )%
Contract research and services revenues             6,527             6,237           290            5  %
Net sales and revenues                  $          18,323     $      39,779     $ (21,456 )        (54 )%

The 65% decrease in sales of goods for the nine months ended September 30, 2012 as compared to the nine months ended September 30, 2011 was primarily due to a decrease of $14.2 million in solar module manufacturing equipment revenues, a decrease of $7.2 million in solar cell materials revenue, and a decrease of $447 thousand in solar systems revenues. The decrease in solar module equipment sales of 56% in 2012 as compared to 2011 was primarily due to a decrease in individual module equipment units delivered in 2012. The decrease in sales of solar cell materials, all to one customer, of 100% in 2012 as compared to 2011 was due to the completion of definite delivery commitments to a solar cell materials contract in the first quarter of 2011. The decrease in sales of solar systems of 87% in 2012 as compared to 2011 was primarily due to the completion of a photovoltaic system project in 2011.

The 5% increase in contract research and services revenues for the nine months ended September 30, 2012 as compared to the nine months ended September 30, 2011 is primarily attributable to an increase of $1.1 million in solar research and development revenue and an increase of $269 thousand in equipment research and development revenue, partially offset by a decrease of $1.1 million in biomedical revenue.

The increase in revenues from our solar research and development services in 2012 as compared to 2011 was a result of revenue recognized on two government funded solar research projects that started in the fourth quarter of 2011. The increase in revenues from our equipment research and development services in 2012 as compared to 2011 was a result of revenue recognized on an equipment research project that started in the second quarter of 2012. Revenues from our biomedical services decreased 17% in 2012 as compared to 2011 as a result of a decrease in the number and value of biomedical orders in 2012.

Cost of Sales and Revenues

The following table categorizes our cost of sales and revenues for the periods
presented, stated in dollars and as a percentage of related sales and revenues:
                                        Three Months Ended September 30,                  Decrease
(in thousands)                       2012           %         2011         %           $            %
Cost of goods sold               $     2,048        110 %   $ 4,499         73 %   $ (2,451 )      (54 )%
Cost of contract research and
services                               1,228         52 %     1,230         61 %         (2 )        -  %
Net cost of sales and revenues   $     3,276         77 %   $ 5,729         70 %   $ (2,453 )      (43 )%

Cost of goods sold decreased 54% for the three months ended September 30, 2012 as compared to the three months ended September 30, 2011, primarily as a result of decreased costs related to solar module equipment, partially offset by a slight increase in advances technology center costs. The decrease in solar module equipment costs of 59% in 2012 as compared to 2011 was

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primarily due to a decrease in associated revenue. As a percentage of sales, cost of goods sold was 110% of sales of goods in 2012 as compared to 73% of sales of goods in 2011. This increase in the percentage of sales in 2012 is due primarily to a lower utilization of capacity.

Cost of contract research and services increased slightly for the three months ended September 30, 2012 as compared to the three months ended September 30, 2011, primarily as a result of increased costs related to solar and equipment research and development services, partially offset by a slight decrease in costs related to biomedical services. The increase in solar research and development services costs of 122% in 2012 as compared to 2011 was primarily due to an increase in associated revenue from two government funded solar research projects. Cost of contract research and services as a percentage of related revenue decreased to 52% of related revenues in 2012 from 61% in 2011, primarily due to higher margin orders in solar and equipment research and development services.

Cost of sales and revenues also includes approximately $12 thousand and $22 thousand of stock-based compensation for the three months ended September 30, 2012 and 2011, respectively.

The following table categorizes our cost of sales and revenues for the periods presented, stated in dollars and as a percentage of related sales and revenues:

                                          Nine Months Ended September 30,                Increase (Decrease)
(in thousands)                        2012           %          2011         %              $              %
Cost of goods sold               $     10,470         89 %   $ 25,263         75 %   $    (14,793 )       (59 )%
Cost of contract research and
services                                3,702         57 %      3,608         58 %             94           3  %
Net cost of sales and revenues   $     14,172         77 %   $ 28,871         73 %   $    (14,699 )       (51 )%

Cost of goods sold decreased 59% for the nine months ended September 30, 2012 as compared to the nine months ended September 30, 2011, primarily as a result of decreased costs related to solar module equipment, solar cell materials and solar systems, partially offset by a slight increase in advances technology center costs. The decrease in solar module equipment costs of 44% in 2012 as compared to 2011 was primarily due to a decrease in associated revenue. The decrease in costs of solar cell materials, all to one customer, of 100% in 2012 as compared to 2011 was due to the completion of definite delivery commitments to a solar cell materials contract in the first quarter of 2011. The decrease of solar system costs of 56% in 2012 as compared to 2011 was primarily due to the completion of a photovoltaic system project in 2011 as compared to none in 2012. As a percentage of sales, cost of goods sold was 89% of sales of goods in 2012 as compared to 75% of sales of goods in 2011. This increase in the percentage of sales in 2012 is due primarily to a lower utilization of capacity.

Cost of contract research and services increased 3% for the nine months ended September 30, 2012 as compared to the nine months ended September 30, 2011, primarily as a result of increased costs related to solar and equipment research and development services, partially offset by decreased costs related to biomedical services. The increase in solar research and development services costs of 200% in 2012 as compared to 2011 was primarily due to an increase in associated revenue from two government funded solar research projects. The decrease in biomedical services costs of 8% in 2012 as compared to 2011 was primarily due to a decrease in associated revenue. Cost of contract research and services as a percentage of related revenue decreased slightly to 57% of related revenues in 2012 from 58% in 2011.

Cost of sales and revenues also includes approximately $47 thousand and $75 thousand of stock-based compensation for the nine months ended September 30, 2012 and 2011, respectively.

Operating Expenses

The following table categorizes our operating expenses for the periods
presented, stated in dollars and as a percentage of total sales and revenues:
                                 Three Months Ended September 30,                      Decrease
(in thousands)             2012            %           2011           %             $             %
Selling, general and
administrative         $     2,934           69 %   $   3,446           42 %   $    (512 )        (15 )%
Internal research and
development                     36            1 %          50            1 %         (14 )        (28 )%
Operating expenses     $     2,970           70 %   $   3,496           43 %   $    (526 )        (15 )%

Selling, General and Administrative Expenses

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Selling, general and administrative expense decreased 15% in the three months ended September 30, 2012 as compared to the three months ended September 30, 2011, primarily as a result of a decrease in marketing and employee related expenses and a decrease in agent commissions in the solar business unit. In addition, a benefit was realized related to the change in value of the deferred compensation plan. Selling, general and administrative expense increased to 69% of sales and revenues in 2012 as compared to 42% in 2011. The increase was primarily due to the decrease in sales and revenues.

Selling, general and administrative expenses include approximately $36 thousand and $56 thousand of stock-based compensation for the three months ended September 30, 2012 and 2011, respectively.

Internal Research and Development

Internal research and development expense decreased 28% in the three months
ended September 30, 2012 as compared to the three months ended September 30,
2011, primarily as a result of lower levels of research and development spent in
the solar group. As a percentage of sales and revenue, internal research and
development expenses remained constant in 2012 when compared to 2011.

The following table categorizes our operating expenses for the periods
presented, stated in dollars and as a percentage of total sales and revenues:
                                  Nine Months Ended September 30,                      Decrease
(in thousands)             2012            %           2011           %             $             %
Selling, general and
administrative         $     9,338           51 %   $  11,404           29 %   $  (2,066 )        (18 )%
Internal research and
development                    227            1 %         586            1 %        (359 )        (61 )%
Operating expenses     $     9,565           52 %   $  11,990           30 %   $  (2,425 )        (20 )%

Selling, General and Administrative Expenses

Selling, general and administrative expense decreased 18% in the nine months ended September 30, 2012 as compared to the nine months ended September 30, 2011, primarily as a result of a decrease in marketing, rent and employee related expenses and a decrease in agent commissions in the solar business unit.
In addition, a benefit was realized related to the change in value of the deferred compensation plan. Selling, general and administrative expense increased to 51% of sales and revenues in 2012 as compared to 29% in 2011. The increase was primarily due to the decrease in sales and revenues.

Selling, general and administrative expenses include approximately $122 thousand and $209 thousand of stock-based compensation for the nine months ended September 30, 2012 and 2011, respectively.

Internal Research and Development

Internal research and development expense decreased 61% in the nine months ended September 30, 2012 as compared to the nine months ended September 30, 2011, primarily as a result of lower levels of research and development spent in the solar group. As a percentage of sales and revenue, internal research and development expenses remained constant in 2012 when compared to 2011.

Other Expense, Net

We incurred interest expense of $30 thousand and $26 thousand for the three months ended September 30, 2012 and 2011, respectively. We had currency exchange losses of approximately $9 thousand and currency exchange gains of approximately $1 thousand during the three months ended September 30, 2012 and 2011, respectively.

We incurred interest expense of $97 thousand and $91 thousand for the nine months ended September 30, 2012 and 2011, respectively. We had currency exchange losses of approximately $6 thousand and $1 thousand during the nine months ended September 30, 2012 and 2011, respectively.

Income Taxes

We recorded an income tax benefit on our loss from continuing operations of $24 thousand and $2.0 million during the three and nine months ended September 30, 2012, respectively, which was offset by a provision on our income from discontinued operations of $2.0 million during the nine months ended September 30, 2012. Gross federal net operating loss carryforwards were

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approximately $14 million as of December 31, 2011 and expire at various times through 2031. We have a full valuation allowance recorded against the net deferred tax assets at September 30, 2012 due to uncertainty regarding realization of these assets in the future.

We recorded a state income tax provision of $3 thousand and $18 thousand for the three and nine months ended September 30, 2011, respectively.

Loss from Discontinued Operations

During the first quarter of 2012, we began pursuing an exclusive sales process of our Semiconductor Business Unit.
On March 9, 2012, we completed the sale of the Semiconductor Business Unit to Masimo. Accordingly, the results of operations and assets and liabilities of the Semiconductor Business Unit are being presented herein as discontinued operations.

During the second quarter of 2009, we began pursuing an exclusive sales process of our Medical Products Business Unit. On December 14, 2009, we completed the sale of the Medical Products Business Unit to Bard Access Systems, Inc. Accordingly, the results and liabilities of the Medical Products Business Unit are being presented herein as discontinued operations.

We recorded net loss from discontinued operations of $250 thousand and net income from discontinued operations of $2.8 million for the three and nine months ended September 30, 2012, respectively. Included in discontinued operations for the nine months ended September 30, 2012 is a gain on sale of business unit to Masimo of $5.4 million and an income tax provision of $2.0 million. Included in the gain of $5.4 million is proceeds received from Masimo of $8.0 million, less assets and liabilities assumed by Masimo of $2.1 million and legal and professional fees related to complete the sale of $425 thousand.

We recorded a loss from discontinued operations of $697 thousand and $1.9 million for the three and nine months ended September 30, 2011, respectively. See Note 12 to the unaudited condensed consolidated financial statements.

Net Income (Loss)

We reported net loss of $2.3 million and $1.8 million for the three months ended September 30, 2012 and 2011, respectively. Net loss increased approximately $513 thousand, primarily due to a $1.5 million decline in gross margin associated with lower revenue, partially offset by a $526 thousand decline in operating expenses and reduced losses of $447 thousand from discontinued operations.

We reported net loss of $740 thousand and $3.1 million for the nine months ended September 30, 2012 and 2011, respectively. Net loss decreased approximately $2.3 million, primarily due to a $6.7 million improvement from discontinued operations before tax and $2.4 million decline in operating expenses, partially offset by $6.8 million decline in gross margin associated with lower revenue.

Liquidity and Capital Resources
September 30, December 31, Increase (in thousands) 2012 2011 $ % Cash and cash equivalents $ 5,178 $ 4,758 $ 420 9 % Working capital $ 7,351 $ 5,700 $ 1,651 29 %

Cash and cash equivalents increased due to cash provided by investing activities, partially offset by cash used in operating and financing activities.
Included in operating and investing activities is one time payments received in the first quarter of 2012 totaling $6.6 million related to the sale of the Semiconductor Business Unit included in discontinued operations. The overall increase in working capital is due to an increase in cash and restricted cash and a decrease in current liabilities, primarily accounts payable, advances on contracts in progress and liabilities of discontinued operations, partially offset by a decline in accounts receivable, inventory, deposits on equipment for inventory and assets of discontinued operations. We have historically funded our operating cash requirements using operating cash flow, proceeds from the sale and licensing of technology and assets and proceeds from the sale of equity securities.

There are no material commitments by us for capital expenditures. At September 30, 2012, our accumulated deficit was approximately $14.8 million, compared to accumulated deficit of approximately $14.1 million as of December 31, 2011.

. . .

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