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SPIR > SEC Filings for SPIR > Form 10-K on 29-Mar-2013All Recent SEC Filings

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Form 10-K for SPIRE CORP


29-Mar-2013

Annual Report


Item 7. 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 described below and above under "Item 1A. Risk Factors" and "Item 1. Business." Readers are encouraged to carefully review those risk factors. 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 provide 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 the U.S., 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 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, to Bard. Accordingly, the results of operations and liabilities of the Medical Products Business Unit are being presented herein as discontinued operations. See Note 17 to the consolidated financial statements.

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, to Masimo. Accordingly, the results of operations and assets and liabilities of the Semiconductor Business Unit are being presented herein as discontinued operations. See Note 17 to the 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 53% and 49% of net sales and revenues for 2012 and 2011, respectively, continue to constitute a significant portion of our net sales and revenues.

Results of Operations

The following discussions of our results of continuing operations exclude the results related to the Medical Products Business Unit and the Semiconductor Business Unit, which were sold on December 14, 2009 and March 9, 2012, respectively. The Medical Products Business Unit and the Semiconductor Business Unit have been segregated from continuing operations and are reflected as discontinued operations for all periods presented. See "Net income (loss) from discontinued operations, net of tax" below and Note 17 to the consolidated financial statements.


The following table sets forth certain items as a percentage of net sales and revenues for the periods presented:

                                                                Year Ended December 31,
                                                                  2012             2011

Net sales and revenues                                            100  %             100  %
Cost of sales and revenues                                        (76 )              (76 )
Gross margin                                                       24                 24
Selling, general and administrative expenses                      (53 )              (25 )
Internal research and development expenses                         (1 )               (1 )
Gain on termination of contracts                                    -                  1
Operating loss from continuing operations                         (30 )               (1 )
Other expense, net                                                  -                  -
Loss from continuing operations before income tax benefit         (30 )               (1 )
Income tax benefit - continuing operations                          9                  1
Net loss from continuing operations                               (21 )                -
Net income (loss) from discontinued operations, net of tax         13                 (3 )

Net loss (8 )% (3 )%

Overall

Our total net sales and revenues for the year ended December 31, 2012 ("2012") decreased 62% to $22.1 million as compared to $58.7 million for the year ended December 31, 2011 ("2011"). The decrease was primarily attributable to a $35.7 million decrease in solar revenue and a $930 thousand decrease in biomedical revenue.

Solar Business Unit

Sales in our solar business unit decreased 70% to $15.3 million in 2012 as compared to $51.0 million in 2011. The decrease in solar business unit revenue is primarily the result of a decrease in solar module equipment revenue in 2012 of $21.7 million, a decrease in solar system revenue of $8.7 million and 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, partially offset by an increase in solar R&D revenue of $1.3 million in 2012. Lower government incentives in the photovoltaic market and the world-wide oversupply of photovoltaic modules relative to market demand has led to precipitously declining prices in the photovoltaic market. The oversupply has also resulted in reduced demand for photovoltaic manufacturing equipment that will not improve until the module supply/demand imbalance is rectified via the growing photovoltaic systems market. Our Solar Business Unit has been negatively impacted by this reduction in demand which is contributing to decreased revenue in our solar business unit.

Biomedical Business Unit

Revenues in our biomedical business unit decreased 12% to $6.9 million in 2012 as compared to $7.8 million in 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.

Year Ended December 31, 2012 Compared to Year Ended December 31, 2011

Net Sales and Revenues

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


                                          Year Ended December 31,            Increase (Decrease)
(in thousands)                              2012             2011              $               %

Sales of goods                         $      12,989     $   50,744     $    (37,755 )         (74 )%
Contract research and service revenues         9,121          7,998            1,123            14  %
Net sales and revenues                 $      22,110     $   58,742     $    (36,632 )         (62 )%

The 74% decrease in sales of goods for 2012 as compared to 2011 was primarily due to a decrease of $21.7 million in solar module manufacturing equipment revenues, a decrease of $8.7 million in solar systems revenues and a decrease of $7.2 million in solar cell materials revenue. The decrease in solar module equipment sales of 64% 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 systems of 99% in 2012 as compared to 2011 was primarily due to the completion of a photovoltaic system project in 2011. 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. Lower government incentives in the photovoltaic market and the world-wide oversupply of photovoltaic modules relative to market demand has led to precipitously declining prices in the photovoltaic market. The oversupply has also resulted in reduced demand for photovoltaic manufacturing equipment that will not improve until the module supply/demand imbalance is rectified via the growing photovoltaic systems market. Our Solar Business Unit has been negatively impacted by this reduction in demand which is contributing to decreased sales of goods.

The 14% increase in contract research and service revenues for 2012 as compared to 2011 was primarily attributable to an increase of $1.4 million in solar research and development revenue and an increase of $701 thousand in equipment research and development revenue, partially offset by a decrease of $921 thousand in biomedical revenue. The increase in solar research and development revenue of 604% in 2012 as compared to 2011 was primarily due to two new research and development projects started with the U.S. Department of Energy in 2012. The increase in equipment research and development revenue in 2012 as compared to 2011 was primarily due to new research and development projects started in 2012. Revenues from our biomedical services decreased 12% in 2012 compared to 2011 as a result of a slight decrease in the number and value of biomedical orders in 2012.

Revenues from the delivery of solar equipment to First Solar, Inc. and revenues from the delivery of biomedical services to Stryker Orthopedics accounted for 12% and 14%, respectively, of total net sales and revenues for 2012.

Revenues from the delivery of solar equipment to Servo Dynamics Co., Ltd. and First Solar, Inc. accounted for 16% and 11%, respectively, of total net sales and revenues for 2011. Revenues from the delivery of a solar photovoltaic system to PPS Berkshire Solar LLC accounted for 13% of total net sales and revenues for 2011. Revenues from the delivery of solar equipment and recurring revenues from the sale of solar cell materials to Federal Prison Industries, Inc. accounted for 1% and 12%, respectively, of total net sales and revenues for 2011.

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:

                                        Years Ended December 31,                   Increase (Decrease)
(in thousands)                 2012           %          2011          %              $              %

Cost of goods sold          $  11,943          92 %   $ 40,171          79 %   $    (28,228 )        (70 )%
Cost of contract research
and services                    4,896          54 %      4,581          57 %            315            7  %
Net cost of sales and
revenues                    $  16,839          76 %   $ 44,752          76 %   $    (27,913 )        (62 )%

Cost of goods sold decreased 70% for 2012 as compared to 2011, primarily as a result of decreased costs related to solar module equipment, solar systems and solar cell materials, partially offset by a slight increase in advanced technology center costs. The decrease in solar module equipment costs of 54% in 2012 as compared to 2011 was primarily due to a decrease in associated revenue. The decrease of solar system costs of 97% 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. 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. As a percentage of sales, cost of goods sold was 92% of sales of goods in 2012 as compared to 79% 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 7% for 2012 as compared to 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 192% 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 54% of related revenues in 2012 from 57% in 2011, primarily due to higher margin orders in solar and equipment research and development services.

Cost of sales and revenues also includes approximately $52 thousand and $93 thousand of share-based compensation in 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 net sales and revenues:

                                          Years Ended December 31,              Decrease
(in thousands)                         2012       %       2011       %         $          %
Selling, general and administrative $  11,676    53 %   $ 14,466    25 %   $ (2,790 )   (19 )%
Internal research and development         233     1 %        776     1 %       (543 )   (70 )%
Operating expenses                  $  11,909    54 %   $ 15,242    26 %   $ (3,333 )   (22 )%

Selling, General and Administrative Expenses

Selling, general and administrative expense decreased 19% in 2012 as compared to 2011, primarily as a result of a decrease in marketing, deferred rent and employee related expenses and a decrease in agent commissions in the solar business unit due to a decrease in solar module manufacturing equipment revenues. In addition, a net benefit was realized related to the change in value of the deferred compensation plan. Selling, general and administrative expense increased to 53% of sales and revenues in 2012 as compared to 25% in 2011. The increase was primarily due to the decrease in sales and revenues.

Selling, general and administrative expenses include approximately $150 thousand and $252 thousand of share-based compensation in 2012 and 2011, respectively.

Internal Research and Development Expenses

Internal research and development expense decreased 70% in 2012 as compared to 2011, primarily as a result of lower levels of internal research and development spent in the solar business unit due to an increase in funded research and development. As a percentage of sales and revenue, internal research and development expenses remained constant in 2012 when compared to 2011.

Gains on Termination of Contracts

In the fourth quarter of 2011, we determined that a purchase and sale agreement with Genus Innovation Ltd. ("Genus") related to a module manufacturing line was terminated due to a breach of contract by Genus. Genus had failed to take delivery of equipment and make payments as required by the agreement. In the third quarter of 2011, we formally notified Genus that they were in breach of the agreement and provided Genus until October 30, 2011 to cure the breach. Genus failed to cure the breach as required by the agreement and we sent Genus formal notification on October 31, 2011 that the agreement was terminated. In the fourth quarter of 2011, we recognized a gain on termination of contracts of $409 thousand which relates to Genus' non-refundable deposit. See Note 16 to the consolidated financial statements.

In the fourth quarter of 2012, we determined that a purchase and sale agreement, as amended, with Evergreen Solar Systems India (P) Ltd. ("Evergreen") related to a module manufacturing line expansion was terminated due to a breach of contract by Evergreen. Evergreen had failed to make payments as required by the agreement and has not responded to numerous communications by us. In the fourth quarter of 2012, we recognized a gain on termination of contracts of $35 thousand which relates to Evergreen's non-refundable deposit. See Note 16 to the consolidated financial statements.

Other Income (Expense), Net


We incurred interest expense of $120 thousand and $141 thousand in 2012 and 2011, respectively. The decrease in interest expense is due to lower interest payments due to reduced amounts outstanding under the credit facilities with Silicon Valley Bank in 2012 compared with 2011. We had currency exchange losses of $7 thousand and gains of $8 thousand in 2012 and 2011, respectively.

Income Taxes

We recorded an income tax benefit on our loss from continuing operations of $2.0 million and $890 thousand in 2012 and 2011, respectively, which was offset by a provision on our income from discontinued operations of $1.9 million and $914 thousand in 2012 and 2011, respectively. Gross federal net operating loss carryforwards were approximately $13.9 million as of December 31, 2012 and expire at various times through 2032. We have a full valuation allowance recorded against the net deferred tax assets at December 31, 2012 due to uncertainty regarding realization of these assets in the future.

Income (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 of operations and liabilities of the Medical Products Business Unit are being presented herein as discontinued operations.

We recorded net income from discontinued operations of $2.9 million and a net loss from discontinued operations of $1.4 million in 2012 and 2011, respectively. Included in discontinued operations for 2012 is a gain on sale of business unit to Masimo of $5.4 million and an income tax provision of $1.9 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. Included in discontinued operations for 2011 is a net gain on legal settlement of $2.3 million and an income tax provision of $914 thousand. Included in the net gain of $2.3 million is proceeds received from a contract manufacturer of $2.5 million, less legal costs of $214 thousand. See Note 17 to the consolidated financial statements.

Net Loss

We reported a net loss of $1.9 million and $1.5 million for 2012 and 2011, respectively. Net loss increased approximately $375 thousand, primarily due to a $8.0 million decrease in 2012 solar equipment margin, a $675 thousand decrease in 2012 biomedical services margin and a $374 thousand decrease in 2012 gain on termination of contracts, partially offset by a $5.4 million improvement from discontinued operations before tax in 2012 and decreased operating expenses of $3.3 million in 2012.

Liquidity and Capital Resources
December 31, December 31, Increase (Decrease) (in thousands) 2012 2011 $ % Cash and cash equivalents $ 3,030 $ 4,758 $ (1,728 ) (36 )% Working capital $ 6,616 $ 5,700 $ 916 16 %

Cash and cash equivalents decreased due to cash used in operating activities and to a lesser extent financing activities, partially offset by cash provided by investing activities. Included in 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 a decrease in current liabilities, primarily accounts payable, accrued liabilities, advances on contracts in progress and liabilities of discontinued operations, partially offset by a decline in cash, 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 December 31, 2012, our accumulated deficit was approximately $15.9 million compared to accumulated deficit of approximately $14.1 million as of December 31, 2011.

During the first quarter of 2012, we began pursuing an exclusive sales process of our Semiconductor Business Unit and on March 9, 2012, we completed the sale of the Semiconductor Business Unit to Masimo Corporation. The asset purchase agreement provided that the aggregate purchase price for the Semiconductor Business Unit was $8.0 million plus the assumption of $500


thousand in liabilities, with the cash portion of the purchase price being reduced by retained cash and liabilities assumed by Masimo in excess of $500 thousand. As a result, in the fist quarter of 2012 we received approximately $7.3 million in cash (less the escrow described below) and Masimo assumed approximately $1.2 million in liabilities. Of the purchase price, approximately $718 thousand was deposited into an indemnity escrow account for fifteen months (or until June, 2013) to partially secure our obligations for any indemnity claims under the asset purchase agreement. In connection with this transaction, the lease for the premises in Hudson, New Hampshire where the Semiconductor Business Unit was located was terminated on March 9, 2012, and we were released from all future obligations under the lease as of such date. See Note 17 to the consolidated financial statements.

We currently believe that our existing cash resources at December 31, 2012, will be sufficient to fund our operations into the second half of 2013; however, we cannot assure you of this. The maturity date of our credit facilities is June 29, 2013. As a result, our independent registered public accounting firm has expressed a substantial doubt about our ability to continue as a going concern in their report on our consolidated financial statements.

We have various options on how to fund future operational losses or working capital needs, including but not limited to sales of equity, bank debt, the sale or license of assets and technology, or joint ventures involving cash infusions, as we have done in the past; however, there are no assurances that we will be able to sell equity, obtain or access bank debt, sell or license assets or technology or enter into such joint ventures on a timely basis and at appropriate values. We have developed several plans including cost reduction efforts, expand revenue in other solar markets and potential strategic alternatives to offset a decline in business due to global economic conditions. Our inability to successfully implement our cost reduction strategies, expand revenue in other solar markets or to renew our credit facilities, could adversely impact our ability to continue as a going concern.

Based on the forecasts and estimates underlying our current operating plan, the financial statements do not include any adjustments that might be necessary if we are unable to continue as a going concern.

Loan Agreements

We have two separate credit facilities with Silicon Valley Bank (the "Bank" or "SVB"): (i) a Second Amended and Restated Loan and Security Agreement and (ii) an Amended and Restated Export-Import Bank Loan and Security Agreement pursuant to which outstanding amounts under this facility are guaranteed by the Export-Import Bank of the United States (the "EXIM Bank").

On December 20, 2012, we entered into with the Bank (i) the Fourth Loan Modification Agreement amending certain terms of the Second Amended and Restated Loan and Security Agreement dated as of November 16, 2009 (as amended, the "Revolving Credit Facility") and (ii) the Fourth Loan Modification Agreement amending certain terms of the Amended and Restated Export-Import Bank Loan and Security Agreement dated as of November 16, 2009 (as amended, the "Ex-Im Facility"). Pursuant to the terms of the Fourth Loan Modification Agreements, we agreed with the Bank to (i) extend the maturity date of the Revolving Credit Facility and the Ex-Im Facility from December 29, 2012 to June 29, 2013 and (ii) decrease the aggregate amount of the Revolving Credit Facility and the Ex-Im Facility from $6 million to $1.5 million, with up to $1 million available under the Revolving Credit Facility and up to $1.5 million available under the Ex-Im Facility. In addition, the guidance line has been extended to support letters of credit in an aggregate amount of up to $1.5 million through June 29, 2013. If we achieve certain levels of liquidity, based on cash on hand and availability under the credit facility, we will not be required to cash collateralize letters of credit issued under this guidance line.
Our obligations under these two credit facilities, as well as the guidance line, are secured by substantially all of our assets. Advances under the Revolving Credit Facility are limited to 80% of eligible receivables. Advances under the Ex-Im Facility are limited to (i) 90% of eligible receivables subject to a . . .

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