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SPIR > SEC Filings for SPIR > Form 10-Q on 10-May-2013All Recent SEC Filings

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Form 10-Q for SPIRE CORP


10-May-2013

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, 2012 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"). Accordingly, the results of operations and assets and liabilities of the Semiconductor 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 30% and 65% of net sales and revenues for the three months ended March 31, 2013 and 2012, 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 March 31,
                                                           2013                    2012
Net sales and revenues                                       100  %                  100  %
Cost of sales and revenues                                   (93 )                   (74 )
Gross margin                                                   7                      26
Selling, general and administrative expenses                 (87 )                   (47 )
Internal research and development expenses                     -                      (1 )
 Operating loss from continuing operations                   (80 )                   (22 )
Other expense, net                                            (1 )                     -
Loss from continuing operations before income tax
benefit                                                      (81 )                   (22 )
Income tax benefit - continuing operations                     -                      27
Income (loss) from continuing operations                     (81 )                     5
Income from discontinued operations, net of tax                -                      40
Net income (loss)                                            (81 )%                   45  %

Overall

Our total net sales and revenues for the three months ended March 31, 2013 were $3.2 million as compared to $7.5 million for the three months ended March 31, 2012, which represents a decrease of $4.3 million or 57%. The decrease was primarily attributable to a $4.4 million decrease in solar revenue, partially offset by a slight increase in biomedical revenue.

Solar Business Unit

Sales in our solar business unit decreased 75% during the three months ended March 31, 2013 to $1.4 million as compared to $5.9 million for the three months ended March 31, 2012. The decrease in solar business unit revenue is primarily the result of a decrease in solar module equipment revenue in 2013 of $4.5 million, partially offset by an increase in equipment research and development revenue of $196 thousand in 2013. 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 on our biomedical business unit increased 10% during the three months ended March 31, 2013 to $1.8 million as compared to $1.6 million for the three months ended March 31, 2012. The increase was primarily attributable to an increase in revenue from our orthopedics coating services, partially offset by a decrease in revenue from our research and development contracts.

Three Months Ended March 31, 2013 Compared to Three Months Ended March 31, 2012

Net Sales and Revenues

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

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                                           Three Months Ended March 31,            Increase (Decrease)
(in thousands)                                2013               2012                $               %
Sales of goods                          $           970     $       5,489     $     (4,519 )         (82 )%
Contract research and services revenues           2,268             1,986              282            14  %
Net sales and revenues                  $         3,238     $       7,475     $     (4,237 )         (57 )%

The 82% decrease in sales of goods for the three months ended March 31, 2013 as compared to the three months ended March 31, 2012 was primarily due to a decrease of $4.5 million in solar module manufacturing equipment revenues. The decrease in solar module equipment sales of 83% in 2013 as compared to 2012 was primarily due to a decrease in individual module equipment units delivered in 2013. 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 services revenues for the three months ended March 31, 2013 as compared to the three months ended March 31, 2012 is primarily attributable to an increase of $283 thousand in biomedical service revenue and an increase of $196 thousand in equipment research and development revenue, partially offset by a decrease of $113 thousand in biomedical research and development revenue and a decrease of $85 thousand in solar research and development revenue. Revenues from our biomedical services increased 19% in 2013 compared to 2012 as a result of an increase in revenue from two large customers in 2013. The increase in equipment research and development revenue in 2013 as compared to 2012 was primarily due to new research and development projects started in the third quarter of 2012. The decrease in solar and biomedical research and development revenue of 39% in 2013 as compared to 2012 was primarily due to the completion of three research and development projects 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 March 31,                      Decrease
(in thousands)                         2013             %         2012         %           $            %
Cost of goods sold               $    1,791             185 %   $ 4,288         78 %   $ (2,497 )      (58 )%
Cost of contract research and
services                              1,222              54 %     1,234         62 %        (12 )       (1 )%
Net cost of sales and revenues   $    3,013              93 %   $ 5,522         74 %   $ (2,509 )      (45 )%

Cost of goods sold decreased 58% for the three months ended March 31, 2013 as compared to the three months ended March 31, 2012, primarily as a result of decreased costs related to solar module equipment. The decrease in solar module equipment costs of 59% in 2013 as compared to 2012 was primarily due to a decrease in associated revenue. As a percentage of sales, cost of goods sold was 185% of sales of goods in 2013 as compared to 78% of sales of goods in 2012. This increase in the percentage of sales in 2013 is due primarily to a decline in sales of higher margin equipment in 2013 and to a lesser extent, lower indirect costs not sufficient to offset the amount of overhead absorbed due to the reduction in sales volume.

Cost of contract research and services decreased 1% for the three months ended March 31, 2013 as compared to the three months ended March 31, 2012, primarily as a result of decreased costs related to biomedical services, partially offset by increased costs related to biomedical and equipment research and development services. The decrease in biomedical services costs of 11% in 2013 as compared to 2012 was primarily due to reductions in indirect costs. The increase in biomedical and equipment research and development services costs of 139% in 2013 as compared to 2012 was primarily due to a new equipment research and development project started in the third quarter of 2012. Cost of contract research and services as a percentage of related revenue decreased to 54% of related revenues in 2013 from 62% in 2012. This decrease in the percentage of sales in 2013 is primarily due to higher margin from a new equipment research and development project started in the third quarter of 2012.

Cost of sales and revenues also includes approximately $8 thousand and $19 thousand of share-based compensation for the three months ended March 31, 2013 and 2012, respectively.

Operating Expenses

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

                                           Three Months Ended March 31,               Decrease
(in thousands)                             2013           %       2012      %        $         %
Selling, general and administrative $    2,814           87 %   $ 3,464    46 %   $ (650 )   (19 )%
Internal research and development           13            - %        98     1 %      (85 )   (87 )%
Operating expenses                  $    2,827           87 %   $ 3,562    48 %   $ (735 )   (21 )%

Selling, General and Administrative Expenses

Selling, general and administrative expense decreased 19% in the three months ended March 31, 2013 as compared to the three months ended March 31, 2012, primarily as a result of a decrease in marketing, insurance and employee related expenses and a decrease in agent commissions in the solar business unit. In addition, there were fewer gains realized related to the change in value of the deferred compensation plan. Selling, general and administrative expense increased to 87% of sales and revenues in 2013 as compared to 46% in 2012. The increase was primarily due to the decrease in sales and revenues.

Selling, general and administrative expenses include approximately $28 thousand and $36 thousand of share-based compensation for the three months ended March 31, 2013 and 2012, respectively.

Internal Research and Development

Internal research and development expense decreased 87% in the three months ended March 31, 2013 as compared to the three months ended March 31, 2012, 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 decreased slightly in 2013 when compared to 2012.

Other Expense, Net

We incurred interest expense of $16 thousand and $31 thousand for the three months ended March 31, 2013 and 2012, 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 2013 compared with 2012. We had currency exchange losses of approximately $8 thousand and currency exchange gains of approximately $2 thousand during the three months ended March 31, 2013 and 2012, respectively.

Income Taxes

We recorded a state income tax provision from continuing operations of $2 thousand during the three months ended March 31, 2013. We recorded an income tax benefit on our loss from continuing operations of $2.0 million during the three months ended March 31, 2012, which was offset by a provision on our income from discontinued operations of $2.0 million during the three months ended March 31, 2012. 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 March 31, 2013 due to uncertainty regarding realization of these assets in the future.

Income 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.

We recorded net income from discontinued operations of $3.0 million for the three months ended March 31, 2012. Included in discontinued operations for the three months ended March 31, 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. See Note 13 to the unaudited condensed consolidated financial statements.

Net Income (Loss)

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We reported net loss of $2.6 million and net income of $3.4 million for the three months ended March 31, 2013 and 2012, respectively. Net income decreased approximately $6.0 million, primarily due to a $5.0 million decline from discontinued operations before tax and a $2.0 million decline in solar business unit margin, partially offset by a $734 thousand decline in operating expenses and improved margin in the biomedical services business unit of $242 thousand.

Liquidity and Capital Resources
March 31, December 31, Decrease (in thousands) 2013 2012 $ % Cash and cash equivalents $ 2,162 $ 3,030 $ (868 ) (29 )% Working capital $ 4,383 $ 6,616 $ (2,233 ) (34 )%

Cash and cash equivalents decreased due to cash used in operating activities and to a lesser extent investing activities. The overall decrease in working capital is due to a decrease in current assets, primarily cash, accounts receivable, inventories and prepaid expenses and other current assets along with an increase in accounts payable and accrued liabilities. 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 March 31, 2013, our accumulated deficit was approximately $18.6 million, compared to accumulated deficit of approximately $15.9 million as of December 31, 2012.

We currently believe that our existing cash resources at March 31, 2013, 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, in our Annual Report on Form 10-K for the year ended December 31, 2012, our independent registered public accounting firm expressed a substantial doubt about our ability to continue as a going concern in their report on our consolidated financial statements dated March 28, 2013.

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.

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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 suitable foreign currency hedge agreement if applicable, plus (ii) 75% of all other eligible receivables billed in foreign currency, plus (iii) 50% of the value of eligible inventory, as defined. Under the Revolving Credit Facility and the Ex-Im Facility, as long as any commitment remains outstanding under the facilities, we must comply with a financial covenant by maintaining a minimum cash balance of $1.0 million. In addition, until all amounts under the credit facilities with the Bank are repaid, covenants under the credit facilities impose restrictions on our ability to, among other things, incur additional indebtedness, create or permit liens on our assets, merge, consolidate or dispose of assets (other than in the ordinary course of business), make dividend and other restricted payments, make certain debt or equity investments, make certain acquisitions, engage in certain transactions with affiliates or change the business conducted by us. Any failure by the us to comply with the covenants and obligations under the credit facilities could result in an event of default, in which case the Bank may be entitled to declare all amounts owed to be due and payable immediately.

Under the credit facilities, interest on outstanding borrowings accrues at a rate per annum equal to the greater of (i) the prime rate plus 2.5% or (ii) 7.0%. In addition, if we achieve certain levels of liquidity, based on cash on hand and availability under the credit facility, we will have a 0.5% lower interest rate.

Advances outstanding under the Revolving Credit Facility were $449 thousand and $449 thousand at March 31, 2013 and December 31, 2012, respectively. Advances outstanding under the Ex-Im Facility were $141 thousand and $141 thousand at March 31, 2013 and December 31, 2012, respectively. As of March 31, 2013, the interest rate per annum on the Revolving Credit Facility and the Ex-Im Facility was 6.0% and 6.0%, respectively. We have utilized $675 thousand and $675 thousand of the guidance line at March 31, 2013 and December 31, 2012, respectively. Combined availability under the Revolving Credit Facility and the Ex-Im Facility was $59 thousand as of March 31, 2013.

Net Cash Used in Operating Activities

Net cash used in operating activities was $790 thousand in the three months ended March 31, 2013. Net cash used in operating activities was $3.2 million in the three months ended March 31, 2012, which includes $1.6 million of cash used in operating activities of discontinued operations. See Note 13 to the unaudited condensed consolidated financial statements. As of March 31, 2013, we had unrestricted cash and cash equivalents of $2.2 million compared to $3.0 million as of December 31, 2012.

Foreign Currency Fluctuation

We sell almost exclusively in U.S. dollars, generally against an irrevocable non-transferable confirmed letter of credit through a major United States bank. Accordingly, we are not directly affected by foreign exchange fluctuations on our current sales orders. However, fluctuations in foreign exchange rates do have an effect on our customers' access to U.S. dollars and on the pricing competition on certain pieces of equipment that we sell in selected markets. We bear the risk of any currency fluctuations that may be associated with these commitments. We attempt to hedge known transactions when possible to minimize foreign exchange risk. We had no hedging activity during the first three months of 2013 and 2012. Foreign exchange gain (loss) included in other expense, net, was a loss of approximately $8 thousand and a gain of $2 thousand during the three months ended March 31, 2013 and 2012, respectively.

Related Party Transactions

On November 30, 2007, we entered into a new Lease Agreement (the "Bedford Lease") with SPI-Trust, a Trust of which Roger G. Little, Chairman of the Board, Chief Executive Officer and President of the Company, is the sole trustee and principal beneficiary, with respect to 144,230 square feet of space comprising the entire building in which we have occupied space since December 1, 1985. The term of the Bedford Lease commenced on December 1, 2007 and was originally set to expire on November 30, 2012. The annual rental rate for the first year of the Bedford Lease was $12.50 per square foot on a triple net basis, whereby the tenant is responsible for operating expenses, taxes and maintenance of the building. The annual rental rate increased on each anniversary by $0.75 per square foot.

On September 17, 2010, we entered into the First Amendment to Lease Agreement with SPI-Trust to amend the Bedford Lease. The term of the Bedford Lease was extended for an additional five (5) years to expire on November 30, 2017. The annual rental rate for the first year of the extended term (December 1, 2012 through November 30, 2013) is $16.00 per square foot on a triple net basis, whereby the tenant is responsible for operating expenses, taxes and maintenance of the building. After the first year of the extended term of the Bedford Lease, the annual rental rate increases on each anniversary by $0.50 per square foot. We have the right to further extend the term of the Bedford Lease for an additional five (5) year period. If we exercise this right to

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