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SPIR > SEC Filings for SPIR > Form 10-Q on 13-Aug-2013All Recent SEC Filings

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Form 10-Q for SPIRE CORP


13-Aug-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 13 to the unaudited condensed consolidated financial statements.

Operating results will depend upon revenue growth or decline 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 37% and 34% of net sales and revenues for the three and six months ended June 30, 2013, respectively, and 65% and 65% of net sales and revenues for the three and six months ended June 30, 2012, respectively, continue to constitute a significant portion of our net sales and revenues.

- 18-

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 June 30,            Six Months Ended June 30,
                                          2013                2012              2013                2012
Net sales and revenues                     100  %              100  %            100  %              100  %
Cost of sales and revenues                 (86 )               (81 )             (89 )               (77 )
Gross margin                                14                  19                11                  23
Selling, general and administrative
expenses                                   (64 )               (45 )             (75 )               (46 )
Internal research and development                                                                     (1 )
expenses                                     -                  (1 )               -
 Operating loss from continuing                                                                      (24 )
operations                                 (50 )               (27 )             (64 )
Other expense, net                           -                  (1 )              (1 )                 -
Loss from continuing operations
before income tax benefit                  (50 )               (28 )             (65 )               (24 )
Income tax benefit - continuing
operations                                   -                   -                 -                  14
Loss from continuing operations            (50 )               (28 )             (65 )               (10 )
Income from discontinued operations,
net of tax                                   -                   -                 -                  21

Net income (loss) (50 )% (28 )% (65 )% 11 %

Overall

Our total net sales and revenues for the six months ended June 30, 2013 were $6.8 million as compared to $14.1 million for the six months ended June 30, 2012, which represents a decrease of $7.3 million or 52%. The decrease was primarily attributable to a $7.4 million decrease in solar revenue, partially offset by a slight increase in biomedical revenue.

Solar Business Unit

Sales in our solar business unit decreased 69% during the six months ended June 30, 2013 to $3.3 million as compared to $10.7 million for the six months ended June 30, 2012. The decrease in solar business unit revenue is primarily the result of a decrease in solar module equipment revenue in 2013 of $7.3 million, partially offset by an increase in equipment research and development revenue of $504 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 3% during the six months ended June 30, 2013 to $3.5 million as compared to $3.4 million for the six months ended June 30, 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 and Six Months Ended June 30, 2013 Compared to Three and Six Months Ended
June 30, 2012

Net Sales and Revenues

The following table categorizes our net sales and revenues for the periods
presented:
                                            Three Months Ended June 30,               Decrease
(in thousands)                                2013               2012              $             %
Sales of goods                          $         1,467     $       4,449     $  (2,982 )        (67 )%
Contract research and services revenues           2,107             2,171           (64 )         (3 )%
Net sales and revenues                  $         3,574     $       6,620     $  (3,046 )        (46 )%

- 19-

The 67% decrease in sales of goods for the three months ended June 30, 2013 as compared to the three months ended June 30, 2012 was primarily due to a decrease of $2.8 million in solar module manufacturing equipment revenues. The decrease in solar module equipment sales of 66% 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 3% decrease in contract research and services revenues for the three months ended June 30, 2013 as compared to the three months ended June 30, 2012 is primarily attributable to a decrease of $314 thousand in solar research and development revenue, partially offset by an increase of $308 thousand in equipment research and development revenue. The decrease in solar research and development revenue of 73% in 2013 as compared to 2012 was primarily due to the completion of two research and development projects in the first quarter of 2013 and the second quarter of 2012. The increase in equipment research and development revenue in 2013 as compared to 2012 was primarily due to new research and development projects starting in the third quarter of 2012.

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

                                            Six Months Ended June 30,             Increase (Decrease)
(in thousands)                                2013              2012                $               %
Sales of goods                          $        2,437     $       9,938     $     (7,501 )         (75 )%
Contract research and services revenues          4,375             4,157              218             5  %
Net sales and revenues                  $        6,812     $      14,095     $     (7,283 )         (52 )%

The 75% decrease in sales of goods for the six months ended June 30, 2013 as compared to the six months ended June 30, 2012 was primarily due to a decrease of $7.3 million in solar module manufacturing equipment revenues. The decrease in solar module equipment sales of 75% 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 5% increase in contract research and services revenues for the six months ended June 30, 2013 as compared to the six months ended June 30, 2012 is primarily attributable to an increase of $504 thousand in equipment research and development revenue and an increase of $243 thousand in biomedical service revenue, partially offset by a decrease of $399 thousand in solar research and development revenue and a decrease of $130 thousand in biomedical research and development revenue. The increase in equipment research and development revenue in 2013 as compared to 2012 was primarily due to new research and development projects starting in the third quarter of 2012. Revenues from our biomedical services increased 8% in 2013 compared to 2012 as a result of an increase in revenue from two large customers in 2013. The decrease in solar research and development revenue of 50% in 2013 as compared to 2012 was primarily due to the completion of two research and development projects in the first quarter of 2013 and the second quarter of 2012. The decrease in biomedical research and development revenue of 57% in 2013 as compared to 2012 was primarily due to the completion of two 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 June 30,                      Decrease
(in thousands)                         2013            %         2012         %           $            %
Cost of goods sold               $    1,902            130 %   $ 4,134         93 %   $ (2,232 )      (54 )%
Cost of contract research and
services                              1,159             55 %     1,240         57 %        (81 )       (7 )%
Net cost of sales and revenues   $    3,061             86 %   $ 5,374         81 %   $ (2,313 )      (43 )%

- 20-

Cost of goods sold decreased 54% for the three months ended June 30, 2013 as compared to the three months ended June 30, 2012, primarily due to a decrease of $2.2 million in costs related to solar module equipment. The decrease in solar module equipment costs of 55% 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 130% of sales of goods in 2013 as compared to 93% 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 7% for the three months ended June 30, 2013 as compared to the three months ended June 30, 2012, primarily due to a decrease of $146 thousand in costs related to solar research and development services and $58 thousand in costs related to biomedical research and development services, partially offset by an increase of $98 thousand in costs related to equipment research and development services. The decrease in solar research and development services costs of 76% in 2013 as compared to 2012 was primarily due to a reduction in direct costs related to the completion of two projects. The decrease in biomedical research and development services costs of 38% in 2013 as compared to 2012 was primarily due to a reduction in direct costs related to reduced revenue and reduced indirect employee related costs. The increase in equipment research and development services costs in 2013 as compared to 2012 was primarily due to new equipment research and development projects starting in the third quarter of 2012. Cost of contract research and services as a percentage of related revenue decreased to 55% of related revenues in 2013 from 57% in 2012. This decrease in the percentage of revenue in 2013 is primarily due to higher margin from new equipment research and development projects started in the third quarter of 2012.

Cost of sales and revenues also includes approximately $9 thousand and $16 thousand of share-based compensation for the three months ended June 30, 2013 and 2012, 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:

                                             Six Months Ended June 30,              Decrease
(in thousands)                            2013        %       2012       %         $          %
Cost of goods sold                     $   3,693    152 %   $  8,422    85 %   $ (4,729 )   (56 )%
Cost of contract research and services     2,381     54 %      2,474    60 %        (93 )    (4 )%
Net cost of sales and revenues         $   6,074     89 %   $ 10,896    77 %   $ (4,822 )   (44 )%

Cost of goods sold decreased 56% for the six months ended June 30, 2013 as compared to the six months ended June 30, 2012, primarily due to a decrease of $4.6 million in costs related to solar module equipment. The decrease in solar module equipment costs of 57% in 2013 as compared to 2012 was primarily due to a decrease in associated revenue. As a percentage of sales, cost of goods sold increased to 152% of sales of goods in 2013 as compared to 85% 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 4% for the six months ended June 30, 2013 as compared to the six months ended June 30, 2012, primarily due to a decrease of $143 thousand in costs related to solar research and development services and $85 thousand in costs related to biomedical services, partially offset by an increase of $156 thousand in costs related to equipment research and development services. The decrease in solar research and development services costs of 42% in 2013 as compared to 2012 was primarily due to a reduction in direct costs related to the completion of two projects. The decrease in biomedical services costs of 4% in 2013 as compared to 2012 was primarily due to reductions in indirect costs. The increase in equipment research and development services costs in 2013 as compared to 2012 was primarily due to new equipment research and development projects starting 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 60% in 2012. This decrease in the percentage of sales in 2013 is primarily due to higher margin from new equipment research and development projects starting in the third quarter of 2012.

Cost of sales and revenues also includes approximately $17 thousand and $35 thousand of share-based compensation for the six months ended June 30, 2013 and 2012, 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:

                                     - 21-
--------------------------------------------------------------------------------


                                           Three Months Ended June 30,               Decrease
(in thousands)                            2013           %       2012      %        $         %
Selling, general and administrative $    2,271          64 %   $ 2,940    44 %   $ (669 )   (23 )%
Internal research and development           10           - %        93     1 %      (83 )   (89 )%
Operating expenses                  $    2,281          64 %   $ 3,033    46 %   $ (752 )   (25 )%

Selling, General and Administrative Expenses

Selling, general and administrative expense decreased 23% in the three months ended June 30, 2013 as compared to the three months ended June 30, 2012, 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, there were fewer losses realized related to the change in value of the deferred compensation plan. Selling, general and administrative expense increased to 64% of sales and revenues in 2013 as compared to 44% in 2012. The increase was primarily due to the decrease in sales and revenues.

Selling, general and administrative expenses include approximately $32 thousand and $50 thousand of share-based compensation for the three months ended June 30, 2013 and 2012, respectively.

Internal Research and Development

Internal research and development expense decreased 89% in the three months
ended June 30, 2013 as compared to the three months ended June 30, 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.

The following table categorizes our operating expenses for the periods
presented, stated in dollars and as a percentage of total sales and revenues:
                                           Six Months Ended June 30,               Decrease
(in thousands)                           2013         %       2012      %         $          %
Selling, general and administrative $   5,085        75 %   $ 6,404    45 %   $ (1,319 )   (21 )%
Internal research and development          23         - %       191     1 %       (168 )   (88 )%
Operating expenses                  $   5,108        75 %   $ 6,595    47 %   $ (1,487 )   (23 )%

Selling, General and Administrative Expenses

Selling, general and administrative expense decreased 21% in the six months ended June 30, 2013 as compared to the six months ended June 30, 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. Selling, general and administrative expense increased to 75% of sales and revenues in 2013 as compared to 45% in 2012. The increase was primarily due to the decrease in sales and revenues.

Selling, general and administrative expenses include approximately $60 thousand and $86 thousand of share-based compensation for the six months ended June 30, 2013 and 2012, respectively.

Internal Research and Development

Internal research and development expense decreased 88% in the six months ended June 30, 2013 as compared to the six months ended June 30, 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 $13 thousand and $36 thousand for the three months ended June 30, 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 $1 thousand and currency exchange gains of approximately $1 thousand during the three months ended June 30, 2013 and 2012, respectively.

- 22-

We incurred interest expense of $29 thousand and $67 thousand for the six months ended June 30, 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 $9 thousand and currency exchange gains of approximately $3 thousand during the six months ended June 30, 2013 and 2012, respectively.

Income Taxes

We recorded a state income tax provision from continuing operations of $2 thousand during the six months ended June 30, 2013. We recorded an income tax benefit on our loss from continuing operations of $2.0 million during the six months ended June 30, 2012, which was offset by a provision on our income from discontinued operations of $2.0 million during the six months ended June 30, 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 June 30, 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 six months ended June 30, 2012. Included in discontinued operations for the six months ended June 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. See Note 13 to the unaudited condensed consolidated financial statements.

Net Income (Loss)

We reported net loss of $1.8 million and $1.8 million for the three months ended June 30, 2013 and 2012, respectively. Net loss decreased approximately $40 thousand, primarily due to a $752 thousand decline in operating expenses, partially offset by a $710 thousand decline in solar business unit margin.

We reported net loss of $4.4 million and net income of $1.5 million for the six months ended June 30, 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 $2.7 million decline in solar business unit margin, partially offset by a $1.5 million decline in operating expenses and improved margin in the biomedical business unit of $217 thousand.

Liquidity and Capital Resources
June 30, December 31, Decrease (in thousands) 2013 2012 $ % Cash and cash equivalents $ 1,735 $ 3,030 $ (1,295 ) (43 )% Working capital $ 2,607 $ 6,616 $ (4,009 ) (61 )%

Cash and cash equivalents decreased due to cash used in operating activities, partially offset by cash provided by investing activities. The overall decrease in working capital is due to a decrease in current assets, primarily cash, accounts receivable, inventories and current assets of discontinued operations 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 June 30, 2013, our accumulated deficit was approximately $20.4 million, compared to accumulated deficit of approximately $15.9 million as of December 31, 2012.

We currently believe that our existing cash resources at June 30, 2013, will be sufficient to fund our operations into the second half of 2013; however, we . . .

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