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SPIR > SEC Filings for SPIR > Form 10-Q on 19-Nov-2013All Recent SEC Filings

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Form 10-Q for SPIRE CORP


19-Nov-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 and our subsidiaries along with our variable interest entity 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, through our variable interest entity, N2 Biomedical LLC ("N2 Bio"), 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 provides turn-key services to our customers to backward integrate to solar cell manufacturing.

In the biomedical area, through our variable interest entity, N2 Bio, 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 performs sponsored research programs into practical applications of advanced biomedical technologies.

Transactions

On September 18, 2013, we, Spire Biomedical, Inc. (the "Subsidiary" and together with us, "Spire Bio") entered into an Asset Purchase Agreement (the "Purchase Agreement") with N2 Bio pursuant to which N2 Bio agreed to (i) acquire substantially all of the assets of the Subsidiary's biomedical business (the "Bio Business Unit") and (ii) assume and pay certain liabilities related to the purchased assets as set forth in the Purchase Agreement (collectively, the "Transaction"). The Transaction closed on September 18, 2013. The purchase price for the Bio Business Unit was $10.5 million plus the assumption of liabilities of approximately $100 thousand, with $6.0 million paid in cash at closing, a $2.4 million subordinated convertible promissory note, and 310,549 Series A Convertible Preferred Units of N2 Bio valued at approximately $2.1 million ($6.72 per share). The assets and liabilities of the Subsidiary's biomedical business are under common control and requires carryover basis for financial reporting. The difference between the consideration paid and the carrying value of the assets and liabilities acquired by N2 Bio was recorded as a deemed dividend by us in the amount of $9.5 million and has been eliminated in consolidation. Mark C. Little was the Chief Executive Officer of the Subsidiary, is one of our director's and is the Chief Executive Officer of N2 Bio. Mark C. Little is the son of Roger G. Little, our Chief Executive Officer.

We have determined that N2 Bio is a VIE because the equity investment at risk from the majority shareholders of N2 Bio is not sufficient to permit N2 Bio to finance its activities without additional subordinated financial support from us. As discussed above, N2 Bio is subject to a subordinated convertible promissory note. Additionally, Mark Little is the Chief Executive Officer of N2 Bio and also one of our director's which qualifies as a related party. We have also determined that we have the obligation to absorb losses and the right to receive benefits from N2 Bio that could potentially be significant to it. Therefore, we have determined that N2 Bio is a VIE and must consolidate the financial condition, results of operations and cash flows of N2 Bio with those of our own. See Note 14 to the unaudited condensed consolidated financial statements.

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The subordinated convertible promissory note (i) bears interest at 9% per annum until paid in full, (ii) is convertible, at our option, into Common Units of N2 Bio at a conversion price of $6.72 per share, (iii) has a seven year term, (iv) is unsecured and (v) is subordinate in right of payment to all senior bank indebtedness of N2 Bio.

The Series A Convertible Preferred Units (i) represent an equity ownership interest of 19.9% in N2 Bio, (ii) are governed by the terms of the Amended and Restated Limited Liability Company Agreement of N2 Bio dated September 18, 2013,
(iii) rank senior to the Common Units on liquidation, dissolution and winding up, and (iv) vote together with the Common Units on an as-converted basis. We have the right to appoint one director to the Board of Directors of N2 Bio. N2 Bio is subject to certain affirmative and negative operating covenants in favor of the holder of Series A Preferred Units.

On September 18, 2013, we and N2 Bio entered into a Shared Services Agreement whereby the we will provide N2 Bio certain services (the "Shared Services") for a period of three years. It is the intent of the parties that the aggregate fees for the Shared Services shall equal approximately $500,000 during the first year. Following the first anniversary, N2 Bio may terminate any specific Shared Service with 20 days' written notice to us.

On September 18, 2013, the lease agreement between SPI-Trust and us for the premises in Bedford, Massachusetts where the Business is located was amended, by reducing our leased space and annual base rent by approximately 19%. All other material terms and conditions related to the lease remain unchanged as of such date.

On September 18, 2013, N2 Bio entered into a Lease Agreement (the "N2 Bio Bedford Lease") with SPI-Trust with respect to 27,048 square feet of space in the premises in Bedford, Massachusetts. The term of the N2 Bio Bedford Lease commenced on September 18, 2013 and is set to expire on November 30, 2020. The annual rental rate prorated for September 18, 2013 to 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. The annual rental rate increases on December 1, 2013 and each anniversary thereafter by $0.50 per square foot.

The Purchase Agreement includes a five-year commitment of (i) us not to compete with the Bio Business Unit services and (ii) N2 Bio not to compete with our consumer electronic products business. We and N2 Bio both agreed not to solicit the officers or employees of the other party for a one-year period.

On March 9, 2012, we completed the sale of our semiconductor business unit, which provided semiconductor foundry services, operated a semiconductor foundry and fabrication facility and was 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.

Liquidity

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 27% and 31% of net sales and revenues for the three and nine months ended September 30, 2013, respectively, and 29% and 57% of net sales and revenues for the three and nine months ended September 30, 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 September 30,         Nine Months Ended September 30,
                                            2013                 2012               2013                 2012
Net sales and revenues                      100  %               100  %             100  %               100  %
Cost of sales and revenues                  (72 )                (78 )              (83 )                (77 )
Gross margin                                 28                   22                 17                   23
Selling, general and administrative
expenses                                    (81 )                (69 )              (77 )                (51 )
Internal research and development                                                                         (1 )
expenses                                      -                   (1 )                -
 Operating loss from continuing                                                                          (29 )
operations                                  (53 )                (48 )              (60 )
Other expense, net                           (1 )                 (1 )                -                   (1 )
Loss from continuing operations
before income tax benefit                   (54 )                (49 )              (60 )                (30 )
Income tax benefit - continuing
operations                                    -                    1                  -                   11
Loss from continuing operations             (54 )                (48 )              (60 )                (19 )
Income (loss) from discontinued
operations, net of tax                        -                   (6 )                -                   15
Net loss                                    (54 )                (54 )              (60 )                 (4 )
Less: Net loss attributable to                                                                             -
noncontrolling interest                      (3 )                  -                 (1 )
Net loss attributable to common                                                                           (4 )%
stockholders                                (51 )%               (54 )%             (59 )%

Overall

Our total net sales and revenues for the nine months ended September 30, 2013 were $11.0 million as compared to $18.3 million for the nine months ended September 30, 2012, which represents a decrease of $7.3 million or 40%. 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 56% during the nine months ended September 30, 2013 to $5.8 million as compared to $13.2 million for the nine months ended September 30, 2012. The decrease in solar business unit revenue is primarily the result of a decrease in solar module equipment revenue of $7.8 million and a decrease in solar research and development revenue of $672 thousand, partially offset by an increase in equipment research and development revenue of $819 thousand and an increase in solar systems revenue of $565 thousand. 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 from the biomedical business increased 2% during the nine months ended September 30, 2013 to $5.2 million as compared to $5.1 million for the nine months ended September 30, 2012. The increase was primarily attributable to an increase in revenue from the orthopedics coating services, partially offset by a decrease in revenue from our research and development contracts.

Three and Nine Months Ended September 30, 2013 Compared to Three and Nine Months
Ended September 30, 2012

Net Sales and Revenues

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

                                     - 23-
--------------------------------------------------------------------------------


                                          Three Months Ended September 30,           Increase (Decrease)
(in thousands)                                 2013                2012               $                %
Sales of goods                          $           1,776     $       1,858     $      (82 )           (4 )%
Contract research and services revenues             2,378             2,370              8              -  %
Net sales and revenues                  $           4,154     $       4,228     $      (74 )           (2 )%

The 4% decrease in sales of goods for the three months ended September 30, 2013 as compared to the three months ended September 30, 2012 was primarily due to a decrease of $431 thousand in solar module manufacturing equipment revenues and a decrease of $260 thousand in ATC Lab revenues, partially offset by an increase of $610 thousand in solar systems revenues. The decrease in solar module equipment sales of 28% in 2013 as compared to 2012 was primarily due to a decrease in individual module equipment units delivered in 2013. The decrease in ATC lab revenue of 87% in 2013 as compared to 2012 was primarily due to the completion of two large projects benefiting 2012. The increase in solar systems revenue of 4,016% in 2013 as compared to 2012 was primarily due to the completion of two solar system projects 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 slight increase in contract research and services revenues for the three months ended September 30, 2013 as compared to the three months ended September 30, 2012 is primarily attributable to an increase of $315 thousand in equipment research and development revenue, partially offset by a decrease of $273 thousand in solar 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 end of the third quarter of 2012. The decrease in solar research and development revenue of 76% in 2013 as compared to 2012 was primarily due to the completion of two research and development projects in the first and second quarter of 2013.

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

                                           Nine Months Ended September 30,           Increase (Decrease)
(in thousands)                                 2013                2012                $               %
Sales of goods                          $           4,213     $      11,796     $     (7,583 )         (64 )%
Contract research and services revenues             6,753             6,527              226             3  %
Net sales and revenues                  $          10,966     $      18,323     $     (7,357 )         (40 )%

The 64% decrease in sales of goods for the nine months ended September 30, 2013 as compared to the nine months ended September 30, 2012 was primarily due to a decrease of $7.8 million in solar module manufacturing equipment revenues and a decrease of $394 thousand in ATC Lab revenues, partially offset by an increase of $565 thousand in solar systems revenues.. The decrease in solar module equipment sales of 69% in 2013 as compared to 2012 was primarily due to a decrease in individual module equipment units delivered in 2013. The decrease in ATC lab revenue of 85% in 2013 as compared to 2012 was primarily due to the completion of three large projects benefiting 2012. The increase in solar systems revenue of 878% in 2013 as compared to 2012 was primarily due to the completion of two solar system projects 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% increase in contract research and services revenues for the nine months ended September 30, 2013 as compared to the nine months ended September 30, 2012 is primarily attributable to an increase of $819 thousand in equipment research and development revenue and an increase of $244 thousand in biomedical service revenue, partially offset by a decrease of $672 thousand in solar research and development revenue and a decrease of $166 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 end of the third quarter of 2012. Revenues from our biomedical services increased 5% in 2013 compared to 2012 as a result of an increase in revenue from three large customers in 2013. The decrease in solar research and development revenue of 58% in 2013 as compared to 2012 was primarily due to the completion of three research and development projects in the first and third quarter of 2013 and the second quarter of 2012. The decrease in biomedical research

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and development revenue of 61% in 2013 as compared to 2012 was primarily due to the completion of two research and development projects in the second and forth quarter of 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)                       2013          %         2012         %           $           %
Cost of goods sold               $    1,868        105 %   $ 2,048        110 %   $  (180 )       (9 )%
Cost of contract research and
services                              1,101         46 %     1,228         52 %      (127 )      (10 )%
Net cost of sales and revenues   $    2,969         71 %   $ 3,276         77 %   $  (307 )       (9 )%

Cost of goods sold decreased 9% for the three months ended September 30, 2013 as compared to the three months ended September 30, 2012, primarily due to a decrease of $472 thousand in costs related to solar module equipment and a decrease of $175 thousand in costs related to the ATC lab, partially offset by an increase of $467 thousand in costs related to solar systems. The decrease in solar module equipment costs of 26% in 2013 as compared to 2012 was primarily due to a decrease in associated revenue. The decrease in ATC lab costs of 80% in 2013 as compared to 2012 was primarily due to a decrease in associated revenue. The increase in solar system costs of 1,144% in 2013 as compared to 2012 was primarily due to the delivery of 2 solar system projects in 2013. As a percentage of sales, cost of goods sold was 105% of sales of goods in 2013 as compared to 110% of sales of goods in 2012. This decrease in the percentage of sales in 2013 is due primarily to the delivery of 2 high margin solar system projects in 2013, partially offset by 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 10% for the three months ended September 30, 2013 as compared to the three months ended September 30, 2012, primarily due to a decrease of $109 thousand in costs related to solar research and development services and $49 thousand in costs related to biomedical services, partially offset by an increase of $48 thousand in costs related to equipment research and development services. The decrease in solar research and development services costs of 65% 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 service costs of 6% in 2013 as compared to 2012 was primarily due to a reduction in indirect costs as a result of cost cutting programs. 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 end of the third quarter of 2012. Cost of contract research and services as a percentage of related revenue decreased to 46% of related revenues in 2013 from 52% 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 end of the third quarter of 2012.

Cost of sales and revenues also includes approximately $1 thousand and $12 thousand of share-based compensation for the three months ended September 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:

                                         Nine Months Ended September 30,                  Decrease
(in thousands)                       2013          %          2012         %           $            %
Cost of goods sold               $    5,561        132 %   $ 10,470         89 %   $ (4,909 )      (47 )%
Cost of contract research and
services                              3,482         52 %      3,702         57 %       (220 )       (6 )%
Net cost of sales and revenues   $    9,043         82 %   $ 14,172         77 %   $ (5,129 )      (36 )%

Cost of goods sold decreased 47% for the nine months ended September 30, 2013 as compared to the nine months ended September 30, 2012, primarily due to a decrease of $5.1 million in costs related to solar module equipment and a decrease of $213 thousand in costs related to the ATC lab, partially offset by an increase of $378 thousand in costs related to solar systems. The decrease in solar module equipment costs of 51% in 2013 as compared to 2012 was primarily due to a decrease in associated revenue. The decrease in ATC lab costs of 62% in 2013 as compared to 2012 was primarily due to a decrease in associated revenue. The increase in solar system costs of 152% in 2013 as compared to 2012 was primarily due to the delivery of 2 solar system projects in 2013. As a percentage of sales, cost of goods sold increased to 132% of sales of goods in 2013 as compared to 89% 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

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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, partially offset by the delivery of 2 high margin solar system projects in 2013.

Cost of contract research and services decreased 6% for the nine months ended September 30, 2013 as compared to the nine months ended September 30, 2012, primarily due to a decrease of $252 thousand in costs related to solar research and development services and $134 thousand in costs related to biomedical services, partially offset by an increase of $203 thousand in costs related to equipment research and development services. The decrease in solar research and development services costs of 50% in 2013 as compared to 2012 was primarily due to a reduction in direct costs related to the completion of three projects. The decrease in biomedical services costs of 5% 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 end of the third quarter of 2012. Cost of contract research and services as a percentage of related revenue decreased to 52% of related revenues in 2013 from 57% 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 end of the third quarter of 2012.

Cost of sales and revenues also includes approximately $18 thousand and $47 thousand of share-based compensation for the nine months ended September 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:
                                 Three Months Ended September 30,                  Increase (Decrease)
(in thousands)             2013            %           2012           %              $               %
Selling, general and
administrative         $     3,381           81 %   $   2,934           69 %   $      447             15  %
Internal research and
development                     15            - %          36            1 %          (21 )          (58 )%
Operating expenses     $     3,396           82 %   $   2,970           70 %   $      426             14  %

Selling, General and Administrative Expenses

Selling, general and administrative expense increased 15% in the three months . . .

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