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EX-10.95 - EX-10.95 - MULTI FINELINE ELECTRONIX INCmflx-ex1095_354.htm
EX-10.97 - EX-10.97 - MULTI FINELINE ELECTRONIX INCmflx-ex1097_356.htm
EX-10.96 - EX-10.96 - MULTI FINELINE ELECTRONIX INCmflx-ex1096_355.htm
EX-32.1 - EX-32.1 - MULTI FINELINE ELECTRONIX INCmflx-ex321_6.htm
EX-31.2 - EX-31.2 - MULTI FINELINE ELECTRONIX INCmflx-ex312_7.htm
EX-31.1 - EX-31.1 - MULTI FINELINE ELECTRONIX INCmflx-ex311_8.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

FORM 10-Q

 

(Mark One)

x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2016

OR

¨

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to             

Commission file number 000-50812

 

MULTI-FINELINE ELECTRONIX, INC.

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

95-3947402

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

8659 Research Drive

Irvine, CA 92618

(Address of principal executive offices, Zip Code)

(949) 453-6800

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

¨

  

Accelerated filer

 

x

 

 

 

 

Non-accelerated filer

 

¨ (Do not check if a smaller reporting company)

  

Smaller reporting company

 

¨

Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2).    Yes  ¨    No  x

The number of outstanding shares of the registrant’s Common Stock, $0.0001 par value, as of April 30, 2016 was 24,634,437.

 

 

 

 

 


Multi-Fineline Electronix, Inc.

Index

 

 

 

 

 


PART I. FINANCIAL INFORMATION

 

Item 1.

Condensed Consolidated Financial Statements

MULTI-FINELINE ELECTRONIX, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In Thousands, Except Share Data)

(unaudited)

 

 

March 31, 2016

 

 

December 31, 2015

 

ASSETS

 

 

 

 

 

 

 

Cash and cash equivalents

$

205,744

 

 

$

214,234

 

Accounts receivable, net of allowances of $745 and $916

   at March 31, 2016 and December 31, 2015, respectively

 

61,059

 

 

 

80,142

 

Inventories

 

51,782

 

 

 

56,455

 

Income tax receivable

 

143

 

 

 

225

 

Other current assets

 

4,671

 

 

 

5,439

 

Total current assets

 

323,399

 

 

 

356,495

 

Property, plant and equipment, net

 

127,799

 

 

 

131,987

 

Land use rights

 

3,190

 

 

 

3,193

 

Deferred taxes

 

8,812

 

 

 

8,798

 

Other assets

 

810

 

 

 

987

 

Total assets

$

464,010

 

 

$

501,460

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

Accounts payable

$

81,198

 

 

$

106,902

 

Other current liabilities

 

21,605

 

 

 

22,920

 

Income taxes payable

 

2,093

 

 

 

3,124

 

Total current liabilities

 

104,896

 

 

 

132,946

 

Other long-term liabilities

 

7,440

 

 

 

7,432

 

Total liabilities

 

112,336

 

 

 

140,378

 

Commitments and contingencies (Note 2)

 

 

 

 

 

 

 

Stockholders' equity

 

 

 

 

 

 

 

Preferred stock, $0.0001 par value, 5,000,000 and 5,000,000

   shares authorized at March 31, 2016 and December 31, 2015,

   respectively; 0 and 0 shares issued and outstanding at

   March 31, 2016 and December 31, 2015, respectively

 

 

 

Common stock, $0.0001 par value; 100,000,000 and

   100,000,000 shares authorized at March 31, 2016

   and December 31, 2015, respectively;

   24,633,425 and 24,460,997 shares issued and outstanding

   at March 31, 2016 and December 31, 2015, respectively

 

2

 

 

 

2

 

Additional paid in capital

 

96,257

 

 

 

97,124

 

Retained earnings

 

219,435

 

 

 

229,181

 

Accumulated other comprehensive income

 

35,980

 

 

 

34,775

 

Total stockholders' equity

 

351,674

 

 

 

361,082

 

Total liabilities and stockholders' equity

$

464,010

 

 

$

501,460

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 

 

1


MULTI-FINELINE ELECTRONIX, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

(In Thousands, Except Share and Per Share Data)

(unaudited)

 

 

Three Months Ended March 31,

 

 

2016

 

 

2015

 

Net sales

$

101,246

 

 

$

149,099

 

Cost of sales

 

99,579

 

 

 

130,060

 

Gross profit

 

1,667

 

 

 

19,039

 

Operating expenses:

 

 

 

 

 

 

 

Research and development

 

1,169

 

 

 

1,374

 

Sales and marketing

 

3,094

 

 

 

3,967

 

General and administrative

 

6,532

 

 

 

5,492

 

Impairment and restructuring

 

(5

)

 

 

(1,180

)

Total operating expenses

 

10,790

 

 

 

9,653

 

Operating (loss) income

 

(9,123

)

 

 

9,386

 

Other income and expense:

 

 

 

 

 

 

 

Interest income

 

440

 

 

 

354

 

Interest expense

 

(88

)

 

 

(91

)

Other income (expense), net

 

(719

)

 

 

938

 

(Loss) income before taxes

 

(9,490

)

 

 

10,587

 

Provision for income taxes

 

256

 

 

 

1,491

 

Net (loss) income

 

(9,746

)

 

 

9,096

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

Foreign currency translation adjustment

 

1,205

 

 

 

(987

)

Total comprehensive net (loss) income

$

(8,541

)

 

$

8,109

 

 

 

 

 

 

 

 

 

Net (loss) income per share:

 

 

 

 

 

 

 

Basic

$

(0.40

)

 

$

0.37

 

Diluted

$

(0.40

)

 

$

0.36

 

Shares used in computing net (loss) income per share:

 

 

 

 

 

 

 

Basic

 

24,609,764

 

 

 

24,318,019

 

Diluted

 

24,609,764

 

 

 

25,100,781

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 

 

2


MULTI-FINELINE ELECTRONIX, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands)

(unaudited)

 

 

Three Months Ended

March 31,

 

 

2016

 

 

2015

 

Cash flows from operating activities

 

 

 

 

 

 

 

Net (loss) income

$

(9,746

)

 

$

9,096

 

Adjustments to reconcile net (loss) income to net cash

   (used in) provided by operating activities:

 

 

 

 

 

 

 

Depreciation and amortization

 

9,838

 

 

 

11,474

 

Deferred taxes

 

32

 

 

 

(25

)

Stock-based compensation expense

 

1,036

 

 

 

1,220

 

Asset impairments (recoveries)

 

(6

)

 

 

(284

)

Loss (gain) on disposal of equipment and assets held for sale

 

239

 

 

 

(1,096

)

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable

 

19,035

 

 

 

45,230

 

Inventories

 

5,389

 

 

 

14,370

 

Other current assets

 

930

 

 

 

2,940

 

Other assets

 

180

 

 

 

(67

)

Accounts payable

 

(25,246

)

 

 

(41,164

)

Other current liabilities

 

(1,598

)

 

 

(19,953

)

Income taxes payable

 

(718

)

 

 

(83

)

Other liabilities

 

(6

)

 

 

(1,487

)

Net cash (used in) provided by operating activities

 

(641

)

 

 

20,171

 

Cash flows from investing activities

 

 

 

 

 

 

 

Purchases of property and equipment

 

(6,106

)

 

 

(3,890

)

Proceeds from sale of equipment and assets held for sale

 

52

 

 

 

6,719

 

Net cash (used in) provided by investing activities

 

(6,054

)

 

 

2,829

 

Cash flows from financing activities

 

 

 

 

 

 

 

Tax withholdings for net share settlement of equity awards

 

(1,904

)

 

 

(78

)

Net cash used in financing activities

 

(1,904

)

 

 

(78

)

Effect of exchange rate changes on cash

 

109

 

 

 

89

 

Net change in cash

 

(8,490

)

 

 

23,011

 

Cash and cash equivalents at beginning of period

 

214,234

 

 

 

132,382

 

Cash and cash equivalents at end of period

$

205,744

 

 

$

155,393

 

Non-cash investing activities

 

 

 

 

 

 

 

Purchases of property and equipment

$

5,463

 

 

$

1,331

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 

 

3


1. Description of Business

Multi-Fineline Electronix, Inc. (“MFLEX” or the “Company”) was incorporated in 1984 in the State of California and reincorporated in the State of Delaware in June 2004. The Company is primarily engaged in the engineering, design and manufacture of flexible printed circuit boards along with related component assemblies.

United Engineers Limited (“UEL”) and its wholly owned subsidiary, UE Centennial Venture Pte. Ltd (“UECV”, and together with UEL, “UE”), through its affiliates and subsidiaries, beneficially owned approximately 60% and 61% of the Company’s outstanding common stock as of March 31, 2016 and December 31, 2015, respectively. This beneficial ownership of the Company’s common stock by UE provides these entities with control over the outcome of stockholder votes at the Company, except with respect to certain related-party transactions with UE or its subsidiaries, including WBL Corporation Limited (“WBL”), which require a separate vote of the non-UE stockholders.

 

 

2. Basis of Presentation

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. The Company has three wholly owned subsidiaries located in China: MFLEX Suzhou Co., Ltd., (“MFC”), formerly known as Multi-Fineline Electronix (Suzhou No. 2) Co., Ltd. (“MFC2”) and into which Multi-Fineline Electronix (Suzhou) Co., Ltd. (“MFC1”, which we are in the process of de-registering) was merged in fiscal 2010, and MFLEX Chengdu Co., Ltd. (“MFLEX Chengdu”); one located in the Cayman Islands: M-Flex Cayman Islands, Inc. (“MFCI”); one located in Singapore: Multi-Fineline Electronix Singapore Pte. Ltd. (“MFLEX Singapore”); one located in Malaysia: Multi-Fineline Electronix Malaysia Sdn. Bhd. (“MFM”); one located in Cambridge, England: MFLEX UK Limited (“MFE”); one located in Korea: MFLEX Korea, Ltd. (“MKR”); and one located in the Netherlands: MFLEX B.V. (“MNE”). All significant intercompany transactions and balances have been eliminated in consolidation.

Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes contained in the Company’s 2015 Annual Report on Form 10-K. The financial information presented in the accompanying statements reflects all adjustments that are, in the opinion of management, necessary for a fair statement of the periods indicated. All such adjustments are of a normal recurring nature. The year-end condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by U.S. GAAP. Operating results for the three months ended March 31, 2016 are not necessarily indicative of the results that may be expected for the year ending December 31, 2016. Unless otherwise indicated, the financial information in these notes is presented in thousands (except per share amounts).

Proposed Acquisition by DSBJ

On February 4, 2016, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Suzhou Dongshan Precision Manufacturing Co., Ltd., a company organized under the laws of the People’s Republic of China (“DSBJ”), and Dragon Electronix Merger Sub Inc., a Delaware corporation and indirect wholly owned subsidiary of DSBJ (“Merger Sub”), under which Merger Sub will be merged with and into the Company (the “Merger”), with the Company continuing after the Merger as the surviving corporation and indirect subsidiary of DSBJ. The Merger Agreement has been unanimously approved by the Company’s Board of Directors.

Under the terms of the Merger Agreement, the Company’s stockholders will receive $23.95 in cash for each share of common stock held at the close of the transaction. The proposed transaction values the Company’s equity at approximately $610,000 on a fully diluted basis. Consummation of the Merger is subject to approval by the Company’s stockholders and DSBJ’s stockholders, certain regulatory approvals and other closing conditions and is expected to occur in the third quarter of 2016.

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”) issued revised authoritative guidance that requires a reporting entity to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets, unless those contracts are within the scope of other standards. The revised guidance is effective for annual periods beginning after December 15, 2017 (January 2018 for the Company), including interim periods within that reporting period. The Company is currently evaluating the impact of its pending adoption of this guidance on its financial position, results of operations and cash flows.

4


In February 2016, the FASB issued revised authoritative guidance that aims to increase transparency and comparability by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. Under the new guidance, lessees will be required to recognize the following for all leases (with the exception of short-term leases) at the commencement date (i) a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and (ii) a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Lessees (for capital and operating leases) and lessors (for sales-type, direct financing, and operating leases) must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative period presented. The guidance is effective for annual periods beginning after December 15, 2018 (January 2019 for the Company), including interim periods within those annual periods. The Company is currently evaluating the impact of its pending adoption of this new guidance on its financial position, results of operations and cash flows.

In March 2016, the FASB issued authoritative guidance that aims to simplify several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The guidance is effective for annual periods beginning after December 15, 2016 (January 2017 for the Company), and interim periods within those annual periods. Early adoption is permitted for any entity in any interim or annual period. The Company is currently evaluating the impact of its pending adoption of this new guidance on its financial position, results of operations and cash flows.

Fair Value Measurements

The carrying amounts of certain of the Company’s financial instruments, including cash, accounts receivable, accounts payable and other current liabilities approximated fair value due to their short maturities. For recognition purposes, on a recurring basis, the Company’s assets and liabilities related to money market funds are measured at fair value at the end of each reporting period. The fair value of the Company’s money market funds was measured using Level 1 fair value inputs, which consisted of quoted market prices in active markets for identical assets and liabilities.

The Company’s assets and liabilities measured at fair value on a recurring basis subject to the disclosure requirements as defined under the FASB authoritative accounting guidance were as follows:

 

 

Fair Value Measurements of Assets and Liabilities

on a Recurring Basis as of

March 31, 2016

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Money market funds (cash and cash equivalents)

$

5,014

 

 

$

 

 

$

 

 

$

5,014

 

 

$

 

 

$

 

 

 

Fair Value Measurements of Assets and Liabilities

on a Recurring Basis as of

December 31, 2015

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Money market funds (cash and cash equivalents)

$

5,009

 

 

$

 

 

$

 

 

$

5,009

 

 

$

 

 

$

 

 

Inventories

Inventories, net of applicable write-downs, were composed of the following:

 

 

March 31, 2016

 

 

December 31, 2015

 

Raw materials and supplies

$

6,629

 

 

$

9,684

 

Work-in-progress

 

13,163

 

 

 

15,340

 

Finished goods

 

31,990

 

 

 

31,431

 

 

$

51,782

 

 

$

56,455

 

 

5


Property, Plant and Equipment

Property, plant and equipment, net, were composed of the following:

 

 

March 31, 2016

 

 

December 31, 2015

 

Building

$

51,685

 

 

$

51,427

 

Machinery and equipment

 

319,817

 

 

 

321,600

 

Computers and capitalized software

 

15,019

 

 

 

14,295

 

Building and leasehold improvements

 

2,756

 

 

 

2,748

 

Construction-in-progress

 

4,008

 

 

 

318

 

 

$

393,285

 

 

$

390,388

 

Accumulated depreciation and amortization

 

(265,486

)

 

 

(258,401

)

 

$

127,799

 

 

$

131,987

 

 

Other Current Liabilities

Other current liabilities were composed of the following:

 

 

March 31, 2016

 

 

December 31, 2015

 

Wages and compensation

$

9,539

 

 

$

12,843

 

Restructuring expenses¹

 

2,915

 

 

 

2,954

 

Other accrued expenses

 

9,151

 

 

 

7,123

 

 

$

21,605

 

 

$

22,920

 

1 

Refer to Note 7 for further information on the Company’s impairment and restructuring activities during the three months ended March 31, 2016.

 

Product Warranty Accrual

Changes in the product warranty accrual for the three months ended March 31, 2016 and 2015 were as follows:

 

 

Balance at

January 1

 

 

Warranty

Expenditures

 

 

Provision for

Estimated

Warranty Cost

 

 

Balance at March 31

 

2016

$

533

 

 

 

(419

)

 

 

434

 

 

$

548

 

2015

$

1,013

 

 

 

(464

)

 

 

256

 

 

$

805

 

 

Net Income Per Share—Basic and Diluted

The following table presents a reconciliation of basic and diluted shares for the three months ended March 31, 2016 and 2015:

 

 

Three Months Ended

March 31,

 

 

2016

 

 

2015

 

Basic weighted-average number of common shares outstanding

 

24,609,764

 

 

 

24,318,019

 

Dilutive effect of potential common shares

 

 

 

 

782,762

 

Diluted weighted-average number of common and potential common shares

   outstanding

 

24,609,764

 

 

 

25,100,781

 

Potential common shares excluded from the per share computations as the effect

   of their inclusion would not be dilutive

 

882,957

 

 

 

637,105

 

 

Commitments and Contingencies

Litigation

The Company is involved in litigation from time to time in the ordinary course of business. Other than as described, management does not believe the outcome of any currently pending matters will have a material adverse effect on the Company’s financial position, results of operations or cash flows.

6


On April 29, 2016, a class action lawsuit was filed by a purported stockholder in the United States District Court in the Central District of California challenging the proposed Merger with DSBJ. The lawsuit alleges that the individual members of the Company’s Board of Directors (the “MFLEX Board”) breached their fiduciary duties to the Company’s stockholders by agreeing to the proposed merger transaction for inadequate consideration and through an allegedly flawed sales process, and that the defendant companies, MFLEX, DSBJ and Merger Sub, aided and abetted such alleged breaches. The plaintiff in the action seeks, among other things, an order enjoining the Merger and, in the event the merger is completed, rescission and/or damages as a result of the alleged violations of law, as well as fees and costs. Although it is not possible to predict the outcome of this litigation matter with certainty, MFLEX and the MFLEX Board believe that the claims asserted in this lawsuit are without merit and intend to vigorously defend against these claims. In view of our indemnification obligation to our directors, we are unable to estimate a range of loss, if any, that could result were there to be an adverse final decision. If an unfavorable outcome were to occur in these cases, it is possible that the impact could be material to our results of operations in the period(s) in which any such outcome becomes probable and estimable.

Other Commitments

The Company has outstanding purchase and other commitments, which exclude amounts already recorded on the Condensed Consolidated Balance Sheets. The outstanding purchase commitments to acquire capital assets and other materials and services totaled $12,316 and $9,922 as of March 31, 2016 and December 31, 2015, respectively.

Pursuant to the laws applicable to the People’s Republic of China’s Foreign Investment Enterprises, the Company’s two active wholly owned subsidiaries in China, MFC and MFLEX Chengdu, are restricted from paying cash dividends on 10% of after-tax statutory profit, subject to certain cumulative limits. These restrictions as of March 31, 2016 and December 31, 2015 were $18,418 and $18,326, respectively.

Significant Concentrations

The Company’s net sales into its largest industry sectors, as a percentage of total net sales, are presented below:

 

 

Three Months Ended

March 31,

 

 

2016

 

 

2015

 

Smartphones

 

64

%

 

 

75

%

Tablets

 

24

%

 

 

15

%

Consumer electronics1

 

10

%

 

 

9

%

1

Includes wearables and connected home devices.

 

 

3. Lines of Credit

During August 2014, the Company, as guarantor, and MFLEX Singapore, as borrower, entered into a Loan and Security Agreement with certain financial institutions, as lenders, and Bank of America, N.A. (“BA”), as agent, providing for a senior revolving credit facility in an amount up to $30,000. The credit facility has a three-year term, and availability under the credit facility is calculated based on a formula which takes into account multiple factors, including the accounts receivable of borrower, the geographic location of borrower’s customer, and whether the customer’s receivable is insured by a third party. Amounts outstanding will bear interest at either: (1) a rate equal to LIBOR or SIBOR, plus an applicable margin, which ranges from 175 to 275 basis points, or (2) a defined base rate plus an applicable margin ranging from 75 to 275 basis points. In either case, the applicable margin is based on the fixed charge coverage ratio of the Company and its subsidiaries, measured on a consolidated basis. Refer to Note 8 for further discussion.

During July 2013, MFC entered into a Line of General Credit Agreement (the “MFC Credit Line”) with Agricultural Bank of China, Suzhou Wuzhong Sub-branch (“ABC”), providing for a line of credit to MFC in an amount of 200,000 Chinese Renminbi (“RMB”) ($30,954 at March 31, 2016). The MFC Credit Line will mature on July 30, 2016. The Company is in the process of renewing this line of credit.

During May 2013, MFC entered into a Line of Credit Agreement (the “CCB Credit Line”) with China Construction Bank, Suzhou Industry Park Sub-Branch (“CCB”), which provides for a borrowing facility for 300,000 RMB ($46,431 at March 31, 2016). The CCB Credit Line will mature on May 5, 2016. Refer to Note 8 for further discussion.

7


A summary of the lines of credit is as follows:

 

 

Amounts Available at

 

 

Amounts Outstanding at

 

 

March 31, 2016

 

 

December 31, 2015

 

 

March 31, 2016

 

 

December 31, 2015

 

Line of credit (BA)

$

30,000

 

 

$

30,000

 

 

$

 

 

$

 

Line of credit (ABC)

 

30,954

 

 

 

30,800

 

 

 

 

 

 

 

Line of credit (CCB)

 

46,431

 

 

 

46,199

 

 

 

 

 

 

 

 

$

107,385

 

 

$

106,999

 

 

$

 

 

$

 

 

As of March 31, 2016, the Company was in compliance with all applicable financial covenants.

 

 

4. Segment Information

Based on the evaluation of the Company’s internal financial information, management believes that the Company operates in one reportable segment under one reporting unit. The Company is primarily engaged in the engineering, design and manufacture of flexible circuit boards along with related component assemblies. For the periods presented, the Company operated in four geographical areas: United States, China, Singapore and Other (which includes Malaysia, Korea and the United Kingdom). Net sales are presented based on the country in which the sales originate, which is where the legal entity is domiciled. The financial results of the Company’s geographic segments are presented on a basis consistent with the condensed consolidated financial statements. The geographic area’s net sales amounts include intra-company product sales transactions, which are offset in the elimination line.

Net sales by geographic segment is as follows:

 

 

Three Months Ended

March 31,

 

 

2016

 

 

2015

 

Net sales

 

 

 

 

 

 

 

United States

$

2,056

 

 

$

3,237

 

China

 

103,068

 

 

 

123,836

 

Singapore

 

96,447

 

 

 

141,889

 

Other

 

 

 

 

517

 

Eliminations

 

(100,325

)

 

 

(120,380

)

Total

$

101,246

 

 

$

149,099

 

 

 

5. Stock-Based Compensation

2014 Equity Incentive Plan

At the Company’s annual meeting of stockholders on March 5, 2014, the stockholders approved the Company’s 2014 Equity Incentive Plan (the “2014 Plan”). Upon stockholder approval of the 2014 Plan, the Company’s 2004 Stock Incentive Plan, as amended and restated to date (the “2004 Plan”) was terminated.

Restricted Stock Units

From time to time, the Company grants service-based restricted stock units (“RSUs”) under the 2014 Plan to certain employees (including executive officers) and directors at no cost to such individual. Each RSU represents one hypothetical share of the Company’s common stock, without voting or dividend rights. The RSUs granted to employees generally vest over a period of three years with one-third vesting on each of the anniversary dates of the grant date. Total compensation cost related to RSUs is determined based on the fair value of the Company’s common stock on the date of grant and is amortized into expense over the vesting period using the straight-line method.

8


RSU activity for the three months ended March 31, 2016 is summarized as follows:

 

 

Number of

Shares

 

 

Weighted

-Average

Grant-Date

Fair Value

 

Non-vested shares outstanding at December 31, 2015

 

1,246,653

 

 

$

9.13

 

Granted

 

 

 

 

 

Vested

 

(276,477

)

 

 

8.68

 

Canceled

 

(4,800

)

 

 

12.05

 

Non-vested shares outstanding at March 31, 2016

 

965,376

 

 

$

9.25

 

 

RSU details for the three months ended March 31, 2016 and 2015 are summarized as follows:

 

 

 

Three Months Ended

March 31,

 

 

 

2016

 

 

2015

 

Service-based RSUs granted

 

 

 

 

24,780

 

Stock-based compensation expense recognized

 

$

1,036

 

 

$

1,220

 

Weighted-average grant-date fair value of non-vested RSUs granted

 

$

 

 

$

19.82

 

Weighted-average grant-date fair value of RSUs vested

 

$

8.68

 

 

$

13.81

 

Aggregate intrinsic value of RSUs vested

 

$

5,122

 

 

$

752

 

 

Unearned compensation as of March 31, 2016 was $4,770 related to non-vested RSUs, which will be recognized into expense over the weighted-average remaining contractual life of the non-vested RSUs of 1.2 years.

 

Stock-Based Compensation Expense Summary

The following table shows a summary of the stock-based compensation expense by expense type included in the Condensed Consolidated Statements of Comprehensive Income for the three months ended March 31, 2016 and 2015:

 

 

 

Three Months Ended

March 31,

 

 

 

2016

 

 

2015

 

Cost of sales

 

$

99

 

 

$

103

 

Research and development

 

 

105

 

 

 

101

 

Sales and marketing

 

 

66

 

 

 

163

 

General and administrative

 

 

766

 

 

 

853

 

Total

 

$

1,036

 

 

$

1,220

 

 

 

6. Income Taxes

As of March 31, 2016, the Company recorded a liability for income taxes associated with uncertain tax positions of $13,834, of which $5,832, if recognized, would favorably affect the Company’s effective tax rate. As of December 31, 2015, the total liability for income taxes associated with uncertain tax positions was $13,835, of which $5,832, if recognized, would favorably affect the Company’s effective tax rate. The Company anticipates that there will be changes to the unrecognized tax benefit associated with uncertain tax positions due to the expiration of the statutes of limitation, payment of tax on amended returns, audit settlements and other changes in reserves. However, due to the uncertainty regarding the timing of these events, other than the statute of limitation expiration, a current estimate of the range of changes that may occur within the next 12 months cannot be made.

The Chinese tax authority has concluded the field work associated with auditing the income tax returns of MFC and MFC1 for tax years 2005 through 2011 related to transfer pricing on tangible goods sold by the Company to related parties. The Chinese tax authority issued a final notice of assessment of $12,569, including interest, and the Company made the corresponding payment in February 2015. The Company is currently seeking relief from double taxation through competent authority on this cross-border adjustment. An estimate of the ultimate resolution cannot be made at this time.

The Chinese tax authority is currently auditing the income tax returns of MFLEX Chengdu for tax years 2009 through 2015. The Chinese tax authority raised questions related to transfer pricing on tangible goods sold by the Company to related parties. The questions primarily related to the transfer pricing methodology and the selection of comparable companies. Discussions with the Chinese tax authority surrounding this issue are ongoing. Management believes that an adequate provision has been made related to this audit.

9


The outcome of these tax audits cannot be predicted with certainty. If any issues raised in the Company’s tax audits are resolved in a manner not consistent with management’s expectations, then the Company could be required to adjust its provision for income tax in the period such resolution occurs. Any significant adjustments from the tax authorities could have a material adverse effect on the Company’s results of operations, cash flows and financial position if not resolved favorably.

 

 

7. Impairment and Restructuring

The Company recorded the following impairment and restructuring (recoveries) expenses during the three months ended March 31, 2016 and 2015:

 

 

 

Three Months Ended

March 31,

 

 

 

2016

 

 

2015

 

Asset recoveries

 

$

(6

)

 

$

(284

)

Gain on sale of a satellite facility

 

 

 

 

 

(1,101

)

One-time termination benefits

 

 

 

 

 

13

 

Other costs

 

 

1

 

 

 

192

 

Impairment and restructuring

 

$

(5

)

 

$

(1,180

)

 

Restructuring Reserve Activity

The following table reflects the movement activity of the restructuring reserve for the three months ended March 31, 2016:

 

 

One-Time Termination Benefits

 

 

Contract Termination Costs

 

 

Other Costs

 

 

Total Accrued Restructuring

 

Accrued at December 31, 2015

$

 

 

 

$

 

 

 

$

 

2,954

 

 

$

 

2,954

 

Restructuring additions

 

 

 

 

 

 

 

 

 

 

1

 

 

 

 

1

 

Adjustment/foreign exchange effect

 

 

 

 

 

 

 

 

 

 

14

 

 

 

 

14

 

Amount paid

 

 

 

 

 

 

 

 

 

 

(54

)

 

 

 

(54

)

Accrued at March 31, 2016

$

 

 

 

$

 

 

 

$

 

2,915

 

 

$

 

2,915

 

 

 

8. Subsequent Events

In anticipation of the closing of the Merger, on May 2, 2016, the Company, as guarantor, and MFLEX Singapore, as borrower, entered into a Second Amendment to Loan and Security Agreement (“Second Amendment”) with certain financial institutions, as lenders, and Bank of America, N.A., as agent. The Second Amendment amended the Loan and Security Agreement to, among other items, consent to the change of control of the Company which will result from the Merger Agreement and to amend the covenant relating to a future change of control to reflect DSBJ as the indirect parent of the Company.

The foregoing description is qualified in its entirety by reference to the Second Amendment to Loan and Security Agreement, filed as Exhibit 10.95 to this Form 10-Q.

On May 4, 2016, MFC entered into a credit line agreement with China Construction Bank, Suzhou Industry Park Sub-Branch (“CCB”), which provides for a borrowing facility for 300,000 RMB ($46,431 at March 31, 2016). The CCB credit line agreement is effective May 6, 2016 and will mature on May 7, 2017. Interest on the credit line agreement for U.S. dollar lending will be negotiated and determined by both parties based on the lending cost in the market for U.S. dollar transactions on the day the loan is made. For RMB lending, the interest rate is based on the current rate set by the People’s Bank of China at the time of borrowing.

The foregoing description is qualified in its entirety by reference to the Credit Line Contract and Facility Offer Letter, filed as Exhibits 10.96 and 10.97, respectively, to this Form 10-Q.

As of May 5, 2016, no amounts were outstanding under our loan agreements with Bank of America or CCB.

 

 

 

10


Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

This Quarterly Report on Form 10-Q (“Quarterly Report”) contains forward-looking statements that involve a number of risks and uncertainties. These forward-looking statements include, but are not limited to, statements and predictions as to any statements regarding our ability to successfully complete our proposed merger transaction with Suzhou Dongshan Precision Manufacturing Co., Ltd., our expectations regarding our revenues, sales, sales growth, net income and losses, inventory levels, production build plans, restructuring and reorganization efforts and related charges, operating expenses, research and development expenses, earnings, operations, gross margins, including without limitation, our targeted gross margin range, achievement of margins within or outside of such range and factors that could affect gross margins, yields, anticipated cash needs and uses of cash, credit lines, including compliance with covenants and usage of such lines, capital requirements and capital expenditures, payment terms, expected tax rates, results of audits of us in China and the United States, needs for additional financing, use of working capital, the benefits and risks of our China operations, the impact of environmental regulations, anticipated growth strategies, ability to attract customers and diversify our customer base, our sources of net sales, anticipated trends and challenges in our business and the markets in which we operate, trends regarding the use of flex and assemblies in smartphones, tablets and other consumer electronic devices, the adequacy of our facilities, capability, capacity and equipment, the impact of economic and industry conditions on our customers and our business, current and upcoming programs and product mix and the learning curves associated with our programs, market opportunities, customer demand, our competitive position, labor issues in the jurisdictions in which we operate, the commercial success of our customers and their products, critical accounting policies and the impact of recent accounting pronouncements. Additional forward-looking statements include, but are not limited to, statements pertaining to other financial items, plans, strategies or objectives of management for future operations, our financial condition or prospects, and any other statement that is not historical fact, including any statement which is preceded by the word “may,” “might,” “will,” “intend,” “should,” “could,” “can,” “would,” “expect,” “believe,” “anticipate,” “estimate,” “predict,” “aim,” “potential,” “plan,” or similar words. For all of the foregoing forward-looking statements, we claim the protection of the Private Securities Litigation Reform Act of 1995. Actual events or results may differ materially from our expectations. Important factors that could cause actual results to differ materially from those stated or implied by our forward-looking statements include, but are not limited to, our ability to maintain the cost savings realized by our recent restructuring, the impact of changes in demand for our products, our success with new and current customers, our ability to be competitive in terms of price, technology, capability and manufacturing, our ability to maintain or grow our market share, our ability to diversify our customer base and market segments, the success of our customers and their products in the marketplace, our effectiveness in managing manufacturing processes, inventory levels and costs of our operations, the degree to which we are able to utilize available manufacturing capacity, achieve expected yields and obtain expected gross margins, the impact of competition, the economy and technological advances, and the other risks set forth below under “Part II, Item 1A – Risk Factors.” These forward-looking statements represent our judgment as of the date hereof. We disclaim any intent or obligation to update these forward-looking statements.

Overview

Proposed Acquisition by DSBJ

On February 4, 2016, we entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Suzhou Dongshan Precision Manufacturing Co., Ltd., a company organized under the laws of the People’s Republic of China (“DSBJ”), and Dragon Electronix Merger Sub Inc., a Delaware corporation and indirect wholly owned subsidiary of DSBJ (“Merger Sub”), under which Merger Sub will be merged with and into our company (the “Merger”), with us continuing after the Merger as the surviving corporation and indirect subsidiary of DSBJ. The Merger Agreement has been unanimously approved by our Board of Directors.

Under the terms of the Merger Agreement, our stockholders will receive $23.95 in cash for each share of common stock held at the close of the transaction. The proposed transaction values our equity at approximately $610.0 million on a fully diluted basis. Consummation of the Merger is subject to approval by our stockholders and DSBJ’s stockholders, certain regulatory approvals and other closing conditions and is expected to occur in the third quarter of 2016.

Additional information about the Merger and the terms of the Merger Agreement can be found in our definitive proxy on Schedule 14A filed with the Securities and Exchange Commission (“SEC”) on April 28, 2016, our Annual Report on Form 10-K filed with the SEC on February 11, 2016 and in the Current Report on Form 8-K filed by us under Item 1.01 of that Form 8-K on February 4, 2016, including the full text of the Merger Agreement filed as Annex A to the proxy and Exhibit 2.1 to that Form 8-K. Our stockholders are urged to read all relevant documents filed with the SEC because they contain important information about the proposed transaction. Investors and security holders are able to obtain the documents free of charge at the SEC’s web site, www.sec.gov, or for free from us by contacting (949) 453-6800 or through the investor relations section of our website (www.mflex.com).

11


 Business Overview

We are a global provider of high-quality, technologically advanced flexible printed circuits and value-added component assembly solutions to the electronics industry. We believe that we are one of a limited number of manufacturers that provide a seamless, integrated flexible printed circuit and assembly solution from design and application engineering and prototyping through high-volume fabrication, component assembly and testing. We target our solutions within the electronics market and, in particular, our solutions enable our customers to achieve a desired size, shape, weight or functionality of the device. Current examples of applications for our products include smartphones, tablets, computer/data storage, wearables, connected home devices, portable bar code scanners, personal computers, medical and automotive industry applications and other consumer electronic devices. We provide our solutions to original equipment manufacturers (“OEMs”) such as Apple Inc., and to electronic manufacturing services (“EMS”) providers such as Foxconn Electronics, Inc. Our business model, and the way we approach the markets which we serve, is based on value added engineering and providing technology solutions to our customers facilitating the miniaturization of portable electronics. We currently rely on a core mobility end-market for nearly all of our net sales. We believe this dynamic market offers fewer, but larger, opportunities than other electronic markets do, and changes in market leadership can occur with little to no warning. Through early supplier involvement with customers, we look to assist in the development of new designs and processes for the manufacturing of their products and, through value added assembly of components on flex, seek to provide a higher level of product within their supply chain structure. This approach may or may not always fit with the operating practices of all OEMs. Our ability to add to our customer base may have a direct impact on the relative percentage of each customer’s net sales to total net sales during any reporting period.

We typically have numerous programs in production at any particular time, the life cycle for which is typically around one year. The programs’ prices are subject to intense negotiation and are determined on a program by program basis, dependent on a wide variety of factors, including without limitation, competitor pricing, expected volumes, assumed yields, material costs, and the amount of third party components within the program. Our profitability is dependent upon how we perform against our targets and the assumptions on which we base our prices for each particular program. In addition, the price on a particular program typically decreases as the program matures. Our volumes, margins and yields also vary from program to program and, given various factors and assumptions on which we base our prices, are not necessarily indicative of our profitability. In fact, some lower-priced programs have higher margins while other higher-priced programs have lower margins. Given that the programs in production vary from period to period and the pricing and margins between programs vary widely, volumes, while important for overhead absorption, are not necessarily indicative of our financial performance. For example, we could experience an increase in volumes for a particular program during a particular period, but depending on that program’s margins and yields and the other programs in production during that period, those higher volumes may or may not result in an increase in overall profitability. In the mobility market, the first six months of production are the most critical in terms of growth and profitability opportunities.

From our inception in 1984 until 1989, we were engaged primarily in the manufacturing of flexible printed circuits for military and aerospace applications. In early 1990, we began to develop the concept of attaching components on flexible printed circuits. Through these early efforts, we developed the concept of the value-added approach with respect to integrating our design engineering expertise with our component assembly capabilities. This strategy enabled us to capitalize on two trends over the course of the 1990s, the outsourcing by OEMs of their manufacturing needs and the shift of manufacturing facilities outside of the United States. In 1994, we formed a wholly owned Chinese subsidiary to better serve customers that have production facilities in Asia and provide a cost-effective, high-volume production platform for the manufacture of our products. In 2002, we formed a second wholly owned subsidiary in China to further expand our flexible printed circuit manufacturing and assembly capacity, and we merged these two subsidiaries into one in 2010. Our Chinese subsidiaries provide a complete range of capabilities and services to support our global customer base, including design engineering and high-volume production of single-sided, double-sided and multi-layer flexible printed circuits and component assemblies. In 2014, following a full review of our manufacturing footprint and in an effort to realign our manufacturing capacity and costs with expected net sales, we initiated a plan to consolidate our production facilities to reduce the total manufacturing floor space by approximately one-third (the “Restructuring”). As part of the Restructuring, MFLEX Chengdu, along with two satellite manufacturing facilities in Suzhou, China, were consolidated into our two main manufacturing plants under MFC in Suzhou. In addition, we closed MFE, which had been located in Cambridge, United Kingdom, and we reduced headcount at other locations. The Restructuring was complete as of December 31, 2014.

Critical Accounting Policies

Information with respect to our critical accounting policies which we believe have the most significant effect on our reported results and require subjective or complex judgments of management are contained on page 28 in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our 2015 Annual Report on Form 10-K.

 

 

12


Comparison of the Three Months Ended March 31, 2016 and 2015

The following table sets forth our consolidated statements of (loss) income data expressed as a percentage of net sales for the periods indicated:

 

 

Three Months Ended

March 31,

 

 

 

2016

 

 

2015

 

 

Net sales

 

100.0

 

%

 

100.0

 

%

Cost of sales

 

98.4

 

 

 

87.2

 

 

Gross profit

 

1.6

 

 

 

12.8

 

 

Operating expenses:

 

 

 

 

 

 

 

 

Research and development

 

1.2

 

 

 

0.9

 

 

Sales and marketing

 

3.1

 

 

 

2.7

 

 

General and administrative

 

6.5

 

 

 

3.7

 

 

Impairment and restructuring

 

 

 

 

(0.8

)

 

Total operating expenses

 

10.8

 

 

 

6.5

 

 

Operating (loss) income

 

(9.2

)

 

 

6.3

 

 

Other income and expense:

 

 

 

 

 

 

 

 

Interest income

 

0.4

 

 

 

0.2

 

 

Interest expense

 

(0.1

)

 

 

(0.1

)

 

Other income (expense), net

 

(0.7

)

 

 

0.6

 

 

(Loss) income before taxes

 

(9.6

)

 

 

7.0

 

 

Provision for income taxes

 

0.3

 

 

 

1.0

 

 

Net (loss) income

 

(9.9

)

%

 

6.0

 

%

 

Net Sales. Net sales decreased to $101.2 million for the three months ended March 31, 2016, from $149.1 million for the three months ended March 31, 2015. The decrease of $47.9 million, or 32.1%, was primarily due to decreased net sales into our smartphones and consumer electronics sectors, partially offset by increased sales into our tablets sector, as further quantified below. Net sales to our largest customer accounted for 80% of our total net sales and decreased $16.0 million to $81.3 million for the three months ended March 31, 2016, primarily the result of lower production volumes from certain smartphone programs. Net sales to a China-based customer decreased $20.5 million for the three months ended March 31, 2016 as a result of programs reaching the end of their product life cycle, as well as decreased net sales to a U.S.-based customer of $9.1 million.

Net sales into our smartphones sector decreased to $64.6 million for the three months ended March 31, 2016, from $112.3 million for the three months ended March 31, 2015. The decrease of $47.7 million in net sales into the smartphones sector was due primarily to decreased net sales to a major customer of $21.1 million, decreased net sales to a China-based customer of $20.5 million and decreased net sales to a Korea-based customer of $3.3 million, primarily due to softness in the smartphone market. For the three months ended March 31, 2016 and 2015, our smartphones sector accounted for approximately 64% and 75% of total net sales, respectively.

Net sales into our consumer electronics sector (which includes wearables and connected home devices) decreased to $10.0 million for the three months ended March 31, 2016, from $13.2 million for the three months ended March 31, 2015. The decrease of $3.2 million in net sales into the consumer electronics sector was due primarily to decreased sales to a major customer in this sector, particularly in the wearables category. For the three months ended March 31, 2016 and 2015, our consumer electronics sector accounted for approximately 10% and 9% of total net sales, respectively.

Net sales into our tablets sector increased to $23.8 million for the three months ended March 31, 2016, from $22.0 million for the three months ended March 31, 2015. The increase of $1.8 million in net sales into the tablets sector was due primarily to increased sales volumes to a major customer in this sector of approximately $10.5 million, partially offset by decreased sales volumes to a U.S.-based customer in this sector of approximately $8.9 million. For the three months ended March 31, 2016 and 2015, our tablets sector accounted for approximately 24% and 15% of total net sales, respectively.

Gross Margin. Gross margin decreased to 1.6% for the three months ended March 31, 2016 from 12.8% for the three months ended March 31, 2015. The decline was primarily due to lower overhead absorption (approximately 940 basis points impact) and direct labor efficiencies (approximately 160 basis points impact) as a result of the reduced net sales level. Gross profit was $1.7 million for the three months ended March 31, 2016 as compared to $19.0 million for the three months ended March 31, 2015.

13


Research and Development. Research and development expense decreased by $0.2 million to $1.2 million for the three months ended March 31, 2016, from $1.4 million in the comparable period of the prior year. As a percentage of net sales, research and development expense increased to 1.2% from 0.9% in the comparable period of the prior year.

Sales and Marketing. Sales and marketing expense decreased by $0.9 million to $3.1 million for the three months ended March 31, 2016, from $4.0 million in the comparable period of the prior year. The decrease is primarily due to reduced variable spending and commissions as a result of the lower net sales level. As a percentage of net sales, sales and marketing expense increased to 3.1% from 2.7% in the comparable period of the prior year.

General and Administrative. General and administrative expense increased by $1.0 million to $6.5 million for the three months ended March 31, 2016, from $5.5 million in the comparable period of the prior year. This increase was primarily due to increased merger and acquisition-related expenses of $1.3 million, partially offset by reduced variable spending due to the lower net sales level in the quarter. As a percentage of net sales, general and administrative expense increased to 6.5% from 3.7% in the comparable period of the prior year.

Impairment and Restructuring. During the three months ended March 31, 2016, we recorded impairment and restructuring of less than $(0.1) million. Refer to Note 7 “Impairment and Restructuring” in the Notes to Consolidated Financial Statements for further details. During the three months ended March 31, 2015, we recorded impairment and restructuring of $(1.2) million primarily due to a gain of $1.1 million on the sale of a satellite facility in Suzhou, China.

Other Income (Expense), Net. Other expense, net totaled $0.7 million for the three months ended March 31, 2016, as compared to other income, net of $0.9 million for the three months ended March 31, 2015. This was primarily the result of foreign exchange due to the movement of the U.S. dollar versus the RMB and other foreign currencies.

Income Taxes. The effective tax rate for the three months ended March 31, 2016 and 2015 was (3)% and 14%, respectively. The variance in our effective tax rate is primarily the net result of our income and tax expense distribution by region. We expect future tax rates to vary if current tax regulations change.

Liquidity and Capital Resources

Our principal sources of liquidity have been cash provided by operations and our ability to borrow under our various credit facilities. Our principal uses of cash have been to finance working capital and capital expenditures. We anticipate these uses will continue to be our principal uses of cash in the future. Global financial and credit markets have been volatile in recent years, and future adverse conditions of these markets could negatively affect our ability to secure funds or raise capital at a reasonable cost, if needed.

Our cash balances are held in numerous locations throughout the world. As of March 31, 2016, our cash held outside of the United States totaled $164.8 million, a majority of which may be brought back to the United States without significant tax implications by settling intercompany balances, if needed. We believe that funds generated from our operations and available from our borrowing facilities will be sufficient to fund current business operations as well as anticipated growth over at least the next year, without the need to repatriate earnings. Undistributed earnings of our foreign subsidiaries amounted to approximately $142.4 million as of March 31, 2016. Those earnings are considered to be permanently reinvested due to certain restrictions under local laws as well as our plans to reinvest such earnings for future expansion in certain foreign jurisdictions.

Changes in the principal components of operating cash flows during the three months ended March 31, 2016 were as follows:

 

·

Net cash used in operating activities for the three months ended March 31, 2016 was $0.6 million versus $20.2 million of net cash provided by operating activities for the comparable period of the prior year, primarily due to net loss of $9.7 million for the three months ended March 31, 2016, versus net income of $9.1 million for the comparable period of the prior year.

 

·

Our net accounts receivable balance decreased to $61.1 million as of March 31, 2016 from $80.1 million as of December 31, 2015, a decrease of 23.7%, due to seasonality of net sales. Days sales outstanding on a quarterly basis increased to 54 days at March 31, 2016 from 43 days at December 31, 2015. Our inventory balance decreased to $51.8 million as of March 31, 2016 from $56.5 million as of December 31, 2015, a decrease of 8.3%, as a result of the timing of program ramps. Days in inventory on a quarterly basis increased to 47 days at March 31, 2016 from 34 days at December 31, 2015, as a result of lower sales volumes. Our accounts payable balance decreased to $81.2 million as of March 31, 2016 from $106.9 million as of December 31, 2015, which is a decrease of 24.0%, due to the timing of program ramps. Days payable on a quarterly basis increased to 73 days at March 31, 2016 from 65 days at December 31, 2015.

14


 

·

We had a loss of $0.2 million on disposal of equipment and assets held for sale during the three months ended March 31, 2016, versus a gain of $1.1 million on disposal of equipment and assets held for sale and impairment recoveries of $0.3 million for the comparable period of the prior year.

 

·

Depreciation and amortization expense was $9.8 million for three months ended March 31, 2016, versus $11.5 million for the comparable period of the prior year, primarily due to decreased capital expenditures and disposals of fixed assets in the prior year.

Our principal investing and financing activities during the three months ended March 31, 2016 were as follows:

 

·

Net cash used in investing activities was $6.1 million for the three months ended March 31, 2016 and consisted of cash purchases of capital equipment and other assets of $6.1 million, partially offset by proceeds of less than $0.1 million from sale of equipment.

 

·

Net cash used in financing activities was $1.9 million for the three months ended March 31, 2016 and consisted of tax withholdings for net share settlements of equity awards to employees. Our loans payable and borrowings outstanding against credit facilities were zero at March 31, 2016 and December 31, 2015.

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

Market Risk

Market risk represents the risk of loss arising from adverse changes in liquidity, market rates and foreign exchange rates. At March 31, 2016, no amounts were outstanding under our loan agreements with Bank of America, Agricultural Bank of China or China Construction Bank. The amounts outstanding under these loan agreements at any time may fluctuate and we may, from time to time, be subject to refinancing risk. We do not believe that a change of 100 basis points in interest would have a material effect on our results of operations or financial condition based on our current borrowing level. There have been no material changes in our market risks during the three months ended March 31, 2016.

Foreign Currency Risk

We derive a substantial portion of our sales outside of the United States. Approximately $97.9 million, or 97%, of total shipments to these foreign manufacturers during the three months ended March 31, 2016 were made in U.S. dollars with the remaining balance of our net sales denominated primarily in RMB. We currently have a significant portion of our expenses, more specifically cost of sales, denominated in RMB, whereby a significant appreciation or depreciation in the RMB could materially affect our reported expenses in U.S. dollars. The exchange rate for the RMB to the U.S. dollar has been an average of 6.53 RMB per U.S. dollar for the three months ended March 31, 2016. To date, we attempt to manage our working capital in a manner to minimize foreign currency exposure and from time to time, we may engage in currency hedging activities through use of forward contracts but such activities may not be able to limit the risks of currency fluctuations. We continue to be vulnerable to appreciation or depreciation of foreign currencies against the U.S. dollar.

Liquidity Risk

With a strong cash position and no debt, we believe our anticipated cash flows from operations are sufficient to fund our operations, including capital expenditure requirements, through at least the next 12 months. If there is a need for additional cash to fund our operations, we may attempt to access our global credit lines, which totaled $107.4 million of available borrowings as of March 31, 2016.

 

 

Item 4.

Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Based on an evaluation carried out as of the end of the period covered by this Quarterly Report, under the supervision and with the participation of our management, including our Chief Executive Officer (“CEO”), and Chief Financial Officer (“CFO”), our CEO and CFO have concluded that, as of the end of such period, our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) are effective.

Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting during the quarter ended March 31, 2016 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION

Item 1.

Legal Proceedings

 

For a description of our material pending legal proceedings, refer to Note 2 “Commitments and Contingencies” of the Notes to Unaudited Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report, which is incorporated herein by reference.

Item 1A.

Risk Factors

FACTORS THAT MAY AFFECT OUR OPERATING RESULTS

Our business, financial condition, operating results and cash flows can be impacted by a number of factors, including, but not limited to those set forth below, any of which could cause our results to be adversely impacted and could result in a decline in the value or loss of an investment in our common stock. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also affect our business.

Risks Related to Our Proposed Acquisition by DSBJ

On February 4, 2016, we entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Suzhou Dongshan Precision Manufacturing Co., Ltd., a company organized under the laws of the People’s Republic of China (“DSBJ”), and Dragon Electronix Merger Sub Inc., a Delaware corporation and indirect wholly owned subsidiary of DSBJ (“Merger Sub”), under which Merger Sub will be merged with and into our company (the “Merger”), with us continuing after the Merger as the surviving corporation and indirect subsidiary of DSBJ. The Merger Agreement has been unanimously approved by our Board of Directors.

Under the terms of the Merger Agreement, our stockholders will receive $23.95 in cash for each share of common stock held at the close of the transaction.

Consummation of the Merger is expected to occur in the third quarter of 2016 and is subject to certain customary closing conditions including, among others, the absence of certain legal impediments; the expiration or termination of the required waiting periods under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (early termination for which was received on March 7, 2016); antitrust regulatory approval in the People’s Republic of China; review and clearance by the Committee on Foreign Investment in the United States; certain other filings and approvals by governmental authorities in the People’s Republic of China; and approval by our stockholders and DSBJ’s stockholders.

The Merger Agreement contains certain termination rights for us and DSBJ. Upon termination of the Merger Agreement, we may be required to pay DSBJ a termination fee, or DSBJ may be required to pay us a reverse termination fee, depending on the circumstances under which the Merger Agreement is terminated. Concurrently with the execution of the Merger Agreement, DSBJ deposited $20.0 million of the aggregate Merger consideration into an escrow account with Citibank, N.A., and further deposited $7.45 million on February 23, 2016, in order to secure the reverse termination fee that may become payable by DSBJ to us.

We will be required to pay a termination fee of 3.0% of the aggregate Merger consideration to DSBJ if the Merger Agreement is terminated because, among other things, we enter into an alternative definitive agreement in respect of a superior proposal, our Board of Directors changes its recommendation to stockholders with respect to the Merger, or our stockholders do not approve the Merger.

DSBJ will be required to pay us a reverse termination fee of $27.45 million if the Merger Agreement is terminated because, among other things, the DSBJ’s shareholders do not approve the transaction, DSBJ fails to consummate the Merger after fulfilling its other closing conditions, or the Merger is not consummated solely because certain required regulatory approvals are not obtained within six months after the execution date of the Merger Agreement (which date may, in certain circumstances, be extended at DSBJ’s discretion for an additional three months only if additional time is needed to obtain certain required regulatory approvals and DSBJ deposits an additional $10.0 million into the escrow account, increasing the reverse termination fee to $37.45 million).

For additional information related to the Merger Agreement, please refer to the Current Report on Form 8-K filed with the SEC on February 4, 2016, including the full text of the Merger Agreement filed as Exhibit 2.1 to that Form 8-K.

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The announcement and pendency of our proposed Merger with DSBJ could adversely affect our business, financial results and operations.

The announcement and pendency of the proposed acquisition of our company by DSBJ could cause disruptions in and create uncertainty surrounding our business, including affecting our relationships with our existing and future customers, suppliers and employees, which could have an adverse effect on our business, financial results and operations, regardless of whether the proposed Merger is completed. In particular, we could potentially lose important personnel as a result of the departure of employees who decide to pursue other opportunities in light of the proposed acquisition. We could also potentially lose customers or suppliers, and new customer or supplier contracts could be delayed or decreased. In addition, we have diverted, and will continue to divert, significant management resources towards the completion of the transaction, which could adversely affect our business and results of operations.

We are also subject to restrictions on the conduct of our business prior to the consummation of the Merger as provided in the Merger Agreement, including, among other things, certain restrictions on our ability to acquire other businesses, sell, transfer or license our assets, amend our organizational documents, and incur indebtedness. These restrictions could result in our inability to respond effectively to competitive pressures, industry developments and future opportunities and may otherwise harm our business, financial results and operations.

Failure to complete the proposed Merger could adversely affect our business and the market price of our common stock.

There is no assurance that the closing of the Merger will occur. Consummation of the Merger is subject to various conditions, including, among other things, the absence of certain legal impediments; the expiration or termination of the required waiting periods under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (early termination for which was received on March 7, 2016); antitrust regulatory approval in the People’s Republic of China; review and clearance by the Committee on Foreign Investment in the United States; certain other filings and approvals by governmental authorities in the People’s Republic of China; and approval by our stockholders and DSBJ’s stockholders. We cannot predict with certainty whether and when any of these conditions will be satisfied. Although there is not a financing contingency in the Merger Agreement, the Merger could fail if DSBJ is unable to obtain the financing for the transaction, in which event we would likely be entitled to the reverse break-up fee. In addition, the Merger Agreement may be terminated under certain specified circumstances, including, but not limited to, a change in the recommendation of our Board of Directors or a termination of the Merger Agreement by us to enter into an agreement for a “superior proposal.” If the Merger is not consummated, our stock price will likely decline as our stock has recently traded based on the proposed per share price for the Merger. We will have incurred significant costs, including, among other things, the diversion of management resources, for which we will have received little or no benefit if the closing of the Merger does not occur. A failed transaction may result in negative publicity and a negative impression of us in the investment community. The occurrence of any of these events individually or in combination could have a material adverse effect on our results of operations and our stock price.

A lawsuit has been filed against us challenging the Merger, and additional lawsuits are possible.

On April 29, 2016, a class action lawsuit was filed by a purported stockholder in the United States District Court in the Central District of California challenging the proposed Merger with DSBJ. The lawsuit alleges that the individual members of our Board of Directors (the “MFLEX Board”) breached their fiduciary duties to our stockholders by agreeing to the proposed merger transaction for inadequate consideration and through an allegedly flawed sales process, and that the defendant companies - MFLEX, DSBJ and Merger Sub - aided and abetted such alleged breaches. The plaintiff in the action seeks, among other things, an order enjoining the Merger and, in the event the merger is completed, rescission and/or damages as a result of the alleged violations of law, as well as fees and costs. Although it is not possible to predict the outcome of this litigation matter with certainty, MFLEX and the MFLEX Board believe that the claims asserted in this lawsuit are without merit and intend to vigorously defend against these claims. In view of our indemnification obligation to our directors, we are unable to estimate a range of loss, if any, that could result were there to be an adverse final decision. If an unfavorable outcome were to occur in these cases, it is possible that the impact could be material to our results of operations in the period(s) in which any such outcome becomes probable and estimable.

Other potential plaintiffs may also file similar lawsuits challenging the proposed transaction. If the above-referenced case, and any potential additional cases, are not resolved, it could prevent or delay completion of the Merger and result in significant cost to us, including costs associated with the indemnification of directors and officers.

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Risks Related to Our Business

We experienced a decline in revenue in each year from fiscal 2011 to 2014, as well as incurred net losses in the first quarter of 2016 and in fiscal years 2013 and 2014, and we may incur net losses in future periods.

From fiscal year 2011 to fiscal year 2014, we experienced a decline in revenue from $831.6 million in 2011, to $818.9 million in 2012, to $787.6 million in 2013, to $633.2 million in 2014, resulting from a decline in sales to certain of our key customers. We believe this resulted from decline of business from one of our key customers, which has been undergoing a business transition, as well as loss of market share from another key customer. Although we are undertaking efforts to diversify our customer base and increase our sales, including to new customers, there can be no assurance that we will be successful in offsetting these losses with sales to other customers.

In addition, in the first quarter of 2016 and in fiscal years 2013 and 2014, we incurred a net loss of $9.7 million, $65.5 million and $84.5 million, respectively. These losses, among other things, adversely affect our stockholders’ equity and working capital. Although we have undergone strategic restructuring efforts and returned to profitability in several recent quarters, we incurred a net loss this quarter and our profitability may continue to fluctuate from quarter to quarter based on a variety of factors, including capacity utilization, overhead absorption, yields and product mix.

We are, and have historically been, heavily dependent upon the smartphone, tablet and consumer electronics industries, and any downturn in these sectors may reduce our net sales.

For the three months ended March 31, 2016 and 2015, approximately 64% and 75%, respectively, of our net sales were derived from sales to companies for products or services into our smartphone sector; approximately 24% and 15%, respectively, of our net sales derived from sales were to companies for products or services into our tablet sector; and approximately 10 and 9%, respectively, of our net sales were derived from sales to companies for products or services into our consumer electronics sector, which includes wearables and connected home devices. In general, these sectors are subject to economic cycles, changes in customer order patterns and periods of slowdown. Intense competition, relatively short product life cycles and significant fluctuations in product demand characterize these sectors, and these sectors are also generally subject to rapid technological change and product obsolescence. Fluctuations in demand for our products as a result of periods of slowdown in these markets, including the current economic downturn and slowdown in the smartphone market, or discontinuation of products or modifications developed in connection with next generation products could reduce our net sales.

We depend on a very limited number of key customers, and a limited number of programs from those customers, for significant portions of our net sales and if we lose business with any of these customers or if the products we are in are not commercially successful, our net sales could decline substantially.

For the past several years, a substantial portion of our net sales has been derived from products that are incorporated into programs manufactured by or on behalf of a very limited number of key customers and their subcontractors, including Apple Inc. In the first quarter of 2016, the fiscal year ended December 31, 2015, the three months ended December 31, 2014 and the fiscal years ended September 30, 2014 and 2013, our net sales to our largest customer represented approximately 80%, 75%, 76%, 57% and 75%, respectively, of our net sales. In the first quarter of 2016, the fiscal year ended December 31, 2015, the three months ended December 31, 2014 and the fiscal years ended September 30, 2014 and 2013, our net sales to our second largest customer represented approximately 3%, 10%, 12%, 17% and 3%, respectively, of our net sales. In addition, a substantial portion of our sales to each customer is often tied to only one, or a small number of, programs. Our significant customer concentration increases the risk that our business terms with those customers may not be as favorable to us as those we might receive in a more competitive environment. The loss of a major customer or a significant reduction in sales to a major customer, including due to a penalty imposed by a customer, the loss of market share with the customers, the lack of commercial success by such customer or one or more of its products, a slowdown in growth or downturn in the market in which a major customer operates, a product failure of a customer’s program or limited flex content in a program, would seriously harm our business. Although we are continuing our efforts to reduce dependence on a limited number of customers, we may not be successful in such efforts.

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We will have difficulty selling our products if customers do not design flexible printed circuits and assemblies into their product offerings or our customers’ product offerings are not commercially successful.

We sell our flexible printed circuits and assemblies directly or indirectly to OEMs, who include our flexible circuits and component assemblies in their product offerings. We must continue to design our products into our customers’ product offerings in order to remain competitive. However, our OEM customers may decide not to design flexible printed circuits into their product offerings (or may reduce the amount of flex in a product offering), or may procure flexible printed circuits from one of our competitors. If an OEM selects one of our competitors to provide a product instead of us or switches to alternative technologies developed or manufactured by one or more of our competitors, it becomes significantly more difficult for us to sell our products to that OEM because changing component providers after the initial production runs begin involves significant cost, time, effort and risk for the OEM. Even if an OEM designs one of our products into its product offering, the product may not be commercially successful or may experience product failures, we may not receive any orders from that manufacturer, the OEM may qualify additional vendors for the product or we could be undercut by a competitor’s pricing. Additionally, if an OEM selects one or more of our competitors, they may rely upon such competitors for the life of that specific offering and subsequent generations of similar offerings. Any of these events would result in fewer sales and reduced profits for us, and could adversely affect the accuracy of any forward-looking guidance we may give.

Changes in the products our customers buy from us can significantly affect our capacity, net sales and profitability.

We sell our flexible printed circuits and assemblies to a very limited number of customers, who typically purchase these products from us for numerous programs at any particular time. Customer programs differ in design and material content and our products’ prices and profitability are dependent on a wide variety of factors, including without limitation, expected volumes, assumed yields, material costs, actual yields and the amount of third-party components within the program. If we lose sales for a program that has higher material content, we may have to replace it with sales for a program that has lower material content, thus requiring additional capacity to generate the same amount of net sales. We may not have such capacity available, or it may not be economically advantageous to acquire such capacity, which could then result in lower net sales. Furthermore, if we were unable to increase our capacity to match our customers’ requests, we may lose existing business from such customer, in addition to losing future sales. In addition, if we were to utilize our capacity to increase sales of bare flex (flex without assembly), this could also generate lower net sales at potentially different (higher or lower) profitability levels.

Our customers often cancel their orders, change production quantities, delay production or qualify additional vendors, any of which can reduce our net sales, increase our expenses, affect our gross margin and/or cause us to write down inventory.

Substantially all of our sales are made on a purchase order basis, and we are not always able to predict with certainty the number of orders we will receive or the timing or magnitude of the orders. Our customers may cancel, change or delay product purchase orders, or suspend business with us altogether, with little or no advance notice to us. These changes may be for a variety of reasons, including changes in their prospects, the perception of the quality of our products, cancellation of orders as a penalty a customer decides to impose on us, the competitiveness of our pricing, the success of their products in the market, reliance on a new vendor and the overall economic forecast. The risk of this is particularly high during the ramp phase of our customers’ new programs, when their programs may not gain the traction they expected or they may decide to push out the timing on a program due to a variety of circumstances, including many that do not relate to us at all. In general, we do not have long-term contractual relationships with our customers that require them to order minimum quantities of our products, and our customers may decide to use another manufacturer or discontinue ordering from us in their discretion, potentially even after we have begun production on their program. In addition, many of our products are shipped to hubs, and we often have limited visibility and no control as to when our customers pull the inventory from the hub. We also have increased risks with respect to inventory control and potential inventory loss, and must rely on third parties for recordkeeping, when our products are shipped to a hub. In addition, whether products are pulled from our hub, or the hub of one of our competitors is not within our control, and the EMS companies who make such decisions may favor one of our competitors over us, particularly if such competitor is affiliated with the EMS company. As a result of these factors, we are not always able to forecast accurately the net sales that we will make in a given period, and our sales could drop precipitously at any time on little or no notice. Changes in orders can also result in layoffs and associated severance costs, which in any given financial period could materially adversely affect our financial results.

In addition, we are increasingly being required to purchase materials, components and equipment before a customer becomes contractually committed to an order so that we may timely deliver the expected order to the customer. We may increase our production capacity, working capital and overhead in expectation of orders that may never be placed, or, if placed, may be delayed, reduced or canceled. As a result, we may be unable to recover costs that we incur in anticipation of orders that are never placed or are cancelled without liability after placed, such as costs associated with purchased raw materials, components or equipment. Delayed, reduced or canceled orders could also result in write-offs of obsolete inventory. Although we estimate inventory reserve amounts, the amount reserved may not be sufficient for such write-offs. In addition, we may underutilize our manufacturing capacity if we decline other orders because we expect to use our capacity for orders that are later delayed, reduced or canceled.

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Our industry is extremely competitive, and if we are unable to respond to competitive pressures we may lose sales and our market share could decline.

We compete primarily with large flexible printed circuit board manufacturers located throughout Asia, including Taiwan, China, Korea, Japan and Singapore. We believe that the number of companies producing flexible printed circuit boards has increased materially in recent years and may continue to increase. In addition, certain former competitors are in the process of re-instituting their flexible printed circuit production which will increase competition in our market. Certain EMS providers have developed or acquired their own flexible printed circuit manufacturing capabilities or have extensive experience in electronics assembly, and in the future may cease ordering products from us or even compete with us on OEM programs. In addition, the number of customers in the market has been decreasing through consolidation and otherwise and the smartphone and tablet markets continue to become more competitive in terms of pricing. Furthermore, many companies in our target customer base may move the design and manufacturing of their products to original design manufacturers in Asia. These factors, among others, make our industry extremely competitive. If we are not successful in addressing these competitive aspects of our business, we may not be able to grow or maintain our market share, net sales, or profitability.

Our products and their terms of sale are subject to various pressures from our customers, competitors and market forces, any of which could harm our gross profits.

Our selling prices are affected by changes in overall demand for our products, changes in the specific products our customers buy, pricing of competitors’ products, our manufacturing efficiency, product life cycles and general economic conditions. In addition, from time to time we may elect to reduce the price of certain products we produce in order to gain additional orders, or not lose orders, on a particular program. A typical life cycle for one of our products has our selling price decrease as the program matures. To offset price decreases during a product’s life cycle, we rely primarily on higher sales volume and improving our manufacturing yield and productivity to reduce a product’s cost. If we cannot reduce our manufacturing costs as prices decline during a product’s life cycle, or if we are required to pay damages to a customer due to a breach of contract or other claim, including due to quality or delivery issues, our cost of sales as a percentage of net sales may increase, which would harm our profitability and could affect our working capital levels.

In addition, our key customers and their subcontractors are able to exert significant pricing pressure on us and often require us to renegotiate the terms of our arrangements with them, including increasing or removing liability and indemnification thresholds and increasing the length of payment terms, among other terms. Increases in our labor costs, especially in China where we may have little or no advance notice of such increases, changes in contract terms and regular price reductions have historically resulted in lower gross margins for us and may continue to do so in future periods. Furthermore, our competitive position is dependent upon the yields and quality we are able to achieve on our products and our level of automation as compared to our competitors. We believe our competitors have been rapidly investing in more efficient and higher capability processes and automation, and if we do not match such investments, this could negatively impact our ability to compete on price, technology and capability. These trends and factors may harm our business and make it more difficult to compete effectively, and grow or maintain our net sales and profitability.

Significant product failures or safety concerns about our or our customers’ products could harm our reputation and our business.

Continued improvement in manufacturing capabilities, quality control, material costs and successful product testing capabilities are critical to our growth. Our efforts to monitor, develop, modify and implement stringent testing and manufacturing processes for our products may not be sufficient. If any flaw in the design, production, assembly or testing of our or our customers’ products were to occur or if our, or our customers’, products were believed to be unsafe, it could result in significant delays in product shipments by, or cancellation of orders or substantial penalties from, our customers and their customers, substantial refund, recall, repair or replacement costs, an increased return rate for our products, potential damage to our reputation, or potential lawsuits which could prove to be time consuming and costly. Pronouncements by the World Health Organization listing mobile phone use as possibly carcinogenic may affect our customers’ sales and in turn affect our sales to our customers. Because we normally provide a warranty for our products, a significant claim for damages related to a breach of warranty could materially affect our financial results.

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Problems with manufacturing yields and/or our inability to ramp up production could impair our ability to meet customer demand for our products.

We could experience low manufacturing yields due to, among other things, design errors, manufacturing failures in new or existing products, the inexperience of new employees, component defects, or the learning curve experienced during the initial and ramp up stages of new product introduction. If we cannot achieve expected yields in the manufacture of our products, this could result in higher operating costs, which could result in higher per unit costs, reduced product availability and may subject us to substantial penalties by our customers. Reduced yields or an inability to successfully ramp up products can significantly harm our gross margins, resulting in lower profitability or even losses. In addition, if we were unable to ramp up our production in order to meet customer demand, whether due to yield or other issues, it would impair our ability to meet customer demand for our products, which could cause us to lose an order for such product, or lose the customer altogether, and our net sales and profitability would be negatively affected.

We must invest in and develop or adopt new technology and update our manufacturing processes in order to remain an attractive supplier to our customers, and we may not be able to do so successfully.

Our long-term strategy relies in part on timely adopting, developing and manufacturing technological advances and new processes to meet our customers’ needs and to expand into new markets outside the mobility market. However, any new technology or process adopted or developed by us may not meet the expectations of our existing or potential customers, or customers outside the mobility market may not select either our current or new process capabilities for their offerings. Customers could decide to switch to alternative technologies or materials, adopt new or competing industry standards with which our products are incompatible or fail to adopt standards with which our products are compatible. If we are unable to obtain customer qualifications for new processes or product features, cannot qualify our processes for high-volume production quantities or do not execute our operational and strategic plans for new developments in advanced technologies in a timely manner, our net sales or profitability may decrease. In addition, we may incur higher manufacturing costs in connection with new technology, materials, products or product features, as we may be required to replace, modify, design, build and install equipment, all of which would require additional capital expenditures. Also, due to financial constraints, we may not be able to invest in such new technology advancements and as a result, could fall behind our competition and/or not be able to satisfy our customers’ requirements, which could result in loss of sales and decreased profitability.

We must continue to be able to procure raw materials and components on commercially reasonable terms to manufacture our products profitably.

Generally we do not maintain a large surplus stock of raw materials or components for our products because the specific assemblies are uniquely applicable to the products we produce for our customers; therefore, we rely on third-party suppliers to provide these raw materials and components in a timely fashion and on commercially reasonable terms. In addition, we are often required by our customers to seek components from a limited number of suppliers that have been pre-qualified by the customer. We, or our customers, may not be able to obtain the components or flex materials that are required for our customers’ programs, which in turn could forestall, delay, or halt our production or our customers’ programs. Delays may occur in future periods for a variety of reasons, including but not limited to, natural disasters. Furthermore, the supply of certain precious metals required for our products is limited, and our suppliers could lose their export or import licenses on materials we require, any of which could limit or halt our ability to manufacture our products. We may not be successful in managing any shortage of raw materials or components that we may experience in the future, which could adversely affect our relationships with our customers and result in a decrease in our net sales or litigation by our customers against us. Component shortages could also increase our cost of goods sold because we may be required to pay higher prices for components in short supply. In addition, suppliers could go out of business, discontinue the supply of key materials, or consider us too small of a customer to sell to directly, and could require us to buy through distributors, increasing the cost of such components to us.

Our manufacturing and shipping costs may also be impacted by fluctuations in the cost of oil and gas. Any fluctuations in the supply or prices of these commodities could have an adverse effect on our profit margins and financial condition.

If we are unable to attract or retain personnel necessary to operate our business, our ability to develop and market our products successfully could be harmed.

We believe that our success is highly dependent on our current executive officers and management team. We do not have an employment contract with Reza Meshgin, our president and chief executive officer, or any of our other key personnel, and their knowledge of our business and industry would be extremely difficult to replace. The loss of any key employee or the inability to attract or retain qualified personnel, including engineers, sales and marketing personnel, management or finance personnel could delay the development and introduction of our products, harm our reputation or otherwise damage our business.

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Furthermore, from time to time we have experienced very high employee turnover in our facilities in China, and we experience difficulty in recruiting employees for these facilities. In addition, we have noted the signs of wage inflation, labor unrest and increased unionization in China and new regulations regarding the usage of contract workers, and expect these to be ongoing trends for the foreseeable future, which could cause employee issues, including work stoppages, excessive wage increases and increased activity of labor unions, at our China facilities. A large number of our employees works in our facilities in China, and our costs associated with hiring and retaining these employees have increased over the past several years. The high turnover rate, increasing wages, new regulations regarding contract workers, difficulty in recruiting and retaining qualified employees and the other labor trends we are noting in China have resulted in an increase in our employee expenses, and a continuation of any of these trends could result in even higher costs or production disruptions or delays or the inability to ramp up production to meet increased customer orders, resulting in order cancellation, imposition of customer penalties if we were unable to timely deliver product or a negative impact on net sales and profits for us.

Our reliance on outside service providers may negatively impact our operations, products and customer satisfaction.

From time to time, we use the services of outside service vendors, or OSVs, for certain activities related to our business, including to provide manufacturing services within our facilities. Our reliance on these OSVs subjects us to a number of risks, including:

 

·

our inability to have the same level of control over the employees of the OSVs who are providing manufacturing services for us as we would have over our own employees, which could affect the pre-employment screening, loss control, efficiency, work flow and quality of work of our operations; and

 

·

regulations regarding the use of OSVs in China could cause us to be forced to stop using, or limit the percentage of our workforce provided by, OSVs with little or no notice, which could negatively affect our ability to produce product for our customers.

Our manufacturing capacity may be interrupted, limited or delayed if we cannot maintain sufficient utility sources in China.

The flexible printed circuit fabrication process requires a stable utility source. From time to time, we experience insufficient supplies of electrical power, especially during the warmer summer months in China. In addition, China has instituted energy conservation regulations which ration the amount of electricity that may be used by enterprises such as ours. Although we have purchased a few generators and could lease additional generators, such generators do not produce sufficient electricity supply to run our manufacturing facilities and they are costly to operate. Power or steam interruptions, electricity shortages, the cost of diesel fuel to run our back-up generators or government intervention, particularly in the form of rationing, are factors that could restrict our access to electricity at our Chinese manufacturing facilities. Any such insufficient access to electricity, gas, steam or other utility could affect our ability to manufacture and related costs. Any such shortages could result in delays in our shipments to our customers and, potentially, the loss of customer orders and penalties from such customers for the delay.

Our global operations expose us to additional risk and uncertainties.

We have operations in a number of countries, including the United States, China and Singapore. Our global operations may be subject to risks that may limit our ability to operate our business. We manufacture the bulk of our products in China and sell our products globally, which exposes us to a number of risks which can arise from international trade transactions, local business practices and cultural considerations, including:

 

·

political unrest, terrorism and economic or financial instability;

 

·

restrictions on our ability to repatriate earnings;

 

·

unexpected changes in regulatory requirements and uncertainty related to developing legal and regulatory systems related to economic and business activities, real property ownership and application of contract rights;

 

·

nationalization programs that may be implemented by foreign governments;

 

·

import-export regulations;

 

·

difficulties in enforcing agreements and collecting receivables;

 

·

difficulties in ensuring compliance with the laws and regulations of multiple jurisdictions, including complying with local employment and overtime regulations, which regulations could affect our ability to quickly ramp production;

 

·

difficulties in ensuring that health, safety, environmental and other working conditions are properly implemented and/or maintained by the local office, the failure of which could require us to close our factories on little or no notice;

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·

changes in labor practices, including wage inflation, frequent and extremely high increases in the minimum wage, labor unrest and unionization policies;

 

·

limited intellectual property protection;

 

·

longer payment cycles by international customers;

 

·

currency exchange fluctuations;

 

·

inadequate local infrastructure and disruptions of service from utilities or telecommunications providers, including electricity shortages;

 

·

transportation delays and difficulties in managing international distribution channels;

 

·

difficulties in staffing foreign subsidiaries and in managing an expatriate workforce;

 

·

potentially adverse tax consequences;

 

·

differing employment practices and labor issues;

 

·

the occurrence of natural disasters, such as earthquakes, floods or other acts of force majeure; and

 

·

public health emergencies such as SARS, avian flu and swine flu.

We also face risks associated with currency exchange and convertibility, inflation and repatriation of earnings as a result of our foreign operations. In some countries, economic, monetary and regulatory factors could affect our ability to convert funds to U.S. dollars or move funds from accounts in these countries. We are also vulnerable to appreciation or depreciation of foreign currencies against the U.S. dollar. Although we have significant operations in Asia, a substantial portion of transactions are denominated in U.S. dollars, including approximately 98% of the total shipments made to foreign manufacturers during the fiscal year 2015. The remaining balance of our net sales is primarily denominated in Chinese Renminbi (“RMB”). As a result, as appreciation against the U.S. dollar increases, it will result in an increase in the cost of our business expenses in China. Further, downward fluctuations in the value of foreign currencies relative to the U.S. dollar may make our products less price competitive than local solutions. Although we have recently benefited from foreign exchange rates, unfavorable movements in the exchange rates could adversely impact our financial condition. From time to time, we may engage in currency hedging activities, but such activities may not be able to limit the impact or risks of currency fluctuations.

In addition, our activities in China are subject to administrative review and approval by various national and local agencies of China’s government. Given the changes occurring in China’s legal and regulatory structure, we may not be able to secure required governmental approval for our activities or facilities, or the government may not apply real property or contract rights in the same manner as one may expect in other jurisdictions.

From time to time, we restructure our manufacturing capacity, and we may have difficulty managing these changes.

From time to time, we engage in a number of manufacturing expansion and contraction projects, based on the then-current and forecasted needs of our business. In addition, from time to time, we engage in international restructuring efforts in order to better align our business functions with our international operations and transition to other lower cost locations in continuation of our cost reduction efforts.

Our management team may have difficulty managing our manufacturing capacity and transition projects or otherwise managing any growth or downsizing in our business that we may experience. Risks associated with right-sizing our manufacturing capacity may include those related to:

 

·

managing multiple, concurrent capacity expansion or reduction projects;

 

·

managing the reduction of employee headcount for facilities where we reduce or cease our activities;

 

·

accurately predicting any increases or decreases in demand for our products and managing our manufacturing capacity appropriately;

 

·

under-utilized capacity, particularly during the start-up phase of a new manufacturing facility and the effects on our gross margin of under-utilization;

 

·

managing increased employment costs and scrap rates often associated with periods of growth or contraction;

 

·

implementing, integrating and improving operational and financial systems, procedures and controls, including our computer systems;

23


 

·

construction delays, equipment delays or shortages, labor shortages and disputes and production start-up problems; and

 

·

cost overruns and charges related to our expansion or contraction of activities.

Our management team may not be effective in restructuring our manufacturing facilities, and our systems, procedures and controls may not be adequate to support such changes in manufacturing capacity. Any inability to manage changes in our manufacturing capacity may harm our profitability and growth.

United Engineers Limited is deemed to have an indirect beneficial ownership in approximately 60% of our outstanding common stock and is able to exert influence over us and our major corporate decisions.

United Engineers Limited (“UEL”) through its subsidiaries (which include WBL Corporation Limited (“WBL”) as result of UEL’s stock acquisition of WBL in 2013) (collectively the “UE Group”) is deemed to indirectly beneficially own approximately 60% of our outstanding common stock. As a result, the UE Group has influence over the composition of our board of directors and our management, operations and potential significant corporate actions. The board or executive management composition of the UE Group could change, and such change could affect the strategic direction of the UE Group and the way the UE Group influences our corporate actions. For example, although we have put in place several measures designed to limit the amount of influence the UE Group has over us (including a staggered board of directors, not allowing action by written consent of our stockholders and not allowing stockholders to call a special meeting), for so long as the UE Group continues to control more than a majority of our outstanding common stock, it will have the ability to control who is elected to our board of directors each year, and ultimately can change out our entire board in three years. Furthermore, the strategic direction of the UE Group may influence how, when and if the WBL Entities (defined below) elect to sell its stock in us under the Registration Statement on Form S-3 that has been filed by the Company and declared effective by the SEC to cover such sales.

In addition, for so long as WBL or its subsidiaries (collectively, the “WBL Entities”) effectively own at least one-third of our voting stock, it has the ability, through a stockholders’ agreement with us, to approve the appointment of any chief executive officer or the issuance of securities that would reduce the WBL Entities’ effective ownership of us to a level that is below a majority of our outstanding shares of common stock, as determined on a fully diluted basis. As a result, the WBL Entities could preclude us from engaging in an acquisition or other strategic opportunity that we may want to pursue if such acquisition or opportunity require the issuance of our common stock. This concentration of ownership may also discourage, delay or prevent a change of control of our company, which could deprive our other stockholders of an opportunity to receive a premium for their stock as part of a sale of our company, could harm the market price of our common stock and could impede the growth of our company. The UE Group could also sell a controlling interest in us, or a portion of their interest, to a third party, including a participant in our industry, which could adversely affect our operations or our stock price.

The UE Group and its representatives on our board of directors may have interests that conflict with, or are different from, the interests of our other stockholders. These conflicts of interest could include potential competitive business activities, corporate opportunities, indemnity arrangements, debt covenants, sales or distributions by the UE Group of our common stock and the exercise by the UE Group of its ability to influence our management and affairs. In general, our certificate of incorporation does not contain any provision that is designed to facilitate resolution of actual or potential conflicts of interest. If any conflict of interest is not resolved in a manner favorable to our stockholders, it could adversely affect our operations and our stockholders’ interests may be substantially harmed.

UEL may be unable to vote its shares in us on certain matters that require stockholder approval without obtaining approval from the stockholders of UEL and/or regulatory approval and it is possible that such stockholders or the relevant regulators may not approve the proposed corporate action.

UEL’s ordinary shares are listed on the Singapore Securities Exchange Trading Limited (the “Singapore Exchange”). Under the rules of the Singapore Exchange, when we submit a matter for the approval of our stockholders, UEL may be required to obtain the approval of its own respective stockholders for such action before UEL can vote its shares with respect to our proposal or dispose of our shares of common stock. Examples of corporate actions we may seek to take that may require UEL to obtain its stockholders’ approval include the Merger, and may also include certain amendments of our certificate of incorporation, an acquisition or a sale of our assets the value of which exceeds certain prescribed thresholds under the rules of the Singapore Exchange, and certain issuances of our capital stock. In addition, we have been advised that if UEL is in an “offer period” under the rules of the Singapore Exchange (for example, if there was a potential offer by a third party for UEL’s outstanding shares), then during the pendency of such offer period UEL may be prevented from doing anything that would constitute “frustration of the offer” without first obtaining (a) either the approval of its stockholders or the potential offeror and (b) the Singapore Securities Industry Council (the “SIC”). Any material acquisition by, or disposition of, one of UEL’s subsidiaries, including us, could be considered a “frustration of the offer,” and thus, approval by UEL’s stockholders/potential offeror and the SIC could first be required for UEL.

24


To obtain stockholder approval, UEL must prepare a circular describing the proposal, submit it to the Singapore Exchange for review and send the circular to its stockholders, which may take several weeks or longer. In addition, UEL is required under its corporate rules to give its stockholders advance notice of the meeting. Consequently, if we need to obtain our stockholders’ approval for a matter which also requires the approval of the stockholders of UEL, the process of seeking stockholder approval from UEL may delay our proposed action and it is possible that the stockholders of UEL may not approve our proposed corporate action. It is also possible that we might not be able to establish a quorum at our stockholder meeting if UEL is unable to vote at the meeting if the approval of the stockholders of UEL is not obtained. The rules of the Singapore Exchange that govern WBL and UEL are subject to revision from time to time, and policy considerations may affect rule interpretation and application. It is possible that any change to or interpretation of existing or future rules may be more restrictive and complex than the existing rules and interpretations.

Our business requires significant investments in capital equipment, facilities and technological improvements, and we may not be able to obtain sufficient funds to make such capital expenditures.

To remain competitive, we must continue to make significant investments in capital equipment, facilities and technological improvements. We expect that substantial capital may be required to expand our manufacturing capacity and fund working capital requirements in the future. In addition, we expect that new technology requirements may increase the capital intensity of our business. We may need to raise additional funds through further debt or equity financings in order to fund our anticipated growth and capital expenditures, and we may not be able to raise additional capital on reasonable terms, or at all, particularly given our recent financial performance. If we are unable to obtain sufficient capital in the future, we may have to curtail our capital expenditures. Any curtailment of our capital expenditures could result in a reduction in net sales, reduced quality of our products, increased manufacturing costs for our products, harm to our reputation, reduced manufacturing efficiencies or other harm to our business. Furthermore, our board has authorized a stock repurchase program, and may authorize additional stock repurchases in the future, and the funds we expend for any such repurchase may later be needed for the operation of our business.

In addition, under our stockholder agreement with the WBL Entities, approval from a “WBL Director” on our board (as defined in such agreement) is required for the issuance of securities that would reduce its effective ownership of us to below a majority of the outstanding shares of our common stock as determined on a fully diluted basis. If such approval is required for a proposed financing, it is possible that we may not be able to obtain the approval for the financing and we may not be able to complete the transaction, which could make it more difficult to obtain sufficient funds to operate and expand our business.

We are subject to covenants in our credit agreements and any failure to comply with such covenants could result in our being unable to borrow under the agreements and other negative consequences.

Our credit agreements contain customary covenants. There can be no assurance that we will be able to comply with any borrowing conditions or other covenants in our current or future credit agreements. Our failure to comply with these covenants could cause us to be unable to borrow under the agreements and may constitute an event of default which, if not cured or waived, could result in the acceleration of the maturity of any indebtedness then outstanding under that, or other, credit agreements, which would require us to pay all amounts outstanding. Due to our cash and cash equivalent position and the fact that we have no long-term borrowings currently outstanding under our lines, we do not currently anticipate that our failure to comply with any of the covenants under our credit lines would have a significant impact on our ability to meet our financial obligations in the near term. Termination of one of our credit lines because of a failure to comply with such covenants, however, would be a disclosable event and may be perceived negatively. Such perception could adversely affect the market price for our common stock and our ability to obtain financing in the future.

Tax positions we have taken may be challenged and we are subject to the risk of changing income tax rates and laws.

From time to time, we may be subject to various types of tax audits, during which tax positions we have taken may be challenged and overturned. If this were to occur, our tax rates could significantly increase and we may be required to pay significant back taxes, interests and/or penalties. The outcome of tax audits cannot be predicted with certainty. If any issues addressed in our tax audits are resolved in a manner not consistent with management’s expectations, we could be required to adjust our provision for income tax in the period such resolution occurs. Any significant proposed adjustments could have a material adverse effect on our results of operations, cash flows and financial position if not resolved favorably.

In addition, a change in tax laws, treaties or regulations, or their interpretation, of any country in which we operate could result in a higher tax rate. For example, there has been increased scrutiny by the U.S. government on tax positions taken, and during February 2016, the United States Department of the Treasury issued a high-level outline of proposed modifications to international tax laws for the fiscal year 2017. If any of these, or similar, proposals are passed, our statements of financial position and results of operations could be negatively impacted.

25


If we fail to secure or protect our intellectual property rights, competitors may be able to use our technologies, which could weaken our competitive position and harm our business.

We rely primarily on trade secrets and confidentiality procedures relating to our manufacturing processes to protect our proprietary rights. Despite our efforts, these measures can only provide limited protection. Unauthorized third parties may try to copy or reverse engineer portions of our products or otherwise obtain and use our intellectual property. If we fail to protect our proprietary rights adequately, our competitors could offer similar products using processes or technologies developed by us, potentially harming our competitive position. In addition, other parties may independently develop similar or competing technologies.

We also rely on patent protection for some of our intellectual property. Our patents may be expensive to obtain and there is no guarantee that either our current or future patents will provide us with any competitive advantages. A third party may challenge the validity of our patents, or circumvent our patents by developing competing products based on technology that does not infringe our patents. Further, patent protection is not available at all in certain countries and some countries that do allow registration of patents do not provide meaningful redress for patent violations. As a result, protecting intellectual property in those countries is difficult, and competitors could sell products in those countries that have functions and features that would otherwise infringe on our intellectual property. If we fail to protect our intellectual property rights adequately, our competitors may gain access to our technology and our business may be harmed.

We may be sued by third parties for alleged infringement of their proprietary rights.

From time to time, we have received, and expect to continue to receive, notices of claims of infringement, misappropriation or misuse of other parties’ proprietary rights. We could also be subject to claims arising from the allocation of intellectual property rights among us and our customers. Any claims brought against us or our customers, with or without merit, could be time-consuming and expensive to litigate or settle, and could divert management attention away from our business plan. Adverse determinations in litigation could subject us to significant liability and could result in the loss of our proprietary rights. A successful lawsuit against us could also force us to cease selling or require us to redesign any products or marks that incorporate the infringed intellectual property. In addition, we could be required to seek a license from the holder of the intellectual property to use the infringed technology, and it is possible that we may not be able to obtain a license on reasonable terms, or at all. If we fail to develop a non-infringing technology on a timely basis or to license the infringed technology on acceptable terms, our business, financial condition and results of operations could be harmed.

Complying with environmental laws and regulations or the environmental policies of our customers may increase our costs and reduce our profitability, and constrain our ability to expand in the locations where we current manufacture.

We are subject to a variety of environmental laws and regulations relating to the storage, discharge, handling, emission, generation, manufacture, use and disposal of chemicals, solid and hazardous waste and other toxic and hazardous materials used in the manufacture of flexible printed circuits and component assemblies in our facilities in the United States, Europe and Asia. In addition, certain of our customers have, or in the future may have, environmental policies with which we are required to comply that are more stringent than applicable laws and regulations. For example, certain of our customers are requesting that we voluntarily disclose data regarding our environmental discharge with the Institute of Public and Environmental Affairs (“IPE”), which is a non-governmental organization in China. A significant portion of our manufacturing operations are located in China, where we are subject to constantly evolving environmental regulation, including its revised Environmental Protection Law, effective January 1, 2015, and where certain jurisdictions have restricted granting additional licenses for manufacturing the types of products we produce. In addition, we are often required to obtain reports from our suppliers regarding the materials they provide to us. The costs of complying with any change in, or interpretation of, such regulations or customer policies and the costs of remedying potential violations or resolving enforcement actions that might be initiated by governmental entities could be substantial.

In the event of a violation, we may be required to halt one or more segments of our operations until such violation is cured or we may be fined by a customer. The costs of remedying violations or resolving enforcement actions that might be initiated by governmental authorities could be substantial. Any remediation of environmental contamination would involve substantial expense that could harm our results of operations. In addition, we cannot predict the nature, scope or effect of future regulatory or customer requirements to which our operations may be subject or the manner in which existing or future laws or customer policies will be administered or interpreted. Future regulations may be applied to materials, products or activities that have not been subject to regulation previously. The costs of complying with new or more stringent regulations or policies could be significant.

26


Compliance with regulations and customer demands regarding “conflict minerals” could significantly increase costs and affect the manufacturing and sale of our products.

Section 1502 of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”) required the SEC to establish disclosure and reporting requirements regarding specified minerals originating in the Democratic Republic of the Congo or an adjoining country that are necessary to the functionality or production of products manufactured by companies required to file reports with the SEC. The SEC adopted disclosure rules for companies that use conflict minerals in their products, with substantial supply chain verification requirements in the event that the materials come from, or could have come from such areas. These rules may affect sourcing at competitive prices and availability of sufficient quantities of minerals used in the manufacture of our products. In addition, certain of our customers have implemented conflict mineral programs which are more stringent than the Dodd-Frank Act. There are costs associated with complying with the disclosure and our customers’ requirements, such as costs related to determining the source of such minerals used in our products. Also, because our supply chain is complex, we may face commercial challenges if we are unable to sufficiently verify the origins for all metals used in our products through the due diligence procedures that we implement. Moreover, we may encounter challenges to satisfy those customers who require that all of the components of our products be certified as conflict free which could place us at a competitive disadvantage if we are unable to do so.

Potential future acquisitions or strategic business alliances could be difficult to integrate, divert the attention of key management personnel, disrupt our business, dilute stockholder value and adversely affect our financial results.

As part of our business strategy, from time to time we consider acquisitions of, or business alliances with, companies, technologies and products that we feel could enhance our capabilities, complement our current products or expand the breadth of our markets or customer base. We have limited experience in acquiring or partnering with other businesses and technologies. Potential and completed acquisitions and strategic alliances involve numerous risks, including:

 

·

restrictions on our operating activities contained in the Merger Agreement;

 

·

difficulties in integrating operations, technologies, accounting and personnel;

 

·

problems maintaining uniform standards, procedures, controls and policies;

 

·

difficulties in supporting and transitioning customers of our acquired companies;

 

·

diversion of financial and management resources from existing operations;

 

·

potential costs incurred in executing on such a transaction, including any necessary debt or equity financing;

 

·

risks associated with entering new markets in which we have no or limited prior experience;

 

·

potential loss of key employees; and

 

·

inability to generate sufficient revenues to offset acquisition or start-up costs.

Acquisitions also frequently result in the recording of goodwill and other intangible assets which are subject to potential impairments in the future that could harm our financial results. In addition, if we finance acquisitions by issuing convertible debt or equity securities, our existing stockholders may be diluted, which could affect the market price of our stock. As a result, if we fail to properly evaluate acquisitions or partnerships, we may not achieve the anticipated benefits of any such acquisitions or partnerships, and we may incur costs in excess of what we anticipate.

We face potential risks associated with loss, theft or damage of our property or the property of our customers.

Some of our customers have entrusted us with proprietary equipment, intellectual property or confidential information to be used in the design, manufacture and testing of the products we make for them. In addition, the products we make for our customers themselves often contain proprietary or confidential property of our customers. In some instances, we face potentially millions of dollars in financial exposure to those customers if such equipment, products, intellectual property or confidential information is leaked, lost, damaged or stolen. Although we take precautions against such leakage, loss, theft or damage and we may insure against a portion of these risks, such insurance is expensive, may not be applicable to any loss we may experience and, even if applicable, may not be sufficient to cover any such loss. Further, in addition to monetary penalties, a customer could cancel outstanding orders or not place future orders if such a loss was to occur.

Litigation may distract us from operating our business.

Litigation that may be brought by or against us could cause us to incur significant expenditures and distract our management from the operations and conduct of our business. Furthermore, there can be no assurance that we would prevail in such litigation or resolve such litigation on terms favorable to us, which may adversely affect our operations.

27


If we fail to maintain an effective system of internal controls, we may not be able to accurately report our financial results.

Effective internal controls are necessary for us to provide reliable financial reports. This effort is made more challenging by our significant overseas operations. If we cannot provide reliable financial reports, our operating results could be misstated, current and potential stockholders could lose confidence in our financial reporting and the trading price of our stock could be negatively affected. There can be no assurance that our internal controls over financial processes and reporting will be effective in the future.

Risks Related to Our Common Stock

Sales of our common stock by our majority stockholder could depress the price of our common stock or weaken market confidence in our prospects.

We have filed a Registration Statement on Form S-3, covering the re-sale of all 14,817,052 of our shares held by the WBL Entities. The WBL Entities may sell all or part of the shares of our common stock that it owns (or distribute those shares to its shareholders). A large influx of shares of our common stock into the market as a result of such sales, or the mere perception that these sales could occur, could cause the market price of our common stock to decline, perhaps substantially, and may weaken market confidence in us or our prospects, which could have an adverse effect on our financial condition, results of operation or stock price. If there is a disposal by the WBL Entities of their shares of our common stock with value that exceeds certain prescribed thresholds and constitutes a major transaction under the rules of the Singapore Exchange, then such disposal may require the approval of the stockholders of UEL. The WBL Entities may be able to sell part of their shares of our common stock without requiring such stockholders’ approval if such thresholds are not met; however, even such sale could impact the market price of our common stock. Further, these sales, or the possibility that these sales may occur, also might make it more difficult for us to sell equity securities in the future at a time and at a price that we deem appropriate.

The trading price of our common stock is volatile.

The trading prices of the securities of technology companies, including the trading price of our common stock, have historically been highly volatile. During the 12-month period from April 1, 2015 to March 31, 2016, the high and low sales prices for our common stock were $12.59 and $26.05 per share. Factors that could affect the trading price of our common stock include, but are not limited to:

 

·

failure to complete the proposed Merger with DSBJ;

 

·

fluctuations in our financial results;

 

·

the limited size of our public float;

 

·

announcements of technological innovations or events affecting companies in our industry;

 

·

changes in the estimates of our financial results;

 

·

changes in the recommendations of any securities analysts that elect to follow our common stock; and

 

·

market conditions in our industry, the industries of our customers and the economy as a whole.

In addition, although we have approximately 24.6 million shares of common stock outstanding as of March 31, 2016, approximately 14.8 million of those shares are held by the WBL Entities. As a result, there is a limited public float in our common stock. If any of our significant stockholders were to decide to sell a substantial portion of its shares the trading price of our common stock could decline. See “Risk Factors—Sales of our common stock by our majority stockholder could depress the price of our common stock or weaken market confidence in our prospects” for more information.

If certain requirements are not met, the SEC could impose sanctions against China-based members of certain accounting firms’ networks, which could affect our ability to have those firms perform audits for us in the future.

From time to time, the SEC requests access to the audit documents of Chinese US-listed companies from their accountants. Many of the accounting firms, including the Chinese members of the so-called Big Four accounting firms’ networks, have historically refused to provide these records citing China’s state law which specifies that certain Chinese company records can be claimed as state secrets. In January 2014, an SEC Administrative Law judge made an initial decision which determined that the Chinese members of the Big Four firms’ networks, including PricewaterhouseCoopers Zhong Tian LLP (“PwC China”), among others, should be suspended from practicing before the SEC for a period of six months, which includes, but is not limited to, performing audits of subsidiaries of companies that are registered with the SEC. This decision was stayed pending review, and in February 2015, the SEC announced that it had come to a settlement with the China-based firms associated with the Big Four firms, which settlement imposed sanctions against the firms and provides the SEC with authority to impose a variety of remedial measures on the firms if future document productions fail to meet specified criteria. Remedies for future non-compliance could include, as appropriate, an automatic six-month bar on a single firm’s performance of certain audit work.

28


We have substantial operations in China that are currently audited by PwC China, a member firm of the PwC network, of which our auditor, PricewaterhouseCoopers LLP, is also a member. If such a remedy was to be imposed on PwC China for failure to comply with the settlement, we could be unable to use PwC China, or any of the other affected accounting firms, to perform audits of our operations in China, and may have difficulty finding another firm with sufficient resources or experience to competently audit our Chinese entities. This could cause us to not meet our financial reporting obligations, which could negatively influence investor perceptions and cause a decline in our stock price.

Delaware law and our corporate charter and bylaws contain anti-takeover provisions that could delay or discourage takeover attempts that stockholders may consider favorable.

Provisions in our certificate of incorporation and bylaws may have the effect of delaying or preventing a change of control or changes in our management including, among other things, provisions providing for a classified board of directors, authorizing the board of directors to issue preferred stock and the elimination of stockholder voting by written consent. In addition, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, which may discourage, delay or prevent certain business combinations with stockholders owning 15% or more of our outstanding voting stock. These provisions in our charter, bylaws and under Delaware law could discourage delay or prevent potential takeover attempts that stockholders may consider favorable.

Item 5.

Other Information

In anticipation of the Merger, on May 2, 2016, Multi-Fineline Electronix, Inc., as guarantor, and Multi-Fineline Electronix Singapore Pte. Ltd., as borrower, entered into a Second Amendment to Loan and Security Agreement (“Second Amendment”) with certain financial institutions, as lenders, and Bank of America, N.A., as agent. The Second Amendment amended the Loan and Security Agreement to, among other items, consent to the change of control of the Company which will result from the Merger Agreement and to amend the covenant relating to a future change of control to reflect DSBJ as the indirect parent of the Company.

The foregoing description is qualified in its entirety by reference to the Second Amendment to Loan and Security Agreement, filed as Exhibit 10.95 to this Form 10-Q.

On May 4, 2016, MFLEX Suzhou Co., Ltd. entered into a credit line agreement with China Construction Bank, Suzhou Industry Park Sub-Branch (“CCB”), which provides for a borrowing facility for 300,000 RMB ($46,431 at March 31, 2016). The CCB credit line agreement is effective May 6, 2016 and will mature on May 7, 2017. Interest on the credit line agreement for U.S. dollar lending will be negotiated and determined by both parties based on the lending cost in the market for U.S. dollar transactions on the day the loan is made. For RMB lending, the interest rate is based on the current rate set by the People’s Bank of China at the time of borrowing.

The foregoing description is qualified in its entirety by reference to the Credit Line Contract and Facility Offer Letter, filed as Exhibits 10.96 and 10.97, respectively, to this Form 10-Q.

Item 6.

Exhibits

The exhibit list required by this Item 6 is incorporated by reference to the Exhibit Index immediately following the signature page of this report.

29


SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

Multi-Fineline Electronix, Inc.,

a Delaware corporation

 

Date: May 5, 2016

By:

 

/s/ Thomas Kampfer

 

 

 

Thomas Kampfer

Chief Financial Officer and Executive Vice-President

(Duly Authorized Officer and Principal Financial

Officer of the Registrant)

 

 

 

30


MULTI-FINELINE ELECTRONIX, INC.

EXHIBIT INDEX

 

 

 

 

 

 

 

Incorporated by Reference

 

Exhibit

Number

 

Exhibit Title

 

Filed with this
Form 10-Q

 

Form

 

File No.

 

Date Filed

 

2.1

 

Agreement and Plan of Merger Among Multi-Fineline Electronix, Inc., Suzhou Dongshan

Precision Manufacturing Co., Ltd., and Dragon Electronix Merger Sub Inc.

 

 

 

8-K

 

000-50812

 

2/4/2016

 

 

 

 

 

 

 

 

 

 

 

3.2

 

Restated Certificate of Incorporation of the Company.

 

 

 

S-1

 

333-114510

 

6/3/2004

 

 

 

 

 

 

 

 

 

 

 

3.4

 

Second Amended and Restated Bylaws of the Company.

 

 

 

8-K

 

000-50812

 

12/8/2009

 

 

 

 

 

 

 

 

 

 

 

3.5

 

Amendment to Second Amended and Restated Bylaws of the Company.

 

 

 

8-K

 

000-50812

 

2/4/2016

 

 

 

 

 

 

 

 

 

 

 

4.1