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, 2017

 

Or

 

o

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 001–34529

 

STR Holdings, Inc.

(Exact name of registrant as specified in its charter)

 

Delaware		27–1023344
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
10 Water Street, Enfield, Connecticut		06082
(Address of principal executive offices)		(Zip Code)

 

(860) 272–4235

(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 o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, 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 o

 

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

 

Large accelerated filer o		Accelerated filer o
Non–accelerated filer o		Smaller reporting company x
		Emerging growth company filer o

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. YES o NO o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b–2 of the Exchange Act). YES o NO x

 

At April 30, 2017, there were 19,311,326 shares of Common Stock, par value $0.01 per share, outstanding.

 

 

 

INDEX TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

STR Holdings, Inc. and Subsidiaries

Three Months Ended March 31, 2017

 

	PAGE NUMBER
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements	2
Condensed Consolidated Balance Sheets as of March 31, 2017 and December 31, 2016 (unaudited)	2
Condensed Consolidated Statements of Comprehensive Loss for the Three Months Ended March 31, 2017 and 2016 (unaudited)	3
Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2017 and 2016 (unaudited)	4
Notes to Condensed Consolidated Financial Statements	5
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	15
Item 3. Quantitative and Qualitative Disclosures About Market Risk	23
Item 4. Controls and Procedures	23
PART II. OTHER INFORMATION
Item 1. Legal Proceedings	24
Item 1A. Risk Factors	24
Item 5. Other Information	24
Item 6. Exhibits	25
SIGNATURE	26

 

 

 

 

 

 

 

 

 

 

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

STR Holdings, Inc. and Subsidiaries

CONDENSED CONSOLIDATED BALANCE SHEETS

(unaudited)

All amounts in thousands except share and per share amounts

 

 

See accompanying notes to these condensed consolidated financial statements.

STR Holdings, Inc. and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(unaudited)

All amounts in thousands except share and per share amounts

 

 

See accompanying notes to these condensed consolidated financial statements.

STR Holdings, Inc. and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

All amounts in thousands

 

 

See accompanying notes to these condensed consolidated financial statements.

STR Holdings, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

All amounts in thousands except share amounts, per share amounts or unless otherwise noted

 

 

 

 

 

 

 

 

 

 

 

 

Item 2.

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

 

The following discussion and analysis of the financial condition and results of our operations should be read together with our Condensed Consolidated Financial Statements and the related Notes to the Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q. This discussion contains forward-looking statements, based on current expectations and related to future events and our future financial performance, that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of many factors, including those set forth under Item 1A,—Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2016.

 

Forward-Looking Statements

 

This Quarterly Report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are subject to inherent risks and uncertainties. These forward-looking statements present our current expectations and projections relating to our financial condition, results of operations, plans, objectives, future performance and business and are based on assumptions that we have made in light of our industry experience and perceptions of historical trends, current conditions, expected future developments and other factors management believes are appropriate under the circumstances. However, these forward-looking statements are not guarantees of future performance or financial or operating results. Forward-looking statements include, but are not limited to, the statements regarding the following: (1) incurring substantial losses for the foreseeable future and our inability to achieve or sustain profitability in the future; (2) the potential impact of pursuing strategic alternatives, including dissolution and liquidation of our Company, winding up our operations in China, restructuring our business to align with our customers’ geography; (3) our reliance on a single product line and any contemplated pursuits of new market sectors; (4) our securing net sales to new customers, growing net sales to existing key customers and increasing our market share; (5) customer concentration in our business and our relationships with and dependence on key customers; (6) the outsourcing arrangements and reliance on third parties for the manufacture of a portion of our encapsulants; (7) technological changes in the solar energy industry or our failure to develop and introduce or integrate new technologies could render our encapsulants uncompetitive or obsolete; (8) competition; (9) our failure to manufacture product in China negatively affecting our ability to sell to Chinese solar module manufacturers; (10) excess capacity in the solar supply chain; (11) demand for solar energy in general and solar modules in particular; (12) our operations and assets in China being subject to significant political and economic uncertainties; (13) limited legal recourse under the laws of China if disputes arise; (14) our ability to adequately protect our intellectual property, particularly during the outsource manufacturing of our products; (15) our lack of credit facility and our inability to obtain credit; (16) a significant reduction or elimination of government subsidies and economic incentives or a change in government policies that promote the use of solar energy; (17) volatility in commodity costs; (18) our customers’ financial profile causing additional credit risk on our accounts receivable; (19) our dependence on a limited number of third-party suppliers for raw materials for our encapsulants and other significant materials used in our process; (20) potential product performance matters and product liability; (21) our substantial international operations and shift of business focus to emerging markets; (22) the impact of changes in foreign currency exchange rates on financial results, and the geographic distribution of revenues; (23) losses of financial incentives from government bodies in certain foreign jurisdictions; (24) compliance with the qualifications of the OTCQB; (25) the ability to realize synergies from the transaction with Zhenfa Energy Group Co., Ltd. (“Zhenfa”); and (26) the other risks and uncertainties described under “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and in subsequent periodic reports on Form 10-K, 10-Q and 8-K. You are urged to carefully review and consider the disclosure found in our filings, which are available on http://www.sec.gov or http://www.strsolar.com. Should one or more of these risks or uncertainties materialize, or should any of these assumptions prove to be incorrect, actual results may vary materially from those projected in these forward-looking statements. We undertake no obligation to publicly update any forward-looking statement contained in this Quarterly Report, whether as a result of new information, future developments or otherwise, except as may be required by law.

 

Overview

 

STR Holdings, Inc. and its subsidiaries (“we”, “us”, “our” or the “Company”) commenced operations in 1944 as a plastics and industrial materials research and development company. Based upon our expertise in polymer science, we evolved into a global provider of encapsulants to the solar industry. Encapsulant is a critical component used to protect and hold solar modules together.

We were the first to develop ethylene-vinyl acetate (“EVA”) based encapsulants for use in commercial solar module manufacturing. Our initial development effort was conducted while under contract to the predecessor of the U.S. Department of Energy in the 1970s. Since that time, we have expanded our solar encapsulant business, by investing in research and development and global production capacity.

 

In September 2011, we sold our Quality Assurance (“QA”) business, which provided consumer product development, inspection, testing and audit services that enabled our retail and manufacturing clients to determine whether products met applicable safety, regulatory, quality, performance and social standards, to Underwriters Laboratories, Inc. (“UL”) for $275.0 million in cash, plus assumed cash. Information about our divestiture of the QA business is included in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, and Note 4, Discontinued Operations, of the Notes to Consolidated Financial Statements, included in Item 8, Financial Statements and Supplementary Data, of our Annual Report on Form 10-K for the year ended December 31, 2016.

 

Recent Developments and Strategy

Strategic Focus

We continue to operate at a substantial net loss. We incurred net losses from operations of approximately $3.0 million for the three months ended March 31, 2017 and $15.9 million for the year ended December 31, 2016.

 

Our business unit in China (“STR China”) incurred a loss of approximately $5.8 million during 2016, including a bad debt expense of $1.5 million. In light of continued poor financial results of STR China, we have decided to conduct an orderly wind down of our China manufacturing operations to eliminate operating losses related to this business unit. Given that our China factory has been manufacturing encapsulants for sale outside of China, we are currently working to accommodate production by working with a tolling partner in the primary export market, namely India.

 

We continue to explore options for reorganizing of our encapsulant business to better align with customer geography, to reduce the cash burn related to unprofitable locations and to convert assets to cash for potential redeployment into more profitable endeavors, and possible business opportunities in potentially more profitable parts of the solar supply-chain, as well as other strategic alternatives. We cannot assure that we will be able to successfully pursue any such potential transactions. If we are successful in pursuing any such transactions, we may be required to expend significant funds, incur debt or other obligations or issue additional securities, any of which could significantly dilute our current stockholders and may negatively affect our operating results and financial condition. We cannot assure that any such strategic transactions, or any financing in connection therewith, would be available on favorable terms, if at all, or that we will realize any anticipated benefits from any such transactions that we complete. In the event that we are not successful in restructuring our encapsulant business or pursuing opportunities in the downstream solar market or other strategic transactions, we also intend to consider alternatives, including without limitation, the acquisition of another business, the divestiture of all or certain of our assets, joint ventures and other transactions outside the ordinary course of business.

 

If we are not successful in executing on our strategic plans to reorganize our encapsulant business and achieve profitability, we may decide to wind down or cease any or all of our operations.

 

In addition, any further wind-down or dissolution of us may be a lengthy and complex process, yield unexpected results and delay any potential distributions to our stockholders. Such process may also require the further expenditure of our resources, such as legal, accounting and other professional fees and expenses and other related charges, which would decrease the amount of assets available for distributions to our stockholders.

 

Recent Developments

Manufacturing Facility Fire

During October 2016, a fire damaged a portion of our production facility located in Shajiabang, Jiangsu, China. No employee injuries have been reported. As of the date of this report, the facility has been restored to operational condition and one of our two production lines is operating. The second production line was ruled a total loss by our insurer and has been removed from the facility and disposed of. We have insurance coverage and are currently working with our agents and the carrier to finalize the claim related to this event. During the fourth quarter of 2016, we recorded a $0.9 million loss on disposal of fixed assets. In April 2017, our China subsidiary received an interim payment of RMB5.0 million ($0.7 million as of April 30, 2017) from our local China insurance carrier related to the existing fire insurance claim. This payment does not represent a final settlement, and we continue to work with our agents and the carrier to finalize the claim.

 

Compliance With OTCQB Marketplace Listing Standards

 

Our common stock trades on the OTCQB Marketplace (“OTCQB”) under the symbol “STRI.” On December 1, 2016, we were notified by the OTCQX that the Company did not meet the OTCQX Requirements for Continued Qualification found in Section 3.2 of the OTCQX Rules for U.S. Companies due to the Company failing to maintain a market capitalization of at least $5.0 million for at least one of every 30 consecutive calendar days. The OTCQX granted us a 60 day extension beginning on January 3, 2017 with a re-evaluation on or after February 28, 2017. Our market capitalization did not return to at least $5.0 million, and following that re-evaluation our stock began trading on the OTCQB market effective April 3, 2017.

 

2014 Transaction with Zhenfa

In 2014, we entered into certain definitive agreements with Zhenfa and its indirect wholly-owned subsidiary, Zhen Fa New Energy (U.S.) Co., Ltd., a Nevada corporation (“Zhenfa U.S.”).

 

Purchase Agreement

 

On August 11, 2014, we entered into a Stock Purchase Agreement (the “Purchase Agreement”) with Zhenfa U.S., pursuant to which Zhenfa U.S. acquired approximately 51% of our then outstanding shares of common stock (the “Transaction”) on December 15, 2014 (the “Closing Date”).

 

Sales Service Agreement

 

In connection with the execution of the Purchase Agreement, Specialized Technology Resources, Inc., our wholly owned subsidiary, entered into a sales service agreement (the "Sales Service Agreement") with Zhenfa, whereby Zhenfa agreed, among other things, to assist us in a number of endeavors, including, without limitation, marketing and selling our products in China, acquiring local raw materials, hiring and training personnel in China, and complying with Chinese law. The Sales Service Agreement also provided us an option to lease a Zhenfa-owned manufacturing facility rent free for a period of five years, which expired on December 15, 2016. The Sales Service Agreement became effective on the date of Closing, for an initial term of two years, and automatically renews for one year periods unless terminated earlier. The Sales Service Agreement may also be terminated by either party at such time as Zhenfa and its affiliates own less than 10% of our outstanding Common Stock.

 

CRITICAL ACCOUNTING POLICIES

 

Our discussion and analysis of our financial condition and results of operations are based upon our interim condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The preparation of these condensed consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, net sales and expenses, and related disclosures of contingent assets and liabilities. We continually evaluate our estimates, including those related to bad debts, valuation of inventory, long-lived assets, product performance matters, income taxes, stock–based compensation and deferred tax assets and liabilities. We base our estimates on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from these estimates. The accounting policies we believe to be most critical to understand our financial results and condition and that require complex and subjective management judgments are discussed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Critical Accounting Policies” in our Annual Report on Form 10–K filed with the Securities and Exchange Commission on March 9, 2017.

 

There have been no changes in our critical accounting policies during the quarter ended March 31, 2017.

RESULTS OF OPERATIONS

 

Condensed Consolidated Results of Operations

 

The following tables set forth our condensed consolidated results of operations for the three months ended March 31, 2017 and 2016:

 

		Three Months Ended March 31,
		2017				2016
Net sales		$	3,713			$	6,423
Cost of sales			4,210				6,824
Gross loss			(497	)			(401	)
Selling, general and administrative expenses			1,981				1,909
Research and development expense			314				327
(Recovery) provision for bad debt expense			(165	)			425
Operating loss			(2,627	)			(3,062	)
Interest expense, net			(4	)			(11	)
Other expense, net			(426	)			-
Gain on disposal of fixed assets			3				-
Foreign currency transaction loss			(11	)			(88	)
Loss from operations before income tax benefit			(3,065	)			(3,161	)
Income tax benefit from operations			(18	)			(214	)
Net loss from operations		$	(3,047	)		$	(2,947	)

 

Net Sales

 

		Three Months Ended March 31,
		2017								2016								Change
		Amount				% of Total Net Sales				Amount				% of Total Net Sales				Amount				%
Net sales		$	3,713				100.0	%		$	6,423				100	%		$	(2,710	)			(42.2	)%

 

The decrease in net sales for the three months ended March 31, 2017 compared to the corresponding period in 2016 was driven by an approximate 16% decrease in our average selling price (“ASP”) and an approximate 31% decrease in sales volume.

 

The price decline was impacted by foreign exchange translation of the Euro and Renminbi compared to the U.S. Dollar, which is our reporting currency. The average Euro and Renminbi exchange rates decreased by 3% and 6%, respectively, in the first quarter of 2017 compared to the corresponding 2016 period. Ex-currency impact, our ASP decreased by 12%. This decline in ASP was primarily attributable to continued intense competition, and, to a lesser extent, shift in product mix. We had sales of a laminated product in the prior period, which effectively boosted ASP by approximately 6%, but did not sell any of this product in the current period. ASP for like-to-like product sales declined by 10%.

 

The volume decline was primarily driven by a 50% volume decrease in Spain and a 10% volume decrease in China, partially offset by sales to customers in India (serviced primarily from China).

 

Cost of Sales

 

		Three Months Ended March 31,
		2017								2016								Change
		Amount				% of Total Net Sales				Amount				% of Total Net Sales				Amount				%
Cost of sales		$	4,210				113.4	%		$	6,824				106.2	%		$	(2,614	)			(38.3	)%

 

The decrease in our cost of sales for the three months ended March 31, 2017 compared to the corresponding period in 2016 was primarily driven by the 31% decrease in sales volume combined with an approximate 15% decrease in raw material cost per unit. The lower raw material cost per unit was primarily driven by a 10% decrease in resin costs, as well as a 4% increase in paperless sales mix. Direct labor decreased by $0.2 million associated with the sales volume decrease. Overhead costs decreased by $0.6 million primarily due to continued cost-reduction actions.

 

Gross Loss

 

		Three Months Ended March 31,
		2017								2016								Change
		Amount				% of Total Net Sales				Amount				% of Total Net Sales				Amount				%
Gross loss		$	(497	)			(13.4	)%		$	(401	)			(6.2	)%		$	(96	)			(23.9	)%

 

Gross loss as a percentage of net sales increased for the three months ended March 31, 2017 compared to the corresponding period in 2016 mainly as a result of a decline in ASP and volume and lower absorption of fixed costs that more than offset our decrease in raw material costs as described above.

 

Selling, General and Administrative Expenses (“SG&A”)

 

		Three Months Ended March 31,
		2017								2016								Change
		Amount				% of Total Net Sales				Amount				% of Total Net Sales				Amount				%
SG&A		$	1,981				53.4	%		$	1,909				29.7	%		$	72				3.8	%

 

SG&A increased slightly by $0.1 million for the three months ended March 31, 2017 compared to 2016. This increase was primarily driven by a $0.1 million increase in restructuring.

 

Research and Development Expense (“R&D”)

 

		Three Months Ended March 31,
		2017								2016								Change
		Amount				% of Total Net Sales				Amount				% of Total Net Sales				Amount				%
Research and development expense		$	314				8.5	%		$	327				5.1	%		$	(13	)			(4.0	)%

 

Research and development expense decreased by less than $0.1 million for the three months ended March 31, 2017 compared to 2016, as our research and development staffing and activity has remained relatively consistent during the two periods. Our research and development cost as a percentage of sales, however, increased year over year as a result of our decreased sales.

 

(Recovery) Provision for Bad Debt Expense

 

		Three Months Ended March 31,
		2017								2016								Change
		Amount				% of Total Net Sales				Amount				% of Total Net Sales				Amount				%
(Recovery) provision for bad debt expense		$	(165	)			(4.4	)%		$	425				6.6	%		$	(590	)			(138.8	)%

 

The recovery for bad debt expense recorded during the three months ended March 31, 2017 primarily related to receiving cash for previously aged accounts receivable that were reserved for under our policy, primarily in China.

 

Other (Expense) Income

 

		Three Months Ended March 31,
		2017								2016								Change
		Amount				% of Total Net Sales				Amount				% of Total Net Sales				Amount				%
Other (expense) income		$	(426	)			(11.5	)%		$	-				-	%		$	(426	)			(100.0	)%

 

In July 2015, we announced a restructuring plan that included the closure of our Malaysia facility, effective August 2, 2015. During the first six months of 2016, we received and accepted an offer of RM25.0 million (approximately $5.7 million as of March 31, 2017) for the land-use right and building. We entered into a definitive Purchase and Sale Agreement on November 18, 2016. As a result of the pending sale (subject to the approval of the Johor Port Authority), an impairment of assets held for sale of $0.4 million, related to the foreign currency fluctuation of the Ringgit, was recorded during the first quarter of 2017.

 

Foreign Currency Transaction (Loss) Gain

 

		Three Months Ended March 31,
		2017								2016								Change
		Amount				% of Total Net Sales				Amount				% of Total Net Sales				Amount				%
Foreign currency transaction (loss) gain		$	(11	)			(0.3	)%		$	(88	)			(1.4	)%		$	77				87.5	%

 

The foreign currency transaction impact was a loss of less than $0.1 million for the three months ended March 31, 2017 compared to a loss of $0.1 million in the corresponding 2016 period. This change was primarily the result of volatility in the Euro spot exchange rate versus the U.S. Dollar. Our primary foreign currency exposures are intercompany loans, U.S. Dollar cash balances in foreign locations and some U.S. Dollar denominated accounts receivable at our Spain and China facilities.

 

Income Tax (Benefit) Expense

 

		Three Months Ended March 31,
		2017								2016								Change
		Amount				% of Total Net Sales				Amount				% of Total Net Sales				Amount				%
Income tax (benefit) expense		$	(18	)			(0.5	)%		$	(214	)			(3.3	)%		$	196				91.6	%

 

During the three months ended March 31, 2017, we recorded an income tax benefit of less than $0.1 million, resulting in an effective tax rate of 0.7%. The income tax benefit was primarily related to the allocation of tax expense between operations and other comprehensive income when applying the exception to ASC 740 intraperiod allocation rule. The projected annual effective tax rate, excluding the intraperiod allocation, is 0.0% as compared to the U.S. federal statutory rate of 35.0%. The annual effective tax rate is principally driven by changes in valuation allowances.

During the three months ended March 31, 2016, we recorded an income tax benefit of $0.2 million, resulting in an effective tax rate of 6.8%. The income tax benefit was primarily related to the allocation of tax expense between operations and other comprehensive income when applying the exception to ASC 740 intraperiod allocation rule. The projected annual effective tax rate, excluding the intraperiod allocation, was 0.0% as compared to the U.S. federal statutory rate of 35.0%. The annual effective tax rate was principally driven by changes in valuation allowances.

Segment Results of Operations

 

We report our business in one reported segment. We measure segment performance based on net sales and Adjusted EBITDA. See Note 17-Reportable Segment and Geographical Information located in the Notes to the Condensed Consolidated Financial Statements for a definition of Adjusted EBITDA and further information. Net sales for our segment is described in further detail above. The discussion that follows is a summary analysis of net sales and the primary changes in Adjusted EBITDA.

 

The following tables set forth information about our operations by our reportable segment:

 

		Three Months Ended March 31,
		2017				2016
Reconciliation of Adjusted EBITDA to Net Loss from Operations
Adjusted EBITDA		$	(2,027	)		$	(2,515	)
Depreciation			(340	)			(474	)
Interest income, net			(4	)			(11	)
Income tax benefit			18				214
Restructuring			(137	)			(2	)
Stock–based compensation			(120	)			(159	)
Impairment of fixed assets held for sale			440				-
Gain on disposal of fixed assets			3				-
Net Loss from Operations		$	(3,047	)		$	(2,947	)

 

 

		Three Months Ended March 31,
		2017				2016				Change
		Amount				Amount				Amount				%
Net Sales		$	3,713			$	6,423			$	(2,710	)			(42.2	)%
Adjusted EBITDA		$	(2,027	)		$	(2,515	)		$	488				19.4	%
Adjusted EBITDA as % of Segment Net Sales			(54.6	)%			(39.2	)%

 

Adjusted EBITDA as a percentage of net sales declined for the three months ended March 31, 2017 compared to 2016 driven by a decline in ASP and lower sales volume. These negative impacts were partially offset by reduced bad debt expense.

Cost-Reduction Actions

 

In June 2016, we eliminated certain positions at our Spain facility effective July 5, 2016. We recorded $0.1 million of severance and benefits in cost of sales and $0.1 million of severance and benefits in selling, general and administrative expenses during 2016.

 

A roll-forward of the severance and other exit cost accrual activity is as follows:

		March 31,				March 31,
		2017				2016
Balance as of beginning of year		$	0.3			$	0.3
Additions			0.1				-
Reductions			(0.1	)			-
Balance as of end of period		$	0.3			$	0.3

 

The restructuring accrual consists of $0.3 million and $0.3 million for severance and benefits as of March 31, 2017 and 2016, respectively.

Financial Condition, Liquidity and Capital Resources

 

We have funded our operations primarily through our existing cash balance. As of March 31, 2017, our principal source of liquidity was $11.4 million of cash and $1.8 million of Chinese bank acceptance notes. Our principal needs for liquidity have been, and for the foreseeable future we expect will continue to be, for working capital and capital investments. We also expect to receive proceeds from our sale of our Johor, Malaysia facility. In the first six months of 2016, we entered into an agreement to sell our rights to the facility for RM25.0 million (approximately $5.7 million as of March 31, 2017), the formal purchase and sale agreement was executed in November 2016. Closing of the transaction is subject to the customary conditions to closing of transactions of this type, including the approval of the Johor Port Authority. Payment terms are currently longer in China than in many other locations, which result in delayed cash receipts from certain of our customers. Additionally, evolving China currency control regulations may limit our access to the $1.8 million of cash and $1.8 million of bank acceptance notes located in China for use outside the country. Although we believe that our available cash will be sufficient to meet our liquidity needs, including capital investments (mainly equipment upgrades and information technology needs), through at least the next 12 months, if we are unable to collect our accounts receivable or fail to receive payment in a timely fashion, or obtain bank acceptance notes from our customers, or fail to receive payment on the sale of our Malaysia property, our financial condition and results of operations will be negatively affected. In order to mitigate this risk, we are attempting to obtain bank acceptance notes with respect to the accounts receivable from certain of our Chinese customers.

We incurred bad debt expense of $2.6 million during 2016 and filed lawsuits against three customers of STR China for non-payment during 2016. Other customers in China are significantly behind terms. Even if STR China is able to prevail in court in China, we cannot assure that we will be paid timely, if at all. We have rejected orders from multiple customers in China, with whom we were successful in securing technical qualification, due to their failure to meet certain credit metrics or in some cases, a poor history of payment to us.

 

In October 2015, our wholly owned Spanish subsidiary, Specialized Technology Resources España S.A., entered into a factoring agreement to sell, with recourse, certain European, U.S. and other foreign company-based receivables to Eurofactor Hispania S.A.U., who was later acquired by Credit Agricole Leasing & Factoring sucursal en España during the first quarter of 2017. Under the current terms of the factoring agreement, the maximum amount of outstanding advances at any one time is €1.5 million (approximately $1.6 million as of March 31, 2017), which is subject to adjustment based on the level of eligible receivables, restrictions on concentrations of receivables and the historical performance of the receivables sold. The annual discount rate is 2% plus EURIBOR for Euro-denominated receivables and 2% plus LIBOR for all other currencies. The term of the agreement is for one year, which will be automatically extended unless terminated by either party with 90 days prior written notice. As of March 31, 2017 €1.1 million ($1.2 million as of March 31, 2017) was available under the factoring agreement based upon receivables outstanding.

 

In connection with our continued efforts to return our encapsulant business to profitability, on July 24, 2015 our Board approved a restructuring of our encapsulant business, which included the shut-down of our Malaysia manufacturing facility, effective August 2, 2015. We are in the process of selling the Johor, Malaysia facility and its production and ancillary equipment. In connection with the shut-down and sale of the Malaysia facility, we incurred approximately $1.3 million of associated non-recurring costs during the second half of 2015. As noted above, during 2016, in connection with the potential sale of the Malaysia facility (specifically, the land-use right and building), an analysis of the asset group was performed and an impairment of assets held for sale of $1.7 million was recorded. Effective November 18, 2016, we entered into an agreement to sell our rights to the facility for RM25.0 million (approximately $5.7 million as of March 31, 2017). Closing of the transaction is subject to customary conditions to closing of transactions of this type, including the approval of the Johor Port Authority. We cannot assure that we will be able to close the sale of our Malaysia real estate on a timely basis or on favorable terms or that the costs of closure of that facility will not be higher than anticipated.

 

We remain open to exploring possible business opportunities in potentially more profitable parts of the solar supply chain, alternate geographic markets, as well as other strategic alternatives. We cannot assure that we will be able to successfully pursue any such potential opportunities. If we are successful in pursuing any such opportunities, we may be required to expend significant funds, incur debt or other obligations or issue additional securities, any of which could significantly dilute our current stockholders and may negatively affect our operating results and financial condition. We cannot assure that any such strategic opportunities or related transactions, or any financing in connection therewith, would be available on favorable terms, if at all, or that we will realize any anticipated benefits from any such transactions that we complete. In the event that we are not successful in restructuring our encapsulant business or pursuing opportunities in the downstream solar market or other strategic transactions, we also intend to consider alternatives, including, without limitation, the acquisition of another business, the divestiture of all or certain of our assets, joint ventures and other transactions outside the ordinary course of business.

 

If we are not able to fund our working capital needs, we will have to slow our projected growth, which may further impede or delay our attempt to return to profitability. We expect to fund our cash requirements with our existing cash and bank acceptance notes, leveraging our European factoring facility and other potential working capital financing arrangements.

 

Our cash and cash equivalents balance is located in the following geographies:

		March 31, 2017
United States		$	6,634
Spain			1,662
Malaysia			1,180
China			1,826
Hong Kong			116
Consolidated		$	11,418

Due to, among other things, the difficulty repatriating cash to the U.S., we may have limited access to the $1.8 million of cash and $1.8 million of bank acceptance notes located in China for use outside the country.

 

We do not permanently re-invest our Malaysia subsidiary’s earnings. Based upon the Malaysia subsidiary’s liabilities to us, we expect the undistributed earnings of our Malaysia subsidiary will be repatriated to the U.S. in a tax-free manner. We do not permanently re-invest our Spain earnings, so this cash balance is available for dividend repatriation (less any applicable withholding taxes). We have not elected to permanently re-invest our Hong Kong and China earnings and plan to utilize our cash located in Hong Kong and China to fund working capital requirements and wind down costs. Our goal is to achieve and maintain self-sufficiency in each of our manufacturing locations to meet local cash requirements. We cannot assure that we will continue to fund the manufacturing operations in any location, if such operations would require investment of additional cash from other jurisdictions.

 

Cash Flows

 

Cash Flow from Operating Activities from Operations

 

Net cash used in operating activities from operations was $0.7 million for the three months ended March 31, 2017 compared to $2.1 million for the three months ended March 31, 2016. Net loss plus and minus non-cash adjustments (“cash loss”) declined by approximately $0.3 million for the three months ended March 31, 2017 compared to the same period in 2016. We incurred lower working capital investment associated with our sequential sales decrease and tighter inventory management.

 

Cash Flow from Investing Activities from Operations

 

Net cash used in investing activities was $0.4 million and less than $0.1 million for the three months ended March 31, 2017 and 2016, respectively. The 2017 capital investments related to the restoration and repairs to the building and equipment at our China facility following the fire in 2016 and will be included in the related insurance claim. In April 2017, our China subsidiary received an interim payment of RMB5.0 million ($0.7 million as of April 30, 2017) from our local China insurance carrier related to the existing fire insurance claim. This payment does not represent a final settlement, and we continue to work with our agents and the carrier to finalize the claim. We expect remaining 2017 consolidated capital expenditures to be less than $0.5 million.

 

Cash Flow from Financing Activities from Operations

 

Net cash provided by financing activities was less than $0.1 million and $0.9 million for the three months ended March 31, 2017 and 2016, respectively, primarily due to funds received by our Spanish subsidiary related to the factoring agreement.

Off-Balance Sheet Arrangements

 

We have no significant off–balance sheet financing arrangements.

 

Effects of Inflation

 

Inflation generally affects us by increasing costs of raw materials, labor and equipment. During the first three months of 2017, we were not materially affected by inflation.

 

Recently Issued Accounting Standards

 

There are no new accounting pronouncements that we believe will have an impact on our consolidated financial statements.

 

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

 

We are not required to provide this Item 3 because we are a smaller reporting company.

 

Item 4.

Controls and Procedures

 
Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports to the Securities Exchange Act of 1934, as amended (“Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms, and that such information is accumulated and communicated to our management, including our Chairman, President and Chief Executive Officer and our Vice President, Chief Financial Officer and Chief Accounting Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.

 

 

As of March 31, 2017, we carried out an evaluation, under the supervision and with the participation of our management, including our Chairman, President and Chief Executive Officer and our Vice President, Chief Financial Officer and Chief Accounting Officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act. Based upon that evaluation, our Chairman, President and Chief Executive Officer and our Vice President, Chief Financial Officer and Chief Accounting Officer concluded that our disclosure controls and procedures are effective.

 

Changes in Internal Control over Financial Reporting

 

There have not been any changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the first fiscal quarter of our fiscal year ended December 31, 2017 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

PART II. OTHER INFORMATION

 

Item 1.

Legal Proceedings

 

From time to time, we are and have been a party to litigation that arises in the ordinary course of our business.

In October 2016, a complaint was filed by Solaria Energia y Medio Ambiente S.A. (“Solaria”) against the Company and its Spanish subsidiary, Specialized Technology Resources España S.A. (“STR Spain”), in the Court of the First Instance No. 8 in Oviedo, Spain, relating to a product quality claim in connection with a non-encapsulant product that STR Spain purchased from a vendor in 2005 and 2006 and resold to Solaria. The Company stopped selling this product in 2006. Solaria is seeking approximately €3.3 million (approximately $3.5 million), plus interest, in damages.

 

As of the date of this filing, the Company has filed its statement of defense, as well as its technical report related to the claim, and is in compliance with the requirements of the court relative to the claim. A trial was held on April 6, 2017, in Oviedo, Spain. The Company is currently awaiting a ruling from the court.

 

Item 1A.

Risk Factors

 

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2016, which could materially affect our business, financial position and results of operations. There have been no material changes to the risk factors as disclosed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2016.

 

Item 5.

Other Information

 

None.

 

Item 6.

Exhibits

 

31.1		Certification of Chief Executive Officer pursuant to Rule 13a-14 Securities Exchange Act Rules 13a-14(a) and 15d-14(a), pursuant to section 302 of the Sarbanes-Oxley Act of 2002.
31.2		Certification of Chief Financial Officer pursuant to Rule 13a-14 Securities Exchange Act Rules 13a-14(a) and 15d-14(a), pursuant to section 302 of the Sarbanes-Oxley Act of 2002.
32.1		Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted by Section 906 of the Sarbanes-Oxley Act of 2002.
32.2		Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted by Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS		XBRL Instance Document
101.SCH*		XBRL Taxonomy Extension Schema Document
101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF		XBRL Definition Linkbase Document
101.LAB		XBRL Taxonomy Extension Label Linkbase Document
101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document

 

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.

 

	STR HOLDINGS, INC.
	(Registrant)
Date: May 11, 2017	/s/ Thomas D. Vitro
	Name:	Thomas D. Vitro
	Title:	Vice President & Chief Financial Officer
		(Duly Authorized Officer and Principal Financial Officer)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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