Item 1.
|
|
Financial
Statements
|
STR Holdings, Inc. and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
All amounts in thousands except share
and per share amounts
|
|
September 30,
2017
|
|
December 31,
2016
|
ASSETS
|
|
|
|
|
|
|
|
|
CURRENT ASSETS
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
13,320
|
|
|
$
|
12,379
|
|
Bank acceptance notes
|
|
|
554
|
|
|
|
3,360
|
|
Accounts receivable, trade, less allowances for doubtful accounts of $1,873 and $2,640 in 2017 and 2016, respectively
|
|
|
2,204
|
|
|
|
2,989
|
|
Inventories, net
|
|
|
1,889
|
|
|
|
1,847
|
|
Prepaid expenses
|
|
|
888
|
|
|
|
972
|
|
Other current assets
|
|
|
976
|
|
|
|
1,095
|
|
Total current assets
|
|
|
19,831
|
|
|
|
22,642
|
|
Property, plant and equipment, net
|
|
|
7,928
|
|
|
|
7,974
|
|
Assets held for sale (Note 8)
|
|
|
5,920
|
|
|
|
6,090
|
|
Other long-term assets
|
|
|
106
|
|
|
|
140
|
|
Total assets
|
|
$
|
33,785
|
|
|
$
|
36,846
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
CURRENT LIABILITIES
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
951
|
|
|
$
|
1,500
|
|
Accrued liabilities (Note 9)
|
|
|
2,953
|
|
|
|
2,617
|
|
Income taxes payable
|
|
|
998
|
|
|
|
993
|
|
Due to factor
|
|
|
505
|
|
|
|
381
|
|
Total current liabilities
|
|
|
5,407
|
|
|
|
5,491
|
|
Total liabilities
|
|
|
5,407
|
|
|
|
5,491
|
|
COMMITMENTS AND CONTINGENCIES (Note 10)
|
|
|
|
|
|
|
|
|
Stockholders’ Equity
|
|
|
|
|
|
|
|
|
Preferred stock, $0.01 par value, 20,000,000 shares authorized; no shares issued and outstanding
|
|
|
—
|
|
|
|
—
|
|
Common stock, $0.01 par value, 200,000,000 shares authorized; 19,455,061 and 19,453,821 issued and outstanding, respectively, in 2017 and 19,239,587 and 19,238,347 issued and outstanding, respectively, in 2016
|
|
|
190
|
|
|
|
187
|
|
Treasury stock, 1,240 shares at cost
|
|
|
(57
|
)
|
|
|
(57
|
)
|
Additional paid–in capital
|
|
|
231,959
|
|
|
|
231,627
|
|
Accumulated deficit
|
|
|
(198,208
|
)
|
|
|
(193,971
|
)
|
Accumulated other comprehensive loss, net
|
|
|
(5,506
|
)
|
|
|
(6,431
|
)
|
Total stockholders’ equity
|
|
|
28,378
|
|
|
|
31,355
|
|
Total liabilities and stockholders’ equity
|
|
$
|
33,785
|
|
|
$
|
36,846
|
|
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
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Net sales
|
|
$
|
3,533
|
|
|
$
|
4,030
|
|
|
$
|
10,303
|
|
|
$
|
17,144
|
|
Cost of sales
|
|
|
3,392
|
|
|
|
4,929
|
|
|
|
11,297
|
|
|
|
18,384
|
|
Gross profit (loss)
|
|
|
141
|
|
|
|
(899
|
)
|
|
|
(994
|
)
|
|
|
(1,240
|
)
|
Selling, general and administrative expenses
|
|
|
1,554
|
|
|
|
1,798
|
|
|
|
4,834
|
|
|
|
5,489
|
|
Research and development expense
|
|
|
225
|
|
|
|
308
|
|
|
|
775
|
|
|
|
949
|
|
(Recovery) provision for bad debt expense
|
|
|
(483
|
)
|
|
|
651
|
|
|
|
(863
|
)
|
|
|
2,010
|
|
Operating loss
|
|
|
(1,155
|
)
|
|
|
(3,656
|
)
|
|
|
(5,740
|
)
|
|
|
(9,688
|
)
|
Interest income (expense), net
|
|
|
1
|
|
|
|
(2
|
)
|
|
|
(6
|
)
|
|
|
39
|
|
Other income (expense), net (Note 8)
|
|
|
321
|
|
|
|
9
|
|
|
|
1,527
|
|
|
|
(1,690
|
)
|
(Loss) gain on disposal of fixed assets
|
|
|
(369
|
)
|
|
|
—
|
|
|
|
(382
|
)
|
|
|
2
|
|
Foreign currency transaction gain (loss)
|
|
|
123
|
|
|
|
(64
|
)
|
|
|
48
|
|
|
|
(351
|
)
|
Loss before income tax benefit
|
|
|
(1,079
|
)
|
|
|
(3,713
|
)
|
|
|
(4,553
|
)
|
|
|
(11,688
|
)
|
Income tax benefit
|
|
|
(173
|
)
|
|
|
(35
|
)
|
|
|
(316
|
)
|
|
|
(50
|
)
|
Net loss
|
|
$
|
(906
|
)
|
|
$
|
(3,678
|
)
|
|
$
|
(4,237
|
)
|
|
$
|
(11,638
|
)
|
Other comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation (net of tax effect of $100, $44, $357 and $139, respectively)
|
|
$
|
294
|
|
|
$
|
64
|
|
|
$
|
925
|
|
|
$
|
158
|
|
Other comprehensive income
|
|
|
294
|
|
|
|
64
|
|
|
|
925
|
|
|
|
158
|
|
Comprehensive loss
|
|
$
|
(612
|
)
|
|
$
|
(3,614
|
)
|
|
$
|
(3,312
|
)
|
|
$
|
(11,480
|
)
|
Net loss per share (Note 4):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.05
|
)
|
|
$
|
(0.20
|
)
|
|
$
|
(0.23
|
)
|
|
$
|
(0.63
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
(0.05
|
)
|
|
$
|
(0.20
|
)
|
|
$
|
(0.23
|
)
|
|
$
|
(0.63
|
)
|
Weighted–average shares outstanding (Note 4):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
18,978,987
|
|
|
|
18,517,983
|
|
|
|
18,870,923
|
|
|
|
18,350,438
|
|
Diluted
|
|
|
18,978,987
|
|
|
|
18,517,983
|
|
|
|
18,870,923
|
|
|
|
18,350,438
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
Nine Months Ended
September 30,
|
|
|
2017
|
|
2016
|
OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(4,237
|
)
|
|
$
|
(11,638
|
)
|
Adjustments to reconcile net loss to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
516
|
|
|
|
1,418
|
|
Stock–based compensation expense
|
|
|
388
|
|
|
|
399
|
|
(Gain) loss on disposal of property, plant and equipment
|
|
|
382
|
|
|
|
(2
|
)
|
(Recovery) provision for bad debt expense
|
|
|
(863
|
)
|
|
|
2,010
|
|
Impairment of assets held for sale
|
|
|
170
|
|
|
|
1,708
|
|
Proceeds from insurance claim
|
|
|
1,723
|
|
|
|
—
|
|
Provision for deferred taxes
|
|
|
(335
|
)
|
|
|
(85
|
)
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
1,981
|
|
|
|
3,000
|
|
Due from Zhenfa
|
|
|
—
|
|
|
|
(1,165
|
)
|
Income tax receivable
|
|
|
—
|
|
|
|
8,252
|
|
Inventories, net
|
|
|
123
|
|
|
|
2,702
|
|
Other current assets
|
|
|
1,017
|
|
|
|
(921
|
)
|
Accounts payable
|
|
|
(660
|
)
|
|
|
(827
|
)
|
Accrued liabilities
|
|
|
535
|
|
|
|
1,107
|
|
Income taxes payable
|
|
|
3
|
|
|
|
5
|
|
Other, net
|
|
|
123
|
|
|
|
101
|
|
Total net cash provided by operating activities
|
|
|
866
|
|
|
|
6,064
|
|
|
|
|
|
|
|
|
|
|
INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
Capital investments
|
|
|
(406
|
)
|
|
|
(180
|
)
|
Proceeds from sale of fixed assets
|
|
|
268
|
|
|
|
16
|
|
Total net cash used in investing activities
|
|
|
(138
|
)
|
|
|
(164
|
)
|
|
|
|
|
|
|
|
|
|
FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
Shared services arrangement with Zhenfa
|
|
|
—
|
|
|
|
56
|
|
Factoring arrangement
|
|
|
71
|
|
|
|
(160
|
)
|
Total net cash provided by (used in) financing activities
|
|
|
71
|
|
|
|
(104
|
)
|
Effect of exchange rate changes on cash
|
|
|
142
|
|
|
|
312
|
|
|
|
|
|
|
|
|
|
|
Net change in cash and cash equivalents
|
|
|
941
|
|
|
|
6,108
|
|
Cash and cash equivalents, beginning of period
|
|
|
12,379
|
|
|
|
7,703
|
|
Cash and cash equivalents, end of period
|
|
$
|
13,320
|
|
|
$
|
13,811
|
|
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
|
NOTE 1—BASIS OF PRESENTATION
The accompanying condensed consolidated
financial statements and the related interim information contained within the notes to the condensed consolidated financial statements
have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”)
and the applicable rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial information
and quarterly reports on the Form 10-Q. Accordingly, they do not include all of the information and the notes required for complete
financial statements. These condensed consolidated financial statements should be read in conjunction with the consolidated financial
statements and notes thereto for the year ended December 31, 2016, included in STR Holdings, Inc.’s (the “Company”)
Annual Report on Form 10–K, as amended by the Company’s Form 10 K/A, for the year ended December 31, 2016. The unaudited
interim condensed consolidated financial statements have been prepared on the same basis as the audited consolidated financial
statements, and in the opinion of management, reflect all adjustments, consisting of only normal and recurring adjustments, necessary
for the fair presentation of the Company’s financial position, results of operations and cash flows for the interim periods
presented. The results for the interim periods presented are not necessarily indicative of future results.
The year-end Condensed Consolidated Balance
Sheet data was derived from audited financial statements, but does not include all disclosures required by GAAP.
The preparation of the condensed consolidated
financial statements in conformity with GAAP requires management to make significant estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from management’s
estimates.
On December 1, 2016, the Company was 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 $5,000 for at least one
of every 30 consecutive calendar days. The OTCQX granted the Company a 60 day extension beginning on January 3, 2017 with a re-evaluation
on or after February 28, 2017. The Company’s market capitalization did not return to at least $5,000, and following that
re-evaluation the Company’s stock began trading on the OTCQB market effective April 3, 2017.
NOTE 2—RECENT ACCOUNTING PRONOUNCEMENTS
In January 2016, the FASB issued ASU 2016-01,
“Financial Instruments - Overall: Recognition and Measurement of Financial Assets and Financial Liabilities.” The main
objective of this update is to enhance the reporting model for financial instruments to provide users of financial statements with
more decision-useful information. The new guidance addresses certain aspects of recognition, measurement, presentation, and disclosure
of financial instruments. This ASU is effective for fiscal years beginning after December 15, 2017, including interim periods within
those fiscal years. As of September 30, 2017, the Company does not expect this ASU to have a significant impact on its financial
statements or disclosures.
NOTE 3—TRANSACTION WITH ZHEN FA NEW ENERGY (U.S.) CO.,
LTD. AND ZHENFA ENERGY GROUP CO., LTD.
The Company has entered into certain definitive
agreements with Zhenfa Energy Group Co., Ltd., a Chinese limited liability company (“Zhenfa”) and its affiliate,
Zhen Fa New Energy (U.S.) Co., Ltd., a Nevada corporation (“Zhenfa U.S.”).
Purchase Agreement
On August 11, 2014, the Company entered
into a Stock Purchase Agreement (the “Purchase Agreement”) with Zhenfa U.S., pursuant to which Zhenfa U.S. acquired
approximately 51% of the Company’s then outstanding shares of common stock (the “Transaction”) on December 15,
2014 (the “Closing Date”).
The Company also entered into a guarantee
agreement (the “Guarantee Agreement”) with Zhenfa pursuant to which Zhenfa agreed to guarantee all obligations of Zhenfa
U.S. under the Purchase Agreement, including but not limited to, the payment of the purchase price and the performance of all covenants
and agreements of Zhenfa U.S in the Purchase Agreement.
STR Holdings, Inc. and Subsidiaries
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
(unaudited)
|
All amounts in thousands except share amounts, per share amounts or unless otherwise noted
|
NOTE 3—TRANSACTION WITH ZHEN FA NEW ENERGY (U.S.) CO.,
LTD. AND ZHENFA ENERGY GROUP CO., LTD. (Continued)
In connection with the closing of the Transaction,
the Company entered into a registration rights agreement (the “Registration Rights Agreement”) with Zhenfa U.S. that,
among other things, requires the Company to register the shares acquired by Zhenfa U.S. in the Transaction, at the Company’s
expense, upon the request of Zhenfa U.S. or certain transferees of Zhenfa U.S.
Sales Service Agreement
In connection with the execution of the
Purchase Agreement, Specialized Technology Resources, Inc., an operating subsidiary of the Company, entered into a Sales Service
Agreement (the “ Sales Service Agreement”) with Zhenfa whereby Zhenfa agreed, among other things, to assist the Company
in a number of endeavors, including, without limitation, marketing and selling the Company’s products in China, acquiring
local raw materials, hiring and training personnel in China, and complying with Chinese law. The Sales Service Agreement also provided
the Company a two-year option, which expired on December 15, 2016, to lease a Zhenfa-owned manufacturing facility rent free for
a period of five years. The Sales Service Agreement became effective on the Closing Date for an initial term of two years, and
automatically extends for one year periods unless terminated earlier by either party. The Sales Service Agreement may also be terminated
by either party at such time as Zhenfa and its affiliates own less than 10% of the outstanding common stock of the Company.
NOTE 4—LOSS PER SHARE
The calculation of basic and diluted net
loss per share for the periods presented is as follows:
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Basic and diluted net loss per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(906
|
)
|
|
$
|
(3,678
|
)
|
|
$
|
(4,237
|
)
|
|
$
|
(11,638
|
)
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted–average shares outstanding
|
|
|
18,978,987
|
|
|
|
18,517,983
|
|
|
|
18,870,923
|
|
|
|
18,350,438
|
|
Add:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive effect of stock options
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Dilutive effect of restricted common stock
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Weighted–average shares outstanding with dilution
|
|
|
18,978,987
|
|
|
|
18,517,983
|
|
|
|
18,870,923
|
|
|
|
18,350,438
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.05
|
)
|
|
$
|
(0.20
|
)
|
|
$
|
(0.23
|
)
|
|
$
|
(0.63
|
)
|
Diluted
|
|
$
|
(0.05
|
)
|
|
$
|
(0.20
|
)
|
|
$
|
(0.23
|
)
|
|
$
|
(0.63
|
)
|
Due to the net loss for the three and nine
months ended September 30, 2017 and 2016, the computation of dilutive weighted-average common shares outstanding does not
include any stock options or any shares of unvested restricted common stock as these potential awards are anti-dilutive.
Because the effect would be anti-dilutive,
there were 1,121,332 stock options outstanding that were not included in the computation of diluted weighted-average shares outstanding
for each of the three and nine months ended September 30, 2017. Similarly, there were 1,121,332 stock options outstanding
that were not included in the computation of diluted weighted-average shares outstanding for each of the three and nine months
ended September 30, 2016.
NOTE 5—BANK ACCEPTANCE NOTES
Customers in China may settle their accounts
with bank acceptance notes, which are draft instruments that are guaranteed to be paid at maturity by the issuing bank. Upon receipt
of the bank acceptance note, the Company can elect to hold the instrument until maturity and receive full face value, discount
it with the bank for a fee, or transfer it at full face value to suppliers who will accept the note as settlement of the Company’s
accounts payable balance with them.
STR Holdings, Inc. and Subsidiaries
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
(unaudited)
|
All amounts in thousands except share amounts, per share amounts or unless otherwise noted
|
NOTE 5—BANK ACCEPTANCE NOTES (Continued)
Bank acceptance notes consist of the following:
|
|
September 30,
2017
|
|
December 31,
2016
|
Balance as of beginning of period
|
|
$
|
3,360
|
|
|
$
|
92
|
|
Received from customers
|
|
|
1,523
|
|
|
|
7,030
|
|
Converted to cash
|
|
|
(3,437
|
)
|
|
|
—
|
|
Paid to suppliers
|
|
|
(1,048
|
)
|
|
|
(3,756
|
)
|
Foreign exchange impact
|
|
|
156
|
|
|
|
(6
|
)
|
Balance as of end of period
|
|
$
|
554
|
|
|
$
|
3,360
|
|
All of the bank acceptance notes as of September
30, 2017 mature prior to December 31, 2017. Due to the short time to maturity, the Company believes the bank acceptance notes’
carrying value approximates fair value. As of September 30, 2017, the annual effective discount rate for all of the bank acceptance
notes was 5.0%.
NOTE 6—INVENTORIES
Inventories consist of the following:
|
|
September 30,
2017
|
|
December 31,
2016
|
Finished goods
|
|
$
|
628
|
|
|
$
|
470
|
|
Raw materials
|
|
|
1,548
|
|
|
|
1,812
|
|
Reserve
|
|
|
(287
|
)
|
|
|
(435
|
)
|
Inventories, net
|
|
$
|
1,889
|
|
|
$
|
1,847
|
|
NOTE 7—LONG-LIVED ASSETS
Impairment Testing
In accordance with ASC 360-Property, Plant
and Equipment, the Company assesses the impairment of its long-lived assets whenever changes in events or circumstances indicate
that the carrying value of such assets may not be recoverable. During each reporting period, the Company assessed if the following
factors were present, which would cause an impairment review: overall negative solar industry conditions; a significant or prolonged
decrease in net sales generated under its trademarks; loss of a significant customer or a reduction in demand for customers’
products; a significant adverse change in the extent to or manner in which the Company used its trademarks or proprietary technology;
such assets becoming obsolete due to new technology or manufacturing processes entering the markets or an adverse change in legal
factors; and the market capitalization of the Company’s common stock.
At September 30, 2017 and December 31, 2016,
the Company recorded valuation allowances against its deferred tax assets. The valuation allowances were recorded since the Company
had three consecutive years of taxable losses and determined that its history of actual net losses was evidence that should be
given more weight than future projections. The Company determined the recording of valuation allowances against deferred tax assets
to be an indicator to test its long-lived assets, which consist solely of property, plant and equipment, for impairment. The Company
assessed the specific recoverability of its property, plant and equipment using updated real estate appraisals and other data for
its other fixed assets, mainly production equipment. Based upon this analysis, the Company believes its property, plant and equipment
carrying value was recoverable and depreciable lives were appropriate as of September 30, 2017. If the Company experiences a significant
reduction in future sales volume, further average selling price (“ASP”) reductions, lower profitability, a cessation
of operations at any of its facilities, or negative changes in U.S. or Spain real estate markets, the Company’s property,
plant and equipment may be subject to future impairment or accelerated depreciation.
NOTE 8—ASSETS HELD FOR SALE
In July 2015, the Company announced a restructuring
plan that included the closure of its Johor, Malaysia facility effective August 2, 2015. Subsequent to the announcement, the Company
engaged advisors and was actively trying to sell its land-use right, building and other fixed assets located at the facility. In
the first six months of 2016, the Company received and ultimately accepted an offer for RM25,000 (approximately
$5,920 as of September 30, 2017) for the land-use right and building, subject to completion of definitive documentation. In November
2016, the formal purchase and sale agreement (the “Malaysia Sale Agreement”) was executed. Closing of the transaction
was subject to customary conditions to closing of transactions of this type, including the approval of the Johor Port Authority.
STR Holdings, Inc. and Subsidiaries
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
(unaudited)
|
All amounts in thousands except share amounts, per share amounts or unless otherwise noted
|
NOTE 8—ASSETS HELD FOR SALE (Continued)
On July 31, 2017, the Company received a
notice from the Purchaser purporting to terminate the Malaysia Sale Agreement, alleging that the Johor Port Authority (“JPA”)
was seeking to impose conditions on the approval of the transfer of the facility to the Purchaser that the Purchaser deemed unacceptable.
Specifically, the conditions included a minimum monthly container shipment requirement typical of other properties located in the
port. The Company responded to the Purchaser disputing the validity of the purported termination on the grounds that the Condition
Period had not yet expired and the Company was continuing to seek to work with the JPA to address the condition objected to by
the Purchaser. Following further discussions, the JPA has refused to reduce the objected to condition from its consent. As a result,
the Company now considers the Malaysia Sale Agreement to be terminated pursuant to the initial notice from the Purchaser and plans
to re-launch the sale process for its Malaysia facility.
In accordance with ASC 360-Property, Plant
and Equipment, the Company assessed the asset group attributed to the sale for impairment. Based upon the Company’s assessment
of the status of the Malaysia property, plant and equipment, all of the requirements (including the held for sale requirements)
set forth in ASC 360-10-45-9 were met and the assets were classified on the condensed consolidated balance sheet as of September
30, 2017 and December 31, 2016 as assets held for sale. An impairment loss of $170, related to the foreign currency fluctuation
of the Malaysian Ringgit, was recorded in the Company’s condensed consolidated statement of comprehensive loss in other expense,
net during the first nine months of 2017. An impairment loss of $1,708 was recorded in the Company’s condensed consolidated
statement of comprehensive loss during the second quarter of 2016.
NOTE 9—ACCRUED LIABILITIES
Accrued liabilities consist of the following:
|
|
September 30,
2017
|
|
December 31,
2016
|
Product performance (see Note 10)
|
|
$
|
—
|
|
|
$
|
21
|
|
Salaries and wages
|
|
|
339
|
|
|
|
310
|
|
Accrued bonus
|
|
|
515
|
|
|
|
270
|
|
Professional fees
|
|
|
411
|
|
|
|
535
|
|
Restructuring severance and benefits (see Note 11)
|
|
|
154
|
|
|
|
269
|
|
Environmental (see Note 10)
|
|
|
57
|
|
|
|
57
|
|
Accrued franchise tax
|
|
|
64
|
|
|
|
66
|
|
Client deposits
|
|
|
1,236
|
|
|
|
922
|
|
Accrued income tax
|
|
|
19
|
|
|
|
—
|
|
Other
|
|
|
158
|
|
|
|
167
|
|
Total accrued liabilities
|
|
$
|
2,953
|
|
|
$
|
2,617
|
|
NOTE 10—COMMITMENTS AND CONTINGENCIES
The Company is a party to claims and litigation
in the normal course of its operations. Management believes that the ultimate outcome of these matters will not have a material
adverse effect on the Company’s financial position, results of operations, or cash flows.
Product Performance
The Company provides a short-term warranty
that it has manufactured its products to the Company’s specifications. On limited occasions, the Company incurs costs to
service its products in connection with specific product performance matters that do not meet the Company’s specifications.
Anticipated future costs are recorded as part of cost of sales and accrued liabilities for specific product performance matters
when it is probable that a liability has been incurred and the amount of the liability can be reasonably estimated.
STR Holdings, Inc. and Subsidiaries
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
(unaudited)
|
All amounts in thousands except share amounts, per share amounts or unless otherwise noted
|
NOTE 10—COMMITMENTS AND CONTINGENCIES (Continued)
On isolated occasions, the Company has also
offered limited short-term performance warranties relating to its encapsulants not causing module power loss. The Company’s
encapsulants are validated by long-term performance testing
during product development prior to launch and during customer
certification prior to mass production. The Company has operated its solar business since the 1970s and over 20 GW of solar modules
incorporating its encapsulants have been installed in the field with no reported module power performance issues caused by
the Company’s encapsulants and no related warranty claims to date. Based on this fact pattern, the Company has not accrued
any warranty liability associated for this potential liability as its occurrence is deemed to be remote. If the Company was to
ever receive a warranty claim for such matter, the Company would assess the need for a warranty accrual at that time.
The Company has accrued for specific product
performance matters incurred in 2017 and 2016 that are based on management’s best estimate of ultimate expenditures that
it may incur for such items. The Company’s product performance liability that is recorded in accrued liabilities in the condensed
consolidated balance sheets was $0 and $21 as of September 30, 2017 and December 31, 2016, respectively.
Environmental
During 2010, the Company performed a Phase II
environmental site assessment at its 10 Water Street, Enfield, Connecticut location. During its investigation, the site
was found to contain a presence of volatile organic compounds. The Company has been in contact with the Department of Environmental
Protection and has engaged a licensed contractor to remediate this circumstance. Based on ASC 450-Contingencies, the Company has
accrued the estimated cost to remediate. The Company’s environmental liability that is recorded in accrued liabilities in
the condensed consolidated balance sheets was $57 as of September 30, 2017 and December 31, 2016.
Solaria
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, plus interest,
in damages.
A trial was held on April 6, 2017 in Oviedo,
Spain, and the Company is currently awaiting a ruling from the court. The Company has product liability insurance coverage for
claims of this nature, excluding the original product cost but including defense costs. The Company believes it has meritorious
defenses and does not believe a loss is probable or can be reasonably estimated. As such, no accrual relating to this complaint
was recorded as of September 30, 2017 and December 31, 2016.
NOTE 11—COST
-
REDUCTION ACTIONS
In June 2016, the Company eliminated certain
positions at its Spain facility, effective July 5, 2016. The Company recorded $121 of severance and benefits in cost of sales and
$108 of severance and benefits in selling, general and administrative expenses during 2016.
On March 7, 2017 the Company made the decision
to wind down its China manufacturing operations substantially by the end of the second quarter of 2017. The decision is consistent
with ongoing efforts to reorganize its encapsulant business to better align with customer geography, to reduce losses related to
unprofitable locations and to convert assets to cash for potential redeployment into more profitable endeavors. In connection with
the restructuring, the Company does not expect any significant asset impairment charges and recorded $112 of severance charges
and benefits in cost of sales and $29 of severance charges and benefits in selling, general and administrative expenses during
the first nine months of 2017. The Company sold certain production and testing equipment from the China facility to its tolling
partner in India during the third quarter.
STR Holdings, Inc. and Subsidiaries
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
(unaudited)
|
All amounts in thousands except share amounts, per share amounts or unless otherwise noted
|
NOTE 11—COST
-
REDUCTION ACTIONS (Continued)
The restructuring accrual consists of $154
for severance and benefits as of September 30, 2017. A rollforward of the severance and other exit cost accrual activity is
as follows:
|
|
September 30,
2017
|
|
September 30,
2016
|
Balance as of beginning of year
|
|
$
|
269
|
|
|
$
|
268
|
|
Additions
|
|
|
209
|
|
|
|
219
|
|
Reductions
|
|
|
(204
|
)
|
|
|
(165
|
)
|
Reversals
|
|
|
(120
|
)
|
|
|
—
|
|
Balance as of end of period
|
|
$
|
154
|
|
|
$
|
322
|
|
NOTE 12—FAIR VALUE MEASUREMENTS
The Company measures certain financial assets
and liabilities at fair value on a recurring basis in the financial statements. The hierarchy ranks the quality and reliability
of inputs, or assumptions, used in the determination of fair value
and requires financial assets and liabilities carried at fair
value to be classified and disclosed in one of the following three categories:
|
·
|
Level 1-quoted prices (unadjusted) in active markets for identical assets and liabilities;
|
|
·
|
Level 2-unadjusted quoted prices in active markets for similar assets or liabilities, or unadjusted quoted prices for identical
or similar assets or liabilities in markets that are not active, or inputs other than quoted prices that are observable for the
asset or liability; and
|
|
·
|
Level 3-unobservable inputs that are not corroborated by market data.
|
The following table provides the fair value
measurements of applicable financial assets and liabilities as of September 30, 2017:
|
|
Financial assets and liabilities at fair value
as of September 30, 2017
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
|
|
|
|
|
|
Money market funds (1)
|
|
$
|
1,812
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Bank acceptance notes (2)
|
|
$
|
554
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Non-recurring fair value measurements (3)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
5,920
|
|
Total
|
|
$
|
2,366
|
|
|
$
|
—
|
|
|
$
|
5,920
|
|
The following table provides the fair value
measurements of applicable financial assets and liabilities as of December 31, 2016:
|
|
Financial assets and liabilities at fair value
as of December 31, 2016
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
|
|
|
|
|
|
Money market funds (1)
|
|
$
|
7,429
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Bank acceptance notes (2)
|
|
$
|
3,360
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Non-recurring fair value measurements (3)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
6,090
|
|
Total
|
|
$
|
10,789
|
|
|
$
|
—
|
|
|
$
|
6,090
|
|
_______________________
|
(1)
|
Included in cash and cash equivalents on the Company’s Condensed Consolidated Balance Sheets. The carrying amount of
money market funds is a reasonable estimate of fair value due to the short-term maturity.
|
|
(2)
|
Refer to Note 5 for further
information
|
|
(3)
|
Included in assets held for sale on the Company’s Condensed Consolidated Balance Sheets. Refer to Note 8 for further
information.
|
STR Holdings, Inc. and Subsidiaries
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
(unaudited)
|
All amounts in thousands except share amounts, per share amounts or unless otherwise noted
|
NOTE 13—FACTORING ARRANGEMENT
In October 2015, STR Spain 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., which was later acquired by Credit Agricole Leasing and 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 €1,500
(approximately $1,772 as of September 30, 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 initial term of the agreement was for one year,
which is automatically extended unless terminated by either party with 90 days prior written notice. As of September 30, 2017 and
December 31, 2016 the Company has recorded $505 and $381, respectively, as due to factor on the Condensed Consolidated Balance
Sheets.
NOTE 14—INCOME TAXES
There is no provision or benefit for federal,
foreign or state income taxes for the three and nine months ended September 30, 2017 other than income tax benefit of $173 and
$316, respectively, resulting from an intra-period tax allocation between operations and other comprehensive income.
The Company has evaluated the positive and
negative evidence bearing upon the realizability of its deferred tax assets. Based on the Company’s history of operating
losses, the Company has concluded that it is more likely than not that the benefit of its deferred tax assets will not be realized.
Accordingly, the Company has provided a full valuation allowance for deferred tax assets as of September 30, 2017 and December 31,
2016.
There was no provision or benefit for federal,
foreign or state income taxes for the three and nine months ended September 30, 2016 other than income tax benefit of $35 and $50,
respectively, resulting from an intra-period tax allocation between operations and other comprehensive income.
NOTE 15—STOCKHOLDERS’ EQUITY
Changes in stockholders’ equity for
the nine months ended September 30, 2017 are as follows:
|
|
Common Stock
|
|
Treasury Stock
|
|
Additional
Paid–In
|
|
Accumulated
Other
Comprehensive
|
|
Accumulated
|
|
Total
Stockholders’
|
|
|
Issued
|
|
Amount
|
|
Acquired
|
|
Amount
|
|
Capital
|
|
Loss
|
|
Deficit
|
|
Equity
|
Balance at December 31, 2016
|
|
|
18,669,927
|
|
|
$
|
187
|
|
|
|
1,240
|
|
|
$
|
(57
|
)
|
|
$
|
231,627
|
|
|
$
|
(6,431
|
)
|
|
$
|
(193,971
|
)
|
|
$
|
31,355
|
|
Stock-based compensation
|
|
|
337,878
|
|
|
|
3
|
|
|
|
—
|
|
|
|
—
|
|
|
|
332
|
|
|
|
—
|
|
|
|
—
|
|
|
|
335
|
|
Net loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(4,237
|
)
|
|
|
(4,237
|
)
|
Foreign currency translation, net of tax
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
925
|
|
|
|
—
|
|
|
|
925
|
|
Balance at September 30, 2017
|
|
|
19,007,805
|
|
|
$
|
190
|
|
|
|
1,240
|
|
|
$
|
(57
|
)
|
|
$
|
231,959
|
|
|
$
|
(5,506
|
)
|
|
$
|
(198,208
|
)
|
|
$
|
28,378
|
|
Common Stock
The Company’s Board of Directors has
authorized 200,000,000 shares of common stock, $0.01 par value. At September 30, 2017, there were 19,455,061 shares issued and
19,453,821 shares outstanding of common stock. Each share of common stock is entitled to one vote per share. Included in the 19,453,821
shares outstanding are 19,007,805 shares of common stock and 446,016 shares of unvested restricted common stock.
NOTE 16—STOCK-BASED COMPENSATION
On November 6, 2009, the Company’s
Board of Directors approved the Company’s 2009 Equity Incentive Plan (the “2009 Plan”) which became effective
on the same day. Effective May 14, 2013, the 2009 Plan was amended to increase the number of shares subject to the 2009 Plan.
As a result, a total of 4,133,133 shares of common stock are reserved for issuance under the 2009 Plan. The 2009 Plan is administered
by the Board of Directors or any committee designated by the Board of Directors, which has the authority to designate participants
and determine the number and type of awards to be granted, the time at which awards are exercisable, the method of payment and
any other terms or conditions of the awards. The 2009 Plan provides for the grant of stock options, including incentive stock options
and nonqualified stock options (collectively, “options”), stock appreciation rights, shares of
restricted stock, or “restricted stock,” rights to dividend equivalents and other stock-based awards (collectively,
the “awards”). The Board of Directors or the committee will, with regard to each award, determine the terms and conditions
of the award, including the number of shares subject to the award, the vesting terms of the award, and the purchase price for the
award. Awards may be made in assumption of or in substitution for outstanding awards previously granted by the Company or its affiliates,
or a company acquired by the Company or with which it combines. Options outstanding generally vest over a three or four-year period
and expire ten years from the date of grant. There were 1,015,531 shares available for grant under the 2009 Plan as of September
30, 2017.
STR Holdings, Inc. and Subsidiaries
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
(unaudited)
|
All amounts in thousands except share amounts, per share amounts or unless otherwise noted
|
NOTE 16—STOCK-BASED COMPENSATION (Continued)
The following table summarizes the options
activity under the Company’s 2009 Plan for the nine months ended September 30, 2017:
|
|
Options Outstanding
|
|
|
Number
of
Shares
|
|
Weighted–
Average
Exercise
Price
|
|
Weighted–
Average
Remaining
Contractual
Term
(in years)
|
|
Weighted–
Average
Grant–Date
Fair Value
|
|
Aggregate
Intrinsic
Value(1)
|
Balance at December 31, 2016
|
|
|
1,121,332
|
|
|
$
|
1.52
|
|
|
|
—
|
|
|
$
|
0.99
|
|
|
$
|
(1,469
|
)
|
Options granted
|
|
|
—
|
|
|
$
|
—
|
|
|
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Exercised
|
|
|
—
|
|
|
$
|
—
|
|
|
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Canceled/forfeited
|
|
|
—
|
|
|
$
|
—
|
|
|
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Balance at September 30, 2017
|
|
|
1,121,332
|
|
|
$
|
1.52
|
|
|
|
7.35
|
|
|
$
|
0.99
|
|
|
$
|
(1,469
|
)
|
Vested and exercisable as of September 30, 2017
|
|
|
747,552
|
|
|
$
|
1.52
|
|
|
|
7.35
|
|
|
$
|
0.99
|
|
|
$
|
(979
|
)
|
Vested and exercisable as of September 30, 2017 and expected to vest thereafter
|
|
|
1,114,673
|
|
|
$
|
1.52
|
|
|
|
7.35
|
|
|
$
|
0.99
|
|
|
$
|
(1,460
|
)
|
_______________________
(1) The aggregate intrinsic value is calculated
as the difference between the exercise price of the underlying awards and the closing stock price of $0.21 of the Company’s
common stock on September 30, 2017.
As of September 30, 2017, there was
$123 of unrecognized compensation cost related to outstanding stock option awards. This amount is expected to be recognized over
a weighted-average remaining vesting period of less than one year. To the extent the actual forfeiture rate is different from what
the Company has anticipated, stock-based compensation related to these awards will be different from its expectations. The Company
did not receive any proceeds related to the exercise of stock options for the three and nine months ended September 30, 2017.
The following table summarizes the restricted
common stock activity of the Company for the nine months ended September 30, 2017:
|
|
Unvested
Restricted Shares
|
|
|
Number of
Shares
|
|
Weighted–
Average
Grant–Date
Fair Value
|
Unvested at December 31, 2016
|
|
|
568,420
|
|
|
$
|
—
|
|
Granted
|
|
|
499,684
|
|
|
$
|
—
|
|
Vested
|
|
|
(337,878
|
)
|
|
$
|
0.17
|
|
Canceled
|
|
|
(284,210
|
)
|
|
$
|
—
|
|
Unvested at September 30, 2017
|
|
|
446,016
|
|
|
$
|
—
|
|
Expected to vest after September 30, 2017
|
|
|
446,016
|
|
|
$
|
—
|
|
As of September 30, 2017, there was
$9 of unrecognized compensation cost related to unvested restricted shares. This amount is expected to be recognized over a
weighted-average remaining vesting period of less than one year. To the extent the actual forfeiture rate is different from
what the Company has anticipated, stock-based compensation related to these awards will be different from its
expectations.
STR Holdings, Inc. and Subsidiaries
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
(unaudited)
|
All amounts in thousands except share amounts, per share amounts or unless otherwise noted
|
NOTE 16—STOCK-BASED COMPENSATION (Continued)
Stock-based compensation expense was included
in the following Condensed Consolidated Statements of Comprehensive Loss categories for operations:
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Selling, general and administrative expense
|
|
$
|
136
|
|
|
$
|
119
|
|
|
$
|
388
|
|
|
$
|
399
|
|
Total stock-based compensation expense
|
|
$
|
136
|
|
|
$
|
119
|
|
|
$
|
388
|
|
|
$
|
399
|
|
NOTE 17—REPORTABLE SEGMENT AND GEOGRAPHICAL INFORMATION
ASC 280-10-50, “ Disclosure about
Segments of an Enterprise and Related Information,” establishes standards for the manner in which companies report information
about operating segments, products, geographic areas and major customers The method of determining what information to report is
based on the way that management organizes the operating segment within the enterprise for making operating decisions and assessing
financial performance. Since the Company has one product, sells to global customers in one industry, procures raw materials from
similar vendors and expects similar long-term economic characteristics, the Company has one reporting segment and the information
as to its operation is set forth below.
Adjusted EBITDA is the main metric used
by the management team and the Board of Directors to plan, forecast and review the Company’s segment performance. Adjusted
EBITDA represents net loss before interest income and expense, income tax expense, depreciation, stock-based compensation expense,
restructuring and certain non-recurring income and expenses from the results of operations.
The following tables set forth information
about the Company’s operations by its reportable segment and by geographic area:
Operations by Reportable Segment
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Reconciliation of Adjusted EBITDA to Net Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
|
$
|
(1,092
|
)
|
|
$
|
(3,099
|
)
|
|
$
|
(4,725
|
)
|
|
$
|
(7,985
|
)
|
Depreciation
|
|
|
237
|
|
|
|
(468
|
)
|
|
|
(516
|
)
|
|
|
(1,418
|
)
|
Interest income (expense), net
|
|
|
1
|
|
|
|
(2
|
)
|
|
|
(6
|
)
|
|
|
39
|
|
Income tax benefit
|
|
|
173
|
|
|
|
35
|
|
|
|
316
|
|
|
|
50
|
|
Restructuring
|
|
|
(65
|
)
|
|
|
(25
|
)
|
|
|
(89
|
)
|
|
|
(219
|
)
|
Stock–based compensation
|
|
|
(136
|
)
|
|
|
(119
|
)
|
|
|
(388
|
)
|
|
|
(399
|
)
|
Proceeds received from insurance claim
|
|
|
248
|
|
|
|
—
|
|
|
|
1,723
|
|
|
|
—
|
|
Impairment of assets held for sale
|
|
|
97
|
|
|
|
—
|
|
|
|
(170
|
)
|
|
|
(1,708
|
)
|
(Loss) gain on disposal of fixed assets
|
|
|
(369
|
)
|
|
|
—
|
|
|
|
(382
|
)
|
|
|
2
|
|
Net Loss
|
|
$
|
(906
|
)
|
|
$
|
(3,678
|
)
|
|
$
|
(4,237
|
)
|
|
$
|
(11,638
|
)
|
Operations by Geographic Area
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Net Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Spain
|
|
$
|
2,569
|
|
|
$
|
1,947
|
|
|
$
|
6,323
|
|
|
$
|
8,362
|
|
China
|
|
|
951
|
|
|
|
2,077
|
|
|
|
3,925
|
|
|
|
8,764
|
|
United States
|
|
|
13
|
|
|
|
6
|
|
|
|
55
|
|
|
|
18
|
|
Total Net Sales
|
|
$
|
3,533
|
|
|
$
|
4,030
|
|
|
$
|
10,303
|
|
|
$
|
17,144
|
|
STR Holdings, Inc. and Subsidiaries
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
(unaudited)
|
All amounts in thousands except share amounts, per share amounts or unless otherwise noted
|
NOTE 17—REPORTABLE SEGMENT AND GEOGRAPHICAL INFORMATION
(Continued)
Long-Lived Assets by Geographic Area
|
|
September 30,
2017
|
|
December 31,
2016
|
Long-Lived Assets
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
1,348
|
|
|
$
|
1,448
|
|
Spain
|
|
|
6,338
|
|
|
|
5,990
|
|
China
|
|
|
242
|
|
|
|
535
|
|
Hong Kong
|
|
|
1
|
|
|
|
1
|
|
Total Long-Lived Assets
|
|
$
|
7,928
|
|
|
$
|
7,974
|
|
Foreign sales are based on the country in
which the sales originated. Net sales to three of the Company’s major customers that exceeded 10% of the Company’s
consolidated net sales for the three months ended September 30, 2017 were $1,844. Net sales to two of the Company’s
major customers that exceeded 10% of the Company’s consolidated net sales for the nine months ended September 30, 2017
were $3,920. Net sales to two of the Company’s major customers that exceeded 10% of the Company’s consolidated net
sales for the three and nine months ended September 30, 2016 were $2,028 and $5,629, respectively.
Accounts receivable from two customers amounted
to $777 and accounts receivable from two customers amounted to $597 as of September 30, 2017 and December 31, 2016, respectively.
NOTE 18—RELATED PARTY TRANSACTION
Huhui Supply Agreement
The Company’s Chinese subsidiary,
Specialized Technology Resources Solar (Suzhou) Co. Ltd. (“STR China”) entered into a supply agreement (the “Huhui
Supply Agreement”) dated as of December 31, 2014 with Zhangjiagang Huhui Segpv Co. Ltd ("Huhui"), a solar module
manufacturer and an affiliate of Zhenfa. Pursuant to the Huhui Supply Agreement, STR China agreed to supply Huhui
with the Company's encapsulant products and Huhui agreed (i) to purchase not less than 535 MW worth of encapsulants (the “Minimum
Amount”) during each contract year, (ii) to pay the Company a deposit equal to 10% of the Minimum Amount, and (iii) not
to purchase encapsulant products from other encapsulant manufacturers. The initial term of the Huhui Supply Agreement was for one
year; however, such initial term was extended for an additional six months due to failure by Huhui to purchase the Minimum Amount
at the end of the first year anniversary of the effective date of the Huhui Supply Agreement. The Huhui Supply Agreement further
provides that Huhui’s obligations are contingent (unless otherwise provided in the agreement) upon (i) the delivery by STR
China of an initial shipment of products in accordance with the specifications and (ii) the qualification of the products by Huhui
during a sample production
run of not less than 30 days. As of September 30, 2017, Huhui
had not commenced the sample production run. The Huhui Supply Agreement shall automatically renew for additional one year
terms if either party fails to notify the other party at least 90 days prior to the end of the then current term that it is electing
to terminate the agreement. The Company believes that the terms and conditions set forth in the Huhui Agreement at that time were
fair and reasonable to the Company. The Company received $1,148 as a deposit from Huhui during the year ended December 31, 2015,
which is included in accrued liabilities on the Condensed Consolidated Balance Sheets. During the three and nine months ended September
30, 2017 the Company did not record any sales to this customer.
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 in this Quarterly Report on Form 10-Q and under Item 1A,—Risk
Factors in our Annual Report on Form 10-K, as amended by our Form 10-K/A, for the year ended December 31, 2016 (the “2016
Form 10-K”).
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”); (26) the ability to successfully complete our investment in Spain on a timely basis or
within budget, if at all, or that we will be able to achieve our anticipated revenue, earnings or payback from this new investment;
(27) that we will be able to timely collect the full amount of the insurance proceeds that we anticipate to support this project,
or that we will be able to obtain the loan we have applied for from the regional government on favorable terms if at all; and (28)
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.
Strategic Developments
We continue to operate at a substantial
net loss. We incurred net losses of approximately $4.2 million for the nine months ended September 30, 2017 and $15.9 million for
the year ended December 31, 2016.
Wind-down of China Manufacturing Operations.
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 addition, in October 2016, a fire destroyed one of our two China-based production lines. The fire
caused substantial damage to our building and some of our ancillary equipment in addition to the production line. In light of continued
poor financial results of STR China, as well as the effects of the fire, we decided to conduct an orderly wind down of our China
manufacturing operations to reduce operating losses related to this business unit.
India Tolling Plan
. A review
of our production in China revealed that roughly half of our sales volume was being exported to our customers in India. Moreover,
our customers in India have generally been more reliable in terms of payment and pricing than our customers in China. In conjunction
with our decision to conduct an orderly wind down of our manufacturing operations in China, we have decided to serve the market
in India with production through a tolling partner in that country. We recently sold our remaining undamaged production line from
China to this tolling partner and have completed installation and debugging. We expect our tolling partner in India to begin manufacturing
commercial quantities of STR-formulated encapsulant products by the end of this year. By using a tolling partner, our goal is to
continue to serve and seek to grow our customer base in India without a significant capital investment by us. We have not previously
worked with our tolling partner in India and we cannot assure that the tolling partner will provide us with the support we anticipate
or that we can otherwise successfully manage our collaboration with our tolling partner. If problems develop in our relationship
with our India tolling partner, or if such party fails to perform as expected, it could lead to product defects, manufacturing
and shipping delays, significant cost increases, changes in our strategies, and even failure of our initiatives, each of which
may have a material adverse effect on our business, financial condition, and results of operations. We cannot assure you that the
India tolling plan will be successful. For additional information with respect to the execution risks associated with our India
tolling plan, please see under Item 1A,—Risk Factors in this Quarterly Report on Form 10-Q.
We continue to explore options for reorganizing
our encapsulant business to better align with customer geography, to reduce the cash burn related to unprofitable locations, 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.
High-End Food Packaging
Opportunity
. In September 2017, our board of directors approved our pursuit of a significant investment to enter the
high-end food packaging business through our wholly-owned subsidiary in Spain. This investment opportunity, which leverages
our plastics expertise, includes the purchase of new, state-of-the-art plastics processing equipment and related building
improvements along with the addition of experienced staff to pursue manufacturing and sales of high-end food packaging
products. We expect to be able to apply certain local incentives, as well as conditional insurance proceeds available only
if we invest in new plastics manufacturing equipment, thereby lowering our
expected effective initial net investment from approximately $5.0 million to approximately $2.0 million. We have also applied
for loans of up to $2.4 million from the regional government of Asturias, Spain to further support the project. Subject to
the timely purchase and installation of equipment, we expect to begin to generate revenues from this investment by 2019. The
food packaging business is highly competitive having market participants with substantially more resources and experience
than us. We will be a new entry into this market and we cannot assure you that we will be successful in this new endeavor.
In particular, we cannot assure that we will be able to successfully complete our investment in this new business on a
timely basis or within budget, if at all, or that we will be able to achieve our anticipated revenue or earnings from this
new investment. Nor can we assure that we will be able to timely collect the full amount of the insurance proceeds that
we anticipate to support this project, or that we will be able to obtain the loan we have applied for from the
regional government on favorable terms if at all.
Alternative Transactions.
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 wind-down or dissolution
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.
Manufacturing Facility Fire.
During the fourth quarter of 2016, we recorded a $0.9 million loss on disposal of fixed assets attributable to our Chinese manufacturing
facility fire. During the first nine months of 2017, our China subsidiary received interim payments totaling RMB11.6 million (approximately
$1.7 million as of September 30, 2017) from our local China insurance carrier related to the existing fire insurance claim. These
payments do 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 2016 Form 10-K.
There have been no changes in our critical
accounting policies during the quarter ended September 30, 2017.
RESULTS OF OPERATIONS
Condensed Consolidated Results of Operations
The following tables set forth our condensed
consolidated results of operations for the three and nine months ended September 30, 2017 and 2016:
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Net sales
|
|
$
|
3,533
|
|
|
$
|
4,030
|
|
|
$
|
10,303
|
|
|
$
|
17,144
|
|
Cost of sales
|
|
|
3,392
|
|
|
|
4,929
|
|
|
|
11,297
|
|
|
|
18,384
|
|
Gross profit (loss)
|
|
|
141
|
|
|
|
(899
|
)
|
|
|
(994
|
)
|
|
|
(1,240
|
)
|
Selling, general and administrative expenses
|
|
|
1,554
|
|
|
|
1,798
|
|
|
|
4,834
|
|
|
|
5,489
|
|
Research and development expense
|
|
|
225
|
|
|
|
308
|
|
|
|
775
|
|
|
|
949
|
|
(Recovery) provision for bad debt expense
|
|
|
(483
|
)
|
|
|
651
|
|
|
|
(863
|
)
|
|
|
2,010
|
|
Operating loss
|
|
|
(1,155
|
)
|
|
|
(3,656
|
)
|
|
|
(5,740
|
)
|
|
|
(9,688
|
)
|
Interest income (expense), net
|
|
|
1
|
|
|
|
(2
|
)
|
|
|
(6
|
)
|
|
|
39
|
|
Other income (expense), net (Note 8)
|
|
|
321
|
|
|
|
9
|
|
|
|
1,527
|
|
|
|
(1,690
|
)
|
(Loss) gain on disposal of fixed assets
|
|
|
(369
|
)
|
|
|
—
|
|
|
|
(382
|
)
|
|
|
2
|
|
Foreign currency transaction gain (loss)
|
|
|
123
|
|
|
|
(64
|
)
|
|
|
48
|
|
|
|
(351
|
)
|
Loss before income tax benefit
|
|
|
(1,079
|
)
|
|
|
(3,713
|
)
|
|
|
(4,553
|
)
|
|
|
(11,688
|
)
|
Income tax benefit
|
|
|
(173
|
)
|
|
|
(35
|
)
|
|
|
(316
|
)
|
|
|
(50
|
)
|
Net loss
|
|
$
|
(906
|
)
|
|
$
|
(3,678
|
)
|
|
$
|
(4,237
|
)
|
|
$
|
(11,638
|
)
|
Net Sales
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
2017
|
|
2016
|
|
Change
|
|
2017
|
|
2016
|
|
Change
|
|
|
Amount
|
|
% of
Total
Net
Sales
|
|
Amount
|
|
% of
Total
Net
Sales
|
|
Amount
|
|
%
|
|
Amount
|
|
% of
Total
Net
Sales
|
|
Amount
|
|
% of
Total
Net
Sales
|
|
Amount
|
|
%
|
Net sales
|
|
$
|
3,533
|
|
|
|
100.0
|
%
|
|
$
|
4,030
|
|
|
|
100.0
|
%
|
|
$
|
(497
|
)
|
|
|
(12.3
|
)%
|
|
$
|
10,303
|
|
|
|
100.0
|
%
|
|
$
|
17,144
|
|
|
|
100.0
|
%
|
|
$
|
(6,841
|
)
|
|
|
(39.9
|
)%
|
The decrease in net sales for the three
months ended September 30, 2017 compared to the corresponding period in 2016 was driven by an approximate 20% decrease in sales
volume partially offset by 9% increase in our average selling price (“ASP”). Net sales to three of our major customers
that exceeded 10% of our consolidated net sales for the three months ended September 30, 2017 were $1.8 million. Net sales
to two of our major customers that exceeded 10% of our consolidated net sales for the three months ended September 30, 2016 were
$2.0 million.
The volume decline was primarily driven
by a 22% volume decrease in Spain and a 70% volume decrease with Chinese customers, partially offset by sales to customers in India
(serviced primarily from China).
The decrease in net sales for the nine months
ended September 30, 2017 compared to the corresponding period in 2016 was driven by an approximate 3% decrease in our ASP and an
approximate 38% decrease in sales volume. The volume decline was driven by the factors mentioned above.
On a sequential basis, net sales increased
by $0.5 million, or 15.6%, compared to the three months ended June 30, 2017. This increase was primarily driven by an 8% increase
in sales volume as well as a 7% increase in ASP.
Cost of Sales
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
2017
|
|
2016
|
|
Change
|
|
2017
|
|
2016
|
|
Change
|
|
|
Amount
|
|
% of
Total
Net
Sales
|
|
Amount
|
|
% of
Total
Net
Sales
|
|
Amount
|
|
%
|
|
Amount
|
|
% of
Total
Net
Sales
|
|
Amount
|
|
% of
Total
Net
Sales
|
|
Amount
|
|
%
|
Cost of sales
|
|
$
|
3,392
|
|
|
|
96.0
|
%
|
|
$
|
4,929
|
|
|
|
122.3
|
%
|
|
$
|
(1,537
|
)
|
|
|
(31.2
|
)%
|
|
$
|
11,297
|
|
|
|
109.6
|
%
|
|
$
|
18,384
|
|
|
|
107.2
|
%
|
|
$
|
(7,087
|
)
|
|
|
(38.5
|
)%
|
The decrease in our cost of sales for the
three months ended September 30, 2017 compared to the corresponding period in 2016 was primarily driven by the 20% decrease
in sales volume combined with an approximate 1% decrease in raw material cost per unit. The lower raw material cost per unit was
primarily driven by a 2% decrease in resin costs partially offset by an 8% decrease in paperless sales mix. Direct labor decreased
by less than $0.1 million, associated with the sales volume decrease. Overhead costs decreased by $0.6 million primarily due to
continued cost-reduction actions.
The decrease in our cost of sales for the
nine months ended September 30, 2017 compared to the corresponding period in 2016 was primarily driven by the 38% decrease
in sales volume, combined with an approximate 6% decrease in raw material cost per unit. The lower raw material cost per unit was
primarily driven by a 4% decrease in resin costs partially offset by a 7% decrease in paperless sales mix. Direct labor decreased
by $0.5 million, associated with the sales volume decrease. Overhead costs decreased by $1.7 million primarily due to continued
cost-reduction actions.
Gross Profit (Loss)
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
2017
|
|
2016
|
|
Change
|
|
2017
|
|
2016
|
|
Change
|
|
|
Amount
|
|
% of
Total
Net
Sales
|
|
Amount
|
|
% of
Total
Net
Sales
|
|
Amount
|
|
%
|
|
Amount
|
|
% of
Total
Net
Sales
|
|
Amount
|
|
% of
Total
Net
Sales
|
|
Amount
|
|
%
|
Gross profit (loss)
|
|
$
|
141
|
|
|
|
4.0
|
%
|
|
$
|
(899
|
)
|
|
|
(22.3
|
)%
|
|
$
|
1,040
|
|
|
|
115.7
|
%
|
|
$
|
(994
|
)
|
|
|
(9.6
|
)%
|
|
$
|
(1,240
|
)
|
|
|
(7.2
|
)%
|
|
$
|
246
|
|
|
|
19.8
|
%
|
Gross loss, as a percentage of net sales,
improved for the three months ended September 30, 2017 compared to the corresponding period in 2016 mainly as a result of
a decrease in sales volume combined with a decrease in raw material prices.
Gross loss, as a percentage of net sales,
declined for the nine months ended September 30, 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 September 30,
|
|
Nine Months Ended September 30,
|
|
|
2017
|
|
2016
|
|
Change
|
|
2017
|
|
2016
|
|
Change
|
|
|
Amount
|
|
% of
Total
Net
Sales
|
|
Amount
|
|
% of
Total
Net
Sales
|
|
Amount
|
|
%
|
|
Amount
|
|
% of
Total
Net
Sales
|
|
Amount
|
|
% of
Total
Net
Sales
|
|
Amount
|
|
%
|
SG&A
|
|
$
|
1,554
|
|
|
|
44.0
|
%
|
|
$
|
1,798
|
|
|
|
44.6
|
%
|
|
$
|
(244
|
)
|
|
|
(13.6
|
)%
|
|
$
|
4,834
|
|
|
|
46.9
|
%
|
|
$
|
5,489
|
|
|
|
32.0
|
%
|
|
$
|
(655
|
)
|
|
|
(11.9
|
)%
|
SG&A decreased by $0.2 million for the
three months ended September 30, 2017 compared to 2016. This decrease was primarily driven by a $0.1 million decrease in labor
and benefits expense and a $0.1 million decrease in professional fees expense.
SG&A decreased by $0.7 million for the
nine months ended September 30, 2017 compared to 2016. This decrease was primarily driven by $0.3 million in lower labor and benefits,
a $0.1 million decrease each in travel, dues and fees and marketing expense and a $0.1 million reduction in restructuring expense.
SG&A expenses for the three months ended
September 30, 2017 were $1.6 million compared to $1.3 million for the three months ended June 30, 2017. The sequential increase
was driven by an increase in annual incentive compensation expense and restructuring charges.
Research and Development Expense (“R&D”)
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
2017
|
|
2016
|
|
Change
|
|
2017
|
|
2016
|
|
Change
|
|
|
Amount
|
|
% of
Total
Net
Sales
|
|
Amount
|
|
% of
Total
Net
Sales
|
|
Amount
|
|
%
|
|
Amount
|
|
% of
Total
Net
Sales
|
|
Amount
|
|
% of
Total
Net
Sales
|
|
Amount
|
|
%
|
R&D
|
|
$
|
225
|
|
|
|
6.4
|
%
|
|
$
|
308
|
|
|
|
7.6
|
%
|
|
$
|
(83
|
)
|
|
|
(26.9
|
)%
|
|
$
|
775
|
|
|
|
7.5
|
%
|
|
$
|
949
|
|
|
|
5.5
|
%
|
|
$
|
(174
|
)
|
|
|
(18.3
|
)%
|
Research and development expense decreased
by $0.1 million and $0.2 million for the three and nine months ended September 30, 2017, respectively, compared to the corresponding
periods in the prior year, 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 for the nine months ended September 30, 2017, however,
increased year over year as a result of our decreased sales. The reduction in costs in absolute dollars was primarily attributable
to a reallocation of activities of research and development personnel to support the Company’s manufacturing efforts and
general and administrative functions.
(Recovery)Provision for Bad Debt Expense
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
2017
|
|
2016
|
|
Change
|
|
2017
|
|
2016
|
|
Change
|
|
|
Amount
|
|
% of
Total
Net
Sales
|
|
Amount
|
|
% of
Total
Net
Sales
|
|
Amount
|
|
%
|
|
Amount
|
|
% of
Total
Net
Sales
|
|
Amount
|
|
% of
Total
Net
Sales
|
|
Amount
|
|
%
|
(Recovery) provision for bad debt expense
|
|
$
|
(483
|
)
|
|
|
(13.7
|
)%
|
|
$
|
651
|
|
|
|
16.2
|
%
|
|
$
|
(1,134
|
)
|
|
|
(174.2
|
)%
|
|
$
|
(863
|
)
|
|
|
(8.4
|
)%
|
|
$
|
2,010
|
|
|
|
11.7
|
%
|
|
$
|
(2,873
|
)
|
|
|
(142.9
|
)%
|
The recovery for bad debt expense recorded
during the three and nine months ended September 30, 2017 primarily related to receiving cash for previously aged accounts
receivable that were reserved for under our policy, primarily in China.
Other Income (Expense), net
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
2017
|
|
2016
|
|
Change
|
|
2017
|
|
2016
|
|
Change
|
|
|
Amount
|
|
% of
Total
Net
Sales
|
|
Amount
|
|
% of
Total
Net
Sales
|
|
Amount
|
|
%
|
|
Amount
|
|
% of
Total
Net
Sales
|
|
Amount
|
|
% of
Total
Net
Sales
|
|
Amount
|
|
%
|
Other income (expense), net
|
|
$
|
321
|
|
|
|
9.1
|
%
|
|
$
|
9
|
|
|
|
0.2
|
%
|
|
$
|
312
|
|
|
|
3,466.7
|
%
|
|
$
|
1,527
|
|
|
|
14.8
|
%
|
|
$
|
(1,690
|
)
|
|
|
(9.9
|
)%
|
|
$
|
3,217
|
|
|
|
190.4
|
%
|
In July 2015, we announced a restructuring
plan that included the closure of our Malaysia facility, effective August 2, 2015. During 2016, we entered into a definitive Purchase
and Sale Agreement (the “Malaysia Purchase Agreement”) for the land-use right and the building for a purchase price
of RM25.0 million (approximately $5.9 million as of September 30, 2017). As a result of the pending sale (which was subject to
the approval of the Johor Port Authority (the “JPA”)), a gain on assets held for sale of $0.1 million and a loss on
assets held for sale of $0.2 million, related to the foreign currency fluctuation of the Malaysian Ringgit, was recorded during
the three and nine months ended September 30, 2017, respectively. The JPA had sought to add, as a condition to its approval of
the sale, a minimum monthly container shipment requirement typical of other properties located in the port. The purchaser refused
to accept such condition and had provided notice to the Company of termination of the Malaysia Purchase Agreement if the condition
was not removed. Following further discussions, the JPA refused to remove the objected to condition from its consent. As a result,
the Company now considers the Malaysia Purchase Agreement to be terminated and plans to re-launch the sale process for its Malaysia
facility.
During the three and nine months ended September
30, 2017, our China subsidiary received interim payments of $0.2 million and $1.7 million, respectively, from our local China insurance
carrier related to the existing fire insurance claim. These payments do not represent a final settlement, and we continue
to work with our agents and the carrier to finalize the claim.
Foreign Currency Transaction Gain (Loss)
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
2017
|
|
2016
|
|
Change
|
|
2017
|
|
2016
|
|
Change
|
|
|
Amount
|
|
% of
Total
Net
Sales
|
|
Amount
|
|
% of
Total
Net
Sales
|
|
Amount
|
|
%
|
|
Amount
|
|
% of
Total
Net
Sales
|
|
Amount
|
|
% of
Total
Net
Sales
|
|
Amount
|
|
%
|
Foreign currency transaction gain (loss)
|
|
$
|
123
|
|
|
|
3.5
|
%
|
|
$
|
(64
|
)
|
|
|
(1.6
|
)%
|
|
$
|
187
|
|
|
|
292.2
|
%
|
|
$
|
48
|
|
|
|
0.5
|
%
|
|
$
|
(351
|
)
|
|
|
(2.0
|
)%
|
|
$
|
399
|
|
|
|
113.7
|
%
|
The foreign currency transaction impact
was a gain of $0.1 million for the three months ended September 30, 2017 compared to a loss of less than $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.
The foreign currency transaction gain for
the nine months ended September 30, 2017 was less than $0.1 million compared to a loss of $0.4 million for the nine months ended
September 30, 2016.
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
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
2017
|
|
2016
|
|
Change
|
|
2017
|
|
2016
|
|
Change
|
|
|
Amount
|
|
% of
Total
Net
Sales
|
|
Amount
|
|
% of
Total
Net
Sales
|
|
Amount
|
|
%
|
|
Amount
|
|
% of
Total
Net
Sales
|
|
Amount
|
|
% of
Total
Net
Sales
|
|
Amount
|
|
%
|
Income tax benefit
|
|
$
|
(173
|
)
|
|
|
(4.9
|
)%
|
|
$
|
(35
|
)
|
|
|
(0.9
|
)%
|
|
$
|
(138
|
)
|
|
|
(394.3
|
)%
|
|
$
|
(316
|
)
|
|
|
(3.1
|
)%
|
|
$
|
(50
|
)
|
|
|
(0.3
|
)%
|
|
$
|
(266
|
)
|
|
|
(532.0
|
)%
|
During the three and nine months ended September
30, 2017, we recorded an income tax benefit of $0.2 million and $0.3 million, respectively, resulting in an effective tax rate
of 16.0% and 6.9%, respectively. The income tax benefit was primarily related to the allocation of tax expense between operations
and other comprehensive income when applying the exception to the ASC 740 intra-period 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 and nine months ended September
30, 2016, we recorded an income tax benefit of less than $0.1 million and $0.1 million, respectively, resulting in an effective
tax rate of 0.9% and 0.4%, respectively. The income tax benefit was primarily related to the allocation of tax expense between
operations and other comprehensive income when applying the exception to the ASC 740 intra-period 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.
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 reportable segment:
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Reconciliation of Adjusted EBITDA to Net Loss
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
|
$
|
(1,092
|
)
|
|
$
|
(3,099
|
)
|
|
$
|
(4,725
|
)
|
|
$
|
(7,985
|
)
|
Depreciation
|
|
|
237
|
|
|
|
(468
|
)
|
|
|
(516
|
)
|
|
|
(1,418
|
)
|
Interest income (expense), net
|
|
|
1
|
|
|
|
(2
|
)
|
|
|
(6
|
)
|
|
|
39
|
|
Income tax benefit
|
|
|
173
|
|
|
|
35
|
|
|
|
316
|
|
|
|
50
|
|
Restructuring
|
|
|
(65
|
)
|
|
|
(25
|
)
|
|
|
(89
|
)
|
|
|
(219
|
)
|
Stock–based compensation
|
|
|
(136
|
)
|
|
|
(119
|
)
|
|
|
(388
|
)
|
|
|
(399
|
)
|
Proceeds received from insurance claim
|
|
|
248
|
|
|
|
—
|
|
|
|
1,723
|
|
|
|
—
|
|
Impairment of assets held for sale
|
|
|
97
|
|
|
|
—
|
|
|
|
(170
|
)
|
|
|
(1,708
|
)
|
(Loss) gain on disposal of fixed assets
|
|
|
(369
|
)
|
|
|
—
|
|
|
|
(382
|
)
|
|
|
2
|
|
Net Loss
|
|
$
|
(906
|
)
|
|
$
|
(3,678
|
)
|
|
$
|
(4,237
|
)
|
|
$
|
(11,638
|
)
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
2017
|
|
2016
|
|
Change
|
|
2017
|
|
2016
|
|
Change
|
|
|
Amount
|
|
Amount
|
|
Amount
|
|
%
|
|
Amount
|
|
Amount
|
|
Amount
|
|
%
|
Net Sales
|
|
$
|
3,533
|
|
|
$
|
4,030
|
|
|
$
|
(497
|
)
|
|
|
(12.3
|
)%
|
|
$
|
10,303
|
|
|
$
|
17,144
|
|
|
$
|
(6,841
|
)
|
|
|
(39.9
|
)%
|
Adjusted EBITDA
|
|
$
|
(1,092
|
)
|
|
$
|
(3,099
|
)
|
|
$
|
2,007
|
|
|
|
64.8
|
%
|
|
$
|
(4,725
|
)
|
|
$
|
(7,985
|
)
|
|
$
|
3,260
|
|
|
|
40.8
|
%
|
Adjusted EBITDA
as % of Segment Net Sales
|
|
|
(30.9
|
)%
|
|
|
(76.9
|
)%
|
|
|
|
|
|
|
|
|
|
|
(45.9
|
)%
|
|
|
(46.6
|
)%
|
|
|
|
|
|
|
|
|
Adjusted EBITDA as a percentage of net sales
improved for the three months ended September 30, 2017 compared to 2016 driven by lower sales volume as well as improved SG&A,
R&D, bad debt and favorable foreign currency impact.
Adjusted EBITDA as a percentage of net sales
improved for the nine months ended September 30, 2017 compared to 2016 driven by lower sales volume as well as improved SG&A,
R&D, bad debt and favorable foreign currency impact.
Adjusted EBITDA for the third quarter of
2017 was $(1.1) million compared to $(1.6) million from the second quarter of 2017. The sequential improvement was primarily due
to increased sales volume as well as improved R&D, bad debt expense and favorable foreign currency impact.
Cost-Reduction Actions
In June 2016, we eliminated certain positions
at our Spain facility, effective July 5, 2016. In connection with this, 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.
In light of continued difficulties in the
China market, on March 7, 2017 we made the decision to wind down our China manufacturing operations substantially by the end of
the second quarter of 2017. In early July we vacated our Chinese facility and relocated key personnel to temporary offices.
The decision was consistent with ongoing efforts to reorganize our encapsulant business to better align with customer geography,
to reduce losses related to unprofitable locations and to convert assets to cash for potential redeployment into more profitable
endeavors. In connection with the restructuring, the Company recorded $0.1 million of severance charges and benefits in cost of
sales and less than $0.1 million of severance and benefits in selling, general and administrative expenses during the first nine
months of 2017.
A roll-forward of the severance and other
exit cost accrual activity was as follows:
|
|
September 30,
2017
|
|
September 30,
2016
|
Balance as of beginning of year
|
|
$
|
0.3
|
|
|
$
|
0.3
|
|
Additions
|
|
|
0.2
|
|
|
|
0.2
|
|
Reductions
|
|
|
(0.2
|
)
|
|
|
(0.2
|
)
|
Reversals
|
|
|
(0.1
|
)
|
|
|
—
|
|
Balance as of end of period
|
|
$
|
0.2
|
|
|
$
|
0.3
|
|
The restructuring accrual consisted of $0.2
million and $0.3 million for severance and benefits as of September 30, 2017 and 2016, respectively.
Financial Condition, Liquidity and Capital Resources
We have funded our operations
primarily through our existing cash balance. As of September 30, 2017, our principal source of liquidity was $13.3 million of
cash and $0.6 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 are also seeking to sell our Johor,
Malaysia facility, as discussed herein. With respect to China, 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 $6.1 million of cash and $0.6 million of bank acceptance notes located in China as of
September 30, 2017 for use outside the country. Although we believe that our timely available cash will be sufficient to meet
our liquidity needs, including capital investments, 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, our financial condition and results of operations will be
negatively affected.
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, STR Spain 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 $1.8 million as of September 30, 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 initial term of the agreement was for one year, which is automatically extended unless terminated by either
party with 90 days prior written notice. As of September 30, 2017 €1.1 million ($1.3 million as of September 30, 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 seeking to sell our Johor,
Malaysia facility and its production and ancillary equipment. In connection with the shut-down and potential sale of the Malaysia
facility, we incurred approximately $1.3 million of associated non-recurring costs during the second half of 2015. In 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 the Malaysia Purchase Agreement to sell our rights to the facility for RM25.0 million (approximately $5.9 million
as of September 30, 2017). Closing of the transactionwas subject to customary conditions to closing of transactions of this type,
including the approval of the JPA. On July 31, 2017, we received a notice from Tiong Nam Logistics Solutions SDN BHD (the “Purchaser”)
purporting to terminate the Malaysia Purchase Agreement, alleging that the JPA was seeking to impose conditions on the approval
of the transfer of the facility to the Purchaser that the Purchaser found unacceptable. The conditions included a minimum monthly
container shipment requirement typical of other properties located in the port. We responded to the Purchaser disputing the validity
of the purported termination on the grounds that the condition period had not yet expired and we were continuing to seek to work
with the JPA to reduce the condition objected to by the Purchaser. Following further discussions, the JPA refused to reduce or
remove the objected to condition from its consent. As a result, we now consider the Malaysia Purchase Agreement to be terminated
pursuant to the initial notice from the Purchaser and plan to re-launch the sale process for our Malaysia facility.
In September 2017, our board
of directors approved our pursuit of a significant investment to enter the high-end food packaging business through STR
Spain. This investment opportunity, which leverages our plastics expertise, includes the purchase of new, state-of-the-art
plastics processing equipment and related building improvements along with the addition of experienced staff to pursue the
manufacture and sales of high-end food packaging products. We expect to be able to apply certain local incentives, as well as
conditional insurance proceeds available only if we invest in new plastics manufacturing equipment, thereby lowering our
expected effective initial net investment from approximately $5.0 million to approximately $2.0 million. We have also applied
for loans of up to $2.4 million from the regional government of Asturias, Spain to further support the project. Subject to
the timely purchase and installation of equipment, we expect to begin to generate revenues from this investment by 2019. The
food packaging business is highly competitive, and we cannot assure that we will be successful in this new endeavor.
In particular, we cannot assure that we will be able to successfully complete our investment in this new business on a
timely basis or within budget, if at all, or that we will be able to achieve our anticipated revenue or earnings from this
new investment. Nor can we assure that we will be able to timely collect the full amount of the insurance proceeds that
we anticipate to support this project, or that we will be able to obtain the loan we have applied for from the
regional government on favorable terms if at all.
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:
|
|
September 30, 2017
|
China
|
|
$
|
6,140
|
|
United States
|
|
|
3,286
|
|
Spain
|
|
|
3,322
|
|
Malaysia
|
|
|
514
|
|
Hong Kong
|
|
|
58
|
|
Consolidated
|
|
$
|
13,320
|
|
Due to the difficulty repatriating cash
to the U.S., among other factors, we may have limited access to the $6.1 million of cash and $0.6 million of bank acceptance notes
located in China for use outside the country. We are presently applying for a reduction of the registered capital associated with
STR China. If the application is approved, we will be entitled to move up to $5.0 million out of China, in which case the funds
would be used to settle intercompany loans, ultimately flowing back to the United States. We cannot guarantee that our application
for the reduction of registered capital will be approved timely, if at all.
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
Net cash provided by operating activities
was $0.9 million for the nine months ended September 30, 2017 compared to net cash provided by operating activities of $6.1
million for the nine months ended September 30, 2016. This decline was primarily driven by the receipt of an $8.3 million income
tax refund in the prior year. Net loss plus and minus non-cash adjustments improved by approximately $3.9 million for the nine
months ended September 30, 2017 compared to the same period in 2016. This improvement was driven primarily by the receipt of the
$1.7 million partial payment related to the insurance claim from the fire at our China facility.
Cash Flow from Investing Activities
Net cash used in investing activities
was $0.1 million and $0.2 million for the nine months ended September 30, 2017 and 2016, respectively. The 2017 capital
investments were related to the restoration and repairs to the building and equipment at our China facility following the
fire in 2016 and are included in the related insurance claim. In the first nine months of 2017, our China subsidiary received
interim payments totaling RMB11.6 million (approximately $1.7 million as of September 30, 2017) from our local China
insurance carrier related to the existing fire insurance claim. These payments do 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 $0.1 million, excluding our planned investment in the food packaging business. We expect our
investment in the food packaging business through the end of fiscal 2018 to be approximately $5.0 million. Although there can
be no assurance, we expect to be able to apply certain conditional insurance proceeds, available only if we invest in new
plastics manufacturing equipment, and local incentives to the project, thereby lowering our expected effective initial net
investment to approximately $2.0 million.
Cash Flow from Financing Activities
Net cash provided by financing activities
was $0.1 million for the nine months ended September 30, 2017 compared to net cash used in financing activities of $0.1 million
for the nine months ended September 30, 2016, 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 nine months of 2017, we were not materially affected by inflation.
Recently Issued Accounting Standards
In January 2016, the FASB issued ASU 2016-01,
“Financial Instruments - Overall: Recognition and Measurement of Financial Assets and Financial Liabilities.” The main
objective of this update is to enhance the reporting model for financial instruments to provide users of financial statements with
more decision-useful information. The new guidance addresses certain aspects of recognition, measurement, presentation, and disclosure
of financial instruments. This ASU is effective for fiscal years beginning after December 15, 2017, including interim periods within
those fiscal years. As of September 30, 2017, we do not expect this ASU to have a significant impact on its financial statements
or disclosures.