UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

(mark one)

 

x

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

 

For the Quarterly Period Ended March 31, 2016

 

Or

 

o

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

 

For the transition period from to

 

Commission file number 001–34529

 

STR Holdings, Inc.

(Exact name of registrant as specified in its charter)

 

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

 

(860) 272–4235

(Registrant’s telephone number, including area code)

 

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

 

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

 

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

 

Large accelerated filer o	Accelerated filer o
Non–accelerated filer o	Smaller reporting company x
(Do not check if a smaller reporting company)

 

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

 

At April 30, 2016, there were 18,434,348 shares of Common Stock, par value $0.01 per share, outstanding.

 

 

INDEX TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

STR Holdings, Inc. and Subsidiaries

Three Months Ended March 31, 2016

 

	PAGE NUMBER
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements	2
Condensed Consolidated Balance Sheets as of March 31, 2016 and December 31, 2015 (unaudited)	2
Condensed Consolidated Statements of Comprehensive Loss for the Three Months Ended March 31, 2016 and 2015 (unaudited)	3
Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2016 and 2015 (unaudited)	4
Notes to Condensed Consolidated Financial Statements	5
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	17
Item 3. Quantitative and Qualitative Disclosures About Market Risk	26
Item 4. Controls and Procedures	26
PART II. OTHER INFORMATION
Item 1. Legal Proceedings	27
Item 1A. Risk Factors	27
Item 5. Other Information	27
Item 6. Exhibits	28
SIGNATURE	29

 

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

STR Holdings, Inc. and Subsidiaries

CONDENSED CONSOLIDATED BALANCE SHEETS

(unaudited)

All amounts in thousands except share and per share amounts

 

  

See accompanying notes to these condensed consolidated financial statements.

 

STR Holdings, Inc. and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(unaudited)

All amounts in thousands except share and per share amounts

 

 

See accompanying notes to these condensed consolidated financial statements.

 

STR Holdings, Inc. and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

All amounts in thousands

 

 

 

See accompanying notes to these condensed consolidated financial statements.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The following discussion and analysis of the financial condition and results of our operations should be read together with our Condensed Consolidated Financial Statements and the related Notes to the Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q. This discussion contains forward-looking statements, based on current expectations and related to future events and our future financial performance, that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of many factors, including those set forth under Item 1A,—Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2015.

 

Explanatory Note: All share amounts and per share amounts below have been adjusted to reflect the one-for-three reverse stock split effected as of January 30, 2015.

 

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; (3) our reliance on a single product line; (4) our securing sales to new customers, growing net sales to existing key customers and increasing our market share, particularly in China; (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 that 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 in China; (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, particularly in China and the United States; (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 OTCQX; (25) the ability to realize synergies from the transaction with Zhenfa (as described herein); and (26) the other risks and uncertainties described under “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and in subsequent periodic reports on Form 10-K, 10-Q and 8-K. You are urged to carefully review and consider the disclosure found in our filings which are available on http://www.sec.gov or http://www.strsolar.com. Should one or more of these risks or uncertainties materialize, or should any of these assumptions prove to be incorrect, actual results may vary materially from those projected in these forward-looking statements. We undertake no obligation to publicly update any forward-looking statement contained in this Quarterly Report, whether as a result of new information, future developments or otherwise, except as may be required by law.

 

Overview

 

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

 

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

 

In September 2011, we sold our Quality Assurance (“QA”) business, which provided consumer product development, inspection, testing and audit services that enabled our retail and manufacturing clients to determine whether products met applicable safety, regulatory, quality, performance and social standards, to Underwriters Laboratories, Inc. (“UL”) for $275.0 million in cash, plus assumed cash. The historical results of operations of our former QA business have been recast and presented as discontinued operations in this Quarterly Report on Form 10-Q. Further information about our divestiture of the QA business is included in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, and Note 4, Discontinued Operations, of the Notes to Consolidated Financial Statements, included in Item 8, Financial Statements and Supplementary Data, of our Annual Report on Form 10-K for the year ended December 31, 2015.

 

Recent Developments and Strategy

 

Strategic Focus

 

For several years, we have been working to increase our market share in China through investments in people, research and development and facilities. First, we increased our Chinese sales and technical service teams to develop sound customer relationships at the tactical level and provide customer service in the local language, custom and time zone. Second, we invested in research and development to broaden the process window of our encapsulant products for use in Chinese module production processes, which differ from those found in the western markets we have historically supplied. Broadening our process window, while also maintaining and optimizing our high-quality performance attributes of long-term stability, low shrinkage, high light transmission and PID resistance, took significant effort and time. Third, we invested in local manufacturing in China to shorten the order fulfillment cycle and to comply with customer demand for domestic production. Our subsidiary, STR Solar (Hong Kong), Limited, also contracts with a contract manufacturer in China to manufacture certain of our encapsulant products to our specification. This manufacturer currently has approximately 1.1 GW of annual active manufacturing capacity. In addition, we have built out our own leased 57,500 square foot manufacturing facility located in Shajiabang, China. This facility became operational in the fourth quarter of 2014 and now has 1.0 GW of production capacity.

 

We continue to operate at a substantial net loss. Accordingly, we must increase net sales to cover our current and anticipated operating expenses, and to achieve or sustain profitability in the future. We incurred net losses from continuing operations of approximately $13.4 million and $22.7 million for the years ended December 31, 2015 and 2014, respectively. In addition, we incurred a net loss from continuing operations of $2.9 million for the three months ended March 31, 2016.

 

Given the challenges we have faced in China, we have, for some time, sought to align with Chinese companies engaged in the solar industry. As disclosed herein, our transactions with Zhenfa Energy Group Co., Ltd. a Chinese limited liability company (“Zhenfa”), in addition to providing a substantial cash dividend for our stockholders, have provided us with a strategic alliance in China to assist us in the highly competitive Chinese solar encapsulant manufacturing market.

 

Transaction with Zhenfa

 

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 and Special Dividend

 

On August 11, 2014, we entered into a Stock Purchase Agreement (the “Purchase Agreement”) with Zhenfa U.S., pursuant to which we agreed to issue and sell to Zhenfa U.S., and Zhenfa U.S. agreed to purchase from us, an aggregate of approximately 9.2 million shares (the “Purchased Shares”) of our common stock, to Zhenfa U.S. for an aggregate purchase price (“Purchased Price”) of approximately $21.7 million, or $2.35 per share (the “Transaction”). The Purchased Shares represented approximately 51% of our outstanding shares of common stock upon the closing of the Transaction (the “Closing”), which occurred on December 15, 2014.

 

In connection with the Closing, we declared a special dividend (the “Special Dividend”) on December 11, 2014 to be paid to all of our stockholders of record (other than Zhenfa U.S.) in an amount equal to $2.55 per common share on January 2, 2015. The cash used to pay the Special Dividend was paid to our transfer agent as of December 31, 2014.

 

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 provides us an option to lease a Zhenfa-owned manufacturing facility rent free for a period of five years, extendable by an additional five years at 50% of the then-current market rental rate. The Sales Service Agreement became effective on the date of Closing, has an initial term of two years following the date of Closing and is automatically extended for one year periods unless terminated earlier. The Sales Service Agreement may also be terminated by either party at such time as Zhenfa and its affiliates own less than 10% of our outstanding Common Stock.

 

CRITICAL ACCOUNTING POLICIES

 

Our discussion and analysis of our financial condition and results of operations are based upon our interim condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The preparation of these condensed consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, net sales and expenses, and related disclosures of contingent assets and liabilities. We continually evaluate our estimates, including those related to bad debts, valuation of inventory, long-lived assets, product performance matters, income taxes, stock–based compensation and deferred tax assets and liabilities. We base our estimates on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from these estimates. The accounting policies we believe to be most critical to understand our financial results and condition and that require complex and subjective management judgments are discussed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Critical Accounting Policies” in our Annual Report on Form 10–K filed with the Securities and Exchange Commission on March 22, 2016.

 

There have been no changes in our critical accounting policies during the quarter ended March 31, 2016.

 

RESULTS OF OPERATIONS

 

Condensed Consolidated Results of Operations

 

The following tables set forth our condensed consolidated results of operations for the three months ended March 31, 2016 and 2015:

 

		Three Months Ended March 31,
		2016				2015
Net sales		$	6,423			$	6,863
Cost of sales			6,824				7,009
Gross loss			(401	)			(146	)
Selling, general and administrative expenses			1,909				2,582
Research and development expense			327				352
Provision (recovery) for bad debt expense			425				(43	)
Operating loss			(3,062	)			(3,037	)
Interest (expense) income, net			(11	)			4
Foreign currency transaction (loss) gain			(88	)			480
Loss from continuing operations before income tax (benefit) expense			(3,161	)			(2,553	)
Income tax (benefit) expense from continuing operations			(214	)			53
Net loss from continuing operations		$	(2,947	)		$	(2,606	)

 

Net Sales

 

		Three Months Ended March 31,
		2016								2015								Change
		Amount				% of Total Net Sales				Amount				% of Total Net Sales				Amount				%
Net sales		$	6,423				100.0	%		$	6,863				100	%		$	(440	)			(6.4	)%

 

The decrease in net sales for the three months ended March 31, 2016 compared to the corresponding period in 2015 was driven by an approximate 3% decrease in our average selling price (“ASP”) and an approximate 4% decrease in sales volume.

 

The price decline was primarily caused by foreign exchange translation of the Euro compared to the U.S Dollar, which is our reporting currency. The average Euro exchange rate decreased by 3% in the first quarter of 2016 compared to the corresponding 2015 period. Ex-currency impact, our ASP increased by 1% mainly due to an improved ASP at our Spanish facility.

 

The volume decline was primarily driven by a reduction of net sales with our largest customer, who modified its OEM manufacturing partner footprint in the latter part of 2014 and announced the significant reduction of its OEM module business by the end of 2015 and an increase in its in-house module production in China. Excluding this customer, with whom we are trying to re-engage business in China, volume increased by approximately 47% with our remaining customers, primarily driven by a 117% volume increase in China as well as growth in India.

 

We are currently in the qualification process with potential additional customers. The qualification process must occur with each prospective customer. The internal qualification process and timing are managed and customized by each module manufacturer. In addition, we may also experience ramp delays after module manufacturers complete the internal certification process and introduce our encapsulants in their mass-production process for the first time. If our encapsulants do not perform similarly during initial module production as they did during certification and internal testing, we may have to perform additional engineering and laboratory testing, and in some cases may have to change our encapsulant formulation, which would require re-qualification testing. Any production ramp issues that we may experience with potential customers will require additional costs to resolve and would reduce our net sales, both of which would negatively impact the results of our operations and financial condition. Moreover, even if we successfully complete a qualification process for a customer, we cannot assure if or when we may receive any orders from such customer on acceptable terms if at all.

 

Cost of Sales

 

		Three Months Ended March 31,
		2016								2015								Change
		Amount				% of Total Net Sales				Amount				% of Total Net Sales				Amount				%
Cost of sales		$	6,824				106.2	%		$	7,009				102.1	%		$	(185	)			(2.6	)%

  

The decrease in our cost of sales for the three months ended March 31, 2016 compared to the corresponding period in 2015 was primarily driven by the 4% decrease in sales volume partially offset by an approximate 3% increase in raw material cost per unit. The higher raw material cost per unit was primarily driven by both a higher concentration of specialty laminated product sales, which carry higher raw material costs, as well as inefficiencies at our China factory, which have since been improved, partially offset by foreign currency translation benefit received by our Spanish plant related to a 3% decrease in the Euro for the three months ended March 31, 2016 versus the corresponding 2015 period. Direct labor decreased by less than $0.1 million associated with the sales volume decrease. Overhead costs decreased by $0.2 million primarily due to continued cost-reduction actions.

 

Gross Loss

 

		Three Months Ended March 31,
		2016								2015								Change
		Amount				% of Total Net Sales				Amount				% of Total Net Sales				Amount				%
Gross loss		$	(401	)			(6.2	)%		$	(146	)			(2.1	)%		$	(255	)			(174.7	)%

  

Gross loss as a percentage of net sales declined for the three months ended March 31, 2016 compared to the corresponding period in 2015 mainly, as a result of a decrease in sales volume and increase in raw material cost per unit as described above partially offset by foreign currency translation benefit received by our Spanish plant.

 

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

 

		Three Months Ended March 31,
		2016								2015								Change
		Amount				% of Total Net Sales				Amount				% of Total Net Sales				Amount				%
SG&A		$	1,909				29.7	%		$	2,582				37.6	%		$	(673	)			(26.1	)%

 

SG&A decreased $0.7 million for the three months ended March 31, 2016 compared to 2015. This decrease was primarily driven by a $0.3 million decrease in labor and benefits, a $0.1 million decrease in annual incentive compensation, a $0.1 million decrease in travel and a $0.1 million decrease in professional fees.

 

Research and Development Expense (“R&D”)

 

 

		Three Months Ended March 31,
		2016								2015								Change
		Amount				% of Total Net Sales				Amount				% of Total Net Sales				Amount				%
Research and development expense		$	327				5.1	%		$	352				5.1	%		$	(25	)			(7.1	)%

  

Research and development expense decreased by less than $0.1 million for the three months ended March 31, 2016 compared to 2015, as our research and development staffing and activity has remained relatively constant during the two periods.

 

Provision (Recovery) for Bad Debt Expense

 

		Three Months Ended March 31,
		2016								2015								Change
		Amount				% of Total Net Sales				Amount				% of Total Net Sales				Amount				%
Provision (recovery) for bad debt expense		$	425				6.6	%		$	(43	)			(0.6	)%		$	468				1,088.4	%

 

The provision for bad debt expense recorded during the three months ended March 31, 2016 primarily related to the aging of certain Chinese customers, partially offset by receiving cash for previously aged accounts receivable that were reserved for under our policy.

 

Interest (Expense) Income, Net

 

		Three Months Ended March 31,
		2016								2015								Change
		Amount				% of Total Net Sales				Amount				% of Total Net Sales				Amount				%
Interest (expense) income, net		$	(11	)			(0.2	)%		$	4				0.1	%		$	(15	)			(375.0	)%

 

Interest (expense) income, net decreased during the three months ended March 31, 2016 compared to the corresponding 2015 period primarily driven by interest paid to Eurofactor in connection with the Spanish factoring arrangement.

 

Foreign Currency Transaction (Loss) Gain

 

 

		Three Months Ended March 31,
		2016								2015								Change
		Amount				% of Total Net Sales				Amount				% of Total Net Sales				Amount				%
Foreign currency transaction (loss) gain		$	(88	)			(1.4	)%		$	480				7.0	%		$	(568	)			(118.3	)%

 

 

The foreign currency transaction impact was a loss of $0.1 million for the three months ended March 31, 2016 compared to a gain of $0.5 million in the corresponding 2015 period. This change was primarily the result of volatility in the Euro spot exchange rate versus the U.S. dollar, which increased 6% for the three months ended March 31, 2016 compared to a 22% decrease during the corresponding 2015 period. Our primary foreign currency exposures are intercompany loans and U.S. dollar cash balances in foreign locations.

 

Income Tax (Benefit) Expense from Continuing Operations

 

		Three Months Ended March 31,
		2016								2015								Change
		Amount				% of Total Net Sales				Amount				% of Total Net Sales				Amount				%
Income tax (benefit) expense		$	(214	)			(3.3	)%		$	53				0.8	%		$	(267	)			(503.8	)%

 

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

 

During the three months ended March 31, 2015, we recorded an income tax expense of $0.1 million, resulting in an effective tax rate of (2.1)%. The tax provision reflects discrete items in the quarter primarily relating to interest on uncertain tax positions resulting in a $0.1 million expense in the quarter. The projected annual effective tax rate, excluding these discrete items 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, Adjusted EBITDA and non-GAAP loss per share from continuing operations (“non-GAAP EPS”). 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 and non-GAAP EPS is described in further detail below. 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 continuing operations by our reportable segment:

 

		Three Months Ended March 31,
		2016				2015
Reconciliation of Adjusted EBITDA to Net Loss from Continuing Operations
Adjusted EBITDA		$	(2,515	)		$	(1,769	)
Depreciation			(474	)			(490	)
Interest income, net			(11	)			4
Income tax benefit (expense)			214				(53	)
Restructuring			(2	)			(145	)
Stock–based compensation			(159	)			(153	)
Net Loss from Continuing Operations		$	(2,947	)		$	(2,606	)

 

 

		Three Months Ended March 31,
		2016				2015				Change
		Amount				Amount				Amount				%
Net Sales			6,423			$	6,863			$	(440	)			(6.4	)%
Adjusted EBITDA			(2,515			$	(1,769			$	(746	)			(42.2	)%
Adjusted EBITDA as % of Segment Net Sales			(39.2	)%			(25.8	)%

 

Adjusted EBITDA as a percentage of net sales declined for the three months ended March 31, 2016 compared to 2015 driven by an unfavorable impact from foreign currency and higher gross loss and bad debt expense partially offset by lower SG&A.

 

Cost-Reduction Actions

 

In July 2015, following a decision by our largest customer to exit its OEM module production in Malaysia, we reassessed the continued operations of our Malaysia facility and decided to close our Malaysia facility, effective August 2, 2015. During 2015 we recognized $0.3 million of severance and benefits as well as a $0.5 million inventory write down in cost of sales and $0.5 million of severance and benefits in selling, general and administrative expenses related to the Malaysia facility closure.

 

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

 

		March 31, 2016				March 31, 2015
Balance as of beginning of year		$	0.3			$	0.1
Additions			—				0.1
Cash utilization			—				(0.1	)
Balance as of end of period		$	0.3			$	0.1

 

The restructuring accrual consists of $0.3 million and $0.1 million for severance and benefits as of March 31, 2016 and 2015, respectively.

 

Non-GAAP Loss Per Share from Continuing Operations

 

To supplement our consolidated financial statements, we use a non-GAAP financial measure called non-GAAP EPS. Non-GAAP EPS is defined as net loss from continuing operations not including the tax effected impact of deferred financing costs, stock-based compensation and restructuring divided by the weighted-averages shares outstanding and is defined for the periods presented in the following table. The weighted-average common share count for GAAP reporting does not include the number of potentially dilutive common shares since these potential shares do not share in any loss generated and are anti-dilutive. However, we have included these shares in our non-GAAP EPS calculations when we have generated non-GAAP net earnings and such shares are dilutive in those periods. Refer to the weighted-average shares reconciliation below. All amounts are stated in thousands except per share amounts and unless otherwise noted.

 

We believe that non-GAAP EPS provides meaningful supplemental information regarding our performance by excluding certain expenses that may not be indicative of the core business operating results and may help in comparing current period results with those of prior periods as well as with our peers. Non-GAAP EPS is one of the main metrics used by management and our Board of Directors to plan and measure our operating performance.

 

Although we use non-GAAP EPS as a measure to assess the operating performance of our business, non-GAAP EPS has significant limitations as an analytical tool because it excludes certain material costs. Because non-GAAP EPS does not account for these expenses, its utility as a measure of our operating performance has material limitations. The omission of restructuring and stock-based compensation expense limits the usefulness of this measure. Non-GAAP EPS also adjusts for the related tax effects of the adjustments and the payment of taxes is a necessary element of our operations. Because of these limitations, management does not view non-GAAP EPS in isolation and uses other measures, such as Adjusted EBITDA, net loss from continuing operations, net sales, gross loss and operating loss, to measure operating performance.

 

		Three Months Ended				Three Months Ended
		March 31, 2016				March 31, 2015
		(unaudited)				(unaudited)
Net loss from continuing operations		$	(2,947	)		$	(2,606	)
Adjustments to net loss from continuing operations:
Stock-based compensation expense			159				153
Restructuring			2				145
Tax effect of adjustments			(49	)			(105	)
Non-GAAP net loss from continuing operations		$	(2,835	)		$	(2,413	)
Basic shares outstanding GAAP			18,265,845				18,070,384
Diluted shares outstanding GAAP			18,265,845				18,070,384
Stock options			—				—
Restricted common stock			—				—
Diluted shares outstanding non-GAAP			18,265,845				18,070,384
Diluted net loss per share from continuing operations		$	(0.16	)		$	(0.14	)
Diluted non-GAAP net loss per share from continuing operations		$	(0.16	)		$	(0.13	)

 

Financial Condition, Liquidity and Capital Resources

 

We have funded our operations primarily through our existing cash balance. As of March 31, 2016, our principal source of liquidity was $6.6 million of cash, $0.2 million of bank acceptance notes, $2.1 million due from Zhenfa and $8.3 million of income tax receivables. Our principal needs for liquidity have been, and for the foreseeable future we expect will continue to be, for working capital and capital investments. Payment terms are currently longer in China than in many other locations, which has delayed cash receipts from certain of our customers. Although we believe that our available cash will be sufficient to meet our liquidity needs, including for capital investments (mainly equipment upgrades and information technology needs) through at least the next 12 months, if we are unable to collect our accounts receivable, amounts due from Zhenfa or income tax receivable or fail to receive payment of these in a timely fashion or obtain bank acceptance notes from our customers, our financial condition and results of operations will be negatively affected. In order to mitigate this risk, we are attempting to obtain bank acceptance notes with respect to the accounts receivable from certain of our Chinese customers and actively pursuing the collection of our income tax receivable as well as the balance due from Zhenfa.

 

In October 2015, our wholly owned Spanish subsidiary, Specialized Technology Resources España S.A., entered into a factoring agreement to sell, with recourse, certain European, U.S. and other foreign company-based receivables to Eurofactor Hispania S.A.U. Under the current terms of the factoring agreement, the maximum amount of outstanding advances at any one time is €1.5 million ($1.7 million as of March 31, 2016), which is subject to adjustment based on the level of eligible receivables, restrictions on concentrations of receivables and the historical performance of the receivables sold. The annual discount rate is 2% plus EURIBOR for Euro-denominated receivables and 2% plus LIBOR for all other currencies. The term of the agreement is for one year, which will be automatically extended unless terminated by either party with 90 days prior written notice. As of March 31, 2016 €0.2 million ($0.2 million as of March 31, 2016) was available under the factoring agreement based upon receivables outstanding.

 

In connection with our continued efforts to return our encapsulant business to profitability, on July 24, 2015 our Board approved a restructuring of our encapsulant business, which included the shut-down of our Malaysia manufacturing facility effective August 2, 2015. We are in the process of selling the Malaysia facility and its production and ancillary equipment. In connection with the shut-down and sale of the Malaysia facility, we incurred approximately $1.3 million of associated non-recurring costs during the second half of 2015. We cannot assure that we will be able to sell our Malaysian real estate on a timely basis or on favorable terms, if at all, that the costs of closure of that facility will not be higher than anticipated. Should market conditions warrant, and provided we have not yet sold the associated property plant and equipment, we may consider restarting the facility, among other options, to provide us with additional capacity. Returning the facility to operational condition would entail replacing some ancillary equipment sold at auction and rebuilding the manufacturing team.

 

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

 

If we are not 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, bank acceptance notes and income tax receivable, leveraging our European factoring facility and other potential working capital financing arrangements that we are currently seeking.

 

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

 

		March 31, 2016
United States		$	2,338
Spain			2,518
Malaysia			317
China			1,310
Hong Kong			148
Consolidated		$	6,631

 

Due to the difficulty to repatriate cash to the U.S., the $1.3 million of cash and cash equivalents located in China is expected to remain in China for working capital needs.

 

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 therefore, this cash balance is available for dividend repatriation. We have accrued for this tax liability. 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 a portion of our working capital requirements and capital investment in China. Our goal is to achieve and maintain self-sufficiency in for each of our manufacturing locations to meet its cash requirements. We cannot assure that we will continue to fund the manufacturing operations in any location if such operations would require investment of additional cash from other jurisdictions.

 

Cash Flows

 

Cash Flow from Operating Activities from Continuing Operations

 

Net cash used in operating activities from continuing operations was $2.1 million for the three months ended March 31, 2016 compared to $1.7 million for the three months ended March 31, 2015. Net loss plus and minus non-cash adjustments (“cash loss”) increased by approximately $0.1 million for the three months ended March 31, 2016 compared to the same period in 2015. We incurred lower working capital investment associated with our sequential sales decrease and tighter inventory management. In addition, we incurred less than $0.1 million of restructuring payments made in the first quarter of 2016, compared to approximately $0.1 million of restructuring payments and a one-time $0.2 million deferred compensation payment in the first quarter of 2015.

 

Cash Flow from Operating Activities from Discontinued Operations

 

Net cash provided by operating activities from discontinued operations was less than $0.1 million for the three months ended March 31, 2015 due to receiving cash refunds for a prior state tax receivable.

 

Cash Flow from Investing Activities from Continuing Operations

 

Net cash used in investing activities was less than $0.1 million and $1.4 million for the three months ended March 31, 2016 and 2015, respectively. The 2015 capital investments related to the building improvements at our Enfield, Connecticut location and the continued build out of our leased facility in China. We expect remaining 2016 consolidated capital expenditures to be less than $0.5 million.

 

Free Cash Flow

 

We use an alternative non-GAAP measure of liquidity called free cash flow. We define free cash flow as cash used in operating activities from continuing operations less capital investments. Free cash flow was $(2.1) million and $(3.1) million in the three months ended March 31, 2016 and 2015, respectively. We believe free cash flow is an important measure of our overall liquidity and our ability to fund future growth and provide a return to stockholders. Free cash flow does not reflect, among other things, mandatory debt service, other borrowing activity, discretionary dividends on our common stock and acquisitions.

 

We consider free cash flow to be a liquidity measure that provides useful information to management and investors about the amount of cash generated or used by the business that, after the funding of R&D, required investment in working capital and acquisition of property and equipment, including production equipment, can be used for strategic opportunities, including reinvestment in our business, making strategic acquisitions, returning capital to stockholders and strengthening the Condensed Consolidated Balance Sheets. We also use this non-GAAP financial measure for financial and operational decision making and as a means to evaluate period-to-period comparisons. Analysis of free cash flow also facilitates management’s comparisons of our operating results to competitors’ operating results. A limitation of using free cash flow versus the GAAP measure of cash used by operating activities from continuing operations as a means for evaluating our business is that free cash flow does not represent the total increase or decrease in the cash balance from operations for the period. We compensate for this limitation by providing information about the changes in our cash balance on the face of the Condensed Consolidated Statements of Cash Flows and in the above discussion.

 

		Three Months Ended March 31,
		2016				2015
		(unaudited)				(unaudited)
Cash used in operating activities		$	(2,091	)		$	(1,672	)
Less: capital investments			(9	)			(1,392	)
Free cash flow		$	(2,100	)		$	(3,064	)

 

Cash Flow from Financing Activities from Continuing Operations

 

Net cash provided by financing activities was $0.9 million for the three months ended March 31, 2016 primarily due to our Spanish subsidiary receiving funds related to the factoring agreement. Net cash used in financing activities for the three months ended March 31, 2015 was less than $0.1 million primarily due to clean-up payments related to the Special Dividend.

 

Off-Balance Sheet Arrangements

 

We have no off–balance sheet financing arrangements.

 

Effects of Inflation

 

Inflation generally affects us by increasing costs of raw materials, labor and equipment. During the first three months of 2016, we were not materially affected by inflation.

 

Recently Issued Accounting Standards

 

In January 2016, 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. We are currently evaluating the new guidance to determine the impact it may have on our consolidated financial statements.

 

In March 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update ("ASU") 2016-09, "Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting." The objective of this update is to simplify several aspects of the accounting for employee share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. This ASU is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. Early adoption is permitted. We are currently evaluating the new guidance to determine the impact it may have on its consolidated financial statements.

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

 

We are not required to provide this Item 7A because we are a smaller reporting company.

 

Item 4. Controls and Procedures

 

Disclosure Controls and Procedures

 

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

 

As of March 31, 2016, we carried out an evaluation, under the supervision and with the participation of our management, including our Chairman, President and Chief Executive Officer and our Vice President, Chief Financial Officer and Chief Accounting Officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act. Based upon that evaluation, our Chairman, President and Chief Executive Officer and our Vice President, Chief Financial Officer and Chief Accounting Officer concluded that our disclosure controls and procedures are effective.

 

Changes in Internal Control over Financial Reporting

 

There have not been any changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the first fiscal quarter of our fiscal year ended December 31, 2016 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

PART II. OTHER INFORMATION

 

Item 1. Legal Proceedings

 

From time to time, we are and have been a party to litigation that arises in the ordinary course of our business. There were no material legal proceedings pending during the quarter ended March 31, 2016.

 

Item 1A. Risk Factors

 

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2015, which could materially affect our business, financial position and results of operations. There have been no material changes to the risk factors as disclosed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2015.

 

Item 5. Other Information

 

None.

Item 6. Exhibits

 

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

 

 

SIGNATURE

 

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

 

	STR HOLDINGS, INC.
	(Registrant)
Date: May 10, 2016	/s/ Thomas D. Vitro
	Name:	Thomas D. Vitro
	Title:	Vice President & Chief Financial Officer
		(Duly Authorized Officer and Principal Financial Officer)

 

 

 

 

 

 

 

 

 

29

---