Item 1. Financial Statements
STR Holdings, Inc. and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
All amounts in thousands except share
and per share amounts
|
|
March 31,
2016
|
|
December 31,
2015
|
ASSETS
|
|
|
|
|
|
|
|
|
CURRENT ASSETS
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
6,631
|
|
|
$
|
7,703
|
|
Bank acceptance notes
|
|
|
155
|
|
|
|
92
|
|
Due from Zhenfa
|
|
|
2,073
|
|
|
|
2,058
|
|
Accounts receivable, trade, less allowances for doubtful accounts of $879 and $499 in 2016 and 2015, respectively
|
|
|
9,401
|
|
|
|
9,112
|
|
Inventories, net
|
|
|
3,548
|
|
|
|
4,806
|
|
Income tax receivable
|
|
|
8,252
|
|
|
|
8,252
|
|
Prepaid expenses
|
|
|
1,306
|
|
|
|
1,221
|
|
Other current assets
|
|
|
2,696
|
|
|
|
2,044
|
|
Total current assets
|
|
|
34,062
|
|
|
|
35,288
|
|
Property, plant and equipment, net
|
|
|
10,473
|
|
|
|
10,581
|
|
Assets held for sale (Note 8)
|
|
|
7,898
|
|
|
|
7,899
|
|
Other long-term assets
|
|
|
157
|
|
|
|
148
|
|
Total assets
|
|
$
|
52,590
|
|
|
$
|
53,916
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
CURRENT LIABILITIES
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
2,493
|
|
|
$
|
2,192
|
|
Accrued liabilities (Note 9)
|
|
|
2,876
|
|
|
|
3,080
|
|
Income taxes payable
|
|
|
994
|
|
|
|
989
|
|
Due to factoring
|
|
|
1,450
|
|
|
|
483
|
|
Total current liabilities
|
|
|
7,813
|
|
|
|
6,744
|
|
Total liabilities
|
|
|
7,813
|
|
|
|
6,744
|
|
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; 18,335,492 and 18,334,252 issued and outstanding, respectively, in 2016 and 18,261,807 and
18,260,567 issued and outstanding, respectively, in 2015
|
|
|
183
|
|
|
|
182
|
|
Treasury stock, 1,240 shares at cost
|
|
|
(57
|
)
|
|
|
(57
|
)
|
Additional paid–in capital
|
|
|
231,153
|
|
|
|
230,999
|
|
Accumulated deficit
|
|
|
(181,048
|
)
|
|
|
(178,101
|
)
|
Accumulated other comprehensive loss, net
|
|
|
(5,454
|
)
|
|
|
(5,851
|
)
|
Total stockholders’ equity
|
|
|
44,777
|
|
|
|
47,172
|
|
Total liabilities and stockholders’ equity
|
|
$
|
52,590
|
|
|
$
|
53,916
|
|
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
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
|
)
|
Discontinued operations:
|
|
|
|
|
|
|
|
|
Income tax benefit from discontinued operations
|
|
|
—
|
|
|
|
—
|
|
Net earnings from discontinued operations
|
|
|
—
|
|
|
|
—
|
|
Net loss
|
|
|
(2,947
|
)
|
|
|
(2,606
|
)
|
Other comprehensive loss:
|
|
|
|
|
|
|
|
|
Foreign currency translation (net of tax effect of $193 and $0, respectively)
|
|
|
397
|
|
|
|
(1,521
|
)
|
Other comprehensive loss
|
|
|
397
|
|
|
|
(1,521
|
)
|
Comprehensive loss
|
|
$
|
(2,550
|
)
|
|
$
|
(4,127
|
)
|
Net loss per share (Note 4):
|
|
|
|
|
|
|
|
|
Basic from continuing operations
|
|
$
|
(0.16
|
)
|
|
$
|
(0.14
|
)
|
Basic from discontinued operations
|
|
|
—
|
|
|
|
—
|
|
Basic
|
|
$
|
(0.16
|
)
|
|
$
|
(0.14
|
)
|
|
|
|
|
|
|
|
|
|
Diluted from continuing operations
|
|
$
|
(0.16
|
)
|
|
$
|
(0.14
|
)
|
Diluted from discontinued operations
|
|
|
—
|
|
|
|
—
|
|
Diluted
|
|
$
|
(0.16
|
)
|
|
$
|
(0.14
|
)
|
Weighted–average shares outstanding (Note 4):
|
|
|
|
|
|
|
|
|
Basic
|
|
|
18,265,845
|
|
|
|
18,070,384
|
|
Diluted
|
|
|
18,265,845
|
|
|
|
18,070,384
|
|
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
|
|
Three Months Ended March 31,
|
|
|
2016
|
|
2015
|
OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(2,947
|
)
|
|
$
|
(2,606
|
)
|
Net earnings from discontinued operations
|
|
|
—
|
|
|
|
—
|
|
Net loss from continuing operations
|
|
|
(2,947
|
)
|
|
|
(2,606
|
)
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
474
|
|
|
|
490
|
|
Stock-based compensation expense
|
|
|
159
|
|
|
|
153
|
|
Provision (recovery) for bad debt expense
|
|
|
425
|
|
|
|
(43
|
)
|
Provision for deferred taxes
|
|
|
(214
|
)
|
|
|
—
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(556
|
)
|
|
|
(1,358
|
)
|
Due from Zhenfa
|
|
|
—
|
|
|
|
—
|
|
Inventories, net
|
|
|
1,360
|
|
|
|
353
|
|
Other current assets
|
|
|
(1,055
|
)
|
|
|
(827
|
)
|
Accounts payable
|
|
|
257
|
|
|
|
1,105
|
|
Accrued liabilities
|
|
|
93
|
|
|
|
(197
|
)
|
Income taxes payable
|
|
|
5
|
|
|
|
3
|
|
Other, net
|
|
|
(92
|
)
|
|
|
1,255
|
|
Net cash used in continuing operations
|
|
|
(2,091
|
)
|
|
|
(1,672
|
)
|
Net cash provided by discontinued operations
|
|
|
—
|
|
|
|
9
|
|
Total net cash used in operating activities
|
|
|
(2,091
|
)
|
|
|
(1,663
|
)
|
|
|
|
|
|
|
|
|
|
INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
Capital investments
|
|
|
(9
|
)
|
|
|
(1,392
|
)
|
Net cash used in continuing operations
|
|
|
(9
|
)
|
|
|
(1,392
|
)
|
Net cash used in discontinued operations
|
|
|
—
|
|
|
|
—
|
|
Total net cash used in investing activities
|
|
|
(9
|
)
|
|
|
(1,392
|
)
|
|
|
|
|
|
|
|
|
|
FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
Special dividend
|
|
|
—
|
|
|
|
(20
|
)
|
Shared services arrangement with Zhenfa
|
|
|
28
|
|
|
|
—
|
|
Factoring arrangement
|
|
|
908
|
|
|
|
—
|
|
Common stock issued under employee stock purchase plan
|
|
|
—
|
|
|
|
1
|
|
Net cash provided by (used in) continuing operations
|
|
|
936
|
|
|
|
(19
|
)
|
Net cash used in discontinued operations
|
|
|
—
|
|
|
|
—
|
|
Total net cash provided by (used in) financing activities
|
|
|
936
|
|
|
|
(19
|
)
|
Effect of exchange rate changes on cash
|
|
|
92
|
|
|
|
(210
|
)
|
|
|
|
|
|
|
|
|
|
Net change in cash and cash equivalents
|
|
|
(1,072
|
)
|
|
|
(3,284
|
)
|
Cash and cash equivalents, beginning of period
|
|
|
7,703
|
|
|
|
16,552
|
|
Cash and cash equivalents, end of period
|
|
$
|
6,631
|
|
|
$
|
13,268
|
|
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, 2015, included in STR Holdings, Inc.’s (the “Company”)
Annual Report on Form 10–K filed with the SEC on March 22, 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.
On January 30, 2015, the Company filed
a Certificate of Amendment to its Restated Certificate of Incorporation in order to effect a one-for-three reverse split of its
common stock and its common stock began trading on the New York Stock Exchange (“NYSE”) on a split-adjusted basis on
February 2, 2015. No fractional shares were issued in connection with the reverse stock split. As a result of the reverse stock
split, the number of issued and outstanding shares of the Company’s common stock was reduced to 18,074,291 and 18,073,051,
respectively, at December 31, 2014. The change in the number of shares resulting from the reverse stock split has been applied
retroactively to all shares and per share amounts presented in the condensed consolidated financial statements and accompanying
notes.
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.
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. The Company is currently evaluating the new guidance to determine the impact it may have on its 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. The Company is currently
evaluating the new guidance to determine the impact it may have on its consolidated financial statements.
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 and Special Dividend
On August 11, 2014, the Company entered into a Stock Purchase
Agreement (the “Purchase Agreement”) with Zhenfa U.S., pursuant to which the Company agreed to issue and sell to Zhenfa
U.S., and Zhenfa U.S. agreed to purchase from the Company, an aggregate of 9,210,710 shares (the “Purchased Shares”)
of its authorized but unissued common stock, par value $0.01 per share, for an aggregate purchase price of approximately $21,664 (the “Purchase
Price”), or $2.35 per share (the “Transaction”). The Purchased Shares represented approximately 51% of the Company’s
outstanding shares of common stock upon the closing of the Transaction, which occurred on December 15, 2014 (the “Closing
Date”).
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 3—TRANSACTION WITH ZHEN FA NEW ENERGY (U.S.) CO.,
LTD. AND ZHENFA ENERGY GROUP CO., LTD.
(Continued)
In connection with the Closing, the Company
declared a special dividend (the “Special Dividend”) on December 11, 2014 to be paid to all of its stockholders of
record (other than Zhenfa U.S.) in an amount equal to $2.55 per common share on January 2, 2015.
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.
In connection with the closing of the Transaction, the Company declared
a special dividend (the “Special Dividend”) on December 11, 2014 to be paid to all of its stockholders of record (other
than Zhenfa U.S.) in an amount equal to $2.55 per common share on January 2, 2015.
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 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 provides the Company 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 Company has not exercised this option as of March 31, 2016. The Sales Service Agreement became effective on the Closing Date,
has an initial term of two years following the Closing Date and is automatically extended 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.
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 4—LOSS PER SHARE
The calculation of basic and diluted net
loss per share for the periods presented is as follows:
|
|
Three Months Ended
March 31,
|
|
|
2016
|
|
2015
|
Basic and diluted net loss per share
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
Net loss from continuing operations
|
|
$
|
(2,947
|
)
|
|
$
|
(2,606
|
)
|
Net earnings from discontinued operations
|
|
|
—
|
|
|
|
—
|
|
Net loss
|
|
$
|
(2,947
|
)
|
|
$
|
(2,606
|
)
|
Denominator:
|
|
|
|
|
|
|
|
|
Weighted–average shares outstanding
|
|
|
18,265,845
|
|
|
|
18,070,384
|
|
Add:
|
|
|
|
|
|
|
|
|
Dilutive effect of stock options
|
|
|
—
|
|
|
|
—
|
|
Dilutive effect of restricted common stock
|
|
|
—
|
|
|
|
—
|
|
Weighted–average shares outstanding with dilution
|
|
|
18,265,845
|
|
|
|
18,070,384
|
|
|
|
|
|
|
|
|
|
|
Net loss per share:
|
|
|
|
|
|
|
|
|
Basic from continuing operations
|
|
$
|
(0.16
|
)
|
|
$
|
(0.14
|
)
|
Basic from discontinued operations
|
|
|
—
|
|
|
|
—
|
|
Basic
|
|
$
|
(0.16
|
)
|
|
$
|
(0.14
|
)
|
|
|
|
|
|
|
|
|
|
Diluted from continuing operations
|
|
$
|
(0.16
|
)
|
|
$
|
(0.14
|
)
|
Diluted from discontinued operations
|
|
|
—
|
|
|
|
—
|
|
Diluted
|
|
$
|
(0.16
|
)
|
|
$
|
(0.14
|
)
|
Due to the loss from continuing operations for the three months ended
March 31, 2016 and 2015, the computation of dilutive weighted-average common shares outstanding does not include 0 and 70,522 stock
options, respectively and any shares of unvested restricted common stock as these potential awards do not share in any loss generated
by the Company and are anti-dilutive.
Because the effect would be anti-dilutive,
there were 12 shares of common stock issuable upon the exercise of options issued under the STR Holdings, Inc. 2010 Employee Stock
Purchase Plan (“ESPP”) that were not included in the computation of diluted weighted-average shares outstanding for
the three months ended March 31, 2015. As of October 1, 2015, the Company terminated the ESPP.
Because the effect would be anti-dilutive,
there were 0 and 1,964,665 stock options outstanding that were not included in the computation of diluted weighted-average shares
outstanding for the three months ended March 31, 2016 and 2015, respectively.
NOTE 5—BANK ACCEPTANCE NOTES
Customers in China may settle their amounts
owed to the Company with bank acceptance notes. Bank acceptance notes are draft instruments that are guaranteed to be paid at maturity
by the respective 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.
Bank acceptance notes consists of the following:
|
|
March 31,
2016
|
|
December 31,
2015
|
Balance as of beginning of period
|
|
$
|
92
|
|
|
$
|
—
|
|
Received from customers
|
|
|
341
|
|
|
|
5,874
|
|
Converted to cash
|
|
|
—
|
|
|
|
(1,566
|
)
|
Paid to suppliers
|
|
|
(279
|
)
|
|
|
(4,216
|
)
|
Foreign exchange impact
|
|
|
1
|
|
|
|
—
|
|
Balance as of end of period
|
|
$
|
155
|
|
|
$
|
92
|
|
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 5—BANK ACCEPTANCE NOTES (Continued)
All of the bank acceptance notes as of March
31, 2016 mature prior to June 30, 2016. Due to the short time to maturity, the Company believes the bank acceptance notes’
carrying value approximates fair value. As of March 31, 2016, the annual effective discount rate for all of the bank acceptance
notes was 3.3%.
NOTE 6—INVENTORIES
Inventories consist of the following:
|
|
March 31,
2016
|
|
December 31,
2015
|
Finished goods
|
|
$
|
767
|
|
|
$
|
872
|
|
Raw materials
|
|
|
3,234
|
|
|
|
4,630
|
|
Reserve
|
|
|
(453
|
)
|
|
|
(696
|
)
|
Inventories, net
|
|
$
|
3,548
|
|
|
$
|
4,806
|
|
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 March 31, 2016 and December 31, 2015, 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 it determined that its history of actual net losses was negative evidence that should be given more weight
than future projections. The Company determined the recording of valuation allowances 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’s carrying value was recoverable
and depreciable lives were appropriate as of March 31, 2016. 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 Malaysia, 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 Malaysia facility effective August 2, 2015. Subsequent to the announcement, the Company engaged advisors and is actively trying to sell its land-use right, building and other fixed assets located at the 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 Malaysian 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 March 31,
2106 and December 31, 2015 as assets held for sale. A loss on reclassification of $722 was recorded in the Company’s
condensed consolidated statement of comprehensive loss during the third quarter of 2015.
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 9—ACCRUED LIABILITIES
Accrued liabilities consist of the following:
|
|
March 31,
2016
|
|
December 31,
2015
|
Product performance (see Note 10)
|
|
$
|
1
|
|
|
$
|
—
|
|
Salary and wages
|
|
|
443
|
|
|
|
411
|
|
Accrued bonus
|
|
|
277
|
|
|
|
131
|
|
Professional fees
|
|
|
479
|
|
|
|
510
|
|
Restructuring severance and benefits (see Note 11)
|
|
|
253
|
|
|
|
268
|
|
Environmental (see Note 10)
|
|
|
57
|
|
|
|
57
|
|
Accrued franchise tax
|
|
|
61
|
|
|
|
125
|
|
Client deposits
|
|
|
1,005
|
|
|
|
972
|
|
Other
|
|
|
300
|
|
|
|
606
|
|
Total
|
|
$
|
2,876
|
|
|
$
|
3,080
|
|
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.
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 2016 and 2015 that are based on management’s best estimate of ultimate expenditures that
it may incur for such items. The following table summarizes the Company’s product performance liability that is recorded
in accrued liabilities in the condensed consolidated balance sheets:
|
|
March 31,
2016
|
|
March 31,
2015
|
Balance as of beginning of period
|
|
$
|
—
|
|
|
$
|
189
|
|
Additions
|
|
|
1
|
|
|
|
67
|
|
Reductions
|
|
|
—
|
|
|
|
(5
|
)
|
Foreign exchange impact
|
|
|
—
|
|
|
|
—
|
|
Balance as of end of period
|
|
$
|
1
|
|
|
$
|
251
|
|
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 10—COMMITMENTS AND CONTINGENCIES
(Continued)
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 following table summarizes the Company’s environmental liability that is recorded in
accrued liabilities in the condensed consolidated balance sheets:
|
|
March 31,
2016
|
|
March 31,
2015
|
Balance as of beginning of period
|
|
$
|
57
|
|
|
$
|
57
|
|
Additions
|
|
|
—
|
|
|
|
—
|
|
Reductions
|
|
|
—
|
|
|
|
—
|
|
Balance as of end of period
|
|
$
|
57
|
|
|
$
|
57
|
|
NOTE 11—COST
–
REDUCTION ACTIONS
In July 2015, the Company reassessed the
continued operations of its Malaysia facility and decided to close its Malaysia facility, effective August 2, 2015,
following a decision by the Company's largest customer to exit its OEM module production
in Malaysia.
The Company reviewed the current inventory on hand and began to transfer inventory to its other manufacturing
locations. An analysis was performed and inventory was written down to net realizable value. During the second half of 2015 the
Company recognized $352 of severance and benefits as well as a $467 inventory write down in cost of sales and $467 of severance
and benefits in selling, general and administrative expenses related to the Malaysia facility closure.
The restructuring accrual consists of $253
for severance and benefits as of March 31, 2016. A rollforward of the severance and other exit cost accrual activity is as
follows:
|
|
March 31,
2016
|
|
March 31,
2015
|
Balance as of beginning of year
|
|
$
|
268
|
|
|
$
|
32
|
|
Additions
|
|
|
2
|
|
|
|
145
|
|
Reductions
|
|
|
(17
|
)
|
|
|
(147
|
)
|
Balance as of end of period
|
|
$
|
253
|
|
|
$
|
30
|
|
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 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 March 31, 2016:
|
|
Financial assets and liabilities at fair value
as of March 31, 2016
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Money market funds (1)
|
|
$
|
2,004
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Bank acceptance notes (2)
|
|
$
|
155
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Non-recurring fair value measurements (3)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
7,898
|
|
Total
|
|
$
|
2,159
|
|
|
$
|
—
|
|
|
$
|
7,898
|
|
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 12—FAIR VALUE MEASUREMENTS (Continued)
The following table provides the fair value measurements
of applicable financial assets and liabilities as of December 31, 2015:
|
|
Financial assets and liabilities at fair value
as of December 31, 2015
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Money market funds (1)
|
|
$
|
3,002
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Bank acceptance notes (2)
|
|
$
|
92
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Non-recurring fair value measurements (3)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
7,899
|
|
Total
|
|
$
|
3,094
|
|
|
$
|
—
|
|
|
$
|
7,899
|
|
(1)
|
Included in cash and cash equivalents on the Company’s Condensed Consolidated Balance Sheets.
|
(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.
|
NOTE 13—FACTORING ARRANGEMENT
In October 2015, the Company’s 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 the Company
has recorded $1,450 as due to factoring on the consolidated balance sheets.
NOTE 14—INCOME TAXES FROM CONTINUING OPERATIONS
There is no provision or benefit for federal,
foreign, or state income taxes for the three months ended March 31, 2016 other than the $214 income tax benefit, resulting from
an intraperiod tax allocation between continuing 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 March 31, 2016 and December 31,
2015.
There is no provision or benefit for federal,
foreign or state income taxes for the three months ended March 31, 2015 other than the $53 income tax expense, resulting from interest
on uncertain tax positions.
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 March 31, 2015.
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 15—STOCKHOLDERS’ EQUITY
Changes in stockholders’ equity for
the three months ended March 31, 2016 are as follows:
|
|
Common Stock
|
|
Treasury Stock
|
|
Additional Paid-In
|
|
Accumulated Other Comprehensive
|
|
Accumulated
|
|
Total Stockholders’
|
|
|
Issued
|
|
Amount
|
|
Acquired
|
|
Loss
|
|
Capital
|
|
Loss
|
|
Deficit
|
|
Equity
|
Balance at December 31, 2015
|
|
|
18,214,762
|
|
|
$
|
182
|
|
|
|
1,240
|
|
|
$
|
(57
|
)
|
|
$
|
230,999
|
|
|
$
|
(5,851
|
)
|
|
$
|
(178,101
|
)
|
|
$
|
47,172
|
|
Stock–based compensation
|
|
|
85,136
|
|
|
|
1
|
|
|
|
—
|
|
|
|
—
|
|
|
|
126
|
|
|
|
—
|
|
|
|
—
|
|
|
|
127
|
|
Shared services arrangement with Zhenfa
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
28
|
|
|
|
—
|
|
|
|
—
|
|
|
|
28
|
|
Net loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(2,947
|
)
|
|
|
(2,947
|
)
|
Foreign currency translation, net of tax
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
397
|
|
|
|
—
|
|
|
|
397
|
|
Balance at March 31, 2016
|
|
|
18,299,898
|
|
|
$
|
183
|
|
|
|
1,240
|
|
|
$
|
(57
|
)
|
|
$
|
231,153
|
|
|
$
|
(5,454
|
)
|
|
$
|
(181,048
|
)
|
|
$
|
44,777
|
|
Preferred Stock
The Company’s Board of Directors has
authorized 20,000,000 shares of preferred stock, $0.01 par value. At March 31, 2016, there were no shares issued or outstanding.
Common Stock
Reverse Stock Split
As more fully described in Note 1, the Company
effected a one-for-three reverse split of its common stock on January 30, 2015.
The Company’s Board of Directors has
authorized 200,000,000 shares of common stock, $0.01 par value. At March 31, 2016, there were 18,335,492 shares issued and 18,334,252
shares outstanding of common stock. Each share of common stock is entitled to one vote per share. Included in the 18,334,252 shares
outstanding are 18,299,898 shares of common stock and 34,354 shares of unvested restricted common stock.
Treasury Stock
At March 31, 2016, there were 1,240
shares held in treasury that were purchased at a cost of $57.
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 date of grant. There were 1,883,990 shares available for grant under the 2009 Plan as of March 31, 2016.
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 16—STOCK
–
BASED COMPENSATION
(Continued)
The following table summarizes the options
activity under the Company’s 2009 Plan for the three months ended March 31, 2016:
|
|
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, 2015
|
|
|
1,501,331
|
|
|
$
|
1.52
|
|
|
|
9.10
|
|
|
$
|
0.99
|
|
|
$
|
(1,832
|
)
|
Options granted
|
|
|
—
|
|
|
$
|
—
|
|
|
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Exercised
|
|
|
—
|
|
|
$
|
—
|
|
|
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Cancelled/forfeited
|
|
|
(128,889
|
)
|
|
$
|
1.52
|
|
|
|
—
|
|
|
$
|
—
|
|
|
$
|
157
|
|
Balance at March 31, 2016
|
|
|
1,372,442
|
|
|
$
|
1.52
|
|
|
|
8.85
|
|
|
$
|
0.99
|
|
|
$
|
(1,674
|
)
|
Vested and exercisable as of March 31, 2016
|
|
|
487,107
|
|
|
$
|
1.52
|
|
|
|
8.85
|
|
|
$
|
0.99
|
|
|
$
|
(594
|
)
|
Vested and exercisable as of March 31, 2016 and expected to vest thereafter
|
|
|
1,313,434
|
|
|
$
|
1.52
|
|
|
|
8.85
|
|
|
$
|
0.99
|
|
|
$
|
(1,602
|
)
|
(1) The aggregate intrinsic value is calculated as
the difference between the exercise price of the underlying awards and the closing stock price of $0.30 of the Company’s
common stock on March 31, 2016.
As of March 31, 2016, there was $803 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 months ended March 31, 2016.
The following table summarizes the restricted
shares activity of the Company for the three months ended March 31, 2016:
|
|
Unvested
Restricted Shares
|
|
|
Number of
Shares
|
|
Weighted–
Average
Grant–Date
Fair Value
|
Unvested at December 31, 2015
|
|
|
45,805
|
|
|
$
|
1.14
|
|
Granted
|
|
|
85,136
|
|
|
$
|
—
|
|
Vested
|
|
|
(85,136
|
)
|
|
$
|
—
|
|
Cancelled
|
|
|
(11,451
|
)
|
|
$
|
1.14
|
|
Unvested at March 31, 2016
|
|
|
34,354
|
|
|
$
|
1.14
|
|
Expected to vest after March 31, 2016
|
|
|
34,354
|
|
|
$
|
1.14
|
|
As of March 31, 2016, there was $11 of unrecognized
compensation cost related to unvested restricted shares. This amount is expected to be recognized over a weighted-average remaining
vesting period of approximately 0.1 years. 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.
On November 9, 2010, the Company’s
Board of Directors adopted the Employee Stock Purchase Plan (the “ESPP”) and reserved 166,667 shares of the Company’s
common stock for issuance thereunder. The ESPP was made effective upon its approval by the votes of the Company’s stockholders
on May 24, 2011 during the Company’s annual meeting for the purpose of qualifying such shares for special tax treatment
under Section 423 of the Internal Revenue Code of 1986, as amended. As of October 31, 2015 the Company terminated the ESPP.
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 16—STOCK
–
BASED COMPENSATION
(Continued)
Under the ESPP, eligible employees used
payroll withholdings to purchase shares of the Company’s common stock at a 10% discount. The Company had established four
offering periods in which eligible employees could participate. The Company purchased the number of required shares each period based upon the employees’
contribution plus the 10% discount. The number of shares purchased times the 10% discount was recorded by the Company as stock-based
compensation. The Company recorded $0 in stock-based compensation expense relating to the ESPP for the three months ended March
31, 2015.
Deferred Compensation
The Company had a deferred compensation
arrangement with certain members of management, including Robert S. Yorgensen, that stated upon the earlier of December 31,
2015, sale of the Company (which included a change of control transaction), or termination of employment for any reason, the members
were entitled to bonus payments based upon a formula set forth in their respective employment agreements. The payments were tied
to distribution amounts they would have received with respect to their former ownership in the predecessor Company if the assets
were sold at fair market value compared to the value of the Company’s stock price. The amount of the potential bonus payment
was capped at $1,180. In accordance with ASC 718-30, the obligation should have been remeasured quarterly at fair value. The Company
determined fair value using observable current market information as of the reporting date. The most significant input to determine
the fair value was determined to be the Company’s common stock price which is a Level 2 input. Based upon the difference
of the floor in the agreements and the effective valuation of the Transaction of $4.80 per share for Mr. Yorgensen, $204 of accrued
compensation was paid out during the first quarter of 2015. As of March 31, 2016, no deferred compensation arrangements exist.
Stock-based compensation expense was included
in the following Condensed Consolidated Statements of Comprehensive Loss categories for continuing operations:
|
|
Three Months Ended
March 31,
|
|
|
2016
|
|
2015
|
Cost of sales
|
|
$
|
—
|
|
|
$
|
—
|
|
Selling, general and administrative expense
|
|
$
|
159
|
|
|
$
|
153
|
|
Research and development expense
|
|
$
|
—
|
|
|
$
|
—
|
|
Total stock-based compensation expense
|
|
$
|
159
|
|
|
$
|
153
|
|
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. Prior to the sale of
its QA business in 2011, the Company reported two operating segments: QA and Solar. Due to the sale, QA is being reported as a
discontinued operation and the Company reassessed its segment reporting. 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 from continuing operations 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.
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 17—REPORTABLE SEGMENT AND GEOGRAPHICAL INFORMATION
(Continued)
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
March 31,
|
|
|
2016
|
|
2015
|
Reconciliation of Adjusted EBITDA to Net Loss from Continuing Operations
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
|
$
|
(2,515
|
)
|
|
$
|
(1,769
|
)
|
Depreciation
|
|
|
(474
|
)
|
|
|
(490
|
)
|
Interest (expense) 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
|
)
|
Operations by Geographic Area
|
|
Three Months Ended
March 31,
|
|
|
2016
|
|
2015
|
Net Sales
|
|
|
|
|
|
|
|
|
Spain
|
|
$
|
3,847
|
|
|
$
|
3,948
|
|
China
|
|
|
2,564
|
|
|
|
1,197
|
|
United States
|
|
|
11
|
|
|
|
44
|
|
Malaysia
|
|
|
—
|
|
|
|
1,674
|
|
Total Net Sales
|
|
$
|
6,423
|
|
|
$
|
6,863
|
|
Long
–
Lived Assets by Geographic
Area
|
|
March 31,
2016
|
|
December 31,
2015
|
Long-Lived Assets
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
1,551
|
|
|
$
|
1,594
|
|
Spain
|
|
|
6,947
|
|
|
|
6,765
|
|
China
|
|
|
1,973
|
|
|
|
2,220
|
|
Hong Kong
|
|
|
2
|
|
|
|
2
|
|
Total Long–Lived Assets
|
|
$
|
10,473
|
|
|
$
|
10,581
|
|
Foreign sales are based on the country in
which the sales originate. Net sales to two of the Company’s major customers that exceeded 10% of the Company’s consolidated
net sales for the three months ended March 31, 2016 was $1,933. Net sales to two of the Company’s major customers that exceeded
10% of the Company’s consolidated net sales for the three months ended March 31, 2015 was $3,272.
Accounts receivable from two customers amounted
to $1,839 as of March 31, 2016 and accounts receivable from two customers amounted to $1,570 as of December 31, 2015.
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 18—RELATED PARTIES
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 the 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 March 31, 2016, 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 are 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 Consolidated Balance Sheets. During the three
months ended March 31, 2016 the Company recorded $0 in net sales to this customer.
Module-for-Encapsulant Swap Transaction
During the second quarter of 2015, the Company
entered into a module-for-encapsulant swap transaction with Zhenfa and Zhejiang ReneSola Jiangsu Co., Ltd. (“ReneSola”)
to settle outstanding accounts receivable due from ReneSola. As part of this three-party transaction, the Company agreed to accept
solar modules as settlement of approximately $7,487 of outstanding receivables from ReneSola, and Zhenfa agreed to purchase these
modules from the Company for $7,487. As of March 31, 2016 the Company received $5,414 leaving a receivable of $2,073 due from Zhenfa
related to this transaction.
Employment of Zhenfa Personnel
On July 27, 2015, the Company
announced the appointment of Mr. Qu Chao to the office of Vice President, Strategic Investment, and Mr. Kong Weijie as Vice
President, Business Development and General Manager, China, effective August 1, 2015. At the time, Messrs. Qu and Kong were
officers of Zhenfa. Mr. Qu was also a member of the Company’s Board of Directors. The services of Messrs. Qu and Kong
were provided by Zhenfa, at no charge to the Company, pursuant to the terms of the Zhenfa Sales Service Agreement, as
described in Note 3 above. In October 2015, the Company was advised by representatives of Zhenfa that Mr. Qu resigned as an
officer of Zhenfa and that Zhenfa would no longer be supporting Mr. Qu’s services as Vice President, Strategic
Investment. The Company has not separately engaged Mr. Qu to continue to provide those services as he is no longer an officer
of the Company. As of the date of this report, Mr. Qu is no longer a director of the Company.
Mr. Kong currently attempts to divide his time evenly between his
duties with Zhenfa and STR. As a result, the value of Mr. Kong’s services provided must be reflected in the Company’s
consolidated financial statements. This shared services arrangement was recorded as a non-cash expense in selling, general and
administrative expenses and an increase to additional paid-in capital of $28 for the three months ended March 31, 2016.
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.