UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

(mark one)

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

For the Quarterly Period Ended March 31, 2018

Or

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

For the transition period from to

Commission file number 001–34529

 

STR Holdings, Inc.

(Exact name of registrant as specified in its charter)

 

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

 

(860) 272–4235

(Registrant’s telephone number, including area code)

 

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

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

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

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

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

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

At April 30, 2018, there were 20,038,221 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, 2018

 

 

 

  PAGE
NUMBER
PART I. FINANCIAL INFORMATION  
   
Item 1. Financial Statements 2
Condensed Consolidated Balance Sheets as of March 31, 2018 and December 31, 2017 (unaudited) 2
Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three Months Ended March 31, 2018 and 2017 (unaudited) 3
Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2018 and 2017 (unaudited) 4
Notes to Condensed Consolidated Financial Statements 5
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 16
Item 3. Quantitative and Qualitative Disclosures About Market Risk 25
Item 4. Controls and Procedures 25
   
PART II. OTHER INFORMATION  
   
Item 1. Legal Proceedings 25
Item 1A. Risk Factors 26
Item 5. Other Information 26
Item 6. Exhibits 27
SIGNATURE 28

 

 

 

 

 

 

 

 

 1 

 

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

 

   March 31,
2018
  December 31,
2017
ASSETS          
CURRENT ASSETS          
Cash and cash equivalents   $13,270   $13,499 
Bank acceptance notes    702    904 
Accounts receivable, trade, less allowances for doubtful accounts of $1,717 and $1,725 in 2018 and 2017, respectively    966    1,199 
Inventories, net    1,064    1,110 
Prepaid expenses    848    748 
Other current assets    804    767 
Total current assets    17,654    18,227 
Property, plant and equipment, net    8,794    8,728 
Assets held for sale (Note 7)    6,155    6,155 
Other long-term assets    80    76 
Total assets   $32,683   $33,186 
LIABILITIES AND STOCKHOLDERS’ EQUITY          
CURRENT LIABILITIES          
Accounts payable   $710   $971 
Accrued liabilities (Note 8)    1,321    2,307 
Income taxes payable    899    896 
Due to factor    276    454 
Total current liabilities    3,206    4,628 
Deferred tax liabilities    797    698 
Total liabilities    4,003    5,326 
COMMITMENTS AND CONTINGENCIES (Note 9)           
Stockholders’ Equity           
Preferred stock, $0.01 par value, 20,000,000 shares authorized; no shares issued and outstanding         
Common stock, $0.01 par value, 200,000,000 shares authorized; 19,985,153 and 19,983,913 issued and outstanding, respectively, in 2018 and 19,919,529 and 19,918,289 issued and outstanding, respectively, in 2017    196    195 
Treasury stock, 1,240 shares at cost    (57)   (57)
Additional paid–in capital    232,195    232,149 
Accumulated deficit    (198,753)   (199,072)
Accumulated other comprehensive loss, net    (4,901)   (5,355)
Total stockholders’ equity    28,680    27,860 
Total liabilities and stockholders’ equity   $32,683   $33,186 

 

See accompanying notes to these Condensed Consolidated Financial Statements.

 

 2 

 

STR Holdings, Inc. and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(unaudited)

All amounts in thousands except share and per share amounts

 

   Three Months Ended
March 31,
   2018  2017
Net sales   $3,746   $3,713 
Cost of sales    2,445    4,210 
Gross profit (loss)    1,301    (497)
Selling, general and administrative expenses    1,692    1,981 
Research and development expense    215    314 
Recovery for bad debt expense    (61)   (165)
Operating loss    (545)   (2,627)
Interest expense, net    (1)   (4)
Other income (expense), net    1,020    (426)
Gain on disposal of fixed assets        3 
Foreign currency transaction loss    (56)   (11)
Earnings (loss) from operations before income tax expense (benefit)    418    (3,065)
Income tax expense (benefit) from operations    99    (18)
Net earnings (loss) from operations    319    (3,047)
Other comprehensive earnings:          
Foreign currency translation (net of tax effect of $45 and $52, respectively)    454    130 
Other comprehensive earnings    454    130 
Comprehensive earnings (loss)   $773   $(2,917)
Net earnings (loss) per share (Note 3):          
Basic from operations   $0.02   $(0.16)
Basic   $0.02   $(0.16)
           
Diluted from operations   $0.02   $(0.16)
Diluted   $0.02   $(0.16)
Weighted–average shares outstanding (Note 3):          
Basic    19,571,947    18,795,927 
Diluted    19,709,356    18,795,927 

 

See accompanying notes to these Condensed Consolidated Financial Statements.

 

 3 

 

STR Holdings, Inc. and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

All amounts in thousands

 

   Three Months Ended
March 31,
   2018  2017
OPERATING ACTIVITIES          
Net earnings (loss)  $319   $(3,047)
Adjustments to reconcile net earnings (loss) to net cash used in operating activities:          
Depreciation   199    340 
Stock-based compensation expense   74    120 
Gain on disposal of fixed assets       (3)
Recovery for bad debt expense   (61)   (165)
Impairment of assets held for sale       440 
Provision for deferred taxes   99    (70)
Customer forfeiture of deposit   (990)    
Changes in operating assets and liabilities:          
Accounts receivable   96    (12)
Inventories, net   65    (63)
Other current assets   212    1,244 
Accounts payable   (548)   90 
Accrued liabilities   (62)   556 
Income taxes payable   2    1 
Other, net   160    (88)
Total net cash used in operating activities   (435)   (657)
           
INVESTING ACTIVITIES          
Capital investments   (12)   (351)
Proceeds from sale of fixed assets   225     
Total net cash provided by (used in) investing activities   213    (351)
           
FINANCING ACTIVITIES          
Factoring arrangement   (189)   29 
Total net cash (used in) provided by financing activities   (189)   29 
Effect of exchange rate changes on cash   182    18 
           
Net change in cash and cash equivalents   (229)   (961)
Cash and cash equivalents, beginning of period   13,499    12,379 
Cash and cash equivalents, end of period  $13,270   $11,418 

 

See accompanying notes to these Condensed Consolidated Financial Statements.

 

 4 

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, 2017, included in STR Holdings, Inc.’s (the “Company”) Annual Report on Form 10–K filed with the SEC on March 16, 2018. The unaudited interim Condensed Consolidated Financial Statements have been prepared on the same basis as the audited consolidated financial statements, and in the opinion of management, reflect all adjustments, consisting of only normal and recurring adjustments, necessary for the fair presentation of the Company’s financial position, results of operations and cash flows for the interim periods presented. The results for the interim periods presented are not necessarily indicative of future results.

 

The year-end Condensed Consolidated Balance Sheet data was derived from audited financial statements, but does not include all disclosures required by GAAP.

 

The preparation of the Condensed Consolidated Financial Statements in conformity with GAAP requires management to make significant estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from management’s estimates.

 

NOTE 2—RECENT ACCOUNTING PRONOUNCEMENTS AND ADOPTION

 

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers” (Topic 606). This ASU is intended to clarify the principles for recognizing revenue by removing inconsistencies and weaknesses in revenue requirements; providing a more robust framework for addressing revenue issues; improving comparability of revenue recognition practices across entities, industries, jurisdictions and capital markets; and providing more useful information to users of financial statements through improved revenue disclosure requirements. The provisions of this ASU are ultimately effective for interim and annual periods beginning after December 15, 2017. The standard shall be applied retrospectively to each period presented or as a cumulative-effect adjustment as of the date of adoption. During 2016, the FASB clarified the implementation guidance on principal versus agent, identifying performance obligations, licensing, and collectability.

 

The Company adopted the new revenue recognition standard (“ASC 606”) on January 1, 2018. Results for reporting periods beginning after January 1, 2018 are presented under ASC 606, while prior period amounts are not adjusted and continue to be reported in accordance with ASC 605, Revenue Recognition. The application of the standard had no impact on the Company’s consolidated financial statements for any periods prior to 2018. The adoption of ASC 606 represents a change in accounting principle to more closely align revenue recognition with the delivery of the Company’s products, licenses and services. ASC 606 requires an entity to evaluate revenue recognition by identifying a contract with a customer, identifying the performance obligations in the contract, determining the transaction price, allocating the transaction price to the performance obligations in the contract, and recognizing revenue when (or as) the entity satisfies a performance obligation.

 

Revenue is principally derived from the sale and licensing of highly engineered plastic sheet and film products. The Company receives specific purchase orders for the manufacture, sale and delivery of these products that identify the goods and/or services to be transferred, the price for those goods and other commercial terms of the order. The goods are generally purchased under EXW (or EX-Works) terms, meaning that the customer is responsible for arranging the shipping of the goods and title passes when the goods are picked up from the Company’s dock. Revenue is recognized upon the transfer of title, and there are no price concessions, volume discounts, rebates, refunds, credits, incentives, performance bonuses, royalties or other types of variable consideration.

 

In the specific case of an Equipment Purchase Agreement and a Technology License Agreement (the “Agreements”) signed on January 16, 2018 for an aggregate transaction price of $6,000, the Company will purchase from a third party specialized equipment (the “Equipment”) for the production of one of the Company’s proprietary encapsulants (the “Encapsulant”), resell the Equipment to the customer, install the Equipment at a facility of the customer and train the

 

 5 

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 2—RECENT ACCOUNTING PRONOUNCEMENTS AND ADOPTION (Continued)

 

customer’s personnel in the Equipment’s use. Under the license agreement, the Company has granted the customer the right to use the formula for the Encapsulant and certain of the Company’s production techniques to make or have made the Encapsulant for use in PV modules manufactured by the customer. For revenue recognition purposes, the Company defines the following three distinct major performance obligations of the Agreements and the corresponding transaction price allocated to those performance obligations:

 

Obligation 1 - $1,750 - Price Report, Formula and Sample
Obligation 2 - $2,000 - Equipment, including delivery & installation (incl. training)
Obligation 3 - $2,250 - License (perpetual)

 

Obligation 1 is considered to be separate and distinct from the other two obligations, in that the information provided under this obligation represents significant standalone value to the customer and the Company’s obligation to provide this information is separately identifiable from the other obligations in the agreements. Obligation 2 and Obligation 3 were also clearly identifiable, as defined by the Equipment (including delivery and installation by an agreed-upon date) and the License (with an effective start date upon the receipt of the Acceptance Test Payment).

 

The Company applied a “cost-plus” approach to Obligation 1 and Obligation 2. As the Company had never before sold any type of license, had no established specific license pricing and had no knowledge of pricing for similar licenses, the Company used the Residual approach for Obligation 3. The License is perpetual, distinct and not combined with other goods and services, and is a right to use, rather than to access, functional intellectual property.

 

The Company also assessed whether it was acting in a principal or agent role in each performance obligation of the Agreements. In all obligations, the Company determined it was acting in the role of Principal and therefore revenue is recognized on a gross basis.

 

As a result, the Company recognized $1,750 in the quarter ended March 31, 2018 upon delivery of the Price Report, Formula and Sample. The total transaction price of the Agreements is expected to be recognized as revenue as follows:

 

    2018    2019(a)    Total 
Revenue expected to be recognized as of December 31  $1,750   $4,250   $6,000 

 

(a)$2,000 upon installation of the Equipment and $2,250 upon Acceptance and commencement of the License.

 

There are no new accounting pronouncements that the Company believes will have an impact on its consolidated financial statements.

 

 6 

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—EARNINGS (LOSS) PER SHARE

 

The calculation of basic and diluted net earnings (loss) per share for the periods presented is as follows:

 

   Three Months Ended
March 31,
   2018  2017
Basic and diluted net earnings (loss) per share          
Numerator:          
Net earnings (loss)  $319   $(3,047)
Denominator:          
Weighted–average shares outstanding    19,571,947    18,795,927 
Add:          
Dilutive effect of stock options         
Dilutive effect of restricted common stock    137,409     
Weighted–average shares outstanding with dilution    19,709,356    18,795,927 
           
Net earnings (loss) per share:          
Basic   $0.02   $(0.16)
           
Diluted   $0.02   $(0.16)

 

Due to the loss from operations for the three months ended March 31, 2017, the computation of dilutive weighted-average common shares outstanding does not include any stock options or any shares of unvested restricted common stock as these potential awards are anti-dilutive.

 

Because the effect would be anti-dilutive, there were 1,121,332 stock options outstanding that were not included in the computation of diluted weighted-average shares outstanding for the three months ended March 31, 2018 and 2017.

 

 

NOTE 4—BANK ACCEPTANCE NOTES

 

Customers in China may settle their accounts with bank acceptance notes, which are draft instruments that are guaranteed to be paid at maturity by the issuing bank. Upon receipt of the bank acceptance note, the Company can elect to hold the instrument until maturity and receive full face value, discount it with the bank for a fee, or transfer it at full face

value to suppliers who will accept the note as settlement of the Company’s accounts payable balance with them.

 

Bank acceptance notes consist of the following:

 

   March 31,
2018
  December 31,
2017
Balance as of beginning of period   $904   $3,360 
Received from customers        1,985 
Converted to cash    (232)   (3,508)
Paid to suppliers        (1,162)
Foreign exchange impact    30    229 
Balance as of end of period   $702   $904 

 

All of the bank acceptance notes as of March 31, 2018 mature prior to September 30, 2018. Due to the short time to maturity, the Company believes the bank acceptance notes’ carrying value approximates fair value. As of March 31, 2018, the annual effective discount rate for all of the bank acceptance notes was 6.0%.

 

 7 

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—INVENTORIES

 

Inventories consist of the following:

 

   March 31,
2018
  December 31,
2017
Finished goods   $355   $340 
Raw materials    754    829 
Reserve    (45)   (59)
Inventories, net   $1,064   $1,110 

 

NOTE 6—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, 2018 and December 31, 2017, the Company recorded valuation allowances against its deferred tax assets. The valuation allowances were recorded since the Company had three consecutive years of taxable losses and determined that its history of actual net losses was evidence that should be given more weight than future projections. The Company determined the recording of valuation allowances against deferred tax assets to be an indicator to test its long-lived assets, which consist solely of property, plant and equipment, for impairment. The Company assessed the specific recoverability of its property, plant and equipment using updated real estate appraisals and other data for its other fixed assets, mainly production equipment. Based upon this analysis, the Company believes its property, plant and equipment carrying value was recoverable and depreciable lives were appropriate as of March 31, 2018. Therefore no impairment was recorded in 2018. If the Company experiences a significant reduction in future sales volume, further average selling price (“ASP”) reductions, lower profitability, a cessation of operations at any of its facilities, or negative changes in U.S. or Spain real estate markets, the Company’s property, plant and equipment may be subject to future impairment or accelerated depreciation.

 

NOTE 7—ASSETS HELD FOR SALE

 

In July 2015, the Company announced a restructuring plan that included the closure of its Johor, Malaysia facility effective August 2, 2015. Subsequent to the announcement, the Company engaged advisors and was actively trying to sell its land-use right, building and other fixed assets located at the facility. During 2016, the Company entered into a definitive Purchase and Sale Agreement for the land-use right and the building for a purchase price of RM25,000. Closing of the transaction was subject to customary conditions to closing of transactions of this type, including the approval of the Johor Port Authority (“JPA”). On July 31, 2017, the Company received a notice from the purchaser purporting to terminate the agreement, alleging that the JPA was seeking to impose certain conditions on the approval of the transfer of the facility to the purchaser that it found unacceptable. The Company was not successful in removing those conditions, and the agreement terminated. The Company has re-launched the sale process for its Malaysia facility.

 

In accordance with ASC 360-Property, Plant and Equipment, the Company assessed the asset group attributed to the sale for impairment. Based upon the Company’s assessment of the status of the Malaysia property, plant and equipment, all of the requirements (including the held for sale requirements) set forth in ASC 360-10-45-9 were met and the assets were classified on the Condensed Consolidated Balance Sheet as of March 31, 2018 and December 31, 2017 as assets held for sale. An impairment loss of $440, related to the foreign currency fluctuation of the Ringgit, was recorded in the Company’s Condensed Consolidated Statement of Comprehensive Income (Loss) in other expense, net during the first quarter of 2017.

 

 

 8 

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 8—ACCRUED LIABILITIES

 

Accrued liabilities consist of the following:

 

   March 31,
2018
  December 31,
2017
Salary and wages    288    239 
Accrued bonus    166    258 
Professional fees    445    319 
Restructuring severance and benefits (see Note 10)    125    87 
Environmental (see Note 9)    57    57 
Accrued franchise tax    63    90 
Client deposits    95    1,157 
Other    82    100 
Total   $1,321   $2,307 

 

NOTE 9—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’s policy is to accrue for specific product performance matters based on management’s best estimate of ultimate expenditures that it may incur for such items. The Company’s product performance liability that is recorded in accrued liabilities in the Condensed Consolidated Balance Sheets was $0 as of March 31, 2018 and December 31, 2017, respectively.

 

Environmental

 

During 2010, the Company performed a Phase II environmental site assessment at its 10 Water Street, Enfield, Connecticut location. During its investigation, the site was found to contain a presence of volatile organic compounds. The Company has been in contact with the Department of Environmental Protection and has engaged a licensed contractor to remediate this circumstance. Based on ASC 450-Contingencies, the Company has accrued the estimated cost to remediate. The Company’s environmental liability that is recorded in accrued liabilities in the Condensed Consolidated Balance Sheets was $57 as of March 31, 2018 and December 31, 2017.

 

Solaria

 

In October 2016, a complaint was filed by Solaria Energia y Medio Ambiente S.A. (“Solaria”) against the Company and its Spanish subsidiary, Specialized Technology Resources España S.A. (“STR Spain”), in the Court of the First Instance

 

 9 

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—COMMITMENTS AND CONTINGENCIES (Continued)

 

No. 8 in Oviedo, Spain, relating to a product quality claim in connection with a non-encapsulant product that STR Spain purchased from a vendor in 2005 and 2006 and resold to Solaria. The Company stopped selling this product in 2006. Solaria is seeking approximately €3,300, plus interest, in damages.

 

A trial was held on April 6, 2017 in Oviedo, Spain, and the Company is currently awaiting a ruling from the court. The Company has product liability insurance coverage for claims of this nature, excluding the original product cost but including defense costs. The Company believes it has meritorious defenses and does not believe a loss is probable or can be reasonably estimated. As such, no accrual relating to this complaint was recorded as of March 31, 2018 and December 31, 2017.

 

NOTE 10—COSTREDUCTION ACTIONS

 

On March 7, 2017 the Company made the decision to wind down its China manufacturing operations substantially by the end of the second quarter of 2017. The decision was consistent with ongoing efforts to reorganize its encapsulant business to better align with customer geography, to reduce losses related to unprofitable locations and to convert assets to cash for potential redeployment into more profitable endeavors. In connection with the restructuring, the Company does not expect any significant asset impairment charges and recorded $136 of severance charges during the first quarter of 2017 and $67 of severance charges during the first quarter of 2018. The Company sold certain production and testing equipment from the China facility to its tolling partner in India during the third quarter of 2017.

 

The restructuring accrual consists of $125 for severance and benefits as of March 31, 2018. A rollforward of the severance and other exit cost accrual activity is as follows:

 

   March 31,
2018
  March 31,
2017
Balance as of beginning of period   $87   $269 
Additions    67    136 
Reductions    (29)   (82)
Balance as of end of period   $125   $323 

 

NOTE 11—FAIR VALUE MEASUREMENTS

 

The Company measures certain financial assets and liabilities at fair value on a recurring basis in the financial statements. The hierarchy ranks the quality and reliability of inputs, or assumptions, used in the determination of fair value

and requires financial assets and liabilities carried at fair value to be classified and disclosed in one of the following three categories:

 

·Level 1-quoted prices (unadjusted) in active markets for identical assets and liabilities;
·Level 2-unadjusted quoted prices in active markets for similar assets or liabilities, or unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or inputs other than quoted prices that are observable for the asset or liability; and
·Level 3-unobservable inputs that are not corroborated by market data.

 

The following table provides the fair value measurements of applicable financial assets and liabilities as of March 31, 2018:

 

   Financial assets and liabilities at fair value
as of March 31, 2018
   Level 1  Level 2  Level 3
Money market funds (1)   $6,191   $   $ 
Bank acceptance notes (2)   $702   $   $ 
Non-recurring fair value measurements (3)   $   $   $6,155 
Total   $6,893   $   $6,155 

 

 10 

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 11—FAIR VALUE MEASUREMENTS (Continued)

 

The following table provides the fair value measurements of applicable financial assets and liabilities as of December 31, 2017:

 

   Financial assets and liabilities at fair value
as of December 31, 2017
   Level 1  Level 2  Level 3
Money market funds (1)   $6,688   $   $ 
Bank acceptance notes (2)   $904   $   $ 
Non-recurring fair value measurements (3)   $   $   $6,155 
Total   $7,592   $   $6,155 

_______________________

(1) Included in cash and cash equivalents on the Company’s Condensed Consolidated Balance Sheets. The carrying amount of money market funds is a reasonable estimate of fair value due to the short-term maturity. 
(2) Refer to Note 4 for further information.
(3) Included in assets held for sale on the Company’s Condensed Consolidated Balance Sheets. Refer to Note 7 for further information.

 

NOTE 12—FACTORING ARRANGEMENT

 

In October 2015, the Company’s wholly owned Spanish subsidiary, STR Spain, entered into a factoring agreement to sell, with recourse, certain European, U.S. and other foreign company-based receivables to Eurofactor Hispania S.A.U, who was later acquired by Credit Agricole Leasing and Factoring Sucursal en España during the first quarter of 2017. Under the current terms of the factoring agreement, the maximum amount of outstanding advances at any one time is €1,500 ($1,849 as of March 31, 2018), 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, 2018 and December 31, 2017 the Company has recorded $276 and $454, respectively, as due to factor on the Condensed Consolidated Balance Sheets.

 

NOTE 13—INCOME TAXES FROM OPERATIONS

 

On December 22, 2017, the Tax Cuts and Jobs Act (“TCJA”) was enacted into law in the United States. The legislation contains several key tax provisions including the reduction of the corporate income tax rate to 21% effective January 1, 2018, a one-time transition tax on foreign earnings which have not previously been subject to tax in the United States, as well as a variety of other changes, including limitation of the tax deductibility of interest expense, limitations for the deduction for net operating losses, new taxes on certain foreign-sourced earnings, and modification or repeal of many business deductions and credits.

 

The SEC staff issued SAB 118 which allows companies to record provisional amounts during a one-year measurement period. At December 31, 2017, the Company has not completed its accounting for the tax effects of the enactment of the TCJA; however, the Company estimated what it believes to be the effects of the TCJA on its existing deferred tax balances and the one-time transition tax, and recorded a provisional estimate for these tax effects.

 

During the three months ended March 31, 2018, the Company did not record any measurement period adjustments to the provisional estimates recorded at December 31, 2017. Final accounting for these impacts is expected in the third quarter of 2018 subsequent to the Company’s completion of the 2017 tax return.

 

The TCJA subjects a U.S. shareholder to tax on global intangible low-taxed income (GILTI) earned by certain foreign subsidiaries for which an entity can make an accounting policy election to either recognize deferred taxes for temporary basis differences expected to reverse as GILTI in future years or provide for the tax expense related to GILTI in the year the tax is incurred. Given the complexity of the GILTI provisions, the Company is still evaluating the effects of the GILTI provisions and has not yet determined its accounting policy. As of March 31, 2018, the Company does not anticipate a GILTI inclusion for the taxable year. The Company will continue to assess forthcoming guidance and accounting

 

 11 

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 13—INCOME TAXES FROM OPERATIONS (Continued)

 

interpretations on the effects of the TCJA and expects to complete its analysis within the measurement period in accordance with the SEC guidance.

 

During the three months ended March 31, 2018, the Company recorded an income tax expense of $99 resulting in an effective tax rate of 23.7%. This effective tax rate for the three months ended March 31, 2018 differs from the U.S. statutory tax rate primarily due to the effect of taxes on foreign earnings.

 

There was no provision or benefit for federal, foreign, or state income taxes for the three months ended March 31, 2017 other than the $18 income tax benefit resulting from an intraperiod tax allocation between operations and other comprehensive income.

 

NOTE 14—STOCKHOLDERS’ EQUITY

 

Changes in stockholders’ equity for the three months ended March 31, 2018 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, 2017    19,532,573   $195    1,240   $(57)  $232,149   $(5,355)  $(199,072)  $27,860 
Stock–based compensation    65,624    1            46            47 
Net earnings                            319    319 
Foreign currency translation, net of tax                        454        454 
Balance at March 31, 2018    19,598,197   $196    1,240   $(57)  $232,195   $(4,901)  $(198,753)   28,680 

 

Common Stock

 

The Company’s Board of Directors has authorized 200,000,000 shares of common stock, $0.01 par value. At March 31, 2018, there were 19,985,153 shares issued and 19,983,913 shares outstanding of common stock. Each share of common

stock is entitled to one vote per share. Included in the 19,983,913 shares outstanding are 19,598,197 shares of common stock and 385,716 shares of unvested restricted common stock.

 

NOTE 15—STOCKBASED 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 Plan. As a result, a total of 4,133,133 shares of common stock are reserved for issuance under the 2009 Plan. The 2009 Plan is administered by the Board of Directors or any committee designated by the Board of Directors, which has the authority to designate participants and determine the number and type of awards to be granted, the time at which awards are exercisable, the method of payment and any other terms or conditions of the awards. The 2009 Plan provides for the grant of stock options, including incentive stock options and nonqualified stock options (collectively, “options”), stock appreciation rights, shares of restricted stock, or “restricted stock,” rights to dividend equivalents and other stock-based awards (collectively, the “awards”). The Board of Directors or the committee will, with regard to each award, determine the terms and conditions of the award, including the number of shares subject to the award, the vesting terms of the award, and the purchase price for the award. Awards may be made in assumption of or in substitution for outstanding awards previously granted by the Company or its affiliates, or a company acquired by the Company or with which it combines. Options outstanding generally vest over a three or four-year period and expire ten years from the date of grant. There were 485,439 shares available for grant under the 2009 Plan as of March 31, 2018.

 

 12 

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—STOCKBASED COMPENSATION (Continued)

 

The following table summarizes the options activity under the Company’s 2009 Plan for the three months ended March 31, 2018:

 

   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, 2017    1,121,332   $1.52       $0.99   $(1,379)
Options granted       $       $   $ 
Exercised       $       $   $ 
Cancelled/forfeited       $       $   $ 
Balance at March 31, 2018    1,121,332   $1.52    6.86   $0.99   $(1,379)
Vested and exercisable as of March 31, 2018    1,121,332   $1.52    6.86   $0.99   $(1,379)
Vested and exercisable as of March 31, 2018 and expected to vest thereafter    1,121,332   $1.52    6.86   $0.99   $(1,379)

___________________

 

(1) The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying awards and the closing stock price of $0.29 of the Company’s common stock on March 31, 2018.

 

As of March 31, 2018, there was $0 of unrecognized compensation cost related to outstanding stock option awards. The Company did not receive any proceeds related to the exercise of stock options for the three months ended March 31, 2018.

 

The following table summarizes the restricted shares activity of the Company for the three months ended March 31, 2018:

 

   Unvested
Restricted Shares
   Number of
Shares
  Weighted–
Average
Grant–Date
Fair Value
Unvested at December 31, 2017    385,716   $ 
Granted    65,624   $ 
Vested    (65,624)  $0.24 
Unvested at March 31, 2018    385,716   $ 
Expected to vest after March 31, 2018    385,716   $ 

 

As of March 31, 2018, there was $72 of unrecognized compensation cost related to unvested restricted shares. This amount is expected to be recognized over a weighted-average remaining vesting period of less than one year. To the extent the actual forfeiture rate is different from what the Company has anticipated, stock-based compensation related to these awards will be different from its expectations.

 

Stock-based compensation expense was included in the following Condensed Consolidated Statements of Comprehensive Income (Loss) categories for operations:

 

   Three Months Ended
March 31,
   2018  2017
Selling, general and administrative expense   $74   $120 
Total stock-based compensation expense   $74   $120 

 

 13 

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—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. The Company focuses on the manufacturing, sale and licensing of highly engineered plastic sheet and film products to customers throughout the world. The Company procures raw materials from multiple similar vendors and expects similar long-term economic characteristics for its products.

 

Operations by Geographic Area

 

   Three Months Ended
March 31,
   2018  2017
Net Sales          
Spain   $1,476   $1,712 
China    30    1,991 
United States    2,240    10 
Total Net Sales   $3,746   $3,713 

 

LongLived Assets by Geographic Area

 

   March 31,
2018
  December 31,
2017
Long-Lived Assets          
United States   $1,274   $1,311 
Spain    7,184    7,141 
China    336    276 
Hong Kong         
Total Long–Lived Assets   $8,794   $8,728 

 

Foreign sales are based on the country in which the sales originated. 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, 2018 was $2,176. Net sales to one of the Company’s major customers that exceeded 10% of the Company’s consolidated net sales for the three months ended March 31, 2017 was $700.

 

Accounts receivable from two customers amounted to $460 as of March 31, 2018 and accounts receivable from two customers amounted to $70 as of December 31, 2017.

 

NOTE 17—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 due to failure by Huhui to purchase the Minimum Amount at the end of the first year anniversary of the effective date of the Huhui Supply Agreement. The Huhui Supply Agreement further provided that Huhui’s obligations were 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 December 31, 2017, Huhui had not commenced the sample production run. The Huhui Supply Agreement automatically renewed for additional one year terms if either party failed to notify the other party at least 90 days prior to the

 

 14 

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—RELATED PARTIES (Continued)

 

end of the then current term that it was electing to terminate the agreement. The Company believes that the terms and conditions set forth in the Huhui Agreement at that time were fair and reasonable to the Company. The Company received $1,148 as a deposit from Huhui during the year ended December 31, 2015, which was included in accrued liabilities on the Condensed Consolidated Balance Sheets.

 

Huhui did not complete its 30 day production run as contemplated under the Supply Agreement and on March 27, 2018, following the approval of the Company’s Special Committee of Continuing Directors, STR China entered into an agreement to terminate the Supply Agreement (the “Termination Agreement”). Pursuant to the Termination Agreement, Huhui agreed that STR China would retain the Deposit, and each of Huhui and STR China agreed to release the other from any liability or further obligations under the Supply Agreement. The Company recognized the full amount of the deposit as other income on the Condensed Consolidated Statement of Comprehensive Income (Loss).

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 15 

 

 

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, 2017.

 

Forward-Looking Statements

 

This Quarterly Report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are subject to inherent risks and uncertainties. These forward-looking statements present our current expectations and projections relating to our financial condition, results of operations, plans, objectives, future performance and business and are based on assumptions that we have made in light of our industry experience and perceptions of historical trends, current conditions, expected future developments and other factors management believes are appropriate under the circumstances. However, these forward-looking statements are not guarantees of future performance or financial or operating results. Forward-looking statements include, but are not limited to, the statements regarding the following: (1) incurring substantial losses for the foreseeable future and our inability to achieve or sustain profitability in the future; (2) the potential impact of pursuing strategic alternatives, including dissolution and liquidation of our Company, winding up our operations in China, restructuring our business to align with our customers’ geography; (3) our reliance on a single product line and any contemplated pursuits of new market sectors; (4) our securing net sales to new customers, growing net sales to existing key customers and increasing our market share; (5) customer concentration in our business and our relationships with and dependence on key customers; (6) the outsourcing arrangements and reliance on third parties for the manufacture of a portion of our encapsulants; (7) technological changes in the solar energy industry or our failure to develop and introduce or integrate new technologies could render our encapsulants uncompetitive or obsolete; (8) competition; (9) our failure to manufacture product in China negatively affecting our ability to sell to Chinese solar module manufacturers; (10) excess capacity in the solar supply chain; (11) demand for solar energy in general and solar modules in particular; (12) our operations and assets in China being subject to significant political and economic uncertainties; (13) limited legal recourse under the laws of China if disputes arise; (14) our ability to adequately protect our intellectual property, particularly during the outsource manufacturing of our products; (15) our lack of credit facility and our inability to obtain credit; (16) a significant reduction or elimination of government subsidies and economic incentives or a change in government policies that promote the use of solar energy; (17) volatility in commodity costs; (18) our customers’ financial profile causing additional credit risk on our accounts receivable; (19) our dependence on a limited number of third-party suppliers for raw materials for our encapsulants and other significant materials used in our process; (20) potential product performance matters and product liability; (21) our substantial international operations and shift of business focus to emerging markets; (22) the impact of changes in foreign currency exchange rates on financial results, and the geographic distribution of revenues; (23) losses of financial incentives from government bodies in certain foreign jurisdictions; (24) compliance with the qualifications of the OTCQB; (25) the ability to realize synergies from the transaction with Zhenfa Energy Group Co., Ltd. (“Zhenfa”); (26) the ability to successfully complete our investment in Spain on a timely basis or within budget, if at all, or that we will be able to achieve our anticipated revenue, earnings or payback from this new investment; (27) that we will be able to timely collect the full amount of the insurance proceeds that we anticipate to support this project, or that we will be able to obtain the loan we have applied for from the regional government on favorable terms if at all and (28) the other risks and uncertainties described under “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and in subsequent periodic reports on Form 10-K, 10-Q and 8-K. You are urged to carefully review and consider the disclosure found in our filings, which are available on http://www.sec.gov or http://www.strsolar.com. Should one or more of these risks or uncertainties materialize, or should any of these assumptions prove to be incorrect, actual results may vary materially from those projected in these forward-looking statements. We undertake no obligation to publicly update any forward-looking statement contained in this Quarterly Report, whether as a result of new information, future developments or otherwise, except as may be required by law.

 

Overview

 

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

 

 16 

 

 

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.

 

Recent Developments

 

Wind-down of China Manufacturing Operations. Our business unit in China (“STR China”) incurred a loss of approximately $5.8 million during 2016, including a bad debt expense of $1.5 million. In October 2016, a fire destroyed one of our two China-based production lines and caused substantial damage to our building and some of our ancillary equipment. In light of continued poor financial results of STR China, as well as the effects of the fire, we conducted an orderly wind down of our China manufacturing operations to reduce operating losses related to this business unit. By the close of 2017, we effectively completed the wind down process, with only a small administrative team remaining in an office under short-term lease.

 

India Tolling Plan. A review of our production in China revealed that roughly half of our sales volume was being exported to our customers in India. Moreover, our customers in India have generally been more reliable in terms of payment and pricing than our customers in China. In conjunction with our wind down of manufacturing operations in China, we have entered into an agreement with a tolling partner in India. We sold our undamaged production line from STR China to this tolling partner and it is now in commercial operation making STR-formulated encapsulant products. By using a tolling partner, our goal is to continue to serve and grow our customer base in India without having to make a significant direct capital investment. We have not worked with our tolling partner in India prior to 2017 and we cannot ensure that the tolling partner will provide us with the support we anticipate or that we can otherwise successfully manage our collaboration with our tolling partner. If problems develop in our relationship with our India tolling partner, or if such party fails to perform as expected, it could lead to product defects, manufacturing and shipping delays, significant cost increases, changes in our strategies, and even failure of our initiatives, each of which may have a material adverse effect on our business, financial condition, and results of operations. We cannot assure you that the India tolling plan will continue to be successful or that it is sustainable in the long term. We have recently agreed to sell and have received a deposit for an additional production line to our tolling partner to enable the tolling partner to further increase its capacity.

 

We continue to reorganize our encapsulant business to better align with customer geography, to reduce the cash burn related to unprofitable locations, to convert assets to cash for potential redeployment into more profitable endeavors and possible business opportunities in potentially more profitable parts of the solar supply-chain, and to evaluate other strategic alternatives.

 

High-End Food Packaging. In the fourth quarter of 2017, we initiated a significant investment through our wholly-owned subsidiary in Spain to enter the high-end food packaging business. This investment, which leverages our plastics expertise, includes the purchase of new, state-of-the-art plastics processing equipment and related building improvements along with the addition of experienced staff to pursue manufacturing and sales of high-end food packaging products. As anticipated, we have received and applied certain conditional insurance proceeds to this project, helping to offset our net capital investment. These insurance proceeds are available to the Company only if we invest in new plastics manufacturing equipment. We have been advised by our insurer that our investment qualifies for reimbursement under the terms of our policy and, accordingly, they have paid our U.S. entity the amount of $0.8 million in October 2017, to cover the cost of the deposit for the primary capital equipment. We expect them to reimburse our U.S entity for an additional approximately $1.8 million during 2018 as we continue to make qualifying capital investment under the packaging project. We have also applied for loans of up to €2.0 million from the regional government of Asturias, Spain to further support the project. Subject to the timely purchase and installation of equipment, we expect to begin production by 2019. The food packaging business is highly competitive having market participants with substantially more resources and experience than us. We will be a new entrant in this market and we cannot assure you that we will be successful in this new endeavor. In particular, we cannot assure that we will be able to successfully complete our investment in this new business on a timely basis or within budget, if at all, or that we will be able to achieve our anticipated revenue or earnings from this new investment. Nor can we assure that we will be able to timely collect the full amount of the insurance proceeds that we anticipate to support this project, or that we will be able to obtain the loan(s) we have applied for from the regional government on favorable terms if at all.

 

Alternative Transactions. In the event that we are not successful in restructuring our plastics manufacturing business, in entering into the high-end food packaging business, or in completing 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.

 

 17 

 

 

If we are unsuccessful in executing on our strategic plans to ultimately achieve profitability by reorganizing our plastics manufacturing business and entering the high-end packaging business, we may also decide to wind down or cease any or all of our operations.

 

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

 

Manufacturing Facility Fire. During the fourth quarter of 2016, we recorded a $0.9 million loss on disposal of fixed assets attributable to our Chinese manufacturing facility fire. During 2017, STR China received interim payments totaling RMB12.7 million (approximately $2.0 million as of March 31, 2018) from our local China insurance carrier related to the existing fire insurance claim. During 2017, we also received $0.8 million in the U.S. under the master property insurance plan related to the same claim. These payments do not represent a final settlement, and we continue to work with our agents and the carrier to finalize the claim.

 

Equipment Purchase and License Agreement. On January 16, 2018, STR Holdings, Inc., through its wholly owned subsidiary Specialized Technology Resources, Inc. (the “Company”), entered into an equipment purchase agreement and a technology license agreement (together, the “Agreements”) with a manufacturer of solar photovoltaic (PV) modules (the “Purchaser”).

 

Under the equipment purchase agreement, the Company will purchase from a third party specialized equipment (the “Equipment”) for the production of one of the Company’s proprietary encapsulants (the “Encapsulant”), resell the Equipment to the Purchaser, install the Equipment at a facility of the Purchaser and train Purchaser personnel in the Equipment’s use. Under the license agreement, the Company has granted the Purchaser the right to use the formula for the Encapsulant and certain of the Company’s production techniques to make or have made the Encapsulant for use in PV modules manufactured by the Purchaser. The license granted to the Purchaser is exclusive with respect to specified types of PV modules manufactured by the Purchaser, and nonexclusive as to all other types of PV modules. The Purchaser may also sublicense its rights under the technology license agreement to licensees of its PV module manufacturing processes.

 

Under the Agreements, the Purchaser will pay the Company an aggregate of $6.0 million. Billing and payment under the Agreements follows a schedule involving certain milestones relating to the qualification of the Encapsulant and installation, acceptance and operation of the Equipment. The Company received the initial payment of $1.8 million during the first quarter of 2018, with the balance to follow during the remainder of 2018 and 2019 as milestones occur. For revenue recognition purposes under ASC 606, $1.8 million was recorded as revenue during the first quarter of 2018 as initial performance obligations were satisfied, and the Company expects that the balance of the $6.0 million aggregate amount will be recognized as revenue when the remaining performance obligations are fulfilled in 2019.

 

The Company does not expect the Agreements to impact or otherwise displace any of its existing business in the solar encapsulant market.

 

2014 Transaction with Zhenfa

 

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

 

Purchase Agreement

 

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

 

Sales Service Agreement

 

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

 

 18 

 

 

As we have substantially discontinued operations in China, Zhenfa is not currently providing us with any material services under this agreement. However, we continue to interact with Zhenfa to assess whether there may be projects of interest to us to pursue in China. Our activities with Zhenfa under the Sales Service Agreement are subject to the oversight of our Special Committee of Continuing Directors.

 

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 16, 2018.

 

Other than the adoption of ASC 606 (see Note 2), there have been no changes in our critical accounting policies during the quarter ended March 31, 2018.

 

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, 2018 and 2017:

 

   Three Months Ended
March 31,
   2018  2017
Net sales   $3,746   $3,713 
Cost of sales    2,445    4,210 
Gross profit (loss)    1,301    (497)
Selling, general and administrative expenses    1,692    1,981 
Research and development expense    215    314 
Recovery for bad debt expense    (61)   (165)
Operating loss    (545)   (2,627)
Interest expense, net    (1)   (4)
Other income (expense), net    1,020    (426)
Gain on disposal of fixed assets        3 
Foreign currency transaction loss    (56)   (11)
Earnings (loss) from operations before income tax expense (benefit)    418    (3,065)
Income tax expense (benefit) from operations    99    (18)
Net earnings (loss) from operations   $319   $(3,047)

 

 19 

 

 

Net Sales

 

   Three Months Ended March 31,
   2018  2017  Change
   Amount  % of
Total
Net
Sales
  Amount  % of
Total
Net
Sales
  Amount  %
Net sales   $3,746    100.0%  $3,713    100%  $33    0.9%

 

The slight increase in net sales for the three months ended March 31, 2018 compared to the corresponding period in 2017 was driven by recognition of $1.8 million related to completed performance obligations under the equipment purchase agreement and the technology license agreement partially offset by a $1.7 million reduction in encapsulant sales. The decrease in encapsulant sales was primarily attributable to an approximate 57% decrease in sales volume that was partially offset by an approximate 25% increase in our average selling price (“ASP”).

 

The volume decline was primarily driven by a 30% volume decrease in Spain and a 99% volume decrease in China, partially offset by sales to customers in India through our tolling partner. The increase in ASP was primarily attributable to our elimination of our lower priced and unprofitable sales in China.

 

Cost of Sales

 

   Three Months Ended March 31,
   2018  2017  Change
   Amount  % of
Total
Net
Sales
  Amount  % of
Total
Net
Sales
  Amount  %
Cost of sales   $2,445    65.3%  $4,210    113.4%  $(1,765)   (41.9)%

 

The decrease in our cost of sales for the three months ended March 31, 2018 compared to the corresponding period in 2017 was primarily driven by the 57% decrease in encapsulant sales volume partially offset by an approximate 12% increase in raw material cost per unit. The higher raw material cost per unit was primarily driven by a 13% increase in resin costs, as well as a 2% decrease in paperless sales mix. Direct labor decreased by $0.1 million partially attributable to the sales volume decrease. Overhead costs decreased by $0.1 million primarily due to continued cost-reduction actions.

 

Gross Profit (Loss)

 

   Three Months Ended March 31,
   2018  2017  Change
   Amount  % of
Total
Net
Sales
  Amount  % of
Total
Net
Sales
  Amount  %
Gross profit ( loss)   $1,301    34.7%  $(497)   (13.4)%  $1,798    361.8%

 

Gross profit (loss) as a percentage of net sales improved for the three months ended March 31, 2018 compared to the corresponding period in 2017 mainly as a result of recognition of $1.8 million related to completed performance obligations under the equipment purchase agreement and the technology license agreement.

 

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

 

   Three Months Ended March 31,
   2018  2017  Change
   Amount  % of
Total
Net
Sales
  Amount  % of
Total
Net
Sales
  Amount  %
SG&A   $1,692    45.2%  $1,981    53.4%  $(289)   (14.6)%

 

SG&A decreased by $0.3 million for the three months ended March 31, 2018 compared to 2017. This decrease was primarily driven by a $0.1 million decrease each in labor and benefits, management incentive plan expense and restructuring charges.

 

 20 

 

 

Research and Development Expense (“R&D”)

 

   Three Months Ended March 31,
   2018  2017  Change
   Amount  % of
Total
Net
Sales
  Amount  % of
Total
Net
Sales
  Amount  %
Research and development expense   $215    5.7%  $314    8.5%  $(99)   (31.5)%

 

Research and development expense decreased by $0.1 million for the three months ended March 31, 2018 compared to 2017, as we continued to economize these activities.

 

Recovery for Bad Debt Expense

 

   Three Months Ended March 31,
   2018  2017  Change
   Amount  % of
Total
Net
Sales
  Amount  % of
Total
Net
Sales
  Amount  %
Recovery for bad debt expense   $(61)   (1.6)%  $(165)   (4.4)%  $104    63.0%

 

The recovery for bad debt expense recorded during the three months ended March 31, 2018 and March 31, 2017 primarily related to receiving cash for previously aged accounts receivable that were reserved for under our policy, primarily in China.

 

Other Income (Expense)

 

   Three Months Ended March 31,
   2018  2017  Change
   Amount  % of
Total
Net
Sales
  Amount  % of
Total
Net
Sales
  Amount  %
Other income (expense)   $1,020    27.2%  $(426)   (11.5)%  $1,446    339.4%

 

On March 27, 2018, following the approval of the Company’s Special Committee of Continuing Directors, STR China entered into an agreement to terminate the Huhui Supply Agreement (the “Termination Agreement”). Pursuant to the Termination Agreement, Huhui agreed that STR China would retain the deposit, and each of Huhui and STR China agreed to release the other from any liability or further obligations under the Supply Agreement. As a result of the Termination Agreement, we recorded other income of $1.0 million during the first quarter.

 

In July 2015, we announced a restructuring plan that included the closure of our Malaysia facility, effective August 2, 2015. During 2016, we entered into a definitive Purchase and Sale Agreement for the land-use right and the building for a purchase price of RM25.0 million (approximately $6.5 million as of March 31, 2018). As a result of the pending sale (which was subject to the approval of the JPA), a loss on assets held for sale of $0.4 million, related to the foreign currency fluctuation of the Malaysian Ringgit, was recorded during the first quarter of 2017. As noted above, this agreement terminated prior to the consummation of the sale. The Company has re-launched the sale process for its Malaysia facility.

 

Foreign Currency Transaction Loss

 

   Three Months Ended March 31,
   2018  2017  Change
   Amount  % of
Total
Net
Sales
  Amount  % of
Total
Net
Sales
  Amount  %
Foreign currency transaction loss   $(56)   (1.5)%  $(11)   (0.3)%  $(45)   (409.1)%

 

The foreign currency transaction impact was a loss of less than $0.1 million for the three months ended March 31, 2018 and March 31, 2017. This change was primarily the result of volatility in the Euro spot exchange rate versus the U.S. dollar.

 

Our primary foreign currency exposures are intercompany loans, U.S. dollar cash balances in foreign locations and some U.S. dollar denominated accounts receivable at our Spain and China facilities.

 

 21 

 

 

Income Tax Expense (Benefit)

 

   Three Months Ended March 31,
   2018  2017  Change
   Amount  % of
Total
Net
Sales
  Amount  % of
Total
Net
Sales
  Amount  %
Income tax expense (benefit)   $99    2.6%  $(18)   (0.5)%  $117    650.0%

 

During the three months ended March 31, 2018, we recorded an income tax expense of less than $0.1 million, resulting in an effective tax rate of 23.7%. This effective tax rate for the three months ended March 31, 2018 differs from the U.S. statutory tax rate primarily due to the effect of taxes on foreign earnings.

 

During the three months ended March 31, 2018, the Company did not record any measurement period adjustments to the provisional estimates recorded at December 31, 2017 relating to the Tax Cuts and Jobs Act. Final accounting for these impacts is expected in the third quarter of 2018 subsequent to the Company’s completion of the 2017 tax return.

 

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

 

Cost-Reduction Actions

 

On March 7, 2017 we made the decision to wind down our China manufacturing operations substantially by the end of the second quarter of 2017. The decision was consistent with ongoing efforts to reorganize our encapsulant business to better align with customer geography, to reduce losses related to unprofitable locations and to convert assets to cash for potential redeployment into more profitable endeavors. In connection with the restructuring, we do not expect any significant asset impairment charges and recorded $0.1 million of severance charges during the first quarter of 2017 and the first quarter of 2018. The Company sold certain production and testing equipment from the China facility to its tolling partner in India during the third quarter of 2017.

 

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

 

   March 31,
2018
  March 31,
2017
Balance as of beginning of year   $0.1   $0.3 
Additions    0.1    0.1 
Reductions    (0.1)   (0.1)
Balance as of end of period   $0.1   $0.3 

 

The restructuring accrual consists of $0.1 million and $0.3 million for severance and benefits as of March 31, 2018 and 2017, respectively.

 

Financial Condition, Liquidity and Capital Resources

 

We have funded our operations primarily through our earnings and existing cash balance. As of March 31, 2018, our principal source of liquidity was $13.3 million of cash and $0.7 million of Chinese bank acceptance notes. Our principal needs for liquidity have been, and for the foreseeable future we expect will continue to be, for working capital and capital investments. We are also seeking to sell our Johor, Malaysia facility, as discussed herein. With respect to China, evolving currency control regulations may limit our access to the $2.7 million of cash and $0.7 million of bank acceptance notes located in China as of March 31, 2018 for use outside the country. Although we believe that our timely available cash will be sufficient to meet our liquidity needs, including capital investments, through at least the next 12 months, if we are unable to collect our accounts receivable or fail to receive payment in a timely fashion, our financial condition and results of operations will be negatively affected.

 

Our wholly owned Spanish subsidiary, Specialized Technology Resources España S.A. (“STR Spain”), has a factoring agreement to sell, with recourse, certain European, U.S. and other foreign company-based receivables to Eurofactor Hispania S.A.U., who was later acquired by Credit Agricole Leasing & Factoring Sucursal en España during the first quarter of 2017. Under the current terms of the factoring agreement, the maximum amount of outstanding advances at any one time is €1.5 million (approximately $1.8 million as of March 31, 2018), 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 agreement renews annually unless terminated by either party with 90 days prior written notice. As of March 31, 2018 €1.3 million ($1.6 million as of March 31, 2018) was available under the factoring agreement based upon receivables outstanding.

 

 22 

 

 

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 that included the shut-down of our Malaysia manufacturing facility, effective August 2, 2015. We are seeking to sell our Johor, Malaysia facility having already sold most of its production and ancillary equipment. In connection with the shut-down and potential sale of the Malaysia facility, we incurred approximately $1.3 million of associated non-recurring costs during the second half of 2015. In 2016, in connection with the potential sale of the Malaysia facility (specifically, the land-use right and building), an analysis of the asset group was performed and an impairment of assets held for sale of $1.7 million was recorded. As previously noted, we entered into an agreement to sell our rights to the facility for RM25.0 million (approximately $6.5 million as of March 31, 2018), however that agreement terminated during 2017 prior to consummation of the transaction. We have since re-launched the sale process for our Malaysia facility.

 

In the fourth quarter of 2017, the Company initiated a significant investment through our wholly owned subsidiary in Spain to enter the high-end food packaging business. This ongoing investment, which leverages our plastics expertise, includes the purchase of new, state-of-the-art plastics processing equipment and related building improvements along with the addition of experienced staff to pursue manufacturing and sales of high-end food packaging products. We have received and applied certain conditional insurance proceeds to this project, helping to offset our net capital investment. These insurance proceeds are available to the Company only if we invest in new plastics manufacturing equipment We have been advised by our insurer that our investment qualifies for reimbursement under the terms of our policy and, accordingly, they have paid our U.S. entity the amount of $0.8 million in October 2017, to cover the cost of the deposit for the primary capital equipment. We expect them to reimburse our U.S. entity for an additional approximately $1.8 million during 2018 as we continue to make qualifying capital investment under the packaging project. We have also applied for loans of up to $2.4 million from the regional government of Asturias, Spain to further support the project. Subject to the timely purchase and installation of equipment, we expect to begin production by 2019. The food packaging business is highly competitive having market participants with substantially more resources and experience than us. We will be a new entrant in this market and we cannot assure that we will be successful in this new endeavor. In particular, we cannot assure that we will be able to successfully complete our investment in this new business on a timely basis or within budget, if at all, or that we will be able to achieve our anticipated revenue or earnings from this new investment. Nor can we assure that we will be able to timely collect the full amount of the insurance proceeds that we anticipate to support this project, or that we will be able to obtain the loan(s) we have applied for from the regional government on favorable terms if at all.

 

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

 

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

 

 23 

 

 

Our cash and cash equivalents balance is located in the following geographies (dollars in thousands):

 

   March 31, 2018
    
United States   $8,149 
Spain    1,848 
Malaysia    445 
China    2,687 
Hong Kong    141 
Consolidated   $13,270 

 

Due to the difficulty repatriating cash to the U.S., among other factors, we may have limited access to the $2.7 million of cash and $0.7 million of bank acceptance notes located in China for use outside the country. In 2017 we applied for, and received approval for, a reduction of the registered capital associated with STR China, enabling us to move $5.0 million out of China. We have applied for a further reduction of up to $3.0 million in 2018, to be used to settle intercompany loans, ultimately flowing back to the United States. We cannot guarantee that our application for the further reduction of registered capital will be approved timely, if at all.

 

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

 

Cash Flows

 

Cash Flow from Operating Activities from Operations

 

Net cash used in operating activities from operations was $0.4 million for the three months ended March 31, 2018 compared to $0.7 million for the three months ended March 31, 2017. Net loss plus and minus non-cash adjustments (“cash loss”) improved by $2.0 million for the three months ended March 31, 2018 compared to the same period in 2017. This improvement was primarily driven by the receipt of the initial payment of $1.8 million under the equipment purchase agreement and the technology license agreement.

 

Cash Flow from Investing Activities from Operations

 

Net cash provided by investing activities was $0.2 million and net cash used in investing activities was $0.4 million for the three months ended March 31, 2018 and 2017, respectively. We expect remaining 2018 consolidated capital expenditures to be approximately $4.0 million related to the high-end food packaging equipment.

 

Cash Flow from Financing Activities from Operations

 

Net cash used in financing activities was $0.2 million and net cash provided by financing activities was less than $0.1 million for the three months ended March 31, 2018 and 2017, respectively, primarily due to funds received by our Spanish subsidiary related to the factoring agreement.

 

Off-Balance Sheet Arrangements

 

We have no significant off–balance sheet financing arrangements.

 

Effects of Inflation

 

Inflation generally affects us by increasing costs of raw materials, labor and equipment. During the first three months of 2018, we were not materially affected by inflation.

 

Recently Issued Accounting Standards

 

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

 

 24 

 

 

Item 3.    Quantitative and Qualitative Disclosures about Market Risk

 

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

 

Item 4.    Controls and Procedures

 

Disclosure Controls and Procedures

 

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

 

As of March 31, 2018, 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, 2018 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

PART II. OTHER INFORMATION

 

Item 1.    Legal Proceedings

 

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

 

In October 2016, a complaint was filed by Solaria Energia y Medio Ambiente S.A. (“Solaria”) against the Company and its Spanish subsidiary, STR Spain, in the Court of the First Instance No. 8 in Oviedo, Spain, relating to a product quality claim in connection with a non-encapsulant product that STR Spain purchased from a vendor in 2005 and 2006 and resold to Solaria. The Company stopped selling this product in 2006. Solaria is seeking approximately €3.3 million (approximately $4.1 million as of March 31, 2018), plus interest, in damages.

 

A trial was held on April 6, 2017, in Oviedo, Spain. The Company is currently awaiting a ruling from the court.

 

In 2016, the Company filed suit against CEEG (Nanjing) Renewable Energy Co., Ltd. (“NRE”), the parent company of our former customer CSUN in Nanjing Jiangning District People’s Court, China. In a hearing held on August 10, 2016, the court found NRE delinquent in making payment against bona fide STR invoices dating back to April of 2015 and ordered NRE to pay the Company the amount of RMB8.0 million for encapsulant sold to CSUN, RMB0.1 million for court fees, RMB0.3 million for interest and RMB0.4 million for attorney fees. Following the subsequent failure of NRE to pay according to the order of the Nanjing Jiangning District People’s Court, STR initiated enforcement proceedings in the enforcement department of Nanjing Jiangning District People’s Court and ultimately agreed to accept installment payments managed through the court, the first of which came due on February 28, 2018 and remains unpaid. The Company has since filed an application for the resumption of enforcement, for which the court has acknowledged receipt. The court has informed the Company that it will schedule another hearing to take further actions against NRE and its Chairman, Mr. Lu Tingxiu, the compel NRE to pay the Company according to the court order currently in force.

 

 25 

 

 

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, 2017, 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, 2017.

 

Item 5.    Other Information

 

None.

 

 

 

 

 

 

 

 

 

 

 

 26 

 

 

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

 

 

 

 

 

 

 

 

 

 

 27 

 

 

SIGNATURE

 

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

 

  STR HOLDINGS, INC.  
  (Registrant)  
     
Date: May 11, 2018 /s/ Thomas D. Vitro  
  Name: Thomas D. Vitro  
  Title: Vice President & Chief Financial Officer
    (Duly Authorized Officer and Principal Financial Officer)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

28

 

 

Exhibit 31.1

 

CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO

SECURITIES EXCHANGE ACT RULES 13a-14(a) AND 15d-14(a), AS ADOPTED

PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

 

I, Robert S. Yorgensen, certify that:

 

1.I have reviewed this Quarterly Report on Form 10-Q of STR Holdings, Inc.;

 

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

(a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

(b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

(c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

(d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

(a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

(b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date: May 11, 2018 /s/ Robert S. Yorgensen  
  Name: Robert S. Yorgensen  
  Title:

Chairman, President and Chief Executive Officer

(Principal Executive Officer)

 

Exhibit 31.2

 

CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO

SECURITIES EXCHANGE ACT RULES 13a-14(a) AND 15d-14(a), AS ADOPTED

PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

 

I, Thomas D. Vitro, certify that:

 

1.I have reviewed this Quarterly Report on Form 10-Q of STR Holdings, Inc.;

 

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-(f)) for the registrant and have:

 

(a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

(b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

(c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

(d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

(a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

(b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date: May 11, 2018 /s/ Thomas D. Vitro  
  Name: Thomas D. Vitro  
  Title: Vice President, Chief Financial Officer and Chief
Accounting Officer (Principal Financial Officer and
Principal Accounting Officer)

 

Exhibit 32.1

 

CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER

PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED

BY SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

 

Pursuant to Section 1350, Chapter 63 of Title 18, United States Code, as adopted by Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned, as Chairman, President and Chief Executive Officer of STR Holdings, Inc. (the “Company”), does hereby certify that to my knowledge:

 

1.the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2018 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

 

2.the information contained in the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2018 fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

Date: May 11, 2018 /s/ Robert S. Yorgensen  
  Name: Robert S. Yorgensen  
  Title:

Chairman, President and Chief Executive Officer

(Principal Executive Officer)

 

 

Exhibit 32.2

 

CERTIFICATION OF THE CHIEF FINANCIAL OFFICER

PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED

BY SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

 

Pursuant to Section 1350, Chapter 63 of Title 18, United States Code, as adopted by Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned, as Vice President, Chief Financial Officer and Chief Accounting Officer of STR Holdings, Inc. (the “Company”), does hereby certify that to my knowledge:

 

1.the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2018 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

 

2.the information contained in the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2018 fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

Date: May 11, 2018 /s/ Thomas D. Vitro  
  Name: Thomas D. Vitro  
  Title: Vice President, Chief Financial Officer and Chief
Accounting Officer (Principal Financial Officer and
Principal Accounting Officer)