NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Unless the context otherwise requires, all references to “Maxwell,” the “Company,” “we,” “us,” and “our,” refer to Maxwell Technologies, Inc. and its subsidiaries; all references to “Maxwell SA” refer to the Company’s Swiss subsidiary, Maxwell Technologies, SA; all references to “Nesscap Korea” refer to the Company’s Korean subsidiary, Nesscap Co., Ltd.
Note 1 – Description of Business and Basis of Presentation
Description of Business
Maxwell Technologies, Inc. is a Delaware corporation originally incorporated in 1965 under the name Maxwell Laboratories, Inc. In 1983, the Company completed an initial public offering, and in 1996, changed its name to Maxwell Technologies, Inc. The Company is headquartered in San Diego, California, and has
three
manufacturing facilities located in Rossens, Switzerland; Yongin, South Korea and Peoria, Arizona. In addition, the Company has
two
contract manufacturers located in China. Maxwell operates as
one
operating segment, which is comprised of
two
product lines:
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•
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Ultracapacitors:
The Company’s primary focus, ultracapacitors, are energy storage devices that possess a unique combination of high power density, extremely long operational life and the ability to charge and discharge very rapidly. The Company’s ultracapacitor cells, multi-cell packs and modules provide highly reliable energy storage and power delivery solutions for applications in multiple industries, including automotive, bus, rail and truck in transportation and grid energy storage, and wind in renewable energy.
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•
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High-Voltage Capacitors:
The Company’s CONDIS
®
high-voltage capacitors are designed and manufactured to perform reliably for decades in all climates. These products include grading and coupling capacitors and capacitive voltage dividers that are used to ensure the safety and reliability of electric utility infrastructure and other applications involving transport, distribution and measurement of high-voltage electrical energy.
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In April 2017, the Company acquired substantially all of the assets and business of Nesscap Energy, Inc. (“Nesscap”), a developer and manufacturer of ultracapacitor products for use in transportation, renewable energy, industrial and consumer markets. The acquisition added complementary businesses to the Company’s operations and expanded the Company’s portfolio of ultracapacitor products.
In April 2016, the Company sold substantially all of the assets and liabilities of a third product line, radiation-hardened microelectronics. The Company’s radiation-hardened microelectronic products for satellites and spacecraft included single board computers and components, such as high-density memory and power modules.
The Company’s products are designed and manufactured to perform reliably for the life of the products and systems into which they are integrated. The Company achieves high reliability through the application of proprietary technologies and rigorously controlled design, development, manufacturing and test processes.
Basis of Presentation
The accompanying condensed consolidated financial statements include the accounts of Maxwell Technologies, Inc. and its subsidiaries and have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”). All intercompany transactions and account balances have been eliminated in consolidation. The Company has prepared the accompanying unaudited interim condensed consolidated financial statements in accordance with the instructions to Form 10-Q and the standards of accounting measurement set forth in the
Interim Reporting
Topic of the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”). Consequently, the Company has not necessarily included in this Form 10-Q all information and footnotes required for audited financial statements. In the opinion of the Company’s management, the accompanying unaudited condensed consolidated financial statements in this Form 10-Q contain all adjustments (consisting only of normal recurring adjustments, except as otherwise indicated) necessary to for a fair statement of the financial position, results of operations, and cash flows of Maxwell Technologies, Inc. for all periods presented. The results reported in these condensed consolidated financial statements should not be regarded as necessarily indicative of results that may be expected for any subsequent period or for the entire year. These unaudited condensed consolidated financial statements and notes thereto should be read in conjunction with the Company’s audited financial statements and the notes thereto included in the Company’s latest Annual Report on Form 10-K. Certain information and footnote disclosures normally included in the annual financial statements prepared in accordance with U.S. GAAP have been condensed or omitted in the accompanying interim consolidated financial statements. The year-end condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by U.S. GAAP.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect reported amounts and related disclosures. These estimates include, but are not limited to, assessing the collectability of accounts receivable, applied and unapplied production costs, production capacities, the usage and recoverability of inventories and long-lived assets, deferred income taxes, the incurrence of warranty obligations, the fair value of acquired tangible and intangible assets, impairment of goodwill and intangible assets, estimation of the cost to complete certain projects, estimation of pension assets and liabilities, estimation of employee severance benefit obligations, accruals for estimated losses for legal matters, and estimation of the value of stock-based compensation awards, including the probability that the performance criteria of restricted stock unit awards will be met.
Income Taxes
As of
June 30, 2017
, the Company has a cumulative valuation allowance recorded offsetting its worldwide net deferred tax assets of
$91.0 million
, of which the significant majority represents the valuation allowance on its U.S. net deferred tax asset. The Company has established a valuation allowance against its U.S. federal and state deferred tax assets due to the uncertainty surrounding the realization of such assets. Management periodically evaluates the recoverability of the deferred tax assets and at such time as it is determined that it is more likely than not that U.S. deferred tax assets are realizable, the valuation allowance will be reduced accordingly. Any such release would result in recording a tax benefit that would increase net income in the period the valuation is released.
The Company records taxes on the undistributed earnings of foreign subsidiaries unless the subsidiaries’ earnings are considered indefinitely reinvested outside of the U.S. As of
June 30, 2017
, the Company has recorded a
$4.9 million
deferred tax liability for Swiss withholding taxes associated with
$97.6 million
of undistributed earnings of its Swiss subsidiary that are no longer considered indefinitely reinvested. In the event that the Company repatriates these funds, these withholding taxes would become payable.
Goodwill
Goodwill, which represents the excess of the cost of an acquired business over the net fair value assigned to its assets and liabilities, is not amortized. Instead, goodwill is assessed annually at the reporting unit level for impairment under the
Intangibles—Goodwill and Other
Topic of the FASB ASC. The Company has established December 31 as the annual impairment test date. In addition, the Company assesses goodwill in between annual test dates if an event occurs or circumstances change that could more likely than not reduce the fair value of a reporting unit below its carrying value. The Company first makes a qualitative assessment as to whether goodwill is impaired. If it is more likely than not that goodwill is impaired, the Company performs a quantitative impairment analysis to determine if goodwill is impaired. The Company may also determine to skip the qualitative assessment in any year and move directly to the quantitative test. The quantitative goodwill impairment analysis compares the reporting unit’s carrying amount to its fair value. Goodwill impairment is recorded for any excess of a reporting unit's carrying amount over its fair value, not to exceed the total amount of goodwill allocated to the reporting unit.
During the year ended
December 31, 2016
, the Company performed a quantitative goodwill impairment analysis for
one
reporting unit, which required the Company to make significant assumptions and estimates about the extent and timing of future cash flows, discount rates and growth rates. The analysis indicated that the goodwill assigned to the reporting unit was not impaired.
Long-Lived Assets and Intangible Assets
The Company records intangible assets at their respective estimated fair values at the date of acquisition. Intangible assets are amortized based upon the pattern in which their economic benefit will be realized, or if this pattern cannot be reliably determined, using the straight-line method over their estimated useful lives of
eight
to
fourteen
years.
The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets, including intangible assets, may not be recoverable. When such events occur, the Company compares the carrying amounts of the assets to their undiscounted expected future cash flows. If the Company determines that the carrying value of the asset is not recoverable, a permanent impairment charge is recorded for the amount by which the carrying value of the long-lived asset exceeds its fair value.
Warranty Obligation
The Company provides warranties on all product sales for terms ranging from
one
to
eight
years. The Company accrues for the estimated warranty costs at the time of sale based on historical warranty experience plus any known or expected changes in warranty exposure. As of
June 30, 2017
and
December 31, 2016
, the accrued warranty liability included in “accounts payable and accrued liabilities” in the condensed consolidated balance sheets was
$2.0 million
and
$1.2 million
, respectively.
Revenue Recognition
Revenue is derived primarily from the sale of manufactured products directly to customers. Product revenue is recognized, according to the guidelines of the Securities and Exchange Commission (“SEC”) Staff Accounting Bulletin (“SAB”) Numbers 101,
Revenue Recognition in Financial Statements
, and 104,
Revenue Recognition
, when all of the following criteria are met: (1) persuasive evidence of an arrangement exists (upon contract signing or receipt of an authorized purchase order from a customer); (2) title passes to the customer at either shipment from the Company’s facilities or receipt at the customer facility, depending on shipping terms; (3) customer payment is deemed fixed or determinable and free of contingencies or significant uncertainties; and (4) collectability is reasonably assured. This policy has been consistently applied from period to period.
A portion of our revenue is derived from sales to distributors. Distributor revenue is recognized when all of the criteria for revenue recognition are met, which is generally the time of shipment to the distributor; all returns and credits are estimable and not significant. Certain distributor agreements of Nesscap Korea provide for significant rights of return and price adjustment; revenue related to these distributors is deferred until the period in which the distributor sells through the inventory to the end customer.
Revenue from production-type contracts, which represents less than
five
percent of total revenue, is recognized using the percentage of completion method. The degree of completion is determined based on costs incurred as a percentage of total costs anticipated, excluding costs that are not representative of progress to completion.
Total deferred revenue and customer deposits in the consolidated balance sheets as of
June 30, 2017
and
December 31, 2016
was
$5.8 million
and
$4.0 million
, respectively, and primarily relates to cash received under the localization agreement with CRRC-SRI which will be recognized over the
ten
-year term of the agreement, amounts received in advance from a customer in connection with a production-type contract for which revenue is recognized using the percentage of completion method, payments received under a joint development agreement, which are recognized as an offset to research and development expense as services are performed, deferred revenue for distributors on the sell-through method of recognition, and customer advances.
Liquidity
As of
June 30, 2017
, the Company had approximately
$19.2 million
in cash and cash equivalents, and working capital of
$43.9 million
. In July 2015, the Company entered into a loan agreement with East West Bank (“EWB”), whereby EWB made available to the Company a secured credit facility in the form of a revolving line of credit which is available up to a maximum of the lesser of: (a)
$25.0 million
; or (b) a certain percentage of domestic and foreign trade receivables. As of
June 30, 2017
,
no
amounts have been borrowed under this revolving line of credit and the amount available was
$15.5 million
. Management believes the available cash balance, along with the available borrowings under the revolving line of credit, will be sufficient to fund operations, obligations as they become due, and capital investments for at least the next twelve months.
On April 10, 2017, the Company entered into a stock purchase agreement with SDIC Fund Management Co., Ltd. (“SDIC Fund”), pursuant to which the Company agreed to issue and sell to SDIC approximately
7.4 million
shares of the Company’s common stock for
$6.32
per share, for an aggregate purchase price of approximately
$46.6 million
(the “Transaction”) to be used for strategic developments, including dry battery electrode development, as well as working capital and general corporate purposes. The Transaction is subject to certain closing conditions, including clearance by the Committee on Foreign Investments in the United States (“CFIUS”) as well as completion of filings with relevant Chinese governmental authorities. On August 4, 2017, just prior to the August 7, 2017 expiration date of the investigation phase of the CFIUS review process, the Company and SDIC Fund mutually agreed to voluntarily withdraw the CFIUS filing thereby allowing for additional time for review and discussion with CFIUS regarding the transaction. The Company and SDIC Fund are continuing to work with CFIUS and our advisors to address the remaining open information requests before refiling.
Net Income (Loss) per Share
In accordance with the
Earnings Per Share
Topic of the FASB ASC, basic net income or loss per share is calculated using the weighted average number of common shares outstanding during the period. Diluted net income per share includes the impact of additional common shares that would have been outstanding if potentially dilutive common shares were issued. Potentially dilutive securities are not considered in the calculation of diluted net loss per share, as their inclusion would be anti-dilutive. The following table sets forth the computation of basic and diluted net income (loss) per share (in thousands, except per share data):
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Three Months Ended June 30,
|
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Six Months Ended June 30,
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|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
Numerator
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(10,118
|
)
|
|
$
|
2,167
|
|
|
$
|
(20,517
|
)
|
|
$
|
(4,681
|
)
|
|
Denominator
|
|
|
|
|
|
|
|
|
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Weighted-average common shares outstanding
|
|
35,526
|
|
|
31,842
|
|
|
33,871
|
|
|
31,746
|
|
|
Effect of potentially dilutive securities:
|
|
|
|
|
|
|
|
|
|
Restricted stock awards
|
|
—
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|
|
9
|
|
|
—
|
|
|
—
|
|
|
Restricted stock unit awards
|
|
—
|
|
|
168
|
|
|
—
|
|
|
—
|
|
|
Employee stock purchase plan
|
|
—
|
|
|
8
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|
|
—
|
|
|
—
|
|
|
Weighted-average common shares outstanding, assuming dilution
|
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35,526
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|
|
32,027
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|
|
33,871
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|
|
31,746
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Net income (loss) per share
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Basic and diluted
|
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$
|
(0.28
|
)
|
|
$
|
0.07
|
|
|
$
|
(0.61
|
)
|
|
$
|
(0.15
|
)
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The following table summarizes instruments that may be convertible into common shares that are not included in the denominator used in the diluted net loss per share calculation because to do so would be anti-dilutive (in thousands):
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Three Months Ended June 30,
|
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Six Months Ended June 30,
|
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
Outstanding options to purchase common stock
|
|
393
|
|
|
661
|
|
|
393
|
|
|
636
|
|
|
Unvested restricted stock awards
|
|
30
|
|
|
99
|
|
|
30
|
|
|
158
|
|
|
Unvested restricted stock unit awards
|
|
2,499
|
|
|
471
|
|
|
2,499
|
|
|
1,742
|
|
|
Bonus to be paid in stock awards
|
|
226
|
|
|
—
|
|
|
226
|
|
|
180
|
|
Business Combinations
The Company accounts for businesses it acquires in accordance with ASC Topic 805,
Business Combinations
, which allocates the fair value of the purchase consideration to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values. The excess of the purchase consideration over the fair values of these identifiable assets and liabilities is recorded as goodwill. When determining the fair values of assets acquired and liabilities assumed, management makes significant estimates and assumptions. The Company may utilize third-party valuation specialists to assist the Company in the allocation. Initial purchase price allocations are subject to revision within the measurement period, not to exceed one year from the date of acquisition. Acquisition-related expenses and transaction costs associated with business combinations are expensed as incurred.
Restructuring and Exit Costs
Restructuring and exit costs involve employee-related termination costs, facility exit costs and other costs associated with restructuring activities. The Company accounts for charges resulting from operational restructuring actions in accordance with ASC Topic 420,
Exit or Disposal Cost Obligations
(“ASC 420”) and ASC Topic 712,
Compensation-Nonretirement Postemployment Benefits
(“ASC 712”).
The recognition of restructuring costs requires the Company to make certain assumptions related to the amounts of employee severance benefits, the time period over which leased facilities will remain vacant and expected sublease terms and discount rates. Estimates and assumptions are based on the best information available at the time the obligation arises. These estimates are reviewed and revised as facts and circumstances dictate; changes in these estimates could have a material effect on the amount accrued in the condensed consolidated balance sheet.
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09,
Revenue from Contracts with Customers
. The standard provides companies with a single model for accounting for revenue arising from contracts with customers and supersedes current revenue recognition guidance, including industry-specific revenue guidance. The core principle of the model is to recognize revenue when control of the goods or services transfers to the customer, as opposed to recognizing revenue when the risks and rewards transfer to the customer under the existing revenue guidance. The guidance permits companies to either apply the requirements retrospectively to all prior periods presented, or apply the requirements in the year of adoption, through a cumulative adjustment. In August 2015, the FASB issued ASU 2015-14,
Deferral of the Effective Date
, which defers the required adoption date of ASU 2014-09 by one year. As a result of the deferred effective date, ASU 2014-09 will be effective for the Company in its first quarter of fiscal 2018. Early adoption is permitted but not before the original effective date of the new standard of the first quarter of fiscal 2017. The following ASUs were subsequently issued by the FASB to clarify the implementation guidance in some areas and add practical expedients: In March 2016, ASU 2016-08,
Revenue from Contracts with Customers: Principal versus Agent Considerations;
in April 2016, ASU 2016-10,
Revenue from Contracts with Customers: Identifying Performance Obligations and Licensing;
in May 2016, ASU 2016-12,
Revenue from Contracts with Customers: Narrow Scope Improvements and Practical Expedients;
and in December 2016, ASU 2016-20,
Technical Corrections and Improvements to Revenue from Contracts with Customers
. The Company is in the process of evaluating its standard product sales arrangements and has identified an adoption impact related to revenue from certain distributor agreements which is currently deferred until the period in which the distributor sells through the inventory to the end customer. In connection with the adoption of ASU 2014-09, the Company anticipates a change in the recognition of such distributor revenue whereby revenue is estimated and recognized in the period in which the Company sells the product to the distributor; the adoption impact is expected to be less than
$1.0 million
. Other than this impact, the Company has not yet identified any expected material impact on the timing and measurement of revenue for standard product sales arrangements from the adoption of the standard; however, the Company has not yet formalized its final conclusions from this review process. The Company is still evaluating the impact of adoption on non-product sales arrangements, which represent less than
five
percent of revenue. The Company has also developed a comprehensive project plan to guide implementation of the new standard. The Company intends to adopt the new standard using the modified retrospective transition method effective January 1, 2018.
In February 2016, the FASB issued ASU No. 2016-02,
Leases
. The standard requires that a lessee recognize the assets and liabilities that arise from operating leases. A lessee should recognize in its balance sheet a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities. In transition, lessees and lessors are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. The guidance in ASU 2016-02 is effective for annual and interim reporting periods beginning after December 15, 2018. The Company’s initial evaluation of its current leases does not indicate that the adoption of this standard will have a material impact on its consolidated statements of operations. The Company expects that the adoption of the standard will have a material impact on its consolidated balance sheets for the recognition of certain operating leases as right-of-use assets and lease liabilities.
In March 2016, the FASB issued ASU No. 2016-09,
Improvements to Employee Share-Based Payment Accounting,
which changes the accounting for employee share-based payments, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. Under the new guidance, excess tax benefits associated with share-based payment awards will be recognized in the income statement when the awards vest or settle, rather than in stockholders’ equity. In addition, it will increase the number of shares an employer can withhold to cover income taxes on share-based payment awards and still qualify for the exemption to liability classification. The guidance was effective for the Company in the first quarter of 2017. The adoption of this standard resulted in the recognition of approximately
$10.0 million
of deferred tax assets related to stock-based compensation and a corresponding increase in the Company’s valuation allowance, which will be disclosed in the Company’s notes to the consolidated financial statements in its Annual Report on Form 10-K.
In November 2016, the FASB issued ASU No. 2016-18,
Statement of Cash Flows - Restricted Cash
, which requires entities to show the changes in the total of cash, cash equivalents, restricted cash and restricted cash equivalents in the statement of cash flows. The guidance will be effective for the Company in its first quarter of fiscal 2018. Early adoption is permitted, including adoption in an interim period, but any adjustments must be reflected as of the beginning of the fiscal year that includes that interim period. The new standard must be adopted retrospectively. The Company early adopted this standard in the fourth quarter of 2016. In accordance with the Company’s early adoption of ASU No. 2016-18, for the six months ended
June 30, 2016
, the retrospective restatement was limited to including restricted cash balances in the amount of
$0.4 million
in beginning and
$0.1 million
in ending cash, cash equivalents and restricted cash balances in the consolidated statements of cash flows. The retrospective adoption did not impact reported net loss and does not otherwise have a material impact on the presentation of the overall financial statements.
In January 2017, the FASB issued ASU No. 2017-01,
Business Combinations: Clarifying the Definition of a Business
, which clarifies the definition of a business and adds further guidance in evaluating whether a transaction should be accounted for as an acquisition of an asset or a business. This standard will be effective for the first annual period beginning after December 15, 2017, including interim periods within those periods. Early adoption is permitted. The Company early adopted this standard on January 1, 2017 and the adoption did not have an effect on the Company’s consolidated financial statements.
In January 2017, the FASB issued ASU No. 2017-04,
Intangibles - Goodwill and Other,
which eliminates step two of the quantitative goodwill impairment test. Step two required determination of the implied fair value of a reporting unit, and then a comparison of this implied fair value with the carrying amount of goodwill for the reporting unit, in order to determine any goodwill impairment. Under the new guidance, an entity is only required to complete a one-step quantitative test, by comparing the fair value of a reporting unit with its carrying amount, and any goodwill impairment charge is determined by the amount by which the carrying amount exceeds the reporting unit’s fair value. However, the loss should not exceed the total amount of goodwill allocated to the reporting unit. The standard is effective for the Company in the first quarter of 2020, with early adoption permitted as of January 1, 2017, and is to be applied on a prospective basis. The adoption of the standard will not materially impact the Company's consolidated financial statements unless step one of the annual goodwill impairment test fails. The Company early adopted this standard on January 1, 2017 and the adoption did not have an effect on the Company’s consolidated financial statements.
In March 2017, the FASB issued ASU No. 2017-07,
Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost
, which changes how employers that sponsor defined benefit pension or other postretirement benefit plans present the net periodic benefit cost in the statement of operations. The new guidance requires entities to report the service cost component in the same line item or items as other compensation costs. The other components of net benefit cost are required to be presented in the statement of operations separately from the service cost component and outside the subtotal of loss from operations. ASU 2017-07 also provides that only the service cost component is eligible for capitalization. This standard will impact the Company’s loss from operations but will have no impact on our net loss or net loss per share. The standard is effective for the Company in the first quarter of 2018, with adoption to be applied on a retrospective basis.
In May 2017, the FASB issued ASU No. 2017-09,
Compensation-Stock Compensation: Scope of Modification Accounting,
which provides clarification on when modification accounting should be used for changes to the terms or conditions of a share-based payment award. This ASU does not change the accounting for modifications but clarifies that modification accounting guidance should only be applied if there is a change to the value, vesting conditions or award classification and would not be required if the changes are considered non-substantive. The amendments of this ASU are effective for the Company in the first quarter of 2018, with early adoption permitted. The adoption of ASU 2017-09 is not expected to have an impact on the Company’s consolidated financial statements.
There have been no other recent accounting standards, or changes in accounting standards, during the
six months ended June 30, 2017
, as compared with the recent accounting standards described in our Annual Report on Form 10-K, that are of material significance, or have potential material significance, to the Company.
Note 2 – Balance Sheet Details (in thousands)
Inventories, net
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
2017
|
|
December 31,
2016
|
|
Raw materials and purchased parts
|
|
$
|
10,386
|
|
|
$
|
12,980
|
|
|
Work-in-process
|
|
2,819
|
|
|
858
|
|
|
Finished goods
|
|
18,771
|
|
|
19,492
|
|
|
Reserves
|
|
(1,802
|
)
|
|
(1,082
|
)
|
|
Total inventories, net
|
|
$
|
30,174
|
|
|
$
|
32,248
|
|
Warranty
Activity in the warranty reserve, which is included in “accounts payable and accrued liabilities” in the condensed consolidated balance sheets, is as follows:
|
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|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
2017
|
|
2016
|
|
Beginning balance
|
|
$
|
1,213
|
|
|
$
|
1,288
|
|
|
Acquired liability from Nesscap
|
|
773
|
|
|
—
|
|
|
Product warranties issued
|
|
270
|
|
|
213
|
|
|
Settlement of warranties
|
|
(181
|
)
|
|
(226
|
)
|
|
Changes related to preexisting warranties
|
|
(61
|
)
|
|
(69
|
)
|
|
Ending balance
|
|
$
|
2,014
|
|
|
$
|
1,206
|
|
Accumulated Other Comprehensive Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
Currency
Translation
Adjustment
|
|
Defined Benefit
Pension Plan
|
|
Accumulated
Other
Comprehensive
Income
|
|
Affected Line Items in the Statement of Operations
|
|
Balance as of December 31, 2016
|
|
$
|
7,826
|
|
|
$
|
(2,426
|
)
|
|
$
|
5,400
|
|
|
|
|
Other comprehensive income before reclassification
|
|
4,126
|
|
|
—
|
|
|
4,126
|
|
|
|
|
Amounts reclassified from accumulated other comprehensive income
|
|
—
|
|
|
60
|
|
|
60
|
|
|
Cost of Sales, Selling, General and Administrative and Research and Development Expense
|
|
Net other comprehensive income for the
six months ended June 30, 2017
|
|
4,126
|
|
|
60
|
|
|
4,186
|
|
|
|
|
Balance as of June 30, 2017
|
|
$
|
11,952
|
|
|
$
|
(2,366
|
)
|
|
$
|
9,586
|
|
|
|
Note 3 – Business Combination
On April 28, 2017, the Company acquired substantially all of the assets and business of Nesscap Energy, Inc. (“Nesscap”), a developer and manufacturer of ultracapacitor products for use in transportation, renewable energy, industrial and consumer markets, in exchange for the issuance of approximately
4.1 million
shares of Maxwell common stock (the “Share Consideration”) and the assumption of certain liabilities pursuant to the terms of the previously announced Arrangement Agreement dated as of February 28, 2017 between Maxwell and Nesscap (the “ Nesscap Acquisition”). The value of the Share Consideration was approximately
$25.3 million
based on the closing price of the Company’s common stock on April 28, 2017. Additionally, per the Arrangement Agreement, the Company paid approximately
$1.0 million
of transaction taxes on behalf of the seller. The Nesscap Acquisition was effected by means of a court-approved statutory plan of arrangement and was approved by the requisite vote cast by shareholders of Nesscap at a special meeting of Nesscap’s shareholders held on April 24, 2017.
The Share Consideration represents approximately
11.3%
of the outstanding shares of Maxwell, based on the number of shares of Maxwell common stock outstanding as of April 28, 2017.
The Nesscap Acquisition adds scale to the Company’s operations and expands the Company’s portfolio of ultracapacitor products.
The fair value of the purchase price consideration consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
Maxwell common stock
|
|
$
|
25,294
|
|
|
Settlement of seller’s transaction expenses
|
|
1,006
|
|
|
Total estimated purchase price
|
|
$
|
26,300
|
|
The acquisition has been accounted for under the acquisition method of accounting in accordance with ASC 805,
Business Combinations
. Under this method of accounting, the Company recorded the acquisition based on the fair value of the consideration given and the cash consideration paid. The Company allocated the acquisition consideration paid to the identifiable assets acquired and liabilities assumed based on their respective preliminary fair values at the date of completion of the acquisition. Any excess of the value of consideration paid over the aggregate fair value of those net assets has been recorded as goodwill, which is attributable to expected synergies from combining operations, the acquired workforce, as well as intangible assets which do not qualify for separate recognition. The Company has not yet determined the allocation of goodwill to its reporting units. The goodwill associated with the acquisition is not deductible for income tax purposes.
The preliminary fair values of net tangible assets and intangible assets acquired were based upon preliminary valuations and the Company's estimates and assumptions are subject to change within the measurement period (up to one year from the acquisition date). The primary areas that remain preliminary relate to a license termination liability, income taxes and residual goodwill. The Company expects to continue to obtain information to assist in determining the fair values of the net assets acquired during the measurement period.
The following table summarizes the preliminary allocation of the assets acquired and liabilities assumed at the acquisition date (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Fair Value
|
|
Cash and cash equivalents
|
|
$
|
909
|
|
|
Accounts receivable
|
|
2,545
|
|
|
Inventories
|
|
4,397
|
|
|
Prepaid expenses and other assets
|
|
764
|
|
|
Property and equipment
|
|
3,314
|
|
|
Intangible assets
|
|
11,800
|
|
|
Accounts payable, accrued compensation and other liabilities
|
|
(5,713
|
)
|
|
Employee severance obligation
|
|
(3,340
|
)
|
|
Total identifiable net assets
|
|
14,676
|
|
|
Goodwill
|
|
11,624
|
|
|
Total purchase price
|
|
$
|
26,300
|
|
The fair value of inventories acquired included an acquisition accounting fair market value step-up of
$0.7 million
. In the three months ended June 30, 2017, the Company recognized
$0.3 million
of the step-up as a component of cost of revenue for acquired inventory sold during the period. Included in inventory as of June 30, 2017, was
$0.4 million
relating to the remaining fair value step-up associated with the acquisition.
For the three and six months ended June 30, 2017, acquisition-related costs of
$1.5 million
and
$1.8 million
, respectively, were included in selling, general, and administrative expenses in the Company's condensed consolidated statements of operations.
The following table presents details of the preliminary identified intangible assets acquired through the Nesscap Acquisition (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated Useful Life (in years)
|
|
Fair Value
|
|
Customer relationships - institutional
|
|
14
|
|
$
|
3,200
|
|
|
Customer relationships - non-institutional
|
|
10
|
|
4,400
|
|
|
Trademarks and trade names
|
|
10
|
|
1,500
|
|
|
Developed technology
|
|
8
|
|
2,700
|
|
|
Total intangible assets
|
|
|
|
$
|
11,800
|
|
The fair value of the
$11.8 million
of identified intangible assets acquired in connection with the Nesscap Acquisition was estimated using an income approach. Under the income approach, an intangible asset's fair value is equal to the present value of future economic benefits to be derived from ownership of the asset. More specifically, the fair values of the customer relationship intangible assets were determined using the multi-period excess earnings method, which estimates an intangible asset’s value based on the present value of the incremental after-tax cash flows attributable only to the intangible asset. The fair values of the trademark and trade names and developed technology intangible assets were valued using the relief from royalty method, which is based on the principle that ownership of the intangible asset relieves the owner of the need to pay a royalty to another party in exchange for rights to use the asset.
The following unaudited pro forma financial information presents the combined results of operations for each of the periods presented, as if the Nesscap Acquisition had occurred at the beginning of fiscal year 2016 (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
Net revenues
|
|
$
|
38,096
|
|
|
$
|
39,675
|
|
|
$
|
69,948
|
|
|
$
|
78,640
|
|
|
Net income (loss)
|
|
(9,346
|
)
|
|
1,264
|
|
|
(20,487
|
)
|
|
(6,655
|
)
|
|
Net income (loss) per share:
|
|
|
|
|
|
|
|
|
|
Basic
|
|
(0.25
|
)
|
|
0.04
|
|
|
(0.56
|
)
|
|
(0.19
|
)
|
|
Diluted
|
|
(0.25
|
)
|
|
0.03
|
|
|
(0.56
|
)
|
|
(0.19
|
)
|
|
Weighted average common shares outstanding:
|
|
|
|
|
|
|
|
|
|
Basic
|
|
36,757
|
|
|
35,989
|
|
|
36,511
|
|
|
35,893
|
|
|
Diluted
|
|
36,757
|
|
|
36,174
|
|
|
36,511
|
|
|
35,893
|
|
The unaudited pro forma information has been adjusted to reflect the following:
|
|
|
|
•
|
Amortization expense for acquired intangibles and removal of Nesscap historical intangibles amortization
|
|
|
|
|
•
|
Removal of historical Nesscap interest expenses, gains and losses related to debt not acquired
|
|
|
|
|
•
|
Recognition of expense associated with the valuation of inventory acquired
|
|
|
|
|
•
|
Removal of transaction expenses
|
The pro forma data is presented for illustrative purposes only and is not necessarily indicative of the consolidated results of operations of the combined business had the acquisition actually occurred at the beginning of fiscal year 2016 or of the results of future operations of the combined business. The unaudited pro forma financial information does not reflect any operating efficiencies and cost saving that may be realized from the integration of the acquisition. For the three and six months ended June 30, 2017,
$4.1 million
of revenue and
$0.5 million
of net loss included in the Company's condensed consolidated statements of operations were the result of acquired Nesscap operations.
Note 4 – Sale of Microelectronics Product Line
On April 27, 2016, the Company sold substantially all of the assets and liabilities comprising its microelectronics product line to Data Device Corporation, a privately-held Delaware corporation. The transaction purchase price was
$21.0 million
, subject to a working capital adjustment and a one year
$1.5 million
escrow holdback on the purchase price, which was received in May 2017.
The assets sold were primarily comprised of inventory, accounts receivable and property and equipment. The liabilities sold were comprised mainly of deferred revenue, accounts payable and other current liabilities. During the first quarter of 2016, the Company met the held for sale criteria in accordance with ASC Topic 380,
Impairment or Disposal of Long Lived Assets,
and
the Company ceased depreciation on the property and equipment and classified the assets to be sold as held for sale. During the second quarter of 2016, all assets and liabilities formerly classified as held for sale were disposed of pursuant to the sale. The sale of the microelectronics product line did not represent a strategic shift that had a major effect on the Company’s operations and financial results. As such, the Company did not account for the disposition as a discontinued operation. During the
six months ended June 30, 2016
, the Company recorded a gain of
$6.7 million
related to the sale of the microelectronics product line.
In connection with the sale of the microelectronics product line, the Company guaranteed the future operating lease commitment related to the facility formerly occupied by the microelectronics product line, which was assumed by the buyer. The Company is obligated to perform under the guarantee if Data Device Corporation defaults on the lease at any time during the remainder of the lease agreement. The lease had a remaining lease term of
fifteen
months from the date of sale and expires on July 31, 2017. As of June 30, 2017, the undiscounted maximum amount of potential future payments under the lease guarantee is
$0.1 million
. The Company assessed the probability that it will be required to make payments under the terms of the guarantee based upon its actual and expected loss experience. Consistent with the requirements of FASB ASC 460,
Guarantees,
the Company has not recorded a liability on its consolidated balance sheet as of June 30, 2017 as a loss is not considered probable.
Note 5 – Goodwill and Intangible Assets
In April 2017, the Company acquired substantially all of the assets and business of Nesscap. As of June 30, 2017, the purchase price allocation for the Nesscap Acquisition remains preliminary.
The change in the carrying amount of goodwill from December 31,
2016
to
June 30, 2017
was as follows (in thousands):
|
|
|
|
|
|
|
|
|
Balance at December 31, 2016
|
|
$
|
22,799
|
|
|
Goodwill from Nesscap Acquisition
|
|
11,624
|
|
|
Foreign currency translation adjustments
|
|
1,169
|
|
|
Balance at June 30, 2017
|
|
$
|
35,592
|
|
The composition of intangible assets subject to amortization was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2017
|
|
|
|
Useful Life
(in years)
|
|
Gross Initial Carrying Value
|
|
Cumulative Foreign Currency Translation Adjustment
|
|
Accumulated Amortization
|
|
Net Carrying Value
|
|
Customer relationships - institutional
|
|
14
|
|
$
|
3,200
|
|
|
$
|
(36
|
)
|
|
$
|
(39
|
)
|
|
$
|
3,125
|
|
|
Customer relationships - non-institutional
|
|
10
|
|
4,400
|
|
|
(50
|
)
|
|
(75
|
)
|
|
4,275
|
|
|
Trademarks and trade names
|
|
10
|
|
1,500
|
|
|
(17
|
)
|
|
(25
|
)
|
|
1,458
|
|
|
Developed technology
|
|
8
|
|
2,700
|
|
|
(31
|
)
|
|
(58
|
)
|
|
2,611
|
|
|
Total intangible assets
|
|
|
|
$
|
11,800
|
|
|
$
|
(134
|
)
|
|
$
|
(197
|
)
|
|
$
|
11,469
|
|
The useful life of intangible assets reflects the period the assets are expected to contribute directly or indirectly to future cash flows. Intangible assets are amortized over the useful lives of the assets utilizing the straight-line method, which is materially consistent with the pattern in which the expected benefits will be consumed, calculated using undiscounted cash flows.
Amortization expense of
$60,000
was recorded to “cost of revenue” and
$142,000
was recorded to “selling, general and administrative” expense for the three and
six months ended June 30, 2017
. Estimated amortization expense for the remainder of 2017 is
$0.6 million
. Estimated amortization expense for the years 2018 through 2021 is
$1.2 million
each year. The expected amortization expense is an estimate and actual amounts could differ due to additional intangible asset acquisitions, changes in foreign currency rates or impairment of intangible assets.
Note 6 – Restructuring and Exit Costs
2017 Restructuring Plan
On February 28, 2017, the Board of Directors of the Company approved a comprehensive restructuring plan that includes a wide range of organizational efficiency initiatives and other cost reduction opportunities. Total charges for the 2017 restructuring plan are approximately
$1.0 million
, all of which were incurred in the first quarter of 2017. These charges consist of employee severance costs which will all be paid in cash.
For the
six months ended June 30, 2017
, the Company recorded net charges related to its 2017 restructuring plan of
$1.0 million
within “restructuring and exit costs” in the condensed consolidated statements of operations.
No
restructuring charges were incurred during the
three months ended June 30, 2017
.
The following table summarizes the changes in the Company’s 2017 restructuring plan liability, which is recorded in “accrued employee compensation” in the Company’s condensed consolidated balance sheet, for the
six months ended June 30, 2017
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
Employee Severance Costs
|
|
Restructuring liability as of December 31, 2016
|
|
$
|
—
|
|
|
Costs incurred
|
|
997
|
|
|
Amounts paid
|
|
(600
|
)
|
|
Restructuring liability as of June 30, 2017
|
|
$
|
397
|
|
2015 Restructuring Plan
In 2015, the Company initiated a restructuring plan to consolidate U.S. manufacturing operations and to reduce headcount and operating expenses in order to align the Company’s cost structure with the current business forecast and to improve operational efficiency. The plan also included the disposition of the Company’s microelectronics product line which was completed in April 2016. The restructuring plan was otherwise substantially completed in the first quarter of 2016. Total restructuring and exit costs were
$2.8 million
, which included
$1.3 million
in facilities costs related to the consolidation of manufacturing operations,
$1.2 million
in employee severance costs and
$0.3 million
in other exit costs. The Company also incurred
$0.6 million
in accelerated equipment depreciation expense related to the consolidation of manufacturing operations. Total cash expenditures related to restructuring activities were approximately
$1.5 million
.
In June 2015, the Company ceased use of approximately
60,000
square feet of its Peoria, AZ manufacturing facility, and determined this leased space would have no future economic benefit to the Company based on the current business forecast. As a result, the Company has recorded a liability for the future rent obligation associated with this space, net of estimated sublease income, in accordance with ASC Topic 420. As of
June 30, 2017
and December 31, 2016, lease obligation liabilities related to this leased space of
$0.6 million
and
$0.8 million
, respectively, were included in “accounts payable and accrued liabilities” and “other long term liabilities” in the condensed consolidated balance sheets.
As the 2015 restructuring plan was completed in 2016, there were no restructuring charges or cash payments related to this plan during the three and
six months ended June 30, 2017
. For the three and
six months ended June 30, 2016
, the Company recorded net charges related to its 2015 restructuring plan of
$0.1 million
and
$0.3 million
, respectively, within “restructuring and exit costs” and also recorded
$0.1 million
of accelerated depreciation expense during the
six months ended June 30, 2016
within “cost of revenue” in the condensed consolidated statements of operations. During the three and
six months ended June 30, 2016
, cash payments in connection with the 2015 restructuring plan were
$0.2 million
and
$0.4 million
, respectively, primarily related to employee severance and other exit costs.
Note 7 – Credit Facilities
Revolving Line of Credit
In July 2015, the Company entered into a Loan and Security Agreement (the “Loan Agreement”) with East West Bank (“EWB”), whereby EWB made available to the Company a secured credit facility in the form of a revolving line of credit (the “Revolving Line of Credit”). The Revolving Line of Credit is available up to a maximum of the lesser of: (a)
$25.0 million
; or (b) a certain percentage of domestic and foreign trade receivables. As of
June 30, 2017
the amount available under the Revolving Line of Credit was
$15.5 million
. In general, amounts borrowed under the Revolving Line of Credit are secured by a lien on all of the Company’s assets, including its intellectual property, as well as a pledge of
100%
of its equity interests in Maxwell SA. The obligations under the Loan Agreement are also guaranteed directly by Maxwell SA. The Revolving Line of Credit will mature on July 3, 2018. In the event that the Company is in violation of the representations, warranties and covenants made in the Loan Agreement, including certain financial covenants set forth therein, the Company may not be able to utilize the Revolving Line of Credit or repayment of amounts owed pursuant to the Loan Agreement could be accelerated. The Company is currently in compliance with the financial covenants that it is required to meet during the term of the credit agreement including the minimum four-quarter rolling EBITDA, quarterly minimum quick ratio and monthly minimum cash requirements. On February 28, 2017, the Company entered into an amendment to the Loan Agreement to approve the acquisition of substantially all of the assets and business of Nesscap Energy, Inc., and to modify certain financial covenants.
Amounts borrowed under the Revolving Line of Credit bear interest, payable monthly. Such interest shall accrue based upon, at the Company’s election, subject to certain limitations, either a Prime Rate plus a margin ranging from
0%
to
0.50%
or the LIBOR Rate plus a margin ranging from
2.75%
to
3.25%
, the specific rate for each as determined based upon the Company’s leverage ratio from time to time.
The Company is required to pay an annual commitment fee equal to
$125,000
, and an unused commitment fee of the average daily unused amount of the Revolving Line of Credit, payable monthly, equal to a per annum rate in a range of
0.30%
to
0.50%
, as determined by the Company’s leverage ratio on the last day of the previous fiscal quarter. No amounts have been borrowed under this Revolving Line of Credit as of
June 30, 2017
.
Other Long-term Borrowings
The Company has various financing agreements for vehicles. These agreements are for up to an original
three
year repayment period with interest rates ranging from
0.9%
to
1.9%
. At
June 30, 2017
and
December 31, 2016
,
$77,000
and
$83,000
, respectively, was outstanding under these financing agreements.
Note 8 – Fair Value Measurements
The Company records certain financial instruments at fair value in accordance with the
Fair Value Measurements and Disclosures
Topic of the FASB ASC. Historically, the financial instruments to which this topic applied were foreign currency forward contracts and the fair value of these foreign currency forward contracts was recorded as a liability or asset in the consolidated balance sheets. During the second quarter of 2016, the Company ceased using foreign currency forward contracts to hedge foreign currency exposure as management determined its foreign currency exposure was no longer sufficiently significant to merit the use of hedging instruments. Therefore, no foreign currency forward contracts were outstanding as of
June 30, 2017
. The fair value of these derivative instruments was measured using models following quoted market prices in active markets for identical instruments, which is a Level 2 input under the fair value hierarchy of the
Fair Value Measurements and Disclosures
Topic of the FASB ASC.
The carrying value of short-term and long-term borrowings approximates fair value because of the relative short maturity of these instruments and the interest rates the Company could currently obtain.
Note 9 – Foreign Currency Derivative Instruments
The Company has historically used forward contracts to hedge certain monetary assets and liabilities, primarily receivables, payables and cash balances, denominated in foreign currencies. During the second quarter of 2016, the Company ceased using foreign currency forward contracts to hedge foreign currency exposure as management determined its foreign currency exposure was no longer sufficiently significant to merit the use of hedging instruments. The change in fair value of these forward contracts represented a natural hedge as gains and losses on these instruments partially offset the changes in the fair value of the underlying monetary assets and liabilities due to movements in currency exchange rates. These forward contracts generally expired in one month. These contracts were considered economic hedges but were not designated as hedges under the
Derivatives and Hedging Topic
of the FASB ASC, therefore, the change in the fair value of the instrument was recognized each period in the consolidated statement of operations.
The net gains and losses on foreign currency forward contracts included in “foreign currency exchange loss, net” in the condensed consolidated statements of operations are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2016
|
|
Six Months Ended June 30, 2016
|
|
Total gain (loss)
|
|
|
$
|
(73
|
)
|
|
$
|
(88
|
)
|
The net gains and losses on foreign currency forward contracts were partially offset by net gains and losses on the underlying monetary assets and liabilities. Foreign currency gains and losses on those underlying monetary assets and liabilities included in “foreign currency exchange loss, net” in the condensed consolidated statements of operations are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2016
|
|
Six Months Ended June 30, 2016
|
|
Total gain (loss)
|
|
$
|
(19
|
)
|
|
$
|
(37
|
)
|
For additional information, refer to Note 8 – Fair Value Measurements.
Note 10 – Stock Plans
The Company has
two
active stock-based compensation plans as of
June 30, 2017
: the 2004 Employee Stock Purchase Plan and the 2013 Omnibus Equity Incentive Plan under which incentive stock options, non-qualified stock options, restricted stock awards and restricted stock units can be granted to employees and non-employee directors.
The Company generally issues the majority of employee stock compensation grants in the first quarter of the year; other grants issued during the year are typically for new employees or non-employee directors.
Stock Options
During the three and
six months ended June 30, 2017
, the Company granted
45,000
stock options which had an average grant date fair value per share of
$2.95
. During the three and six months ended June 30, 2016,
no
stock options were granted. Compensation expense recognized for stock options for the
three months ended June 30, 2017
and
2016
was
$57,000
and
$4,000
, respectively. Compensation expense recognized for stock options for the
six months ended June 30, 2017
and
2016
was
$107,000
and
$85,000
, respectively. The fair value of the stock options granted during the three and
six months ended June 30, 2017
was estimated using the Black-Scholes valuation model with the following assumptions:
|
|
|
|
|
|
|
|
|
|
Three and Six Months Ended June 30, 2017
|
|
Expected dividend yield
|
|
—
|
%
|
|
Expected volatility
|
|
59
|
%
|
|
Risk-free interest rate
|
|
1.87
|
%
|
|
Expected term (in years)
|
|
5.5
|
|
Restricted Stock Awards
Beginning in 2014, the Company ceased granting restricted stock awards (“RSAs”) and began granting restricted stock units (“RSUs”) to employees as part of its annual equity incentive award program, therefore, no restricted stock awards were issued during the three and
six months ended
June 30, 2017
and
2016
. During the
three months ended June 30, 2017
and
2016
, compensation expense recognized for RSAs was
$0.1 million
and
$0.3 million
, respectively. During the
six months ended June 30, 2017
and
2016
, compensation expense recognized for RSAs was
$0.2 million
and
$9,000
, respectively. During the first quarter of 2016, there were significant reversals of previously recorded expense due to terminations under the Company’s 2015 restructuring plan as well as other employee terminations.
Restricted Stock Units
Non-employee directors receive annual RSU awards as part of their annual retainer compensation. These awards vest approximately
one
year from the date of grant provided the non-employee director provides continued service. Additionally, new directors normally receive RSUs upon their election to the board. The Company also grants RSUs to employees as part of its annual equity incentive award program, with vesting typically in equal annual installments over
four
years of continuous service. Additionally, the Company grants performance-based restricted stock units (“PSUs”) to executives with vesting contingent on continued service and achievement of specified performance objectives or stock price performance. Each restricted stock unit represents the right to receive
one
unrestricted share of the Company’s common stock upon vesting.
During the
three months ended June 30, 2017
, the Company granted
443,704
RSUs of which
254,942
were service-based RSUs with an average grant date fair value of
$5.73
per share and
188,762
were PSUs with an average grant date fair value of
$6.08
per share. During the
six months ended
June 30, 2017
, the Company granted
1,413,417
RSUs of which
921,655
were service-based RSUs with an average grant date fair value of
$5.52
per share and
491,762
were PSUs with an average grant date fair value of
$6.77
per share.
During the
three months ended June 30, 2016
, the Company granted
152,417
RSUs of which
122,085
were service-based RSUs with an average grant date value of
$5.10
per share and
30,332
were PSUs with an average grant date fair value of
$7.08
per share. During the
six months ended June 30, 2016
, the Company granted
1,187,631
RSUs of which
854,912
were service-based RSUs with an average grant date value of
$5.59
per share and
332,719
were PSUs with an average grant date fair value of
$7.50
per share.
For the
three months ended June 30, 2017
and 2016, PSUs granted included
30,762
and
30,332
market-condition restricted stock units, respectively. For the
six months ended
June 30, 2017
and
2016
, PSUs granted included
333,762
and
286,495
market-condition restricted stock units, respectively. The market-condition PSUs will vest based on the level of the Company’s stock price performance against a determined market index over
one
,
two
and
three
year performance periods. The market-condition PSUs have the potential to vest between
0%
and
200%
depending on the Company’s stock price performance and the recipients must remain employed through the end of each performance period in order to vest. The fair value of the market-condition PSUs granted was calculated using a Monte Carlo valuation model with the following assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Three and Six Months Ended June 30,
|
|
|
|
2017
|
|
2016
|
|
Expected dividend yield
|
|
—
|
%
|
|
—
|
%
|
|
Expected volatility
|
|
53
|
%
|
|
62
|
%
|
|
Risk-free interest rate
|
|
1.55
|
%
|
|
1.07
|
%
|
|
Expected term (in years)
|
|
2.8
|
|
|
3.0
|
|
The following table summarizes the amount of compensation expense recognized for RSUs for the three and
six months ended
June 30, 2017
and
2016
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
RSU Type
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
Service-based
|
|
$
|
669
|
|
|
$
|
536
|
|
|
$
|
1,337
|
|
|
$
|
1,069
|
|
|
Performance objectives
|
|
164
|
|
|
29
|
|
|
170
|
|
|
41
|
|
|
Market-condition
|
|
403
|
|
|
180
|
|
|
595
|
|
|
371
|
|
|
|
|
$
|
1,236
|
|
|
$
|
745
|
|
|
$
|
2,102
|
|
|
$
|
1,481
|
|
Employee Stock Purchase Plan
The 2004 Employee Stock Purchase Plan (“ESPP”) permits substantially all employees to purchase common stock through payroll deductions, at
85%
of the lower of the trading price of the stock at the beginning or at the end of each
six
month offering period. The number of shares purchased is based on participants’ contributions made during the offering period.
Compensation expense recognized for the ESPP for the
three months ended June 30, 2017
and
2016
was
$20,000
and
$54,000
, respectively, and was
$53,000
and
$135,000
, respectively, for the
six months ended June 30, 2017
and
2016
. The fair value of the ESPP shares for the three and
six months ended June 30, 2017
and
2016
was estimated using the Black-Scholes valuation model for a call and a put option with the following weighted-average assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three and Six Months Ended June 30,
|
|
|
|
2017
|
|
2016
|
|
Expected dividend yield
|
|
—
|
%
|
|
—
|
%
|
|
Expected volatility
|
|
29
|
%
|
|
60
|
%
|
|
Risk-free interest rate
|
|
0.62
|
%
|
|
0.49
|
%
|
|
Expected term (in years)
|
|
0.5
|
|
|
0.5
|
|
|
Fair value per share
|
|
$
|
1.19
|
|
|
$
|
2.27
|
|
Bonuses Settled in Stock
On January 15, 2016, the Compensation Committee of the Board of Directors of the Company adopted the Maxwell Technologies, Inc. Incentive Bonus Plan to enable participants to earn annual incentive bonuses based upon achievement of specified financial and strategic performance objectives. The Company may settle bonuses earned under the plan in either cash or stock, and currently intends to settle the majority of bonuses earned under the plan in stock. During the first quarter of 2017, the Company settled
$1.2 million
of bonuses earned under the plan for the 2016 performance period with
142,582
shares of fully vested common stock and
89,730
fully vested restricted stock units, which were subsequently settled during the second quarter of 2017. An additional
$0.3 million
of bonuses earned for the 2016 performance period are recorded in “accrued employee compensation” in the Company’s condensed consolidated balance sheet as of June 30, 2017.
The Company recorded
$0.8 million
and
$0.3 million
of stock compensation expense related to the bonus plan during the
three months ended June 30, 2017
and 2016, respectively. The Company recorded
$1.3 million
and
$0.9 million
of stock compensation expense related to the bonus plan during the
six months ended June 30, 2017
and 2016, respectively.
Director Fees Settled in Stock
In 2017, the Board approved a deferred compensation program under which non-employee directors may make irrevocable elections to receive all or a portion of their cash-based non-employee director fees (including, as applicable, any annual retainer fee, committee fee and any other compensation payable with respect to their service as a member of the Board) in stock and to elect to defer receipt of those shares. In the event that a director makes such an election, the Company will grant fully vested restricted stock units in lieu of cash, with an initial value equal to the cash fees, which will be settled either in the year granted or at a future date elected by the respective non-employee director through the issuance of Maxwell common stock. In addition, non-employee directors may elect to defer settlement of the initial and annual RSU awards granted to them in connection with their service as a non-employee director. The Company recorded
$0.1 million
of stock compensation expense related to director fees to be settled in stock during the three and
six months ended June 30, 2017
.
Stock-Based Compensation Expense
Stock-based compensation cost included in cost of revenue; selling, general and administrative expense; and research and development expense is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
Cost of revenue
|
|
$
|
257
|
|
|
$
|
262
|
|
|
$
|
450
|
|
|
$
|
497
|
|
|
Selling, general and administrative
|
|
1,596
|
|
|
966
|
|
|
2,665
|
|
|
1,637
|
|
|
Research and development
|
|
401
|
|
|
231
|
|
|
677
|
|
|
528
|
|
|
Total stock-based compensation expense
|
|
$
|
2,254
|
|
|
$
|
1,459
|
|
|
$
|
3,792
|
|
|
$
|
2,662
|
|
Note 11 – Defined Benefit Plans
Maxwell SA Pension Plan
Maxwell SA has a retirement plan that is classified as a defined benefit pension plan. The employee pension benefit is based on compensation, length of service and credited investment earnings. The plan guarantees both a minimum rate of return as well as minimum annuity purchase rates. The Company’s funding policy with respect to the pension plan is to contribute the amount required by Swiss law, using the required percentage applied to the employee’s compensation. In addition, participating employees are required to contribute to the pension plan. This plan has a measurement date of December 31.
Components of net periodic pension cost are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
Service cost
|
|
$
|
245
|
|
|
$
|
297
|
|
|
$
|
486
|
|
|
$
|
587
|
|
|
Interest cost
|
|
57
|
|
|
62
|
|
|
114
|
|
|
123
|
|
|
Expected return on plan assets
|
|
(252
|
)
|
|
(298
|
)
|
|
(499
|
)
|
|
(589
|
)
|
|
Prior service cost amortization
|
|
39
|
|
|
38
|
|
|
75
|
|
|
75
|
|
|
Deferred loss amortization
|
|
—
|
|
|
62
|
|
|
—
|
|
|
122
|
|
|
Net periodic pension cost
|
|
$
|
89
|
|
|
$
|
161
|
|
|
$
|
176
|
|
|
$
|
318
|
|
Employer contributions of
$0.1 million
and
$0.2 million
were paid during the
three months ended June 30, 2017
and
2016
, respectively. Employer contributions of
$0.3 million
were paid during each of the
six months ended June 30, 2017
and
2016
. Additional employer contributions of approximately
$0.3 million
are expected to be paid during the remainder of fiscal
2017
.
Korea Employee Severance Plan
In connection with the Nesscap Acquisition, the Company assumed the accrued severance liability related to Nesscap Korea’s employees. Pursuant to the Labor Standards Act of Korea, employees and most executive officers with
one
or more years of service are entitled to severance benefits upon the termination of their employment based on their length of service and rate of pay.
Components of net cost related to the employee severance plan are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three and Six Months Ended June 30, 2017
|
|
Service cost
|
|
$
|
88
|
|
|
Interest cost
|
|
13
|
|
|
Net cost
|
|
$
|
101
|
|
Employer contributions of
$1,000
were paid during each of the three and
six months ended June 30, 2017
. Additional employer contributions of approximately
$5,000
are expected to be paid during the remainder of fiscal 2017.
Note 12 – Legal Proceedings
Although the Company expects to incur legal fees in connection with the below legal proceedings, the Company is unable to estimate the amount of such legal fees and therefore, such fees will be expensed in the period the legal services are performed.
FCPA Matter
In January 2011, the Company reached settlements with the U.S. Securities and Exchange Commission (“SEC”) and the U.S. Department of Justice (“DOJ”) with respect to charges asserted by the SEC and DOJ relating to the anti-bribery, books and records, internal controls, and disclosure provisions of the U.S. Foreign Corrupt Practices Act (“FCPA”) and other securities laws violations. The Company paid the monetary penalties under these settlements in installments such that all monetary penalties were paid in full by January 2013. With respect to the DOJ charges, a judgment of dismissal was issued in the U.S. District Court for the Southern District of California on March 28, 2014.
On October 15, 2013, the Company received an informal notice from the DOJ that an indictment against the former Senior Vice President and General Manager of its Swiss subsidiary had been filed in the United States District Court for the Southern District of California. The indictment is against the individual, a former officer, and not against the Company and the Company does not foresee that further penalties or fines could be assessed against it as a corporate entity for this matter. However, the Company may be required throughout the term of the action to advance the legal fees and costs incurred by the individual defendant and to incur other financial obligations. While the Company maintains directors’ and officers’ insurance policies which are intended to cover legal expenses related to its indemnification obligations in situations such as these, the Company cannot determine if and to what extent the insurance policy will cover the ongoing legal fees for this matter. Accordingly, the legal fees that may be incurred by the Company in defending this former officer could have a material impact on its financial condition and results of operation.
Swiss Bribery Matter
In August 2013, the Company’s Swiss subsidiary was served with a search warrant from the Swiss federal prosecutor’s office. At the end of the search, the Swiss federal prosecutor presented the Company with a listing of the materials gathered by the representatives and then removed the materials from its premises for keeping at the prosecutor’s office. Based upon the Company’s exposure to the case, the Company believes this action to be related to the same or similar facts and circumstances as the FCPA action previously settled with the SEC and the DOJ. During initial discussions, the Swiss prosecutor has acknowledged both the existence of the Company’s deferred prosecution agreement with the DOJ and its cooperation efforts thereunder, both of which should have a positive impact on discussions going forward. Additionally, other than the activities previously reviewed in conjunction with the SEC and DOJ matters under the FCPA, the Company has no reason to believe that additional facts or circumstances are under review by the Swiss authorities. To date, the Swiss prosecutor has not issued its formal decision as to whether the charges will be brought against individuals or the Company or whether the proceeding will be abandoned. At this stage in the investigation, the Company is currently unable to determine the extent to which it will be subject to fines in accordance with Swiss bribery laws and what additional expenses will be incurred in order to defend this matter. As such, the Company cannot determine whether there is a reasonable possibility that a loss will be incurred nor can it estimate the range of any such potential loss. Accordingly, the Company has not accrued an amount for any potential loss associated with this action, but an adverse result could have a material adverse impact on its financial condition and results of operation.
Government Investigations
In early 2013, the Company voluntarily provided information to the SEC and the United States Attorney’s Office for the Southern District of California related to its announcement that it intended to file restated financial statements for fiscal years 2011 and 2012. On June 11, 2015 and June 16, 2016, the Company received subpoenas from the SEC requesting certain documents related to, among other things, the facts and circumstances surrounding the restated financial statements. The Company has provided documents and information to the SEC in response to the subpoenas and continues to cooperate with the SEC. In September 2016, the Company entered into a tolling agreement effective for the period beginning on September 12, 2016, and running through June 30, 2017, with the SEC related to these matters. In June 2017, the Company entered into an amended and restated version of this tolling agreement effective for the period beginning on September 12, 2016, and running through October 31, 2017. At this stage, the Company cannot predict the ultimate outcome of this investigation or whether it will result in any loss. Accordingly, the Company has not accrued an amount for any potential loss associated with this action, but an adverse result could have a material adverse impact on its financial condition and results of operations.