NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Unless the context otherwise requires, all references to “Maxwell,” the “Company,” “we,” “us,” and “our” refer to Maxwell Technologies, Inc. and its subsidiaries, and all references to “Maxwell SA” refer to our Swiss subsidiary, Maxwell Technologies, SA.
Note 1—Description of Business and Summary of Significant Accounting Policies
Description of Business
Maxwell Technologies, Inc. is a Delaware corporation originally incorporated under the name Maxwell Laboratories, Inc. in 1965. The Company made an initial public offering of common stock on the NASDAQ Stock Market in 1983, and changed its name to Maxwell Technologies, Inc. in 1996. The Company is headquartered in San Diego, California, and has
two
manufacturing facilities located in Yongin, South Korea and Peoria, Arizona. In addition, the Company uses
two
contract manufacturers located in China.
The Company develops, manufactures and markets energy storage and power delivery products for transportation, grid energy storage, industrial and other applications. The Company’s ultracapacitor products 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, modules and subsystems provide highly reliable energy storage and power delivery solutions for applications in multiple industries, including automotive, grid energy storage, wind, bus, industrial and truck. The Company’s lithium-ion capacitors are energy storage devices with the power characteristics of an ultracapacitor combined with the enhanced energy storage capacity approaching that of a battery and are uniquely designed to address a variety of applications in the rail, grid, and industrial markets where energy density and weight are differentiating factors.
In addition to its energy storage product line, the Company has developed and transformed its patented, proprietary and fundamental dry electrode manufacturing technology that has historically been used to make ultracapacitors to create a new technology that can be applied to the manufacturing of batteries, which we believe can create significant performance and cost benefits as compared to today’s state of the art lithium-ion batteries.
In December 2018, the Company sold its high voltage capacitor product line. High voltage’s CONDIS® capacitor products included grading and coupling capacitors, electric voltage transformers and metering products 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. The results of the high voltage product line are included in discontinued operations.
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.
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.
Financial Statement Presentation
The accompanying 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.
During the fourth quarter of 2018, the Company sold its high voltage capacitor product line. The divestiture of the high voltage product line met the definition of a strategic shift that has a significant effect on the Company’s operations and financial results; therefore, the results of operations for the high voltage product line have been presented as discontinued operations in accordance with ASC 205-20,
Presentation of Financial Statements-Discontinued Operations
for all periods presented. Additionally, high voltage’s assets and liabilities as of December 31, 2017 are separately presented as related to discontinued operations on the consolidated balance sheet. Unless otherwise noted, discussion within these notes to the consolidated financial statements relates to continuing operations. Refer to Note 9 for additional information on discontinued operations.
Liquidity
On December 19, 2018, the Company entered into a Share Purchase Agreement with RN C Holding SA, a special purpose holding entity and affiliate of Renaissance Investment Foundation, (“Renaissance”), providing for the sale of
100%
of the shares of the Company’s Swiss subsidiary, Maxwell Technologies SA (“Maxwell SA”), and its high voltage capacitor product line to Renaissance. The transaction simultaneously closed with the signing of the Share Purchase Agreement on December 19, 2018. The upfront purchase price was approximately
$55.1 million
, which after certain reductions and other transaction-related expenses resulted in net upfront cash proceeds of approximately
$47.8 million
.
In August 2018, the Company completed a public offering of
7,590,000
shares of its common stock at a public offering price of
$3.25
per share. The Company received total net proceeds of approximately
$23.0 million
from the offering, after deducting underwriting discounts, commissions and offering expenses.
As of
December 31, 2018
, the Company had approximately
$58.0 million
in cash and cash equivalents, and working capital of
$86.1 million
. In addition, the Company has a revolving line of credit with East West Bank (the “Revolving Line of Credit”), under which
no
borrowings were outstanding as of
December 31, 2018
. As of
December 31, 2018
, the amount available under the Revolving Line of Credit was
$10.5 million
. This facility is scheduled to expire in May 2021. Management believes the available cash balance will be sufficient to fund operations, obligations as they become due, and capital investments for at least the next twelve months.
Reclassifications
The divestiture of the high voltage product line during the fourth quarter of 2018 met the definition of a strategic shift that has a significant effect on the Company’s operations and financial results; therefore, the results of operations for the high voltage product line have been reclassified as discontinued operations
for all periods presented. Additionally, high voltage’s assets and liabilities as of December 31, 2017 have been reclassified and are now separately presented as related to discontinued operations on the consolidated balance sheet.
In accordance with the Company’s adoption of ASU No. 2017-07, non-service cost expense and income related to defined benefit plans were reclassified to “other components of defined benefit plans, net” for the year ended December 31, 2017. See further information under Recent Accounting Pronouncements below.
Interest income of
$79,000
for the year ended December 31, 2017 which was previously included in “interest expense, net” has been reclassified to “other income” in the consolidated statement of operations, to conform to the current period presentation.
“Unrealized loss on foreign currency exchange rates” for the year ended December 31, 2017 has been reclassified to “trade and other accounts receivable” in the consolidated statements of cash flows, to conform to the current period presentation.
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 and other defined benefit plan assets and liabilities, 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.
Cash and Cash Equivalents
Cash and cash equivalents consist primarily of cash in readily available checking and money market accounts. Cash equivalents consist of highly liquid investments that are readily convertible to cash and that mature within three months or less from the date of purchase. The carrying amounts approximate fair value due to the short maturities of these instruments.
Accounts Receivable and Allowance for Doubtful Accounts
Trade receivables are stated at gross invoiced amount less an allowance for uncollectible accounts. The allowance for doubtful accounts reflects management’s best estimate of probable losses inherent in the accounts receivable balance. Management determines the allowance for doubtful accounts based on known troubled accounts, historical experience and other currently available evidence.
Inventories
Inventories are stated at the lower of cost (first-in first-out basis) or net realizable value. Finished goods and work-in-process inventory values include the cost of raw materials, labor and manufacturing overhead. Inventory when written down to net realizable value establishes a new cost basis and its value is not subsequently increased based upon changes in underlying facts and circumstances. The Company also makes adjustments to reduce the carrying amount of inventories for estimated excess or obsolete inventories. Factors influencing these adjustments include inventories on-hand compared with historical and estimated future sales for existing and new products and assumptions about the likelihood of obsolescence.
The Company utilizes contract manufacturers for manufacturing and assembly of some of its products. In 2018, the Company entered into an agreement with a new contract manufacturer in Asia. The terms of the agreement include the storage of Company owned electrode materials at the contract manufacturer’s facility which the Company records as consigned inventory. Additionally, the contract manufacturer is required to procure and stock raw materials sufficient to meet Maxwell’s forecasts, that, once processed, the Company is obligated to repurchase as finished goods; therefore, the Company also records these materials as consigned inventory and consigned inventory liability. The agreement with the contract manufacturer also requires a certain quarterly purchase commitment by the Company, and indicates that should the Company not meet its quarterly purchase commitment, an adjustment to the price shall be negotiated for the reduced purchase amount.
Property and Equipment
Property and equipment are carried at cost and are depreciated using the straight-line method. Depreciation is provided over the estimated useful lives of the related assets (
three
to
ten
years). Leasehold improvements are depreciated over the shorter of their estimated useful life or the term of the lease. Leasehold improvements funded by landlords are recorded as property and equipment, which is depreciated over the shorter of the estimated useful life of the asset or the lease term, and deferred rent, which is amortized over the lease term. As of
December 31, 2018
and
2017
, the net book value of leasehold improvements funded by landlords was
$1.0 million
and
$1.2 million
, respectively. As of
December 31, 2018
and
2017
, the unamortized balance of deferred rent related to landlord funding of leasehold improvements was
$1.0 million
and
$1.2 million
, respectively, which is included in “accounts payable and accrued liabilities” and “other long-term liabilities” in the consolidated balance sheets. In 2018, in connection with a transition to a new contract manufacturer, the Company recorded leased equipment of
$1.9 million
for production line equipment located at the contract manufacturer’s facility that met the definition of a capital lease, which will be depreciated over the three-year term of the agreement.
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.
No
impairments of goodwill were reported during the years ended
December 31, 2018
and
2017
. Also see Note 5,
Goodwill and Intangible Assets,
for further discussion of the Company’s goodwill impairment analysis.
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. During each of the years ended
December 31, 2018
and 2017, the Company recorded impairment charges of
$0.2 million
. These impairment charges related to property and equipment which were no longer forecasted to be utilized during their remaining useful lives and for which the fair values approximated zero.
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
December 31, 2018
and
2017
, the accrued warranty liability included in “accounts payable and accrued liabilities” in the consolidated balance sheets was
$0.9 million
and
$1.3 million
, respectively.
Convertible Debt
Convertible notes are regarded as compound instruments, consisting of a liability component and an equity component. The component parts of compound instruments are classified separately as financial liabilities and equity in accordance with the substance of the contractual arrangement. At the date of issue, the fair value of the liability component is estimated using the prevailing market interest rate for a similar non-convertible instrument. This amount is recorded as a liability on an amortized cost basis until extinguished upon conversion or at the instrument’s maturity date. The equity component is determined by deducting the amount of the liability component from the proceeds of the compound instrument as a whole. This is recognized as additional paid-in capital and included in equity, net of income tax effects, and is not subsequently remeasured. After initial measurement, the convertible notes are carried at amortized cost using the effective interest method.
Income Taxes
Deferred income taxes are provided on a liability method in accordance with the
Income Taxes
Topic of the FASB ASC, whereby deferred tax assets are recognized for deductible temporary differences and deferred tax liabilities are recognized for taxable temporary differences. Under this method, deferred income taxes are recorded to reflect the tax consequences on future years of temporary differences between the tax basis of assets and liabilities and their reported amounts at each period end. If it is more likely than not that some portion or all of a deferred tax asset will not be realized, a valuation allowance is recognized. The guidance also provides criteria for the recognition, measurement, presentation and disclosures of uncertain tax positions. A tax benefit from an uncertain tax position may be recognized if it is “more likely than not” that the position is sustainable based solely on its technical merits.
Concentration of Credit Risk
The Company maintains cash balances at various financial institutions primarily in California. Cash balances commonly exceed the
$250,000
Federal Deposit Insurance Corporation insurance limit. The Company has not experienced any losses in such accounts and management believes that the Company is not exposed to any significant credit risk with respect to such cash and cash equivalents.
Financial instruments, which subject the Company to potential concentrations of credit risk, consist principally of the Company’s accounts receivable. The Company’s accounts receivable result from product sales to customers in various industries and in various geographical areas, both domestic and foreign. The Company performs credit evaluations of its customers and generally requires no collateral.
Two
customers, Beijing Etechwin and Continental Automotive, accounted for
12%
and
11%
of total revenue in 2018, respectively.
Two
customers accounted for 10% or more of total accounts receivable at December 31, 2018; CRRC-SRI and Wuxi Chirun Technology accounted for
12%
and
10%
of accounts receivable, respectively.
Three
customers, Continental Automotive, Beijing Etechwin and CRRC-SRI, accounted for
15%
,
11%
and
10%
of total revenue in 2017, respectively.
Two
customers accounted for 10% or more of total accounts receivable at December 31, 2017; Continental Automotive and CRRC-SRI accounted for
15%
and
11%
of accounts receivable, respectively.
Research and Development Expense
Research and development expenditures are expensed in the period incurred. Third-party funding of research and development expense under cost-sharing arrangements is recorded as an offset to research and development expense in the period the expenses are incurred. Research and development expense was
$20.0 million
and
$16.3 million
, net of third-party funding under cost-sharing arrangements of
$0.2 million
and
$2.5 million
, for the years ended
December 31, 2018
and
2017
, respectively. For the year ended December 31, 2017, third-party funding under cost-sharing arrangements included
$2.2 million
related to a joint development agreement to fund the short-term costs of developing technologies for the automotive market.
Shipping and Handling Expense
The Company recognizes shipping and handling expenses as a component of cost of revenue.
Advertising Expense
Advertising costs are expensed in the period incurred. Advertising expense was
$0.3 million
and
$0.4 million
for the years ended
December 31, 2018
and
2017
, respectively.
Foreign Currencies
The Company’s primary foreign currency exposure is related to its subsidiary in Korea. The functional currency of the Korean subsidiary is the Korean Won. The Company’s Korean subsidiary has U.S. dollar, Euro and local currency (Korean Won) revenue and operating expenses. Changes in these currency exchange rates impact the reported U.S. dollar amount of revenue, expenses and debt. Assets and liabilities of the Korean subsidiary are translated at month-end exchange rates, and revenue, expenses, gains and losses are translated at rates of exchange that approximate the rate in effect at the time of the transaction. Any translation adjustments resulting from this process are presented separately as a component of accumulated other comprehensive income within stockholders’ equity in the consolidated balance sheets. Foreign currency transaction gains and losses on intercompany balances considered long term in nature are accounted for as translation adjustments within equity. Accumulated other comprehensive income is recognized in the statement of operations when the related business is divested. All other foreign currency transaction gains and losses are reported in “foreign currency exchange loss, net” in the consolidated statements of operations.
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 consolidated balance sheet.
Related Party Transactions
As part of the Nesscap Acquisition, Titan Power Solution LLS (“Titan”) became a customer of the Company. In May 2018, I2BF Global Ventures (“I2BF), of which a member of our board of directors is a founding partner and current director, obtained a controlling interest in Titan. During the year ended December 31, 2018, we received payments of approximately
$397,000
from Titan related to the purchase of the Company’s products, of which payments of
$282,000
were received by us after I2BF became a controlling owner of Titan in May 2018.
Net Income or 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 loss per share (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2018
|
|
2017
|
Numerator:
|
|
|
|
|
Loss from continuing operations, net of income taxes
|
|
$
|
(44,442
|
)
|
|
$
|
(53,862
|
)
|
Income from discontinued operations, net of income taxes
|
|
7,894
|
|
|
10,733
|
|
Net loss
|
|
$
|
(36,548
|
)
|
|
$
|
(43,129
|
)
|
Denominator:
|
|
|
|
|
Weighted average common shares outstanding, basic and diluted
|
|
41,031
|
|
|
35,480
|
|
Net income (loss) per share - basic and diluted:
|
|
|
|
|
Continuing operations
|
|
$
|
(1.08
|
)
|
|
$
|
(1.52
|
)
|
Discontinued operations
|
|
0.19
|
|
|
0.30
|
|
Net loss per share - basic and diluted
|
|
$
|
(0.89
|
)
|
|
$
|
(1.22
|
)
|
The following table summarizes instruments that may be convertible into common shares that are not included in the denominator used in the computation of diluted earnings per share because they are anti-dilutive for continuing operations, and as such the treatment for discontinued operations is also anti-dilutive (in thousands of shares):
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
Outstanding options to purchase common stock
|
|
357
|
|
|
361
|
|
Unvested restricted stock awards
|
|
—
|
|
|
26
|
|
Unvested restricted stock unit awards
|
|
2,757
|
|
|
2,650
|
|
Employee stock purchase plan awards
|
|
122
|
|
|
38
|
|
Bonus and director fees to be paid in stock awards
|
|
734
|
|
|
477
|
|
Convertible senior notes
|
|
7,245
|
|
|
7,245
|
|
|
|
11,215
|
|
|
10,797
|
|
Stock-Based Compensation
The Company issues stock-based compensation awards to its employees and non-employee directors, including stock options, restricted stock, restricted stock units, and shares under an employee stock purchase plan. The Company records compensation expense for stock-based awards in accordance with the criteria set forth in the
Stock Compensation
Subtopic of the FASB ASC. The Company uses the Black-Scholes option pricing model to estimate the fair value of stock option grants. The determination of the fair value of stock options utilizing the Black-Scholes model is affected by the Company’s stock price and a number of assumptions, including expected volatility, expected term, risk-free interest rate and expected dividends.
The fair value of restricted stock awards (“RSAs”) and restricted stock unit awards (“RSUs”) with service-based or performance-based vesting is based on the closing market price of the Company’s common stock on the date of grant. Compensation expense equal to the fair value of each RSA or RSU is recognized ratably over the requisite service period. For RSUs with vesting contingent on Company performance conditions, the Company uses the requisite service period that is most likely to occur. The requisite service period is estimated based on the performance period as well as any time-based service requirements. If it is unlikely that a performance condition will be achieved, no compensation expense is recognized unless it is later determined that achievement of the performance condition is likely. Expense may be adjusted for changes in the expected outcomes of the related performance conditions, with the impact of such changes recognized as a cumulative adjustment in the consolidated statement of operations in the period in which the expectation changes.
The Company issues market-condition RSUs to certain members of executive management. Since the vesting of the market-condition RSUs is dependent on stock price performance, the fair values of these awards are estimated using a Monte-Carlo valuation model. The determination of the fair value of market-condition RSUs utilizing a Monte-Carlo valuation model is affected by the Company’s stock price and a number of assumptions, including expected volatility, expected life, risk-free interest rate and expected dividends.
In 2016, Company adopted a bonus plan that enabled participants to earn annual incentive bonuses based upon achievement of specified financial and strategic performance objectives. Under the terms of this plan, the Company has the ability to settle bonuses earned under the plan with common stock or fully vested RSUs. The Company settled the majority of bonuses earned under in 2017 in stock during 2018. For the fiscal year 2018 performance period, the Company intends to settle the amounts earned under the bonus plan in stock or fully vested RSUs in the first quarter of 2019. The stock-based compensation expense accrued under this bonus plan represents stock-settled debt per ASC 718 and ASC 480, as such, the Company has recorded a liability for bonuses expected to be paid in fully vested RSUs in “accrued employee compensation” in the Company’s consolidated balance sheets.
Stock-based compensation expense recognized in the consolidated statements of operations is based on equity awards ultimately expected to vest. The Company estimates forfeitures at the time of grant and revises forfeitures, if necessary, in subsequent periods with a cumulative catch up adjustment if actual forfeitures differ from those estimates. For market-condition awards, because the effect of the market-condition is reflected as an adjustment to the awards’ fair value at grant date, subsequent forfeitures due to the Company’s stock price performance do not result in a reversal of expense.
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
. ASU 2014-09 and its related amendments provide companies with a single model for accounting for revenue arising from contracts with customers and supersedes prior 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. The Company adopted the new accounting standard using the modified retrospective transition method effective January 1, 2018 and recorded a $0.3 million impact to “accumulated deficit” in the Company’s consolidated balance sheet. See Note 2 for further information.
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 were originally required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. In July 2018, FASB issued ASU No. 2018-11,
Targeted Improvements
. This update still requires modified retrospective transition; however, it adds the option to initially apply the new standard at the adoption date and recognize a cumulative-effect adjustment in the current period instead of at the beginning of the earliest period presented. The guidance is effective for annual and interim reporting periods beginning after December 15, 2018. The Company is in the process of finalizing its evaluation of current leases and quantifying the impact to its balance sheet. The Company expects that the adoption of the standard will have a material impact on its consolidated balance sheet for the recognition of certain operating leases as right-of-use assets and lease liabilities. The Company does not expect the adoption of this standard to have a material impact on its consolidated statements of operations. The Company will adopt the new accounting standard using the modified retrospective transition option effective January 1, 2019.
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 impacts the Company’s gross profit and loss from operations but has no impact on net loss or net loss per share. The Company adopted ASU 2017-07 on January 1, 2018, with adoption applied on a retrospective basis. The Company used the practical expedient that permits it to use the amounts previously disclosed in the defined benefit plans note for the prior comparative periods as the basis for applying the retrospective presentation requirements. In connection with this adoption, for the
year ended
December 31, 2017, the Company reclassified
$39,000
,
$8,000
and
$8,000
(excluding discontinued operations) of net non-service costs and income from cost of revenue, selling, general and administrative expense and research and development expense, respectively, to “other components of defined benefit plans, net”.
In February 2018, the FASB issued ASU No. 2018-02,
Income Statement-Reporting Comprehensive Income
, which amends the previous guidance to allow for certain tax effects “stranded” in accumulated other comprehensive income, which are impacted by the Tax Cuts and Jobs Act, to be reclassified from accumulated other comprehensive income into retained earnings. This amendment pertains only to those items impacted by the new tax law and will not apply to any future tax effects stranded in accumulated other comprehensive income. This standard is effective for the Company in the first quarter of 2019, with early adoption permitted. The Company does not expect this ASU to have a material impact on its consolidated financial statements.
In March 2018, the FASB issued ASU No. 2018-05,
Income Taxes: Amendments to SEC paragraphs pursuant to SEC Staff Accounting Bulletin No. 118
. The Amendments in this update add various SEC paragraphs pursuant to the issuance of SEC Staff Accounting Bulletin No. 118,
Income Tax Accounting Implications of the Tax Cuts and Jobs Act
(“SAB 118”). SAB 118 directs taxpayers to consider the implications of the Tax Cuts and Jobs Act as provisional when it does not have the necessary information available, prepared, or analyzed in reasonable detail to complete its accounting for the change in the tax law. The Company recognized the provisional tax impacts of the Tax Cuts and Jobs Act in the fourth quarter of 2017, therefore, the Company’s subsequent adoption of ASU 2018-05 in the first quarter of 2018 had no impact on its accounting for income taxes. During the fourth quarter of 2018, the Company’s accounting for this change in tax law was considered complete and no longer provisional.
In June 2018, the FASB issued ASU No. 2018-07,
Improvements to Nonemployee Share-Based Payment Accounting
, which simplifies the accounting for nonemployee share-based payments by aligning the accounting with the requirements for employee share-based compensation. This standard is effective for the Company in the first quarter of 2019, with early adoption permitted. The Company does not expect this ASU to have a material impact on its consolidated financial statements.
In August 2018, the FASB issued ASU No. 2018-13,
Changes to the Disclosure Requirements for Fair Value Measurement.
This ASU eliminates, adds and modifies certain disclosure requirements for fair value measurements as part of its disclosure framework project. The standard is effective for all entities for financial statements issued for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted. The adoption of this guidance is not expected to have a material impact on the Company’s financial statements.
In August 2018, the FASB issued ASU No. 2018-14,
Compensation - Retirement Benefits - Defined Benefit Plans - General
. This ASU modifies the disclosure requirements for defined benefit and other postretirement plans. This ASU eliminates certain disclosures associated with accumulated other comprehensive income, plan assets, related parties, and the effects of interest rate basis point changes on assumed health care costs; while other disclosures have been added to address significant gains and losses related to changes in benefit obligations. This ASU also clarifies disclosure requirements for projected benefit and accumulated benefit obligations. The amendments in this ASU are effective for fiscal years ending after December 15, 2020 and for interim periods therein with early adoption permitted. Adoption on a retrospective basis for all periods presented is required. The Company is currently evaluating the impact of adoption on its financial statement disclosures.
Business Enterprise Information
The Company operates as a single operating segment with a single product line. According to the FASB ASC Topic
Disclosures about Segments of an Enterprise and Related Information
, operating segments are defined as components of an enterprise for which separate financial information is evaluated regularly by the chief operating decision maker (“CODM”) in deciding how to allocate resources and in assessing performance. The Company’s CODM is the Chief Executive Officer who evaluates the Company’s financial information and resources and assesses performance on a consolidated basis.
Revenue by geographic area is presented below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
Revenue from external customers located in
(1)
:
|
|
2018
|
|
2017
|
China
|
|
$
|
28,790
|
|
|
$
|
36,251
|
|
United States
|
|
15,733
|
|
|
7,989
|
|
Germany
|
|
12,201
|
|
|
11,641
|
|
Hungary
|
|
12,169
|
|
|
13,451
|
|
All other countries
(2)
|
|
21,566
|
|
|
18,377
|
|
Total
|
|
$
|
90,459
|
|
|
$
|
87,709
|
|
_____________
|
|
|
|
|
(1)
Location is determined by shipment destination.
(2)
Revenue from external customers located in countries included in “All other countries” does not individually comprise more than 10% of total revenue for any of the years presented.
Long-lived assets by geographic location are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
2018
|
|
2017
|
United States
|
|
$
|
15,003
|
|
|
$
|
14,455
|
|
China
|
|
2,931
|
|
|
1,107
|
|
South Korea
|
|
6,443
|
|
|
4,398
|
|
Total
|
|
$
|
24,377
|
|
|
$
|
19,960
|
|
Note 2 – Revenue Recognition
On January 1, 2018, the Company adopted ASC 606,
Revenue from Contracts with Customers
and all the related amendments and applied it to all contracts that were not completed as of January 1, 2018 using the modified retrospective method. The Company recognized the cumulative effect of initially applying the new revenue standard as an adjustment to the opening balance of accumulated deficit. Prior period amounts have not been restated and continue to be reported under the accounting standards in effect for those periods.
The Company’s adoption impact related to the recognition of certain previously deferred distributor revenue. The Company does not expect a material impact to its consolidated statements of operations on an ongoing basis from the adoption of the new standard.
The cumulative effect to the Company’s consolidated January 1, 2018 balance sheet from the adoption of the new revenue standard was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet
|
|
Balance at December 31, 2017
|
|
Adjustments Due to ASC 606
|
|
Balance at January 1, 2018
|
Assets:
|
|
|
|
|
|
|
Trade and other accounts receivable, net of allowance
|
|
$
|
22,712
|
|
|
$
|
227
|
|
|
$
|
22,939
|
|
Inventories
|
|
23,450
|
|
|
(430
|
)
|
|
23,020
|
|
Liabilities and Stockholders’ Equity:
|
|
|
|
|
|
|
Accounts payable and accrued liabilities
|
|
27,283
|
|
|
37
|
|
|
27,320
|
|
Deferred revenue and other current liabilities
|
|
6,572
|
|
|
(518
|
)
|
|
6,054
|
|
Accumulated deficit
|
|
(247,233
|
)
|
|
278
|
|
|
(246,955
|
)
|
The impact of adoption on the Company’s consolidated balance sheet as of
December 31, 2018
and consolidated statement of operations for the year ended
December 31, 2018
was not material.
The Company’s revenues primarily result from the sale of manufactured products and reflect the consideration to which the Company expects to be entitled. The Company records revenue based on a five-step model in accordance with ASC 606. For its customer contracts, the Company identifies the performance obligations, determines the transaction price, allocates the contract transaction price to the performance obligations, and recognizes the revenue when (or as) control of goods or services is transferred to the customer.
For product sales, each purchase order, along with any existing governing customer agreements when applicable, represents a contract with a customer and each product sold to a customer typically represents a distinct performance obligation. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. The majority of the Company’s product sales are subject to ExWorks (as defined in Incoterms 2010) delivery terms and revenue is recorded at the point in time when products are picked up by the customer's freight forwarder, as the Company has determined that this is the point in time that control transfers to the customer. Certain customers have shipping terms where control does not transfer until the product is delivered to the customer’s location. For these transactions, revenue is recognized at the time that the product is delivered to the customer’s location.
Provisions for customer volume discounts, product returns, rebates and allowances are variable consideration and are estimated and recorded as a reduction of revenue in the same period the related product revenue is recorded. Such provisions are calculated using historical averages and adjusted for any expected changes due to current business conditions, and are not material.
The Company provides assurance-type 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.
The Company records revenue net of sales tax, value added tax, excise tax and other taxes collected on behalf of customers concurrent with revenue-producing activities. The Company has elected to recognize the cost for freight and shipping when control over the products sold passes to customers and revenue is recognized.
The Company’s contracts with customers do not typically include extended payment terms. Payment terms vary by contract type and type of customer and generally range from 30 to 90 days from delivery.
A portion of the Company’s revenue is derived from sales to distributors which represented approximately
8%
of revenue for the year ended
December 31, 2018
.
Approximately
five
percent of total revenue is derived from non-product sales. When the Company’s contracts with customers require specialized services or other deliverables that are not separately identifiable from other promises in the contracts and, therefore, not distinct, then the non-distinct obligations are accounted for as a single performance obligation. For performance obligations that the Company satisfies over time, which represented
5%
of revenue for the year ended
December 31, 2018
, revenue is recognized by consistently applying a method of measuring progress toward complete satisfaction of that performance obligation. The Company uses the input method to recognize revenue on the basis of the Company’s efforts or inputs to the satisfaction of a performance obligation relative to the total inputs expected to satisfy that performance obligation. The Company uses the actual costs incurred relative to the total estimated costs to determine its progress towards contract completion.
The following tables disaggregate the Company’s revenue by shipment destination:
|
|
|
|
|
|
|
|
Year Ended December 31,
|
Region:
|
|
2018
|
Americas
|
|
$
|
16,255
|
|
Asia Pacific
|
|
39,324
|
|
Europe
|
|
34,880
|
|
Total
|
|
$
|
90,459
|
|
The Company does not have material contract assets since revenue is recognized as control of goods are transferred or as services are performed. As of
December 31, 2018
and
December 31, 2017
, the Company’s contract liabilities primarily relate to cash received under a licensing and services agreement, amounts received in advance from a customer in connection with a specialized services contract for which revenue is recognized over time, and customer advances. Changes in the Company’s contract liabilities, which are included in “deferred revenue and other current liabilities” in the Company’s consolidated balance sheets, are as follows:
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2018
|
Beginning balance as of December 31, 2017
|
|
$
|
5,234
|
|
Impact of adoption of ASC 606
|
|
(518
|
)
|
Increases due to cash received from customers
|
|
3,143
|
|
Decreases due to recognition of revenue
|
|
(4,356
|
)
|
Other changes
|
|
(24
|
)
|
Contract liabilities as of December 31, 2018
|
|
$
|
3,479
|
|
The Company has two uncompleted, non-product sale contracts with original durations of greater than one year. The transaction price allocated to performance obligations unsatisfied at
December 31, 2018
in connection with these contracts is
$3.9 million
. Of this amount,
$0.6 million
relates to a specialized services contract which is recognized over time and is expected to be completed within one year. The other
$3.3 million
relates to a licensing and services contract, for which the estimate of the transaction price allocated to unsatisfied performance obligations was adjusted in the third quarter of 2018; the adjustment did not have a material impact on our financial statements as it primarily pertained to unsatisfied performance obligations. Revenue related to the licensing and services contract is expected to be recognized at a point in time when certain conditions are met which are dependent on the customer, and therefore the timing of recognition cannot currently be estimated. The licensing and services arrangement also provides for royalties for product sales that use the licensed intellectual property, which will be recognized at the time the related sales occur.
Note 3—Balance Sheet Details (in thousands):
Inventories
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2018
|
|
December 31, 2017
|
Raw materials and purchased parts
|
|
$
|
11,267
|
|
|
$
|
8,259
|
|
Work-in-process
|
|
492
|
|
|
1,026
|
|
Finished goods
|
|
12,961
|
|
|
14,165
|
|
Consigned inventory
|
|
8,925
|
|
|
—
|
|
Total inventories
|
|
$
|
33,645
|
|
|
$
|
23,450
|
|
Warranty
Activity in the warranty reserve, which is included in “accounts payable and accrued liabilities” in the consolidated balance sheets, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2018
|
|
2017
|
Beginning balance
|
|
$
|
1,315
|
|
|
$
|
910
|
|
Acquired liability from Nesscap
|
|
—
|
|
|
773
|
|
Product warranties issued
|
|
532
|
|
|
117
|
|
Settlement of warranties
|
|
(463
|
)
|
|
(693
|
)
|
Changes related to preexisting warranties
|
|
(440
|
)
|
|
208
|
|
Ending balance
|
|
$
|
944
|
|
|
$
|
1,315
|
|
Property and equipment, net
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
2018
|
|
2017
|
Machinery, furniture and office equipment
|
|
$
|
55,146
|
|
|
$
|
50,195
|
|
Leased equipment
|
|
1,911
|
|
|
—
|
|
Computer hardware and software
|
|
9,740
|
|
|
8,955
|
|
Leasehold improvements
|
|
18,990
|
|
|
17,742
|
|
Construction in progress
|
|
4,211
|
|
|
2,310
|
|
Property and equipment, gross
|
|
89,998
|
|
|
79,202
|
|
Less accumulated depreciation and amortization
|
|
(65,621
|
)
|
|
(59,242
|
)
|
Total property and equipment, net
|
|
$
|
24,377
|
|
|
$
|
19,960
|
|
|
|
|
|
|
Accounts payable and accrued liabilities
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
2018
|
|
2017
|
Accounts payable
|
|
$
|
4,675
|
|
|
$
|
17,842
|
|
Income tax payable
|
|
348
|
|
|
415
|
|
Accrued warranty
|
|
944
|
|
|
1,315
|
|
Consigned inventory liability
|
|
7,078
|
|
|
—
|
|
Other accrued liabilities
|
|
3,468
|
|
|
7,711
|
|
Total accounts payable and accrued liabilities
|
|
$
|
16,513
|
|
|
$
|
27,283
|
|
Accumulated Other Comprehensive Income (Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
Currency
Translation
Adjustment
|
|
Defined Benefit Plans
|
|
Accumulated
Other
Comprehensive
Income (Loss)
|
|
Affected Line Items in the Statement of Operations
|
Balance as of December 31, 2017
|
|
$
|
12,957
|
|
|
$
|
(881
|
)
|
|
$
|
12,076
|
|
|
|
Other comprehensive income (loss) before reclassification
|
|
(1,694
|
)
|
|
—
|
|
|
(1,694
|
)
|
|
|
Amounts reclassified from accumulated other comprehensive income (loss)
|
|
—
|
|
|
(558
|
)
|
|
(558
|
)
|
|
Other components of defined benefit plans, net; and Income from discontinued operations, net of income taxes
|
Other comprehensive income (loss) recognized in connection with divestiture
|
|
(10,869
|
)
|
|
749
|
|
|
(10,120
|
)
|
|
Income from discontinued operations, net of income taxes
|
Total change in accumulated other comprehensive income (loss)
|
|
(12,563
|
)
|
|
191
|
|
|
(12,372
|
)
|
|
|
Balance as of December 31, 2018
|
|
$
|
394
|
|
|
$
|
(690
|
)
|
|
$
|
(296
|
)
|
|
|
Note 4 – 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 represented 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 energy storage 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 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 goodwill associated with the acquisition is not deductible for income tax purposes.
The fair values of net tangible assets and intangible assets acquired were based upon the Company's estimates and assumptions at the acquisition date. The following table summarizes the 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
$686,000
. During the year ended December 31, 2017, the Company recognized
$646,000
of the step-up as a component of cost of revenue for acquired inventory sold during the period. The remaining
$40,000
related to the fair value step-up associated with the acquisition was recognized in connection with the Company’s adoption of ASC 606.
For the year ended December 31, 2017, acquisition-related costs of
$1.9 million
were included in selling, general, and administrative expenses in the Company's consolidated statements of operations.
The following table presents details of the 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 the year ended December 31, 2017, as if the Nesscap Acquisition had occurred at the beginning of fiscal year 2016 (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2017
|
Net revenues
|
|
$
|
92,875
|
|
Net loss
|
|
(43,849
|
)
|
Net loss per share:
|
|
|
Basic and diluted
|
|
(1.19
|
)
|
Weighted average common shares outstanding:
|
|
|
Basic and diluted
|
|
36,809
|
|
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
|
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 year ended December 31, 2017,
$17.3 million
of revenue and
$0.9 million
of net loss included in the Company's consolidated statements of operations was related to Nesscap operations. The Company does not consider the 2017 revenue and net loss related to Nesscap operations to be indicative of the results of the Nesscap Acquisition due to integration activities since the acquisition date.
Also see Note 5,
Goodwill and Intangible Assets
, for further information on goodwill and intangible assets related to the Nesscap Acquisition.
Note 5—Goodwill and Intangible Assets
The Company performs an impairment test for goodwill annually according to the
Intangibles—Goodwill and Other
Topic of the FASB ASC. On January 1, 2017, the Company also early adopted ASU 2017 No. 2017-04,
Intangibles - Goodwill and Other,
which eliminates step two of the quantitative goodwill impairment test. The Company first makes a qualitative assessment of the likelihood of goodwill impairment and if it concludes that it is more likely than not that the carrying amount of a reporting unit is greater than its fair value, then it will be required to perform a quantitative impairment test. Otherwise, performing the impairment test is not required. Qualitative factors assessed at the reporting unit level include, but are not limited to, changes in industry and market structure, competitive environments, planned capacity and new product launches, cost factors such as raw material prices and financial performance of the reporting unit. The Company may also determine to skip the qualitative assessment in any year and move directly to the quantitative test.
The quantitative impairment test consists of estimating the fair value and comparing the estimated fair value with the carrying value of the reporting unit. 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 guidance requires goodwill to be reviewed annually at the same time every year or when an event occurs or circumstances change such that it is reasonably possible that an impairment may exist. The Company selected December 31 as its annual testing date.
In 2018, the Company performed a qualitative assessment of its reporting units which included an evaluation of changes in industry, market and macroeconomic conditions as well as consideration of each reporting unit’s financial performance and any significant trends. In 2018, the Company substantially integrated the operations related to its Nesscap Acquisition in 2017, which included changes to the Company’s reporting structure related to the acquired operations; therefore, the Company determined that it had one reporting unit, which represented a combination of two reporting units from our prior year assessment. The Company first assessed each former reporting separately, and then as a combined, single reporting unit. The Company’s qualitative assessments indicated that it was not more likely that not that goodwill is impaired.
The change in the carrying amount of goodwill during
2017
and
2018
was as follows (in thousands):
|
|
|
|
|
Balance at December 31, 2016
|
$
|
2,343
|
|
Goodwill from Nesscap Acquisition
|
11,624
|
|
Foreign currency translation adjustments
|
740
|
|
Balance at December 31, 2017
|
14,707
|
|
Foreign currency translation adjustments
|
(518
|
)
|
Balance at December 31, 2018
|
$
|
14,189
|
|
Goodwill of approximately
$21.4 million
related to discontinued operations was derecognized during the year ended December 31, 2018 in connection with the sale of the Company’s high voltage product line and is excluded from the table above.
The composition of intangible assets subject to amortization was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2018
|
|
|
Useful Life
(in years)
|
|
Gross Initial Carrying Value
|
|
Cumulative Foreign Currency Translation Adjustment
|
|
Accumulated Amortization
|
|
Net Carrying Value
|
Customer relationships - institutional
|
|
14
|
|
$
|
3,200
|
|
|
$
|
57
|
|
|
$
|
(390
|
)
|
|
$
|
2,867
|
|
Customer relationships - non-institutional
|
|
10
|
|
4,400
|
|
|
74
|
|
|
(759
|
)
|
|
3,715
|
|
Trademarks and trade names
|
|
10
|
|
1,500
|
|
|
25
|
|
|
(259
|
)
|
|
1,266
|
|
Developed technology
|
|
8
|
|
2,700
|
|
|
43
|
|
|
(587
|
)
|
|
2,156
|
|
Total intangible assets
|
|
|
|
$
|
11,800
|
|
|
$
|
199
|
|
|
$
|
(1,995
|
)
|
|
$
|
10,004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 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
|
|
|
$
|
197
|
|
|
$
|
(156
|
)
|
|
$
|
3,241
|
|
Customer relationships - non-institutional
|
|
10
|
|
4,400
|
|
|
266
|
|
|
(304
|
)
|
|
4,362
|
|
Trademarks and trade names
|
|
10
|
|
1,500
|
|
|
90
|
|
|
(103
|
)
|
|
1,487
|
|
Developed technology
|
|
8
|
|
2,700
|
|
|
160
|
|
|
(235
|
)
|
|
2,625
|
|
Total intangible assets
|
|
|
|
$
|
11,800
|
|
|
$
|
713
|
|
|
$
|
(798
|
)
|
|
$
|
11,715
|
|
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.
For the
year ended December 31, 2018
, amortization expense of
$0.4 million
was recorded to “cost of revenue” and
$0.9 million
was recorded to “selling, general and administrative.” For the year ended December 31, 2017, amortization expense of
$0.2 million
was recorded to “cost of revenue” and
$0.6 million
was recorded to “selling, general and administrative.” Estimated amortization expense for the years 2019 through 2023 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 Plans
In September 2017, the Company initiated a restructuring plan to optimize headcount in connection with the acquisition and integration of the assets and business of Nesscap, as well as to implement additional organizational efficiencies. Total charges for the September 2017 restructuring plan were
$1.1 million
, and were primarily incurred in the third quarter of 2017. Total net charges for the
year ended December 31, 2018
for the September 2017 restructuring plan were
$(112,000)
, which represented restructuring charges of
$45,000
adjusted for reversals of expense of
$157,000
; the plan was completed in the third quarter of 2018.
In February 2017, the Company implemented a comprehensive restructuring plan that included a wide range of organizational efficiency initiatives and other cost reduction opportunities. Total charges for the year ended December 31, 2017 for the February 2017 restructuring plan were
$0.9 million
; the plan was completed in the third quarter of 2017.
The charges related to both of the 2017 restructuring plans consist of employee severance costs and have been paid in cash. The charges were recorded within “restructuring and exit costs” in the consolidated statements of operations.
The following table summarizes the changes in the liabilities for each of the 2017 restructuring plans, which are recorded in “accrued employee compensation” in the Company’s condensed consolidated balance sheet for the
year ended December 31, 2018
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
February 2017 Plan
|
|
September 2017 Plan
|
|
|
Employee Severance Costs
|
Restructuring liability as of December 31, 2016
|
|
$
|
—
|
|
|
$
|
—
|
|
Costs incurred
|
|
997
|
|
|
1,275
|
|
Amounts paid
|
|
(855
|
)
|
|
(431
|
)
|
Accruals released
|
|
(142
|
)
|
|
(27
|
)
|
Restructuring liability as of December 31, 2017
|
|
—
|
|
|
817
|
|
Costs incurred
|
|
—
|
|
|
45
|
|
Amounts paid
|
|
—
|
|
|
(705
|
)
|
Accruals released
|
|
—
|
|
|
(157
|
)
|
Restructuring liability as of December 31, 2018
|
|
$
|
—
|
|
|
$
|
—
|
|
Adjustment to Lease Liability
In 2015 and 2016, the Company completed a restructuring plan that consolidated U.S. manufacturing operations and disposed of the Company’s microelectronics product line. In connection with this plan, 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 business forecast. In the years ended December 31, 2018 and 2017, the Company recognized additional facilities costs of
$0.1 million
and
$0.2 million
, respectively, as restructuring charges to record adjustments to the sublease income assumptions included in the estimated future rent obligation of this leased space. 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
December 31, 2018
and December 31, 2017, lease obligation liabilities related to this leased space of
$0.5 million
and
$0.7 million
, respectively, were included in “accounts payable and accrued liabilities” and “other long term liabilities” in the condensed consolidated balance sheets.
Note 7—Debt and Credit Facilities
Convertible Senior Notes
On September 25, 2017 and October 11, 2017, the Company issued
$40.0 million
and
$6.0 million
, respectively, of
5.50%
Convertible Senior Notes due 2022 (the “Notes”). The Company received net proceeds, after deducting the initial purchaser’s discount and offering expenses payable by the Company, of approximately
$43.0 million
. The Notes bear interest at a rate of
5.50%
per year, payable semi-annually in arrears on March 15 and September 15 of each year, with payments commencing on March 15, 2018. The Notes mature on September 15, 2022, unless earlier purchased by the Company, redeemed, or converted.
The Notes are unsecured obligations of Maxwell and rank senior in right of payment to any of Maxwell’s subordinated indebtedness; equal in right of payment to all of Maxwell’s unsecured indebtedness that is not subordinated; effectively subordinated in right of payment to any of Maxwell’s secured indebtedness to the extent of the value of the assets securing such indebtedness; and structurally subordinated to all indebtedness and other liabilities (including trade payables) of Maxwell’s subsidiaries.
The Notes are convertible into cash, shares of the Company’s common stock, or a combination thereof, at the Company’s election, upon the satisfaction of specified conditions and during certain periods as described below. The initial conversion rate is
157.5101
shares of the Company’s common stock per $1,000 principal amount of Notes, representing an initial effective conversion price of
$6.35
per share of common stock and premiums of
27%
and
29%
to the Company’s
$5.00
and
$4.94
stock prices at the September 25, 2017 and October 11, 2017 dates of issuance, respectively. The conversion rate may be subject to adjustment upon the occurrence of certain specified events as provided in the indenture governing the Notes, dated September 25, 2017 between the Company and Wilmington Trust, National Association, as trustee (the “Indenture”), but will not be adjusted for accrued but unpaid interest. As of
December 31, 2018
, the if-converted value of the Notes did not exceed the principal value of the Notes.
Prior to the close of business on the business day immediately preceding June 15, 2022, the Notes will be convertible at the option of holders only upon the satisfaction of specified conditions and during certain periods. Thereafter until the close of business on the business day immediately preceding maturity, the Notes will be convertible at the option of the holders at any time regardless of these conditions.
Upon the occurrence of certain fundamental changes involving the Company, holders of the Notes may require the Company to repurchase for cash all or part of their Notes at a repurchase price equal to 100% of the principal amount of the Notes to be repurchased, plus accrued and unpaid interest, if any, to, but excluding, the fundamental change repurchase date.
The Company may not redeem the Notes prior to September 20, 2020. The Company may redeem the Notes, at its option, in whole or in part on or after September 20, 2020 if the last reported sale price of the Company’s common stock has been at least
130%
of the conversion price then in effect for at least
20
trading days
The Company considered the features embedded in the Notes, that is, the conversion feature, the Company's call feature, and the make-whole feature, and concluded that they are not required to be bifurcated and accounted for separately from the host debt instrument.
The Notes included an initial purchaser’s discount of
$2.5 million
, or
5.5%
. This discount is recorded as an offset to the debt and is amortized over the expected life of the Notes using the effective interest method.
Upon conversion by the holders, the Company may elect to settle such conversion in shares of its common stock, cash, or a combination thereof. As a result of its cash conversion option, the Company segregated the liability component of the instrument from the equity component. The liability component was measured by estimating the fair value of a non-convertible debt instrument that is similar in its terms to the Notes. The calculation of the fair value of the debt component required the use of Level 3 inputs, including utilization of credit assumptions and high yield bond indices. Fair value was estimated using an income approach, through discounting future interest and principal payments due under the Notes at a discount rate of
12.0%
, an interest rate equal to the estimated borrowing rate for similar non-convertible debt. The excess of the initial proceeds from the Notes over the estimated fair value of the liability component was
$8.5 million
and was recognized as a debt discount and recorded as an increase to additional paid-in capital, and will be amortized over the expected life of the Notes using the effective interest method. Amortization of the debt discount is recognized as non-cash interest expense.
The transaction costs of
$0.5 million
incurred in connection with the issuance of the Notes were allocated to the liability and equity components based on their relative values. Transaction costs allocated to the liability component are being amortized using the effective interest method and recognized as non-cash interest expense over the expected term of the Notes. Transaction costs allocated to the equity component of
$0.1 million
reduced the value of the equity component recognized in stockholders’ equity.
The initial purchaser debt discount, the equity component debt discount and the transaction costs allocated to the liability are being amortized over the contractual term to maturity of the Notes using an effective interest rate of
12.2%
.
The carrying value of the Notes is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
2018
|
|
2017
|
Principal amount
|
|
$
|
46,000
|
|
|
$
|
46,000
|
|
Unamortized debt discount - equity component
|
|
(6,778
|
)
|
|
(8,144
|
)
|
Unamortized debt discount - initial purchaser
|
|
(2,024
|
)
|
|
(2,431
|
)
|
Unamortized transaction costs
|
|
(319
|
)
|
|
(383
|
)
|
Net carrying value
|
|
$
|
36,879
|
|
|
$
|
35,042
|
|
Total interest expense related to the Notes is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2018
|
|
2017
|
Cash interest expense
|
|
|
|
|
Coupon interest expense
|
|
$
|
2,530
|
|
|
$
|
661
|
|
Non-cash interest expense
|
|
|
|
|
Amortization of debt discount - equity component
|
|
1,366
|
|
|
330
|
|
Amortization of debt discount - initial purchaser
|
|
407
|
|
|
98
|
|
Amortization of transaction costs
|
|
64
|
|
|
16
|
|
Total interest expense
|
|
$
|
4,367
|
|
|
$
|
1,105
|
|
Revolving Line of Credit
The Company has 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. On February 14, 2019, the Company entered into an amendment to the Loan Agreement to amend and restate the Revolving Line of Credit (the “Revolving Line of Credit”). The Revolving Line of Credit matures on May 8, 2021, and is available up to a maximum of the lesser of: (a)
$15.0 million
; or (b) a certain percentage of domestic and foreign trade receivables. As of December 31, 2018, prior to the February 2019 amendment, the Revolving Line of Credit was available up to a maximum of the lesser of: (a)
$25.0 million
; or (b) a certain percentage of domestic and foreign trade receivables, plus, for the twelve months ending May 8, 2019, the lesser of: (a)
$5.0 million
; and (b) a certain portion of the Company’s cash and cash equivalents.
As of
December 31, 2018
, the amount available under the Revolving Line of Credit was
$10.5 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
65%
of its equity interests in the Company’s Korean subsidiary. The obligations under the Loan Agreement are also guaranteed directly by the Company’s Korean subsidiary. 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. As of December 31, 2018, the Company is in compliance with the financial covenants that it is required to meet during the term of the credit agreement including the minimum two-quarter rolling EBITDA and minimum liquidity requirements.
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 the 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 of
$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. There were
no
borrowings outstanding under the Revolving Line of Credit as of
December 31, 2018
and 2017.
Other Long-term Borrowings
In 2018, in connection with a contract manufacturer transition, the Company’s agreement with the contract manufacturer included a provision that met the lease definition criteria in reference to approximately
$1.9 million
of manufacturing equipment located at the contract manufacturer’s facility. Some of the terms of the equipment agreement have not yet been finalized; however, the Company anticipates that it will make even quarterly payments over
3 years
, after which time title of the equipment will transfer to Maxwell. As of December 31, 2018, the arrangement was recorded as a capital lease. The Company utilized a discount rate of
5.0%
to calculate the effective interest on this borrowing. At
December 31, 2018
, the Company had
$1.5 million
of capital lease liability outstanding under this arrangement. As of
December 31, 2018
, the Company’s lease payment commitments under this arrangement were
$0.5 million
,
$0.7 million
and
$0.4 million
for the years ended December 31, 2019, 2020 and 2021, respectively.
Note 8—Fair Value Measurement
The Company records certain financial instruments at fair value in accordance with the hierarchy from the
Fair Value Measurements and Disclosures
Topic of the FASB ASC as follows.
Fair Value of Assets
Level 1:
Observable inputs such as quoted prices in active markets for identical assets.
Level 2:
Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.
Level 3
: Unobservable inputs that reflect the reporting entity’s own assumptions.
As of
December 31, 2018
and 2017, the fair value of the Company’s convertible senior notes issued in September and October 2017 was approximately
$36.0 million
and
$52.6 million
, respectively, and was measured using Level 2 inputs. The carrying value of other 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—Discontinued Operations
On December 19, 2018, the Company entered into a Share Purchase Agreement with RN C Holding SA, a special purpose holding entity and affiliate of Renaissance Investment Foundation, (“Renaissance”), providing for the sale of
100%
of the shares of the Company’s Swiss subsidiary, Maxwell Technologies SA (“Maxwell SA”), and its high voltage capacitor product line to Renaissance. The transaction simultaneously closed with the signing of the Share Purchase Agreement on December 19, 2018. The upfront purchase price was approximately
$55.1 million
, which after certain reductions and other transaction-related expenses resulted in net upfront cash proceeds of approximately
$47.8 million
. These reductions and transaction related expenses included a
$0.9 million
holdback that was placed in a third party escrow account to satisfy potential withholding tax obligations, transaction expenses of
$2.1 million
and additional adjustments for agreed upon net working capital amounts and other financial related adjustments as agreed upon and set forth in the Share Purchase Agreement.
In addition to the upfront purchase price, per the terms of the agreement, Renaissance will make milestone payments of up to
$7.5 million
per year based on the achievement of specific revenue targets related to the high voltage capacitor product line in fiscal years 2019 and 2020 resulting in potential aggregate milestone payments of approximately
$15 million
. Renaissance may set off any damages incurred for indemnification matters covered by the Share Purchase Agreement against any future milestone payments. Additionally, up to
$5.0 million
may be withheld from any potential milestone payments and funded to a separate escrow account to satisfy certain indemnity obligations as set forth in the Share Purchase Agreement. The Company will account for any potential milestone payments received as gain contingencies in accordance with the provisions of ASC 450,
Contingencies
; therefore, the Company will not record any gain or recognize any income related to the potential milestone payments until the period in which they are realized.
Following is the reconciliation of purchase price to net proceeds received and to the gain recognized in income from discontinued operations (in thousands):
|
|
|
|
|
|
Purchase price
|
|
$
|
55,055
|
|
Adjustments to purchase price
|
|
(791
|
)
|
Amounts held in escrow
|
|
(859
|
)
|
Payment of withholding taxes
|
|
(3,492
|
)
|
Cash proceeds received
|
|
49,913
|
|
Transaction expenses
|
|
(2,099
|
)
|
Net cash proceeds received
|
|
$
|
47,814
|
|
|
|
|
Net cash proceeds received
|
|
$
|
47,814
|
|
Net assets of high voltage product line
|
|
(56,718
|
)
|
Release of accumulated other comprehensive income from equity
|
|
10,120
|
|
Release of withholding tax liabilities
|
|
890
|
|
Release of employee liabilities and cancellation of equity awards
|
|
488
|
|
Payment of withholding taxes
|
|
3,492
|
|
Amounts held back in escrow
|
|
859
|
|
Gain on sale of high voltage product line, before income taxes
|
|
6,945
|
|
Income tax related to gain on sale
|
|
(1,534
|
)
|
Gain on sale, net of income taxes
|
|
$
|
5,411
|
|
For the years ended December 31, 2018 and 2017, the Company recognized
$7.9 million
and
$10.7 million
, respectively, of income net of income taxes from the discontinued operations of the high voltage product line. The major line items constituting the income of the high voltage product line which are reflected in our consolidated statements of operations as discontinued operations are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2018
|
|
2017
|
Revenue
|
|
$
|
22,620
|
|
|
$
|
42,659
|
|
Cost of revenue
|
|
13,035
|
|
|
19,462
|
|
Gross profit
|
|
9,585
|
|
|
23,197
|
|
Operating expenses:
|
|
|
|
|
Selling, general and administrative
|
|
6,886
|
|
|
7,884
|
|
Research and development
|
|
2,087
|
|
|
2,084
|
|
Total operating expenses
|
|
8,973
|
|
|
9,968
|
|
Income from operations of discontinued operations
|
|
612
|
|
|
13,229
|
|
Other components of defined benefit plans, net
|
|
938
|
|
|
628
|
|
Other income and expense, net
|
|
(78
|
)
|
|
(26
|
)
|
Gain on sale of high voltage product line, net of income taxes
|
|
5,411
|
|
|
—
|
|
Income tax benefit (provision)
|
|
1,011
|
|
|
(3,098
|
)
|
Income from discontinued operations, net of income taxes
|
|
$
|
7,894
|
|
|
$
|
10,733
|
|
The assets and liabilities of the high voltage product line that were classified as discontinued operations in the consolidated balance sheet as of December 31, 2017 are as follows (in thousands):
|
|
|
|
|
|
|
|
December 31
|
|
|
2017
|
Cash and cash equivalents
|
|
$
|
3,930
|
|
Trade and other accounts receivable, net of allowance for doubtful accounts
|
|
8,931
|
|
Inventories
|
|
8,778
|
|
Prepaid expenses and other current assets
|
|
824
|
|
Current assets of discontinued operations
|
|
$
|
22,463
|
|
|
|
|
Property and equipment, net
|
|
8,084
|
|
Goodwill
|
|
21,354
|
|
Pension asset
|
|
11,712
|
|
Non-current assets of discontinued operations
|
|
$
|
41,150
|
|
|
|
|
Accounts payable and accrued liabilities
|
|
5,475
|
|
Accrued employee compensation
|
|
652
|
|
Deferred revenue and other current liabilities
|
|
97
|
|
Short-term borrowings and current portion of long-term debt
|
|
33
|
|
Current liabilities of discontinued operations
|
|
$
|
6,257
|
|
|
|
|
Deferred tax liability, long-term
|
|
3,774
|
|
Long-term debt, excluding current portion
|
|
82
|
|
Other long-term liabilities
|
|
127
|
|
Non-current liabilities of discontinued operations
|
|
$
|
3,983
|
|
Note 10—Stock Plans
The Company’s disclosures provided in this note include both continuing operations and discontinued operations.
Equity Incentive Plans
The Company has
two
active share-based compensation plans as of
December 31, 2018
: the 2004 Employee Stock Purchase Plan (“ESPP”) and the 2013 Omnibus Equity Incentive Plan (the “Incentive Plan”), as approved by the stockholders. Under the Incentive Plan, incentive stock options, non-qualified stock options, restricted stock awards (“RSAs”) and restricted stock units (“RSUs”) have been granted to employees and non-employee directors. Generally, these awards vest over periods of
one
to
four
years. In addition, equity awards have been issued to senior management where vesting of the award is tied to Company performance or market conditions. The Company’s policy is to issue new shares of its common stock upon the exercise of stock options, vesting of restricted stock units, granting of restricted stock awards or ESPP purchases.
The Company’s Incentive Plan currently provides for an equity incentive pool of
7,900,000
shares. Shares reserved for issuance are replenished by forfeited shares from the Incentive Plan. Additionally, equity awards forfeited under the Company’s former 2005 equity incentive plan and shares that were available under other predecessor plans are included in the total shares available for issuance under the Incentive Plan.
For the year ended
December 31, 2018
, the tax benefit associated with stock option exercises, restricted stock unit vesting, restricted stock grants, and disqualifying dispositions of both incentive stock options and stock issued under the Company’s ESPP, was approximately
$4.8 million
.
Stock Options
The Company grants stock options to its employees, executive management and directors on a discretionary basis. The following table summarizes total aggregate stock option activity for the year ended
December 31, 2018
(in thousands, except for per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Shares
|
|
Weighted
Average
Exercise
Price
|
|
Weighted
Average
Remaining
Contractual
Term
(in years)
|
|
Aggregate
Intrinsic
Value
|
Balance at December 31, 2017
|
|
361
|
|
|
$
|
8.05
|
|
|
|
|
|
Granted
|
|
30
|
|
|
5.37
|
|
|
|
|
|
Cancelled
|
|
(35
|
)
|
|
9.41
|
|
|
|
|
|
Balance at December 31, 2018
|
|
356
|
|
|
7.69
|
|
|
5.65
|
|
$
|
—
|
|
Vested or expected to vest at December 31, 2018
|
|
354
|
|
|
7.70
|
|
|
5.64
|
|
—
|
|
Exercisable at December 31, 2018
|
|
270
|
|
|
8.20
|
|
|
5.10
|
|
—
|
|
The weighted-average grant date fair value of stock options granted during the years ended
December 31, 2018
and 2017 was
$2.75
and
$2.97
, respectively. There were
no
option exercises for the years ended
December 31, 2018
and 2017.
The fair value of the stock options granted during the years ended December 31, 2018 and 2017 was estimated using the Black-Scholes valuation model using the following assumptions:
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2018
|
|
2017
|
Expected dividends
|
|
—
|
%
|
|
—
|
%
|
Expected volatility weighted average
|
|
54
|
%
|
|
59
|
%
|
Risk-free interest rate
|
|
3.0
|
%
|
|
1.9
|
%
|
Expected life/term weighted average (in years)
|
|
5.5
|
|
|
5.5
|
|
The expected dividend yield is zero because the Company has never paid cash dividends and has no present intention to pay cash dividends. The expected term is based on the Company’s historical experience from previous stock option grants. Expected volatility is based on the historical volatility of the Company’s stock measured over a period commensurate with the expected option term. The Company does not consider implied volatility due to the low volume of publicly traded options in the Company’s stock. The risk-free interest rate is derived from the zero coupon rate on U.S. Treasury instruments with a term comparable to the option’s expected term.
As of
December 31, 2018
, there was
$0.1 million
of total unrecognized compensation cost related to stock options. The cost is expected to be recognized over a weighted average period of
0.4 years
.
Restricted Stock Awards
No
RSAs were granted during the years ended
December 31, 2018
and
2017
. The following table summarizes RSA activity for the year ended
December 31, 2018
(in thousands, except for per share data):
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted Average
Grant Date
Fair Value
|
Nonvested at December 31, 2017
|
|
26
|
|
|
$
|
14.57
|
|
Vested
|
|
(25
|
)
|
|
14.57
|
|
Forfeited
|
|
(1
|
)
|
|
14.57
|
|
Nonvested at December 31, 2018
|
|
—
|
|
|
—
|
|
The vest date fair value of RSAs vested in
2018
and
2017
was
$0.1 million
and
$0.3 million
, respectively.
Restricted Stock Units
Non-employee directors receive annual RSU awards as partial consideration for their annual retainer compensation. These awards vest in full
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 to executives with vesting contingent on continued service and achievement of specified performance objectives or stock price performance. Each RSU represents the right to receive
one
unrestricted share of the Company’s common stock upon vesting.
The following table summarizes RSU activity for both service-based awards and performance-based awards for the year ended
December 31, 2018
(in thousands, except for per share data):
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted Average
Grant Date
Fair Value
|
Nonvested at December 31, 2017
|
|
2,650
|
|
|
$
|
6.16
|
|
Granted
|
|
1,544
|
|
|
6.12
|
|
Released
|
|
(570
|
)
|
|
5.92
|
|
Vested with deferred settlement
|
|
(45
|
)
|
|
5.64
|
|
Forfeited
|
|
(821
|
)
|
|
6.22
|
|
Nonvested at December 31, 2018
|
|
2,758
|
|
|
6.18
|
|
The weighted average grant date fair value of RSUs granted in the years ended December 31 2018 and 2017 was
$6.12
and
5.89
, respectively. The vest date fair value of RSUs released in the years ended December 31, 2018 and 2017 was
$3.0 million
and
$2.9 million
, respectively. As of
December 31, 2018
, there was
$8.3 million
of unrecognized compensation cost related to nonvested RSU awards. The cost is expected to be recognized over a weighted average period of
2.0 years
.
For the years ended
December 31, 2018
and
2017
, RSU grants were composed of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31
|
|
|
2018
|
|
2017
|
|
|
Shares granted
(in thousands)
|
|
Average grant date fair value
|
|
Shares granted
(in thousands)
|
|
Average grant date fair value
|
Service-based
|
|
1,111
|
|
$
|
5.70
|
|
|
1,270
|
|
|
$
|
5.53
|
|
Performance objectives
|
|
78
|
|
5.85
|
|
|
158
|
|
|
5.73
|
|
Market-condition
|
|
355
|
|
7.49
|
|
|
368
|
|
|
7.22
|
|
Total RSUs granted
|
|
1,544
|
|
6.12
|
|
|
1,796
|
|
|
5.89
|
|
For the year ended
December 31, 2018
and
2017
, RSUs granted included market-condition RSUs., The market-condition RSUs 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 RSUs 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 market-condition RSUs granted was calculated using a Monte Carlo valuation model with the following assumptions:
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2018
|
|
2017
|
Expected dividend yield
|
|
—
|
%
|
|
—
|
%
|
Expected volatility
|
|
41% - 47%
|
|
|
53
|
%
|
Risk-free interest rate
|
|
2.36% - 2.60%
|
|
|
1.55
|
%
|
Expected term (in years)
|
|
2.5 - 2.9
|
|
|
2.8
|
|
The following table summarizes the amount of compensation expense recognized for RSUs for the years ended
December 31, 2018
and
2017
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
RSU Type
|
|
2018
|
|
2017
|
Service-based
|
|
$
|
4,054
|
|
|
$
|
3,268
|
|
Performance objectives
|
|
320
|
|
|
379
|
|
Market-condition
|
|
1,912
|
|
|
1,539
|
|
|
|
$
|
6,286
|
|
|
$
|
5,186
|
|
Employee Stock Purchase Plan
Pursuant to the Company’s amended and restated 2004 Employee Stock Purchase Plan (“ESPP”), the aggregate number of shares of common stock which may be purchased shall not exceed
1,500,000
shares of common stock of the Company. For the years ended
December 31, 2018
,
2017
,
159,544
and
77,914
shares, respectively, were purchased under the ESPP.
The 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.
The fair value of the “look back” option for ESPP shares issued during the offering period is estimated using the Black-Scholes valuation model for a call and a put option. The share price used for the model is a
15%
discount on the stock price on the last trading day before the offering period; the number of shares to be purchased is based on employee contributions. The fair value of ESPP awards was calculated using the following weighted-average assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2018
|
|
2017
|
Expected dividends
|
|
—
|
%
|
|
—
|
%
|
Expected volatility
|
|
42
|
%
|
|
34
|
%
|
Risk-free interest rate
|
|
1.88
|
%
|
|
0.89
|
%
|
Expected life (in years)
|
|
0.50
|
|
|
0.45
|
|
Fair value per share
|
|
$
|
1.28
|
|
|
$
|
1.30
|
|
The intrinsic value of shares of the Company’s stock purchased pursuant to the ESPP during each of the years ended
December 31, 2018
and
2017
was
$0.1 million
.
Bonuses Settled in Stock
In 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 year ended December 31, 2018, the Company settled
$3.0 million
of bonuses earned under the plan for the 2017 performance period with
506,017
shares of fully vested common stock. During the year ended December 31, 2017, the Company settled
$1.6 million
of bonuses earned under the plan for the 2016 performance period with
302,326
shares of fully vested common stock. The Company intends to settle bonuses earned under the plan for the fiscal year 2018 performance period with fully vested common stock of the Company in the first quarter of 2019.
The Company recorded
$2.0 million
and
$2.8 million
of stock compensation expense related to the bonuses during the years ended
December 31, 2018
and
2017
, respectively.
Director Fees Settled in Stock
In early 2017, the Board approved a non-employee director deferred compensation program pursuant to which participating non-employee directors may make irrevocable elections on an annual basis to take fully vested restricted stock units in lieu 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) and to defer the settlement upon the vesting of all or a portion of their equity awards granted in the applicable calendar year. 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 immediately after grant or at a future date elected by the respective non-employee director through the issuance of Maxwell common stock.
During the
year ended December 31, 2018
, the Company settled
$399,000
of director fees with
97,138
fully vested RSUs. During the year ended December 31, 2017, the Company settled
$164,000
of director fees with
28,732
fully vested RSUs.
Stock-based Compensation Expense
Compensation cost for stock options, RSAs, RSUs, ESPP, bonuses and director fees for the years ended December 31, 2018 and 2017, respectively, is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2018
|
|
2017
|
Stock options
|
|
$
|
271
|
|
|
$
|
237
|
|
Restricted stock awards
|
|
83
|
|
|
416
|
|
Restricted stock units
|
|
6,286
|
|
|
5,186
|
|
ESPP
|
|
148
|
|
|
114
|
|
Bonuses settled in stock
|
|
1,986
|
|
|
2,826
|
|
Director fees settled in stock
|
|
304
|
|
|
258
|
|
Total stock-based compensation expense, including discontinued operations
|
|
9,078
|
|
|
9,037
|
|
Less: stock-based compensation expense related to discontinued operations
|
|
(31
|
)
|
|
(798
|
)
|
Total stock-based compensation expense, continuing operations
|
|
$
|
9,047
|
|
|
$
|
8,239
|
|
Stock-based compensation cost included in cost of revenue; selling, general and administrative expense; and research and development expense for the years ended December 31, 2018 and 2017, respectively, is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2018
|
|
2017
|
Cost of revenue
|
|
$
|
1,077
|
|
|
$
|
948
|
|
Selling, general and administrative
|
|
6,635
|
|
|
6,065
|
|
Research and development
|
|
1,335
|
|
|
1,226
|
|
Total stock-based compensation expense
|
|
$
|
9,047
|
|
|
$
|
8,239
|
|
Share Reservations
The following table summarizes the shares available for grant under the Company’s stock-based compensation plans as of
December 31, 2018
:
|
|
|
|
2013 Omnibus Equity Incentive Plan
|
3,067,729
|
|
2004 Employee Stock Purchase Plan
|
458,065
|
|
Total
|
3,525,794
|
|
Note 11—Shelf Registration Statements
On November 9, 2017, the Company filed a shelf registration statement on Form S-3 with the SEC to, from time to time, sell up to an aggregate of
$125 million
of any combination of its common stock, warrants, debt securities or units. On November 16, 2017, the registration statement was declared effective by the SEC, which will allow the Company to access the capital markets for the three-year period following this effective date. Net proceeds, terms and pricing of each offering of securities issued under the shelf registration statement will be determined at the time of such offerings.
In August 2018, under the shelf registration statement, the Company completed a public offering of
7,590,000
shares of its common stock at a public offering price of
$3.25
per share. The Company received total net proceeds of approximately
$23.0 million
from the offering, after deducting underwriting discounts, commissions and offering expenses. Offering net proceeds are being used for general corporate purposes, including research and development expenses, capital expenditures, working capital, repayment of debt and general and administrative expenses. As of
December 31, 2018
,
$24.7 million
of securities have been issued under the shelf registration statement and a balance of
$100.3 million
remains available for future issuance.
Note 12—Income Taxes
On December 22, 2017, the President of the United States signed into law the Tax Cuts and Jobs Act. The legislation significantly changes U.S. tax law by, among other things, reducing the US federal corporate tax rate from 35% to 21%, implementing a territorial tax system and imposing a repatriation tax on deemed repatriated earnings of foreign subsidiaries. In December 2017, the SEC staff issued Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (SAB 118), which allowed the Company to record provisional amounts during a measurement period not to extend beyond one year of the enactment date. As a result, The Company previously recorded a provisional estimate of the effect of the Tax Act in its financial statements. In the fourth quarter of 2018, the Company completed its analysis to determine the effect of the Tax Act and recorded immaterial adjustments as of December 22, 2018.
While the Tax Act provides for a modified territorial tax system, beginning in 2018, GILTI provisions will be applied providing an incremental tax on low taxed foreign income. The GILTI provisions require the Company to include in its U.S. income tax return foreign subsidiary earnings in excess of an allowable return on the foreign subsidiary’s tangible assets. During 2018, the Company made an accounting policy election to treat taxes related to GILTI as a current period expense when incurred.
During the year ended December 31, 2017, the Company remeasured its U.S. deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, which is generally 21%. The Company recorded a decrease related to its deferred tax assets and liabilities of
$34.7 million
with a corresponding adjustment to its valuation allowance for the year ended December 31, 2017. As the Company’s deferred tax asset is offset by a full valuation allowance, this change in rates had no impact on the Company’s financial position or results of operations.
The one-time transition tax is based on the Company’s total post-1986 earnings and profits (“E&P”) that were previously deferred from U.S. income taxes. The Company recorded additional U.S. taxable income of
$8.4 million
, which did not result in additional tax expense due to its net operating losses.
For financial reporting purposes, loss from continuing operations before income taxes includes the following components (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2018
|
|
2017
|
United States
|
|
$
|
(43,694
|
)
|
|
$
|
(52,720
|
)
|
Foreign
|
|
(1,844
|
)
|
|
(583
|
)
|
Total
|
|
$
|
(45,538
|
)
|
|
$
|
(53,303
|
)
|
The provision for income taxes based on loss from continuing operations before income taxes is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2018
|
|
2017
|
Federal:
|
|
|
|
|
Current
|
|
$
|
—
|
|
|
$
|
—
|
|
Deferred
|
|
(5,763
|
)
|
|
18,646
|
|
|
|
(5,763
|
)
|
|
18,646
|
|
State:
|
|
|
|
|
Current
|
|
7
|
|
|
5
|
|
Deferred
|
|
(651
|
)
|
|
231
|
|
|
|
(644
|
)
|
|
236
|
|
Foreign:
|
|
|
|
|
Current
|
|
405
|
|
|
519
|
|
Deferred
|
|
(703
|
)
|
|
(1,880
|
)
|
|
|
(298
|
)
|
|
(1,361
|
)
|
(Decrease) increase in valuation allowance
|
|
5,609
|
|
|
(16,962
|
)
|
Tax provision
|
|
$
|
(1,096
|
)
|
|
$
|
559
|
|
The provision for income taxes in the accompanying consolidated statements of operations differs from the amount calculated by applying the statutory income tax rate to loss before income taxes. The primary components of such difference are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2018
|
|
2017
|
Taxes at federal statutory rate
|
|
$
|
(9,563
|
)
|
|
$
|
(18,123
|
)
|
State taxes, net of federal benefit
|
|
(97
|
)
|
|
(236
|
)
|
Effect of tax rate differential for foreign subsidiary
|
|
176
|
|
|
(340
|
)
|
Valuation allowance, including tax benefits of stock activity
|
|
5,609
|
|
|
(16,962
|
)
|
Tax rate change
|
|
(244
|
)
|
|
34,732
|
|
Discontinued operations
|
|
1,927
|
|
|
—
|
|
Stock-based compensation
|
|
513
|
|
|
224
|
|
Foreign withholding taxes
|
|
414
|
|
|
295
|
|
Return to provision adjustments
|
|
667
|
|
|
(2,931
|
)
|
Subpart F income inclusion
|
|
—
|
|
|
2,998
|
|
SEC settlement penalty
|
|
—
|
|
|
959
|
|
Business combination
|
|
—
|
|
|
(1,914
|
)
|
Other, net
|
|
(498
|
)
|
|
1,857
|
|
Tax provision
|
|
$
|
(1,096
|
)
|
|
$
|
559
|
|
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 as evidenced by the cumulative losses from operations through
December 31, 2018
. Management periodically evaluates the recoverability of the deferred tax assets. At such time as it is determined that it is more likely than not that deferred assets are realizable, the valuation allowance will be reduced accordingly and recorded as a tax benefit. The Company has recorded a valuation allowance of
$67.0 million
as of
December 31, 2018
to reflect the estimated amount of deferred tax assets that may not be realized. The Company increased its valuation allowance by
$5.6 million
for the year ended
December 31, 2018
.
At
December 31, 2018
, the Company has federal and state net operating loss carryforwards of approximately
$235.2 million
and
$43.6 million
, respectively. The federal tax loss carryforwards will begin to expire in 2020 and the state tax loss carryforwards will begin to expire in 2023. In addition, the Company has research and development and other tax credit carryforwards for federal and state income tax purposes as of
December 31, 2018
of
$7.7 million
and
$9.8 million
, respectively. The federal credits will begin to expire in 2019 unless utilized and the state credits have an indefinite life. Pursuant to Internal Revenue Code Sections 382 and 383, use of the Company’s federal net operating loss and credit carryforwards may be limited upon a cumulative change in ownership of more than 50% within a three-year period.
Items that give rise to significant portions of the deferred tax accounts are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2018
|
|
2017
|
Deferred tax assets:
|
|
|
|
|
Tax loss carryforwards
|
|
$
|
53,834
|
|
|
$
|
50,183
|
|
Accrued foreign taxes
|
|
—
|
|
|
1,044
|
|
Research and development and other tax credit carryforwards
|
|
1,149
|
|
|
792
|
|
Uniform capitalization, contract and inventory related reserves
|
|
1,388
|
|
|
982
|
|
Accrued vacation
|
|
327
|
|
|
301
|
|
Allowance for doubtful accounts
|
|
147
|
|
|
161
|
|
Stock-based compensation
|
|
2,309
|
|
|
2,029
|
|
Capitalized research and development
|
|
2,688
|
|
|
3,043
|
|
Tax basis depreciation less book depreciation
|
|
1,888
|
|
|
1,492
|
|
Pension assets
|
|
992
|
|
|
1,022
|
|
Deferred revenue
|
|
798
|
|
|
175
|
|
163(j) interest limitation
|
|
1,135
|
|
|
—
|
|
Other
|
|
1,741
|
|
|
2,367
|
|
Total
|
|
68,396
|
|
|
63,591
|
|
Deferred tax liabilities:
|
|
|
|
|
Withholding tax on undistributed earnings of foreign subsidiary
|
|
—
|
|
|
(4,879
|
)
|
Intangible assets
|
|
(978
|
)
|
|
(1,514
|
)
|
Foreign exchange gains/losses
|
|
(183
|
)
|
|
(351
|
)
|
Total
|
|
(1,161
|
)
|
|
(6,744
|
)
|
Net deferred tax assets before valuation allowance
|
|
67,235
|
|
|
56,847
|
|
Valuation allowance
|
|
(67,012
|
)
|
|
(61,403
|
)
|
Net deferred tax assets (liabilities)
|
|
$
|
223
|
|
|
$
|
(4,556
|
)
|
As of
December 31, 2018 and 2017
, deferred tax assets of
$0.3 million
and
$0.4 million
, respectively, were included in other non-current assets in the consolidated balance sheets.
The Company accounts for uncertain tax benefits in accordance with the provisions of section 740-10 of the
Accounting for Uncertainty in Income Taxes
Topic of the FASB ASC. Of the total unrecognized tax benefits at
December 31, 2018
, approximately
$17.5 million
was recorded as a reduction to deferred tax assets, which caused a corresponding reduction in the Company’s valuation allowance of
$17.5 million
. To the extent unrecognized tax benefits are recognized at a time when a valuation allowance does not exist, the recognition of the
$17.5 million
tax benefit would reduce the effective tax rate. The Company does not anticipate that the amount of unrecognized tax benefits as of
December 31, 2018
will change materially within the 12-month period following
December 31, 2018
.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands):
|
|
|
|
|
Balance at December 31, 2016
|
$
|
15,579
|
|
Increase in current period positions
|
1,081
|
|
Decrease in prior period positions
|
(518
|
)
|
Balance at December 31, 2017
|
16,142
|
|
Increase in current period positions
|
1,167
|
|
Increase in prior period positions
|
340
|
|
Decrease in prior period positions
|
(32
|
)
|
Balance at December 31, 2018
|
$
|
17,617
|
|
The Company recognizes interest and penalties as a component of income tax expense. Interest and penalties for the years ended
December 31, 2018 and 2017
were
$(27,000)
and
$29,000
, respectively.
The Company’s U.S. federal income tax returns for tax years subsequent to 2014 are subject to examination by the Internal Revenue Service and its state income tax returns subsequent to 2013 are subject to examination by state tax authorities. The Company’s foreign tax returns subsequent to 2012 are subject to examination by the foreign tax authorities.
Net operating losses from years for which the statute of limitations has expired (2014 and prior for federal and 2013 and prior for state) could be adjusted in the event that the taxing jurisdictions challenge the amounts of net operating loss carryforwards from such years.
Note 13—Leases
Rental expense amounted to
$3.8 million
and
$3.4 million
for the years ended
December 31, 2018
and
2017
, respectively, and was incurred primarily for facility leases. Future annual minimum rental commitments as of
December 31, 2018
are as follows (in thousands):
|
|
|
|
|
Fiscal Years
|
|
2019
|
$
|
2,848
|
|
2020
|
2,736
|
|
2021
|
2,735
|
|
2022
|
2,202
|
|
2023
|
1,218
|
|
Thereafter
|
2,814
|
|
Total
|
$
|
14,553
|
|
Note 14—Postretirement Benefit Plans
Korea Defined Benefit Plan
In connection with the Nesscap Acquisition on April 28, 2017, the Company assumed the defined benefit plan 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 lump sum separation benefits upon the termination of their employment based on their length of service and rate of pay.
The following table reflects changes in the defined benefit plan obligation for the period from acquisition to
December 31, 2018
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
April 29 through December 31,
|
|
|
2018
|
|
2017
|
Change in benefit obligation:
|
|
|
|
|
Beginning benefit obligation
|
|
$
|
3,966
|
|
|
$
|
3,360
|
|
Service cost
|
|
590
|
|
|
361
|
|
Interest cost
|
|
110
|
|
|
55
|
|
Benefits paid
|
|
(503
|
)
|
|
(212
|
)
|
Actuarial loss
|
|
518
|
|
|
174
|
|
Effect of foreign currency translation
|
|
(172
|
)
|
|
228
|
|
Projected benefit obligation at end of year
|
|
4,509
|
|
|
3,966
|
|
Fair value of plan assets
|
|
20
|
|
|
24
|
|
Unfunded status at end of year
|
|
$
|
4,489
|
|
|
$
|
3,942
|
|
Amounts recognized in the consolidated balance sheets consist of (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
2018
|
|
2017
|
Net defined benefit plan liability
|
|
$
|
4,489
|
|
|
$
|
3,942
|
|
|
|
|
|
|
Accumulated other comprehensive loss includes the following:
|
|
|
|
|
Actuarial loss before taxes
|
|
$
|
692
|
|
|
$
|
174
|
|
The components of net periodic pension cost and other amounts recognized in other comprehensive income (loss) before taxes are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
April 29 through December 31,
|
|
|
2018
|
|
2017
|
Components of net periodic defined benefit plan cost:
|
|
|
|
|
Service cost
|
|
$
|
590
|
|
|
$
|
361
|
|
Interest cost
|
|
110
|
|
|
55
|
|
Net periodic defined benefit plan cost
|
|
$
|
700
|
|
|
$
|
416
|
|
Other amounts recognized in other comprehensive income (loss) before income taxes are as follows:
|
|
|
|
|
Actuarial loss on benefit obligation
|
|
$
|
518
|
|
|
$
|
174
|
|
Total loss recognized in other comprehensive income (loss), before taxes
|
|
518
|
|
|
174
|
|
Total loss recognized in net periodic defined benefit plan cost and other comprehensive income (loss), before taxes
|
|
$
|
1,218
|
|
|
$
|
590
|
|
Assumptions used to determine the benefit obligation and net periodic defined benefit plan cost are as follows:
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
April 29 through December 31,
|
|
|
2018
|
|
2017
|
Discount rate
|
|
2.46
|
%
|
|
2.98
|
%
|
Rate of compensation increase
|
|
6.96
|
%
|
|
6.11
|
%
|
The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid (in thousands):
|
|
|
|
|
2019
|
$
|
372
|
|
2020
|
364
|
|
2021
|
419
|
|
2022
|
331
|
|
2023
|
414
|
|
Years 2024 through 2028
|
1,293
|
|
Total
|
$
|
3,193
|
|
In compliance with local labor law, the Company is required to make contributions for foreign line workers. Employer contributions of
$7,000
were paid during the year ended
December 31, 2018
and
$6,000
were paid during the period from acquisition to December 31, 2017. The Company expects to make contributions of approximately
$7,000
in 2019.
U.S. Plan
The Company has a postretirement benefit plan covering its employees in the United States. Substantially all U.S. employees are eligible to elect coverage under a contributory employee savings plan which provides for Company matching contributions based on one-half of employee contributions up to certain plan limits. The Company’s matching contributions under this plan totaled
$0.4 million
and
$0.5 million
for the years ended
December 31, 2018
and
2017
, respectively.
Note 15—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 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 former 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. In December 2018, the Company sold its Swiss subsidiary as part of the sale of its high voltage product line and agreed to indemnify, within certain parameters, the purchaser for damages which may arise from this matter. 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. In March 2018, the Company consented to an order filed by the SEC without admitting or denying the SEC’s findings thereby resolving alleged violations of certain anti-fraud and books and records provisions of the federal securities laws and related rules. Under the terms of the order, the Company was required to pay
$2.8 million
in a civil penalty and agreed not to commit or cause any violations of certain anti-fraud and books and records provisions of the federal securities laws and related rules. The Company had previously accrued this amount owed as an operating expense in its financial statements in the third quarter of 2017 and paid the amount in full in April 2018.
Note 16—Subsequent Events
On February 3, 2019, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Tesla, Inc., a Delaware corporation (“Tesla”) and Cambria Acquisition Corp., a Delaware corporation and a wholly owned subsidiary of Tesla (“Merger Sub”), which contemplates the acquisition of the Company by Tesla, through Merger Sub. The Merger Agreement contemplates that Tesla would commence an all stock exchange offer for all of the issued and outstanding shares of the Company (the “Offer”), followed by a merger of Merger Sub with and into the Company pursuant to which the Company will survive as a wholly-owned subsidiary of Tesla (the “Merger”).
In the Offer, each Company stockholder who elects to participate in the Offer will receive a fractional share of common stock of Tesla (“Tesla Common Stock”) for each share of Company common stock (“Company Common Stock”) exchanged in the Offer. Pursuant to the terms and subject to the conditions of the Merger Agreement, as promptly as practicable (but in no event later than four (
4
) business days following the date on which Tesla files its Annual Report on Form 10-K for the fiscal year ending December 31, 2018), Tesla will commence the Offer to purchase each issued and outstanding share of Company Common Stock for a fraction of a share of Tesla Common Stock, equal to the quotient obtained by dividing
$4.75
by the volume weighted average closing sale price of one (
1
) share of Tesla Common Stock as reported on the NASDAQ Global Select Market (“NASDAQ”) for the five (
5
) consecutive trading days ending on and including the second trading day immediately preceding the expiration of the Offer (the “Tesla Trading Price”). However, in the event that the Tesla Trading Price is equal to or less than
$245.90
, then each share of Company Common Stock shall be exchanged for
0.0193
of a share of Tesla Common Stock. Such shares of Tesla Common Stock, plus any cash paid in lieu of any fractional shares of Tesla Common Stock, is referred to as the “Offer Consideration”.
At the effective time of the Merger, each outstanding option to purchase Company Common Stock that is outstanding, unexercised and unexpired immediately prior to the effective time shall be automatically assumed by Tesla and converted into and become an option to acquire Tesla Common Stock, as further described in the Merger Agreement, Similarly, each Company restricted share unit that is outstanding immediately prior to the effective time, shall be assumed by Tesla and converted automatically into and become a restricted stock unit covering shares of Tesla Common Stock.
The Merger Agreement and the consummation of the transactions contemplated thereby have been unanimously approved by the board of directors of the Company (the “Board”), and the Board has resolved to recommend to the stockholders of the Company to accept the Offer and tender their shares of Company Common Stock to Merger Sub pursuant to the Offer.
Under the terms of the Merger Agreement, prior to the expiration of the Offer and subject to customary limitations and conditions, the Company may terminate the Merger Agreement to accept a “superior proposal” if Tesla chooses not to match such proposal, provided that the Company pays Tesla a termination fee of
$8.295 million
in cash. Each of the parties may also terminate the Merger Agreement if the closing of the Offer has not occurred within five (
5
) months of the signing of the Merger Agreement.