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
three
manufacturing facilities located in Rossens, Switzerland; Yongin, South Korea and Peoria, Arizona. In addition, the Company has
two
contract manufacturers located in China. Maxwell offers the following
two
product lines:
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Energy Storage:
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.
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High-Voltage Capacitors:
The Company’s CONDIS® high-voltage capacitors are designed and manufactured to perform reliably for decades in all climates. These products include grading and coupling capacitors, 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.
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In addition to its two existing product lines, 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 April 2017, the Company acquired substantially all of the assets and business of Nesscap Energy, Inc. (“Nesscap”), a developer and manufacturer of ultracapacitor products for use in transportation, renewable energy, industrial and consumer markets. The acquisition added complementary businesses to the Company’s operations and expanded the Company’s portfolio of ultracapacitor products.
In April 2016, the Company sold substantially all of the assets and liabilities of a third product line, radiation-hardened microelectronics. The Company’s radiation-hardened microelectronic products for satellites and spacecraft included single board computers and components, such as high-density memory and power modules.
The Company’s products are designed and manufactured to perform reliably for the life of the products and systems into which they are integrated. The Company achieves high reliability through the application of proprietary technologies and rigorously controlled design, development, manufacturing and test processes.
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.
Liquidity
On September 25, 2017, the Company issued
$40.0 million
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
$37.3 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, commencing on March 15, 2018. On October 11, 2017, under a 30-day option that was exercised, the Company issued an additional
$6.0 million
aggregate principal amount of convertible senior notes under the same terms and received
$5.7 million
of net proceeds.
As of
December 31, 2017
, the Company had approximately
$50.1 million
in cash and cash equivalents, and working capital of
$68.4 million
. In July 2015, the Company entered into a loan agreement with East West Bank (“EWB”), whereby EWB made available to the Company a secured credit facility in the form of a revolving line of credit which is available up to a maximum of the lesser of: (a)
$25.0 million
; or (b) a certain percentage of domestic and foreign trade receivables. As of
December 31, 2017
, no amounts have been borrowed under this revolving line of credit and the amount available was
$13.3 million
. This facility is scheduled to expire in July 2018. 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.
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.
Revenue Recognition
Revenue is derived primarily from the sale of manufactured products directly to customers. Product revenue is recognized, according to the guidelines of the Securities and Exchange Commission (“SEC”) Staff Accounting Bulletin (“SAB”) Numbers 101,
Revenue Recognition in Financial Statements
, and 104,
Revenue Recognition
, when all of the following criteria are met: (1) persuasive evidence of an arrangement exists (upon contract signing or receipt of an authorized purchase order from a customer); (2) title passes to the customer at either shipment from the Company’s facilities or receipt at the customer facility, depending on shipping terms; (3) customer payment is deemed fixed or determinable and free of contingencies or significant uncertainties; and (4) collectability is reasonably assured. This policy has been consistently applied from period to period.
A portion of our sales revenue is derived from sales to distributors. Distributor revenue is recognized when all of the criteria for revenue recognition are met, which is generally the time of shipment to the distributor; returns and credits are typically estimable and not significant. Certain distributor agreements of Nesscap Korea provide for significant rights of return and price adjustment; revenue related to these distributors is deferred until the period in which the distributor sells through the inventory to the end customer.
Revenue from production-type contracts, which represents less than five percent of total revenue, is recognized using the percentage of completion method. The degree of completion is determined based on costs incurred as a percentage of total costs anticipated, excluding costs that are not representative of progress to completion.
Total deferred revenue and customer deposits in the consolidated balance sheets as of
December 31, 2017
and
2016
was
$6.7 million
and
$4.0 million
, respectively, and primarily relates to cash received under the localization agreement with CRRC-SRI, amounts received in advance in connection with a production-type contract for which revenue is recognized using the percentage of completion method, deferred revenue for distributors on the sell-through method of recognition, and customer advances.
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, net
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. Unabsorbed manufacturing costs are treated as expense in the period incurred.
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, 2017
and
2016
, the net book value of leasehold improvements funded by landlords was
$1.4 million
and
$1.7 million
, respectively. As of
December 31, 2017
and
2016
, the unamortized balance of deferred rent related to landlord funding of leasehold improvements was
$1.4 million
and
$1.7 million
, respectively, which is included in “accounts payable and accrued liabilities” and “other long-term liabilities” in the consolidated balance sheets.
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, 2017
,
2016
and
2015
. 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 the years ended
December 31, 2017
and 2016, the Company recorded impairment charges of
$0.2 million
and
$1.4 million
, respectively. 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.
No
impairments of property and equipment were recorded during the year ended December 31
2015
.
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, 2017
and
2016
, the accrued warranty liability included in “accounts payable and accrued liabilities” in the consolidated balance sheets was
$1.4 million
and
$1.2 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 and Switzerland. In California, cash balances commonly exceed the
$250,000
Federal Deposit Insurance Corporation insurance limit. In Switzerland, the banks where the Company has cash deposits are either government-owned, or in the case of cash deposited with non-government banks, deposits are insured up to
100,000
Swiss Francs. 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.
One
customer, ABB Ltd., accounted for
12%
of total revenue in 2017.
Two
customers accounted for 10% or more of total accounts receivable at December 31, 2017; Continental Automotive and ABB Ltd. accounted for
11%
and
10%
of accounts receivable, respectively.
No
customers accounted for 10% or more of total revenue during the year ended December 31, 2016 or 10% or more of total accounts receivable at December 31, 2016.
One
customer, Shenzhen Xinlikang Supply China Management Co. Ltd., accounted for
19%
of total revenue in
2015
.
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
$18.4 million
,
$20.9 million
and
$24.7 million
, net of third-party funding under cost-sharing arrangements of
$2.8 million
,
$1.2 million
and
$1.3 million
, for the years ended
December 31, 2017
,
2016
and
2015
, respectively. For the years ended December 31, 2017 and 2016, third-party funding under cost-sharing arrangements included
$2.2 million
and
$0.6 million
, respectively, 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
$0.7 million
,
$0.7 million
and
$1.1 million
for the years ended
December 31, 2017
,
2016
and
2015
, respectively.
Foreign Currencies
The Company’s primary foreign currency exposure is related to its subsidiaries in Switzerland and Korea. The functional currency of the Swiss and Korean subsidiaries are the Swiss Franc and Korean Won, respectively. The Company’s Swiss subsidiary has Euro and local currency (Swiss Franc) revenue and operating expenses, and local currency loans. 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 Swiss and Korean subsidiaries 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. All other foreign currency transaction gains and losses are reported in “foreign currency exchange loss, net” in the consolidated statements of operations.
Foreign Currency Derivative Instruments
The Company has historically used forward contracts to hedge certain monetary assets and liabilities, primarily receivables, payables, and cash balances, denominated in foreign currencies. The Company’s objective was to partially offset gains or losses resulting from these exposures with opposing gains or losses on the forward contracts, thereby reducing volatility of earnings created by these foreign currency exposures. During the year ended December 31, 2016, the Company ceased using foreign currency forward contracts to hedge foreign currency transaction exposure as management determined its foreign currency transaction exposure is no longer significant. In accordance with the
Derivatives and Hedging
Topic of the FASB ASC, the fair values of the forward contracts were estimated at each period end based on quoted market prices and were recorded as a net asset or liability on the consolidated balance sheets. These contracts were considered economic hedges but were not designated as hedges under the
Derivatives and Hedging Topic
of the FASB ASC, therefore, the change in the fair value of the instruments was recognized in the consolidated statements of operations and was recorded 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.
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):
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Years Ended December 31,
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2017
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2016
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2015
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Numerator
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Net loss
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$
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(43,129
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)
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$
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(23,705
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)
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$
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(22,333
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)
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Denominator
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Weighted average common shares outstanding, basic and diluted
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35,480
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31,870
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|
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30,716
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Net loss per share
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Basic and diluted
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$
|
(1.22
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)
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$
|
(0.74
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)
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$
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(0.73
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)
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The following table summarizes instruments that may be convertible into common shares that are not included in the denominator used in the diluted net loss per share calculation because to do so would be anti-dilutive (in thousands of shares):
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2017
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2016
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2015
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Outstanding options to purchase common stock
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361
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414
|
|
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931
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Unvested restricted stock awards
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26
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88
|
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245
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Unvested restricted stock unit awards
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2,650
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1,748
|
|
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885
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Employee stock purchase plan awards
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38
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—
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10
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Bonus and director fees to be paid in stock awards
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477
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265
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—
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Convertible senior notes
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7,245
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—
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—
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10,797
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2,515
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2,071
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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.
In 2016 and 2017, the Company issued 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 were estimated using a Monte-Carlo valuation model. The determination of the fair value of market-condition RSUs utilizing a Monte-Carlo valuation model was 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 the 2016 plan in stock or fully vested RSUs during 2017. For the fiscal year 2017 performance period, the Company intends to settle the amounts earned under the bonus plan in fully vested RSUs in the first quarter of 2018. 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
. The standard provides companies with a single model for accounting for revenue arising from contracts with customers and supersedes current revenue recognition guidance, including industry-specific revenue guidance. The core principle of the model is to recognize revenue when control of the goods or services transfers to the customer, as opposed to recognizing revenue when the risks and rewards transfer to the customer under the existing revenue guidance. The guidance permits companies to either apply the requirements retrospectively to all prior periods presented, or apply the requirements in the year of adoption, through a cumulative adjustment. In August 2015, the FASB issued ASU 2015-14,
Deferral of the Effective Date
, which defers the required adoption date of ASU 2014-09 by one year. As a result of the deferred effective date, ASU 2014-09 will be effective for the Company in its first quarter of fiscal 2018. Early adoption is permitted but not before the original effective date of the new standard of the first quarter of fiscal 2017. The following ASUs were subsequently issued by the FASB to clarify the implementation guidance in some areas and add practical expedients: In March 2016, ASU 2016-08,
Revenue from Contracts with Customers: Principal versus Agent Considerations;
in April 2016, ASU 2016-10,
Revenue from Contracts with Customers: Identifying Performance Obligations and Licensing;
in May 2016, ASU 2016-12,
Revenue from Contracts with Customers: Narrow Scope Improvements and Practical Expedients;
and in December 2016, ASU 2016-20,
Technical Corrections and Improvements to Revenue from Contracts with Customers
. The Company’s is currently finalizing its evaluation of standard product sales arrangements and has identified an adoption impact related to revenue from certain distributor agreements which was deferred until the period in which the distributor sells through the inventory to the end customer. In connection with the adoption of ASU 2014-09, the Company will change the recognition of sales to these distributors whereby revenue will be estimated and recognized in the period in which the Company transfers control of the product to the distributor; the adoption impact is not expected to be material. Other than this impact, the Company has not identified any expected impact on the timing and measurement of revenue for standard product sales arrangements from the adoption of the standard and the Company is currently formalizing its final conclusions. The Company is also formalizing its evaluation of the impact of adoption on non-product sales arrangements, which represent less than five percent of revenue. The Company has developed and used a comprehensive project plan to guide implementation of the new standard and is currently completing its assessment. The Company will adopt the new accounting standard using the modified retrospective transition method effective January 1, 2018.
In February 2016, the FASB issued ASU No. 2016-02,
Leases
. The standard requires that a lessee recognize the assets and liabilities that arise from operating leases. A lessee should recognize in its balance sheet a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities. In transition, lessees and lessors are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. The guidance in ASU 2016-02 is effective for annual and interim reporting periods beginning after December 15, 2018. The Company’s initial evaluation of its current leases does not indicate that the adoption of this standard will have a material impact on its consolidated statements of operations. The Company expects that the adoption of the standard will have a material impact on its consolidated balance sheets for the recognition of certain operating leases as right-of-use assets and lease liabilities.
In March 2016, the FASB issued ASU No. 2016-09,
Improvements to Employee Share-Based Payment Accounting,
which changes the accounting for employee share-based payments, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. Under the new guidance, excess tax benefits associated with share-based payment awards will be recognized in the income statement when the awards vest or settle, rather than in stockholders’ equity. In addition, it will increase the number of shares an employer can withhold to cover income taxes on share-based payment awards and still qualify for the exemption to liability classification. The guidance was effective for the Company in the first quarter of 2017. The adoption of this standard resulted in the recognition of
$10.0 million
of gross deferred tax assets related to stock-based compensation and a corresponding increase in the Company’s valuation allowance. The Company has elected to account for forfeitures of share-based payments by estimating the number of awards expected to be forfeited at the time of grant and adjusting the estimate to reflect changes in expected vesting of shares.
In November 2016, the FASB issued ASU No. 2016-18,
Statement of Cash Flows - Restricted Cash
, which requires entities to show the changes in the total of cash, cash equivalents, restricted cash and restricted cash equivalents in the statement of cash flows. The guidance will be effective for the Company in its first quarter of fiscal 2018. Early adoption is permitted, including adoption in an interim period, but any adjustments must be reflected as of the beginning of the fiscal year that includes that interim period. The new standard must be adopted retrospectively. The Company early adopted this standard in the fourth quarter of 2016. In accordance with the Company’s early adoption of ASU No. 2016-18, the retrospective restatement was limited to including restricted cash balances in the amount of
$0.4 million
in beginning cash, cash equivalents and restricted cash balances for the year ended December 31, 2016 in the consolidated statements of cash flows. The retrospective adoption did not impact reported net loss and does not otherwise have a material impact on the presentation of the overall financial statements.
In January 2017, the FASB issued ASU No. 2017-04,
Intangibles - Goodwill and Other,
which eliminates step two of the quantitative goodwill impairment test. Step two required determination of the implied fair value of a reporting unit, and then a comparison of this implied fair value with the carrying amount of goodwill for the reporting unit, in order to determine any goodwill impairment. Under the new guidance, an entity is only required to complete a one-step quantitative test, by comparing the fair value of a reporting unit with its carrying amount, and any goodwill impairment charge is determined by the amount by which the carrying amount exceeds the reporting unit’s fair value. However, the loss should not exceed the total amount of goodwill allocated to the reporting unit. The standard is effective for the Company in the first quarter of 2020, with early adoption permitted as of January 1, 2017, and is to be applied on a prospective basis. The adoption of the standard will not materially impact the Company's consolidated financial statements unless step one of the annual goodwill impairment test fails. The Company early adopted this standard on January 1, 2017 and the adoption did not have an effect on the Company’s consolidated financial statements.
In March 2017, the FASB issued ASU No. 2017-07,
Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost
, which changes how employers that sponsor defined benefit pension or other postretirement benefit plans present the net periodic benefit cost in the statement of operations. The new guidance requires entities to report the service cost component in the same line item or items as other compensation costs. The other components of net benefit cost are required to be presented in the statement of operations separately from the service cost component and outside the subtotal of loss from operations. ASU 2017-07 also provides that only the service cost component is eligible for capitalization. The standard is effective for the Company in the first quarter of 2018, with adoption to be applied on a retrospective basis. The Company’s 2017 and 2016 loss from operations, when restated, will increase
$0.7 million
and
$0.5 million
, respectively, due to the reclassification of the non-service cost components of net benefit cost which will be moved to a line below loss from operations. There is no impact to net loss or net loss per share in the Company’s consolidated statements of operations. The Company applied the practical expedient as the estimation basis for this reclassification.
In May 2017, the FASB issued ASU No. 2017-09,
Compensation-Stock Compensation: Scope of Modification Accounting
, which provides clarification on when modification accounting should be used for changes to the terms or conditions of a share-based payment award. This ASU does not change the accounting for modifications but clarifies that modification accounting guidance should only be applied if there is a change to the value, vesting conditions or award classification and would not be required if the changes are considered non-substantive. The amendments of this ASU are effective for the Company in the first quarter of 2018, with early adoption permitted. The adoption of ASU 2017-09 is not expected to have an impact on the Company’s consolidated financial statements.
In August 2017, the FASB issued ASU No. 2017-12,
Derivatives and Hedging - Targeted Improvements to Accounting for Hedging Activities
, which modifies the presentation and disclosure of hedging results. Further, it provides partial relief on the timing of certain aspects of hedge documentation and eliminates the requirement to recognize hedge ineffectiveness separately in income. The amendments in this ASU are effective for the Company in the first quarter of 2019. The Company does not expect this ASU to have a material impact on its consolidated financial statements.
Business Enterprise Information
The Company operates as a single operating segment. 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 product line and geographic area is presented below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
|
Revenue by product line:
|
|
2017
|
|
2016
|
|
2015
|
|
Ultracapacitors
|
|
$
|
87,709
|
|
|
$
|
71,491
|
|
|
$
|
114,525
|
|
|
High-voltage capacitors
|
|
42,659
|
|
|
45,177
|
|
|
41,718
|
|
|
Microelectronic products
|
|
—
|
|
|
4,576
|
|
|
11,129
|
|
|
Total
|
|
$
|
130,368
|
|
|
$
|
121,244
|
|
|
$
|
167,372
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
|
Revenue from external customers located in
(1)
:
|
|
2017
|
|
2016
|
|
2015
|
|
China
|
|
$
|
44,945
|
|
|
$
|
48,191
|
|
|
$
|
87,856
|
|
|
United States
|
|
13,874
|
|
|
12,041
|
|
|
20,836
|
|
|
Germany
|
|
16,287
|
|
|
12,854
|
|
|
13,972
|
|
|
Hungary
|
|
13,454
|
|
|
11,473
|
|
|
11,630
|
|
|
All other countries
(2)
|
|
41,808
|
|
|
36,685
|
|
|
33,078
|
|
|
Total
|
|
$
|
130,368
|
|
|
$
|
121,244
|
|
|
$
|
167,372
|
|
|
_____________
|
|
|
|
|
|
|
(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,
|
|
|
|
2017
|
|
2016
|
|
2015
|
|
United States
|
|
$
|
14,443
|
|
|
$
|
19,267
|
|
|
$
|
22,267
|
|
|
China
|
|
1,107
|
|
|
1,477
|
|
|
4,148
|
|
|
South Korea
|
|
4,398
|
|
|
—
|
|
|
—
|
|
|
Switzerland
|
|
8,096
|
|
|
5,376
|
|
|
6,021
|
|
|
Total
|
|
$
|
28,044
|
|
|
$
|
26,120
|
|
|
$
|
32,436
|
|
Note 2—Balance Sheet Details (in thousands):
Inventories
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2017
|
|
December 31, 2016
|
|
Raw materials and purchased parts
|
|
$
|
12,675
|
|
|
$
|
12,210
|
|
|
Work-in-process
|
|
1,756
|
|
|
858
|
|
|
Finished goods
|
|
17,797
|
|
|
19,180
|
|
|
Total inventories
|
|
$
|
32,228
|
|
|
$
|
32,248
|
|
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,
|
|
|
|
2017
|
|
2016
|
|
Beginning balance
|
|
$
|
1,213
|
|
|
$
|
1,288
|
|
|
Acquired liability from Nesscap
|
|
773
|
|
|
—
|
|
|
Product warranties issued
|
|
177
|
|
|
486
|
|
|
Settlement of warranties
|
|
(876
|
)
|
|
(458
|
)
|
|
Changes related to preexisting warranties
|
|
126
|
|
|
(103
|
)
|
|
Ending balance
|
|
$
|
1,413
|
|
|
$
|
1,213
|
|
Property and equipment, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2017
|
|
2016
|
|
Machinery, furniture and office equipment
|
|
$
|
67,963
|
|
|
$
|
62,583
|
|
|
Computer hardware and software
|
|
10,436
|
|
|
10,071
|
|
|
Leasehold improvements
|
|
21,599
|
|
|
20,320
|
|
|
Construction in progress
|
|
5,461
|
|
|
1,401
|
|
|
Property and equipment, gross
|
|
105,459
|
|
|
94,375
|
|
|
Less accumulated depreciation and amortization
|
|
(77,415
|
)
|
|
(68,255
|
)
|
|
Total property and equipment, net
|
|
$
|
28,044
|
|
|
$
|
26,120
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2017
|
|
2016
|
|
Accounts payable
|
|
$
|
21,242
|
|
|
$
|
13,109
|
|
|
Income tax payable
|
|
1,737
|
|
|
1,066
|
|
|
Accrued warranty
|
|
1,413
|
|
|
1,213
|
|
|
Other accrued liabilities
|
|
8,366
|
|
|
3,793
|
|
|
Total accounts payable and accrued liabilities
|
|
$
|
32,758
|
|
|
$
|
19,181
|
|
Accumulated Other Comprehensive Income (Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
Currency
Translation
Adjustment
|
|
Pension and Defined Benefit Plan
|
|
Accumulated
Other
Comprehensive
Income
|
|
Affected Line Items in the Statement of Operations
|
|
Balance as of December 31, 2016
|
|
$
|
7,826
|
|
|
$
|
(2,426
|
)
|
|
$
|
5,400
|
|
|
|
|
Other comprehensive income before reclassification
|
|
5,131
|
|
|
—
|
|
|
5,131
|
|
|
|
|
Amounts reclassified from accumulated other comprehensive income (loss)
|
|
—
|
|
|
1,545
|
|
|
1,545
|
|
|
Cost of Sales, Selling, General and Administrative and Research and Development Expense
|
|
Net other comprehensive income
|
|
5,131
|
|
|
1,545
|
|
|
6,676
|
|
|
|
|
Balance as of December 31, 2017
|
|
$
|
12,957
|
|
|
$
|
(881
|
)
|
|
$
|
12,076
|
|
|
|
Note 3 – Business Combination
On April 28, 2017, the Company acquired substantially all of the assets and business of Nesscap Energy, Inc. (“Nesscap”), a developer and manufacturer of ultracapacitor products for use in transportation, renewable energy, industrial and consumer markets, in exchange for the issuance of approximately
4.1 million
shares of Maxwell common stock (the “Share Consideration”) and the assumption of certain liabilities pursuant to the terms of the previously announced Arrangement Agreement dated as of February 28, 2017 between Maxwell and Nesscap (the “ Nesscap Acquisition”). The value of the Share Consideration was approximately
$25.3 million
based on the closing price of the Company’s common stock on April 28, 2017. Additionally, per the Arrangement Agreement, the Company paid approximately
$1.0 million
of transaction taxes on behalf of the seller. The Nesscap Acquisition was effected by means of a court-approved statutory plan of arrangement and was approved by the requisite vote cast by shareholders of Nesscap at a special meeting of Nesscap’s shareholders held on April 24, 2017.
The Share Consideration represents approximately
11.3%
of the outstanding shares of Maxwell, based on the number of shares of Maxwell common stock outstanding as of April 28, 2017.
The Nesscap Acquisition adds scale to the Company’s operations and expands the Company’s portfolio of ultracapacitor products.
The fair value of the purchase price consideration consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
Maxwell common stock
|
|
$
|
25,294
|
|
|
Settlement of seller’s transaction expenses
|
|
1,006
|
|
|
Total estimated purchase price
|
|
$
|
26,300
|
|
The acquisition has been accounted for under the acquisition method of accounting in accordance with ASC 805,
Business Combinations
. Under this method of accounting, the Company recorded the acquisition based on the fair value of the consideration given and the cash consideration paid. The Company allocated the acquisition consideration paid to the identifiable assets acquired and liabilities assumed based on their respective fair values at the date of completion of the acquisition. Any excess of the value of consideration paid over the aggregate fair value of those net assets has been recorded as goodwill, which is attributable to expected synergies from combining operations, the acquired workforce, as well as intangible assets which do not qualify for separate recognition. The Company has allocated the goodwill to a new reporting unit. 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
. In 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. Included in inventory as of December 31, 2017, was
$40,000
related to the remaining fair value step-up associated with the acquisition.
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 each of the periods presented, as if the Nesscap Acquisition had occurred at the beginning of fiscal year 2016 (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2017
|
|
2016
|
|
Net revenues
|
|
$
|
135,534
|
|
|
$
|
141,724
|
|
|
Net loss
|
|
(43,849
|
)
|
|
(28,701
|
)
|
|
Net loss per share:
|
|
|
|
|
|
Basic and diluted
|
|
(1.19
|
)
|
|
(0.80
|
)
|
|
Weighted average common shares outstanding:
|
|
|
|
|
|
Basic and diluted
|
|
36,809
|
|
|
36,017
|
|
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 4 – Sale of Microelectronics Product Line
On April 27, 2016, the Company sold substantially all of the assets and liabilities comprising its microelectronics product line to Data Device Corporation, a privately-held Delaware corporation. The transaction purchase price was
$21.0 million
, subject to a working capital adjustment and a one year
$1.5 million
escrow holdback on the purchase price, which was received in May 2017.
The assets sold were primarily comprised of inventory, accounts receivable and property and equipment. The liabilities sold were comprised mainly of deferred revenue, accounts payable and other current liabilities. During the first quarter of 2016, the Company met the held for sale criteria in accordance with ASC Topic 380,
Impairment or Disposal of Long Lived Assets,
and
the Company ceased depreciation on the property and equipment and classified the assets to be sold as held for sale. During the second quarter of 2016, all assets and liabilities formerly classified as held for sale were disposed of pursuant to the sale. The sale of the microelectronics product line did not represent a strategic shift that had a major effect on the Company’s operations and financial results. As such, the Company did not account for the disposition as a discontinued operation. During the year ended December 31, 2016, the Company recorded a gain of
$6.7 million
related to the sale of the microelectronics product line.
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 2017, 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. The Company’s qualitative assessment indicated that it was not more likely that not that goodwill is impaired. Further, the Company noted no significant negative trends or decreases in its long-range plan that would indicate a different result compared to its 2016 quantitative analysis of its ultracapacitor reporting unit.
In 2016, the Company assessed the qualitative factors for
one
of its two reporting units and concluded that it was more likely than not that its fair value exceeded its carrying value and therefore did not perform quantitative testing for the reporting unit. For its other reporting unit, the Company determined to skip the qualitative assessment and moved directly to the quantitative test. The Company utilized a discounted cash flow methodology to calculate the fair value of the reporting unit. Based on the fair value analysis, management concluded that fair value exceeded carrying value of the reporting unit and no additional quantitative testing was required. As a result of the Company’s annual assessments,
no
impairments were recorded during the years ended
December 31, 2017
,
2016
and
2015
.
The change in the carrying amount of goodwill during
2016
and
2017
was as follows (in thousands):
|
|
|
|
|
|
|
|
Balance at December 31, 2015
|
$
|
23,635
|
|
|
Foreign currency translation adjustments
|
(545
|
)
|
|
Disposition of microelectronics product line
|
(291
|
)
|
|
Balance at December 31, 2016
|
22,799
|
|
|
Foreign currency translation adjustments
|
1,638
|
|
|
Goodwill from Nesscap Acquisition
|
11,624
|
|
|
Balance at December 31, 2017
|
$
|
36,061
|
|
The composition of intangible assets subject to amortization was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, 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 2018 through 2021 is
$1.2 million
each year. The expected amortization expense is an estimate and actual amounts could differ due to additional intangible asset acquisitions, changes in foreign currency rates or impairment of intangible assets.
Note 6 – Restructuring and Exit Costs
2017 Restructuring 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 approximately
$1.2 million
, all of which were incurred in 2017.
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 approximately
$0.9 million
.
The Company accounts for charges resulting from restructuring and exit activities in accordance with ASC Topic 420,
Exit or Disposal Cost Obligations
(“ASC 420”), and ASC Topic 712,
Compensation-Nonretirement Postemployment Benefits,
for employee termination benefits to be paid in accordance with its ongoing employee termination benefit arrangement.
The charges related to both of the 2017 restructuring plans consist of employee severance costs and have been or will be 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, 2017
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
February 2017 Plan
|
|
September 2017 Plan
|
|
|
|
Employee Severance Costs
|
|
Restructuring plans 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
|
|
2015 Restructuring Plan
In 2015, the Company initiated a restructuring plan to consolidate U.S. manufacturing operations and to reduce headcount and operating expenses in order to align the Company’s cost structure with the current business forecast and to improve operational efficiency. The 2015 plan also included the disposition of the Company’s microelectronics product line which was completed in April 2016. With the exception of lease assumption revisions described below, the plan was completed in 2016. Total restructuring and exit costs for the 2015 plan were
$3.0 million
, which included
$1.5 million
in facilities costs related to the consolidation of manufacturing operations,
$1.2 million
in employee severance costs and
$0.3 million
in other exit costs. The Company also incurred
$0.6 million
in accelerated equipment depreciation expense related to the consolidation of manufacturing operations. Total cash expenditures, excluding lease payments, related to the 2015 restructuring plan activities were approximately
$1.5 million
.
In June 2015, the Company ceased use of approximately
60,000
square feet of its Peoria, AZ manufacturing facility, and determined this leased space would have no future economic benefit to the Company based on the current business forecast. As a result, in June 2015, the Company recorded a liability for the future rent obligation associated with this space, net of estimated sublease income, in accordance with ASC Topic 420. For the year ended December 31, 2015, the expense related to the exit of this leased space was
$1.2 million
, before tax, and was recorded as a component of total restructuring and exit costs. During the years ended December 31, 2017 and 2016, the Company recorded additional restructuring and exit costs of
$0.2 million
and
$0.1 million
, respectively, related to revisions to the sublease income assumption.
For the years ended December 31, 2017, 2016 and 2015, the Company recorded total charges related to its 2015 restructuring plan of
$0.2 million
,
$0.3 million
and
$2.5 million
, respectively, within “restructuring and exit costs” in the consolidated statements of operations. Additionally, for the years ended December 31, 2016 and 2015, the Company recorded
$0.1 million
and
$0.4 million
, respectively, of accelerated depreciation expense within “cost of revenue” in the consolidated statements of operations.
As of
December 31, 2017
, the Company’s consolidated balance sheet includes restructuring liability associated with lease obligation costs of
$0.3 million
in “accounts payable and accrued liabilities” and
$0.4 million
in “other long term liabilities.”
The following table summarizes restructuring and exit costs related to the 2015 restructuring plan for the years ended
December 31, 2017
, 2016 and 2015 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee Severance Costs
|
|
Lease Obligation Costs
|
|
Other Exit Costs
|
|
Total
|
|
Restructuring liability as of December 31, 2014
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Costs incurred
|
|
1,439
|
|
|
1,208
|
|
|
—
|
|
|
2,647
|
|
|
Restructuring cash payments
|
|
(1,010
|
)
|
|
—
|
|
|
—
|
|
|
(1,010
|
)
|
|
Accruals released
|
|
(135
|
)
|
|
—
|
|
|
—
|
|
|
(135
|
)
|
|
Lease payments and accretion
|
|
—
|
|
|
(165
|
)
|
|
—
|
|
|
(165
|
)
|
|
Restructuring liability as of December 31, 2015
|
|
294
|
|
|
1,043
|
|
|
—
|
|
|
1,337
|
|
|
Costs incurred
|
|
67
|
|
|
86
|
|
|
298
|
|
|
451
|
|
|
Restructuring cash payments
|
|
(207
|
)
|
|
—
|
|
|
(246
|
)
|
|
(453
|
)
|
|
Accruals released
|
|
(154
|
)
|
|
—
|
|
|
—
|
|
|
(154
|
)
|
|
Lease payments and accretion
|
|
—
|
|
|
(327
|
)
|
|
(52
|
)
|
|
(379
|
)
|
|
Restructuring liability as of December 31, 2016
|
|
—
|
|
|
802
|
|
|
—
|
|
|
802
|
|
|
Costs incurred
|
|
—
|
|
|
179
|
|
|
—
|
|
|
179
|
|
|
Lease payments and accretion
|
|
—
|
|
|
(311
|
)
|
|
—
|
|
|
(311
|
)
|
|
Restructuring liability as of December 31, 2017
|
|
$
|
—
|
|
|
$
|
670
|
|
|
$
|
—
|
|
|
$
|
670
|
|
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, 2017
, 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 fair 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, 2017
|
|
Principal amount
|
|
$
|
46,000
|
|
|
Unamortized debt discount - equity component
|
|
(8,144
|
)
|
|
Unamortized debt discount - initial purchaser
|
|
(2,431
|
)
|
|
Unamortized transaction costs
|
|
(383
|
)
|
|
Net carrying value
|
|
$
|
35,042
|
|
Total interest expense related to the Notes is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2017
|
|
Cash interest expense
|
|
|
|
Coupon interest expense
|
|
$
|
661
|
|
|
Non-cash interest expense
|
|
|
|
Amortization of debt discount - equity component
|
|
330
|
|
|
Amortization of debt discount - initial purchaser
|
|
98
|
|
|
Amortization of transaction costs
|
|
16
|
|
|
Total interest expense
|
|
$
|
1,105
|
|
Revolving Line of Credit
In July 2015, the Company entered into a Loan and Security Agreement (the “Loan Agreement”) with East West Bank (“EWB”), whereby EWB made available to the Company a secured credit facility in the form of a revolving line of credit (the “Revolving Line of Credit”). The Revolving Line of Credit is available up to a maximum of the lesser of: (a)
$25.0 million
; or (b) a certain percentage of domestic and foreign trade receivables. As of
December 31, 2017
the amount available under the Revolving Line of Credit was
$13.3 million
. In general, amounts borrowed under the Revolving Line of Credit are secured by a lien on all of the Company’s assets, including its intellectual property, as well as a pledge of
100%
of its equity interests in Maxwell SA. The obligations under the Loan Agreement are also guaranteed directly by Maxwell SA. The Revolving Line of Credit will mature on July 3, 2018. In the event that the Company is in violation of the representations, warranties and covenants made in the Loan Agreement, including certain financial covenants set forth therein, the Company may not be able to utilize the Revolving Line of Credit or repayment of amounts owed pursuant to the Loan Agreement could be accelerated. The Company is currently in compliance with the financial covenants that it is required to meet during the term of the credit agreement including the minimum four-quarter rolling EBITDA, quarterly minimum quick ratio and monthly minimum cash requirements. On March 1, 2017, the Company entered into an amendment to the Loan Agreement to approve the acquisition of substantially all of the assets and business of Nesscap Energy, Inc., and to modify certain financial covenants.
Amounts borrowed under the Revolving Line of Credit bear interest, payable monthly. Such interest shall accrue based upon, at the Company’s election, subject to certain limitations, either 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.
No
amounts have been borrowed under the Revolving Line of Credit as of
December 31, 2017
.
Former Credit Facility
In December 2011, the Company obtained a secured credit facility in the form of a revolving line of credit (the “Former Revolving Line of Credit”) and an equipment term loan (the “Equipment Term Loan”) (together, the “Former Credit Facility”). Borrowings under the Former Credit Facility bore interest, payable monthly, at either (i) the bank’s prime rate or (ii) LIBOR plus
2.25%
, at the Company’s option subject to certain limitations. The Equipment Term Loan was available to finance
80%
of eligible equipment purchases made between April 1, 2011 and April 30, 2012. During this period, the Company borrowed
$5.0 million
under the Equipment Term Loan. The balance of the Equipment Term Loan was paid in full by the maturity date of April 30, 2015. Concurrently with entering into the Loan Agreement described above, in July 2015, the Company repaid all outstanding loans under the Former Revolving Line of Credit and the Former Credit Facility was terminated. The Company did not incur any early termination or prepayment penalties under the Former Credit Facility in connection with the above transactions.
Other Long-term Borrowings
Maxwell SA has various financing agreements for vehicles. These agreements are for up to an original
three
-year repayment period with interest rates ranging from
0.9%
to
1.9%
. At
December 31, 2017
and
2016
,
$115,000
and
$83,000
, respectively, was outstanding under these agreements.
Note 8—Fair Value Measurement
The Company records certain financial instruments at fair value in accordance with the
Fair Value Measurements and Disclosures
Topic of the FASB ASC. Historically, the financial instruments to which this topic applied were foreign currency forward contracts and pension assets. The fair value of foreign currency forward contracts was recorded as a liability or asset in the consolidated balance sheets. During the second quarter of 2016, the Company ceased using foreign currency forward contracts to hedge foreign currency exposure as management determined its foreign currency exposure is no longer significant. Therefore,
no
foreign currency forward contracts were outstanding as of
December 31, 2017
or 2016. The fair value of derivative instruments was measured using models following quoted market prices in active markets for identical instruments, which is a Level 2 input under the fair value hierarchy of the
Fair Value Measurements and Disclosures
Topic of the FASB ASC. Also see Note 9,
Foreign Currency Derivative Instruments
, and Note 14,
Pension and Other Postretirement Benefit Plans
, of this Annual Report on Form 10-K, for further discussion of fair value measurements.
As of December 31, 2017, the fair value of the Company’s convertible senior notes issued in September and October 2017 is approximately
$52.6 million
, and was measured using Level 2 inputs. The carrying value of short-term and long-term borrowings approximates fair value because of the relative short maturity of these instruments and the interest rates the Company could currently obtain.
Note 9—Foreign Currency Derivative Instruments
The Company has historically used forward contracts to hedge certain monetary assets and liabilities, primarily receivables, payables, and cash balances, denominated in foreign currencies. During the year ended December 31, 2016, the Company ceased using foreign currency forward contracts to hedge foreign currency exposure as management determined its foreign currency exposure is no longer significant. The change in fair value of these forward contracts represented a natural hedge as gains and losses on these instruments partially offset the changes in the fair value of the underlying monetary assets and liabilities due to movements in currency exchange rates. These forward contracts generally expired in one month. These contracts were considered economic hedges but were not designated as hedges under the
Derivatives and Hedging
Topic of the FASB ASC, therefore, the change in the fair value of the instruments was recognized each period in the consolidated statements of operations.
The net losses on foreign currency forward contracts included in “foreign currency exchange loss, net” in the consolidated statements of operations are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2017
|
|
2016
|
|
2015
|
|
Total loss
|
|
$
|
—
|
|
|
$
|
(88
|
)
|
|
$
|
(720
|
)
|
The net losses on foreign currency derivative contracts were partially offset by net gains and losses on the underlying monetary assets and liabilities. The net foreign currency gains or losses on those underlying monetary assets and liabilities included in “foreign currency exchange loss, net” in the consolidated statements of operations are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2017
|
|
2016
|
|
2015
|
|
Total gain (loss)
|
|
$
|
—
|
|
|
$
|
(37
|
)
|
|
$
|
179
|
|
Note 10—Stock Plans
Equity Incentive Plans
The Company has
two
active share-based compensation plans as of
December 31, 2017
: 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
6,400,000
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, 2017
, 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
$4.2 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, 2017
(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, 2016
|
|
414
|
|
|
$
|
8.97
|
|
|
|
|
|
|
Granted
|
|
50
|
|
|
5.56
|
|
|
|
|
|
|
Cancelled
|
|
(103
|
)
|
|
10.56
|
|
|
|
|
|
|
Balance at December 31, 2017
|
|
361
|
|
|
$
|
8.05
|
|
|
5.72
|
|
$
|
67
|
|
|
Vested or expected to vest at December 31, 2017
|
|
354
|
|
|
$
|
8.09
|
|
|
5.68
|
|
$
|
65
|
|
|
Exercisable at December 31, 2017
|
|
220
|
|
|
$
|
9.20
|
|
|
4.39
|
|
$
|
30
|
|
The weighted-average grant date fair value of stock options granted during the years ended
December 31, 2017
and 2015 was
$2.97
and
$3.34
, respectively.
No
stock options were granted during the year ended December 31, 2016. The total intrinsic value of options exercised during the year ended December 31, 2015 was
$16,000
. There were
no
option exercises for the years ended
December 31, 2017
and 2016.
The fair value of the stock options granted during the years ended December 31, 2017 and 2015 was estimated using the Black-Scholes valuation model using the following assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2017
|
|
2015
|
|
Expected dividends
|
|
—
|
%
|
|
—
|
%
|
|
Expected volatility range
|
|
58% to 59%
|
|
|
60% to 61%
|
|
|
Expected volatility weighted average
|
|
59
|
%
|
|
60
|
%
|
|
Risk-free interest rate
|
|
1.9
|
%
|
|
1.6
|
%
|
|
Expected life/term weighted average (in years)
|
|
5.5
|
|
|
4.9
|
|
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, 2017
, there was
$0.3 million
of total unrecognized compensation cost related to stock options. The cost is expected to be recognized over a weighted average period of
1.1 years
.
Restricted Stock Awards
During the year ended December 31, 2014, the Company ceased granting RSAs and began granting RSUs to employees and executive management as part of its annual equity incentive award program.
The following table summarizes RSA activity for the year ended
December 31, 2017
(in thousands, except for per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted Average
Grant Date
Fair Value
|
|
Nonvested at December 31, 2016
|
|
88
|
|
|
$
|
13.37
|
|
|
Vested
|
|
(53
|
)
|
|
12.58
|
|
|
Forfeited
|
|
(9
|
)
|
|
14.57
|
|
|
Nonvested at December 31, 2017
|
|
26
|
|
|
$
|
14.57
|
|
No
RSAs were granted during the years ended
December 31, 2017
,
2016
and 2015. The vest date fair value of RSAs vested in
2017
,
2016
and
2015
was
$0.3 million
,
$0.6 million
and
$1.2 million
, respectively. As of
December 31, 2017
, there was
$0.1 million
of unrecognized compensation cost related to nonvested RSAs expected to be recognized over a weighted average period of
0.2
years.
Restricted Stock Units
Non-employee directors receive annual RSU awards, normally in February of each year, 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 (“PSUs”) 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, 2017
(in thousands, except for per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted Average
Grant Date
Fair Value
|
|
Nonvested at December 31, 2016
|
|
1,748
|
|
|
$
|
6.40
|
|
|
Granted
|
|
1,796
|
|
|
5.89
|
|
|
Released
|
|
(540
|
)
|
|
5.86
|
|
|
Forfeited
|
|
(354
|
)
|
|
6.45
|
|
|
Nonvested at December 31, 2017
|
|
2,650
|
|
|
$
|
6.16
|
|
The weighted average grant date fair value of RSUs granted, including PSUs, in the years ended
December 31, 2017
,
2016
and
2015
was
$5.89
,
$6.00
and
$7.02
, respectively. The release date fair value of RSUs in the years ended
December 31, 2017
,
2016
and
2015
was
$2.9 million
,
$1.3 million
and
$0.5 million
, respectively. As of
December 31, 2017
, 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
2.2 years
.
RSU activity included
158,000
,
46,224
and
214,831
PSUs granted in the years ended
December 31, 2017
,
2016
and
2015
with a weighted average grant date fair value of
$5.73
,
$5.08
and
$7.18
per share, respectively, with vesting contingent upon specified Company performance conditions or objectives.
Additionally, for the year ended
December 31, 2017
, RSUs granted included
367,874
market-condition PSUs with a weighted average grant date fair value of
$7.22
. For the year ended December 31, 2016, RSUs granted included
313,460
market-condition PSUs with a weighted average grant date fair value of
$7.76
. The market-condition PSUs will be earned based on the level of the Company’s stock price performance against a determined market index over
one
,
two
and
three
-year performance periods. The market-condition PSUs have the potential to vest between
0%
and
200%
depending on the Company’s stock price performance and the recipients must remain employed through the end of each performance period in order to vest.
No
market-condition PSUs were granted during the year ended December 31, 2015. The fair value of market-condition PSUs granted was calculated using a Monte Carlo valuation model with the following assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2017
|
|
2016
|
|
Expected dividend yield
|
|
—
|
%
|
|
—
|
%
|
|
Expected volatility
|
|
53
|
%
|
|
62
|
%
|
|
Risk-free interest rate
|
|
1.55
|
%
|
|
1.07
|
%
|
|
Expected term (in years)
|
|
2.8
|
|
|
3.0
|
|
The following table summarizes the amount of compensation expense recognized for RSUs for the years ended
December 31, 2017
,
2016
and
2015
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
RSU Type
|
|
2017
|
|
2016
|
|
2015
|
|
Service-based
|
|
$
|
3,268
|
|
|
$
|
2,243
|
|
|
$
|
1,362
|
|
|
Performance objectives
|
|
379
|
|
|
103
|
|
|
(28
|
)
|
|
Market-condition
|
|
1,539
|
|
|
869
|
|
|
128
|
|
|
|
|
$
|
5,186
|
|
|
$
|
3,215
|
|
|
$
|
1,462
|
|
Employee Stock Purchase Plan
In 2013, the Company amended and restated the 2004 Employee Stock Purchase Plan (“ESPP”). Pursuant to the 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, 2017
,
2016
and 2015,
77,914
,
111,832
and
145,733
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,
|
|
|
|
2017
|
|
2016
|
|
2015
|
|
Expected dividends
|
|
—
|
%
|
|
—
|
%
|
|
—
|
%
|
|
Expected volatility
|
|
34
|
%
|
|
57
|
%
|
|
57
|
%
|
|
Risk-free interest rate
|
|
0.89
|
%
|
|
0.43
|
%
|
|
0.29
|
%
|
|
Expected life (in years)
|
|
0.45
|
|
|
0.5
|
|
|
0.5
|
|
|
Fair value per share
|
|
$
|
1.30
|
|
|
$
|
1.93
|
|
|
$
|
1.86
|
|
The intrinsic value of shares of the Company’s stock purchased pursuant to the ESPP for offering periods within the years ended
December 31, 2017
,
2016
and
2015
was
$0.1 million
,
$0.1 million
and
$0.2 million
, respectively.
Bonuses Settled in Stock
On January 15, 2016, the Compensation Committee of the Board of Directors of the Company adopted the Maxwell Technologies, Inc. Incentive Bonus Plan to enable participants to earn annual incentive bonuses based upon achievement of specified financial and strategic performance objectives. The Company may settle bonuses earned under the plan in either cash or stock, and currently intends to settle the majority of bonuses earned under the plan in stock. During the year ended December 31, 2017, the Company settled the 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 2017 performance period with fully vested common stock of the Company in the first quarter of 2018.
The Company recorded
$2.8 million
and
$1.4 million
of stock compensation expense related to the bonus plan during the years ended
December 31, 2017
and
2016
, respectively.
Director Fees Settled in Stock
In 2017, the Board approved a deferred compensation program under which non-employee directors may make irrevocable elections to receive all or a portion of their cash-based non-employee director fees (including, as applicable, any annual retainer fee, committee fee and any other compensation payable with respect to their service as a member of the Board) in stock and to elect to defer receipt of those shares. In the event that a director makes such an election, the Company will grant fully vested RSUs in lieu of cash, with an initial value equal to the cash fees, which will be settled either in the year granted or at a future date elected by the respective non-employee director through the issuance of Maxwell common stock. In addition, non-employee directors may elect to defer settlement of the initial and annual RSU awards granted to them in connection with their service as a non-employee director. During the
year ended December 31, 2017
, the Company settled
$164,000
of director fees earned in 2017 with
28,732
fully vested RSUs. The Company recorded
$258,000
of stock compensation expense related to director fees to be settled in stock during the
year ended December 31, 2017
.
Stock-based Compensation Expense
Compensation cost for stock options, RSAs, RSUs, ESPP, bonuses and director fees is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2017
|
|
2016
|
|
2015
|
|
Stock options
|
|
$
|
237
|
|
|
$
|
171
|
|
|
$
|
232
|
|
|
Restricted stock awards
|
|
416
|
|
|
388
|
|
|
1,974
|
|
|
Restricted stock units
|
|
5,186
|
|
|
3,215
|
|
|
1,462
|
|
|
ESPP
|
|
114
|
|
|
231
|
|
|
278
|
|
|
Bonuses settled in stock
|
|
2,826
|
|
|
1,359
|
|
|
—
|
|
|
Director fees settled in stock
|
|
258
|
|
|
—
|
|
|
—
|
|
|
Total stock-based compensation expense
|
|
$
|
9,037
|
|
|
$
|
5,364
|
|
|
$
|
3,946
|
|
Stock-based compensation cost included in cost of revenue; selling, general and administrative expense; and research and development expense is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2017
|
|
2016
|
|
2015
|
|
Cost of revenue
|
|
$
|
1,070
|
|
|
$
|
854
|
|
|
$
|
644
|
|
|
Selling, general and administrative
|
|
6,606
|
|
|
3,674
|
|
|
2,502
|
|
|
Research and development
|
|
1,361
|
|
|
836
|
|
|
800
|
|
|
Total stock-based compensation expense
|
|
$
|
9,037
|
|
|
$
|
5,364
|
|
|
$
|
3,946
|
|
Share Reservations
The following table summarizes the shares available for grant under the Company’s stock-based compensation plans as of
December 31, 2017
:
|
|
|
|
|
|
|
2013 Omnibus Equity Incentive Plan
|
3,138,321
|
|
|
2004 Employee Stock Purchase Plan
|
617,609
|
|
|
Total
|
3,755,930
|
|
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. As of December 31, 2017, no securities have been issued under the Company’s shelf registration statement. 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.
On April 23, 2015, under a previous shelf registration statement effective June 30, 2014, the Company entered into an At-the-Market Equity Offering Sales Agreement (“Sales Agreement”) with Cowen and Company, LLC (“Cowen”) pursuant to which they could sell, up to an aggregate of
$10.0 million
in shares of common stock through Cowen, as sales agent. Under the Sales Agreement, the Company agreed to pay Cowen a commission equal to
3.0%
of the gross proceeds from the sale of shares of our common stock. On June 11, 2015, the Company completed the sale of approximately
$10.0 million
of common stock and terminated the offering. Approximately
1.83 million
shares were sold in the offering at an average share price of
$5.46
. The Company received net proceeds of
$9.6 million
after commissions and offering costs of
$0.4 million
.
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. Pursuant to the SEC’s Staff Accounting Bulletin No. 118,
Income Tax Accounting Implications of the Tax Cuts and Jobs Act
(“SAB 118”), given the amount and complexity of the changes in the tax law resulting from the tax legislation, the Company has not finalized the accounting for the income tax effects of the tax legislation. This includes the provisional amounts recorded related to the transition tax and the remeasurement of deferred taxes. The impact of the tax legislation may differ from this estimate, during the one-year measurement period due to, among other things, further refinement of the Company’s calculations, changes in interpretations and assumptions the Company has made, guidance that may be issued and actions the Company may take as a result of the tax legislation.
The Company has 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 provisional 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. However, we are still analyzing certain aspects of the Act and refining our calculations, which could potentially affect the measurement of these balances or potentially give rise to new deferred tax amounts. 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. To determine the amount of the transition tax, the Company must determine, in addition to other factors, the amount of post-1986 E&P of its relevant subsidiaries. The Company recorded a provisional amount of additional U.S. taxable income of
$8.4 million
, which did not result in additional tax expense due to its net operating losses. However, the Company is continuing to gather additional information to more precisely compute the amount of the transition tax. As the Company has significant net operating losses, any change to this provisional amount would have no impact on the Company’s financial position or results of operations.
For financial reporting purposes, loss before income taxes includes the following components (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2017
|
|
2016
|
|
2015
|
|
United States
|
|
$
|
(49,167
|
)
|
|
$
|
(38,319
|
)
|
|
$
|
(35,074
|
)
|
|
Foreign
|
|
9,695
|
|
|
18,759
|
|
|
17,344
|
|
|
Total
|
|
$
|
(39,472
|
)
|
|
$
|
(19,560
|
)
|
|
$
|
(17,730
|
)
|
The provision for income taxes based on loss before income taxes is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2017
|
|
2016
|
|
2015
|
|
Federal:
|
|
|
|
|
|
|
|
Current
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Deferred
|
|
18,646
|
|
|
(11,360
|
)
|
|
(4,297
|
)
|
|
|
|
18,646
|
|
|
(11,360
|
)
|
|
(4,297
|
)
|
|
State:
|
|
|
|
|
|
|
|
Current
|
|
5
|
|
|
7
|
|
|
6
|
|
|
Deferred
|
|
231
|
|
|
923
|
|
|
62
|
|
|
|
|
236
|
|
|
930
|
|
|
68
|
|
|
Foreign:
|
|
|
|
|
|
|
|
Current
|
|
3,155
|
|
|
3,742
|
|
|
4,930
|
|
|
Deferred
|
|
(1,418
|
)
|
|
561
|
|
|
8
|
|
|
|
|
1,737
|
|
|
4,303
|
|
|
4,938
|
|
|
(Decrease) increase in valuation allowance
|
|
(16,962
|
)
|
|
10,272
|
|
|
3,894
|
|
|
Tax provision
|
|
$
|
3,657
|
|
|
$
|
4,145
|
|
|
$
|
4,603
|
|
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,
|
|
|
|
2017
|
|
2016
|
|
2015
|
|
Taxes at federal statutory rate
|
|
$
|
(13,420
|
)
|
|
$
|
(6,650
|
)
|
|
$
|
(6,028
|
)
|
|
State taxes, net of federal benefit
|
|
(236
|
)
|
|
(208
|
)
|
|
(236
|
)
|
|
Effect of tax rate differential for foreign subsidiary
|
|
(1,646
|
)
|
|
(2,985
|
)
|
|
(2,641
|
)
|
|
Valuation allowance, including tax benefits of stock activity
|
|
(16,962
|
)
|
|
10,272
|
|
|
3,894
|
|
|
Tax rate change
|
|
34,732
|
|
|
—
|
|
|
—
|
|
|
Foreign taxes on unremitted earnings
|
|
—
|
|
|
1,204
|
|
|
2,085
|
|
|
Stock-based compensation
|
|
224
|
|
|
441
|
|
|
134
|
|
|
Foreign withholding taxes
|
|
295
|
|
|
260
|
|
|
180
|
|
|
Return to provision adjustments
|
|
(2,931
|
)
|
|
1,062
|
|
|
1,131
|
|
|
Subpart F income inclusion
|
|
2,998
|
|
|
906
|
|
|
5,914
|
|
|
SEC settlement penalty
|
|
959
|
|
|
—
|
|
|
—
|
|
|
Business combination
|
|
(1,914
|
)
|
|
—
|
|
|
—
|
|
|
Other
|
|
1,558
|
|
|
(157
|
)
|
|
170
|
|
|
Tax provision
|
|
$
|
3,657
|
|
|
$
|
4,145
|
|
|
$
|
4,603
|
|
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, 2017
. 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
$61.4 million
as of
December 31, 2017
to reflect the estimated amount of deferred tax assets that may not be realized. The Company decreased its valuation allowance by
$17.0 million
for the year ended
December 31, 2017
.
At
December 31, 2017
, the Company has federal and state net operating loss carryforwards of approximately
$219.0 million
and
$37.7 million
, respectively. The federal tax loss carryforwards will begin to expire in 2020 and the state tax loss carryforwards will begin to expire in 2018. In addition, the Company has research and development and other tax credit carryforwards for federal and state income tax purposes as of
December 31, 2017
of
$7.0 million
and
$9.0 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.
The Company was granted a tax holiday in Switzerland, which was effective as of January 1, 2012 for up to 10 years. The tax holiday was conditioned upon the Company meeting certain employment and investment thresholds. As of January 1, 2017, the Company was no longer eligible for the tax holiday due to not meeting the employment threshold. The impact of the tax holiday decreased foreign taxes by
$0.6 million
and
$0.7 million
for 2016 and 2015, respectively. The benefit of the tax holiday on net loss per diluted share was
$0.02
for both 2016 and 2015. On January 16th, 2018, the Company was granted a new tax holiday in Switzerland, which was retroactively effective as of January 1, 2017 with a term through December 31, 2021. The new tax holiday is conditioned upon the Company meeting certain investment thresholds. The retroactive effect of the tax holiday will be recorded in the first quarter of 2018, in accordance with the enacted date of the new tax holiday.
The Company records U.S. income taxes on the undistributed earnings of foreign subsidiaries unless the subsidiaries’ earnings are considered indefinitely reinvested outside of the U.S. As of
December 31, 2017
, the Company has recorded a
$4.9 million
deferred tax liability for Swiss withholding taxes associated with
$97.6 million
of undistributed earnings of its Swiss subsidiary that are no longer considered indefinitely reinvested. In the event that the Company repatriates these funds, this withholding tax would become payable to the Swiss government. During the years ended
December 31, 2017, 2016 and 2015
, income tax expense associated with undistributed earnings of its Swiss subsidiary that are no longer considered indefinitely reinvested was
$0
,
$1.2 million
and
$2.1 million
, respectively. As of
December 31, 2017
, there were
$11.8 million
of undistributed earnings considered indefinitely reinvested. Determination of the amount of any unrecognized deferred income tax liability on the excess of the financial reporting basis over the tax basis of investments in foreign subsidiaries is not practicable because of the complexities of the hypothetical calculation.
Items that give rise to significant portions of the deferred tax accounts are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2017
|
|
2016
|
|
Deferred tax assets:
|
|
|
|
|
|
Tax loss carryforwards
|
|
$
|
50,183
|
|
|
$
|
62,994
|
|
|
Tax credit carryforwards
|
|
792
|
|
|
19
|
|
|
Uniform capitalization, contract and inventory related reserves
|
|
805
|
|
|
598
|
|
|
Accrued vacation
|
|
301
|
|
|
514
|
|
|
Stock-based compensation
|
|
2,029
|
|
|
2,130
|
|
|
Capitalized research and development
|
|
3,043
|
|
|
5,532
|
|
|
Tax basis depreciation less book depreciation
|
|
1,523
|
|
|
1,661
|
|
|
Intangible assets
|
|
—
|
|
|
1,354
|
|
|
Deferred revenue
|
|
175
|
|
|
33
|
|
|
Accrued foreign taxes
|
|
1,044
|
|
|
1,263
|
|
|
Other
|
|
2,369
|
|
|
2,523
|
|
|
Total
|
|
62,264
|
|
|
78,621
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
Inventory deduction
|
|
(587
|
)
|
|
(369
|
)
|
|
Pension assets
|
|
(1,326
|
)
|
|
(1,733
|
)
|
|
Allowance for doubtful accounts
|
|
(534
|
)
|
|
(677
|
)
|
|
Withholding tax on undistributed earnings of foreign subsidiary
|
|
(4,879
|
)
|
|
(4,879
|
)
|
|
Unrealized gains and losses
|
|
(351
|
)
|
|
(733
|
)
|
|
Intangible assets
|
|
(1,514
|
)
|
|
—
|
|
|
Total
|
|
(9,191
|
)
|
|
(8,391
|
)
|
|
Net deferred tax assets before valuation allowance
|
|
53,073
|
|
|
70,230
|
|
|
Valuation allowance
|
|
(61,403
|
)
|
|
(78,366
|
)
|
|
Net deferred tax liabilities
|
|
$
|
(8,330
|
)
|
|
$
|
(8,136
|
)
|
As of both
December 31, 2017 and 2016
, deferred tax assets of
$0.4 million
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, 2017
, approximately
$16.0 million
was recorded as a reduction to deferred tax assets, which caused a corresponding reduction in the Company’s valuation allowance of
$16.0 million
. To the extent unrecognized tax benefits are recognized at a time when a valuation allowance does not exist, the recognition of the
$16.0 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, 2017
will change materially within the 12-month period following
December 31, 2017
.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands):
|
|
|
|
|
|
|
|
Balance at December 31, 2015
|
$
|
14,014
|
|
|
Increase in current period positions
|
1,596
|
|
|
Increase in prior period positions
|
116
|
|
|
Decrease in prior period positions
|
(147
|
)
|
|
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
|
|
The Company recognizes interest and penalties as a component of income tax expense. Interest and penalties for the years ended
December 31, 2017, 2016 and 2015
were
$29,000
,
$148,000
and
$119,000
, 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
$4.3 million
,
$4.1 million
and
$5.0 million
for the years ended
December 31, 2017
,
2016
and
2015
, respectively, and was incurred primarily for facility leases. Future annual minimum rental commitments as of
December 31, 2017
are as follows (in thousands):
|
|
|
|
|
|
|
|
Fiscal Years
|
|
|
2018
|
$
|
3,824
|
|
|
2019
|
3,850
|
|
|
2020
|
3,099
|
|
|
2021
|
2,124
|
|
|
2022
|
2,202
|
|
|
Thereafter
|
4,033
|
|
|
Total
|
$
|
19,132
|
|
Note 14—Pension and Other Postretirement Benefit Plans
Maxwell SA Pension Plan
The
Compensation—Retirement Benefits
Subtopic of the FASB ASC requires balance sheet recognition of the total over funded or underfunded status of pension and postretirement benefit plans. Under the guidance, actuarial gains and losses, prior service costs or credits, and any remaining transition assets or obligations that have not been recognized under previous accounting standards must be recognized as a component of accumulated other comprehensive income (loss) within stockholders’ equity, net of tax effects, until they are amortized as a component of net periodic benefit cost (income).
The Company’s plan is regulated by the Swiss Government and is funded by the employees and the Company. The pension benefit is based on compensation, length of service and credited investment earnings. The plan guarantees both a minimum rate of return as well as minimum annuity purchase rates. The Company’s funding policy with respect to the pension plan is to contribute the amount required by Swiss law, using the required percentage applied to the employee’s compensation. In addition, participating employees are required to contribute to the pension plan. The Company made pension contributions of
$0.6 million
in each of the years ended December 31,
2017
,
2016
and
2015
; approximately
45%
of the total contributions to the plan each year are made by the employees. This plan has a measurement date of December 31. The Company does not have any rights to the assets of the plan other than the right to offset the liabilities of the plan.
The net pension asset increased from
$8.9 million
to
$11.7 million
during the year ended
December 31, 2017
. The increase in plan assets was primarily due to a higher return on plan assets than expected and higher than expected withdrawal and mortality experience during the year. The accumulated benefit obligation was
$29.9 million
and
$28.9 million
as of
December 31, 2017
and
2016
, respectively. The increase in the benefit obligation was primarily due to a lower amount of benefits paid during the year than new obligations incurred. The plan is fully funded and continues to be in a surplus condition.
The following table reflects changes in the pension benefit obligation and plan assets for the years ended
December 31, 2017
and
2016
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
|
|
|
2017
|
|
2016
|
|
Change in benefit obligation:
|
|
|
|
|
|
Benefit obligation at beginning of year
|
|
$
|
30,257
|
|
|
$
|
33,153
|
|
|
Service cost
|
|
982
|
|
|
1,171
|
|
|
Interest cost
|
|
230
|
|
|
246
|
|
|
Plan participant contributions
|
|
527
|
|
|
509
|
|
|
Benefits paid
|
|
(1,729
|
)
|
|
(1,570
|
)
|
|
Actuarial (gain) loss
|
|
119
|
|
|
(2,425
|
)
|
|
Effect of foreign currency translation
|
|
1,330
|
|
|
(827
|
)
|
|
Projected benefit obligation at end of year
|
|
31,716
|
|
|
30,257
|
|
|
Changes in plan assets:
|
|
|
|
|
|
Fair value of plan assets at beginning of year
|
|
39,144
|
|
|
39,002
|
|
|
Actual return on plan assets
|
|
3,131
|
|
|
1,657
|
|
|
Company contributions
|
|
615
|
|
|
596
|
|
|
Plan participant contributions
|
|
527
|
|
|
509
|
|
|
Benefits paid
|
|
(1,729
|
)
|
|
(1,570
|
)
|
|
Effect of foreign currency translation
|
|
1,740
|
|
|
(1,050
|
)
|
|
Fair value of plan assets at end of year
|
|
43,428
|
|
|
39,144
|
|
|
Funded status at end of year
|
|
$
|
11,712
|
|
|
$
|
8,887
|
|
Amounts recognized in the consolidated balance sheets consist of (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2017
|
|
2016
|
|
Net long-term pension asset
|
|
$
|
11,712
|
|
|
$
|
8,887
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive loss consists of the following:
|
|
|
|
|
|
Net prior service cost
|
|
782
|
|
|
779
|
|
|
Net loss
|
|
1,391
|
|
|
3,113
|
|
|
Accumulated other comprehensive loss before taxes
|
|
$
|
2,173
|
|
|
$
|
3,892
|
|
The components of net periodic pension cost and other amounts recognized in other comprehensive income (loss) before taxes are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
|
|
|
2017
|
|
2016
|
|
2015
|
|
Components of net periodic pension cost:
|
|
|
|
|
|
|
|
Service cost
|
|
$
|
982
|
|
|
$
|
1,171
|
|
|
$
|
958
|
|
|
Interest cost
|
|
230
|
|
|
246
|
|
|
332
|
|
|
Expected return on plan assets
|
|
(1,009
|
)
|
|
(1,175
|
)
|
|
(1,551
|
)
|
|
Prior service cost amortization
|
|
151
|
|
|
150
|
|
|
136
|
|
|
Deferred loss amortization
|
|
—
|
|
|
243
|
|
|
45
|
|
|
Settlement cost
|
|
—
|
|
|
—
|
|
|
492
|
|
|
Net periodic pension cost
|
|
$
|
354
|
|
|
$
|
635
|
|
|
$
|
412
|
|
|
Other amounts recognized in other comprehensive income (loss) before income taxes are as follows:
|
|
|
|
|
|
|
|
Prior service cost amortization
|
|
$
|
(151
|
)
|
|
$
|
(150
|
)
|
|
$
|
(136
|
)
|
|
(Gain) loss on value of plan assets
|
|
(2,118
|
)
|
|
(476
|
)
|
|
1,131
|
|
|
Actuarial (gain) loss on benefit obligation
|
|
119
|
|
|
(2,425
|
)
|
|
1,262
|
|
|
Plan change
|
|
—
|
|
|
—
|
|
|
83
|
|
|
Settlement
|
|
—
|
|
|
—
|
|
|
(492
|
)
|
|
Deferred loss amortization
|
|
—
|
|
|
(243
|
)
|
|
(45
|
)
|
|
Total (income) loss recognized in other comprehensive income, before taxes
|
|
$
|
(2,150
|
)
|
|
$
|
(3,294
|
)
|
|
$
|
1,803
|
|
|
Total (income) recognized in net periodic pension cost and other comprehensive income, before taxes
|
|
$
|
(1,796
|
)
|
|
$
|
(2,659
|
)
|
|
$
|
2,215
|
|
Assumptions used to determine the benefit obligation and net periodic pension cost are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
|
|
|
2017
|
|
2016
|
|
Weighted-average assumptions used to determine benefit obligation:
|
|
|
|
|
|
Discount rate
|
|
0.75
|
%
|
|
0.75
|
%
|
|
Rate of compensation increase
|
|
2.00
|
%
|
|
2.00
|
%
|
|
Measurement date
|
|
11/30/2017
|
|
|
11/30/2016
|
|
|
Weighted-average assumptions used to determine net periodic pension cost:
|
|
|
|
|
|
Discount rate
|
|
0.75
|
%
|
|
0.75
|
%
|
|
Expected long-term return on plan assets
|
|
2.50
|
%
|
|
3.00
|
%
|
|
Rate of compensation increase
|
|
2.00
|
%
|
|
2.50
|
%
|
|
|
|
|
|
|
|
Percentage of the fair value of total plan assets held in each major category of plan assets:
|
|
|
|
|
|
Equity securities
|
|
33
|
%
|
|
29
|
%
|
|
Debt securities
|
|
21
|
%
|
|
23
|
%
|
|
Real estate investment funds
|
|
39
|
%
|
|
43
|
%
|
|
Other
|
|
7
|
%
|
|
5
|
%
|
|
Total
|
|
100
|
%
|
|
100
|
%
|
The pension plan’s overall strategy and investment policy is managed by the board of the plan. The overall long-term rate is based on the target asset allocation of
14%
Swiss bonds,
10%
non-Swiss hedged bonds,
10%
Swiss equities,
15%
global equities,
5%
emerging market equities,
4%
alternative investments,
40%
Swiss real estate and
2%
cash and equivalents.
The
2018
expected future long-term rate of return is estimated to be
3.00%
, which is based on historical asset rates of return for each asset allocation classification of
(0.69)%
for Swiss bonds,
(0.43)%
for non-Swiss hedged bonds,
3.50%
for Swiss equities,
5.38%
for global equities,
5.79%
for emerging market equities,
2.52%
for alternative investments,
2.54%
for Swiss real estate and
0.27%
for cash and equivalents. The
2017
expected long-term rate of return was
2.50%
and was based on the historical asset rates of return of
(1.11)%
for Swiss bonds,
(1.20)%
for non-Swiss hedged bonds,
3.00%
for Swiss equities,
4.80%
for global equities,
5.00%
for emerging market equities,
1.80%
for alternative investments,
2.10%
for real estate and
(0.20)%
for cash and equivalents.
|
|
|
|
|
|
|
|
Expected amortization during the year ending December 31, 2018 is as follows (in thousands):
|
|
|
|
|
|
Amortization of net prior service costs
|
$
|
97
|
|
The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid (in thousands):
|
|
|
|
|
|
|
|
2018
|
$
|
1,349
|
|
|
2019
|
1,316
|
|
|
2020
|
1,256
|
|
|
2021
|
1,294
|
|
|
2022
|
1,452
|
|
|
Years 2023 through 2027
|
7,094
|
|
|
Total
|
$
|
13,761
|
|
The Company expects to contribute approximately
$0.6 million
to the pension plan in
2018
.
Investment objectives:
The primary investment goal of the pension plan is to achieve a total annualized return sufficient to fund its obligations over the long-term. The investments are evaluated, compared and benchmarked to plans with similar investment strategies. The plan also attempts to minimize risk by not having any single security or class of securities with a disproportionate impact on the plan. As a guideline, assets are diversified by asset classes (equity, fixed income/bonds, and alternative investments).
The fair values of the plans assets at
December 31, 2017
and
2016
, by asset category, are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at
|
|
|
|
|
|
December 31, 2017
|
|
|
|
Total
|
|
Active
Market
Prices
(Level 1)
|
|
Significant
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Cash held in Swiss Franc, Euro and USD
|
|
$
|
1,670
|
|
|
$
|
1,670
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Equity securities
|
|
15,487
|
|
|
14,364
|
|
|
1,123
|
|
|
—
|
|
|
Fixed income / Bond securities:
|
|
9,235
|
|
|
9,235
|
|
|
—
|
|
|
—
|
|
|
Other assets (accounts receivable, assets at real estate management company)
|
|
29
|
|
|
—
|
|
|
29
|
|
|
—
|
|
|
Investments measured at net asset value
(1)
|
|
17,007
|
|
|
|
|
|
|
|
|
Net assets of pension plan
|
|
$
|
43,428
|
|
|
$
|
25,269
|
|
|
$
|
1,152
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at
|
|
|
|
|
|
December 31, 2016
|
|
|
|
Total
|
|
Active
Market
Prices
(Level 1)
|
|
Significant
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Cash held in Swiss Franc, Euro and USD
|
|
$
|
705
|
|
|
$
|
705
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Equity securities
|
|
12,534
|
|
|
11,481
|
|
|
1,053
|
|
|
—
|
|
|
Fixed income / Bond securities:
|
|
8,842
|
|
|
8,842
|
|
|
—
|
|
|
—
|
|
|
Other assets (accounts receivable, assets at real estate management company)
|
|
29
|
|
|
—
|
|
|
29
|
|
|
—
|
|
|
Investments measured at net asset value
(1)
|
|
17,034
|
|
|
|
|
|
|
|
|
Net assets of pension plan
|
|
$
|
39,144
|
|
|
$
|
21,028
|
|
|
$
|
1,082
|
|
|
$
|
—
|
|
(1)
Investments measured at net asset value represent real estate investment funds that are measured at fair value using the net asset value per share (or its equivalent) practical expedient and therefore have not been categorized in the fair value hierarchy. The fair value amounts presented in these tables are intended to permit reconciliation of the fair value hierarchy to the total plan assets disclosed above.
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.
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, 2017
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
April 29, 2017 through December 31,
|
|
|
|
2017
|
|
Change in benefit obligation:
|
|
|
|
Benefit obligation on April 28, 2017
|
|
$
|
3,360
|
|
|
Service cost
|
|
361
|
|
|
Interest cost
|
|
55
|
|
|
Benefits paid
|
|
(212
|
)
|
|
Actuarial loss
|
|
174
|
|
|
Effect of foreign currency translation
|
|
228
|
|
|
Projected benefit obligation at end of year
|
|
3,966
|
|
|
Fair value of plan assets
|
|
24
|
|
|
Unfunded status at end of year
|
|
3,942
|
|
Amounts recognized in the consolidated balance sheets consist of (in thousands):
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2017
|
|
Net defined benefit plan liability
|
|
$
|
3,942
|
|
|
|
|
|
|
Accumulated other comprehensive loss includes the following:
|
|
|
|
Actuarial loss before taxes
|
|
$
|
174
|
|
The components of net periodic pension cost and other amounts recognized in other comprehensive income (loss) before taxes are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
May 1, 2017 through December 31,
|
|
|
|
2017
|
|
Components of net periodic defined benefit plan cost:
|
|
|
|
Service cost
|
|
$
|
361
|
|
|
Interest cost
|
|
55
|
|
|
Net periodic defined benefit plan cost
|
|
$
|
416
|
|
|
Other amounts recognized in other comprehensive income (loss) before income taxes are as follows:
|
|
|
|
Actuarial loss on benefit obligation
|
|
$
|
174
|
|
|
Total loss recognized in other comprehensive income, before taxes
|
|
174
|
|
|
Total loss recognized in net periodic defined benefit plan cost and other comprehensive income, before taxes
|
|
$
|
590
|
|
Assumptions used to determine the benefit obligation and net periodic defined benefit plan cost are as follows:
|
|
|
|
|
|
|
|
|
|
May 1, 2017 through December 31,
|
|
|
|
2017
|
|
Discount rate
|
|
2.98
|
%
|
|
Rate of compensation increase
|
|
6.11
|
%
|
The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid (in thousands):
|
|
|
|
|
|
|
|
2018
|
$
|
332
|
|
|
2019
|
332
|
|
|
2020
|
370
|
|
|
2021
|
338
|
|
|
2022
|
265
|
|
|
Years 2023 through 2027
|
1,237
|
|
|
Total
|
$
|
2,874
|
|
In compliance with local labor law, the Company is required to make contributions for foreign line workers. Employer contributions of
$6,000
were paid during the period from acquisition to December 31, 2017. The Company expects to make contributions of approximately
$8,000
in 2018.
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
$0.5 million
,
$0.5 million
and
$0.6 million
for the years ended
December 31, 2017
,
2016
and
2015
, 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 U.S. Securities and Exchange Commission (“SEC”) and the U.S. Department of Justice (“DOJ”) with respect to charges asserted by the SEC and DOJ relating to the anti-bribery, books and records, internal controls, and disclosure provisions of the U.S. Foreign Corrupt Practices Act (“FCPA”) and other securities laws violations. The Company paid the monetary penalties under these settlements in installments such that all monetary penalties were paid in full by January 2013. With respect to the DOJ charges, a judgment of dismissal was issued in the U.S. District Court for the Southern District of California on March 28, 2014.
On October 15, 2013, the Company received an informal notice from the DOJ that an indictment against the former Senior Vice President and General Manager of its Swiss subsidiary had been filed in the United States District Court for the Southern District of California. The indictment is against the individual, a former officer, and not against the Company and the Company does not foresee that further penalties or fines could be assessed against it as a corporate entity for this matter. However, the Company may be required throughout the term of the action to advance the legal fees and costs incurred by the individual defendant and to incur other financial obligations. While the Company maintains directors’ and officers’ insurance policies which are intended to cover legal expenses related to its indemnification obligations in situations such as these, the Company cannot determine if and to what extent the insurance policy will cover the ongoing legal fees for this matter. Accordingly, the legal fees that may be incurred by the Company in defending this former officer could have a material impact on its financial condition and results of operation.
Swiss Bribery Matter
In August 2013, the Company’s Swiss subsidiary was served with a search warrant from the Swiss federal prosecutor’s office. At the end of the search, the Swiss federal prosecutor presented the Company with a listing of the materials gathered by the representatives and then removed the materials from its premises for keeping at the prosecutor’s office. Based upon the Company’s exposure to the case, the Company believes this action to be related to the same or similar facts and circumstances as the FCPA action previously settled with the SEC and the DOJ. During initial discussions, the Swiss prosecutor has acknowledged both the existence of the Company’s deferred prosecution agreement with the DOJ and its cooperation efforts thereunder, both of which should have a positive impact on discussions going forward. Additionally, other than the activities previously reviewed in conjunction with the SEC and DOJ matters under the FCPA, the Company has no reason to believe that additional facts or circumstances are under review by the Swiss authorities. To date, the Swiss prosecutor has not issued its formal decision as to whether the charges will be brought against individuals or the Company or whether the proceeding will be abandoned. At this time, the Company continues to cooperate with the Swiss prosecutor and while there continues to be no resolution of this matter, the Company has re-assessed the probable outcome of the matter and accrued an insignificant amount in our financial statements for the fourth quarter of 2017. However, a more adverse result, such as the incurrence of more excessive fines in accordance with Swiss bribery laws, could occur and have a material adverse impact on the Company’s 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 September 2016, the Company entered into a tolling agreement effective for the period beginning on September 12, 2016, and running through June 30, 2017, with the SEC related to these matters. In June 2017, the Company entered into an amended and restated version of this tolling agreement effective for the period beginning on September 12, 2016, and running through October 31, 2017. In November 2017, the Company entered into an amended and restated version of this tolling agreement effective for the period beginning on September 12, 2016, and running through December 22, 2017. In December 2017, the Company entered into another amended and restated version of this tolling agreement effective for the period beginning on September 12, 2016, and running through March 2, 2018. The Company is cooperating with the investigation and recently made an offer of settlement to resolve the matter, which is subject to approval by the SEC Commissioners. The proposed settlement would be entered into by the Company without admitting or denying the SEC’s findings and would resolve alleged violations of certain anti-fraud and books and records provisions of the federal securities laws and related rules. Under the terms of the proposed settlement, the Company would pay
$2.8 million
in a civil penalty and agree not to commit or cause any violations of certain anti-fraud and books and records provisions of the federal securities laws and related rules. In the third quarter of 2017, the Company has made a corresponding accrual for the settlement amount as an operating expense in its financial statements.
Note 16—Unaudited Quarterly Financial Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
|
|
|
|
March 31
|
|
|
|
June 30
|
|
|
|
September 30
|
|
|
|
December 31
|
|
|
|
|
|
(in thousands except per share data)
|
|
|
|
Year Ended December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
26,686
|
|
|
|
|
$
|
37,103
|
|
|
|
|
$
|
35,816
|
|
|
|
|
$
|
30,763
|
|
|
|
|
Gross profit
|
|
6,191
|
|
|
|
|
7,827
|
|
|
|
|
7,396
|
|
|
|
|
7,381
|
|
|
|
|
Net income (loss)
|
|
(10,399
|
)
|
|
(a)
|
|
(10,118
|
)
|
|
(b)
|
|
(13,860
|
)
|
|
(c)
|
|
(8,752
|
)
|
|
(d)
|
|
Basic and diluted net loss per share
|
|
$
|
(0.32
|
)
|
|
|
|
$
|
(0.28
|
)
|
|
|
|
$
|
(0.37
|
)
|
|
|
|
$
|
(0.24
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
|
|
|
|
March 31
|
|
|
|
June 30
|
|
|
|
September 30
|
|
|
|
December 31
|
|
|
|
|
|
(in thousands except per share data)
|
|
|
|
Year Ended December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
35,203
|
|
|
|
|
$
|
34,135
|
|
|
|
|
$
|
25,506
|
|
|
|
|
$
|
26,400
|
|
|
|
|
Gross profit
|
|
9,653
|
|
|
|
|
9,981
|
|
|
|
|
7,628
|
|
|
|
|
5,708
|
|
|
|
|
Net income (loss)
|
|
(6,848
|
)
|
|
(e)
|
|
2,167
|
|
|
(f)
|
|
(6,855
|
)
|
|
(g)
|
|
(12,169
|
)
|
|
(h)
|
|
Basic and diluted net income (loss) per share
|
|
$
|
(0.22
|
)
|
|
|
|
$
|
0.07
|
|
|
|
|
$
|
(0.21
|
)
|
|
|
|
$
|
(0.38
|
)
|
|
|
_____________________
|
|
|
|
(a)
|
Includes restructuring and exit costs of
$1.0 million
and non-cash expense for stock-based compensation of
$1.5 million
.
|
|
|
|
|
(b)
|
Includes acquisition related expense of
$1.8 million
and non-cash expense for stock-based compensation of
$2.3 million
.
|
|
|
|
|
(c)
|
Includes restructuring and exit costs of
$1.3 million
, SEC and FCPA legal and settlement costs of
$3.0 million
and non-cash expense for stock-based compensation of
$2.8 million
.
|
|
|
|
|
(d)
|
Includes non-cash expense for stock-based compensation of
$2.5 million
.
|
|
|
|
|
(e)
|
Includes non-cash expense for stock-based compensation of
$1.2 million
.
|
|
|
|
|
(f)
|
Includes gain on sale of product line of
$6.7 million
, release of tax liability of
$1.5 million
and non-cash expense for stock-based compensation of
$1.5 million
.
|
|
|
|
|
(g)
|
Includes non-cash expense for stock-based compensation of
$1.1 million
.
|
|
|
|
|
(h)
|
Includes impairment of assets of $
1.2 million
, non-cash deferred tax expense of
$1.2 million
in connection with the probable repatriation of a portion of the unremitted earnings of a foreign subsidiary and non-cash expense for stock-based compensation of
$1.6 million
.
|