NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Unless the context otherwise requires, all references to “Maxwell,” the “Company,” “we,” “us,” and “our,” refer to Maxwell Technologies, Inc. and its subsidiaries; all references to “Maxwell SA” refer to the Company’s Swiss subsidiary, Maxwell Technologies, SA; all references to “Nesscap Korea” refer to the Company’s Korean subsidiary, Nesscap Co., Ltd.
Note 1 – Description of Business and Basis of Presentation
Description of Business
Maxwell Technologies, Inc. is a Delaware corporation originally incorporated in 1965 under the name Maxwell Laboratories, Inc. In 1983, the Company completed an initial public offering, and in 1996, changed its name to Maxwell Technologies, Inc. The Company is headquartered in San Diego, California, and has
three
manufacturing facilities located in Rossens, Switzerland; Yongin, South Korea and Peoria, Arizona. In addition, the Company has
two
contract manufacturers located in China. Maxwell offers the following:
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•
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Dry Battery Electrode Technology
: 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 the Company believes can create significant performance and cost benefits as compared to today’s state of the art lithium-ion batteries.
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•
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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 and modules 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 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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•
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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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The Company’s products are designed and manufactured to perform reliably for the life of the products and systems into which they are integrated. The Company achieves high reliability through the application of proprietary technologies and rigorously controlled design, development, manufacturing and test processes.
Basis of Presentation
The accompanying condensed consolidated financial statements include the accounts of Maxwell Technologies, Inc. and its subsidiaries and have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”). All intercompany transactions and account balances have been eliminated in consolidation. The Company has prepared the accompanying unaudited interim condensed consolidated financial statements in accordance with the instructions to Form 10-Q and the standards of accounting measurement set forth in the
Interim Reporting
Topic of the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”). Consequently, the Company has not necessarily included in this Form 10-Q all information and footnotes required for audited financial statements. In the opinion of the Company’s management, the accompanying unaudited condensed consolidated financial statements in this Form 10-Q contain all adjustments (consisting only of normal recurring adjustments, except as otherwise indicated) necessary to for a fair statement of the financial position, results of operations, and cash flows of Maxwell Technologies, Inc. for all periods presented. The results reported in these condensed consolidated financial statements should not be regarded as necessarily indicative of results that may be expected for any subsequent period or for the entire year. These unaudited condensed consolidated financial statements and notes thereto should be read in conjunction with the Company’s audited financial statements and the notes thereto included in the Company’s latest Annual Report on Form 10-K. Certain information and footnote disclosures normally included in the annual financial statements prepared in accordance with U.S. GAAP have been condensed or omitted in the accompanying interim consolidated financial statements. The year-end condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by U.S. GAAP.
Reclassifications
In accordance with the Company’s adoption of ASU No. 2017-07, non-service cost expense and income related to defined benefit plans were reclassified to “other components of defined benefit plans, net” for the
three and nine months ended
September 30, 2017
. See further information under Recent Accounting Pronouncements below.
“Unrealized loss on foreign currency exchange rates” for the
nine months ended
September 30, 2017
has been reclassified to “trade and other accounts receivable” in the consolidated statements of cash flows, to conform to the current period presentation.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect reported amounts and related disclosures. These estimates include, but are not limited to, assessing the collectability of accounts receivable; estimates of returns, rebates, discounts and allowances in the recognition of revenue; estimated applied and unapplied production costs; production capacities; the usage and recoverability of inventories and long-lived assets; deferred income taxes; the incurrence of warranty obligations; the fair value of acquired tangible and intangible assets; impairment of goodwill and intangible assets; estimation of the cost to complete certain projects; estimation of pension assets and liabilities; estimation of employee severance benefit obligations; accruals for estimated losses for legal matters; and estimation of the value of stock-based compensation awards, including the probability that the performance criteria of restricted stock unit awards will be met.
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.
Long-Lived Assets and Intangible Assets
The Company records intangible assets at their respective estimated fair values at the date of acquisition. Intangible assets are amortized based upon the pattern in which their economic benefit will be realized, or if this pattern cannot be reliably determined, using the straight-line method over their estimated useful lives of
eight
to
fourteen
years.
The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets, including intangible assets, may not be recoverable. When such events occur, the Company compares the carrying amounts of the assets to their undiscounted expected future cash flows. If the Company determines that the carrying value of the asset is not recoverable, a permanent impairment charge is recorded for the amount by which the carrying value of the long-lived asset exceeds its fair value.
Warranty Obligation
The Company provides warranties on all product sales for terms ranging from
one
to
eight
years. The Company accrues for the estimated warranty costs at the time of sale based on historical warranty experience plus any known or expected changes in warranty exposure. As of
September 30, 2018
and
December 31, 2017
, the accrued warranty liability included in “accounts payable and accrued liabilities” in the condensed consolidated balance sheets was
$1.1 million
and
$1.4 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.
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.
Liquidity and Going Concern
As of
September 30, 2018
, the Company had approximately
$23.6 million
in cash and cash equivalents, and working capital of
$67.1 million
. In addition, the Company has a revolving line of credit with East West Bank (the “Revolving Line of Credit”) providing for a maximum borrowing amount of
$25.0 million
, subject to a borrowing base limitation, under which
no
borrowings were outstanding as of
September 30, 2018
. As of
September 30, 2018
, the amount available under the Revolving Line of Credit was
$16.3 million
. This facility is scheduled to expire in May 2021.
In August 2018, the Company completed a public offering of
7,590,000
shares of its common stock at a public offering price of
$3.25
per share. The Company received total net proceeds of approximately
$23.0 million
from the offering, after deducting underwriting discounts, commissions and offering expenses. Proceeds from the offering are being used for general corporate purposes, including research and development expenses, capital expenditures, working capital, repayment of debt and general and administrative expenses.
The Company has incurred significant operating losses for several years and expects to continue to incur losses and negative cash flows from operations for at least the next 12 months following the issuance of these financial statements. During the nine months ended September 30, 2018, the Company’s use of cash from operations was
$40.0 million
. Existing cash resources are not expected to be sufficient to fund forecasted future negative cash flows from operations and obligations as they become due through one year following the issuance of these financial statements, without additional funding. Additionally, absent significant improvement in the Company’s operating results as well as additional funding, the Company expects that within one year following the issuance of these financial statements, it may not be in compliance with the financial covenants that it is required to meet during the term of the Revolving Line of Credit agreement, including a minimum two-quarter rolling EBITDA requirement and an ongoing minimum liquidity requirement.
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern; however, the above conditions raise substantial doubt about the Company’s ability to do so. The financial statements do not include any adjustments to reflect the possible future effects that may result should the Company be unable to continue as a going concern.
Management has assessed the Company’s ability to continue as a going concern as of the balance sheet date, and for at least one year following the financial statement issuance date. The assessment of a company’s ability to meet its obligations is inherently judgmental. However, the Company has historically been able to successfully secure funding and execute alternative cash management plans to meet its obligations as they become due. The following conditions were considered in management’s evaluation of the Company’s ability to continue as a going concern:
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The Company's operating plan for the next 12 months from the date of issuance of these financial statements contemplates a significant reduction in its net operating cash outflows as compared to the nine months ended September 30, 2018, resulting from (a) a return to normal inventory levels after the completion of its contract manufacturer transition in 2018 which required higher cash outflows related to a buildup of inventory during the transition and (b) revenue recovery in the Company’s high-voltage product line as delayed infrastructure projects are resumed and uncertainties related to tax reform legislation and tariffs are resolved. However, it is uncertain when and to what degree these recoveries in the business will occur.
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•
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The Company may delay otherwise planned spending on capital investments, research and development and other various activities as necessary to help curb cash outflow until if and when necessary funding is obtained to pursue such activities.
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•
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The Company has a shelf registration statement which allows it to sell up to an aggregate of
$125 million
of any combination of its common stock, warrants, debt securities or units. Under this registration statement, the Company may access the capital markets for the three-year period ending November 15, 2020. As of
September 30, 2018
,
$24.7 million
of securities have been issued under the Company’s shelf registration statement and a balance of
$100.3 million
remains available for future issuance pursuant to the shelf registration statement.
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•
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The Company is actively exploring non-dilutive funding opportunities. No assurance can be given that any future transaction will be successful or that it will be on terms that are satisfactory to the Company or that the resources will be received in a timely manner. If the Company is unable to secure funding, the Company’s business, financial condition and results of operations will be materially adversely affected, and the Company may be unable to continue as a going concern.
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Net Income (Loss) per Share
In accordance with the
Earnings Per Share
Topic of the FASB ASC, basic net income or loss per share is calculated using the weighted average number of common shares outstanding during the period. Diluted net income per share includes the impact of additional common shares that would have been outstanding if potentially dilutive common shares were issued. Potentially dilutive securities are not considered in the calculation of diluted net loss per share, as their inclusion would be anti-dilutive. The following table sets forth the computation of basic and diluted net income (loss) per share (in thousands, except per share data):
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Three Months Ended September 30,
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Nine Months Ended September 30,
|
|
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2018
|
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2017
|
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2018
|
|
2017
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Numerator
|
|
|
|
|
|
|
|
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Net loss
|
|
$
|
(9,723
|
)
|
|
$
|
(13,860
|
)
|
|
$
|
(30,230
|
)
|
|
$
|
(34,377
|
)
|
Denominator
|
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding
|
|
42,497
|
|
|
37,008
|
|
|
39,381
|
|
|
34,929
|
|
Net loss per share
|
|
|
|
|
|
|
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Basic and diluted
|
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$
|
(0.23
|
)
|
|
$
|
(0.37
|
)
|
|
$
|
(0.77
|
)
|
|
$
|
(0.98
|
)
|
The following table summarizes instruments that may be convertible into common shares that are not included in the denominator used in the diluted net loss per share calculation because to do so would be anti-dilutive (in thousands):
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Three and Nine Months Ended September 30,
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2018
|
|
2017
|
Outstanding options to purchase common stock
|
|
357
|
|
|
364
|
|
Unvested restricted stock awards
|
|
—
|
|
|
29
|
|
Unvested restricted stock unit awards
|
|
3,016
|
|
|
2,760
|
|
Employee stock purchase plan awards
|
|
77
|
|
|
29
|
|
Bonus and director fees to be paid in stock awards
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|
504
|
|
|
349
|
|
Convertible senior notes
|
|
7,245
|
|
|
6,300
|
|
|
|
11,199
|
|
|
9,831
|
|
Business Combinations
The Company accounts for businesses it acquires in accordance with ASC Topic 805,
Business Combinations
, which allocates the fair value of the purchase consideration to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values. The excess of the purchase consideration over the fair values of these identifiable assets and liabilities is recorded as goodwill. When determining the fair values of assets acquired and liabilities assumed, management makes significant estimates and assumptions. The Company may utilize third-party valuation specialists to assist the Company in the allocation. Initial purchase price allocations are subject to revision within the measurement period, not to exceed one year from the date of acquisition. Acquisition-related expenses and transaction costs associated with business combinations are expensed as incurred.
Restructuring and Exit Costs
Restructuring and exit costs involve employee-related termination costs, facility exit costs and other costs associated with restructuring activities. The Company accounts for charges resulting from operational restructuring actions in accordance with ASC Topic 420,
Exit or Disposal Cost Obligations
(“ASC 420”) and ASC Topic 712,
Compensation-Nonretirement Postemployment Benefits
(“ASC 712”).
The recognition of restructuring costs requires the Company to make certain assumptions related to the amounts of employee severance benefits, the time period over which leased facilities will remain vacant and expected sublease terms and discount rates. Estimates and assumptions are based on the best information available at the time the obligation arises. These estimates are reviewed and revised as facts and circumstances dictate; changes in these estimates could have a material effect on the amount accrued in the condensed consolidated balance sheet.
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09,
Revenue from Contracts with Customers
. ASU 2014-09 and its related amendments provide companies with a single model for accounting for revenue arising from contracts with customers and supersedes prior revenue recognition guidance, including industry-specific revenue guidance. The core principle of the model is to recognize revenue when control of the goods or services transfers to the customer, as opposed to recognizing revenue when the risks and rewards transfer to the customer under the existing revenue guidance. The guidance permits companies to either apply the requirements retrospectively to all prior periods presented, or apply the requirements in the year of adoption, through a cumulative adjustment. The Company adopted the new accounting standard using the modified retrospective transition method effective January 1, 2018 and recorded a $0.3 million impact to “accumulated deficit” in the Company’s consolidated balance sheet. See Note 2 for further information.
In February 2016, the FASB issued ASU No. 2016-02,
Leases
. The standard requires that a lessee recognize the assets and liabilities that arise from operating leases. A lessee should recognize in its balance sheet a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities. In transition, lessees and lessors were originally required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. In July 2018, FASB issued ASU No. 2018-11,
Targeted Improvements
. This update still requires modified retrospective transition; however, it adds the option to initially apply the new standard at the adoption date and recognize a cumulative-effect adjustment in the current period instead of at the beginning of the earliest period presented. The guidance is effective for annual and interim reporting periods beginning after December 15, 2018. The Company’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. However, the Company does expect 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. The Company will adopt the new accounting standard using the modified retrospective transition option effective January 1, 2019.
In March 2017, the FASB issued ASU No. 2017-07,
Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost
, which changes how employers that sponsor defined benefit pension or other postretirement benefit plans present the net periodic benefit cost in the statement of operations. The new guidance requires entities to report the service cost component in the same line item or items as other compensation costs. The other components of net benefit cost are required to be presented in the statement of operations separately from the service cost component and outside the subtotal of loss from operations. ASU 2017-07 also provides that only the service cost component is eligible for capitalization. This standard impacts the Company’s gross profit and loss from operations but has no impact on net loss or net loss per share. The Company adopted ASU 2017-07 on January 1, 2018, with adoption applied on a retrospective basis. The Company used the practical expedient that permits it to use the amounts previously disclosed in the defined benefit plans note for the prior comparative periods as the basis for applying the retrospective presentation requirements. In connection with this adoption, for the three months ended September 30, 2017, the Company reclassified
$72,000
,
$51,000
and
$18,000
of net non-service costs and income from cost of revenue, selling, general and administrative expense and research and development expense, respectively, to “other components of defined benefit plans, net”; for the
nine months ended
September 30, 2017, the Company reclassified
$229,000
,
$153,000
and
$57,000
of net non-service costs and income from cost of revenue, selling, general and administrative expense and research and development expense, respectively, to “other components of defined benefit plans, net”.
In February 2018, the FASB issued ASU No. 2018-02,
Income Statement-Reporting Comprehensive Income
, which amends the previous guidance to allow for certain tax effects “stranded” in accumulated other comprehensive income, which are impacted by the Tax Cuts and Jobs Act, to be reclassified from accumulated other comprehensive income into retained earnings. This amendment pertains only to those items impacted by the new tax law and will not apply to any future tax effects stranded in accumulated other comprehensive income. This standard is effective for the Company in the first quarter of 2019, with early adoption permitted. The Company does not expect this ASU to have a material impact on its consolidated financial statements.
In March 2018, the FASB issued ASU No. 2018-05,
Income Taxes: Amendments to SEC paragraphs pursuant to SEC Staff Accounting Bulletin No. 118
. The Amendments in this update add various SEC paragraphs pursuant to the issuance of SEC Staff Accounting Bulletin No. 118,
Income Tax Accounting Implications of the Tax Cuts and Jobs Act
(“SAB 118”). SAB 118 directs taxpayers to consider the implications of the Tax Cuts and Jobs Act as provisional when it does not have the necessary information available, prepared, or analyzed in reasonable detail to complete its accounting for the change in the tax law. The Company recognized the provisional tax impacts of the Tax Cuts and Jobs Act in the fourth quarter of 2017, therefore, the Company’s subsequent adoption of ASU 2018-05 in the first quarter of 2018 had no impact on its accounting for income taxes.
In June 2018, the FASB issued ASU No. 2018-07,
Improvements to Nonemployee Share-Based Payment Accounting
, which simplifies the accounting for nonemployee share-based payments by aligning the accounting with the requirements for employee share-based compensation. This standard is effective for the Company in the first quarter of 2019, with early adoption permitted. The Company does not expect this ASU to have a material impact on its consolidated financial statements.
In August 2018, the FASB issued ASU No. 2018-13,
Changes to the Disclosure Requirements for Fair Value Measurement.
This ASU eliminates, adds and modifies certain disclosure requirements for fair value measurements as part of its disclosure framework project. The standard is effective for all entities for financial statements issued for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted. The adoption of this guidance is not expected to have a material impact on the Company’s financial statements.
In August 2018, the FASB issued ASU No. 2018-14,
Compensation - Retirement Benefits - Defined Benefit Plans - General
. This ASU modifies the disclosure requirements for defined benefit and other postretirement plans. This ASU eliminates certain disclosures associated with accumulated other comprehensive income, plan assets, related parties, and the effects of interest rate basis point changes on assumed health care costs; while other disclosures have been added to address significant gains and losses related to changes in benefit obligations. This ASU also clarifies disclosure requirements for projected benefit and accumulated benefit obligations. The amendments in this ASU are effective for fiscal years ending after December 15, 2020 and for interim periods therein with early adoption permitted. Adoption on a retrospective basis for all periods presented is required. The Company is currently evaluating the impact of adoption on its financial statement disclosures.
There have been no other recent accounting standards, or changes in accounting standards, during the
nine months ended September 30, 2018
, as compared with the recent accounting standards described in our Annual Report on Form 10-K, that are of material significance, or have potential material significance, to the Company.
Note 2 – Revenue Recognition
On January 1, 2018, the Company adopted ASC 606,
Revenue from Contracts with Customers
and all the related amendments and applied it to all contracts that were not completed as of January 1, 2018 using the modified retrospective method. The Company recognized the cumulative effect of initially applying the new revenue standard as an adjustment to the opening balance of accumulated deficit. Prior period amounts have not been restated and continue to be reported under the accounting standards in effect for those periods.
The Company’s adoption impact related to the recognition of certain previously deferred distributor revenue. The Company does not expect a material impact to its consolidated statements of operations on an ongoing basis from the adoption of the new standard.
The cumulative effect to the Company’s consolidated January 1, 2018 balance sheet from the adoption of the new revenue standard was as follows (in thousands):
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Balance Sheet
|
|
Balance at December 31, 2017
|
|
Adjustments Due to ASC 606
|
|
Balance at January 1, 2018
|
Assets:
|
|
|
|
|
|
|
Trade and other accounts receivable, net of allowance
|
|
$
|
31,643
|
|
|
$
|
227
|
|
|
$
|
31,870
|
|
Inventories
|
|
32,228
|
|
|
(430
|
)
|
|
31,798
|
|
Liabilities and Stockholders’ Equity:
|
|
|
|
|
|
|
Accounts payable and accrued liabilities
|
|
32,758
|
|
|
37
|
|
|
32,795
|
|
Deferred revenue and customer deposits
|
|
6,669
|
|
|
(518
|
)
|
|
6,151
|
|
Accumulated deficit
|
|
(247,233
|
)
|
|
278
|
|
|
(246,955
|
)
|
The impact of adoption on the Company’s consolidated balance sheet as of
September 30, 2018
and consolidated statement of operations for the three and nine months ended
September 30, 2018
was not material.
The Company’s revenues primarily result from the sale of manufactured products and reflect the consideration to which the Company expects to be entitled. The Company records revenue based on a five-step model in accordance with ASC 606. For its customer contracts, the Company identifies the performance obligations, determines the transaction price, allocates the contract transaction price to the performance obligations, and recognizes the revenue when (or as) control of goods or services is transferred to the customer.
For product sales, each purchase order represents a contract with a customer and each product sold to a customer typically represents a distinct performance obligation. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. The majority of the Company’s product sales are subject to ExWorks (as defined in Incoterms 2010) delivery terms and revenue is recorded at the point in time when products are picked up by the customer's freight forwarder, as the Company has determined that this is the point in time that control transfers to the customer. Certain customers have shipping terms where control does not transfer until the product is delivered to the customer’s location. For these transactions, revenue is recognized at the time that the product is delivered to the customer’s location.
Provisions for customer volume discounts, product returns, rebates and allowances are variable consideration and are estimated and recorded as a reduction of revenue in the same period the related product revenue is recorded. Such provisions are calculated using historical averages and adjusted for any expected changes due to current business conditions.
The Company provides assurance-type warranties on all product sales for terms ranging from
one
to
eight
years. The Company accrues for the estimated warranty costs at the time of sale based on historical warranty experience plus any known or expected changes in warranty exposure.
The Company records revenue net of sales tax, value added tax, excise tax and other taxes collected concurrent with revenue-producing activities. The Company has elected to recognize the cost for freight and shipping when control over the products sold passes to customers and revenue is recognized.
The Company’s contracts with customers do not typically include extended payment terms. Payment terms vary by contract type and type of customer and generally range from 30 to 90 days from delivery.
A portion of the Company’s revenue is derived from sales to distributors which represented approximately
5%
and
6%
of revenue for the three and nine months ended
September 30, 2018
, respectively.
Less than
five
percent of total revenue is derived from non-product sales. When the Company’s contracts with customers require specialized services or other deliverables that are not separately identifiable from other promises in the contracts and, therefore, not distinct, then the non-distinct obligations are accounted for as a single performance obligation. For performance obligations that the Company satisfies over time, which represented
3%
of revenue for the three and nine months ended
September 30, 2018
, revenue is recognized by consistently applying a method of measuring progress toward complete satisfaction of that performance obligation. The Company uses the input method to recognize revenue on the basis of the Company’s efforts or inputs to the satisfaction of a performance obligation relative to the total inputs expected to satisfy that performance obligation. The Company uses the actual costs incurred relative to the total estimated costs to determine its progress towards contract completion.
The following tables disaggregate the Company’s revenue by product line and by shipment destination:
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Three Months Ended September 30,
|
|
Nine Months Ended September 30,
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Product Line:
|
|
2018
|
|
2018
|
Energy Storage
|
|
$
|
26,535
|
|
|
$
|
72,242
|
|
High-Voltage Capacitors
|
|
7,192
|
|
|
19,365
|
|
Total
|
|
$
|
33,727
|
|
|
$
|
91,607
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
Region:
|
|
2018
|
|
2018
|
Americas
|
|
$
|
7,067
|
|
|
$
|
16,970
|
|
Asia Pacific
|
|
14,385
|
|
|
38,929
|
|
Europe
|
|
12,275
|
|
|
35,708
|
|
Total
|
|
$
|
33,727
|
|
|
$
|
91,607
|
|
The Company does not have material contract assets since revenue is recognized as control of goods are transferred or as services are performed. As of
September 30, 2018
and
December 31, 2017
, the Company’s contract liabilities primarily relate to cash received under a licensing and services agreement, amounts received in advance from a customer in connection with a specialized services contract for which revenue is recognized over time, and customer advances. Changes in the Company’s contract liabilities, which are included in “deferred revenue and customer deposits” in the Company’s condensed consolidated balance sheets, are as follows:
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
2018
|
Beginning balance as of December 31, 2017
|
|
$
|
5,331
|
|
Impact of adoption of ASC 606
|
|
(518
|
)
|
Increases due to cash received from customers
|
|
2,098
|
|
Decreases due to recognition of revenue
|
|
(3,784
|
)
|
Other changes
|
|
(206
|
)
|
Contract liabilities as of September 30, 2018
|
|
$
|
2,921
|
|
The Company has two uncompleted, non-product sale contracts with original durations of greater than one year. The transaction price allocated to performance obligations unsatisfied at
September 30, 2018
in connection with these contracts is
$4.9 million
. Of this amount,
$1.6 million
relates to a specialized services contract which is recognized over time and is expected to be completed within one year. The other
$3.3 million
relates to a licensing and services contract, for which the estimate of the transaction price allocated to unsatisfied performance obligations was adjusted in the third quarter of 2018; revenue is expected to be recognized at a point in time when certain conditions are met which are dependent on the customer, and therefore the timing of recognition cannot currently be estimated. The licensing and services arrangement also provides for royalties for product sales that use the licensed intellectual property, which will be recognized at the time the related sales occur.
Note 3 – Balance Sheet Details (in thousands)
Inventories
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
2018
|
|
December 31,
2017
|
Raw materials and purchased parts
|
|
$
|
14,056
|
|
|
$
|
12,675
|
|
Work-in-process
|
|
1,198
|
|
|
1,756
|
|
Finished goods
|
|
22,625
|
|
|
17,797
|
|
Consigned inventory
|
|
1,742
|
|
|
—
|
|
Total inventories
|
|
$
|
39,621
|
|
|
$
|
32,228
|
|
Warranty
Activity in the warranty reserve, which is included in “accounts payable and accrued liabilities” in the condensed consolidated balance sheets, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
2018
|
|
2017
|
Beginning balance
|
|
$
|
1,413
|
|
|
$
|
1,213
|
|
Acquired liability from Nesscap
|
|
—
|
|
|
773
|
|
Product warranties issued
|
|
510
|
|
|
352
|
|
Settlement of warranties
|
|
(477
|
)
|
|
(300
|
)
|
Changes related to preexisting warranties
|
|
(345
|
)
|
|
253
|
|
Ending balance
|
|
$
|
1,101
|
|
|
$
|
2,291
|
|
Accumulated Other Comprehensive Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
Currency
Translation
Adjustment
|
|
Defined Benefit
Pension Plan
|
|
Accumulated
Other
Comprehensive
Income
|
|
Affected Line Items in the Statement of Operations
|
Balance as of December 31, 2017
|
|
$
|
12,957
|
|
|
$
|
(881
|
)
|
|
$
|
12,076
|
|
|
|
Other comprehensive income before reclassification
|
|
(1,457
|
)
|
|
—
|
|
|
(1,457
|
)
|
|
|
Amounts reclassified from accumulated other comprehensive income
|
|
—
|
|
|
57
|
|
|
57
|
|
|
Cost of Sales, Selling, General and Administrative and Research and Development Expense
|
Net other comprehensive income for the
nine months ended September 30, 2018
|
|
(1,457
|
)
|
|
57
|
|
|
(1,400
|
)
|
|
|
Balance as of September 30, 2018
|
|
$
|
11,500
|
|
|
$
|
(824
|
)
|
|
$
|
10,676
|
|
|
|
Note 4 – Business Combination
On April 28, 2017, the Company acquired substantially all of the assets and business of Nesscap Energy, Inc. (“Nesscap”), a developer and manufacturer of ultracapacitor products for use in transportation, renewable energy, industrial and consumer markets, in exchange for the issuance of approximately
4.1 million
shares of Maxwell common stock (the “Share Consideration”) and the assumption of certain liabilities pursuant to the terms of the previously announced Arrangement Agreement dated as of February 28, 2017 between Maxwell and Nesscap (the “ Nesscap Acquisition”). The value of the Share Consideration was approximately
$25.3 million
based on the closing price of the Company’s common stock on April 28, 2017. Additionally, per the Arrangement Agreement, the Company paid approximately
$1.0 million
of transaction taxes on behalf of the seller. The Nesscap Acquisition was effected by means of a court-approved statutory plan of arrangement and was approved by the requisite vote cast by shareholders of Nesscap at a special meeting of Nesscap’s shareholders held on April 24, 2017.
The Share Consideration represented approximately
11.3%
of the outstanding shares of Maxwell, based on the number of shares of Maxwell common stock outstanding as of April 28, 2017.
The Nesscap Acquisition adds scale to the Company’s operations and expands the Company’s portfolio of energy storage products.
The fair value of the purchase price consideration consisted of the following (in thousands):
|
|
|
|
|
|
Maxwell common stock
|
|
$
|
25,294
|
|
Settlement of seller’s transaction expenses
|
|
1,006
|
|
Total estimated purchase price
|
|
$
|
26,300
|
|
The acquisition has been accounted for under the acquisition method of accounting in accordance with ASC 805,
Business Combinations
. Under this method of accounting, the Company recorded the acquisition based on the fair value of the consideration given and the cash consideration paid. The Company allocated the acquisition consideration paid to the identifiable assets acquired and liabilities assumed based on their respective fair values at the date of completion of the acquisition. Any excess of the value of consideration paid over the aggregate fair value of those net assets has been recorded as goodwill, which is attributable to expected synergies from combining operations, the acquired workforce, as well as intangible assets which do not qualify for separate recognition. The Company has allocated 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
. During the year ended December 31, 2017, the Company recognized
$646,000
of the step-up as a component of cost of revenue for acquired inventory sold during the period. The remaining
$40,000
related to the fair value step-up associated with the acquisition was recognized in connection with the Company’s adoption of ASC 606.
For the three and
nine months ended September 30, 2017
, acquisition-related costs of
$46,000
and
$1.8 million
, respectively, were included in selling, general, and administrative expenses in the Company's condensed consolidated statements of operations.
The following table presents details of the identified intangible assets acquired through the Nesscap Acquisition (in thousands):
|
|
|
|
|
|
|
|
|
|
Estimated Useful Life (in years)
|
|
Fair Value
|
Customer relationships - institutional
|
|
14
|
|
$
|
3,200
|
|
Customer relationships - non-institutional
|
|
10
|
|
4,400
|
|
Trademarks and trade names
|
|
10
|
|
1,500
|
|
Developed technology
|
|
8
|
|
2,700
|
|
Total intangible assets
|
|
|
|
$
|
11,800
|
|
The fair value of the
$11.8 million
of identified intangible assets acquired in connection with the Nesscap Acquisition was estimated using an income approach. Under the income approach, an intangible asset's fair value is equal to the present value of future economic benefits to be derived from ownership of the asset. More specifically, the fair values of the customer relationship intangible assets were determined using the multi-period excess earnings method, which estimates an intangible asset’s value based on the present value of the incremental after-tax cash flows attributable only to the intangible asset. The fair values of the trademark and trade names and developed technology intangible assets were valued using the relief from royalty method, which is based on the principle that ownership of the intangible asset relieves the owner of the need to pay a royalty to another party in exchange for rights to use the asset.
The following unaudited pro forma financial information presents the combined results of operations for the three and
nine months ended September 30, 2017
as if the Nesscap Acquisition had occurred at the beginning of fiscal year 2016 (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
2017
|
|
2017
|
Net revenues
|
|
$
|
35,816
|
|
|
$
|
104,771
|
|
Net loss
|
|
(13,573
|
)
|
|
(35,165
|
)
|
Net loss per share:
|
|
|
|
|
Basic and diluted
|
|
(0.37
|
)
|
|
(0.96
|
)
|
Weighted average common shares outstanding:
|
|
|
|
|
Basic and diluted
|
|
37,008
|
|
|
36,706
|
|
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.
Also see Note 5,
Goodwill and Intangible Assets
, for further information on goodwill and intangible assets related to the Nesscap Acquisition.
Note 5 – Goodwill and Intangible Assets
The change in the carrying amount of goodwill from December 31,
2017
to
September 30, 2018
was as follows (in thousands):
|
|
|
|
|
|
Balance as of December 31, 2017
|
|
$
|
36,061
|
|
Foreign currency translation adjustments
|
|
(597
|
)
|
Balance as of September 30, 2018
|
|
$
|
35,464
|
|
The composition of intangible assets subject to amortization was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2018
|
|
|
Useful Life
(in years)
|
|
Gross Initial Carrying Value
|
|
Cumulative Foreign Currency Translation Adjustment
|
|
Accumulated Amortization
|
|
Net Carrying Value
|
Customer relationships - institutional
|
|
14
|
|
$
|
3,200
|
|
|
$
|
68
|
|
|
$
|
(332
|
)
|
|
$
|
2,936
|
|
Customer relationships - non-institutional
|
|
10
|
|
4,400
|
|
|
89
|
|
|
(645
|
)
|
|
3,844
|
|
Trademarks and trade names
|
|
10
|
|
1,500
|
|
|
30
|
|
|
(219
|
)
|
|
1,311
|
|
Developed technology
|
|
8
|
|
2,700
|
|
|
52
|
|
|
(499
|
)
|
|
2,253
|
|
Total intangible assets
|
|
|
|
$
|
11,800
|
|
|
$
|
239
|
|
|
$
|
(1,695
|
)
|
|
$
|
10,344
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 three and
nine months ended September 30, 2018
, amortization expense of
$90,000
and
$0.3 million
, respectively, was recorded to “cost of revenue” and
$0.2 million
and
$0.7 million
, respectively, was recorded to “selling, general and administrative.” For the three and
nine months ended September 30, 2017
, amortization expense of
$88,000
and
$148,000
, respectively, was recorded to “cost of revenue” and
$0.2 million
and
$0.4 million
, respectively, was recorded to “selling, general and administrative.” Estimated amortization expense for the remainder of 2018 is
$0.3 million
. Estimated amortization expense for the years 2019 through 2022 is
$1.2 million
each year. The expected amortization expense is an estimate and actual amounts could differ due to additional intangible asset acquisitions, changes in foreign currency rates or impairment of intangible assets.
Note 6 – Restructuring and Exit Costs
2017 Restructuring Plans
In September 2017, the Company initiated a restructuring plan to optimize headcount in connection with the acquisition and integration of the assets and business of Nesscap, as well as to implement additional organizational efficiencies. Total charges for the September 2017 restructuring plan were
$1.1 million
, and were primarily incurred in the third quarter of 2017. Total net charges for the
nine months ended September 30, 2018
for the September 2017 restructuring plan were
$(112,000)
, which represented restructuring charges of
$45,000
adjusted for reversals of expense of
$157,000
; the plan was completed in the third quarter of 2018.
In February 2017, the Company implemented a comprehensive restructuring plan that included a wide range of organizational efficiency initiatives and other cost reduction opportunities. Total charges for the February 2017 restructuring plan were approximately
$0.9 million
; the plan was completed in the third quarter of 2017.
The charges related to both of the 2017 restructuring plans consist of employee severance costs and have been paid in cash. The charges were recorded within “restructuring and exit costs” in the condensed 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
nine months ended September 30, 2018
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
February 2017 Plan
|
|
September 2017 Plan
|
|
|
Employee Severance Costs
|
Restructuring liability as of December 31, 2016
|
|
$
|
—
|
|
|
$
|
—
|
|
Costs incurred
|
|
997
|
|
|
1,275
|
|
Amounts paid
|
|
(855
|
)
|
|
(431
|
)
|
Accruals released
|
|
(142
|
)
|
|
(27
|
)
|
Restructuring liability as of December 31, 2017
|
|
—
|
|
|
817
|
|
Costs incurred
|
|
—
|
|
|
45
|
|
Amounts paid
|
|
—
|
|
|
(705
|
)
|
Accruals released
|
|
—
|
|
|
(157
|
)
|
Restructuring liability as of September 30, 2018
|
|
$
|
—
|
|
|
$
|
—
|
|
Adjustment to Lease Liability
In 2015 and 2016, the Company completed a restructuring plan that consolidated U.S. manufacturing operations and disposed of the Company’s microelectronics product line. In connection with this plan, in June 2015, the Company ceased use of approximately
60,000
square feet of its Peoria, AZ manufacturing facility, and determined this leased space would have no future economic benefit to the Company based on the business forecast. In the second quarter of 2018, the Company reversed facilities costs of
$0.1 million
as an adjustment to restructuring charges to reflect changes to the lease liability and sublease income assumptions included in the estimated future rent obligation of this leased space. In the third quarter of 2017, the Company recognized additional facilities costs of
$0.2 million
as restructuring charges to record an adjustment to the sublease income assumption included in the estimated future rent obligation of this leased space. The Company has recorded a liability for the future rent obligation associated with this space, net of estimated sublease income, in accordance with ASC Topic 420. As of
September 30, 2018
and December 31, 2017, lease obligation liabilities related to this leased space of
$0.5 million
and
$0.7 million
, respectively, were included in “accounts payable and accrued liabilities” and “other long term liabilities” in the condensed consolidated balance sheets.
Note 7 – Debt and Credit Facilities
Convertible Senior Notes
On September 25, 2017 and October 11, 2017, the Company issued
$40.0 million
and
$6.0 million
, respectively, of
5.50%
Convertible Senior Notes due 2022 (the “Notes”). The Company received net proceeds, after deducting the initial purchaser’s discount and offering expenses payable by the Company, of approximately
$43.0 million
. The Notes bear interest at a rate of
5.50%
per year, payable semi-annually in arrears on March 15 and September 15 of each year, with payments commencing on March 15, 2018. The Notes mature on September 15, 2022, unless earlier purchased by the Company, redeemed, or converted.
The Notes are unsecured obligations of Maxwell and rank senior in right of payment to any of Maxwell’s subordinated indebtedness; equal in right of payment to all of Maxwell’s unsecured indebtedness that is not subordinated; effectively subordinated in right of payment to any of Maxwell’s secured indebtedness to the extent of the value of the assets securing such indebtedness; and structurally subordinated to all indebtedness and other liabilities (including trade payables) of Maxwell’s subsidiaries.
The Notes are convertible into cash, shares of the Company’s common stock, or a combination thereof, at the Company’s election, upon the satisfaction of specified conditions and during certain periods as described below. The initial conversion rate is
157.5101
shares of the Company’s common stock per $1,000 principal amount of Notes, representing an initial effective conversion price of
$6.35
per share of common stock and premiums of
27%
and
29%
to the Company’s
$5.00
and
$4.94
stock prices at the September 25, 2017 and October 11, 2017 dates of issuance, respectively. The conversion rate may be subject to adjustment upon the occurrence of certain specified events as provided in the indenture governing the Notes, dated September 25, 2017 between the Company and Wilmington Trust, National Association, as trustee (the “Indenture”), but will not be adjusted for accrued but unpaid interest. As of
September 30, 2018
, the if-converted value of the Notes did not exceed the principal value of the Notes.
Prior to the close of business on the business day immediately preceding June 15, 2022, the Notes will be convertible at the option of holders only upon the satisfaction of specified conditions and during certain periods. Thereafter until the close of business on the business day immediately preceding maturity, the Notes will be convertible at the option of the holders at any time regardless of these conditions.
Upon the occurrence of certain fundamental changes involving the Company, holders of the Notes may require the Company to repurchase for cash all or part of their Notes at a repurchase price equal to 100% of the principal amount of the Notes to be repurchased, plus accrued and unpaid interest, if any, to, but excluding, the fundamental change repurchase date.
The Company may not redeem the Notes prior to September 20, 2020. The Company may redeem the Notes, at its option, in whole or in part on or after September 20, 2020 if the last reported sale price of the Company’s common stock has been at least
130%
of the conversion price then in effect for at least
20
trading days
The Company considered the features embedded in the Notes, that is, the conversion feature, the Company's call feature, and the make-whole feature, and concluded that they are not required to be bifurcated and accounted for separately from the host debt instrument.
The Notes included an initial purchaser’s discount of
$2.5 million
, or
5.5%
. This discount is recorded as an offset to the debt and is amortized over the expected life of the Notes using the effective interest method.
Upon conversion by the holders, the Company may elect to settle such conversion in shares of its common stock, cash, or a combination thereof. As a result of its cash conversion option, the Company segregated the liability component of the instrument from the equity component. The liability component was measured by estimating the fair value of a non-convertible debt instrument that is similar in its terms to the Notes. The calculation of the fair value of the debt component required the use of Level 3 inputs, including utilization of credit assumptions and high yield bond indices. Fair value was estimated using an income approach, through discounting future interest and principal payments due under the Notes at a discount rate of
12.0%
, an interest rate equal to the estimated borrowing rate for similar non-convertible debt. The excess of the initial proceeds from the Notes over the estimated fair value of the liability component was
$8.5 million
and was recognized as a debt discount and recorded as an increase to additional paid-in capital, and will be amortized over the expected life of the Notes using the effective interest method. Amortization of the debt discount is recognized as non-cash interest expense.
The transaction costs of
$0.5 million
incurred in connection with the issuance of the Notes were allocated to the liability and equity components based on their relative values. Transaction costs allocated to the liability component are being amortized using the effective interest method and recognized as non-cash interest expense over the expected term of the Notes. Transaction costs allocated to the equity component of
$0.1 million
reduced the value of the equity component recognized in stockholders’ equity.
The initial purchaser debt discount, the equity component debt discount and the transaction costs allocated to the liability are being amortized over the contractual term to maturity of the Notes using an effective interest rate of
12.2%
.
The carrying value of the Notes is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
2018
|
|
December 31,
2017
|
Principal amount
|
|
$
|
46,000
|
|
|
$
|
46,000
|
|
Unamortized debt discount - equity component
|
|
(7,135
|
)
|
|
(8,144
|
)
|
Unamortized debt discount - initial purchaser
|
|
(2,130
|
)
|
|
(2,431
|
)
|
Unamortized transaction costs
|
|
(336
|
)
|
|
(383
|
)
|
Net carrying value
|
|
$
|
36,399
|
|
|
$
|
35,042
|
|
Total interest expense related to the Notes is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Cash interest expense
|
|
|
|
|
|
|
|
|
Coupon interest expense
|
|
$
|
633
|
|
|
$
|
37
|
|
|
$
|
1,898
|
|
|
$
|
37
|
|
Non-cash interest expense
|
|
|
|
|
|
|
|
|
Amortization of debt discount - equity component
|
|
346
|
|
|
18
|
|
|
1,008
|
|
|
18
|
|
Amortization of debt discount - initial purchaser
|
|
103
|
|
|
5
|
|
|
301
|
|
|
5
|
|
Amortization of transaction costs
|
|
16
|
|
|
1
|
|
|
47
|
|
|
1
|
|
Total interest expense
|
|
$
|
1,098
|
|
|
$
|
61
|
|
|
$
|
3,254
|
|
|
$
|
61
|
|
Revolving Line of Credit
The Company has a Loan and Security Agreement (the “Loan Agreement”) with East West Bank (“EWB”) whereby EWB made available to the Company a secured credit facility in the form of a revolving line of credit (the “Revolving Line of Credit”). On May 8, 2018, the Company entered into an amendment to the Loan Agreement to amend, restate and extend the Revolving Line of Credit for a
three
-year period expiring on May 8, 2021. 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, plus, for the twelve months ending May 8, 2019, the lesser of: (a)
$5.0 million
; and (b) a certain portion of the Company’s cash and cash equivalents. On August 7, 2018, the Company entered into an amendment to the Loan Agreement to amend certain financial covenants related to minimum EBITDA requirements at fiscal quarter-ends during the term of the credit agreement.
As of
September 30, 2018
, the amount available under the Revolving Line of Credit, net of borrowings, was
$16.3 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 the Company’s Swiss subsidiary and a pledge of
65%
of its equity interests in the Company’s Korean subsidiary. The obligations under the Loan Agreement are also guaranteed directly by the Company’s Swiss and Korean subsidiaries. In the event that the Company is in violation of the representations, warranties and covenants made in the Loan Agreement, including certain financial covenants set forth therein, the Company may not be able to utilize the Revolving Line of Credit or repayment of amounts owed pursuant to the Loan Agreement could be accelerated. As of
September 30, 2018
, the Company is in compliance with the financial covenants that it is required to meet during the term of the credit agreement including the minimum two-quarter rolling EBITDA and minimum liquidity requirements.
Amounts borrowed under the Revolving Line of Credit bear interest, payable monthly. Such interest shall accrue based upon, at the Company’s election, subject to certain limitations, either a Prime Rate plus a margin ranging from
0%
to
0.50%
or the LIBOR Rate plus a margin ranging from
2.75%
to
3.25%
, the specific rate for each as determined based upon the Company’s leverage ratio from time to time.
The Company is required to pay an annual commitment fee equal to
$125,000
, and an unused commitment fee of the average daily unused amount of the Revolving Line of Credit, payable monthly, equal to a per annum rate in a range of
0.30%
to
0.50%
, as determined by the Company’s leverage ratio on the last day of the previous fiscal quarter. There were
no
borrowings outstanding under the Revolving Line of Credit as of
September 30, 2018
and
December 31, 2017
.
Other Long-term Borrowings
The Company has various financing agreements for vehicles. These agreements are for up to an original
three
-year repayment period with interest rates ranging from
0.9%
to
1.9%
. At
September 30, 2018
and
December 31, 2017
,
$89,000
and
$115,000
, respectively, was outstanding under these financing agreements.
Note 8 – Fair Value Measurements
The Company records certain financial instruments at fair value in accordance with the hierarchy from the
Fair Value Measurements and Disclosures
Topic of the FASB ASC as follows.
Fair Value of Assets
Level 1:
Observable inputs such as quoted prices in active markets for identical assets.
Level 2:
Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.
Level 3
: Unobservable inputs that reflect the reporting entity’s own assumptions.
The Company records pension assets at fair value. As of the last fair value measurement date of
December 31, 2017
, the net pension asset included plan assets with a fair value of
$43.4 million
. The plan assets consisted of debt and equity securities, real estate investment funds and cash and cash equivalents. The fair values of debt and equity securities are determined based on quoted prices in active markets for identical assets, which are Level 1 inputs under the fair value hierarchy. The fair value measurement of the real estate investment funds is based on net asset value which is excluded from the fair value hierarchy.
As of
September 30, 2018
and December 31, 2017, the fair value of the Company’s convertible senior notes issued in September and October 2017 was approximately
$41.5 million
and
$52.6 million
, respectively, and was measured using Level 2 inputs. The carrying value of other short-term and long-term borrowings approximates fair value because of the relative short maturity of these instruments and the interest rates the Company could currently obtain.
Note 9 – Stock Plans
The Company has
two
active stock-based compensation plans as of
September 30, 2018
: the 2004 Employee Stock Purchase Plan and the 2013 Omnibus Equity Incentive Plan under which incentive stock options, non-qualified stock options, restricted stock awards and restricted stock units can be granted to employees and non-employee directors.
The Company generally issues the majority of employee stock compensation grants in the first quarter of the year; other grants issued during the year are typically for new employees or non-employee directors.
Stock Options
Stock options are granted to certain employees from time to time on a discretionary basis. Beginning in 2017, non-employee directors receive annual stock option awards as part of their annual retainer compensation. During the nine months ended
September 30, 2018
,
30,000
stock options were granted with a weighted average grant date fair value per share of
$2.75
.
No
stock options were granted during the three months ended September 30, 2018. During the
three and nine months ended
September 30, 2017
,
5,000
and
50,000
stock options were granted, respectively, with a weighted average grant date fair value per share of
$3.12
and
$2.97
, respectively. Compensation expense recognized for stock options for the
three months ended September 30, 2018
and
2017
was
$65,000
and
$62,000
, respectively. Compensation expense recognized for stock options for the
nine months ended September 30, 2018
and
2017
was
$205,000
and
$169,000
, respectively.
The fair value of the stock options granted was estimated using the Black-Scholes valuation model with the following assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
2017
|
|
2018
|
|
2017
|
Expected dividend yield
|
|
—
|
%
|
|
—
|
%
|
|
—
|
%
|
Expected volatility
|
|
58
|
%
|
|
54
|
%
|
|
58% - 59%
|
|
Risk-free interest rate
|
|
1.96
|
%
|
|
2.95
|
%
|
|
1.87% - 1.96%
|
|
Expected term (in years)
|
|
5.5
|
|
|
5.5
|
|
|
5.5
|
|
Restricted Stock Awards
Beginning in 2014, the Company ceased granting restricted stock awards (“RSAs”) and began granting restricted stock units (“RSUs”) to employees as part of its annual equity incentive award program, therefore, no restricted stock awards were issued during the three and
nine months ended
September 30, 2018
and
2017
. During the
three months ended September 30, 2018
and
2017
, compensation expense recognized for RSAs was
$0
and
$0.1 million
, respectively. During the
nine months ended September 30, 2018
and
2017
, compensation expense recognized for RSAs was
$83,000
and
$0.3 million
, respectively.
Restricted Stock Units
Non-employee directors receive annual RSU awards as part of their annual retainer compensation. These awards vest approximately
one
year from the date of grant provided the non-employee director provides continued service. Additionally, new directors normally receive RSUs upon their election to the board. The Company also grants RSUs to employees as part of its annual equity incentive award program, with vesting typically in equal annual installments over
four
years of continuous service. Additionally, the Company grants performance-based restricted stock units (“PSUs”) to executives and certain employees with vesting contingent on continued service and achievement of specified performance objectives or stock price performance. Each restricted stock unit represents the right to receive
one
unrestricted share of the Company’s common stock upon vesting.
For the
three and nine months ended
September 30, 2018
and
2017
, PSUs granted included market-condition restricted stock units. The market-condition PSUs will vest based on the level of the Company’s stock price performance against a determined market index over
one
,
two
and
three
-year performance periods. The market-condition PSUs have the potential to vest between
0%
and
200%
depending on the Company’s stock price performance and the recipients must remain employed through the end of each performance period in order to vest. The fair value of the market-condition PSUs granted was calculated using a Monte Carlo valuation model with the following assumptions:
|
|
|
|
|
|
|
|
|
|
Three and Nine Months Ended September 30,
|
|
|
2018
|
|
2017
|
Expected dividend yield
|
|
—
|
%
|
|
—
|
%
|
Expected volatility
|
|
41% - 47%
|
|
|
53
|
%
|
Risk-free interest rate
|
|
2.36% - 2.60%
|
|
|
1.55
|
%
|
Expected term (in years)
|
|
2.5 - 2.9
|
|
|
2.8
|
|
For the three and
nine months ended
September 30, 2018
and
2017
, RSU grants were composed of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
2018
|
|
2017
|
|
|
Shares granted
(in thousands)
|
|
Average grant date fair value
|
|
Shares granted
(in thousands)
|
|
Average grant date fair value
|
Service-based
|
|
10
|
|
|
$
|
3.69
|
|
|
321
|
|
|
$
|
5.58
|
|
Performance objectives
|
|
—
|
|
|
n/a
|
|
|
—
|
|
|
n/a
|
|
Market-condition
|
|
—
|
|
|
n/a
|
|
|
34
|
|
|
6.79
|
|
Total RSUs granted
|
|
10
|
|
|
3.69
|
|
|
355
|
|
|
5.70
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
2018
|
|
2017
|
|
|
Shares granted
(in thousands)
|
|
Average grant date fair value
|
|
Shares granted
(in thousands)
|
|
Average grant date fair value
|
Service-based
|
|
1,111
|
|
|
$
|
5.70
|
|
|
1,242
|
|
|
$
|
5.54
|
|
Performance objectives
|
|
78
|
|
|
5.85
|
|
|
158
|
|
|
5.73
|
|
Market-condition
|
|
355
|
|
|
7.49
|
|
|
368
|
|
|
7.22
|
|
Total RSUs granted
|
|
1,544
|
|
|
6.12
|
|
|
1,768
|
|
|
5.91
|
|
The following table summarizes the amount of compensation expense recognized for RSUs for the three and
nine months ended
September 30, 2018
and
2017
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
RSU Type
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Service-based
|
|
$
|
1,043
|
|
|
$
|
1,124
|
|
|
$
|
3,229
|
|
|
$
|
2,460
|
|
Performance objectives
|
|
(49
|
)
|
|
219
|
|
|
239
|
|
|
389
|
|
Market-condition
|
|
526
|
|
|
432
|
|
|
1,413
|
|
|
1,027
|
|
|
|
$
|
1,520
|
|
|
$
|
1,775
|
|
|
$
|
4,881
|
|
|
$
|
3,876
|
|
Employee Stock Purchase Plan
The 2004 Employee Stock Purchase Plan (“ESPP”) permits substantially all employees to purchase common stock through payroll deductions, at
85%
of the lower of the trading price of the stock at the beginning or at the end of each
six
month offering period. The number of shares purchased is based on participants’ contributions made during the offering period.
Compensation expense recognized for the ESPP for the
three months ended September 30, 2018
and
2017
was
$35,000
and
$28,000
, respectively. Compensation expense recognized for the ESPP for the
nine months ended September 30, 2018
and
2017
was
$114,000
and
$81,000
, respectively. The fair value of the ESPP shares was estimated using the Black-Scholes valuation model for a call and a put option with the following weighted-average assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Expected dividend yield
|
|
—
|
%
|
|
—
|
%
|
|
—
|
%
|
|
—
|
%
|
Expected volatility
|
|
38
|
%
|
|
37
|
%
|
|
40
|
%
|
|
32
|
%
|
Risk-free interest rate
|
|
2.09
|
%
|
|
1.09
|
%
|
|
1.74
|
%
|
|
0.78
|
%
|
Expected term (in years)
|
|
0.50
|
|
|
0.38
|
|
|
0.50
|
|
|
0.46
|
|
Fair value per share
|
|
$
|
1.39
|
|
|
$
|
1.45
|
|
|
$
|
1.34
|
|
|
$
|
1.28
|
|
Bonuses Settled in Stock
In 2016, the Compensation Committee of the Board of Directors of the Company adopted the Maxwell Technologies, Inc. Incentive Bonus Plan to enable participants to earn annual incentive bonuses based upon achievement of specified financial and strategic performance objectives. The Company may settle bonuses earned under the plan in either cash or stock, and currently intends to settle the majority of bonuses earned under the plan in stock. During the first quarter of 2018, the Company settled
$3.0 million
of bonuses earned under the plan for the 2017 performance period with
506,017
shares of fully vested common stock. During the first quarter of 2017, the Company settled
$1.2 million
of bonuses earned under the plan for the 2016 performance period with
142,582
shares of fully vested common stock and
89,730
fully vested restricted stock units, which were subsequently settled during the second quarter of 2017. An additional
$0.3 million
of bonuses earned for the 2016 performance period were settled with
42,662
shares of fully vested common stock in the third quarter of 2017.
The Company recorded
$0.3 million
and
$0.7 million
of stock compensation expense related to the bonus plan during the
three months ended September 30, 2018
and
2017
, respectively. The Company recorded
$1.8 million
and
$1.9 million
of stock compensation expense related to the bonus plan during the
nine months ended September 30, 2018
and
2017
, respectively.
Director Fees Settled in Stock
In early 2017, the Board approved a non-employee director deferred compensation program pursuant to which participating non-employee directors may make irrevocable elections on an annual basis to take fully vested restricted stock units in lieu of their cash-based non-employee director fees (including, as applicable, any annual retainer fee, committee fee and any other compensation payable with respect to their service as a member of the Board) and to defer the settlement upon the vesting of all or a portion of their equity awards granted in the applicable calendar year. In the event that a director makes such an election, the Company will grant fully vested restricted stock units in lieu of cash, with an initial value equal to the cash fees, which will be settled immediately after grant or at a future date elected by the respective non-employee director through the issuance of Maxwell common stock.
The Company recorded
$65,000
and
$92,000
of stock compensation expense related to director fees to be settled in stock during the
three months ended September 30, 2018
and
2017
, respectively. The Company recorded
$239,000
and
$164,000
of stock compensation expense related to director fees to be settled in stock during the
nine months ended September 30, 2018
and
2017
, respectively. During the
nine months ended September 30, 2018
, the Company granted
65,618
fully vested RSU in lieu of
$334,000
of director fees. During the nine months ended September 30, 2017, the Company granted
12,904
fully vested RSU in lieu of
$71,000
of director fees.
Stock-Based Compensation Expense
Stock-based compensation cost included in cost of revenue; selling, general and administrative expense; and research and development expense is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Cost of revenue
|
|
$
|
255
|
|
|
$
|
271
|
|
|
$
|
939
|
|
|
$
|
721
|
|
Selling, general and administrative
|
|
1,479
|
|
|
2,097
|
|
|
5,309
|
|
|
4,762
|
|
Research and development
|
|
260
|
|
|
387
|
|
|
1,117
|
|
|
1,064
|
|
Total stock-based compensation expense
|
|
$
|
1,994
|
|
|
$
|
2,755
|
|
|
$
|
7,365
|
|
|
$
|
6,547
|
|
Note 10—Shelf Registration Statement
On November 9, 2017, the Company filed a shelf registration statement on Form S-3 with the SEC to, from time to time, sell up to an aggregate of
$125 million
of any combination of its common stock, warrants, debt securities or units. On November 16, 2017, the registration statement was declared effective by the SEC, which will allow the Company to access the capital markets for the three-year period following this effective date. Net proceeds, terms and pricing of each offering of securities issued under the shelf registration statement will be determined at the time of such offerings.
In August 2018, under the shelf registration statement, the Company completed a public offering of
7,590,000
shares of its common stock at a public offering price of
$3.25
per share. The Company received total net proceeds of approximately
$23.0 million
from the offering, after deducting underwriting discounts, commissions and offering expenses. Offering net proceeds are being used for general corporate purposes, including research and development expenses, capital expenditures, working capital, repayment of debt and general and administrative expenses.
Note 11—Income Taxes
The effective tax rate differs from the statutory U.S. federal income tax rate of 21% primarily due to foreign income tax and the valuation allowance against our domestic deferred tax assets.
The Company recorded an income tax provision of
$0.4 million
and
$0.5 million
for the
three months ended September 30, 2018
and
2017
, respectively. The Company recorded an income tax benefit of
$0.4 million
and an income tax provision of
$3.1 million
for the
nine months ended September 30, 2018
and
2017
, respectively. The Company’s income taxes are primarily related to taxes on income generated by the Company’s Swiss subsidiary. During the first quarter of 2018, the Company recognized the impact of a tax holiday granted by the Swiss government for taxes on income generated by the Company’s Swiss subsidiary, which was retroactive to the beginning of 2017. The provision in 2017 is primarily related to taxes on income generated by the Company’s Swiss subsidiary, for which the full statutory tax rate applied.
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 ASU No. 2018-05, 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 is still analyzing certain aspects of the Act and refining its calculations, which could potentially affect the analysis of the Company’s deferred tax assets and liabilities and its historical foreign earnings and profits as well as potential correlative adjustments. Any subsequent adjustment is expected to be offset by a change in valuation allowance and have no impact on the Company’s financial position or results of operations.
As of
September 30, 2018
, the Company has a cumulative valuation allowance recorded offsetting its worldwide net deferred tax assets of
$61.4 million
, of which the significant majority represents the valuation allowance on its U.S. net deferred tax asset. The Company has established a valuation allowance against its U.S. federal and state deferred tax assets due to the uncertainty surrounding the realization of such assets. Management periodically evaluates the recoverability of the deferred tax assets and at such time as it is determined that it is more likely than not that U.S. deferred tax assets are realizable, the valuation allowance will be reduced accordingly. Any such release would result in recording a tax benefit that would increase net income in the period the valuation is released.
During the
nine months ended September 30, 2018
, the Company reduced its net deferred tax liabilities by
$0.4 million
to record the impact of the new tax holiday granted by the Swiss government.
The Company records taxes on the undistributed earnings of foreign subsidiaries unless the subsidiaries’ earnings are considered indefinitely reinvested outside of the U.S. As of
September 30, 2018
, 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. Pursuant to discussions with tax authorities, the Company intends to repatriate
$10.0 million
in Swiss accumulated earnings each year for approximately the next 8 years in order to reduce outstanding amounts owed to its Swiss subsidiary; the Company intends to declare each annual amount as a dividend and pay a
5%
withholding tax at the time such dividends are declared.
Note 12 – Defined Benefit Plans
Maxwell SA Pension Plan
Maxwell SA has a retirement plan that is classified as a defined benefit pension plan. The employee pension benefit is based on compensation, length of service and credited investment earnings. The plan guarantees both a minimum rate of return as well as minimum annuity purchase rates. The Company’s funding policy with respect to the pension plan is to contribute the amount required by Swiss law, using the required percentage applied to the employee’s compensation. In addition, participating employees are required to contribute to the pension plan. This plan has a measurement date of December 31.
Components of net pension cost are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Service cost
|
|
$
|
309
|
|
|
$
|
251
|
|
|
$
|
939
|
|
|
$
|
737
|
|
Cost recognized as a component of compensation cost
|
|
309
|
|
|
251
|
|
|
939
|
|
|
737
|
|
Interest cost
|
|
58
|
|
|
59
|
|
|
175
|
|
|
172
|
|
Expected return on plan assets
|
|
(322
|
)
|
|
(258
|
)
|
|
(978
|
)
|
|
(757
|
)
|
Prior service cost amortization
|
|
24
|
|
|
38
|
|
|
72
|
|
|
113
|
|
Net cost recognized in other components of defined benefit plans, net
|
|
(240
|
)
|
|
(161
|
)
|
|
(731
|
)
|
|
(472
|
)
|
Net pension cost
|
|
$
|
69
|
|
|
$
|
90
|
|
|
$
|
208
|
|
|
$
|
265
|
|
Employer contributions of
$134,000
and
$155,000
were paid during the
three months ended September 30, 2018
and
2017
, respectively. Employer contributions of
$0.4 million
and
$0.5 million
were paid during the
nine months ended September 30, 2018
and
2017
, respectively. Additional employer contributions of approximately
$113,000
are expected to be paid during the remainder of fiscal
2018
.
Korea Defined Benefit Plan
In connection with the Nesscap Acquisition, 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.
Components of net cost related to the Korea employee defined benefit plan are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Service cost
|
|
$
|
145
|
|
|
$
|
134
|
|
|
$
|
446
|
|
|
$
|
221
|
|
Cost recognized as a component of compensation cost
|
|
145
|
|
|
134
|
|
|
446
|
|
|
221
|
|
Interest cost
|
|
23
|
|
|
20
|
|
|
82
|
|
|
34
|
|
Cost recognized in other components of defined benefit plans, net
|
|
23
|
|
|
20
|
|
|
82
|
|
|
34
|
|
Net cost
|
|
$
|
168
|
|
|
$
|
154
|
|
|
$
|
528
|
|
|
$
|
255
|
|
Employer contributions of
$1,000
and
$2,000
were paid during the
three months ended September 30, 2018
and
2017
, respectively. Employer contributions of
$6,000
and
$4,000
were paid during the
nine months ended September 30, 2018
and
2017
, respectively. Additional employer contributions of approximately
$1,000
are expected to be paid during the remainder of fiscal 2018.
Note 13 – Legal Proceedings
Although the Company expects to incur legal fees in connection with the below legal proceedings, the Company is unable to estimate the amount of such legal fees and therefore, such fees will be expensed in the period the legal services are performed.
FCPA Matter
In January 2011, the Company reached settlements with the SEC and the U.S. Department of Justice (“DOJ”) with respect to charges asserted by the SEC and DOJ relating to the anti-bribery, books and records, internal controls, and disclosure provisions of the U.S. Foreign Corrupt Practices Act (“FCPA”) and other securities laws violations. The Company paid the monetary penalties under these settlements in installments such that all monetary penalties were paid in full by January 2013. With respect to the DOJ charges, a judgment of dismissal was issued in the U.S. District Court for the Southern District of California on March 28, 2014.
On October 15, 2013, the Company received an informal notice from the DOJ that an indictment against the former Senior Vice President and General Manager of its Swiss subsidiary had been filed in the United States District Court for the Southern District of California. The indictment is against the individual, a former officer, and not against the Company and the Company does not foresee that further penalties or fines could be assessed against it as a corporate entity for this matter. However, the Company may be required throughout the term of the action to advance the legal fees and costs incurred by the individual defendant and to incur other financial obligations. While the Company maintains directors’ and officers’ insurance policies which are intended to cover legal expenses related to its indemnification obligations in situations such as these, the Company cannot determine if and to what extent the insurance policy will cover the ongoing legal fees for this matter. Accordingly, the legal fees that may be incurred by the Company in defending this former officer could have a material impact on its financial condition and results of operation.
Swiss Bribery Matter
In August 2013, the Company’s Swiss subsidiary was served with a search warrant from the Swiss federal prosecutor’s office. At the end of the search, the Swiss federal prosecutor presented the Company with a listing of the materials gathered by the representatives and then removed the materials from its premises for keeping at the prosecutor’s office. Based upon the Company’s exposure to the case, the Company believes this action to be related to the same or similar facts and circumstances as the FCPA action previously settled with the SEC and the DOJ. During initial discussions, the Swiss prosecutor has acknowledged both the existence of the Company’s deferred prosecution agreement with the DOJ and its cooperation efforts thereunder, both of which should have a positive impact on discussions going forward. Additionally, other than the activities previously reviewed in conjunction with the SEC and DOJ matters under the FCPA, the Company has no reason to believe that additional facts or circumstances are under review by the Swiss authorities. To date, the Swiss prosecutor has not issued its formal decision as to whether the charges will be brought against individuals or the Company or whether the proceeding will be abandoned. At this stage in the investigation, the Company is currently unable to determine the extent to which it will be subject to fines in accordance with Swiss bribery laws and what additional expenses will be incurred in order to defend this matter. As such, the Company cannot determine whether there is a reasonable possibility that a loss will be incurred nor can it estimate the range of any such potential loss. Accordingly, the Company has not accrued an amount for any potential loss associated with this action, but an adverse result could have a material adverse impact on its financial condition and results of operation.
Government Investigations
In early 2013, the Company voluntarily provided information to the SEC and the United States Attorney’s Office for the Southern District of California related to its announcement that it intended to file restated financial statements for fiscal years 2011 and 2012. On June 11, 2015 and June 16, 2016, the Company received subpoenas from the SEC requesting certain documents related to, among other things, the facts and circumstances surrounding the restated financial statements. The Company has provided documents and information to the SEC in response to the subpoenas. In March 2018, the Company consented to an order filed by the SEC without admitting or denying the SEC’s findings thereby resolving alleged violations of certain anti-fraud and books and records provisions of the federal securities laws and related rules. Under the terms of the order, the Company was required to pay
$2.8 million
in a civil penalty and agreed not to commit or cause any violations of certain anti-fraud and books and records provisions of the federal securities laws and related rules. The Company had previously accrued this amount owed as an operating expense in its financial statements in the third quarter of 2017 and paid the amount in full in April 2018.