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MXWL > SEC Filings for MXWL > Form 10-Q/A on 14-Aug-2013All Recent SEC Filings

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Form 10-Q/A for MAXWELL TECHNOLOGIES INC


14-Aug-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Unless the context otherwise requires, all references in this Quarterly Report on Form 10-Q (this "Quarterly Report") to "Maxwell," "the Company," "we," "us," and "our" refer to Maxwell Technologies, Inc. and its subsidiaries; all references to "Maxwell SA" refer to our Swiss subsidiary, Maxwell Technologies, SA.
FORWARD-LOOKING STATEMENTS Some of the statements contained in this document and incorporated herein by reference discuss our plans and strategies for our business or make other forward-looking statements, as this term is defined in the Private Securities Litigation Reform Act. The words "anticipates," "believes," "estimates," "expects," "plans," "intends," "may," "could," "will," "continue," "seek," "should," "would" and similar expressions are intended to identify these forward-looking statements, but are not the exclusive means of identifying them. These forward-looking statements reflect the current views and beliefs of our management; however, various risks, uncertainties and contingencies could cause our actual results, performance or achievements to differ materially from those expressed in, or implied by, our statements. Such risks, uncertainties and contingencies include, but are not limited to, the following:
• our ability to remain competitive and stimulate customer demand through successful introduction of new products, and to educate our prospective customers on the products we offer;

• dependence upon the sale of products to a small number of customers and vertical markets, some of which are heavily dependent on government funding or government subsidies which may or may not continue in the future;

• dependence upon the sale of products into China and Europe, where macroeconomic factors outside our control may adversely affect our sales;

• risks related to our international operations including, but not limited to, our ability to adequately comply with the changing rules and regulations in countries where our business is conducted, our ability to oversee and control our foreign subsidiaries and their operations, our ability to effectively manage foreign currency exchange rate fluctuations arising from our international operations, and our ability to continue to comply with the U.S. Foreign Corrupt Practices Act as well as the anti-bribery laws of foreign jurisdictions and the terms and conditions of our settlement agreements with the Securities and Exchange Commission and the Department of Justice;

• successful acquisition, development and retention of key personnel;

• our ability to effectively manage our reliance upon certain suppliers of key component parts and specialty equipment and logistical services;

• our ability to match production volume to actual customer demand;

• our ability to manage product quality problems;

• our ability to protect our intellectual property rights and to defend claims against us;

• our ability to effectively identify, enter into, manage and benefit from strategic alliances;

• occurrence of a catastrophic event at any of our facilities;

• occurrence of a technology systems failure, network disruptions, or breach in data security;

• our ability to obtain sufficient capital to meet our operating or other needs; and

• our ability to manage and minimize the impact of unfavorable legal proceedings.

Many of these factors are beyond our control. Additionally, there can be no assurance that we will not incur new or additional unforeseen costs in connection with the ongoing conduct of our business. Accordingly, any forward-looking statements included herein do not purport to be predictions of future events or circumstances and may not be realized.
For a discussion of important risks associated with an investment in our securities, including factors that could cause actual results to differ materially from expectations referred to in the forward-looking statements, see Risk Factors in Part II, Item 1A, of this document and Part I, Item 1A, of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2012 filed on August 1, 2013. We do not have any obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise.


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Background on the Restatement
Audit Committee's Investigation
In January 2013, following receipt of information concerning potential revenue recognition issues, the Audit Committee of the Board of Directors engaged independent legal counsel and forensic accountants to conduct an investigation concerning the potential issues and to work with management to determine the potential impact on accounting for revenue. In February 2013, as a result of the findings of the Audit Committee's investigation to date, we determined that certain of our employees had engaged in conduct which resulted in revenue being recorded in periods prior to the criteria for revenue recognition under U.S. generally accepted accounting principles being satisfied.
The investigation revealed arrangements with three of our distributors regarding extended payment terms, which allowed these distributors to pay us after they received payment from their customer, and with one of our distributors regarding return rights and profit margin protection, for sales to such distributors with respect to certain transactions. In addition, arrangements were revealed with one non-distributor customer to honor transfer of title at a date later than the customer's purchase orders indicated. Based on the results of its investigation, the Audit Committee determined that these arrangements had not been communicated to our finance and accounting department, or to our CEO, and therefore, had not been considered when revenue was originally recorded. Based on the terms of the agreements with these four customers as they were known to our finance and accounting department, it had been our policy to record revenue related to shipments as title passed at either shipment from our facilities or receipt at the customer's facility, assuming all other revenue recognition criteria had been achieved. In addition to the arrangements noted above, the investigation uncovered an error on an individual transaction where a customer was given extended payment terms, which allowed them to pay us after they received payment from their customer, but those terms were not considered when revenue was originally recognized. As a result of the arrangements discovered during the investigation, we do not believe that a fixed or determinable sales price existed at the time of shipment, nor was collection reasonably assured, at least with respect to certain transactions. In addition, revenue related to certain shipments to the one non-distributor customer was recorded before the actual transfer of title and the satisfaction of our obligation to deliver the products. Therefore, revenue from these sales should not have been recognized at the time of shipment.
Based on the arrangements with customers revealed in the investigation that were not considered when revenue was originally recognized, we determined the following:
• Beginning in the period in which the investigation revealed arrangements regarding extended payment terms for certain sales to three distributors, we determined it appropriate to defer revenue recognition on all sales to these distributors from the period of shipment to the period in which payment is received. For these distributors, revenue recognition in the period in which payment is received was determined to be appropriate beginning in the fourth quarter of 2011.

• Beginning in the period in which the investigation revealed return rights and profit margin protection for one distributor, we determined it appropriate to defer revenue recognition on all sales to this distributor until the distributor confirms with us that they are not entitled to any further returns or credits. For this distributor, the deferral of revenue on this basis was determined to be appropriate beginning in the fourth quarter of 2011. At such time as the distributor confirms with us that they are not entitled to any further returns or credits, which is currently anticipated to occur in the second half of the fiscal year 2013, previous sales for which revenue has been deferred, net of any credits or returns that may be made by the distributor, will be recognized as revenue.

• For the arrangements with the non-distributor customer to honor transfer of title at a date later than the customer's purchase order indicated, we determined it appropriate to defer revenue recognition to the period in which we agreed to honor transfer of title.

• For the individual transaction where a customer was given extended payment terms which were not considered when revenue was originally recognized in the first quarter of 2011, revenue recognition in the period in which payment was received, which was in the second quarter of 2011, was determined to be appropriate.

Management's Subsequent Internal Review
Once the audit committee investigation was complete, management of the Company conducted a review beginning with the first quarter of 2009 through the first quarter of 2013 to ensure that all sales arrangements had been detected and accounted for appropriately. During this review, we noted that there were a number of quarter end revenue cut-off errors wherein revenue was recorded prior to the transfer of title to the customer and the satisfaction of our obligation to deliver the products. We have corrected these errors occurring in the first quarter of 2011 through the third quarter of 2012 by moving the revenue recognition for these items to the period in which delivery actually occurred.


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Results of the Audit Committee's Investigation and Management's Internal Review Based on the findings of the investigation, as previously reported in our current report on Form 8-K dated March 7, 2013, the Audit Committee, in consultation with management and the Board of Directors, concluded that our previously issued financial statements contained in our annual report on Form 10-K for the year ended December 31, 2011, and the quarterly reports on Form 10-Q for the quarters ended March 31, 2011, June 30, 2011, September 30, 2011, March 31, 2012, June 30, 2012 and September 30, 2012, should no longer be relied upon. Accordingly, the consolidated financial statements for the first three quarters of the fiscal year ended December 31, 2012, for the fiscal year ended December 31, 2011, and for each of the interim periods within the fiscal year ended December 31, 2011, have been restated in our Annual Report on Form 10-K for the fiscal year ended December 31, 2012. See Note 15, in our Annual Report on Form 10-K for the fiscal year ended December 31, 2012, for the effects of the restatement adjustments on our 2012 and 2011 unaudited quarterly financial information.
As a result of the Audit Committee's investigation, certain employees were terminated and our Sr. Vice President of Sales and Marketing resigned as reported in our current report on Form 8-K dated March 7, 2013.
In connection with the errors identified during the investigation resulting in the restatement of previously reported financial statements, we identified control deficiencies in our internal control over financial reporting that constitute material weaknesses. For a discussion of our disclosure controls and procedures and the material weaknesses identified, see Part I, Item 4, Controls and Procedures, of this Quarterly Report on Form 10-Q/A.
Our previously filed annual report on Form 10-K for the fiscal year ended December 31, 2011, and our quarterly reports on Form 10-Q for the periods affected by the restatements, have not been amended, other than this amended quarterly report on Form 10-Q for the quarter ended September 30, 2012. Accordingly, investors should no longer rely upon our previously released financial statements for any quarterly or annual periods after and including March 31, 2011, and any earnings releases or other communications relating to these periods. See Note 2, Restatement of Previously Issued Financial Statements and Financial Information, and Note 15, Unaudited Quarterly Financial Information, of the Notes to the Consolidated Financial Statements, in our Annual Report on Form 10-K for the fiscal year ended December 31, 2012, for the impact of these adjustments for the full fiscal year ended December 31, 2011, and the first three quarters of the fiscal year ended December 31, 2012 and each of the quarterly periods in the fiscal year ended December 31, 2011, respectively.
Restatement Adjustments
Restatement Adjustments Related to Sales Arrangements Several adjustments were made to our previously filed consolidated financial statements as a result of the restatement in order to reflect revenue recognition in the appropriate periods as discussed above. Accordingly, for the subject sales transactions, revenue and accounts receivable balances were reduced by an equivalent amount in the period that the sale was originally recorded as revenue, and revenue was increased in the subsequent period in which the criteria for revenue recognition were met. Further, for the subject sales transactions, cost of revenue was reduced, and inventory was increased, in the period that the sale was originally recorded as revenue, and cost of revenue was increased, and inventory was reduced, in the period the sale was ultimately recorded as revenue. However, for sales to one distributor in which revenue is being deferred until we determine that the distributor is not entitled to any further returns or credits, as discussed above, the increase to revenue, and the related reduction to inventory and increase to cost of revenue, will be recorded in a future period when this determination is made.
The adjustments also reflect the impacts of adjusting our returns reserves for certain stock rotation rights of the distributors, and adjusting our reserves for allowances for doubtful accounts, as well as commissions expense, although these changes were not material.
In addition to the adjustments to revenue, accounts receivable, inventory and cost of revenue, inventory reserve balances and cost of revenue were adjusted in relation to the adjustments to inventory discussed above, in order to reflect inventory ultimately recorded on our balance sheets at its lower of cost or market value.
Other Restatement Adjustments
Since our determination to restate previously issued financial statements constituted an event of default under the terms of our credit facility, the bank had the right to require immediate payment of the outstanding borrowings. As a result restatement adjustments were recorded to reclassify the amounts outstanding under the credit facility from long-term debt to current liabilities as of each respective balance sheet date. In addition, an insignificant amount of debt issuance costs were reclassified from a long-term asset to a short-term asset, consistent with the classification of the related debt. In June 2013, we entered into a forbearance agreement with the bank wherein the bank agreed to forbear from further exercise of its rights and remedies to


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call our outstanding debt under the credit facility in connection with the events of default for a period terminating on the earlier of September 30, 2013 or the occurrence of any additional events of default.
Further, a restatement adjustment was made to reclassify a legal settlement with a customer from selling, general and administrative expense to contra-revenue in the second quarter of 2011 in the amount of for $2.6 million. Certain other immaterial adjustments were made in connection with the restatement, which increased our net loss by $153,000 for the year ended December 31, 2011, and decreased our net income by $170,000 for the nine-months ended September 30, 2012.
The restatement adjustments did not impact our previously reported tax provision or benefit in any of the affected periods, other than a $54,000 decrease in the income tax provision for the quarter ended September 30, 2012, as all of the restatement adjustments were related to our U.S. operations, for which we have significant net operating loss carryforwards and have not recorded an income tax expense or benefit in any period to date. However, the restatement adjustments did impact the composition of our deferred tax assets and liabilities as of December 31, 2011 as presented in Note 10, Income Taxes, of the Notes to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2012.
For the impact of the restatement adjustments on our financial statements for the three and nine months ended September 30, 2012, and 2011, see Note 2, Restatement of Previously Issued Financial Statements and Financial Information. Unless required as a result of the restatement, we have not otherwise updated or amended the information in this amended quarterly report on Form 10-Q. Overview
Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is designed to provide a reader of our financial statements with a narrative from the perspective of our management on our financial condition, results of operations, liquidity and certain other factors that may affect our future results. Our MD&A is presented in the following sections:
• Executive Overview

• Highlights of the Nine Months Ended September 30, 2012

• Results of Operations

• Liquidity and Capital Resources

• Critical Accounting Policies and Estimates

• Off Balance Sheet Arrangements

Executive Overview
Maxwell is a global leader in developing, manufacturing and marketing advanced energy storage and power delivery products for transportation, industrial, information technology and other applications, and microelectronic products for space and satellite applications. Our strategy is to establish a compelling value proposition for our products by designing and manufacturing them to perform reliably with minimal maintenance over long operational lifetimes. We have three product lines: ultracapacitors with applications in multiple industries, including transportation, automotive, information technology, renewable energy and consumer and industrial electronics; high-voltage capacitors applied mainly in electrical utility infrastructure; and radiation-hardened microelectronic products for space and satellite applications.
Our primary objective is to grow revenue and profit margins by creating and satisfying demand for ultracapacitor-based energy storage and power delivery solutions. We are focusing on establishing and expanding market opportunities for ultracapacitors and being the preferred supplier for ultracapacitor products worldwide. We believe that the transportation industry represents the largest market opportunity for ultracapacitors, primarily for applications related to engine starting, electrical system augmentation, and braking energy recuperation and hybrid electric drive systems for transit buses, trucks and autos, and electric rail vehicles. Backup power applications, including instantly available power for uninterruptible power supply may also represent a significant market opportunity.
We also seek to expand market opportunities for our high-voltage capacitor and radiation-hardened microelectronic products. The market for high-voltage capacitors consists mainly of expansion, upgrading and maintenance of existing electrical utility infrastructure and new infrastructure installations in developing countries. Such installations are capital-intensive and frequently are subject to regulation, availability of government funding and general economic conditions. Although the market for microelectronics products for space and satellite applications is relatively small, the specialized nature


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of these products and the requirement for failure-free reliability allows us to generate profit margins significantly higher than those for commodity electronic components.
In the third quarter of 2012, revenues were $42.7 million, representing an increase of 2% compared with the same period one year ago. Revenue growth in the current fiscal year has been slower when compared with the higher annual growth rates achieved in the two most recent fiscal years, and is primarily attributable to slower revenue growth for our ultracapacitor products, for which revenue increased by 10% to $28.3 million in the third quarter of 2012 compared with the third quarter of 2011. This decline in the overall growth rate for our ultracapacitor products is primarily attributable to slowing in the two primary markets in which we currently sell our products, the hybrid transit vehicle and wind energy markets. Slower growth in sales in the hybrid transit vehicle market is primarily due to changes and delays in government programs and funding for public transit vehicle procurements, mainly in Europe. In addition, we are beginning to see a near-term reduction in customer forecasts for hybrid transit vehicle applications in China, which is our primary market. For wind energy, there has been a global slowdown in new wind system deployments in the last several quarters. These conditions, in conjunction with weaker general economic conditions in Europe and elsewhere, have caused our growth rates in these primary markets to decline in recent quarters.
Revenues for our high voltage products were relatively stable in the third quarter of 2012 compared with the same period in the prior year at $10.9 million, while revenues for our microelectronics products, which tend to be volatile, were $3.5 million for the third quarter of 2012 compared with $4.6 million for the same period in 2011. Overall gross profit margin during the quarter increased to 42% compared with 40% in the third quarter of 2011, primarily due to cost efficiencies associated with greater volume as well as cost reduction efforts. Operating expenses in the third quarter of 2012 were 29% of revenue, compared with 36% of revenue in the same period one year ago. Going forward, we will continue to focus on trying to grow our business and strengthen our market leadership and brand recognition through further penetration of existing markets, entry into new markets and development of new products. Our primary focus will be to try to grow our ultracapacitor business through continued market penetration in primary applications, including automotive, transportation, renewable energy and backup power. In order to achieve our growth objectives, we will need to overcome risks and challenges facing our business. A significant challenge we face is our ability to manage dependence on a small number of vertical markets, including some that are driven by government regulation or are highly dependent on government subsidy programs. For example, a large portion of our current ultracapacitor business is concentrated in the Chinese hybrid transit bus and wind energy markets, which are heavily dependent on government regulation and subsidy. As mentioned above, these markets are experiencing slower rates of growth in recent quarters compared with the past couple of years related to changes or delays in government policies and subsidy programs that have historically advanced our sales into these markets. Although we believe the long-term prospects for these markets remain positive, we plan to develop growth opportunities for our products in other vertical markets, including applications for back-up power, and heavy vehicle cold starting, in order to further diversify our market presence and build our long-term growth prospects.
Other significant risks and challenges we face include the ability to maintain profitability; the ability to develop our management team, product development infrastructure and manufacturing capacity to facilitate growth; competing technologies that may capture market share and interfere with our planned growth; and hiring, developing and retaining key personnel critical to the execution of our strategy. We will be attentive to these risks and will focus on growing our revenues and profits, and on developing new products and promoting the value proposition of our products over competing technologies. In addition, we are in the process of augmenting current manufacturing capacity and infrastructure, which we believe will be sufficient to accommodate planned growth.
Highlights of the Nine Months Ended September 30, 2012 During the nine months ended September 30, 2012, we continued to focus on introducing new products, increasing production capacity to meet anticipated future demand, reducing product costs, making capital investments to facilitate growth, and improving production processes. Some of these efforts are described below:

•         In January, we announced that Bombardier Transportation, a leading
          producer of rail vehicles and rail transportation equipment, systems
          and services, has selected Maxwell ultracapacitors as the energy
          storage element of the BOMBARDIER EnerGstorฎ braking energy
          recuperation system.


•         Also in January, we announced that we have entered into a one-year
          agreement with Pana-Pacific, a preferred integrator and engineering
          partner in the commercial vehicle market, to distribute our new
          ultracapacitor-based Engine Start Module in the United States, Canada
          and Mexico, although sales of this product to date have not been
          significant.


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•         In February, we announced that our Swiss subsidiary is participating in
          a program of the Swiss government to accelerate our initiatives to
          improve manufacturing processes and enhance performance of our CONDISฎ
          high-voltage capacitor products for electric utility grid
          infrastructure and other high-voltage applications.


•         In March, we announced that we are in the process of planning a new
          ultracapacitor electrode production facility that will double our
          current electrode capacity, and are also increasing internal and
          outsourced assembly capabilities to ensure that we can meet increasing
          worldwide demand for ultracapacitor products.


•         In May, we announced that our Swiss subsidiary has launched a new line
          of CONDISฎ capacitors and voltage dividers based on environmentally
          friendly technology for medium voltage applications.


•         Also in May, we announced the signing of a global distribution
          agreement with Digi-Key Corporation, a global electronic components
          distributor recognized by design engineers as having the industry's
          largest selection of electronic components available for immediate
          shipment, who will now distribute our products worldwide.


•         In June, R&D Magazine recognized our ultracapacitor-based Engine Start
          Module for medium and heavy duty trucks as one of the 100 most
          technologically significant products introduced into the marketplace
          over the past year, although sales of this product to date have not
          been significant.

Results of Operations
The Third Quarter of 2012 Compared with the Third Quarter of 2011
The following table presents certain unaudited statement of operations data
. . .
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