Maxwell Reports Third Quarter 2017 Results

Maxwell Technologies Inc. has reported financial results for the 3 months ended September 30, 2017. Total revenues for the third quarter of 2017 were $35.8 million, compared with $37.1 million for the second quarter of 2017 and $25.5 million for the prior year quarter. Net loss for the third quarter of 2017 was $13.9 million, compared with a net loss of $10.1 million for the second quarter of 2017 and a net loss of $6.9 million for the prior year quarter. The company reported $(2.1) million of adjusted earnings before interest, taxes, depreciation and amortization (Adjusted EBITDA) for the third quarter of 2017, compared with $(1.8) million for the second quarter of 2017 and $(2.3) million for the prior year quarter. Non-GAAP net loss for the third quarter of 2017 was $4.9 million, compared with a non-GAAP net loss of $5.5 million for the second quarter of 2017 and $5.6 million for the prior year quarter. 

"We have been focused on intersecting three disruptive megatrends in the automotive and grid markets that we expect will accelerate future growth. We expect those megatrends - renewable power generation, vehicle electrification and the battery electric vehicle revolution - to drive unprecedented growth in these markets, which are at the center of our strategy, and for the technologies in our portfolio. With $43 million in net cash recently raised, we are optimistic that we are now sufficiently capitalized to seize this considerable opportunity," says Dr. Franz Fink, Maxwell's President and Chief Executive Officer. "At the same time, we are very focused on continuing to cement our foundation through improving operational efficiencies, developing cutting-edge technology platforms, optimizing our product portfolio and achieving profitability to create the runway to capitalize on the aforementioned opportunities."

Discussion of Financial Results for the Quarter

Please note that Nesscap is included in all results and outlook beginning May 1, 2017.

Revenue and Gross Margin

• Total revenue for the third quarter of 2017 was $35.8 million, compared with $37.1 million for the second quarter of 2017, driven by seasonal softness in high-voltage offset by strong ultracapacitor revenue in the wind market. Ultracapacitor revenue for the third quarter of 2017 was $27.6 million, compared with $25.1 million for the second quarter of 2017. High-voltage revenue was $8.3 million for the third quarter of 2017, compared with $12.0 million for the second quarter of 2017.
• Gross margin for the third quarter of 2017 was 20.6% compared with 21.1% in the second quarter of 2017, driven by stronger ultracapacitor sales, which generally have lower gross margins than the corporate average, and softer high-voltage sales, which generally have higher gross margins than the corporate average.
• Non-GAAP gross margin for the third quarter of 2017 was 22.5% compared with 22.7% in the second quarter of 2017 and excludes acquisition related intangibles amortization and inventory step-up expense as well as stock-based compensation expense.

Operating Expense, Interest Expense, Net Loss & Adjusted EBITDA

• Operating expense for the third quarter of 2017 was $20.7 million, compared with $16.5 million for the second quarter of 2017. The quarter-over-quarter increase was driven by restructuring charges associated with the early execution of an organizational optimization following the Nesscap acquisition and costs related to certain legal matters, including an amended agreement with Viex, a settlement with the SEC and fees associated with an investment agreement with SDIC that were previously capitalized.
• Non-GAAP operating expense for the third quarter of 2017 was $12.4 million compared with $12.5 million for the second quarter of 2017 and excludes stock-based compensation, amortization of intangibles, acquisition related expenses, restructuring charges and other non-recurring legal and settlement costs, including, as noted above, the Viex amendment, the SEC settlement and fees associated with the SDIC agreement.
• Net interest expense for the third quarter of 2017 was $152,000 and includes the coupon interest for the last 6 days of the quarter from the convertible notes issued on September 25, 2017 and non-cash interest for amortization of debt issuance costs and discounts.
• Non-GAAP interest expense for the third quarter of 2017 was $128,000, which excludes the non-cash interest mentioned above.
• Net loss for the third quarter of 2017 was $13.9 million, or $(0.37) per share, compared with a net loss of $10.1 million, or $(0.28) per share, for the second quarter of 2017.
• Non-GAAP net loss for the third quarter of 2017 was $4.9 million compared with a non-GAAP net loss of $5.5 million for the second quarter of 2017.
• Adjusted EBITDA for the third quarter of 2017 was $(2.1) million, compared with $(1.8) million for the second quarter of 2017.

Capital Expenditures

• Capital expenditures during the third quarter of 2017 were $1.3 million, compared with $1.1 million for the second quarter of 2017. Capital expenditures in the third quarter were primarily related to investments in the Korea manufacturing facility, Switzerland facility and equipment upgrades and dry battery electrode spending.

Strategic Business & Operational Highlights

• Maxwell issued $46 million aggregate principal of convertible senior notes in a private offering to qualified institutional buyers. The initial $40 millionwas issued on September 25th and the exercise of the full $6 million over-allotment was issued on October 11 (collectively the "Notes"). The Notes bear interest at a fixed rate of 5.5%, paid semi-annually in arrears on March 15th and September 15th, beginning March 15, 2018 and mature on September 15, 2022, unless earlier purchased, redeemed or converted. The conversion rate is approximately 157.51 shares of Maxwell common stock per $1000 principal amount of Notes, equivalent to an initial conversion price of $6.35 per share. The Notes are convertible by noteholders under certain conditions until June 2022, and then convertible after June 2022 without restriction. Maxwell can convert the Notes after September 2020 under certain conditions if Maxwell's stock trades above 130% of the conversion price. Maxwell received approximately $43 million net cash, including debt discount and offering costs. In conjunction with this issuance, the Company's previous agreement with SDIC was terminated.
• Maxwell recently made an offer of settlement with the Securities and Exchange Commission (SEC) to resolve 2011 and 2012 financial restatement matters for a settlement fee of $2.8 million. While the Company's settlement offer remains subject to review by the SEC Commissioners, the proposed settlement would be entered into by the Company without admitting or denying the SEC's findings and would resolve alleged violations of certain anti-fraud and books and records provisions of the federal securities laws and related rules, thereby concluding the investigation. Under the terms of the proposed settlement, Maxwell would pay $2.8 million in a civil penalty and agree not to commit or cause any violations of certain anti-fraud and books and records provisions of the federal securities laws and related rules. The full amount of the settlement fee is anticipated to be payable by Maxwell in full once the definitive settlement agreement has been approved and finalized.

Business Outlook

• Total revenue for the fourth quarter of 2017 is expected to be in the range of $31 million to $33 million.
• Gross margin for the fourth quarter of 2017 is expected to be 26%, plus or minus 150 basis points.
• Non-GAAP gross margin for the fourth quarter of 2017 is expected to be in the range of 26% to 29%.
• GAAP operating expense for the fourth quarter of 2017 is expected to be in the range of $14.4 million to $14.8 million.
• Non-GAAP operating expense for the fourth quarter of 2017 is expected to be in the range of $11.9 million to $12.3 million.

The company has reconciled expected GAAP and non-GAAP gross margin, operating expenses, adjusted EBITDA, net loss and net loss per share at the midpoint of expectations. However, the Company is not able to estimate additional potentially excluded and reconciling amounts due to the substantial uncertainties involved. The effect of these excluded items may be significant.