Maxwell Reports Second Quarter 2018 Results

Maxwell Technologies Inc. has reported financial results for the three months ended June 30, 2018. Total revenues for the second quarter of 2018 were $29.5 million, compared with $28.4 million for the first quarter of 2018 and $37.1 million for the prior year quarter. Net loss for the second quarter of 2018 was $11.3 million, compared with a net loss of $9.2 million for the first quarter of 2018 and a net loss of $10.1 million for the prior year quarter. Non-GAAP net loss for the second quarter of 2018 was $7.8 million, compared with a non-GAAP net loss of $5.8 million for the first quarter of 2018 and $5.5 million for the prior year quarter. The company reported $(4.6) million of adjusted earnings before interest, taxes, depreciation and amortization (Adjusted EBITDA) for the second quarter of 2018, compared with $(4.2) million for the first quarter of 2018 and $(1.8) million for the prior year quarter.

"In Q2 we came in about where we expected. The recent U.S. tariffs on China imports, as well as unclear U.S. tax incentive policy, continue to cause uncertainty for some of our customers and, therefore, affect our high voltage capacitor revenue. We now believe that the tariffs implemented on July 6 will slightly affect our energy storage revenue in Q3. Despite this, we believe that the long-term fundamentals of our business have not changed. End demand in the markets we serve is growing, we continue to make excellent progress with our dry battery electrode technology development and strategic partnership discussions, and our overall strategy is playing out as intended," says Dr. Franz Fink, Maxwell's President and Chief Executive Officer. "We continue to make progress in all our energy storage target markets and are well positioned for long-term growth. Although we are facing short-term headwinds, the core energy storage product line is stable and market indicators bode well for mid- to long-term robust demand for our high voltage capacitor products. In Q3, we anticipate 15% sequential top-line revenue growth at the mid-point of guidance, despite the short-term pressure we are experiencing."

Fink also adds, "We believe that strengthening our balance sheet is a priority given the current geopolitical uncertainty and its immediate impact on our business. In order to preserve the long-term growth and value of the company for our shareholders, we intend to pursue additional financing, which may include equity financing, debt financing, strategic partnerships or other financing arrangements. We anticipate the need for a minimum of $15 million in incremental capital to bridge the company to a recovery to prior revenue levels. We are evaluating our financial alternatives, including the amount we may seek to raise, in order to ensure continuity of investment in future growth programs such as dry battery electrode and energy storage."

Discussion of Financial Results for the Second Quarter

Revenue and Gross Margin

• Total revenue for the second quarter of 2018 was $29.5 million, compared with $28.4 million for the first quarter of 2018, driven by an increase in high voltage capacitor revenue. High voltage capacitor revenue was $6.8 million for the second quarter of 2018, compared with $5.4 million for the first quarter of 2018, due to higher China tenders. Energy storage revenue for the second quarter of 2018 was $22.7 million, compared with $23.0 million for the first quarter of 2018, driven by anticipated seasonal growth in Wind offset by decreases in other markets due primarily to the timing of project-based revenue and last-time buys for certain products related to the Nesscap portfolio consolidation.
• Gross margin for the second quarter of 2018 was 18.4% compared with 20.0% in the first quarter of 2018, driven primarily by higher costs associated with the global manufacturing consolidation and an unfavorable shift in product mix for energy storage product sales, offset partially by an increase in high voltage capacitor product sales, which generally have higher gross margins than the corporate average.
• Non-GAAP gross margin for the second quarter of 2018 was 19.9% compared with 21.5% in the first quarter of 2018 and excludes acquisition related intangibles amortization and stock-based compensation expense.

Operating Expense, Interest Expense, Net Loss & Adjusted EBITDA

• Operating expense for the second quarter of 2018 was $15.4 million, compared with $15.0 million for the first quarter of 2018. The quarter-over-quarter increase was driven primarily by higher project-related engineering expenses.
• Non-GAAP operating expense for the second quarter of 2018 was $12.7 million compared with $12.5 million for the first quarter of 2018 and excludes stock-based compensation, amortization of intangibles and a restructuring related expense.
• Net interest expense was approximately $1.0 million for both the second and first quarters of 2018, which includes coupon interest and non-cash interest from amortization of debt issuance costs and discounts on convertible notes issued in 2017.
• Non-GAAP interest expense was approximately $0.7 million for the second quarter of 2018 compared with $0.6 million for the first quarter of 2018, and excludes the non-cash interest mentioned above.
• Net loss for the second quarter of 2018 was $11.3 million, or $(0.30) per share, compared with a net loss of $9.2 million, or $(0.25) per share, for the first quarter of 2018.
• Non-GAAP net loss for the second quarter of 2018 was $7.8 million compared with a non-GAAP net loss of $5.8 million for the first quarter of 2018.
• Adjusted EBITDA for the second quarter of 2018 was $(4.6) million, compared with $(4.2) million for the first quarter of 2018.

Capital Expenditures

• Capital expenditures during both the second and first quarters of 2018 were $3.9 million. Capital expenditures in the second quarter were primarily related to the Korea manufacturing facility expansion as well as ultracapacitor, lithium-ion capacitor and dry battery electrode equipment.

Liquidity

• Maxwell's cash position was approximately $25 million as of July 31, 2018, including $10.0 million of additional borrowings under our revolving line of credit in July 2018. Maxwell management has determined that unless we raise sufficient capital in the form of debt or equity, there is uncertainty as to whether the company will have sufficient funds to continue as a going concern. Factors that have contributed to a reduction in our cash position include the geopolitical environment relating to trade tariffs, extended collection cycles for receivables from customers in China, and a build-up of transitional inventory with a contract manufacturer as part of our global manufacturing optimization strategy intended to expand gross margins.

Business Highlights

• Maxwell announced the launch of its new Grid Cell Pack and Grid Energy Storage System, two new highly scalable system solutions designed to deliver reliable, fast responding, long lifetime storage in grids and microgrids. The harnessing of intermittent solar and wind energy is expected to more than double over the next five years, causing instability and increased power and frequency deviances in the grid, potentially resulting in service disruption. Maxwell's new system solutions are designed to stabilize voltage and frequency, firm renewable power output, provide bridging and ramping services, and improve generator response. They can be deployed as stand-alone energy storage systems or in combination with other energy storage assets, such as batteries, to improve utility project business cases, including stacked functionality and extension of battery life to lower capital expense, operating expense and lifetime cost.

Third Quarter 2018 Business Outlook

• Total revenue is expected to be in the range of $32 million to $36 million.
• Gross margin is expected to be 18.7%, plus or minus 150 basis points.
• Non-GAAP gross margin is expected to be 20.0%, plus or minus 150 basis points.
• GAAP operating expense is expected to be in the range of $15.4 million to $15.6 million.
• Non-GAAP operating expense is expected to be in the range of $12.8 million to $13.0 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 guidance. 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.