UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

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 our Swiss Subsidiary, Maxwell Technologies, SA. All references to “Nesscap Korea” refer to our Korean Subsidiary, Nesscap Korea Co., Ltd.

Some of the statements contained in this Annual Report on Form 10-K and incorporated herein by reference discuss our plans and strategies for our business or make other forward-looking statements, within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The words “anticipates,” “believes,” “estimates,” “expects,” “predicts,” “potential,” “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:

Many of these factors are beyond our control. Additionally, there can be no assurance that we will not incur new or additional unforeseen costs or risks 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.

We do not have any obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise.

Complementary to our ultracapacitor products, lithium-ion capacitors are energy storage devices, thatwhich due to their unique materials and design, have more than three times the energy density, similar power density, and a similarly long cycle life compared with ultracapacitors, as well as very low self-discharge similar to lithium-ion batteries. Like ultracapacitors, lithium-ion capacitors have a variety of applications, such as short-range vehicles, rail, grid energy storage, and industrial, where higher energy density and/or fast charge are required. With their unique properties, we believe lithium-ion capacitor products can open up new market opportunities for us.

Compared with batteries, which require minutes or hours to fully charge or discharge, ultracapacitors discharge and recharge in as little as fractions of a second. Although ultracapacitors store only about five to ten percent as much electrical energy as a battery of comparable size, they can deliver or absorb electric energy up to 100 times more rapidly than batteries. Because they operate reliably through hundreds of thousands to millions of charge cycles, compared with only hundreds to a few thousand equivalent cycles for batteries, ultracapacitors have significantly higher lifetime energy throughput, which equates to significantly lower cost on a life cycle basis.

With no moving parts and negligible chemical reactions involved in their energy storage mechanism, ultracapacitors provide a simple and highly reliable solution to buffer short-term mismatches between power available and power required. Additionally, ultracapacitors offer the advantage of storing energy in the same form in which it is used, as electricity.

In many applications, power demand varies widely from moment to moment, and peak power demand typically is much greater than the average power requirement. For example, automobiles require 10 times more power to accelerate than to maintain a constant speed, and forklifts require more power to lift a heavy pallet of material than to move from place to place within a warehouse.

We sell our high-voltage capacitor products to large systems integrators, which install and service power plants and electrical utility infrastructure worldwide.

We produce our dry-processed electrode material for our own ultracapacitor products, and for sale to other ultracapacitor manufacturers such as Yeong-Long Technologies Co., Ltd. (“YEC”) at our Peoria facility. In 2013, we completed a major electrode capacity expansion in our Peoria facility. This facility gives us sufficient capacity to support both our current ultracapacitor production requirements and external electrode demand in the near term. As demand increases, additional increments of electrode production capacity can be added within a year through the utilization of established equipment vendors.

Our principal marketing strategy is to identify applications for which our products and technology offer a compelling value proposition, to become a preferred vendor on the basis of service, value and price, and to negotiate supply agreements that enable us to establish long-term relationships with key OEM and integrator customers. To optimize our go-to-market strategy and tailor our products to end userend-user application, we organized our marketing team into two specialized ultracapacitor product line teams. One team supports Automotive and Transportation market segments which require highly rugged and robust products with very stringent automotive qualification requirements and solid change management. The other team supports all Green Infrastructure applications such as grid energy storage, wind power and other more stationary applications that require very cost sensitive products with very high service lifetimes and often very complex systems solutions. Our marketing efforts strive to develop application specificapplication-specific product portfolios and solutions for our Automotive & Transportation and Green Infrastructure market segments. As these design-in sales tend to be technical and engineering-intensive, we organize market-specific teams composed of sales, applications engineering and other technical and operational personnel to work closely with our customers across multiple disciplines to satisfy their requirements for form, fit, function and environmental needs. As time-to-market often is a primary motivation for our customers to use our products, the initial sale and design-in process typically evolvesevolve into ongoing account management to ensure on-time delivery, responsive technical support and value addedvalue-added problem-solving.

We design and conduct discrete marketing programs intended to position and promote each of our product lines. These include trade shows, seminars, advertising, product publicity, distribution of product literature, internet websites and social media. We utilize marketing communications specialists to develop and implement our marketing programs, design and develop marketing materials, negotiate advertising media purchases, write and place product press releases and manage our marketing websites.

We also have an alliance with YEC to assemble and market small cell ultracapacitor products. In addition, we sell electrode material to YEC, both for Maxwell-branded products and for incorporation into YEC’s own ultracapacitor products.

Our ultracapacitor products have two types of competitors: other ultracapacitor suppliers and purveyors of energy storage and power delivery solutions based on batteries or other technologies. Although a number of companies are developing ultracapacitor products and technology, our principal competitors in the supply of ultracapacitor or supercapacitor products are Panasonic, a division of Matsushita Electric Industrial Co., Ltd., NessCap Co., Ltd., LS Mtron, a unit of LS Cable, Supreme Power Solutions Co., Ltd., Vina Technology Company, Ltd., Samxon, a unit of Man Yue Technology Holdings, Ltd., Skeleton Technologies, Yunasko, Ltd., and Ioxus, Inc. The key competitive factors in the ultracapacitor industry are price, performance (energy stored and power delivered per unit volume), durability and reliability, operational lifetime and overall breadth of product offerings. We believe that our ultracapacitor products and electrode material compete favorably with respect to all of these competitive factors. However, pricing expectations and competition in certain markets, such as auto and wind, places significant pressure on our pricing and margins for our products, and we are continually pursing opportunities to reduce the cost of our product in order to improve our competitive position and product margins. Specifically, the hybrid transit vehicle market for ultracapacitors in China, a region which has historically represented a significant portion of our sales, has recently become more competitive with respect to pricing and volume requirements due to changes in government subsidy programs which has caused usappear to lower our pricesfavor battery based energy storage solutions and also place a requirement for local product manufacturing. We performed a very thorough analysis of the current market landscape and decided to remain competitive. In addition, the recent increasevery selectively target opportunities in this market in the number of competitors inshort-term. At the hybrid transit vehicle marketsame time, our partner in China, along with government subsidy programCRRC-SRI, has completed localization requirements regarding localizationfor the manufacturing of our ultracapacitor-based modules, and we are positioned to support customer demand for any opportunities that may drive downmeet our market share.minimum return requirements.

Ultracapacitors also compete with products based on other technologies, including advanced batteries in power quality and peak power applications, as well as with flywheels, thermal storage and batteries in backup energy storage applications. We believe that the durability, long life, performance and value of ultracapacitors gives them a competitive advantage over these alternative choices in many applications. In addition, integration of ultracapacitors with some of these competing products may provide optimized solutions that neither product can provide by itself. For example, tier 1 auto parts supplier Continental AG designed a combined solution incorporating ultracapacitors with a battery for engine starting in a start-stop-idle elimination system for “micro hybrid” autos which was introduced in 2010 and installed in approximately two million cars by French automaker PSA Peugeot Citroen and was more recently introduced by General Motors for several models under the Cadillac brand.

Our current research, development and engineering activities are focused on on:

Our pending and any future patent applications may not survive the challenges of patent prosecution in the jurisdictions in which we file throughout the world; however, our strategy is to focus on countries generating revenue as well as markets which we deem key to our business strategies and objectives. We routinely seek patent protection in the United States and the principal countries of Europe and Asia. At present, we do not rely on licenses from any third parties to produce our products.

Our existing patent portfolios and pending patent applications relate primarily to:

Historically, our high-voltage capacitor products have been based on our know-how and trade secrets rather than on patents. We filed our first patent application covering our high-voltage capacitor technology in 2003, and we continue to pursue patent protection in addition to trade secret protection of certain aspects of our products’ design and production.

While our primary strategy for protecting our proprietary technologies, processes and designs is related to obtaining patents, we also apply for trademark registrations which identify us as the source of the products. Additionally, we promote our technologies, processes and designs in association with these registered trademarks to further distinguish our products from those of our competitors. As of December 31, 2016,2017, we had fiveseven formal trademark registrations within the U.S.

Establishing and protecting proprietary products and technologies is a key element of our corporate strategy. Although we attempt to protect our intellectual property rights through patents, trademarks, copyrights, trade secrets and other measures, there can be no assurance that these steps will be adequate to prevent infringement, misappropriation or otheranother misuse by third parties, or will be adequate under the laws of some foreign countries, which may not protect our intellectual property rights to the same extent as do the laws of the U.S.

We use employee and third-party confidentiality and nondisclosure agreements to protect our trade secrets and unpatented know-how. We require each of our employees to enter into a proprietary rights and nondisclosure agreement in which the employee agrees to maintain the confidentiality of all our proprietary information and, subject to certain exceptions, to assign to us all rights in any proprietary information or technology made or contributed by the employee during his or her employment with us. In addition, we regularly enter into nondisclosure agreements with third parties, such as potential product development partners and customers, to protect any information disclosed in the pursuit of securing possible fruitful business endeavors.

Having substantial international operations also increases the complexity of managing our financial reporting and internal controls and procedures. Additionally, as a result of our extensive international operations and significant revenue generated outside the U.S., the dollar amount of our current and future revenue, expenses and debt may be materially affected by fluctuations in foreign currency exchange rates. Similarly, assets and liabilities of our Swiss subsidiaryand South Korean subsidiaries that are not denominated in itstheir functional currencycurrencies are subject to effects of currency fluctuations, which may affect our reported earnings. Also, changes in the mix of income from our domestic and foreign operations, expiration of tax holidays and changes in tax laws and regulations could increase our tax expense. If we are unable to manage these risks effectively, it could impair our ability to achieve our targets for revenue and profitability.

As a result of our status as a publicly traded company within the U.S., we are subject to the U.S. Foreign Corrupt Practices Act (“FCPA”), which prohibits companies from making improper payments to foreign officials for the purpose of obtaining or retaining business. Additionally, as a result of our international operations, we could also be subject to the anti-bribery laws of other jurisdictions which vary slightly from jurisdiction to jurisdiction and may be different than the FCPA. If we fail to comply with anti-bribery laws and regulations, we could be subject to civil and/or criminal penalties as well as expenses related to any internal investigation.

Sales within a relatively small number of vertical markets and a small number of geographic regions make up a large portion of our revenue. Our ability to grow our sales within this limited number of markets and regions depends on our ability to compete on price, delivery and quality. If a particular market into which we sell experiences a decline, then our customers will decrease their own consumption of our products thereby reducing our revenue. For example, if municipalities are no longer accepting of ultracapacitor systems for hybrid buses, then our direct customers will no longer consume products from us for incorporation into such applications. Additionally, a substantial portion of our revenue stems from sales to customers within a limited number of geographic regions including, notably, China and Germany. If certain factors were to arise including, for example, a catastrophic event or shift in economic health and stability within a particular region, then customers within these regions may reduce their consumption of our products resulting in reduced revenue for us. While we have focused efforts targeting growth of product acceptance in other smaller market segments, there can be no assurance that the revenue associated with these emerging markets will be able to fully or partially offset any down turn in the vertical markets where we currently maintain substantial business.

Our products are currently sold into a limited number of vertical markets, some of which are either directly funded by or partially subsidized with government funding. TheOur dry battery electrode technology and the use of our ultracapacitor technology in certain applications is still relatively immature, and the costs associated with producing the products is perceived to be high as compared with more mature and readily understood solutions. However, many government entities have determined that they view certain prevailing interests, including, for example, reduction of pollution, to outweigh the economic costs associated with incorporating these clean technologies and therefore are willing to allocate government funding to encourage companies to produce goods which reduce pollution and energy consumption. For example, a large portion of our current ultracapacitor business is concentrated in the Chinese hybrid transit vehicle and wind energy markets, which are heavily dependent on government regulation and subsidy. These markets have and may continue to experience volatility when there are changes or delays in government policies and subsidy programs that support our sales into these markets. For example, in 2016,over the Chinese government proposed a new registration requirementpast year, demand for energy storage manufacturers who sell into the automotive and heavy transportation markets. Many subsidies offered by the Chinese government require a manufacturer to be registered under this regimeour ultracapacitors in order to be eligible for the applicable subsidies, thereby injecting some uncertainty as to whether our customers will be able to capture the benefit of this new program while determining which manufacturers will be able to complete the proposed registration requirement. For 2017 and beyond, we may continue to see variability in revenue as a result of uncertainty regarding how these potential changes to the China hybrid bus market significantly decreased due to changes in the government subsidy will impactprogram as well a requirement to localize product manufacturing. Accordingly, in 2017, our sales into these markets.this market were not significant. However, to reduce our dependency on China government influences, we established a localized manufacturing partnership with CRRC-SRI, thus positioning the Company for future revenue opportunities. However, despite our efforts, it is uncertain whether our sales into the China hybrid bus market will resume or recover to historical levels.

Similarly, our high-voltage capacitor products are primarily consumed by markets which are either directly funded by or controlled by the respective government bodies in the jurisdictions where our customers do business. For example, our high-voltage capacitor products are largely used for electric utility infrastructures which are largely controlled by the respective governments supplying power and electricity to its populations. If these government entities elect to change their policies on government subsidies or decide to cancel or reduce certain government funding programs, then our customers could cancel or reduce orders for our products.

If we cannot successfully close this planned acquisition, we may not be able to successfully expand our operations or achieve our revenue and other financial targets. Further, thereThere can be no assurance that we will be able to generate sufficient cash flow from an acquisitionany future acquisitions or realize any other anticipated benefits. In addition, there can be no assurance that the due diligence undertaken in connection with an acquisition will uncover all liabilities relating to the acquired business. Nor can there be any assurance that our profitability will be improved as a result of this acquisition.acquisitions. Any acquisition may involve operating risks, such as:

As disclosed on February 28, 2017,In the past, we have initiated a planned acquisition along with concurrent restructuring and reorganization activities in an effort to improve operational efficiency, and such efforts are expected to continue in the future. These actions are intended to better align our cost structure with near-term revenue, and also to improve engineering and operational efficiencies throughout the organization. Additional reductions-in-force and senior level employee replacementsor reorganizations may be required as we continue to realign our business organization, operations and product lines. Upon the close of the anticipated transaction,

While we have made significant progress in our efforts to integrate manufacturing and other operations with the acquired business of Nesscap, we are continuing these integration efforts, and they may not be successful. For example, we may encounter issues with integrating the prior management style and workplace culture of Nesscap to be more aligned with our view of management and workplace culture. We may encounter issues with the transition of products delivered to our customers from the higher cost solutions, either from our currentlegacy facilities or theNesscap’s facility, of the acquired business, as the case may be, to the integrated cost efficient solutions. Such difficulties, even if managed correctly, could result in delays in the actual integration of our manufacturing operations and therefore a delay in realizing anticipated reductions in expenses. Any restructuring efforts could also disrupt our ability to supply products to customers, detriment relationships with customers and other business partners, divert the attention of management away from other priorities, harm our reputation, expose us to increased risk of legal claims by terminated employees, increase our expenses, increase the workload placed upon remaining employees and cause employees to lose confidence in our future performance and decide to leave. In addition, if we continue to reduce our workforce, it may adversely impact our ability to respond rapidly to new growth opportunities or to remain competitive. Further, employees whose positions were or will be eliminated in connection with these restructuring activities or who otherwise determine to leave may seek employment with our competitors, customers or suppliers. Although each of our employees is required to sign a confidentiality agreement with us at the time of employment, which agreement contains covenants prohibiting, among other things, the disclosure or use of our confidential information and the solicitation of our employees, we cannot guarantee that the confidential nature of our proprietary information will be maintained in the course of such future employment, or that our key continuing employees will not be solicited to terminate their employment with us. We cannot guarantee that any restructuring activities undertaken in the future will be successful, or that we will be able to realize the anticipated cost savings and other anticipated benefits from our restructuring plans.

WeIn 2017, we issued Senior Convertible Notes due in 2022 for net proceeds of $43.0 million. While we believe this funding will be sufficient to support our operations and investment priorities in the near-term, we believe that in the future we may need a substantial amount of additional capital for a number of potential purposes in furtherance of our strategic missions and growth objectives. For example,Namely, the development of dry battery electrode technology requires a substantial amount of capital. Moreover, to meet potential growth in demand for our products, particularly for our ultracapacitor products, we will need significant resources for customized production equipment. Further, additional capital may be required to execute on our strategies related to continued expansion into commercial markets, development of new products and technologies, and acquisitions of new or complementary businesses, product lines or technologies. Cash generated by our operations may not be sufficient to cover these investments.

We are subject to various legal proceedings and claims that have arisen out of the ordinary conduct of our business and are not yet resolved, and additional claims may arise in the future. Results of legal proceedings cannot be predicted with certainty. Regardless of merit, litigation may be both time-consuming and disruptive to our operations and could cause significant expense and diversion of management attention. From time to time, we are involved in major lawsuits concerning intellectual property, torts, contracts, shareholder litigation, administrative and regulatory proceedings and other matters, as well as governmental inquiries and investigations, the outcomes of which may be significant to our results of operations and may limit our ability to engage in our business activities. In recognition of these considerations, we may enter into material settlements to avoid ongoing costs and efforts in defending or pursuing a matter. Should we fail to prevail in certain matters, or should several of these matters be resolved against us in the same reporting period, we may be faced with significant monetary damages or injunctive relief against us that could adversely affect our business, financial condition and operating results. While we have insurance related to our business operations, it may not apply to or fully cover any liabilities we incur as a result of these lawsuits. We record reserves for potential liabilities where we believe the liability to be probable and reasonably estimable. However, our actual costs may be materially different from these estimates.

Additionally, these investigations. Further, these lawsuits, including, notably the investigation by the SEC,legal matters could be both time-consuming and disruptive to our business and our reputation could be harmed as a result of the allegations asserted in public statements and court documents throughout the course of the action. Consequently, our financial condition or operating results could be materially adversely affected.

We derive a significant portion of our revenue and earnings from international operations. Such operations outside the U.S. are subject to special risks and restrictions, including: fluctuations in currency values and foreign currency exchange rates, import and export requirements and trade policy, anti-corruption laws, tax laws (including U.S. and foreign taxes on foreign subsidiaries), foreign exchange controls, and cash repatriation restrictions, tax implications on inter-company arrangements, data privacy requirements, labor laws, anti-competition regulations, and other potentially detrimental domestic and foreign governmental practices or policies affecting U.S. companies doing business abroad. Compliance with these U.S. and foreign laws and regulations increases the costs of doing business in foreign jurisdictions and these costs may continue to increase in the future as a result of changes in such laws and regulations or in their interpretation. Furthermore, we have implemented policies and procedures designed to ensure compliance with these laws and regulations, but there can be no assurance that our employees, contractors, or agents will not violate such laws and regulations or our policies. Any violations of rules and regulations could individually or in the aggregate materially adversely affect our financial condition or operating results. Some of our business partners also have international operations and are subject to the risks described above. Even if we are able to successfully manage the risks of international operations, our business may be adversely affected if our business partners are not able to successfully manage these risks.

We currently own foreign subsidiaries located within Europe and Asia including those involved in the recently announced target acquisition, where the employees and cultures represent certain vast differences from employees and cultures within the United States where our corporate headquarters is situated. While the cultural values and philosophies of the people located in Europe and portions of Asia are generally viewed to be in alignment with that of U.S. persons, there are still some significant differences. For example, the respective European data privacy laws take a harsher position regarding the protection of employee personal data and, consequently, there is less information shared with the U.S. parent corporation regarding employees working for our European subsidiaries. Additionally, the human resources and the systems our foreign entities use can be vastly different; notably, our Swiss, Korean, German, Korean, and Chinese subsidiaries utilize a primary language other than English for communications. Having substantial international operations also increases the complexity of managing our financial reporting and internal controls and procedures. If we are unable to manage these risks effectively, it could negatively impact our operating performance and our reputation.

As a result of our extensive international operations and significant revenue generated outside the U.S., the dollar amount of our current and future revenue, expenses and debt may be materially affected by fluctuations in foreign currency exchange rates. Our primary exposure to movements in foreign currency exchange rates relates to non-U.S. dollar denominated sales in Europe as well as non-U.S. dollar denominated operating expenses incurred throughout the world. Weakening of foreign currencies relative to the U.S. dollar will adversely affect the U.S. dollar value of our foreign currency-denominated sales and earnings, and generally could lead us to raise international pricing, potentially reducing demand for our products. In some circumstances, due to competition or other reasons, we may decide not to raise local prices to the full extent to offset unfavorable exchange rate fluctuations, or at all, which would adversely affect the U.S. dollar value of our foreign currency denominated sales and earnings. Conversely, a strengthening of foreign currencies, while generally beneficial to our foreign currency-denominated sales and earnings, could cause us to realize a reduction in our overall gross margin as the U.S. dollar value of our foreign currency-denominated expenses increases. In an effort to minimize volatility in our statement of operations from transactions denominated in foreign currencies, we employ efforts to maintain our significant operating activities in the local currencies of our each of our operating entities, and minimize activities in non-local currencies for which foreign currency exchange rate changes would impact our operating results, however, we cannot assure that our efforts will be successful.

As a result of the recent inflation in the value of the Swiss Franc against many other currencies, the prices for our high-voltage products, which are denominated primarily in Swiss Francs, became less affordable to customers that trade in these other currencies. This may result in a decrease in sales of our high-voltage products, or we could be required to reduce our prices, and thereby our profit margins, to maintain our market share.

Due to our status as a U.S. issuer, we are subject to the FCPA, which prohibits companies from making, promising or offering improper payments or other things of value to foreign officials for the purpose of obtaining or retaining business or a business advantage. In January 2011, we reached settlements with the SEC and DOJ with respect to charges asserted regarding certain payments made to an independent third-party sales agent in China for our high-voltage capacitor products produced by our Swiss subsidiary, Maxwell SA. As a result, we were required to pay monetary fines totaling $14.4 million, and to implement additional remedial measures to strengthen our compliance program concerning anti-bribery.

Substantially all of our components and products are manufactured in whole or in part by a few third-party manufacturers. Many of these manufacturers are located outside of the U.S. and are all located within a relatively small geographic location. If a catastrophic event occurs within this area, or the social or economic conditions shift within this geography, we could experience business interruptions, delayed delivery of products, or other adverse impacts to our ongoing business. We have also outsourced much of our transportation and logistics management. While these arrangements may lower operating costs, they also reduce our direct control over production and distribution. Such diminished control could have an adverse effect on the quality or quantity of our products as well as our flexibility to respond to changing conditions. In addition, we rely on third-party manufacturers to adhere to the terms and conditions of the agreements in place with each party. For example, although arrangements with such manufacturers may contain provisions for warranty expense reimbursement, we may remain responsible to the customer for warranty service in the event of product defects. Any unanticipated product defect or warranty liability, whether pursuant to arrangements with contract manufacturers or otherwise, could adversely affect our reputation, financial condition and operating results.

Because we currently obtain certain key components including, but not limited to binder, separator, paper, aluminum piece parts, die, printed circuit boards and certain finished goods, including, notably, ultracapacitor finished goods, from single or limited sources, we are subject to significant supply and pricing risks. If the particular supplier is unable to provide the appropriate quantity and/or quality of the raw material or the finished goods at the prices required, then we will be unable to produce and deliver our goods to customers, thereby losing out on revenue generation and, potentially, incurring penalties for failing to timely perform. For example, a substantial portion of our revenue is generated from finished goods supplied to us from a single contract manufacturer. If this contract manufacturer is unable to supply the finished goods to us to meet our customer demand, then we could be forced to decline acceptance of customer orders, which could lead to, among other things, a reputation that we are an unreliable supplier and a decline in future demand for our products. Additionally, if we are not aware of potential constraints upon our contract manufacturer for these finished goods before we enter into binding supply commitments with our own customers, then we could be required to pay damages to the customers. While we have established mitigation strategies to attempt to minimize the likelihood and impact of an inability to supply finished goods due to supplier constraints, we cannot be certain that such mitigation strategies will eliminate an adverse effect to our financial condition.

Additionally, we use some custom components that are not common to the rest of the industries served by our suppliers and which are often available from only one source. Also, when a component or product uses new technologies, initial capacity constraints may exist until the particular supplier’s yield has matured or manufacturing capacity has increased. Continued availability of these components at acceptable prices, or at all, may be affected if those suppliers decide to concentrate on the production of common components instead of components customized to meet our unique requirements. If the supply of a key single-sourced component for a new or existing product were delayed or constrained, if such components were available only at significantly higher prices, or if a key manufacturing vendor delayed shipments of completed products to us, then our financial condition and operating results could be adversely affected.

In the case ofOur dry battery electrode technology is new, and our ultracapacitor products we sellalso represent a relatively new technology, including advancements to our current technology,in each case which could contain defects in design or manufacture, or could be implemented incorrectly in the end use application. As a direct consequence of the introduction of new features for our technology as well as new implementations by our customer base, we are still learning about the potential quality issues that could arise during operation in certain applications. Consequently, we are not always capable of anticipating the quality or implementation problems which the products may experience in the field. Products sold into high performance environments such as heavy transportation, automotive markets or grid infrastructure installations could experience additional operating characteristics that could unexpectedly interfere with the intended operation of our products. For example, if the end use application is in an environment which subjects the products to levels of vibration above our internal design and qualification levels, then the products could fail to achieve the customer’s performance requirements. With this sometimes limited understanding of the application and operation of our products in varying end user implementations, our customers may perceive our products as exhibiting quality problems, which could harm our reputation. We strive to respond quickly in addressing the concerns of our customers by modifying our products and assisting our customers in designing new implementation or installation strategies to achieve higher performance characteristics or to satisfy new or modified applications of our products. As such, the release time of next generation products or application solutions can be relatively quick, and we may assume additional risks associated with expediting the release of new or modified products.

We are also building our infrastructure to adequately and efficiently handle any potential recall and the reverse logistics involved in returning our products to our facilities in the event that any defects are found. There can be no assurance that we will be able to detect and fix all defects in the products we sell or will be able to efficiently handle all issues related to product returns or implementation concerns. As we continue to pursue additional vertical markets, we are gaining a better understanding of certain business practices of these markets with respect to potential product recalls. For example, certain portions of the transportation industry are sensitive to product recall issues as they relate to both government regulations as well as customer satisfaction and safety. Failure to successfully prevent a defect in our products which prompts a recall or a failure to successfully manage expenses associated with any recalls could cause lost revenue, harm to our reputation, and significant warranty and other expenses, and result in an adverse impact on our financial condition and operating results.

Intellectual property (“IP”) rights are crucial to maintaining our competitive advantage and growing our business. We endeavor to obtain and protect our intellectual propertyIP rights which we feel will allow us to retain or advance our competitive advantage in the marketplace. However, there can be no assurance that we will be able to adequately identify and protect the portions of IP which are strategic to our business.business, including, without limitation, IP related to dry battery electrode technology which remains under development and a key part of our strategy. Generally, when strategic IP rights are identified, we will seek formal protection in jurisdictions in which our products are produced or used, jurisdictions in which competitors are producing or importing their products, and jurisdictions into which our products are imported. Different nations may provide limited rights and inconsistent duration of protection for our products. Additionally, we may be unable to obtain protection for or defend our IP in key jurisdictions. For example, the patent prosecution and enforcement system within China is less mature than the systems in other jurisdictions and therefore we may be more limited in our ability to enforce our rights. This disadvantage would likely be compounded by the challenge of any enforcement attempts by us as a foreign entity seeking protection against a Chinese company infringing on our IP in China.

Even if protection is obtained, competitors or others in the chain of commerce may raise legal challenges to our rights or illegally infringe our rights, including through means that may be difficult to prevent or detect. For example, a certain portion of our IP portfolio is related to unique process steps performed during the manufacture of our products which are not readily recognizable in the physical embodiment of the final product. It may be difficult to identify and prove that a competitor is infringing on our rights to such process steps. Further, we are required to divulge certain of our IP to our business partners to enable them to provide quality products or raw materials to us or enable the exploitation and success of strategic partnerships. To the extent that such disclosure occurs in China or other jurisdictions in which the ability to protect IP is more limited, existing or new competitors in this region could begin to use our IP in the development of their own products, which could reduce our competitive edge. Even in jurisdictions in which IP is highly valued, and therefore protected, the financial burden of asserting or defending our IP rights could prove to be cost prohibitive for us thereby putting us in a position in which we must sacrifice our competitive edge.

In addition, because of the rapid pace of technology advancements, and the confidentiality of patent applications in some jurisdictions, competitors may be issued patents stemming from pending patent applications that were unknown to us prior to issuance of the patents. This could reduce the value of our commercial or pipeline products or, to the extent they cover key technologies on which we have unknowingly relied, require that we seek to obtain a license or cease using the technology, no matter how valuable to our business. We may not be able to obtain such a license on acceptable terms. The extent to which we succeed or fail in our efforts to protect our intellectual propertyIP will affect our financial condition and results of operations.

Our reputation is important to our growth and success. As a leader in an emerging technology industry, we recognize the value in identifying, selecting and managing key strategic alliances. We are mainly focusing our business on the specific products we deliver and pursuit of strategic alliances with other companies could allow us to provide customers with integrated or other new products, services, or technology advancements derived from the alliances. To be successful, we must first be able to define and identify opportunities which align with our growth plan. Additionally, we cannot be certain that our alliance partners will provide us with the support we anticipate, that such alliance or other relationships will be successful in advancing technology, or that any alliances or other relationships will be successful in manufacturing and marketing new or improved products. Our success is also highly dependent upon our ability to manage the respective parameters of all strategic alliances, promote the benefits to us, and to not prohibit or discourage other opportunities which may be beneficial to us in the future. Also, certain provisions of alliance agreements may include restrictions that limit our ability to independently pursue or exploit the developments under such strategic alliances. Currently, we have alliances with several partners both in the U.S. and throughout the world. We anticipate that future alliances may also be with foreign partners or entities. As a result, such alliances may be subject to the political climate and economies of the foreign countries where such partners reside and operate. If the strategic alliances we pursue are not successful, our business and prospects could be negatively affected.

Weather conditions, natural disasters or other catastrophic events could cause significant disruptions in operations, including, specifically, disruptions at our manufacturing facilities or those of our major suppliers or customers. In turn, the quality, cost and volumes of the products we produce and sell could be unexpectedly, negatively affected, which will impact our sales and profitability. Natural disasters or industrial accidents could also damage our manufacturing facilities or infrastructure, or those of our major suppliers or major customers, which could affect our costs, production volumes and demand for our products. However, we have implemented certain mitigation strategies to ensure that certain components and processes involved in the manufacture of our component materials and finished goods are somehow temporarily available so as to reduce the impact of such a catastrophic event.

War, terrorism, geopolitical uncertainties, public health issues, and other business interruptions have caused and could cause damage or disruption to international commerce and the global economy, and thus could have a strong negative effect on us, our suppliers, logistics providers, manufacturing partners and customers. Our business operations could be subject to interruption by power shortages, terrorist attacks and other hostile acts, labor disputes, public health issues, and other events beyond our control. Such events could decrease demand for our products, make it difficult or impossible for us to produce and deliver products to our customers, or to receive components from our suppliers, thereby creating delays and inefficiencies in our supply chain. Should major public health issues, including pandemics, arise, we could be negatively affected by more stringent employee travel restrictions, additional limitations in freight services, governmental actions limiting the movement of products between regions, and disruptions in the operations of our manufacturing partners and component suppliers. The majority of our research and development activities, our corporate headquarters, information technology systems, and other critical business operations, including certain component suppliers and manufacturing partners, are in locations that could be affected by natural disasters. In the event of a natural disaster, losses could be incurred and significant recovery time could be required to resume operations and our financial condition and operating results could be materially adversely affected. While we may purchase insurance policies to cover the direct economic impact experienced following a natural disaster occurring at one of our own facilities, there can be no assurance that such insurance policies will cover the full extent of our financial loss nor will they cover losses which are not economic in nature such as, for example, our business and reputation as a reliable supplier.

Information technology system failures, network disruptions, and breaches of data security and sophisticated and targeted computer crime and cyber-attacks could disrupt our operations by impeding the manufacture or shipment of products, the processing of transactions or reporting of financial results, or by causing an unintentional disclosure of confidential information. In the ordinary course of our business, we collect and store sensitive data in our data centers and on our networks, including intellectual property, proprietary business information, and personal information of our business partners and employees. Despite our security measures, our information technology and infrastructure may be vulnerable to attacks by hackers or breached due to employee error, malfeasance or other disruptions. Any such breach could compromise our networks and the information stored there could be accessed, publicly disclosed, lost or stolen. In the ordinary course of our business, we collect and store sensitive data in our data centers and on our networks, including IP, proprietary business information, and personal information of our business partners and employees. Despite our efforts to protect sensitive, confidential or personal data or information, our facilities and systems and those of our third-party service providers may be vulnerable to security breaches, theft, misplaced or lost data, programming and/or human errors that could potentially lead to the compromising of sensitive, confidential or personal data or information, improper use of our systems, software solutions or networks, unauthorized access, use, disclosure, modification or destruction of information, defective products, production downtimes and operational disruptions, which in turn could adversely affect our reputation, competitiveness and results of operations. While management has taken steps to address these concerns by employee training, implementing certain data and system redundancy, hardening and fail-over along with other network security, comprehensive monitoring of our networks and systems, maintenance of backup and protective systems and other internal control measures, there can be no assurance that the measures we have implemented to date would be sufficient in the event of a system failure, loss of data or security breach. As a result, in the event of such a failure, loss of data or security breach, our financial condition and operating results could be adversely affected.

In the ordinary course of our business, we collect and store sensitive data, including intellectual property,IP, our proprietary business information and that of our customers, suppliers and business partners, and personally identifiable information of our customers and employees, in our data centers and on our networks. The secure processing, maintenance and transmission of this information is critical to our operations and business strategy. Despite our security measures, our information technology and infrastructure may be vulnerable to attacks by hackers or breached due to employee error, malfeasance or other disruptions. Any such breach could compromise our networks and the information stored there could be accessed, publicly disclosed, lost or stolen. Any such access, disclosure or other loss of information could result in legal claims or proceedings, liability under laws that protect the privacy of personal information, regulatory penalties, disruption of our operations and the services we provide to customers, and damage to our reputation, which could adversely affect our financial results and competitive position.

Customers’ decisions are affected by market, economic and government regulation conditions which can be difficult to accurately gauge in advance. In addition, many of the markets for our ultracapacitor products are within emerging industries as well as within project-oriented business models and, as such, it can be difficult to predict our future customer demand. Failure to provide customers and channel partners with demanded quantities of our products could reduce our sales. Conversely, increased capacity which exceeds actual customer demands for our products increases our costs and, consequently, reduces our profit margins on the products delivered. Although we have implemented policies and procedures for refining our forecasting methods, including a more sophisticated mechanism for gauging the sales pipeline to better project timing of new customer demand, there can be no assurance that these policies and procedures will provide accurate intelligence to align our production plans with customer demands. As a result of all of these factors, we could fail to meet revenue or profit margin targets.

We depend upon our reputation to compete for customers, suppliers, investors, strategic partners and personnel. Unfavorable publicity can damage our reputation and negatively impact our economic performance. Our restatement of our prior periods financial statements contained within our Annual Report on Form 10-K for the fiscal year ended December 31, 2012, and the underlying business causes of such restatement, could damage our reputation. For example, in June 2015 and June 2016, wethe Company received subpoenas from the SEC requesting certain documents related to, among other things, the facts and circumstances surrounding the restated financial statements. We haveThe Company has provided the requireddocuments and information to the SEC in response to these subpoenas and continue to cooperatethe subpoenas. We entered into a tolling agreement with the SEC effective for the period beginning on September 12, 2016, and currently running through March 2, 2018. We are cooperating with the courseinvestigation and recently made an offer of their ongoing investigation. At this stage,settlement to resolve the matter, which is subject to approval by the SEC Commissioners. The proposed settlement would be entered into by the Company without admitting or denying the SEC’s findings and would resolve alleged violations of certain anti-fraud and books and records provisions of the federal securities laws and related rules. Under the terms of the proposed settlement, we 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. However, we cannot predictensure that the ultimate outcome of this investigation will align with this proposed settlement, and consequently, there can also be no assurance that unfavorable publicity arising from the forgoingthis matter will not have a material adverse effect on our business.

As of December 31, 2016,2017, we had U.S. federal tax and state tax net operating loss carryforwards of approximately $186.8$219.0 million and $48.4$37.7 million, respectively. Realization of any benefit from our tax net operating losses is dependent on both our ability to generate future taxable income before our net operating loss carryforwards expire, as well as the absence of certain “ownership changes” to our common stock. An “ownership change,” as defined in the applicable federal income tax rules, would place significant limitations, on an annual basis, on the use of such net operating losses to offset any future taxable income we may generate. The issuance of shares of our common stock, including the issuance of shares of common stock upon future conversion or exercise of outstanding stock options, could cause such an “ownership change.” Such limitations triggered by an “ownership change,” in conjunction with the net operating loss expiration provisions, could effectively eliminate our ability to use a substantial portion of our net operating loss carryforwards to offset any future taxable income.

Our stock has at times experienced substantial price volatility due to a number of factors, including but not limited to the various factors set forth in this “Risk Factors” section, as well as variations between our actual and anticipated financial results, announcements by us or our competitors, and uncertainty about future global economic conditions. The stock market as a whole also has experienced extreme price and volume fluctuations that have affected the market price of many technology companies in ways that may have been unrelated to these companies’ operating performance. Furthermore, we believe our stock price may reflect certain future growth and profitability expectations. If we fail to meet these expectations, our stock price may significantly decline which could have an adverse impact on investor confidence and employee retention.

Some provisions in our certificate of incorporation and bylaws could make it more difficult for a third-party to acquire control of us, even if such change in control would be beneficial to our stockholders. We have a classified board of directors, which means that our directors are divided into three classes that are elected to three-year terms on a staggered basis. Since the three-year terms of each class overlap the terms of the other classes of directors, the entire board of directors cannot be replaced in any one year. Furthermore, our certificate of incorporation contains a “fair price provision” which may require a potential acquirer to obtain the consent of our board to any business combination involving us. Our certificate of incorporation and bylaws also contain provisions barring stockholder action by written consent unless first approved by a majority of the disinterested directors, and the calling by stockholders of a special meeting. Amendment of such provisions requires a super majority vote by the stockholders, except with the consent of the board of directors and a majority of the disinterested directors in certain circumstances. The provisions of our certificate of incorporation and bylaws could delay, deter or prevent a merger, tender offer, or other business combination or change in control involving us that stockholders might consider to be in their best interests. This includes offers or attempted takeovers that could result in our stockholders receiving a premium over the market price for their shares of our common stock.

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:

In order to optimize our energy storage portfolio, over the last year, we have made steady progress leveraging our core competencies by diversifying our ultracapacitor products and solidifying our product roadmap with innovative new complete system solution offerings as we transition to higher growth market opportunities in automotive, manufacturergrid energy storage, rail and a tier 1 automotive supplier.

We are continuing to focus on introducing new products, winning new customers, developing new product applications, adjusting production capacity, reducing costs to align with near-term revenue forecasts, and improving production and other operational processes. Some of these efforts are described below:

Results of Operations

The following table presents certain statement of operations data expressed as a percentage of revenue for the periods indicated:

Net loss reported for 2017 was $43.1 million, or $1.22 per share, compared with a net loss in 2016 wasof $23.7 million, or $0.74 per share, compared withand a net loss in 2015 of $22.3 million, or $0.73 per share, and adiluted share.

The increase in net loss of $19.4 million in 20142017 compared with 2016 was primarily related to the following:

The increase in net loss of $1.4 million in 2016 compared with 2015 was driven by a decline in revenue of 28% and a decline in gross profit of 35%, which were primarily related to changes in China’s government subsidy programs.programs for hybrid transit vehicles. The effect of these declines was largely offset by a $6.7 million gain from the sale of our microelectronics product line and fully realizedas well as savings in 2016 from our restructuring and cost reduction efforts. Despite lower operating expenses in absolute dollars resulting from our restructuring and cost reduction efforts, operating expenses in 2016 increased to 48% of revenue, compared with 41% of revenue in the prior year, primarily attributable to the significant decline in revenue in 2016.

The following table presents revenue, cost of revenue and gross profit for the years ended December 31, 2017, 2016 2015 and 20142015 (in thousands, except percentages):

During 2016, revenue decreased 28% to $121.2 million, compared with $167.4 million in the prior year. This decrease in revenue was primarily related to lower revenue for our ultracapacitor product line which decreased by $43.0 million, or 38%, to $71.5 million from $114.5 million.

Revenue for our high-voltage products increased by $3.5 million to $45.2 million in 2016, compared with $41.7 million for the prior year. This increase was primarily driven by increased infrastructure renewal investment by the Canadian government. Revenue for our microelectronics products decreased by $6.6 million to $4.6 million for the 2016 compared with $11.1 million for the 2015, due to the sale of this product line in April 2016.

A substantial amount of our revenue is generated through our Swiss subsidiary which has a functional currency of the Swiss Franc. As such, reported revenue can be materially impacted by changes in exchange rates between the Swiss Franc and the U.S. Dollar, our reporting currency. Due to the minimal change in exchange rates between the U.S. Dollar and Swiss Franc during 2017 compared with 2016, revenue was not significantly impacted. Due to the strengthening of the U.S. Dollar against the Swiss Franc during 2016 compared with 2015, revenue was negatively impacted by $1.1 million. Due to the strengthening of the U.S. Dollar against the Swiss Franc during 2015 compared with 2014, revenue was negatively impacted by $2.0 million.

During 2016, gross profit decreased $18.0 million, or 35%, to $33.0 million compared with $51.0 million in the prior year. This decrease was associated with lower revenue, primarily due to lower sales volume, an increase in product costs due to higher unabsorbed fixed costs associated with the lower sales volume, as well as a less significant impact from a reduction in pricing for our ultracapacitor products. As a percentage of revenue, gross margin decreased to 27% in 2016 compared with 30% in the prior year. ThisThese decrease waswere associated with lower revenue, primarily associated withdue to lower sales volume, a change in product mix which no longer includes sales of higher margin microelectronics products, an increase in product costs due to higher unabsorbed fixed costs associated with the lower sales volume,production volumes, as well as a less significant impact from a reduction in pricing for our ultracapacitor products.

The following table presents selling, general and administrative expense for the years ended December 31, 2017, 2016 2015 and 20142015 (in thousands, except percentages):

Selling, general and administrative expenses for 2016 decreased by $4.5 million, or 11%, compared with 2015. This decrease primarily related to a decrease of $1.7 million in labor costs related to headcount reductions in connection with our restructuring and sale of the microelectronics product line, a decrease of $1.7 million related to lower legal costs associated with the ongoing SEC and FCPA investigations, a decrease of $1.3 million related to the release of a foreign payroll tax liability due to the lapse of a statute of limitations, as well as various expense savings related to our restructuring and cost reduction efforts and sale of the microelectronics product line. These decreases were partially offset by an increase of $1.2 million in stock compensation expense related to our 2016 management bonus plan, whereas our bonus plan was suspended for 2015. Selling, general and administrative expenses increased to 30% of revenue, up from 24% in 2015, as revenue proportionately decreased more than expenses between the periods.

Research and development expenses for 2016 decreased by $3.8 million, or 15%, compared with 2015. The decrease was primarily associated with a decrease of $1.1 million in labor and headcount-related costs primarily related to our restructuring and cost reduction efforts and sale of the microelectronics product line, an increase of $0.9 million in third-party funding under cost-sharing arrangements, as well as other decreases related to our restructuring and cost reduction efforts and sale of the microelectronics product line, such as a decrease of $0.7 million in outsourced research and development services, a decrease of $0.5 million in facilities costs and a decrease of $0.5 million in tool and supply expenses. Research and development expenses increased to 17% of revenue, up from 15% in 2015, as revenue proportionately decreased more than expenses between the periods.

Restructuring and Exit Costs

Impairment of Assets

Provision for Income Taxes

The effective tax rate differs from the statutory U.S. federal income tax rate of 34% primarily due to foreign income taxes and the valuation allowance against our domestic deferred tax assets.

We recorded an income tax provision of $3.7 million, $4.1 million $4.6 million and $4.3$4.6 million for the years ended December 31, 2017, 2016 2015 and 2014,2015, respectively. This provision is primarily related to taxes on income generated by our Swiss subsidiary. As of December 31, 2016,2017, we have recorded a $4.9 million deferred tax liability for Swiss withholding taxes associated with $97.6 million of undistributed earnings of our Swiss subsidiary that are no longer considered indefinitely reinvested. In the event that we repatriate these funds, this withholding tax would become payable to the Swiss government. During the years ended December 31, 2017, 2016 2015 and 2014,2015, income tax expense associated with undistributed earnings of our Swiss subsidiary that are no longer considered indefinitely reinvested was $0, $1.2 million and $2.1 million, respectively.

On December 22, 2017, the President of the United States signed into law the Tax Cuts and $1.6Jobs Act. The tax 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.

Due to the tax legislation, we have remeasured our U.S. deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, which is generally 21%. We recorded a provisional decrease related to our deferred tax assets and liabilities of $34.7 million respectively.with a corresponding adjustment to our valuation allowance for the year ended December 31, 2017. However, we are still analyzing certain aspects of the Act and refining our calculations, which could potentially affect the measurement of these balances or potentially give rise to new deferred tax amounts. As our deferred tax asset is offset by a full valuation allowance, this change in rates had no impact on our financial position or results of operations.

At December 31, 2016,2017, we have a cumulative valuation allowance recorded offsetting our worldwide net deferred tax assets of $78.4$61.4 million, of which the significant majority represents the valuation allowance on our U.S. net deferred tax assets. We have established a valuation allowance against our 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.

The following table summarizes our cash flows from operating, investing and financing activities for each of the past three fiscal years (in thousands):

In 2016, cash used in operating activities of $14.4 million related primarily to a net loss of $23.7 million, which included non-cash charges of $9.8 million, a decrease in accounts payable and accrued liabilities of $14.9 million related to lower procurement activity in 2016, and an increase in inventory of $5.0 million, net of the sale of the microelectronics product line inventories, related to timing differences in matching production to demand. These decreases in cash were partially offset by a decrease in accounts receivable of $20.1 million primarily related to a lower volume of sales near the end of 2016 compared with the end of 2015.

In 2015, cash provided by operating activities of $9.4 million related primarily to an increase in accounts payable and accrued liabilities of $5.0 million primarily due to timing of payments, and a decrease in inventory of $5.3 million primarily associated with efforts to reduce our inventory levels. These increases in cash were partially offset by a net loss of $22.3 million, which included non-cash charges of $20.6 million.

Cash used in operating activities was $15.0 million for 2017 compared with cash used in operating activities of $14.4 million for 2016. Cash flows from operating activities were impacted by working capital changes which had a positive effect on cash flow of $5.4 million for the year ended December 31, 2017, while working capital was relatively unchanged in in 2016. This positive effect of changes in working capital was partially offset by lower gross profit and higher operating expenses in 2017.

Cash used in operating activities was $14.4 million for 2016 compared with cash provided by operating activities of $9.4 million for 2015. Cash flows from operating activities were negatively impacted by lower revenue and gross profit in 2016. Additionally, during 2016, working capital was relatively unchanged, net of the impact of the sale of the microelectronics product line, compared with positive cash flows of $11.2 million in 2015 mainly from changes in working capital.

Cash provided by operatingused in investing activities was $9.4$4.4 million for 20152017 compared with cash used in operating activities of $6.2 million for 2014. Cash flows from operating activities were positively impacted by working capital changes of $11.2 million in 2015 compared with a negative impact from working capital changes in 2014 of $15.1 million. This increase in cash flows was partially offset by lower revenue and gross profit in 2015 compared with 2014.

Cash provided by financing activities was $43.3 million for 2017, compared with $0.8 million forprovided by financing activities in 2016 compared withand $5.4 million used in financing activities in 2015 and $9.6 million2015. Cash provided by financing activities for 2017 primarily resulted from net proceeds of $43.0 million from our issuance of convertible debt in 2014.2017, as well as proceeds from purchases under our employee stock purchase plan of $0.3 million. Cash provided by financing activities for 2016 resulted from proceeds from purchases under our employee stock purchase plan of $0.8 million. Cash used in financing activities in 2015 primarily resulted from net payments on long term and short term borrowings of $15.8 million, offset by net proceeds from our at-the-market equity offering of $9.6 million and proceeds from exercises of employee stock options and purchases under our employee stock purchase plan of $0.9 million.

As of December 31, 2016,2017, we had approximately $25.4$50.1 million in cash and cash equivalents, and working capital of $53.1$68.4 million. In July 2015, we entered into a loan agreement with East West Bank (“EWB”), whereby EWB made available to us a secured credit facility in the form of a Revolving Line of Credit. The Revolving Line of Credit is available up to a maximum of the lesser of: (a) $25.0 million; or (b) a certain percentage of domestic and foreign trade receivables. As of December 31, 2016,2017, the amount available under the Revolving Line of Credit was $11.4$13.3 million. No amounts have been borrowed under this Revolving Line of Credit as of December 31, 2016.2017. This facility is scheduled to expire in July 2018.

In addition, in June 2014, we filed a shelf registration statement on Form S-3 with the SEC to, from time to time, sell up to $125 million of our common stock, warrants, debt securities or units. On June 30, 2014, the registration statement was declared effective by the SEC, which allowsallowed us to access the capital markets for the three-year period following this effective date. On April 23, 2015, we entered into an At-the-Market Equity Offering Sales Agreement (“Sales Agreement”) with Cowen and Company, LLC (“Cowen”) pursuant to which we could sell, at our option, up to an aggregate of $10.0 million in shares of common stock through Cowen, as sales agent. Under the Sales Agreement, we agreed to pay Cowen a commission equal to 3.0% of the gross proceeds from the sale of shares of our common stock. On June 11, 2015, we completed the sale of approximately $10.0 million of our common stock and terminated the offering. Approximately 1.83 million shares were sold in the offering at an average share price of $5.46. We received net proceeds of $9.6 million after commissions and offering costs of $0.4 million.

In November 2017, we filed a new shelf registration statement on Form S-3 with the SEC to, from time to time, sell up to $125 million of our common stock, warrants, debt securities or units. On November 16, 2017, the registration statement was declared effective by the SEC, which allows us to access the capital markets for the three-year period following this effective date.

In April 2016, we completed the sale of substantially all of the assets and liabilities of our microelectronics product line and received cash proceeds of $20.5 million, net of a one yearone-year, $1.5 million holdback on the purchase price.price which was received in 2017.

Capital expenditures are expected to be approximately $10.0in the range of $15.0 million to $25.0 million in 2017.2018. Approximately 45%50% of our planned capital spending is focused onrelated to process development and infrastructure associated with our dry battery electrode technology, 30% is related to improving manufacturing processes and factory expansion for existing products, 15% is related to other product research and development investments, and 35% is focused on improving manufacturing processes. Thethe remaining planned capital spending willis to support information technology infrastructure and improvements to our facilities.other facilities improvements.

As of December 31, 2016,2017, the amount of cash and short-term investments held by foreign subsidiaries was $18.8$9.1 million. If these funds are needed for our operations in the U.S. in the future, we may be required to pay taxes to repatriate these funds at a rate of approximately 5%. We have accrued the tax expense associated with the potential future repatriation of these funds.

In September and October 2017, subjectwe issued $46.0 million of 5.50% convertible senior unsecured notes due 2022 (the “Notes”). We received net proceeds, after deducting underwriting discounts and fees and expenses payable by the Company, of approximately $43.0 million. The Convertible Senior Notes bear interest at a rate of 5.50% per year, payable semiannually in arrears on March 15 and September 15 of each year, commencing on March 15, 2018. The Convertible Senior Notes mature on September 25, 2022, unless earlier purchased by the Company, redeemed, or converted. We believe that we have sufficient capital resources and cash flows from operations to approval of the shareholders of Nesscap, regulatory approvals and other customary closing conditions.support scheduled interest payments on this debt.

Maxwell SA has various financing agreements for vehicles. These agreements are for up to an original three-year repayment period with interest rates ranging from 0.9% to 3.9%1.9%. At December 31, 2017 and 2016, $115,000 and 2015, $83,000, and $91,000, respectively, was outstanding under these agreements.

We consider an accounting estimate to be critical if: 1) the accounting estimate requires us to make assumptions about matters that were uncertain at the time the accounting estimate was made and 2) changes in the estimate are reasonably likely to occur from period to period, or use of different estimates that we reasonably could have used in the current period, would have a material impact on our financial condition or results of operations.

We believe the following are either (i) critical accounting policies that require us to make significant estimates or assumptions in the preparation of our consolidated financial statements or (ii) other key accounting policies that may require us to make difficult or subjective judgments.

Revenue Recognition

A portion of our sales revenue is derived from sales to distributors. Distributor revenue is recognized when all of the criteria for revenue recognition are met, which is generally the time of shipment to the distributor; all returns and credits are typically estimable and not significant. Certain distributor agreements of Nesscap Korea provide for significant rights of return and price adjustment; revenue related to these distributors is deferred until the period in which the distributor sells through the inventory to the end customer.

Pension and Defined Benefit Plan Liability

Goodwill Impairment

Stock-Based Compensation

The fair value of restricted stock awards (“RSAs”) and restricted stock unit awards (“RSUs”) is based on the closing market price of our common stock on the date of grant. Compensation expense equal to the fair value of each RSA or RSU is recognized ratably over the requisite service period. For RSUs with vesting contingent on the achievement of Company performance conditions, we use the requisite service period that is most likely to occur. The requisite service period is estimated based on the performance period as well as any time-based employee service requirements. If it is unlikely that a performance condition will be achieved, no compensation expense is recognized unless it is later determined that achievement of the performance condition is likely. Expense may be adjusted for changes in the expected outcomes of the related performance conditions, with the impact of such changes recognized as a cumulative adjustment in the consolidated statement of operations in the period in which the expectation changes.

In 20162017 and 2014,2016, we issued market-condition RSUs to certain members of executive management. Since the vesting of the market-condition RSUs is dependent on stock price performance, the fair value of these awards was estimated using a Monte-Carlo valuation model. The determination of the fair value of market-condition RSUs utilizing a Monte-Carlo valuation model was affected by our stock price and a number of assumptions, including expected volatility, expected life, risk-free interest rate and expected dividends.

For RSUs with vesting contingent on the achievement of Company performance conditions, the amount of compensation expense is estimated based on the expected achievement of the performance condition. This requires us to make estimates of the likelihood of the achievement of Company performance conditions, which is highly judgmental. We base our judgments as to the expected achievement of Company performance conditions based on the financial projections of the Company that are used by management for business purposes, which represent our best estimate of expected Company performance. If it is unlikely that a performance condition will be achieved, no compensation expense is recognized unless it is later determined that achievement of the performance condition is likely. Further, the requisite service period is estimated based on the performance period as well as any time-based employee service requirements.

We evaluate the assumptions used to value stock-based awards on a quarterly basis. If factors change and we employ different assumptions, stock-based compensation expense may differ significantly from what we have recorded in the past. If there are any modifications or cancellations of stock-based awards, we may be required to accelerate, increase or decrease any remaining, unrecognized stock-based compensation expense. Compensation expense may be significantly impacted in the future to the extent our estimates differ from actual results.

Income Taxes

We record U.S. income taxes on the undistributed earnings of foreign subsidiaries unless the subsidiaries’ earnings are considered indefinitely reinvested outside of the U.S. As of December 31, 2016,2017, we have recorded a $4.9 million deferred tax liability for Swiss withholding taxes associated with $97.6 million of undistributed earnings of our Swiss subsidiary that are no longer considered indefinitely reinvested. In the event that we repatriate these funds, this withholding tax would become payable to the Swiss government. As of December 31, 2016,2017, there were no$11.8 million of undistributed earnings considered indefinitely reinvested.

Commitments and Contingencies

We re-evaluate these assessments each quarter or as new and significant information becomes available to determine whether a liability should be recognized or if any existing liability should be adjusted. The actual cost of ultimately resolving a claim or proceeding may be substantially different from the amount of the recognized liability. In addition, because it is not permissible to recognize a liability until the loss is both probable and estimable, in some cases there may be insufficient time to recognize a liability prior to the actual incurrence of the loss (upon verdict and judgment at trial, for example, or in the case of a quickly negotiated settlement).

We believe that inflation has not had a material impact on our results of operations for any of our fiscal years in the three-year period ended December 31, 2016.2017. However, there can be no assurance that future inflation would not have an adverse impact on our operating results and financial condition.

None.

We face exposure to financial market risks, including adverse movements in foreign currency exchange rates and changes in interest rates. These exposures may change over time and could have a material adverse impact on our financial results. We have not entered into or invested in any instruments that are subject to market risk, except as follows:

Our primary foreign currency exposure is related to our subsidiarysubsidiaries in Switzerland. Maxwell SA hasSwitzerland and Korea. These subsidiaries have Euro, U.S. dollar and local currency (Swiss Franc) revenue and operating expenses, as well as local currency loans. Changes in these currency exchange rates impact the reported amount (U.S. dollar) of revenue, expenses and debt.

As of December 31, 2016,2017, the impact of a theoretical detrimental change in foreign currency exchange rates of 10% would result in a hypothetical loss of $0.1$0.2 million. ForAs local currency debt carried by our Swiss subsidiary the impact of a hypothetical 10% detrimental changeis minor, changes in foreign currency exchange rates would result in a hypothetical loss of $8,000, which would be recorded in accumulated other comprehensive income on the consolidated balance sheet.not significantly impact our financial results.

At December 31, 2016,2017, we had no outstanding balance under our Revolving Line of Credit. We have various financing agreements for vehicles. These agreements are for up to a five-year repayment period with interest rates ranging from 0.9% to 1.9%. At December 31, 2017, approximately $83,000 in debt, $43,000$115,000 was outstanding under these financing agreements, $82,000 of which is classified as long-term debt. Debt outstanding is related to vehicle financing agreements and due to the minimal amounts outstanding anyAs these borrowings are minor, changes in interest rates would not significantly impact our financial results.

We have a net pension asset of $8.9$11.7 million at December 31, 2016,2017, including plan assets of $39.1$43.4 million, which are recorded at fair value. The plan assets consist of 52%54% debt and equity securities, 43%39% real estate investment funds and 5%7% cash and cash equivalents. The fair value measurement of real estate investment funds is subject to the real estate market forces in Switzerland. The fair value of debt and equity securities is determined based on quoted prices in active markets for identical assets and is subject to interest rate risk. We manage our risk by having a diversified portfolio. See Note 1314 to the consolidated financial statements for further discussion on the pension assets.

Our consolidated financial statements and notes thereto appear on pages 4958 to 8096 of this Annual Report on Form 10-K.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

MAXWELL TECHNOLOGIES, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except shares and per share data)