Restatement of Previously issued Financial Statements and Financial Information

Background on the Restatement

Audit Committee's Investigation

In January 2013, following receipt of information concerning potential revenue recognition issues, the Audit Committee of the Board of Directors engaged independent legal counsel and forensic accountants to conduct an investigation concerning the potential issues and to work with management to determine the potential impact on accounting for revenue. In February 2013, as a result of the findings of the Audit Committee's investigation to date, the Company determined that certain of its employees had engaged in conduct which resulted in revenue being recorded in periods prior to the criteria for revenue recognition under U.S. generally accepted accounting principles being satisfied.

The investigation revealed arrangements with three of the Company's distributors regarding extended payment terms, and with one of the Company's distributors regarding return rights and profit margin protection, for sales to such distributors with respect to certain transactions. In addition, arrangements were revealed with one non-distributor customer to honor transfer of title at a date later than the customer's purchase orders indicated. Based on the results of its investigation, the Audit Committee determined that these arrangements had not been communicated to the Company's finance and accounting department, or to the Company's CEO, and therefore, had not been considered when revenue was originally recorded. Based on the terms of the agreements with these customers as they were known to the Company's finance and accounting department, it had been the Company's policy to record revenue related to shipments as title passed at either shipment from the Company's facilities or receipt at the customer's facility, assuming all other revenue recognition criteria had been achieved. In addition to the arrangements noted above, the investigation uncovered an error on an individual transaction where a customer was given extended payment terms but those terms were not considered when revenue was originally recognized.

As a result of the arrangements discovered during the investigation, the Company does not believe that a fixed or determinable sales price existed at the time of shipment, nor was collection reasonably assured, at least with respect to certain transactions. In addition, revenue related to certain shipments to the one non-distributor customer was recorded before the actual transfer of title and the satisfaction of the Company's obligation to deliver the products. Therefore, revenue from these sales should not have been recognized at the time of shipment.

Based on the arrangements with customers revealed in the investigation that were not considered when revenue was originally recognized, the Company determined the following:

•

Beginning in the period in which the investigation revealed arrangements regarding extended payment terms for certain sales to three distributors, the Company determined it is appropriate to defer revenue recognition on all sales to these distributors from the period of shipment to the period of cash receipt. For these distributors, revenue recognition in the period of cash receipt was determined to be appropriate beginning in the fourth quarter of 2011.

•

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


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


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

Management's Subsequent Internal Review

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

Results of the Audit Committee's Investigation and Management's Internal Review

Based on the findings of the investigation, as previously reported in the Company's current report on Form 8-K dated March 7, 2013, the Audit Committee, in consultation with management and the Board of Directors, concluded that the Company's previously issued financial statements contained in its annual report on Form 10-K for the year ended December 31, 2011, and the quarterly reports on Form 10-Q for the quarters ended March 31, 2011, June 30, 2011, September 30, 2011, March 31, 2012, June 30, 2012 and September 30, 2012, should no longer be relied upon. Accordingly, the accompanying consolidated financial statements for the first three quarters of the fiscal year ended December 31, 2012, for the fiscal year ended December 31, 2011, and for each of the interim periods within the fiscal year ended December 31, 2011, have been restated in this Annual Report on Form 10-K.

As a result of the Audit Committee's investigation, certain employees were terminated and the Company's Sr. Vice President of Sales and Marketing resigned as reported in the Company's current report on Form 8-K dated March 7, 2013.

In connection with the errors identified during the investigation resulting in the restatement of previously reported financial statements, the Company identified control deficiencies in its internal control over financial reporting that constitute material weaknesses. For a discussion of our disclosure controls and procedures and the material weaknesses identified, see Part II, Item 9A, Controls and Procedures, of this Annual Report on Form 10-K.

The Company's previously filed annual report on Form 10-K for the fiscal year ended December 31, 2011, and its quarterly reports on Form 10-Q for the periods affected by the restatements, have not been amended. Accordingly, investors should no longer rely upon the Company's previously released financial statements for any quarterly or annual periods after and including March 31, 2011, and any earnings releases or other communications relating to these periods. See Note 15, Unaudited Quarterly Financial Information, of the Notes to the Consolidated Financial Statements, in this Annual Report for the impact of these adjustments for the full fiscal year ended December 31, 2011, and the first three quarters of the fiscal year ended December 31, 2012 and each of the quarterly periods in the fiscal year ended December 31, 2011, respectively.

Restatement Adjustments

Restatement Adjustments Related to Sales Arrangements

Several adjustments were made to the Company's previously filed consolidated financial statements as a result of the restatement in order to reflect revenue recognition in the appropriate periods as discussed above. Accordingly, for the subject sales transactions, revenue and accounts receivable balances were reduced by an equivalent amount in the period that the sale was originally recorded as revenue, and revenue was increased in the subsequent period in which the criteria for revenue recognition were met. Further, for the subject sales transactions, cost of revenue was reduced, and inventory was increased, in the period that the sale was originally recorded as revenue, and cost of revenue was increased, and inventory was reduced, in the period the sale was ultimately recorded as revenue. However, for sales to one distributor in which revenue is being deferred until the Company determines that the distributor is not entitled to any further returns or credits, as discussed above, the increase to revenue, and the related reduction to inventory and increase to cost of revenue, will be recorded in a future period when this determination is made.

The adjustments also reflect the impacts of adjusting the Company's returns reserves for certain stock rotation rights of the distributors, and adjusting the Company's reserves for allowances for doubtful accounts, as well as commissions expense, although these changes were not material.

In addition to the adjustments to revenue, accounts receivable, inventory and cost of revenue, inventory reserves balances and cost of revenue were adjusted in relation to the adjustments to inventory discussed above, in order to reflect inventory ultimately recorded on our balance sheets at its lower of cost or market value.

Other Restatement Adjustments

Since the Company's determination to restate its previously issued financial statements constituted an event of default under the terms of its credit facility, the bank had the right to require immediate payment of the outstanding borrowings. As a result, restatement adjustments were recorded to reclassify the amounts outstanding under the credit facility from long-term debt to current liabilities as of each respective balance sheet date. In addition, an insignificant amount of debt issuance costs were reclassified from a long-term asset to a short-term asset, consistent with the classification of the related debt. In June 2013, the Company entered into a forbearance agreement with the bank wherein the bank agreed to forbear from further exercise of its rights and remedies to call our outstanding debt under the credit facility in connection with the events of default for a period terminating on the earlier of September 30, 2013 or the occurrence of any additional events of default.

Further, a restatement adjustment was made to reclassify a legal settlement with a customer from selling, general and administrative expense to contra-revenue in the second quarter of 2011 in the amount of for $2.6 million. Certain other immaterial adjustments were made in connection with the restatement, which resulted in a $153,000 decrease to the net loss recorded for the year ended December 31, 2011, and a $170,000 decrease to net income/loss for the nine-months ended September 30, 2012.

The restatement adjustments did not impact the Company's previously reported tax provision or benefit in any of the affected periods, other than a $54,000 decrease in the income tax provision for the quarter ended September 30, 2012, as all of the restatement adjustments were related to our U.S. operations, for which we have significant net operating loss carryforwards and have not recorded an income tax expense or benefit in any period to date. However, the restatement adjustments did impact the composition of our deferred tax assets and liabilities as of December 31, 2011 as presented in Note 10, Income Taxes, of the Notes to the Consolidated Financial Statements included in this Annual Report.

Effects of Restatement

For the fiscal year ended December 31, 2011, the restatement adjustments decreased revenue by $10.1 million and decreased previously reported net income by $2.3 million or $0.08 per diluted share, to a net loss of $1.4 million. As of June 30, 2013, we had collected the related accounts receivable on all sales transactions that were subject to restatement for the year ended December 31, 2011, with the exception of an insignificant amount that was subsequently credited to certain customers.

The following pages present the effects of the restatement adjustments on the Company's previously reported consolidated balance sheet, statement of operations, and statement of cash flows for the fiscal year ended December 31, 2011.

MAXWELL TECHNOLOGIES, INC.

CONSOLIDATED BALANCE SHEET

(in thousands, except per share data)



	December 31, 2011
	As previously reported			Restatement Adjustments			Debt Classification Adjustments			Restated
ASSETS
Current assets:
Cash and cash equivalents	$	29,289		$	—		$	—		$	29,289
Trade and other accounts receivable, net of allowance for doubtful accounts of $450 at December 31, 2011	36,131			(8,158		)	—			27,973
Inventories	27,232			6,002			—			33,234
Prepaid expenses and other current assets	3,125			(34		)	61			3,152
Total current assets	95,777			(2,190		)	61			93,648
Property and equipment, net	28,541			—			—			28,541
Intangible assets, net	1,111			—			—			1,111
Goodwill	24,887			—			—			24,887
Pension asset	6,359			—			—			6,359
Other non-current assets	261			—			(61		)	200
Total assets	$	156,936		$	(2,190	)	$	—		$	154,746
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable and accrued liabilities	$	36,103		$	(3	)	$	—		$	36,100
Accrued warranty	258			—			—			258
Accrued employee compensation	6,243			100			—			6,343
Deferred revenue	1,042			—			—			1,042
Short-term borrowings and current portion of long-term debt	5,431			—			—			5,431
Deferred tax liability	499			—			—			499
Total current liabilities	49,576			97			—			49,673
Deferred tax liability, long-term	933			—			—			933
Long-term debt, excluding current portion	68			—			—			68
Other long-term liabilities	3,028			—			—			3,028
Total liabilities	53,605			97			—			53,702
Commitments and contingencies (Note 12 and Note 14)
Stockholders’ equity:
Common stock, $0.10 par value per share, 40,000 shares authorized; 28,174 shares issued and outstanding at December 31, 2011	2,815			—			—			2,815
Additional paid-in capital	252,907			—			—			252,907
Accumulated deficit	(163,021		)	(2,287		)	—			(165,308		)
Accumulated other comprehensive income	10,630			—			—			10,630
Total stockholders’ equity	103,331			(2,287		)	—			101,044
Total liabilities and stockholders’ equity	$	156,936		$	(2,190	)	$	—		$	154,746

MAXWELL TECHNOLOGIES, INC.

CONSOLIDATED STATEMENT OF OPERATIONS

(in thousands, except per share data)



	Year Ended December 31, 2011
	As previously reported			Restatement Adjustments			Restated
Revenue	$	157,311		$	(10,135	)	$	147,176
Cost of revenue	95,254			(5,148		)	90,106
Gross profit	62,057			(4,987		)	57,070
Operating expenses:
Selling, general and administrative	37,944			(2,726		)	35,218
Research and development	22,330			26			22,356
Total operating expenses	60,274			(2,700		)	57,574
Income (loss) from operations	1,783			(2,287		)	(504		)
Interest expense, net	(109		)	—			(109		)
Amortization of debt discount and prepaid debt costs	(55		)	—			(55		)
Gain on embedded derivatives and warrants	1,086			—			1,086
Income (loss) from operations before income taxes	2,705			(2,287		)	418
Income tax provision	1,856			—			1,856
Net income (loss)	$	849		$	(2,287	)	$	(1,438	)
Net income (loss) per share:
Basic	$	0.03		$	(0.08	)	$	(0.05	)
Diluted	$	0.03		$	(0.08	)	$	(0.05	)
Weighted average common shares outstanding:
Basic	27,637			—			27,637
Diluted	28,161			—			27,637

MAXWELL TECHNOLOGIES, INC.

CONSOLIDATED STATEMENT OF CASH FLOWS

(in thousands)



	Year Ended December 31, 2011
	As previously reported			Restatement Adjustments			Restated
Operating activities:
Net income (loss)	$	849		$	(2,287	)	$	(1,438	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation	6,800			—			6,800
Amortization of intangible assets	559			—			559
Amortization of debt discount and prepaid debt costs	55			—			55
Gain on embedded derivatives and warrants	(1,086		)	—			(1,086		)
Pension cost	(109		)				(109		)
Stock based-compensation expense	2,582			—			2,582
Loss on impairment of property and equipment	—			—			—
Provision for (recovery of) losses on accounts receivable	427			(127		)	300
Changes in operating assets and liabilities:
Trade and other accounts receivable	(9,112		)	8,285			(827		)
Inventories	(8,121		)	(6,002		)	(14,123		)
Prepaid expenses and other assets	87			35			122
Deferred income taxes	(1,108		)	—			(1,108		)
Accounts payable and accrued liabilities and deferred revenue	8,469			(3		)	8,466
Accrued employee compensation	179			99			278
Other long-term liabilities	(5,572		)				(5,572		)
Net cash used in operating activities	(5,101		)	—			(5,101		)
Investing activities:
Purchases of property and equipment	(14,466		)	—			(14,466		)
Net cash used in investing activities	(14,466		)	—			(14,466		)
Financing activities:
Principal payments on long-term debt and short-term borrowings	(12,462		)	—			(12,462		)
Proceeds from long-term and short-term borrowings	12,229			—			12,229
Proceeds from exercise of stock warrants	—			—			—
Repurchase of shares for employee tax withholding obligation	(154		)	—			(154		)
Proceeds from issuance of common stock under equity compensation plans	2,819			—			2,819
Proceeds from issuance of common stock under secondary security offering	—			—			—
Release of restricted cash	8,000			—			8,000
Net cash provided by financing activities	10,432			—			10,432
Decrease in cash and cash equivalents from operations	(9,135		)	—			(9,135		)
Effect of exchange rate changes on cash and cash equivalents	(1,405		)	—			(1,405		)
Decrease in cash and cash equivalents	(10,540		)	—			(10,540		)
Cash and cash equivalents at beginning of year	39,829			—			39,829
Cash and cash equivalents at end of year	$	29,289		$	—		$	29,289
Cash paid for:
Interest	$	166		$	—		$	166
Income taxes	$	3,329		$	—		$	3,329
Supplemental schedule of noncash investing and financing activities:
Landlord funding of leasehold improvements	$	1,522		$	—		$	1,522
Conversion of debenture into shares of common stock	$	9,341		$	—		$	9,341
Stock warrant liability settled in shares of common stock	$	—		$	—		$	—

The restated financial information by product line and geographic area for fiscal year 2011 is presented below (in thousands):



	December 31, 2011
	As previously reported		Restatement Adjustments			Restated
Revenues by product line:
Ultracapacitors	$	96,971	$	(10,135	)	$	86,836
High-voltage capacitors	42,309		—			42,309
Microelectronic products	18,031					18,031
Total	$	157,311	$	(10,135	)	$	147,176

Revenues from external customers located in:
China	$	43,187	$	—		$	43,187
United States	30,608		(885		)	29,723
Germany	32,911		(6,658		)	26,253
All other countries	50,605		(2,592		)	48,013
Total	$	157,311	$	(10,135	)	$	147,176