June 06, 2013 - 12:15pm EST by
2013 2014
Price: 7.55 EPS $0.00 $0.00
Shares Out. (in M): 28 P/E 0.0x 0.0x
Market Cap (in $M): 210 P/FCF 0.0x 0.0x
Net Debt (in $M): 9 EBIT 0 0
TEV ($): 200 TEV/EBIT 0.0x 0.0x

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  • Accounting restatement
  • Fraud
  • Technology
  • Aggressive Accounting
  • China Exposure
  • Electronics


This is a long shot by VIC standards but the upside is 300+% the current share price and the path is in place to get there.  I recommend the purchase of MAXWELL TECHNOLOGIES (Nasdaq: MXWL).  MXWL was founded in the 60s and went public in the 80s.  They were originally a government contract research firm but now do commercial electronics.  It has substantial growth prospects ahead but it fell from grace earlier this year based on accounting technicalities.  The problems were acknowledged by management and are now being resolved.  The share price should rise over time as the stock takes back a portion of the previous valuation.  Most importantly, this is an opportunity to buy into an industry leader with fascinating technology that could change the world (ultra-capacitors!) at a fraction of the price from a year ago!  


This opportunity exists because a whistleblower from within the company reported that European sales were being booked too aggressively.   The audit committee hired a 3rd party forensic auditor (different from their regular auditor) to investigate.  A few bad apples on their sales team were giving distributors the option to return products with off-contract, side-arrangements if they didn’t sell through.  The sales shouldn’t have been recognized as sales if they were not truly transferring all the risk of ownership (hmmm… Tesla does this?  must be green energy thing).  Their auditor quit at the same time and said there was no way for this revenue recognition issue to have happened without the management team knowing about it, especially the finance department.  In addition, there may be some legal implications – the auditors didn’t catch the revenue recognition issue and decided to separate themselves from the matter.


So we are left with a $200 million company and plenty of stench:


Smell #1: Not current with SEC filings


Smell #2:  Auditor resignation


Smell #3:  Many years of messy, reclassified financial statements going back to even before the auditor resignation


Smell #4 & 5:  Management turnover & BOD turnover (to be fair, just 1 guy)


Smell #6 &7:  Green energy, auto-industry flakiness + Hyped battery technology flakiness.


Smell #8:  Early stage, not a whole lot of profits in their history.


Smell #9:  Issued a lot of shares over the last 7 years (all at higher share prices!).


All this is enough for most investors to take a pass or go short.   What’s next is going to make it even more difficult to stomach - Smell #10:  their prized technology goes on to Chinese buses!   Ouch.  CCME part 2?!!


How’d I get 300% upside?  A return to grace - over the last half-dozen years they’ve traded at an average of 3.75x sales.  Currently, they trade less than 1.2x sales.  They appear to be meeting their targeted gross margin (40% range) and are half way to their targeted 14% operating profit margin, which has led them to turn in a few profitable quarters prior to this accounting mess.   Management isn’t issuing guidance and I’m not making projections.   They have a neat product with a very obvious value proposition.  My thesis is simply that they have above average growth opportunities and they can once again get a decent valuation for the company when the smoke clears and they become current with their filings. 


There is nothing wrong with their core business as their revenues remain strong. Two other aspects that could be negatively impacting valuation are (1) They have exposure to China, and mentioned macro-visibility issues there like multitudes of other companies, and (2) they are not talking to the Street until the accounting issues are resolved.


Here is how things are improving:


  1. They fired the sales team responsible for the revenue recognition problems
  2. They hired a reputable auditor
  3. They’ve added a new COO with a solid reputation and management history – adding credibility.
  4. They’ve taken on a new board member with a solid reputation and turnaround history – adding credibility


They are straightening up their accounting and getting their filings current.  The revenue recognition had nothing to do with their operations in China.  They were not raising capital during the restated periods.  It appears that the guilty sales team was just trying to make their numbers for personal gain.  Since that revenue is now slowing being recognized, as the products aren’t being returned, it could even be argued that the revenue contours from the restated numbers will be even more appealing to momentum & growth investors.


What do they do that I think is so great?  They make ultra-capacitors.  Ultra-capacitors allow the storing and discharge of electricity “quickly & temporarily” that complements traditional batteries’ “slow & long term” characteristics.  Specifically, an ultra-capacitor is capable of absorbing electricity much faster than a regular battery and then dispensing it much faster, as well.  It’s capable of many more cycles (i.e. much tougher, lasts longer), it is lighter, smaller and not nearly as sensitive to temperature.  It is not a replacement for a traditional battery as it can’t hold nearly as much electricity and it can’t hold electricity for a long time. 


The real magic happens when you mix the ultra-capacitor with a traditional energy source or battery.  For the same application, you can use a smaller traditional battery if you mix it with an ultra-capacitor.  The traditional battery will last longer as the ultra-capacitor takes the abuse of the fast charging cycles.  The ultra-capacitor is capable of capturing almost all the recycled energy from braking, instead of just a portion.  The ultra-capacitor is capable of giving back all that energy at once during the time you need it the most, when you’re accelerating off the line.


In 2005, Kleiner Perkins made a much-hyped $3 million investment in electric car battery maker called EEstor that’s goal was to make a capacitor-type battery.  Follow on investments during the run up in gasoline prices were made by a Canadian company, Zinn Motors.  Nothing has come from this investment and a lot of the electric-car haterz said “told ya so.”  The technology that EEstor promised is related to ultra-capacitors so the idea that this can work has lost a lot of momentum.   Maxwell is absolutely not promising the world with their product like EEstor did.  The Maxwell products are in use and they work.   If you have $20 laying around you can buy them on ebay and make your own battery-like applications.  People are finding new uses for their technology as we speak in everything from toys to medical equipment.


A Google search will allow one to read plenty of stuff about ultracaps and multiple debates on how they can be applied but perhaps this video captures the novelty of this technology the best.   In the video, the little blue D-sized battery things are Maxwell Ultracaps.  6 of them start this car up.   I’m pretty sure this video is not made by the company (don’t mind the chickens):


Other positive factors that make this a great story:


(1) This product is NEW.  It has only been commercially viable for 5 years.   They are finding new opportunities and applications for it. 


(2) MXWL believes they have a significant intellectual property in their patented dry electrode fabrication process.  It allows them to manufacture the capacitors cheaper.  They believe it can be applied to lithium-ion battery production to lower production costs.


(3) New board member, David Schlotterbeck, has an impressive history in the medical industry and they’re attempting to move their products into that arena.  To add credibility to the firm, they put him on the audit committee from the get-go.


(4) It is still scaling.  Cost of production should drop over time like other batteries and solar panels did.

I do not hold a position of employment, directorship, or consultancy with the issuer.
I and/or others I advise hold a material investment in the issuer's securities.


Management’s stated goal is to meet Nasdaq’s 180-day deadline for getting current with their SEC filings.    Thus, by late summer the smoke should start to clear and the stock should re-rate.

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