Maxwell Technologies' (MXWL) CEO Franz Fink On Q2 2018 Results - Earnings Call Transcript

Maxwell Technologies Inc. (NASDAQ:MXWL) Q2 2018 Earnings Conference Call August 6, 2018 5:00 PM ET

Executives

Kimberly Tom – Director-Investor Relations

Franz Fink – President and Chief Executive Officer

David Lyle – Chief Financial Officer

Analysts

Kristen Owen – Oppenheimer

Craig Irwin – Roth Capital

Jed Dorsheimer – Canaccord Genuity

Jeff Osborne – Cowen and Company

Operator

Good afternoon. My name is [indiscernible], and I’ll be your conference operator today. At this time, I would like to welcome everyone to the Maxwell Technologies Q2 2018 Earnings Call. [Operator Instructions] Thank you.

Kimberly Tom, Director of Investor Relations, you may begin your conference.

Kimberly Tom

Good afternoon, everyone. Thanks for joining us, and welcome to Maxwell’s second quarter 2018 conference call. This call is being webcast live and together with the earnings release, is available on the Investor Relations section of our corporate website. The results and data we discuss today reflect the consolidated results of Maxwell Technologies. Statements about future expected events and financial results are forward-looking and subject to risks and uncertainties.

Our actual results may differ. Please refer to the risk factors detailed in our SEC filings and in today’s earnings release for further discussion. For anyone listening to a recorded or webcast replay or reviewing a written transcript, this conference call is dated August 6, 2018. The company disclaims any duty or obligation to update any forward-looking information, whether as a result of new information, future events or otherwise. During our call, we will discuss some non-GAAP measures, including non-GAAP gross margin, non-GAAP operating expense, non-GAAP interest expense, non-GAAP net loss per share and adjusted EBITDA, that when used in combination with GAAP results, provide us with additional analytical tools to understand our operations.

We believe that these measures provide useful information to management, our Board of Directors and investors about the operating activities and business trends related to our financial condition and results of operations. These non-GAAP measures are intended to supplement GAAP financial information and should not be considered in isolation as a substitute for or as superior to financial measures calculated in accordance with GAAP. The company’s financial results calculated in accordance with GAAP and the reconciliation to those financial statements should be carefully evaluated. For a reconciliation of non-GAAP measures to the most directly comparable GAAP measures, please see the notes to the financial statements in today’s earnings release, a copy of which is posted on the company’s website.

On the call today to discuss our second quarter results are Dr. Franz Fink, Maxwell’s President and Chief Executive Officer; and David Lyle, Maxwell’s Chief Financial Officer. Following our prepared remarks, the call operator will come back on the line for the question-and-answer portion of the call.

I would now like to turn the call over to Franz.

Franz Fink

Welcome and thank you for joining us this afternoon. On today’s call we will review our financial results and outlook and provide updates on the progress we have made with each of our key markets and technologies. In Q2 we came in about where we expected. In Q3, we expect top line revenue to grow 15% sequentially despite continued pressure on our high-voltage product sales, which have not yet returned to historical levels. I would like to address this issue upfront.

As we discussed last quarter, our electrical utility grid customers have indicated that the U.S. steel tariffs has placed a great deal of uncertainty on their great infrastructure build out, which as a result is affecting our high-voltage product sales. Additionally, some of our China customers have recently begun asking for longer payment terms indicating that there may be a tightening of control of cash leaving the country and we have consumed that a prolonged trade dispute could put pricing pressure on our China wind sales.

Also facing these headwinds, we expect our high-voltage product line, which provides foundational cash flow to Maxwell to continue to see a base level of sale due to the minimum requirements necessary for utilities to maintain certain levels of service. Additional, the continued need to upgrade aging grid infrastructure globally bodes well for mid to long-term robust demand. We are confident that the business will return to previous levels and it is just a matter of timing of recovery.

The energy storage product line is positioned to begin a period of growth going into 2019 setting up for acceleration in 2020, as Geely ramps up new grid energy storage and wind retrofit projects come online in our lithium-ion capacitor business with our partner CRRC-SRI in China rail gains momentum.

Likewise, we continue to make very encouraging progress with our dry battery electrode technology and strategic collaboration discussions. I will discuss all of these prospects in more detail later in the call. As a whole, we believe our strategy is playing out as intended and we are nearing a launching point for the next stage of growth as we expect product trends in a number of market segments to come together through 2019 and into 2020. Therefore, we are committed to our strategy and to doing what is necessary to alleviate any risk occurring from the recent geopolitically induced headwinds.

We are already taking action to mitigate the situation to a degree by optimizing short-term operational in capital spending. Furthermore, we believe it is in the best interest of Maxwell and our shareholders to strengthen our balance sheet by pursuing additional financing. Based on a conservative growth forecast, we anticipate that we need a minimum of $15 million in incremental capital to bridge the company to the earlier of a strategic partnership lead investment or to the point, we have anticipated growth generates breakeven EBITDA.

We are evaluating our financial alternatives, including the amount we may seek to raise, in order to ensure continuity of investment in future growth programs such as dry battery electrode. We believe that this is necessary to secure our strategy and to unlock the true value of the technology platform we have been building. Dave will provide more details on our full financial results later in the call, so let’s now move on to updates in energy storage where we continue to make steady progress.

I will begin with the automotive market. As the vehicle electrification megatrend begins to accelerate we continue to see increasing interest from OEMs from Mexico to complete automotive solutions for both mild hybrid and autonomous driving applications. With our game changing Geely solution, we demonstrated the benefit that ultra-capacitors solutions can provide in delivering aggregate peak power unattainable by competing battery-based solutions to supports a heightened demand of the many electric functions in today’s vehicles.

We are on track to meet Geely’s expected start up production in late 2019 ramping to material levels in 2020. We see demand for our ultra-capacitor solutions and applications including peak power, autonomous driving and E-active suspension. Our pipeline of prospect is robust and we continue to work on securing additional opportunities that have the potential to further accelerate our growth.

We are zeroing in on a couple of opportunities one in peak power that has the potential to be very meaningful but it is earlier on in the process and one in E-active suspension that is not a sizable as Geely but more significant than any other previous design wins that we have more recently attained. We will continue to provide updates as we progress with these exciting new opportunities.

Next, I will move onto discuss grid energy storage. I am pleased to report that last month we launched two new highly scalable products that deliver reliable, fast responding, long-lifetime storage in grids and microgrids. According to Bloomberg New Energy Finance, energy generation by intermittent solar and wind will more than double over the next 12 years to quickly accelerating megatrend that we at Maxwell have had on our radar for some time. Because of this rapid influx of renewal energy the potential for service disruption and the grid is growing due to instability and increased power and frequency deviation.

Plus, energy storage resources must be able to respond faster, cycle more frequently and support grid and auxiliary services to ensure a great stability and resiliency. Maxwell’s new grid product and solutions are designed to stabilize voltage and frequency, firm renewable power output provide bridging and renting services, improve generator response and can be deployed as a standalone energy storage systems or in combination with batteries.

Our pipeline of opportunities in this market continues to grow into additional interest we have received in only one month following the product launch has exceeded our expectations. In the short-term, we expect new engagements in microgrid projects, which are small but have shorter sales cycle to begin ramp revenue into next six to 12 months.

Looking forward, we expect our current pipeline of utility scale grid projects including the first commissioning of the transitional level power stabilization design with our global OEM partner to set the stage for growth in 2019 moving into 2020. We are encouraged by news on this and we hope to share more with you soon.

Next, let me discuss our progress with our lithium-ion capacitor or L cap technology in rail. We continue to become more and more excited about opportunities into China onboard rail market as there is expected to be erected increase and plan routes for trolley bus lines due to the Chinese government’s focus on light rail infrastructure investment.

Our partner in China CRRC-SRI anticipates that approximately 900 trams per year will be added in China into 2019 to 2020 timeframe with our L cap solution being one of the key enabling technology alternatives. By 2020, the actual tram operating mileage in China could reach 640 kilometer with an additional 2,500 kilometers planned to be added in subsequent years.

To give you an idea of how large this opportunity could be. We estimate on average that each tram using our technology would contain roughly $30,000 to $50,000 of our company. Given that CRRC-SRI is a clear market leader with a commanding market share in this segment in China this translates into an annual revenue opportunity into tens of millions of dollars from Maxwell over the next several years as the technology ramps.

On the manufacturing side, we remain on track to have CRRC-SRI’s L cap mass production facility ready to begin to ramp to full scale self-production in Q4 and as Maxwell is a exclusive supplier of L cap electrode, we expect our revenue to begin to ramp at that time as well. Given the market opportunity, we believe we could see meaningful revenue contribution from this market in 2019 and beyond.

On the technology side, we continue to meet program milestones in our lithium-ion capacitor generation to technology, which we expect to be in production in 2019. Due to the progress we have made to date, we recently signed a Memorandum of Understanding with our partner, which expands the scope of the partnership to include further new technology developments for next generation L cap technology anticipated to further advance power and energy densities. We expect the next generation L cap technology to enable new applications, unlock broader market opportunities, provide further long-term revenue growth opportunities and further advance our localization strategy in China.

Now, I will move onto wind wherein Q2 we saw quarter-over-quarter growth as anticipated due to typical seasonal strength. We are continuing to make great traction with our new wind retrofit solution where we are now in trials in 15 different wind farms. This includes three of the largest climate renewable companies in the U.S., which have each made the decision to implement our ultra-capacitor solution to replace batteries in their existing wind turbines.

Thus far, we have received a lot of interest and acceptance in the marketplace having already signed an agreement with one domestic channel partner and working on two potential additional global partnerships. We expect the revenue contribution from our wind retrofit solution to gradually increase starting in the second half of this year, as implementations take shape in commercial deployments and zero [ph]. We continue to expect demand in the traditional wind market to remain stable for the remainder of 2018 with continued seasonal strength again in Q3 and typical seasonal softness in Q4.

Lastly, I would like to give an update regarding our dry battery electrodes technology. We continue to make steady progress on our patented technology. I’m happy to report that we have successfully completed the proof-of-concept with our partner by delivering electrode rolls from our current pilot line with production scaling and new production level quality and consistency. With this phase of our development complete, we have taken yet another meaningful step toward scale up in commercialization.

In addition, we have been making excellent progress in scaling our cell building capacities. We recently build a number of advanced large format battery cells in our current lab scale environment and the initial performance characteristics of these cells look very good. Based on these results, we are gaining confidence that’s a potential for commercialization partnerships is significant and we continue to receive new and higher levels of interest from traditional automotive OEMs battery manufacturers as well as global leaders in other sectors of technology and infrastructure.

Due to the ever increasing technology requirements being driven by the coming battery electric vehicle megatrend, inherent technological challenges faced by the electrodes more and more global leaders are in search of plausible breakthrough advancements in battery technology. Due to the progress we are making and demonstrating the benefits of our technology many of those global leaders have begun to evaluate our technology as a critical ingredient in the long-term energy storage technology platform strategy.

As we enter the next phase of our dry electrode development and scale up we are confident that further optimization large format cells will be achieved once we are using more technologically advanced manufacturing process equipment. This equipment will enable the production of even higher capacity cells with an increasing level of process control and consistency and will support the full capability of our dry electrode technology with respect to higher energy density and performance.

Our prospective partners and customers agree with this point of view and they collectively believe that demonstration of this larger scale production capability will be game changing and will likely lead to a proliferation of interest in partnerships and commercial engagements with a much broader set of technology leaders once again quickly test, evaluate and adopt our technology with high confidence in its application for mass production.

To that end, we have continued to make solid progress in our ongoing discussions with potential partners regarding to scale up in commercialization of our technology with the end goal of maximizing the value of any partnership agreement for Maxwell and our shareholders. Securing partnership agreements remains one of our top priorities for 2018.

Overall the long-term fundamentals of our business have not changed and I remain confident that our strategy remains intact. In energy storage, we continue to see new developments as we make forward progress in all markets. In auto, we are on track with Geely, have robust pipeline and are getting closer to securing incremental design wins. In grid, we recently announced two new subsystem products and have a growing pipeline of opportunities. In rail, the market opportunity continues to expand and we are on track with our partner to ramp up to full scale production by the end of this year. In wind, we are seeing excellent momentum and have made a lot of traction with our new retrofit emotion.

In addition, our dry battery electrode technology is meeting other high expectations from a technological standpoint, we are experiencing growing interest from potential partners and we continue to make progress on establishing strategic partnerships to accelerate to commercialization of the technology. Lastly, in high-voltage also we have facing short-term headwinds due to the tariffs and some uncertainty created by the current geopolitical situation we believe the mid to long-term business outlook remains robust.

In order to protect the value of the business, we have built, we plan to pursue additional financing, which would strengthen our balance sheet and ensure that we have adequate cash to operate the business and to continue to make the required investments to unlock the value of our technology platform.

With that, I would like to turn the call over to Dave.

David Lyle

Thanks, Franz. Today I will discuss our Q2 2018 results, our outlook for Q3 2018 and I’ll provide more detail on our cash situation. Starting with Q2, our revenue was $29.5 million, slightly below the midpoint of our guidance range of $28 million to $33 million. Energy storage revenue came in at $22.7 million, flat sequentially driven by anticipated seasonal growth and wind offset by decreases in other markets due primarily to the timing of project-based revenue and last-time buys related to the Nesscap portfolio consolidation. High-voltage revenue came in at $6.8 million with slight growth from Q1 but still holding at a base level as we have not seen much in the way of recovery yet.

Non-GAAP gross margin in Q2 was 19.9% at about the bottom of our previous guidance range of 20% to 23%, driven by lower than expected high-voltage revenue, which carries gross margins higher than our corporate average. Q2 non-GAAP gross margin excludes approximately $338,000 of stock-based compensation expense and $93,000 of Nesscap related intangibles amortization. Non-GAAP operating expense for Q2 was $12.7% slightly better than the $12.8 million midpoint of our guidance range mainly due to our focus on optimizing spending.

Non-GAAP operating expense excludes approximately $2.4 million in stock-based compensation expense, $221,000 in acquisition related tangibles amortization, $78,000 related to restructuring. Net non-GAAP interest expense for Q2 was $704,000, which excludes approximately $326,000 of non-cash amortization and debt issuance cost and discounts relating to convertible debt issuance. Q2 tax expense was $300,000 mostly associated with the taxes of our Swiss subsidiary.

Q2 non-GAAP net loss was about $7.8 million resulting in a net loss per share of $0.21 based on a basic share count of approximately 38.1 million shares. GAAP net loss was $11.3 million for the quarter and GAAP net loss per share was $0.30. Q2 adjusted EBITDA was negative $4.6 million. DSOs for the second quarter were approximately 78 and inventory churns were 2.3 times. Our energy storage inventory levels grew sequentially mainly in preparation for the midyear transition of contract manufacturers in China, which is part of our global manufacturing optimization strategy and to expand gross margin.

Additionally, high-voltage product was built in order to accommodate last minute orders, which we hope would materialize, however, that did not happen and we finished the quarter with additional inventory that was anticipated to be sold in Q3. We ended Q2 with a cash balance of about $21.5 million, which includes the Q1 draw of $5 million that was made from our existing working capital line of credit. Cash usage in the quarter was primarily driven by a smaller contribution from high-voltage due to the revenue shortfall, which resulted in our negative $4.6 million adjusted EBITDA, $3.9 million in capital expenditures, and $9 million in working capital needs, which were driven primarily by the pre-build of inventory to support our factory transition as well as the $2.8 million payment for the final SEC settlement.

Now I’d like to provide guidance for the third quarter of 2018. We expect top line revenue in Q3 to be in the range of $32 million to $36 million quarter-over-quarter growth driven mainly by seasonal strength in the wind market as well as growth in grid in non-China bus. Although our current high-voltage Q3 billings and backlog are already better than the prior two quarters, it held off on forecasting any beginnings of recovery in high-voltage given that ambiguity that still remains and thus we expect the high-voltage product revenue line will be flat sequentially.

We have factored into our Q3 guidance for energy storage about $500,000 in revenue loss due to the tariffs imposed on $34 billion worth of imports of Chinese goods on July, 6. Our ultra-capacitor products are included on the tariff list and while we manufacture our electrode here in the U.S. and in South Korea where all our important IT and trade secrets reside, we use contract manufacturers in China to assemble the majority of our cells and modules. Therefore, products sold to customers in the U.S. maybe subject to the tariff.

We expect Q3 non-GAAP gross margin to be 20% plus or minus of 150 basis points, which is relatively flat to Q1 and Q2 and mainly due to product mix moving toward our energy storage product line. In Q3 we also factored in a small less than 50 basis points decrease in gross margin due to the effects of tariffs on our energy storage product line. We anticipate excluding from Q3 gross margin approximately $340,000 on stock-based compensation expense and $90,000 in intangibles amortization related to the Nesscap acquisition.

From a mid to long-term perspective, we are in the process of executing several initiatives designed to improve energy storage gross margins including manufacturing consolidation, transitioning customers to an optimized portfolio of lower cost products following the acquisition of the Nesscap business and the development and launch of integrated solutions such as the Geely multifunction subsystem and our recently announced Grid Cell Pack and Grid Energy Storage System. That being said, gross margin expansion is highly dependent on the recovery of our high-voltage revenue and we believe the recovery is only a question of time.

We’re already hearing from our larger customers that we should see increased demand in Q4 although in the interim, we expect corporate gross margins to remain at this lower level until we have better visibility and the recovery occurred. In Q3, we expect non-GAAP operating expense to be in the range of $12.8 million to $13 million, sequential increases due primarily to the push out of roughly $150,000 of project related R&D expenses from Q2 into Q3.

We estimate our Q2 non-GAAP operating expense will exclude approximately $2.4 million in the stock-based compensation expense and about $220,000 in acquisition related to intangibles. We expect non-GAAP interest expense in Q3 to be about $820,000 which excludes approximately $470,000 in non-cash amortization of debt issuance costs and discount. We expect our tax expense in Q3 to be about $300,000 mostly associated with taxes on the income of our Swiss subsidiary.

At the midpoint of guidance, we expect Q3 non-GAAP net loss per share to be $0.18 based on a basic share count of roughly 38.2 shares, does not include any potential impact from the new financing. At the midpoint of guidance Q3 adjusted EBITDA is expected to be negative $3.8 million, last quarter we provided guidance that we expected to reach breakeven adjusted EBITDA for the second half of 2018 it was based on a recovery in high-voltage product sales as well as solid growth in energy storage. Continue to have a positive outlook for our energy storage product line, we are confident that the high-voltage business will ultimately return to previous revenue levels, which have been in a $36 million to the $46 million range over the last decade. However, given the continuing effect of the trade dispute on our business, we do not expect to be able to reach this objective in 2018.

I want to emphasis that reaching breakeven adjusted EBITDA continues to be one of the most important short-term goals for Maxwell. With all the initiatives we have put in place to improve gross margin as well as a positive outlook for growth in every one of our energy storage focus areas including auto, rail, grid, wind and non-China bus we believe that once we see a full recovery in high-voltage breakeven adjusted EBITDA will be attainable.

In regards to cash, we expect our cash balance at the end of Q3 to decline driven by the continued below normal high-voltage contribution, anticipated capital expenditures of roughly $3 million and most importantly working capital needs. We built up inventory in the first half and do not expect to fully offset the expense by revenue received in a more muted Q3 than expected.

Additionally, some of our customers in China have recently begun asking for longer payment terms, while we are working closely with these customers this will increase our working capital requirements. To mitigate the situation, we are managing our capital expenditures very tightly and only spending on the most critical needs until we see a recovery.

In addition we expect our working capital requirements to decrease as we sell through the inventory that was pre-built for the factory transition and we expect to deplete this extra supply by the first quarter of 2019. Also to note, we took an additional $10 million draw from our working capital line in July.

I would like to reiterate that as Franz discussed, we remain confident that our current strategy is [indiscernible] in order to secure the strategy and unlock the value of the technology platform that we’ve been building. We plan to pursue additional financing of at least $15 million to strengthen our balance sheet.

Now I’ll turn the call back to Franz, for closing comments.

Franz Fink

Thanks, Dave. As we approach the next phase of Maxwell with growth expected to begin to ramp, I would like to reassure our investors that the strategy we laid out in executing tool remains intact. We believe that our high-voltage product line is fundamentally solid. In energy storage, we expect to add incremental meaningful revenue ramping throughout 2019 and accelerating in 2020. In dry battery electrode we have made excellent progress over the last six months and we remain focused on establishing strategic partnerships to commercialize the technology.

In closing, we are executing on the necessary measures to mitigate the short-term headwinds. We are actively taking additional steps to strengthen our balance sheet to ensure that we protect our business, continue to invest our strategy to drive long-term growth and most importantly unlock the true value of our technology platform for our investors.

Operator, we are now ready to open to call up for questions.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] And our first question comes from the line of Noah Kaye from Oppenheimer. Your line is open.

Kristen Owen

Great. Good evening. Thank you for taking our questions. This is Kristen on for Noah. First, just wanted to touch on the timetable that you provided for breakeven and adjusted EBITDA, can you give us a little bit more color there and what that implies for OpEx spending in the coming quarters?

David Lyle

Yes. So we don’t guide more than one quarter out but what we did say was that given what we’re seeing in the high-voltage business [indiscernible] when that would be, when that recovers obviously that would be a point where that’s attainable. We said that we don’t think it’s going to happen this year though based on the fact that we really want to see the second half as a whole EBITDA breakeven or better with what we’re seeing in Q3 that’s just not going to happen. It really is going to take a recovery from the high-voltage business, but it’s going to – also require the existing energy storage business to grow next year into the types of growth that we expected across most of our or not all of our markets and applications.

Kristen Owen

Thank you. And then you talked about some of the opportunities that you are seeing in automotive, certainly China has the fastest EV penetration in the Geely. But just wondering how weighted is your new program exposure to the Chinese OEMs versus North America and European OEMs.

Franz Fink

Yes. Thanks for the question. Our pipeline is pretty much fairly broad across all geographies. Again, Geely, as you know and we have shared has multiple vehicles on that platform that initially will ramp in Europe and U.S. But we are working with Geely also to further secure here on the same platform volume in China. Now the other tool significant and there’s obviously more but the other two significant opportunities we referred today in the call, one being a peak power a little bit earlier in the process is not in China.

I don’t want to point the two other regions where it could be but it’s obliviously either in Europe or in U.S. And also, in E-active suspension that we are closer to and we are very focused on securing as it is very meaningful not as big as Geely like we pointed out. But more meaningful than other ones we have more recently attained is also in Europe or in U.S. So the next ones besides obviously having more business with Geely beyond the initial platforms in Europe and in U.S., we are pretty much focused on securing opportunities in Europe and in U.S.

Kristen Owen

And then just one last time one if we could. Could you characterize the mixed program between mild hybrids and EVs and then perhaps provide some contact around the content from vehicle on that mild hybrid versus EVs.

Franz Fink

Yes. So on the V side I think you’re referring more to the – at least from current technology standpoint because the dry electrode which we cannot of course go into more detail. But we are talking here more mild hybrids and other internal combustion engine type of cars that like in one case is looking into really providing very sophisticated E-active suspension capability and in the other one for certain electrification needs that has to do with a multitude of function including electrical power steering and others requires peak power. But that’s internal combustion engine type of car. So it’s more into mild hybrid and internal combustion engine side of things versus electric vehicle side of things.

Kristen Owen

Okay. And then content per vehicle anything that you could share there?

Franz Fink

That of course depended on applications in one of the ones it’s – let’s say, in the high teens, so anywhere from about $60 to $100 type of dollars in the other one in peak power. It’s just like in the case of Geely around $100 to $200. And so I don’t want to go into more details there.

Kristen Owen

Great. Thank you so much. We’ll leave it there. Thank you.

Operator

And our next question comes from the line of Craig Irwin of Roth Capital. Your line is open.

Craig Irwin

Hi, good evening and thanks for taking my questions. Dr. Fink, the E-active suspension, I know you can’t name your customers but one of them is pretty high profile, you see their vehicles on the street in New York. I know they are very expensive but at least a couple times a week and I assume that they have units out in the 100 to 200 unit range. Can you maybe frame out for us application-by-application the approximate number of units that Maxwell has fielded using ultra-capacitor-based systems? So the E-active suspension is one, the E-turbo is another, what you did for PSA and the C3 drive trend is another. Can you may be share with us the populations of the vehicles with the Maxwell inside by application.

Franz Fink

Yes. I can give that an attempt to provide directional. But Craig, of course you know this is very depended on the application and particularly in the case of E-active suspension a little bit more difficult because in the design wins we have paint we are standard in some and optional in others. And so one we refer to today on today’s call why that is more meaningful is because we are fairly confident that with this new OEM in their vehicles and their platforms we have pretty much going to be the standard across their higher end vehicle lineup.

And of course, we are talking where in that case with E-active suspension meaningful tens of thousands of cars are here ultimately but obviously not hundred thousands of cars. In the peak power like Geely and mild hybrid, you can do some math, Craig and there I think we provided that in the last call that it’s an initial design win of $100 million. And in that context we have a content of $100 million to $200 million, let’s say it’s $150 million and then you can calculate there that from a lifetime standpoint, we are just going to be there short or shy of 1 million cars.

Now lifetime, if you’re looking the automotive five to seven years you can do the math that clearly at the peak we’re going to be there all for one hundred thousand vehicles, which is again not millions but due to the content and it’s first program obviously extremely meaningful. And then I would say that, of course, other applications we are working on could be of course anywhere in between that.

Craig Irwin

Great. Thank you for that. One of the things that you had mentioned in the past couple calls as a potential opportunity for Maxwell was the retrofit of the blade balancing systems in the wind turbine market particularly the U.S. market. Maybe with the migration and technology for some of the older less efficient hydraulic systems as these turbines came up for refurbishment? Can you maybe describe for us the traction there approximately how many groups you might be working with? Is this playing out similar to your expectations?

Franz Fink

Yes. We have been stopping that program and initiative over one year ago – almost two years ago. And of course, we have to develop the program, you have to go to the big leaders in that market the brand names. But as you know, they’re all operating of course different wind farms and that makes it just a little bit initially more complicated as valuable into corporate from a business and what is your selling price and the contractual things. At the end of the day you have to convince the wind farm operators that there’s a return of investment.

And I would say, over the last six months our progress has been very, very nicely accelerating with now 14 wind forms and by the months more looking into it really convincing themselves. You take our retrofit module and drive your wind pitch control and for the rest of the lifetime of your turbine you never have any maintenance and anything to change and more. With this acceleration involves the recent wind, and wind farm and wind operator and of course wind supplier conferences it has led to really other people like we mentioned today suppliers into that market that supply all sorts of different solutions from the wind pitch control system to any other equipment tools you name it required for either upgrading or repairing looking into basically what we have done.

And they have approached us and said, hey, why would I not take on your product because I’m already operating in the market I provide a lot of different product for maintenance repowering and beyond and I can help you to proliferate that across those wind farms not faster. One we have signed up and with two very significant ones. We are in discussions to sign up an agreement globally.

Now as far as some of the bigger customers refer to today in the call, I don’t want to go into the details. But I’m sure, people like E.ON and EDF and other ones, so basically some of the big operators generally renewable energy and energy but also wind farms here in U.S. and around the world.

Craig Irwin

Thank you for that. So then, I guess – maybe the tougher question, right is electrodes. We know that you’re excited about it, you’ve been very clear with investors for the last couple of years that you’re really, really excited about the electrode opportunity. But has done absolutely nothing for your valuation, so maybe it’s a fair assumption there that maybe the investors aren’t as excited about the electrode opportunity as – maybe the management team and the Board at Maxwell.

What would it take for you to maybe approach your customers there which will have knowledge, the full knowledge of the reasons for your excitement, approach them and have them fund you rather than going to the market, have them give you development funding for product that you could deliver to them under adjusted terms for the next number of years. And forgo that need for deletion or additional debt or whatever instrument you choose over the next number of lease.

Franz Fink

Yes, certainly. So certainly I think we’re going down both past, but let me just first maybe take on your initial question on why maybe the market is not fully recognized yet on where we are. I mean that’s to some extent understandable, I think because it’s not surprising to us into me that clearly investors are looking CFO proof point and the proof point being their first strategic partnership in collaboration that holds or contributes with significant funding.

And hence we’re very, very focused on this – we’re making good progress. And as we said it remains a top priority for us this year. Now to your point to go to potential partners and customers and get them involved certainly, we will be reaching out the investors into where we’re and explore all revenues for investment financing or funding, so that certainly our plan.

Craig Irwin

And last question if I may, what would have take for you to choose that Maxwell as an entire entity. I mean this is something where we know that there are interested parties out there. And I don’t think Maxwell has ever been officially offered. What would it take for Maxwell to be available as a full entity to one of these large industrials that as expressed interest in the property.

Franz Fink

Yes. So I think in that context, let me just share with you and how we look at this, we are certainly focused ultimately on one thing that is protecting our strategy, our business and the true value of the platform we have been building for our investors. And in the context, we’re very focused on execution despites the headwinds. As we have shared in what’s going on in our product lines. And from that perspective, we’re always open to explore if it would be required to do whatever it takes to maximize shareholder value.

And if it would finally required to do what you just pointed out here, that’s ultimately I believe we would go into. And I think I would like to leave it with that on in opening just summarizing, we’re focused on continue to advance our business to protect it. And ultimately only have one goal to maximize the value for our shareholders.

Craig Irwin

Excellent. That’s good to hear. Thank you, Franz. And good luck with the financing and we look forward to the other side of this tariff situation that we’re all facing right now.

Franz Fink

Thanks, Craig.

Operator

And our next question comes from the line of Jed Dorsheimer from Canaccord Genuity. Your line is open.

Jed Dorsheimer

Thanks. Hey guys, most questions has been asked, but we’re just read through your comments in terms of the minimum amount raised to $15 million looking at the cash needs of the – and burn of the company. And then just because that with the E suspension commentary, which I’m assuming you feel is the closest to signing. Expectations around that would be before the March timeframe in terms of doing a deal with the customer. Is that the right way to look at that?

Franz Fink

Jed I assume just to clarify with that last question you are referring to the E-Active suspension or…

Jed Dorsheimer

Correct. I mean it’s more, basically you’re looking to do a deal based on that excluding the high voltage business bouncing back quickly, the timeframe of that deal looks – looks to me to before the March quarter.

Franz Fink

Yes, I mean, if you are asking with respect to the two next significant opportunities in the pipeline that one is longer out and one is close by, one very well could be secured, let’s say within the next – I guess that would be six months to nine months, you know we always careful in putting here exact numbers by the month down. But yes, you could expect that the once we are more confident with is in the more near to mid-term horizon, yes.

Jed Dorsheimer

Okay. And just looking at the inventory for the transitional factory. It looks of that inventory came down a decent amount so, sorry, went off, I’m just wondering there was no inventory write-offs during the quarter correct?

Franz Fink

No. What you’re saying is, we have talked about transitioning our contract manufacturers in China as part of our overall gross margin optimization strategy globally. And what we’ve also said historically that we – the transition would happen mid-year which it did, so we had to build up enough inventory in the first half to be able to supply into that the demand in the second half. And that creates working capital issues, right? An extra – about an extra $10 million in inventory and order to deliver to the second half demand that we’ve expected at the time. Part of the issue that we’re dealing with now on a working capital front is a bigger gap than expected, because we’re seeing slower revenue in Q3. So paying for that inventory and waiting for the receipt is creating a little bit of working capital need for us.

Jed Dorsheimer

Understood. Thanks for the clarification, and see you guys Wednesday.

Franz Fink

Sounds great. Thanks.

Operator

And our next question comes line of Jeff Osborne from Cowen and Company. Your line is open.

Jeff Osborne

Hey, good afternoon. Just a couple questions here. On Q4, I just wanted to understand the puts and takes, I know you were not giving a quantitative guidance, but you gave some hits as it relates to the different segments. So if I heard you right, rail will be up, wind will be down seasonally and high voltage flat is there any other items?

Franz Fink

Now you’re talking about Q3 right?

Jeff Osborne

I was actually referring more to Q4, so as I said Q3 when would be up seasonally, but down in Q3 if I heard you right?

Franz Fink

Yes, typically it is, because the hot season for the wind turbines as in Q2 and Q3 during the month you can actually install them during the winter months it gets point difficult so Q4 and Q1 typically a little slower.

Jeff Osborne

Got it. And then CRRC will be up in Q4 is that program gets underway, I mean you’re expecting a flattish high voltage market with maybe some moderate growth in auto?

Franz Fink

Yes. We should see in general, it’s going into Q4 pressure from wind, but flat to up on some of the other markets. Obviously the rail is an opportunity – real opportunity with us risen opportunity for us in Q4. Certainly going to be the timing of when their production is complete.

Jeff Osborne

And I assume when today’s more than half of the mix of the storage or Ultracapacitor segment, I know in the past used to break that out specifically you no longer do that, but just as there were you can answer that how meaningful when does as a percentage of the total?

David Lyle

Yes, we don’t break that out, but it’s not past, despite from that.

Jeffrey Osborne

Got it. And then in the past you’ve talked about, I think it was 14 or 15 automotive design wins, is there any updates that you can provide in terms of what you’ve won in that space for all of the different applications that you have?

Franz Fink

Yes. Just basically, Jeff to summarize again, so those 14 have been predominantly in backup and an E-active suspension, then of course number 15 if you just take it is when we end on these multiple platforms is peak power with Geely and the next two we’re focusing on as another very, very significant peak power, a little bit earlier in the cycle, and then E-active suspension so we are working with is looking at the broader deployment across multiple vehicles and cross their higher end platforms. So, but of course, selected tools still need to be secured. The other 14 progressing to plan in the pipeline as we said is robust.

Jeff Osborne

Makes sense. Two other quick ones here. On the grid side, you had a pretty strong presence that DistribuTECH in the area the press release out a month or so ago, is there any actual wins in that space I know you’ve had some field trials and whatnot, but do you have any contracted revenue? Might as the…

Franz Fink

Yes. So like we said today, we expect here with new product that of course, some of those customers already have been evaluating and looking at for some time that now released and provided end with initial response we got even from further potential customers within one month of releasing it. We expect here initial revenues to commence, on the microgrid side of things, here within the next six to 12 months.

Jeff Osborne

Got it. And then two quick ones for Dave. Is the way I’m just trying to get a sense that the importance of high-voltage, as it relates to hitting to EBITDA positive, is it just back in the envelope if you were at ton-ish million a quarter of revenue does I get you the EBITDA positive as a company with the current expense profile and the margin mix that segment offsetting some of the weakness in Ultracapacitor group or is need to be higher than that?

David Lyle

Yes, obviously, it depends on the energy storage number, but generally speaking, that’s about the minimum that we need to be able to get there probably a little higher, but that often turns on a quarter that you’re talking about right? Because we’re typically real stronger in Q2 and Q3…

Jeff Osborne

And then can you just remind us having gone through the Q, I don’t even true – but you hinted to, eluded to drawing $10 million on a line of credit in July post the quarter. Can you just remind us what the capacity is – a borrowing capacity on that and how much with that $10 million is available?

David Lyle

Yes, the two goes out pretty seem here probably tomorrow the answer to the question about the drawn borrowing base is really related to our accounts receivable, typically it’s in $10 million to $15 million range more recently, and in fact, we’re actually in discussions with the bank to that a little bit the overall capacity of $25 million is still there, but I think the borrowing basis what we’re trying to increase.

Jeff Osborne

Got it. Okay, thank you.

Operator

And there are no further questions at this time.

Franz Fink

Okay. Well, thanks for everyone participating. Thanks for your interest in Maxwell, and we’re looking forward to talking to you today and over the next couple of days. Thanks for joining today. Thank you.

Operator

This concludes today’s conference call. You may now disconnect. Have a great day.