ASPEN AEROGELS INC, 10-Q filed on 11/7/2018
Quarterly Report
v3.10.0.1
Document and Entity Information - shares
9 Months Ended
Sep. 30, 2018
Nov. 06, 2018
Document And Entity Information [Abstract]    
Document Type 10-Q  
Amendment Flag false  
Document Period End Date Sep. 30, 2018  
Document Fiscal Year Focus 2018  
Document Fiscal Period Focus Q3  
Trading Symbol ASPN  
Entity Registrant Name ASPEN AEROGELS INC  
Entity Central Index Key 0001145986  
Current Fiscal Year End Date --12-31  
Entity Filer Category Accelerated Filer  
Entity Small Business true  
Entity Emerging Growth Company true  
Entity Ex Transition Period true  
Entity Common Stock, Shares Outstanding   23,970,487
v3.10.0.1
Consolidated Balance Sheets - USD ($)
$ in Thousands
Sep. 30, 2018
Dec. 31, 2017
Current assets:    
Cash and cash equivalents $ 5,177 $ 10,694
Accounts receivable, net of allowances of $236 and $93 21,461 26,764
Inventories 9,909 8,915
Prepaid expenses and other current assets 1,410 1,289
Total current assets 37,957 47,662
Property, plant and equipment, net 71,000 76,067
Other long-term assets 76 86
Total assets 109,033 123,815
Current liabilities:    
Accounts payable 7,884 10,653
Accrued expenses 3,529 5,862
Revolving line of credit 5,156 3,750
Deferred revenue 2,811 1,304
Total current liabilities 19,380 21,569
Deferred rent 1,207 1,303
Prepayment liability 4,053  
Deferred revenue long-term 900  
Total liabilities 25,540 22,872
Commitments and contingencies (Note 7)
Stockholders’ equity:    
Preferred stock, $0.00001 par value; 5,000,000 shares authorized, no shares issued and outstanding at September 30, 2018 and December 31, 2017
Common stock, $0.00001 par value; 125,000,000 shares authorized, 23,961,361 and 23,643,189 shares issued and outstanding at September 30, 2018 and December 31, 2017, respectively 0 0
Additional paid-in capital 540,970 538,088
Accumulated deficit (457,477) (437,145)
Total stockholders’ equity 83,493 100,943
Total liabilities and stockholders’ equity $ 109,033 $ 123,815
v3.10.0.1
Consolidated Balance Sheets (Parenthetical) - USD ($)
$ in Thousands
Sep. 30, 2018
Dec. 31, 2017
Statement Of Financial Position [Abstract]    
Allowance for doubtful accounts $ 236 $ 93
Preferred stock, par value $ 0.00001 $ 0.00001
Preferred stock, shares authorized 5,000,000 5,000,000
Preferred stock, shares issued 0 0
Preferred stock, shares outstanding 0 0
Common stock, par value $ 0.00001 $ 0.00001
Common stock, shares authorized 125,000,000 125,000,000
Common stock, shares issued 23,961,361 23,643,189
Common stock, shares outstanding 23,961,361 23,643,189
v3.10.0.1
Consolidated Statements of Operations - USD ($)
$ in Thousands
3 Months Ended 9 Months Ended
Sep. 30, 2018
Sep. 30, 2017
Sep. 30, 2018
Sep. 30, 2017
Revenue:        
Total revenue $ 23,937 $ 27,198 $ 68,682 $ 75,269
Cost of revenue:        
Gross profit 1,529 4,948 7,083 10,863
Operating expenses:        
Research and development 1,384 1,468 4,627 4,753
Sales and marketing 3,061 2,745 10,281 9,271
General and administrative 3,453 3,765 12,149 14,354
Total operating expenses 7,898 7,978 27,057 28,378
Loss from operations (6,369) (3,030) (19,974) (17,515)
Interest expense, net (163) (58) (358) (123)
Total interest expense, net (163) (58) (358) (123)
Net loss $ (6,532) $ (3,088) $ (20,332) $ (17,638)
Net loss per share:        
Basic and diluted $ (0.27) $ (0.13) $ (0.86) $ (0.76)
Weighted-average common shares outstanding:        
Basic and diluted 23,808,703 23,442,241 23,707,245 23,356,997
Product [Member]        
Revenue:        
Total revenue $ 23,342 $ 26,812 $ 66,978 $ 73,700
Cost of revenue:        
Cost of revenue 22,154 22,115 60,853 63,706
Research Services [Member]        
Revenue:        
Total revenue 595 386 1,704 1,569
Cost of revenue:        
Cost of revenue $ 254 $ 135 $ 746 $ 700
v3.10.0.1
Consolidated Statements of Cash Flows - USD ($)
$ in Thousands
9 Months Ended
Sep. 30, 2018
Sep. 30, 2017
Cash flows from operating activities:    
Net loss $ (20,332) $ (17,638)
Adjustments to reconcile net loss to net cash used in operating activities:    
Depreciation and amortization 8,259 8,032
Stock-compensation expense 3,414 3,982
Lease incentives (91) (80)
Accretion of prepayment discount 107  
Other   (1)
Changes in operating assets and liabilities:    
Accounts receivable 5,303 944
Inventories (994) (1,124)
Prepaid expenses and other assets (111) 224
Accounts payable (3,310) (478)
Accrued expenses (2,305) 752
Deferred revenue 1,353 565
Deferred rent (33) (128)
Net cash used in operating activities (8,740) (4,950)
Cash flows from investing activities:    
Capital expenditures (2,651) (5,423)
Net cash used in investing activities (2,651) (5,423)
Cash flows from financing activities:    
Proceeds from borrowings under line of credit 30,975 6,000
Repayment of borrowings under line of credit (29,569) (6,000)
Prepayment proceeds under customer supply agreement, net 5,000  
Repayment of obligations under capital lease   (23)
Payments made for employee restricted stock tax withholdings (532) (385)
Net cash provided by (used in) financing activities 5,874 (408)
Net decrease in cash (5,517) (10,781)
Cash at beginning of period 10,694 18,086
Cash at end of period 5,177 7,305
Supplemental disclosures of cash flow information:    
Interest paid 237 151
Supplemental disclosures of non-cash activities:    
Changes in accrued capital expenditures 541 $ (3,701)
Deferred revenue 1,009  
Capitalized interest $ 26  
v3.10.0.1
Description of Business and Basis of Presentation
9 Months Ended
Sep. 30, 2018
Organization Consolidation And Presentation Of Financial Statements [Abstract]  
Description of Business and Basis of Presentation

(1) Description of Business and Basis of Presentation

Nature of Business

Aspen Aerogels, Inc. (the Company) is an aerogel technology company that designs, develops and manufactures innovative, high-performance aerogel insulation used primarily in the energy infrastructure and building materials markets. The Company also conducts research and development related to aerogel technology supported by funding from several agencies of the U.S. government and other institutions in the form of research and development contracts.

The Company maintains its corporate offices in Northborough, Massachusetts. The Company has three wholly owned subsidiaries: Aspen Aerogels Rhode Island, LLC, Aspen Aerogels Germany, GmbH and Aspen Aerogels Georgia, LLC.

Liquidity

In August 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014‑15, Presentation of Financial Statements-Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (ASU 2015-14). This ASU requires management to assess and evaluate whether conditions or events exist, considered in the aggregate, that raise substantial doubt about the entity's ability to continue as a going concern within one year after the financial statements issue date. The Company adopted this standard effective January 1, 2017.

At September 30, 2018, the Company had a cash and cash equivalents balance of $5.2 million and $5.2 million of outstanding borrowings under its revolving line of credit (see note 7). After giving effect to the outstanding borrowings and letters of credit, the additional amount available to the Company at September 30, 2018 under the revolving line of credit was $8.0 million. The existing revolving line of credit matures on April 28, 2019.

The Company is making investments to increase capacity at its existing manufacturing facility in East Providence, Rhode Island, to expand its sales and marketing efforts, and to develop new technologies and business opportunities. The Company expects its existing cash balance and the amount anticipated to be available under the existing revolving line of credit will be sufficient to fund a portion of these investments. The Company plans to manage capital expenditures and working capital balances to maintain the cash resources required to support current operating requirements and the initial phases of the capacity expansion plan.

The Company will need to supplement its cash balance and amounts available under its revolving line of credit with anticipated cash flows from operations, local government grants, debt financings, customer prepayments, technology licensing agreements or equity financings to provide the capital required to complete the expansion of the existing manufacturing facility and to fund its strategic business initiatives.

Unaudited Interim Financial Information

The accompanying unaudited interim consolidated financial statements include the accounts of the Company and have been prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Certain information and disclosures normally included in the consolidated financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to such rules and regulations. As such, the information included in this Quarterly Report on Form 10-Q should be read in conjunction with the audited consolidated financial statements and accompanying notes in our Annual Report on Form 10-K for the year ended December 31, 2017 (the Annual Report), filed with the Securities and Exchange Commission on March 1, 2018.

In the opinion of the Company’s management, the unaudited interim consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements and include all adjustments that are of a normal recurring nature and necessary for the fair statement of the Company’s financial position as of September 30, 2018 and the results of its operations for the nine months ended September 30, 2018 and 2017 and the cash flows for the nine month periods then ended. The Company has evaluated events through the date of this filing.

The results of operations for the three and nine months ended September 30, 2018 are not necessarily indicative of the results to be expected for the year ending December 31, 2018 or any other period.

v3.10.0.1
Significant Accounting Policies
9 Months Ended
Sep. 30, 2018
Accounting Policies [Abstract]  
Significant Accounting Policies

(2) Significant Accounting Policies

Principles of Consolidation

The accompanying consolidated financial statements, which have been prepared in accordance with U.S. GAAP, include the accounts of the Company and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.

Use of Estimates

The preparation of the consolidated financial statements requires the Company to make a number of estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Significant items subject to such estimates and assumptions include allowances for doubtful accounts, sales returns and allowances, product warranty costs, inventory valuation, the carrying amount of property and equipment, stock-based compensation and deferred income taxes. The Company evaluates its estimates and assumptions on an on-going basis using historical experience and other factors, including the current economic environment, which are believed to be reasonable under the circumstances. Management adjusts such estimates and assumptions when facts and circumstances warrant. Illiquid credit markets, volatile equity markets and declines in business investment increase the uncertainty inherent in such estimates and assumptions. As future events and their effects cannot be determined with precision, actual results could differ significantly from these estimates. Changes in these estimates resulting from continuing changes in the economic environment will be reflected in the financial statements in future periods.

Cash and Cash Equivalents

Cash equivalents include short-term, highly liquid instruments, which consist of money market accounts. All cash and cash equivalents are maintained with major financial institutions in North America. Deposits with these financial institutions may exceed the amount of insurance provided on such deposits; however, these deposits typically may be redeemed upon demand and, therefore, bear minimal risk.

Revenue Recognition

On January 1, 2018, the Company adopted Accounting Standards Codification 606, Revenue from Contracts with Customers (ASC 606). See note 3 for further details.

The Company recognizes revenue from the sale of products and performance of research and development services. Revenue is recognized when a customer obtains control of promised goods or services, in an amount that reflects the consideration which the Company expects to receive in exchange from those goods or services.

Sales returns are recorded based on historical sales and return information. Products that exhibit unusual sales return patterns due to quality or other manufacturing matters are specifically investigated and analyzed as part of the sales return accrual. The sales return accrual represents a reserve for products that may be returned due to quality concerns or authorized for destruction in the field. Sales return reserves are recorded at full original sales value. The Company rarely exchanges products from inventory for returned products. Sales return and other credit reserves were $0.2 million and $0.1 million at September 30, 2018 and December 31, 2017, respectively.

Stock-based Compensation

Stock-based compensation expense is measured at the grant date based on the fair value of the award. Expense is recognized on a straight-line basis over the requisite service period for all awards with service conditions. For performance-based awards, the grant date fair value is recognized as expense when the condition is probable of being achieved, and then on a graded basis over the requisite service period. The Company uses the Black-Scholes option-pricing model to determine the fair value of service-based option awards, which requires a number of complex and subjective assumptions including fair value of the underlying security, the expected volatility of the underlying security, a risk-free interest rate and the expected term of the option. The fair value of restricted stock and restricted stock unit grants is determined using the closing trading price of the Company’s common stock on the date of grant. The fair value of awards containing market conditions is determined using a Monte Carlo simulation model based upon the nature of the conditions, the expected volatility of the underlying security, and other relevant factors.

During the nine months ended September 30, 2018, the Company granted 58,062 shares of restricted common stock with a grant date fair value of $0.3 million and 81,102 non-qualified options (NSOs) to purchase shares of common stock with a grant date fair value of $0.4 million vesting over a period of one year to its non-employee directors under the 2014 Employee, Director and Consultant Equity Incentive Plan (the 2014 Equity Plan). During the nine months ended September 30, 2018, the Company also granted 497,910 restricted common stock units (RSUs) with a grant date fair value of $2.3 million and 493,154 NSOs to purchase shares of common stock with a grant date fair value of $1.1 million to employees under the 2014 Equity Plan. The RSUs and NSOs granted to employees vest over a three year period.

Stock-based compensation is included in cost of revenue or operating expenses, as applicable, and consists of the following:

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

 

 

(In thousands)

 

Cost of product revenue

 

$

158

 

 

$

201

 

 

$

474

 

 

$

641

 

Research and development expenses

 

 

124

 

 

 

151

 

 

 

355

 

 

 

449

 

Sales and marketing expenses

 

 

206

 

 

 

294

 

 

 

647

 

 

 

865

 

General and administrative expenses

 

 

640

 

 

 

718

 

 

 

1,938

 

 

 

2,027

 

Total stock-based compensation

 

$

1,128

 

 

$

1,364

 

 

$

3,414

 

 

$

3,982

 

Pursuant to the “evergreen” provisions of the 2014 Equity Plan, the number of shares of common stock authorized for issuance under the plan automatically increased by 472,863 shares to 7,009,460 shares effective January 1, 2018.

As of September 30, 2018, 3,826,217 shares of common stock were reserved for issuance upon the exercise or vesting of outstanding stock-based awards granted under the 2014 Equity Plan. In addition, as of September 30, 2018, 89,465 shares of common stock were reserved for issuance upon the exercise of outstanding stock options granted under the Company’s 2001 Equity Incentive Plan, as amended (the 2001 Equity Plan). Any cancellations or forfeitures of the options outstanding under the 2001 Equity Plan will result in the shares reserved for issuance upon exercise of such options becoming available for grant under the 2014 Equity Plan. As of September 30, 2018, there were 1,785,891 shares of common stock available for future grant under the 2014 Equity Plan.

 

Earnings per Share

The Company calculates net loss per common share based on the weighted-average number of common shares outstanding during each period. Potential common stock equivalents are determined using the treasury stock method. The weighted-average number of common shares included in the computation of diluted net loss gives effect to all potentially dilutive common equivalent shares, including outstanding stock options, RSUs and warrants. Common equivalent shares are excluded from the computation of diluted net loss per share if their effect is antidilutive.

Segments

Operating segments are identified as components of an enterprise about which separate, discrete financial information is available for evaluation by the chief operating decision maker in making decisions on how to allocate resources and assess performance. The Company’s chief operating decision maker is the Chief Executive Officer. The Company’s chief operating decision maker reviews consolidated operating results to make decisions about allocating resources and assessing performance for the entire Company. The Company views its operations and manages its business as one operating segment.

Information about the Company’s total revenues, based on shipment destination or services location, is presented in the following table:

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

 

 

(In thousands)

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S.

 

$

11,485

 

 

$

13,555

 

 

$

30,677

 

 

$

32,816

 

International

 

 

12,452

 

 

 

13,643

 

 

 

38,005

 

 

 

42,453

 

Total

 

$

23,937

 

 

$

27,198

 

 

$

68,682

 

 

$

75,269

 

Warranty Costs

The Company provides warranties for its products and records the estimated cost within cost of revenue in the period that the related revenue is recorded. The Company’s standard warranty period extends to one year from the date of shipment. This standard warranty provides that the Company’s products will be free from defects in material and workmanship, and will, under normal use, conform to the specifications for the product.

The Company’s products may be utilized in systems that involve new technical demands and new configurations. Accordingly, the Company regularly reviews and assesses whether warranty reserves should be recorded in the period that the related revenue is recorded. For an initial shipment of product for use in a system with new technical demands or new configurations and where the Company is unsure of meeting the customer’s specifications, the Company will defer the recognition of product revenue and related costs until written customer acceptance is obtained.

The Company performs periodic testing of its aerogel blankets to ensure compliance with published performance specifications. From time to time, tests may indicate a product could potentially perform outside of these specifications. At that time, additional testing is initiated or the Company may conduct a root cause investigation. During the nine months ended September 30, 2018, a test result indicated that tested samples performed outside the published performance specifications for a specific attribute of a product and, as a result, the Company performed additional testing. The Company has determined that it is probable it has incurred a liability, however, a liability or range of liability is not estimable as of September 30, 2018. The Company will continue to assess the impact of the testing results on its customer base and, depending on the assessment, could be subject to material warranty charges in future periods.

The Company did not record any warranty expense during the nine months ended September 30, 2018. During the nine months ended September 30, 2017, the Company recorded warranty expense of $0.9 million. This specific warranty charge was related to product claims for a single product application issue. As of September 30, 2018, the Company had satisfied all outstanding warranty claims.

Recently Issued Accounting Standards

From time to time, new accounting pronouncements are issued by the FASB or other standard setting bodies. Recently issued standards typically do not require adoption until a future effective date. Prior to their effective date, the Company evaluates the pronouncements to determine the potential effects of adoption to its consolidated financial statements.

Standards Implemented Since December 31, 2017

In August 2015, the FASB issued a deferral of ASU 2014-09, Revenue from Contracts with Customers. The standard replaced the transaction- and industry-specific revenue recognition guidance under current U.S. GAAP with a principle based approach for determining revenue recognition. As a result of the deferral, public entities were required to apply the revised revenue recognition standard for the annual reporting period beginning on or after December 15, 2017, including interim periods within that annual reporting period. The Company adopted this standard using the modified retrospective method on January 1, 2018. The Company completed its analysis of the new revenue standard and determined that it would not materially impact the allocation and timing of recognition of previously reported revenues from the sale of products or performance of research and development services. In addition, the Company determined that there were no incremental contract costs or contract fulfillment costs to be recognized in connection with the adoption. Based on the Company’s analysis, no adjustment to retained earnings was required as of the January 1, 2018 adoption date. Accordingly, the Company’s application of the standard did not have a material impact on the Company’s consolidated balance sheet at January 1, 2018 and did not have a material impact to its statement of operations for the nine months ended September 30, 2018 and 2017 or the twelve months ended December 31, 2017.

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (ASU 2016-15). This amendment addresses eight classification issues related to the statement of cash flows. The amendments in ASU 2016-15 are effective for public business entities for annual and interim periods in fiscal years beginning after December 15, 2017. The Company adopted the provisions of the amendment on January 1, 2018. The adoption of the standard has not resulted in any material impact to the Company’s consolidated financial statements or other disclosures.

Standards to be Implemented

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). FASB ASU 2016-02 modifies the accounting for leases and requires that all leases be recorded on the consolidated balance sheets as assets and liabilities. This standard is effective for fiscal years beginning after December 15, 2018. Early application is permitted. The Company expects to adopt the new standard on January 1, 2019, to apply a modified retrospective transition approach and to use the effective date as the date of initial application. As a result, the Company will not update financial information and will not provide the disclosures required under the new standard for dates and periods before January 1, 2019. The Company expects to elect the package of practical expedients under the new standard, which permits the Company to not reassess prior conclusions about lease identification, lease classification, and initial direct costs. The Company expects that this standard will have a material effect on the Company’s consolidated financial statements. The most significant effects relate to the recognition of new right-of-use (ROU) assets and lease liabilities on the consolidated balance sheets and the provision of significant new disclosures about the Company’s leasing activities. The Company currently expects to elect the short-term lease recognition exemption for all leases that qualify. For leases that qualify for this exemption, the Company will not recognize ROU assets or lease liabilities. The Company also currently expects to elect the practical expedient to not separate lease and non-lease components for all of the Company’s leases.

The Company is in the process of updating its systems, controls and procedures for lease portfolio accounting to comply with the new standard. The Company does not expect a significant change in leasing activities prior to the expected adoption of the new standard on January 1, 2019.

v3.10.0.1
Revenue from Contracts with Customers
9 Months Ended
Sep. 30, 2018
Revenue From Contract With Customer [Abstract]  
Revenue from Contracts with Customers

(3) Revenue from Contracts with Customers

On January 1, 2018, the Company adopted Accounting Standards Codification 606, Revenue from Contracts with Customers (ASC 606) using the modified retrospective method for all contracts not completed as of the date of adoption. The adoption of ASC 606 did not have a material impact on the allocation and timing of the recognition of previously reported revenues from the sale of products, subsea projects or performance of research and development services. In addition, the Company determined that there are no incremental contract costs or contract fulfillment costs associated with the adoption. The reported results for 2018 reflect the application of ASC 606 guidance while the reported results for 2017 were prepared under the guidance of ASC 605. The adoption of ASC 606 represents a change in accounting principle that more closely aligns revenue recognition with the delivery of the Company's product or research services and will provide financial statement readers with enhanced disclosures.

Revenue Recognition

Revenue is recognized when a customer obtains control of promised goods or services, in an amount that reflects the consideration which the entity expects to receive in exchange from those goods or services. To determine revenue recognition for arrangements within the scope of ASC 606, the Company performs the following five steps: (i) identification of the contract with a customer; (ii) identification of the performance obligations in the contract; (iii) determination of the transaction price; (iv) allocation of the transaction price to the separate performance obligations in the contract; and (v) recognition of the revenue associated with performance obligation as they are satisfied. The Company applies the five-step model to contracts when it is probable that the Company will collect the consideration it is entitled to in exchange for the goods or services it transfers to the customer. At contract inception, once the contract is determined to be within the scope of ASC 606, the Company assesses the goods or services promised within each contract and determines those that are performance obligations, and assesses whether each promised good or service is distinct. If the contract contains a single performance obligation, the entire transaction price is allocated to the single performance obligation. Contracts that contain multiple performance obligations require an allocation of the transaction price based on the estimated relative standalone selling prices of the promised products or services underlying each performance obligation. The Company determines standalone selling prices based on the price at which the performance obligation is sold separately. If the standalone selling price is not observable through past transactions, the Company estimates the standalone selling price taking into account available information such as market conditions and internally approved pricing guidelines related to the performance obligations. The Company then recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied.

When determining the transaction price of a contract, an adjustment is made if payment from a customer occurs either significantly before or significantly after performance, resulting in a significant financing component. Applying the practical expedient in paragraph ASC 606-10-32-18, the Company does not assess whether a significant financing component exists if the period between when the Company performs its obligations under the contract and when the customer pays is one year or less. The Company did not have any contracts outstanding at January 1, 2018 and did not enter into any contracts during the nine months ended September 30, 2018 that contained a significant financing component.

The Company records deferred revenue for product sales when the Company has delivered products but other performance obligations have not been satisfied or control has not been transferred to the customer.

 

Shipping and Handling Costs

Shipping and handling costs associated with outbound freight after control over a product has transferred to a customer are accounted for as fulfillment costs and are included in the cost of product revenue. The amount of revenue recognized reflects the consideration to which the Company expects to be entitled to receive in exchange for these products or research services.

Product Revenue

The Company generally enters into contracts containing one type of performance obligation. The Company recognizes product revenue when the performance obligation is satisfied, which is generally upon delivery according to contractual shipping terms within customer purchase orders.

The Company also enters into rebate agreements with certain customers. These agreements may be considered an additional performance obligation of the Company or variable consideration within a contract. Rebates are recorded as a reduction of revenue in the period the related product revenue is recognized. A corresponding liability is recorded as a component of deferred revenue on the consolidated balance sheets. These arrangements are primarily based on the customer attaining contractually specified sales volumes.

The Company estimates the amount of its product sales that may be returned by its customers and records this estimate as a reduction of revenue in the period the related product revenue is recognized. The Company currently estimates product return liabilities using historical rates of return, current quarter credit sales, and specific items of exposure on a contract by contract basis.

Subsea Projects

The Company manufactures and sells subsea products that are designed for pipe-in-pipe applications in offshore oil production and are typically customized to meet customer specifications. Subsea products typically have no alternative use and contain an enforceable right to payment. Customer invoicing terms for subsea products are typically based on certain milestones within the production and delivery schedule. Under the provisions of ASC 606, the Company recognizes revenue at a point in time when transfer of control of the products is passed to the customer, or over time utilizing the input/cost-to-cost method. The timing of revenue recognition is assessed on a contract by contract basis. During the nine months ended September 30, 2018, the Company recognized $2.4 million in connection with subsea projects.

Other Revenue

The Company is party to an amended and restated supply agreement with BASF Polyurethanes GmbH (BASF) (the Supply Agreement) and a joint development agreement with BASF SE (the JDA) (see note 7). Pursuant to the Supply Agreement, the Company will sell exclusively to BASF the Company’s Spaceloft A2 product at annual volumes to be specified by BASF, subject to certain volume limits. The Company has determined that the exclusivity component of the Supply Agreement represents a performance obligation to BASF that will be satisfied over time. The Company will calculate the value of the exclusivity component upon receipt of prepayments from BASF. Revenue associated with this performance obligation will be recognized over the term of the agreement which expires on December 31, 2027.

During the nine months ended September 30, 2018, BASF made two prepayments of $2.5 million each. At the time of the receipt of the prepayments, the Company calculated and accounted for the value associated with exclusivity component as deferred revenue. The value associated with the exclusivity component was approximately $0.5 million for each prepayment.

During the nine months ended September 30, 2018, the Company recognized less than $0.1 million in revenue associated with the exclusive right to sell Spaceloft A2 which is recorded as a component of product revenue in the Company’s consolidated statement of operations. At September 30, 2018, deferred revenue related to the exclusivity component of the Supply Agreement totaled $1.0 million. There was no deferred revenue related to the Supply Agreement at December 31, 2017.

Research Services

The Company performs research services under contracts with various government agencies and other institutions. These contracts generally have one type of performance obligation associated with the provision of research services including functional licenses to any resulting intellectual property. The Company records revenue using the percentage-of-completion method in two ways: (1) for firm-fixed-price contracts, the Company accrues that portion of the total contract price that is allocable on the basis of the Company’s estimates of costs incurred to date to total contract costs; and (2) for cost-plus-fixed-fee contracts, the Company records revenue that is equal to total payroll cost incurred times a stated factor plus reimbursable expenses, to a stated upper limit. The primary cost under the Company’s research service contacts is the labor effort expended in completing the research, and the only deliverable, other than the labor hours expended, is the reporting of research results to the customer. Because the input measure of labor hours expended is also reflective of the output measure, it is a reliable means to measure the extent of progress toward completion. Revisions in cost estimates and fees during the course of the contract are reflected in the accounting period in which the facts that require the revisions become known. Contract costs and rates used to allocate overhead to contracts are subject to audit by the respective contracting government agency. Adjustments to revenue as a result of audit are recorded within the period they become known. To date, adjustments to revenue as a result of contracting agency audits have been insignificant.

Disaggregation of Revenue

In the following table, revenue is disaggregated by primary geographical region and source of revenue:

 

 

Three Months ended

 

 

 

 

 

 

Nine Months Ended

 

 

 

 

 

 

 

September 30, 2018

 

 

 

 

 

 

September 30, 2018

 

 

 

 

 

 

 

U.S.

 

 

International

 

 

Total

 

 

U.S.

 

 

International

 

 

Total

 

 

 

(In thousands)

 

 

 

 

 

 

(In thousands)

 

 

 

 

 

Geographical region

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Asia

 

$

 

 

$

7,814

 

 

$

7,814

 

 

$

 

 

$

23,715

 

 

$

23,715

 

Canada

 

 

 

 

 

186

 

 

 

186

 

 

 

 

 

 

2,457

 

 

 

2,457

 

Europe

 

 

 

 

 

3,881

 

 

 

3,881

 

 

 

 

 

 

9,747

 

 

 

9,747

 

Latin America

 

 

 

 

 

571

 

 

 

571

 

 

 

 

 

 

2,086

 

 

 

2,086

 

U.S.

 

 

11,485

 

 

 

 

 

 

11,485

 

 

 

30,677

 

 

 

 

 

 

30,677

 

Total revenue

 

$

11,485

 

 

$

12,452

 

 

$

23,937

 

 

$

30,677

 

 

$

38,005

 

 

$

68,682

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Source of revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Product revenue

 

$

10,890

 

 

$

10,833

 

 

$

21,723

 

 

$

28,968

 

 

$

35,529

 

 

$

64,497

 

Subsea projects

 

 

 

 

 

1,591

 

 

 

1,591

 

 

 

5

 

 

 

2,430

 

 

 

2,435

 

Other revenue

 

 

 

 

 

28

 

 

 

28

 

 

 

 

 

 

46

 

 

 

46

 

Research services

 

 

595

 

 

 

 

 

 

595

 

 

 

1,704

 

 

 

 

 

 

1,704

 

Total revenue

 

$

11,485

 

 

$

12,452

 

 

$

23,937

 

 

$

30,677

 

 

$

38,005

 

 

$

68,682

 

Contract Balances

The following table presents changes in the Company’s contract assets and contract liabilities during the nine months ended September 30, 2018:

 

 

Balance at December 31, 2017

 

 

Additions

 

 

Deductions

 

 

Balance at September 30, 2018

 

 

 

(In thousands)

 

Contract assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Subsea projects

 

$

2,463

 

 

$

3,924

 

 

$

(4,826

)

 

$

1,561

 

Research services

 

 

425

 

 

 

1,706

 

 

 

(1,809

)

 

 

322

 

Total contract assets

 

$

2,888

 

 

$

5,630

 

 

$

(6,635

)

 

$

1,883

 

Contract liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deferred revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Product revenue

 

$

1,178

 

 

$

2,070

 

 

$

(2,492

)

 

$

756

 

Subsea projects

 

 

126

 

 

 

3,363

 

 

 

(1,624

)

 

 

1,865

 

Research services

 

 

 

 

 

82

 

 

 

 

 

 

82

 

Other revenue

 

 

 

 

 

1,054

 

 

 

(46

)

 

 

1,008

 

Total contract liabilities

 

$

1,304

 

 

$

6,569

 

 

$

(4,162

)

 

$

3,711

 

During the nine months ended September 30, 2018, the Company recognized $1.3 million of revenue that was included in deferred revenue at the beginning of the period.

A contract asset is recorded when the Company satisfies a performance obligation by transferring a promised good or service and has earned the right to consideration from its customer. These assets may represent a conditional or unconditional right to consideration and are included within accounts receivable on the consolidated balance sheets.

A contract liability is recorded when consideration is received, or such consideration is unconditionally due, from a customer prior to transferring goods or services under the terms of the contract. Contract liabilities are recognized as revenue after control of the products or services is transferred to the customer and all revenue recognition criteria have been met. 

Transition Disclosures

The following tables summarize the impacts of adopting ASC 606 on certain components of the Company’s consolidated financial statements as of and for the three and nine months ended September 30, 2018:

Consolidated Balance Sheets

 

 

As of September 30, 2018

 

 

 

As reported under ASC 606

 

 

Pro forma as if ASC 605 was in effect

 

 

 

(In thousands)

 

Inventories

 

$

9,909

 

 

$

10,445

 

Total current assets

 

 

37,957

 

 

 

38,493

 

Total assets

 

 

109,033

 

 

 

109,569

 

Deferred revenue

 

 

2,811

 

 

 

3,313

 

Total current liabilities

 

 

19,380

 

 

 

19,882

 

Total liabilities

 

 

25,540

 

 

 

26,042

 

Accumulated deficit

 

 

(457,477

)

 

 

(457,443

)

Total stockholders’ equity

 

 

83,493

 

 

 

83,527

 

Total liabilities and stockholders’ equity

 

 

109,033

 

 

 

109,569

 

Total reported assets and liabilities were each approximately $0.5 million less than the pro forma consolidated balance sheet which assumes ASC 605 guidance remained in effect as of September 30, 2018. Reported inventories and deferred revenue reflect the impact of revenue recognized over time utilizing the input/cost-to-cost method for subsea projects during the nine months ended September 30, 2018.

Consolidated Statements of Operations

 

 

Three Months Ended September 30, 2018

 

 

Nine Months Ended September 30, 2018

 

 

 

As reported under ASC 606

 

 

Pro forma as if ASC 605 was in effect

 

 

As reported under ASC 606

 

 

Pro forma as if ASC 605 was in effect

 

 

 

(In thousands)

 

Product revenue

 

$

23,342

 

 

$

22,840

 

 

$

66,978

 

 

$

66,476

 

Total revenue

 

 

23,937

 

 

 

23,435

 

 

 

68,682

 

 

 

68,180

 

Product cost of revenue

 

 

22,154

 

 

 

21,618

 

 

 

60,853

 

 

 

60,317

 

Gross profit

 

 

1,529

 

 

 

1,563

 

 

 

7,083

 

 

 

7,117

 

Loss from operations

 

 

(6,369

)

 

 

(6,335

)

 

 

(19,974

)

 

 

(19,940

)

Net loss

 

 

(6,532

)

 

 

(6,498

)

 

 

(20,332

)

 

 

(20,298

)

Total reported product revenue and product cost of revenue were each approximately $0.5 million greater than the pro forma consolidated statement of operations for the three and nine months ended September 30, 2018 under ASC 606. Reported revenue and cost of revenue reflect the impact of revenue recognized over time utilizing the input/cost-to-cost method for subsea projects during the nine months ended September 30, 2018. Under ASC 605 subsea projects revenue was recognized at a point in time when transfer of control of the product passed to the customer.

The impact of the adoption of ASC 606 on the consolidated statement of cash flows for the nine months ended September 30, 2018 was not material and had no impact on net cash used in operating activities.

 

v3.10.0.1
Inventories
9 Months Ended
Sep. 30, 2018
Inventory Disclosure [Abstract]  
Inventories

(4) Inventories

Inventories consist of the following:

 

 

 

September 30,

 

 

December 31,

 

 

 

2018

 

 

2017

 

 

 

(In thousands)

 

Raw materials

 

$

3,045

 

 

$

2,543

 

Finished goods

 

 

6,864

 

 

 

6,372

 

Total

 

$

9,909

 

 

$

8,915

 

 

v3.10.0.1
Property, Plant and Equipment, Net
9 Months Ended
Sep. 30, 2018
Property Plant And Equipment [Abstract]  
Property, Plant and Equipment, Net

(5) Property, Plant and Equipment, Net

Property, plant and equipment consist of the following:

 

 

 

September 30,

 

 

December 31,

 

 

Useful

 

 

 

2018

 

 

2017

 

 

life

 

 

 

(In thousands)

 

 

 

 

 

Construction in progress

 

$

9,541

 

 

$

7,699

 

 

 

 

Buildings

 

 

24,016

 

 

 

24,013

 

 

30 years

 

Machinery and equipment

 

 

119,361

 

 

 

118,786

 

 

3-10 years

 

Computer equipment and software

 

 

8,249

 

 

 

8,099

 

 

3 years

 

Total

 

 

161,167

 

 

 

158,597

 

 

 

 

 

Accumulated depreciation

 

 

(90,167

)

 

 

(82,530

)

 

 

 

 

Property, plant and equipment, net

 

$

71,000

 

 

$

76,067

 

 

 

 

 

 

Depreciation expense was $8.3 million and $8.0 million for the nine months ended September 30, 2018 and 2017, respectively.

Construction in progress included engineering designs and other pre-construction costs for the planned manufacturing facility in Statesboro, Georgia of $7.2 million at both September 30, 2018 and December 31, 2017. The Company has delayed the project to construct the Statesboro, Georgia manufacturing facility to better align the timing of this capacity expansion with the Company’s assessment of future demand. In addition, construction in progress included $2.3 million and less than $0.1 million at September 30, 2018 and December 31, 2017, respectively, related to projects associated with the Company’s plan to expand the capacity of the East Providence, Rhode Island facility.

v3.10.0.1
Accrued Expenses
9 Months Ended
Sep. 30, 2018
Payables And Accruals [Abstract]  
Accrued Expenses

(6) Accrued Expenses

Accrued expenses consist of the following:

 

 

 

September 30,

 

 

December 31,

 

 

 

2018

 

 

2017

 

 

 

(In thousands)

 

Employee compensation

 

$

2,163

 

 

$

4,633

 

Other accrued expenses

 

 

1,366

 

 

 

1,229

 

Total

 

$

3,529

 

 

$

5,862

 

 

v3.10.0.1
Commitments and Contingencies
9 Months Ended
Sep. 30, 2018
Commitments And Contingencies Disclosure [Abstract]  
Commitments and Contingencies

(7) Commitments and Contingencies

Customer Supply Agreement

The Company is party to the Supply Agreement with BASF and the JDA with BASF SE. Pursuant to the Supply Agreement, the Company will sell exclusively to BASF the Company’s Spaceloft A2 product at annual volumes to be specified by BASF, subject to certain volume limits. The Supply Agreement will terminate on December 31, 2027. Upon expiration of the Supply Agreement, the Company will be subject to a post-termination supply commitment for an additional two years. The JDA is designed to facilitate the collaboration between the parties on the development and commercialization of new products.

In addition, BASF, in its sole discretion, may make prepayments to the Company in the aggregate amount of up to $22.0 million during the term of the Supply Agreement. BASF agreed to make a prepayment in the amount of $5.0 million to the Company in two equal installments in 2018 (the 2018 Prepayment). The amounts and terms of additional prepayment installments, if any, are subject to negotiation between the Company and BASF.

After January 1, 2019, the Company will, at BASF’s instruction, credit up to 25.3% of any amounts invoiced by the Company for Spaceloft A2 product sold to BASF against the prepayment balance. However, BASF has no obligation to purchase products under the Supply Agreement. If any of the 2018 Prepayment remains uncredited as of December 31, 2021, BASF may request that the Company repay the uncredited amount to BASF. The prepayment obligation is secured by a security interest in real estate, plant and equipment at the Company’s Rhode Island facility and a license to certain intellectual property.

As of September 30, 2018, the Company had received $5.0 million of the 2018 Prepayment from BASF, which is recorded on the balance sheet as a prepayment liability, net of discount of $0.9 million. The discount will be amortized into interest expense through December 31, 2021, or until the prepayment liability is fully credited by purchases from BASF.

Prepayment liability consists of the following:

 

 

September 30,

 

 

December 31,

 

 

 

2018

 

 

2017

 

 

 

(In thousands)

 

Prepayment liability

 

$

5,000

 

 

$

 

Discount on prepayment liability

 

 

(1,054

)

 

 

 

Accretion of discount expense, net

 

 

107

 

 

 

 

Prepayment liability, less current maturities

 

$

4,053

 

 

$

 

The deferred revenue associated with the prepayment liability represents a grant to BASF of the exclusive right to sell Spaceloft A2 over the term of the Supply Agreement. Deferred revenue will be amortized into revenue on a straight-line basis over the term of the Supply Agreement. At September 30, 2018, $1.0 million was recorded as deferred revenue of which $0.1 million was recorded as a component of short term deferred revenue. During the nine months ended September 30, 2018, the Company recognized less than $0.1 million in revenue associated with the grant to BASF of the exclusive right to sell Spaceloft A2, which is recorded as a component of product revenue in the consolidated statement of operations.

Deferred revenue consists of the following:

 

 

September 30,

 

 

December 31,

 

 

 

2018

 

 

2017

 

 

 

(In thousands)

 

Total deferred revenue

 

$

3,711

 

 

$

1,304

 

Current maturities of deferred revenue - product revenue

 

 

(2,702

)

 

 

(1,304

)

Current maturities of deferred revenue - Supply Agreement

 

 

(109

)

 

 

 

Deferred revenue, less current maturities

 

$

900

 

 

$

 

Revolving Line of Credit

The Company entered into an Amended and Restated Loan and Security Agreement (the Loan Agreement) with Silicon Valley Bank (the Bank), on August 31, 2014, which has been subsequently amended from time to time. On January 25, 2018, the Loan Agreement was amended to extend the maturity date of the facility to April 28, 2018. On April 25, 2018, the Loan Agreement was further amended to extend the maturity date of the facility to April 28, 2019. Under the Loan Agreement, the Company may borrow up to $20.0 million subject to compliance with certain covenants and borrowing base limitations. At the Company’s election, the interest rate applicable to borrowings may be based on the prime rate or LIBOR. Prime rate-based rates vary from prime rate plus 0.75% per annum to prime rate plus 2.00% per annum, while LIBOR-based rates vary from LIBOR plus 3.75% per annum to LIBOR plus 4.25% per annum. In addition, the Company is required to pay a monthly fee of 0.5% per annum of the average unused portion of the facility. Obligations under the Loan Agreement are secured by a security interest in all assets of the Company, including those at the East Providence facility, except for certain exclusions. The revolving credit facility matures on April 28, 2019.

At September 30, 2018 and December 31, 2017, the Company had $5.2 million and $3.8 million, respectively, drawn on the revolving credit facility. Under the Loan Agreement, the Company is required to comply with both non-financial and financial covenants, including minimum Adjusted EBITDA and minimum Adjusted Quick Ratio covenants, each as defined in the Loan Agreement. During 2018, the Company obtained a waiver on two occasions from the Bank with respect to compliance with the Adjusted Quick Ratio covenant. At September 30, 2018, the Company was in compliance with all such covenants. The Company has been required to provide letters of credit to secure obligations under certain commercial contracts. The Company had outstanding letters of credit backed by the revolving credit facility of $2.0 million and $2.3 million at September 30, 2018 and December 31, 2017, respectively, which reduce the funds otherwise available to the Company under the facility.

At September 30, 2018, the effective amount available to the Company under the revolving credit facility was $8.0 million after giving effect to the $5.2 million in outstanding borrowings and $2.0 million of outstanding letters of credit.

Litigation

The Company is, from time to time, a party to litigation that arises in the normal course of its business operations. See Part II, Item 1 “Legal Proceedings” of this Quarterly Report on Form 10-Q for a description of certain of the Company’s current legal proceedings. The Company is not presently a party to any litigation for which it believes a loss is probable requiring an amount to be accrued or a possible loss contingency requiring disclosure.

v3.10.0.1
Deferred Rent
9 Months Ended
Sep. 30, 2018
Other Liabilities Disclosure [Abstract]  
Deferred Rent

(8) Deferred Rent

The Company leases office and warehouse space in Northborough, Massachusetts and East Providence, Rhode Island.

For leases that contain fixed increases in the minimum annual lease payments during the term of the lease, the Company recognizes rental expense on a straight-line basis over the lease term, and records the difference between rent expense and the amount currently payable as deferred rent.

Deferred rent consists of the following:

 

 

 

September 30,

 

 

December 31,

 

 

 

2018

 

 

2017

 

 

 

(In thousands)

 

Deferred rent

 

$

1,387

 

 

$

1,511

 

Current maturities of deferred rent

 

 

(180

)

 

 

(208

)

Deferred rent, less current maturities

 

$

1,207

 

 

$

1,303

 

 

v3.10.0.1
Net Loss Per Share
9 Months Ended
Sep. 30, 2018
Earnings Per Share [Abstract]  
Net Loss Per Share

(9) Net Loss Per Share

The computation of basic and diluted net loss per share consists of the following:

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

 

 

(In thousands, except

share and per share data)

 

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(6,532

)

 

$

(3,088

)

 

$

(20,332

)

 

$

(17,638

)

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding, basic and diluted

 

 

23,808,703

 

 

 

23,442,241

 

 

 

23,707,245

 

 

 

23,356,997

 

Net loss per share, basic and diluted

 

$

(0.27

)

 

$

(0.13

)

 

$

(0.86

)

 

$

(0.76

)

 

Potentially dilutive common shares that were excluded from the computation of diluted net loss per share because they were anti-dilutive consist of the following:

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Common stock options

 

 

2,994,452

 

 

 

2,476,829

 

 

 

2,994,452

 

 

 

2,476,829

 

Restricted common stock units

 

 

921,227

 

 

 

834,859

 

 

 

921,227

 

 

 

834,859

 

Common stock warrants

 

 

 

 

 

120

 

 

 

 

 

 

120

 

Restricted common stock awards

 

 

136,187

 

 

 

151,859

 

 

 

136,187

 

 

 

151,859

 

Total

 

 

4,051,866

 

 

 

3,463,667

 

 

 

4,051,866

 

 

 

3,463,667

 

In the table above, anti-dilutive shares consist of those common stock equivalents that have (i) an exercise price above the average stock price for the period or (ii) related average unrecognized stock compensation expense sufficient to buy back the entire amount of shares. The Company excludes the shares issued in connection with restricted stock awards from the calculation of basic weighted average common shares outstanding until the restrictions lapse.

v3.10.0.1
Income Taxes
9 Months Ended
Sep. 30, 2018
Income Tax Disclosure [Abstract]  
Income Taxes

(10) Income Taxes

The Company incurred net operating losses and recorded a full valuation allowance against net deferred tax assets for all periods presented. Accordingly, the Company has not recorded a provision for federal or state income taxes.

The Securities and Exchange Commission staff issued Staff Accounting Bulletin No. 118 (SAB 118) to address the tax reform legislation enacted in the United States in 2017. In accordance with SAB 118, the Company has recognized the provisional tax impacts, related to the re-measurement of its deferred income tax assets and liabilities associated with the one-time mandatory transition tax on deemed repatriation as of December 31, 2017. Although the Company does not believe there will be any material adjustments in subsequent reporting periods, the ultimate impact may differ from the provisional amounts, due to, among other things, the significant complexity of the 2017 Tax Cuts and Jobs Act and anticipated additional regulatory guidance that may be issued by the Internal Revenue Service, changes in analysis, interpretations and assumptions the Company has made and actions the Company may take as a result of the 2017 Tax Cuts and Jobs Act.

v3.10.0.1
Subsequent Events
9 Months Ended
Sep. 30, 2018
Subsequent Events [Abstract]  
Subsequent Events

(11) Subsequent Events

The Company has evaluated subsequent events through November 7, 2018, the date of issuance of the consolidated financial statements for the three and nine months ended September 30, 2018.

 

 

v3.10.0.1
Description of Business and Basis of Presentation (Policies)
9 Months Ended
Sep. 30, 2018
Accounting Policies [Abstract]  
Nature of Business

Nature of Business

Aspen Aerogels, Inc. (the Company) is an aerogel technology company that designs, develops and manufactures innovative, high-performance aerogel insulation used primarily in the energy infrastructure and building materials markets. The Company also conducts research and development related to aerogel technology supported by funding from several agencies of the U.S. government and other institutions in the form of research and development contracts.

The Company maintains its corporate offices in Northborough, Massachusetts. The Company has three wholly owned subsidiaries: Aspen Aerogels Rhode Island, LLC, Aspen Aerogels Germany, GmbH and Aspen Aerogels Georgia, LLC.

Liquidity

Liquidity

In August 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014‑15, Presentation of Financial Statements-Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (ASU 2015-14). This ASU requires management to assess and evaluate whether conditions or events exist, considered in the aggregate, that raise substantial doubt about the entity's ability to continue as a going concern within one year after the financial statements issue date. The Company adopted this standard effective January 1, 2017.

At September 30, 2018, the Company had a cash and cash equivalents balance of $5.2 million and $5.2 million of outstanding borrowings under its revolving line of credit (see note 7). After giving effect to the outstanding borrowings and letters of credit, the additional amount available to the Company at September 30, 2018 under the revolving line of credit was $8.0 million. The existing revolving line of credit matures on April 28, 2019.

The Company is making investments to increase capacity at its existing manufacturing facility in East Providence, Rhode Island, to expand its sales and marketing efforts, and to develop new technologies and business opportunities. The Company expects its existing cash balance and the amount anticipated to be available under the existing revolving line of credit will be sufficient to fund a portion of these investments. The Company plans to manage capital expenditures and working capital balances to maintain the cash resources required to support current operating requirements and the initial phases of the capacity expansion plan.

The Company will need to supplement its cash balance and amounts available under its revolving line of credit with anticipated cash flows from operations, local government grants, debt financings, customer prepayments, technology licensing agreements or equity financings to provide the capital required to complete the expansion of the existing manufacturing facility and to fund its strategic business initiatives.

Unaudited Interim Financial Information

Unaudited Interim Financial Information

The accompanying unaudited interim consolidated financial statements include the accounts of the Company and have been prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Certain information and disclosures normally included in the consolidated financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to such rules and regulations. As such, the information included in this Quarterly Report on Form 10-Q should be read in conjunction with the audited consolidated financial statements and accompanying notes in our Annual Report on Form 10-K for the year ended December 31, 2017 (the Annual Report), filed with the Securities and Exchange Commission on March 1, 2018.

In the opinion of the Company’s management, the unaudited interim consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements and include all adjustments that are of a normal recurring nature and necessary for the fair statement of the Company’s financial position as of September 30, 2018 and the results of its operations for the nine months ended September 30, 2018 and 2017 and the cash flows for the nine month periods then ended. The Company has evaluated events through the date of this filing.

The results of operations for the three and nine months ended September 30, 2018 are not necessarily indicative of the results to be expected for the year ending December 31, 2018 or any other period.

Principles of Consolidation

Principles of Consolidation

The accompanying consolidated financial statements, which have been prepared in accordance with U.S. GAAP, include the accounts of the Company and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.

Use of Estimates

Use of Estimates

The preparation of the consolidated financial statements requires the Company to make a number of estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Significant items subject to such estimates and assumptions include allowances for doubtful accounts, sales returns and allowances, product warranty costs, inventory valuation, the carrying amount of property and equipment, stock-based compensation and deferred income taxes. The Company evaluates its estimates and assumptions on an on-going basis using historical experience and other factors, including the current economic environment, which are believed to be reasonable under the circumstances. Management adjusts such estimates and assumptions when facts and circumstances warrant. Illiquid credit markets, volatile equity markets and declines in business investment increase the uncertainty inherent in such estimates and assumptions. As future events and their effects cannot be determined with precision, actual results could differ significantly from these estimates. Changes in these estimates resulting from continuing changes in the economic environment will be reflected in the financial statements in future periods.

Cash and Cash Equivalents

Cash and Cash Equivalents

Cash equivalents include short-term, highly liquid instruments, which consist of money market accounts. All cash and cash equivalents are maintained with major financial institutions in North America. Deposits with these financial institutions may exceed the amount of insurance provided on such deposits; however, these deposits typically may be redeemed upon demand and, therefore, bear minimal risk.

Revenue Recognition

Revenue Recognition

On January 1, 2018, the Company adopted Accounting Standards Codification 606, Revenue from Contracts with Customers (ASC 606). See note 3 for further details.

The Company recognizes revenue from the sale of products and performance of research and development services. Revenue is recognized when a customer obtains control of promised goods or services, in an amount that reflects the consideration which the Company expects to receive in exchange from those goods or services.

Sales returns are recorded based on historical sales and return information. Products that exhibit unusual sales return patterns due to quality or other manufacturing matters are specifically investigated and analyzed as part of the sales return accrual. The sales return accrual represents a reserve for products that may be returned due to quality concerns or authorized for destruction in the field. Sales return reserves are recorded at full original sales value. The Company rarely exchanges products from inventory for returned products. Sales return and other credit reserves were $0.2 million and $0.1 million at September 30, 2018 and December 31, 2017, respectively.

Stock-based Compensation

Stock-based Compensation

Stock-based compensation expense is measured at the grant date based on the fair value of the award. Expense is recognized on a straight-line basis over the requisite service period for all awards with service conditions. For performance-based awards, the grant date fair value is recognized as expense when the condition is probable of being achieved, and then on a graded basis over the requisite service period. The Company uses the Black-Scholes option-pricing model to determine the fair value of service-based option awards, which requires a number of complex and subjective assumptions including fair value of the underlying security, the expected volatility of the underlying security, a risk-free interest rate and the expected term of the option. The fair value of restricted stock and restricted stock unit grants is determined using the closing trading price of the Company’s common stock on the date of grant. The fair value of awards containing market conditions is determined using a Monte Carlo simulation model based upon the nature of the conditions, the expected volatility of the underlying security, and other relevant factors.

During the nine months ended September 30, 2018, the Company granted 58,062 shares of restricted common stock with a grant date fair value of $0.3 million and 81,102 non-qualified options (NSOs) to purchase shares of common stock with a grant date fair value of $0.4 million vesting over a period of one year to its non-employee directors under the 2014 Employee, Director and Consultant Equity Incentive Plan (the 2014 Equity Plan). During the nine months ended September 30, 2018, the Company also granted 497,910 restricted common stock units (RSUs) with a grant date fair value of $2.3 million and 493,154 NSOs to purchase shares of common stock with a grant date fair value of $1.1 million to employees under the 2014 Equity Plan. The RSUs and NSOs granted to employees vest over a three year period.

Stock-based compensation is included in cost of revenue or operating expenses, as applicable, and consists of the following:

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

 

 

(In thousands)