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(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.
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, 2016 (the Annual Report), filed with the Securities and Exchange Commission on March 2, 2017.
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 March 31, 2017 and the results of its operations for the three months ended March 31, 2017 and 2016 and the cash flows for the three month periods then ended. The Company has evaluated events through the date of this filing.
The results of operations for the three months ended March 31, 2017 are not necessarily indicative of the results to be expected for the year ending December 31, 2017 or any other period.
There have been no changes to the Company’s significant accounting policies described in the Annual Report that have had a material impact on the Company’s consolidated financial statements and notes thereto.
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(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 dictate. 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
The Company recognizes revenue from the sale of products and performance of research and development services. Revenue is recognized when all of the following criteria are met: persuasive evidence of an arrangement exists, the price to the buyer is fixed or determinable, delivery has occurred or services have been provided, and collectability is reasonably assured.
Product Revenue
Product revenue is recognized upon transfer of title and risk of loss, which is upon shipment or delivery. The Company’s customary shipping terms are free on board (FOB) shipping point.
The Company records deferred revenue for product sales when (i) the Company has delivered products but other revenue recognition criteria have not been satisfied or (ii) payments have been received in advance of products being delivered.
Research Services Revenue
The Company performs research services under contracts with various government agencies and other institutions. The Company records revenue earned on research services contracts 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 is the labor effort expended in completing research, and the only deliverable, other than the labor hours expended, is 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 towards 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 in the period they become known. To date, adjustments to revenue as a result of audit have been insignificant.
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 terms of the conditions, the expected volatility of the underlying security, and other relevant factors.
During the three months ended March 31, 2017, the Company granted 481,373 restricted common stock units (RSUs) and non-qualified stock options (NSOs) to purchase 320,571 shares of common stock to employees under the 2014 Employee, Director and Consultant Equity Incentive Plan (the 2014 Equity Plan). The employee RSUs and NSOs will vest over a three year period. Stock-based compensation is included in cost of sales or operating expenses, as applicable, and consists of the following:
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Three Months Ended |
|
|||||
|
|
March 31, |
|
|||||
|
|
2017 |
|
|
2016 |
|
||
|
|
(In thousands) |
|
|||||
Cost of product revenue |
|
$ |
204 |
|
|
$ |
192 |
|
Research and development expenses |
|
|
138 |
|
|
|
140 |
|
Sales and marketing expenses |
|
|
268 |
|
|
|
261 |
|
General and administrative expenses |
|
|
634 |
|
|
|
777 |
|
Total stock-based compensation |
|
$ |
1,244 |
|
|
$ |
1,370 |
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Effective January 1, 2017, the Company adopted the provision of Financial Accounting Standards Board (FASB) Accounting Standards Update (ASU) 2016-09, Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (ASU 2016-09) related to the timing of accounting for the forfeitures of share based awards using a modified retrospective transition method by means of a cumulative-effect adjustment to equity as of January 1, 2017 of $0.3 million. Effective January 1, 2017, the Company will record the impact of forfeitures of service based awards at the time an award is forfeited.
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 467,396 shares to 6,536,597 shares effective January 1, 2017.
As of March 31, 2017, 3,244,691 shares of common stock were reserved for issuance upon the exercise or vesting, as appropriate, of outstanding stock-based awards granted under the 2014 Equity Plan. In addition, as of March 31, 2017, 92,947 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 March 31, 2017, there were 2,485,081 shares of common stock available for 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 income (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 income (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:
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Three Months Ended |
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|||||
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March 31, |
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|||||
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2017 |
|
|
2016 |
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||
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(In thousands) |
|
|||||
Revenue: |
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|
|
|
|
|
|
|
U.S. |
|
$ |
9,130 |
|
|
$ |
11,413 |
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International |
|
|
13,872 |
|
|
|
21,408 |
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Total |
|
$ |
23,002 |
|
|
$ |
32,821 |
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Warranty Costs
The Company provides warranties for its products and records the estimated cost within cost of sales in the period that the related revenue is recorded. The Company’s standard warranty period extends to one year from the date of shipment. The standard warranties provide 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 may involve new technical demands and new configurations. As such, the Company regularly reviews and assesses whether warranty reserves shall be recorded in the period the related revenue is recorded. For an initial shipment of product in a system with new technical demands or 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.
During the three months ended March 31, 2017, the Company recorded warranty expense of $0.9 million. This specific warranty charge was related to a product claim for a specific product application issue.
Recently Issued Accounting Standards
In March 2016, the FASB issued ASU 2016-09. The amendment is to simplify several aspects of the accounting for share-based payment transactions including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. For public entities, the amendments in ASU 2016-09 are effective for interim and annual reporting periods beginning after December 15, 2016. The Company has adopted this standard effective January 1, 2017. The provision of ASU 2016-09 related to the timing of accounting for the forfeitures of share based awards was adopted using a modified retrospective transition method by means of a cumulative-effect adjustment to equity as of January 1, 2017 of $0.3 million. The other provisions of ASU 2016-09 have been adopted prospectively.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). FASB ASU 2016-02 changes the accounting for leases and includes a requirement to record all leases on the consolidated balance sheets as assets and liabilities. This update is effective for fiscal years beginning after December 15, 2018. Early application is permitted. The Company has not yet selected a transition method and is evaluating the effect the updated standard will have on its consolidated financial statements and related disclosures.
In August 2015, the FASB issued a deferral of ASU 2014-09, Revenue from Contracts with Customers. The standard will eliminate the transaction- and industry-specific revenue recognition guidance under current U.S. GAAP and replace it with a principle based approach for determining revenue recognition. As a result of the deferral, public entities are required to apply the revenue recognition standard for the annual reporting period beginning on or after December 15, 2017, including interim periods within that annual reporting period. Early application is permitted only as of annual and interim periods in fiscal years beginning after December 15, 2016. The Company expects to adopt the modified retrospective method and is evaluating the effect that the updated standard will have on its consolidated financial statements and related disclosures.
In July 2015, the FASB issued ASU 2015-11, Inventory (Topic 330), which, for entities that do not measure inventory using the last-in, first-out (LIFO) or retail inventory method, changes the measurement principle for inventory from the lower of cost or market to lower of cost and net realizable value. The ASU also eliminates the requirement for these entities to consider replacement cost or net realizable value less an approximately normal profit margin when measuring inventory. Public entities are required to apply the standards for fiscal years beginning after December 15, 2016, including interim periods within those fiscal periods. The Company adopted this standard effective January 1, 2017. There was no material impact on the Company’s consolidated financial statements and disclosures.
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. For public business entities, 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. Early adoption is permitted, including adoption in an interim period. The Company has not yet selected a transition method and is evaluating the effect the updated standard will have on its consolidated financial statements and related disclosures.
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(3) Inventories
Inventories consist of the following:
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March 31, |
|
|
December 31, |
|
||
|
|
2017 |
|
|
2016 |
|
||
|
|
(In thousands) |
|
|||||
Raw materials |
|
$ |
3,556 |
|
|
$ |
3,511 |
|
Finished goods |
|
|
11,576 |
|
|
|
9,357 |
|
Total |
|
$ |
15,132 |
|
|
$ |
12,868 |
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(4) Property, Plant and Equipment, Net
Property, plant and equipment consist of the following:
|
|
March 31, |
|
|
December 31, |
|
|
Useful |
|
|||
|
|
2017 |
|
|
2016 |
|
|
life |
|
|||
|
|
(In thousands) |
|
|
|
|
|
|||||
Construction in progress |
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$ |
11,216 |
|
|
$ |
11,139 |
|
|
|
— |
|
Buildings |
|
|
23,929 |
|
|
|
23,901 |
|
|
30 years |
|
|
Machinery and equipment |
|
|
114,370 |
|
|
|
113,659 |
|
|
3-10 years |
|
|
Computer equipment and software |
|
|
7,817 |
|
|
|
7,679 |
|
|
3 years |
|
|
Total |
|
|
157,332 |
|
|
|
156,378 |
|
|
|
|
|
Accumulated depreciation |
|
|
(74,613 |
) |
|
|
(71,984 |
) |
|
|
|
|
Property, plant and equipment, net |
|
$ |
82,719 |
|
|
$ |
84,394 |
|
|
|
|
|
Depreciation expense was $2.7 million and $2.4 million for the three months ended March 31, 2017 and 2016, respectively.
Construction in progress totaled $11.2 million and $11.1 million at March 31, 2017 and December 31, 2016, respectively, which included engineering designs and other pre-construction costs for the planned manufacturing facility in Statesboro, Georgia of $7.2 million at March 31, 2017 and December 31, 2016.
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(5) Accrued Expenses
Accrued expenses consist of the following:
|
|
March 31, |
|
|
December 31, |
|
||
|
|
2017 |
|
|
2016 |
|
||
|
|
(In thousands) |
|
|||||
Employee compensation |
|
$ |
2,661 |
|
|
$ |
2,796 |
|
Other accrued expenses |
|
|
1,451 |
|
|
|
1,191 |
|
Total |
|
$ |
4,112 |
|
|
$ |
3,987 |
|
|
(6) Commitments and Contingencies
Customer Supply Agreement
During 2016, the Company entered into a supply agreement and a side agreement (together, the Supply Agreement) and a joint development agreement (the JDA) with BASF SE (BASF). 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, under the terms of the Supply Agreement, BASF will make a non-interest bearing prepayment to the Company in the aggregate amount of $22 million during the construction of the Company’s planned manufacturing facility in Statesboro, Georgia (Plant Two), subject to the Company’s prior satisfaction of certain preconditions, including securing a debt commitment from a third party lender for at least $30 million. BASF is obligated to pay the prepayment to the Company in eight equal consecutive quarterly installments commencing on the first day of the calendar quarter following the date on which the preconditions are met. Once commenced, BASF’s obligation to make such quarterly payments shall be subject to postponement in the event of delays of three months or more in the projected date of completion of Plant Two by a commensurate number of months.
After October 1, 2018, 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 prepayment remains uncredited against amounts invoiced by the Company as of September 30, 2023, BASF may request that the Company repay the uncredited amount to BASF in four equal quarterly installments beginning on December 31, 2023. The repayment obligation will be secured by a security interest in real estate, plant and equipment at the Company’s Rhode Island and Georgia manufacturing facilities.
As of March 31, 2017, the Company anticipates that the impact of constrained capital investment and low activity levels in the global energy markets will continue through 2017. With this view of the market, the Company has elected to temporarily delay the board approved Plant Two project and its related financing to better align the capacity expansion with the Company’s assessment of demand for the 2018 to 2020 period. As a result, the Company has yet to fulfill the prepayment preconditions and commencement of the quarterly prepayments from BASF will be delayed until the preconditions are satisfied.
Revolving Line of Credit
The Company entered into an Amended and Restated Loan and Security Agreement with Silicon Valley Bank (Loan Agreement), on August 31, 2014, which has been subsequently amended from time to time. On January 27, 2017, the Loan Agreement was amended to extend the maturity date of the revolving credit facility to January 28, 2018. Under the Loan Agreement, the Company may borrow up to $20 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 1.75% 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 unused line fee of 0.5% per annum of the average unused portion of the facility. The Company’s obligations under the Loan Agreement are secured by a first priority security interest in all assets of the Company, including those at the East Providence facility, except for certain exclusions.
At March 31, 2017 and December 31, 2016, the Company had no amounts 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, as defined. At March 31, 2017, the Company was in compliance with all such financial covenants.
The Company has been required to provide its landlord for its Northborough, Massachusetts facility with letters of credit securing certain obligations. As of January 31, 2017, these obligations were released by the landlord. In addition, the Company has been required to provide certain customers with letters of credit securing obligations under commercial contracts. The Company had outstanding letters of credit backed by the revolving credit facility of $2.4 million and $2.7 million at March 31, 2017 and December 31, 2016, respectively, which reduce the funds otherwise available to the Company under the facility. Based on the available borrowing base, the effective amount available to the Company under the revolving credit facility at March 31, 2017 was $9.7 million after consideration of the $2.4 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.
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(7) Deferred Rent
For leases that contain fixed increases in the minimum annual lease payment during the original 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.
Lease incentives for allowances for qualified leasehold improvements received from the landlord are amortized on a straight-line basis over the lease term. These improvements and the funding received from the landlord are recorded as fixed asset additions and a deferred rent liability on the consolidated balance sheet. The deferred rent liability is being amortized as a reduction to rent expense over the life of the lease.
Cash flows from the landlord for the reimbursement of improvements have been reported within cash from operating activities, while cash flows remitted for the acquisition of leasehold improvements are classified within investing activity cash flows. As of March 31, 2017, deferred rent included $0.8 million in deferred lease incentives and $0.5 million of straight-line rental obligations.
Deferred rent consists of the following:
|
|
March 31, |
|
|
December 31, |
|
||
|
|
2017 |
|
|
2016 |
|
||
|
|
(In thousands) |
|
|||||
Deferred rent |
|
$ |
1,251 |
|
|
$ |
1,125 |
|
Current maturities of deferred rent |
|
|
(169 |
) |
|
|
(154 |
) |
Deferred rent, less current maturities |
|
$ |
1,082 |
|
|
$ |
971 |
|
|
(9) 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.
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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.
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, 2016 (the Annual Report), filed with the Securities and Exchange Commission on March 2, 2017.
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 March 31, 2017 and the results of its operations for the three months ended March 31, 2017 and 2016 and the cash flows for the three month periods then ended. The Company has evaluated events through the date of this filing.
The results of operations for the three months ended March 31, 2017 are not necessarily indicative of the results to be expected for the year ending December 31, 2017 or any other period.
There have been no changes to the Company’s significant accounting policies described in the Annual Report that have had a material impact on the Company’s consolidated financial statements and notes thereto.
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 dictate. 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
The Company recognizes revenue from the sale of products and performance of research and development services. Revenue is recognized when all of the following criteria are met: persuasive evidence of an arrangement exists, the price to the buyer is fixed or determinable, delivery has occurred or services have been provided, and collectability is reasonably assured.
Product Revenue
Product revenue is recognized upon transfer of title and risk of loss, which is upon shipment or delivery. The Company’s customary shipping terms are free on board (FOB) shipping point.
The Company records deferred revenue for product sales when (i) the Company has delivered products but other revenue recognition criteria have not been satisfied or (ii) payments have been received in advance of products being delivered.
Research Services Revenue
The Company performs research services under contracts with various government agencies and other institutions. The Company records revenue earned on research services contracts 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 is the labor effort expended in completing research, and the only deliverable, other than the labor hours expended, is 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 towards 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 in the period they become known. To date, adjustments to revenue as a result of audit have been insignificant.
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 terms of the conditions, the expected volatility of the underlying security, and other relevant factors.
During the three months ended March 31, 2017, the Company granted 481,373 restricted common stock units (RSUs) and non-qualified stock options (NSOs) to purchase 320,571 shares of common stock to employees under the 2014 Employee, Director and Consultant Equity Incentive Plan (the 2014 Equity Plan). The employee RSUs and NSOs will vest over a three year period. Stock-based compensation is included in cost of sales or operating expenses, as applicable, and consists of the following:
|
|
Three Months Ended |
|
|||||
|
|
March 31, |
|
|||||
|
|
2017 |
|
|
2016 |
|
||
|
|
(In thousands) |
|
|||||
Cost of product revenue |
|
$ |
204 |
|
|
$ |
192 |
|
Research and development expenses |
|
|
138 |
|
|
|
140 |
|
Sales and marketing expenses |
|
|
268 |
|
|
|
261 |
|
General and administrative expenses |
|
|
634 |
|
|
|
777 |
|
Total stock-based compensation |
|
$ |
1,244 |
|
|
$ |
1,370 |
|
Effective January 1, 2017, the Company adopted the provision of Financial Accounting Standards Board (FASB) Accounting Standards Update (ASU) 2016-09, Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (ASU 2016-09) related to the timing of accounting for the forfeitures of share based awards using a modified retrospective transition method by means of a cumulative-effect adjustment to equity as of January 1, 2017 of $0.3 million. Effective January 1, 2017, the Company will record the impact of forfeitures of service based awards at the time an award is forfeited.
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 467,396 shares to 6,536,597 shares effective January 1, 2017.
As of March 31, 2017, 3,244,691 shares of common stock were reserved for issuance upon the exercise or vesting, as appropriate, of outstanding stock-based awards granted under the 2014 Equity Plan. In addition, as of March 31, 2017, 92,947 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 March 31, 2017, there were 2,485,081 shares of common stock available for 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 income (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 income (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 |
|
|||||
|
|
March 31, |
|
|||||
|
|
2017 |
|
|
2016 |
|
||
|
|
(In thousands) |
|
|||||
Revenue: |
|
|
|
|
|
|
|
|
U.S. |
|
$ |
9,130 |
|
|
$ |
11,413 |
|
International |
|
|
13,872 |
|
|
|
21,408 |
|
Total |
|
$ |
23,002 |
|
|
$ |
32,821 |
|
Warranty Costs
The Company provides warranties for its products and records the estimated cost within cost of sales in the period that the related revenue is recorded. The Company’s standard warranty period extends to one year from the date of shipment. The standard warranties provide 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 may involve new technical demands and new configurations. As such, the Company regularly reviews and assesses whether warranty reserves shall be recorded in the period the related revenue is recorded. For an initial shipment of product in a system with new technical demands or 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.
During the three months ended March 31, 2017, the Company recorded warranty expense of $0.9 million. This specific warranty charge was related to a product claim for a specific product application issue.
Recently Issued Accounting Standards
In March 2016, the FASB issued ASU 2016-09. The amendment is to simplify several aspects of the accounting for share-based payment transactions including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. For public entities, the amendments in ASU 2016-09 are effective for interim and annual reporting periods beginning after December 15, 2016. The Company has adopted this standard effective January 1, 2017. The provision of ASU 2016-09 related to the timing of accounting for the forfeitures of share based awards was adopted using a modified retrospective transition method by means of a cumulative-effect adjustment to equity as of January 1, 2017 of $0.3 million. The other provisions of ASU 2016-09 have been adopted prospectively.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). FASB ASU 2016-02 changes the accounting for leases and includes a requirement to record all leases on the consolidated balance sheets as assets and liabilities. This update is effective for fiscal years beginning after December 15, 2018. Early application is permitted. The Company has not yet selected a transition method and is evaluating the effect the updated standard will have on its consolidated financial statements and related disclosures.
In August 2015, the FASB issued a deferral of ASU 2014-09, Revenue from Contracts with Customers. The standard will eliminate the transaction- and industry-specific revenue recognition guidance under current U.S. GAAP and replace it with a principle based approach for determining revenue recognition. As a result of the deferral, public entities are required to apply the revenue recognition standard for the annual reporting period beginning on or after December 15, 2017, including interim periods within that annual reporting period. Early application is permitted only as of annual and interim periods in fiscal years beginning after December 15, 2016. The Company expects to adopt the modified retrospective method and is evaluating the effect that the updated standard will have on its consolidated financial statements and related disclosures.
In July 2015, the FASB issued ASU 2015-11, Inventory (Topic 330), which, for entities that do not measure inventory using the last-in, first-out (LIFO) or retail inventory method, changes the measurement principle for inventory from the lower of cost or market to lower of cost and net realizable value. The ASU also eliminates the requirement for these entities to consider replacement cost or net realizable value less an approximately normal profit margin when measuring inventory. Public entities are required to apply the standards for fiscal years beginning after December 15, 2016, including interim periods within those fiscal periods. The Company adopted this standard effective January 1, 2017. There was no material impact on the Company’s consolidated financial statements and disclosures.
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. For public business entities, 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. Early adoption is permitted, including adoption in an interim period. The Company has not yet selected a transition method and is evaluating the effect the updated standard will have on its consolidated financial statements and related disclosures.
|
Stock-based compensation is included in cost of sales or operating expenses, as applicable, and consists of the following:
|
|
Three Months Ended |
|
|||||
|
|
March 31, |
|
|||||
|
|
2017 |
|
|
2016 |
|
||
|
|
(In thousands) |
|
|||||
Cost of product revenue |
|
$ |
204 |
|
|
$ |
192 |
|
Research and development expenses |
|
|
138 |
|
|
|
140 |
|
Sales and marketing expenses |
|
|
268 |
|
|
|
261 |
|
General and administrative expenses |
|
|
634 |
|
|
|
777 |
|
Total stock-based compensation |
|
$ |
1,244 |
|
|
$ |
1,370 |
|
Information about the Company’s total revenues, based on shipment destination or services location, is presented in the following table:
|
|
Three Months Ended |
|
|||||
|
|
March 31, |
|
|||||
|
|
2017 |
|
|
2016 |
|
||
|
|
(In thousands) |
|
|||||
Revenue: |
|
|
|
|
|
|
|
|
U.S. |
|
$ |
9,130 |
|
|
$ |
11,413 |
|
International |
|
|
13,872 |
|
|
|
21,408 |
|
Total |
|
$ |
23,002 |
|
|
$ |
32,821 |
|
|
Inventories consist of the following:
|
|
March 31, |
|
|
December 31, |
|
||
|
|
2017 |
|
|
2016 |
|
||
|
|
(In thousands) |
|
|||||
Raw materials |
|
$ |
3,556 |
|
|
$ |
3,511 |
|
Finished goods |
|
|
11,576 |
|
|
|
9,357 |
|
Total |
|
$ |
15,132 |
|
|
$ |
12,868 |
|
|
Property, plant and equipment consist of the following:
|
|
March 31, |
|
|
December 31, |
|
|
Useful |
|
|||
|
|
2017 |
|
|
2016 |
|
|
life |
|
|||
|
|
(In thousands) |
|
|
|
|
|
|||||
Construction in progress |
|
$ |
11,216 |
|
|
$ |
11,139 |
|
|
|
— |
|
Buildings |
|
|
23,929 |
|
|
|
23,901 |
|
|
30 years |
|
|
Machinery and equipment |
|
|
114,370 |
|
|
|
113,659 |
|
|
3-10 years |
|
|
Computer equipment and software |
|
|
7,817 |
|
|
|
7,679 |
|
|
3 years |
|
|
Total |
|
|
157,332 |
|
|
|
156,378 |
|
|
|
|
|
Accumulated depreciation |
|
|
(74,613 |
) |
|
|
(71,984 |
) |
|
|
|
|
Property, plant and equipment, net |
|
$ |
82,719 |
|
|
$ |
84,394 |
|
|
|
|
|
|
Accrued expenses consist of the following:
|
|
March 31, |
|
|
December 31, |
|
||
|
|
2017 |
|
|
2016 |
|
||
|
|
(In thousands) |
|
|||||
Employee compensation |
|
$ |
2,661 |
|
|
$ |
2,796 |
|
Other accrued expenses |
|
|
1,451 |
|
|
|
1,191 |
|
Total |
|
$ |
4,112 |
|
|
$ |
3,987 |
|
|
Deferred rent consists of the following:
|
|
March 31, |
|
|
December 31, |
|
||
|
|
2017 |
|
|
2016 |
|
||
|
|
(In thousands) |
|
|||||
Deferred rent |
|
$ |
1,251 |
|
|
$ |
1,125 |
|
Current maturities of deferred rent |
|
|
(169 |
) |
|
|
(154 |
) |
Deferred rent, less current maturities |
|
$ |
1,082 |
|
|
$ |
971 |
|
|
|
|
|
|
|
|
|
|
|
|