The following discussion of our financial condition and results of operations
should be read in conjunction with the "Selected Financial Data" and our
consolidated financial statements and the related notes thereto included in this
Annual Report on Form 10-K. In addition to historical information, some of the
information contained in the following discussion and analysis or set forth
elsewhere in this report, including information with respect to our plans and
strategy for our business, includes forward looking information that involves
risks, uncertainties and assumptions. You should read the Risk Factors set forth
in Item 1A of this Annual Report on Form 10-K for a discussion of important
factors that could cause actual results to differ materially from the results
described in or implied by the forward-looking statements contained in the
following discussion and analysis. Our actual results and the timing of events
could differ materially from those anticipated by these forward looking
statements.
Investors and others should note that we routinely use the Investors section of
our website to announce material information to investors and the marketplace.
While not all of the information that we post on the Investors section of our
website is of a material nature, some information could be deemed to be
material. Accordingly, we encourage investors, the media, and others interested
in us to review the information that we share on the Investors section of our
website, https://www.aerogel.com/.
Overview
We design, develop and manufacture innovative, high-performance aerogel insulation used primarily in the energy infrastructure and building materials markets. We believe our aerogel blankets deliver the best thermal performance of any widely used insulation product available on the market today and provide a combination of performance attributes unmatched by traditional insulation materials. Our end-use customers select our products where thermal performance is critical and to save money, improve resource efficiency, enhance sustainability, preserve operating assets and protect workers. Our insulation is used by oil producers and the owners and operators of refineries, petrochemical plants, liquefied natural gas facilities, power generating assets and other energy infrastructure. Our Pyrogel and Cryogel product lines have undergone rigorous technical validation by industry leading end-users and achieved significant market adoption. We also derive product revenue from the building materials and other end markets. Customers in these markets use our products for applications as diverse as wall systems, military and commercial aircraft, trains, buses, appliances, apparel, footwear and outdoor gear. As we continue to enhance our aerogel technology platform, we believe we will have opportunities to address additional high value applications in the global insulation market and in a diverse set of new markets, including the electric vehicle market.
We generate product revenue through the sale of our line of aerogel blankets. We
market and sell our products primarily through a sales force based in
Our salespeople work directly with end-use customers and engineering firms to promote the qualification, specification and acceptance of our products. We also rely on an existing and well-established channel of qualified insulation distributors and contractors in more than 50 countries around the world to ensure rapid delivery of our products and strong end-user support. Our salespeople also work to educate insulation contractors about the technical and operating cost advantages of our aerogel blankets. We also perform research services under contracts with various agencies of theU.S. government, including theDepartment of Defense and theDepartment of Energy , and other institutions. Research performed under contract with government agencies and other institutions enables us to develop and leverage technologies into broader commercial applications. In late 2019, we decided to cease efforts to secure additional funded research contracts and to wind down our existing contract research activities during 2020. This decision reflected our desire to focus our research and development resources on initiatives to improve the profitability of our existing business and on efforts to develop new products and next generation technology with application in new, high value market segments. We manufacture our products using our proprietary technology at our facility inEast Providence, Rhode Island . We have operated theEast Providence facility since 2008 and had increased our annual capacity through 2017 to 50 million square feet of aerogel blankets. During 2018, we initiated a series of projects designed to increase this capacity to 60 million square feet of aerogel blankets by the end of 2020. As ofDecember 31, 2019 , we had increased our annual capacity to 55 million square feet of aerogel blankets as a result of this initiative. We had previously completed the design and engineering for a second manufacturing facility to be located inStatesboro, Georgia . During 2016, we elected to delay construction of the facility due to our assessment of future demand. InDecember 2018 , we determined that we will not use the existing design and engineering to construct a second facility in any location. Accordingly, we 52
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determined that the design and engineering costs were not recoverable and
recorded an impairment charge of
We are engaged in a strategic partnership with BASF to develop and commercialize products for the building materials and other markets. The strategic partnership includes a supply agreement governing the exclusive sale of specified products to BASF and a joint development agreement targeting innovative products and technologies. BASF has no obligation to purchase any products under the supply agreement. Pursuant to the supply agreement, BASF may, in its sole discretion, make prepayments to us in the aggregate amount of up to$22.0 million during the term of the agreement. We may repay the prepayments to BASF at any time in whole or in part for any reason. BASF made a prepayment to us of$5.0 million during 2018. As ofJanuary 1, 2019 , 25.3% of any amounts that we invoice for Spaceloft A2 sold to BASF will be credited against the outstanding balance of the 2018 prepayment. If any amount of the 2018 prepayment remains uncredited atDecember 31, 2021 , BASF may require that we repay the uncredited amount to BASF. InJanuary 2019 , BASF made an additional prepayment to us of$5.0 million . AfterJanuary 1, 2020 , 50% of any amounts that we invoice for a newly developed product sold to BASF will be credited against the outstanding balance of the 2019 prepayment. AfterDecember 31, 2022 , BASF may require that we credit 24.7% of any amounts we invoice for Spaceloft A2 sold to BASF against the outstanding balance of the 2019 prepayment or may require that we repay the uncredited amount to BASF. OnFebruary 18, 2020 , we completed an underwritten public offering of 1,955,000 shares of our common stock at an offering price of$8.25 per share. We received net proceeds of$14.8 million after deducting underwriting discounts of$1.0 million and offering expenses of approximately$0.4 million . OnMarch 3, 2020 , we amended our revolving credit facility withSilicon Valley Bank to extend the maturity date of the facility toApril 28, 2021 . Under our revolving credit facility, we are permitted to borrow a maximum of$20.0 million , subject to continued covenant compliance and borrowing base requirements. At our election, the interest rate applicable to borrowings under the revolving credit facility 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, we are required to pay a monthly unused revolving line facility fee of 0.5% per annum of the average unused portion of the revolving credit facility. The credit facility has also been amended to establish certain minimum Adjusted EBITDA levels with respect to the minimum Adjusted EBITDA financial covenant for the extended term. We intend to extend or replace the facility prior to its maturity.
Our revenue for the year ended
Key Metrics and Non-GAAP Financial Measures
We regularly review a number of metrics, including the following key metrics, to evaluate our business, measure our performance, identify trends affecting our business, formulate financial projections and make strategic decisions.
Square Foot Operating Metric
We price our product and measure our product shipments in square feet. We estimate our annual capacity was 55 million square feet of aerogel blankets atDecember 31, 2019 . We believe the square foot operating metric allows us and our investors to measure our manufacturing capacity and product shipments on a uniform and consistent basis. The following chart sets forth product shipments in square feet associated with recognized revenue, including revenue recognized over time utilizing the input/cost-to-cost method, for the periods presented: Year Ended December 31, 2019 2018 2017 (Square feet in thousands) Product shipments in square feet 40,720 34,435 37,519 Adjusted EBITDA We use Adjusted EBITDA, a non-GAAP financial measure, as a means to assess our operating performance. We define Adjusted EBITDA as net income (loss) before interest expense, taxes, depreciation, amortization, stock-based compensation expense 53
-------------------------------------------------------------------------------- and other items, from time to time, which we do not believe are indicative of our core operating performance, which in 2018 included an impairment of construction in progress. Adjusted EBITDA is a supplemental measure of our performance that is not presented in accordance withU.S. GAAP. Adjusted EBITDA should not be considered as an alternative to net income (loss) or any other measure of financial performance calculated and presented in accordance withU.S. GAAP. In addition, our definition and presentation of Adjusted EBITDA may not be comparable to similarly titled measures presented by other companies.
We use Adjusted EBITDA:
• as a measure of operating performance because it does not include the
impact of items that we do not consider indicative of our core operating
performance;
• for planning purposes, including the preparation of our annual operating
budget; • to allocate resources to enhance the financial performance of our business; and • as a performance measure used under our bonus plan. We also believe that the presentation of Adjusted EBITDA provides useful information to investors with respect to our results of operations and in assessing the performance and value of our business. Various measures of EBITDA are widely used by investors to measure a company's operating performance without regard to items that can vary substantially from company to company depending upon financing and accounting methods, book values of assets, capital structures and the methods by which assets were acquired. Although measures similar to Adjusted EBITDA are frequently used by investors and securities analysts in their evaluation of companies, we understand that Adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for net income, income from operations, net cash provided by (used in) operating activities or an analysis of our results of operations as reported underU.S. GAAP. Some of these limitations are: • Adjusted EBITDA does not reflect our historical cash expenditures or future requirements for capital expenditures or other contractual commitments;
• Adjusted EBITDA does not reflect changes in, or cash requirements for, our
working capital needs; • Adjusted EBITDA does not reflect stock-based compensation expense;
• Adjusted EBITDA does not reflect our tax expense or cash requirements to
pay our income taxes;
• Adjusted EBITDA does not reflect our interest expense, or the cash requirements necessary to service interest or principal payments on our debt;
• although depreciation, amortization and impairment charges are non-cash
charges, the assets being depreciated, amortized or impaired will often
have to be replaced in the future, and Adjusted EBITDA does not reflect
any cash requirements for these replacements; and
• other companies in our industry may calculate EBITDA or Adjusted EBITDA
differently than we do, limiting their usefulness as a comparative
measure.
Because of these limitations, our Adjusted EBITDA should not be considered as a measure of discretionary cash available to us to reinvest in the growth of our business or as a measure of cash available for us to meet our obligations. To properly and prudently evaluate our business, we encourage you to review the GAAP financial statements included elsewhere in this Annual Report on Form 10-K, and not to rely on any single financial measure to evaluate our business. 54
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The following table presents a reconciliation of net loss, the most directly comparable GAAP measure, to Adjusted EBITDA for the years presented:
Year Ended December 31, 2019 2018 2017 ($ in thousands) Net loss$ (14,565 ) $ (34,440 ) $ (19,321 )
Depreciation and amortization 10,213 10,787
10,753
Impairment of construction in progress - 7,356
-
Stock-based compensation (1) 3,771 4,302
5,091 Interest expense, net 406 524 185 Adjusted EBITDA$ (175 ) $ (11,471 ) $ (3,292 )
(1) Represents non-cash stock-based compensation related to vesting and
modifications of stock option grants, vesting of restricted stock units and
vesting and modification of restricted common stock.
The following table presents a reconciliation of net loss, the most directly comparable GAAP measure, to Adjusted EBITDA for the quarters presented:
Three months ended Three months ended 2019 2018 March 31 June 30 Sept. 30 Dec. 31 March 31 June 30 Sept. 30 Dec. 31 ($ in thousands) Net loss$ (6,002 ) $ (5,318 ) $ (2,289 ) $ (956 ) $ (6,842 ) $ (6,958 ) $ (6,532 ) $ (14,108 ) Depreciation and amortization 2,532 2,565 2,554
2,562 3,171 2,515 2,573 2,528 Impairment of construction in progress
- - - - - - - 7,356
Stock-based compensation (1) 878 996 1,011
886 1,136 1,150 1,128 888 Interest expense, net 41 103 136 126 92 103 163 166 Adjusted EBITDA$ (2,551 ) $ (1,654 ) $ 1,412 $ 2,618 $ (2,443 ) $ (3,190 ) $ (2,668 ) $ (3,170 )
(1) Represents non-cash stock-based compensation related to vesting and
modifications of stock option grants, vesting of restricted stock units and
vesting and modification of restricted common stock.
Our financial performance, including such measures as net income (loss), earnings per share and Adjusted EBITDA, are affected by a number of factors including volume and mix of aerogel products sold, average selling prices, our material and manufacturing costs, the costs associated with capacity expansions and start-up of additional production capacity, and the amount and timing of operating expenses, including patent enforcement costs. Accordingly, we expect that our net income (loss), earnings per share and Adjusted EBITDA will vary from period to period. During 2019, we experienced volume growth in our core petrochemical and refinery markets inNorth America , and an increase in project-based demand, particularly in the subsea and LNG markets. We also implemented a price increase for 2019 designed to support revenue growth and to offset an increase in raw material costs. As a result of these factors, we achieved total revenue growth of 34%, a decrease in net loss, and an improvement in Adjusted EBITDA during 2019 versus 2018. During 2020, we expect our revenue growth rate to moderate principally due to an anticipated decrease in project-based demand in the subsea market and our expectation of little to no growth in project-based demand in the LNG market. In addition, we have decided to wind down our contract research activities in 2020 to focus our research and development resources on initiatives to improve the profitability of our existing business and to leverage our aerogel technology into new markets, including the electric vehicle market. Despite the lower projected growth rate, we expect that our ongoing initiatives to reduce raw material costs will help to increase our gross profit and to expand our gross margin. As a result, we are a projecting strong year-over-year improvements in both net loss and Adjusted EBITDA in 2020. 55
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Components of Our Results of Operations
Revenue
We recognize product revenue from the sale of our line of aerogel products and research services revenue from the provision of services under contracts with various agencies of theU.S. government and other institutions. Product and research services revenue is recognized upon the satisfaction of contractual performance obligations. We record deferred revenue for product sales when (i) we have delivered products but other revenue recognition criteria have not been satisfied or (ii) payments have been received in advance of the completion of required performance obligations.
The following table sets forth the total revenue for the periods presented:
Year Ended December 31, 2019 2018 2017 ($ in thousands) Revenue: Product$ 136,934 $ 102,123 $ 109,590 Research services 2,441 2,238 2,041 Total revenue$ 139,375 $ 104,361 $ 111,631 Product revenue accounted for 98% of total revenue for each of the years endedDecember 31, 2019 , 2018 and 2017. We experienced a 34% increase in total revenue during 2019 principally due to growth in the North American petrochemical and refinery market, an increase in project based demand in the LNG and subsea markets, and the impact of price increases enacted in early 2019, offset, in part, by decreases in shipments to the building materials and Asian petrochemical markets. During 2020, we expect our revenue growth to moderate principally due to an anticipated decrease in project-based demand in the subsea market. We also expect to see little to no growth in project-based demand in the LNG market. In addition, we have decided to wind down our research services activities in 2020 in order to focus our research and development resources on initiatives to improve the profitability of our existing business and to leverage our aerogel technology into new markets, including the electric vehicle market. As a result, we expect that research services revenue will decrease as a percentage of total revenue during 2020. A substantial majority of our revenue is generated from a limited number of direct customers, including distributors, contractors, OEMs, partners and end-use customers. Our 10 largest customers accounted for approximately 68% of our total revenue during the year endedDecember 31, 2019 , and we expect that most of our revenue will continue to come from a relatively small number of customers for the foreseeable future. In 2019, sales toDistribution International, Inc. and SPCC Joint Venture represented 20% and 13% our total revenue, respectively. In 2018, sales toDistribution International, Inc. represented 20% of our total revenue. In 2017, sales toDistribution International Inc. and TechnipFMC represented 15% and 12% of our total revenue, respectively. For each of the noted periods, there were no other customers that represented 10% or more of our total revenues. We conduct business across the globe and a substantial portion of our revenue is generated outside ofthe United States . Total revenue from outside ofthe United States , based on shipment destination, amounted to$81.0 million , or 58% of our total revenue,$62.6 million , or 60% of our total revenue, and$60.2 million , or 54% of our total revenue, in the years endedDecember 31, 2019 , 2018 and 2017, respectively. Cost of Revenue
Cost of product revenue consists primarily of materials and manufacturing expense. Cost of product revenue is recorded when the related product revenue is recognized.
Material is our most significant component of cost of product revenue and includes fibrous batting, silica materials and additives. Material costs as a percentage of product revenue were 48%, 47% and 45% for the years endedDecember 31, 2019 , 2018 and 2017, respectively. Material costs as a percentage of product revenue vary from product to product due to differences in average selling prices, material requirements, product thicknesses and manufacturing yields. In addition, we provide warranties for our products and record the estimated cost within cost of revenue in the period that the related revenue is recorded or when we become aware that a potential warranty claim is probable and can be reasonably estimated. As a result of these factors, material costs as a percentage of product revenue will vary from period to period due to changes in the mix of aerogel products sold, the costs of our raw materials or the estimated cost of warranties. 56
-------------------------------------------------------------------------------- During the year endedDecember 31, 2018 , we experienced a significant increase in the costs of certain silica precursor materials, which constitute over 50% of our raw material costs. In response, we are seeking to achieve higher selling prices, lower cost formulations, material sourcing improvements, and manufacturing yield enhancements to reduce the cost of raw materials for our aerogel products. We expect that material costs will decrease both in absolute dollars and as a percentage of product revenue during 2020 as we focus our research and development resources on improving the profitability of our existing business principally through implementation of lower cost product formulations. Manufacturing expense is also a significant component of cost of product revenue. Manufacturing expense includes labor, utilities, maintenance expense, and depreciation on manufacturing assets. Manufacturing expense also includes stock-based compensation of manufacturing employees and shipping costs. Manufacturing expense as a percentage of product revenue was 33%, 42% and 39% for the years endedDecember 31, 2019 , 2018 and 2017, respectively. While product revenue increased by 34% during 2019, manufacturing expense increased by only 7% due principally to the high proportion of fixed manufacturing expense in ourEast Providence, Rhode Island manufacturing facility. We expect that manufacturing expense will grow both in absolute dollars and as a percentage of product revenue during 2020 principally due to increases in compensation and related costs, product qualification expenses, and waste disposal expenses, offset, in part, by decreases in process gas and utilities expenses. In total, we expect that cost of product revenue will decrease both in absolute dollars and as a percentage of product revenue during 2020 versus 2019. In the longer term, we expect cost of product revenue will increase in absolute dollars but continue to decline as a percentage of product revenue. Cost of research services revenue consists of direct labor costs of research personnel engaged in the contract research, third-party consulting and subcontractor expense, and associated direct material costs. This cost of revenue also includes overhead expenses associated with project resources, development tools and supplies. Cost of research services revenue is recorded when the related research services revenue is recognized. We expect cost of research services will decline as we wind down our existing contract research activities during 2020. Gross Profit Our gross profit as a percentage of revenue is affected by a number of factors, including the volume of aerogel products produced and sold, the mix of aerogel products sold, average selling prices, our material and manufacturing costs, realized capacity utilization and the costs associated with expansions and start-up of production capacity. Accordingly, we expect our gross profit in absolute dollars and as a percentage of revenue to vary significantly from period to period. During 2019, we experienced growth in revenue as a result of volume growth in our core petrochemical and refinery markets inthe United States , and an increase in project-based demand, particularly in the subsea and LNG markets. We also implemented a price increase for 2019 designed to offset recent increases in raw material costs and to improve gross profit margins. In addition, manufacturing expenses grew during 2019 at a rate significantly lower than growth in product revenue due to the high proportion of fixed manufacturing expense in our manufacturing operations. As a result, gross profit improved both in absolute dollars and as a percentage of revenue during the year. During 2020, we expect our revenue growth rate to moderate principally due to an anticipated decrease in project-based demand in the subsea market and our expectation of little to no growth in project-based demand in the LNG market. In addition, we have decided to wind down our contract research activities in 2020 in order to focus our research and development resources on initiatives to improve the profitability of our existing business and to leverage our aerogel technology into new markets. Despite the lower projected growth rate, we expect that our ongoing initiatives to reduce raw material costs will help to increase our gross profit and to expand our gross margin. Accordingly, we expect gross profit to improve both in absolute dollars and as a percentage of revenue during 2020. In the longer term, we expect gross profit to continue to improve in absolute dollars and as a percentage of revenue due to expected increases in total revenue, production volumes and manufacturing productivity. In addition, we expect the gross profit improvement derived from the increases in revenue, volume and productivity will be supported by the continued implementation of lower cost product formulations and realization of material purchasing efficiencies. 57
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Operating Expenses
Operating expenses consist of research and development, sales and marketing, and general and administrative expenses. Operating expenses include personnel costs, legal fees, professional fees, service fees, insurance premiums, travel expense, facilities related costs and other costs and fees. The largest component of our operating expenses is personnel costs, consisting of salaries, benefits, incentive compensation and stock-based compensation. In any particular period, the timing and extent of personnel additions or reductions, legal activities, including patent enforcement actions, marketing programs, research efforts and a range of similar activities or actions could materially affect our operating expenses, both in absolute dollars and as a percentage of revenue. During 2020, we project operating expenses to increase in both absolute dollars and as a percentage of revenue. In the longer term, we expect that operating expenses will increase in absolute dollars, but decrease as a percentage of revenue.
Research and Development Expenses
Research and development expenses consist primarily of expenses for personnel engaged in the development of next generation aerogel compositions, form factors and manufacturing technologies. These expenses also include testing services, prototype expenses, consulting services, trial formulations for new products, equipment depreciation, facilities costs and related overhead. We expense research and development costs as incurred. We expect to continue to devote substantial resources to the development of new aerogel technologies. We believe that these investments are necessary to maintain and improve our competitive position. We expect to continue to invest in research and engineering personnel and the infrastructure required in support of their efforts. While we expect that our research and development expenses will increase in absolute dollars but decrease as a percentage of revenue in the longer term, in 2020 we expect such expenses will increase in both absolute dollars and as a percentage of revenue.
Sales and Marketing Expenses
Sales and marketing expenses consist primarily of personnel costs, incentive compensation, marketing programs, travel and related costs, consulting expenses and facilities related costs. We have expanded our sales force and sales consultants globally to drive anticipated growth in customers and demand for our products. While we expect that our sales and marketing expenses will increase in absolute dollars but decrease as a percentage of revenue in the longer term, in 2020 we expect such expenses will increase in both absolute dollars and as a percentage of revenue.
General and Administrative Expenses
General and administrative expenses consist primarily of personnel costs, legal expenses, consulting and professional services, audit and tax consulting costs, and expenses for our executive, finance, legal, human resources and information technology organizations. General and administrative expenses have increased as we have incurred additional costs related to operating as a publicly-traded company, which include costs of compliance with securities, corporate governance and related laws and regulations, investor relations expenses, increased insurance premiums, including director and officer insurance, and increased audit and legal fees. In addition, we expect our general and administrative expenses to increase as we add general and administrative personnel to support the anticipated growth of our business. We also expect that the patent enforcement actions, described in more detail under "Legal Proceedings" in Part I, Item 3 of this Annual Report on Form 10-K, if protracted, could result in significant legal expense over the medium to long-term. While we expect that our general and administrative expenses will increase in absolute dollars but decrease as a percentage of revenue in the longer term, in 2020 we expect such expenses will increase in both absolute dollars and as a percentage of revenue.
Interest Expense, Net
For the years endedDecember 31, 2019 , 2018, and 2017, interest expense, net consisted primarily of fees and interest expense related to our revolving credit facility. Provision for Income Taxes We have incurred net losses since inception and have not recorded benefit provisions forU.S. federal income taxes or state income taxes since the tax benefits of our net losses have been offset by valuation allowances due to the uncertainty associated with the utilization of net operating loss carryforwards. 58
-------------------------------------------------------------------------------- AtDecember 31, 2019 , the Company had$233.8 million of net operating losses available to offset future federal income, if any, of which$194.6 million expire on various dates throughDecember 31, 2037 . Net operating losses of$39.2 million generated during the years endedDecember 31, 2019 and 2018 have an unlimited carryforward. OnDecember 22, 2017 , the President ofthe United States signed into law the Tax Cuts and Jobs Act (TCJA) tax reform legislation. This legislation makes significant change inU.S. tax law including a reduction in the corporate tax rates, changes to net operating loss carryforwards and carrybacks, and a repeal of the corporate alternative minimum tax. The legislation reduced theU.S. corporate tax rate from 34% to 21% for the years endingDecember 31, 2019 and 2018. As a result of the enacted law, we were required to revalue deferred tax assets and liabilities at the 21% rate as ofDecember 31, 2017 . This resulted in a decrease in our net deferred tax asset and corresponding valuation allowance of$26.7 million . As we maintain a full valuation allowance against our net deferred tax asset position inthe United States , this revaluation did not result in an income tax expense or benefit in the prior year. The provisions of the TCJA related to the one-time mandatory transition tax on deemed repatriation did not have an impact on our results of operations during the year endedDecember 31, 2017 . The other provisions of the TCJA did not have a material impact on our 2019, 2018, and 2017 consolidated financial statements.
Results of Operations
The following tables set forth our results of operations for the periods presented: Year Ended December 31, 2019 2018 2017 ($ in thousands) Revenue: Product$ 136,934 $ 102,123 $ 109,590 Research services 2,441 2,238 2,041 Total revenue 139,375 104,361 111,631 Cost of revenue: Product 111,759 90,660 92,052 Research services 1,332 1,032 908 Gross profit 26,284 12,669 18,671 Operating expenses:
Research and development 8,407 6,319
6,180
Sales and marketing 15,557 13,794
12,604
General and administrative 16,479 19,116
19,023
Impairment of construction in progress - 7,356
-
Total operating expenses 40,443 46,585 37,807 Loss from operations (14,159 ) (33,916 ) (19,136 ) Interest expense, net (406 ) (524 ) (185 ) Total interest expense, net (406 ) (524 ) (185 ) Net loss$ (14,565 ) $ (34,440 )
$ (19,321 ) 59
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Year ended
The following tables set forth our results of operations for the periods presented: Year Ended Year Ended December 31, December 31, 2019 2018 $ Change % Change 2019 2018 (Percentage of ($ in thousands) total revenue) Revenue: Product$ 136,934 $ 102,123 $ 34,811 34 % 98 % 98 % Research services 2,441 2,238 203 9 % 2 % 2 % Total revenue 139,375 104,361 35,014 34 % 100 % 100 % Cost of revenue: Product 111,759 90,660 21,099 23 % 80 % 87 % Research services 1,332 1,032 300 29 % 1 % 1 % Gross profit 26,284 12,669 13,615 107 % 19 % 12 % Operating expenses: Research and development 8,407 6,319 2,088 33 % 6 % 6 % Sales and marketing 15,557 13,794 1,763 13 % 11 % 13 % General and administrative 16,479 19,116 (2,637 ) (14 )% 12 % 18 % Impairment of construction in progress - 7,356 (7,356 ) 100 % - % 7 % Total operating expenses 40,443 46,585 (6,142 ) (13 )% 29 % 45 % Loss from operations (14,159 ) (33,916 ) 19,757 (58 )% (10 )% (32 )% Interest expense, net (406 ) (524 ) 118 (23 )% (0 )% (1 )% Total interest expense, net (406 ) (524 ) 118 (23 )% (0 )% (1 )% Net loss$ (14,565 ) $ (34,440 ) $ 19,875 (58 )% (10 )% (33 )% Revenue Year Ended December 31, Change 2019 2018 Percentage Percentage Amount of Revenue Amount of Revenue Amount Percentage ($ in thousands) Revenue: Product$ 136,934 98 %$ 102,123 98 %$ 34,811 34 % Research services 2,441 2 % 2,238 2 % 203 9 % Total revenue$ 139,375 100 %$ 104,361 100 %$ 35,014 34 %
The following chart sets forth product shipments in square feet associated with recognized revenue, including revenue recognized over time utilizing the input/cost-to-cost method, for the periods presented:
Year Ended December 31, Change 2019 2018 Amount Percentage Product shipments in square feet (in thousands) 40,720 34,435 6,285 18 %
Total revenue increased
Product revenue increased by$34.8 million , or 34%, to$136.9 million in 2019 from$102.1 million in 2018. This increase was principally the result of growth in the North American petrochemical and refinery markets, an increase in project-based demand in the LNG and subsea markets, and the impact of price increases enacted in early 2019, offset, in part, by decreases in shipments to the building materials and Asian petrochemical markets. 60 -------------------------------------------------------------------------------- Product revenue for the year endedDecember 31, 2019 included$27.3 million in sales toDistribution International, Inc. and$18.0 million in sales to SPCC Joint Venture. Product revenue for the year endedDecember 31, 2018 included$21.4 million in sales toDistribution International, Inc. The average selling price per square foot of our products increased by$0.40 , or 14%, to$3.36 per square foot for the year endedDecember 31, 2019 from$2.96 per square foot for the year endedDecember 31, 2018 . The increase in average selling price principally reflected the impact of price increases enacted in early 2019. This increase in average selling price had the effect of increasing product revenue by approximately$16.2 million for the year endedDecember 31, 2019 . In volume terms, product shipments increased by 6.3 million square feet, or 18%, to 40.7 million square feet of aerogel products for the year endedDecember 31, 2019 , as compared to 34.4 million square feet in the year endedDecember 31, 2018 . The increase in product volume had the effect of increasing product revenue by approximately$18.6 million for the year endedDecember 31, 2019 . Research services revenue increased by$0.2 million , or 9%, to$2.4 million in 2019 from$2.2 million in 2018. The increase was primarily due to the timing and amount of funding available under research contracts during the year endedDecember 31, 2019 from the comparable period in 2018. Product revenue as a percentage of total revenue was 98% of total revenue in both 2019 and 2018. Research services revenue was 2% of total revenue in both 2019 and 2018. We expect that product revenue will comprise virtually all of our total revenue in the long-term. During 2020, we anticipate our revenue growth to moderate principally due to an anticipated decrease in project-based demand in the subsea market. We also expect to see little to no growth in project-based demand in the LNG market. In addition, we have decided to wind down our research services activities in 2020 in order to focus our research and development resources on improving the profitability of our existing business and to leverage our aerogel technology into new markets, including the electric vehicle market. Cost of Revenue Year Ended December 31, Change 2019 2018 Percentage Percentage Percentage Percentage of Related of Total of Related of Total Amount Revenue Revenue Amount Revenue Revenue Amount Percentage ($ in thousands) Cost of revenue: Product$ 111,759 82 % 80 %$ 90,660 89 % 87 %$ 21,099 23 % Research services 1,332 55 % 1 % 1,032 46 % 1 % 300 29 % Total cost of revenue$ 113,091 81 % 81 %$ 91,692 88 % 88 %$ 21,399 23 % Total cost of revenue increased$21.4 million , or 23%, to$113.1 million in 2019 from$91.7 million in 2018. The increase in total cost of revenue was primarily the result of an increase in product cost of revenue. Product cost of revenue increased$21.1 million , or 23%, to$111.8 million in 2019 from$90.7 million in 2018. The$21.1 million increase was the result of an$18.3 million increase in material costs and a$2.8 million increase in manufacturing expense. The increase in material costs was driven principally by the 6.3 million square feet, or 18%, increase in product shipments and an unfavorable mix of products sold. The increase in manufacturing expense was the result of increases in compensation and related costs of$1.7 million , waste disposal expense of$0.7 million and other manufacturing expenses of$0.4 million . Product cost of revenue as a percentage of product revenue decreased to 82% in 2019 from 89% in 2018. This decrease was the result of the high proportion of fixed manufacturing expenses that remained essentially unchanged despite the 34% increase in product revenue in 2019, offset, in part, by the increase in material costs during the year.
We expect that product cost of revenue will decrease both in absolute dollars and as a percentage of product revenue during 2020 versus 2019 principally through implementation of lower cost product formulations and material purchasing efficiencies.
61 -------------------------------------------------------------------------------- Research services cost of revenue increased by$0.3 million , or 29%, to$1.3 million in 2019 from$1.0 million in 2018. Cost of research service revenue as a percentage of research services revenue increased to 55% in 2019 from 46% in 2018 due to an increase in the proportion of third-party contract services utilized to support the contracted research. Gross Profit Year Ended December 31, Change 2019 2018 Percentage Percentage Amount of Revenue Amount of Revenue Amount Percentage ($ in thousands) Gross profit$ 26,284 19 %$ 12,669 12 %$ 13,615 107 % Gross profit increased$13.6 million , or 107%, to$26.3 million in 2019 from$12.7 million in 2018. The increase in gross profit was the result of the$35.0 million increase in total revenue, offset, in part, by the$21.4 million increase in total cost of revenue. The increase in revenue was principally associated with growth in the North American petrochemical and refinery markets, an increase in project based demand in the LNG and subsea markets, and the impact of price increases enacted in early 2019, offset, in part, by a decrease in shipments to the building materials and Asian petrochemical markets. The increase in total cost of revenue was driven principally by the 6.3 million square feet, or 18%, increase in product shipments and the unfavorable mix of products sold. Gross profit as a percentage of total revenue increased to 19% of total revenue in 2019 from 12% in 2018. This increase was principally the result of the high proportion of fixed manufacturing expenses that remained essentially unchanged despite the 34% increase in product revenue in 2019. During 2020, we are projecting our revenue growth rate to moderate due to an anticipated decrease in project-based demand in the subsea market. We also expect to see little to no growth in project-based demand in the LNG market. In addition, we have decided to wind down our research services activities in 2020 in order to focus our research and development resources on improving the profitability of our existing business. Despite the lower projected growth rate, we expect that our ongoing initiatives to reduce raw material costs will help to increase our gross profit and to expand our gross margin. Accordingly, we expect gross profit to improve both in absolute dollars and as a percentage of revenue during 2020.
Research and Development Expenses
Year Ended December 31, Change 2019 2018 Percentage Percentage Amount of Revenue Amount of Revenue Amount Percentage ($ in thousands) Research and development expenses$ 8,407 6 %$ 6,319 6 %$ 2,088 33 % Research and development expenses increased by$2.1 million , or 33%, to$8.4 million in 2019 from$6.3 million in 2018. The$2.1 million increase was the result of increases in compensation and related costs of$1.7 million and other research and development costs of$0.4 million .
Research and development expenses as a percentage of total revenue remained
unchanged at 6% during the year ended
We expect that our research and development expenses to increase in both absolute dollars and as a percentage of revenue during 2020 in support of the development of innovative products, advanced process technologies, and new markets.
In the long-term, we expect to continue to increase investment in research and development in our efforts to enhance and expand our aerogel technology platform. However, we expect that research and development expenses will decline as a percentage of total revenue in the long-term due to projected growth in product revenue. 62
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Sales and Marketing Expenses Year Ended December 31, Change 2019 2018 Percentage Percentage Amount of Revenue Amount of Revenue Amount Percentage ($ in thousands) Sales and marketing expenses$ 15,557 11 %$ 13,794 13 %$ 1,763 13 % Sales and marketing expenses increased by$1.8 million , or 13%, to$15.6 million in 2019 from$13.8 million in 2018. The increase was the result of an increase in compensation and related costs of$1.6 million and professional fees of$0.6 million , offset, in part, by a decrease in marketing expenses of$0.4 million . Sales and marketing expenses as a percentage of total revenue decreased to 11% in 2019 from 13% in 2018 due to the 34% increase in revenue, offset, in part, by the 13% increase in sales and marketing expenses in 2019. We expect sales and marketing expenses to increase in both absolute dollars and as a percentage of revenue during 2020 due principally to a planned increase in marketing expense during the year. In the long-term, we expect that sales and marketing expenses will increase in absolute dollars as we continue to increase sales personnel and marketing efforts in support of expected growth in demand for our products. However, we expect that sales and marketing expenses will decrease as a percentage of total revenue in the long-term due to projected growth in product revenue.
General and Administrative Expenses
Year Ended December 31, Change 2019 2018 Percentage Percentage Amount of Revenue Amount of Revenue Amount Percentage ($ in thousands) General and administrative expenses$ 16,479 12 %$ 19,116 18 %$ (2,637 ) (14 )% General and administrative expenses decreased by$2.6 million , or 14%, to$16.5 million in 2019 from$19.1 million in 2018. The$2.6 million decrease was the result of decreases in provision for uncollectible accounts of$3.1 million , professional fees of$0.4 million , and other general administrative expenses of$0.1 million , offset, in part, by increases in compensation and related costs of$0.9 million and patent enforcement costs of$0.1 million .
General and administrative expenses as a percentage of total revenue decreased to 12% in 2019 from 18% in 2018 due to both the 14% decrease in general and administrative expenses and the 34% increase in revenue in 2019.
We expect general and administrative expenses to increase in both absolute dollars and as a percentage of revenue during 2020.
We expect to increase general and administrative personnel and expense levels in the long term to support the anticipated growth of our business and continued expansion of our manufacturing operations. We also expect that the patent enforcement actions, described in more detail under "Legal Proceedings" in part I, Item 3, of this Annual Report on Form 10-K, will continue to result in high levels of legal expense in the near term and, if such actions are protracted, could result in significant additional legal expense over the medium to long term. In the longer term, we expect that general and administrative expenses will increase in absolute dollars but decrease as a percentage of revenue due to projected growth in product revenue.
Impairment of Construction In Progress
We had previously completed the design and engineering for a second manufacturing facility to be located inStatesboro, Georgia . During 2016, we elected to delay construction of the facility due to our assessment of future demand. InDecember 2018 , we determined that we will not use the existing design and engineering to construct a second facility in any location. Accordingly, we determined that the design and engineering costs were not recoverable and recorded an impairment charge of$7.4 million on construction in progress assets in 2018. We did not record any impairments of construction in progress in 2019. 63
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Interest Expense, Net Year Ended December 31, Change 2019 2018 Percentage Percentage Amount of Revenue Amount of Revenue Amount Percentage ($ in thousands) Interest expense, net$ (406 ) (0 )%$ (524 ) (1 )%$ 118 (23 )%
Interest expense, net, consisting primarily of fees and interest expense
associated with outstanding balances under our revolving credit agreement, was
Year ended
The following tables set forth our results of operations for the periods presented: Year Ended December 31, Year Ended December 31, 2018 2017 $ Change % Change 2018 2017 (Percentage of ($ in thousands) total revenue) Revenue: Product$ 102,123 $ 109,590 $ (7,467 ) (7 )% 98 % 98 % Research services 2,238 2,041 197 10 % 2 % 2 % Total revenue 104,361 111,631 (7,270 ) (7 )% 100 % 100 % Cost of revenue: Product 90,660 92,052 (1,392 ) (2 )% 87 % 82 % Research services 1,032 908 124 14 % 1 % 1 % Gross profit 12,669 18,671 (6,002 ) (32 )% 12 % 17 % Operating expenses: Research and development 6,319 6,180 139 2 % 6 % 6 % Sales and marketing 13,794 12,604 1,190 9 % 13 % 11 % General and administrative 19,116 19,023 93 0 % 18 % 17 % Impairment of construction in progress 7,356 - 7,356 100 % 7 % - % Total operating expenses 46,585 37,807 8,778 23 % 45 % 34 % Loss from operations (33,916 ) (19,136 ) (14,780 ) 77 % (32 )% (17 )% Interest expense, net (524 ) (185 ) (339 ) 183 % (1 )% (0 )% Total interest expense, net (524 ) (185 ) (339 ) 183 % (1 )% (0 )% Net loss$ (34,440 ) $ (19,321 ) $ (15,119 ) 78 % (33 )% (17 )% Revenue Year Ended December 31, Change 2018 2017 Percentage Percentage Amount of Revenue Amount of Revenue Amount Percentage ($ in thousands) Revenue: Product$ 102,123 98 %$ 109,590 98 %$ (7,467 ) (7 )% Research services 2,238 2 % 2,041 2 % 197 10 % Total revenue$ 104,361 100 %$ 111,631 100 %$ (7,270 ) (7 )% The following chart sets forth product shipments in square feet for the periods presented: Year Ended December 31, Change 2018 2017 Amount Percentage Product shipments in square feet (in thousands) 34,435 37,519 (3,084 ) (8 )% 64
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Total revenue decreased by
Product revenue decreased by$7.5 million , or 7%, to$102.1 million in 2018 from$109.6 million in 2017. This decrease was principally the result of a decrease in project revenue in the subsea market and due to the conclusion of the multiyear petrochemical project with Reliance Industries Limited, offset, in part, by growth in our core petrochemical and refinery markets, particularly inAsia , and in the building materials market. Product revenue for the year ended 2018 included$21.4 million in sales toDistribution International, Inc. Product revenue for the year ended 2017 included$16.7 million in sales toDistribution International, Inc. and$13.2 million in sales to TechnipFMC plc. The average selling price per square foot of our products increased by an effective$0.04 , or 1%, to$2.96 per square foot for the year endedDecember 31, 2018 from$2.92 per square foot for the year endedDecember 31, 2017 . The increase in average selling price reflected the impact of price increases enacted in early 2018. This increase in average selling price had the effect of increasing product revenue by approximately$1.4 million for the year endedDecember 31, 2018 . In volume terms, product shipments decreased 3.1 million square feet, or 8%, to 34.4 million square feet of aerogel products for the year endedDecember 31, 2018 , as compared to 37.5 million square feet in the year endedDecember 31, 2017 . The decrease in product volume had the effect of decreasing product revenue by approximately$8.9 million for the year endedDecember 31, 2018 . Research services revenue increased by$0.2 million , or 10%, to$2.2 million in 2018 from$2.0 million in 2017. The increase was primarily due to the timing and amount of funding available under research contracts during the year endedDecember 31, 2018 from the comparable period in 2017. Product revenue as a percentage of total revenue was 98% of total revenue in both 2018 and 2017. Research services revenue was 2% of total revenue in both 2018 and 2017. Cost of Revenue Year Ended December 31, Change 2018 2017 Percentage Percentage Percentage Percentage of Related of Total of Related of Total Amount Revenue Revenue Amount Revenue Revenue Amount Percentage ($ in thousands) Cost of revenue: Product$ 90,660 89 % 87 %$ 92,052 84 % 82 %$ (1,392 ) (2 )% Research services 1,032 46 % 1 % 908 44 % 1 % 124 14 % Total cost of revenue$ 91,692 88 % 88 %$ 92,960 83 % 83 %$ (1,268 ) (1 )% Total cost of revenue decreased by$1.3 million , or 1%, to$91.7 million in 2018 from$93.0 million in 2017. The decrease in total cost of revenue was primarily the result of a decrease in product cost of revenue. Product cost of revenue decreased$1.4 million , or 2%, to$90.7 million in 2018 from$92.1 million in 2017. The$1.4 million decrease was the result of a$0.8 million decrease in material costs and a$0.6 million decrease in manufacturing expense. The decrease in material costs was driven by a decrease of$0.9 million in warranty expense and the 3.1 million square feet, or 8%, decrease in product shipments period over period, offset, in part, by an increase in the cost of raw materials, particularly in the cost of silica materials, and an increase in the cost of freight of$0.5 million . The decrease in manufacturing expense was the result of decreases in maintenance expense of$1.0 million and utilities expense of$0.9 million , offset, in part, by increases in compensation and related costs of$0.8 million and other costs of$0.5 million . Although product revenue decreased by 7% during 2018, manufacturing expense decreased by only 1% due principally to the high proportion of fixed manufacturing expense in our manufacturing operations. As a result, product cost of revenue as a percentage of product revenue increased to 89% during 2018 from 84% in 2017. Research services cost of revenue increased by$0.1 million , or 14%, to$1.0 million in 2018 from$0.9 million in 2017. The increase in research services cost of revenue was due to the 10% increase in research services revenue during 2018 and an increase in the mix of outside services versus internal labor required to support the contracted research. 65
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Gross Profit Year Ended December 31, Change 2018 2017 Percentage Percentage Amount of Revenue Amount of Revenue Amount Percentage ($ in thousands) Gross profit$ 12,669 12 %$ 18,671 17 %$ (6,002 ) (32 )% Gross profit decreased$6.0 million , or 32%, to$12.7 million in 2018 from$18.7 million in 2017. This$6.0 million decrease was the result of the$7.2 million or 7% decrease in total revenue offset, in part, by the$1.3 million or 1% decrease in total cost of revenue. The decrease in revenue was principally the result of a decline in project revenue in the subsea market and due to the conclusion of the multiyear petrochemical project with Reliance Industries Limited. The$1.3 million decrease in total cost of revenue was the result of a$0.8 million decrease in material costs and a$0.6 million decrease in manufacturing expense, offset, in part by a$0.1 million increase in the cost of research services revenue.
Total cost of revenue decreased by only 1% despite the 7% decline in total revenue during 2018 due principally to the high proportion of fixed costs in our manufacturing facility. As a result, gross profit as a percentage of total revenue decreased to 12% of total revenue in 2018 as compared to 17% in 2017.
Research and Development Expenses
Year Ended December 31, Change 2018 2017 Percentage Percentage Amount of Revenue Amount of Revenue Amount Percentage ($ in thousands) Research and development expenses$ 6,319 6 %$ 6,180 6 %$ 139 2 % Research and development expenses increased$0.1 million , or 2% to$6.3 million in 2018 from$6.2 million during 2017. The$0.1 million increase was the result of increases in compensation and related costs of$0.2 million offset, in part, by a decrease in professional fees of$0.1 million .
Sales and Marketing Expenses
Year Ended December 31, Change 2018 2017 Percentage Percentage Amount of Revenue Amount of Revenue Amount Percentage ($ in thousands) Sales and marketing expenses$ 13,794 13 %$ 12,604 11 %$ 1,190 9 % Sales and marketing expenses increased by$1.2 million , or 9%, to$13.8 million in 2018 from$12.6 million during 2017. The$1.2 million increase was the result of increases in professional fees and commissions of$0.4 million , travel related costs of$0.6 million , and other external sales and marketing expense of$0.5 million offset, in part, by a decrease in compensation costs of$0.3 million .
General and Administrative Expenses
Year Ended December 31, Change 2018 2017 Percentage Percentage Amount of Revenue Amount of Revenue Amount Percentage ($ in thousands) General and administrative expenses$ 19,116 18 %$ 19,023 17 %$ 93 0 % General and administrative expenses increased by$0.1 million , or less than 1%, to$19.1 million in 2018 from$19.0 million in 2017. The$0.1 million increase was the result of an increase in the provisions for uncollectible accounts receivable of$2.5 million , legal and professional fees of$0.6 million , and other general and administrative expenses of$0.3 million , offset, in part, by a decrease in patent enforcement costs of$2.7 million , and compensation and related costs of$0.6 million . 66
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Impairment of Construction In Progress
We had previously completed the design and engineering for a second manufacturing facility to be located inStatesboro, Georgia supported by a package of incentives, including free land, from state and local governmental authorities. During 2016, we elected to delay construction of the facility due to our assessment of future demand. InDecember 2018 , the local governmental authorities notified us that they will exercise their right to terminate the incentive package inFebruary 2019 and to make the identified site available to other parties. In addition, we determined that due to our cumulative manufacturing process advancements since 2016 and expected additional improvements in the near future, we would not use the existing design and engineering to construct a second facility in any location. Accordingly, we determined that the design and engineering costs were not recoverable and recorded an impairment charge of$7.4 million on construction in progress assets during 2018. We did not record any impairments of construction in progress in 2017. Interest Expense, net Year Ended December 31, Change 2018 2017 Percentage Percentage Amount of Revenue Amount of Revenue Amount Percentage ($ in thousands) Interest expense, net$ (524 ) (1 )%$ (185 ) (0 )%$ (339 ) 183 %
Interest expense, net, consisting primarily of fees and interest expense
associated with outstanding balances under our revolving credit agreement, was
Liquidity and Capital Resources
Overview
We have experienced significant losses and invested substantial resources since our inception to develop, commercialize and protect our aerogel technology and to build a manufacturing infrastructure capable of supplying aerogel products at the volumes and costs required by our customers. These investments have included research and development and other operating expenses, capital expenditures and investment in working capital balances. Through 2015, we experienced revenue growth and gained share in our target markets. Despite a decline in revenue in 2016, 2017 and 2018, our financial projections anticipated long-term revenue growth, increasing levels of gross profit and improved cash flow from operations. To support this growth, we initiated a plan in 2018 to increase the capacity of ourEast Providence, Rhode Island manufacturing facility to approximately 60 million square feet of aerogel blankets by the end of 2020. We may incur up to$1.0 million in capital expenditures to complete the plan during 2020. In line with our financial projections, we experienced strong growth in revenue, gross profit and cash flow from operations during 2019. We have taken several actions during 2019 and to date in 2020 to increase the financial resources available to support current operating requirements. OnJanuary 30, 2019 , we received a second$5.0 million prepayment pursuant to the supply agreement with BASF. OnFebruary 18, 2020 , we completed an underwritten public offering of our common stock and received net proceeds of$14.8 million . OnMarch 3, 2020 , we extended the maturity of our revolving credit facility with SVB toApril 28, 2021 . We believe that our existing cash balance, available credit and anticipated cash flows from operations will be sufficient to complete the planned capacity expansion of ourEast Providence manufacturing facility and to fund our planned strategic business initiatives. However, in the future, we may need to supplement our cash balance, available credit and anticipated cash flows from operations with debt financings, customer prepayments, technology licensing agreements or equity financings to provide the capital necessary to complete future capacity expansions or to fund evolving strategic business initiatives.
Primary Sources of Liquidity
Our principal sources of liquidity are currently our cash and cash equivalents and our revolving credit facility withSilicon Valley Bank . Cash and cash equivalents consist primarily of cash and money market accounts on deposit with banks. As ofDecember 31, 2019 , we had$3.6 million of cash and cash equivalents. 67
-------------------------------------------------------------------------------- OnFebruary 18, 2020 , we completed an underwritten public offering of 1,955,000 shares of our common stock at an offering price of$8.25 per share. We received net proceeds of$14.8 million after deducting underwriting discounts of$1.0 million and offering expenses of approximately$0.4 million . AtDecember 31, 2019 , we had debt obligations of$3.1 million related to borrowings under our revolving credit facility withSilicon Valley Bank ,$0.9 million of outstanding letters of credit secured by our revolving credit facility and an obligation of$10.0 million associated with prepayments received pursuant to the BASF Supply Agreement. We have maintained the revolving credit facility, as amended from time to time, withSilicon Valley Bank sinceMarch 2011 . OnMarch 3, 2020 , our revolving credit facility was amended to extend the maturity date of the facility toApril 28, 2021 . The amendment to the credit facility also established certain minimum EBITDA levels with respect to the minimum Adjusted EBITDA financial covenant for the extended term. Under our revolving credit facility, we are permitted to borrow a maximum of$20.0 million , subject to continued covenant compliance and borrowing base requirements. At our election, the interest rate applicable to borrowings under the revolving credit facility 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, we are required to pay a monthly unused revolving line facility fee of 0.5% per annum of the average unused portion of the revolving credit facility. We intend to extend or replace the facility prior to its maturity. Under the revolving credit facility, we are required to comply with both non-financial and financial covenants, including the minimum EBITDA covenant, as defined in the loan agreement. AtDecember 31, 2019 , we were in compliance with all such covenants. See "Risk Factors -- Risks Related to Our Business and Strategy -- We will require significant additional capital to pursue our growth strategy, but we may not be able to obtain additional financing on acceptable terms or at all" in this Annual Report on Form 10-K for the year endedDecember 31, 2019 . The amount available to us under the revolving credit facility atDecember 31, 2019 was$12.4 million after giving effect to the$3.1 million in outstanding borrowings and$0.9 million of outstanding letters of credit.
Analysis of Cash Flow
The following table summarizes our cash flows for the periods indicated:
Year Ended December 31, 2019 2018 2017 ($ in thousands)
Net cash provided by (used in):
Operating activities$ (1,054 ) $ (8,654 ) $ (4,606 ) Investing activities (2,112 ) (3,593 ) (6,118 ) Financing activities 3,472 4,880 3,332
Net increase (decrease) in cash 306 (7,367 )
(7,392 )
Cash, beginning of period 3,327 10,694
18,086
Cash and cash equivalents, end of period
Operating Activities During 2019, we used$1.1 million in net cash in operating activities, as compared to the use of$8.7 million in net cash during 2018, a decrease in the use of cash of$7.6 million . This decrease in use of cash was the result of the decrease in net loss adjusted for non-cash items of$9.6 million , offset, in part, by a decrease in cash provided by changes in working capital of$2.0 million . During 2018, we used$8.7 million net cash in operating activities, as compared to the use of$4.6 million in net cash during 2017, an increase in the use of cash of$4.1 million . This increase in use of cash was the result of the increase in net loss adjusted for non-cash items of$6.1 million , offset, in part, by an increase in cash provided by changes in working capital of$2.0 million . 68
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Investing Activities
Net cash used in investing activities is primarily related to capital expenditures to support our growth. Net cash used in investing activities for 2019 and 2018 totaled$2.1 million and$3.6 million , respectively, in capital expenditures primarily for machinery and equipment to improve the throughput, efficiency and capacity of ourEast Providence facility.
Financing Activities
Net cash provided by financing activities in 2019 totaled$3.5 million and consisted of$125.8 million in borrowings under our revolving credit facility and$5.0 million in prepayment proceeds under the BASF supply agreement, offset, in part, by$126.8 million of repayments under our revolving credit facility and$0.5 million for payments for employee tax withholdings associated with the vesting of restricted stock units. Net cash provided by financing activities in 2018 totaled$4.9 million and consisted of$56.7 million in borrowings under our revolving credit facility and$5.0 million in prepayment proceeds under the BASF supply agreement, offset, in part, by$56.3 million of repayments under our revolving credit facility and$0.5 million for payments for employee tax withholdings associated with the vesting of restricted stock units.
Capital Spending and Future Capital Requirements
We have made capital expenditures primarily to develop and expand our manufacturing capacity. Our capital expenditures totaled$2.1 million in 2019,$3.6 million in 2018 and$6.1 million in 2017. As ofDecember 31, 2019 , we had capital commitments of approximately$0.5 million , which included commitments for which we have entered into contracts as well as commitments authorized by our Board of Directors and relate to the enhancement of our existing production lines in ourEast Providence facility. These commitments consist primarily of costs for equipment and construction. We intend to fund capital expenditures related the expansion of capacity of our existing manufacturing facility with our existing cash balance, available credit and anticipated cash flows from operations.
Off-Balance Sheet Arrangements
Since inception, we have not engaged in any off balance sheet activities as defined in Item 303(a)(4) of Regulation S-K.
Contractual Obligations and Commitments
Operating Leases
We lease office space for our corporate offices inNorthborough, Massachusetts , which expires in 2026, and warehouse space and land near ourEast Providence facility, which expire at various dates from 2018 through 2024, under non-cancelable operating lease agreements. See "Item 2 - Properties." We also lease vehicles and equipment under non-cancelable operating leases that expire at various dates. OnJune 29, 2016 , we entered into a lease withCabot II- MA1M03, LLC , orCabot Properties , to lease approximately 51,650 square feet of space located at30 Forbes Road ,Northborough, MA 01532, the location of our current headquarters. The lease superseded a lease between us andCabot Properties' predecessor-in-interest. The term of the lease began onJanuary 1, 2017 and ends onDecember 31, 2026 . The annual base rent associated with the lease was approximately$408,000 during 2017 and has and will increase by approximately 3% annually during the lease term. The lease also provides for our payment of our pro rata share of real estate taxes and certain other expenses. Upon the expiration of the lease term, we will have the right to extend the lease for an additional three years. Supply Agreement InJune 2016 , we entered into a supply agreement and a side agreement with BASF SE. InFebruary 2018 , we entered into an amended and restated supply agreement and side agreement withBASF Polyurethanes GmbH (BASF). OnJanuary 14, 2019 , we entered into the first addendum to the supply agreement with BASF (as amended and restated and after giving effect to the first addendum, the supply agreement). Pursuant to the supply agreement, we will sell exclusively to BASF certain products at annual volumes to be specified by BASF, subject to specified volume limits. Pricing is based on a cost-plus formula. The supply agreement also specifies the markets in which BASF is permitted to sell each of the products. BASF has no obligation to purchase any of the products under the supply agreement. The supply agreement will terminate onDecember 31, 2027 with respect to our Spaceloft A2 69
-------------------------------------------------------------------------------- product, and onDecember 31, 2028 with respect to the newly developed product, if not renewed prior to such dates. Upon expiration of the supply agreement, we will be subject to a post-termination supply commitment for the specified products for an additional two years. In addition to the customary terms associated with supply agreements, BASF, in its sole discretion, may make prepayments to us in the aggregate amount of up to$22.0 million during the term of the supply agreement. BASF made two prepayments to us in the aggregate amount of$5.0 million during 2018. BASF made an additional prepayment of$5.0 million to us inJanuary 2019 . We have secured our obligation to repay the prepayments with a first priority security interest in real estate, machinery and equipment located at our existing manufacturing facility inEast Providence, Rhode Island . Additionally, we granted non-exclusive licenses to ourRhode Island subsidiary under our intellectual property as necessary to operate such machinery and equipment. BeginningJanuary 1, 2019 , we will credit 25.3% of any amounts that we invoice for Spaceloft A2 sold to BASF against the outstanding balance of the 2018 prepayment. If any of the 2018 prepayment remains uncredited as ofDecember 31, 2021 , BASF may request that we repay the uncredited amount to BASF. AfterJanuary 1, 2020 , we will credit 50% of any amounts that we invoice for a newly developed product sold to BASF against the outstanding balance of the 2019 prepayment. AfterDecember 31, 2022 , BASF may elect to have us credit 24.7% of any amounts we invoice for Spaceloft A2 sold to BASF against the outstanding balance of the 2019 prepayment or may request that we repay the uncredited amount to BASF. The specific terms of additional tranches of prepayments, if any, are to be agreed by us and BASF at a future date. We may repay any prepayment balance to BASF at any time in whole or in part for any reason. In the event of a sale of all or substantially all of our assets or a change of control ofAspen , BASF may in certain instances have the right to terminate the supply agreement, in which case any remaining balance of prepayments as of such sale or change of control will be due and payable to BASF within 30 days of the relevant transaction.
Joint Development Agreement
InJune 2016 , we and BASF SE also entered into a Joint Development Agreement, or the JDA, setting forth the rights and obligations of us and BASF SE with respect to collaboration on the development and commercialization of new products. Under the JDA, each party may propose that the parties enter into joint efforts to seek to develop one or more products or services for commercialization on terms to be agreed by the parties. The JDA established a joint steering committee with equal representation from each of us and BASF SE to oversee any such collaboration. Unless otherwise agreed, all intellectual property created in the performance of joint development activities will generally be jointly owned by us and BASF SE. The JDA will have an initial term of two years or the duration of any project in process, with the option for the parties to renew at the expiration. Either party may terminate the JDA for any reason with 90-days prior notice to the other party, provided that such termination will not terminate any project under the JDA then in progress, with any such ongoing project able to be terminated by either party for any reason on 90-days prior notice to the other party. Revolving Credit Facility InMarch 2011 , we entered into a revolving credit facility withSilicon Valley Bank . This facility has been amended at various dates throughDecember 2019 . OnMarch 3, 2020 , the Loan Agreement was further amended to extend the maturity date of the facility toApril 28, 2021 . Under the facility, we are permitted to borrow a maximum of$20.0 million , subject to continued covenant compliance and borrowing base requirements. At our election, the interest rate applicable to borrowings under the amended revolving credit facility 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, we are required to pay a monthly unused revolving line facility fee of 0.5% per annum of the average unused portion of the revolving credit facility. The credit facility has also been amended to establish certain minimum Adjusted EBITDA levels with respect to the minimum Adjusted EBITDA financial covenant for the extended term.
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Recent Accounting Pronouncements
Standards Implemented Since
InFebruary 2016 , theFinancial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-02, Leases (Topic 842). FASB ASU 2016-02 modified the accounting for leases and requires that all leases be recorded on the consolidated balance sheets as assets and liabilities. This standard was effective for fiscal years beginning afterDecember 15, 2018 . We adopted this standard onJanuary 1, 2019 using the modified retrospective transition approach with the effective date as the date of initial application. As a result, we did not update financial information or provide the disclosures otherwise required under the new standard for dates and periods beforeJanuary 1, 2019 . To measure our lease liabilities, we used our incremental borrowing rate as of the date of adoption or the rate implicit in the lease, if available. The discount rate was applied to the remaining lease term and remaining payments at the date of adoption. We also elected the package of practical expedients under the new standard, which permitted us to not reassess prior conclusions about lease identification, lease classification, and initial direct costs. The most significant effects of this new standard on the consolidated financial statements related 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 leasing activities. Upon adoption onJanuary 1, 2019 , we recognized operating lease liabilities of approximately$6.0 million with corresponding ROU assets of approximately$4.6 million . Additionally, we derecognized deferred rent liabilities of$1.4 million . This standard has not materially impacted our consolidated net loss or net cash used in operations. We also elected the short-term lease recognition exemption for all leases that qualify. For leases that qualify for this exemption, we do not recognize ROU assets or lease liabilities. In addition, we elected the practical expedient to not separate non-lease components from the associated lease components for all of our equipment leases. Standards to be Implemented
We believe that the impact of recently issued accounting standards that are not yet effective will not have a material impact on our consolidated financial statements.
Critical Accounting Policies and Estimates
Our financial statements are prepared in accordance with accounting principles generally accepted inthe United States of America . The preparation of our financial statements and related disclosures requires us to make estimates, assumptions and judgments that affect the reported amount of assets, liabilities, revenue, costs and expenses and related disclosures. We believe that the estimates, assumptions and judgments involved in these accounting policies have the greatest potential impact on our financial statements; and therefore, we consider these to be our critical accounting policies. Accordingly, we evaluate our estimates and assumptions on an ongoing basis. Our actual results may differ from these estimates under different assumptions and conditions. See note 2 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K for information about these critical accounting policies, as well as a description of our other significant accounting policies. Revenue Recognition We recognize product revenue from the sale of our line of aerogel products and research services revenue from the provision of services under contracts with various agencies of theU.S. government and other institutions. Product and research services revenue is recognized upon the satisfaction of contractual performance obligations. In general, our customary shipping terms are FOB shipping point. Products are typically delivered without significant post-sale obligations to customers other than standard warranty obligations for product defects. We provide warranties for our products and record the estimated cost within cost of sales in the period that the revenue is recorded. Our standard warranty period extends one to two years from the date of shipment, depending on the type of product purchased. Our warranties provide that our products will be free from defects in material and workmanship, and will, under normal use, conform to the specifications for the product. During the year endedDecember 31, 2018 , test results indicated that tested samples performed outside the published performance specifications for a specific attribute of a product. We have completed our assessment of the impact of the testing results on our customer base and, based on that completed assessment, have determined that it is remote that we have incurred a liability as ofDecember 31, 2019 . We did not record any warranty expense during the years endedDecember 31, 2019 and 2018. During the year endedDecember 31, 2017 , we recorded warranty expense of$0.9 million . This warranty charge was related to a product claim for a specific application issue. This claim was outside of our typical experience. As ofDecember 31, 2019 , we had satisfied all outstanding warranty claims. 71 -------------------------------------------------------------------------------- Research services revenue is derived from the execution of contracts awarded by theU.S. government, other government agencies and other institutions. Our research service arrangements require us to perform research to investigate new forms and applications of aerogel technology. We record revenue earned on research services contracts using the percentage-of-completion method in two ways: (1) for firm-fixed-price contracts, we accrue that portion of the total contract price that is allocable, on the basis of our estimates of costs incurred to date to total contract cost; (2) for cost-plus-fixed-fee contracts, we record revenue that is equal to total payroll cost incurred times a stated factor plus reimbursable expenses, to a stated upper limit. The primary cost in these arrangements is the labor effort expended in completing the research. Typically, the only deliverable, other than labor hours expended, is reporting research results to the customer or delivery of research grade aerogel products. 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. Contract costs and rates used to allocate overhead to contracts are subject to audit by the respective contracting government agency. 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.
Stock-based Compensation
We maintain an equity incentive plan pursuant to which our board of directors may grant qualified and nonqualified stock options, restricted stock, restricted stock units and other stock-based awards to board members, officers, key employees and others who provide or have provided service to us. We measure the costs associated with stock-based awards based on their estimated fair value at date of grant. We recognize the costs of stock-based awards as service, performance or market conditions are met. Future expense amounts for any particular quarterly or annual period could be affected by changes in our assumptions or changes in market conditions.
Stock Options
We use the Black-Scholes option-pricing model to estimate the fair value of stock option awards. The determination of the estimated fair value of stock option awards is based on a number of complex and subjective assumptions. These assumptions include the determination of the estimated fair value of the underlying security (prior to our initial public offering), the expected volatility of the underlying security, a risk-free interest rate, the expected term of the option, and the forfeiture rate for the award class. The following assumptions were used to estimate the fair value of the option awards: Year Ended December 31, 2019 2018 2017 Weighted-average assumptions: Expected term (in years) 5.81 5.93 5.86 Expected volatility 49.90 % 47.68 % 51.95 % Risk free rate 2.44 % 2.76 % 1.99 % Expected dividend yield - % - % - %
• The expected term represents the period that our stock-based awards are
expected to be outstanding and is determined using the simplified method
described in ASC Topic 718, Compensation - Stock Compensation, for all grants. We believe this is a better representation of the estimated life than our actual limited historical exercise behavior.
• For the years ended
volatility is based on the weighted-average volatility of up to 17 companies within various industries that we believe are similar to our own.
• The risk-free interest rate is based on
with a remaining term equal to the expected life assumed at the date of
grant.
• We use an expected dividend yield of zero, since we do not intend to pay
cash dividends on our common stock in the foreseeable future, nor have we
paid dividends on our common stock in the past.
During the year endedDecember 31, 2017 , we adopted the provisions of ASU 2016-09 related to the timing of accounting for the forfeitures of share based awards using a modified retrospective method. Under these provisions, we record the impact of forfeitures of service based awards at the time an award is forfeited. Our adoption of the provisions resulted in a cumulative-effect adjustment to equity as ofJanuary 1, 2017 of$0.3 million . Prior to our adoption of ASU 2016-09, forfeitures were required to be estimated at the time of grant and revised, if necessary, in subsequent periods, if actual forfeitures differed from those estimates. Forfeitures were estimated based on voluntary termination behavior as well as analysis of actual option forfeitures. 72
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For stock options that contained a market condition issued to our chief executive officer during the year endedDecember 31, 2015 , we used a Monte Carlo Simulation model to estimate the grant date fair value of awards expected to vest. The simulation model was based on the Black Scholes option-pricing model and a number of complex assumptions including (i) if the vesting condition is satisfied within the time-vesting periods, and (ii) the date the common stock price target is met per the terms of the agreement. OnNovember 7, 2018 , we entered into an executive agreement with the CEO which modified the change in control provisions for the outstanding stock options that contained a market condition. This modification resulted in the recognition of additional compensation expense of less than$0.1 million during the year endedDecember 31, 2018 . For the restricted stock award issued to our Chief Executive Officer during the year endedDecember 31, 2015 that contain a performance condition, we assess the probability that the performance condition will be satisfied. OnAugust 2, 2017 , we modified the performance target with respect to 78,125 shares of these awards. As ofDecember 31, 2019 , we have recorded$0.1 million in compensation expense to date in connection with the award.
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