UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
☒☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2017
OR
☐☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 001-36481
ASPEN AEROGELS, INC.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
30 Forbes Road, Building B
Northborough, Massachusetts
(Address of principal executive offices)
04-3559972
(I.R.S. Employer
Identification No.)
01532
(Zip Code)
Registrant’s telephone number, including area code (508) 691-1111
Securities registered pursuant to Section 12(b) of the Exchange Act:
Title of each class
Common Stock, par value $0.00001 per share
Name of each exchange on which registered
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Exchange Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐
No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes ☐
No ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒
No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant
to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒
No ☐
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☒
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated
filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Non-accelerated filer
☐
☐ (Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐
No ☒
Accelerated filer
Smaller reporting company
Emerging growth company
☒
☐
☒
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting
standards provided pursuant to Section 13(a) of the Exchange Act. ☒
The aggregate market value of the registrant’s common stock held by non-affiliates of the registrant (without admitting that any person whose shares are not included in such calculation is an
affiliate) computed by reference to the price at which the common stock was last sold as of the last business day of the registrant’s most recently completed second fiscal quarter was
approximately $86.6 million.
As of February 27, 2018, the registrant had 23,643,189 shares of common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s definitive Proxy Statement for its Annual Meeting of Stockholders to be held on June 20, 2018 are incorporated by reference into Part III of this Annual Report on
Form 10-K to the extent stated herein.
PART I
ITEM 1.
ITEM 1A.
ITEM 1B.
ITEM 2.
ITEM 3.
ITEM 4.
PART II
ITEM 5.
ITEM 6.
ITEM 7.
ITEM 7A.
ITEM 8.
ITEM 9.
ITEM 9A.
ITEM 9B.
PART III
ITEM 10.
ITEM 11.
ITEM 12.
ITEM 13.
ITEM 14.
PART IV
ITEM 15.
ITEM 16.
TABLE OF CONTENTS
BUSINESS
RISK FACTORS
UNRESOLVED STAFF COMMENTS
PROPERTIES
LEGAL PROCEEDINGS
MINE SAFETY DISCLOSURES
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF
EQUITY SECURITIES
SELECTED FINANCIAL DATA
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
CONTROLS AND PROCEDURES
OTHER INFORMATION
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
EXECUTIVE COMPENSATION
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
PRINCIPAL ACCOUNTING FEES AND SERVICES
EXHIBITS, FINANCIAL STATEMENT SCHEDULES
FORM 10-K SUMMARY
SIGNATURES
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Item 1.
BUSINESS
PART I
Aspen Aerogels, Inc. 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. When used in this report, the terms “we,” “us,” “our” and “the
Company” refer to Aspen Aerogels, Inc. and its subsidiaries.
We design, develop and manufacture innovative, high-performance aerogel insulation. 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 products provide two to five times the thermal performance of widely used traditional insulation in a thin, easy-to-use and durable blanket form. Our
end-use customers select our products where thermal performance is critical, and to save money, improve resource efficiency, preserve operating assets and protect
workers.
Our technologically advanced products are targeted at the estimated $3.1 billion annual global market for energy infrastructure insulation materials. Our
aerogel insulation has undergone rigorous technical validation and is used by many of the world’s largest oil producers and the owners and operators of refineries,
petrochemical plants, liquefied natural gas facilities and power generating and distribution assets, such as ExxonMobil, PTT LNG, Dominion Resources and Royal
Dutch Shell. Our products replace traditional insulation in existing facilities during regular maintenance, upgrades and capacity expansions. In addition, our aerogel
products are increasingly being specified for use in new-build energy infrastructure facilities.
We introduced our two key product lines, Pyrogel and Cryogel in 2008. Our product revenue has grown from $17.2 million in 2008 to $109.6 million in
2017, representing a nine year compound annual growth rate of 23%. During this period, we have sold more than $719 million of our products globally,
representing an installed base of more than 279 million square feet of insulation. We believe that this initial success positions us for future growth and continued
gain in market share.
We currently focus our commercial efforts in the energy infrastructure market, where we believe our products have the highest value applications. We also
market and sell aerogel products for use within the building materials market. 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.
We have grown our business by forming technical and commercial relationships with industry leaders, which has allowed us to optimize our products to
meet the particular demands of targeted market sectors. We have benefited from our technical and commercial relationships with ExxonMobil in the oil refinery
and petrochemical sector, with TechnipFMC in the offshore oil sector and with BASF in the building materials market. We will continue our strategy of working
with innovative companies to target and penetrate additional market opportunities.
Our patented aerogel product and manufacturing technologies are significant assets. Aerogels are complex structures in which 97% of the volume consists
of air trapped between intertwined clusters of amorphous silica solids. These extremely low density solids provide superior insulating properties. Although aerogels
are usually fragile materials, we have developed innovative and proprietary manufacturing processes that enable us to produce industrially robust aerogel insulation
cost-effectively and at commercial scale.
Our products help customers to improve the resource efficiency and sustainability of their operations. Our products also enable compact system design,
reduce installation time and costs, promote freight and logistics cost savings, reduce system weight and required storage space and enhance job site safety. Our
products reduce the incidence of corrosion under insulation, which is a significant maintenance cost and safety issue in energy infrastructure facilities. Many of our
products also offer strong fire protection, which is a critical performance requirement in our markets. We believe our array of product attributes provides strong
competitive advantages over traditional insulation. Although competing insulation materials may have one or more comparable attributes, we believe that no single
insulation material currently available offers all of the properties of our aerogel insulation products.
Total revenue for the years ended December 31, 2017, 2016 and 2015 was $111.6 million, $117.7 million and $122.5 million, respectively. For the years
ended December 31, 2017, 2016 and 2015, based on shipment destination or research services location, our U.S. revenue was $51.4 million, $35.7 million and
$44.5 million, respectively, and our international revenue was $60.2 million, $82.0 million and $78.0 million, respectively.
We manufacture our products using proprietary technology at our facility in East Providence, Rhode Island. We have operated the East Providence facility
since 2008 and have significantly increased manufacturing capacity and productivity since that date. We
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commenced operation of our third production line in the East Providence facility in 2015 which increased our annual nameplate capacity to 50 million square feet
of aerogel blankets. We have initiated a series of projects designed to increase this capacity to 60 million square feet of aerogel blankets by the end of 2020. W e
have also completed the design and engineering of the first production line in a planned second manufacturing facility to be located in Statesboro, Georgia
supported by a package of ince ntives from the State of Georgia and l ocal governmental entities . We have elected to delay construction of th e Statesboro facility
to better align the timing of th is capacity expansion with ou r assessment of future demand.
Financial information about our product and research services revenues, net loss per share and our total assets are provided in our consolidated financial
statements included elsewhere in this Annual Report on Form 10-K.
Our Markets and Competition
Our core market is the energy infrastructure insulation market. This market is global, well-established and includes large and well-capitalized end-users.
This market includes companies operating refinery, petrochemical, oil production, LNG production and storage facilities. The market also includes firms operating
gas, coal, nuclear, hydro and solar thermal power generating plants and district energy systems. Insulation systems in the energy infrastructure market are designed
to maintain hot and cold process equipment, piping and storage tanks at optimal temperatures, to protect plant and equipment from the elements and from the risk
of fire, and to protect workers. The market is served by a well-organized, well-established, worldwide network of distributors, contractors and engineers.
Demand for insulation in the energy infrastructure market is composed of demand associated with new-build construction of facilities, capital expansions
and related capital projects, as well as with routine, non-discretionary maintenance programs within existing facilities. Capital expansions and related capital
projects in the energy infrastructure market are driven primarily by overall economic growth and projected growth in energy demand. Maintenance programs are
essential to optimal operation of process equipment, to protect workers and to minimize the risk of a catastrophic loss. Accordingly, we believe that demand for
insulation for maintenance purposes in comparison to capital projects is less affected by volatility associated with economic cycles, energy prices and other
macroeconomic factors.
The major end-use markets that drive demand for our products include oil refining, petrochemical, natural gas and LNG production and storage, onshore oil
production, offshore oil production and power generation. Global energy demand is expected to increase in the long-term and, in order to serve this growing
demand, we believe our end-use customers will continue to invest in major energy infrastructure projects.
We also sell our products for use in the building materials and other end markets, including for the fabrication of insulation parts by original equipment
manufacturers, or OEMs. These OEMs develop products incorporating our aerogel blankets for applications as diverse as military and commercial aircraft, trains,
buses, appliances, apparel, footwear and outdoor gear. While these are not presently our core markets, we anticipate that we will allocate a growing portion of our
manufacturing capacity to serve these markets in the long term. We believe the key performance criteria for insulation in these markets and applications include
thermal performance, compact design, durability and fire resistance.
We operate in a highly competitive environment. In general, we compete with traditional insulation materials based on product performance, price,
availability and proximity to the customer. Customers may choose among a variety of insulation materials that offer a range of characteristics including thermal
performance, durability, vapor permeability, moisture resistance, ease of installation and upfront and lifecycle costs. Within each type of insulation material, there
is also competition between the manufacturers of that material. Most types of traditional insulation materials are produced by a number of different manufacturers
and once customers have chosen the type of insulation material that they intend to use, they will choose a manufacturer of that material based primarily on each
manufacturer’s price and delivery schedule. Insulation manufacturers include a range of large, high-volume, multinational manufacturers offering branded products
and strong technical support services to small, low-volume, local manufacturers offering low prices and limited customer support.
We believe the primary competitive factors in our market are:
•
•
•
•
product performance (along multiple criteria), quality and fitness for purpose;
product price, installed cost and lifecycle cost;
product availability; and
proximity to customer and logistics.
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Our products are priced at a premium to traditional insulation materials. While our competitors offer many traditional insulation products that are priced
below our products on a per-unit basis, we believe our products have superior performance attributes and may have the lowest cost on a fully-installed basis or offer
significant life-cycle cost savings.
We compete in the aerogel insulation market with Cabot Corporation and a growing number of other competitors, including Guangdong Alison Hi-Tech
Co., Ltd. and Nano Tech Co., Ltd. that manufacture and sell aerogel insulation products. We expect to face increasing competition in the aerogel insulation market
over the next several years as existing competitors and new entrants seek to develop and market their own aerogel products.
Within each of our target markets, we encounter one or more of these organizations or their resellers and a significant number of other aggressive national,
regional and local suppliers of traditional insulation products. Our competitors are seeking to enhance traditional insulation materials and to develop and introduce
new and emerging insulation technologies. Competing technologies that outperform our insulation products in one or more performance attributes could be
developed and successfully introduced. See “Risk Factors —The energy infrastructure insulation market is highly competitive; if we are unable to compete
successfully, we may not be able to increase or maintain our market share and revenues.”
Our market share in 2017 was less than 4% of the estimated $3.1 billion annual global market for energy infrastructure insulation materials. Many of our
competitors have greater market presence, larger market share, longer operating histories, stronger name recognition, larger customer bases and significantly
greater financial, technical, sales and marketing, manufacturing and other resources than we have and may be better able to withstand volatility within the industry
and throughout the economy as a whole while retaining greater operating and financial flexibility. If our competitors lower their prices, or develop new products
with better performance, or if we are unable to compete effectively, our growth opportunities, share of the market, margins and profitability may decline.
Our Competitive Strengths
Because insulation is used in a wide variety of demanding applications, insulation materials must satisfy a wide range of performance criteria on a cost-
effective basis. We believe that our aerogel technology has allowed us to create superior insulation products for our core markets that will allow us to continue to
grow our share of the global insulation market. We believe that the potential for significant technological innovation in traditional insulation materials is limited
and that new high-performance materials will be required to meet evolving market requirements for energy efficient insulation systems. Our line of high-
performance aerogel blankets is positioned to meet these requirements. Our solution is driven by our innovative and proprietary technology that produces aerogels
in a flexible and industrially robust blanket form and is supported by over 20 years of research and development dedicated to new aerogel compositions, form
factors and manufacturing technologies. We believe our aerogel blankets deliver a superior combination of performance attributes that enable end-users to save
money, improve resource efficiency, preserve operating assets and protect workers across a wide range of applications in our target markets.
We believe the following combination of capabilities distinguishes us from our competitors and positions us to continue to gain market share in the energy
infrastructure insulation market:
•
•
•
Disruptive Products with a Compelling Value Proposition. Our aerogel products provide two to five times the thermal performance of widely used
traditional insulation in a thin, easy-to-use and durable blanket form. We believe our array of product attributes provides strong competitive
advantages over traditional insulation and will enable us to gain a larger share of the energy infrastructure insulation market. Although competing
insulation materials may have one or more comparable attributes, we believe that no single insulation material currently available offers all of the
properties of our aerogel insulation.
Important Energy End Markets. Our products are primarily used in large scale energy infrastructure facilities. Given continued growth in global
energy consumption in the long-term, and the construction of new facilities to satisfy this demand, we believe that we serve well capitalized and
growing global end markets. In order to capture the opportunities in our end markets, we have a network of sales professionals and qualified
distributors in more than 40 countries around the world.
Growing Installed Base with Industry-leading End-Users. We have an installed base of more than 279 million square feet of insulation,
representing more than $719 million in cumulative product sales since 2008. Through our relationships with industry leading end-use customers, our
products have undergone rigorous testing and technical validation and are now in use at many of the world’s largest oil producers, refiners and
petrochemical companies. These relationships have shortened the sales cycle with other customers and have helped to facilitate our market
penetration. We also have strong relationships with a global network of energy-focused distributors, contractors and engineering firms that
understand the significant advantages our products provide to end-users.
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•
•
•
Proven, Scalable Business Model. Our proprietary manufacturing technology is proven and has been successfully scaled up to meet increasing
demand. We have operated the East Providence facility since 2008 and have significantly increased manufacturing capacity and productivity during
the period. We successfully commenced operation of our second production line at this facility in March 2011 and doubled our annual nameplate
capacity to 40 million square feet of aerogel blankets. We commenced operations of a third line in the East Providence facility during the first quarter
of 2015 which increased our annual nameplate capacity by 25% to 50 million square feet of aerogel blankets.
Protected Technology Platform and Proprietary Manufacturing Capability. Our aerogel technology platform is the result of more than 20 years of
research and development dedicated to new aerogel compositions, form factors and manufacturing technologies. Our intellectual property portfolio is
supported by 107 issued patents, with an additional 102 pending, in U.S. and foreign jurisdictions in areas related to product design, chemistry,
process technology and market applications. In addition, we have significant know-how and trade secrets related to product formulations and
manufacturing techniques. We believe our portfolio of patents, trade secrets and know-how presents a barrier to potential new entrants in the
commercialization of aerogel blanket insulation.
Experienced Management Team with a Demonstrated Track Record. Our executive officers have an average of more than 20 years each of
experience in global industrial companies, specialty chemical companies or related material science research. This management team is responsible
for the continued development of our aerogel technology platform, the commercial acceptance of our products, and the creation of a global
distribution and marketing platform. As of December 31, 2017, we employed 263 people including material scientists, engineers, manufacturing line
operators, sales personnel, administrative staff, and management. We believe our dedicated and experienced team is an important competitive asset.
Our Growth Strategy
We are targeting continued expansion of the use of our products within energy infrastructure facilities during regular maintenance, upgrades and expansions.
In addition to opportunities to replace traditional insulation at existing facilities, we are also pursuing insulation applications at new-build and large capacity
expansion projects around the world.
Our strategy is to create economic value by leveraging our technological and market leadership in aerogels to be the premier provider of high-performance
insulation products serving global energy infrastructure customers. We also will pursue high-value opportunities for our aerogel products within other segments of
the global insulation market, including the building materials market. In addition, we will leverage our aerogel technology platform to develop innovative, aerogel
enhanced products for applications outside the global insulation market. During 2018, we intend to invest approximately $6.0 million in incremental manufacturing
and operating expense with the objective of restoring long-term growth in our existing markets and to develop new business opportunities. This incremental
expense is associated, in large part, with our plan to add 49 new employees to our team during the year.
Key elements of our strategy include:
•
•
Broaden Energy Market Diversity and Grow Market Share. We plan to focus additional resources to continue to grow our share of the energy
infrastructure insulation market, both through increased sales to our existing customers and through sales to new customers. We plan to continue to
expand our global sales and distribution network and seek to promote greater enterprise-wide adoption of our products by existing end-use
customers. To date, the majority of our revenue has been generated from applications in refineries and petrochemical facilities. We will continue to
pursue and expect greater adoption of our products in district heating, LNG production and storage, and power generation markets. In addition, our
product revenue has been and will continue to be generated in large part by demand for insulation associated with scheduled plant shutdowns, or
turnarounds, and other maintenance-related projects. With broad adoption of our products and our growing installed base, we expect that our
products will be specified at increasing rates during the design phase in a growing number of new-build and capital expansion projects. We also
expect that growth in global energy demand over time will result in increased new-build and large capacity expansion projects, driving demand for
our aerogel products.
Leverage Strategic Relationships in the Building Materials Market. We are pursuing market opportunities with leading building materials
manufacturers and distributors across multiple regions to address the increasingly stringent regulatory environment governing the thermal
performance of buildings. We have entered into a multi-faceted strategic partnership with BASF to develop and commercialize products optimized
for the building materials market. The strategic partnership offers a near-term commercial opportunity through the sale of our Spaceloft A2 product
line and long-term commercial potential through our joint development efforts focused on innovative products and technologies. We believe our
strategic
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•
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•
partnership with BASF will facilitate our penetration of the building materials market by combining the strength of our aerogel technology platform
with BASF’s broad technical , commercial and distribution capabilities .
Capitalize on Innovation to Develop New Markets. Our team of materials scientists and engineers focus on advancing our aerogel technology
platform and developing next generation aerogel compositions, form factors and manufacturing processes. We believe that we are well positioned to
leverage over 20 years of research and development to develop and commercialize disruptive aerogel products for a wide array of new markets
beyond energy infrastructure and building materials. We will seek to exploit the unique characteristics of aerogels, including low thermal
conductivity, high surface area, high electrical conductivity, and tunable porosity, to develop aerogel enhanced products and next generation
technology addressing complex and unmet market needs. We will continue to seek potential partnerships with industry leaders that include a mix of
commercial, technical and financial elements to realize the full potential offered by our proprietary aerogel technology platform in targeted markets.
Strategically Increase Capacity to Meet Demand. Demand for our aerogel products has grown significantly since our inception. From 2008 through
2017, our product revenue has grown at a compound annual growth rate of 23% to $109.6 million. To meet growth in demand for our products, we
added a third production line in our East Providence facility in 2015 which increased our annual nameplate capacity to 50 million square feet of
aerogel blankets. We have initiated a series of projects designed to increase the nameplate capacity of the East Providence facility by an additional
10 million square feet of aerogel blankets by the end of 2020 at a projected cost of between $15 million and $20 million. In addition, we have
completed the design and engineering of a planned first production line in a second manufacturing facility to be constructed in Statesboro, Georgia.
We currently expect the first line will increase our annual nameplate capacity by approximately 40 million square feet of aerogel blankets for a cost
of between $120 million and $130 million. We have elected to delay construction of the Statesboro facility to better align the timing of this capacity
expansion with our assessment of future demand.
Enhance Our Profit Margins, Operational Cash Flow and Return on Invested Capital. We will seek to continuously improve the cost efficiency of
our manufacturing process, to optimize the formulation of our products and to manage our supply chain to reduce costs. We believe additional
opportunities to realize production efficiencies and to reduce per unit overhead costs will arise with growth in the scale of our manufacturing
operations. We believe our current expansion plans will enhance profit potential, increase operating cash flow capability, and offer attractive returns
on incremental invested capital. In addition, we will focus our development efforts on new products and next generation technology with application
in new, high value market segments.
Our Products
Aerogels are highly porous structures in which 97% of the volume consists of air trapped between intertwined clusters of amorphous silica solids. Aerogels
are a very low density solids and are extremely fragile materials. However, our proprietary manufacturing process produces aerogels in a flexible, resilient, durable
and easy-to-use blanket form.
The core raw material in the production of our aerogel products is silica precursors. Our manufacturing process initially creates a semi-solid alcogel in
which the silica structure is filled with ethanol. We produce aerogel by means of a supercritical extraction process that removes ethanol from the gel and replaces it
with air. Our process allows the ethanol to be extracted without causing the solid matrix in the gel to collapse from capillary forces.
Our material costs were 45%, 41% and 45% of product revenue for the years ended December 31, 2017, 2016 and 2015, respectively. We are seeking to
lower our manufacturing costs and to improve the per square foot costs of our aerogel blankets by optimizing our formulations and manufacturing processes to
improve yields, by realizing price reductions from existing vendors, by qualifying new vendors for certain materials and by reducing shipping costs. Our objective
is both to reduce costs to enhance our competitive advantage and to ensure we deliver high quality products to our customers.
The materials used in the production of our products consist primarily of fiber battings, silica precursors and ethanol, which is used in the delivery of the
silica precursors. Multiple sources of supply exist for all of our raw materials, and we believe the markets for these products are competitive and prices are
relatively stable. We purchase silica precursors from several suppliers. Based on the current level of demand for our products, we believe that an adequate long-
term supply of silica precursors is available. However, if demand for our products increases rapidly, we will need to work with suppliers to ensure that an adequate
long-term supply of silica precursors will be available at competitive prices. Suppliers of silica precursors include industrial companies that produce it directly or
that produce it as a byproduct of other industrial processes. We are working with a number of these suppliers to plan for our potential future needs and to develop
processes to reduce the long-term cost of these materials. See “Risk Factors — Shortages of the raw materials used in the production of our products, increases in
the cost of such materials or disruptions in our supply chain could adversely impact our financial condition and results of operations.”
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Our aerogel blankets are reinforced with fiber batting. We manufacture and sell our blankets in 60 inch wide, three foot diameter rolls with a standard range
of thickness of 5 millimeters to 10 millimeters. Our base products are all flexible, hydrophobic , vapor permeable , compression resistant and able to be cut and
fabricated using conventional tools. We have specifically developed our line of aerogel blankets to meet the requirements of a broad set of applications within our
target markets. The composition and attributes of our standard aerogel blankets are described below:
Energy Infrastructure Markets
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Pyrogel XT-E. Pyrogel XT-E, our best-selling product, is reinforced with a glass-fiber batting and has an upper use temperature of 650° C. Pyrogel
XT-E was initially designed for use in refineries and petrochemical facilities, but has proven to have wide applicability throughout the energy
infrastructure market. Pyrogel XT-E is optimized for high temperature applications between 100° C and 400° C. Pyrogel XT-E’s hydrophobicity and
vapor permeability reduce the risk of corrosion under insulation in energy infrastructure operating systems when compared to traditional insulation.
Pyrogel HPS. Pyrogel HPS is optimized for applications within the power generation market with operating temperatures greater than 400° C. With
an upper use temperature of 650° C, high durability and extremely low thermal conductivity, Pyrogel HPS is ideal for installation in high
performance turbine systems and in demanding thermal environments in power plants and systems. Pyrogel HPS also provides strong value at high
temperatures and in demanding thermal applications in refining and chemical processing systems.
Pyrogel XTF. Pyrogel XTF provides thermal performance similar to Pyrogel XT, but is reinforced with a glass- and silica-fiber batting. Pyrogel XTF
is specially formulated to provide strong protection against fire.
Cryogel Z. Cryogel Z is designed for sub-ambient and cryogenic applications in the energy infrastructure market. Cryogel Z is reinforced with a
glass- and polyester-fiber batting and is produced with an integral vapor barrier. Cryogel Z is also specially formulated to minimize the incidence of
stress corrosion cracking in stainless steel systems. Cryogel Z’s combination of properties allow for simplified system designs and reduced
installation costs in cold applications throughout the energy infrastructure market when compared to traditional insulation.
Spaceloft Subsea. Spaceloft Subsea is reinforced with glass- and polyester-fiber batting and is designed for use in pipe-in-pipe applications in
offshore oil production. Spaceloft Subsea is typically fabricated and pre-packaged to permit faster installation. Spaceloft Subsea allows for small
profile carrier pipelines and associated reductions in capital costs.
Other Markets
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Spaceloft Grey. Spaceloft Grey is reinforced with a glass- and polyester- fiber batting and is designed for use in the building materials market.
Spaceloft Grey is either utilized in roll form by contractors in the field or fabricated by OEMs into strips, panels and systems that meet industry
standards. Spaceloft Grey is designed for use in solid wall buildings and where space is at a premium. Spaceloft A2, a variant of Spaceloft Grey, is
reinforced with a glass-fiber batting and specifically designed to meet Euroclass A2 fire standards.
Cryogel X201. Cryogel X201 is similar in composition to Cryogel Z, but is produced without the integral vapor barrier. Cryogel X201 is designed
for use in cold system designs where space is at a premium. Cryogel X201 is targeted to OEMs that design, produce and sell refrigerated appliances,
cold storage equipment and aerospace systems.
R-Values by Material
Insulation is a material or combination of materials that slows the transfer of heat from one side of the material to the other. The composition of our aerogel
products minimizes the three mechanisms of thermal transport:
•
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Conduction. Heat conduction through a material is correlated to the material’s density. Aerogels are very low density solids. As a result, thermal
conductivity through the aerogel material itself is extremely low.
Convection. Heat convection in gases is through movement of gas molecules. Due to the restricted movement of gases in the aerogel structure,
thermal convection is eliminated inside the aerogels.
Radiation. Radiation requires no medium to transfer the heat. Thermal radiation is partially absorbed by aerogels. Our aerogel products also contain
infrared absorbing additives to significantly reduce radiant heat transfer.
We believe our aerogel products offer the lowest levels of thermal conductivity, or best insulating performance, of any widely used insulation available on
the market today.
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The lower a material’s thermal conductivity, the more slowly heat is transferred through the material . R-values are a commo nly used measure of an
insulating material’s resistance to heat transfer. R-value is calculated as the thickness of an insulation material divided by the thermal conductivity of the insulation
material. Materials with higher R-values have lower thermal con ductivity and are better insulators. Traditional and specialty insulation materials provide a range of
R-values. Aerogels have the highest R-value per unit of thickness in comparison to traditional insulation materials.
Qualification for Use
Our products have undergone rigorous testing and are now qualified for global usage in both routine maintenance and in capital projects at many of the
world’s largest oil producers, refiners and petrochemical companies. These end-users of our products have well defined practices, codes, specification and
standards for materials and systems installed or used in their facilities. These specifications include insulation system design standards, material qualification and
selection processes, and insulation application practices. As part of the material qualification process established by these companies, a new insulation product must
meet general industry standards, such as consensus standards developed by ASTM International, and, in some cases, company-specific internal standards to be
considered for use. In addition, most of these companies require one or more field trials to evaluate fitness for use in specific applications. The companies either run
these qualification processes and field trials internally or through third parties engaged by them, and they generally do not publicly disclose the results of their
testing. While the specific processes and timelines vary from company to company, in general, upon successful completion of the qualification process for an
insulation product, an end-user will typically deem the product to be qualified for use in its facilities on a local, regional or global basis for one or more
applications. Because our end-use customers are typically businesses with very large operations in multiple sites, our insulation sales likely represent only a small
portion of the total insulation used by any one of these companies. Accordingly, once our products are qualified at a company, we continue to seek to expand use of
our products by the end-use customer in additional applications and at multiple locations.
Our Sales Channel
We market and sell our products primarily through our global sales force. Our sales personnel are based in North America, Europe and Asia and travel
extensively to market and sell our products to new and existing customers. The efforts of our sales force are supported by a small number of sales consultants with
extensive knowledge of a particular market or region. Our sales force establishes and maintains customer and partner relationships, delivers highly technical
information and provides first class customer service. We plan to expand our sales force globally to support anticipated growth in customers and demand for our
products.
Our sales force calls on and maintains relationships with participants at all levels of the insulation industry supply chain. We have established a network of
insulation distributors to ensure rapid delivery of our products in critical regions. Our sales personnel work to educate insulation contractors about the technical and
operating cost advantages of aerogel blankets. Our sales force works directly with end-users and engineering firms to promote qualification, specification and wider
acceptance of our products in existing and new applications. In the energy infrastructure market, we rely heavily on the existing and well-established channel of
distributors and contractors to deliver products to our customers. In addition, our sales personnel work with OEMs and strategic partners to create new products and
solutions to expand our market reach.
The sales cycle for a new insulation material is typically lengthy. Our sales cycle from initial customer trials to widespread use can take from one to three
years, although we typically realize increasing revenue at each stage in the cycle. We believe our relationships with technically sophisticated customers and
strategic partners serve to validate our technology, products and value proposition within a target market. These relationships have proven to accelerate the sales
cycle with other customers within specific markets and to facilitate growth in market share. We have focused our marketing efforts on developing technical support
materials, installation guides, case studies and general awareness of the superior performance of our aerogel blankets. We rely on our website, printed technical
materials, participation in industry conferences and tradeshows and presentation of technical papers to communicate our message to existing and potential
customers. We also receive strong word-of-mouth support from the growing network of distributors, installation contractors, OEMs, strategic partners and end-
users that understand the benefits of our products.
As of December 31, 2017, we had 38 sales and marketing professionals worldwide. Their efforts were supported by a team of eight sales consultants.
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Our Customers and End-Users
Customers
Our primary customers are distributors, installation contractors and OEMs that stock, install and fabricate insulation products, components and systems for
technically sophisticated end-users that require high-performance insulation.
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Distributors: We currently operate through a global network of 69 insulation distributors. In general, insulation distributors stock, sell and distribute
aerogel materials to insulation contractors and end-users. The distribution of our product outside the United States is often conducted under
agreements that provide for exclusivity by geography linked to annual purchase volume minimums. These insulation distributors typically market,
promote and advertise our aerogel materials across their market.
Contractors: We currently sell directly to a number of insulation contractors under project specific contracts or general purchase orders. Insulation
contractors generally perform insulation installation, inspection, maintenance and project management for end-users. In addition, some insulation
contractors provide end-users with project engineering and design services.
OEMs: We currently sell directly to a small network of OEMs that design, fabricate and manufacture insulation components and systems for use in
the energy infrastructure, industrial, building materials, transportation, appliance and apparel markets.
Direct Sales to End-Users: In certain instances, we sell directly to end-use customers in the energy infrastructure insulation market. In these
instances, our end-use customer directly manages and controls specification, logistic, installation, inspection, maintenance and fabrication activities
of our aerogel products.
Distribution International, Inc. and TechnipFMC plc represented 15% and 12%, respectively, of our total revenue for 2017 and were our only customers
representing 10% or more of our revenue for that period.
Our product revenue is generated by sales to customers around the world. In 2017, 46% of our product revenue was generated in the United States, 32% in
Asia-Pacific, 15% in Europe, 4% in Latin America, 2% in Canada, and less than 1% in the Middle East based on shipment destination.
A substantial portion of our sales are to shipment destinations located outside the United States, including Korea, India, Hong Kong, Norway, Brazil,
Taiwan, Australia, Great Britain, Germany and the Netherlands based on our shipment destination. Total revenue generated from outside of the United States
amounted to $60.2 million or 54% of total revenue, $82.0 million or 70% of total revenue and $78.0 million or 64% of total revenue, in the years ended December
31, 2017, 2016 and 2015, respectively. In addition, we may expand our operations outside the United States. As a result, we are subject to a number of risks; see
“Risk Factors — A substantial portion of our revenue comes from sales in foreign countries and we may expand our operations outside of the United States, which
subjects us to increased economic, foreign exchange, operational and political risks that could increase our costs and make it difficult for us to operate profitably.”
End-Users
The end-users of our aerogel blankets include some of the largest and most well capitalized companies in the world. Our products are installed in more than
40 countries worldwide.
Energy Infrastructure
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Oil Refining: We believe we have had initial product deployments in more than 30% of the world’s 640 refineries. In addition, we believe our
aerogel blankets are used by 24 of the world’s 25 largest refining companies including ExxonMobil, Shell and Chevron, among others. Over time,
these companies have used our products in an increasing range of applications and throughout an increasing number of their facilities.
Petrochemical: We believe our aerogel blankets are used by all of the world’s 20 largest petrochemical companies including Reliance Industries,
Formosa Petrochemical, and LyondellBasell Industries, among others.
Natural Gas and LNG: Our products are in use at facilities operated by PTT LNG, ExxonMobil, and Dominion Energy, among others.
Onshore: Our aerogel blankets are in use in several Canadian oil sands facilities owned and operated by Suncor Energy, ConocoPhillips and Husky
Energy, among others.
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Offshor e: Our products are currently used in subsea projects off the coast of Brazil, in the Gulf of Mexico, in the North Sea, off the coast of
Malaysia and off the west coast of Africa. Our products are installed in offshore projects owned by Total, Marathon Oil , ConocoPhillips and Shell,
among others.
Power Generation: We are targeting operators of gas, coal, nuclear, hydro and solar power generating facilities. Our products are currently used at
facilities owned and operated by NextEra Energy Resources, among others.
District Energy: Our products are used in medium- to high – temperature steam distribution networks in universities and municipalities within the
United States and Asia.
Building Materials and Other Markets
Traditionally, we have relied on the efforts of a small network of partners, OEMs and fabrication houses to serve the building materials, transportation,
apparel and appliance markets. These partners, OEMs and fabricators are manufacturers of components and systems for buildings, refrigerated and hot appliances,
cold storage equipment, automobiles, aircraft, trains and electronic sectors and manufacturers of outdoor gear and apparel. In addition, we have partnered with
BASF to develop and commercialize innovative products optimized to meet the needs of the building materials market. While our products have not yet been
widely adopted in these markets, we expect that the end-users of our products in these markets will include a wide range of institutions, businesses, individuals, and
government agencies.
Manufacturing
We manufacture our products using our proprietary technology at our facility located in East Providence, Rhode Island. We have operated the East
Providence facility since 2008 and have significantly increased manufacturing capacity and productivity during the period. Our manufacturing process is proven,
scalable and can meet increasing demand.
Our manufacturing group is led by a seasoned team with management experience at global industrial and specialty chemical companies. Our manufacturing
workforce is experienced and, to date, we have experienced employee turnover consistent with others in our industry. We have well-defined maintenance,
environmental, health and safety programs and operating processes in place. We employ statistical processes and quality controls in our manufacturing systems.
We measure and monitor thermal conductivity, hydrophobicity and other key properties of our aerogel blankets during the manufacturing process. We are ISO
9001:2015 certified.
We successfully commenced operation of our third production line at the East Providence facility in 2015, which increased our annual nameplate capacity to
50 million square feet of aerogel blankets. We have initiated a series of projects designed to increase the nameplate capacity of the East Providence facility by an
additional 10 million square feet of aerogel blankets by the end of 2020 at a projected cost of between $15 million and $20 million. This series of projects is
designed to improve manufacturing productivity and capital efficiency through a phased deployment of enhanced chemical and process technologies.
In addition, we have completed the design and engineering of a planned first production line in a second manufacturing facility to be constructed on a 43
acre site in Statesboro, Georgia. The site is served by rail and provides convenient access to local ports. State and local governmental authorities have agreed to
provide us with a package of incentives including outright grants, free land, infrastructure support, tax credits and abatements, training programs and related
benefits.
Based on our plans for the second facility, our projected cost to construct plant infrastructure and a first production line in two phases is between
$120 million and $130 million. We currently expect the first line will increase our estimated annual nameplate capacity by 40 million square feet of aerogel
blankets. The plant site, layout and design will support future development of two additional similar production lines. We have elected to delay construction of the
Statesboro facility to better align the timing of this capacity expansion with our assessment of future demand.
We directly control all stages in the manufacture of our aerogel blankets. Our direct ownership of manufacturing operations allows us to maintain control of
proprietary process technologies and to control product quality. Our production of aerogel blankets utilizes a continuous process and consists of the following key
steps:
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Sol Preparation. Mixing of a silica precursor in ethanol, a catalyst and additives in set formulas to deliver the target properties of the resultant
aerogel.
Casting. Application of the sol into a fiber batting and initial formation of the gel structure.
Aging. Bathing of the gel-saturated blankets in fluids to impart desired physical and thermal properties.
Extraction. Supercritical extraction of the ethanol liquid from the gel-saturated blanket to produce an aerogel blanket.
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Heat Treatment. Drying to remove trace ethanol, salts and water from the aerogel blankets.
Finishing. Coating to enhance quality and product handling.
Quality Control. Utilizing statistical process and quality controls to measure thermal conductivity, hydrophobicity and other key properties of our
aerogel blankets.
Our material costs were the equivalent of 45%, 41% and 45% of product revenue for the years ended December 31, 2017, 2016 and 2015, respectively. The
materials used in the production of our products consist primarily of fiber battings, silica precursors and ethanol, which is used in the delivery of the silica
precursors. Multiple sources of supply exist for all of our raw materials, and we believe the markets for these products are competitive and prices are relatively
stable. We purchase silica precursors from several suppliers. Based on the current level of demand for our products, we believe that an adequate long-term supply
of silica precursors is available. However, if demand for our products increases rapidly, we will need to work with suppliers to ensure that an adequate long-term
supply of silica precursors will be available. Suppliers of silica precursors include industrial companies that produce it directly or that produce it as a byproduct of
other industrial processes. We are working with a number of suppliers to plan for our potential future needs and to develop processes to reduce the long-term cost
of the silica precursors used in our products. See “Risk Factors — Risks Related to Our Business and Strategy — Shortages of the raw materials used in the
production of our products, increases in the cost of such materials or disruptions in our supply chain could adversely impact our financial condition and results of
operations.”
We are seeking to lower our manufacturing costs and to improve the per square foot costs of our aerogel blankets by optimizing our formulations and
manufacturing processes to improve yields, by obtaining material price reductions from existing vendors, by qualifying new vendors for certain materials and by
optimizing shipping costs. In addition, we believe additional opportunities to realize production efficiencies and to reduce per unit overhead costs will arise with
growth in the scale of our manufacturing operations. Our objective is both to reduce costs to enhance our competitive advantage and to ensure we deliver high
quality finished products to our customers.
Research and Development
The mission of our research and development team is to leverage our aerogel technology platform in support of our commercial objectives. In our existing
markets, research and development personnel design new and improved insulation products to enhance our value to customers and to expand our revenue potential.
Our materials scientists and engineers also seek to develop enhanced chemical and process technologies to improve yields, lower manufacturing costs and improve
product performance. In new markets, research and development personnel seek to exploit the unique characteristics of aerogels, including low thermal
conductivity, high surface area, high electrical conductivity, and tunable porosity, to develop aerogel enhanced products and next generation technology addressing
complex and unmet market needs.
Our research and development expenditures were $6.2 million, $5.3 million and $5.3 million for the years ended December 31, 2017, 2016 and 2015,
respectively. In addition, we spent $0.9 million, $1.3 million and $1.0 million for the years ended December 31, 2017, 2016 and 2015, respectively, on research and
development activities sponsored by federal and other government agencies.
Contract Research and Government Support
We regularly seek funding from a number of federal and other government agencies in support of our research and development and manufacturing
activities. Research performed under contract to the Department of Defense, the Department of Energy and other institutions allows us to develop and leverage
technologies into broader commercial applications. We also work closely with customers in government and industry to develop potential aerogel solutions that
leverage not only the thermal insulation performance but other benefits of aerogels as well. The research and development activities that we conduct under such
contracts may produce intellectual property to which we may not have ownership or exclusive rights and will be unable to protect or monetize.
Under our contracts, the U.S. government generally has the right not to exercise options to extend or expand our contracts and may modify, curtail or
terminate the contracts at its convenience. Our government customers may not renew our existing contracts after the conclusion of their terms and we may not be
able to enter into new contracts with U.S. government agencies. Any decision by the U.S. government not to exercise contract options or to modify, curtail or
terminate our contracts or not to renew our contracts or enter into new contracts with us would adversely affect our revenues.
We have received $53.7 million in funding under government contracts from inception through December 31, 2017. Our contract research revenue was
$2.0 million, $2.2 million and $2.0 million for the fiscal years ended December 31, 2017, 2016 and 2015, respectively.
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Intellectual Pro perty
Our success depends in part upon our ability to obtain, maintain and enforce intellectual property rights that cover our aerogel technology platform,
including, product forms, applications and/or manufacturing technologies and the technology or know-how that enables these product forms, applications,
technologies and specifications, to avoid and defend against claims that we infringe the intellectual property rights of others, and to prevent the unauthorized use of
our intellectual property. Since aerogels were developed more than 80 years ago, there has been a wide range of research, development and publication on aerogels
and related technologies, which make it difficult to establish intellectual property rights to many key elements of aerogel technology and to obtain meaningful
patent protection. Where appropriate, we seek to protect our rights by filing patent applications in United States and other key foreign jurisdictions related to
products, processes, technology and improvements that we consider patentable and important to our business and, in particular, our aerogel technology, product
forms and their applications in promising markets and our manufacturing technologies. We also rely on trade secrets, trademarks, licensing agreements,
confidentiality and nondisclosure agreements and continuing technological innovation to safeguard our intellectual property rights and develop and maintain our
competitive advantage.
As of December 31, 2017, we owned 39 issued U.S. patents, 23 pending U.S. patent applications (including three issued U.S. patents and one pending U.S.
patent application that we co-own with third parties), 68 issued foreign patents and 71 pending foreign patent applications (including 18 issued foreign patents and
three pending foreign patent applications that we co-own with third parties). The U.S. patents that we own are generally effective for 20 years from the filing date
of the earliest application to which each U.S. patent claims priority. The scope and duration of each of our foreign patents varies in accordance with local law. Our
early patents start to expire in December 2021.
In May, 2016, we filed a complaint for patent infringement against Nano Tech Co., Ltd., or Nano, and Guangdong Alison Hi-Tech., Ltd., or Alison and
together with Nano, the Respondents, in the United States International Trade Commission, or the ITC. The ITC complaint alleged that these two China-based
companies have engaged and are engaging in unfair trade practices by importing aerogel products in the United States that infringe, and/or are manufactured by
processes that infringe, several of our patents in violation of Section 337 of the Tariff Act of 1930, or the Tariff Act. In the ITC complaint, we sought exclusion
orders from the ITC that direct the United States Customs and Border Protection to stop the importation of these infringing products. In June 2016, the ITC
instituted an investigation based on our complaint. In September 2017, the Administrative Law Judge (“ALJ”) presiding over the ITC investigation issued an Initial
Determination finding that Alison and Nano have infringed three of our patents relating to aerogel insulation and/or methods of manufacturing aerogel insulation.
As part of the Initial Determination, the ALJ found that Alison and Nano infringed all of the patent claims asserted against each of them across the three asserted
patents, and that Alison and Nano failed to prove the asserted claims were invalid. The ALJ also recommended a limited exclusion order as a remedy to prevent the
importation of infringing aerogel products into the United States. On February 5, 2018, the ITC issued its final determination confirming the ALJ’s infringement
and validity determinations except with respect to one dependent product claim where the ITC found the claim not infringed. The ITC also revised some of the
ALJ’s claim constructions. However, the ITC affirmed that Alison and Nano have each violated Section 337 of the Tariff Act and therefore issued a limited
exclusion order prohibiting importation of infringing aerogel insulation products manufactured by Alison and Nano. The exclusion order, which will be enforced by
United States Customs and Border Protection, is subject to a 60-day presidential review period, but is otherwise expected to be in full effect starting on April 6,
2018. Upon a request by a party, the final determination may be appealed to the United States Court of Appeals for the Federal Circuit. In addition to Respondents’
contention at the ITC that the asserted patents were invalid, Alison also filed petitions with United States Patent and Trademark Office, or USPTO, requesting
Inter-Partes Review to cancel certain claims in three of Aspen’s manufacturing process patents and one product patent. A three member panel of Administrative
Patent Judges at the USPTO denied all of Alison’s petitions to institute Inter-Partes Review challenging the validity of these Aspen patents. Alison has also filed
similar requests with the Chinese Patent Office, or SIPO, seeking to invalidate two of our Chinese manufacturing process patents and two of our Chinese product
patents. After the conclusion of the oral proceedings and before any decision issued by the SIPO, Alison withdrew all of its requests for invalidation of our Chinese
patents.
In April 2016, we filed a patent infringement suit at the District Court in Mannheim, Germany against the Respondents and two European resellers asserting
their infringement of one of our German patents. We subsequently asserted infringement of another three patents against Nano and a European reseller of Alison’s
products at the Mannheim court. In 2016, we settled with one of the European resellers in exchange for a commitment not to procure infringing products and
cooperation with our case. In January 2018, the court issued a series of judgments by acknowledgement (German, “Anerkenntnisurteil ”)
finding the second
reseller, Hiltex Techniche Weefsels b.v., or Hiltex, liable for infringement and issued injunctions against Hiltex preventing its resale of infringing Chinese aerogels.
The judgments resulted from a settlement agreement whereby Hiltex agreed not to resell infringing products in Europe where at least one of the asserted patents is
active. The litigation against the other defendants is ongoing. Nano has also initiated a nullity action in German Federal Patent Court against one of our asserted
German manufacturing process patents. Alison likewise filed an opposition to one of the asserted patents at the European Patent Office, or EPO, and also initiated
nullity actions against two other patents. Nano also filed an opposition against the same patent at the EPO.
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Due to their nature, it is difficult to predict the outcome or the costs involved in any litigation. Furthermore, the Respondents may have significant resources
and interest to litigate and therefore, these litigation matters could be protracted and may ul timately involve significant legal expenses. We have incurred
approximately $7.3 million of expenses related to this litigation through December 31, 2017. In addition to the foregoing, we have been and may be from time to
time party to other legal proceedi ngs that arise in the ordinary course of business and to other patent enforcement actions to assert our patent rights.
We believe that having distinctive names is an important factor in marketing our products, and therefore we use trademarks to brand some of our products,
including Pyrogel, Cryogel and Spaceloft. As of December 31, 2017, we had five trademark registrations in the United States and 48 trademark registrations in
foreign jurisdictions, including the European Union, Japan, China, Canada, South Korea and Brazil. Although we have a foreign trademark registration program for
selected marks, our approach may not be comprehensive enough or we may not be able to register or use such marks in each foreign country in which we seek
registration.
Cross License Agreement with Cabot Corporation
In April 2006, we entered into a cross license agreement with Cabot Corporation, as amended in September 2007, in which each party granted certain
intellectual property rights to the other party. The cross license agreement remains in effect until the expiration of the last to expire of the issued patents or patent
applications and acquired patents licensed thereunder. We hold a non-exclusive, worldwide license to those patents and patent applications owned or licensed by
Cabot that are necessary for us to (i) practice our manufacturing technology within a field of use, which is defined in accordance with the specific chemistry of our
aerogel products and the supercritical fluid technology that we use in our manufacturing technology and (ii) use and sell the resulting aerogel blanket and derivative
products. We paid Cabot $38 million over a period of approximately seven years, with the last payment made in March 2013, in connection with this license
agreement. We have granted to Cabot a reciprocal, non-exclusive, worldwide license to certain patents and patent applications that we own that are necessary for
Cabot to practice its processes within a field of use defined in accordance with the specific chemistry in its aerogel products and the drying technology that it uses
to manufacture its products. The grant of license to each party covers issued patents, patent applications and patents issued from such counterpart applications, as
well as patents licensed or acquired during a specified period, in each case that claim aerogels, or methods, materials of manufacture, or uses of aerogels.
Our Company
We are a corporation organized under the laws of Delaware. In June 2008, we completed a reorganization pursuant to which our predecessor company
merged with and into a newly formed Delaware corporation, renamed Aspen Aerogels, Inc. We own three wholly owned subsidiaries: Aspen Aerogels Rhode
Island, LLC, Aspen Aerogels Germany, GmbH and Aspen Aerogels Georgia, LLC, which was formed in August 2016. We maintain our corporate offices in
Northborough, Massachusetts.
On June 18, 2014, we completed our initial public offering, or IPO, of 7,500,000 shares of our common stock at a public offering price of $11.00 per share.
As of February 27, 2018, we had 23,643,189 shares of our common stock outstanding.
We are required to file annual, quarterly and current reports, proxy statements and other information required by the Securities Exchange Act of 1934, as
amended, or the Exchange Act, with the Securities and Exchange Commission, or the SEC. You may read and copy the reports and other information we file with
the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Room 1580, Washington, D.C. 20549. You may also obtain copies of this information by mail
from the public reference section of the SEC, 100 F Street, N.E., Washington, D.C. 20549, at prescribed rates. You may obtain information regarding the operation
of the public reference room by calling 1-800-SEC-0330. The SEC also maintains a website that contains reports, proxy statements and other information about
issuers, like us, who file electronically with the SEC. The address of that website is http://www.sec.gov.
We maintain a public website at http://www.aerogel.com and use our website as a means of disclosing material non-public information and for complying
with our disclosure obligations under Regulation FD. Our website includes an Investors section through which we make available, free of charge, our Annual
Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, Proxy Statements and Forms 3, 4 and 5 filed on behalf of directors and
executive officers, as well as any amendments to those reports filed or furnished pursuant to the Exchange Act as soon as reasonably practicable after we
electronically file such material with, or furnish it to, the SEC. We also make available on our website the charters for our Board of Directors’ Audit Committee,
Compensation and Leadership Development Committee and Nominating and Corporate Governance Committee, as well as our Code of Business Conduct and
Ethics, our Corporate Governance Guidelines and other related materials. The information on our website is not part of this annual report.
Our Investor Relations Department can be contacted at Aspen Aerogels, Inc., 30 Forbes Road, Building B, Northborough, MA 01532, Attention: Investor
Relations; telephone: 508-691-1111; e-mail: ir@aerogel.com.
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Employees
As of December 31, 2017, we had 263 full-time employees and one part-time employee, with 29 in research and development, 172 in manufacturing
operations and supply chain, 38 in sales and marketing and 24 in general and administrative functions. Of our employees, 251 are located in the United States and
twelve are located abroad. We consider our current relationship with our employees to be of good standing. None of our employees are represented by labor unions
or have collective bargaining agreements.
Seasonality
Our industry and product offering makes us less susceptible to seasonal patterns as our operating results are generated in part by demand for insulation
associated with new-build construction of facilities, capital expansions and related capital projects, and larger maintenance-related projects in the energy
infrastructure market. Historically, our second and fourth quarter results have shown increased levels of revenue, which we believe is associated with our end-use
customers’ maintenance schedules and timing of capital projects.
Environmental Matters
We are subject to federal, state, local and foreign laws and regulations designed to protect the environment and to regulate the discharge of materials into the
environment. We believe that our policies, practices, and procedures are properly designed to prevent unreasonable risk of environmental damage and associated
financial liability. To date, environmental control regulations have not had a significant adverse effect on our overall operations. See “Risk Factors — We may
incur significant costs complying with environmental, health and safety laws and related claims, and failure to comply with these laws and regulations could expose
us to significant liabilities, which could adversely affect our results of operations.”
Item 1A.
RISK FACTORS
Risks Related to Our Business and Strategy
We have incurred annual net losses since our inception, and we may continue to incur net losses in the future and may never reach profitability.
We have a history of losses, and we may not ever achieve full year profitability. We experienced net losses of $19.3 million, $12.0 million and $6.4 million
for the years ended December 31, 2017, 2016 and 2015, respectively. As of December 31, 2017, our accumulated deficit was $437.1 million. We expect to continue
to incur operating losses as a result of expenses associated with the continued development and expansion of our business. Our expenses include research and
development, sales and marketing, and general and administrative costs. Furthermore, these expenses are not the only factors that may contribute to our net losses.
For example, interest expense on any future financing arrangements that we incur could contribute to our net losses. Any failure to increase revenue or manage our
cost structure as we implement initiatives to grow our business could prevent us from achieving profitability, or sustaining profitability if we do achieve it. In
addition, our ability to achieve profitability is subject to a number of risks and uncertainties discussed below, many of which are beyond our control. Failure to
become and remain profitable may adversely affect the market price of our common stock and our ability to raise capital and continue operations.
We have yet to achieve positive total cash flow, and our ability to generate positive cash flow is uncertain.
To develop and expand our business, we have made significant up-front investments in our manufacturing capacity and incurred research and development,
sales and marketing and general and administrative expenses. In addition, our growth has required a significant investment in working capital. We experienced
negative cash flows from operating activities of $4.6 million and $0.6 million for the year ended December 31, 2017 and 2016, respectively, and positive cash
flows from operating activities of $5.4 million for the year ended December 31, 2015. The cumulative cash flows from operating activities during the three year
period were insufficient to offset cash flows used in investing activities principally to expand our manufacturing capacity during the same time period. As a result,
we experienced negative total cash flows during the three year period.
We expect that for the foreseeable future our total cash flow will remain negative. In particular, we will need cash to fund our significant planned future
capital expenditures to expand manufacturing capacity in our East Providence, Rhode Island manufacturing facility and with the planned construction of our second
manufacturing plant. We will also require significant amounts of working capital to support our growth and we will need to increase our inventories of raw
materials and our products as we seek to grow our business. In addition, to the extent we incur long-term debt, we may have debt maturities from time to time that
will require cash in order to repay those obligations. We may not achieve sufficient revenue growth to generate positive future cash flow and, therefore,
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we may need to raise additional capital from investors to achie ve our expected growth. An inability to generate positive cash flow for the foreseeable future or
raise additional capital on reasonable terms, if at all, may decrease our long-term viability.
We are dependent on a single manufacturing facility. Any significant disruption to this facility or the failure of any one of our three production lines in this
facility to operate according to our expectation could have a material adverse effect on our business and results of operations.
We have three production lines in a single manufacturing facility located in East Providence, Rhode Island. Our ability to meet the demands of our
customers depends on efficient, proper and uninterrupted operations at this manufacturing facility. In the event of a significant disruption to our sole manufacturing
facility or breakdown of any of the production lines, we currently do not expect that we would have sufficient inventory in stock to meet demand until the
production lines return to operation.
Power failures or disruptions, the breakdown, failure or substandard performance of equipment, or the damage or destruction of buildings and other facilities
due to fire or natural disasters could severely affect our ability to continue our operations. In the event of such disruptions, we are unlikely to find suitable
alternatives or may not be able to make needed repairs on a timely basis and at reasonable cost, which could have a material adverse effect on our business and
results of operations. In particular, our manufacturing processes include the use of high pressures, high temperatures and flammable chemicals, which subjects us to
a significant risk of loss resulting from fire, spill or related event. We had occasional incidences of fires at our initial facility in Northborough, Massachusetts that
preceded our current manufacturing facility in East Providence, Rhode Island.
If our manufacturing facility or any equipment therein were to be damaged or cease operations, it may reduce revenue, cause us to lose customers and
otherwise adversely affect our business. The insurance policies we maintain to cover losses caused by fire or natural disaster, including business interruption
insurance, may not adequately compensate us for any such losses and will not address a loss of customers that we expect would result. If our existing
manufacturing facility was damaged or destroyed we would be unable to operate our business for an extended period of time and our business and results of
operations may be materially adversely affected, potentially even threatening our viability.
If the expected growth in the demand for our products does not follow after each of our planned capacity expansions, then our business will be materially
adversely affected.
Our long-term growth plan requires that we continue to increase our production capacity. As we pursue our capacity expansion plans, we will incur
significant capital expenditures and increased levels of manufacturing expenses in anticipation of expected growth in demand for our products. In particular, we
expect that these substantial additional expenditures will be made by us significantly in advance of the existence of the level of demand that would ensure the most
efficient use of our planned new capacity. As a result, if the expected growth in demand for our products fails to materialize within a reasonable amount of time
following each of our planned capacity expansions, whether because of low oil and gas prices, the loss of a significant customer, the failure to develop new markets
or for any other reason, then we would suffer decreased levels of cash flow and our financial condition and results of operations would be adversely affected.
If we fail to achieve the increase in production capacity that our long-term growth requires in a timely manner, or at all, our growth may be hindered and our
business or results of operations may be materially adversely affected.
If, for any reason, including our inability to obtain financing, our planned expansion of capacity in our existing East Providence, Rhode Island facility or in
our planned second manufacturing facility to be constructed in Statesboro, Georgia should fail to be completed in a timely manner, or at all, or any of the
production lines in our existing or future manufacturing facilities do not operate according to our expectations, sales and or profitability may be impeded, our
growth may be hindered and our business or results of operations may be materially adversely affected.
Many factors could delay, impede or prevent the expansion of our existing manufacturing facility or construction and operation of a second manufacturing
facility or cause us to reduce the scale or scope of the expansion projects, including:
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our inability to obtain financing on favorable terms, or at all;
design, engineering and construction difficulties or delays;
our failure or delay in obtaining necessary legal, regulatory and other approvals;
interruptions in the supply of the necessary equipment, or construction materials or labor or an increase in their respective prices;
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opposition of local interests; and
natural disasters, accidents, political unrest or unforeseen events.
Many factors could prevent our existing and future manufacturing facilities from producing at expected, projected or targeted nameplate capacities or could
cause us to reduce the scale or scope of future capacity expansions or facilities, including:
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design and engineering failures;
inability to retain, manage and train a skilled workforce;
the challenges of operating technically advanced or higher volume equipment than currently employed at our current facility in East Providence,
Rhode Island;
improper operation of the manufacturing equipment;
decreases in our manufacturing yields due to the inefficient use of the materials needed to make our products in our manufacturing process;
the availability of raw materials to support the levels of production that we anticipate at these facilities;
strikes or labor disputes; and
damage to the manufacturing equipment due to design and engineering flaws, construction difficulties or operator error.
Any such capacity expansion will place a significant strain on our senior management team and our financial and other resources. The costs associated with
and the resources necessary for our capacity expansion plans could exceed our expectations and result in a materially adverse impact on our business, results of
operations, financial condition and cash flows.
If we are unable to complete the projects as contemplated, the costs incurred in connection with such projects may not be recoverable. For example, during
2013, we redesigned and reduced the planned scale of the third production line in our East Providence, Rhode Island facility. We recorded an associated
$3.4 million impairment charge during 2013 related to the write-off of construction in progress assets. As of December 31, 2017, we have capitalized
approximately $7.2 million related to engineering designs and other pre-construction costs related to our planned second manufacturing facility in Statesboro,
Georgia. A redesign of, change in scale of, or failure to complete the construction of second manufacturing facility and other similar impairments of our assets in
the future could result in a materially adverse impact on our business, results of operations, and financial condition.
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.
The growth of our business will depend on substantial amounts of additional capital for expansion of existing production lines or construction of new
production lines or facilities, for ongoing operating expenses, for continued development of our aerogel technology platform, or for introduction of new product
lines. Our capital requirements will depend on many factors, including the rate of our revenue growth, our introduction of new products, our enhancements to
existing products, and our expansion of sales and marketing and product development activities. In particular, our plans to expand our existing facility in East
Providence, Rhode Island and to construct a planned second manufacturing facility in Statesboro, Georgia are dependent on our ability to raise debt and potentially
issue equity. There is no assurance that we will be able obtain any such type of financing on terms acceptable to us or at all.
In addition, we may consider strategic acquisitions of complementary businesses or technologies to grow our business, which would require significant
capital and could increase our capital requirements related to future operation of the acquired business or technology.
We may not be able to obtain loans or raise additional capital on acceptable terms or at all. Our loan and security agreement with Silicon Valley Bank, under
which we have the ability to borrow up to $20.0 million, contains restrictions on our ability to incur additional indebtedness, which, if not waived, could prevent us
from obtaining needed capital. In addition, our revolving credit facility with Silicon Valley Bank will mature on April 28, 2018. Any future credit facilities or debt
instruments would likely contain similar restrictions. We may not be able to obtain bank credit arrangements or effect an equity or debt financing on terms
acceptable to us or at all in order to fund our future capacity expansion plans. A failure to obtain additional financing when needed could adversely affect our
ability to maintain and grow our business.
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A sustained downturn in the energy industry, due to lower oil and gas prices or reduced energy demand, could decre ase demand for some or all of our
products and services, which could have a material adverse effect on our business, financial condition and results of operations.
Demand for a significant portion of our products and services depends on the level of capital expenditure by companies in the energy industry, which
depends, in part, on current and expected energy prices. Prices of oil and gas have been highly volatile in the past several years with oil prices reaching a high
above $100 per barrel in mid-2014 to a low below $30 per barrel in early 2016. The volatility in oil prices and declines in oil prices have resulted, from time to
time, in a reduction in capital expenditures by many companies in the energy industry, and in particular by end-users of our products involved in the construction
and expansion of offshore and onshore oil and gas production facilities. Sustained lower energy prices may also reduce our end-users’ need to improve energy
savings by using premium-priced insulation products like ours, thus reducing demand for our products and causing downward pressure on the pricing of our
products. A sustained downturn in the capital expenditures of our customers, whether due to periods of lower energy prices or a further decrease in the market price
of oil and gas or otherwise, and including the perception that such a downturn might occur or continue, may delay capital projects, decrease demand for our
products and cause downward pressure on the prices we charge for our products, which, in turn, could have a material adverse effect on our business, financial
condition and results of operations. Such downturns, including the perception that they might occur or continue, could have a significant negative impact on the
market price of our common stock.
The markets we serve are subject to general economic conditions and cyclical demand, which could harm our business and lead to significant shifts in our
results of operations from quarter to quarter that make it difficult to project long-term performance.
Our results of operations have been, and may in the future be, adversely affected by general economic conditions and the cyclical pattern of certain
industries in which our customers and end-users operate. Demand for our products and services depends in large part upon the level of capital and maintenance
expenditures by many of our customers and end-users, in particular those in the energy, petrochemical and power generation industries, and firms that design,
construct and operate facilities for these industries.
These customers’ expenditures historically have been cyclical in nature and vulnerable to economic downturns. In particular, profitability in the energy
industry is highly sensitive to supply and demand cycles and commodity prices, which historically have been volatile; and our customers in this industry
historically have tended to delay large capital projects, including expensive maintenance and upgrades, during industry downturns. Delays in customer projects may
cause fluctuations in the timing or the amount of revenue earned and our results of operations in a particular period. Prolonged periods of little or no economic
growth could decrease demand for oil and gas which, in turn, could result in lower demand for our products and a negative impact on our results of operations and
cash flows. In addition, this historically cyclical demand and potential customer project delays may lead to significant shifts in our results of operations from
quarter to quarter, which limits our ability to make accurate long-term predictions about our future performance. We estimate that sales to end-use customers in the
energy industry accounted for approximately 95% of our 2017 revenues and we expect that they will continue to account for a significant portion of our future
revenues.
If we fail to meet required project, investment and job requirement goals for the second manufacturing facility in a timely fashion, the package of incentives
offered by governmental entities may be terminated or we may be required to repay the value of incentives received from governmental entities, which could
have a material adverse impact our financial condition and results of operations.
We have been offered incentives by the State of Georgia, Bulloch County Development Authority and the City of Statesboro to locate and operate our
planned second manufacturing facility in Statesboro, Georgia. These incentives include a cash grant, income and withholding tax credits, training assistance, the
gift of a 43 acre site, a 10 year property tax abatement, infrastructure improvements, reduced fees, site preparation services, and temporary office space. If we do
not commence construction of the second manufacturing facility by February 15, 2019, the governmental entities may terminate the agreement under which the
incentives are to be provided. There can be no assurance that we will be able to commence construction prior to that date or that the parties to the agreement will
agree to extend such date. In addition, if we do not achieve specific investment and job creation goals at the Statesboro, Georgia site by 2021, and maintain such
levels for a period of seven years thereafter, we will be required to repay the value of any incentives received to the governmental entities, which could adversely
impact our financial condition and results of operations.
We have elected to delay the second manufacturing facility to better align the timing of this capacity expansion with our assessment of future demand. As a
result, we have not yet incurred an obligation to repay any incentives that may be provided by the government entities.
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Growth has placed significant demands on our management systems and our infrastructure. If we fail to manage our long-term growth ef fectively, we may be
unable to execute our business plan, address competitive challenges and meet applicable product specifications and technical and delivery requirements.
We may be unable to manage our growth. To manage our anticipated future growth, we must continue to:
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improve and expand our manufacturing, sales and marketing, and engineering organizations,
enhance our research and development capabilities and resources,
improve regulatory compliance, financial control and reporting systems;
expand our manufacturing and distribution facilities and capacity; and
recruit, train and retain additional qualified personnel to enhance our managerial capabilities.
All of these measures will require significant expenditures and will demand the attention of management. At certain points in the past, significant growth in
demand for our products has put our management and operating systems under strain. In addition, the physical expansion of our operations may lead to significant
costs and may divert our management and business development resources. Furthermore, we compete for personnel and advisors with other companies and other
organizations, many of which are larger and have greater name recognition and financial and other resources than we do. Due to our limited resources, we may not
be able to effectively manage the expansion of our operations or adequately recruit, train and retain qualified personnel. Any inability to manage growth could
result in a loss of existing customers and revenues, delays in the execution of our business plans, and disruption of our operations. If we fail to achieve the
necessary level of efficiency in our organization as it grows, it could have a material adverse impact on our business, results of operations and financial conditions.
We allocate our manufacturing operations, sales and marketing, research and development, general and administrative and financial resources based on our
business plan, which includes assumptions about current and future orders and revenues from customers. However, the factors involved in such projections are
uncertain. If our assumptions regarding these factors prove to be incorrect or if competing products gain further market share, then actual demand for our aerogel
products could be significantly less than the demand we anticipate and we may not be able to grow our revenue or achieve profitability.
Shortages of the raw materials used in the production of our products, increases in the cost of such materials or disruptions in our supply chain could have a
material adverse impact on our financial condition and results of operations.
The raw materials used in the production of our products consist primarily of fiber battings, silica precursors and additives. In addition, the production
process requires the use of process gases and other materials typical to the chemical processing industry, as well as access to electricity, natural gas, water and other
basic utilities. Although we are not dependent on a single supplier, we are dependent on the ability of our third-party suppliers to supply such materials on a timely
and consistent basis. While these materials and utilities are available from numerous sources, they may be subject to fluctuations in availability and price.
Our third-party suppliers may not dedicate sufficient resources to meet our scheduled delivery requirements or our suppliers may not have sufficient
resources to satisfy our requirements during any period of sustained or growing demand. Failure of suppliers to supply, delays in supplying or disruptions in the
supply chain for our raw materials, or adverse allocations in the supply of certain high demand raw materials could materially adversely affect the results of our
operations. Supply disruptions may affect our ability to meet our delivery schedules on a timely basis and materially negatively impact our results of operations.
For example, in September 2015, pursuant to a force majeure notification, our primary carbon dioxide gas supplier temporarily curtailed supply of carbon dioxide
to us due to a feedstock issue impacting the northeastern United States. During this period, the supply disruption required that we intermittently idle a portion of our
manufacturing equipment thereby reducing our production volume.
Most of our raw materials are procured through individual purchase orders or short-term contracts and not through long-term contracts that ensure a fixed
price or guaranteed supply for an extended period of time. This procurement strategy may not support sustained long-term supply chain stability. Fluctuations in the
prices of these raw materials could have a material adverse effect on our results of operations. Our ability to pass increases in raw material prices on to our
customers is limited due to competitive pricing pressure and the time lag between increased costs and implementation of related price increases.
In particular, we purchase a variety of silica precursors from several suppliers, mostly pursuant to individual purchase orders or short-term contracts and not
pursuant to long-term contracts. We do not have a secure, long-term supply of silica precursors. We may not be able to establish arrangements for secure, long-term
silica precursor supplies at prices consistent with our current costs or may incur a delay in supply while we seek alternative sources. In addition, fluctuations in
ethanol prices may affect the cost of silica precursors. Any inability to continue to purchase silica precursors without long-term agreements in place, or to otherwise
establish a
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long-term supply of silica precursors at prices consistent with our current costs, would have a ma terial adverse effect on our ability to increase our sales and
achieve profitability.
From time to time we have had difficulty in consistently producing products that meet applicable product specifications and technical and delivery
requirements, and such difficulties could expose us to financial, contractual or other liabilities.
Our insulation products are technologically advanced and require a precise and complex manufacturing process. Because of the precision and complexity of
this manufacturing process and the high-performance characteristics of our products, from time to time we have had difficulty in consistently producing products
that meet applicable specifications and technical and delivery requirements, including, our customers’ and the end-users’ specifications and requirements. At
certain times in the past, the growth in demand for our products has contributed to this difficulty by putting significant pressure on our management, our personnel
and our production facilities. See “Risk Factors — Growth has placed significant demands on our management systems and our infrastructure. If we fail to manage
our long-term growth effectively, we may be unable to execute our business plan, address competitive challenges and meet applicable product specifications and
technical and delivery requirements.”
Any failure to meet these product specifications or technical and delivery requirements could result in the termination of existing customer contracts or
purchase orders, the elimination or reduction of future purchase orders, the impairment of customer relationships, and the incurrence of financial, contractual or
other liabilities. Products that do not meet these specifications or requirements may also expose us to warranty and product liability claims and associated adverse
publicity. Any such termination, reduction, impairment, liability or publicity could result in a broader loss of existing customers and revenues and delay the
execution of our business plans, disrupt our operations and could have a material adverse effect on our results of operations and financial condition.
The market for insulation products incorporating aerogel blankets is relatively undeveloped and our products may never be widely adopted, which would have
a material adverse effect on our business.
The market for insulation products utilizing aerogel blankets is relatively undeveloped. Accordingly, our future results of operations will depend in large
part on our ability to gain market share of the global energy infrastructure insulation market. Our ability to gain market share in this market is highly dependent on
the acceptance of our products by large, well-established end-users, distributors, contractors and OEMs. The insulation market has historically been slow to adopt
new technologies and products. Most insulation types currently in use in these markets have been in use for over 50 years. In addition, there is a tendency of end-
users in some of our markets to opt for the lower short-term costs associated with traditional insulation materials. If we fail to successfully educate existing and
potential end-users, distributors, contractors and OEMs regarding the benefits and value of our aerogel products, or if existing users of our products no longer rely
on aerogel insulation for their insulation needs, our ability to sell our products and grow our revenue could be limited.
Our business strategy also includes the development of next generation products with the performance characteristics and price points required by markets
outside the energy infrastructure market, including the building materials market. In the event that we are unable to develop products that meet market needs, we
may be unable to successfully penetrate such markets. In addition, the innovative product development process requires the dedication of significant human,
technical and financial resources, with no certainty of success or recovery of our related expenses. As a result, we may be unable to grow our business in markets
outside of the energy infrastructure market, which could adversely affect the demand for our products.
Because we are often a new supplier to our end-use customers, we also may face concerns from these end-use customers about our reliability and our ability
to produce our products in a volume sufficient to meet their supply needs. As a result, we may experience a reluctance or unwillingness by existing end-use
customers to expand their use of our products and by potential end-use customers to begin using our products. Our products may never reach mass adoption, and
changes or advances in technologies could adversely affect the demand for our products.
A failure to increase, or a decrease in, demand for aerogel insulation products caused by lack of end-user, market or distribution channel acceptance,
technological challenges or competing technologies and products would result in a lower revenue growth rate or decreased revenue, either of which could have a
material adverse effect on our business and our results of operations.
Our products are expensive relative to other insulation products, which could make it more difficult for us to grow our revenue and achieve broader adoption
of our aerogel products.
While we believe our products have superior performance attributes and may sometimes have the lowest cost on a fully-installed basis or offer life-cycle
cost savings, our competitors offer many traditional insulation products that are priced below our products. Our products are expensive relative to other insulation
products and end-use customers may not value our products’ performance
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attributes sufficiently to pay their premium price. This could make it more difficult for us to grow our revenue and achieve broader adoption of our aerogel
products. In addition, some of the benefits of our products are based on reduced installation time and related labor expense. In regions where labor costs are
significantly lower than in the United States and Europe, the cost benefits of reduced installation times may not be adequate to overcome the relatively high pri ce
of our products and may make it more difficult for us to grow our revenue in those regions.
The insulation market we serve is highly competitive; if we are unable to compete successfully, we may not be able to increase or maintain our market share
and revenues.
We face strong competition primarily from established manufacturers of traditional insulation materials. Large producers of traditional insulation materials,
such as Johns Mansville, Saint-Gobain, Knauf Gips, Owens Corning and Rockwool, dominate the insulation market. In addition, we face increasing competition
from other companies seeking to develop high-performance insulation materials, including aerogel insulation. For example, Cabot Corporation manufactures,
markets and sells a different form of aerogel insulation that is competitive with our products, particularly in the offshore oil and gas sector for use in pipe-in-pipe
applications. In addition, we are aware of competitors in China, including Guangdong Alison Hi-Tech Co, Ltd and Nano Tech Co, Ltd, which manufacture and
market aerogel insulation products in blanket form. Many of our competitors are substantially larger and better capitalized than we are and possess greater financial
resources. Our competitors could focus their substantial financial resources to develop new or additional competing products or develop products that are more
attractive to potential customers than the products that we offer. We expect to face an increasing amount of competition in the aerogel insulation market over the
next several years as existing competitors and new entrants seek to develop and market their own aerogel products.
Because some insulation manufacturers are substantially larger and better capitalized than we are, they may have the ability to sell their products at
substantially lower costs to a large, existing customer base. Our products are expensive relative to other insulation products and end-use customers may not value
our products’ superior performance attributes sufficiently to pay their premium price. In addition, from time to time we may increase the prices for our products and
these price increases may not be accepted by our end-use customers and could result in a decreased demand for our products. Similarly, we may make changes to
our products in order to respond to customer demand or to improve their performance attributes and these changes may not be accepted by our end-use customers
and could result in a decrease in demand for our products. These competitive factors could:
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make it more difficult for us to attract and retain customers;
cause us to slow the rate of increase of our prices, delay or cancel planned price increases, lower our prices or discount our prices in order to
compete; and
reduce our market share and revenues.
Any of these outcomes could have a material adverse effect on our results of operations, financial condition and cash flows.
A substantial portion of our revenue comes from sales in foreign countries and we may expand our operations outside of the United States, which subjects us to
increased economic, trade, foreign exchange, operational and political risks that could materially adversely impact our business, financial conditions and
results of operations and also increase our costs and make it difficult for us to operate profitably.
A substantial portion of our sales are to shipment destinations outside the United States, including Korea, India, Hong Kong, Norway, Brazil, Taiwan,
Australia, Great Britain, Germany and the Netherlands. Total revenue generated from outside of the United States, based on our shipment destination, amounted to
$60.2 million or 54% of total revenue, $82.0 million or 70% of total revenue and $78.0 million or 64% of total revenue, for the years ended December 31, 2017,
2016 and 2015, respectively. As a result, we are subject to a number of risks, including, but not limited to:
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the effect of applicable U.S. and foreign tax structures, including tax rates that may be higher than tax rates in the United States or taxes that may be
duplicative of those imposed in the United States;
trade relations among the United States and those foreign countries in which our customers and suppliers have operations, including protectionist
measures such as tariffs and import or export licensing requirements, whether imposed by the United States or such foreign countries;
general economic and political conditions in each country, which may interfere with, among other things, our supply chain, our customers and all of
our activities in a particular location;
difficulty in the enforcement of contractual obligations in non-U.S. jurisdictions and the collection of accounts receivable from foreign accounts;
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different regulatory regimes in the various countries in which we operate or sell our products;
inadequate intellectual property protection in foreign countries;
the difficulties and increased expense in complying with multiple and potentially conflicting domestic and foreign laws, regulations, product
approvals and trade standards, including the U.S. Foreign Corrupt Practices Act and similar anti-bribery laws in non-U.S. jurisdictions, as well as the
rules and regulations of the U.S. Office of Foreign Assets Control and similar sanctions laws;
foreign currency exchange controls, restrictions and fluctuations, which could result in reduced revenue and increased operating expense;
transportation delays or interruptions;
labor rules and collective bargaining arrangements in foreign jurisdictions;
difficulty in staffing and managing (including ensuring compliance with internal policies and controls) geographically widespread operations; and
terrorist activity and political unrest, particularly given the use of our products at energy facilities.
In addition, sales of our products are generally conducted in U.S. dollars and we also bid for foreign projects in U.S. dollars. The strengthening of the U.S.
dollar against the local currencies in the countries into which we sell our products may result in our products becoming more expensive relative to competing
insulation products priced in the local currency. If the U.S. dollar strengthens, our sales into foreign countries with relatively weaker currencies may be adversely
impacted and we may be less competitive in bidding for projects in those markets.
Our success will depend in large part on our ability to manage the effects of continued global political and economic uncertainty, especially in our
international markets.
Because of our significant international operations, we could be materially adversely affected by violations of the U.S. Foreign Corrupt Practices Act and
similar anti-corruption, anti-bribery and anti-kickback laws.
We operate on a global basis, with 54% of our product sales in 2017 being made to destinations outside the United States, including Canada, Mexico,
Europe, Asia, South America and the Middle East. Our business operations and sales in countries outside the United States are subject to anti-corruption, anti-
bribery and anti-kickback laws and regulations, including restrictions imposed by the Foreign Corrupt Practices Act, or FCPA, as well as the United Kingdom
Bribery Act of 2010, or UK Bribery Act. The FCPA, UK Bribery Act, and similar anti-corruption, anti-bribery and anti-kickback laws in other jurisdictions
generally prohibit companies, their intermediaries and their agents from making improper payments to government officials or any other persons for the purpose of
obtaining or retaining business. We operate and sell our products in many parts of the world that have experienced governmental corruption to some degree and, in
certain circumstances, strict compliance with anti-corruption, anti-bribery and anti-kickback laws may conflict with local customs and practices. We train our
employees concerning anti-corruption, anti-bribery and anti-kickback laws and have policies in place that prohibit employees from making improper payments. We
continue to implement internal controls and procedures designed to ensure that we comply with anti-corruption, anti-bribery and anti-kickback laws, rules and
regulations and mitigate and protect against corruption risks. We cannot provide assurance that our internal controls and procedures will protect us from reckless,
criminal or other acts committed by our employees or third-parties with whom we work. If we are found to be liable for violations of the FCPA or similar anti-
corruption, anti-bribery and anti-kickback laws in international jurisdictions, either due to our own acts or out of inadvertence, or due to the acts or inadvertence of
others, we could suffer criminal or civil fines or penalties or other repercussions, including reputational harm, which could have a material adverse effect on our
business, results of operations and financial condition.
A failure to comply with export control or economic sanctions laws and regulations could have a material adverse impact on our business, results of operations
or financial condition. We may be unable to ensure that our distributors comply with applicable sanctions and export control laws.
We operate on a global basis, with 54% of our product sales in 2017 being made to destinations outside the United States, including Canada, Mexico,
Europe, Asia, South America and the Middle East. We face several risks inherent in conducting business internationally, including compliance with applicable
economic sanctions laws and regulations, such as laws and regulations administered by the United States Department of Treasury’s Office of Foreign Assets
Control, or OFAC, the United States Department of State and the United States Department of Commerce. We must also comply with all applicable export control
laws and regulations of the United States and other countries. Violations of these laws or regulations could result in significant additional
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sanctions including criminal or civil fines or penalties, more onerous compliance requirements, more extensive debarments from export privileges or loss of
authorizations needed to conduct aspects of our international business.
In certain countries, we may engage third party agents or intermediaries, such as customs agents, to act on our behalf and if these third party agents or
intermediaries violate applicable laws, their actions may result in criminal or civil fines or penalties or other sanctions being assessed against us. We take certain
measures designed to ensure our compliance with U.S. export and economic sanctions law and we believe that we have never sold our products to Iran, Cuba,
Sudan or Syria through third party agents or intermediaries or made any effort to attract business from any of these countries. However, it is possible that some of
our products were sold or will be sold to distributors or other parties that, without our knowledge or consent, re-exported or will re-export such products to these
countries. Although none of our non-U.S. distributors are located in, or to our knowledge, conduct business with Iran, Cuba, Sudan or Syria, we may not be
successful in ensuring compliance with limitations or restrictions on business with these or other countries subject to economic sanctions. There can be no
assurance that we will be in compliance with export control or economic sanctions laws and regulations in the future.
Any such violation could result in significant criminal or civil fines, penalties or other sanctions and repercussions, including reputational harm that could
have a material adverse impact on our business, results of operations or financial condition.
We rely on sales to a limited number of direct customers, including distributors, contractors, OEMs, partners and end-use customers for the substantial
majority of our revenue, and the loss of one or more significant direct customers or several of our smaller direct customers could materially harm our business.
In addition, we understand from our direct customers that a substantial majority of their sales of our products are to a small number of end-use customers and
the loss of one or more significant end-use customers or several of our smaller end-use customers could materially harm our business.
A substantial majority of our revenue is generated from sales to a limited number of direct customers, including distributors, contractors, OEMs, partners
and end-use customers. For the years ended December 31, 2017, 2016 and 2015, total revenue from our top ten direct customers represented 69%, 67% and 64% of
our revenues, respectively. Distribution International, Inc. and TechnipFMC represented 15% and 12% of our total revenue in 2017, respectively, Reliance
Industries Limited and Distribution International, Inc. represented 25% and 12% of our total revenue in 2016, respectively; and Reliance Industries Limited and
Distribution International, Inc. represented 14% and 12% of our total revenue in 2015, respectively. Although the composition of our significant distributors,
contractors, OEMs, partners and end-use customers will vary from period to period, we expect that most of our revenues will continue, for the foreseeable future, to
come from sales to a relatively small number of direct customers. In addition, we understand from our direct customers that a substantial majority of their sales of
our products are to a small number of end-use customers.
Our direct customer concentration also creates accounts receivable concentrations and related risks. As of December 31, 2017, Reliance Industries Limited,
Distribution International, Inc. and Qualiman Engenharia accounted for 19%, 14% and 11% of our accounts receivable, respectively.
The substantial majority of our sales to distributors are transacted on a purchase order basis. The contracts we enter into with our direct customers generally
do not include long-term commitments or minimum volumes that ensure future sales of our products. In addition, we understand that our direct customers’
contracts with end-use customers also generally do not include such commitments or minimums. Consequently, our results of operations may fluctuate significantly
from period-to-period based on the actions of one or more significant direct customers or end-use customers.
A direct customer may take actions that affect us for reasons that we cannot anticipate or control, such as reasons related to an end-use customer’s financial
condition, changes in business strategy or operations, the introduction of alternative competing products, or as the result of the perceived quality or cost-
effectiveness of our products. Our agreements with these direct customers may be cancelled if we fail to meet certain product specifications or materially breach the
agreement or for other reasons outside of our control. In addition, our direct customers may seek to renegotiate the terms of current agreements or renewals. The
loss of, or a reduction in sales or anticipated sales to, one or more of our significant direct customers or end-use customers or several of our smaller direct
customers or end-use customers could have a material adverse effect on our business, financial condition and results of operations.
If we are unable to maintain our technological advantage over our competitors, our business may be materially adversely affected.
We research, develop, manufacture and sell high-performance aerogel insulation products. Rapid and ongoing changes in technology and product standards
could quickly render our products less competitive, or even obsolete, particularly if we fail to continue to improve the performance of our insulation products. We
are currently developing new applications for our existing products as well as new aerogel technologies; however, we may not be successful in doing so and new
applications or technologies
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may not be commercially useful. Other companies that are seeking to enhance traditional insulation materials have recently introduced or are developing other
emerging insulation technologies. These competitors are engaged in significa nt development work on these various insulation products. Competing technologies
that outperform our insulation in one or more performance attributes could be developed and successfully introduced.
We are also aware of certain companies, including Guangdong Alison Hi-Tech Co, Ltd and Nano Tech Co, Ltd, that have developed or are developing
products using aerogel technology similar to our technology and these or other companies have introduced or could introduce aerogel products that compete
directly with our products and could in the future outperform them in one or more performance attributes, could be offered to our customers as a cheaper alternative
to our products or may result in pricing pressure on us. As a result of this increasing current competition and potential future competition, our products may not
compete effectively in our target markets.
Negative perceptions regarding the safety, quality or other attributes of our products or a failure or a perceived failure of our products could have a material
adverse effect on our results of operations and could make us unable to continue our business.
Given the history of asbestos as an insulation material, we believe that there is an elevated level of attention towards perceived health and safety risks in the
insulation industry. As a consequence, it is essential to our existing business and to our future growth that our products are considered safe. Even modest
perceptions by existing or potential distributors, contractors or end-use customers in our target markets that our products are not safe could have a critical impact on
our ability to sell our products and to continue as a business. Further, our competitors have in the past, and may in the future, seek to create or perpetuate such
perceptions. There is risk of an actual or perceived failure of our products or other negative perceptions regarding our products, such as perceived health hazards.
For example, dust is produced by our products during their installation and use, which increases the likelihood of the perception of a hazard. Another example is the
potential in very high temperature applications for material failure. Like most insulation products, our Pyrogel XT and XT-E products will normally go through a
controlled burn-in process immediately after exposure to high temperatures. If installed improperly, the burn-in may proceed too rapidly and the material may
become damaged. In addition, the thermal performance of our materials may degrade over time due to a variety of operational or environmental conditions. We
take steps to educate our distributors, contractors, OEMs and end-use customers on the nature of our products and the proper installation and operating procedures
in order to mitigate these risks. Such an event, or the perception of such an event, could quickly result in our direct and end-use customers replacing our products
with traditional insulation materials which could have a material adverse effect on our results of operations.
Our activities and operations are subject to numerous health and safety laws and regulations. If we violate such regulations, we could face penalties and fines
or be required to curtail or cease operations.
We are subject to numerous health and safety laws and regulations in each of the jurisdictions in which we operate. These health and safety laws and
regulations apply to us including with regard to hazardous substances that we use in our manufacturing process and that certain of our products contain. These
substances include titanium dioxide, iron oxide, ethanol and carbon black, each of which has been determined, in certain forms, with certain contaminants and at
certain levels, to be hazardous, possibly carcinogenic or otherwise harmful to humans. We may also consider and adopt the use of other hazardous substances or
substances potentially containing hazardous contaminants, with similar or higher risks in connection with new products or modifications to our current products
and related manufacturing.
Our processes also require the use of other regulated substances in raw material delivery and manufacturing, including among others, ethanol. Applicable
laws and regulations require us to obtain and maintain permits and approvals and implement health and safety programs and procedures to control risks associated
with our operations. Compliance with those laws and regulations can require us to incur substantial costs. Moreover, if our compliance programs are not successful,
we could be subject to penalties or to revocation of our permits, which may require us to curtail or cease operations of the affected facilities. In particular, the
construction of our second manufacturing facility will require us to obtain and maintain new permits from various regulatory authorities and if the issuance of such
permits is delayed or denied, it would slow or potentially prevent the expansion of our manufacturing capacity. Violations of laws, regulations and permit
requirements may also result in criminal sanctions, injunctions and the denial or revocation of our various permits.
While we use hazardous substances, including titanium dioxide and carbon black, in forms and at levels that are subject to current rules and regulations,
such rules and regulations may become more stringent such that we are required to modify our manufacturing process and such that our customers’ use of our
products may be impacted. Changes in the products or manufacturing processes may require the customers to perform an extensive re-qualification process, which
our customers may not want to undertake for various reasons, resulting in the customer switching to competing products. In addition, changes in our production or
manufacturing process may result in uses above currently permitted levels. Such uses or changes in rules or regulations could materially adversely affect our
business, financial condition and results of operations.
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Health and safety laws, regulations and permit requirements may become more stringent or otherwise change. Any such changes could require us to incur
materially higher costs than we currently have. Our costs of complying with current and future health and safety laws, regulations and permit requirements, and any
liabilities, fines or other sanctions resulting from violations of them, could adversely affect our business, financial condition and results of operations.
We may face certain product liability or warranty claims on our products, including from improper installation of our products by third parties. As a
consequence, we could lose existing and future business and our ability to develop, market and sell our insulation could be harmed.
The design, development, production and sale of our products involve an inherent risk of product liability claims and associated adverse publicity. We may
be named directly in product liability suits relating to our products, even for defects resulting from errors of our distributors, contractors, OEMs, partners or end-use
customers. These claims could be brought by various parties, including distributors, contactors, OEMs, partners and other direct end-use customers who are
purchasing products directly from us, or end-use customers who purchase our products from our distributors. We could also be named as co-parties in product
liability suits that are brought against the distributors, contractors, OEMs, partners and end-use customers. Our products are often installed in our end-use
customers’ complex and capital intensive facilities in inherently hazardous or dangerous environments, including in the energy, petrochemical and power
generation industries, where the potential liability from risk of loss could be substantial. The failure of our products to perform to customer expectations, whether or
not because of improper installation, could give rise to warranty claims against us. We take steps to educate our distributors, contractors, OEMs, partners and end-
use customers about the proper installation procedures to mitigate the risk of an uncontrolled burn-in for very high temperature applications of Pyrogel XT and XT-
E. However, installation of our products is handled by third parties over whom we have no control and errors or defects in their installation may also give rise to
claims against us, diminish our brand or divert our resources from other purposes. Any of these claims, even if without merit, could result in costly litigation or
divert management’s attention and resources. In addition, many of our products are integrated into the final products of our customers. The integration of our
products may entail the risk of product liability or warranty claims based on malfunctions or hazards from both our products and the final products of our
customers.
A material product liability claim may seriously harm our results of operations, as well as damage our customer relationships and reputation. Although we
carry general liability insurance, our current insurance coverage could be insufficient to protect us from all liability that may be imposed under these types of
claims. Insurance coverage is expensive, may be difficult to obtain and may not be available in the future on acceptable terms or at all. Our distributors, contractors,
OEMs, partners and end-use customers may not have adequate insurance to cover against potential claims. This insurance may not provide adequate coverage
against potential losses, and if claims or losses exceed our liability insurance coverage, we may go out of business. In addition, insurance coverage may become
more expensive, which would harm our results of operations.
We may incur significant costs complying with environmental, health and safety laws and related claims, and failure to comply with these laws and regulations
could expose us to significant liabilities, which could materially adversely affect our results of operations.
Costs of compliance with regional, national, state and local existing and future environmental, health and safety laws and regulations could adversely affect
our cash flow and results of operations. We are required to comply with numerous environmental laws and regulations and to obtain numerous governmental
permits in order to operate our facilities and in connection with the design, development, manufacture and transport of our products and the storage, use, handling
and disposal of hazardous substances, including environmental, health and safety laws, regulations and permits governing air emissions. We may incur significant
additional costs to comply with these requirements. If we fail to comply with these requirements, we could be subject to civil or criminal liability, damages and
fines, and our operations could be curtailed, suspended or shutdown. In addition, certain foreign laws and regulations may affect our ability to export products
outside of the United States. Existing environmental, health and safety laws and regulations could be revised or reinterpreted and new laws and regulations could be
adopted or become applicable to us or our products, and future changes in environmental, health and safety laws and regulations could occur. These factors may
materially increase the amount we must invest to bring our processes into compliance and impose additional expense on our operations.
Among the changes to environmental laws and regulations that could occur is the adoption of regulatory frameworks to reduce greenhouse gas emissions,
which a number of countries, particularly in the European Union, have adopted, or are considering adopting, including the 2015 Paris Agreement on climate
change. These include adoption of cap and trade regimes, carbon taxes, restrictive permitting, increased efficiency standards, and incentives or mandates for
renewable energy, any of which could increase the costs of manufacturing our products and increase our compliance costs, which could materially adversely affect
our business and results of operations.
In addition, private lawsuits, including claims for remediation of contamination, personal injury or property damage, or actions by regional, national, state
and local regulatory agencies, including enforcement or cost-recovery actions, may materially increase our
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costs. Certain environmental laws make us potentially liable on a joint and several basis for the r emediation of contamination at or emanating from properties or
facilities that we currently or formerly owned or operated or properties to which we arranged for the disposal of hazardous substances. Such liability may require us
to pay more than our fair s hare and could require us to address contamination caused by others. For example, the site of our East Providence facility contains
certain levels of contamination caused by prior third-party activities on and near the site. Such contamination remains in p lace under a state-approved deed
restriction, and we are required to comply with such deed restriction and the accompanying soil management plan. In general, the deed restriction prohibits the
residential use of the property and the use of groundwater as p otable water, and requires the maintenance of engineering controls and annual inspections to help
prevent exposure to contaminated soils. The soil management plan requires us to notify the state environmental agency with respect to any soil excavation, sto
ckpiling, sampling and off-site disposal of excavated soil. Although we have not had to make material expenditures to satisfy these requirements to date, in the
future, we may incur additional costs to comply with these requirements and failure to do so co uld disrupt the operation of our facility or could subject us to
liability for environmental remediation. We may incur liability relating to the remediation of contamination, including contamination we did not cause.
Furthermore, ethanol, one of the materi als that we handle in large quantities in our manufacturing process is subject to additional laws and regulations including
those administered by the U.S. Alcohol and Tobacco Tax and Trade Bureau. While we seek to comply with the stringent requirements of these laws and
regulations, these laws and regulations are complex and are subject to interpretation. Any changes in these laws or regulations or changes in our manufacturing
processes may require us to request changes to our existing permits or obtain new permits. Any requests to change our existing permits or obtain new permits may
be delayed or denied and may require us to modify our manufacturing processes, which could be costly and time consuming and could adversely affect our business
and results of o perations.
We may not be able to obtain or maintain, from time to time, all required environmental regulatory approvals. A delay in obtaining any required
environmental regulatory approvals or failure to obtain and comply with them could materially adversely affect our business and results of operations.
Failure by us to develop, maintain and strengthen strategic relationships with industry leaders to commercialize our products, particularly in the building
materials market, may adversely affect our results of operations and our ability to grow our business.
Our business strategy requires us to align the design and performance attributes of our products to the evolving needs of the market. To facilitate this
process, we have sought out partnerships and relationships with industry leaders in order to assist in the development and commercialization of our products. We
face competition from other manufacturers of insulation in seeking out and entering into such partnerships and relationships with industry leaders in our target
markets and we may therefore not be successful in establishing strategic relationships in those markets.
In the building materials market, we have entered into a supply agreement and a side agreement (together, the supply agreement) with BASF Polyeurathanes
GmbH (BASF) and a joint development agreement with BASF SE. Pursuant to the supply agreement, we will sell exclusively to BASF our Spaceloft A2 product at
annual volumes to be specified by BASF, subject to certain volume limits. The joint development agreement is designed to facilitate the collaboration between the
parties on the development and commercialization of new products.
In addition to the customary terms associated with supply agreements, in support of our capacity expansion plan, process optimization projects, and research
and development activities, BASF, in its sole discretion, may make advances, or prepayments, to us in the aggregate amount of up to $22 million during the term of
the Supply Agreement. BASF has agreed to make a prepayment in the amount of $5 million to us in two installments in 2018. We have secured our obligation to
repay the prepayment with a first priority security interest in real estate, machinery and equipment located at our existing manufacturing facility in East Providence,
Rhode Island. Additionally, we have granted non-exclusive licenses to our subsidiaries under our intellectual property as necessary to operate such machinery and
equipment.
After January 1, 2019, we will credit 25.3% of any amounts that we invoice for Spaceloft A2 product sold to BASF against the outstanding balance of the
2018 prepayment, if any, with such credits limited to a specified annual amount. BASF has no obligation to purchase Product under the supply agreement. If any of
the 2018 prepayment remains uncredited as of December 31, 2021, BASF may request that we repay the uncredited amount to BASF. The amounts and terms of
additional prepayment installments, if any, are subject to further negotiation between us and BASF.
Although BASF has placed orders for product under the supply agreement, there can be no assurance that BASF will ever be a significant customer for our
products. Furthermore, there can be no assurance that we or BASF will be able to perform under the supply agreement or the joint development agreement or
achieve our or its respective goals with respect to the supply agreement, the joint development agreement or the broader relationship between us and BASF. In
addition, our grant of a security interest to BASF may make it more difficult for us to pledge our assets to secure other obligations, including to potential lenders,
and as a result may impede our ability to incur additional indebtedness in the future.
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In the event that we are unable to develop products that meet market needs or maintain our relationship with BASF, we may be required to find less p
rominent partners in the building materials market and we may be less able or unable to successfully penetrate that market. As a result of any of the above, we may
lessen or lose our ability to grow our business in the building materials market which could adversely affect our business, financial condition and results of
operations, including impairing our profitability .
We have entered into and may enter into future agreements that may limit our ability to broadly market our products or could involve future obligations, which
could make it more difficult for us to commercialize certain of our products and negatively affect our business and results of operations.
We have a joint development agreement with BASF to develop products in the building materials market. In order to develop and commercialize our
products, we may enter into additional joint development agreements or commercial arrangements. We cannot be certain that any products will be successfully
developed under any such agreement or, even if developed, that they will be successfully produced or commercialized. These agreements may contain exclusivity,
ownership and other terms that may limit our ability to commercialize any products or technology developed in connection with such agreements, including in
ways that we do not envision at the time of entering into the agreement. In addition, these agreements may not obligate either party to make any purchases and may
contain technical specifications that must be achieved to the satisfaction of our partner, which we cannot be certain we will be able to achieve. If our ability to
commercialize products or technology developed in connection with these agreements is limited or if we fail to achieve the technical specifications that may be
required, then our business, financial condition and results of operations could be materially adversely affected.
If we do not continue to develop and maintain distribution channels for our products and to meet our customers’ demand for our products, our results of
operations could be adversely affected.
For a significant portion of our revenues, we rely on sales to distributors who then sell our products to end-users in our target markets. Our success depends,
in part, on our maintaining satisfactory relationships with these distributors. Our distributors require us to meet expectations of delivery, quality and pricing of our
products, at both the distribution channel level and at the level of the end-user of our products. If we fail to meet expected standards, our revenues would decline
and this could materially adversely affect our business, results of operations and financial condition. In addition, we have been unable at times to produce sufficient
amounts of our products to meet demand from our customers and we may not be able to avoid capacity constraints in the future if demand exceeds our expectations
or we fail to expand the capacity of our existing East Providence, Rhode Island manufacturing facility or bring into operation as planned the second manufacturing
facility to be located in Statesboro, Georgia. If we are unable to deliver our products within such short timeframes, we may be at risk of losing direct or end-use
customers. Accordingly, shortfalls in sales could materially adversely affect our business and results of operations.
The qualification process for our products can be lengthy and unpredictable, potentially delaying adoption of our products and causing us to incur significant
expense potentially without recovery.
Qualification of our products by many of our direct and end-use customers can be lengthy and unpredictable and many of these direct and end-use
customers have extended budgeting and procurement processes. This extended sales process requires the dedication of significant time by our personnel and our
use of significant financial resources, with no certainty of success or recovery of our related expenses. Furthermore, even after an extensive qualification process,
our products may fail to meet the standards sought by our end-use customers and may not be qualified for use by such end-use customers. Additionally, our
continued process improvements and cost-reduction efforts may require us or the end-users to re-qualify our products. Failure to qualify or re-qualify our products
may result in us losing such companies as end-users of our products, which would cause a decrease in our revenue or revenue growth rate either of which could
materially adversely affect our business and results of operations.
Our revenue may fluctuate, which may result in a high degree of variability in our results of operations and make it difficult for us to plan based on our future
outlook and to forecast our future performance.
Our revenue may fluctuate from period to period due to a wide variety of factors. Since we rely on sales to a limited number of direct customers and end-use
customers, changes in demand from one or more direct customers or end-users can significantly impact our revenue from period to period. In addition, the sales
cycles for our products, including their qualification for use, are long and can result in unpredictability in our revenues. We expect to have an increasing percentage
of our products sold for use in capital projects, which orders tend to be larger and more sporadic, that will further increase this unpredictability and the difficulty for
us in forecasting quarterly or annual performance. Because of these factors, we have a limited basis on which to predict our quarterly revenue. Our profitability
from period-to-period may also vary due to the mix of products that we sell in different periods. These factors may result in a high degree of variability in our
results of operations and will make it difficult for us to accurately evaluate and plan based on our future outlook and to forecast quarterly or annual performance.
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Our results of operations could be materially adversely affected if our operating expenses incurred do not correspond with the timing of our revenues.
Most of our operating expenses, such as manufacturing facility expenses, employee compensation and research expenses, are either relatively fixed in the
short-term or incurred in advance of sales. In addition, our spending levels are based in part on our expectations regarding future revenues. As a result, if revenues
for a particular quarter are below expectations, we may not be able to proportionately reduce operating expenses for that quarter. Our reliance on sales to a limited
number of direct customers and end-use customers, the length of our sales cycles and the potentially increasing percentage of our products sold for use in capital
projects each can cause sporadic demand for our products which would limit our ability to predict future sales. This limitation could result in our being unable to
reduce spending quickly enough to compensate for reductions in sales and could therefore adversely affect our results of operations for any particular operating
period.
We are exposed to the credit risk of some of our direct customers, including distributors, contractors and OEMs, which subjects us to the risk of non-payment
for our products.
We distribute our products through a network of distributors, contractors and OEMs, some of which may not be well-capitalized and may be of a lower
credit quality. This direct customer network subjects us to the risk of non-payment for our products. During 2017, we wrote off $0.5 million in accounts receivable
due to non-payment of amounts due by a single customer. In addition, during periods of economic downturn in the global economy, our exposure to credit risks
from our direct customers may increase, and our efforts to monitor and mitigate the associated risks may not be effective. In the event of non-payment by one or
more of our direct customers, our business, financial condition and results of operations could be materially adversely affected.
Our working capital requirements involve estimates based on demand and production expectations and may decrease or increase beyond those currently
anticipated, which could materially harm our results of operations and financial condition.
In order to fulfill the product delivery requirements of our direct and end-use customers, we plan for working capital needs in advance of customer orders.
As a result, we base our funding and inventory decisions on estimates of future demand. If demand for our products does not increase as quickly as we have
estimated or drops off sharply, our inventory and expenses could rise, and our business and results of operations could suffer. Alternatively, if we experience sales
in excess of our estimates, our working capital needs may be higher than those currently anticipated. Our ability to meet this excess customer demand depends on
our ability to arrange for additional financing for any ongoing working capital shortages, since it is likely that cash flow from sales will lag behind these investment
requirements. In addition, we plan to increase our inventory in the longer term in order to meet our expected future demand. This would result in an increase in our
working capital requirements that could harm our results of operations and financial condition.
Breakdowns, security breaches, loss of data and other disruptions of our information technology systems could compromise sensitive information related to our
business, prevent us from accessing critical information and expose us to liability, which would cause our business and reputation to suffer.
In the ordinary course of our business, we collect and store sensitive data, including intellectual property, our proprietary business information and that of
our suppliers, customers and business partners, and personally identifiable information about our employees. We manage and maintain our applications and data
utilizing on-site and off-site systems. These applications and data encompass a wide variety of business critical information including research and development
information, commercial information and business and financial information.
The secure processing, storage, maintenance and transmission of this critical information is vital to our operations and business strategy, and we devote
resources to protecting such information. Although we take measures to protect sensitive information from unauthorized access or disclosure, our information
technology and infrastructure may be vulnerable to breakdowns, attacks by hackers, viruses, breaches or interruptions due to employee error, malfeasance or other
disruptions, or lapses in compliance with privacy and security mandates. Any such virus, breakdown, attack, breach or interruption could compromise our networks
and the information stored there could be accessed by unauthorized parties, publicly disclosed, lost or stolen. We have measures in place that are designed to detect
and respond to such security incidents and breaches of privacy and security mandates, but there can be no assurance that our management or diligence efforts will
prevent such breakdowns or breaches in our systems. Any such access, disclosure or other loss of information could result in legal claims or proceedings, liability
under laws that protect the privacy of personal information or other laws, government enforcement actions and regulatory penalties. Unauthorized access, loss or
dissemination could also disrupt our operations, customer support services, research and development activities, capture of company financial information, various
general and administrative aspects of our business and damage our reputation, any of which could adversely affect our business.
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Our contracts with U.S. government agencies may subject us to audits, criminal penal ties, sanctions and other expenses and fines.
We perform contract research services for U.S. government agencies and our products are sold to customers that may incorporate them into government
projects. U.S. government agencies, including the Defense Contract Audit Agency and the Department of Labor, routinely audit government contractors. These
agencies review a contractor’s compliance with contract terms and conditions, performance under its contracts, cost structure and compliance with applicable laws,
regulations and standards. The U.S. government also may review the adequacy of a contractor’s systems and policies, including a contractor’s purchasing, property,
estimating, billing, accounting, compensation and management information systems. Any costs found to be overcharged or improperly allocated to a specific
contract or any amounts improperly billed or charged for products or services will be subject to reimbursement to the government. As a government contractor, we
are required to disclose to the U.S. government credible evidence of certain violations of law and contract overpayments. If we are found to have participated in
improper or illegal activities, we may be subject to civil and criminal penalties and administrative sanctions, including termination of contracts, forfeiture of profits,
suspension of payments, fines and suspension or prohibition from doing business with the U.S. government. Any negative publicity related to such contracts,
regardless of the accuracy of such publicity, may adversely affect our business or reputation.
Our contracts with U.S. government agencies may not be funded by future appropriations and are subject to modification or termination at any time prior to
their completion.
Our contracts with U.S. government agencies are subject to the availability of appropriated funds. The U.S. government funds our contract research work
through a variety of funding programs that rely on monies appropriated by Congress. At any point, the availability of funding could change, thus reducing the
opportunities for new or continued revenues to us from government contract work. Revenue from contracts with U.S. government agencies constituted 2% of our
total revenue in each of 2017, 2016 and 2015, respectively. We expect that our revenue under such contracts will decline due to the recent trend toward tightening
of federal spending guidelines and programs.
In addition, under our contracts, the U.S. government generally has the right not to exercise options to extend or expand our contracts and may modify,
curtail or terminate the contracts at its convenience. Our government customers may not renew our existing contracts after the conclusion of their terms and we
may not be able to enter into new contracts with U.S. government agencies. Any decision by the U.S. government not to exercise contract options or to modify,
curtail or terminate our contracts or not to renew our contracts or enter into new contracts with us would adversely affect our revenues.
Our revolving credit facility contains financial and operating restrictions that may limit our access to credit. In addition, our revolving credit facility expires on
April 28, 2018 and we may not be able to renew, extend or replace the expiring facility. If we fail to comply with covenants in our revolving credit facility or if
facility is terminated, we may be required to repay our indebtedness thereunder, which may have an adverse effect on our liquidity .
Provisions governing our revolving credit facility impose restrictions on our ability to operate, including, for some of the agreements and instruments, but
not for others, our ability to:
•
•
•
•
•
•
•
incur capital expenditures;
incur additional debt;
pay dividends and make distributions;
redeem or repurchase capital stock;
create liens;
enter into transactions with affiliates; and
merge or consolidate with or into other entities.
Our revolving credit facility also contains other customary covenants. We may not be able to comply with these covenants in the future. Our failure to
comply with these covenants may result in the declaration of an event of default and could cause us to be unable to borrow funds under our revolving credit facility.
In addition to preventing additional borrowings under our revolving credit facility, an event of default, if not cured or waived, may result in the acceleration of the
maturity of indebtedness outstanding under the revolving credit facility, which would require us to pay all amounts outstanding. Such an event may also lead our
lender to exercise its security interest in our assets, including all of our real property and equipment at our East Providence facility. If an event of default occurs, we
may not be able to cure it within any applicable cure period, if at all. If the maturity of our indebtedness is accelerated, we may not have sufficient funds available
for repayment or we may not have the ability to borrow or obtain sufficient funds to replace the accelerated indebtedness on terms acceptable to us, or at all.
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If we lose key personnel upon whom we are dependent, or if we are unable to successfully recruit and retain skilled employees, we may not be able to manage
our operations and meet our strategic objectives.
Our continued success depends to a considerable degree upon the continued services of a small number of our employees with critical knowledge of our
products, our manufacturing process, our intellectual property, our customers and our global operations. The loss or unavailability of any of these individuals could
harm our ability to execute our business plan, maintain important business relationships and complete certain product development initiatives, which could harm
our business. In the event that any of these key individuals leave their employment with us or take new employment with a competitor, our business and results of
operations could be materially adversely affected. In addition, our continued success depends upon the availability, contributions, vision, skills, experience and
effort of our senior management, financial, sales and marketing, engineering and production teams. We do not maintain “key person” insurance on any of our
employees. We have entered into employment agreements with certain members of our senior management team, but none of these agreements guarantee the
services of the individual for a specified period of time. All of the agreements with members of our senior management team provide that employment is at-will
and may be terminated by the employee at any time and without notice.
Although we do not have any reason to believe that we may lose the services of any our employees with critical knowledge of our products, our
manufacturing processes, our customers and our global operations or any of our senior management, financial, sales and marketing, engineering and production
teams in the foreseeable future, the loss of the services of any of these individuals might impede our operations or the achievement of our strategic and financial
objectives. The loss or interruption of the service of any of these individuals or our inability to attract or retain other qualified personnel or advisors could have a
material adverse effect on our business, financial condition and results of operations and could significantly reduce our ability to manage our operations and
implement our strategy.
Our ability to use our net operating loss carryforwards may be subject to limitation, which could result in a higher effective tax rate and adversely affect our
financial condition and results of operations.
During 2014, we performed analyses pursuant to Section 382 of the Internal Revenue Code of 1986, as amended, or the Internal Revenue Code, as well as
similar state provisions, in order to determine whether any limitations might exist on the utilization of net operating losses and other tax attributes. Generally, a
change of more than 50% in the ownership of a company’s stock, by value, over a three year period constitutes an ownership change for U.S. federal income tax
purposes. An ownership change may limit a company’s ability to use its net operating loss carryforwards attributable to the period prior to such change. Based on
these analyses, we determined that it is more likely than not that an ownership change occurred on June 18, 2014 upon the closing of our IPO, resulting in an annual
limitation on the use of our net operating losses and other tax attributes as of such date. As a result, our prior net operating losses were limited to $155.2 million,
including built-in gains of $42.0 million at the date of that ownership change. The use of our net operating loss carryforwards may be restricted further in the event
of any future changes in our ownership.
We may not be able to successfully develop and introduce new products in a timely manner at competitive prices, which would limit our ability to grow and
maintain our competitive position and could adversely affect our financial conditions, results of operations and cash flow.
Our growth depends, in part, on continued sales of existing products, including by improving the performance of existing products, as well as the successful
development and introduction of new products, which face the uncertainty of customer acceptance and reaction from competitors. New product development
requires considerable resources and attention that may shift our focus from and may disrupt our current operations, given that we have fewer resources than many
of our competitors. We may not be able to sustainably manufacture new products with attractive margins and we may experience higher yield losses than expected.
Any delay in the development or launch of a new product could result in our not being the first to market, which could compromise our competitive position. Even
if we manage to develop and introduce new products, such products may not address market needs or otherwise compete with third party products. Even if our new
products are adopted by the market, we may not achieve the growth in revenue that we expect from such new products and our investment in these efforts may not
be proportional to our expected or actual revenue growth. If we are unable to develop and introduce new products in a cost-effe ctive manner or otherwise manage
effectively the operations related to new products, our results of operations and financial condition could be adversely impacted.
Risks Related to Our Intellectual Property
Our inability to protect our intellectual property rights could negatively affect our business and results of operations.
Our ability to compete effectively depends in part upon developing, maintaining and/or protecting intellectual property rights relevant to our aerogel product
forms, applications, manufacturing technologies and brand names. We rely principally on a combination of patent protection, trade secret laws, confidentiality and
nondisclosure agreements, trademark registrations, common
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law rights and licensing arrangements to establish and prot ect the intellectual property rights relevant to our business. However, these measures may not be
adequate in every given case to permit us to gain or keep any competitive advantage, particularly in those countries where the laws do not protect our proprie tary
rights as fully as or where the enforcement tools are weaker or less effective than those in the United States. In particular, since aerogels were developed
approximately 80 years ago, there has been a wide range of research, development and publicati on related to aerogels, which makes it difficult to establish
intellectual property rights to many key elements of aerogel technology and to obtain patent protection. Accordingly, much of the general technology that we use in
our manufacture of aerogel bla nkets is not protected by patents.
Where we consider it appropriate, our strategy is to seek patent protection in the United States and other countries on technologies used in or relating to our
aerogel product forms, applications and manufacturing technologies. As of December 31, 2017, we had 39 issued U.S. patents and 68 issued foreign patents,
including three U.S. patents and 18 foreign patents that we co-own with third parties. The issuance of a patent is not conclusive as to its scope, validity or
enforceability. Thus, any patent held by us or to be issued to us from a pending patent application, could be challenged, invalidated or held unenforceable in
litigation or proceedings before the U.S. Patent and Trademark Office, or USPTO, and/or other patent tribunals. Third parties could develop technologies that
circumvent the patent protection we have secured. No consistent policy regarding the breadth of patent claims has emerged to date in the United States and the
landscape could become more uncertain in view of future rule changes by the USPTO, the introduction of patent reform legislation and decisions in patent law
cases by the federal courts including the United States Supreme Court.
The patent landscape outside the United States is even less predictable. As a result, the validity and enforceability of patents cannot be predicted with
certainty. For example, we are aware of competitors that manufacture and market aerogel insulation products in China, where it may be difficult for us to enforce
our intellectual property rights against these or other competitors. In May 2016, we filed a complaint for patent infringement against Nano Tech Co., Ltd. (Nano)
and Guangdong Alison Hi-Tech., Ltd., (Alison) which we refer to collectively as the Respondents, in the United States International Trade Commission, or ITC. In
addition to Respondents’ contention at the ITC that the patents we asserted there are invalid, Alison also filed petitions with United States Patent and Trademark
Office requesting Inter-Partes Review to cancel certain claims in three of our manufacturing process patents and a product patent. A three-member panel of
Administrative Patent Judges at the USPTO denied all of Alison’s petitions to institute Inter-Partes Review challenging the validity of Aspen patents. Alison also
filed similar requests with the Chinese Patent Office (SIPO) seeking to invalidate two of our Chinese manufacturing process patents and two of our Chinese
product patents. After the conclusion of the oral proceedings and before any decision issued by the SIPO, Alison withdrew all of its requests for invalidation of our
Chinese patents. In September 2017, the Administrative Law Judge (ALJ) presiding over the ITC investigation issued an Initial Determination finding that Alison
and Nano infringed our patents relating to aerogel insulation and/or methods of manufacturing aerogel insulation. As part of the Initial Determination, the ALJ
found that Alison and Nano infringed all of the patent claims asserted against each of them across the three asserted patents, and that Alison and Nano failed to
prove that the asserted claims were invalid. The ALJ also recommended a limited exclusion order as a remedy to prevent the importation of infringing aerogel
products manufactured by Respondents into the United States. In February 2018, the ITC issued its final determination confirming the ALJ’s infringement and
validity determinations except with respect to one dependent product claim where the ITC found that the claim was not infringed. The ITC also revised some of the
ALJ’s claim constructions. In addition, the ITC issued a limited exclusion order prohibiting importation of infringing aerogel insulation products manufactured by
Alison and Nano. The Respondents may appeal the final determination to the U.S. Court of Appeals for the Federal Circuit.
We also filed a patent infringement suit in April 2016 at the District Court in Mannheim, Germany against the Respondents and two European distributors.
During 2016, we settled with one European distributor in exchange for a commitment not to procure infringing products and cooperation with our case. In January
2018, the court issued a series of judgments by acknowledgement (German, Anerkenntnisurteil) finding the second reseller, Hiltex Techniche Weefsels b.v.
(Hiltex), liable for infringement and also issued injunctions against Hiltex. The judgments resulted from a settlement agreement in which Hiltex agreed not to resell
infringing products in Europe where at least one of the asserted patents are active. Nano initiated nullity actions in German Federal Court against three of our
manufacturing process patents in Germany. Alison likewise filed an opposition to one of the asserted patents at the European Patent Office (“EPO”) and also
initiated nullity action against two other patents. Nano also filed an opposition against the same patent at the EPO. The litigation against the defendants, Alison and
Nano, is ongoing. See “Risk Factors —We have initiated intellectual property litigation that will be costly, and could limit or invalidate our intellectual property
rights, divert time and efforts away from business operations, require us to pay damages and/or costs and expenses and/or otherwise have an adverse material
impact on our business, and we could become subject to additional intellectual property litigation in the future” below.
In addition, we may fail to apply for patents on important technologies or innovative products in a timely fashion, if at all, and our existing and future
patents may not be sufficiently broad to prevent others from practicing our technologies or from developing competing products or technologies, in particular given
the long history of aerogel development. Furthermore, third parties could practice our intellectual property rights in territories where we do not have patent
protection. Such third parties may then try to import products made using our intellectual property rights into the United States or other countries. Our strategy is to
seek registration of trademarks for our brands in many, but not all, of the jurisdictions in which we sell our products based on various factors, including
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our sales volumes in the jurisdiction, our ability to enforce local laws and cost. Our strategy may not be adequate to protect our brands in all circumstances,
especially in foreign jurisdictions.
As of December 31, 2017, we had 23 pending U.S. patent applications and 71 pending foreign patent applications, including one pending U.S. patent
application and three foreign pending patent applications that we co-own with other third parties. Our pending patent applications are directed to various enabling
technologies for the product forms, applications and manufacturing technologies that support our current business, as well as aspects of products under
development or contemplated for the future. The issuance of patents from these applications involves complex legal and factual questions and, thus, we cannot
provide assurance that any of our pending patent applications will result in the issuance of patents to us. The USPTO, relevant foreign patent offices and other
relevant patent tribunals may deny or require significant narrowing of claims in our pending patent applications. Patents issued as a result of any of our pending
patent applications may not cover our enabling technology and/or the products or processes that support our current or future business or afford us with significant
commercial protection against others with similar technology. Proceedings before the USPTO could result in adverse decisions as to the priority of our inventions
and the narrowing or invalidation of claims in issued patents. In addition, our pending patent applications filed in foreign countries are subject to laws, rules and
procedures that differ from those of the United States, and thus foreign patent applications may not be granted even if counterpart United States patents are issued.
We have initiated intellectual property litigation that is and will continue to be costly, and could limit or invalidate our intellectual property rights, divert time
and efforts away from business operations, require us to pay damages and/or costs and expenses and/or otherwise have an material adverse impact on our
business, and we could become subject to additional such intellectual property litigation in the future.
The success of our business is highly dependent on protecting our intellectual property rights. Unauthorized parties may attempt to copy or otherwise obtain
and use our products and/or enabling technology. Policing the unauthorized use of our intellectual property rights is difficult and expensive, as is enforcing these
rights against unauthorized use by others. Identifying unauthorized use of our intellectual property rights is difficult because we may be unable to monitor the
technologies and/or materials being employed by other parties. The steps we have taken or will take may not prevent unauthorized use of our intellectual property
rights, particularly in foreign countries where enforcement of intellectual property rights may be more difficult than in the United States.
In May 2016, we filed a complaint for patent infringement against Nano Tech Co., Ltd. and Guangdong Alison Hi-Tech., Ltd., which we refer to
collectively as the Respondents, in the United States International Trade Commission. The ITC complaint alleged that these two China-based companies have
engaged and are engaging in unfair trade practices by importing and selling aerogel products in the United States that infringe, and/or are manufactured by
processes that infringe, several of our patents. In the ITC complaint, we sought exclusion orders from the ITC that direct the United States Customs and Border
Protection to stop the importation of infringing products. In June 2016, the ITC instituted an investigation based on our complaint. In September 2017, the
Administrative Law Judge (ALJ) presiding over the ITC investigation issued an Initial Determination finding that Alison and Nano infringed three of our patents
relating to aerogel insulation and/or methods of manufacturing aerogel insulation. As part of the Initial Determination, the ALJ found that Alison and Nano
infringed all the patent claims asserted against each of them and that Alison and Nano failed to prove that the asserted claims were invalid. The ALJ also
recommended a limited exclusion order as a remedy to prevent the importation of infringing aerogel products into the United States. In February 2018, the ITC
issued its final determination confirming the ALJ’s infringement and validity determinations except with respect to one dependent product claim where the ITC
found that the claim was not infringed. The ITC also revised some of the ALJ’s claim construction. In addition, the ITC issued a limited exclusion order prohibiting
importation of infringing aerogel insulation products manufactured by Alison and Nano. The Respondents may appeal the final determination to the U.S. Court of
Appeals for the Federal Circuit.
In addition to Respondents’ contention at the ITC that the patents we asserted there are invalid, Alison also filed petitions with USPTO requesting Inter-
Partes Review to cancel certain claims in three of Aspen’s manufacturing process patents and one product patent. A three-member panel of Administrative Patent
Judges at the USPTO denied all of Alison’s petitions to institute Inter-Partes Review challenging the validity of these Aspen patents. Alison also filed similar
requests with the Chinese Patent Office (“SIPO”) seeking to invalidate two of our Chinese manufacturing process patents and two of our Chinese product patents.
After the conclusion of the oral proceedings and before any decision issued by the SIPO, Alison withdrew all of its requests for invalidation of our Chinese patents.
We also filed a patent infringement suit in April 2016 at the District Court in Mannheim, Germany against the Respondents and two European distributors.
During 2016, we settled with one of the European distributors in exchange for a commitment not to procure infringing products and cooperation with our case. In
January 2018, the court issued a series of judgments by acknowledgement (German, Anerkenntnisurteil )
finding the second reseller, Hiltex Techniche Weefsels
b.v. (Hiltex), liable for infringement and also issued injunctions against Hiltex. The judgments resulted from a settlement agreement in which Hiltex agreed not to
resell infringing products in Europe where at least one of the asserted patents are active. The litigation against Nano and Alison remains ongoing. Nano
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has initiated nullity action s in German Federal Court against three of our manufacturing process patents in Germany. Alison likewise filed an opposition to one of
the asserted patents at the European Patent Office (EPO) and also initiated nullity action against two other patents. Nano also filed an opposition against the same
patent at the EPO. As Alison and Nano have already sought to invalidate our patents in various jurisdictions , we expect defendants to bring similar actions in
additional jurisdictions or against additional patents and that w e will incur additional costs to defend such actions. Due to their nature, it is difficult to predict the
outcome or the costs involved in any litigati on or administrative proceeding . Furthermore, the defendants may have significant resources and interest to litigate
and, therefore, this litigation could be protracted and may ultimately involve significant legal expenses.
Our continued commercial success will also depend in part upon not infringing the patents or violating other intellectual property rights of third parties. We
are aware of patents and patent applications generally relating to aspects of our technologies filed by, and issued to, third parties. Our knowledge of the patent
landscape with respect to the technologies currently embodied within our aerogel products and the technologies that we practice in manufacturing those products
indicates that the third-party patent rights most relevant to our business are those owned by Cabot and licensed to us under the cross license agreement with Cabot.
Nevertheless, we cannot determine with certainty whether patents or patent applications of other parties may materially affect our ability to conduct our business.
There may be existing patents of which we are unaware that we may inadvertently infringe, resulting in claims against us or our customers. In recent years,
Chinese, Japanese and South Korean entities have filed a significant number of patent applications related to aerogel products in both their home countries and in
foreign countries. These patents in application areas of aerogels may make it more difficult for OEMs and end-use customers in these countries to use our products
in new and different applications, which in turn may limit our ability to penetrate new markets.
In the event that the manufacture, use and/or sale of our products or technologies is challenged, or if our product forms or technologies conflict with patent
rights of others or our operations conflict with trademark or similar rights of others, third parties could bring legal actions against us in the United States, Europe or
other countries, claiming damages and seeking to enjoin the manufacturing and/or marketing of our products. In addition, it is not possible to predict with certainty
what patent claims may arise from pending patent applications of third parties. In the United States, for example, patent prosecution can proceed in secret prior to
issuance of a patent, provided such application is not filed in a foreign jurisdiction. For U.S. patent applications that are also filed in foreign jurisdictions, such
patent applications will not be published until 18 months from the filing date of the application. As a result, third parties may be able to obtain patents with claims
relating to our product forms, applications and/or manufacturing processes which they could attempt to assert against us or our end-users.
In the case of any of the above, litigation may be necessary to enforce, protect or defend our intellectual property rights or to determine the validity and
scope of the intellectual property rights of others. Any such litigation, including our ongoing patent enforcement actions described above, could be unsuccessful,
cause us to incur substantial costs, divert resources and the efforts of our personnel away from daily operations, harm our reputation and/or result in the impairment
of our intellectual property rights. In some cases, litigation may be threatened or brought by a patent holding company (otherwise known as non-practicing entities
or patent “trolls”) or other adverse patent owner who has no relevant product revenues and against which our patents may provide little or no deterrence. If we are
found to infringe any patents, regardless of whether litigation is brought against us by third parties or, as in the case of our ongoing patent enforcement actions
described above, brought by us against third parties, we could be required to:
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pay substantial monetary damages, including lost profits, reasonable royalties and/or treble damages if an infringement is found to be willful;
totally discontinue or substantially modify any products or processes that are found to be in violation of another party’s intellectual property rights;
and/or
seek a license to continue making and selling our products and/or using our manufacturing processes, which we may not be able to obtain on
reasonable terms, if at all, which could significantly increase our operating expenses and/or decrease our revenue.
In the actions brought by us against third parties, including our ongoing patent enforcement actions described above, we may be required to pay costs and
expenses of opposing parties, including attorney fees, if we lose.
If our competitors are able to use our technology without payment to us, our ability to compete effectively could be materially harmed. Our contracts
generally indemnify our customers for third-party claims of intellectual property infringement related to the manufacture and use of our products, and typically up
to the amount of the purchase price paid for the product, which could cause us to become involved, and subject to liability, in litigation between our customers and
third parties. The expense of defending these claims may adversely affect our results of operations.
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Patents covering technologies that are similar or superior to our technologies may be developed or obtained by third parties. We may need to seek licenses to
these technologies, which could limit our ability to manufacture our products and have a material adverse effect on our business and results of operations.
Competitors or other third parties may independently develop and obtain patents covering technologies that are similar or superior to the product forms,
applications or manufacturing technologies that we employ. In such event, we may need to obtain licenses for these technologies. However, we may not be able to
obtain licenses on reasonable terms, if at all, which could limit our ability to manufacture our current and/or future products and operate our business.
Our contracts with the U.S. government and other third parties could negatively affect our intellectual property rights.
To further our product development efforts, our scientists and engineers work closely with customers, the U.S. government and other third parties to
research and develop advancements in aerogel product forms, applications and manufacturing technologies. We have entered into agreements with private third
parties and have been awarded numerous research contracts with the U.S. government to independently or jointly research, design and develop new devices and
systems that incorporate aerogel material. We also expect to enter into similar private agreements and be awarded similar government contracts in the future. In
some instances, the research and development activities that we conduct under contract with the U.S. government and/or with private third parties may produce
intellectual property to which we may not have ownership or exclusive rights and will be unable to protect or monetize.
Moreover, when we develop new technologies using U.S. government funding, the government may obtain certain rights in any resulting patents, technical
data and/or other confidential and proprietary information, generally including, at a minimum, a non-exclusive license authorizing the U.S. government to use the
invention, technical data or software for non-commercial purposes. Federal government funding may limit when and how we can deploy our technology developed
under those contracts. In addition, inventions must be reported promptly to the funding agencies, the federal funding must be disclosed in any resulting patent
applications, and our rights in such inventions will normally be subject to government license rights, periodic post-contract utilization reporting, foreign
manufacturing restrictions and “march-in” rights. March-in rights refer to the right of the U.S. government to require us to grant a license to the technology to a
responsible applicant or, if we refuse, the government may grant the license itself. The U.S. government may exercise its march-in rights if it determines that action
is necessary because we fail to achieve practical application of any technology developed under contract with the government or because action is necessary to
alleviate health or safety needs, to meet requirements of federal regulations or to give preference to United States industry. The U.S. government may also have the
right to disclose our confidential and proprietary information to third parties. In addition, failure to comply with all the government contract requirements may
result in us losing the patent rights.
Our U.S. government-sponsored research contracts are also subject to audit and require that we provide regular written technical updates on a monthly,
quarterly or annual basis, and, at the conclusion of the research contract, a final report on the results of our technical research. Because these reports are generally
available to the public, third parties may obtain some aspects of our confidential and proprietary information relating to our product forms, applications and/or
manufacturing processes. If we fail to provide these reports or to provide accurate and complete reports, the U.S. government could obtain rights to any intellectual
property arising from the related research.
Furthermore, there could be disputes between us and a private third party as to the ownership rights to any inventions that we develop in collaboration with
such third party. Any such dispute may cause us to incur substantial costs including potential license obligations, and could place a significant strain on our
financial resources, divert the attention of management from our core business and harm our reputation.
We rely on trade secrets to protect our technology, and our failure to obtain or maintain trade secret protection could materially adversely affect our
competitive business position.
We rely in part on trade secret protection to protect confidential and proprietary information relating to our technology, particularly where we do not believe
patent protection is appropriate or obtainable. We continue to develop and refine the manufacturing technologies used to produce our aerogel products and believe
that we have already developed, and will continue to develop, significant know-how related to these technologies. However, trade secrets can be difficult to protect.
We may not be able to maintain the secrecy of this information and competitors may develop or acquire equally or more valuable information related to the
manufacture of comparable aerogel products. Our strategy for scale-up of commercial production will continue to require us to share confidential and proprietary
information with the U.S. government and other third parties. While we take reasonable efforts to protect our trade secrets, our employees, consultants, contractors
or scientific and other advisors, or those of our business partners, may intentionally or inadvertently disclose our confidential and proprietary information to
competitors. Any enforcement of claims by us that a third party has obtained and is using our trade secrets is expensive, time consuming and uncertain. In addition,
foreign courts are sometimes less willing than United States courts to protect trade secrets.
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We require all employees and consultants to execute confidentiality and/or nondisclosure agreements upon the commencement of an employment or
consulting arrangement with us, which agreements generally require that all c onfidential and proprietary information developed by the individual or made known
to the individual by us during the course of the individual’s relationship with us be kept confidential and not disclosed to third parties. These agreements further
generally provide that inventions conceived by the individual in the course of rendering services to us will be our exclusive property. Nevertheless, these
agreements may not be honored and our confidential and proprietary information may be disclosed, or these agr eements may be unenforceable or difficult to
enforce. We also require customers and vendors to execute confidentiality and/or nondisclosure agreements. However, we have not obtained such agreements from
all of our customers and vendors. Moreover, some of o ur customers may be subject to laws and regulations that require them to disclose information that we would
otherwise seek to keep confidential. Our confidential and proprietary information may be otherwise disclosed without our authorization or knowledge. Moreover,
third parties could reverse engineer our manufacturing processes, independently develop substantially equivalent confidential and proprietary information or
otherwise gain access to our trade secrets. Failure to maintain trade secret protection could enable others to produce competing products and adversely affect our
competitive business position.
Loss of the intellectual property rights that we license from Cabot Corporation would have a material adverse impact on our business.
We have licensed certain intellectual property rights from Cabot under a cross license agreement. These intellectual property rights have been critical to the
manufacture of our existing products and may also be important to our research, development and manufacture of new products. Any loss of the intellectual
property rights granted to us thereunder, including as a result of ineffective protection of such rights by Cabot, abandonment or expiration of the involved patents or
a breach of or dispute under the agreement by either party would have a material adverse impact on our financial condition, results of operations and growth
prospects, and might prevent us from continuing our business.
Risks Related to Our Common Stock
We have incurred and will continue to incur costs and demands upon management as a result of complying with the laws and regulations affecting public
companies in the United States, which may adversely affect our results of operations.
We are subject to the reporting requirements of the Exchange Act that require us to file, among other things, quarterly reports on Form 10-Q and annual
reports on Form 10-K. Under Section 302 of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, as a part of each of these reports, our chief executive
officer and chief financial officer are required to evaluate and report their conclusions regarding the effectiveness of our disclosure controls and procedures and to
certify that they have done so. Effective internal controls are necessary for us to provide reliable financial reports and prevent fraud. Under Section 404 of the
Sarbanes-Oxley Act, we have included a report of management on our internal control over financial reporting in our Form 10-K for our fiscal year ended
December 31, 2017. In addition, upon the first annual report required to be filed with the SEC following the date we are no longer an “emerging growth company”
as defined in the Jumpstart Our Business Startups Act, or JOBS Act, the independent registered public accounting firm auditing our financial statements will be
required to attest to and report on the effectiveness of our internal control over financial reporting. The process of improving and documenting our internal controls
and complying with Section 404 is expensive and time consuming, and requires significant attention of management.
Complying with these requirements applicable to public companies may place a strain on our personnel, information technology systems and resources
while diverting management’s attention from other business concerns. We have engaged outside service providers with appropriate public company compliance
experience and technical accounting knowledge to support our compliance efforts. We may need to engage additional service providers to ensure compliance which
may cause us to incur additional operating costs.
These and other requirements may also make it more difficult or more costly for us to obtain or maintain certain types of insurance, including directors’ and
officers’ liability insurance. We may be forced to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar
coverage.
The impact of these requirements could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors, our board
committees or as executive officers. Any one of these requirements could have a material adverse effect on our business, financial condition and results of
operations.
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Because we are a public company, we are obligated to develop and maintai n proper and effective internal control over financial reporting. If our internal
controls over financial reporting are determined to be ineffective, or if our auditors are otherwise unable to attest to their effectiveness when required, investor
confidenc e in our company, and our common stock price, may be adversely affected.
Pursuant to Section 404a of the Sarbanes-Oxley Act, we have furnished a report by management on the effectiveness of our internal control over financial
reporting for the fiscal year ended December 31, 2017 and will continue to do so in each year thereafter. This assessment will be required to include disclosure of
any material weaknesses identified by our management in our internal control over financial reporting. Our independent registered public accounting firm will not
be required to formally attest to the effectiveness of our internal control over financial reporting until the first annual report required to be filed with the SEC
following the date we are no longer an “emerging growth company,” as defined in the JOBS Act.
We continue to assess our system of internal controls over financial reporting and successfully completed documentation necessary to perform the annual
evaluation required to comply with Section 404. In future periods, we may discover, and not be able to remediate timely, significant deficiencies or material
weaknesses. During the evaluation and testing process in 2017, we did not identify any material weaknesses in our internal controls over financial reporting. In
future periods, if we were to identify one or more material weaknesses in our internal control, we may be unable to assert that our internal controls are effective. If
we are unable to assert that our internal controls over financial reporting are effective, we could lose investor confidence in the accuracy and completeness of our
financial reports or it could cause us to fail to meet our reporting obligations, which could have a material adverse effect on the price of our common stock. In
addition, any failure to comply with Section 404 could subject us to a variety of administrative sanctions, including SEC action, ineligibility for short form resale
registration, the suspension or delisting of our common stock from The New York Stock Exchange, and the inability of registered broker-dealers to make a market
in our common stock, which would further reduce our stock price and could harm our business.
We are eligible to be treated as an “emerging growth company” as defined in the JOBS Act, and we cannot be certain if the reduced disclosure requirements
applicable to emerging growth companies makes or will make our common stock less attractive to investors.
We are an “emerging growth company”, as defined in the JOBS Act. For as long as we continue to be an emerging growth company, we may take
advantage of exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies, including:
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not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, as described above;
reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements; and
exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden
parachute payments not previously approved.
We will remain an emerging growth company until the earliest to occur of (i) the end of the fiscal year for which we report $1.0 billion or more in annual
revenues, (ii) the end of the fiscal year in which the market value of our common stock held by non-affiliates exceeds $700 million on the last business day of our
second fiscal quarter, (iii) our issuance, in a three year period, of more than $1.0 billion of non-convertible debt, and (iv) December 31, 2019. We cannot predict if
investors find or will find our common stock less attractive because we may rely on these exemptions. If some investors find our common stock less attractive as a
result, there may be a less active trading market for our common stock and our stock price may be more volatile.
The trading market in our common stock has been limited and substantially less liquid than the average trading market for a stock quoted on The New York
Stock Exchange.
Since our initial listing on The New York Stock Exchange on June 13, 2014, the trading market in our common stock has been limited and substantially less
liquid than the average trading market for companies listed on The New York Stock Exchange. The listing of our common stock on The New York Stock Exchange
does not assure that a meaningful, consistent and liquid trading market currently exists or will exist in the future. We cannot predict whether a more active market
for our common stock will develop in the future. An absence of an active trading market could adversely affect our stockholders’ ability to sell our common stock
at current market prices in short time periods, or possibly at all. An inactive market may also impair our ability to raise capital by selling our common stock and
may impair our ability to acquire other companies, products or technologies by using our common stock as consideration. Additionally, analyst coverage of our
common stock may be limited and such lack of coverage may have a depressive effect on the market price for our common stock. As of December 31, 2017,
approximately 20.6% of our outstanding shares of common stock were held by our executive officers, directors, principal stockholders and their respective
affiliates, which may adversely affect the liquidity of the trading market for our common stock, in as much as federal securities laws restrict sales of our
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shares by these stockholders. If our affiliates continue to hold their shares of common stock, th ere will be a more limited trading volume in our common stock,
which may make it more difficult for investors to sell their shares or increase the volatility of our stock price.
We expect that the price of our common stock will fluctuate substantially, which could subject us to securities class action litigation and result in substantial
losses to our stockholders.
The price of our common stock may fluctuate substantially due to a number of factors, including the following, some of which are beyond our control:
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volume and timing of orders for our products;
quarterly and yearly variations in our or our competitors’ results of operations;
our announcement or our competitors’ announcements regarding new products, product enhancements, significant contracts, number of distributors,
acquisitions or strategic investments;
announcements of technological innovations relating to aerogels, thermal management and energy infrastructure insulation;
results of operations or projections that vary from the expectations of securities analysts and investors;
the periodic nature of our sales cycles, in particular for capital projects in the energy infrastructure market;
our ability to develop, obtain regulatory clearance or approval for and market new and enhanced products on a timely basis;
future sales of our common stock, including sales by our executive officers, directors and significant stockholders and their respective affiliates;
announcements by third parties of significant claims or proceedings against us, including with regard to intellectual property and product liability;
changes in accounting principles; and
general U.S. and global economic conditions and other factors, including factors unrelated to our operating performance or the operating
performance of our competitors.
Furthermore, the U.S. stock market has at times experienced extreme volatility that in some cases has been unrelated or disproportionate to the operating
performance of particular companies. These broad market and industry fluctuations may adversely affect the market price of our common stock, regardless of our
actual operating performance.
In the past, following periods of market volatility, stockholders have instituted securities class action litigation. If we become involved in securities
litigation, it could have a substantial cost and divert resources and the attention of our senior management team from our business regardless of the outcome of such
litigation.
Securities analysts may not continue coverage of our common stock or may issue negative reports, which may have a negative impact on the market price of
our common stock.
The trading market for our common stock relies in part on the research and reports that industry or financial analysts publish about us or our business.
Securities analysts may elect not to provide research coverage of our common stock. If securities analysts do not cover or continue to cover our common stock, the
lack of research coverage may cause the market price of our common stock to decline. If one or more of the analysts who elects to cover us downgrades our stock,
our stock price would likely decline substantially. If one or more of these analysts ceases coverage of us, we could lose visibility in the market, which in turn could
cause our stock price to decline. In addition, rules mandated by the Sarbanes-Oxley Act and a global settlement reached in 2003 between the SEC, other regulatory
agencies and a number of investment banks have led to a number of fundamental changes in how analysts are reviewed and compensated. In particular, many
investment banking firms are required to contract with independent financial analysts for their stock research. It may be difficult for companies such as ours, with
smaller market capitalizations, to attract independent financial analysts that will cover our common stock. This could have a negative effect on the market price of
our stock.
37
Our directors, officers and principal stockholders have significant voting power and may take actions that may not be in the best interests of our other
stockholders.
As of December 31, 2017, our executive officers, directors and principal stockholders and their affiliates collectively controlled approximately 20.6% of our
outstanding shares of common stock. As a result, these stockholders, if they act together, may be able to control the management and affairs of our company and
certain matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions. This concentration of
ownership may have the effect of delaying or preventing a change of control and might adversely affect the market price of our common stock. This concentration
of ownership may not be in the best interests of our other stockholders.
Anti-takeover provisions in our restated certificate of incorporation and restated bylaws, and Delaware law, could delay or discourage a takeover.
Anti-takeover provisions in our restated certificate of incorporation and restated bylaws and Delaware law may have the effect of deterring or delaying
attempts by our stockholders to remove or replace management, engage in proxy contests and effect changes in control. The provisions of our charter documents
include:
•
•
•
•
•
procedures for advance notification of stockholder nominations and proposals;
the inability of our stockholders to call a special meeting of the stockholders and the inability of our stockholders to act by written consent;
the ability of our board of directors to create new directorships and to fill any vacancies on the board of directors;
the ability of our board of directors to amend our restated bylaws without stockholder approval; and
the ability of our board of directors to issue up to 5,000,000 shares of preferred stock without stockholder approval upon the terms and conditions
and with the rights, privileges and preferences as our board of directors may determine.
In addition, as a Delaware corporation, we are subject to Delaware law, including Section 203 of the Delaware General Corporation Law. In general,
Section 203 prohibits a Delaware corporation from engaging in any business combination with any interested stockholder for a period of three years following the
date that the stockholder became an interested stockholder unless certain specific requirements are met as set forth in Section 203. These provisions, alone or
together, could have the effect of deterring or delaying changes in incumbent management, proxy contests or changes in control.
Our restated certificate of incorporation designates a state or federal court located within the State of Delaware as the exclusive forum for certain types of
actions and proceedings that may be initiated by our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes
with us or our directors, officers or employees.
Our restated certificate of incorporation provides that, subject to limited exceptions, a state or federal court located within the State of Delaware will be the
exclusive forum for (1) any derivative action or proceeding brought on our behalf, (2) any action asserting a claim of breach of a fiduciary duty owed by any of our
directors, officers or other employees to us or our stockholders, (3) any action asserting a claim against us arising pursuant to any provision of the Delaware
General Corporation Law, our restated certificate of incorporation or our restated bylaws, or (4) any other action asserting a claim against us that is governed by the
internal affairs doctrine. Any person or entity purchasing or otherwise acquiring any interest in shares of our capital stock shall be deemed to have notice of and to
have consented to the provisions of our restated certificate of incorporation described above. This choice of forum provision may limit a stockholder’s ability to
bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers or other employees, which may discourage such lawsuits
against us and our directors, officers and employees. Alternatively, if a court were to find these provisions of our restated certificate of incorporation inapplicable
to, or unenforceable in respect of, one or more of the specified types of actions or proceedings, we may incur additional costs associated with resolving such
matters in other jurisdictions, which could adversely affect our business and financial condition.
Our shareholders may experience future dilution as a result of future equity offerings.
In the future, we may offer additional shares of our common stock or other securities convertible into or exchangeable for our common stock in order to
raise additional capital. We cannot assure our shareholders that we will be able to sell shares or other securities in any other offering at a price per share that is
equal to or greater than the price per share our shareholders paid for our shares. Investors purchasing shares or other securities in the future could have rights,
preferences or privileges senior to those of our shareholders and our shareholders may experience dilution. Our shareholders may incur additional dilution upon the
exercise of any outstanding stock options or warrants, the issuance of shares of restricted stock, the vesting of restricted stock units, or the issuance, vesting or
exercise of other equity awards.
38
We do not intend to pay c ash dividends in the foreseeable future and, consequently, our shareholders’ ability to achieve a return on your investment will
depend on appreciation in the price of our common stock.
We have never declared or paid cash dividends on our common stock and we do not intend to pay any cash dividends on our common stock in the
foreseeable future. We currently expect to retain all available funds and any future earnings for use in the operation and expansion of our business. In addition, the
terms of our revolving credit facility restrict our ability to pay dividends and any future credit facilities, loan agreements, debt instruments or other agreements may
further restrict our ability to pay dividends. Payments of future dividends, if any, will be at the discretion of our board of directors after taking into account various
factors, including our business, results of operations and financial condition, current and anticipated cash needs, plans for expansion and any legal or contractual
limitations on our ability to pay dividends. As a result, capital appreciation, if any, of our common stock will be our shareholders’ sole source of potential gain for
the foreseeable future.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This report includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and
Section 21E of the Exchange Act that relate to future events or our future financial performance and involve known and unknown risks, uncertainties and other
factors that may cause our actual results, levels of activity, performance or achievements to differ materially from any future results, levels of activity, performance
or achievements expressed or implied by these forward-looking statements. Words such as, but not limited to, “believe,” “expect,” “anticipate,” “estimate,”
“intend,” “seek,” “may,” “plan,” “potential,” “predict,” “project,” “targets,” “likely,” “will,” “would,” “could,” “should,” “continue,” and similar expressions or
phrases, or the negative of those expressions or phrases, are intended to identify forward-looking statements, although not all forward-looking statements contain
these identifying words. Although we believe that we have a reasonable basis for each forward-looking statement contained in this report, we caution you that these
statements are based on our projections of the future that are subject to known and unknown risks and uncertainties and other factors that may cause our actual
results, level of activity, performance or achievements expressed or implied by these forward-looking statements, to differ. The description of our Business set forth
in Item 1, the Risk Factors set forth in this Item 1A and our Management’s Discussion and Analysis of Financial Condition and Results of Operations set forth in
Item 7 as well as other sections in this report, discuss some of the factors that could contribute to these differences. These forward-looking statements include,
among other things, statements about:
•
•
•
•
•
•
•
•
•
•
•
the expected future growth of the market for aerogel insulation and continued gain in market share, in particular in the energy infrastructure
insulation market and other markets we target;
our plans to invest approximately $6.0 million in incremental manufacturing and operating expense and to add 49 employees during 2018;
our expectation that our investment in incremental manufacturing and operating expense will restore long-term growth in our existing markets and
develop new business opportunities;
our plans to continue to develop and optimize aerogel products for applications within the building materials market and our plan to realize revenue
from this market;
our pursuit of high-value opportunities for our aerogel products within different segments of the global insulation market, including the building
materials market, and our plans to leverage our aerogel technology platform to develop innovative, aerogel enhanced products for applications
outside the global insulation market;
our plans to focus additional resources to continue to grow our share of the energy infrastructure insulation market;
our pursuit of and the expected greater adoption of our products in district heating systems, LNG production and storage, and power generation
markets and our expectation that product revenue will be generated in large part by demand for insulation associated with scheduled plant
shutdowns, or turnarounds, and other maintenance-related projects;
our expectation that our products will be specified during the design phase in a growing number of new plant construction and capital expansion
projects and our expectation that we will have an increasing percentage of our products sold for use in capital projects;
our expectation that the growth in global energy demand will result in increased new-build and large capacity expansion projects, driving demand for
our aerogel products;
our plans to continue our strategy of working with innovative companies to target and penetrate additional market opportunities;
our plans to develop strategic partnerships to facilitate market penetration beyond the energy infrastructure and building materials market, as well as
the expected goals and priorities of such strategic partnerships;
39
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
our belief that an adequate long-term supply of silica-precursor is available;
our belief that our portfolio of patents, trade secrets and know-how presents a significant barrier to potential new entrants in the production of
aerogel blanket insulation;
our expectation that we will be successful in enforcing and defending our patents against competitors and that such patents are valid and enforceable,
as well as our expectations about the costs and consequences of our current or potential future patent litigation and the potential for additional patent
litigation;
our belief that our products possess strong competitive advantages over traditional insulation materials, including the superior thermal performance
and the thin, easy-to-use and durable blanket form of our products;
our plans to expand capacity at our East Providence, Rhode Island manufacturing facility and our plans to construct a second manufacturing facility
in Statesboro, Georgia;
our expectation that expanded capacity in our East Providence, Rhode Island facility or the first phase of the first production line at the planned
second manufacturing facility will become available or operational in a timely manner to support the long-term growth in demand we expect;
our current estimate that the cost of the project to expand capacity in our East Providence, Rhode Island facility will range from $15 million to $20
million;
our expectation that the project to expand capacity in our East Providence, Rhode Island facility will provide an additional annual nameplate capacity
of 10 million square feet of aerogel blankets;
our belief that we can finance the expansion of our existing manufacturing facility with our cash balance, anticipated cash flows from operations,
local government grants, debt financings and potentially equity financings;
our belief that our end-use customers will continue to invest in major energy infrastructure projects;
our expectation that we will continue to sell our products in the building materials and other end markets;
our expectation that we will develop, manufacture and sell new products and technologies through the strategic partnership with BASF and that our
strategic partnership with BASF will facilitate our penetration of the building materials market;
our current estimate that design, development and construction costs for this second manufacturing facility and its first production line, to be built in
two phases, will range from $120 million to $130 million;
our expectation that our planned second manufacturing facility and its first production line will provide an additional annual nameplate capacity of
40 million square feet of aerogel blankets, and that the plant site, layout and design will support future development of two additional similar
production lines;
our belief that we can finance our planned second manufacturing facility and its first production line with anticipated cash flows from operations,
local government grants, debt financings and potentially equity financings;
our belief that the potential for significant technological innovation in traditional insulation materials is limited and that new high-performance
materials will be required to meet evolving market requirements for energy efficient insulations systems;
our belief that our aerogel products and manufacturing processes are proprietary and that we can protect our patents, trade secrets and know-how
associated therewith;
our belief that we can continue to improve the cost efficiency of our manufacturing process, that our current expansion plans offer attractive returns
on incremental invested capital, and that we will focus our development efforts on new products and next generation technology with application in
new, high value market segments;
our belief that we will have opportunities to address additional high value applications in the estimated $3.1 billion global insulation market, and that
we are well positioned to leverage a decade’s worth of research and development to design and commercialize disruptive aerogel products for a wide
array of new markets;
our belief that our products have the lowest cost on a fully-installed basis or offer significant life-cycle cost savings in energy infrastructure and
certain other applications as compared to traditional insulation materials;
our plans to continue to expand our global sales force and distribution network to support anticipated growth in customers and demand for our
products and our plans to seek to promote greater enterprise-wide utilization of our products by existing end-use customers;
40
•
•
•
•
•
•
•
•
our expectation to c ontinue to hire a significant number of employees in order to support our anticipated growth , and that in the long-term we will
continue to increase investment in research, development and engineering personnel, projects and infrastructure in support of ef forts to develop new
products, technologies and markets ;
our expectations about future revenues, expenses, gross profit, net loss, loss per share and Adjusted EBITDA, sources and uses of cash, capital
requirements and the sufficiency of our existing cash balance and available credit;
our expectations that most of our revenue will continue to come from a relatively small number of customers for the foreseeable future;
our expectations of long-term revenue growth, with increasing levels of gross profit and improved cash flows from operations and our expectations
that we will incur significant capital expenditures related to the expansion of our manufacturing capacity to support this expected long term growth
in demand;
our expectations about the impact of new accounting pronouncements on our consolidated financial statements and related disclosures;
our belief that our experienced and dedicated leadership team will provide us with a competitive advantage in the industry;
the expected future development of new aerogel technologies; and
our expectations about limitations of net operating losses.
We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements, and you should not place undue reliance on
our forward-looking statements. Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking
statements we make. We have included important cautionary statements in this report, particularly in the Risk Factors set forth in Item 1A of this Annual Report on
Form 10-K, that we believe could cause actual results or events to differ materially from the forward-looking statements that we make. Our forward-looking
statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments we may make.
You should read this report and the documents that we reference in this report and have filed as exhibits to this report completely and with the understanding
that our actual future results may be materially different from what we expect. The forward-looking statements contained in this report are made as of the date of
this report, and we do not assume, and specifically disclaim, any obligation to update any forward-looking statements, whether as a result of new information,
future events or otherwise.
Item 1B.
UNRESOLVED STAFF COMMENTS
None.
Item 2.
PROPERTIES
Our corporate headquarters are located in Northborough, Massachusetts, where we occupy approximately 51,650 square feet under a lease expiring on
December 31, 2026. We also own an approximately 143,000 square foot manufacturing facility in East Providence, Rhode Island. In addition, we lease a 10,500
square foot facility, a 24,000 square foot facility and a 128,000 square foot facility in East Providence, Rhode Island, which leases expire on March 31,
2021, March 31, 2021 and March 31, 2019, respectively. We also intend to construct a second manufacturing facility to be located in Statesboro, Georgia.
Item 3.
LEGAL PROCEEDINGS
In May 2016, we filed a complaint for patent infringement against Nano and Alison in the ITC. The ITC complaint alleged that these two China-based
companies engaged in unfair trade practices by importing aerogel products in the United States that infringed, and/or are manufactured by processes that infringe,
several of the Company’s patents in violation of Section 337 of the Tariff Act. In the ITC complaint, we sought exclusion orders from the ITC that direct the United
States Customs and Border Protection to stop the importation of these infringing products. In June 2016, the ITC instituted an investigation based on our complaint.
In September 2017, the ALJ presiding over the ITC investigation issued an Initial Determination finding that Alison and Nano infringed our patents relating to
aerogel insulation and/or the methods of manufacturing aerogel insulation. As part of the Initial Determination, the ALJ found that Alison and Nano infringed all
the patent claims asserted against each of them across the three asserted patents and that Alison and Nano failed to prove that the asserted claims were invalid. The
ALJ also recommended a limited exclusion order as a remedy to prevent the importation of infringing aerogel products into the United States. In February 2018, the
ITC issued its final determination confirming the ALJ’s infringement and validity determinations except with respect to one dependent product claim where the
ITC found the claim not infringed. The ITC also revised some of the ALJ’s claim constructions. However, the ITC affirmed
41
that Alison and Nano each violated Section 337 of the Tariff Act and issued a limited exclusion order prohibiting importation of infringing aerogel insulation
products manufactured by Ali son and Nano . T he exclusion order , which will be enforced by the United States Customs and Border Protection , is subject to a 60-
day presidential review period , but is otherwise expected to be in full effect starting on April 6, 2018 . Upon a request by a party, the final determination may be
appealed to the United States Court of Appeals for the Federal Circuit. In addition to Respondents’ contention at the ITC that the asserted patents were invalid,
Alison also filed petitions with the USPTO requesting Inter-Partes Review to cancel certain claims in three of the Company’s manufacturing process patents and
one product patent. A three-member panel of Administrative Patent Judges at t he USPTO denied all of Alison’s petitions to institute I nter-Partes Review
challenging the validity of these Aspen patents. Alison also filed similar requests with the SIPO seeking to invalidate two of our Chinese manufacturing process
patents and two of our Chinese product patents. After the conclusion of the oral proceedings and before any decision issued by the SIPO, Alison withdrew all of its
requests for invalidation of our Chinese patents.
In April 2016, we also filed a patent infringement suit at the District Court in Mannheim, Germany against the Respondents and two European resellers
asserting their infringement of one of our German patents. We subsequently asserted infringement of another three patents against Nano and a European reseller of
Alison’s products at the Mannheim court. We have since settled with one European reseller in exchange for a commitment not to procure infringing products and
cooperation with our case. In January 2018, the court issued a series of judgments by acknowledgement (German, “Anerkenntnisurteil ”)
finding the second
reseller, Hiltex, liable for infringement and also issued injunctions against Hiltex. The judgments resulted from a settlement agreement in which Hiltex agreed not
to resell the infringing products in Europe where at least one of the asserted patents are active. The litigation against Alison and Nano remains ongoing. Nano also
initiated a nullity actions in German Federal Patent Court against three of our asserted German manufacturing process patents. Alison likewise filed an opposition
to one of the asserted patents at the EPO and also initiated nullity action against two other patents. Nano also filed an opposition against the same patent at the EPO.
Due to their nature, it is difficult to predict the outcome or the costs involved in any litigation or administrative proceedings, including any appeals process.
Furthermore, the Respondents may have significant resources and interest to litigate and therefore, these litigation matters could be protracted and may ultimately
involve significant legal expenses. In a ddition to the foregoing, we have been and may be from time to time party to other legal proceedings that arise in the
ordinary course of business and to other patent enforcement actions to assert our patent rights.
Item 4.
MINE SAFETY DISCLOSURES
Not applicable.
42
PART II
Item 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF
EQUITY SECURITIES
Market Information and Dividend Policy
Our common stock is trading on The New York Stock Exchange, or NYSE, under the symbol “ASPN.” The following table sets forth, for the period
indicated, the high and low sales prices of our common stock as reported by the NYSE:
2017
2016
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
High
Low
4.86 $
4.62 $
4.90 $
5.14 $
6.58 $
5.39 $
6.29 $
6.71 $
3.84
3.95
3.99
4.12
3.38
3.91
4.42
3.61
$
$
$
$
$
$
$
$
As of January 31, 2018, there were 63 stockholders of record of our common stock. We have not paid dividends to our stockholders since our inception and
we do not plan to pay cash dividends in the foreseeable future. We currently intend to retain earnings, if any, to finance the development and expansion of our
business.
43
Stock Performance Graph
The following graph and table compare the cumulative total stockholder return for our common stock during the period from June 13, 2014 (the date our
common stock commenced trading on the NYSE) through December 31, 2017 in comparison to the S&P Oil & Gas Equipment Select Industry Index and the
Russell 2000. The graph and the table below assume (i) that $100 was invested at the market close on June 13, 2014 in the common stock of Aspen Aerogels, Inc.,
the S&P Oil & Gas Equipment Select Industry Index and the Russell 2000, and (ii) reinvestment of dividends. The comparisons in the graph and table are not
intended to be indicative of the possible future performance of our common stock.
6/13/2014 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15
Aspen Aerogels, Inc.
S&P Oil & Gas Equipment Select Industry
Index (TR)
Russell 2000
100.00 102.79 93.77 74.14 67.72 61.58 69.77 56.47
100.00 102.43 83.68 59.08 52.83 54.98 37.68 37.42
100.00 102.60 94.75 103.61 107.75 107.85 94.67 97.70
Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Sep-17 Dec-17
Aspen Aerogels, Inc.
S&P Oil & Gas Equipment Select Industry
Index (TR)
Russell 2000
41.86 46.23 55.44 38.42 38.60 41.40 40.47 45.40
37.03 40.22 40.95 48.16 43.40 33.53 36.34 37.65
95.82 99.07 107.65 116.72 119.20 121.73 36.34 132.07
The performance graph and table above are being furnished and shall not be deemed “filed” for purposes of Section 18 of the Exchange Act, or otherwise
subject to the liabilities under that section, nor shall it be deemed incorporated by reference into any registration statement or other filing under the Securities Act or
the Exchange Act, except as shall be expressly set forth by specific reference in such filing.
Unregistered Sales of Equity Securities and Use of Proceeds
(a) Unregistered
Sales
of
Equity
Securities
. Not applicable.
44
(b) Use
of
Proceeds
from
Initial
Pu
blic
Offering
of
Common
Stock
. We registered shares of our common stock in connection with our initial public
offering pursuant to a registration statement on Form S-1 (File No. 333-195523), which was declared effective by the SEC on June 12, 2014, and a r egistration
statement on Form S-1 (File No. 333-196719) filed pursuant to Rule 462(b) of the Securities Act.
We received aggregate net proceeds from the offering of approximately $74.7 million, after deducting $4.3 million of underwriting discounts and
approximately $3.5 million of offering expenses.
As of December 31, 2017, we used $19.8 million of the net proceeds of the offering to repay all amounts outstanding under our subordinated notes and our
revolving credit facility; $31.0 million of the net proceeds of the offering for capital expenditures related to our third production line in East Providence, Rhode
Island; and $7.2 million of the net proceeds of the offering for the design of our planned second manufacturing facility in Statesboro, Georgia. The remainder of the
net proceeds are held in a deposit account and money market account with a major financial institution in North America. We have broad discretion in the use of
the net proceeds from our initial public offering and could spend the proceeds in ways that do not improve our results of operations or enhance the value of our
stock. There has been no material change in our planned use of the balance of the net proceeds from the offering as described in our final prospectus filed with the
SEC on June 16, 2014.
(c) Purchases
of
Equity
Securities
By
the
Issuer
and
Affiliated
Purchasers
. We did not repurchase any of our equity securities during the year ended
December 31, 2017.
Item 6.
SELECTED FINANCIAL DATA
The following table sets forth our selected consolidated financial data for the periods, and as of the dates, indicated. You should read the following selected
consolidated financial data in conjunction with our consolidated financial statements and the related notes thereto included elsewhere in this Annual Report on
Form 10-K and the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of this Annual Report on Form 10-K.
45
We derived the consolidated statement of operations data for the years ended De cember 31, 2017, 2016 and 2015 , and the consolidated balance sheet data
as of December 31, 2017 and 2016 , from our audited consolidated financial statements and the related notes thereto included elsewhere in this Annual Report,
which financial statements have been audited by KPMG LLP, independent registered public accounting firm. We derived the consolidated statement of operations
data for the fiscal years ended December 31, 2014 and 2013 , and the consolidated balance sheet data as of December 31, 2015 , 2 014 and 2013 , from our audited
consolidated financial statements and the related notes thereto that are not included in this Annual Report, which financial statements have been audited by KPMG
LLP, independent registered public accounting firm.
Consolidated statements of operations data:
Revenue:
2017
Year Ended December 31,
2015
($ in thousands, except share and per share data)
2014
2016
$
109,590 $
2,041
111,631
115,490 $
2,248
117,738
120,532 $
1,986
122,518
99,259 $
3,140
102,399
Product
Research services
Total revenue
Cost of revenue:
Product
Research services
Gross profit
Operating expenses:
Research and development
Sales and marketing
General and administrative
Write-off of construction in progress
Total operating expenses
Loss from operations
Other expense, net:
Interest expense, net
Gain on extinguishment of convertible notes
Loss on exchange of convertible notes
Postponed financing costs
Costs associated with postponed public offering
Total other expense, net
Net loss
Accretion (deemed dividends) on preferred stock
Extinguishment of redeemable feature for convertible
preferred stock
Earnings attributable to preferred stock shareholders
Net income (loss) attributable to common stockholders
Per share data:
Net income (loss) attributable to common stockholders per
share:
Basic
Diluted
Weighted-average common shares outstanding:
Basic
Diluted
2013
82,057
4,037
86,094
73,399
1,964
10,731
5,159
9,271
12,833
3,440
30,703
(19,972)
(30,599)
8,898
(5,697)
—
(241)
(27,639)
(47,611)
(996)
86,161
(36,216)
1,338
92,052
908
18,671
6,180
12,604
19,023
—
37,807
(19,136)
(185)
—
—
—
—
(185)
(19,321)
93,123
1,304
23,311
5,306
11,810
17,415
—
34,531
(11,220)
(147)
—
—
(656)
—
(803)
(12,023)
—
—
96,865
1,005
24,648
5,253
10,562
15,068
—
30,883
(6,235)
(182)
—
—
—
—
(182)
(6,417)
—
83,677
1,642
17,080
5,980
10,290
16,853
—
33,123
(16,043)
(50,281)
—
—
—
—
(50,281)
(66,324)
—
—
—
(19,321) $
—
—
(12,023) $
—
—
(6,417) $
—
—
(66,324) $
$
$
$
(0.83) $
(0.83) $
(0.52) $
(0.52) $
(0.28) $
(0.28) $
(5.37) $
(5.37) $
426.52
410.56
23,390,235
23,139,807
22,986,931
12,349,456
23,390,235
23,139,807
22,986,931
12,349,456
3,137
3,259
46
Consolidated balance sheet data:
Cash and cash equivalents
Working capital (1)
Total assets
Total debt
Total stockholders’ equity (deficit)
(1) Working capital means current assets minus current liabilities.
2017
2016
As of December 31,
2015
2014
2013
$
$
10,694
26,093
123,815
3,750
100,943
$
18,086
32,056
134,669
39
115,564
$
32,804
44,238
140,074
107
122,474
$
49,719
53,168
145,043
165
123,716
1,574
(3,370)
90,233
138,555
(61,966)
Item 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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.
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, 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.
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
North America, Europe and Asia. The efforts of our sales force are supported by a small number of sales consultants with extensive knowledge of a particular
market or region. Our sales force is responsible for establishing and maintaining customer and partner relationships, delivering highly technical information and
ensuring high-quality customer service.
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 40 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 the U.S. government, including the Department of Defense and the Department
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.
We manufacture our products using our proprietary technology at our facility in East Providence, Rhode Island. We commenced operation of a third
production line in the East Providence facility during 2015 which increased our annual nameplate capacity to 50 million square feet of aerogel blankets. We have
initiated a series of projects designed to increase this nameplate capacity to 60 million square feet of aerogel blankets by the end of 2020. We have also completed
the design and engineering of a first line in a planned second manufacturing facility to be located in Statesboro, Georgia supported by a package of incentives from
the State of Georgia and local governmental authorities. We have elected to delay construction of the Statesboro facility to better align the timing of this capacity
expansion with our assessment of future demand.
47
We have entered into a strategic partnership with BASF to develop and commercialize products for the building materials and other markets. The strategic
partnership includes a sup ply agreement governing the sale of our Spaceloft A2 product to BASF and a joint development agreement targeting innovative products
and technologies. Pursuant to the Supply Agreement, BASF may , in its sole discretion, make prepayments to the Company in th e aggregate amount of up to $22
million in support of our capacity expansion plans, our process improvement initiatives and our new business development efforts. BASF has agreed to make a
prepayment to us in the amount of $5 million in two installments dur ing 2018. The 2018 prepayment will be either credited against amounts invoiced to BASF for
Spaceloft A2 or repaid by us to BASF on or after December 31, 2021.
In July 2017, we announced the launch of a new product, Pyrogel HPS, a high-temperature aerogel blanket engineered to provide superior thermal
conductivity and economic performance at service temperatures between 400°C and 650°C.
Our revenue for the year ended December 31, 2017 was $111.6 million, which represented a decrease of 5% from the year ended December 31, 2016. Net
loss for the year ended December 31, 2017 was $19.3 million and net loss per share was $0.83.
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 nameplate capacity was 50 million square feet of aerogel
blankets at December 31, 2017. 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 associated with recognized revenue in square feet for the periods
presented:
Product shipments in square feet
Adjusted EBITDA
2017
Year Ended December 31,
2016
(Square feet in thousands)
44,286
37,519
2015
42,246
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 and other items, which occur from time to time, that we do not
believe are indicative of our core operating performance. Adjusted EBITDA is a supplemental measure of our performance that is not presented in accordance with
U.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 with U.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.
48
Although measures sim ilar 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 under U.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.
The following table presents a reconciliation of net loss, the most directly comparable GAAP measure, to Adjusted EBITDA for the years presented:
Net loss
Depreciation and amortization
Stock-based compensation (1)
Interest expense, net
Postponed financing costs
Adjusted EBITDA
2017
Year Ended December 31,
2016
($ in thousands)
2015
$
$
(19,321) $
10,753
5,091
185
—
(3,292) $
(12,023) $
9,853
5,313
147
656
3,946 $
(6,417)
9,887
5,413
182
—
9,065
(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:
Net loss
Depreciation and amortization
Stock-based compensation (1)
Interest expense, net
Postponed financing costs
Adjusted EBITDA
Three months ended
2017
Three months ended
2016
June 30 Sept. 30 Dec. 31 March 31
June 30 Sept. 30 Dec. 31
(5,472) $
2,630
1,374
39
—
(1,429) $
(3,088) $
2,726
1,364
58
—
1,060 $
(1,683) $
2,721
1,109
62
—
2,209 $
(1,797) $
2,410
1,370
39
—
2,022 $
(1,387) $
2,416
1,433
39
—
2,501 $
(3,097) $
2,472
1,474
37
656
1,542 $
(5,742)
2,555
1,036
32
—
(2,119)
March 31
$
(9,078) $
2,676
1,244
26
—
(5,132) $
$
(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.
49
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 sel ling prices, our material and manufacturing costs, the costs associated with and timing of capacity
expansions and start-up of additional production capacity, and the amount and timing of operating expenses , including patent enforcement costs . As we build out
our manufacturing capacity in new facilities in the longer term, we expect increased manufacturing expenses will periodically have a negative impact on net
income (loss), earnings per share and Adjusted EBITDA, but will set the framework for improved p erformance in the long term. Accordingly, we expect that our
net income (loss), earnings per share and Adjusted EBITDA will vary from period to period, in particular as and when we expand our manufacturing capacity in
new facilities .
As a result of the conclusion of a multiyear petrochemical project with Reliance Industries Limited and an expected decline in the volume of subsea
projects, which together comprised 19% of our product revenue during 2017, we may experience a decrease in revenue, an increase in net loss and loss per share
and a decrease in Adjusted EBITDA during 2018. In addition, we plan to increase investment in new initiatives and personnel by approximately $6.0 million during
2018 with the objective of restoring long-term growth in our existing markets and developing new business opportunities. This investment is associated, in large
part, with our plan to add 49 new employees to our team during the year. As a result of a planned increase in manufacturing and operating expenses associated with
these new initiatives and personnel, we may experience an increase in net loss and loss per share and a decrease in Adjusted EBITDA during 2018 even in the event
that we experience an increase in revenue during the year.
Emerging Growth Company Status
The JOBS Act permits an “emerging growth company” such as us to take advantage of an extended transition period to comply with new or revised
accounting standards applicable to public companies. We have opted out of this provision and, as a result, we comply with new or revised accounting standards as
required when they are adopted. This decision to opt out of the extended transition period under the JOBS Act is irrevocable.
Components of Our Results of Operations
Revenue
We recognize product revenue from the sale of our line of aerogel products and research services revenue from the provision of services under contracts
with various agencies of the U.S. government and other institutions. Product revenue is recognized upon transfer of title and risk of loss, which is upon shipment or
delivery. The following table sets forth the total revenue for the periods presented:
Revenue:
Product
Research services
Total revenue
2017
Year Ended December 31,
2016
($ in thousands)
2015
$
$
109,590 $
2,041
111,631 $
115,490 $
2,248
117,738 $
120,532
1,986
122,518
Product revenue accounted for 98% of total revenue for each of the years ended December 31, 2017, 2016 and 2015. In the near term, we may experience a
decrease in product revenue due to an anticipated decrease in project related revenue in the subsea market and as a result of the conclusion of the major
petrochemical project with Reliance Industries. However, we expect a resumption of growth in product revenue in the long term due to increasing market adoption
of our line of aerogel blankets in the energy infrastructure market, particularly in the power generation, LNG and district energy markets, and increasing
penetration of new markets, including the building materials market. We expect that research services revenue will remain a small percentage of total revenue due
to limitations on our eligibility to receive contract awards under federal guidelines.
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 69% of our total revenue during the year ended December 31, 2017, and we expect that most
of our revenue will continue to come from a relatively small number of customers for the foreseeable future. In 2017, sales to Distribution International, Inc. and
TechnipFMC represented 15% and 12% of our total revenue, respectively. In 2016, sales to Reliance Industries Limited and Distribution International, Inc.
represented 25% and 15% of our total revenue, respectively. In 2015, sales to Distribution International, Inc. and Reliance Industries Limited represented 14% and
12% of total revenue, respectively. For each of the noted periods, there were no other customers that represented 10% or more of our total revenues.
50
We conduct business across the globe and a substantial portion of our revenue is generated outside of the United States. Total revenue from outside of the
United States, based on shipment destination, amounted to $60.2 million, or 54% of our total revenue, $ 82.0 million, or 70 % of our total revenue, and $
78.0 million or 64 % of our total revenue, in the years ended Dece mber 31, 2017, 2016 and 2015 , respectively.
Cost of Revenue
Cost of product revenue consists primarily of materials and manufacturing expense, including labor, utilities, maintenance expense and depreciation on
manufacturing assets. Cost of product revenue is recorded when the related product revenue is recognized. Cost of product revenue also includes stock-based
compensation of manufacturing employees and shipping costs.
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 45%, 41% and 45% for the years ended December 31, 2017, 2016 and 2015, 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 sales in the period that the
related revenue is recorded. As a result, material costs as a percentage of revenue will vary from period to period due to changes in the mix of aerogel products sold
or the estimated cost of warranties. However, in general, we expect material costs in the aggregate to decline as a percentage of revenue as we seek to achieve
higher selling prices, material sourcing improvements, quality improvements and manufacturing yield enhancements for our aerogel products.
Manufacturing expense is also a significant component of cost of revenue. Manufacturing expense as a percentage of product revenue was 39%, 39% and
36% for the years ended December 31, 2017, 2016 and 2015, respectively. During 2017, product revenue and manufacturing expense each declined by 5%. As a
result, manufacturing expense as a percentage of product revenue remained flat to the comparable period in 2016. The decrease in manufacturing expense in
absolute dollars during 2017 reflected a reduction in manufacturing personnel and expense associated with our plan to decrease output during the period to control
inventory balances.
As we increase manufacturing capacity in our East Providence, Rhode Island facility through 2020 and, over time, through the anticipated construction,
operation and expansion of a second manufacturing facility, we expect manufacturing expense as a percentage of product revenue will increase following each such
expansion but will decrease in the long-term with increased revenues supported by the effect of completed capacity expansions.
We expect that cost of product revenue in absolute dollars and as a percentage of product revenue will decrease during 2018 versus 2017. The projected
decrease in cost of product revenue in absolute dollars and as a percentage of product revenue reflects the impact of a planned increase in manufacturing output and
an expected favorable mix of products sold, offset, in part, by a planned increase in personnel and expense in support of our capacity expansion and growth
initiatives.
Cost of research services revenue consists of direct labor costs of research personnel engaged in the contract research, third-party consulting 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.
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. As
and when we build out our manufacturing capacity, we expect increased manufacturing expenses will periodically have a negative impact on gross profit in the
periods following any such expansion.
As a result of the conclusion of a multiyear petrochemical project with Reliance Industries Limited and an expected decrease in the volume of subsea
projects, which together comprised 19% of our product revenue during 2017, we may experience a decrease in revenue and an associated decrease in gross profit in
absolute dollars and as a percentage of revenue during 2018. In addition, we plan to increase investment in manufacturing personnel and expenses during 2018 in
support of our objective to increase the capacity of our East Providence manufacturing facility, operational improvement initiatives and our new business
development efforts. As a result of this planned increase in manufacturing expense, we may experience a decrease in gross profit even in the event that we
experience an increase in revenue during the year.
51
Howe ver, in the longer term, we expect gross profit to improve as a percentage of revenue due to expected increases in manufacturing productivity and
production volumes, supported by expected capacity expansions, improvements in manufacturing yields and realiz ation of material purchasing efficiencies.
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.
We plan to increase investment in new initiatives and personnel during 2018 with the objective of restoring long-term growth in our existing markets and to
develop new business opportunities. As a result of this planned increase in operating expenses for new initiatives and personnel, we expect to experience an
increase in operating expenses both in absolute dollars and as a percentage of revenue during 2018.
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, 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 the nearer term we expect such expenses will increase 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 plan to expand our sales force and sales consultants globally to drive anticipated growth in customers and demand for our
products. While we expect that sales and marketing expenses will increase in absolute dollars but decrease as a percentage of revenue in the longer-term, in the
nearer term we expect such expenses will increase 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 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, if protracted, could result in significant legal expense over the medium to
long-term. During 2018, we expect general and administrative expense will decrease both in absolute dollars and as a percentage of revenue due to an anticipated
reduction in patent enforcement costs. In the longer term, however, we expect that general and administrative expenses will increase in absolute dollars but
continue to decline as a percentage of revenue.
Other Expense, Net
For the year ended December 31, 2017, other expense, net consisted primarily of fees and interest expense related to our revolving credit facility. For the
year ended December 31, 2016, other expense, net consisted primarily of postponed financing costs and fees related to our revolving credit facility. For the year
ended December 31, 2015, other expense, net consisted primarily of fees related to our revolving credit facility.
52
Provision for Income Taxes
We have incurred net losses since inception and have not recorded benefit provisions for U.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.
For the year ended December 31, 2014, we performed an analysis pursuant to Internal Revenue Code Section 382, as well as similar state provisions, in
order to determine whether any limitations might exist on the utilization of net operating losses and other tax attributes. Based on this analysis, we have determined
that an ownership change occurred as a result of our initial public offering in June 2014, resulting in an annual limitation on the use of our net operating losses and
other tax attributes as of such date. As a result, our prior net operating losses were limited to $155.2 million, including built-in gains of $42.0 million at the date of
that ownership change. At December 31, 2017, we had $194.2 million of net operating losses available to offset future federal income, if any, and which expire on
various dates through December 31, 2037.
On December 22, 2017, the President of the United States signed into law the Tax Cuts and Jobs Act (TCJA) tax reform legislation. This legislation makes
significant change in U.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 the U.S. corporate tax rate from the current rate of 34% to 21% for the year ending 2018. As a result of
the enacted law, the Company was required to revalue deferred tax assets and liabilities at the 21% rate. This results in a decrease in the Company’s net deferred
tax asset and corresponding valuation allowance of $26.7 million. As the Company maintains a full valuation allowance against its net deferred tax asset position in
the United States, this revaluation does not result in an income tax expense or benefit in the current period. The provisions of the TCJA related to the one-time
mandatory transition tax on deemed repatriation did not have an impact on the Company’s results of operations during the year ended December 31, 2017. The
other provisions of the TCJA did not have a material impact on the Company’s 2017 consolidated financial statements.
Results of Operations
The following tables set forth our results of operations for the periods presented:
Revenue:
Product
Research services
Total revenue
Cost of revenue:
Product
Research services
Gross profit
Operating expenses:
Research and development
Sales and marketing
General and administrative
Total operating expenses
Loss from operations
Other expense, net:
Interest expense, net
Postponed financing costs
Total other expense, net
Net loss
2017
Year Ended December 31,
2016
($ in thousands)
2015
$
109,590 $
2,041
111,631
115,490 $
2,248
117,738
120,532
1,986
122,518
92,052
908
18,671
6,180
12,604
19,023
37,807
(19,136)
(185)
—
(185)
(19,321) $
93,123
1,304
23,311
5,306
11,810
17,415
34,531
(11,220)
(147)
(656)
(803)
(12,023) $
96,865
1,005
24,648
5,253
10,562
15,068
30,883
(6,235)
(182)
—
(182)
(6,417)
$
53
Year ended December 31, 201 7 compared to year ended December 31, 2016
The following tables set forth our results of operations for the periods presented:
Revenue:
Product
Research services
Total revenue
Cost of revenue:
Product
Research services
Gross profit
Operating expenses:
Research and development
Sales and marketing
General and administrative
Total operating expenses
Loss from operations
Other expense, net:
Interest expense, net
Postponed financing costs
Total other expense, net
Net loss
Revenue
Revenue:
Product
Research services
Total Revenue
2017
Year Ended December 31,
$ Change
2016
($ in thousands)
Year Ended
December 31,
% Change
2017
2016
(Percentage of
total revenue)
$
109,590 $
2,041
111,631
115,490 $
2,248
117,738
92,052
908
18,671
93,123
1,304
23,311
6,180
12,604
19,023
37,807
(19,136)
5,306
11,810
17,415
34,531
(11,220)
(185)
—
(185)
(19,321) $
(147)
(656)
(803)
(12,023) $
$
(5,900)
(207)
(6,107)
(1,071)
(396)
(4,640)
874
794
1,608
3,276
(7,916)
(38)
656
618
(7,298)
(5)%
(9)%
(5)%
(1)%
(30)%
(20)%
16%
7%
9%
9%
71%
26%
(100)%
(77)%
61%
98%
2%
100%
82%
1%
17%
6%
11%
17%
34%
(17)%
(0)%
0%
(0)%
(17)%
98%
2%
100%
79%
1%
20%
5%
10%
15%
29%
(10)%
0%
(1)%
(1)%
(10)%
Year Ended December 31,
2017
2016
Change
Amount
Percentage
of Revenue
Amount
Percentage
of Revenue
Amount
Percentage
($ in thousands)
$
$
109,590
2,041
111,631
98% $
2%
100% $
115,490
2,248
117,738
98% $
2%
100% $
(5,900)
(207)
(6,107)
(5)%
(9)%
(5)%
The following chart sets forth product shipments in square feet for the periods presented:
Product shipments in square feet (in thousands)
Year Ended
December 31,
Change
2017
2016
Amount
Percentage
37,519
44,286
(6,767)
(15)%
Total revenue decreased by $6.1 million, or 5%, in 2017 to $111.6 million from $117.7 million in 2016 due principally to a decrease in product revenue.
Product revenue decreased by $5.9 million, or 5%, to $109.6 million in 2017 from $115.5 million in 2016. This decrease was principally the result of a
decrease in the sales in the Asian market, led by the conclusion of the multiyear petrochemical project with Reliance Industries Limited, offset, in part, by an
increase in revenue in the U.S. energy infrastructure market, including growth in district energy, LNG and power, and in the subsea market. Product revenue for the
year ended 2017 included $16.7 million in sales to Distribution International, Inc. and $13.2 million to TechnipFMC plc. Product revenue for the year ended
December 31, 2016 included $29.3 million to a Reliance Industries Limited and $17.3 million to Distribution International, Inc.
54
The average selling price pe r square foo t of our products in creased by an effective $0.31 , or 12% , to $2.92 per square foot for the year ended December
31, 2017 from $2.61 per square foot for the year ended December 31, 2016 . The in crease in average selling price reflects a year-over-year increase in the mix of
high-priced sub sea products, combined with a de crease in the volume of products sold to Reliance Industries Limited with lower, project-based pricing. This in
crease in average selling price had the effect of in creasing product revenu e by approximately $11.6 million for the year ended Decembe r 31, 2017 .
In volume terms, product shipments decreased 6.8 million square feet, or 15%, to 37.5 million square feet of aerogel products for the year ended December
31, 2017, as compared to 44.3 million square feet in the year ended December 31, 2016. The decrease in product volume had the effect of decreasing product
revenue by approximately $17.6 million for the year ended December 31, 2017.
Research services revenue decreased by $0.2 million, or 9%, to $2.0 million in 2017 from $2.2 million in 2016. The decrease was primarily due to the
timing and amount of funding available under research contracts during the year ended December 31, 2017 from the comparable period in 2016.
Product revenue as a percentage of total revenue was 98% of total revenue in 2017 and 2016. Research services revenue was 2% of total revenue in 2017
and 2016. We expect that product revenue will continue to comprise a significant percentage of our total revenue in the long-term.
During 2018, we may experience a decrease in product and total revenue versus the comparable period in 2017. The potential decline in revenue is the result
of the conclusion of a multiyear petrochemical project with Reliance Industries Limited and a projected decrease in the volume of subsea projects, which together
comprised 19% of product revenue during 2017.
Cost of Revenue
Cost of revenue:
Product
Research services
Total cost of revenue
Year Ended December 31,
Change
2017
Percentage
of Related
Revenue
Percentage
of Total
Revenue
Amount
2016
Percentage
of Related
Revenue
Percentage
of Total
Revenue
Amount
($ in thousands)
Amount
Percentage
$ 92,052
908
$ 92,960
84%
44%
83%
82% $ 93,123
1%
1,304
83% $ 94,427
81%
58%
80%
79% $ (1,071)
1%
(396)
80% $ (1,467)
(1)%
(30)%
(2)%
Total cost of revenue decreased by $1.5 million, or 2%, to $93.0 million in 2017 from $94.4 million in 2016. The decrease in total cost of revenue was the
result of a decrease of $2.2 million in manufacturing expense and a decrease of $0.4 million in cost of research services, offset, in part, by an increase of $0.7
million in material costs and $0.4 million in warranty expense.
Product cost of revenue decreased $1.1 million, or 1%, to $92.1 million in 2017 from $93.1 million in 2016. The $1.1 million decrease was the result of a
decrease in in manufacturing expense of $2.2 million, offset, in part by an increase in material costs of $0.7 million and an increase in warranty expense of $0.4
million. The decrease in manufacturing expense included decreases in utilities expense of $1.6 million and labor costs of $0.7 million, offset, in part, by an increase
in all other manufacturing expense of $0.2 million. The decrease in manufacturing expense also reflected a reduction in manufacturing personnel and expense
associated with our plan to decrease output during the year to reduce inventory balances.
Product cost of revenue as a percentage of product revenue increased to 84% during 2017 from 81% in 2016. This increase was principally the result of a
shift in mix to higher cost products for the subsea market and the 25% decrease in manufacturing output during 2017 versus 2016.
We expect that cost of product revenue and cost of product revenue as a percentage of product revenue will decrease slightly during 2018 versus 2017. The
projected decrease in cost of product revenue in absolute dollars and as a percentage of product revenue reflects the impact of a planned increase in manufacturing
output and an expected favorable mix of products sold, offset, in part, by a planned increase in personnel and expense in support of our capacity expansion and
growth initiatives.
Research services cost of revenue decreased by $0.4 million, or 30%, to $0.9 million in 2017 from $1.3 million in 2016. The decrease in research services
cost of revenue was due to the 9% decrease in research services revenue during 2017 and an increase in the mix of internal labor versus outside services required to
support the contracted research.
55
Gross Profit
Year Ended December 31,
Change
2017
Amount
Percentage
of Revenue
2016
Amount
Percentage
of Revenue
($ in thousands)
Amount
Percentage
Gross profit
$
18,671
17% $
23,311
20% $
(4,640)
(20)%
Gross profit decreased $4.6 million, or 20%, to $18.7 million in 2017 from $23.3 million in 2016. This $4.6 million decrease was the result of the $6.1
million decrease in total revenue offset, in part, by a $1.5 million decrease in total cost of revenue. The decrease in revenue was led by the conclusion of the
multiyear petrochemical project with Reliance Industries Limited, offset, in part, by increases in revenue in the U.S. energy infrastructure market and in the subsea
market. The $1.1 million decrease in product cost of revenue was the result of a decrease in in manufacturing expense of $2.2 million, offset, in part by an increase
in material costs of $0.7 million and an increase in warranty expense of $0.4 million . The decrease in manufacturing expense reflected a reduction in
manufacturing personnel and expense associated with a decrease in output by 25% during the year.
Total cost of revenue decreased by only 2% despite a 5% decline in total revenue during 2017 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 17% of total revenue in 2017 as compared to 20% in 2016.
In 2018, we expect gross profit as a percentage of total revenue will increase slightly from the comparable period in 2017. The projected increase in gross
profit during 2018 reflects the impact of a planned increase in manufacturing output and an expected favorable mix of products sold, offset, in part, by a planned
increase in personnel and expense in support of our capacity expansion and growth initiatives.
Research and Development Expenses
Year Ended December 31,
2017
2016
Change
Amount
Percentage
of Revenue
Amount
Percentage
of Revenue
Amount
Percentage
Research and development expenses
$
6,180
6% $
($ in thousands)
5,306
5% $
874
16%
Research and development expenses increased $0.9 million, or 16% to $6.2 million in 2017 from $5.3 million during 2016. The $0.9 million increase was
the result of increases in payroll related costs of $0.4 million, depreciation expense of $0.3 million and professional fees of $0.2 million.
We expect that our research, development and engineering personnel and expenses during 2018 will increase from 2017 levels in support of innovative
products, advanced process technologies, and new markets. Due to the expected growth in research and development expenses, we expect research and
development expenses as a percentage of total revenue to increase in 2018.
In the long-term, we expect to continue to increase investment in research, development and engineering personnel, projects and infrastructure in support of
efforts to develop new products, technologies and markets. However, we expect that research and development expenses will decline as a percentage of total
revenue in the long-term due to projected growth in product revenue.
Sales and Marketing Expenses
Year Ended December 31,
Change
2017
Amount
Percentage
of Revenue
2016
Amount
Percentage
of Revenue
($ in thousands)
Amount
Percentage
Sales and marketing expenses
$
12,604
11% $
11,810
10% $
794
7%
Sales and marketing expenses increased by $0.8 million, or 7%, to $12.6 million in 2017 from $11.8 million during 2016. The $0.8 million increase was the
result of a $1.4 million increase in payroll and related costs associated with an increase in sales personnel, offset, in part, by reduction of $0.4 million in
professional fees and $0.2 million in marketing expenses. We expect sales and marketing expenses to increase during 2018 in line with a planned increase in sales
personnel and marketing initiatives. Due to the
56
expected growth in sales and marketing expenses, we expect sales and marketing expenses as a percentag e of total revenue to increase in 2018 .
We expect that sales and marketing expenses will increase in absolute dollars in the long term as we continue to increase sales personnel and marketing
efforts in support of expected growth in demand for our products. However, we expect that sales and marketing expenses will decrease as a percentage of total
revenue in the long-term due to projected growth in product revenue.
General and Administrative Expenses
Year Ended December 31,
2017
2016
Change
Amount
Percentage
of Revenue
Amount
Percentage
of Revenue
Amount
Percentage
($ in thousands)
General and administrative expenses
$
19,023
17% $
17,415
15% $
1,608
9%
General and administrative expenses increased by $1.6 million, or 9%, to $19.0 million in 2017 from $17.4 million in 2016. The $1.6 million increase was
primarily the result of an increase in compensation costs of $1.1 million, $0.5 million in write-offs of customer receivables, and $0.2 million in professional fees,
offset, in part, by a decrease in patent enforcement expense of $0.1 million and facility expenses of $0.1 million. We expect general and administrative expenses to
decrease during 2018 due to expected decreases in patent enforcement costs and stock-based compensation. Due to the projected decrease in general and
administrative expenses, we expect general and administrative expenses as a percentage of total revenue to decrease in 2018.
We expect to increase general and administrative personnel and expense levels in the long term to support the anticipated growth of our business and
continued expansion of our manufacturing operations. We also expect that the patent enforcement actions, described in more detail under “Legal Proceedings” in
part I, Item 3, of this Annual Report on Form 10-K, will continue to result in high levels of legal expense in the near term and, if such actions are protracted, could
result in significant additional legal expense over the medium to long term. In the longer term, we expect that general and administrative expenses will increase in
absolute dollars but decrease as a percentage of revenue due to projected growth in product revenue.
Other Expense, Net
Other expense, net
Interest expense, net
Postponed financing costs
Total other expense, net
Year Ended December 31,
Change
2017
Amount
Percentage
of Revenue
2016
Amount
Percentage
of Revenue
($ in thousands)
Amount
Percentage
$
$
(185)
—
(185)
(0)% $
—%
(0)% $
(147)
(656)
(803)
(0)% $
(1)%
(1)% $
(38)
656
618
26%
(100)%
(77)%
Total other expense, net, decreased by $0.6 million to $0.2 million in 2017 from $0.8 million in 2016. The $0.6 million decrease was primarily the result of
a decrease of $0.7 million in postponed financing costs, offset, in part, by a small increase in interest expense. Interest expense in 2017 and 2016 was comprised
primarily of fees and interest expense related to our revolving credit facility.
57
Year ended December 31, 2016 compared to year ended December 31, 2015
The following tables set forth our results of operations for the periods presented:
Revenue:
Product
Research services
Total revenue
Cost of revenue:
Product
Research services
Gross profit
Operating expenses:
Research and development
Sales and marketing
General and administrative
Total operating expenses
Loss from operations
Other expense, net:
Interest expense, net
Postponed financing costs
Total other expense, net
Net loss
Revenue
Revenue:
Product
Research services
Total Revenue
2016
Year Ended December 31,
$ Change
2015
% Change
Year Ended December 31,
2015
2016
($ in thousands)
$
115,490 $
2,248
117,738
120,532 $
1,986
122,518
93,123
1,304
23,311
5,306
11,810
17,415
34,531
(11,220)
96,865
1,005
24,648
5,253
10,562
15,068
30,883
(6,235)
(147)
(656)
(803)
(12,023) $
(182)
—
(182)
(6,417) $
$
(5,042)
262
(4,780)
(3,742)
299
(1,337)
53
1,248
2,347
3,648
(4,985)
35
(656)
(621)
(5,606)
(4)%
13%
(4)%
(4)%
30%
(5)%
1%
12%
16%
12%
80%
(19)%
N/A
341%
87%
(Percentage of
total revenue)
98%
2%
100%
79%
1%
20%
5%
10%
15%
29%
(10)%
(0)%
(1)%
(1)%
(10)%
98%
2%
100%
79%
1%
20%
4%
9%
12%
25%
(5)%
(0)%
0%
(0)%
(5)%
Year Ended December 31,
2016
2015
Change
Amount
Percentage
of Revenue
Amount
Percentage
of Revenue
Amount
Percentage
($ in thousands)
$
$
115,490
2,248
117,738
98% $
2%
100% $
120,532
1,986
122,518
98% $
2%
100% $
(5,042)
262
(4,780)
(4)%
13%
(4)%
The following chart sets forth product shipments in square feet for the periods presented:
Product shipments in square feet (in thousands)
Year Ended
December 31,
Change
2016
2015
Amount
Percentage
44,286
42,246
2,040
5%
Total revenue decreased by $4.8 million, or 4%, in 2016 to $117.7 million from $122.5 million in 2015 due principally to a decrease in product revenue
associated with the impact of constrained capital investment and low activity levels in the global energy infrastructure market.
Product revenue decreased by $5.0 million, or 4%, to $115.5 million in 2016 from $120.5 million in 2015. This decrease was principally the result of a
decrease in the sales of our aerogel products in the subsea market and the European energy market offset, in part, by an increase in sales in the Asian energy market
and the building materials market.
The average selling price per square foot of our products decreased by an effective $0.24, or 8%, to $2.61 per square foot for the year ended December 31,
2016 from $2.85 per square foot for the year ended December 31, 2015. The decrease in average selling price reflects a year-over-year decline in the mix of high-
priced subsea products, combined with an increase in the mix of products
58
sold to Reliance Industries Limited with project-based pricing. This de crease in average selling price had the effect of decreasing product revenue by $10.7 million
for the year ended December 31, 2016.
In volume terms, product shipments increased 2.0 million square feet, or 5%, to 44.3 million square feet of aerogel products for the year ended December
31, 2016, as compared to 42.2 million square feet in the year ended December 31, 2015. The increase in volume was supported by the increase in manufacturing
capacity associated with the operation of the third production line in the East Providence facility for a full year. The increase in product volume had the effect of
increasing product revenue by approximately $5.7 million for the year ended December 31, 2016.
Research services revenue increased by $0.3 million, or 13%, to $2.2 million in 2016 from $2.0 million in 2015. The increase was primarily due to the
timing and amount of funding available under research contracts during the year ended December 31, 2016 from the comparable period in 2015.
Product revenue as a percentage of total revenue was 98% of total revenue in 2016 and 2015, respectively. Research services revenue was 2% of total
revenue in 2016 and 2015, respectively.
Cost of Revenue
Cost of revenue:
Product
Research services
Total cost of revenue
2016
Percentage
of Related
Revenue
Year Ended December 31,
Percentage
of Total
Revenue
Amount
2015
Percentage
of Related
Revenue
Percentage
of Total
Revenue
($ in thousands)
Amount
Change
Amount
Percentage
$ 93,123
1,304
$ 94,427
81%
58%
80%
79% $ 96,865
1%
1,005
80% $ 97,870
80%
51%
80%
79% $
1%
80% $
(3,742)
299
(3,443)
(4)%
30%
(4)%
Total cost of revenue decreased by $3.4 million, or 4%, to $94.4 million in 2016 from $97.9 million in 2015. The decrease in total cost of revenue was the
result of a decrease of $6.0 million in material costs, offset, in part, by an increase of $2.3 million in manufacturing expense and an increase of $0.3 million in cost
of research services.
Product cost of revenue decreased $3.7 million, or 4%, to $93.1 million in 2016 from $96.9 million in 2015. The $3.7 million decrease was the result of a
$6.0 million decrease in material costs, offset, in part, by a $2.3 million increase in manufacturing expense year over year. The increase in manufacturing expense
included increases in compensation expense of $0.9 million, utility expenses of $0.3 million and maintenance and facility expense of $1.1 million. The increased
level of manufacturing expense was driven by operation of the third production line in the East Providence facility for a full year in 2016 versus three quarters in
2015. Despite growth in product volume of 5% during the year ended December 31, 2016, material costs declined due to strong improvement in manufacturing
yields and a shift in mix to lower cost products versus the comparable period in 2015.
Product cost of revenue as a percentage of product revenue increased to 81% during 2016 from 80% in 2015. This increase was the result of the
combination of the increase in manufacturing expense associated with operation of the third production line in the East Providence facility for a full year in 2016
and the decline in product revenue associated with the impact of constrained capital investment and low activity levels in the global energy infrastructure market.
The impact of the increase in manufacturing expense and decline in product revenue was offset, in part, by the improvement in manufacturing yields and the shift
in mix to lower cost products during the year ended December 31, 2016 versus the comparable period in 2015.
Research services cost of revenue increased by $0.3 million, or 30%, to $1.3 million in 2016 from $1.0 million in 2015. The increase in research services
cost of revenue was due to the 13% increase in research services revenue during 2016 and an unfavorable mix of labor and expense required to perform the
contracted research.
59
Gross Profit
Year Ended December 31,
Change
2016
Amount
Percentage
of Revenue
2015
Amount
Percentage
of Revenue
($ in thousands)
Amount
Percentage
Gross profit
$
23,311
20% $
24,648
20% $
(1,337)
(5)%
Gross profit decreased $1.3 million, or 5%, to $23.3 million in 2016 from $24.6 million in 2015. This $1.3 million decrease was the result of the $4.8
million decrease in total revenue and a related $3.4 million decrease in total costs of sales. The decrease in revenue was principally associated with the impact of
constrained capital investment and low activity levels in the global energy infrastructure market. The decrease in total cost of sales was driven by the reduction in
material costs offset, in part, by the increase in manufacturing expense and the increase in contract research expense.
Gross profit as a percentage of total revenue remained unchanged at approximately 20% of total revenue for both 2016 and 2015. The percentage decline in
total revenue and total cost of revenue during 2016 each approximated 4% during 2016. As a result, gross profit as a percentage of total revenue remained constant
for the years ended December 31, 2016 and 2015.
Research and Development Expenses
Year Ended December 31,
2016
2015
Change
Amount
Percentage
of Revenue
Amount
Percentage
of Revenue
Amount
Percentage
($ in thousands)
Research and development expenses
$
5,306
5% $
5,253
4% $
53
1%
Research and development expenses remained flat at $5.3 million for the years ended December 31, 2016 and 2015. An increase in depreciation expense of
$0.1 million was offset by a decrease in employee compensation of $0.1 million.
Sales and Marketing Expenses
Year Ended December 31,
2016
2015
Change
Amount
Percentage
of Revenue
Amount
Percentage
of Revenue
Amount
Percentage
($ in thousands)
Sales and marketing expenses
$
11,810
10% $
10,562
9% $
1,248
12%
Sales and marketing expenses increased by $1.2 million, or 12%, to $11.8 million in 2016 from $10.6 million during 2015. The $1.2 million increase was
the result of a $0.3 million increase in payroll and related costs associated with an increase in sales personnel, $0.6 million in professional and commission fees and
$0.4 million in travel expenses of our sales force, offset, in part, by a reduction in marketing expense of $0.1 million.
General and Administrative Expenses
Year Ended December 31,
Change
2016
Amount
Percentage
of Revenue
2015
Amount
Percentage
of Revenue
($ in thousands)
Amount
Percentage
General and administrative expenses
$
17,415
15% $
15,068
12% $
2,347
16%
General and administrative expenses increased by $2.3 million, or 16%, to $17.4 million in 2016 from $15.1 million in 2015. The $2.3 million increase was
primarily the result of increases in the patent enforcement expense of $3.3 million offset, in part, by decreases in payroll and related costs of $0.6 million and
facility expenses of $0.4 million.
60
Other Exp ense , net
Other expense, net
Interest expense, net
Postponed financing costs
Total other expense, net
Year Ended December 31,
Change
2016
Amount
Percentage
of Revenue
2015
Amount
Percentage
of Revenue
($ in thousands)
Amount
Percentage
$
$
(147)
(656)
(803)
(0)% $
(1)%
(1)% $
(182)
—
(182)
(0)% $
—%
(0)% $
35
(656)
(621)
(19)%
N/A
341%
Total other expense, net, increased by $0.6 million to $0.8 million in 2016 from $0.2 million in 2015. The $0.6 million increase was primarily the result of a
$0.7 million charge relating to financing costs, offset, in part, by a small decrease in interest expense. Interest expense in 2016 and 2015 was comprised primarily
of costs related to our revolving credit facility.
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 and 2017 and a potential decline
in revenue in 2018, our financial projections anticipate long-term revenue growth, with increasing levels of gross profit and improved cash flows from operations.
To support this growth, we expect to incur up to $20 million of capital expenditures related to our plan to increase the capacity of our East Providence, Rhode
Island manufacturing facility by 20% by the end of 2020. In addition, we expect to incur up to $130 million of capital expenditures to construct a first
manufacturing line in a planned second manufacturing facility to be located in Statesboro, Georgia which, while currently delayed, we believe will ultimately be
needed to support this expected long term growth in demand.
We believe that our existing cash balance and anticipated credit will be sufficient to fund a portion of the planned expansion of our East Providence
manufacturing facility. We also expect to receive a $5 million prepayment in two installments from BASF during 2018 in support of our capacity expansion plans,
our process improvement initiatives and our new business development efforts. In addition, w e plan to manage other capital expenditures and working capital
balances to maintain the cash resources required to support current operating requirements and the initial phases of our capacity expansion plan.
Beyond 2018, we will need to supplement our cash balance with anticipated cash flows from operations, local government grants, debt financings, customer
prepayments and equity financings, if necessary, to provide the capital required to complete the expansion of our existing manufacturing facility and the first
production line in our second manufacturing facility .
Primary Sources of Liquidity
Our principal sources of liquidity are currently our cash and cash equivalents and our revolving credit facility with Silicon Valley Bank. Cash and cash
equivalents consist primarily of cash and money market accounts on deposit with banks. As of December 31, 2017, we had $10.7 million of cash and cash
equivalents.
At December 31, 2017, we had debt obligations of $3.8 million related to borrowings under our revolving credit facility with Silicon Valley Bank. At
December 31, 2017, we also had $2.3 million of outstanding letters of credit secured by our revolving credit facility.
We have maintained the revolving credit facility, as amended from time to time, with Silicon Valley Bank since March 2011. On January 25, 2018, our
revolving credit facility was amended to extend the maturity date of the facility to April 28, 2018. 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
61
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.
The effective amount available to us under the facility at December 31, 2017 was $13.9 million after giving effect to the $3.8 million outstanding
borrowings and the $2.3 million of outstanding letters of credit.
Analysis of Cash Flow
The following table summarizes our cash flows for the periods indicated:
Net cash (used in) provided by:
Operating activities
Investing activities
Financing activities
Net (decrease) in cash
Cash, beginning of period
Cash and cash equivalents, end of period
Operating
Activities
2017
Year Ended December 31,
2016
($ in thousands)
2015
$
$
(4,606) $
(6,118)
3,332
(7,392)
18,086
10,694 $
(578) $
(13,216)
(924)
(14,718)
32,804
18,086 $
5,359
(21,956)
(318)
(16,915)
49,719
32,804
During 2017, we used $4.6 million net cash in operating activities, as compared to the use of $0.6 million in net cash during 2016, an increase in the use of
cash of $4.0 million. This increase in use of cash was the result of the increase in net loss adjusted for non-cash items of $7.4 million, offset, in part, by an increase
in cash provided by changes in working capital of $3.4 million.
During 2016, we used $0.6 million in net cash in operating activities, as compared to generating $5.4 million in net cash during the comparable period in
2015, a decrease in net cash provided of $6.0 million. This decrease was the result of an increase in net cash used for changes in operating assets and liabilities of
$1.0 million and an unfavorable year-to-year change in net loss adjusted for non-cash items of $5.0 million.
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 2017 and
2016 totaled $6.1 million and $13.2 million, respectively.
Net cash used in investing activities in 2017 included $6.1 million in capital expenditures for machinery to improve the throughput and efficiency of our
East Providence facility.
Net cash used in investing activities in 2016 included $7.2 million in capital expenditures for engineering design and other pre-construction costs related to
our planned second manufacturing facility in Statesboro, Georgia. In addition, net cash used in investing activities in 2016 included capital expenditures for
machinery and equipment for our full scale pilot line, to support our new product line for the power market and to improve the throughput and efficiency of our
East Providence facility.
Financing
Activities
Net cash provided by financing activities in 2017 totaled $3.3 million principally due to $27.3 million in borrowing on our revolving credit facility offset by
$23.5 million in associated repayments. In addition the Company made $0.4 million for payments for employee tax withholdings associated with the vesting of
restricted stock units and less than $0.1 million for repayments of obligations under capital leases.
Net cash used in financing activities in 2016 totaled $0.9 million and consisted of approximately $0.7 million related to postponed financing costs, $0.2 for
payments made for employee tax withholdings associated with the vesting of restricted stock, and less than $0.1 million for repayments of obligations under capital
leases.
62
Capital Spending and Future Capital Requirements
We have made capital expenditures primarily to develop and expand our manufacturing capacity. Our capital expenditures totaled $6.1 million in 2017,
$13.2 million in 2016 and $22.0 million in 2015. As of December 31, 2017, we had capital commitments of approximately $0.1 million, which included
commitments for which we have entered into contracts as well as commitments authorized by our Board of Directors. These commitments relate to the
improvement of our existing production lines in our East Providence facility. These commitments consist primarily of equipment cost and construction costs. We
plan to fund these capital commitments from available cash proceeds from our IPO and anticipated available credit.
We intend to fund capital expenditures related to both the expansion of capacity of our existing manufacturing facility and to the development and
construction of our planned second manufacturing facility with the remaining proceeds from our IPO, anticipated available credit, cash flow from operations, local
government grants, debt financings, customer prepayments and equity financings, if necessary. We estimate that the total expenditures for capacity expansion of
our existing facility will be approximately $15 million to $20 million. We estimate the total expenditures for plant infrastructure and the first production line in our
second manufacturing facility will be approximately $120 million to $130 million.
Off-Balance Sheet Arrangements
Since inception, we have not engaged in any off balance sheet activities as defined in Item 303(a)(4) of Regulation S-K.
Contractual Obligations and Commitments
The following table summarizes our contractual obligations as of December 31, 2017, under contracts that provide for fixed and determinable payments
over the periods indicated:
Contractual Obligations
Purchase order commitments
Supplier purchase commitments
Operating leases
Total
Operating and Capital Leases
Total
Less than
1 Year
1-3 Years
($ in thousands)
4-5 Years
More than
5 Years
$
$
4,707 $
13,411
5,978
24,096 $
4,707 $
5,004
1,335
11,046 $
— $
8,407
2,131
10,538 $
— $
—
960
960 $
—
—
1,552
1,552
We lease our office space for our corporate offices in Northborough, Massachusetts, which expires in 2026, and warehouse space and land near our East
Providence facility, which expire at various dates from 2018 through 2021, 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.
Operating
Leases
On June 29, 2016, we entered into an Industrial Real Estate Lease, or the Lease, with Cabot II- MA1M03, LLC, or Cabot Properties, to lease approximately
51,650 square feet of space located at 30 Forbes Road, Northborough, MA 01532, the location of our current headquarters. The Lease supersedes the Multi-Tenant
Industrial Net Lease dated as of August 20, 2001, as amended, by and between us and TMT 290 Industrial Park, Inc., Cabot Properties’ predecessor-in-interest. The
term of the Lease began on January 1, 2017 and ends on December 31, 2026. The annual base rent associated with the Lease was approximately $408,000 during
the first year, increasing by approximately 3% annually for the term of the Lease. The Lease also provides for our payment of our pro rata share of real estate taxes
and certain other expenses. Upon expiration of the Lease term, we will have the right to extend the Lease for an additional term of three years.
Supply Agreement
In June 2016, we entered into a supply agreement and a side agreement with BASF SE. In February 2018, we entered into an amended and restated supply
agreement and side agreement with BASF Polyurethanes GmbH (BASF) (as amended and restated, the supply agreement). Pursuant to the supply agreement, we
will sell exclusively to BASF our Spaceloft A2 product, or the Product, at annual volumes to be specified by BASF, subject to certain volume limits. Pricing shall
be based on a cost-plus formula. The supply agreement also specifies the markets in which BASF will be permitted to sell Product. The supply agreement will
terminate on December 31, 2027, if not renewed prior to such date. Upon expiration of the supply agreement, we will be subject to a post-termination supply
commitment for an additional two years. In addition to the customary terms associated with supply agreements, in
63
support of our capacity expansion plan, process optimization p rojects , and research and development activities, BASF , in its sole discretion, may make advance s,
or prepayments, to us in the aggregate amount of up to $22 million during the term of the s upply a greement. BASF has agreed to make a prepayment in the amoun
t of $5 million to us in two installments in 2018. We have secure d our obligation to repay the prepay ment with a first priority security interest in real estate,
machinery and equipment located at our existing manufacturing facility in East Providence, Rho de Island . Additionally, we grant ed non-exclusive licenses to our
Rhode Island subsidiary under our intellectual property as necessary to operate such machinery and equipment.
After January 1, 2019, we will credit 25.3% of any amounts that we invoice for Product sold to BASF against the outstanding balance of the 2018
prepayment, if any, with such credits limited to a specified annual amount. If any of the 2018 prepayment remains uncredited as of December 31, 2021, BASF may
request that we repay the uncredited amount to BASF on or after December 31, 2021. The specific terms of additional tranches of prepayments, if any, are to be
agreed by us and BASF at a future date. BASF has no obligation to purchase Product under the supply agreement. 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 of Aspen, 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
In June 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 between the parties 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 establishes 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 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
In March 2011, we entered into a revolving credit facility with Silicon Valley Bank. This facility has been amended at various dates through December
2017. We further amended the agreement in January 2018 to extend the maturity date of the facility to April 28, 2018. 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.
At December 31, 2017, the amount available to us under the revolving credit facility was $13.9 million after giving effect to $3.8 million in borrowings and
$2.3 million of letters of credit outstanding under the facility.
Accrued Asset Retirement Obligations
As of December 31, 2015, the Company had asset retirement obligations arising from requirements to perform certain asset retirement activities upon the
termination of its Northborough, Massachusetts facility lease and upon disposal of certain machinery and equipment. The liability was initially measured at fair
value and subsequently adjusted for accretion expense and changes in the amount or timing of the estimated cash flows. The corresponding asset retirement costs
are capitalized as part of the carrying amount of the related long-lived asset and depreciated over the asset’s remaining useful life.
During the year ended December 31, 2016, the Company incurred approximately $0.2 million in expenditures in support of completing the restoration
of 31,577 square feet of space formerly utilized for manufacturing operations in the Northborough, Massachusetts facility. This manufacturing space was vacated
and returned to the landlord on July 1, 2016.
In June 2016, the Company executed an agreement to remain at the Northborough, Massachusetts facility through December 31, 2026. As part of the new
agreement, the Company’s obligation to restore the remaining space in the Northborough facility was eliminated. The settlement of the remaining reserve balance
of approximately $0.2 million was reclassified to accrued expenses and will be amortized as a reduction to rent expense over the term of the new lease agreement.
64
Recent Account ing Pronouncements
Standards Implemented Since December 31, 2016
In July 2015, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (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 standard for fiscal years beginning after
December 15, 2016, including interim periods within those fiscal periods. We adopted this standard effective January 1, 2017. Application of the standard has not
resulted in any material impact on our consolidated financial statements or other disclosures.
In March 2016, the FASB issued ASU 2016-09. The amendment simplifies 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. We adopted this standard effective January
1, 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 by means of a cumulative-effect adjustment to equity as of January 1, 2017 of $0.3 million. We adopted the other provisions of ASU 2016-09
prospectively.
Standards to be Implemented
In August 2015, the FASB issued a deferral of ASU 2014-09, Revenue from Contracts with Customers. The standard replaces the transaction- and industry-
specific revenue recognition guidance under current U.S. GAAP with a principle based approach for determining revenue recognition. As a result of the deferral,
public entities are required to apply the revised revenue recognition standard for the annual reporting period beginning on or after December 15, 2017, including
interim periods within that annual reporting period. We will adopt this standard using the modified retrospective method on January 1, 2018. We completed our
analysis of the new revenue standard and determined that it will not materially impact the allocation and timing of recognition of previously reported revenues from
the sale of products or performance of research and development services. In addition, we have determined that there are no incremental contracts costs or contract
fulfillment costs to be recognized in connection with the adoption. Based on our analysis, no adjustment to retained earnings will be required as of the January 1,
2018 adoption date. Accordingly, our application of the standard is not expected to have a material impact on our consolidated balance sheet at January 1, 2018 and
will not have a material impact to our statement of operations. Additional disclosures will be required in future filings.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). FASB ASU 2016-02 modifies the accounting for leases and requires that all leases
be recorded on the consolidated balance sheets as assets and liabilities. This update is effective for fiscal years beginning after December 15, 2018. Early
application is permitted. We have not yet selected a transition method and are evaluating the effect the updated standard will have on our consolidated financial
statements and related disclosures. We currently expect that most of our operating lease commitments will be subject to the new standard and recognized as right-
of-use assets and operating lease liabilities. We expect application of the standard will increase reported value of both total assets and total liabilities upon adoption
and will have a material impact on our consolidated financial statements and other 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. 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. We completed our assessment of the amendment and determined that adoption will not have a significant impact on our consolidated financial statements or
other disclosures. We will adopt the provisions of the amendment effective January 1, 2018.
From time to time, new accounting pronouncements are issued by the FASB or other standard setting bodies and adopted by the Company as of the
specified effective date. Unless otherwise discussed, we believe that the impact of recently issued standards that are not yet effective will not have a material impact
on our financial position or results of operations upon adoption.
Critical Accounting Policies and Estimates
Our financial statements are prepared in accordance with accounting principles generally accepted in the 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
65
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 upon shipment or delivery, and research services revenue upon delivery of
research and development services, including under contracts with various agencies of the U.S. government. 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 is recognized upon transfer of title and risk of loss, which is upon shipment or delivery. 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. In 2017, we
recorded warranty expense of $0.9 million. This specific warranty charge was related to a product claim for a specific application issue. In 2016, we recorded
warranty expense of $0.5 million. This specific warranty charge was related to product warranty claims for a specific project. These claims were outside of the
Company’s typical experience. For the year ended December 31, 2015, warranty charges were immaterial to our consolidated financial statements. As of
December 31, 2017, we had satisfied all outstanding warranty claims.
Research services revenue is derived from the execution of contracts awarded by the U.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 and the only deliverable other than labor hours expended is the reporting of the 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. 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.
66
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:
Weighted-average assumptions:
Expected term (in years)
Expected volatility
Risk free rate
Expected dividend yield
2017
Year Ended
December 31,
2016
2015
5.86
51.95%
1.99%
—%
5.86
53.56%
1.36%
—%
6.02
57.95%
1.79%
—%
•
•
•
•
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 December 31, 2017, 2016 and 2015, the expected 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 U.S. Treasury zero-coupon issues 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 ended December 31, 2017, we adopted ASU 2016-09. The provisions of ASU 2016-09 related to the timing of accou nting for the
forfeitures of share based awards was adopted using a modified retrospective method by means of a cumulative-effect adjustment to equity as of January 1, 2017 of
$0.3 million. During each of the years ended December 31, 2016 and 2015, compensation expense has been reduced for an estimated forfeiture rate of 7.0%.
Forfeitures were required to be estimated at the time of grant and revised, if necessary, in subsequent periods, if actual forfeitures differ from those estimates.
Forfeitures were estimated based on voluntary termination behavior as well as analysis of actual option forfeitures.
For stock options that contained a market condition issued to the Company’s chief executive officer during the year ended December 31, 2015, the
Company 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. For restricted stock awards issued to the Company’s Chief Executive Officer that contain
a performance condition, the Company assesses the probability that the performance condition will be satisfied. On August 2, 2017, the Company modified the
performance target with respect to 78,125 shares of these awards. Upon modification, the Company determined that the performance-based condition of this
restricted stock awards was probable and $0.2 million in compensation has been recorded to date in conjunction with the award.
Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and
tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
We recognize the effect of income tax positions only if those positions are more likely than not of being sustained. We account for uncertain tax positions
using a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a
tax return. Differences between tax positions taken in a tax return and amounts recognized in the financial statements are recorded as adjustments to income taxes
payable or receivable, or adjustments to
67
defer red taxes, or both. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. We recognize penalties and
interest related to recognized tax positions, if any, as a component of income tax expense.
Management’s judgment and estimates are required in determining our tax provision, deferred tax assets and liabilities and any valuation allowance
recorded against deferred tax assets. We review the recoverability of deferred tax assets during each reporting period by reviewing estimates of future taxable
income, future reversals of existing taxable temporary differences and tax planning strategies that would, if necessary, be implemented to realize the benefit of a
deferred tax asset before expiration. We have recorded a full valuation allowance against our deferred tax assets due to the uncertainty associated with the
utilization of the net operating loss carryforwards. In assessing the realizability of deferred tax assets, we consider all available evidence, historical and prospective,
with greater weight given to historical evidence, in determining whether it is more likely than not that some portion or all of the deferred tax assets will not be
realized. The ultimate realization of our deferred tax assets generally is dependent upon generation of future taxable income.
Impairment of Long-Lived Assets
Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future undiscounted net cash flows
expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated undiscounted future cash flows, an impairment charge is recognized
for the amount by which the carrying amount of the asset exceeds the fair value of the asset. Fair value is determined through various valuation techniques
including discounted cash flows models, quoted market values and third-party independent appraisals, as considered necessary.
Item 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk represents the risk of loss that may impact our financial position due to adverse changes in financial market prices and rates. Our market risk
exposure results primarily from fluctuations in interest rates as well as from inflation. In the normal course of business, we are exposed to market risks, including
changes in interest rates which affect our line of credit under our revolving credit facility as well as cash flows. We may also face additional exchange rate risk in
the future as we expand our business internationally.
Interest Rate Risk
We are exposed to changes in interest rates in the normal course of our business. At December 31, 2017, we had unrestricted cash and cash equivalents of
$10.7 million. These amounts were held for working capital and capital expansion purposes and were invested primarily in deposit and money market accounts at a
major financial institution in North America. Due to the short-term nature of these investments, we believe that our exposure to changes in the fair value of our cash
as a result of changes in interest rates is not material.
As of December 31, 2017, we had $3.8 million drawn and outstanding on our revolving credit facility. At December 31, 2017, we also had $2.3 million of
outstanding letters of credit supported by the revolving credit facility.
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 maturity date of our revolving credit facility is April 28, 2018.
At December 31, 2017, the amount available to us under the revolving credit facility was $13.9 million after giving effect to the $3.8 million in borrowings
and $2.3 million of letters of credit outstanding under the facility.
Inflation Risk
Although we expect that our operating results will be influenced by general economic conditions, we do not believe that inflation has had a material effect
on our results of operations during the periods presented in this report. However, our business may be affected by inflation in the future.
68
Foreign Currency Exchange Risk
We are subject to inherent risks attributed to operating in a global economy. Principally all of our revenue, receivables, purchases and debts are denominated
in U.S. dollars.
69
Item 8.
FINANCIAL STATEMEN TS AND SUPPLEMENTARY DATA
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders
Aspen Aerogels, Inc.:
Opinion
on
the
Consolidated
Financial
Statements
We have audited the accompanying consolidated balance sheets of Aspen Aerogels, Inc. and subsidiaries (the “Company”) as of December 31, 2017 and 2016, the
related consolidated statements of operations, stockholders’ equity, and cash flows for each of the years in the three‑year period ended December 31, 2017, and the
related notes and financial statement schedule (collectively, the “consolidated financial statements”). In our opinion, the consolidated financial statements present
fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of its operations and its cash flows for each
of the years in the three‑year period ended December 31, 2017, in conformity with U.S. generally accepted accounting principles.
Basis
for
Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States)
(“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and
regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of
internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and
performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the
consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as
evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
We have served as the Company’s auditor since 2002.
Boston, Massachusetts
March 1, 2018
/s/ KPMG LLP
70
ASPEN AEROGELS, INC.
Consolidated Balance Sheets
$
$
$
Assets
Current assets:
Cash and cash equivalents
Accounts receivable, net of allowances of $93 and $93
Inventories
Prepaid expenses and other current assets
Total current assets
Property, plant and equipment, net
Other long-term assets
Total assets
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable
Accrued expenses
Revolving line of credit
Deferred revenue
Capital leases, current portion
Total current liabilities
Capital leases, excluding current portion
Deferred rent
Total liabilities
Commitments and contingencies (Note 9)
Stockholders’ equity:
Preferred stock, $0.00001 par value; 5,000,000 shares authorized, no shares issued or
outstanding at December 31, 2017 and 2016
Common stock, $0.00001 par value; 125,000,000 shares authorized, 23,643,189
shares issued and outstanding at December 31, 2017; 23,369,838 shares issued and
outstanding at December 31, 2016
Additional paid-in capital
Accumulated deficit
Total stockholders’ equity
Total liabilities and stockholders’ equity
$
See accompanying notes to consolidated financial statements.
71
December 31,
2017
2016
(In thousands, except
share and per share data)
10,694 $
26,764
8,915
1,289
47,662
76,067
86
123,815 $
10,653 $
5,862
3,750
1,304
—
21,569
—
1,303
22,872
18,086
17,535
12,868
1,697
50,186
84,394
89
134,669
13,065
3,987
—
1,043
35
18,130
4
971
19,105
—
—
—
538,088
(437,145)
100,943
123,815 $
—
533,088
(417,524)
115,564
134,669
Revenue:
Product
Research services
Total revenue
Cost of revenue:
Product
Research services
Gross profit
Operating expenses:
Research and development
Sales and marketing
General and administrative
Total operating expenses
Loss from operations
Other expense, net:
Interest expense, net
Postponed financing costs
Total other expense, net
Net loss
Net loss per share:
Basic and diluted
Weighted-average common shares outstanding:
Basic and diluted
ASPEN AEROGELS, INC.
Consolidated Statements of Operations
2017
Year Ended December 31,
2016
(In thousands, except
share and per share data)
2015
$
109,590 $
2,041
111,631
115,490 $
2,248
117,738
120,532
1,986
122,518
92,052
908
18,671
6,180
12,604
19,023
37,807
(19,136)
93,123
1,304
23,311
5,306
11,810
17,415
34,531
(11,220)
(185)
—
(185)
(19,321) $
(147)
(656)
(803)
(12,023) $
96,865
1,005
24,648
5,253
10,562
15,068
30,883
(6,235)
(182)
—
(182)
(6,417)
(0.83) $
(0.52) $
(0.28)
23,390,235
23,139,807
22,986,931
$
$
See accompanying notes to consolidated financial statements.
72
Balance at December 31, 2014
Net loss
Stock compensation expense
Issuance of restricted stock
Vesting of restricted stock units
Balance at December 31, 2015
Net loss
Stock compensation expense
Issuance of restricted stock
Vesting of restricted stock units
Balance at December 31, 2016
Net loss
Adoption of new accounting standard
Stock compensation expense
Issuance of restricted stock
Retirement of restricted stock
Vesting of restricted stock units
Balance at December 31, 2017
ASPEN AEROGELS, INC.
Consolidated Statements of Stockholders’ Equity
(In thousands, except share and per share data)
Preferred Stock
$0.00001 Par
Value
Shares
Value
—
—
—
—
—
— $
—
—
—
—
— $
—
—
—
—
—
—
— $
Common Stock
$0.00001 Par
Value
Additional
Paid-in
Capital
Accumulated
Deficit
Total
Stockholders’
Equity
Value
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
Shares
22,992,273
—
—
132,130
60,449
23,184,852 $
—
—
75,152
109,834
23,369,838 $
—
—
—
86,023
(12,289)
199,617
23,643,189 $
— $
—
—
—
—
— $
—
—
—
—
— $
—
—
—
—
—
—
— $
522,800 $
—
5,413
—
(238)
527,975 $
—
5,313
—
(200)
533,088 $
—
300
5,091
—
—
(391)
538,088 $
(399,084) $
(6,417)
—
—
—
(405,501) $
(12,023)
—
—
—
(417,524) $
(19,321)
(300)
—
—
—
—
(437,145) $
123,716
(6,417)
5,413
—
(238)
122,474
(12,023)
5,313
—
(200)
115,564
(19,321)
—
5,091
—
—
(391)
100,943
See accompanying notes to consolidated financial statements.
73
ASPEN AEROGELS, INC.
Consolidated Statements of Cash Flows
Cash flows from operating activities:
Net loss
Adjustments to reconcile net loss to net cash (used in)
provided by operating activities:
Depreciation and amortization
Postponed financing costs
Stock compensation expense
Lease incentives
Other
Changes in operating assets and liabilities:
Accounts receivable
Inventories
Prepaid expenses and other assets
Accounts payable
Accrued expenses
Deferred revenue
Other liabilities
Net cash (used in) provided by operating activities
Cash flows from investing activities:
Capital expenditures
Purchase of marketable securities
Maturity and sale of marketable securities
Net cash used in investing activities
Cash flows from financing activities:
Proceeds from borrowings under line of credit
Repayment of borrowings under line of credit
Postponed financing costs
Repayment of obligations under capital lease
Payments made for employee restricted stock minimum tax withholdings
Net cash (used in) provided by financing activities
Net (decrease) increase in cash
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
Supplemental disclosures of cash flow information:
Interest paid
Income taxes paid
Supplemental disclosures of non-cash activities:
Changes in accrued capital expenditures
Capital lease
2017
Year Ended December 31,
2016
(In thousands)
2015
$
(19,321) $
(12,023) $
(6,417)
10,753
—
5,091
(111)
(1)
(8,704)
3,953
411
1,269
1,821
261
(28)
(4,606)
(6,118)
—
—
(6,118)
27,250
(23,500)
—
(27)
(391)
3,332
(7,392)
18,086
10,694 $
220 $
— $
(3,681) $
— $
9,853
656
5,313
—
—
3,089
(6,336)
(19)
105
(2,178)
362
600
(578)
(13,216)
—
—
(13,216)
—
—
(656)
(68)
(200)
(924)
(14,718)
32,804
18,086 $
196 $
— $
2,116 $
— $
9,887
—
5,413
—
(139)
(2,644)
(1,635)
(881)
1,517
(227)
333
152
5,359
(21,956)
(2,500)
2,500
(21,956)
—
—
—
(80)
(238)
(318)
(16,915)
49,719
32,804
198
—
(5,332)
21
$
$
$
$
$
See accompanying notes to consolidated financial statements.
74
ASPEN AEROGELS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Description of Business
Nature of Business
Aspen Aerogels, Inc. (the Company) is an aerogel technology company that designs, develops and manufactures innovative, high-performance aerogel
insulation used primarily in the energy infrastructure and building materials markets. The Company also conducts research and development related to aerogel
technology supported by funding from several agencies of the U.S. government and other institutions in the form of research and development contracts.
The Company maintains its corporate offices in Northborough, Massachusetts. The Company has three wholly owned subsidiaries: Aspen Aerogels Rhode
Island, LLC, Aspen Aerogels Germany, GmbH and Aspen Aerogels Georgia, LLC.
On June 18, 2014, the Company completed the initial public offering (IPO) of its common stock.
Liquidity
In August 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014‑15, Presentation of Financial
Statements-Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. (ASU 2015-14). This ASU
requires management to assess and evaluate whether conditions or events exist, considered in the aggregate, that raise substantial doubt about the entity's ability to
continue as a going concern within one year after the financial statements issue date. This standard is effective for annual periods ending after December 15, 2016.
The Company adopted this standard effective January 1, 2017.
During the year ended 2017, the Company incurred a net loss of $19.3 million, used $4.6 million of cash in operations and had a net cash balance of $6.9
million, after giving effect to the $3.8 million in outstanding borrowings under its revolving line of credit (see note 6). The existing revolving line of credit matures
on April 28, 2018.
The Company is making investments to increase capacity at its existing manufacturing facility in East Providence, Rhode Island, for the planned
manufacturing facility in Statesboro, Georgia and to expand its sales and marketing efforts. The Company expects its existing cash balance, the $5.0 million
prepayment under its amended customer supply agreement (see note 9) and anticipated credit will be sufficient to fund these investments. The Company has no
mitigating plans in place to reduce its cash expenditures under its current operating plan.
(2) Summary of Basis of Presentation and Significant Accounting Policies
Principles of Consolidation
The accompanying consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles (U.S.
GAAP), include the accounts of the Company and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated in
consolidation.
Use of Estimates
The preparation of the consolidated financial statements requires the Company to make a number of estimates and assumptions that affect the reported
amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period.
Significant items subject to such estimates and assumptions include allowances for doubtful accounts, sales returns and allowances, product warranty costs,
inventory valuation, the carrying amount of property and equipment, stock-based compensation and deferred income taxes. The Company evaluates its estimates
and assumptions on an on-going basis using historical experience and other factors, including the current economic environment, which are believed to be
reasonable under the circumstances. Management adjusts such estimates and assumptions when facts and circumstances warrant. Illiquid credit markets, volatile
equity markets and declines in business investment can increase the uncertainty inherent in such estimates and assumptions. As future events and their effects
cannot be determined with precision, actual results could differ
75
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.
Marketable Securities
Marketable securities consisted primarily of marketable debt securities which are classified as available-for-sale and are carried at fair value. The Company
held no marketable securities as of December 31, 2017 or 2016. During the year ended December 31, 2015, the Company purchased $2.5 million of marketable
securities which matured during the same period. The unrealized gains and losses on available-for-sale securities are recorded in accumulated other comprehensive
income (loss). The Company considers all highly liquid investments with maturities of 90 days or less at the time of purchase to be cash equivalents, and
investments with maturities of greater than 90 days at the time of purchase to be marketable securities. When a marketable security incurs a significant unrealized
loss for a sustained period of time, the Company will review the instrument to determine if it is other-than-temporarily impaired. If it is determined that an
instrument is other-than-temporarily impaired, the Company will record the unrealized loss in the consolidated statement of operations.
Concentration of Credit Risk
Financial instruments, which potentially expose the Company to concentrations of credit risk, consist principally of accounts receivable. The Company’s
customers are primarily insulation distributors, insulation contractors, insulation fabricators and select end-users located throughout the world. The Company
performs ongoing credit evaluations of its customers’ financial condition and generally requires no collateral to secure accounts receivable. The Company
maintains an allowance for doubtful accounts based on its assessment of the collectability of accounts receivable. The Company reviews the allowance for doubtful
accounts quarterly. During the year ended December 31, 2017, the Company wrote off $0.5 million of accounts receivable related to a single customer. The
Company has not experienced any other meaningful non-payment or write-offs of accounts receivable. Accordingly, the allowance for doubtful accounts was zero
at December 31, 2017 and 2016. The Company does not have any off-balance-sheet credit exposure related to its customers.
For the year ended December 31, 2017, two customers represented 15% and 12% of total revenue, respectively. For the year ended December 31, 2016, two
customers represented 25% and 15% of total revenue, respectively. For the year ended December 31, 2015, two customers represented 14% and 12% of total
revenue, respectively.
At December 31, 2017, the Company had three customers that accounted for 19%, 14% and 11% of accounts receivable, respectively. At December 31,
2016, the Company had three customers that accounted for 31%, 17% and 10% of accounts receivable, respectively.
Inventories
Inventory consists of finished products and raw materials. Inventories are carried at lower of cost, determined using the first-in, first-out (FIFO) method, and
net realizable value. Cost includes materials, labor and manufacturing overhead. Manufacturing overhead is allocated to the costs of conversion based on normal
capacity of the Company’s production facility. Abnormal freight, handling costs and material waste is expensed in the period it occurs.
The Company periodically reviews its inventories and makes provisions as necessary for estimated excess, obsolete or damaged goods to ensure values
approximate the lower of cost and net realizable value. The amount of any such provision is equal to the difference between the cost of inventory and the estimated
net realizable value based upon assumptions about future demand, selling prices and market conditions.
Property, Plant and Equipment, Net
Property, plant and equipment are stated at cost. Assets held under capital leases are stated at the lesser of the present value of future minimum payments,
using the Company’s incremental borrowing rate, or the fair value of the property at the inception of the
76
lease. Expenditures for maintenance and repairs are charged to expense as incurred, whereas major betterments are capitalized as additions to property, plant and
equipment.
Depreciation on plant and equipment is calculated on the straight-line method over the estimated useful lives of the assets. Assets related to capital leases
are amortized on a straight-line basis over the shorter of the lease term or estimated useful life of the asset.
Assets utilized in the Company’s operations that are taken out of service with no future use are charged to cost of sales or operating expenses, depending on
the department in which the asset was utilized. Write-offs of construction in progress are charged to operating expenses upon the determination of no future use.
Other Assets
Other assets primarily include long-term deposits.
Impairment of Long-Lived Assets
Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or asset group
may not be recoverable. Recognition and measurement of a potential impairment is performed on assets grouped with other assets and liabilities at the lowest level
where identifiable cash flows are largely independent of the cash flows of other assets and liabilities. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset or asset group to future undiscounted net cash flows expected to be generated by the asset or asset group. If the
carrying amount of an asset or asset group exceeds its estimated undiscounted future cash flows, an impairment charge is recognized for the amount by which the
carrying amount of the asset or asset group exceeds the fair value of the asset or asset group. Fair value is determined through various valuation techniques
including discounted cash flow models, quoted market values and third-party independent appraisals, as considered necessary.
Asset Retirement Obligations
During the year ended December 31, 2016, the Company recorded an asset retirement obligation associated with its lease obligations and the retirement of
tangible long-lived assets. The Company reviews legal obligations associated with the retirement of long-lived assets that result from contractual obligations or the
acquisition, construction, development and/or normal use of the assets. If it is determined that a legal obligation exists, regardless of whether the obligation is
conditional on a future event, the fair value of the liability for an asset retirement obligation is recognized in the period in which it is incurred, if a reasonable
estimate of fair value can be made. An amount equal to the fair value of the liability is also recorded as a long-term asset that is depreciated over the estimated life
of the asset. The difference between the gross expected future cash outflow and its present value is accreted over the life of the related lease as an operating
expense. The Company fully satisfied its asset retirement obligation during the year ended December 31, 2016.
Deferred Revenue
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.
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 landlords are amortized on a straight-line basis over the lease term. The short-term portion of
deferred rent is included within accrued expenses on the consolidated balance sheet.
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.
77
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 shipping point.
Sales returns are recorded based on historical sales and return information. Products that exhibit unusual sales return patterns due to quality or other
manufacturing matters are specifically investigated and analyzed as part of the sales return accrual. The sales return accrual represents a reserve for products that
may be returned due to quality concerns or authorized for destruction in the field. Sales return reserves are recorded at full original sales value. The Company rarely
exchanges products from inventory for returned products. Sales return reserves were $0.1 million at December 31, 2017 and 2016.
For initial shipments of products 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.
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 under the Company’s research service contracts is the labor effort expended in completing the 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 toward completion. Revisions in cost estimates and fees during the course of the contract are reflected in the
accounting period in which the facts that require the revisions become known. Contract costs and rates used to allocate overhead to contracts are subject to audit by
the respective contracting government agency. Adjustments to revenue as a result of audit are recorded in the period they become known. To date, adjustments to
revenue as a result of audit have been insignificant.
Warranty
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. This standard warranty provides that the Company’s products will be free from
defects in material and workmanship, and will, under normal use, conform to the specifications for the product.
The Company’s products may be utilized in systems that involve new technical demands and new configurations. Accordingly, the Company regularly
reviews and assesses whether warranty reserves should be recorded in the period the related revenue is recorded. For an initial shipment of product for use in a
system with new technical demands or new configurations and where the Company is unsure of meeting the customer’s specifications, the Company will defer the
recognition of product revenue and related costs until written customer acceptance is obtained.
During the year ended December 31, 2017 and 2016, the Company recorded warranty expense of $0.9 million and $0.5 million, respectively. These specific
warranty charges were related to product claims for two separate product application issues. These claims were outside of the Company’s typical experience. As of
December 31, 2017, the Company had satisfied all outstanding warranty claims.
Shipping and Handling Costs
Shipping and handling costs are classified as a component of cost of revenue. Customer payments of shipping and handling costs are recorded as product
revenue.
Stock-based Compensation
The Company grants share-based awards to its employees and non-employee directors. All share-based awards granted, including grants of stock options,
restricted stock and restricted stock units (RSUs), are recognized in the statement of operations based on their fair value as of the date of grant. 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
78
option-pricing model to determine the fair value of service-based option awards . The Black-Scholes model requires the us e of 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 RSUs is determined using the closing price of the Company’s common stock on the date of grant. All shares of
restricted stock are not transferable until vested. Restricted stock is typically issued to non-employee directors and typically vests over a one-year period from the
date of issuance. RSUs are issued to employees and typically vest over a three to four year period from the date of issuance. The fair value of restricted stock and
RSUs upon which vesting is solely service-based is expensed ratably over the vesting period. If the service condition for shares of restricted stock is not met for any
reason, the shares of unvested restricted stock will be forfeited and returned to the Company.
For stock options that contain a market condition, the Company uses the Monte-Carlo simulation option-pricing model to determine the fair value of the
awards. In addition to the input assumptions used in the Black-Scholes model, the Monte-Carlo simulation option-pricing model factors the probability that the
specific market condition may or may not be satisfied into the valuation. Stock-based compensation expense for awards with a market condition is recognized on a
straight-line basis over the requisite service period for each such award.
Pursuant to the evergreen provisions of the 2014 Employee, Director and Consultant Equity Incentive 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.
Research and Development
Costs incurred in the research and development of the Company’s products include compensation and related costs, services provided by third-party
contractors, materials and supplies and are classified as research and development expenses as incurred. Research and development costs directly associated with
research services revenue are classified as research services in cost of revenue.
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 loss per share if their effect is antidilutive.
Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and
tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
The Company recognizes the effect of income tax positions only if those positions are more likely than not of being sustained. The Company accounts for
uncertain tax positions using a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or
expected to be taken in a tax return. Differences between tax positions taken in a tax return and amounts recognized in the financial statements are recorded as
adjustments to income taxes payable or receivable, or adjustments to deferred taxes, or both. Changes in recognition or measurement are reflected in the period in
which the change in judgment occurs. The Company recognizes penalties and interest related to uncertain tax positions, if any, as a component of income tax
expense.
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
79
maker reviews consolidated operating results to make decisions about allocating resources and assessing performance for the entire Company. The Company views
its operati ons 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:
Revenue:
U.S.
International
Total
Recently Issued Accounting Standards
2017
Year Ended December 31,
2016
(In thousands)
2015
$
$
51,439 $
60,192
111,631 $
35,726 $
82,012
117,738 $
44,553
77,965
122,518
From time to time, new accounting pronouncements are issued by the FASB or other standard setting bodies. Recently issued standards typically do not
require adoption until a future effective date. Prior to their effective date, the Company evaluates the pronouncements to determine the potential effects of adoption
to its consolidated financial statements.
Standards Implemented After December 31, 2016
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 standard for fiscal years beginning after December 15, 2016, including interim periods within those fiscal
periods. The Company adopted this standard effective January 1, 2017. Application of the standard has not resulted in any material impact to the Company’s
consolidated financial statements or other disclosures.
In March 2016, the FASB issued ASU 2016-09 , Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment
Accounting . The amendment simplifies 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 adopted this standard effective January 1, 2017. The
provisions of ASU 2016-09 related to the timing of accounting for the forfeitures of share based awards was adopted using a modified retrospective 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 were adopted prospectively.
Standards to be Implemented After December 31, 2017
In August 2015, the FASB issued a deferral of ASU 2014-09, Revenue from Contracts with Customers. The standard replaces the transaction- and industry-
specific revenue recognition guidance under current U.S. GAAP with a principle based approach for determining revenue recognition. As a result of the deferral,
public entities are required to apply the revised revenue recognition standard for the annual reporting period beginning on or after December 15, 2017, including
interim periods within that annual reporting period. The Company will adopt this standard using the modified retrospective method on January 1, 2018. The
Company completed its analysis of the new revenue standard and determined that it will not materially impact the allocation and timing of recognition of
previously reported revenues from the sale of products or performance of research and development services. In addition, the Company determined that there are no
incremental contracts costs or contract fulfillment costs to be recognized in connection with the adoption. Based on the Company’s analysis, no adjustment to
retained earnings will be required as of the January 1, 2018 adoption date. Accordingly, the Company’s application of the standard is not expected to have a
material impact on the Company’s consolidated balance sheet at January 1, 2018 and will not have a material impact to our statement of operations. Additional
disclosures will be required in future filings.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). FASB ASU 2016-02 modifies the accounting for leases and requires that all leases
be recorded on the consolidated balance sheets as assets and liabilities. This 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. The Company
80
currently expects that most of its operating lease commitments will be subject to the new standard and recognized as right-of-use assets and operating lease
liabilities . The Company expects application of the standard will increase the reported value of both total assets and total liabilities upon adoption and will h ave a
material impact on the Company’s consolidated financial statements and other 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. 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 completed its assessment of the amendment and has determined that adoption will not have a significant impact on the Company’s
consolidated financial statements or other disclosures. The Company will adopt the provisions of the amendment effective January 1, 2018.
(3) Inventories
Inventories consist of the following:
Raw material
Finished goods
Total
(4) Property, Plant and Equipment, Net
Property, plant and equipment consist of the following:
Construction in progress
Buildings
Machinery and equipment
Computer equipment and software
Total
Accumulated depreciation and amortization
Property, plant and equipment, net
December 31,
2017
2016
(In thousands)
2,543 $
6,372
8,915 $
3,511
9,357
12,868
$
$
December 31,
2017
2016
Useful life
$
$
(In thousands)
7,699 $
24,013
118,786
8,099
158,597
(82,530)
76,067 $
11,139
23,901
113,659
7,679
156,378
(71,984)
84,394
—
30 years
3 — 10 years
3 years
Plant and equipment under capital leases was less than $0.1 million at both December 31, 2017 and 2016.
Depreciation expense was $10.8 million, $9.8 million and $9.8 million for the years ended December 31, 2017, 2016 and 2015, respectively. Amortization
associated with assets under capital leases was less than $0.1 million for each of the years ended December 31, 2017, 2016 and 2015.
Construction in progress totaled $7.7 million and $11.1 million at December 31, 2017 and 2016, respectively, which included engineering designs and other
pre-construction costs for the planned manufacturing facility in Statesboro, Georgia of $7.2 million at both December 31, 2017 and 2016. The Company assessed
the engineering designs and pre-construction costs associated with the planned manufacturing facility and determined that the assets remain technologically feasible
as of December 31, 2017.
The Company has delayed the project to construct the Statesboro, Georgia manufacturing facility to better align the timing of this capacity expansion with
the Company’s assessment of future demand.
81
(5) Accrued Expenses
Accrued expenses consist of the following:
Employee compensation
Other accrued expenses
(6) Revolving Line of Credit
December 31,
2017
2016
(In thousands)
4,633 $
1,229
5,862 $
2,796
1,191
3,987
$
$
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 25, 2018, the Loan Agreement was amended to extend the maturity date of the facility to
April 28, 2018. Under the Loan Agreement, the Company may borrow up to $20.0 million subject to compliance with certain covenants and borrowing base
limitations. At the Company’s election, the interest rate applicable to borrowings may be based on the prime rate or LIBOR. Prime rate-based rates vary from prime
rate plus 0.75% per annum to prime rate plus 2.00% per annum, while LIBOR-based rates vary from LIBOR plus 3.75% per annum to LIBOR plus 4.25% per
annum. In addition, the Company is required to pay a monthly unused line fee of 0.5% per annum of the average unused portion of the facility. Obligations under
the Loan Agreement are secured by a security interest in all assets of the Company, including those at the East Providence facility, except for certain exclusions.
During the year ended December 31, 2017, the Company borrowed $27.3 million and repaid $23.5 million under the line of credit. At December 31, 2017
and 2016, the Company had $3.8 million and $0.0 million drawn on the revolving credit facility. Under the Loan Agreement, the Company is required to comply
with both non-financial and financial covenants, including minimum Adjusted EBITDA and minimum Adjusted Quick Ratio covenants, as defined. At
December 31, 2017, the Company was in compliance with all such covenants.
The Company has been required to provide letters of credit to secure obligations under certain commercial contracts and real property leases. The Company
had outstanding letters of credit backed by the revolving credit facility of $2.3 million and $2.7 million at December 31, 2017 and 2016, respectively, which reduce
the funds otherwise available to the Company under the facility.
At December 31, 2017, the effective amount available to the Company under the revolving credit facility was $13.9 million after giving effect to the $3.8
million in outstanding borrowings and $2.3 million of outstanding letters of credit.
(7) Other Expense, net
For the year ended December 31, 2017, other expense, net of $0.2 million consisted primarily of fees and interest expense related to the Company’s
revolving credit facility with Silicon Valley Bank.
For the year ended December 31, 2016, other expense, net of $0.8 million consisted of financing costs and interest expense. During the year, the Company
engaged with a third party lender to secure a term loan to fund a portion of the construction of the planned manufacturing facility in Statesboro, Georgia. In 2016,
the Company decided to delay construction of the facility and its related financing to better align the timing of this capacity expansion with the Company’s
assessment of future demand. As a result, the Company recorded a $0.7 million charge for postponed financing costs. The charge included legal fees incurred
directly by the Company and on behalf of the potential lender. In addition, the Company recognized fees of $0.1 million associated with the revolving credit
facility.
For the year ended December 31, 2015, other expense, net consisted primarily of fees associated with the revolving credit facility of $0.2 million.
82
(8) Deferred Rent
Deferred rent is comprised as follows:
Deferred rent
Current maturities of deferred rent
Deferred rent, less current maturities
December 31,
2017
2016
(In thousands)
1,511 $
(208)
1,303 $
1,125
(154)
971
$
$
On June 29, 2016, the Company executed a new agreement to extend its lease of the Northborough, Massachusetts facility through December 31, 2026. As
part of the new agreement, the Company’s obligation to perform certain activities upon the termination of the prior lease was eliminated. The settlement of the asset
retirement obligation balance of approximately $0.2 million was reclassified to other long-term liabilities and will be amortized as a reduction to rent expense over
the term of the new lease agreement.
(9) Commitments and Contingencies
Operating Leases
During 2016, the Company entered into an agreement to extend its lease of approximately 51,650 square feet of office space in Northborough,
Massachusetts. The lease commenced on January 1, 2017 and will expire on December 31, 2026. The annual base rent associated with the lease was $408,000
during 2017 and will increase by approximately 3% annually for the term of the lease. The lease also requires the payment by the Company of its pro rata share of
real estate taxes and certain other expenses. Prior to the expiration of the lease, the Company will have the right to extend the lease for an additional term of three
years.
Under the terms of the new lease, the landlord provided the Company with an allowance of $1.2 million to be utilized for improvements to the leased
premises. These amounts are recorded as a component of deferred rent in determining the minimum lease payments for the property. As of December 31, 2017 and
2016, the Company had capitalized $1.2 million and $0.7 million in associated leasehold improvement costs, respectively.
The Company also leases facilities and equipment under operating leases expiring at various dates through 2021. Under these agreements, the Company is
obligated to pay annual rent, real estate taxes, and certain operating expenses.
Future minimum lease payments under operating leases at December 31, 2017 are as follows:
Year
2018
2019
2020
2021
2022
Thereafter
Total minimum lease payments
Operating
Leases
(In thousands)
$
$
1,335
909
687
535
473
2,039
5,978
The Company incurred rent expense under all operating leases of approximately $1.4 million, $1.5 million and $1.6 million in the years ended December
31, 2017, 2016 and 2015, respectively.
Letters of Credit
The Company has been required to provide certain customers with letters of credit securing obligations under commercial contracts. The Company had
letters of credit outstanding of $2.3 million and $2.7 million at December 31, 2017 and 2016, respectively. These letters of credit are secured by the Company’s
revolving credit facility (see note 6).
83
Customer Supply Agreement
The Company is party to a supply agreement, as amended, with BASF Polyurethanes GmbH (BASF) (the Supply Agreement) and a joint development
agreement with BASF SE (the JDA). Pursuant to the Supply Agreement, the Company will sell exclusively to BASF the Company’s Spaceloft A2 product at
annual volumes to be specified by BASF, subject to certain volume limits. The Supply Agreement will terminate on December 31, 2027. Upon expiration of the
Supply Agreement, the Company will be subject to a post-termination supply commitment for an additional two years. The JDA is designed to facilitate the
collaboration between the parties on the development and commercialization of new products.
In addition, BASF, in its sole discretion, may make prepayments to the Company in the aggregate amount of up to $22 million during the term of the Supply
Agreement. BASF has agreed to make a prepayment in the amount of $5 million to the Company in two equal installments in 2018 (the 2018 Prepayment). The
amounts and terms of additional prepayment installments, if any, are subject to negotiation between the Company and BASF.
After January 1, 2019, the Company will, at BASF’s instruction, credit up to 25.3% of any amounts invoiced by the Company for Spaceloft A2 product sold
to BASF against the prepayment balance. However, BASF has no obligation to purchase products under the Supply Agreement. If any of the 2018 Prepayment
remains uncredited as of December 31, 2021, BASF may request that the Company repay the uncredited amount to BASF. The prepayment obligation is secured by
a security interest in real estate, plant and equipment at the Company’s Rhode Island facility and a license to certain intellectual property.
Litigation
The Company is, from time to time, a party to litigation that arises in the normal course of its business operations. See Part I, Item 3 (“Legal Proceedings”)
of this Annual Report on Form 10-K 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.
(10) Stockholders’ Equity
At December 31, 2017 and 2016, the Company was authorized to issue 130,000,000 shares of stock, of which 125,000,000 shares were designated as
common stock and 5,000,000 shares were designated as preferred stock.
(11) Employee Benefit Plan
The Company sponsors the Aspen Aerogels, Inc. 401(k) Plan. Under the terms of the plan, the Company’s employees may contribute a percentage of their
pretax earnings. During the years ended December 31, 2017, 2016 and 2015, the Company provided matching contributions of $0.2 million, $0.2 million and $0.1
million, respectively.
(12) Employee Stock Ownership Plans
Effective June 12, 2014, the Company adopted the 2014 Employee, Director and Consultant Equity Incentive Plan (the 2014 Equity Plan). Under the 2014
Equity Plan, the Company may grant incentive stock options (ISOs), non-qualified stock options (NSOs), restricted stock, restricted stock units (RSUs) and other
stock-based awards. Stock options under the plan are to be granted with an exercise price not less than the fair market value of the Company’s common stock at the
date of grant. Equity awards granted to employees generally vest over a service period of three to four years. Restricted stock and stock options granted to
nonemployee directors generally vest over a one year service period.
During 2017, the Company granted 86,023 shares of restricted common stock with a grant date fair value of $0.4 million and NSOs to purchase 119,133
shares of common stock with a grant date fair value of $0.2 million to its non-employee directors. The awards to non-employee directors during 2017 will vest over
a period of one year. The Company also granted 481,373 RSUs and NSOs to purchase 320,571 shares of common stock to employees. The RSUs and NSOs
granted to employees during 2017 will vest over a three year period. All awards to nonemployee directors and employees during 2017 were granted under the 2014
Equity Plan.
On December 11, 2015, the Company issued certain equity grants to its chief executive officer which included 78,125 shares of restricted stock, NSOs to
purchase 84,745 shares of common stock vesting solely over three years and NSOs to purchase 370,181 shares of common stock vesting subject to certain common
stock price target achievements, as defined, over a three to five year period (the CEO Options). Collectively, these equity grants had an aggregate fair value of $2.0
million at the time of grant. The restricted stock award will vest based on achievement of a Company financial performance target for fiscal year 2020.
84
On August 2, 2017, the Company modified the performance target for the year ending December 31, 2020 with respect to 78,125 shares of res tricted stock
held b y its chief executive officer. In addition, the Company modified the vesting conditions of NSOs held by its chief executive officer to purchase 131,578 and 1
2 2,324 shares of common stock to extend the time period to achieve certain common stock price targets by an additional year to four and five years from the date
of grant, respectively .
The Company accounted for the extension of the time periods for the achievement of the common stock price target vesting conditions of the NSOs as
modifications in determining the stock-based compensation expense to be recognized over the remaining service period. The total incremental compensation
expense resulting from the modification was $0.1 million. The incremental compensation expense associated with these awards will be recognized over the
remaining service period of the awards.
Stock-based compensation is included in cost of sales or operating expenses, as applicable, and consists of the following:
Cost of product revenue
Research and development expenses
Sales and marketing expenses
General and administrative expenses
Total stock-based compensation
2017
Year Ended December 31,
2016
(In thousands)
2015
$
$
790 $
555
1,096
2,650
5,091 $
796 $
594
1,066
2,857
5,313 $
824
666
1,012
2,911
5,413
At December 31, 2017, 3,170,009 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, at December 31, 2017, 90,288 shares of common stock were reserved issuance upon the exercise of
outstanding 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 or such options becoming available for grant under the 2014
Equity Plan. At December 31, 2017, there were 2,402,555 shares available for future grant under the 2014 Equity Plan.
Stock Options Valuation and Amortization Method
The fair value of each stock option is estimated as of the date of grant using the Black-Scholes option pricing model. Key inputs into this formula included
expected term, expected volatility, expected dividend yield and the risk-free rate. Each assumption is set forth and discussed below.
The Company used a Monte Carlo Simulation model to estimate the original grant date fair value of the CEO Options and the 2017 modification. The
simulation model was based on the Black-Scholes option pricing model and a number of complex assumptions including (i) whether 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.
For stock options with a service condition, the fair value is amortized on a straight-line basis over the requisite service period of the options, which is
generally a three- to four-year vesting period from the date of grant.
Expected Term
The expected term represents the period that the Company’s stock-based awards are expected to be outstanding. The Company does not have sufficient
historical exercise data to provide a reasonable basis upon which to estimate the expected term. Accordingly, the Company uses the simplified method to calculate
the expected term for options granted.
Expected Volatility
Due to the Company’s limited historical data, the Company’s uses an estimated volatility based on the historical volatility of comparable companies with
publicly available share prices. In 2017, 2016 and 2015, the expected volatility is based on the weighted average volatility of up to 17 companies with business,
financial and market attributes that the Company believes are similar to its own.
Expected Dividend
The Company uses an expected dividend yield of zero. The Company does not intend to pay cash dividends on its common stock in the foreseeable future,
nor has it paid dividends on its common stock in the past.
85
Risk-free Interest Rate
The Company uses a risk-free interest rate based on U.S. Treasury zero-coupon issues with a remaining term equal to the expected life assumed at the date
of grant.
Estimated Forfeitures
Effective January 1, 2017, the Company adopted the provisions of ASU 2016-09 related to the timing of accounting for the forfeitures of share based awards
using a modified retrospective transition method. Under these provisions, the Company records the impact of forfeitures of service based awards at the time an
award is forfeited. Adoption of the provisions resulted in a cumulative-effect adjustment to equity as of January 1, 2017 of $0.3 million.
Prior to adopting ASU 2016-09, forfeitures were required to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual
forfeitures differ from those estimates. Forfeitures were estimated based on voluntary termination behavior as well as analysis of actual option forfeitures.
Accordingly, share-based compensation expense had been reduced by an estimated annual forfeiture rate for the years ended December 31, 2016 and 2015.
Assumptions Utilized
The following information relates to the fair value of the option awards estimated by use of the Black-Scholes option pricing model:
Weighted average assumptions:
Expected term (in years)
Expected volatility
Risk free rate
Expected dividend yield
Weighted average fair value:
Grant-date fair value of options granted
Grant-date fair value of options vested
Aggregate intrinsic value of options exercised
$
$
$
Outstanding Options
The following table summarizes information about stock options outstanding:
2017
Year Ended December 31,
2016
(In thousands)
2015
5.86
51.95%
1.99%
0.00%
2.08
3.98
—
$
$
$
5.86
53.56%
1.36%
0.00%
2.16
7.58
—
$
$
$
6.02
57.95%
1.79%
0.00%
3.82
11.89
—
Options outstanding at December 31, 2016
Granted
Forfeited
Exercised
Options outstanding at December 31, 2017
Exercisable at December 31, 2017
Expected to vest at December 31, 2017
Weighted
Average
Weighted
Weighted
Remaining
Average
Average
Contractual
Exercise
Grant Date
Term
Price
Fair Value
(Years)
Per Share
Per Share
($ in thousands, except share and per share data)
Aggregate
Intrinsic
Value
8.26 $
2.08 $
6.98 $
— $
7.18 $
11.80 $
2.99 $
11.80
4.14
9.75
—
10.48
15.59
5.85
8.30 $
36,326
$
7.64 $
6.98 $
8.24 $
—
554,236
—
465,719
Number of
Shares
2,063,574 $
439,704 $
(70,372) $
— $
2,432,906 $
1,156,129 $
1,276,777 $
As of December 31, 2017, total unrecognized compensation cost related to non-vested service-based options granted under the 2014 Equity Plan was $2.2
million. The unrecognized compensation cost for the service-based options is expected to be recognized over a weighted average period of 1.68 years.
86
Restricted Stock Awards and Restricted Stock Units
The Company values restricted stock awards and RSUs based on the closing price of our shares on the date of grant. RSUs have time-based vesting
conditions and typically vest over three or four years. Restricted stock awards issued to nonemployee directors generally vest in full one year from the date of grant.
Information related to grants of RSUs during 2017 is as follows:
Balance at December 31, 2016
Granted
Vested
Forfeited
Balance at December 31, 2017
Restricted
Stock
Units
Weighted
Average
Grant Date
Fair Value
682,085 $
481,373
(293,561)
(42,506)
827,391 $
5.83
4.14
6.67
4.91
4.59
Restricted stock awards granted during 2017 are considered issued and outstanding common stock and are excluded from the table above. As of
December 31, 2017 there were 151,859 shares of restricted stock outstanding.
The total intrinsic value of restricted stock and RSUs that vested in 2017 and 2016 was $1.4 million and $0.6 million, respectively. As of December 31,
2017, 901,125 of the total shares of restricted stock and RSUs outstanding will vest upon the fulfillment of service conditions. In addition, 78,125 shares of
restricted stock will vest only if a certain performance condition is achieved. As of December 31, 2017, the Company had determined that the performance-based
condition was probable and $0.1 million in compensation expense was recorded to date in conjunction with the award.
As of December 31, 2017, total unrecognized compensation cost related to restricted stock awards of $0.1million, RSUs of $2.3million and restricted stock
with performance-based conditions of $0.2 million is expected to be recognized over a weighted average period of 0.45 years, 1.68 years and 3.00 years,
respectively.
(13) Net Loss Per Share
The computation of basic and diluted net loss per share consists of the following:
Numerator:
Net loss
Denominator:
Weighted average shares outstanding, basic and diluted
Year ended December 31,
2015
2016
2017
(In thousands, except share and per share data)
$
(19,321) $
(12,023) $
(6,417)
23,390,235
23,139,807
22,986,931
Net loss per share, basic and diluted
$
(0.83) $
(0.52) $
(0.28)
Potentially dilutive common shares that were excluded from the computation of diluted net loss per share because they were anti-dilutive consist of the
following:
Common stock options
Restricted common stock units
Common stock warrants
Restricted common stock awards
Total
2017
2,432,906
827,391
—
151,859
3,412,156
Year ended December 31,
2016
2,063,574
682,085
115
153,277
2,899,051
2015
1,702,337
417,126
131
132,130
2,251,724
87
In the table above, anti-dilutive shares consist of those common stock equivalents that have (i) an exercise price above the average stock price for the period
or (ii) related average unrecognized stock compensation expense suff icient to buy bac k the entire amount of shares. The Company excludes the shares issued in
connection with restricted stock awards from the calculation of basic weighted average common shares outstanding until the restrictions lapse.
As of December 31, 2017 and 2016, there was no dilutive impact of the common stock options, RSUs, common stock warrants and restricted stock awards.
(14) Income Taxes
The Company incurred net operating losses and recorded a full valuation allowance against net deferred assets for all periods presented. Accordingly, the
Company has not recorded a provision for federal or state income taxes.
The reconciliation between the U.S. statutory income tax rate and the Company’s effective rate consists of the following:
U.S. federal income tax statutory rate
Permanent differences
State tax, net of federal benefit
Changes in valuation allowance for deferred tax assets
Stock-based compensation
2017 Tax Cuts and Jobs Act
Other
Effective tax rate
Year Ended December 31,
2016
2015
2017
35%
(3)%
(5)%
113%
—%
(138)
(2)%
—
35%
(4)%
(1)%
(30)%
(1)%
—%
1%
—
35%
(11)%
(6)%
(11)%
(8)%
—%
1%
—
The tax effects of temporary differences between financial statement and tax accounting that gave rise to significant portions of the Company’s deferred tax
assets and deferred tax liabilities at December 31, 2017 and 2016 are presented below:
Deferred tax assets:
Net operating loss carryforwards
Stock-based compensation
Tax credit carryforwards
Reserves and accruals
Intangible assets and amortization
Total gross deferred tax assets
Deferred tax liabilities:
Depreciation
Total deferred tax liabilities
Total deferred tax assets and liabilities
Valuation allowance
Net deferred tax asset
December 31,
2017
2016
(In thousands)
45,307 $
4,719
308
492
56
50,882
(4,645)
(4,645)
46,237
(46,237)
— $
66,276
6,140
312
398
95
73,221
(5,295)
(5,295)
67,926
(67,926)
—
$
$
On December 22, 2017, the President of the United States signed into law the Tax Cuts and Jobs Act (TCJA) tax reform legislation. This legislation makes
significant change in U.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 the U.S. corporate tax rate from the current rate of 34% to 21% for the year ending 2018. As a result of
the enacted law, the Company was required to revalue deferred tax assets and liabilities at the 21% rate. This results in a decrease in the Company’s net deferred
tax asset and corresponding valuation allowance of $26.7 million. As the Company maintains a full valuation allowance against its net deferred tax asset position in
the United States, this revaluation does not result in an income tax expense or benefit in the current period. The provisions of the TCJA related to the one-time
mandatory transition tax on deemed repatriation did not have an impact on the Company’s results of operations during the year ended December 31, 2017. The
other provisions of the TCJA did not have a material impact on the Company’s 2017 consolidated financial statements.
88
The net change in the valuation allowance for the year ended December 31, 2017 , was a de crease of $ 21. 7 million. The Company has recorded a full
valuation allowance against its deferred tax assets due to the uncertainty associated with the utilization of the net operating loss carryforwards and other future
deductible items. In assessing the realizability of deferred tax assets, the Company considers all available evidence, historical and prospective, with greater weight
given to historical evidence, in de termining whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate
realization of the Company’s deferred tax assets generally is dependent upon generation of future taxable income.
At December 31, 2017, the Company has $194.6 million of net operating losses available to offset future federal income, if any, and which expire on
various dates through December 31, 2037.
For the year ended December 31, 2014, the Company performed an analysis pursuant to Internal Revenue Code Section 382, as well as similar state
provisions, in order to determine whether any limitations might exist on the utilization of net operating losses and other tax attributes. Based on this analysis, the
Company has determined that an ownership change occurred as a result of the June 2014 IPO, resulting in an annual limitation on the use of its net operating losses
and other tax attributes as of such date. Net operating losses of $113.2 million were determined to be available. The Company also determined that built-in gains of
$42.0 million existed at the date of the ownership change. Built-in gains increase the limitation under the Internal Revenue Code to the extent triggered during the
five-year period subsequent to the date of change. Absent the disposition of certain built-in gain assets within the five-year period subsequent to the change in
ownership, the entire $42.0 million of net operating losses will expire in June 2019.
At December 31, 2017, the Company has $76.7 million of apportioned net operating losses available to offset future state taxable income, if any, and which
begin to expire at various dates between 2018 and 2037.
For each of the years ended December 31, 2017, 2016 and 2015, the Company did not have any material unrecognized tax benefits and thus no interest and
penalties related to unrecognized tax benefits were recorded. In addition, the Company does not expect that the amount of unrecognized tax benefits will change
significantly within the next twelve months.
The Company files a federal income tax return in the United States and income tax returns in various state and foreign jurisdictions. All tax years are open
for examination by the taxing authorities for both federal and state purposes.
The Securities & Exchange Commission staff issued Staff Accounting Bulletin No. 118 (SAB 118) to address the tax reform legislation. In accordance with
SAB 118, the Company has recognized the provisional tax impacts, outlined above, related to the re-measurement of its deferred income tax assets and liabilities
associated with the one-time mandatory transition tax on deemed repatriation. Although the Company does not believe there will be any material adjustments in
subsequent reporting periods, the ultimate impact may differ from the provisional amounts, due to, among other things, the significant complexity of the 2017 Tax
Act and anticipated additional regulatory guidance that may be issued by the IRS, changes in analysis, interpretations and assumptions the Company has made and
actions the Company may take as a result of the 2017 Tax Act.
(15) Subsequent Events
The Company has evaluated subsequent events through March 1, 2018, the date of issuance of the consolidated financial statements for the year ended
December 31, 2017.
On January 25, 2018, the Company’s Loan Agreement was amended to extend the maturity date of the facility to April 28, 2018 and includes the
modification of certain financial covenants and the consent to the amendment of the supply agreement and side agreement with BASF .
On February 16, 2018, the Company amended and restated its existing supply agreement and side agreement with BASF. Among the amended terms of the
agreement, BASF has agreed to remit prepayments in the aggregate amount of $5 million to the Company in two installments during 2018. The Company will
credit 25.3% of any amounts invoiced by the Company for product sold to BASF after January 1, 2019 against any remaining balance of the prepayments. Any
remaining balance from the prepayments as of December 31, 2021, BASF may require that the Company repay such amount to BASF after December 31, 2021.
89
QUARTERLY RESULTS OF OPERATIONS
2017
Total revenue
Gross profit
Loss from operations
Net loss
Net loss per share basic and diluted
common share - basic
2016
Total revenue
Gross profit
Loss from operations
Net loss
Net income loss per share basic and diluted
common share - basic
March 31,
June 30,
Sept 30,
Dec 31,
Three Months Ended
(in thousands, except per share data)
(unaudited)
$
$
$
23,002 $
2,221
(9,052)
(9,078)
25,069 $
3,694
(5,433)
(5,472)
27,198 $
4,948
(3,030)
(3,088)
36,362
7,808
(1,621)
(1,683)
(0.39) $
(0.23) $
(0.13) $
(0.07)
32,821 $
6,527
(1,758)
(1,797)
27,718 $
6,653
(1,348)
(1,387)
29,560 $
6,402
(2,404)
(3,097)
27,639
3,729
(5,710)
(5,742)
$
(0.08) $
(0.06) $
(0.13) $
(0.25)
90
Schedule II
VALUATION AND QUALIFYING ACCOUNTS
(in millions)
Description
Year Ended December 31, 2017:
Allowances for uncollectible accounts and sales returns and
allowances
Year Ended December 31, 2016:
Allowances for uncollectible accounts and sales returns and
allowances
Year Ended December 31, 2015:
Allowances for uncollectible accounts and sales returns and
allowances
$
$
$
Balance
at
Beginning
of Year
Charges
to
Costs
and
Expenses (a)
Deductions to
Allowances
for
Uncollectible
Accounts (b)
Charges to
(Deductions
from)
Other
Accounts (c)
Balance
at
End of
Year
93
—
—
— $
89
—
—
4 $
120
—
—
(31) $
93
93
89
(a) Represents allowances for uncollectible accounts established through selling, general and administrative expenses.
(b) Represents actual write-offs of uncollectible accounts.
(c) Represents net change in allowances for sales returns, recorded as contra-revenue.
91
Item 9.
CHANGES IN AND DISAGREEMENTS WITH ACCO UNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
Item 9A.
CONTROLS AND PROCEDURES
(a) Evaluation
of
Disclosure
Controls
and
Procedures
. We maintain disclosure controls and procedures that are designed to ensure that information
required to be disclosed in the reports that we file or submit under the Securities Exchange Act of 1934, as amended, or the Exchange Act, is recorded, processed,
summarized and reported within the time periods specified in the SEC’s rules and forms and is accumulated and communicated to our management, including our
principal executive officer and principal financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required
disclosure.
As of December 31, 2017, our management, with the participation of our principal executive officer and principal financial officer, evaluated the
effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Our management recognizes that
any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives, and management
necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on such evaluation, our principal executive
officer and principal financial officer have concluded, that, as of December 31, 2017, our disclosure controls and procedures were effective to ensure that
information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the
time periods specified in the SEC’s rules and forms, and is accumulated and communicated to our management, including our principal executive officer and
principal financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
(b) Management’s
Report
on
Internal
Control
over
Financial
Reporting
. The Company’s management is responsible for establishing and maintaining
adequate internal control over financial reporting. Internal control over financial reporting is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, as a
process designed by, or under the supervision of, the Company’s principal executive and principal financial officers and effected by the Company’s board of
directors, management and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles. The Company’s internal control over financial reporting includes
those policies and procedures that:
•
•
•
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the
Company;
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of
management and directors of the Company; and
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that
could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with
the policies or procedures may deteriorate.
The Company’s management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2016. In making this
assessment, management used the criteria set forth by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework (2013).
Based on our assessment, management believes that, as of December 31, 2017, the Company’s internal control over financial reporting is effective based on
those criteria.
(c) Changes
in
Internal Controls
. There were no changes in our internal control over financial reporting, as such term is defined in Rules 13a-15(f) and
15(d)-15(f) promulgated under the Exchange Act, identified in connection with the evaluation of such internal control that occurred during the fourth quarter of the
last fiscal year that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
92
Item 9B.
OTHER INFORMATION
Not applicable.
93
PART III
Item 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The response to this item is incorporated by reference from the discussion responsive thereto under the captions “Management and Corporate Governance,”
“Section 16(a) Beneficial Ownership Reporting Compliance,” and “Code of Business Conduct and Ethics” in the Company’s Proxy Statement for the 2018 Annual
Meeting of Stockholders.
Item 11.
EXECUTIVE COMPENSATION
The response to this item is incorporated by reference from the discussion responsive thereto under the caption “Executive Officer and Director
Compensation” in the Company’s Proxy Statement for the 2018 Annual Meeting of Stockholders.
Item 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
The response to this item is incorporated by reference from the discussion responsive thereto under the captions “Security Ownership of Certain Beneficial
Owners and Management,” and “Equity Compensation Plan Information” in the Company’s Proxy Statement for the 2018 Annual Meeting of Stockholders.
Item 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The response to this item is incorporated by reference from the discussion responsive thereto under the captions “Certain Relationships and Related Person
Transactions” and “Management and Corporate Governance” in the Company’s Proxy Statement for the 2018 Annual Meeting of Stockholders.
Item 14.
PRINCIPAL ACCOUNTING FEES AND SERVICES
The response to this item is incorporated by reference from the discussion responsive thereto under the caption “Independent Registered Public Accounting
Firm” in the Company’s Proxy Statement for the 2018 Annual Meeting of Stockholders.
94
Item 15.
EXHIBITS, FINANCIAL STATEMENT SCHEDULES
Item 15(a). The following documents are filed as part of this Annual Report on Form 10-K:
PART IV
Item 15(a)(1) The following consolidated financial statements of the Company are included in Part II, Item 8 of this Annual Report on Form 10-K:
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2017 and 2016
Consolidated Statements of Operations for the Years Ended December 31, 2017, 2016, and 2015
Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2017, 2016 and 2015
Consolidated Statements of Cash Flows for the Years Ended December 31, 2017, 2016 and 2015
Notes to Consolidated Financial Statements
Item 15(a)(2) The following financial statements schedule is included in Part II, Item 8:
Schedule II – Valuation and Qualifying Accounts
All other financial statement schedules have not been included because they are not applicable or the information is included in the financial statements or
notes thereto.
Item 15(a)(3) Exhibits
The following is a list of exhibits filed as part of this Annual Report on Form 10-K.
Exhibit
Number
Exhibit Description
Filed
with this
Report
3.1
3.2
4.1
4.2
4.3
4.4
4.5
4.6
Restated Certificate of Incorporation of the Registrant, as filed with the
Secretary of State of the State of Delaware on June 18, 2014.
Restated Bylaws of Aspen Aerogels, Inc.
Form of common stock certificate.
Form of warrant to purchase common stock issued by the Registrant in
connection with 2004 and 2005 financing arrangements, as amended and
restated .
Form of warrant to purchase common stock issued by the Registrant in
connection with the 2005 equity financing, as amended and restated.
Form of warrant to purchase common stock issued by the Registrant in
connection with the 2008 reorganization.
Form of warrant to purchase common stock issued by the Registrant in
connection with the 2008 financing.
Form of warrant to purchase common stock issued by the Registrant in
connection with the 2010 subordinated note and warrant financing.
95
Incorporated by
Reference
herein from
Form or
Schedule
Form 8-K
(Exhibit 3.2)
Form 8-K
(Exhibit 3.3)
Amendment No. 1 to
Form S-1
(Exhibit 4.1)
Form S-1
(Exhibit 4.2)
Form S-1
(Exhibit 4.3)
Form S-1
(Exhibit 4.4)
Form S-1
(Exhibit 4.5)
Form S-1
(Exhibit 4.6)
Filing Date
SEC File/Reg.
Number
6/19/14
001-36481
6/19/14
001-36481
5/14/14
333-195523
4/28/14
333-195523
4/28/14
333-195523
4/28/14
333-195523
4/28/14
333-195523
4/28/14
333-195523
Exhibit
Number
4.7
9.1
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
Exhibit Description
Sixth amended and restated registration rights agreement, dated as of
June 11, 2012, by and among the Registrant and the investors named
therein, as amended.
Letter agreement, dated as of June 11, 2014, by and between the
Registrant and the Fidelity Funds.
2001 equity incentive plan, as amended . +
Form of incentive stock option agreement granted under 2001 equity
incentive plan, as amended .+
Form of 2013 incentive stock option agreement for options issued in
exchange for the forfeiture of options granted under 2001 equity incentive
plan, as amended .+
Form of 2013 performance-based incentive stock option agreement
granted under 2001 equity incentive plan, as amended .+
Form of non-qualified stock option agreement granted under 2001 equity
incentive plan, as amended .+
Form of 2013 non-qualified stock option agreement for options issued in
exchange for the forfeiture of options granted under 2001 equity incentive
plan, as amended .+
Form of 2013 performance-based non-qualified stock option agreement
granted under 2001 equity incentive plan, as amended .+
Form of 2013 independent director stock option agreement for options
issued in exchange for the forfeiture of options granted under 2001 equity
incentive plan, as amended .+
Form of 2013 performance-based independent director stock option
agreement granted under 2001 equity incentive plan, as amended .+
10.10
2014 employee, director and consultant equity incentive plan. +
10.11
10.12
10.13
10.14
Form of stock option agreement granted under 2014 employee, director
and consultant equity incentive plan .+
Form of restricted stock unit agreement for executive officers under 2014
employee, director and consultant equity incentive plan. +
Form of restricted stock agreement for directors under 2014 employee,
director and consultant equity incentive plan. +
Multi-tenant industrial net lease, dated August 20, 2001, by and between
the Registrant and Cabot II — MA1M03, LLC (as successor landlord to
TMT290 Industrial Park, Inc.), as amended.
96
Filed
with this
Report
Incorporated by
Reference
herein from
Form or
Schedule
Form S-1
(Exhibit 4.8)
Filing Date
SEC File/Reg.
Number
4/28/14
333-195523
Amendment No. 5 to
Form S-1
(Exhibit 9.1)
6/12/14
333-195523
Form S-1
(Exhibit 10.1.1)
Form S-1
(Exhibit 10.1.2)
Form S-1
(Exhibit 10.1.3)
Form S-1
(Exhibit 10.1.4)
Form S-1
(Exhibit 10.1.5)
Form S-1
(Exhibit 10.1.6)
Form S-1
(Exhibit 10.1.7)
Form S-1
(Exhibit 10.1.8)
Form S-1
(Exhibit 10.1.9)
Form S-8
(Exhibit 99.10)
Amendment No. 1 to
Form S-1
(Exhibit 10.2.2)
Form 10-Q
(Exhibit 10.3)
Amendment No. 1 to
Form S-1
(Exhibit 10.2.3)
Form S-1
(Exhibit 10.3)
4/28/14
333-195523
4/28/14
333-195523
4/28/14
333-195523
4/28/14
333-195523
4/28/14
333-195523
4/28/14
333-195523
4/28/14
333-195523
4/28/14
333-195523
4/28/14
333-195523
8/13/14
333-198124
5/14/14
333-195523
11/7/14
001-36481
5/14/14
333-195523
4/28/14
333-195523
Exhibit
Number
10.15.1
10.15.2
10.15.3
10.15.4
10.15.5
10.15.6
10.16
10.17
10.18
10.19
10.20
10.21
Exhibit Description
Filed
with this
Report
Amended and Restated Loan and Security Agreement dated
September 3, 2014 and effective as of August 31, 2014, by and
between the Company and Silicon Valley Bank .
Consent and First Amendment to the Amended and Restated Loan
and Security Agreement, dated August 19, 2016, by and between
the Registrant and Silicon Valley Bank.
Second Amendment to the Amended and Restated Loan and
Security Agreement, dated November 23, 2016, by and between
the registrant and Silicon Valley Bank.
Third Amendment to the Amended and Restated Loan and
Security Agreement, dated December 27, 2016, by and between
the Registrant and Silicon Valley Bank.
Fourth Amendment to the Amended and Restated Loan and
Security Agreement, dated January 27, 2017, by and between the
Registrant and Silicon Valley Bank.
Fifth Amendment to the Amended and Restated Loan and
Security Agreement, dated September 27, 2017, by and between
the Registrant and Silicon Valley Bank.
Executive agreement, dated as of December 16, 2015, by and
between the Registrant and Donald R. Young. +
Executive agreement, dated as of December 16, 2015, by and
between the Registrant and John F. Fairbanks. +
Executive agreement, dated as of December 16, 2015, by and
between the Registrant and George L. Gould, Ph.D .+
Executive agreement, dated as of December 16, 2015, by and
between the Registrant and Jeffrey A. Ball. +
Executive agreement, dated as of December 16, 2015, by and
between the Registrant and Corby C. Whitaker. +
Executive agreement, dated as of December 16, 2015, by and
between the Registrant and Kelley W. Conte. +
10.22
Bonus plan. +
10.23
Form of participation letter of executive officers under bonus
plan. +
10.24
Non-Employee Director Compensation Policy . +
10.25
Cross license agreement dated as of April 1, 2006 by and between
Cabot Corporation and the Registrant, as amended. *
97
Incorporated by
Reference
herein from
Form or
Schedule
Form 8-K
(Exhibit 10.1)
Form 10-Q
(Exhibit 10.1)
Form 10-K
(Exhibit 10.15.3)
Form 10-K
(Exhibit 10.15.4)
Form 10-Q
(Exhibit 10.1)
Form 10-Q
(Exhibit 10.1)
Form 10-K
(Exhibit 10.16)
Form 10-K
(Exhibit 10.17)
Form 10-K
(Exhibit 10.18)
Form 10-K
(Exhibit 10.19)
Form 10-K
(Exhibit 10.20)
Form 10-K
(Exhibit 10.21)
Amendment No. 2 to
Form S-1
(Exhibit 10.15)
Form 10-K
(Exhibit 10.23)
Form 10-Q
(Exhibit 10.5)
Form S-1
(Exhibit 10.17)
Filing Date
SEC File/Reg.
Number
9/9/14
001-36481
11/3/16
001-36481
3/2/17
001-36481
3/2/17
001-36481
5/5/17
001-36481
11/3/17
001-36481
3/4/16
001-36481
3/4/16
001-36481
3/4/16
001-36481
3/4/16
001-36481
3/4/16
001-36481
3/4/16
001-36481
5/22/14
333-195523
3/2/17
001-36481
8/5/16
001-36481
4/28/14
333-195523
Exhibit
Number
10.2 6
10.27
10.28
10.29
10.30
10.31
10.32
14.1
21.1
23.1
31.1
31.2
32
Exhibit Description
Form of indemnification agreement with directors and certain officers. +
Inducement Agreement, dated February 15, 2016, by and between the
Registrant and the Development Authority of Bulloch County, the City of
Statesboro, Georgia and Bulloch County, Georgia.
PILOT Agreement, dated February 15, 2016, by and between the
Registrant and the Development Authority of Bulloch County, the City of
Statesboro, Georgia and Bulloch County, Georgia.
Performance and Accountability Agreement, dated February 15, 2016, by
and between the Registrant and the Development Authority of Bulloch
County, the Georgia Department of Community Affairs and the
administering agency for the OneGeorgia Authority.
Supply Agreement, dated June 21, 2016, by and between the Registrant
and BASF SE .*
Side Agreement, dated June 21, 2016, by and between the Registrant and
BASF SE .*
Joint Development Agreement, dated June 21, 2016, by and between the
Registrant and BASF SE .*
Code of business conduct and ethics.
Subsidiaries of the Registrant .
Consent of KPMG LLP.
Certification of principal executive officer under Section 302(a) of the
Sarbanes-Oxley Act of 2002.
Certification of principal financial officer under Section 302(a) of the
Sarbanes-Oxley Act of 2002.
Certifications of the principal executive officer and the principal financial
officer under Section 906 of the Sarbanes-Oxley Act of 2002.
98
Filed
with this
Report
Incorporated by
Reference
herein from
Form or
Schedule
Amendment No. 1 to
Form S-1
(Exhibit 10.18)
Filing Date
5/14/14
SEC File/Reg.
Number
333-195523
Form 10-Q
(Exhibit 10.1)
Form 10-Q
(Exhibit 10.2)
Form 10-Q
(Exhibit 10.3)
Form 10-Q
(Exhibit 10.1)
Form 10-Q
(Exhibit 10.2)
Form 10-Q
(Exhibit 10.3)
Form 8-K
(Exhibit 14.1)
5/6/16
001-36481
5/6/16
001-36481
5/6/16
001-36481
8/5/16
8/5/16
8/5/16
001-36481
001-36481
001-36481
6/22/15
001-36481
X
X
X
X
X
Incorporated by
Reference
herein from
Form or
Schedule
Filed
with this
Report
X
Filing Date
SEC File/Reg.
Number
Exhibit Description
The following materials from the Registrant’s
Annual Report on Form 10-K for the fiscal year
ended December 31, 2017, formatted in XBRL (eXtensible Business
Reporting Language): (i) Consolidated Balance Sheets as of December 31,
2017 and 2016, (ii) Consolidated Statements of Operations for the Years
Ended December 31, 2017, 2016 and 2015, (iii) Consolidated Statements
Stockholders’ Equity for the Years Ended December 31, 2017, 2016 and
2015, (iv) Consolidated Statements of Cash Flows for the
Years Ended December 31, 2017, 2016, and 2015, and (v) Notes to
Consolidated Financial Statements.
Management contract or compensatory plan or arrangement.
Confidential treatment has been granted with respect to certain portions of this Exhibit, which portions have been omitted and filed separately with the
Securities and Exchange Commission as part of an application for confidential treatment pursuant to the Securities Act of 1933, as amended.
Exhibit
Number
101
+
*
Item 16 .
FORM 10-K SUMMARY
None.
99
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
SIGNAT URES
Date: March 1, 2018
ASPEN AEROGELS, INC.
By:
/s/ Donald R. Young
Donald R. Young
President and Chief Executive Officer
(principal executive officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant
and in the capacities indicated below and on the dates indicated.
Signature
/s/ Donald R. Young
Donald R. Young
/s/ John F. Fairbanks
John F. Fairbanks
/s/ Mark L. Noetzel
Mark L. Noetzel
/s/ Rebecca A. Blalock
Rebecca A. Blalock
/s/ Robert M. Gervis
Robert M. Gervis
/s/ Steven R. Mitchell
Steven R. Mitchell
/s/ William P. Noglows
William P. Noglows
/s/ Richard F. Reilly
Richard F. Reilly
Title
Date
President, Chief Executive Officer
and Director (principal executive
officer)
Vice President, Chief Financial
Officer and Treasurer (principal
financial officer and principal
accounting officer)
March 1, 2018
March 1, 2018
Chairman of the Board
March 1, 2018
Director
Director
Director
Director
Director
100
March 1, 2018
March 1, 2018
March 1, 2018
March 1, 2018
March 1, 2018
SUBSIDIARIES OF ASPEN AEROGELS, INC.
Exhibit 21.1
Aspen Aerogels Germany GmbH, a German entity
Aspen Aerogels Rhode Island, LLC, a Rhode Island limited liability company
Aspen Aerogels Georgia, LLC, a Georgia limited liability company
Consent of Independent Registered Public Accounting Firm
Exhibit 23.1
The Board of Directors
Aspen Aerogels, Inc.:
We consent to the incorporation by reference in the registration statements (Nos. 333-216434, 333-209995 and 333-198124) on Form S-8 and registration statement
(No. 333-221403) on Form S-3 of Aspen Aerogels, Inc. of our report dated March 1, 2018, with respect to the consolidated balance sheets of Aspen Aerogels, Inc.
as of December 31, 2017 and 2016, and the related consolidated statements of income, stockholders’ equity, and cash flows for each of the years in the three-year
period ended December 31, 2017, and the related notes and financial statement schedule (collectively, the “consolidated financial statements”), which report
appears in the December 31, 2017 annual report on Form 10-K of Aspen Aerogels, Inc.
Boston, Massachusetts
March 1, 2018
/s/ KPMG LLP
Exhibit 31.1
I, Donald R. Young, certify that:
1. I have reviewed this annual report on Form 10-K of Aspen Aerogels, Inc.;
CERTIFICATIONS UNDER SECTION 302
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the
registrant and have:
a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that
material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the
period in which this report is being prepared;
b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to
provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles;
c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of
the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal
quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s
internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to
adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over
financial reporting.
Date: March 1, 2018
/s/ Donald R. Young
Donald R. Young
President and Chief Executive Officer
(principal executive officer)
Exhibit 31.2
I, John F. Fairbanks, certify that:
1. I have reviewed this annual report on Form 10-K of Aspen Aerogels, Inc.;
CERTIFICATIONS UNDER SECTION 302
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the
registrant and have:
a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that
material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the
period in which this report is being prepared;
b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to
provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles;
c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of
the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal
quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s
internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to
adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over
financial reporting.
Date: March 1, 2018
/s/ John F. Fairbanks
John F. Fairbanks
Vice President, Chief Financial Officer and Treasurer
(principal financial officer and principal accounting officer)
CERTIFICATIONS UNDER SECTION 906
Exhibit 32
Pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of section 1350, chapter 63 of title 18, United States Code), each of the
undersigned officers of Aspen Aerogels, Inc., a Delaware corporation (the “Company”), does hereby certify, to such officer’s knowledge, that:
The Annual Report for the year ended December 31, 2017 (the “Form 10-K”) of the Company fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934, and the information contained in the Form 10-K fairly presents, in all material respects, the financial condition and
results of operations of the Company.
Dated: March 1, 2018
Dated: March 1, 2018
/s/ Donald R. Young
Donald R. Young
President and Chief Executive Officer
(principal executive officer)
/s/ John F. Fairbanks
John F. Fairbanks
Vice President, Chief Financial Officer and Treasurer
(principal financial officer and principal accounting officer)