ASPEN AEROGELS INC, 10-K filed on 3/13/2015
Annual Report
Document and Entity Information (USD $)
In Millions, except Share data, unless otherwise specified
12 Months Ended
Dec. 31, 2014
Mar. 2, 2015
Jun. 30, 2014
Document And Entity Information [Abstract]
 
 
 
Document Type
10-K 
 
 
Amendment Flag
false 
 
 
Document Period End Date
Dec. 31, 2014 
 
 
Document Fiscal Year Focus
2014 
 
 
Document Fiscal Period Focus
FY 
 
 
Trading Symbol
ASPN 
 
 
Entity Registrant Name
ASPEN AEROGELS INC 
 
 
Entity Central Index Key
0001145986 
 
 
Current Fiscal Year End Date
--12-31 
 
 
Entity Well-known Seasoned Issuer
No 
 
 
Entity Current Reporting Status
Yes 
 
 
Entity Voluntary Filers
No 
 
 
Entity Filer Category
Non-accelerated Filer 
 
 
Entity Common Stock, Shares Outstanding
 
22,992,273 
 
Entity Public Float
 
 
$ 207.4 
Consolidated Balance Sheets (USD $)
In Thousands, unless otherwise specified
Dec. 31, 2014
Dec. 31, 2013
Current assets:
 
 
Cash and cash equivalents
$ 49,719 
$ 1,574 
Accounts receivable, net of allowance for doubtful accounts
17,924 
18,762 
Inventories
4,897 
6,892 
Prepaid expenses and other current assets
836 
791 
Total current assets
73,376 
28,019 
Property, plant and equipment, net
71,492 
62,023 
Other assets
175 
191 
Total assets
145,043 
90,233 
Current liabilities:
 
 
Subordinated notes, current portion
 
17,306 
Convertible notes, current portion
 
435 
Capital leases, current portion
76 
75 
Revolving line of credit
1,000 
Accounts payable
14,202 
7,114 
Accrued expenses
5,588 
4,814 
Deferred revenue
292 
595 
Other current liabilities
50 
50 
Total current liabilities
20,208 
31,389 
Senior convertible notes
 
28,135 
Convertible notes, excluding current portion
 
91,439 
Capital leases, excluding current portion
89 
165 
Other long-term liabilities
1,030 
1,071 
Total liabilities
21,327 
152,199 
Commitments and contingencies (Note 12)
   
   
Stockholders' equity (deficit):
 
 
Convertible preferred stock, value
   
   
Common stock, $0.00001 par value; 125,000,000 shares authorized, 22,992,273 shares issued and 22,922,273 outstanding at December 31, 2014; 255,702 shares authorized, 3,137 shares issued and outstanding at December 31, 2013
Additional paid-in capital
522,800 
270,794 
Accumulated deficit
(399,084)
(332,760)
Total stockholders' equity (deficit)
123,716 
(61,966)
Total liabilities, convertible preferred stock and stockholders' equity (deficit)
145,043 
90,233 
Series C [Member]
 
 
Stockholders' equity (deficit):
 
 
Convertible preferred stock, value
   
   
Series B [Member]
 
 
Stockholders' equity (deficit):
 
 
Convertible preferred stock, value
   
   
Series A [Member]
 
 
Stockholders' equity (deficit):
 
 
Convertible preferred stock, value
   
   
Consolidated Balance Sheets (Parenthetical) (USD $)
Dec. 31, 2014
Dec. 31, 2013
Convertible preferred stock, par value
$ 0.00001 
$ 0.00001 
Convertible preferred stock, shares authorized
5,000,000 
Convertible preferred stock, shares issued
Convertible preferred stock, shares outstanding
Common stock, par value
$ 0.00001 
$ 0.00001 
Common stock, shares authorized
125,000,000 
255,702 
Common stock, shares issued
22,992,273 
3,137 
Common stock, shares outstanding
22,992,273 
3,137 
Series C [Member]
 
 
Convertible preferred stock, par value
$ 0.00001 
$ 0.00001 
Convertible preferred stock, shares authorized
116,024,242 
Convertible preferred stock, shares issued
20,000 
Convertible preferred stock, shares outstanding
20,000 
Series B [Member]
 
 
Convertible preferred stock, par value
$ 0.00001 
$ 0.00001 
Convertible preferred stock, shares authorized
1,601,053 
Convertible preferred stock, shares issued
1,601,053 
Convertible preferred stock, shares outstanding
1,601,053 
Series A [Member]
 
 
Convertible preferred stock, par value
$ 0.00001 
$ 0.00001 
Convertible preferred stock, shares authorized
5,284,347 
Convertible preferred stock, shares issued
5,284,347 
Convertible preferred stock, shares outstanding
5,284,347 
Consolidated Statements of Operations (USD $)
In Thousands, except Share data, unless otherwise specified
12 Months Ended
Dec. 31, 2014
Dec. 31, 2013
Dec. 31, 2012
Revenue:
 
 
 
Product
$ 99,259 
$ 82,057 
$ 60,389 
Research services
3,140 
4,037 
3,064 
Total revenue
102,399 
86,094 
63,453 
Cost of revenue:
 
 
 
Product
83,677 
73,399 
70,025 
Research services
1,642 
1,964 
1,396 
Gross profit (loss)
17,080 
10,731 
(7,968)
Operating expenses:
 
 
 
Research and development
5,980 
5,159 
5,142 
Sales and marketing
10,290 
9,271 
8,564 
General and administrative
16,853 
12,833 
11,299 
Write-off of construction in progress
 
3,440 
 
Total operating expenses
33,123 
30,703 
25,005 
Income (loss) from operations
(16,043)
(19,972)
(32,973)
Other income (expense):
 
 
 
Interest expense
(50,281)
(30,599)
(21,790)
Gain on extinguishment of convertible notes
 
8,898 
 
Loss on exchange of convertible notes
 
(5,697)
 
Debt extinguishment costs
 
 
(1,379)
Costs associated with postponed public offering
 
(241)
 
Total other income (expense), net
(50,281)
(27,639)
(23,169)
Net income (loss)
(66,324)
(47,611)
(56,142)
Net income (loss) attributable to common stockholders
$ (66,324)
$ 1,338 
$ (8,941)
Net income (loss) attributable to common stockholders per common share:
 
 
 
Basic
$ (5.37)
$ 426.52 
$ (2,851.08)
Diluted
$ (5.37)
$ 410.56 
$ (2,851.08)
Weighted-average common shares outstanding:
 
 
 
Basic
12,349,456 
3,137 
3,136 
Diluted
12,349,456 
3,259 
3,136 
Consolidated Statements of Stockholders' Equity (Deficit) (USD $)
In Thousands, except Share data
Total
USD ($)
IPO [Member]
USD ($)
Preferred Stock 0.00001 Par Value [Member]
USD ($)
Common Stock 0.00001 Par Value [Member]
USD ($)
Common Stock 0.00001 Par Value [Member]
IPO [Member]
Additional Paid-in Capital [Member]
USD ($)
Additional Paid-in Capital [Member]
IPO [Member]
USD ($)
Accumulated Deficit [Member]
USD ($)
Series C Convertible Preferred Stock 0.00001 Par Value [Member]
USD ($)
Series B Convertible Preferred Stock 0.00001 Par Value [Member]
USD ($)
Series A Convertible Preferred Stock 0.00001 Par Value [Member]
USD ($)
Beginning balance at Dec. 31, 2011
$ (113,513)
 
 
 
 
$ 115,494 
 
$ (229,007)
 
 
 
Beginning balance, shares at Dec. 31, 2011
 
 
 
3,134 
 
 
 
 
 
 
 
Net income (loss)
(56,142)
 
 
 
 
 
 
(56,142)
 
 
 
Issuance of common stock
 
 
 
 
 
 
 
 
 
Issuance of common stock, shares
 
 
 
 
 
 
 
 
 
 
Stock compensation expense
1,654 
 
 
 
 
1,654 
 
 
 
 
 
Dividends on redeemable convertible preferred stock
(4,191)
 
 
 
 
(4,191)
 
 
 
 
 
Changes in redeemable convertible preferred stock to redemption value
51,392 
 
 
 
 
51,392 
 
 
 
 
 
Ending balance at Dec. 31, 2012
(120,795)
 
 
 
 
164,354 
 
(285,149)
 
 
 
Ending balance, shares at Dec. 31, 2012
 
 
 
3,137 
 
 
 
 
 
 
 
Net income (loss)
(47,611)
 
 
 
 
 
 
(47,611)
 
 
 
Stock compensation expense
4,426 
 
 
 
 
4,426 
 
 
 
 
 
Dividends on redeemable convertible preferred stock
(996)
 
 
 
 
(996)
 
 
 
 
 
Changes in redemption value of redeemable convertible preferred stock at extinguishment
86,161 
 
 
 
 
86,161 
 
 
 
 
 
Reclassification of redeemable convertible preferred stock from temporary to permanent equity
1,085 
 
 
 
 
1,085 
 
 
 
 
 
Reclassification of redeemable convertible preferred stock from temporary to permanent equity, shares
 
 
 
 
 
 
 
 
 
1,601,053 
5,284,347 
Issuance of Series C convertible preferred stock, shares
 
 
 
 
 
 
 
 
20,000 
 
 
Issuance of Series C preferred stock warrants, net of issuance costs
15,764 
 
 
 
 
15,764 
 
 
 
 
 
Ending balance at Dec. 31, 2013
(61,966)
 
 
 
 
270,794 
 
(332,760)
 
 
 
Ending balance, shares at Dec. 31, 2013
 
 
 
3,137 
 
 
 
 
20,000 
1,601,053 
5,284,347 
Net income (loss)
(66,324)
 
 
 
 
 
 
(66,324)
 
 
 
Issuance of common stock
74,712 
 
 
 
74,712 
 
 
 
 
Issuance of common stock, shares
 
 
 
31 
7,500,000 
 
 
 
 
 
 
Stock compensation expense
8,781 
 
 
 
 
8,781 
 
 
 
 
 
Net cashless exercise of Series C warrants
 
 
 
Net cashless exercise of Series C warrants, shares
 
 
 
 
 
 
 
 
86,997,362 
 
 
Conversion of convertible preferred stock to common stock
 
 
 
Conversion of convertible preferred stock to common stock, shares
 
 
 
115,982 
 
 
 
 
(87,017,362)
(1,601,053)
(5,284,347)
Conversion of convertible debt to common stock
168,510 
 
 
 
 
168,510 
 
 
 
 
 
Conversion of convertible debt to common stock, shares
 
 
 
15,319,034 
 
 
 
 
 
 
 
Issuance of restricted stock
 
 
 
61,816 
 
 
 
 
 
 
 
Issuance of Restricted Stock, shares
 
 
 
Forfeiture of restricted stock
 
 
 
Forfeiture of Restricted Stock, shares
 
 
 
(7,727)
 
 
 
 
 
 
 
Ending balance at Dec. 31, 2014
$ 123,716 
 
 
 
 
$ 522,800 
 
$ (399,084)
 
 
 
Ending balance, shares at Dec. 31, 2014
 
 
 
22,992,273 
 
 
 
 
 
 
 
Consolidated Statements of Cash Flows (USD $)
In Thousands, unless otherwise specified
12 Months Ended
Dec. 31, 2014
Dec. 31, 2013
Dec. 31, 2012
Cash flows from operating activities:
 
 
 
Net income (loss)
$ (66,324)
$ (47,611)
$ (56,142)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
 
 
 
Depreciation and amortization
10,183 
10,061 
9,684 
Write-off of construction in progress
 
3,440 
 
Loss on disposal of assets
119 
230 
2,489 
Debt issuance costs and noncash interest expenses
47 
998 
2,959 
Write-off of costs associated with postponed public offering
 
241 
 
Accretion of debt to fair value
50,011 
18,696 
18,678 
Gain on extinguishment of convertible notes
 
(8,898)
 
Loss on exchange of convertible notes
 
5,697 
 
Issuance of Series C preferred stock warrants in connection with senior convertible notes
 
10,677 
 
Stock compensation expense
8,781 
4,426 
1,654 
Loss on extinguishment of debt
 
 
1,379 
Other
(31)
(25)
(2)
Changes in operating assets and liabilities:
 
 
 
Accounts receivable
838 
(4,809)
(6,796)
Inventories
1,995 
(547)
3,177 
Prepaid expenses and other assets
(129)
(287)
(2)
Accounts payable
687 
(1,686)
1,676 
Accrued expenses
774 
2,297 
1,086 
Deferred revenue
(303)
(588)
281 
Other liabilities
 
(6,000)
(6,000)
Net cash provided by (used in) operating activities
6,648 
(13,688)
(25,879)
Cash flows from investing activities:
 
 
 
Capital expenditures
(13,241)
(3,329)
(10,236)
Decrease in restricted cash
 
 
451 
Net cash used in investing activities
(13,241)
(3,329)
(9,785)
Cash flows from financing activities:
 
 
 
Borrowings under line of credit
4,500 
19,929 
25,515 
Repayments under line of credit
(5,500)
(20,267)
(24,177)
Proceeds from issuance of long-term debt
 
18,500 
24,890 
Repayment of borrowings under long-term debt
(18,849)
 
 
Financing costs
(47)
(872)
(425)
Proceeds from initial public offering
74,712 
 
 
Repayment of obligations under capital lease
(80)
(42)
(42)
Proceeds from issuance of common stock
 
Net cash provided by financing activities
54,738 
17,248 
25,766 
Net increase (decrease) in cash
48,145 
231 
(9,898)
Cash at beginning of period
1,574 
1,343 
11,241 
Cash at end of period
49,719 
1,574 
1,343 
Supplemental disclosures of cash flow information:
 
 
 
Interest paid
223 
228 
152 
Income taxes paid
Supplemental disclosures of non-cash activities:
 
 
 
Conversion of convertible and senior convertible notes to common stock
168,510 
 
 
Accrued dividends on preferred stock
 
996 
4,191 
Changes in redemption value of redeemable convertible preferred stock
 
(86,161)
(51,392)
Reclassification of redeemable convertible preferred stock from temporary to permanent equity
 
(1,085)
 
Changes in accrued capital expenditures
6,401 
(523)
(38)
Capitalized interest
34 
70 
2,270 
Capital lease
$ 5 
$ 160 
 
Description of Business
Description of Business

(1) Description of Business

Nature of Business

Aspen Aerogels, Inc. (the Company) is an energy technology company that designs, develops and manufactures innovative, high-performance aerogel insulation. 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 two wholly owned subsidiaries: Aspen Aerogels Rhode Island, LLC and Aspen Aerogels Germany, GmbH.

On June 18, 2014, the Company completed an initial public offering (IPO) of 7,500,000 shares of its common stock at a public offering price of $11.00 per share. The Company received net proceeds of $74.7 million after deducting underwriting discounts and commissions of $4.3 million and offering expenses of approximately $3.5 million. Upon the closing of the offering, all of the Company’s then-outstanding (i) warrants to purchase Series C preferred stock, (the “Series C warrants”) were subject to an automatic net cashless exercise, (ii) convertible preferred stock (including the shares of Series C preferred stock issued upon the automatic net cashless exercise of Series C warrants) automatically converted into 115,982 shares of common stock, and (iii) Convertible Notes (see note 8) and Senior Convertible Notes (see note 7) automatically converted into 15,319,034 shares of common stock.

Prior to the closing of the offering, the Company completed a 1-for-824.7412544 reverse stock split of its common stock. All common shares and related per share amounts in the financial statements and notes have been adjusted retroactively to reflect the reverse stock split.

Summary of Basis of Presentation and Significant Accounting Policies
Summary of Basis of Presentation and Significant Accounting Policies

(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 generally accepted accounting principles in the United States of America, include the accounts of the Company and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.

Reclassification

The December 31, 2013 balance sheet reflects a $0.2 million reclassification of the Company’s sales returns reserve from a component of accrued expenses to a reduction of accounts receivable, a $0.1 million reclassification of other assets to prepaid expenses and other current assets and a reclassification of $0.1 million of other long term liabilities to other current liabilities to conform to the current period’s presentation. The change has no impact on the results of operations.

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, inventory valuation, the carrying amount of property and equipment, fair value of debt and capital stock, 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 it believes to be reasonable under the circumstances. Management adjusts such estimates and assumptions when facts and circumstances dictate. Illiquid credit markets, volatile equity markets and declines in business investment increase the uncertainty inherent in such estimates and assumptions. As future events and their effects cannot be determined with precision, actual results could differ significantly from these estimates. Changes in these estimates resulting from continuing changes in the economic environment will be reflected in the financial statements in future periods.

Cash & 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.

Fair Value of Financial Instruments

Fair value is an exit price that represents the amount that would be received from the sale of an asset or paid to transfer a liability in an orderly transaction between market participants. Accordingly, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. The Company discloses the manner in which fair value is determined for assets and liabilities based on a three-tiered fair value hierarchy. The hierarchy ranks the quality and reliability of the information used to determine the fair values. The three levels of inputs described in the standard are:

Level 1: Quoted prices in active markets for identical assets or liabilities.

Level 2: Observable inputs, other than Level 1 prices, for the assets or liabilities, either directly or indirectly, for substantially the full term of the assets or liabilities.

Level 3: Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Under the Fair Value Option Subsections of Financial Accounting Standards Board (FASB) ASC Subtopic 825-10, Financial Instruments — Overall, the Company has the irrevocable option to report most financial assets and financial liabilities at fair value on an instrument by instrument basis, with changes in fair value reported in earnings each reporting period. As a result of electing this option, the Company recorded its Subordinated Notes, Senior Convertible Notes and Convertible Notes at fair value in order to measure these liabilities at amounts that more accurately reflect the economics of these instruments (see notes 6, 7 and 8).

At December 31, 2014, no financial assets or liabilities were measured at fair value. At December 31, 2013, the Company’s Subordinated Notes, Senior Convertible Notes and Convertible Notes were valued utilizing Level 3 inputs.

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 consist primarily of insulation distributors, insulation contractors 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. The Company has not experienced any meaningful non-payment or write-offs of accounts receivable. Accordingly, the allowance for doubtful accounts was zero at December 31, 2014 and 2013. The Company does not have any off-balance-sheet credit exposure related to its customers.

 

For the year ended December 31, 2014, two customers represented 13% and 12% of total revenue, respectively. For the year ended December 31, 2013, two customers represented 15% and 11% of total revenue, respectively. For the year ended December 31, 2012, one customer represented 13% of total revenue.

At December 31, 2014, the Company had three customers that accounted for 17%, 17% and 11% of accounts receivable, respectively. At December 31, 2013, the Company had three customers that accounted for 20%, 14% and 11% 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, or market. 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 or market. The amount of any such provision is equal to the difference between the cost of inventory and the estimated market 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 lease. Expenditures for maintenance and repairs are charged to expense as incurred, whereas major betterments are capitalized as additions to property, plant and equipment.

Interest expense capitalization commences at the time a capital project begins construction and concludes when the project is completed. The Company has capitalized interest costs as part of the historical cost of constructing its manufacturing facilities. The Company capitalized less than $0.1 million, $0.1 million and $2.3 million in interest costs related to the build-out of the East Providence facility during the years ended December 31, 2014, 2013 and 2012, respectively.

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 and patent costs. Patent costs are amortized over the life of the patent.

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 flows models, quoted market values and third-party independent appraisals, as considered necessary.

Asset Retirement Obligations

The Company records asset retirement obligations 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.

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.

Redeemable Convertible Preferred Stock

The Company’s Series A and Series B redeemable convertible preferred stock were classified as temporary equity and shown net of issuance costs at December 31, 2012. The Company recognized changes in the redemption value and adjusted the carrying amount of the redeemable convertible preferred stock to equal the redemption value at the end of each reporting period.

As part of an amendment to its certificate of incorporation in 2013, the Company changed the terms of its redeemable convertible preferred stock such that the fair value of the shares immediately after the amendment was significantly different from the fair value of the shares immediately before the amendment. Accordingly, the Company accounted for the amendment as an extinguishment. The change in fair value upon extinguishment was recorded in additional paid-in capital (see note 13).

Revenue Recognition

The Company recognizes revenue from the sale of products and delivery of research and development services. Revenue is recognized when all of the following criteria are met: persuasive evidence of an arrangement exists, the price to the buyer is fixed or determinable, delivery has occurred or services have been provided, and collectability is reasonably assured.

Product Revenue

Product revenue is generally recognized upon transfer of title and risk of loss, which is generally upon shipment or delivery. The Company’s customary shipping terms are free on board (FOB) shipping point; however, some products are shipped using FOB destination shipping terms. Revenue associated with products shipped FOB destination is recognized when the products reach their specified destination. Products are typically delivered without significant post-sale obligations to customers.

 

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 and $0.2 million at December 31, 2014 and 2013, respectively.

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 one to two years from the date of sale, depending on the type of product purchased. The warranties provide that the Company’s products will be free from defects in material and workmanship, and will, under normal use, conform to the specifications for the product. For the years ended December 31, 2014, 2013 and 2012, warranty claims and charges have been insignificant.

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; (2) for cost-plus-fixed-fee contracts, the Company records revenue that is equal to total payroll cost incurred times a stated factor plus reimbursable expenses, to a stated upper limit. The primary cost is the labor effort expended in completing research and the only deliverable other than the labor hours expended is reporting of research results to the customer. Because the input measure of labor hours expended is also reflective of the output measure, it is a reliable means to measure the extent of progress towards completion. Revisions in cost estimates and fees during the course of the contract are reflected in the accounting period in which the facts that require the revisions become known.

Provision is made for the entire amount of future estimated losses on contracts when the current contract estimate is a loss while claims for additional contract compensation are not reflected in the accounts until the year in which such claims are identifiable and receipt is probable. 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. Adjustments to revenue as a result of audit have been insignificant.

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

Stock-based compensation cost is measured at the grant date based on the fair value of the award. Expense is recognized on a straight-line basis over the requisite service period for all awards with service conditions. For performance-based awards, the grant date fair value is recognized as expense when the condition is probable of being achieved, and then on a graded basis over the requisite service period. The Company uses the Black-Scholes option-pricing model to determine the fair value of service-based option awards, which requires a number of complex and subjective assumptions including fair value of the underlying security, the expected volatility of the underlying security, a risk-free interest rate and the expected term of the option. The fair value of restricted stock and restricted stock unit grants is determined using the closing trading price of the Company’s common stock on the date of grant. For performance-based stock options issued during the year ended December 31, 2013, the Company used a Monte Carlo simulation model to estimate the number of options the Company expected to remain outstanding and eligible for vesting upon completion of an IPO. The simulation model was based on a number of complex assumptions including the terms of the performance condition, the expected value of the Company’s common stock at the time of its IPO, the expected time from the date of grant to its IPO, and expected volatility. The compensation cost of these performance-based options was determined by multiplying the Black-Scholes estimate of grant date fair value by the percentage of options expected to remain outstanding and eligible for vesting upon completion of the Company’s IPO.

Research and Development

Costs incurred in the research and development of the Company’s products are expensed as incurred and include compensation and related costs, services provided by third-party contractors, materials and supplies and are classified as research and development expenses. Research and development costs directly associated with research services revenue are classified as research services in cost of revenue.

Earnings Per Share

Prior to the IPO, net income (loss) per common share was calculated using the two-class method, which is an earnings allocation formula that determines net income (loss) per share for the holders of the Company’s common shares and participating securities. Prior to their conversion to common stock at the time of the Company’s IPO, the Company’s Series A preferred stock, Series B preferred stock, Series C preferred stock and Series C preferred stock warrants contained participation rights in any dividend to be paid by the Company to holders of its common shares and were deemed to be participating securities. Net income (loss) available to common shareholders and participating securities was allocated to each share on an as-if-converted basis as if all of the earnings for the period had been distributed. The participating securities did not include a contractual obligation to share in losses of the Company and were not included in the calculation of net loss per share in the periods that have a net loss.

Diluted net income (loss) per share is computed using the more dilutive of (a) the two-class method, or (b) the if-converted method. The Company allocates net income (loss) first to preferred stockholders and holders of warrants to purchase preferred stock based on dividend rights and then to common stockholders, preferred stockholders and preferred warrant holders based on ownership interests. 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 and warrants. Common equivalent shares are excluded from the computation of diluted net income (loss) per share if their effect is antidilutive.

Subsequent to the IPO, the Company calculates net income (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, restricted stock units and warrants. Common equivalent shares are excluded from the computation of diluted net income (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 maker reviews consolidated operating results to make decisions about allocating resources and assessing performance for the entire Company. The Company views its operations and manages its business as one operating segment.

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

 

     Year Ended December 31  
     2014      2013      2012  
     (In thousands)  

Revenue:

        

U.S.

   $ 39,809       $ 30,164       $ 19,909   

International

     62,590         55,930         43,544   
  

 

 

    

 

 

    

 

 

 

Total

$ 102,399    $ 86,094    $ 63,453   
  

 

 

    

 

 

    

 

 

 

Recently Issued Accounting Standards

In May 2014, the FASB issued Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers. The standard will eliminate the transaction- and industry-specific revenue recognition guidance under current U.S. GAAP and replace it with a principle based approach for determining revenue recognition. Public entities are required to apply the revenue recognition standard for annual reporting period beginning on or after December 15, 2016, including interim periods within that annual reporting period. Early application is not permitted. The Company has not yet selected a transition method and is evaluating the effect that the updated standard will have on its consolidated financial statements and related disclosures.

In August 2014, the FASB issued ASU 2014-15, Presentation of Financial Statements—Going Concern: Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. The standard requires an entity’s management to evaluate whether there are conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued. Public entities are required to apply standards for annual reporting periods ending after December 15, 2016, and interim periods thereafter. Early application is permitted. The Company early adopted this standard and it did not have a material impact on its consolidated financial statements.

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, the Company believes that the impact of recently issued standards that are not yet effective will not have a material impact on its financial position or results of operations upon adoption.

Inventories
Inventories

(3) Inventories

Inventories consist of the following:

 

     December 31  
     2014      2013  
     (In thousands)  

Raw material

   $ 4,052       $ 2,813   

Finished goods

     845         4,079   
  

 

 

    

 

 

 

Total

$ 4,897    $ 6,892   
  

 

 

    

 

 

 

Property, Plant and Equipment, Net
Property, Plant and Equipment, Net

(4) Property, Plant and Equipment, Net

Property, plant and equipment consist of the following:

 

     December 31       
     2014      2013      Useful life
     (In thousands)       

Construction in progress

   $ 24,124       $ 6,177      

Buildings

     16,303         16,303       30 years

Machinery and equipment

     78,378         77,466       5 — 10 years

Computer equipment and software

     5,556         5,298       3 years
  

 

 

    

 

 

    

Total

  124,361      105,244   

Accumulated depreciation and amortization

  (52,869   (43,221
  

 

 

    

 

 

    

Property, plant and equipment, net

$ 71,492    $ 62,023   
  

 

 

    

 

 

    

Plant and equipment under capital leases consist of the following:

 

     December 31  
     2014      2013  
     (In thousands)  

Office equipment, at cost

   $ 118       $ 113   

Vehicles, at cost

     288         288   
  

 

 

    

 

 

 

Total capital leases

  406      401   

Accumulated amortization

  (265   (178
  

 

 

    

 

 

 

Capital leases, net

$ 141    $ 223   
  

 

 

    

 

 

 

Depreciation expense was $10.1 million, $10.0 million and $9.6 million for the years ended December 31, 2014, 2013 and 2012, respectively. Amortization associated with assets under capital leases was less than $0.1 million, for each of the years ended December 31, 2014, 2013 and 2012.

During the fourth quarter of 2012, certain equipment related to the Company’s manufacturing operations in the East Providence facility was taken out of service with no future alternative use. The remaining carrying value of the equipment of $2.5 million was charged to cost of sales.

During the fourth quarter of 2013, the Company completed its 2014 operating plan, which contemplated alternatives to complete the build out of the East Providence facility. In conjunction with this process, the Company performed an assessment of on-hand, long-lead time equipment for the third production line and determined that certain costs and partially completed assets had no future alternative use. As a result, the Company recorded a write-off of construction in progress totaling $3.4 million, inclusive of $0.4 million of capitalized interest, for the year ended December 31, 2013. In addition, $2.3 million of equipment was identified as having an alternative use as spare parts for the existing production lines.

 

Construction in progress totaling $24.1 million and $6.2 million, at December 31, 2014 and 2013, respectively, related primarily to the construction of a third production line and other capital projects at the East Providence facility.

Accrued Expenses
Accrued Expenses

(5) Accrued Expenses

Accrued expenses consist of the following:

 

     December 31  
     2014      2013  
     (In thousands)  

Employee compensation

   $ 4,851       $ 3,926   

Professional fees

     76         200   

Deferred rent

     155         112   

Other accrued expenses

     506         576   
  

 

 

    

 

 

 
$ 5,588    $ 4,814   
  

 

 

    

 

 

 
Subordinated Notes
Subordinated Notes

(6) Subordinated Notes

Subordinated Notes consists of the following:

 

     December 31  
     2014      2013  
     (In thousands)  

Subordinated Notes

   $ —         $ 17,306   

Current maturities of Subordinated Notes

     —          (17,306
  

 

 

    

 

 

 

Subordinated Notes, excluding current portion

$       —      $ —    
  

 

 

    

 

 

 

On December 29, 2010, the Company issued 12% Secured Subordinated Promissory Notes (the Subordinated Notes) for aggregate proceeds of $10.0 million with an original maturity date of December 29, 2015. The proceeds were used to fund the expansion of a second manufacturing line at the East Providence facility. The Subordinated Notes were collateralized by certain of the Company’s assets at the East Providence facility.

All accrued interest on the Subordinated Notes was compounded semi-annually and added to principal on June 30th and December 31st of each year. Accrued and unpaid interest on the Subordinated Notes was due and payable at maturity. The Subordinated Notes were subject to certain financial covenants, which include a minimum tangible net worth calculation.

In conjunction with the financing, the Company issued 181 detachable stock warrants to purchase the Company’s common stock at $8.25 per share. The warrants were immediately exercisable and set to expire on December 29, 2017. The Company determined that the warrants, which are subject to net share settlement, are equity classified. A portion of the debt proceeds totaling $2.2 million was allocated to the warrants based on the estimated fair value of the warrants using the Black Scholes option pricing model and the following assumptions: (i) risk free interest rate of 2.75%, (ii) life of 7.5 years, (iii) volatility of 50%, and (iv) expected dividend yield of zero. The debt discount was being amortized to interest expense utilizing the effective interest rate method over the term of the Subordinated Notes.

The Company executed several amendments to the Subordinated Notes prior to September 26, 2012, in which the maturity date of the Subordinated Notes was extended to March 2, 2014 and the interest rate was increased to 12.75% and then to 15% per annum. The Company determined that these amendments were not substantial and represented modifications at the respective amendment dates.

 

In connection with the issuances of the Convertible Notes on September 26, 2012, the terms of the Subordinated Notes were amended (i) to increase the interest rate to 20% per annum and (ii) to add a premium which provided each note holder with additional interest equal to the amount of interest that would have accrued to the date of the amendment if the notes had provided interest at a rate of 20% per annum on the original principal amount and from the initial date of issuance. The applicable premium of $1.4 million of additional interest was due upon maturity. In conjunction with the Company’s March 2013 financing (see note 7), the Company further amended the terms of the Subordinated Notes to extend the maturity date to September 30, 2014.

The Company determined that the present value of the cash flow pursuant to the Subordinated Notes, as amended on September 26, 2012, was more than 10% greater than the remaining cash flow pursuant to the notes prior to the amendment. Accordingly, the Company accounted for the amendment as an extinguishment and reissuance of new Subordinated Notes. The Company recorded a $1.4 million loss associated with the extinguishment, which represents the difference between the carrying value of the original Subordinated Notes and the fair value of the new Subordinated Notes.

Subsequent to the extinguishment and upon reissuance of the Subordinated Notes, the Company elected the fair value option for the Subordinated Notes and recorded the instrument at fair value. The fair value of the Subordinated Notes was determined by analysis of the amount to be paid on the notes at the occurrence of certain events in which the Subordinated Notes would be repaid to the noteholders in cash. The probability weighted discounted cash flow analysis utilized assumptions related to the probability of the occurrence of each of the various events and appropriate discount rates for each of the scenarios.

At December 31, 2012 the valuations were calculated at an implied discount of approximately 31% and were weighted as follows: repayment prior to maturity on June 30, 2013, 65%; and repayment at maturity on September 30, 2014, 35%. There would not be a material difference if the weightings were increased or decreased by 10%. At December 31, 2012, the aggregate fair value of the Subordinated Notes was determined to be $13.5 million, with an aggregate unpaid principal balance totaling $13.1 million.

At December 31, 2013 the valuations were calculated at an implied discount of approximately 20% and were weighted as follows: repayment prior to maturity on June 30, 2014, 20%; and repayment at maturity on September 30, 2014, 80%. There would not be a material difference if the weightings were increased or decreased by 10%. At December 31, 2013, the aggregate fair value of the Subordinated Notes was determined to be $17.3 million, with an aggregate unpaid principal balance totaling $15.9 million.

Upon the completion of the Company’s IPO discussed in note 1, the Company used a portion of the net proceeds to repay $18.8 million of the original principal balance and accrued interest on the Subordinated Notes. As of June 20, 2014, all obligations under the Subordinated Notes had been paid in full.

The following table presents a roll-forward of the fair value of Level 3 (significant unobservable inputs) Subordinated Notes for the years ended December 31, 2014, 2013 and 2012:

 

Balance at December 31, 2011

$ —    

Transfer into Level 3 on September 26, 2012 (1)

  12,435   

Change in fair value included in interest expense

  1,100   
  

 

 

 

Balance at December 31, 2012

  13,535   

Change in fair value included in interest expense

  3,771   
  

 

 

 

Balance at December 31, 2013

  17,306   

Change in fair value included in interest expense

  1,543   

Repayment

  (18,849
  

 

 

 

Balance at December 31, 2014

$ —    
  

 

 

 

 

(1) Fair value option election was made on September 26, 2012.

 

Interest expense, inclusive of changes in fair value and amortization of deferred financing costs, related to the Subordinated Notes for the years ended December 31, 2014, 2013 and 2012 was $1.5 million, $3.8 million and $2.9 million, respectively. Of these totals, $0.0 million, $0.0 million and $0.3 million have been capitalized as part of the costs of the second production line at the Company’s East Providence facility for the years ended December 31, 2014, 2013 and 2012, respectively (see note 10).

Senior Convertible Notes
Senior Convertible Notes

(7) Senior Convertible Notes

Senior Convertible Notes consist of the following:

 

     December 31,  
     2014      2013  
     (In thousands)  

March 2013 Investor Notes

   $   —         $ 24,482   

March 2013 Arcapita Notes

     —           3,653   
  

 

 

    

 

 

 

Total Senior Convertible Notes

$ —      $ 28,135   
  

 

 

    

 

 

 

Effective March 28, 2013, the Company entered into a Note and Warrant Purchase Agreement (March 2013 NPA) authorizing the issuance of $22.5 million of Senior Subordinated Convertible Notes (the March 2013 Investor Notes) and Senior Subordinated Arcapita Notes (the March 2013 Arcapita Notes) (collectively, the Senior Convertible Notes). At each closing under the March 2013 NPA, the Company issued warrants to purchase shares of a newly created Series C Preferred Stock (the Series C) based on the principal balance of Senior Convertible Notes issued to each purchaser. The Company determined that the Series C warrants, which were subject to net share settlement, were equity classified. Collectively, the warrants issued pursuant to the March 2013 NPA were exercisable for Series C shares equal to 85.7% of the then outstanding capital stock of the Company on a fully diluted basis. The warrants had an exercise price of $0.0001 per share, were immediately exercisable and an expiration date of March 28, 2023.

The March 2013 Investor Notes accrued interest at a rate of 8% per annum compounded annually and added to principal on December 31st of each year. Accrued and unpaid interest was payable upon maturity or on the date of any prepayment. Accrued interest was payable in cash at the time of payment of principal or converted with the outstanding principal amount into common shares of the Company upon an IPO. Upon maturity, the Company was required to pay 1.375 times the aggregate principal amount and accrued interest on the March 2013 Investor Notes then outstanding or $33.8 million on March 28, 2016.

The March 2013 Arcapita Notes were non-interest-bearing and were scheduled to mature on March 28, 2016. The March 2013 Arcapita Notes included an option to purchase one share of nonparticipating preferred stock, as defined, on the maturity date. This preferred stock was to be senior to all other series of the Company’s outstanding convertible preferred stock and have a liquidation preference totaling $5.2 million at maturity. If this option were to have been exercised, the Company would have created a new series of preferred stock.

Pursuant to side letter agreements, in March and May 2013, holders of $7.5 million of Convertible Notes (see note 8) issued in November 2012 and January 2013 (the Initial Notes) exchanged their original principal balance for an equivalent principal amount of Senior Convertible Notes (the Exchanged Notes) and a pro-rata share of Series C warrants issued under the March 2013 NPA. The Company accounted for the warrant as a debt issuance cost and recorded an immediate charge for the fair value of the Series C warrants totaling $5.4 million in interest expense. Pursuant to the exchange, the holders of the Exchanged Notes received notes senior in preference to the Initial Notes and with an extended maturity date of March 28, 2016.

Given that the terms of the Exchanged Notes were substantially different than the terms of the Initial Notes, the exchange was accounted for as an extinguishment of debt. Upon the exchange, the Company recognized a loss totaling $5.7 million representing the difference between (i) the fair value of the Exchanged Notes at reissuance and the fair value of Series C preferred stock warrants, and (ii) the carrying value of the Initial Notes. The Company elected to account for all of the issuances of its Senior Convertible Notes and various embedded derivatives in accordance with ASC Topic 825-10, Fair Value Option for Financial Liabilities, whereby the Company initially and subsequently measured this financial instrument in its entirety at fair value, with the changes in fair value recorded each reporting period in other interest expense (income).

In March and May 2013, the Company issued an additional $15.0 million of Senior Convertible Notes. The noteholders received a pro-rata share of Series C warrants for their participation in the financing. The Company accounted for the warrant issuances as a debt issuance cost and recorded an immediate charge for the fair value of the Series C warrants totaling $10.7 million in interest expense (see note 10). In conjunction with the March 2013 NPA, the Company incurred $0.9 million of debt issuance costs, which was allocated between the debt and equity instruments related to the transaction. $0.6 million was allocated to the notes and recorded through interest expense, while the remaining $0.3 million was allocated to the warrants with an offset for additional paid-in capital.

Net proceeds from the issuance of the Senior Convertible Notes were used (i) for investment in working capital to support revenue growth (ii) for capital expenditures to improve the efficiency and throughput of existing manufacturing assets and (iii) to settle all cash obligations under the Company’s cross license agreement with Cabot Corporation (see note 11).

Upon the completion of the Company’s IPO discussed in note 1, the outstanding principal and accrued interest on the Senior Convertible Notes were marked to an aggregate fair value of $39.5 million and automatically converted into 3,591,604 shares of common stock equal to the unpaid principal amount of the Senior Convertible Notes and accrued interest as of June 18, 2014 divided by the Conversion Price, which was 62.5% of the initial public offering price of $11.00 per share. In addition, all outstanding Series C warrants were automatically net exercised, which, together with the then outstanding shares of Series C preferred stock, converted into 104,734 shares of common stock upon the closing of the Company’s IPO.

Fair Value Option

The following table presents the difference between the aggregate fair value and the aggregate unpaid principal balance of the Senior Convertible Notes recorded at fair value at December 31, 2013:

 

     Aggregate fair value      Aggregate unpaid
principal balance
     Fair value over
unpaid principal
balance
 
     (In thousands)  

March 2013 Investor Notes

   $ 24,482      $ 19,567      $ 4,915   

March 2013 Arcapita Notes

     3,653        2,980        673   
  

 

 

    

 

 

    

 

 

 

Total Senior Convertible Notes

$ 28,135   $ 22,547   $ 5,588   
  

 

 

    

 

 

    

 

 

 

Fair Value Measurements

The change in the fair values of the Senior Convertible Notes during the year ended December 31, 2014 and 2013 was determined by utilizing probability weighted discounted cash flow analyses, which took into consideration market and general economic events, as well as the Company’s financial results and other data available. These analyses determined the amount to be paid on the Senior Convertible Notes in either cash or shares at the occurrence of certain events in which the Senior Convertible Notes would be converted into shares of the Company’s common stock or would be repaid in cash. The probability weighted discounted cash flow analyses utilized assumptions related to the probability of the occurrence of each of the various events and appropriate discount rates for each of the scenarios as of December 31, 2013 are as follows:

 

Potential exit

scenario event

   Estimated
exit date of
future event
     Estimated
probability of
future event
 

IPO scenario 1

     06/30/14         45

IPO scenario 2

     03/31/15         5

Sale scenario 1

     06/30/14         15

Sale scenario 2

     03/31/15         15

Dissolution

     09/30/14         5

Private company

     At maturity         15

The above scenarios incorporated a weighted average implied discount rate of 41.7%.

The final payment amount of the Senior Convertible Notes upon the closing of the Company’s IPO was determined to be $39.5 million.

The following table presents a roll-forward of the fair value of Level 3 (significant unobservable inputs) Senior Convertible Notes for the years ended December 31, 2014, 2013 and 2012:

 

     March 2013
Investor

Notes
     March 2013
Arcapita

Notes
     Total Senior
Convertible
Notes
 

Beginning balance as of December 31, 2012

   $ —        $ —        $ —    

Issuances of senior convertible notes

     13,435         1,536         14,971   

Fair value of notes exchanged for senior convertible notes

     6,132         1,444         7,576   

Conversion of the Senior Convertible Notes

     4,915         673         5,588   
  

 

 

    

 

 

    

 

 

 

Balance at December 31, 2013

  24,482      3,653      28,135   

Change in fair value included in interest expense

  9,803      1,570      11,373   

Conversion of Convertible Notes

  (34,285   (5,223   (39,508
  

 

 

    

 

 

    

 

 

 

Balance at December 31, 2014

$ —      $ —      $ —     
  

 

 

    

 

 

    

 

 

 

Changes in fair value of the Company’s Senior Convertible Notes for the years ended December 31, 2014 and 2013 was $11.4 million and $5.6 million, respectively. The charge for the fair value of the Series C warrants of $10.7 million was included in interest income (expense) for the year ended December 31, 2013.

Convertible Notes
Convertible Notes

(8) Convertible Notes

Convertible Notes consist of the following:

 

     December 31  
     2014      2013  
     (In thousands)  

Investor Notes

   $     —         $ 87,479   

Arcapita Notes

     —           4,395   
  

 

 

    

 

 

 

Total Convertible Notes

  —        91,874   

Current maturities of convertible notes

  —        (435
  

 

 

    

 

 

 

Convertible Notes, excluding current portion

$ —      $ 91,439   
  

 

 

    

 

 

 

 

Commencing in June 2011 and concluding in January 2013, the Company issued a total of $69.9 million of 8% subordinated convertible notes (the Investor Notes) to new and existing investors. The Investor Notes had original maturity dates of June 1, 2014, June 14, 2014 and December 6, 2014, depending on their date of issuance. Commencing in December 2011 and concluding in September 2012, the Company issued a total of $3.5 million of noninterest bearing convertible notes to an existing investor (the Arcapita Notes). The Arcapita Notes were originally set to mature on December 6, 2014. Net proceeds from the Investor Notes and Arcapita Notes (collectively, the Convertible Notes) were used to fund the completion of the Company’s second production line at the East Providence facility, to begin the construction of a third production line at the East Providence facility, and to fund the Company’s operating cash requirements.

In conjunction with the execution of the March 2013 NPA (see note 7) on March 28, 2013, the holders of all but approximately $0.3 million of original principal amount of the Convertible Notes agreed to extend the original maturity date of their notes by two years. Given that the term of the Convertible Notes, as amended, differed substantially from the original term, the amendment was accounted for as an extinguishment of debt. On March 28, 2013, the Company recognized a gain on extinguishment totaling $8.9 million which represents the difference between (i) the fair value of the Convertible Notes at reissuance, and (ii) the fair value of the Convertible Notes just prior to the amendment.

The Investor Notes earned interest at a rate of 8% per annum compounded annually and to be added to principal on December 31st of each year. Accrued and unpaid interest was payable at maturity or on the date of any prepayment. Accrued interest was payable in cash at the time of payment of principal or converted with the outstanding principal amount into common shares of the Company upon an IPO. Upon maturity, the Company was to be required to pay 1.375 times the aggregate principal amount and accrued interest on the Investor Notes then outstanding. Aggregate principal amounts due on December 6, 2014, June 1, 2016 and December 6, 2016 are $0.5 million, $61.0 million and $63.5 million, respectively.

The Arcapita Notes were non-interest-bearing and due on December 6, 2016. The Arcapita Notes included an option to purchase one share of nonparticipating preferred stock, as defined, on the maturity date. This preferred stock was to be senior to all other series of the Company’s outstanding convertible preferred stock and to have a liquidation preference totaling $6.8 million. If this option were to have been exercised, the Company would have created a new series of preferred stock.

The Company elected to record the Convertible Notes at fair value upon issuance. The aggregate fair value of the notes was $91.9 million at December 31, 2013.

Upon the closing of the Company’s IPO discussed in note 1, the outstanding principal and accrued interest on the Convertible Notes were marked to an aggregate fair value of $129.0 million and automatically converted into 11,727,430 shares of common stock equal to the unpaid principal amount of the Convertible Notes and accrued interest divided by the Conversion Price, which was 62.5% of the initial public offering price of $11.00 per share.

Fair Value Option

The following table presents the difference between the aggregate fair value and the aggregate unpaid principal balance of the Convertible Notes recorded at fair value at December 31, 2013:

 

     Aggregate fair value      Aggregate unpaid
principal balance
     Fair value over
unpaid principal
balance
 
     (In thousands)  

Investor Notes

   $ 87,479       $ 68,264       $ 19,215   

Arcapita Notes

     4,395         3,479         916   
  

 

 

    

 

 

    

 

 

 

Total Convertible Notes

$ 91,874    $ 71,743    $ 20,131   
  

 

 

    

 

 

    

 

 

 

 

Fair Value Measurements

The change in the fair values of the Senior Convertible Notes during the year ended December 31, 2014 and 2013 was determined by utilizing probability weighted discounted cash flow analyses, which took into consideration market and general economic events, as well as the Company’s financial results and other data available. These analyses determined the amount to be paid on the Senior Convertible Notes in either cash or shares at the occurrence of certain events in which the Senior Convertible Notes would be converted into shares of the Company’s common stock or would be repaid in cash. The probability weighted discounted cash flow analyses utilized assumptions related to the probability of the occurrence of each of the various events and appropriate discount rates for each of the scenarios as of December 31, 2013 were as follows:

 

     December 31, 2013  

Potential exit scenario event

   Estimated
exit date of
future event
     Estimated
probability
of future
event
 

IPO scenario 1

     06/30/14         45

IPO scenario 2

     03/31/15         5

Sale scenario 1

     06/30/14         15

Sale scenario 2

     03/31/15         15

Dissolution

     09/30/14         5

Private company

     At maturity         15

The above scenarios incorporated weighted average implied discount rates of 31% and 40% at December 31, 2012 and 2013, respectively.

Given that the valuation of the Convertible Notes utilized several unobservable inputs, the Company determined that the valuation of the Convertible Notes was a Level 3 valuation.

The final payment amount of the Convertible Notes upon the closing of the Company’s IPO was determined to be $129.0 million.

The following table presents a roll-forward of the fair value of Level 3 (significant unobservable inputs) Convertible Notes for the years ended December 31, 2014, 2013 and 2012:

 

     Investor
Notes
     Arcapita
Notes
     Total
Convertible
Notes
 

Balance at December 31, 2011

   $ 50,118       $ 585       $ 50,703   

Issuances of convertible notes

     21,991         2,900         24,891   

Change in fair value included in interest expense

     18,811         683         19,494   
  

 

 

    

 

 

    

 

 

 

Balance at December 31, 2012

  90,920      4,168      95,088   

Issuances of convertible notes

  2,090      1,440      3,530   

Fair value of notes exchanged for senior convertible notes

  (5,971   (1,282   (7,253

Gain on extinguishment of convertible notes

  (8,498   (400   (8,898

Change in fair value included in interest expense

  8,938      469      9,407   
  

 

 

    

 

 

    

 

 

 

Balance at December 31, 2013

  87,479      4,395      91,874   

Change in fair value included in interest expense

  35,036      2,092      37,128   

Conversion of Convertible Notes

  (122,515   (6,487   (129,002
  

 

 

    

 

 

    

 

 

 

Balance at December 31, 2014

$ —      $ —      $ —     
  

 

 

    

 

 

    

 

 

 

 

The charge recognized as a result of the change in the fair value of the Company’s Convertible Notes was $37.1 million, $9.4 million and $17.6 million for the years ended December 31, 2014, 2013 and 2012, respectively (see note 10).

Revolving Line of Credit
Revolving Line of Credit

(9) Revolving Line of Credit

In March 2011, the Company entered into a $10.0 million revolving credit facility with Silicon Valley Bank. This facility has been amended at various dates through 2014.

On September 3, 2014, the Company amended and restated the loan and security agreement to extend the maturity date of the facility to August 31, 2016 and increase the maximum amount the Company is permitted to borrow, subject to continued covenant compliance and borrowing base requirements, from $10 million to $20 million. At the Company’s election, the interest rate applicable to borrowings under the amended revolving credit facility may be based on the prime rate or the LIBOR. Prime rate-based rates vary from prime rate plus 0.75% per annum to prime rate plus 1.75% per annum, while LIBOR-based rates vary from LIBOR plus 3.75% per annum to LIBOR plus 4.25% per annum. In addition, the Company is required to pay a monthly unused revolving line facility fee of 0.5% per annum of the average unused portion of the revolving credit facility. The amended revolving credit facility is secured by a first priority security interest in all assets of the Company, including those at the East Providence facility, except for certain exclusions.

At December 31, 2014 and 2013, the Company had drawn $0.0 million and $1.0 million, respectively, on the revolving credit facility. The Company also had outstanding letters of credit backed by the revolving credit facility of $1.4 million and $1.2 million at December 31, 2014 and 2013, respectively, which reduce the funds otherwise available to the Company. Based on the available borrowing base, the effective amount available to the Company at December 31, 2014 was $12.4 million after giving respect to the $1.4 million of outstanding letters of credit. Under the amended revolving credit facility, the Company is required to comply with financial covenants relating to, among other items, minimum Adjusted EBITDA, maximum unfinanced capital expenditures and other non-financial covenants. At December 31, 2014, the Company was in compliance with all such financial covenants.

Interest Expense
Interest Expense

(10) Interest Expense

Interest expense consists of the following:

 

     Year ended December 31  
     2014      2013      2012  

Changes in fair value:

        

Subordinated notes

   $ 1,543       $ 3,771       $ 1,100   

Senior convertible notes

     11,373         5,588         —    

Convertible notes, net of capitalization(1)

     37,095         9,337         17,578   

Issuance of Series C preferred stock warrants in connection with senior convertible notes

     —           10,677         —    

Subordinated notes interest, net of capitalization(2)

     —           —           822   

Amortization of deferred financing costs for subordinated notes

     —           —           636   

Debt closing costs

     47         585         425   

Imputed interest on Cabot obligation

     —           391         1,018   

Other interest

     223         250         211   
  

 

 

    

 

 

    

 

 

 
$ 50,281    $ 30,599    $ 21,790   
  

 

 

    

 

 

    

 

 

 

 

(1) The charge recognized as a result of the change in the fair value of the Company’s Convertible Notes is presented net of capitalized interest expense of $0.1 million, $0.1 million and $1.9 million for the years ended December 31, 2014, 2013 and 2012, respectively.
(2) Interest expense recognized from the Company’s Subordinated Notes is presented net of capitalized interest expense of $0.0 million, $0.0 million and $0.3 million for the years ended December 31, 2014, 2013 and 2012, respectively.

Debt closing costs and commitment fees, consisting primarily of legal and related fees, associated with the issuance or modification of the Company’s Subordinated Notes, Senior Convertible Notes, Convertible Notes, and revolving credit facility are amortized over the term of the debt instrument and recorded in interest expense.

Capitalized interest relates primarily to costs associated with the Company’s third production line and significant improvements for the second production line at the East Providence facility.

Other Long-term Liabilities
Other Long-term Liabilities

(11) Other Long-term Liabilities

Other long-term liabilities consist of the following:

 

     December 31  
     2014      2013  
     (In thousands)  

Asset retirement obligations (ARO)

   $ 1,018       $ 1,009   

Other

     62         112   
  

 

 

    

 

 

 
  1,080      1,121   

Current maturities of other long-term liabilities

  (50 )   (50 )
  

 

 

    

 

 

 

Other long-term liabilities, less current maturities

$ 1,030   $ 1,071   
  

 

 

    

 

 

 

The Company has asset retirement obligations (ARO) 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.

A summary of ARO activity consists of the following:

 

     Year Ended December 31  
     2014      2013  
     (In thousands)  

Balance at beginning of period

   $ 1,009       $ 1,000   

Accretion of discount expense

     40         34   

Settlement costs

     (31      (25
  

 

 

    

 

 

 

Balance at end of period

$ 1,018    $ 1,009   
  

 

 

    

 

 

 

In August 2013, the Company extended its Northborough, Massachusetts facility lease to August 2016. As a result, the Company classified the ARO as long term at December 31, 2014 and 2013.

On April 1, 2006, the Company and Cabot Corporation entered into a Cross License Agreement to license certain intellectual property rights. Such licenses will expire on the last day of the life of each issued patent or patent applications and acquired patents licensed thereunder. On September 21, 2007, the Cross License Agreement was amended to modify the consideration payable to Cabot by the Company to $38.0 million in cash in quarterly installments over a seven-year period. The Company adjusted its obligation to Cabot to reflect a revised net present value of the consideration payable to Cabot of $19.3 million. The discount of $18.7 million was amortized to interest expense over the term of the payment schedule.

 

The consideration provided to Cabot was for the value of the licensed patents and patent applications, the avoidance of potential claims on prior use of Cabot issued patents and related costs. $1.0 million of the total consideration was allocated to the fair market value of the patents and patent applications licensed from Cabot, $0.5 million was allocated to the fair market value of the patents and patent applications licensed to Cabot, and the remainder was allocated to general and administrative expenses.

The remaining consideration payable to Cabot under the Cross License Agreement was paid in full during 2013.

Commitments and Contingencies
Commitments and Contingencies

(12) Commitments and Contingencies

Capital Leases

The Company has entered into certain capital leases for computer equipment and vehicles. The leases are payable in monthly installments and expire at various dates through 2017. The recorded balance of capital lease obligations as of December 31, 2014 and 2013 was $0.2 million and $0.2 million, respectively. Future minimum payments under capital leases at December 31, 2014 are as follows:

 

Year

   Capital Lease
Obligations
 
     (In thousands)  

2015

   $ 87   

2016

     64   

2017

     30   
  

 

 

 

Total

  181   

Less portion representing interest

  (16
  

 

 

 

Present value of future minimum payments

  165   

Current maturities of capital lease payments

  (76
  

 

 

 

Capital leases, excluding current portion

$ 89   
  

 

 

 

Operating Leases

The Company leases facilities and office equipment under operating leases expiring at various dates through 2021. Under these agreements, the Company is obligated to pay annual rentals, as noted below, plus real estate taxes, and certain operating expenses. Some operating leases contain rent escalation clauses whereby the rent payments increase over the term of the lease. In such cases, rent expense is recognized on a straight-line basis over the lease term.

Future minimum lease payments under operating leases at December 31, 2014 are as follows:

 

Year

   Operating
Leases
 
     (In thousands)  

2015

   $ 1,126   

2016

     1,133   

2017

     600   

2018

     601   

2019

     170   

Thereafter

     34   
  

 

 

 

Total minimum lease payments

$ 3,664   
  

 

 

 

 

The Company incurred rent expense under all operating leases of approximately $1.2 million in each of the years ended December 31, 2014, 2013 and 2012.

Letters of Credit

Pursuant to the terms of its Northborough, Massachusetts facility lease, the Company has been required to provide the lessor with letters of credit securing certain obligations. In addition, 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 for $1.4 million and $1.2 million at December 31, 2014 and 2013, respectively. These letters of credit are secured by the Company’s revolving credit facility (see note 9).

Litigation

The Company is, from time to time, a party to litigation that arises in the normal course of its business operations. 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.

Conversion of Redeemable Convertible Preferred Stock
Conversion of Redeemable Convertible Preferred Stock

(13) Conversion of Redeemable Convertible Preferred Stock

The fair value of the Company’s Series A Redeemable Convertible Preferred Stock (Series A) and Series B Redeemable Convertible Preferred Stock (Series B) was estimated using the probability-weighted expected return method, or PWERM, which considers the value of preferred and common stock based upon analysis of the future values for equity assuming various future outcomes, including initial public offerings, merger or sale, dissolutions or continued operation as a private company. Accordingly, share value is based upon the probability-weighted present value of expected future net cash flows, considering each of the possible future events, as well as the rights and preferences of each share class. As such, the Company’s redeemable convertible preferred stock was valued utilizing Level 3 inputs.

In conjunction with the execution of the March 2013 NPA, the redemption and dividend rights of the Company’s issued and outstanding Series B and Series A were eliminated and the liquidation preference of the Series B and Series A was reduced to an aggregate of $4.0 million. During March 2013, the Company recorded decreases in the redemption value of the Company’s Series B and Series A shares of $30.0 million and $56.1 million, respectively, reflecting the changes in the fair market value of the Series B and Series A shares at the time of the March 2013 Financing. Given that the release of the redemption rights substantially impacted the fair value of the Series B and Series A, the elimination of the rights was accounted for as an extinguishment of the securities. As a result, the Company recorded a gain on extinguishment of Series B and Series A of approximately $86.2 million recorded in additional paid-in capital available to common stockholders. Additionally, the remaining value of the Series B and Series A of $1.1 million subsequent to extinguishment was recorded in additional paid-in capital upon reclassification from temporary to permanent equity.

At the time of the March 2013 Financing, the Company’s board of directors established the price per share of the Company’s Series B and Series A shares at $0.20 and $0.15 per share, respectively, as determined by the PWERM method. This valuation took into consideration market and general economic events as well as the Company’s financial results and other data available at that time. In addition, the board reaffirmed that the continued use of market multiples based on comparable companies was appropriate. At the time of the March 2013 financing, the various scenarios, excluding dissolution, resulted in equity fair values ranging from $20.0 million to $215.0 million. At the time of the March 2013 financing, the valuations were weighted as follows: IPO, 40%; sale of the Company/assets, 45%; dissolution, 10%; and remain private, 5%. The estimated fair value of one share of common and preferred stock was estimated under each of the four scenarios and the associated probabilities to arrive at a probability weighted value per share.

 

Upon the closing of the Company’s IPO discussed in note 1, the outstanding shares of Series A, Series B and Series C converted into 115,982 shares of common stock.

Stockholders' Equity (Deficit)
Stockholders' Equity (Deficit)

(14) Stockholders’ Equity (Deficit)

On June 18, 2014, the Company completed an IPO of 7,500,000 shares of its common stock at a public offering price of $11.00 per share. The Company received net proceeds of $74.7 million after deducting underwriting discounts and commissions of $4.3 million and other offering expenses of approximately $3.5 million. Upon the closing of the offering, all of the Company’s then-outstanding (i) Series C warrants to purchase Series C preferred stock, were subject to an automatic net cashless exercise, (ii) convertible preferred stock (including the shares of Series C preferred stock issued upon the automatic net cashless exercise of Series C warrants) automatically converted into 115,982 shares of common stock, and (iii) Convertible Notes (see note 8) and Senior Convertible Notes (see note 7) automatically converted into 15,319,034 shares of common stock.

At December 31, 2014, 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.

Employee Benefit Plan
Employee Benefit Plan

(15) 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. The Company has not provided matching contributions nor has it made any contributions to the plan.

Employee Stock Ownership Plans
Employee Stock Ownership Plans

(16) Employee Stock Ownership Plans

Effective June 12, 2014, upon the pricing of the IPO, 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, non-qualified stock options, restricted stock 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.

Upon the completion of the IPO, the Company issued 61,816 shares of restricted common stock vesting over a period of one year with an aggregate value at issuance of approximately $0.7 million to its non-employee directors under the 2014 Equity Plan. In September 2014, the Company issued 318,517 restricted stock units (RSUs) and non-qualified stock options (NSOs) to purchase 934,018 shares of common stock to employees under the 2014 Equity Plan. The RSUs and NSOs will vest over a four year period for certain executive employees and over a three year period for other employees.

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

 

     Year Ended
December 31
 
     2014      2013      2012  
     (In thousands)  

Cost of product revenue

   $ 1,121       $ 496       $ 221   

Research and development expenses

     1,046         267         112   

Sales and marketing expenses

     1,390         727         384   

General and administrative expenses

     5,224         2,936         937   
  

 

 

    

 

 

    

 

 

 

Total stock-based compensation

$ 8,781    $ 4,426    $ 1,654   
  

 

 

    

 

 

    

 

 

 

 

During the years ended December 31, 2014, 2013 and 2012, the Company issued stock options with a 10-year term that contain service conditions. Generally, these stock options vest and become exercisable over a service period of three to four years from the date of grant.

During the year ended December 31, 2013, the Company also issued stock options with a 10-year term that contain both a performance condition and a service condition. The performance-based options were to vest and become exercisable only in the event of the completion of the Company’s IPO and then over a service period of three to four years from the date of grant. The number of shares subject to the performance-based options was to be reduced, as necessary, such that each holder’s total option holdings would equal a target percentage of the Company’s common stock deemed outstanding immediately prior to the IPO. The aggregate target percentage for all holders of performance-based options issued during the year ended December 31, 2013 was 15.384%. If the number of shares subject to these options was insufficient to achieve the target percentage in an IPO, the Company was under no obligation to grant additional options to the holder.

At December 31, 2014, 1,244,781 shares of common stock were reserved for stock-based awards granted under the 2014 Equity Plan. In addition, 96,369 shares of common stock are reserved for stock-based awards granted under the Company’s 2001 Equity Plan, which was replaced by the 2014 Equity Plan. Any cancellations or forfeitures of these awards will become available for grant under the 2014 Equity Plan. At December 31, 2014, there were 3,750,420 shares available for grant under the 2014 Equity Plan.

Valuation and Amortization Method

Prior to the IPO, the Board of Directors had historically determined the fair value of the Company’s common stock based on the market approach and the income approach to estimate the enterprise value of the business under various liquidity event scenarios, including an IPO by the Company and the sale of the Company. To support the valuations, the Company utilized a probability-weighted expected return under those various liquidity scenarios, public guideline companies, management cash flow projections and other assumptions to derive the enterprise value of the business. The Company then derived the estimated fair value of each class of stock, taking into consideration the rights and preferences of each instrument based on a probability-weighted expected return.

The fair value of each stock option was 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.

For the performance-based stock options issued during the year ended December 31, 2013, the Company used a Monte Carlo simulation model to estimate the number of options expected to remain outstanding and eligible for vesting upon completion of the Company’s IPO. The simulation model was based on a number of complex assumptions including the terms of the performance condition, the value of our common stock at the time of the Company’s IPO, the expected time from the date of grant to the Company’s IPO and expected volatility. The number of options expected to remain outstanding and eligible for vesting upon completion of the Company’s IPO was estimated to be 96.8% and 97.4% of the options granted at August 7, 2013 and December 20, 2013, respectively. The fair value of each performance-based stock option was determined by multiplying the Black-Scholes estimate of grant date fair value by the percentage of options expected to remain outstanding and eligible for vesting upon completion of the Company’s IPO.

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. For the performance-based stock options issued during the year ended December 31, 2013, a portion of the fair value was recognized as expense when the IPO performance condition was achieved and the remainder over the requisite service period, 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 uses the simplified method as prescribed by FASB ASC 718 to calculate the expected term for options granted, as it does not have sufficient historical exercise data to provide a reasonable basis upon which to estimate the expected term.

Expected Volatility

Due to the Company’s limited historical data, the estimated volatility reflects the incorporation of the historical volatility of comparable companies with publicly available share prices. In 2014, 2013 and 2012, the expected volatility is based on the weighted average volatility of up to seven companies within various industries 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.

Risk-free Interest Rate

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.

Estimated Forfeitures

Forfeitures are required to be estimated at the time of grant and revised, if necessary, in subsequent periods, if actual forfeitures differ from those estimates. Forfeitures are estimated based on voluntary termination behavior as well as analysis of actual option forfeitures. Accordingly, share-based compensation expense has been reduced by an estimated annual forfeiture rate for the years ended December 31, 2014, 2013 and 2012.

Assumptions Utilized

The following information relates to the fair value of the option awards estimated by use of the Black-Scholes option pricing model:

 

     Year Ended December 31  
     2014     2013     2012  

Weighted average assumptions:

      

Expected term (in years)

     6.17        5.47        6.02   

Expected volatility

     50.09     48.99     58.06

Risk free rate

     1.94     1.69     0.95

Expected dividend yield

     0.00     0.00     0.00

Weighted average fair value:

      

Grant-date fair value of options granted

   $ 5.37      $ 0.12      $ 5.60   

Grant-date fair value of options vested

   $ 97.31      $ 0.18      $ 2.30   

Aggregate intrinsic value of options exercised

   $ 4,816.50     $ —       $ —    

Modifications

On August 7, 2013, the Company canceled substantially all options held by Company employees and granted two sets of new options to these employees. Each recipient received a grant of options containing service-based vesting conditions and a second grant of options containing both service and performance-based vesting conditions. The performance-based vesting was met upon the successful completion of the IPO of the Company’s common stock.

On December 20, 2013, the Company canceled all options held by members of the Company’s board of directors and granted two sets of new options to these directors. Each recipient received a grant of options containing service-based vesting conditions and a second grant of options containing both service and performance-based vesting conditions. The performance-based vesting was met upon the successful completion of the IPO of the Company’s common stock.

As a result of the cancellation and concurrent grant of options, the Company accounted for these transactions 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 $7.8 million and $1.0 million for the two grant dates, respectively. The incremental compensation expense associated with the service based awards of $2.0 million will be recognized over the remaining service period of the new options. The Company recorded $0.4 million and $6.4 million associated with the service and performance-based awards, respectively, during the year ended December 31, 2014 as a result of the IPO in June 2014.

Outstanding Options

The following table summarizes information about stock options outstanding:

 

     Number of
Shares
    Weighted
Average
Grant Date
Fair Value
Per Share
     Weighted
Average
Exercise
Price
Per Share
     Weighted
Average
Remaining
Contractual
Term
(Years)
     Aggregate
Intrinsic
Value
 
     ($ in thousands, except share and per share data)  

Options outstanding at December 31, 2013

     97,183      $ 97.36       $ 92.25         9.63      

Granted

     934,018      $ 5.37       $ 10.78         

Forfeited

     (4,660   $ 20.14       $ 21.45         

Exercised

     (31 )   $ 95.92      $ 74.23          $ 4,816.50  
  

 

 

            

Options outstanding at December 31, 2014

  1,026,510    $ 14.01    $ 18.44      9.59    $ —    
  

 

 

            

Exercisable at December 31, 2014

  63,731    $ 97.31    $ 82.10      8.59    $ —    
  

 

 

            

Expected to vest at December 31, 2014

  827,504    $ 8.82    $ 13.46      9.66    $ —    
  

 

 

            

As of December 31, 2014, total unrecognized compensation cost related to nonvested options granted under the Plan was $6.8 million. The unrecognized compensation cost consisted of $5.9 million relating to service-based awards and $0.9 million to performance-based awards. The unrecognized compensation cost for the service-based options and performance-based awards is expected to be recognized over a weighted average period of 2.76 and 1.60 years, respectively.

 

Restricted Stock Awards and Restricted Stock Units

The Company values restricted stock awards and RSUs based on the closing trading value of our shares on the date of grant. Information related to grants of RSUs during 2014 is as follows:

 

     Restricted
Stock
Units
    

Weighted

Average

Grant Date

Fair Value

 

Balance at December 31, 2013

     —        $ —    

Granted

     318,517         10.78   

Vested

     —          —    

Forfeited

     (3,877 )      10.78   
  

 

 

    

 

 

 

Balance outstanding at December 31, 2014

  314,640    $ 10.78   
  

 

 

    

 

 

 

Restricted stock awards granted during 2014 are considered issued and outstanding common stock and are excluded from the table above.

As of December 31, 2014, total unrecognized compensation cost related to restricted stock awards and RSUs granted under the 2014 Equity Plan was $0.3 million and $2.6 million and is expected to be recognized over a weighted average period of 0.44 and 3.11 years, respectively.

Net Income (Loss) Per Share
Net Income (Loss) Per Share

(17) Net Income (Loss) Per Share

The computation of basic and diluted net income (loss) per share attributable to common stockholders consists of the following:

 

     Year ended December 31  
     2014     2013     2012  
     (In thousands, except share and per share data)  

Numerator:

      

Net income (loss)

   $ (66,324   $ (47,611   $ (56,142

Deemed dividends on participating preferred stock (inclusive of issuance costs and changes in redemption value, including extinguishment):

      

Series B

     —         29,622        3,772   

Series A

     —         55,543        43,429   
  

 

 

   

 

 

   

 

 

 

Total preferred stock deemed dividends

  —       85,165      47,201   

Earnings attributable to participating convertible preferred stock shareholders and Series C preferred stock warrant holders

  —       (36,216   —    
  

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to common stockholders

$ (66,324 $ 1,338    $ (8,941
  

 

 

   

 

 

   

 

 

 

Denominator:

Weighted average shares outstanding, basic

  12,349,456      3,137      3,136   

Effect of warrants to purchase common stock

  —       122      —    
  

 

 

   

 

 

   

 

 

 

Weighted average shares outstanding, diluted

  12,349,456      3,259      3,136   
  

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to common stockholders per common share, basic

$ (5.37 $ 426.52    $ (2,851.08

Effect of warrants to purchase common stock

  —       (15.96 )   —    
  

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to common stockholders per common share, diluted

$ (5.37 $ 410.56    $ (2,851.08
  

 

 

   

 

 

   

 

 

 

Potential dilutive common shares that were excluded from the computation of diluted net income (loss) attributable to common stockholders per common share because they were anti-dilutive consist of the following:

 

     Year ended December 31  
     2014      2013      2012  

Series B (a)

     —           —          1,941   

Series A (a)

     —           —          6,407   

Common stock options

     1,026,510         21,846         2,749   

Restricted common stock units

     314,640         —          —    

Common stock warrants

     131         —          137   
  

 

 

    

 

 

    

 

 

 

Total

  1,341,281      21,846      11,234   
  

 

 

    

 

 

    

 

 

 

 

(a) Common stock equivalent reflecting conversion of preferred shares.

As of December 31, 2014, there was no dilutive impact of the common stock options, restricted common stock units and common stock warrants. All other potentially dilutive instruments were converted into shares of common stock upon the closing of the Company’s IPO on June 18, 2014.

As of December 31, 2013 the Company had outstanding $28.1 million of Senior Convertible Notes and $91.9 million of Convertible Notes, which were convertible into common stock upon the occurrence of an IPO at prices that are not determinable until the occurrence of those future events (see notes 7 and 8), and 97,183 outstanding common stock options, which were exercisable into common stock upon the occurrence of an IPO and the performance of service during the vesting period (see note 16). As of December 31, 2012 the Company had $95.1 million of outstanding Convertible Notes which were convertible into common stock upon the occurrence of an IPO at prices that were not determinable until the occurrence of those future events (see note 8). Because the necessary conditions for the conversion of these convertible notes and common stock options had not been satisfied during the respective years ended, the Company has excluded these convertible notes and performance options from the table above and the calculation of diluted net (loss) income per share for the respective years ended.

Income Taxes
Income Taxes

(18) 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:

 

     Year Ended December 31  
     2014     2013     2012  

U.S. federal income tax statutory rate

     35     35     35

Debt and warrant fair value adjustments

     (26 %)      (16 %)      (12 %) 

Changes in valuation allowance for deferred tax assets

     1     6     (22 %) 

Write down of losses not previously benefitted

     (11 %)      (22 %)      0

Other

     1     (3 %)      (1 %) 
  

 

 

   

 

 

   

 

 

 

Effective tax rate

  —        —        —     
  

 

 

   

 

 

   

 

 

 

 

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, 2014 and 2013 are presented below:

 

     December 31  
     2014      2013  
     (In thousands)  

Deferred tax assets:

     

Net operating loss carryforwards

   $ 61,457       $ 67,503   

Transaction related costs

     —           1,494   

Stock-based compensation

     4,479         2,460   

Tax credit carryforwards

     379         393   

Reserves and accruals

     282         896   

Intangible assets and amortization

     384         —     

Other

     5         127   
  

 

 

    

 

 

 

Total gross deferred tax assets

  66,986      72,873   

Deferred tax liabilities:

Depreciation

$ (3,311 $ (2,717
  

 

 

    

 

 

 

Total deferred tax liabilities

  (3,311   (2,717
  

 

 

    

 

 

 

Total deferred tax assets and liabilities

  63,675      70,156   

Valuation allowance

  (63,675   (70,156
  

 

 

    

 

 

 

Net deferred tax asset

$ —      $ —     
  

 

 

    

 

 

 

The net change in the valuation allowance for the year ended December 31, 2014, was a decrease of $6.5 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 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 the Company’s deferred tax assets generally is dependent upon generation of future taxable income.

At December 31, 2014, the Company has $161.4 million of net operating losses available to offset future federal income, if any, and which expire on various dates through December 31, 2034.

For the year ended December 31, 2010, the Company performed an analysis pursuant to Section 382 of the Internal Revenue Code of 1986, as amended (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. Based on this analysis, the Company has determined that it is more likely than not that an ownership change occurred on June 10, 2008, resulting in an annual limitation on the use of its net operating losses and other tax attributes as of such date. The Company also determined that built-in gains of $29.5 million existed at the date of the ownership change. Built-in gains increase the limitation under the Internal Revenue Code Section 382 to the extent triggered during the five year period subsequent to the date of change, which period ended in June 2013.

For the year ended December 31, 2013, 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 no ownership changes occurred as a result of the March 2013 financing (see note 7) and, as a result, there was no annual limitation on the use of its net operating losses and other tax attributes as of such date.

 

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, 2014, the Company has $106.0 million of apportioned net operating losses available to offset future state taxable income, if any, and which begin to expire at various dates between 2015 and 2034.

For each of the years ended December 31, 2014, 2013 and 2012, 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.

Related Party Transactions
Related Party Transactions

(19) Related Party Transactions

The Company had the following transactions with related parties:

During the years ended 2014, 2013 and 2012, the Company sold aerogel products to one stockholder totaling $4.7 million, to three stockholders totaling $8.9 million and to four stockholders totaling $10.7 million, respectively. The Company had trade receivables with these stockholders of $2.0 million and $2.0 million at December 31, 2014 and 2013, respectively.

Prior to the closing of the Company’s IPO in June 2014, several stockholders of the Company held Subordinated Notes, Senior Convertible Notes and Convertible Notes (see notes 6, 7 and 8).

Subsequent Events
Subsequent Events

(20) Subsequent Events

The Company has evaluated subsequent events through March 13, 2015, the date of issuance of the consolidated financial statements for the year ended December 31, 2014.

Quarterly Results of Operations
Quarterly Results of Operations

QUARTERLY RESULTS OF OPERATIONS

(in thousands, except per share data)

(unaudited)

 

     Three Months Ended  
     March 31,     June 30,     Sept 30,     Dec 31,  

2014

        

Total revenue

   $ 22,363      $ 26,615      $ 25,437      $ 27,984   

Gross profit

     3,346        3,425        5,072        5,236   

Income (loss) from operations

     (2,898     (8,121     (2,365     (2,658

Net income (loss)

     (19,049     (42,148     (2,412     (2,714

Net income (loss) attributable to common stockholders

     (19,049     (42,148     (2,412     (2,714

Net income (loss) attributable to common stockholders per common share - basic

   $ (6,065.89   $ (13.88   $ (0.10   $ (0.12

Net income (loss) attributable to common stockholders per common share - diluted

   $ (6,065.89   $ (13.88   $ (0.10   $ (0.12

2013

        

Total revenue

   $ 17,005      $ 22,978      $ 21,880      $ 24,232   

Gross profit

     38        3,531        3,580        3,583   

Income (loss) from operations

     (6,025     (2,638     (4,665     (6,644

Net income (loss)

     1,027        (18,984     (8,038     (16,950

Net income (loss) attributable to common stockholders

     20,251        (18,984     (12,703     (16,950

Net income (loss) attributable to common stockholders per common share - basic

   $ 6,455.53      $ (6,051.64   $ (4,049.41   $ (5,403.25

Net income (loss) attributable to common stockholders per common share - diluted

   $ 6,455.21      $ (6,051.64   $ (4,049.41   $ (5,403.25

The reported results for 2014 included interest expense comprised of changes in fair value of the subordinated notes, senior convertible notes, convertible notes and debt closing costs and other interest expense of: $16.2 million in the first quarter, $34.0 million in the second quarter, less than $0.1 million in the third quarter and $0.1 million in the fourth quarter. The changes in fair value of the respective notes were calculated based on the expected conversion amounts of the notes into equity at the closing of our initial public offering.

The reported results for 2013 included interest expense comprised of changes in fair value of the subordinated notes, senior convertible notes, convertible notes, debt closing costs, other interest expense, loss on exchange of convertible notes, gain on the extinguishment of convertible notes and costs associated with a postponed public offering of: $7.1 million of income in the first quarter, $16.3 million in the second quarter, $8.0 million in the third quarter and $10.3 million in the fourth quarter. The changes in fair value of the respective notes were calculated based on the expected conversion amounts of the notes into equity at the closing of our initial public offering.

Valuation and Qualifying Accounts
Valuation and Qualifying Accounts

Schedule II

VALUATION AND QUALIFYING ACCOUNTS

(in millions)

 

Description

   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
 

Year Ended December 31, 2014:

          

Allowances for uncollectible accounts and sales returns and allowances

   $ 209         —           —          (89   $ 120   

Year Ended December 31, 2013:

          

Allowances for uncollectible accounts and sales returns and allowances

   $ 421         —           —          (212   $ 209   

Year Ended December 31, 2012:

          

Allowances for uncollectible accounts and sales returns and allowances

   $ 282         —           (103     242      $ 421   

 

(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.

Description of Business (Policies)

Nature of Business

Aspen Aerogels, Inc. (the Company) is an energy technology company that designs, develops and manufactures innovative, high-performance aerogel insulation. 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 two wholly owned subsidiaries: Aspen Aerogels Rhode Island, LLC and Aspen Aerogels Germany, GmbH.

On June 18, 2014, the Company completed an initial public offering (IPO) of 7,500,000 shares of its common stock at a public offering price of $11.00 per share. The Company received net proceeds of $74.7 million after deducting underwriting discounts and commissions of $4.3 million and offering expenses of approximately $3.5 million. Upon the closing of the offering, all of the Company’s then-outstanding (i) warrants to purchase Series C preferred stock, (the “Series C warrants”) were subject to an automatic net cashless exercise, (ii) convertible preferred stock (including the shares of Series C preferred stock issued upon the automatic net cashless exercise of Series C warrants) automatically converted into 115,982 shares of common stock, and (iii) Convertible Notes (see note 8) and Senior Convertible Notes (see note 7) automatically converted into 15,319,034 shares of common stock.

Prior to the closing of the offering, the Company completed a 1-for-824.7412544 reverse stock split of its common stock. All common shares and related per share amounts in the financial statements and notes have been adjusted retroactively to reflect the reverse stock split.

Principles of Consolidation

The accompanying consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States of America, include the accounts of the Company and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.

Reclassification

The December 31, 2013 balance sheet reflects a $0.2 million reclassification of the Company’s sales returns reserve from a component of accrued expenses to a reduction of accounts receivable, a $0.1 million reclassification of other assets to prepaid expenses and other current assets and a reclassification of $0.1 million of other long term liabilities to other current liabilities to conform to the current period’s presentation. The change has no impact on the results of operations.

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, inventory valuation, the carrying amount of property and equipment, fair value of debt and capital stock, 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 it believes to be reasonable under the circumstances. Management adjusts such estimates and assumptions when facts and circumstances dictate. Illiquid credit markets, volatile equity markets and declines in business investment increase the uncertainty inherent in such estimates and assumptions. As future events and their effects cannot be determined with precision, actual results could differ significantly from these estimates. Changes in these estimates resulting from continuing changes in the economic environment will be reflected in the financial statements in future periods.

Cash & 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.

Fair Value of Financial Instruments

Fair value is an exit price that represents the amount that would be received from the sale of an asset or paid to transfer a liability in an orderly transaction between market participants. Accordingly, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. The Company discloses the manner in which fair value is determined for assets and liabilities based on a three-tiered fair value hierarchy. The hierarchy ranks the quality and reliability of the information used to determine the fair values. The three levels of inputs described in the standard are:

Level 1: Quoted prices in active markets for identical assets or liabilities.

Level 2: Observable inputs, other than Level 1 prices, for the assets or liabilities, either directly or indirectly, for substantially the full term of the assets or liabilities.

Level 3: Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Under the Fair Value Option Subsections of Financial Accounting Standards Board (FASB) ASC Subtopic 825-10, Financial Instruments — Overall, the Company has the irrevocable option to report most financial assets and financial liabilities at fair value on an instrument by instrument basis, with changes in fair value reported in earnings each reporting period. As a result of electing this option, the Company recorded its Subordinated Notes, Senior Convertible Notes and Convertible Notes at fair value in order to measure these liabilities at amounts that more accurately reflect the economics of these instruments (see notes 6, 7 and 8).

At December 31, 2014, no financial assets or liabilities were measured at fair value. At December 31, 2013, the Company’s Subordinated Notes, Senior Convertible Notes and Convertible Notes were valued utilizing Level 3 inputs.

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 consist primarily of insulation distributors, insulation contractors 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. The Company has not experienced any meaningful non-payment or write-offs of accounts receivable. Accordingly, the allowance for doubtful accounts was zero at December 31, 2014 and 2013. The Company does not have any off-balance-sheet credit exposure related to its customers.

For the year ended December 31, 2014, two customers represented 13% and 12% of total revenue, respectively. For the year ended December 31, 2013, two customers represented 15% and 11% of total revenue, respectively. For the year ended December 31, 2012, one customer represented 13% of total revenue.

At December 31, 2014, the Company had three customers that accounted for 17%, 17% and 11% of accounts receivable, respectively. At December 31, 2013, the Company had three customers that accounted for 20%, 14% and 11% 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, or market. 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 or market. The amount of any such provision is equal to the difference between the cost of inventory and the estimated market 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 lease. Expenditures for maintenance and repairs are charged to expense as incurred, whereas major betterments are capitalized as additions to property, plant and equipment.

Interest expense capitalization commences at the time a capital project begins construction and concludes when the project is completed. The Company has capitalized interest costs as part of the historical cost of constructing its manufacturing facilities. The Company capitalized less than $0.1 million, $0.1 million and $2.3 million in interest costs related to the build-out of the East Providence facility during the years ended December 31, 2014, 2013 and 2012, respectively.

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 and patent costs. Patent costs are amortized over the life of the patent.

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 flows models, quoted market values and third-party independent appraisals, as considered necessary.

Asset Retirement Obligations

The Company records asset retirement obligations 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.

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.

Redeemable Convertible Preferred Stock

The Company’s Series A and Series B redeemable convertible preferred stock were classified as temporary equity and shown net of issuance costs at December 31, 2012. The Company recognized changes in the redemption value and adjusted the carrying amount of the redeemable convertible preferred stock to equal the redemption value at the end of each reporting period.

 

As part of an amendment to its certificate of incorporation in 2013, the Company changed the terms of its redeemable convertible preferred stock such that the fair value of the shares immediately after the amendment was significantly different from the fair value of the shares immediately before the amendment. Accordingly, the Company accounted for the amendment as an extinguishment. The change in fair value upon extinguishment was recorded in additional paid-in capital (see note 13).

Revenue Recognition

The Company recognizes revenue from the sale of products and delivery of research and development services. Revenue is recognized when all of the following criteria are met: persuasive evidence of an arrangement exists, the price to the buyer is fixed or determinable, delivery has occurred or services have been provided, and collectability is reasonably assured.

Product Revenue

Product revenue is generally recognized upon transfer of title and risk of loss, which is generally upon shipment or delivery. The Company’s customary shipping terms are free on board (FOB) shipping point; however, some products are shipped using FOB destination shipping terms. Revenue associated with products shipped FOB destination is recognized when the products reach their specified destination. Products are typically delivered without significant post-sale obligations to customers.

 

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 and $0.2 million at December 31, 2014 and 2013, respectively.

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 one to two years from the date of sale, depending on the type of product purchased. The warranties provide that the Company’s products will be free from defects in material and workmanship, and will, under normal use, conform to the specifications for the product. For the years ended December 31, 2014, 2013 and 2012, warranty claims and charges have been insignificant.

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; (2) for cost-plus-fixed-fee contracts, the Company records revenue that is equal to total payroll cost incurred times a stated factor plus reimbursable expenses, to a stated upper limit. The primary cost is the labor effort expended in completing research and the only deliverable other than the labor hours expended is reporting of research results to the customer. Because the input measure of labor hours expended is also reflective of the output measure, it is a reliable means to measure the extent of progress towards completion. Revisions in cost estimates and fees during the course of the contract are reflected in the accounting period in which the facts that require the revisions become known.

Provision is made for the entire amount of future estimated losses on contracts when the current contract estimate is a loss while claims for additional contract compensation are not reflected in the accounts until the year in which such claims are identifiable and receipt is probable. 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. Adjustments to revenue as a result of audit have been insignificant.

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

Stock-based compensation cost is measured at the grant date based on the fair value of the award. Expense is recognized on a straight-line basis over the requisite service period for all awards with service conditions. For performance-based awards, the grant date fair value is recognized as expense when the condition is probable of being achieved, and then on a graded basis over the requisite service period. The Company uses the Black-Scholes option-pricing model to determine the fair value of service-based option awards, which requires a number of complex and subjective assumptions including fair value of the underlying security, the expected volatility of the underlying security, a risk-free interest rate and the expected term of the option. The fair value of restricted stock and restricted stock unit grants is determined using the closing trading price of the Company’s common stock on the date of grant. For performance-based stock options issued during the year ended December 31, 2013, the Company used a Monte Carlo simulation model to estimate the number of options the Company expected to remain outstanding and eligible for vesting upon completion of an IPO. The simulation model was based on a number of complex assumptions including the terms of the performance condition, the expected value of the Company’s common stock at the time of its IPO, the expected time from the date of grant to its IPO, and expected volatility. The compensation cost of these performance-based options was determined by multiplying the Black-Scholes estimate of grant date fair value by the percentage of options expected to remain outstanding and eligible for vesting upon completion of the Company’s IPO.

Research and Development

Costs incurred in the research and development of the Company’s products are expensed as incurred and include compensation and related costs, services provided by third-party contractors, materials and supplies and are classified as research and development expenses. Research and development costs directly associated with research services revenue are classified as research services in cost of revenue.

Earnings Per Share

Prior to the IPO, net income (loss) per common share was calculated using the two-class method, which is an earnings allocation formula that determines net income (loss) per share for the holders of the Company’s common shares and participating securities. Prior to their conversion to common stock at the time of the Company’s IPO, the Company’s Series A preferred stock, Series B preferred stock, Series C preferred stock and Series C preferred stock warrants contained participation rights in any dividend to be paid by the Company to holders of its common shares and were deemed to be participating securities. Net income (loss) available to common shareholders and participating securities was allocated to each share on an as-if-converted basis as if all of the earnings for the period had been distributed. The participating securities did not include a contractual obligation to share in losses of the Company and were not included in the calculation of net loss per share in the periods that have a net loss.

Diluted net income (loss) per share is computed using the more dilutive of (a) the two-class method, or (b) the if-converted method. The Company allocates net income (loss) first to preferred stockholders and holders of warrants to purchase preferred stock based on dividend rights and then to common stockholders, preferred stockholders and preferred warrant holders based on ownership interests. 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 and warrants. Common equivalent shares are excluded from the computation of diluted net income (loss) per share if their effect is antidilutive.

Subsequent to the IPO, the Company calculates net income (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, restricted stock units and warrants. Common equivalent shares are excluded from the computation of diluted net income (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 maker reviews consolidated operating results to make decisions about allocating resources and assessing performance for the entire Company. The Company views its operations and manages its business as one operating segment.

 

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

 

     Year Ended December 31  
     2014      2013      2012  
     (In thousands)  

Revenue:

        

U.S.

   $ 39,809       $ 30,164       $ 19,909   

International

     62,590         55,930         43,544   
  

 

 

    

 

 

    

 

 

 

Total

$ 102,399    $ 86,094    $ 63,453   
  

 

 

    

 

 

    

 

 

 

Recently Issued Accounting Standards

In May 2014, the FASB issued Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers. The standard will eliminate the transaction- and industry-specific revenue recognition guidance under current U.S. GAAP and replace it with a principle based approach for determining revenue recognition. Public entities are required to apply the revenue recognition standard for annual reporting period beginning on or after December 15, 2016, including interim periods within that annual reporting period. Early application is not permitted. The Company has not yet selected a transition method and is evaluating the effect that the updated standard will have on its consolidated financial statements and related disclosures.

In August 2014, the FASB issued ASU 2014-15, Presentation of Financial Statements—Going Concern: Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. The standard requires an entity’s management to evaluate whether there are conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued. Public entities are required to apply standards for annual reporting periods ending after December 15, 2016, and interim periods thereafter. Early application is permitted. The Company early adopted this standard and it did not have a material impact on its consolidated financial statements.

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, the Company believes that the impact of recently issued standards that are not yet effective will not have a material impact on its financial position or results of operations upon adoption.

Summary of Basis of Presentation and Significant Accounting Policies (Tables)
Schedule of Revenues, Based on Shipment Destination or Services Location

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

 

     Year Ended December 31  
     2014      2013      2012  
     (In thousands)  

Revenue:

        

U.S.

   $ 39,809       $ 30,164       $ 19,909   

International

     62,590         55,930         43,544   
  

 

 

    

 

 

    

 

 

 

Total

$ 102,399    $ 86,094    $ 63,453   
  

 

 

    

 

 

    

 

 

 
Inventories (Tables)
Schedule of Inventories

Inventories consist of the following:

 

     December 31  
     2014      2013  
     (In thousands)  

Raw material

   $ 4,052       $ 2,813   

Finished goods

     845         4,079   
  

 

 

    

 

 

 

Total

$ 4,897    $ 6,892   
  

 

 

    

 

 

 

Property, Plant and Equipment, Net (Tables)

Property, plant and equipment consist of the following:

 

     December 31       
     2014      2013      Useful life
     (In thousands)       

Construction in progress

   $ 24,124       $ 6,177      

Buildings

     16,303         16,303       30 years

Machinery and equipment

     78,378         77,466       5 — 10 years

Computer equipment and software

     5,556         5,298       3 years
  

 

 

    

 

 

    

Total

  124,361      105,244   

Accumulated depreciation and amortization

  (52,869   (43,221
  

 

 

    

 

 

    

Property, plant and equipment, net

$ 71,492    $ 62,023   
  

 

 

    

 

 

 

Plant and equipment under capital leases consist of the following:

 

     December 31  
     2014      2013  
     (In thousands)  

Office equipment, at cost

   $ 118       $ 113   

Vehicles, at cost

     288         288   
  

 

 

    

 

 

 

Total capital leases

  406      401   

Accumulated amortization

  (265   (178
  

 

 

    

 

 

 

Capital leases, net

$ 141    $ 223   
  

 

 

    

 

 

 

Accrued Expenses (Tables)
Schedule of Accrued Expenses

Accrued expenses consist of the following:

 

     December 31  
     2014      2013  
     (In thousands)  

Employee compensation

   $ 4,851       $ 3,926   

Professional fees

     76         200   

Deferred rent

     155         112   

Other accrued expenses

     506         576   
  

 

 

    

 

 

 
$ 5,588    $ 4,814   
  

 

 

    

 

 

 
Subordinated Notes (Tables)

Subordinated Notes consists of the following:

 

     December 31  
     2014      2013  
     (In thousands)  

Subordinated Notes

   $ —         $ 17,306   

Current maturities of Subordinated Notes

     —          (17,306
  

 

 

    

 

 

 

Subordinated Notes, excluding current portion

$       —      $ —    
  

 

 

    

 

 

 

The following table presents a roll-forward of the fair value of Level 3 (significant unobservable inputs) Convertible Notes for the years ended December 31, 2014, 2013 and 2012:

 

     Investor
Notes
     Arcapita
Notes
     Total
Convertible
Notes
 

Balance at December 31, 2011

   $ 50,118       $ 585       $ 50,703   

Issuances of convertible notes

     21,991         2,900         24,891   

Change in fair value included in interest expense

     18,811         683         19,494   
  

 

 

    

 

 

    

 

 

 

Balance at December 31, 2012

  90,920      4,168      95,088   

Issuances of convertible notes

  2,090      1,440      3,530   

Fair value of notes exchanged for senior convertible notes

  (5,971   (1,282   (7,253

Gain on extinguishment of convertible notes

  (8,498   (400   (8,898

Change in fair value included in interest expense

  8,938      469      9,407   
  

 

 

    

 

 

    

 

 

 

Balance at December 31, 2013

  87,479      4,395      91,874   

Change in fair value included in interest expense

  35,036      2,092      37,128   

Conversion of Convertible Notes

  (122,515   (6,487   (129,002
  

 

 

    

 

 

    

 

 

 

Balance at December 31, 2014

$ —      $ —      $ —     
  

 

 

    

 

 

    

 

 

 

The following table presents a roll-forward of the fair value of Level 3 (significant unobservable inputs) Senior Convertible Notes for the years ended December 31, 2014, 2013 and 2012:

 

     March 2013
Investor
Notes
     March 2013
Arcapita
Notes
     Total Senior
Convertible
Notes
 

Beginning balance as of December 31, 2012

   $ —        $ —        $ —    

Issuances of senior convertible notes

     13,435         1,536         14,971   

Fair value of notes exchanged for senior convertible notes

     6,132         1,444         7,576   

Conversion of the Senior Convertible Notes

     4,915         673         5,588   
  

 

 

    

 

 

    

 

 

 

Balance at December 31, 2013

  24,482      3,653      28,135   

Change in fair value included in interest expense

  9,803      1,570      11,373   

Conversion of Convertible Notes

  (34,285   (5,223   (39,508
  

 

 

    

 

 

    

 

 

 

Balance at December 31, 2014

$ —      $ —      $ —     
  

 

 

    

 

 

    

 

 

 

The following table presents a roll-forward of the fair value of Level 3 (significant unobservable inputs) Subordinated Notes for the years ended December 31, 2014, 2013 and 2012:

 

Balance at December 31, 2011

$ —    

Transfer into Level 3 on September 26, 2012 (1)

  12,435   

Change in fair value included in interest expense

  1,100   
  

 

 

 

Balance at December 31, 2012

  13,535   

Change in fair value included in interest expense

  3,771   
  

 

 

 

Balance at December 31, 2013

  17,306   

Change in fair value included in interest expense

  1,543   

Repayment

  (18,849
  

 

 

 

Balance at December 31, 2014

$ —    
  

 

 

 

 

(1) Fair value option election was made on September 26, 2012.
Convertible Notes (Tables)

Convertible Notes consist of the following:

 

     December 31  
     2014      2013  
     (In thousands)  

Investor Notes

   $     —         $ 87,479   

Arcapita Notes

     —           4,395   
  

 

 

    

 

 

 

Total Convertible Notes

  —        91,874   

Current maturities of convertible notes

  —        (435
  

 

 

    

 

 

 

Convertible Notes, excluding current portion

$ —      $ 91,439   
  

 

 

    

 

 

 

The following table presents the difference between the aggregate fair value and the aggregate unpaid principal balance of the Convertible Notes recorded at fair value at December 31, 2013:

 

     Aggregate fair value      Aggregate unpaid
principal balance
     Fair value over
unpaid principal
balance
 
     (In thousands)  

Investor Notes

   $ 87,479       $ 68,264       $ 19,215   

Arcapita Notes

     4,395         3,479         916   
  

 

 

    

 

 

    

 

 

 

Total Convertible Notes

$ 91,874    $ 71,743    $ 20,131   
  

 

 

    

 

 

    

 

 

The probability weighted discounted cash flow analyses utilized assumptions related to the probability of the occurrence of each of the various events and appropriate discount rates for each of the scenarios as of December 31, 2013 were as follows:

 

     December 31, 2013  

Potential exit scenario event

   Estimated
exit date of
future event
     Estimated
probability
of future
event
 

IPO scenario 1

     06/30/14         45

IPO scenario 2

     03/31/15         5

Sale scenario 1

     06/30/14         15

Sale scenario 2

     03/31/15         15

Dissolution

     09/30/14         5

Private company

     At maturity         15

Senior Convertible Notes consist of the following:

 

     December 31,  
     2014      2013  
     (In thousands)  

March 2013 Investor Notes

   $   —         $ 24,482   

March 2013 Arcapita Notes

     —           3,653   
  

 

 

    

 

 

 

Total Senior Convertible Notes

$ —      $ 28,135   
  

 

 

    

 

 

 

The following table presents the difference between the aggregate fair value and the aggregate unpaid principal balance of the Senior Convertible Notes recorded at fair value at December 31, 2013:

 

     Aggregate fair value      Aggregate unpaid
principal balance
     Fair value over
unpaid principal
balance
 
     (In thousands)  

March 2013 Investor Notes

   $ 24,482       $ 19,567       $ 4,915   

March 2013 Arcapita Notes

     3,653         2,980         673   
  

 

 

    

 

 

    

 

 

 

Total Senior Convertible Notes

$ 28,135    $ 22,547    $ 5,588   
  

 

 

    

 

 

    

 

 

 

The probability weighted discounted cash flow analyses utilized assumptions related to the probability of the occurrence of each of the various events and appropriate discount rates for each of the scenarios as of December 31, 2013 are as follows:

 

Potential exit

scenario event

   Estimated
exit date of
future event
     Estimated
probability of
future event
 

IPO scenario 1

     06/30/14         45

IPO scenario 2

     03/31/15         5

Sale scenario 1

     06/30/14         15

Sale scenario 2

     03/31/15         15

Dissolution

     09/30/14         5

Private company

     At maturity         15
Interest Expense (Tables)
Summary of Interest Expense

Interest expense consists of the following:

 

     Year ended December 31  
     2014      2013      2012  

Changes in fair value:

        

Subordinated notes

   $ 1,543       $ 3,771       $ 1,100   

Senior convertible notes

     11,373         5,588         —    

Convertible notes, net of capitalization(1)

     37,095         9,337         17,578   

Issuance of Series C preferred stock warrants in connection with senior convertible notes

     —           10,677         —    

Subordinated notes interest, net of capitalization(2)

     —           —           822   

Amortization of deferred financing costs for subordinated notes

     —           —           636   

Debt closing costs

     47         585         425   

Imputed interest on Cabot obligation

     —           391         1,018   

Other interest

     223         250         211   
  

 

 

    

 

 

    

 

 

 
$ 50,281    $ 30,599    $ 21,790   
  

 

 

    

 

 

    

 

 

 

 

(1) The charge recognized as a result of the change in the fair value of the Company’s Convertible Notes is presented net of capitalized interest expense of $0.1 million, $0.1 million and $1.9 million for the years ended December 31, 2014, 2013 and 2012, respectively.
(2) Interest expense recognized from the Company’s Subordinated Notes is presented net of capitalized interest expense of $0.0 million, $0.0 million and $0.3 million for the years ended December 31, 2014, 2013 and 2012, respectively.
Other Long-term Liabilities (Tables)

Other long-term liabilities consist of the following:

 

     December 31  
     2014      2013  
     (In thousands)  

Asset retirement obligations (ARO)

   $ 1,018       $ 1,009   

Other

     62         112   
  

 

 

    

 

 

 
  1,080      1,121   

Current maturities of other long-term liabilities

  (50 )   (50 )
  

 

 

    

 

 

 

Other long-term liabilities, less current maturities

$ 1,030   $ 1,071   
  

 

 

    

 

 

 

A summary of ARO activity consists of the following:

 

     Year Ended December 31  
     2014      2013  
     (In thousands)  

Balance at beginning of period

   $ 1,009       $ 1,000   

Accretion of discount expense

     40         34   

Settlement costs

     (31      (25
  

 

 

    

 

 

 

Balance at end of period

$ 1,018    $ 1,009   
  

 

 

    

 

 

 
Commitments and Contingencies (Tables)

Future minimum payments under capital leases at December 31, 2014 are as follows:

 

Year

   Capital Lease
Obligations
 
     (In thousands)  

2015

   $ 87   

2016

     64   

2017

     30   
  

 

 

 

Total

  181   

Less portion representing interest

  (16
  

 

 

 

Present value of future minimum payments

  165   

Current maturities of capital lease payments

  (76
  

 

 

 

Capital leases, excluding current portion

$ 89   
  

 

 

 

Future minimum lease payments under operating leases at December 31, 2014 are as follows:

 

Year

   Operating
Leases
 
     (In thousands)  

2015

   $ 1,126   

2016

     1,133   

2017

     600   

2018

     601   

2019

     170   

Thereafter

     34   
  

 

 

 

Total minimum lease payments

$ 3,664   
  

 

 

 

Employee Stock Ownership Plans (Tables)

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

 

     Year Ended
December 31
 
     2014      2013      2012  
     (In thousands)  

Cost of product revenue

   $ 1,121       $ 496       $ 221   

Research and development expenses

     1,046         267         112   

Sales and marketing expenses

     1,390         727         384   

General and administrative expenses

     5,224         2,936         937   
  

 

 

    

 

 

    

 

 

 

Total stock-based compensation

$ 8,781    $ 4,426    $ 1,654   
  

 

 

    

 

 

    

 

 

 

The following information relates to the fair value of the option awards estimated by use of the Black-Scholes option pricing model:

 

     Year Ended December 31  
     2014     2013     2012  

Weighted average assumptions:

      

Expected term (in years)

     6.17        5.47        6.02   

Expected volatility

     50.09     48.99     58.06

Risk free rate

     1.94     1.69     0.95

Expected dividend yield

     0.00     0.00     0.00

Weighted average fair value:

      

Grant-date fair value of options granted

   $ 5.37      $ 0.12      $ 5.60   

Grant-date fair value of options vested

   $ 97.31      $ 0.18      $ 2.30   

Aggregate intrinsic value of options exercised

   $ 4,816.50     $ —       $ —    

The following table summarizes information about stock options outstanding:

 

     Number of
Shares
    Weighted
Average
Grant Date
Fair Value
Per Share
     Weighted
Average
Exercise
Price
Per Share
     Weighted
Average
Remaining
Contractual
Term
(Years)
     Aggregate
Intrinsic
Value
 
     ($ in thousands, except share and per share data)  

Options outstanding at December 31, 2013

     97,183      $ 97.36       $ 92.25         9.63      

Granted

     934,018      $ 5.37       $ 10.78         

Forfeited

     (4,660   $ 20.14       $ 21.45         

Exercised

     (31 )   $ 95.92      $ 74.23          $ 4,816.50  
  

 

 

            

Options outstanding at December 31, 2014

  1,026,510    $ 14.01    $ 18.44      9.59    $ —    
  

 

 

            

Exercisable at December 31, 2014

  63,731    $ 97.31    $ 82.10      8.59    $ —    
  

 

 

            

Expected to vest at December 31, 2014

  827,504    $ 8.82    $ 13.46      9.66    $ —    
  

 

 

            

Information related to grants of RSUs during 2014 is as follows:

 

     Restricted
Stock
Units
    

Weighted

Average

Grant Date

Fair Value

 

Balance at December 31, 2013

     —        $ —    

Granted

     318,517         10.78   

Vested

     —          —    

Forfeited

     (3,877 )      10.78   
  

 

 

    

 

 

 

Balance outstanding at December 31, 2014

  314,640    $ 10.78   
  

 

 

    

 

 

 
Net Income (Loss) Per Share (Tables)

The computation of basic and diluted net income (loss) per share attributable to common stockholders consists of the following:

 

     Year ended December 31  
     2014     2013     2012  
     (In thousands, except share and per share data)  

Numerator:

      

Net income (loss)

   $ (66,324   $ (47,611   $ (56,142

Deemed dividends on participating preferred stock (inclusive of issuance costs and changes in redemption value, including extinguishment):

      

Series B

     —         29,622        3,772   

Series A

     —         55,543        43,429   
  

 

 

   

 

 

   

 

 

 

Total preferred stock deemed dividends

  —       85,165      47,201   
  

 

 

     

Earnings attributable to participating convertible preferred stock shareholders and Series C preferred stock warrant holders

  —       (36,216   —    
  

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to common stockholders

$ (66,324 $ 1,338    $ (8,941
  

 

 

   

 

 

   

 

 

 

Denominator:

Weighted average shares outstanding, basic

  12,349,456      3,137      3,136   

Effect of warrants to purchase common stock

  —       122      —    
  

 

 

   

 

 

   

 

 

 

Weighted average shares outstanding, diluted

  12,349,456      3,259      3,136   
  

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to common stockholders per common share, basic

$ (5.37 $ 426.52    $ (2,851.08

Effect of warrants to purchase common stock

  —       (15.96 )   —    
  

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to common stockholders per common share, diluted

$ (5.37 $ 410.56    $ (2,851.08
  

 

 

   

 

 

   

 

 

 

Potential dilutive common shares that were excluded from the computation of diluted net income (loss) attributable to common stockholders per common share because they were anti-dilutive consist of the following:

 

     Year ended December 31  
     2014      2013      2012  

Series B (a)

     —           —          1,941   

Series A (a)

     —           —          6,407   

Common stock options

     1,026,510         21,846         2,749   

Restricted common stock units

     314,640         —          —    

Common stock warrants

     131         —          137   
  

 

 

    

 

 

    

 

 

 

Total

  1,341,281      21,846      11,234   
  

 

 

    

 

 

    

 

 

 

 

(a) Common stock equivalent reflecting conversion of preferred shares.
Income Taxes (Tables)

The reconciliation between the U.S. statutory income tax rate and the Company’s effective rate consists of the following:

 

     Year Ended December 31  
     2014     2013     2012  

U.S. federal income tax statutory rate

     35     35     35

Debt and warrant fair value adjustments

     (26 %)      (16 %)      (12 %) 

Changes in valuation allowance for deferred tax assets

     1     6     (22 %) 

Write down of losses not previously benefitted

     (11 %)      (22 %)      0

Other

     1     (3 %)      (1 %) 
  

 

 

   

 

 

   

 

 

 

Effective tax rate

  —        —        —     
  

 

 

   

 

 

   

 

 

 

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, 2014 and 2013 are presented below:

 

     December 31  
     2014      2013  
     (In thousands)  

Deferred tax assets:

     

Net operating loss carryforwards

   $ 61,457       $ 67,503   

Transaction related costs

     —           1,494   

Stock-based compensation

     4,479         2,460   

Tax credit carryforwards

     379         393   

Reserves and accruals

     282         896   

Intangible assets and amortization

     384         —     

Other

     5         127   
  

 

 

    

 

 

 

Total gross deferred tax assets

  66,986      72,873   

Deferred tax liabilities:

Depreciation

$ (3,311 $ (2,717
  

 

 

    

 

 

 

Total deferred tax liabilities

  (3,311   (2,717
  

 

 

    

 

 

 

Total deferred tax assets and liabilities

  63,675      70,156   

Valuation allowance

  (63,675   (70,156
  

 

 

    

 

 

 

Net deferred tax asset

$ —      $ —     
  

 

 

    

 

 

 

Quarterly Results of Operations (Tables)
Summary of Quarterly Financial Information

QUARTERLY RESULTS OF OPERATIONS

(in thousands, except per share data)

(unaudited)

 

     Three Months Ended  
     March 31,     June 30,     Sept 30,     Dec 31,  

2014

        

Total revenue

   $ 22,363      $ 26,615      $ 25,437      $ 27,984   

Gross profit

     3,346        3,425        5,072        5,236   

Income (loss) from operations

     (2,898     (8,121     (2,365     (2,658

Net income (loss)

     (19,049     (42,148     (2,412     (2,714

Net income (loss) attributable to common stockholders

     (19,049     (42,148     (2,412     (2,714

Net income (loss) attributable to common stockholders per common share - basic

   $ (6,065.89   $ (13.88   $ (0.10   $ (0.12

Net income (loss) attributable to common stockholders per common share - diluted

   $ (6,065.89   $ (13.88   $ (0.10   $ (0.12

2013

        

Total revenue

   $ 17,005      $ 22,978      $ 21,880      $ 24,232   

Gross profit

     38        3,531        3,580        3,583   

Income (loss) from operations

     (6,025     (2,638     (4,665     (6,644

Net income (loss)

     1,027  &#