(6) Commitments and Contingencies

Customer Supply Agreement

On June 21, 2016, the Company entered into a supply agreement and a side agreement (together, the supply agreement) and a joint development agreement with BASF SE (BASF). Pursuant to the supply agreement, the Company will sell exclusively to BASF the Company’s Spaceloft^® A2 product at annual volumes to be specified by BASF, subject to certain volume limits. The supply agreement will terminate on December 31, 2027, if not renewed prior to such date. Upon expiration of the supply agreement, the Company will be subject to a post-termination supply commitment for an additional two years. The joint development agreement is designed to facilitate the collaboration between the parties on the development and commercialization of new products.

In addition, BASF will make a non-interest bearing prepayment to the Company in the aggregate amount of $22 million during the construction of the planned manufacturing facility in Statesboro, Georgia (Plant Two), subject to the Company’s prior satisfaction of certain preconditions related to the finalization of certain aspects of the product specification and the progress of the financing and construction of Plant Two, including securing a debt commitment from a third party lender for at least $30 million. BASF is obligated to pay the prepayment to the Company in eight equal consecutive quarterly installments commencing on the later of (i) October 1, 2016 or (ii) the first day of the calendar quarter following the date on which the Plant Two progress preconditions are met. Once commenced, BASF’s obligation to make such quarterly payments shall be subject to postponement in the event of delays of three months or more in the projected date of completion of Plant Two by a commensurate number of months.

After October 1, 2018, the Company will, at BASF’s instruction, credit up to 25.3% of any amounts invoiced by the Company for Spaceloft^® A2 product sold to BASF against the prepayment balance. However, BASF has no obligation to purchase products under the supply agreement. If any of the prepayment remains uncredited against amounts invoiced by the Company as of September 30, 2023, BASF may request that the Company repay the uncredited amount to BASF in four equal quarterly installments beginning on December 31, 2023. The repayment obligation will be secured by a security interest in real estate, plant and equipment at the Company’s Rhode Island and Georgia manufacturing facilities.

As of September 30, 2016, the Company anticipates that the general uncertainty in the energy markets and recent weakness in the downstream markets will continue into 2017. With this view of the market, the Company had elected to temporarily delay the board approved Plant Two project and its related financing to better align the capacity expansion with the Company’s assessment of demand for the 2018 to 2020 period. As a result, the Company has yet to fulfill certain of the prepayment preconditions and commencement of the quarterly prepayments from BASF will be delayed until such preconditions are satisfied.

Financing Costs

During the nine months ended September 30, 2016, the Company engaged with a third party lender to secure a debt commitment to support the construction of Plant Two. During the three months ended September 2016, the Company decided, at its sole discretion, to temporarily delay both the Plant Two project and its related financing to better align the capacity expansion with the Company’s assessment of demand for the 2018 to 2020 period. In addition, the Company anticipates that debt commitments from third party lenders will be postponed for a period of at least six months. As a result, the Company recorded a $0.6 million charge included in other expense, net for postponed financing costs. The charge included legal fees incurred by the Company itself and on behalf of the potential lender.

Asset Retirement Obligation

As of December 31, 2015, the Company had 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.

During the nine months ended September 30, 2016, the Company incurred approximately $0.2 million in expenditures in support of completing the restoration of 31,577 square feet of space formerly utilized for manufacturing operations in the Northborough, Massachusetts facility. This manufacturing space was vacated and returned to the landlord on July 1, 2016.

On June 29, 2016, the Company executed an agreement to remain at the Northborough, Massachusetts facility through December 31, 2026. As part of the new agreement, the Company’s obligation to restore the remaining space in the Northborough facility was eliminated. The settlement of the remaining reserve balance of approximately $0.2 million was reclassified to accrued expenses and will be amortized as a reduction to rent expense over the term of the new lease agreement.


	Nine Months Ended September 30, 2016
	(In thousands)
Balance at beginning of period	$	397
Expenditures		(156	)
Settlement of asset retirement obligation		(241	)

Balance at end of period	$	—

Revolving Line of Credit

The Company maintains a revolving credit facility with Silicon Valley Bank. On August 19, 2016, the Company amended the Amended and Restated Loan and Security Agreement with Silicon Valley Bank, which was originally effective from August 31, 2014 to August 31, 2016 (the Credit Facility), pursuant to which, the Credit Facility’s maturity date was extended to November 29, 2016. The Company may borrow up to $20 million under the facility subject to compliance with certain covenants and borrowing base limitations. At the Company’s election, the interest rate applicable to borrowings under the revolving credit facility may be based on the prime rate or LIBOR. Prime rate-based rates vary from prime rate plus 0.75% per annum to prime rate plus 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 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 both September 30, 2016 and December 31, 2015, the Company had no amounts drawn on the revolving credit facility. Under the 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 September 30, 2016, the Company was in compliance with all such financial covenants.

Pursuant to the terms of its existing Northborough, Massachusetts facility lease, the Company has been required to provide the landlord 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 outstanding letters of credit backed by the revolving credit facility of $2.5 million and $2.7 million September 30, 2016 and December 31, 2015, respectively, which reduce the funds otherwise available to the Company under the revolving credit facility. Based on the available borrowing base and net of the $2.5 million of outstanding letters of credit, the amount available to the Company under the revolving credit facility at September 30, 2016 was $12.5 million.

Litigation

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

Operating Leases

On June 29, 2016, the Company entered into a new agreement with Cabot II- MA1M03, LLC (Cabot Properties) to lease approximately 51,650 square feet of office space in Northborough, MA, the location of the Company’s current headquarters. The new lease follows the existing lease between the Company and Cabot Properties that expires on December 31, 2016. The lease term will commence on January 1, 2017 and expire on December 31, 2026. The annual base rent associated with the lease will be approximately $408,000 during the first year of the lease, and increase by approximately 3% annually for the term of the lease. The lease also provides for the payment by the Company of its pro rata share of real estate taxes and certain other expenses. Prior to the expiration of the lease term, the Company will have the right to extend the lease for an additional term of three years.

Under the terms of the new lease, Cabot Properties will provide the Company with an allowance of up to $1.2 million to be utilized for improvements to the leased premises. The Company will account for the reimbursements from Cabot Properties for such improvements as a lease obligation incentive. In addition, the new lease eliminated the Company’s asset retirement obligations under the existing lease. The settlement of the remaining asset retirement reserve balance of approximately $0.2 million was reclassified to other liabilities. These amounts will be recorded as a component of deferred rent in determining the minimum lease payments for the property. As of September 30, 2016, the Company had capitalized $0.4 million in leasehold improvement costs.