Revenue is recognized when a customer obtains control of promised goods or services in an amount that reflects the consideration which the entity expects to receive in exchange for those goods or services. To determine revenue recognition for arrangements within the scope of ASC 606, the Company performs the following five steps: (i) identification of the contract with a customer; (ii) identification of the performance obligations in the contract; (iii) determination of the transaction price; (iv) allocation of the transaction price to the separate performance obligations in the contract; and (v) recognition of the revenue associated with performance obligations as they are satisfied. The Company applies the five-step model to contracts when it is probable that the Company will collect the consideration it is entitled to in exchange for the goods or services it transfers to the customer. At contract inception, once the contract is determined to be within the scope of ASC 606, the Company assesses the goods or services promised within each contract and determines those that are performance obligations, and assesses whether each promised good or service is distinct. If the contract contains a single performance obligation, the entire transaction price is allocated to the single performance obligation. Contracts that contain multiple performance obligations require an allocation of the transaction price based on the estimated relative standalone-selling prices of the promised products or services underlying each performance obligation. The Company determines standalone-selling prices based on the price at which the performance obligation is sold separately. If the standalone-selling price is not observable through past transactions, the Company estimates the standalone-selling price taking into account available information such as market conditions and internally approved pricing guidelines related to the performance obligations. The Company then recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied.

When determining the transaction price of a contract, an adjustment is made if payment from a customer occurs either significantly before or significantly after performance, resulting in a significant financing component. Applying the practical expedient in paragraph ASC 606-10-32-18, the Company does not assess whether a significant financing component exists if the period between when the Company performs its obligations under the contract and when the customer pays is one year or less. The Company did not have any contracts outstanding at December 31, 2019 and did not enter into any contracts during the six months ended June 30, 2020 that contained a significant financing component.

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 the completion of required performance obligations.

Shipping and handling costs associated with outbound freight after control over a product has transferred to a customer are accounted for as fulfillment costs and are included in the cost of product revenue. The amount of revenue recognized includes the consideration to which the Company expects to be entitled to receive in exchange for these shipping and handling costs.

The Company generally enters into contracts containing one type of performance obligation. The Company recognizes product revenue when the performance obligation is satisfied, which is generally upon delivery according to contractual shipping terms within customer purchase orders.

The Company also enters into rebate agreements with certain customers. These agreements may be considered an additional performance obligation of the Company or variable consideration within a contract. Rebates are recorded as a reduction of revenue in the period the related product revenue is recognized. A corresponding liability is recorded as a component of deferred revenue on the consolidated balance sheets. These arrangements are primarily based on the customer attaining contractually specified sales volumes.

The Company estimates the amount of its product sales that may be returned by its customers and records this estimate as a reduction of revenue in the period the related product revenue is recognized. The Company currently estimates product return liabilities using historical rates of return, current quarter credit sales, and specific items of exposure on a contract-by-contract basis. Sales return reserves were approximately $0.1 million at both June 30, 2020 and December 31, 2019.

The Company manufactures and sells products that are designed for pipe-in-pipe applications in subsea oil production and are typically customized to meet customer specifications. Subsea products typically have no alternative use and contain an enforceable right to payment. Customer invoicing terms for subsea products are typically based on certain milestones within the production and delivery schedule. Under the provisions of ASC 606, the Company recognizes revenue at a point in time when transfer of control of the products is passed to the customer, or over time utilizing the input method. The timing of revenue recognition is assessed on a contract-by-contract basis. During the six months ended June 30, 2020 and 2019, the Company recognized revenue of $5.3 million and $12.5 million, respectively, in connection with subsea projects.

The Company performs research services under contracts with various government agencies and other institutions. These contracts generally have one type of performance obligation associated with the provision of research services including functional licenses to any resulting intellectual property. The Company records revenue using the percentage-of-completion method in two ways: (1) for firm-fixed-price contracts, the Company accrues that portion of the total contract price that is allocable on the basis of the Company’s estimates of costs incurred to date to total contract costs; and (2) for cost-plus-fixed-fee contracts, the Company records revenue that is equal to total payroll cost incurred times a stated factor plus reimbursable expenses, to a stated upper limit. The primary cost under the Company’s research service contracts is the labor effort expended in completing the research. Typically, the only deliverable, other than the labor hours expended, is reporting research results to the customer or delivery of research grade aerogel products. Because the input measure of labor hours expended is also reflective of the output measure, it is a reliable means to measure the extent of progress toward completion. Revisions in cost estimates and fees during the course of the contract are reflected in the accounting period in which the facts that require the revisions become known. Contract costs and rates used to allocate overhead to contracts are subject to audit by the respective contracting government agency. Adjustments to revenue as a result of audit are recorded within the period they become known. To date, adjustments to revenue as a result of contracting agency audits have been insignificant.

In the following tables, revenue is disaggregated by primary geographical region and source of revenue:

	Three Months Ended June 30,
	2020						2019
	U.S.		International		Total		U.S.		International		Total
	(In thousands)
Geographical region
Asia	$	—	$	13,652	$	13,652	$	—	$	7,786	$	7,786
Canada		—		235		235		—		9		9
Europe		—		1,818		1,818		—		5,864		5,864
Latin America		—		844		844		—		902		902
U.S.		8,092		—		8,092		14,972		—		14,972
Total revenue	$	8,092	$	16,549	$	24,641	$	14,972	$	14,561	$	29,533

Source of revenue
Product revenue	$	7,974	$	13,454	$	21,428	$	10,790	$	10,334	$	21,124
Subsea projects		3		3,095		3,098		3,557		4,227		7,784
Research services		115		—		115		625		—		625
Total revenue	$	8,092	$	16,549	$	24,641	$	14,972	$	14,561	$	29,533

	Six Months Ended June 30,
	2020						2019
	U.S.		International		Total		U.S.		International		Total
	(In thousands)
Geographical region
Asia	$	—	$	23,756	$	23,756	$	—	$	14,509	$	14,509
Canada		—		690		690		—		1,906		1,906
Europe		—		4,955		4,955		—		12,987		12,987
Latin America		—		1,894		1,894		—		1,819		1,819
U.S.		21,765		—		21,765		26,224		—		26,224
Total revenue	$	21,765	$	31,295	$	53,060	$	26,224	$	31,221	$	57,445

Source of revenue
Product revenue	$	20,427	$	27,087	$	47,514	$	20,915	$	22,299	$	43,214
Subsea projects		1,111		4,208		5,319		3,557		8,922		12,479
Research services		227		—		227		1,752		—		1,752
Total revenue	$	21,765	$	31,295	$	53,060	$	26,224	$	31,221	$	57,445

The following table presents changes in the Company’s contract assets and contract liabilities during the six months ended June 30, 2020:

	Balance at December 31, 2019		Additions		Deductions			Balance at June 30, 2020
	(In thousands)
Contract assets
Subsea projects	$	2,811	$	5,373	$	(5,915	)	$	2,269
Research services		172		183		(205	)		150
Total contract assets	$	2,983	$	5,556	$	(6,120	)	$	2,419
Contract liabilities
Deferred revenue
Product revenue	$	4,991	$	561	$	(2,852	)	$	2,700
Subsea projects		491		3,208		(3,150	)		549
Research services		138		94		(69	)		163
Prepayment liability		9,786		—		(110	)		9,676
Total contract liabilities	$	15,406	$	3,863	$	(6,181	)	$	13,088

During the six months ended June 30, 2020, the Company recognized $3.3 million of revenue that was included in deferred revenue at the beginning of the period.

A contract asset is recorded when the Company satisfies a performance obligation by transferring a promised good or service and has earned the right to consideration from its customer. These assets may represent a conditional or unconditional right to consideration and are included within accounts receivable on the consolidated balance sheets.

A contract liability is recorded when consideration is received, or such consideration is unconditionally due, from a customer prior to transferring goods or services under the terms of the contract. Contract liabilities are recognized as revenue after control of the products or services is transferred to the customer and all revenue recognition criteria have been met.