ASPEN AEROGELS INC quarterly report, Q1 FY2018

Aspen Aerogels, Inc. — Q1 2018 Form 10-Q

Reporting period: Three months ended March 31, 2018; comparative period is Q1 2017. Unaudited consolidated results. Aspen designs and manufactures aerogel insulation and also performs contract research services.

Financial results

Metric	Q1 2018	Q1 2017
Revenue	$23.1 million	$23.0 million
Gross profit / margin	$2.8 million / 12%	$2.2 million / 10%
Operating loss	$6.8 million	$9.1 million
Net loss / diluted loss per share	$6.8 million / $0.29	$9.1 million / $0.39
Adjusted EBITDA (non-GAAP)	$(2.4) million	$(5.1) million
Net cash used in operating activities	$2.4 million	$4.4 million
Capital expenditures	$0.7 million	$2.1 million

Product revenue was $22.5 million, up 1%; research-services revenue was $0.6 million, down 18%. Product shipments declined 6% to 7.7 million square feet, while average selling price rose 8% to $2.91 per square foot. Product revenue growth reflected price increases and mix, offset by lower volume and reduced Asian project sales.

Balance sheet and liquidity

• Cash and cash equivalents were $9.6 million at March 31, 2018, down from $10.7 million at year-end 2017. Current assets were $40.8 million and current liabilities were $15.7 million.
• Revolving-credit borrowings were $3.8 million; $2.1 million of letters of credit reduced effective available capacity to $6.7 million. The facility permits up to $20 million subject to borrowing-base and covenant limits. The company reported covenant compliance.
• The credit facility maturity was extended after quarter-end, on April 25, 2018, to April 28, 2019, with certain financial covenants modified.
• A $2.5 million BASF prepayment received in March is recorded as a prepayment liability, net of discount, and related deferred revenue. BASF agreed to a further $2.5 million installment in 2018.
• Operating cash use improved year over year, partly reflecting a $6.6 million reduction in accounts receivable. The BASF prepayment contributed $2.5 million to financing cash flow.

Material changes and management commentary

• Gross margin improved year over year, principally because Q1 2017 included a $0.9 million warranty charge; no warranty expense was recorded in Q1 2018. Lower product costs also reflected lower material costs, partly offset by higher manufacturing expense.
• General and administrative expense declined 32% to $4.5 million, mainly due to $2.6 million less in patent-enforcement costs. Sales and marketing expense increased 13% to $3.5 million; R&D expense was broadly unchanged at $1.6 million.
• Management cited the conclusion of a multiyear Asian petrochemical project and an expected decline in subsea project volume as potential drags on 2018 revenue. Those activities represented 19% of 2017 product revenue.
• The company planned approximately $6 million of additional 2018 investment in new initiatives and personnel. It expected 2018 gross margin to increase slightly versus 2017, while R&D, sales and marketing expense were expected to rise. Management also anticipated lower G&A expense, including lower patent-enforcement costs.
• East Providence capacity was estimated at 50 million square feet annually; projects were underway to increase it to 60 million by the end of 2020, with up to $20 million of capital expenditures anticipated. The proposed Statesboro, Georgia facility was delayed to better match capacity timing with demand; management cited up to $130 million of potential capital expenditures for its first production line.
• Management said current cash, the remaining 2018 BASF prepayment, and expected credit availability should fund planned investments under the operating plan. Beyond 2018, the company may need operating cash flow, grants, debt, customer prepayments or equity financing. It stated that it had no mitigating plans to reduce cash expenditures under the current operating plan.

Risks, contingencies, and unusual items

• Product testing indicated that samples of one product performed outside published specifications. Further testing was ongoing; no warranty liability was considered probable or estimable at quarter-end. The company warned that results could lead to material warranty charges in future periods.
• The BASF agreement provides for exclusive supply of Spaceloft A2 through 2027, with a two-year post-termination supply commitment. BASF is not obligated to purchase products; any 2018 prepayment not credited by December 31, 2021 may be subject to repayment at BASF’s request.
• Patent-enforcement litigation involving China-based competitors continued in Germany. The U.S. International Trade Commission issued a limited exclusion order in February 2018; further litigation and appeals may be costly and protracted. The company reported no litigation loss considered probable and requiring accrual.
• The company adopted ASC 606 on January 1, 2018 using the modified retrospective method and reported no material adoption impact. It expected the lease-accounting standard, effective for it in 2019, to materially increase reported assets and liabilities.
• Management reported that disclosure controls were effective and that there were no material changes in internal control over financial reporting during the quarter.

Important facts for investors to verify

• Progress and results of additional product testing, and whether a warranty obligation becomes probable or estimable.
• Revenue, pricing, shipment volumes and margins as the Asian project ends and subsea demand changes; also monitor customer and distributor concentration.
• Cash burn, covenant compliance, borrowing-base availability, and the timing and terms of the remaining BASF prepayment or any future financing.
• Execution, costs and demand assumptions for East Providence expansion and the delayed Statesboro facility.
• Potential legal costs and outcomes of ongoing patent proceedings, and the basis for anticipated reductions in patent-enforcement expense.
• The MD&A interest-expense comparison table labels the prior-period column “2016,” while the financial statements and surrounding discussion identify the comparison as Q1 2017; confirm the intended comparative period.