Aspen Aerogels, Inc. — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018. The company designs and manufactures aerogel insulation, primarily for energy infrastructure and building materials, and provides contract research services.
Financial performance
| Metric | Q2 2018 | Q2 2017 | First half 2018 | First half 2017 |
|---|---|---|---|---|
| Revenue | $21.7 million | $25.1 million | $44.7 million | $48.1 million |
| Gross profit / margin | $2.7 million / 12.7% | $3.7 million / 14.7% | $5.6 million / 12.4% | $5.9 million / 12.3% |
| Operating loss | $6.9 million | $5.4 million | $13.6 million | $14.5 million |
| Net loss | $7.0 million | $5.5 million | $13.8 million | $14.6 million |
| Net loss per share, diluted | $0.29 | $0.23 | $0.58 | $0.62 |
| Adjusted EBITDA (non-GAAP) | $(3.2) million | $(1.4) million | $(5.6) million | $(6.6) million |
- Q2 revenue fell 14%; product revenue declined 14% and shipments fell 18% to 7.2 million square feet. First-half revenue decreased 7% and shipments fell 12% to 14.9 million square feet.
- Price and product mix partly offset lower volume: average selling price rose 5% in Q2 to $2.95 per square foot and 6% in the first half to $2.93.
- First-half operating cash outflow was $6.2 million, versus $6.0 million a year earlier. Capital expenditures were $1.7 million, down from $4.8 million.
- Cash and cash equivalents were $7.3 million at June 30, down from $10.7 million at year-end 2017. The company had $3.8 million drawn on its revolving credit facility, $2.0 million of letters of credit, and $8.7 million of effective remaining availability. The facility matures April 28, 2019; the company reported compliance with its covenants.
- Total liabilities were $24.5 million and stockholders’ equity was $88.9 million. The $5.0 million BASF prepayment is recorded as a liability net of discount; the related obligation is secured by Rhode Island property, plant and equipment and certain intellectual property.
Changes and management outlook
- Lower revenue reflected reduced subsea project work and the completion of major Asian petrochemical and LNG projects in 2017. Growth in North American petrochemical and refinery markets and higher selling prices provided partial offsets.
- Q2 gross margin declined from 14.7% to 12.7%, as revenue and output fell while fixed manufacturing costs remained. First-half gross margin was broadly stable year over year. Silica precursor costs increased; these materials represent more than half of raw material costs.
- Management expected revenue to decline during 2018, citing the completed Asian project and lower anticipated subsea activity. It also expected higher net losses and lower Adjusted EBITDA for 2018, reflecting the revenue decline and approximately $6 million of additional investment in initiatives and personnel. Management expected second-half gross profit to be lower than the comparable 2017 period.
- The East Providence expansion is intended to increase annual nameplate capacity from 50 million to 60 million square feet by the end of 2020, with up to $20 million of capital spending. Construction of a planned Statesboro, Georgia facility, for which up to $130 million of capital expenditures were anticipated, was delayed to align capacity with demand. Government incentives could be terminated if construction does not begin by February 15, 2019.
- BASF paid $5.0 million in prepayments during the first half under a supply agreement running through 2027. BASF may credit amounts against future purchases; any 2018 prepayment still uncredited at December 31, 2021 may be requested for repayment. BASF has no obligation to buy product. The agreement includes an exclusive right relating to Spaceloft A2; associated deferred revenue was $1.0 million at June 30.
Risks, contingencies and notable items
- Testing found that samples for a product attribute performed outside published specifications. Management determined a liability was probable but could not estimate it as of June 30; no warranty expense was recorded in the first half. Further assessment could result in material warranty charges.
- A patent infringement exclusion order against two China-based competitors remains in effect, but Alison appealed the ITC decision. Related proceedings in Germany and China continue. Management cautioned that litigation could be protracted and costly; it did not identify a probable loss requiring accrual.
- The company expects to need additional funding beyond 2018 for expansion and strategic initiatives, potentially from operating cash flow, grants, debt, customer prepayments, licensing or equity financing. It said current cash and anticipated credit would fund only a portion of planned investment.
- The company adopted ASC 606 in 2018; management reported no material effect on revenue timing or reported results. It expected adoption of the new lease standard in 2019 to materially increase reported assets and liabilities.
Investor verification priorities
- Track product shipments, pricing, mix and customer/project concentration, particularly the pace of replacement demand after major project completions.
- Assess the product testing and warranty exposure, including any estimate or subsequent charge disclosed in later filings.
- Verify liquidity, covenant compliance, credit-facility renewal or refinancing, and the sources and terms of funding for planned expansion.
- Monitor East Providence expansion spending and the Statesboro facility decision, including the February 2019 incentive deadline.
- Follow the BASF prepayment credit and repayment terms, supply volumes, and whether the partnership generates additional funding or demand.