Aspen Aerogels, Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; comparisons are with Q1 2016 unless otherwise noted. Unaudited consolidated results. Aspen designs and manufactures aerogel insulation, primarily for energy infrastructure and building materials, and also earns revenue from contracted research services. Amounts below are in millions of dollars unless stated otherwise.
Financial performance and liquidity
| Metric | Q1 2017 | Q1 2016 / prior balance |
|---|---|---|
| Total revenue | $23.0 | $32.8 |
| Gross profit / margin | $2.2 / 10% | $6.5 / 20% |
| Operating loss | $(9.1) | $(1.8) |
| Net loss / diluted loss per share | $(9.1) / $(0.39) | $(1.8) / $(0.08) |
| Adjusted EBITDA (non-GAAP) | $(5.1) | $2.0 |
| Cash used in operating activities | $(4.4) | $(0.2) |
| Cash and cash equivalents at period end | $11.2 | $18.1 at Dec. 31, 2016 |
| Capital expenditures | $2.1 | $3.1 |
Product revenue was $22.3 million; research services revenue was $0.7 million. Product shipments declined 30% to 8.3 million square feet, while average selling price fell 1% to $2.70 per square foot. Product cost of revenue was 92% of product revenue versus 81% a year earlier. The company recorded $0.9 million of warranty expense for a claim involving a specific product application.
At March 31, total assets were $127.6 million and stockholders’ equity was $107.4 million. Current assets were $44.8 million versus current liabilities of $19.1 million. Debt was minimal: less than $0.1 million of capital lease obligations and no revolver borrowings. The $20 million revolving facility matures January 28, 2018; after borrowing-base limits and $2.4 million of letters of credit, effective availability was $9.7 million. Aspen reported compliance with its financial covenants.
Material changes and management outlook
- Revenue fell 30%, primarily because a multiyear petrochemical project with a major Asian energy customer concluded, alongside weaker subsea project activity and a broad decline in global downstream markets. That customer represented 25% of 2016 product revenue.
- Gross profit fell 66%; fixed manufacturing costs were not reduced in line with lower sales. General and administrative expense rose 68% to $6.6 million, principally due to a $2.5 million increase in patent enforcement costs.
- Management expects revenue to decline and net loss and loss per share to increase, with Adjusted EBITDA decreasing, in 2017 versus 2016. It cited the completed Asian project, constrained capital investment and low global energy-market activity; fixed costs and delays in reducing variable costs could amplify the earnings impact. Management anticipated these market conditions would continue through 2017.
- The planned Statesboro, Georgia, manufacturing facility and related financing were temporarily delayed to align capacity with expected demand in 2018–2020. The $22 million of BASF prepayments depend on conditions that remain unmet, including securing at least $30 million in third-party debt commitments; the prepayments therefore have not commenced. BASF has no obligation to purchase product under the supply agreement.
- Management expects higher 2017 R&D and G&A expenses and modestly higher sales and marketing expenses; patent litigation may add significant legal costs if prolonged. The company’s longer-term expectations for revenue growth, improved gross profit and operating cash flow are forward-looking and uncertain.
Risks, contingencies and other items
Aspen is pursuing patent infringement proceedings in the U.S. ITC and Germany against China-based competitors and related parties; certain patent challenges remain pending. The company said litigation outcomes and costs are difficult to predict and that proceedings could be protracted. It reported no litigation loss that it considered probable and requiring accrual. The filing states there were no material changes to the risk factors in its 2016 Form 10-K. Aspen had a full valuation allowance against net deferred tax assets and recorded no income tax provision.
Important facts for investors to verify
- Whether demand and the 2017 revenue decline track management’s outlook, and whether the lost Asian project or weak energy markets are offset by other customers and markets.
- Whether product volume, manufacturing utilization, product mix and warranty costs allow gross margin to recover or deteriorate further.
- Cash burn, working-capital needs, covenant compliance and borrowing-base availability as cash declined to $11.2 million.
- Timing, financing and capital requirements for Statesboro, including satisfaction of BASF prepayment conditions and any resulting repayment obligations.
- Developments, legal costs and outcomes in the patent proceedings, as well as the impact of any further warranty claims.