Aspen Aerogels, Inc. — Q2 2014 Form 10-Q
Reporting period: Three and six months ended June 30, 2014; comparisons are to the same 2013 periods. Aspen designs and manufactures aerogel insulation and also performs contracted research. Its products primarily serve energy infrastructure markets.
Financial performance and liquidity
Amounts are in millions of dollars unless otherwise noted.
| Metric | Q2 2014 | Q2 2013 | First half 2014 | First half 2013 |
|---|---|---|---|---|
| Revenue | $26.6 | $23.0 | $49.0 | $40.0 |
| Gross profit / margin | $3.4 / 13% | $3.5 / 15% | $6.8 / 14% | $3.6 / 9% |
| Operating loss | $(8.1) | $(2.6) | $(11.0) | $(8.7) |
| Net loss | $(42.1) | $(19.0) | $(61.2) | $(18.0) |
| Adjusted EBITDA (non-GAAP) | $0.4 | $0.4 | $0.5 | $(2.7) |
- First-half revenue rose 22%; product revenue increased 25% to $47.4 million, while research-services revenue declined 21% to $1.6 million. Product shipments grew 16% to 18.9 million square feet. Management attributed product growth to energy-sector demand, higher prices, and a richer product mix.
- First-half product cost as a share of product revenue improved to 87% from 93%, reflecting better yields, lower raw-material cost per square foot, and improved capacity utilization. In Q2, gross margin fell to 13% from 15%, partly due to IPO-triggered stock compensation and product mix.
- First-half net loss included $50.2 million of interest expense, primarily noncash fair-value accretion of convertible debt to its IPO conversion value. Management said IPO-related items totaled $38.8 million, including $33.2 million of debt accretion and $5.6 million of performance-award compensation. Stock-based compensation was $6.3 million for the half.
- Operating cash flow was positive $0.2 million, versus $(12.6) million in the prior-year half; the 2014 figure was supported by $50.0 million of noncash debt accretion and other noncash adjustments. Investing cash outflow was $2.2 million, principally capital expenditures. Financing cash inflow was $57.3 million, including IPO proceeds and debt repayments.
- Cash was $56.9 million at June 30, versus $1.6 million at year-end 2013. Working capital was $68.2 million. Total liabilities were $15.0 million; debt obligations were limited to approximately $0.2 million of capital leases, with notes converted and subordinated notes repaid. The company reported no revolving-line borrowings and $1.5 million of letters of credit.
Material changes and significant transactions
- The company completed its IPO on June 18, 2014, selling 7.5 million shares at $11 per share. It reported approximately $74.8 million in net proceeds after underwriting discounts and offering expenses. The cash-flow statement reports $77.3 million of IPO proceeds and notes that $2.5 million of IPO costs remained unpaid at June 30.
- At the IPO, convertible and senior convertible notes converted into approximately 15.3 million common shares; preferred stock also converted. The company repaid $18.8 million of subordinated notes and used IPO proceeds to repay amounts outstanding on its revolving facility. Common shares outstanding were 23.0 million at June 30.
- Product revenue growth was strongest in international markets. First-half international revenue was $31.5 million, compared with U.S. revenue of $17.4 million. A reduction in eligible government research-contract awards contributed to lower research-services revenue.
Outlook, risks, and contingencies
- No specific revenue or earnings guidance was provided. Management expected continued revenue growth, higher gross profit, and improving operating cash flow, while cautioning that results and cash flows could fluctuate.
- Construction of a third East Providence production line began in Q2. Estimated cost is $30 million; management expected completion in the first half of 2015 and added annual nameplate capacity of 10–11 million square feet to current capacity of 40–44 million. A second plant in Europe or Asia was contemplated, subject to grants and additional debt or equity financing. Management expected significant capital expenditures through 2017.
- Management expected near-term gross-margin improvement from price increases, lower stock compensation, and product mix, partly offset by start-up costs for the third line. It expected continued longer-term investment in R&D, sales, and public-company infrastructure.
- The revolving credit facility maturity was extended to August 31, 2014, and renewal discussions were ongoing. Repayment of subordinated notes triggered a technical free-cash-flow covenant default at June 30; the bank had approved the repayment and granted a waiver. The facility was also subject to liquidity and other covenants.
- Key risks include ongoing losses and uncertain sustained positive cash flow; dependence on one manufacturing facility; execution, financing, and demand risks associated with capacity expansion; customer and end-market concentration and cyclical energy-sector spending; raw-material supply and pricing; international, regulatory, environmental, product-liability, and intellectual-property risks; and possible dilution or share-price volatility.
- The company reported no material legal proceedings and no probable litigation loss requiring accrual. It identified a prior significant deficiency related to accounting and financial-reporting staffing and described remediation actions. Management concluded disclosure controls were effective as of June 30, 2014.
Important facts for investors to verify
- Reconcile IPO proceeds reported in the financial statements and notes, including the unpaid offering costs, and confirm the subsequent use of proceeds.
- Assess how much of the reported loss reflects noncash debt fair-value accretion and IPO-triggered compensation, versus recurring operating costs and cash requirements.
- Track the third-line budget, schedule, start-up performance, and the financing and timing assumptions for any second manufacturing facility.
- Confirm renewal or replacement of the revolving credit facility, the status of the covenant waiver, and available liquidity after letters of credit and expansion spending.
- Monitor customer concentration, energy-project demand, research-contract eligibility, and whether shipment growth and pricing improvements persist.
- Review dilution and potential share supply following debt conversions, registration rights, and IPO lock-up expirations; interpret historical per-share comparisons in light of the reverse stock split and IPO conversion.