Aspen Aerogels, Inc. — Q2 2017 Form 10-Q
Reporting period: Three and six months ended June 30, 2017; comparisons are with the corresponding 2016 periods. Aspen designs and manufactures aerogel insulation, primarily for energy infrastructure and building materials, and also provides contract research services. Amounts below are in millions unless stated otherwise.
Financial performance and liquidity
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Total revenue | $25.1 | $27.7 | $48.1 | $60.5 |
| Gross profit / margin | $3.7 / 15% | $6.7 / 24% | $5.9 / 12% | $13.2 / 22% |
| Operating loss | $(5.4) | $(1.3) | $(14.5) | $(3.1) |
| Net loss | $(5.5) | $(1.4) | $(14.6) | $(3.2) |
| Net loss per share, diluted | $(0.23) | $(0.06) | $(0.62) | $(0.14) |
| Adjusted EBITDA (non-GAAP) | $(1.4) | $2.5 | $(6.6) | $4.5 |
- For the six months, operating cash used was $6.0 million, capital expenditures were $4.8 million, and financing cash used was $0.3 million. Cash declined $11.1 million to $7.0 million from $18.1 million at year-end 2016.
- At June 30, cash was $7.0 million and total liabilities were $15.3 million. There were no revolving-credit borrowings and less than $0.1 million of capital lease obligations. The $20 million facility had $10.5 million effectively available after borrowing-base limits and $2.3 million of letters of credit; it matures January 28, 2018.
- Current assets were $38.0 million and current liabilities were $14.0 million. Stockholders’ equity was $103.3 million.
Changes versus the prior comparable period
- Q2 revenue fell 10%; six-month revenue fell 21%. Product shipments decreased 12% in Q2 and 22% for the six-month period. Product revenue accounted for 98% of total revenue in both periods.
- Management attributed weaker product sales mainly to lower global downstream-energy activity and the conclusion of a multiyear petrochemical project with a major Asian energy company. Lower subsea project work also affected the six-month comparison. U.S. LNG and district-energy sales partly offset the declines.
- Six-month average selling price rose 1% to $2.76 per square foot, but lower shipment volume reduced product revenue by $13.1 million; the price increase added $0.6 million.
- Six-month gross profit fell 55%. Product cost as a share of product revenue rose to 89% from 79%, as lower output and revenue left fixed manufacturing costs less absorbed. General and administrative expense rose 36%, principally reflecting $2.3 million of higher patent-enforcement costs.
Outlook, commentary, and risks
- Management expected revenue to decline, net loss to increase, and Adjusted EBITDA to decrease in 2017 versus 2016, citing weak energy-market investment and the completed Asian project. It cautioned that fixed costs and delays in reducing variable costs could make profit and EBITDA deterioration greater, in percentage terms, than the revenue decline. No specific numeric full-year guidance was provided.
- The planned Statesboro, Georgia manufacturing facility and related financing were delayed to align capacity with expected 2018–2020 demand. The facility’s $22 million in contingent BASF prepayments cannot begin until specified conditions are met, including securing at least $30 million of third-party debt commitment. BASF has no obligation to purchase products under the supply agreement.
- Management said constrained capital investment and low global energy-market activity were expected to continue through 2017. It intended to manage capital spending and working capital; the existing cash and credit were expected to support current operations and remaining facility design and development, while additional funding would be needed for construction.
- Warranty expense was $0.9 million for the first half, versus $0.5 million a year earlier. The company said the charges related to two product-application claims outside its typical experience.
- Patent-infringement proceedings against China-based companies were ongoing in the U.S. and Germany; management noted they could be prolonged and generate significant legal expense. The company reported no litigation loss it believed probable and requiring accrual.
- A new risk factor highlighted that product development, customer acceptance, manufacturing yields, cost competitiveness, and timely launches may not meet expectations. In July 2017, Aspen announced Pyrogel HPS, designed for service temperatures up to 650°C.
- Disclosure controls were reported effective as of June 30, 2017, with no material changes in internal control over financial reporting during the half year. The company reported a full valuation allowance against net deferred tax assets and no income-tax provision.
Important facts for investors to verify
- Whether market weakness, reduced shipment volumes, and the loss of the major Asian project continue to pressure revenue and manufacturing utilization.
- Cash burn, borrowing-base availability, covenant compliance, and the plan to extend or replace the credit facility before its January 2018 maturity.
- Funding, timing, demand assumptions, and contingent BASF prepayment conditions for the delayed Statesboro facility.
- Whether gross margins recover and warranty claims, patent litigation costs, and planned operating-expense increases remain within expectations.
- Progress and commercial adoption of new products, including Pyrogel HPS, and the potential dilution from outstanding equity awards.