ASPEN AEROGELS, INC. The following information should be read in conjunction with the unaudited financial information and the notes thereto included in this Quarterly Report on Form 10-Q and the audited financial information and the notes thereto included in the Annual Report on Form 10-K for the year endedDecember 31, 2021 , filed with theU.S. Securities and Exchange Commission (SEC) onMarch 1, 2022 , which we refer to as the Annual Report. Certain matters discussed in this Quarterly Report on Form 10-Q may be deemed to be forward-looking statements that involve risks and uncertainties. We make such forward-looking statements pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and other federal securities laws. In this Quarterly Report on Form 10-Q, words such as "may," "will," "anticipate," "estimate," "expects," "projects," "intends," "plans," "believes" and similar expressions (as well as other words or expressions referencing future events, conditions or circumstances) are intended to identify forward-looking statements. Our actual results and the timing of certain events may differ materially from the results discussed, projected, anticipated, or indicated in any forward-looking statements. We caution you that forward-looking statements are not guarantees of future performance and that our actual results of operations, financial condition and liquidity, and the development of the industry in which we operate may differ materially from the forward-looking statements contained in this Quarterly Report on Form 10-Q. In addition, even if our results of operations, financial condition and liquidity, and the development of the industry in which we operate are consistent with the forward-looking statements contained in this Quarterly Report on Form 10-Q, they may not be predictive of results or developments in future periods.
The following information and any forward-looking statements should be considered in light of factors discussed elsewhere in this Quarterly Report on Form 10-Q and under "Risk Factors" in Item 1A of the Annual Report.
We caution readers not to place undue reliance on any forward-looking statements made by us, which speak only as of the date they are made. We disclaim any obligation, except as specifically required by law and the rules of theSEC , to publicly update or revise any such statements to reflect any change in our expectations or in events, conditions or circumstances on which any such statements may be based, or that may affect the likelihood that actual results will differ from those set forth in the forward-looking statements. You should read the following discussion and analysis of financial condition and results of operations together with Part I Item 1 "Financial Statements," which includes our financial statements and related notes, elsewhere in this Quarterly Report on Form 10-Q. Investors and others should note that we routinely use the Investors section of our website to announce material information to investors and the marketplace. While not all of the information that we post on the Investors section of our website is of a material nature, some information could be deemed to be material. Accordingly, we encourage investors, the media, and others interested in us to review the information that we share on the Investors section of our website, https://www.aerogel.com.
Products
Our core businesses are organized into two reportable segments:
We design, develop and manufacture innovative, high-performance aerogel
insulation used primarily in the energy infrastructure and sustainable building
materials markets. We believe our aerogel blankets deliver the best thermal
performance of any widely used insulation product available on the market today
and provide a combination of performance attributes unmatched by traditional
insulation materials. Our end-user customers select our products where thermal
performance is critical and to save money, improve resource efficiency, enhance
sustainability, preserve operating assets and protect workers. Our insulation is
used by oil producers and the owners and operators of refineries, petrochemical
plants, liquefied natural gas facilities, power generating assets and other
energy infrastructure. Our Pyrogel and Cryogel product lines have undergone
rigorous technical validation by industry leading end-users and achieved
significant market adoption. Our Spaceloft building materials are increasingly
used by building owners to improve the energy efficiency and to enhance fire
protection in buildings ranging from historic brownstones to modern high rises.
We also derive revenue from a number of other end markets. Customers in these
markets use our products for applications as diverse as military and commercial
aircraft, trains, buses, appliances, apparel, footwear and outdoor gear. As we
continue to enhance our aerogel technology platform, we believe we will have
additional opportunities to address high value applications in the global
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--------------------------------------------------------------------------------insulation market, the electric vehicle market and in a number of new, high-value markets, including hydrogen energy, filtration, water purification, and gas sorption.
We market and sell our products primarily through a sales force based in
Our salespeople work directly with end-user customers and engineering firms to promote the qualification, specification and acceptance of our aerogel and thermal barrier products. We also rely on an existing and well-established channel of qualified insulation distributors and contractors in more than 50 countries around the world to ensure rapid delivery of our aerogel products and strong end-user support. Thermal Barrier We are actively developing a number of promising aerogel products and technologies for the electric vehicle market. We have developed and are commercializing our proprietary line of PyroThin aerogel thermal barriers for use in battery packs in electric vehicles. Our PyroThin product is an ultra-thin, lightweight and flexible thermal barrier designed with other functional layers to impede the propagation of thermal runaway across multiple lithium-ion battery system architectures. Our thermal barrier technology is designed to offer a unique combination of thermal management, mechanical performance and fire protection properties. These properties enable electric vehicle manufacturers to achieve critical battery performance and safety goals. In addition, we are seeking to leverage our patented carbon aerogel technology to develop industry-leading battery materials for use in lithium-ion battery cells. These battery materials have the potential to increase the energy density of the battery cells, thus enabling an increase in the driving range of electric vehicles. The commercial potential for our PyroThin thermal barriers and our carbon aerogel battery materials in the electric vehicle market is significant. Accordingly, we are hiring additional personnel, incurring additional operating expenses, incurring significant capital expenditures to expand aerogel manufacturing capacity, establishing an automated thermal barrier fabrication operation, enhancing research and development resources and expanding our battery material research facilities, among other items. We have entered into production contracts with certain major OEMs, includingGeneral Motors LLC (GM) to supply fabricated, multi-part thermal barriers for use in the battery system of its next-generation electric vehicles. Pursuant to the contracts withGM , we are obligated to supply the barriers at fixed annual prices and at volumes to be specified by the customer up to a daily maximum quantity through the term of the agreements, which expire at various times from 2026 through 2034. WhileGM has agreed to purchase its requirement for the barriers from us at locations to be designated from time to time, it has no obligation to purchase any minimum quantity of barriers under the contracts. In addition,GM may terminate the contracts any time and for any or no reason. All other terms of the contracts are generally consistent withGM's standard purchase terms, including quality and warranty provisions customary in the automotive industry.
Manufacturing Operations
We manufacture our products using our proprietary technology at our facility inEast Providence, Rhode Island . We have operated theEast Providence facility since 2008 and have increased our capacity in phases to approximately$250.0 million in annual revenue. To meet expected growth in demand for our aerogel products in the electric vehicle market, we are planning to expand our aerogel blanket capacity by constructing a second manufacturing plant inBulloch County, Georgia . OnFebruary 17, 2022 , we entered into an Inducement Agreement with theDevelopment Authority of Bulloch County (the Development Authority), theCity of Statesboro ,Bulloch County, Georgia (collectively, Statesboro Entities). Pursuant to the Inducement Agreement, the Statesboro Entities will provide various incentives to induce us to invest at least$325.0 million in constructing and equipping our second manufacturing facility inBulloch County, Georgia and to create at least 250 full-time jobs. Separately, and concurrently, the Company entered into a Memorandum of Understanding (the MOU) with theGeorgia Department of Economic Development (the GDEcD). Pursuant to both the Inducement Agreement and the MOU, the Local Governmental Entities and the GDEcD will provide various incentives to induce the Company to invest at least$325.0 million in constructing and equipping a facility to produce aerogel-based products inBulloch County, Georgia and to create at least 250 full-time jobs (the Project). We will also receive statutory incentives for economic development provided by theState of Georgia . Incentives afforded by the Statesboro Entities to us include, but are not limited to, property tax reductions and utility and site infrastructure improvements for the Project. Additionally, the Development Authority, with assistance from the GDEcD, will also apply for a grant, the proceeds of which shall be used by us for certain equipment in connection with the Project. The Development Authority will lease to us an approximately 90-acre property along with buildings and equipment to be built therein, for a term of five years, with an option to renew for an additional 22 --------------------------------------------------------------------------------
5 years, in consideration for the payment of nominal rent, and grant to us an option to purchase the property upon the earlier of the expiration or termination of the lease at a nominal price.
In addition, we entered into a (i) PILOT Agreement with the Statesboro Entities that sets forth our rights and obligations with respect to the incentives received pursuant to the Inducement Agreement and (ii) a Performance and Accountability Agreement with other state authorities, which provides for a grant of$1,000,000 . Pursuant to these agreements, in the event that we fail to meet at least 80% of the investment and job creation goals within 36 months following the earlier to occur of (i) the completion and issuance of the certificate of occupancy with respect to the planned second manufacturing facility or (ii)December 31, 2024 (the Commencement Date), we may be required to repay portions of property tax savings, the grant to the Development Authority and other incentives. In addition, we must maintain our achievement of 80% of the investment and job creation goals for a period of 60 months thereafter. We expect to build the second plant in two phases at an estimated cost of$575.0 million for the first phase and$125.0 million for the second phase. We currently expect the first phase of the plant will increase our annual revenue capacity by approximately$650.0 million and the second phase by approximately$700.0 million . We expect to have the first phase of the second plant operational late in the second-half of 2023. In addition, we are constructing a state-of-the-art, automated thermal barrier fabrication operation inMonterrey, Mexico in order to keep pace with the significant potential demand for our PyroThin thermal barriers.
Financial Summary
OnFebruary 18, 2022 , we sold and issued to an affiliate of Koch$100.0 million in aggregate principal amount of our Convertible Senior PIK Toggle Notes due 2027 (the Notes), pursuant to a note purchase agreement, dated as ofFebruary 15, 2022 , by and between us and the affiliate of Koch. The Notes bear interest at the Secured Overnight Financing Rate (SOFR) plus 5.50% per annum if interest is paid in cash (the Cash Interest), or, if interest is paid in kind (through an increase in the principal amount of the outstanding Notes or through the issuance of additional Notes), at SOFR plus 6.50% per annum (PIK Interest). Under the terms of the investment, SOFR has a floor of 1% and a cap of 3%. We can elect to make any interest payment through Cash Interest, PIK Interest or any combination thereof. Interest on the Notes is payable semi-annually in arrears onJune 30 andDecember 30 , commencing onJune 30, 2022 . It is expected that the Notes will mature onFebruary 18, 2027 , subject to earlier conversion, redemption or repurchase.
On
OnMarch 16, 2022 , we entered into a sales agreement for an at-the-market (ATM) offering program withCowen and Company, LLC as our sales agent. During the six months endedJune 30, 2022 , we sold 882,288 shares of our common stock, through the ATM offering program and received net proceeds of$28.1 million , after deducting commissions and estimated offering expenses payable by us. OnMarch 12, 2021 , we entered into an Amended and Restated Loan and Security Agreement (Loan Agreement) withSilicon Valley Bank to extend the maturity date of the revolving credit facility toApril 28, 2022 . Pursuant to the Loan Agreement, we are permitted to borrow a maximum of$20.0 million , subject to continued covenant compliance and borrowing base requirements. The interest rate applicable to borrowings under the revolving credit facility is based on the prime rate, subject to a minimum rate of 4.00% per annum, plus a margin. The rates applicable to borrowings vary from prime rate plus 0.75% per annum to prime rate plus 2.00% per annum. In addition, we are required to pay a monthly unused revolving line facility fee of 0.50% per annum of the average unused portion of the revolving credit facility. The credit facility has also been amended to establish minimum Adjusted EBITDA and minimum Adjusted Quick Ratio covenants, each as defined in the Loan Agreement. At various dates in 2021, and subsequently onMarch 31, 2022 andApril 28, 2022 , we entered into amendments to the Loan Agreement to revise certain financial covenants, among other things. OnJune 23, 2022 , the Loan Agreement was amended to extend the maturity date of the revolving credit facility toAugust 26, 2022 . Our revenue for the six months endedJune 30, 2022 was$84.0 million , which represented an increase of$24.2 million , or 41%, from$59.8 million for the six months endedJune 30, 2021 . Net loss for the six months endedJune 30, 2022 was$43.5 million and net loss per share was$1.27 . Net loss for the six months endedJune 30, 2021 was$12.9 million and net loss per share was$0.46 . In response to the COVID-19 pandemic, we have implemented and are following safe practices recommended by public health authorities and other government entities. We continue to focus on the safety and health of our employees, customers and vendors. In addition, we have implemented various precautionary measures, including remote work arrangements, restricted business travel and procedures for social distancing, face coverings and safe hygiene. We continue to monitor public health guidance as it evolves and plan to adapt our practices as appropriate. Refer to "Risk Factors" in Item 1A of the Annual Report for more information concerning risks to our business associated with COVID-19. 23 --------------------------------------------------------------------------------
Key Metrics and Non-GAAP Financial Measures
We regularly review a number of metrics, including the following key metrics, to evaluate our business, measure our performance, identify trends affecting our business, formulate financial projections and make strategic decisions.
Square Foot Operating Metric
We price our energy industrial product and measure our shipments in square feet.
We believe the square foot operating metric allows us and our investors to
measure our manufacturing capacity and energy industrial product shipments on a
uniform and consistent basis. The following chart sets forth energy industrial
product shipments in square feet associated with recognized revenue, including
revenue recognized over time utilizing the input method, for the periods
presented:
Three Months Ended Six Months Ended
June 30, June 30,
2022 2021 2022 2021
(In thousands)Product shipments in square feet 9,200 9,830 17,363
18,444 Adjusted EBITDA We use Adjusted EBITDA, a non-GAAP financial measure, as a means to assess our operating performance. We define Adjusted EBITDA as net income (loss) before interest expense, taxes, depreciation, amortization, stock-based compensation expense and other items, from time to time, which we do not believe are indicative of our core operating performance. Adjusted EBITDA is a supplemental measure of our performance that is not presented in accordance withU.S. GAAP. Adjusted EBITDA should not be considered as an alternative to net income (loss) or any other measure of financial performance calculated and presented in accordance withU.S. GAAP. In addition, our definition and presentation of Adjusted EBITDA may not be comparable to similarly titled measures presented by other companies.
We use Adjusted EBITDA:
• as a measure of operating performance because it does not include the
impact of items that we do not consider indicative of our core operating
performance;
• for planning purposes, including the preparation of our annual operating
budget;
• to allocate resources to enhance the financial performance of our
business; and
• as a performance measure used under our bonus plan.
We also believe that the presentation of Adjusted EBITDA provides useful
information to investors with respect to our results of operations and in
assessing the performance and value of our business. Various measures of EBITDA
are widely used by investors to measure a company's operating performance
without regard to items that can vary substantially from company to company
depending upon financing and accounting methods, book values of assets, capital
structures and the methods by which assets were acquired.
Although measures similar to Adjusted EBITDA are frequently used by investors
and securities analysts in their evaluation of companies, we understand that
Adjusted EBITDA has limitations as an analytical tool, and you should not
consider it in isolation or as a substitute for net income (loss), income (loss)
from operations, net cash provided by (used in) operating activities or an
analysis of our results of operations as reported under U.S. GAAP. Some of these
limitations are:
• Adjusted EBITDA does not reflect our historical cash expenditures or
future requirements for capital expenditures or other contractual
commitments;
• Adjusted EBITDA does not reflect changes in, or cash requirements for, our
working capital needs;
• Adjusted EBITDA does not reflect stock-based compensation expense;
• Adjusted EBITDA does not reflect our income tax expense or cash
requirements to pay our income taxes;
• Adjusted EBITDA does not reflect our interest expense, or the cash
requirements necessary to service interest or principal payments on our
debt;
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• although depreciation, amortization and impairment charges are non-cash
charges, the assets being depreciated, amortized or impaired will often
have to be replaced in the future, and Adjusted EBITDA does not reflect
any cash requirements for these replacements; and
• other companies in our industry may calculate EBITDA or Adjusted EBITDA
differently than we do, limiting their usefulness as a comparative
measure.
Because of these limitations, our Adjusted EBITDA should not be considered as a measure of discretionary cash available to us to reinvest in the growth of our business or as a measure of cash available for us to meet our obligations. To properly and prudently evaluate our business, we encourage you to review theU.S. GAAP financial statements included elsewhere in this Quarterly Report on Form 10-Q, and not to rely on any single financial measure to evaluate our business.
The following table presents a reconciliation of net loss, the most directly
comparable
Three Months Ended Six Months Ended
June 30, June 30,
2022 2021 2022 2021
(In thousands) (In thousands)
Net loss $ (24,050 ) $ (6,669 ) $ (43,534 ) $ (12,919 )
Depreciation and amortization 2,032 2,104 4,161 4,742
Stock-based compensation(1) 2,295 1,070 4,123
2,046 Interest expense 1,404 55 2,264 130 Adjusted EBITDA$ (18,319 ) $ (3,440 ) $ (32,986 ) $ (6,001 ) (1) Represents non-cash stock-based compensation related to vesting and modifications of stock option grants, vesting of restricted stock units and vesting of restricted common stock. Our financial performance, including such measures as net income (loss), earnings per share and Adjusted EBITDA, are affected by a number of factors including volume and mix of aerogel products sold, average selling prices, our material costs and manufacturing expenses, the costs associated with capacity expansions and start-up of additional production capacity, and the amount and timing of operating expenses. Accordingly, we expect that our net income (loss), earnings per share and Adjusted EBITDA will vary from period to period. We expect growth in revenue during 2022 driven by a continued post-COVID recovery in the energy infrastructure market, accelerating demand in the electric vehicle market and continued market share gains in the sustainable building materials market. Our expectation to maintain revenue growth is based, in part, on our original equipment manufacturer (OEM) customers' production volume forecasts and targets as well as our expectation to successfully scale our manufacturing capabilities and address any potential supply chain issues to meet this expected demand. We are also planning a significant increase in staffing and spending levels in support of our electric vehicle market opportunities during the year, including expenses associated with the start-up and operation of an automated fabrication facility inMonterrey, Mexico and the initial staffing and operational requirements of our planned second aerogel manufacturing facility inBulloch County, Georgia . As a result, we expect to experience an increase in net loss and a decrease in Adjusted EBITDA during 2022. We also expect to incur significant capital expenditures and increased expenses during the remainder of 2022, related to our planned second aerogel manufacturing facility to be located inBulloch County, Georgia . We are planning to invest approximately$700.0 million in two phases in the construction of the second facility. We expect to have the first phase of the second plant operational late in the second-half of 2023.
Components of Our Results of Operations
Revenue
We recognize revenue from the sale of our energy industrial aerogel products and
thermal barriers. Revenue is recognized upon the satisfaction of contractual
performance obligations.
We record deferred revenue for sales when (i) we have delivered products, but
other revenue recognition criteria have not been satisfied, or (ii) payments
have been received in advance of the completion of required performance
obligations.
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We project revenue growth during 2022 due to a continued post-COVID recovery in
the energy infrastructure market, accelerating demand in the electric vehicle
market for our thermal barrier product and continued market share gains in the
sustainable building materials market. Our projected revenue growth may be
constrained by a shortage of unskilled labor associated with the COVID-19
pandemic.
Cost of Revenue
Cost of product revenue consists primarily of materials and manufacturing expense. Cost of product revenue is recorded when the related product revenue is recognized.
Material is our most significant component of cost of energy industrial product revenue and includes fibrous batting, silica materials and additives. Material costs as a percentage of product revenue vary from product to product due to differences in average selling prices, material requirements, product thicknesses, and manufacturing yields. In addition, we provide warranties for our products and record the estimated cost within cost of revenue in the period that the related revenue is recorded or when we become aware that a potential warranty claim is probable and can be reasonably estimated. As a result of these factors, material costs as a percentage of product revenue will vary from period to period due to changes in the mix of aerogel products sold, the costs of our raw materials or the estimated cost of warranties. In addition, global supply chain disturbances, increased reliance on foreign materials procurement, industrial gas supply constraints, increases in the cost of our raw materials, and other factors may significantly impact our material costs and have a material impact on our operations. InMay 2022 , one of our silanes suppliers,Silbond Corporation , informed us that it needs to curtail supply of one of the silanes we use, such that we may not receive all of our requirements in the near term due to difficulties in arranging transportation of the silanes to us. We are currently working with our supplier to identify and obtain an adequate supply of silanes or otherwise fill the shortage. We are also exploring other potential options for obtaining transportation and supply, including potentially from other third parties including fromAsia or by arranging transportation of silanes ourselves. However, there can be no assurance that we will be able to obtain sufficient supplies of silanes in a timely matter, which could result in material adverse impacts on our business and our financial condition. We expect that material costs will increase in absolute dollars during 2022 due to projected growth in product shipments, but decrease as a percentage of revenue due to projected increases in average selling prices, improved manufacturing, and fabrication yields and a favorable mix of products sold. Manufacturing expense is also a significant component of cost of revenue. Manufacturing expense includes labor, utilities, maintenance expense, and depreciation on manufacturing assets. Manufacturing expense also includes stock-based compensation for manufacturing employees and shipping costs. Manufacturing expense is our most significant component of cost of our thermal barrier product revenue. We expect that manufacturing expense will increase in absolute dollars and as a percentage of revenue during 2022 due to increased manual fabrication staffing and spending levels in support of our thermal barrier business, including the start-up and operation of a fabrication facility inMonterrey, Mexico and the initial staffing and operational requirements of our planned second aerogel manufacturing facility inBulloch County, Georgia .
In total, we expect that cost of product revenue will increase in absolute dollars during 2022 versus 2021 and as a percentage of revenue versus 2021 driven by the costs to support our expected higher run-rate revenue in future periods.
Gross Profit Our gross profit as a percentage of revenue is affected by a number of factors, including the volume of aerogel products produced and sold, the mix of aerogel products sold, average selling prices, our material and manufacturing costs, realized capacity utilization and the costs associated with expansions and start-up of production capacity. Accordingly, we expect our gross profit to vary significantly in absolute dollars and as a percentage of revenue from period to period. During 2022, we expect gross profit to increase in both absolute dollars and as a percentage of total revenue due to the combination of a projected increase in total revenue combined with projected reduction in material costs as a percentage of total revenue related to our energy industrial products, offset, in part, by a projected increase in manufacturing expense as a percentage of revenue primarily related to our thermal barrier business.
Operating Expenses
Operating expenses consist of research and development, sales and marketing, and
general and administrative expenses. Operating expenses include personnel costs,
legal fees, professional fees, service fees, insurance premiums, travel expense,
facilities related costs and other costs, expenses and fees. The largest
component of our operating expenses is personnel costs, consisting of salaries,
benefits, incentive compensation and stock-based compensation. In any particular
period, the timing and extent of personnel
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additions or reductions, legal activities, including patent enforcement actions,
marketing programs, research efforts and a range of similar activities or
actions could materially affect our operating expenses, both in absolute dollars
and as a percentage of revenue.
During 2022, we expect to continue to hire additional technical, operational and
commercial personnel and incur additional operating expenses to support the
anticipated multi-year growth in our PyroThin thermal barrier business. As a
result, we expect that operating expenses will increase in both absolute dollars
and as a percentage of revenue during the year. In the longer term, we expect
that operating expenses will increase in absolute dollars, but decrease as a
percentage of revenue.
Research and Development Expenses
Research and development expenses consist primarily of expenses for personnel engaged in the development of next-generation aerogel compositions, form factors and manufacturing technologies. These expenses also include testing services, prototype expenses, consulting services, trial formulations for new products, equipment depreciation, facilities costs and related overhead. We expense research and development costs as incurred. We expect to continue to devote substantial resources to the development of new aerogel technologies, including our carbon aerogel battery materials. We believe that these investments are necessary to maintain and improve our competitive position. We also expect to continue to invest in research and engineering personnel and the infrastructure required in support of their efforts. While we expect our research and development expenses will increase in absolute dollars but decrease as a percentage of revenue in the longer term, in 2022, we expect these expenses will increase in both absolute dollars and as a percentage of revenue.
Sales and Marketing Expenses
Sales and marketing expenses consist primarily of personnel costs, incentive compensation, marketing programs, travel and related costs, consulting expenses and facilities related costs. We expect that sales and marketing expenses will increase in absolute dollars and as a percentage of revenue during 2022 principally due to an increase in compensation associated with the addition of personnel in support of our PyroThin thermal barrier business. In the longer term, we expect that sales and marketing expenses will increase in absolute dollars but decrease as a percentage of revenue.
General and Administrative Expenses
General and administrative expenses consist primarily of personnel costs, legal expenses, consulting and professional services, audit fees, compliance with securities, corporate governance and related laws and regulations, investor relations expenses and insurance premiums, including director and officer insurance.
We expect our general and administrative expenses to increase as we add general and administrative personnel to support the anticipated growth of our business. We also expect that the patent enforcement actions, described in more detail under "Legal Proceedings" in Part I, Item 3 of our Annual Report on Form 10-K for the year endedDecember 31, 2021 , if protracted, could result in significant legal expense over the medium to long-term. While we expect that our general and administrative expenses will increase in absolute dollars but decrease as a percentage of revenue in the longer term, in 2022, we expect such expenses will increase in both absolute dollars and as a percentage of revenue.
Interest Expense, Net
Interest expense, net consists of interest expense on our convertible note and fees and interest expense related to our revolving credit facility.
Provision for Income Taxes
We have incurred net losses since inception and have not recorded benefit provisions forU.S. federal income taxes or state income taxes since the tax benefits of our net losses have been offset by valuation allowances due to the uncertainty associated with the utilization of net operating loss carryforwards. 27 --------------------------------------------------------------------------------
Results of Operations
Three months ended
The following tables set forth a comparison of the components of our results of operations for the periods presented:
Revenue
Three Months Ended June 30,
2022 2021 Change
Percentage Percentage
Amount of Revenue Amount of Revenue Amount Percentage
($ in thousands)
Revenue:
Energy industrial $ 34,877 76 % $ 31,458 99 % $ 3,419 11 %
Thermal barrier 10,763 24 % 212 1 % 10,551 NM
Total revenue $ 45,640 100 % $ 31,670 100 % $ 13,970 44 %
Total revenue increased $14.0 million , or 44%, to $45.6 million for the three
months ended June 30, 2022 from $31.6 million in the comparable period in 2021.
The increase in total revenue was the result of increases in both thermal
barrier and energy industrial revenue.
The following chart sets forth energy industrial product shipments in square
feet associated with recognized revenue, including revenue recognized over time
utilizing the input method, for the periods presented:
Three Months Ended June 30, Change
2022 2021 Amount Percentage
Product shipments in square feet (in
thousands) 9,200 9,830 (630 ) (6 )%
Energy industrial revenue increased by $3.4 million , or 11%, to $34.9 million
for the three months ended June 30, 2022 from $31.5 million in the comparable
period in 2021. This increase was driven by project-based demand in the subsea
market in addition to an increase in maintenance-based demand in the Asia global
petrochemical and refinery markets offset by a decrease in Europe .
Energy industrial revenue for the three months ended June 30, 2022 included $9.3
million to a North American distributor. Energy industrial revenue for the three
months ended June 30, 2021 included $9.6 million to a North American distributor
and $3.7 million to a European LNG project contractor.
The average selling price per square foot of our energy industrial products
increased by $0.59 , or 18%, to $3.79 per square foot for the three months ended
June 30, 2022 from $3.20 per square foot for the three months ended June 30,
2021 . The increase in average selling price principally reflected the impact of
a change in the mix of products sold. This increase in average selling price had
the effect of increasing product revenue by $5.4 million for the three months
ended June 30, 2022 from the comparable period in 2021.
In volume terms, energy industrial product shipments decreased by 0.6 million
square feet, or 6%, to 9.2 million square feet for the three months ended
June 30, 2022 , as compared to 9.8 million square feet for the three months ended
June 30, 2021 . The decrease in volume had the effect of decreasing product
revenue by $2.0 million for the three months ended June 30, 2022 from the
comparable period in 2021.
Thermal barrier revenue was $10.8 million for the three months ended June 30,
2022 as compared to $0.2 million for the three months ended June 30, 2021 .
Thermal barrier revenue for the three months ended June 30, 2022 included $7.4
million to a major U.S. automotive OEM and $1.9 million to a major Asian
automotive OEM.
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Cost of Revenue
Three Months Ended June 30,
2022 2021 Change
Percentage Percentage Percentage Percentage
of Related of Total of Related of Total
Amount Revenue Revenue Amount Revenue Revenue Amount Percentage
($ in thousands)
Cost of revenue:
Energy industrial $ 28,893 83 % 63%$ 25,660 82 % 81 %$ 3,233 13 % Thermal barrier 17,958 167 % 39 % 1,430 NM 5 % 16,528 NM Total cost of revenue$ 46,851 103 % 103 %$ 27,090 86 % 86 %$ 19,761 73 % Total cost of revenue increased$19.8 million , or 73%, to$46.9 million for the three months endedJune 30, 2022 from$27.1 million in the comparable period in 2021. The increase in total cost of revenue was the result of increases in thermal barrier and energy industrial cost of revenue. Energy industrial cost of revenue increased$3.2 million , or 13%, to$28.9 million for the three months endedJune 30, 2022 from$25.7 million in the comparable period in 2021. The$3.2 million increase was the result of a$6.2 million increase in material costs to support the 11% increase in energy industrial revenue from the comparable period in 2021, offset by a$3.0 million decrease in manufacturing and other operating costs. Thermal barrier cost of revenue increased$16.6 million to$18.0 million for the three months endedJune 30, 2022 as compared to$1.4 million for the three months endedJune 30, 2021 . The$16.6 million increase was the result of a$4.9 million increase in material costs and an$11.7 million increase in manufacturing. The increase in material costs was the result of the increase in revenue volume from the comparable period in 2021 in which there were minimal thermal barrier sales. The increase in manufacturing was driven by increases in compensation and related costs of$7.8 million and other manufacturing and operating costs of$3.9 million . Gross Profit Three Months Ended June 30, 2022 2021 Change Percentage Percentage Amount of Revenue Amount of Revenue Amount Percentage ($ in thousands) Gross profit: Energy industrial$ 5,984 17 %$ 5,798 18 %$ 186 3 % Thermal barrier (7,195 ) (67 )% (1,218 ) NM (5,977 ) NM Total gross (loss) profit$ (1,211 ) (3 )%$ 4,580 14 %$ (5,791 ) (126 )% Gross profit decreased by$5.8 million , or 126%, to$(1.2) million for the three months endedJune 30, 2022 from$4.6 million in the comparable period in 2021. The decrease in gross profit was the result of the$19.8 million increase in total cost of revenue, offset, in part, by the$14.0 million increase in total revenue. The decrease in gross profit reflects the increase in overhead costs and additional resources to support our expected higher run-rate revenue in future periods for both our energy industrial and thermal barrier products.
Research and Development Expenses
Three Months Ended June 30,
2022 2021 Change
Percentage Percentage
Amount of Revenue Amount of Revenue Amount Percentage
($ in thousands)
Research and development expenses $ 4,447 10 % $ 2,609 8 % $ 1,838 70 %
Research and development expenses increased by $1.8 million , or 70%, to $4.4
million for the three months ended June 30, 2022 from $2.6 million in the
comparable period in 2021. The $1.8 million increase reflects an increase in
compensation and related costs of $0.8 million , equipment and lease expenses of
$0.6 million and other research and development expenses of $0.4 million .
29
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Research and development expenses as a percentage of total revenue increased to
10% of total revenue for three months ended
Sales and Marketing Expenses
Three Months Ended June 30,
2022 2021 Change
Percentage Percentage
Amount of Revenue Amount of Revenue Amount Percentage
($ in thousands)
Sales and marketing expenses $ 7,633 17 % $ 3,568 11 % $ 4,065 114 %
Sales and marketing expenses increased by $4.0 million , or 114%, to $7.6 million
for the three months ended June 30, 2022 from $3.6 million in the comparable
period in 2021. The $4.0 million increase was principally the result of
increases in compensation and related costs of $2.2 million , operating supplies
expenses of $0.9 million , travel-related expenditures of $0.4 million , marketing
expenses of $0.2 million and other sales and marketing expenses of $0.3 million .
Sales and marketing expenses as a percentage of total revenue increased to 17%
for the three months ended June 30, 2022 from 11% in the comparable period in
2021, due principally to the increase in compensation and related expenses
associated with an increase in sales and business development personnel.
General and Administrative Expenses
Three Months Ended June 30,
2022 2021 Change
Percentage Percentage
Amount of Revenue Amount of Revenue Amount Percentage
($ in thousands)
General and administrative expenses $ 9,355 20 % $ 5,017 16 % $ 4,338 86 %
General and administrative expenses increased by $4.3 million , or 86%, to $9.3
million for the three months ended June 30, 2022 from $5.0 million in the
comparable period in 2021. The $4.3 million increase was the result of increases
in compensation and related costs of $2.6 million , operating and lease expenses
of $1.0 million , professional fees of $0.6 million and other general and
administrative expenses of $0.1 million .
General and administrative expenses as a percentage of total revenue increased
to 20% for the three months ended June 30, 2022 from 16% in the comparable
period in 2021.
Interest Expense, net
Three Months Ended June 30,
2022 2021 Change
Percentage Percentage
Amount of Revenue Amount of Revenue Amount Percentage
($ in thousands)
Interest expense:
Interest expense, related party $ (1,550 ) (3 )% $ - - $ (1,550 ) NM
Interest expense, net 146 0 % (55 ) - 201 NM
Total interest expense, net $ (1,404 ) (3 )% $ (55 ) 0 % $ (1,349 ) NM
Interest expense, net increased by $1.3 million to $1.4 million for the three
months ended June 30, 2022 from less than $0.1 million in the comparable period
in 2021. The $1.3 million increase was the result of interest relating to our
Convertible Note.
30--------------------------------------------------------------------------------
Results of Operations
Six months ended
The following tables set forth a comparison of the components of our results of operations for the periods presented:
Revenue
Six Months Ended June 30,
2022 2021 Change
Percentage of Percentage of
Amount Revenue Amount Revenue Amount Percentage
($ in thousands)
Revenue:
Energy industrial $ 65,652 78 % $59,455 99 %$ 6,197 10 % Thermal barrier 18,395 22 % 312 1 % 18,083 NM Total revenue$ 84,047 100 %$ 59,767 100 %$ 24,280 41 % Total revenue increased$24.2 million , or 41%, to$84.0 million for the three months endedJune 30, 2022 from$59.8 million in the comparable period in 2021. The increase in total revenue was the result of increases in both thermal barrier and energy industrial revenue. The following chart sets forth energy industrial product shipments in square feet associated with recognized revenue, including revenue recognized over time utilizing the input method, for the periods presented: Six Months Ended June 30, Change 2022 2021 Amount Percentage Product shipments in square feet (in thousands) 17,363 18,444 (1,081 ) (6 )% Energy industrial revenue increased by$6.2 million , or 10%, to$65.7 million for the six months endedJune 30, 2022 from$59.5 million in the comparable period in 2021. This increase was driven by maintenance-based demand in the global petrochemical and refinery markets, particularly inAsia andNorth America , due to the continued post-COVID recovery, project based demand in the subsea market, offset, in part, by a maintenance-based demand in the global petrochemical and refinery markets, particularly inEurope . Energy industrial revenue for the six months endedJune 30, 2022 included$20.2 million to a North American distributor. Energy industrial revenue for the six months endedJune 30, 2021 included$17.0 million to a North American distributor and$8.8 million to a European LNG project contractor. The average selling price per square foot of our energy industrial products increased by$0.56 , or 17%, to$3.78 per square foot for the six months endedJune 30, 2022 from$3.22 per square foot for the six months endedJune 30, 2021 . The increase in average selling price principally reflected the impact of a change in the mix of products sold. This increase in average selling price had the effect of increasing product revenue by$9.7 million for the six months endedJune 30, 2022 from the comparable period in 2021. In volume terms, energy industrial product shipments decreased by 1.1 million square feet, or 6%, to 17.4 million square feet for the six months endedJune 30, 2022 , as compared to 18.4 million square feet for the six months endedJune 30, 2021 . The decrease in volume had the effect of decreasing product revenue by$3.5 million the six months endedJune 30, 2022 from the comparable period in 2021. Thermal barrier revenue was$18.4 million for the six months endedJune 30, 2022 as compared to$0.3 million for the six months endedJune 30, 2021 . Thermal barrier revenue for the six months endedJune 30, 2022 included$13.6 million to a majorU.S. automotive OEM and$3.1 million to a major Asian automotive OEM. 31 --------------------------------------------------------------------------------
Cost of Revenue
Six Months Ended June 30,
2022 2021 Change
Percentage Percentage Percentage Percentage
of Related of Total of Related of Total
Amount Revenue Revenue Amount Revenue Revenue Amount Percentage
($ in thousands)
Cost of revenue:
Energy industrial $ 56,671 86 % 67 % $ 48,780 82 % 82 % $ 7,891 16 %
Thermal barrier 30,375 165 % 36 % 2,451 NM 4 % 27,924 NM
Total cost of revenue $ 87,046 104 % 104 % $ 51,231 86 % 86 % $ 35,815 70 %
Total cost of revenue increased $35.8 million , or 70%, to $87.0 million for the
six months ended June 30, 2022 from $51.2 million in the comparable period in
2021. The increase in total cost of revenue was the result of increases in
thermal barrier and energy industrial cost of revenue.
Energy industrial cost of revenue increased
Thermal barrier cost of revenue increased$27.9 million to$30.4 million for the six months endedJune 30, 2022 as compared to$2.5 million in the comparable period in 2021. The$27.9 million increase was the result of a$9.6 million increase in material costs and an$18.3 million increase in manufacturing costs. The increase in material costs was the result of the increase in revenue volume from the comparable period in 2021 in which there were minimal thermal barrier sales. The increase in manufacturing costs was driven by increases in compensation and related costs of$14.3 million and other operating and manufacturing costs of$4.0 million . Gross Profit Six Months Ended June 30, 2022 2021 Change Percentage Percentage Amount of Revenue Amount of Revenue Amount Percentage ($ in thousands) Gross profit: Energy industrial$ 8,981 14 %$ 10,675 18 %$ (1,694 ) (16 )% Thermal barrier (11,980 ) (65 )% (2,139 ) NM (9,841 ) NM Total gross (loss) profit$ (2,999 ) (4 )%$ 8,536 14 %$ (11,535 ) (135 )% Gross profit decreased by$11.5 million , or 135%, to$(3.0) million for the six months endedJune 30, 2022 from$8.5 million in the comparable period in 2021. The decrease in gross profit was the result of the$35.8 million increase in total cost of revenue, offset, in part, by the$24.2 million increase in total revenue. The decrease in gross profit reflects the increase in overhead costs and additional resources to support our expected higher run-rate revenue in future periods for both our energy industrial and thermal barrier products.
Research and Development Expenses
Six Months Ended June 30,
2022 2021 Change
Percentage Percentage
Amount of Revenue Amount of Revenue Amount Percentage
($ in thousands)
Research and development expenses $ 8,039 10 % $ 5,051 8 % $ 2,988 59 %
Research and development expenses increased by $3.0 million , or 59%, to $8.0
million for the six months ended June 30, 2022 from $5.0 million in the
comparable period in 2021. The $3.0 million increase reflects an increase in
compensation and related costs of $1.3 million , equipment and lease expenses of
$1.1 million and other research and development expenses of $0.6 million .
32
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Research and development expenses as a percentage of total revenue increased to
10% for the six months ended June 30, 2022 from 8% in the comparable period in
2021.
Sales and Marketing Expenses
Six Months Ended June 30,
2022 2021 Change
Percentage Percentage
Amount of Revenue Amount of Revenue Amount Percentage
($ in thousands)
Sales and marketing expenses $ 13,651 16 % $ 6,869 11 % $ 6,782 99 %
Sales and marketing expenses increased by $6.8 million , or 99%, to $13.7 million
for the six months ended June 30, 2022 from $6.9 million in the comparable
period in 2021. The $6.8 million increase was principally the result of
increases in compensation and related costs of $4.3 million , operating supplies
expenses of $1.1 million , travel-related expenditures of $0.6 million , marketing
expenses of $0.4 million , and other sales and marketing expenses of $0.4
million .
Sales and marketing expenses as a percentage of total revenue increased to 16%
for the six months ended
General and Administrative Expenses
Six Months Ended June 30,
2022 2021 Change
Percentage Percentage
Amount of Revenue Amount of Revenue Amount Percentage
($ in thousands)
General and administrative expenses $ 16,581 20 % $ 9,405 16 % $ 7,176 76 %
General and administrative expenses increased by $7.2 million , or 76%, to $16.6
million for the six months ended June 30, 2022 from $9.4 million in the
comparable period in 2021. The $7.2 million increase was the result of increases
in compensation and related costs of $3.5 million , operating and lease expenses
of $2.1 million , an increase in professional fees of $0.8 million and other
general and administrative expenses of $0.8 million .
General and administrative expenses as a percentage of total revenue increased
to 20% for the six months ended June 30, 2022 from 16% in the comparable period
in 2021.
Interest Expense, net
Six Months Ended June 30,
2022 2021 Change
Percentage Percentage
Amount of Revenue Amount of Revenue Amount Percentage
($ in thousands)
Interest expense:
Interest expense, related party $ (2,369 ) (3 )% $ - $ - $ (2,369 ) NM
Interest expense, net 105 - (130 ) - 235 (181 )%
Total interest expense, net $ (2,264 ) (3 )% $ (130 ) 0 % $ (2,134 ) 1642 %
Interest expense, net increased by $2.1 million to $2.2 million for the six
months ended June 30, 2022 from $0.1 million in the comparable period in 2021.
The $2.1 million increase was the result of interest relating to our Convertible
Note.
33
--------------------------------------------------------------------------------Liquidity and Capital Resources
Overview
We have experienced significant losses and invested substantial resources since our inception to develop, commercialize and protect our aerogel technology and to build a manufacturing infrastructure capable of supplying aerogel products at the volumes and costs required by our customers. These investments have included research and development and other operating expenses, capital expenditures and investment in working capital balances. Our long-term financial projections anticipate revenue growth, increasing levels of gross profit, and improved cash flows from operations. To meet expected growth in demand for our aerogel products in the electric vehicle market, we are planning to expand our aerogel blanket capacity by constructing a second manufacturing plant inBulloch County, Georgia . We expect to build the second plant in two phases at an estimated cost of$575.0 million for the first phase and$125.0 million for the second phase. We expect to have the first phase of the second plant operational late in the second-half of 2023. In addition, we are constructing and planning commence the operation of a state-of-the-art, thermal barrier fabrication operation inMonterrey, Mexico during 2022 in order to keep pace with the significant potential demand for our PyroThin thermal barriers. We are also increasing our investment in the research and development of next-generation aerogel products and technologies. During 2022, we will continue to develop aerogel products and technologies for the electric vehicle market. We believe the commercial potential for our technology in the electric vehicle market is significant. To meet the anticipated revenue growth and take advantage of this market opportunity, we are adding personnel, incurring additional operating expenses, and planning to construct a carbon aerogel battery materials facility, among other items. We took several actions during 2021 to increase the financial resources available to support current operating requirements and capital expenditures. InJune 2021 , we sold 3,462,124 shares to an affiliate of Koch Strategic Platforms in a private placement of our common stock and received net proceeds of$73.5 million after deducting fees and offering expenses of$1.5 million . During 2021, we also sold shares of our common stock through our ATM offering program and received net proceeds of$19.4 million . InFebruary 2022 , we sold 1,791,986 shares to an affiliate of Koch Strategic Platforms in a private placement of our common stock and received net proceeds of$49.9 million after deducting fees and offering expenses of$0.1 million . In addition, inFebruary 2022 , we sold and issued to an affiliate of Koch$100.0 million in aggregate principal amount of our Convertible SeniorPIK Toggle Notes. During the six months endedJune 30, 2022 , we sold 882,288 shares of our common stock through our ATM offering program and received net proceeds of$28.1 million , after deducting commissions and estimated offering expenses payable by us. We believe that ourJune 30, 2022 cash and cash equivalents balance of$162.2 million and funds available under our revolving credit facility will be sufficient to support current operating requirements, current research and development activities and the initial capital expenditures required to support the evolving commercial opportunities in the electric vehicle market and other strategic business opportunities. However, we plan to supplement our cash balance and available credit with equity financings, debt financings, customer prepayments or technology licensing fees to provide the additional capital necessary to purchase the capital equipment, construct the new facilities and complete the aerogel capacity expansions required to support our evolving commercial opportunities and strategic business initiatives. We also intend to extend or replace our revolving credit facility withSilicon Valley Bank prior to its maturity. We believe that the consummation of equity financings could potentially result in an ownership change under Section 382 of the Internal Revenue Code. Such an ownership change would lead to the use of our net operating loss carryforwards being restricted. Our inability to use a substantial portion of our net operating loss carryforwards would result in a higher effective tax rate and adversely affect our financial condition and results of operations.
Primary Sources of Liquidity
Our principal sources of liquidity are currently our cash and cash equivalents and our revolving credit facility withSilicon Valley Bank . Cash and cash equivalents consist primarily of cash and money market accounts on deposit with banks. As ofJune 30, 2022 , we had$162.2 million of cash and cash equivalents. OnJune 29, 2021 , we sold 3,462,124 shares to an affiliate of Koch Strategic Platforms in a private placement of our common stock and received net proceeds of$73.5 million after deducting fees and offering expenses of$1.5 million . 34 -------------------------------------------------------------------------------- InFebruary 2022 , we sold 1,791,986 shares to an affiliate of Koch Strategic Platforms in a private placement of our common stock and received net proceeds of$49.9 million after deducting fees and offering expenses of$0.1 million . In addition, inFebruary 2022 , we sold and issued to an affiliate of Koch$100.0 million in aggregate principal amount of our Convertible SeniorPIK Toggle Notes. OnMarch 16, 2022 , we entered into a sales agreement for an ATM offering program withCowen and Company, LLC andPiper Sandler & Co. , as our sales agents. During the six months endedJune 30, 2022 , we sold 882,288 shares of our common stock through the ATM offering program and received net proceeds of$28.1 million , after deducting commissions and estimated offering expenses payable by us. Subsequent toJune 30, 2022 , we sold 3,959,798 shares of our common stock and received net proceeds of$39.5 million through the ATM offering program.
We have a prepayment balance of
We have maintained our revolving credit facility, as amended from time to time, withSilicon Valley Bank sinceMarch 2011 . At various dates in 2021, and subsequently onMarch 31, 2022 andApril 28, 2022 , the Company entered into amendments to the Loan Agreement to revise certain financial covenants, among other things. OnJune 23, 2022 , the Loan Agreement was amended to extend the maturity date of the revolving credit facility toAugust 26, 2022 . We intend to extend or replace the facility prior to its maturity. Under our revolving credit facility, we may borrow a maximum of$20.0 million , subject to continued covenant compliance and borrowing base requirements. The interest rate applicable to borrowings under the revolving credit facility is based on the prime rate, as defined, subject to a minimum rate of 4.00% per annum. The rates applicable to borrowings vary from prime rate plus 0.75% per annum to prime rate plus 2.00% per annum. In addition, we are required to pay a monthly unused revolving line facility fee of 0.50% per annum of the average unused portion of the revolving credit facility.
As of
Under the revolving credit facility, we are required to comply with both non-financial and financial covenants, including minimum Adjusted EBITDA and Adjusted Quick Ratio covenants, as defined in the loan agreement. As ofJune 30, 2022 , we were in compliance with all such covenants. The amount available to us under the revolving credit facility as ofJune 30, 2022 was$18.0 million after giving effect to the$1.2 million of letters of credit outstanding. Analysis of Cash Flow
During the six months endedJune 30, 2022 , we used$32.9 million in net cash in operating activities, as compared to the use of$0.5 million in net cash during the comparable period in 2021, an increase in the use of cash of$32.4 million . This increase in use of cash was the result of increases in net loss adjusted for non-cash items of$25.9 million and in net cash used by changes in operating assets and liabilities of$6.3 million .
Net cash used in investing activities is for capital expenditures for machinery and equipment principally to improve the throughput, efficiency and capacity of ourEast Providence facility and engineering designs for the planned aerogel manufacturing facility inBulloch County, Georgia . Net cash used in investing activities for the six months endedJune 30, 2022 and 2021 was$52.4 million and$3.9 million , respectively.
Net Cash Provided by Financing Activities
Net cash provided by financing activities for the six months endedJune 30, 2022 totaled$170.8 million and consisted of$99.8 million in net proceeds from the issuance of convertible debt,$49.9 million in net proceeds from the private placement of our common stock,$28.1 million in net proceeds from the ATM offering program, and less than$0.2 million in proceeds from employee stock 35 -------------------------------------------------------------------------------- option exercises, offset, in part, by$4.7 million in cash used for payments made for repayments of a prepayment liability and$2.4 million in cash used for payments made for employee tax withholdings associated with the vesting of restricted stock units. Net cash provided by financing activities for the six months endedJune 30, 2021 totaled$90.2 million and consisted of$73.6 million in net proceeds from the Private Placement,$18.6 million in net proceeds from the ATM offering program, and$0.7 million in proceeds from employee stock option exercises, offset, in part, by$2.7 million in cash used for payments made for employee tax withholdings associated with the vesting of restricted stock units.
Contractual Obligations and Commitments
There have been no material changes to our contractual obligations and commitments as reported in our Annual Report.
Recent Accounting Pronouncements
Information regarding new accounting pronouncements is included in note 2 to our unaudited consolidated financial statements contained in Item 1 of this Quarterly Report on Form 10-Q.
Critical Accounting Policies and Estimates
Our financial statements are prepared in accordance withU.S. GAAP. The preparation of our financial statements and related disclosures requires us to make estimates, assumptions and judgments that affect the reported amount of assets, liabilities, revenue, costs and expenses and related disclosures. We believe that the estimates, assumptions and judgments involved in these accounting policies have the greatest potential impact on our financial statements and, therefore, we consider these to be our critical accounting policies. Accordingly, we evaluate our estimates and assumptions on an ongoing basis. Our actual results may differ from these estimates under different assumptions and conditions. See our Annual Report and note 2 to our consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for information about these critical accounting policies, as well as a description of our other significant accounting policies.
Certain Factors That May Affect Future Results of Operations
TheSEC encourages companies to disclose forward-looking information so that investors can better understand a company's future prospects and make informed investment decisions. This Quarterly Report on Form 10-Q contains such "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. These statements involve known and unknown risks, uncertainties and other important factors, which may cause our actual results, performance or achievements to be materially different from any future results, performances or achievements expressed or implied by the forward-looking statements. Forward-looking statements include, but are not limited to, statements about: the expected future growth of the market for our aerogel products and our continued gain in market share, in particular in the electric vehicle market, the energy infrastructure insulation market, the lithium-ion battery thermal barrier markets, and other markets we target; our beliefs in the appropriateness of our assumptions, the accuracy of our estimates regarding expenses, loss contingencies, future revenues, future profits, uses of cash, available credit, capital requirements, and the need for additional financing to operate our business, including to complete the planned construction and development of our second manufacturing facility inBulloch County, Georgia , or fabrication operations inMonterrey, Mexico , and to fund our planned strategic business initiatives; the performance of our aerogel blankets; our expectation that we will be successful in obtaining, enforcing and defending our patents against competitors and that such patents are valid and enforceable; our belief that our products possess strong competitive advantages over traditional insulation materials, including the superior thermal performance and the thin, easy-to-use and durable blanket form of our products; our expectations regarding the investment to open a second manufacturing facility inGeorgia and the anticipated job creation as a result thereof; the anticipated capacity expansion as a result of the planned second manufacturing facility inGeorgia and the expected commencement of production; our estimates of annual production capacity; our plans regarding the future capacity expansion, including the selection of a manufacturing site and the construction and operation of the facility; our ability to obtain approvals and terms that are acceptable to move forward with the construction of a facility in the southeasternU.S. on a timely basis, or at all; beliefs about the role of our technology and products in the electric vehicle market; beliefs about the commercial potential for our technology in the electric vehicle market; beliefs about our ability to produce and deliver products to electric vehicle customers; beliefs aboutAspen's contracts with the majorU.S. automotive manufacturer; beliefs about the potential for the majorU.S. automotive manufacturer to become a significant customer forAspen's products; beliefs about revenue, costs, expenses, profitability, investments or cash flow associated with the contracts with the majorU.S. automotive manufacturer; our expectations about the size and timing of awarded business in the electric vehicle market, future revenues and profit margins, arising from our supply relationship and contract with automotive OEMs and our ability to win more business and increase revenue in the electric vehicle market; beliefs about the performance of our thermal 36 -------------------------------------------------------------------------------- barrier products in the battery systems of electric vehicles; beliefs about the potential commercial opportunity forAspen's thermal barrier products; the current or future trends in the energy, energy infrastructure, chemical and refinery, LNG, sustainable building materials, electric vehicle thermal barrier, electric vehicle battery materials or other markets and the impact of these trends on our business; our investments in the electric vehicle market and aerogel technology platform; our beliefs about the usefulness of the square foot operating metric; our beliefs about the financial metrics that are indicative of our core performance; our beliefs about the usefulness of our presentation of Adjusted EBITDA; our expectations about the effect of manufacturing capacity on financial metrics such as Adjusted EBITDA; our expectations about future revenues, expenses, gross profit, net loss, loss per share and Adjusted EBITDA, sources and uses of cash, capital requirements and the sufficiency of our existing cash balance and available credit; our beliefs about the outcome, effects or estimated costs of current or potential litigation or their respective timing, including expected legal expense in connection with our patent enforcement actions; our plans to devote substantial resources to the development of new aerogel technology; our expectations about product mix; our expectations about future material costs and manufacturing expenses as a percentage of revenue; our expectations of future gross profit and the effect of manufacturing expenses, manufacturing capacity and productivity on gross profit; our expectations about our resources and other investments in new technology and related research and development activities and associated expenses; our expectations about short and long term (a) research and development (b) general and administrative and (c) sales and marketing expenses; our expectations of revenue growth, increased gross profit, and improving cash flows over the long term; our intentions about managing capital expenditures and working capital balances; our expectations about incurring significant capital expenditures in the future; our expectations about the expansion of our workforce and resources and its effect on sales and marketing, general and administrative, and related expenses; our expectations about future product revenue and demand for our products; our expectations about the effect of stock-based compensation on various costs and expenses; our expectations about potential sources of future financing; our beliefs about the impact of accounting policies on our financial statements; our beliefs about the effect of interest rates, inflation and foreign currency fluctuations on our results of operations and financial condition; our beliefs about the expansion of our international operations, including inMexico ; our statements about the impact of major public health concerns, including the COVID-19 pandemic or other pandemics arising globally, and the future, and currently unknown extent of, the impact of the COVID-19 pandemic on our business and operations; and our statements about the sufficiency of our current and future actions to address the impact of the COVID-19 pandemic on our business and operations, including our future revenue, Adjusted EBITDA and other financial metrics. Words such as "may," "will," "anticipate," "estimate," "expects," "projects," "intends," "plans," "believes" and words and terms of similar substance used in connection with any discussion of future operating or financial performance, identify forward-looking statements. All forward-looking statements are management's present expectations of future events and are subject to a number of risks and uncertainties that could cause actual results to differ materially and adversely from those described in the forward-looking statements. These risks include, but are not limited to, those set forth in this Quarterly Report on Form 10-Q and under the heading "Risk Factors" contained in Item 1A of our Annual Report. In light of these assumptions, risks and uncertainties, the results and events discussed in the forward-looking statements contained in this Quarterly Report on Form 10-Q might not occur. Stockholders and other readers are cautioned not to place undue reliance on the forward-looking statements, which speak only as of the date of this Quarterly Report on Form 10-Q. We are not under any obligation, and we expressly disclaim any obligation, to update or alter any forward-looking statements, whether as a result of new information, future events or otherwise. All subsequent forward-looking statements attributable toAspen Aerogels, Inc. or to any person acting on its behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this section. Item 3. Quantitative and Qualitative Disclosures About Market Risk. Market risk represents the risk of loss that may impact our financial position due to adverse changes in financial market prices and rates. Our market risk exposure results primarily from fluctuations in interest rates as well as from inflation. In the normal course of business, we are exposed to market risks, including changes in interest rates which affect our line of credit under our revolving credit facility as well as cash flows. We may also face additional exchange rate risk in the future as we expand our business internationally.
Interest Rate Risk
We are exposed to changes in interest rates in the normal course of our business. As ofJune 30, 2022 , we had unrestricted cash and cash equivalents of$162.2 million . These amounts were held for working capital and capital expansion purposes and were invested primarily in deposit accounts, money market accounts, and high-quality debt securities issued by theU.S. government via cash sweep accounts at a major financial institution inNorth America . Due to the short-term nature of these investments, we believe that our exposure to changes in the fair value of our cash as a result of changes in interest rates is not material. 37 -------------------------------------------------------------------------------- As ofJune 30, 2022 , we had a convertible note outstanding with principal balance of$100.0 million . Our convertible note bears interest at the Secured Overnight Financing Rate (SOFR) plus 5.50% per annum if interest is paid in cash, or, if interest is paid in-kind as an increase in the principal amount of the outstanding note, at the SOFR plus 6.50% per annum. Under the terms of the investment, SOFR has a floor of 1% and a cap of 3%. Interest is paid semi-annually in arrears onJune 30 andDecember 30 . We, at our option, are permitted to settle each semi-annual interest payment in cash, in-kind, or any combination thereof. As ofJune 30, 2022 , we had no borrowings outstanding on our revolving credit facility. As ofJune 30, 2022 , we had$1.2 million of outstanding letters of credit supported by the revolving credit facility. Under our revolving credit facility, we are permitted to borrow a maximum of$20.0 million , subject to continued covenant compliance and borrowing base requirements. The interest rate applicable to borrowings under the revolving credit facility is based on the prime rate, as defined, subject to a minimum rate of 4.00% per annum. The rates applicable to borrowings vary from prime rate plus 0.75% per annum to prime rate plus 2.00% per annum. In addition, we are required to pay a monthly unused revolving line of credit facility fee of 0.5% per annum of the average unused portion of the revolving credit facility. The maturity date of our revolving credit facility isAugust 26, 2022 . We intend to extend or replace the facility prior to its maturity.
As of
Inflation Risk
Although we expect that our operating results will be influenced by general economic conditions, we do not believe that inflation has had a material effect on our results of operations during the periods presented in this report. However, our business may be affected by inflation in the future.
Foreign Currency Exchange Risk
We are subject to inherent risks attributed to operating in a global economy. Principally all our revenue, receivables, purchases and debts are denominated inU.S. dollars. Item 4. Controls and Procedures.
(a) Evaluation of Disclosure Controls and Procedures.
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in the reports that we file or submit under the Securities Exchange Act of 1934, as amended (the Exchange Act), is recorded, processed, summarized and reported within the time periods specified in theSEC's rules and forms and is accumulated and communicated to our management, including our principal executive officer and principal financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. As ofJune 30, 2022 , our management, with the participation of our principal executive officer and principal financial officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives, and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on such evaluation, our principal executive officer and principal financial officer have concluded that, as ofJune 30, 2022 , our disclosure controls and procedures were effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in theSEC's rules and forms, and is accumulated and communicated to our management, including our principal executive officer and principal financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. In addition, our principal executive officer and principal financial officer have concluded that the impact of the COVID-19 pandemic did not impact our ability to maintain our internal controls over financial reporting and disclosure controls and procedures. 38 --------------------------------------------------------------------------------
(b) Changes in Internal Controls.
During the six months endedJune 30, 2022 , there were no changes in our internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15(d)-15(f) promulgated under the Exchange Act, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. 39
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