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, 2019 , filed with theU.S. Securities and Exchange Commission (SEC) onMarch 6, 2020 , 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/.
Overview
We design, develop and manufacture innovative, high-performance aerogel insulation used primarily in the energy infrastructure and 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-use 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. We also derive product revenue from the building materials and other end markets. Customers in these markets use our products for applications as diverse as wall systems, 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 opportunities to address additional high value applications in the global insulation market and in a diverse set of new markets, including the electric vehicle market.
We generate product revenue through the sale of our line of aerogel blankets. We
market and sell our products primarily through a sales force based in
17 -------------------------------------------------------------------------------- Our salespeople work directly with end-use customers and engineering firms to promote the qualification, specification and acceptance of our 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 products and strong end-user support. Our salespeople also work to educate insulation contractors about the technical and operating cost advantages of our aerogel blankets. We also perform research services under contracts with various agencies of theU.S. government, including theDepartment of Defense and theDepartment of Energy , and other institutions. In late 2019, we decided to cease efforts to secure additional funded research contracts and to wind down our existing contract research activities during 2020. This decision reflected our desire to focus our research and development resources on initiatives to improve the profitability of our existing business and on efforts to develop new products and next generation technology with application in new, high value markets. We manufacture our products using our proprietary technology at our facility inEast Providence, Rhode Island . We have operated theEast Providence facility since 2008 and had increased our annual capacity through 2017 to 50 million square feet of aerogel blankets. During 2018, we initiated a series of projects, which we refer to as EP20, designed to increase this capacity to 60 million square feet of aerogel blankets by the end of 2020. As ofJune 30, 2020 , we had increased our annual capacity to 55 million square feet of aerogel blankets as a result of this initiative. We have delayed the implementation of our next generation chemistry and process technologies during 2020 and currently expect to achieve our EP20 goals by the end of 2021. We are engaged in a strategic partnership with BASF to develop and commercialize products for the building materials and other markets. The strategic partnership includes a supply agreement governing the exclusive sale of specified products to BASF and a joint development agreement targeting innovative products and technologies. BASF has no obligation to purchase any products under the supply agreement. Pursuant to the supply agreement, BASF may, in its sole discretion, make prepayments to us in the aggregate amount of up to$22.0 million during the term of the agreement. We may repay the prepayments to BASF at any time in whole or in part for any reason. BASF made a prepayment to us of$5.0 million during 2018. As ofJanuary 1, 2019 , 25.3% of any amounts that we invoice for Spaceloft A2 sold to BASF will be credited against the outstanding balance of the 2018 prepayment. If any amount of the 2018 prepayment remains uncredited atDecember 31, 2021 , BASF may require that we repay the uncredited amount to BASF. InJanuary 2019 , BASF made an additional prepayment to us of$5.0 million . As ofJanuary 1, 2020 , 50% of any amounts that we invoice for a newly developed product sold to BASF will be credited against the outstanding balance of the 2019 prepayment. AfterDecember 31, 2022 , BASF may require that we credit 24.7% of any amounts we invoice for Spaceloft A2 sold to BASF against the outstanding balance of the 2019 prepayment or may require that we repay the uncredited amount to BASF. OnFebruary 18, 2020 , we completed an underwritten public offering of 1,955,000 shares of our common stock at an offering price of$8.25 per share. We received net proceeds of$14.8 million after deducting underwriting discounts and commissions of$1.1 million and offering expenses of approximately$0.3 million . OnMarch 3, 2020 , we amended our revolving credit facility withSilicon Valley Bank to extend the maturity date of the facility toApril 28, 2021 . 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. At our election, the interest rate applicable to borrowings under the revolving credit facility may be based on the prime rate or LIBOR. Prime rate-based rates vary from prime rate plus 0.75% per annum to prime rate plus 2.00% per annum, while LIBOR-based rates vary from LIBOR plus 3.75% per annum to LIBOR plus 4.25% 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 credit facility was also amended to establish certain minimum Adjusted EBITDA levels with respect to the minimum Adjusted EBITDA financial covenant for the extended term. We currently project that we may not meet the Adjusted EBITDA financial covenant for the quarter ending onDecember 31, 2020 . Accordingly, we intend to enter into discussions withSilicon Valley Bank with the goal of modifying the Adjusted EBITDA financial covenant to ensure continued compliance through the maturity of the facility. We also intend to extend or replace the facility prior to its maturity. OnMay 1, 2020 , our wholly-owned subsidiary,Aspen Aerogels Rhode Island, LLC (Borrower), executed a note for an unsecured loan of$3,685,800 pursuant to the Paycheck Protection Program (PPP Loan) under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), as amended, and administered by theU.S. Small Business Administration (SBA). The Borrower conferred with representatives of the SBA prior to finalizing the PPP Loan. The loan is unsecured, contains customary events of default, carries an interest rate of 1% per year, and matures onMay 1, 2022 . The Borrower may repay the loan at any time without penalty. In addition, the Borrower is permitted at any time to submit an application to extend the maturity of loan toMay 1, 2025 . The Borrower may apply to have the PPP Loan indebtedness forgiven in whole or in part subject to SBA guidelines and based on the use of loan proceeds for payroll costs, mortgage interest payments, rent and utility costs over either an eight-week or 24-week 18 -------------------------------------------------------------------------------- period, at the Borrower's option, following its receipt of the loan proceeds. The SBA may disapprove of the Borrower's loan forgiveness application if the agency determines that it was ineligible for the PPP Loan. As ofJune 30, 2020 , the Borrower had not applied for forgiveness. The Borrower is not required to apply for PPP loan forgiveness and, upon application, it may not receive loan forgiveness in whole or in part. In addition, the amount of potential loan forgiveness will be reduced if the Borrower fails to maintain employee and salary levels during the eight-week or 24-week period following its receipt of the loan proceeds. If the Borrower applies for forgiveness, and the PPP loan is not forgiven in whole or only forgiven in part, the Borrower will be required to immediately begin making payments of principal and accrued interest in equal monthly installments over the remaining term of the loan for any post-forgiveness balance outstanding. If the Borrower does not apply for forgiveness byAugust 19, 2021 , it will be required to make payments of principal and accrued interest in equal monthly installments over the remaining term of the loan. The Borrower is using the proceeds of the PPP loan to support ongoing operations and to sustain staffing levels in ourEast Providence, Rhode Island manufacturing facility despite the unfavorable impact the COVID-19 pandemic and volatile energy markets are having on our business. Our revenue for the six months endedJune 30, 2020 was$53.1 million , which represented a decrease of$4.4 million , or 8%, from the six months endedJune 30, 2019 . Net loss for the six months endedJune 30, 2020 was$8.9 million and net loss per share was$0.34 . Net loss for the six months endedJune 30, 2019 was$11.3 million and net loss per share was$0.47 . With regard to the COVID-19 pandemic, we are following and implementing safe practices recommended by public health authorities and other government entities. We will continue to focus on the safety and health of our employees, customers and vendors. 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 the section below entitled "Item 1A. Risk Factors" for more information concerning risks to our business associated with COVID-19. At present, we are not certain of the extent of the impact that the COVID-19 pandemic and global oil market volatility may have on our business. Our manufacturing facility remains operational and we have not encountered any significant disruption to our supply chain or our ability to deliver to our customers. However, the demand for our products has been negatively impacted and we expect to experience a year-over-year decrease in total revenue. In response to this general uncertainty in the market for our products, we have taken a number of actions to reduce expenses, including wage reductions, temporary suspension of board fees and selected reductions to discretionary expenses. In addition, as permitted by the CARES Act, we have elected to defer certain payments of our employer share ofSocial Security tax that would otherwise be required to be paid during the period beginning onMarch 27, 2020 and endingDecember 31, 2020 . We are also prepared to temporarily curtail operations in ourEast Providence, Rhode Island manufacturing facility if necessary to ensure the safety of our employees or to align capacity with the expected lower demand. However, these reductions and any subsequent actions we may take may not be sufficient to offset the impact of the expected decrease in revenue and we are likely to experience a year-over-year increase in net loss and decrease in Adjusted EBITDA in 2020.
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 product and measure our product shipments in square feet. We estimate our annual capacity was 55 million square feet of aerogel blankets atJune 30, 2020 . We believe the square foot operating metric allows us and our investors to measure our manufacturing capacity and product shipments on a uniform and consistent basis. The following chart sets forth 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, 2020 2019 2020 2019 (In thousands)
Product shipments in square feet 7,317 8,421 15,482
17,106 19
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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 underU.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;
• 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. 20
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The following table presents a reconciliation of net loss, the most directly
comparable
Three Months Ended Six Months Ended June 30, June 30, 2020 2019 2020 2019 (In thousands) Net loss$ (5,698 ) $ (5,318 ) $ (8,867 ) $ (11,320 ) Depreciation and amortization 2,562 2,565 5,125
5,097
Stock-based compensation(1) 1,007 996 1,999
1,874 Interest expense 50 103 133 144 Adjusted EBITDA$ (2,079 ) $ (1,654 ) $ (1,610 ) $ (4,205 ) (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 and manufacturing costs, 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.
Components of Our Results of Operations
Revenue
We recognize product revenue from the sale of our line of aerogel products and research services revenue from the provision of services under contracts with various agencies of theU.S. government and other institutions. Product and research services revenue is recognized upon the satisfaction of contractual performance obligations. We record deferred revenue for product 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. At present, we are not certain of the extent of the impact that the COVID-19 pandemic and global oil market volatility may have on our business. Our manufacturing facility remains operational and we have not yet encountered any significant disruption to our supply chain or our ability to deliver to our customers. However, the demand for our products has been negatively impacted and we expect to experience a year-over-year decrease in total revenue.
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 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. We expect that material costs will decrease in absolute dollars during 2020 due to the expected decrease in demand for our products associated with the COVID-19 pandemic and global oil market volatility, lower cost product formulations, and improved manufacturing yields.
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 of manufacturing employees and shipping costs. We expect that manufacturing expense will decline in absolute dollars during 2020 principally due to our plan to reduce compensation costs and discretionary expenses in response to the expected decrease in demand for our products associated with the COVID-19 pandemic and global oil market volatility.
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In total, we expect that cost of product revenue will decrease in absolute dollars during 2020, but is likely to increase as a percentage of product revenue versus 2019 due to the expected decrease in our 2020 revenue levels associated with the COVID-19 pandemic and global oil market volatility.
Cost of research services revenue consists of direct labor costs of research personnel engaged in contract research, third-party consulting and subcontractor expense, and associated direct material costs. This cost of revenue also includes overhead expenses associated with project resources, development tools and supplies. Cost of research services revenue is recorded when the related research services revenue is recognized. We expect cost of research services will decline as we wind down our existing contract research activities during 2020. 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 in absolute dollars and as a percentage of revenue to vary significantly from period to period. During 2020, the demand for our products has been negatively impacted due to the COVID-19 pandemic and global oil market volatility and we expect to experience a year-over-year decrease in total revenue. We also expect that material costs will decrease as a result of lower cost product formulations, enhanced yields and the expected decrease in demand for our products. In addition, we expect that manufacturing expenses will decline principally due to our plan to reduce compensation costs and discretionary expenses. However, we expect these material cost and manufacturing reductions will not be sufficient to offset the impact of the expected decrease in revenue and we are likely to experience a year-over-year decrease in gross profit both in absolute dollars and as a percentage of revenue during 2020.
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 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 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. We expect that operating expenses will decline in absolute dollars during 2020 principally due to our plan to reduce compensation costs and discretionary expenses in response to the general uncertainty associated with the COVID-19 pandemic and global oil market volatility. However, we expect operating expenses will increase as a percentage of revenue versus 2019 due to the expected decrease in demand for our products during 2020.
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. We believe that these investments are necessary to maintain and improve our competitive position. We expect to continue to invest in research and engineering personnel and the infrastructure required in support of their efforts. We expect that research and development expenses during 2020 will remain unchanged from 2019 levels. However, we expect research and development expenses to increase a percentage of revenue versus 2019 due to the expected decrease in our revenue during 2020 as a result of the COVID-19 pandemic and global oil market volatility and due to our decision to wind down our contract research activities during 2020 to focus our research and development resources on improving our existing business profitability and developing new products and next generation technology with application in new, high value markets.
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. 22
-------------------------------------------------------------------------------- We expect that sales and marketing expenses will decline in absolute dollars during 2020 principally due to our plan to reduce compensation costs and discretionary expenses in response to the general uncertainty associated with the COVID-19 pandemic and global oil market volatility. However, we expect sales and marketing expenses will increase as a percentage of revenue versus 2019 due to the expected decrease in demand for our products during 2020.
General and Administrative Expenses
General and administrative expenses consist primarily of personnel costs, legal expenses, consulting and professional services, audit and tax consulting costs, and expenses for our executive, finance, legal, human resources and information technology organizations. General and administrative expenses have increased as we have incurred additional costs related to operating as a publicly-traded company, which include costs of compliance with securities regulations, corporate governance and related laws and regulations, investor relations expenses, increased insurance premiums, including director and officer insurance, and increased audit and legal fees. In addition, 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 II, Item 1 of this Quarterly Report on Form 10-Q, if protracted, could result in significant legal expense over the medium to long-term. We expect that general and administrative expenses will decline in absolute dollars during 2020 principally due to our plan to reduce compensation costs and discretionary expenses in response to the general uncertainty associated with the COVID-19 pandemic and global oil market volatility. However, we expect general and administrative expenses will increase as a percentage of revenue versus 2019 due to the expected decrease in demand for our products during 2020.
Interest Expense, Net
Interest expense, net consists primarily of 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.
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, 2020 2019 Change Percentage Percentage Amount of Revenue Amount of Revenue Amount Percentage ($ in thousands) Revenue: Product$ 24,526 100 %$ 28,908 98 %$ (4,382 ) (15 )% Research services 115 0 % 625 2 % (510 ) (82 )% Total revenue$ 24,641 100 %$ 29,533 100 %$ (4,892 ) (17 )% The following chart sets forth 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 2020 2019 Amount Percentage Product shipments in square feet (in thousands) 7,317 8,421 (1,104 ) (13 )% 23
-------------------------------------------------------------------------------- Total revenue decreased$4.9 million , or 17%, to$24.6 million for the three months endedJune 30, 2020 from$29.5 million in the comparable period in 2019. The decrease in total revenue was the result of decreases in both product revenue and research services revenue. Product revenue decreased by$4.4 million , or 15%, to$24.5 million for the three months endedJune 30, 2020 from$28.9 million in the comparable period in 2019. This decrease was principally the result of decreases in maintenance-based demand in theU.S. petrochemical and refinery markets and in project-based demand in the subsea market, offset, in part, by an increase in project-based demand in the Asian LNG market. Product revenue for the three months endedJune 30, 2020 included$5.5 million to an Asian LNG project contractor,$3.1 million to a subsea contractor and$2.4 million to a North American distributor. Product revenue for the three months endedJune 30, 2019 included$6.6 million to a subsea contractor,$4.3 million to a North American distributor and$3.7 million to an Asian LNG project contractor. The average selling price per square foot of our products decreased by$0.08 , or 2%, to$3.35 per square foot for the three months endedJune 30, 2020 from$3.43 per square foot for the three months endedJune 30, 2019 . The decrease in average selling price principally reflected the impact of the decrease in the proportion of maintenance-based product revenue in theU.S. petrochemical and refinery market for the three months endedJune 30, 2020 from the comparable period in 2019. This decrease in average selling price had the effect of decreasing product revenue by$0.6 million for the three months endedJune 30, 2020 from the comparable period in 2019. In volume terms, product shipments decreased by 1.1 million square feet, or 13%, to 7.3 million square feet of aerogel products for the three months endedJune 30, 2020 , as compared to 8.4 million square feet for the three months endedJune 30, 2019 . The decrease in product volume had the effect of decreasing product revenue by$3.8 million for the three months endedJune 30, 2020 from the comparable period in 2019. Research services revenue decreased$0.5 million , or 82%, to$0.1 million for the three months endedJune 30, 2020 from$0.6 million in the comparable period in 2019. The decrease was primarily due to our decision to wind down our contract research activities during 2020 to focus our research and development resources on improving our existing business profitability and developing new products and next generation technology with application in new, high value markets. Product revenue was nearly 100% of total revenue for the three months endedJune 30, 2020 and 98% of total revenue for the three months endedJune 30, 2019 . Research services revenue was less than 1% of total revenue for the three months endedJune 30, 2020 and 2% of total revenue for the three months endedJune 30, 2019 . Cost of Revenue Three Months Ended June 30, 2020 2019 Change Percentage Percentage Percentage Percentage of Related of Total of Related of Total Amount Revenue Revenue Amount Revenue Revenue Amount Percentage ($ in thousands) Cost of revenue: Product$ 21,761 89 % 88 %$ 25,715 89 % 87 %$ (3,954 ) (15 )% Research services 29 25 % 0 % 304 49 % 1 % (275 ) (90 )% Total cost of revenue$ 21,790 88 % 88 %$ 26,019 88 % 88 %$ (4,229 ) (16 )% Total cost of revenue decreased$4.2 million , or 16%, to$21.8 million for the three months endedJune 30, 2020 from$26.0 million in the comparable period in 2019. The decrease in total cost of revenue was the result of decreases in both product cost of revenue and research services cost of revenue. Product cost of revenue decreased by$3.9 million , or 15%, to$21.8 million for the three months endedJune 30, 2020 from$25.7 million in the comparable period in 2019. The$3.9 million decrease was the result of a$2.2 million decrease in material costs, and a$1.7 million decrease in manufacturing expense. The decrease in material costs was the result of the 1.1 million square feet, or 13%, decrease in total product shipments, lower cost product formulations and improved manufacturing yields. The decrease in manufacturing expense was the result of decreases in compensation and related costs of$0.6 million , maintenance expense of$0.3 million , operating supplies expense of$0.3 million , waste disposal costs of$0.2 million , professional services expense of$0.2 million , and other manufacturing expenses of$0.1 million . 24 --------------------------------------------------------------------------------
Product cost of revenue as a percentage of product revenue was 89% during both
the three months ended
Research services cost of revenue decreased$0.3 million , or 90%, to less than$0.1 million for the three months endedJune 30, 2020 from$0.3 million for the comparable period in 2019. Cost of research service revenue as a percentage of research services revenue decreased to 25% during the three months endedJune 30, 2020 from 49% in the comparable period in 2019 due to a decrease in the proportion of third-party services utilized to support the contracted research. Gross Profit Three Months Ended June 30, 2020 2019 Change Percentage Percentage Amount of Revenue Amount of Revenue Amount Percentage ($ in thousands) Gross profit$ 2,851 12 %$ 3,514 12 %$ (663 ) (19 )% Gross profit decreased by$0.7 million , or 19%, to$2.8 million for the three months endedJune 30, 2020 from$3.5 million in the comparable period in 2019. The decrease in gross profit was the result of the$4.9 million decrease in total revenue offset, in part, by the$4.2 million decrease in total cost of revenue. The decrease in revenue was principally the result of decreases in maintenance-based demand in theU.S. petrochemical and refinery markets and in project-based demand in the subsea market, offset, in part, by an increase in project-based demand in the Asian LNG market. The decrease in total cost of revenue was the result of the 1.1 million square feet, or 13%, decrease in total product shipments, lower cost product formulations, improved manufacturing yields and a decrease in manufacturing expense.
Gross profit as a percentage of total revenue remained 12% of total revenue for
the three months ended
Research and Development Expenses
Three Months Ended June 30, 2020 2019 Change Percentage Percentage Amount of Revenue Amount of Revenue Amount Percentage ($ in thousands) Research and development expenses$ 2,121 9 %$ 1,868 6 %$ 253 14 % Research and development expenses increased by$0.2 million , or 14%, to$2.1 million for the three months endedJune 30, 2020 from$1.9 million in the comparable period in 2019. The$0.2 million increase was primarily the result of an increase in compensation and related costs. Research and development expenses as a percentage of total revenue increased to 9% for the three months endedJune 30, 2020 from 6% in the comparable period in 2019 due to both the increase in research and development expenses and the decrease in revenue during the three months endedJune 30, 2020 .
Sales and Marketing Expenses
Three Months Ended June 30, 2020 2019 Change Percentage Percentage Amount of Revenue Amount of Revenue Amount Percentage ($ in thousands) Sales and marketing expenses$ 2,972 12 %$ 3,509 12 %$ (537 ) (15 )% Sales and marketing expenses decreased by$0.5 million , or 15%, to$3.0 million for the three months endedJune 30, 2020 from$3.5 million in the comparable period in 2019. The$0.5 million decrease was the result of decreases in travel expense of$0.5 million and other marketing expenses of$0.2 million , offset, in part, by increases in compensation and related costs of$0.1 million and sales consultant expense of$0.1 million .
Sales and marketing expenses as a percentage of total revenue remained 12% of
total revenue for the three months ended
25 --------------------------------------------------------------------------------
General and Administrative Expenses
Three Months Ended June 30, 2020 2019 Change Percentage Percentage Amount of Revenue Amount of Revenue Amount Percentage ($ in thousands) General and administrative expenses$ 3,406 14 %$ 3,352 11 %$ 54 2 % General and administrative expenses increased by$0.1 million , or 2%, to$3.4 million for the three months endedJune 30, 2020 from$3.3 million in the comparable period in 2019. The$0.1 million increase was the result of a decrease in recoveries of provisions for uncollectible accounts receivable of$0.2 million and an increase in compensation and related costs of$0.2 million , offset, in part, by decreases in patent enforcement costs of$0.2 million and other general and administrative costs of$0.1 million . General and administrative expenses as a percentage of total revenue increased to 14% for the three months endedJune 30, 2020 from 11% in the comparable period in 2019 due to both the increase in general and administrative expenses and the decrease in revenue. Interest Expense, net Three Months Ended June 30, 2020 2019 Change Percentage Percentage Amount of Revenue Amount of Revenue Amount Percentage ($ in thousands) Interest expense, net$ (50 ) (0 )%$ (103 ) (0 )%$ 53 (51 )%
Interest expense, net, consists primarily of fees and interest expense
associated with outstanding balances under our revolving credit agreement and
was less than
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, 2020 2019 Change Percentage of Percentage of Amount Revenue Amount Revenue Amount Percentage ($ in thousands) Revenue: Product$ 52,833 100 %$ 55,693 97 %$ (2,860 ) (5 )% Research services 227 0 % 1,752 3 % (1,525 ) (87 )% Total revenue$ 53,060 100 %$ 57,445 100 %$ (4,385 ) (8 )% The following chart sets forth product shipments in square feet for the periods presented: Six Months Ended June 30, Change 2020 2019 Amount Percentage Product shipments in square feet (in thousands) 15,482 17,106 (1,624 ) (9 )% Total revenue decreased$4.4 million , or 8%, to$53.1 million for the six months endedJune 30, 2020 from$57.4 million in the comparable period in 2019. The decrease in total revenue was the result of decreases in both product revenue and research services revenue. Product revenue decreased by$2.9 million , or 5%, to$52.8 million for the six months endedJune 30, 2020 from$55.7 million in the comparable period in 2019. This decrease was principally the result of decreases in project-based demand in the Canadian petrochemical and refinery markets, project-based demand in the subsea market, and in maintenance-based demand in theU.S. 26 --------------------------------------------------------------------------------
petrochemical and refinery markets, offset, in part, by an increase in project-based demand in the Asian LNG market and the impact of price increases enacted in 2019 and 2020.
Product revenue for the six months endedJune 30, 2020 included$10.1 million to an Asian LNG project contractor and$9.4 million to a North American distributor. Product revenue for the six months endedJune 30, 2019 included$10.0 million to a North American distributor and$6.8 million and$5.7 million to two subsea contractors, respectively. The average selling price per square foot of our products increased by$0.15 , or 5%, to$3.41 per square foot for the six months endedJune 30, 2020 from$3.26 per square foot for the six months endedJune 30, 2019 . The increase in average selling price principally reflected the impact of price increases enacted in 2019 and 2020, offset, in part, by the impact of the decrease in the proportion of maintenance-based product revenue in theU.S. petrochemical and refinery market for the six months endedJune 30, 2020 from the comparable period in 2019. This increase in average selling price had the effect of increasing product revenue by$2.4 million for the six months endedJune 30, 2020 from the comparable period in 2019. In volume terms, product shipments decreased by 1.6 million square feet, or 9%, to 15.5 million square feet of aerogel products for the six months endedJune 30, 2020 , as compared to 17.1 million square feet for the six months endedJune 30, 2019 . The decrease in product volume had the effect of decreasing product revenue by$5.3 million for the six months endedJune 30, 2020 from the comparable period in 2019. Research services revenue decreased$1.5 million , or 87%, to$0.2 million for the six months endedJune 30, 2020 from$1.8 million in the comparable period in 2019. The decrease was primarily due to our decision to wind down our contract research activities during 2020 to focus our research and development resources on improving our existing business profitability and developing new products and next generation technology with application in new, high value markets. Product revenue was nearly 100% of total revenue for the six months endedJune 30, 2020 and 97% of total revenue for the six months endedJune 30, 2019 . Research services revenue was less than 1% of total revenue for the six months endedJune 30, 2020 and 3% of total revenue for the six months endedJune 30, 2019 . Cost of Revenue Six Months Ended June 30, 2020 2019 Change Percentage Percentage Percentage Percentage of Related of Total of Related of Total Amount Revenue Revenue Amount Revenue Revenue Amount Percentage ($ in thousands) Cost of revenue: Product$ 44,160 84 % 83 %$ 49,193 88 % 86 %$ (5,033 ) (10 )% Research services 69 30 % 0 % 1,020 58 % 2 % (951 ) (93 )% Total cost of revenue$ 44,229 83 % 83 %$ 50,213 87 % 87 %$ (5,984 ) (12 )% Total cost of revenue decreased$6.0 million , or 12%, to$44.2 million for the six months endedJune 30, 2020 from$50.2 million in the comparable period in 2019. The decrease in total cost of revenue was the result of decreases in both product cost of revenue and research services cost of revenue. Product cost of revenue decreased$5.0 million , or 10%, to$44.2 million for the six months endedJune 30, 2020 from$49.2 million in the comparable period in 2019. The$5.0 million decrease was the result of a$3.8 million decrease in material costs and a$1.2 million decrease in manufacturing expense. The decrease in material costs was driven principally by the 1.6 million square feet, or 9%, decrease in product shipments, lower cost product formulations and improved manufacturing yields. The decrease in manufacturing expense was the result of decreases in operating supplies expenses of$0.4 million , waste disposal costs of$0.2 million , maintenance expense of$0.2 million , utilities expense of$0.2 million , compensation and related costs of$0.1 million , and other manufacturing expenses of$0.1 million . Product cost of revenue as a percentage of product revenue decreased to 84% during the six months endedJune 30, 2020 from 88% during the six months endedJune 30, 2019 . This decrease was the result of price increases enacted in 2019 and 2020, a favorable mix of products sold, lower cost product formulations, improved manufacturing yields and our initiatives to reduce manufacturing expense. Research services cost of revenue decreased$1.0 million , or 93%, to less than$0.1 million for the six months endedJune 30, 2020 from$1.0 million for the comparable period in 2019. Cost of research service revenue as a percentage of research services 27
-------------------------------------------------------------------------------- revenue decreased to 30% during the six months endedJune 30, 2020 from 58% in the comparable period in 2019 due to a decrease in the proportion of outside services utilized to support the contracted research. Gross Profit Six Months Ended June 30, 2020 2019 Change Percentage Percentage Amount of Revenue Amount of Revenue Amount Percentage ($ in thousands) Gross profit$ 8,831 17 %$ 7,232 13 %$ 1,599 22 % Gross profit increased$1.6 million , or 22%, to$8.8 million for the six months endedJune 30, 2020 from$7.2 million in the comparable period in 2019. The increase in gross profit was the result of the$6.0 decrease in total cost of revenue, offset, in part, by the$4.4 million decrease in total revenue. The decrease in total cost of revenue was driven principally by the 1.6 million square foot, or 9%, decrease in product shipments, lower cost product formulations, improved manufacturing yields, and a decrease in manufacturing expense. The decrease in revenue was principally associated with decreases in project-based demand in the Canadian petrochemical and refinery markets, project-based demand in the subsea market, and in maintenance-based demand in theU.S. petrochemical and refinery markets, offset, in part, by an increase in project-based demand in the Asian LNG market, and the impact of price increases enacted in 2019 and 2020.
Gross profit as a percentage of total revenue increased to 17% of total revenue
for the six months ended
Research and Development Expenses
Six Months Ended June 30, 2020 2019 Change Percentage Percentage Amount of Revenue Amount of Revenue Amount Percentage ($ in thousands) Research and development expenses$ 4,348 8 %$ 3,796 7 %$ 552 15 % Research and development expenses increased by$0.5 million , or 15%, to$4.3 million for the six months endedJune 30, 2020 from$3.8 million in the comparable period in 2019. The$0.5 million increase was the result of increases in compensation and related costs of$0.4 million and other research and development expenses of$0.1 million . Research and development expenses as a percentage of total revenue increased to 8% of for the six months endedJune 30, 2020 from 7% in the comparable period in 2019 due to both the increase in research and development expenses and the decrease in revenue.
Sales and Marketing Expenses
Six Months Ended June 30, 2020 2019 Change Percentage Percentage Amount of Revenue Amount of Revenue Amount Percentage ($ in thousands) Sales and marketing expenses$ 6,296 12 %$ 7,020 12 %$ (724 ) (10 )% Sales and marketing expenses decreased by$0.7 million , or 10%, to$6.3 million for the six months endedJune 30, 2020 from$7.0 million in the comparable period in 2019. The$0.7 million decrease was the result of decreases in travel expense of$0.6 million , compensation and related costs of$0.2 million and other marketing expenses of$0.2 million , offset, in part, by an increase in sales consultant expense of$0.3 million .
Sales and marketing expenses as a percentage of total revenue remained 12% for
the six months ended
General and Administrative Expenses
Six Months Ended June 30, 2020 2019 Change Percentage Percentage Amount of Revenue Amount of Revenue Amount Percentage ($ in thousands) General and administrative expenses$ 6,921 13 %$ 7,592 13 %$ (671 ) (9 )% 28
-------------------------------------------------------------------------------- General and administrative expenses decreased by$0.7 million , or 9%, to$6.9 million during the six months endedJune 30, 2020 from$7.6 million in the comparable period in 2019. The$0.7 million decrease was the result of decreases in patent enforcement costs of$0.4 million , compensation and related costs of$0.3 million , and other general and administrative expenses of$0.2 million , offset, in part, by a decrease in recoveries of provisions for uncollectible accounts receivable of$0.2 million .
General and administrative expenses as a percentage of total revenue remained
13% of total revenue for the six months ended
Interest Expense, net Six Months Ended June 30, 2020 2019 Change Percentage Percentage Amount of Revenue Amount of Revenue Amount Percentage ($ in thousands) Interest expense, net$ (133 ) (0 )%$ (144 ) (0 )%$ 11 (8 )%
Interest expense, net, consists primarily of fees and interest expense
associated with outstanding balances under our revolving credit agreement and
was
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. Through 2015, we experienced revenue growth and gained share in our target markets. Despite a decline in revenue in 2016, 2017 and 2018, we experienced strong growth in revenue, gross profit and cash flows from operations during 2019. Our financial projections anticipate long-term revenue growth, increasing levels of gross profit and improved cash flow from operations. To support this growth, we initiated a plan in 2018 to increase the capacity of ourEast Providence, Rhode Island manufacturing facility to approximately 60 million square feet of aerogel blankets by the end of 2020. We have delayed the implementation of our next generation chemistry and process technologies during 2020 and currently expect to achieve our EP20 goals by the end of 2021. We may incur additional capital expenditures to complete this plan during the remainder of 2020 and 2021. We have taken several actions to date in 2020 to increase the financial resources available to support current operating requirements, capacity expansions and strategic investments. InFebruary 2020 , we completed an underwritten public offering of our common stock and received net proceeds of$14.8 million . InMarch 2020 , we extended the maturity of our revolving credit facility withSilicon Valley Bank toApril 28, 2021 . Additionally, inMay 2020 , our wholly-owned subsidiary,Aspen Aerogels Rhode Island, LLC , received PPP Loan proceeds of$3.7 million under the CARES Act. We believe that our existing cash balance will be sufficient to support operations, complete the planned capacity expansion of ourEast Providence manufacturing facility and to fund our planned strategic business initiatives. However, we are not certain of the extent of the impact that the COVID-19 pandemic and global oil market volatility may have on our business. The demand for our products has been negatively impacted and we expect to experience a year-over-year decrease in total revenue. In response to the expected decrease in demand for our products, we instituted a number of actions to reduce expenses and to improve liquidity during the six months endedJune 30, 2020 . However, these actions and any subsequent actions we may take may not be sufficient to offset the impact of the expected decrease in revenue and we are likely to experience a year-over-year increase in net loss, a decrease in Adjusted EBITDA and an increase in cash used in operating activities during 2020. In turn, we may not meet the Adjusted EBITDA financial covenant under our revolving credit agreement withSilicon Valley Bank for the quarter ending onDecember 31, 2020 . In response, we intend to enter into discussions withSilicon Valley Bank with the objective of modifying the Adjusted EBITDA financial covenant to ensure continued compliance through the maturity of the facility. We also intend to extend or replace the facility prior to its maturity. We may also need to supplement our cash balance with additional credit facilities, debt financings, customer prepayments, technology licensing fees or equity financings to provide the capital necessary to fund operating requirements, complete future capacity expansions or to support evolving strategic business initiatives. 29 --------------------------------------------------------------------------------
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, 2020 , we had$13.4 million of cash and cash equivalents. OnFebruary 18, 2020 , we completed an underwritten public offering of 1,955,000 shares of our common stock at an offering price of$8.25 per share. We received net proceeds of$14.8 million after deducting underwriting discounts and commissions of$1.1 million and offering expenses of approximately$0.3 million . OnMay 1, 2020 , the Borrower executed a note for an unsecured loan of$3,685,800 pursuant to the PPP under the CARES Act, as amended, and administered by the SBA. The loan is unsecured, contains customary events of default, carries an interest rate of 1% per year, and matures onMay 1, 2022 . The Borrower may repay the loan in full at any time without penalty. In addition, the Borrower is permitted at any time to submit an application to extend the maturity of loan toMay 1, 2025 . The Borrower may apply to have the PPP Loan indebtedness forgiven in whole or in part subject to SBA guidelines and based on the use of loan proceeds for payroll costs, mortgage interest payments, rent and utility costs over either an eight-week or 24-week period, at the Borrower's option, following its receipt of the loan proceeds. The SBA may disapprove of the Borrower's loan forgiveness application if the agency determines that it was ineligible for the PPP Loan. As ofJune 30, 2020 , the Borrower had not applied for forgiveness. The Borrower is not required to apply for PPP loan forgiveness and, upon application, it may not receive loan forgiveness in whole or in part. In addition, the amount of potential loan forgiveness will be reduced if the Borrower fails to maintain employee and certain salary levels during the eight-week or 24-week period following its receipt of the loan proceeds. If the Borrower applies for forgiveness, and the PPP loan is not forgiven in whole or only forgiven in part, it will be required to immediately begin making payments of principal and accrued interest in equal monthly installments over the remaining term of the loan for any post-forgiveness balance outstanding. If the Borrower does not apply for forgiveness byAugust 19, 2021 , it will be required to make payments of principal and accrued interest in equal monthly installments over the remaining term of the loan. The Borrower is using the proceeds of the PPP loan to support ongoing operations and to sustain staffing levels in ourEast Providence, Rhode Island manufacturing facility despite the unfavorable impact the COVID-19 pandemic and volatile energy markets are having on our business. AtJune 30, 2020 , we had no outstanding borrowings under our revolving credit facility withSilicon Valley Bank ,$1.3 million of outstanding letters of credit secured by the revolving credit facility,$3.7 million outstanding on the PPP Loan, and an obligation of$9.9 million associated with prepayments received pursuant to our supply agreement with BASF. We have maintained the revolving credit facility, as amended from time to time, withSilicon Valley Bank sinceMarch 2011 . OnMarch 3, 2020 , our revolving credit facility was amended to extend the maturity date of the facility toApril 28, 2021 . The amendment to the credit facility also established certain minimum Adjusted EBITDA levels with respect to the minimum Adjusted EBITDA financial covenant for the extended term. 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. At our election, the interest rate applicable to borrowings under the revolving credit facility may be based on the prime rate or LIBOR. Prime rate-based rates vary from prime rate plus 0.75% per annum to prime rate plus 2.00% per annum, while LIBOR-based rates vary from LIBOR plus 3.75% per annum to LIBOR plus 4.25% 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. Under the revolving credit facility, we are required to comply with both non-financial and financial covenants, including the minimum Adjusted EBITDA covenant, as defined in the loan agreement. AtJune 30, 2020 , we were in compliance with all such covenants. However, we currently project that we may not meet the Adjusted EBITDA financial covenant for the quarter ending onDecember 31, 2020 . Accordingly, we intend to enter into discussions withSilicon Valley Bank with the goal of modifying the Adjusted EBITDA financial covenant to ensure continued compliance through the maturity of the facility. We also intend to extend or replace the facility prior to its maturity.
The amount available to us under the facility at
30 --------------------------------------------------------------------------------
Analysis of Cash Flow
During the six months endedJune 30, 2020 , we used$3.2 million in net cash in operating activities, as compared to the use of$1.9 million in net cash during the comparable period in 2019, an increase in the use of cash of$1.3 million . This increase in use of cash was the result of an increase in net cash used by changes in operating assets and liabilities of$3.9 million , offset, in part, by a decrease in net loss adjusted for non-cash items of$2.6 million .
Net cash used in investing activities is primarily related to capital expenditures to support our growth. Net cash used in investing activities for the six months endedJune 30, 2020 and 2019 was$2.0 million and$1.3 million , respectively, in capital expenditures primarily for machinery and equipment to improve the capacity, throughput, efficiency and reliability of ourEast Providence facility.
Net Cash Provided by Financing Activities
Net cash provided by financing activities for the six months endedJune 30, 2020 totaled$14.9 million and consisted of$19.4 million in borrowings under our line of credit,$14.8 million in net proceeds from an underwritten public offering of our common stock,$3.7 million in net proceeds from the issuance of long-term debt, and$0.9 million in proceeds from employee stock option exercises, offset, in part, by$22.6 million of repayments under our line of credit and$1.3 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, 2019 totaled$3.2 million and consisted of$56.2 million in borrowings under our line of credit and$5.0 million in prepayment proceeds under our supply agreement with BASF, offset, in part, by$57.5 million of repayments under our line of credit and$0.5 million in cash used for payments made for employee tax withholdings associated with the vesting of restricted stock units.
Off Balance Sheet Arrangements
Since inception, we have not engaged in any off balance sheet activities as defined in Item 303(a)(4) of Regulation S-K.
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. 31
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Forward-looking statements include, but are not limited to, statements about: 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, PPP Loan Proceeds, capital requirements, and the need for additional financing to operate our business, including to complete the planned capacity expansion of ourEast Providence manufacturing facility, 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 plans to expand capacity in ourEast Providence, Rhode Island manufacturing facility; our estimates of annual production capacity; our expectation to achieve our EP20 goals by the end of 2021; our strategic partnership with BASF and the potential benefits of such a relationship, including the potential for it to create new product and market opportunities; our supply agreement with BASF, our supply to BASF of its Spaceloft A2 product and newly developed product, the potential for future cash advances from BASF under our supply agreement with BASF (payment of which are subject to certain conditions) to provide a source of financing for some portion of the cost of the planned capacity expansion in ourEast Providence, Rhode Island manufacturing facility and the potential for BASF to become a significant customer for our products; our joint development agreement with BASF, and the potential for it to support the development of new aerogel products and technologies; 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; 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; 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; our belief that we qualify for partial or complete forgiveness of the PPP Loan; and changes by governmental authorities regarding the CARES Act or related administrative matters and the Company's and its subsidiary's abilities to comply with the terms of the PPP Loan and the CARES Act, including to use the proceeds of the PPP Loan as described herein. 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.
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