Good day and thank you for standing by. Welcome to the Aspen Aerogels Q1 2021 Earnings Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, John Fairbanks. Thank you. Please, go ahead.

Good afternoon. Thank you for joining us for the Aspen Aerogels conference call. I'm John Fairbanks, Aspen's Chief Financial Officer. There are a few housekeeping items that I would like to address before turning the call over to Don Young, Aspen's President and CEO. The press release announcing Aspen's financial results and business developments, as well as a reconciliation of management's use of non-GAAP financial measures compared to the most applicable GAAP measures, is available on the Investors section of Aspen's website, www.aerogel.com. Included in the press release is a summary statement of operations, a summary balance sheet, and a summary of key financial and operating statistics for the first quarter ended March 31, 2021. In addition, the Investors section of Aspen's website will contain an archived version of this webcast for approximately one year. Please note that our discussion today will include forward-looking statements, including any statement regarding outlook expectations, beliefs, projections, estimates, targets, prospects, business plans and any other statement that is not a historical fact. These forward-looking statements are subject to risks and uncertainties. Aspen Aerogels' actual results may differ materially from those expressed in these forward-looking statements. A list of factors that could affect the company's actual results can be found in Aspen's press release issued today and are discussed in more detail in the reports Aspen files with the SEC, particularly in the company's most recent Annual Report on Form 10-K. The company's press release issued today and filings with the SEC can also be found in the Investors section of Aspen's website. The forward-looking statements made today represent the company's views as of today, April 29, 2021. Aspen Aerogels disclaims any obligation to update these forward-looking statements to reflect future events or circumstances. During this call, we will refer to non-GAAP financial measures, including adjusted EBITDA. These financial measures are not prepared in accordance with US Generally Accepted Accounting Principles or GAAP. These non-GAAP financial measures are not intended to be considered in isolation or to substitute the results prepared in accordance with GAAP. The definitions and reconciliations of these non-GAAP financial measures to the most directly comparable GAAP financial measures, and a discussion of why we present these non-GAAP financial measures, are included in today's press release. I'll now turn the call over to Don.

Thank you, John. Good afternoon. Thank you for joining us for our Q1 2021 earnings call. Today, I will describe the opportunities we have for substantial value creation over the next five years and will provide a progress report on our strategic initiatives. John will recap our Q1 performance and finish with our updated outlook for 2021. We will conclude today's call with a Q&A session. The key points from my comments today are: first, we are now developing and supplying prototype and production thermal barriers to five of the 10 largest automotive OEMs; second, acid battery materials have received requests from five battery and automotive companies for evaluation samples of our carbon aerogel materials; and finally, our energy infrastructure business is showing early signs of a post-pandemic rebound, including a new LNG win. At the time of our last earnings call, we posted a new company presentation on our website. I want to share key points captured in that deck, because to appreciate our full potential it is important to understand our strategy, the scope of our opportunities, and the progress we are making to create value. Leveraging our aerogel technology platform is at the core of our strategy to be a global technology leader in sustainability, with a focus on multibillion-dollar opportunities in high-growth, high-value markets and on creating a proprietary diverse and valuable business. We have several opportunities currently in motion that fit this profile, with the spectrum spanning from those in the R&D phase to those in full commercial mode. I will discuss three of them today: PyroThin thermal barriers, which we believe represent an opportunity through this decade of $30 billion; acid battery materials, which we believe represent an opportunity through this decade of over $35 billion; and Pyrogel and Cryogel products for energy infrastructure, which we believe represent an opportunity during this decade of over $30 billion. Our PyroThin thermal barriers allow EV manufacturers to manage thermal runaway. Thermal runaway is the phenomenon where a cell in a lithium-ion battery pack has a sudden release of energy that can result in a fire and it is a challenge for all EV battery platforms. PyroThin thermal barriers are designed to impede the propagation of thermal runaway and to reduce the severity of the event. Aspen's technology offers a unique combination of performance attributes that enable EV manufacturers to achieve critical safety goals without sacrificing driving range. In Q4, 2020, we announced that a major U.S. automotive OEM awarded Aspen contracts to supply PyroThin thermal barriers for use in its EV battery platform. We have the potential from these contracts alone to generate revenue of $75 million in 2023 and $150 million per year from 2024 through 2030. These contracts alone represent an opportunity of approximately $1 billion for Aspen over this decade. The ultimate value of the contract depends on our customers' success in participating in the global transformation to electric vehicles, and we believe this customer is well positioned to succeed. Since that time, we have developed a robust business development pipeline for PyroThin thermal barriers. We are becoming a leading industry resource for the rapid development, testing, and prototyping of thermal runaway solutions for mitigating the impact of thermal runaway. It might be helpful for me to describe the various stages of our business development pipeline. The first stage is our initial engagement and is marked by the fact that we are connected with the subject matter expert at the target company to exchange technical ideas and requirements. We have dozens of companies in this category. I'm not going to focus on this first stage in my remarks today, but instead, on the more substantive second and third stages of our pipeline. In the second stage, we provide PyroThin samples to prospective customers for fundamental testing. We are involved with more than 15 companies in this phase, including automotive OEMs, battery OEMs, and stationary and energy storage companies. At this point, we engage more formally with the potential customers, apply our technical expertise, and provide optimal solutions to address thermal runaway in that customer's battery system. This group of companies represents commercial opportunities principally beginning in the 2022 to 2024 timeframe. In the third stage, we advanced to providing target customers with full thermal barrier prototype and production parts for system testing and integration. Our goal in this stage is to transition our potential customer for testing PyroThin samples to purchasing prototypes and on to awarding us multi-year supply contracts similar to the ones we announced in Q4 2020. We are now engaged with five of the 10 largest automotive OEMs in this third stage. Altogether, these five companies sold over 35 million ICE vehicles and EVs in 2019 and have committed more than $140 billion to electrification. Each of the companies has promised all-electric line-ups within a decade. These companies either have launched EVs or will launch EVs by 2022 and represent a great opportunity for Aspen to ramp volume quickly in the coming few years. With the accelerating pace of our thermal barrier work, we are increasing our investment in the business. We are recruiting people with deep automotive and EV experience, covering technology, supply chain, quality, automation, and business development. We are also planning a capital investment in our Advanced Thermal Barrier Center or ATBC. This investment is consistent with our goal to be the expert industry resource for thermal barrier solutions. This best-in-class facility will enable rapid prototyping, performance testing, collaborative customer engagement, and both low volume and automated production parts. We believe these investments and our thermal barrier opportunity have the potential to generate significant returns. The second opportunity I would like to review today is Acid Battery Materials, which we refer to as ABM, where we are deploying our carbon aerogel technology in the design of low-cost, high-performance silicon-rich anodes in lithium-ion batteries. The replacement of graphite anodes with silicon is widely viewed as the best near-term approach to boost lithium-ion battery performance and to reduce costs. The approach enables drop-in materials compatible with the manufacturing technology underlying today's battery gigafactories. Our work centers on leveraging our two decades of experience in the design and manufacture of aerogel nano materials at scale, in order to optimize the cost and performance of our carbon aerogels. We are confident that we can meet the targets set forth by our valuation partners. We are responding today to requests for evaluation samples from five battery and automotive companies. These companies are seeking high-capacity silicon anodes that are readily available to use with their current battery designs and that may play a role in future battery designs, including solid state. We are encouraged by the development of our silicon carbon aerogel solution. This increased level of market engagement in our carbon aerogels has given us the confidence to accelerate our plans to make additional investments in ABM. We are adding scientists and engineers to the team and have kicked off a significant facility expansion to accelerate the in-house development and testing of full multi-layer lithium-ion battery cells. This expansion will also speed market development by providing much-needed production capacity for larger quantities and evaluation materials to meet demand from the growing list of battery and automotive OEMs. The investment in the ABM facilities is being done in conjunction with an expansion of our overall laboratory assets that support our R&D and new business creation teams, all consistent with our strategy to leverage our aerogel technology platform into new high growth, high value markets. I'll now provide a few comments on our energy infrastructure business. Revenue of $28.1 million exceeded our expectations and was roughly on par with the pre-pandemic Q1 2020. One quarter alone does not signal an end to the pandemic, but there were green shoots that suggest a relatively good first half and something closer to normal as we work our way through the year. In particular, a few of our regions are beginning to show signs of a post-pandemic uptick in activity. In the U.S. market, we see our distributors beginning to restock and our end-users begin to address deferred maintenance work. We also see an increase in LNG project work, which includes the award of the Arctic LNG contract. We believe that we are well positioned to emerge from the COVID-19 period with a strong operating platform in energy infrastructure and significant strategic momentum for the company as a whole. At this point, I'd also like to provide an update on the targets and milestones for 2023 that we first introduced earlier this year. We set a revenue target of $225 million for 2023, approximately doubling revenue from our 2021 outlook. The breadth and intensity of our engagement with automotive OEMs around pyro and thermal barriers and the positive signs in the energy infrastructure market caused us to be yet more confident in our ability to achieve this 2023 revenue target. We also believe that we have the opportunity to double revenue not only between 2021 and 2023 but again between 2023 and 2025. Our belief is based both on the positive macro environment in support of e-mobility and on our potential for several additional multi-year battery platform wins for our unique and protected PyroThin thermal barrier technology. In addition to the investments that we are making to keep pace with the progress of PyroThin thermal barriers and Aspen battery materials, we are also planning to expand capacity with a second aerogel manufacturing plant. We have the required capacity today in our East Providence plant to support our 2023 revenue target of $225 million. But with the opportunity to double revenue again by 2025, we will need additional capacity by late 2023. We plan to build plant two in a modular fashion and will determine the capacity of the first phase of plant two based on the potential value of additional thermal barrier contract awards. A definitive plan for plant two comprised of a site location set schedule and an appropriate balance sheet is important to the large EV OEMs who want us not only to have ample capacity but also a diversity of manufacturing sites. We will share details of our plans for plant two in the coming months. Overall, the key points from my comments today are: first, we are developing and supplying prototype and production thermal barriers now to five of the 10 largest automotive OEMs. Aspen battery materials have received requests from five battery and automotive companies for evaluation samples of our carbon aerogel materials. Next, our energy infrastructure business is showing early signs of a post pandemic rebound including a new LNG win. And lastly, we have decided to accelerate investment in these businesses based on significant momentum and opportunity. John, I'll turn it to you.

Thanks, Don. I'll start by running through our reported financial results for the first quarter of 2021 at a summary level. Total revenue declined 1% to $28.1 million from $28.4 million in the first quarter of 2020. Net loss increased to $6.3 million or $0.22 per share this year versus a net loss of $3.2 million or $0.13 per share in the first quarter last year. Adjusted EBITDA was a negative $2.6 million compared to positive $500,000 a year ago. We define adjusted EBITDA as net income or loss before interest, taxes, depreciation, amortization, stock-based compensation expense and other items that we do not believe are indicative of our core operating performance. I'll now provide additional detail on the components of our results. First, I'll discuss revenue. Total revenue decreased by 1% to $28.1 million. This decrease in first quarter revenue was driven by a decrease in demand in the refinery and petrochemical market, particularly in Asia, and a decrease in project work in the subsea market, offset in large part by strong demand in the global LNG market led by shipments to the Arctic LNG and PTT LNG projects. Total shipments for the quarter increased 6% to 8.6 million square feet of aerogel blankets, while our average selling price decreased by 6% to $3.25 per square foot. The decrease in average selling price reflected a decrease in the mix of higher-priced subsea products and an increase in the mix of lower-priced 5-millimeter and LNG products this year versus the first quarter of 2020. Next, I'll discuss gross profit. Gross profit was $4 million or 14% during 2021 versus $6 million or 21% during 2020. This decrease in gross profit was driven by the 6% decrease in average sales price, an increase in material costs, offset in part by a 6% increase in volume and a reduction in manufacturing expense. I want to highlight that our first-quarter gross profit was reduced by $1.2 million, and our gross margin by 400 basis points, as a result of a $1.8 million reduction in our finished goods inventory during the quarter. We expect that those finished goods inventories will regain that contribution later in the year. Next, I'll discuss operating expense. First-quarter operating expense increased by $1.1 million or 12% versus last year to $10.1 million. The increase in operating expense was primarily the result of additional recruiting expense and compensation costs associated with new hires including those supporting our e-mobility business development initiatives, offset in part by reduced travel expenses associated with ongoing COVID-19 related restrictions. Next, I'll discuss our balance sheet and cash flow for the quarter. Cash used in operations of $1.9 million reflected our adjusted EBITDA of negative $2.6 million, offset in part by a $700,000 decrease in working capital investment during the quarter. The decrease in working capital was principally the result of a decrease in inventories of $2.3 million during the quarter. Capital expenditures during the quarter were $1.5 million. We're focused on improving the efficiency and reliability of our East Providence manufacturing facility and to a lesser extent establishing our thermal barrier fabrication operations. Cash provided by financing activities of $4.1 million is comprised of $6.2 million generated by our sale of equity for our existing ATM facility, offset in part by a net of $2.1 million of cash used for employee equity transactions. As a result, we ended the quarter with $17.2 million of cash, net current assets of $27 million, no borrowings under our revolving credit facility, and shareholders' equity of $66.6 million. We also had access to an additional $13.1 million available under our revolving credit facility at quarter end. I'll now turn to our full year 2021 outlook. Although COVID-19 continues to depress activity in our energy infrastructure markets, particularly in Asia, we're seeing early signs of improved demand in North and South America. As a result, we are now projecting revenue growth for the last three quarters of 2021 in the mid-single digits to mid-teens. We're increasing our 2021 revenue outlook by $3 million to between $103 million and $111 million for the year. We've also decided to increase our strategic investments during the remainder of 2021 in support of our e-mobility business development initiatives. This investment will include $10 million of incremental expense to enhance the technical, commercial and operational teams and resources in support of our thermal barrier and battery materials opportunities. Of the total, we expect to incur $6 million of incremental expense and cost of sales for additional manufacturing, fabrication, supply chain, quality, and engineering personnel, and the operating costs associated with our new fabrication facilities. We expect to incur the remaining $4 million of incremental expense in operating expense for scientists, researchers, salespeople, and administrative support personnel to expand and protect our patent portfolio including our e-mobility products and technology and for operating costs associated with our expanded research and corporate facilities. Our 2021 strategic investments will also include an incremental $18 million of capital expenditures to construct our advanced thermal barrier center, to expand our battery materials production, fabrication, and testing facilities and to complete the initial engineering designs for our second silica aerogel manufacturing plant. Including the strategic capital investment, we project our capital expenditures a range between $20 million and $25 million for the full year. We believe these strategic investments will position Aspen to take advantage of the significant growth opportunities available to us today in the electric vehicle market to leverage our aerogel technology platform, to develop new high-growth businesses and resume the strong operating performance that characterized 2019 as the impact of COVID-19 subsides. Including the impact of these strategic investments, our revised 2021 full year outlook is as follows: We expect total revenue of between $103 million and $111 million; net loss of between $28.3 million and $31.9 million; adjusted EBITDA between negative $15.2 million and negative $18.8 million; EPS of between a loss of $1.01 and a loss of $1.14 per share. This EPS outlook assumes a weighted average of 28 million shares outstanding for the year. In addition, this 2021 outlook assumes depreciation of $8.9 million, stock-based compensation expense of $4 million, and interest expense of $200,000. Full year outlook also projects the gross margin in the mid-teens, an average selling price of between $3.35 and $3.40 per square foot. Turning to cash, we're confident in our cash on hand, available credit, and proceeds from potential equity sales under our existing ATM facility that will be sufficient to fund operating requirements and strategic capital expenditures for the remainder of the year. Longer term, we're working on a number of potential financing alternatives to fund the construction of our second silica aerogel manufacturing facility, other capital expenditures required to support our e-mobility business opportunities and post 2021 operating requirements. We'll announce the additional details of the second plant and other capital projects as our planning efforts progress during the year. I'll now turn the call over to Mike for Q&A.

Your first question comes from Eric Stine from Craig-Hallum.

Hi, Don and John.

Hi, Eric.

Hi, Eric.

Based on the details, I don't really know where to start here, but maybe just on the thermal barrier side, talking about the progress you've made with the five that are more advanced. I'm curious how that has accelerated since you announced your first partner. Obviously, there's urgency from those five, but what are you seeing in terms of urgency in this area from the group? I would assume you still have confidence in securing at least one to two more this year?

Well, I think we are feeling that urgency and we believe, as we've said in the past, that now is the time to win these contracts. These are multi-year design wins, and I think just from an external point of view or a macro point of view, the momentum around e-mobility electrification and the proliferation of EVs is going at least as swiftly as people expected and maybe even more so. So, we believe that we will win additional contracts during 2021, Eric. The progress that we've made from stage one, as I described it, to two and now we're down into the third stage. We believe that we'll continue to move companies through that. I think the issue of thermal runaway is also becoming increasingly prevalent as you've seen recalls occur for many companies and other regulatory warnings around some of these things in all three regions in Asia, Europe and here in the United States.

Got it. One thing I know that as of later over the last couple of months, you got increased confidence in your ability to eventually flow through your current customers. I'm curious if that is still an area that you're confident in. And is there an event that triggers that, or how should we think about potential timing there?

Yes, we said that we expected to do it during the second quarter of this year, and we think that is still the case. It is interesting and not just with this one but with others who are in stage three. There is an element of strategy for them and in the way they might be addressing thermal runaway. And so I don't think all the companies are going to announce their decisions at the same time. Many companies might view this as a proprietary aspect of their battery platform and perhaps not want to do a big announcement. Having said that, we expect that we will be able to make announcements along the way because it's in their interest. We're investing in a second plant, as I said, a significant investment. We have to have the confidence. Our people have to understand what is the basis for that confidence and to have major players in the EV space align with the figure around thermal runaway. It's just an important endorsement and I think that capital decision will breathe that kind of major capital decision.

Right and fair to say that I mean that's a capital decision you wouldn't make if you didn't have a high level of confidence in additional business on both paths, thermal runaway and the carbon aerogel path?

Yes, that's correct. One of the advantages of our manufacturing plans is their modular design, similar to what we did in East Providence. We initially built a line, expanded it, and then added additional modules in subsequent lines. We are experienced in expanding the line gradually. A key consideration for the second plant is properly sizing the first module, which will depend on the contracts we have secured. This approach allows us to build based on actual demand rather than a speculative model, making our strategy truly demand-driven.

Absolutely. Very good to hear. Maybe last one for me just on the carbon aerogel path. Clearly last call you talked about that had accelerated. You've moved up the timeframe a little bit and it seems like it continues to do so. When you mentioned the five companies, does that five include SK and Evonik, or are those five in addition to those two?

It includes one of them.

Okay.

And I don't mean to be elusive about that. SK is very much on the customer side. And Evonik, as you know, is a supplier of materials to their partner to us in that sense. And so the five that we mentioned include one of which is SK or, let's say, market facing.

Okay. Got it. Thank you very much.

Thanks, Eric.

Thanks, Eric.

Your next question comes from Chris Souther from B. Riley.

Hi, guys. Thanks for taking my question here. Maybe to start on the $18 million incremental spend for the advanced thermal battery center. Is the completion of this investment acting as any kind of barrier to additional wins, do you think, or is this really just about demonstrating manufacturing expertise for these larger customers and kind of speeding up your production timeframes here? I just want to get a sense of how you guys are when you're kind of building this out to potentially demonstrate with customers the rationale and what the capabilities you're going to have coming out of that.

Sure, Chris. It really does both. So the advanced thermal barrier center will be a customer center where we'll do rapid prototyping in response to customer demand. We're doing that today but on a bit of a shoe string, so the ATBC will help us there. But it will also house our automated fabrication operations as well. We will be producing millions of thermal barriers for the contract that we've already won. We anticipate that with additional wins that number will only increase. We need to automate that thermal barrier fabrication operation in order to ultimately be successful delivering these components to our customers. So it will help us gain more customers and then it will help us produce product to those customers' contracts ultimately.

That makes a lot of sense. Regarding the planning for the second facility, it seems to depend on customer demand. As we look at potential awards coming in this year and next, how do we envision the ramp-up from 2022 to 2024 with various customers? Given the modular approach, when will you provide details to the market about your plans? The size of your targets may continue to change. I'm curious if we can expect more information by year-end, which could lead to further expansion in 2022 with new customer wins. How should we approach this?

Chris, I think we are going to build plant 2. For us, we are studying how big to build that first line if you will or that first phase of this project. It's important. I said it in my notes a little that it's important not only for capacity but also because these large OEMs are expecting us to have not only ample capacity, but they would also like to have a diversity of manufacturing sites. This is a significant commitment on our part to this new business that we've entered into. In terms of timing, I think that we will make announcements before the end of the year as to how this will play out in terms of site location and most probably size as well because we really need to get after it here. We need this capacity as we get late into 2023 and certainly by the time we start 2024. It's about a 24-month process. We have a dedicated team today working on this. As John described when we’re putting some of the initial design together, all the lessons we've learned from building line 1, line 2, and line 3 in our East Providence facility. A tremendous amount of work is being done on this today. So I think you can expect announcements sooner rather than later, certainly before the end of this year.

Got it. And then kind of 24 months from the start of production for kind of incremental lines, what would be the timeframe you think you'd need if you're going to expand it beyond the initial scope?

It definitely takes us less time to build the second phase. However, it likely shortens the timeline from 24 months to around 15 or 18 months. Once we have the structure and infrastructure in place, it will reduce the timeframe a bit. But we need to ensure the first phase is adequately sized to the best of our ability.

Understood and it makes a lot of sense. And then just last one here. On the $10 million in incremental expense this year on the EV side, you mentioned a split between COGS and OpEx. Can you talk about what the impact was in the first quarter? Maybe I missed that? And then what the cadence would be for the rest of the year for the rest of that spend maybe would be helpful?

Yes, that incremental spend is all Q2 through the end of the year. So it's going to come from this point forward. So it didn't include any expenses that we incurred in the first quarter.

What were kind of the impacts to COGS from the increased EV side?

It was about one point of margin at this time, which wasn't significant. However, it will increase rapidly as we transition from prototype production to full-scale commercial production. This was included in our initial projections. We are accelerating some expenses that we had originally planned for 2022 into 2021 due to the increased interest in our thermal barriers and our confidence that the thermal barrier business will grow quickly from 2022 through 2025.

I will hop in the queue. Thanks, guys.

Thanks.

Your next question comes from Jed Dorsheimer from Canaccord.

Hi, thanks for taking my questions. I have several, if you don't mind. I guess first maybe just energy infrastructure. I mean first off congrats on better top line and sort of the bold move of the capacity expansion at these levels. So if we just dig into the energy infrastructure, clearly pricing is starting to increase on the traditional hydrocarbon based fuels. Is there anything else other than rig counts and refiners' utilization that's driving a level of confidence on this side of the business in terms of that ramp? And then I've got follow-ups on the other two areas.

I think our indicators are sort of threefold. One is, we're seeing restocking. And you might remember in Q2 of last year, I talked about the destocking that we saw going on through our very well-established distribution channel here in the United States and around the world. Those distributors are pretty close to the ground so to speak and they have a good sense for what is happening facility by facility. So, we view that as a positive sign. Second, we have been clear that we believe that because of the low-density work sites that had been required during this COVID period, which continues in many parts of the world, most parts of the world probably, there is no question that there was deferred maintenance and we're beginning to see some of that deferred work be initiated and attempted here. We view that as a positive sign. And then third, we are seeing the project pipeline begin to come alive again. The worst thing that a contractor or asset owner could do is start a project and have its team on site, off-site, on site, off-site, it's a terrible way, an expensive way to run a project. So more projects than not just were either not started or put on hold. And we're beginning to see some of those come back to life here. We are positioned neatly in the specifications for several of these projects. So that gives us confidence. And of course, we announced earlier the new LNG project, so-called Arctic LNG that win. Those are three things, Jed, that we're seeing in the numbers and activity levels. Again, it's not true across the board or around the world entirely, but it's certainly true in pockets. And we think as the pandemic gets a little further behind us, it will become the case in most all regions.

Got it. And then just as a reminder on the value proposition if you will. I know on the oil side, I believe it thermal benefits on the heat as well as rust under pipe are kind of the major drivers. On the LNG, is that working the same, but cryogenically in terms of the cooler temps, or is that still a thermal heat value proposition there?

Thermal management remains a crucial aspect of our value proposition in this area. Fire protection is also significant. Particularly on the LNG side, we emphasize the ability to install our materials more quickly and with a less skilled workforce in modular yards rather than exclusively on site. The durability of our materials allows for easy transportation on pipes or vessels from a yard to remote locations. Our materials are designed to withstand this transport well. Therefore, our value proposition in the LNG sector is extensive and robust. Our consistent 50% revenue CAGR since 2015, following our investment in this area, illustrates our success effectively.

Got it. And then just maybe a pivot to the EV and the battery materials side, so on the thermal runaway opportunity, what are you replacing in terms of the core shell? Because there are thermal mitigation and propagation solutions in terms of mitigation reduction solutions now, so I'm just curious, what are you prepared at this point to sort of talk about the improvements that you're seeing against what an OEM or a battery manufacturer might be replacing and using your material instead?

I believe there are several factors to consider. Many of the battery platforms we are currently working with are new and are in the early stages of development. They are searching for the best materials to solve their challenges. In this context, we are not displacing an established product; rather, we are integral to the initial design of these battery platforms. This positions us strongly, which is why investing in the advanced thermal barrier center is critical for us to provide necessary support to address the common challenges faced by these battery platforms. Unlike the energy infrastructure business, where we had to overcome long-standing competitors through a lengthy process, we are making significant progress with these new battery platforms that do not have entrenched relationships with existing materials. Our material offers a rare blend of thermal management, non-combustibility, and mechanical durability while being very thin, which allows for more cells to fit and ultimately increases driving range. We believe we have a valuable product, and we are committed to guiding these companies through our development process as they finalize their battery platforms.

And then, last question, I guess, just on the battery materials on the anode side of things, obviously, moving to silicon on the anodes has a tremendous amount of benefits. But the issue has always been the coefficient of thermal expansion associated with the thermal increase. So I'm just curious, where are you in terms of the data with the testing with the five customers that you're in? Are there any metrics that you might be able to share at this point in terms of that solution?

Providing the data is a goal for us publicly here in 2021 and we think that it's a relatively bold move. Not many are doing that. We're eager to do it. And you're right, that is the challenge: expansion of silicon is significant, and how do you protect that expansion through cycle life? A lot of the work that we're doing with our evaluation partners revolves around exactly that cycle life. How durable are these materials? We think our carbon aerogels are a perfect scaffolding for that, given their mechanical durability, and our ability to manipulate pore size and create uniformity of the pore size. We're doing a variety of things that protect that silicon as well as possible. That's our focus, and an enormous amount of our scientific team is dedicated to that issue, but the idea of presenting our data publicly during 2021.

Great. Thank you.

Thank you, Jed.

Your next question comes from Doug Becker from Northland Capital.

Hi, Don.

Hi, Doug.

Don, you made the point, you're not knocking out incumbents specifically, but curious if there's been any notable changes around the competitive landscape with competing solutions for thermal barriers or the carbon aerogels?

We believe it's reasonable to assume that the automotive OEMs we're collaborating with, including five of the ten largest in the world, are evaluating all available materials. The OEM with whom we secured a contract began their process with various materials in the initial phase of a three-part RFQ, and we are currently making good progress in that process, as are many of these companies. While we are not fully aware of all the materials we are being compared to, we do know some. This is a challenging issue that does not have simple solutions. Our product, PyroThin, stems from the passive fire protection materials we use in energy sectors, where such protection is vital. We have significantly optimized it for lithium-ion batteries, and we already had substantial knowledge of the challenges before we began. This has positioned us strongly. You also mentioned acid battery materials and silicon-rich anode materials. There are numerous companies focused on these areas, with a consensus that incorporating silicon into current lithium-ion batteries is a sensible step forward in the technology roadmap. The major advantage is that it aligns well with the existing manufacturing processes of these factories, some of which are already operational while others are expected to commence soon. This alignment is essential for these materials, and we believe this view is shared widely. Since our last update, we have added three more companies requesting samples after reviewing our data and materials, indicating that interest is growing. We have much to accomplish, and we are investing in the business by bringing in additional scientists and engineers. Our confidence has increased, and we think the next steps include sharing data, comparing that data with other solutions, and announcing further partnerships alongside our existing collaborations in Korea and Germany.

That all sounds very consistent with what you've said in the past, yes competitors are out there, but no major changes in that plan as what it is. And then maybe a quick update on the opportunity for stationary energy storage and distributed generation. It seems to get a lot of airtime today. Has that opportunity just kind of taken a back seat given the other opportunities we have right in front of you?

Not really actually. I mean, certainly, our team is focused on. Obviously, the EV space is so prevalent right now, out there in the world. The stationary energy systems are typically associated with residential or small business, so behind-the-meter types of solar to battery systems. Again, using the same lithium-ion technology battery cells, typically perched up next to one's home, and some of the formal runway issues are prevalent there as well. We have continued to make progress with two entities, one in Germany, one here in the United States. We've made good progress with them, but I think it's a really interesting and important area for us.

And I think last quarter, you mentioned you were involved in some RFQs that I assume those are still continuing to move forward. But is there any way to frame the opportunities specifically from this aspect of the business?

I think we have five major OEMs in the third stage of our development process. Think of that as pretty advanced. Whether it's exactly an RFQ or not, or advanced prototyping and providing production parts, it's pretty advanced at this point. I'd say they've limited their choices down to very, very few possible solutions, so we haven't won until we win, but we feel strongly that we're in an excellent position to be able to announce some additional contracts this calendar year.

And just to clarify, I was actually specifically talking about the stationary energy storage.

Excuse me. I would say that we'll have one of those announced here in 2021.

Perfect. Thank you.

Thank you, Doug.

Your next question comes from Amit Dayal from H.C. Wainwright.

Hi, Amit.

Good afternoon. How are you?

Sorry, I was on mute.

Hey, Amit. How are you?

Thank you. With respect to this EV opportunity, there have been some recent headlines about supply chain challenges in the auto space. Is that impacting any of your timeline or is that not much of a concern at this point?

It is not directly impacting us in terms of semiconductor shortages. However, there may be some indirect effects that could slow things down. Overall, everyone, whether a major OEM or a supplier like Aspen, is facing supply chain challenges. The supply chains are not designed to repeatedly start and stop; they experienced significant slowdowns or halts for many parts. Resetting these supply chains will take some time, and there may be disruptions along the way. That said, we do not anticipate any issues on our end.

Understood. Thank you for that. And then, you had indicated you're expecting single-digit millions to sales into that opportunity for 2021 and 2022. Is there any change to that outlook, or are you still sort of in that realm?

We believe that's a reasonable expectation for you. However, I have noted that we are increasingly confident about our target of $225 million for 2023, especially considering the progress we've made with major automotive OEMs in the third stage of our development process. Our energy infrastructure business is showing signs of returning to normal. While there is still a way to go, things are moving in a positive direction. This was reflected in our revenue for Q1, which exceeded our expectations. One quarter alone doesn't signify the end of the pandemic, but we feel we are on the right path. Therefore, we are optimistic about our 2023 target, which we believe will be supported by the revenue growth from 2021 and 2022. The investments we are making and our ability to advance towards automated, higher-volume production of thermal barrier parts are crucial for our success.

One other comment, single-digit millions in 2021 and 2022 was from the US-based automotive OEM alone. If we have additional contract wins, it could give us upside on those numbers, particularly in 2022. But as long as the US automotive company is successful, we should achieve those numbers, and additional contract wins would give us upside.

All right. Thank you for that clarity and that’s helpful. Just one last one for me, the decrease in average selling prices, maybe because of the product mix in 1Q, is this sort of a temporary situation and you guys are managing through this going forward?

Yes, it really is a function. We sold a lot of 5-millimeter product and we sell our 5-millimeter product for about half the average selling prices of the 10-millimeter products. So that mix drove it down. It is project related. We'd expect that to continue into the second quarter, but to sort of resume our higher levels of average selling prices in the second half of the year. Just to clarify, our bill of material costs per square foot for the thinner product for the 5-millimeter product is lower as well. We really maintain our margin. We have lower revenues and we also have lower material costs, which give us the same contribution. There's been no economic degradation on it and we'll rebound in the second half of the year.

Understood. Thank you for that. Hey, that’s all I have. Appreciate all the color. Thank you.

Your next question comes from Jeffrey Campbell from Alliance Global Partners.

Good afternoon. And thanks for squeezing me in. The first thing I wanted to ask about, Don, I just wondered if there was much segregation between those battery folks that are deep into PyroThin adoption or sampling and testing, and those that are showing the strong and increasing interest in the common anode product. It seems like these are both the necessary products in the same battery assuming that they performed to expectations.

Yes, it's a good question, and I would say that when I think about it, there is overlap. But I would say there are different groups within these firms who are working on these things. There are only so many players, let's face it, at the end of the day, and we believe there will be only so many successful players at the end of the day. Some of the incumbents will be successful and some of the newcomers will be. It's not too surprising.

Okay. Well, thank you for that. Regarding the OEMs and the battery manufacturers that are in the second or third of the PyroThin phases that you outlined, can you provide some color just on geography like US, EU, Asia to get a sense of that?

They represent all three major regions. So, this isn't going to be terribly helpful, but there are participants from Asia, participants from Europe, and participants from the US in Phases 2 and 3.

Within Asia, it's China and other countries as well. So, a really great geographic diversity.

Yes, John, your mention of China is noteworthy because we've previously discussed an entity there that infringes on your patents. However, it seems that your work in China suggests there's more involved than simply producing some aerogel, unless all the other research has been completed and the collaborators you're working with are at a different stage. Is that the correct interpretation?

Yes, I believe there are companies that aim to become international and we have been very proactive and successful in protecting our intellectual property globally. I want to emphasize that if these companies aspire to be international, they shouldn't be violating intellectual property, and we've observed this in their actions as well.

That's a great point. They want to be able to sell outside of the moat. My last question, and you sort of alluded to this earlier, but I'll just add a little bit of color to it. You mentioned that some large OEMs are cognizant about the diversity of supply locations. I was just wondering as you're planning your future roof line expansion, maybe not just Phase 2 but maybe even in a further phase as it comes to that. Are there any potential large foreign customers that are indicating that Pyrogel or a PyroThin facility source closer to their manufacturing capability? Is there any importance to that?

Jeffrey, our materials ship very effectively and cost effectively. We've exported historically approximately two-thirds of our product to all corners of the globe. Having ample supply and having a diversity of supply are the two most important things. Having a nearby supply I think has been voiced as much a nice-to-have and not a requirement. As we come to a full capacity of plant 2, we will have to think very hard about where we locate plant 3, and it's very likely driven by where we are particularly successful on the thermal barrier side of the plate. I could make a good argument for Europe and I can make a good argument for Asia. So we'll see how it plays out.

In the interim as well, we could site fabrication operations in Europe and in Asia but make the base aerogel-based PyroThin product here in the US just to ensure we have that proximity and quick turnaround on prototype designs and delivery of fabricated parts.

That's a really good point, John. I think you'll see more of that. That is much lighter afoot to do that sort of thing than to build a full-fledged aerogel manufacturing plant. It's a very logical maybe interim.

Yes. I appreciate that color. That makes further sense. Thank you.

Great. Thank you, Jeffrey. Appreciate it.

The Q&A session is now ended. I will turn the call back over to Don Young for closing remarks.

Thank you, Mike. Appreciate it. Thanks for your help. Thank you everyone. We appreciate your interest in Aspen Aerogels and we look forward to reporting our Q2 results in late July. Be well and have a good evening. Thanks very much. Take care.

This concludes today's conference call. Thank you for participating. You may now disconnect.