Aspen Aerogels, Inc. — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019; comparisons are with the corresponding 2018 periods. Aspen designs and manufactures aerogel insulation and also performs contracted research. All dollar amounts below are in millions unless otherwise stated.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $35.4 | $23.9 | $92.9 | $68.7 |
| Gross profit / margin | $7.7 / 21.9% | $1.5 / 6.4% | $15.0 / 16.1% | $7.1 / 10.3% |
| Operating loss | $(2.2) | $(6.4) | $(13.3) | $(20.0) |
| Net loss | $(2.3) | $(6.5) | $(13.6) | $(20.3) |
| Adjusted EBITDA (non-GAAP) | $1.4 | $(2.7) | $(2.8) | $(8.3) |
- Q3 revenue rose 48%; product revenue grew 50% to $35.0 million. Shipments increased 33% to 10.36 million square feet, while average selling price rose 13% to $3.38 per square foot.
- Nine-month revenue grew 35%. Product shipments increased 21% to 27.47 million square feet and average selling price increased 12% to $3.30 per square foot. Product revenue was 98% of nine-month revenue.
- Management attributed growth primarily to North American petrochemical and refinery demand, LNG and subsea projects, and early-2019 price increases. Building-materials and Asian petrochemical shipments partly offset nine-month growth.
- Gross margin improvement reflected higher prices and volume, and fixed manufacturing costs spread over higher sales; the company also cited unfavorable product mix during the nine-month period and higher material costs.
Cash flow, balance sheet and liquidity
- For the nine months, operating cash use was $5.8 million, investing cash use was $1.6 million, and financing provided $5.2 million. Cash declined $2.1 million from year-end 2018 to $1.2 million at September 30, 2019.
- At September 30, cash was $1.2 million; current assets were $40.5 million and current liabilities $25.7 million. Total assets were $100.1 million, total liabilities $41.0 million, and stockholders’ equity $59.1 million.
- Revolver borrowings were $4.9 million, with $0.7 million of letters of credit and $7.6 million available after those amounts. The $20 million facility matures April 28, 2020 and is subject to borrowing-base requirements and covenants. Aspen reported compliance with covenants and intends to extend or replace the facility.
- Aspen had received $10 million in BASF customer prepayments, recorded as a liability; less than $0.1 million had been credited against invoices. Contract terms may require credits against future sales or repayment of uncredited balances under specified circumstances.
- Inventories increased to $13.5 million from $7.3 million at year-end 2018. Accounts receivable was $24.4 million. The company reported that collection of a $2.6 million remaining balance from Qualiman was unlikely and wrote it off against the allowance.
Outlook, risks and unusual items
- No specific numerical revenue or earnings guidance is provided. Management said it expected operating expenses in the fourth quarter and full year 2019 to be significantly lower than the comparable 2018 periods, principally because 2018 included a $7.4 million construction-in-progress impairment and a $2.8 million reserve for uncollectible receivables.
- Aspen was expanding its East Providence facility: estimated annual nameplate capacity was approximately 55 million square feet at quarter-end, with a stated target of approximately 60 million by the end of 2020. Management said existing cash and available credit would fund only part of planned expansion and strategic initiatives; additional operating cash flows, debt, customer prepayments, licensing or equity financing may be needed.
- The company reported a $13.6 million nine-month net loss and $5.8 million operating cash use, while holding only $1.2 million cash. It also identified the need to manage capital expenditures and working capital to preserve liquidity.
- Litigation remains a potential source of cost and uncertainty. The U.S. ITC exclusion order against Nano and Alison remained in effect, and patent proceedings continued in Europe and Asia. Aspen stated that protracted proceedings could involve significant legal expenses.
- In Brazil, Aspen had pursued approximately $2.9 million of past-due invoices from Qualiman; it had recovered $0.3 million, while additional recovery was considered unlikely after Qualiman entered judicial reorganization.
- Other notable items: the company adopted lease accounting in 2019, recognizing operating lease liabilities of approximately $6.0 million at adoption; management said this did not materially affect net loss or operating cash use. The company had a full valuation allowance against deferred tax assets and recorded no income-tax provision.
Important facts for investors to verify
- Whether revenue growth, pricing and product mix sustain the improved gross margins and progress toward positive operating cash flow.
- How Aspen will fund the capacity expansion and strategic investments, and whether it can extend or replace the revolver before its April 2020 maturity while meeting borrowing-base and EBITDA covenant requirements.
- Future cash-credit or repayment obligations related to BASF’s $10 million prepayments, and whether BASF purchases develop despite having no purchase obligation under the supply agreement.
- Customer concentration and collection exposure, including the Qualiman loss and significant project-related sales.
- Potential legal costs and outcomes of ongoing patent matters, along with execution and demand risks around the facility expansion.