Aspen Aerogels, Inc. — Q3 2018 Form 10-Q
Reporting period: Quarter ended September 30, 2018; balance-sheet figures are as of September 30, 2018. Comparative income-statement figures are for Q3 and the nine months ended September 30, 2017. Amounts below are in U.S. dollars.
Business context
Aspen designs and manufactures aerogel insulation for energy infrastructure, building materials and other markets, and performs contract research. It operates as one segment, with manufacturing at its East Providence, Rhode Island facility. Management cited lower subsea and South American project activity and the completion of major prior-year projects as key factors in 2018’s revenue decline.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Total revenue | $23.9m | $27.2m | $68.7m | $75.3m |
| Gross profit / margin | $1.5m / 6% | $4.9m / 18% | $7.1m / 10% | $10.9m / 14% |
| Operating loss | $(6.4)m | $(3.0)m | $(20.0)m | $(17.5)m |
| Net loss | $(6.5)m | $(3.1)m | $(20.3)m | $(17.6)m |
| Net loss per share, diluted | $(0.27) | $(0.13) | $(0.86) | $(0.76) |
| Adjusted EBITDA, non-GAAP | $(2.7)m | $1.1m | $(8.3)m | $(5.5)m |
For the nine months, product shipments declined 11% to 22.7 million square feet; product revenue fell 9%. Average selling price rose 2% to $2.95 per square foot, but lower volume reduced product revenue by $8.4m, partly offset by a $1.7m benefit from price increases. In Q3, shipments fell 10%, average selling price declined 4% to $2.99, and product revenue decreased 13%. Product cost of revenue was 91% of product revenue for the nine months, versus 86% a year earlier, reflecting weaker revenue against largely fixed manufacturing costs and higher silica costs.
Operating expenses totaled $27.1m for the nine months, down from $28.4m. Lower general and administrative expense, chiefly due to $2.4m less patent-enforcement spending, was partly offset by higher sales and marketing expense. No income tax provision was recorded because net operating losses were covered by a full valuation allowance.
Cash, liquidity and capital plans
- Cash and cash equivalents were $5.2m, down from $10.7m at December 31, 2017. Net cash used in operations was $8.7m, compared with $5.0m in the prior-year period; capital expenditures were $2.7m, versus $5.4m.
- At September 30, borrowings under the revolving credit facility were $5.2m; outstanding letters of credit were $2.0m, leaving $8.0m effectively available. The facility permits up to $20.0m subject to borrowing-base limits and covenants, and matures April 28, 2019. The company reported covenant compliance at quarter-end, but had obtained two 2018 waivers related to its Adjusted Quick Ratio covenant.
- Aspen received $5.0m in BASF prepayments. The balance-sheet prepayment liability, net of discount, was $4.1m; the prepayment is to be credited against qualifying BASF purchases or may be repayable if uncredited amounts remain after December 31, 2021. The agreement is secured by specified Rhode Island assets and intellectual property. BASF may make additional prepayments, up to $22.0m in aggregate over the agreement’s term, at its discretion.
- Management said existing cash and available credit would fund only part of planned investment and that additional operating cash flow, grants, debt, customer prepayments, licensing proceeds or equity financing would be needed to complete strategic plans. The East Providence expansion is intended to raise annual nameplate capacity from 50m to 60m square feet by the end of 2020, with up to $12m of additional capital spending expected. The planned Statesboro, Georgia facility, with up to $130m of projected capital expenditures, was delayed pending demand assessment.
Outlook, risks and unusual items
- Management outlook: Aspen projected 2019 revenue growth of more than 20% versus 2018, a smaller net loss and a return to positive Adjusted EBITDA. Management attributed the outlook to expected petrochemical and refinery volume growth, anticipated subsea and LNG project demand, and a 2019 price increase. These are forward-looking expectations, not guarantees.
- Warranty exposure: Testing during the first nine months indicated that samples for a product attribute were outside published specifications. The company determined a liability was probable but could not estimate it at September 30; no warranty expense was recorded for the period. Management warned that future charges could be material. Aspen recorded $0.9m of warranty expense in the first nine months of 2017 for a separate product-application issue.
- Costs and capacity: Management reported a significant increase in silica precursor costs amid a silanes-market supply imbalance. Lower manufacturing output and fixed costs also weighed on margins. Statesboro incentives could be terminated if construction did not commence by February 15, 2019.
- Liquidity risk: The company said it needs additional funding for expansion and strategic initiatives. The credit facility’s near-term maturity, borrowing-base and covenant requirements, and prior covenant waivers are relevant risks.
- Legal matters: The ITC exclusion order against two manufacturers’ infringing imports remained in effect; one respondent appealed part of the determination. In Brazil, a court ruled in October 2018 for Aspen on approximately $2.9m of past-due invoices, subject to appeal. The company said it had no litigation loss that it considered probable and requiring accrual.
- Other notable disclosure: A new CEO employment agreement, effective January 1, 2019, provides specified severance and change-of-control benefits, including a potential transaction bonus tied to the change-of-control price and net proceeds.
Most important facts for investors to verify
- Whether revenue, shipment volumes, pricing and margins recover as management projected for 2019, and whether the company achieves positive Adjusted EBITDA.
- Updates on the product-specification testing, the possible warranty liability and any related customer claims or costs.
- Cash use, access to additional financing, covenant compliance and renewal or replacement of the credit facility before its April 2019 maturity.
- Progress, spending and demand support for the East Providence expansion and the delayed Statesboro project, including the status of Georgia incentives.
- Collection of the Brazilian receivable and developments in the patent litigation and appeals.