Aspen Aerogels, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; comparisons are with the three months ended March 31, 2018 unless noted. Aspen designs and manufactures aerogel insulation and also performs contract research. Amounts below are in U.S. dollars; financial statement amounts are in millions unless indicated otherwise.
Financial results and liquidity
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Total revenue | $27.9 | $23.1 | +21% |
| Gross profit / gross margin | $3.7 / 13% | $2.8 / 12% | +$0.9; margin improved |
| Operating expenses | $9.7 | $9.6 | +1% |
| Operating loss | $(6.0) | $(6.8) | Loss narrowed |
| Net loss / loss per share | $(6.0) / $(0.25) | $(6.8) / $(0.29) | Loss narrowed |
| Adjusted EBITDA (non-GAAP) | $(2.6) | $(2.4) | Loss widened slightly |
| Net cash used in operations | $(3.0) | $(2.4) | Use increased |
| Capital expenditures | $0.6 | $0.7 | Use decreased |
- Product revenue was $26.8 million, up 19%; research services revenue was $1.1 million, up 104%. Subsea project revenue was $4.7 million versus $0.8 million. Product shipments rose 12% to 8.7 million square feet, while average selling price increased 6% to $3.08 per square foot.
- Higher sales reflected subsea project activity, growth in petrochemical and refinery markets, and early-2019 price increases. Higher silica costs and shipment volume increased product costs; product cost as a share of product revenue improved slightly to 88% from 89%.
- At March 31, cash was $3.4 million, current assets $35.8 million, and current liabilities $20.7 million. The company had $3.3 million outstanding under its revolving credit facility and reported $7.1 million of effective availability after borrowings and letters of credit. Operating cash use plus capital spending was approximately $3.6 million.
- Total liabilities were $35.4 million, including $9.8 million of long-term BASF prepayment liability and $5.9 million of operating lease liabilities. Stockholders’ equity was $64.7 million. The credit facility matures April 28, 2020; the company reported covenant compliance at quarter-end.
Material changes and operating developments
- Revenue growth outpaced cost growth, increasing gross profit to $3.7 million. Operating expenses were nearly flat; lower general and administrative expense was partly offset by higher research and development spending.
- Capacity at the East Providence facility was approximately 55 million square feet annually at quarter-end, up from the prior level; the company’s plan targets approximately 60 million square feet by the end of 2020. It expects up to an additional $12 million of expansion expenditures through 2020.
- BASF made an additional $5 million prepayment in January, bringing total prepayments received to $10 million. These funds are liabilities subject to future product credits and potential repayment under specified terms; BASF is not obligated to purchase products under the supply agreement.
- The credit facility was amended to extend maturity, revise borrowing-base terms, remove the adjusted quick-ratio covenant, and establish minimum EBITDA levels for the extended term.
- Adoption of the new lease standard on January 1, 2019 added approximately $6.0 million of lease liabilities and $4.6 million of right-of-use assets; management said adoption did not materially affect net loss or operating cash flow.
Outlook, risks and contingencies
- Management projected 2019 revenue growth exceeding 20% versus 2018, a lower net loss, and a return to positive Adjusted EBITDA. Drivers cited include core-market volume growth, subsea and LNG project demand, new-market penetration, and price increases. These are forward-looking targets, not guarantees.
- Management expects 2019 gross profit to improve in dollars and as a percentage of revenue, citing pricing, product mix, cost initiatives, and manufacturing leverage. It also expects R&D expense to increase in 2019; results may vary with volumes, mix, raw-material prices, yields, capacity costs, and timing of projects.
- The company stated that cash and available credit will fund only part of planned expansion and strategic initiatives; it expects to need operating cash flows and/or additional debt, customer prepayments, licensing agreements, or equity financing. The credit facility must be extended or replaced before its April 2020 maturity.
- Warranty testing identified a product attribute that may be outside published specifications. The company considers a liability probable but could not estimate an amount at March 31; future warranty charges may result. No warranty expense was recorded in Q1.
- Patent enforcement proceedings remain ongoing in multiple jurisdictions, with potential for protracted litigation and significant legal expense. German court judgments in March found infringement of one patent and ordered injunctions, damages, information, and recall remedies; appeals may follow. The company said it could not predict litigation outcomes or costs.
- A Brazilian customer, Qualiman, owes approximately $2.9 million in past-due invoices. The company prevailed in the underlying payment proceedings, but recovery remains ongoing and depends on Qualiman’s liquidity.
Important facts for investors to verify
- Whether the projected 2019 growth, margin improvement, and positive Adjusted EBITDA are achieved, and whether capacity expansion remains on schedule and within expected cost.
- Cash burn, borrowing-base availability, covenant compliance, and plans to extend or replace the credit facility before maturity; assess the need for additional financing.
- Progress in realizing BASF prepayments through sales credits, and the potential repayment exposure if balances remain uncredited under the agreement terms.
- Any estimate or development concerning the unquantified product warranty exposure, and the outcome, timing, and costs of patent litigation.
- Collection of the Qualiman receivable and the concentration and timing of large distributor and project-based sales.