ASPN 10-Q
Aspen Aerogels Inc (ASPN)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number:
(Exact name of registrant as specified in its charter)
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(State or other jurisdiction of incorporation or organization) |
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(I.R.S. Employer Identification No.) |
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(Address of principal executive offices) |
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(Zip Code) |
Registrant’s telephone number, including area code: (
Securities registered pursuant to Section 12(b) of the Act:
Title of each class |
Trading Symbol |
Name of exchange on which registered |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer |
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Non-accelerated filer |
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Smaller reporting company |
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Emerging growth company |
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
As of October 31, 2023, the registrant had
ASPEN AEROGELS, INC.
INDEX TO FORM 10-Q
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Item 1. |
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Consolidated Balance Sheets (unaudited) as of September 30, 2023 and December 31, 2022 |
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Item 2. |
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Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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Item 3. |
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35 |
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Item 4. |
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35 |
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Item 1. |
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37 |
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Item 1A. |
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37 |
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Item 2. |
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39 |
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Item 3. |
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39 |
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Item 4. |
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39 |
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Item 5. |
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39 |
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Item 6. |
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40 |
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41 |
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Trademarks, Trade Names and Service Marks
We own or have rights to use “Aspen Aerogels,” “Cryogel,” “Pyrogel,” “Spaceloft,” “PyroThin,” the Aspen Aerogels logo and other trademarks, service marks and trade names of Aspen Aerogels, Inc. appearing in this Quarterly Report on Form 10-Q. Solely for convenience, the trademarks, service marks and trade names referred to in this report are presented without the ® and TM symbols, but such references are not intended to indicate, in any way, that the owner thereof will not assert, to the fullest extent under applicable law, such owner’s rights to these trademarks, service marks and trade names. This report contains additional trademarks, service marks and trade names of other companies, which, to our knowledge, are the property of their respective owners.
PART I — FINANCIAL INFORMATION
Item 1. Financial Statements.
ASPEN AEROGELS, INC.
Consolidated Balance Sheets
(Unaudited)
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September 30, |
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December 31, |
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2023 |
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2022 |
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(In thousands, except |
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Assets |
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Current assets: |
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Cash and cash equivalents |
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$ |
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$ |
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Restricted cash |
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Accounts receivable, net of allowances of $ |
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Inventories |
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Prepaid expenses and other current assets |
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Total current assets |
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Property, plant and equipment, net |
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Operating lease right-of-use assets |
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Other long-term assets |
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Total assets |
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$ |
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$ |
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Liabilities and Stockholders’ Equity |
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Current liabilities: |
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Accounts payable |
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$ |
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$ |
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Accrued expenses |
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Deferred revenue |
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Operating lease liabilities |
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Total current liabilities |
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Convertible note - related party |
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Operating lease liabilities long-term |
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Total liabilities |
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Stockholders’ equity: |
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Preferred stock, $ |
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Common stock, $ |
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Additional paid-in capital |
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Accumulated deficit |
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( |
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Total stockholders’ equity |
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Total liabilities and stockholders’ equity |
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$ |
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$ |
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See accompanying notes to unaudited consolidated financial statements.
1
ASPEN AEROGELS, INC.
Consolidated Statements of Operations
(Unaudited)
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Three Months Ended |
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Nine Months Ended |
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September 30, |
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September 30, |
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2023 |
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2022 |
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2023 |
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2022 |
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(In thousands, except |
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Revenue |
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$ |
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$ |
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$ |
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$ |
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Cost of revenue |
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Gross profit (loss) |
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( |
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Operating expenses: |
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Research and development |
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Sales and marketing |
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General and administrative |
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Total operating expenses |
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Loss from operations |
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( |
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( |
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( |
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Other income (expense) |
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Interest expense, convertible note - related party |
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( |
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( |
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( |
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( |
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Interest income, net |
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Income from Employee Retention Credits |
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— |
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— |
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Total other income (expense), net |
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( |
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( |
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Net loss |
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$ |
( |
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$ |
( |
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$ |
( |
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$ |
( |
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Net loss per share: |
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Basic and diluted |
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$ |
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$ |
( |
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$ |
( |
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$ |
( |
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Weighted-average common shares outstanding: |
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Basic and diluted |
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See accompanying notes to unaudited consolidated financial statements.
2
ASPEN AEROGELS, INC.
Consolidated Statements of Stockholders’ Equity
(Unaudited)
(In thousands, except share data)
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Preferred Stock |
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Common Stock |
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Additional |
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Accumulated |
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Total Stockholders' Equity |
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Shares |
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Value |
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Shares |
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Value |
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Balance at December 31, 2022 |
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— |
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$ |
— |
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$ |
— |
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$ |
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$ |
( |
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$ |
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Net loss |
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— |
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— |
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— |
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— |
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— |
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( |
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( |
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Stock compensation expense |
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— |
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— |
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— |
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— |
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— |
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Vesting of restricted stock units |
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— |
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— |
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— |
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( |
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— |
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( |
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Proceeds from employee stock option exercises |
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— |
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— |
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— |
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— |
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Balance at March 31, 2023 |
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$ |
— |
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$ |
— |
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$ |
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$ |
( |
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$ |
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Net loss |
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— |
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— |
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— |
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— |
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— |
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( |
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( |
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Stock compensation expense |
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— |
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— |
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— |
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— |
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— |
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Issuance of restricted stock |
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— |
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— |
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— |
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— |
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— |
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— |
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Vesting of restricted stock units |
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— |
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— |
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— |
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( |
) |
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— |
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( |
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Proceeds from employee stock option exercises |
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— |
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— |
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— |
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— |
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Balance at June 30, 2023 |
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— |
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$ |
— |
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$ |
— |
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$ |
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$ |
( |
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$ |
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Net loss |
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— |
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— |
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— |
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— |
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— |
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( |
) |
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( |
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Stock compensation expense |
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— |
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— |
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— |
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— |
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— |
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Vesting of restricted stock units |
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— |
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— |
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— |
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( |
) |
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— |
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( |
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Proceeds from employee stock option exercises |
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— |
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— |
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— |
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— |
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Issuance costs from underwritten public offering |
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— |
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— |
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— |
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— |
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( |
) |
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— |
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( |
) |
Balance at September 30, 2023 |
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— |
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$ |
— |
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$ |
— |
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$ |
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$ |
( |
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$ |
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Preferred Stock |
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Common Stock |
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Additional |
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Accumulated |
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Total Stockholders' Equity |
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Shares |
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Value |
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Shares |
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Value |
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Balance at December 31, 2021 |
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— |
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$ |
— |
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$ |
— |
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$ |
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$ |
( |
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$ |
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Net loss |
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— |
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— |
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— |
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— |
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— |
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( |
) |
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( |
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Stock compensation expense |
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— |
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— |
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— |
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— |
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— |
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Vesting of restricted stock units |
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— |
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— |
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— |
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( |
) |
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— |
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( |
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Proceeds from employee stock option exercises |
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— |
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— |
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— |
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— |
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Proceeds from at-the-market offering, net of commissions of $ |
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— |
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— |
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— |
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— |
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Proceeds from private placement of common stock, net of fees and issuance costs of $ |
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— |
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— |
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— |
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— |
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Balance at March 31, 2022 |
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— |
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$ |
— |
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$ |
— |
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$ |
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$ |
( |
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$ |
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Net loss |
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— |
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— |
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— |
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— |
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— |
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( |
) |
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( |
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Stock compensation expense |
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— |
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— |
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— |
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— |
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— |
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Issuance of restricted stock |
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— |
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— |
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— |
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— |
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— |
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— |
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Vesting of restricted stock units |
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— |
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— |
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— |
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( |
) |
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— |
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( |
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Proceeds from employee stock option exercises |
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— |
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— |
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— |
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— |
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Proceeds from at-the-market offering, net of commissions of $ |
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— |
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— |
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— |
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— |
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Balance at June 30, 2022 |
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— |
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$ |
— |
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$ |
— |
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$ |
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$ |
( |
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$ |
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Net loss |
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— |
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— |
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— |
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— |
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— |
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( |
) |
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( |
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Stock compensation expense |
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— |
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— |
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— |
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— |
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— |
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Issuance of restricted stock |
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— |
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— |
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— |
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— |
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— |
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— |
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Vesting of restricted stock units |
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— |
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— |
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— |
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— |
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— |
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— |
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Proceeds from at-the-market offering, net of commissions of $ |
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— |
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— |
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— |
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— |
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Balance at September 30, 2022 |
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— |
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$ |
— |
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$ |
— |
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$ |
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$ |
( |
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$ |
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See accompanying notes to unaudited consolidated financial statements.
3
ASPEN AEROGELS, INC.
Consolidated Statements of Cash Flows
(Unaudited)
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Nine Months Ended |
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September 30, |
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2023 |
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2022 |
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(In thousands) |
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Cash flows from operating activities: |
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Net loss |
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$ |
( |
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$ |
( |
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Adjustments to reconcile net loss to net cash used in operating activities: |
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Depreciation |
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Accretion of interest on convertible note - related party |
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Amortization of convertible note issuance costs |
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Amortization of debt discount due to modification of convertible note – related party |
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— |
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Provision for bad debt |
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( |
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Stock-compensation expense |
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Reduction in the carrying amount of operating lease right-of-use assets |
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Changes in operating assets and liabilities: |
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Accounts receivable |
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( |
) |
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Inventories |
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( |
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( |
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Prepaid expenses and other assets |
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( |
) |
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( |
) |
Accounts payable |
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( |
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Accrued expenses |
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Deferred revenue |
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( |
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Operating lease liabilities |
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( |
) |
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( |
) |
Net cash used in operating activities |
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( |
) |
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( |
) |
Cash flows from investing activities: |
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Capital expenditures |
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( |
) |
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( |
) |
Net cash used in investing activities |
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( |
) |
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( |
) |
Cash flows from financing activities: |
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|
|
||
Proceeds from issuance of convertible note - related party |
|
|
— |
|
|
|
|
|
Issuance costs from convertible note |
|
|
— |
|
|
|
( |
) |
Proceeds from employee stock option exercises |
|
|
|
|
|
|
||
Payments made for employee restricted stock tax withholdings |
|
|
( |
) |
|
|
( |
) |
Proceeds from at-the-market offering, net of commissions of $ |
|
|
— |
|
|
|
|
|
Fees and issuance costs from at-the-market offering |
|
|
— |
|
|
|
( |
) |
Proceeds from private placement of common stock |
|
|
— |
|
|
|
|
|
Fees and issuance costs from private placement of common stock |
|
|
( |
) |
|
|
( |
) |
Repayment of prepayment liability |
|
|
— |
|
|
|
( |
) |
Net cash provided by (used in) financing activities |
|
|
( |
) |
|
|
|
|
Net (decrease) increase in cash, cash equivalents and restricted cash |
|
|
( |
) |
|
|
|
|
Cash, cash equivalents and restricted cash at beginning of period |
|
|
|
|
|
|
||
Cash, cash equivalents and restricted cash at end of period |
|
$ |
|
|
$ |
|
||
Supplemental disclosures of cash flow information: |
|
|
|
|
|
|
||
Interest paid |
|
$ |
|
|
$ |
|
||
Income taxes paid |
|
$ |
— |
|
|
$ |
— |
|
Supplemental disclosures of non-cash activities: |
|
|
|
|
|
|
||
Right-of-use assets obtained in exchange for new operating lease liabilities |
|
$ |
|
|
$ |
|
||
Capitalized interest |
|
$ |
|
|
$ |
|
||
Changes in accrued capital expenditures |
|
$ |
( |
) |
|
$ |
|
|
See accompanying notes to unaudited consolidated financial statements.
4
ASPEN AEROGELS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) Description of Business and Basis of Presentation
Nature of Business
Aspen Aerogels, Inc. (the Company) is an aerogel technology company that designs, develops and manufactures innovative, high-performance aerogel insulation used primarily in the energy industrial and sustainable insulation materials markets. In addition, the Company has introduced a line of aerogel thermal barriers for use in battery packs in the electric vehicle market. The Company is also developing applications for its aerogel technology in the battery materials and a number of other high-potential markets.
The Company maintains its corporate offices in Northborough, Massachusetts. The Company has
Liquidity
During the nine months ended September 30, 2023, the Company incurred a net loss of $
On November 28, 2022, the Company entered into a loan agreement with (the GM Loan Agreement) General Motors Holdings LLC (GM), an entity affiliated with General Motors LLC, which provides for a multi-draw senior secured term loan (the GM Loan) in an aggregate principal amount of up to $
The revised GM Loan Agreement also amended the conditions precedent to funding to require the Company to provide evidence that cash proceeds of one or more equity and/or debt financing arrangements of not less than $
The Company is increasing investment in the research and development of next-generation aerogel products and manufacturing process technologies. In addition, the Company has developed a number of promising aerogel products and technologies for the electric vehicle market. The Company believes that the commercial potential for the Company’s products and technology in the electric vehicle market is significant. Accordingly, the Company is hiring additional personnel, incurring additional operating expenses, and incurring significant capital expenditures to expand silica aerogel manufacturing capacity, build an automated thermal barrier fabrication operation, enhance research and development laboratory facilities and equipment, and construct a battery materials facility, among other efforts.
The Company expects its existing cash balance will be sufficient to support current operating requirements, current research and development activities and the capital expenditures required to support the evolving commercial opportunity in the electric vehicle market and other strategic business initiatives. However, the Company plans to supplement its cash balance with equity financings, debt financings, equipment leasing, sale-leaseback transactions, customer prepayments, or government grant and loan programs to provide the additional capital necessary to purchase the capital equipment, construct the new facilities, establish the operations and complete the aerogel capacity expansions required to support these evolving commercial opportunities and strategic business initiatives.
5
Unaudited Interim Financial Information
The accompanying unaudited interim consolidated financial statements include the accounts of the Company and have been prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Certain information and disclosures normally included in the consolidated financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to such rules and regulations. As such, the information included in this Quarterly Report on Form 10-Q should be read in conjunction with the audited consolidated financial statements and accompanying notes in our Annual Report on Form 10-K for the year ended December 31, 2022 (the Annual Report), filed with the U.S. Securities and Exchange Commission on March 16, 2023.
In the opinion of the Company’s management, the unaudited interim consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements and include all adjustments that are of a normal recurring nature and necessary for the fair statement of the Company’s financial position as of September 30, 2023 and the results of its operations and stockholders’ equity for the three and nine months ended September 30, 2023 and 2022 and the cash flows for the nine-month periods then ended. The Company has evaluated subsequent events through the date of this filing.
The Company’s results of operations for the three and nine months ended September 30, 2023 are not necessarily indicative of the results to be expected for the year ending December 31, 2023 or any other period.
(2) Significant Accounting Policies
Principles of Consolidation
The accompanying condensed consolidated financial statements of the Company include the accounts of all its subsidiaries which are majority-owned, controlled by the Company or a variable interest entity (VIE) where the Company is the primary beneficiary. All significant intercompany accounts and transactions have been eliminated in consolidation.
A VIE is an entity that lacks one or more of the characteristics of a voting interest entity. A VIE is defined as an entity in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. The Company consolidates a VIE in accordance with ASC 810, Consolidation (ASC 810) when it is the primary beneficiary of such VIE. As primary beneficiary, the Company has both the power to direct the activities that most significantly impact the economic performance of the VIE and a right to receive benefits or absorb losses of the entity that could be potentially significant to the VIE. The Company is required to reconsider its evaluation of whether to consolidate a VIE each reporting period, based upon changes in the facts and circumstances pertaining to the VIE.
The Company evaluates the initial consolidation of each Consolidated VIE, which includes a determination of whether the VIE constitutes the definition of a business in accordance with ASC 805, Business Combinations (ASC 805), by considering if substantially all of the fair value of the gross assets within the VIE are concentrated in either a single identifiable asset or group of single identifiable assets. Upon consolidation, the Company recognizes the assets acquired, the liabilities assumed, and any third-party ownership of membership interests as non-controlling interest as of the consolidation or acquisition date, measured at their relative fair values.
In April 2022, the Company engaged Prodensa Servicios de Consultora to establish OPE Manufacturer Mexico S de RL de CV, a maquiladora located in Mexico with the express purposes of manufacturing thermal barrier PyroThin products and ultimately constructing an automated fabrication facility for PyroThin. OPE is currently owned by Prodensa, which charges a management fee though there is an option for OPE to be purchased by the Company after a period of
Use of Estimates
The preparation of the consolidated financial statements requires the Company to make a number of estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Significant items subject to such estimates and assumptions include allowances for doubtful accounts, sales returns and allowances, product warranty costs, inventory valuation, the carrying amount of property and equipment, right-of-use assets, lease liabilities, stock-based compensation, and deferred income taxes. The Company evaluates its
6
estimates and assumptions on an on-going basis using historical experience and other factors, including current economic conditions, which are believed to be reasonable under the circumstances. Management adjusts such estimates and assumptions when facts and circumstances warrant. Illiquid credit markets, volatile equity markets and declines in business investment can increase the uncertainty inherent in such estimates and assumptions. As future events and their effects cannot be determined with precision, actual results could differ significantly from these estimates. Changes in these estimates resulting from continuing changes in the economic environment will be reflected in the financial statements in future periods.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current year presentation.
Cash and Cash Equivalents
Cash equivalents include short-term, highly liquid instruments, which consist of money market accounts and high-quality debt securities issued by the U.S. government via cash sweep and investment accounts. Cash and cash equivalents are maintained primarily with major financial institutions in North America. Deposits with these financial institutions may exceed the amount of insurance provided on such deposits; however, these deposits typically may be redeemed upon demand and, therefore, bear minimal risk.
In light of the failure of Silicon Valley Bank and other regional banks, the Company continues to establish commercial banking relationships with additional large financial institutions.
Restricted Cash
As of September 30, 2023, the Company had $
Concentration of Credit Risk
Financial instruments, which potentially expose the Company to concentrations of credit risk, consist principally of accounts receivable. The Company’s customers are primarily insulation distributors, insulation contractors, insulation fabricators and select energy and automotive end-users located throughout the world. The Company performs ongoing credit evaluations of its customers’ financial condition and generally requires no collateral to secure accounts receivable. The Company maintains an allowance for doubtful accounts based on its assessment of the collectability of accounts receivable. The Company reviews the allowance for doubtful accounts quarterly. During the nine months ended September 30, 2023, the Company recorded a reduction for estimated customer uncollectible accounts receivable of less than $
For the nine months ended September 30, 2023 and 2022,
At September 30, 2023, the Company had
Revenue Recognition
Leases
The Company accounts for its leases in accordance with Accounting Standards Update (ASU) 2016-02 (Topic 842). See note 10 for further details.
7
Stock-based Compensation
The Company grants share-based awards to its employees and non-employee directors under its equity incentive plans: the 2023 Equity Incentive Plan (the 2023 Equity Plan) and its predecessor, the 2014 Employee, Director, and Consultant Equity Incentive Plan (the 2014 Equity Plan). All share-based awards granted, including grants of stock options, restricted stock and restricted stock units (RSUs), are recognized in the statement of operations based on their fair value as of the date of grant. Expense is recognized on a straight-line basis over the requisite service period for all awards with service conditions. For performance-based awards, the grant date fair value is recognized as expense when the condition is probable of being achieved, and then on a graded basis over the requisite service period. The Company uses the Black-Scholes option-pricing model to determine the fair value of service-based option awards. The Black-Scholes model requires the use of a number of complex and subjective assumptions including fair value of the underlying security, the expected volatility of the underlying security, a risk-free interest rate and the expected term of the option.
The fair value of restricted stock and RSUs is determined using the closing price of the Company’s common stock on the date of grant. All shares of restricted stock are not transferable until vested. Restricted stock is typically issued to non-employee directors and typically vests over a
For stock options that contain a market condition, the Company uses the Monte-Carlo simulation option-pricing model to determine the fair value of the awards. In addition to the input assumptions used in the Black-Scholes model, the Monte-Carlo simulation option-pricing model factors the probability that the specific market condition may or may not be satisfied into the valuation. Stock-based compensation expense for awards with a market condition is recognized on a straight-line basis over the requisite service period for each such award.
During the nine months ended September 30, 2023, the Company granted
Stock-based compensation is included in cost of revenue or operating expenses, as applicable, and consists of the following:
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
||||||||||
|
|
September 30, |
|
|
September 30, |
|
||||||||||
|
|
2023 |
|
|
2022 |
|
|
2023 |
|
|
2022 |
|
||||
|
|
(In thousands) |
|
|
(In thousands) |
|
||||||||||
Cost of product revenue |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Research and development expenses |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Sales and marketing expenses |
|
|
|
|
|
|
|
|
|
|
|
|
||||
General and administrative expenses |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total stock-based compensation |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
The 2023 Equity Plan was approved by stockholders at the Company’s annual meeting of stockholders on June 1, 2023 as the successor to the 2014 Equity Plan, and no further awards may be made under the 2014 Equity Plan after that date. As of September 30, 2023,
8
Net Loss per Share
The Company calculates net loss per share of common stock based on the weighted-average number of shares of common stock outstanding during each period. Potential common stock equivalents are determined using the treasury stock method. The weighted-average number of shares of common stock included in the computation of diluted net loss gives effect to all potentially dilutive common equivalent shares, including outstanding stock options and RSUs. Common equivalent shares are excluded from the computation of diluted net loss per share if their effect is antidilutive.
Warranty
The Company provides warranties for its products and records the estimated cost within cost of revenue in the period that the related revenue is recorded.
The Company’s standard warranty period for energy industrial products extends to
The Company’s thermal barrier products provide quality and warranty provisions customary in the automotive industry.
The Company recorded warranty expense related to its thermal barrier products of $
Employee Retention Credits
In March 2020, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was signed into law, providing numerous tax provisions and other stimulus measures, including the Employee Retention Credit: a refundable tax credit against certain employment taxes. The Taxpayer Certainty and Disaster Tax Relief Act of 2020 and the American Rescue Plan Act of 2021 extended and expanded the availability of the Employee Retention Credits. We qualified for the Employee Retention Credits in the third and fourth quarters of 2020 and the first quarter of 2021. In September 2023, we submitted filings for CARES Employee Retention Credits totaling $
Recently Issued Accounting Standards
From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board or other standard setting bodies. Recently issued standards typically do not require adoption until a future effective date. Prior to their effective date, the Company evaluates the pronouncements to determine the potential effects of adoption to its consolidated financial statements.
Standards Implemented Since December 31, 2022
The Company has not implemented any accounting standards that had a material impact on its consolidated financial statements during the nine months ended September 30, 2023.
Standards to be Implemented
The Company believes that the impact of recently issued accounting standards that are not yet effective will not have a material impact on its consolidated financial statements.
(3) Revenue from Contracts with Customers
Revenue Recognition
Revenue is recognized when a customer obtains control of promised goods or services in an amount that reflects the consideration which the entity expects to receive in exchange for those goods or services. To determine revenue recognition for
9
arrangements within the scope of ASC 606, the Company performs the following five steps: (i) identification of the contract with a customer; (ii) identification of the performance obligations in the contract; (iii) determination of the transaction price; (iv) allocation of the transaction price to the separate performance obligations in the contract; and (v) recognition of the revenue associated with performance obligations as they are satisfied. The Company applies the five-step model to contracts when it is probable that the Company will collect the consideration it is entitled to in exchange for the goods or services it transfers to the customer. At contract inception, once the contract is determined to be within the scope of ASC 606, the Company assesses the goods or services promised within each contract and determines those that are performance obligations and assesses whether each promised good or service is distinct. If the contract contains a single performance obligation, the entire transaction price is allocated to the single performance obligation. Contracts that contain multiple performance obligations require an allocation of the transaction price based on the estimated relative standalone-selling prices of the promised products or services underlying each performance obligation. The Company determines standalone-selling prices based on the price at which the performance obligation is sold separately. If the standalone-selling price is not observable through past transactions, the Company estimates the standalone-selling price considering available information such as market conditions and internally approved pricing guidelines related to the performance obligations. The Company then recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied.
When determining the transaction price of a contract, an adjustment is made if payment from a customer occurs either significantly before or significantly after performance, resulting in a significant financing component. Applying the practical expedient in paragraph ASC 606-10-32-18, the Company does not assess whether a significant financing component exists if the period between when the Company performs its obligations under the contract and when the customer pays is one year or less. The Company did not have any contracts outstanding at December 31, 2022 and did not enter into any contracts during the nine months ended September 30, 2023 that contained a significant financing component.
The Company records deferred revenue for product sales when (i) the Company has 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.
Energy Industrial
The Company generally enters into contracts containing
The Company also enters into rebate agreements with certain customers. These agreements may be considered an additional performance obligation of the Company or variable consideration within a contract. Rebates are recorded as a reduction of revenue in the period the related revenue is recognized. A corresponding liability is recorded as a component of deferred revenue on the consolidated balance sheets. These arrangements are primarily based on the customer attaining contractually specified sales volumes.
The Company estimates the amount of its sales that may be returned by its customers and records this estimate as a reduction of revenue in the period the related revenue is recognized. The Company currently estimates return liabilities using historical rates of return, current quarter credit sales, and specific items of exposure on a contract-by-contract basis. Sales return reserves were approximately $
Thermal Barriers
The Company supplies fabricated, multi-part thermal barriers for use in battery packs in the electric vehicle market. These thermal barriers are customized to meet customer specifications. Although thermal barrier products are customized with no alternative use to the Company, the Company does not always have an enforceable right to payment. Under the provisions of ASC 606, the Company recognizes revenue at a point in time when transfer of the control of the products is passed to the customer according to the terms of the contract. The timing of revenue recognition is assessed on a contract-by-contract basis.
10
Shipping and Handling Costs
Shipping and handling costs associated with outbound freight after control over a product has transferred to a customer are accounted for as fulfillment costs and are included in the cost of product revenue. The associated amount of revenue recognized includes the consideration to which the Company expects to be entitled to receive in exchange for incurring these shipping and handling costs.
Disaggregation of Revenue
In the following tables, revenue is disaggregated by primary geographical region and source of revenue:
|
|
Three Months Ended September 30, |
|
|||||||||||||||||||||
|
|
2023 |
|
|
2022 |
|
||||||||||||||||||
|
|
U.S. |
|
|
International |
|
|
Total |
|
|
U.S. |
|
|
International |
|
|
Total |
|
||||||
|
|
(In thousands) |
|
|||||||||||||||||||||
Geographical region |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Asia |
|
$ |
— |
|
|
$ |
|
|
$ |
|
|
$ |
— |
|
|
$ |
|
|
$ |
|
||||
Canada |
|
|
— |
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
||||
Europe |
|
|
— |
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
||||
Latin America |
|
|
— |
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
||||
U.S. |
|
|
|
|
|
— |
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
||||
Total revenue |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Source of revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Energy industrial |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||||
Thermal barrier |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Total revenue |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||||
|
|
Nine Months Ended September 30, |
|
|||||||||||||||||||||
|
|
2023 |
|
|
2022 |
|
||||||||||||||||||
|
|
U.S. |
|
|
International |
|
|
Total |
|
|
U.S. |
|
|
International |
|
|
Total |
|
||||||
|
|
(In thousands) |
|
|||||||||||||||||||||
Geographical region |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Asia |
|
$ |
— |
|
|
$ |
|
|
$ |
|
|
$ |
— |
|
|
$ |
|
|
$ |
|
||||
Canada |
|
|
— |
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
||||
Europe |
|
|
— |
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
||||
Latin America |
|
|
— |
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
||||
U.S. |
|
|
|
|
|
— |
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
||||
Total revenue |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Source of revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Energy industrial |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||||
Thermal barrier |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Total revenue |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||||
11
Contract Balances
The following table presents changes in the Company’s contract assets and contract liabilities during the nine months ended September 30, 2023:
|
|
Balance at |
|
|
Additions |
|
|
Deductions |
|
|
Balance at |
|
||||
|
|
(In thousands) |
|
|||||||||||||
Contract assets |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Thermal barrier |
|
$ |
|
|
$ |
— |
|
|
$ |
( |
) |
|
$ |
— |
|
|
Total contract assets |
|
$ |
|
|
$ |
— |
|
|
$ |
( |
) |
|
$ |
— |
|
|
Contract liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Deferred revenue |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Energy industrial |
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|||
Total contract liabilities |
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|||
During the nine months ended September 30, 2023, the Company recognized $
A contract asset is recorded when the Company satisfies a performance obligation by transferring a promised good or service and has earned the right to consideration from its customer. These assets may represent a conditional right to consideration and are included within accounts receivable and other current assets on the consolidated balance sheets.
A contract liability is recorded when consideration is received, or such consideration is unconditionally due, from a customer prior to transferring goods or services under the terms of the contract. Contract liabilities are recognized as revenue after control of the products or services is transferred to the customer and all revenue recognition criteria have been met.
(4) Inventories
Inventories consist of the following:
|
|
September 30, |
|
|
December 31, |
|
||
|
|
2023 |
|
|
2022 |
|
||
|
|
(In thousands) |
|
|||||
Raw materials |
|
$ |
|
|
$ |
|
||
Work in process |
|
|
|
|
|
|
||
Finished goods |
|
|
|
|
|
|
||
Total |
|
$ |
|
|
$ |
|
||
(5) Property, Plant and Equipment, Net
Property, plant and equipment consist of the following:
|
|
September 30, |
|
|
December 31, |
|
|
Useful |
|
|||
|
|
2023 |
|
|
2022 |
|
|
life |
|
|||
|
|
(In thousands) |
|
|
|
|
||||||
Construction in progress |
|
$ |
|
|
$ |
|
|
|
— |
|
||
Buildings |
|
|
|
|
|
|
|
|
||||
Machinery and equipment |
|
|
|
|
|
|
|
|
||||
Computer equipment and software |
|
|
|
|
|
|
|
|
||||
|
|
|
|
|
|
|
Shorter of useful life or lease term |
|
||||
Total |
|
|
|
|
|
|
|
|
|
|||
Accumulated depreciation |
|
|
( |
) |
|
|
( |
) |
|
|
|
|
Property, plant and equipment, net |
|
$ |
|
|
$ |
|
|
|
|
|||
12
Depreciation expense was $
Construction in progress totaled $
(6) Accrued Expenses
Accrued expenses consist of the following:
|
|
September 30, |
|
|
December 31, |
|
||
|
|
2023 |
|
|
2022 |
|
||
|
|
(In thousands) |
|
|||||
Employee compensation |
|
$ |
|
|
$ |
|
||
Other accrued expenses |
|
|
|
|
|
|
||
Total |
|
$ |
|
|
$ |
|
||
(7) Related Party Transactions
Convertible Note
During the year ended December 31, 2022, the Company issued a $
During the nine months ended September 30, 2023, the Company incurred $
Other
During the nine months ended September 30, 2023, the Company recorded costs of $
(8) Convertible Note – Related Party
2022 Convertible Note
On
The 2022 Convertible Note is a senior unsecured obligation of the Company and ranks equal in right of payment to all senior unsecured indebtedness of the Company, and will rank senior in right of payment to any indebtedness that is contractually subordinated to the 2022 Convertible Note.
13
In accordance with ASU 2020-06, the 2022 Convertible Note is accounted for as a single unit of account and consists of the following:
|
|
September 30, |
|
|
|
|
2023 |
|
|
|
|
(In thousands) |
|
|
Convertible note, principal |
|
$ |
|
|
Payment in-kind |
|
|
|
|
Accrued interest |
|
|
|
|
Discount on convertible note, net of accumulated amortization |
|
|
( |
) |
Debt issuance costs, net of accumulated amortization |
|
|
( |
) |
Convertible note |
|
$ |
|
|
In general, fair values determined by Level 1 inputs utilize observable inputs such as quoted prices in active markets for identical assets or liabilities. Fair values determined by Level 2 inputs utilize data points that are either directly or indirectly observable, such as quoted prices for similar instruments in active markets, interest rates and yield curves. Fair values determined by Level 3 inputs utilize unobservable data points in which there is little or no market data, which require the Company to develop its own assumptions for the asset or liability. The 2022 Convertible Note does not have current observable inputs such as recent trading prices (Level 3) and is measured at fair value using a combination of option pricing and discounted cash flow models and incorporate management’s assumptions for stock price, volatility and risk rate.
The Company estimated the fair value of the 2022 Convertible Notes is approximately $
Contractual Interest Rates
The 2022 Convertible Note was issued at par and bears interest at the Secured Overnight Financing Rate (SOFR) plus
The Company elected to repay the contractual interest due on June 30, 2022, December 30, 2022 and June 30, 2023 in-kind as an increase to the principal amount of $
Debt issuance costs, net of accumulated amortization is $
Conversion Rights
On November 28, 2022, the Company entered into an amendment to the 2022 Convertible Note to reduce the initial Conversion Price by $
14
Optional Redemption
Contingent Redemption
Upon the occurrence of certain fundamental changes described in the Indenture (each, a Fundamental Change), the Holder of the Note may require that the Company repurchase all or part of the principal amount of the Note at a purchase price of
Embedded Derivatives
The Company determined that the Make-Whole feature of the 2022 Convertible Note requires bifurcation in accordance with Accounting Standards Codification 815, Derivatives and Hedging (ASC 815). Accordingly, the Company must separately account for the feature at fair value with changes in fair value reported in current period earnings. The fair value of the Make-Whole was determined to be immaterial as of February 18, 2022 and September 30, 2023.
(9) Commitments and Contingencies
Cloud Computing Agreement
The Company is party to a cloud computing agreement that is a service contract for enterprise resource planning software. During the year ended December 31, 2022, the Company amended the agreement to a new
|
|
September 30, |
|
|
December 31, |
|
||
|
|
2023 |
|
|
2022 |
|
||
|
|
(In thousands) |
|
|||||
Cloud computing costs included in other current assets |
|
$ |
|
|
$ |
|
||
Cloud computing costs included in other assets |
|
|
|
|
|
|
||
Amortization of cloud computing costs |
|
|
( |
) |
|
|
( |
) |
Total capitalized cloud computing costs |
|
$ |
|
|
$ |
|
||
Thermal Barrier Contracts
The Company is party to production contracts with General Motors to supply fabricated, multi-part thermal barriers (Barriers) for use in the battery system of its next-generation electric vehicles (Contracts). Pursuant to the Contracts, the Company is obligated to supply Barriers at fixed annual prices and at volumes to be specified by General Motors up to a daily maximum quantity through the respective terms of the agreements, which expire at various times from 2026 through 2034.
Federal, State and Local Environmental Regulations
The Company is subject to federal, state and local environmental laws and regulations. These laws generally provide for control of pollutants released into the environment and require responsible parties to undertake remediation. Penalties may be imposed for noncompliance.
15
Litigation
The Company is, from time to time, a party to litigation that arises in the normal course of its business operations. See Part II, Item 1 “Legal Proceedings” of this Quarterly Report on Form 10-Q for a description of certain of the Company’s current legal proceedings. The Company is not presently a party to any litigation for which it believes a loss is probable requiring an amount to be accrued or a possible loss contingency requiring disclosure.
(10) Leases
The Company leases office, laboratory, warehouse and fabrication space in Massachusetts, Rhode Island and Monterrey, Mexico under operating leases. Under these agreements, the Company is obligated to pay annual rent, real estate taxes, and certain other operating expenses. The Company also leases equipment under operating leases. The Company’s operating leases expire at various dates through
The Company determines if an arrangement is a lease at inception. Right-of-use (ROU) assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s payment obligations under the lease. Operating lease ROU assets and liabilities are recognized based on the present value of lease payments over the lease term. To measure its lease liabilities, the Company uses its incremental borrowing rate or the rate implicit in the lease, if available. The Company calculates its incremental borrowing rate using a synthetic credit rating analysis based on Moody’s Building Materials Industry Rating Methodology. ROU assets also include any direct costs and prepaid lease payments but exclude any lease incentives received. The Company’s lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the lease term.
The Company elected the short-term lease recognition exemption for all leases that qualify. For leases that qualify for this exemption, the Company does not recognize ROU assets or lease liabilities. For lease agreements with lease and non-lease components, the Company accounts for each component separately. However, in the case of equipment leases, the Company accounts for lease and non-lease components as a single component.
Maturities of operating lease liabilities as of September 30, 2023 are as follows:
Year |
|
Operating |
|
|
|
|
(In thousands) |
|
|
2023 (excluding the nine months ended September 30, 2023) |
|
$ |
|
|
2024 |
|
|
|
|
2025 |
|
|
|
|
2026 |
|
|
|
|
2027 |
|
|
|
|
Thereafter |
|
|
|
|
Total lease payments |
|
|
|
|
Less imputed interest |
|
|
( |
) |
Total lease liabilities |
|
$ |
|
|
The Company incurred operating lease costs of $
As of September 30, 2023, the weighted average remaining lease term for operating leases was
As of September 30, 2023, the Company had
16
(11) Net Loss Per Share
The computation of basic and diluted net loss per share consists of the following:
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
||||||||||
|
|
September 30, |
|
|
September 30, |
|
||||||||||
|
|
2023 |
|
|
2022 |
|
|
2023 |
|
|
2022 |
|
||||
|
|
(In thousands, except |
|
|||||||||||||
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Net loss |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Weighted average shares outstanding, basic and diluted |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Net loss per share, basic and diluted |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
Potentially dilutive common shares that were excluded from the computation of diluted net loss per share because they were anti-dilutive consist of the following:
|
|
Three and Nine Months Ended |
|
|||||
|
|
September 30, |
|
|||||
|
|
2023 |
|
|
2022 |
|
||
Common stock options |
|
|
|
|
|
|
||
Restricted common stock units |
|
|
|
|
|
|
||
Restricted common stock awards |
|
|
|
|
|
|
||
Convertible note, if converted |
|
|
|
|
|
|
||
Total |
|
|
|
|
|
|
||
As the Company incurred a net loss for the three and nine months ended September 30, 2023 and 2022, the potential dilutive shares from common stock options, restricted common stock units, restricted common stock awards, and the convertible note were excluded from the calculation of diluted net loss per share because their effect would have been anti-dilutive for the periods presented. The Company excludes the shares issued in connection with restricted stock awards from the calculation of basic weighted average common shares outstanding until the restrictions lapse.
(12) Income Taxes
The Company incurred net operating losses and recorded a full valuation allowance against net deferred tax assets for all periods presented. Accordingly, the Company has not recorded a provision for federal or state income taxes.
(13) Segment Information
Operating segments are identified as components of an enterprise about which separate, discrete financial information is available for evaluation by the chief operating decision maker in making decisions on how to allocate resources and assess performance. The Company’s chief operating decision maker is the Chief Executive Officer. The Company’s chief operating decision maker reviews consolidated operating results to make decisions about allocating resources and assessing performance for the entire Company. The Company reports
17
Summarized below are the Revenue and Segment Operating Profit for each reporting segment:
|
|
Revenue |
|
|
Segment Operating Profit (Loss) |
|
|
Revenue |
|
|
Segment Operating Profit (Loss) |
|
||||||||||||||||||||
|
|
Three Months Ended |
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
Nine Months Ended |
|
||||||||||||||||||||
|
|
September 30, |
|
|
September 30, |
|
|
September 30, |
|
|
September 30, |
|
||||||||||||||||||||
|
|
2023 |
|
|
2022 |
|
|
2023 |
|
|
2022 |
|
|
2023 |
|
|
2022 |
|
|
2023 |
|
|
2022 |
|
||||||||
|
|
(In thousands) |
|
|
(In thousands) |
|
||||||||||||||||||||||||||
Energy industrial |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||||||
Thermal barrier |
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
|
( |
) |
||||||
Total |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
( |
) |
||||||
Corporate expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Operating loss |
|
|
|
|
|
|
|
|
( |
) |
|
|
( |
) |
|
|
|
|
|
|
|
|
( |
) |
|
|
( |
) |
||||
Other income (expense), net |
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
|
( |
) |
||||||
Net loss |
|
|
|
|
|
|
|
$ |
( |
) |
|
$ |
( |
) |
|
|
|
|
|
|
|
$ |
( |
) |
|
$ |
( |
) |
||||
|
|
Total Assets |
|
|||||
|
|
September 30, |
|
|
December 31, |
|
||
|
|
2023 |
|
|
2022 |
|
||
|
|
(In thousands) |
|
|||||
Energy industrial |
|
$ |
|
|
$ |
|
||
Thermal barrier |
|
|
|
|
|
|
||
Total assets of reportable segments |
|
|
|
|
|
|
||
Construction in progress |
|
|
|
|
|
|
||
All other corporate assets |
|
|
|
|
|
|
||
|
|
$ |
|
|
$ |
|
||
(14) Other Current Assets
The CARES Act provides an employee retention credit (CARES Employee Retention Credit), which is a refundable tax credit against certain employment taxes of up to $
(15) Subsequent Events
The Company has evaluated subsequent events through November 2, 2023, the date of issuance of the consolidated financial statements for the three and nine months ended September 30, 2023.
18
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
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 ended December 31, 2022, filed with the U.S. Securities and Exchange Commission (SEC) on March 16, 2023, 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 and the Quarterly Reports on Form 10-Q for the quarters ended March 31, 2023 and June 30, 2023.
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 the SEC, 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.
Products
Our core businesses are organized into two reportable segments: Energy Industrial and Thermal Barrier. The following describes our key product offerings and new product innovations by reportable segment.
Energy Industrial
We design, develop and manufacture innovative, high-performance aerogel insulation used primarily in the energy industrial and sustainable insulation 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-user 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 industrial. Our Pyrogel and Cryogel product lines have undergone rigorous technical validation by industry leading end-users and achieved significant market adoption. Our Spaceloft sustainable insulation materials are increasingly used by building owners to improve the energy efficiency and to enhance fire protection in buildings ranging from historic brownstones to modern high rises.
We also derive revenue from a number of other end markets. Customers in these markets use our products for applications as diverse as military and commercial aircraft, trains, buses, appliances, apparel, footwear and outdoor gear. As we continue to enhance
19
our Aerogel Technology Platform, we believe we will have additional opportunities to address high-value applications in the global insulation market, the electric vehicle market and in a number of new, high-value markets, including hydrogen energy, filtration, water purification, and gas sorption.
We market and sell our products primarily through a sales force based in North America, Europe and Asia. The efforts of our sales force are supported by a small number of sales consultants with extensive knowledge of a particular market or region. Our sales force is responsible for establishing and maintaining customer and partner relationships, delivering highly technical information and ensuring high-quality customer service.
Our salespeople work directly with end-user customers and engineering firms to promote the qualification, specification and acceptance of our aerogel and thermal barrier 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 aerogel products and strong end-user support.
Thermal Barrier
We are also actively developing a number of promising aerogel products and technologies for the electric vehicle market. We have developed and are commercializing our proprietary line of PyroThin aerogel thermal barriers for use in battery packs in electric vehicles. Our PyroThin product is an ultra-thin, lightweight and flexible thermal barrier designed with other functional layers to impede the propagation of thermal runaway across multiple lithium-ion battery system architectures. Our thermal barrier technology is designed to offer a unique combination of thermal management, mechanical performance and fire protection properties. These properties enable electric vehicle manufacturers to achieve critical battery performance and safety goals. In addition, we are seeking to leverage our patented carbon aerogel technology to develop industry-leading battery materials for use in lithium-ion battery cells. These battery materials have the potential to increase the energy density of the battery cells, thus enabling an increase in the driving range of electric vehicles.
The commercial potential for our PyroThin thermal barriers and our carbon aerogel battery materials in the electric vehicle market is significant. Accordingly, we are hiring additional personnel, incurring additional operating expenses, incurring significant capital expenditures to expand aerogel manufacturing capacity, establishing an automated thermal barrier fabrication operation, enhancing research and development resources and expanding our battery material research facilities, among other items.
We have entered into production contracts with certain major OEMs, including General Motors LLC ("General Motors"), to supply fabricated, multi-part thermal barriers for use in the battery system of its next-generation electric vehicles. Pursuant to the contracts with General Motors, we are obligated to supply the barriers at fixed annual prices and at volumes to be specified by the customer up to a daily maximum quantity through the term of the agreements, which expire at various times from 2026 through 2034. While General Motors has agreed to purchase its requirement for the barriers from us at locations to be designated from time to time, it has no obligation to purchase any minimum quantity of barriers under the contracts. In addition, General Motors may terminate the contracts any time and for any or no reason. All other terms of the contracts are generally consistent with General Motors's standard purchase terms, including quality and warranty provisions customary in the automotive industry.
Manufacturing Operations
We manufacture our products using our proprietary technology at our facility in East Providence, Rhode Island. We have operated the East Providence facility since 2008 and have increased our capacity in phases to approximately $250.0 million in annual revenue. To meet expected growth in demand for our aerogel products in the electric vehicle market, we have been in the process of expanding our aerogel blanket capacity by constructing a second manufacturing plant in Bulloch County, Georgia. However, in order to manage the development of the second plant so that its increased capacity comes online in a manner that aligns with our current expectations as to demand from our EV customers, we are extending the timeframe for construction and commissioning of the second plant until such time as its capacity is supported by increased demand. In the meantime, and until we ramp up construction, we expect to be able to substantially reduce our planned capital expenditures for 2023 and 2024. At the same time, we believe that productivity improvements in our existing Rhode Island facility combined with supply of our energy industrial products from one or more contract manufacturers in China beginning in 2024 will permit us to achieve a target revenue capacity of approximately $550.0 million in 2024 and prior to the completion and start-up of the second plant. Nonetheless, there can be no assurance as to when we will ramp up construction on the second plant. There can also be no assurance that our contract manufacturing strategy of meeting the demand of our energy industrial customers with supply from one or more contract manufacturers in China will provide us with adequate manufacturing capacity or supply for that expected demand. Furthermore, when we ramp up construction on the second plant, further cost inflation and/or supply chain disruptions, as well as potential changes in the scope of the facilities, could lead to increases to our prior estimates for completion of the second plant.
20
Recent Developments
On September 28, 2023 (the “First Amendment Effective Date”), Aspen Aerogels Georgia, LLC, a Georgia limited liability company (the “Borrower”), our wholly-owned subsidiary, entered into a first amendment (the “First Amendment”) to amend that certain loan agreement, dated as of November 28, 2022 (the “Loan Agreement”), by and among (i) the Borrower, (ii) us, as a guarantor and (iii) Aspen Aerogels Rhode Island, LLC, a Rhode Island limited liability company (“Aspen RI” and, together with the Borrower and us, each, a “Loan Party” and collectively, the “Loan Parties”), as a guarantor, and (iv) General Motors Holdings LLC (“GM”), as lender.
Pursuant to the First Amendment, the Loan Parties and GM agreed to, among other things, (i) extend the draw period for the delayed draw senior secured term loans (the “Loan”), from beginning on January 1, 2023 and ending on September 30, 2023, to instead a period beginning on the date that is twelve (12) months prior to the date agreed upon by Borrower and GM for the start of production at an aerogel manufacturing facility in Bulloch County, Georgia (the “Plant”) under the applicable GM Purchase Contracts (as defined therein) and ending on March 31, 2024 (or any later date approved in writing by GM at its sole discretion); (ii) extend the maturity date of the Loan Agreement from March 31, 2025 to September 30, 2025; and (iii) add the following financial covenants measured starting from the fiscal quarter ending December 31, 2024 and at the end of each fiscal quarter thereafter (each such fiscal quarter end, a “Test Date”): (A) a covenant requiring that the Total Leverage Ratio (as defined therein) shall not exceed 5.00:1.00 as of the applicable Test Date and (B) a covenant requiring that the ratio of our total indebtedness and our subsidiaries (with certain exceptions) to our consolidated equity shall not be greater than 1.20x as of the applicable Test Date, in each case, with compliance demonstrated through the submission of a certain compliance certificate (the “Financial Covenants”), subject to customary equity cure rights with respect to the Financial Covenants.
The First Amendment also amended the conditions precedent to funding to (i) require the Borrower to provide evidence that cash proceeds of one or more equity and/or debt financing arrangements of not less than $500.0 million in the aggregate (inclusive of all equity investments contributed to the Borrower for use in connection with the Plant prior to the First Amendment Effective Date) have been contributed to and disbursed by the Borrower in the manner prescribed in a pre-determined project budget (subject to a permitted variance) to fund the construction of and equipment for the first phase of the Plant and (ii) require that 70% of the total cost in connection with the construction and operation of the Plant has been fully funded prior to such applicable borrowing under the Loan Agreement.
Financial Summary
Our revenue for the nine months ended September 30, 2023 was $154.5 million, which represented an increase of $33.7 million, or 28%, from $120.8 million for the nine months ended September 30, 2022. Net loss for the nine months ended September 30, 2023 was $45.3 million and net loss per share was $0.65. Net loss for the nine months ended September 30, 2022 was $73.1 million and net loss per share was $2.03.
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 energy industrial product and measure our shipments in square feet. We believe the square foot operating metric allows us and our investors to measure our manufacturing capacity and energy industrial product shipments on a uniform and consistent basis. The following chart sets forth energy industrial product shipments in square feet associated with recognized revenue, including revenue recognized over time, for the periods presented:
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
||||||||||
|
|
September 30, |
|
|
September 30, |
|
||||||||||
|
|
2023 |
|
|
2022 |
|
|
2023 |
|
|
2022 |
|
||||
|
(In thousands) |
|
||||||||||||||
Product shipments in square feet |
|
|
5,909 |
|
|
|
6,711 |
|
|
|
22,337 |
|
|
|
24,074 |
|
21
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 with U.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 with U.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:
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 under U.S. GAAP. Some of these limitations are:
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 the U.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.
22
The following table presents a reconciliation of net loss, the most directly comparable U.S. GAAP measure, to Adjusted EBITDA for the periods presented:
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
||||||||||
|
|
September 30, |
|
|
September 30, |
|
||||||||||
|
|
2023 |
|
|
2022 |
|
|
2023 |
|
|
2022 |
|
||||
|
|
(In thousands) |
|
|||||||||||||
Net loss |
|
$ |
(13,073 |
) |
|
$ |
(29,595 |
) |
|
$ |
(45,292 |
) |
|
$ |
(73,129 |
) |
Depreciation and amortization |
|
|
4,550 |
|
|
|
2,531 |
|
|
|
10,757 |
|
|
|
6,692 |
|
Stock-based compensation(1) |
|
|
2,789 |
|
|
|
2,590 |
|
|
|
7,766 |
|
|
|
6,713 |
|
Other (income) expense |
|
|
(1,561 |
) |
|
|
1,286 |
|
|
|
(5,294 |
) |
|
|
3,550 |
|
Adjusted EBITDA |
|
$ |
(7,295 |
) |
|
$ |
(23,188 |
) |
|
$ |
(32,063 |
) |
|
$ |
(56,174 |
) |
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 costs and manufacturing expenses, 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.
We expect to maintain strong revenue growth during 2023 driven by a continued post-COVID recovery in the energy industrial market, accelerating demand in the electric vehicle market and continued market share gains in the sustainable insulation materials market. Our expectation to maintain strong revenue growth is based, in part, on our OEM customers’ production volume forecasts and targets as well as our expectation to successfully scale our manufacturing capabilities and address any potential supply chain issues to meet this expected demand. As a result, we expect to experience a decrease in both net loss and Adjusted EBITDA during 2023.
Components of Our Results of Operations
Revenue
We recognize revenue from the sale of our energy industrial aerogel products and thermal barriers. Revenue is recognized upon the satisfaction of contractual performance obligations.
We record deferred revenue for 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.
We project revenue growth during 2023 due to accelerating demand in the electric vehicle market and continued market share gains in the sustainable insulation materials market.
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. In addition, global supply chain disturbances, increased reliance on foreign materials procurement, industrial gas supply constraints, increases in the cost of our raw materials, and other factors may significantly impact our material costs and have a material impact on our operations. We expect that material costs will increase in absolute dollars during 2023 due to projected growth in product shipments, but decrease as a percentage of revenue due to projected increases in average selling prices, improved manufacturing, and fabrication yields and a favorable mix of products sold.
23
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 increase in absolute dollars and increase as a percentage of revenue during 2023 due to increased staffing and spending levels in support of our thermal barrier business, including the start-up and operation of an automated fabrication facility in Monterrey, Mexico. We are also continuing to monitor the impact of engaging one or more contract manufacturers in China to supply our aerogel products for the energy industrial market beginning in 2024 on our manufacturing expense and cost of product revenue.
In total, we expect that cost of product revenue will increase in absolute dollars during 2023 versus 2022 and decrease as a percentage of revenue versus 2022 driven by the costs to support our expected higher run-rate revenue in future periods.
Gross Profit
Our gross profit as a percentage of revenue is affected by a number of factors, including the volume of products produced and sold, the mix of 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 to vary significantly in absolute dollars and as a percentage of revenue from period to period.
During 2023, we expect gross profit to increase in both absolute dollars and as a percentage of total revenue due to the combination of a projected increase in total revenue combined with projected reduction in material costs as a percentage of total revenue, offset, in part, by a projected increase in manufacturing expense as a percentage of revenue.
In the longer term, we expect gross profit to improve in absolute dollars and as a percentage of revenue due to expected increases in total revenue, production volumes and manufacturing productivity. In addition, we expect the gross profit improvement derived from the increases in revenue, volume and productivity will be supported by the continued implementation of lower cost product formulations and realization of material purchasing efficiencies.
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, expenses 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.
During 2023, we expect to continue to hire additional personnel and incur additional operating expenses to support the anticipated multi-year growth in our PyroThin thermal barrier business. As a result, we expect that operating expenses will increase in absolute dollars, and remain consistent as a percentage of revenue during the year. In the longer term, we expect that operating expenses will increase in absolute dollars, but decrease as a percentage of revenue.
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, including our carbon aerogel battery materials. We believe that these investments are necessary to maintain and improve our competitive position. We also expect to continue to invest in research and engineering personnel and the infrastructure required in support of their efforts. We expect our research and development expenses will increase in absolute dollars, while decreasing as a percentage of revenue in 2023 and in the longer term.
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. We expect our sales and marketing expenses will increase in absolute dollars, while decreasing as a percentage of revenue in 2023 and in the longer term.
24
General and Administrative Expenses
General and administrative expenses consist primarily of personnel costs, legal expenses, consulting and professional services, audit fees, compliance with securities, corporate governance and related laws and regulations, investor relations expenses and insurance premiums, including director and officer insurance.
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 I, Item 3 of our Annual Report on Form 10-K for the year ended December 31, 2022 and “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 our general and administrative expenses will increase in absolute dollars but decrease as a percentage of revenue in the longer term. In 2023, we expect such expenses will increase in both absolute dollars and as a percentage of revenue.
Interest Expense, Convertible Note - Related Party
Interest expense, convertible note - related party is net of the capitalized interest related to the $100.0 million in aggregate initial principal amount of our 2022 Convertible Note and $13.0 million relating to payment in-kind.
Interest Income (Expense), Net
Interest expense, net consists of interest expense related to our revolving credit facility and interest earned on the cash balances invested in deposit accounts, money market accounts, and high-quality debt securities issued by the U.S. government.
Income from Employee Retention Credit
Employee retention credit consists of other income related to our submitted filings for CARES Employee Retention Credits.
Provision for Income Taxes
We have incurred net losses since inception and have not recorded benefit provisions for U.S. federal income taxes or state income taxes since the tax benefits of our net losses have been offset by valuation allowances due to the uncertainty associated with the utilization of net operating loss carryforwards.
Results of Operations
Three months ended September 30, 2023 compared to the three months ended September 30, 2022
The following tables set forth a comparison of the components of our results of operations for the periods presented:
Revenue
|
|
Three Months Ended September 30, |
|
|
|
|
|
|||||||||||
|
|
2023 |
|
2022 |
|
Change |
||||||||||||
|
|
|
|
|
Percentage |
|
|
|
|
Percentage |
|
|
|
|
|
|||
|
|
Amount |
|
|
of Revenue |
|
Amount |
|
|
of Revenue |
|
Amount |
|
|
Percentage |
|||
|
|
($ in thousands) |
||||||||||||||||
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
Energy industrial |
|
$ |
27,912 |
|
|
46% |
|
$ |
24,752 |
|
|
67% |
|
$ |
3,160 |
|
|
13% |
Thermal barrier |
|
|
32,843 |
|
|
54% |
|
|
11,954 |
|
|
33% |
|
|
20,889 |
|
|
175% |
Total revenue |
|
$ |
60,755 |
|
|
100% |
|
$ |
36,706 |
|
|
100% |
|
$ |
24,049 |
|
|
66% |
Total revenue increased $24.0 million, or 66%, to $60.7 million for the three months ended September 30, 2023 from $36.7 million in the comparable period in 2022. The increase in total revenue was the result of an increase in both thermal barrier and energy industrial revenue.
25
The following chart sets forth energy industrial product shipments in square feet associated with recognized revenue, including revenue recognized over time, for the periods presented:
|
|
Three Months Ended September 30, |
|
|
Change |
|
||||||||||
|
|
2023 |
|
|
2022 |
|
|
Amount |
|
|
Percentage |
|
||||
Product shipments in square feet (in thousands) |
|
|
5,909 |
|
|
|
6,711 |
|
|
|
(802 |
) |
|
|
(12 |
)% |
Energy industrial revenue increased by $3.1 million, or 13%, to $27.9 million for the three months ended September 30, 2023 from $24.8 million in the comparable period in 2022. This increase was driven by project-based demand in the subsea market and a more favorable mix of product shipments in the global petrochemical and refinery markets in Latin America, offset, in part, by a decrease in the volume of shipments in the global petrochemical and refinery markets of Asia, North America and Europe.
Energy industrial revenue for the three months ended September 30, 2023 included $8.0 million to a North American distributor, in comparison to $10.5 million for the comparable period of 2022.
The average selling price per square foot of our energy industrial products increased by $1.03, or 28%, to $4.72 per square foot for the three months ended September 30, 2023 from $3.69 per square foot for the three months ended September 30, 2022. The increase in average selling price reflected the impact of price increases enacted in 2023 and a change in the mix of products sold, as we strive to maximize capacity in our aerogel manufacturing facility. This increase in average selling price had the effect of increasing product revenue by $6.1 million for the three months ended September 30, 2023 from the comparable period in 2022.
In volume terms, energy industrial product shipments decreased by 0.8 million square feet, or 12%, to 5.9 million square feet for the three months ended September 30, 2023, as compared to 6.7 million square feet for the three months ended September 30, 2022. The decrease in volume had the effect of decreasing product revenue by $3.0 million for the three months ended September 30, 2023 from the comparable period in 2022.
Thermal barrier revenue was $32.8 million for the three months ended September 30, 2023 as compared to $11.9 million for the three months ended September 30, 2022. During the three months ended September 30, 2023 and 2022, thermal barrier revenue included $29.5 million and $9.2 million, respectively, to a major U.S. automotive OEM.
Cost of Revenue
|
|
Three Months Ended September 30, |
|
|
|
|
||||||||||||
|
|
2023 |
2022 |
Change |
||||||||||||||
|
|
|
|
|
Percentage |
|
|
|
|
Percentage |
|
|
|
|
|
|||
|
|
Amount |
|
|
Revenue |
|
Amount |
|
|
Revenue |
|
Amount |
|
|
Percentage |
|||
|
|
($ in thousands) |
||||||||||||||||
Cost of revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
Energy industrial |
|
$ |
22,087 |
|
|
79% |
|
$ |
22,689 |
|
|
92% |
|
$ |
(602 |
) |
|
(3)% |
Thermal barrier |
|
|
24,858 |
|
|
76% |
|
|
20,376 |
|
|
170% |
|
|
4,482 |
|
|
22% |
Total cost of revenue |
|
$ |
46,945 |
|
|
77% |
|
$ |
43,065 |
|
|
117% |
|
$ |
3,880 |
|
|
9% |
Total cost of revenue increased $3.9 million, or 9%, to $47.0 million for the three months ended September 30, 2023 from $43.1 in the comparable period in 2022. The increase in total cost of revenue was the result of an increase in thermal barrier cost of revenue, offset by a decrease in energy industrial cost of revenue.
Energy industrial cost of revenue decreased $0.6 million, or 3%, to $22.1 million for the three months ended September 30, 2023 from $22.7 million in the comparable period in 2022. The $0.6 million decrease was the result of a $0.2 million decrease in material costs due to change in the product mix and a $0.4 million decrease in manufacturing and other operating costs from the comparable period in 2022. The decrease in manufacturing costs was driven by decrease in compensation and related costs of $0.7 million, depreciation and facility related expenses of $0.4 million and other manufacturing and operating costs of $0.2 million, offset by an increase in utilities expenses of $0.9 million.
Thermal barrier cost of revenue increased $4.5 million to $24.9 million for the three months ended September 30, 2023 as compared to $20.4 million for the three months ended September 30, 2022. The $4.5 million increase was the result of a $1.3 million increase in material costs and a $3.2 million increase in manufacturing costs. The increase in manufacturing costs was driven by a $1.9 million increase in depreciation and facility costs, $1.0 million increase in utilities expenses and other manufacturing and operating costs of $0.6 million, offset by a decrease in compensation and related costs of $0.3 million.
26
Gross Profit
|
|
Three Months Ended September 30, |
|
|
|
|
|
|||||||||||
|
|
2023 |
|
2022 |
|
Change |
||||||||||||
|
|
|
|
|
Percentage |
|
|
|
|
Percentage |
|
|
|
|
|
|||
|
|
Amount |
|
|
of Revenue |
|
Amount |
|
|
of Revenue |
|
Amount |
|
|
Percentage |
|||
|
|
($ in thousands) |
||||||||||||||||
Gross profit: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
Energy industrial |
|
$ |
5,825 |
|
|
21% |
|
$ |
2,063 |
|
|
8% |
|
$ |
3,762 |
|
|
182% |
Thermal barrier |
|
|
7,985 |
|
|
24% |
|
|
(8,422 |
) |
|
(70)% |
|
|
16,407 |
|
|
195% |
Total gross profit (loss) |
|
$ |
13,810 |
|
|
23% |
|
$ |
(6,359 |
) |
|
(17)% |
|
$ |
20,169 |
|
|
317% |
Gross profit increased by $20.1 million, or 317%, to $13.8 million for the three months ended September 30, 2023 from $6.3 million of gross loss in the comparable period in 2022. The increase in gross profit was the result of the $24.0 million increase in total revenue, offset by the $3.9 million increase in total cost of revenue. The increase in gross profit reflects the increase in revenue, offset, in part by, additional resources to support our expected higher run-rate revenue in future periods for both our energy industrial and thermal barrier products from the comparable period in 2022.
Research and Development Expenses
|
|
Three Months Ended September 30, |
|
|
|
|
|
|||||||||||
|
|
2023 |
|
2022 |
|
Change |
||||||||||||
|
|
|
|
|
Percentage |
|
|
|
|
Percentage |
|
|
|
|
|
|||
|
|
Amount |
|
|
of Revenue |
|
Amount |
|
|
of Revenue |
|
Amount |
|
|
Percentage |
|||
|
|
($ in thousands) |
||||||||||||||||
Research and development expenses |
|
$ |
4,218 |
|
|
7% |
|
$ |
4,694 |
|
|
13% |
|
$ |
(476 |
) |
|
(10)% |
Research and development expenses decreased by $0.5 million, or 10%, to $4.2 million for the three months ended September 30, 2023 from $4.7 million in the comparable period in 2022. The $0.5 million decrease reflects decreases in professional fees of $0.6 million, compensation and related expenses of $0.1 million and other research and development expenses of $0.1 million, offset by an increase in facility related expenditures of $0.3 million.
Research and development expenses as a percentage of total revenue decreased to 7% of total revenue for the three months ended September 30, 2023 from 13% in the comparable period in 2022.
Sales and Marketing Expenses
|
|
Three Months Ended September 30, |
|
|
|
|
|
|||||||||||
|
|
2023 |
|
2022 |
|
Change |
||||||||||||
|
|
|
|
|
Percentage |
|
|
|
|
Percentage |
|
|
|
|
|
|||
|
|
Amount |
|
|
of Revenue |
|
Amount |
|
|
of Revenue |
|
Amount |
|
|
Percentage |
|||
|
|
($ in thousands) |
||||||||||||||||
Sales and marketing expenses |
|
$ |
8,386 |
|
|
14% |
|
$ |
7,293 |
|
|
20% |
|
$ |
1,093 |
|
|
15% |
Sales and marketing expenses increased by $1.1 million, or 15%, to $8.4 million for the three months ended September 30, 2023 from $7.3 million in the comparable period in 2022. The $1.1 million increase was principally the result of increases in depreciation and facility related expenses of $0.9 million and an increase in compensation and related expenses of $0.4 million, offset by a decrease in professional fees of $0.2 million.
Sales and marketing expenses as a percentage of total revenue decreased to 14% of total revenue for the three months ended September 30, 2023 from 20% in the comparable period in 2022.
General and Administrative Expenses
|
|
Three Months Ended September 30, |
|
|
|
|
|
|||||||||||
|
|
2023 |
|
2022 |
|
Change |
||||||||||||
|
|
|
|
|
Percentage |
|
|
|
|
Percentage |
|
|
|
|
|
|||
|
|
Amount |
|
|
of Revenue |
|
Amount |
|
|
of Revenue |
|
Amount |
|
|
Percentage |
|||
|
|
($ in thousands) |
||||||||||||||||
General and administrative expenses |
|
$ |
15,840 |
|
|
26% |
|
$ |
9,963 |
|
|
27% |
|
$ |
5,877 |
|
|
59% |
27
General and administrative expenses increased by $5.8 million, or 59%, to $15.8 million for the three months ended September 30, 2023 from $10.0 million in the comparable period in 2022. The $5.8 million increase was the result of additional staffing combined with increases in compensation and related costs of $5.2 million and professional services expenses of $1.0 million, and other general and administrative expenses of $0.1 million, partially offset by a decrease in facility related expenditures of $0.5 million.
General and administrative expenses as a percentage of total revenue decreased to 26% for the three months ended September 30, 2023 from 27% in the comparable period in 2022.
Other Income (Expense), net
|
|
Three Months Ended September 30, |
|
|
|
|
|
|||||||||||
|
|
2023 |
|
2022 |
|
Change |
||||||||||||
|
|
|
|
|
Percentage |
|
|
|
|
Percentage |
|
|
|
|
|
|||
|
|
Amount |
|
|
of Revenue |
|
Amount |
|
|
of Revenue |
|
Amount |
|
|
Percentage |
|||
|
|
($ in thousands) |
||||||||||||||||
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
Interest (expense), related party |
|
$ |
(1,938 |
) |
|
(3)% |
|
$ |
(1,734 |
) |
|
(5)% |
|
$ |
(204 |
) |
|
12% |
Interest income, net |
|
|
1,313 |
|
|
2% |
|
|
448 |
|
|
1% |
|
|
865 |
|
|
193% |
Income from Employee Retention Credits |
|
|
2,186 |
|
|
4% |
|
|
— |
|
|
— |
|
|
2,186 |
|
|
NM |
Total other income (expense), net |
|
$ |
1,561 |
|
|
3% |
|
$ |
(1,286 |
) |
|
(4)% |
|
$ |
2,847 |
|
|
(221)% |
Other income (expense), net increased by $2.8 million to $1.5 million of other income for the three months ended September 30, 2023 from $1.3 million of other expense in the comparable period in 2022. The $2.8 million increase was the result of $2.2 million of Employee Retention Credits, $0.8 million of interest income and a $0.2 million net impact of capitalized interest relating to our Convertible Note in the comparable period in 2022.
Results of Operations
Nine months ended September 30, 2023 compared to the nine months ended September 30, 2022
The following tables set forth a comparison of the components of our results of operations for the periods presented:
Revenue
|
|
Nine Months Ended September 30, |
|
|
|
|
|
|||||||||||
|
|
2023 |
|
2022 |
|
Change |
||||||||||||
|
|
|
|
|
Percentage of |
|
|
|
|
Percentage of |
|
|
|
|
|
|||
|
|
Amount |
|
|
Revenue |
|
Amount |
|
|
Revenue |
|
Amount |
|
|
Percentage |
|||
|
|
($ in thousands) |
||||||||||||||||
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
Energy industrial |
|
$ |
97,311 |
|
|
63% |
|
$ |
90,404 |
|
|
75% |
|
$ |
6,907 |
|
|
8% |
Thermal barrier |
|
|
57,188 |
|
|
37% |
|
|
30,349 |
|
|
25% |
|
|
26,839 |
|
|
88% |
Total revenue |
|
$ |
154,499 |
|
|
100% |
|
$ |
120,753 |
|
|
100% |
|
$ |
33,746 |
|
|
28% |
Total revenue increased $33.7 million, or 28%, to $154.5 million for the nine months ended September 30, 2023 from $120.8 million in the comparable period in 2022. The increase in total revenue was the result of an increase in both thermal barrier and energy industrial revenue.
The following chart sets forth energy industrial product shipments in square feet associated with recognized revenue, including revenue recognized over time, for the periods presented:
|
|
Nine Months Ended September 30, |
|
|
Change |
|
||||||||||
|
|
2023 |
|
|
2022 |
|
|
Amount |
|
|
Percentage |
|
||||
Product shipments in square feet (in thousands) |
|
|
22,337 |
|
|
|
24,074 |
|
|
|
(1,737 |
) |
|
|
(7 |
)% |
Energy industrial revenue increased by $6.9 million, or 8%, to $97.3 million for the nine months ended September 30, 2023 from $90.4 million in the comparable period in 2022. This increase was driven by project-based demand in the subsea market and a more favorable mix of product shipments in the global petrochemical and refinery markets in Latin America and Asia, offset, in part, by a decrease in the volume of shipments in the global petrochemical and refinery markets of North America and Europe.
28
Energy industrial revenue for the nine months ended September 30, 2023 included $27.6 million to a North American distributor, in comparison to $30.7 million for the comparable period of 2022.
The average selling price per square foot of our energy industrial products increased by $0.60, or 16%, to $4.36 per square foot for the nine months ended September 30, 2023 from $3.76 per square foot for the nine months ended September 30, 2022. The increase in average selling price reflected the impact of price increases enacted in 2023 and a change in the mix of products sold, as we strive to maximize capacity in our aerogel manufacturing facility. This increase in average selling price had the effect of increasing product revenue by $13.4 million for the nine months ended September 30, 2023 from the comparable period in 2022.
In volume terms, energy industrial product shipments decreased by 1.7 million square feet, or 7%, to 22.3 million square feet for the nine months ended September 30, 2023, as compared to 24.0 million square feet for the nine months ended September 30, 2022. The decrease in volume had the effect of decreasing product revenue by $6.5 million the nine months ended September 30, 2023 from the comparable period in 2022.
Thermal barrier revenue was $57.2 million for the nine months ended September 30, 2023 as compared to $30.3 million for the nine months ended September 30, 2022. During the nine months ended September 30, 2023 and 2022, thermal barrier revenue included $49.0 million and $22.8 million to a major U.S. automotive OEM, respectively.
Cost of Revenue
|
|
Nine Months Ended September 30, |
|
|
|
|
||||||||||||
|
|
2023 |
2022 |
Change |
||||||||||||||
|
|
|
|
|
Percentage |
|
|
|
|
Percentage |
|
|
|
|
|
|||
|
|
Amount |
|
|
Revenue |
|
Amount |
|
|
Revenue |
|
Amount |
|
|
Percentage |
|||
|
|
($ in thousands) |
||||||||||||||||
Cost of revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
Energy industrial |
|
$ |
73,065 |
|
|
75% |
|
$ |
79,360 |
|
|
88% |
|
$ |
(6,295 |
) |
|
(8)% |
Thermal barrier |
|
|
54,131 |
|
|
95% |
|
|
50,751 |
|
|
167% |
|
|
3,380 |
|
|
7% |
Total cost of revenue |
|
$ |
127,196 |
|
|
82% |
|
$ |
130,111 |
|
|
108% |
|
$ |
(2,915 |
) |
|
(2)% |
Total cost of revenue decreased $2.9 million, or 2%, to $127.2 million for the nine months ended September 30, 2023 from $130.1 in the comparable period in 2022. The decrease in total cost of revenue was the result of a decrease in energy industrial cost of revenue, offset by an increase in thermal barrier cost of revenue.
Energy industrial cost of revenue decreased $6.3 million, or 8%, to $73.1 million for the nine months ended September 30, 2023 from $79.4 million in the comparable period in 2022. The $6.3 million decrease was the result of a $6.9 million decrease in material costs due to change in the product mix, offset by a $0.6 million increase in manufacturing and other operating costs from the comparable period in 2022. The increase in manufacturing costs was driven by an increase in utilities expenses of $0.7 million, offset by a decrease in compensation and related costs of $0.1 million.
Thermal barrier cost of revenue increased $3.4 million to $54.1 million for the nine months ended September 30, 2023 as compared to $50.7 million for the nine months ended September 30, 2022. The $3.4 million increase was the result of a $6.3 million increase in manufacturing costs, offset by a $2.9 million decrease in material costs. The increase in manufacturing costs was driven by increases in depreciation and facility costs of $5.3 million and utilities expenses of $2.6 million and other manufacturing and operating costs of $1.0 million, offset by a decrease in compensation and related costs of $2.6 million.
Gross Profit
|
|
Nine Months Ended September 30, |
|
|
|
|
|
|||||||||||
|
|
2023 |
|
2022 |
|
Change |
||||||||||||
|
|
|
|
|
Percentage |
|
|
|
|
Percentage |
|
|
|
|
|
|||
|
|
Amount |
|
|
of Revenue |
|
Amount |
|
|
of Revenue |
|
Amount |
|
|
Percentage |
|||
|
|
($ in thousands) |
||||||||||||||||
Gross profit: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
Energy industrial |
|
$ |
24,246 |
|
|
25% |
|
$ |
11,044 |
|
|
12% |
|
$ |
13,202 |
|
|
120% |
Thermal barrier |
|
|
3,057 |
|
|
5% |
|
|
(20,402 |
) |
|
(67)% |
|
|
23,459 |
|
|
115% |
Total gross profit (loss) |
|
$ |
27,303 |
|
|
18% |
|
$ |
(9,358 |
) |
|
(8)% |
|
$ |
36,661 |
|
|
392% |
Gross profit increased by $36.6 million, or 392%, to $27.3 million for the nine months ended September 30, 2023 from $9.3 million of gross loss in the comparable period in 2022. The increase in gross profit was primarily the result of the $33.7 million
29
increase in total revenue and the $2.9 million decrease in total cost of revenue. The increase in gross profit reflects the decrease in costs, offset, in part by, additional resources to support our expected higher run-rate revenue in future periods for both our energy industrial and thermal barrier products from the comparable period in 2022.
Research and Development Expenses
|
|
Nine Months Ended September 30, |
|
|
|
|
|
|||||||||||
|
|
2023 |
|
2022 |
|
Change |
||||||||||||
|
|
|
|
|
Percentage |
|
|
|
|
Percentage |
|
|
|
|
|
|||
|
|
Amount |
|
|
of Revenue |
|
Amount |
|
|
of Revenue |
|
Amount |
|
|
Percentage |
|||
|
|
($ in thousands) |
||||||||||||||||
Research and development expenses |
|
$ |
12,281 |
|
|
8% |
|
$ |
12,733 |
|
|
11% |
|
$ |
(452 |
) |
|
(4)% |
Research and development expenses decreased by $0.4 million, or 4%, to $12.3 million for the nine months ended September 30, 2023 from $12.7 million in the comparable period in 2022. The $0.4 million decrease reflects a decrease in professional fees of $1.4 million, compensation and related costs of $0.2 million and other research and development expenses of $0.4 million, offset by an increase in depreciation and facility related expenses of $1.6 million.
Research and development expenses as a percentage of total revenue decreased to 8% of total revenue for the nine months ended September 30, 2023 from 11% in the comparable period in 2022.
Sales and Marketing Expenses
|
|
Nine Months Ended September 30, |
|
|
|
|
|
|||||||||||
|
|
2023 |
|
2022 |
|
Change |
||||||||||||
|
|
|
|
|
Percentage |
|
|
|
|
Percentage |
|
|
|
|
|
|||
|
|
Amount |
|
|
of Revenue |
|
Amount |
|
|
of Revenue |
|
Amount |
|
|
Percentage |
|||
|
|
($ in thousands) |
||||||||||||||||
Sales and marketing expenses |
|
$ |
24,226 |
|
|
16% |
|
$ |
20,944 |
|
|
17% |
|
$ |
3,282 |
|
|
16% |
Sales and marketing expenses increased by $3.3 million, or 16%, to $24.2 million for the nine months ended September 30, 2023 from $20.9 million in the comparable period in 2022. The $3.3 million increase was principally the result of increases in compensation and related costs of $1.9 million, facility related expenditures of $1.2 million and other sales and marketing expenses of $0.2 million.
Sales and marketing expenses as a percentage of total revenue decreased to 16% for the nine months ended September 30, 2023 from 17% in the comparable period in 2022.
General and Administrative Expenses
|
|
Nine Months Ended September 30, |
|
|
|
|
|
|||||||||||
|
|
2023 |
|
2022 |
|
Change |
||||||||||||
|
|
|
|
|
Percentage |
|
|
|
|
Percentage |
|
|
|
|
|
|||
|
|
Amount |
|
|
of Revenue |
|
Amount |
|
|
of Revenue |
|
Amount |
|
|
Percentage |
|||
|
|
($ in thousands) |
||||||||||||||||
General and administrative expenses |
|
$ |
41,382 |
|
|
27% |
|
$ |
26,544 |
|
|
22% |
|
$ |
14,838 |
|
|
56% |
General and administrative expenses increased by $14.8 million, or 56%, to $41.3 million for the nine months ended September 30, 2023 from $26.5 million in the comparable period in 2022. The $14.8 million increase was the result of additional staffing combined with increases in compensation and related costs of $12.6 million and professional services expenses of $2.7 million, offset by a $0.5 million decrease in other general and administrative expenses.
General and administrative expenses as a percentage of total revenue increased to 27% for the nine months ended September 30, 2023 from 22% in the comparable period in 2022.
30
Other Income (Expense), net
|
|
Nine Months Ended September 30, |
|
|
|
|
|
|||||||||||
|
|
2023 |
|
2022 |
|
Change |
||||||||||||
|
|
|
|
|
Percentage |
|
|
|
|
Percentage |
|
|
|
|
|
|||
|
|
Amount |
|
|
of Revenue |
|
Amount |
|
|
of Revenue |
|
Amount |
|
|
Percentage |
|||
|
|
($ in thousands) |
||||||||||||||||
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
Interest (expense), related party |
|
$ |
(2,424 |
) |
|
(2)% |
|
$ |
(4,103 |
) |
|
(3)% |
|
$ |
1,679 |
|
|
(41)% |
Interest income, net |
|
|
5,532 |
|
|
4% |
|
|
553 |
|
|
— |
|
|
4,979 |
|
|
NM |
Income from Employee Retention Credits |
|
|
2,186 |
|
|
1% |
|
|
— |
|
|
— |
|
|
2,186 |
|
|
NM |
Total other income (expense), net |
|
$ |
5,294 |
|
|
3% |
|
$ |
(3,550 |
) |
|
(3)% |
|
$ |
8,844 |
|
|
NM |
Other income (expense), net increased by $8.8 million to $5.3 million of other income for the nine months ended September 30, 2023 from $3.5 million of other expense in the comparable period in 2022. The $8.8 million increase was the result of $5.0 million of interest income, $2.2 million of Employee Retention Credits and a $1.6 million net impact of capitalized interest relating to our Convertible Note in the comparable period in 2022.
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.
Our long-term financial projections anticipate revenue growth, increasing levels of gross profit, and improved cash flows from operations. To meet expected growth in demand for our aerogel products in the electric vehicle market, we have been in the process of expanding our aerogel blanket capacity by constructing a second manufacturing plant in Bulloch County, Georgia. However, in order to manage the development of the second plant so that its increased capacity comes online in a manner that aligns with our current expectations as to demand from our EV customers, we are extending the timeframe for construction and commissioning of the second plant until such time as its capacity is supported by increased demand. In the meantime, and until we ramp up construction, we expect to be able to substantially reduce our planned capital expenditures for 2023 and 2024. At the same time, we believe that productivity improvements in our existing Rhode Island facility combined with supply of our energy industrial products from one or more contract manufacturers in China beginning in 2024 will permit us to achieve a target revenue capacity of approximately $550.0 million in 2024 and prior to the completion and start-up of the second plant. Nonetheless, there can be no assurance as to when we will ramp up construction on the second plant. There can also be no assurance that our contract manufacturing strategy of meeting the demand of our energy industrial customers with supply from one or more contract manufacturers in China will provide us with adequate manufacturing capacity or supply for that expected demand. Furthermore, when we ramp up construction on the second plant, further cost inflation and/or supply chain disruptions, as well as potential changes in the scope of the facilities, could lead to increases to our prior estimates for completion of the second plant.
We are also increasing our investment in the research and development of next-generation aerogel products and technologies. During 2023, we will continue to develop aerogel products and technologies for the electric vehicle market. We believe the commercial potential for our technology in the electric vehicle market is significant. To meet the anticipated revenue growth and take advantage of this market opportunity, we are adding personnel, incurring additional operating expenses, and planning to construct a carbon aerogel battery materials facility, among other items.
In February 2022, we sold and issued to an affiliate of Koch $100.0 million in aggregate principal amount of our 2022 Convertible Note. In addition, in March 2022, pursuant to a securities purchase agreement dated February 15, 2022, we sold to an affiliate of Koch 1,791,986 shares of our common stock, at a price of $27.902 per share, for net proceeds of $49.9 million after deducting fees and offering expenses of $0.1 million.
We believe that our September 30, 2023 cash and cash equivalents balance of $94.6 million will be sufficient to support current operating requirements, current research and development activities and the initial capital expenditures required to support the evolving commercial opportunities in the electric vehicle market and other strategic business opportunities.
31
However, we plan to supplement our cash balance with equity financings, debt financings, equipment leasing, sale-leaseback transactions, customer prepayments, or government grant and loan programs to provide the additional capital necessary to purchase the capital equipment, construct the new facilities, establish the operations and complete the aerogel capacity expansions required to support our evolving commercial opportunities and strategic business initiatives. We also intend to enter into a new revolving credit facility. We believe that the consummation of equity financings could potentially result in an ownership change under Section 382 of the Internal Revenue Code. Such an ownership change would lead to the use of our net operating loss carryforwards being restricted. Our inability to use a substantial portion of our net operating loss carryforwards would result in a higher effective tax rate and adversely affect our financial condition and results of operations.
Primary Sources of Liquidity
Our principal sources of liquidity are currently our cash and cash equivalents. Cash and cash equivalents consist primarily of cash, money market accounts, and sweep accounts on deposit with banks. As of September 30, 2023, we had $94.6 million of unrestricted cash and cash equivalents.
In February 2022, we sold and issued to an affiliate of Koch $100.0 million in aggregate principal amount of our 2022 Convertible Note. In addition, in March 2022, pursuant to a securities purchase agreement dated February 15, 2022, we sold to an affiliate of Koch 1,791,986 shares of our common stock, at a price of $27.902 per share, for net proceeds of $49.9 million after deducting fees and offering expenses of $0.1 million.
Analysis of Cash Flow
Net Cash Used in Operating Activities
During the nine months ended September 30, 2023, we used $39.8 million in net cash in operating activities, as compared to the use of $70.3 million in net cash during the comparable period in 2022, a decrease in the use of cash of $30.5 million. This decrease in use of cash was the result of lower net loss adjusted for non-cash items of $31.4 million offset by net cash used by changes in operating assets and liabilities of $0.9 million.
During the nine months ended September 30, 2022, we used $70.3 million in net cash in operating activities, as compared to the use of $6.6 million in net cash during the comparable period in 2021, an increase in the use of cash of $63.7 million. This increase in use of cash was the result of increases in net loss adjusted for non-cash items of $40.6 million and in net cash used by changes in operating assets and liabilities of $23.1 million.
Net Cash Used in Investing Activities
Net cash used in investing activities is for capital expenditures for machinery and equipment principally to improve the throughput, efficiency and capacity of our East Providence facility and engineering designs and construction costs for the planned aerogel manufacturing facility in Bulloch County, Georgia. Net cash used in investing activities for the nine months ended September 30, 2023 and 2022 was $147.7 million and $119.3 million, respectively.
Net Cash Provided by Financing Activities
Net cash used in financing activities for the nine months ended September 30, 2023 totaled $0.1 million and consisted of $0.4 million in cash used for payments made for employee tax withholdings associated with the vesting of restricted stock units and $0.1 million issuance costs from private placement of common stock, offset, in part, by $0.4 million in proceeds from employee stock option exercises.
Net cash provided by financing activities for the nine months ended September 30, 2022 totaled $215.5 million and consisted of $99.8 million in net proceeds from the issuance of convertible debt, $49.9 million in net proceeds from the private placement of our common stock, $72.7 million in net proceeds from the ATM offering program, and less than $0.2 million in proceeds from employee stock option exercises, offset, in part, by $4.7 million in cash used for repayments of a prepayment liability and $2.4 million in cash used for payments made for employee tax withholdings associated with the vesting of restricted stock units.
32
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 with U.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
The SEC 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. Forward-looking statements include, but are not limited to, statements about: the expected future growth of the market for our aerogel products and our continued gain in market share, in particular in the electric vehicle market, the energy infrastructure insulation market, the lithium-ion battery thermal barrier markets, and other markets we target; our beliefs in the appropriateness of our assumptions, the accuracy of our estimates regarding expenses, loss contingencies, future revenues, revenue capacity, future profits, uses of cash, available credit, capital requirements, and the need for additional financing to operate our business and for capital expenditures 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 expectations regarding the investment to open a second manufacturing facility in Georgia, the extended construction and commissioning timeframe for the planned second manufacturing facility, our efforts to manage the construction of the second plant to align with our expectations of demand from EV customers; our estimates of annual production capacity; beliefs about the commercial potential for our technology in the electric vehicle market; beliefs about our ability to produce and deliver products to electric vehicle customers; beliefs about Aspen’s contracts with the major automotive manufacturers; our expectations about the size and timing of awarded business in the electric vehicle market, future revenues and profit margins, arising from our supply relationship and contract with automotive OEMs and our ability to win more business and increase revenue in the electric vehicle market; beliefs about the performance of our thermal barrier products in the battery systems of electric vehicles; the current or future trends in the energy, energy infrastructure, chemical and refinery, LNG, sustainable building materials, electric vehicle thermal barrier, electric vehicle battery materials or other markets and the impact of these trends on our business; our investments in the electric vehicle market and aerogel technology platform; our beliefs about the financial metrics that are indicative of our core performance; 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 expectations about future material costs and manufacturing expenses as a percentage of revenue, including the impact of engaging one or more contract manufacturers in China for supply of our energy industrial products; our expectation about the ability of the Chinese contract manufacturers that we engage to consistently supply the aerogel product that we order in a timely manner; 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; and our expectations about potential sources of future financing.
33
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 to Aspen 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.
34
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Market risk represents the risk of loss that may impact our financial position due to adverse changes in financial market prices and rates. Our market risk exposure results primarily from fluctuations in interest rates, as well as from inflation. In the normal course of business, we are exposed to market risks, including changes in interest rates which affect our cash flows. We may also face additional exchange rate risk in the future as we expand our business internationally.
Interest Rate Risk
We are exposed to changes in interest rates in the normal course of our business. As of September 30, 2023, we had unrestricted cash and cash equivalents of $94.6 million. These amounts were held for working capital and capital expansion purposes and were invested primarily in deposit accounts, money market accounts, and high-quality debt securities issued by the U.S. government via cash sweep accounts primarily at major financial institutions in North America. Due to the short-term nature of these investments, we believe that our exposure to changes in the fair value of our cash as a result of changes in interest rates is not material.
As of September 30, 2023, we had a convertible note outstanding with principal balance of $113.0 million. Our convertible note bears interest at the Secured Overnight Financing Rate (SOFR) plus 5.50% per annum if interest is paid in cash, or, if interest is paid in-kind as an increase in the principal amount of the outstanding note, at the SOFR plus 6.50% per annum. Under the terms of the investment, SOFR has a floor of 1% and a cap of 3%. Interest is paid semi-annually in arrears on June 30 and December 30. We, at our option, are permitted to settle each semi-annual interest payment in cash, in-kind, or any combination thereof.
As of September 30, 2023, we had $0.3 million of restricted cash to support our outstanding letters of credit to secure obligations under certain commercial contracts and other obligations. We terminated our revolving credit facility agreement on November 28, 2022.
Inflation Risk
Although we expect that our operating results will be influenced by general economic conditions, we do not believe that inflation has had a material effect on our results of operations during the periods presented in this report. However, our business may be affected by inflation in the future.
Foreign Currency Exchange Risk
We are subject to inherent risks attributed to operating in a global economy. Principally all our revenue, receivables, purchases and debts are denominated in U.S. dollars.
Item 4. Controls and Procedures.
(a) Evaluation of Disclosure Controls and Procedures.
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in the reports that we file or submit under the Securities Exchange Act of 1934, as amended (the Exchange Act), is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and is accumulated and communicated to our management, including our principal executive officer and principal financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
As of September 30, 2023, our management, with the participation of our principal executive officer and principal financial officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives, and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on such evaluation, our principal executive officer and principal financial officer have concluded that, as of September 30, 2023, our disclosure controls and procedures were effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and is accumulated and communicated to our management, including our principal executive officer and principal financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
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(b) Changes in Internal Controls.
During the nine months ended September 30, 2023, there were no changes in our internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15(d)-15(f) promulgated under the Exchange Act, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II — OTHER INFORMATION
Item 1. Legal Proceedings.
We are involved in various legal claims and proceedings in the normal course of operations. We believe the outcome of these matters will not have a material adverse effect on our consolidated financial position, results of operations or liquidity, except as described in Part 1, Item 3. “Legal Proceedings” of our Annual Report on Form 10-K. Since the filing of our Form 10-K, there have been no material changes in our legal proceedings from those disclosed therein, other than as noted below.
Our patent infringement proceedings in Italy against of AMA S.p.A. and AMA Composites S.r.l. (collectively, AMA) are ongoing. In July 2023, the technical experts appointed by the judge issued a report finding key claims of our process patents valid and infringed by the aerogel products manufactured by Nano Tech Co., Ltd. and sold by AMA.
Our patent infringement proceedings in Korea against Beerenberg Services AS, Beerenberg Korea Ltd., and Bronx (China) Co., Ltd. (collectively, “Beerenberg”) at the Seoul District Court and Korea Trade Commission (KTC) are ongoing. Beerenberg Korea Ltd. and Bronx (China) Co., Ltd. have confirmed in their answers to the KTC investigation that the accused infringing products are manufactured in China by Bronx (China) Co., Ltd. and imported into Korea by Beerenberg Korea Ltd.
In August and September 2023, LG Chem Ltd. filed oppositions at the Korean Intellectual Property Trial and Appeal Board and at the Japanese Patent Office against one of the Korean patents we are asserting against Beerenberg in Korea and a Japanese counterpart of the Korean patents. We intend to vigorously defend the validity of these patents.
In October 2022, we were served with a summons from Aerogels Poland Nanotechnology LLC (“APN”), a former distributor of our products in Poland with whom we previously terminated our distribution agreements because of APN’s failure to pay amounts due to us. The summons asserts causes of action for declaratory judgment, breach of contract, breach of implied contract, equitable estoppel and fraud, and states that plaintiffs will seek declaratory judgment, actual and liquidated damages in the sum of $20 million, in addition to attorneys’ fees. We were not served with any complaint at the time the summons was served. In December 2022, we filed a notice of appearance in New York County Supreme Court and a demand upon plaintiffs to file and serve a complaint. In March 2023, plaintiffs filed a complaint asserting various causes of action consistent with those set forth in the October 2022 summons, and a demand for monetary damages and other relief in excess of $16 million. On June 30, 2023, we filed a motion for an order to compel arbitration, seeking dismissal of certain claims, and for attorney’s fees. We intend to vigorously defend this matter.
Item 1A. Risk Factors.
The ownership of our common stock involves a number of risks and uncertainties. When evaluating the Company and our business before making an investment decision regarding our securities, potential investors should carefully consider the risk factors and uncertainties described in Part 1, Item 1A. “Risk Factors” of our Annual Report on Form 10-K. Since the filing of our Form 10-K, there have been no material changes in our risk factors from those disclosed therein, other than as provided below.
We are engaging third-party contract manufacturers in China to supply our energy industrial products beginning in 2024. If such contract manufacturers are unable to manufacture and deliver a sufficient quantity of high-quality products on a timely and cost-efficient basis, our net revenue and business operations may be harmed and our reputation may suffer.
We are engaging one or more contract manufacturers in China for supply of our energy industrial products beginning in 2024, which we believe will enable us to achieve a target revenue capacity of approximately $550.0 million in 2024 and prior to the completion and start-up of our planned second manufacturing plant. If our contract manufacturers are unable to deliver the required aerogel product on a timely basis, we may experience delays in delivering our finished aerogel product to customers in the energy industrial market. In addition, because our third party contract manufacturers have manufacturing facilities in China, their ability to provide us with adequate supplies of high-quality products on a timely and cost-efficient basis is subject to a number of additional risks and uncertainties, including political, social and economic instability and other factors that could impact the shipment of supplies. If our manufacturers are unable to provide us with adequate supplies of high-quality aerogel products on a timely and cost-efficient basis, our operations could be disrupted and our revenue and business operations may suffer. Moreover, if our third-party contract manufacturers cannot consistently produce high-quality products that are free of defects, we may experience a loss of customers, which may also reduce our revenues and may harm our reputation and brand. Furthermore, our third-party contract manufacturers may become subject to various supply chain disruptions, including but not limited as a result of COVID-19, other pandemics or public health crises, and geopolitical disputes and conflicts, any of which could slow or halt the delivery of products to us and increase the price of certain materials due to resulting increases in costs of raw materials and shipping costs.
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Our potential inability to adequately protect our intellectual property as a result of engaging contract manufacturers in China for the supply of our aerogel products for our customers in the energy industrial market could negatively impact our performance.
In connection with our engagement of contract manufacturers in China, we expect to implement customary manufacturer safeguards onsite, such as the use of confidentiality agreements with employees, to protect our proprietary information and technologies during the manufacturing process of our aerogel products for the energy industrial market. However, these safeguards may not effectively prevent unauthorized use of such information and technical know-how, or prevent the contract manufacturer from retaining them. Although the courts in China are increasing and broadening their protection of intellectual property rights, the legal regime governing intellectual property rights in China is relatively immature and it is often difficult to create and enforce intellectual property rights or protect trade secrets there. We face risks that our proprietary information may not be afforded the same protection in China as it is in countries with well-developed intellectual property laws, and local laws may not provide an adequate remedy in the event of unauthorized disclosure of confidential information. Costly and time-consuming litigation could be necessary to enforce and determine the scope of our proprietary rights in China, and failure to obtain or maintain trade secret protection could adversely affect our competitive business position. In the event that the third-party contract manufacturer of our proprietary aerogel product misappropriates our intellectual property, our business, prospects and financial condition could be materially and adversely affected.
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
(a) Unregistered Sales of Equity Securities.
None.
(b) Use of Proceeds from Initial Public Offering of Common Stock.
Not applicable.
(c) Purchases of Equity Securities by the Issuer and Affiliated Purchasers.
We did not repurchase any of our equity securities during the quarter ended September 30, 2023.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Other Information.
During the fiscal quarter ended September 30, 2023, none of our
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Item 6. Exhibits.
(a) Exhibits
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10.1+ |
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Employment Offer Letter, dated August 23, 2023, by and between the Company and Santhosh Daniel. |
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10.2 |
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10.3+ |
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Aspen Aerogels, Inc. Bonus Plan (Amended and Restated Effective as of January 1, 2024). |
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10.4+ |
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10.5+ |
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Separation Agreement, dated September 5, 2023, by and between the Company and Kelley Conte. |
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10.6+ |
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Consulting Agreement, dated September 5, 2023, by and between the Company and Kelley Conte. |
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31.1 |
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Certification of principal executive officer under Section 302(a) of the Sarbanes-Oxley Act of 2002. |
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31.2 |
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Certification of principal financial officer under Section 302(a) of the Sarbanes-Oxley Act of 2002. |
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101.INS |
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XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. |
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101.SCH |
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Inline XBRL Taxonomy Extension Schema Document. |
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101.CAL |
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Inline XBRL Taxonomy Extension Calculation Linkbase Document. |
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101.DEF |
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Inline XBRL Taxonomy Extension Definition Linkbase Document. |
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101.LAB |
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Inline XBRL Taxonomy Extension Label Linkbase Document. |
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101.PRE |
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Inline XBRL Taxonomy Extension Presentation Linkbase Document. |
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104 |
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Cover Page Interactive Data File (embedded within the Inline XBRL document). |
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+ Management contract or compensatory plan or arrangement.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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ASPEN AEROGELS, INC. |
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Date: November 2, 2023 |
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By: |
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/s/ Donald R. Young |
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Donald R. Young |
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President and Chief Executive Officer (principal executive officer) |
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Date: November 2, 2023 |
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By: |
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/s/ Ricardo C. Rodriguez |
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Ricardo C. Rodriguez |
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Chief Financial Officer and Treasurer (principal financial officer) |
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