Aspen Aerogels, Inc.

to the most directly comparable GAAP financial measures and a discussion of why we present these non-GAAP financial measures are included in yesterday's press release. And one final note, during the Q&A session, in the interest of time, we ask that you limit your questions to two questions at a time. If you have additional questions beyond the initial two, please get back into the queue and we will get to all questions. And I'll now turn the call over to Don. Don?

Thanks, Laura. Good morning, everyone. Thank you for joining us for our Q3 2022 earnings call. I will kick things off with a progress report on our recent business developments and financing activities, and Ricardo will discuss business results and outlook. We will conclude with a Q&A session. Our first revenue guidance for 2022 had a center point of $150 million. At the time, we reiterated our 2023 target to double revenue from 2021 to 2023 to $240 million and to triple revenue from 2023 to 2025 to over $700 million. During the second quarter, we raised our revenue guidance to a center point of $190 million while maintaining our 2023 and 2025 revenue targets. At our last earnings call, we anticipated that automotive OEMs would be impacted from time to time by supply chain challenges that could influence their growth ramps in any given period. We saw this in the third quarter, and while we had record thermal barrier revenue, it was less than we expected at the outset of the quarter. Q3 revenue was also impacted by some of our own supply chain issues, which Ricardo will cover in his presentation. We are experiencing during the second half of this year the fluctuations inherent in the startup nature of the EV market as our OEMs ramp their EV production. We believe that our Q4 thermal barrier revenue will be at a record level of approximately $20 million and will enable us to achieve overall revenue for the year of approximately $180 million, revenue growth for the year of nearly 50%. Our PyroThin thermal barrier commercial activity continues to gather pace as we deepen our engagement with additional customers. We continue to sell parts to support customer product development and our long-term revenue pipeline, most notably to the commercial vehicle division of an important German OEM and one of its luxury light vehicle brands. Increasing the number of vehicle nameplates to which we supply production parts is key. While we will continue to anticipate variability from one quarter to the next during the ramping period, overall, we believe that the long-term EV momentum is powerful. We remain confident that we have ample opportunity to reach our 2023 revenue target of $240 million and our 2025 revenue target of $720 million. We have a deep order book on the energy and industrial side of our business. And while it can mitigate some of the variability of the EV OEM ramp, it is not a one for one replacement at the revenue level. There are several highlights from the energy industrial business. We continue to see strong growth in LNG markets. During Q3, we had several early wins and accelerated LNG projects that will unfold in the coming quarters and years. In North America, We had first shipments of product for the conversion of former drilling rigs to rapid deployment LNG assets. We received additional orders in Latin America for Peru LNG and expect continued growth in Latin America as projects on the Pacific take shape. We are expanding our presence in the Middle East and are proud to partner with ADNOC LNG, where we received our first Crowdgel award in Q3. In the US, we saw strong demand and serviced large turnarounds through the quarter on the refinery and petrochemical side of the business. We completed major construction and material support for Shell's Penn Chemical Facility. We also continued during Q3 to execute on the largest propylene oxide plant in the world for Lyondell. The value drivers for these wins are long-term asset protection and simplified logistics We are seeing similarly high activity levels in Europe, Asia, and in Canada. One last note on energy industrial. Our space loft subsea pipe and pipe segment is strong with five recent awards from Subsea 7, Technip FMC, and All Seas. These five projects represent approximately $12.7 million in revenue, and our backlog in this space continues to grow. The strong outlook for energy industrial is fueled by our value drivers of efficiency, resiliency, and safety. We are building in optionality to manage our overall revenue growth during this early stage of the EV megatrend. This flexibility is a good example of the benefit of our strategy to leverage the aerogel technology platform into a diverse set of large and dynamic markets. With an active energy industrial business and with a strong position to grow with the EV megatrend, we are committed to our $240 million 2023 revenue target and our $720 million 2025 revenue target. We continue to make progress on Plant 2, our aerogel manufacturing facility under construction in Georgia. At a macro level, The past 12 months have been marked by supply chain inflationary and cost of capital challenges for all projects and our plan to project has not been immune. We are proactively managing the project in order to mitigate cost and schedule pressures and doing so without losing sight of our goal to build the initial phase of the first class. aerogel manufacturing facility that enables us to hit our 2025 revenue target of 720 million dollars. We have also designed Plant 2 to allow us to bring online incremental capacity as our current OEM scale and as we are able to convert a robust development and prototyping pipeline into design awards with new OEMs. We believe Plant 2 positions us to play a significant and important role in battery performance and safety. As we have said in the past and as is especially true in the current financial markets, we are taking an all of the above approach to financing our growth plan. As we explore prospective sources of capital, we have continued to focus on strategic investors who know our company and the markets we serve and who have the potential to make equity or debt investments in the business as Koch Strategic Platforms has done in the past and has indicated its interest in doing so again. We believe having a strategic investor as the centerpiece of an investor group will add validation to our business strategy and, of course, strengthen our balance sheet. While market conditions continue to be a challenge, we believe we will close a round of financing in the near term. In addition to potential strategic investors and the public equity and debt markets, We are engaged with government programs as potential 2023 sources of capital for Plant 2. Our first application for the U.S. Department of Energy grant for advanced battery materials as part of the Bipartisan Infrastructure Act was not funded, as we believe the awards were largely granted to companies that are, quote, inside the cell. We believe that the administration is likely to announce an additional $3 billion in grant funding opportunities before the end of second quarter 2023. We expect that a significant amount of that funding will be dedicated to U.S.-based manufacturers dedicated to the electrification economy. We are also exploring other DOE programs that are focused on battery performance and safety. The programs target American manufacturing in an effort to address the resiliency of supply chains in the U.S., especially for projects in critical areas of sustainability such as energy storage and related materials. While such DOE programs can take time and are unpredictable, we believe we are a very good candidate and that our pursuit is consistent with our all of the above approach to raising the necessary capital for us to execute our long-term strategy. And finally, I would like to continue the practice of highlighting our ESG work during quarterly earnings calls. For the past two decades, sustainability has been linked to the success of our business. It is a natural fit for us to explore new uses for our Aerogel technology platform with the goal of improving environmental performance and safety of our customers' products and processes. It is also at the core of our culture to respect and celebrate our employees by striving to create a diverse and inclusive environment. We believe we have a responsibility to make a positive impact on our communities, and we are committed to creating a corporate culture that pursues its mission with the highest standards of integrity. During the third quarter, Aspen published our inaugural ESG highlights report and launched our ESG webpage, which provide a comprehensive overview of our overall ESG strategy. We look forward to your feedback. I will now turn the call over to Ricardo Rodriguez. Ricardo Rodriguez Thank you, Don.

I'll start on slide four and our financial highlights for the third quarter, starting with revenues. We delivered $36.7 million of revenues in Q3, which translates into 21 percent growth year over year. Energy industrial demand remains very strong, and we're booking orders into the second half of next year. We see no demand risk in the medium to long term on our EV thermal barriers as the move to electrification accelerates. Our annual air plant shutdown to implement longer roll lengths and faster line speeds combined with CO2 shortages and near term volume ramp up delays in EV thermal barrier part demand prevented us from continuing the recent quarterly revenue growth rate that we've been driving for three quarters in a row. Absent these disruptions, we believe revenue would have increased by $7 million. Our EV thermal barrier revenues increased by 11% over the prior quarter to $11.9 million and over 12-fold year over year. Our Q3 energy industrial revenues of $24.7 million were 16% lower than those in the same quarter last year and 29% lower than in the previous quarter. This segment was most affected by our pre-scheduled annual plant shutdown and the national CO2 shortage. To illustrate this impact, it's worth remembering that our aerogel plant in Rhode Island operates 24-7. We effectively shut down this operation for seven days, from July 16th to July 22nd, and implemented various process changes that are already yielding benefits with faster line speeds and longer road production lengths. The national CO2 shortage prevented us from realizing these benefits in the third quarter by limiting our aerogel production for at least 17 days. We've implemented various measures to ensure that we reduce the frequency and impact of further interruptions by increasing our CO2 storage capacity on site and starting to manage the transportation of supply with our own trailers. These investments have already contributed to a stable production schedule this month. Next, I'll provide a summary of our main expenses. Material expenses of $20.8 million for the quarter made up 57 percentage points of sales, which continue to be over 10 percentage points higher than where we want these to be in the long term. This delta is driven by the fact that most of our EV thermal barrier production in July will still deliver from Rhode Island with higher scrap levels and a more complex part design that has been phased out as we transition to higher volumes. In Q3, we effectively transferred our EV thermal barrier assembly from Rhode Island to a larger site in Monterrey, Mexico, with higher volume processes that will enable our profitable growth in the future. As we completed this initiative at the beginning of August, Demand on the three automotive nameplates that we're currently supplying temporarily slowed as customers are addressing their own issues, increasing vehicle production volumes. This slowdown prevented our thermal barrier gross margins from improving quarter over quarter, ending at negative 70% versus negative 67% in the prior quarter by affecting our ability to absorb fixed costs. We are confident, however, that as soon as demand accelerates next year, we will be able to capitalize on the transition to optimize processes. Conversion costs, which we consistently describe as all production costs required to convert raw materials into finished goods, were of $22.8 million and made up 61 percentage points of sales. These costs include all elements of direct labor, manufacturing overhead, factory supplies, rent, insurance, utilities, overhead, and inspection. With less revenue than expected during the quarter and approximately $12.9 million of these expenses being fixed, it was challenging to continue our path towards reducing the percentage of sales through improved fixed cost absorption. However, we remain confident in our ability to leverage the higher throughput rates enabled by faster line speeds and longer aerogel roll lengths to manage these costs. Operating expenses, which are key to delivering our revenue and profitability goals of 2023 and beyond, were of $22 million. These increased by half a million dollars quarter over quarter versus an increase of $4.6 million in Q2 over the prior quarter. This modest increase aligns with my remarks from Q2 around making sure that our OPEX increases become more modest and focus precisely on delivering three things. Tangible productivity benefits through new process development and the implementation of systems that streamline our methods and drive overall productivity. Two, new business awards through our EV thermal barrier technical sales efforts. And lastly, clear milestones in our R&D efforts. These include our silicon anode carbon aerogel development efforts, along with R&D efforts in our silica aerogel-based insulation formulations. These are the developments that drive lower chemical waste expenses through reformulation and enable further productivity improvements. Accordingly, our net loss increased to $29.6 million, or 75 cents per share, versus a net loss of $7.8 million, or 24 cents per share in the same quarter of 2021. Adjusted EBITDA was negative $23.2 million in Q3, compared to negative $7.8 million in Q3 of last year. As a reminder, we define adjusted EBITDA as net income or loss before interest, taxes, depreciation, amortization, stock-based compensation expenses, and other items that we do not believe are indicative of our core operating performance. In Q3, these other items included $2.6 million of stock-based compensation, and $1.3 million of interest expense. Next, alter the cash flow and our balance sheet. Cash used in operations of $37.4 million reflected our adjusted EBITDA of negative $28.3 million and an increase in operational cash needs of $14.3 million that reflects a quarterly decrease in accounts payable of $15.5 million. Capital expenditures during the quarter of $67 million included the site work, extractor pit formation as part of Plan 2's construction, assembly equipment for a higher volume thermal barrier operations, the R&D lab upgrades for our carbon aerogel battery material efforts, and the initial construction of our advanced thermal barrier center. As progress remains on track for Plan 2 to enable a revenue growth in 2024, we have incurred $129.4 million in capital expenses through the end of Q3 towards it. Cash provided by financing activities of $44.7 million during Q3 included $44.9 million of net proceeds from our ATM offering transactions at a gross average price of $10.63 per share. We ended the quarter with $102.4 million of cash no borrowings under our revolving credit facility, and shareholders' equity of $182.4 million. We remain geared to deliver revenues of $180 million in 2022, a net loss in the range of $82.3 million and $86.8 million, and adjusted EBITDA in the range of negative $57.5 million and $62 million. Our capital expenditures for the year are expected to range between $200 and $255 million, as we work to further optimize our commitments and investments across the board. Delivering over $59 million of revenues during the fourth quarter is subject to various external factors, such as our thermal barriers customers' abilities to maintain their stated vehicle production volumes, and the supply chain of our main raw materials such as silanes, batting, CO2, and the local labor market, particularly for our aerogel facility in Rhode Island. We are proactively managing our supply chain risks and have ensured that we supply silanes and batting to execute our production plans. Recent nationwide CO2 shortages in the tight labor market continue to pose the highest near-term risks to our revenue ramp. Before turning the call back to Don, I'd like to provide a brief commercial activities update on slide six. In this chart, to remind everyone, the size of the circle is the vehicle volume in millions that Piper Sandler is forecasting for these OEMs in 2025, and their placement on the map is their approximate headquarters location. The color of the circle then determines whether we have been awarded business by that OEM, are actively quoting business, undergoing testing, or not active with that OEM. We presented an earlier version of this slide during our Q2 earnings call. You can see that our team has successfully entered the quoting stages with the largest customers in Europe and Asia that will be relevant on a global basis in 2025. The volume of prototyping activity in Europe has also advanced into deep technical development that reinforces our strategy and continues to demonstrate customers' eagerness to invest in the right thermal runaway and thermal propagation solution. In Q3, we also started discussions with an additional American OEM and have provided them with pyro-thin materials to test its capabilities. With that, I'm happy to turn the call back to Don.

Thank you, Ricardo. Before we turn to the Q&A session, I would like to reiterate two important points. First, both our EV and energy industrial businesses provide a favorable backdrop for us to reach our 2023 and 2025 revenue targets. And second, despite the challenging financial markets, we are confident that we will fund our plan to execute our strategy, will become cash flow positive during 2024, and create value for our shareholders. We appreciate your continued support. Emily, let's turn to the Q&A session.

Thank you. We will now begin the question and answer session. If you would like to ask a question, please do so now by pressing star followed by the number one on your telephone keypad. If you change your mind and would like to be removed from the queue, please press star followed by two. When preparing to ask your question, please ensure that your microphone is unmuted locally. Our first question today comes from the line of Eric Stein with Craig Callum. Eric, your line is open.

Hi, Donna. Hi, Ricardo.

Eric, how are you?

Doing well, thanks. So I'd love to just stick with slide five. I mean, first of all, great to see that, you know, you've added Tesla. And I mean, that seems to be pretty recent since that. It looks like it's been updated over the last month. But I'm curious, so you've had the blue circles, and you're in quoting stage. I mean, is this an area where it's kind of going as expected and that you've got the OEMs now really trying to dial in what their plans are for their platform for specific launches, launch dates, that sort of thing? Just maybe thoughts on that, and do you have an expectation of when – you think you could see some movement of those moving from cold stage to actual awards?

Sure, Eric. And maybe before answering that one, I'll just make a quick correction on my remarks around the CapEx range. I actually meant to say that our CapEx range is going to be between $200 and $225 million, which I believe there in the pressure of the moment I read it as $255 on the higher end. But now, to answer your question on our progress in Europe, yeah, I mean, for us really what is evidence of progress there and getting closer to actually being sourced is the level of prototyping activity and the volume of parts and the iteration of those designs that are worked through with the teams. And that's why we put that in Don's remarks, because it is notable. I mean, that volume of prototype parts that we've sent in Europe has increased, and we've got a clearer line of sight to what the specific applications we're being eyed for. And so I think That will continue making progress, and next year we're going to start seeing that convert into a potential award.

Eric, I would just add to what Ricardo said. The pattern of engagement with these European OEMs and the intensity of it and sort of this specifics of the prototype tweaks, if you will, remind us very much of where we were with our earlier award wins with General Motors and Toyota. And I think it is also a function of those companies in the development of their battery platforms and the various nameplates that they have. We recognize this pattern quite clearly, and that gives us confidence that we're in a good position with several of them.

So that, I mean, fair to say that it sounds like with the one German OEM that you called out in the presentation, I mean, confidence there, but potentially 2023 is when you see, you know, others, whether it's Europe or Asia or, I mean, could be North America as well.

Absolutely.

Okay. And maybe second one for me, you know, you may be limited as to what you can say and understandable if that's the case. But, you know, as I think about all these circles on the map and how that plays into financing, I mean, clearly a strategic and, you know, you seem to have a lot of confidence in going down that road of You know, any clarity you can provide, you know, do you think it would be potentially from this map on this slide or, you know, someone in the more broad insulation space?

We'd just like to be careful answering that, Eric. Let's just say sort of all of the above, if we can, just to use a phrase that we've used before. Not to be evasive, but I just want to be careful in this stage of engagement.

Nope, understandable, but I thought I would give it a shot anyway.

Okay, thank you. Appreciate it, yeah. Thanks so much.

Our next question comes from Colin Rush with Oppenheimer. Please go ahead, Colin.

Thanks so much, guys. So with the full year guidance, it looks like you're going to get to about $16 million in revenue for the year. I just want to understand where that incremental revenue is coming from. All of that's coming from the EV space, and assume that the larger bulk of that is going to be coming from the industrial space and how much visibility you have to those numbers right now.

Yeah, I think... The volumes on the EV thermal barrier side have become clear for Q4 just recently. And so as Don mentioned in his remarks, I think we've got a relatively clear line of sight to around $20 million for the EV thermal barrier space. And then really we're leaning heavily on really the products that we have the highest productivity on out of the aerogel facility to really deliver the rest, the other $40 million here. I mean, the backlog is really strong there, and we've got customers there eager and expecting the product. And so as we were working our way through the end of Q3, we started allocating aerogel production to the energy industrial segment. we've continued to do that and that's what's going to, that's what still gives us confidence into the $180 million for the year in 2022.

I think as Ricardo said in his script, the, you know, we're taking orders into 2023 at this, well into 2023 at this point on the energy industrial side. So we've got, so for us it comes down to, avoiding any supply chain issues during Q4. And as Ricardo also said in his remarks, we've made significant improvements, not only with productivity, but around some of our raw materials, in particular CO2, which has been challenging nationally for a period. We've put in place some belt and suspenders efforts to be sure that we don't have disruptions going forward.

Okay, that's super helpful, guys. And then just thinking about the gross margin evolution here, you know, with those supply chain adjustments and some of the cost out measures that you've got, how should we be thinking about the cadence of gross margin improvement as we get through the balance of this year, which you guys have provided a fair amount of detail on, but more importantly, into next year?

Yeah, I mean, it's heavily volume dependent on the EV thermal barrier side. But we're still not deviating from our plans to turn that positive next year. And here, as we work to deliver the $20 million in Q4, I think we're going to see a very good improvement over Q3 and Q2. just given the nature of what these parts look like now and really the processes that we're using to make them. So we're really pushing hard to turn that positive as soon as possible, and I feel confident that as we deliver the 20 million, that gives us enough of our revenue base to demonstrate that path.

Okay, great. Thanks, guys. Okay, great. Thank you, Kyle.

Our next question today comes from Alex Potter with Piper Sandler. Please go ahead, Alex.

Great. Thanks. So, Ricardo, my first question is on the revised CapEx guide, 200 to 225 million, which is down versus last quarter. I'm just wondering if you can give some color on what qualitatively has changed. Are you delaying CapEx? Are you finding areas of increased efficiency? What's the the main driver of that downward adjustment?

Sure. It's really just more timing versus our estimates at the beginning of the year and then in June as we were looking at it. While the progress hasn't slowed, it ultimately comes down to when these expenses actually hit our books and they're hitting us slower than we were originally expecting as we were planning for the year. and then obviously working through our capital raise efforts. At the same time, when it comes to all of the other projects, we're really scrutinizing the scope of every single thing to not overcommit here. And that has given us some efficiency, but it's not the bulk of the retiming here.

Okay, that's helpful. And then I guess maybe also just on sources of incremental capital, I can appreciate the sensitivity around this topic. It appears obviously to be a very material topic. If you look at the guidance for CapEx as well as your cash balance as it currently exists, I'm wondering the extent to which you have access to capital. I can't remember how much is left on the ATM. Is a big capital raise necessary in the next three to six months in order for you to continue on your path with this CapEx guidance, or is it not necessary?

Alex, this is Don. We anticipate, we believe that we will have a capital raise in the near term and to support our Plant 2 and some of the other activities that we have going on that require capital and to stay on course to execute on our strategy. I think having a strong balance sheet is also important to some of the automotive OEMs who are looking to us to have parts designed into their platforms over a long period of time. And so there are several good reasons for us to fortify the hundred and some million dollars that we started this quarter with. And we intend to do that again. We believe we'll do it in the near term. With respect to the ATM, do you have that? We've got around $60 million. Remaining on that, Alex, yeah.

And we're being cautious and opportunistic on how we use that. And it's obviously not the main source of capital here.

Okay, great. maybe if i can squeeze one last one in here um can you talk about the this co2 shortage this is the first time i had heard of it i'm not really steeped in that supply chain so any additional color you can give on that it sounds like you are taking some mitigating factors in order to address that but to what extent could something like this resurface next quarter or two quarters from now obviously it seems like this sort of crept up out of nowhere So how big of a risk is this or other parts of the supply chain in that energy industrial part of the business? Thanks.

Yeah, I mean, the CO2 shortage hasn't really gone away. And it's actually been in the news quite a bit over the summer with folks in the beverage space not being able to get it, dry ice suppliers not being able to get it. and it's it started here in the northeast as we understand it and basically spread throughout the country and it's still there what we've had to do is really just increase the amount of buffer that we have of it on site and and then really take control over how we get it from anywhere in the country rather than relying on you know more of a regional supply chain. And so for us, it really didn't come out of nowhere. We've been flagging it as a risk really since Q1 and started installing the additional capacity for storage on site. More structurally, there's an opportunity to invest in actually doing our own recapturing. As we understand the national issue, it really all stemmed from a contamination issue for one of the main sources in the US that really prevented all of us who are heavy users of CO2 to get it on a timely manner. It's alleviated. Dave Kuntz, Given that the demand is dropping in the fall but we've also just been able to. Dave Kuntz, put in place the right mitigation action so that we're less affected by it. Dave Kuntz, For us in Q3 particularly the issue was the timing right ideally this would have been timed exactly when we shut down the plant for our improvements. But really, the bulk of the down days came after we restarted the plant ready to make more aerogels.

And just one last comment. As we did site selection, Alex, for our plant too, the southeast has a much greater, much more robust sources of CO2 supply. And our R&D effort has also, we recycle the vast percentage of the RCO2 usage. We continue to improve upon that. And as Ricardo alluded to, I think in the future as we continue to sort of pull our supply chain a little closer in, we have opportunities to self-generate as well. And so we've been focused on this for a while. This has been an issue potential issue for a while and obviously it came it came out in full force in in the third quarter but I think our team is doing a lot going at it from a lot of different directions and and again as I say the southeast where our plant number two is again has a much more robust set of suppliers that's super helpful guys thanks I'll pass it on thanks Alex

Our next question comes from Chris Souther with B Reilly. Chris, please go ahead.

Yeah, hey, thanks for taking my call. Maybe just to start, we could talk about, you know, you mentioned near-term capital raise from strategic, potentially another round with Coke and ATM. I just wanted to get a sense, you know, if there's an additional DOE loan you know, for kind of 2023? Are we still looking at $150 million for that potentially next year? And, you know, maybe as you're, you know, sizing other investments between now and then, you know, just how we should think about, you know, you guys baking in the DOE loan as part of the puzzle if you need the cash kind of ahead of when that approval might come in.

Let me just comment on our work with DOE. As I said in my script, there was a set of awards that took place a couple of weeks ago. We were not included in that. Many of the companies who were were in the battery chemistry, sort of as I said, sort of inside the cell. We anticipate that in Q2 of 2023, There will be a second set of awards, again, as we understand it, in the range of about $3 billion. And there will be a greater focus on manufacturing. And our grant application was specific to our Plant 2 activities. We believe we're a good candidate for for that in support of electrification and some of the themes that are inherent in that program. So we are very focused on presenting well, if you will, in that effort. Although, Chris, it is hard to count on it. And so we're taking an approach to be sure that I don't want to call it a nice to have, but we are taking an approach to be sure we have the adequate capital to continue to execute our strategy throughout 2023 of building that facility and bringing Plant 2 up online so it's contributing in the beginning of 2024 to support our growth in that year. In terms of other capital, Yeah, we'll continue. We're very focused, again, not to overuse the all of the above phrase, but we will be focused on strategic investors. Coke has been a terrific supporter of ours, and we believe they will continue to be. And And the equity and debt markets as well. So again, we're taking a pretty broad view of this. We believe that we will be able to close a round of financing here in the near term, and we'll continue to work the capitalization of our company to keep up with the enormous opportunity that we have in front of us.

Got it. Okay. Yeah, all that makes sense. I think you had called out the grant you were applying for on this last round that was announced, you know, a week or two ago, that it was $150 million. Is that kind of in the ballpark of what you'd be applying for in that, you know, upcoming kind of orbit? Okay. Got it. Cool.

Correct.

And then maybe just on Toyota. Okay. And then maybe just on Toyota, you know, there have been multiple press releases over the past week or so. talking about Toyota reviewing their overall EV roadmap, potentially transitioning with larger volumes around 2025 and the BZ4X maybe being a bigger piece of that 2025 plans. Can we just get a sense, maybe mashing up some of those press reports we're seeing with what you guys have baked in for 2025 from that customer? I'm curious if you guys are reading the same things and thinking that The volumes you've talked about, you know, having visibility for might have upside, you know, anything you could kind of comment around, you know, progress with that customer around kind of the platform win beyond BZ I think would be helpful for folks.

Well, coincidentally, we have a team in Japan this week, actually, and visiting with Toyota among others. among others. And of course, we've read some of the same dispatches that you're referring to. I think what I would just say is that we are engaged technically and commercially with Toyota and remain close to them. And I don't mean to say we're privy to anything that is

Yeah, that goes beyond the headline.

It goes beyond the headline, but I think when you boil it all down, I think the headlines were really, yes, maybe a shift, but I think a shift to go bigger and be yet more committed to it.

And also, to answer your question on just how that factors into our 2025 revenue plan, right now we're really only including the nameplate that we have been awarded.

Yeah. Yeah. OK. Thanks, guys.

Thanks, Chris.

Our next question comes from Jeff Osborne with Cohen. Please go ahead, Jeff.

Yeah, good morning. Two quick questions, Don. One, I think in the past you had talked about maybe challenges in using your PyroThin product for cylindrical format batteries. I was just curious if that's still the case or if you found an application that might work for that.

That's still the case.

Got it.

Yeah.

Is there anything to do with cell-to-cell more at the pack level or no?

Yeah, I mean, for folks that are using prismatics and pouch cells. And so, I mean, this whole idea of the form factor is something that we're seeing everybody reconsidering right now, along with chemistries. But we're definitely... more compatible with folks that are using prismatic and powered cells?

I think speaking generally, Jeff, without meaning to speak to any one OEM, I think we also see, as Ricardo mentions, companies working on different chemistries and sometimes form factors to go along with those chemistries, perhaps LFP James Rattling Leafs, chemistries etc, and so it's interesting. James Rattling Leafs, To be engaged in some of those programs again on the prismatic and pouch. James Rattling Leafs, side of that we're we're we're we're our strengths live.

James Rattling Leafs, got it just to be clear, because you've seen GM also announced stationary batteries are you in conversations around. stationary batteries? And if so, is that included in slide five, I think it is, that references your dialogue with potential customers? Or is that just specifically for automobiles in 2025?

So slide five only refers to particularly light vehicle volumes. But as we understand, the stationary batteries that you mentioned are also on the Altium platform using Altium modules, and we are in the Altium modules.

Justin Delacruz- got it and then just the last question I had that's helpful Ricardo is you mentioned several times the shutdown in July, and the you know speeding up. Justin Delacruz- As well as the elongation of the roles can, can you quantify you know what the potential either margin impact is of that exercise or the the potential annual revenue impact or percentage yes. Justin Delacruz- or any way to frame that.

Yeah, so all else being equal and uninterrupted, you know, without any changes in product mix, that's around a 20% productivity improvement, just additional throughput with the same fixed expenses.

That's great to hear. That's all I had. Thank you.

Thank you, Jeff.

Our next question comes from George Gianerikos with Tanacore Genuity. Please go ahead, George.

Hi, good morning, and thanks for taking my questions. I'd like to ask about Toyota again. Good morning. So some of the articles referenced a complete redesign of their thermal management, and I'm just kind of curious as to whether you could share any thoughts on that. on what you know about what they're considering there. Thank you.

Yeah, it's hard to go into a ton of detail there, unfortunately. Not to evade it, but really, we just don't want to front the news here.

George, I would just say that Toyota has a has an important focus on thermal management, as I think some of the articles have said, and as they've had in the past. But I think the fact that they have included that in their redesign kind of concepts, I think, is interesting.

And also, it's worth mentioning that the overall trend towards more Yeah, right. More of it, more and better. So, yeah, I think.

I think I think that I want to focus on a previous question as well. Around the energy, the stationary storage opportunity, I mean, how many conversations have you had with regards to that market? Can you share any details about how that might be a future opportunity beyond startup?

Well, with respect to, we've had across the industry, we've had conversations on this. General Motors, of course, made their announcement more recently in this regard. And we, and they are using their, and they have stated that they are using their Ultium battery platform as the basis for this stationary energy storage. And so we're sort of literally and figuratively in the middle of that. And so that is a positive for us as they build that out. We have been engaged with them around Ultium. And our focus, of course, has been on the EV side of the business to date. So again, we don't have any extra insights that we'd be able to share at this point on their strategy. Of course, other companies have worked in this direction also and we've been engaged with them. A lot of the same ideas of mitigating the dangers of thermal runaways certainly apply in this case as they do in an EV.

Thank you. Thank you, George.

Our next question comes from Tom Curran with Seaport Research Partners. Please go ahead, Tom.

Good morning. Not much left on my list. With this eminent round of financing, Don, would the expectation still be, number one, that it's most likely to be structured as some type of pipe, and then number two, that it will probably include two strategic investors?

Yeah.

The pipe option is certainly a, you know, falls under the umbrella of all of the above for certain, and it would be an interesting approach to us. I think the idea of multiple strategics, we were, we were not necessarily including coke in in in that in that phraseology um even though one could very much make the argument that it's a it's a strategic strategic in in many regards and as a partner they've they've been extremely helpful um to us so i think that's i'll just leave it i'll just leave it there for if i may um and and again we we believe we anticipate that this will play out here in the near term.

Fair enough. I understand, you know, things are very sensitive and constrained at the moment, but just that clarification, I was including KSP in, you know, asking about more than one strategic, so you've partly answered that.

No, I'm glad you, I'm glad you, I believe you clarified that. Right.

And then, Ricardo, for conversion costs, I believe you said for thermal barriers, conversion costs came in for 3Q at 61% of sales. Looking to 4Q of 2023, if you should hit your thermal barriers gross margin target for 4Q, Where would you expect conversion costs as a percentage of thermal barrier revenue to be at that point? And could you just revisit and expound upon what the drivers should be of that expected reduction in conversion costs as a percentage of thermal barriers revenue?

Yeah, they need to basically be cut in half. So they need to be in that 25 to 30 percent level. And alive for a lot of it next year. Correct. And I mean, I just want you to. Yeah, a good a good a good portion of that improvement comes through. Just the volume rate that we that I would be assuming as I do the math for that quarter. But but really, it kind of is a shame that we didn't have the thermal barrier volumes that we were expecting in August and September during the quarter because we would have already started showing a path towards that through our operation in Mexico. And so we're hoping to really work now here in Q4 as we deliver roughly $20 million in of thermal barrier revenues to start making a meaningful dent at that 61%. And ideally, a year from next quarter, we'll have cut that in half at least.

Great. So we should see that first significant step down in conversion costs as a percentage of revenue starting with next quarter's results.

Correct. Assuming the volumes are there. Great.

Thank you. Thank you, Trapp.

Our next question comes from Chip Moore with EF Hutton. Please go ahead.

Thanks for taking the question. I just wanted to follow up there on the gross margin ramp in Q4. I think, you know, guidance implies somewhere closer to where you were back in 2019 and you just touched on uh the move to monterey for pyrofin so thanks for that i guess maybe on sub c i should be expecting the bulk of those orders you called out to hit in q4 or any other factors to consider there there is some some of that activity will will be um will be

produced and delivered during Q4. The majority of it will be in 2023. Got it.

Okay. And then just to follow up, maybe you can give us a bit more of an update on advanced battery materials. You know, a lot of that COE money announced last week is going to projects in that space, as you know. Just curious maybe how you're prioritizing investment there. Is it something you sort of wait until you get that next round of financing to accelerate, or how should we think about that?

Yeah, I mean, we haven't slowed down that development and actually have seen really encouraging results on those three metrics that we outlined earlier in the year. The team is just really impressive. As we built it up, they're working in a brand new lab. And we feel just as confident as we were a quarter ago or even two around our path to get there and have made meaningful progress towards demonstrating the increased energy density, the increased dependability on that higher density path towards a lower cost process and than a lot of what we're seeing getting awarded here and and then also reduce variability as you put the material into actually making a cell so really the the team is still on a path towards demonstrating all of those things here before the end of the year and as we do that and we think about applying for a grant, I think emphasizing on those developments will be really important to improve our candidacy for these things as we focus on our inside the cell efforts more meaningfully after having demonstrated all of these milestones.

We're also able, reducing variability, really focused on cycle life as well. and the ability now to begin to produce enough quantity for larger-scale testing, both internally, if you will, and with potential partners.

Good to hear. All right, I'll hop on. Thanks.

Thanks so much.

We have no further questions today. So, Don, I will hand back to you for concluding remarks.

Thank you, Emily. We appreciate your interest in aspen aerogels and look forward to reporting to you our fourth quarter 2022 results in February. Be well and have a good day. Thank you so much.

Thank you, everyone, for joining us today. This concludes our call. You may now disconnect your lines.