ASPEN AEROGELS INC (ASPN) FY 2023 MD&A

Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the related notes thereto included in this Annual Report on Form 10-K. In addition to historical information, some of the information contained in the following discussion and analysis or set forth elsewhere in this report, including information with respect to our plans and strategy for our business, includes forward-looking information that involves risks, uncertainties and assumptions. You should read the Risk Factors set forth in Item 1A of this Annual Report on Form 10-K for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis. Our actual results and the timing of events could differ materially from those anticipated by these forward looking statements.

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, LNG 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.

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 our Aerogel Technology Platform, we believe we will have additional opportunities to address high-value applications in the global insulation 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 EV market. We have developed and are commercializing our proprietary line of PyroThin® aerogel thermal barriers for use in battery packs in EVs. 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 EV 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 EVs.

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The commercial potential for our PyroThin thermal barriers and our carbon aerogel battery materials in the EV 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, or GM, to supply fabricated, multi-part thermal barriers for use in the battery system of its next-generation EVs. Pursuant to the contracts with GM, 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 GM 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, GM may terminate the contracts any time and for any or no reason. All other terms of the contracts are generally consistent with GM’s standard purchase terms, including quality and warranty provisions customary in the automotive industry. We have also entered into production contracts with Toyota, Scania, ACC, a battery cell joint venture between Stellantis N.V, Saft-TotalEnergies and Mercedes-Benz, and Audi, a luxury brand of the Volkswagen Group.

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 meet expected growth in demand for our aerogel products in the EV 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 2024. At the same time, we believe that productivity improvements in our existing Rhode Island facility combined with the supplemental supply of our energy industrial products from one or more external manufacturing facilities in China will permit us to achieve a target revenue capacity of approximately $650 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 external manufacturing facilities 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 estimated costs for completion of the second plant. In 2023, we opened our 59,000-square-foot engineering and rapid prototyping facility in Marlborough, MA. Our Advanced Thermal Barrier Center (ATBC) is designed to be the engineering hub of PyroThin cell-to-cell barriers, which help manufacturers optimize the safety and performance of battery packs for eMobility and energy storage system (ESS) markets.

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.

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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

On November 5, 2020, we entered into a sales agreement for an at-the-market (“ATM”) offering program with B. Riley Securities as our sales agent. During the year ended December 31, 2021, we sold 929,981 shares of our common stock through the ATM offering program with B. Riley Securities and received net proceeds of $19.4 million. On March 16, 2022, we entered into a sales agreement for an ATM offering program with Cowen and Company, LLC and Piper Sandler & Co., as our sales agents, or the 2022 ATM offering program. During the year ended December 31, 2022, we sold 5,241,400 shares of our common stock through the 2022 ATM offering program and received net proceeds of $72.7 million. The 2022 ATM offering program was terminated on June 20, 2023.

On February 3, 2021, we entered into a supply agreement with Silbond Corporation for the purchase of certain silanes products. Pursuant to the agreement, we agreed to purchase, and Silbond agreed to supply, all of our requirements for the specified silanes at our East Providence facility through the term of the agreement on September 30, 2023, unless either party terminates the agreement earlier pursuant to its terms. In October 2022, we extended the agreement through December 31, 2023, and the agreement has subsequently terminated.

On June 29, 2021, we sold 3,462,124 shares to an affiliate of Koch, in a private placement of our common stock and received net proceeds of $73.5 million after deducting fees and offering expenses of $1.5 million. On March 28, 2022, we sold to an affiliate of Koch, 1,791,986 shares of our common stock for aggregate gross proceeds of $50.0 million, pursuant to a securities purchase agreement, dated as of February 15, 2022, by and between us and the affiliate of Koch.

On February 18, 2022, we sold and issued to an affiliate of Koch $100.0 million in aggregate principal amount of our Convertible Senior PIK Toggle Notes due 2027, or the Notes, pursuant to a note purchase agreement, dated as of February 15, 2022, by and between us and the affiliate of Koch. The Notes bear interest at the Secured Overnight Financing Rate, or SOFR, plus 5.50% per annum if interest is paid in cash, or the Cash Interest, or, if interest is paid in kind (through an increase in the principal amount of the outstanding Notes or through the issuance of additional Notes), at SOFR plus 6.50% per annum, or PIK Interest. Under the terms of the investment, SOFR has a floor of 1% and a cap of 3%. We can elect to make any interest payment through Cash Interest, PIK Interest or any combination thereof. Interest on the Notes is payable semi-annually in arrears on June 30 and December 30, commencing on June 30, 2022. It is expected that the Notes will mature on February 18, 2027, subject to earlier conversion, redemption or repurchase. On November 28, 2022, in connection with the Loan Agreement (described below) we entered into an amendment to the Notes, or the Convertible Note Amendment, to reduce the initial Conversion Price (as defined in the Notes) by $5.00 per share from $34.936625 per share to $29.936625 per share, by increasing the initial Conversion Rate (as defined in the Notes) from 28.623257 shares per $1,000 of Capitalized Principal Amount (as defined in the Notes) to 33.400100 shares per $1,000 of Capitalized Principal Amount under the Notes.

On November 28, 2022, our wholly owned subsidiary, Aspen Aerogels Georgia, LLC, or the Borrower, entered into the Loan Agreement, by and between (i) the Borrower, (ii) Aspen Aerogels, Inc. and (iii) Aspen RI, and, together with the Borrower and Aspen Aerogels, Inc., each, a Loan Party and collectively, the Loan Parties), as guarantors, and (iv) GM, as lender. The Borrower is required to use the proceeds of the Loan in connection with the construction and operation of our planned aerogel manufacturing facility in Bulloch County, Georgia. The Loan Agreement provides for a multi-draw senior secured term loan in an aggregate principal amount of up to $100.0 million, or the Loan, available to the Borrower to draw on a delayed draw basis after January 1, 2023 to September 30, 2023, subject to certain conditions precedent to funding. The interest rate on the Loan is equal to the term Secured Overnight Financing Rate published by CME Group Benchmark Administration Limited for a six-month interest period, or Term SOFR, plus 8.0% per year, subject to a term SOFR floor of 1.0%, or the Floor, with a maturity date of the earlier of (i) March 31, 2025 and (ii) 90 days prior to the maturity date of any other debt facility to which the Loan Parties may be a party (other than any revolving loan agreement), or the Maturity Date. At the Borrower’s election and prior to the issuance of a certificate of occupancy for the Plant, interest may be paid-in-kind at a rate equal to Term SOFR (subject to the Floor) plus 9.0% per year. Refer to Recent Developments for details of the amendment to the Loan Agreement.

On November 29, 2022, we completed an underwritten public offering of 29,052,631 shares of our common stock at a public offering price of $9.50 per share. We received net proceeds of $267.5 million after deducting underwriting discounts and commissions of $8.1 million and offering expenses of approximately $0.5 million.

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On November 28, 2022, we terminated the Amended and Restated Loan and Security Agreement, or the SVB Loan Agreement, with Silicon Valley Bank, or SVB. As of the date of termination, we had no amounts due or owed to SVB under the SVB Loan Agreement for any principal, interest, or other amounts, other than approximately $1.2 million in letters of credit that were issued under the SVB Loan Agreement and will be cash collateralized in connection with the termination of the SVB Loan Agreement.

In December 2023, we sold 6,060,607 shares of our common stock at an offering price of $12.38 per share in a registered direct offering for net proceeds of $74.4 million, after deducting offering expenses of approximately $0.6 million.

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:

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, which in 2021 included a gain on the extinguishment of debt. 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:

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as a measure of operating performance because it does not include the impact of items that we do not consider indicative of our core operating performance;

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for planning purposes, including the preparation of our annual operating budget;

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to allocate resources to enhance the financial performance of our business; and

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as a performance measure used under our bonus plan.

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:

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Adjusted EBITDA does not reflect our historical cash expenditures or future requirements for capital expenditures or other contractual commitments;

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Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs;

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Adjusted EBITDA does not reflect stock-based compensation expense;

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Adjusted EBITDA does not reflect our income tax expense or cash requirements to pay our income taxes;

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Adjusted EBITDA does not reflect our interest expense, or the cash requirements necessary to service interest or principal payments on our debt;

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although depreciation, amortization and impairment charges are non-cash charges, the assets being depreciated, amortized or impaired will often have to be replaced in the future, and Adjusted EBITDA does not reflect any cash requirements for these replacements; and

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other companies in our industry may calculate EBITDA or Adjusted EBITDA differently than we do, limiting their usefulness as a comparative measure.

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 Annual Report on Form 10-K, and not to rely on any single financial measure to evaluate our business.

The following table presents a reconciliation of net loss, the most directly comparable U.S. GAAP measure, to Adjusted EBITDA for the years presented:

(1)
Represents non-cash stock-based compensation related to vesting and modifications of stock option grants, vesting of restricted stock units and vesting and modification of restricted common stock.

The following table presents a reconciliation of net loss, the most directly comparable U.S. GAAP measure, to Adjusted EBITDA for the quarters presented:

(1)
Represents non-cash stock-based compensation related to vesting and modifications of stock option grants, vesting of restricted stock units and vesting and modification of restricted common stock.

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.

During 2023, we experienced strong volume growth in our thermal barrier products. As a result, we experienced total revenue growth of 32% during the year. We increased staffing and spending levels in support of the growing demand for our thermal barrier business and our carbon aerogel battery material opportunity in coming years. We also increased staffing and spending to expand and defend our IP portfolio, and to enhance our general and administrative functions to manage the anticipated strong growth in our business.

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We expect to maintain strong revenue growth during 2024 driven by accelerating demand in the EV 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 negative Adjusted EBITDA during 2024.

We also expect to incur reduced capital expenditures and expenses during 2024 related to our planned second aerogel manufacturing facility to be located in Bulloch County, Georgia. We may, from time to time, enter into leasing arrangements including sale and leaseback financing arrangements. In January 2024, we entered into a sale and leaseback arrangement, pursuant to which we sold certain equipment to an equipment leasing company (the “Leasing Company”) for a one-time cash payment of $5.0 million and leased back such equipment from the Leasing Company. The associated monthly lease rents will be paid over the term of three years. We intend to continue evaluating certain assets for potential sale and lease back arrangements in the future. This type of arrangement would provide us with one-time cash payments in the near term, in exchange for future lease payments.

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 product 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.

The following table sets forth the total revenue for the periods presented:

Energy industrial revenue accounted for 54%, 69%, and greater than 95% of total revenue for the years ended December 31, 2023, 2022 and 2021, respectively. We experienced a 32% increase in total revenue during 2023 driven by the increase in our energy industrial business, particularly in Europe, and continued growth in the EV market.

We project revenue growth during 2024 due to accelerating demand in the EV market and continued market share gains in the sustainable insulation materials market.

A substantial majority of our revenue is generated from a limited number of direct customers, including distributors, contractors, fabricators, OEMs, partners and end-user customers. Our ten largest customers accounted for approximately 80% of our total revenue during the year ended December 31, 2023, and we expect that most of our revenue will continue to come from a relatively small number of customers for the foreseeable future.

In 2023, sales to GM and Distribution International, Inc. represented 41% and 14% of our total revenue, respectively. In 2022, sales to GM and Distribution International, Inc. represented 25% and 22% of our total revenue, respectively. In 2021, sales to Distribution International, Inc. represented 28% of our total revenue. For each of the noted periods, there were no other customers that represented 10% or more of our total revenues.

We conduct business across the globe and a substantial portion of our revenue is generated outside of the United States. Total revenue from outside of the United States, based on shipment destination, amounted to $87.7 million, or 37% of our total revenue, $66.4 million, or 37% of our total revenue, and $54.8 million, or 45% of our total revenue, in the years ended December 31, 2023, 2022 and 2021, respectively.

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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 a significant component of cost of product revenue and includes fibrous batting, silica materials and additives. Material costs as a percentage of product revenue were 36%, 51% and 48% for the years ended December 31, 2023, 2022 and 2021, respectively. 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, engineering changes, higher prototype sales 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 2024 due to projected growth in product shipments and contracts but remain stable as a percentage of revenue due to improved manufacturing, and fabrication yields and a favorable mix of products sold.

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. Manufacturing expense as a percentage of product revenue was 40%, 46% and 44% for the years ended December 31, 2023, 2022 and 2021, respectively. We expect that manufacturing expense will increase in absolute dollars and decrease as a percentage of revenue during 2024 due to increased staffing and spending levels in support of our thermal barrier business, including the operation of an automated fabrication facility in Monterrey, Mexico. We are also continuing to monitor the impact of engaging one or more external manufacturing facilities in China to supply our aerogel products for the energy industrial market beginning in 2024 on our manufacturing expense and cost of product revenue.

During 2024, we expect that cost of product revenue will increase in absolute dollars due to projected volume growth and a planned increase in staffing and spending levels, but decrease as a percentage of product revenue due to projected increases in average selling prices, improved manufacturing and fabrication yields and a favorable mix of products sold.

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. Gross profit as a percentage of total revenue was 24%, 3%, and 8% for the years ended December 31, 2023, 2022 and 2021, respectively.

During 2024, 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 and manufacturing expense as a percentage of total 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.

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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 and decrease as a percentage of revenue in 2024 and 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 but decrease as a percentage of revenue in 2024 and in the longer term.

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 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 this Annual Report on Form 10-K, 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 and decrease 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 principal amount of our Convertible Senior PIK Toggle Notes.

Other Income (Expense), Net

For the years ended December 31, 2023, 2022 and 2021, interest expense, net consists of interest expense related to our revolving credit facility and in 2022 and 2023, included interest earned on the cash balances invested in deposit accounts, money market accounts, and high-quality debt securities issued by the U.S. government.

Gain on Extinguishment of Debt

On May 1, 2020, our wholly-owned subsidiary, Aspen Aerogels Rhode Island, LLC, executed a note for an unsecured PPP loan of $3.7 million pursuant to the CARES Act. On August 24, 2021, the SBA remitted $3.7 million in principal and accrued interest to the noteholder after approving the Aspen Aerogels Rhode Island, LLC’s application for forgiveness of the PPP Loan. Accordingly, we recorded a total gain on the extinguishment of debt of $3.7 million during the year ended December 31, 2021.

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.

At December 31, 2023, we had $358.9 million of net operating losses available to offset future federal income tax, if any, of which $194.6 million expire on various dates through December 31, 2038. Net operating losses of $164.3 million generated from 2018 through 2023 have an unlimited carryforward.

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Results of Operations

The following tables set forth our results of operations for the periods presented:

Year ended December 31, 2023 compared to year ended December 31, 2022

The following tables set forth our results of operations for the periods presented:

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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:

Total revenue increased $58.3 million, or 32%, to $238.7 million in 2023 from $180.4 million in 2022. The increase in total revenue was the result of increases in both energy industrial and thermal barrier revenue.

Energy industrial revenue increased by $3.8 million, or 3%, to $128.6 million in 2023 from $124.8 million in 2022. This increase was driven by a more favorable mix of product shipments in the global petrochemical and refinery markets, particularly in Latin America, project-based demand in the subsea market, offset, in part, by a decrease in maintenance-based demand in the global petrochemical and refinery markets in North America, Europe, and Asia.

Energy industrial revenue for the years ended December 31, 2023 and 2022, included $33.6 million and $39.3 million in sales to Distribution International, Inc., respectively. The average selling price per square foot of our products increased by $0.70, or 18%, to $4.53 per square foot for the year ended December 31, 2023, from $3.83 per square foot for the year ended December 31, 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 approximately $19.9 million for the year ended December 31, 2023.

In volume terms, product shipments decreased by 4.2 million square feet, or 13%, to 28.4 million square feet of aerogel products for the year ended December 31, 2023, as compared to 32.6 million square feet in the year ended December 31, 2022. The decrease in product volume had the effect of decreasing product revenue by approximately $16.1 million for the year ended December 31, 2023.

Thermal barrier revenue was $110.1 million for the year ended December 31, 2023, as compared to $55.6 million for the year ended December 31, 2022. Thermal barrier revenue for the year ended December 31, 2023 included $97.5 million to a major U.S. automotive OEM and $5.5 million to a major Asian automotive OEM. Thermal barrier revenue for the year ended December 31, 2022 included $45.8 million to a major U.S. automotive OEM and $5.1 million to a major Asian automotive OEM.

Energy industrial revenue as a percentage of total revenue was 54% and 69% of total revenue in 2023 and in 2022, respectively. Thermal barrier revenue was 46% and 31% of total revenue in 2023 and in 2022, respectively.

Cost of Revenue

Total cost of revenue increased $6.4 million, or 4%, to $181.8 million in 2023 from $175.4 million in 2022. The increase in total cost of revenue was the result of an increase in thermal barrier, offset, in part, by a decrease in energy industrial cost of revenue.

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Energy industrial cost of revenue decreased $11.5 million, or 11%, to $94.5 million from $106.0 million in the comparable period in 2022. The $11.5 million decrease was the result of a $11.4 million decrease in material costs and a $0.1 million decrease in manufacturing and other operating costs from the comparable period in 2022. The decrease in material costs was the result of the lower revenue volume from the comparable period in 2022, and lower raw material costs in 2023 compared to 2022.

Thermal barrier cost of revenue increased $17.9 million to $87.3 million as compared to $69.4 million in the comparable period in 2022. The $17.9 million increase was the result of a $5.8 million increase in material costs and a $12.1 million increase in manufacturing costs. The increase in material costs was the result of the increase in revenue volume from the comparable period in 2022, offset by lower raw material prices in 2023 compared to 2022. The increase in manufacturing costs was driven by increases in depreciation and facility costs of $7.1 million and utilities expenses of $3.3 million and other manufacturing and operating costs of $1.7 million.

Gross Profit

Gross profit increased $51.9 million, or 1,044%, to $56.9 million in 2023 from $5.0 million in 2022. The increase in gross profit was the result of the $58.3 million increase in total revenue, partially offset by the $6.4 million increase in total cost of revenue. The increase in total cost of revenue was principally driven by the increase in overhead costs and additional resources to support our expected higher run-rate revenue in future periods for both our energy industrial and thermal barrier products.

Research and Development Expenses

Research and development expenses decreased by $0.5 million, or 3%, to $16.4 million in 2023 from $16.9 million in 2022. The $0.5 million decrease was the result of decreases in professional fees of $1.5 million, operating material and supplies costs of $0.7 million, compensation and related costs of $0.6 million, partially offset by an increase in depreciation and facility related expenses of $2.1 million and other research and development expenses of $0.2 million.

Research and development expenses as a percentage of total revenue decreased to 7% during the year ended December 31, 2023 from 9% in the comparable period in 2022, primarily due to the decrease in professional fees.

Sales and Marketing Expenses

Sales and marketing expenses increased by $4.2 million, or 15%, to $33.0 million in 2023 from $28.8 million in 2022. The increase was the result of increases in depreciation and facility related expenses of $2.9 million and compensation and related costs of $2.1 million, partially offset by a decrease in operating material and supplies costs of $0.8 million.

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Sales and marketing expenses as a percentage of total revenue decreased to 14% in 2023 from 16% in 2022 primarily due to the 32% increase in revenue from the comparable period in 2022.

General and Administrative Expenses

General and administrative expenses increased by $18.3 million, or 47%, to $56.8 million in 2023 from $38.5 million in 2022. The $18.3 million increase was the result of increases in compensation and related costs of $15.3 million and professional fees of $3.6 million, offset by a decrease in other costs of $0.6 million.

General and administrative expenses as a percentage of total revenue increased to 24% in 2023 from 21% in 2022 primarily due to increased expenditures associated with the growth in our human resource, finance, information technology and general management organizations in preparation for the anticipated growth in our business.

Other Income (Expense), net

Other income (expense), net increased by $6.9 million to $3.4 million in 2023 from $(3.5) million in 2022. The $6.9 million increase was the result of $4.9 million of interest income, $2.2 million of Employee Retention Credits and a $(0.2) million net impact of capitalized interest relating to our Convertible Note in the comparable period in 2022.

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Year ended December 31, 2022 compared to year ended December 31, 2021

The following tables set forth our results of operations for the periods presented:

Revenue

The following chart sets forth product shipments in square feet associated with recognized revenue, including revenue recognized over time, for the periods presented:

Total revenue increased $58.7 million, or 48%, to $180.3 million in 2022 from $121.6 million in 2021. The increase in total revenue was the result of increases in both energy industrial and thermal barrier revenue.

Energy industrial revenue increased by $9.8 million, or 9%, to $124.8 million in 2022 from $115.0 million in 2021. This increase was driven by a more favorable mix of product shipments in the global petrochemical and refinery markets, particularly in Asia and North America, project-based demand in the subsea market, offset, in part, by a decrease in maintenance-based demand in the global petrochemical and refinery markets in Europe.

Energy industrial revenue for the years ended December 31, 2022 and 2021, included $39.3 million and $34.1 million in sales to Distribution International, Inc., respectively. The average selling price per square foot of our products increased by $0.50, or 15%, to $3.83 per square foot for the year ended December 31, 2022, from $3.33 per square foot for the year ended December 31, 2021. This increase in average selling price principally reflected the impact of a change in the mix of products sold. This increase in average selling price had the effect of increasing product revenue by approximately $16.3 million for the year ended December 31, 2022.

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In volume terms, product shipments decreased by 2.0 million square feet, or 6%, to 32.6 million square feet of aerogel products for the year ended December 31, 2022, as compared to 34.6 million square feet in the year ended December 31, 2021. The decrease in product volume had the effect of decreasing product revenue by approximately $6.6 million for the year ended December 31, 2022.

Thermal barrier revenue was $55.6 million for the year ended December 31, 2022, as compared to $6.7 million for the year ended December 31, 2021. Thermal barrier revenue for the year ended December 31, 2022 included $45.8 million to a major U.S. automotive OEM and $5.1 million to a major Asian automotive OEM.

Energy industrial revenue as a percentage of total revenue was 69% and 95% of total revenue in 2022 and in 2021, respectively. Thermal barrier revenue was 31% and 5% of total revenue in 2022 and in 2021, respectively.

Cost of Revenue

Total cost of revenue increased $63.7 million, or 57%, to $175.4 million in 2022 from $111.7 million in 2021. The increase in total cost of revenue was the result of an increases in thermal barrier and energy industrial cost of revenue.

Energy industrial cost of revenue increased $5.5 million, or 5%, to $106.0 million from $100.5 million in the comparable period in 2021. The $5.5 million increase was the result of a $16.4 million increase in material costs, offset by a $10.9 million decrease in manufacturing and other operating costs from the comparable period in 2021.

Thermal barrier cost of revenue increased $58.2 million to $69.4 million as compared to $11.2 million in the comparable period in 2021. The $58.2 million increase was the result of a $17.0 million increase in material costs and a $41.2 million increase in manufacturing costs. The increase in material costs was the result of the increase in revenue volume from the comparable period in 2021. The increase in manufacturing was driven by increases in compensation and related costs of $11.7 million and other manufacturing and operating costs of $29.5 million.

Gross Profit

Gross profit decreased $4.9 million, or 50%, to $5.0 million in 2022 from $9.9 million in 2021. The decrease in gross profit was the result of the $63.7 million increase in total cost of revenue, partially offset by the $58.7 million increase in total revenue. The increase in total cost of revenue was principally driven by the increase in overhead costs and additional resources to support our expected higher run-rate revenue in future periods for both our energy industrial and thermal barrier products.

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Research and Development Expenses

Research and development expenses increased by $5.5 million, or 48%, to $16.9 million in 2022 from $11.4 million in 2021. The $5.5 million increase was the result of increases in compensation and related costs of $2.5 million, professional fees and materials costs of $1.1 million, equipment and lease costs of $0.9 million, depreciation expenses of $0.7 million and other research and development expenses of $0.3 million.

Research and development expenses as a percentage of total revenue was 9% during the years ended December 31, 2022 and 2021.

Sales and Marketing Expenses

Sales and marketing expenses increased by $12.2 million, or 74%, to $28.8 million in 2022 from $16.6 million in 2021. The increase was the result of increases in compensation and related costs of $7.2 million, operating material and supplies costs of $1.8 million, travel related costs of $1.6 million, marketing costs of $0.8 million and professional fees and other expenses of $0.8 million.

Sales and marketing expenses as a percentage of total revenue increased to 16% in 2022 from 14% in 2021 primarily due to elevated levels of compensation associated with an increase in sales and marketing personnel.

General and Administrative Expenses

General and administrative expenses increased by $16.0 million, or 71%, to $38.5 million in 2022 from $22.5 million in 2021. The $16.0 million increase was the result of increases in compensation and related costs of $8.8 million, professional fees and other costs of $3.3 million, leasing and facility costs of $1.5 million, information technology related costs of $1.3 million and legal related costs of $1.1 million.

General and administrative expenses as a percentage of total revenue increased to 21% in 2022 from 19% in 2021 primarily due to increased expenditures associated with the growth in our human resource, finance, information technology and general management organizations in preparation for the anticipated growth in our business.

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Interest Expense, net

Interest expense, net increased by $3.3 million to $3.5 million in 2022 from $0.2 million in 2021. The $3.3 million increase was the result of increase in interest expense, related party by $5.1 million offset by increase in interest income, net of $1.8 million. Increase in interest expense, related party of $5.1 million was the result of interest relating to our Convertible Note. Interest income, net increased by $1.8 million to $1.6 million in 2022 from $(0.2) million in 2021 due to higher cash balances throughout 2022, in addition to more favorable interest rates.

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 EV 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 of 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 2024. At the same time, we believe that productivity improvements in our existing Rhode Island facility combined with the supplemental supply of our energy industrial products from one or more external manufacturing facilities in China will permit us to achieve a target revenue capacity of approximately $650 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 external manufacturing facilities 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 estimated costs 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 2024, we will continue to develop aerogel products and technologies for the EV market. We believe the commercial potential for our technology in the EV 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.

During the year ended December 31, 2022, we sold 5,241,400 shares of our common stock through the 2022 ATM offering program and received net proceeds of $72.7 million. On November 29, 2022, we completed an underwritten public offering of 29,052,631 shares of our common stock at a public offering price of $9.50 per share. We received net proceeds of $267.5 million after deducting underwriting discounts and commissions of $8.1 million and offering expenses of approximately $0.5 million.

In February 2022, we sold and issued to an affiliate of Koch $100.0 million in aggregate principal amount of our Convertible Senior PIK Toggle Notes. 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.

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On December 19, 2023, we entered into a securities purchase agreement with certain institutional investors named therein, pursuant to which we issued and sold, in a registered direct offering directly to the Investors an aggregate of 6,060,607 shares of our common stock at an offering price of $12.38 per share. We received net proceeds of $74.4 million, after deducting offering expenses of approximately $0.6 million.

We believe that our December 31, 2023 cash and cash equivalents balance of $139.7 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 EV market and other strategic business opportunities.

We may, from time to time, enter into leasing arrangements including sale and leaseback financing arrangements. In January 2024, we entered into a sale and leaseback arrangement, pursuant to which we sold certain equipment to the Leasing Company for a one-time cash payment of $5.0 million and leased back such equipment from the Leasing Company. The associated monthly lease rents will be paid over the term of three years.

However, we plan to supplement our cash balance and available credit 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 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. Furthermore, we have certain assets that are currently owned, which we are evaluating for potential sale and lease back arrangements. This type of arrangement would provide us with one-time cash payments in the near term, in exchange for future lease payments. We believe that 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 December 31, 2023, we had $139.7 million of 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 Convertible Senior PIK Toggle Notes. 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.

On March 16, 2022, we entered into a sales agreement for an ATM offering program with Cowen and Company, LLC and Piper Sandler & Co., as our sales agents. During the year ended December 31, 2022, we sold 5,241,400 shares of our common stock through the 2022 ATM offering program and received net proceeds of $72.7 million. The 2022 ATM offering program was terminated on June 20, 2023.

On November 28, 2022, our wholly owned subsidiary, Aspen Aerogels Georgia, LLC, entered into a $100.0 million loan agreement with GM for which the proceeds to be used for the construction and operation of our planned aerogel manufacturing facility in Bulloch County, Georgia. The agreement allows for borrowings beginning in on the date that is twelve (12) months prior to the date agreed upon by Borrower and GM for the start of production at the Plant and ending on March 31, 2024 (or any later date approved in writing by GM at its sole discretion).

On November 29, 2022, we completed an underwritten public offering of 29,052,631 shares of our common stock at a public offering price of $9.50 per share. We received net proceeds of $267.5 million after deducting underwriting discounts and commissions of $8.1 million and offering expenses of approximately $0.5 million.

On December 19, 2023, we entered into a securities purchase agreement with certain institutional investors named therein, pursuant to which we issued and sold, in a registered direct offering directly to the Investors an aggregate of 6,060,607 shares of our common stock at an offering price of $12.38 per share. We received net proceeds of $74.4 million, after deducting offering expenses of approximately $0.6 million.

See “Risk Factors - Risks Related to Our Business and Strategy - We will require significant additional capital to pursue our growth strategy, but we may not be able to obtain additional financing on acceptable terms or at all” in this Annual Report on Form 10-K for the year ended December 31, 2022.

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Analysis of Cash Flow

The following table summarizes our cash flows for the periods indicated:

Operating Activities

During 2023, we used $42.6 million in net cash in operating activities, as compared to the use of $94.4 million in net cash during 2022, a decrease in the use of cash of $51.8 million. This decrease in the use of cash was the result of the decrease in net loss adjusted for non-cash items of $44.8 million, and a decrease in cash used by changes in working capital of $7.0 million.

During 2022, we used $94.4 million in net cash in operating activities, as compared to the use of $18.6 million in net cash during 2021, an increase in the use of cash of $75.8 million. This increase in the use of cash was the result of the increase in net loss adjusted for non-cash items of $31.6 million, and a decrease in cash provided by changes in working capital of $44.2 million.

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, our automated fabrication facility in Mexico and engineering designs for the planned aerogel manufacturing facility in Bulloch County, Georgia. Net cash used in investing activities for 2023 and 2022 totaled $175.5 million and $178.0 million, respectively.

Financing Activities

Net cash provided by financing activities in 2023 totaled $75.5 million and consisted of net proceeds from the registered direct offering of common stock of $74.2 million and $1.7 million in proceeds from employee stock option exercises, offset, in part, by $0.4 million in cash used for payments made for employee tax withholdings associated with the vesting of restricted stock units.

Net cash provided by financing activities in 2022 totaled $478.4 million and consisted of $267.5 million of net proceeds from our underwritten public offering, $99.8 million in net proceeds from the issuance of convertible debt, $72.7 million of net proceeds from our 2022 ATM offering program, net proceeds from the private placement of common stock of $49.9 million, and proceeds from employee stock option exercises of $0.6 million, offset, in part, by $9.7 million for payments of a prepayment liability and $2.4 million for payments for employee tax withholdings associated with the vesting of restricted stock units.

Capital Spending and Future Capital Requirements

We have made capital expenditures primarily to develop and expand our manufacturing capacity. Our capital expenditures totaled $175.5 million in 2023, $178.0 million in 2022 and $13.8 million in 2021. As of December 31, 2023, we had capital commitments of approximately $202.6 million, which included commitments for which we have entered into contracts as well as commitments authorized by our Board of Directors. These commitments relate to the enhancement of our existing production lines in our East Providence facility and our fabrication operation in Mexico, and the planned aerogel manufacturing facility in Bulloch County, Georgia and consist primarily of costs for equipment and construction.

As indicated in the overview of the liquidity and capital resources section, 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 2024.

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We intend to fund capital expenditures related to the expansion of capacity of our existing manufacturing facility with our existing cash balance and anticipated cash flows from operations. We plan to fund the capital expenditures required to build a carbon aerogel battery materials facility, and to construct a new aerogel blanket manufacturing facility with additional equity financings, debt financings, equipment leasing, sale-leaseback transactions, customer prepayments, government grant and loan programs or credit facilities.

Contractual Obligations and Commitments

Operating Leases

We lease office space for our corporate offices in Northborough, Massachusetts, which expires in 2031. We also lease additional facilities in East Providence, Rhode Island; Marlborough, Massachusetts; Monterrey, Mexico; and Pawtucket, Rhode Island for research, administrative, fabrication, and warehousing purposes under leases expiring between January 31, 2024 and April 30, 2034. See “Item 2 — Properties.” We also lease vehicles and equipment under non-cancelable operating leases that expire at various dates.

Thermal Barrier Contract

We are party to production contracts with GM, to supply fabricated, multi-part thermal barriers, or Barriers, for use in the battery system of its next-generation EVs, or Contracts. Pursuant to the Contracts, we are obligated to supply Barriers at fixed annual prices and at volumes to be specified by the OEM up to a daily maximum quantity through the respective terms of the agreements, which expire at various times from 2026 through 2034. While the OEM has agreed to purchase its requirement for Barriers for locations to be designated from time to time by the OEM, it has no obligation to purchase any minimum quantity of Barriers under the Contracts. In addition, the OEM may terminate the Contracts any time and for any or no reason. All other terms of the Contracts are generally consistent with the OEM’s standard purchase terms, including quality and warranty provisions customary in the automotive industry.

Revolving Credit Facility

On March 12, 2021, we entered into an Amended and Restated Loan and Security Agreement, or the SVB Loan Agreement, with Silicon Valley Bank, or SVB.

On November 28, 2022, we terminated the SVB Loan Agreement with Silicon Valley Bank. As of the date of termination, we had no amounts due or owed to SVB under the SVB Loan Agreement for any principal, interest, or other amounts, other than approximately $1.2 million in letters of credit that were issued under the SVB Loan Agreement and were cash collateralized in connection with the termination of the SVB Loan Agreement.

Convertible Note - Related Party

On February 18, 2022, we sold and issued to an affiliate of Koch $100.0 million in aggregate principal amount of Notes. The Notes bear interest at the rate of SOFR plus 5.50% per annum if interest is paid in cash, or, if interest is paid in kind (through an increase in the principal amount of the outstanding Notes or through the issuance of additional Notes), at SOFR plus 6.50% per annum. Under the terms of the investment, SOFR has a floor of 1% and a cap of 3%. We can elect to make any interest payment through Cash Interest, PIK Interest or any combination thereof. Interest on the Notes is payable semi-annually in arrears on June 30 and December 30, commencing on June 30, 2022. It is expected that the Notes will mature on February 18, 2027, subject to earlier conversion, redemption or repurchase.

The Notes are convertible at the option of the holder at any time until the business day prior to the maturity date, including in connection with a redemption by us. On November 28, 2022, in connection with the Loan Agreement, we entered into an amendment to the Notes, or the Convertible Note Amendment, to reduce the initial Conversion Price (as defined in the Notes) by $5.00 per share from $34.936625 per share to $29.936625 per share, by increasing the initial Conversion Rate (as defined in the Notes) from 28.623257 shares per $1,000 of Capitalized Principal Amount (as defined in the Notes) to 33.400100 shares per $1,000 of Capitalized Principal Amount under the Notes, subject to customary anti-dilution and other adjustments (as described in the Indenture, which governs the Notes). If the closing price per share of our common stock on the New York Stock Exchange is at least 130% of the Conversion Price for 20 consecutive trading days, we may elect to convert the principal and accrued interest owing under the Notes, plus a make-whole amount equal to the sum of the present values of the remaining interest payments that would have otherwise been payable from the date of such conversion, redemption or repurchase, as applicable, through maturity, or the Make-Whole Amount, into our common stock at the Conversion Price.

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The Notes are redeemable by us at any time and from time to time in the event that the volume weighted average price of our common stock for the 10 trading days immediately preceding the date on which we provide the redemption notice has been at least 130% of the Conversion Price then in effect, at a redemption price of 100% of the principal amount of such Notes, plus accrued and unpaid interest to, but excluding the redemption date, plus the Make-Whole Amount.

Purchase Commitments

As of December 31, 2023, we had purchase commitments of approximately $267.3 million, which included capital commitments of $202.6 million. Purchase commitments related to capital expenditures are anticipated to be spent over the next three years, while our remaining purchase commitments are anticipated to be spent throughout 2024.

Purchase obligations relate primarily to open purchase orders for capital expenditures, inventories, and goods and services. Purchase obligations are entered into with various vendors in the normal course of business and are consistent with our expected requirements.

Recently Issued Accounting Standards

From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board, or FASB, 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, 2023

The Company has not implemented any accounting standards that had a material impact on its consolidated financial statements during the year ended December 31, 2023.

Standards to be Implemented

In November 2023, the Financial Accounting Standards Board (FASB) issued Accounting Standard Update (ASU) 2023-07 Segment Reporting (Topic 280) Improvements to Reportable Segment Disclosures to enhance disclosures about significant segment expenses. This ASU is effective for our fiscal year 2024 and interim periods in fiscal year 2025. Early adoption is permitted. We are currently evaluating segment expense disclosures related to its annual report for fiscal year 2024.

In December 2023, the FASB issued ASU 2023-09 Income Taxes (Topic 740) Improvements to Income Tax Disclosures that requires disclosure of disaggregated income taxes paid, prescribes standard categories for the components of the effective tax rate reconciliation, and modifies other income tax-related disclosures. This ASU is effective for our fiscal year 2025. Early adoption is permitted. We are currently evaluating income tax disclosures related to our annual report for fiscal year 2025. Although there are several other new accounting pronouncements issued by the FASB, we do not believe any of these accounting pronouncements had or will have a material impact on our Consolidated Financial Statements.

We believe that the impact of recently issued accounting standards that are not yet effective will not have a material impact on our consolidated financial statements.

Critical Accounting Policies and Estimates

Our financial statements are prepared in accordance with accounting principles generally accepted in the United States of America. 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 note 2 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K for information about these critical accounting policies, as well as a description of our other significant accounting policies.

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Revenue Recognition

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. Products are typically delivered without significant post-sale obligations to customers other than standard warranty obligations for product defects. We provide warranties for our products and record the estimated cost within cost of sales in the period that the revenue is recorded. Our standard warranty period extends one to two years from the date of shipment, depending on the type of product purchased. Our warranties provide that our products will be free from defects in material and workmanship, and will, under normal use, conform to the specifications for the product.

We recorded warranty expense of $0.5 million during the year ended December 31, 2023. We recorded warranty expense of $0.2 million during the year ended December 31, 2022. We recorded warranty expense of less than $0.1 million during the year ended December 31, 2021. As of December 31, 2023, we had satisfied all outstanding warranty claims.

Stock-based Compensation

We maintain an equity incentive plan pursuant to which our Board of Directors may grant qualified and nonqualified stock options, restricted stock, restricted stock units and other stock-based awards to board members, officers, key employees and others who provide or have provided service to us.

We measure the costs associated with stock-based awards based on their estimated fair value at date of grant. We recognize the cost of stock-based awards as service, performance or market conditions are met. Future expense amounts for any particular quarterly or annual period could be affected by changes in our assumptions or changes in market conditions.

Stock Options

We use the Black-Scholes option-pricing model to estimate the fair value of stock option awards. The determination of the estimated fair value of stock option awards is based on a number of complex and subjective assumptions. These assumptions include the determination of the estimated fair value of the underlying security, the expected volatility of the underlying security, a risk-free interest rate, the expected term of the option, and the forfeiture rate for the award class. The following assumptions were used to estimate the fair value of the option awards:

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The expected term represents the period that our stock-based awards are expected to be outstanding and is determined using the simplified method described in ASC Topic 718, Compensation — Stock Compensation, for all grants. We believe this is a better representation of the estimated life than our actual limited historical exercise behavior.

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For the years ended December 31, 2023, 2022 and 2021, we used our historical volatility as a basis to estimate expected volatility in the valuation of stock options.

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The risk-free interest rate is based on U.S. Treasury zero-coupon issues with a remaining term equal to the expected life assumed at the date of grant.

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We use an expected dividend yield of zero, since we do not intend to pay cash dividends on our common stock in the foreseeable future, nor have we paid dividends on our common stock in the past.

For stock options that contain a market condition, we use a Monte-Carlo Simulation model to estimate the grant date fair value of awards expected to vest. We based the simulation model on the Black Scholes option-pricing model and a number of other complex assumptions including (i) whether the vesting condition would be satisfied within the time-vesting periods, and (ii) the date the common stock price target would be achieved per the terms of the agreement.

For the restricted stock awards issued to our Chief Executive Officer during the year ended December 31, 2021 with vesting subject to achievement of certain volume weighted average common stock price targets over a three-to-five year period, we used a

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Monte-Carlo simulation model to estimate the grant date fair value with respect to 461,616 shares of restricted common stock. The award had an aggregate grant date fair value of $6.5 million.

On June 2, 2022, we issued 53,590 shares of restricted common stock, pursuant to a performance-based restricted stock agreement, to each of certain employees, with vesting in tranches, subject to achievement of certain time and performance vesting conditions, as defined, over a three-to-five year period. We used a Monte-Carlo simulation model to estimate the grant date fair value of the awards. The equity awards had a total aggregate fair value of $4.0 million at the time of grant.

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