ASPEN AEROGELS INC (ASPN) FY 2022 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, liquefied natural gas facilities, power generating assets and other energy industrial. Our Pyrogel® and Cryogel® product lines have undergone rigorous technical validation by industry leading end-users and achieved significant market adoption. Our Spaceloft® sustainable insulation materials are increasingly used by building owners to improve the energy efficiency and to enhance fire protection in buildings ranging from historic brownstones to modern high rises.

We also derive revenue from a number of other end markets. Customers in these markets use our products for applications as diverse as military and commercial aircraft, trains, buses, appliances, apparel, footwear and outdoor gear. As we continue to enhance our Aerogel Technology Platform, we believe we will have additional opportunities to address high-value applications in the global insulation market, the electric vehicle market and in a number of new, high-value markets, including hydrogen energy, filtration, water purification, and gas sorption.

We market and sell our products primarily through a sales force based in North America, Europe and Asia. The efforts of our sales force are supported by a small number of sales consultants with extensive knowledge of a particular market or region. Our sales force is responsible for establishing and maintaining customer and partner relationships, delivering highly technical information and ensuring high-quality customer service.

Our salespeople work directly with end-user customers and engineering firms to promote the qualification, specification and acceptance of our aerogel and thermal barrier products. We also rely on an existing and well-established channel of qualified insulation distributors and contractors in more than 50 countries around the world to ensure rapid delivery of our aerogel products and strong end-user support.

Thermal Barrier

We are also actively developing a number of promising aerogel products and technologies for the electric vehicle market. We have developed and are commercializing our proprietary line of PyroThin® aerogel thermal barriers for use in battery packs in electric vehicles. Our PyroThin product is an ultra-thin, lightweight and flexible thermal barrier designed with other functional layers to impede the propagation of thermal runaway across multiple lithium-ion battery system architectures. Our thermal barrier technology is designed to offer a unique combination of thermal management, mechanical performance and fire protection properties. These properties enable electric vehicle manufacturers to achieve critical battery performance and safety goals. In addition, we are seeking to leverage our patented carbon aerogel technology to develop industry-leading battery materials for use in lithium-ion battery cells.

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These battery materials have the potential to increase the energy density of the battery cells, thus enabling an increase in the driving range of electric vehicles.

The commercial potential for our PyroThin thermal barriers and our carbon aerogel battery materials in the electric vehicle market is significant. Accordingly, we are hiring additional personnel, incurring additional operating expenses, incurring significant capital expenditures to expand aerogel manufacturing capacity, establishing an automated thermal barrier fabrication operation, enhancing research and development resources and expanding our battery material research facilities, among other items.

We have entered into production contracts with certain major OEMs, including General Motors LLC, or GM, to supply fabricated, multi-part thermal barriers for use in the battery system of its next-generation electric vehicles. 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.

Manufacturing Operations

We manufacture our products using our proprietary technology at our facility in East Providence, Rhode Island. We have operated the East Providence facility since 2008 and have increased our capacity in phases to approximately $250.0 million in annual revenue. To meet expected growth in demand for our aerogel products in the electric vehicle market, we are in the process of expanding our aerogel blanket capacity by constructing a second manufacturing plant in Bulloch County, Georgia.

We had initially expected to build the second plant in two phases and had previously estimated a cost of approximately $575.0 million for the first phase and approximately $125.0 million for the second phase. However, we have refined our approach to revenue capacity planning and corresponding project milestones and are no longer taking a phased approach to the project. Instead, we are focused on achieving a target revenue capacity increase in connection with the second aerogel facility of over $1.2 billion, which was the originally contemplated target revenue capacity of the first and second phases. Additionally, as a result of cost inflation and supply chain challenges for this project, we reviewed the plans, schedule and scope of the project in order to manage these potential cost drivers with the aim of keeping our capital expenditures on the second plant as close as possible to our prior estimates while still seeking to achieve our original revenue capacity increases of over $1.2 billion. As a result of the review of the schedule and scope of the project, we are estimating a cost of approximately $710.0 million, which includes approximately $164.5 million that we have spent through December 31, 2022. Nonetheless, further cost inflation and/or supply chain disruptions, as well as potential changes in the scope of the facilities, could lead to increases to our prior estimates. While the currently planned facilities can accommodate additional equipment in the future to further increase revenue capacity, this is not currently in scope. We expect to start up the second aerogel plant in the first-half of 2024.

On February 17, 2022, we entered into an Inducement Agreement with the Development Authority of Bulloch County (the Development Authority), the City of Statesboro, Bulloch County, Georgia (collectively, Statesboro Entities). Pursuant to the Inducement Agreement, the Statesboro Entities will provide various incentives to induce us to invest at least $325.0 million in constructing and equipping our second manufacturing facility in Bulloch County, Georgia and to create at least 250 full-time jobs. Separately, and concurrently, the Company entered into a Memorandum of Understanding (the MOU) with the Georgia Department of Economic Development (the GDEcD). Pursuant to both the Inducement Agreement and the MOU, the Local Governmental Entities and the GDEcD will provide various incentives to induce the Company to invest at least $325.0 million in constructing and equipping a facility to produce aerogel-based products in Bulloch County, Georgia and to create at least 250 full-time jobs (the Project). We will also receive statutory incentives for economic development provided by the State of Georgia. Incentives afforded by the Statesboro Entities to us include, but are not limited to, property tax reductions and utility and site infrastructure improvements for the Project. Additionally, the Development Authority, with assistance from the GDEcD, will also apply for a grant, the proceeds of which shall be used by us for certain equipment in connection with the Project. The Development Authority will lease to us an approximately 90-acre property along with buildings and equipment to be built therein, for a term of five years, with an option to renew for an additional five years, in consideration for the payment of nominal rent, and grant to us an option to purchase the property upon the earlier of the expiration or termination of the lease at a nominal price.

In addition, we entered into a (i) PILOT Agreement with the Statesboro Entities that sets forth our rights and obligations with respect to the incentives received pursuant to the Inducement Agreement and (ii) a Performance and Accountability Agreement with other state authorities, which provides for a grant of $1,000,000. Pursuant to these agreements, in the event that we fail to meet at least 80% of the investment and job creation goals within 36 months following the earlier to occur of (i) the completion and issuance of the certificate of occupancy with respect to the planned second manufacturing facility or (ii) December 31, 2024 (the Commencement

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Date), we may be required to repay portions of property tax savings, the grant to the Development Authority and other incentives. In addition, we must maintain our achievement of 80% of the investment and job creation goals for a period of 60 months thereafter.

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.

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.

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 a Loan Agreement, or the “Loan Agreement”, by and between (i) the Borrower, (ii) Aspen Aerogels, Inc. and (iii) Aspen Aerogels Rhode Island, LLC, a Rhode Island limited liability company, or 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.

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 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.

On May 1, 2020, our wholly owned subsidiary, Aspen Aerogels Rhode Island, LLC, executed a note for an unsecured loan of $3.7 million, or PPP Loan, pursuant to the Paycheck Protection Program established by the CARES Act, as amended, and

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administered by the U.S. Small Business Administration, or the SBA. On August 24, 2021, the SBA remitted $3.7 million in principal and less than $0.1 million in accrued interest after approving the Borrower’s application for forgiveness of the PPP Loan under the provisions of the CARES Act. Accordingly, we recorded a total gain on the extinguishment of debt of $3.7 million during the year ended December 31, 2021.

Our revenue for the year ended December 31, 2022 was $180.3 million, which represented an increase of $58.7 million, or 48%, from the year ended December 31, 2021. Net loss for the year ended December 31, 2022 was $82.7 million and net loss per share was $2.10. Net loss for the year ended December 31, 2021, was $37.1 million and net loss per share was $1.22.

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 utilizing the input method, 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 2022, we experienced strong volume growth in both our energy industrial and thermal barrier products. As a result, we experienced total revenue growth of 48% during the year. We significantly increased staffing and spending levels in support of

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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. As a result, we experienced an increase in both net loss and Adjusted EBITDA during 2022 versus 2021.

We expect to maintain strong revenue growth during 2023 driven by a continued post-COVID recovery in the energy industrial market, accelerating demand in the electric vehicle market and continued market share gains in the sustainable insulation materials market. Our expectation to maintain strong revenue growth is based, in part, on our OEM customers’ production volume forecasts and targets as well as our expectation to successfully scale our manufacturing capabilities and address any potential supply chain issues to meet this expected demand. As a result, we expect to experience a decrease in both net loss and Adjusted EBITDA during 2023.

We also expect to incur significant capital expenditures and growing expenses during 2023, related to our planned second aerogel manufacturing facility to be located in Bulloch County, Georgia. We are estimating a cost of approximately $710.0 million for the construction of our second aerogel manufacturing facility, which includes approximately $164.5 million that we have spent through December 31, 2022. We expect to start up the second aerogel plant in the first-half of 2024.

At full capacity, we estimate the Georgia facility alone can produce thermal barriers for 4.4 million electric vehicles per year and support more than $1.2 billion in annual revenue. In the aggregate, we project our East Providence and Georgia plants will provide the capacity to support more than $1.6 billion in annual revenue with potential gross margins of 35%, EBITDA margins of 25% and free cash flow sufficient to fund future capacity expansions, including a third aerogel plant.

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 69%, 95%, and greater than 99% of total revenue the years ended December 31, 2022, 2021 and 2020, respectively. We experienced a 48% increase in total revenue during 2022 driven by the increase in our energy industrial business, particularly in Asia and North America, and continued growth in the electric vehicle market.

We project revenue growth during 2023 due to accelerating demand in the electric vehicle market and continued market share gains in the sustainable insulation materials market.

A substantial majority of our revenue is generated from a limited number of direct customers, including distributors, contractors, fabricators, partners and end-user customers. Our ten largest customers accounted for approximately 72% of our total revenue during the year ended December 31, 2022, and we expect that most of our revenue will continue to come from a relatively small number of customers for the foreseeable future.

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. In 2020, sales to Distribution International, Inc. and SPCC Joint Venture represented 21% and 15% of our total revenue, respectively. 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 $66.4 million, or 37% of our total revenue,

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$54.8 million, or 45% of our total revenue, and $55.4 million, or 55% of our total revenue, in the years ended December 31, 2022, 2021 and 2020, respectively.

Cost of Revenue

Cost of product revenue consists primarily of materials and manufacturing expense. Cost of product revenue is recorded when the related product revenue is recognized.

Material is our most significant component of cost of product revenue and includes fibrous batting, silica materials and additives. Material costs as a percentage of product revenue were 51%, 48% and 44% for the years ended December 31, 2022, 2021 and 2020, 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, and other factors may significantly impact our material costs and have a material impact on our operations. We expect that material costs will increase in absolute dollars during 2023 due to projected growth in product shipments, but decrease as a percentage of revenue due to projected increases in average selling prices, improved manufacturing, and fabrication yields and a favorable mix of products sold.

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 46%, 44% and 42% for the years ended December 31, 2022, 2021 and 2020, respectively. We expect that manufacturing expense will increase in absolute dollars and decrease as a percentage of revenue during 2023. Manufacturing expense driven by increased staffing and spending levels in support of our thermal barrier business, including the start-up and operation of an automated fabrication facility in Monterrey, Mexico and the initial staffing and operational requirements of our planned second aerogel manufacturing facility in Bulloch County, Georgia.

During 2023, 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 3%, 8%, and 15% for the years ended December 31, 2022, 2021 and 2020, respectively.

During 2023, we expect gross profit to increase in both absolute dollars and as a percentage of total revenue due to the combination of a projected increase in total revenue combined with projected reduction in material costs as a percentage of total revenue, offset, in part, by a projected increase in manufacturing expense as a percentage of revenue.

In the longer term, we expect gross profit to improve in absolute dollars and as a percentage of revenue due to expected increases in total revenue, production volumes and manufacturing productivity. In addition, we expect the gross profit improvement derived from the increases in revenue, volume and productivity will be supported by the continued implementation of lower cost product formulations and realization of material purchasing efficiencies.

Operating Expenses

Operating expenses consist of research and development, sales and marketing, and general and administrative expenses. Operating expenses include personnel costs, legal fees, professional fees, service fees, insurance premiums, travel expense, facilities related costs and other costs, expenses and fees. The largest component of our operating expenses is personnel costs, consisting of salaries, benefits, incentive compensation and stock-based compensation. In any particular period, the timing and extent of personnel additions or reductions, legal activities, including patent enforcement actions, marketing programs, research efforts and a range of similar activities or actions could materially affect our operating expenses, both in absolute dollars and as a percentage of revenue.

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During 2023, we expect to continue to hire additional personnel and incur additional operating expenses to support the anticipated multi-year growth in our PyroThin thermal barrier business. As a result, we expect that operating expenses will increase in absolute dollars, and remain consistent as a percentage of revenue during the year. In the longer term, we expect that operating expenses will increase in absolute dollars, but decrease as a percentage of revenue.

Research and Development Expenses

Research and development expenses consist primarily of expenses for personnel engaged in the development of next generation aerogel compositions, form factors and manufacturing technologies. These expenses also include testing services, prototype expenses, consulting services, trial formulations for new products, equipment depreciation, facilities costs and related overhead. We expense research and development costs as incurred. We expect to continue to devote substantial resources to the development of new aerogel technologies, including our carbon aerogel battery materials. We believe that these investments are necessary to maintain and improve our competitive position. We also expect to continue to invest in research and engineering personnel and the infrastructure required in support of their efforts. While we expect our research and development expenses will increase in absolute dollars but decrease as a percentage of revenue in the longer term, in 2023 we expect these expenses will increase in both absolute dollars and as a percentage of revenue.

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 that sales and marketing expenses will increase in absolute dollars and remain consistent as a percentage of revenue during 2023 principally due to an increase in compensation associated with the addition of personnel in support of our PyroThin thermal barrier business. In the longer term, we expect that sales and marketing expenses will increase in absolute dollars but decrease as a percentage of revenue.

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. In addition, 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. While we expect that our general and administrative expenses will increase in absolute dollars but decrease as a percentage of revenue in the longer term, in 2023 we expect such expenses will increase in both absolute dollars and as a percentage of revenue.

Interest Expense, Convertible Note - Related Party

Interest expense, convertible note - related party is net of the capitalized interest related to the $100.0 million in aggregate principal amount of our Convertible Senior PIK Toggle Notes.

Interest Income (Expense), Net

For the years ended December 31, 2022, 2021, and 2020, interest expense, net consists of interest expense related to our revolving credit facility and in 2022, 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.

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.

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At December 31, 2022, we had $348.0 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, 2037. Net operating losses of $153.4 million generated from 2018 through 2022 have an unlimited carryforward.

Results of Operations

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

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:

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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 utilizing the input method, 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.

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.

We project revenue growth during 2023 due to a continued post-COVID recovery in the energy industrial market, accelerating demand in the electric vehicle market and continued market share gains in the sustainable insulation materials market.

Cost of Revenue

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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.

During 2023, we expect that cost of revenue will increase in absolute dollars due to projected volume growth and a planned increase in staffing and spending levels to meet our expected revenue growth, but decrease as a percentage of revenue due to projected increases in average selling prices, improved manufacturing and fabrication yields and a favorable mix of products sold.

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 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.

During 2023, we expect gross profit to increase in both in absolute dollars and as a percentage of total revenue due principally to the projected increase in total revenue combined with a projected reduction in material costs as a percentage of total revenue, offset, in part, by a projected increase in manufacturing expense as a percentage of revenue.

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.

We expect that our research and development expenses will increase in absolute dollars and remain consistent as a percentage of revenue during 2023 in line with our decision to increase resources dedicated to the development of new aerogel products and technologies, including our carbon aerogel battery materials.

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In the long-term, we expect to continue to increase investment in research and development in our efforts to enhance and expand our Aerogel Technology Platform. However, we expect that research and development expenses will decline as a percentage of total revenue in the long-term due to projected growth in product revenue.

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.

We expect sales and marketing expenses to increase in absolute dollars and decrease as a percentage of revenue during 2023, principally due to planned increases in staffing in support of our PyroThin thermal barrier business and a planned increase in marketing expense during the year.

In the long-term, we expect that sales and marketing expenses will continue to increase in absolute dollars as we continue to increase sales personnel and marketing efforts in support of expected growth in demand for our products, and we expect that sales and marketing expenses will decrease as a percentage of total revenue in the long-term due to projected growth in product revenue.

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.

We expect general and administrative expenses to increase in both absolute dollars and as a percentage of revenue during 2023.

We also expect to increase general and administrative personnel and expense levels in the long term to support the anticipated growth of our business and continued expansion of our manufacturing operations. 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, could result in significant additional legal expense over the medium-to-long term. However, in the longer term, we expect that general and administrative expenses will decrease as a percentage of revenue due to projected growth in product revenue.

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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 interest relating to our Convertible Note. Interest expense, related party $5.1 million increase 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.

Year ended December 31, 2021 compared to year ended December 31, 2020

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

Revenue

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

Total revenue increased $21.3 million, or 21%, to $121.6 million in 2021 from $100.3 million in 2020. The increase in total revenue was the result of increases in both product revenue and research services revenue.

Product revenue increased by $21.3 million, or 21%, to $121.1 million in 2021 from $99.8 million in 2020. This increase was driven by the increase in square feet shipped in our energy industrial business, particularly in North America, due to the beginning stages of a post-COVID recovery, initial revenues in the electric vehicle market, and continued market share gains in the sustainable insulation materials market.

Product revenue for the year ended December 31, 2021, included $34.1 million in sales to Distribution International, Inc. Product revenue for the year ended December 31, 2020, included $20.7 million in sales to Distribution International, Inc. and $15.3 million in sales to SPCC Joint Venture. The average selling price per square foot of our products decreased by $0.03, or 1%, to $3.46 per square foot for the year ended December 31, 2021, from $3.49 per square foot for the year ended December 31, 2020. This decrease in average selling price principally reflected the impact of a change in the mix of products sold. This decrease in average selling price had the effect of decreasing product revenue by approximately $0.9 million for the year ended December 31, 2021.

In volume terms, product shipments increased by 6.4 million square feet, or 22%, to 35.0 million square feet of aerogel products for the year ended December 31, 2021, as compared to 28.6 million square feet in the year ended December 31, 2020. The increase in product volume had the effect of increasing product revenue by approximately $22.1 million for the year ended December 31, 2021.

Research services revenue increased by $0.1 million, or 16%, to $0.5 million in 2021 from $0.4 million in 2020. We have decided to cease efforts to secure additional research contracts and to wind down existing contract research activities.

Product revenue as a percentage of total revenue was greater than 99% of total revenue in 2021 and in 2020. Research services revenue was less than 1% of total revenue in 2021 and in 2020.

Cost of Revenue

Total cost of revenue increased $26.0 million, or 30%, to $111.7 million in 2021 from $85.7 million in 2020. The increase in total cost of revenue was the result of an increase in product cost of revenue.

Product cost of revenue increased $26.1 million, or 30%, to $111.6 million in 2021 from $85.5 million in 2020. The $26.1 million increase was the result of a $14.5 million increase in material costs and an $11.6 million increase in manufacturing expense. The increase in material costs was driven principally by the 6.4 million square feet, or 22%, increase in product shipments, an increase in manufacturing costs and an unfavorable mix of products sold. The increase in manufacturing expense was primarily driven by increases in compensation and related costs of $8.0 million, operating supplies of $2.1 million, maintenance costs of $0.6 million, waste disposal costs of $0.5 million, and operating costs of $0.4 million.

Product cost of revenue as a percentage of product revenue increased to 92% in 2021 from 86% in 2020. This increase was the result of the increase in both material costs and manufacturing expense as a percentage of revenue during the year ended December 31, 2021.

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Gross Profit

Gross profit decreased $4.7 million, or 32%, to $9.9 million in 2021 from $14.6 million in 2020. The decrease in gross profit was the result the $26.0 million increase in total cost of revenue, partially offset by the $21.3 million increase in total revenue. The increase in total cost of revenue was principally driven by the 6.4 million square feet, or 22%, increase in product shipments. The increase in total revenue was principally the result of the 6.4 million square feet, or 22%, increase in product shipments.

Gross profit as a percentage of total revenue decreased to 8% in 2021 from 15% in 2020. This decrease was principally the result of the $11.6 million increase in manufacturing costs and the unfavorable mix of products sold.

Research and Development Expenses

Research and development expenses increased by $2.7 million, or 31%, to $11.4 million in 2021 from $8.7 million in 2020. The $2.7 million increase was the result of increases in compensation and related costs of $1.6 million, professional fees of $0.6 million and other research and development expenses of $0.5 million.

Research and development expenses as a percentage of total revenue was 9% during the years ended December 31, 2021 and 2020.

Sales and Marketing Expenses

Sales and marketing expenses increased by $4.8 million, or 41%, to $16.6 million in 2021 from $11.8 million in 2020. The increase was the result of increases in compensation and related costs of $4.6 million and other expenses of $0.7 million, partially offset by a decrease in sales consultant expenditures of $0.5 million.

Sales and marketing expenses as a percentage of total revenue increased to 14% in 2021 from 12% in 2020, primarily due to elevated levels of compensation associated with an increase in sales and marketing personnel.

We expect sales and marketing expenses to increase in both absolute dollars and as a percentage of revenue during 2022, principally due to planned increases in staffing in support of our PyroThin thermal barrier business and a planned increase in marketing expense during the year.

General and Administrative Expenses

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General and administrative expenses increased by $6.8 million, or 44%, to $22.5 million in 2021 from $15.7 million in 2020. The $6.8 million increase was the result of increases in compensation and related costs of $2.8 million, professional fees of $2.4 million, and other general and administrative costs of $2.2 million, partially offset by a decrease in the provision for bad debt of $0.6 million.

General and administrative expenses as a percentage of total revenue increased to 19% in 2021 from 16% in 2020 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.

Interest Expense, net

Interest expense, net, consisting primarily of fees and interest expense associated with outstanding balances under our revolving credit agreement, was $0.2 million in 2021 and 2020.

Liquidity and Capital Resources

Overview

We have experienced significant losses and invested substantial resources since our inception to develop, commercialize and protect our aerogel technology and to build a manufacturing infrastructure capable of supplying aerogel products at the volumes and costs required by our customers. These investments have included research and development and other operating expenses, capital expenditures, and investment in working capital balances.

Our long-term financial projections anticipate revenue growth, increasing levels of gross profit, and improved cash flows from operations. To meet expected growth in demand for our aerogel products in the electric vehicle market, we are planning to expand our aerogel blanket capacity by constructing a second manufacturing plant in Bulloch County, Georgia, construction of which is currently in progress. We had initially expected to build the second plant in two phases and had previously estimated a cost of approximately $575.0 million for the first phase and approximately $125.0 million for the second phase. However, we have refined our approach to revenue capacity planning and corresponding project milestones and are no longer taking a phased approach to the project. Instead, we are focused on achieving a target revenue capacity increase in connection with the second aerogel facility of over $1.2 billion, which was the originally contemplated target revenue capacity of the first and second phases. Additionally, as a result of cost inflation and supply chain challenges for this project, we reviewed the plans, schedule and scope of the project in order to manage these potential cost drivers with the aim of keeping our capital expenditures on the second plant as close as possible to our prior estimates while still seeking to achieve our original revenue capacity increases of over $1.2 billion. As a result of the review of the schedule and scope of the project, we are estimating a cost of approximately $710.0 million, which includes approximately $164.5 million that we have spent through December 31, 2022. Nonetheless, further cost inflation and/or supply chain disruptions, as well as potential changes in the scope of the facilities, could lead to increases to our prior estimates. While the currently planned facilities can accommodate additional equipment in the future to further increase revenue capacity, this is not currently in scope. We expect to start up the second aerogel plant in the first-half of 2024.

We are also increasing our investment in the research and development of next-generation aerogel products and technologies. During 2023, we will continue to develop aerogel products and technologies for the electric vehicle market. We believe the commercial potential for our technology in the electric vehicle market is significant. To meet the anticipated revenue growth and take advantage of this market opportunity, we are adding personnel, incurring additional operating expenses, and planning to construct a carbon aerogel battery materials facility, among other items.

We have taken several actions during 2022 to increase the financial resources available to support current operating requirements and capital expenditures. 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.

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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.

We believe that our December 31, 2022 cash and cash equivalents balance of $281.3 million will be sufficient to support current operating requirements, current research and development activities and the initial capital expenditures required to support the evolving commercial opportunities in the electric vehicle market and other strategic business opportunities.

However, we plan to supplement our cash balance and available credit with equity financings, debt financings, customer prepayments or technology licensing fees 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. We believe that the consummation of equity financings could potentially result in an ownership change under Section 382 of the Internal Revenue Code. Such an ownership change would lead to the use of our net operating loss carryforwards being restricted. Our inability to use a substantial portion of our net operating loss carryforwards would result in a higher effective tax rate and adversely affect our financial condition and results of operations.

Primary Sources of Liquidity

Our principal sources of liquidity are currently our cash and cash equivalents. Cash and cash equivalents consist primarily of cash, money market accounts, and sweep accounts on deposit with banks. As of December 31, 2022, we had $281.3 million of cash and cash equivalents.

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 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.

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.

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 2023.

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.

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 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.

During 2021, we used $18.6 million in net cash in operating activities, as compared to the use of $9.9 million in net cash during 2020, an increase in the use of cash of $8.7 million. This increase in the use of cash was the result of the increase in net loss adjusted for non-cash items of $19.4 million, and a decrease in cash provided by changes in working capital of $10.8 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 and engineering designs for the planned aerogel manufacturing facility in Bulloch County, Georgia. Net cash used in investing activities for 2022 and 2021 totaled $178.0 million and $13.8 million, respectively.

Financing Activities

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.

Net cash provided by financing activities in 2021 totaled $92.5 million and consisted of $19.4 million of net proceeds from an ATM offering program with B. Riley Securities, net proceeds from the private placement of common stock of $73.5 million, and proceeds from employee stock option exercises of $2.3 million, offset, in part, by $2.7 million in cash used 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 $178.0 million in 2022, $13.8 million in 2021 and $3.4 million in 2020. As of December 31, 2022, we had capital commitments of approximately $192.7 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 the planned aerogel manufacturing facility in Bulloch County, Georgia and consist primarily of costs for equipment and construction.

We had initially expected to build the second plant in two phases and had previously estimated a cost of approximately $575.0 million for the first phase and approximately $125.0 million for the second phase. However, we have refined our approach to revenue capacity planning and corresponding project milestones and are no longer taking a phased approach to the project. Instead, we are focused on achieving a target revenue capacity increase in connection with the second aerogel facility of over $1.2 billion, which was the originally contemplated target revenue capacity of the first and second phases. Additionally, as a result of cost inflation and supply chain challenges for this project, we reviewed the plans, schedule and scope of the project in order to manage these potential cost

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drivers with the aim of keeping our capital expenditures on the second plant as close as possible to our prior estimates while still seeking to achieve our original revenue capacity increases of ovre $1.2 billion. As a result of the review of the schedule and scope of the project, we are estimating a cost of approximately $710.0 million, which includes approximately $164.5 million that we have spent through December 31, 2022.

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 establish an automated thermal barrier fabrication operation, build a carbon aerogel battery materials facility, and to construct a new aerogel blanket manufacturing facility with additional equity financings, debt financings, customer prepayments, technology licensing fees 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 October 31, 2023 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 General Motors, to supply fabricated, multi-part thermal barriers, or Barriers, for use in the battery system of its next-generation electric vehicles, 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 will be 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

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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.

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.

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, 2021

During the year ended December 31, 2022, the Company adopted Accounting Standards Update (ASU) 2020-06, Debt-Debt with Conversion and Other Options (Topic 470) and Derivatives and Hedging-Contracts in Entity’s Own Equity (Topic 815): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity. This ASU simplifies the accounting for convertible instruments by eliminating the cash conversion and beneficial conversion feature models used to separately account for embedded conversion features as a component of equity. Instead, the entity will account for the convertible debt or convertible preferred stock securities as a single unit of account, unless the conversion feature requires bifurcation and recognition as derivatives. Additionally, the guidance requires entities to use the if-converted method for all convertible instruments in the diluted earnings per share calculation and include the effect of potential share settlement for instruments that may be settled in cash or shares. The Company has applied the provisions of the standards to the embedded derivative features of its convertible note – related party that was issued on February 18, 2022 and determined the fair value to be immaterial at issuance and as of December 31, 2022.

The Company also adopted Accounting Standards Update (ASU) 2018-17, Consolidation (Topic 810): Targeted Improvements to Related Party Guidance for Variable Interest Entities. This ASU amends the guidance for determining whether a decision-making fee is a variable interest and requires organizations to consider indirect interests held through related parties under common control on a proportional basis rather than as the equivalent of a direct interest in its entirety. The Company adopted ASU 2018-17 during the year ended December 31, 2022, and the adoption of this guidance did not have a material impact on the Company's consolidated balance sheet, consolidated statements of operations or consolidated statements of cash flows.

In December 2021, the FASB issued ASU 2021-10, Government Assistance Topic 832, which provides increased transparency by requiring business entities to disclose information about certain types of government assistance received. Public entities are required to apply the new standard for annual reporting periods beginning after December 15, 2021 and interim periods within those fiscal periods. This standard is to be applied prospectively. Early adoption is permitted as of the beginning of an interim or annual period. The Company believes the adoption of this guidance did not have a material impact on the Company's consolidated balance sheet, consolidated statements of operations or consolidated statements of cash flows.

Standards to be Implemented

The Company believes that the impact of recently issued accounting standards that are not yet effective will not have a material impact on its consolidated financial statements.

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. In general, our customary shipping terms are FOB shipping point and ex works. 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 $0.2 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. We did not record any warranty expense during the year ended December 31, 2020. As of December 31, 2022, 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, 2022 and 2021, we used our historical volatility as a basis to estimate expected volatility in the valuation of stock options. For the year ended December 31, 2020, the expected volatility is primarily based on the weighted-average volatility of up to 17 companies within various industries that we believe are similar to our own.

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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.

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On December 10, 2020, we modified the vesting conditions of NSOs to purchase 116,279 shares of common stock held by our CEO to extend the time period to achieve the common stock price target. We accounted for the extension of the time period as a modification and recognized $1.1 million of incremental stock compensation expense during the year ended December 31, 2020.

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