aspn-10k_20181231.htm

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes ☐ No ☒

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☒

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☒

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

The aggregate market value of the registrant’s common stock held by non-affiliates of the registrant (without admitting that any person whose shares are not included in such calculation is an affiliate) computed by reference to the price at which the common stock was last sold as of the last business day of the registrant’s most recently completed second fiscal quarter was approximately $107.8 million.

As of March 7, 2019, the registrant had 24,246,807 shares of common stock outstanding.

Portions of the registrant’s definitive Proxy Statement for its Annual Meeting of Stockholders to be held on June 19, 2019 are incorporated by reference into Part III of this Annual Report on Form 10-K to the extent stated herein.

Aspen Aerogels, Inc. is an aerogel technology company that designs, develops and manufactures innovative, high-performance aerogel insulation used primarily in the energy infrastructure and building materials markets. The Company also conducts research and development related to aerogel technology supported by funding from several agencies of the U.S. government and other institutions. When used in this report, the terms “we,” “us,” “our” and “the Company” refer to Aspen Aerogels, Inc. and its subsidiaries.

We design, develop and manufacture innovative, high-performance aerogel insulation. 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 products provide two to five times the thermal performance of widely used traditional insulation in a thin, easy-to-use and durable blanket form. Our end-use 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 technologically advanced products are targeted at the estimated $3.1 billion annual global market for energy infrastructure insulation materials. Our aerogel insulation has undergone rigorous technical validation and is used by many of the world’s largest oil producers and the owners and operators of refineries, petrochemical plants, liquefied natural gas facilities and power generating and distribution assets, such as ExxonMobil, PTT LNG, Dominion Resources and Royal Dutch Shell. Our products replace traditional insulation in existing facilities during regular maintenance, upgrades and capacity expansions. In addition, our aerogel products are increasingly being specified for use in new-build energy infrastructure facilities.

We introduced our two key product lines, Pyrogel and Cryogel in 2008. Our product revenue has grown from $17.2 million in 2008 to $102.1 million in 2018, representing a ten year compound annual growth rate of 19%. During this period, we have sold more than $821 million of our products globally, representing an installed base of more than 313 million square feet of insulation. We believe that this decade of success positions us for future growth and continued gain in market share.

We currently focus our commercial efforts in the energy infrastructure market, where we believe our products have multiple high value applications. We also market and sell aerogel products for use within the building materials and other end markets. Customers in these markets use our products for applications as diverse as wall systems, 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 opportunities to address additional high value applications in the global insulation market and in a diverse set of new markets.

We have grown our business by forming technical and commercial relationships with industry leaders, which has allowed us to optimize our products to meet the particular demands of targeted market sectors. We have benefited from our technical and commercial relationships with ExxonMobil in the oil refinery and petrochemical sector, with TechnipFMC in the offshore oil sector and with BASF in the building materials market. We will continue our strategy of working with innovative companies to target and penetrate additional market opportunities.

Our patented aerogel product and manufacturing technologies are significant assets. Aerogels are complex structures in which 97% of the volume consists of air trapped between intertwined clusters of amorphous silica solids. These extremely low density solids provide superior insulating properties. Although aerogels are usually fragile materials, we have developed innovative and proprietary manufacturing processes that enable us to produce industrially robust aerogel insulation cost-effectively and at commercial scale.

Our products help customers to improve the resource efficiency and sustainability of their operations. Our products also enable compact system design, reduce installation time and costs, promote freight and logistics cost savings, reduce system weight and required storage space and enhance job site safety. Our products reduce the incidence of corrosion under insulation, which is a significant maintenance cost and safety issue in energy infrastructure facilities. Many of our products also offer strong fire protection, which is a critical performance requirement in our markets. We believe our array of product attributes provides strong competitive advantages over traditional insulation. Although competing insulation materials may have one or more comparable attributes, we believe that no single insulation material currently available offers all of the properties of our aerogel insulation products.

Total revenue for the years ended December 31, 2018, 2017 and 2016 was $104.4 million, $111.6 million and $117.7 million, respectively. For the years ended December 31, 2018, 2017 and 2016, based on shipment destination or research services location, our U.S. revenue was $41.7 million, $51.4 million and $35.7 million, respectively, and our international revenue was $62.6 million, $60.2 million and $82.0 million, respectively.

We manufacture our products using proprietary and patent-protected technology at our facility in East Providence, Rhode Island. We have operated the East Providence facility since 2008 and have significantly increased our manufacturing capacity and productivity since that date. We commenced operation of our third production line in the East Providence facility in 2015 which increased our annual nameplate capacity to 50 million square feet of aerogel blankets. In 2018, we initiated a series of projects designed to increase this nameplate capacity by 20 percent to 60 million square feet of aerogel blankets by the end of 2020. As of December 31, 2018, we had increased the nameplate capacity in our East Providence facility to 55 million square feet of aerogel blankets.

Financial information about our product and research services revenues, net loss per share and our total assets are provided in our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.

Our core market is the energy infrastructure insulation market. This market is global, well-established and includes large and well-capitalized end-users. This market includes companies operating refinery, petrochemical, oil production, and LNG production and storage facilities. The market also includes firms operating gas, coal, nuclear, hydro and solar thermal power generating plants and district energy systems. Insulation systems in the energy infrastructure market are designed to maintain hot and cold process equipment, piping and storage tanks at optimal temperatures, to protect plant and equipment from the elements and from the risk of fire, and to protect workers. The market is served by a well-organized, well-established, worldwide network of distributors, contractors and engineers.

Demand for insulation in the energy infrastructure market is composed of demand associated with new-build construction of facilities, capital expansions and related capital projects, as well as with routine, non-discretionary maintenance programs within existing facilities. Capital expansions and related capital projects in the energy infrastructure market are driven primarily by overall economic growth and projected growth in energy demand. Maintenance programs are essential to optimal operation of process equipment, to protect workers and to minimize the risk of a catastrophic loss. Accordingly, we believe that demand for insulation for maintenance purposes in comparison to capital projects is less affected by volatility associated with economic cycles, energy prices and other macroeconomic factors.

The major end-use markets that drive demand for our products include oil refining, petrochemical, natural gas and LNG production and storage, onshore oil production, offshore oil production and power generation. Global energy demand is expected to increase in the long-term and, in order to serve this growing demand, we believe our end-use customers will continue to invest in major energy infrastructure projects.

We also sell our products for use in the building materials and other end markets, including for the fabrication of insulation parts by original equipment manufacturers, or OEMs. These OEMs develop products incorporating our aerogel blankets for applications as diverse as military and commercial aircraft, trains, buses, appliances, apparel, footwear and outdoor gear. While these are not presently our core markets, we anticipate that we will allocate a growing portion of our manufacturing capacity to serve these markets in the long term. We believe the key performance criteria for insulation in these markets and applications include thermal performance, compact design, durability and fire resistance.

We operate in a highly competitive environment. In general, we compete with traditional insulation materials based on product performance, price, availability and proximity to the customer. Customers may choose among a variety of insulation materials that offer a range of characteristics including thermal performance, durability, vapor permeability, moisture resistance, ease of installation and upfront and lifecycle costs. Within each type of insulation material, there is also competition between the manufacturers of that material. Most types of traditional insulation materials are produced by a number of different manufacturers and once customers have chosen the type of insulation material that they intend to use, they will choose a manufacturer of that material based primarily on each manufacturer’s price and delivery schedule. Insulation manufacturers include a range of large, high-volume, multinational manufacturers offering branded products and strong technical support services to small, low-volume, local manufacturers offering low prices and limited customer support.

Our products are priced at a premium to traditional insulation materials. While our competitors offer many traditional insulation products that are priced below our products on a per-unit basis, we believe our products have superior performance attributes and may have the lowest cost on a fully-installed basis or offer significant life-cycle cost savings.

We compete in the aerogel insulation market with Cabot Corporation, Armacell International S.A., Guangdong Alison Hi-Tech Co., Ltd. and Nano Tech Co., Ltd. and a growing number of other competitors that manufacture and sell aerogel insulation products. We expect to face increasing competition in the aerogel insulation market over the next several years as existing competitors and new entrants seek to develop and market their own aerogel products. In addition to other aerogel insulation products, we also encounter competition from innovatively packaged traditional insulation materials that compete with our products on the basis of one or more performance factors.

Within each of our target markets, we encounter one or more of these organizations or their resellers and a significant number of other aggressive national, regional and local suppliers of traditional insulation products. Our competitors are seeking to enhance traditional insulation materials and to develop and introduce new and emerging insulation technologies. Competing technologies that outperform our insulation products in one or more performance attributes could be developed and successfully introduced. See “Risk Factors —The energy infrastructure insulation market is highly competitive; if we are unable to compete successfully, we may not be able to increase or maintain our market share and revenues.”

Our market share in 2018 was approximately 3% of the estimated $3.1 billion annual global market for energy infrastructure insulation materials. Many of our competitors have greater market presence, larger market share, longer operating histories, stronger name recognition, larger customer bases and significantly greater financial, technical, sales and marketing, manufacturing and other resources than we have and may be better able to withstand volatility within the industry and throughout the economy as a whole while retaining greater operating and financial flexibility. If our competitors lower their prices, or develop new products with better performance, or if we are unable to compete effectively, our growth opportunities, share of the market, margins and profitability may decline.

Because insulation is used in a wide variety of demanding applications, insulation materials must satisfy a wide range of performance criteria on a cost-effective basis. We believe that our aerogel technology has allowed us to create superior insulation products for our core markets that will allow us to continue to grow our share of the global insulation market. We believe that the potential for significant technological innovation in traditional insulation materials is limited and that new high-performance materials will be required to meet evolving market requirements for energy efficient insulation systems. Our line of high-performance aerogel blankets is positioned to meet these requirements. Our solution is driven by our innovative and proprietary technology that produces aerogels in a flexible and industrially robust blanket form and is supported by over 20 years of research and development dedicated to new aerogel compositions, form factors and manufacturing technologies. We believe our aerogel blankets deliver a superior combination of performance attributes that enable end-users to save money, improve resource efficiency, preserve operating assets and protect workers across a wide range of applications in our target markets.

We believe the following combination of capabilities distinguishes us from our competitors and positions us to continue to gain market share in the energy infrastructure insulation market:

We are targeting continued expansion of the use of our products within energy infrastructure facilities during regular maintenance, upgrades and expansions. In addition to opportunities to replace traditional insulation at existing facilities, we are also pursuing insulation applications at new-build and large capacity expansion projects around the world.

Our strategy is to create economic value by leveraging our technological and market leadership in aerogels to be the premier provider of high-performance insulation products serving global energy infrastructure customers. We also will pursue high-value opportunities for our aerogel products within other segments of the global insulation market, including the building materials market. In addition, we will leverage our aerogel technology platform to develop innovative, aerogel enhanced products for applications outside the global insulation market.

Aerogels are highly porous structures in which 97% of the volume consists of air trapped between intertwined clusters of amorphous silica solids. Aerogels are a very low density solids and are extremely fragile materials. However, our proprietary manufacturing process produces aerogels in a flexible, resilient, durable and easy-to-use blanket form.

The core raw material in the production of our aerogel products is silica precursors. Our manufacturing process initially creates a semi-solid alcogel in which the silica structure is filled with ethanol. We produce aerogel by means of a supercritical extraction

process that removes ethanol from the gel and replaces it with air. Our process allows the ethanol to be extracted without causing the solid matrix in the gel to collapse from capillary forces.

Our material costs were 47%, 45% and 41% of product revenue for the years ended December 31, 2018, 2017 and 2016, respectively. We are seeking to lower our manufacturing costs and to improve the per square foot costs of our aerogel blankets by optimizing our formulations to reduce material costs, by enhancing manufacturing process controls to improve yields, by realizing price reductions from existing vendors, by qualifying new vendors and by reducing shipping costs. Our objective is both to reduce costs to enhance our competitive position and to ensure we deliver high quality products to our customers.

The materials used in the production of our products consist primarily of several silica precursors, fiber batting, and other additives. The markets for these materials are generally competitive and multiple sources of supply exist for all of our raw materials. However, during 2018, we experienced a significant increase in the price of certain silica precursors due to a supply imbalance in the silanes market. We are actively working to reformulate our products to reduce our reliance on the materials that are susceptible to significant price fluctuations.

We purchase silica precursors from several suppliers. Based on the current level of demand for our products, we believe that an adequate long-term supply of silica precursors is available. However, if demand for our products increases rapidly, we will need to work with suppliers to ensure that an adequate long-term supply of silica precursors will be available at competitive prices. Suppliers of silica precursors include industrial companies that produce the materials directly or that produce them as a byproduct of other industrial processes. We are working with a number of these suppliers to plan for our potential future needs and to develop our processes to reduce the long-term cost impact of these materials. See “Risk Factors — Shortages of the raw materials used in the production of our products, increases in the cost of such materials or disruptions in our supply chain could adversely impact our financial condition and results of operations.”

Our aerogel blankets are reinforced with fiber batting. We manufacture and sell our blankets in 60 inch wide, three foot diameter rolls with a standard range of thickness of 5 millimeters to 10 millimeters. Our base products are all flexible, hydrophobic, vapor permeable, compression resistant and able to be cut and fabricated using conventional tools. We have specifically developed our line of aerogel blankets to meet the requirements of a broad set of applications within our target markets. The composition and attributes of our standard aerogel blankets are described below:

Insulation is a material or combination of materials that slows the transfer of heat from one side of the material to the other. The composition of our aerogel products minimizes the three mechanisms of thermal transport:

We believe our aerogel products offer the lowest levels of thermal conductivity, or best insulating performance, of any widely used insulation available on the market today.

The lower a material’s thermal conductivity, the more slowly heat is transferred through the material. R-values are a commonly used measure of an insulating material’s resistance to heat transfer. R-value is calculated as the thickness of an insulation material divided by the thermal conductivity of the insulation material. Materials with higher R-values have lower thermal conductivity and are better insulators. Traditional and specialty insulation materials provide a range of R-values. Aerogels have the highest R-value per unit of thickness in comparison to traditional insulation materials.

Our products have undergone rigorous testing and are now qualified for global usage in both routine maintenance and in capital projects at many of the world’s largest oil producers, refiners and petrochemical companies. These end-users of our products have well defined practices, codes, specification and standards for materials and systems installed or used in their facilities. These specifications include insulation system design standards, material qualification and selection processes, and insulation application practices. As part of the material qualification process established by these companies, a new insulation product must meet general industry standards, such as consensus standards developed by ASTM International, and, in some cases, company-specific internal standards to be considered for use. In addition, most of these companies require one or more field trials to evaluate fitness for use in specific applications. The companies either run these qualification processes and field trials internally or through third parties engaged by them, and they generally do not publicly disclose the results of their testing. While the specific processes and timelines vary from company to company, in general, upon successful completion of the qualification process for an insulation product, an end-user will typically deem the product to be qualified for use in its facilities on a local, regional or global basis for one or more applications. Because our end-use customers are typically businesses with very large operations in multiple sites, our insulation sales likely represent only a small portion of the total insulation used by any one of these companies. Accordingly, once our products are qualified at a company, we continue to seek to expand use of our products by the end-use customer in additional applications and at multiple locations.

We market and sell our products primarily through our global sales force. Our sales personnel are based in North America, Europe and Asia and travel extensively to market and sell our products to new and existing customers. 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 establishes and maintains customer and partner relationships, delivers highly technical information and provides first class customer service. We plan to expand our sales force globally to support anticipated growth in customers and demand for our products.

Our sales force calls on and maintains relationships with participants at all levels of the insulation industry supply chain. We have established a network of insulation distributors to ensure rapid delivery of our products in critical regions. Our sales personnel work to educate insulation contractors about the technical and operating cost advantages of aerogel blankets. Our sales force also works directly with end-users and engineering firms to promote qualification, specification and wider acceptance of our products in existing and new applications. In the energy infrastructure market, we rely heavily on the existing and well-established channel of distributors and contractors to deliver products to our customers. In addition, our sales personnel work with OEMs and strategic partners to create new products and solutions to expand our market reach.

The sales cycle for a new insulation material is typically lengthy. Our sales cycle from initial customer trials to widespread use can take from one to three years, although we typically realize increasing revenue at each stage in the cycle. We believe our relationships with technically sophisticated customers and strategic partners serve to validate our technology, products and value proposition within a target market. These relationships have proven to accelerate the sales cycle with other customers within specific markets and to facilitate growth in market share. We have focused our marketing efforts on developing technical support materials, installation guides, case studies and general awareness of the superior performance of our aerogel blankets. We rely principally on our website, social media, printed technical materials, participation in industry conferences and tradeshows and presentation of technical papers to communicate our message to existing and potential customers. We also receive strong word-of-mouth support from the growing network of distributors, installation contractors, OEMs, strategic partners and end-users that understand the benefits of our products.

As of December 31, 2018, we had 48 sales and marketing professionals worldwide. Their efforts were supported by a team of ten sales consultants.

Our primary customers are distributors, installation contractors and OEMs that stock, install and fabricate insulation products, components and systems for technically sophisticated end-users that require high-performance insulation.

Distribution International, Inc. represented 20% of our total revenue for 2018 and was our only customer representing 10% or more of our revenue for that period.

Our product revenue is generated by sales to customers around the world. In 2018, 39% of our product revenue was generated in the United States, 34% in Asia, 19% in Europe, 5% in Canada and less than 3% in Latin America based on shipment destination.

A substantial portion of our sales are to shipment destinations located outside the United States, including Korea, Great Britain, Taiwan, Hong Kong, India, Canada, Norway, Singapore, Germany, and Australia. Total revenue generated from outside of the United States amounted to $62.6 million or 60% of total revenue, $60.2 million or 54% of total revenue and $82.0 million or 70% of total revenue, in the years ended December 31, 2018, 2017 and 2016, respectively. In addition, we may expand our operations outside the United States. As a result, we are subject to a number of risks; see “Risk Factors — A substantial portion of our revenue comes from sales in foreign countries and we may expand our operations outside of the United States, which subjects us to increased economic, foreign exchange, operational and political risks that could increase our costs and make it difficult for us to operate profitably.”

The end-users of our aerogel blankets include some of the largest and most well capitalized companies in the world. Our products are installed in more than 50 countries worldwide.

Traditionally, we have relied on the efforts of a small network of partners, OEMs and fabrication houses to serve the building materials, transportation, apparel and appliance markets. These partners, OEMs and fabricators are manufacturers of components and systems for buildings, refrigerated and hot appliances, cold storage equipment, automobiles, aircraft, trains and electronic sectors and manufacturers of outdoor gear and apparel. In addition, we have partnered with BASF to develop and commercialize innovative products optimized to meet the needs of the building materials market. The end-users of our products in these markets include a wide range of institutions, businesses, individuals, municipalities and government agencies.

We manufacture our products using our proprietary technology at our facility located in East Providence, Rhode Island. We have operated the East Providence facility since 2008 and have significantly increased manufacturing capacity and productivity during the period. Our manufacturing process is proven, scalable and can meet increasing demand.

Our manufacturing group is led by a seasoned team with management experience at global industrial and specialty chemical companies. Our manufacturing workforce is skilled and, to date, we have experienced employee turnover consistent with our industry.

We have well-defined operating processes and maintenance, environmental, health and safety programs to support our operations. We employ statistical processes and quality controls in our manufacturing systems. We measure and monitor thermal conductivity, hydrophobicity and other key properties of our aerogel blankets in our manufacturing operations. We are ISO 9001:2015 certified.

We successfully commenced operation of our third production line at the East Providence facility in 2015, which increased our annual nameplate capacity to 50 million square feet of aerogel blankets. We have initiated a series of projects, which we refer to as EP20, designed to increase the nameplate capacity of the East Providence facility by an additional 10 million square feet of aerogel blankets by the end of 2020. During 2018, we completed EP20 projects at a cost of $3 million that increased our nameplate capacity to 55 million square feet. We estimate the cost to complete the remaining EP20 projects will be up to $12 million. The EP20 projects are designed to improve manufacturing productivity and capital efficiency through a phased deployment of enhanced chemical and process technologies.

We directly control all stages in the manufacture of our aerogel blankets. Our direct ownership of manufacturing operations allows us to maintain control of proprietary process technologies and to control product quality. Our production of aerogel blankets utilizes a continuous process and consists of the following key steps:

Our material costs were 47%, 45% and 41% of product revenue for the years ended December 31, 2018, 2017 and 2016, respectively.

The materials used in the production of our products consist primarily of a several silica precursors, fiber batting, and other additives. The markets for these materials are generally competitive and multiple sources of supply exist for all of our raw materials. However, during 2018, we experienced a significant increase in the price of certain silica precursors due to a supply imbalance in the silanes market. We are actively working to reformulate our products to reduce our reliance on materials that are susceptible to significant price fluctuations.

We purchase silica precursors from several suppliers. Based on the current level of demand for our products, we believe that an adequate long-term supply of silica precursors is available. However, if demand for our products increases rapidly, we will need to work with suppliers to ensure that the long-term supply of silica precursors will be available at competitive prices. Suppliers of silica precursors include industrial companies that produce the materials directly or that produce them as a byproduct of other industrial processes. We are working with a number of suppliers to plan for our potential future needs and to develop our processes to reduce the long-term cost impact of these materials. See “Risk Factors — Risks Related to Our Business and Strategy — Shortages of the raw materials used in the production of our products, increases in the cost of such materials or disruptions in our supply chain could adversely impact our financial condition and results of operations.”

We are seeking to lower our manufacturing costs and to improve the per square foot costs of our aerogel blankets by optimizing our formulations to reduce material costs, by enhancing manufacturing process controls to improve yields, by realizing price reductions from existing vendors, by qualifying new vendors and by reducing shipping costs. In addition, we believe additional opportunities to realize production efficiencies and to reduce per unit overhead costs will arise with growth in the scale of our manufacturing operations. Our objective is both to reduce costs to enhance our competitive advantage and to ensure we deliver high quality finished products to our customers.

The mission of our research and development team is to leverage our aerogel technology platform in support of our commercial objectives. In our existing markets, research and development personnel design new and improved insulation products to enhance our

value to customers and to expand our revenue potential. Our materials scientists and engineers also seek to develop enhanced chemical and process technologies to improve yields, lower manufacturing costs and improve product performance. In new markets, research and development personnel seek to exploit the unique characteristics of aerogels, including low thermal conductivity, high surface area, high electrical conductivity, and tunable porosity, to develop aerogel enhanced products and next generation technology addressing complex and unmet market needs.

Our research and development expenditures were $6.3 million, $6.2 million and $5.3 million for the years ended December 31, 2018, 2017 and 2016, respectively. In addition, we spent $1.0 million, $0.9 million and $1.3 million for the years ended December 31, 2018, 2017 and 2016, respectively, on research and development activities sponsored by federal and other government agencies.

We regularly seek funding from a number of federal and other government agencies in support of our research and development and manufacturing activities. Research performed under contract to the Department of Defense, the Department of Energy and other institutions allows us to develop and leverage technologies into broader commercial applications. We also work closely with customers in government and industry to develop potential aerogel solutions that leverage not only the thermal insulation performance but other benefits of aerogels as well. The research and development activities that we conduct under such contracts may produce intellectual property to which we may not have ownership or exclusive rights and will be unable to protect or monetize.

Under our contracts, the U.S. government generally has the right not to exercise options to extend or expand our contracts and may modify, curtail or terminate the contracts at its convenience. Our government customers may not renew our existing contracts after the conclusion of their terms and we may not be able to enter into new contracts with U.S. government agencies. Any decision by the U.S. government not to exercise contract options or to modify, curtail or terminate our contracts or not to renew our contracts or enter into new contracts with us would adversely affect our revenues.

We have received $55.9 million in funding under government contracts from inception through December 31, 2018. Our contract research revenue was $2.2 million, $2.0 million and $2.2 million for the fiscal years ended December 31, 2018, 2017 and 2016, respectively.

Our success depends in part upon our ability to obtain, maintain and enforce intellectual property rights that cover our aerogel technology platform, including, product forms, applications and/or manufacturing technologies and the technology or know-how that enables these product forms, applications, technologies and specifications, to avoid and defend against claims that we infringe the intellectual property rights of others, and to prevent the unauthorized use of our intellectual property. Since aerogels were developed more than 80 years ago, there has been a wide range of research, development and publication on aerogels and related technologies, which make it difficult to establish intellectual property rights to many key elements of aerogel technology and to obtain meaningful patent protection. Where appropriate, we seek to protect our rights by filing patent applications in United States and other key foreign jurisdictions related to products, processes, technology and improvements that we consider patentable and important to our business and, in particular, our aerogel technology, product forms and their applications in promising markets and our manufacturing technologies. We also rely on trade secrets, trademarks, licensing agreements, confidentiality and nondisclosure agreements and continuing technological innovation to safeguard our intellectual property rights and develop and maintain our competitive edge.

As of December 31, 2018, we owned 40 issued U.S. patents, 23 pending U.S. patent applications (including five issued U.S. patents and three pending U.S. patent application that we co-own with third parties), 79 issued foreign patents and 78 pending foreign patent applications (including 18 issued foreign patents and 20 pending foreign patent applications that we co-own with third parties). The patents that we own are generally effective for 20 years from the filing date of the earliest application to which each U.S. patent claims priority. The scope of each of our foreign patents varies in accordance with local law. Our early product patents start to expire in December 2021.

In May, 2016, we filed a complaint for patent infringement against Nano Tech Co., Ltd., or Nano, and Guangdong Alison Hi-Tech., Ltd., or Alison, and together with Nano, the Respondents, in the United States International Trade Commission, or the ITC. The ITC complaint alleged that these two China-based companies have engaged and are engaging in unfair trade practices by importing aerogel products in the United States that infringe, and/or are manufactured by processes that infringe, several of our patents in violation of Section 337 of the Tariff Act of 1930. In the ITC complaint, we sought exclusion orders from the ITC that direct the United States Customs and Border Protection to stop the importation of these infringing products. In June 2016, the ITC instituted an investigation based on our complaint. In September 2017, the Administrative Law Judge (“ALJ”) presiding over the ITC investigation issued an Initial Determination finding that Alison and Nano have infringed our patents relating to aerogel insulation and/or methods

of manufacturing aerogel insulation. As part of the Initial Determination, the ALJ found that Alison and Nano infringed all of the patent claims asserted against each of them across the three asserted patents, and that Alison and Nano failed to prove the asserted claims were invalid. The ALJ also recommended a limited exclusion order as a remedy to prevent the importation of infringing aerogel products into the United States. In February 2018, the ITC issued its final determination confirming the ALJ’s infringement and validity determinations except with respect to one dependent product claim where the ITC found the claim not infringed. The ITC also revised some of the ALJ’s claim constructions. However, the ITC affirmed that Alison and Nano have each violated Section 337 of the Tariff Act and issued a limited exclusion order prohibiting importation of infringing aerogel insulation products manufactured by Alison and Nano. The exclusion order, enforced by United States Customs and Border Protection, is currently in effect. Alison has sought an appeal of ITC’s finding that a product composition patent asserted by us against Alison is valid and infringed. As neither respondents appealed the ITC findings of validity or infringement with respect to asserted process patents, the exclusion order remains valid and enforced irrespective of the outcome of the current appeal. In addition to Respondents’ contention at the ITC that the asserted patents were invalid, Alison also filed petitions with United States Patent and Trademark Office, or USPTO, requesting Inter-Partes Review to cancel certain claims in three of Aspen’s manufacturing process patents and one product patent. A three member panel of Administrative Patent Judges at the USPTO denied all of Alison’s petitions to institute Inter-Partes Review challenging the validity of these Aspen patents. Alison has also filed similar requests with the Chinese Patent Office, or SIPO, seeking to invalidate two of our Chinese manufacturing process patents and two of our Chinese product patents. After the conclusion of the oral proceedings and before any decision issued by the SIPO, Alison withdrew all of its requests for invalidation of our Chinese patents.

In May 2018, Alison filed another request seeking to invalidate one of our manufacturing process patents at SIPO. After conducting an oral proceeding in September 2018, the Patent Reexamination Board of SIPO, or PRB, issued a decision in October 2018 holding Aspen’s issued patent as amended to be valid. The decision by the PRB is subject to an appeal to the Beijing IP court. In 2018, a reseller of Nano’s products in Taiwan challenged the validity of one of our patents in Taiwan. After reviewing our response submissions, the Taiwan patent office determined that our patent as granted is valid and dismissed the challenge. In late 2018, LG Chem Ltd has challenged the validity of one of our process patents in Korea. The ensuing proceedings are ongoing. We expect to face additional such challenges in the coming years as the interest for our products grows around the world.

In April 2016, we filed a patent infringement suit at the District Court in Mannheim, Germany against the Respondents and two European resellers asserting their infringement of one of our German patents. We subsequently asserted infringement of another three patents against Nano and a European reseller of Alison’s products at the Mannheim court. We subsequently settled with one of the European resellers in exchange for a commitment not to procure infringing products and cooperation with our case. In January 2018, the court issued a series of judgments by acknowledgement (German, “Anerkenntnisurteil”) finding the second reseller, Hiltex Techniche Weefsels b.v., or Hiltex, liable for infringement and issued injunctions against Hiltex. The judgments resulted from a settlement agreement whereby Hiltex agreed not to resell infringing products in Europe where at least one of the asserted patents is active. Nano and Alison also initiated a nullity actions in German Federal Patent Court against our asserted German patents. The German Federal Patent Court conducted an oral proceeding with respect to one patent in September 2018 and determined that the patent is valid as originally issued and dismissed the challenge to its validity. Alison and Nano likewise filed an opposition to one of the asserted patents at the European Patent Office, or EPO, in which EPO revoked the patent on formality grounds. Such determination is subject to an appeal to the EPO Board of appeals. Our infringement litigation against Alison and Nano remains ongoing with respect to the earlier asserted patent while the Mannheim court stayed the proceedings involving subsequently asserted patents pending resolution of the nullity actions.

Due to their nature, it is difficult to predict the outcome or the costs involved in any litigation. Furthermore, the Respondents may have significant resources and interest to litigate and therefore, these litigation matters could be protracted and may ultimately involve significant legal expenses. We have incurred approximately $8.1 million of expenses related to this litigation through December 31, 2018. In addition to the foregoing, we have been and may be from time to time party to other legal proceedings that arise in the ordinary course of business and to other patent enforcement actions to assert our patent rights.

We believe that having distinctive names is an important factor in marketing our products, and therefore we use trademarks to brand some of our products, including Pyrogel, Cryogel and Spaceloft. As of December 31, 2018, we had five trademark registrations in the United States, one trademark registration with the World Intellectual Property Organization, and 49 trademark registrations in foreign jurisdictions, including the European Union, Japan, China, Canada, South Korea and Brazil. Although we have a foreign trademark registration program for selected marks, our approach may not be comprehensive and we may not be able to register or use such marks in each foreign country in which we seek registration.

In April 2006, we entered into a cross license agreement with Cabot Corporation, as amended in September 2007, in which each party granted certain intellectual property rights to the other party. The cross license agreement remains in effect until the expiration of

the last to expire of the issued patents or patent applications and acquired patents licensed thereunder. We hold a non-exclusive, worldwide license to those patents and patent applications owned or licensed by Cabot that are necessary for us to (i) practice our manufacturing technology within a field of use, which is defined in accordance with the specific chemistry of our aerogel products and the supercritical fluid technology that we use in our manufacturing technology and (ii) use and sell the resulting aerogel blanket and derivative products. We paid Cabot $38 million over a period of approximately seven years, with the last payment made in March 2013, in connection with this license agreement. We have granted to Cabot a reciprocal, non-exclusive, worldwide license to certain patents and patent applications that we own that are necessary for Cabot to practice its processes within a field of use defined in accordance with the specific chemistry in its aerogel products and the drying technology that it uses to manufacture its products. The grant of license to each party covers issued patents, patent applications and patents issued from such counterpart applications, as well as patents licensed or acquired during a specified period, in each case that claim aerogels, or methods, materials of manufacture, or uses of aerogels.

We are a corporation organized under the laws of Delaware. In June 2008, we completed a reorganization pursuant to which our predecessor company merged with and into a newly formed Delaware corporation, renamed Aspen Aerogels, Inc. We own three wholly owned subsidiaries: Aspen Aerogels Rhode Island, LLC, Aspen Aerogels Germany, GmbH and Aspen Aerogels Georgia, LLC, which was formed in August 2016. We maintain our corporate offices in Northborough, Massachusetts.

On June 18, 2014, we completed our initial public offering, or IPO, of 7,500,000 shares of our common stock at a public offering price of $11.00 per share. As of March 7, 2019, we had 24,246,807 shares of our common stock outstanding.

We are required to file annual, quarterly and current reports, proxy statements and other information required by the Securities Exchange Act of 1934, as amended, or the Exchange Act, with the Securities and Exchange Commission, or the SEC. SEC filings are available at the SEC’s website at https://www.sec.gov.

We maintain a public website at https://www.aerogel.com and use our website as a means of disclosing material non-public information and for complying with our disclosure obligations under Regulation FD. Our website includes an Investors section through which we make available, free of charge, our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, Proxy Statements and Forms 3, 4 and 5 filed on behalf of directors and executive officers, as well as any amendments to those reports filed or furnished pursuant to the Exchange Act as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. The members of our Board of Directors and the designated chairs of the committees of the Board of Directors are reflected on the signature page of this annual report on Form 10-K. We also make available on our website the charters for our Board of Directors’ Audit Committee, Compensation and Leadership Development Committee and Nominating and Corporate Governance Committee, as well as our Code of Business Conduct and Ethics, our Corporate Governance Guidelines and other related materials. The information on our website is not part of this annual report.

Our Investor Relations Department can be contacted at Aspen Aerogels, Inc., 30 Forbes Road, Building B, Northborough, MA 01532, Attention: Investor Relations; telephone: 508-691-1111; e-mail: ir@aerogel.com.

As of December 31, 2018, we had 295 full-time employees and one part-time employee, with 34 in research and development, 187 in manufacturing operations and supply chain, 48 in sales and marketing and 26 in general and administrative functions. Of our employees, 283 are located in the United States and twelve are located abroad. We consider our current relationship with our employees to be of good standing. None of our employees are represented by labor unions or have collective bargaining agreements.

Our industry and product offering makes us less susceptible to seasonal patterns as our operating results are generated in part by demand for insulation associated with new-build construction of facilities, capital expansions and related capital projects, and larger maintenance-related projects in the energy infrastructure market. Historically, our second and fourth quarter results have shown increased levels of revenue, which we believe is associated with our end-use customers’ maintenance schedules and timing of capital projects.

We are subject to federal, state, local and foreign laws and regulations designed to protect the environment and to regulate the discharge of materials into the environment. We believe that our policies, practices, and procedures are properly designed to prevent unreasonable risk of environmental damage and associated financial liability. To date, environmental control regulations have not had a significant adverse effect on our overall operations. See “Risk Factors — We may incur significant costs complying with environmental, health and safety laws and related claims, and failure to comply with these laws and regulations could expose us to significant liabilities, which could adversely affect our results of operations.”

We have incurred annual net losses since our inception, and we may continue to incur net losses in the future and may never reach profitability.

We have a history of losses, and we may not ever achieve full year profitability. We experienced net losses of $34.4 million, $19.3 million and $12.0 million for the years ended December 31, 2018, 2017 and 2016, respectively. As of December 31, 2018, our accumulated deficit was $471.6 million. We expect to continue to incur operating losses as a result of expenses associated with the continued development and expansion of our business. Our expenses include research and development, sales and marketing, and general and administrative costs. Furthermore, these expenses are not the only factors that may contribute to our net losses. For example, interest expense on any future financing arrangements that we incur could contribute to our net losses. Any failure to increase revenue or manage our cost structure as we implement initiatives to grow our business could prevent us from achieving profitability, or sustaining profitability if we do achieve it. In addition, our ability to achieve profitability is subject to a number of risks and uncertainties discussed below, many of which are beyond our control. Failure to become and remain profitable may adversely affect the market price of our common stock and our ability to raise capital and continue operations.

We have yet to achieve positive total cash flow, and our ability to generate positive cash flow is uncertain.

To develop and expand our business, we have made significant up-front investments in our manufacturing capacity and incurred research and development, sales and marketing and general and administrative expenses. In addition, our growth has required a significant investment in working capital. We experienced negative cash flows from operating activities of $8.7 million, $4.6 million and $0.6 million for the years ended December 31, 2018, 2017 and 2016, respectively. The negative cumulative cash flows from operating activities during the three year period were exacerbated by cash flows used in investing activities to maintain, enhance and expand our manufacturing operations during the same time period. As a result, we experienced negative total cash flows during the three year period.

We expect our total cash flow will be positive on an annual basis during 2019. However, we expect to experience significant variability in the levels of working capital required to support our operating activities from time to time throughout the year. As a result, we project that our existing cash balance alone will periodically be insufficient to fund these working capital requirements during the year. During these periods, we will be dependent on our line of credit with Silicon Valley Bank, or SVB, under which we have the ability to borrow up to $20.0 million, to fund the balance of the required investment in working capital. The credit agreement requires us to comply with both non-financial and financial covenants, including minimum Adjusted EBITDA and minimum Adjusted Quick Ratio covenants, as defined in the credit agreement. In May 2018, August 2018, November 2018 and December 2018, we obtained waivers from SVB related to our compliance with these financial covenants. These waivers were subject to certain conditions, including, in the case of the November 2018 waiver, the Company’s issuance of $3.25 million in equity or receipt of $5.0 million in customer advanced payments on or before January 31, 2019. Although we met these conditions, including in connection with the November 2018 waiver upon receipt on January 30, 2019 of a $5.0 million advanced payment from BASF, there can be no assurance that we will continue to comply with such covenants or that SVB will waive such potential or actual non-compliances, if requested or waive them with reasonable and achievable conditions. As a result, we could end up in default under the agreement or otherwise be unable to continue to borrow under our line of credit, subject to acceleration of the payment of any balance and further subject to the remedies typically available to a lender. See “Our revolving credit facility contains financial and operating restrictions that may limit our access to credit. In addition, our revolving credit facility expires on April 28, 2020 and we may not be able to renew, extend or replace the expiring facility. If we fail to comply with covenants in our revolving credit facility or if facility is terminated, we may be required to repay our indebtedness thereunder, which may have an adverse effect on our liquidity.”

In addition, we may not achieve sufficient revenue growth to generate positive cash flow in 2019 or beyond. As a result, we may need to raise additional capital from investors to achieve our expected growth. Any inability to generate positive future cash flow, to

borrow funds or to raise additional capital on reasonable terms, if at all, may harm our short-term financial condition or threaten our long-term viability.

Our working capital requirements involve estimates based on demand and production expectations and may decrease or increase beyond those currently anticipated, which could materially harm our results of operations and financial condition.

In order to fulfill the product delivery requirements of our direct and end-use customers, we plan for working capital needs in advance of customer orders. As a result, we base our funding and inventory decisions on estimates of future demand. If demand for our products does not increase as quickly as we have estimated or drops off sharply, our inventory and expenses could rise, and our business and results of operations could suffer. Alternatively, if we experience sales in excess of our estimates, our working capital needs may be higher than those currently anticipated. Our ability to meet this excess customer demand depends on our ability to arrange for additional financing for any ongoing working capital shortages, since it is likely that cash flow from sales will lag behind these investment requirements. In the past, we have principally relied on our line of credit with SVB to supplement these financing needs. The revolving credit agreement requires us to comply with both non-financial and financial covenants. During 2018, we failed on three occasions to comply with a single liquidity related financial covenant, but we were able to obtain waivers on all three occasions from SVB with respect to our compliance with this covenant. In the future, there can be no assurance that we will continue to comply with such covenants and that SVB will waive such non-compliances, if requested. As a result, we could end up in default under the agreement or otherwise be unable to continue to borrow under our line of credit. Any failure to borrow under our line credit when needed could adversely affect our ability to invest in the working capital required to maintain and grow our business.

Our revolving credit facility contains financial and operating restrictions that may limit our access to credit. In addition, our revolving credit facility expires on April 28, 2020 and we may not be able to renew, extend or replace the expiring facility. If we fail to comply with covenants in our revolving credit facility or if facility is terminated, we may be required to repay our indebtedness thereunder, which may have an adverse effect on our liquidity.

Provisions governing our revolving credit facility impose restrictions on our ability to operate, including, for some of the agreements and instruments, but not for others, our ability to:

Our revolving credit facility also contains other customary covenants. We may not be able to comply with these covenants in the future. Our failure to comply with these covenants may result in the declaration of an event of default and could cause us to be unable to borrow funds under our revolving credit facility. In addition to preventing additional borrowings under our revolving credit facility, an event of default, if not cured or waived, may result in the acceleration of the maturity of indebtedness outstanding under the revolving credit facility, which would require us to pay all amounts outstanding. Such an event may also lead our lender to exercise its security interest in our assets, including all of our real property and equipment at our East Providence facility. If an event of default occurs, we may not be able to cure it within any applicable cure period, if at all. If the maturity of our indebtedness is accelerated, we may not have sufficient funds available for repayment or we may not have the ability to borrow or obtain sufficient funds to replace the accelerated indebtedness on terms acceptable to us, or at all.

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.

The growth of our business will depend on substantial amounts of additional capital for expansion of existing production lines or construction of new production lines or facilities, for ongoing operating expenses, for continued development of our aerogel technology platform, or for introduction of new product lines. Our capital requirements will depend on many factors, including the rate of our revenue growth, our introduction of new products, our enhancements to existing products, and our expansion of sales and marketing and product development activities. In particular, our plans to expand capacity in our existing facility in East Providence,

Rhode Island are dependent on our ability to raise debt and potentially issue equity. There is no assurance that we will be able obtain any such type of financing on terms acceptable to us or at all.

In addition, we may consider strategic acquisitions of complementary businesses or technologies to grow our business, which would require significant capital and could increase our capital requirements related to future operation of the acquired business or technology.

We may not be able to obtain loans or raise additional capital on acceptable terms or at all. Our revolving credit facility with SVB contains restrictions on our ability to incur additional indebtedness, which, if not waived, could prevent us from obtaining needed capital. In addition, our revolving credit facility is scheduled to mature on April 28, 2020. Any future credit facilities or debt instruments would likely contain similar or additional restrictions. We may not be able to obtain bank credit arrangements or effect an equity or debt financing on terms acceptable to us or at all in order to fund our future capacity expansion plans. Any failure to obtain additional financing when needed could adversely affect our ability to maintain and grow our business.

Shortages of the raw materials used in the production of our products, increases in the cost of such materials or disruptions in our supply chain could have a material adverse impact on our financial condition and results of operations.

The raw materials used in the production of our products consist primarily of fiber battings, silica precursors and other additives. In addition, the production process requires the use of process gases and other materials typical to the chemical processing industry, as well as access to electricity, natural gas, water and other basic utilities. Although we are not dependent on a single supplier, we are dependent on the ability of our third-party suppliers to supply such materials on a timely and consistent basis. While these materials and utilities are available from numerous sources, they may be, and have been in the past, subject to fluctuations in availability and price. For example, during the year ended December 31, 2018, we had experienced a significant increase in the costs of silica precursor materials, which constitute over 50% of our raw material costs.

Our third-party suppliers may not dedicate sufficient resources to meet our scheduled delivery requirements or our suppliers may not have sufficient resources to satisfy our requirements during any period of sustained or growing demand. Failure of suppliers to supply, delays in supplying or disruptions in the supply chain for our raw materials, or adverse allocations in the supply of certain high demand raw materials could materially adversely affect the results of our operations. Supply disruptions may affect our ability to meet our delivery schedules on a timely basis and materially negatively impact our results of operations. For example, in September 2015, pursuant to a force majeure notification, our primary carbon dioxide gas supplier temporarily curtailed supply of carbon dioxide to us due to a feedstock issue impacting the northeastern United States. During this period, the supply disruption required that we intermittently idle a portion of our manufacturing equipment thereby reducing our production volume and adversely impacting our results of operation.

Most of our raw materials are procured through individual purchase orders or short-term contracts and not through long-term contracts that ensure a fixed price or guaranteed supply for an extended period of time. This procurement strategy may not support sustained long-term supply chain stability. Fluctuations in the prices of these raw materials could have a material adverse effect on our results of operations. Our suppliers also seek more-value added uses for our raw materials. Such competitive uses for our raw materials creates material price and availability risks to our business. In addition, our ability to pass increases in raw material prices on to our customers is limited due to competitive pricing pressure and the time lag between the increase in costs and the implementation of related price increases.

In particular, we purchase a variety of silica precursors from several suppliers, mostly pursuant to individual purchase orders or short-term contracts and not pursuant to long-term contracts. We do not have a secure, long-term supply of silica precursors. We may not be able to establish arrangements for secure, long-term silica precursor supplies at prices consistent with our current costs or may incur a delay in supply while we seek alternative sources. For example, we experienced a significant increase in the price of certain silica precursors during 2018 due to a supply imbalance in the silanes market. While we are seeking to reformulate our products to reduce our reliance on materials that are susceptible to significant price fluctuations, our efforts may not be successful. Any inability to continue to purchase silica precursors without long-term agreements in place, or to otherwise establish a long-term supply of silica precursors at prices consistent with our current cost estimates, would have a material adverse effect on our ability to increase our sales and achieve profitability.

We are dependent on a single manufacturing facility. Any significant disruption to this facility or the failure of any one of our three production lines in this facility to operate according to our expectation could have a material adverse effect on our business and results of operations.

We have three production lines in a single manufacturing facility located in East Providence, Rhode Island. Our ability to meet the demands of our customers depends on efficient, proper and uninterrupted operations at this manufacturing facility. In the event of a significant disruption to our sole manufacturing facility or breakdown of any of the production lines, we currently do not expect that we would have sufficient inventory in stock to meet demand until the production lines return to operation.

Power failures or disruptions, the breakdown, failure or substandard performance of equipment, or the damage or destruction of buildings and other facilities due to fire or natural disasters could severely affect our ability to continue our operations. In the event of such disruptions, we are unlikely to find suitable alternatives or may not be able to make needed repairs on a timely basis and at reasonable cost, which could have a material adverse effect on our business and results of operations. In particular, our manufacturing processes include the use of high pressures, high temperatures and flammable chemicals, which subjects us to a significant risk of loss resulting from fire, spill or related event. We had occasional incidences of fires at our initial facility in Northborough, Massachusetts that preceded our current manufacturing facility in East Providence, Rhode Island.

If our manufacturing facility or any equipment therein were to be damaged or cease operations, it may reduce revenue, cause us to lose customers and otherwise adversely affect our business. The insurance policies we maintain to cover losses caused by fire or natural disaster, including business interruption insurance, may not adequately compensate us for any such losses and will not address a loss of customers that we expect would result. If our existing manufacturing facility was damaged or destroyed, we would be unable to operate our business for an extended period of time and our business and results of operations may be materially adversely affected, potentially even threatening our viability.

From time to time we have had difficulty in consistently producing products that meet applicable product specifications and technical and delivery requirements, and such difficulties could expose us to financial, contractual or other liabilities.

Our insulation products are technologically advanced and require a precise and complex manufacturing process. Because of the precision and complexity of this manufacturing process and the high-performance characteristics of our products, from time to time we have had difficulty in consistently producing products that meet applicable specifications and technical and delivery requirements, including, our customers’ and the end-users’ specifications and requirements. At certain times in the past, the growth in demand for our products has contributed to this difficulty by putting significant pressure on our management, our personnel and our production facilities. See “Risk Factors — Growth has placed significant demands on our management systems and our infrastructure. If we fail to manage our long-term growth effectively, we may be unable to execute our business plan, address competitive challenges and meet applicable product specifications and technical and delivery requirements.”

Any failure to meet these product specifications or technical and delivery requirements could result in the termination of existing customer contracts or purchase orders, the elimination or reduction of future purchase orders, the impairment of customer relationships, and the incurrence of financial, contractual or other liabilities. Products that do not meet these specifications or requirements may also expose us to warranty and product liability claims and associated adverse publicity. Any such termination, reduction, impairment, liability or publicity could result in a broader loss of existing customers and revenues and delay the execution of our business plans, disrupt our operations and could have a material adverse effect on our results of operations and financial condition.

A sustained downturn in the energy industry, due to lower oil and gas prices or reduced energy demand, could decrease demand for some or all of our products and services, which could have a material adverse effect on our business, financial condition and results of operations.

Demand for a significant portion of our products and services depends on the level of capital expenditure by companies in the energy industry, which depends, in part, on current and expected energy prices. Prices of oil and gas have been highly volatile in the past several years with oil prices reaching a high above $100 per barrel in mid-2014 to a low below $30 per barrel in early 2016. The volatility in oil prices and declines in oil prices have resulted, from time to time, in a reduction in capital expenditures by many companies in the energy industry, and in particular by end-users of our products involved in the construction and expansion of offshore and onshore oil and gas production facilities. Sustained lower energy prices may also reduce our end-users’ need to improve energy savings by using premium-priced insulation products like ours, thus reducing demand for our products and causing downward pressure on the pricing of our products. A sustained downturn in the capital expenditures of our customers, whether due to periods of lower energy prices or a further decrease in the market price of oil and gas or otherwise, and including the perception that such a downturn might occur or continue, may delay capital projects, decrease demand for our products and cause downward pressure on the

prices we charge for our products, which, in turn, could have a material adverse effect on our business, financial condition and results of operations. Such downturns, including the perception that they might occur or continue, could have a significant negative impact on the market price of our common stock.

Regulation of greenhouse gas emissions could reduce demand for hydrocarbon products and lead to a sustained downturn in the energy industry, which could decrease demand for our products and have a material adverse effect on our business, financial condition and results of operation.

Due to concerns about the risks of climate change, a number of countries are adopting or considering adopting regulations to reduce greenhouse gas emissions. Greenhouse gas regulations could have the impact of increasing energy costs, reducing the demand for hydrocarbons, decreasing profitability and return on investment in the energy industry, and leading to a sustained downturn in the energy industry. Demand for a significant portion of our products depends on the aggregate level of capital expenditure in the energy industry, which depends, in part, on the expected return on such investments. A sustained period of diminished returns or expected returns on capital deployed in the energy industry as a result of greenhouse gas regulations or otherwise, may delay capital projects, decrease demand for our products and cause downward pressure on the prices we charge for our products, which, in turn, could have a material adverse effect on our business, financial condition, results of operations and the market price of our common stock.

The markets we serve are subject to general economic conditions and cyclical demand, which could harm our business and lead to significant shifts in our results of operations from quarter to quarter that make it difficult to project long-term performance.

Our results of operations have been, and may in the future be, adversely affected by general economic conditions and the cyclical pattern of certain industries in which our customers and end-users operate. Demand for our products and services depends in large part upon the level of capital and maintenance expenditures by many of our customers and end-users, in particular those in the energy, petrochemical and power generation industries, and firms that design, construct and operate facilities for these industries.

These customers’ expenditures historically have been cyclical in nature and vulnerable to economic downturns. In particular, profitability in the energy industry is highly sensitive to supply and demand cycles and commodity prices, which historically have been volatile; and our customers in this industry historically have tended to delay large capital projects, including expensive maintenance and upgrades, during industry downturns. Delays in customer projects may cause fluctuations in the timing or the amount of revenue earned and our results of operations in a particular period. Prolonged periods of little or no economic growth could decrease demand for oil and gas which, in turn, could result in lower demand for our products and a negative impact on our results of operations and cash flows. In addition, this historically cyclical demand and potential customer project delays may lead to significant shifts in our results of operations from quarter to quarter, which limits our ability to make accurate long-term predictions about our future performance. We estimate that sales to end-use customers in the energy industry accounted for approximately 94% of our 2018 revenues and we expect that they will continue to account for a significant portion of our future revenues.

The market for insulation products incorporating aerogel blankets is relatively undeveloped and our products may never be widely adopted, which would have a material adverse effect on our business.

The market for insulation products utilizing aerogel blankets is relatively undeveloped. Accordingly, our future results of operations will depend in large part on our ability to gain market share of the global energy infrastructure insulation market. Our ability to gain market share in this market is highly dependent on the acceptance of our products by large, well-established end-users, distributors, contractors and OEMs. The insulation market has historically been slow to adopt new technologies and products. Most insulation types currently in use in these markets have been in use for over 50 years. In addition, there is a tendency of end-users in some of our markets to opt for the lower short-term costs associated with traditional insulation materials. If we fail to successfully educate existing and potential end-users, distributors, contractors and OEMs regarding the benefits and value of our aerogel products, or if existing users of our products no longer rely on aerogel insulation for their insulation needs, our ability to sell our products and grow our revenue could be limited.

Our business strategy also includes the development of next generation products with the performance characteristics and price points required by markets outside the energy infrastructure market, including the building materials market. In the event that we are unable to develop products that meet market needs, we may be unable to successfully penetrate such markets. In addition, the innovative product development process requires the dedication of significant human, technical and financial resources, with no certainty of success or recovery of our related expenses. As a result, we may be unable to grow our business in markets outside of the energy infrastructure market, which could adversely affect the demand for our products.

Because we are often a new supplier to our end-use customers, we also may face concerns from these end-use customers about our reliability and our ability to produce our products in a volume sufficient to meet their supply needs. As a result, we may

experience a reluctance or unwillingness by existing end-use customers to expand their use of our products and by potential end-use customers to begin using our products. Our products may never reach mass adoption, and changes or advances in technologies could adversely affect the demand for our products.

A failure to increase, or a decrease in, demand for aerogel insulation products caused by lack of end-user, market or distribution channel acceptance, technological challenges or competing technologies and products would result in a lower revenue growth rate or decreased revenue, either of which could have a material adverse effect on our business and our results of operations.

Our products are expensive relative to other insulation products, which could make it more difficult for us to grow our revenue and achieve broader adoption of our aerogel products.

While we believe our products have superior performance attributes and may sometimes have the lowest cost on a fully-installed basis or offer life-cycle cost savings, our competitors offer many traditional insulation products that are priced below our products. Our products are expensive relative to other insulation products and end-use customers may not value our products’ performance attributes sufficiently to pay their premium price. This could make it more difficult for us to grow our revenue and achieve broader adoption of our aerogel products. In addition, some of the benefits of our products are based on reduced installation time and related labor expense. In regions where labor costs are significantly lower than in the United States and Europe, the cost benefits of reduced installation times may not be adequate to overcome the relatively high price of our products and may make it more difficult for us to grow our revenue in those regions.

The insulation market we serve is highly competitive. If we are unable to compete successfully, we may not be able to increase or maintain our market share and revenues.

We face strong competition primarily from established manufacturers of traditional insulation materials. Large producers of traditional insulation materials, such as Johns Mansville, Saint-Gobain, Knauf Gips, Owens Corning and Rockwool, dominate the insulation market. In addition, we face increasing competition from other companies seeking to develop high-performance insulation materials, including aerogel insulation. For example, Cabot Corporation manufactures, markets and sells a different form of aerogel insulation that is competitive with our products, particularly in the offshore oil and gas sector for use in pipe-in-pipe applications. In addition, we are aware of competitors including Armacell International S.A., Guangdong Alison Hi-Tech Co, Ltd and Nano Tech Co, Ltd, which manufacture and market aerogel insulation products in blanket form. Many of our competitors are substantially larger and better capitalized than we are and possess greater financial resources. Our competitors could focus their substantial financial resources to develop new or additional competing products or develop products that are more attractive to potential customers than the products that we offer. We expect to face an increasing amount of competition in the aerogel insulation market over the next several years as existing competitors and new entrants seek to develop and market their own aerogel products.

Because some insulation manufacturers are substantially larger and better capitalized than we are, they may have the ability to sell their products at substantially lower costs to a large, existing customer base. Our products are expensive relative to other insulation products and end-use customers may not value our products’ superior performance attributes sufficiently to pay their premium price. In addition, from time to time we may increase the prices for our products and these price increases may not be accepted by our end-use customers and could result in a decreased demand for our products. Similarly, we may make changes to our products in order to respond to customer demand or to improve their performance attributes and these changes may not be accepted by our end-use customers and could result in a decrease in demand for our products. These competitive factors could:

Any of these outcomes could have a material adverse effect on our results of operations, financial condition and cash flows.

Failure by us to develop, maintain and strengthen strategic relationships with industry leaders to commercialize our products, particularly in the building materials market, may adversely affect our results of operations and our ability to grow our business.

Our business strategy requires us to align the design and performance attributes of our products to the evolving needs of the market. To facilitate this process, we have sought out partnerships and relationships with industry leaders in order to assist in the development and commercialization of our products. We face competition from other manufacturers of insulation in seeking out and

entering into such partnerships and relationships with industry leaders in our target markets and we may therefore not be successful in establishing strategic relationships in those markets.

In the building materials market, we have entered into an amended and restated supply agreement and an amended and restated side agreement (together, the supply agreement) with BASF Polyeurathanes GmbH, or BASF, and a joint development agreement with BASF SE. Pursuant to the supply agreement, we sell exclusively to BASF certain products at annual volumes to be specified by BASF, at its full discretion, subject to certain volume limits. BASF has no obligation to purchase any products under the supply agreement. The joint development agreement is designed to facilitate the collaboration between the parties on the development and commercialization of new products, which may not result in meaningful revenue contribution to our business.

In addition to the customary terms associated with supply agreements, BASF, in its sole discretion, may make prepayments to us in the aggregate amount of up to $22.0 million during the term of the supply agreement. During 2018, BASF made prepayments to us of $5.0 million. We secured our obligation to repay the prepayment with a first priority security interest in real estate, machinery and equipment located at our existing manufacturing facility in East Providence, Rhode Island. Additionally, we granted our subsidiaries non-exclusive licenses to our intellectual property as necessary to operate this machinery and equipment.

After January 1, 2019, we will credit 25.3% of any amounts that we invoice for Spaceloft A2 product sold to BASF against the outstanding balance of the 2018 prepayment. If any of the 2018 prepayment remains uncredited as of December 31, 2021, BASF may request that we repay the uncredited amount to BASF.

On January 15, 2019, we entered into an addendum to the supply agreement. The addendum provided for the inclusion of a newly developed product to be supplied to BASF under the supply agreement and for a second prepayment of $5.0 million subsequently remitted by BASF to us on January 30, 2019.

After January 1, 2020, we will credit up to 50% of any amounts that we invoice for the newly developed product sold to BASF against the outstanding balance of the 2019 prepayment. If any of the 2019 prepayment remains uncredited as of December 31, 2022, BASF may request that we either (i) credit 24.7% of any amounts we invoice for Spaceloft A2 product against the remaining balance of the 2019 prepayment, or (ii) repay the uncredited balance to BASF. The amounts and terms of additional prepayment installments, if any, are subject to further negotiation between us and BASF.

Although BASF has placed orders for products under the supply agreement, there can be no assurance that BASF will ever be a significant customer for our products. Furthermore, there can be no assurance that we or BASF will be able to perform under the supply agreement or the joint development agreement or to achieve our or its respective goals with respect to the supply agreement, the joint development agreement or the broader collaboration between us and BASF. In addition, our grant of a security interest to BASF may make it more difficult for us to pledge our assets to secure other obligations, including to potential lenders, and as a result may impede our ability to incur additional indebtedness in the future.

In the event that we are unable to develop products that meet market needs or maintain our relationship with BASF, we may be required to find less prominent partners in the building materials market and we may be less able or unable to successfully penetrate that market. As a result of any of the above, we may lessen or lose our ability to grow our business in the building materials market which could adversely affect our business, financial condition and results of operations, including impairing our profitability.

We have entered into and may enter into future agreements that may limit our ability to broadly market our products or could involve future obligations, which could make it more difficult for us to commercialize certain of our products and negatively affect our business and results of operations.

We have a joint development agreement with BASF to develop products in the building materials market. In order to develop and commercialize our products, we may enter into additional joint development agreements or commercial arrangements. We cannot be certain that any products will be successfully developed under any such agreement or, even if developed, that they will be successfully produced or commercialized. These agreements may contain exclusivity, ownership and other terms that may limit our ability to commercialize any products or technology developed in connection with such agreements, including in ways that we do not envision at the time of entering into the agreement. In addition, these agreements may not obligate either party to make any purchases and may contain technical specifications that must be achieved to the satisfaction of our partner, which we cannot be certain we will be able to achieve. If our ability to commercialize products or technology developed in connection with these agreements is limited or if we fail to achieve the technical specifications that may be required, then our business, financial condition and results of operations could be materially adversely affected.

We may not be able to successfully develop and introduce new products in a timely manner at competitive prices, which would limit our ability to grow and maintain our competitive position and could adversely affect our financial conditions, results of operations and cash flow.

Our growth depends, in part, on continued sales of existing products, including by improving the performance of existing products, as well as the successful development and introduction of new products, which face the uncertainty of customer acceptance and reaction from competitors. New product development requires considerable resources and attention that may shift our focus from and may disrupt our current operations, given that we have fewer resources than many of our competitors. We may not be able to sustainably manufacture new products with attractive margins and we may experience higher yield losses than expected. Any delay in the development or launch of a new product could result in our not being the first to market, which could compromise our competitive position. Even if we manage to develop and introduce new products, such products may not address market needs or otherwise compete with third party products. Even if our new products are adopted by the market, we may not achieve the growth in revenue that we expect from such new products and our investment in these efforts may not be proportional to our expected or actual revenue growth. If we are unable to develop and introduce new products in a cost-effective manner or otherwise manage effectively the operations related to new products, our results of operations and financial condition could be adversely impacted.

If we do not continue to develop and maintain distribution channels for our products and to meet our customers’ demand for our products, our results of operations could be adversely affected.

For a significant portion of our revenues, we rely on sales to distributors who then sell our products to end-users in our target markets. Our success depends, in part, on our maintaining satisfactory relationships with these distributors. Our distributors require us to meet expectations of delivery, quality and pricing of our products, at both the distribution channel level and at the level of the end-user of our products. If we fail to meet expected standards, our revenues would decline and this could materially adversely affect our business, results of operations and financial condition. In addition, we have been unable at times to produce sufficient amounts of our products to meet demand from our customers and we may not be able to avoid capacity constraints in the future if demand exceeds our expectations or we fail to expand the capacity of our existing East Providence, Rhode Island manufacturing facility. If we are unable to deliver our products within such short timeframes, we may be at risk of losing direct or end-use customers. Accordingly, shortfalls in sales could materially adversely affect our business and results of operations.

The qualification process for our products can be lengthy and unpredictable, potentially delaying adoption of our products and causing us to incur significant expense potentially without recovery.

Qualification of our products by many of our direct and end-use customers can be lengthy and unpredictable and many of these direct and end-use customers have extended budgeting and procurement processes. This extended sales process requires the dedication of significant time by our personnel and our use of significant financial resources, with no certainty of success or recovery of our related expenses. Furthermore, even after an extensive qualification process, our products may fail to meet the standards sought by our end-use customers and may not be qualified for use by such end-use customers. Additionally, our continued process improvements and cost-reduction efforts may require us or the end-users to re-qualify our products. Failure to qualify or re-qualify our products may result in us losing such companies as end-users of our products, which would cause a decrease in our revenue or revenue growth rate either of which could materially adversely affect our business and results of operations.

Our revenue may fluctuate, which may result in a high degree of variability in our results of operations and make it difficult for us to plan based on our future outlook and to forecast our future performance.

Our revenue may fluctuate from period to period due to a wide variety of factors. Since we rely on sales to a limited number of direct customers and end-use customers, changes in demand from one or more direct customers or end-users can significantly impact our revenue from period to period. In addition, the sales cycles for our products, including their qualification for use, are long and can result in unpredictability in our revenues. We expect to have an increasing percentage of our products sold for use in capital projects, which orders tend to be larger and more sporadic, that will further increase this unpredictability and the difficulty for us in forecasting quarterly or annual performance. Because of these factors, we have a limited basis on which to predict our quarterly revenue. Our profitability from period-to-period may also vary due to the mix of products that we sell in different periods. These factors may result in a high degree of variability in our results of operations and will make it difficult for us to accurately evaluate and plan based on our future outlook and to forecast quarterly or annual performance.

Our results of operations could be materially adversely affected if our operating expenses incurred do not correspond with the timing of our revenues.

Most of our operating expenses, such as manufacturing facility expenses, employee compensation and research expenses, are either relatively fixed in the short-term or incurred in advance of sales. In addition, our spending levels are based in part on our expectations regarding future revenues. As a result, if revenues for a particular quarter are below expectations, we may not be able to proportionately reduce operating expenses for that quarter. Our reliance on sales to a limited number of direct customers and end-use customers, the length of our sales cycles and the potentially increasing percentage of our products sold for use in capital projects each can cause sporadic demand for our products which would limit our ability to predict future sales. This limitation could result in our being unable to reduce spending quickly enough to compensate for reductions in sales and could therefore adversely affect our results of operations for any particular operating period.

We are exposed to the credit risk of some of our direct customers, including distributors, contractors and OEMs, which subjects us to the risk of non-payment for our products.

We distribute our products through a network of distributors, contractors and OEMs, some of which may not be well-capitalized and may be of a lower credit quality. This direct customer network subjects us to the risk of non-payment for our products. In addition, we operate in a number of countries characterized by intermittent governmental, market and financial crises. During 2018, we established a reserve for uncollectible accounts receivable from a Brazilian contractor for $2.8 million related to a single project and wrote off another $0.1 million in accounts receivable due to non-payment of amounts due by a European OEM. In addition, during periods of economic downturn in the global economy, our exposure to credit risks from our direct customers may increase, and our efforts to monitor and mitigate the associated risks may not be effective. In the event of additional non-payments by one or more of our direct customers, our business, financial condition and results of operations could be materially adversely affected.

If we fail to achieve the increase in production capacity that our long-term growth requires in a timely manner, or at all, our growth may be hindered and our business or results of operations may be materially adversely affected.

If, for any reason, including our inability to obtain financing, our planned expansion of capacity in our existing East Providence, Rhode Island facility should fail to be completed in a timely manner, or at all, or any of the production lines in our existing or future manufacturing facilities do not operate according to our expectations, sales and or profitability may be impeded, our growth may be hindered and our business or results of operations may be materially adversely affected.

Many factors could delay, impede or prevent the expansion of our existing manufacturing facility, or construction and operation of future, potential manufacturing facilities, or cause us to reduce the scale or scope of the expansion projects, including:

Many factors could prevent our existing and future, potential manufacturing facilities from producing at expected, projected or targeted nameplate capacities or could cause us to reduce the scale or scope of future capacity expansions or facilities, including:

Any such capacity expansion will place a significant strain on our senior management team and our financial and other resources. The costs associated with and the resources necessary for our capacity expansion plans could exceed our expectations and result in a materially adverse impact on our business, results of operations, financial condition and cash flows.

If we are unable to complete the projects as contemplated, the costs incurred in connection with such projects may not be recoverable. For example, during 2013, we redesigned and reduced the planned scale of the third production line in our East Providence, Rhode Island facility. We recorded an associated $3.4 million impairment charge during 2013 related to the write-off of construction in progress assets. In addition, during 2018, we determined that our engineering plans, designs and drawings for a second manufacturing facility in Statesboro, Georgia will not be used due principally to our decision to significantly delay construction of the facility. Accordingly, we recorded an impairment charge of $7.4 million on pre-construction and related costs for the Statesboro facility.

A redesign of, change in scale of, or failure to initiate and complete the construction of potential manufacturing facilities and other similar impairments of our assets in the future could result in a materially adverse impact on our business, results of operations, and financial condition.

If the expected growth in the demand for our products does not follow after each of our planned capacity expansions, then our business will be materially adversely affected.

Our long-term growth plan requires that we continue to increase our production capacity. As we pursue our capacity expansion plans, we will incur significant capital expenditures and increased levels of manufacturing expenses in anticipation of expected growth in demand for our products. In particular, we expect that these substantial additional expenditures will be made by us significantly in advance of the existence of the level of demand that would ensure the most efficient use of our planned new capacity. As a result, if the expected growth in demand for our products fails to materialize within a reasonable amount of time following each of our planned capacity expansions, whether because of low oil and gas prices, the loss of a significant customer, the failure to develop new markets or for any other reason, then we would suffer decreased levels of cash flow and our financial condition and results of operations would be adversely affected.

Growth has placed significant demands on our management systems and our infrastructure. If we fail to manage our long-term growth effectively, we may be unable to execute our business plan, address competitive challenges and meet applicable product specifications and technical and delivery requirements.

We may be unable to manage our growth. To manage our anticipated future growth, we must continue to:

All of these measures will require significant expenditures and will demand the attention of management. At certain points in the past, significant growth in demand for our products has put our management and operating systems under strain. In addition, the physical expansion of our operations may lead to significant costs and may divert our management and business development resources. Furthermore, we compete for personnel and advisors with other companies and other organizations, many of which are larger and have greater name recognition and financial and other resources than we do. Due to our limited resources, we may not be able to effectively manage the expansion of our operations or adequately recruit, train and retain qualified personnel. Any inability to manage growth could result in a loss of existing customers and revenues, delays in the execution of our business plans, and disruption of our operations. If we fail to achieve the necessary level of efficiency in our organization as it grows, it could have a material adverse impact on our business, results of operations and financial conditions.

We allocate our manufacturing operations, sales and marketing, research and development, general and administrative and financial resources based on our business plan, which includes assumptions about current and future orders and revenues from

customers. However, the factors involved in such projections are uncertain. If our assumptions regarding these factors prove to be incorrect or if competing products gain further market share, then actual demand for our aerogel products could be significantly less than the demand we anticipate and we may not be able to grow our revenue or achieve profitability.

A substantial portion of our revenue comes from sales in foreign countries and we may expand our operations outside of the United States, which subjects us to increased economic, trade, foreign exchange, operational and political risks that could materially adversely impact our business, financial conditions and results of operations and also increase our costs and make it difficult for us to operate profitably.

A substantial portion of our sales are to shipment destinations outside the United States, including Korea, Great Britain, Taiwan, Hong Kong, India, Canada, Singapore, Norway, Germany, and Australia. Total revenue generated from outside of the United States, based on our shipment destination, amounted to $62.6 million or 60% of total revenue, $60.2 million or 54% of total revenue and $82.0 million or 70% of total revenue, for the years ended December 31, 2018, 2017 and 2016, respectively. As a result, we are subject to a number of risks, including, but not limited to:

In addition, sales of our products are generally conducted in U.S. dollars and we also bid for foreign projects in U.S. dollars. The strengthening of the U.S. dollar against the local currencies in the countries into which we sell our products may result in our products becoming more expensive relative to competing insulation products priced in the local currency. If the U.S. dollar strengthens, our sales into foreign countries with relatively weaker currencies may be adversely impacted and we may be less competitive in bidding for projects in those markets.

Our success will depend in large part on our ability to manage the effects of continued global political and economic uncertainty, especially in our international markets.

Because of our significant international operations, we could be materially adversely affected by violations of the U.S. FCPA and similar anti-corruption, anti-bribery and anti-kickback laws.

the United States are subject to anti-corruption, anti-bribery and anti-kickback laws and regulations, including restrictions imposed by the FCPA, as well as the United Kingdom Bribery Act of 2010, or UK Bribery Act. The FCPA, UK Bribery Act, and similar anti-corruption, anti-bribery and anti-kickback laws in other jurisdictions generally prohibit companies, their intermediaries and their agents from making improper payments to government officials or any other persons for the purpose of obtaining or retaining business. We operate and sell our products in many parts of the world that have experienced governmental corruption to some degree and, in certain circumstances, strict compliance with anti-corruption, anti-bribery and anti-kickback laws may conflict with local customs and practices. We train our employees concerning anti-corruption, anti-bribery and anti-kickback laws and have policies in place that prohibit employees from making improper payments. We continue to implement internal controls and procedures designed to ensure that we comply with anti-corruption, anti-bribery and anti-kickback laws, rules and regulations and mitigate and protect against corruption risks. We cannot provide assurance that our internal controls and procedures will protect us from reckless, criminal or other acts committed by our employees or third-parties with whom we work. If we are found to be liable for violations of the FCPA or similar anti-corruption, anti-bribery and anti-kickback laws in international jurisdictions, either due to our own acts or out of inadvertence, or due to the acts or inadvertence of others, we could suffer criminal or civil fines or penalties or other repercussions, including reputational harm, which could have a material adverse effect on our business, results of operations and financial condition.

A failure to comply with export control or economic sanctions laws and regulations could have a material adverse impact on our business, results of operations or financial condition. We may be unable to ensure that our distributors comply with applicable sanctions and export control laws.

We operate on a global basis, with 61% of our product sales in 2018 being made to destinations outside the United States, including Canada, Mexico, Europe, Asia, South America and the Middle East. We face several risks inherent in conducting business internationally, including compliance with applicable economic sanctions laws and regulations, such as laws and regulations administered by OFAC, the United States Department of State and the United States Department of Commerce. We must also comply with all applicable export control laws and regulations of the United States and other countries. Violations of these laws or regulations could result in significant additional sanctions including criminal or civil fines or penalties, more onerous compliance requirements, more extensive debarments from export privileges or loss of authorizations needed to conduct aspects of our international business.

In certain countries, we may engage third party agents or intermediaries, such as customs agents, to act on our behalf and if these third party agents or intermediaries violate applicable laws, their actions may result in criminal or civil fines or penalties or other sanctions being assessed against us. We take certain measures designed to ensure our compliance with U.S. export and economic sanctions law and we believe that we have never sold our products to Iran, Cuba, Sudan or Syria through third party agents or intermediaries or made any effort to attract business from any of these countries. However, it is possible that some of our products were sold or will be sold to distributors or other parties that, without our knowledge or consent, re-exported or will re-export such products to these countries. Although none of our non-U.S. distributors are located in, or to our knowledge, conduct business with Iran, Cuba, Sudan or Syria, we may not be successful in ensuring compliance with limitations or restrictions on business with these or other countries subject to economic sanctions. There can be no assurance that we will be in compliance with export control or economic sanctions laws and regulations in the future.

Any such violation could result in significant criminal or civil fines, penalties or other sanctions and repercussions, including reputational harm that could have a material adverse impact on our business, results of operations or financial condition.

We rely on sales to a limited number of direct customers, including distributors, contractors, OEMs, partners and end-use customers for the substantial majority of our revenue, and the loss of one or more significant direct customers or several of our smaller direct customers could materially harm our business. In addition, we understand from our direct customers that a substantial majority of their sales of our products are to a small number of end-use customers and the loss of one or more significant end-use customers or several of our smaller end-use customers could materially harm our business.

A substantial majority of our revenue is generated from sales to a limited number of direct customers, including distributors, contractors, OEMs, partners and end-use customers. For the years ended December 31, 2018, 2017 and 2016, total revenue from our top ten direct customers represented 63%, 69% and 67% of our revenues, respectively. Distribution International, Inc. represented 20% of our total revenue in 2018, Distribution International, Inc. and TechnipFMC represented 15% and 12% of our total revenue in 2017, respectively; and Reliance Industries Limited and Distribution International, Inc. represented 25% and 12% of our total revenue in 2016, respectively. Although the composition of our significant distributors, contractors, OEMs, partners and end-use customers will vary from period to period, we expect that most of our revenues will continue, for the foreseeable future, to come from sales to a relatively small number of direct customers. In addition, we understand from our direct customers that a substantial majority of their sales of our products are to a small number of end-use customers.

Our direct customer concentration also creates accounts receivable concentrations and related risks. As of December 31, 2018, Distribution International, Inc. accounted for 18% of our accounts receivable.

The substantial majority of our sales to distributors are transacted on a purchase order basis. The contracts we enter into with our direct customers generally do not include long-term commitments or minimum volumes that ensure future sales of our products. In addition, we understand that our direct customers’ contracts with end-use customers also generally do not include such commitments or minimums. Consequently, our results of operations may fluctuate significantly from period-to-period based on the actions of one or more significant direct customers or end-use customers.

A direct customer may take actions that affect us for reasons that we cannot anticipate or control, such as reasons related to an end-use customer’s financial condition, contractual arrangements with end-use customers, changes in business strategy or operations, the introduction of alternative competing products, or as the result of the perceived quality or cost-effectiveness of our products. Our agreements with these direct customers may be cancelled if we fail to meet certain product specifications or materially breach the agreement or for other reasons outside of our control. In addition, our direct customers may seek to renegotiate the terms of current agreements or renewals. The loss of, or a reduction in sales or anticipated sales to, one or more of our significant direct customers or end-use customers or several of our smaller direct customers or end-use customers could have a material adverse effect on our business, financial condition and results of operations.

If we are unable to maintain our technological advantage over our competitors, our business may be materially adversely affected.

We research, develop, manufacture and sell high-performance aerogel insulation products. Rapid and ongoing changes in technology and product standards could quickly render our products less competitive, or even obsolete, particularly if we fail to continue to improve the performance of our insulation products. We are currently developing new applications for our existing products as well as new aerogel technologies; however, we may not be successful in doing so and new applications or technologies may not be commercially useful. Other companies that are seeking to enhance traditional insulation materials have recently introduced or are developing other emerging insulation technologies. These competitors are engaged in significant development work on these various insulation products. Competing technologies that outperform our insulation in one or more performance attributes could be developed and successfully introduced.

We are also aware of certain companies, including Armacell International S.A., Guangdong Alison Hi-Tech Co, Ltd and Nano Tech Co, Ltd, that have developed or are developing products using aerogel technology similar to our technology and these or other companies have introduced or could introduce aerogel products that compete directly with our products and could in the future outperform them in one or more performance attributes, could be offered to our customers as a cheaper alternative to our products or may result in pricing pressure on us. As a result of this increasing current competition and potential future competition, our products may not compete effectively in our target markets.

Negative perceptions regarding the safety, quality or other attributes of our products or a failure or a perceived failure of our products could have a material adverse effect on our results of operations and could make us unable to continue our business.

Given the history of asbestos as an insulation material, we believe that there is an elevated level of attention towards perceived health and safety risks in the insulation industry. As a consequence, it is essential to our existing business and to our future growth that our products are considered safe. Even modest perceptions by existing or potential distributors, contractors or end-use customers in our target markets that our products are not safe could have a critical impact on our ability to sell our products and to continue as a business. Further, our competitors have in the past, and may in the future, seek to create or perpetuate such perceptions. There is risk of an actual or perceived failure of our products or other negative perceptions regarding our products, such as perceived health hazards. For example, dust is produced by our products during their installation and use, which increases the likelihood of the perception of a hazard. Another example is the potential in very high temperature applications for material failure. Like most insulation products, our Pyrogel XT and XT-E products will normally go through a controlled burn-in process immediately after exposure to high temperatures. If installed improperly, the burn-in may proceed too rapidly and the material may become damaged. In addition, the thermal performance of our materials may degrade over time due to a variety of operational or environmental conditions. We take steps to educate our distributors, contractors, OEMs and end-use customers on the nature of our products and the proper installation and operating procedures in order to mitigate these risks. Such an event, or the perception of such an event, could quickly result in our direct and end-use customers replacing our products with traditional insulation materials which could have a material adverse effect on our results of operations.

Our activities and operations are subject to numerous health and safety laws and regulations. If we violate such regulations, we could face penalties and fines or be required to curtail or cease operations.

We are subject to numerous health and safety laws and regulations in each of the jurisdictions in which we operate. These health and safety laws and regulations apply to us including with regard to hazardous substances that we use in our manufacturing process and that certain of our products contain. These substances include titanium dioxide, iron oxide, ethanol and carbon black, each of which has been determined, in certain forms, with certain contaminants and at certain levels, to be hazardous, possibly carcinogenic or otherwise harmful to humans. We may also consider and adopt the use of other hazardous substances or substances potentially containing hazardous contaminants, with similar or higher risks in connection with new products or modifications to our current products and related manufacturing.

Our processes also require the use of other regulated substances in raw material delivery and manufacturing, including among others, ethanol. Applicable laws and regulations require us to obtain and maintain permits and approvals and implement health and safety programs and procedures to control risks associated with our operations. Compliance with those laws and regulations can require us to incur substantial costs. Moreover, if our compliance programs are not successful, we could be subject to penalties or to revocation of our permits, which may require us to curtail or cease operations of the affected facilities. In particular, the construction of future, potential facilities will require us to obtain and maintain new permits from various regulatory authorities and if the issuance of such permits is delayed or denied, it would slow or potentially prevent the expansion of our manufacturing capacity. Violations of laws, regulations and permit requirements may also result in criminal sanctions, injunctions and the denial or revocation of our various permits.

While we use hazardous substances, including titanium dioxide and carbon black, in forms and at levels that are subject to current rules and regulations, such rules and regulations may become more stringent such that we are required to modify our manufacturing process and such that our customers’ use of our products may be impacted. Regulatory changes contemplated in several countries, particularly in Europe, may substantially increase these risks. Changes in the products or manufacturing processes may require the customers to perform an extensive re-qualification process, which our customers may not want to undertake for various reasons, resulting in the customer switching to competing products. In addition, changes in our production or manufacturing process may result in uses above currently permitted levels. Such uses or changes in rules or regulations could materially adversely affect our business, financial condition and results of operations.

Health and safety laws, regulations and permit requirements may become more stringent or otherwise change. Any such changes could require us to incur materially higher costs than we currently have. Our costs of complying with current and future health and safety laws, regulations and permit requirements, and any liabilities, fines or other sanctions resulting from violations of them, could adversely affect our business, financial condition and results of operations.

We may face certain product liability or warranty claims on our products, including from improper installation of our products by third parties. As a consequence, we could lose existing and future business and our ability to develop, market and sell our insulation could be harmed.

The design, development, production and sale of our products involve an inherent risk of product liability claims and associated adverse publicity. We may be named directly in product liability suits relating to our products, even for defects resulting from errors of our distributors, contractors, OEMs, partners or end-use customers. These claims could be brought by various parties, including distributors, contactors, OEMs, partners and other direct end-use customers who are purchasing products directly from us, or end-use customers who purchase our products from our distributors. We could also be named as co-parties in product liability suits that are brought against the distributors, contractors, OEMs, partners and end-use customers. Our products are often installed in our end-use customers’ complex and capital intensive facilities in inherently hazardous or dangerous environments, including in the energy, petrochemical and power generation industries, where the potential liability from risk of loss could be substantial. The failure of our products to perform to customer expectations, whether or not because of improper installation, could give rise to warranty claims against us. We take steps to educate our distributors, contractors, OEMs, partners and end-use customers about the proper installation procedures to mitigate the risk of an uncontrolled burn-in for very high temperature applications of Pyrogel XT and XT-E. However, installation of our products is handled by third parties over whom we have no control and errors or defects in their installation may also give rise to claims against us, diminish our brand or divert our resources from other purposes. Any of these claims, even if without merit, could result in costly litigation or divert management’s attention and resources. In addition, many of our products are integrated into the final products of our customers. The integration of our products may entail the risk of product liability or warranty claims based on malfunctions or hazards from both our products and the final products of our customers.

A material product liability claim may seriously harm our results of operations, as well as damage our customer relationships and reputation. Although we carry general liability insurance, our current insurance coverage could be insufficient to protect us from

all liability that may be imposed under these types of claims. Insurance coverage is expensive, may be difficult to obtain and may not be available in the future on acceptable terms or at all. Our distributors, contractors, OEMs, partners and end-use customers may not have adequate insurance to cover against potential claims. This insurance may not provide adequate coverage against potential losses, and if claims or losses exceed our liability insurance coverage, we may go out of business. In addition, insurance coverage may become more expensive, which would harm our results of operations.

We may incur significant costs complying with environmental, health and safety laws and related claims, and failure to comply with these laws and regulations could expose us to significant liabilities, which could materially adversely affect our results of operations.

Costs of compliance with regional, national, state and local existing and future environmental, health and safety laws and regulations could adversely affect our cash flow and results of operations. We are required to comply with numerous environmental laws and regulations and to obtain numerous governmental permits in order to operate our facilities and in connection with the design, development, manufacture and transport of our products and the storage, use, handling and disposal of hazardous substances, including environmental, health and safety laws, regulations and permits governing air emissions. We may incur significant additional costs to comply with these requirements. If we fail to comply with these requirements, we could be subject to civil or criminal liability, damages and fines, and our operations could be curtailed, suspended or shutdown. In addition, certain foreign laws and regulations may affect our ability to export products outside of the United States. Existing environmental, health and safety laws and regulations could be revised or reinterpreted and new laws and regulations could be adopted or become applicable to us or our products, and future changes in environmental, health and safety laws and regulations could occur. These factors may materially increase the amount we must invest to bring our processes into compliance and impose additional expense on our operations.

Among the changes to environmental laws and regulations that could occur is the adoption of regulatory frameworks to reduce greenhouse gas emissions, which a number of countries, particularly in the European Union, have adopted, or are considering adopting, including the 2015 Paris Agreement on climate change. These include adoption of cap and trade regimes, carbon taxes, restrictive permitting, increased efficiency standards, and incentives or mandates for renewable energy, any of which could increase the costs of manufacturing our products and increase our compliance costs, and/or reduce demand for our products from our customers in the energy industry, all of which could materially adversely affect our business and results of operations.

In addition, private lawsuits, including claims for remediation of contamination, personal injury or property damage, or actions by regional, national, state and local regulatory agencies, including enforcement or cost-recovery actions, may materially increase our costs. Certain environmental laws make us potentially liable on a joint and several basis for the remediation of contamination at or emanating from properties or facilities that we currently or formerly owned or operated or properties to which we arranged for the disposal of hazardous substances. Such liability may require us to pay more than our fair share and could require us to address contamination caused by others. For example, the site of our East Providence facility contains certain levels of contamination caused by prior third-party activities on and near the site. Such contamination remains in place under a state-approved deed restriction, and we are required to comply with such deed restriction and the accompanying soil management plan. In general, the deed restriction prohibits the residential use of the property and the use of groundwater as potable water, and requires the maintenance of engineering controls and annual inspections to help prevent exposure to contaminated soils. The soil management plan requires us to notify the state environmental agency with respect to any soil excavation, stockpiling, sampling and off-site disposal of excavated soil. Although we have not had to make material expenditures to satisfy these requirements to date, in the future, we may incur additional costs to comply with these requirements and failure to do so could disrupt the operation of our facility or could subject us to liability for environmental remediation. We may incur liability relating to the remediation of contamination, including contamination we did not cause. Furthermore, ethanol, one of the materials that we handle in large quantities in our manufacturing process is subject to additional laws and regulations including those administered by the U.S. Alcohol and Tobacco Tax and Trade Bureau. While we seek to comply with the stringent requirements of these laws and regulations, these laws and regulations are complex and are subject to interpretation. Any changes in these laws or regulations or changes in our manufacturing processes may require us to request changes to our existing permits or obtain new permits. Any requests to change our existing permits or obtain new permits may be delayed or denied and may require us to modify our manufacturing processes, which could be costly and time consuming and could adversely affect our business and results of operations.

We may not be able to obtain or maintain, from time to time, all required environmental regulatory approvals. A delay in obtaining any required environmental regulatory approvals or failure to obtain and comply with them could materially adversely affect our business and results of operations.

Breakdowns, security breaches, loss of data and other disruptions of our information technology systems could compromise sensitive information related to our business, prevent us from accessing critical information and expose us to liability, which would cause our business and reputation to suffer.

In the ordinary course of our business, we collect and store sensitive data, including intellectual property, our proprietary business information and that of our suppliers, customers and business partners, and personally identifiable information about our employees. We manage and maintain our applications and data utilizing on-site and off-site systems. These applications and data encompass a wide variety of business critical information including research and development information, commercial information and business and financial information.

The secure processing, storage, maintenance and transmission of this critical information is vital to our operations and business strategy, and we devote resources to protecting such information. Although we take measures to protect sensitive information from unauthorized access or disclosure, our information technology and infrastructure may be vulnerable to breakdowns, attacks by hackers, viruses, breaches or interruptions due to employee error, malfeasance or other disruptions, or lapses in compliance with privacy and security mandates. Any such virus, breakdown, attack, breach or interruption could compromise our networks and the information stored there could be accessed by unauthorized parties, publicly disclosed, lost or stolen. We have measures in place that are designed to detect and respond to such security incidents and breaches of privacy and security mandates, but there can be no assurance that our management or diligence efforts will prevent such breakdowns or breaches in our systems. Any such access, disclosure or other loss of information could result in legal claims or proceedings, liability under laws that protect the privacy of personal information or other laws, government enforcement actions and regulatory penalties. Unauthorized access, loss or dissemination could also disrupt our operations, customer support services, research and development activities, capture of company financial information, various general and administrative aspects of our business and damage our reputation, any of which could adversely affect our business.

Our contracts with U.S. government agencies may subject us to audits, criminal penalties, sanctions and other expenses and fines.

We perform contract research services for U.S. government agencies and our products are sold to customers that may incorporate them into government projects. U.S. government agencies, including the Defense Contract Audit Agency and the Department of Labor, routinely audit government contractors. These agencies review a contractor’s compliance with contract terms and conditions, performance under its contracts, cost structure and compliance with applicable laws, regulations and standards. The U.S. government also may review the adequacy of a contractor’s systems and policies, including a contractor’s purchasing, property, estimating, billing, accounting, compensation and management information systems. Any costs found to be overcharged or improperly allocated to a specific contract or any amounts improperly billed or charged for products or services will be subject to reimbursement to the government. As a government contractor, we are required to disclose to the U.S. government credible evidence of certain violations of law and contract overpayments. If we are found to have participated in improper or illegal activities, we may be subject to civil and criminal penalties and administrative sanctions, including termination of contracts, forfeiture of profits, suspension of payments, fines and suspension or prohibition from doing business with the U.S. government. Any negative publicity related to such contracts, regardless of the accuracy of such publicity, may adversely affect our business or reputation.

Our contracts with U.S. government agencies may not be funded by future appropriations and are subject to modification or termination at any time prior to their completion.

Our contracts with U.S. government agencies are subject to the availability of appropriated funds. The U.S. government funds our contract research work through a variety of funding programs that rely on monies appropriated by Congress. At any point, the availability of funding could change, thus reducing the opportunities for new or continued revenues to us from government contract work. Revenue from contracts with U.S. government agencies constituted 2% of our total revenue in each of 2018, 2017 and 2016, respectively. We expect that our revenue under such contracts will decline due to the recent trend toward tightening of federal spending guidelines and programs.

In addition, under our contracts, the U.S. government generally has the right not to exercise options to extend or expand our contracts and may modify, curtail or terminate the contracts at its convenience. Our government customers may not renew our existing contracts after the conclusion of their terms and we may not be able to enter into new contracts with U.S. government agencies. Any decision by the U.S. government not to exercise contract options or to modify, curtail or terminate our contracts or not to renew our contracts or enter into new contracts with us would adversely affect our revenues.

If we lose key personnel upon whom we are dependent, or if we are unable to successfully recruit and retain skilled employees, we may not be able to manage our operations and meet our strategic objectives.

Our continued success depends to a considerable degree upon the continued services of a small number of our employees with critical knowledge of our products, our manufacturing process, our intellectual property, our customers and our global operations. The loss or unavailability of any of these individuals could harm our ability to execute our business plan, maintain important business relationships and complete certain product development initiatives, which could harm our business. In the event that any of these key individuals leave their employment with us or take new employment with a competitor, our business and results of operations could be materially adversely affected. In addition, our continued success depends upon the availability, contributions, vision, skills, experience and effort of our senior management, financial, sales and marketing, engineering and production teams. We do not maintain “key person” insurance on any of our employees. We have entered into employment agreements with certain members of our senior management team, but none of these agreements guarantee the services of the individual for a specified period of time. All of the agreements with members of our senior management team provide that employment is at-will and may be terminated by the employee at any time and without notice.

The loss of the services of any of key employees might impede our operations or the achievement of our strategic and financial objectives. The loss or interruption of the service of any of these individuals or our inability to attract or retain other qualified personnel or advisors could have a material adverse effect on our business, financial condition and results of operations and could significantly reduce our ability to manage our operations and implement our strategy.

Our ability to use our net operating loss carryforwards may be subject to limitation, which could result in a higher effective tax rate and adversely affect our financial condition and results of operations.

During 2014, we performed analyses pursuant to Section 382 of the Internal Revenue Code of 1986, as amended, or the Internal Revenue Code, as well as similar state provisions, in order to determine whether any limitations might exist on the utilization of net operating losses and other tax attributes. Generally, a change of more than 50% in the ownership of a company’s stock, by value, over a three year period constitutes an ownership change for U.S. federal income tax purposes. An ownership change may limit a company’s ability to use its net operating loss carryforwards attributable to the period prior to such change. Based on these analyses, we determined that it is more likely than not that an ownership change occurred on June 18, 2014 upon the closing of our IPO, resulting in an annual limitation on the use of our net operating losses and other tax attributes as of such date. As a result, our prior net operating losses were limited to $155.2 million, including built-in gains of $42.0 million at the date of that ownership change. The use of our net operating loss carryforwards may be restricted further in the event of any future changes in our ownership.

Our inability to protect our intellectual property rights could negatively affect our business and results of operations.

Our ability to compete effectively depends in part upon developing, maintaining and/or protecting intellectual property rights relevant to our aerogel product forms, applications, manufacturing technologies and brand names. We rely principally on a combination of patent protection, trade secret laws, confidentiality and nondisclosure agreements, trademark registrations, common law rights and licensing arrangements to establish and protect the intellectual property rights relevant to our business. However, these measures may not be adequate in every given case to permit us to gain or keep any competitive advantage, particularly in those countries where the laws do not protect our proprietary rights as fully as or where the enforcement tools are weaker or less effective than those in the United States. In particular, since aerogels were developed approximately 80 years ago, there has been a wide range of research, development and publication related to aerogels, which makes it difficult to establish intellectual property rights to many key elements of aerogel technology and to obtain patent protection. Accordingly, much of the general technology that we use in our manufacture of aerogel blankets is not protected by patents.

Where we consider it appropriate, our strategy is to seek patent protection in the United States and other countries on technologies used in or relating to our aerogel product forms, applications and manufacturing technologies. As of December 31, 2018, we had 40 issued U.S. patents and 79 issued foreign patents, including five U.S. patents and 18 foreign patents that we co-own with third parties. The issuance of a patent is not conclusive as to its scope, validity or enforceability. Thus, any patent held by us or to be issued to us from a pending patent application, could be challenged, invalidated or held unenforceable in litigation or proceedings before the U.S. Patent and Trademark Office, or USPTO, and/or other patent tribunals. Third parties could develop technologies that circumvent the patent protection we have secured. No consistent policy regarding the breadth of patent claims has emerged to date in the United States and the landscape could become more uncertain in view of future rule changes by the USPTO, the introduction of patent reform legislation and decisions in patent law cases by the federal courts including the United States Supreme Court.

The patent landscape outside the United States is even less predictable. As a result, the validity and enforceability of patents cannot be predicted with certainty. For example, we are aware of competitors that manufacture and market aerogel insulation products in China, where it may be difficult for us to enforce our intellectual property rights against these or other competitors. In May 2016, we filed a complaint for patent infringement against Nano Tech Co., Ltd. (Nano) and Guangdong Alison Hi-Tech., Ltd., (Alison) which we refer to collectively as the Respondents, in the United States International Trade Commission, or ITC. In addition to Respondents’ contention at the ITC that the patents we asserted there are invalid, Alison also filed petitions with United States Patent and Trademark Office requesting Inter-Partes Review to cancel certain claims in three of our manufacturing process patents and a product patent. A three-member panel of Administrative Patent Judges at the USPTO denied all of Alison’s petitions to institute Inter-Partes Review challenging the validity of Aspen patents. Alison also filed similar requests with the Chinese Patent Office (SIPO) seeking to invalidate two of our Chinese manufacturing process patents and two of our Chinese product patents. After the conclusion of the oral proceedings and before any decision issued by the SIPO, Alison withdrew all of its requests for invalidation of our Chinese patents. In September 2017, the Administrative Law Judge (ALJ) presiding over the ITC investigation issued an Initial Determination finding that Alison and Nano infringed our patents relating to aerogel insulation and/or methods of manufacturing aerogel insulation. As part of the Initial Determination, the ALJ found that Alison and Nano infringed all of the patent claims asserted against each of them across the three asserted patents, and that Alison and Nano failed to prove that the asserted claims were invalid. The ALJ also recommended a limited exclusion order as a remedy to prevent the importation of infringing aerogel products manufactured by Respondents into the United States. In February 2018, the ITC issued its final determination confirming the ALJ’s infringement and validity determinations except with respect to one dependent product claim where the ITC found that the claim was not infringed. The ITC also revised some of the ALJ’s claim constructions. In addition, the ITC issued a limited exclusion order prohibiting importation of infringing aerogel insulation products manufactured by Alison and Nano. Alison has appealed the final determination related to the validity and Alison’s infringement of our asserted product patent to the U.S. Court of Appeals for the Federal Circuit. The appeal is currently ongoing.

We also filed a patent infringement suit in April 2016 at the District Court in Mannheim, Germany against the Respondents and two European distributors. During 2016, we settled with one European distributor in exchange for a commitment not to procure infringing products and cooperation with our case. In January 2018, the court issued a series of judgments by acknowledgement (German, Anerkenntnisurteil) finding the second reseller, Hiltex Techniche Weefsels b.v. (Hiltex), liable for infringement and also issued injunctions against Hiltex. The judgments resulted from a settlement agreement in which Hiltex agreed not to resell infringing products in Europe where at least one of the asserted patents are active. Nano initiated nullity actions in German Federal Patent Court against three of our manufacturing process patents in Germany. Alison likewise filed an opposition to one of the asserted patents at the European Patent Office (“EPO”) and also initiated nullity action against two other patents. Nano also filed an opposition against the same patent at the EPO. In December 2018, EPO determined to revoke the opposed patent on formality grounds. Such determination is subject to an appeal to the EPO Board of appeals. The German Federal Patent Court has determined that one of the patents challenged by Nano is valid as issued. The enforcement and validity litigations against the defendants, Alison and Nano, are ongoing. Additionally, a reseller of Nano’s products in Taiwan challenged the validity of one of our patents in Taiwan. After careful review of our response, Taiwanese patent office has determined the patent as valid and dismissed the challenge in December 2018. LG Chem Ltd has sought to challenge one of our patents in Korea. The resulting patent invalidation trial is ongoing. See “Risk Factors —We have initiated intellectual property litigation that will be costly, and could limit or invalidate our intellectual property rights, divert time and efforts away from business operations, require us to pay damages and/or costs and expenses and/or otherwise have an adverse material impact on our business, and we could become subject to additional intellectual property litigation in the future” below.

In addition, we may fail to apply for patents on important technologies or innovative products in a timely fashion, if at all, and our existing and future patents may not be sufficiently broad to prevent others from practicing our technologies or from developing competing products or technologies, in particular given the long history of aerogel development. Furthermore, third parties could practice our intellectual property rights in territories where we do not have patent protection. Such third parties may then try to import products made using our intellectual property rights into the United States or other countries. Our strategy is to seek registration of trademarks for our brands in many, but not all, of the jurisdictions in which we sell our products based on various factors, including our sales volumes in the jurisdiction, our ability to enforce local laws and cost. Our strategy may not be adequate to protect our brands in all circumstances, especially in foreign jurisdictions.

As of December 31, 2018, we had 23 pending U.S. patent applications and 78 pending foreign patent applications, including three pending U.S. patent application and 20 foreign pending patent applications that we co-own with other third parties. Our pending patent applications are directed to various enabling technologies for the product forms, applications and manufacturing technologies that support our current business, as well as aspects of products under development or contemplated for the future. The issuance of patents from these applications involves complex legal and factual questions and, thus, we cannot provide assurance that any of our pending patent applications will result in the issuance of patents to us. The USPTO, relevant foreign patent offices and other relevant patent tribunals may deny or require significant narrowing of claims in our pending patent applications. Patents issued as a result of any of our pending patent applications may not cover our enabling technology and/or the products or processes that support our

current or future business or afford us with significant commercial protection against others with similar technology. Proceedings before the USPTO could result in adverse decisions as to the priority of our inventions and the narrowing or invalidation of claims in issued patents. In addition, our pending patent applications filed in foreign countries are subject to laws, rules and procedures that differ from those of the United States, and thus foreign patent applications may not be granted even if counterpart United States patents are issued.

We have initiated intellectual property litigation that is and will continue to be costly, and could limit or invalidate our intellectual property rights, divert time and efforts away from business operations, require us to pay damages and/or costs and expenses and/or otherwise have an material adverse impact on our business, and we could become subject to additional such intellectual property litigation in the future.

The success of our business is highly dependent on protecting our intellectual property rights. Unauthorized parties may attempt to copy or otherwise obtain and use our products and/or enabling technology. Policing the unauthorized use of our intellectual property rights is difficult and expensive, as is enforcing these rights against unauthorized use by others. Identifying unauthorized use of our intellectual property rights is difficult because we may be unable to monitor the technologies and/or materials being employed by other parties. The steps we have taken or will take may not prevent unauthorized use of our intellectual property rights, particularly in foreign countries where enforcement of intellectual property rights may be more difficult than in the United States.

In May 2016, we filed a complaint for patent infringement against Nano Tech Co., Ltd. and Guangdong Alison Hi-Tech., Ltd., which we refer to collectively as the Respondents, in the United States International Trade Commission. The ITC complaint alleged that these two China-based companies have engaged and are engaging in unfair trade practices by importing and selling aerogel products in the United States that infringe, and/or are manufactured by processes that infringe, several of our patents. In the ITC complaint, we sought exclusion orders from the ITC that direct the United States Customs and Border Protection to stop the importation of infringing products. In June 2016, the ITC instituted an investigation based on our complaint. In September 2017, the Administrative Law Judge (ALJ) presiding over the ITC investigation issued an Initial Determination finding that Alison and Nano infringed three of our patents relating to aerogel insulation and/or methods of manufacturing aerogel insulation. As part of the Initial Determination, the ALJ found that Alison and Nano infringed all the patent claims asserted against each of them and that Alison and Nano failed to prove that the asserted claims were invalid. The ALJ also recommended a limited exclusion order as a remedy to prevent the importation of infringing aerogel products into the United States. In February 2018, the ITC issued its final determination confirming the ALJ’s infringement and validity determinations except with respect to one dependent product claim where the ITC found that the claim was not infringed. The ITC also revised some of the ALJ’s claim construction. In addition, the ITC issued a limited exclusion order prohibiting importation of infringing aerogel insulation products manufactured by Alison and Nano. Alison has appealed the final determination related to the validity and Alison’s infringement of our asserted product patent to the U.S. Court of Appeals for the Federal Circuit. The appeal is currently ongoing.

In addition to Respondents’ contention at the ITC that the patents we asserted there are invalid, Alison also filed petitions with USPTO requesting Inter-Partes Review to cancel certain claims in three of Aspen’s manufacturing process patents and one product patent. A three-member panel of Administrative Patent Judges at the USPTO denied all of Alison’s petitions to institute Inter-Partes Review challenging the validity of these Aspen patents. Alison also filed similar requests with the Chinese Patent Office (“SIPO”) seeking to invalidate two of our Chinese manufacturing process patents and two of our Chinese product patents. After the conclusion of the oral proceedings and before any decision issued by the SIPO, Alison withdrew all of its requests for invalidation of our Chinese patents in 2017. Subsequently in 2018, Alison again challenged one of the same patents. SIPO determined the patent, as amended as valid. SIPO’s determination is subject to an appeal to the Beijing IP Court.

We also filed a patent infringement suit in April 2016 at the District Court in Mannheim, Germany against the Respondents and two European distributors. During 2016, we settled with one of the European distributors in exchange for a commitment not to procure infringing products and cooperation with our case. In January 2018, the court issued a series of judgments by acknowledgement (German, Anerkenntnisurteil) finding the second reseller, Hiltex Techniche Weefsels b.v. (Hiltex), liable for infringement and also issued injunctions against Hiltex. The judgments resulted from a settlement agreement in which Hiltex agreed not to resell infringing products in Europe where at least one of the asserted patents are active. The litigation against Nano and Alison remains ongoing. Nano has initiated nullity actions in German Federal Court against three of our manufacturing process patents in Germany. Alison likewise filed an opposition to one of the asserted patents at the European Patent Office (EPO) and also initiated nullity action against two other patents. Nano also filed an opposition against the same patent at the EPO. In December 2018, EPO determined to revoke the opposed patent on formality grounds. Such determination is subject to an appeal to the EPO Board of appeals. The German Federal Patent Court has determined that one of the patents challenged by Nano is valid as issued. Additionally, a reseller of Nano’s products in Taiwan challenged the validity of one of our patents in Taiwan. After careful review of our response, Taiwanese patent office has determined the patent as valid and dismissed the challenge in December 2018. LG Chem Ltd has sought to challenge one of our patents in Korea. The resulting patent invalidation trial is ongoing. As many third parties have already sought to invalidate our patents

in various jurisdictions, we expect defendants to bring similar actions in additional jurisdictions or against additional patents and that we will incur additional costs to defend such actions. Due to their nature, it is difficult to predict the outcome or the costs involved in any litigation or administrative proceeding. Furthermore, the defendants may have significant resources and interest to litigate and, therefore, this litigation could be protracted and may ultimately involve significant legal expenses.

Our continued commercial success will also depend in part upon not infringing the patents or violating other intellectual property rights of third parties. We are aware of patents and patent applications generally relating to aspects of our technologies filed by, and issued to, third parties. Our knowledge of the patent landscape with respect to the technologies currently embodied within our aerogel products and the technologies that we practice in manufacturing those products indicates that the third-party patent rights most relevant to our business are those owned by Cabot and licensed to us under the cross license agreement with Cabot. Nevertheless, we cannot determine with certainty whether patents or patent applications of other parties may materially affect our ability to conduct our business. There may be existing patents of which we are unaware that we may inadvertently infringe, resulting in claims against us or our customers. In recent years, Chinese, Japanese and South Korean entities have filed a significant number of patent applications related to aerogel products in both their home countries and in foreign countries. These patents in application areas of aerogels may make it more difficult for OEMs and end-use customers in these countries to use our products in new and different applications, which in turn may limit our ability to penetrate new markets.

In the event that the manufacture, use and/or sale of our products or technologies is challenged, or if our product forms or technologies conflict with patent rights of others or our operations conflict with trademark or similar rights of others, third parties could bring legal actions against us in the United States, Europe or other countries, claiming damages and seeking to enjoin the manufacturing and/or marketing of our products. In addition, it is not possible to predict with certainty what patent claims may arise from pending patent applications of third parties. In the United States, for example, patent prosecution can proceed in secret prior to issuance of a patent, provided such application is not filed in a foreign jurisdiction. For U.S. patent applications that are also filed in foreign jurisdictions, such patent applications will not be published until 18 months from the filing date of the application. As a result, third parties may be able to obtain patents with claims relating to our product forms, applications and/or manufacturing processes which they could attempt to assert against us or our end-users.

In the case of any of the above, litigation may be necessary to enforce, protect or defend our intellectual property rights or to determine the validity and scope of the intellectual property rights of others. Any such litigation, including our ongoing patent enforcement actions described above, could be unsuccessful, cause us to incur substantial costs, divert resources and the efforts of our personnel away from daily operations, harm our reputation and/or result in the impairment of our intellectual property rights. In some cases, litigation may be threatened or brought by a patent holding company (otherwise known as non-practicing entities or patent “trolls”) or other adverse patent owner who has no relevant product revenues and against which our patents may provide little or no deterrence. If we are found to infringe any patents, regardless of whether litigation is brought against us by third parties or, as in the case of our ongoing patent enforcement actions described above, brought by us against third parties, we could be required to:

In the actions brought by us against third parties, including our ongoing patent enforcement actions described above, we may be required to pay costs and expenses of opposing parties, including attorney fees, if we lose.

If our competitors are able to use our technology without payment to us, our ability to compete effectively could be materially harmed. Our contracts generally indemnify our customers for third-party claims of intellectual property infringement related to the manufacture and use of our products, and typically up to the amount of the purchase price paid for the product, which could cause us to become involved, and subject to liability, in litigation between our customers and third parties. The expense of defending these claims may adversely affect our results of operations.

Patents covering technologies that are similar or superior to our technologies may be developed or obtained by third parties. We may need to seek licenses to these technologies, which could limit our ability to manufacture our products and have a material adverse effect on our business and results of operations.

Competitors or other third parties may independently develop and obtain patents covering technologies that are similar or superior to the product forms, applications or manufacturing technologies that we employ. In such event, we may need to obtain licenses for these technologies. However, we may not be able to obtain licenses on reasonable terms, if at all, which could limit our ability to manufacture our current and/or future products and operate our business.

Our contracts with the U.S. government and other third parties could negatively affect our intellectual property rights.

To further our product development efforts, our scientists and engineers work closely with customers, the U.S. government and other third parties to research and develop advancements in aerogel product forms, applications and manufacturing technologies. We have entered into agreements with private third parties and have been awarded numerous research contracts with the U.S. government to independently or jointly research, design and develop new devices and systems that incorporate aerogel material. We also expect to enter into similar private agreements and be awarded similar government contracts in the future. In some instances, the research and development activities that we conduct under contract with the U.S. government and/or with private third parties may produce intellectual property to which we may not have ownership or exclusive rights and will be unable to protect or monetize.

Moreover, when we develop new technologies using U.S. government funding, the government may obtain certain rights in any resulting patents, technical data and/or other confidential and proprietary information, generally including, at a minimum, a non-exclusive license authorizing the U.S. government to use the invention, technical data or software for non-commercial purposes. Federal government funding may limit when and how we can deploy our technology developed under those contracts. In addition, inventions must be reported promptly to the funding agencies, the federal funding must be disclosed in any resulting patent applications, and our rights in such inventions will normally be subject to government license rights, periodic post-contract utilization reporting, foreign manufacturing restrictions and “march-in” rights. March-in rights refer to the right of the U.S. government to require us to grant a license to the technology to a responsible applicant or, if we refuse, the government may grant the license itself. The U.S. government may exercise its march-in rights if it determines that action is necessary because we fail to achieve practical application of any technology developed under contract with the government or because action is necessary to alleviate health or safety needs, to meet requirements of federal regulations or to give preference to United States industry. The U.S. government may also have the right to disclose our confidential and proprietary information to third parties. In addition, failure to comply with all the government contract requirements may result in us losing the patent rights.

Our U.S. government-sponsored research contracts are also subject to audit and require that we provide regular written technical updates on a monthly, quarterly or annual basis, and, at the conclusion of the research contract, a final report on the results of our technical research. Because these reports are generally available to the public, third parties may obtain some aspects of our confidential and proprietary information relating to our product forms, applications and/or manufacturing processes. If we fail to provide these reports or to provide accurate and complete reports, the U.S. government could obtain rights to any intellectual property arising from the related research.

Furthermore, there could be disputes between us and a private third party as to the ownership rights to any inventions that we develop in collaboration with such third party. Any such dispute may cause us to incur substantial costs including potential license obligations, and could place a significant strain on our financial resources, divert the attention of management from our core business and harm our reputation.

We rely on trade secrets to protect our technology, and our failure to obtain or maintain trade secret protection could materially adversely affect our competitive business position.

We rely in part on trade secret protection to protect confidential and proprietary information relating to our technology, particularly where we do not believe patent protection is appropriate or obtainable. We continue to develop and refine the manufacturing technologies used to produce our aerogel products and believe that we have already developed, and will continue to develop, significant know-how related to these technologies. However, trade secrets can be difficult to protect. We may not be able to maintain the secrecy of this information and competitors may develop or acquire equally or more valuable information related to the manufacture of comparable aerogel products. Our strategy for scale-up of commercial production will continue to require us to share confidential and proprietary information with the U.S. government and other third parties. While we take reasonable efforts to protect our trade secrets, our employees, consultants, contractors or scientific and other advisors, or those of our business partners, may intentionally or inadvertently disclose our confidential and proprietary information to competitors. Any enforcement of claims by us

that a third party has obtained and is using our trade secrets is expensive, time consuming and uncertain. In addition, foreign courts are sometimes less willing than United States courts to protect trade secrets.

We require all employees and consultants to execute confidentiality and/or nondisclosure agreements upon the commencement of an employment or consulting arrangement with us, which agreements generally require that all confidential and proprietary information developed by the individual or made known to the individual by us during the course of the individual’s relationship with us be kept confidential and not disclosed to third parties. These agreements further generally provide that inventions conceived by the individual in the course of rendering services to us will be our exclusive property. Nevertheless, these agreements may not be honored and our confidential and proprietary information may be disclosed, or these agreements may be unenforceable or difficult to enforce. We also require customers and vendors to execute confidentiality and/or nondisclosure agreements. However, we have not obtained such agreements from all of our customers and vendors. Moreover, some of our customers may be subject to laws and regulations that require them to disclose information that we would otherwise seek to keep confidential. Our confidential and proprietary information may be otherwise disclosed without our authorization or knowledge. Moreover, third parties could reverse engineer our manufacturing processes, independently develop substantially equivalent confidential and proprietary information or otherwise gain access to our trade secrets. Additionally, cyber security threats, especially originating from countries such as China, Russia, Iran and North Korea as broadly reported in the media, pose a significant risk to maintaining control of our trade secrets. Failure to maintain trade secret protection could enable others to produce competing products and adversely affect our competitive business position.

Loss of the intellectual property rights that we license from Cabot Corporation would have a material adverse impact on our business.

We have licensed certain intellectual property rights from Cabot under a cross license agreement. These intellectual property rights have been critical to the manufacture of our existing products and may also be important to our research, development and manufacture of new products. Any loss of the intellectual property rights granted to us thereunder, including as a result of ineffective protection of such rights by Cabot, abandonment or expiration of the involved patents or a breach of or dispute under the agreement by either party would have a material adverse impact on our financial condition, results of operations and growth prospects, and might prevent us from continuing our business.

We may be subject to, or may in the future become subject to, U.S. federal and state, and foreign laws and regulations imposing obligations on how we collect, use, disclose, store and process personal information. Our actual or perceived failure to comply with such obligations could result in liability or reputational harm and could harm our business. Ensuring compliance with such laws could also impair our efforts to maintain and expand our customer base, and thereby decrease our revenue.

We are subject to laws and regulations governing data privacy and other personal information. These laws and regulations govern our processing of personal data, including the collection, access, use, analysis, modification, storage, transfer, security breach notification, destruction and disposal of personal data. We must comply with laws and regulations associated with the international transfer of personal data based on the location in which the personal data originates and the location in which it is processed. Although there are legal mechanisms to facilitate the transfer of personal data from the European Economic Area, or EEA, and Switzerland to the United States, the decision of the European Court of Justice that invalidated the safe harbor framework has increased uncertainty around compliance with EU privacy law requirements. As a result of the decision, it was no longer possible to rely on safe harbor certification as a legal basis for the transfer of personal data from the European Union to entities in the United States. In February 2016, the European Commission announced an agreement with the Department of Commerce, or DOC, to replace the invalidated safe harbor framework with a new EU-U.S. “Privacy Shield.” On July 12, 2016, the European Commission adopted a decision on the adequacy of the protection provided by the Privacy Shield. The Privacy Shield is intended to address the requirements set out by the European Court of Justice in its recent ruling by imposing more stringent obligations on companies, providing stronger monitoring and enforcement by the DOC and Federal Trade Commission and making commitments on the part of public authorities regarding access to information.

The privacy and security of personally identifiable information stored, maintained, received or transmitted, including electronically, subject to significant regulation in the United States and abroad. While we strive to comply with all applicable privacy and security laws and regulations, legal standards for privacy continue to evolve and any failure or perceived failure to comply may result in proceedings or actions against us by government entities or others, or could cause reputational harm, which could have a material adverse effect on our business.

U.S.-based companies may certify compliance with the privacy principles of the Privacy Shield. Certification to the Privacy Shield, however, is not mandatory. If a U.S.-based company does not certify compliance with the Privacy Shield, it may rely on other authorized mechanisms to transfer personal data.

The privacy and data security landscape is still in flux. In October 2016, an action for annulment of the European Commission decision on the adequacy of Privacy Shield was brought before the European Court of Justice by three French digital rights advocacy groups, La Quadrature du Net, French Data Network and the Fédération FDN. This case, Case T-738/16, is currently pending before the European Court of Justice. Should the European Court of Justice invalidate the Privacy Shield, it will no longer be possible to transfer data from the European Union to entities in the United States under a Privacy Shield certification, in which case other legal mechanisms would need to be put in place.

The legislative and regulatory landscape for privacy and data security continues to evolve, and there has been an increasing focus on privacy and data security issues which may affect our business. Failure to comply with current and future laws and regulations could result in government enforcement actions (including the imposition of significant penalties), criminal and civil liability for us and our officers and directors, private litigation and/or adverse publicity that negatively affects our business.

If we or our vendors fail to comply with applicable data privacy laws, or if the legal mechanisms we or our vendors rely upon to allow for the transfer of personal data from the EEA or Switzerland to the United States (or other countries not considered by the European Commission to provide an adequate level of data protection) are not considered adequate, we could be subject to government enforcement actions and significant penalties against us, and our business could be adversely impacted if our ability to transfer personal data outside of the EEA or Switzerland is restricted, which could adversely impact our operating results. The EU General Data Protection Regulation, which was effective as of May 25, 2018, introduced new data protection requirements in the European Union relating to the consent of the individuals to whom the personal data relates, the information provided to the individuals, the documentation we must retain, the security and confidentiality of the personal data, data breach notification and the use of third party processors in connection with the processing of personal data. The EU General Data Protection Regulation has increased our responsibility and potential liability in relation to personal data that we process, and we may be required to put in place additional mechanisms to ensure compliance with the EU General Data Protection Regulation. However, our ongoing efforts related to compliance with the EU General Data Protection Regulation may not be successful and could increase our cost of doing business. In addition, data protection authorities of the different EU member states may interpret the EU General Data Protection Regulation differently, and guidance on implementation and compliance practices are often updated or otherwise revised, which adds to the complexity of processing personal data in the European Union.

In the United States, California recently adopted the California Consumer Privacy Act of 2018, or CCPA, which will come into effect beginning in January 2020. The CCPA has been characterized as the first “GDPR-like” privacy statute to be enacted in the United States because it mirrors a number of the key provisions of the EU General Data Protection Regulation. The CCPA establishes a new privacy framework for covered businesses by creating an expanded definition of personal information, establishing new data privacy rights for consumers in the State of California, imposing special rules on the collection of consumer data from minors, and creating a new and potentially severe statutory damages framework for violations of the CCPA and for businesses that fail to implement reasonable security procedures and practices to prevent data breaches.

We have incurred and will continue to incur costs and demands upon management as a result of complying with the laws and regulations affecting public companies in the United States, which may adversely affect our results of operations.

We are subject to the reporting requirements of the Exchange Act that require us to file, among other things, quarterly reports on Form 10-Q and annual reports on Form 10-K. Under Section 302 of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, as a part of each of these reports, our chief executive officer and chief financial officer are required to evaluate and report their conclusions regarding the effectiveness of our disclosure controls and procedures and to certify that they have done so. Effective internal controls are necessary for us to provide reliable financial reports and prevent fraud. Under Section 404 of the Sarbanes-Oxley Act, we have included a report of management on our internal control over financial reporting in our Form 10-K for our fiscal year ended December 31, 2018. In addition, upon the first annual report required to be filed with the SEC following the date we are no longer an “emerging growth company” as defined in the Jumpstart Our Business Startups Act, or JOBS Act, the independent registered public accounting firm auditing our financial statements will be required to attest to and report on the effectiveness of our internal control over financial reporting. The process of improving and documenting our internal controls and complying with Section 404 is expensive and time consuming, and requires significant attention of management.

Complying with these requirements applicable to public companies may place a strain on our personnel, information technology systems and resources while diverting management’s attention from other business concerns. We have engaged outside service providers with appropriate public company compliance experience and technical accounting knowledge to support our compliance efforts. We may need to engage additional service providers to ensure compliance which may cause us to incur additional operating costs.

These and other requirements may also make it more difficult or more costly for us to obtain or maintain certain types of insurance, including directors’ and officers’ liability insurance. We may be forced to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage.

The impact of these requirements could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors, our board committees or as executive officers. Any one of these requirements could have a material adverse effect on our business, financial condition and results of operations.

Because we are a public company, we are obligated to develop and maintain proper and effective internal control over financial reporting. If our internal controls over financial reporting are determined to be ineffective, or if our auditors are otherwise unable to attest to their effectiveness when required, investor confidence in our company, and our common stock price, may be adversely affected.

Pursuant to Section 404a of the Sarbanes-Oxley Act, we have furnished a report by management on the effectiveness of our internal control over financial reporting for the fiscal year ended December 31, 2018 and will continue to do so in each year thereafter. This assessment will be required to include disclosure of any material weaknesses identified by our management in our internal control over financial reporting. Our independent registered public accounting firm will not be required to formally attest to the effectiveness of our internal control over financial reporting until the first annual report required to be filed with the SEC following the date we are no longer an “emerging growth company,” as defined in the JOBS Act.

We continue to assess our system of internal controls over financial reporting and successfully completed documentation necessary to perform the annual evaluation required to comply with Section 404. In future periods, we may discover, and not be able to remediate timely, significant deficiencies or material weaknesses. During the evaluation and testing process in 2018, we did not identify any material weaknesses in our internal controls over financial reporting. In future periods, if we were to identify one or more material weaknesses in our internal control, we may be unable to assert that our internal controls are effective. If we are unable to assert that our internal controls over financial reporting are effective, we could lose investor confidence in the accuracy and completeness of our financial reports or it could cause us to fail to meet our reporting obligations, which could have a material adverse effect on the price of our common stock. In addition, any failure to comply with Section 404 could subject us to a variety of administrative sanctions, including SEC action, ineligibility for short form resale registration, the suspension or delisting of our common stock from The New York Stock Exchange, and the inability of registered broker-dealers to make a market in our common stock, which would further reduce our stock price and could harm our business.

We are eligible to be treated as an “emerging growth company” as defined in the JOBS Act, and we cannot be certain if the reduced disclosure requirements applicable to emerging growth companies makes or will make our common stock less attractive to investors.

We are an “emerging growth company”, as defined in the JOBS Act. For as long as we continue to be an emerging growth company, we may take advantage of exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies, including:

We will remain an emerging growth company until the earliest to occur of (i) the end of the fiscal year for which we report $1.0 billion or more in annual revenues, (ii) the end of the fiscal year in which the market value of our common stock held by non-affiliates exceeds $700 million on the last business day of our second fiscal quarter, (iii) our issuance, in a three year period, of more than $1.0 billion of non-convertible debt, and (iv) December 31, 2019. We cannot predict if investors find or will find our common stock less attractive because we may rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile.

The trading market in our common stock has been limited and substantially less liquid than the average trading market for a stock quoted on The New York Stock Exchange.

Since our initial listing on The New York Stock Exchange on June 13, 2014, the trading market in our common stock has been limited and substantially less liquid than the average trading market for companies listed on The New York Stock Exchange. The listing of our common stock on The New York Stock Exchange does not assure that a meaningful, consistent and liquid trading market currently exists or will exist in the future. We cannot predict whether a more active market for our common stock will develop in the future. An absence of an active trading market could adversely affect our stockholders’ ability to sell our common stock at current market prices in short time periods, or possibly at all. An inactive market may also impair our ability to raise capital by selling our common stock and may impair our ability to acquire other companies, products or technologies by using our common stock as consideration. Additionally, analyst coverage of our common stock may be limited and such lack of coverage may have a depressive effect on the market price for our common stock. As of December 31, 2018, approximately 34.7% of our outstanding shares of common stock were held by our executive officers, directors, principal stockholders and their respective affiliates, which may adversely affect the liquidity of the trading market for our common stock, in as much as federal securities laws restrict sales of our shares by these stockholders. If our affiliates continue to hold their shares of common stock, there will be a more limited trading volume in our common stock, which may make it more difficult for investors to sell their shares or increase the volatility of our stock price.

We expect that the price of our common stock will fluctuate substantially, which could subject us to securities class action litigation and result in substantial losses to our stockholders.

The price of our common stock may fluctuate substantially due to a number of factors, including the following, some of which are beyond our control:

Furthermore, the U.S. stock market has at times experienced extreme volatility that in some cases has been unrelated or disproportionate to the operating performance of particular companies. These broad market and industry fluctuations may adversely affect the market price of our common stock, regardless of our actual operating performance.

In the past, following periods of market volatility, stockholders have instituted securities class action litigation. If we become involved in securities litigation, it could have a substantial cost and divert resources and the attention of our senior management team from our business regardless of the outcome of such litigation.

Securities analysts may not continue coverage of our common stock or may issue negative reports, which may have a negative impact on the market price of our common stock.

The trading market for our common stock relies in part on the research and reports that industry or financial analysts publish about us or our business. Securities analysts may elect not to provide research coverage of our common stock. If securities analysts do not cover or continue to cover our common stock, the lack of research coverage may cause the market price of our common stock to decline. If one or more of the analysts who elects to cover us downgrades our stock, our stock price would likely decline substantially. If one or more of these analysts ceases coverage of us, we could lose visibility in the market, which in turn could cause our stock price to decline. In addition, rules mandated by the Sarbanes-Oxley Act and a global settlement reached in 2003 between the SEC, other regulatory agencies and a number of investment banks have led to a number of fundamental changes in how analysts are reviewed and compensated. In particular, many investment banking firms are required to contract with independent financial analysts for their stock research. It may be difficult for companies such as ours, with smaller market capitalizations, to attract independent financial analysts that will cover our common stock. This could have a negative effect on the market price of our stock.

Our directors, officers and principal stockholders have significant voting power and may take actions that may not be in the best interests of our other stockholders.

As of December 31, 2018, our executive officers, directors and principal stockholders and their affiliates collectively controlled approximately 34.7% of our outstanding shares of common stock. As a result, these stockholders, if they act together, may be able to control the management and affairs of our company and certain matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions. This concentration of ownership may have the effect of delaying or preventing a change of control and might adversely affect the market price of our common stock. This concentration of ownership may not be in the best interests of our other stockholders.

Anti-takeover provisions in our restated certificate of incorporation and restated bylaws, and Delaware law, could delay or discourage a takeover.

Anti-takeover provisions in our restated certificate of incorporation and restated bylaws and Delaware law may have the effect of deterring or delaying attempts by our stockholders to remove or replace management, engage in proxy contests and effect changes in control. The provisions of our charter documents include:

In addition, as a Delaware corporation, we are subject to Delaware law, including Section 203 of the Delaware General Corporation Law. In general, Section 203 prohibits a Delaware corporation from engaging in any business combination with any interested stockholder for a period of three years following the date that the stockholder became an interested stockholder unless certain specific requirements are met as set forth in Section 203. These provisions, alone or together, could have the effect of deterring or delaying changes in incumbent management, proxy contests or changes in control.

Our restated certificate of incorporation designates a state or federal court located within the State of Delaware as the exclusive forum for certain types of actions and proceedings that may be initiated by our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers or employees.

Our restated certificate of incorporation provides that, subject to limited exceptions, a state or federal court located within the State of Delaware will be the exclusive forum for (1) any derivative action or proceeding brought on our behalf, (2) any action asserting a claim of breach of a fiduciary duty owed by any of our directors, officers or other employees to us or our stockholders, (3) any action asserting a claim against us arising pursuant to any provision of the Delaware General Corporation Law, our restated certificate of incorporation or our restated bylaws, or (4) any other action asserting a claim against us that is governed by the internal affairs doctrine. Any person or entity purchasing or otherwise acquiring any interest in shares of our capital stock shall be deemed to have notice of and to have consented to the provisions of our restated certificate of incorporation described above. This choice of

forum provision may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers or other employees, which may discourage such lawsuits against us and our directors, officers and employees. Alternatively, if a court were to find these provisions of our restated certificate of incorporation inapplicable to, or unenforceable in respect of, one or more of the specified types of actions or proceedings, we may incur additional costs associated with resolving such matters in other jurisdictions, which could adversely affect our business and financial condition.

Our shareholders may experience future dilution as a result of future equity offerings.

In the future, we may offer additional shares of our common stock or other securities convertible into or exchangeable for our common stock in order to raise additional capital. We cannot assure our shareholders that we will be able to sell shares or other securities in any other offering at a price per share that is equal to or greater than the price per share our shareholders paid for our shares. Investors purchasing shares or other securities in the future could have rights, preferences or privileges senior to those of our shareholders and our shareholders may experience dilution. Our shareholders may incur additional dilution upon the exercise of any outstanding stock options or warrants, the issuance of shares of restricted stock, the vesting of restricted stock units, or the issuance, vesting or exercise of other equity awards.

We do not intend to pay cash dividends in the foreseeable future and, consequently, our shareholders’ ability to achieve a return on your investment will depend on appreciation in the price of our common stock.

We have never declared or paid cash dividends on our common stock and we do not intend to pay any cash dividends on our common stock in the foreseeable future. We currently expect to retain all available funds and any future earnings for use in the operation and expansion of our business. In addition, the terms of our revolving credit facility restrict our ability to pay dividends and any future credit facilities, loan agreements, debt instruments or other agreements may further restrict our ability to pay dividends. Payments of future dividends, if any, will be at the discretion of our board of directors after taking into account various factors, including our business, results of operations and financial condition, current and anticipated cash needs, plans for expansion and any legal or contractual limitations on our ability to pay dividends. As a result, capital appreciation, if any, of our common stock will be our shareholders’ sole source of potential gain for the foreseeable future.

This report includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Exchange Act that relate to future events or our future financial performance and involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to differ materially from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. Words such as, but not limited to, “believe,” “expect,” “anticipate,” “estimate,” “intend,” “seek,” “may,” “plan,” “potential,” “predict,” “project,” “targets,” “likely,” “will,” “would,” “could,” “should,” “continue,” and similar expressions or phrases, or the negative of those expressions or phrases, are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. Although we believe that we have a reasonable basis for each forward-looking statement contained in this report, we caution you that these statements are based on our projections of the future that are subject to known and unknown risks and uncertainties and other factors that may cause our actual results, level of activity, performance or achievements expressed or implied by these forward-looking statements, to differ. The description of our Business set forth in Item 1, the Risk Factors set forth in this Item 1A and our Management’s Discussion and Analysis of Financial Condition and Results of Operations set forth in Item 7 as well as other sections in this report, discuss some of the factors that could contribute to these differences. These forward-looking statements include, among other things, statements about:

We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements, and you should not place undue reliance on our forward-looking statements. Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements we make. We have included important cautionary statements in this report, particularly in the Risk Factors set forth in Item 1A of this Annual Report on Form 10-K, that we believe could cause actual results or events to differ materially from the forward-looking statements that we make. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments we may make.

You should read this report and the documents that we reference in this report and have filed as exhibits to this report completely and with the understanding that our actual future results may be materially different from what we expect. The forward-looking statements contained in this report are made as of the date of this report, and we do not assume, and specifically disclaim, any obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise.

Our corporate headquarters are located in Northborough, Massachusetts, where we occupy approximately 51,650 square feet under a lease expiring on December 31, 2026. We also own an approximately 143,000 square foot manufacturing facility in East Providence, Rhode Island. In addition, we lease a 10,500 square foot facility, a 24,000 square foot facility and a 128,000 square foot facility in East Providence, Rhode Island, which leases expire on March 31, 2021, March 31, 2021 and March 31, 2024, respectively.

In May 2016, we filed a complaint for patent infringement against Nano Tech Co., Ltd., or Nano, and Guangdong Alison Hi Tech., Ltd., or Alison, and together with Nano, the Respondents, in the International Trade Commission, or ITC. The ITC complaint alleged that these two China-based companies engaged in unfair trade practices by importing aerogel products in the United States that infringed, and/or are manufactured by processes that infringe, several of our patents in violation of Section 337 of the Tariff Act. In the ITC complaint, we sought exclusion orders from the ITC that direct the United States Customs and Border Protection to stop the importation of these infringing products. In June 2016, the ITC instituted an investigation based on our complaint. In September 2017, the Administrative Law Judge, or ALJ, presiding over the ITC investigation issued an Initial Determination finding that Alison and Nano infringed our patents relating to aerogel insulation and/or the methods of manufacturing aerogel insulation. As part of the Initial Determination, the ALJ found that Alison and Nano infringed all the patent claims asserted against each of them across the three asserted patents and that Alison and Nano failed to prove that the asserted claims were invalid. The ALJ also recommended a limited exclusion order as a remedy to prevent the importation of infringing aerogel products into the United States. In February 2018, the ITC issued its final determination confirming the ALJ’s infringement and validity determinations except with respect to one dependent product claim where the ITC found the claim not infringed. The ITC also revised some of the ALJ’s claim constructions. However, the ITC affirmed that Alison and Nano each violated Section 337 of the Tariff Act and issued a limited exclusion order prohibiting importation of infringing aerogel insulation products manufactured by Alison and Nano. The exclusion order, which is enforced by the United States Customs and Border Protection, is currently in effect. In June 2018, Alison has filed a notice of appeal seeking a review of the ITC determination and order by the United States Court of Appeals for the Federal Circuit (CAFC). In its opening brief filed in September 2018, Alison has sought an appeal of ITC’s finding that a product composition patent asserted by us against Alison is valid and infringed. As neither respondents appealed the ITC findings of validity or infringement with respect to asserted process patents, the exclusion order remains valid and enforced irrespective of the outcome of the appeal. In addition to Respondents’ contention at the ITC that the asserted patents were invalid, Alison also filed petitions with the United States Patent and Trademark Office, or USPTO, requesting Inter-Partes Review to cancel certain claims in three of our manufacturing process patents and one product patent. A three-member panel of Administrative Patent Judges at the USPTO denied all of Alison’s petitions to institute Inter-Partes Review challenging the validity of these Aspen patents. Alison also filed similar requests with the Chinese Patent Office, or SIPO, seeking to invalidate two of our Chinese manufacturing process patents and two of our Chinese product patents. After the conclusion of the oral proceedings and before any decision issued by the SIPO, Alison withdrew all of its requests for invalidation of our Chinese patents. In May 2018, Alison filed another request seeking invalidation of one of our manufacturing process patents at SIPO, the same patent that it previously sought to invalidate and subsequently withdrew the request in 2017. After conducting an oral proceeding on September 6, 2018, the Patent Reexamination Board of SIPO, or PRB, issued a decision on October 26, 2018 holding Aspen’s issued patent as amended as valid. The decision by the PRB is subject to an appeal to the Beijing IP court.

In April 2016, we also filed a patent infringement suit at the District Court in Mannheim, Germany against the Respondents and two European resellers asserting their infringement of one of our German patents. We subsequently asserted infringement of another three patents against Nano and a European reseller of Alison’s products at the Mannheim court. We have since settled with one European reseller in exchange for a commitment not to procure infringing products and cooperation with our case. In January 2018, the court issued a series of judgments by acknowledgement (German, “Anerkenntnisurteil”) finding the second reseller, Hiltex, liable for infringement and also issued injunctions against Hiltex. The judgments resulted from a settlement agreement in which Hiltex agreed not to resell the infringing products in Europe where at least one of the asserted patents are active. Nano and Alison also initiated a nullity actions in German Federal Patent Court against our asserted German patents. On the first patent (EP1638750) challenged at the Federal Patent Court, on September 25, 2018 the Court conducted an oral proceeding and determined that the patent is valid as originally issued and dismissed the challenge to its validity. They likewise filed an opposition to one of the asserted patents at the European Patent Office, or EPO. In December 2018, EPO determined the patent was invalid on formality grounds and decided to revoke it. Such determination is subject to an appeal to the EPO Board of appeals. The infringement litigation against Alison and Nano remains ongoing with respect to the earlier asserted patent while the Mannheim court stayed the proceedings involving

subsequently asserted patents pending resolution of the nullity actions. Additionally, a reseller of Nano’s products in Taiwan challenged the validity of one of our patents in Taiwan. After careful review of our response, Taiwanese patent office has determined the patent as valid and dismissed the challenge in December 2018. LG Chem Ltd. has sought to challenge one of our patents in Korea. The resulting patent invalidation trial is ongoing.

Due to their nature, it is difficult to predict the outcome or the costs involved in any litigation or administrative proceedings, including any appeals process. Furthermore, the Respondents may have significant resources and interest to litigate and therefore, these litigation matters could be protracted and may ultimately involve significant legal expenses. In addition to the foregoing, we have been and may be from time to time party to other legal proceedings that arise in the ordinary course of business and to other patent enforcement actions to assert our patent rights.

In August 2018, we filed an enforcement suit against Qualiman Engenharia E Montagens LTDA, or Qualiman, one of our South American customers, in civil court in Sao Paulo, SP Brazil seeking payment of past due invoices totaling approximately $2.9 million. In October 2018, the Brazilian court ruled in our favor with respect to Qualiman’s obligation to pay us immediately. As part of the remedy, the Court ordered Qualiman’s customer, Petroleo Brasilero S.A. to redirect part of its payments to Qualiman to a court-administered bank account and other appropriate actions. Subsequently, we learned that Qualiman has laid off a substantial portion of its installers and threatened to walk away from Petrobras contract. In connection with such layoffs, a Brazilian labor court is addressing reparations to laid-off workers. In the minutes of such labor court proceedings, we learned that Petrobras and Qualiman are seeking to renegotiate the contract between them in connection with this project. On February 26, 2019, an appeals court dismissed Qualiman’s appeal of the decision of the Sao Paulo civil court on the merits. The recovery of money owed is ongoing and the court decision is subject to further appeal and the liquidity of Qualiman.

Our common stock is trading on The New York Stock Exchange, or NYSE, under the symbol “ASPN.” As of January 31, 2019, there were 84 stockholders of record of our common stock.

We have not paid dividends to our stockholders since our inception and we do not plan to pay cash dividends in the foreseeable future. We currently intend to retain earnings, if any, to finance the development and expansion of our business.

(b) Use of Proceeds from Initial Public Offering of Common Stock. Not applicable.

(c) Purchases of Equity Securities By the Issuer and Affiliated Purchasers. We did not repurchase any of our equity securities during the year ended December 31, 2018.

The following table sets forth our selected consolidated financial data for the periods, and as of the dates, indicated. You should read the following selected consolidated financial data in conjunction with our consolidated financial statements and the related notes thereto included elsewhere in this Annual Report on Form 10-K and the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of this Annual Report on Form 10-K.

We derived the consolidated statement of operations data for the years ended December 31, 2018, 2017 and 2016, and the consolidated balance sheet data as of December 31, 2018 and 2017, from our audited consolidated financial statements and the related notes thereto included elsewhere in this Annual Report, which financial statements have been audited by KPMG LLP, independent registered public accounting firm. We derived the consolidated statement of operations data for the fiscal years ended December 31, 2015 and 2014, and the consolidated balance sheet data as of December 31, 2016, 2015 and 2014, from our audited consolidated financial statements and the related notes thereto that are not included in this Annual Report, which financial statements have been audited by KPMG LLP, independent registered public accounting firm.

	Year Ended December 31,
	2018			2017			2016			2015			2014
	($ in thousands, except share and per share data)
Consolidated statements of operations data:
Revenue:
Product	$	102,123		$	109,590		$	115,490		$	120,532		$	99,259
Research services		2,238			2,041			2,248			1,986			3,140
Total revenue		104,361			111,631			117,738			122,518			102,399
Cost of revenue:
Product		90,660			92,052			93,123			96,865			83,677
Research services		1,032			908			1,304			1,005			1,642
Gross profit		12,669			18,671			23,311			24,648			17,080
Operating expenses:
Research and development		6,319			6,180			5,306			5,253			5,980
Sales and marketing		13,794			12,604			11,810			10,562			10,290
General and administrative		19,116			19,023			17,415			15,068			16,853
Impairment of construction in progress		7,356			—			—			—			—
Total operating expenses		46,585			37,807			34,531			30,883			33,123
Loss from operations		(33,916	)		(19,136	)		(11,220	)		(6,235	)		(16,043	)
Other expense, net:
Interest expense, net		(524	)		(185	)		(147	)		(182	)		(50,281	)
Postponed financing costs		—			—			(656	)		—			—
Total other expense, net		(524	)		(185	)		(803	)		(182	)		(50,281	)
Net loss		(34,440	)		(19,321	)		(12,023	)		(6,417	)		(66,324	)
Per share data:
Net loss per share:
Basic and diluted	$	(1.45	)	$	(0.83	)	$	(0.52	)	$	(0.28	)	$	(5.37	)
Weighted-average common shares outstanding:
Basic and diluted		23,738,852			23,390,235			23,139,807			22,986,931			12,349,456

	As of December 31,
	2018		2017		2016		2015		2014
Consolidated balance sheet data:
Cash and cash equivalents	$	3,327	$	10,694	$	18,086	$	32,804	$	49,719
Working capital ⁽¹⁾		14,185		26,093		32,056		44,238		53,168
Total assets		99,023		123,815		134,669		140,074		145,043
Total debt		4,181		3,750		39		107		165
Total stockholders’ equity (deficit)		70,254		100,943		115,564		122,474		123,716

The following discussion of our financial condition and results of operations should be read in conjunction with the “Selected Financial Data” and 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.

We design, develop and manufacture innovative, high-performance aerogel insulation used primarily in the energy infrastructure and building 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-use 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 infrastructure. Our Pyrogel and Cryogel product lines have undergone rigorous technical validation by industry leading end-users and achieved significant market adoption. We also derive product revenue from the building materials and other end markets. Customers in these markets use our products for applications as diverse as wall systems, military and commercial aircraft, trains, buses, appliances, apparel, footwear and outdoor gear.

We generate product revenue through the sale of our line of aerogel blankets. 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-use customers and engineering firms to promote the qualification, specification and acceptance of our 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 products and strong end-user support. Our salespeople also work to educate insulation contractors about the technical and operating cost advantages of our aerogel blankets.

We also perform research services under contracts with various agencies of the U.S. government, including the Department of Defense and the Department of Energy, and other institutions. Research performed under contract with government agencies and other institutions enables us to develop and leverage technologies into broader commercial applications.

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 annual nameplate capacity through 2017 to 50 million square feet of aerogel blankets. During 2018, we initiated a series of projects designed to increase this nameplate capacity to 60 million square feet of aerogel blankets by the end of 2020. As of December 31, 2018, we had increased our annual capacity to 55 million square feet of aerogel blankets as a result of this initiative.

We had previously completed the design and engineering for a second manufacturing facility to be located in Statesboro, Georgia supported by a package of incentives, including free land, from state and local governmental authorities. During 2016, we elected to delay construction of the facility due to our assessment of future demand. In December 2018, the local governmental authorities notified us that they will exercise their right to terminate the incentive package in February 2019 and to make the identified site available to other parties. In addition, we determined that due to our cumulative manufacturing process advancements since 2016 and expected additional improvements in the near future, we will not use the existing design and engineering to construct a second facility in any location. Accordingly, we determined that the design and engineering costs are not recoverable and recorded an impairment charge of $7.4 million on construction in progress assets during 2018.

We have entered into a strategic partnership with BASF to develop and commercialize products for the building materials and other markets. The strategic partnership includes a supply agreement governing the exclusive sale of specified products to BASF and a joint development agreement targeting innovative products and technologies. BASF has no obligation to purchase any products under

the supply agreement. Pursuant to the supply agreement, BASF may, in its sole discretion, make prepayments to us in the aggregate amount of up to $22.0 million during the term of the agreement. The prepayments may be repaid by us to BASF at any time in whole or in part for any reason.

BASF made prepayments to us of $5.0 million during 2018. After January 1, 2019, 25.3% of any amounts that we invoice for Spaceloft A2 sold to BASF will be credited against the outstanding balance of these 2018 prepayments. If any of these 2018 prepayments remain uncredited at December 31, 2021, BASF may request that we repay the uncredited amount to BASF. BASF made a subsequent prepayment to us in January 2019. After January 1, 2020, 50% of any amounts that we invoice for a newly developed product sold to BASF will credited against the outstanding balance of this 2019 prepayment. After December 31, 2022, BASF may elect to have us credit 24.7% of any amounts we invoice for Spaceloft A2 sold to BASF against the outstanding balance of the 2019 prepayment or request that we repay the uncredited amount to BASF.

On March 4, 2019, our revolving credit facility with Silicon Valley Bank was amended to extend the maturity date of the facility to April 28, 2020. Under our revolving credit facility, we are permitted to borrow a maximum of $20.0 million, subject to continued covenant compliance and borrowing base requirements. At our election, the interest rate applicable to borrowings under the revolving credit facility may be based on the prime rate or LIBOR. Prime rate-based rates vary from prime rate plus 0.75% per annum to prime rate plus 2.00% per annum, while LIBOR-based rates vary from LIBOR plus 3.75% per annum to LIBOR plus 4.25% per annum. In addition, we are required to pay a monthly unused revolving line facility fee of 0.5% per annum of the average unused portion of the revolving credit facility. The credit facility has also been amended to (i) revise the definition of “Borrowing Base” to remove the eligible inventory component of the Borrowing Base, (ii) remove the Adjusted Quick Ratio financial covenant set forth in the loan agreement and (iii) establish certain minimum Adjusted EBITDA levels with respect to the minimum Adjusted EBITDA financial covenant for the extended term. We intend to extend or replace the facility prior to its maturity.

Our revenue for the year ended December 31, 2018 was $104.4 million, which represented a decrease of 7% from the year ended December 31, 2017. Net loss for the year ended December 31, 2018 was $34.4 million and net loss per share was $1.45.

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.

We price our product and measure our product shipments in square feet. We estimate our annual nameplate capacity was 55 million square feet of aerogel blankets at December 31, 2018. We believe the square foot operating metric allows us and our investors to measure our manufacturing capacity and product shipments on a uniform and consistent basis. The following chart sets forth product shipments associated with recognized revenue in square feet for the periods presented:

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 the current year includes an impairment of construction in progress. 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 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, income from operations, net cash provided by (used in) operating activities or an analysis of our results of operations as reported under U.S. GAAP. Some of these limitations are:

Because of these limitations, our Adjusted EBITDA should not be considered as a measure of discretionary cash available to us to reinvest in the growth of our business or as a measure of cash available for us to meet our obligations.

To properly and prudently evaluate our business, we encourage you to review the 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 GAAP measure, to Adjusted EBITDA for the years presented:

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

	Three months ended												Three months ended
	2018												2017
	March 31			June 30			Sept. 30			Dec. 31			March 31			June 30			Sept. 30			Dec. 31
Net loss	$	(6,842	)	$	(6,958	)	$	(6,532	)	$	(14,108	)	$	(9,078	)	$	(5,472	)	$	(3,088	)	$	(1,683	)
Depreciation and amortization		3,171			2,515			2,573			2,528			2,676			2,630			2,726			2,721
Impairment of construction in progress		—			—			—			7,356			—			—			—			—
Stock-based compensation ⁽¹⁾		1,136			1,150			1,128			888			1,244			1,374			1,364			1,109
Interest expense, net		92			103			163			166			26			39			58			62
Adjusted EBITDA	$	(2,443	)	$	(3,190	)	$	(2,668	)	$	(3,170	)	$	(5,132	)	$	(1,429	)	$	1,060		$	2,209

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 and manufacturing costs, the costs associated with capacity expansions and start-up of additional production capacity, and the amount and timing of operating expenses, including patent enforcement costs. As we build out our manufacturing capacity, we expect increased manufacturing expenses will periodically have a negative impact on net income (loss), earnings per share and Adjusted EBITDA, but will set the framework for improved performance in the longer term. Accordingly, we expect that our net income (loss), earnings per share and Adjusted EBITDA will vary from period to period, in particular when we expand our manufacturing capacity in new facilities.

As a result of the conclusion of a multiyear petrochemical project with Reliance Industries Limited and a decline in the volume of subsea projects, which together comprised 19% of our product revenue during 2017, we experienced a decrease in revenue during 2018. In addition, we increased our investment in new initiatives and personnel during 2018 to restore long-term growth in existing markets and to develop new business opportunities. We also experienced a significant increase in the cost of silica precursor materials, recorded an impairment charge of $7.4 million on pre-construction costs associated with a previously planned second manufacturing facility, and established a reserve for uncollectible accounts receivable for $2.8 million from a Brazilian contractor related to a single project. As a result of the decrease in revenue, the increase in material costs and the impact of the identified operating expenses, we experienced a significant increase in net loss and net loss per share and decrease in Adjusted EBITDA during 2018.

During 2019, we are projecting growth in total revenue principally due to expected volume growth in our core petrochemical and refinery markets, an anticipated increase in project-based demand, particularly in the subsea and LNG markets, and increasing penetration of new markets, including the building materials market. We have also implemented a price increase for 2019 designed to support revenue growth and to offset the increase in raw material costs. As a result of these factors, we are projecting total revenue growth versus 2018 in excess of 20%, a decrease in net loss and a return to positive Adjusted EBITDA for the year.

The JOBS Act permits an “emerging growth company” such as us to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies. We have opted out of this provision and, as a result, we comply with new or revised accounting standards as required when they are adopted. This decision to opt out of the extended transition period under the JOBS Act is irrevocable.

Product revenue accounted for 98% of total revenue for each of the years ended December 31, 2018, 2017 and 2016. We experienced a decrease in revenue during 2018 due to the conclusion of the multiyear petrochemical project with Reliance Industries Limited and a decrease in project related revenue in the subsea market, which together comprised 19% of our product revenue during 2017. During 2019, we are projecting growth in total revenue in excess of 20% principally due to expected volume growth in our core petrochemical and refinery markets, an anticipated increase in project-based demand, particularly in the subsea and LNG markets, and continued penetration of new markets, including the building materials market. We expect that research services revenue will remain a small percentage of total revenue due to limitations on our eligibility to receive contract awards under federal guidelines.

A substantial majority of our revenue is generated from a limited number of direct customers, including distributors, contractors, OEMs, partners and end-use customers. Our 10 largest customers accounted for approximately 63% of our total revenue during the year ended December 31, 2018, and we expect that most of our revenue will continue to come from a relatively small number of customers for the foreseeable future. In 2018, sales to Distribution International, Inc. represented 20% our total revenue. In 2017, sales to Distribution International, Inc. and TechnipFMC represented 15% and 12% of our total revenue, respectively. In 2016, sales to Reliance Industries Limited and Distribution International Inc. represented 25% and 15% of 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 $62.6 million, or 60% of our total revenue, $60.2 million, or 54% of our total revenue, and $82.0 million, or 70% of our total revenue, in the years ended December 31, 2018, 2017 and 2016, respectively.

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 47%, 45% and 41% for the years ended December 31, 2018, 2017 and 2016, 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. During the year ended December 31, 2018, we experienced a significant increase in the costs of certain silica precursor materials, which constitute over 50% of our raw material costs. 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. During the year ended December 31, 2018, test results indicated that tested samples performed outside the published performance specifications for a specific attribute of a product. We determined that it is probable we have incurred a liability, however, the liability is not estimable as of December 31, 2018. We will continue to assess the impact of the test results on our customer base and, depending on the assessment, we could be subject to warranty charges in future periods. As a result of these factors, material costs as a percentage of 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.

However, in 2019, we expect material costs to decline as a percentage of revenue as we seek to achieve higher selling prices, lower cost formulations, material sourcing improvements, and manufacturing yield enhancements for our aerogel products.

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 42%, 39% and 39% for the years ended December 31, 2018, 2017 and 2016, respectively. While product revenue decreased by 7% during 2018, manufacturing expense decreased by only 1% due principally to the high proportion of fixed manufacturing expense in our East Providence, Rhode Island manufacturing facility. Conversely, we expect that manufacturing expense will grow in absolute dollars during 2019, but at a rate significantly lower than the expected growth in product revenue. As a result, we expect manufacturing expense as a percentage of revenue will decrease in 2019 versus 2018.

In total, we expect that cost of product revenue will increase in absolute dollars, but decrease as a percentage of product revenue during 2019 versus 2018. The projected increase in cost of product revenue in absolute dollars reflects the impact of a planned increase in manufacturing output to support expected revenue growth, offset, in part, by a projected increase in average selling prices and an expected favorable mix of products sold. In the longer term, we expect cost of product revenue will continue both to increase in absolute dollars and to decline as a percentage of revenue.

Cost of research services revenue consists of direct labor costs of research personnel engaged in the contract research, third-party consulting expense, and associated direct material costs. This cost of revenue also includes overhead expenses associated with project resources, development tools and supplies. Cost of research services revenue is recorded when the related research services revenue is recognized.

Our gross profit as a percentage of revenue is affected by a number of factors, including the volume of aerogel products produced and sold, the mix of aerogel 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 in absolute dollars and as a percentage of revenue to vary significantly from period to period.

During 2019, we are projecting growth in revenue as a result of expected volume growth in our core petrochemical and refinery markets, an anticipated increase in project-based demand, particularly in the subsea and LNG markets, and our expectation of increased penetration of new markets, including the building materials market. In addition, we implemented a price increase for 2019 designed to offset recent increases in raw material costs and to improve gross profit margins. We also expect manufacturing expenses will grow during 2019 at a rate significantly lower than projected growth in product revenue due to the high proportion of fixed manufacturing expense in our manufacturing operations. As a result, we expect gross profit to improve both in absolute dollars and as a percentage of revenue during 2019.

In the longer term, we expect gross profit to continue 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 increases in revenue, volume and productivity will be supported by the implementation of lower cost product formulations and realization of material purchasing efficiencies.

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 and fees. The largest component of our operating expenses is personnel costs, consisting of salaries, benefits, incentive compensation and stock-based compensation. In any particular period, the timing and extent of personnel additions or reductions, legal activities, including patent enforcement actions, marketing programs, research efforts and a range of similar activities or actions could materially affect our operating expenses, both in absolute dollars and as a percentage of revenue.

During 2019, we project a significant decrease in operating expenses both in absolute dollars and as a percentage of revenue versus 2018. The expected decrease in operating expenses both in absolute dollars and as a percentage of revenue principally reflects our expectation that impairments and reserves during 2019 will be of a significantly lower magnitude than the impairment charge of $7.4 million on construction in progress and the $2.9 million reserve for uncollectible accounts receivable incurred during 2018. 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 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, 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. We believe that these investments are necessary to maintain and improve our competitive position. We expect to continue to invest in research and engineering personnel and the infrastructure required in support of their efforts. While we expect that our research and development expenses will increase in absolute dollars but decrease as a percentage of revenue in the longer term, in 2019 we expect such expenses will increase both in absolute dollars and as a percentage of revenue.

Sales and marketing expenses consist primarily of personnel costs, incentive compensation, marketing programs, travel and related costs, consulting expenses and facilities related costs. We have expanded our sales force and sales consultants globally to drive anticipated growth in customers and demand for our products. We expect that sales and marketing expenses will increase in absolute dollars but decrease as a percentage of revenue in both 2019 and in the longer term.

General and administrative expenses consist primarily of personnel costs, legal expenses, consulting and professional services, audit and tax consulting costs, and expenses for our executive, finance, legal, human resources and information technology organizations. General and administrative expenses have increased as we have incurred additional costs related to operating as a publicly-traded company, which include costs of compliance with securities, corporate governance and related laws and regulations, investor relations expenses, increased insurance premiums, including director and officer insurance, and increased audit and legal fees. 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. During 2019, we expect general and administrative expense will decrease both in absolute dollars and as a percentage of revenue due primarily to an expected reduction in the provision for uncollectible accounts receivable versus 2018. In the longer term, however, we expect that general and administrative expenses will increase in absolute dollars but continue to decline as a percentage of revenue.

For the years ended December 31, 2018 and 2017, other expense, net consisted primarily of fees and interest expense related to our revolving credit facility. For the year ended December 31, 2016, other expense, net consisted primarily of postponed financing costs and fees related to our revolving credit facility.

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, 2018, the Company had $223.1 million of net operating losses available to offset future federal income, if any, of which $194.6 million expire on various dates through December 31, 2037. Net operating losses of $28.5 million generated during the year ended December 31, 2018 have an unlimited carryforward.

On December 22, 2017, the President of the United States signed into law the Tax Cuts and Jobs Act (TCJA) tax reform legislation. This legislation makes significant change in U.S. tax law including a reduction in the corporate tax rates, changes to net operating loss carryforwards and carrybacks, and a repeal of the corporate alternative minimum tax. The legislation reduced the U.S. corporate tax rate from 34% to 21% for the year ending 2018. As a result of the enacted law, we were required to revalue deferred tax assets and liabilities at the 21% rate as of December 31, 2017. This resulted in a decrease in our net deferred tax asset and corresponding valuation allowance of $26.7 million. As we maintain a full valuation allowance against our net deferred tax asset position in the United States, this revaluation did not result in an income tax expense or benefit in the prior year. The provisions of the TCJA related to the one-time mandatory transition tax on deemed repatriation did not have an impact on our results of operations

during the year ended December 31, 2017. The other provisions of the TCJA did not have a material impact on our 2018 or 2017 consolidated financial statements.

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

	Year Ended December 31,
	2018			2017			2016
	($ in thousands)
Revenue:
Product	$	102,123		$	109,590		$	115,490
Research services		2,238			2,041			2,248
Total revenue		104,361			111,631			117,738
Cost of revenue:
Product		90,660			92,052			93,123
Research services		1,032			908			1,304
Gross profit		12,669			18,671			23,311
Operating expenses:
Research and development		6,319			6,180			5,306
Sales and marketing		13,794			12,604			11,810
General and administrative		19,116			19,023			17,415
Impairment of construction in progress		7,356			—			—
Total operating expenses		46,585			37,807			34,531
Loss from operations		(33,916	)		(19,136	)		(11,220	)
Other expense, net:
Interest expense, net		(524	)		(185	)		(147	)
Postponed financing costs		—			—			(656	)
Total other expense, net		(524	)		(185	)		(803	)
Net loss	$	(34,440	)	$	(19,321	)	$	(12,023	)

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

	Year Ended December 31,												Year Ended December 31,
	2018			2017			$ Change			% Change			2018			2017
	($ in thousands)												(Percentage of total revenue)
Revenue:
Product	$	102,123		$	109,590		$	(7,467	)		(7	)%		98	%		98	%
Research services		2,238			2,041			197			10	%		2	%		2	%
Total revenue		104,361			111,631			(7,270	)		(7	)%		100	%		100	%
Cost of revenue:
Product		90,660			92,052			(1,392	)		(2	)%		87	%		82	%
Research services		1,032			908			124			14	%		1	%		1	%
Gross profit		12,669			18,671			(6,002	)		(32	)%		12	%		17	%
Operating expenses:
Research and development		6,319			6,180			139			2	%		6	%		6	%
Sales and marketing		13,794			12,604			1,190			9	%		13	%		11	%
General and administrative		19,116			19,023			93			0	%		18	%		17	%
Impairment of construction in progress		7,356			—			7,356			100	%		7	%		—	%
Total operating expenses		46,585			37,807			8,778			23	%		45	%		34	%
Loss from operations		(33,916	)		(19,136	)		(14,780	)		77	%		(32	)%		(17	)%
Other expense, net:
Interest expense, net		(524	)		(185	)		(339	)		183	%		(1	)%		(0	)%
Total interest expense, net		(524	)		(185	)		(339	)		183	%		(1	)%		(0	)%
Net loss	$	(34,440	)	$	(19,321	)	$	(15,119	)		78	%		(33	)%		(17	)%

	Year Ended December 31,										Change
	2018					2017
	Amount		Percentage of Revenue			Amount		Percentage of Revenue			Amount			Percentage
	($ in thousands)
Revenue:
Product	$	102,123		98	%	$	109,590		98	%	$	(7,467	)		(7	)%
Research services		2,238		2	%		2,041		2	%		197			10	%
Total revenue	$	104,361		100	%	$	111,631		100	%	$	(7,270	)		(7	)%

The following chart sets forth product shipments in square feet for the periods presented:

Total revenue decreased by $7.2 million, or 7%, in 2018 to $104.4 million from $111.6 million in 2017 due principally to a decrease in product revenue.

Product revenue decreased by $7.5 million, or 7%, to $102.1 million in 2018 from $109.6 million in 2017. This decrease was principally the result of a decrease in project revenue in the subsea market and due to the conclusion of the multiyear petrochemical project with Reliance Industries Limited, offset, in part, by growth in our core petrochemical and refinery markets, particularly in Asia, and in the building materials market. Product revenue for the year ended 2018 included $21.4 million in sales to Distribution

International, Inc. Product revenue for the year ended 2017 included $16.7 million in sales to Distribution International, Inc. and $13.2 million in sales to TechnipFMC plc.

The average selling price per square foot of our products increased by an effective $0.04, or 1%, to $2.96 per square foot for the year ended December 31, 2018 from $2.92 per square foot for the year ended December 31, 2017. The increase in average selling price reflected the impact of price increases enacted in early 2018. This increase in average selling price had the effect of increasing product revenue by approximately $1.4 million for the year ended December 31, 2018.

In volume terms, product shipments decreased 3.1 million square feet, or 8%, to 34.4 million square feet of aerogel products for the year ended December 31, 2018, as compared to 37.5 million square feet in the year ended December 31, 2017. The decrease in product volume had the effect of decreasing product revenue by approximately $8.9 million for the year ended December 31, 2018.

Research services revenue increased by $0.2 million, or 10%, to $2.2 million in 2018 from $2.0 million in 2017. The increase was primarily due to the timing and amount of funding available under research contracts during the year ended December 31, 2018 from the comparable period in 2017.

Product revenue as a percentage of total revenue was 98% of total revenue in both 2018 and 2017. Research services revenue was 2% of total revenue in both 2018 and 2017. We expect that product revenue will continue to comprise a significant percentage of our total revenue in the long-term.

During 2019, we anticipate an increase in product and total revenue in excess of 20% versus 2018. The projected increase in revenue principally due to expected volume growth in our core petrochemical and refinery markets, an anticipated increase in project-based demand, particularly in the subsea and LNG markets, and continued penetration of new markets, including the building materials market.

	Year Ended December 31,																Change
	2018								2017
	Amount		Percentage of Related Revenue			Percentage of Total Revenue			Amount		Percentage of Related Revenue			Percentage of Total Revenue			Amount			Percentage
	($ in thousands)
Cost of revenue:
Product	$	90,660		89	%		87	%	$	92,052		84	%		82	%	$	(1,392	)		(2	)%
Research services		1,032		46	%		1	%		908		44	%		1	%		124			14	%
Total cost of revenue	$	91,692		88	%		88	%	$	92,960		83	%		83	%	$	(1,268	)		(1	)%

Total cost of revenue decreased by $1.3 million, or 1%, to $91.7 million in 2018 from $93.0 million in 2017. The decrease in total cost of revenue was primarily the result of a decrease in product cost of revenue.

Product cost of revenue decreased $1.4 million, or 2%, to $90.7 million in 2018 from $92.1 million in 2017. The $1.4 million decrease was the result of a $0.8 million decrease in material costs and a $0.6 million decrease in manufacturing expense. The decrease in material costs was driven by the 3.1 million square feet, or 8%, decrease in product shipments period over period or $0.4 million, despite the increase in the cost of raw materials, particularly in the cost of silica materials and a decrease of $0.9 million in warranty expense, offset, in part, by an increase in the cost of freight of $0.5 million. The decrease in manufacturing expense was the result of decreases in maintenance expense of $1.0 million and utilities expense of $0.9 million, offset, in part, by increases in compensation and related costs of $0.8 million and other costs of $0.5 million.

Although product revenue decreased by 7% during 2018, manufacturing expense decreased by only 1% due principally to the high proportion of fixed manufacturing expense in our manufacturing operations. As a result, product cost of revenue as a percentage of product revenue increased to 89% during 2018 from 84% in 2017.

We expect that cost of product revenue will increase in absolute dollars, but will decrease as a percentage of product revenue during 2019 versus 2018. The projected increase in cost of product revenue in absolute dollars reflects the impact of the expected growth in product revenue and our planned increase in manufacturing output. The projected decrease in cost of product revenue as a percentage of product revenue is due principally to our expectation that our manufacturing costs will increase at a lower rate than the expected growth in revenue during 2019 due to the high proportion of fixed manufacturing expense in our manufacturing operations.

Research services cost of revenue increased by $0.1 million, or 14%, to $1.0 million in 2018 from $0.9 million in 2017. The increase in research services cost of revenue was due to the 10% increase in research services revenue during 2018 and an increase in the mix of outside services versus internal labor required to support the contracted research.

Gross profit decreased $6.0 million, or 32%, to $12.7 million in 2018 from $18.7 million in 2017. This $6.0 million decrease was the result of the $7.2 million or 7% decrease in total revenue offset, in part, by a $1.3 million or 1% decrease in total cost of revenue. The decrease in revenue was principally the result of a decline in project revenue in the subsea market and due to the conclusion of the multiyear petrochemical project with Reliance Industries Limited. The $1.3 million decrease in total cost of revenue was the result of a $0.8 million decrease in material costs and a $0.6 million decrease in manufacturing expense, offset, in part by a $0.1 million increase in the cost of research services revenue.

Total cost of revenue decreased by only 1% despite the 7% decline in total revenue during 2018 due principally to the high proportion of fixed costs in our manufacturing facility. As a result, gross profit as a percentage of total revenue decreased to 12% of total revenue in 2018 as compared to 17% in 2017.

We expect total revenue in 2019 to grow in excess of 20% versus 2018. We also expect cost of total revenue in 2019 to decrease as a percentage of total revenue as compared to 2018. As a result, we expect gross profit to improve both in absolute dollars and as a percentage of revenue during 2019.

Research and development expenses increased $0.1 million, or 2% to $6.3 million in 2018 from $6.2 million during 2017. The $0.1 million increase was the result of increases in compensation and related costs of $0.2 million offset, in part, by a decrease in professional fees of $0.1 million.

We expect that our research, development and engineering personnel and expenses during 2019 will increase from 2018 levels both in absolute dollars and as a percentage of total revenue in support of the development of innovative products, advanced process technologies, and new markets.

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 increased by $1.2 million, or 9%, to $13.8 million in 2018 from $12.6 million during 2017. The $1.2 million increase was the result of increases in professional fees and commissions of $0.4 million, travel related costs of $0.6 million, and other external sales and marketing expense of $0.5 million offset, in part, by a decrease in compensation costs of $0.3 million.

We expect sales and marketing expenses to increase during 2019 principally due an increase in compensation related to the increase in sales personnel during 2018. However, we expect sales and marketing expenses as a percentage of total revenue to decrease due to the strong projected growth in total revenue during the year.

In the long-term, we expect that sales and marketing expenses will increase in absolute dollars as we continue to increase sales personnel and marketing efforts in support of expected growth in demand for our products. However, 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 increased by $0.1 million, or less than 1%, to $19.1 million in 2018 from $19.0 million in 2017. The $0.1 million increase was the result of an increase in the provisions for uncollectible accounts receivable of $2.5 million, legal and professional fees of $0.6 million, and other general and administrative expenses of $0.3 million, offset, in part, by a decrease in patent enforcement costs of $2.7 million, and compensation and related costs of $0.6 million.

We expect general and administrative expenses to decrease during 2019 due primarily to an expected reduction in the provision for uncollectible receivables versus 2018. Due to the projected decrease in general and administrative expenses and the expected growth in total revenue, we expect general and administrative expenses as a percentage of total revenue to decrease in 2019.

We 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, will continue to result in high levels of legal expense in the near term and, if such actions are protracted, could result in significant additional legal expense over the medium to long term. In the longer term, we expect that general and administrative expenses will increase in absolute dollars but decrease as a percentage of revenue due to projected growth in product revenue.

Interest expense, net, increased by $0.3 million to $0.5 million in 2018 from $0.2 million in 2017. The $0.3 million increase was the result of an increase in interest expense associated with an increase in outstanding borrowings under our revolving line of credit.

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

	Year Ended December 31,												Year Ended December 31,
	2017			2016			$ Change			% Change			2017			2016
	($ in thousands)												(Percentage of total revenue)
Revenue:
Product	$	109,590		$	115,490		$	(5,900	)		(5	)%		98	%		98	%
Research services		2,041			2,248			(207	)		(9	)%		2	%		2	%
Total revenue		111,631			117,738			(6,107	)		(5	)%		100	%		100	%
Cost of revenue:
Product		92,052			93,123			(1,071	)		(1	)%		82	%		79	%
Research services		908			1,304			(396	)		(30	)%		1	%		1	%
Gross profit		18,671			23,311			(4,640	)		(20	)%		17	%		20	%
Operating expenses:
Research and development		6,180			5,306			874			16	%		6	%		5	%
Sales and marketing		12,604			11,810			794			7	%		11	%		10	%
General and administrative		19,023			17,415			1,608			9	%		17	%		15	%
Total operating expenses		37,807			34,531			3,276			9	%		34	%		29	%
Loss from operations		(19,136	)		(11,220	)		(7,916	)		71	%		(17	)%		(10	)%
Other expense, net:
Interest expense, net		(185	)		(147	)		(38	)		26	%		(0	)%		(0	)%
Postponed financing costs		—			(656	)		656		N/A				0	%		(1	)%
Total other expense, net		(185	)		(803	)		618			(77	)%		(0	)%		(1	)%
Net loss	$	(19,321	)	$	(12,023	)	$	(7,298	)		61	%		(17	)%		(10	)%

	Year Ended December 31,										Change
	2017					2016
	Amount		Percentage of Revenue			Amount		Percentage of Revenue			Amount			Percentage
	($ in thousands)
Revenue:
Product	$	109,590		98	%	$	115,490		98	%	$	(5,900	)		(5	)%
Research services		2,041		2	%		2,248		2	%		(207	)		(9	)%
Total revenue	$	111,631		100	%	$	117,738		100	%	$	(6,107	)		(5	)%

The following chart sets forth product shipments in square feet for the periods presented:

Total revenue decreased by $6.1 million, or 5%, in 2017 to $111.6 million from $117.7 million in 2016 due principally to a decrease in product revenue.

Product revenue decreased by $5.9 million, or 5%, to $109.6 million in 2017 from $115.5 million in 2016. This decrease was principally the result of a decrease in the sales in the Asian market, led by the conclusion of the multiyear petrochemical project with Reliance Industries Limited, offset, in part, by an increase in revenue in the U.S. energy infrastructure market, including growth in

district energy, LNG and power, and in the subsea market. Product revenue for the year ended 2017 included $16.7 million in sales to Distribution International, Inc. and $13.2 million to TechnipFMC plc. Product revenue for the year ended December 31, 2016 included $29.3 million to a Reliance Industries Limited and $17.3 million to Distribution International, Inc.

The average selling price per square foot of our products increased by an effective $0.31, or 12%, to $2.92 per square foot for the year ended December 31, 2017 from $2.61 per square foot for the year ended December 31, 2016. The increase in average selling price reflects a year-over-year increase in the mix of high-priced subsea products, combined with a decrease in the volume of products sold to Reliance Industries Limited with lower, project-based pricing. This increase in average selling price had the effect of increasing product revenue by approximately $11.6 million for the year ended December 31, 2017.

In volume terms, product shipments decreased 6.8 million square feet, or 15%, to 37.5 million square feet of aerogel products for the year ended December 31, 2017, as compared to 44.3 million square feet in the year ended December 31, 2016. The decrease in product volume had the effect of decreasing product revenue by approximately $17.6 million for the year ended December 31, 2017.

Research services revenue decreased by $0.2 million, or 9%, to $2.0 million in 2017 from $2.2 million in 2016. The decrease was primarily due to the timing and amount of funding available under research contracts during the year ended December 31, 2017 from the comparable period in 2016.

Product revenue as a percentage of total revenue was 98% of total revenue in 2017 and 2016. Research services revenue was 2% of total revenue in 2017 and 2016.

	Year Ended December 31,																Change
	2017								2016
	Amount		Percentage of Related Revenue			Percentage of Total Revenue			Amount		Percentage of Related Revenue			Percentage of Total Revenue			Amount			Percentage
	($ in thousands)
Cost of revenue:
Product	$	92,052		84	%		82	%	$	93,123		81	%		79	%	$	(1,071	)		(1	)%
Research services		908		44	%		1	%		1,304		58	%		1	%		(396	)		(30	)%
Total cost of revenue	$	92,960		83	%		83	%	$	94,427		80	%		80	%	$	(1,467	)		(2	)%

Total cost of revenue decreased by $1.5 million, or 2%, to $93.0 million in 2017 from $94.4 million in 2016. The decrease in total cost of revenue was the result of a decrease of $2.2 million in manufacturing expense and a decrease of $0.4 million in cost of research services, offset, in part, by an increase of $0.7 million in material costs and $0.4 million in warranty expense.

Product cost of revenue decreased $1.1 million, or 1%, to $92.1 million in 2017 from $93.1 million in 2016. The $1.1 million decrease was the result of a decrease in in manufacturing expense of $2.2 million, offset, in part by an increase in material costs of $0.7 million and an increase in warranty expense of $0.4 million. The decrease in manufacturing expense included decreases in utilities expense of $1.6 million and labor costs of $0.7 million, offset, in part, by an increase in all other manufacturing expense of $0.2 million. The decrease in manufacturing expense also reflected a reduction in manufacturing personnel and expense associated with our plan to decrease output during the year to reduce inventory balances.

Product cost of revenue as a percentage of product revenue increased to 84% during 2017 from 81% in 2016. This increase was principally the result of a shift in mix to higher cost products for the subsea market and the 25% decrease in manufacturing output during 2017 versus 2016.

Research services cost of revenue decreased by $0.4 million, or 30%, to $0.9 million in 2017 from $1.3 million in 2016. The decrease in research services cost of revenue was due to the 9% decrease in research services revenue during 2017 and an increase in the mix of internal labor versus outside services required to support the contracted research.

Gross profit decreased $4.6 million, or 20%, to $18.7 million in 2017 from $23.3 million in 2016. This $4.6 million decrease was the result of the $6.1 million decrease in total revenue offset, in part, by a $1.5 million decrease in total cost of revenue. The decrease in revenue was led by the conclusion of the multiyear petrochemical project with Reliance Industries Limited, offset, in part, by increases in revenue in the U.S. energy infrastructure market and in the subsea market. The $1.1 million decrease in product cost of revenue was the result of a decrease in in manufacturing expense of $2.2 million, offset, in part by an increase in material costs of $0.7 million and an increase in warranty expense of $0.4 million. The decrease in manufacturing expense reflected a reduction in manufacturing personnel and expense associated with a decrease in output by 25% during the year.

Total cost of revenue decreased by only 2% despite a 5% decline in total revenue during 2017 due principally to the high proportion of fixed costs in our manufacturing facility. As a result, gross profit as a percentage of total revenue decreased to 17% of total revenue in 2017 as compared to 20% in 2016.

Research and development expenses increased $0.9 million, or 16% to $6.2 million in 2017 from $5.3 million during 2016. The $0.9 million increase was the result of increases in payroll related costs of $0.4 million, depreciation expense of $0.3 million and professional fees of $0.2 million.

Sales and marketing expenses increased by $0.8 million, or 7%, to $12.6 million in 2017 from $11.8 million during 2016. The $0.8 million increase was the result of a $1.4 million increase in payroll and related costs associated with an increase in sales personnel, offset, in part, by reduction of $0.4 million in professional fees and $0.2 million in marketing expenses.

General and administrative expenses increased by $1.6 million, or 9%, to $19.0 million in 2017 from $17.4 million in 2016. The $1.6 million increase was primarily the result of an increase in compensation costs of $1.1 million, $0.5 million in write-offs of customer receivables, and $0.2 million in professional fees, offset, in part, by a decrease in patent enforcement expense of $0.1 million and facility expenses of $0.1 million.

	Year Ended December 31,												Change
	2017						2016
	Amount			Percentage of Revenue			Amount			Percentage of Revenue			Amount			Percentage
	($ in thousands)
Other expense, net
Interest expense, net	$	(185	)		(0	)%	$	(147	)		(0	)%	$	(38	)		26	%
Postponed financing costs		—			—	%		(656	)		(1	)%		656			(100	)%
Total other expense, net	$	(185	)		(0	)%	$	(803	)		(1	)%	$	618			(77	)%

Total other expense, net, decreased by $0.6 million to $0.2 million in 2017 from $0.8 million in 2016. The $0.6 million decrease was primarily the result of a decrease of $0.7 million in postponed financing costs, offset, in part, by a small increase in interest expense. Interest expense in 2017 and 2016 was comprised primarily of fees and interest expense related to our revolving credit facility.

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.

Through 2015, we experienced revenue growth and gained share in our target markets. Despite a decline in revenue in 2016, 2017 and 2018, our financial projections anticipate long-term revenue growth, with increasing levels of gross profit and improved cash flows from operations. To support this growth, we have initiated a plan to increase the capacity of our East Providence, Rhode Island manufacturing facility to 60 million square feet of aerogel blankets by the end of 2020. We expect to incur up to an additional $12.0 million in expenditures related to this plan through 2020.

We believe that our existing cash balance and available credit will be sufficient to fund a portion of the planned expansion of our East Providence manufacturing facility and other strategic business initiatives. During January 2019, we received an additional $5.0 million prepayment pursuant to the supply agreement with BASF. On March 4, 2019, we extended the maturity of our revolving credit facility to April 28, 2020. In addition, we plan to manage other capital expenditures and working capital balances during 2019 and 2020 to maintain the cash resources required to support current operating requirements.

However, we will need to supplement our cash balance and available credit with anticipated cash flows from operations, debt financings, customer prepayments, technology licensing agreements or equity financings to provide the capital required to complete the planned expansion of our existing manufacturing facility and to fund other strategic business initiatives.

Our principal sources of liquidity are currently our cash and cash equivalents and our revolving credit facility with Silicon Valley Bank. Cash and cash equivalents consist primarily of cash and money market accounts on deposit with banks. As of December 31, 2018, we had $3.3 million of cash and cash equivalents.

At December 31, 2018, we had debt obligations of $4.2 million related to borrowings under our revolving credit facility with Silicon Valley Bank. At December 31, 2018, we also had $1.6 million of outstanding letters of credit secured by our revolving credit facility and an obligation of $5.0 million associated with prepayments received pursuant to the BASF Supply Agreement.

We have maintained the revolving credit facility, as amended from time to time, with Silicon Valley Bank since March 2011. On March 4, 2019, our revolving credit facility was amended to extend the maturity date of the facility to April 28, 2020. Under our revolving credit facility, we are permitted to borrow a maximum of $20.0 million, subject to continued covenant compliance and borrowing base requirements. At our election, the interest rate applicable to borrowings under the revolving credit facility may be based on the prime rate or LIBOR. Prime rate-based rates vary from prime rate plus 0.75% per annum to prime rate plus 2.00% per annum, while LIBOR-based rates vary from LIBOR plus 3.75% per annum to LIBOR plus 4.25% per annum. In addition, we are

required to pay a monthly unused revolving line facility fee of 0.5% per annum of the average unused portion of the revolving credit facility. The credit facility has also been amended to (i) revise the definition of “Borrowing Base” to remove the eligible inventory component of the Borrowing Base, (ii) remove the Adjusted Quick Ratio financial covenant set forth in the loan agreement and (iii) establish certain minimum Adjusted EBITDA levels with respect to the minimum Adjusted EBITDA financial covenant for the extended term. We intend to extend or replace the facility prior to its maturity.

Under the revolving credit facility, we are required to comply with both non-financial and financial covenants, including minimum Adjusted EBITDA and minimum Adjusted Quick Ratio covenants, each as defined in the loan agreement. At December 31, 2018, we were in compliance with all such covenants. However, in May 2018, in August 2018 and in November 2018, we obtained from Silicon Valley Bank a waiver with respect to our compliance with the Adjusted Quick Ratio covenant. These waivers were subject to our meeting certain conditions, including, in the case of the November 2018 waiver, our issuance of $3.25 million in equity or receipt of $5.0 million in customer advanced payments on or before January 31, 2019. We met the conditions of the November 2018 waiver upon receipt on January 30, 2019 of a $5.0 million prepayment from BASF. There can be no assurance that we will be able to comply with these or other covenants in the future or that Silicon Valley Bank will be willing to provide waivers of such covenants. As a result, we could end up in default under the revolving credit facility or unable to continue to borrow under the revolving credit facility.

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, 2018.

The effective amount available to us under the revolving credit facility at December 31, 2018 was $10.3 million after giving effect to the $4.2 million in outstanding borrowings and $1.6 million of outstanding letters of credit.

During 2018, we used $8.7 million net cash in operating activities, as compared to the use of $4.6 million in net cash during 2017, an increase in the use of cash of $4.1 million. This increase in use of cash was the result of the increase in net loss adjusted for non-cash items of $6.1 million, offset, in part, by an increase in cash provided by changes in working capital of $2.0 million.

During 2017, we used $4.6 million net cash in operating activities, as compared to the use of $0.6 million in net cash during 2016, an increase in the use of cash of $4.0 million. This increase in use of cash was the result of the increase in net loss adjusted for non-cash items of $7.4 million, offset, in part, by an increase in cash provided by changes in working capital of $3.4 million.

Net cash used in investing activities is primarily related to capital expenditures to support our growth. Net cash used in investing activities for 2018 and 2017 totaled $3.6 million and $6.1 million, respectively, in capital expenditures primarily for machinery and equipment to improve the throughput, efficiency and capacity of our East Providence facility.

Net cash provided by financing activities in 2018 totaled $4.9 million and consisted of $56.7 million in borrowings under our revolving credit facility and $5.0 million in prepayment proceeds under the BASF supply agreement, offset, in part, by $56.3 million

of repayments under our revolving credit facility and $0.5 million for payments for employee tax withholdings associated with the vesting of restricted stock units.

Net cash provided by financing activities in 2017 totaled $3.3 million principally due to $27.3 million in borrowings on our revolving credit facility offset by $23.5 million in associated repayments. In addition, we made $0.4 million for payments for employee tax withholdings associated with the vesting of restricted stock units and less than $0.1 million for repayments of obligations under capital leases.

We have made capital expenditures primarily to develop and expand our manufacturing capacity. Our capital expenditures totaled $3.6 million in 2018, $6.1 million in 2017 and $13.2 million in 2016. As of December 31, 2018, we had capital commitments of approximately $0.4 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. These commitments consist primarily of costs for equipment and construction. We plan to fund these capital commitments from available cash, customer prepayments and anticipated available credit.

We intend to fund capital expenditures related the expansion of capacity of our existing manufacturing facility with anticipated available credit, cash flow from operations, debt financings, technology licensing agreements, customer prepayments or equity financings. We estimate that the total future expenditures to complete the planned capacity expansion of our existing facility will be up to an additional $12.0 million.

Since inception, we have not engaged in any off balance sheet activities as defined in Item 303(a)(4) of Regulation S-K.

We lease office space for our corporate offices in Northborough, Massachusetts, which expires in 2026, and warehouse space and land near our East Providence facility, which expire at various dates from 2018 through 2024, under non-cancelable operating lease agreements. See “Item 2 — Properties.” We also lease vehicles and equipment under non-cancelable operating leases that expire at various dates.

On June 29, 2016, we entered into a lease with Cabot II- MA1M03, LLC, or Cabot Properties, to lease approximately 51,650 square feet of space located at 30 Forbes Road, Northborough, MA 01532, the location of our current headquarters. The lease superseded a lease between us and Cabot Properties’ predecessor-in-interest. The term of the lease began on January 1, 2017 and ends on December 31, 2026. The annual base rent associated with the lease was approximately $408,000 during 2017 and has and will increase by approximately 3% annually during the lease term. The lease also provides for our payment of our pro rata share of real estate taxes and certain other expenses. Upon the expiration of the lease term, we will have the right to extend the lease for an additional three years.

In June 2016, we entered into a supply agreement and a side agreement with BASF SE. In February 2018, we entered into an amended and restated supply agreement and side agreement with BASF Polyurethanes GmbH (BASF). On January 14, 2019, we entered into the first addendum to the supply agreement with BASF (as amended and restated and after giving effect to the first addendum, the supply agreement). Pursuant to the supply agreement, we will sell exclusively to BASF certain products at annual volumes to be specified by BASF, subject to specified volume limits. Pricing is based on a cost-plus formula. The supply agreement also specifies the markets in which BASF is permitted to sell each of the products. BASF has no obligation to purchase any of the products under the supply agreement. The supply agreement will terminate on December 31, 2027 with respect to our Spaceloft A2 product, and on December 31, 2028 with respect to the newly developed product, if not renewed prior to such dates. Upon expiration of the supply agreement, we will be subject to a post-termination supply commitment for the specified products for an additional two years.

In addition to the customary terms associated with supply agreements, BASF, in its sole discretion, may make prepayments to us in the aggregate amount of up to $22.0 million during the term of the supply agreement. BASF made two prepayments to us in the aggregate amount of $5.0 million during 2018. BASF made an additional prepayment of $5.0 million to us in January 2019. We have secured our obligation to repay the prepayments with a first priority security interest in real estate, machinery and equipment located

at our existing manufacturing facility in East Providence, Rhode Island. Additionally, we granted non-exclusive licenses to our Rhode Island subsidiary under our intellectual property as necessary to operate such machinery and equipment.

After January 1, 2019, we will credit 25.3% of any amounts that we invoice for Spaceloft A2 sold to BASF against the outstanding balance of the 2018 prepayment. If any of the 2018 prepayment remains uncredited as of December 31, 2021, BASF may request that we repay the uncredited amount to BASF. After January 1, 2020, we will credit 50% of any amounts that we invoice for a newly developed product sold to BASF against the outstanding balance of the 2019 prepayment. After December 31, 2022, BASF may elect to have us credit 24.7% of any amounts we invoice for Spaceloft A2 sold to BASF against the outstanding balance of the 2019 prepayment or request that we repay the uncredited amount to BASF. The specific terms of additional tranches of prepayments, if any, are to be agreed by us and BASF at a future date.

We may repay any prepayment balance to BASF at any time in whole or in part for any reason. In the event of a sale of all or substantially all of our assets or a change of control of Aspen, BASF may in certain instances have the right to terminate the supply agreement, in which case any remaining balance of prepayments as of such sale or change of control will be due and payable to BASF within 30 days of the relevant transaction.

In June 2016, we and BASF SE also entered into a Joint Development Agreement, or the JDA, setting forth the rights and obligations of us and BASF SE with respect to collaboration on the development and commercialization of new products. Under the JDA, each party may propose that the parties enter into joint efforts to seek to develop one or more products or services for commercialization on terms to be agreed by the parties. The JDA established a joint steering committee with equal representation from each of us and BASF SE to oversee any such collaboration. Unless otherwise agreed, all intellectual property created in the performance of joint development activities will generally be jointly owned by us and BASF SE. The JDA will have an initial term of two years or the duration of any project in process, with the option for the parties to renew at the expiration. Either party may terminate the JDA for any reason with 90-days prior notice to the other party, provided that such termination will not terminate any project under the JDA then in progress, with any such ongoing project able to be terminated by either party for any reason on 90-days prior notice to the other party.

In March 2011, we entered into a revolving credit facility with Silicon Valley Bank. This facility has been amended at various dates through December 2018. On March 4, 2019, the Loan Agreement was further amended to extend the maturity date of the facility to April 28, 2020. Under the facility, we are permitted to borrow a maximum of $20.0 million, subject to continued covenant compliance and borrowing base requirements. At our election, the interest rate applicable to borrowings under the amended revolving credit facility may be based on the prime rate or LIBOR. Prime rate-based rates vary from prime rate plus 0.75% per annum to prime rate plus 2.00% per annum, while LIBOR-based rates vary from LIBOR plus 3.75% per annum to LIBOR plus 4.25% per annum. In addition, we are required to pay a monthly unused revolving line facility fee of 0.5% per annum of the average unused portion of the revolving credit facility. The credit facility has also been amended to (i) revise the definition of “Borrowing Base” to remove the eligible inventory component of the Borrowing Base, (ii) remove the Adjusted Quick Ratio financial covenant set forth in the loan agreement and (iii) establish certain minimum Adjusted EBITDA levels with respect to the minimum Adjusted EBITDA financial covenant for the extended term.

At December 31, 2018, the amount available to us under the revolving credit facility was $10.3 million after giving effect to $4.2 million in borrowings and $1.6 million of letters of credit outstanding under the facility.

In August 2015, the Financial Accounting Standards Board (FASB) issued a deferral of Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers. The standard replaced the transaction- and industry-specific revenue recognition guidance under current U.S. GAAP with a principle based approach for determining revenue recognition. As a result of the deferral, public entities were required to apply the revised revenue recognition standard for the annual reporting period beginning on or after December 15, 2017, including interim periods within that annual reporting period. We adopted this standard using the modified retrospective method on January 1, 2018. We completed our analysis of the new revenue standard and determined that it would not materially impact the allocation and timing of recognition of previously reported revenues from the sale of products or performance of

research and development services. In addition, we determined that there were no incremental contract costs or contract fulfillment costs to be recognized in connection with the adoption. Based on our analysis, no adjustment to retained earnings was required as of the January 1, 2018 adoption date. Accordingly, our application of the standard did not have a material impact on our consolidated balance sheet at January 1, 2018 and did not have a material impact to our statement of operations for the years ended December 31, 2018, 2017 and 2016.

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (ASU 2016-15). This amendment addresses eight classification issues related to the statement of cash flows. The amendments in ASU 2016-15 are effective for public business entities for annual and interim periods in fiscal years beginning after December 15, 2017. We adopted the provisions of the amendment on January 1, 2018. The adoption of the standard has not resulted in any material impact to our consolidated financial statements or other disclosures.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). FASB ASU 2016-02 modifies the accounting for leases and requires that all leases be recorded on the consolidated balance sheets as assets and liabilities. This standard is effective for fiscal years beginning after December 15, 2018. We will adopt this standard using the modified retrospective transition approach with the effective date as the date of initial application. As a result, we will not update financial information and will not provide the disclosures required under the new standard for dates and periods before January 1, 2019. To measure our lease liabilities, we will use our incremental borrowing rate as of the date of adoption or the rate implicit in the lease, if available. The discount rate will be applied to the remaining lease term and remaining payments at the date of adoption. We will elect the package of practical expedients under the new standard, which permits us to not reassess prior conclusions about lease identification, lease classification, and initial direct costs. We have completed our analysis of the new standard and have determined that it will have a material effect on our consolidated financial statements. The most significant effects relate to the recognition of new right-of-use, or ROU, assets and lease liabilities on the consolidated balance sheets and the provision of significant new disclosures about our leasing activities. Based on our analysis, we will recognize operating lease liabilities of approximately $6.0 million with corresponding ROU assets of approximately $4.6 million. Additionally, we will derecognize existing deferred rent liabilities of $1.4 million. We will elect the short-term lease recognition exemption for all leases that qualify. For leases that qualify for this exemption, we will not recognize ROU assets or lease liabilities. We will also elect the practical expedient to not separate lease and non-lease components for all of our equipment leases.

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.

We recognize product revenue from the sale of our line of aerogel products and research services revenue from the provision of services under contracts with various agencies of the U.S. government and other institutions. Product and research services revenue is recognized upon the satisfaction of contractual performance obligations. In general, our customary shipping terms are FOB shipping point. 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. During the year ended December 31, 2018, test results indicated that tested samples performed outside the published performance specifications for a specific attribute of a product. We determined that it is probable we have incurred a liability, however, the liability is not estimable as of December 31, 2018. We will continue to assess the impact of the test results on our customer base and, depending on the assessment, we could be subject to warranty charges in future periods.

For the year ended December 31, 2018, we did not record any warranty expense. In 2017, we recorded warranty expense of $0.9 million. This specific warranty charge was related to a product claim for a specific application issue. In 2016, we recorded

warranty expense of $0.5 million. This specific warranty charge was related to product warranty claims for a specific project. These claims were outside of our typical experience. As of December 31, 2018, we had satisfied all outstanding warranty claims.

Research services revenue is derived from the execution of contracts awarded by the U.S. government, other government agencies and other institutions. Our research service arrangements require us to perform research to investigate new forms and applications of aerogel technology. We record revenue earned on research services contracts using the percentage-of-completion method in two ways: (1) for firm-fixed-price contracts, we accrue that portion of the total contract price that is allocable, on the basis of our estimates of costs incurred to date to total contract cost; (2) for cost-plus-fixed-fee contracts, we record revenue that is equal to total payroll cost incurred times a stated factor plus reimbursable expenses, to a stated upper limit. The primary cost in these arrangements is the labor effort expended in completing the research and the only deliverable other than labor hours expended is the reporting of the research results to the customer. Because the input measure of labor hours expended is also reflective of the output measure, it is a reliable means to measure the extent of progress towards completion. Contract costs and rates used to allocate overhead to contracts are subject to audit by the respective contracting government agency. Revisions in cost estimates and fees during the course of the contract are reflected in the accounting period in which the facts that require the revisions become known.

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 costs 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.

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 (prior to our initial public offering), 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:

During the year ended December 31, 2017, we adopted the provisions of ASU 2016-09 related to the timing of accounting for the forfeitures of share based awards using a modified retrospective method. Under these provisions, we record the impact of forfeitures of service based awards at the time an award is forfeited. Our adoption of the provisions resulted in a cumulative-effect adjustment to equity as of January 1, 2017 of $0.3 million. Prior to our adoption of ASU 2016-09, forfeitures were required to be

estimated at the time of grant and revised, if necessary, in subsequent periods, if actual forfeitures differed from those estimates. Forfeitures were estimated based on voluntary termination behavior as well as analysis of actual option forfeitures. Accordingly, we reduced share-based compensation expense by an estimated annual forfeiture rate of 7.0% during the year ended December 31, 2016.

For stock options that contained a market condition issued to our chief executive officer during the year ended December 31, 2015, we used a Monte Carlo Simulation model to estimate the grant date fair value of awards expected to vest. The simulation model was based on the Black Scholes option-pricing model and a number of complex assumptions including (i) if the vesting condition is satisfied within the time-vesting periods, and (ii) the date the common stock price target is met per the terms of the agreement. On November 7, 2018, we entered into an executive agreement with the CEO which modified the change in control provisions for the outstanding stock options that contained a market condition. This modification resulted in the recognition of additional compensation expense of less than $0.1 million during the year ended December 31, 2018.

For the restricted stock award issued to our Chief Executive Officer during the year ended December 31, 2015 that contain a performance condition, we assess the probability that the performance condition will be satisfied. On August 2, 2017, we modified the performance target with respect to 78,125 shares of these awards. Upon modification, we determined that the performance-based condition of this restricted stock award was probable and $0.2 million in compensation has been recorded to date in conjunction with the award.

Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated undiscounted future cash flows, an impairment charge is recognized for the amount by which the carrying amount of the asset exceeds the fair value of the asset. Fair value is determined through various valuation techniques including discounted cash flows models, quoted market values and third-party independent appraisals, as considered necessary.

Market risk represents the risk of loss that may impact our financial position due to adverse changes in financial market prices and rates. Our market risk exposure results primarily from fluctuations in interest rates as well as from inflation. In the normal course of business, we are exposed to market risks, including changes in interest rates which affect our line of credit under our revolving credit facility as well as cash flows. We may also face additional exchange rate risk in the future as we expand our business internationally.

We are exposed to changes in interest rates in the normal course of our business. At December 31, 2018, we had unrestricted cash and cash equivalents of $3.3 million. These amounts were held for working capital and capital expansion purposes and were invested primarily in deposit and money market accounts at a major financial institution in North America. Due to the short-term nature of these investments, we believe that our exposure to changes in the fair value of our cash as a result of changes in interest rates is not material.

As of December 31, 2018, we had $4.2 million drawn and outstanding on our revolving credit facility. At December 31, 2018, we also had $1.6 million of outstanding letters of credit supported by the revolving credit facility.

Under our revolving credit facility, we are permitted to borrow a maximum of $20.0 million, subject to continued covenant compliance and borrowing base requirements. At our election, the interest rate applicable to borrowings under the revolving credit facility may be based on the prime rate or LIBOR. Prime rate-based rates vary from prime rate plus 0.75% per annum to prime rate

plus 2.00% per annum, while LIBOR-based rates vary from LIBOR plus 3.75% per annum to LIBOR plus 4.25% per annum. In addition, we are required to pay a monthly unused revolving line facility fee of 0.5% per annum of the average unused portion of the revolving credit facility. The maturity date of our revolving credit facility is April 28, 2020.

At December 31, 2018, the amount available to us under the revolving credit facility was $10.3 million after giving effect to the $4.2 million in borrowings and $1.6 million of letters of credit outstanding under the facility.

Although we expect that our operating results will be influenced by general economic conditions, we do not believe that inflation has had a material effect on our results of operations during the periods presented in this report. However, our business may be affected by inflation in the future.

We are subject to inherent risks attributed to operating in a global economy. Principally all of our revenue, receivables, purchases and debts are denominated in U.S. dollars.

We have audited the accompanying consolidated balance sheets of Aspen Aerogels, Inc. and subsidiaries (the Company) as of December 31, 2018 and 2017, the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the years in the three‑year period ended December 31, 2018, and the related notes and financial statement schedule (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the years in the three‑year period ended December 31, 2018, in conformity with U.S. generally accepted accounting principles.

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

	December 31,
	2018			2017
	(In thousands, except share and per share data)
Assets
Current assets:
Cash and cash equivalents	$	3,327		$	10,694
Accounts receivable, net of allowances of $2,877 and $93		25,565			26,764
Inventories		7,318			8,915
Prepaid expenses and other current assets		1,041			1,289
Total current assets		37,251			47,662
Property, plant and equipment, net		61,699			76,067
Other long-term assets		73			86
Total assets	$	99,023		$	123,815
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	12,392		$	10,653
Accrued expenses		3,864			5,862
Revolving line of credit		4,181			3,750
Deferred revenue		2,629			1,304
Total current liabilities		23,066			21,569
Deferred rent		1,218			1,303
Prepayment liability		4,485			—
Total liabilities		28,769			22,872
Commitments and contingencies (Note 10)
Stockholders' equity:
Preferred stock, $0.00001 par value; 5,000,000 shares authorized, no shares issued or outstanding at December 31, 2018 and 2017		—			—
Common stock, $0.00001 par value; 125,000,000 shares authorized, 23,973,517 and 23,643,189 shares issued and outstanding at December 31, 2018 and December 31, 2017, respectively		—			—
Additional paid-in capital		541,839			538,088
Accumulated deficit		(471,585	)		(437,145	)
Total stockholders' equity		70,254			100,943
Total liabilities and stockholders' equity	$	99,023		$	123,815

	Year Ended December 31,
	2018			2017			2016
	(In thousands, except share and per share data)
Revenue:
Product	$	102,123		$	109,590		$	115,490
Research services		2,238			2,041			2,248
Total revenue		104,361			111,631			117,738
Cost of revenue:
Product		90,660			92,052			93,123
Research services		1,032			908			1,304
Gross profit		12,669			18,671			23,311
Operating expenses:
Research and development		6,319			6,180			5,306
Sales and marketing		13,794			12,604			11,810
General and administrative		19,116			19,023			17,415
Impairment of construction in progress		7,356			—			—
Total operating expenses		46,585			37,807			34,531
Loss from operations		(33,916	)		(19,136	)		(11,220	)
Other expense, net:
Interest expense, net		(524	)		(185	)		(147	)
Postponed financing costs		—			—			(656	)
Total other expense, net		(524	)		(185	)		(803	)
Net loss	$	(34,440	)	$	(19,321	)	$	(12,023	)
Net loss per share:
Basic and diluted	$	(1.45	)	$	(0.83	)	$	(0.52	)
Weighted-average common shares outstanding:
Basic and diluted		23,738,852			23,390,235			23,139,807

	Preferred Stock $0.00001 Par Value				Common Stock $0.00001 Par Value					Additional Paid-in Capital			Accumulated Deficit			Total Stockholders’ Equity
	Shares		Value		Shares			Value
Balance at December 31, 2015		—		—		23,184,852			—	$	527,975		$	(405,501	)	$	122,474
Net loss		—		—		—			—		—			(12,023	)		(12,023	)
Stock compensation expense		—		—		—			—		5,313			—			5,313
Issuance of restricted stock		—		—		75,152			—		—			—			—
Vesting of restricted stock units		—		—		109,834			—		(200	)		—			(200	)
Balance at December 31, 2016		—	$	—		23,369,838		$	—	$	533,088		$	(417,524	)	$	115,564
Net loss		—		—		—			—		—			(19,321	)		(19,321	)
Adoption of new accounting standard						—			—		300			(300	)		—
Stock compensation expense		—		—		—			—		5,091			—			5,091
Issuance of restricted stock		—		—		86,023			—		—			—			—
Retirement of restricted stock						(12,289	)		—		—			—			—
Vesting of restricted stock units		—		—		199,617			—		(391	)		—			(391	)
Balance at December 31, 2017		—	$	—		23,643,189		$	—	$	538,088		$	(437,145	)	$	100,943
Net loss		—		—		—			—		—			(34,440	)		(34,440	)
Stock compensation expense		—		—		—			—		4,302			—			4,302
Issuance of restricted stock		—		—		58,062			—		—			—			—
Vesting of restricted stock units		—		—		272,266			—		(551	)		—			(551	)
Balance at December 31, 2018		—	$	—		23,973,517		$	—	$	541,839		$	(471,585	)	$	70,254

	Year Ended December 31,
	2018			2017			2016
	(In thousands)
Cash flows from operating activities:
Net loss	$	(34,440	)	$	(19,321	)	$	(12,023	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		10,787			10,753			9,853
Impairment of construction in progress		7,356			—			—
Provision for bad debt		2,922			455			—
Postponed financing costs		—			—			656
Stock compensation expense		4,302			5,091			5,313
Lease incentives		(121	)		(111	)		—
Other		—			(1	)		—
Changes in operating assets and liabilities:
Accounts receivable		(1,723	)		(9,159	)		3,089
Inventories		1,597			3,953			(6,336	)
Prepaid expenses and other assets		261			411			(19	)
Accounts payable		1,557			1,269			105
Accrued expenses		(2,056	)		1,821			(2,178	)
Deferred revenue		810			261			362
Other liabilities		94			(28	)		600
Net cash used in operating activities		(8,654	)		(4,606	)		(578	)
Cash flows from investing activities:
Capital expenditures		(3,593	)		(6,118	)		(13,216	)
Net cash used in investing activities		(3,593	)		(6,118	)		(13,216	)
Cash flows from financing activities:
Proceeds from borrowings under line of credit		56,716			27,250			—
Repayment of borrowings under line of credit		(56,285	)		(23,500	)		—
Prepayment proceeds under customer supply agreement, net		5,000			—			—
Postponed financing costs		—			—			(656	)
Repayment of obligations under capital lease		—			(27	)		(68	)
Payments made for employee restricted stock minimum tax withholdings		(551	)		(391	)		(200	)
Net cash provided by (used in) financing activities		4,880			3,332			(924	)
Net decrease in cash		(7,367	)		(7,392	)		(14,718	)
Cash and cash equivalents at beginning of period		10,694			18,086			32,804
Cash and cash equivalents at end of period	$	3,327		$	10,694		$	18,086
Supplemental disclosures of cash flow information:
Interest paid	$	338		$	220		$	196
Income taxes paid	$	—		$	—		$	—
Supplemental disclosures of non-cash activities:
Changes in accrued capital expenditures	$	182		$	(3,681	)	$	2,116
Capitalized interest	$	44		$	—		$	—

Aspen Aerogels, Inc. (the Company) is an aerogel technology company that designs, develops and manufactures innovative, high-performance aerogel insulation used primarily in the energy infrastructure and building materials markets. The Company also conducts research and development related to aerogel technology supported by funding from several agencies of the U.S. government and other institutions in the form of research and development contracts.

The Company maintains its corporate offices in Northborough, Massachusetts. The Company has three wholly owned subsidiaries: Aspen Aerogels Rhode Island, LLC, Aspen Aerogels Germany, GmbH and Aspen Aerogels Georgia, LLC.

On June 18, 2014, the Company completed the initial public offering (IPO) of its common stock.

During the year ended 2018, the Company incurred a net loss of $34.4 million, used $8.7 million of cash in operations and had a cash and cash equivalents balance of $3.3 million and $4.2 million of outstanding borrowings under its revolving line of credit (see note 7). After giving effect to the outstanding borrowings and letters of credit, the additional amount available to the Company at December 31, 2018 under the revolving line of credit was $10.3 million. The existing revolving line of credit matures on April 28, 2020.

The Company is making investments to increase capacity at its existing manufacturing facility in East Providence, Rhode Island and to develop new technologies and business opportunities. The Company expects its existing cash balance and the amount anticipated to be available under the existing revolving line of credit will be sufficient to fund a portion of these investments. The Company plans to manage other capital expenditures and working capital balances to maintain the cash resources required to support current operating requirements and to complete the capacity expansion plan.

The Company will need to supplement its cash balance and amounts available under its revolving line of credit with anticipated cash flows from operations, debt financings, customer prepayments, technology licensing agreements or equity financings to provide the capital required to complete the expansion of the existing manufacturing facility and to fund its strategic business initiatives.

The accompanying consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles (U.S. GAAP), include the accounts of the Company and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.

The statement of cash flows for the year ended December 31, 2017 reflects a $0.5 million reclassification of the Company’s provision for bad debts to an adjustment to reconcile net loss to net cash used in operating activities from a component of changes in accounts receivable. The change has no impact on the results of operations.

The preparation of the consolidated financial statements requires the Company to make a number of estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Significant items subject to such estimates and assumptions include allowances for doubtful accounts, sales returns and allowances, product warranty costs, inventory valuation, the carrying amount of property and equipment, stock-based compensation and deferred income taxes. The Company evaluates its estimates and assumptions on an on-going basis using historical experience and other factors, including the current economic environment, which are believed to be reasonable under the circumstances. Management adjusts such estimates and assumptions when facts and circumstances warrant. Illiquid credit markets, volatile equity markets and declines in business investment can increase the uncertainty inherent in such estimates and assumptions. As future events and their effects cannot be determined with precision, actual results could differ significantly from these estimates. Changes in these estimates resulting from continuing changes in the economic environment will be reflected in the financial statements in future periods.

Cash equivalents include short-term, highly liquid instruments, which consist of money market accounts. All cash and cash equivalents are maintained with major financial institutions in North America. Deposits with these financial institutions may exceed the amount of insurance provided on such deposits; however, these deposits typically may be redeemed upon demand and, therefore, bear minimal risk.

Financial instruments, which potentially expose the Company to concentrations of credit risk, consist principally of accounts receivable. The Company’s customers are primarily insulation distributors, insulation contractors, insulation fabricators and select end-users located throughout the world. The Company performs ongoing credit evaluations of its customers’ financial condition and generally requires no collateral to secure accounts receivable. The Company maintains an allowance for doubtful accounts based on its assessment of the collectability of accounts receivable. The Company reviews the allowance for doubtful accounts quarterly. During the year ended December 31, 2018, the Company recorded a charge for uncollectible accounts receivable of $2.9 million related to four customers of which one customer accounted for $2.8 million of the charge. Allowance for doubtful accounts was $2.8 and zero at December 31, 2018 and 2017, respectively. The Company does not have any off-balance-sheet credit exposure related to its customers.

For the year ended December 31, 2018, one customer represented 20% of total revenue. For the year ended December 31, 2017, two customers represented 15% and 12% of total revenue, respectively. For the year ended December 31, 2016, two customers represented 25% and 15% of total revenue, respectively.

At December 31, 2018, the Company had one customer that accounted for 18% of accounts receivable. At December 31, 2017, the Company had three customers that accounted for 19%, 14% and 11% of accounts receivable, respectively.

Inventory consists of finished products and raw materials. Inventories are carried at lower of cost, determined using the first-in, first-out (FIFO) method, and net realizable value. Cost includes materials, labor and manufacturing overhead. Manufacturing overhead is allocated to the costs of conversion based on normal capacity of the Company’s production facility. Abnormal freight, handling costs and material waste is expensed in the period it occurs.

The Company periodically reviews its inventories and makes provisions as necessary for estimated excess, obsolete or damaged goods to ensure values approximate the lower of cost and net realizable value. The amount of any such provision is equal to the difference between the cost of inventory and the estimated net realizable value based upon assumptions about future demand, selling prices and market conditions.

Property, plant and equipment are stated at cost. Expenditures for maintenance and repairs are charged to expense as incurred, whereas major betterments are capitalized as additions to property, plant and equipment.

Interest expense capitalization commences at the time a capital project begins construction and concludes when the project is completed. The Company has capitalized interest costs as part of the historical costs of constructing its manufacturing facilities or significant capital projects. The Company capitalized less than $0.1 million in interest costs related to the capacity expansion project of the existing East Providence, Rhode Island manufacturing facility during the year ended December 31, 2018. The Company did not capitalize interest on projects during the years ended December 31, 2017 or December 31 2016.

Depreciation on plant and equipment is calculated on the straight-line method over the estimated useful lives of the assets. Assets related to leasehold improvements are amortized on a straight-line basis over the shorter of the lease term or estimated useful life of the asset.

Assets utilized in the Company’s operations that are taken out of service with no future use are charged to cost of revenue or operating expenses, depending on the department in which the asset was utilized. Impairments of construction in progress are charged to operating expenses upon the determination of no future use.

Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable. Recognition and measurement of a potential impairment is performed on assets grouped with other assets and liabilities at the lowest level where identifiable cash flows are largely independent of the cash flows of other assets and liabilities. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset or asset group to future undiscounted net cash flows expected to be generated by the asset or asset group. If the carrying amount of an asset or asset group exceeds its estimated undiscounted future cash flows, an impairment charge is recognized for the amount by which the carrying amount of the asset or asset group exceeds the fair value of the asset or asset group. Fair value is determined through various valuation techniques including discounted cash flow models, quoted market values and third-party independent appraisals, as considered necessary.

The Company had previously completed the design and engineering for a second manufacturing facility to be located in Statesboro, Georgia supported by a package of incentives, including free land, from state and local governmental authorities. During 2016, the Company elected to delay construction of the facility due to its assessment of future demand. In December 2018, the local governmental authorities notified the Company that they will exercise their right to terminate the incentive package in February 2019 and to make the identified site available to other parties. In addition, the Company determined that due to its cumulative manufacturing process advancements since 2016 and expected additional improvements in the near future, it will not use the existing design and engineering to construct a second facility in any location. Accordingly, the Company determined that the design and engineering costs are not recoverable and recorded an impairment charge of $7.4 million on construction in progress assets during 2018.

For leases that contain fixed increases in the minimum annual lease payment during the original term of the lease, the Company recognizes rental expense on a straight-line basis over the lease term, and records the difference between rent expense and the amount currently payable as deferred rent. Lease incentives for allowances for qualified leasehold improvements received from landlords are amortized on a straight-line basis over the lease term. The short-term portion of deferred rent is included within accrued expenses on the consolidated balance sheet.

On January 1, 2018, the Company adopted Accounting Standards Codification 606, Revenue from Contracts with Customers (ASC 606). See note 3 for further details.

The Company provides warranties for its products and records the estimated cost within cost of sales in the period that the related revenue is recorded. The Company’s standard warranty period extends to one year from the date of shipment. This standard

warranty provides that the Company’s products will be free from defects in material and workmanship, and will, under normal use, conform to the specifications for the product.

The Company’s products may be utilized in systems that involve new technical demands and new configurations. Accordingly, the Company regularly reviews and assesses whether warranty reserves should be recorded in the period the related revenue is recorded. For an initial shipment of product for use in a system with new technical demands or new configurations and where the Company is unsure of meeting the customer’s specifications, the Company will defer the recognition of product revenue and related costs until written customer acceptance is obtained.

The Company performs periodic testing of its aerogel blankets to ensure compliance with published performance specifications. From time to time, tests may indicate a product could potentially perform outside of these specifications. At that time, additional testing is initiated or the Company may conduct a root cause investigation. During the year ended December 31, 2018, test results indicated that tested samples performed outside the published performance specifications for a specific attribute of a product. The Company has determined that it is probable it has incurred a liability, however, a liability or range of liability is not estimable as of December 31, 2018. The Company will continue to assess the impact of the testing results on its customer base and, depending on the assessment, could be subject to warranty charges in future periods.

The Company did not record any warranty expense during the year ended December 31, 2018. During the years ended December 31, 2017 and 2016, the Company recorded warranty expense of $0.9 million and $0.5 million, respectively. These specific warranty charges were related to product claims for two separate product application issues. These claims were outside of the Company’s typical experience. As of December 31, 2018, the Company had satisfied all outstanding warranty claims.

Shipping and handling costs are classified as a component of cost of revenue. Customer payments of shipping and handling costs are recorded as product revenue.

The Company grants share-based awards to its employees and non-employee directors. All share-based awards granted, including grants of stock options, restricted stock and restricted stock units (RSUs), are recognized in the statement of operations based on their fair value as of the date of grant. Expense is recognized on a straight-line basis over the requisite service period for all awards with service conditions. For performance-based awards, the grant date fair value is recognized as expense when the condition is probable of being achieved, and then on a graded basis over the requisite service period. The Company uses the Black-Scholes option-pricing model to determine the fair value of service-based option awards. The Black-Scholes model requires the use of a number of complex and subjective assumptions including fair value of the underlying security, the expected volatility of the underlying security, a risk-free interest rate and the expected term of the option.

The fair value of restricted stock and RSUs is determined using the closing price of the Company’s common stock on the date of grant. All shares of restricted stock are not transferable until vested. Restricted stock is typically issued to non-employee directors and typically vests over a one-year period from the date of issuance. RSUs are issued to employees and typically vest over a three to four year period from the date of issuance. The fair value of restricted stock and RSUs upon which vesting is solely service-based is expensed ratably over the vesting period. If the service condition for shares of restricted stock is not met for any reason, the shares of unvested restricted stock will be forfeited and returned to the Company.

For stock options that contain a market condition, the Company uses the Monte-Carlo simulation option-pricing model to determine the fair value of the awards. In addition to the input assumptions used in the Black-Scholes model, the Monte-Carlo simulation option-pricing model factors the probability that the specific market condition may or may not be satisfied into the valuation. Stock-based compensation expense for awards with a market condition is recognized on a straight-line basis over the requisite service period for each such award.

Pursuant to the evergreen provisions of the 2014 Employee, Director and Consultant Equity Incentive Plan, the number of shares of common stock authorized for issuance under the plan automatically increased by 472,863 shares to 7,009,460 shares effective January 1, 2018.

Costs incurred in the research and development of the Company’s products include compensation and related costs, services provided by third-party contractors, materials and supplies and are classified as research and development expenses as incurred. Research and development costs directly associated with research services revenue are classified as research services in cost of revenue.

The Company calculates net loss per common share based on the weighted-average number of common shares outstanding during each period. Potential common stock equivalents are determined using the treasury stock method. The weighted-average number of common shares included in the computation of diluted net income (loss) gives effect to all potentially dilutive common equivalent shares, including outstanding stock options, RSUs and warrants. Common equivalent shares are excluded from the computation of diluted net loss per share if their effect is antidilutive.

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

The Company recognizes the effect of income tax positions only if those positions are more likely than not of being sustained. The Company accounts for uncertain tax positions using a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Differences between tax positions taken in a tax return and amounts recognized in the financial statements are recorded as adjustments to income taxes payable or receivable, or adjustments to deferred taxes, or both. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. The Company recognizes penalties and interest related to uncertain tax positions, if any, as a component of income tax expense.

Operating segments are identified as components of an enterprise about which separate, discrete financial information is available for evaluation by the chief operating decision maker in making decisions on how to allocate resources and assess performance. The Company’s chief operating decision maker is the Chief Executive Officer. The Company’s chief operating decision maker reviews consolidated operating results to make decisions about allocating resources and assessing performance for the entire Company. The Company views its operations and manages its business as one operating segment.

Information about the Company’s total revenues, based on shipment destination or services location, is presented in the following table:

From time to time, new accounting pronouncements are issued by the 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.

In August 2015, the FASB issued a deferral of ASU 2014-09, Revenue from Contracts with Customers. The standard replaced the transaction- and industry-specific revenue recognition guidance under current U.S. GAAP with a principle based approach for determining revenue recognition. As a result of the deferral, public entities were required to apply the revised revenue recognition standard for the annual reporting period beginning on or after December 15, 2017, including interim periods within that annual reporting period. The Company adopted this standard using the modified retrospective method on January 1, 2018. The Company completed its analysis of the new revenue standard and determined that it would not materially impact the allocation and timing of recognition of previously reported revenues from the sale of products or performance of research and development services. In addition, the Company determined that there were no incremental contract costs or contract fulfillment costs to be recognized in connection with the adoption. Based on the Company’s analysis, no adjustment to retained earnings was required as of the January 1, 2018 adoption date. Accordingly, the Company’s application of the standard did not have a material impact on the Company’s consolidated balance sheet at January 1, 2018 and did not have a material impact to its statement of operations for the years ended December 31, 2018, 2017 and 2016.

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (ASU 2016-15). This amendment addresses eight classification issues related to the statement of cash flows. The amendments in ASU 2016-15 are effective for public business entities for annual and interim periods in fiscal years beginning after December 15, 2017. The Company adopted the provisions of the amendment on January 1, 2018. The adoption of the standard has not resulted in any material impact to the Company’s consolidated financial statements or other disclosures.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). FASB ASU 2016-02 modifies the accounting for leases and requires that all leases be recorded on the consolidated balance sheets as assets and liabilities. This standard is effective for fiscal years beginning after December 15, 2018. The Company will adopt this standard using the modified retrospective transition approach with the effective date as the date of initial application. As a result, the Company will not update financial information and will not provide the disclosures required under the new standard for dates and periods before January 1, 2019. To measure its lease liabilities, the Company will use its incremental borrowing rate as of the date of adoption or the rate implicit in the lease, if available. The discount rate will be applied to the remaining lease term and remaining payments at the date of adoption. The Company will elect the package of practical expedients under the new standard, which permits the Company to not reassess prior conclusions about lease identification, lease classification, and initial direct costs. The Company completed its analysis of the new standard and determined that it will have a material effect on the consolidated financial statements. The most significant effects relate to the recognition of new right-of-use, or ROU, assets and lease liabilities on the consolidated balance sheets and the provision of significant new disclosures about leasing activities. Based on the Company’s analysis, the Company will recognize operating lease liabilities of approximately $6.0 million with corresponding ROU assets of approximately $4.6 million. Additionally, the Company will derecognize existing deferred rent liabilities of $1.4 million. The Company will elect the short-term lease recognition exemption for all leases that qualify. For leases that qualify for this exemption, the Company will not recognize ROU assets or lease liabilities. The Company will also elect the practical expedient to not separate lease and non-lease components for all of our equipment leases.

On January 1, 2018, the Company Adopted Accounting Standards Codification 606, Revenue from Contracts with Customers (ASC 606) using the modified retrospective method for all contracts not completed as of the date of adoption. The adoption of ASC 606 did not have a material impact on the allocation and timing of the recognition of previously reported revenues from the sale of products, subsea projects or performance of research services. In addition, the Company determined that there are no incremental contract costs or contract fulfillment costs associated with the adoption. The reported results for 2018 reflect the application of ASC 606 guidance while the reported results for 2017 were prepared under the guidance of ASC 605. The adoption of ASC 606 represents a change in accounting principle that more closely aligns revenue recognition with the delivery of the Company's product or research services and will provide financial statement readers with enhanced disclosures.

Revenue is recognized when a customer obtains control of promised goods or services, in an amount that reflects the consideration which the entity expects to receive in exchange from those goods or services. To determine revenue recognition for arrangements within the scope of ASC 606, the Company performs the following five steps: (i) identification of the contract with a customer; (ii) identification of the performance obligations in the contract; (iii) determination of the transaction price; (iv) allocation of the transaction price to the separate performance obligations in the contract; and (v) recognition of the revenue associated with

performance obligations as they are satisfied. The Company applies the five-step model to contracts when it is probable that the Company will collect the consideration it is entitled to in exchange for the goods or services it transfers to the customer. At contract inception, once the contract is determined to be within the scope of ASC 606, the Company assesses the goods or services promised within each contract and determines those that are performance obligations, and assesses whether each promised good or service is distinct. If the contract contains a single performance obligation, the entire transaction price is allocated to the single performance obligation. Contracts that contain multiple performance obligations require an allocation of the transaction price based on the estimated relative standalone selling prices of the promised products or services underlying each performance obligation. The Company determines standalone selling prices based on the price at which the performance obligation is sold separately. If the standalone selling price is not observable through past transactions, the Company estimates the standalone selling price taking into account available information such as market conditions and internally approved pricing guidelines related to the performance obligations. The Company then recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied.

When determining the transaction price of a contract, an adjustment is made if payment from a customer occurs either significantly before or significantly after performance, resulting in a significant financing component. Applying the practical expedient in paragraph ASC 606-10-32-18, the Company does not assess whether a significant financing component exists if the period between when the Company performs its obligations under the contract and when the customer pays is one year or less. The Company did not have any contracts outstanding at January 1, 2018 and did not enter into any contracts during the year ended December 31, 2018 that contained a significant financing component.

The Company records deferred revenue for product sales when the Company has delivered products but other performance obligations have not been satisfied or control has not been transferred to the customer.

Shipping and handling costs associated with outbound freight after control over a product has transferred to a customer are accounted for as fulfillment costs and are included in the cost of product revenue. The amount of revenue recognized reflects the consideration to which the Company expects to be entitled to receive in exchange for these products or research services.

The Company generally enters into contracts containing one type of performance obligation. The Company recognizes product revenue when the performance obligation is satisfied, which is generally upon delivery according to contractual shipping terms within customer purchase orders.

The Company also enters into rebate agreements with certain customers. These agreements may be considered an additional performance obligation of the Company or variable consideration within a contract. Rebates are recorded as a reduction of revenue in the period the related product revenue is recognized. A corresponding liability is recorded as a component of deferred revenue on the consolidated balance sheets. These arrangements are primarily based on the customer attaining contractually specified sales volumes.

The Company estimates the amount of its product sales that may be returned by its customers and records this estimate as a reduction of revenue in the period the related product revenue is recognized. The Company currently estimates product return liabilities using historical rates of return, current quarter credit sales, and specific items of exposure on a contract by contract basis. Sales return reserves were less than $0.1 million at both December 31, 2018 and December 31, 2017.

The Company manufactures and sells subsea products that are designed for pipe-in-pipe applications in offshore oil production and are typically customized to meet customer specifications. Subsea products typically have no alternative use and contain an enforceable right to payment. Customer invoicing terms for subsea products are typically based on certain milestones within the production and delivery schedule. Under the provisions of ASC 606, the Company recognizes revenue at a point in time when transfer of control of the products is passed to the customer, or over time utilizing the input/cost-to-cost method. The timing of revenue recognition is assessed on a contract by contract basis. During the year ended December 31, 2018, the Company recognized $8.1 million in connection with subsea projects.

The Company performs research services under contracts with various government agencies and other institutions. These

contracts generally have one type of performance obligation associated with the provision of research services including functional licenses to any resulting intellectual property. The Company records revenue using the percentage-of-completion method in two ways: (1) for firm-fixed-price contracts, the Company accrues that portion of the total contract price that is allocable on the basis of the Company’s estimates of costs incurred to date to total contract costs; and (2) for cost-plus-fixed-fee contracts, the Company records revenue that is equal to total payroll cost incurred times a stated factor plus reimbursable expenses, to a stated upper limit. The primary cost under the Company’s research service contacts is the labor effort expended in completing the research, and the only deliverable, other than the labor hours expended, is the reporting of research results to the customer. Because the input measure of labor hours expended is also reflective of the output measure, it is a reliable means to measure the extent of progress toward completion. Revisions in cost estimates and fees during the course of the contract are reflected in the accounting period in which the facts that require the revisions become known. Contract costs and rates used to allocate overhead to contracts are subject to audit by the respective contracting government agency. Adjustments to revenue as a result of audit are recorded within the period they become known. To date, adjustments to revenue as a result of contracting agency audits have been insignificant.

In the following table, revenue is disaggregated by primary geographical region and source of revenue:

	Year Ended
	December 31, 2018
	U.S.		International		Total
	(In thousands)
Geographical region
Asia	$	—	$	34,597	$	34,597
Canada		—		4,749		4,749
Europe		—		19,905		19,905
Latin America		—		3,377		3,377
U.S.		41,733		—		41,733
Total revenue	$	41,733	$	62,628	$	104,361

Source of revenue
Product revenue	$	39,490	$	54,487	$	93,977
Subsea projects		5		8,141		8,146
Research services		2,238		—		2,238
Total revenue	$	41,733	$	62,628	$	104,361

The following table presents changes in the Company’s contract assets and contract liabilities during the year ended December 31, 2018:

	Balance at December 31, 2017		Additions		Deductions			Balance at December 31, 2018
	(In thousands)
Contract assets
Subsea projects	$	2,463	$	8,555	$	(8,276	)	$	2,742
Research services		425		2,283		(2,339	)		369
Total contract assets	$	2,888	$	10,838	$	(10,615	)	$	3,111
Contract liabilities
Deferred revenue
Product revenue	$	1,178	$	1,890	$	(1,317	)	$	1,751
Subsea projects		126		7,037		(6,382	)		781
Research services		-		180		(83	)		97
Prepayment liability		-		5,000		(515	)		4,485
Total contract liabilities	$	1,304	$	14,107	$	(8,297	)	$	7,114

During the year ended December 31, 2018, the Company recognized $1.3 million of revenue that was included in deferred revenue at the beginning of the period.

A contract asset is recorded when the Company satisfies a performance obligation by transferring a promised good or service and has earned the right to consideration from its customer. These assets may represent a conditional or unconditional right to consideration and are included within accounts receivable on the consolidated balance sheets.

A contract liability is recorded when consideration is received, or such consideration is unconditionally due, from a customer prior to transferring goods or services under the terms of the contract. Contract liabilities are recognized as revenue after control of the products or services is transferred to the customer and all revenue recognition criteria have been met.

There was no difference in the accounting for revenue transactions under ASC 606 or ASC 605 as of and for the year ended December 31, 2017. The following tables summarize the impacts of adopting ASC 606 on certain components of the Company’s consolidated financial statements as of and for the year ended December 31, 2018:

Total reported assets and liabilities were approximately $3.3 million and $3.1 million, respectively, less than the pro forma consolidated balance sheet which assumes ASC 605 guidance remained in effect as of December 31, 2018. Reported inventories and deferred revenue reflect the impact of revenue recognized over time utilizing the input/cost-to-cost method for subsea projects during the year ended December 31, 2018.

Total reported product revenue and product cost of revenue were approximately, $3.1 million and $3.3 million, respectively, greater than the pro forma consolidated statement of operations for the year ended December 31, 2018 under ASC 606. Reported revenue and cost of revenue reflect the impact of revenue recognized over time utilizing the input/cost-to-cost method for subsea projects during the year ended December 31, 2018. Under ASC 605 subsea projects revenue was recognized at a point in time when transfer of control of the product passed to the customer.

The impact of the adoption of ASC 606 on the consolidated statement of cash flows for the year ended December 31, 2018 was not material and had no impact on net cash used in operating activities.

Depreciation expense was $10.8 million, $10.8 million and $9.8 million for the years ended December 31, 2018, 2017 and 2016, respectively. Amortization associated with assets under capital leases was less than $0.1 million for years ended December 31, 2017 and 2016. The Company had no assets under capital leases during the year ended December 31, 2018.

Construction in progress totaled $1.6 million and $7.7 million at December 31, 2018 and 2017, respectively. The balance at December 31, 2017 included engineering designs and other pre-construction costs totaling $7.2 million for a planned manufacturing facility in Statesboro, Georgia. In addition, construction in progress included $1.2 million and less than $0.1 million at December 31, 2018 and 2017, respectively, related to projects associated with the Company’s plan to expand the capacity of the East Providence, Rhode Island facility.

The Company is party to an Amended and Restated Loan and Security Agreement with Silicon Valley Bank (Loan Agreement). On January 25, 2018, the Loan Agreement was amended to extend the maturity date of the facility to April 28, 2018. On April 25, 2018, the Loan Agreement was further amended to extend the maturity date of the facility to April 28, 2019. Under the Loan Agreement, the Company may borrow up to $20.0 million subject to compliance with certain covenants and borrowing base limitations. At the Company’s election, the interest rate applicable to borrowings may be based on the prime rate or LIBOR. Prime rate-based rates vary from prime rate plus 0.75% per annum to prime rate plus 2.00% per annum, while LIBOR-based rates vary from LIBOR plus 3.75% per annum to LIBOR plus 4.25% per annum. In addition, the Company is required to pay a monthly unused line fee of 0.5% per annum of the average unused portion of the facility. Obligations under the Loan Agreement are secured by a security interest in all assets of the Company, including those at the East Providence facility, except for certain exclusions.

During the year ended December 31, 2018, the Company borrowed $56.7 million and repaid $56.3 million under the line of credit. At December 31, 2018 and 2017, the Company had $4.2 million and $3.8 million drawn on the revolving credit facility. Under the Loan Agreement, the Company is required to comply with both non-financial and financial covenants, including minimum Adjusted EBITDA and minimum Adjusted Quick Ratio covenants, as defined. In May 2018, August 2018 and November 2018, the Company obtained a waiver from Silicon Valley Bank related to its compliance with the Adjusted Quick Ratio covenant. These waivers were subject to the Company’s meeting certain conditions, including, in the case of the November 2018 waiver, the Company’s issuance of $3.25 million in equity or receipt of $5.0 million in customer advanced payments on or before January 31, 2019. The Company met the conditions of the November 2018 waiver upon receipt on January 30, 2019 of a $5.0 million prepayment from BASF. In December 2018, the Company obtained and subsequently met the conditions of a waiver from Silicon Valley Bank related to its compliance with the minimum Adjusted EBITDA covenant. The Company was in compliance with all non-financial and financial covenants as of December 31, 2018 under the terms of the waivers.

The Company has been required to provide letters of credit to secure obligations under certain commercial contracts. The Company had outstanding letters of credit backed by the revolving credit facility of $1.6 million and $2.3 million at December 31, 2018 and 2017, respectively, which reduce the funds otherwise available to the Company under the facility.

At December 31, 2018, the effective amount available to the Company under the revolving credit facility was $10.3 million after giving effect to the $4.2 million in outstanding borrowings and $1.6 million of outstanding letters of credit.

For the years ended December 31, 2018 and 2017, other expense, net of $0.5 million and $0.2 million, respectively, consisted primarily of fees and interest expense related to the Company’s revolving credit facility with Silicon Valley Bank.

For the year ended December 31, 2016, other expense, net of $0.8 million consisted of $0.7 million of postponed financing costs related to the Company’s decision to delay the construction and to terminate the financing of a second manufacturing facility during the year and $0.1 million of interest expense related to the revolving credit facility with Silicon Valley Bank.

The Company leases office and warehouse space in Northborough, Massachusetts and East Providence Rhode Island.

For leases that contain fixed increases in the minimum annual lease payments during the term of the lease, the Company recognizes rental expense on a straight-line basis over the lease term, and records the difference between rent expense and the amount currently payable in deferred rent.

During 2016, the Company entered into an agreement to extend its lease of approximately 51,650 square feet of office space in Northborough, Massachusetts. The lease commenced on January 1, 2017 and will expire on December 31, 2026. The annual base rent associated with the lease was $408,000 during 2017 and will increase by approximately 3% annually for the term of the lease. The lease also requires the payment by the Company of its pro rata share of real estate taxes and certain other expenses. Prior to the expiration of the lease, the Company will have the right to extend the lease for an additional term of three years.

Under the terms of the lease extension, the landlord provided the Company with an allowance of $1.2 million to be utilized for improvements to the leased premises. These amounts are recorded as a component of deferred rent in determining the minimum lease payments for the property. At December 31, 2018 and 2017, the Company had capitalized $1.2 million in associated leasehold improvement costs.

The Company also leases facilities and equipment under operating leases expiring at various dates through 2024. Under these agreements, the Company is obligated to pay annual rent, real estate taxes, and certain operating expenses.

Future minimum lease payments under operating leases at December 31, 2018 are as follows:

The Company incurred rent expense under all operating leases of approximately $1.5 million, $1.4 million and $1.5 million in the years ended December 31, 2018, 2017 and 2016, respectively.

The Company has been required to provide certain customers with letters of credit securing obligations under commercial contracts. The Company had letters of credit outstanding of $1.6 million and $2.3 million at December 31, 2018 and 2017, respectively. These letters of credit are secured by the Company’s revolving credit facility (see note 7).

The Company is party to a supply agreement, as amended, with BASF Polyurethanes GmbH (BASF) (the Supply Agreement) and a joint development agreement with BASF SE (the JDA). Pursuant to the Supply Agreement, the Company will sell exclusively to BASF the Company’s Spaceloft A2 product at annual volumes to be specified by BASF, subject to certain volume limits. The Supply Agreement will terminate on December 31, 2027. Upon expiration of the Supply Agreement, the Company will be subject to a post-termination supply commitment for an additional two years. The JDA is designed to facilitate the collaboration between the parties on the development and commercialization of new products.

In addition, BASF, in its sole discretion, may make prepayments to the Company in the aggregate amount of up to $22.0 million during the term of the Supply Agreement. BASF agreed to make prepayments in the amount of $5.0 million to the Company in 2018 (the 2018 Prepayment). The amounts and terms of additional prepayments, if any, are subject to negotiation between the Company and BASF.

After January 1, 2019, the Company will, at BASF’s instruction, credit up to 25.3% of any amounts invoiced by the Company for Spaceloft A2 product sold to BASF against the 2018 Prepayment balance. However, BASF has no obligation to purchase products under the Supply Agreement. If any of the 2018 Prepayment remains uncredited as of December 31, 2021, BASF may request that the Company repay the uncredited amount to BASF. The prepayment obligation is secured by a security interest in real estate, plant and equipment at the Company’s Rhode Island facility and a license to certain intellectual property.

As of December 31, 2018, the Company had recorded the 2018 Prepayment of $5.0 million as a prepayment liability, net of the current portion of $0.5 million which is included within deferred revenue on the consolidated balance sheet.

The Company is, from time to time, a party to litigation that arises in the normal course of its business operations. See Part I, Item 3 (“Legal Proceedings”) of this Annual Report on Form 10-K for a description of certain of the Company’s current legal proceedings. The Company is not presently a party to any litigation for which it believes a loss is probable requiring an amount to be accrued or a possible loss contingency requiring disclosure.

At December 31, 2018 and 2017, the Company was authorized to issue 130,000,000 shares of stock, of which 125,000,000 shares were designated as common stock and 5,000,000 shares were designated as preferred stock.

The Company sponsors the Aspen Aerogels, Inc. 401(k) Plan. Under the terms of the plan, the Company’s employees may contribute a percentage of their pretax earnings. During each of the years ended December 31, 2018, 2017 and 2016, the Company provided matching contributions of $0.2 million.

Effective June 12, 2014, the Company adopted the 2014 Employee, Director and Consultant Equity Incentive Plan (the 2014 Equity Plan). Under the 2014 Equity Plan, the Company may grant incentive stock options (ISOs), non-qualified stock options (NSOs), restricted stock, restricted stock units (RSUs) and other stock-based awards. Stock options under the plan are to be granted with an exercise price not less than the fair market value of the Company’s common stock at the date of grant. Equity awards granted to employees generally vest over a service period of three to four years. Restricted stock and stock options granted to nonemployee directors generally vest over a one year service period.

During 2018, the Company granted 58,062 shares of restricted common stock with a grant date fair value of $0.3 million and 81,102 NSOs to purchase shares of common stock with a grant date fair value of $0.4 million to its non-employee directors. The awards to non-employee directors during 2018 will vest over a period of one year. The Company also granted 497,910 RSUs with a grant date fair value of $2.3 million and 493,154 NSOs to purchase shares of common stock with a grant date fair value of $1.1 million to employees. The RSUs and NSOs granted to employees during 2018 will vest over a three year period. All awards to nonemployee directors and employees during 2018 were granted under the 2014 Equity Plan.

On December 11, 2015, the Company issued certain equity grants to its chief executive officer which included 78,125 shares of restricted stock, 84,745 NSOs to purchase shares of common stock vesting solely over three years and 370,181 NSOs to purchase shares of common stock vesting subject to certain common stock price target achievements, as defined, over a three to five year period (the CEO Options). Collectively, these equity grants had an aggregate fair value of $2.0 million at the time of grant. The restricted stock award will vest based on achievement of a Company financial performance target for fiscal year 2020.

On August 2, 2017, the Company modified the performance target for the year ending December 31, 2020 with respect to 78,125 shares of restricted stock held by its chief executive officer. In addition, the Company modified the vesting conditions of 131,578 and 122,324 NSOs held by its chief executive officer to purchase shares of common stock to extend the time period to achieve certain common stock price targets by an additional year to four and five years from the date of grant, respectively.

The Company accounted for the extension of the time periods for the achievement of the common stock price target vesting conditions of the NSOs as modifications in determining the stock-based compensation expense to be recognized over the remaining service period. The total incremental compensation expense resulting from the modification was $0.1 million. The incremental compensation expense associated with these awards will be recognized over the remaining service period of the awards.

On November 7, 2018, the Company modified the vesting conditions of the CEO Options such that in the event of a change in control, all the outstanding NSOs would vest, regardless of whether or not the common stock price target vesting conditions of the NSOs are achieved. The total incremental compensation expense resulting from the modification was approximately $0.1 million which will be recognized over the remaining term of the options.

Stock-based compensation is included in cost of sales or operating expenses, as applicable, and consists of the following:

At December 31, 2018, 3,780,217 shares of common stock were reserved for issuance upon the exercise or vesting, as appropriate, of outstanding stock-based awards granted under the 2014 Equity Plan. In addition, at December 31, 2018, 89,465 shares of common stock were reserved issuance upon the exercise of outstanding options granted under the Company’s 2001 Equity Incentive Plan, as amended (the 2001 Equity Plan). Any cancellations or forfeitures of the options outstanding under the 2001 Equity Plan will result in the shares reserved for issuance upon exercise or such options becoming available for grant under the 2014 Equity Plan. At December 31, 2018, there were 1,815,982 shares available for future grant under the 2014 Equity Plan.

The fair value of each stock option is estimated as of the date of grant using the Black-Scholes option pricing model. Key inputs into this formula included expected term, expected volatility, expected dividend yield and the risk-free rate. Each assumption is set forth and discussed below.

The Company used a Monte Carlo Simulation model to estimate the original grant date fair value of the CEO Options as well as the 2017 and 2018 modifications. The simulation model was based on the Black-Scholes option pricing model and a number of complex assumptions including (i) whether the vesting condition is satisfied within the time-vesting periods, and (ii) the date the common stock price target is met per the terms of the agreement.

For stock options with a service condition, the fair value is amortized on a straight-line basis over the requisite service period of the options, which is generally a three- to four-year vesting period from the date of grant.

The expected term represents the period that the Company’s stock-based awards are expected to be outstanding. The Company does not have sufficient historical exercise data to provide a reasonable basis upon which to estimate the expected term. Accordingly, the Company uses the simplified method to calculate the expected term for options granted.

Due to the Company’s limited historical data, the Company’s uses an estimated volatility based on the historical volatility of comparable companies with publicly available share prices. In 2018, 2017 and 2016, the expected volatility is based on the weighted average volatility of up to 17 companies with business, financial and market attributes that the Company believes are similar to its own.

The Company uses an expected dividend yield of zero. The Company does not intend to pay cash dividends on its common stock in the foreseeable future, nor has it paid dividends on its common stock in the past.

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

Effective January 1, 2017, the Company adopted the provisions of ASU 2016-09 related to the timing of accounting for the forfeitures of share based awards using a modified retrospective transition method. Under these provisions, the Company records the impact of forfeitures of service based awards at the time an award is forfeited. Adoption of the provisions resulted in a cumulative-effect adjustment to equity as of January 1, 2017 of $0.3 million.

Prior to adopting ASU 2016-09, forfeitures were required to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Forfeitures were estimated based on voluntary termination behavior as well as analysis of actual option forfeitures. Accordingly, share-based compensation expense had been reduced by an estimated annual forfeiture rate for the year ended December 31, 2016.

The following information relates to the fair value of the option awards estimated by use of the Black-Scholes option pricing model:

	Year Ended December 31,
	2018			2017			2016
	(In thousands)
Weighted average assumptions:
Expected term (in years)		5.93			5.86			5.86
Expected volatility		47.68	%		51.95	%		53.56	%
Risk free rate		2.76	%		1.99	%		1.36	%
Expected dividend yield		0.00	%		0.00	%		0.00	%
Weighted average fair value:
Grant-date fair value of options granted	$	2.29		$	2.08		$	2.16
Grant-date fair value of options vested	$	3.29		$	3.98		$	7.58
Aggregate intrinsic value of options exercised	$	—		$	—		$	—

	Number of Shares			Weighted Average Grant Date Fair Value Per Share		Weighted Average Exercise Price Per Share		Weighted Average Remaining Contractual Term (Years)		Aggregate Intrinsic Value
	($ in thousands, except share and per share data)
Options outstanding at December 31, 2017		2,432,906		$	7.18	$	10.48		7.64	$	554,236
Granted		574,256		$	2.29	$	4.73
Forfeited		(12,710	)	$	11.65	$	16.07
Exercised		—		$	—	$	—			$	—
Options outstanding at December 31, 2018		2,994,452		$	6.22	$	9.34		7.11	$	—
Exercisable at December 31, 2018		1,743,482		$	8.87	$	12.40		6.32	$	—
Expected to vest at December 31, 2018		1,250,970		$	2.53	$	5.08		8.22	$	—

As of December 31, 2018, total unrecognized compensation cost related to non-vested service-based options granted under the 2014 Equity Plan was $1.7 million. The unrecognized compensation cost for the service-based options is expected to be recognized over a weighted average period of 1.75 years.

The Company values restricted stock awards and RSUs based on the closing price of our shares on the date of grant. RSUs have time-based vesting conditions and typically vest over three or four years. Restricted stock awards issued to nonemployee directors generally vest in full one year from the date of grant.

Restricted stock awards granted during 2018 are considered issued and outstanding common stock and are excluded from the table above. As of December 31, 2018 there were 136,187 shares of restricted stock outstanding.

The total intrinsic value of restricted stock and RSUs that vested in 2018 and 2017 was $0.8 million and $1.4 million, respectively. As of December 31, 2018, 933,289 of the total shares of restricted stock and RSUs outstanding will vest upon the fulfillment of service conditions. In addition, 78,125 shares of restricted stock will vest only if a certain performance condition is achieved. As of December 31, 2018, the Company had determined that the performance-based condition was probable and $0.2 million in compensation expense was recorded to date in conjunction with the award.

As of December 31, 2018, total unrecognized compensation cost related to restricted stock awards of $0.1 million, RSUs of $2.3 million and restricted stock with performance-based conditions of $0.1 million is expected to be recognized over a weighted average period of 0.47 years, 1.80 years and 2.00 years, respectively.

The computation of basic and diluted net loss per share consists of the following:

Potentially dilutive common shares that were excluded from the computation of diluted net loss per share because they were anti-dilutive consist of the following:

In the table above, anti-dilutive shares consist of those common stock equivalents that have (i) an exercise price above the average stock price for the period or (ii) related average unrecognized stock compensation expense sufficient to buy back the entire amount of shares. The Company excludes the shares issued in connection with restricted stock awards from the calculation of basic weighted average common shares outstanding until the restrictions lapse.

As of December 31, 2018 and 2017, there was no dilutive impact of the common stock options, RSUs, common stock warrants and restricted stock awards.

The Company incurred net operating losses and recorded a full valuation allowance against net deferred assets for all periods presented. Accordingly, the Company has not recorded a provision for federal or state income taxes.

The reconciliation between the U.S. statutory income tax rate and the Company’s effective rate consists of the following:

	Year Ended December 31,
	2018			2017			2016
U.S. federal income tax statutory rate		21	%		35	%		35	%
Permanent differences		—	%		(3	)%		(4	)%
State tax, net of federal benefit		2	%		(5	)%		(1	)%
Changes in valuation allowance for deferred tax assets		(22	)%		113	%		(30	)%
Stock-based compensation		—	%		—	%		(1	)%
2017 Tax Cuts and Jobs Act		—	%		(138	)%		—	%
Other		(1	)%		(2	)%		1	%
Effective tax rate		—			—			—

The tax effects of temporary differences between financial statement and tax accounting that gave rise to significant portions of the Company’s deferred tax assets and deferred tax liabilities at December 31, 2018 and 2017 are presented below:

	December 31,
	2018			2017
	(In thousands)
Deferred tax assets:
Net operating loss carryforwards	$	51,629		$	45,307
Stock-based compensation		5,194			4,719
Tax credit carryforwards		296			308
Reserves and accruals		1,258			492
Interest expense limitation		135			—
Intangible assets and amortization		50			56
Total gross deferred tax assets		58,562			50,882
Deferred tax liabilities:
Depreciation		(4,614	)		(4,645	)
Total deferred tax liabilities		(4,614	)		(4,645	)
Total deferred tax assets and liabilities		53,948			46,237
Valuation allowance		(53,948	)		(46,237	)
Net deferred tax asset	$	—		$	—

On December 22, 2017, the President of the United States signed into law the Tax Cuts and Jobs Act (TCJA) tax reform legislation. This legislation makes significant change in U.S. tax law including a reduction in the corporate tax rates, changes to net operating loss carryforwards and carrybacks, and a repeal of the corporate alternative minimum tax. The legislation reduced the U.S. corporate tax rate from 34% to 21% for the year ending 2018. As a result of the enacted law, the Company was required to revalue deferred tax assets and liabilities at the 21% rate as of December 31, 2017. This resulted in a decrease in the Company’s net deferred tax asset and corresponding valuation allowance of $26.7 million. As the Company maintains a full valuation allowance against its net deferred tax asset position in the United States, this revaluation did not result in an income tax expense or benefit in the prior year. The provisions of the TCJA related to the one-time mandatory transition tax on deemed repatriation did not have an impact on the Company’s results of operations during the years ended December 31, 2018 and 2017. The other provisions of the TCJA did not have a material impact on the Company’s 2018 or 2017 consolidated financial statements.

The Company is subject to additional requirements of the TCJA which became effective during the year ended December 31, 2018. The change in tax law allows post-2017 federal net operating losses to be carried forward indefinitely and allows such net operating losses to offset up to 80% of future taxable income. The Company is also subject to the rules regarding global intangible low-taxed income (“GILTI”), which the Company has elected to account for as a period cost, the limitation on the deductibility of certain executive compensation and interest expense and other immaterial provisions.

The net change in the valuation allowance for the year ended December 31, 2018, was an increase of $7.7 million. The Company has recorded a full valuation allowance against its deferred tax assets due to the uncertainty associated with the utilization of

the net operating loss carryforwards and other future deductible items. In assessing the realizability of deferred tax assets, the Company considers all available evidence, historical and prospective, with greater weight given to historical evidence, in determining whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of the Company’s deferred tax assets generally is dependent upon generation of future taxable income.

At December 31, 2018, the Company has $82.1 million of apportioned net operating losses available to offset future state taxable income, if any, and which begin to expire at various dates between 2019 and 2038.

For each of the years ended December 31, 2018, 2017 and 2016, the Company did not have any material unrecognized tax benefits and thus no interest and penalties related to unrecognized tax benefits were recorded. In addition, the Company does not expect that the amount of unrecognized tax benefits will change significantly within the next twelve months.

The Company files a federal income tax return in the United States and income tax returns in various state and foreign jurisdictions. All tax years are open for examination by the taxing authorities for both federal and state purposes.

The Securities & Exchange Commission staff issued Staff Accounting Bulletin No. 118 (SAB 118) to address the tax reform legislation. In accordance with SAB 118, the Company has recognized the provisional tax impacts, outlined above, related to the re-measurement of its deferred income tax assets and liabilities associated with the one-time mandatory transition tax on deemed repatriation. The ultimate impact may differ from the provisional amounts, due to, among other things, the significant complexity of the 2017 Tax Act and anticipated additional regulatory guidance that may be issued by the IRS, changes in analysis, interpretations and assumptions the Company has made and actions the Company may take as a result of the 2017 Tax Act. The Company has completed its review of the 2017 Tax Act and noted no material changes to its initial assessment.

The Company has evaluated subsequent events through March 8, 2019, the date of issuance of the consolidated financial statements for the year ended December 31, 2018.

On January 14, 2019, the Company entered into an addendum to its existing supply agreement with BASF. Pursuant to the addendum, BASF remitted a prepayment in the amount of $5.0 million to the Company during January 2019. The Company will credit 50.0% of any amounts that we invoice for a newly developed product sold to BASF after January 1, 2020 against the outstanding balance of this 2019 prepayment. After December 31, 2022, BASF may elect to have the Company credit 24.7% of any amounts we invoice for Spaceloft A2 sold to BASF against the outstanding balance of this 2019 prepayment, if any, or request that the Company repay the uncredited amount of the 2019 prepayment to BASF in full.

On March 4, 2019, the Company’s revolving credit facility with Silicon Valley Bank was amended to extend the maturity date of the facility to April 28, 2020. Under the Company’s revolving credit facility, it is permitted to borrow a maximum of $20.0 million, subject to continued covenant compliance and borrowing base requirements. At the Company’s election, the interest rate applicable to borrowings under the revolving credit facility may be based on the prime rate or LIBOR. Prime rate-based rates vary from prime rate plus 0.75% per annum to prime rate plus 2.00% per annum, while LIBOR-based rates vary from LIBOR plus 3.75% per annum to LIBOR plus 4.25% per annum. In addition, the Company is required to pay a monthly unused revolving line facility fee of 0.5% per annum of the average unused portion of the revolving credit facility. The credit facility has also been amended to (i) revise the definition of “Borrowing Base” to remove the eligible inventory component of the Borrowing Base, (ii) remove the Adjusted Quick Ratio financial covenant set forth in the loan agreement and (iii) establish certain minimum Adjusted EBITDA levels with respect to the minimum Adjusted EBITDA financial covenant for the extended term. The Company intends to extend or replace the facility prior to its maturity.

	Three Months Ended
	March 31,			June 30,			Sept 30,			Dec 31,
	(in thousands, except per share data)
	(unaudited)
2018
Total revenue	$	23,074		$	21,671		$	23,937		$	35,679
Gross profit		2,810			2,744			1,529			5,586
Loss from operations		(6,750	)		(6,855	)		(6,369	)		(13,942	)
Net loss		(6,842	)		(6,958	)		(6,532	)		(14,108	)
Net loss per share basic and diluted common share - basic	$	(0.29	)	$	(0.29	)	$	(0.27	)	$	(0.59	)
2017
Total revenue	$	23,002		$	25,069		$	27,198		$	36,362
Gross profit		2,221			3,694			4,948			7,808
Loss from operations		(9,052	)		(5,433	)		(3,030	)		(1,621	)
Net loss		(9,078	)		(5,472	)		(3,088	)		(1,683	)
Net income loss per share basic and diluted common share - basic	$	(0.39	)	$	(0.23	)	$	(0.13	)	$	(0.07	)

Description	Balance at Beginning of Year		Charges to Costs and Expenses (a)		Recoveries of Costs and Expenses (b)			Deductions to Allowances for Uncollectible Accounts (c)			Charges to (Deductions from) Other Accounts (d)		Balance at End of Year
Year Ended December 31, 2018:
Allowances for uncollectible accounts and sales returns and allowances	$	93		2,961		(39	)		(142	)		4	$	2,877
Year Ended December 31, 2017:
Allowances for uncollectible accounts and sales returns and allowances	$	93		—		—			—			—	$	93
Year Ended December 31, 2016:
Allowances for uncollectible accounts and sales returns and allowances	$	89		—		—			—			4	$	93

(a)Represents allowances for uncollectible accounts established through general and administrative expenses.

(b)Represents recoveries of allowances for uncollectible accounts established through general and administrative expenses.

(d)Represents net change in allowances for sales returns, recorded as contra-revenue.

(a) Evaluation of Disclosure Controls and Procedures. We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in the reports that we file or submit under the Securities Exchange Act of 1934, as amended, or the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and is accumulated and communicated to our management, including our principal executive officer and principal financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

As of December 31, 2018, our management, with the participation of our principal executive officer and principal financial officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives, and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on such evaluation, our principal executive officer and principal financial officer have concluded, that, as of December 31, 2018, our disclosure controls and procedures were effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and is accumulated and communicated to our management, including our principal executive officer and principal financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

(b) Management’s Report on Internal Control over Financial Reporting. The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, as a process designed by, or under the supervision of, the Company’s principal executive and principal financial officers and effected by the Company’s board of directors, management and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. The Company’s internal control over financial reporting includes those policies and procedures that:

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

The Company’s management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2018. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework (2013).

Based on our assessment, management believes that, as of December 31, 2018, the Company’s internal control over financial reporting is effective based on those criteria.

(c) Changes in Internal Controls. There were no changes in our internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15(d)-15(f) promulgated under the Exchange Act, identified in connection with the evaluation of such internal control that occurred during the fourth quarter of the last fiscal year that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

The foregoing description of the amendment to the credit facility is only a summary of its material terms and does not purport to be complete. This summary is qualified in its entirety by reference to the description of the amendment to the credit facility, a copy of which will be filed as an exhibit to a future periodic report of the Company.

The response to this item is incorporated by reference from the discussion responsive thereto under the captions “Management and Corporate Governance,” “Section 16(a) Beneficial Ownership Reporting Compliance,” and “Code of Business Conduct and Ethics” in the Company’s Proxy Statement for the 2019 Annual Meeting of Stockholders.

The response to this item is incorporated by reference from the discussion responsive thereto under the caption “Executive Officer and Director Compensation” in the Company’s Proxy Statement for the 2019 Annual Meeting of Stockholders.

The response to this item is incorporated by reference from the discussion responsive thereto under the captions “Security Ownership of Certain Beneficial Owners and Management,” and “Equity Compensation Plan Information” in the Company’s Proxy Statement for the 2019 Annual Meeting of Stockholders.

Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

The response to this item is incorporated by reference from the discussion responsive thereto under the captions “Certain Relationships and Related Person Transactions” and “Management and Corporate Governance” in the Company’s Proxy Statement for the 2019 Annual Meeting of Stockholders.

The response to this item is incorporated by reference from the discussion responsive thereto under the caption “Independent Registered Public Accounting Firm” in the Company’s Proxy Statement for the 2019 Annual Meeting of Stockholders.

Item 15(a). The following documents are filed as part of this Annual Report on Form 10-K:

Item 15(a)(1) The following consolidated financial statements of the Company are included in Part II, Item 8 of this Annual Report on Form 10-K:

Consolidated Statements of Operations for the Years Ended December 31, 2018, 2017, and 2016

Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2018, 2017 and 2016

Consolidated Statements of Cash Flows for the Years Ended December 31, 2018, 2017 and 2016

Item 15(a)(2) The following financial statements schedule is included in Part II, Item 8:

All other financial statement schedules have not been included because they are not applicable or the information is included in the financial statements or notes thereto.

The following is a list of exhibits filed as part of this Annual Report on Form 10-K.

Exhibit Number	Exhibit Description	Filed with this Report	Incorporated by Reference herein from Form or Schedule	Filing Date	SEC File/Reg. Number
10.32	Side Agreement, dated June 21, 2016, by and between the Registrant and BASF SE.*		Form 10-Q (Exhibit 10.2)	8/5/16	001-36481

10.32.1	Amended and Restated Side Agreement, dated February 16, 2018, by and between the Registrant and BASF SE.*		Form 10-Q (Exhibit 10.3)	5/4/18	001-36481

10.33	Joint Development Agreement, dated June 21, 2016, by and between the Registrant and BASF SE.*		Form 10-Q (Exhibit 10.3)	8/5/16	001-36481

14.1	Code of business conduct and ethics.		Form 8-K (Exhibit 14.1)	6/22/15	001-36481

21.1	Subsidiaries of the Registrant.	X

23.1	Consent of KPMG LLP.	X

31.1	Certification of principal executive officer under Section 302(a) of the Sarbanes-Oxley Act of 2002.	X

31.2	Certification of principal financial officer under Section 302(a) of the Sarbanes-Oxley Act of 2002.	X

32	Certifications of the principal executive officer and the principal financial officer under Section 906 of the Sarbanes-Oxley Act of 2002.	X

101	The following materials from the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2018, formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets as of December 31, 2018 and 2017, (ii) Consolidated Statements of Operations for the Years Ended December 31, 2018, 2017 and 2016, (iii) Consolidated Statements Stockholders’ Equity for the Years Ended December 31, 2018, 2017 and 2016, (iv) Consolidated Statements of Cash Flows for the Years Ended December 31, 2018, 2017, and 2016, and (v) Notes to Consolidated Financial Statements.	X

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated below and on the dates indicated.

Delaware		04-3559972
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

30 Forbes Road, Building B Northborough, Massachusetts		01532
(Address of principal executive offices)		(Zip Code)

Title of each class		Name of each exchange on which registered
Common Stock, par value $0.00001 per share		New York Stock Exchange


PART I		3
ITEM 1.	BUSINESS	3
ITEM 1A.	RISK FACTORS	16
ITEM 1B.	UNRESOLVED STAFF COMMENTS	45
ITEM 2.	PROPERTIES	45
ITEM 3.	LEGAL PROCEEDINGS	45
ITEM 4.	MINE SAFETY DISCLOSURES	46
PART II		47
ITEM 5.	MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES	47
ITEM 6.	SELECTED FINANCIAL DATA	47
ITEM 7.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	49
ITEM 7A.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	70
ITEM 8.	FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA	72
ITEM 9.	CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE	97
ITEM 9A.	CONTROLS AND PROCEDURES	97
ITEM 9B.	OTHER INFORMATION	98
PART III		99
ITEM 10.	DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE	99
ITEM 11.	EXECUTIVE COMPENSATION	99
ITEM 12.	SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS	99
ITEM 13.	CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE	99
ITEM 14.	PRINCIPAL ACCOUNTING FEES AND SERVICES	99
PART IV		100
ITEM 15.	EXHIBITS, FINANCIAL STATEMENT SCHEDULES	100
ITEM 16.	FORM 10-K SUMMARY	104
	SIGNATURES	105

	Year Ended December 31,
	2018		2017		2016
	(Square feet in thousands)
Product shipments in square feet		34,435		37,519		44,286

	December 31,
	2018			2017			Useful life
	(In thousands)
Construction in progress	$	1,568		$	7,699		—
Buildings		24,016			24,013		30 years
Machinery and equipment		120,466			118,786		3 — 10 years
Computer equipment and software		8,352			8,099		3 years
Total		154,402			158,597
Accumulated depreciation and amortization		(92,703	)		(82,530	)
Property, plant and equipment, net	$	61,699		$	76,067

Large accelerated filer	☐	Accelerated filer	☒

Non-accelerated filer	☐	Smaller reporting company	☒
		Emerging growth company	☒

	As of December 31, 2018
	As reported under ASC 606			Pro forma as if ASC 605 was in effect
	(In thousands)
Inventories	$	7,318		$	10,572
Total current assets		37,251			40,505
Total assets		99,023			102,277
Deferred revenue		2,629			5,759
Total current liabilities		23,066			26,196
Total liabilities		28,769			31,899
Accumulated deficit		(471,585	)		(471,461	)
Total stockholders’ equity		70,254			70,378
Total liabilities and stockholders’ equity		99,023			102,277

	Year Ended December 31, 2018
	As reported under ASC 606			Pro forma as if ASC 605 was in effect
	(In thousands)
Product revenue	$	102,123		$	98,993
Total revenue		104,361			101,231
Product cost of revenue		90,660			87,406
Gross profit		12,669			12,793
Loss from operations		(33,916	)		(33,792	)
Net loss		(34,440	)		(34,316	)

Year	Operating Leases
	(In thousands)
2019	$	1,375
2020		1,304
2021		1,124
2022		1,068
2023		1,082
Thereafter		1,701
Total minimum lease payments	$	7,654

	Restricted Stock Units			Weighted Average Grant Date Fair Value
Balance at December 31, 2017		827,391		$	4.59
Granted		497,910			4.62
Vested		(391,989	)		5.13
Forfeited		(58,085	)		4.31
Balance at December 31, 2018		875,227		$	4.38

	ASPEN AEROGELS, INC.

Date: March 8, 2019	By:	/s/ Donald R. Young
		Donald R. Young
		President and Chief Executive Officer
		(principal executive officer)

Signature	Title	Date

/s/ Donald R. Young Donald R. Young	President, Chief Executive Officer and Director (principal executive officer)	March 8, 2019

/s/ John F. Fairbanks John F. Fairbanks	Vice President, Chief Financial Officer and Treasurer (principal financial officer and principal accounting officer)	March 8, 2019

/s/ William P. Noglows William P. Noglows	Chairman of the Board	March 8, 2019

/s/ Rebecca B. Blalock Rebecca B. Blalock	Director and Chair of the Nominating and Governance Committee	March 8, 2019

/s/ Robert M. Gervis Robert M. Gervis	Director and Chair of the Compensation and Leadership Development Committee	March 8, 2019

/s/ Steven R. Mitchell Steven R. Mitchell	Director	March 8, 2019

/s/ Mark L. Noetzel Mark L. Noetzel	Director	March 8, 2019

/s/ Richard F. Reilly Richard F. Reilly	Director and Chair of the Audit Committee	March 8, 2019