ASPEN AEROGELS INC - Quarter Report: 2014 June (Form 10-Q)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

For the quarterly period ended June 30, 2014

OR

For the transition period from                      to                     

Commission file number: 001-36481

ASPEN AEROGELS, INC.

(Exact name of registrant as specified in its charter)

Registrant’s telephone number, including area code: (508) 691-1111

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  x

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).    Yes  x    No  ¨

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

As of July 31, 2014, the registrant had 23,000,000 shares of common stock outstanding.

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ASPEN AEROGELS, INC.

INDEX TO FORM 10-Q

Trademarks, Trade Names and Service Marks

We own or have rights to use “Aspen Aerogels,” “Cryogel,” “Pyrogel,” “Spaceloft,” the Aspen Aerogels logo and other trademarks, service marks and trade names of Aspen Aerogels appearing in this quarterly report on Form 10-Q. Solely for convenience, the trademarks, service marks and trade names referred to in this report are without the ® and TM symbols, but such references are not intended to indicate, in any way, that the owner thereof will not assert, to the fullest extent under applicable law, such owner’s rights to these trademarks, service marks and trade names. This report contains additional trademarks, service marks and trade names of other companies, which, to our knowledge, are the property of their respective owners.

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PART I - FINANCIAL INFORMATION

ASPEN AEROGELS, INC.

Consolidated Balance Sheets

(Unaudited)

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See accompanying notes to unaudited consolidated financial statements.

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ASPEN AEROGELS, INC.

Consolidated Statements of Operations

(Unaudited)

See accompanying notes to unaudited consolidated financial statements.

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ASPEN AEROGELS, INC.

Consolidated Statements of Cash Flows

(Unaudited)

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See accompanying notes to unaudited consolidated financial statements.

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ASPEN AEROGELS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

(1) Description of Business and Basis of Presentation

Nature of Business

Aspen Aerogels, Inc. (collectively with its subsidiaries, the Company) is an energy technology company that designs, develops and manufactures innovative, high-performance aerogel insulation. 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.

Unaudited Interim Financial Information

The accompanying unaudited interim consolidated financial statements include the accounts of the Company and have been prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) and regulations of the Securities and Exchange Commission (the SEC) regarding interim financial reporting. Certain information and disclosures normally included in the consolidated financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to such rules and regulations. As such, the information included in this quarterly report on Form 10-Q should be read in conjunction with the audited consolidated financial statements and accompanying notes for the year ended December 31, 2013 included in our prospectus dated June 12, 2014 and filed with the SEC pursuant to Rule 424(b) under the Securities Act of 1933, as amended, on June 16, 2014 (the Prospectus).

In the opinion of the Company’s management, the unaudited interim consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements and include all adjustments that are of a normal recurring nature and necessary for the fair statement of the Company’s financial position as of June 30, 2014 and the results of its operations for the three months and six months ended June 30, 2014 and 2013 and the cash flows for the six month period then ended. The Company has evaluated events throughout the date of this filing.

The results of operations for the three and six months ended June 30, 2014 are not necessarily indicative of the results to be expected for the year ending December 31, 2014 or any other period.

There have been no changes to our significant accounting policies described in the Prospectus that have had a material impact on our consolidated financial statements and notes thereto. All intercompany balances and transactions have been eliminated in consolidation.

Reclassification

The December 31, 2013 balance sheet reflects a $0.2 million reclassification of the Company’s sales returns reserve from a component of accrued expenses to a reduction of accounts receivable to conform to the current period’s presentation. The change has no impact on the results of operations.

(2) Initial Public Offering

On June 18, 2014, the Company completed an initial public offering (an IPO) of 7,500,000 shares of its common stock at a public offering price of $11.00 per share. The Company received net proceeds of $74.8 million after deducting underwriting discounts and commissions of $4.3 million and other offering expenses of approximately $3.4 million of which $2.5 million was unpaid as of June 30, 2014. Upon the closing of the offering, all of the Company’s then-outstanding (i) warrants to purchase Series C preferred stock, (the “Series C warrants”) were subject to an automatic net cashless exercise, (ii) convertible preferred stock (including the shares of Series C preferred stock issued upon the automatic net cashless exercise of Series C warrants) automatically converted into 115,982 shares of common stock, and (iii) Convertible Notes (see note 9) and Senior Convertible Notes (see note 8) automatically converted into 15,319,034 shares of common stock.

Prior to the closing of the offering, the Company completed a 1-for-824.7412544 reverse stock split of its common stock. All common shares and related per share amounts in the financial statements and notes have been adjusted retroactively to reflect the reverse stock split.

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Upon the closing of the IPO, the Company amended and restated its certificate of incorporation. The total number of shares of all classes of stock which the Company will have the authority to issue is 130,000,000 shares, consisting of 125,000,000 shares of common stock, par value $0.00001 per share (the Common Stock) and 5,000,000 shares of preferred stock, par value $0.00001 per share (the Preferred Stock).

2014 Employee, Director and Consultant Equity Incentive Plan

Upon completion of the IPO, 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, non-qualified stock options, restricted stock, unrestricted stock 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.

(3) Significant Accounting Policies

Use of Estimates

The preparation of the consolidated financial statements requires the Company to make a number of estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Significant items subject to such estimates and assumptions include allowances for doubtful accounts, inventory valuation, the carrying amount of property and equipment, fair value of debt and capital stock, 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 it believes to be reasonable under the circumstances. Management adjusts such estimates and assumptions when facts and circumstances dictate. Illiquid credit markets, volatile equity markets and declines in business investment 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

Cash balances are maintained with major financial institutions in North America. Deposits with these financial institutions may exceed the amount of insurance provided on such deposits.

Fair Value of Financial Instruments

Fair value is an exit price that represents the amount that would be received from the sale of an asset or paid to transfer a liability in an orderly transaction between market participants. Accordingly, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. The Company discloses the manner in which fair value is determined for assets and liabilities based on a three-tiered fair value hierarchy. The hierarchy ranks the quality and reliability of the information used to determine the fair values. The three levels of inputs described in the standard are:

Under the Fair Value Option Subsections of Financial Accounting Standards Board (FASB) ASC Subtopic 825-10, Financial Instruments — Overall, the Company has the irrevocable option to report most financial assets and financial liabilities at fair value on an instrument by instrument basis, with changes in fair value reported in earnings each reporting period. As a result of electing this option, the Company had recorded its Subordinated Notes, Senior Convertible Notes and Convertible Notes at fair value in order to measure these liabilities at amounts that more accurately reflect the economics of these instruments (see notes 7, 8 and 9).

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During the six months ended June 30, 2014 and at December 31, 2013 the Company valued its Subordinated Notes, Senior Convertible Notes and Convertible Notes utilizing Level 3 inputs.

Stock-based Compensation

Stock-based compensation cost is measured at the grant date based on the fair value of the award. 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 awards, which requires 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, the expected term of the option and the forfeiture rate. For performance-based stock options issued during the year ended December 31, 2013, the Company used a Monte Carlo simulation model to estimate the number of options the Company expected to remain outstanding and eligible for vesting upon completion of an IPO. The simulation model was based on a number of complex assumptions including the terms of the performance condition, the expected value of the Company’s common stock at the time of its IPO, the expected time from the date of grant to its IPO, and expected volatility. The compensation cost of these performance-based options was determined by multiplying the Black-Scholes estimate of grant date fair value by the percentage of options expected to remain outstanding and eligible for vesting upon completion of the Company’s IPO. As a result of the closing of the initial public offering, the Company recorded $5.6 million of stock-based compensation related to these performance-based awards during the six months ended June 30, 2014.

The Company issued shares of restricted stock with an aggregate value at issuance of $0.7 million to non-employee directors during the six months ended June 30, 2014. The Company did not issue any stock-based awards during the six months ended June 30, 2013.

Earnings per Share

Prior to the IPO, net income (loss) per common share was calculated using the two-class method, which is an earnings allocation formula that determines net income (loss) per share for the holders of the Company’s common shares and participating securities. Prior to their conversion to common stock at the time of the Company’s IPO, the Company’s Series A preferred stock, Series B preferred stock and Series C preferred stock warrants contained participation rights in any dividend to be paid by the Company to holders of its common shares and were deemed to be participating securities. Net income (loss) available to common shareholders and participating securities is allocated to each share on an as-if-converted basis as if all of the earnings for the period had been distributed. The participating securities did not include a contractual obligation to share in losses of the Company and are not included in the calculation of net loss per share in the periods that have a net loss.

Diluted net income (loss) per share is computed using the more dilutive of (a) the two-class method, or (b) the if-converted method. The Company allocates net income (loss) first to preferred stockholders and holders of warrants to purchase preferred stock based on dividend rights and then to common, preferred stockholders and preferred warrant holders based on ownership interests. 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 and warrants. Common equivalent shares are excluded from the computation of diluted net income (loss) per share if their effect is antidilutive.

Subsequent to the IPO, the Company calculates net income (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 and warrants. Common equivalent shares are excluded from the computation of diluted net income (loss) per share if their effect is antidilutive.

Segments

Operating segments are identified as components of an enterprise about which discrete financial information is available for evaluation by the chief operating decision maker when 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.

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

Recently Issued Accounting Standards

In May 2014, the FASB issued new revenue recognition guidance which provides a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and will supersede most current revenue recognition guidance. The new standard also requires significantly expanded disclosures regarding the qualitative and quantitative information of an entity’s nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The guidance is effective for the Company in 2017. Early adoption is not permitted. The Company is currently evaluating the impact the standard will have on its consolidated financial statements.

From time to time, new accounting pronouncements are issued by the FASB or other standard setting bodies and adopted by the Company as of the specified effective date. Unless otherwise discussed, the Company believes that the impact of recently issued standards that are not yet effective will not have a material impact on its financial position or results of operations upon adoption.

(4) Inventories

Inventories consist of the following:

(5) Property, Plant and Equipment, Net

Property, plant and equipment consist of the following:

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Depreciation expense was $5.1 million and $4.9 million for the six months ended June 30, 2014 and 2013, respectively.

Construction in progress totaling $6.9 million and $6.2 million at June 30, 2014 and December 31, 2013, respectively, related primarily to capital projects at the Company’s manufacturing facility in East Providence, RI.

(6) Accrued Expenses

Accrued expenses consist of the following:

(7) Subordinated Notes

In June 2014, the Company used a portion of the net proceeds from the initial public offering discussed in note 2 to repay $18.8 million of the original principal balance and accrued interest on the Subordinated Notes. As of June 30, 2014, all obligations under the Subordinated Notes had been paid in full. As of December 31, 2013, Subordinated Notes of $17.3 million were classified as a current liability.

The Company elected the fair value option for the Subordinated Notes and had recorded the instrument at fair value. The fair value of the Subordinated Notes was determined by analysis of the amount to be paid on the notes at the occurrence of certain events in which the Subordinated Notes would be repaid to the noteholders in cash. The probability weighted discounted cash flow analysis utilized assumptions related to the probability of the occurrence of each of the various events and appropriate discount rates for each of the scenarios.

At June 30, 2013 the valuations were calculated at an implied discount of approximately 20% and were weighted as follows: repayment prior to maturity on June 30, 2014, 35%; and repayment at maturity on September 30, 2014, 65%. There would not be a material difference if the weightings were increased or decreased by 10%. At June 30, 2013, the aggregate fair value of the Subordinated Notes was determined to be $15.8 million, with an aggregate unpaid principal balance totaling $13.1 million.

At December 31, 2013 the valuations were calculated at an implied discount of approximately 20% and were weighted as follows: repayment prior to maturity on June 30, 2014, 20%; and repayment at maturity on September 30, 2014, 80%. There would not be a material difference if the weightings were increased or decreased by 10%. At December 31, 2013, the aggregate fair value of the Subordinated Notes was determined to be $17.3 million, with an aggregate unpaid principal balance totaling $15.9 million.

During the six month period ended June 30, 2014, prior to the repayment of the Subordinated Notes, the valuations were calculated based on full repayment on June 20, 2014. As of that date, the aggregate fair value of the Subordinated Notes was determined to be $18.8 million. The Subordinated Notes were repaid in full on June 20, 2014.

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The following table presents a roll-forward of the fair value of Level 3 (significant unobservable inputs) Subordinated Notes for the six months ended June 30, 2014 and 2013 (in thousands):

(8) Senior Convertible Notes

Senior Convertible Notes consist of the following:

Effective March 28, 2013, the Company entered into a Note and Warrant Purchase Agreement (March 2013 NPA) authorizing the issuance of $22.5 million of Senior Subordinated Convertible Notes (the March 2013 Investor Notes) and Senior Subordinated Arcapita Notes (the March 2013 Arcapita Notes) (collectively, the Senior Convertible Notes). At each closing under the March 2013 NPA, the Company issued warrants to purchase shares of a newly created Series C Preferred Stock (the Series C) based on the principal balance of Senior Convertible Notes issued to each purchaser. The Company determined that the Series C warrants, which were subject to net share settlement, were equity classified. Collectively, the warrants issued pursuant to the March 2013 NPA were exercisable for Series C shares equal to 85.7% of the then outstanding capital stock of the Company on a fully diluted basis. The warrants had an exercise price of $0.0001 per share, were immediately exercisable and were scheduled to expire by their terms on March 28, 2023.

Pursuant to side letter agreements, in March and May 2013, holders of $7.5 million of Convertible Notes (see note 9) issued in November 2012 and January 2013 (the Initial Notes) exchanged their original principal balance for an equivalent principal amount of Senior Convertible Notes (the Exchanged Notes) and a pro-rata share of Series C warrants issued under the March 2013 NPA. The Company accounted for the warrants as a debt issuance cost and recorded an immediate charge for the fair value of the Series C warrants totaling $5.4 million in other income (expense). Pursuant to the exchange, the holders of the Exchanged Notes received notes senior in preference to the Initial Notes and with an extended maturity date of March 28, 2016.

Given that the terms of the Exchanged Notes were substantially different than the terms of the Initial Notes, the exchange was accounted for as an extinguishment of debt. Upon the exchange, the Company recognized a loss totaling $5.7 million for the six month period ended June 30, 2013. This loss represents the difference between (i) the fair value of the Exchanged Notes at reissuance and the fair value of Series C preferred stock warrants, and (ii) the carrying value of the Initial Notes. The Company elected to

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account for all of the issuances of its Senior Convertible Notes and various embedded derivatives in accordance with ASC Topic 825-10, Fair Value Option for Financial Liabilities, whereby the Company initially and subsequently measured this financial instrument in its entirety at fair value, with the changes in fair value recorded each reporting period in interest expense (income).

In March and May 2013, the Company issued an additional $5.0 million and $10.0 million of Senior Convertible Notes, respectively. The noteholders received a pro-rata share of Series C warrants for their participation in these financings. The Company accounted for the warrant issuances as a debt issuance cost and recorded an immediate charge for the fair value of the Series C warrants. For the three and six months ended June 30, 2013, the Company recorded $7.1 million and $10.7 million, respectively, as a charge to interest expense related to the warrants (see note 11).

In conjunction with the March 2013 NPA, the Company incurred $0.9 million of debt issuance costs during the six months ended June 30, 2013. These debt issuance costs were allocated between the debt and equity instruments related to the transaction. Of the total debt issuance costs, $0.6 million was allocated to the Senior Convertible Notes and recorded through interest expense, while the remaining $0.3 million was allocated to the Series C warrants with an offset for additional paid-in capital.

Net proceeds from the issuance of the Senior Convertible Notes were used (i) for investment in working capital to support revenue growth, (ii) for capital expenditures to improve the efficiency and throughput of existing manufacturing assets, and (iii) for settlement of all cash obligations under the Company’s cross license agreement with Cabot Corporation.

Upon the closing of the Company’s initial public offering discussed in note 2, the outstanding principal and accrued interest on the Senior Convertible Notes were marked to an aggregate fair value of $39.5 million and automatically converted into 3,591,604 shares of common stock equal to the unpaid principal amount of the Senior Convertible Notes and accrued interest as of June 18, 2014 divided by the Conversion Percentage, which was 62.5% of the initial public offering price of $11.00 per share. In addition, all outstanding Series C warrants were automatically net exercised, which together with the then outstanding shares of Series C preferred stock converted into 104,734 shares of common stock upon the closing of the Company’s IPO.

Fair Value Option

The following table presents the difference between the aggregate fair value and the aggregate unpaid principal balance of the Senior Convertible Notes recorded at fair value at December 31, 2013:

Fair Value Measurements

The change in the fair values of the Senior Convertible Notes during the six months ended June 30, 2013 and 2014 was determined by utilizing probability weighted discounted cash flow analyses, which took into consideration market and general economic events, as well as the Company’s financial results and other data available as of June 30, 2013 and 2014. These analyses

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determined the amount to be paid on the Senior Convertible Notes in either cash or shares at the occurrence of certain events in which the Senior Convertible Notes would be converted into shares of the Company’s common stock or would be repaid in cash. The probability weighted discounted cash flow analyses utilized assumptions related to the probability of the occurrence of each of the various events and appropriate discount rates for each of the scenarios as follows:

The above scenarios incorporated a weighted average implied discount rate of 41.7% at both December 31, 2013 and June 30, 2013.

The fair value of the Senior Convertible Notes upon the closing of the Company’s IPO was determined to be $39.5 million.

The following table presents a roll-forward of the fair value of Level 3 (significant unobservable inputs) Senior Convertible Notes for the six months ended June 30, 2014 and 2013:

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Changes in fair value of the Company’s Senior Convertible Notes for the six months ended June 30, 2014 and 2013 was $11.4 million and $1.5 million, respectively. Included in interest income (expense) for the six months ended June 30, 2013 was the charge for the fair value of the Series C warrants of $10.7 million (see note 11).

(9) Convertible Notes

Convertible Notes consist of the following:

Commencing in June 2011 and concluding in January 2013, the Company issued a total of $69.9 million of 8% subordinated convertible notes (the Investor Notes) to new and existing investors. The Investor Notes had original maturity dates of June 1, 2014, June 14, 2014 and December 6, 2014, depending on their date of issuance. Commencing in December 2011 and concluding in September 2012, the Company issued a total of $3.5 million of noninterest bearing convertible notes to an existing investor (the Arcapita Notes, and together with the Investor Notes, the “Convertible Notes”). The Arcapita Notes were originally set to mature on December 6, 2014. Net proceeds from the Convertible Notes were used to fund the completion of the Company’s second production line at the East Providence facility, to begin the construction of a third production line at the East Providence facility and to fund the Company’s operating cash requirements.

In conjunction with the execution of the March 2013 NPA (see note 8) on March 28, 2013, the holders of all but approximately $0.3 million of the original principal amount of the Convertible Notes agreed to extend the original maturity date of their notes by two years. Given that the term of the Convertible Notes, as amended, differed substantially from the original term, the amendment was accounted for as an extinguishment of debt. On March 28, 2013, the Company recognized a gain on extinguishment totaling $8.9 million, which represents the difference between (i) the fair value of the Convertible Notes at reissuance, and (ii) the fair value of the Convertible Notes just prior to the amendment.

The Company elected to record the Convertible Notes at fair value upon issuance. The aggregate fair value of the Convertible Notes was $91.9 million as of December 31, 2013.

Upon the closing of the Company’s IPO discussed in note 2, the outstanding principal and accrued interest on the Convertible Notes were marked to an aggregate fair value of $129.0 million and automatically converted into 11,727,430 shares of common stock equal to the unpaid principal amount of the Convertible Notes and accrued interest divided by the Conversion Percentage, which was 62.5% of the initial public offering price of $11.00 per share.

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Fair Value Option

The following table presents the difference between the aggregate fair value and the aggregate unpaid principal balance of the Convertible Notes recorded at December 31, 2013:

Fair Value Measurements

The changes in the fair value of the Convertible Notes for the six months ended June 30, 2014 and 2013 were determined by utilizing a probability weighted discounted cash flow analysis which took into consideration market and general economic events as well as the Company’s financial results and other data available as of December 31, 2013 and June 30, 2013. This analysis determined the amount to be paid on the notes in either cash or shares at the occurrence of certain events in which the Convertible Notes would be converted into shares of the Company’s common stock or would be repaid to the noteholders in cash. The probability weighted discounted cash flow analysis utilized assumptions related to the probability of the occurrence of each of the various events and appropriate discount rates for each of the scenarios as follows:

The above scenarios incorporated weighted average implied discount rates of 40.0% at December 31, 2013 and June 30, 2013.

The fair value of the Convertible Notes upon the closing of the Company’s IPO was determined to be $129.0 million.

The following table presents a roll-forward of the fair value of Level 3 (significant unobservable inputs) Convertible Notes for the six months ended June 30, 2014 and 2013:

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Changes in fair value of the Company’s Convertible Notes for the six months ended June 30, 2013 resulted in a gain of $3.2 million included in interest expense. The charge recognized as a result of the change in the fair value of the Company’s Convertible Notes included in interest expense for the six months ended June 30, 2014 was $37.1 million (see note 11).

(10) Revolving Line of Credit

In March 2011, the Company entered into a two-year, $10.0 million revolving line of credit facility with a bank under which the Company can borrow up to $8.5 million as of June 30, 2014. Borrowings under the line of credit accrue interest at the greater of the prime rate or 4% per annum (which resulted in an interest rate of 4% as of June 30, 2014 and December 31, 2013) plus 1.0% per annum. The facility also includes fees based on unused portions of the line of credit, among others. The line of credit is secured by a second priority security interest in fixed assets at the East Providence facility and a first priority security interest in all other assets of the Company, including all intellectual property.

On June 28, 2013, the Company renewed its line of credit agreement, extended the maturity date of the facility to June 27, 2014 and increased its available borrowing base. On March 28, 2014 and July 25, 2014, the Company further extended the maturity date of the facility to July 27, 2014 and August 31, 2014, respectively.

At June 30, 2014 and December 31, 2013, the Company had drawn $0.0 million and $1.0 million, respectively, on the line of credit. The Company also had outstanding letters of credit backed by the line of credit of $1.5 million and $1.2 million at June 30, 2014 and December 31, 2013, respectively. The remaining amount available to the Company under the line of credit at June 30, 2014 was $8.5 million.

Under the line of credit, the Company is required to comply with financial covenants relating to free cash flow and liquidity. The repayment of Subordinated Notes on June 20, 2014 triggered non-compliance of the free cash flow requirement as of June 30, 2014 and resulted in a technical default under the line. However, the note repayment was made with the approval of the bank and the Company obtained an appropriate waiver. The Company was in compliance with all other financial covenants.

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(11) Interest Expense

Interest expense (income) consists of the following:

Debt closing costs, consisting primarily of legal and related fees, associated with the issuance or modification of the Company’s Subordinated Notes, Senior Convertible Notes and Convertible Notes are recorded in interest expense as incurred.

(12) Commitments and Contingencies

Letters of Credit

Pursuant to the terms of its Northborough, Massachusetts facility lease, the Company has been required to provide the lessor with letters of credit securing certain obligations. In addition, 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 for $1.5 million at June 30, 2014 and $1.2 million at December 31, 2013. These letters of credit are secured by the Company’s revolving line of credit (see note 10).

Litigation

The Company is, from time to time, a party to litigation that arises in the normal course of its business operations. 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.

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(13) Net Income (Loss) Per Share

The computation of basic and diluted net income (loss) per share attributable to common stockholders consists of the following:

During the six months ended June 30, 2013, the Company recorded dividends associated with its Series B convertible preferred stock (the Series B) and Series A convertible preferred stock (the Series A) totaling $0.3 million and $0.6 million, respectively. In conjunction with the execution of the March 2013 NPA, the redemption and dividend rights of the Company’s issued and outstanding Series B and Series A were eliminated. In March 2013, the Company recorded decreases in the redemption value of the Company’s Series B and Series A shares of $30.0 million and $56.1 million, respectively, reflecting the changes in the fair market value of the Series B and Series A shares at the time of the March 2013 NPA. Given that the release of the redemption rights substantially impacted the fair value of the Series B and Series A, the elimination of the rights was accounted for as an extinguishment of the securities.

During the six months ended June 30, 2013, the Company recorded a gain on extinguishment of Series B and Series A of approximately $86.2 million recorded in additional paid-in capital available to common stockholders. Additionally, the remaining value of the Series B and Series A of $1.1 million subsequent to extinguishment was recorded in additional paid-in capital upon reclassification from temporary to permanent equity. As a result, the Company included in the computation of basic and diluted net income (loss) per share attributable to common stockholders preferred stock deemed dividends aggregating $29.6 million and $55.5 million for the Series B and A, respectively, during the six months ended June 30, 2013.

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Potential dilutive common shares that were excluded from the computation of diluted net income (loss) attributable to common stockholders per common share because they were anti-dilutive consist of the following:

As of June 30, 2014, there was no dilutive impact of the common stock options and common stock warrants. All other potentially dilutive instruments were converted into shares of common stock upon the closing of the Company’s IPO on June 18, 2014.

As of June 30, 2013, the Company had $24.0 million of Senior Convertible Notes and $79.2 million of Convertible Notes outstanding, which were convertible into common stock upon the occurrence of an IPO at prices that were not determinable until the occurrence of the IPO (see notes 8 and 9). Because the necessary conditions for the conversion of these convertible notes had not been satisfied during the period ended June 30, 2013, the Company excluded these convertible notes from the table above and the calculation of diluted net (loss) income per share for the three and six months ended June 30, 2013.

(14) Income Taxes

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

(15) Related Party Transactions

The Company had the following transactions with related parties:

The Company sold aerogel products to two stockholders of the Company totaling $1.9 million and $2.1 million during the six months ended June 30, 2014 and 2013, respectively. The Company had trade receivables with these stockholders of $1.8 million and $2.0 million at June 30, 2014 and December 31, 2013, respectively.

An affiliate of one of the Company’s principal stockholders is a director of a company that owns an insurance brokerage through which the Company purchases insurance. The Company’s premiums for a comprehensive property and casualty insurance program are $0.9 million and $0.6 million on an annual basis in 2014 and 2013, respectively. In addition, subsequent to the closing of the Company’s IPO in June 2014, the Company will incur an annual premium of approximately $0.6 million for a new excess directors and officer’s liability insurance policy.

In connection with note and warrant financing transactions and amendments, the Company reimbursed stockholders $0.3 million for legal expenses during the six months ended June 30, 2013.

Prior to the closing of the Company’s IPO in June 2014, the Company had Subordinated Notes, Senior Convertible Notes and Convertible Notes outstanding with several stockholders of the Company (see notes 7, 8 and 9).

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The following information should be read in conjunction with the unaudited financial information and the notes thereto included in this Quarterly Report on Form 10-Q and the audited financial information and the notes thereto included in the Prospectus that forms a part of our Registration Statement on Form S-1 (File No. 333-195523), which was filed with the Securities and Exchange Commission (the “SEC”) pursuant to Rule 424(b) on June 16, 2014, which we refer to as the Prospectus.

Certain matters discussed in this Quarterly Report on Form 10-Q may be deemed to be forward-looking statements that involve risks and uncertainties. We make such forward-looking statements pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and other federal securities laws. In this Quarterly Report on Form 10-Q, words such as “may,” “will,” “anticipate,” “estimate,” “expects,” “projects,” “intends,” “plans,” “believes” and similar expressions (as well as other words or expressions referencing future events, conditions or circumstances) are intended to identify forward-looking statements.

Our actual results and the timing of certain events may differ materially from the results discussed, projected, anticipated, or indicated in any forward-looking statements. We caution you that forward-looking statements are not guarantees of future performance and that our actual results of operations, financial condition and liquidity, and the development of the industry in which we operate may differ materially from the forward-looking statements contained in this Quarterly Report. In addition, even if our results of operations, financial condition and liquidity, and the development of the industry in which we operate are consistent with the forward-looking statements contained in this Quarterly Report, they may not be predictive of results or developments in future periods.

The following information and any forward-looking statements should be considered in light of factors discussed elsewhere in this Quarterly Report on Form 10-Q, including those risks identified under Part II, Item 1A, and the “Risk Factors” section of the Prospectus.

We caution readers not to place undue reliance on any forward-looking statements made by us, which speak only as of the date they are made. We disclaim any obligation, except as specifically required by law and the rules of the SEC, to publicly update or revise any such statements to reflect any change in our expectations or in events, conditions or circumstances on which any such statements may be based, or that may affect the likelihood that actual results will differ from those set forth in the forward-looking statements.

You should read the following discussion and analysis of financial condition and results of operations together with Part I Item 1 “Financial Information” and our financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q.

Overview

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 end-use customers select our products where thermal performance is critical and to save money, reduce energy use, preserve operating assets and protect workers.

Our insulation is used by oil producers and the owners and operators of refineries, petrochemical plants, LNG facilities, power generating assets and other energy infrastructure. Our Pyrogel and Cryogel product lines were introduced in 2008 and have undergone

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rigorous technical validation by industry leading end-users and achieved significant market adoption. We also derive product revenue from the building and construction and other end markets. Customers in these markets use our aerogels 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 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 30 countries around the world that ensures 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 process and technology at our facility in East Providence, Rhode Island. We have operated the East Providence facility since 2008. We commenced operation of a second production line at this facility at the end of March 2011, which doubled our annual nameplate capacity to 40 million to 44 million square feet of aerogel blankets, depending on product mix. We commenced construction of a third production line in the East Providence facility during the three months ended June 30, 2014 with a total construction cost estimate of $30 million. We expect that this third production line will increase our annual nameplate capacity by 10 million to 11 million square feet of aerogel blankets when construction is concluded in the first half of 2015.

Our revenue for the six months ended June 30, 2014 was $49.0 million, which represented an increase of 22% from the six months ended June 30, 2013. Net loss for the six months ended June 30, 2014 was $61.2 million and diluted loss per share attributable to common stockholders was $40.05. Net loss for the six months ended June 30, 2014 included a total of $38.8 million of expense or $25.42 per share attributable to common stockholders related to expenses recorded in connection with the closing of our initial public offering including (i) recognition of compensation cost of performance-based stock options of $5.6 million, and (ii) accretion of convertible notes to final conversion value of $33.2 million.

Key Metrics and Non-GAAP Financial Measures

We regularly review a number of metrics, including the following key metrics, to evaluate our business, measure our performance, identify trends affecting our business, formulate financial projections and make strategic decisions.

Square Foot Operating Metric

We price our product and measure our product shipments in square feet. We have produced in excess of 100 million square feet of aerogel blankets in the East Providence facility since 2008. We estimate our annual production capacity is currently 40 million to 44 million square feet of aerogel blankets, depending on product mix. We believe the square foot operating metric allows us and our investors to measure the growth in 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:

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Adjusted EBITDA

We use Adjusted EBITDA, a non-GAAP financial measure, as a means to assess our operating performance. We define Adjusted EBITDA as net income (loss) before interest expense, taxes, depreciation, amortization, stock-based compensation expense and other items, from time to time that we do not believe are indicative of our core operating performance, which recently have included loss on disposal of assets, gain or loss on extinguishment or exchange of debt, write-off of costs of postponed financing activities and write-off of construction in progress. Adjusted EBITDA is a supplemental measure of our performance that is not presented in accordance with 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 GAAP. In addition, our definition and presentation of Adjusted EBITDA may not be comparable to similarly titled measures presented by other companies.

We use Adjusted EBITDA:

We also believe that the presentation of Adjusted EBITDA provides useful information to investors with respect to our results of operations and in assessing the performance and value of our business. Various measures of EBITDA are widely used by investors to measure a company’s operating performance without regard to items that can vary substantially from company to company depending upon financing and accounting methods, book values of assets, capital structures and the methods by which assets were acquired.

Although measures similar to Adjusted EBITDA are frequently used by investors and securities analysts in their evaluation of companies, we understand that Adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for GAAP, income from operations or an analysis of our results of operations as reported under 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 Quarterly Report on Form 10-Q, and not to rely on any single financial measure to evaluate our business.

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

Our Adjusted EBITDA is affected by a number of factors including the mix between product revenue and research services revenue, the mix of aerogel products sold, average selling prices, average material costs, our actual manufacturing costs, the costs associated with and timing of expansions and start-up of additional production capacity, and the amount and timing of operating expenses. As we continue to grow our base of product revenue and to build out manufacturing capacity, we expect increased manufacturing expenses will periodically have a negative impact on Adjusted EBITDA, but will set the framework for improved Adjusted EBITDA moving forward. Accordingly, we expect that our Adjusted EBITDA will vary from period to period as we expand our manufacturing capacity.

Components of Our Results of Operations

Revenue

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 revenue is recognized upon transfer of title and risk of loss, which is generally upon shipment or delivery.

Cost of Revenue

Cost of revenue for our product revenue consists primarily of materials and manufacturing expense, including direct labor and manufacturing overhead, including depreciation. Cost of product revenue is recorded when the related product revenue is recognized. Cost of product revenue also includes stock-based compensation of manufacturing employees and costs of shipping.

Material is our most significant component of cost of product revenue and includes fibrous batting, silica materials and additives. Material costs as a percentage of product revenue vary from product to product due to differences in average selling prices, material requirements, blanket thickness and manufacturing yields. As a result, material costs as a percentage of revenue will vary from period to period due to changes in the mix of aerogel products sold. However, in general, we expect material costs in the aggregate to decline as a percentage of revenue as we seek to achieve higher selling prices, material sourcing improvements, new material sources and manufacturing yield enhancements for our aerogel products.

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Manufacturing expense is also a significant component of cost of revenue. As we continue to increase manufacturing capacity in our East Providence facility and a second plant, we expect manufacturing expense as a percentage of product revenue will increase in the near-term following each expansion but will decrease in the long-term with increased revenues supported by the effect of completed capacity expansions. Cost of revenue for our research services revenue consists primarily of direct labor costs of research personnel committed to funded research and development contracts, as well as third-party consulting, and associated direct material costs. This cost of revenue also includes overhead expenses associated with project resources, engineering tools and supplies. Cost of revenue for our research services revenue is recorded when the related research services revenue is recognized.

Gross Profit

Our gross profit as a percentage of revenue is affected by a number of factors, including the mix between product revenue and research services revenue, the mix of aerogel products sold, average selling prices, average material costs, our actual manufacturing costs and the costs associated with expansions and start-up of production capacity. As we continue to build out our manufacturing capacity, we expect increased manufacturing expenses will periodically have a negative impact on gross profit, but will set the framework for improved gross profit moving forward. Accordingly, we expect our gross profit in absolute dollars and as a percentage of revenue to vary from period to period as we expand our manufacturing capacity. However, in general, following the completion of our capacity expansions, we expect gross profit to improve as a percentage of revenue in the long-term due to increases in manufacturing productivity, increased production volumes, improved manufacturing yields and material purchasing efficiencies.

Operating Expenses

Operating expenses consist of research and development, sales and marketing, and general and administrative expenses. The largest component of our operating expenses is personnel costs, consisting of salaries, benefits, incentive compensation and stock-based compensation. We expect to continue to hire a significant number of new employees in order to support our anticipated growth. In any particular period, the timing of additional hires could materially affect our operating expenses, both in absolute dollars and as a percentage of revenue.

Research and Development Expenses

Research and development expenses consist primarily of expenses for personnel engaged in the development of next generation aerogel compositions, form factors and manufacturing technologies. These expenses also include testing services, prototype expenses, consulting services, 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 technology. We believe that these investments are necessary to maintain and improve our competitive position. We expect that our research and development expenses will increase as we continue to invest in additional research and engineering personnel and the infrastructure required in support of their efforts. Accordingly, we expect that our research and development expenses will continue to increase in absolute dollars but decrease as a percentage of revenue in the long-term.

Sales and Marketing Expenses

Sales and marketing expenses consist primarily of personnel costs, incentive compensation, marketing programs, travel and related costs and consulting expenses. We plan to expand 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 continue to increase in absolute dollars but decrease as a percentage of revenue in the long-term.

General and Administrative Expenses

General and administrative expenses consist primarily of personnel costs, legal expenses, consulting and professional services, tax and audit costs, and expenses for our executive, finance, human resources and information technology organizations. We expect general and administrative expenses to increase as we incur additional costs related to operating as a publicly-traded company, including costs of compliance with securities, corporate governance and related regulations, investor relations expenses, increased insurance premiums, including director and officer insurance, and increased audit and legal fees. In addition, we expect to add general and administrative personnel to support the anticipated growth of our business and continued expansion of our manufacturing operations. We expect that general and administrative expenses will continue to increase in absolute dollars but decrease as a percentage of revenue in the long-term.

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Other Income (Expense)

Other income (expense) consists of (i) interest expense consisting primarily of fair market value adjustments to our subordinated notes, convertible notes and the issuance of our Series C warrants, subordinated and convertible note issuance costs, the amortization of the subordinated note debt discount, and other interest, (ii) gains or losses on extinguishment or exchange of subordinated notes and convertible notes and (iii) costs associated with a postponed public offering.

Provision for Income Taxes

We have incurred net losses since inception and have not recorded benefit provisions for U.S. federal income taxes or state income taxes since the tax benefits of our net losses have been offset by valuation allowances due to the uncertainty associated with the utilization of net operating loss carryforwards.

Results of Operations

Three months ended June 30, 2014 compared to the three months ended June 30, 2013

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

Revenue

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

Total revenue increased $3.6 million, or 16%, to $26.6 million for the three months ended June 30, 2014 from $23.0 million in the comparable period in 2013, primarily as a result of an increase in product revenue.

Product revenue increased $4.1 million, or 19%, to $25.9 million for the three months ended June 30, 2014 from $21.8 million in the comparable period in 2013. This increase was principally the result of an increase in sales of our aerogel products in the petrochemical sector in Asia and South America. The revenue increase reflects price increases enacted during the last half of 2013 and the first six months of 2014 and a shift in mix of aerogel products sold toward higher priced products. The average selling price per square foot of our products increased by an effective $0.11, or 4%, to $2.57 per square foot for the three months ended June 30, 2014 from $2.46 per square foot for the comparable period in 2013. In volume terms, product shipments increased 1.2 million square feet, or 14%, to 10.1 million square feet of aerogel products for the three months ended June 30, 2014, as compared to 8.9 million square feet in the comparable period in 2013. The increase in demand during the three months ended June 30, 2014 included increased sales of $3.6 million for use in a petrochemical facility expansion by a major Asian energy company, $1.2 million to a South American distributor primarily related to the construction of expanded capacity at a petrochemical plant in Brazil, and $0.9 million to a Korean distributor for general distribution into the petrochemical sector.

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Research services revenue decreased $0.5 million to $0.7 million for the three months ended June 30, 2014 from $1.2 million in the comparable period in 2013. The decrease was primarily due to a reduction in active research contracts with government agencies during 2014. During the three months ended June 30, 2014, we provided research services on six contracts compared to 13 contracts in the comparable period in 2013. This decrease in contracts is principally the result of certain limitations on our eligibility to receive contract awards under federal guidelines and programs due to a variety of factors including the size of our revenues, the number of our employees and the makeup of our ownership.

Product revenue was 97% and 95% of total revenue for the three months ended June 30, 2014 and 2013, respectively. Research services revenue was 3% and 5% of total revenue for the three months ended June 30, 2014 and 2013, respectively. We expect that product revenue will increase as a percentage of our total revenue due to the anticipated growth in demand for our products in the energy infrastructure market.

Cost of Revenue