S-1/A 1 b86908a3sv1za.htm FORM S-1/A sv1za
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As filed with the Securities and Exchange Commission on September 1, 2011
Registration No. 333-175128
 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
 
 
Amendment No. 3
To
Form S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
Aspen Aerogels, Inc.
(Exact name of Registrant as specified in its charter)
 
         
Delaware
(State or other jurisdiction of
incorporation or organization)
  5033
(Primary Standard Industrial
Classification Code Number)
  04-3559972
(I.R.S. Employer
Identification Number)
30 Forbes Road, Building B
Northborough, Massachusetts 01532
(508) 691-1111
(Address, including zip code, and telephone number, including area code, of Registrant’s principal executive offices)
 
 
 
 
Donald R. Young
President and Chief Executive Officer
Aspen Aerogels, Inc.
30 Forbes Road, Building B
Northborough, Massachusetts 01532
(508) 691-1111
(Name, address, including zip code, and telephone number, including area code, of agent for service)
 
 
 
 
Copies to:
 
     
Sahir Surmeli, Esq.
Jonathan L. Kravetz, Esq.
Thomas R. Burton, III, Esq.
Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C.
One Financial Center
Boston, Massachusetts 02111
(617) 542-6000
  Vincent Pagano, Jr., Esq.
Simpson Thacher & Bartlett LLP
425 Lexington Avenue
New York, New York 10017
(212) 455-2000
 
Approximate date of commencement of proposed sale to the public:  As soon as practicable after this registration statement becomes effective.
 
If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 as amended (the “Securities Act”), check the following box. o
 
If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  o
 
If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  o
 
If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  o
 
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. (Check one):
 
             
Large accelerated filer o
  Accelerated filer o   Non-accelerated filer þ
(Do not check if a smaller reporting company)
  Smaller reporting company o
 
The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.
 


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The information in this preliminary prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell nor does it seek an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.
 
Subject to Completion. Dated September 1, 2011
 
PRELIMINARY PROSPECTUS
 
           Shares
 
(ASPEN LOGO)
Aspen Aerogels, Inc.
Common Stock
 
 
 
 
This is an initial public offering of shares of common stock of Aspen Aerogels, Inc.
 
We are offering           shares of common stock to be sold in this offering. Prior to this offering, there has been no public market for our common stock.
 
It is currently estimated that the initial public offering price per share will be between $      and $     . We have applied to list the common stock on The New York Stock Exchange under the symbol “ASPN.”
 
See “Risk Factors” on page 12 to read about factors you should consider before buying shares of our common stock.
 
Neither the Securities and Exchange Commission nor any other regulatory body has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.
 
                 
   
Per Share
 
Total
 
Initial public offering price
  $       $    
Underwriting discount
  $       $    
Proceeds, before expenses, to us
  $       $  
 
To the extent that the underwriters sell more than           shares of common stock, the underwriters have the option to purchase up to an additional           shares from us at the initial public offering price less the underwriting discount.
 
 
 
 
The underwriters expect to deliver the shares against payment in New York, New York on          , 2011.
 
Goldman, Sachs & Co. Morgan Stanley
 
Prospectus dated          , 2011
 
 
 


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 EX-23.1
 
 
 
 
No dealer, salesperson or other person is authorized to give any information or to represent anything not contained in this prospectus. You must not rely on any unauthorized information or representations. This prospectus is an offer to sell only the shares offered hereby, but only under circumstances and in jurisdictions where it is lawful to do so. The information contained in this prospectus is current only as of its date.
 
INDUSTRY AND MARKET DATA
 
This prospectus contains market data and industry forecasts that were obtained from industry publications, third party market research and publicly available information. These publications generally state that the information contained therein has been obtained from sources believed to be reliable, but the accuracy and completeness of such information is not guaranteed.
 
This prospectus also contains estimates and other statistical data made by independent parties and by us relating to market size and growth and other data about our industry. We obtained the industry and market data in this prospectus from our own research as well as from industry and general publications, surveys and studies conducted by third parties, some of which may not be publicly available. For example, this prospectus also includes statistical data extracted from a market research report by The Freedonia Group and a separate market research report by Freedonia Custom Research, Inc., an independent international market research firm, which was commissioned by us and was issued in May 2011. Such data involves a number of assumptions and limitations and contains projections and estimates of the future performance of the industries in which we operate that are subject to a high degree of uncertainty. We caution you not to give undue weight to such projections, assumptions and estimates.
 
The Freedonia Custom Research, Inc. Report, or the Freedonia Report, represents data or viewpoints developed independently on our behalf and does not constitute a specific guide to action.

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In preparing the Freedonia Report, Freedonia Custom Research, Inc. used various sources, including publically available third party financial statements; government statistical reports; press releases; industry magazines; and interviews with manufacturers of related products (including us), manufacturers of competitive products, distributors of related products and government and trade associations. The Freedonia Report speaks as of its final publication date (and not as of the date of this prospectus).
 
Information about End-Use Customers
 
The data and statistics that we present relating to the end-users of our products, such as our sales to the industrial, building and construction and OEM markets, or to sectors within these markets, are estimates based on our reasonable belief. This is because we sell our products primarily to distributors, contractors and OEMs that in turn sell our products to end-users or install our products into the facilities or equipment of the ultimate end-users. Consequently, the information that we derive from our sales process and our invoice process to our direct distributors, contractors and OEM customers typically does not indicate with certainty into which market the product will be used or for what purpose. We base our estimates on information obtained from: (i) discussions with and feedback received from our direct distributor, contractor and OEM customers that purchase directly from us, (ii) discussions with and feedback received from our end-users, and (iii) the nature and potential uses of each of our products, as certain of our products are designed for use in a specific market.
 
TRADEMARKS, TRADE NAMES AND SERVICE MARKS
 
“Aspen Aerogels,” “Cryogel,” “Pyrogel,” “Spaceloft,” the Aspen Aerogels logo and other trademarks, service marks and trade names of Aspen Aerogels appearing in this prospectus are the property of Aspen Aerogels, Inc. Solely for convenience, the trademarks, service marks and trade names referred to in this prospectus 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 prospectus contains additional trade names, trademarks and service marks of other companies, which, to our knowledge, are the property of their respective owners.


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PROSPECTUS SUMMARY
 
This summary provides an overview of selected information contained elsewhere in this prospectus and does not contain all of the information you should consider before investing in our common stock. You should carefully read this prospectus and the registration statement of which this prospectus is a part in their entirety before investing in our common stock, including the information discussed under “Risk Factors” and our consolidated financial statements and the related notes thereto included elsewhere in this prospectus. Unless otherwise indicated herein, the terms “we,” “our,” “us,” or “the Company” refer to Aspen Aerogels, Inc. and its predecessor entity and unless otherwise noted, their respective subsidiaries.
 
Overview
 
We are an energy efficiency company that designs, develops and manufactures 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 superior combination of performance attributes unmatched by traditional insulation materials. Our end-use customers use our products to save money, conserve energy, reduce CO2 emissions and protect workers and assets.
 
Our technologically advanced products are targeted at the estimated $32 billion annual global market for insulation materials. Our insulation is principally used by industrial companies, such as ExxonMobil and NextEra Energy, that operate petrochemical, refinery, industrial and power generation facilities. We are also working with BASF Construction Chemicals and other leading insulation manufacturers to develop and commercialize products for applications in the building and construction market. We believe demand for our high-performance insulation products will increase significantly to support widespread global efforts to cost-effectively improve energy efficiency. To address capacity constraints caused by growing demand, we began operating a second production line in late March 2011 designed to double our production capacity at our East Providence, Rhode Island facility.
 
We have grown our business by forming technical and commercial relationships with industry-leading customers to optimize our products to meet the particular demands of targeted market sectors. In the industrial market, we have benefited from our technical and commercial relationships with ExxonMobil in the oil refinery and petrochemical sector, with Technip in the offshore oil sector, and with NextEra Energy in the power generation sector. In the building and construction market, we have a joint development agreement with BASF Construction Chemicals to develop products to meet increasingly stringent building standards requiring improved thermal performance in retrofit and new-build wall systems, particularly in Europe.
 
Our core aerogel technology and manufacturing processes are our most significant assets. As of June 30, 2011, we employed 28 research scientists and process engineers focused on advancing our current aerogel technology and developing next generation aerogel compositions, form factors and manufacturing technologies. Our aerogels are complex structures in which 97% of the volume consists of air trapped in nanopores 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 aerogel products provide up to five times the thermal performance of widely used traditional insulation in a thin, easy-to-use blanket form. Our products enable compact design, reduce installation time and costs, promote freight savings, simplify logistics, reduce system weight and required storage space and enhance job site safety. Our products provide excellent compression resistance, are hydrophobic and reduce the incidence of corrosion under insulation, a significant operational cost and safety issue in industrial facilities. Our products also offer strong fire protection, which is a critical performance requirement in both the industrial and building and construction markets. We believe our array of product attributes provides strong competitive advantages over traditional insulation. Although


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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.
 
We manufacture our products using our proprietary process technology at our facility in East Providence, Rhode Island. We have operated the East Providence facility at high volume and high yield continuously since mid-2008. We successfully commenced operation of our second production line at this facility at the end of March 2011 and immediately began producing commercial quality aerogel blankets. This line was completed on time and on budget and is expected to double our annual production capacity by the end of 2011 to 40 to 44 million square feet of aerogel blankets, depending on product mix. We are engaged in the design and engineering phase of a third production line at our East Providence facility and have commenced procurement of certain capital equipment which has a longer lead-time. We currently expect that this third line will be completed during 2012. We also plan to construct a second manufacturing facility in the United States or Europe, the location of which will be based on factors including proximity to raw material suppliers, proximity to customers, labor and construction costs and availability of governmental incentives.
 
Pursuit of our capacity expansion plan requires us to raise capital. During the past year, we have completed three financings and established a line of credit. In late 2010, we issued $21.4 million of convertible preferred stock to a group of investors led by BASF Venture Capital and $10.0 million of subordinated notes to a group of investors led by affiliates of Piper Capital LLC. In the first half of 2011, we issued $30.0 million of convertible notes to affiliates of Fidelity Investments and BASF Venture Capital and established a $10.0 million revolving credit facility with Silicon Valley Bank.
 
Our Markets
 
Since 2008, our Cryogel and Pyrogel product lines have been used by some of the world’s largest oil producers, refiners and petrochemical companies, including ExxonMobil, Suncor Energy, Anadarko Petroleum, Dong Energy, Hu-Chems Company, SK Energy, Petrobras, Honam Petrochemical, Marathon Oil, Shell, LyondellBasell, Enagas, Citgo, PetroLogistics and Tupras. These products also are in use in applications in a variety of industrial facilities, including liquefied natural gas facilities, food processing facilities, oil sands extraction operations and electric power generation facilities. Insulation systems in these facilities are designed to maintain hot and cold process piping and storage tanks at optimal process temperatures, to protect plant and equipment from the elements and from the risk of fire and to protect workers. Freedonia Custom Research, Inc. has estimated that the worldwide industrial insulation market totaled $4.5 billion in 2010. We estimate that we generated 92% of our 2010 product revenue in the industrial insulation market.
 
Within the building and construction market, we are replicating our strategy of working with industry leaders to seek to penetrate critical market sectors. In addition to our relationship with BASF Construction Chemicals, we are also engaged in product development efforts in Europe and North America with other insulation industry leaders to target a wide variety of applications. Our products also have been installed since 2006 in residential and commercial new-build and retrofit building projects through the efforts of a small network of distribution partners. Insulation systems in the building and construction market are designed to isolate the interior of buildings from external temperature variations and to reduce energy costs. Freedonia Custom Research, Inc. has estimated that the worldwide building and construction insulation market totaled $22.7 billion in 2010. We estimate that we generated 5% of our 2010 product revenue in the building and construction insulation market.
 
In addition to our core markets, we also rely on a small number of fabricators to supply fabricated insulation parts to original equipment manufacturers, or OEMs. These global OEMs develop products using our aerogels for applications as diverse as military and commercial aircraft, trains, buses, appliances, apparel, footwear and outdoor gear. While we do not currently allocate significant resources to these markets, we believe there are many future opportunities within these markets for our aerogel technology based on its unique attributes. Freedonia Custom Research, Inc. has


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estimated that the worldwide transportation, appliance and apparel insulation markets totaled $4.9 billion in 2010. We estimate that we generated 3% of our 2010 product revenue in the transportation, appliance and apparel insulation markets.
 
Our Solution
 
We believe our aerogel blankets deliver a superior combination of performance attributes that provide cost-effective solutions to address the demanding performance objectives of a wide range of applications in our target markets, including:
 
  •  Best Thermal Performance.  Our aerogel blankets provide the best thermal performance of any widely used insulation product available on the market today and excel in applications where available space is constrained or thermal performance targets are aggressive.
 
  •  Wide Temperature Range.  We offer insulation products that address the entire range of applications within the cryogenic and sub-ambient (−273oC to 90oC), ambient (0oC to 40oC) and hot process (−25oC to 650oC) temperature ranges.
 
  •  Ease of Installation.  Our flexible aerogel blankets install faster than rigid insulation materials in the industrial market, which reduces labor costs and total system costs.
 
  •  Compact Design.  Our aerogel blankets reduce insulation system volume by 50% to 80% compared to traditional insulation, enabling a reduction in the footprint, size and structural costs of facilities, systems, vehicles and buildings.
 
  •  High Durability.  Our aerogel blankets offer excellent compression resistance, tensile strength and vibration resiliency. Our products allow companies to pre-insulate, stack and transport steel pipes destined for use in harsh environments, which significantly reduces installation labor costs in remote areas.
 
  •  Strong Fire Protection.  Our Pyrogel XT and Spaceloft A2 product lines were specifically designed to provide strong fire performance in applications within the industrial and building and construction markets, qualifying our products for use in a variety of applications in our target markets.
 
  •  Moisture Resistance.  Our aerogel blankets are durably hydrophobic. Our products offer improved thermal performance in insulation systems exposed to the elements or operating in humid environments compared to traditional insulation.
 
  •  Reduced Corrosion Under Insulation, or CUI.  Our Pyrogel XT product line is both durably hydrophobic and vapor permeable. These attributes have the potential to reduce the incidence of CUI in hot process applications, which we believe provides our customers with a significant reduction in long-term operating and capital costs.
 
  •  Simplified Logistics.  Our products reduce the volume and weight of material purchased, inventoried, transported and installed in the field. In addition, our products reduce the number of stock-keeping units, or SKUs, required to complete a project. Simplified logistics accelerate project timelines, reduce installation costs and improve worker safety.
 
We believe these performance attributes simplify logistics, accelerate project timelines, reduce installation costs, improve worker safety and significantly reduce long-term operating and capital costs for our customers. In the industrial market, we believe these characteristics enable our end-use customers to meet their insulation performance targets at lower total installed or lifecycle costs versus traditional insulation in a growing number of applications. In the building and construction market, we believe the increasing thermal standards for retrofit and new-build wall systems in Europe will become more difficult to meet with traditional insulation materials due to space constraints. We believe the thin form factor and strong fire properties of our aerogel blankets will provide a cost-effective and practical means to meet increasingly stringent building standards in Europe.


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Our Competitive Strengths
 
We believe the following combination of capabilities distinguishes us from our competitors and positions us to compete effectively and benefit from the expected growth in the market for energy efficiency solutions:
 
  •  Superior product based on proven technology in commercial production.  Our aerogel products provide up to five times the thermal performance of widely used traditional insulation in a thin, easy-to-use blanket form. We believe our array of product attributes provides strong competitive advantages over traditional insulation and will enable us to take a growing share of the existing market for insulation in both the industrial and the building and construction markets. 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.
 
  •  Proven and scalable proprietary manufacturing process.  Our manufacturing process is proven and has been replicated to meet increasing demand. Our original line in East Providence, Rhode Island, has operated continuously since mid-2008. We successfully commenced operation of our second production line at this facility in March 2011 and immediately began producing commercial quality aerogel blankets. We believe that our proven ability to produce product that meets our clients’ specifications and our increased production capacity will provide customers with the certainty of supply that is required to expand their use of our products.
 
  •  Strong relationships with industry leaders.  Through our relationships with industry leading end-use customers, our products have undergone rigorous testing and are now in use at some of the world’s largest oil producers, refiners and petrochemical companies as ranked by a weighted measure of sales, profits, assets and market value. These relationships have shortened the sales cycle with other customers within the industrial market and have helped to facilitate our market penetration. Within the building and construction market, we have partnered with BASF Construction Chemicals to develop products to meet increasingly stringent building standards for thermal performance of retrofit and new-build wall systems. As part of our relationship with BASF Construction Chemicals, we have recently developed a product, Spaceloft A2, targeted at the building and construction market.
 
  •  Capital efficient business model.  To respond to increased demand for our products, we successfully commenced operation in late March 2011 of a second production line at our East Providence facility. The expansion is expected to increase our annual production capacity by 20 to 22 million square feet of aerogel blankets at a total construction cost of approximately $31.5 million. We believe that our second production line, at full capacity and at current prices, would be capable of producing in the range of $50 million to $54 million in annual revenue of aerogel blankets.
 
  •  Experienced management and operations team.  Each of our executive officers has over 20 years of experience in global industrial companies, specialty chemical companies or related materials science research. This team has worked closely together at Aspen Aerogels for nearly five years, and we believe our dedicated and experienced workforce is an important competitive asset. As of June 30, 2011, we employed 161 dedicated research scientists, engineers, manufacturing line operators, sales and administrative staff and management.


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Our Strategy
 
Our goal is to create shareholder value by becoming the leading provider of high-performance aerogel products serving the global energy efficiency market. We intend to achieve this goal by pursuing the following strategies:
 
  •  Expand our manufacturing capacity to meet market demand.  Demand for our aerogel products in 2010 grew by approximately 88% compared to 2009 and exceeded our manufacturing capacity. In response, we constructed a second production line at our East Providence facility designed to double our manufacturing capacity. To meet anticipated future growth in demand for our products, we are engaged in the design, engineering and initial procurement phase of a third production line in our East Providence facility and plan to construct a second manufacturing facility in the United States or Europe.
 
  •  Increase industrial insulation market penetration.  We plan to focus additional resources to achieve a greater share of the industrial insulation market, both through increased sales to our existing customers and sales to new customers. In addition, we anticipate that our growing maintenance-based business will lead to increasing sales of our products into large capital projects, including the construction of new refineries and petrochemical facilities in emerging markets.
 
  •  Leverage strategic relationships in the building and construction market.  We have a joint development arrangement with BASF Construction Chemicals to penetrate the market for energy efficient wall systems. We are pursuing additional market opportunities with other leading building materials manufacturers and distributors across multiple regions to address the increasingly stringent regulatory environment governing the thermal performance of buildings. We believe this approach will enable us to leverage their broad technical and distribution capabilities and facilitate market penetration.
 
  •  Expand our sales force, network of distributors and OEM channels.  We plan to expand our sales force and distribution network to support growth in the industrial and building and construction markets. We also intend to expand our network of OEM fabricators to pursue opportunities in the transportation, appliance and apparel markets.
 
  •  Continue to develop advanced aerogel compositions, applications and manufacturing technologies.  We believe that we are well positioned to leverage a decade’s worth of research and development to commercialize new products, applications and advanced manufacturing technologies.
 
Risks Related to Our Business
 
Investing in our common stock involves substantial risk. You should carefully consider all of the information in this prospectus prior to investing in our common stock. There are several risks related to our business that are described under “Risk Factors” elsewhere in this prospectus. Among these important risks are the following:
 
  •  We have incurred net losses since our inception, and we may continue to incur net losses in the future and may never reach profitability;
 
  •  We have yet to achieve positive cash flow, and our ability to generate positive cash flow is uncertain;
 
  •  We have a limited operating history. This may make it difficult to evaluate our business and prospects and may expose us to increased risks and uncertainties;
 
  •  The market for insulation products incorporating aerogel blankets is relatively undeveloped, which makes it difficult to forecast adoption rates and demand for our products;


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  •  We rely on sales to a limited number of distributors and contractors for the substantial majority of our revenue, and the loss of one or more significant distributors or several of our smaller distributors could materially harm our business;
 
  •  Any significant disruption to our sole manufacturing facility or the failure of our production lines to operate according to our expectation could have a material adverse effect on our results of operations;
 
  •  Our products are very 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; and
 
  •  Our directors, officers and principal stockholders have significant voting power and will continue to control a substantial majority of our common stock after this offering.
 
Company Information
 
Our predecessor company was incorporated in Delaware in May 2001. In June 2008, we completed a reorganization pursuant to which our predecessor company merged with and into a newly formed Delaware corporation, Aspen Merger Sub, Inc., a wholly-owned subsidiary of our predecessor company formed for the purpose of the reorganization. As the surviving entity to the merger, we then changed our name from “Aspen Merger Sub, Inc.” to “Aspen Aerogels, Inc.”
 
Our principal executive offices are located at 30 Forbes Road, Building B, Northborough, Massachusetts 01532, and our telephone number is (508) 691-1111. Our website address is www.aerogel.com. The information contained on, or accessible from, our website is not incorporated by reference into this prospectus.


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The Offering
 
Common stock offered by us           shares (or           shares if the underwriters exercise their option to purchase additional shares in full)
 
Common stock to be outstanding immediately after this offering           shares (or           shares if the underwriters exercise their option to purchase additional shares in full)
 
Use of proceeds We estimate that the net proceeds to us from this offering, after deducting estimated underwriting discounts and estimated offering expenses payable by us, will be approximately $      million (or approximately $      million if the underwriters exercise their option to purchase additional shares in full) assuming an initial public offering price of $      per share, which is the mid-point of the estimated price range set forth on the cover page of this prospectus. We intend to use the net proceeds from this offering for general corporate purposes, including the construction of additional manufacturing capacity. See “Use of Proceeds” for more information.
 
Proposed NYSE symbol “ASPN”
 
The number of shares of our common stock to be outstanding after this offering is based on 94,972,797 shares of our common stock outstanding as of June 30, 2011 after giving effect to the automatic conversion of our outstanding Series A and B redeemable convertible preferred stock, which we refer to collectively as our preferred stock, into 68,853,493 shares of our common stock immediately prior to the completion of this offering and excludes the following:
 
  •  14,110,658 shares of our common stock issuable upon the exercise of stock options outstanding as of June 30, 2011 at a weighted-average exercise price of $0.62 per share;
 
  •            shares of our common stock that will be available for future issuance under our 2011 equity incentive plan to be effective upon completion of this offering; and
 
  •  1,127,324 shares of common stock issuable upon the exercise of warrants outstanding as of June 30, 2011 at a weighted-average exercise price of $0.002 per share.
 
Except as otherwise noted, all information in this prospectus:
 
  •  assumes the adoption of our restated certificate of incorporation and restated by-laws in connection with the consummation of the offering made hereby;
 
  •  assumes that the closing of the offering made hereby occurs on          , 2011 with an initial public offering price per share of $     , the mid-point of the price range set forth on the cover page of this prospectus;
 
  •  gives effect to the automatic conversion of all outstanding shares of our preferred stock into 68,853,493 shares of our common stock on a 1-for-1 basis;
 
  •  gives effect to the issuance of          shares of common stock to the holders of our outstanding preferred stock upon the closing of the offering made hereby in satisfaction of accumulated dividends, as required by the terms of the preferred stock;
 
  •  gives effect to the issuance of           shares of common stock issuable upon the automatic conversion of our $30.0 million aggregate principal amount of 8.0% convertible subordinated notes due June 2014, which we refer to as our convertible notes, together with accrued


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  interest thereon, upon the closing of the offering made hereby, at a conversion price equal to 87.5% of the initial offering price per share of the common stock offered hereby;
 
  •  gives effect to a           for           reverse split of our common stock, which will take place prior to the closing of the offering made hereby; and
 
  •  assumes no exercise by the underwriters of their option to purchase additional shares.
 
See “Capitalization” for conversion adjustments with respect to our preferred stock and our convertible notes that may be applicable upon future events, such as the completion of this offering.
 
We refer to the conversion of our preferred stock into shares of common stock (including the conversion of accumulated dividends on each series into shares of common stock) and the automatic conversion of our convertible notes into shares of common stock (including the conversion of the accrued interest into shares of our common stock) herein, as the preferred stock and convertible notes conversions.


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Summary Consolidated Financial Data
 
The following tables present a summary of our consolidated financial data for the periods, and as of the dates, indicated. We derived the consolidated statement of operations data for the years ended December 31, 2008, 2009 and 2010 from our audited consolidated financial statements and the related notes thereto included elsewhere in this prospectus. We derived the consolidated statement of operations data for the six months ended June 30, 2010 and 2011 and the consolidated balance sheet data as of June 30, 2011 from our unaudited consolidated financial statements and the related notes thereto included elsewhere in this prospectus. The results of operations for these interim periods are not necessarily indicative of the results to be expected for a full year. Our unaudited consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements and the related notes thereto and, in the opinion of our management, reflect all adjustments that are necessary for a fair presentation in conformity with U.S. generally accepted accounting principles, or GAAP. Our historical results for prior periods are not necessarily indicative of results to be expected for any future period. The summary unaudited pro forma balance sheet information as of June 30, 2011 has been prepared to give effect to this offering, our application of the proceeds therefrom and the preferred stock and convertible notes conversions as if they had occurred on June 30, 2011. The summary unaudited pro forma balance sheet information is for informational purposes only and does not purport to indicate balance sheet information as of any future date.
 
You should read this summary consolidated financial data together with our audited and unaudited consolidated financial statements and the related notes thereto included elsewhere in this prospectus and the information under “Selected Consolidated Financial Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
 
                                         
          Six Months Ended
 
    Year Ended December 31     June 30  
   
2008
   
2009
   
2010
   
2010
   
2011
 
    ($ in thousands, except share and per share data)  
 
Consolidated statements of operations data:
                                       
Revenue:
                                       
Product
  $ 17,202     $ 24,752     $ 38,690     $ 16,008     $ 24,333  
Research services
    2,868       3,864       4,519       2,238       1,817  
                                         
Total revenue
    20,070       28,616       43,209       18,246       26,150  
Cost of revenue:
                                       
Product
    32,160       30,462       35,399       16,114       21,545  
Research services
    1,169       1,788       2,119       1,005       922  
Impairment charge
    2,524                          
                                         
Gross profit (loss)
    (15,783 )     (3,634 )     5,691       1,127       3,683  
Operating expenses:
                                       
Research and development
    2,134       2,524       2,985       1,719       1,728  
Sales and marketing
    4,034       3,994       4,526       2,318       2,557  
General and administrative
    6,180       5,430       5,675       2,813       3,443  
                                         
Total operating expenses
    12,348       11,948       13,186       6,850       7,728  
                                         
Income (loss) from operations
    (28,131 )     (15,582 )     (7,495 )     (5,723 )     (4,045 )
                                         
Other income (expense):
                                       
Interest income
    287       18       170       37       51  
Interest expense
    (7,400 )     (3,075 )     (2,585 )     (1,404 )     (2,269 )
                                         
Total other expense, net
    (7,113 )     (3,057 )     (2,415 )     (1,367 )     (2,218 )
                                         
Net income (loss)
    (35,244 )     (18,639 )     (9,910 )     (7,090 )     (6,263 )
Dividends and accretion on
redeemable convertible
preferred stock
    (2,351 )     (2,984 )     (57,007 )     (39,264 )     (68,604 )
                                         
Net income (loss) attributable to
common stockholders
  $ (37,595 )   $ (21,623 )   $ (66,917 )   $ (46,354 )   $ (74,867 )
                                         
Per share data:
                                       
Net income (loss) per share attributable
to common stockholders,
basic and diluted
  $ (3,389.12 )   $ (2.21 )   $ (2.62 )   $ (1.81 )   $ (2.88 )
                                         
Weighted-average common shares outstanding, basic and diluted
    11,093       9,751,616       25,574,286       25,573,997       26,005,705  
                                         


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          Six Months Ended
 
    Year Ended December 31     June 30  
   
2008
   
2009
   
2010
   
2010
   
2011
 
    ($ in thousands, except share and per share data)  
 
Pro forma net income (loss) per share, basic and diluted(1)
                                       
                                         
Weighted-average common shares outstanding used in computing pro forma net income (loss) per share, basic and diluted(1)
                                       
                                         
                                         
                                         
    Year Ended December 31     Six Months Ended June 30  
   
2008
   
2009
   
2010
   
2010
   
2011
 
    (In thousands)  
 
Other operating data:
                                       
Product shipments in square feet(2)
    6,909       10,525       16,443       7,114       10,612  
Adjusted EBITDA(3)
  $ (17,621 )   $ (9,121 )   $ (2,394 )   $ (3,261 )   $ (238 )
 
                 
    As of June 30, 2011  
   
Actual
   
Pro forma
 
    ($ in thousands)  
 
Consolidated balance sheet data:
               
Cash and cash equivalents
  $ 29,633          
Working capital(4)
    30,554          
Total assets
    110,871          
Total debt
    39,264          
Preferred stock
    178,390          
Total stockholders’ (deficit) equity
    (132,536 )        
 
(1) Pro forma per share data will be computed based upon the number of shares of common stock outstanding immediately after consummation of this offering applied to our historical net income (loss) amounts and will give retroactive effect to the preferred stock and convertible notes conversions (assuming an initial public offering price of $     , the mid-point of the price range set forth on the cover page of this prospectus) and the issuance of the shares of our common stock offered hereby.
 
The following table presents the calculation of pro forma basic and diluted net income (loss) per share of common stock attributable to our common stockholders:
 
                                         
          Six Months Ended
 
    Year Ended December 31     June 30  
   
2008
   
2009
   
2010
   
2010
   
2011
 
    ($ in thousands, except share and per share data)  
 
Net income (loss) attributable to common stockholders
  $ (37,595 )   $ (21,623 )   $ (66,917 )   $ (46,354 )   $ (74,867 )
Dividends and accretion on redeemable convertible preferred stock
    2,351       2,984       57,007       39,264       68,604  
Interest expense
                                       
Discount on conversion of convertible notes
                                       
                                         
Pro forma net income (loss) attributable to common stockholders
                                       
                                         
Weighted-average common shares outstanding, basic and diluted
    11,093       9,751,616       25,574,286       25,573,997       26,005,705  
Common shares issued upon conversion of preferred stock and accrued dividends
                                       
Common shares issued upon conversion of convertible notes and interest thereon
                                       
                                         
Weighted-average common shares outstanding used in computing pro forma net income (loss) per share, basic and diluted
                                       
                                         
Pro forma net income (loss) per share, basic and diluted
                                       
                                         

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(2) We price our products and measure our product shipments in square feet. We believe the square foot operating metric allows us and our investors to measure our sales volume on a uniform and consistent basis.
 
(3) 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 depreciation and amortization expense, interest expense, stock-based compensation expense and impairment charges. Adjusted EBITDA is a supplemental measure of our performance that is not required by, or 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 as a measure of operating performance, because it does not include the impact of items that we do not consider indicative of our core operating performance, for planning purposes, including the preparation of our annual operating budget, to allocate resources to enhance the financial performance of our business and as a performance measure under our bonus plan. We also believe that the presentation of Adjusted EBITDA provides useful information to investors with respect to our results of operations and in assessing the performance and value of our business. Various measures of EBITDA are widely used by investors to measure a company’s operating performance without regard to items that can vary substantially from company to company depending upon financing and accounting methods, book values of assets, capital structures and the methods by which assets were acquired.
 
We understand that, although measures similar to Adjusted EBITDA are frequently used by investors and securities analysts in their evaluation of companies, 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:
 
• Adjusted EBITDA does not reflect our historical cash expenditures or future requirements for capital expenditures or other contractual commitments;
 
• Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs;
 
• Adjusted EBITDA does not reflect stock-based compensation expense;
 
• Adjusted EBITDA does not reflect our tax expense or cash requirements to pay our income taxes;
 
• Adjusted EBITDA does not reflect our interest expense, or the cash requirements necessary to service interest or principal payments on our debt;
 
• Although depreciation, amortization and impairment are non-cash charges, the assets being depreciated, amortized or impaired will often have to be replaced in the future, and Adjusted EBITDA does not reflect any cash requirements for these replacements; and
 
• Other companies in our industry may calculate EBITDA or Adjusted EBITDA differently than we do, limiting their usefulness as a comparative measure.
 
Because of these limitations, our Adjusted EBITDA should not be considered as a measure of discretionary cash available to us to reinvest in the growth of our business or as a measure of cash available for us to meet our obligations.
 
To properly and prudently evaluate our business, we encourage you to review the GAAP financial statements included elsewhere in this prospectus and not to rely on any single financial measure to evaluate our business.
 
The following table presents a reconciliation of net income (loss), the most directly comparable GAAP measure, to Adjusted EBITDA for the periods presented:
 
                                         
          Six Months
 
    Year Ended December 31     Ended June 30  
   
2008
   
2009
   
2010
   
2010
   
2011
 
    ($ in thousands)  
 
Net income (loss)
    (35,244 )     (18,639 )     (9,910 )     (7,090 )     (6,263 )
Depreciation and amortization
    7,059       5,630       4,633       2,261       3,365  
Stock-based compensation
    927       831       468       201       442  
Interest expense, net
    7,113       3,057       2,415       1,367       2,218  
Impairment charge
    2,524                          
                                         
Adjusted EBITDA
  $ (17,621 )   $ (9,121 )   $ (2,394 )   $ (3,261 )   $ (238 )
                                         
 
(4) Working capital means current assets minus current liabilities.


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RISK FACTORS
 
Investing in our common stock involves a high degree of risk. You should carefully consider the risks described below and all of the other information set forth in this prospectus, including our consolidated financial statements and the related notes thereto, before deciding to invest in our common stock. If any of the events or developments described below occurs, our business, financial condition or results of operations could be negatively affected. In that case, the market price of our common stock could decline, and you could lose all or part of your investment.
 
Risks Related to Our Business and Strategy
 
We have incurred 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 or sustain profitability. We experienced net losses of $35.2 million, $18.6 million and $9.9 million for the years ended December 31, 2008, 2009 and 2010, respectively, and $6.3 million for the six months ended June 30, 2011. As of June 30, 2011, our accumulated deficit was $202.4 million and total stockholders’ deficit was $132.5 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 sales and marketing, research and development, 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 our currently outstanding debt and on any debt that we incur in the future 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 or sustaining profitability. In addition, our ability to achieve profitability is subject to a number of the 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 cash flow, and our ability to generate positive cash flow is uncertain.
 
To rapidly 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 over the last several years. We have had negative cash flow before investing and financing activities of $22.0 million, $13.0 million and $15.1 million for the years ended December 31, 2008, 2009 and 2010, respectively, and $7.2 million for the six months ended June 30, 2011. We anticipate that we will continue to have negative cash flow for the foreseeable future as we continue to make significant future capital expenditures to expand our manufacturing capacity and incur increased research and development, sales and marketing, and general and administrative expenses. Our business will also require significant amounts of working capital to support our growth and we will need to increase our inventories of raw materials and our products as we seek to grow our business. Therefore, we may need to raise additional capital from investors to achieve our expected growth, and we may not achieve sufficient revenue growth to generate positive future cash flow. An inability to generate positive cash flow for the foreseeable future or raise additional capital on reasonable terms may decrease our long-term viability.
 
We have a limited operating history. This may make it difficult to evaluate our business and prospects, and may expose us to increased risks and uncertainties.
 
We began operating in May 2001 and, until 2004, when we first began generating significant commercial revenues, we were primarily focused on research and development. We did not begin generating significant revenues from our current generation of products until 2008. Accordingly, we have only a limited operating history and an even more limited history of generating revenues from our


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current generation of products. As a result of our limited operating history, we have limited financial data that can be used to evaluate our business, strategies, performance and prospects or an investment in our common stock. Any evaluation of our business and our prospects must be considered in light of our limited operating history and the risks and uncertainties encountered by companies at our stage of development. To address these risks and uncertainties, we must do the following:
 
  •  maintain and expand our current relationships and develop new relationships with direct and end-use customers;
 
  •  increase our penetration of the industrial market, the building and construction market and other markets for our products;
 
  •  maintain and increase our manufacturing capacity to meet existing and anticipated future demand for our products;
 
  •  continue to develop our aerogel insulation products and increase our research and development activities;
 
  •  identify new partnership and market opportunities for our products;
 
  •  develop new applications for our products and our aerogel technology;
 
  •  execute our business and marketing strategies successfully;
 
  •  respond to competitive developments; and
 
  •  attract, integrate, retain and motivate qualified personnel.
 
We may be unable to accomplish one or more of these objectives, which could cause our business to suffer. In addition, pursuing many of these goals is expected to entail substantial expense, which would adversely impact our operating results and financial condition. Any predictions about our future operating results may not be as accurate as they could be if we had a longer operating history.
 
If we are unable to maintain our technological advantage and expand market acceptance of our products, our business may be adversely affected.
 
We are researching, developing, manufacturing and selling high-performance aerogel insulation products. The market for aerogel insulation is at a relatively early stage of development, and the extent to which our aerogel insulation will be able to meet the requirements of our direct and end-use customers and achieve significant market acceptance is uncertain. Rapid and ongoing changes in technology and product standards could quickly render our products less competitive, or even obsolete, 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 and potential 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 that have developed or are developing products using aerogel technology similar to our technology and these or other companies could introduce aerogel products that compete directly with our products and outperform them in one or more performance attributes. As a result of this competition and potential competition, our products may not compete effectively in our target markets.
 
In addition, we intend to expand our penetration of the building and construction market, which we are targeting for our products. However, historically, many of our potential end-users in the building and construction market have been slow to adopt new technology and incorporate new design and construction techniques, which may delay or prevent the adoption of our products. Our efforts to


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expand beyond our existing markets may not be successful. Our products may never be accepted by those new markets or result in the creation of additional revenue. Additionally, we have been unable at times to produce sufficient amounts of our product to meet demand from our customers, and we may not be able to avoid capacity constraints in the future. If we are unable to deliver our products within the timeframes required by our direct and end-use customers, we may be at risk of losing sales. Therefore, our recent historical growth trajectory may not provide an accurate representation of the market dynamics we may experience in the future, making it difficult to evaluate our future prospects.
 
Many factors outside of our control may affect the demand for our insulation products.
 
Our direct and end-use customers operate in extremely competitive industries, and competition to supply their insulation needs focuses on, among other factors, delivering sufficient thermal performance in a cost-effective fashion. Many other factors outside of our control may also affect the demand for our insulation products and the viability of widespread adoption of our aerogel blankets, including:
 
  •  the price of our aerogel insulation compared to traditional insulation materials, including the tendency of end-users in some markets to opt for the frequently lower short-term costs of traditional insulation materials even when the long-term and overall costs of our products are lower and the performance attributes of our products are superior;
 
  •  the regulation of energy efficiency and building standards in the industrial and the building and construction markets;
 
  •  the availability of government funding and incentives to support the use of high-performance insulation materials, such as our aerogel blankets; and
 
  •  fluctuations in economic and market conditions, including changes in the cost of energy, the relative value of energy efficiency measures, foreign exchange rates and the cost of the raw materials for our products.
 
Any of these factors could make it more difficult for us to attract and retain customers, cause us to lower our prices in order to compete, or reduce our market share and revenues, any of which could have a material adverse effect on our financial condition and results of operations.
 
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 financial performance will depend in large part on our ability to penetrate the worldwide insulation market. Our penetration of this market is highly dependent on the acceptance of our products by large, well-established end-users, contractors, installers and distributors. 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. If we fail to successfully educate existing and potential industrial and building and construction market end-users, installers, contractors and distributors regarding the benefits 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 business could be limited. Because we are a new supplier to our end-use customers, we 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 or distribution channel acceptance, technological challenges, competing technologies


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and products or otherwise would result in a lower revenue growth rate or decreased revenue, either of which could materially adversely affect our business and operating results.
 
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. Because our products are relatively new in the insulation market, continued adoption of our products and the rate of such adoption is not certain. Also, since we rely on sales to a limited number of direct customers and end-user 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 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 our limited operating history and the difficulty in determining the adoption rates for our products, we have no basis on which to predict our quarterly revenue. 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.
 
Any significant disruption to our sole manufacturing facility or the failure of our production lines to operate according to our expectation could have a material adverse effect on our results of operations.
 
We currently have only two production lines in one manufacturing facility, which is located in East Providence, Rhode Island. Our ability to meet the demands of our customers depends on efficient, proper and uninterrupted operations at our manufacturing facility. We only recently began operations on our second production line and we have not yet achieved target capacity on this line. We may not be able to do so. In addition, in the event of a breakdown of one or more production lines, we may not 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 may not be able to find suitable alternatives or 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. Particularly, our manufacturing processes include the use of both high temperatures and the highly flammable chemical ethanol, which subjects us to a significant risk of loss resulting from fire. We had occasional incidences of fires at our prototype facility, however, damage was immaterial. While our manufacturing facilities are designed to limit any damage resulting from a fire, this risk cannot be completely eliminated. We maintain insurance policies to cover losses caused by fire or natural disaster, including business interruption insurance, however, such insurance may not adequately compensate us for any such losses. If our manufacturing facilities were to be damaged or cease operations, and our insurance proves to be inadequate, it may reduce revenue, cause us to lose customers and otherwise adversely affect our business. If our sole manufacturing facility was damaged or destroyed prior to completing construction of a second facility, we would be unable to operate our business for an extended period of time and may go out of business.
 
We operate in highly competitive markets; 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 incumbent insulation materials and also from other companies producing high performance insulation materials. Large producers of incumbent insulation materials dominate the insulation market. See “Business — Competition.” In addition, there are other companies seeking to develop high-performance insulation materials, including aerogel insulation. Many of our competitors are substantially larger and better


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capitalized than we are and possess greater financial resources. Cabot Corporation, or Cabot, is our primary competitor in the market for aerogel insulation and is larger and better capitalized than we are. Cabot manufactures and sells a different form of aerogel insulation that is currently competitive with our products primarily in the offshore oil sector for use in pipe-in-pipe applications, and may compete with our products as we seek to expand our sales in the building and construction market. Our competitors, including Cabot, 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.
 
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. While 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 incumbent insulation products that are priced below our products. Our products are very 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. For example, we currently plan on adding a coating to certain of our products in order to reduce dustiness; however, this planned coating may not achieve its aims, may not be valued by end-use customers and may negatively impact our cost structure and margins. Any of these competitive factors could make it more difficult for us to attract and retain customers, cause us to lower our prices in order to compete, and reduce our market share and revenues, any of which could have a material adverse effect on our financial condition and results of operations.
 
We rely on sales to a limited number of direct customers, including distributors, contractors and OEMs, for the substantial majority of our revenue, and the loss of one or more significant direct customers or several or 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 and OEMs. For the years ended December 31, 2008, 2009 and 2010, and the six months ended June 30, 2011, revenue from our top ten direct customers represented 51%, 47%, 53% and 63% of our revenues, respectively. For the six months ended June 30, 2010, Technip and Thorpe Products represented 18% and 10%, respectively, of our total revenue and for the six months ended June 30, 2011, Enershield and Thorpe Products represented 21% and 10%, respectively, of our total revenue. In 2008, Aerogel Korea Co, Ltd. represented 12% of our total revenue; in 2009, no direct customer represented 10% or more of our total revenue; and in 2010, Technip represented 14% of our total revenue. For each of the periods discussed above, there were no other customers that represented 10% or more of our total revenues. Although the composition of our significant distributors, contractors, and OEMs 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 contracts with our direct customers generally do not include long-term commitments or minimum volumes that ensure future sales of our products and our understanding is that our direct customers’ contracts with end-use customers also generally do not include such commitments or


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minimums. Consequently, our financial results 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, 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.
 
We understand from our direct customers, including our distributor, contractor and OEM customers, that a substantial majority of their sales of our products are to end-use customers in the oil and gas industry, making us susceptible to prolonged negative trends relating to this industry.
 
We understand from our direct customers, including our distributor, contractor and OEM customers that a substantial majority of their sales of our products are to end-use customers in the oil and gas industry, making us susceptible to prolonged negative trends relating to this industry. We estimate that sales to end-use customers in the oil and gas industry accounted for approximately 82% of our 2010 revenue. While we seek to maintain a broad end-use customer base across several industries, our end-use customers in the oil and gas industry have accounted for a significant portion of our historical revenues. Certain economic conditions, including low oil prices, can result in slowdowns in the oil and gas industry, which in turn can result in reduced demand for our products. If the oil and gas industry were to suffer a prolonged or significant downturn, our revenues, profits and cash flows may be reduced significantly. While we also sell to other direct and end-use customers in the industrial market and other markets, including the building and construction industry, these markets are also cyclical in nature and, as such, are subject to economic downturns that could have a similar adverse effect on our revenue, profits and cash flows.
 
Negative perceptions regarding the safety 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 customers, potential customers and others in the markets that we are targeting that our products are not safe could have a critical impact on our ability to sell our products and to continue as a business. In particular, the dust produced by our products during their installation and use increases the likelihood of such perceptions. Further, our competitors have in the past and may in the future, seek to perpetuate such perceptions. Our products are still not widely used and there is risk of an actual or perceived failure of our products or other negative perceptions regarding our products, such as perceived health hazards. 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, and if we violate such regulations, we could face penalties and fines.
 
We are subject to numerous health and safety laws and regulations in each of the jurisdictions in which we operate, including with regards to hazardous substances that we use in our manufacturing


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process. These 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. Violations of laws, regulations and permit requirements may also result in criminal sanctions or injunctions. Manufacture of our products requires the use of hazardous substances and our products contain these same materials, including titanium dioxide and carbon black, which, in certain forms and at certain levels, has been determined to be possibly carcinogenic or otherwise harmful to humans. While we use these hazardous substances, including titanium dioxide and carbon black, in forms and at levels that comply with current rules and regulations governing their use known to us, 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 product may be impacted, or we may inadvertently use such materials. In addition, our production or manufacturing process may result in uses above permitted levels. Such uses or changes in rules or regulations could materially adversely affect our business, financial condition and operating results. Health and safety laws, regulations and permit requirements may change or become more stringent. 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 operating results.
 
Our products are very 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 incumbent insulation products that are priced below our products. Our products are very 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 cost 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 such regions.
 
Changes to regional, national and local laws and regulations regarding energy efficiency and building standards could materially adversely affect our business and operating results.
 
We believe that there has been a trend in certain countries, especially within the European Union, for governments to mandate increasingly stringent energy efficiency standards and building standards for certain construction and renovation projects and this trend has evidenced itself at various levels of government, including regional, national and local. Our business is affected by these laws and regulations. If this trend toward increasingly stringent energy efficiency standards and building standards were to lessen or cease or if there were to be a trend towards weaker energy efficiency standards and building standards or reduced enforcement of existing standards, then our business and operating results could be materially adversely affected. In addition, changes to the laws and regulations governing energy efficiency and building standards in specific jurisdictions or the enforcement of such laws, regulations or standards could materially adversely impact our business and operating results if we have significant sales of our products in that jurisdiction or if we were targeting that jurisdiction for expanded future sales.


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In particular, our sales in the building and construction market are driven substantially by government policies and legislation in Europe that mandate high levels of energy efficiency in buildings. The European Union’s directive on the energy performance of buildings, Directive 2010/ 31/ EU, or EPBD, requires EU member states to pass legislation or implement regulations requiring all new buildings as well as most major renovations to achieve minimum energy performance requirements. The EPBD significantly expands the scope of the original EU directive on building energy performance adopted in 2002, Directive 2002/91/EC. While we believe the policies established under the EPBD offer a significant opportunity for our products in the European building and construction market, this opportunity is largely dependent on faithful implementation of the directive by EU member states and continued support for national and local energy efficiency initiatives. Many EU member states have not yet fully adopted legislation implementing the original 2002 directive and it is unclear when certain EU members will pass legislation implementing the EPBD. In the event that the European Union repeals or weakens the requirements of the EPBD or that EU member states do not adopt or enforce national legislation implementing the EPBD, our business and operating results may be materially adversely impacted.
 
As a result of becoming a public company, we will be 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.
 
We will be required, pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, to furnish a report by management on, among other things, the effectiveness of our internal control over financial reporting for the first fiscal year beginning after the effective date of this offering and in each year thereafter. Our auditors may also need to attest to the effectiveness of our internal controls over financial reporting. These assessments will need to include disclosure of any material weaknesses identified by our management in our internal control over financial reporting.
 
Although our independent registered public accounting firm did not complete an audit of internal controls over financial reporting as of December 31, 2010, two significant deficiencies in internal controls were identified in connection with the preparation of our financial statements and the audit of our financial results for 2010. We determined that we had a significant deficiency relating to our accounting resources and financial information systems. In addition, we determined that we had a significant deficiency relating to our information technology and general controls.
 
We have taken actions to remediate both of these significant deficiencies including instituting more detailed recording, review and approval processes, establishing additional internal controls, providing additional training and hiring additional financial and accounting staff; however, we do not expect that they will be remediated at the time of this offering.
 
We are in the very early stages of the costly and challenging process of compiling our system of internal controls over financial reporting and processing documentation necessary to perform the evaluation needed to comply with Section 404. We may discover, and not be able to remediate, future significant deficiencies or material weaknesses, nor be able to complete our evaluation, testing and any required remediation in a timely fashion, any of which would make us less likely to detect or prevent fraud. In addition, we may not be able to remediate our current significant deficiencies. During the evaluation and testing process, if we identify one or more material weaknesses in our internal control over financial reporting, we will 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, or if our auditors are unable to express an opinion on the effectiveness of our internal controls, 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, a delay in compliance with Section 404 could subject us to a variety of administrative sanctions, including Securities and Exchange Commission, or SEC, action, ineligibility


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for short form resale registration, the suspension or delisting of our common stock from The New York Stock Exchange, or NYSE, 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 will 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 operating results.
 
After the consummation of this offering, we will be 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, as a part of each of these reports, our chief executive officer and chief financial officer will be required to evaluate and report their conclusions regarding the effectiveness of our disclosure controls and procedures and to certify that they have done so. This requirement will apply to our first Form 10-Q for the quarter following effectiveness of the registration statement. Effective internal controls are necessary for us to provide reliable financial reports and prevent fraud. In addition, under Section 404 of the Sarbanes-Oxley Act, we will be required to include a report of management on our internal control over financial reporting in our Form 10-K. In addition, 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. This requirement will first apply to our Form 10-K for our fiscal year ending December 31, 2012. The process of improving our internal controls and complying with Section 404 will be expensive and time consuming, and will require significant attention of management.
 
Complying with these and other requirements applicable to public companies may place a strain on our personnel, information technology systems and resources and divert management’s attention from other business concerns. We may need to hire additional accounting and financial staff with appropriate public company experience and technical accounting knowledge, and we may not be able to do so without incurring material costs. These and other requirements may also make it more difficult or more costly for us to obtain certain types of insurance, including directors’ and officers’ liability insurance. We, therefore, 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 events 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 events could have a material adverse effect on our business, financial condition and results of operations.
 
Our continued growth requires that we expand our manufacturing facilities and increase our production capacity. If we fail to achieve this manufacturing expansion and capacity increase, our growth may be hindered and our business may be materially adversely affected.
 
We are engaged in the design, engineering and initial procurement phase of building a third production line in our current manufacturing facility in East Providence and also plan to construct a second manufacturing facility located in either the United States or Europe. If, for any reason, the third production line or the second manufacturing facility should fail to be completed in a timely fashion or any of the production lines in our current or any future manufacturing facilities do not operate according to our expectations, sales may be impeded, our growth may be hindered and our business may be materially adversely affected. Additionally, 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. Many factors could delay or prevent the addition of a third production line or the construction of a second manufacturing facility, including our inability to find financing on favorable terms, or at all, design, engineering and construction difficulties, interruptions in the supply of the necessary construction materials or the increase in their price, and our failure to obtain necessary legal, regulatory and other approvals. Many factors could prevent the third production line or the second manufacturing facility from producing at their expected full capacity, including design and engineering failures, inability to retain and train a skilled workforce, improper


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operation of the manufacturing equipment and damage to the manufacturing equipment due to design and engineering flaws or operator error. Any such expansion will place a significant strain on our senior management team and our financial and other resources. The costs associated with our expansion could exceed our expectations and result in a materially adverse impact on our operating results.
 
Growth may place significant demands on our management and our infrastructure. If we fail to manage our growth effectively, we may be unable to execute our business plan or address competitive challenges adequately.
 
We expect to continue to expand our manufacturing, sales and marketing, operations, engineering, research and development capabilities and financial control and reporting systems, and as a result, we may be unable to manage our growth. To manage our anticipated future growth, we must continue to implement and improve our managerial, operational, financial control and reporting systems, expand our facilities and continue to recruit and train additional qualified personnel. All of these measures will require significant expenditures and will demand the attention of management. Due to our limited resources, we may not be able to effectively manage the expansion of our operations or recruit and adequately train additional qualified personnel. The physical expansion of our operations may lead to significant costs and may divert our management and business development resources. Any inability to manage growth could delay the execution of our business plans or disrupt our operations. If we fail to achieve the necessary level of efficiency in our organization as it grows, our business, results of operations and financial condition would be harmed.
 
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. If we are not able to hire, train and retain the necessary personnel, or if these managerial, operational, financial and reporting improvements are not implemented successfully, we could lose customers and revenues. We allocate our 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 from industrial customers, building and construction customers and original equipment manufacturers, or OEMs. However, these factors are uncertain. If our assumptions regarding these factors prove to be incorrect or if competing products gain further acceptance, then actual demand for our aerogel products could be significantly less than the demand we anticipate and we may not be able to sustain our revenue growth or achieve profitability.
 
Our financial results may vary from period-to-period due to changes in the mix of our products that we sell during a period and due to our expenses not corresponding with the timing of our revenues, which may lead to volatility in our stock price.
 
Our profitability from period-to-period may vary due to the mix of products that we sell in different periods. Although changes in our product mix from period to period have not historically had a significant impact on our financial results, as we seek to continue to expand our business, we expect to sell an increasing amount of our aerogel insulation products into the building and construction and OEM markets. Certain of the products aimed at these markets have different margin profiles than the products that have historically generated most of our product revenue. In particular, Spaceloft and Spaceloft A2, which are targeted at the building and construction market, are relatively lower margin as compared to our Pyrogel and Cryogel products, which are targeted at the industrial and OEM markets. Accordingly, sales of individual products may not necessarily be consistent across periods, which could cause our revenue, cost of revenue, gross profit, net income and cash flow to vary from period to period.
 
In addition, most of our expenses are either relatively fixed in the short-term or incurred in advance of sales. These spending levels are based in part on our expectations regarding future revenues. As a result, if revenues for a particular operating period are below expectations, we may not be able to proportionately reduce expenses for that period. Therefore, we believe that period-to-period


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comparisons of our operating results may not necessarily be meaningful and that these comparisons cannot be relied upon as indicators of future performance. As a result, our operating results may not meet expectations of equity research analysts or investors. If this occurs, the trading price of our common stock could fall substantially either suddenly or over time.
 
The qualification process for our products in the industrial, building and construction and other markets can be lengthy and unpredictable, potentially delaying adoption of our products and incurring significant expense.
 
Qualification of our products by many of our direct and end-use customers in the industrial, building and construction and other markets 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. Such a failure to qualify 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 operating results.
 
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 operating results.
 
The raw materials used in the production of our products consist primarily of polyester and fiberglass battings, amorphous silica and ethanol, which is used in the delivery of the amorphous silica. Although we are not dependent on any one supplier, we are dependent on the ability of our third-party suppliers to supply such materials on a timely and consistent basis. While these raw materials are available from numerous sources, they may be subject to fluctuations in availability and price. 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 demand. Failure of suppliers to supply, delays in supplying, or disruptions in the supply chain for our raw materials, or allocations in the supply of certain high demand raw components, could materially adversely affect our operations, our profitability and our ability to meet our delivery schedules on a timely and competitive basis.
 
Fluctuations in the prices of these raw materials could have a material adverse effect on results of operations. 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 increased costs and implementation of related price increases. We purchase amorphous silica from several suppliers, mostly pursuant to individual purchase orders and not pursuant to long-term contracts. While we do have a supply agreement with Silbond Corporation, Silbond provides less than a third of our amorphous silica needs. Although we are working with a number of amorphous silica providers to plan for our potential future needs and to develop processes to reduce our amorphous silica costs, we do not have a secure, long-term supply of amorphous silica. We may not be able to establish arrangements for secure, long-term amorphous silica supplies at prices consistent with our current costs or without incurring a delay in supply at prices consistent with our current costs while we seek to identify different sources. Any inability to continue to purchase silica pursuant to purchase orders, without long-term agreements in place, or to otherwise establish a long-term supply of amorphous silica at prices consistent with our current costs would have a material adverse effect on our ability to increase our sales and achieve profitability.


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If we do not continue to develop and maintain distribution channels for our products, our profitability could be impaired.
 
For a significant portion of our revenues in the industrial and OEM markets, we rely on sales to distributors who then sell our products to end-users in those markets. Our success depends, in part, on our maintaining satisfactory relationships with these distributors. The majority of our sales to distributors are effected on a purchase order basis that requires 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. Additionally, 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 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 operating results.
 
Failure by us to develop, maintain and strengthen strategic relationships with industry leaders to commercialize our products, particularly in the building and construction 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 and construction market, we have entered into a joint development agreement with BASF Construction Chemicals to develop products to meet increasingly stringent building standards for thermal performance of retrofit and new-build wall systems. In the event that we are unable to develop products that meet market needs or maintain our relationship with BASF Construction Chemicals, we may be required to find less prominent partners in the building and construction market and we may be less able or unable to successfully penetrate that market. As a result, we may lose our ability to grow our business in the building and construction market, which could adversely affect our results of operations, including impairing our profitability.
 
We may enter into 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 Construction Chemicals to develop products in the building and construction market and other joint development agreements that we enter into from time to time. In order to develop and commercialize our products, we may enter into additional joint development agreements or commercial arrangements, in particular in the building and construction and OEM markets. 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 operating results could be materially adversely affected.


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Our results of operations could be adversely affected if our operating expenses 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. Additionally, 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. For example, the time between our customers’ placing an order and delivery of our product is typically short, which limits 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 operating results for any particular operating period. Even though the sales cycle for our products is often long, the lead time between an actual order and shipment of the product is typically short and the insulation market is generally characterized by just-in-time delivery. This limits our ability to predict future sales and could also result in our inability to reduce spending quickly enough to compensate for reductions in sales.
 
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.
 
Although many of our end-use customers are larger, well-capitalized industrial companies, we distribute our products through a network of distributors, contractors and OEMs that 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. Although we have not experienced a significant incidence of non-payment for our products, such non-payments may occur in the future. 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 non-payment by one or more of our direct customers, our business, financial condition and operating results could be materially adversely affected.
 
Our working capital requirements involve estimates based on demand and production expectations and may decrease or increase beyond those currently anticipated, which could harm our operating results 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 operating results 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. To meet any ongoing working capital shortages, we may rely on our current loan and security agreement with Silicon Valley Bank, which we refer to as our revolving credit facility, under which we are entitled to borrow up to $10.0 million. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources.” In addition, we plan to increase our inventory in order to meet our expected future demand. This would result in an increase in our working capital requirements that could harm our operating results and financial condition.
 
Our contracts with U.S. government agencies may subject us to audits, criminal penalties, sanctions and other expenses and fines.
 
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


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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 credible evidence of certain violations of law and contract overpayments to the U.S. government. 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. For example, we currently receive a significant portion of our government contract revenues through the Small Business Innovation Research program, or SBIR. SBIR funding for our contracts with U.S. government agencies could be reduced or eliminated for a number of reasons including the discontinuance of the program as a result of action or inaction by Congress, a decrease in the portion of U.S. government agencies’ budgets that are allocated to research and development, or a reduction of the percentage of research and development budgets that are allocated to SBIR. We expect that our revenue under such contracts will continue to decline due to the recent trend toward tightening of federal spending guidelines and programs. Additionally, SBIR funding is currently available only to companies with less than 500 employees. In the event that our employee headcount equals or exceeds 500, we would no longer be eligible to compete for and be awarded contracts funded through SBIR. Any reduction in available funding or inability to participate in the SBIR program may adversely affect our revenues.
 
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.
 
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 and continue to be critical to the manufacture of our existing products and may also be important to our research, development and manufacture of new products. Any termination or limitation of our cross license agreement with Cabot, or any loss of the intellectual property rights granted to us thereunder as a result of ineffective protection of such rights by Cabot, a breach of or dispute under the cross license agreement by either party or our inability to meet the payment schedule set forth in the cross license agreement would have a material adverse impact on our financial condition, results of operations and growth prospects, and would prevent us from continuing our business. Under the terms of the cross license agreement, as amended, we are obligated, among other things, to pay Cabot a nonrefundable fee of $38 million that


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is amortized on a quarterly basis with the total amount to be paid in full no later than December 2013. As of June 30, 2011, $15.0 million remained outstanding to Cabot. For a more detailed description of the cross license agreement with Cabot, see “Business — Intellectual Property — Cross License Agreement with Cabot Corporation” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Contractual Obligations and Commitments — Cross License Agreement.”
 
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 and manufacturing processes. We rely principally on a combination of patent protection, trade secret laws, confidentiality and nondisclosure agreements 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 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 critical 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 processes. As of June 30, 2011, we had 17 issued U.S. patents and 13 issued foreign patents, including one U.S. patent and one European patent that we co-own with a third party. The issuance of a patent is not conclusive as to its scope, validity and 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 and/or other patent tribunals, or circumvented by others. 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 United States Patent and Trademark Office, 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. In addition, we may fail to apply for patents on important technologies or product candidates 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.
 
As of June 30, 2011, we had 20 pending U.S. patent applications and 34 pending foreign patent applications, including one pending U.S. patent application that we co-own with a third party and a family of pending foreign patent applications that we co-own with another third party. Our pending patent applications are directed to various enabling technologies for the product forms, applications and manufacturing processes 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 assure you that any of our pending patent applications will result in the issuance of patents to us. The U.S. Patent and Trademark Office and relevant foreign 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


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or afford us with significant commercial protection against others with similar technology. Proceedings before the U.S. Patent and Trademark Office 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.
 
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 processes 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 processes. 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 our aerogel products. 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. This federal government funding may limit when and how we can deploy our technology developed under those contracts. In addition, 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.
 
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 or complete reports, the U.S. government could obtain rights to any intellectual property arising from the related research.


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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, 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 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 processes used to produce our aerogel products and believe that we have already developed, and will continue to develop, significant know-how related to these processes. However, trade secrets can be difficult to protect. We may not be able to maintain the secrecy of this know-how, and competitors may develop or acquire equally or more valuable know-how 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 also 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 may not have 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. For example, third parties could reverse engineer our manufacturing processes, independently develop substantially equivalent confidential and proprietary information or otherwise gain access to our trade secrets. Failure to maintain trade secret protection could enable others to produce competing products and adversely affect our competitive business position.
 
We could become subject to intellectual property litigation that could be costly, limit or cancel our intellectual property rights, divert time and efforts away from business operation, require us to pay damages and/or otherwise have an adverse material impact on our business.
 
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 processes and/or materials being employed by other parties. The steps we have taken 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.


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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, and our knowledge of the patent landscape with respect to the technologies currently embodied within our aerogel products and the processes 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 the event that the manufacture, use and/or sale of our products or processes is challenged, or if our product forms or processes conflict with patent 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. Additionally, it is not possible to predict with certainty what patent claims may issue from pending patent applications. 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.
 
In either case, 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 litigation 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 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, we could be required to (1) pay substantial monetary damages, including lost profits, reasonable royalties and/or treble damages if an infringement is found to be willful and/or (2) totally discontinue or substantially modify any products or processes that are found to be in violation of another party’s intellectual property rights. We also may have to seek a license to continue making and selling our products and/or using our manufacturing processes, which we may not be able to obtain on reasonable terms, if at all, which could significantly increase our operating expenses and/or decrease our revenue. If our competitors are able to use our technology without payment to us, our ability to compete effectively could be harmed. Our contracts generally indemnify our customers for third-party claims of intellectual property infringement related to our manufacture of a product up to the amount of the purchase price paid for the product. The expense of defending these claims may adversely affect our financial results.
 
We may incur significant costs complying with environmental laws and related claims, and failure to comply with these laws and regulations could expose us to significant liabilities, which could adversely affect our operating results.
 
Costs of compliance with regional, national, state and local existing and future environmental laws and regulations could adversely affect our cash flow and profitability. 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 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 or suspended. In addition, certain foreign laws and regulations may affect our ability to export products outside of the United States. Existing environmental laws and regulations could be revised or reinterpreted and new laws and regulations could be adopted or become applicable to us or


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our products, and future changes in environmental 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. 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, which could materially adversely affect our business and operating results.
 
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 we currently or formerly owned or operated or properties to which we arranged for the disposal of hazardous substances. Such liability is not limited to the cleanup of contamination we actually caused. For example, the site of our East Providence facility was associated with contamination caused by prior activities on and near the site. While there is currently in place a covenant not to sue from the state environmental agency and a state-approved deed restriction addressing contamination left in place by a previous owner, we are required to comply with the 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 engineered controls to prevent exposure to contaminated soils and annual inspections. The soil management plan requires notice to the state environmental agency of soil excavation and the 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 manufacturing 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.
 
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 operating results.
 
We may face certain product liability or warranty claims from 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, third-party installers or end-use customers. These claims could be brought by various parties, including distributors and other direct customers who are purchasing products directly from us, third-party installers who are contracted by our direct and end-use customers to install our products, 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, third-party installers and end-use customers of our products. Installation of our products is handled by third parties over which 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. 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. 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


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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, third-party installers and end-use customers may not have adequate insurance coverage 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.
 
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, operational and political risks that could increase our costs and make it difficult for us to continue to operate profitably.
 
We conduct business across the globe, with a substantial portion of our sales outside the United States for each of the years ended December 31, 2008, 2009 and 2010. Revenue from outside of the United States, based on shipment destination or services location, amounted to $9.6 million or 48.0% of revenue, $15.9 million or 55.7% of revenue, and $23.2 million or 53.6% of revenue in the years ended December 31, 2008, 2009 and 2010, respectively. In addition, we may expand our operations outside of the United States. As a result, we are subject to a number of risks, including, but not limited to:
 
  •  foreign currency fluctuations, which could result in reduced revenue and increased operating expense;
 
  •  labor rules and collective bargaining arrangements in foreign jurisdictions, if we seek to expand our manufacturing facilities overseas;
 
  •  the effect of applicable foreign tax structures, including tax rates that may be higher than tax rates in the United States or taxes that may be duplicative of those imposed in the United States;
 
  •  tariffs and trade barriers;
 
  •  general economic and political conditions in each country, which may interfere with, among other things, our supply chain, our customers and all of our activities in a particular location;
 
  •  inadequate intellectual property protection in foreign countries;
 
  •  the difficulties and increased expense in complying with a variety of domestic and foreign laws, regulations and trade standards, including the Foreign Corrupt Practices Act; and
 
  •  terrorist activity and political unrest, particularly given the use of our products at oil and gas facilities.
 
Our success will depend in large part on our ability to manage the effects of continued global political and/or economic uncertainty, especially in our significant geographic markets.
 
Our business is affected by seasonal trends, and these trends could have an adverse effect on our operating results.
 
We are subject to seasonal fluctuations that we believe are tied to seasonal levels of industrial activity and the practices of the worldwide insulation market. As a result, our revenue and operating income in the fourth quarter is typically higher, and our revenue and operating income in the first


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quarter is typically lower, than in other quarters of the year. In addition, if our products’ penetration of the building and construction market grows, we may become subject to fluctuations related to commercial and residential construction cycles. As a result of these seasonal trends and fluctuations, we may occasionally experience declines in revenue or earnings as compared to the immediately preceding quarter, and comparisons of our operating results on a period-to-period basis may not be meaningful. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Quarterly Results of Operations — Seasonality and Quarterly Results.”
 
We may 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 construction of new production lines or facilities, ongoing operating expenses and continued development of our aerogel product lines. Our capital requirements will depend on many factors, including the rate of our revenue growth, our introduction of new products and enhancements to existing products, and our expansion of sales and marketing and product development activities. In addition, we may consider strategic acquisitions of complementary businesses or technologies to grow our business, which could require significant capital and could increase our capital expenditures related to future operation of the acquired business or technology. We may not be able to obtain loans or additional capital on acceptable terms or at all. Moreover, our revolving credit facility, our secured subordinated notes issued in December 2010, which we refer to as the subordinated notes, our convertible notes and our loan agreement with Massachusetts Development Finance Agency contain restrictions on our ability to incur additional indebtedness, which, if not waived, could prevent us from obtaining needed capital. Any future credit facilities or debt instruments would likely contain similar restrictions. In the event additional funding is required, 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. A failure to obtain additional financing when needed could adversely affect our ability to maintain and grow our business.
 
Our credit facilities and our debt instruments contain financial and operating restrictions that may limit our access to credit. If we fail to comply with covenants in our credit facilities or our debt instruments, we may be required to repay our indebtedness thereunder, which may have an adverse effect on our liquidity.
 
Provisions in our revolving credit facility, our subordinated notes, our convertible notes and our loan agreement with Massachusetts Development Finance Agency each impose restrictions on our ability to operate, including, for some of the agreements and instruments, but not for others, our ability to:
 
  •  incur additional debt;
 
  •  pay dividends and make distributions;
 
  •  redeem or repurchase capital stock;
 
  •  create liens;
 
  •  enter into transactions with affiliates; and
 
  •  merge or consolidate with or into other entities.
 
These credit facilities and debt instruments also contain 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 and under our other debt instruments and


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credit facility, which would require us to pay all amounts outstanding. 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. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources.”
 
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 guarantees 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.
 
Although we do not have any reason to believe that we may lose the services of any our employees with critical knowledge of our products, our manufacturing processes, our customers and our global operations or any of our senior management, financial, sales and marketing, engineering and production teams in the foreseeable future, the loss of the services of any of these individuals 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 will be subject to limitation, which could result in a higher effective tax rate and adversely affect our financial condition and results of operations.
 
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. At December 31, 2010, we had $112 million of net operating losses available to offset future federal income, if any, which expire on various dates through December 31, 2030; however, we expect $30 million of our net operating losses will not be able to be utilized after June 2013. We performed an analysis pursuant to Internal Revenue Code Section 382, 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. Based on this analysis, we determined that it is more likely than not that an ownership change occurred on June 10, 2008, resulting in an annual limitation on the use of our net operating losses and other tax attributes as of such date. We also determined that we had certain built-in gains at the date of ownership change. Built-in gains increase the limitation under the Internal Revenue Code Section 382 to the extent triggered during the five year period subsequent to the date of change. Absent the disposition of certain built-in gain assets, which


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assets are critical to our business and are unlikely to be disposed of, within the five year period subsequent to the acquisition, approximately $30 million of our net operating losses will not be able to be utilized after June 2013.
 
Risks Related to This Offering
 
There has been no prior public market for our common stock and an active trading market may not develop.
 
Prior to this offering, there has never been a public market for our common stock. A liquid trading market for our common stock may not develop. We cannot predict when or whether investor interest in our common stock on the NYSE might lead to an increase in market price or the development of a more active trading market or how liquid that market might become. If an active market for our securities does not develop, it may be difficult to sell common stock you purchase in this offering. 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.
 
We expect that the price of our common stock will fluctuate substantially and you may not be able to sell your shares at or above the initial public offering price.
 
The initial public offering price of our common stock sold in this offering was determined by negotiation between the representatives of the underwriters and us. This price may not reflect the market price of our common stock that will prevail in the trading market following this offering. You may not be able to resell your shares at or above the initial public offering price due to a number of factors, including those listed in “— Risks Related to Our Business and Strategy” and including the following, some of which are beyond our control:
 
  •  volume and timing of orders for our products;
 
  •  quarterly and yearly variations in our or our competitors’ results of operations;
 
  •  our announcement or our competitors’ announcements regarding new products, product enhancements, significant contracts, number of distributors, acquisitions or strategic investments;
 
  •  announcements of technological innovations relating to aerogels, thermal management and energy conservation insulation;
 
  •  results of operations that vary from the expectations of securities analysts and investors;
 
  •  the periodic nature of our sales cycles, in particular for capital projects in the industrial market;
 
  •  our ability to develop, obtain regulatory clearance or approval for and market new and enhanced products on a timely basis;
 
  •  future sales of our common stock, including sales by our executive officers, directors and significant stockholders;
 
  •  announcements by third parties of significant claims or proceedings against us, including with regards to intellectual property and product liability;
 
  •  changes in accounting principles; and
 
  •  general U.S. and global economic conditions and other factors, including factors unrelated to our operating performance or the operating performance of our competitors.
 
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.


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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 were 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 initiate 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 will rely 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 after the completion of this offering. If securities analysts do not cover our common stock after the completion of this offering, 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 June 30, 2011, our officers, directors and principal stockholders and their affiliates collectively controlled approximately 81.3% of our outstanding common stock. After this offering, assuming no exercise of the underwriters’ option to purchase additional shares, our officers, directors and principal stockholders and their affiliates collectively will control approximately     % of our outstanding common stock. As a result, these stockholders, if they act together, will be able to control the management and affairs of our company and most 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.
 
Our management team may invest or spend the proceeds of this offering in ways in which you may not agree or in ways that may not yield a return.
 
We expect to use the net proceeds from this offering for general corporate purposes, including the construction of additional manufacturing capacity. Our management will have considerable discretion in the application of the net proceeds of this offering. Stockholders may not agree with such uses and the net proceeds may be used for corporate purposes that do not increase our operating results or market value. Until the net proceeds are used, they may be placed in investments that do not produce income or that lose value.
 
Anti-takeover provisions in our restated certificate of incorporation and restated by-laws, and Delaware law, could delay or discourage a takeover.
 
Anti-takeover provisions in our restated certificate of incorporation and restated by-laws and Delaware law may have the effect of deterring or delaying attempts by our stockholders to remove or


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replace management, engage in proxy contests and effect changes in control. The provisions of our charter documents include:
 
  •  procedures for advance notification of stockholder nominations and proposals;
 
  •  the inability of our stockholders to call a special meeting of the stockholders and the inability of our stockholders to act by written consent;
 
  •  the ability of our board of directors to create new directorships and to fill any vacancies on the board of directors;
 
  •  the ability of our board of directors to amend our restated by-laws without stockholder approval; and
 
  •  the ability of our board of directors to issue up to           shares of preferred stock without stockholder approval upon the terms and conditions and with the rights, privileges and preferences as our board of directors may determine.
 
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. See “Description of Capital Stock.”
 
Future sales of our common stock or the possibility or perception of such future sales may depress our stock price and impair our ability to raise future capital through the sale of our equity securities.
 
Upon completion of the offering, our current stockholders will hold a substantial number of shares of our common stock that they will be able to sell in the public market in the near future. A significant portion of these shares will be held by a small number of stockholders. Sales by our current stockholders of a substantial number of shares after this offering, or the perception that these sales could occur, could significantly reduce the market price of our common stock. All the shares sold in this offering will be freely tradable. Substantially all of the remaining shares of our common stock are available for resale in the public market, subject to the restrictions on sale or transfer during the 180-day lockup period after the date of this prospectus that is described in “Shares Eligible for Future Sale.” Registration of the sale of these shares of our common stock would permit their sale into the market immediately. As restrictions on resale end or upon registration of any of these shares for resale, the market price of our common stock could drop significantly if the holders of these shares sell them or are perceived by the market as intending to sell them. These sales could also impede our ability to raise future capital.
 
Moreover, following the completion of this offering and including (i) any shares issued in satisfaction of any accrued but unpaid dividends on our preferred stock and (ii) any shares of common stock issuable upon the automatic conversion of all principal and accrued but unpaid interest on our convertible notes, each of which would occur upon the closing of the offering made hereby, the holders of approximately           shares of common stock, as well as approximately 1.0 million shares underlying certain outstanding warrants to purchase our common stock, will have rights, subject to some conditions, to require us to include their shares in registration statements that we may file for ourselves or other stockholders. The      million shares represent approximately     % of the total number of shares of our common stock to be outstanding immediately after this offering, assuming no exercise of the underwriters’ option to purchase additional shares. See “Description of Capital Stock — Registration Rights” for a description of the registration rights of these stockholders. By exercising their registration rights and selling a large number of shares, these holders could cause the prevailing market price of our common stock to decline.


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As a new investor, you will experience immediate and substantial dilution in the net tangible book value of the shares you purchase in this offering.
 
The initial public offering price is substantially higher than the net tangible book value per share prior to the completion of this offering. Assuming an initial public offering price of our common stock of $      per share, the mid-point of the initial public offering price range set forth on the cover page of this prospectus, you will incur immediate dilution in net tangible book value per share of $     . This dilution is due in large part to earlier investors in our company having paid substantially less than the initial public offering price when they purchased their shares. Additionally, new investors in this offering will have contributed     % of our total equity as of          , 2011, but will own only     % of our outstanding shares upon completion of this offering.
 
Since we may require additional funds to develop new products and continue to expand our business, we may conduct substantial future offerings of equity securities. Future equity issuances, including future public offerings or future private placements of equity securities and any additional shares issued in connection with acquisitions, will result in further dilution to investors.
 
We do not intend to pay cash dividends in the foreseeable future and, consequently, your 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, our subordinated notes, our convertible notes and our cross license agreement with Cabot restrict our ability to pay dividends and any future credit facilities, loan agreements, debt instruments or license agreement 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, operating results 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 your sole source of potential gain for the foreseeable future.


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SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS
 
This prospectus contains forward-looking statements. All statements other than statements of historical facts contained in this prospectus, including statements regarding our strategy, future operations, future financial position, future revenue, projected costs, prospects, plans, objectives of management and expected market growth are forward-looking statements. These statements involve known and unknown risks, uncertainties and other important factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements.
 
The words “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,’’ “potential,” “predict,” “project,” “should,” “target,” “will,” “would” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. These forward-looking statements include, among other things, statements about:
 
  •  our expectations as to the future growth of our business;
 
  •  the expected future growth of the market for aerogel insulation, insulation generally, and energy efficiency solutions;
 
  •  our belief that our products provide strong competitive advantages over traditional insulation materials;
 
  •  our expectations that our second production line will be capable of operating at full capacity by the end of 2011 and that our first two production lines will then be capable of an annual production capacity of 40 to 44 million square feet of aerogel blankets, depending on product mix;
 
  •  our expectation that upon completion of our third production line, our annual manufacturing capacity will increase by between 20 and 26 million square feet of aerogel blankets;
 
  •  our ability to produce $50 to $54 million in annual revenue of aerogel blankets at current prices on our second production line when operating at full capacity;
 
  •  our expectation that the construction of our third production line will be completed during 2012 and at a cost of approximately $45 million to $50 million;
 
  •  our plans to construct a second manufacturing facility in the United States or Europe, based on proximity to raw material suppliers, proximity to customers, labor and construction costs and available governmental incentives, and our estimate that design, development and construction costs will range from $150 million to $200 million;
 
  •  the expected energy and cost savings of our products; and
 
  •  the expected future development of new aerogel technologies.
 
These forward looking statements are only predictions and we may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements, so 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 based these forward-looking statements largely on our current expectations and projections about future events and trends that we believe may affect our business, financial condition and operating results. We have included important factors in the cautionary statements included in this prospectus, particularly in the “Risk Factors” section, that could cause actual future 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.
 
Our forward-looking statements in this prospectus represent our views only as of the date of this prospectus. We disclaim any intent or obligation to update “forward-looking statements” made in this prospectus to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results over time. You should, therefore, not rely on these forward-looking statements as representing our views as of any date subsequent to the date of this prospectus.


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USE OF PROCEEDS
 
We estimate that we will receive net proceeds from this offering of approximately $      million, or approximately $      million if the underwriters exercise their option to purchase additional shares in full, based on an assumed initial public offering price of $      per share, which is the mid-point of the estimated price range set forth on the cover page of this prospectus, after deducting estimated underwriting discounts and estimated offering expenses payable by us.
 
A $1.00 increase (decrease) in the assumed initial public offering price of $      per share would increase (decrease) the net proceeds to us from this offering by $      million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and estimated offering expenses payable by us. An increase (decrease) of 1,000,000 shares from the expected number of shares to be sold in this offering, assuming no change in the assumed initial public offering price per share, would increase (decrease) our net proceeds from this offering by $      million.
 
We intend to use a portion of the net proceeds we receive from this offering for the estimated $45 million to $50 million in expenditures for the design, development and construction of our third production line in East Providence. We also intend to use the remaining net proceeds for general corporate purposes, which may include funding a portion of the design, development and construction of our planned second manufacturing facility. We estimate that the total expenditures for this planned second manufacturing facility will be approximately $150 million to $200 million. We intend to fund the remainder of the amounts required for the planned construction of our second manufacturing facility with cash on hand, cash flow from operations and additional indebtedness. Pending specific utilization of the net proceeds as described above, we intend to invest the net proceeds of the offering in short-term investment grade and U.S. government securities.


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DIVIDEND POLICY
 
We have never declared or paid any dividends on our common stock. We currently intend to retain future earnings, if any, to finance our research and development efforts and for use in the operation and expansion of our business and do not anticipate declaring or paying cash dividends in the foreseeable future.
 
The convertible note purchase agreement related to the convertible notes, the revolving credit facility, the note purchase agreement related to the subordinated notes and the cross license agreement with Cabot all contain restrictive covenants that restrict our ability to pay any dividends or make any distributions or payment on, or redeem, retire or repurchase, any capital stock. Any future determination to pay dividends will be at the discretion of our board of directors and will depend upon a number of factors, including our results of operations, financial condition, future prospects, contractual restrictions, restrictions imposed by applicable law and other factors our board of directors deems relevant.


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CAPITALIZATION
 
The following table sets forth our cash and cash equivalents and capitalization as of June 30, 2011:
 
  •  on an actual basis;
 
  •  on an unaudited pro forma basis to give effect upon the completion of this offering to (i) the automatic conversion of all shares of our preferred stock into shares of our common stock and the issuance of shares of common stock in satisfaction of accumulated dividends on such preferred stock; (ii) the automatic conversion of our convertible notes and all accrued but unpaid interest thereon into shares of our common stock; and (iii) the sale of           shares of our common stock offered by us in this offering at an assumed initial public offering price of $      per share, the mid-point of the price range set forth on the cover page of this prospectus, after deducting estimated underwriting discounts and estimated offering expenses payable by us.
 
You should read this table together with our consolidated financial statements and the related notes thereto, as well as the information under “Selected Consolidated Financial Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” The unaudited pro forma information below is prepared for illustrative purposes only and our capitalization following the completion of this offering will be adjusted based on the actual initial public offering price, the closing of the offering made hereby and other terms of the offering determined at pricing.
 
                 
    As of June 30, 2011  
   
Actual
   
Pro forma
 
    (Unaudited)  
    (In thousands, except share and per share data)  
 
Cash and cash equivalents(1)
  $ 29,633     $  
                 
                 
Long-term debt including current portion
  $ 8,724     $    
Convertible notes(2)
    30,540          
Series B redeemable convertible preferred stock, $0.001 par value; 17,000,000 shares authorized, 16,010,292 shares issued and outstanding, actual; no shares authorized, issued or outstanding, pro forma(3)
    42,161          
Series A redeemable convertible preferred stock, $0.001 par value, 52,843,201 shares authorized, issued and outstanding, actual; no shares authorized, issued or outstanding, pro forma(3)
    136,229          
Stockholders’ (deficit) equity:
               
Common stock, $0.001 par value; 114,000,000 shares authorized, 26,119,304 shares issued and outstanding, actual; and           shares issued and outstanding, pro forma(1)(2)(3)
    26          
Additional paid-in capital(1)
    69,876          
Accumulated deficit
    (202,438 )        
                 
Total stockholders’ (deficit) equity(1)
  $ (132,536 )   $  
                 
Total capitalization(1)
  $ 85,118     $     
                 
 
(1) To the extent we change the number of shares of common stock sold by us in this offering from the shares we expect to sell or we change the initial public offering price from the $      per share assumed initial public offering price, representing the mid-point of the estimated price range set forth on the cover page of this prospectus, or any combination of these events occurs, the net proceeds to us from this offering and consequently the cash and cash equivalents and each of additional paid-in capital, total stockholders’ equity and total capitalization may increase or decrease. A $1.00 increase


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(decrease) in the assumed initial public offering price per share of the common stock would increase (decrease) the net proceeds that we receive in this offering and each of our unaudited pro forma cash and cash equivalents, additional paid-in capital, total stockholders’ equity and total capitalization by approximately $      million, assuming that the number of shares offered by us under this prospectus remains the same. An increase (decrease) of 1,000,000 shares in the expected number of shares to be sold in the offering, assuming no change in the assumed initial public offering price per share, would increase (decrease) our net proceeds from this offering and consequently the cash and cash equivalents and each of additional paid-in capital, total stockholders’ equity and total capitalization by approximately $      million.
 
(2) The unpaid principal amount of the convertible notes, together with any accrued but unpaid interest thereon, will be automatically converted into common stock upon the closing of the offering made hereby at a conversion price equal to 87.5% of the initial offering price per share to the public in this offering.
 
A $1.00 increase from the assumed initial public offering price of $      per share would decrease the number of shares of common stock issuable upon the conversion of the convertible notes by           shares and $1.00 decrease from the assumed initial public offering price of $      per share would increase the number of shares of common stock issuable upon the conversion of the convertible notes by           shares, in each case, assuming a      , 2011 closing date of the offering. For each day after the assumed      , 2011 closing date, the number of shares of common stock issuable upon the convertible notes would increase by           shares, assuming an initial offering price of $      per share. The actual number of shares of common stock to be issued upon the conversion of the convertible notes will be based on the amount of accrued but unpaid interest then outstanding and the actual initial public offering price.
 
(3) Each series of our preferred stock will convert upon the completion of this offering on a 1-for-1 basis. The terms of our existing preferred stock require us, upon the closing of the offering made hereby, to issue additional shares of common stock to the holders of such preferred stock in satisfaction of accumulated dividends on such preferred stock. The accumulated dividends were approximately $5.8 million at June 30, 2011 and accumulate at the rate of approximately $11,000 per day thereafter. The common stock issued in satisfaction of those dividends will be valued at the public offering price per share in this offering.
 
A $1.00 increase from the assumed initial public offering price of $      per share would decrease the number of shares of common stock to be issued to the holders of preferred stock in satisfaction of accumulated dividends on such preferred stock by approximately           shares and a $1.00 decrease from the assumed initial public offering price of $      per share would increase the number of shares of common stock to be issued to the holders of our preferred stock in satisfaction of accumulated dividends on such preferred stock by approximately           shares, in each case, assuming the closing date of the offering hereby occurs on          , 2011. For each day after the assumed        , 2011 closing date, the number of shares of common stock issuable to the holders of preferred stock in satisfaction of accumulated dividends on such preferred stock would increase by           shares, assuming an initial offering price of $      per share. The actual number of shares of common stock to be issued to the holders of our preferred stock will be based on the amount of accrued dividends then outstanding and the actual initial public offering price.


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DILUTION
 
If you invest in our common stock, your interest in our net tangible book value will be diluted to the extent of the difference between the initial public offering price and the net tangible book value per share of our common stock immediately after the completion of this offering. Dilution results from the fact that the initial public offering price is substantially in excess of the book value per share attributable to the existing stockholders for the presently outstanding stock.
 
As of June 30, 2011, our net tangible book value was approximately $     , or approximately $      per share of common stock. Net tangible book value per share represents the amount of our total tangible assets less total liabilities and preferred stock, divided by 26,119,304, the number of common shares outstanding on June 30, 2011. Our pro forma net tangible book value as of June 30, 2011 was $     , or $      per share of common stock. Pro forma net tangible book value per share represents the amount of our total tangible assets less our total liabilities, divided by the number of shares of our common stock outstanding, as of June 30, 2011, after giving effect to (i) the automatic conversion of all shares of our preferred stock into 68,853,493 shares of our common stock; (ii) the issuance of           shares of common stock upon the closing of the offering made hereby in satisfaction of accumulated dividends on our preferred stock, assuming an initial public offering price of $      per share, the mid-point of the price range set forth on the cover page of this prospectus, and the closing of the offering made hereby occurs on          , 2011; and (iii) the automatic conversion of $30.0 million aggregate principal amount and all accrued but unpaid interest on our convertible notes upon the closing of the offering made hereby into an aggregate of           shares of our common stock, at a conversion price equal to 87.5% of the initial offering price, assuming an initial public offering price of $      per share, the mid-point of the price range set forth on the cover page of this prospectus, and that the closing of the offering made hereby occurs on          , 2011.
 
After giving effect to the sale by us of shares of our common stock in the offering at the assumed initial public offering price of $     , the mid-point of the price range set forth on the cover page of this prospectus, and after deducting estimated underwriting discounts and estimated offering expenses payable by us, our pro forma as adjusted net tangible book value as of June 30, 2011 would have been approximately $     , or approximately $      per share. This amount represents an immediate increase in pro forma as adjusted net tangible book value of $      per share to our existing stockholders and an immediate dilution in pro forma as adjusted net tangible book value of approximately $      per share to new investors purchasing shares of our common stock in this offering. We determine dilution by subtracting the pro forma as adjusted net tangible book value per share after the offering from the amount of cash that a new investor paid for a share of common stock.
 
The following table illustrates this dilution on a per share basis:
 
                 
Assumed initial public offering price per share
          $        
Pro forma net tangible book value per share as of June 30, 2011
               
Increase per share attributable to cash payments by new investors in this offering
               
Pro forma as adjusted net tangible book value per share after this offering
               
Dilution in pro forma net tangible book value per share to new investors
          $  
                 
 
If the underwriters exercise their option to purchase additional shares in full, the pro forma as adjusted net tangible book value per share after giving effect to the offering would be $      per share. This represents an increase in pro forma as adjusted net tangible book value of $      per share to existing stockholders and dilution in pro forma as adjusted net tangible book value of $      per share to new investors.
 
A $1.00 increase (decrease) in the assumed initial public offering price of $     , the mid-point of the price range set forth on the cover page of this prospectus, would increase (decrease) our pro forma as adjusted net tangible book value after this offering by $      million and the pro forma as


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adjusted net tangible book value per share after this offering by $      per share and would increase (decrease) the dilution per share to new investors in this offering by $      per share, in each case, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and assuming the closing of the offering made hereby occurs on          , 2011. The information discussed above is illustrative only and will adjust based on the actual initial public offering price and other terms of the offering determined at pricing.
 
The following table shows, as of          , 2011, the differences between the number of shares purchased from us, the total consideration paid to us and the average price per share that existing stockholders and new investors paid.
 
                                         
    Shares Purchased     Total Consideration     Average Price
 
   
Number
   
Percentage
   
Amount
   
Percentage
   
per Share
 
 
Existing stockholders
                      %   $                   %   $        
New investors
                                       
                                         
Total
            %   $         %   $  
                                         
 
A $1.00 increase (decrease) in the assumed initial public offering price of $      per share, the mid-point of the price range set forth on the cover page of this prospectus, would increase (decrease) total consideration paid by new investors, total consideration paid by all stockholders and the average price per share paid by all stockholders by $     , $      and $     , respectively, after deducting estimated underwriting discounts and estimated offering expenses payable by us, and assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and assuming the closing of the offering made hereby occurs on          , 2011.
 
The discussion and tables above assume no exercise of the underwriters’ option to purchase additional shares. If the underwriters’ option to purchase additional shares is exercised in full, the number of shares of our common stock held by existing stockholders will be further reduced to     % of the total number of shares of our common stock to be outstanding after the offering, and the number of shares of our common stock held by investors participating in the offering will be further increased to     % of the total number of shares of our common stock to be outstanding after the offering.
 
In addition, except as noted, the above discussion and table assume no exercise of stock options or warrants to purchase common stock after June 30, 2011. As of June 30, 2011, we had outstanding options to purchase a total of 14,110,658 shares of our common stock at a weighted-average exercise price of $0.62 per share and 1,127,324 shares of common stock reserved for issuance upon the exercise of outstanding warrants at a weighted-average exercise price of $0.002 per share. If all such options and warrants had been exercised as of June 30, 2011, pro forma as adjusted net tangible book value per share would be $      per share and dilution to new investors would be $      per share. To the extent we grant options to our employees in the future and those options are exercised or other issuances of common stock are made, there will be further dilution to new investors.


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SELECTED CONSOLIDATED FINANCIAL DATA
 
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 audited and unaudited consolidated financial statements and the related notes thereto included elsewhere in this prospectus and the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of this prospectus.
 
We derived the consolidated statement of operations data for the years ended December 31, 2008, 2009 and 2010, and the consolidated balance sheet data as of December 31, 2009 and 2010, from our audited consolidated financial statements and the related notes thereto included elsewhere in this prospectus. We derived the consolidated statement of operations data for the fiscal years ended December 31, 2006 and 2007, and the consolidated balance sheet data as of December 31, 2006, 2007 and 2008, from our audited consolidated financial statements and the related notes thereto that are not included in this prospectus. We derived the consolidated statement of operations data for the six months ended June 30, 2010 and 2011, and the consolidated balance sheet data as of June 30, 2011, from our unaudited consolidated financial statements and the related notes thereto included elsewhere in this prospectus. The results of operations for these interim periods are not necessarily indicative of the results to be expected for a full year. Our unaudited consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements and the related notes thereto and, in the opinion of our management, reflect all adjustments that are necessary for a fair presentation in conformity with GAAP. Our historical results for prior periods are not necessarily indicative of results to be expected for any future period.


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          Six Months Ended
 
    Year Ended December 31     June 30  
   
2006
   
2007
   
2008
   
2009
   
2010
   
2010
   
2011
 
    ($ in thousands, except share and per share data)  
Consolidated statements of operations data:
                                                       
Revenue:
                                                       
Product
  $ 5,571     $ 9,075     $ 17,202     $ 24,752     $ 38,690     $ 16,008     $ 24,333  
Research services
    5,806       4,743       2,868       3,864       4,519       2,238       1,817  
                                                         
Total revenue
    11,377       13,818       20,070       28,616       43,209       18,246       26,150  
Cost of revenue:
                                                       
Product
    17,490       15,356       32,160       30,462       35,399       16,114       21,545  
Research services
    2,316       1,573       1,169       1,788       2,119       1,005       922  
Impairment charge
                2,524                          
                                                         
Gross profit (loss)
    (8,429 )     (3,111 )     (15,783 )     (3,634 )     5,691       1,127       3,683  
Operating expenses:
                                                       
Research and development
    6,176       3,203       2,134       2,524       2,985       1,719       1,728  
Sales and marketing
    5,726       4,868       4,034       3,994       4,526       2,318       2,557  
General and administrative
    6,678       7,158       6,180       5,430       5,675       2,813       3,443  
                                                         
Total operating expenses
    18,580       15,229       12,348       11,948       13,186       6,850       7,728  
                                                         
Income (loss) from operations
    (27,009 )     (18,340 )     (28,131 )     (15,582 )     (7,495 )     (5,723 )     (4,045 )
                                                         
Other income (expense):
                                                       
Interest income
    271       56       287       18       170       37       51  
Interest expense
    (10,002 )     (10,745 )     (7,400 )     (3,075 )     (2,585 )     (1,404 )     (2,269 )
                                                         
Total other expense, net
    (9,731 )     (10,689 )     (7,113 )     (3,057 )     (2,415 )     (1,367 )     (2,218 )
                                                         
Net income (loss)
    (36,740 )     (29,029 )     (35,244 )     (18,639 )     (9,910 )     (7,090 )     (6,263 )
Dividends and accretion on redeemable convertible preferred stock
    (1,812 )     (1,812 )     (2,351 )     (2,984 )     (57,007 )     (39,264 )     (68,604 )
                                                         
Net income (loss) attributable to common stockholders
  $ (38,552 )   $ (30,841 )   $ (37,595 )   $ (21,623 )   $ (66,917 )   $ (46,354 )   $ (74,867 )
                                                         
Per share data:
                                                       
Net income (loss) per share attributable to common stockholders, basic and diluted
  $ (4,163.04 )   $ (3,289.81 )   $ (3,389.12 )   $ (2.21 )   $ (2.62 )   $ (1.81 )   $ (2.88 )
                                                         
Weighted-average common shares outstanding, basic and diluted
    9,261       9,375       11,093       9,751,616       25,574,286       25,573,997       26,005,705  
                                                         
Pro forma net income (loss) per share, basic and diluted(1)
                                                       
                                                         
Weighted-average common shares outstanding used in computing pro forma net income (loss) per share, basic and diluted(1)
                                                       
                                                         
 
                                                 
    December 31   June 30
   
2006
 
2007
 
2008
 
2009
 
2010
 
2011
    ($ in thousands)    
Consolidated balance sheet data:
                                               
Cash and cash equivalents
  $ 5,839     $ 794     $ 11,988     $ 27,502     $ 26,800     $ 29,633  
Working capital(2)
    (34,593 )     (55,213 )     9,404       21,766       24,723       30,554  
Total assets
    61,273       49,296       54,624       64,735       88,795       110,871  
Total debt
    26,502       29,195       755       509       8,067       39,264  
Preferred stock
    61,051       62,863       184,269       31,681       109,786       178,390  
Total stockholders’ (deficit) equity
    (93,185 )     (123,055 )     (159,655 )     6,153       (58,103 )     (132,536 )
 
(1) Pro forma per share data will be computed based upon the number of shares of common stock outstanding immediately after consummation of this offering applied to our historical net income (loss) amounts and will give retroactive effect to the preferred stock and convertible notes conversions (assuming an initial public offering price of $      per share, the mid-point


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of the price range set forth on the cover page of this prospectus) and the issuance of the shares of our common stock offered hereby.
 
The following table presents the calculation of historical and pro forma basic and diluted net income (loss) per share of common stock attributable to our common stockholders:
 
                                                         
          Six Months
 
    Year Ended December 31     Ended June 30  
   
2006
   
2007
   
2008
   
2009
   
2010
   
2010
   
2011
 
    ($ in thousands, except share and per share data)  
 
Net income (loss) attributable to common stockholders
  $ (38,552 )   $ (30,841 )   $ (37,595 )   $ (21,623 )   $ (66,917 )   $ (46,354 )   $ (74,867 )
Dividends and accretion on redeemable convertible preferred stock
    1,812       1,812       2,351       2,984       57,007       39,264       68,604  
Interest expense
                                                       
Discount on conversion of convertible notes
                                                       
                                                         
Pro forma net income (loss) attributable to common stockholders
                                                       
                                                         
Weighted-average common shares outstanding, basic and diluted
    9,261       9,375       11,093       9,751,616       25,574,286       25,573,997       26,005,705  
Common shares issued upon conversion of preferred stock and accrued dividends
                                                       
Common shares issued upon conversion of convertible notes and interest thereon
                                                       
                                                         
Weighted-average common shares outstanding used in computing pro forma net income (loss) per share, basic and diluted
                                                       
                                                         
Pro forma net income (loss) per share, basic and diluted
                                                       
                                                         
 
(2) Working capital means current assets minus current liabilities.


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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
You should read the following in conjunction with the “Selected Consolidated Financial Data” and our consolidated financial statements and the related notes thereto included elsewhere in this prospectus. In addition to historical information, the following discussion and analysis includes forward looking information that involves risks, uncertainties and assumptions. Our actual results and the timing of events could differ materially from those anticipated by these forward looking statements as a result of many factors, including those discussed under “Risk Factors” elsewhere in this prospectus. See also “Special Note Regarding Forward Looking Statements” included elsewhere in this prospectus.
 
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 superior combination of performance attributes unmatched by traditional insulation materials. Our end-use customers use our products to save money, conserve energy, reduce CO2 emissions and protect workers and assets.
 
Our products are targeted at the estimated $32 billion annual global market for insulation materials. Our insulation is principally used by industrial companies that operate petrochemical, refinery, industrial and power generation facilities. We are working with leading building materials manufacturers to develop and further commercialize our products for applications in the building and construction market. We also rely on a small number of fabricators and OEMs to develop and sell products for applications as diverse as military and commercial aircraft, trains, buses, appliances, apparel, footwear and outdoor gear. We estimate that we generated 92% of our 2010 product revenue in the industrial insulation markets, 5% of our 2010 product revenue in the building and construction insulation market, and 3% of our 2010 product revenue in the transportation, appliance and apparel insulation markets.
 
We generate product revenue through the sale of our line of aerogel blankets. We market and sell our products primarily through a direct 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 required to establish and maintain customer and partner relationships, to deliver highly technical information, and to ensure high quality customer service.
 
In the industrial market, we rely on an existing and well-established channel of distributors and contractors to distribute products to our end-use customers. In the building and construction market, we believe that our relationships with leading building materials manufacturers with established distribution networks will facilitate our penetration of the market on a cost-effective basis. In the transportation, appliance and apparel markets, our current plan is to rely on the efforts of OEMs to develop opportunities within and provide access to the markets.
 
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, high-volume process technology at our facility in East Providence, Rhode Island. We have operated the East Providence facility since mid-2008 and commenced operation of a second production line at this facility at the end of March 2011. We expect our annual production capacity by the end of 2011 to reach 40 to 44 million square feet of aerogel blankets, depending on product mix.


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Our core aerogel technology and manufacturing processes are our most significant assets. As of June 30, 2011, we employed 28 research scientists and process engineers focused on developing next generation aerogel compositions, form factors and manufacturing technologies. Since inception through June 30, 2011, we have invested $25.7 million into our research and development activities and have delivered $35.8 million in research services revenue.
 
Our predecessor company was incorporated in 2001 and spun off from Aspen Systems, Inc., of Marlborough, Massachusetts, to focus on the development and commercialization of aerogel technology. We began selling our first products commercially in the second quarter of 2001. Since inception through June 30, 2011, we have generated $165.8 million in revenue consisting of $130.0 million in product revenue and $35.8 million in research services revenue. As of June 30, 2011, we had 161 employees principally located at two sites in the United States.
 
Our total revenue has grown from $11.4 million for the year ended December 31, 2006 to $43.2 million for the year ended December 31, 2010. For the year ended December 31, 2010, our revenue grew 51% to $43.2 million from $28.6 million in 2009. For the six months ended June 30, 2011, our revenue grew 44% to $26.2 million from $18.2 million in the comparable period in 2010.
 
We have experienced significant losses since inception, have an accumulated deficit of $202.4 million at June 30, 2011, and have significant ongoing cash flow commitments. We have invested significant resources to commercialize aerogel technology and to build a manufacturing infrastructure capable of supplying aerogel products at the volumes and costs required by our customers. We currently market a set of commercially viable products, serve a growing base of customers and are experiencing rapid growth.
 
Factors Affecting Our Performance
 
Revenue Growth
 
The key driver to improve our financial performance will be continued revenue growth. We believe demand for our products will increase significantly to support widespread global efforts to improve energy efficiency. We plan to add resources to gain share of the industrial insulation market by increasing revenue from existing and new end-use customers. We also anticipate that our growing revenue base associated with maintenance programs will lead to increasing revenue associated with large capital projects, including the construction of new refineries and petrochemical facilities in emerging markets. We expect that this increased revenue will drive incremental improvement in gross profit, operating income and net income, and will lead to higher levels of cash flow from operations. Our ability to achieve sufficient revenue to generate net income and to fully fund operations will require continued near-term investments in manufacturing facilities, capital equipment, technology and personnel. We expect these investments to negatively impact current net income and cash balances, but to also set the framework for improving financial performance in the long-term.
 
Manufacturing Capacity
 
Demand for our aerogel products in 2010 increased by 88% from 2009 and exceeded our manufacturing capacity. In response to growing demand, we constructed a second production line in our East Providence facility designed to double our manufacturing capacity. We plan to continue to expand capacity to meet increased demand for our products. We are engaged in the design and engineering phase of a third production line at our East Providence facility and have commenced procurement of certain capital equipment which has a longer lead-time. We currently expect that this third line will be completed during 2012. We also plan to construct a second manufacturing facility in either the United States or Europe and to commence operations at the facility in the second half of 2013. We currently estimate that design, development and construction of our third production line in the East Providence facility will require expenditures of $45 million to $50 million. We currently estimate that design, development and construction of a second manufacturing facility, likely to be comprised of three production lines, will require expenditures of $150 million to $200 million. We


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currently expect to construct our second manufacturing facility in several phases, in order to align manufacturing capacity to anticipated demand for our products. Our ability to successfully bring this capacity online as planned will have a significant impact on our financial condition and results of operations.
 
Organizational Resources
 
We plan to expand our sales force globally to support anticipated growth in customers and demand for our products. We also intend to increase personnel, funding and capital equipment devoted to the research and development of new and advanced technologies. In addition, we plan to increase staff to support the expansion of our East Providence facility during 2012 and multi-facility manufacturing operations during the second half of 2013. These plans will require a significant investment in managerial talent, human resources, information systems, processes and controls to ensure maintenance of efficient and economic operations. These investments are critical to our ability to increase revenue, to generate net income and to fully fund operations.
 
Reliance on Partners
 
Our ability to initiate, maintain and manage relationships and strategic arrangements has been fundamental to the success of our business. We plan to leverage our relationships with leading building materials manufacturers and OEMs to facilitate penetration of the building and construction, transportation, appliance and apparel markets. These relationships are critical to our ability to penetrate these new markets on a cost-effective basis and are critical to our ability to sustain high levels of revenue growth, to generate net income and to fully fund operations.
 
Project-Based Revenue
 
Our product revenue has and will be generated in large part by demand for insulation associated with new-build construction of facilities, capital expansions and related capital projects, and larger maintenance-related projects. These projects include new construction, capacity expansion and maintenance in the Canadian oil sands, offshore oil wells, LNG facilities, refineries and petrochemical plants. Although we expect to generate a stream of product revenue over time from a number of projects and from a number of customers, the intermittent nature of project-based revenue or the revenue generated by a single project could be material to our revenue and results of operations in any given reporting period. In addition, these projects are affected by macroeconomic factors including the price of oil and economic growth. Accordingly, our project-based revenue in any given period could fluctuate due to changes in macroeconomic conditions. Fluctuations in our project-based revenue could, in turn, have a material impact on our results of operations in any given reporting period. See “Risk Factors — Risks Related to Our Business and Strategy — 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.”
 
Product Mix
 
Changes in our product mix have not historically had a significant impact on our financial results from period to period. As we seek to continue to expand our business, we expect to sell an increasing amount of our aerogel insulation products into the building and construction and OEM markets. Certain of the products aimed at these markets have different margin profiles than the products that have historically generated most of our product revenue. Increased sales into the building and construction and OEM markets may result in sales of individual products not being consistent across periods, which could affect product mix and cause our revenue, cost of revenue, gross profit, net income and cash flow to vary. In particular, Spaceloft and Spaceloft A2, which are targeted at the building and construction market, are relatively lower margin as compared to our Pyrogel and Cryogel products, which are targeted at the industrial and OEM markets.


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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. The following table sets forth the total revenue for the periods presented:
 
                                         
          Six Months
 
          Ended
 
    Year Ended December 31     June 30  
   
2008
   
2009
   
2010
   
2010
   
2011
 
    ($ in thousands)  
 
Revenue:
                                       
Product
  $ 17,202     $ 24,752     $ 38,690     $ 16,008     $ 24,333  
Research services
    2,868       3,864       4,519       2,238       1,817  
                                         
Total revenue
  $ 20,070     $ 28,616     $ 43,209     $ 18,246     $ 26,150  
                                         
 
We expect continued growth in product revenue due to increasing market acceptance of our line of aerogel blankets and increasing demand for energy efficiency products to reduce energy consumption and CO2 emissions. We expect that research services revenue will decline due to the recent trend toward tightening of federal spending guidelines and programs.
 
Product revenue accounted for 88% and 93% of total revenue for the six months ended June 30, 2010 and 2011, respectively, and 86%, 86% and 90% for the years ended December 31, 2008, 2009 and 2010, respectively. We expect that product revenue will continue to increase as a percentage of our total revenue due to the anticipated strong growth in product revenue in combination with the expected decline in research services revenue.
 
A substantial majority of our revenue is generated from a limited number of direct customers, principally distributors, contractors and OEMs. Our 10 largest customers accounted for approximately 63% of our total revenue during the six months ended June 30, 2011, and we expect that most of our revenue will continue to come from a relatively small number of customers for the foreseeable future. For the six months ended June 30, 2010, Technip and Thorpe Products represented 18% and 10%, respectively, of our total revenue and for the six months ended June 30, 2011, Enershield and Thorpe Products represented 21% and 10%, respectively, of our total revenue. In 2008, Aerogel Korea Co, Ltd. represented 12% of our total revenue; in 2009, no customer represented 10% or more of our total revenue; and in 2010, Technip represented 14% of total revenue. For each of the periods discussed above, there were no other customers that represented 10% or more of our total revenues.
 
We conduct business across the globe, with a substantial portion of our sales outside the United States for each of the years ended December 31, 2008, 2009 and 2010. In addition, we may expand our operations outside of the United States. Revenue from outside of the United States, based on shipment destination or services location, amounted to $9.6 million or 48.0% of our total revenue, $15.9 million or 55.7% of our total revenue, and $23.2 million or 53.6% of our total revenue in the years ended December 31, 2008, 2009 and 2010, respectively, and $7.3 million or 40% of our total revenue and $17.6 million or 67% of our total revenue in the six months ended June 30, 2010 and 2011, respectively.
 
Cost of Revenue
 
Cost of revenue for our product revenue consists primarily of raw materials, direct labor and manufacturing overhead. Cost of product revenue is recorded when the related product revenue is recognized. Cost of product revenue also includes stock-based compensation and costs of shipping.


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Raw material is our most significant component of cost of product revenue and includes fibrous batting, silica materials and additives. Raw material costs as a percentage of product revenue were 89.7%, 56.9% and 52.9% for the years ended December 31, 2008, 2009 and 2010, respectively, and 57.0% and 46.1% for the six months ended June 30, 2010 and 2011, respectively. The decline in raw material costs as a percentage of product revenue during the periods presented was due principally to purchasing efficiencies and manufacturing yield improvements. Raw 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, raw 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 raw material costs in the aggregate to decline modestly as a percentage of revenue as we seek to achieve continued sourcing improvements and yield enhancements.
 
Manufacturing expense, including direct labor and manufacturing overhead, is also a significant component of cost of revenue. We incurred a significant increase in manufacturing expense associated with the operation of our second production line in the East Providence facility during the second quarter of 2011. These costs are principally fixed in nature and will be under-absorbed during the period in which we ramp the production line to full capacity. These under-absorbed manufacturing costs will increase the cost of product revenue as a percentage of revenue in the near term, but we expect these costs to decrease as a percentage of revenue as a result of revenue growth supported by the increase in manufacturing capacity.
 
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 grow our base of product revenue and 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 that 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, 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.
 
Operating expenses are reported net of any funding received under contracts that are considered to be cost-sharing arrangements with no contractually committed deliverable. We have entered into several cost-sharing arrangements with various agencies of the U.S. government. Funds paid to us under these agreements are not reported as revenue but are used to directly offset our


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cost of revenue, research and development, sales and marketing and general and administrative expenses in support of our product revenue. Costs incurred and cost of revenue, research and development, sales and marketing and general and administrative expenditures offset by cost sharing funding received under these contracts are as follows:
 
                                         
          Six Months Ended
 
    Year Ended December 31     June 30  
   
2008
   
2009
   
2010
   
2010
   
2011
 
    ($ in thousands)  
 
Total costs incurred
  $ 3,193     $ 1,672     $ 2,005     $ 346     $ 171  
                                         
Expenditures offset by cost sharing funding received:
                                       
Cost of revenue:
                                       
Product
  $ 43     $ 20     $ 33     $ 6     $ 7  
Research services
    1,227       637       1,124       185       51  
Operating expenses:
                                       
Research and development
    1,214       620       475       82       79  
Sales and marketing
    342       193       170       33       15  
General and administrative
    367       202       203       40       19  
                                         
Total expenditures offset by cost sharing
  $ 3,193     $ 1,672     $ 2,005     $ 346     $ 171  
                                         
 
We do not expect to receive any additional funds under cost-sharing arrangements in the near term due to the recent trend toward tightening of federal spending guidelines and programs.
 
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 continue to 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-related costs, incentive compensation, marketing programs, travel and entertainment costs, consulting expenses and facilities-related costs. We plan to expand our sales force and sales consultants globally to support 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


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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.
 
Other Income (Expense)
 
Other income (expense) consists primarily of imputed interest expense on our cross license agreement with Cabot Corporation, and interest expense on our term loans and notes payable and is presented net of other income, which is primarily interest income.
 
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.
 
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 44.5 million square feet of aerogel blankets in the East Providence facility since mid-2008. Our annual manufacturing capacity is a function of product mix. We expect our annual production capacity by the end of 2011 to reach 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 our manufacturing capacity and shipments on a uniform and consistent basis. The following chart sets forth product shipments in square feet for the periods presented:
 
                                         
        Six Months Ended
    Year Ended December 31   June 30
   
2008
 
2009
 
2010
 
2010
 
2011
    (Square feet in thousands)
 
Product shipments in square feet
    6,909       10,525       16,443       7,114       10,612  
 
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 depreciation and amortization expense, stock-based compensation expense, interest expense, net of interest income, and impairment charges. Adjusted EBITDA is a supplemental measure of our performance that is not required by, or 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 as a measure of operating performance, because it does not include the impact of items that we do not consider indicative of our core operating performance, for planning purposes, including the preparation of our annual operating budget, to allocate resources to enhance the financial performance of our business and as a performance measure used under our bonus plan. We also believe that the presentation of Adjusted EBITDA provides useful information to investors with


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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. See footnote (3) under “Summary Consolidated Financial Data.”
 
To properly and prudently evaluate our business, we encourage you to review the GAAP financial statements included elsewhere in this prospectus, and not to rely on any single financial measure to evaluate our business.
 
The following table presents a reconciliation of net income (loss), the most directly comparable GAAP measure, to Adjusted EBITDA for the periods presented:
 
                         
    Year Ended December 31  
   
2008
   
2009
   
2010
 
    ($ in thousands)  
 
Net income (loss)
  $ (35,244 )   $ (18,639 )   $ (9,910 )
Depreciation and amortization
    7,059       5,630       4,633  
Stock-based compensation(1)
    927       831       468  
Interest expense, net
    7,113       3,057       2,415  
Impairment charge
    2,524              
                         
Adjusted EBITDA
  $ (17,621 )   $ (9,121 )   $ (2,394 )
                         
 
(1) Represents non-cash stock-based compensation related to stock option grants.
 
                                                                                 
    Three Months Ended  
    2009     2010     2011  
    March 31    
June 30
   
Sept. 30
   
Dec. 31
   
March 31
   
June 30
   
Sept. 30
   
Dec. 31
   
March 31
   
June 30
 
    ($ in thousands)        
 
Net income (loss)
  $ (5,230 )   $ (5,892 )   $ (3,866 )   $ (3,651 )   $ (3,667 )   $ (3,423 )   $ (1,337 )   $ (1,483 )   $ (1,721 )   $ (4,542 )
Depreciation and amortization
    1,393       1,379       1,580       1,278       1,137       1,124       1,137       1,235       1,310       2,055  
Stock-based compensation(1)
    99       91       125       516       96       105       122       145       190       252  
Interest expense, net
    812       773       750       722       696       671       606       442       451       1,767  
Impairment charge
                                                           
                                                                                 
Adjusted EBITDA
  $ (2,926 )   $ (3,649 )   $ (1,411 )   $ (1,135 )   $ (1,738 )   $ (1,523 )   $ 528     $ 339     $ 230     $ (468 )
                                                                                 
 
(1) Represents non-cash stock-based compensation related to stock option grants.
 
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 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.
 
We achieved positive Adjusted EBITDA for the first time in the three months ended September 30, 2010, and sustained a positive, quarterly Adjusted EBITDA through the three months ended March 31, 2011. The decrease in Adjusted EBITDA for the three months ended June 30, 2011 reflected a significant increase in under-absorbed manufacturing expense associated with the startup and operation of our second production line in the East Providence facility.


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Results of Operations
 
The following tables set forth our results of operations for the periods presented:
 
                                         
          Six Months Ended
 
    Year Ended December 31     June 30  
   
2008
   
2009
   
2010
   
2010
   
2011
 
    ($ in thousands)  
 
Revenue:
                                       
Product
  $ 17,202     $ 24,752     $ 38,690     $ 16,008     $ 24,333  
Research services
    2,868       3,864       4,519       2,238       1,817  
                                         
Total revenue
    20,070       28,616       43,209       18,246       26,150  
Cost of revenue:
                                       
Product
    32,160       30,462       35,399       16,114       21,545  
Research services
    1,169       1,788       2,119       1,005       922  
Impairment charge
    2,524                          
                                         
Gross profit (loss)
    (15,783 )     (3,634 )     5,691       1,127       3,683  
Operating expenses:
                                       
Research and development
    2,134       2,524       2,985       1,719       1,728  
Sales and marketing
    4,034       3,994       4,526       2,318       2,557  
General and administrative
    6,180       5,430       5,675       2,813       3,443  
                                         
Total operating expenses
    12,348       11,948       13,186       6,850       7,728  
                                         
Income (loss) from operations
    (28,131 )     (15,582 )     (7,495 )     (5,723 )     (4,045 )
                                         
Other income (expense):
                                       
Interest income
    287       18       170       37       51  
Interest expense
    (7,400 )     (3,075 )     (2,585 )     (1,404 )     (2,269 )
                                         
Total other expense, net
    (7,113 )     (3,057 )     (2,415 )     (1,367 )     (2,218 )
                                         
Net income (loss)
  $ (35,244 )   $ (18,639 )   $ (9,910 )   $ (7,090 )   $ (6,263 )
                                         


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Six months ended June 30, 2010, compared to six months ended June 30, 2011
 
The following tables set forth our results of operations for the periods presented:
 
                                                 
    Six Months Ended June 30     Six Months Ended June 30  
   
2010
   
2011
   
$ Change
   
% Change
   
2010
   
2011
 
                            (Percentage of total revenue)  
    ($ in thousands)                    
 
Revenue:
                                               
Product
  $ 16,008     $ 24,333     $ 8,325       52 %     88 %     93 %
Research services
    2,238       1,817       (421 )     (19 %)     12 %     7 %
                                                 
Total revenue
    18,246       26,150       7,904       43 %     100 %     100 %
Cost of revenue:
                                               
Product
    16,114       21,545       5,431       34 %     88 %     82 %
Research services
    1,005       922       (83 )     (8 %)     6 %     4 %
                                                 
Gross profit
    1,127       3,683       2,556       227 %     6 %     14 %
Operating expenses:
                                               
Research and development
    1,719       1,728       9       1 %     9 %     7 %
Sales and marketing
    2,318       2,557       239       10 %     13 %     10 %
General and administrative
    2,813       3,443       630       22 %     15 %     13 %
                                                 
Total operating expenses
    6,850       7,728       878       13 %     38 %     30 %
                                                 
Income (loss) from operations
    (5,723 )     (4,045 )     1,678       (29 %)     (31 %)     (15 %)
                                                 
Other income (expense):
                                               
Interest income
    37       51       14       38 %     0 %     0 %
Interest expense
    (1,404 )     (2,269 )     (865 )     62 %     (8 %)     (9 %)
                                                 
Total other expense, net
    (1,367 )     (2,218 )     (851 )     62 %     (7 %)     (8 %)
                                                 
Net income (loss)
  $ (7,090 )   $ (6,263 )   $ 827       (12 %)     (39 %)     (24 %)
                                                 
 
Revenue
 
                                                 
    Six Months Ended June 30              
    2010     2011              
          Percentage
          Percentage
    Change  
   
Amount
   
of Revenue
   
Amount
   
of Revenue
   
Amount
   
Percentage
 
    ($ in thousands)  
 
Revenue:
                                               
Product
  $ 16,008       88 %   $ 24,333       93 %   $ 8,325       52 %
Research services
    2,238       12 %     1,817       7 %     (421 )     (19 %)
                                                 
Total revenue
  $ 18,246       100 %   $ 26,150       100 %   $ 7,904       43 %
                                                 
 
The following chart sets forth product shipments in square feet for the periods presented:
 
                                 
    Six Months
   
    Ended
   
    June 30   Change
   
2010
 
2011
 
Amount
 
Percentage
    (Square feet in thousands)
 
Product shipments in square feet
    7,114       10,612       3,498       49 %


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Total revenue increased $7.9 million, or 43%, to $26.2 million for the six months ended June 30, 2011, from $18.2 million in the comparable period in 2010. The increase was primarily the result of continued strong growth in product revenue due to increasing market acceptance of our products in the oil and gas sector of the industrial market.
 
Product revenue increased $8.3 million, or 52%, to $24.3 million for the six months ended June 30, 2011, from $16.0 million in the comparable period in 2010. This increase was principally the result of an increase in demand for our aerogel products in the oil and gas sector of the industrial market. In addition, during the six months ended June 30, 2011, $5.6 million of product revenue represented sales to Enershield and was associated with a capital project in the Canadian oil-sands, and $2.6 million represented sales to Thorpe Products for general distribution into the North American oil and gas sector. During the six months ended June 30, 2010, $3.2 million of product revenue represented sales to Technip and was associated with two offshore oil projects, and $1.8 million represented sales to Thorpe Products for general distribution into the North American oil and gas sector.
 
In terms of volume, product shipments increased 3.5 million square feet, or 49%, to 10.6 million square feet of aerogel products, as compared to 7.1 million square feet in the comparable period in 2010. We did not increase the prices of our products during the periods presented. Product revenue as a percentage of total revenue for the six months ended June 30, 2011 increased to 93% of total revenue from 88% of total revenue in the comparable period in 2010. We expect that product revenue will continue to increase as a percentage of total revenue in the long-term.
 
Research services revenue decreased $0.4 million, or 19%, to $1.8 million for the six months ended June 30, 2011 from $2.2 million in the comparable period in 2010. This decrease in revenue is principally the result of a recent trend toward tightening of federal spending guidelines and programs. Research services revenue as a percentage of total revenue decreased to 7% of total revenue for the six months ended June 30, 2011 from 12% of total revenue in the comparable period of 2010. We expect that research services revenue will continue to decrease as a percentage of total revenue in the long-term due to projected strong growth in product revenue.
 
Cost of Revenue
 
                                                                 
    Six Months Ended June 30              
    2010     2011              
          Percentage
    Percentage
          Percentage
    Percentage
             
          of Related
    of Total
          of Related
    of Total
    Change  
   
Amount
   
Revenue
   
Revenue
   
Amount
   
Revenue
   
Revenue
   
Amount
   
Percentage
 
    ($ in thousands)  
 
Cost of revenue:
                                                               
Product
  $ 16,114       101 %     88 %   $ 21,545       89 %     82 %   $ 5,431       34 %
Research services
    1,005       45 %     6 %     922       51 %     4 %     (83 )     (8 )%
                                                                 
Total cost of revenue
  $ 17,119       94 %     94 %   $ 22,467       86 %     86 %   $ 5,348       31 %
                                                                 
 
Total cost of revenue increased $5.3 million, or 31%, to $22.5 million for the six months ended June 30, 2011 from $17.1 million in the comparable period in 2010. The increase in total cost of revenue was the result of an increase of $2.1 million in raw material used to support increased product revenue and an increase of $3.3 million in overhead expense to support the operation of our second production line at our East Providence facility, which became operational during the second quarter of 2011, offset by a $0.1 million decrease in cost of research services revenue.
 
Product cost of revenue as a percentage of product revenue decreased to 89% for the six months ended June 30, 2011 from 101% in the comparable period in 2010, primarily due to economies of scale related to the increase in manufacturing output at the East Providence facility. We expect to incur a $0.6 million quarterly increase in manufacturing costs included in cost of product revenue during the third quarter of 2011 in connection with the continued increased utilization and continued scaling of our second production line. We expect product cost of revenue as a percentage of product revenue to decrease in the long-term due to projected growth in product revenue supported by the increase in manufacturing capacity from the operation of our second production line.


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Research services cost of revenue as a percentage of research services revenue increased to 51% for the six months ended June 30, 2011 from 45% in the comparable period in 2010. This increase was the result of a change in the mix of labor and expenses required to perform the contracted research.
 
Gross Profit
 
                                                 
    Six Months Ended June 30        
    2010   2011        
        Percentage
      Percentage
  Change
   
Amount
 
of Revenue
 
Amount
 
of Revenue
 
Amount
 
Percentage
    ($ in thousands)
 
Gross profit
  $ 1,127       6 %   $ 3,683       14 %   $ 2,556       227 %
 
Gross profit increased $2.6 million, or 227%, to $3.7 million for the six months ended June 30, 2011 from $1.1 million in the comparable period in 2010. This increase in gross profit was principally the result of the increase in product revenue, a reduction in raw material cost as a percentage of product revenue and economies of scale related to the increase in manufacturing output at our East Providence facility. Gross profit as a percentage of total revenue increased to 14% for the six months ended June 30, 2011 from 6% of total revenue in the comparable period in 2010. We expect that gross profit as a percentage of total revenue will decline slightly from the levels realized during the six months ended June 30, 2011 due to the expected $0.6 million quarterly increase in manufacturing costs included in cost of product revenue associated with the operation of our second production line. However, we expect gross profit as a percentage of revenue to increase in the long-term due to projected growth in product revenue supported by the increase in manufacturing capacity.
 
Research and Development, or R&D, Expenses
 
                                                 
    Six Months Ended June 30        
    2010   2011        
        Percentage
      Percentage
  Change
   
Amount
 
of Revenue
 
Amount
 
of Revenue
 
Amount
 
Percentage
    ($ in thousands)
 
R&D expenses
  $ 1,719       9 %   $ 1,728       7 %   $ 9       1 %
 
R&D expenses of $1.7 million for the six months ended June 30, 2011 remained unchanged from the comparable period in 2010. This was principally the result of a $0.1 million decrease in labor allocated to cost of research services, which was offset by $0.1 million of plant engineering costs capitalized during the six months ended June 30, 2011 related to the construction of our second production line at our East Providence facility. R&D expenses as a percentage of total revenue decreased to 7% for the six months ended June 30, 2011 from 9% in the comparable period in 2010. This decrease was principally the result of the significant increase in total revenue for the six months ended June 30, 2011 from the comparable period in 2010. We expect that our research and development expenses will increase as we invest in additional research and engineering personnel and the infrastructure required in support of their efforts. However, we expect that research and development expenses will decline as a percentage of total revenue in the long-term due to projected strong growth in product revenue.
 
Sales and Marketing Expenses
 
                                                 
    Six Months Ended June 30        
    2010   2011        
        Percentage
      Percentage
  Change
   
Amount
 
of Revenue
 
Amount
 
of Revenue
 
Amount
 
Percentage
    ($ in thousands)
 
Sales and marketing expenses
  $ 2,318       13 %   $ 2,557       10 %   $ 239       10 %
 
Sales and marketing expenses increased $0.2 million, or 10%, to $2.6 million for the six months ended June 30, 2011 from $2.3 million in the comparable period in 2010. This increase was principally


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the result of a $0.2 million increase in labor expense associated with additional sales and marketing personnel and a $0.1 million increase in expense for sales consultants partially offset by a decrease of $0.1 million in incentive compensation. Sales and marketing expenses as a percentage of total revenue decreased to 10% for the six months ended June 30, 2011 from 13% in the comparable period in 2010. This decrease was principally driven by the increase in total revenue for the six months ended June 30, 2011, from the comparable period in 2010. We expect that sales and marketing expenses will increase as we expand our sales force and sales consultants globally to support anticipated growth in customers and demand for our products. However, we expect that sales and marketing expenses will continue to decline as a percentage of total revenue in the long-term due to projected strong growth in product revenue.
 
General and Administrative, or G&A, Expenses
 
                                                 
    Six Months Ended June 30        
    2010   2011        
        Percentage
      Percentage
  Change
   
Amount
 
of Revenue
 
Amount
 
of Revenue
 
Amount
 
Percentage
    ($ in thousands)
 
G&A expenses
  $ 2,813       15 %   $ 3,443       13 %   $ 630       22 %
 
G&A expenses increased $0.6 million, or 22%, to $3.4 million for the six months ended June 30, 2011 from $2.8 million in the comparable period in 2010. This increase was principally the result of an increase in labor expense associated with additional finance, information technology, and human resource personnel hired in preparation for operating as a public company. G&A expenses as a percentage of total revenue decreased to 13% for the six months ended June 30, 2011 from 15% in the comparable period in 2010. This decrease was principally driven by the increase in total revenue for the six months ended June 30, 2011 from the comparable period in 2010. We expect G&A 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, ongoing listing fees, increased staff to comply with public company requirements and increased legal and audit 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. However, we expect that G&A expenses will decline as a percentage of total revenue in the long-term due to projected strong growth in product revenue.
 
Other Income (Expense)
 
                                                 
    Six Months Ended June 30              
    2010     2011              
          Percentage
          Percentage
    Change  
   
Amount
   
of Revenue
   
Amount
   
of Revenue
   
Amount
   
Percentage
 
    ($ in thousands)  
 
Other income (expense):
                                               
Interest income
  $ 37       0 %   $ 51       0 %   $ 14       38 %
Interest expense
    (1,404 )     (8 )%     (2,269 )     (9 )%     (865 )     62 %
                                                 
Total other expense, net
  $ (1,367 )     (7 )%   $ (2,218 )     (8 )%   $ (851 )     62 %
                                                 
 
Other expense, net of other income, increased $0.9 million, or 62%, to $2.2 million, for the six months ended June 30, 2011 from $1.4 million in the comparable period in 2010. This increase was primarily the result of $0.4 million of interest expense on the subordinated notes issued in the fourth quarter of 2010 and $0.9 million of interest expense on the convertible notes issued in June 2011 offset, in part, by a $0.4 million decrease in imputed interest expense associated with our cross license agreement with Cabot. The decrease in imputed interest expense of $0.4 million was driven by


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payment of $7.5 million of this obligation during the 12 months ending June 30, 2011, which resulted in a corresponding reduction in imputed interest expense during the period.
 
Year ended December 31, 2009, compared to year ended December 31, 2010
 
The following tables set forth our results of operations for the periods presented:
 
                                                 
    Year Ended December 31     Year Ended December 31  
   
2009
   
2010
   
$ Change
   
% Change
   
2009
   
2010
 
                            (Percentage of total revenue)  
    ($ in thousands)                    
 
Revenue:
                                               
Product
  $ 24,752     $ 38,690     $ 13,938       56 %     86 %     90 %
Research services
    3,864       4,519       655       17 %     14 %     10 %
                                                 
Total revenue
    28,616       43,209       14,593       51 %     100 %     100 %
Cost of revenue:
                                               
Product
    30,462       35,399       4,937       16 %     106 %     82 %
Research services
    1,788       2,119       331       19 %     6 %     5 %
                                                 
Gross profit (loss)
    (3,634 )     5,691       9,325       257 %     (13 )%     13 %
Operating expenses:
                                               
Research and development
    2,524       2,985       461       18 %     9 %     7 %
Sales and marketing
    3,994       4,526       532       13 %     14 %     10 %
General and administrative
    5,430       5,675       245       5 %     19 %     13 %
                                                 
Total operating expenses
    11,948       13,186       1,238       10 %     42 %     31 %
                                                 
Income (loss) from operations
    (15,582 )     (7,495 )     8,087       52 %     (54 )%     (17 )%
                                                 
Other income (expense):
                                               
Interest income
    18       170       152       844 %     0 %     0 %
Interest expense
    (3,075 )     (2,585 )     490       16 %     (11 )%     (6 )%
                                                 
Total other expense, net
    (3,057 )     (2,415 )     642       21 %     (11 )%     (6 )%
                                                 
Net income (loss)
  $ (18,639 )   $ (9,910 )   $ 8,729       47 %     (65 )%     (23 )%
                                                 
 
Revenue
 
                                                 
    Year Ended December 31              
    2009     2010              
          Percentage
          Percentage
    Change  
   
Amount
   
of Revenue
   
Amount
   
of Revenue
   
Amount
   
Percentage
 
    ($ in thousands)  
 
Revenue:
                                               
Product
  $ 24,752       86 %   $ 38,690       90 %   $ 13,938       56 %
Research services
    3,864       14 %     4,519       10 %     655       17 %
                                                 
Total revenue
  $ 28,616       100 %   $ 43,209       100 %   $ 14,593       51 %
                                                 
 
The following chart sets forth product shipments in square feet for the periods presented:
 
                                 
    Year Ended
   
    December 31   Change
   
2009
 
2010
 
Amount
 
Percentage
 
Product shipments in square feet (in thousands)
    10,525       16,443       5,918       56 %
 
Total revenue increased $14.6 million, or 51%, in 2010 to $43.2 million from $28.6 million in 2009 primarily as a result of an increase in product revenue. Product revenue increased $13.9 million,


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or 56%, to $38.7 million in 2010 from $24.8 million in 2009. This increase was principally the result of an increase in demand for our aerogel products in the oil and gas sector of the industrial market in 2010. This increase in demand during 2010 included sales to Technip totaling $6.2 million associated with four offshore oil projects and sales to Enershield totaling $3.8 million associated with a project in the Canadian oil sands. In volume terms, product shipments increased 5.9 million square feet, or 56%, to 16.4 million square feet of aerogel products, as compared to 10.5 million square feet in 2009. We did not increase the prices of our products during the periods presented. Research services revenue increased $0.7 million, or 17%, to $4.5 million in 2010 from $3.9 million in 2009 primarily due to revenue generated under a significant contract with the Department of Energy.
 
Product revenue as a percentage of total revenue increased to 90% of total revenue in 2010, from 86% of total revenue in 2009. Research services revenue decreased to 10% of total revenue in 2010 from 14% of total revenue in 2009. Moving forward, we expect product revenue to continue to increase as a percentage of total revenue, and research services revenue to continue to decrease as a percentage of total revenue.
 
Cost of Revenue
 
                                                                 
    Year Ended December 31              
    2009     2010              
          Percentage
    Percentage
          Percentage
    Percentage
             
          of Related
    of Total
          of Related
    of Total
    Change  
   
Amount
   
Revenue
   
Revenue
   
Amount
   
of Revenue
   
Revenue
   
Amount
   
Percentage
 
    ($ in thousands)  
 
Cost of revenue:
                                                               
Product
  $ 30,462       123 %     106 %   $ 35,399       91 %     82 %   $ 4,937       16 %
Research services
    1,788       46 %     6 %     2,119       47 %     5 %     331       19 %
                                                                 
Total cost of revenue
  $ 32,250       113 %     113 %   $ 37,518       87 %     87 %   $ 5,268       16 %
                                                                 
 
Total cost of revenue increased $5.3 million, or 16%, to $37.5 million in 2010 from $32.3 million in 2009. The increase in total cost of revenue was the result of an increase of $5.4 million in raw material costs to support increased product revenue and an increase of $0.3 million in cost of research services to support increased research services revenue, offset, in part, by a decrease of $0.6 million in manufacturing expense due to improved manufacturing productivity.
 
Product cost of revenue increased $4.9 million, or 16%, to $35.4 million in 2010 from $30.5 million in 2009. Product cost of revenue as a percentage of product revenue decreased to 91% during 2010 from 123% in 2009 due to the decrease in manufacturing costs, a reduction in material costs as a percentage of product revenue, and increased production volume during the year. The reduction in material costs as a percentage of product revenue, in turn, was the result of improved manufacturing yields and purchasing efficiency during 2010. We expect to incur a $9.8 million increase in manufacturing costs included in cost of product revenue during 2011 primarily associated with the operation of our second production line in the East Providence facility.
 
Research services cost of revenue increased $0.3 million, or 19%, to $2.1 million during 2010 from $1.8 million during 2009. The increase was due to the increase in research services provided during 2010 and an unfavorable mix of labor and expense associated with the contracts. Research services cost of revenue as a percentage of research services revenue increased to 47% during 2010 from 46% in 2009 principally due to the mix of labor and expense required to perform the contracted research, each of which carries a different rate of reimbursement.


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Gross Profit (Loss)
 
                                                 
    Year Ended December 31        
    2009   2010        
        Percentage
      Percentage
  Change
   
Amount
 
of Revenue
 
Amount
 
of Revenue
 
Amount
 
Percentage
    ($ in thousands)
 
Gross profit (loss)
  $ (3,634 )     (13 )%   $ 5,691       13 %   $ 9,325       257 %
 
Gross profit increased $9.3 million, or 257%, to $5.7 million in 2010 from a gross loss of $3.6 million in 2009. This increase in gross profit was the result of economies of scale associated with increased product revenue, a reduction in material costs as a percentage of product revenue due to improved manufacturing yields and purchasing efficiency and a decrease in manufacturing expenses due to increased productivity at our East Providence facility. Gross profit as a percentage of total revenue increased to 13% of total revenue in 2010 from a gross loss of 13% of total revenue in 2009. We expect gross profit as a percentage of total revenue to decrease from 2010 levels in the near term due to the $9.8 million increase in manufacturing costs included in cost of product revenue associated with the operation of our second production line in the East Providence facility. We expect gross profit as a percentage of total revenue to increase in the long-term due to projected growth in product revenue supported by the increase in manufacturing capacity.
 
R&D Expenses
 
                                                 
    Year Ended December 31        
    2009   2010        
        Percentage
      Percentage
  Change
   
Amount
 
of Revenue
 
Amount
 
of Revenue
 
Amount
 
Percentage
    ($ in thousands)
 
R&D expenses
  $ 2,524       9 %   $ 2,985       7 %   $ 461       18 %
 
R&D expenses increased $0.5 million, or 18%, to $3.0 million in 2010 from $2.5 million in 2009. This increase was principally the result of an increase of $0.3 million in labor and related benefits for engineering personnel to support the operation of our East Providence facility, and an increase of $0.1 million in contract engineering expense. R&D costs as a percentage of total revenue decreased to 7% during 2010 from 9% during 2009. This decrease was the result of strong growth in product revenue during 2010. We expect that our research and development expenses will continue to increase as we invest in additional research and engineering personnel and the infrastructure required in support of their efforts. However, we expect that research and development expenses will decline as a percentage of total revenue due to projected strong growth in product revenue.
 
Sales and Marketing Expenses
 
                                                 
    Year Ended December 31        
    2009   2010        
        Percentage
      Percentage
  Change
   
Amount
 
of Revenue
 
Amount
 
of Revenue
 
Amount
 
Percentage
    ($ in thousands)
 
Sales and marketing expenses
  $ 3,994       14 %   $ 4,526       10 %   $ 532       13 %
 
Sales and marketing expenses increased $0.5 million, or 13%, to $4.5 million during 2010 from $4.0 million during 2009. The increase in expense was driven by a $0.5 million increase related to an increase in sales personnel and an increase of $0.4 million in incentive compensation associated with the 56% increase in product revenue during 2010, partially offset by a $0.3 million decrease in legal fees and a $0.1 million decrease in expense for sales consultants. Sales and marketing expenses as a percentage


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of total revenue decreased to 10% during 2010 from 14% in 2009. This decrease was the result of the growth in total revenue during 2010. We plan to continue to expand our sales force and sales consultants globally during 2011 to support 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 total revenue in the long-term.
 
G&A Expenses
 
                                                 
    Year Ended December 31        
    2009   2010        
        Percentage
      Percentage
  Change
   
Amount
 
of Revenue
 
Amount
 
of Revenue
 
Amount
 
Percentage
    ($ in thousands)
 
G&A expenses
  $ 5,430       19 %   $ 5,675       13 %   $ 245       5 %
 
G&A expenses increased $0.2 million, or 5%, to $5.7 million in 2010 from $5.4 million in 2009. This increase was primarily the result of a $0.1 million increase in labor and incentive compensation for finance and human resource personnel, and a $0.1 million increase in legal and professional fees. G&A expenses as a percentage of total revenue decreased to 13% for 2010 from 19% in 2009. This decrease was principally driven by the increase in total revenue during the year. We expect G&A 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 legal and audit 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. As a result, we expect that G&A expenses will increase in absolute dollars but decrease as a percentage of total revenue in the long-term.
 
Other Income (Expense)
 
                                                 
    Year Ended December 31              
    2009     2010              
          Percentage
          Percentage
    Change  
   
Amount
   
of Revenue
   
Amount
   
of Revenue
   
Amount
   
Percentage
 
    ($ in thousands)  
 
Other income (expense):
                                               
Interest income
  $ 18       0 %   $ 170       0 %   $ 152       844 %
Interest expense
    (3,075 )     (11 )%     (2,585 )     (6 )%     490       16 %
                                                 
Total other expense, net
  $ (3,057 )     (11 )%   $ (2,415 )     (6 )%   $ 642       21 %
                                                 
 
Other expense, net of other income, decreased $0.6 million, or 21%, to $2.4 million in 2010 from $3.1 million in 2009. This decrease was primarily the result of a decrease of $0.6 million in imputed interest expense associated with our cross license agreement with Cabot. The decrease in imputed interest expense of $0.6 million was driven by the payment of $7.4 million of this obligation during the year ended December 31, 2010, which resulted in a corresponding reduction in imputed interest expense for the period.


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Year ended December 31, 2008, compared to year ended December 31, 2009
 
The following tables set forth our results of operations for the periods presented:
 
                                                 
    Year Ended December 31     Year Ended December 31  
   
2008
   
2009
   
$ Change
   
% Change
   
2008
   
2009
 
          ($ in thousands)                 (Percentage of total revenue)  
 
Revenue:
                                               
Product
  $ 17,202     $ 24,752     $ 7,550       44 %     86 %     86 %
Research services
    2,868       3,864       996       35 %     14 %     14 %
                                                 
Total revenue
    20,070       28,616       8,546       43 %     100 %     100 %
Cost of revenue:
                                               
Product
    32,160       30,462       (1,698 )     (5 )%     160 %     106 %
Research services
    1,169       1,788       619       53 %     6 %     6 %
Impairment charge
    2,524             (2,524 )     (100 )%     13 %     0 %
                                                 
Gross profit (loss)
    (15,783 )     (3,634 )     12,149       77 %     (79 )%     (13 )%
Operating expenses:
                                               
Research and development
    2,134       2,524       390       18 %     11 %     9 %
Sales and marketing
    4,034       3,994       (40 )     (1 )%     20 %     14 %
General and administrative
    6,180       5,430       (750 )     (12 )%     31 %     19 %
                                                 
Total operating expenses
    12,348       11,948       (400 )     (3 )%     62 %     42 %
                                                 
Income (loss) from operations
    (28,131 )     (15,582 )     12,549       45 %     (140 )%     (54 )%
                                                 
Other income (expense):
                                               
Interest income
    287       18       (269 )     (94 )%     1 %     0 %
Interest expense
    (7,400 )     (3,075 )     4,325       58 %     (37 )%     (11 )%
                                                 
Total other expense, net
    (7,113 )     (3,057 )     4,056       57 %     (35 )%     (11 )%
                                                 
Net income (loss)
  $ (35,244 )   $ (18,639 )   $ 16,605       47 %     (176 )%     (65 )%
                                                 
 
Revenue
 
                                                 
    Year Ended December 31              
    2008     2009              
          Percentage
          Percentage
    Change  
   
Amount
   
of Revenue
   
Amount
   
of Revenue
   
Amount
   
Percentage
 
    ($ in thousands)  
 
Revenue:
                                               
Product
  $ 17,202       86 %   $ 24,752       86 %   $ 7,550       44 %
Research services
    2,868       14 %     3,864       14 %     996       35 %
                                                 
Total revenue
  $ 20,070       100 %   $ 28,616       100 %   $ 8,546       43 %
                                                 


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The following chart depicts product shipments in square feet for the periods presented:
 
                                 
    Year Ended December 31   Change
   
2008
 
2009
 
Amount
 
Percentage
 
Product shipments in square feet (in thousands)
    6,909       10,525       3,616       52 %
 
Total revenue increased $8.5 million, or 43%, in 2009 to $28.6 million from $20.1 million in 2008 primarily as a result of an increase in product revenue. Product revenue increased $7.6 million, or 44%, to $24.8 million in 2009 from $17.2 million in 2008. This increase was principally the result of a broad based increase in global demand for our line of aerogel products in the oil and gas sector of the industrial market, supported by an expansion of our global insulation distributor network. In volume terms, product shipments increased 3.6 million square feet, or 52%, to 10.5 million square feet of aerogel products in 2009, as compared to 6.9 million square feet in 2008.