S-1 1 d627478ds1.htm S-1 S-1
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As filed with the Securities and Exchange Commission on April 28, 2014

Registration No. 333-            

 

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Form S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

Aspen Aerogels, Inc.

(Exact name of Registrant as specified in its charter)

 

Delaware  

3990

  04-3559972

(State or other jurisdiction of

incorporation or organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(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.

Thomas R. Burton, III, Esq.

John T. Rudy, Esq.

Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C.

One Financial Center

Boston, Massachusetts 02111

(617) 542-6000

 

John F. Fairbanks

Vice President, Chief Financial

Officer and Treasurer

Aspen Aerogels, Inc.

30 Forbes Road, Building B

Northborough, Massachusetts 01532

(508) 691-1111

 

Roxane F. Reardon, 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.      ¨

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.      ¨

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.      ¨

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.      ¨

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  ¨

  Accelerated filer  ¨   Non-accelerated filer  þ   Smaller reporting company  ¨
    (Do not check if a smaller reporting company)  

CALCULATION OF REGISTRATION FEE

 

 

Title of Each Class of

Securities to be Registered

 

Proposed

Maximum
Aggregate

Offering Price(1)(2)

  Amount of
Registration Fee(2)

Common Stock, $0.00001 par value per share

  $86,250,000   $11,109

 

 

(1) Estimated solely for the purpose of computing the amount of the registration fee pursuant to Rule 457(o) under the Securities Act of 1933, as amended.
(2) Includes the offering price of shares of common stock that may be sold if the over-allotment option granted by the Registrant to the underwriters is exercised.

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 April 28, 2014

PROSPECTUS

 

 

             Shares

 

LOGO

Aspen Aerogels, Inc.

Common Stock

 

 

This is the initial public offering of shares of common stock of Aspen Aerogels, Inc.

We are offering              shares of common stock. No public market currently exists for our common stock.

We intend to apply to list the common stock on the New York Stock Exchange under the symbol “ASPN.”

We anticipate that the initial public offering price will be between $         and $             per share.

We are an “emerging growth company” as that term is used in the Jumpstart Our Business Startups Act of 2012 and, as such, have elected to comply with certain reduced public company reporting requirements for this prospectus and future filings.

Investing in our common stock involves risks. See “Risk Factors” beginning on page 14 of this prospectus. 

 

     Per Share      Total  

Initial public offering price

   $                    $                

Underwriting discounts and commissions(1)

   $         $     

Proceeds, before expenses, to us

   $         $     

 

(1) We have agreed to reimburse the underwriters for certain expenses in connection with this offering. See “Underwriting.”

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.

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.

The underwriters expect to deliver the shares on or about                     , 2014.

 

 

 

Barclays   J.P. Morgan   Citigroup

 

 

Prospectus dated                     , 2014


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TABLE OF CONTENTS

 

     Page  

PROSPECTUS SUMMARY

     1   

RISK FACTORS

     14   

SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS

     39   

USE OF PROCEEDS

     41   

DIVIDEND POLICY

     42   

CAPITALIZATION

     43   

DILUTION

     45   

SELECTED CONSOLIDATED FINANCIAL DATA

     47   

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     50   

BUSINESS

     83   

MANAGEMENT

     106   

EXECUTIVE AND DIRECTOR COMPENSATION

     114   

CERTAIN RELATIONSHIPS AND RELATED PERSON TRANSACTIONS

     128   

PRINCIPAL STOCKHOLDERS

     134   

DESCRIPTION OF CAPITAL STOCK

     140   

DESCRIPTION OF CERTAIN INDEBTEDNESS

     146   

SHARES ELIGIBLE FOR FUTURE SALE

     149   

MATERIAL U.S. FEDERAL TAX CONSIDERATIONS FOR NON-U.S. HOLDERS

     152   

UNDERWRITING

     156   

LEGAL MATTERS

     163   

EXPERTS

     163   

WHERE YOU CAN FIND MORE INFORMATION

     163   

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

     F-1   

APPENDIX A — GLOSSARY OF SELECTED TERMS

     A-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.

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, size of insulation opportunity at various types of energy infrastructure facilities 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 an off-the-shelf market research report (World Insulation - #2956) by The Freedonia Group, an independent international market research firm, and a separate custom market research report by Freedonia Custom Research, Inc., a wholly-owned subsidiary of The Freedonia Group, or Freedonia, which was commissioned by us and was issued in February 2014. Such data involves a number of assumptions and limitations and contains projections

 

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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, research opinion or viewpoints developed independently on our behalf and does not constitute a specific guide to action. In preparing the Freedonia Report, Freedonia used various sources, including publicly 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 owners and operators of refineries, petrochemical plants, LNG facilities, power generating assets and other energy infrastructure facilities, 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 end 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

We own or have rights to use “Aspen Aerogels,” “Cryogel,” “Pyrogel,” “Spaceloft,” the Aspen Aerogels logo and other trademarks, service marks and trade names of Aspen Aerogels appearing in this prospectus. 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 trademarks, service marks and trade names 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. A glossary of selected terms is provided in Appendix A located at the end of 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 technology company that designs, develops and manufactures innovative, high-performance aerogel insulation used primarily in large-scale energy infrastructure facilities. We believe our aerogel blankets deliver the best thermal performance of any widely used insulation product available on the market today and provide a combination of performance attributes unmatched by traditional insulation materials. Our products provide two to five times the thermal performance of widely used traditional insulation in a thin, easy-to-use and durable blanket form. Our end-use customers select our products where thermal performance is critical, and to save money, reduce energy use, preserve operating assets and protect workers.

Our technologically advanced products are targeted at the estimated $2.8 billion annual global market for energy infrastructure insulation materials. Our aerogel insulation has undergone rigorous technical validation and is used by many of the world’s largest oil producers and the owners and operators of refineries, petrochemical plants, liquefied natural gas, or LNG, facilities and power generating assets, such as ExxonMobil, Formosa Petrochemical, Pemex Gas and NextEra Energy Resources. Our products replace traditional insulation in existing facilities during regular maintenance, upgrades and capacity expansions. In addition, we are increasingly being specified for use in new-build energy infrastructure facilities.

We introduced our two key product lines, Pyrogel and Cryogel, in 2008. We have invested significant resources to commercialize our technology and to build our business, have incurred and expect to continue to incur annual operating losses, and have an accumulated deficit of $332.8 million at December 31, 2013. As a result of this investment, our product revenue has grown from $17.2 million in 2008 to $82.1 million in 2013, representing a compound annual growth rate of 37%. We have sold more than $250 million of our products globally, representing an installed base of more than 100 million square feet of insulation. We believe that this initial success positions us for future growth and continued gain in market share.

We currently target our sales efforts in the energy infrastructure market, where we believe our products have the highest value applications. As we continue to expand our production capacity and enhance our technology, we believe we will have opportunities to address additional high value applications in the estimated $37 billion global insulation market.

Aerogels are complex structures in which 97% of the volume consists of air trapped between intertwined clusters of amorphous silica solids. These extremely low density solids provide superior insulating properties. Our products enable compact design, reduce installation time and costs, promote freight and logistics cost savings, reduce system weight and required storage space and enhance job site safety. Our products reduce the incidence of corrosion under insulation, which is a significant maintenance cost and safety issue in energy infrastructure facilities. Our products also offer strong fire protection, which is a critical performance requirement in our markets. We believe our array of product attributes provides strong competitive advantages over traditional insulation. Although competing insulation materials may have one or more comparable attributes, we believe that no single insulation material currently available offers all of the properties of our aerogel insulation.

We manufacture our products using proprietary technology at our facility in East Providence, Rhode Island. We have operated the East Providence facility at high volume and high yield since 2008. We successfully

 

 

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commenced operation of our second production line at this facility at the end of March 2011, which doubled our annual nameplate capacity to 40 million to 44 million square feet of aerogel blankets, depending on product mix.

To address anticipated near and mid-term capacity constraints caused by increasing demand for our products, we are in the process of expanding our production facility. We are in the design and engineering phase of a third production line at our East Providence facility and have procured certain capital equipment with a longer lead-time. We currently expect that this third line will increase our annual nameplate capacity by 25% to 50 million to 55 million square feet and will be completed in the first half of 2015. We plan to construct a second manufacturing facility in Europe or Asia, the location of which will be based on factors including labor and construction costs, availability of governmental incentives, and proximity to raw material suppliers. We anticipate initial operation of a first production line at this facility during 2017.

Our capacity expansion plan requires us to raise capital. We plan to complete the expansion of our current production facility using a portion of the proceeds from this offering. We will use additional proceeds from this offering to fund the development, design and a portion of the build-out of a second plant. We expect to utilize anticipated cash flows from operations, local government grants and debt financing to provide the remaining capital required to complete the first production line in our second facility.

Our Core Market

Our two principal products, Pyrogel and Cryogel, are used by many of the world’s largest oil producers, refiners and petrochemical companies. Our products are also in use in applications in a variety of other energy infrastructure facilities around the world, including LNG facilities, oil sands extraction operations, offshore oil projects and power generation facilities. Insulation systems in these markets 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, to mitigate corrosion and to protect workers. Insulation is low in cost relative to the total cost of a typical energy infrastructure facility, but is critical to its safe, reliable and efficient operation. According to estimates in the Freedonia Custom Research Inc. Report, or the Freedonia Report, the worldwide energy infrastructure insulation market totaled $2.8 billion in 2013 and is expected to grow to $3.5 billion in 2018. We estimate that we generated 87% of our 2013 product revenue in the energy infrastructure insulation market.

Global energy demand for all forms of energy is expected to increase by 56% from 2010 to 2040, according to the International Energy Outlook 2013 report by the U.S. Energy Information Administration, or EIA. In order to serve this growing demand, we believe our end-use customers will continue to invest in major energy infrastructure projects. The major end markets that drive demand for our products include:

 

   

Oil Refining: We believe our aerogel blankets are used by 24 of the world’s largest 25 refining companies including ExxonMobil, Petrobras and Chevron, among others. World refining capacity is projected to increase by approximately 1.5 million barrels of crude oil, condensate or natural gas liquids per day (MMBbl/d) on average per year from 2013 to 2017, according to the September 2013 Barclays CEO Energy-Power Conference presentation by Valero Energy Corporation.

 

   

Petrochemical: We believe our aerogel blankets are used by 19 of the world’s 20 largest petrochemical companies including Formosa Petrochemical, Hu-Chems Company and a major Asian energy company, among others. Worldwide capital spending in the chemistry sector is projected to increase from $413.8 billion in 2012 to $617.5 billion in 2018, at a compound annual growth rate of 6.9%, according to the Year-End 2013 Chemical Industry Situation and Outlook report by the American Chemistry Council, America’s oldest chemicals trade association.

 

   

Natural Gas and LNG: Our products are in use at ExxonMobil, Pemex Gas and Qatargas, among others. As of March 2014, global LNG demand is expected to increase from 28.8 billion cubic feet of natural gas per day (Bcf/d) in 2010 to 60.1 Bcf/d in 2025, at a compound annual growth rate of 5.0%, according to the Global LNG Long-Term Outlook Q1 2014 by Wood Mackenzie, a leading independent energy research and consulting firm.

 

 

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Onshore Oil Production, including Oil Sands: Our aerogel blankets are in use in several Canadian oil sands facilities owned and operated by Suncor Energy, ConocoPhillips and Husky Energy, among others. Annual production from oil sands activities is projected to increase from 1.8 MMBbl/d in 2012 to 5.2 MMBbl/d in 2030, at a compound annual growth rate of 6.1%, according to the June 2013 Crude Oil Forecasts, Markets & Transportation report by the Canadian Association of Petroleum Producers.

 

   

Offshore Oil Production: Our products are currently used in subsea projects off the coast of Brazil, in the Gulf of Mexico, in the North Sea, off the coast of Malaysia and off the west coast of Africa in projects operated by Marathon Oil, ConocoPhillips, Shell and others. Our relationships with Technip and other engineering, procurement and construction contractors are critical to the selection of our products for subsea projects. Annual global spending on offshore drilling activities is projected to increase from $97 billion in 2012 to $170 billion in 2019, at a compound annual growth rate of approximately 8.4%, according to the December 2013 Drilling and Production Outlook report by Spears and Associates, Inc., a leading independent oilfield equipment and service company research and consulting firm.

 

   

Power Generation: We are targeting operators of gas, coal, nuclear, hydro and solar power generating facilities. Although not a significant portion of our revenue today, our products are currently used at a facility owned and operated by NextEra Energy Resources among other power generation facilities. Global net electricity generation is projected to increase by 69% from 21.4 trillion kilowatt hours, or kWh, in 2012 to 36.2 trillion kWh in 2035, according to the International Energy Outlook 2013 report by the EIA.

We are targeting continued expansion of the use of our products within energy infrastructure facilities during regular maintenance, upgrades and expansions. In addition to opportunities to replace traditional insulation at existing facilities, we are also pursuing insulation applications at new-build and large capacity expansion projects around the world. Historically, a significant portion of our revenue has been derived from displacing traditional insulation at existing facilities, in particular during periods of planned plant maintenance or upgrades. We believe these maintenance applications will continue to comprise a large portion of our revenue mix. As our end-use customers gain experience with our products at existing facilities, we believe that more of our customers will also select our products for new-build facility construction and large capacity expansion projects, which we expect to drive significant revenue growth.

We also derived 13% of our 2013 product revenue from the building and construction and other end markets. Customers in these markets use our aerogels for applications as diverse as wall systems, military and commercial aircraft, trains, buses, appliances, apparel, footwear and outdoor gear. While not our core market, we anticipate that we will continue to allocate a modest portion of our manufacturing capacity to serve these markets.

In addition, we continue to perform contract research services for a number of federal and non-federal government agencies, including NASA, National Science Foundation, Defense Advanced Research Projects Agency, U.S. Army, U.S. Navy, U.S. Air Force and the Department of Energy, among others.

Our Solution

We believe our aerogel blankets deliver a superior combination of performance attributes that enable end-users to save money, reduce energy use, preserve operating assets and protect workers across 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 thermal performance requirements are demanding or available space for insulation is constrained. Our products address a wide range of applications within the cryogenic and sub-ambient (down to -200°C), ambient and hot process (up to 650°C) temperature ranges.

 

   

Reduced Corrosion Under Insulation, or CUI. Our Pyrogel XT product line is both hydrophobic and vapor permeable. These attributes have the potential to reduce the incidence of CUI in hot process

 

 

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applications, which we believe provides our end-users with a significant reduction in long-term operating and capital costs. Corrosion of process piping and storage tanks increases the risk of catastrophic system failures. Preventative facility maintenance and related expenses are estimated to cost the petrochemical industry billions of dollars per year. Our products also offer improved thermal performance in insulation systems exposed to the elements or operating in humid environments compared to traditional insulation.

 

   

Compact Design and Faster Installation. 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 complex facilities. The flexible form factor of our products also makes them faster to install than rigid insulation materials, which reduces labor costs and total installed costs. In addition, our products reduce the volume and weight of material purchased, inventoried, transported and installed in the field, and they reduce the number of stock-keeping units required to complete a project. Simplified logistics accelerate project timelines, reduce installation costs and protect workers.

 

   

High Durability and Fire Protection. 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. In addition, our Pyrogel XTF product was specifically designed to provide strong fire performance in applications within the energy infrastructure and other end markets.

We believe these product attributes uniquely address the demanding performance requirements of the energy infrastructure insulation market. In particular, these attributes help our end-use customers reduce long-term operating and capital costs and meet their goals to enhance safety and reliability. We believe these characteristics are leading our end-use customers to choose our insulation products in a growing number of energy infrastructure facilities.

Our Competitive Strengths

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

 

   

Disruptive Products with a Compelling Value Proposition. Our aerogel products provide two to five times the thermal performance of widely used traditional insulation in a thin, easy-to-use and durable blanket form. We believe our array of product attributes provides strong competitive advantages over traditional insulation and will enable us to gain a larger share of the energy infrastructure insulation market. 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.

 

   

Attractive Energy End Markets. Our products are primarily used in large scale energy infrastructure facilities. Freedonia has estimated that the worldwide energy infrastructure insulation market totaled $2.8 billion in 2013 and is expected to grow to $3.5 billion by 2018. Global energy demand for all forms of energy is expected to increase by 56% from 2010 to 2040, according to the International Energy Outlook 2013 report by the EIA. Given the continued growth in global energy consumption and the construction of new facilities to satisfy this demand, we believe that we serve attractive and growing global end markets. In order to capture the opportunities in our end markets, we have a network of sales professionals and qualified distributors in more than 30 countries around the world.

 

   

Growing Installed Base with Industry-leading End-Users. We have an installed base of more than 100 million square feet of insulation, representing more than $250 million in cumulative product sales since 2008. Through our relationships with industry leading end-use customers, our products have undergone rigorous testing and technical validation and are now in use at many of the world’s largest oil

 

 

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producers, refiners and petrochemical companies. These relationships have shortened the sales cycle with other customers and have helped to facilitate our market penetration. We also have strong relationships with a global network of energy-focused distributors, contractors and engineering firms that understands the significant advantages our products provide to end-users. We believe our products have been used by 24 of the world’s largest 25 refining companies and 19 of the world’s largest 20 petrochemical companies and have been initially deployed in approximately 30% of the world’s 640 refineries.

 

   

Proven, Scalable Business Model. Our proprietary manufacturing technology is proven and has been successfully scaled up to meet increasing demand. We have operated the East Providence facility at high volume and high yield since 2008. We successfully commenced operation of our second production line at this facility in March 2011 and doubled our annual nameplate capacity to 40 million to 44 million square feet of aerogel blankets.

 

   

Protected Technology Platform and Proprietary Manufacturing Capability. Our product solution is the result of more than a dozen years of research and development dedicated to new aerogel compositions, form factors and manufacturing technologies. Our intellectual property portfolio is supported by 51 issued patents, with an additional 18 pending in U.S. and foreign jurisdictions in areas related to product design, chemistry, process technology and market applications. In addition, we believe we have significant trade secrets related to product formulations and manufacturing techniques. We believe our portfolio of patents, trade secrets and know-how presents a formidable barrier to potential new entrants in the production of aerogel blanket insulation.

 

   

Experienced Management Team with a Demonstrated Track Record. Our executive officers have an average of more than 20 years each of experience in global industrial companies, specialty chemical companies or related material science research. This management team is responsible for the development of our proprietary manufacturing technology, the commercial acceptance of our products, and the creation of a global distribution and marketing platform. As of April 15, 2014, we employed 220 research scientists, engineers, manufacturing line operators, sales and administrative staff, and management. We believe our dedicated and experienced team is an important competitive asset. Our senior management team and key employees will continue to have a significant equity stake in Aspen Aerogels following this offering.

Our Growth Strategy

Our strategy is to create shareholder value by becoming the leading provider of high-performance insulation products serving global energy infrastructure customers. Key elements of our strategy include:

 

   

Expand Our Manufacturing Capacity to Meet Market Demand. Demand for our aerogel products has grown significantly. From 2008 through 2013, our product revenue has grown at a compound annual growth rate of 37% to $82.1 million. To meet anticipated growth in demand for our products, we are engaged in the design, engineering and procurement phases of a third production line in our East Providence facility and plan to construct a second manufacturing facility in Europe or Asia. We expect that this third production line at our East Providence facility will increase our annual nameplate capacity by 10 million to 11 million square feet of aerogel blankets at a total additional construction cost of approximately $30 million. We expect this third production line to be completed in the first half of 2015. We also intend to build a second production plant in Europe or Asia after completion of our third production line. We anticipate initial operation of the first production line at this facility during 2017. Based on our preliminary plans for this plant, our projected cost to construct this first production line and plant infrastructure for a multi-line facility is $80 million to $100 million with an estimated annual nameplate capacity of 26 million to 28 million square feet of aerogel blankets. The plant infrastructure design would also support future development of two additional similar production lines.

 

 

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Increase Our Market Share. We plan to focus additional resources to continue to grow our share of the energy infrastructure insulation market, both through increased sales to our existing customers and through sales to new customers. We will continue to expand our global sales force and distribution network in support of this objective and seek to promote greater enterprise-wide utilization of our products by existing end-use customers. To date, the majority of our revenue has been generated from applications in refineries and petrochemical facilities. We will continue to pursue and expect greater adoption of our products in the oil production, LNG production and storage, and power generation markets.

 

   

Exploit Project Growth Opportunities. Our product revenue has been and will be generated in large part by demand for insulation associated with scheduled plant shutdowns, or turnarounds, and other maintenance-related projects. With our broad adoption and growing installed base, we expect that our products will be specified during the design phase in a growing number of new plant construction and capital expansion projects. We expect that growth in global energy demand will result in increased new-build and large capacity expansion projects, driving demand for our aerogel products.

 

   

Continue to Improve Our Profit Margins. We will continuously improve the cost efficiency of our manufacturing process to optimize the formulation of our products and to manage our supply chain to reduce costs. In addition, we plan to establish our second facility in a lower-cost labor market. As our overall manufacturing scale grows, we believe there will be additional opportunities to realize efficiencies and to reduce our per unit overhead costs. We believe our current expansion plan offers attractive returns on incremental invested capital.

 

   

Capitalize on Innovation. We employ a team of research scientists and process engineers focused on advancing our current aerogel technology and developing next generation aerogel compositions, form factors and manufacturing processes. We believe that we are well positioned to leverage a decade’s worth of research and development to design and commercialize additional disruptive aerogel products for the energy infrastructure market. In addition, as we continue to enhance our technology and expand our capacity, we believe we will have opportunities to address additional high value applications in the estimated $37 billion global insulation market.

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;

 

   

Our independent registered public accounting firm’s report contains an explanatory paragraph that expresses substantial doubt about our ability to continue as a going concern;

 

   

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

 

   

If we fail to achieve the increase in production capacity that our continued growth requires, our growth may be hindered and our business may be materially adversely affected;

 

   

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

 

   

We will require significant additional capital to pursue our growth strategy beyond the construction of our third line in our East Providence facility, but we may not be able to obtain additional financing on acceptable terms or at all;

 

 

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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;

 

   

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

 

   

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; and

 

   

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

Implications of Being an Emerging Growth Company

As a company with less than $1.0 billion in revenue during our most recently completed fiscal year, we qualify as an “emerging growth company” as defined in Section 2(a) of the Securities Act of 1933, as amended, which we refer to as the Securities Act, as modified by the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. As an emerging growth company, we may take advantage of specified reduced disclosure and other requirements that are otherwise applicable, in general, to public companies that are not emerging growth companies. These provisions include:

 

   

Reduced disclosure about our executive compensation arrangements;

 

   

No non-binding shareholder advisory votes on executive compensation or golden parachute arrangements;

 

   

Exemption from the auditor attestation requirement in the assessment of our internal control over financial reporting; and

 

   

Reduced disclosure of certain financial information in this prospectus.

We will remain an emerging growth company until the earliest to occur of:

 

   

the end of the fiscal year for which we report $1.0 billion or more in annual revenues;

 

   

the end of the fiscal year in which the market value of our common stock held by non-affiliates exceeds $700 million on the last business day of our second fiscal quarter;

 

   

our issuance, in a three year period, of more than $1.0 billion of non-convertible debt; and

 

   

December 31, 2019.

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

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, renamed 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)

 

Over-allotment option

We have granted the underwriters a 30-day option to purchase up to              of additional shares of our common stock to cover over-allotments, if any.

 

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:

 

   

approximately $30 million of the net proceeds to fund the additional expenditures necessary for the design, development and construction of our third production line in our East Providence facility;

 

   

approximately $         million of the net proceeds to repay amounts outstanding under our revolving line of credit, which is payable in July 2014, and approximately $19 million of the net proceeds to repay our 20% subordinated notes due September 2014; and

 

   

the remaining net proceeds for general corporate purposes, which will include funding a portion of the design, development and construction of our planned second production plant in Europe or Asia after completion of our third production line.

 

  See “Use of Proceeds” for more information.

 

Risk factors

You should carefully read the “Risk Factors” section of this prospectus for a discussion of factors that you should consider before deciding to invest in shares of our common stock.

 

Proposed NYSE symbol

“ASPN”

The number of shares of our common stock to be outstanding after this offering is based on                      shares of our common stock outstanding as of                     , 2014, after giving effect to the exercise of all of our outstanding warrants to purchase Series C preferred stock and the conversion of all of our preferred stock and convertible notes based on the assumptions set forth below immediately prior to the completion of this offering and excluding the following:

 

   

80,050,105 shares of our common stock issuable upon the exercise of stock options outstanding as of April 15, 2014 at a weighted-average exercise price of $0.112 per share, which share number assumes

 

 

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the closing of the offering made hereby occurs on                     , 2014 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;

 

   

             shares of our common stock that will be available for future issuance under our 2014 equity incentive plan to be effective upon completion of this offering; and

 

   

112,576 shares of common stock issuable upon the exercise of warrants to purchase our common stock outstanding as of April 15, 2014 at a weighted-average exercise price of $0.017 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                     , 2014 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;

 

   

assumes the issuance of              shares of our common stock upon closing of this offering comprised of:

 

   

96,333,792 shares of our common stock issuable upon the assumed cash exercise of our outstanding warrants to purchase Series C preferred stock and the automatic conversion of all outstanding shares of our preferred stock (which would be reduced by              shares in the event that the exercise price of all of our outstanding warrants to purchase Series C preferred stock was paid pursuant to the net exercise provisions of the warrants, based on an initial offering price of $        , the mid-point of the price range set forth on the cover page of this prospectus); and

 

   

             shares of our common stock issuable upon the automatic conversion of our convertible notes including accrued but unpaid interest thereon at a conversion price equal to 62.5% of the initial public offering price per share in this offering;

 

   

assumes the exchange by Arcapita Ventures I Limited, or Arcapita, immediately prior to this offering of its notes for a number of shares of our common stock based on the initial public offering price and a discount factor that will result in Arcapita receiving approximately the number of shares that it would have received if its notes, which it holds in lieu of convertible notes due to its investment restrictions, accrued interest and automatically converted upon the same terms as the convertible notes;

 

   

reflects the 1-for-10 reverse split of our common stock and preferred stock which took place in August 2013;

 

   

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.

We refer collectively to our Series A, B and C convertible preferred stock as our preferred stock. We refer to the automatic conversion of our preferred stock into shares of common stock and the automatic conversion of our convertible note (including accrued but unpaid interest) into shares of common stock as the preferred stock and convertible notes conversions. When we refer to our convertible notes, we are including the notes held by Arcapita and when we refer to the convertible notes conversions, we are including the exchange of Arcapita’s notes for shares of our common stock at a discount factor that will result in Arcapita receiving approximately the number of shares that it would have received if its notes, which it holds in lieu of convertible notes due to its investment restrictions, accrued interest and automatically converted upon the same terms as the convertible notes.

 

 

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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, 2011, 2012 and 2013 and the consolidated balance sheet data as of December 31, 2013 from our audited consolidated financial statements and the related notes thereto included elsewhere in this prospectus. Our historical results for prior periods are not necessarily indicative of results to be expected for any future period.

You should read this summary consolidated financial data together with our audited consolidated financial statements and the related notes thereto included elsewhere in this prospectus and the information under “Selected Consolidated Financial Data,” “Capitalization” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

    Year Ended December 31  
             2011                        2012                        2013            
    ($ in thousands, except share and per share data)  

Consolidated statements of operations data:

     

Revenue:

     

Product

  $ 42,717      $ 60,389      $ 82,057   

Research services

    3,233        3,064        4,037   
 

 

 

   

 

 

   

 

 

 

Total revenue

    45,950        63,453        86,094   

Cost of revenue:

     

Product

    47,071        70,025        73,399   

Research services

    1,505        1,396        1,964   
 

 

 

   

 

 

   

 

 

 

Gross profit (loss)

    (2,626     (7,968     10,731   

Operating expenses:

     

Research and development

    4,085        5,142        5,159   

Sales and marketing

    5,565        8,564        9,271   

General and administrative

    8,291        11,299        12,833   

Write-off of construction in progress

    —          —          3,440   
 

 

 

   

 

 

   

 

 

 

Total operating expenses

    17,941        25,005        30,703   
 

 

 

   

 

 

   

 

 

 

Income (loss) from operations

    (20,567     (32,973     (19,972
 

 

 

   

 

 

   

 

 

 

Other income (expense):

     

Interest expense(1)

    (8,822     (21,790     (30,599

Gain on extinguishment of convertible notes

    —          —          8,898   

Loss on exchange of convertible notes

    —          —          (5,697

Debt extinguishment costs

    —          (1,379     —     

Costs associated with postponed public offering

    (3,443     —          (241
 

 

 

   

 

 

   

 

 

 

Total other income (expense), net

    (12,265     (23,169     (27,639
 

 

 

   

 

 

   

 

 

 

Net income (loss)

    (32,832     (56,142     (47,611

Accretion (deemed dividends) on preferred stock

    (23,665     47,201        (996

Extinguishment of redeemable feature for convertible preferred stock

    —          —          86,161   

Earnings attributable to preferred stock shareholders

    —          —          (36,216
 

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to common stockholders

  $ (56,497   $ (8,941   $ 1,338   
 

 

 

   

 

 

   

 

 

 

 

 

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    Year Ended December 31  
             2011                        2012                        2013            
    ($ in thousands, except share and per share data)  

Per share data:

     

Net income (loss) attributable to common stockholders per share:

     

Basic

  $ (21.66   $ (3.41   $ 0.51   

Diluted

  $ (21.66   $ (3.41   $ 0.49   

Weighted-average common shares outstanding:

     

Basic

    2,607,888        2,622,897        2,623,156   

Diluted

    2,607,888        2,622,897        2,722,947   

Pro forma net income (loss) per share:(2)

     

Basic

     

Diluted

     

Weighted-average common shares outstanding used in computing pro forma net income (loss) per share:(2)

     

Basic

     

Diluted

     

 

     Year Ended December 31  
     2011     2012     2013  
     (In thousands)  

Other operating data:

      

Product shipments in square feet(3)

     19,473        27,280        35,560   

Adjusted EBITDA(4)

   $ (11,982   $ (19,146   $ (1,815

 

     As of December 31, 2013
     Actual     As adjusted(5)
     ($ in thousands)

Consolidated balance sheet data:

    

Cash

   $ 1,574     

Working capital(6)

     (3,460  

Total assets

     90,442     

Total debt

     138,555     

Preferred stock

     —       

Total stockholders’ (deficit) equity

     (61,966  

 

(1) Interest expense consists primarily of fair market value adjustments related to our subordinated notes, convertible notes and the issuance of our Series C warrants, subordinated note and convertible note issuance costs, the amortization of the subordinated note debt discount and imputed interest on our obligations under our cross license agreements with Cabot Corporation.
(2) 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.

 

 

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     The following table presents the calculation of pro forma basic and diluted net income (loss) per share:

 

     Year Ended December 31  
              2011                        2012                        2013            
     ($ in thousands, except share and per share data)  

Net income (loss) attributable to common stockholders

   $ (56,497   $ (8,941   $ 1,338   

Deemed dividends (accretion) on preferred stock

     23,665        (47,201     996   

Extinguishment of redeemable feature for convertible preferred stock

     —          —          (86,161

Earnings attributable to preferred stock shareholders

     —          —          36,216   

Interest expense

      

Pro forma net income (loss) attributable to common stockholders

      

Weighted-average common shares outstanding, basic and diluted

      

Pro forma common shares issued upon conversion of preferred stock and exercise of Series C warrants

      

Pro forma 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

      

 

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

 

     We use Adjusted EBITDA 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.

 

    

Although measures similar to Adjusted EBITDA are frequently used by investors and securities analysts in their evaluation of companies, we understand that Adjusted EBITDA has limitations as an analytical

 

 

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

 

   

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:

 

     Year Ended December 31  
     2011     2012     2013  
     ($ in thousands)  

Net income (loss)

   $ (32,832   $ (56,142   $ (47,611

Interest expense

     8,822        21,790        30,599   

Depreciation and amortization

     7,521        9,684        10,061   

Loss on disposal of assets

     —          2,489        230   

Stock-based compensation

     1,064        1,654        4,426   

Gain on extinguishment of convertible notes

     —          —          (8,898

Loss on exchange of convertible notes

     —          —          5,697   

Debt extinguishment costs

     —          1,379        —     

Write-off of costs associated with postponed public offering

     3,443        —          241   

Write-off of construction in progress

     —          —          3,440   
  

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

   $ (11,982   $ (19,146   $ (1,815
  

 

 

   

 

 

   

 

 

 

 

(5) The summary as adjusted balance sheet information as of December 31, 2013 has been prepared to give effect to this offering, our use of a portion of the net proceeds therefrom to repay all outstanding amounts under our revolving credit facility if any, and under our subordinated notes therefrom and the preferred stock and convertible notes conversions as if they had occurred on December 31, 2013. The summary as adjusted balance sheet information is for informational purposes only and does not purport to indicate balance sheet information as of any future date.
(6) Working capital means current assets minus current liabilities. It includes $18.8 million of current maturities of debt and other liabilities that are also included in total debt.

 

 

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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 profitability. We experienced net losses of $32.8 million, $56.1 million and $47.6 million for the years ended December 31, 2011, 2012 and 2013, respectively. As of December 31, 2013, our accumulated deficit was $332.8 million and total stockholders’ deficit was $62.0 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 profitability, or sustaining profitability if we do achieve it. 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 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 flows from operating activities of $24.2 million, $25.9 million and $13.7 million for the years ended December 31, 2011, 2012 and 2013, respectively.

We expect that for the foreseeable future our overall cash flow will remain negative. In particular, we will need cash to fund our significant planned future capital expenditures to expand our manufacturing capacity. We 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. In addition, from time to time, we may have debt maturities that will require cash in order to repay those obligations. We may not achieve sufficient revenue growth to generate positive future cash flow and, therefore, we may need to raise additional capital from investors to achieve our expected growth. An inability to generate positive cash flow for the foreseeable future or raise additional capital on reasonable terms, if at all, may decrease our long-term viability.

Our independent registered public accounting firm’s report contains an explanatory paragraph that expresses substantial doubt about our ability to continue as a going concern.

As a result of our recurring net losses taken together with the maturity of our subordinated notes due September 2014 and the expiration of our revolving credit facility in July 2014, our independent registered public accounting firm has expressed substantial doubt regarding our ability to continue as a going concern. We plan to repay our subordinated notes and borrowings under our revolving credit facility with a portion of the net proceeds of this offering.

 

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

We currently operate 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 this manufacturing facility. In the event of a significant disruption to our sole manufacturing facility or breakdown of either production line, we currently do not expect that we would have sufficient inventory in stock to meet demand until the production lines return to operation.

Power failures or disruptions, the breakdown, failure or substandard performance of equipment, or the damage or destruction of buildings and other facilities due to fire or natural disasters could severely affect our ability to continue our operations. In the event of such disruptions, we are unlikely to find suitable alternatives or may not be able to make needed repairs on a timely basis and at reasonable cost, which could have a material adverse effect on our business and results of operations. In particular, our manufacturing processes include the use of both high temperatures and flammable chemicals, which subjects us to a significant risk of loss resulting from fire. We had occasional incidences of fires at our initial facility in Northborough, Massachusetts that preceded our current manufacturing facility in East Providence, Rhode Island. If our manufacturing facility were to be damaged or cease operations, it may reduce revenue, cause us to lose customers and otherwise adversely affect our business. The insurance policies we maintain to cover losses caused by fire or natural disaster, including business interruption insurance, may not adequately compensate us for any such losses and will not address a loss of customers that we would expect would result. If our sole manufacturing facility was damaged or destroyed prior to the commencement of operations at a second manufacturing facility, which is currently expected to be 2017, we would be unable to operate our business for an extended period of time and our business and results of operations may be materially adversely affected, potentially even threatening our viability.

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

Our continued growth requires that we increase our production capacity. Consequently, we are engaged in the design, engineering and initial procurement phase of building a third production line in our manufacturing facility in East Providence and also plan to construct a second manufacturing facility located in either Europe or Asia. If, for any reason, including our inability to obtain financing, the third production line or the second manufacturing facility should fail to be completed in a timely manner, or at all, or any of the production lines in any future manufacturing facilities do not operate according to our expectations, sales may be impeded, our growth may be hindered and our business or results of operations may be materially adversely affected.

Many factors could delay or prevent the addition of a third production line or the construction of a second manufacturing facility or cause us to reduce the scale or scope of the new facilities, including:

 

   

our inability to obtain financing on favorable terms, or at all;

 

   

design, engineering and construction difficulties or delays;

 

   

our failure or delay in obtaining necessary legal, regulatory and other approvals;

 

   

interruptions in the supply of the necessary equipment, or construction materials or labor or an increase in their price;

 

   

opposition of local interests; and

 

   

natural disasters, accidents, political unrest or unforeseen events.

Many factors could prevent the third production line or the second manufacturing facility from producing at their expected effective or nameplate capacity or could cause us to reduce the scale or scope of the new facilities, including:

 

   

design and engineering failures;

 

   

inability to retain and train a skilled workforce;

 

   

the challenges of operating significantly higher volume equipment at the planned second facility than currently employed at our existing facility in East Providence;

 

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improper operation of the manufacturing equipment;

 

   

decreases in our manufacturing yields due to an increase in the cost of the materials needed to make our products or the inefficient use of these materials in our manufacturing process;

 

   

strikes or labor disputes; and

 

   

damage to the manufacturing equipment due to design and engineering flaws, construction difficulties 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 business, results of operations, financial condition and cash flows.

If we are unable to complete the projects contemplated, the costs incurred in connection with such projects may not be recoverable. For example, during 2013, we redesigned and reduced the planned scale of the third production line. As a result, we reviewed the construction in progress assets associated with the third production line and determined that $3.0 million had no future use. In addition, we concluded that an additional $0.4 million of construction in progress assets were not utilized or functional. Accordingly, we recorded a $3.4 million impairment charge during 2013 related to the write-off of construction in progress assets. A similar redesign or reduction in scale could affect the planned third production line or the second manufacturing facility and similar impairments of our assets in the future could harm our financial condition.

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

As we pursue our capacity expansion plans, we will incur significant capital expenses and increased levels of manufacturing expenses in anticipation of expected growth in demand for our products. In particular, we expect that these substantial additional expenditures will be made by us significantly in advance of the existence of the level of demand that would ensure the most efficient use of our planned new capacity. As a result, if the expected growth in demand for our products fails to materialize within a reasonable amount of time following each of our planned capacity expansions, then we would suffer decreased levels of cash flow and our financial condition and results of operations would be adversely affected.

We will require significant additional capital to pursue our growth strategy beyond the construction of our third line in our East Providence facility, 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 particular, our plans to construct a second manufacturing facility in Europe or Asia are dependent on our ability to secure grants from governments and to raise debt financing. There is no assurance of our ability to obtain either type of financing on terms acceptable to us or at all.

In addition, we may consider strategic acquisitions of complementary businesses or technologies to grow our business, which 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 loan and security agreement with Silicon Valley Bank under which we have the ability to borrow up to $10.0 million and our subordinated notes 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. We may not be able to obtain bank credit arrangements or effect an equity or debt financing on terms acceptable to us or at all in order to fund our future capacity expansion plans. A failure to obtain additional financing when needed could adversely affect our ability to maintain and grow our business.

 

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

The market for insulation products utilizing aerogel blankets is relatively undeveloped. Accordingly, our future results of operation will depend in large part on our ability to gain market share of the global energy infrastructure insulation market. Our ability to gain market share in this market is highly dependent on the acceptance of our products by large, well-established end-users, distributors, contractors and OEMs. The energy infrastructure insulation market has historically been slow to adopt new technologies and products. Most insulation types currently in use in these markets have been in use for over 50 years. In addition, there is a tendency of end-users in some of our markets to opt for the frequently lower short-term costs of traditional insulation materials. If we fail to successfully educate existing and potential end-users, distributors, contractors and OEMs 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.

In particular, because we are still often 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 or competing technologies and products would result in a lower revenue growth rate or decreased revenue, either of which could materially adversely affect our business and results of operations.

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

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

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

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

 

   

improve our existing, and implement additional, managerial capabilities, manufacturing, sales and marketing, and engineering operations, research and development capabilities, regulatory compliance systems and financial control and reporting systems;

 

   

expand our manufacturing and distribution 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. At certain points in the past, significant growth in demand for our product has put our management and manufacturing systems under strain. As a result, there have been periods of time when we have had difficulty

 

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consistently producing product that met our specifications. In addition, the physical expansion of our operations may lead to significant costs and may divert our management and business development resources. Furthermore, we compete for personnel and advisors with other companies and other organizations, many of which are larger and have greater name recognition and financial and other resources than we do. Due to our limited resources, we may not be able to effectively manage the expansion of our operations or recruit and adequately train additional qualified personnel or retain personnel. Any inability to manage growth could result in a loss of existing customers and revenues and delay the execution of our business plans, disrupt our operations or result in financial, contractual or other liabilities. 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 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 customers. 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.

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

Our results of operations have been, and may in the future be, adversely affected by general economic conditions and the cyclical pattern of certain industries in which our customers and end-users operate. Demand for our products and services depends in large part upon the level of capital and maintenance expenditures by many of our customers and end-users, in particular those in the energy, petrochemical and power generation industries, and firms that design, construct and operate facilities for these industries. These customers’ expenditures historically have been cyclical in nature and vulnerable to economic downturns. In particular, profitability in the energy industry is highly sensitive to supply and demand cycles and commodity prices, which historically have been volatile; and our customers in this industry historically have tended to delay large capital projects, including expensive maintenance and upgrades, during industry downturns. Customer project delays may cause fluctuations in the timing or the amount of revenue earned and our results of operations in a particular period. Prolonged periods of little or no economic growth could decrease demand for oil and gas which, in turn, could result in lower demand for our products and a negative impact on our results of operations and cash flows. In addition, this historically cyclical demand and potential customer project delays may lead to significant shifts in our results of operations from quarter to quarter, which limits our ability to make accurate long-term predictions about our future performance. We estimate that sales to end-use customers in the energy industry accounted for approximately 87% of our 2013 revenues and we expect that they will account for a significant portion of our future revenues.

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

Demand for a significant portion of our products and services depends upon the level of capital expenditure by companies in the energy industry, which depends, in part, on energy prices. Prices of oil and gas have been very volatile over the past three years, with significant increases until achieving historic highs in July 2008, followed immediately by a steep decline through 2009, a moderate increase throughout 2010 and continued volatility from 2011 through 2013. A sustained downturn in the capital expenditures of our customers, whether due to a decrease in the market price of oil and gas or otherwise, may delay projects, decrease demand for our products and services and cause downward pressure on the prices we charge, which, in turn, could have a material adverse effect on our business, financial condition and results of operations. Such downturns, including the perception that they might continue, could have a significant negative impact on the market price of our common stock.

 

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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.

A substantial portion of our sales are to shipment destinations outside the United States, including in Canada, Taiwan, Brazil, South Korea, Norway, Japan, Germany, Singapore, India and the United Kingdom. Total revenue generated from outside of the United States, based on our shipment destination or research services location, amounted to $30.8 million or 67% of revenue, $43.5 million or 69% of revenue, and $55.9 million or 65% of revenue, in the years ended December 31, 2011, 2012 and 2013, respectively. In addition, we may expand our operations outside of the United States, including our manufacturing operations in connection with our planned second manufacturing facility expected to be located in Europe or Asia. As a result, we are subject to a number of risks, including, but not limited to:

 

   

labor rules and collective bargaining arrangements in foreign jurisdictions, particularly with respect to our planned second manufacturing facility in Europe or Asia;

 

   

difficulty in staffing and managing (including ensuring compliance with internal policies and controls) geographically widespread operations;

 

   

the effect of applicable U.S. and 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;

 

   

trade relations between the United States and those foreign countries in which our customers and suppliers have operations, including protectionist measures such as tariffs and import or export licensing requirements;

 

   

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;

 

   

difficulty in the enforcement of contractual obligations in non-U.S. jurisdictions and the collection of accounts receivable from foreign accounts;

 

   

different regulatory regimes in the various countries in which we operate or sell our products;

 

   

inadequate intellectual property protection in foreign countries;

 

   

the difficulties and increased expense in complying with multiple and potentially conflicting domestic and foreign laws, regulations, product approvals and trade standards, including the U.S. Foreign Corrupt Practices Act and similar anti-bribery laws in non-U.S. jurisdictions, as well as the rules and regulations of the U.S. Office of Foreign Assets Control and similar sanctions laws;

 

   

foreign currency exchange controls, restrictions and fluctuations, which could result in reduced revenue and increased operating expense;

 

   

transportation delays or interruptions; and

 

   

terrorist activity and political unrest, particularly given the use of our products at energy facilities.

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

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

We operate on a global basis, with 68% of our product sales in 2013 being made to destinations outside the United States, including Canada, Europe, Asia, South America and the Middle East. Our business operations and sales in countries outside the United States are subject to anti-corruption, anti-bribery and anti-kickback laws and regulations, including restrictions imposed by the Foreign Corrupt Practices Act, or FCPA, as well as the United Kingdom Bribery Act of 2010, or UK Bribery Act. The FCPA, UK Bribery Act, and similar anti-corruption, anti-bribery and anti-kickback laws in other jurisdictions generally prohibit companies and their intermediaries and agents from making improper payments to government officials or any other persons for the purpose of obtaining or retaining business. We operate and sell our products in many parts of the world that have

 

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experienced governmental corruption to some degree and, in certain circumstances, strict compliance with anti-corruption, anti-bribery and anti-kickback laws may conflict with local customs and practices. We train our employees concerning anti-corruption, anti-bribery and anti-kickback laws and have policies in place that prohibit employees from making improper payments. We are implementing internal controls and procedures designed to ensure that we comply with anti-corruption, anti-bribery and anti-kickback laws, rules and regulations and mitigate and protect against corruption risks. We cannot provide assurance that our internal controls and procedures will protect us from reckless, criminal or other acts committed by our employees or third-parties with whom we work. If we are found to be liable for violations of the FCPA or similar anti-corruption, anti-bribery and anti-kickback laws in international jurisdictions, either due to our own acts or out of inadvertence, or due to the acts or inadvertence of others, we could suffer criminal or civil fines or penalties or other repercussions, including reputational harm, which could have a material and adverse effect on our business, results of operations and financial condition.

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

We operate on a global basis, with 68% of our product sales in 2013 being made to destinations outside the United States, including Canada, Europe, Asia, South America and the Middle East. We face several risks inherent in conducting business internationally, including compliance with applicable economic sanctions laws and regulations, such as laws and regulations administered by the United States Department of Treasury’s Office of Foreign Assets Control, or OFAC, the United States Department of State and the United States Department of Commerce. We must also comply with all applicable export control laws and regulations of the United States and other countries. Violations of these laws or regulations could result in significant additional sanctions including criminal or civil fines or penalties, more onerous compliance requirements, more extensive debarments from export privileges or loss of authorizations needed to conduct aspects of our international business.

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

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, 2011, 2012 and 2013, total revenue from our top ten direct customers represented 60%, 59% and 65% of our revenues, respectively. In 2011, Enershield Industries Ltd. represented 13% of our total revenue and Aerogel Korea Co., Ltd. represented 10% of our total revenue; in 2012, Distribution International represented 13% of our total revenue; and in 2013, Distribution International, Inc. represented 15% of our total revenue and AllTech Consulting Co., Ltd.

 

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represented 11% 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 direct customer concentration also creates risk for accounts receivable exposure. As of December 31, 2013, three of our direct customers accounted for 20%, 14% and 11% of our accounts receivable, respectively.

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

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

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

We are researching, developing, manufacturing and selling high-performance aerogel insulation products. Rapid and ongoing changes in technology and product standards could quickly render our products less competitive, or even obsolete, particularly if we fail to continue to improve the performance of our insulation products. We are currently developing new applications for our existing products as well as new aerogel technologies; however, we may not be successful in doing so and new applications or technologies may not be commercially useful. Other companies that are seeking to enhance traditional insulation materials have recently introduced or are developing other emerging 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.

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

We face strong competition primarily from established manufacturers of traditional insulation materials. Large producers of traditional insulation materials, such as Johns Mansville, Saint-Gobain, Knauf Gips, Owens Corning and Rockwool, dominate the insulation market. In addition, we face competition from other companies seeking to develop high-performance insulation materials, including aerogel insulation. For example, Cabot Corporation manufactures, markets and sells a different form of aerogel insulation that is competitive with our products, particularly in the offshore oil and gas sector for use in pipe-in-pipe applications. Many of our competitors are substantially larger and better capitalized than we are and possess greater financial resources. In

 

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addition, we are aware of competitors in China that manufacture and market aerogel insulation products. Our competitors could focus their substantial financial resources to develop new or additional competing products or develop products that are more attractive to potential customers than the products that we offer.

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

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 existing or potential distributors, contractors or end-use customers in our target markets that our products are not safe could have a critical impact on our ability to sell our products and to continue as a business. There is risk of an actual or perceived failure of our products or other negative perceptions regarding our products, such as perceived health hazards. For example, dust is produced by our products during their installation and use, which increases the likelihood of the perception of hazard. Another example is the potential for material failure in very high temperature applications. Like most insulation products, our Pyrogel XT and XT-E products will normally go through a controlled burn-in process immediately after exposure to very high temperatures. If installed improperly, the burn-in may proceed too rapidly and the material may become damaged. Further, our competitors have in the past, and may in the future, seek to perpetuate such perceptions. We are currently taking steps to educate our distributors, contractors, OEMs and end-use customers on the nature of our products and the proper installation procedures in order to mitigate these risks. Such an event, or the perception of such an event, could quickly result in our direct and end-use customers replacing our products with traditional insulation materials which could have a material adverse effect on our results of operations.

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

We are subject to numerous health and safety laws and regulations in each of the jurisdictions in which we operate. These health and safety laws and regulations apply to us including with regards to hazardous substances that we use in our manufacturing process and that certain of our products contain. These hazardous substances include titanium dioxide and carbon black, each of which has been determined, in certain forms and at certain levels, to be possibly carcinogenic or otherwise harmful to humans. Our processes also require the use of other regulated substances in raw material delivery and manufacturing, including among others, ethanol. 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. In particular, the construction of our third production line in our East Providence facility will require us to obtain new permits from various regulatory authorities and if the issuance of such permits was delayed or denied, it would slow or potentially prevent the expansion of our manufacturing capacity. Violations of laws, regulations and permit requirements may also result in criminal sanctions or injunctions.

 

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While we use hazardous substances, including titanium dioxide and carbon black, in forms and at levels that are subject to current rules and regulations, such rules and regulations may become more stringent such that we are required to modify our manufacturing process and such that our customers’ use of our products may be impacted. In addition, changes in our production or manufacturing process may result in uses above currently permitted levels. Such uses or changes in rules or regulations could materially adversely affect our business, financial condition and results of operations.

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

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

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

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

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

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

The raw materials used in the production of our products consist primarily of polyester and glass fiber battings, silica precursors and additives. 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. In addition, fluctuations in ethanol prices may affect the cost of silica precursors. 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 ability to meet our delivery schedules on a timely and competitive basis and results of operations.

 

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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.

In particular, we purchase silica precursors from several suppliers, mostly pursuant to individual purchase orders and not pursuant to long-term contracts. We do not have a secure, long-term supply of silica precursors. We may not be able to establish arrangements for secure, long-term silica precursors supplies at prices consistent with our current costs or may incur a delay in supply while we seek alternative sources. Any inability to continue to purchase silica precursors pursuant to purchase orders, without long-term agreements in place, or to otherwise establish a long-term supply of silica precursors at prices consistent with our current costs, would have a material adverse effect on our ability to increase our sales and achieve profitability.

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

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

The qualification process for our products can be lengthy and unpredictable, potentially delaying adoption of our products and incurring significant expense.

Qualification of our products by many of our direct and end-use customers can be lengthy and unpredictable and many of these direct and end-use customers have extended budgeting and procurement processes. This extended sales process requires the dedication of significant time by our personnel and our use of significant financial resources, with no certainty of success or recovery of our related expenses. Furthermore, even after an extensive qualification process, our products may fail to meet the standards sought by our end-use customers and may not be qualified for use by such end-use customers. 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 results of operations.

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.

In order to commercialize our products, we may enter into commercial arrangements with distributors, OEMs or other customers. These agreements have contained, and may in the future 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. These agreements may contain technical specifications or minimum volumes that must be achieved. However, these agreements may not obligate either party to make any purchases. As a result, our ability to commercialize products in a certain region or for a certain application may be limited and as a consequence our business, financial condition and results of operations could be materially adversely affected.

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

We distribute our products through a network of distributors, contractors and OEMs, some of which may not be well-capitalized and may be of a lower credit quality. This direct customer network subjects us to the risk

 

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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 results of operations 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 results of operations and financial condition.

In order to fulfill the product delivery requirements of our direct and end-use customers, we plan for working capital needs in advance of customer orders. As a result, we base our funding and inventory decisions on estimates of future demand. If demand for our products does not increase as quickly as we have estimated or drops off sharply, our inventory and expenses could rise, and our business and results of operations could suffer. Alternatively, if we experience sales in excess of our estimates, our working capital needs may be higher than those currently anticipated. Our ability to meet this excess customer demand depends on our ability to arrange for additional financing for any ongoing working capital shortages, since it is likely that cash flow from sales will lag behind these investment requirements. To meet any ongoing working capital shortages, we may rely on our revolving credit facility; however, the credit available under this facility at any given time may not be able to meet our needs for working capital. In addition, the facility will mature on July 27, 2014 and we may not be able to extend or replace the facility upon expiration. 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 results of operations and financial condition.

Breakdowns, security breaches and other disruptions of our information technology systems could compromise our information and expose us to liability, which would cause our business and reputation to suffer.

In the ordinary course of our business, we collect and store sensitive data, including intellectual property, our proprietary business information and that of our suppliers, customers and business partners, and personally identifiable information. The secure maintenance of this information is critical to our operations and business strategy. Despite our security measures, our information technology and infrastructure may be vulnerable to breakdowns, attacks by hackers or breaches due to employee error, malfeasance or other disruptions. Any such breakdown or breach could compromise our networks and the information stored there could be accessed, publicly disclosed, lost or stolen. There can be no assurance that our management or diligence efforts will prevent such breakdowns or breaches in our systems. Any such access, disclosure or other loss of information could result in legal claims or proceedings, liability under laws that protect the privacy of personal information or other laws, disrupt our operations and damage our reputation, which could adversely affect our business.

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 results of operations.

Costs of compliance with regional, national, state and local existing and future environmental laws and regulations could adversely affect our cash flow and results of operations. We are required to comply with numerous environmental laws and regulations and to obtain numerous governmental permits in order to operate our facilities and in connection with the design, development, manufacture and transport of our products and the storage, use, handling and disposal of hazardous substances, including environmental 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

 

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reinterpreted and new laws and regulations could be adopted or become applicable to us or 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 results of operations.

In addition, private lawsuits, including claims for remediation of contamination, personal injury or property damage, or actions by regional, national, state and local regulatory agencies, including enforcement or cost-recovery actions, may materially increase our costs. Certain environmental laws make us potentially liable on a joint and several basis for the remediation of contamination at or emanating from properties or facilities we currently or formerly owned or operated or properties to which we arranged for the disposal of hazardous substances. Such liability may require us to pay more than our fair share and could require us to address contamination caused by others. For example, the site of our East Providence facility contains certain levels of contamination caused by prior third-party activities on and near the site. Such contamination remains in place under a state-approved deed restriction, and we are required to comply with such deed restriction and the accompanying soil management plan. In general, the deed restriction prohibits the residential use of the property and the use of groundwater as potable water, and requires the maintenance of engineering controls and annual inspections to help prevent exposure to contaminated soils. The soil management plan requires us to notify the state environmental agency with respect to any soil excavation, stockpiling, sampling and off-site disposal of excavated soil. Although we have not had to make material expenditures to satisfy these requirements to date, in the future, we may incur additional costs to comply with these requirements and failure to do so could disrupt the operation of our facility or could subject us to liability for environmental remediation. We may incur liability relating to the remediation of contamination, including contamination we did not cause.

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

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

 

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attention and resources. In addition, many of our products are integrated into the final products of our customers. The integration of our products may entail the risk of product liability or warranty claims based on malfunctions or hazards from both our products and the final products of our customers.

A material product liability claim may seriously harm our results of operations, as well as damage our customer relationships and reputation. Although we carry general liability insurance, our current insurance coverage could be insufficient to protect us from all liability that may be imposed under these types of claims. Insurance coverage is expensive, may be difficult to obtain and may not be available in the future on acceptable terms or at all. Our distributors, contractors, OEMs 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.

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

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

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

Our contracts with U.S. government agencies are subject to the availability of appropriated funds. The U.S. government funds our contract research work through a variety of funding programs that rely on monies appropriated by Congress. At any point, the availability of funding could change, thus reducing the opportunities for new or continued revenues to us from government contract work. Revenue from contracts with U.S. government agencies constituted 7.0%, 4.8% and 4.7% of total revenue in 2011, 2012 and 2013, respectively. 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.

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.

 

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Our revolving credit facility and subordinated notes contain financial and operating restrictions that may limit our access to credit. If we fail to comply with covenants in our revolving credit facility or subordinated notes, we may be required to repay our indebtedness thereunder, which may have an adverse effect on our liquidity.

Provisions governing our revolving credit facility and our subordinated notes 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.

Our revolving credit facility and subordinated notes 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, subordinated notes and convertible notes, which would require us to pay all amounts outstanding. Such an event may also lead our lenders to exercise their security interest in our assets, including all of our intellectual property and all of our real property and equipment at our East Providence facility. If an event of default occurs, we may not be able to cure it within any applicable cure period, if at all. If the maturity of our indebtedness is accelerated, we may not have sufficient funds available for repayment or we may not have the ability to borrow or obtain sufficient funds to replace the accelerated indebtedness on terms acceptable to us, or at all. We intend to use a portion of the proceeds from this offering to repay our subordinated notes and amounts outstanding under our revolving credit facility.

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

 

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inability to attract or retain other qualified personnel or advisors could have a material adverse effect on our business, financial condition and results of operations and could significantly reduce our ability to manage our operations and implement our strategy.

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

We performed analyses 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 these analyses, 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. 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. We also determined that we had built-in gains of $29.5 million at the date of that 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, which period ended in June 2013. As a result, the entire $29.5 million of net operating losses expired unutilized in June 2013.

At December 31, 2013, we had $173.3 million of net operating losses available to offset future federal income, if any, which expire on various dates through December 31, 2033. We expect to have another ownership change occur in connection with this offering. Accordingly, we expect a significant portion of these net operating losses will likely expire unutilized.

Risks Related to Our Intellectual Property

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

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

Where we consider it appropriate, our strategy is to seek patent protection in the United States and other countries on technologies used in or relating to our aerogel product forms, applications and manufacturing technologies. As of April 15, 2014, we had 21 issued U.S. patents and 30 issued foreign patents, including two U.S. patents and one European patent that we co-own with third parties. The issuance of a patent is not conclusive as to its scope, validity or enforceability. Thus, any patent held by us or to be issued to us from a pending patent application, could be challenged, invalidated or held unenforceable in litigation or proceedings before the U.S. Patent and Trademark Office and/or other patent tribunals. Third parties could develop technologies that circumvent the patent protection we have secured. No consistent policy regarding the breadth of patent claims has emerged to date in the United States and the landscape could become more uncertain in view of future rule changes by the 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.

 

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The patent landscape outside the United States is even less predictable. As a result, the validity and enforceability of patents cannot be predicted with certainty. For example, we are aware of competitors that manufacture and market aerogel insulation products in China, where it may be difficult for us to enforce our intellectual property rights against these or other competitors. In 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. Our strategy is to seek registration of trademarks for our brands in many, but not all of the jurisdictions in which we sell our products based on various factors, including our sales volumes in the jurisdiction, our ability to enforce local laws and cost. Our strategy may not be adequate to protect our brands in all circumstances, especially in foreign jurisdictions.

As of April 15, 2014, we had 13 pending U.S. patent applications and 5 pending foreign patent applications, as well as 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 technologies that support our current business, as well as aspects of products under development or contemplated for the future. The issuance of patents from these applications involves complex legal and factual questions and, thus, we cannot 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, relevant foreign patent offices and other relevant patent tribunals may deny or require significant narrowing of claims in our pending patent applications. Patents issued as a result of any of our pending patent applications may not cover our enabling technology and/or the products or processes that support our current or future business or afford us with significant commercial protection against others with similar technology. Proceedings before the 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 technologies that we employ. In such event, we may need to obtain licenses for these technologies. However, we may not be able to obtain licenses on reasonable terms, if at all, which could limit our ability to manufacture our current and/or future products and operate our business.

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

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

Moreover, when we develop new technologies using U.S. government funding, the government may obtain certain rights in any resulting patents, technical data and/or other confidential and proprietary information,

 

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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, inventions must be reported promptly to the funding agencies, the federal funding must be disclosed in any resulting patent applications, and our rights in such inventions will normally be subject to government license rights, periodic post-contract utilization reporting, foreign manufacturing restrictions and “march-in” rights. March-in rights refer to the right of the U.S. government to require us to grant a license to the technology to a responsible applicant or, if we refuse, the government may grant the license itself. The U.S. government may exercise its march-in rights if it determines that action is necessary because we fail to achieve practical application of any technology developed under contract with the government or because action is necessary to alleviate health or safety needs, to meet requirements of federal regulations or to give preference to United States industry. The U.S. government may also have the right to disclose our confidential and proprietary information to third parties. In addition, failure to comply with all the government contract requirements may result in us losing the patent rights.

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

Furthermore, there could be disputes between us and a private third party as to the ownership rights to any inventions that we develop in collaboration with such third party. Any such dispute may cause us to incur substantial costs, 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 technologies used to produce our aerogel products and believe that we have already developed, and will continue to develop, significant know-how related to these technologies. However, trade secrets can be difficult to protect. We may not be able to maintain the secrecy of this information and competitors may develop or acquire equally or more valuable information related to the manufacture of comparable aerogel products. Our strategy for scale-up of commercial production will continue to require us to share confidential and proprietary information with the U.S. government and other third parties. While we take reasonable efforts to protect our trade secrets, our employees, consultants, contractors or scientific and other advisors, or those of our business partners, may intentionally or inadvertently disclose our confidential and proprietary information to competitors. Any enforcement of claims by us that a third party has obtained and is using our trade secrets is expensive, time consuming and uncertain. In addition, foreign courts are sometimes less willing than United States courts to protect trade secrets.

We require all employees and consultants to execute confidentiality and/or nondisclosure agreements upon the commencement of an employment or consulting arrangement with us, which agreements generally require that all confidential and proprietary information developed by the individual or made known to the individual by us during the course of the individual’s relationship with us be kept confidential and not disclosed to third parties. These agreements further generally provide that inventions conceived by the individual in the course of rendering services to us will be our exclusive property. Nevertheless, these agreements may not be honored and our confidential and proprietary information may be disclosed, or these agreements may be unenforceable or difficult to enforce. We also require customers and vendors to execute confidentiality and/or nondisclosure

 

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agreements. However, we have not obtained such agreements from all of our customers and vendors. Moreover, some of our customers may be subject to laws and regulations that require them to disclose information that we would otherwise seek to keep confidential. Our confidential and proprietary information may be otherwise disclosed without our authorization or knowledge. Moreover, third parties could reverse engineer our manufacturing processes, independently develop substantially equivalent confidential and proprietary information or otherwise gain access to our trade secrets. 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 invalidate 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 technologies and/or materials being employed by other parties. The steps we have taken or will take may not prevent unauthorized use of our intellectual property rights, particularly in foreign countries where enforcement of intellectual property rights may be more difficult than in the United States.

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

In the event that the manufacture, use and/or sale of our products or technologies is challenged, or if our product forms or technologies conflict with patent rights of others or our operations conflict with trademark or similar rights of others, third parties could bring legal actions against us in the United States, Europe or other countries, claiming damages and seeking to enjoin the manufacturing and/or marketing of our products. In addition, it is not possible to predict with certainty what patent claims may arise from pending patent applications of third parties. In the United States, for example, patent prosecution can proceed in secret prior to issuance of a patent, provided such application is not filed in a foreign jurisdiction. For U.S. patent applications that are also filed in foreign jurisdictions, such patent applications will not be published until 18 months from the filing date of the application. As a result, third parties may be able to obtain patents with claims relating to our product forms, applications and/or manufacturing processes which they could attempt to assert against us or our end-users. In 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 such 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 (otherwise known as non-practicing entities or patent “trolls”) or other adverse patent owner who has no relevant product revenues and against which our patents may provide little or no deterrence. If we are found to infringe any patents, we could be required to:

 

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pay substantial monetary damages, including lost profits, reasonable royalties and/or treble damages if an infringement is found to be willful;

 

   

totally discontinue or substantially modify any products or processes that are found to be in violation of another party’s intellectual property rights; and/or

 

   

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 the products, and typically up to the amount of the purchase price paid for the product. The expense of defending these claims may adversely affect our results of operations.

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 loss of the intellectual property rights granted to us thereunder, including as a result of ineffective protection of such rights by Cabot or a breach of or dispute under the agreement by either party would have a material adverse impact on our financial condition, results of operations and growth prospects, and might prevent us from continuing our business. For a more detailed description of the cross license agreement with Cabot, see “Business — Intellectual Property — Cross License Agreement with Cabot Corporation.”

Risks Related to Our Common Stock and This Offering

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 results of operations.

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 of 2002 (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. This requirement will first apply to our Form 10-K for our fiscal year ended December 31, 2015. In addition, upon the later of our second annual report or the first annual report required to be filed with the SEC following the date we are no longer an “emerging growth company” as defined in the JOBS Act, the independent registered public accounting firm auditing our financial statements will be required to attest to and report on the effectiveness of our internal control over financial reporting. The process of improving 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 additional 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 may be forced to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage.

 

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

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, 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, which would be for the fiscal year ended December 31, 2015, and in each year thereafter. Our independent registered public accounting firm will not be required to formally attest to the effectiveness of our internal control over financial reporting until the later of our second annual report or the first annual report required to be filed with the SEC following the date we are no longer an “emerging growth company,” as defined in the JOBS Act. These assessments will be required 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, 2013, one significant deficiency in internal controls was identified in connection with the preparation of our financial statements. In light of our becoming a public company, we determined that we had a significant deficiency relating to our need for additional accounting and financial reporting staff. We have taken actions to remediate this significant deficiency, including hiring external consultants to provide additional resources in connection with the 2013 year-end and commencing the hiring process for additional full-time financial and accounting staff. We cannot assure you that there will not be material weaknesses or other significant deficiencies in our internal controls in the future.

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. We may not 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. 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, 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 SEC action, ineligibility for short form resale registration, the suspension or delisting of our common stock from The New York Stock Exchange, and the inability of registered broker-dealers to make a market in our common stock, which would further reduce our stock price and could harm our business.

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

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

 

   

not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, as described above;

 

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reduced disclosure obligations regarding executive compensation in this prospectus and our periodic reports and proxy statements; and

 

   

exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved.

We will remain an emerging growth company until the earliest to occur of (i) the end of the fiscal year for which we report $1.0 billion or more in annual revenues, (ii) the end of the fiscal year in which the market value of our common stock held by non-affiliates exceeds $700 million on the last business day of our second fiscal quarter, (iii) our issuance, in a three year period, of more than $1.0 billion of non-convertible debt, and (iv) December 31, 2019. Even after we no longer qualify as an emerging growth company, we may still qualify as a “smaller reporting company” which would allow us to take advantage of many of the same exemptions from disclosure requirements, including not being required to complying with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act and reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements. We cannot predict if investors will find our common stock less attractive because we may rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile.

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 infrastructure 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 markets;

 

   

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;

 

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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. 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.

After this offering, our officers, directors and principal stockholders and their affiliates collectively will control approximately     % of our outstanding common stock (or     % if the underwriters exercise in full their option to purchase additional shares). 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.

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 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;

 

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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.”

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

Our restated certificate of incorporation provides that, subject to limited exceptions, a state or federal court located within the State of Delaware will be the exclusive forum for (1) any derivative action or proceeding brought on our behalf, (2) any action asserting a claim of breach of a fiduciary duty owed by any of our directors, officers or other employees to us or our stockholders, (3) any action asserting a claim against us arising pursuant to any provision of the Delaware General Corporation Law, our restated certificate of incorporation or our amended and restated by-laws, or (4) any other action asserting a claim against us that is governed by the internal affairs doctrine. Any person or entity purchasing or otherwise acquiring any interest in shares of our capital stock shall be deemed to have notice of and to have consented to the provisions of our restated certificate of incorporation described above. This choice of forum provision may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers or other employees, which may discourage such lawsuits against us and our directors, officers and employees. Alternatively, if a court were to find these provisions of our restated certificate of incorporation inapplicable to, or unenforceable in respect of, one or more of the specified types of actions or proceedings, we may incur additional costs associated with resolving such matters in other jurisdictions, which could adversely affect our business and financial condition.

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 upon conversion of our preferred stock (including shares of Series C preferred stock issuable upon the assumed exercise of all of our

 

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outstanding warrants to purchase Series C preferred stock in connection with this offering) 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 99,354 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              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.

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                     , 2014, but will own only     % of our outstanding shares upon completion of this offering.

Since we 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 and our subordinated notes restrict our ability to pay dividends and any future credit facilities, loan agreements, debt instruments or other agreements may further restrict our ability to pay dividends. Payments of future dividends, if any, will be at the discretion of our board of directors after taking into account various factors, including our business, results of operations and financial condition, current and anticipated cash needs, plans for expansion and any legal or contractual limitations on our ability to pay dividends. As a result, capital appreciation, if any, of our common stock will be 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, in particular in energy infrastructure facilities;

 

   

our belief that our products possess strong competitive advantages over traditional insulation materials, including the superior thermal performance and the thin, easy-to-use and durable blanket form of our products;

 

   

our expectation that our planned third production line will be completed in the first half of 2015, with the additional expenditures for the design, development and construction of this line totaling approximately $30 million;

 

   

our expectation that our planned third production line will increase our capacity by 25% to 50 million to 55 million square feet of aerogel blankets;

 

   

our plans to construct a second manufacturing facility in Europe or Asia, the location of which will be based on factors including labor and construction costs, availability of governmental incentives and proximity to raw material suppliers;

 

   

our expectation that the first production line at the planned second manufacturing facility will become operational during 2017;

 

   

our estimate that design, development and construction costs for this second manufacturing facility and its first production line will range from $80 million to $100 million;

 

   

our expectation that our planned second manufacturing facility and its first production line will increase our annual nameplate capacity by 26 million to 28 million square feet of aerogel blankets;

 

   

our belief that we can finance our planned second manufacturing facility and its first production line with, in addition to the proceeds from this offering, anticipated cash flows from operations, local government grants and debt financing;

 

   

our belief that our aerogel products and manufacturing processes are proprietary and that we can protect our patents, trade secrets and know-how associated therewith;

 

   

our belief that we can continue to improve the cost efficiency of our manufacturing process;

 

   

our belief that our products have the lowest cost on a fully-installed basis or offer significant life-cycle cost savings in energy infrastructure and certain other applications as compared to traditional insulation materials;

 

   

the expected future development of new aerogel technologies; and

 

   

our expectations about limitations of net operating losses in connection with this offering.

 

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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:

 

   

approximately $30 million of the net proceeds we receive from this offering to fund the additional expenditures necessary for the design, development and construction of our third production line in East Providence;

 

   

approximately $              million of the net proceeds to repay any amounts outstanding under our revolving line of credit, which matures on July 27, 2014 and bears interest at the greater of the prime rate or 4% (which at December 31, 2013 was 4% per annum and which is also the weighted average rate), plus 1.0% per annum, and approximately $19 million of the net proceeds to repay our subordinated notes due September 2014, which bear interest at a rate of 20% per annum; and

 

   

the remaining net proceeds for general corporate purposes, which will include funding a portion of the design, development and construction of our planned second production plant in Europe or Asia after completion of our third production line.

We anticipate initial operation of a first production line at this second production plant during 2017. Based on our preliminary plans for this plant, our projected cost to construct an initial production line and plant infrastructure is $80 million to $100 million, of which we expect approximately $         million to $         million to be funded by the net proceeds of this offering. We expect that the remaining $         million to $         million required to construct an initial production line and plant infrastructure will be funded by anticipated cash flows from operations, local government grants and debt financings. See “Risk Factors—Risks Related to Our Business and Strategy—We will require significant additional capital to pursue our growth strategy beyond the construction of our third line in our East Providence facility, but we may not be able to obtain additional financing on acceptable terms or at all.”

 

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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, for use in the operation and expansion of our business and to finance our research and development efforts and do not anticipate declaring or paying cash dividends in the foreseeable future.

The convertible note purchase agreements related to the convertible notes, the revolving credit facility and the note purchase agreement related to the subordinated notes 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. Our convertible notes will automatically convert into common stock with the consummation of this offering. We intend to repay our subordinated notes with a portion of the proceeds from this offering.

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 capitalization as of December 31, 2013:

 

   

on an actual basis;

 

   

on an as adjusted basis (a) assuming the exercise for cash of all of our outstanding warrants to purchase Series C preferred stock and (b) giving effect upon the completion of this offering to;

 

   

the automatic conversion of all shares of our preferred stock into             shares of our common stock;

 

   

the automatic conversion of our convertible notes and all accrued but unpaid interest thereon into             shares of our common stock; and

 

   

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 and the use of a portion of the proceeds therefrom to repay all outstanding amounts under our revolving credit facility and under our subordinated notes due September 2014.

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 as adjusted 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 December 31, 2013  
     Actual     As adjusted  
     (Unaudited)
(In thousands, except
share and per share data)
 

Cash(1)

   $ 1,574      $                
  

 

 

   

 

 

 

Debt:

    

Capital leases

   $ 240      $                

Revolving Credit Facility(2)

     1,000     

Subordinated Notes(2)

     17,306     

Convertible notes(3)

     120,009     
  

 

 

   

 

 

 

Total debt

   $ 138,555      $                
  

 

 

   

 

 

 

Stockholders’ (deficit) equity:

    

Series A preferred stock, $0.00001 par value; 5,284,347 shares authorized, issued and outstanding, on an actual basis; no shares issued or outstanding, as adjusted

     —       

Series B preferred stock, $0.00001 par value; 1,601,053 shares authorized, issued and outstanding, on an actual basis; no shares issued or outstanding, as adjusted

     —       

Series C preferred stock, $0.00001 par value; 116,024,242 shares authorized, 20,000 shares issued and outstanding, on an actual basis; no shares issued or outstanding, as adjusted

     —       

Common stock, $0.00001 par value; 210,888,230 shares authorized, 2,623,156 shares issued and outstanding, on an actual basis; and              shares issued and outstanding, as adjusted(1)(3)(4)

     —       
    

Additional paid-in capital(1)(3)(4)

     270,794     

Accumulated deficit

     (332,760  
  

 

 

   

 

 

 

Total stockholders’ (deficit) equity

   $ (61,966   $                
  

 

 

   

 

 

 

Total capitalization

   $ 76,589      $                
  

 

 

   

 

 

 

 

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(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 each of additional paid-in capital, total stockholders’ equity and total capitalization may increase or decrease. A $1.00 increase (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 as adjusted cash, 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 each of additional paid-in capital, total stockholders’ equity and total capitalization by approximately $         million.

 

(2) A portion of the net proceeds will be used to repay the amounts outstanding under the revolving credit facility and under the subordinated notes, which were              and             , respectively, as of             , 2014.

 

(3) The unpaid principal amount of our convertible notes, together with accrued but unpaid interest thereon (which in each case has been accruing since issuance), will be automatically converted into common stock upon the closing of the offering made hereby, at a conversion price equal to 62.5% of the initial public offering price per share of the common stock 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                     , 2014 closing date of the offering. For each day after the assumed                     , 2014 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.

 

(4) Excludes 80,050,105 shares of our common stock issuable upon the exercise of stock options outstanding as of April 15, 2014 and 112,576 shares of our common stock issuable upon the exercise of warrants to purchase our common stock outstanding as of April 15, 2014.

 

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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 December 31, 2013, our net tangible book value was approximately $(62.2) million, or approximately $(23.71) 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 2,623,156, the number of shares of our common stock outstanding on December 31, 2013. Our pro forma net tangible book value as of December 31, 2013 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 December 31, 2013, after (a) assuming the exercise for cash of all of our outstanding warrants to purchase Series C preferred stock and (b) giving effect to (i) the automatic conversion of all shares of our preferred stock into 96,333,792 shares of our common stock and (ii) the automatic conversion of all outstanding principal and 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 62.5% 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                     , 2014.

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 December 31, 2013 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 December 31, 2013

 

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 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                 , 2014. 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.

 

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The following table shows, as of                     , 2014, 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
per Share
 
     Number    Percentage     Amount      Percentage    

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                     , 2014.

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 December 31, 2013. As of December 31, 2013, we had outstanding options to purchase a total of 80,198,540 shares of our common stock at a weighted-average exercise price of $0.11 per share and 112,576 shares of common stock reserved for issuance upon the exercise of outstanding warrants at a weighted-average exercise price of $0.017 per share. If all such options and warrants had been exercised as of December 31, 2013, 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 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, 2011, 2012 and 2013, and the consolidated balance sheet data as of December 31, 2012 and 2013, 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, 2009 and 2010, and the consolidated balance sheet data as of December 31, 2009, 2010 and 2011, from our audited consolidated financial statements and the related notes thereto that are not included in this prospectus. Our historical results for prior periods are not necessarily indicative of results to be expected for any future period.

 

    Year Ended December 31  
    2009     2010     2011     2012     2013  
    ($ in thousands, except share and per share data)  

Consolidated statements of operations data:

         

Revenue:

         

Product

  $ 24,752      $ 38,690      $ 42,717      $ 60,389      $ 82,057   

Research services

    3,864        4,519        3,233        3,064        4,037   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

    28,616        43,209        45,950        63,453        86,094   

Cost of revenue:

         

Product

    30,462        35,399        47,071        70,025        73,399   

Research services

    1,788        2,119        1,505        1,396        1,964   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit (loss)

    (3,634     5,691        (2,626     (7,968     10,731   

Operating expenses:

         

Research and development

    2,524        2,985        4,085        5,142        5,159   

Sales and marketing

    3,994        4,526        5,565        8,564        9,271   

General and administrative

    5,430        5,675        8,291        11,299        12,833   

Write-off of construction in progress

    —          —          —          —          3,440   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    11,948        13,186        17,941        25,005        30,703   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from operations

    (15,582     (7,495     (20,567     (32,973     (19,972

Other income (expense):

         

Interest expense

    (3,057     (2,415     (8,822     (21,790     (30,599

Gain on extinguishment of convertible notes

    —          —          —          —          8,898   

Loss on exchange of convertible notes

    —          —          —          —          (5,697

Debt extinguishment costs

    —          —          —          (1,379     —     

Costs associated with postponed public offering

    —          —          (3,443     —          (241
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other income (expense), net

    (3,057     (2,415     (12,265     (23,169     (27,639
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

    (18,639     (9,910     (32,832     (56,142     (47,611

Accretion (deemed dividends) on preferred stock

    (2,984     (57,007     (23,665     47,201        (996

Extinguishment of redeemable feature for convertible preferred stock

    —          —          —          —          86,161   

Earnings attributable to preferred stock shareholders

    —          —          —          —          (36,216
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to common stockholders

  $ (21,623   $ (66,917   $ (56,497   $ (8,941   $ 1,338   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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    Year Ended December 31  
    2009     2010     2011     2012     2013  
    ($ in thousands, except share and per share data)  

Per share data:

         

Net income (loss) attributable to common stockholders per share:

         

Basic

  $ (22.17   $ (26.17   $ (21.66   $ (3.41   $ 0.51   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

  $ (22.17   $ (26.17   $ (21.66   $ (3.41   $ 0.49   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average common shares outstanding:

         

Basic

    975,162        2,557,429        2,607,888        2,622,897        2,623,156   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

    975,162        2,557,429        2,607,888        2,622,897        2,722,947   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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  
     2009      2010     2011     2012     2013  
     ($ in thousands)  

Consolidated balance sheet data:

           

Cash

   $ 27,502       $ 26,800      $ 11,241      $ 1,343      $     1,574   

Working capital(2)

     21,766         24,723        12,532        1,132        (3,460

Total assets

     64,735         88,795        102,154        95,301        90,442   

Total debt

     575         8,139        60,462        110,083        138,555   

Redeemable preferred stock

     31,681         109,786        133,451        86,250        —     

Total stockholders’ (deficit) equity

     6,153         (58,103     (113,513     (120,795     (61,966

 

(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 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.
(2) Working capital means current assets minus current liabilities.

 

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The following table presents the calculation of historical and pro forma basic and diluted net income (loss) per share:

 

    Year Ended December 31  
    2009     2010     2011     2012     2013  
    ($ in thousands, except share and per share data)  

Net income (loss) attributable to common stockholders

  $ (21,623   $ (66,917   $ (56,497   $ (8,941   $ 1,338   

Deemed dividends (accretion) on preferred stock

    2,984        57,007        23,665        (47,201     996   

Extinguishment of redeemable feature for convertible preferred stock

    —          —          —          —          (86,161

Earnings attributable to preferred stock shareholders

    —          —          —          —          36,216   

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

         

Common shares issued upon conversion of preferred stock

         

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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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 combination of performance attributes unmatched by traditional insulation materials. Our end-use customers select our products where thermal performance is critical and to save money, reduce energy use, preserve operating assets and protect workers.

Our insulation is used by oil producers and the owners and operators of refineries, petrochemical plants, LNG facilities, power generating assets and other energy infrastructure. Our Pyrogel and Cryogel product lines were introduced in 2008 and have undergone rigorous technical validation by industry leading end-users and achieved significant market adoption. We also derive product revenue from the building and construction and other end markets. Customers in these markets use our aerogels for applications as diverse as wall systems, military and commercial aircraft, trains, buses, appliances, apparel, footwear and outdoor gear. We estimate that we generated 87% of our 2013 product revenue in the energy infrastructure markets and 13% in the building and construction and other end markets.

We generate product revenue through the sale of our line of aerogel blankets. We market and sell our products primarily through a sales force based in North America, Europe and Asia. In 2013, 68% of our product revenue was generated outside the United States. The efforts of our sales force are supported by a small number of sales consultants with extensive knowledge of a particular market or region. Our sales force is responsible for establishing and maintaining customer and partner relationships, and for delivering highly technical information, and ensuring high quality customer service.

Our salespeople work directly with end-use customers and engineering firms to promote qualification, specification and acceptance of our products. We also rely on an existing and well-established channel of qualified insulation distributors and contractors in more than 30 countries around the world that ensures rapid delivery of our products and strong end-user support. Our salespeople also work to educate insulation contractors about the technical and operating cost advantages of our aerogel blankets.

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

We manufacture our products using our proprietary process and technology at our facility in East Providence, Rhode Island. We have operated the East Providence facility at high volume and high yield since 2008. We commenced operation of a second production line at this facility at the end of March 2011, which doubled our annual nameplate capacity to 40 million to 44 million square feet of aerogel blankets, depending on product mix.

 

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Our proprietary aerogel technology and manufacturing processes are significant assets. Our intellectual property portfolio is supported by 51 issued patents, with an additional 18 pending in the U.S. and foreign jurisdictions in areas related to product design, chemistry, manufacturing process and application. Our research scientists and process engineers are focused on developing next generation aerogel compositions, form factors and manufacturing technologies. Since inception through December 31, 2013, we have invested $36.7 million into our research and development activities.

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 December 31, 2013, we have generated $335.2 million in revenue consisting of $290.9 million in product revenue and $44.3 million in research services revenue. As of April 15, 2014, we had 220 employees principally located at two sites in the United States.

Our total revenue has grown from $20.1 million for the year ended December 31, 2008 to $86.1 million for the year ended December 31, 2013. For the year ended December 31, 2012, our total revenue grew 38% to $63.5 million from $46.0 million in 2011. For the year ended December 31, 2013, our total revenue grew 36% to $86.1 million from $63.5 million in 2012.

We have experienced significant losses since inception, have an accumulated deficit of $332.8 million at December 31, 2013, and have ongoing cash flow commitments. We have invested material resources to commercialize aerogel technology and to build a manufacturing infrastructure capable of supplying aerogel products at the volumes and prices required by our customers. We are currently experiencing rapid growth as we strive to serve our expanding customer base.

Factors Affecting Our Performance

Manufacturing Capacity

Our aerogel product revenue increased by 36% in 2013 from 2012 and was in line with our compound annual growth rate of 37% over our last five years. To meet anticipated continued growth in demand for our products, we are engaged in the design, engineering and procurement phase of a third production line in our East Providence facility which we expect to complete in the first half of 2015. We also plan to construct a second manufacturing facility in either Europe or Asia and to commence operations of a first production line at this facility during 2017. We currently estimate that design, development and construction of our third production line in the East Providence facility will require additional expenditures of approximately $30 million. We expect to construct our second manufacturing facility in several phases in order to align manufacturing capacity to anticipated demand for our products. We currently estimate that design, development and construction of an initial production line and plant infrastructure will require expenditures of between $80 million to $100 million. Our ability to successfully bring this capacity online as planned and to ramp-up production in a timely manner will have a significant impact on our financial condition and results of operations.

Revenue Growth

A critical driver to improve our financial performance will be continued revenue growth. We expect that 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 and support sufficient revenue to generate net income will require continued near-term investments in manufacturing facilities, capital equipment, technology and personnel, which will negatively impact net income and cash balances in the short-term, but we expect these investments to be drivers of improved financial performance in the long-term. Our revenue growth is in turn dependent on several factors, including adoption rates of our aerogel products, demand for energy infrastructure insulation and our ability to grow our market share.

 

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Project-Based Revenue

Our product revenue has been and will continue to be generated in large part by demand for insulation associated with large capacity expansions and related capital projects at existing facilities and new-build facility construction. We estimate approximately two-thirds of our product revenue was project-based in 2013. Although we expect to generate a stream of product revenue over time from multiple projects and from numerous customers, the intermittent nature of project-based revenue, including the revenue generated by a single project, could have a material impact on our revenue and results of operations in any given reporting period. In addition, these projects are affected by macroeconomic factors including energy demand and economic growth. Accordingly, our project-based revenue in any given period could also 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.”

Organizational Resources

We plan to expand our resources in support of anticipated growth of our business and to achieve our strategic objectives. We plan to increase our sales force and spending globally to support anticipated growth in demand for our products. We plan to increase engineering resources to manage the anticipated design and construction of a third line in our East Providence facility and a first line in our second manufacturing facility in Europe or Asia. We plan to increase manufacturing staff to support expanded output in our East Providence facility during 2015 and in multi-facility operations in 2017. We intend to increase personnel, funding and capital equipment devoted to the research and development of new and advanced technologies. We also plan to expand general and administrative staff in support of our operating as a public company. 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.

Components of Our Results of Operations

Revenue

We recognize product revenue from the sale of our line of aerogel products and research services revenue from the provision of services under contracts with various agencies of the U.S. government and other institutions. Product revenue is recognized upon transfer of title and risk of loss, which is generally upon shipment or delivery. The following table sets forth the total revenue for the periods presented:

 

     Year Ended December 31  
     2011      2012      2013  
     ($ in thousands)  

Revenue:

        

Product

   $ 42,717       $ 60,389       $ 82,057   

Research services

     3,233         3,064         4,037   
  

 

 

    

 

 

    

 

 

 

Total revenue

   $ 45,950       $ 63,453       $ 86,094   
  

 

 

    

 

 

    

 

 

 

Product revenue accounted for 93%, 95% and 95% of total revenue for the years ended December 31, 2011, 2012 and 2013, respectively. We expect continued growth in product revenue due to increasing market adoption of our line of aerogel blankets supported by increasing demand projected within all segments of the energy infrastructure market. We expect that research services revenue will continue to decline as a percentage of total revenue.

 

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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 65% of our total revenue during the year ended December 31, 2013, and we expect that most of our revenue will continue to come from a relatively small number of customers for the foreseeable future. In 2011, Enershield Industries Ltd. and Aerogel Korea Co., Ltd. represented 13% and 10% of total revenue, respectively; in 2012, Distribution International represented 13% of total revenue; and in 2013, Distribution International and Alltech Consulting Co. Ltd. represented 15% and 11% of total revenue, respectively. 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, 2011, 2012 and 2013. In addition, we may expand our operations outside of the United States. Total revenue from outside of the United States, based on shipment destination or research services location, amounted to $30.8 million or 67% of our total revenue, $43.5 million or 69% of our total revenue, and $55.9 million, or 65% of our total revenue, in the years ended December 31, 2011, 2012 and 2013, respectively.

Cost of Revenue

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

Material is our most significant component of cost of product revenue and includes fibrous batting, silica materials and additives. Material costs as a percentage of product revenue were 53%, 61% and 47% for the years ended December 31, 2011, 2012 and 2013, respectively. Material costs as a percentage of product revenue vary from product to product due to differences in average selling prices, material requirements, blanket thickness and manufacturing yields. As a result, material costs as a percentage of revenue will vary from period to period due to changes in the mix of aerogel products sold. However, in general, we expect material costs in the aggregate to decline as a percentage of revenue as we seek to achieve higher selling prices, material sourcing improvements, new material sources and manufacturing yield enhancements for our aerogel products.

Manufacturing expense is also a significant component of cost of revenue. Manufacturing expense as a percentage of product revenue was 58%, 56% and 42% for the years ended December 31, 2011, 2012 and 2013, respectively. We incurred a significant increase in manufacturing expense associated with the operation of our second production line in the East Providence facility beginning in 2011. These costs were principally fixed in nature and constituted an increased percentage of product revenue during 2011 and 2012 as we increased production toward nameplate capacity. During 2013, manufacturing expense decreased as a percentage of product revenue as a result of strong revenue growth supported by the expanded manufacturing capacity and improved manufacturing productivity. As we continue to increase manufacturing capacity in our East Providence facility and a second plant, we expect manufacturing expense as a percentage of product revenue will increase in the near-term following each expansion but will decrease in the long-term with increased revenues supported by the effect of completed capacity expansions.

Cost of revenue for our research services revenue consists primarily of direct labor costs of research personnel committed to funded research and development contracts, as well as third-party consulting, and associated direct material costs. This cost of revenue also includes overhead expenses associated with project resources, engineering tools and supplies. Cost of revenue for our research services revenue is recorded when the related research services revenue is recognized.

Gross Profit

Our gross profit as a percentage of revenue is affected by a number of factors, including the mix between product revenue and research services revenue, the mix of aerogel products sold, average selling prices, average

 

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material costs, our actual manufacturing costs and the costs associated with expansions and start-up of production capacity. As we continue to build out our manufacturing capacity, we expect increased manufacturing expenses will periodically have a negative impact on gross profit, but will set the framework for improved gross profit moving forward. Accordingly, we expect our gross profit in absolute dollars and as a percentage of revenue to vary from period to period as we expand our manufacturing capacity. However, in general, following the completion of our capacity expansions, we expect gross profit to improve as a percentage of revenue in the long-term due to increases in manufacturing productivity, increased production volumes, improved manufacturing yields and material purchasing efficiencies.

Operating Expenses

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

Research and Development Expenses

Research and development expenses consist primarily of expenses for personnel engaged in the development of next generation aerogel compositions, form factors and manufacturing technologies. These expenses also include testing services, prototype expenses, consulting services, equipment depreciation, facilities costs and related overhead. We expense research and development costs as incurred. We expect to continue to devote substantial resources to the development of new aerogel technology. We believe that these investments are necessary to maintain and improve our competitive position. We expect that our research and development expenses will 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 costs, incentive compensation, marketing programs, travel and related costs, consulting expenses and facilities-related costs. We plan to expand our sales force and sales consultants globally to drive anticipated growth in customers and demand for our products. We expect that sales and marketing expenses will continue to increase in absolute dollars but decrease as a percentage of revenue in the long-term.

General and Administrative Expenses

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

Other Income (Expense)

Other income (expense) consists of (i) interest expense consisting primarily of fair market value adjustments to our subordinated notes, convertible notes and the issuance of our Series C warrants, subordinated and convertible

 

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note issuance costs, the amortization of the subordinated note debt discount, and imputed interest on our obligations under our cross license agreement with Cabot Corporation, (ii) gains or losses on extinguishment or exchange of subordinated notes and convertible notes and (iii) costs associated with a postponed public offering.

Provision for Income Taxes

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

Key Metrics and Non-GAAP Financial Measures

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

Square Foot Operating Metric

We price our product and measure our product shipments in square feet. We have produced in excess of 100 million square feet of aerogel blankets in the East Providence facility since 2008. Our annual production capacity is currently 40 million to 44 million square feet of aerogel blankets, depending on product mix. We believe the square foot operating metric allows us and our investors to measure the growth in our manufacturing capacity and product shipments on a uniform and consistent basis. The following chart sets forth product shipments associated with recognized revenue in square feet for the periods presented:

 

     Year Ended December 31  
     2011      2012      2013  
     (Square feet in thousands)  

Product shipments in square feet

     19,473         27,280         35,560   

Adjusted EBITDA

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

We use Adjusted EBITDA:

 

   

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.

 

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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. See footnote (3) under “Prospectus Summary –Summary Consolidated Financial Data” for a discussion of the limitations of Adjusted EBITDA.

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 years presented:

 

     Year Ended December 31  
     2011     2012     2013  
     ($ in thousands)  

Net income (loss)

   $ (32,832   $ (56,142   $ (47,611

Interest expense

     8,822        21,790        30,599   

Depreciation and amortization

     7,521        9,684        10,061   

Loss on disposal of assets

     —          2,489        230   

Stock-based compensation(1)

     1,064        1,654        4,426   

Gain on extinguishment of convertible notes

     —          —          (8,898

Loss on exchange of convertible notes

     —          —          5,697   

Debt extinguishment costs

     —          1,379        —     

Write-off of costs associated with postponed public offering

     3,443        —          241   

Write-off of construction in progress

     —          —          3,440   
  

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

   $ (11,982   $ (19,146   $ (1,815
  

 

 

   

 

 

   

 

 

 

 

(1) Represents non-cash stock-based compensation related to vesting and modifications of stock option grants.

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

 

    Three Months Ended  
    2012     2013  
    March 31     June 30     Sept. 30     Dec. 31     March 31     June 30     Sept. 30     Dec. 31  
    ($ in thousands)  

Net income (loss)

  $ (9,645   $ (12,279   $ (10,218   $ (24,000   $ 1,027      $ (18,984   $ (12,704   $ (16,950

Interest expense(1)

    2,110        3,447        1,513        14,720        (3,366     15,620        8,039        10,306   

Depreciation and amortization

    2,142        2,346        2,564        2,632        2,469        2,479        2,483        2,630   

Loss on disposal of assets

    —          —          —          2,489        —          —          —          230   

Stock-based compensation(2)

    299        431        438        486        495        510        2,916        505   

Gain on extinguishment of convertible notes

    —          —          —          —          (8,898     —          —          —     

Loss on exchange of convertible notes

    —          —          —          —          5,212        485        —          —     

Debt extinguishment costs

    —          —          1,379        —          —          —          —          —     

Costs associated with postponed public offering

    —          —          —          —          —          241        —          —     

Write-off of construction in progress

    —          —          —          —          —          —          —          3,440   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

  $ (5,094   $ (6,055   $ (4,324   $ (3,673   $ (3,061   $ 351      $ 734      $ 161   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)

Interest expense consists primarily of fair market value adjustments related to our subordinated notes, convertible notes and the issuance of our Series C warrants, subordinated note and convertible note issuance

 

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  costs, the amortization of the subordinated note debt discount and imputed interest on our obligations under our cross license agreements with Cabot Corporation.
(2) Represents non-cash stock-based compensation related to vesting and modifications of 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.

Emerging Growth Company Status

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

Results of Operations

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

 

     Year Ended December 31  
     2011     2012     2013  
     ($ in thousands)  

Revenue:

      

Product

   $ 42,717      $ 60,389      $ 82,057   

Research services

     3,233        3,064        4,037   
  

 

 

   

 

 

   

 

 

 

Total revenue

     45,950        63,453        86,094   

Cost of revenue:

      

Product

     47,071        70,025        73,399   

Research services

     1,505        1,396        1,964   
  

 

 

   

 

 

   

 

 

 

Gross profit (loss)

     (2,626     (7,968     10,731   

Operating Expenses:

      

Research and development

     4,085        5,142        5,159   

Sales and marketing

     5,565        8,564        9,271   

General and administrative

     8,291        11,299        12,833   

Write-off of construction in progress

     —          —          3,440   
  

 

 

   

 

 

   

 

 

 

Total operating expenses

     17,941        25,005        30,703   
  

 

 

   

 

 

   

 

 

 

Income (loss) from operations

     (20,567     (32,973     (19,972
  

 

 

   

 

 

   

 

 

 

Other income (expense):

      

Interest expense

     (8,822     (21,790     (30,599

Gain on extinguishment of convertible notes

     —          —          8,898   

Loss on exchange of convertible notes

     —          —          (5,697

Debt extinguishment costs

     —          (1,379     —     

Costs associated with postponed public offering

     (3,443     —          (241
  

 

 

   

 

 

   

 

 

 

Total other income (expense), net

     (12,265     (23,169     (27,639
  

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ (32,832   $ (56,142   $ (47,611
  

 

 

   

 

 

   

 

 

 

 

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Year ended December 31, 2012 compared to year ended December 31, 2013

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

 

     Year Ended December 31     Year Ended
December 31
 
     2012     2013     $ Change     % Change     2012     2013  
     ($ in thousands)          

(Percentage of

total revenue)

 

Revenue:

            

Product

   $ 60,389      $ 82,057      $ 21,668        36     95     95

Research services

     3,064        4,037        973        32     5     5
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

     63,453        86,094        22,641        36     100     100

Cost of revenue:

            

Product

     70,025        73,399        3,374        5     110     85

Research services

     1,396        1,964        568        41     2     2
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit (loss)

     (7,968     10,731        18,699        235     (13 )%      12

Operating expenses:

            

Research and development

     5,142        5,159        17        0     8     6

Sales and marketing

     8,564        9,271        707        8     13     11

General and administrative

     11,299        12,833        1,534        14     18     15

Write-off of construction in progress

     —          3,440        3,440        100     —       4
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     25,005        30,703        5,698        23     39     36
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from operations

     (32,973     (19,972     13,001        39     (52 )%      (23 )% 

Other income (expense):

            

Interest expense

     (21,790     (30,599     (8,809     (40 )%      (34 )%      (36 )% 

Gain on extinguishment of convertible notes

     —          8,898        8,898        100     —       10

Loss on exchange of convertible notes

     —          (5,697     (5,697     (100 )%      —       (7 )% 

Debt extinguishment costs

     (1,379     —          1,379        100     (2 )%      —  

Costs associated with postponed public offering

     —          (241     (241     (100 )%      —       —  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other income (expense), net

     (23,169     (27,639     (4,470     (19 )%      (37 )%      (32 )% 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ (56,142   $ (47,611   $ 8,531        15     (88 )%      (55 )% 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Revenue

 

     Year Ended December 31     Change  
     2012     2013    
     Amount      Percentage
of  Revenue
    Amount      Percentage
of  Revenue
   
               Amount      Percentage  
     ($ in thousands)  

Revenue:

               

Product

   $ 60,389         95   $ 82,057         95   $ 21,668         36

Research services

     3,064         5     4,037         5     973         32
  

 

 

      

 

 

      

 

 

    

Total revenue

   $ 63,453         100   $ 86,094         100   $ 22,641         36
  

 

 

      

 

 

      

 

 

    

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

 

     Year Ended
December 31
     Change  
     2012      2013      Amount      Percentage  

Product shipments in square feet (in thousands)

     27,280         35,560         8,280         30

 

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Total revenue increased $22.6 million, or 36%, in 2013 to $86.1 million from $63.5 million in 2012 primarily as a result of an increase in product revenue.

Product revenue increased $21.7 million, or 36%, to $82.1 million in 2013 from $60.4 million in 2012. This increase was principally the result of an increase in sales of our aerogel products in the refinery and petrochemical sectors in Asia, North America and South America during 2013. This increase in demand during 2013 included increased sales of $4.9 million to one distributor in Asia primarily related to construction of a new petrochemical plant in Taiwan, increased sales of $4.6 million to another distributor in the United States for general distribution into the energy infrastructure market, and increased sales of $4.6 million to a South American distributor primarily related to construction of expanded capacity in a petrochemical plant in Brazil. In volume terms, product shipments increased 8.3 million square feet, or 30%, to 35.6 million square feet of aerogel products, as compared to 27.3 million square feet in 2012. We also increased the prices of some of our products during 2013. We did not increase the prices of our products during 2012.

Research services revenue increased $1.0 million, or 32%, to $4.0 million in 2013 from $3.1 million in 2012 primarily due to revenue generated in 2013 under a significant contract with the Department of Energy.

Product revenue as a percentage of total revenue was 95% of total revenue in 2013 and 2012. Research services revenue was 5% of total revenue in 2013 and 2012. We expect that product revenue will increase as a percentage of our total revenue due to the anticipated growth in demand for our products in the energy infrastructure market.

Cost of Revenue

 

    Year Ended December 31     Change  
    2012     2013    
    Amount     Percentage
of  Related
Revenue
    Percentage
of  Total
Revenue
    Amount     Percentage
of  Related
of Revenue
    Percentage
of  Total
Revenue
   
               
                Amount     Percentage  
    ($ in thousands)  

Cost of revenue:

               

Product

  $ 70,025        116     110   $ 73,399        89     85   $ 3,374        5

Research services

    1,396        46     2     1,964        49     2     568        41
 

 

 

       

 

 

       

 

 

   

Total cost of revenue

  $ 71,421        113     113   $ 75,363        88     88   $ 3,942        6
 

 

 

       

 

 

       

 

 

   

Total cost of revenue increased $3.9 million, or 6%, to $75.3 million in 2013 from $71.4 million in 2012. The increase in total cost of revenue was the result of an increase of $2.0 million in material costs and an increase of $1.3 million in manufacturing expense to support increased product revenue and an increase of $0.6 million in cost of research services to support increased research services revenue.

Product cost of revenue increased $3.4 million, or 5%, to $73.4 million in 2013 from $70.0 million in 2012. Product cost of revenue as a percentage of product revenue decreased to 89% during 2013 from 116% in 2012 as a result of a reduction in both material costs and manufacturing expense as a percentage of product revenue during the year. The reduction in material costs as a percentage of product revenue was the result of improved manufacturing yields and purchasing efficiency. The reduction in manufacturing expense as a percentage of product revenue was the result of improved manufacturing throughput and efficiency.

We expect that material costs and manufacturing expense will continue to increase during 2014 due to the increase in production volume in our East Providence facility required to support expected revenue growth. In addition, we expect an increase in manufacturing expense associated with initial start-up costs leading to operation of a third line in the East Providence facility. However, we expect the cost of product revenue as a

 

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percentage of product revenue for our 2014 fiscal year to decrease as a result of expected revenue growth and productivity improvements during the year.

Research services cost of revenue increased $0.6 million, or 41%, to $2.0 million in 2013 from $1.4 million in 2012. The increase was due in large part to the 32% growth in research service revenue during 2013 in combination with an increase in cost of research services revenue as a percentage of research services revenue to 49% in 2013 from 46% in 2012. The increase in cost of research services revenue was due to an unfavorable mix of labor and expense required to perform the contracted research, each of which carries a different rate of reimbursement.

Gross Profit (Loss)

 

     Year Ended December 31     Change  
     2012     2013    
     Amount     Percentage
of  Revenue
    Amount      Percentage
of  Revenue
   
              Amount      Percentage  
     ($ in thousands)  

Gross profit (loss)

   $ (7,968     (13 )%    $ 10,731         12   $ 18,699         235

Gross profit increased $18.7 million to $10.7 million in 2013 from a gross loss of $8.0 million in 2012. This increase in gross profit was principally the result of a reduction in material costs and manufacturing expenses as a percentage of product revenue due to improved manufacturing yields, purchasing efficiency and productivity at our East Providence facility. In addition, the increase in the price of some of our products during 2013 also contributed to the increase in gross profit. Gross profit as a percentage of total revenue increased to 12% of total revenue in 2013 from a gross loss of 13% of total revenue in 2012. We expect gross profit as a percentage of total revenue to increase during 2014 due to growth in product revenue and continued improvements in manufacturing throughput and efficiency.

Research and Development Expenses

 

     Year Ended December 31     Change  
     2012     2013    
     Amount      Percentage
of  Revenue
    Amount      Percentage
of  Revenue
   
               Amount      Percentage  
     ($ in thousands)  

Research and development expenses

   $ 5,142         8   $ 5,159         6   $ 17         0

R&D expenses increased $0.1 million to $5.2 million in 2013 from $5.1 million in 2012. This increase was principally the result of an increase of $0.6 million in payroll and related costs for engineering personnel partially offset by a decrease of $0.3 million in material expense and $0.2 million in contract engineering expense. R&D costs as a percentage of total revenue decreased to 6% during 2013 from 8% during 2012. This decrease was the result of growth in total revenue during 2013. 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 due to projected growth in product revenue.

Sales and Marketing Expenses

 

     Year Ended December 31     Change  
     2012     2013    
     Amount      Percentage
of  Revenue
    Amount      Percentage
of  Revenue
   
               Amount      Percentage  
     ($ in thousands)  

Sales and marketing expenses

   $ 8,564         13   $ 9,271         11   $ 707         8

 

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Sales and marketing expenses increased $0.7 million, or 8%, to $9.3 million in 2013 from $8.6 million during 2012. The $0.7 million increase was primarily the result of the growth of $1.0 million in payroll and related costs associated with an increase in sales personnel and incentive compensation, partially offset by a $0.1 million decrease in other selling expense and a $0.2 million decrease in travel expense. Sales and marketing expenses as a percentage of total revenue decreased to 11% during 2013 from 13% in 2012. This decrease was the result of the growth in total revenue during 2013. We plan to continue to expand our sales force and sales consultants globally during 2014 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 due to projected growth in product revenue.

General and Administrative Expenses

 

     Year Ended December 31     Change  
     2012     2013    
     Amount      Percentage
of  Revenue
    Amount      Percentage
of  Revenue
   
               Amount      Percentage  
     ($ in thousands)  

General and administrative expenses

   $ 11,299         18   $ 12,833         15   $ 1,534         14

G&A expenses increased $1.5 million, or 14%, to $12.8 million in 2013 from $11.3 million in 2012. This increase was primarily the result of a $3.0 million increase in payroll and related costs of executive, finance and human resource personnel partially offset by a $1.4 million decrease in legal and professional fees, and a $0.1 million decrease in all other expense. G&A expenses as a percentage of total revenue decreased to 15% for 2013 from 18% in 2012. This decrease was principally driven by the strong increase in total revenue in 2013. 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 will decline as a percentage of total revenue in the long-term as a result of projected growth in product revenue.

Write-off of construction in progress

During 2013, we redesigned and reduced the planned scale of the third production line. As a result, we reviewed the construction in progress assets associated with the third production line and determined that $3.0 million had no future use. In addition, we concluded that an additional $0.4 million of construction in progress assets were not utilized or functional. Accordingly, we recorded a $3.4 million impairment charge during 2013 related to the write-off of construction in progress assets. We did not record any write-offs of construction in progress in 2012.

 

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Other Income (Expense)

 

    Year Ended December 31     Change  
    2012     2013    
    Amount     Percentage
of  Revenue
    Amount     Percentage
of  Revenue
   
            Amount     Percentage  
    ($ in thousands)  

Other income (expense):

           

Interest expense

  $ (21,790     (34 )%    $ (30,599     (36 )%    $ (8,809     (40 )% 

Gain on extinguishment of convertible notes

    —          —       8,898        10     8,898        100

Loss on exchange of convertible notes

    —          —       (5,697     (7 )%      (5,697     (100 )% 

Debt extinguishment costs

    (1,379     (2 )%      —          —       1,379        100

Costs associated with postponed public offering

    —          —       (241     —       (241     (100 )% 
 

 

 

     

 

 

     

 

 

   

Total other income (expense), net

  $ (23,169     (37 )%    $ (27,639     (32 )%    $ (4,470     (19 )% 
 

 

 

     

 

 

     

 

 

   

Total other income (expense), net increased $4.5 million, or 19%, to $27.6 million in 2013 from $23.2 million in 2012. This increase was primarily the result of an increase in interest expense of $8.8 million, a $5.7 million loss on exchange of convertible notes related to an exchange of convertible notes for senior convertible notes, and costs associated with a postponed public offering of $0.2 million, partially offset by an $8.9 million gain on the extinguishment of convertible notes related to an amendment to the terms of the notes and a decrease of $1.4 million in debt extinguishment costs. The increase in interest expense was primarily due to the recognition of the fair value upon issuance of the Series C warrants, which was treated as an issuance cost in the March 2013 financing.

 

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Year ended December 31, 2011 compared to year ended December 31, 2012

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

 

    Year Ended December 31     Year Ended
December 31
 
    2011     2012     $ Change     % Change     2011     2012  
    ($ in thousands)           (Percentage of
total revenue)
 

Revenue:

           

Product

  $ 42,717      $ 60,389      $ 17,672        41     93     95

Research services

    3,233        3,064        (169     (5 )%      7     5
 

 

 

   

 

 

   

 

 

       

Total revenue

    45,950        63,453        17,503        38     100     100

Cost of revenue:

           

Product

    47,071        70,025        22,954        49     102     110

Research services

    1,505        1,396        (109     (7 )%      3     2
 

 

 

   

 

 

   

 

 

       

Gross profit (loss)

    (2,626     (7,968     (5,342     (203 )%      (6 )%      (13 )% 

Operating expenses:

           

Research and development

    4,085        5,142        1,057        26     9     8

Sales and marketing

    5,565        8,564        2,999        54     12     13

General and administrative

    8,291        11,299        3,008        36     18     18
 

 

 

   

 

 

   

 

 

       

Total operating expenses

    17,941        25,005        7,064        39     39     39
 

 

 

   

 

 

   

 

 

       

Income (loss) from operations

    (20,567     (32,973     (12,406     (60 )%      (45 )%      (52 )% 

Other income (expense):

           

Interest expense

    (8,822     (21,790     (12,968     (147 )%      (19 )%      (34 )% 

Debt extinguishment costs

    —          (1,379     (1,379     (100 )%      —       (2 )% 

Costs associated with postponed public offering

    (3,443     —          3,443        100     (7 )%      —  
 

 

 

   

 

 

   

 

 

       

Total other income (expense), net

    (12,265     (23,169     (10,904     (89 )%      (27 )%      (37 )% 
 

 

 

   

 

 

   

 

 

       

Net income (loss)

  $ (32,832   $ (56,142   $ (23,310     (71 )%      (71 )%      (88 )% 
 

 

 

   

 

 

   

 

 

       

Revenue

 

     Year Ended December 31     Change  
     2011     2012    
     Amount      Percentage
of  Revenue
    Amount      Percentage
of  Revenue
   
               Amount      Percentage  
     ($ in thousands)  

Revenue:

               

Product

   $ 42,717         93   $ 60,389         95   $ 17,672         41

Research services

     3,233         7     3,064         5     (169      (5 )% 
  

 

 

      

 

 

      

 

 

    

Total revenue

   $ 45,950         100   $ 63,453         100   $ 17,503         38
  

 

 

      

 

 

      

 

 

    

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

 

     Year Ended
December 31
     Change  
     2011      2012      Amount      Percentage  

Product shipments in square feet (in thousands)

     19,473         27,280         7,807         40

Total revenue increased $17.5 million, or 38%, in 2012 to $63.5 million from $46.0 million in 2011, primarily as a result of an increase in product revenue. Product revenue increased $17.7 million, or 41%, to $60.4 million in 2012 from $42.7 million in 2011. This increase was principally the result of an increase in demand for

 

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our aerogel products in the energy infrastructure market in Asia and the United States during 2012. This increase in demand during 2012 included increased sales of $3.6 million to one distributor in Asia primarily related to construction of a new petrochemical plant in Taiwan, increased sales of $2.9 million to a Canadian distributor primarily related to capital projects in the oil-sands, and increased sales of $2.6 million to an end-user for a solar power project located in the United States. In volume terms, product shipments increased 7.8 million square feet, or 40%, to 27.3 million square feet of aerogel products, as compared to 19.5 million square feet in 2011. We did not increase the prices of our products during the periods presented.

Product revenue as a percentage of total revenue grew to 95% in 2012 from 93% in 2011 due to growth in product revenue. Research services revenue declined to 5% of total revenue in 2012 from 7% in 2011.

Cost of Revenue

 

    Year Ended December 31              
    2011     2012              
          Percentage
of  Related
Revenue
    Percentage
of  Total
Revenue
          Percentage
of  Related
of Revenue
    Percentage
of  Total
Revenue
             
                        Change  
    Amount         Amount         Amount     Percentage  
    ($ in thousands)  

Cost of revenue:

               

Product

  $ 47,071        110     102   $ 70,025        116     110   $ 22,954        49

Research services

    1,505        47     3     1,396        46     2     (109     (7 )% 
 

 

 

       

 

 

       

 

 

   

Total cost of revenue

  $ 48,576        106     106   $ 71,421        113     113   $ 22,845        47
 

 

 

       

 

 

       

 

 

   

Total cost of revenue increased $22.8 million, or 47%, to $71.4 million in 2012 from $48.6 million in 2011. The increase in total cost of revenue was the result of an increase of $14.1 million in material costs to support increased product revenue and unfavorable manufacturing yields associated with operation of our second production line in the East Providence facility, which became operational during the second quarter of 2011, and an increase of $8.9 million in manufacturing expenses associated with operation of our second line for a full year and to support increased product revenue, offset slightly by a decrease of $0.1 million in cost of research services associated with the decline in research services revenue.

Product cost of revenue increased $23.0 million, or 49%, to $70.0 million in 2012 from $47.1 million in 2011. Product cost of revenue as a percentage of product revenue increased to 116% during 2012 from 110% in 2011. The increase in product cost of revenue as a percentage of product revenue was driven by the increase in manufacturing expense and unfavorable manufacturing yields as we increased output from the second production line in the East Providence facility toward nameplate capacity during 2012.

Research services cost of revenue decreased $0.1 million, or 7%, to $1.4 million during 2012 from $1.5 million during 2011. The decrease was due to the decline in research services provided during 2012. Research services cost of revenue as a percentage of research services revenue decreased to 46% during 2012 from 47% in 2011 principally due to the mix of labor and expense required to perform the contracted research, each of which carries a different rate of reimbursement.

Gross Profit (Loss)

 

     Year Ended December 31     Change  
     2011     2012    
     Amount     Percentage
of  Revenue
    Amount     Percentage
of  Revenue
   
             Amount     Percentage  
     ($ in thousands)  

Gross profit (loss)

   $ (2,626     (6 )%    $ (7,968     (13 )%    $ (5,342     (203 )% 

 

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Gross loss increased $5.3 million, or 203%, to $8.0 million in 2012 from $2.6 million in 2011. This increase in gross loss was driven by increased manufacturing expenses and unfavorable manufacturing yields as we increased output from the second production line in the East Providence facility toward nameplate capacity during 2012. Gross loss as a percentage of total revenue increased to 13% of total revenue in 2012 from 6% of total revenue in 2011.

Research and Development Expenses

 

     Year Ended December 31     Change  
     2011     2012    
     Amount      Percentage
of  Revenue
    Amount      Percentage
of  Revenue
   
               Amount      Percentage  
     ($ in thousands)  

Research and development expenses

   $ 4,085         9   $ 5,142         8   $ 1,057         26

R&D expenses increased $1.1 million, or 26%, to $5.1 million in 2012 from $4.1 million in 2011. This increase was principally the result of an increase of $0.7 million in payroll and related costs for research personnel and an increase of $0.3 million in material expense. R&D costs as a percentage of total revenue decreased from 9% during 2011 to 8% during 2012. This decrease was the result of the growth in total revenue in 2012.

Sales and Marketing Expenses

 

     Year Ended December 31     Change  
     2011     2012    
     Amount      Percentage
of  Revenue
    Amount      Percentage
of  Revenue
   
               Amount      Percentage  
     ($ in thousands)  

Sales and marketing expenses

   $ 5,565         12   $ 8,564         13   $ 2,999         54

Sales and marketing expenses increased $3.0 million, or 54%, to $8.6 million during 2012 from $5.6 million during 2011. This increase was primarily the result of a $2.4 million increase in payroll and related costs associated with an increase in sales personnel to support product revenue growth, a $0.1 million increase in professional fees, a $0.3 million increase in travel expense and a $0.2 million increase in other expense. Sales and marketing expenses as a percentage of total revenue increased to 13% during 2012 from 12% in 2011. This increase was due to planned investments in sales resources and expenses to support revenue growth.

General and Administrative Expenses

 

     Year Ended December 31     Change  
     2011     2012    
     Amount      Percentage
of  Revenue
    Amount      Percentage
of  Revenue
   
               Amount      Percentage  
     ($ in thousands)  

General and administrative expenses

   $ 8,291         18   $ 11,299         18   $ 3,008         36

G&A expenses increased $3.0 million, or 36%, to $11.3 million in 2012 from $8.3 million in 2011. This increase was primarily the result of a $1.0 million increase in payroll and related costs of executive, finance and human resource personnel, a $0.9 million increase in legal and professional fees, a $0.5 million increase in depreciation, a $0.3 million increase in information technology expense, a $0.1 million increase in facilities expense, and a $0.2 million increase in all other expenses. G&A expenses as a percentage of total revenue remained constant at 18% for 2012 and 2011.

 

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Other Income (Expense)

 

     Year Ended December 31     Change  
     2011     2012    
     Amount     Percentage
of  Revenue
    Amount     Percentage
of  Revenue
   
             Amount     Percentage