As filed with the Securities and Exchange Commission on
September 1, 2011
Registration
No. 333-175128
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Amendment No. 3
To
Form S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
Aspen Aerogels, Inc.
(Exact name of Registrant as
specified in its charter)
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Delaware
(State or other jurisdiction
of
incorporation or organization)
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5033
(Primary Standard
Industrial
Classification Code Number)
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04-3559972
(I.R.S. Employer
Identification Number)
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30 Forbes Road, Building B
Northborough, Massachusetts 01532
(508) 691-1111
(Address, including zip code,
and telephone number, including area code, of Registrants
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:
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Sahir Surmeli, Esq.
Jonathan L. Kravetz, Esq.
Thomas R. Burton, III, Esq.
Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C.
One Financial Center
Boston, Massachusetts 02111
(617) 542-6000
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Vincent Pagano, Jr., Esq.
Simpson Thacher & Bartlett LLP
425 Lexington Avenue
New York, New York 10017
(212) 455-2000
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Approximate date of commencement of proposed sale to the
public: As soon as practicable after this
registration statement becomes effective.
If any of the securities being registered on this form are to be
offered on a delayed or continuous basis pursuant to
Rule 415 under the Securities Act of 1933 as amended (the
Securities Act), check the following
box. o
If this form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act,
check the following box and list the Securities Act registration
statement number of the earlier effective registration statement
for the same
offering. o
If this form is a post-effective amendment filed pursuant to
Rule 462(c) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering. o
If this form is a post-effective amendment filed pursuant to
Rule 462(d) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering. o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in
Rule 12b-2
of the Exchange Act. (Check one):
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Large accelerated
filer o
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Accelerated
filer o
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Non-accelerated
filer þ
(Do not check if a smaller reporting company)
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Smaller reporting
company o
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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.
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.
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Subject
to Completion. Dated September 1, 2011
PRELIMINARY PROSPECTUS
Shares
Aspen Aerogels, Inc.
Common Stock
This is an initial public offering of shares of common stock of
Aspen Aerogels, Inc.
We are
offering shares
of common stock to be sold in this offering. Prior to this
offering, there has been no public market for our common stock.
It is currently estimated that the initial public offering price
per share will be between $ and
$ . We have applied to list the
common stock on The New York Stock Exchange under the symbol
ASPN.
See Risk Factors on page 12 to read about
factors you should consider before buying shares of our common
stock.
Neither the Securities and Exchange Commission nor any other
regulatory body has approved or disapproved of these securities
or passed upon the accuracy or adequacy of this prospectus. Any
representation to the contrary is a criminal offense.
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Per Share
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Total
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Initial public offering price
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$
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$
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Underwriting discount
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$
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$
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Proceeds, before expenses, to us
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$
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$
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To the extent that the underwriters sell more
than shares
of common stock, the underwriters have the option to purchase up
to an
additional shares
from us at the initial public offering price less the
underwriting discount.
The underwriters expect to deliver the shares against payment in
New York, New York
on ,
2011.
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Goldman,
Sachs & Co. |
Morgan Stanley |
Prospectus
dated ,
2011
TABLE OF
CONTENTS
No dealer, salesperson or other person is authorized to give any
information or to represent anything not contained in this
prospectus. You must not rely on any unauthorized information or
representations. This prospectus is an offer to sell only the
shares offered hereby, but only under circumstances and in
jurisdictions where it is lawful to do so. The information
contained in this prospectus is current only as of its date.
INDUSTRY AND
MARKET DATA
This prospectus contains market data and industry forecasts that
were obtained from industry publications, third party market
research and publicly available information. These publications
generally state that the information contained therein has been
obtained from sources believed to be reliable, but the accuracy
and completeness of such information is not guaranteed.
This prospectus also contains estimates and other statistical
data made by independent parties and by us relating to market
size and growth and other data about our industry. We obtained
the industry and market data in this prospectus from our own
research as well as from industry and general publications,
surveys and studies conducted by third parties, some of which
may not be publicly available. For example, this prospectus also
includes statistical data extracted from a market research
report by The Freedonia Group and a separate market research
report by Freedonia Custom Research, Inc., an independent
international market research firm, which was commissioned by us
and was issued in May 2011. Such data involves a number of
assumptions and limitations and contains projections and
estimates of the future performance of the industries in which
we operate that are subject to a high degree of uncertainty. We
caution you not to give undue weight to such projections,
assumptions and estimates.
The Freedonia Custom Research, Inc. Report, or the Freedonia
Report, represents data or viewpoints developed independently on
our behalf and does not constitute a specific guide to action.
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In preparing the Freedonia Report, Freedonia Custom Research,
Inc. used various sources, including publically available third
party financial statements; government statistical reports;
press releases; industry magazines; and interviews with
manufacturers of related products (including us), manufacturers
of competitive products, distributors of related products and
government and trade associations. The Freedonia Report speaks
as of its final publication date (and not as of the date of this
prospectus).
Information about
End-Use Customers
The data and statistics that we present relating to the
end-users of our products, such as our sales to the industrial,
building and construction and OEM markets, or to sectors within
these markets, are estimates based on our reasonable belief.
This is because we sell our products primarily to distributors,
contractors and OEMs that in turn sell our products to end-users
or install our products into the facilities or equipment of the
ultimate end-users. Consequently, the information that we derive
from our sales process and our invoice process to our direct
distributors, contractors and OEM customers typically does not
indicate with certainty into which market the product will be
used or for what purpose. We base our estimates on information
obtained from: (i) discussions with and feedback received
from our direct distributor, contractor and OEM customers that
purchase directly from us, (ii) discussions with and
feedback received from our end-users, and (iii) the nature
and potential uses of each of our products, as certain of our
products are designed for use in a specific market.
TRADEMARKS, TRADE
NAMES AND SERVICE MARKS
Aspen Aerogels, Cryogel,
Pyrogel, Spaceloft, the Aspen Aerogels
logo and other trademarks, service marks and trade names of
Aspen Aerogels appearing in this prospectus are the property of
Aspen Aerogels, Inc. Solely for convenience, the trademarks,
service marks and trade names referred to in this prospectus are
without the
®
and
tm
symbols, but such references are not intended to indicate, in
any way, that the owner thereof will not assert, to the fullest
extent under applicable law, such owners rights to these
trademarks, service marks and trade names. This prospectus
contains additional trade names, trademarks and service marks of
other companies, which, to our knowledge, are the property of
their respective owners.
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PROSPECTUS
SUMMARY
This summary provides an overview of selected information
contained elsewhere in this prospectus and does not contain all
of the information you should consider before investing in our
common stock. You should carefully read this prospectus and the
registration statement of which this prospectus is a part in
their entirety before investing in our common stock, including
the information discussed under Risk Factors and our
consolidated financial statements and the related notes thereto
included elsewhere in this prospectus. Unless otherwise
indicated herein, the terms we, our,
us, or the Company refer to Aspen
Aerogels, Inc. and its predecessor entity and unless otherwise
noted, their respective subsidiaries.
Overview
We are an energy efficiency company that designs, develops and
manufactures innovative, high-performance aerogel insulation. We
believe our aerogel blankets deliver the best thermal
performance of any widely used insulation product available on
the market today and provide a superior combination of
performance attributes unmatched by traditional insulation
materials. Our end-use customers use our products to save money,
conserve energy, reduce
CO2
emissions and protect workers and assets.
Our technologically advanced products are targeted at the
estimated $32 billion annual global market for insulation
materials. Our insulation is principally used by industrial
companies, such as ExxonMobil and NextEra Energy, that operate
petrochemical, refinery, industrial and power generation
facilities. We are also working with BASF Construction Chemicals
and other leading insulation manufacturers to develop and
commercialize products for applications in the building and
construction market. We believe demand for our high-performance
insulation products will increase significantly to support
widespread global efforts to cost-effectively improve energy
efficiency. To address capacity constraints caused by growing
demand, we began operating a second production line in late
March 2011 designed to double our production capacity at our
East Providence, Rhode Island facility.
We have grown our business by forming technical and commercial
relationships with industry-leading customers to optimize our
products to meet the particular demands of targeted market
sectors. In the industrial market, we have benefited from our
technical and commercial relationships with ExxonMobil in the
oil refinery and petrochemical sector, with Technip in the
offshore oil sector, and with NextEra Energy in the power
generation sector. In the building and construction market, we
have a joint development agreement with BASF Construction
Chemicals to develop products to meet increasingly stringent
building standards requiring improved thermal performance in
retrofit and new-build wall systems, particularly in Europe.
Our core aerogel technology and manufacturing processes are our
most significant assets. As of June 30, 2011, we employed
28 research scientists and process engineers focused on
advancing our current aerogel technology and developing next
generation aerogel compositions, form factors and manufacturing
technologies. Our aerogels are complex structures in which 97%
of the volume consists of air trapped in nanopores between
intertwined clusters of amorphous silica solids. These extremely
low density solids provide superior insulating properties.
Although aerogels are usually fragile materials, we have
developed innovative and proprietary manufacturing processes
that enable us to produce industrially robust aerogel insulation
cost-effectively and at commercial scale.
Our aerogel products provide up to five times the thermal
performance of widely used traditional insulation in a thin,
easy-to-use blanket form. Our products enable compact design,
reduce installation time and costs, promote freight savings,
simplify logistics, reduce system weight and required storage
space and enhance job site safety. Our products provide
excellent compression resistance, are hydrophobic and reduce the
incidence of corrosion under insulation, a significant
operational cost and safety issue in industrial facilities. Our
products also offer strong fire protection, which is a critical
performance requirement in both the industrial and building and
construction markets. We believe our array of product attributes
provides strong competitive advantages over traditional
insulation. Although
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competing insulation materials may have one or more comparable
attributes, we believe that no single insulation material
currently available offers all of the properties of our aerogel
insulation.
We manufacture our products using our proprietary process
technology at our facility in East Providence, Rhode Island. We
have operated the East Providence facility at high volume and
high yield continuously since mid-2008. We successfully
commenced operation of our second production line at this
facility at the end of March 2011 and immediately began
producing commercial quality aerogel blankets. This line was
completed on time and on budget and is expected to double our
annual production capacity by the end of 2011 to 40 to
44 million square feet of aerogel blankets, depending on
product mix. We are engaged in the design and engineering phase
of a third production line at our East Providence facility and
have commenced procurement of certain capital equipment which
has a longer lead-time. We currently expect that this third line
will be completed during 2012. We also plan to construct a
second manufacturing facility in the United States or Europe,
the location of which will be based on factors including
proximity to raw material suppliers, proximity to customers,
labor and construction costs and availability of governmental
incentives.
Pursuit of our capacity expansion plan requires us to raise
capital. During the past year, we have completed three
financings and established a line of credit. In late 2010, we
issued $21.4 million of convertible preferred stock to a
group of investors led by BASF Venture Capital and
$10.0 million of subordinated notes to a group of investors
led by affiliates of Piper Capital LLC. In the first half of
2011, we issued $30.0 million of convertible notes to
affiliates of Fidelity Investments and BASF Venture Capital and
established a $10.0 million revolving credit facility with
Silicon Valley Bank.
Our
Markets
Since 2008, our Cryogel and Pyrogel product lines have been used
by some of the worlds largest oil producers, refiners and
petrochemical companies, including ExxonMobil, Suncor Energy,
Anadarko Petroleum, Dong Energy, Hu-Chems Company, SK Energy,
Petrobras, Honam Petrochemical, Marathon Oil, Shell,
LyondellBasell, Enagas, Citgo, PetroLogistics and Tupras. These
products also are in use in applications in a variety of
industrial facilities, including liquefied natural gas
facilities, food processing facilities, oil sands extraction
operations and electric power generation facilities. Insulation
systems in these facilities are designed to maintain hot and
cold process piping and storage tanks at optimal process
temperatures, to protect plant and equipment from the elements
and from the risk of fire and to protect workers. Freedonia
Custom Research, Inc. has estimated that the worldwide
industrial insulation market totaled $4.5 billion in 2010.
We estimate that we generated 92% of our 2010 product revenue in
the industrial insulation market.
Within the building and construction market, we are replicating
our strategy of working with industry leaders to seek to
penetrate critical market sectors. In addition to our
relationship with BASF Construction Chemicals, we are also
engaged in product development efforts in Europe and North
America with other insulation industry leaders to target a wide
variety of applications. Our products also have been installed
since 2006 in residential and commercial new-build and retrofit
building projects through the efforts of a small network of
distribution partners. Insulation systems in the building and
construction market are designed to isolate the interior of
buildings from external temperature variations and to reduce
energy costs. Freedonia Custom Research, Inc. has estimated that
the worldwide building and construction insulation market
totaled $22.7 billion in 2010. We estimate that we
generated 5% of our 2010 product revenue in the building and
construction insulation market.
In addition to our core markets, we also rely on a small number
of fabricators to supply fabricated insulation parts to original
equipment manufacturers, or OEMs. These global OEMs develop
products using our aerogels for applications as diverse as
military and commercial aircraft, trains, buses, appliances,
apparel, footwear and outdoor gear. While we do not currently
allocate significant resources to these markets, we believe
there are many future opportunities within these markets for our
aerogel technology based on its unique attributes. Freedonia
Custom Research, Inc. has
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estimated that the worldwide transportation, appliance and
apparel insulation markets totaled $4.9 billion in 2010. We
estimate that we generated 3% of our 2010 product revenue in the
transportation, appliance and apparel insulation markets.
Our
Solution
We believe our aerogel blankets deliver a superior combination
of performance attributes that provide cost-effective solutions
to address the demanding performance objectives of a wide range
of applications in our target markets, including:
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Best Thermal Performance. Our aerogel
blankets provide the best thermal performance of any widely used
insulation product available on the market today and excel in
applications where available space is constrained or thermal
performance targets are aggressive.
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Wide Temperature Range. We offer
insulation products that address the entire range of
applications within the cryogenic and sub-ambient
(−273oC
to 90oC),
ambient
(0oC to
40oC) and
hot process
(−25oC
to
650oC) temperature
ranges.
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Ease of Installation. Our flexible
aerogel blankets install faster than rigid insulation materials
in the industrial market, which reduces labor costs and total
system costs.
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Compact Design. Our aerogel blankets
reduce insulation system volume by 50% to 80% compared to
traditional insulation, enabling a reduction in the footprint,
size and structural costs of facilities, systems, vehicles and
buildings.
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High Durability. Our aerogel blankets
offer excellent compression resistance, tensile strength and
vibration resiliency. Our products allow companies to
pre-insulate, stack and transport steel pipes destined for use
in harsh environments, which significantly reduces installation
labor costs in remote areas.
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Strong Fire Protection. Our Pyrogel XT
and Spaceloft A2 product lines were specifically designed to
provide strong fire performance in applications within the
industrial and building and construction markets, qualifying our
products for use in a variety of applications in our target
markets.
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Moisture Resistance. Our aerogel
blankets are durably hydrophobic. Our products offer improved
thermal performance in insulation systems exposed to the
elements or operating in humid environments compared to
traditional insulation.
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Reduced Corrosion Under Insulation, or
CUI. Our Pyrogel XT product line is both
durably hydrophobic and vapor permeable. These attributes have
the potential to reduce the incidence of CUI in hot process
applications, which we believe provides our customers with a
significant reduction in long-term operating and capital costs.
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Simplified Logistics. Our products
reduce the volume and weight of material purchased, inventoried,
transported and installed in the field. In addition, our
products reduce the number of stock-keeping units, or SKUs,
required to complete a project. Simplified logistics accelerate
project timelines, reduce installation costs and improve worker
safety.
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We believe these performance attributes simplify logistics,
accelerate project timelines, reduce installation costs, improve
worker safety and significantly reduce long-term operating and
capital costs for our customers. In the industrial market, we
believe these characteristics enable our end-use customers to
meet their insulation performance targets at lower total
installed or lifecycle costs versus traditional insulation in a
growing number of applications. In the building and construction
market, we believe the increasing thermal standards for retrofit
and new-build wall systems in Europe will become more difficult
to meet with traditional insulation materials due to space
constraints. We believe the thin form factor and strong fire
properties of our aerogel blankets will provide a cost-effective
and practical means to meet increasingly stringent building
standards in Europe.
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Our Competitive
Strengths
We believe the following combination of capabilities
distinguishes us from our competitors and positions us to
compete effectively and benefit from the expected growth in the
market for energy efficiency solutions:
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Superior product based on proven technology in commercial
production. Our aerogel products provide up
to five times the thermal performance of widely used traditional
insulation in a thin, easy-to-use blanket form. We believe our
array of product attributes provides strong competitive
advantages over traditional insulation and will enable us to
take a growing share of the existing market for insulation in
both the industrial and the building and construction markets.
Although competing insulation materials may have one or more
comparable attributes, we believe that no single insulation
material currently available offers all of the properties of our
aerogel insulation.
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Proven and scalable proprietary manufacturing
process. Our manufacturing process is proven
and has been replicated to meet increasing demand. Our original
line in East Providence, Rhode Island, has operated continuously
since mid-2008. We successfully commenced operation of our
second production line at this facility in March 2011 and
immediately began producing commercial quality aerogel blankets.
We believe that our proven ability to produce product that meets
our clients specifications and our increased production
capacity will provide customers with the certainty of supply
that is required to expand their use of our products.
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Strong relationships with industry
leaders. Through our relationships with
industry leading end-use customers, our products have undergone
rigorous testing and are now in use at some of the worlds
largest oil producers, refiners and petrochemical companies as
ranked by a weighted measure of sales, profits, assets and
market value. These relationships have shortened the sales cycle
with other customers within the industrial market and have
helped to facilitate our market penetration. Within the building
and construction market, we have partnered with BASF
Construction Chemicals to develop products to meet increasingly
stringent building standards for thermal performance of retrofit
and new-build wall systems. As part of our relationship with
BASF Construction Chemicals, we have recently developed a
product, Spaceloft A2, targeted at the building and construction
market.
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Capital efficient business model. To
respond to increased demand for our products, we successfully
commenced operation in late March 2011 of a second production
line at our East Providence facility. The expansion is expected
to increase our annual production capacity by 20 to
22 million square feet of aerogel blankets at a total
construction cost of approximately $31.5 million. We
believe that our second production line, at full capacity and at
current prices, would be capable of producing in the range of
$50 million to $54 million in annual revenue of
aerogel blankets.
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Experienced management and operations
team. Each of our executive officers has over
20 years of experience in global industrial companies,
specialty chemical companies or related materials science
research. This team has worked closely together at Aspen
Aerogels for nearly five years, and we believe our dedicated and
experienced workforce is an important competitive asset. As of
June 30, 2011, we employed 161 dedicated research
scientists, engineers, manufacturing line operators, sales and
administrative staff and management.
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Our
Strategy
Our goal is to create shareholder value by becoming the leading
provider of high-performance aerogel products serving the global
energy efficiency market. We intend to achieve this goal by
pursuing the following strategies:
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Expand our manufacturing capacity to meet market
demand. Demand for our aerogel products in
2010 grew by approximately 88% compared to 2009 and exceeded our
manufacturing capacity. In response, we constructed a second
production line at our East Providence facility designed to
double our manufacturing capacity. To meet anticipated future
growth in demand for our products, we are engaged in the design,
engineering and initial procurement phase of a third production
line in our East Providence facility and plan to construct a
second manufacturing facility in the United States or Europe.
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Increase industrial insulation market
penetration. We plan to focus additional
resources to achieve a greater share of the industrial
insulation market, both through increased sales to our existing
customers and sales to new customers. In addition, we anticipate
that our growing maintenance-based business will lead to
increasing sales of our products into large capital projects,
including the construction of new refineries and petrochemical
facilities in emerging markets.
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Leverage strategic relationships in the building and
construction market. We have a joint
development arrangement with BASF Construction Chemicals to
penetrate the market for energy efficient wall systems. We are
pursuing additional market opportunities with other leading
building materials manufacturers and distributors across
multiple regions to address the increasingly stringent
regulatory environment governing the thermal performance of
buildings. We believe this approach will enable us to leverage
their broad technical and distribution capabilities and
facilitate market penetration.
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Expand our sales force, network of distributors and OEM
channels. We plan to expand our sales force
and distribution network to support growth in the industrial and
building and construction markets. We also intend to expand our
network of OEM fabricators to pursue opportunities in the
transportation, appliance and apparel markets.
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Continue to develop advanced aerogel compositions,
applications and manufacturing
technologies. We believe that we are well
positioned to leverage a decades worth of research and
development to commercialize new products, applications and
advanced manufacturing technologies.
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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:
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We have incurred net losses since our inception, and we may
continue to incur net losses in the future and may never reach
profitability;
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We have yet to achieve positive cash flow, and our ability to
generate positive cash flow is uncertain;
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We have a limited operating history. This may make it difficult
to evaluate our business and prospects and may expose us to
increased risks and uncertainties;
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The market for insulation products incorporating aerogel
blankets is relatively undeveloped, which makes it difficult to
forecast adoption rates and demand for our products;
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We rely on sales to a limited number of distributors and
contractors for the substantial majority of our revenue, and the
loss of one or more significant distributors or several of our
smaller distributors could materially harm our business;
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Any significant disruption to our sole manufacturing facility or
the failure of our production lines to operate according to our
expectation could have a material adverse effect on our results
of operations;
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Our products are very expensive relative to other insulation
products, which could make it more difficult for us to grow our
revenue and achieve broader adoption of our aerogel
products; and
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Our directors, officers and principal stockholders have
significant voting power and will continue to control a
substantial majority of our common stock after this offering.
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Company
Information
Our predecessor company was incorporated in Delaware in May
2001. In June 2008, we completed a reorganization pursuant to
which our predecessor company merged with and into a newly
formed Delaware corporation, Aspen Merger Sub, Inc., a
wholly-owned subsidiary of our predecessor company formed for
the purpose of the reorganization. As the surviving entity to
the merger, we then changed our name from Aspen Merger
Sub, Inc. to Aspen Aerogels, Inc.
Our principal executive offices are located at 30 Forbes Road,
Building B, Northborough, Massachusetts 01532, and our telephone
number is
(508) 691-1111.
Our website address is www.aerogel.com. The information
contained on, or accessible from, our website is not
incorporated by reference into this prospectus.
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The
Offering
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Common stock offered by us |
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shares
(or shares
if the underwriters exercise their option to purchase additional
shares in full) |
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Common stock to be outstanding immediately after this offering |
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shares
(or shares
if the underwriters exercise their option to purchase additional
shares in full) |
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Use of proceeds |
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We estimate that the net proceeds to us from this offering,
after deducting estimated underwriting discounts and estimated
offering expenses payable by us, will be approximately
$ million (or approximately
$ million if the underwriters
exercise their option to purchase additional shares in full)
assuming an initial public offering price of
$ per share, which is the
mid-point of the estimated price range set forth on the cover
page of this prospectus. We intend to use the net proceeds from
this offering for general corporate purposes, including the
construction of additional manufacturing capacity. See Use
of Proceeds for more information. |
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Proposed NYSE symbol |
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ASPN |
The number of shares of our common stock to be outstanding after
this offering is based on 94,972,797 shares of our common
stock outstanding as of June 30, 2011 after giving effect
to the automatic conversion of our outstanding Series A and
B redeemable convertible preferred stock, which we refer to
collectively as our preferred stock, into 68,853,493 shares
of our common stock immediately prior to the completion of this
offering and excludes the following:
|
|
|
|
|
14,110,658 shares of our common stock issuable upon the
exercise of stock options outstanding as of June 30, 2011
at a weighted-average exercise price of $0.62 per share;
|
|
|
|
shares
of our common stock that will be available for future issuance
under our 2011 equity incentive plan to be effective upon
completion of this offering; and
|
|
|
|
1,127,324 shares of common stock issuable upon the exercise
of warrants outstanding as of June 30, 2011 at a
weighted-average exercise price of $0.002 per share.
|
Except as otherwise noted, all information in this prospectus:
|
|
|
|
|
assumes the adoption of our restated certificate of
incorporation and restated by-laws in connection with the
consummation of the offering made hereby;
|
|
|
|
assumes that the closing of the offering made hereby occurs
on ,
2011 with an initial public offering price per share of
$ , the mid-point of the price
range set forth on the cover page of this prospectus;
|
|
|
|
gives effect to the automatic conversion of all outstanding
shares of our preferred stock into 68,853,493 shares of our
common stock on a 1-for-1 basis;
|
|
|
|
gives effect to the issuance
of shares
of common stock to the holders of our outstanding preferred
stock upon the closing of the offering made hereby in
satisfaction of accumulated dividends, as required by the terms
of the preferred stock;
|
|
|
|
gives effect to the issuance
of shares
of common stock issuable upon the automatic conversion of our
$30.0 million aggregate principal amount of
8.0% convertible subordinated notes due June 2014, which we
refer to as our convertible notes, together with accrued
|
7
|
|
|
|
|
interest thereon, upon the closing of the offering made hereby,
at a conversion price equal to 87.5% of the initial offering
price per share of the common stock offered hereby;
|
|
|
|
|
|
gives effect to
a
for
reverse split of our common stock, which will take place prior
to the closing of the offering made hereby; and
|
|
|
|
assumes no exercise by the underwriters of their option to
purchase additional shares.
|
See Capitalization for conversion adjustments with
respect to our preferred stock and our convertible notes that
may be applicable upon future events, such as the completion of
this offering.
We refer to the conversion of our preferred stock into shares of
common stock (including the conversion of accumulated dividends
on each series into shares of common stock) and the automatic
conversion of our convertible notes into shares of common stock
(including the conversion of the accrued interest into shares of
our common stock) herein, as the preferred stock and convertible
notes conversions.
8
Summary
Consolidated Financial Data
The following tables present a summary of our consolidated
financial data for the periods, and as of the dates, indicated.
We derived the consolidated statement of operations data for the
years ended December 31, 2008, 2009 and 2010 from our
audited consolidated financial statements and the related notes
thereto included elsewhere in this prospectus. We derived the
consolidated statement of operations data for the six months
ended June 30, 2010 and 2011 and the consolidated balance
sheet data as of June 30, 2011 from our unaudited
consolidated financial statements and the related notes thereto
included elsewhere in this prospectus. The results of operations
for these interim periods are not necessarily indicative of the
results to be expected for a full year. Our unaudited
consolidated financial statements have been prepared on the same
basis as the audited consolidated financial statements and the
related notes thereto and, in the opinion of our management,
reflect all adjustments that are necessary for a fair
presentation in conformity with U.S. generally accepted
accounting principles, or GAAP. Our historical results for prior
periods are not necessarily indicative of results to be expected
for any future period. The summary unaudited pro forma balance
sheet information as of June 30, 2011 has been prepared to
give effect to this offering, our application of the proceeds
therefrom and the preferred stock and convertible notes
conversions as if they had occurred on June 30, 2011. The
summary unaudited pro forma balance sheet information is for
informational purposes only and does not purport to indicate
balance sheet information as of any future date.
You should read this summary consolidated financial data
together with our audited and unaudited consolidated financial
statements and the related notes thereto included elsewhere in
this prospectus and the information under Selected
Consolidated Financial Data and Managements
Discussion and Analysis of Financial Condition and Results of
Operations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
Year Ended December 31
|
|
|
June 30
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2010
|
|
|
2011
|
|
|
|
($ in thousands, except share and per share data)
|
|
|
Consolidated statements of operations data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
|
|
$
|
17,202
|
|
|
$
|
24,752
|
|
|
$
|
38,690
|
|
|
$
|
16,008
|
|
|
$
|
24,333
|
|
Research services
|
|
|
2,868
|
|
|
|
3,864
|
|
|
|
4,519
|
|
|
|
2,238
|
|
|
|
1,817
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
20,070
|
|
|
|
28,616
|
|
|
|
43,209
|
|
|
|
18,246
|
|
|
|
26,150
|
|
Cost of revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
|
|
|
32,160
|
|
|
|
30,462
|
|
|
|
35,399
|
|
|
|
16,114
|
|
|
|
21,545
|
|
Research services
|
|
|
1,169
|
|
|
|
1,788
|
|
|
|
2,119
|
|
|
|
1,005
|
|
|
|
922
|
|
Impairment charge
|
|
|
2,524
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit (loss)
|
|
|
(15,783
|
)
|
|
|
(3,634
|
)
|
|
|
5,691
|
|
|
|
1,127
|
|
|
|
3,683
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
2,134
|
|
|
|
2,524
|
|
|
|
2,985
|
|
|
|
1,719
|
|
|
|
1,728
|
|
Sales and marketing
|
|
|
4,034
|
|
|
|
3,994
|
|
|
|
4,526
|
|
|
|
2,318
|
|
|
|
2,557
|
|
General and administrative
|
|
|
6,180
|
|
|
|
5,430
|
|
|
|
5,675
|
|
|
|
2,813
|
|
|
|
3,443
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
12,348
|
|
|
|
11,948
|
|
|
|
13,186
|
|
|
|
6,850
|
|
|
|
7,728
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
(28,131
|
)
|
|
|
(15,582
|
)
|
|
|
(7,495
|
)
|
|
|
(5,723
|
)
|
|
|
(4,045
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
287
|
|
|
|
18
|
|
|
|
170
|
|
|
|
37
|
|
|
|
51
|
|
Interest expense
|
|
|
(7,400
|
)
|
|
|
(3,075
|
)
|
|
|
(2,585
|
)
|
|
|
(1,404
|
)
|
|
|
(2,269
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other expense, net
|
|
|
(7,113
|
)
|
|
|
(3,057
|
)
|
|
|
(2,415
|
)
|
|
|
(1,367
|
)
|
|
|
(2,218
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
(35,244
|
)
|
|
|
(18,639
|
)
|
|
|
(9,910
|
)
|
|
|
(7,090
|
)
|
|
|
(6,263
|
)
|
Dividends and accretion on
redeemable convertible
preferred stock
|
|
|
(2,351
|
)
|
|
|
(2,984
|
)
|
|
|
(57,007
|
)
|
|
|
(39,264
|
)
|
|
|
(68,604
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to
common stockholders
|
|
$
|
(37,595
|
)
|
|
$
|
(21,623
|
)
|
|
$
|
(66,917
|
)
|
|
$
|
(46,354
|
)
|
|
$
|
(74,867
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per share data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share attributable
to common stockholders,
basic and diluted
|
|
$
|
(3,389.12
|
)
|
|
$
|
(2.21
|
)
|
|
$
|
(2.62
|
)
|
|
$
|
(1.81
|
)
|
|
$
|
(2.88
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding, basic and diluted
|
|
|
11,093
|
|
|
|
9,751,616
|
|
|
|
25,574,286
|
|
|
|
25,573,997
|
|
|
|
26,005,705
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
Year Ended December 31
|
|
|
June 30
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2010
|
|
|
2011
|
|
|
|
($ in thousands, except share and per share data)
|
|
|
Pro forma net income (loss) per share, basic and diluted(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding used in computing pro
forma net income (loss) per share, basic and diluted(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
|
|
Six Months Ended June 30
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2010
|
|
|
2011
|
|
|
|
(In thousands)
|
|
|
Other operating data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product shipments in square feet(2)
|
|
|
6,909
|
|
|
|
10,525
|
|
|
|
16,443
|
|
|
|
7,114
|
|
|
|
10,612
|
|
Adjusted EBITDA(3)
|
|
$
|
(17,621
|
)
|
|
$
|
(9,121
|
)
|
|
$
|
(2,394
|
)
|
|
$
|
(3,261
|
)
|
|
$
|
(238
|
)
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2011
|
|
|
|
Actual
|
|
|
Pro forma
|
|
|
|
($ in thousands)
|
|
|
Consolidated balance sheet data:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
29,633
|
|
|
|
|
|
Working capital(4)
|
|
|
30,554
|
|
|
|
|
|
Total assets
|
|
|
110,871
|
|
|
|
|
|
Total debt
|
|
|
39,264
|
|
|
|
|
|
Preferred stock
|
|
|
178,390
|
|
|
|
|
|
Total stockholders (deficit) equity
|
|
|
(132,536
|
)
|
|
|
|
|
|
|
|
(1)
|
|
Pro forma per share data will be
computed based upon the number of shares of common stock
outstanding immediately after consummation of this offering
applied to our historical net income (loss) amounts and will
give retroactive effect to the preferred stock and convertible
notes conversions (assuming an initial public offering price of
$ , the mid-point of the price
range set forth on the cover page of this prospectus) and the
issuance of the shares of our common stock offered hereby.
|
|
|
|
The following table presents the
calculation of pro forma basic and diluted net income (loss) per
share of common stock attributable to our common stockholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
Year Ended December 31
|
|
|
June 30
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2010
|
|
|
2011
|
|
|
|
($ in thousands, except share and per share data)
|
|
|
Net income (loss) attributable to common stockholders
|
|
$
|
(37,595
|
)
|
|
$
|
(21,623
|
)
|
|
$
|
(66,917
|
)
|
|
$
|
(46,354
|
)
|
|
$
|
(74,867
|
)
|
Dividends and accretion on redeemable convertible preferred stock
|
|
|
2,351
|
|
|
|
2,984
|
|
|
|
57,007
|
|
|
|
39,264
|
|
|
|
68,604
|
|
Interest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount on conversion of convertible notes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net income (loss) attributable to common stockholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding, basic and diluted
|
|
|
11,093
|
|
|
|
9,751,616
|
|
|
|
25,574,286
|
|
|
|
25,573,997
|
|
|
|
26,005,705
|
|
Common shares issued upon conversion of preferred stock and
accrued dividends
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common shares issued upon conversion of convertible notes and
interest thereon
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding used in computing pro
forma net income (loss) per share, basic and diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net income (loss) per share, basic and diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10
|
|
|
(2)
|
|
We price our products and measure
our product shipments in square feet. We believe the square foot
operating metric allows us and our investors to measure our
sales volume on a uniform and consistent basis.
|
|
|
|
(3)
|
|
We use Adjusted EBITDA, a non-GAAP
financial measure, as a means to assess our operating
performance. We define Adjusted EBITDA as net income (loss)
before depreciation and amortization expense, interest expense,
stock-based compensation expense and impairment charges.
Adjusted EBITDA is a supplemental measure of our performance
that is not required by, or presented in accordance with, GAAP.
Adjusted EBITDA should not be considered as an alternative to
net income (loss) or any other measure of financial performance
calculated and presented in accordance with GAAP. In addition,
our definition and presentation of Adjusted EBITDA may not be
comparable to similarly titled measures presented by other
companies.
|
|
|
|
|
|
We use Adjusted EBITDA as a measure
of operating performance, because it does not include the impact
of items that we do not consider indicative of our core
operating performance, for planning purposes, including the
preparation of our annual operating budget, to allocate
resources to enhance the financial performance of our business
and as a performance measure under our bonus plan. We also
believe that the presentation of Adjusted EBITDA provides useful
information to investors with respect to our results of
operations and in assessing the performance and value of our
business. Various measures of EBITDA are widely used by
investors to measure a companys 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.
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We understand that, although
measures similar to Adjusted EBITDA are frequently used by
investors and securities analysts in their evaluation of
companies, Adjusted EBITDA has limitations as an analytical
tool, and you should not consider it in isolation or as a
substitute for GAAP income from operations or an analysis of our
results of operations as reported under GAAP. Some of these
limitations are:
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Adjusted EBITDA does
not reflect our historical cash expenditures or future
requirements for capital expenditures or other contractual
commitments;
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Adjusted EBITDA does
not reflect changes in, or cash requirements for, our working
capital needs;
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Adjusted EBITDA does
not reflect stock-based compensation expense;
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Adjusted EBITDA does
not reflect our tax expense or cash requirements to pay our
income taxes;
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Adjusted EBITDA does
not reflect our interest expense, or the cash requirements
necessary to service interest or principal payments on our debt;
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Although depreciation,
amortization and impairment are non-cash charges, the assets
being depreciated, amortized or impaired will often have to be
replaced in the future, and Adjusted EBITDA does not reflect any
cash requirements for these replacements; and
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Other companies in our
industry may calculate EBITDA or Adjusted EBITDA differently
than we do, limiting their usefulness as a comparative measure.
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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.
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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.
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The following table presents a
reconciliation of net income (loss), the most directly
comparable GAAP measure, to Adjusted EBITDA for the periods
presented:
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Six Months
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Year Ended December 31
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Ended June 30
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2008
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2009
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2010
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2010
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2011
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($ in thousands)
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Net income (loss)
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(35,244
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)
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(18,639
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)
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(9,910
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)
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(7,090
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)
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(6,263
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)
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Depreciation and amortization
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7,059
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5,630
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4,633
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2,261
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3,365
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Stock-based compensation
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927
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831
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468
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201
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442
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Interest expense, net
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7,113
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3,057
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2,415
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1,367
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2,218
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Impairment charge
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2,524
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Adjusted EBITDA
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$
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(17,621
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)
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$
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(9,121
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)
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$
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(2,394
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)
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$
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(3,261
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)
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$
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(238
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)
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(4)
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Working capital means current
assets minus current liabilities.
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11
RISK
FACTORS
Investing in our common stock involves a high degree of risk.
You should carefully consider the risks described below and all
of the other information set forth in this prospectus, including
our consolidated financial statements and the related notes
thereto, before deciding to invest in our common stock. If any
of the events or developments described below occurs, our
business, financial condition or results of operations could be
negatively affected. In that case, the market price of our
common stock could decline, and you could lose all or part of
your investment.
Risks Related to
Our Business and Strategy
We have
incurred net losses since our inception, and we may continue to
incur net losses in the future and may never reach
profitability.
We have a history of losses, and we may not ever achieve or
sustain profitability. We experienced net losses of
$35.2 million, $18.6 million and $9.9 million for
the years ended December 31, 2008, 2009 and 2010,
respectively, and $6.3 million for the six months ended
June 30, 2011. As of June 30, 2011, our accumulated
deficit was $202.4 million and total stockholders
deficit was $132.5 million. We expect to continue to incur
operating losses as a result of expenses associated with the
continued development and expansion of our business. Our
expenses include sales and marketing, research and development,
and general and administrative costs. Furthermore, these
expenses are not the only factors that may contribute to our net
losses. For example, interest expense on our currently
outstanding debt and on any debt that we incur in the future
could contribute to our net losses. Any failure to increase
revenue or manage our cost structure as we implement initiatives
to grow our business could prevent us from achieving or
sustaining profitability. In addition, our ability to achieve
profitability is subject to a number of the risks and
uncertainties discussed below, many of which are beyond our
control. Failure to become and remain profitable may adversely
affect the market price of our common stock and our ability to
raise capital and continue operations.
We have yet to
achieve positive cash flow, and our ability to generate positive
cash flow is uncertain.
To rapidly develop and expand our business, we have made
significant up-front investments in our manufacturing capacity
and incurred research and development, sales and marketing and
general and administrative expenses. In addition, our growth has
required a significant investment in working capital over the
last several years. We have had negative cash flow before
investing and financing activities of $22.0 million,
$13.0 million and $15.1 million for the years ended
December 31, 2008, 2009 and 2010, respectively, and
$7.2 million for the six months ended June 30, 2011.
We anticipate that we will continue to have negative cash flow
for the foreseeable future as we continue to make significant
future capital expenditures to expand our manufacturing capacity
and incur increased research and development, sales and
marketing, and general and administrative expenses. Our business
will also require significant amounts of working capital to
support our growth and we will need to increase our inventories
of raw materials and our products as we seek to grow our
business. Therefore, we may need to raise additional capital
from investors to achieve our expected growth, and we may not
achieve sufficient revenue growth to generate positive future
cash flow. An inability to generate positive cash flow for the
foreseeable future or raise additional capital on reasonable
terms may decrease our long-term viability.
We have a
limited operating history. This may make it difficult to
evaluate our business and prospects, and may expose us to
increased risks and uncertainties.
We began operating in May 2001 and, until 2004, when we first
began generating significant commercial revenues, we were
primarily focused on research and development. We did not begin
generating significant revenues from our current generation of
products until 2008. Accordingly, we have only a limited
operating history and an even more limited history of generating
revenues from our
12
current generation of products. As a result of our limited
operating history, we have limited financial data that can be
used to evaluate our business, strategies, performance and
prospects or an investment in our common stock. Any evaluation
of our business and our prospects must be considered in light of
our limited operating history and the risks and uncertainties
encountered by companies at our stage of development. To address
these risks and uncertainties, we must do the following:
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maintain and expand our current relationships and develop new
relationships with direct and end-use customers;
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increase our penetration of the industrial market, the building
and construction market and other markets for our products;
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maintain and increase our manufacturing capacity to meet
existing and anticipated future demand for our products;
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continue to develop our aerogel insulation products and increase
our research and development activities;
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identify new partnership and market opportunities for our
products;
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develop new applications for our products and our aerogel
technology;
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execute our business and marketing strategies successfully;
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respond to competitive developments; and
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attract, integrate, retain and motivate qualified personnel.
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We may be unable to accomplish one or more of these objectives,
which could cause our business to suffer. In addition, pursuing
many of these goals is expected to entail substantial expense,
which would adversely impact our operating results and financial
condition. Any predictions about our future operating results
may not be as accurate as they could be if we had a longer
operating history.
If we are
unable to maintain our technological advantage and expand market
acceptance of our products, our business may be adversely
affected.
We are researching, developing, manufacturing and selling
high-performance aerogel insulation products. The market for
aerogel insulation is at a relatively early stage of
development, and the extent to which our aerogel insulation will
be able to meet the requirements of our direct and end-use
customers and achieve significant market acceptance is
uncertain. Rapid and ongoing changes in technology and product
standards could quickly render our products less competitive, or
even obsolete, if we fail to continue to improve the performance
of our insulation products. We are currently developing new
applications for our existing products as well as new aerogel
technologies; however, we may not be successful in doing so and
new applications or technologies may not be commercially useful.
Other companies that are seeking to enhance traditional
insulation materials have recently introduced or are developing
other emerging and potential insulation technologies. These
competitors are engaged in significant development work on these
various insulation products. Competing technologies that
outperform our insulation in one or more performance attributes
could be developed and successfully introduced. We are also
aware of certain companies that have developed or are developing
products using aerogel technology similar to our technology and
these or other companies could introduce aerogel products that
compete directly with our products and outperform them in one or
more performance attributes. As a result of this competition and
potential competition, our products may not compete effectively
in our target markets.
In addition, we intend to expand our penetration of the building
and construction market, which we are targeting for our
products. However, historically, many of our potential end-users
in the building and construction market have been slow to adopt
new technology and incorporate new design and construction
techniques, which may delay or prevent the adoption of our
products. Our efforts to
13
expand beyond our existing markets may not be successful. Our
products may never be accepted by those new markets or result in
the creation of additional revenue. Additionally, we have been
unable at times to produce sufficient amounts of our product to
meet demand from our customers, and we may not be able to avoid
capacity constraints in the future. If we are unable to deliver
our products within the timeframes required by our direct and
end-use customers, we may be at risk of losing sales. Therefore,
our recent historical growth trajectory may not provide an
accurate representation of the market dynamics we may experience
in the future, making it difficult to evaluate our future
prospects.
Many factors
outside of our control may affect the demand for our insulation
products.
Our direct and end-use customers operate in extremely
competitive industries, and competition to supply their
insulation needs focuses on, among other factors, delivering
sufficient thermal performance in a cost-effective fashion. Many
other factors outside of our control may also affect the demand
for our insulation products and the viability of widespread
adoption of our aerogel blankets, including:
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the price of our aerogel insulation compared to traditional
insulation materials, including the tendency of end-users in
some markets to opt for the frequently lower short-term costs of
traditional insulation materials even when the long-term and
overall costs of our products are lower and the performance
attributes of our products are superior;
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the regulation of energy efficiency and building standards in
the industrial and the building and construction markets;
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the availability of government funding and incentives to support
the use of high-performance insulation materials, such as our
aerogel blankets; and
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fluctuations in economic and market conditions, including
changes in the cost of energy, the relative value of energy
efficiency measures, foreign exchange rates and the cost of the
raw materials for our products.
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Any of these factors could make it more difficult for us to
attract and retain customers, cause us to lower our prices in
order to compete, or reduce our market share and revenues, any
of which could have a material adverse effect on our financial
condition and results of operations.
The market for
insulation products incorporating aerogel blankets is relatively
undeveloped and our products may never be widely adopted, which
would have a material adverse effect on our
business.
The market for insulation products utilizing aerogel blankets is
relatively undeveloped. Accordingly, our future financial
performance will depend in large part on our ability to
penetrate the worldwide insulation market. Our penetration of
this market is highly dependent on the acceptance of our
products by large, well-established end-users, contractors,
installers and distributors. The insulation market has
historically been slow to adopt new technologies and products.
Most insulation types currently in use in these markets have
been in use for over 50 years. If we fail to successfully
educate existing and potential industrial and building and
construction market end-users, installers, contractors and
distributors regarding the benefits of our aerogel products, or
if existing users of our products no longer rely on aerogel
insulation for their insulation needs, our ability to sell our
products and grow our business could be limited. Because we are
a new supplier to our end-use customers, we may face concerns
from these end-use customers about our reliability and our
ability to produce our products in a volume sufficient to meet
their supply needs. As a result, we may experience a reluctance
or unwillingness by existing end-use customers to expand their
use of our products and by potential end-use customers to begin
using our products. Our products may never reach mass adoption,
and changes or advances in technologies could adversely affect
the demand for our products. A failure to increase, or a
decrease in, demand for aerogel insulation products caused by
lack of end-user or distribution channel acceptance,
technological challenges, competing technologies
14
and products or otherwise would result in a lower revenue growth
rate or decreased revenue, either of which could materially
adversely affect our business and operating results.
Our revenue
may fluctuate, which may result in a high degree of variability
in our results of operations and make it difficult for us to
plan based on our future outlook and to forecast our future
performance.
Our revenue may fluctuate from period to period due to a wide
variety of factors. Because our products are relatively new in
the insulation market, continued adoption of our products and
the rate of such adoption is not certain. Also, since we rely on
sales to a limited number of direct customers and end-user
customers, changes in demand from one or more direct customers
or end-users can significantly impact our revenue from period to
period. In addition, the sales cycles for our products are long
and can result in unpredictability in our revenues. We expect to
have an increasing percentage of our products sold for use in
capital projects, which orders tend to be larger and more
sporadic, that will further increase this unpredictability and
the difficulty for us in forecasting quarterly or annual
performance. Because of our limited operating history and the
difficulty in determining the adoption rates for our products,
we have no basis on which to predict our quarterly revenue.
These factors may result in a high degree of variability in our
results of operations and will make it difficult for us to
accurately evaluate and plan based on our future outlook and to
forecast quarterly or annual performance.
Any
significant disruption to our sole manufacturing facility or the
failure of our production lines to operate according to our
expectation could have a material adverse effect on our results
of operations.
We currently have only two production lines in one manufacturing
facility, which is located in East Providence, Rhode Island. Our
ability to meet the demands of our customers depends on
efficient, proper and uninterrupted operations at our
manufacturing facility. We only recently began operations on our
second production line and we have not yet achieved target
capacity on this line. We may not be able to do so. In addition,
in the event of a breakdown of one or more production lines, we
may not have sufficient inventory in stock to meet demand until
the production lines return to operation.
Power failures or disruptions, the breakdown, failure or
substandard performance of equipment, or the damage or
destruction of buildings and other facilities due to fire or
natural disasters could severely affect our ability to continue
our operations. In the event of such disruptions, we may not be
able to find suitable alternatives or make needed repairs on a
timely basis and at reasonable cost, which could have a material
adverse effect on our business and results of operations.
Particularly, our manufacturing processes include the use of
both high temperatures and the highly flammable chemical
ethanol, which subjects us to a significant risk of loss
resulting from fire. We had occasional incidences of fires at
our prototype facility, however, damage was immaterial. While
our manufacturing facilities are designed to limit any damage
resulting from a fire, this risk cannot be completely
eliminated. We maintain insurance policies to cover losses
caused by fire or natural disaster, including business
interruption insurance, however, such insurance may not
adequately compensate us for any such losses. If our
manufacturing facilities were to be damaged or cease operations,
and our insurance proves to be inadequate, it may reduce
revenue, cause us to lose customers and otherwise adversely
affect our business. If our sole manufacturing facility was
damaged or destroyed prior to completing construction of a
second facility, we would be unable to operate our business for
an extended period of time and may go out of business.
We operate in
highly competitive markets; if we are unable to compete
successfully, we may not be able to increase or maintain our
market share and revenues.
We face strong competition primarily from established
manufacturers of incumbent insulation materials and also from
other companies producing high performance insulation materials.
Large producers of incumbent insulation materials dominate the
insulation market. See Business
Competition. In addition, there are other companies
seeking to develop high-performance insulation materials,
including aerogel insulation. Many of our competitors are
substantially larger and better
15
capitalized than we are and possess greater financial resources.
Cabot Corporation, or Cabot, is our primary competitor in the
market for aerogel insulation and is larger and better
capitalized than we are. Cabot manufactures and sells a
different form of aerogel insulation that is currently
competitive with our products primarily in the offshore oil
sector for use in pipe-in-pipe applications, and may compete
with our products as we seek to expand our sales in the building
and construction market. Our competitors, including Cabot, could
focus their substantial financial resources to develop new or
additional competing products or develop products that are more
attractive to potential customers than the products that we
offer.
Because some insulation manufacturers are substantially larger
and better capitalized than we are, they may have the ability to
sell their products at substantially lower costs to a large,
existing customer base. While our products have superior
performance attributes and may sometimes have the lowest cost on
a fully-installed basis or offer life-cycle cost savings, our
competitors offer many incumbent insulation products that are
priced below our products. Our products are very expensive
relative to other insulation products and end-use customers may
not value our products superior performance attributes
sufficiently to pay their premium price. In addition, from time
to time we may increase the prices for our products and these
price increases may not be accepted by our end-use customers and
could result in a decreased demand for our products. Similarly,
we may make changes to our products in order to respond to
customer demand or to improve their performance attributes and
these changes may not be accepted by our end-use customers and
could result in a decrease in demand for our products. For
example, we currently plan on adding a coating to certain of our
products in order to reduce dustiness; however, this planned
coating may not achieve its aims, may not be valued by end-use
customers and may negatively impact our cost structure and
margins. Any of these competitive factors could make it more
difficult for us to attract and retain customers, cause us to
lower our prices in order to compete, and reduce our market
share and revenues, any of which could have a material adverse
effect on our financial condition and results of operations.
We rely on
sales to a limited number of direct customers, including
distributors, contractors and OEMs, for the substantial majority
of our revenue, and the loss of one or more significant direct
customers or several or our smaller direct customers could
materially harm our business. In addition, we understand from
our direct customers that a substantial majority of their sales
of our products are to a small number of end-use customers and
the loss of one or more significant end-use customers or several
of our smaller end-use customers could materially harm our
business.
A substantial majority of our revenue is generated from sales to
a limited number of direct customers, including distributors,
contractors and OEMs. For the years ended December 31,
2008, 2009 and 2010, and the six months ended June 30,
2011, revenue from our top ten direct customers represented
51%, 47%, 53% and 63% of our revenues, respectively. For the six
months ended June 30, 2010, Technip and Thorpe Products
represented 18% and 10%, respectively, of our total revenue and
for the six months ended June 30, 2011, Enershield and
Thorpe Products represented 21% and 10%, respectively, of our
total revenue. In 2008, Aerogel Korea Co, Ltd. represented 12%
of our total revenue; in 2009, no direct customer represented
10% or more of our total revenue; and in 2010, Technip
represented 14% of our total revenue. For each of the periods
discussed above, there were no other customers that represented
10% or more of our total revenues. Although the composition of
our significant distributors, contractors, and OEMs will vary
from period to period, we expect that most of our revenues will
continue, for the foreseeable future, to come from sales to a
relatively small number of direct customers. In addition, we
understand from our direct customers that a substantial majority
of their sales of our products are to a small number of end-use
customers.
Our contracts with our direct customers generally do not include
long-term commitments or minimum volumes that ensure future
sales of our products and our understanding is that our direct
customers contracts with end-use customers also generally
do not include such commitments or
16
minimums. Consequently, our financial results may fluctuate
significantly from
period-to-period
based on the actions of one or more significant direct customers
or end-use customers.
A direct customer may take actions that affect us for reasons
that we cannot anticipate or control, such as reasons related to
an end-use customers financial condition, changes in
business strategy or operations, the introduction of alternative
competing products, or as the result of the perceived quality or
cost-effectiveness of our products. Our agreements with these
direct customers may be cancelled if we fail to meet certain
product specifications or materially breach the agreement or for
other reasons outside of our control. In addition, our direct
customers may seek to renegotiate the terms of current
agreements or renewals. The loss of, or a reduction in sales or
anticipated sales to, one or more of our significant direct
customers or end-use customers or several of our smaller direct
customers or end-use customers could have a material adverse
effect on our business, financial condition and results of
operations.
We understand
from our direct customers, including our distributor, contractor
and OEM customers, that a substantial majority of their sales of
our products are to end-use customers in the oil and gas
industry, making us susceptible to prolonged negative trends
relating to this industry.
We understand from our direct customers, including our
distributor, contractor and OEM customers that a substantial
majority of their sales of our products are to end-use customers
in the oil and gas industry, making us susceptible to prolonged
negative trends relating to this industry. We estimate that
sales to end-use customers in the oil and gas industry accounted
for approximately 82% of our 2010 revenue. While we seek to
maintain a broad end-use customer base across several
industries, our end-use customers in the oil and gas industry
have accounted for a significant portion of our historical
revenues. Certain economic conditions, including low oil prices,
can result in slowdowns in the oil and gas industry, which in
turn can result in reduced demand for our products. If the oil
and gas industry were to suffer a prolonged or significant
downturn, our revenues, profits and cash flows may be reduced
significantly. While we also sell to other direct and end-use
customers in the industrial market and other markets, including
the building and construction industry, these markets are also
cyclical in nature and, as such, are subject to economic
downturns that could have a similar adverse effect on our
revenue, profits and cash flows.
Negative
perceptions regarding the safety or other attributes of our
products or a failure or a perceived failure of our products
could have a material adverse effect on our results of
operations and could make us unable to continue our
business.
Given the history of asbestos as an insulation material, we
believe that there is an elevated level of attention towards
perceived health and safety risks in the insulation industry. As
a consequence, it is essential to our existing business and to
our future growth that our products are considered safe. Even
modest perceptions by customers, potential customers and others
in the markets that we are targeting that our products are not
safe could have a critical impact on our ability to sell our
products and to continue as a business. In particular, the dust
produced by our products during their installation and use
increases the likelihood of such perceptions. Further, our
competitors have in the past and may in the future, seek to
perpetuate such perceptions. Our products are still not widely
used and there is risk of an actual or perceived failure of our
products or other negative perceptions regarding our products,
such as perceived health hazards. Such an event, or the
perception of such an event, could quickly result in our direct
and end-use customers replacing our products with traditional
insulation materials which could have a material adverse effect
on our results of operations.
Our activities
and operations are subject to numerous health and safety laws
and regulations, and if we violate such regulations, we could
face penalties and fines.
We are subject to numerous health and safety laws and
regulations in each of the jurisdictions in which we operate,
including with regards to hazardous substances that we use in
our manufacturing
17
process. These laws and regulations require us to obtain and
maintain permits and approvals and implement health and safety
programs and procedures to control risks associated with our
operations. Compliance with those laws and regulations can
require us to incur substantial costs. Moreover, if our
compliance programs are not successful, we could be subject to
penalties or to revocation of our permits, which may require us
to curtail or cease operations of the affected facilities.
Violations of laws, regulations and permit requirements may also
result in criminal sanctions or injunctions. Manufacture of our
products requires the use of hazardous substances and our
products contain these same materials, including titanium
dioxide and carbon black, which, in certain forms and at certain
levels, has been determined to be possibly carcinogenic or
otherwise harmful to humans. While we use these hazardous
substances, including titanium dioxide and carbon black, in
forms and at levels that comply with current rules and
regulations governing their use known to us, such rules and
regulations may become more stringent such that we are required
to modify our manufacturing process and such that our
customers use of our product may be impacted, or we may
inadvertently use such materials. In addition, our production or
manufacturing process may result in uses above permitted levels.
Such uses or changes in rules or regulations could materially
adversely affect our business, financial condition and operating
results. Health and safety laws, regulations and permit
requirements may change or become more stringent. Any such
changes could require us to incur materially higher costs than
we currently have. Our costs of complying with current and
future health and safety laws, regulations and permit
requirements, and any liabilities, fines or other sanctions
resulting from violations of them, could adversely affect our
business, financial condition and operating results.
Our products
are very expensive relative to other insulation products, which
could make it more difficult for us to grow our revenue and
achieve broader adoption of our aerogel products.
While we believe our products have superior performance
attributes and may sometimes have the lowest cost on a
fully-installed basis or offer life-cycle cost savings, our
competitors offer many incumbent insulation products that are
priced below our products. Our products are very expensive
relative to other insulation products and end-use customers may
not value our products performance attributes sufficiently
to pay their premium price. This could make it more difficult
for us to grow our revenue and achieve broader adoption of our
aerogel products. In addition, some of the cost benefits of our
products are based on reduced installation time and related
labor expense. In regions where labor costs are significantly
lower than in the United States and Europe, the cost benefits of
reduced installation times may not be adequate to overcome the
relatively high price of our products and may make it more
difficult for us to grow our revenue in such regions.
Changes to
regional, national and local laws and regulations regarding
energy efficiency and building standards could materially
adversely affect our business and operating
results.
We believe that there has been a trend in certain countries,
especially within the European Union, for governments to mandate
increasingly stringent energy efficiency standards and building
standards for certain construction and renovation projects and
this trend has evidenced itself at various levels of government,
including regional, national and local. Our business is affected
by these laws and regulations. If this trend toward increasingly
stringent energy efficiency standards and building standards
were to lessen or cease or if there were to be a trend towards
weaker energy efficiency standards and building standards or
reduced enforcement of existing standards, then our business and
operating results could be materially adversely affected. In
addition, changes to the laws and regulations governing energy
efficiency and building standards in specific jurisdictions or
the enforcement of such laws, regulations or standards could
materially adversely impact our business and operating results
if we have significant sales of our products in that
jurisdiction or if we were targeting that jurisdiction for
expanded future sales.
18
In particular, our sales in the building and construction market
are driven substantially by government policies and legislation
in Europe that mandate high levels of energy efficiency in
buildings. The European Unions directive on the energy
performance of buildings, Directive 2010/ 31/ EU, or
EPBD, requires EU member states to pass legislation or implement
regulations requiring all new buildings as well as most major
renovations to achieve minimum energy performance requirements.
The EPBD significantly expands the scope of the original EU
directive on building energy performance adopted in 2002,
Directive 2002/91/EC. While we believe the policies established
under the EPBD offer a significant opportunity for our products
in the European building and construction market, this
opportunity is largely dependent on faithful implementation of
the directive by EU member states and continued support for
national and local energy efficiency initiatives. Many EU member
states have not yet fully adopted legislation implementing the
original 2002 directive and it is unclear when certain EU
members will pass legislation implementing the EPBD. In the
event that the European Union repeals or weakens the
requirements of the EPBD or that EU member states do not adopt
or enforce national legislation implementing the EPBD, our
business and operating results may be materially adversely
impacted.
As a result of
becoming a public company, we will be obligated to develop and
maintain proper and effective internal control over financial
reporting. If our internal controls over financial reporting are
determined to be ineffective, or if our auditors are otherwise
unable to attest to their effectiveness when required, investor
confidence in our company, and our common stock price, may be
adversely affected.
We will be required, pursuant to Section 404 of the
Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, to
furnish a report by management on, among other things, the
effectiveness of our internal control over financial reporting
for the first fiscal year beginning after the effective date of
this offering and in each year thereafter. Our auditors may also
need to attest to the effectiveness of our internal controls
over financial reporting. These assessments will need to include
disclosure of any material weaknesses identified by our
management in our internal control over financial reporting.
Although our independent registered public accounting firm did
not complete an audit of internal controls over financial
reporting as of December 31, 2010, two significant
deficiencies in internal controls were identified in connection
with the preparation of our financial statements and the audit
of our financial results for 2010. We determined that we had a
significant deficiency relating to our accounting resources and
financial information systems. In addition, we determined that
we had a significant deficiency relating to our information
technology and general controls.
We have taken actions to remediate both of these significant
deficiencies including instituting more detailed recording,
review and approval processes, establishing additional internal
controls, providing additional training and hiring additional
financial and accounting staff; however, we do not expect that
they will be remediated at the time of this offering.
We are in the very early stages of the costly and challenging
process of compiling our system of internal controls over
financial reporting and processing documentation necessary to
perform the evaluation needed to comply with Section 404.
We may discover, and not be able to remediate, future
significant deficiencies or material weaknesses, nor be able to
complete our evaluation, testing and any required remediation in
a timely fashion, any of which would make us less likely to
detect or prevent fraud. In addition, we may not be able to
remediate our current significant deficiencies. During the
evaluation and testing process, if we identify one or more
material weaknesses in our internal control over financial
reporting, we will be unable to assert that our internal
controls are effective. If we are unable to assert that our
internal controls over financial reporting are effective, or if
our auditors are unable to express an opinion on the
effectiveness of our internal controls, we could lose investor
confidence in the accuracy and completeness of our financial
reports or it could cause us to fail to meet our reporting
obligations, which could have a material adverse effect on the
price of our common stock. In addition, a delay in compliance
with Section 404 could subject us to a variety of
administrative sanctions, including Securities and Exchange
Commission, or SEC, action, ineligibility
19
for short form resale registration, the suspension or delisting
of our common stock from The New York Stock Exchange, or NYSE,
and the inability of registered broker-dealers to make a market
in our common stock, which would further reduce our stock price
and could harm our business.
We will incur
costs and demands upon management as a result of complying with
the laws and regulations affecting public companies in the
United States, which may adversely affect our operating
results.
After the consummation of this offering, we will be subject to
the reporting requirements of the Exchange Act that require us
to file, among other things, quarterly reports on
Form 10-Q
and annual reports on
Form 10-K.
Under Section 302 of the Sarbanes-Oxley Act, as a part of
each of these reports, our chief executive officer and chief
financial officer will be required to evaluate and report their
conclusions regarding the effectiveness of our disclosure
controls and procedures and to certify that they have done so.
This requirement will apply to our first
Form 10-Q
for the quarter following effectiveness of the registration
statement. Effective internal controls are necessary for us to
provide reliable financial reports and prevent fraud. In
addition, under Section 404 of the Sarbanes-Oxley Act, we
will be required to include a report of management on our
internal control over financial reporting in our
Form 10-K.
In addition, the independent registered public accounting firm
auditing our financial statements will be required to attest to
and report on the effectiveness of our internal control over
financial reporting. This requirement will first apply to our
Form 10-K
for our fiscal year ending December 31, 2012. The process
of improving our internal controls and complying with
Section 404 will be expensive and time consuming, and will
require significant attention of management.
Complying with these and other requirements applicable to public
companies may place a strain on our personnel, information
technology systems and resources and divert managements
attention from other business concerns. We may need to hire
additional accounting and financial staff with appropriate
public company experience and technical accounting knowledge,
and we may not be able to do so without incurring material
costs. These and other requirements may also make it more
difficult or more costly for us to obtain certain types of
insurance, including directors and officers
liability insurance. We, therefore, may be forced to accept
reduced policy limits and coverage or incur substantially higher
costs to obtain the same or similar coverage. The impact of
these events could also make it more difficult for us to attract
and retain qualified persons to serve on our board of directors,
our board committees or as executive officers. Any one of these
events could have a material adverse effect on our business,
financial condition and results of operations.
Our continued
growth requires that we expand our manufacturing facilities and
increase our production capacity. If we fail to achieve this
manufacturing expansion and capacity increase, our growth may be
hindered and our business may be materially adversely
affected.
We are engaged in the design, engineering and initial
procurement phase of building a third production line in our
current manufacturing facility in East Providence and also plan
to construct a second manufacturing facility located in either
the United States or Europe. If, for any reason, the third
production line or the second manufacturing facility should fail
to be completed in a timely fashion or any of the production
lines in our current or any future manufacturing facilities do
not operate according to our expectations, sales may be impeded,
our growth may be hindered and our business may be materially
adversely affected. Additionally, we have been unable at times
to produce sufficient amounts of our products to meet demand
from our customers, and we may not be able to avoid capacity
constraints in the future. Many factors could delay or prevent
the addition of a third production line or the construction of a
second manufacturing facility, including our inability to find
financing on favorable terms, or at all, design, engineering and
construction difficulties, interruptions in the supply of the
necessary construction materials or the increase in their price,
and our failure to obtain necessary legal, regulatory and other
approvals. Many factors could prevent the third production line
or the second manufacturing facility from producing at their
expected full capacity, including design and engineering
failures, inability to retain and train a skilled workforce,
improper
20
operation of the manufacturing equipment and damage to the
manufacturing equipment due to design and engineering flaws or
operator error. Any such expansion will place a significant
strain on our senior management team and our financial and other
resources. The costs associated with our expansion could exceed
our expectations and result in a materially adverse impact on
our operating results.
Growth may
place significant demands on our management and our
infrastructure. If we fail to manage our growth effectively, we
may be unable to execute our business plan or address
competitive challenges adequately.
We expect to continue to expand our manufacturing, sales and
marketing, operations, engineering, research and development
capabilities and financial control and reporting systems, and as
a result, we may be unable to manage our growth. To manage our
anticipated future growth, we must continue to implement and
improve our managerial, operational, financial control and
reporting systems, expand our facilities and continue to recruit
and train additional qualified personnel. All of these measures
will require significant expenditures and will demand the
attention of management. Due to our limited resources, we may
not be able to effectively manage the expansion of our
operations or recruit and adequately train additional qualified
personnel. The physical expansion of our operations may lead to
significant costs and may divert our management and business
development resources. Any inability to manage growth could
delay the execution of our business plans or disrupt our
operations. If we fail to achieve the necessary level of
efficiency in our organization as it grows, our business,
results of operations and financial condition would be harmed.
We compete for personnel and advisors with other companies and
other organizations, many of which are larger and have greater
name recognition and financial and other resources than we do.
If we are not able to hire, train and retain the necessary
personnel, or if these managerial, operational, financial and
reporting improvements are not implemented successfully, we
could lose customers and revenues. We allocate our operations,
sales and marketing, research and development, general and
administrative and financial resources based on our business
plan, which includes assumptions about current and future orders
from industrial customers, building and construction customers
and original equipment manufacturers, or OEMs. However, these
factors are uncertain. If our assumptions regarding these
factors prove to be incorrect or if competing products gain
further acceptance, then actual demand for our aerogel products
could be significantly less than the demand we anticipate and we
may not be able to sustain our revenue growth or achieve
profitability.
Our financial
results may vary from
period-to-period
due to changes in the mix of our products that we sell during a
period and due to our expenses not corresponding with the timing
of our revenues, which may lead to volatility in our stock
price.
Our profitability from
period-to-period
may vary due to the mix of products that we sell in different
periods. Although changes in our product mix from period to
period have not historically had a significant impact on our
financial results, as we seek to continue to expand our
business, we expect to sell an increasing amount of our aerogel
insulation products into the building and construction and OEM
markets. Certain of the products aimed at these markets have
different margin profiles than the products that have
historically generated most of our product revenue. In
particular, Spaceloft and Spaceloft A2, which are targeted at
the building and construction market, are relatively lower
margin as compared to our Pyrogel and Cryogel products, which
are targeted at the industrial and OEM markets. Accordingly,
sales of individual products may not necessarily be consistent
across periods, which could cause our revenue, cost of revenue,
gross profit, net income and cash flow to vary from period to
period.
In addition, most of our expenses are either relatively fixed in
the short-term or incurred in advance of sales. These spending
levels are based in part on our expectations regarding future
revenues. As a result, if revenues for a particular operating
period are below expectations, we may not be able to
proportionately reduce expenses for that period. Therefore, we
believe that period-to-period
21
comparisons of our operating results may not necessarily be
meaningful and that these comparisons cannot be relied upon as
indicators of future performance. As a result, our operating
results may not meet expectations of equity research analysts or
investors. If this occurs, the trading price of our common stock
could fall substantially either suddenly or over time.
The
qualification process for our products in the industrial,
building and construction and other markets can be lengthy and
unpredictable, potentially delaying adoption of our products and
incurring significant expense.
Qualification of our products by many of our direct and end-use
customers in the industrial, building and construction and other
markets can be lengthy and unpredictable and many of these
direct and end-use customers have extended budgeting and
procurement processes. This extended sales process requires the
dedication of significant time by our personnel and our use of
significant financial resources, with no certainty of success or
recovery of our related expenses. Furthermore, even after an
extensive qualification process, our products may fail to meet
the standards sought by our end-use customers and may not be
qualified for use by such end-use customers. Such a failure to
qualify may result in us losing such companies as end-users of
our products, which would cause a decrease in our revenue or
revenue growth rate either of which could materially adversely
affect our business and operating results.
Shortages of
the raw materials used in the production of our products,
increases in the cost of such materials or disruptions in our
supply chain could adversely impact our financial condition and
operating results.
The raw materials used in the production of our products consist
primarily of polyester and fiberglass battings, amorphous silica
and ethanol, which is used in the delivery of the amorphous
silica. Although we are not dependent on any one supplier, we
are dependent on the ability of our third-party suppliers to
supply such materials on a timely and consistent basis. While
these raw materials are available from numerous sources, they
may be subject to fluctuations in availability and price. Our
third-party suppliers may not dedicate sufficient resources to
meet our scheduled delivery requirements or our suppliers may
not have sufficient resources to satisfy our requirements during
any period of sustained demand. Failure of suppliers to supply,
delays in supplying, or disruptions in the supply chain for our
raw materials, or allocations in the supply of certain high
demand raw components, could materially adversely affect our
operations, our profitability and our ability to meet our
delivery schedules on a timely and competitive basis.
Fluctuations in the prices of these raw materials could have a
material adverse effect on results of operations. Our ability to
pass increases in raw material prices on to our customers is
limited due to competitive pricing pressure and the time lag
between increased costs and implementation of related price
increases. We purchase amorphous silica from several suppliers,
mostly pursuant to individual purchase orders and not pursuant
to long-term contracts. While we do have a supply agreement with
Silbond Corporation, Silbond provides less than a third of our
amorphous silica needs. Although we are working with a number of
amorphous silica providers to plan for our potential future
needs and to develop processes to reduce our amorphous silica
costs, we do not have a secure, long-term supply of amorphous
silica. We may not be able to establish arrangements for secure,
long-term amorphous silica supplies at prices consistent with
our current costs or without incurring a delay in supply at
prices consistent with our current costs while we seek to
identify different sources. Any inability to continue to
purchase silica pursuant to purchase orders, without long-term
agreements in place, or to otherwise establish a long-term
supply of amorphous silica at prices consistent with our current
costs would have a material adverse effect on our ability to
increase our sales and achieve profitability.
22
If we do not
continue to develop and maintain distribution channels for our
products, our profitability could be impaired.
For a significant portion of our revenues in the industrial and
OEM markets, we rely on sales to distributors who then sell our
products to end-users in those markets. Our success depends, in
part, on our maintaining satisfactory relationships with these
distributors. The majority of our sales to distributors are
effected on a purchase order basis that requires us to meet
expectations of delivery, quality and pricing of our products,
at both the distribution channel level and at the level of the
end-user of our products. If we fail to meet expected standards,
our revenues would decline and this could materially adversely
affect our business, results of operations and financial
condition. Additionally, we have been unable at times to produce
sufficient amounts of our products to meet demand from our
customers and we may not be able to avoid capacity constraints
in the future. If we are unable to deliver our products within
such short timeframes, we may be at risk of losing direct or
end-use customers. Accordingly, shortfalls in sales could
materially adversely affect our business and operating results.
Failure by us
to develop, maintain and strengthen strategic relationships with
industry leaders to commercialize our products, particularly in
the building and construction market, may adversely affect our
results of operations and our ability to grow our
business.
Our business strategy requires us to align the design and
performance attributes of our products to the evolving needs of
the market. To facilitate this process, we have sought out
partnerships and relationships with industry leaders in order to
assist in the development and commercialization of our products.
We face competition from other manufacturers of insulation in
seeking out and entering into such partnerships and
relationships with industry leaders in our target markets and we
may therefore not be successful in establishing strategic
relationships in those markets. In the building and construction
market, we have entered into a joint development agreement with
BASF Construction Chemicals to develop products to meet
increasingly stringent building standards for thermal
performance of retrofit and new-build wall systems. In the event
that we are unable to develop products that meet market needs or
maintain our relationship with BASF Construction Chemicals, we
may be required to find less prominent partners in the building
and construction market and we may be less able or unable to
successfully penetrate that market. As a result, we may lose our
ability to grow our business in the building and construction
market, which could adversely affect our results of operations,
including impairing our profitability.
We may enter
into agreements that may limit our ability to broadly market our
products or could involve future obligations, which could make
it more difficult for us to commercialize certain of our
products and negatively affect our business and results of
operations.
We have a joint development agreement with BASF Construction
Chemicals to develop products in the building and construction
market and other joint development agreements that we enter into
from time to time. In order to develop and commercialize our
products, we may enter into additional joint development
agreements or commercial arrangements, in particular in the
building and construction and OEM markets. We cannot be certain
that any products will be successfully developed under any such
agreement or, even if developed, that they will be successfully
produced or commercialized. These agreements may contain
exclusivity, ownership and other terms that may limit our
ability to commercialize any products or technology developed in
connection with such agreements, including in ways that we do
not envision at the time of entering into the agreement. In
addition, these agreements may not obligate either party to make
any purchases and may contain technical specifications that must
be achieved to the satisfaction of our partner, which we cannot
be certain we will be able to achieve. If our ability to
commercialize products or technology developed in connection
with these agreements is limited or if we fail to achieve the
technical specifications that may be required, then our
business, financial condition and operating results could be
materially adversely affected.
23
Our results of
operations could be adversely affected if our operating expenses
do not correspond with the timing of our revenues.
Most of our operating expenses, such as manufacturing facility
expenses, employee compensation and research expenses, are
either relatively fixed in the short-term or incurred in advance
of sales. Additionally, our spending levels are based in part on
our expectations regarding future revenues. As a result, if
revenues for a particular quarter are below expectations, we may
not be able to proportionately reduce operating expenses for
that quarter. For example, the time between our customers
placing an order and delivery of our product is typically short,
which limits our ability to predict future sales. This
limitation could result in our being unable to reduce spending
quickly enough to compensate for reductions in sales and could
therefore adversely affect our operating results for any
particular operating period. Even though the sales cycle for our
products is often long, the lead time between an actual order
and shipment of the product is typically short and the
insulation market is generally characterized by
just-in-time
delivery. This limits our ability to predict future sales and
could also result in our inability to reduce spending quickly
enough to compensate for reductions in sales.
We are exposed
to the credit risk of some of our direct customers, including
distributors, contractors and OEMs, which subjects us to the
risk of non-payment for our products.
Although many of our end-use customers are larger,
well-capitalized industrial companies, we distribute our
products through a network of distributors, contractors and OEMs
that may not be well-capitalized and may be of a lower credit
quality. This direct customer network subjects us to the risk of
non-payment for our products. Although we have not experienced a
significant incidence of non-payment for our products, such
non-payments may occur in the future. In addition, during
periods of economic downturn in the global economy, our exposure
to credit risks from our direct customers may increase, and our
efforts to monitor and mitigate the associated risks may not be
effective. In the event of non-payment by one or more of our
direct customers, our business, financial condition and
operating results could be materially adversely affected.
Our working
capital requirements involve estimates based on demand and
production expectations and may decrease or increase beyond
those currently anticipated, which could harm our operating
results and financial condition.
In order to fulfill the product delivery requirements of our
direct and end-use customers, we plan for working capital needs
in advance of customer orders. As a result, we base our funding
and inventory decisions on estimates of future demand. If demand
for our products does not increase as quickly as we have
estimated or drops off sharply, our inventory and expenses could
rise, and our business and operating results could suffer.
Alternatively, if we experience sales in excess of our
estimates, our working capital needs may be higher than those
currently anticipated. Our ability to meet this excess customer
demand depends on our ability to arrange for additional
financing for any ongoing working capital shortages, since it is
likely that cash flow from sales will lag behind these
investment requirements. To meet any ongoing working capital
shortages, we may rely on our current loan and security
agreement with Silicon Valley Bank, which we refer to as our
revolving credit facility, under which we are entitled to borrow
up to $10.0 million. See Managements Discussion
and Analysis of Financial Condition and Results of
Operations Liquidity and Capital Resources. In
addition, we plan to increase our inventory in order to meet our
expected future demand. This would result in an increase in our
working capital requirements that could harm our operating
results and financial condition.
Our contracts
with U.S. government agencies may subject us to audits, criminal
penalties, sanctions and other expenses and fines.
U.S. government agencies, including the Defense Contract
Audit Agency and the Department of Labor, routinely audit
government contractors. These agencies review a
contractors compliance with
24
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 contractors systems and policies, including
a contractors purchasing, property, estimating, billing,
accounting, compensation and management information systems. Any
costs found to be overcharged or improperly allocated to a
specific contract or any amounts improperly billed or charged
for products or services will be subject to reimbursement to the
government. As a government contractor, we are required to
disclose credible evidence of certain violations of law and
contract overpayments to the U.S. government. If we are
found to have participated in improper or illegal activities, we
may be subject to civil and criminal penalties and
administrative sanctions, including termination of contracts,
forfeiture of profits, suspension of payments, fines and
suspension or prohibition from doing business with the
U.S. government. Any negative publicity related to such
contracts, regardless of the accuracy of such publicity, may
adversely affect our business or reputation.
Our contracts
with U.S. government agencies may not be funded by future
appropriations and are subject to modification or termination at
any time prior to their completion.
Our contracts with U.S. government agencies are subject to
the availability of appropriated funds. The U.S. government
funds our contract research work through a variety of funding
programs that rely on monies appropriated by Congress. At any
point, the availability of funding could change, thus reducing
the opportunities for new or continued revenues to us from
government contract work. For example, we currently receive a
significant portion of our government contract revenues through
the Small Business Innovation Research program, or SBIR. SBIR
funding for our contracts with U.S. government agencies
could be reduced or eliminated for a number of reasons including
the discontinuance of the program as a result of action or
inaction by Congress, a decrease in the portion of
U.S. government agencies budgets that are allocated
to research and development, or a reduction of the percentage of
research and development budgets that are allocated to SBIR. We
expect that our revenue under such contracts will continue to
decline due to the recent trend toward tightening of federal
spending guidelines and programs. Additionally, SBIR funding is
currently available only to companies with less than
500 employees. In the event that our employee headcount
equals or exceeds 500, we would no longer be eligible to compete
for and be awarded contracts funded through SBIR. Any reduction
in available funding or inability to participate in the SBIR
program may adversely affect our revenues.
In addition, under our contracts, the U.S. government
generally has the right not to exercise options to extend or
expand our contracts and may modify, curtail or terminate the
contracts at its convenience. Our government customers may not
renew our existing contracts after the conclusion of their terms
and we may not be able to enter into new contracts with
U.S. government agencies. Any decision by the
U.S. government not to exercise contract options or to
modify, curtail or terminate our contracts or not to renew our
contracts or enter into new contracts with us would adversely
affect our revenues.
Loss of the
intellectual property rights that we license from Cabot
Corporation would have a material adverse impact on our
business.
We have licensed certain intellectual property rights from Cabot
under a cross license agreement. These intellectual property
rights have been and continue to be critical to the manufacture
of our existing products and may also be important to our
research, development and manufacture of new products. Any
termination or limitation of our cross license agreement with
Cabot, or any loss of the intellectual property rights granted
to us thereunder as a result of ineffective protection of such
rights by Cabot, a breach of or dispute under the cross license
agreement by either party or our inability to meet the payment
schedule set forth in the cross license agreement would have a
material adverse impact on our financial condition, results of
operations and growth prospects, and would prevent us from
continuing our business. Under the terms of the cross license
agreement, as amended, we are obligated, among other things, to
pay Cabot a nonrefundable fee of $38 million that
25
is amortized on a quarterly basis with the total amount to be
paid in full no later than December 2013. As of June 30,
2011, $15.0 million remained outstanding to Cabot. For a
more detailed description of the cross license agreement with
Cabot, see Business Intellectual
Property Cross License Agreement with Cabot
Corporation and Managements Discussion and
Analysis of Financial Condition and Results of
Operations Contractual Obligations and
Commitments Cross License Agreement.
Our inability
to protect our intellectual property rights could negatively
affect our business and results of operations.
Our ability to compete effectively depends in part upon
developing, maintaining
and/or
protecting intellectual property rights relevant to our aerogel
product forms, applications and manufacturing processes. We rely
principally on a combination of patent protection, trade secret
laws, confidentiality and nondisclosure agreements and licensing
arrangements to establish and protect the intellectual property
rights relevant to our business. However, these measures may not
be adequate in every given case to permit us to gain or keep any
competitive advantage, particularly in those countries where the
laws do not protect our proprietary rights as fully as in the
United States. In particular, since aerogels were developed
approximately 80 years ago, there has been a wide range of
research, development and publication related to aerogels, which
makes it difficult to establish intellectual property rights to
many key elements of aerogel technology and to obtain patent
protection. Accordingly, much of the critical technology that we
use in our manufacture of aerogel blankets is not protected by
patents.
Where we consider it appropriate, our strategy is to seek patent
protection in the United States and other countries on
technologies used in or relating to our aerogel product forms,
applications and manufacturing processes. As of June 30,
2011, we had 17 issued U.S. patents and 13 issued foreign
patents, including one U.S. patent and one European patent
that we co-own with a third party. The issuance of a patent is
not conclusive as to its scope, validity and enforceability.
Thus, any patent held by us or to be issued to us from a pending
patent application, could be challenged, invalidated or held
unenforceable in litigation or proceedings before the
U.S. Patent and Trademark Office
and/or other
patent tribunals, or circumvented by others. No consistent
policy regarding the breadth of patent claims has emerged to
date in the United States and the landscape could become more
uncertain in view of future rule changes by the United States
Patent and Trademark Office, the introduction of patent reform
legislation and decisions in patent law cases by the federal
courts including the United States Supreme Court. The patent
landscape outside the United States is even less predictable. As
a result, the validity and enforceability of patents cannot be
predicted with certainty. In addition, we may fail to apply for
patents on important technologies or product candidates in a
timely fashion, if at all, and our existing and future patents
may not be sufficiently broad to prevent others from practicing
our technologies or from developing competing products or
technologies, in particular given the long history of aerogel
development. Furthermore, third parties could practice our
intellectual property rights in territories where we do not have
patent protection. Such third parties may then try to import
products made using our intellectual property rights into the
United States or other countries.
As of June 30, 2011, we had 20 pending U.S. patent
applications and 34 pending foreign patent applications,
including one pending U.S. patent application that we
co-own with a third party and a family of pending foreign patent
applications that we co-own with another third party. Our
pending patent applications are directed to various enabling
technologies for the product forms, applications and
manufacturing processes that support our current business, as
well as aspects of products under development or contemplated
for the future. The issuance of patents from these applications
involves complex legal and factual questions and, thus, we
cannot assure you that any of our pending patent applications
will result in the issuance of patents to us. The
U.S. Patent and Trademark Office and relevant foreign
patent tribunals may deny or require significant narrowing of
claims in our pending patent applications. Patents issued as a
result of any of our pending patent applications may not cover
our enabling technology
and/or the
products or processes that support our current or future
business
26
or afford us with significant commercial protection against
others with similar technology. Proceedings before the
U.S. Patent and Trademark Office could result in adverse
decisions as to the priority of our inventions and the narrowing
or invalidation of claims in issued patents. In addition, our
pending patent applications filed in foreign countries are
subject to laws, rules and procedures that differ from those of
the United States, and thus foreign patent applications may not
be granted even if counterpart United States patents are issued.
Patents
covering technologies that are similar or superior to our
technologies may be developed or obtained by third parties. We
may need to seek licenses to these technologies, which could
limit our ability to manufacture our products and have a
material adverse effect on our business and results of
operations.
Competitors or other third parties may independently develop and
obtain patents covering technologies that are similar or
superior to the product forms, applications or manufacturing
processes that we employ. In such event, we may need to obtain
licenses for these technologies. However, we may not be able to
obtain licenses on reasonable terms, if at all, which could
limit our ability to manufacture our current
and/or
future products and operate our business.
Our contracts
with the U.S. government and other third parties could
negatively affect our intellectual property
rights.
To further our product development efforts, our scientists and
engineers work closely with customers, the U.S. government
and other third parties to research and develop advancements in
aerogel product forms, applications and manufacturing processes.
We have entered into agreements with private third parties and
have been awarded numerous research contracts with the U.S.
government to independently or jointly research, design and
develop new devices and systems that incorporate our aerogel
products. We also expect to enter into similar private
agreements and be awarded similar government contracts in the
future. In some instances, the research and development
activities that we conduct under contract with the
U.S. government
and/or with
private third parties may produce intellectual property to which
we may not have ownership or exclusive rights and will be unable
to protect or monetize. Moreover, when we develop new
technologies using U.S. government funding, the government may
obtain certain rights in any resulting patents, technical data
and/or other
confidential and proprietary information, generally including,
at a minimum, a non-exclusive license authorizing the U.S.
government to use the invention, technical data or software for
non-commercial purposes. This federal government funding may
limit when and how we can deploy our technology developed under
those contracts. In addition, the federal funding must be
disclosed in any resulting patent applications, and our rights
in such inventions will normally be subject to government
license rights, periodic post-contract utilization reporting,
foreign manufacturing restrictions and march-in
rights. March-in rights refer to the right of the U.S.
government to require us to grant a license to the technology to
a responsible applicant or, if we refuse, the government may
grant the license itself. The U.S. government may exercise its
march-in rights if it determines that action is necessary
because we fail to achieve practical application of any
technology developed under contract with the government or
because action is necessary to alleviate health or safety needs,
to meet requirements of federal regulations or to give
preference to United States industry. The U.S. government may
also have the right to disclose our confidential and proprietary
information to third parties.
Our U.S. government-sponsored research contracts are also
subject to audit and require that we provide regular written
technical updates on a monthly, quarterly or annual basis, and,
at the conclusion of the research contract, a final report on
the results of our technical research. Because these reports are
generally available to the public, third parties may obtain some
aspects of our confidential and proprietary information relating
to our product forms, applications
and/or
manufacturing processes. If we fail to provide these reports or
to provide accurate or complete reports, the U.S. government
could obtain rights to any intellectual property arising from
the related research.
27
Furthermore, there could be disputes between us and a private
third party as to the ownership rights to any inventions that we
develop in collaboration with such third party. Any such dispute
may cause us to incur substantial costs, and could place a
significant strain on our financial resources, divert the
attention of management from our core business and harm our
reputation.
We rely on
trade secrets to protect our technology, and our failure to
obtain or maintain trade secret protection could adversely
affect our competitive business position.
We rely in part on trade secret protection to protect
confidential and proprietary information relating to our
technology, particularly where we do not believe patent
protection is appropriate or obtainable. We continue to develop
and refine the manufacturing processes used to produce our
aerogel products and believe that we have already developed, and
will continue to develop, significant know-how related to these
processes. However, trade secrets can be difficult to protect.
We may not be able to maintain the secrecy of this know-how, and
competitors may develop or acquire equally or more valuable
know-how related to the manufacture of comparable aerogel
products. Our strategy for
scale-up of
commercial production will continue to require us to share
confidential and proprietary information with the U.S.
government and other third parties. While we take reasonable
efforts to protect our trade secrets, our employees,
consultants, contractors or scientific and other advisors, or
those of our business partners, may intentionally or
inadvertently disclose our confidential and proprietary
information to competitors. Any enforcement of claims by us that
a third party has obtained and is using our trade secrets is
expensive, time consuming and uncertain. In addition, foreign
courts are sometimes less willing than United States courts to
protect trade secrets.
We also require all employees and consultants to execute
confidentiality
and/or
nondisclosure agreements upon the commencement of an employment
or consulting arrangement with us, which agreements generally
require that all confidential and proprietary information
developed by the individual or made known to the individual by
us during the course of the individuals relationship with
us be kept confidential and not disclosed to third parties.
These agreements further generally provide that inventions
conceived by the individual in the course of rendering services
to us will be our exclusive property. Nevertheless, these
agreements may not be honored and our confidential and
proprietary information may be disclosed, or these agreements
may be unenforceable or difficult to enforce. We also require
customers and vendors to execute confidentiality
and/or
nondisclosure agreements. However, we may not have obtained such
agreements from all of our customers and vendors. Moreover, some
of our customers may be subject to laws and regulations that
require them to disclose information that we would otherwise
seek to keep confidential. Our confidential and proprietary
information may be otherwise disclosed without our
authorization. For example, third parties could reverse engineer
our manufacturing processes, independently develop substantially
equivalent confidential and proprietary information or otherwise
gain access to our trade secrets. Failure to maintain trade
secret protection could enable others to produce competing
products and adversely affect our competitive business position.
We could
become subject to intellectual property litigation that could be
costly, limit or cancel our intellectual property rights, divert
time and efforts away from business operation, require us to pay
damages and/or otherwise have an adverse material impact on our
business.
The success of our business is highly dependent on protecting
our intellectual property rights. Unauthorized parties may
attempt to copy or otherwise obtain and use our products
and/or
enabling technology. Policing the unauthorized use of our
intellectual property rights is difficult and expensive, as is
enforcing these rights against unauthorized use by others.
Identifying unauthorized use of our intellectual property rights
is difficult because we may be unable to monitor the processes
and/or
materials being employed by other parties. The steps we have
taken may not prevent unauthorized use of our intellectual
property rights, particularly in foreign countries where
enforcement of intellectual property rights may be more
difficult than in the United States.
28
Our continued commercial success will also depend in part upon
not infringing the patents or violating other intellectual
property rights of third parties. We are aware of patents and
patent applications generally relating to aspects of our
technologies filed by, and issued to, third parties, and our
knowledge of the patent landscape with respect to the
technologies currently embodied within our aerogel products and
the processes that we practice in manufacturing those products
indicates that the third-party patent rights most relevant to
our business are those owned by Cabot and licensed to us under
the cross license agreement with Cabot. Nevertheless, we cannot
determine with certainty whether patents or patent applications
of other parties may materially affect our ability to conduct
our business. There may be existing patents of which we are
unaware that we may inadvertently infringe, resulting in claims
against us or our customers. In the event that the manufacture,
use and/or
sale of our products or processes is challenged, or if our
product forms or processes conflict with patent rights of
others, third parties could bring legal actions against us in
the United States, Europe or other countries, claiming damages
and seeking to enjoin the manufacturing
and/or
marketing of our products. Additionally, it is not possible to
predict with certainty what patent claims may issue from pending
patent applications. In the United States, for example, patent
prosecution can proceed in secret prior to issuance of a patent,
provided such application is not filed in a foreign
jurisdiction. For U.S. patent applications that are also
filed in foreign jurisdictions, such patent applications will
not be published until 18 months from the filing date of
the application. As a result, third parties may be able to
obtain patents with claims relating to our product forms,
applications
and/or
manufacturing processes which they could attempt to assert
against us.
In either case, litigation may be necessary to enforce, protect
or defend our intellectual property rights or to determine the
validity and scope of the intellectual property rights of
others. Any litigation could be unsuccessful, cause us to incur
substantial costs, divert resources and the efforts of our
personnel away from daily operations, harm our reputation
and/or
result in the impairment of our intellectual property rights. In
some cases, litigation may be threatened or brought by a patent
holding company or other adverse patent owner who has no
relevant product revenues and against which our patents may
provide little or no deterrence. If we are found to infringe any
patents, we could be required to (1) pay substantial
monetary damages, including lost profits, reasonable royalties
and/or
treble damages if an infringement is found to be willful
and/or
(2) totally discontinue or substantially modify any
products or processes that are found to be in violation of
another partys intellectual property rights. We also may
have to seek a license to continue making and selling our
products
and/or using
our manufacturing processes, which we may not be able to obtain
on reasonable terms, if at all, which could significantly
increase our operating expenses
and/or
decrease our revenue. If our competitors are able to use our
technology without payment to us, our ability to compete
effectively could be harmed. Our contracts generally indemnify
our customers for third-party claims of intellectual property
infringement related to our manufacture of a product up to the
amount of the purchase price paid for the product. The expense
of defending these claims may adversely affect our financial
results.
We may incur
significant costs complying with environmental laws and related
claims, and failure to comply with these laws and regulations
could expose us to significant liabilities, which could
adversely affect our operating results.
Costs of compliance with regional, national, state and local
existing and future environmental laws and regulations could
adversely affect our cash flow and profitability. We are
required to comply with numerous environmental laws and
regulations and to obtain numerous governmental permits in order
to operate our facilities and in connection with the design,
development, manufacture and transport of our products and the
storage, use, handling and disposal of hazardous substances,
including environmental laws, regulations and permits governing
air emissions. We may incur significant additional costs to
comply with these requirements. If we fail to comply with these
requirements, we could be subject to civil or criminal
liability, damages and fines, and our operations could be
curtailed or suspended. In addition, certain foreign laws and
regulations may affect our ability to export products outside of
the United States. Existing environmental laws and regulations
could be revised or reinterpreted and new laws and regulations
could be adopted or become applicable to us or
29
our products, and future changes in environmental laws and
regulations could occur. These factors may materially increase
the amount we must invest to bring our processes into compliance
and impose additional expense on our operations.
Among the changes to environmental laws and regulations that
could occur is the adoption of regulatory frameworks to reduce
greenhouse gas emissions, which a number of countries,
particularly in the European Union, have adopted, or are
considering adopting. These include adoption of cap and trade
regimes, carbon taxes, restrictive permitting, increased
efficiency standards, and incentives or mandates for renewable
energy, any of which could increase the costs of manufacturing
our products and increase our compliance costs, which could
materially adversely affect our business and operating results.
In addition, private lawsuits, including claims for remediation
of contamination, personal injury or property damage, or actions
by regional, national, state and local regulatory agencies,
including enforcement or cost-recovery actions, may materially
increase our costs. Certain environmental laws make us
potentially liable on a joint and several basis for the
remediation of contamination at or emanating from properties or
facilities we currently or formerly owned or operated or
properties to which we arranged for the disposal of hazardous
substances. Such liability is not limited to the cleanup of
contamination we actually caused. For example, the site of our
East Providence facility was associated with contamination
caused by prior activities on and near the site. While there is
currently in place a covenant not to sue from the state
environmental agency and a state-approved deed restriction
addressing contamination left in place by a previous owner, we
are required to comply with the deed restriction and the
accompanying soil management plan. In general, the deed
restriction prohibits the residential use of the property and
the use of groundwater as potable water, and requires the
maintenance of engineered controls to prevent exposure to
contaminated soils and annual inspections. The soil management
plan requires notice to the state environmental agency of soil
excavation and the stockpiling, sampling and off-site disposal
of excavated soil. Although we have not had to make material
expenditures to satisfy these requirements to date, in the
future, we may incur additional costs to comply with these
requirements and failure to do so could disrupt the operation of
our manufacturing facility or could subject us to liability for
environmental remediation. We may incur liability relating to
the remediation of contamination, including contamination we did
not cause.
We may not be able to obtain or maintain, from time to time, all
required environmental regulatory approvals. A delay in
obtaining any required environmental regulatory approvals or
failure to obtain and comply with them could materially
adversely affect our business and operating results.
We may face
certain product liability or warranty claims from our products,
including from improper installation of our products by third
parties. As a consequence, we could lose existing and future
business and our ability to develop, market and sell our
insulation could be harmed.
The design, development, production and sale of our products
involve an inherent risk of product liability claims and
associated adverse publicity. We may be named directly in
product liability suits relating to our products, even for
defects resulting from errors of our distributors, third-party
installers or end-use customers. These claims could be brought
by various parties, including distributors and other direct
customers who are purchasing products directly from us,
third-party installers who are contracted by our direct and
end-use customers to install our products, or end-use customers
who purchase our products from our distributors. We could also
be named as co-parties in product liability suits that are
brought against the distributors, third-party installers and
end-use customers of our products. Installation of our products
is handled by third parties over which we have no control and
errors or defects in their installation may also give rise to
claims against us, diminish our brand or divert our resources
from other purposes. The failure of our products to perform to
customer expectations, whether or not because of improper
installation, could give rise to warranty claims against us. Any
of these claims, even if without merit, could result in costly
litigation or divert managements attention and resources.
In addition, many of our products are integrated into the final
30
products of our customers. The integration of our products may
entail the risk of product liability or warranty claims based on
malfunctions or hazards from both our products and the final
products of our customers.
A material product liability claim may seriously harm our
results of operations, as well as damage our customer
relationships and reputation. Although we carry general
liability insurance, our current insurance coverage could be
insufficient to protect us from all liability that may be
imposed under these types of claims. Insurance coverage is
expensive, may be difficult to obtain and may not be available
in the future on acceptable terms or at all. Our distributors,
third-party installers and end-use customers may not have
adequate insurance coverage to cover against potential claims.
This insurance may not provide adequate coverage against
potential losses, and if claims or losses exceed our liability
insurance coverage, we may go out of business. In addition,
insurance coverage may become more expensive, which would harm
our results of operations.
A substantial
portion of our revenue comes from sales in foreign countries and
we may expand our operations outside of the United States, which
subjects us to increased economic, operational and political
risks that could increase our costs and make it difficult for us
to continue to operate profitably.
We conduct business across the globe, with a substantial portion
of our sales outside the United States for each of the years
ended December 31, 2008, 2009 and 2010. Revenue from
outside of the United States, based on shipment destination or
services location, amounted to $9.6 million or 48.0% of
revenue, $15.9 million or 55.7% of revenue, and
$23.2 million or 53.6% of revenue in the years ended
December 31, 2008, 2009 and 2010, respectively. In
addition, we may expand our operations outside of the United
States. As a result, we are subject to a number of risks,
including, but not limited to:
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foreign currency fluctuations, which could result in reduced
revenue and increased operating expense;
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labor rules and collective bargaining arrangements in foreign
jurisdictions, if we seek to expand our manufacturing facilities
overseas;
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the effect of applicable foreign tax structures, including tax
rates that may be higher than tax rates in the United States or
taxes that may be duplicative of those imposed in the United
States;
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tariffs and trade barriers;
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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;
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inadequate intellectual property protection in foreign countries;
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the difficulties and increased expense in complying with a
variety of domestic and foreign laws, regulations and trade
standards, including the Foreign Corrupt Practices Act; and
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terrorist activity and political unrest, particularly given the
use of our products at oil and gas facilities.
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Our success will depend in large part on our ability to manage
the effects of continued global political
and/or
economic uncertainty, especially in our significant geographic
markets.
Our business
is affected by seasonal trends, and these trends could have an
adverse effect on our operating results.
We are subject to seasonal fluctuations that we believe are tied
to seasonal levels of industrial activity and the practices of
the worldwide insulation market. As a result, our revenue and
operating income in the fourth quarter is typically higher, and
our revenue and operating income in the first
31
quarter is typically lower, than in other quarters of the year.
In addition, if our products penetration of the building
and construction market grows, we may become subject to
fluctuations related to commercial and residential construction
cycles. As a result of these seasonal trends and fluctuations,
we may occasionally experience declines in revenue or earnings
as compared to the immediately preceding quarter, and
comparisons of our operating results on a
period-to-period
basis may not be meaningful. See Managements
Discussion and Analysis of Financial Condition and Results of
Operations Quarterly Results of
Operations Seasonality and Quarterly Results.
We may require
significant additional capital to pursue our growth strategy,
but we may not be able to obtain additional financing on
acceptable terms or at all.
The growth of our business will depend on substantial amounts of
additional capital for construction of new production lines or
facilities, ongoing operating expenses and continued development
of our aerogel product lines. Our capital requirements will
depend on many factors, including the rate of our revenue
growth, our introduction of new products and enhancements to
existing products, and our expansion of sales and marketing and
product development activities. In addition, we may consider
strategic acquisitions of complementary businesses or
technologies to grow our business, which could require
significant capital and could increase our capital expenditures
related to future operation of the acquired business or
technology. We may not be able to obtain loans or additional
capital on acceptable terms or at all. Moreover, our revolving
credit facility, our secured subordinated notes issued in
December 2010, which we refer to as the subordinated notes, our
convertible notes and our loan agreement with Massachusetts
Development Finance Agency contain restrictions on our ability
to incur additional indebtedness, which, if not waived, could
prevent us from obtaining needed capital. Any future credit
facilities or debt instruments would likely contain similar
restrictions. In the event additional funding is required, we
may not be able to obtain bank credit arrangements or effect an
equity or debt financing on terms acceptable to us or at all. A
failure to obtain additional financing when needed could
adversely affect our ability to maintain and grow our business.
Our credit
facilities and our debt instruments contain financial and
operating restrictions that may limit our access to credit. If
we fail to comply with covenants in our credit facilities or our
debt instruments, we may be required to repay our indebtedness
thereunder, which may have an adverse effect on our
liquidity.
Provisions in our revolving credit facility, our subordinated
notes, our convertible notes and our loan agreement with
Massachusetts Development Finance Agency each impose
restrictions on our ability to operate, including, for some of
the agreements and instruments, but not for others, our ability
to:
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incur additional debt;
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pay dividends and make distributions;
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redeem or repurchase capital stock;
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create liens;
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enter into transactions with affiliates; and
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merge or consolidate with or into other entities.
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These credit facilities and debt instruments also contain other
customary covenants. We may not be able to comply with these
covenants in the future. Our failure to comply with these
covenants may result in the declaration of an event of default
and could cause us to be unable to borrow funds under our
revolving credit facility. In addition to preventing additional
borrowings under our revolving credit facility, an event of
default, if not cured or waived, may result in the acceleration
of the maturity of indebtedness outstanding under the revolving
credit facility and under our other debt instruments and
32
credit facility, which would require us to pay all amounts
outstanding. If an event of default occurs, we may not be able
to cure it within any applicable cure period, if at all. If the
maturity of our indebtedness is accelerated, we may not have
sufficient funds available for repayment or we may not have the
ability to borrow or obtain sufficient funds to replace the
accelerated indebtedness on terms acceptable to us, or at all.
See Managements Discussion and Analysis of Financial
Condition and Results of Operations Liquidity and
Capital Resources.
If we lose key
personnel upon whom we are dependent, or if we are unable to
successfully recruit and retain skilled employees, we may not be
able to manage our operations and meet our strategic
objectives.
Our continued success depends to a considerable degree upon the
continued services of a small number of our employees with
critical knowledge of our products, our manufacturing process,
our intellectual property, our customers and our global
operations. The loss or unavailability of any of these
individuals could harm our ability to execute our business plan,
maintain important business relationships and complete certain
product development initiatives, which could harm our business.
In the event that any of these key individuals leave their
employment with us or take new employment with a competitor, our
business and results of operations could be materially adversely
affected. In addition, our continued success depends upon the
availability, contributions, vision, skills, experience and
effort of our senior management, financial, sales and marketing,
engineering and production teams. We do not maintain key
person insurance on any of our employees. We have entered
into employment agreements with certain members of our senior
management team, but none of these agreements guarantees the
services of the individual for a specified period of time. All
of the agreements with members of our senior management team
provide that employment is at-will and may be terminated by the
employee at any time and without notice.
Although we do not have any reason to believe that we may lose
the services of any our employees with critical knowledge of our
products, our manufacturing processes, our customers and our
global operations or any of our senior management, financial,
sales and marketing, engineering and production teams in the
foreseeable future, the loss of the services of any of these
individuals might impede our operations or the achievement of
our strategic and financial objectives. The loss or interruption
of the service of any of these individuals or our inability to
attract or retain other qualified personnel or advisors could
have a material adverse effect on our business, financial
condition and results of operations and could significantly
reduce our ability to manage our operations and implement our
strategy.
Our ability to
use our net operating loss carryforwards will be subject to
limitation, which could result in a higher effective tax rate
and adversely affect our financial condition and results of
operations.
Generally, a change of more than 50% in the ownership of a
companys 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 companys ability
to use its net operating loss carryforwards attributable to the
period prior to such change. At December 31, 2010, we had
$112 million of net operating losses available to offset
future federal income, if any, which expire on various dates
through December 31, 2030; however, we expect
$30 million of our net operating losses will not be able to
be utilized after June 2013. We performed an analysis pursuant
to Internal Revenue Code Section 382, as well as similar
state provisions, in order to determine whether any limitations
might exist on the utilization of net operating losses and other
tax attributes. Based on this analysis, we determined that it is
more likely than not that an ownership change occurred on
June 10, 2008, resulting in an annual limitation on the use
of our net operating losses and other tax attributes as of such
date. We also determined that we had certain built-in gains at
the date of ownership change. Built-in gains increase the
limitation under the Internal Revenue Code Section 382 to
the extent triggered during the five year period subsequent to
the date of change. Absent the disposition of certain built-in
gain assets, which
33
assets are critical to our business and are unlikely to be
disposed of, within the five year period subsequent to the
acquisition, approximately $30 million of our net operating
losses will not be able to be utilized after June 2013.
Risks Related to
This Offering
There has been
no prior public market for our common stock and an active
trading market may not develop.
Prior to this offering, there has never been a public market for
our common stock. A liquid trading market for our common stock
may not develop. We cannot predict when or whether investor
interest in our common stock on the NYSE might lead to an
increase in market price or the development of a more active
trading market or how liquid that market might become. If an
active market for our securities does not develop, it may be
difficult to sell common stock you purchase in this offering. An
inactive market may also impair our ability to raise capital by
selling our common stock and may impair our ability to acquire
other companies, products or technologies by using our common
stock as consideration.
We expect that
the price of our common stock will fluctuate substantially and
you may not be able to sell your shares at or above the initial
public offering price.
The initial public offering price of our common stock sold in
this offering was determined by negotiation between the
representatives of the underwriters and us. This price may not
reflect the market price of our common stock that will prevail
in the trading market following this offering. You may not be
able to resell your shares at or above the initial public
offering price due to a number of factors, including those
listed in Risks Related to Our Business and
Strategy and including the following, some of which are
beyond our control:
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volume and timing of orders for our products;
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quarterly and yearly variations in our or our competitors
results of operations;
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our announcement or our competitors announcements
regarding new products, product enhancements, significant
contracts, number of distributors, acquisitions or strategic
investments;
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announcements of technological innovations relating to aerogels,
thermal management and energy conservation insulation;
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results of operations that vary from the expectations of
securities analysts and investors;
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the periodic nature of our sales cycles, in particular for
capital projects in the industrial market;
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our ability to develop, obtain regulatory clearance or approval
for and market new and enhanced products on a timely basis;
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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;
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changes in accounting principles; and
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general U.S. and global economic conditions and other
factors, including factors unrelated to our operating
performance or the operating performance of our competitors.
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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.
34
These broad market and industry fluctuations may adversely
affect the market price of our common stock, regardless of our
actual operating performance.
In the past, following periods of market volatility,
stockholders have instituted securities class action litigation.
If we were involved in securities litigation, it could have a
substantial cost and divert resources and the attention of our
senior management team from our business regardless of the
outcome of such litigation.
Securities
analysts may not initiate coverage of our common stock or may
issue negative reports, which may have a negative impact on the
market price of our common stock.
The trading market for our common stock will rely in part on the
research and reports that industry or financial analysts publish
about us or our business. Securities analysts may elect not to
provide research coverage of our common stock after the
completion of this offering. If securities analysts do not cover
our common stock after the completion of this offering, the lack
of research coverage may cause the market price of our common
stock to decline. If one or more of the analysts who elects to
cover us downgrades our stock, our stock price would likely
decline substantially. If one or more of these analysts ceases
coverage of us, we could lose visibility in the market, which in
turn could cause our stock price to decline. In addition, rules
mandated by the Sarbanes-Oxley Act and a global settlement
reached in 2003 between the SEC, other regulatory agencies and a
number of investment banks have led to a number of fundamental
changes in how analysts are reviewed and compensated. In
particular, many investment banking firms are required to
contract with independent financial analysts for their stock
research. It may be difficult for companies such as ours, with
smaller market capitalizations, to attract independent financial
analysts that will cover our common stock. This could have a
negative effect on the market price of our stock.
Our directors,
officers and principal stockholders have significant voting
power and may take actions that may not be in the best interests
of our other stockholders.
As of June 30, 2011, our officers, directors and principal
stockholders and their affiliates collectively controlled
approximately 81.3% of our outstanding common stock. After this
offering, assuming no exercise of the underwriters option
to purchase additional shares, our officers, directors and
principal stockholders and their affiliates collectively will
control approximately % of our
outstanding common stock. As a result, these stockholders, if
they act together, will be able to control the management and
affairs of our company and most matters requiring stockholder
approval, including the election of directors and approval of
significant corporate transactions. This concentration of
ownership may have the effect of delaying or preventing a change
of control and might adversely affect the market price of our
common stock. This concentration of ownership may not be in the
best interests of our other stockholders.
Our management
team may invest or spend the proceeds of this offering in ways
in which you may not agree or in ways that may not yield a
return.
We expect to use the net proceeds from this offering for general
corporate purposes, including the construction of additional
manufacturing capacity. Our management will have considerable
discretion in the application of the net proceeds of this
offering. Stockholders may not agree with such uses and the net
proceeds may be used for corporate purposes that do not increase
our operating results or market value. Until the net proceeds
are used, they may be placed in investments that do not produce
income or that lose value.
Anti-takeover
provisions in our restated certificate of incorporation and
restated by-laws, and Delaware law, could delay or discourage a
takeover.
Anti-takeover provisions in our restated certificate of
incorporation and restated by-laws and Delaware law may have the
effect of deterring or delaying attempts by our stockholders to
remove or
35
replace management, engage in proxy contests and effect changes
in control. The provisions of our charter documents include:
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procedures for advance notification of stockholder nominations
and proposals;
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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;
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the ability of our board of directors to amend our restated
by-laws without stockholder approval; and
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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.
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In addition, as a Delaware corporation, we are subject to
Delaware law, including Section 203 of the Delaware General
Corporation Law. In general, Section 203 prohibits a
Delaware corporation from engaging in any business combination
with any interested stockholder for a period of three years
following the date that the stockholder became an interested
stockholder unless certain specific requirements are met as set
forth in Section 203. These provisions, alone or together,
could have the effect of deterring or delaying changes in
incumbent management, proxy contests or changes in control. See
Description of Capital Stock.
Future sales
of our common stock or the possibility or perception of such
future sales may depress our stock price and impair our ability
to raise future capital through the sale of our equity
securities.
Upon completion of the offering, our current stockholders will
hold a substantial number of shares of our common stock that
they will be able to sell in the public market in the near
future. A significant portion of these shares will be held by a
small number of stockholders. Sales by our current stockholders
of a substantial number of shares after this offering, or the
perception that these sales could occur, could significantly
reduce the market price of our common stock. All the shares sold
in this offering will be freely tradable. Substantially all of
the remaining shares of our common stock are available for
resale in the public market, subject to the restrictions on sale
or transfer during the
180-day
lockup period after the date of this prospectus that is
described in Shares Eligible for Future Sale.
Registration of the sale of these shares of our common stock
would permit their sale into the market immediately. As
restrictions on resale end or upon registration of any of these
shares for resale, the market price of our common stock could
drop significantly if the holders of these shares sell them or
are perceived by the market as intending to sell them. These
sales could also impede our ability to raise future capital.
Moreover, following the completion of this offering and
including (i) any shares issued in satisfaction of any
accrued but unpaid dividends on our preferred stock and
(ii) any shares of common stock issuable upon the automatic
conversion of all principal and accrued but unpaid interest on
our convertible notes, each of which would occur upon the
closing of the offering made hereby, the holders of
approximately shares
of common stock, as well as approximately 1.0 million
shares underlying certain outstanding warrants to purchase our
common stock, will have rights, subject to some conditions, to
require us to include their shares in registration statements
that we may file for ourselves or other stockholders.
The million shares represent
approximately % of the total number
of shares of our common stock to be outstanding immediately
after this offering, assuming no exercise of the
underwriters option to purchase additional shares. See
Description of Capital Stock Registration
Rights for a description of the registration rights of
these stockholders. By exercising their registration rights and
selling a large number of shares, these holders could cause the
prevailing market price of our common stock to decline.
36
As a new
investor, you will experience immediate and substantial dilution
in the net tangible book value of the shares you purchase in
this offering.
The initial public offering price is substantially higher than
the net tangible book value per share prior to the completion of
this offering. Assuming an initial public offering price of our
common stock of $ per share, the
mid-point of the initial public offering price range set forth
on the cover page of this prospectus, you will incur immediate
dilution in net tangible book value per share of
$ . This dilution is due in large
part to earlier investors in our company having paid
substantially less than the initial public offering price when
they purchased their shares. Additionally, new investors in this
offering will have contributed % of
our total equity as
of ,
2011, but will own only % of our
outstanding shares upon completion of this offering.
Since we may require additional funds to develop new products
and continue to expand our business, we may conduct substantial
future offerings of equity securities. Future equity issuances,
including future public offerings or future private placements
of equity securities and any additional shares issued in
connection with acquisitions, will result in further dilution to
investors.
We do not
intend to pay cash dividends in the foreseeable future and,
consequently, your ability to achieve a return on your
investment will depend on appreciation in the price of our
common stock.
We have never declared or paid cash dividends on our common
stock and we do not intend to pay any cash dividends on our
common stock in the foreseeable future. We currently expect to
retain all available funds and any future earnings for use in
the operation and expansion of our business. In addition, the
terms of our revolving credit facility, our subordinated notes,
our convertible notes and our cross license agreement with Cabot
restrict our ability to pay dividends and any future credit
facilities, loan agreements, debt instruments or license
agreement may further restrict our ability to pay dividends.
Payments of future dividends, if any, will be at the discretion
of our board of directors after taking into account various
factors, including our business, operating results and financial
condition, current and anticipated cash needs, plans for
expansion and any legal or contractual limitations on our
ability to pay dividends. As a result, capital appreciation, if
any, of our common stock will be your sole source of potential
gain for the foreseeable future.
37
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:
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our expectations as to the future growth of our business;
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the expected future growth of the market for aerogel insulation,
insulation generally, and energy efficiency solutions;
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our belief that our products provide strong competitive
advantages over traditional insulation materials;
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our expectations that our second production line will be capable
of operating at full capacity by the end of 2011 and that our
first two production lines will then be capable of an annual
production capacity of 40 to 44 million square feet of
aerogel blankets, depending on product mix;
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our expectation that upon completion of our third production
line, our annual manufacturing capacity will increase by between
20 and 26 million square feet of aerogel blankets;
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our ability to produce $50 to $54 million in annual revenue
of aerogel blankets at current prices on our second production
line when operating at full capacity;
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our expectation that the construction of our third production
line will be completed during 2012 and at a cost of
approximately $45 million to $50 million;
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our plans to construct a second manufacturing facility in the
United States or Europe, based on proximity to raw material
suppliers, proximity to customers, labor and construction costs
and available governmental incentives, and our estimate that
design, development and construction costs will range from
$150 million to $200 million;
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the expected energy and cost savings of our products; and
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the expected future development of new aerogel technologies.
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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.
38
USE OF
PROCEEDS
We estimate that we will receive net proceeds from this offering
of approximately $ million,
or approximately $ million if
the underwriters exercise their option to purchase additional
shares in full, based on an assumed initial public offering
price of $ per share, which is the
mid-point of the estimated price range set forth on the cover
page of this prospectus, after deducting estimated underwriting
discounts and estimated offering expenses payable by us.
A $1.00 increase (decrease) in the assumed initial public
offering price of $ per share
would increase (decrease) the net proceeds to us from this
offering by $ million,
assuming the number of shares offered by us, as set forth on the
cover page of this prospectus, remains the same and after
deducting estimated underwriting discounts and estimated
offering expenses payable by us. An increase (decrease) of
1,000,000 shares from the expected number of shares to be
sold in this offering, assuming no change in the assumed initial
public offering price per share, would increase (decrease) our
net proceeds from this offering by
$ million.
We intend to use a portion of the net proceeds we receive from
this offering for the estimated $45 million to
$50 million in expenditures for the design, development and
construction of our third production line in East Providence. We
also intend to use the remaining net proceeds for general
corporate purposes, which may include funding a portion of the
design, development and construction of our planned second
manufacturing facility. We estimate that the total expenditures
for this planned second manufacturing facility will be
approximately $150 million to $200 million. We intend
to fund the remainder of the amounts required for the planned
construction of our second manufacturing facility with cash on
hand, cash flow from operations and additional indebtedness.
Pending specific utilization of the net proceeds as described
above, we intend to invest the net proceeds of the offering in
short-term investment grade and U.S. government securities.
39
DIVIDEND
POLICY
We have never declared or paid any dividends on our common
stock. We currently intend to retain future earnings, if any, to
finance our research and development efforts and for use in the
operation and expansion of our business and do not anticipate
declaring or paying cash dividends in the foreseeable future.
The convertible note purchase agreement related to the
convertible notes, the revolving credit facility, the note
purchase agreement related to the subordinated notes and the
cross license agreement with Cabot all contain restrictive
covenants that restrict our ability to pay any dividends or make
any distributions or payment on, or redeem, retire or
repurchase, any capital stock. Any future determination to pay
dividends will be at the discretion of our board of directors
and will depend upon a number of factors, including our results
of operations, financial condition, future prospects,
contractual restrictions, restrictions imposed by applicable law
and other factors our board of directors deems relevant.
40
CAPITALIZATION
The following table sets forth our cash and cash equivalents and
capitalization as of June 30, 2011:
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on an unaudited pro forma basis to give effect upon the
completion of this offering to (i) the automatic conversion
of all shares of our preferred stock into shares of our common
stock and the issuance of shares of common stock in satisfaction
of accumulated dividends on such preferred stock; (ii) the
automatic conversion of our convertible notes and all accrued
but unpaid interest thereon into shares of our common
stock; and (iii) the sale
of shares
of our common stock offered by us in this offering at an assumed
initial public offering price of $
per share, the mid-point of the price range set forth on the
cover page of this prospectus, after deducting estimated
underwriting discounts and estimated offering expenses payable
by us.
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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 Managements Discussion and Analysis
of Financial Condition and Results of Operations. The
unaudited pro forma information below is prepared for
illustrative purposes only and our capitalization following the
completion of this offering will be adjusted based on the actual
initial public offering price, the closing of the offering made
hereby and other terms of the offering determined at pricing.
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As of June 30, 2011
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Actual
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Pro forma
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(Unaudited)
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(In thousands, except share and per share data)
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Cash and cash equivalents(1)
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$
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29,633
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$
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Long-term debt including current portion
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$
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8,724
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$
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Convertible notes(2)
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30,540
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Series B redeemable convertible preferred stock,
$0.001 par value; 17,000,000 shares authorized,
16,010,292 shares issued and outstanding, actual; no shares
authorized, issued or outstanding, pro forma(3)
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42,161
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Series A redeemable convertible preferred stock,
$0.001 par value, 52,843,201 shares authorized, issued
and outstanding, actual; no shares authorized, issued or
outstanding, pro forma(3)
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136,229
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Stockholders (deficit) equity:
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Common stock, $0.001 par value; 114,000,000 shares
authorized, 26,119,304 shares issued and outstanding,
actual;
and shares
issued and outstanding, pro forma(1)(2)(3)
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26
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Additional paid-in capital(1)
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69,876
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Accumulated deficit
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(202,438
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Total stockholders (deficit) equity(1)
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$
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(132,536
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$
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Total capitalization(1)
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$
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85,118
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$
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(1)
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To the extent we change the number
of shares of common stock sold by us in this offering from the
shares we expect to sell or we change the initial public
offering price from the $ per
share assumed initial public offering price, representing the
mid-point of the estimated price range set forth on the cover
page of this prospectus, or any combination of these events
occurs, the net proceeds to us from this offering and
consequently the cash and cash equivalents and each of
additional paid-in capital, total stockholders equity and
total capitalization may increase or decrease. A $1.00 increase
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(decrease) in the assumed initial
public offering price per share of the common stock would
increase (decrease) the net proceeds that we receive in this
offering and each of our unaudited pro forma cash and cash
equivalents, additional paid-in capital, total
stockholders equity and total capitalization by
approximately $ million,
assuming that the number of shares offered by us under this
prospectus remains the same. An increase (decrease) of
1,000,000 shares in the expected number of shares to be
sold in the offering, assuming no change in the assumed initial
public offering price per share, would increase (decrease) our
net proceeds from this offering and consequently the cash and
cash equivalents and each of additional paid-in capital, total
stockholders equity and total capitalization by
approximately $ million.
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(2)
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The unpaid principal amount of the
convertible notes, together with any accrued but unpaid interest
thereon, will be automatically converted into common stock upon
the closing of the offering made hereby at a conversion price
equal to 87.5% of the initial offering price per share to the
public in this offering.
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A $1.00 increase from the assumed
initial public offering price of $
per share would decrease the number of shares of common stock
issuable upon the conversion of the convertible notes
by
shares and $1.00 decrease from the assumed initial public
offering price of $ per share
would increase the number of shares of common stock issuable
upon the conversion of the convertible notes
by shares,
in each case, assuming a ,
2011 closing date of the offering. For each day after the
assumed , 2011 closing date,
the number of shares of common stock issuable upon the
convertible notes would increase
by shares,
assuming an initial offering price of
$ per share. The actual number of
shares of common stock to be issued upon the conversion of the
convertible notes will be based on the amount of accrued but
unpaid interest then outstanding and the actual initial public
offering price.
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(3)
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Each series of our preferred stock
will convert upon the completion of this offering on a
1-for-1
basis. The terms of our existing preferred stock require us,
upon the closing of the offering made hereby, to issue
additional shares of common stock to the holders of such
preferred stock in satisfaction of accumulated dividends on such
preferred stock. The accumulated dividends were approximately
$5.8 million at June 30, 2011 and accumulate at the
rate of approximately $11,000 per day thereafter. The common
stock issued in satisfaction of those dividends will be valued
at the public offering price per share in this offering.
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A $1.00 increase from the assumed
initial public offering price of $
per share would decrease the number of shares of common stock to
be issued to the holders of preferred stock in satisfaction of
accumulated dividends on such preferred stock by
approximately
shares and a $1.00 decrease from the assumed initial public
offering price of $ per share
would increase the number of shares of common stock to be issued
to the holders of our preferred stock in satisfaction of
accumulated dividends on such preferred stock by
approximately
shares, in each case, assuming the closing date of the offering
hereby occurs
on ,
2011. For each day after the
assumed , 2011
closing date, the number of shares of common stock issuable to
the holders of preferred stock in satisfaction of accumulated
dividends on such preferred stock would increase
by shares,
assuming an initial offering price of
$ per share. The actual number of
shares of common stock to be issued to the holders of our
preferred stock will be based on the amount of accrued dividends
then outstanding and the actual initial public offering price.
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42
DILUTION
If you invest in our common stock, your interest in our net
tangible book value will be diluted to the extent of the
difference between the initial public offering price and the net
tangible book value per share of our common stock immediately
after the completion of this offering. Dilution results from the
fact that the initial public offering price is substantially in
excess of the book value per share attributable to the existing
stockholders for the presently outstanding stock.
As of June 30, 2011, our net tangible book value was
approximately $ , or approximately
$ per share of common stock. Net
tangible book value per share represents the amount of our total
tangible assets less total liabilities and preferred stock,
divided by 26,119,304, the number of common shares outstanding
on June 30, 2011. Our pro forma net tangible book value as
of June 30, 2011 was $ , or
$ per share of common stock. Pro
forma net tangible book value per share represents the amount of
our total tangible assets less our total liabilities, divided by
the number of shares of our common stock outstanding, as of
June 30, 2011, after giving effect to (i) the
automatic conversion of all shares of our preferred stock into
68,853,493 shares of our common stock; (ii) the
issuance
of
shares of common stock upon the closing of the offering made
hereby in satisfaction of accumulated dividends on our preferred
stock, assuming an initial public offering price of
$ per share, the mid-point of the
price range set forth on the cover page of this prospectus, and
the closing of the offering made hereby occurs
on ,
2011; and (iii) the automatic conversion of
$30.0 million aggregate principal amount and all accrued
but unpaid interest on our convertible notes upon the closing of
the offering made hereby into an aggregate
of
shares of our common stock, at a conversion price equal to 87.5%
of the initial offering price, assuming an initial public
offering price of $ per share, the
mid-point of the price range set forth on the cover page of this
prospectus, and that the closing of the offering made hereby
occurs
on ,
2011.
After giving effect to the sale by us of shares of our common
stock in the offering at the assumed initial public offering
price of $ , the mid-point of the
price range set forth on the cover page of this prospectus, and
after deducting estimated underwriting discounts and estimated
offering expenses payable by us, our pro forma as adjusted net
tangible book value as of June 30, 2011 would have been
approximately $ , or approximately
$ per share. This amount
represents an immediate increase in pro forma as adjusted net
tangible book value of $ per share
to our existing stockholders and an immediate dilution in pro
forma as adjusted net tangible book value of approximately
$ per share to new investors
purchasing shares of our common stock in this offering. We
determine dilution by subtracting the pro forma as adjusted net
tangible book value per share after the offering from the amount
of cash that a new investor paid for a share of common stock.
The following table illustrates this dilution on a per share
basis:
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Assumed initial public offering price per share
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$
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Pro forma net tangible book value per share as of June 30,
2011
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Increase per share attributable to cash payments by new
investors in this offering
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Pro forma as adjusted net tangible book value per share after
this offering
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Dilution in pro forma net tangible book value per share to new
investors
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$
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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
43
adjusted net tangible book value per share after this offering
by $ per share and would increase
(decrease) the dilution per share to new investors in this
offering by $ per share, in each
case, assuming the number of shares offered by us, as set forth
on the cover page of this prospectus, remains the same and
assuming the closing of the offering made hereby occurs
on ,
2011. The information discussed above is illustrative only and
will adjust based on the actual initial public offering price
and other terms of the offering determined at pricing.
The following table shows, as
of ,
2011, the differences between the number of shares purchased
from us, the total consideration paid to us and the average
price per share that existing stockholders and new investors
paid.
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Shares Purchased
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Total Consideration
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Average Price
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Number
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Percentage
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Amount
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Percentage
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per Share
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Existing stockholders
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%
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$
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%
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$
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New investors
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
%
|
|
$
|
|
|
|
|
|
%
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A $1.00 increase (decrease) in the assumed initial public
offering price of $ per share, the
mid-point of the price range set forth on the cover page of this
prospectus, would increase (decrease) total consideration paid
by new investors, total consideration paid by all stockholders
and the average price per share paid by all stockholders by
$ , $
and $ , respectively, after
deducting estimated underwriting discounts and estimated
offering expenses payable by us, and assuming the number of
shares offered by us, as set forth on the cover page of this
prospectus, remains the same and assuming the closing of the
offering made hereby occurs
on ,
2011.
The discussion and tables above assume no exercise of the
underwriters option to purchase additional shares. If the
underwriters option to purchase additional shares is
exercised in full, the number of shares of our common stock held
by existing stockholders will be further reduced
to % of the total number of shares
of our common stock to be outstanding after the offering, and
the number of shares of our common stock held by investors
participating in the offering will be further increased
to % of the total number of shares
of our common stock to be outstanding after the offering.
In addition, except as noted, the above discussion and table
assume no exercise of stock options or warrants to purchase
common stock after June 30, 2011. As of June 30, 2011,
we had outstanding options to purchase a total of
14,110,658 shares of our common stock at a weighted-average
exercise price of $0.62 per share and 1,127,324 shares of
common stock reserved for issuance upon the exercise of
outstanding warrants at a weighted-average exercise price of
$0.002 per share. If all such options and warrants had been
exercised as of June 30, 2011, pro forma as adjusted net
tangible book value per share would be
$ per share and dilution to new
investors would be $ per share. To
the extent we grant options to our employees in the future and
those options are exercised or other issuances of common stock
are made, there will be further dilution to new investors.
44
SELECTED
CONSOLIDATED FINANCIAL DATA
The following table sets forth our selected consolidated
financial data for the periods, and as of the dates, indicated.
You should read the following selected consolidated financial
data in conjunction with our audited and unaudited consolidated
financial statements and the related notes thereto included
elsewhere in this prospectus and the Managements
Discussion and Analysis of Financial Condition and Results of
Operations section of this prospectus.
We derived the consolidated statement of operations data for the
years ended December 31, 2008, 2009 and 2010, and the
consolidated balance sheet data as of December 31, 2009 and
2010, from our audited consolidated financial statements and the
related notes thereto included elsewhere in this prospectus. We
derived the consolidated statement of operations data for the
fiscal years ended December 31, 2006 and 2007, and the
consolidated balance sheet data as of December 31, 2006,
2007 and 2008, from our audited consolidated financial
statements and the related notes thereto that are not included
in this prospectus. We derived the consolidated statement of
operations data for the six months ended June 30, 2010 and
2011, and the consolidated balance sheet data as of
June 30, 2011, from our unaudited consolidated financial
statements and the related notes thereto included elsewhere in
this prospectus. The results of operations for these interim
periods are not necessarily indicative of the results to be
expected for a full year. Our unaudited consolidated financial
statements have been prepared on the same basis as the audited
consolidated financial statements and the related notes thereto
and, in the opinion of our management, reflect all adjustments
that are necessary for a fair presentation in conformity with
GAAP. Our historical results for prior periods are not
necessarily indicative of results to be expected for any future
period.
45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
Year Ended December 31
|
|
|
June 30
|
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2010
|
|
|
2011
|
|
|
|
($ in thousands, except share and per share data)
|
|
Consolidated statements of operations data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
|
|
$
|
5,571
|
|
|
$
|
9,075
|
|
|
$
|
17,202
|
|
|
$
|
24,752
|
|
|
$
|
38,690
|
|
|
$
|
16,008
|
|
|
$
|
24,333
|
|
Research services
|
|
|
5,806
|
|
|
|
4,743
|
|
|
|
2,868
|
|
|
|
3,864
|
|
|
|
4,519
|
|
|
|
2,238
|
|
|
|
1,817
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
11,377
|
|
|
|
13,818
|
|
|
|
20,070
|
|
|
|
28,616
|
|
|
|
43,209
|
|
|
|
18,246
|
|
|
|
26,150
|
|
Cost of revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
|
|
|
17,490
|
|
|
|
15,356
|
|
|
|
32,160
|
|
|
|
30,462
|
|
|
|
35,399
|
|
|
|
16,114
|
|
|
|
21,545
|
|
Research services
|
|
|
2,316
|
|
|
|
1,573
|
|
|
|
1,169
|
|
|
|
1,788
|
|
|
|
2,119
|
|
|
|
1,005
|
|
|
|
922
|
|
Impairment charge
|
|
|
|
|
|
|
|
|
|
|
2,524
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit (loss)
|
|
|
(8,429
|
)
|
|
|
(3,111
|
)
|
|
|
(15,783
|
)
|
|
|
(3,634
|
)
|
|
|
5,691
|
|
|
|
1,127
|
|
|
|
3,683
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
6,176
|
|
|
|
3,203
|
|
|
|
2,134
|
|
|
|
2,524
|
|
|
|
2,985
|
|
|
|
1,719
|
|
|
|
1,728
|
|
Sales and marketing
|
|
|
5,726
|
|
|
|
4,868
|
|
|
|
4,034
|
|
|
|
3,994
|
|
|
|
4,526
|
|
|
|
2,318
|
|
|
|
2,557
|
|
General and administrative
|
|
|
6,678
|
|
|
|
7,158
|
|
|
|
6,180
|
|
|
|
5,430
|
|
|
|
5,675
|
|
|
|
2,813
|
|
|
|
3,443
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
18,580
|
|
|
|
15,229
|
|
|
|
12,348
|
|
|
|
11,948
|
|
|
|
13,186
|
|
|
|
6,850
|
|
|
|
7,728
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
(27,009
|
)
|
|
|
(18,340
|
)
|
|
|
(28,131
|
)
|
|
|
(15,582
|
)
|
|
|
(7,495
|
)
|
|
|
(5,723
|
)
|
|
|
(4,045
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
271
|
|
|
|
56
|
|
|
|
287
|
|
|
|
18
|
|
|
|
170
|
|
|
|
37
|
|
|
|
51
|
|
Interest expense
|
|
|
(10,002
|
)
|
|
|
(10,745
|
)
|
|
|
(7,400
|
)
|
|
|
(3,075
|
)
|
|
|
(2,585
|
)
|
|
|
(1,404
|
)
|
|
|
(2,269
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other expense, net
|
|
|
(9,731
|
)
|
|
|
(10,689
|
)
|
|
|
(7,113
|
)
|
|
|
(3,057
|
)
|
|
|
(2,415
|
)
|
|
|
(1,367
|
)
|
|
|
(2,218
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
(36,740
|
)
|
|
|
(29,029
|
)
|
|
|
(35,244
|
)
|
|
|
(18,639
|
)
|
|
|
(9,910
|
)
|
|
|
(7,090
|
)
|
|
|
(6,263
|
)
|
Dividends and accretion on redeemable convertible
preferred stock
|
|
|
(1,812
|
)
|
|
|
(1,812
|
)
|
|
|
(2,351
|
)
|
|
|
(2,984
|
)
|
|
|
(57,007
|
)
|
|
|
(39,264
|
)
|
|
|
(68,604
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to common stockholders
|
|
$
|
(38,552
|
)
|
|
$
|
(30,841
|
)
|
|
$
|
(37,595
|
)
|
|
$
|
(21,623
|
)
|
|
$
|
(66,917
|
)
|
|
$
|
(46,354
|
)
|
|
$
|
(74,867
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per share data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share attributable to common stockholders,
basic and diluted
|
|
$
|
(4,163.04
|
)
|
|
$
|
(3,289.81
|
)
|
|
$
|
(3,389.12
|
)
|
|
$
|
(2.21
|
)
|
|
$
|
(2.62
|
)
|
|
$
|
(1.81
|
)
|
|
$
|
(2.88
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding, basic and diluted
|
|
|
9,261
|
|
|
|
9,375
|
|
|
|
11,093
|
|
|
|
9,751,616
|
|
|
|
25,574,286
|
|
|
|
25,573,997
|
|
|
|
26,005,705
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net income (loss) per share, basic and diluted(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding used in computing pro
forma net income (loss) per share, basic and diluted(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31
|
|
June 30
|
|
|
2006
|
|
2007
|
|
2008
|
|
2009
|
|
2010
|
|
2011
|
|
|
($ in thousands)
|
|
|
Consolidated balance sheet data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
5,839
|
|
|
$
|
794
|
|
|
$
|
11,988
|
|
|
$
|
27,502
|
|
|
$
|
26,800
|
|
|
$
|
29,633
|
|
Working capital(2)
|
|
|
(34,593
|
)
|
|
|
(55,213
|
)
|
|
|
9,404
|
|
|
|
21,766
|
|
|
|
24,723
|
|
|
|
30,554
|
|
Total assets
|
|
|
61,273
|
|
|
|
49,296
|
|
|
|
54,624
|
|
|
|
64,735
|
|
|
|
88,795
|
|
|
|
110,871
|
|
Total debt
|
|
|
26,502
|
|
|
|
29,195
|
|
|
|
755
|
|
|
|
509
|
|
|
|
8,067
|
|
|
|
39,264
|
|
Preferred stock
|
|
|
61,051
|
|
|
|
62,863
|
|
|
|
184,269
|
|
|
|
31,681
|
|
|
|
109,786
|
|
|
|
178,390
|
|
Total stockholders (deficit) equity
|
|
|
(93,185
|
)
|
|
|
(123,055
|
)
|
|
|
(159,655
|
)
|
|
|
6,153
|
|
|
|
(58,103
|
)
|
|
|
(132,536
|
)
|
|
|
|
(1)
|
|
Pro forma per share data will be
computed based upon the number of shares of common stock
outstanding immediately after consummation of this offering
applied to our historical net income (loss) amounts and will
give retroactive effect to the preferred stock and convertible
notes conversions (assuming an initial public offering price of
$ per share, the mid-point
|
46
|
|
|
|
|
of the price range set forth on the
cover page of this prospectus) and the issuance of the shares of
our common stock offered hereby.
|
The following table presents the calculation of historical and
pro forma basic and diluted net income (loss) per share of
common stock attributable to our common stockholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months
|
|
|
|
Year Ended December 31
|
|
|
Ended June 30
|
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2010
|
|
|
2011
|
|
|
|
($ in thousands, except share and per share data)
|
|
|
Net income (loss) attributable to common stockholders
|
|
$
|
(38,552
|
)
|
|
$
|
(30,841
|
)
|
|
$
|
(37,595
|
)
|
|
$
|
(21,623
|
)
|
|
$
|
(66,917
|
)
|
|
$
|
(46,354
|
)
|
|
$
|
(74,867
|
)
|
Dividends and accretion on redeemable convertible preferred stock
|
|
|
1,812
|
|
|
|
1,812
|
|
|
|
2,351
|
|
|
|
2,984
|
|
|
|
57,007
|
|
|
|
39,264
|
|
|
|
68,604
|
|
Interest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount on conversion of convertible notes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net income (loss) attributable to common stockholders
|
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|
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|
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|
|
|
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|
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|
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|
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|
|
|
Weighted-average common shares outstanding, basic and diluted
|
|
|
9,261
|
|
|
|
9,375
|
|
|
|
11,093
|
|
|
|
9,751,616
|
|
|
|
25,574,286
|
|
|
|
25,573,997
|
|
|
|
26,005,705
|
|
Common shares issued upon conversion of preferred stock and
accrued dividends
|
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Common shares issued upon conversion of convertible notes and
interest thereon
|
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|
Weighted-average common shares outstanding used in computing pro
forma net income (loss) per share, basic and diluted
|
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|
Pro forma net income (loss) per share, basic and diluted
|
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|
|
|
|
|
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|
|
|
|
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|
|
|
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(2)
|
|
Working capital means current
assets minus current liabilities.
|
47
MANAGEMENTS
DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following in conjunction with the
Selected Consolidated Financial Data and our
consolidated financial statements and the related notes thereto
included elsewhere in this prospectus. In addition to historical
information, the following discussion and analysis includes
forward looking information that involves risks, uncertainties
and assumptions. Our actual results and the timing of events
could differ materially from those anticipated by these forward
looking statements as a result of many factors, including those
discussed under Risk Factors elsewhere in this
prospectus. See also Special Note Regarding Forward
Looking Statements included elsewhere in this
prospectus.
Overview
We design, develop and manufacture innovative, high-performance
aerogel insulation. We believe our aerogel blankets deliver the
best thermal performance of any widely used insulation product
available on the market today and provide a superior combination
of performance attributes unmatched by traditional insulation
materials. Our end-use customers use our products to save money,
conserve energy, reduce
CO2 emissions
and protect workers and assets.
Our products are targeted at the estimated $32 billion
annual global market for insulation materials. Our insulation is
principally used by industrial companies that operate
petrochemical, refinery, industrial and power generation
facilities. We are working with leading building materials
manufacturers to develop and further commercialize our products
for applications in the building and construction market. We
also rely on a small number of fabricators and OEMs to develop
and sell products for applications as diverse as military and
commercial aircraft, trains, buses, appliances, apparel,
footwear and outdoor gear. We estimate that we generated 92% of
our 2010 product revenue in the industrial insulation markets,
5% of our 2010 product revenue in the building and construction
insulation market, and 3% of our 2010 product revenue in the
transportation, appliance and apparel insulation markets.
We generate product revenue through the sale of our line of
aerogel blankets. We market and sell our products primarily
through a direct sales force based in North America, Europe and
Asia. The efforts of our sales force are supported by a small
number of sales consultants with extensive knowledge of a
particular market or region. Our sales force is required to
establish and maintain customer and partner relationships, to
deliver highly technical information, and to ensure high quality
customer service.
In the industrial market, we rely on an existing and
well-established channel of distributors and contractors to
distribute products to our end-use customers. In the building
and construction market, we believe that our relationships with
leading building materials manufacturers with established
distribution networks will facilitate our penetration of the
market on a cost-effective basis. In the transportation,
appliance and apparel markets, our current plan is to rely on
the efforts of OEMs to develop opportunities within and provide
access to the markets.
We also perform research services under contracts with various
agencies of the U.S. government, including the Department
of Defense and the Department of Energy, and other institutions.
Research performed under contract with government agencies and
other institutions enables us to develop and leverage
technologies into broader commercial applications.
We manufacture our products using our proprietary, high-volume
process technology at our facility in East Providence, Rhode
Island. We have operated the East Providence facility since
mid-2008 and commenced operation of a second production line at
this facility at the end of March 2011. We expect our annual
production capacity by the end of 2011 to reach 40 to
44 million square feet of aerogel blankets, depending on
product mix.
48
Our core aerogel technology and manufacturing processes are our
most significant assets. As of June 30, 2011, we employed
28 research scientists and process engineers focused on
developing next generation aerogel compositions, form factors
and manufacturing technologies. Since inception through
June 30, 2011, we have invested $25.7 million into our
research and development activities and have delivered
$35.8 million in research services revenue.
Our predecessor company was incorporated in 2001 and spun off
from Aspen Systems, Inc., of Marlborough, Massachusetts, to
focus on the development and commercialization of aerogel
technology. We began selling our first products commercially in
the second quarter of 2001. Since inception through
June 30, 2011, we have generated $165.8 million in
revenue consisting of $130.0 million in product revenue and
$35.8 million in research services revenue. As of
June 30, 2011, we had 161 employees principally
located at two sites in the United States.
Our total revenue has grown from $11.4 million for the year
ended December 31, 2006 to $43.2 million for the year
ended December 31, 2010. For the year ended
December 31, 2010, our revenue grew 51% to
$43.2 million from $28.6 million in 2009. For the six
months ended June 30, 2011, our revenue grew 44% to
$26.2 million from $18.2 million in the comparable
period in 2010.
We have experienced significant losses since inception, have an
accumulated deficit of $202.4 million at June 30,
2011, and have significant ongoing cash flow commitments. We
have invested significant resources to commercialize aerogel
technology and to build a manufacturing infrastructure capable
of supplying aerogel products at the volumes and costs required
by our customers. We currently market a set of commercially
viable products, serve a growing base of customers and are
experiencing rapid growth.
Factors Affecting
Our Performance
Revenue
Growth
The key driver to improve our financial performance will be
continued revenue growth. We believe demand for our products
will increase significantly to support widespread global efforts
to improve energy efficiency. We plan to add resources to gain
share of the industrial insulation market by increasing revenue
from existing and new end-use customers. We also anticipate that
our growing revenue base associated with maintenance programs
will lead to increasing revenue associated with large capital
projects, including the construction of new refineries and
petrochemical facilities in emerging markets. We expect that
this increased revenue will drive incremental improvement in
gross profit, operating income and net income, and will lead to
higher levels of cash flow from operations. Our ability to
achieve sufficient revenue to generate net income and to fully
fund operations will require continued near-term investments in
manufacturing facilities, capital equipment, technology and
personnel. We expect these investments to negatively impact
current net income and cash balances, but to also set the
framework for improving financial performance in the long-term.
Manufacturing
Capacity
Demand for our aerogel products in 2010 increased by 88% from
2009 and exceeded our manufacturing capacity. In response to
growing demand, we constructed a second production line in our
East Providence facility designed to double our manufacturing
capacity. We plan to continue to expand capacity to meet
increased demand for our products. We are engaged in the design
and engineering phase of a third production line at our East
Providence facility and have commenced procurement of certain
capital equipment which has a longer
lead-time.
We currently expect that this third line will be completed
during 2012. We also plan to construct a second manufacturing
facility in either the United States or Europe and to commence
operations at the facility in the second half of 2013. We
currently estimate that design, development and construction of
our third production line in the East Providence facility will
require expenditures of $45 million to $50 million. We
currently estimate that design, development and construction of
a second manufacturing facility, likely to be comprised of three
production lines, will require expenditures of $150 million
to $200 million. We
49
currently expect to construct our second manufacturing facility
in several phases, in order to align manufacturing capacity to
anticipated demand for our products. Our ability to successfully
bring this capacity online as planned will have a significant
impact on our financial condition and results of operations.
Organizational
Resources
We plan to expand our sales force globally to support
anticipated growth in customers and demand for our products. We
also intend to increase personnel, funding and capital equipment
devoted to the research and development of new and advanced
technologies. In addition, we plan to increase staff to support
the expansion of our East Providence facility during 2012 and
multi-facility manufacturing operations during the second half
of 2013. These plans will require a significant investment in
managerial talent, human resources, information systems,
processes and controls to ensure maintenance of efficient and
economic operations. These investments are critical to our
ability to increase revenue, to generate net income and to fully
fund operations.
Reliance on
Partners
Our ability to initiate, maintain and manage relationships and
strategic arrangements has been fundamental to the success of
our business. We plan to leverage our relationships with leading
building materials manufacturers and OEMs to facilitate
penetration of the building and construction, transportation,
appliance and apparel markets. These relationships are critical
to our ability to penetrate these new markets on a
cost-effective basis and are critical to our ability to sustain
high levels of revenue growth, to generate net income and to
fully fund operations.
Project-Based
Revenue
Our product revenue has and will be generated in large part by
demand for insulation associated with new-build construction of
facilities, capital expansions and related capital projects, and
larger maintenance-related projects. These projects include new
construction, capacity expansion and maintenance in the Canadian
oil sands, offshore oil wells, LNG facilities, refineries and
petrochemical plants. Although we expect to generate a stream of
product revenue over time from a number of projects and from a
number of customers, the intermittent nature of project-based
revenue or the revenue generated by a single project could be
material to our revenue and results of operations in any given
reporting period. In addition, these projects are affected by
macroeconomic factors including the price of oil and economic
growth. Accordingly, our project-based revenue in any given
period could fluctuate due to changes in macroeconomic
conditions. Fluctuations in our project-based revenue could, in
turn, have a material impact on our results of operations in any
given reporting period. See Risk Factors Risks
Related to Our Business and Strategy Our revenue may
fluctuate, which may result in a high degree of variability in
our results of operations and make it difficult for us to plan
based on our future outlook and to forecast our future
performance.
Product
Mix
Changes in our product mix have not historically had a
significant impact on our financial results from period to
period. As we seek to continue to expand our business, we expect
to sell an increasing amount of our aerogel insulation products
into the building and construction and OEM markets. Certain of
the products aimed at these markets have different margin
profiles than the products that have historically generated most
of our product revenue. Increased sales into the building and
construction and OEM markets may result in sales of individual
products not being consistent across periods, which could affect
product mix and cause our revenue, cost of revenue, gross
profit, net income and cash flow to vary. In particular,
Spaceloft and Spaceloft A2, which are targeted at the building
and construction market, are relatively lower margin as compared
to our Pyrogel and Cryogel products, which are targeted at the
industrial and OEM markets.
50
Components of Our
Results of Operations
Revenue
We recognize product revenue from the sale of our line of
aerogel products and research services revenue from the
provision of services under contracts with various agencies of
the U.S. government and other institutions. The following
table sets forth the total revenue for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months
|
|
|
|
|
|
|
Ended
|
|
|
|
Year Ended December 31
|
|
|
June 30
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2010
|
|
|
2011
|
|
|
|
($ in thousands)
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
|
|
$
|
17,202
|
|
|
$
|
24,752
|
|
|
$
|
38,690
|
|
|
$
|
16,008
|
|
|
$
|
24,333
|
|
Research services
|
|
|
2,868
|
|
|
|
3,864
|
|
|
|
4,519
|
|
|
|
2,238
|
|
|
|
1,817
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
20,070
|
|
|
$
|
28,616
|
|
|
$
|
43,209
|
|
|
$
|
18,246
|
|
|
$
|
26,150
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We expect continued growth in product revenue due to increasing
market acceptance of our line of aerogel blankets and increasing
demand for energy efficiency products to reduce energy
consumption and
CO2
emissions. We expect that research services revenue will decline
due to the recent trend toward tightening of federal spending
guidelines and programs.
Product revenue accounted for 88% and 93% of total revenue for
the six months ended June 30, 2010 and 2011, respectively,
and 86%, 86% and 90% for the years ended December 31, 2008,
2009 and 2010, respectively. We expect that product revenue will
continue to increase as a percentage of our total revenue due to
the anticipated strong growth in product revenue in combination
with the expected decline in research services revenue.
A substantial majority of our revenue is generated from a
limited number of direct customers, principally distributors,
contractors and OEMs. Our 10 largest customers accounted
for approximately 63% of our total revenue during the six months
ended June 30, 2011, and we expect that most of our revenue
will continue to come from a relatively small number of
customers for the foreseeable future. For the six months ended
June 30, 2010, Technip and Thorpe Products represented 18%
and 10%, respectively, of our total revenue and for the six
months ended June 30, 2011, Enershield and Thorpe Products
represented 21% and 10%, respectively, of our total revenue. In
2008, Aerogel Korea Co, Ltd. represented 12% of our total
revenue; in 2009, no customer represented 10% or more of our
total revenue; and in 2010, Technip represented 14% of total
revenue. For each of the periods discussed above, there were no
other customers that represented 10% or more of our total
revenues.
We conduct business across the globe, with a substantial portion
of our sales outside the United States for each of the years
ended December 31, 2008, 2009 and 2010. In addition, we may
expand our operations outside of the United States. Revenue from
outside of the United States, based on shipment destination or
services location, amounted to $9.6 million or 48.0% of our
total revenue, $15.9 million or 55.7% of our total revenue,
and $23.2 million or 53.6% of our total revenue in the
years ended December 31, 2008, 2009 and 2010, respectively,
and $7.3 million or 40% of our total revenue and
$17.6 million or 67% of our total revenue in the six months
ended June 30, 2010 and 2011, respectively.
Cost of
Revenue
Cost of revenue for our product revenue consists primarily of
raw materials, direct labor and manufacturing overhead. Cost of
product revenue is recorded when the related product revenue is
recognized. Cost of product revenue also includes stock-based
compensation and costs of shipping.
51
Raw material is our most significant component of cost of
product revenue and includes fibrous batting, silica materials
and additives. Raw material costs as a percentage of product
revenue were 89.7%, 56.9% and 52.9% for the years ended
December 31, 2008, 2009 and 2010, respectively, and 57.0%
and 46.1% for the six months ended June 30, 2010 and 2011,
respectively. The decline in raw material costs as a percentage
of product revenue during the periods presented was due
principally to purchasing efficiencies and manufacturing yield
improvements. Raw material costs as a percentage of product
revenue vary from product to product due to differences in
average selling prices, material requirements, blanket thickness
and manufacturing yields. As a result, raw material costs as a
percentage of revenue will vary from period to period due to
changes in the mix of aerogel products sold. However, in
general, we expect raw material costs in the aggregate to
decline modestly as a percentage of revenue as we seek to
achieve continued sourcing improvements and yield enhancements.
Manufacturing expense, including direct labor and manufacturing
overhead, is also a significant component of cost of revenue. We
incurred a significant increase in manufacturing expense
associated with the operation of our second production line in
the East Providence facility during the second quarter of 2011.
These costs are principally fixed in nature and will be
under-absorbed
during the period in which we ramp the production line to full
capacity. These
under-absorbed
manufacturing costs will increase the cost of product revenue as
a percentage of revenue in the near term, but we expect these
costs to decrease as a percentage of revenue as a result of
revenue growth supported by the increase in manufacturing
capacity.
Cost of revenue for our research services revenue consists
primarily of direct labor costs of research personnel committed
to funded research and development contracts, as well as
third-party consulting, and associated direct material costs.
This cost of revenue also includes overhead expenses associated
with project resources, engineering tools and supplies. Cost of
revenue for our research services revenue is recorded when the
related research services revenue is recognized.
Gross
Profit
Our gross profit as a percentage of revenue is affected by a
number of factors, including the mix between product revenue and
research services revenue, the mix of aerogel products sold,
average selling prices, average material costs, our actual
manufacturing costs and the costs associated with expansions and
start-up of
production capacity. As we continue to grow our base of product
revenue and to build out our manufacturing capacity, we expect
increased manufacturing expenses will periodically have a
negative impact on gross profit, but will set the framework for
improved gross profit moving forward. Accordingly, we expect
that our gross profit in absolute dollars and as a percentage of
revenue to vary from period to period as we expand our
manufacturing capacity. However, in general, we expect gross
profit to improve as a percentage of revenue in the long-term
due to increases in manufacturing productivity, increased
production volumes, improved manufacturing yields and material
purchasing efficiencies.
Operating
Expenses
Operating expenses consist of research and development, sales
and marketing, and general and administrative expenses. The
largest component of our operating expenses is personnel costs,
consisting of salaries, benefits, incentive compensation and
stock-based compensation. We expect to continue to hire a
significant number of new employees in order to support our
anticipated growth. In any particular period, the timing of
additional hires could materially affect our operating expenses,
both in absolute dollars and as a percentage of revenue.
Operating expenses are reported net of any funding received
under contracts that are considered to be cost-sharing
arrangements with no contractually committed deliverable. We
have entered into several cost-sharing arrangements with various
agencies of the U.S. government. Funds paid to us under
these agreements are not reported as revenue but are used to
directly offset our
52
cost of revenue, research and development, sales and marketing
and general and administrative expenses in support of our
product revenue. Costs incurred and cost of revenue, research
and development, sales and marketing and general and
administrative expenditures offset by cost sharing funding
received under these contracts are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
Year Ended December 31
|
|
|
June 30
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2010
|
|
|
2011
|
|
|
|
($ in thousands)
|
|
|
Total costs incurred
|
|
$
|
3,193
|
|
|
$
|
1,672
|
|
|
$
|
2,005
|
|
|
$
|
346
|
|
|
$
|
171
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenditures offset by cost sharing funding received:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
|
|
$
|
43
|
|
|
$
|
20
|
|
|
$
|
33
|
|
|
$
|
6
|
|
|
$
|
7
|
|
Research services
|
|
|
1,227
|
|
|
|
637
|
|
|
|
1,124
|
|
|
|
185
|
|
|
|
51
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
1,214
|
|
|
|
620
|
|
|
|
475
|
|
|
|
82
|
|
|
|
79
|
|
Sales and marketing
|
|
|
342
|
|
|
|
193
|
|
|
|
170
|
|
|
|
33
|
|
|
|
15
|
|
General and administrative
|
|
|
367
|
|
|
|
202
|
|
|
|
203
|
|
|
|
40
|
|
|
|
19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenditures offset by cost sharing
|
|
$
|
3,193
|
|
|
$
|
1,672
|
|
|
$
|
2,005
|
|
|
$
|
346
|
|
|
$
|
171
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We do not expect to receive any additional funds under
cost-sharing arrangements in the near term due to the recent
trend toward tightening of federal spending guidelines and
programs.
Research and
Development Expenses
Research and development expenses consist primarily of expenses
for personnel engaged in the development of next generation
aerogel compositions, form factors and manufacturing
technologies. These expenses also include testing services,
prototype expenses, consulting services, equipment depreciation,
facilities costs and related overhead. We expense research and
development costs as incurred. We expect to continue to devote
substantial resources to the development of new aerogel
technology. We believe that these investments are necessary to
maintain and improve our competitive position. We expect that
our research and development expenses will continue to increase
as we continue to invest in additional research and engineering
personnel and the infrastructure required in support of their
efforts. Accordingly, we expect that our research and
development expenses will continue to increase in absolute
dollars but decrease as a percentage of revenue in the long-term.
Sales and
Marketing Expenses
Sales and marketing expenses consist primarily of
personnel-related costs, incentive compensation, marketing
programs, travel and entertainment costs, consulting expenses
and facilities-related costs. We plan to expand our sales force
and sales consultants globally to support anticipated growth in
customers and demand for our products. We expect that sales and
marketing expenses will continue to increase in absolute dollars
but decrease as a percentage of revenue in the long-term.
General and
Administrative Expenses
General and administrative expenses consist primarily of
personnel costs, legal expenses, consulting and professional
services, tax and audit costs, and expenses for our executive,
finance, human resources and information technology
organizations. We expect general and administrative expenses to
increase as we incur additional costs related to operating as a
publicly-traded company, including costs of compliance with
securities, corporate governance and related regulations,
investor relations expenses, increased insurance premiums,
including director and officer insurance, and
53
increased audit and legal fees. In addition, we expect to add
general and administrative personnel to support the anticipated
growth of our business and continued expansion of our
manufacturing operations. We expect that general and
administrative expenses will continue to increase in absolute
dollars but decrease as a percentage of revenue in the long-term.
Other Income
(Expense)
Other income (expense) consists primarily of imputed interest
expense on our cross license agreement with Cabot Corporation,
and interest expense on our term loans and notes payable and is
presented net of other income, which is primarily interest
income.
Provision for
Income Taxes
We have incurred net losses since inception and have not
recorded benefit provisions for U.S. federal income taxes
or state income taxes since the tax benefits of our net losses
have been offset by valuation allowances.
Key Metrics and
Non-GAAP Financial Measures
We regularly review a number of metrics, including the following
key metrics, to evaluate our business, measure our performance,
identify trends affecting our business, formulate financial
projections and make strategic decisions.
Square Foot
Operating Metric
We price our product and measure our product shipments in square
feet. We have produced in excess of 44.5 million square
feet of aerogel blankets in the East Providence facility since
mid-2008. Our annual manufacturing capacity is a function of
product mix. We expect our annual production capacity by the end
of 2011 to reach 40 million to 44 million square feet
of aerogel blankets, depending on product mix. We believe the
square foot operating metric allows us and our investors to
measure our manufacturing capacity and shipments on a uniform
and consistent basis. The following chart sets forth product
shipments in square feet for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
Year Ended December 31
|
|
June 30
|
|
|
2008
|
|
2009
|
|
2010
|
|
2010
|
|
2011
|
|
|
(Square feet in thousands)
|
|
Product shipments in square feet
|
|
|
6,909
|
|
|
|
10,525
|
|
|
|
16,443
|
|
|
|
7,114
|
|
|
|
10,612
|
|
Adjusted
EBITDA
We use Adjusted EBITDA, a non-GAAP financial measure, as a means
to assess our operating performance. We define Adjusted EBITDA
as net income (loss) before depreciation and amortization
expense, stock-based compensation expense, interest expense, net
of interest income, and impairment charges. Adjusted EBITDA is a
supplemental measure of our performance that is not required by,
or presented in accordance with, GAAP. Adjusted EBITDA should
not be considered as an alternative to net income (loss) or any
other measure of financial performance calculated and presented
in accordance with GAAP. In addition, our definition and
presentation of Adjusted EBITDA may not be comparable to
similarly titled measures presented by other companies.
We use Adjusted EBITDA as a measure of operating performance,
because it does not include the impact of items that we do not
consider indicative of our core operating performance, for
planning purposes, including the preparation of our annual
operating budget, to allocate resources to enhance the financial
performance of our business and as a performance measure used
under our bonus plan. We also believe that the presentation of
Adjusted EBITDA provides useful information to investors with
54
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 companys
operating performance without regard to items that can vary
substantially from company to company depending upon financing
and accounting methods, book values of assets, capital
structures and the methods by which assets were acquired. See
footnote (3) under Summary Consolidated Financial
Data.
To properly and prudently evaluate our business, we encourage
you to review the GAAP financial statements included elsewhere
in this prospectus, and not to rely on any single financial
measure to evaluate our business.
The following table presents a reconciliation of net income
(loss), the most directly comparable GAAP measure, to Adjusted
EBITDA for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
|
($ in thousands)
|
|
|
Net income (loss)
|
|
$
|
(35,244
|
)
|
|
$
|
(18,639
|
)
|
|
$
|
(9,910
|
)
|
Depreciation and amortization
|
|
|
7,059
|
|
|
|
5,630
|
|
|
|
4,633
|
|
Stock-based compensation(1)
|
|
|
927
|
|
|
|
831
|
|
|
|
468
|
|
Interest expense, net
|
|
|
7,113
|
|
|
|
3,057
|
|
|
|
2,415
|
|
Impairment charge
|
|
|
2,524
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
|
$
|
(17,621
|
)
|
|
$
|
(9,121
|
)
|
|
$
|
(2,394
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Represents non-cash stock-based
compensation related to stock option grants.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
|
March 31
|
|
|
June 30
|
|
|
Sept. 30
|
|
|
Dec. 31
|
|
|
March 31
|
|
|
June 30
|
|
|
Sept. 30
|
|
|
Dec. 31
|
|
|
March 31
|
|
|
June 30
|
|
|
|
($ in thousands)
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(5,230
|
)
|
|
$
|
(5,892
|
)
|
|
$
|
(3,866
|
)
|
|
$
|
(3,651
|
)
|
|
$
|
(3,667
|
)
|
|
$
|
(3,423
|
)
|
|
$
|
(1,337
|
)
|
|
$
|
(1,483
|
)
|
|
$
|
(1,721
|
)
|
|
$
|
(4,542
|
)
|
Depreciation and amortization
|
|
|
1,393
|
|
|
|
1,379
|
|
|
|
1,580
|
|
|
|
1,278
|
|
|
|
1,137
|
|
|
|
1,124
|
|
|
|
1,137
|
|
|
|
1,235
|
|
|
|
1,310
|
|
|
|
2,055
|
|
Stock-based compensation(1)
|
|
|
99
|
|
|
|
91
|
|
|
|
125
|
|
|
|
516
|
|
|
|
96
|
|
|
|
105
|
|
|
|
122
|
|
|
|
145
|
|
|
|
190
|
|
|
|
252
|
|
Interest expense, net
|
|
|
812
|
|
|
|
773
|
|
|
|
750
|
|
|
|
722
|
|
|
|
696
|
|
|
|
671
|
|
|
|
606
|
|
|
|
442
|
|
|
|
451
|
|
|
|
1,767
|
|
Impairment charge
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
|
$
|
(2,926
|
)
|
|
$
|
(3,649
|
)
|
|
$
|
(1,411
|
)
|
|
$
|
(1,135
|
)
|
|
$
|
(1,738
|
)
|
|
$
|
(1,523
|
)
|
|
$
|
528
|
|
|
$
|
339
|
|
|
$
|
230
|
|
|
$
|
(468
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Represents non-cash stock-based
compensation related to stock option grants.
|
Our Adjusted EBITDA is affected by a number of factors including
the mix between product revenue and research services revenue,
the mix of aerogel products sold, average selling prices,
average material costs, our actual manufacturing costs, the
costs associated with expansions and
start-up of
additional production capacity, and the amount and timing of
operating expenses. As we continue to grow our base of product
revenue and to build out manufacturing capacity, we expect
increased manufacturing expenses will periodically have a
negative impact on Adjusted EBITDA, but will set the framework
for improved Adjusted EBITDA moving forward. Accordingly, we
expect that our Adjusted EBITDA will vary from period to period
as we expand our manufacturing capacity.
We achieved positive Adjusted EBITDA for the first time in the
three months ended September 30, 2010, and sustained a
positive, quarterly Adjusted EBITDA through the three months
ended March 31, 2011. The decrease in Adjusted EBITDA for
the three months ended June 30, 2011 reflected a
significant increase in
under-absorbed
manufacturing expense associated with the startup and operation
of our second production line in the East Providence facility.
55
Results of
Operations
The following tables set forth our results of operations for the
periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
Year Ended December 31
|
|
|
June 30
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2010
|
|
|
2011
|
|
|
|
($ in thousands)
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
|
|
$
|
17,202
|
|
|
$
|
24,752
|
|
|
$
|
38,690
|
|
|
$
|
16,008
|
|
|
$
|
24,333
|
|
Research services
|
|
|
2,868
|
|
|
|
3,864
|
|
|
|
4,519
|
|
|
|
2,238
|
|
|
|
1,817
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
20,070
|
|
|
|
28,616
|
|
|
|
43,209
|
|
|
|
18,246
|
|
|
|
26,150
|
|
Cost of revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
|
|
|
32,160
|
|
|
|
30,462
|
|
|
|
35,399
|
|
|
|
16,114
|
|
|
|
21,545
|
|
Research services
|
|
|
1,169
|
|
|
|
1,788
|
|
|
|
2,119
|
|
|
|
1,005
|
|
|
|
922
|
|
Impairment charge
|
|
|
2,524
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit (loss)
|
|
|
(15,783
|
)
|
|
|
(3,634
|
)
|
|
|
5,691
|
|
|
|
1,127
|
|
|
|
3,683
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
2,134
|
|
|
|
2,524
|
|
|
|
2,985
|
|
|
|
1,719
|
|
|
|
1,728
|
|
Sales and marketing
|
|
|
4,034
|
|
|
|
3,994
|
|
|
|
4,526
|
|
|
|
2,318
|
|
|
|
2,557
|
|
General and administrative
|
|
|
6,180
|
|
|
|
5,430
|
|
|
|
5,675
|
|
|
|
2,813
|
|
|
|
3,443
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
12,348
|
|
|
|
11,948
|
|
|
|
13,186
|
|
|
|
6,850
|
|
|
|
7,728
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
(28,131
|
)
|
|
|
(15,582
|
)
|
|
|
(7,495
|
)
|
|
|
(5,723
|
)
|
|
|
(4,045
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
287
|
|
|
|
18
|
|
|
|
170
|
|
|
|
37
|
|
|
|
51
|
|
Interest expense
|
|
|
(7,400
|
)
|
|
|
(3,075
|
)
|
|
|
(2,585
|
)
|
|
|
(1,404
|
)
|
|
|
(2,269
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other expense, net
|
|
|
(7,113
|
)
|
|
|
(3,057
|
)
|
|
|
(2,415
|
)
|
|
|
(1,367
|
)
|
|
|
(2,218
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(35,244
|
)
|
|
$
|
(18,639
|
)
|
|
$
|
(9,910
|
)
|
|
$
|
(7,090
|
)
|
|
$
|
(6,263
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
56
Six months
ended June 30, 2010, compared to six months ended
June 30, 2011
The following tables set forth our results of operations for the
periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30
|
|
|
Six Months Ended June 30
|
|
|
|
2010
|
|
|
2011
|
|
|
$ Change
|
|
|
% Change
|
|
|
2010
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Percentage of total revenue)
|
|
|
|
($ in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
|
|
$
|
16,008
|
|
|
$
|
24,333
|
|
|
$
|
8,325
|
|
|
|
52
|
%
|
|
|
88
|
%
|
|
|
93
|
%
|
Research services
|
|
|
2,238
|
|
|
|
1,817
|
|
|
|
(421
|
)
|
|
|
(19
|
%)
|
|
|
12
|
%
|
|
|
7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
18,246
|
|
|
|
26,150
|
|
|
|
7,904
|
|
|
|
43
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
Cost of revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
|
|
|
16,114
|
|
|
|
21,545
|
|
|
|
5,431
|
|
|
|
34
|
%
|
|
|
88
|
%
|
|
|
82
|
%
|
Research services
|
|
|
1,005
|
|
|
|
922
|
|
|
|
(83
|
)
|
|
|
(8
|
%)
|
|
|
6
|
%
|
|
|
4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
1,127
|
|
|
|
3,683
|
|
|
|
2,556
|
|
|
|
227
|
%
|
|
|
6
|
%
|
|
|
14
|
%
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
1,719
|
|
|
|
1,728
|
|
|
|
9
|
|
|
|
1
|
%
|
|
|
9
|
%
|
|
|
7
|
%
|
Sales and marketing
|
|
|
2,318
|
|
|
|
2,557
|
|
|
|
239
|
|
|
|
10
|
%
|
|
|
13
|
%
|
|
|
10
|
%
|
General and administrative
|
|
|
2,813
|
|
|
|
3,443
|
|
|
|
630
|
|
|
|
22
|
%
|
|
|
15
|
%
|
|
|
13
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
6,850
|
|
|
|
7,728
|
|
|
|
878
|
|
|
|
13
|
%
|
|
|
38
|
%
|
|
|
30
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
(5,723
|
)
|
|
|
(4,045
|
)
|
|
|
1,678
|
|
|
|
(29
|
%)
|
|
|
(31
|
%)
|
|
|
(15
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
37
|
|
|
|
51
|
|
|
|
14
|
|
|
|
38
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
Interest expense
|
|
|
(1,404
|
)
|
|
|
(2,269
|
)
|
|
|
(865
|
)
|
|
|
62
|
%
|
|
|
(8
|
%)
|
|
|
(9
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other expense, net
|
|
|
(1,367
|
)
|
|
|
(2,218
|
)
|
|
|
(851
|
)
|
|
|
62
|
%
|
|
|
(7
|
%)
|
|
|
(8
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(7,090
|
)
|
|
$
|
(6,263
|
)
|
|
$
|
827
|
|
|
|
(12
|
%)
|
|
|
(39
|
%)
|
|
|
(24
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage
|
|
|
|
|
|
Percentage
|
|
|
Change
|
|
|
|
Amount
|
|
|
of Revenue
|
|
|
Amount
|
|
|
of Revenue
|
|
|
Amount
|
|
|
Percentage
|
|
|
|
($ in thousands)
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
|
|
$
|
16,008
|
|
|
|
88
|
%
|
|
$
|
24,333
|
|
|
|
93
|
%
|
|
$
|
8,325
|
|
|
|
52
|
%
|
Research services
|
|
|
2,238
|
|
|
|
12
|
%
|
|
|
1,817
|
|
|
|
7
|
%
|
|
|
(421
|
)
|
|
|
(19
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
18,246
|
|
|
|
100
|
%
|
|
$
|
26,150
|
|
|
|
100
|
%
|
|
$
|
7,904
|
|
|
|
43
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following chart sets forth product shipments in square feet
for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months
|
|
|
|
|
Ended
|
|
|
|
|
June 30
|
|
Change
|
|
|
2010
|
|
2011
|
|
Amount
|
|
Percentage
|
|
|
(Square feet in thousands)
|
|
Product shipments in square feet
|
|
|
7,114
|
|
|
|
10,612
|
|
|
|
3,498
|
|
|
|
49
|
%
|
57
Total revenue increased $7.9 million, or 43%, to
$26.2 million for the six months ended June 30, 2011,
from $18.2 million in the comparable period in 2010. The
increase was primarily the result of continued strong growth in
product revenue due to increasing market acceptance of our
products in the oil and gas sector of the industrial market.
Product revenue increased $8.3 million, or 52%, to
$24.3 million for the six months ended June 30, 2011,
from $16.0 million in the comparable period in 2010. This
increase was principally the result of an increase in demand for
our aerogel products in the oil and gas sector of the industrial
market. In addition, during the six months ended June 30,
2011, $5.6 million of product revenue represented sales to
Enershield and was associated with a capital project in the
Canadian oil-sands, and $2.6 million represented sales to
Thorpe Products for general distribution into the North American
oil and gas sector. During the six months ended June 30,
2010, $3.2 million of product revenue represented sales to
Technip and was associated with two offshore oil projects, and
$1.8 million represented sales to Thorpe Products for
general distribution into the North American oil and gas sector.
In terms of volume, product shipments increased 3.5 million
square feet, or 49%, to 10.6 million square feet of aerogel
products, as compared to 7.1 million square feet in the
comparable period in 2010. We did not increase the prices of our
products during the periods presented. Product revenue as a
percentage of total revenue for the six months ended
June 30, 2011 increased to 93% of total revenue from 88% of
total revenue in the comparable period in 2010. We expect that
product revenue will continue to increase as a percentage of
total revenue in the long-term.
Research services revenue decreased $0.4 million, or 19%,
to $1.8 million for the six months ended June 30, 2011
from $2.2 million in the comparable period in 2010. This
decrease in revenue is principally the result of a recent trend
toward tightening of federal spending guidelines and programs.
Research services revenue as a percentage of total revenue
decreased to 7% of total revenue for the six months ended
June 30, 2011 from 12% of total revenue in the comparable
period of 2010. We expect that research services revenue will
continue to decrease as a percentage of total revenue in the
long-term due to projected strong growth in product revenue.
Cost of
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage
|
|
|
Percentage
|
|
|
|
|
|
Percentage
|
|
|
Percentage
|
|
|
|
|
|
|
|
|
|
|
|
|
of Related
|
|
|
of Total
|
|
|
|
|
|
of Related
|
|
|
of Total
|
|
|
Change
|
|
|
|
Amount
|
|
|
Revenue
|
|
|
Revenue
|
|
|
Amount
|
|
|
Revenue
|
|
|
Revenue
|
|
|
Amount
|
|
|
Percentage
|
|
|
|
($ in thousands)
|
|
|
Cost of revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
|
|
$
|
16,114
|
|
|
|
101
|
%
|
|
|
88
|
%
|
|
$
|
21,545
|
|
|
|
89
|
%
|
|
|
82
|
%
|
|
$
|
5,431
|
|
|
|
34
|
%
|
Research services
|
|
|
1,005
|
|
|
|
45
|
%
|
|
|
6
|
%
|
|
|
922
|
|
|
|
51
|
%
|
|
|
4
|
%
|
|
|
(83
|
)
|
|
|
(8
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenue
|
|
$
|
17,119
|
|
|
|
94
|
%
|
|
|
94
|
%
|
|
$
|
22,467
|
|
|
|
86
|
%
|
|
|
86
|
%
|
|
$
|
5,348
|
|
|
|
31
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenue increased $5.3 million, or 31%, to
$22.5 million for the six months ended June 30, 2011
from $17.1 million in the comparable period in 2010. The
increase in total cost of revenue was the result of an increase
of $2.1 million in raw material used to support increased
product revenue and an increase of $3.3 million in overhead
expense to support the operation of our second production line
at our East Providence facility, which became operational during
the second quarter of 2011, offset by a $0.1 million
decrease in cost of research services revenue.
Product cost of revenue as a percentage of product revenue
decreased to 89% for the six months ended June 30, 2011
from 101% in the comparable period in 2010, primarily due to
economies of scale related to the increase in manufacturing
output at the East Providence facility. We expect to incur a
$0.6 million quarterly increase in manufacturing costs
included in cost of product revenue during the third quarter of
2011 in connection with the continued increased utilization and
continued scaling of our second production line. We expect
product cost of revenue as a percentage of product revenue to
decrease in the long-term due to projected growth in product
revenue supported by the increase in manufacturing capacity from
the operation of our second production line.
58
Research services cost of revenue as a percentage of research
services revenue increased to 51% for the six months ended
June 30, 2011 from 45% in the comparable period in 2010.
This increase was the result of a change in the mix of labor and
expenses required to perform the contracted research.
Gross
Profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30
|
|
|
|
|
|
|
2010
|
|
2011
|
|
|
|
|
|
|
|
|
Percentage
|
|
|
|
Percentage
|
|
Change
|
|
|
Amount
|
|
of Revenue
|
|
Amount
|
|
of Revenue
|
|
Amount
|
|
Percentage
|
|
|
($ in thousands)
|
|
Gross profit
|
|
$
|
1,127
|
|
|
|
6
|
%
|
|
$
|
3,683
|
|
|
|
14
|
%
|
|
$
|
2,556
|
|
|
|
227
|
%
|
Gross profit increased $2.6 million, or 227%, to
$3.7 million for the six months ended June 30, 2011
from $1.1 million in the comparable period in 2010. This
increase in gross profit was principally the result of the
increase in product revenue, a reduction in raw material cost as
a percentage of product revenue and economies of scale related
to the increase in manufacturing output at our East Providence
facility. Gross profit as a percentage of total revenue
increased to 14% for the six months ended June 30, 2011
from 6% of total revenue in the comparable period in 2010. We
expect that gross profit as a percentage of total revenue will
decline slightly from the levels realized during the six months
ended June 30, 2011 due to the expected $0.6 million
quarterly increase in manufacturing costs included in cost of
product revenue associated with the operation of our second
production line. However, we expect gross profit as a percentage
of revenue to increase in the long-term due to projected growth
in product revenue supported by the increase in manufacturing
capacity.
Research and
Development, or R&D, Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30
|
|
|
|
|
|
|
2010
|
|
2011
|
|
|
|
|
|
|
|
|
Percentage
|
|
|
|
Percentage
|
|
Change
|
|
|
Amount
|
|
of Revenue
|
|
Amount
|
|
of Revenue
|
|
Amount
|
|
Percentage
|
|
|
($ in thousands)
|
|
R&D expenses
|
|
$
|
1,719
|
|
|
|
9
|
%
|
|
$
|
1,728
|
|
|
|
7
|
%
|
|
$
|
9
|
|
|
|
1
|
%
|
R&D expenses of $1.7 million for the six months ended
June 30, 2011 remained unchanged from the comparable period
in 2010. This was principally the result of a $0.1 million
decrease in labor allocated to cost of research services, which
was offset by $0.1 million of plant engineering costs
capitalized during the six months ended June 30, 2011 related to
the construction of our second production line at our East
Providence facility. R&D expenses as a percentage of total
revenue decreased to 7% for the six months ended June 30,
2011 from 9% in the comparable period in 2010. This decrease was
principally the result of the significant increase in total
revenue for the six months ended June 30, 2011 from the
comparable period in 2010. We expect that our research and
development expenses will increase as we invest in additional
research and engineering personnel and the infrastructure
required in support of their efforts. However, we expect that
research and development expenses will decline as a percentage
of total revenue in the long-term due to projected strong growth
in product revenue.
Sales and
Marketing Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30
|
|
|
|
|
|
|
2010
|
|
2011
|
|
|
|
|
|
|
|
|
Percentage
|
|
|
|
Percentage
|
|
Change
|
|
|
Amount
|
|
of Revenue
|
|
Amount
|
|
of Revenue
|
|
Amount
|
|
Percentage
|
|
|
($ in thousands)
|
|
Sales and marketing expenses
|
|
$
|
2,318
|
|
|
|
13
|
%
|
|
$
|
2,557
|
|
|
|
10
|
%
|
|
$
|
239
|
|
|
|
10
|
%
|
Sales and marketing expenses increased $0.2 million, or 10%, to
$2.6 million for the six months ended June 30, 2011
from $2.3 million in the comparable period in 2010. This
increase was principally
59
the result of a $0.2 million increase in labor expense
associated with additional sales and marketing personnel and a
$0.1 million increase in expense for sales consultants
partially offset by a decrease of $0.1 million in incentive
compensation. Sales and marketing expenses as a percentage of
total revenue decreased to 10% for the six months ended
June 30, 2011 from 13% in the comparable period in 2010.
This decrease was principally driven by the increase in total
revenue for the six months ended June 30, 2011, from the
comparable period in 2010. We expect that sales and marketing
expenses will increase as we expand our sales force and sales
consultants globally to support anticipated growth in customers
and demand for our products. However, we expect that sales and
marketing expenses will continue to decline as a percentage of
total revenue in the long-term due to projected strong growth in
product revenue.
General and
Administrative, or G&A, Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30
|
|
|
|
|
|
|
2010
|
|
2011
|
|
|
|
|
|
|
|
|
Percentage
|
|
|
|
Percentage
|
|
Change
|
|
|
Amount
|
|
of Revenue
|
|
Amount
|
|
of Revenue
|
|
Amount
|
|
Percentage
|
|
|
($ in thousands)
|
|
G&A expenses
|
|
$
|
2,813
|
|
|
|
15
|
%
|
|
$
|
3,443
|
|
|
|
13
|
%
|
|
$
|
630
|
|
|
|
22
|
%
|
G&A expenses increased $0.6 million, or 22%, to
$3.4 million for the six months ended June 30, 2011
from $2.8 million in the comparable period in 2010. This
increase was principally the result of an increase in labor
expense associated with additional finance, information
technology, and human resource personnel hired in preparation
for operating as a public company. G&A expenses as a
percentage of total revenue decreased to 13% for the six months
ended June 30, 2011 from 15% in the comparable period in
2010. This decrease was principally driven by the increase in
total revenue for the six months ended June 30, 2011 from
the comparable period in 2010. We expect G&A expenses to
increase as we incur additional costs related to operating as a
publicly traded company, including costs of compliance with
securities, corporate governance and related regulations,
investor relations expenses, increased insurance premiums,
including director and officer insurance, ongoing listing fees,
increased staff to comply with public company requirements and
increased legal and audit fees. In addition, we expect to add
general and administrative personnel to support the anticipated
growth of our business and continued expansion of our
manufacturing operations. However, we expect that G&A
expenses will decline as a percentage of total revenue in the
long-term due to projected strong growth in product revenue.
Other Income
(Expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage
|
|
|
|
|
|
Percentage
|
|
|
Change
|
|
|
|
Amount
|
|
|
of Revenue
|
|
|
Amount
|
|
|
of Revenue
|
|
|
Amount
|
|
|
Percentage
|
|
|
|
($ in thousands)
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
$
|
37
|
|
|
|
0
|
%
|
|
$
|
51
|
|
|
|
0
|
%
|
|
$
|
14
|
|
|
|
38
|
%
|
Interest expense
|
|
|
(1,404
|
)
|
|
|
(8
|
)%
|
|
|
(2,269
|
)
|
|
|
(9
|
)%
|
|
|
(865
|
)
|
|
|
62
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other expense, net
|
|
$
|
(1,367
|
)
|
|
|
(7
|
)%
|
|
$
|
(2,218
|
)
|
|
|
(8
|
)%
|
|
$
|
(851
|
)
|
|
|
62
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other expense, net of other income, increased $0.9 million,
or 62%, to $2.2 million, for the six months ended
June 30, 2011 from $1.4 million in the comparable
period in 2010. This increase was primarily the result of
$0.4 million of interest expense on the subordinated notes
issued in the fourth quarter of 2010 and $0.9 million of
interest expense on the convertible notes issued in June 2011
offset, in part, by a $0.4 million decrease in imputed interest
expense associated with our cross license agreement with Cabot.
The decrease in imputed interest expense of $0.4 million
was driven by
60
payment of $7.5 million of this obligation during the
12 months ending June 30, 2011, which resulted in a
corresponding reduction in imputed interest expense during the
period.
Year ended
December 31, 2009, compared to year ended December 31,
2010
The following tables set forth our results of operations for the
periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
|
|
Year Ended December 31
|
|
|
|
2009
|
|
|
2010
|
|
|
$ Change
|
|
|
% Change
|
|
|
2009
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Percentage of total revenue)
|
|
|
|
($ in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
|
|
$
|
24,752
|
|
|
$
|
38,690
|
|
|
$
|
13,938
|
|
|
|
56
|
%
|
|
|
86
|
%
|
|
|
90
|
%
|
Research services
|
|
|
3,864
|
|
|
|
4,519
|
|
|
|
655
|
|
|
|
17
|
%
|
|
|
14
|
%
|
|
|
10
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
28,616
|
|
|
|
43,209
|
|
|
|
14,593
|
|
|
|
51
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
Cost of revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
|
|
|
30,462
|
|
|
|
35,399
|
|
|
|
4,937
|
|
|
|
16
|
%
|
|
|
106
|
%
|
|
|
82
|
%
|
Research services
|
|
|
1,788
|
|
|
|
2,119
|
|
|
|
331
|
|
|
|
19
|
%
|
|
|
6
|
%
|
|
|
5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit (loss)
|
|
|
(3,634
|
)
|
|
|
5,691
|
|
|
|
9,325
|
|
|
|
257
|
%
|
|
|
(13
|
)%
|
|
|
13
|
%
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
2,524
|
|
|
|
2,985
|
|
|
|
461
|
|
|
|
18
|
%
|
|
|
9
|
%
|
|
|
7
|
%
|
Sales and marketing
|
|
|
3,994
|
|
|
|
4,526
|
|
|
|
532
|
|
|
|
13
|
%
|
|
|
14
|
%
|
|
|
10
|
%
|
General and administrative
|
|
|
5,430
|
|
|
|
5,675
|
|
|
|
245
|
|
|
|
5
|
%
|
|
|
19
|
%
|
|
|
13
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
11,948
|
|
|
|
13,186
|
|
|
|
1,238
|
|
|
|
10
|
%
|
|
|
42
|
%
|
|
|
31
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
(15,582
|
)
|
|
|
(7,495
|
)
|
|
|
8,087
|
|
|
|
52
|
%
|
|
|
(54
|
)%
|
|
|
(17
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
18
|
|
|
|
170
|
|
|
|
152
|
|
|
|
844
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
Interest expense
|
|
|
(3,075
|
)
|
|
|
(2,585
|
)
|
|
|
490
|
|
|
|
16
|
%
|
|
|
(11
|
)%
|
|
|
(6
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other expense, net
|
|
|
(3,057
|
)
|
|
|
(2,415
|
)
|
|
|
642
|
|
|
|
21
|
%
|
|
|
(11
|
)%
|
|
|
(6
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(18,639
|
)
|
|
$
|
(9,910
|
)
|
|
$
|
8,729
|
|
|
|
47
|
%
|
|
|
(65
|
)%
|
|
|
(23
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage
|
|
|
|
|
|
Percentage
|
|
|
Change
|
|
|
|
Amount
|
|
|
of Revenue
|
|
|
Amount
|
|
|
of Revenue
|
|
|
Amount
|
|
|
Percentage
|
|
|
|
($ in thousands)
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
|
|
$
|
24,752
|
|
|
|
86
|
%
|
|
$
|
38,690
|
|
|
|
90
|
%
|
|
$
|
13,938
|
|
|
|
56
|
%
|
Research services
|
|
|
3,864
|
|
|
|
14
|
%
|
|
|
4,519
|
|
|
|
10
|
%
|
|
|
655
|
|
|
|
17
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
28,616
|
|
|
|
100
|
%
|
|
$
|
43,209
|
|
|
|
100
|
%
|
|
$
|
14,593
|
|
|
|
51
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following chart sets forth product shipments in square feet
for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
December 31
|
|
Change
|
|
|
2009
|
|
2010
|
|
Amount
|
|
Percentage
|
|
Product shipments in square feet (in thousands)
|
|
|
10,525
|
|
|
|
16,443
|
|
|
|
5,918
|
|
|
|
56
|
%
|
Total revenue increased $14.6 million, or 51%, in 2010 to
$43.2 million from $28.6 million in 2009 primarily as
a result of an increase in product revenue. Product revenue
increased $13.9 million,
61
or 56%, to $38.7 million in 2010 from $24.8 million
in 2009. This increase was principally the result of an increase
in demand for our aerogel products in the oil and gas sector of
the industrial market in 2010. This increase in demand during
2010 included sales to Technip totaling $6.2 million
associated with four offshore oil projects and sales to
Enershield totaling $3.8 million associated with a project
in the Canadian oil sands. In volume terms, product shipments
increased 5.9 million square feet, or 56%, to
16.4 million square feet of aerogel products, as compared
to 10.5 million square feet in 2009. We did not increase
the prices of our products during the periods presented.
Research services revenue increased $0.7 million, or 17%,
to $4.5 million in 2010 from $3.9 million in 2009
primarily due to revenue generated under a significant contract
with the Department of Energy.
Product revenue as a percentage of total revenue increased to
90% of total revenue in 2010, from 86% of total revenue in 2009.
Research services revenue decreased to 10% of total revenue in
2010 from 14% of total revenue in 2009. Moving forward, we
expect product revenue to continue to increase as a percentage
of total revenue, and research services revenue to continue to
decrease as a percentage of total revenue.
Cost of
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage
|
|
|
Percentage
|
|
|
|
|
|
Percentage
|
|
|
Percentage
|
|
|
|
|
|
|
|
|
|
|
|
|
of Related
|
|
|
of Total
|
|
|
|
|
|
of Related
|
|
|
of Total
|
|
|
Change
|
|
|
|
Amount
|
|
|
Revenue
|
|
|
Revenue
|
|
|
Amount
|
|
|
of Revenue
|
|
|
Revenue
|
|
|
Amount
|
|
|
Percentage
|
|
|
|
($ in thousands)
|
|
|
Cost of revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
|
|
$
|
30,462
|
|
|
|
123
|
%
|
|
|
106
|
%
|
|
$
|
35,399
|
|
|
|
91
|
%
|
|
|
82
|
%
|
|
$
|
4,937
|
|
|
|
16
|
%
|
Research services
|
|
|
1,788
|
|
|
|
46
|
%
|
|
|
6
|
%
|
|
|
2,119
|
|
|
|
47
|
%
|
|
|
5
|
%
|
|
|
331
|
|
|
|
19
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenue
|
|
$
|
32,250
|
|
|
|
113
|
%
|
|
|
113
|
%
|
|
$
|
37,518
|
|
|
|
87
|
%
|
|
|
87
|
%
|
|
$
|
5,268
|
|
|
|
16
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenue increased $5.3 million, or 16%, to
$37.5 million in 2010 from $32.3 million in 2009. The
increase in total cost of revenue was the result of an increase
of $5.4 million in raw material costs to support increased
product revenue and an increase of $0.3 million in cost of
research services to support increased research services
revenue, offset, in part, by a decrease of $0.6 million in
manufacturing expense due to improved manufacturing productivity.
Product cost of revenue increased $4.9 million, or 16%, to
$35.4 million in 2010 from $30.5 million in 2009.
Product cost of revenue as a percentage of product revenue
decreased to 91% during 2010 from 123% in 2009 due to the
decrease in manufacturing costs, a reduction in material costs
as a percentage of product revenue, and increased production
volume during the year. The reduction in material costs as a
percentage of product revenue, in turn, was the result of
improved manufacturing yields and purchasing efficiency during
2010. We expect to incur a $9.8 million increase in
manufacturing costs included in cost of product revenue during
2011 primarily associated with the operation of our second
production line in the East Providence facility.
Research services cost of revenue increased $0.3 million,
or 19%, to $2.1 million during 2010 from $1.8 million
during 2009. The increase was due to the increase in research
services provided during 2010 and an unfavorable mix of labor
and expense associated with the contracts. Research services
cost of revenue as a percentage of research services revenue
increased to 47% during 2010 from 46% in 2009 principally due to
the mix of labor and expense required to perform the contracted
research, each of which carries a different rate of
reimbursement.
62
Gross Profit
(Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
|
|
|
|
|
|
2009
|
|
2010
|
|
|
|
|
|
|
|
|
Percentage
|
|
|
|
Percentage
|
|
Change
|
|
|
Amount
|
|
of Revenue
|
|
Amount
|
|
of Revenue
|
|
Amount
|
|
Percentage
|
|
|
($ in thousands)
|
|
Gross profit (loss)
|
|
$
|
(3,634
|
)
|
|
|
(13
|
)%
|
|
$
|
5,691
|
|
|
|
13
|
%
|
|
$
|
9,325
|
|
|
|
257
|
%
|
Gross profit increased $9.3 million, or 257%, to
$5.7 million in 2010 from a gross loss of $3.6 million
in 2009. This increase in gross profit was the result of
economies of scale associated with increased product revenue, a
reduction in material costs as a percentage of product revenue
due to improved manufacturing yields and purchasing efficiency
and a decrease in manufacturing expenses due to increased
productivity at our East Providence facility. Gross profit as a
percentage of total revenue increased to 13% of total revenue in
2010 from a gross loss of 13% of total revenue in 2009. We
expect gross profit as a percentage of total revenue to decrease
from 2010 levels in the near term due to the $9.8 million
increase in manufacturing costs included in cost of product
revenue associated with the operation of our second production
line in the East Providence facility. We expect gross profit as
a percentage of total revenue to increase in the long-term due
to projected growth in product revenue supported by the increase
in manufacturing capacity.
R&D
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
|
|
|
|
|
|
2009
|
|
2010
|
|
|
|
|
|
|
|
|
Percentage
|
|
|
|
Percentage
|
|
Change
|
|
|
Amount
|
|
of Revenue
|
|
Amount
|
|
of Revenue
|
|
Amount
|
|
Percentage
|
|
|
($ in thousands)
|
|
R&D expenses
|
|
$
|
2,524
|
|
|
|
9
|
%
|
|
$
|
2,985
|
|
|
|
7
|
%
|
|
$
|
461
|
|
|
|
18
|
%
|
R&D expenses increased $0.5 million, or 18%, to
$3.0 million in 2010 from $2.5 million in 2009. This
increase was principally the result of an increase of $0.3
million in labor and related benefits for engineering personnel
to support the operation of our East Providence facility, and an
increase of $0.1 million in contract engineering expense.
R&D costs as a percentage of total revenue decreased to 7%
during 2010 from 9% during 2009. This decrease was the result of
strong growth in product revenue during 2010. We expect that our
research and development expenses will continue to increase as
we invest in additional research and engineering personnel and
the infrastructure required in support of their efforts.
However, we expect that research and development expenses will
decline as a percentage of total revenue due to projected strong
growth in product revenue.
Sales and
Marketing Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
|
|
|
|
|
|
2009
|
|
2010
|
|
|
|
|
|
|
|
|
Percentage
|
|
|
|
Percentage
|
|
Change
|
|
|
Amount
|
|
of Revenue
|
|
Amount
|
|
of Revenue
|
|
Amount
|
|
Percentage
|
|
|
($ in thousands)
|
|
Sales and marketing expenses
|
|
$
|
3,994
|
|
|
|
14
|
%
|
|
$
|
4,526
|
|
|
|
10
|
%
|
|
$
|
532
|
|
|
|
13
|
%
|
Sales and marketing expenses increased $0.5 million, or
13%, to $4.5 million during 2010 from $4.0 million
during 2009. The increase in expense was driven by a
$0.5 million increase related to an increase in sales
personnel and an increase of $0.4 million in incentive
compensation associated with the 56% increase in product revenue
during 2010, partially offset by a $0.3 million decrease in
legal fees and a $0.1 million decrease in expense for sales
consultants. Sales and marketing expenses as a percentage
63
of total revenue decreased to 10% during 2010 from 14% in 2009.
This decrease was the result of the growth in total revenue
during 2010. We plan to continue to expand our sales force and
sales consultants globally during 2011 to support anticipated
growth in customers and demand for our products. We expect that
sales and marketing expenses will increase in absolute dollars
but decrease as a percentage of total revenue in the long-term.
G&A
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
|
|
|
|
|
|
2009
|
|
2010
|
|
|
|
|
|
|
|
|
Percentage
|
|
|
|
Percentage
|
|
Change
|
|
|
Amount
|
|
of Revenue
|
|
Amount
|
|
of Revenue
|
|
Amount
|
|
Percentage
|
|
|
($ in thousands)
|
|
G&A expenses
|
|
$
|
5,430
|
|
|
|
19
|
%
|
|
$
|
5,675
|
|
|
|
13
|
%
|
|
$
|
245
|
|
|
|
5
|
%
|
G&A expenses increased $0.2 million, or 5%, to
$5.7 million in 2010 from $5.4 million in 2009. This
increase was primarily the result of a $0.1 million increase in
labor and incentive compensation for finance and human resource
personnel, and a $0.1 million increase in legal and professional
fees. G&A expenses as a percentage of total revenue
decreased to 13% for 2010 from 19% in 2009. This decrease was
principally driven by the increase in total revenue during the
year. We expect G&A expenses to increase as we incur
additional costs related to operating as a publicly traded
company, including costs of compliance with securities,
corporate governance and related regulations, investor relations
expenses, increased insurance premiums, including director and
officer insurance, and increased legal and audit fees. In
addition, we expect to add general and administrative personnel
to support the anticipated growth of our business and continued
expansion of our manufacturing operations. As a result, we
expect that G&A expenses will increase in absolute dollars
but decrease as a percentage of total revenue in the long-term.
Other Income
(Expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage
|
|
|
|
|
|
Percentage
|
|
|
Change
|
|
|
|
Amount
|
|
|
of Revenue
|
|
|
Amount
|
|
|
of Revenue
|
|
|
Amount
|
|
|
Percentage
|
|
|
|
($ in thousands)
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
$
|
18
|
|
|
|
0
|
%
|
|
$
|
170
|
|
|
|
0
|
%
|
|
$
|
152
|
|
|
|
844
|
%
|
Interest expense
|
|
|
(3,075
|
)
|
|
|
(11
|
)%
|
|
|
(2,585
|
)
|
|
|
(6
|
)%
|
|
|
490
|
|
|
|
16
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other expense, net
|
|
$
|
(3,057
|
)
|
|
|
(11
|
)%
|
|
$
|
(2,415
|
)
|
|
|
(6
|
)%
|
|
$
|
642
|
|
|
|
21
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other expense, net of other income, decreased $0.6 million,
or 21%, to $2.4 million in 2010 from $3.1 million in
2009. This decrease was primarily the result of a decrease of
$0.6 million in imputed interest expense associated with our
cross license agreement with Cabot. The decrease in imputed
interest expense of $0.6 million was driven by the payment of
$7.4 million of this obligation during the year ended
December 31, 2010, which resulted in a corresponding
reduction in imputed interest expense for the period.
64
Year ended
December 31, 2008, compared to year ended December 31,
2009
The following tables set forth our results of operations for the
periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
|
|
Year Ended December 31
|
|
|
|
2008
|
|
|
2009
|
|
|
$ Change
|
|
|
% Change
|
|
|
2008
|
|
|
2009
|
|
|
|
|
|
|
($ in thousands)
|
|
|
|
|
|
|
|
|
(Percentage of total revenue)
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
|
|
$
|
17,202
|
|
|
$
|
24,752
|
|
|
$
|
7,550
|
|
|
|
44
|
%
|
|
|
86
|
%
|
|
|
86
|
%
|
Research services
|
|
|
2,868
|
|
|
|
3,864
|
|
|
|
996
|
|
|
|
35
|
%
|
|
|
14
|
%
|
|
|
14
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
20,070
|
|
|
|
28,616
|
|
|
|
8,546
|
|
|
|
43
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
Cost of revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
|
|
|
32,160
|
|
|
|
30,462
|
|
|
|
(1,698
|
)
|
|
|
(5
|
)%
|
|
|
160
|
%
|
|
|
106
|
%
|
Research services
|
|
|
1,169
|
|
|
|
1,788
|
|
|
|
619
|
|
|
|
53
|
%
|
|
|
6
|
%
|
|
|
6
|
%
|
Impairment charge
|
|
|
2,524
|
|
|
|
|
|
|
|
(2,524
|
)
|
|
|
(100
|
)%
|
|
|
13
|
%
|
|
|
0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit (loss)
|
|
|
(15,783
|
)
|
|
|
(3,634
|
)
|
|
|
12,149
|
|
|
|
77
|
%
|
|
|
(79
|
)%
|
|
|
(13
|
)%
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
2,134
|
|
|
|
2,524
|
|
|
|
390
|
|
|
|
18
|
%
|
|
|
11
|
%
|
|
|
9
|
%
|
Sales and marketing
|
|
|
4,034
|
|
|
|
3,994
|
|
|
|
(40
|
)
|
|
|
(1
|
)%
|
|
|
20
|
%
|
|
|
14
|
%
|
General and administrative
|
|
|
6,180
|
|
|
|
5,430
|
|
|
|
(750
|
)
|
|
|
(12
|
)%
|
|
|
31
|
%
|
|
|
19
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
12,348
|
|
|
|
11,948
|
|
|
|
(400
|
)
|
|
|
(3
|
)%
|
|
|
62
|
%
|
|
|
42
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
(28,131
|
)
|
|
|
(15,582
|
)
|
|
|
12,549
|
|
|
|
45
|
%
|
|
|
(140
|
)%
|
|
|
(54
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
287
|
|
|
|
18
|
|
|
|
(269
|
)
|
|
|
(94
|
)%
|
|
|
1
|
%
|
|
|
0
|
%
|
Interest expense
|
|
|
(7,400
|
)
|
|
|
(3,075
|
)
|
|
|
4,325
|
|
|
|
58
|
%
|
|
|
(37
|
)%
|
|
|
(11
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other expense, net
|
|
|
(7,113
|
)
|
|
|
(3,057
|
)
|
|
|
4,056
|
|
|
|
57
|
%
|
|
|
(35
|
)%
|
|
|
(11
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(35,244
|
)
|
|
$
|
(18,639
|
)
|
|
$
|
16,605
|
|
|
|
47
|
%
|
|
|
(176
|
)%
|
|
|
(65
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage
|
|
|
|
|
|
Percentage
|
|
|
Change
|
|
|
|
Amount
|
|
|
of Revenue
|
|
|
Amount
|
|
|
of Revenue
|
|
|
Amount
|
|
|
Percentage
|
|
|
|
($ in thousands)
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
|
|
$
|
17,202
|
|
|
|
86
|
%
|
|
$
|
24,752
|
|
|
|
86
|
%
|
|
$
|
7,550
|
|
|
|
44
|
%
|
Research services
|
|
|
2,868
|
|
|
|
14
|
%
|
|
|
3,864
|
|
|
|
14
|
%
|
|
|
996
|
|
|
|
35
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
20,070
|
|
|
|
100
|
%
|
|
$
|
28,616
|
|
|
|
100
|
%
|
|
$
|
8,546
|
|
|
|
43
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
65
The following chart depicts product shipments in square feet for
the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
|
Change
|
|
|
2008
|
|
2009
|
|
Amount
|
|
Percentage
|
|
Product shipments in square feet (in thousands)
|
|
|
6,909
|
|
|
|
10,525
|
|
|
|
3,616
|
|
|
|
52
|
%
|
Total revenue increased $8.5 million, or 43%, in 2009 to
$28.6 million from $20.1 million in 2008 primarily as
a result of an increase in product revenue. Product revenue
increased $7.6 million, or 44%, to $24.8 million in
2009 from $17.2 million in 2008. This increase was
principally the result of a broad based increase in global
demand for our line of aerogel products in the oil and gas
sector of the industrial market, supported by an expansion of
our global insulation distributor network. In volume terms,
product shipments increased 3.6 million square feet, or
52%, to 10.5 million square feet of aerogel products in
2009, as compared to 6.9 million square feet in 2008.
In addition, 2009 marked the first full year of revenue from
sales of our Pyrogel XT and Cryogel Z product lines, which we
first introduced in mid-2008. The increase in product revenue of
$7.6 million was the result of an increase in volume of
52%, or an effective $8.9 million, offset, in part, by an
effective decrease of $1.3 million, or 8%, due to lower
pricing of the Pyrogel XT and Cryogel Z product lines.
Research services revenue increased $1.0 million, or 35%,
to $3.9 million in 2009 from $2.9 million in 2008
primarily due to a number of significant research contract
awards.
Product revenue as a percentage of total revenue of 86% and
research services revenue of 14% during 2009 remained unchanged
from 2008.
Cost of
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage
|
|
|
Percentage
|
|
|
|
|
|
Percentage
|
|
|
Percentage
|
|
|
|
|
|
|
|
|
|
|
|
|
of Related
|
|
|
of Total
|
|
|
|
|
|
of Related
|
|
|
of Total
|
|
|
Change
|
|
|
|
Amount
|
|
|
Revenue
|
|
|
Revenue
|
|
|
Amount
|
|
|
Revenue
|
|
|
Revenue
|
|
|
Amount
|
|
|
Percentage
|
|
|
|
($ in thousands)
|
|
|
Cost of revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
|
|
$
|
32,160
|
|
|
|
187
|
%
|
|
|
160
|
%
|
|
$
|
30,462
|
|
|
|
123
|
%
|
|
|
106
|
%
|
|
$
|
(1,698
|
)
|
|
|
(5
|
)%
|
Research services
|
|
|
1,169
|
|
|
|
41
|
%
|
|
|
6
|
%
|
|
|
1,788
|
|
|
|
46
|
%
|
|
|
6
|
%
|
|
|
619
|
|
|
|
53
|
%
|
Impairment charge
|
|
|
2,524
|
|
|
|
13
|
%
|
|
|
13
|
%
|
|
|
|
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
(2,524
|
)
|
|
|
(100
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenue
|
|
$
|
35,853
|
|
|
|
179
|
%
|
|
|
179
|
%
|
|
$
|
32,250
|
|
|
|
113
|
%
|
|
|
113
|
%
|
|
$
|
(3,603
|
)
|
|
|
(10
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenue decreased $3.6 million, or 10%, to
$32.3 million in 2009 from $35.9 million in 2008. The
decrease in total cost of revenue was driven by a
$2.9 million decrease in manufacturing and overhead expense
as a result of the shutdown of our Northborough, Massachusetts
prototype facility and consolidation of manufacturing operations
into our East Providence facility, offset, in part, by an
increase of $1.2 million in material cost due to the growth
in product revenue and a $0.6 million increase in cost of
research services due to growth in research services revenues.
In addition, total cost of revenue in 2008 included an
impairment charge of $2.5 million related to the shutdown
of our Northborough facility.
Cost of product revenue decreased by $1.7 million to
$30.5 million in 2009 from $32.2 million in 2008. As a
result of the net decrease in cost of product revenue and growth
in product revenue during 2009, product cost of revenue as a
percentage of product revenue decreased to 123% during 2009 from
187% in 2008.
Research services cost of revenue increased $0.6 million,
or 53%, to $1.8 million during 2009 from $1.2 million
during 2008. The increase was due to the increase in research
services revenue during 2009 and an unfavorable mix of labor and
expense associated with the contracts. Research
66
services cost of revenue as a percentage of research services
revenue increased to 46% during 2009 from 41% in 2008
principally due to the mix of labor and expense required to
perform the contracted research, each of which carries a
different rate of reimbursement.
Gross Profit
(Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
|
|
|
|
|
|
2008
|
|
2009
|
|
|
|
|
|
|
|
|
Percentage
|
|
|
|
Percentage
|
|
Change
|
|
|
Amount
|
|
of Revenue
|
|
Amount
|
|
of Revenue
|
|
Amount
|
|
Percentage
|
|
|
($ in thousands)
|
|
Gross profit (loss)
|
|
$
|
(15,783
|
)
|
|
|
(79
|
)%
|
|
$
|
(3,634
|
)
|
|
|
(13
|
)%
|
|
$
|
12,149
|
|
|
|
77
|
%
|
Gross loss decreased $12.1 million to $3.6 million in
2009 from a gross loss of $15.8 million in 2008. This
decrease in gross loss was the result of economies of scale
associated with increased product revenue, a reduction in
material costs as a percentage of product revenue due to
improved manufacturing yields and purchasing efficiency, and an
absolute dollar decrease in manufacturing expenses due the
shutdown of our Northborough facility. In addition, total cost
of revenue in 2008 included an impairment charge of
$2.5 million related to the shutdown of the Northborough
facility. Gross loss as a percentage of total revenue decreased
to 13% of total revenue in 2009 from a gross loss of 79% of
total revenue in 2008.
R&D
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
|
|
|
|
|
|
2008
|
|
2009
|
|
|
|
|
|
|
|
|
Percentage
|
|
|
|
Percentage
|
|
Change
|
|
|
Amount
|
|
of Revenue
|
|
Amount
|
|
of Revenue
|
|
Amount
|
|
Percentage
|
|
|
|
|
|
|
($ in thousands)
|
|
|
|
|
|
R&D expenses
|
|
$
|
2,134
|
|
|
|
11
|
%
|
|
$
|
2,524
|
|
|
|
9
|
%
|
|
$
|
390
|
|
|
|
18
|
%
|
R&D expenses increased $0.4 million, or 18%, to
$2.5 million in 2009, from $2.1 million in 2008. This
increase was principally the result of an increase in labor
expense of $0.2 million for research personnel devoted to
product development and a reduction of $0.6 million in
proceeds from cost-sharing arrangements, offset by a
$0.4 million decrease in depreciation of assets in our
Northborough facility. R&D costs as a percentage of total
revenue decreased to 9% during 2009 from 11% during 2008. This
decrease was the result of the growth in total revenue during
2009.
Sales and
Marketing Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
|
|
|
|
|
|
2008
|
|
2009
|
|
|
|
|
|
|
|
|
Percentage
|
|
|
|
Percentage
|
|
Change
|
|
|
Amount
|
|
of Revenue
|
|
Amount
|
|
of Revenue
|
|
Amount
|
|
Percentage
|
|
|
($ in thousands)
|
|
Sales and marketing expenses
|
|
$
|
4,034
|
|
|
|
20
|
%
|
|
$
|
3,994
|
|
|
|
14
|
%
|
|
$
|
(40
|
)
|
|
|
(1
|
)%
|
Sales and marketing expenses remained relatively unchanged from
the 2008 levels. A reduction in expense of $0.2 million
associated with a reduction in sales personnel and sales
consultants and a decrease in contract labor of
$0.1 million was offset by an increase of $0.3 million
of legal expense during 2009. Sales and marketing expenses as a
percentage of total revenue decreased to 14% during 2009 from
20% in 2008. This decrease was primarily the result of the
growth in total revenue during 2009.
67
G&A
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
|
|
|
|
|
|
2008
|
|
2009
|
|
|
|
|
|
|
|
|
Percentage
|
|
|
|
Percentage
|
|
Change
|
|
|
Amount
|
|
of Revenue
|
|
Amount
|
|
of Revenue
|
|
Amount
|
|
Percentage
|
|
|
($ in thousands)
|
|
G&A expenses
|
|
$
|
6,180
|
|
|
|
31
|
%
|
|
$
|
5,430
|
|
|
|
19
|
%
|
|
$
|
(750
|
)
|
|
|
(12
|
)%
|
G&A expenses decreased $0.8 million, or 12%, to
$5.4 million in 2009 from $6.2 million in 2008. This
decrease was primarily the result of a decrease of
$0.2 million in depreciation of assets in our Northborough
facility, a decrease of $0.2 million in incentive
compensation, a reduction of $0.2 million in legal and
professional fees, and a decrease of $0.1 million in
recruiting expense. G&A expenses as a percentage of total
revenue decreased to 19% during 2009 from 31% during 2008. This
decrease was principally driven by the reduction in G&A
expenses and the increase in total revenue during the year.
Other Income
(Expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage
|
|
|
|
|
|
Percentage
|
|
|
Change
|
|
|
|
|
|
|
Amount
|
|
|
of Revenue
|
|
|
Amount
|
|
|
of Revenue
|
|
|
Amount
|
|
|
Percentage
|
|
|
|
|
|
|
($ in thousands)
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
$
|
287
|
|
|
|
1
|
%
|
|
$
|
18
|
|
|
|
0
|
%
|
|
$
|
(269
|
)
|
|
|
(94
|
)%
|
|
|
|
|
Interest expense
|
|
|
(7,400
|
)
|
|
|
(37
|
)%
|
|
|
(3,075
|
)
|
|
|
(11
|
)%
|
|
|
4,325
|
|
|
|
58
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other expense, net
|
|
$
|
(7,113
|
)
|
|
|
(35
|
)%
|
|
$
|
(3,057
|
)
|
|
|
(11
|
)%
|
|
$
|
4,056
|
|
|
|
57
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other expense, net of other income, decreased $4.1 million,
or 57%, to $3.1 million in 2009 from $7.1 million in
2008. This decrease was primarily due to a decrease in interest
expense of $3.9 million following the conversion of our 14%
promissory notes due 2010 and demand notes into several classes
of preferred stock on June 10, 2008. In addition, imputed
interest expense decreased $0.4 million due to the
repayment of $4.4 million of our obligation under our cross
license agreement with Cabot during 2009. Interest income
decreased by $0.3 million due to lower interest rates on our
investment portfolio.
Quarterly Results
of Operations
The unaudited consolidated financial statements for each of the
quarters presented were prepared on a basis consistent with our
audited consolidated financial statements and include all
adjustments, consisting of normal and recurring adjustments,
that our management considers necessary for a fair presentation
of the financial position and results of operations as of and
for such periods. You should review our quarterly operating
results in conjunction with our consolidated financial
statements and the related notes located elsewhere in this
prospectus. The results of operations for any quarter are not
necessarily indicative of the results of operations for any
future periods.
Seasonality
and Quarterly Results
Our operating results may fluctuate for a variety of reasons
outside of our control, including seasonal factors that
influence our customers and our markets, the intermittent nature
of our project-based business and macroeconomic factors.
Historically, we have experienced a relatively high level
68
of revenue in the quarter ended December 31 of each year and a
relatively low level of revenue in the quarter ending March 31
of each year.
Our product revenue is generated in part by demand for
insulation associated with new-build construction of facilities,
capital expansions and related capital projects, and larger
maintenance-related projects. The revenue generated by a single
project could be material to our revenue and results of
operations in any given reporting period. In addition, we
believe that these projects are affected by macroeconomic
factors including the price of oil and economic growth.
Accordingly, our project-based revenue in any given period may
vary due to the intermittent nature of projects and changes in
macroeconomic conditions. 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.
As a result, comparing our operating results on a
period-to-period
basis may not be meaningful and historical results may not be
indicative of future performance. The following table sets forth
the unaudited quarterly consolidated results of operations data
for each of the quarters presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
|
March 31
|
|
|
June 30
|
|
|
Sept. 30
|
|
|
Dec. 31
|
|
|
March 31
|
|
|
June 30
|
|
|
Sept. 30
|
|
|
Dec. 31
|
|
|
March 31
|
|
|
June 30
|
|
|
|
($ in thousands)
|
|
|
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
|
|
$
|
3,886
|
|
|
$
|
5,949
|
|
|
$
|
5,967
|
|
|
$
|
8,950
|
|
|
$
|
7,681
|
|
|
$
|
8,327
|
|
|
$
|
10,187
|
|
|
$
|
12,495
|
|
|
$
|
11,274
|
|
|
$
|
13,059
|
|
Research services
|
|
|
879
|
|
|
|
866
|
|
|
|
1,076
|
|
|
|
1,043
|
|
|
|
1,066
|
|
|
|
1,172
|
|
|
|
1,059
|
|
|
|
1,222
|
|
|
|
1,015
|
|
|
|
802
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
4,765
|
|
|
|
6,815
|
|
|
|
7,043
|
|
|
|
9,993
|
|
|
|
8,747
|
|
|
|
9,499
|
|
|
|
11,246
|
|
|
|
13,717
|
|
|
|
12,289
|
|
|
|
13,861
|
|
Cost of revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
|
|
|
6,064
|
|
|
|
8,426
|
|
|
|
6,860
|
|
|
|
9,112
|
|
|
|
7,647
|
|
|
|
8,467
|
|
|
|
8,567
|
|
|
|
10,718
|
|
|
|
9,473
|
|
|
|
12,072
|
|
Research services
|
|
|
346
|
|
|
|
418
|
|
|
|
498
|
|
|
|
526
|
|
|
|
456
|
|
|
|
549
|
|
|
|
508
|
|
|
|
606
|
|
|
|
544
|
|
|
|
378
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit (loss)
|
|
|
(1,645
|
)
|
|
|
(2,029
|
)
|
|
|
(315
|
)
|
|
|
355
|
|
|
|
644
|
|
|
|
483
|
|
|
|
2,171
|
|
|
|
2,393
|
|
|
|
2,272
|
|
|
|
1,411
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
614
|
|
|
|
601
|
|
|
|
538
|
|
|
|
771
|
|
|
|
917
|
|
|
|
802
|
|
|
|
535
|
|
|
|
731
|
|
|
|
731
|
|
|
|
997
|
|
Sales and marketing
|
|
|
749
|
|
|
|
1,276
|
|
|
|
892
|
|
|
|
1,077
|
|
|
|
1,194
|
|
|
|
1,124
|
|
|
|
1,007
|
|
|
|
1,201
|
|
|
|
1,224
|
|
|
|
1,333
|
|
General and administrative
|
|
|
1,410
|
|
|
|
1,213
|
|
|
|
1,371
|
|
|
|
1,436
|
|
|
|
1,504
|
|
|
|
1,309
|
|
|
|
1,360
|
|
|
|
1,502
|
|
|
|
1,587
|
|
|
|
1,856
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
2,773
|
|
|
|
3,090
|
|
|
|
2,801
|
|
|
|
3,284
|
|
|
|
3,615
|
|
|
|
3,235
|
|
|
|
2,902
|
|
|
|
3,434
|
|
|
|
3,542
|
|
|
|
4,186
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
(4,418
|
)
|
|
|
(5,119
|
)
|
|
|
(3,116
|
)
|
|
|
(2,929
|
)
|
|
|
(2,971
|
)
|
|
|
(2,752
|
)
|
|
|
(731
|
)
|
|
|
(1,041
|
)
|
|
|
(1,270
|
)
|
|
|
(2,775
|
)
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
6
|
|
|
|
|
|
|
|
14
|
|
|
|
(2
|
)
|
|
|
10
|
|
|
|
27
|
|
|
|
1
|
|
|
|
132
|
|
|
|
48
|
|
|
|
3
|
|
Interest expense
|
|
|
(818
|
)
|
|
|
(773
|
)
|
|
|
(764
|
)
|
|
|
(720
|
)
|
|
|
(706
|
)
|
|
|
(698
|
)
|
|
|
(607
|
)
|
|
|
(574
|
)
|
|
|
(499
|
)
|
|
|
(1,770
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other expense, net
|
|
|
(812
|
)
|
|
|
(773
|
)
|
|
|
(750
|
)
|
|
|
(722
|
)
|
|
|
(696
|
)
|
|
|
(671
|
)
|
|
|
(606
|
)
|
|
|
(442
|
)
|
|
|
(451
|
)
|
|
|
(1,767
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(5,230
|
)
|
|
$
|
(5,892
|
)
|
|
$
|
(3,866
|
)
|
|
$
|
(3,651
|
)
|
|
$
|
(3,667
|
)
|
|
$
|
(3,423
|
)
|
|
$
|
(1,337
|
)
|
|
$
|
(1,483
|
)
|
|
$
|
(1,721
|
)
|
|
$
|
(4,542
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table sets forth a reconciliation of net income
(loss) to Adjusted EBITDA for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
|
March 31
|
|
|
June 30
|
|
|
Sept. 30
|
|
|
Dec. 31
|
|
|
March 31
|
|
|
June 30
|
|
|
Sept. 30
|
|
|
Dec. 31
|
|
|
March 31
|
|
|
June 30
|
|
|
|
($ in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(5,230
|
)
|
|
$
|
(5,892
|
)
|
|
$
|
(3,866
|
)
|
|
$
|
(3,651
|
)
|
|
$
|
(3,667
|
)
|
|
$
|
(3,423
|
)
|
|
$
|
(1,337
|
)
|
|
$
|
(1,483
|
)
|
|
$
|
(1,721
|
)
|
|
$
|
(4,542
|
)
|
Depreciation and amortization
|
|
|
1,393
|
|
|
|
1,379
|
|
|
|
1,580
|
|
|
|
1,278
|
|
|
|
1,137
|
|
|
|
1,124
|
|
|
|
1,137
|
|
|
|
1,235
|
|
|
|
1,310
|
|
|
|
2,055
|
|
Stock-based compensation
|
|
|
99
|
|
|
|
91
|
|
|
|
125
|
|
|
|
516
|
|
|
|
96
|
|
|
|
105
|
|
|
|
122
|
|
|
|
145
|
|
|
|
190
|
|
|
|
252
|
|
Interest expense, net
|
|
|
812
|
|
|
|
773
|
|
|
|
750
|
|
|
|
722
|
|
|
|
696
|
|
|
|
671
|
|
|
|
606
|
|
|
|
442
|
|
|
|
451
|
|
|
|
1,767
|
|
Impairment charge
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
|
$
|
(2,926
|
)
|
|
$
|
(3,649
|
)
|
|
$
|
(1,411
|
)
|
|
$
|
(1,135
|
)
|
|
$
|
(1,738
|
)
|
|
$
|
(1,523
|
)
|
|
$
|
528
|
|
|
$
|
339
|
|
|
$
|
230
|
|
|
$
|
(468
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
69
Our Adjusted EBITDA has generally improved over the ten quarters
ended June 30, 2011. We achieved positive Adjusted EBITDA
for the first time in the three months ended September 30,
2010, and sustained a positive, quarterly Adjusted EBITDA
through the three months ended March 31, 2011. The decrease in
Adjusted EBITDA for the three months ended June 30, 2011
reflected a significant increase in under-absorbed manufacturing
expense associated with the start-up and operation of our second
production line in the East Providence facility.
Liquidity and
Capital Resources
Overview
We have experienced significant losses since inception, have an
accumulated deficit of $202.4 million as of June 30,
2011 and have significant ongoing cash flow commitments. We have
invested significant resources to commercialize aerogel
technology and to build a manufacturing infrastructure capable
of supplying aerogel products at the volumes and costs required
by our customers. We currently market a set of commercially
viable products, serve a growing base of customers and are
experiencing rapid growth.
Our financial forecast anticipates increasing revenue, improving
levels of profitability and improving cash flow from operations
supported by capacity expansions and related capital
investments. Based on this forecast, we believe that our
existing cash, cash equivalents, marketable securities,
available credit, and proceeds under recent debt financings and
this offering will be sufficient to satisfy anticipated cash
requirements during the next 12 months. However, if our
operating performance falls short of forecast and deteriorates
from levels achieved during 2010, we could conceivably
experience a decrease in liquidity and a deterioration of our
ability to continue as a going concern. Accordingly, we will
continue to seek new sources of debt and equity financing to
expand our cash balances, financial resources and available
credit to ensure our ability to meet commitments and to fully
fund our operational plans.
Primary
Sources of Liquidity
As of June 30, 2011, we had $29.6 million of cash and
cash equivalents.
In December 2010, we entered into a subordinated note and
warrant purchase agreement with affiliates of Piper Capital LLC
and other investors and issued an aggregate of
$10.0 million principal amount of secured subordinated
promissory notes, which we refer to as our subordinated notes.
The subordinated notes bear interest at the rate of 12% annually
and are required to be repaid upon the earlier of:
(i) March 2, 2014, (ii) the first anniversary of
the completion of this offering or (iii) the last business
day prior to the date that any of our preferred stock is
redeemed. See Description of Certain Indebtedness.
In March 2011, we entered into a $10.0 million revolving
credit facility with Silicon Valley Bank, which we refer to as
our revolving credit facility, under which we could have drawn
$10.0 million as of June 30, 2011 due to borrowing
base limitations. Interest on extensions of credit under the
revolving credit facility is equal to the prime rate which at
June 30, 2011 was 4.0% per annum, plus 1.0% per annum,
provided that if we are at or above a certain liquidity
threshold, interest on extensions of credit under the revolving
credit facility is equal to the prime rate plus 0.5% per annum.
In addition, we are required to pay a quarterly unused revolving
line facility fee of 0.5% per annum of the average unused
portion of the revolving credit facility. The revolving credit
facility will mature on March 31, 2013. As of June 30,
2011, there were no amounts outstanding under the revolving
credit facility. See Description of Certain
Indebtedness.
In June 2011, we entered into a note purchase agreement with
certain affiliates of Fidelity Investments and BASF Venture
Capital and issued $30.0 million aggregate principal amount
of unsecured convertible notes, which we refer to as our
convertible notes, with a maturity date of June 1, 2014.
Interest on the convertible notes accrues at the rate of 8.0%
per year. The unpaid
70
principal amount of the convertible notes, together with any
interest accrued but unpaid thereon, will be automatically
converted into common stock upon the closing of the offering
made hereby at a conversion price equal to 87.5% of the price to
the public in this offering. See Description of Certain
Indebtedness.
We are currently in the due diligence phase of the application
process for a loan guarantee with the Department of Energy under
Section 1703 of Title XVII of the Energy Policy Act of
2005 for a term loan in the amount of approximately
$70.0 million to be used in the financing of the expansion
of our East Providence facility. Our continued expansion of our
East Providence facility is not dependent upon obtaining this
guarantee. If awarded, we will assess the opportunity to obtain
a loan guaranteed under this program.
Analysis of
Cash Flow
The following table summarizes our cash flows for the periods
indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
Year Ended December 31
|
|
|
June 30
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2010
|
|
|
2011
|
|
|
|
($ in thousands)
|
|
|
Net cash provided by (used in) :
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities
|
|
$
|
(21,973
|
)
|
|
$
|
(12,972
|
)
|
|
$
|
(15,126
|
)
|
|
$
|
(9,426
|
)
|
|
$
|
(7,242
|
)
|
Investing activities
|
|
|
(952
|
)
|
|
|
(1,783
|
)
|
|
|
(15,707
|
)
|
|
|
(12,767
|
)
|
|
|
(16,845
|
)
|
Financing activities
|
|
|
34,119
|
|
|
|
30,269
|
|
|
|
30,131
|
|
|
|
(424
|
)
|
|
|
26,920
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash
|
|
|
11,194
|
|
|
|
15,514
|
|
|
|
(702
|
)
|
|
|
(22,617
|
)
|
|
|
2,833
|
|
Cash and cash equivalents, beginning of period
|
|
|
794
|
|
|
|
11,988
|
|
|
|
27,502
|
|
|
|
27,502
|
|
|
|
26,800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
|
$
|
11,988
|
|
|
$
|
27,502
|
|
|
$
|
26,800
|
|
|
$
|
4,885
|
|
|
$
|
29,633
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Cash Used in
Operating Activities
Our net cash used in operating activities for the six months
ended June 30, 2011 was $7.2 million and was primarily
due to our net loss of $6.3 million adjusted for non-cash
items of $5.7 million (including depreciation and
amortization of $3.4 million, imputed interest of
$1.4 million, accretion of convertible notes to fair value
of $0.5 million and stock compensation expense and other
items of $0.4 million) and the net decrease in cash due to
changes in operating assets and liabilities of
$6.7 million. This decrease in cash from changes in
operating assets and liabilities is primarily due to increases
in accounts receivable of $2.6 million, costs in excess of
billings of $0.2 million, and inventories of
$2.9 million and a decrease in other long-term liabilities
of $3.8 million partially offset by a decrease in other
current assets of $0.3 million and increases in accounts
payable of $0.7 million, accrued expenses of
$0.9 million, and deferred revenue of $1.0 million.
The increases in accounts receivable and inventory balances are
primarily driven by the increase in product revenue, while the
decrease in other long-term liabilities is due to the payments
made pursuant to our cross license agreement with Cabot.
Our net cash used in operating activities in 2010 was
$15.1 million and was primarily due to our net loss of
$9.9 million adjusted for non-cash items of
$7.5 million (including depreciation and amortization of
$4.6 million, imputed interest of $2.4 million, and
stock compensation expense of $0.5 million) and a net
decrease in cash due to changes in operating assets and
liabilities of $12.8 million. The net decrease in cash due
to changes in operating assets and liabilities was primarily the
result of increases in accounts receivable of $6.0 million,
inventories of $0.7 million, other current assets of
$0.3 million, and a decrease in other long-term liabilities
of $7.4 million and deferred revenue of $0.2 million
slightly offset by an increase in accrued expenses of
$1.6 million. The increases in accounts receivable and
inventory balances are primarily the result of the increase in
revenue and the decrease in other long-term liabilities is due
to the payments made pursuant to our cross license agreement
with Cabot.
71
Our net cash used in operating activities in 2009 was
$13.0 million and was primarily due to our net loss of
$18.6 million adjusted for non-cash items of
$9.5 million (including depreciation and amortization of
$5.6 million, imputed interest of $3.0 million, and
stock compensation expense of $0.8 million) and a net
decrease in cash due to changes in operating assets and
liabilities of $3.8 million, primarily due to a decrease in
other long-term liabilities of $4.4 million and a decrease
in accounts payable of $1.3 million slightly offset by
decreases in inventories of $1.6 million and accounts
receivable of $0.2 million. The decrease in other long-term
liabilities is due to the payments made pursuant to our cross
license agreement with Cabot.
Our net cash used in operating activities in 2008 was
$22.0 million and was primarily due to our net loss of
$35.2 million adjusted for non-cash items of
$17.6 million (including depreciation and amortization of
$7.1 million, an asset impairment charge of
$2.5 million, imputed interest of $3.5 million,
paid-in-kind
interest of $3.4 million, stock compensation expense of
$0.9 million and other items of $0.2 million) and a
net decrease in cash due to changes in operating assets and
liabilities of $4.4 million, primarily due to increases in
accounts receivable of $1.1 million, inventories of
$1.8 million and a decrease in long-term liabilities of
$4.0 million, slightly offset by increases in accounts
payable of $1.9 million and deferred revenue of
$0.5 million. The decrease in other long-term liabilities
is due to the payments made pursuant to our cross license
agreement with Cabot.
Net Cash Used in
Investing Activities
Net cash used in investing activities primarily related to
capital expenditures to support our growth. For the year ended
December 31, 2010, and the six months ended June 30,
2011, investing activities also include purchases, sales and
maturities of our marketable securities.
Net cash used in investing activities for the six months ended
June 30, 2011 totaled $16.8 million and included
capital expenditures of $20.9 million for machinery and
equipment, primarily related to the build-out of our second
manufacturing line at our East Providence facility, offset, in
part, by net proceeds from the sale of marketable securities of
$4.0 million.
Net cash used in investing activities for 2010 totaled
$15.7 million and included capital expenditures of
$11.3 million for machinery and equipment, primarily
related to the build-out of our second manufacturing line at our
East Providence facility, an increase in our restricted cash
balance of $0.3 million, and net purchases of our
marketable securities of $4.1 million.
Net cash used in investing activities for 2009 totaled
$1.8 million and was principally related to capital
expenditures for machinery and equipment.
Net cash used in investing activities for 2008 totaled
$1.0 million and was principally related to capital
expenditures for machinery and equipment.
Net Cash Provided
by Financing Activities
Cash flows from financing activities primarily include net
proceeds from issuances of preferred stock and proceeds and
payments related to issuances of notes payable.
Net cash provided by financing activities for the six months
ended June 30, 2011 totaled $26.9 million and included
proceeds from the issuance of the convertible notes in the
second quarter of 2011 of $30.0 million offset, in part, by
payment of deferred offering costs of $2.4 million, payment
of deferred financing costs of $0.6 million and repayments
of borrowings under long-term debt and capital lease obligations
of $0.2 million.
Net cash provided by financing activities in 2010 totaled
$30.1 million and included proceeds from the issuance of
preferred stock of $21.1 million and proceeds from the
issuance of debt of $10.0 million that were partially
offset by payment of deferred financing costs of
$0.7 million and repayments of borrowings under long-term
debt and capital lease obligations of $0.3 million.
Net cash provided by financing activities in 2009 totaled
$30.3 million and included proceeds from the issuance of
preferred stock of $30.5 million that were offset, in part,
by repayments of borrowings under long-term debt and capital
lease obligations of $0.3 million.
72
Net cash provided by financing activities in 2008 totaled
$34.1 million and included proceeds from the issuance of
preferred stock of $26.6 million and proceeds from the
issuance of debt of $8.0 million that were offset, in part,
by repayments of borrowings under long-term debt and capital
lease obligations of $0.5 million.
Capital
Spending and Future Capital Requirements
We have made capital expenditures primarily to develop and
expand our manufacturing capacity. Our capital expenditures
totaled $1.1 million in 2008, $1.6 million in 2009,
$11.3 million in 2010 and $20.9 million in the first
six months of 2011. As of June 30, 2011, we had capital
commitments of $13.2 million, which includes commitments
for which we have entered into contracts as well as commitments
authorized by our Board of Directors. These commitments relate
to the completion and improvement of our existing production
lines in our East Providence facility, development and
construction of our third production line, and acquisition of
equipment required to produce a coated version of our products.
These commitments consist of engineering costs, equipment costs,
construction costs and related financing costs. We plan to fund
these capital commitments from available cash, cash flow from
operations and available credit under our revolving credit
facility with Silicon Valley Bank.
We have funded our capital expenditures related to design,
development and construction of our second production line at
East Providence with cash on hand, cash flow from operations and
the proceeds of our financings to date. We intend to fund
capital expenditures related to design, development and
construction of our third production line at East Providence
with cash on hand, cash flow from operations, available credit
and the proceeds of this offering. We currently estimate that
design, development and construction of our third production
line in the East Providence facility will require expenditures
of $45 million to $50 million. We intend to fund
capital expenditures related to design, development and
construction of our planned second manufacturing facility with
cash on hand, cash flow from operations, additional indebtedness
and the remaining proceeds from this offering. We estimate that
the total expenditures for this planned second manufacturing
facility will be approximately $150 million to
$200 million.
We expect to make approximately $1.5 million in capital
expenditures for environmental control facilities in the six
month period ending December 31, 2011, most of which relate
to emission control equipment to support the addition of our
second production line and planned third production line, and
approximately $1.8 million in capital expenditures for
environmental control facilities in 2012, most of which relate
to emission control equipment to support the addition of our
planned third production line. As of June 30, 2011, we had
no capital commitments for environmental control facilities.
Contractual
Obligations and Commitments
The following table summarizes our contractual obligations as of
June 30, 2011, under contracts that provide for fixed and
determinable payments over the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than
|
|
|
|
|
|
|
|
|
More than
|
|
Contractual
Obligations(1)
|
|
Total
|
|
|
1 Year
|
|
|
1-3 Years
|
|
|
3-5 Years
|
|
|
5 Years
|
|
|
|
($ in thousands)
|
|
|
Operating leases
|
|
$
|
1,939
|
|
|
$
|
622
|
|
|
$
|
1,119
|
|
|
$
|
100
|
|
|
$
|
98
|
|
Capital leases
|
|
|
195
|
|
|
|
52
|
|
|
|
122
|
|
|
|
21
|
|
|
|
|
|
6% Term Loan
|
|
|
134
|
|
|
|
134
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subordinated Notes
|
|
|
14,556
|
|
|
|
|
|
|
|
14,556
|
|
|
|
|
|
|
|
|
|
Accrued ARO
|
|
|
1,033
|
|
|
|
|
|
|
|
1,033
|
|
|
|
|
|
|
|
|
|
Cross License Agreement
|
|
|
15,000
|
|
|
|
6,000
|
|
|
|
9,000
|
|
|
|
|
|
|
|
|
|
Purchase Commitment
|
|
|
4,708
|
|
|
|
3,328
|
|
|
|
1,380
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
37,565
|
|
|
$
|
10,136
|
|
|
$
|
27,210
|
|
|
$
|
121
|
|
|
$
|
98
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
The contractual obligations table
excludes repayment of our convertible notes issued in June 2011,
all of which will be automatically converted into shares of our
common stock upon closing of the offering made hereby.
|
73
Operating and
Capital Leases
We lease our office space for our corporate offices in
Northborough, Massachusetts, which expires in 2013, and a
warehouse facility and land adjacent to our East Providence
facility, which expire at various dates from 2013 through 2021,
under non-cancelable operating lease agreements. See
Business Facilities. We also lease
vehicles and equipment under non-cancelable capital leases that
expire at various dates.
6% Term
Loan
In January 2005, we executed a term loan with the Massachusetts
Development Finance Agency for $1.5 million. The proceeds
were used to build research and development lab space at our
Northborough facility. The term loan bears interest at 6% per
annum, is to be repaid in monthly installments of principal and
interest through January 2012, and is secured by certain
leasehold improvements and laboratory equipment.
Subordinated
Notes
On December 29, 2010, we issued secured subordinated
promissory notes for aggregate proceeds of $10.0 million.
The proceeds were used to fund, in part, the construction of a
second manufacturing line at our East Providence facility. The
notes are collateralized by certain of our assets at our East
Providence facility. The term notes bear interest at 12% per
annum, and all accrued interest on the notes is compounded by
adding it to the principal of the subordinated notes on a
semi-annual basis commencing on June 30, 2011 and
continuing until the last such date to occur prior to maturity.
The subordinated notes are required to be repaid upon the
earlier of: (i) March 2, 2014, (ii) the first
anniversary of the completion of this offering or (iii) the
last business day prior to the date that any of our preferred
stock is redeemed. The noted contractual obligation reflects the
balance of principal and accrued interest anticipated to be due
on March 2, 2014.
Accrued Asset
Retirement Obligations
We have asset retirement obligations arising from requirements
to perform certain asset retirement activities at the
termination of our Northborough facility lease and upon disposal
of certain machinery and equipment. The liability was initially
measured at fair value and subsequently adjusted for accretion
expense and changes in the amount or timing of the estimated
cash flows. The corresponding asset retirement costs are
capitalized as part of the carrying amount of the related
long-lived asset and depreciated over the assets remaining
useful life. We maintain restricted cash balances of
$0.2 million to settle part of this liability.
Cross License
Agreement
We are obligated to make quarterly payments through December
2013 under the terms of our cross license agreement with Cabot.
As of June 30, 2011, our remaining payment obligation under
the cross license agreement totaled $15.0 million.
Purchase
Commitment
We have agreed to purchase at least 2.4 million pounds of
silica annually through 2012 at a fixed price per pound pursuant
to the terms of a supply agreement dated January 1, 2011.
The supply agreement has an initial term of two years from
the date of the agreement, with automatic renewals for
subsequent terms of one year, unless either party provides
notice of termination to the other party at least 90 days
prior to the expiration of such term. The contractual obligation
set forth in the table above assumes that the price we pay per
pound of silica remains fixed through the term of the contract.
As of June 30, 2011, we have purchased 0.7 million
pounds of silica and have a remaining commitment in 2011 of
1.7 million pounds.
74
Off Balance Sheet
Arrangements
Since inception, we have not engaged in any off balance sheet
activities as defined in Item 303(a)(4) of
Regulation S-K.
Recent Accounting
Pronouncements
In October 2009, the Financial Accounting Standards Board, or
the FASB, issued Accounting Standards Update, or ASU,
No. 2009-13,
Multiple-Deliverable Revenue Arrangements, or ASU
2009-13. ASU
2009-13
supersedes certain guidance in FASB ASC Topic
605-25,
Multiple-Element Arrangements and requires an entity to
allocate arrangement consideration at the inception of an
arrangement to all of its deliverables based on their relative
selling prices (the relative-selling-price method). ASU
2009-13
eliminates the use of the residual method of allocation in which
the undelivered element is measured at its estimated selling
price and the delivered element is measured as the residual of
the arrangement consideration, and requires the
relative-selling-price method in all circumstances in which an
entity recognizes revenue for an arrangement with multiple
deliverables subject to ASU
2009-13. ASU
2009-13 must
be adopted no later than the beginning of the first fiscal year
beginning on or after June 15, 2010, with early adoption
permitted through either prospective application for revenue
arrangements entered into, or materially modified, after the
effective date or through retrospective application to all
revenue arrangements for all periods presented. We have adopted
ASU 2009-13
and determined that it does not have a material impact on our
consolidated financial statements.
In June 2011, the FASB issued Accounting Standards Update
2011-05,
Comprehensive Income (Topic 220): Presentation of
Comprehensive Income, or ASU
2011-05. The
objective of ASU
2011-05 is
to increase the prominence of items reported in other
comprehensive income. The main provisions of ASU
2011-05
provide that an entity that reports items of other comprehensive
income has the option to present comprehensive income in either
one or two consecutive financial statements. The option in
current U.S. GAAP that permits the presentation of other
comprehensive income in the statement of changes in equity has
been eliminated. ASU
2011-05 is
effective for fiscal years, or interim periods within those
years, beginning after December 15, 2011 and should be
applied retrospectively. Early adoption is permitted. We believe
the adoption of ASU
2011-05 will
not have a material impact on our financial position, results of
operations, cash flows, or disclosures.
Critical
Accounting Policies and Estimates
Our financial statements are prepared in accordance with
accounting principles generally accepted in the United States of
America. The preparation of our financial statements and related
disclosures requires us to make estimates, assumptions and
judgments that affect the reported amount of assets,
liabilities, revenue, costs and expenses and related
disclosures. We believe that the estimates, assumptions and
judgments involved in the accounting policies described below
have the greatest potential impact on our financial statements;
and therefore, we consider these to be our critical accounting
policies. Accordingly, we evaluate our estimates and assumptions
on an ongoing basis. Our actual results may differ from these
estimates under different assumptions and conditions. See
Note 2 to our consolidated financial statements included
elsewhere in this prospectus for information about these
critical accounting policies, as well as a description of our
other significant accounting policies.
Revenue
Recognition
We recognize product revenue from the sale of our line of
aerogel products and research services revenue upon delivery of
research and development services, including under contracts
with various agencies of the U.S. government. Revenue is
recognized when all of the following criteria are met:
persuasive evidence of an arrangement exists, the price to the
buyer is fixed or determinable, delivery has occurred or
services have been provided and collectability is reasonably
assured. Product revenue is recognized upon transfer of title
and risk of loss, which is generally upon shipment or delivery.
In general, our customary shipping terms are FOB shipping point.
Products are typically delivered without
75
significant post-sale obligations to customers other than
standard warranty obligations for product defects. We provide
warranties for our products and record the estimated cost within
cost of sales in the period that the revenue is recorded. Our
standard warranty period extends one to two years from the date
of sale, depending on the type of product purchased. Our
warranties provide that our products will be free from defects
in material and workmanship, and will, under normal use, conform
to the specifications for the product. For the six months ended
June 30, 2011, and for the years ended December 31,
2008, 2009 and 2010, warranty charges have been insignificant.
Research services revenue is derived from the execution of
contracts awarded by the U.S. federal government or other
government agencies. Our research and development arrangements
require us to provide research in which we investigate new
applications of aerogel insulation. We expect to continue
certain research and development contract work that is directly
related to our current product development efforts and we expect
that research service revenue will continue to be a decreasing
percentage of our consolidated revenue. We record revenue earned
on research services contracts using the
percentage-of-completion
method in two ways: (1) for firm-fixed-price contracts, we
accrue that portion of the total contract price that is
allocable, on the basis of our estimates of costs incurred to
date to total contract cost; (2) for cost-plus-fixed-fee
contracts, we record revenue that is equal to total payroll cost
incurred times a stated factor plus reimbursable expenses, to a
stated upper limit. The primary cost in these arrangements is
the labor effort expended in completing the research and the
only deliverable other than labor hours expended is the
reporting of the research results to the customer. Because the
input measure of labor hours expended is also reflective of the
output measure, it is a reliable means to measure the extent of
progress towards completion. Contract costs and rates used to
allocate overhead to contracts are subject to audit by the
respective contracting government agency. Revisions in cost
estimates and fees during the course of the contract are
reflected in the accounting period in which the facts that
require the revisions become known.
Stock-based
Compensation
We maintain an equity incentive plan pursuant to which our board
of directors may grant qualified and nonqualified stock options
to officers, key employees, and others who provide or have
provided service to us. We recognize the costs associated with
stock option grants based on their estimated fair value at date
of grant amortized over the vesting period of the grant, which
is typically three to four years. Future expense amounts for any
particular quarterly or annual period could be affected by
changes in our assumptions or changes in market conditions.
Stock-based compensation is included in cost of revenue and
operating expenses as set forth below:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
|
|
Six Months Ended June 30
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2010
|
|
|
2011
|
|
|
|
($ in thousands)
|
|
|
Product cost of revenue
|
|
$
|
178
|
|
|
$
|
148
|
|
|
$
|
81
|
|
|
$
|
36
|
|
|
$
|
76
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
67
|
|
|
|
96
|
|
|
|
57
|
|
|
|
26
|
|
|
|
47
|
|
Sales and marketing
|
|
|
136
|
|
|
|
157
|
|
|
|
87
|
|
|
|
40
|
|
|
|
65
|
|
General and administrative
|
|
|
546
|
|
|
|
430
|
|
|
|
243
|
|
|
|
99
|
|
|
|
254
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
927
|
|
|
$
|
831
|
|
|
$
|
468
|
|
|
$
|
201
|
|
|
$
|
442
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2011, there was approximately
$3.3 million of total estimated unrecognized compensation
cost related to non-vested options under our equity incentive
plan, which will be recognized over a weighted-average period of
3.6 years.
76
We use the Black-Scholes option-pricing model to estimate the
fair value of stock-based awards. The determination of the
estimated fair value of stock-based awards is based on a number
of complex and subjective assumptions. These assumptions include
the determination of the estimated fair value of the underlying
security, the expected volatility of the underlying security, a
risk-free interest rate, the expected term of the option, and
the forfeiture rate for the award class. The following
assumptions were used to estimate the fair value of the option
awards:
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months
|
|
|
Year Ended December 31
|
|
Ended June 30
|
|
|
2008
|
|
2009
|
|
2010
|
|
2010
|
|
2011
|
|
Weighted-average assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected term (in years)
|
|
|
6.08
|
|
|
|
5.60
|
|
|
|
6.04
|
|
|
|
5.94
|
|
|
|
6.05
|
|
Expected volatility
|
|
|
33.00
|
%
|
|
|
57.00
|
%
|
|
|
49.75
|
%
|
|
|
49.95
|
%
|
|
|
49.27
|
%
|
Risk free rate
|
|
|
3.65
|
%
|
|
|
2.64
|
%
|
|
|
1.90
|
%
|
|
|
2.76
|
%
|
|
|
2.24
|
%
|
Expected dividend yield
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
|
|
|
The expected term represents the period that our stock-based
awards are expected to be outstanding and is determined using
the simplified method described in ASC 718 for all grants.
We believe this is a better representation of the estimated life
than our actual limited historical exercise behavior.
|
|
|
|
|
|
For the six months ended June 30, 2010 and 2011, and for
the years ended December 31, 2008, 2009, and 2010, the
expected volatility is based on the weighted-average volatility
of up to six companies within various industries that the we
believe are similar to our own.
|
|
|
|
|
|
The risk-free interest rate is based on U.S. Treasury
zero-coupon issues with a remaining term equal to the expected
life assumed at the date of grant.
|
|
|
|
We use an expected dividend yield of zero, since we do not
intend to pay cash dividends on our common stock in the
foreseeable future, nor have we paid dividends on our common
stock in the past.
|
As share-based compensation expense is recognized based on
awards ultimately expected to vest, it has been reduced for an
estimated forfeiture rate of 3% for the six months ended
June 30, 2010 and 2011, and the years ended
December 31, 2009 and 2010, and 7% for 2008. Forfeitures
are required to be estimated at the time of grant and revised,
if necessary, in subsequent periods, if actual forfeitures
differ from those estimates. Forfeitures were estimated based on
voluntary termination behavior as well as analysis of actual
option forfeitures.
The assumptions underlying these valuations represent
managements estimates, which involve inherent
uncertainties and the application of management judgment. As a
result, if factors or expected outcomes change and we use
significantly different assumptions or estimates, our
stock-based compensation could be materially different. The most
significant input into the Black-Scholes option-pricing model
used to value our option grants is the estimated fair value of
the common stock. We considered a combination of valuation
methodologies, including market and transaction approaches.
Determination of
Fair Value
We believe we have used reasonable methodologies and assumptions
in determining the fair value of our common stock for financial
reporting purposes. Our board of directors has historically
estimated the fair value of our common stock. Because there has
been no public market for our shares, our board of directors
historically determined the fair value of our common stock based
on the market approach and the income approach to estimate the
enterprise value of the business under various liquidity event
scenarios, including an initial public offering by the company
and the sale of the company. To support the valuations, we
utilized a probability-weighted expected return under those
77
various liquidity scenarios, public guideline companies, our
cash flow projections, and other assumptions to derive the
enterprise value of the business. We then derived the estimated
fair value of each class of stock, taking into consideration the
rights and preferences of each instrument based on a
probability-weighted expected return.
The most significant factors considered in estimating the fair
value of our common stock were as follows:
|
|
|
|
|
current business conditions and projections;
|
|
|
|
the probability and value of future liquidity scenarios,
including an initial public offering by the company and the sale
of the company;
|
|
|
|
the market performance of comparable publicly traded
companies; and
|
|
|
|
U.S. and global capital conditions.
|
We believe consideration of these factors by our board of
directors was a reasonable approach to estimating the fair value
of our common stock for the periods considered. Estimating the
fair value of our stock requires complex and subjective
judgments, however, and there is inherent uncertainty in our
estimate of fair value.
Prior to this offering, we did not maintain a market for our
shares. In the absence of a public market for our common stock,
the fair value of our common stock underlying our stock options
has historically been determined by our board of directors using
methodologies consistent with the American Institute of
Certified Public Accountants Practice Guide, Valuation of
Privately-Held-Company Equity Securities Issued as Compensation.
In connection with making this determination, we have engaged
independent third-party valuation advisors to assist us. In each
case, our board of directors has made the ultimate determination
of fair value. While we have issued new equity to unrelated
third parties and we use such facts in the estimation of the
fair value of our shares, we believe that the lack of a
secondary market for our common stock and our limited history
issuing stock to unrelated parties makes it impracticable to
estimate the expected volatility of our common stock. Therefore,
it was not possible to reasonably estimate the grant-date fair
value of our options using our own historical price data.
Accordingly, we accounted for the share options under the
calculated value method.
78
The following table summarizes the number of stock options
granted from January 1, 2009, through August 31, 2011,
the average per share exercise price of the options, and the
estimated per share fair value of the options:
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
|
|
|
|
Number
|
|
|
Per Share
|
|
|
per Share
|
|
|
|
of Options
|
|
|
Exercise
|
|
|
Option
|
|
Date of Grant
|
|
Granted
|
|
|
Price(1)
|
|
|
Fair
Value(2)
|
|
|
March 27, 2009
|
|
|
2,000
|
|
|
$
|
0.33
|
|
|
$
|
0.04
|
|
May 27, 2009
|
|
|
9,100
|
|
|
|
0.33
|
|
|
|
0.04
|
|
July 22, 2009
|
|
|
6,000
|
|
|
|
0.33
|
|
|
|
0.04
|
|
November 11, 2009
|
|
|
10,276,078
|
|
|
|
0.22
|
|
|
|
0.09
|
|
December 18, 2009
|
|
|
225,000
|
|
|
|
0.22
|
|
|
|
0.09
|
|
January 20, 2010
|
|
|
27,050
|
|
|
|
0.22
|
|
|
|
0.11
|
|
March 17, 2010
|
|
|
49,430
|
|
|
|
0.22
|
|
|
|
0.11
|
|
July 21, 2010
|
|
|
333,443
|
|
|
|
1.30
|
|
|
|
0.63
|
|
September 15, 2010
|
|
|
54,222
|
|
|
|
1.30
|
|
|
|
0.63
|
|
November 17, 2010
|
|
|
1,257,018
|
|
|
|
1.30
|
|
|
|
0.64
|
|
January 18, 2011
|
|
|
530,000
|
|
|
|
1.46
|
|
|
|
0.74
|
|
January 19, 2011
|
|
|
82,512
|
|
|
|
1.46
|
|
|
|
0.74
|
|
March 16, 2011
|
|
|
124,013
|
|
|
|
1.46
|
|
|
|
0.72
|
|
May 18, 2011
|
|
|
1,318,883
|
|
|
|
2.44
|
|
|
|
1.18
|
|
August 10, 2011
|
|
|
243,310
|
|
|
|
2.49
|
|
|
|
1.17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
14,538,059
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
The fair value of our common stock
and the per share exercise price of options are determined by
our board of directors.
|
|
(2)
|
|
The per share fair value of the
options was estimated for the date of grant using the
Black-Scholes option pricing model. This model estimates the
fair value by applying a series of factors including the
exercise price of the option, a risk-free interest rate, the
expected term of the option, expected share price volatility of
the underlying common stock and expected dividends on the
underlying common stock. Additional information regarding our
common stock option awards is set forth in Note 9 to our
audited consolidated financial statements included elsewhere in
this prospectus.
|
Based on the mid-point of the price range set forth on the cover
of this prospectus, the aggregate intrinsic value of our
outstanding stock options as of June 30, 2011 was
$ million.
The fair value of our common stock was estimated using the
probability-weighted expected return method, or PWERM, which
considers the value of preferred and common stock based upon
analysis of the future values for equity assuming various future
outcomes, including initial public offerings, merger or sale,
dissolutions, or continued operation as a private company.
Accordingly, share value is based upon the probability-weighted
present value of expected future net cash flows, considering
each of the possible future events, as well as the rights and
preferences of each share class. PWERM is complex as it requires
numerous assumptions relating to potential future outcomes of
equity, hence, the use of this method can be applied:
(i) when possible future outcomes can be predicted with
reasonable certainty; and (ii) when there is a complex
capital structure (i.e., several classes of preferred and common
stock).
Grants from March 27, 2009 through July 22,
2009. On March 27, 2009, our board of
directors established the exercise price per share of common
stock at $0.33 per share determined by the PWERM method. Our
board of directors reaffirmed this exercise price on
May 27, 2009 and July 22, 2009 in connection with
option grants. The significant drivers and weightings for our
valuations during this period were: initial public offering,
10%; sale of our company/assets, 50%, remain private, 15%; and
dissolution, 25%. The estimated fair value of one share of
common stock was estimated under each of the five scenarios and
the associated probabilities to arrive at a probability-weighted
value per share.
79
Grants from November 11, 2009 through March 17,
2010. On November 11, 2009, our board of
directors established the exercise price per share of common
stock at $0.22 per share determined by the PWERM method. Our
board of directors reaffirmed this exercise price on
December 18, 2009, January 20, 2010 and March 17,
2010 in connection with option grants. This valuation took into
consideration economic events including our arms length
sale of Series A redeemable convertible preferred stock, or
Series A preferred stock, in August 2009, which had been
sold at price per share that was less than prior sales of our
preferred stock due to the economic conditions at that time and
the difficulties in obtaining venture capital funding. The
significant drivers and weightings for our valuations during
this period were: initial public offering, 10%; sale of our
company/assets, 60%, remain private, 10%; and dissolution, 20%.
The estimated fair value of one share of common stock was
estimated under each of the five scenarios and the associated
probabilities to arrive at a probability-weighted value per
share.
Grants from July 21, 2010 through November 17,
2010. On July 21, 2010, our board of
directors established the exercise price per share of common
stock at $1.30 per share determined by the PWERM method. Our
board of directors reaffirmed this exercise price on
September 15, 2010 and November 17, 2010 in connection
with option grants. This valuation took into consideration
economic events including our arms length sale of
Series B redeemable convertible preferred stock, or
Series B preferred stock, in September and October 2010 at
a price of $1.34 per share of Series B preferred stock. The
significant drivers and weightings for our valuations during
this period were: initial public offering, 60%; sale of our
company/assets, 20%, remain private, 15%; and dissolution, 5%.
The estimated fair value of one share of common stock was
estimated under each of the five scenarios and the associated
probabilities to arrive at a probability-weighted value per
share.
Grants from January 18, 2011 through March 16,
2011. On January 18, 2011, our board of
directors established the exercise price per share of common
stock at $1.46 per share determined by the PWERM method. Our
board of directors reaffirmed this exercise price on
January 19, 2011 and March 16, 2011 in connection with
option grants. This valuation took into consideration market and
general economic events as well as our financial results and
other data available at that time. The significant drivers and
weightings for our valuations during this period were: initial
public offering, 60%; sale of our company/assets, 20%, remain
private, 15%; and dissolution, 5%. The estimated fair value of
one share of common stock was estimated under each of the five
scenarios and the associated probabilities to arrive at a
probability-weighted value per share.
Grants on May 18, 2011. On
May 9, 2011, our board of directors established the
exercise price per share of common stock at $2.44 per share
determined by the PWERM method. Our board of directors
reaffirmed this exercise price on May 18, 2011 in
connection with option grants. This valuation took into
consideration market and general economic events as well as our
financial results and other data available at that time. In
addition, a number of additional factors contributed to an
increase in the valuation since the March 2011 valuation. In
late March 2011, we began operating a second production line at
our East Providence, Rhode Island facility. The project was
completed on-time and on-budget, helping us to establish a
track-record of scaling our manufacturing capabilities. Further,
the production line is designed to double our production
capacity. We had also completed our third consecutive quarter
where our Adjusted EBITDA was positive and sustained high
product revenue growth. In addition, we made progress on our
proposed IPO, held an organizational meeting and accelerated our
timeline for our proposed IPO. As part of our continued work
toward an IPO, we received feedback from investment banking
firms that there was continued demand for public offerings of
energy efficiency companies. Based on these factors, in
comparing ourselves to other public companies for purposes of
estimating fair value, our board modified the assumed market
multiples from the top quartile of comparable companies utilized
in our March 2011 valuation to assumed market multiples that
represented a premium to such top quartile companies and reduced
our assumed weighted average cost of capital. The significant
drivers and weightings for our valuations during this period
were: initial public offering, 70%; sale of our company/assets
20%; remain private, 5%; and dissolution, 5%. The estimated fair
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value of one share of common stock was estimated under each of
the five scenarios and the associated probabilities to arrive at
a probability-weighted value per share.
Grants on August 10, 2011. On August
10, 2011, our board of directors established the exercise price
per share of common stock at $2.49 per share determined by the
PWERM method. This valuation took into consideration market and
general economic events as well as our financial results and
other data available at that time. In addition, the board
reaffirmed that the continued use of market multiples that
represented a premium to the top quartile of comparable
companies was appropriate and modestly increased such premium.
The significant drivers and weighting for our valuations during
this period were: initial public offering, 80%; sale of our
company/assets, 10%; remain private, 5%; and dissolution, 5%.
The estimated fair value of one share of common stock was
estimated under each of the five scenarios and the associated
probabilities to arrive at a probability-weighted value per
share.
Valuation models require the input of highly subjective
assumptions. There are significant judgments and estimates
inherent in the determination of these valuations. These
judgments and estimates include assumptions regarding our future
performance, the time to undertaking and completing an initial
public offering or other liquidity event, as well as
determinations of the appropriate valuation methods. If we had
made different assumptions, our stock-based compensation
expense, net income (loss) and net income (loss) per share could
have been significantly different. The foregoing valuation
methodologies are not the only valuation methodologies available
and will not be used to value our common stock once this
offering is complete. We cannot make assurances regarding any
particular valuation of our common stock.
Income
Taxes
Income taxes are accounted for under the asset and liability
method. Deferred tax assets and liabilities are recognized for
the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases and operating loss
and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rates
is recognized in income in the period that includes the
enactment date.
We recognize the effect of income tax positions only if those
positions are more likely than not of being sustained. We
account for uncertain tax positions using a recognition
threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected
to be taken in a tax return. Differences between tax positions
taken in a tax return and amounts recognized in the financial
statements are recorded as adjustments to income taxes payable
or receivable, or adjustments to deferred taxes, or both.
Changes in recognition or measurement are reflected in the
period in which the change in judgment occurs. We recognize
penalties and interest related to recognized tax positions, if
any, as a component of income tax expense.
Managements judgment and estimates are required in
determining our tax provision, deferred tax assets and
liabilities and any valuation allowance recorded against
deferred tax assets. We review the recoverability of deferred
tax assets during each reporting period by reviewing estimates
of future taxable income, future reversals of existing taxable
temporary differences, and tax planning strategies that would,
if necessary, be implemented to realize the benefit of a
deferred tax asset before expiration. We have recorded a full
valuation allowance against our deferred tax assets due to the
uncertainty associated with the utilization of the net operating
loss carryforwards. In assessing the realizability of deferred
tax assets, we consider all available evidence, historical and
prospective, with greater weight given to historical evidence,
in determining whether it is more likely than not that some
portion or all of the deferred tax assets will not be realized.
The ultimate realization of our deferred tax assets generally is
dependent upon generation of future taxable income.
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Fair Value
Option and Fair Value Measurements
ASC Subtopic 825-10 provides entities with an option to measure
many financial instruments and certain other items at fair
value. Under this guidance, unrealized gains and losses on items
for which the fair value option has been elected are reported in
earnings each reporting period. As a result of electing this
option, we record our convertible notes at fair value in order
to measure this liability at an amount that more accurately
reflect the economics of that instrument.
The fair value of the convertible notes was determined by
utilizing a probability weighted discounted cash flow analysis.
This analysis determined the amount to be paid on the loan in
either cash or shares at the occurrence of certain events in
which the convertible notes would be converted into shares of
our common stock or would be repaid to the lender in cash. The
probability weighted discounted cash flow analysis utilized
assumptions related to the probability of each of the various
events occurring and discount rates.
Based upon the above we have determined that the valuation of
the convertible notes is a Level 3 valuation as the valuation
utilized several unobservable inputs.
Impairment of
Long-Lived Assets
Long-lived assets are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an
asset may not be recoverable. Recoverability of assets to be
held and used is measured by a comparison of the carrying amount
of an asset to future undiscounted net cash flows expected to be
generated by the asset. If the carrying amount of an asset
exceeds its estimated undiscounted future cash flows, an
impairment charge is recognized for the amount by which the
carrying amount of the asset exceeds the fair value of the
asset. Fair value is determined through various valuation
techniques including discounted cash flows models, quoted market
values and third-party independent appraisals, as considered
necessary.
Redeemable
Convertible Preferred Stock
Our redeemable convertible preferred stock is classified as
temporary equity and shown net of issuance costs. We recognize
changes in the redemption value immediately as they occur and
adjust the carrying amount of the preferred stock to equal the
redemption value at the end of each reporting period.
Qualitative and
Quantitative Disclosures about Market Risk
Market risk represents the risk of loss that may impact our
financial position due to adverse changes in financial market
prices and rates. Our market risk exposure results primarily
from fluctuations in interest rates as well as from inflation.
In the normal course of business, we are exposed to market
risks, including changes in interest rates which affect our line
of credit under our revolving credit facility as well as cash
flows. We may also face additional exchange rate risk in the
future as we expand our business internationally.
Interest Rate
Risk
We are exposed to changes in interest rates in the normal course
of our business. At June 30, 2011, we had unrestricted cash
and cash equivalents of $29.6 million. These amounts were
held for working capital purposes and were invested primarily in
government-backed securities. Due to the short-term nature of
these investments, we believe that we do not have any material
exposure to changes in the fair value of our cash and cash
equivalents as a result of changes in interest rates.
As of June 30, 2011, our outstanding debt consisted of
capital leases and term loans that have fixed interest rates. In
March 2011 we entered into a two-year line of credit under our
revolving credit facility with a bank, to borrow up to
$10.0 million secured by our then outstanding accounts
receivable
82
and inventory. Borrowings under this revolving credit facility
accrue interest at prime plus 0.5%. As of June 30, 2011,
there were no borrowings outstanding under this revolving credit
facility.
Inflation
Risk
Although we expect that our operating results will be influenced
by general economic conditions, we do not believe that inflation
has had a material effect on our results of operations during
the periods presented. However, our business may be affected by
inflation in the future.
Foreign
Currency Exchange Risk
We are subject to inherent risks attributed to operating in a
global economy. Principally all of our revenue, receivables,
costs and our debts are denominated in U.S. dollars.
Although our international operations are currently not
significant compared to our operations in the United States, we
expect to expand our international operations in the long-term.
An expansion of our international operations will increase our
potential exposure to fluctuations in foreign currencies.
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BUSINESS
Overview
We are an energy efficiency company that designs, develops and
manufactures innovative, high-performance aerogel insulation. We
believe our aerogel blankets deliver the best thermal
performance of any widely used insulation product available on
the market today and provide a superior combination of
performance attributes unmatched by traditional insulation
materials. Our
end-use
customers use our products to save money, conserve energy,
reduce
CO2
emissions and protect workers and assets.
Our technologically advanced products are targeted at the
estimated $32 billion annual global market for insulation
materials. Our insulation is principally used by industrial
companies, such as ExxonMobil and NextEra Energy, that operate
petrochemical, refinery, industrial and power generation
facilities. We are also working with BASF Construction Chemicals
and other leading insulation manufacturers to develop and
commercialize products for applications in the building and
construction market. We believe demand for our high-performance
insulation products will increase significantly to support
widespread global efforts to cost-effectively improve energy
efficiency. To address capacity constraints caused by growing
demand, we began operating a second production line in late
March 2011 designed to double our production capacity at
our East Providence, Rhode Island facility.
We have grown our business by forming technical and commercial
relationships with industry-leading customers to optimize our
products to meet the particular demands of targeted market
sectors. In the industrial market, we have benefited from our
technical and commercial relationships with ExxonMobil in the
oil refinery and petrochemical sector, with Technip in the
offshore oil sector and with NextEra Energy in the power
generation sector. In the building and construction market, we
have a joint development agreement with BASF Construction
Chemicals to develop products to meet increasingly stringent
building standards requiring improved thermal performance in
retrofit and new-build wall systems, particularly in Europe. We
will continue our strategy of working with innovative companies
to target and penetrate new market opportunities.
Our core aerogel technology and manufacturing processes are our
most significant assets. As of June 30, 2011, we employed
28 research scientists and process engineers focused on
advancing our current aerogel technology and developing next
generation aerogel compositions, form factors and manufacturing
technologies. Our aerogels are complex structures in which 97%
of the volume consists of air trapped in nanopores between
intertwined clusters of amorphous silica solids. These extremely
low density solids provide superior insulating properties.
Although aerogels are usually fragile materials, we have
developed innovative and proprietary manufacturing processes
that enable us to produce industrially robust aerogel insulation
cost-effectively and at commercial scale.
Our aerogel products provide up to five times the thermal
performance of widely used traditional insulation in a thin,
easy-to-use blanket form. Our products enable compact design,
reduce installation time and costs, promote freight savings,
simplify logistics, reduce system weight and required storage
space, and enhance job site safety. Our products provide
excellent compression resistance, are hydrophobic and reduce the
incidence of corrosion under insulation, a significant
operational cost and safety issue in industrial facilities. Our
products also offer strong fire protection which is a critical
performance requirement in both the industrial and building and
construction markets. We believe our array of product attributes
provides strong competitive advantages over traditional
insulation. Although 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.
Since 2008, our Cryogel and Pyrogel product lines have been used
by some of the worlds largest oil producers, refiners and
petrochemical companies, including ExxonMobil, Suncor Energy,
Anadarko Petroleum, Dong Energy, Hu-Chems Company, SK Energy,
Petrobras, Honam Petrochemical, Marathon Oil, Shell,
LyondellBasell, Enagas, Citgo, PetroLogistics and Tupras. These
products also are in use in applications in a variety of
industrial facilities, including liquefied natural
84
gas facilities, food processing facilities, oil sands extraction
operations and electric power generation facilities. Insulation
systems in these facilities are designed to maintain hot and
cold process piping and storage tanks at optimal process
temperatures, to protect plant and equipment from the elements
and from the risk of fire, and to protect workers. Freedonia
Custom Research, Inc. has estimated that the industrial
insulation market totaled $4.5 billion in 2010. We estimate
that we generated 92% of our 2010 product revenue in the
industrial insulation market.
Within the building and construction market, we are replicating
our strategy of working with industry leaders to seek to
penetrate critical market sectors. In addition to our
relationship with BASF Construction Chemicals, we are also
engaged in product development efforts in Europe and North
America with other large insulation manufacturers to target a
wide variety of applications. Our products also have been
installed since 2006 in residential and commercial new-build and
retrofit building projects through the efforts of a small
network of distribution partners. Freedonia Custom Research,
Inc. has estimated that the building and construction insulation
market totaled $22.7 billion in 2010. We estimate that we
generated 5% of our 2010 product revenue in the building and
construction insulation market.
In addition to our core markets, we also rely on a small number
of fabricators to supply fabricated insulation parts to original
equipment manufacturers, or OEMs. These global OEMs develop
products using our aerogels for applications as diverse as
military and commercial aircraft, trains, buses, appliances,
apparel, footwear and outdoor gear. While we do not currently
allocate significant resources to these markets, we believe
there are many future opportunities within these markets for our
aerogel technology based on its unique attributes. Freedonia
Custom Research, Inc. has estimated that the transportation,
appliance and apparel insulation markets totaled
$4.9 billion in 2010. We estimate that we generated 3% of
our 2010 product revenue in the transportation, appliance and
apparel insulation markets.
We manufacture our products using our proprietary, high-volume
process technology at our facility in East Providence, Rhode
Island. We have operated the East Providence facility at high
volume and high yield continuously since mid-2008. We
successfully commenced operation of our second production line
at this facility in March 2011 and immediately began producing
commercial quality aerogel blankets. This line was completed on
time and on budget and is expected to double our annual
production capacity by the end of 2011 to 40 to 44 million
square feet of aerogel blankets, depending on product mix. We
are engaged in the design and engineering phase of a third
production line at our East Providence facility and have
commenced procurement of certain capital equipment which has a
longer lead-time. We currently expect that this line will be
completed at our East Providence facility during 2012. We also
plan to construct a second manufacturing facility in the United
States or Europe, the location of which will be based on factors
including proximity to raw material suppliers, proximity to
customers, labor and construction costs and availability of
governmental incentives.
Company
Information
We are a corporation organized under the laws of Delaware. Our
predecessor company was incorporated in Delaware in May 2001. In
June 2008, we completed a reorganization pursuant to which our
predecessor company merged with and into a newly formed Delaware
corporation, Aspen Merger Sub, Inc., a wholly-owned subsidiary
of our predecessor company formed for the purpose of the
reorganization. As the surviving entity to the merger, we then
changed our name from Aspen Merger Sub, Inc. to
Aspen Aerogels, Inc. For more information regarding
the 2008 reorganization. See Note 6 to our audited
consolidated financial statements included elsewhere herein.
Industry
Background
Global economic growth, continued geopolitical conflict in
oil-producing regions, and rising and volatile energy prices are
increasing demand for energy efficiency products to reduce
energy
85
consumption, energy costs and dependence on oil. Heightened
concerns about global warming and climate change are likewise
increasing demand for energy efficiency products targeting the
reduction of
CO2
emissions.
Markets
Insulation is a material or combination of materials that slows
the transfer of heat and is used in a wide variety of
applications. According to Freedonia Custom Research, Inc., the
global market for insulation materials was estimated to be
$32 billion during 2010, and The Freedonia Group estimates
annual growth of 6.3% through 2014. There are a variety of
insulation materials available in the market, most of which have
been in use for over 50 years. Each insulation material has
a different set of performance attributes and the extent of its
use in a given market is based on the performance and cost
criteria applicable to that market.
The primary markets for insulation are:
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industrial, including use as covering for pipes, valves and
storage tanks;
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building and construction, in walls, floors and
ceilings; and
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original equipment manufacture, including use in transportation,
appliances and apparel applications.
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The industrial insulation market is global, well-established and
includes large and well-capitalized customers across a diverse
set of industries. Freedonia Custom Research, Inc. has estimated
that the industrial market for insulation totaled
$4.5 billion during 2010. This market includes companies
operating refinery, petrochemical, general manufacturing, food
processing and district energy operations. The market also
includes firms operating gas, coal, nuclear, hydro and solar
thermal power generating facilities. Insulation systems in the
industrial market are designed to maintain hot and cold process
piping and storage tanks at optimal temperatures, to protect
plant and equipment from the elements and from the risk of fire,
and to protect workers from burns. The industrial insulation
market is served by a well-organized, well-established,
worldwide network of distributors, contractors and engineers.
Based on market data published in 2010, we believe that under
ordinary economic circumstances, approximately 70% of the annual
demand for insulation in the industrial market is generated by
capital expansions and related capital projects, while the
remainder is associated with routine, non-discretionary
maintenance programs within existing facilities. Capital
expansions and related capital projects are driven primarily by
increased energy prices and overall economic growth. Maintenance
programs are essential to optimal operation of processing
equipment, to ensure worker safety and to minimize the risk of a
catastrophic loss. Accordingly, we believe that demand for
insulation for maintenance purposes in comparison to capital
projects is less affected by volatility associated with economic
cycles, the price of oil or similar macroeconomic factors.
The building and construction insulation market is driven by
residential and commercial new-build and retrofit projects.
Freedonia Custom Research, Inc. has estimated that the building
and construction insulation market totaled $22.7 billion in
2010. Insulation systems in the building and construction market
are designed to isolate the interior of buildings from external
temperature variations and to reduce energy costs. These
insulation systems are used in wall systems, under traditional
and radiantly heated floors, in ceilings and roofs, in window
and door frames and in solar thermal panels and systems. Most
insulation products in the building and construction market are
manufactured or fabricated to meet industry-standard thicknesses
and dimensions. The building and construction market is
characterized by a fragmented distribution network and myriad
national, regional and local building codes, regulations and
standards. We believe there are important economic and
regulatory drivers supporting energy efficiency initiatives
globally in this market. First, commercial and residential
buildings currently account for approximately 40% of total
energy consumption in both the United States and the European
Union, according to the Annual Energy Review 2009 dated August
2010 published by the U.S. Energy Information Administration, or
EIA report, and Directive 2010/31/EU of the European Parliament
and of the Council of the European
86
Union, dated May 19, 2010, respectively. For example, in
the United States, buildings surpass both the transportation and
industrial sectors in terms of energy consumption at 29% and
30%, respectively, according to the EIA report. According to
reports published in July 2009 and March 2010 by
McKinsey & Company, governmental policies to
strengthen the thermal performance of commercial, residential
and governmental buildings are among the most cost-effective
means to improve energy efficiency and to reduce carbon
emissions. For example, The Better Buildings Initiative
announced by U.S. President Barack Obama in February 2011
estimates that U.S. companies and business owners can
reduce their energy bills by about $40 billion at
todays energy prices by making buildings more energy
efficient, thus constituting a direct economic benefit.
Additionally, numerous European Union member states, in support
of their commitments under the Kyoto accord to reduce carbon
emissions, have enacted legislation that is increasing minimum
thermal standards for commercial and residential wall systems
through 2020. We believe that these increasing thermal standards
for retrofit and new-build wall systems in Europe are becoming
more difficult to meet with traditional insulation materials. We
also believe that strategic relationships with leading building
materials manufacturers with established distribution networks
are a critical requirement for a new industry player to
penetrate the building and construction market in a rapid and
cost-effective manner.
The transportation, appliance and apparel insulation markets are
global, diverse and fragmented. Freedonia Custom Research, Inc.
has estimated that these markets totaled $4.9 billion in
2010. The transportation market includes insulation of aircraft,
automobiles, ships and trains where we believe the key
performance criteria include thermal performance, a thin
profile, fire resistance and durability. The appliance market
includes insulation of commercial and residential refrigerators
and freezers, conventional and microwave ovens, dryers and water
heaters. The apparel market includes insulation of work boots,
outdoor gear and tents. Insulation applications across the
transportation, appliance and apparel markets commonly require
insulation to be fabricated into forms to meet design
specifications.
Insulation
System Design Considerations
Because insulation is used in a wide variety of demanding
applications, insulation materials must satisfy a wide range of
performance criteria on a cost-effective basis. The technical,
performance and economic challenges faced by insulation
materials in meeting the thermal management requirements of
applications in the industrial, building and construction and
other markets include:
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Thermal Performance. Insulation must
deliver the required thermal performance within the space
allotted. Higher performance insulation is principally required
where space is at a premium.
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Operating Temperature
Limitations. Insulation must be able to
perform safely and effectively in a systems operating
temperature range. Insulation is commonly targeted and optimized
for applications within the cryogenic and
sub-ambient
(−273oC
to 90oC),
ambient
(0oC to
40oC) or
hot process
(−25oC
to
650oC) temperature
regimes.
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Form Factor. Insulation must be
supplied in a form that meets system specifications. Common
insulation forms include flexible blankets, boards, loose fill,
rigid pipe covers, sprayed and shaped foam structures.
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Speed of Installation. Insulation that
installs rapidly helps reduce total system costs. Labor costs
for on-site
installation are a significant component of an insulation
systems total cost.
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Volume and Weight. The volume and
weight of the insulation required to meet system specifications
impact capital and operating costs of a facility, system,
vehicle or building.
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Durability. Insulation must meet
customer specifications for tensile strength, compressive
strength and resiliency. Under cryogenic conditions, insulation
should not crack, contract or degrade in response to freeze-thaw
cycles. In hot process applications, insulation should not
crack, crumble or sag.
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Fire Resistance and
Protection. Insulation is commonly tested for
fire resistance and fire protection under industry-standard
protocols. These tests measure whether insulation contributes to
the spread of flame and smoke or acts as a passive fire barrier.
In industrial markets, minimum fire ratings are largely
determined by individual companies. In the building and
construction markets, minimum fire ratings are usually
determined by national, regional and local building practices
and codes.
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Moisture Resistance. Insulation is
commonly tested for water absorption using industry-standard
protocols. Moisture reduces the thermal performance of
insulation. The resistance of insulation to moisture is critical
to the performance of systems exposed to the elements and
operating in humid climates.
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Vapor Permeability. The rate of flow of
vapor through insulation layers is critical to the performance
of industrial systems. Insulation systems used in cryogenic
applications must be impermeable to water vapor to avoid
catastrophic system failures. Many cryogenic insulation systems
incorporate vapor barriers. Conversely, high vapor permeability
enables optimal system performance in hot process applications.
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Corrosion Under Insulation, or CUI. In
the industrial market, systems operating between
−4oC
and 175oC
are subject to CUI. Insulation materials can trap water and
exacerbate corrosion of the underlying metal surfaces. Corrosion
of process piping and storage tanks increases the risk of
catastrophic system failures. Preventative facility maintenance
and shutdowns are estimated to cost the petrochemical industry
billions of dollars per year. Insulation that is both
hydrophobic and vapor permeable has the potential to
significantly reduce the incidence of CUI.
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Logistics. The logistics associated
with purchasing, storing, transporting and installing insulation
materials in facilities and on job sites can be complex and
costly. Improved logistics on job sites reduces operating costs
and enhances worker safety.
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Within the industrial market, insulation systems are generally
designed to maintain hot and cold process piping and storage
tanks at optimal temperatures, to protect plant and equipment
from external elements and risk of fire, and to protect workers.
In this market, we believe that the performance attributes that
are most important are thermal performance, durability, ease of
installation, moisture resistance and vapor permeability. When
choosing products in the industrial market, we believe that
customers evaluate which insulation product enables them to meet
their performance targets with the lowest installed
and/or
lifecycle costs.
Within the building and construction market, insulation systems
are generally designed to isolate the interior of the building
from external temperature variations and to reduce energy costs.
In this market, we believe that the most important performance
attributes of insulation are thermal performance, form factor,
volume, weight and fire resistance. When choosing insulation in
the building and construction market, customers evaluate which
product provides the most cost-effective means to achieve their
performance targets within system design specifications.
Our
Solution
We believe that our aerogel technology has allowed us to create
superior insulation products for our core markets that will
allow us to continue to grow our share of the global insulation
market. We believe that the potential for significant
technological innovation in traditional insulation materials is
limited and that new high-performance materials will be required
to meet evolving market requirements for energy efficient
insulation systems. Our line of high-performance aerogel
blankets is positioned to meet these requirements. Our solution
is driven by our innovative and proprietary manufacturing
processes that produce aerogels in a flexible and industrially
robust blanket form and is supported by over ten years of
research and development dedicated to new aerogel compositions,
form factors and manufacturing technologies. We believe our
aerogel blankets deliver a superior
88
combination of performance attributes that provide
cost-effective solutions to address the demanding performance
objectives of a wide range of applications in our target
markets, including:
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Best Thermal Performance. Our aerogel
blankets provide the best thermal performance of any widely used
insulation product available on the market today. Our products
excel in applications where available space is constrained or
thermal performance targets are aggressive.
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Wide Temperature Range. We offer
insulation products that address the entire range of
applications within the cryogenic and sub-ambient
(−273oC
to 90oC),
ambient
(0oC to
40oC) and
hot process
(−25oC
to
650oC) temperature
ranges.
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Ease of Installation. Our flexible
aerogel blankets install faster than rigid insulation materials
in the industrial market, which reduces labor costs and total
system costs.
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Compact Design. Our aerogel blankets
reduce insulation system volume by 50% to 80% compared to
traditional insulation. Our products allow for a reduction in
the footprint, size and structural costs of facilities, systems,
vehicles and buildings.
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High Durability. Our aerogel blankets
offer excellent compression resistance, tensile strength and
vibration resiliency. The compression resistance of our products
allows companies to pre-insulate, stack and transport steel
pipes destined for use in harsh or remote environments.
Pre-insulation of pipes significantly reduces installation labor
costs in industrial applications in remote areas such as the oil
sands in Alberta, Canada.
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Strong Fire Protection. Our Pyrogel XT
and Spaceloft A2 product lines were specifically designed to
provide strong fire performance in applications within the
industrial and building and construction markets. Strong fire
performance qualifies our products for use in a variety of
applications in our target markets.
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Moisture Resistance. Our aerogel
blankets are durably hydrophobic. Our products offer improved
thermal performance in insulation systems exposed to the
elements or operating in humid environments compared to
traditional insulation.
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Reduced Corrosion Under Insulation. Our
Pyrogel XT product line is both durably hydrophobic and vapor
permeable. These attributes have the potential to reduce the
incidence of CUI in hot process applications. We believe that a
reduction in CUI offers industrial customers a significant
reduction in long-term operating and capital costs.
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Simplified Logistics. Our aerogel
blankets simplify job site logistics. Our products reduce the
volume and weight of material purchased, inventoried,
transported and installed in the field. In addition, our
products reduce the number of stock-keeping units, or SKUs,
required to complete a project. Simplified logistics accelerate
project timelines, reduce installation costs and improve worker
safety.
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In the industrial market, we believe these characteristics
enable our end-use customers to meet their insulation
performance targets at lower total installed or lifecycle costs
versus traditional insulation in a growing number of
applications. In the building and construction market, we
believe the increasing thermal standards for retrofit and
new-build wall systems in Europe will become more difficult to
meet with traditional insulation materials due to space
constraints. We believe the thin form factor and strong fire
properties of our aerogel blankets will provide a cost-effective
and practical means to meet increasingly stringent building
standards in Europe.
89
Our Competitive
Strengths
We believe the following combination of capabilities
distinguishes us from our competitors and positions us to
compete effectively and benefit from the expected growth in the
market for energy efficiency solutions:
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Superior product based on proven technology in commercial
production. Our aerogel products provide up
to five times the thermal performance of widely used insulation
in a thin, easy-to-use blanket form. Our products enable compact
design, reduce installation time and costs, promote freight
savings, simplify logistics, reduce system weight and required
storage space and enhance job site safety. Our products provide
excellent compression resistance, are hydrophobic and reduce the
incidence of corrosion under insulation, a significant
operational cost and safety issue in industrial facilities. Our
products also offer strong fire protection which is a critical
performance requirement in both the industrial and building and
construction markets. We believe our array of product attributes
provides strong competitive advantages over traditional
insulation and will enable us to take a growing share of the
existing market for insulation in both the industrial and the
building and construction markets. Although competing insulation
materials may have one or more comparable attributes, we believe
that no single insulation material currently available offers
all of the properties of our aerogel insulation.
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Proven and scalable proprietary manufacturing
process. Our manufacturing process is proven
and has been replicated to meet increasing demand. Our original
line in East Providence, Rhode Island, has operated continuously
since mid-2008. From mid-2008 through June 30, 2011, we
have produced and sold in excess of 44 million square feet
of aerogel blankets. We successfully commenced operation of our
second production line at this facility in March 2011 and
immediately began producing commercial quality aerogel blankets.
This line was completed on time and on budget and is expected to
double our annual production capacity by the end of 2011 to 40
to 44 million square feet of aerogel blankets, depending on
product mix. We believe that our proven ability to produce
product that meets our clients specifications and our
increased production capacity will provide customers with the
certainty of supply that is required to expand their use of our
products.
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Strong relationships with industry
leaders. We have a track record of working
with industry leading end-use customers, in order to achieve
in-depth knowledge of our target market and to optimize our
products to meet the challenges they face. With these
relationships, our products have undergone rigorous testing and
are now in use at some of the worlds largest oil
producers, refiners and petrochemical companies as ranked by a
weighted measure of sales, profits, assets and market value (see
Our Products Qualification for
Use). We believe these strong relationships represent a
competitive advantage, giving us both a significant source of
potential demand and a means of validating our technology,
products and value proposition. These relationships have proven
to shorten the sales cycle with other customers within the
industrial market and have helped to facilitate our market
penetration. Within the building and construction market, we
have partnered with BASF Construction Chemicals to develop
products to meet increasingly stringent building standards for
thermal performance of retrofit and new-build wall systems. As
part of our relationship with BASF Construction Chemicals, we
have recently developed a product, Spaceloft A2, targeted at the
building and construction market. BASF Venture Capital made
strategic investments in us in September 2010 and June 2011.
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Capital efficient business model. To
respond to increased demand for our products, we successfully
commenced operation in late March 2011 of a second production
line at the East Providence facility. The expansion is expected
to increase our annual production capacity by 20 to
22 million square feet of aerogel blankets at a total
construction cost of approximately $31.5 million. We
believe that our second production line, at full capacity and at
current prices, would be capable of producing in the range of
$50 million to $54 million in annual revenue of
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90
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aerogel blankets. We expect to add production capacity in a
capital efficient manner through the planned expansion of our
East Providence facility and construction of a second
manufacturing facility in the United States or Europe.
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Experienced management and operations
team. Each of our executive officers has over
20 years of experience in global industrial companies,
specialty chemical companies or related materials science
research. This team has worked closely together at Aspen
Aerogels for nearly five years and we believe our dedicated and
experienced workforce is an important competitive asset. As of
June 30, 2011, we employed 161 dedicated research
scientists, engineers, manufacturing line operators, sales and
administrative staff and management.
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Our
Strategy
Our goal is to create shareholder value by becoming the leading
provider of high-performance aerogel products serving the global
energy efficiency market. We intend to achieve this goal by
pursuing the following strategies:
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Expand our manufacturing capacity to meet market
demand. Demand for our aerogel products in
2010 grew by approximately 88% compared to 2009 and exceeded our
manufacturing capacity. In response, we constructed a second
production line in our East Providence, Rhode Island,
manufacturing facility designed to double our manufacturing
capacity. To meet anticipated growth in demand for our products,
we are engaged in the design, engineering and initial
procurement phase of a third production line in our East
Providence facility and plan to construct a second manufacturing
facility in the United States or Europe. We believe an expanded
and geographically diversified manufacturing base will allow us
to satisfy increasing demand for our products and to eliminate
the risk associated with single site operations.
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Increase industrial insulation market
penetration. We plan to focus additional
resources to achieve a greater share of the industrial
insulation market, both through increased sales to our existing
customers and sales to new customers. We are promoting greater
enterprise-wide utilization of our products by existing end-use
customers. We believe the validation of our products by these
technically sophisticated customers helps shorten the sales
cycle with new customers and facilitates market penetration. In
addition, we anticipate that our growing maintenance-based
business will lead to increasing sales of our products into
large capital projects, including the construction of new
refineries and petrochemical facilities in emerging markets.
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Leverage strategic relationships in the building and
construction market. We believe the building
and construction market represents our largest target market
opportunity and is in the midst of a transformation that is
increasing demand for high-performance, energy-efficient
insulation systems. We have partnered with BASF Construction
Chemicals to penetrate the market for energy efficient wall
systems. We are pursuing additional market opportunities with
other leading building materials manufacturers and distributors
across multiple regions to address the increasingly stringent
regulatory environment governing the thermal performance of
buildings. We believe this approach will enable us to leverage
their broad technical and distribution capabilities and
facilitate market penetration.
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Expand our sales force, network of distributors and OEM
channels. We plan to expand our sales force
and distribution network to support growth in the industrial and
building and construction markets. We have identified
distributors with proven records of success serving important
customers and intend to make selected additions to our existing
global distribution network. We also intend to expand our
network of OEM fabricators to pursue opportunities in the
transportation, appliance and apparel markets. We believe that a
strong, global and diverse network of distributors and OEMs will
support our goal to expand and further penetrate the global
markets for our products.
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91
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Continue to develop advanced aerogel compositions,
applications and manufacturing
technologies. We believe that we are well
positioned to leverage a decades worth of research and
development to commercialize new products, applications and
advanced manufacturing technologies. Examples of new
technologies in early stages of development include:
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Refractory aerogel insulation compositions for use in
applications with temperatures as high as 1649°C including
advanced aerospace thermal protection, high temperature furnaces
and boilers and single crystal silicon manufacture.
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Ultra-low dielectric aerogel films that are mechanically robust
and can be readily integrated into electronic devices including
circuit boards, cables, connectors and discrete components.
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Aerogel solid sorbents that reversibly capture carbon dioxide
for future use in the power industry.
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Highly durable and flexible aerogel composite insulation for use
in tents, outerwear and safety gear.
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Advanced gel compositions designed to enable aerogels to be
processed rapidly and at ultra-high volumes.
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Aerogel materials suitable for gas, liquid and solid filtration
and separation.
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Electrically conductive aerogels suitable for power storage
applications.
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We intend to increase personnel, funding and capital equipment
devoted to the research, development and protection of
intellectual property associated with new and advanced
technologies. We will also continue to seek opportunities to
leverage new and advanced technologies into broad commercial
opportunities.
Our
Products
Our aerogels consist of a complex structure of intertwined
clusters of very fine, lightweight, amorphous silica solids that
comprise 3% of the material by volume. The remaining volume of
the aerogel material is composed of air contained in nanopores.
Aerogels are a very low density solid and are usually extremely
fragile materials. However, our manufacturing processes produce
aerogels in a flexible, resilient, durable and easy-to-use
blanket form.
92
The core raw material in the production of our aerogel products
is a silica-rich stream of ethanol. Our manufacturing process
initially creates a semi-solid alcogel in which the nanopore
structure is filled with ethanol. We produce aerogel by means of
a supercritical extraction process that removes ethanol from the
gel and replaces it with air. Our process allows the liquid
ethanol to be extracted without causing the solid matrix in the
gel to collapse from capillary forces.
The nanoporous structure of our aerogel products minimizes the
three mechanisms of thermal transport:
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Convection. Heat convection through the
gas in nanoporous structures is confined. The mean free path, or
average distance traveled, of gas molecules in aerogels is
significantly reduced. As a result, thermal convection is
severely restricted.
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Conduction. Heat conduction is
correlated to material density. Aerogels are very low density
solids. As a result, thermal conductivity is extremely low.
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Radiation. Radiation requires no medium
to transfer heat. Thermal radiation is partially absorbed by
aerogels. Our aerogel products also contain infrared absorbing
additives to significantly reduce radiant heat transfer.
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We believe our aerogel products offer the lowest levels of
thermal conductivity, or best insulating performance, of any
widely used insulation available on the market today. Our
aerogel blankets are reinforced with non-woven fiber batting. We
manufacture and sell our blankets in 60 inch wide, three
foot diameter rolls with a range of thickness of 2 millimeters
to 10 millimeters. Our base products are all flexible,
hydrophobic yet breathable, compression resistant and able to be
cut with conventional cutting tools. We have specifically
developed our line of aerogel blankets to meet the requirements
of a broad set of applications within the industrial, building
and construction and OEM markets. The composition and attributes
of our aerogel blankets are as described below:
Industrial
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Pyrogel XT. Pyrogel XT, our best
selling product, is reinforced with a glass-fiber batting and
has an upper use temperature of
650oC.
Pyrogel XT was initially designed for use in high temperature
systems in refineries and petrochemical facilities, and we
believe that it has wide applicability throughout the industrial
market, including the power generation and district heating
sectors. Pyrogel XTs hydrophobicity and vapor permeability
reduce the risk of corrosion under insulation in high
temperature operating systems when compared to traditional
insulation.
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Pyrogel XTF. Pyrogel XTF is similar in
thermal performance to Pyrogel XT, but is reinforced with a
glass- and silica-fiber batting. Pyrogel XTF is specially
formulated to provide strong protection against fire.
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Cryogel Z. Cryogel Z is designed for
sub-ambient
and cryogenic applications in the industrial market. Cryogel Z
is reinforced with a glass- and polyester-fiber batting and is
produced with an integral vapor barrier. Cryogel Z is also
specially formulated to minimize the incidence of stress
corrosion cracking in stainless steel systems. We believe that
Cryogel Zs combination of properties allow for simplified
designs and reduced installation costs in cold applications
throughout the industrial market when compared to traditional
insulation.
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Spaceloft Subsea. Spaceloft Subsea is
reinforced with glass- and polyester-fiber batting and is
designed for use in
pipe-in-pipe
applications in offshore oil production. Spaceloft Subsea can be
fabricated and pre-packaged to permit faster installation.
Spaceloft Subsea allows for small profile carrier pipelines and
associated reductions in capital costs.
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93
Building and
Construction
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Spaceloft. Spaceloft is reinforced with
a glass- and polyester-fiber batting and is designed for use in
the building and construction market. Spaceloft is either
utilized in roll form by contractors in the field or fabricated
by OEMs into strips, panels and systems that meet industry
standards. Spaceloft is designed for use in solid wall buildings
and where space is at a premium.
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Spaceloft A2. Spaceloft A2 is
reinforced with a glass-fiber batting and specifically designed
to meet Euroclass A2 standards, a European classification system
based on harmonized standards for fire properties of building
and construction products. Spaceloft A2 was developed under a
joint development agreement with BASF Construction Chemicals.
Under the Euroclass system, the fire characteristics of
construction products are described using fire classes A1,
A2, B, C, D, E and F. Class A1 comprises materials that do
not contribute to a fire. Class A2 contains materials with
a very limited contribution to a fire. We believe that achieving
the Euroclass A2 classification will permit wider use of
Spaceloft A2 in systems subject to European fire performance
standards, including hospitals, schools, warehouses, factories,
shopping centers and commercial buildings over 15 meters high.
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OEM
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Pyrogel 2250. Pyrogel 2250 is
reinforced with carbon-fiber batting and has an upper use
temperature of
200oC.
Pyrogel 2250 is our thinnest and our highest tensile strength
product. Pyrogel 2250 is designed for use in applications where
space is limited. Pyrogel 2250 is targeted to OEMs that design,
produce and sell hot appliances, automotive systems and
electronic components.
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Pyrogel 6650. Pyrogel 6650 is
reinforced with silica-fiber batting and has an upper use
temperature of
650oC.
Pyrogel 6650 is our lowest-density product and is designed for
use in applications where weight is critical. Pyrogel 6650 is
targeted to OEMs that design, produce and sell aerospace systems
and components.
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Cryogel X201. Cryogel X201 is similar
in composition to Cryogel Z, but is produced without a vapor
barrier. Cryogel X201 is designed for use in cold system designs
where space is at a premium. Cryogel X201 is targeted to OEMs
that design, produce and sell refrigerated appliances, cold
storage equipment and aerospace systems.
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The attributes of our aerogel blankets are as summarized in the
following table:
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Nominal
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Thermal
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Maximum Use
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Product
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Thickness
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Conductivity
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Density
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Temperature
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Applications
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Markets
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mm
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in
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mW/
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Btu-in/
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g/cc
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lb/ft3
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°C
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°F
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m-K
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hr-ft2-°F
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Pyrogel XT
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5.0
10.0
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0.20
0.40
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21.0
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0.146
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0.18
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11.0
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650°
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1200°
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High temperature steam pipes, vessels and equipment, and
aerospace and defense systems
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Industrial
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Pyrogel XTF
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10.0
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0.40
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21.0
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0.146
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0.18
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11.0
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650°
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1200°
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High temperature steam pipes, vessels and equipment, aerospace
and defense systems, fire barriers and welding blankets
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Industrial
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Cryogel Z
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5.0
10.0
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0.20
0.40
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15.0
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0.104
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0.13
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8.0
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90°
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194°
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Sub-ambient and cryogenic pipelines, vessels and equipment
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Industrial
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94
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Nominal
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Thermal
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Maximum Use
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Product
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|
Thickness
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Conductivity
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Density
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Temperature
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Applications
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Markets
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mm
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in
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mW/
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Btu-in/
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g/cc
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lb/ft3
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°C
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°F
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m-K
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hr-ft2-°F
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Spaceloft Subsea
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5.0
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0.20
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13.9
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0.096
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0.13
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8.0
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200°
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390°
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Medium to high temperature offshore oil pipelines
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Industrial
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Spaceloft
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5.0
10.0
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0.20
0.40
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14.0
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0.097
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0.15
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9.4
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200°
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390°
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Ambient temperature walls, floors and roofs in commercial,
residential and institutional buildings
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Building and
Construction
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Spaceloft A2
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10.0
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0.40
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18.0
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0.125
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0.18
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11.0
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200°
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390°
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Ambient temperature walls, floors and roofs in commercial,
residential and institutional buildings; Euroclass A2 Fire Rated
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Building and
Construction
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Pyrogel 2250
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2.0
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0.08
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15.5
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0.107
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0.17
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10.7
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200°
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390°
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Medium to high temperature appliances, transportation and
electronics
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OEM
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Pyrogel 6650
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6.0
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0.24
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14.0
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0.097
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0.12
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7.5
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650°
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1200°
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High temperature aerospace and defense systems
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OEM
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Cryogel x201
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5.0
10.0
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0.20
0.40
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15.0
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0.104
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0.13
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8.0
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200°
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390°
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Sub-ambient including refrigerated appliances, cold storage and
aerospace
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OEM
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R-Values by
Material
Insulation is a material or combination of materials that slows
the transfer of heat from one side of the insulation material to
the other. The lower a materials thermal conductivity, the
more slowly heat is transferred across it. R-values are a
commonly used measure of an insulating materials
resistance to heat transfer. R-value is calculated as the
thickness of an insulation material divided by the thermal
conductivity of the insulation material. Materials with higher
R-values have lower thermal conductivity and are better
insulators. Traditional and specialty insulation materials
provide a range of R-values. The following table provides the
R-value per
meter of thickness of aerogels and traditional insulation
materials:
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R-Value
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per meter of thickness
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Material
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Form
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From
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To
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Aerogel
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Blankets, Beads
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66
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100
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Cellulose
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Loose Fill
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22
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26
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Expanded Clay
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Loose Fill
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4
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4
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Expanded Polystyrene (EPS)
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Boardstock
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26
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31
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Extruded Polystyrene (XPS)
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Boardstock
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35
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40
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Fiberglass
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Blankets
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22
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28
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Fiberglass
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Loose Fill
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20
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20
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Fiberglass
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Pipe Covering
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25
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25
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Foamed Glass
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Boardstock
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21
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21
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Mineral Wool
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Blankets
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22
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26
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Mineral Wool
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Loose Fill
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17
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17
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Mineral Wool
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Pipe Covering
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19
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26
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Perlite
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Pipe Covering
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17
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17
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Perlite
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Loose Fill
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17
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21
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95
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R-Value
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per meter of thickness
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Material
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Form
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From
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To
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Perlite
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Board
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17
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19
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|
Polyurethane
|
|
Spray On
|
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44
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44
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Polyurethane
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Rigid board
|
|
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44
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44
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Polyisocyanurate
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|
Rigid board
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45
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50
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Vermiculite
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Loose Fill
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17
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26
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Qualification
for Use
Our products have undergone rigorous testing and are now
qualified for global usage in both routine maintenance and in
capital projects at some of the worlds largest oil
producers, refiners and petrochemical companies as ranked by a
weighted measure of sales, profits, assets and market value.
These end-users of our products have well defined practices,
codes, specification and standards for materials and systems
installed or used in their facilities. These specifications
include insulation system design standards, material
qualification and selection processes, and insulation
application practices. As part of the material qualification
process run by these companies, a new insulation must meet
general industry standards, such as consensus standards
developed by ASTM International, and, in some cases,
company-specific internal standards to be considered for use. In
addition, most of these companies require one or more field
trials to establish fitness for use in specific applications.
The companies either run these qualification processes and field
trials internally or through third parties engaged by them, and
they generally do not publicly disclose the results of their
testing. While the specific processes and timelines vary from
company to company, in general, upon successful completion of
the qualification process for an insulation material, an
end-user will typically deem the material to be qualified for
use in that end-users facilities or equipment on a local,
regional or global basis for one or more applications. Because
our end-use customers are typically businesses with very large
industrial operations, our insulation sales likely represent
only a small portion of the total insulation used by any one of
these companies. Accordingly, once our products are qualified at
a company, we continue to seek to expand use of our products by
the end-use customer.
Sales and
Marketing
We market and sell our products primarily through a direct sales
force. Our salespeople are based in North America, Europe and
Asia and travel extensively to market and sell to new and
existing customers. The efforts of our sales force are supported
by a small number of sales consultants with extensive knowledge
of a particular market or region. Our sales force is required to
establish and maintain customer and partner relationships, to
deliver highly technical information and to provide first class
customer service. We have plans to expand our sales force
globally to support anticipated growth in customers and demand
for our products.
Our sales force calls on and maintains relationships with all
participants in the insulation industry supply chain. Our
salespeople have established and manage a network of insulation
distributors to ensure rapid delivery of our products in
critical regions. Our salespeople work to educate insulation
contractors about the technical and operating cost advantages of
aerogel blankets. Our sales force works with end-users to
promote qualification and acceptance of our products. In
addition, our salespeople work with OEMs and development
partners to create new products and solutions to open new
markets.
In the industrial market, we rely heavily on the existing and
well-established channel of distributors and contractors to
distribute products to our customers. In the building and
construction market, we believe that our relationships with
leading building materials manufacturers with established
distribution networks are a critical requirement to our
penetration of the market on a cost
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effective basis. In the transportation, appliance and apparel
markets, our current plan is to rely on the efforts of OEMs to
develop opportunities within and provide access to the markets.
The sales cycle for a new insulation material is typically
lengthy. Our sales cycle from initial customer trials to
widespread use can take from three to five years, although we
typically realize increasing revenue at each stage in the cycle.
Our relationships with technically sophisticated customers serve
to validate our technology, products and value proposition
within a target market. These relationships have proven to
shorten the sales cycle with other customers within specific
market segments and to facilitate market penetration.
We have focused our marketing efforts on developing technical
support materials, installation guides, case studies and general
awareness of the superior performance of our aerogel blankets.
We rely on our website, printed technical materials,
participation in industry conferences and tradeshows and
presentation of technical papers to communicate our message to
potential customers. We also receive strong
word-of-mouth
support from the growing network of distributors, contractors,
OEMs and end-users that understand the benefits of our products.
As of June 30, 2011, we had 17 employees in our sales
and marketing organization worldwide. Their efforts were
supported by a team of eight sales consultants.
Customers,
Development Relationships and End-Users
Customers
As described below, our primary customers are distributors,
contractors and OEMs that stock, install and fabricate
insulation products, components and systems for technically
sophisticated
end-users
that require high-performance insulation.
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Distributors: We are currently
operating under agreements with a network of over 40 insulation
distributors serving industrial and building and construction
markets across the globe. The agreements generally provide for
exclusivity by geography linked to annual purchase volume
minimums. In general, insulation distributors stock, sell and
distribute aerogel materials to insulation contractors and
end-users. Outside of North America, insulation distributors
often will also proactively market and promote aerogel materials
across all markets. During 2010, our top distributors by revenue
were Thorpe Products, Distribution International, Insulation
Fabricators and General Insulation in the United States, Aerogel
Korea Co, Ltd. in Asia, Aktarus Group and Sheffield Insulations
in Europe, Isolenge Isolantes in South America and Burnaby
Insulation in Canada.
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Contractors: We currently sell directly
to a number of insulation contractors under multi-year
agreements and under project specific contracts. Insulation
contractors generally perform insulation installation,
inspection and maintenance and project management for end-users.
In addition, some insulation contractors provide end-users with
project engineering and design services. Several of our
agreements with contractors provide for exclusivity by market
sector or geography linked to annual purchase volume minimums.
During 2010, our top contractor customers by revenue included
Technip and Saint-Gobain Wanner.
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OEMs: We currently sell directly to
more than ten OEMs that design, fabricate and manufacture
insulation components and systems for use in the industrial,
building and construction, transportation, appliance and apparel
markets. During 2010, our top OEM customers by revenue were
Enershield, A. Proctor Group and Shenzhen Naneng Technology Co.,
Ltd. Enershield manufactures and sells pre-insulated pipes for
use in the Canadian oil sands, A. Proctor Group fabricates and
sells aerogel insulated wall board in the U.K. market, and
Shenzhen Naneng Technology Co., Ltd. supplies insulation systems
for use in Chinas national high speed railway.
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Technip represented 14.3% of our total revenue for 2010 and was
our only customer representing 10% or more of our revenue for
that period.
Development
Relationships
We have worked with companies that we believe are some of the
most technically sophisticated companies in our target markets.
These relationships have allowed us to seek to optimize our
products to meet the particular demands of targeted market
sectors. In the industrial market, we have benefited from our
relationship with ExxonMobil in the oil refinery and
petrochemical sector, with Technip in the offshore oil sector
and with NextEra Energy in the power generation sector, each of
which was the earliest significant adopter of our products in
their respective market sector. Each of these relationships,
while primarily informal, has provided us with technical
feedback as these companies tested and used our products.
Consequently, we believe that we were better able to design our
products to meet the specific needs of important sectors within
the industrial market. In addition each of these three companies
has served as a reference account for us as we seek to expand
our sales to other companies in these sectors and in other parts
of the industrial market.
In the building and construction market, we have a joint
development agreement with BASF Construction Chemicals to
develop products to meet increasingly stringent building
standards requiring improved thermal performance of retrofit and
new-build wall systems. We are also engaged in development
relationships in Europe and North America with other leading
building materials manufacturers to target a variety of
applications within the broader building and construction
market. These development relationships are typically covered by
non-disclosure agreements, but not by other formal agreements.
We have held meetings with each of these companies to explore
opportunities for product and application development in the
building and construction market, have shared technical and
market information, have delivered samples of our aerogel
blankets for evaluation of the fitness of our products for use
in new products and applications. The objective of these
business development efforts is to secure commercial agreements
that promote the sale of our aerogel products. We also rely on a
small number of OEM partners to develop opportunities in the
transportation, appliance and apparel markets.
As described below, the end-users of our aerogel blankets range
from individual homeowners to some of the largest and most well
capitalized companies in the world:
End-Users
Industrial
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Oil Refinery and Petrochemical: Our
aerogel blankets are in use at ExxonMobil, Hu-Chems Company, SK
Energy, Petrobras, Honam Petrochemical, Shell, LyondellBasell,
Enagas, Citgo, PetroLogistics and Tupras, among others. We
believe these companies are the largest purchasers of our
products by revenue during 2010 in the oil refinery and
petrochemical sector. Over time, these companies have used our
products in an increasing range of applications and throughout
an increasing number of their industrial facilities.
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LNG Production and Storage: Our
products are in use in LNG facilities including Gate Import
Terminal in the Netherlands, Canaport LNG in Canada and Golden
Pass LNG in the United States, among others. These facilities
are owned and operated by Qatar Petroleum, ExxonMobil,
ConocoPhillips, Repsol, Irving Oil, Gasunie and Vopak. We
believe that the size and geographic locations of the these
facilities and the owner/operators of these facilities are
representative of our end-use customers in the LNG production
and storage sector.
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Oil Production: Our aerogel blankets
are in use in several Canadian oil sands facilities owned and
operated by Suncor Energy, Devon Energy, Esso, Nexen and Trans
Canada Power. We are not aware of any other significant
end-users of our aerogel blankets in oil sands facilities. In
the offshore oil sector, our products are currently used off the
coast of Brazil, in
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the Gulf of Mexico, in the North Sea and off the west coast of
Africa in projects operated by ExxonMobil, Total, BP, Statoil,
Dong Energy, Maersk Oil, Anadarko Petroleum, ENI Petroleum,
Helix, Marathon Oil and Petrobras. We are not aware of any other
significant end-users of our aerogel blankets in offshore oil
projects.
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Power Generation: We are targeting
operators of gas, coal, nuclear, hydro and solar power
generating facilities. We are working with NextEra Energy to
optimize our product and approach to the power generation
sectors. Our products are currently in use at facilities owned
or operated by NextEra Energy, American Electric Power, NRG
Energy, Luminant Energy, Nova Scotia Power and Xcel Energy. We
are not aware of any other significant end-users of our aerogel
blankets in power generation facilities.
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Other Industrial: Our network of
distributors and contractors provides access to additional
sectors within the industrial market. Our aerogel blankets are
in use in district heating systems owned by Brown University,
Massachusetts Institute of Technology, University of Minnesota,
The City of Baltimore and the Intercontinental Hotel, Miami. Our
products are in use in food processing plants owned by Archer
Daniels Midland, Cargill and Pepperidge Farm. We also have
products in use at a paper mill owned by Tullis Russell Group.
We are not aware of any other significant end-users of our
aerogel blankets in this sector.
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Building and
Construction
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Building and Construction: We are
targeting leading building products manufacturers with
established distribution channels to facilitate penetration of
the building and construction market. We have partnered with
BASF Construction Chemicals to jointly develop technologically
advanced solutions for improved energy efficiency, particularly
for the building envelope. In addition, our products have been
sold and installed in several hundred residential and commercial
new-build and retrofit building projects through the efforts of
our network of distributors and OEMs and by means of
U.S. federal, state and local sponsored projects. We have
products in use today in properties owned or supported by
agencies of U.S. federal, state and local governments,
private and public schools and universities, hospitals, housing
associations, businesses and individuals.
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OEM
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Other Markets: We rely on the efforts
of a small network of OEMs and fabrication houses to target
opportunities in the transportation, apparel and appliance
markets. Our OEMs are manufacturers of components and systems
for refrigerated and hot appliances, cold storage equipment,
automobiles, aircraft, trains and electronic sectors and
manufacturers of outdoor gear and apparel. While our products
have not yet been widely adopted in these markets, we expect
that the end-users of our products in these markets will include
a wide range of government agencies, institutions, businesses
and individuals. We currently have products in use in
Chinas national high-speed railway, commercial ovens,
transport ships, helicopters, motorcycles, hunting and hiking
boots, sleeping pads and insulated water bottles.
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Customer Case
Studies
The following case studies illustrate how our customers and
end-users benefit from our industry leading thermal performance
and unique set of performance attributes:
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Petrobras, a global integrated energy company,
needed to replace deteriorating calcium silicate thermal
insulation on its REGAP NAPHTHA hydrodesulfurization and
treatment unit. Prior to the replacement, the unit was insulated
with a combination of calcium silicate for thermal protection
and a cementitious surface application for fire protection.
However, continued water ingress had deteriorated the calcium
silicate over five years of operation. Petrobras chose to
replace this insulation with Pyrogel XTF for the project, which
offers
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improved thermal performance and reduced thickness, UL 1709
compliant passive fire protection, hydrophobic properties that
prevent water ingress, and rapid installation. As a result of
the choice to use Pyrogel XTF, the refurbishment was
accomplished with a single insulation product with reduced
installation time, which helped reduce disruption at the
facility.
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Brown University, a private, Ivy League university
in the Northeast, wanted to replace existing fiberglass
insulation damaged by moisture that surrounded high-pressure hot
water and chilled water lines running throughout its campus. Due
to tight spaces and limited access in the underground tunnels
where the pipes are housed, the contractor specified Cryogel Z
for chilled water lines and Pyrogel XT for hot water lines. The
aerogel blankets met thermal performance and corrosion
prevention requirements and offered easier installation than
bulkier insulation on pipes of all sizes. Additionally, the
aerogel blankets reduced insulation volume in comparison to
alternative insulation material considered for the project,
which improved clearances in the tunnel pipe racks. The
contractor has informed us that the aerogel blankets reduced
total project costs by 16% in comparison to incumbent materials.
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NextEra Energy, a leading
U.S.-based
power company, has installed Pyrogel XT at four existing fossil
fuel-fired power plants, for distinct applications. NextEra
Energy determined that Pyrogel XTs thermal efficiency was
superior to competing insulations and its hydrophobicity and
vapor permeability would help to prevent corrosion under
insulation. Due to Pyrogel XTs flexible form factor,
NextEra Energy achieved accelerated installation times that it
determined would result in net cost savings over time versus
traditional materials. In May 2011, NextEra Energy placed an
order for Pyrogel XT material, for use at a new 250 megawatt
solar thermal power plant to be located in Riverside County,
California, with product delivery planned for 2012 and 2013.
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Brock Services Ltd., a leading insulation
contractor in the United States, was hired to replace perlite
insulation and associated jacketing on an overhead accumulator
drum at a
U.S.-based
manufacturing facility. Upon removal of the existing insulation,
Brock uncovered heavy corrosion of the drum and recommended
Pyrogel XT as the preferred alternative due to its
hydrophobicity and vapor permeability. Brock informed us that it
was impressed by the 75% reduction in material, reduced weight
and ease of installation associated with the aerogel blankets.
Brock also informed us that Pyrogel XT was more durable and
reduced waste and breakage on the job site. Brock estimated that
use of the aerogel material reduced total installed costs by 12%
in comparison to the traditional material.
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Framingham Housing Authority, in cooperation with
the Massachusetts Department of Housing & Community
Development, renovated and re-insulated a
110-unit low
income housing development in Framingham, Massachusetts. The
renovation was a semi-gut rehabilitation that consisted of
retrofitting the insulation to the existing building walls and
adding insulation to the crawl spaces. Insulating the existing
building walls with traditional insulation materials was
problematic due to the limited space under a new cement plank
siding. Spacelofts combination of high thermal performance
and compact design allowed our insulation materials to be
successfully installed in all 110 housing units.
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Manufacturing
We manufacture our products using our proprietary, high-volume
process technology at our facility located in East Providence,
Rhode Island. We have operated the East Providence facility
continuously since mid-2008. Our manufacturing process is proven
and has been replicated to help meet increasing demand.
Our manufacturing group is led by a seasoned team with
management experience at global industrial and specialty
chemical companies. Our manufacturing workforce is experienced
and, to date, we have experienced low employee turnover. We have
well-defined maintenance and environmental, health and safety
programs and operating processes in place. We utilize
statistical
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process and quality controls to measure the thermal
conductivity, hydrophobicity and thickness of our aerogel
blankets during the manufacturing process. We are ISO 9000:2000
certified.
We price our product and measure our product shipments in square
feet. Annual capacity is a function of product mix. Our original
line in East Providence has operated continuously since
mid-2008. Through June 30, 2011, we have produced and sold
in excess of 44 million square feet of aerogel blankets.
With the recent addition of our second production line, we
estimate that our annual manufacturing capacity will range
between 40 to 44 million square feet of aerogel blankets by
the end of 2011, depending principally upon the mix of products
produced.
We directly control all stages in the manufacture of our aerogel
blankets. Our direct ownership of manufacturing operations
allows us to maintain control of proprietary process
technologies and to control product quality. Our production of
aerogel blankets utilizes a continuous batch process and
consists of the following key steps:
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Sol Preparation. Mixing of a silica
precursor in ethanol, a catalyst and additives in set formulas
to deliver the target properties of the resultant aerogel.
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Casting. Application of the sol into a
non-woven batting and initial formation of the gel structure.
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Aging. Bathing of the gel-saturated
blankets in fluids to impart desired physical and thermal
properties.
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Extraction. Supercritcal extraction of
the ethanol liquid from the gel-saturated blanket to produce an
aerogel blanket.
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Heat Treatment. Drying to remove trace
ethanol, ammonia salts and water from the aerogel blankets.
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Quality Control. Utilizing statistical
process and quality controls to measure thermal conductivity,
hydrophobicity and thickness of our aerogel blankets.
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Our raw material costs were the equivalent of 89.7%, 56.9% and
52.9% of product revenue for the years ended December 31,
2008, 2009 and 2010, respectively. The raw materials used in the
production of our products consist primarily of polyester and
fiberglass battings, amorphous silica and ethanol, which is used
in the delivery of the amorphous silica. Multiple sources of
supply exist for all of our raw materials, and we believe the
markets for these products are competitive and prices are
relatively stable. We purchase amorphous silica from several
suppliers, mostly pursuant to individual purchase orders and not
pursuant to long-term contracts. While we do have a supply
agreement with Silbond Corporation, Silbond provides less than a
third of our amorphous silica needs. Based on the current level
of demand for our products, we believe that an adequate
long-term supply of amorphous silica is available. However, if
demand for our products increases rapidly, we will need to work
with suppliers to ensure that an adequate long-term supply of
amorphous silica will be available. Suppliers of amorphous
silica include industrial companies that produce it directly or
that produce it as a byproduct of other industrial processes. We
are working with a number of suppliers to plan for our potential
future needs and to develop processes to reduce the long-term
cost of the amorphous silica used in our products. See
Risk Factors Risks Related to Our Business and
Strategy Shortages of the raw materials used in the
production of our products, increases in the cost of such
materials or disruptions in our supply chain could adversely
impact our financial condition and operating results.
We are seeking to lower our manufacturing costs and to improve
the per square foot costs of our aerogel blankets by optimizing
our chemistries and manufacturing processes to improve yields,
by obtaining raw material price reductions from existing
vendors, by qualifying new vendors for certain raw materials,
and by optimizing shipping costs. Our objective is both to
reduce costs to enhance our competitive advantage and to ensure
we deliver high quality finished products.
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We plan to expand our aerogel blanket production capacity by
adding a third production line to our East Providence facility
and to establish a second facility in the United States or
Europe. We intend to utilize current processes and equipment in
the design and construction of our third production line and our
second facility. We are currently engaged in a process to
identify optimal sites for our second facility. Considerations
will include proximity to raw material suppliers, proximity to
customers, labor and construction costs and the availability of
governmental incentives. We expect that upon completion of a
third production line, our annual manufacturing capacity will
increase by between 20 and 26 million square feet of aerogel
blankets.
Research and
Development
The mission of our research and development organization is to
provide new innovation and products in support of our commercial
objectives. Our research and development expenditures were
$2.1 million, $2.5 million and $3.0 million for
the years ended December 31, 2008, 2009 and 2010,
respectively. In addition, we spent $1.2 million,
$1.8 million and $2.1 million for the years ended
December 31, 2008, 2009 and 2010, respectively, on research
and development activities sponsored by federal and non-federal
government agencies. Our scientists and engineers work closely
with customers to study and assess insulation application
requirements and guide advancements in aerogel materials and
manufacturing. The scope and focus of our research and
development activities include:
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Research: Our research scientists and
process engineers explore the chemistry and process technologies
of aerogel materials to enhance product performance in response
to needs for high temperature thermal stability, high
compression strength, low density, low thermal conductivity at
low, ambient and high temperatures, high resilience and
flexibility and resistance to environmental elements. Our
research scientists are investigating aerogel compositions
beyond the fiber reinforced silicate aerogel materials which are
the backbone of current products. Carbon, ceramic, rubber and
hybrid aerogels are all topics of study. A range of form factors
are under exploration, including flexible sheets, monoliths,
beads and powders.
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Development: Our development team
responds to customer needs for new and broader performance
aerogel products. Our efforts to enhance the aerogel product
line currently include new grades of flexible aerogel with
higher temperature performance, compression resistance, flame
and smoke resistance and improved low infrared signature
properties.
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Analytical Services: We have invested
in testing and characterization equipment for chemical,
mechanical and thermal property measurements. The
instrumentation allows in-house measurement of all key
properties related to formulation and performance of aerogel
products. The analytical laboratory is managed on a service
basis with testing prioritized against commercial opportunities.
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Process Engineering: We maintain a
range of pilot equipment that allows rapid examination of
formulation and process variables at the research scale. This
capability allows the study and continuous improvement of
operating processes and provides the ability to produce a range
of novel product forms.
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Program Management: We have a
demonstrated record of success in winning and delivering upon
government research programs. Research and development performed
under contract to NASA, NSF, DARPA, U.S. Army,
U.S. Navy, U.S. Air Force and the Department of Energy
enables us to develop and leverage technologies into broader
commercial applications.
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Business Development and Technology
Transition: We work closely with customers in
government and industry to develop potential aerogel solutions
that leverage a wide range of attributes of aerogels. We have a
long history and demonstrated capability of successfully
transitioning technologies from the lab scale into full
production.
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We believe that we are well positioned to leverage a
decades worth of research and development activity to
continue to commercialize new products, applications and
advanced manufacturing technologies. We have already obtained
patents for a number of these technologies in the United States
and abroad. We also maintain a significant portfolio of trade
secrets and know-how in areas of gel compositions, aerogel
manufacturing and process scalability. As of June 30, 2011,
we had 28 research and development employees located at our
headquarters in Northborough, Massachusetts.
Contract Research
and Government Support
We have a demonstrated record of pursuing and securing
government support for our business:
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Contract Research. We regularly seek
funding from a number of federal and non-federal government
agencies in support our research and development and
manufacturing activities. Research performed under contract to
NASA, National Science Foundation, Defense Advanced Research
Projects Agency, U.S. Army, U.S. Navy, U.S. Air
Force and the Department of Energy allows us to develop and
leverage technologies into broader commercial applications. We
also work closely with customers in government and industry to
develop potential aerogel solutions that leverage not only the
thermal insulation performance but other benefits of aerogels as
well.
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Under our contracts, the U.S. government generally has the
right not to exercise options to extend or expand our contracts
and may modify, curtail or terminate the contracts at its
convenience. Our government customers may not renew our existing
contracts after the conclusion of their terms and we may not be
able to enter into new contracts with U.S. government
agencies. Any decision by the U.S. government not to
exercise contract options or to modify, curtail or terminate our
contracts or not to renew our contracts or enter into new
contracts with us would adversely affect our revenues.
We have received $35.0 million in funding under contracts
since inception and had a contract research backlog of
$4.0 million and $5.3 million as of June 30, 2011
and June 30, 2010, respectively.
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Title III. Title III of the
Defense Production Act was established to create, expand and
maintain domestic capacity to produce materials needed for
national defense. Title III has accelerated technology
adoption by establishing competitive and reliable
U.S. sources for key materials. We have received
$16.8 million in awards under Title III to build our
first production line in East Providence, Rhode Island, to
expand effective production capacity, and to reduce
manufacturing costs of high temperature aerogel blankets.
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Department of Energy Loan Guarantee: We
have applied to the Department of Energy for a loan guarantee of
up to $70.7 million under Section 1703 of
Title XVII of the Energy Policy Act of 2005 to fund a
portion of our construction costs of our second and third
production lines in East Providence, Rhode Island and associated
infrastructure. The Department of Energy is currently performing
a detailed Phase II due diligence review of our business
and financial condition to determine whether the capacity
expansion project meets program, statutory and regulatory
requirements. Our continued expansion of our East Providence
facility is not dependent upon obtaining this guarantee. If
awarded, we will assess the opportunity to obtain a loan
guaranteed under this program.
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MassDevelopment: In January 2005, we
executed a term loan with the Massachusetts Development Finance
Agency for $1.5 million. The proceeds were used to build
research and development lab space at our Northborough facility.
The Massachusetts Development Finance Agency is a finance and
development authority established to strengthen the
Massachusetts economy.
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Rhode Island: Our East Providence
facility is located in a Rhode Island Enterprise Zone. We are
eligible for tax credits, credit guarantees and job training
grants.
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Intellectual
Property
Our success depends in part upon our ability to obtain, maintain
and protect intellectual property rights that cover our product
forms, applications
and/or
manufacturing processes and specifications and the technology or
know-how that enables these product forms, applications,
processes and specifications, to avoid and defend against claims
that we infringe the intellectual property rights of others, and
to prevent the unauthorized use of our intellectual property.
Since aerogels were developed approximately 80 years ago,
there has been a wide range of research, development and
publication on aerogels, which makes it difficult to establish
intellectual property rights to many key elements of aerogel
technology and to obtain patent protection. Accordingly, much of
the critical technology that we use in our manufacture of
aerogel blankets is not protected by patents. Where we consider
it appropriate, our policy is to seek to protect our proprietary
rights by filing United States and foreign patent applications
related to technology, inventions and improvements that we
consider patentable and important to the development and conduct
of our business and, in particular, our aerogel technology,
product forms and their applications in promising markets and
our manufacturing processes. Patents owned by us that we
consider important to our business include:
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U.S. Patent Nos. 7,078,359 and 7,504,346, as well as
related foreign counterparts which are directed to
fiber-reinforced aerogel composites and expire on
December 21, 2021;
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U.S. Patent Nos. 7,399,439, 6,989,123 and 7,780,890, as
well as related foreign counterparts, all of which are directed
to methods of manufacturing fiber-reinforced aerogel composites
and expire on June 23, 2024;
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U.S. Patent No. 7,833,916, which is directed to
aerogel-based building materials and expires on July 18,
2025;
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U.S. Patent No. 7,226,243, which is directed to
sub-sea
pipeline systems incorporating our
Spaceloft®
products and expires on May 5, 2024; and
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U.S. Patent No. 7,691,912, which is directed to
organic/inorganic hybrid aerogel composites and expires on
October 10, 2027.
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We also rely on trade secrets, trademarks, licensing agreements,
confidentiality and nondisclosure agreements and continuing
technological innovation to safeguard our intellectual property
rights and develop and maintain our competitive advantage.
As of June 30, 2011, we had 17 issued U.S. patents, 20
pending U.S. patent applications (including one U.S. patent that
we co-own with a third party and one U.S. pending patent
application that we co-own with another third party),
13 issued foreign patents and 34 pending foreign patent
applications (including one European patent and a family of
pending patent applications that we co-own with a third party).
The U.S. patents that we own are generally effective for
20 years from the filing date of the earliest application
to which each U.S. patent claims priority. The scope and
duration of each of our foreign patents varies in accordance
with local law. The patent strategy of companies such as ours is
generally uncertain and involves complex legal and factual
questions. Our ability to maintain and solidify both our
proprietary and our licensed technology will depend in part upon
our success in obtaining patent rights and enforcing those
rights once granted or licensed. We do not know whether any of
our patent applications or those patent applications that we
license from others will result in the issuance of any patents.
Our issued patents and those that may issue in the future, or
those licensed to us, may be challenged, invalidated, rendered
unenforceable or circumvented, which could limit our ability to
prevent competitors from marketing similar or related products,
or shorten the term of patent protection that we may have for
our products, processes and enabling technologies. In addition,
the rights granted under any issued patents may not provide us
with competitive advantages against competitors with similar
technology. Furthermore, our competitors may independently
develop similar technologies or duplicate technology developed
by us or may possess intellectual property rights that could
limit our ability to manufacture our products and operate our
business, particularly given the long history of the development
of aerogel technology. Because of the extensive time
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required for research, development and testing of a potential
product, it is possible that, before a product under development
can be commercialized, any related patent, whether owned by us
or licensed to us, may expire or remain in force for only a
short period of time following commercialization, thereby
substantially reducing or eliminating any advantage of the
patent.
We also rely on trade secret protection for our confidential and
proprietary information. However, trade secrets can be difficult
to protect. We may not be able to maintain our technology or
know-how as trade secrets, and competitors may develop or
acquire equally valuable or more valuable technology or know-how
related to the manufacture of comparable aerogel products. We
also seek to protect our confidential and proprietary
information, in part, by requiring all employees and consultants
to execute confidentiality
and/or
nondisclosure agreements upon the commencement of an employment
or consulting arrangement with us. These 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 individuals relationship with
us be kept confidential and not disclosed to third parties.
These agreements may be breached and may not provide adequate
remedies in the event of breach. We also require our customers
and vendors to execute confidentiality
and/or
nondisclosure agreements. However, we have not obtained such
agreements from all of our customers and vendors. Moreover, some
of our customers may be subject to laws and regulations that
require them to disclose information that we would otherwise
seek to keep confidential. In addition, our trade secrets may
otherwise become known or be independently discovered by
competitors, customers or vendors. To the extent that our
employees, consultants, vendors or contractors use intellectual
property owned by others in their work for us, disputes may
arise as to the rights in related or resulting technologies,
know-how or inventions.
We also believe that having distinctive names may be an
important factor in marketing our products, and therefore we use
trademarks to brand some of our products, including PYROGEL,
CRYOGEL and SPACELOFT. As of June 30, 2011, we had five
trademark registrations in the United States, four trademark
registrations in the European Union and three trademark
registrations in Japan. We have 29 trademark applications
pending in foreign jurisdictions, including China and Brazil.
Although we have a foreign trademark registration program for
selected marks, we may not be able to register or use such marks
in each foreign country in which we seek registration.
We also regularly seek funding from a number of federal and
non-federal government agencies in support of our research and
development and manufacturing activities. The research and
development activities that we conduct under such contracts may
produce intellectual property to which we may not have ownership
or exclusive rights and will be unable to protect or monetize.
Cross License
Agreement with Cabot Corporation
In April 2006, we entered into a cross license agreement with
Cabot Corporation, or Cabot, which was amended in September
2007. Under the terms of the cross license agreement, each party
has granted certain intellectual property rights to the other.
We hold a non-exclusive, worldwide license to those patents and
patent applications owned or licensed by Cabot that are
necessary for us to practice our manufacturing process within a
field of use, which is defined in accordance with the specific
chemistry of our aerogel products and the supercritical fluid
technology that we use in our manufacturing processes. We have
granted to Cabot a reciprocal, nonexclusive, worldwide license
to certain patents and patent applications that we own that are
necessary for Cabot to practice its processes within a field of
use defined in accordance with the specific chemistry in its
aerogel products and the drying technology that it uses to
manufacture its products. The grant of license to each party
covers issued patents, patent applications and patents issued
from such counterpart applications, as well as patents licensed
or acquired during the term of the license, in each case that
claim aerogels, or methods, materials of manufacture, or uses of
aerogels.
In exchange for access to certain of Cabots patents and
patent applications, we are obligated to make an aggregate
payment to Cabot of $38 million payable in quarterly
installments over a seven-year
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period ending no later than December 2013. As of June 30,
2011, $15.0 million remains due to Cabot under the cross
license agreement. See Managements Discussion and
Analysis of Financial Condition and Results of
Operations Contractual Obligations and
Commitments Cross License Agreement. Upon
payment to Cabot of the full consideration due under the cross
license agreement, we will retain a non-exclusive, worldwide
license to any and all existing Cabot intellectual property
licensed under the agreement until the expiration of the
last-to-expire
of Cabots licensed patents.
Under the terms of the cross license agreement, we are
restricted in our ability to sell, transfer, pledge or mortgage
our patents, patent applications or acquired patents that we
license to Cabot. We also bear full responsibility and liability
for any loss, damage, personal injury or death resulting from,
arising out of or connected with our use of the licensed Cabot
intellectual property or our use or any third partys use
of any products manufactured under the licensed Cabot
intellectual property. The right to assert infringement of one
or more patents licensed under the cross license agreement
resides solely with the patent owner and, thus, Cabot has the
exclusive right, but not the obligation, to enforce its rights
in the intellectual property licensed to us under the agreement
at its own expense, and any decision as to whether or not to do
so must be accepted as final by us. The cross license agreement
remains in effect until the expiration of the last to expire of
the issued patents or patent applications and acquired patents
licensed thereunder.
Competition
We operate in a highly competitive environment. In general,
competition in our markets is between various types of
insulation materials based on product quality, price and
performance. Customers may choose among a variety of standard
insulation materials that offer a range of characteristics
including thermal performance, durability, vapor permeability,
moisture resistance, ease of installation and upfront and
lifecycle costs. Within each type of insulation material, there
is also competition between the manufacturers of that material.
Most types of insulation materials are produced by a number of
different manufactures and once customers have chosen the type
of insulation material that they intend to use, they will choose
a manufacturer of that material based primarily on each
manufacturers price and delivery schedule. Insulation
manufacturers include a range of large, high-volume,
multinational manufacturers offering branded products and strong
technical support services to small, low-volume, local
manufacturers offering low prices and limited customer support.
We believe the primary competitive factors in our market are:
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product performance and fitness for purpose;
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product price, installed cost and lifecycle cost;
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product availability; and
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proximity to customer and logistics.
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Our products are priced at a premium to traditional insulation
materials. While our competitors offer many incumbent insulation
products that are priced below our products, 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.
According to The Freedonia Group, industry leading manufacturers
for each of the principal insulation materials include:
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Foamed Plastics. Armacell, BASF, Bayer,
CRH, Dow Chemical, Huntsman, Johns Manville, Kingspan, Knauf
Gips, Owens Corning, Recticel and Saint-Gobain.
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Fiberglass. Johns Manville, Knauf Gips,
Owens Corning, Saint-Gobain and Uralita.
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Mineral Wool. Rockwool, Beijing New
Building Materials, CSR, Johns Manville, KCC, Knauf Gips,
Nichias, Paroc Group, Saint-Gobain and TechnoNICOL.
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Aerogels. Aspen Aerogels and Cabot.
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Other. Pittsburgh Corning for foam
glass insulation; manufacturers of calcium silicate, perlite and
vermiculite tend to be limited to medium- and small-sized,
regional suppliers.
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Within each of our target markets, we encounter these
organizations and a significant number of other aggressive
national, regional and local suppliers. Our competitors are both
seeking to enhance traditional insulation materials and develop
and introduce new and emerging insulation technologies.
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 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.
Within the estimated $32 billion annual global market for
insulation materials, our market share in 2010 was less than
one-tenth of one percent and we expect that in 2011 our market
share will be approximately one-tenth of one percent. Many of
our competitors have greater market presence, larger market
share, longer operating histories, stronger name recognition,
larger customer bases and significantly greater financial,
technical, sales and marketing, manufacturing and other
resources than we have and may be better able to withstand
volatility within the industry and throughout the economy as a
whole while retaining greater operating and financial
flexibility. If our competitors lower their prices, develop new
products or if we are unable to compete effectively, our growth
opportunities, share of the market, margins and profitability
may decline.
In addition, our sales in the building and construction market
in Europe are driven substantially by EU and EU member state
policies and legislation that mandate high levels of energy
efficiency in buildings. The European Unions directive on
the energy performance of buildings, Directive 2010/31/EU, or
EPBD, significantly expands the scope of the original EU
directive on building energy performance adopted in 2002,
Directive 2002/91/EC, by requiring all new buildings as well as
most major renovations to achieve minimum energy performance
requirements. National legislation implementing the minimum
energy performance requirements under the EPBD must be effective
by July 2013. In addition, a number of EU member states provide
various forms of incentives for consumers to improve the energy
efficiency of their homes, including in certain EU member states
tax credits, low-interest loans or grants. While we believe the
policies established under the EPBD and by various EU member
states offer a significant opportunity for our products in the
European building and construction market, this opportunity is
largely dependent on faithful implementation of the directive by
EU member states. Many EU member states have been revising their
national building requirements to comply with the original 2002
directive since its adoption and continue to do so in response
to the EPBD, but levels of implementation and the specific
national requirements have varied substantially from country to
country. Full implementation of the EPBD by any or all of the EU
member states may not occur.
Insulation
Materials
The insulation materials that are currently most widely in use
in the industrial, building and construction, transportation,
appliance and apparel markets include:
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Foamed Plastics. Foamed plastics are
the most prevalent form of insulation material in the world and
are used broadly in the appliance, transportation, industrial
and building and construction markets. Foamed plastic insulation
is made from inexpensive raw materials and is a cost-effective
solution for many end-users. Foamed plastics provide some of the
characteristics of solid insulation and are available in a wide
variety of form factors. However, foamed plastics are generally
not fire resistant.
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Fiberglass. Fiberglass is used
primarily in building and construction and transportation
markets in North America. Fiberglass insulation is made of fine
fibers of glass and is typically adhered with a chemical binder
to a batt form. Fiberglass will not burn, but will melt under
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intensive heat. Fiberglass is inexpensive, easy to install, can
be cut very easily and is primarily used to fill cavity spaces
in building and construction applications.
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Mineral Wool. Mineral wool is commonly
used for insulation and fire protection in the building and
construction market and in high temperature applications in the
industrial market. The two different types of mineral wool are
rock wool, which is produced from natural minerals, and slag
wool, which is produced from iron ore blast furnace slag.
Mineral wool is inexpensive, performs well at high temperatures,
and meets fire safety standards in the building and construction
market, primarily in Europe.
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Specialty Materials. Other insulation
materials are typically used in specialty applications.
Generally, these insulations are either inexpensive, low
performance materials or expensive, high-performance materials.
Perlite and vermiculite are low performance materials used
generally as lightweight, noncombustible insulation. Calcium
silicate is a high-performance alternative that can be molded
for retrofit industrial applications and can withstand high
temperatures. Foamed glass is a high-performance, closed cell,
lightweight material that is used in industrial applications
where chemical absorption is an issue. Vacuum insulated panels
are a relatively new product that provides excellent thermal
performance.
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Foamed plastics, fiberglass and mineral wool materials account
for more than 96% of worldwide insulation demand. The remaining
4% of the market is comprised of specialty materials including
aerogels, perlite, calcium silicate, foamed glass and vacuum
insulated panels.
Seasonality
Historically, we have experienced a relatively higher level of
revenue in the quarter ended December 31 of each year and a
relatively lower level of revenue in the quarter ending
March 31 of each year. As a result, comparing our operating
results on a period-to-period basis may not be meaningful and
historical results may not be indicative of future performance.
Employees
Our success depends, in part, on our employees employed at our
facilities, particularly during peak production periods. As of
June 30, 2011, we had 160 full-time employees and one
part-time employee, with 28 in research and development, 99 in
manufacturing operations and supply chain, 17 in sales and
marketing and 17 in general and administrative functions. Of our
employees, 157 are located in the United States and four are
abroad. We consider our current relationship with our employees
to be good. None of our employees are represented by labor
unions or have collective bargaining agreements.
Legal
Proceedings
In the ordinary course of our business we may be party to
various legal proceedings, including but not limited to those
brought by our current or former employees, customers, suppliers
and competitors, the outcome of which cannot be predicted with
certainty. We are not involved in any legal proceedings that are
expected to have a material adverse effect on our business,
results of operations or financial condition. To the knowledge
of our management, no legal proceedings of a material nature
involving us are pending or threatened by any individuals,
entities or governmental authorities.
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Facilities
Our corporate headquarters are located in Northborough,
Massachusetts, where we occupy approximately 83,000 square
feet under a lease expiring on December 31, 2013. We also
own an approximately 143,000 square foot manufacturing
facility in East Providence, Rhode Island. During 2011, we
entered into leases for a 24,000 square foot facility and a
78,000 square foot facility both located in East Providence,
Rhode Island, which leases expire on February 29, 2016 and
August 31, 2016, respectively. We intend to build a third
production line in our current manufacturing facility in East
Providence and to construct a second manufacturing facility
located in either the United States or Europe. We believe that
our facilities are adequate to meet our current needs, although
if additional space is needed in the future, we believe that
such space will be available on commercially reasonable terms.
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MANAGEMENT
Executive
Officers and Directors
Our executive officers and directors and their respective ages
and positions as of August 15, 2011 are as follows:
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Name
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Age
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Position
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Executive Officers
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Donald R. Young
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54
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President, Chief Executive Officer and Director
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John F. Fairbanks
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Chief Financial Officer, Vice President and Treasurer
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George L. Gould, Ph.D.
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Vice President, Research and Development
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Christopher L. Marlette
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Vice President, Engineering and Design
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Kevin A. Schmidt
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45
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Vice President, Operations
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Harry R. Walkoff
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50
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Vice President, Sales and Marketing
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Non-Employee Directors
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P. Ramsay Battin
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Director(1)(2)
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Robert M. Gervis
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Director(3)
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Craig A. Huff
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Director(1)
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Steven R. Mitchell
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Director(1)(3)
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Mark L. Noetzel
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Chairman of the
Board(1)(4)
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William P. Noglows
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53
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Director(2)(4)
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David J. Prend
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54
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Director(1)(2)
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Richard F. Reilly
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Director(3)(4)
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(1) |
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See Certain Relationships and
Related Person Transactions Agreements with
Stockholders for a discussion of arrangements among our
stockholders pursuant to which this director was selected.
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(2) |
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Member of compensation and
leadership development committee.
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(3) |
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Member of nominating and corporate
governance committee.
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(4) |
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Member of audit committee.
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Donald R. Young has been our President, Chief
Executive Officer and a member of our board of directors since
November 2001. Prior to joining us, Mr. Young served as
Chief Executive Officer of HighWired, a leading venture capital
backed software and
e-learning
company. Prior to that, Mr. Young worked in the United
States and abroad in a broad range of senior operating roles for
Cabot Corporation, a leading global specialty chemical company.
Prior to Cabot Corporation, Mr. Young worked in the
investment business at Fidelity Management & Research.
Mr. Young holds a BA from Harvard College and an MBA from
Harvard Business School. We believe that Mr. Young
possesses specific attributes that qualify him to serve as a
member of our board of directors, including the perspective and
experience he brings as our Chief Executive Officer, which
brings historic knowledge, operational expertise and continuity
to our Board of Directors.
John F. Fairbanks has been our Vice President,
Chief Financial Officer and Treasurer since October 2006. Prior
to joining us, Mr. Fairbanks was a Senior Vice President of
New England Business Service, Inc., or NEBS, and served as
treasurer, chief financial officer and in several senior
operating roles for NEBS during his tenure. Immediately prior to
joining NEBS, Mr. Fairbanks was vice president and
treasurer of M/A-Com, Inc. Mr. Fairbanks holds a BA in
Economics from Middlebury College and an MBA in Finance from the
Wharton School at University of Pennsylvania.
George L. Gould, Ph.D. has been with us since
our inception in 2001 and has served as our Vice President,
Research and Development since April 2011. Prior to this role,
Dr. Gould served in a variety of positions with us, most
recently as our Director, Research and Development from February
2009 to April 2011 and Director, Research from June 2005 to
February 2009. Prior to joining us, Dr. Gould was employed
by our predecessor, Aspen Systems. Prior to joining Aspen
Systems, Dr. Gould was a chemistry professor at the
University of Illinois at Chicago. Dr. Gould holds B.A. in
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Chemistry from the College of Wooster, a Ph.D. in Inorganic
Chemistry from Yale University and carried out his post-doctoral
training at Brookhaven National Laboratory.
Christopher L. Marlette has been with us since
July 2004 and has served as our Vice President, Engineering and
Design since April 2011. From February 2007 to April 2011,
Mr. Marlette served as our Director, Manufacturing and
Engineering, and prior to that, from July 2004 to February 2007,
he served as our Director, Plant Engineering and Maintenance.
Mr. Marlette holds a B.S. in Mechanical Engineering from
Ohio University.
Kevin A. Schmidt has been with us since June 2004
and has served as our Vice President, Operations since February
2007. From June 2004 to February 2007, Mr. Schmidt served
as our Vice President, Manufacturing. Prior to joining us,
Mr. Schmidt worked for the Dow Chemical Company as a plant
and site leader on global business and operational teams.
Mr. Schmidt holds a BS in Chemical Engineering from
Pennsylvania State University.
Harry R. Walkoff has been our Vice President of
Sales and Marketing since December 2006. Prior to joining us,
Mr. Walkoff served as vice president of marketing for
FOAMGLAS and Glass Block products with Pittsburgh Corning
Corporation. Mr. Walkoff holds a BS in Geophysical
Engineering from Colorado School of Mines.
P. Ramsay Battin has served on our board of
directors since June 2008. Mr. Battin is a director with
Arcapita Inc. and, prior to joining Arcapita in March 2006, was
a partner with Southeastern Technology Fund, an early and growth
stage venture capital firm. Mr. Battin has also served in
the corporate finance departments at Lehman Brothers and
Robinson-Humphrey in New York, London and Atlanta.
Mr. Battin currently serves on the boards of directors of
FrameMax, Prenova and Fidelis SeniorCare, and previously served
as a member of the board of directors of Best Doctors, RTO
Software, Seventh Wave and SPI Dynamics. Mr. Battin holds
an AB in History from Princeton University and an MBA from
Harvard Business School. We believe that Mr. Battin
possesses specific attributes that qualify him to serve as a
member of our board of directors, including his experience
building, investing in and growing technology companies and his
experience with sophisticated transactions as an investment
banker. In addition, because Mr. Battin has served on many
boards of directors, we believe he has substantial experience
regarding how boards can and should effectively oversee and
manage companies, and a significant understanding of governance
issues.
Robert M. Gervis has served on our board of
directors since January 2011. Mr. Gervis is Managing Member
and President of Epilogue, LLC, a private advisory firm he
founded in April 2009. Prior to founding Epilogue, LLC,
Mr. Gervis served in various senior executive positions at
Fidelity Investments from July 1994 to March 2009.
Mr. Gervis management experience during his tenure
with Fidelity Investments included serving as (i) Chief
Executive Officer of an oil and natural gas exploration and
production company from December 2002 to March 2006;
(ii) Chief Operating Officer of a full-service real estate
development and investment company that specialized in the
acquisition, design, development and management of high-profile
projects in both the United States and foreign markets from May
2002 to June 2003; and (iii) Managing Director of a private
equity division that invested in a broad range of industries,
including technology, biotechnology, real estate, oil and gas
exploration and production and telecommunications from March
2002 to March 2006. Prior to joining Fidelity Investments,
Mr. Gervis was a partner at the law firm of Weil,
Gotshal & Manges. He currently also serves on the
boards of directors of Georgia Gulf Corporation (NYSE: GGC), and
Tronox Incorporated (OTC: TROX.PK). Mr. Gervis previously
served as a director of Ballyrock Investment Advisors, Inc., a
registered investment adviser that manages Fidelity
Investments structured credit business. Mr. Gervis
holds a BS in Industrial Engineering from Lehigh University and
a JD from The George Washington University. Mr. Gervis also
is a CFA charterholder. We believe that Mr. Gervis
possesses specific attributes that qualify him to serve as a
member of our board of directors and chair of our nominating and
governance committee, including his extensive experience in
finance, capital markets and investing, his management skills,
as well as his experience with sophisticated transactions as a
corporate attorney. In addition, because Mr. Gervis has
served on many boards of
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directors, we believe he has substantial experience regarding
how boards can and should effectively oversee and manage
companies, and a significant understanding of governance issues.
Craig A. Huff has served on our board of directors
since September 2010, and prior to that served on our board of
directors from February 2005 to August 2009. Mr. Huff is
co-Chief Executive Officer and co-founder of Reservoir Capital
Group, or Reservoir, a privately-held investment firm he formed
in 1997. Prior to forming Reservoir, Mr. Huff was a Partner
at Ziff Brothers Investments. Mr. Huff currently serves on
the boards of directors of Contour Global Management, Inc.;
Intrepid Aviation Group, LLC; Amerilife Group, LLC; and AB
Resources Management, Inc. Mr. Huff is also President of
the Board of Trustees of St. Bernards School and serves on
the Board of Trustees of the Princeton Theological Seminary and
on the Board of Advisors of the Center for Regenerative Medicine
(Massachusetts General Hospital/Harvard Stem Cell Institute).
Mr. Huff also served in the U.S. Navy as a nuclear
engineer and nuclear submarine officer. Mr. Huff holds a BS
in Engineering Physics from Abilene Christian University and
received an MBA from Harvard Business School. We believe that
Mr. Huff possesses specific attributes that qualify him to
serve as a member of our board of directors, including his
experience building, investing in and growing technology
companies and his executive experience as co-Chief Executive
Officer of Reservoir, as well as his scientific background. In
addition, because Mr. Huff has served on many boards of
directors, we believe he has substantial experience regarding
how boards can and should effectively oversee and manage
companies, and a significant understanding of governance issues.
Steven R. Mitchell has served on our board of
directors since August 2009. Mr. Mitchell has served as the
managing director of Argonaut Private Equity, LLC, or Argonaut,
since November 2004. Prior to joining Argonaut,
Mr. Mitchell was a principal in both Radical Incubation and
2929 Entertainment. He currently serves on the boards of
directors of Global Client Solutions, LLC; Westec Intelligent
Surveillance, LLC; Yulex Corporation; Solyndra, Inc.; Stepstone
Group; Southwest United Industries, Inc.; Green Hills Software,
Inc.; Newco Valves, LLC; S&R Compression, LLC; DMB Real
Estate, LLC; Aimbridge Hospitality LP; Cordys Holding, BV;
and Major Incorporated, LLC. From 1996 to 1999,
Mr. Mitchell was a corporate attorney at Gibson,
Dunn & Crutcher. Mr. Mitchell holds a BBA in
Marketing from Baylor University and a JD from University of
San Diego School of Law. We believe that Mr. Mitchell
possesses specific attributes that qualify him to serve as a
member of our board of directors, including his experience
building, investing in and growing several manufacturing,
technology and product companies and his experience with
sophisticated transactions as a corporate attorney. In addition,
because Mr. Mitchell has served on many boards of
directors, we believe he has substantial experience regarding
how boards can and should effectively oversee and manage
companies, and a significant understanding of governance issues.
Mark L. Noetzel has served on our board of
directors since December 2009. Mr. Noetzel has worked as a
consultant to several high growth private companies since May
2009. From June 2007 to May 2009, Mr. Noetzel was president
and chief executive officer of Cilion, Inc., a biofuels company.
Prior to joining Cilion in 2007, he had served in several senior
positions at BP plc, including Group Vice President, Global
Retail, from 2003 until 2007, Group Vice President, B2B Fuels
and New Markets, during 2001 and 2002 and Group Vice President,
Chemicals, from 1997 until 2001. Prior to those senior
management roles with BP plc, Mr. Noetzel served in other
management and non-management roles with Amoco from 1981 until
BP plc acquired Amoco Corporation in 1998. Mr. Noetzel is
also chairman of the board of directors of Georgia Gulf
Corporation (NYSE: GGC). Mr. Noetzel holds a BA in
Political Science from Yale University and an MBA from the
Wharton School at University of Pennsylvania. We believe that
Mr. Noetzel possesses specific attributes that qualify him
to serve as a member and chairman of our board of directors,
including more than ten years experience in senior executive
management roles with large, international businesses within the
chemical and fuel industries and his experience as chairman of
the board of an existing public company.
William P. Noglows has served on our board of
directors since January 2011. Mr. Noglows has served as
Chairman, President and Chief Executive Officer of Cabot
Microelectronics Corporation
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(NASDAQ: CCMP), a worldwide supplier of consumable products used
in the semiconductor manufacturing process, since November 2003.
Mr. Noglows was a primary founder of Cabot
Microelectronics, which has been a publicly-traded entity since
2000. From 1983 to 2003, Mr. Noglows was an Executive Vice
President and General Manager at Cabot Corporation, where he
served in a number of roles including Research and Development,
Operations and Global Business Leadership. Mr. Noglows is
also a director of Littelfuse, Inc. (NASDAQ: LFUS), a leading
supplier of circuit protection products for the electronics
industry. Mr. Noglows holds a BS in Chemical Engineering
from the Georgia Institute of Technology. We believe that
Mr. Noglows possesses specific attributes that qualify him
to serve as a member of our board of directors, including his
experience as chief executive officer of a leading public
company and his expertise in developing technology. In addition,
because Mr. Noglows has served on boards of directors of
two other public companies, we believe he has significant
experience regarding how boards can and should effectively
oversee and manage companies, and a significant understanding of
governance issues.
David J. Prend has served on our board of
directors since May 2001. Mr. Prend is the co-founder of
RockPort Capital Partners and has served as a managing general
partner since 1998. Mr. Prend began his career in the
energy industry as an engineer at Bechtel Corporation where he
worked in the area of advanced energy technologies. From 1984
until 1987, he worked at Amoco Corporation in the
Treasurers Department, and in the chemical and upstream
oil and gas subsidiaries of Amoco. He later joined Shearson
Lehman Hutton Inc. in their Natural Resources Investment Banking
Group where he advised companies in the energy, mining and
forest products industries. In 1990, he joined Salomon Brothers
where he was promoted to Managing Director and headed the Global
Energy Investment Banking Group. He currently serves on the
boards of directors of Achates Power, Inc., Aspen Products
Group, Inc., Hycrete Technologies, Inc., InVisage Technologies,
Inc., SatCon Technology Corporation (NASDAQ: SATC), Solyndra,
Inc. and SustainX, Inc. He is also a member of the National
Advisory Council to the National Renewable Energy Laboratory, or
NREL, and is the chairman of the Solar Technology Review Panel
for NREL. Mr. Prend holds a BS in Civil Engineering from
University of California at Berkeley and an MBA from Harvard
Business School. We believe that Mr. Prend possesses
specific attributes that qualify him to serve as a member of our
board of directors and chair of our compensation and leadership
development committee, including his experience in the renewable
energy sector and venture capital industries. In addition,
because Mr. Prend has served on many boards of directors,
we believe he has substantial experience regarding how boards
can and should effectively oversee and manage companies, and a
significant understanding of governance issues.
Richard F. Reilly has served on our board of
directors since July 2010. For 31 years prior to his
retirement in 2009, Mr. Reilly specialized in audits of
manufacturing, technology and distribution companies with KPMG
LLP, with 28 years in the role of senior audit partner.
Prior to his tenure with KPMG LLP Mr. Reilly worked in
private industry, serving in various accounting management roles
in technology and manufacturing companies. Mr. Reilly also
served for ten years in the U.S. Army reserve as a combat
engineer officer. Mr. Reilly currently serves as a member
of the board of trustees and as chair of the audit committee of
Perkins School for the Blind, a non-profit institution
headquartered in Boston, Massachusetts. Mr. Reilly holds a
BS in Business Administration from Northeastern University and
is a Certified Public Accountant. We believe that
Mr. Reilly possesses specific attributes that qualify him
to serve as a member of our board of directors and to serve as
chair of our audit committee, including a deep understanding of
accounting principles and financial reporting rules and
regulations, acquired over the course of his career at KPMG LLP
and in private industry. In addition, we believe Mr. Reilly
has significant experience overseeing, from an independent
auditors perspective, the financial reporting processes of
large public companies in a variety of industries with a global
presence.
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Composition of
our Board of Directors
Our board of directors currently consists of nine members, eight
of whom are non-employee directors. Our directors hold office
until their successors have been elected and qualified or until
the earlier of their death, resignation or removal. There are no
family relationships among any of our directors or executive
officers.
In accordance with our restated certificate of incorporation and
restated by-laws, our board of directors will be divided into
three classes with staggered three-year terms. At each annual
meeting of stockholders commencing with the meeting in 2012, the
successors to the directors whose terms then expire will be
elected to serve until the third annual meeting following the
election. At the closing of the offering made hereby, our
directors will be divided among the three classes as follows:
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the Class I directors will be Messrs. Gervis, Noetzel and
Reilly and their terms will expire at the annual meeting of
stockholders to be held in 2012;
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the Class II directors will be Messrs. Battin, Huff and
Young and their terms will expire at the annual meeting of
stockholders to be held in 2013; and
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the Class III directors will be Messrs. Mitchell, Noglows
and Prend and their terms will expire at the annual meeting of
stockholders to be held in 2014.
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Our restated certificate of incorporation provides that the
authorized number of directors comprising our board of directors
shall be fixed by our restated by-laws. Any additional
directorships resulting from an increase in the number of
directors will be distributed among the three classes so that
each class will consist of approximately one-third of the
directors.
Director
Independence
Under applicable NYSE rules, a director will qualify as
independent if our board of directors affirmatively
determines that he or she has no material relationship with
Aspen Aerogels (either directly or as a partner, stockholder or
officer of an organization that has a relationship with us). Our
board of directors will establish guidelines to assist it in
determining whether a director has such a material relationship.
Ownership of a significant amount of our stock, by itself, does
not constitute a material relationship.
Pursuant to NYSE rules, a director employed by us cannot be
deemed to be an independent director, and
consequently Mr. Young does not qualify as an independent
director.
The applicable rules and regulations of the NYSE require us to
have a majority of independent directors within one year of the
date of the completion of this offering. Our board has
determined that each of Messrs. Battin, Gervis, Huff, Mitchell,
Noetzel, Noglows, Prend and Reilly meet the categorical
standards described above, that none of these directors has a
material relationship with us and that each of these directors
is independent as determined under
Section 303A.02(b) of the NYSE Listed Company Manual.
Committees of
the Board of Directors
Our board of directors has established an audit committee, a
compensation and leadership development committee, or
compensation committee, and a nominating and corporate
governance committee. Each committee operates under a charter
approved by our board of directors. Following the closing of
this offering, copies of each committees charter will be
posted on the Investor Relations section of our website, which
is located at www.aerogel.com. The composition and function of
each of these committees are described below.
Audit Committee. Upon the completion of
this offering, our audit committee will be comprised of
Messrs. Reilly, Noetzel and Noglows. Our board of directors
has determined that Mr. Reilly is an
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audit committee financial expert, as defined by the rules of the
SEC, and satisfies the financial sophistication requirements of
applicable NYSE rules. Our audit committee is authorized to:
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approve and retain the independent auditors to conduct the
annual audit of our financial statements;
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review the proposed scope and results of the audit;
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review and pre-approve audit and non-audit fees and services;
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review accounting and financial controls with the independent
auditors and our financial and accounting staff;
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review and approve transactions between us and our directors,
officers and affiliates;
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recognize and prevent prohibited non-audit services;
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establish procedures for complaints received by us regarding
accounting matters; and
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oversee internal audit functions, if any.
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The applicable rules and regulations of the SEC and NYSE require
us to have one independent audit committee member upon the
listing of our common stock on NYSE, a majority of independent
members within 90 days of the date of the completion of
this offering and all independent audit committee members within
one year of the date of the completion of this offering.
Compensation Committee. Upon completion
of this offering, our compensation committee will be comprised
of Messrs. Noglows, Battin and Prend. Our compensation
committee is authorized to:
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review and recommend the compensation arrangements for
management;
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establish and review general compensation policies with the
objective to attract and retain superior talent, to reward
individual performance and to achieve our financial goals;
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administer our stock incentive and purchase plans;
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ensure appropriate leadership development and succession
planning is in place; and
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oversee the evaluation of management.
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The applicable rules and regulations of the NYSE require us to
have one independent compensation committee member upon the
listing of our common stock on NYSE, a majority of independent
members within 90 days of the date of the completion of
this offering and all independent compensation committee members
within one year of the date of the completion of this offering.
Nominating and Governance
Committee. Upon completion of this offering,
our nominating and governance committee will be comprised of
Messrs. Gervis, Mitchell and Reilly. Our nominating and
governance committee is authorized to:
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identify and nominate candidates for election to the board of
directors;
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review and recommend the compensation arrangements for certain
members of our board of directors;
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develop and recommend to the board of directors a set of
corporate governance principles applicable to our
company; and
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oversee the evaluation of our board of directors.
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The applicable rules and regulations of the NYSE require us to
have one independent nominating and governance committee member
upon the listing of our common stock on NYSE, a majority of
independent members within 90 days of the date of the
completion of this offering and all independent nominating and
governance committee members within one year of the date of the
completion of this offering.
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Compensation
Committee Interlocks and Insider Participation
No member of our compensation committee has at any time been an
employee of ours. None of our executive officers serves as a
member of another entitys board of directors or
compensation committee that has one or more executive officers
serving as a member of our board of directors or compensation
committee.
Corporate
Governance Guidelines
Our board of directors will adopt corporate governance
guidelines to assist the board in the exercise of its duties and
responsibilities and to serve the best interests of our company
and our stockholders. Following this offering, a copy of these
guidelines will be posted on the Investor Relations section of
our website, which is located at www.aerogel.com. These
guidelines, which provide a framework for the conduct of our
boards business, will provide that:
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our boards principal responsibility is to oversee the
management of Aspen Aerogels;
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a majority of the members of our board of directors shall be
independent directors;
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directors have full and free access to management and employees
of our company, and the right to hire and consult with
independent advisors at our expense;
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all directors are expected to participate in continuing director
education on an ongoing basis; and
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at least annually, our board of directors and its committees
will conduct self-evaluations to determine whether they are
functioning effectively.
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Code of
Business Conduct and Ethics
We will adopt a code of business conduct and ethics that will
apply to all of our employees, officers and directors, including
those officers responsible for financial reporting. The code of
business conduct and ethics will be available on our website at
www.aerogel.com upon completion of this offering. We expect that
any amendments to the code, or any waivers of its requirements,
will be disclosed on our website.
Limitation of
Directors and Officers Liability and
Indemnification
The Delaware General Corporation Law authorizes corporations to
limit or eliminate, subject to specified conditions, the
personal liability of directors to corporations and their
stockholders for monetary damages for breach of their fiduciary
duties. Our existing third amended and restated certificate of
incorporation, as amended, and the restated certificate of
incorporation to be effective upon the completion of this
offering limits the liability of our directors to the fullest
extent permitted by Delaware law.
We have obtained director and officer liability insurance to
cover liabilities our directors and officers may incur in
connection with their services to us. Our restated certificate
of incorporation and restated by-laws to be effective upon the
completion of this offering also provide that we will indemnify
and advance expenses to any of our directors and officers who,
by reason of the fact that he or she is one of our officers or
directors, is involved in a legal proceeding of any nature. We
will repay certain expenses incurred by a director or officer in
connection with any civil, criminal, administrative or
investigative action or proceeding, including actions by us or
in our name. Such indemnifiable expenses include, to the maximum
extent permitted by law, attorneys fees, judgments, fines,
ERISA excise taxes, penalties, settlement amounts and other
expenses reasonably incurred in connection with legal
proceedings. A director or officer will not receive
indemnification if he or she is found not to have acted in good
faith and in a manner he or she reasonably believed to be in, or
not opposed to, our best interest.
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We have entered into indemnification agreements with each of our
non-employee directors and will enter into similar agreements
with certain officers. These agreements provide that we will,
among other things, indemnify and advance expenses to our
directors and officers for certain expenses, including
attorneys fees, judgments, fines and settlement amounts
incurred by any such person in any action or proceeding,
including any action by us arising out of such persons
services as our director or officer, or any other company or
enterprise to which the person provides services at our request.
We believe that these provisions and agreements are necessary to
attract and retain qualified persons as directors and officers.
Such limitation of liability and indemnification does not affect
the availability of equitable remedies. In addition, we have
been advised that in the opinion of the SEC, indemnification for
liabilities arising under the Securities Act is against public
policy as expressed in the Securities Act and is therefore
unenforceable.
There is no pending litigation or proceeding involving any of
our directors, officers, employees or agents in which
indemnification will be required or permitted. We are not aware
of any threatened litigation or proceeding that may result in a
claim for such indemnification.
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COMPENSATION
Compensation
Discussion and Analysis
This Compensation Discussion and Analysis provides an overview
of our executive compensation philosophy, the overall objectives
of our executive compensation program, and the components of our
executive compensation program. In addition, we explain how and
why we arrived at specific compensation policies and decisions
involving our named executive officers listed in the Summary
Compensation Table set forth below during 2010.
This Compensation Discussion and Analysis contains
forward-looking statements that are based on our current plans,
considerations, expectations and determinations regarding future
compensation programs. The actual compensation programs that we
adopt may differ materially from currently planned programs as
summarized in this discussion.
Significant
Executive Compensation Actions in 2010
As reflected in our compensation philosophy described below, we
set the compensation of our executive officers, including our
named executive officers, based on their ability to achieve
annual operational objectives that further our long-term
business objectives and to create sustainable long-term
stockholder value in a cost-effective manner. Accordingly, our
2010 compensation actions and decisions were based on our
executive officers accomplishments in these dual areas.
For 2010, we took the following actions with respect to the
compensation of our named executive officers:
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increased the base salary of each named executive officer by
three percent;
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awarded bonuses above a pre-established target based on revenue
performance and awarded discretionary bonuses to our CEO,
Mr. Young, and our Vice President Sales and Marketing,
Mr. Walkoff, who were instrumental in helping the company
achieve its 2010 revenue performance and sales order activity;
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approved stock option awards to provide additional incentives,
satisfy our retention objectives and reward individual
performance for 2010; and
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entered into employment agreements with our executive officers,
including our named executive officers, that provide for
severance and change of control benefits.
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Executive
Compensation Philosophy and Objectives
We have been developing a new technology in a competitive
business environment against much larger entrenched competitors.
To thrive in this environment, we must continuously develop and
refine our product and its manufacturability. To achieve these
objectives, we need a highly talented and seasoned team of
technical and business professionals. To meet this challenge,
our compensation philosophy has been to offer our executive
officers competitive cash compensation and benefits packages and
significant upside potential focused on long-term value creation
through equity compensation.
We have designed our executive compensation program to:
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provide total compensation opportunities which enable us to
recruit and retain executives with the experience and skills to
manage the development of our products and the profitable growth
of our company;
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create a direct and meaningful link between the compensation we
pay and both our business results and each executives
performance;
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establish a clear alignment between the interests of our
executives and the interests of our stockholders;
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reinforce a culture of ownership, excellence and
urgency; and
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offer total compensation that is competitive and fair.
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Compensation
Program Design
To date, the compensation of our executive officers, including
our named executive officers, has consisted of base salary, an
annual cash bonus, equity compensation in the form of stock
options, employee benefits and certain post-employment
arrangements.
A key component of our executive compensation program has been
grants of stock options to purchase shares of our common stock.
As a privately-held company, we have emphasized the use of
equity awards to incentivize our employees, including our named
executive officers, to focus on the growth of our overall
enterprise value and, correspondingly, to create value for our
stockholders. We believe that stock options offer our employees,
including our named executive officers, a valuable long-term
incentive that aligns their interests with the long-term
interests of our stockholders.
We also offer cash compensation in the form of base salaries and
annual cash bonuses. For 2010, our bonus program focused on the
achievement of corporate financial objectives that will
reinforce and are aligned with our longer-term goal of
profitable growth.
We have not adopted any formal policies or guidelines for
allocating compensation between current and long-term
compensation, between cash and non-cash compensation, or among
different forms of non-cash compensation. Instead, we review
each component of executive compensation separately and also
take into consideration the value of each executives
compensation package as a whole and its relative size in
comparison to the other members of the executive team.
Compensation-Setting
Process
To obtain the skills and experience that we believe are
necessary to successfully lead our company, most of our
executive officers have been hired from larger organizations and
have significant experience in their roles. Their initial
compensation arrangements have been determined in individual
negotiations with each individual in connection with his or her
joining us, taking into account his or her qualifications,
experience and prior compensation levels. Historically, our CEO
has been responsible for negotiating these arrangements (except
with respect to his own compensation) with the oversight and
final approval of the board of directors.
Thereafter, in recent years, our compensation and leadership
development committee, referred to as our compensation
committee, has been responsible for overseeing our executive
compensation program, including recommending to our board of
directors for their approval adjustments to the compensation
arrangements of our CEO and other executive officers. Typically,
our CEO makes recommendations to our compensation committee
regarding compensation matters, except with respect to his own
compensation, and often attends the compensation committee
meetings, while excusing himself from any discussions involving
his own compensation. The recommended compensation of our CEO is
proposed by our compensation committee. Once finalized, all
recommendations for executive compensation are then presented to
our board of directors for their approval. We did not engage in
benchmarking, or the use of compensation data about other
companies as a reference point on which to base, justify or
provide a framework for a compensation decision, for 2010. We
also did not review or consider a broad-based third-party survey
to obtain a general understanding of current compensation
practices for 2010. In March 2011, our board of directors
approved a compensation committee charter that delegates to our
compensation committee the authority to approve the compensation
of our executive officers, including our named executive
officers.
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Our compensation committee is authorized to retain the services
of executive compensation advisors from time to time, as it sees
fit, in connection with the carrying out of its duties. In April
2011, our compensation committee engaged Compensia, Inc., a
national compensation consulting firm that provides executive
compensation advisory services, to assist it in evaluating our
executive compensation program and provide guidance in
administering our future executive and equity compensation
programs. Compensia serves at the discretion of our compensation
committee.
In April 2011, Compensia assisted our compensation committee in
developing a peer group of companies to use in understanding
current compensation practices, Compensia also assisted our
compensation committee in assessing the competitiveness of our
executive officers compensation against those of similarly
situated executive officers at late stage venture capital
financed private companies and comparable public companies.
Based on our review of this compensation information, our
compensation committee considered adjustments to our named
executive officers compensation to ensure alignment with
our compensation objectives and current compensation practices
for 2011. In connection with considering these adjustments, we
did not benchmark or otherwise target a specific percentile of
the market data as a reference point in making these
compensation adjustments. Instead, in making their decisions,
the committee considered the compensation philosophy of the
company, the criticality of the position, the performance of the
executive, the responsibilities of the position, recent
promotions, the committee members experience and knowledge
of the market as well as the market data as a source of current
compensation practices. The compensation adjustments included
selected increases in the base salaries of certain executive
officers, including our Vice President, Engineering and Design,
who had recently been promoted; an increase in the target bonus
percentages under the 2011 bonus program for all executive
officers in order to provide a stronger link between annual
incentive pay and annual performance; and an annual grant of
stock options to the executive officers to ensure that they
continue to have appropriate amounts of unvested equity as an
incentive and retention tool after our initial public offering.
Executive
Compensation Program Components
The following describes each component of our executive
compensation program, the rationale for each, and how awards are
determined.
Base
Salary
Base salary is the primary fixed component of our executive
compensation program. We use base salary to compensate our named
executive officers for services rendered during the fiscal year,
and to ensure that we remain competitive in attracting and
retaining executive talent. Each year our compensation committee
conducts a review of each executive officers base salary,
with input from our CEO, and makes adjustments it determines to
be reasonable and necessary to reflect the scope of an executive
officers performance, individual contributions and
responsibilities, position (in the case of a promotion), and
market conditions.
In 2009, our CEO and CFO voluntarily reduced their base salaries
by approximately 11% and 8%, respectively, and all other
executive officers had their base salaries frozen. These actions
were taken to conserve cash in the face of the recession. In
2010, as business recovered, our compensation committee approved
a company-wide base salary merit increase. Each of our executive
officers received a 3% base salary increase as part of the
company-wide program. For 2011, our executive officers each
received a 3% base salary increase as part of the annual
company-wide base salary merit increase. The employment
agreements we entered into with our CEO and CFO in March 2010
reflect the base salary increases that have been made on the
reduced base salary amounts.
The 2010 base salaries of our named executive officers are
discussed below under Employment Arrangements
with Our Named Executive Officers.
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Cash
Bonuses
We use cash bonuses to motivate our executive officers to
achieve our annual financial and strategic objectives. Prior to
2010, bonuses were paid at the discretion of the board of
directors based on their review of the performance of each
executive officer and the company and considering the
recommendations of our CEO. For 2010, our compensation committee
developed a formal bonus program with goals based on company
performance. For 2010, our CEOs target bonus payout was
30% of his annual base salary, our CFO, Vice President,
Operations and Vice President, Sales and Marketing target bonus
payout was 20% of each of their annual base salaries and all
other employees participating in the bonus program, including
our Vice President, Engineering and Design, had a target bonus
payout equal to 15% of each employees respective annual
base salary.
Upon the recommendation of our compensation committee, our board
of directors approved our 2010 corporate bonus plan on
March 17, 2010, and amended such plan on July 21,
2010. Under both the original and amended bonus plan, the
performance metrics were revenue and Adjusted EBITDA. We define
Adjusted EBITDA as earnings (loss) from operations before
depreciation and amortization, share-based compensation expense
and impairment charges.
The amendment to the plan maintained the revenue goal of
$41.75 million and changed the Adjusted EBITDA target from
a target dollar amount for the year to a goal of achieving
positive Adjusted EBITDA in the third and fourth fiscal
quarters. Our compensation committee made this change to focus
the plan participants on achieving positive Adjusted EBITDA for
the last six months of our fiscal year.
Pursuant to the 2010 corporate bonus plan, each named executive
officers 2010 bonus award amount was determined based upon
the achievement of the performance metrics identified above. If
these metrics were met or exceeded, our CEO was entitled to 30%
of his annual base salary and an additional 4% of annual base
salary for every 1% by which the actual revenue exceeded the
target amount; our CFO, Vice President, Operations and Vice
President, Sales and Marketing were entitled to 20% of their
respective annual base salaries and an additional 3% of annual
base salary for every 1% by which the actual revenue exceeded
the target amount; and our Vice President, Engineering and
Design was entitled to 15% of his annual base salary and an
additional 2% of annual base salary for every 1% by which the
actual revenue exceeded the target amount. For 2010, we achieved
positive Adjusted EBITDA in the third and fourth fiscal quarters
and we exceeded the revenue target by 3.37% with actual revenue
of $43.2 million, so that our named executive officers
received a payout above the target amount. The 2010 bonus
payments for our CEO, CFO, Vice President, Operations, Vice
President, Sales and Marketing and Vice President, Engineering
and Design were $140,503 (43.5% of base salary), $72,215,
$78,414, $70,481 (each 30.1% of base salary) and $40,728 (21.7%
of base salary), respectively. A description of our 2010
corporate bonus plan as amended is described below under
2010 Corporate Bonus Plan.
In addition to the payments made under our 2010 corporate bonus
plan, our compensation committee decided to pay discretionary
bonuses to the CEO and the Vice President, Sales and Marketing
to recognize their contributions to our 2010
above-plan
revenue performance and order activity. The Committee determined
that both executive officers played key roles in growing our
revenue and we believe that they would likely have received
higher bonuses under our 2010 corporate bonus plan but for our
capacity constraints in 2010. The amounts were determined by our
compensation committee based on its judgment of each
individuals performance, their experience, each
executives compensation and internal pay equity among the
executive officers to ensure that the relative pay of each
executive officer is appropriate in the context of the duties,
responsibilities and criticality of each executive officer to
the company.
In May 2011, in connection with our compensation
committees review of our executive compensation program,
the target bonus payouts for our named executive officers were
increased. Our compensation committee determined the increases
based on its judgment and taking into account the positive cash
flow that we are starting to generate, the desire for increased
incentive for achieving
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annual financial goals and the greater emphasis on variable cash
compensation in public companies. The increased target bonus
payouts are 50% of our CEOs annual base salary, 35% of the
annual base salaries of our CFO, Vice President, Operations and
Vice President, Sales and Marketing and 25% of the annual base
salary of our Vice President, Engineering and Design.
Equity
Compensation
We use equity awards to incentivize and reward our executive
officers, including our named executive officers, for long-term
corporate performance based on the value of our common stock
and, thereby, to align the interests of our executive officers
with those of our stockholders.
To date, we have not applied a rigid formula in determining the
size of the equity awards that have been granted to our
executive officers. Instead, initial awards have been
established through arms-length negotiation at the time the
individual was hired. In making these awards, our compensation
committee has exercised its judgment, taking into consideration,
among other things, the prospective role and responsibility of
the executive, the long-term potential of the executive officer,
competitive factors, the amount of equity-based compensation
held by the executive officer at his or her former employer, and
the cash compensation received by the executive officer. Based
upon these factors, our compensation committee determined the
size of the award for each of our named executive officers at a
level it considered appropriate to create a meaningful
opportunity for reward predicated on the creation of long-term
stockholder value.
After an executive joins the company, upon the recommendation of
our compensation committee, our board of directors has granted
additional equity awards to our executive officers, including
our named executive officers, on an ad hoc basis. In
recommending these awards, our compensation committee has
exercised its judgment as to the amount of the awards, taking
into consideration the performance of our company, its
evaluation of the expected and actual performance of each
executive officer, his or her individual contributions and
responsibilities, internal parity of awards granted to our
executive officers who are considered at the same level of
responsibility, the overall level of equity compensation at the
company and market conditions.
In November 2009, the company raised additional equity capital
at a price and amount that significantly diluted the ownership
stakes of our employees, including our executive officers. As a
result of this financing, which also resulted in our then
current stock price being well below the exercise price of the
employees existing option grants, the company exchanged
all then outstanding stock options and issued new stock options
with an exercise price equal to the then current fair market
value of the stock and with a new vesting schedule. The company
took this step to ensure that the employees were incentivized to
continue to execute on the companys long-term business
strategy despite the adverse effects of the recession. The new
vesting schedule provided that 25% of the shares were vested
immediately upon grant, with the remaining shares vesting over
three years.
In November 2010, we made a grant of stock options to select
high performing employees, including our named executive
officers. Our grants were based on an overall budget of stock
options our board of directors determined appropriate and was
allocated based on the recommendations of our CEO, except for
his grant. Our CEO used his judgment to develop his
recommendations and considered the performance and criticality
of each executive as well as the internal parity of the grant
sizes among our executive officers and without use of
competitive market information. Similarly, our compensation
committee used its judgment to determine the size of the stock
option grant for our CEO taking into account its assessment of
his performance, the grant sizes of our other executive officers.
The equity awards granted to the named executive officers during
2010 are set forth below under Grants of
Plan-Based Awards.
122
In May 2011, our compensation committee granted the following
additional stock options to the executive officers below in
recognition of their past contributions to the company and to
provide continued incentive and retention going forward:
|
|
|
|
|
|
|
Number of
|
Name
|
|
Stock Options
|
|
Donald R. Young
|
|
|
250,000
|
|
John F. Fairbanks
|
|
|
100,000
|
|
Kevin A. Schmidt
|
|
|
100,000
|
|
Harry R. Walkoff
|
|
|
100,000
|
|
Christopher L. Marlette
|
|
|
40,000
|
|
Retirement and
Other Benefits
We have established a tax-qualified Section 401(k)
retirement savings plan for our employees, including our named
executive officers. Additional benefits received by our
executive officers, including our named executive officers,
include medical, dental and vision benefits, medical and
dependent care flexible spending accounts, short-term and
long-term disability insurance, accidental death and
dismemberment insurance and basic life insurance coverage. These
benefits are provided to our executive officers on the same
basis as to all of our full-time employees.
We design our employee benefit programs to be affordable and
competitive in relation to the market as well as compliant with
applicable laws and practices. We adjust our employee benefit
programs as needed based upon regular monitoring of applicable
laws and practices and the competitive market.
Currently, we do not view perquisites or other personal benefits
as a significant component of our executive compensation
program. In the future, however, we may provide such items in
limited circumstances, such as where we believe it is
appropriate to assist an individual in the performance of his or
her duties, to make our executive officers more efficient and
effective, and for recruitment, motivation, or retention
purposes. All future practices with respect to perquisites or
other personal benefits will be approved and subject to periodic
review by our compensation committee.
Post-Employment
Compensation
In March 2010, we entered into employment agreements with our
named executive officers that include change of control and
severance benefits. These agreements were recently amended and
restated to reflect our anticipated public company status, but
such amendment did not increase or decrease the amount of
severance or change of control benefits.
We believe that the severance and change of control benefits set
forth in the employment agreements entered into in March 2010
assist us in retaining all of our named executive officers. We
also believe that these benefits help our executive officers
maintain continued focus and dedication to their assigned duties
to maximize stockholder value if there is a potential
transaction that could involve a change of control of our
company. The terms of these agreements were determined by our
board of directors based on their experience in developing
compensation programs and their general understanding of the
market terms for severance and change of control benefits. For a
summary of the material terms and conditions of these
provisions, see Potential Payments Upon
Termination or Change of Control.
Tax and
Accounting Considerations
Deductibility of
Executive Compensation
As a private company, in making our compensation decisions, we
have not considered Section 162(m) of the Internal Revenue
Code, or the Code, which disallows a tax deduction to any
123
publicly-held corporation for any remuneration in excess of
$1 million paid in any taxable year to its chief executive
officer and each of its other named executive officers (other
than its chief financial officer) unless an exception applies.
We expect our compensation arrangements put in place prior to
our initial public offering and for several years thereafter
will be exempt under Section 162(m) of the Code.
Once our exemption period expires, we expect that our
compensation committee will adopt a policy that, where
reasonably practicable, we will seek to qualify the variable
compensation paid to our executive officers for the
performance-based compensation exemption from the
deductibility limit. Our compensation committee may, in its
judgment, authorize compensation payments that do not comply
with an exemption from the deductibility limit when it believes
that such payments are appropriate to attract and retain
executive talent.
Taxation of
Parachute Payments and Deferred
Compensation
Sections 280G and 4999 of the Code provide that executive
officers and directors who hold significant equity interests and
certain other service providers may be subject to an excise tax
if they receive payments or benefits in connection with a change
of control of our company that exceeds certain prescribed
limits, and that our company (or a successor) may forfeit a
deduction on the amounts subject to this additional tax. We do
not currently provide any executive, including any named
executive officer, with a
gross-up
or other reimbursement payment for any tax liability that he or
she might owe as a result of the application of
Sections 280G or 4999.
Compensation Risk
Consideration
During fiscal year 2011, at the direction of our compensation
committee, Compensia, assisted by our management, conducted a
review of our compensation policies and practices and their
respective risk profiles. The findings were presented to our
compensation committee for consideration. After consideration of
the information presented, our compensation committee concluded
that our compensation programs are designed with an appropriate
balance of risk and reward in relation to our overall business
strategy and do not encourage excessive or unnecessary
risk-taking behavior.
In making this determination, we considered our pay mix, our
base salaries and the attributes of our variable compensation
programs including our annual bonus plan, our equity programs
and our sales compensation plans and our alignment with market
pay levels and compensation program designs.
Our compensation committee believes that the design of our
executive compensation programs as outlined in the
Compensation Discussion and Analysis above places
emphasis on long-term incentives and competitive base salaries,
while the annual bonus plan is tied to annual goals for
profitable growth. Our compensation committee concluded that
this mix of incentives appropriately balances risk and aligns
the executive officers motivations for the Companys
long-term success, including stock price performance.
124
Summary
Compensation Table
The following table sets forth information regarding
compensation earned by our chief executive officer, our chief
financial officer and our three next most highly compensated
executive officers during our fiscal year ended
December 31, 2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Equity
|
|
|
|
|
|
|
|
|
|
|
Option
|
|
Incentive Plan
|
|
|
|
|
|
|
Salary
|
|
Bonus
|
|
Awards
|
|
Compensation
|
|
Total
|
Name and Principal
Position
|
|
Year
|
|
($)
|
|
($)(1)
|
|
($)(2)
|
|
($)
|
|
($)
|
|
Donald R. Young
|
|
|
2010
|
|
|
$
|
319,202
|
|
|
$
|
40,000
|
|
|
$
|
223,265
|
|
|
$
|
140,503
|
|
|
$
|
722,970
|
|
President and Chief Executive Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
John F. Fairbanks
|
|
|
2010
|
|
|
|
236,710
|
|
|
|
|
|
|
|
95,685
|
|
|
|
72,215
|
|
|
|
404,610
|
|
Vice President, Finance and Chief Financial Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Kevin A. Schmidt
|
|
|
2010
|
|
|
|
257,027
|
|
|
|
|
|
|
|
95,685
|
|
|
|
78,414
|
|
|
|
431,126
|
|
Vice President, Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Harry R. Walkoff
|
|
|
2010
|
|
|
|
230,413
|
|
|
|
20,000
|
|
|
|
95,685
|
|
|
|
70,481
|
|
|
|
416,579
|
|
Vice President, Sales and Marketing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Christopher L. Marlette
|
|
|
2010
|
|
|
|
185,060
|
|
|
|
|
|
|
|
31,895
|
|
|
|
40,728
|
|
|
|
257,683
|
|
Vice President, Engineering and Design
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Represents a discretionary bonus
amount recommended by our compensation committee and approved by
our board of directors in January 2011 for performance in fiscal
year 2010.
|
|
(2) |
|
These amounts represent the
aggregate grant date fair value for option awards granted to our
named executive officers, computed in accordance with FASB ASC
Topic 718. Valuation assumptions are described in the notes to
our financial statements included elsewhere in this prospectus.
See our discussion of stock-based compensation under
Managements Discussion and Analysis of Financial
Condition and Results of Operations Critical
Accounting Policies and Estimates Stock-based
Compensation.
|
125
Grants of
Plan-Based Awards in 2010
The following table sets forth information regarding grants of
plan-based awards during the fiscal year ended December 31,
2010 to our named executive officers.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All Other
|
|
|
|
|
|
|
|
|
Estimated Future
|
|
Option
|
|
|
|
|
|
|
|
|
Payouts Under
|
|
Awards:
|
|
Exercise or
|
|
Grant Date
|
|
|
|
|
Non-Equity
|
|
Number of
|
|
Base Price
|
|
Fair Value of
|
|
|
|
|
Incentive Plan
|
|
Securities
|
|
of Option
|
|
Stock and
|
|
|
Grant
|
|
Awards: Target
|
|
Underlying
|
|
Awards
|
|
Option
|
Name
|
|
Date
|
|
($)(1)
|
|
Options (#)
|
|
($/Sh)
|
|
Awards
($)(2)
|
|
Donald R. Young
|
|
|
|
$
|
95,937
|
(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11/17/2010
|
|
|
|
|
|
|
350,000
|
|
|
$
|
1.30
|
|
|
$
|
223,265
|
|
John F. Fairbanks
|
|
|
|
|
47,429
|
(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11/17/2010
|
|
|
|
|
|
|
150,000
|
|
|
|
1.30
|
|
|
|
95,685
|
|
Kevin A. Schmidt
|
|
|
|
|
51,500
|
(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11/17/2010
|
|
|
|
|
|
|
150,000
|
|
|
|
1.30
|
|
|
|
95,685
|
|
Harry R. Walkoff
|
|
|
|
|
46,290
|
(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11/17/2010
|
|
|
|
|
|
|
150,000
|
|
|
|
1.30
|
|
|
|
95,685
|
|
Christopher L. Marlette
|
|
|
|
|
27,810
|
(5)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11/17/2010
|
|
|
|
|
|
|
50,000
|
|
|
|
1.30
|
|
|
|
31,895
|
|
|
|
|
(1) |
|
Reflects the target non-equity
incentive plan award amounts under our 2010 corporate bonus
plan. The amount shown above for each named executive officer
reflects the target award amount for the full fiscal year which
is based on a percentage of that named executive officers
base salary. The maximum amount of such award cannot be
determined because the named executive officer, upon the
achievement of certain corporate goals, is entitled to a payout
equal to an additional 4% of annual base salary for
Mr. Young, an additional 3% of annual base salary for each
of Messrs. Fairbanks, Schmidt and Walkoff, and 2% of annual
base salary for Mr. Marlette, for every 1% by which the
actual revenue exceeded the target amount. The amounts actually
paid to our named executive officers under the 2010 corporate
bonus plan are shown above in the Summary Compensation Table
under the Non-Equity Incentive Plan Compensation
column. Additionally, see Compensation Discussion and
Analysis Cash Bonuses and
2010 Corporate Bonus Plan below for
details related to the determination of payments under our 2010
corporate bonus plan.
|
|
(2) |
|
These amounts represent the
aggregate grant date fair value for option awards granted to our
named executive officers, computed in accordance with FASB ASC
Topic 718. Valuation assumptions are described in the notes to
our financial statements included elsewhere in this prospectus.
See our discussion of stock-based compensation under
Managements Discussion and Analysis of Financial
Condition and Results of Operations Critical
Accounting Policies and Estimates Stock-based
Compensation.
|
|
(3) |
|
Represents 30% of
Mr. Youngs base salary. See 2010
Corporate Bonus Plan below for details related to the
determination of payments under our 2010 corporate bonus plan.
|
|
(4) |
|
Represents 20% of the named
executive officers base salary. See 2010
Corporate Bonus Plan below for details related to the
determination of payments under our 2010 corporate bonus plan.
|
|
(5) |
|
Represents 15% of
Mr. Marlettes base salary. See 2010
Corporate Bonus Plan below for details related to the
determination of payments under our 2010 corporate bonus plan.
|
Narrative
Disclosure to Summary Compensation Table and Grants of
Plan-Based Awards Table
Employment
Arrangements with Our Named Executive Officers
Donald R.
Young
We entered into an amended and restated executive agreement with
Mr. Young on August 5, 2011 pursuant to which he
continues to serve as our Chief Executive Officer on an at-will
basis. Pursuant to this agreement, Mr. Youngs annual
base salary is $329,400 per year, and he is eligible to receive
an annual performance-based bonus in an amount, if any, to be
determined by our board of directors. Mr. Youngs base
salary may be increased, but not decreased, at the discretion of
our board of directors or a committee thereof.
126
Mr. Young is entitled to certain benefits in connection
with a termination of his employment or a change of control as
discussed below under Potential Payments Upon
Termination or Change of Control.
Other Named
Executive Officers
We entered into amended and restated executive agreements with
Messrs. Fairbanks, Schmidt, Walkoff and Marlette on
August 5, 2011 pursuant to which they continue to serve as
executive officers on an at-will basis. We refer to these
agreements, as well as our executive agreement with
Mr. Young described above, as the executive agreements.
Pursuant to these agreements, the annual base salaries for
Messrs. Fairbanks, Schmidt, Walkoff and Marlette are
$244,300, $265,300, $238,400 and $205,000 per year,
respectively, and they are eligible to receive an annual
performance-based bonus in an amount, if any, to be determined
by our President and Chief Executive Officer. The annual base
salaries set forth in these agreements may be increased, but not
decreased, at the discretion of our board of directors or a
committee thereof.
Messrs. Fairbanks, Schmidt, Walkoff and Marlette are
entitled to certain benefits in connection with a termination of
their employment or a change of control as discussed below under
Potential Payments Upon Termination or Change
of Control.
Employment,
Confidentiality and Non-Competition Agreements
Each of our named executive officers has also entered into an
employment, confidentiality and non-competition agreement. Among
other things, this agreement obligates each named executive
officer to refrain from disclosing any of our proprietary
information received during the course of employment and to
assign to us any inventions conceived or developed during the
course of employment. Additionally, each of our named executive
officers is prohibited from (i) competing with us for a
period of one year following termination of employment and
(ii) soliciting or interfering with our business
relationship of any of our existing clients, customers, business
partners, or employees for a period of two years.
2011 Corporate
Bonus Plan
Upon the recommendation of our compensation committee, our board
of directors approved our 2011 corporate bonus plan on
January 19, 2011 and amended such plan on June 16,
2011. Pursuant to the 2011 corporate bonus plan, as amended, or
the 2011 corporate bonus plan, each named executive
officers 2011 bonus award amount will be determined based
upon the achievement of certain predetermined revenue and EBITDA
goals for 2011. If these corporate goals are met, Mr. Young
will be entitled to 50% of his annual base salary;
Messrs. Fairbanks, Schmidt and Walkoff will be entitled to
35% of their respective annual base salaries; and Mr. Gould
and Mr. Marlette will be entitled to 25% of their
respective annual base salaries. The percentage earned will be
increased or decreased based on our performance against such
goals.
2010 Corporate
Bonus Plan
Upon the recommendation of our compensation committee, our board
of directors approved our 2010 corporate bonus plan on
March 17, 2010 and amended such plan on July 21, 2010.
Pursuant to the 2010 corporate bonus plan, as amended, or the
2010 corporate bonus plan, each named executive officers
2010 bonus award amount was determined based upon the
achievement of certain predetermined revenue and EBITDA targets
for 2010. If these corporate goals were met or exceeded,
Mr. Young was entitled to 30% of his annual base salary and
an additional 4% of annual base salary for every 1% by which the
actual revenue exceeded the target amount;
Messrs. Fairbanks, Schmidt and Walkoff were entitled to 20%
of their respective annual base salaries and an additional 3% of
annual base salary for every 1% by which the actual revenue
exceeded the target amount; and Mr. Marlette was entitled
to 15% of his annual base salary and an additional 2% of annual
base salary
127
for every 1% by which the actual revenue exceeded the target
amount. As a result of meeting and exceeding these corporate
goals for fiscal year 2010, our compensation committee
recommended and our board of directors approved 2010 bonus
payments under our 2010 corporate bonus plan to
Messrs. Young, Fairbanks, Schmidt, Walkoff and Marlette of
$140,503, $72,215, $78,414, $70,481 and $40,728, respectively.
Outstanding
Equity Awards at Fiscal Year-End
The following table sets forth information regarding stock
options held by our named executive officers as of
December 31, 2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Option Awards
|
|
|
|
Number of
|
|
|
Number of
|
|
|
|
|
|
|
|
|
|
Securities
|
|
|
Securities
|
|
|
|
|
|
|
|
|
|
Underlying
|
|
|
Underlying
|
|
|
|
|
|
|
|
|
|
Unexercised
|
|
|
Unexercised
|
|
|
|
|
|
|
|
|
|
Options
|
|
|
Options
|
|
|
Option
|
|
|
Option
|
|
|
|
(#)
|
|
|
(#)
|
|
|
Exercise Price
|
|
|
Expiration
|
|
Name
|
|
Exercisable
|
|
|
Unexercisable
|
|
|
($)
|
|
|
Date
|
|
|
Donald R. Young
|
|
|
1,854,024
|
(1)
|
|
|
1,705,704
|
(2)
|
|
$
|
0.22
|
|
|
|
11/11/2019
|
|
|
|
|
7,291
|
|
|
|
342,709
|
(3)
|
|
|
1.30
|
|
|
|
11/17/2020
|
|
John F. Fairbanks
|
|
|
466,576
|
|
|
|
429,250
|
(2)
|
|
|
0.22
|
|
|
|
11/11/2019
|
|
|
|
|
3,124
|
|
|
|
146,876
|
(3)
|
|
|
1.30
|
|
|
|
11/17/2020
|
|
Kevin A. Schmidt
|
|
|
552,524
|
|
|
|
508,323
|
(2)
|
|
|
0.22
|
|
|
|
11/11/2019
|
|
|
|
|
3,124
|
|
|
|
146,876
|
(3)
|
|
|
1.30
|
|
|
|
11/17/2020
|
|
Harry R. Walkoff
|
|
|
466,576
|
|
|
|
429,250
|
(2)
|
|
|
0.22
|
|
|
|
11/11/2019
|
|
|
|
|
3,124
|
|
|
|
146,876
|
(3)
|
|
|
1.30
|
|
|
|
11/17/2020
|
|
Christopher L. Marlette
|
|
|
202,592
|
|
|
|
186,385
|
(2)
|
|
|
0.22
|
|
|
|
11/11/2019
|
|
|
|
|
1,041
|
|
|
|
48,959
|
(3)
|
|
|
1.30
|
|
|
|
11/17/2020
|
|
|
|
|
(1) |
|
Includes options for
58,206 shares of our common stock transferred to
Mr. Youngs children in December 2010.
|
|
(2) |
|
This option to purchase shares of
our common stock vested as to 25% of the shares on
November 11, 2009 and thereafter 2.083% of the shares vest
in equal monthly installments over 36 months.
|
|
(3) |
|
This option to purchase shares of
our common stock vests as to 2.083% of the shares in equal
monthly installments over the 48 months following the grant
date of November 17, 2010.
|
Option Exercises
and Stock Vested
There were no options exercised by any of the named executive
officers during 2010.
Pension
Benefits
None of our named executive officers participates in or has
account balances in qualified or non-qualified defined benefit
plans sponsored by us.
Non-Qualified
Deferred Compensation
None of our named executive officers participate in or have
account balances in non-qualified defined contribution plans or
other deferred compensation plans maintained by us. The
compensation committee may elect to provide our officers and
other employees with non-qualified defined contribution or
deferred compensation benefits if the compensation committee
determines that doing so is in our best interests.
128
Potential
Payments Upon Termination or Change of Control
We have agreed to provide severance and change of control
payments and benefits to our named executive officers under
specified circumstances, as described below.
Donald R.
Young
Pursuant to the terms of our amended and restated executive
agreement with Mr. Young, dated August 5, 2011,
(i) if we terminate Mr. Youngs employment
without cause, (ii) if he resigns within 30 days of
the occurrence of an event constituting good reason (including
the expiration of any applicable cure periods) or
(iii) upon a change of control, if the executive does not
receive an offer to remain employed by us in the same position
that is set forth in his executive agreement at a comparable
rate of compensation, bonus, benefits and other material terms
for a period of at least two years following the change of
control and the executive is terminated without cause or resigns
for any reason during such two year period, which we refer to as
a change of control termination, Mr. Young will receive
severance payments in an amount equal to six months of his base
salary then in effect, such amount to be paid in regular
installments in accordance with our regular payroll practices.
Upon such an occurrence, Mr. Young will also have the right
to continue participation in all employee benefit plans and
programs to which he was entitled to participate as of the date
of termination for a period of six months following the date of
such termination.
Upon a change of control where the executive does not receive an
offer to remain employed in the same position at a comparable
rate of compensation, bonus, benefits and other material terms
for a period of at least two years following the change of
control, or if Mr. Youngs employment is terminated
without cause or he resigns for good reason at any time during
the two year period following a change of control, any and all
then unvested options to purchase shares of our common stock
will immediately vest and become exercisable. In addition, in
the event that we terminate the options in connection with our
merger or sale, the options will vest immediately prior to such
transaction.
After March 17, 2011, (i) if we terminate
Mr. Youngs employment without cause or (ii) if
he resigns for good reason, Mr. Youngs unvested
options to purchase shares of our common stock will accelerate
by three months. Upon such an occurrence, Mr. Youngs
options to purchase shares of our common stock will remain
exercisable for the entire ten year term of the option and will
not be subject to the general provision in our 2001 equity
incentive plan that provides that an employee is required to
exercise options within 90 days of termination of
employment.
Mr. Youngs right to receive the severance amounts set
forth above are conditioned upon Mr. Youngs execution
and non-revocation within 45 days of the date of
termination of a general release satisfactory to us releasing
us, our officers, agents, stockholder and affiliates from any
liability for any matter other than for payments under the
executive agreement.
Section 280G of the Internal Revenue Code, or the Code,
denies the company a tax deduction for certain payments made to
an executive in connection with a change of control if the
payments exceed a certain amount. Section 4999 of the Code
imposes on the executive an additional twenty percent excise tax
on those payments. As a result, if the aggregate of the payments
and benefits that Mr. Young receives pursuant to his
employment agreement or pursuant to any other plan or agreement
with us are subject to the excise tax imposed by
Section 4999 of the Code, under Mr. Youngs
executive agreement, we are required to reduce the amount of the
aggregate payments so that they are not subject to
Section 4999 of the Code unless the aggregate value of the
payments and benefits on an after tax basis would be greater
than if they are not reduced.
Other Named
Executive Officers
Pursuant to the terms of our amended and restated executive
agreements with Messrs. Fairbanks, Schmidt, Walkoff and
Marlette, each dated August 5, 2011, (i) if we
terminate the executives employment
129
without cause, (ii) if the executive resigns within
30 days of the occurrence of an event constituting good
reason (including the expiration of any applicable cure periods)
or (iii) upon a change of control termination, the
executive will receive severance payments in an amount equal to
three months of the executives base salary then in effect,
such amount to be paid in regular installments in accordance
with our regular payroll practices. Upon such an occurrence, the
executive will also have the right to continue participation in
all employee benefit plans and programs to which the executive
was entitled to participate as of the date of termination for a
period of three months following the date of such termination.
Upon a change of control where the executive does not receive an
offer to remain employed in the same position at a comparable
rate of compensation, bonus, benefits and other material terms
for a period of at least two years following the change of
control, or if the executives employment is terminated
without cause or he resigns for good reason at any time during
the two year period following a change of control, any and all
then unvested options to purchase shares of our common stock
will immediately vest and become immediately exercisable. In
addition, in the event that we terminate the options in
connection with our merger or sale, the options will vest
immediately prior to such transaction.
After March 17, 2011, (i) if we terminate the
executives employment without cause or (ii) if he
resigns for good reason, the executives unvested options
to purchase shares of our common stock will accelerate by three
months. Upon such an occurrence, the executives options to
purchase shares of our common stock will remain exercisable for
the entire ten year term of the option and will not be subject
to the general provision in our 2001 equity incentive plan that
provides that an employee is required to exercise options within
90 days of termination of employment.
The executives right to receive the severance amounts set
forth above are conditioned upon the executives execution
and non-revocation within 45 days of the date of
termination of a general release satisfactory to us releasing
us, our officers, agents, stockholder and affiliates from any
liability for any matter other than for payments under the
executive agreement.
Section 280G of the Code denies the company a tax deduction
for certain payments made to an executive in connection with a
change of control if the payments exceed a certain amount.
Section 4999 of the Code imposes on the executive an
additional twenty percent excise tax on those payments. As a
result, if the aggregate of the payments and benefits that the
executive receives pursuant to his employment agreement or
pursuant to any other plan or agreement with us are subject to
the excise tax imposed by Section 4999 of the Code, under
the executives executive agreement, we are required to
reduce the amount of the aggregate payments so that they are not
subject to Section 4999 of Code unless the aggregate value
of the payments and benefits on an after tax basis would be
greater than if they are not reduced.
Cause is defined under all of the
executive agreements as (i) willful misconduct, dishonesty,
fraud or breach of fiduciary duty to us; (ii) deliberate
disregard of our lawful rules or policies, or breach of an
employment or other agreement with us, which results in direct
or indirect loss, damage or injury to us; (iii) the
unauthorized disclosure of any of our trade secrets or
confidential information; or (iv) the commission of an act
which constitutes unfair competition with us or which induces
any customer or supplier to breach a contract with us.
Good Reason is defined under all of
the executive agreements as (i) any material breach by us
of the executive agreement that we do not cure within thirty
(30) days of receiving written notice specifying in
reasonable detail the nature of such material breach provided by
the executive; (ii) the demotion of the executive such that
the executive no longer serves as in the position set forth in
the executive agreement or a material reduction in the
executives current duties and authority in the position
set forth in the executive agreement, in each case, without his
consent; (iii) the written demand by us for the executive
to relocate or commute more than 40 miles from Brookline,
Massachusetts, in the case of Mr. Young, or Northborough,
Massachusetts, in the case of all other named executive
officers, without his consent; or (iv) any reduction by us
in the executives base salary without his consent.
130
Change of Control is defined under all
of the executive agreements as the occurrence of any of the
following: (i) any person or group
(as such terms are used in Section 13(d)(3) of the Exchange
Act (other than a person or group which is one of our
shareholders as of March 17, 2010)) is or becomes the
beneficial owner, directly or indirectly, through a purchase,
merger or other acquisition transaction or series of
transactions, of our capital stock entitling such person or
group to control 50% or more of the total voting power of our
capital stock entitled to vote generally in the election of
directors, where any voting capital stock of which such person
or group is the beneficial owner that are not then outstanding
are deemed outstanding for purposes of calculating such
percentage; except in connection with our issuance of capital
stock in a bona-fide financing transaction the proceeds of which
are to be utilized by us for general corporate purposes or
(ii) any sale or transfer of all or substantially all of
our assets to another person.
Potential
Payments at December 31, 2010
The table below summarizes the potential payments and benefits
to each of our named executive officers assuming he was
terminated without cause or resigned for good reason at
December 31, 2010.
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Post-
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Severance
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Bonus
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Termination
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Total
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Name
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Payments
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Payments
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Benefits(1)
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Benefits
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Donald R. Young
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$
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159,895
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$
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140,503
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$
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7,113
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$
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307,511
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John F. Fairbanks
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59,286
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72,215
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4,125
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135,626
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Kevin A. Schmidt
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64,375
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78,414
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3,557
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146,346
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Harry R. Walkoff
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57,863
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90,481
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3,557
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151,901
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Christopher L. Marlette
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46,350
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40,728
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3,557
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90,635
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(1) |
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Represents premiums paid by us for
continuation of the executives medical, dental and vision
insurance coverage.
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The table below summarizes the potential payments and benefits
to each of our named executive officers assuming there was
(i) a change of control where the executive does not
receive an offer to remain employed in the same position at a
comparable rate of compensation, bonus, benefits and other
material terms for a period of at least two years following the
change of control or (ii) the executive was terminated
without cause or resigned for good reason at any time during the
two year period following the change of control, as if such
event occurred at December 31, 2010.
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Value of
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Additional
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Post-
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Severance
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Bonus
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Vested Option
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Termination
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Total
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Name
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Payments
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Payments
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Awards
($)(1)
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Benefits(2)
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Benefits
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Donald R. Young
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$
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159,895
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$
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140,503
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$
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2,169,906
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$
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7,113
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$
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2,477,417
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John F. Fairbanks
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59,286
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72,215
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555,770
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|
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4,125
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|
|
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691,396
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Kevin A. Schmidt
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64,375
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78,414
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653,821
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3,557
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|
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800,167
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Harry R. Walkoff
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57,863
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|
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90,481
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555,770
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|
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3,557
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707,671
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Christopher L. Marlette
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46,350
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40,728
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|
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238,951
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3,557
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329,586
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(1) |
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This represents the amount equal to
(a) the number of option shares that would vest, assuming a
change of control termination at December 31, 2010,
multiplied by (b) the excess of $1.46, which represented
our board of directors determination of the fair market
value of our common stock as of December 31, 2010, over the
exercise price of the option.
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(2) |
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Represents premiums paid by us for
continuation of the executives medical, dental and vision
insurance coverage.
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131
Director
Compensation
The following table shows the total compensation paid or accrued
during the fiscal year ended December 31, 2010 to each of
our non-employee directors who served during the year.
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Fees Earned
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Option
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All Other
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or Paid
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Awards
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Compensation
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Total
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Name
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in Cash
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($)(1)
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($)
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($)
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Thomas E.
Banahan(2)
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$
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$
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$
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$
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P. Ramsay Battin
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Craig A. Huff
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Steven R. Mitchell
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Mark L. Noetzel
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63,980
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(3)
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32,625
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(5)
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|
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96,605
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David J. Prend
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Richard F. Reilly
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|
|
|
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173,313
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(4)
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|
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9,376
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(5)
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|
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182,689
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(1) |
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These amounts represent the
aggregate grant date fair value for option awards granted to our
directors, computed in accordance with FASB ASC Topic 718.
Valuation assumptions are described in the notes to our
financial statements included elsewhere in this prospectus. See
our discussion of stock-based compensation under
Managements Discussion and Analysis of Financial
Condition and Results of Operations Critical
Accounting Policies and Estimates Stock-based
Compensation.
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(2) |
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Mr. Banahan resigned as a
member of our board of directors on June 17, 2011.
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(3) |
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On November 17, 2010,
Mr. Noetzel was granted options to purchase
100,000 shares of our common stock at an exercise price of
$1.30. These options vest at the rate of 6.25% per quarter
beginning three months after the grant date, provided that upon
completion of this offering or a sale of the company, 25% of any
unvested options will immediately vest. As of December 31,
2010, Mr. Noetzel held options to purchase
325,000 shares of common stock, 56,250 of which were vested.
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(4) |
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On July 21, 2010 and
November 17, 2010, Mr. Reilly was granted options to
purchase 225,000 and 50,000, respectively, shares of our common
stock, each with an exercise price of $1.30 per share. These
options vest at the rate of 6.25% per quarter beginning three
months after the applicable grant date, provided that upon
completion of this offering or a sale of the company, 25% of any
unvested options will immediately vest. As of December 31,
2010, Mr. Reilly held options to purchase
275,000 shares of common stock, 14,062 of which were vested.
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(5) |
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Consists of payments made pursuant
to a consulting arrangement with the director that is unrelated
to the directors service on the board. Pursuant to the
arrangement, the director was required to attend operating,
sales or similar meetings with our management team and received
an hourly fee in connection with such service.
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In January 2011, Robert M. Gervis and William P. Noglows were
elected as members of our board of directors. In connection with
their agreement to serve on our board of directors, we granted
each an option to purchase 265,000 shares of our common
stock at an exercise price of $1.46. These options vest at the
rate of 6.25% per quarter beginning three months after the grant
date, provided that upon the completion of this offering or a
sale of the company, 25% of any unvested options will
immediately vest.
In recent years, we have not provided any compensation to
employee directors or to directors who were affiliated with our
major shareholders. We have, however, provided option grants, as
set forth above, to non-employee, non-investor directors for
serving on our board of directors.
In July 2011, our board of directors adopted the non-employee
director compensation policy, or our director compensation
policy, that will become effective following the completion of
this offering. The policy is designed to ensure that the
compensation aligns our non-employee directors interests
with the long-term interests of the stockholders, that the
structure of the compensation is simple, transparent and easy
for stockholders to understand and that our non-employee
directors are fairly compensated. Directors who are also our
employees, such as Mr. Young, will not receive additional
compensation for their services as directors.
Pursuant to our director compensation policy, upon initial
election or appointment to the board of directors, new
non-employee directors receive a non-qualified stock option to
purchase 55,000 shares of our common stock at an exercise
price equal to the fair market value on the date of grant, which
132
will vest annually over three years from the date of grant. Each
year of a non-employee directors tenure, the director will
receive a non-qualified stock option to purchase
28,000 shares of our common stock at an exercise price
equal to the fair market value on the date of grant, which will
vest one year from the date of grant. Any vested and unexercised
stock options granted pursuant to our director compensation
policy will terminate on the earlier of ten years from the
date of grant and three months after the recipient ceases
to serve as a director, except in the case of death or
disability, in which event the option will terminate one year
from the date of the directors death or disability. The
options become fully vested and exercisable upon a change of
control.
In addition, pursuant to our director compensation policy, each
non-employee director will be paid an annual retainer of
$30,000, or $60,000 in the case of the chairperson, for their
services. If we hold more than 12 board meetings in a
calendar year, each non-employee director will receive a fee of
$1,500 for each additional board meeting attended in person and
a fee of $1,000 for each additional board meeting attended by
telephone or by other means of communication. Committee members
will receive additional annual retainers as follows:
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Committee
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|
Chairman
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|
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Member
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|
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Audit Committee
|
|
$
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14,000
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|
|
$
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5,500
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Compensation Committee
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|
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10,000
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|
|
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5,000
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Nominating and Governance Committee
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|
|
8,000
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|
|
|
4,000
|
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With respect to the audit committee, if we hold more than 12
meetings of the committee in a calendar year, each committee
member will receive a fee of $1,500 for each additional
committee meeting attended in person and a fee of $1,000 for
each additional committee meeting attended by telephone or by
other means of communication.
With respect to the compensation committee and the nominating
and governance committee, if we hold more than eight meetings of
a committee in a calendar year, each committee member will
receive a fee of $1,500 for each additional committee meeting
attended in person and a fee of $1,000 for each additional
committee meeting attended by telephone or by other means of
communication.
We have reimbursed and will continue to reimburse our
non-employee directors for their reasonable expenses incurred in
attending meetings of our board of directors and committees of
the board of directors.
Stock Option and
Other Compensation Plans
2011 Employee,
Director and Consultant Equity Incentive Plan
Our 2011 employee, director and consultant equity incentive
plan, or the 2011 equity incentive plan, which will become
effective upon the closing of the offering made hereby, was
adopted by our board of directors
in 2011
and approved by our stockholders
in 2011.
The 2011 equity incentive plan will expire
in 2021.
Under our 2011 equity incentive plan, we may grant incentive
stock options, non-qualified stock options, restricted and
unrestricted stock awards and other stock-based awards. There
will be
(1) shares
of our common stock authorized for issuance under the 2011
equity incentive plan plus (2) shares of our common stock
represented by awards granted under our 2001 stock plan that are
forfeited, expire or are cancelled without delivery of shares or
which result in the forfeiture of shares of our common stock
back to us on or after the date that the 2011 equity incentive
plan becomes effective.
In addition, the 2011 equity incentive plan contains an
evergreen provision, which allows for an annual
increase in the number of shares of our common stock available
for issuance under the 2011 equity incentive plan on the first
day of each fiscal year during the period beginning in fiscal
year 2012
133
and ending in fiscal year 2021. The annual increase in the
number of shares shall be equal to the lowest of:
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shares
of our common stock;
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% of the number of shares of our
common stock outstanding as of such date; and
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an amount determined by our board of directors or compensation
committee.
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The board of directors has authorized our compensation committee
to administer the 2011 equity incentive plan. In accordance with
the provisions of the plan, the compensation committee will
determine the terms of options and other awards. The
compensation committee or our board of directors will determine:
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which employees, directors and consultants shall be granted
awards;
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the number of shares of our common stock subject to options and
other awards;
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the exercise price of each option, which generally shall not be
less than fair market value on the date of grant;
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the schedule upon which options become exercisable;
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the termination or cancellation provisions applicable to options;
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the terms and conditions of other awards, including conditions
for repurchase, termination or cancellation, issue price and
repurchase price; and
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all other terms and conditions upon which each award may be
granted in accordance with our plan.
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No participant may receive awards for more
than shares
of our common stock in any fiscal year.
In addition, our board of directors or any committee to which
the board of directors delegates authority may, with the consent
of the affected plan participants, reprice or otherwise amend
outstanding awards consistent with the terms of our plan.
Upon a merger, consolidation or sale of all or substantially all
of our assets, our board of directors or any committee to which
the board of directors delegates authority, or the board of
directors of any corporation assuming our obligations, may, in
its sole discretion, take any one or more of the following
actions pursuant to our plan, as to some or all outstanding
awards:
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provide that outstanding options will be assumed or substituted
for options of the successor corporation;
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provide that the outstanding options must be exercised within a
certain number of days, either to the extent the options are
then exercisable, or at our board of directors discretion,
any such options being made partially or fully exercisable;
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terminate outstanding options in exchange for a cash payment of
an amount equal to the difference between (a) the
consideration payable upon consummation of the corporate
transaction to a holder of the number of shares into which such
option would have been exercisable to the extent then
exercisable (or, in our board of directors discretion, any
such options being made partially or fully exercisable) and
(b) the aggregate exercise price of those options;
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provide that outstanding stock grants will be substituted for
shares of the successor corporation or consideration payable
with respect to our outstanding stock in connection with the
corporate transaction; and
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134
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terminate outstanding stock grants in exchange for payment of an
amount equal to the consideration payable upon consummation of
the corporate transaction to a holder of the same number of
shares comprising the stock grant, to the extent the stock grant
is no longer subject to any forfeiture or repurchase rights (or,
at our board of directors discretion, all forfeiture and
repurchase rights being waived upon the corporate transaction).
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2001 Equity
Incentive Plan
The 2001 equity incentive plan, as amended, or the 2001 equity
incentive plan, was adopted in May 2001 and was last amended in
May 2011. As of June 30, 2011, a maximum of
15,845,806 shares of our common stock was authorized for
issuance under the 2001 equity incentive plan. The 2001 equity
incentive plan allows us to grant options, restricted stock
awards and other stock-based awards to our employees, officers
and directors as well as outside consultants we retain from time
to time. As of June 30, 2011, under the 2001 equity
incentive plan, options to purchase 14,110,658 shares of
our common stock were outstanding, 48,129 shares of our
common stock had been issued and were outstanding pursuant to
the exercise of options, and 1,687,019 shares of our common
stock were available for future awards. We anticipate that upon
completion of this offering we will grant no further stock
options or restricted stock awards under the 2001 equity
incentive plan.
Under the 2001 equity incentive plan, if we are consolidated
with or acquired by another entity in a merger, sale of all or
substantially all of our assets or otherwise, our board of
directors or the board of directors of any entity assuming our
obligations under the 2001 equity incentive plan will take any
of the following actions with respect to the options:
(i) provide that outstanding options will be substituted on
equitable basis for the shares subject to such options either
with (a) consideration payable with respect to the
outstanding shares in connection with the acquisition event or
(b) with comparable securities of the surviving corporation
or acquiring entity; (ii) provide option holders with an
opportunity to exercise their outstanding options and then
terminate any or all unexercised options at such time as the
board of directors deems appropriate; or (iii) require that
option holders surrender their outstanding options in exchange
for a payment in cash in an amount equal to the amount by which
the then fair market value of the unexercised options exceeds
the exercise price of the options.
401(k)
Retirement Plan
We maintain a 401(k) retirement plan that is intended to be a
tax-qualified defined contribution plan under
Section 401(k) of the Code. In general, all of our
employees are eligible to participate upon commencement of their
employment. The 401(k) plan includes a salary deferral
arrangement pursuant to which participants may elect to reduce
their current compensation by up to the statutorily prescribed
limit, equal to $16,500 in 2011, plus $5,500 for individuals
aged 50 and over, and have the amount of the reduction
contributed to the 401(k) plan. We do not currently match any
401(k) contributions.
135
CERTAIN
RELATIONSHIPS AND RELATED PERSON TRANSACTIONS
Since January 1, 2008, we have engaged in the following
transactions with our directors, executive officers and holders
of more than 5% of our voting securities, which we refer to as
our principal stockholders, and affiliates or immediately family
members of our directors, executive officers and principal
stockholders. We believe that all of these transactions were on
terms as favorable as could have been obtained from unrelated
third parties.
Some of our directors are affiliated with our principal
stockholders as indicated in the table below:
|
|
|
Director
|
|
Affiliation with Principal
Stockholder
|
|
P. Ramsay Battin
|
|
Director of Arcapita Inc., an affiliate of Arcapita Ventures I
Limited
|
Craig A. Huff
|
|
Senior Managing Member of RCGM, LLC, the ultimate general
partner of Reservoir Capital Partners, L.P. and Reservoir
Capital Master Fund, L.P.
|
Steven R. Mitchell
|
|
Managing Director of Argonaut Private Equity, LLC, the manager
of Argonaut Ventures I, LLC
|
David J. Prend
|
|
Managing Member of the general partners of RockPort Capital
Partners, L.P. and affiliated entities
|
See Agreements with Stockholders for a
discussion of arrangements among our stockholders pursuant to
which our directors were selected.
Demand Notes
Issued in 2008
Prior to the 2008 recapitalization, referenced below, we issued
a series of demand notes between July 2006 and May 2008. Certain
of these demand notes were purchased in 2008 by certain of our
principal stockholders in the following amounts and on the
following dates:
|
|
|
|
|
|
|
|
|
Date of Issuance
|
|
Original Principal
|
Name of Beneficial
Owner
|
|
of Debt
|
|
Amount of Debt
|
|
Reservoir Capital Partners, L.P. and affiliated funds:
|
|
|
|
|
|
|
Reservoir Capital Partners, L.P.
|
|
January 30, 2008
|
|
$
|
220,450.00
|
|
|
|
February 11, 2008
|
|
$
|
220,450.00
|
|
|
|
February 26, 2008
|
|
$
|
661,350.00
|
|
|
|
March 11, 2008
|
|
$
|
661,350.00
|
|
|
|
March 25, 2008
|
|
$
|
440,900.00
|
|
|
|
April 22, 2008
|
|
$
|
440,900.00
|
|
|
|
May 6, 2008
|
|
$
|
440,900.00
|
|
|
|
May 27, 2008
|
|
$
|
456,001.71
|
|
Reservoir Capital Master Fund, L.P.
|
|
January 30, 2008
|
|
$
|
29,550.00
|
|
|
|
February 11, 2008
|
|
$
|
29,550.00
|
|
|
|
February 26, 2008
|
|
$
|
88,650.00
|
|
|
|
March 11, 2008
|
|
$
|
88,650.00
|
|
|
|
March 25, 2008
|
|
$
|
59,100.00
|
|
|
|
April 22, 2008
|
|
$
|
59,100.00
|
|
|
|
May 6, 2008
|
|
$
|
59,100.00
|
|
|
|
May 27, 2008
|
|
$
|
61,124.29
|
|
These demand notes, which accrued interest at the rate of 6% per
year and were payable on demand, but in any event no later than
June 30, 2008, were converted into preferred stock in
136
connection with the 2008 recapitalization. See 2008
Reorganization, Recapitalization and
Series B-1
Preferred Stock Financing below.
2008
Reorganization, Recapitalization and
Series B-1
Convertible Preferred Stock Financing
In June 2008, we completed a reorganization and recapitalization
pursuant to which our predecessor company merged with and into a
newly formed Delaware corporation, Aspen Merger Sub, Inc., a
wholly-owned subsidiary of our predecessor company formed for
the purpose of the reorganization. As the surviving entity to
the merger, we then changed our name from Aspen Merger
Sub, Inc. to Aspen Aerogels, Inc. Each
outstanding share of our predecessor companys common stock
was converted in the merger into 18 shares of the
companys common stock. All unexercised and unexpired
options and warrants then outstanding to purchase our
predecessor companys common stock were assumed by us and
became exercisable for the companys common stock. All
outstanding shares of our predecessor companys
Series A convertible preferred stock, Series C
convertible preferred stock and Series D convertible
preferred stock were converted in the merger into shares of our
Series A-3
convertible preferred stock,
Series A-2
convertible preferred stock and
Series A-1
convertible preferred stock, respectively. In addition, the
predecessor companys then outstanding demand loans made
prior to November 30, 2007, then outstanding
14% senior secured notes due 2010 and then outstanding
demand loans made on or after November 30, 2007 were
converted into shares of our
Series B-3
convertible preferred stock,
Series B-2
convertible preferred stock and
Series B-1
convertible preferred stock, respectively. The following table
summarizes these conversions of our predecessor companys
Series A convertible preferred stock, Series C
convertible preferred stock, Series D convertible preferred
stock, demand notes and 14% senior secured notes due 2010
with respect to our principal stockholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Type of
|
|
|
|
|
Type of
|
|
|
|
Preferred
|
|
Number of
|
|
|
Preferred
|
|
Number of
|
|
Shares
|
|
Shares
|
|
|
Shares
|
|
Shares
|
|
Received in
|
|
Received in
|
Name of Beneficial
Owner
|
|
Converted
|
|
Converted
|
|
Conversion
|
|
Conversion
|
|
Reservoir Capital Partners, L.P. and affiliated funds
|
|
|
Series D
|
|
|
|
838.8141(1
|
)
|
|
|
Series A-1
|
|
|
|
1,863,372(2
|
)
|
RockPort Capital Partners, L.P. and affiliated funds
|
|
|
Series A
|
|
|
|
279.9500(3
|
)
|
|
|
Series A-3
|
|
|
|
229,867(3
|
)
|
|
|
|
Series C
|
|
|
|
235.8491(4
|
)
|
|
|
Series A-2
|
|
|
|
315,874(5
|
)
|
|
|
|
Series D
|
|
|
|
67.7626(6
|
)
|
|
|
Series A-1
|
|
|
|
150,530(7
|
)
|
|
|
|
(1) |
|
Consists of 739.6663 shares
held by Reservoir Capital Partners, L.P. and 99.1478 shares
held by Reservoir Capital Master Fund, L.P.
|
|
(2) |
|
Consists of 1,643,121 shares
held by Reservoir Capital Partners, L.P. and 220,251 shares
held by Reservoir Capital Master Fund, L.P.
|
|
(3) |
|
Consists of shares held by RockPort
Capital Partners, L.P.
|
|
(4) |
|
Consists of 146.2264 shares
held by RockPort Capital Partners, L.P. and 89.6227 shares
held by RP Co-Investment Fund I, L.P.
|
|
(5) |
|
Consists of 195,842 shares
held by RockPort Capital Partners, L.P. and 120,032 shares
held by RP Co-Investment Fund I, L.P.
|
|
(6) |
|
Consists of 32.0654 shares
held by RockPort Capital Partners, L.P. and 35.6972 shares
held by RP Co-Investment Fund I, L.P.
|
|
(7) |
|
Consists of 71,231 shares held
by RockPort Capital Partners, L.P. and 79,299 shares held
by RP Co-Investment Fund I, L.P.
|
137
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Type of
|
|
|
|
|
|
|
|
|
|
|
Original
|
|
|
Preferred
|
|
|
Number of
|
|
|
|
Description of
|
|
Date of
|
|
Principal
|
|
|
Shares
|
|
|
Shares
|
|
|
|
Debt
|
|
Issuance of
|
|
Amount
|
|
|
Received in
|
|
|
Received in
|
|
Name of Beneficial Owner
|
|
Converted
|
|
Debt
|
|
of Debt
|
|
|
Conversion
|
|
|
Conversion
|
|
|
Reservoir Capital Partners, L.P. and
|
|
Demand loans
|
|
(1)
|
|
$
|
16,686,082.39(1
|
)
|
|
|
Series B-3
|
|
|
|
8,312,260(2
|
)
|
affiliated funds
|
|
14% senior secured
notes due 2010
|
|
(3)
|
|
$
|
16,480,460.48(3
|
)
|
|
|
Series B-2
|
|
|
|
11,847,136(4
|
)
|
|
|
Demand loans
|
|
(5)
|
|
$
|
5,017,126.00(5
|
)
|
|
|
Series B-1
|
|
|
|
2,353,601(6
|
)
|
RockPort Capital Partners, L.P. and
|
|
Demand loans
|
|
(7)
|
|
$
|
14,506,944.47(7
|
)
|
|
|
Series B-3
|
|
|
|
7,234,907(8
|
)
|
affiliated funds
|
|
14% senior secured
notes due 2010
|
|
(9)
|
|
$
|
1,331,354.42(9
|
)
|
|
|
Series B-2
|
|
|
|
950,910(10
|
)
|
|
|
|
(1) |
|
Consists of demand notes held by:
Reservoir Capital Partners, L.P. dated January 19, 2007 in
the original principal amount of $10,966,137.45, Reservoir
Capital Partners, L.P. dated February 26, 2007 in the
original principal amount of $440,900, Reservoir Capital
Partners, L.P. dated March 28, 2007 in the original
principal amount of $440,900, Reservoir Capital Partners, L.P.
dated April 25, 2007 in the original principal amount of
$440,900, Reservoir Capital Partners, L.P. dated June 6,
2007 in the original principal amount of $881,800, Reservoir
Capital Partners, L.P. dated August 1, 2007 in the original
principal amount of $881,800, Reservoir Capital Partners, L.P.
dated September 24, 2007 in the original principal amount
of $661,350, Reservoir Capital Master Fund, L.P. dated
January 19, 2007 in the original principal amount of
$1,469,944.94, Reservoir Capital Master Fund, L.P. dated
February 26, 2007 in the original principal amount of
$59,100, Reservoir Capital Master Fund, L.P. dated
March 28, 2007 in the original principal amount of $59,100,
Reservoir Capital Master Fund, L.P. dated April 25, 2007 in
the original principal amount of $59,100, Reservoir Capital
Master Fund, L.P. dated June 6, 2007 in the original
principal amount of $118,200, Reservoir Capital Master Fund,
L.P. dated August 1, 2007 in the original principal amount
of $118,200 and Reservoir Capital Master Fund, L.P. dated
September 24, 2007 in the original principal amount of
$88,650.
|
|
(2) |
|
Consists of 7,329,751 shares
held by Reservoir Capital Partners, L.P. and 982,509 shares
held by Reservoir Capital Master Fund, L.P.
|
|
(3) |
|
Consists of 14% senior secured
notes due 2010 held by: Reservoir Capital Partners, L.P. dated
February 24, 2005 in the original principal amount of
$8,818,000, Reservoir Capital Partners, L.P. dated
March 23, 2005 in the original principal amount of
$5,714,470.05, Reservoir Capital Master Fund, L.P. dated
February 24, 2005 in the original principal amount of
$1,182,000 and Reservoir Capital Master Fund, L.P. dated
March 23, 2005 in the original principal amount of
$765,990.43.
|
|
(4) |
|
Consists of 10,446,805 shares
held by Reservoir Capital Partners, L.P. and
1,400,331 shares held by Reservoir Capital Master Fund, L.P.
|
|
(5) |
|
Consists of demand notes held by:
Reservoir Capital Partners, L.P. dated November 30, 2007 in
the original principal amount of $661,350, Reservoir Capital
Partners, L.P. dated December 28, 2007 in the original
principal amount of $220,450, Reservoir Capital Partners, L.P.
dated January 30, 2008 in the original principal amount of
$220,450, Reservoir Capital Partners, L.P. dated
February 11, 2008 in the original principal amount of
$220,450, Reservoir Capital Partners, L.P. dated
February 26, 2008 in the original principal amount of
$661,350, Reservoir Capital Partners, L.P. dated March 11,
2008 in the original principal amount of $661,350, Reservoir
Capital Partners, L.P. dated March 25, 2008 in the original
principal amount of $440,900, Reservoir Capital Partners, L.P.
dated April 22, 2008 in the original principal amount of
$440,900, Reservoir Capital Partners, L.P. dated May 6,
2008 in the original principal amount of $440,900, Reservoir
Capital Partners, L.P. dated May 27, 2008 in the original
principal amount of $456,001.71, Reservoir Capital Master Fund,
L.P. dated November 30, 2007 in the original principal
amount of $88,650, Reservoir Capital Master Fund, L.P. dated
December 28, 2007 in the original principal amount of
$29,550, Reservoir Capital Master Fund, L.P. dated
January 30, 2008 in the original principal amount of
$29,550, Reservoir Capital Master Fund, L.P. dated
February 11, 2008 in the original principal amount of
$29,550, Reservoir Capital Master Fund, L.P. dated
February 26, 2008 in the original principal amount of
$88,650, Reservoir Capital Master Fund, L.P. dated
March 11, 2008 in the original principal amount of $88,650,
Reservoir Capital Master Fund, L.P. dated March 25, 2008 in
the original principal amount of $59,100, Reservoir Capital
Master Fund, L.P. dated April 22, 2008 in the original
principal amount of $59,100, Reservoir Capital Master Fund, L.P.
dated May 6, 2008 in the original principal amount of
$59,100 and Reservoir Capital Master Fund, L.P. dated
May 27, 2008 in the original principal amount of $61,124.29.
|
|
(6) |
|
Consists of 2,075,405 shares
held by Reservoir Capital Partners, L.P. and 278,196 shares
held by Reservoir Capital Master Fund, L.P.
|
|
(7) |
|
Consists of demand notes held by:
RockPort Capital Partners, L.P. dated January 19, 2007 in
the original principal amount of $1,023,763.65, RP Co-Investment
Fund I, L.P. dated January 19, 2007 in the original
principal amount of $713,117.81, RockPort SII, LLC dated
January 19, 2007 in the original principal amount of
$3,157,624.65, RockPort Capital Partners II, L.P. dated
January 19, 2007 in the original principal amount of
$6,112,438.36, RockPort Capital Partners II, L.P. dated
February 26, 2007 in the original principal amount of
$500,000, RockPort Capital Partners II, L.P. dated
March 28, 2007 in
|
138
|
|
|
|
|
the original principal amount of
$500,000, RockPort Capital Partners II, L.P. dated
April 25, 2007 in the original principal amount of
$500,000, RockPort Capital Partners II, L.P. dated June 6,
2007 in the original principal amount of $1,000,000 and RockPort
Capital Partners II, L.P. dated August 1, 2007 in the
original principal amount of $1,000,000.
|
|
(8) |
|
Consists of 512,953 shares
held by RockPort Capital Partners, L.P., 357,305 shares
held by RP Co-Investment Fund I, L.P.,
1,582,116 shares held by Rockport SII, LLC and
4,782,533 shares held by RockPort Capital Partners II, L.P.
|
|
(9) |
|
Consists of 14% senior secured
notes due 2010 held by RockPort Capital Partners, L.P. dated
March 23, 2005 in the original principal amount of $630,000
and RP Co-Investment Fund I, L.P. dated March 23, 2005
in the original principal amount of $701,354.42.
|
|
(10) |
|
Consists of 449,973 shares
held by RockPort Capital Partners, L.P. and 500,937 shares
held by RP Co-Investment Fund I, L.P.
|
In connection with the 2008 reorganization and recapitalization,
we issued and sold 12,476,528 shares of our
Series B-1
convertible preferred stock for an aggregate purchase price of
approximately $27,018,062 under a stock purchase agreement.
Shares of our
Series B-1
convertible preferred stock were purchased by certain of our
stockholders in the following amounts and for the following
purchase prices:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
Approximate
|
|
|
|
|
Shares of Series
|
|
Aggregate
|
|
|
|
|
B-1 Convertible Preferred Stock
|
|
Purchase
|
|
Date of
|
Name of Beneficial
Owner
|
|
Purchased
|
|
Price
|
|
Purchase
|
|
Arcapita Ventures I Limited
|
|
|
4,617,847
|
|
|
$
|
10,000,000
|
|
|
|
June 10, 2008
|
|
Reservoir Capital Partners, L.P. and affiliated funds
|
|
|
1,385,355
|
(1)
|
|
$
|
3,000,000
|
|
|
|
June 10, 2008
|
|
RockPort Capital Partners, L.P. and affiliated funds
|
|
|
2,078,031
|
(2)
|
|
$
|
4,500,000
|
|
|
|
June 10, 2008
|
|
|
|
|
(1) |
|
Consists of 1,221,606 shares
purchased by Reservoir Capital Partners, L.P. and
163,749 shares purchased by Reservoir Capital Master Fund,
L.P.
|
|
(2) |
|
Consists of shares purchased by
RockPort Capital Partners II, L.P.
|
The purpose of the 2008 reorganization and recapitalization was
to modify and simplify our capital structure in order to attract
additional financing for the company.
2009
Recapitalization and Series A Convertible Preferred Stock
Financing
In August 2009, we consummated a recapitalization in which the
then outstanding shares of our
Series A-3
convertible preferred stock,
Series A-2
convertible preferred stock,
Series A-1
convertible preferred stock,
Series B-3
convertible preferred stock and
Series B-2
convertible preferred stock were converted into shares of our
common stock on a
1-for-1
basis and the then outstanding shares of our
Series B-1
convertible preferred stock were converted into shares of our
common stock on a
two-for-one
basis. As part of this recapitalization and financing, we and
Arcapita Ventures I Limited agreed to cancel a warrant to
purchase 1,154,462 shares of
Series B-1
convertible preferred stock.
139
The following table summarizes the preferred stock conversions
with respect to our principal stockholders and does not reflect
a 1-for-3
reverse stock split effected on September 25, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
|
|
|
Number of Shares of Preferred Stock Converted
|
|
Stock
|
|
|
Series
|
|
Series
|
|
Series
|
|
Series
|
|
Series
|
|
Series
|
|
Received in
|
Name of Beneficial Owner
|
|
A-3
|
|
A-2
|
|
A-1
|
|
B-3
|
|
B-2
|
|
B-1
|
|
Conversion
|
|
Arcapita Ventures I Limited
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,617,847
|
|
|
|
9,235,694
|
|
Tenaya Capital and affiliated funds
|
|
|
|
|
|
|
97,031
|
(1)
|
|
|
19,221
|
(1)
|
|
|
957,450
|
(1)
|
|
|
121,423
|
(1)
|
|
|
359,027
|
(1)
|
|
|
1,913,179
|
(1)
|
Reservoir Capital Partners, L.P. and affiliated funds
|
|
|
|
|
|
|
|
|
|
|
1,863,372
|
(2)
|
|
|
8,312,260
|
(3)
|
|
|
11,847,136
|
(4)
|
|
|
3,738,956
|
(5)
|
|
|
29,500,680
|
(6)
|
RockPort Capital Partners, L.P. and affiliated funds
|
|
|
229,867
|
(7)
|
|
|
315,874
|
(8)
|
|
|
150,530
|
(9)
|
|
|
7,234,907
|
(10)
|
|
|
950,910
|
(11)
|
|
|
2,078,031
|
(12)
|
|
|
13,039,094
|
(13)
|
|
|
|
(1) |
|
Consists of shares held by Tenaya
Capital IV, LP.
|
|
(2) |
|
Consists of 1,643,121 shares
held by Reservoir Capital Partners, L.P. and 220,251 shares
held by Reservoir Capital Master Fund, L.P.
|
|
(3) |
|
Consists of 7,329,751 shares
held by Reservoir Capital Partners, L.P. and 982,509 shares
held by Reservoir Capital Master Fund, L.P.
|
|
(4) |
|
Consists of 10,446,805 shares
held by Reservoir Capital Partners, L.P. and
1,400,331 shares held by Reservoir Capital Master Fund, L.P.
|
|
(5) |
|
Consists of 3,297,011 shares
held by Reservoir Capital Partners, L.P. and 441,945 shares
held by Reservoir Capital Master Fund, L.P.
|
|
(6) |
|
Consists of 26,013,699 shares
held by Reservoir Capital Partners, L.P. and
3,486,981 shares held by Reservoir Capital Master Fund, L.P.
|
|
(7) |
|
Consists of shares held by RockPort
Capital Partners, L.P.
|
|
(8) |
|
Consists of 195,842 shares
held by RockPort Capital Partners, L.P. and 120,032 shares
held by RP Co-Investment Fund I, L.P.
|
|
(9) |
|
Consists of 71,231 shares held
by RockPort Capital Partners, L.P. and 79,299 shares held
by RP Co-Investment Fund I, L.P.
|
|
(10) |
|
Consists of 512,953 shares
held by RockPort Capital Partners, L.P., 357,305 shares
held by RP Co-Investment Fund I, L.P.,
4,782,533 shares held by RockPort Capital Partners II, L.P.
and 1,582,116 shares held by RockPort SII, LLC.
|
|
(11) |
|
Consists of 449,973 shares
held by RockPort Capital Partners, L.P. and 500,937 shares
held by RP Co-Investment Fund I, L.P.
|
|
(12) |
|
Consists of shares held by RockPort
Capital Partners II, L.P.
|
|
(13) |
|
Consists of 1,460,810 shares
held by RockPort Capital Partners, L.P., 1,057,573 shares
held by RP Co-Investment Fund I, L.P.,
8,938,595 shares held by RockPort Capital Partners II, L.P.
and 1,582,116 shares held by RockPort SII, LLC.
|
In connection with the 2009 recapitalization, in August and
September 2009 we issued and sold an aggregate of
52,843,201 shares of our Series A preferred stock for
an aggregate purchase price of $30,839,407. In September and
October 2010 we issued and sold an aggregate of
16,010,292 shares of our Series B preferred stock for
an aggregate purchase price of $21,402,596. See
Sales of Securities below.
The purpose of the 2009 recapitalization was to modify and
simplify our capital structure in order to attract additional
financing for us.
Sales of
Securities
The following table summarizes our sales of Series A
preferred stock and Series B preferred stock to our
officers, directors and beneficial owners of more than five
percent of any class of our
140
voting securities, and reflects the
1-for-3
reverse stock split effected on September 25, 2009. The
purchase price was the fair market value as determined by
arms-length negotiations between sophisticated investors and our
management and board of directors. Each share of our
Series A preferred stock and Series B preferred stock
is convertible into one share of our common stock. Additionally,
the holders of our preferred stock are entitled to a cumulative
dividend at the rate of 8.0% per year, and we will
issue shares
of common stock upon the closing of the offering made hereby in
satisfaction of these accumulated dividends, 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 offering is closed
on ,
2011.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Type of
|
|
|
|
Approximate
|
|
|
|
|
Preferred
|
|
Number of
|
|
Aggregate
|
|
Date of
|
Name of Beneficial
Owner
|
|
Shares
|
|
Shares
|
|
Purchase Price
|
|
Purchase
|
|
5% or Greater Stockholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Arcapita Ventures I
Limited(1)
|
|
|
Series A
|
|
|
|
5,140,488
|
|
|
$
|
3,000,000
|
|
|
|
8/14/09
|
|
|
|
|
Series A
|
|
|
|
5,063,381
|
|
|
$
|
2,955,000
|
|
|
|
9/14/09
|
|
|
|
|
Series B
|
|
|
|
1,569,961
|
|
|
$
|
2,098,727
|
|
|
|
9/22/10
|
|
Argonaut Ventures I, LLC
|
|
|
Series A
|
|
|
|
12,851,220
|
|
|
$
|
7,500,000
|
|
|
|
8/14/09
|
|
|
|
|
Series A
|
|
|
|
2,499,517
|
|
|
$
|
1,458,724
|
|
|
|
9/14/09
|
|
|
|
|
Series B
|
|
|
|
1,831,721
|
|
|
$
|
2,448,649
|
|
|
|
9/22/10
|
|
Tenaya Capital IV, L.P. and affiliated funds
|
|
|
Series A
|
|
|
|
1,720,198
|
(2)
|
|
$
|
1,003,911
|
|
|
|
9/14/09
|
|
|
|
|
Series B
|
|
|
|
625,531
|
(3)
|
|
$
|
836,211
|
|
|
|
9/22/10
|
|
Reservoir Capital Partners, L.P. and affiliated funds
|
|
|
Series A
|
|
|
|
5,997,236
|
(4)
|
|
$
|
3,500,000
|
|
|
|
8/14/09
|
|
|
|
|
Series A
|
|
|
|
7,710,733
|
(5)
|
|
$
|
4,500,000
|
|
|
|
9/14/09
|
|
|
|
|
Series B
|
|
|
|
2,809,085
|
(6)
|
|
$
|
3,755,191
|
|
|
|
9/22/10
|
|
RockPort Capital Partners, L.P. and affiliated funds
|
|
|
Series A
|
|
|
|
3,426,992
|
(7)
|
|
$
|
2,000,000
|
|
|
|
8/14/09
|
|
|
|
|
Series A
|
|
|
|
3,769,692
|
(8)
|
|
$
|
2,200,000
|
|
|
|
9/14/09
|
|
|
|
|
Series B
|
|
|
|
1,377,332
|
(9)
|
|
$
|
1,841,221
|
|
|
|
9/22/10
|
|
Officers and Directors
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
P. Ramsay Battin
|
|
|
Series A
|
|
|
|
25,702
|
|
|
$
|
15,000
|
|
|
|
9/14/09
|
|
|
|
|
Series B
|
|
|
|
3,067
|
|
|
$
|
4,100
|
|
|
|
10/20/10
|
|
John F. Fairbanks
|
|
|
Series A
|
|
|
|
12,919
|
|
|
$
|
7,540
|
|
|
|
9/10/09
|
|
|
|
|
Series B
|
|
|
|
1,541
|
|
|
$
|
2,061
|
|
|
|
10/20/10
|
|
Donald R. Young
|
|
|
Series A
|
|
|
|
12,919
|
|
|
$
|
7,540
|
|
|
|
9/10/09
|
|
|
|
|
Series B
|
|
|
|
1,541
|
|
|
$
|
2,061
|
|
|
|
10/20/10
|
|
|
|
|
(1) |
|
Does not include shares of
preferred stock purchased by P. Ramsay Battin, a director of
Arcapita Inc., which is an affiliate of Arcapita Ventures I
Limited, and referenced under the Officers and
Directors section of this table.
|
|
(2) |
|
Consists of 676,380 shares of
Series A preferred stock purchased by Tenaya Capital IV-P, LP,
649,052 shares of Series A preferred stock purchased by
Tenaya Capital IV-C, LP and 394,766 shares of Series A
preferred stock purchased by Tenaya Capital IV, LP.
|
|
(3) |
|
Consists of 211,090 shares of
Series B preferred stock purchased by Tenaya Capital IV-P, LP,
202,561 shares of Series B preferred stock purchased
by Tenaya Capital IV-C, LP and 211,880 shares of
Series B preferred stock purchased by Tenaya Capital IV, LP.
|
|
(4) |
|
Consists of 5,222,427 shares
of Series A preferred stock purchased by Reservoir Capital
Partners, L.P. and 774,809 shares of Series A preferred
stock purchased by Reservoir Capital Master Fund, L.P.
|
|
(5) |
|
Consists of 6,799,324 shares
of Series A preferred stock purchased by Reservoir Capital
Partners, L.P. and 911,409 shares of Series A
preferred stock purchased by Reservoir Capital Master Fund, L.P.
|
|
(6) |
|
Consists of shares of Series B
preferred stock purchased by Reservoir Capital Partners, L.P.
|
|
(7) |
|
Consists of shares of Series A
preferred stock purchased by RockPort Capital Partners II, L.P.
|
141
|
|
|
(8) |
|
Consists of 2,398,894 shares
of Series A preferred stock purchased by RockPort Capital
Partners, L.P., 965,348 shares of Series A preferred
stock purchased by RockPort S II, LLC and 405,449 shares of
Series A preferred stock purchased by RockPort Capital
Partners II, L.P.
|
|
(9) |
|
Consists of 344,313 shares of
Series B preferred stock purchased by RockPort Capital
Partners, L.P., 812,836 shares of Series B preferred
stock purchased by RockPort Capital Partners II, L.P.,
178,118 shares of Series B preferred stock purchased
by RockPort S II, LLC and 42,065 shares of Series B
preferred stock purchased by RP Co-Investment Fund I, L.P.
|
Agreements with
Stockholders
In connection with our preferred stock financings described
above under Sales of Securities, we
entered into various stockholder agreements with the holders of
our preferred stock relating to voting rights and information
rights and registration rights, among other things. Our Fifth
Amended and Restated Stockholders Agreement dated
September 22, 2010, as amended, requires the stockholders
party thereto to vote to elect to our board of directors one
individual designated by Argonaut Private Equity, LLC, currently
Steven R. Mitchell; one individual designated by Arcapita
Ventures I Limited, currently P. Ramsay Battin; one individual
designated by Reservoir Capital Group, LLC, currently Craig A.
Huff; one individual designated by RockPort Capital, currently
David J. Prend; one individual designated by Tenaya
Capital, formerly Thomas E. Banahan who resigned as a member of
our board of directors on June 17, 2011; one individual who
is not an affiliate of us or a preferred stockholder and is an
expert in our industry, currently Mark L. Noetzel; one
individual who is our Chief Executive Officer, currently
Donald R. Young; and three additional individuals,
currently Robert M. Gervis, William P. Noglows and
Richard F. Reilly. These stockholder agreements will
terminate upon the completion of this offering, except for the
registration rights granted under our registration rights
agreement, as more fully described below in
Registration Rights and in
Description of Capital Stock Registration
Rights.
2011 Convertible
Note Financing
In 2011, we issued $30.0 million aggregate principal amount
of convertible notes with a maturity date of June 1, 2014
to 13 accredited investors, including 12 funds affiliated
with Fidelity Investments, in our 2011 convertible note
financing. Interest on the convertible notes accrues at the rate
of 8.0% per year. The unpaid principal amount of the convertible
notes, together with any interest accrued but unpaid thereon,
will be automatically converted into common stock upon the
closing of the offering made hereby at a conversion price equal
to 87.5% of the price to the public in this offering. Assuming
an initial public offering price of
$ per share, the mid-point of the
price range set forth on the cover page of this prospectus, and
the closing of the offering made hereby occurs
on ,
2011, the $30.0 million principal amount of the outstanding
convertible notes will convert into
approximately
shares of our common stock.
The convertible notes were issued in a private placement in
accordance with Section 4(2) of the Securities Act and the
shares of common stock issued upon the automatic conversion of
the convertible notes will be restricted securities. The holders
of the convertible notes will be entitled to the registration
rights provided in our registration rights agreement with regard
to the shares of common stock issued upon the automatic
conversion of the convertible notes.
Indemnification
Agreements
We have entered into indemnification agreements with each of our
non-employee directors and will enter into similar agreements
with certain officers. The indemnification agreements and our
restated certificate of incorporation and restated by-laws
require us to indemnify our directors and officers to the
fullest extent permitted by Delaware law. See
Management Limitation of Directors and
Officers Liability and Indemnification.
142
Registration
Rights
Following the expiration of the
lock-up
period described below in Shares Eligible for Future
Sale
Lock-Up
Agreements, pursuant to our registration rights agreement,
the holders
of
shares of common stock, which includes, 26,027,222 shares
of common stock, 68,853,493 shares of common stock issuable
upon conversion of all of our outstanding preferred
stock, shares
of our common stock issuable upon conversion of our convertible
notes upon completion of the offering made hereby
and
shares of common stock issuable in satisfaction of accrued but
unpaid dividends on preferred stock held by our preferred
stockholders, and 993,985 shares of common stock issuable
pursuant to the exercise of warrants or their transferees, are
entitled to registration rights with respect to the shares of
common stock held by them. These shares include substantially
all of the shares held by our principal stockholders and their
affiliates and the outstanding shares of our preferred stock
held by P. Ramsay Battin, one of our directors, Donald R. Young,
our President and Chief Executive Officer, and John F.
Fairbanks, our Chief Financial Officer.
See Description of Capital Stock Registration
Rights for a more detailed description of these
registration rights.
Policy for
Approval of Related Person Transactions
Pursuant to the written charter of our audit committee that will
be in effect upon completion of this offering, the audit
committee is responsible for reviewing, discussing with
management and the independent auditors and approving, (i) prior
to our entry into any such transaction, all transactions in
which we are a participant and in which any parties related to
us, including our executive officers, our directors, beneficial
owners of more than 5% of our securities, immediate family
members of the foregoing persons and any other persons whom our
board of directors determines may be considered related parties
under Item 404 of
Regulation S-K,
has or will have a direct or indirect material interest, or (ii)
courses of dealing with related parties that are significant in
size or involve terms or other aspects that differ from those
that would likely be negotiated with independent parties.
Approval of such related party transaction may, at the
discretion of our audit committee, be conditioned upon our
and/or the
related person at issue taking any actions that our audit
committee in its judgment determines to be necessary or
appropriate. In the event that a member of our audit committee
has an interest in the related party transaction under
discussion, such member must abstain from voting on the
transaction. Such member may, if so requested by the chair of
the audit committee, participate in some or all of the
discussions about the related party transaction in question.
143
PRINCIPAL
STOCKHOLDERS
The following table and accompanying footnotes present
information about the beneficial ownership of our common stock
as of June 30, 2011, and as adjusted to reflect the shares
offered by this prospectus, by:
|
|
|
|
|
each existing stockholder we know to beneficially own 5% or more
of our common stock, which we call our principal stockholders;
|
|
|
|
each of our directors;
|
|
|
|
each of our named executive officers; and
|
|
|
|
all of our current directors and executive officers as a group.
|
Beneficial ownership is determined in accordance with the rules
of the SEC and includes voting or investment power with respect
to the securities. Shares of common stock that may be acquired
by an individual or group within 60 days following
June 30, 2011, pursuant to the exercise of options are
deemed to be outstanding for the purpose of computing the
percentage ownership of such individual or group, but are not
deemed to be outstanding for the purpose of computing the
percentage ownership of any other person shown in the table.
Under these rules, more than one person may be deemed to be a
beneficial owner of the same securities and a person may be
deemed to be a beneficial owner of securities as to which such
person has no economic interest.
The percentage of shares beneficially owned before the offering
is based on 94,972,797 shares of our common stock
outstanding as of June 30, 2011, which gives effect to the
automatic conversion of all shares of our preferred stock
outstanding at June 30, 2011 on a
1-for-1
basis into an aggregate of 68,853,493 shares of our common
stock effective immediately prior to the completion of this
offering, but does not give effect to
(i)
shares of common stock to be issued upon the consummation of
this offering to holders of our preferred stock as payment of
accrued but unpaid dividends accrued through an assumed closing
date of the offering made hereby
of ,
2011 at an assumed offering price of
$ per share the mid-point of the
price range set forth on the cover page of this prospectus or
(ii) the automatic conversion of $30.0 million
aggregate principal amount and all accrued but unpaid interest
on the convertible notes due upon the closing of the offering
made hereby into an aggregate
of shares
of our common stock, at a conversion price equal to 87.5% of the
initial offering price, assuming an initial public offering
price of $ per share, the
mid-point of the price range set forth on the cover page of this
prospectus, and that the closing of the offering made hereby
occurs
on ,
2011. This information will be adjusted when a price range is
determined. The percentage of shares beneficially owned after
the offering is based
on
shares of our common stock to be outstanding after the offering.
144
Except as indicated in footnotes to this table, we believe that
the stockholders named in this table have sole voting and
investment power with respect to all shares of common stock
shown to be beneficially owned by them, based on information
provided to us by such stockholders.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
After this Offering
|
|
After this Offering
|
|
|
|
|
Assuming the Underwriters
|
|
Assuming the Underwriters
|
|
|
Prior to this Offering
|
|
Option is not Exercised
|
|
Option is Exercised in Full
|
|
|
Shares of
|
|
Percentage
|
|
Shares of
|
|
Percentage
|
|
Shares of
|
|
Percentage
|
|
|
Common
|
|
of Common
|
|
Common
|
|
of Common
|
|
Common
|
|
of Common
|
|
|
Stock
|
|
Stock
|
|
Stock
|
|
Stock
|
|
Stock
|
|
Stock
|
|
Name of Beneficial Owner
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal Stockholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Arcapita Ventures I
Limited(1)
|
|
|
14,852,396
|
|
|
|
15.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Argonaut Ventures I,
LLC(2)
|
|
|
17,182,459
|
|
|
|
18.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reservoir Capital Partners, L.P. and affiliated funds
(3)
|
|
|
26,354,045
|
|
|
|
27.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RockPort Capital Partners, L.P. and affiliated
funds(4)
|
|
|
12,937,266
|
|
|
|
13.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tenaya Capital and affiliated
funds(5)
|
|
|
5,869,742
|
|
|
|
6.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Entities affiliated with Fidelity
Investments(6)
|
|
|
|
|
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Directors and Executive Officers:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Donald R.
Young(7)
|
|
|
2,543,019
|
|
|
|
2.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
John F.
Fairbanks(8)
|
|
|
664,713
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Christopher L.
Marlette(9)
|
|
|
279,294
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Kevin A.
Schmidt(9)
|
|
|
763,705
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Harry R.
Walkoff(9)
|
|
|
650,253
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
P. Ramsay
Battin(10)
|
|
|
28,769
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Robert M.
Gervis(9)
|
|
|
33,125
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Craig A.
Huff(11)
|
|
|
26,354,045
|
|
|
|
27.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Steven R.
Mitchell(12)
|
|
|
17,182,459
|
|
|
|
18.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mark L.
Noetzel(9)
|
|
|
103,125
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
William P.
Noglows(9)
|
|
|
33,125
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
David J.
Prend(13)
|
|
|
12,937,266
|
|
|
|
13.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Richard F.
Reilly(9)
|
|
|
65,625
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All executive officers and directors as a group
(14 persons)(14)
|
|
|
61,917,817
|
|
|
|
61.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
|
Indicates beneficial ownership of
less than 1%.
|
|
(1) |
|
Consists of shares held by Arcapita
Ventures I Limited (AVIL). AVIL is managed and
advised by Arcapita Investment Management Limited and Arcapita
Inc., two wholly-owned subsidiaries of Arcapita Bank B.S.C.(c),
which exercises the voting and investment power over the shares
held of record by AVIL. The address for AVIL is
c/o Arcapita
Inc., 75 Fourteenth Street, 24th Floor, Atlanta, Georgia 30309.
|
|
(2) |
|
Consists of shares of common stock
held by Argonaut Ventures I, LLC (Argonaut), a
limited liability company, which is managed by Ken Levit and
Argonaut Private Equity, LLC (APE). Steven R.
Mitchell, one of our directors, Jason Martin, Don Millican, Fred
Dorwart and Ken Kinnear are managers, and the George B. Kaiser
Family Foundation (GKFF), an Oklahoma
not-for-profit
corporation, is the majority owner, of APE.
Messrs. Mitchell, Martin, Millican, Dorwart and Kinnear and
GKFF may be deemed to share and voting and investment control
over the shares, which are beneficially owned by Argonaut. Each
of these individuals and GKFF disclaims beneficial ownership of
the reported securities except to the extent of his or its
pecuniary interest therein. The address of Argonaut
Ventures I, LLC is 6733 South Yale, Tulsa, OK 74136.
|
|
(3) |
|
Consists of 23,502,071 shares
of common stock and 3,025 shares issuable upon the exercise
of warrants exercisable within 60 days of June 30,
2011 held by Reservoir Capital Partners, L.P. (RCP)
and 2,848,544 shares of common stock and 405 shares
issuable upon the exercise of warrants exercisable within
60 days of June 30, 2011 held by Reservoir Capital
Master Fund, L.P. (RCMF). The securities held by RCP
may be deemed to be beneficially owned by Daniel Stern and one
of our directors, Craig A. Huff, who are the senior managing
members (the Reservoir Members) of RCGM, LLC
(RCGM). RCGM is the managing member of Reservoir
Capital Group, L.L.C. (RCG), which is in turn the
general partner of Reservoir Capital Partners (Cayman), L.P.
(RCP Cayman), which is in turn the sole member of
RCP GP, LLC (RCP GP), and which is in turn the
general partner of RCP. The securities held by RCMF may be
deemed to be beneficially owned by the Reservoir Members, who
are the senior managing members of RCGM. RCGM is the managing
member of RCG, which is in turn the general partner of RCMF. As
a result, Messrs. Stern and Huff share voting and
|
145
|
|
|
|
|
investment control over the shares
held by RCP and RCMF. Each of the Reservoir Members, RCGM, RCG,
RCP Cayman and RCP GP disclaims beneficial ownership of the
reported securities except to the extent of his or its pecuniary
interest therein. The address for RCP and RCMF is
c/o Reservoir
Capital Group, L.L.C., 650 Madison Avenue,
24th
Floor, New York, New York 10022.
|
|
(4) |
|
Consists of 3,231,129 shares
of common stock and 13,972 shares issuable upon the
exercise of warrants exercisable within 60 days of
June 30, 2011 held by RockPort Capital Partners, L.P.
(RockPort I); 7,624,809 shares of common stock
and 1,368 shares issuable upon the exercise of warrants
exercisable within 60 days of June 30, 2011 held by
RockPort Capital Partners II, L.P. (RockPort II);
1,670,838 shares of common stock and 446 shares
issuable upon the exercise of warrants exercisable within
60 days of June 30, 2011 held by RockPort SII, LLC
(RSII); and 394,589 shares of common stock and
115 shares issuable upon the exercise of warrants
exercisable within 60 days of June 30, 2011 held by RP
Co-Investment Fund I, LP (RPCIF). The
securities held by RockPort I, RockPort II, RSII and RPCIF
may be deemed to be beneficially owned by RockPort
Capital I, LLC, RockPort Capital II, LLC, RockPort SGII,
LLC and RP Co-Investment Fund I GP, LLC, respectively, each
of which is the general partner of the respective entity. The
securities held by RockPort I, RockPort II, RSII and RPCIF
may also be deemed to be beneficially owned by Alexander Ellis
III, Janet B. James, William E. James, Charles J. McDermott,
Stoddard M. Wilson and one of our directors, David J. Prend, who
are the managing members (the Rockport Members) of
the general partners of each of RockPort I, RockPort II,
RSII and RPCIF, all of which may be deemed to share voting and
investment control with respect to such shares. Each of the
general partners of RockPort I, RockPort II, RSII and RPCIF
and the Rockport Members (the Rockport Reporting
Persons) disclaim beneficial ownership of the reported
securities except to the extent of his, her or its pecuniary
interest therein. The address for the Rockport Reporting Persons
is
c/o RockPort
Capital Partners, 160 Federal Street, 18th Floor, Boston,
Massachusetts 02110.
|
|
(5) |
|
Consists of 1,987,541 shares
of common stock and 661 shares issuable upon the exercise
of warrants exercisable within 60 days of June 30,
2011 held by Tenaya Capital IV, LP (TC IV);
1,980,126 shares of common stock and 658 shares
issuable upon the exercise of warrants exercisable within
60 days of June 30, 2011 held by Tenaya Capital IV-P,
LP (TC IV-P); 1,900,123 shares of common stock
and 633 shares issuable upon the exercise of warrants
exercisable within 60 days of June 30, 2011 held by
Tenaya Capital IV-C, LP (TC IV-C). The general
partner of TC IV is Tenaya Capital IV Annex GP, LLC
(TC IV Annex). The general partner of both TC IV-P
and TC IV-C is Tenaya Capital IV GP, LP, whose general
partner is Tenaya Capital IV GP, LLC (TC IV
LLC). The managing members of TC IV LLC and TC IV Annex
are Thomas E. Banahan, Benjamin Boyer, Stewart Gollmer, Brian
Melton and Brian Paul (collectively, the TC Managing
Members), all of which share voting and dispositive power
over these shares. The TC Managing Members disclaim beneficial
of such shares except to the extent of his pecuniary interest,
if any. The address for TC IV, TC IV-P, TC IV-C and the TC
Managing Members is
c/o Tenaya
Capital, 2965 Woodside Road, Suite A, Woodside, California
94062.
|
|
(6) |
|
Consists of shares of our common
stock to be issued upon the automatic conversion of
$29.0 million principal amount and all accrued but unpaid
interest on the convertible notes upon the closing of the
offering made hereby at a conversion price equal to 87.5% of the
initial offering price, assuming an initial public offering
price of $ per share, the
mid-point of the price range set forth on the cover page of this
prospectus, and that the closing of the offering made hereby
occurs
on ,
2011, of
which shares
of our common stock will be issued to Fidelity Select
Portfolios: Environment and Alternative Energy
Portfolio; shares
of our common stock will be issued to Fidelity Puritan Trust:
Fidelity Puritan
Fund; shares
of our common stock will be issued to Variable Insurance
Products Fund III: Balanced
Portfolio; shares
of our common stock will be issued to Fidelity Securities Fund:
Fidelity Dividend Growth Fund; shares of our common stock will
be issued to Fidelity Advisor Series I: Fidelity Advisor
Dividend Growth
Fund; shares
of our common stock will be issued to Fidelity Central
Investment Portfolios LLC: Fidelity Materials Central
Fund; shares
of our common stock will be issued to Variable Insurance
Products Fund IV: Materials
Portfolio; shares
of our common stock will be issued to Fidelity Select
Portfolios: Materials
Portfolio; shares
of our common stock will be issued to Fidelity Select
Portfolios: Industrials
Portfolio; shares
of our common stock will be issued to Fidelity Advisor Series
VII: Fidelity Advisor Industrials
Fund; shares
of our common stock will be issued to Variable Insurance
Products Fund IV: Industrials Portfolio;
and shares
of our common stock will be issued to Fidelity Central
Investment Portfolios LLC: Fidelity Industrials Central Fund.
The address for each of these entities is
c/o Fidelity
Investments, 82 Devonshire Street, Boston, MA 02109.
|
|
|
|
(7) |
|
Consists of 14,460 shares of
common stock and 2,528,559 shares issuable upon the
exercise of options exercisable within 60 days of
June 30, 2011. These options include 116,412 shares
issuable upon the exercise of options held by
Mr. Youngs children, of which Mr. Young has sole
voting power.
|
|
(8) |
|
Consists of 14,460 shares of
common stock and 650,253 shares issuable upon the exercise
of options exercisable within 60 days of June 30, 2011.
|
|
(9) |
|
Consists of shares issuable upon
the exercise of options exercisable within 60 days of
June 30, 2011.
|
|
(10) |
|
Reflects securities beneficially
owned individually by Mr. Battin. Mr. Battin is a
director of Arcapita Inc., an affiliate of AVIL, but is not
deemed to beneficially own any of the shares held by AVIL.
|
146
|
|
|
(11) |
|
Reflects securities beneficially
owned by RCP and RCMF as set forth in footnote 3, for which
Mr. Huff is a senior managing member of the ultimate
general partner of both entities. Mr. Huff disclaims
beneficial ownership of such shares except to the extent of his
pecuniary interest therein, if any.
|
|
(12) |
|
Reflects securities beneficially
owned by Argonaut as set forth in footnote 2. Mr. Mitchell
is a manager of APE, a manager of Argonaut. Mr. Mitchell
disclaims beneficial ownership of such shares except to the
extent of his pecuniary interest therein, if any.
|
|
(13) |
|
Reflects securities beneficially
owned by Rockport Capital Partners, L.P. and affiliated funds as
set forth in footnote 4, for which Mr. Prend is the
managing general partner. Mr. Prend disclaims beneficial
ownership of such shares except to the extent of his pecuniary
interest therein, if any.
|
|
|
|
(14) |
|
See footnotes 7 through 13. Also
includes options to purchase 279,294 shares of common stock
held by George L. Gould, Ph.D., which are exercisable
within 60 days following June 30, 2011.
|
147
DESCRIPTION OF
CAPITAL STOCK
The following description of our capital stock and provisions
of our restated certificate of incorporation and restated
by-laws are summaries and are qualified by reference to our
restated certificate of incorporation and restated by-laws that
will be in effect upon the closing of the offering made hereby.
Copies of these documents will be filed with the SEC as exhibits
to our registration statement, of which this prospectus forms a
part. The descriptions of our common stock and preferred stock
reflect changes to our capital structure that will occur upon
the closing of the offering made hereby.
Authorized
Capitalization
Upon the closing of the offering made hereby, our authorized
capital stock will consist
of shares
of our common stock, par value $0.001 per share,
and shares
of preferred stock, par value $0.001 per share.
As of June 30, 2011, after giving effect to the conversion
of all outstanding shares of our preferred stock into shares of
our common stock upon completion of this offering, but excluding
any shares issued in satisfaction of any accrued but unpaid
dividends on the preferred stock and any additional shares of
common stock issuable upon conversion of the Series B
preferred stock, each as described above in
Capitalization, we would have had
94,972,797 shares of common stock outstanding held of
record by 111 stockholders. Immediately following the completion
of this offering made hereby, we will
have shares
of common stock outstanding
(and shares
of common stock outstanding if the underwriters exercise their
option to purchase additional shares in full) and no shares of
preferred stock outstanding.
Common
Stock
As of June 30, 2011, we had issued and outstanding
26,119,304 shares of common stock, held by 102 stockholders
of record, and there were outstanding options to purchase
14,110,658 shares of common stock and outstanding warrants
to purchase 1,127,324 shares of common stock.
Holders of our common stock are entitled to one vote for each
share held of record on all matters submitted to a vote of the
stockholders, and do not have cumulative voting rights. Subject
to preferences that may be applicable to any outstanding shares
of preferred stock, holders of common stock are entitled to
receive ratably such dividends, if any, as may be declared from
time to time by our board of directors out of funds legally
available for dividend payments. All outstanding shares of
common stock are fully paid and nonassessable, and the shares of
common stock to be issued upon completion of this offering will
be fully paid and nonassessable. The holders of common stock
have no preferences or rights of conversion, exchange,
pre-emption or other subscription rights. There are no
redemption or sinking fund provisions applicable to the common
stock. In the event of any liquidation, dissolution or
winding-up
of our affairs, holders of common stock will be entitled to
share ratably in our assets that are remaining after payment or
provision for payment of all of our debts and obligations and
after liquidation payments to holders of outstanding shares of
preferred stock, if any.
Preferred
Stock
As of June 30, 2011, we had issued and outstanding
52,843,201 shares of Series A preferred stock, held by
53 stockholders of record and 16,010,292 shares of
Series B preferred stock held by 46 stockholders of record.
The holders of our Series A preferred stock and Series B
preferred stock are entitled to a cumulative dividend at the
rate of 8.0% per year. Upon completion of this offering, all of
our outstanding shares of preferred stock will convert
into shares
of common stock. We will also
issue shares
of common stock upon the closing of the offering made hereby in
satisfaction of accumulated dividends on our preferred stock,
assuming an initial public offering price of
$ per share, the mid-point of the
price range set forth on the cover page of this prospectus, and
that the offering is closed
on ,
2011.
148
If we issue preferred stock after the closing of the offering
made hereby, such preferred stock would have priority over
common stock with respect to dividends and other distributions,
including the distribution of assets upon liquidation. Our board
of directors has the authority, without further stockholder
authorization, to issue from time to time up
to shares
of preferred stock in one or more series and to fix the terms,
limitations, voting rights, relative rights and preferences and
variations of each series. Although we have no present plans to
issue any other shares of preferred stock, the issuance of
shares of preferred stock, or the issuance of rights to purchase
such shares, could decrease the amount of earnings and assets
available for distribution to the holders of common stock, could
adversely affect the rights and powers, including voting rights,
of the common stock, and could have the effect of delaying,
deterring or preventing a change of control of us or an
unsolicited acquisition proposal.
Warrants
As of June 30, 2011, we had warrants outstanding for the
number of shares of our common stock at the exercise prices and
expiration dates set forth below. Warrants entitle the holder to
purchase shares of our common at the specified exercise price at
any time prior to the expiration date.
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
Weighted-Average
|
Expiration Date
|
|
Shares
|
|
Exercise Price
|
|
February 24,
2013(1)(3)(4)(5)
|
|
|
224
|
|
|
$
|
0.003
|
|
March 23,
2013(1)(3)(4)(5)
|
|
|
237
|
|
|
$
|
0.003
|
|
October 20,
2014(1)(2)(3)(4)(5)
|
|
|
56
|
|
|
$
|
4.525
|
|
October 28,
2014(1)(2)(3)(4)(5)
|
|
|
28
|
|
|
$
|
4.525
|
|
January 12,
2015(1)(2)(3)(4)(5)
|
|
|
25
|
|
|
$
|
4.525
|
|
June 10, 2016
|
|
|
133,339
|
|
|
$
|
0.003
|
|
December 29,
2017(3)(5)
|
|
|
993,415
|
|
|
$
|
0.001
|
|
|
|
|
|
|
|
|
|
|
Total:
|
|
|
1,127,324
|
|
|
$
|
0.002
|
|
|
|
|
(1) |
|
Each of these warrants contains
anti-dilution provisions providing for adjustments to the
exercise price upon the issuance of shares of our common stock
at a price less than the exercise price, excluding shares of our
common stock issuable upon exercise of options, warrants,
conversion of convertible securities and certain issuances
approved in advance by a majority of our board of directors.
|
|
(2) |
|
Each of these warrants expires on
the earlier of this date or a corporate event, which is defined
in the warrant to include (i) the sale, transfer, exchange
or other disposition of all or substantially all of our assets;
(ii) a merger or reorganization that results in our
stockholder immediately prior to such transaction holding less
than 50% of the voting power of the surviving entity of such
transaction; (iii) a dissolution or liquidation; and
(iv) the sale, transfer, exchange or other disposition of
all or substantially all of our common stock.
|
|
(3) |
|
The shares underlying each of these
warrants are entitled to certain registration rights set forth
in our registration rights agreement. See
Registration Rights below for a
description of these registration rights.
|
|
(4) |
|
Each of these warrants provides
that immediately before its expiration or termination, if the
fair market value of one share of our common stock is greater
than the exercise price, the warrant will be automatically
exercised pursuant to its net exercise provision.
|
|
(5) |
|
Each of these warrants has net
exercise provisions under which the holder may, in lieu of
payment of the exercise price in cash, surrender the warrant and
receive a net amount of shares of our common based on the fair
market value of the underlying shares of our common stock at the
time of exercise of the warrant, after deduction of the
aggregate exercise price.
|
Registration
Rights
Following the expiration of the
lock-up
period described below in Shares Eligible for Future
Sale
Lock-Up
Agreements, the holders
of
shares of common stock, which includes, 26,027,222 shares
of common stock, 68,853,493 shares of common stock issuable
upon conversion of all of our outstanding preferred
stock,
shares of our common stock issuable upon
149
conversion of our convertible notes upon completion of the
offering made hereby
and
shares of common stock issuable in satisfaction of accrued but
unpaid dividends on preferred stock held by our preferred
stockholders, and 993,985 shares of common stock issuable
pursuant to the exercise of warrants or their transferees, are
entitled to certain registration rights with respect to these
securities as set forth in an agreement between us and the
holders of these securities. We are generally required to pay
all expenses incurred in connection with registrations effected
in connection with the following rights, excluding underwriting
discounts and commissions, and fees and expenses of counsel to
the registering security holders. All registration rights
described below shall terminate at the earlier of (1) the
seventh anniversary of the completion of this offering, provided
this offering constitutes a qualified public offering under our
existing third amended and restated certificate of
incorporation, (2) such shares have been registered under
the Securities Act and (3) with respect to any holder of
registrable shares that holds less than 1% of our common stock,
when such holder can sell all of such shares under Rule 144
promulgated under the Securities Act during any 90 day
period.
Demand rights. At any time after six
months after the completion of this offering, subject to
specified limitations, the holders representing at least a
majority of these registrable shares may require that we
register all or a portion of these securities for sale under the
Securities Act, which we refer to as a demand registration, if
the anticipated aggregate offering price of such securities is
at least $10,000,000. We may be required to effect up to two
such registrations. Stockholders with these registration rights
who are not part of an initial registration demand are entitled
to notice and are entitled to include their shares of common
stock in the registration. Under certain circumstances, the
underwriters, if any, may limit the number of shares included in
any such registration.
Piggyback rights. If we propose to
register any of our equity securities under the Securities Act,
other than in connection with (i) a registration relating
solely to our employee benefit plans, (ii) a registration
relating solely to a business combination or merger involving
us, the holders of these registrable shares are entitled to
notice of such registration and are entitled to include their
shares of common stock in the registration or (iii) the
initial public offering. Under certain circumstances, the
underwriters, if any, may limit the number of shares included in
any such registration.
Form S-3
rights. If we become eligible to file
registration statements on
Form S-3,
subject to specified limitations, the holders of these
registrable shares may require us to register all or a portion
of their registrable shares on
Form S-3,
if the anticipated aggregate offering price of such securities
is at least $2,000,000. Such requests for registration shall not
be considered a demand registration pursuant to the Demand
rights section above. We are not required to
(i) effect more than two such registrations in any rolling
12-month
period or (ii) keep effective at any one time more than one
registration statement on
Form S-3.
Stockholders with these registration rights who are not part of
an initial registration demand are entitled to notice and are
entitled to include their shares of common stock in the
registration. Under certain circumstances, the underwriters, if
any, may limit the number of shares included in any such
registration.
Anti-Takeover
Effects of Delaware Law and Our Restated Certificate of
Incorporation and Restated By-Laws
The provisions of Delaware law, our restated certificate of
incorporation to be filed upon completion of this offering and
our restated by-laws to be effective upon completion of this
offering discussed below could discourage or make it more
difficult to accomplish a proxy contest or other change in our
management or the acquisition of control by a holder of a
substantial amount of our voting stock. It is possible that
these provisions could make it more difficult to accomplish, or
could deter, transactions that stockholders may otherwise
consider to be in their best interests or in our best interests.
These provisions are intended to enhance the likelihood of
continuity and stability in the composition of our board of
directors and in the policies formulated by the board of
directors and to discourage certain types of transactions that
may involve an actual or threatened change of our control. These
provisions are designed to reduce our vulnerability to an
unsolicited acquisition
150
proposal and to discourage certain tactics that may be used in
proxy fights. Such provisions also may have the effect of
preventing changes in our management.
Delaware
Statutory Business Combinations Provision
We are subject to the anti-takeover provisions of
Section 203 of the Delaware General Corporation Law.
Section 203 prohibits a publicly-held Delaware corporation
from engaging in a business combination with an
interested stockholder for a period of three years
after the date of the transaction in which the person became an
interested stockholder, unless the business combination is, or
the transaction in which the person became an interested
stockholder was, approved in a prescribed manner or another
prescribed exception applies. For purposes of Section 203,
a business combination is defined broadly to include
a merger, asset sale or other transaction resulting in a
financial benefit to the interested stockholder, and, subject to
certain exceptions, an interested stockholder is a
person who, together with his or her affiliates and associates,
owns, or within three years prior, did own, 15% or more of the
corporations voting stock.
Classified
Board of Directors; Removal of Directors for Cause
Our restated certificate of incorporation and restated by-laws
to be effective upon completion of this offering provide that
upon completion of this offering, our board of directors will be
divided into three classes, with the term of office of the first
class to expire at the first annual meeting of stockholders
following the initial classification of directors, the term of
office of the second class to expire at the second annual
meeting of stockholders following the initial classification of
directors, and the term of office of the third class to expire
at the third annual meeting of stockholders following the
initial classification of directors. At each annual meeting of
stockholders, directors elected to succeed those directors whose
terms expire will be elected for a three-year term of office.
All directors elected to our classified board of directors will
serve until the election and qualification of their respective
successors or their earlier resignation or removal. The board of
directors is authorized to create new directorships and to fill
such positions so created and is permitted to specify the class
to which any such new position is assigned. The person filling
such position would serve for the term applicable to that class.
The board of directors, or its remaining members, even if less
than a quorum, is also empowered to fill vacancies on the board
of directors occurring for any reason for the remainder of the
term of the class of directors in which the vacancy occurred.
Members of the board of directors may only be removed for cause
and only by the affirmative vote of 75% of our outstanding
voting stock. These provisions are likely to increase the time
required for stockholders to change the composition of the board
of directors. For example, at least two annual meetings will be
necessary for stockholders to effect a change in a majority of
the members of the board of directors.
Advance Notice
Provisions for Stockholder Proposals and Stockholder Nominations
of Directors
Our restated by-laws provide that, for nominations to the board
of directors or for other business to be properly brought by a
stockholder before a meeting of stockholders, the stockholder
must first have given timely notice of the proposal in writing
to our Secretary. For an annual meeting, a stockholders
notice generally must be delivered not less than 45 days
nor more than 75 days prior to the anniversary of the
mailing date of the proxy statement for the previous years
annual meeting. For a special meeting, the notice must generally
be delivered not earlier than the 90th day prior to the
meeting and not later than the later of (1) the
60th day prior to the meeting or (2) the 10th day
following the day on which public announcement of the meeting is
first made. Detailed requirements as to the form of the notice
and information required in the notice are specified in the
restated by-laws. If it is determined that business was not
properly brought before a meeting in accordance with our bylaw
provisions, such business will not be conducted at the meeting.
151
Special
Meetings of Stockholders
Special meetings of the stockholders may be called only by our
board of directors pursuant to a resolution adopted by a
majority of the total number of directors.
No Stockholder
Action by Written Consent
Our restated certificate of incorporation and restated by-laws
do not permit our stockholders to act by written consent. As a
result, any action to be effected by our stockholders must be
effected at a duly called annual or special meeting of the
stockholders.
Super Majority
Stockholder Vote Required for Certain Actions
The Delaware General Corporation Law provides generally that the
affirmative vote of a majority of the shares entitled to vote on
any matter is required to amend a corporations certificate
of incorporation or by-laws, unless the corporations
certificate of incorporation or by-laws, as the case may be,
requires a greater percentage. Our restated certificate of
incorporation requires the affirmative vote of the holders of at
least 75% of our outstanding voting stock to amend or repeal any
of the provisions discussed in this section of this prospectus
entitled Anti-Takeover Effects of Delaware Law and Our
Restated Certificate of Incorporation and Restated Bylaws
or to reduce the number of authorized shares of common stock or
preferred stock. This 75% stockholder vote would be in addition
to any separate class vote that might in the future be required
pursuant to the terms of any preferred stock that might then be
outstanding. In addition, a 75% vote is also required for any
amendment to, or repeal of, our restated by-laws by the
stockholders. Our restated by-laws may be amended or repealed by
a simple majority vote of the board of directors.
Transfer Agent
and Registrar
The transfer agent and registrar for our common stock
is .
Stock Market
Listing
We have applied to list our common stock on the NYSE under the
symbol ASPN.
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DESCRIPTION OF
CERTAIN INDEBTEDNESS
Set out below is a description of certain of our outstanding
indebtedness and our revolving credit facility.
Subordinated
Promissory Notes
In December 2010, we entered into a subordinated note and
warrant purchase agreement with affiliates of Piper Capital LLC
and other investors and issued an aggregate of
$10.0 million principal amount of subordinated notes. In
June 2011, we amended the subordinated note and warrant purchase
agreement to revise the maturity date in connection with the
issuance of our convertible notes. The subordinated notes bear
interest at the rate of 12% annually and are required to be
repaid upon the earlier of: (i) March 2, 2014,
(ii) the first anniversary of the completion of this
offering or (iii) the last business day prior to the date
that any of our preferred stock is redeemed. The subordinated
note and warrant purchase agreement contains standard
restrictive covenants that impose significant operating and
financial restrictions on our operations. As of June 30, 2011,
the total outstanding principal and accrued interest under the
subordinated notes was $10.6 million. In connection with
the issuance of the subordinated notes, we issued warrants to
purchase 1,496,107 shares of our common stock. These
warrants have a seven-year term and are immediately exercisable
at an exercise price of $0.001 per share. The holders of the
warrants will be entitled to registration rights provided in our
registration rights agreement with regard to the shares of
common stock issued upon the exercise of the warrants.
The subordinated notes are subject to a negative pledge on our
intellectual property and are secured by a first priority lien
on all real property and equipment located at our East
Providence facility and a second priority lien on all other
assets, including all accounts, equipment, inventory and
receivables, but excluding our intellectual property and deposit
accounts.
Revolving Credit
Facility
In March 2011, we entered into a $10.0 million revolving
credit facility with Silicon Valley Bank, of which we could have
drawn $10.0 million as of June 30, 2011. In June 2011, we
amended the agreement in connection with the issuance of our
convertible notes. Interest on extensions of credit under the
revolving credit facility is equal to the prime rate which at
June 30, 2011 was 4.0% per annum, plus 1.0% per annum,
provided that if we are at or above a certain liquidity
threshold, interest on extensions of credit under the revolving
credit facility is equal to the prime rate plus 0.5% per annum.
In addition, we are required to pay a quarterly unused revolving
line facility fee of 0.5% per annum of the average unused
portion of the revolving credit facility. The revolving credit
facility contains standard restrictive covenants that impose
significant operating and financial restrictions on our
operations and also contains events of default customary for
credit facilities of this type, including, among other things,
nonpayment of principal or interest when due. The revolving
credit facility will mature on March 31, 2013. As of
June 30, 2011, there were no amounts outstanding under the
revolving credit facility.
The revolving credit facility is subject to a negative pledge on
our intellectual property and is secured by a second priority
lien on all real property and equipment located at our East
Providence facility and a first priority lien on all other
assets, including all accounts, equipment, inventory and
receivables, but excluding our intellectual property.
Subordinated
Convertible Promissory Notes
In June 2011, we entered into a note purchase agreement with
certain affiliates of Fidelity Investments and BASF Venture
Capital and issued $30.0 million aggregate principal amount
of convertible notes, of which $26.0 million have a maturity
date of June 1, 2014 and $4.0 million have a
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maturity date of June 14, 2014. Interest on the convertible
notes accrues at the rate of 8.0% per year. The unpaid principal
amount of the convertible notes, together with any interest
accrued but unpaid thereon, will be automatically converted into
common stock upon the closing of the offering made hereby at a
conversion price equal to 87.5% of the price to the public in
this offering. The note purchase agreement contains standard
restrictive covenants that impose significant operating and
financial restrictions on our operations. The convertible notes
are not secured. The holders of these convertible notes will be
entitled to registration rights provided in our registration
rights agreement with regard to the shares of common stock
issued upon conversion of these convertible notes. As of
June 30, 2011, the total outstanding principal and accrued
interest under the convertible notes was $30.5 million.
154
SHARES ELIGIBLE
FOR FUTURE SALE
Prior to this offering, there has been no public market for our
common stock, and a liquid public trading market for our common
stock may not develop or be sustained after this offering. If a
public market does develop, future sales of significant amounts
of our common stock, including shares issued upon exercise of
outstanding options or warrants, or the anticipation of those
sales, could adversely affect the public market prices
prevailing from time to time and could impair our ability to
raise capital through sales of our equity securities. We have
applied to list our common stock on the NYSE under the symbol
ASPN.
Upon the closing of the offering made hereby, we will have
outstanding an aggregate
of shares
of common stock, assuming no exercise by the underwriters of
their option to purchase additional shares and no exercise of
outstanding options. Of these shares, all of the shares of our
common stock sold in this offering will be freely tradable
without restriction or further registration under the Securities
Act, except for any shares of our common stock purchased by our
affiliates, as that term is defined in Rule 144
under the Securities Act, whose sales would be subject to the
Rule 144 resale restrictions described below.
The remaining shares of common stock will be restricted
securities, as that term is defined in Rule 144 under
the Securities Act. These restricted securities are eligible for
public sale only if they are registered under the Securities Act
or if they qualify for an exemption from registration under the
Securities Act. One such safe-harbor exemption is Rule 144,
which is summarized below.
Subject to the
lock-up
agreements described below and the provisions of Rule 144
under the Securities Act, these restricted securities and shares
sold in this offering will be available for sale in the public
market as follows:
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Shares Eligible
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Date Available for
Sale
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for Sale
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Comment
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Date of prospectus
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Shares sold in the offering and shares that can be sold under
Rule 144 that are not subject to a lock-up
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180 days* after date of prospectus
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Lock-up released; shares can be sold under Rule 144
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*
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180 days corresponds to the
lock-up
period described below in
Lock-up
Agreements. This
lock-up
period may be extended or shortened under certain circumstances
as described in that section. However, Goldman,
Sachs & Co. and Morgan Stanley & Co. LLC,
may in their sole discretion, at any time without prior notice,
release all or any portion of the shares from the restrictions
in any of these agreements.
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In addition, of the 14,110,658 shares of our common stock
that were issuable upon the exercise of stock options
outstanding as of June 30, 2011, options to purchase
6,952,603 shares were exercisable as of June 30, 2011
and, upon exercise, these shares will be eligible for sale in
the public markets, subject to the
lock-up
agreements and securities laws described below.
Rule 144
Affiliate
Resales of Shares
Affiliates of ours must generally comply with Rule 144 if
they wish to sell in the public market any shares of our common
stock, whether or not those shares are restricted
securities. Restricted securities are any
securities acquired from us or one of our affiliates in a
transaction not involving a public offering. All shares of our
common stock issued prior to the closing of the offering made
hereby, and the shares of common stock issuable upon the
conversion of our preferred stock and our convertible notes, are
considered to be restricted securities. The shares of our common
stock sold in this offering are not considered to be restricted
securities.
In general, subject to the
lock-up
agreements described below, beginning 90 days after the
effective date of the registration statement of which this
prospectus is a part, a person who is an
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affiliate of ours, or who was an affiliate of ours at any time
during the three months immediately before a sale can sell
restricted shares of our common stock in compliance with the
following requirements of Rule 144.
Holding Period. If the shares are restricted
securities, an affiliate must have beneficially owned the shares
of our common stock for at least six months.
Manner of Sale. An affiliate must sell its
shares in brokers transactions or certain
riskless principal transactions or to market makers,
each within the meaning of Rule 144.
Limitation on Number of Shares Sold. An
affiliate is only allowed to sell within any three-month period
an aggregate number of shares of our common stock that does
not exceed the greater of:
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one percent of the number of the total number of shares of our
common stock then outstanding, which will equal
approximately shares
immediately after this offering; and
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the average weekly trading volume in our common stock on the
stock exchange where our common stock is traded during the four
calendar weeks preceding either (i) to the extent that the
seller is required to file a notice on Form 144 with
respect to such sale, the date of filing such notice,
(ii) date of receipt of the order to execute the
transaction by the broker or (iii) the date of execution of
the transaction with the market maker.
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Current Public Information. An affiliate may
only resell its restricted securities to the extent that
adequate current public information, as defined in
Rule 144, is available about us, which, in our case, means
that we have been subject to the reporting requirements of
Section 13 or 15(d) of the Exchange Act for a period of at
least 90 days prior to the date of the sale and we have
filed all reports with the SEC required by those sections during
the preceding twelve months (or such shorter period that we have
been subject to these filing requirements).
Notice on Form 144. If the number of
shares of our common stock being sold by an affiliate under
Rule 144 during any three-month period exceeds
5,000 shares or has an aggregate sale price in excess of
$50,000, then the seller must file a notice on Form 144
with the SEC and the stock exchange on which our common stock is
traded concurrently with either the placing of a sale order with
the broker or the execution directly with a market maker.
Non-Affiliate
Resales of Restricted Shares
Any person or entity who is not an affiliate of ours and who has
not been an affiliate of ours at any time during the three
months preceding a sale is only required to comply with
Rule 144 in connection with sales of restricted shares of
our common stock. Subject to the
lock-up
agreements described below, those persons may sell shares of our
common stock that they have beneficially owned for at least one
year without any restrictions under Rule 144 immediately
following the effective date of the registration statement of
which this prospectus is a part.
Further, beginning 90 days after the effective date of the
registration statement of which this prospectus is a part, a
person who is not an affiliate of ours at the time such person
sells shares of our common stock, and has not been an affiliate
of ours at any time during the three months preceding such sale,
and who has beneficially owned such shares of our common stock,
as applicable, for at least six months but less than a year, is
entitled to sell such shares so long as there is adequate
current public information, as defined in Rule 144,
available about us.
Resales of restricted shares of our common stock by
non-affiliates are not subject to the manner of sale, volume
limitation or notice filing provisions of Rule 144,
described above.
Rule 701
Rule 701 under the Securities Act applies to shares
purchased from us by our employees, directors or consultants, in
connection with a qualified compensatory stock plan or other
written
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agreement, either prior to the date of this prospectus or
pursuant to the exercise of options granted prior to the date of
this prospectus. Shares issued in reliance on Rule 701 are
restricted securities, but may be sold in the public
market beginning 90 days after the date of this prospectus
(i) by our affiliates, subject to compliance with the
provisions of Rule 144 other than its one-year holding
period requirement, and (ii) by persons other than our
affiliates, subject only to the manner of sale provisions of
Rule 144.
Lock-up
Agreements
Holders
of
outstanding shares of our common stock, including each of our
officers and directors, have agreed with the underwriters,
subject to certain exceptions, not to offer, sell, contract to
sell, pledge, grant any option to purchase, make any short sale
or otherwise dispose of any shares of our common stock, or any
options or warrants to purchase any shares of our common stock,
or any securities convertible into, exchangeable for or that
represent the right to receive shares of our common stock for a
period through the date 180 days after the date of this
prospectus, as modified as described below, except with the
prior written consent of Goldman, Sachs & Co. and
Morgan Stanley & Co. LLC on behalf of the underwriters.
The 180-day
restricted period will be automatically extended under the
following circumstances:
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if, during the last 17 days of the
180-day
restricted period, we release earnings results or announce
material news or a material event, then the restrictions
described in the preceding paragraph will continue to apply
until the expiration of the
18-day
period beginning on the date of release of the earnings results
or the announcement of the material news or material event, as
applicable; or
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if, prior to the expiration of the
180-day
restricted period, we announce that we will release earnings
results during the
15-day
period following the last day of the
180-day
restricted period, then the restrictions described in the
preceding paragraph will continue to apply until the expiration
of the
18-day
period beginning on the date of release of the earnings results
or the announcement of the material news or material event, as
applicable.
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Goldman, Sachs & Co. and Morgan Stanley &
Co. LLC currently do not anticipate shortening or waiving any of
the lock-up
agreements and do not have any pre-established conditions for
such modifications or waivers. Goldman, Sachs & Co.
and Morgan Stanley & Co. LLC may, however, release for
sale in the public market all or any portion of the shares
subject to the
lock-up
agreement.
Stock
Options
As of June 30, 2011, we had outstanding options to purchase
14,110,658 shares of our common stock at a weighted-average
exercise price of $0.62 per share, of which options to purchase
6,952,603 shares were exercisable as of June 30, 2011.
Following this offering, we intend to file a registration
statement on
Form S-8
under the Securities Act to register all of the shares subject
to outstanding options and options and other awards issuable
under the 2001 equity incentive plan and the 2011 equity
incentive plan. See Management
Compensation Stock Option and Other Compensation
Plans for additional information regarding these plans.
Warrants
As of June 30, 2011, we had outstanding warrants to
purchase an aggregate of 1,127,324 shares of our common
stock at a weighted-average exercise price of $0.002 per share.
Any shares purchased pursuant to these warrants will be
restricted shares and may be sold in the public
market only if they are registered under the Securities Act or
qualify for an exemption from such registration.
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Registration
Rights
Upon expiration of the
lock-up
period described above in
Lock-Up
Agreements, the holders
of
shares of common stock and 993,985 shares of common stock
issuable pursuant to the exercise of warrants, or their
transferees, will be entitled to various rights with respect to
the registration of these shares under the Securities Act. See
Description of Capital Stock Registration
Rights. Registration of these shares under the Securities
Act would result in these shares becoming freely tradable
without restriction under the Securities Act immediately upon
the effectiveness of the registration, except for shares held by
affiliates.
158
MATERIAL U.S.
FEDERAL TAX CONSIDERATIONS FOR
NON-U.S.
HOLDERS
The following is a general discussion of the material
U.S. federal income and estate tax considerations relating
to the purchase, ownership and disposition of our common stock
by a
non-U.S. holder
as of the date hereof. For purposes of this discussion, the term
non-U.S. holder
means a beneficial owner of our common stock (other than a
partnership) that is not, for U.S. federal income tax
purposes:
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an individual who is a citizen or resident of the United States;
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a corporation, or other entity treated as a corporation for
U.S. federal income tax purposes, created or organized in
or under the laws of the United States, any state thereof or the
District of Columbia;
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an estate the income of which is subject to U.S. federal
income taxation regardless of its source; or
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a trust, if a U.S. court is able to exercise primary
supervision over the administration of the trust and one or more
U.S. persons have authority to control all substantial
decisions of the trust or if the trust has a valid election to
be treated as a U.S. person under applicable
U.S. Treasury Regulations.
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An individual may be treated as a resident instead of a
nonresident of the United States in any calendar year for
U.S. federal income tax purposes if the individual was
present in the United States for at least 31 days in that
calendar year and for an aggregate of at least 183 days
during the three-year period ending with the current calendar
year. For purposes of this calculation, all of the days present
in the current year, one-third of the days present in the
immediately preceding year and one-sixth of the days present in
the second preceding year are counted. Residents are taxed for
U.S. federal income tax purposes as if they were
U.S. citizens.
This discussion is based on current provisions of the Code,
existing and proposed U.S. Treasury Regulations promulgated
thereunder, current administrative rulings and judicial
decisions, all as in effect as of the date of this prospectus
and all of which are subject to change or to differing
interpretation, possibly with retroactive effect. Any change
could alter the tax consequences to
non-U.S. holders
described in this prospectus. In addition, the Internal Revenue
Service, or the IRS, could challenge one or more of the tax
consequences described in this prospectus.
We assume in this discussion that each
non-U.S. holder
holds shares of our common stock as a capital asset (generally,
property held for investment). This discussion does not address
all aspects of U.S. federal income and estate taxation that
may be relevant to a particular
non-U.S. holder
in light of that
non-U.S. holders
individual circumstances nor does it address any aspects of
U.S. state, local or
non-U.S. taxes.
This discussion also does not consider any specific facts or
circumstances that may apply to a
non-U.S. holder
and does not address the special tax rules applicable to
particular
non-U.S. holders,
such as:
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insurance companies;
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tax-exempt organizations;
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financial institutions;
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brokers or dealers in securities;
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regulated investment companies;
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pension plans;
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controlled foreign corporations;
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passive foreign investment companies;
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owners that hold our common stock as part of a straddle, hedge,
conversion transaction, synthetic security or other integrated
investment; and
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certain U.S. expatriates.
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In addition, this discussion does not address the tax treatment
of partnerships or other entities which are transparent for
U.S. federal income tax purposes, or persons who hold their
common stock through a partnership or other transparent entity.
A partner in a partnership or other transparent entity that will
hold our common stock should consult his, her or its own tax
advisor regarding the tax consequences of the ownership and
disposition of our common stock through a partnership or other
transparent entity, as applicable.
Prospective investors should consult their own tax advisors
regarding the U.S. federal, state, local and
non-U.S. income
and other tax considerations of acquiring, holding and disposing
of our common stock.
Dividends
If we pay distributions on our common stock, those distributions
generally will constitute dividends for U.S. federal income
tax purposes to the extent paid from our current or accumulated
earnings and profits, as determined under U.S. federal
income tax principles. If a distribution exceeds our current and
accumulated earnings and profits, the excess will be treated as
a tax-free return of the
non-U.S. holders
investment, up to such holders tax basis in the common
stock. Any remaining excess will be treated as capital gain,
subject to the tax treatment described below under the heading
Gain on Disposition of Common Stock.
Dividends paid to a
non-U.S. holder
generally will be subject to withholding of U.S. federal
income tax at a 30% rate or such lower rate as may be specified
by an applicable income tax treaty between the United States and
such holders country of residence. If we determine, at a
time reasonably close to the date of payment of a distribution
on our common stock, that the distribution will not constitute a
dividend because we do not anticipate having current or
accumulated earnings and profits, we intend not to withhold any
U.S. federal income tax on the distribution as permitted by
U.S. Treasury Regulations.
Dividends that are treated as effectively connected with a trade
or business conducted by a
non-U.S. holder
within the United States, and, if an applicable income tax
treaty so provides, that are attributable to a permanent
establishment or a fixed base maintained by the
non-U.S. holder
within the United States (such income,
U.S. effectively connected income), are
generally exempt from the 30% withholding tax if the
non-U.S. holder
satisfies applicable certification and disclosure requirements.
However, such U.S. effectively connected income, net of
specified deductions and credits, is taxed at the same graduated
U.S. federal income tax rates applicable to United States
persons (as defined in the Code). Any U.S. effectively
connected income received by a
non-U.S. holder
that is a corporation may also, under certain circumstances, be
subject to an additional branch profits tax at a 30%
rate or such lower rate as may be specified by an applicable
income tax treaty between the United States and such
holders country of residence.
A
non-U.S. holder
of our common stock who claims the benefit of an applicable
income tax treaty between the United States and such
holders country of residence generally will be required to
provide a properly executed IRS
Form W-8BEN
(or successor form) and satisfy applicable certification and
other requirements. Non-U.S. holders are urged to consult their
own tax advisors regarding their entitlement to benefits under a
relevant income tax treaty. A
non-U.S. holder
that is eligible for a reduced rate of U.S. withholding tax
under an income tax treaty may obtain a refund or credit of any
excess amounts withheld by timely filing an appropriate claim
with the IRS.
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Gain on
Disposition of Common Stock
A
non-U.S. holder
generally will not be subject to U.S. federal income tax on
gain realized on a disposition of our common stock unless:
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the gain is effectively connected with the
non-U.S. holders
conduct of a trade or business in the United States, and, if an
applicable income tax treaty so provides, the gain is
attributable to a permanent establishment maintained by the
non-U.S. holder
in the United States; in these cases, the
non-U.S. holder
will be taxed on a net income basis at the regular graduated
rates and in the manner applicable to United States persons (as
defined in the Code), and, if the
non-U.S. holder
is a foreign corporation, an additional branch profits tax at a
rate of 30%, or a lower rate as may be specified by an
applicable income tax treaty, may also apply;
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the
non-U.S. holder
is an individual present in the United States for 183 days
or more in the taxable year of the disposition and certain other
conditions are met, in which case the
non-U.S. holder
will be subject to a 30% tax (or such lower rate as may be
specified by an applicable income tax treaty) on the net gain
derived from the disposition (which may be offset by United
States source capital losses, even though the individual is not
considered a resident of the United States); or
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we are or have been, at any time during the five-year period
preceding such disposition (or the
non-U.S. holders
holding period, if shorter) a U.S. real property
holding corporation for U.S. federal income tax
purposes, unless our common stock is regularly traded on an
established securities market and the
non-U.S. holder
held no more than five percent of our outstanding common stock,
directly or indirectly, during the shorter of the five-year
period ending on the date of the disposition or the period that
the
non-U.S. holder
held our common stock. Generally, a corporation is a
U.S. real property holding corporation if the
fair market value of its U.S. real property
interests equals or exceeds 50% of the sum of the fair
market value of its worldwide real property interests plus its
other assets used or held for use in a trade or business.
Although valuations are inherently uncertain, and no assurance
can be given that our valuations of our U.S. real property
interests and our other assets used or held for use in a
trade or business will not change, we nevertheless believe that
we are not currently, and we do not anticipate becoming, a
U.S. real property holding corporation for
U.S. federal income tax purposes. Furthermore, even if we
were to become a U.S. real property holding
corporation, so long as our common stock continues to be
regularly traded on an established securities market, only a
non-U.S. holder who holds or held at any time during the
five year period preceding the date of disposition (or such
non-U.S. holders holding period, if shorter) more than 5%
of our common stock will be subject to U.S. federal income tax
on the disposition of our common stock.
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Information
Reporting and Backup Withholding Tax
We must report annually to the IRS and to each
non-U.S. holder
the gross amount of the distributions on our common stock paid
to such holder and the tax withheld, if any, with respect to
such distributions.
Non-U.S. holders
may have to comply with specific certification procedures to
establish that the holder is not a United States person (as
defined in the Code) in order to avoid backup withholding at the
applicable rate, currently 28%, with respect to dividends on our
common stock. Generally, a holder will comply with such
procedures if it certifies, under penalty of perjury, that it is
a
non-U.S. holder
(by providing a properly executed IRS
Form W-8BEN
or otherwise meeting documentary evidence requirements for
establishing that it is a
non-U.S. holder)
and the payor does not have actual knowledge or reason to know
that such holder is a United States person (as defined in the
Code) or otherwise establishes an exemption.
Information reporting and backup withholding generally will
apply to the proceeds of a disposition of our common stock by a
non-U.S. holder
effected by or through the U.S. office of any broker,
U.S. or foreign, unless the holder certifies under penalty
of perjury its status as a
non-U.S. holder
(and the
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payor does not have actual knowledge or reason to know that such
holder is a United States person (as defined in the Code)) and
satisfies certain other requirements, or otherwise establishes
an exemption. Generally, information reporting and backup
withholding will not apply to a payment of disposition proceeds
to a
non-U.S. holder
where the transaction is effected outside the United States
through a
non-U.S. office
of a broker. However, for information reporting purposes,
dispositions effected through a
non-U.S. office
of a broker with substantial U.S. ownership or operations
generally will be treated in a manner similar to dispositions
effected through a U.S. office of a broker.
Non-U.S. holders
should consult their own tax advisors regarding the application
of the information reporting and backup withholding rules to
them.
Copies of information returns may be made available to the tax
authorities of the country in which the
non-U.S. holder
resides or is incorporated under the provisions of a specific
treaty or agreement. Backup withholding is not an additional
tax. Any amounts withheld under the backup withholding rules
from a payment to a
non-U.S. holder
can be refunded or credited against the
non-U.S. holders
U.S. federal income tax liability, if any, provided that an
appropriate claim is timely filed with the IRS.
Federal Estate
Tax
Common stock owned or treated as owned by an individual who is a
non-U.S. holder
(as specially defined for U.S. federal estate tax purposes)
at the time of death will be included in the individuals
gross estate for U.S. federal estate tax purposes and,
therefore, may be subject to U.S. federal estate tax,
unless an applicable estate tax or other treaty provides
otherwise.
The preceding discussion of the material U.S. federal tax
considerations is for general information only. It is not tax
advice. Prospective investors should consult their own tax
advisors regarding the particular U.S. federal, state,
local and
non-U.S. tax
consequences of purchasing, holding and disposing of our common
stock, including the consequences of any proposed changes in
applicable laws.
162
UNDERWRITING
We and the underwriters named below have entered into an
underwriting agreement with respect to the shares being offered.
Subject to certain conditions, each underwriter has severally
agreed to purchase the number of shares indicated in the
following table. Goldman, Sachs & Co. and Morgan
Stanley & Co. LLC are the representatives of the
underwriters.
|
|
|
|
|
|
|
Number of
|
|
Underwriters
|
|
Shares
|
|
|
Goldman, Sachs & Co.
|
|
|
|
|
Morgan Stanley & Co. LLC
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
The underwriters are committed to take and pay for all of the
shares being offered, if any are taken, other than the shares
covered by the option described below unless and until this
option is exercised.
If the underwriters sell more shares than the total number set
forth in the table above, the underwriters have an option to buy
up to an
additional shares
from us. They may exercise that option for 30 days. If any
shares are purchased pursuant to this option, the underwriters
will severally purchase shares in approximately the same
proportion as set forth in the table above.
The following table shows the per share and total underwriting
discounts and commissions to be paid to the underwriters by us.
Such amounts are shown assuming both no exercise and full
exercise of the underwriters option to purchase additional
shares.
|
|
|
|
|
|
|
|
|
|
|
No Exercise
|
|
Full Exercise
|
|
Per Share
|
|
$
|
|
|
|
$
|
|
|
Total
|
|
$
|
|
|
|
$
|
|
|
Shares sold by the underwriters to the public will initially be
offered at the initial public offering price set forth on the
cover of this prospectus. Any shares sold by the underwriters to
securities dealers may be sold at a discount of up to
$ per share from the initial
public offering price. If all the shares are not sold at the
initial public offering price, the representatives may change
the offering price and the other selling terms. The offering of
the shares by the underwriters is subject to receipt and
acceptance and subject to the underwriters right to reject
any order in whole or in part.
The underwriters do not expect sales to discretionary accounts
to exceed five percent of the total number of shares offered.
We estimate that our total expenses for the offering, excluding
underwriting discounts and commissions, will be approximately
$ .
We and our officers, directors and holders of substantially all
of our common stock have agreed with the underwriters, subject
to certain exceptions, not to offer, sell, contract to sell,
pledge, grant any option to purchase, make any short sale or
otherwise dispose of any shares of our common stock, or any
options or warrants to purchase any shares of our common stock,
or any securities convertible into, exchangeable for or that
represent the right to receive shares of our common stock during
the period from the date of this prospectus continuing through
the date 180 days after the date of this prospectus, except
with the prior written consent of the representatives. This
agreement does not apply to any existing employee benefit plans.
See Shares Eligible for Future Sale for a
discussion of certain transfer restrictions.
The 180-day
restricted period described in the preceding paragraph will be
automatically extended if: (1) during the last 17 days
of the
180-day
restricted period, we release earnings results or announce
material news or a material event or (2) prior to the
expiration of the
180-day
restricted
163
period, we announce that we will release earnings results during
the 15-day
period following the last day of the
180-day
restricted period, then the restrictions described in the
preceding paragraph will continue to apply until the expiration
of the
18-day
period beginning on the date of release of the earnings results
or the announcement of the material news or material event, as
applicable.
Prior to the offering, there has been no public market for the
shares. The initial public offering price has been negotiated
among us and the representatives. Among the factors to be
considered in determining the initial public offering price of
the shares, in addition to prevailing market conditions, will be
our historical performance, estimates of our business potential
and earnings prospects, an assessment of our management and the
consideration of the above factors in relation to market
valuation of companies in related businesses.
We have applied to list the common stock on the NYSE under the
symbol ASPN. In order to meet one of the
requirements for listing the common stock on the NYSE, the
underwriters have undertaken to sell lots of 100 or more shares
to a minimum of 2,000 beneficial holders.
In connection with the offering, the underwriters may purchase
and sell shares of common stock in the open market. These
transactions may include short sales, stabilizing transactions
and purchases to cover positions created by short sales. Shorts
sales involve the sale by the underwriters of a greater number
of shares than they are required to purchase in the offering.
Covered short sales are sales made in an amount not
greater than the underwriters option to purchase
additional shares from us in the offering. The underwriters may
close out any covered short position by either exercising their
option to purchase additional shares or purchasing shares in the
open market. In determining the source of shares to close out
the covered short position, the underwriters will consider,
among other things, the price of shares available for purchase
in the open market as compared to the price at which they may
purchase additional shares pursuant to the option granted to
them. Naked short sales are any sales in excess of
such option. The underwriters must close out any naked short
position by purchasing shares in the open market. A naked short
position is more likely to be created if the underwriters are
concerned that there may be downward pressure on the price of
the common stock in the open market after pricing that could
adversely affect investors who purchase in the offering.
Stabilizing transactions consist of various bids for or
purchases of common stock made by the underwriters in the open
market prior to the completion of the offering.
The underwriters may also impose a penalty bid. This occurs when
a particular underwriter repays to the underwriters a portion of
the underwriting discount received by it because the
representatives have repurchased shares sold by or for the
account of such underwriter in stabilizing or short covering
transactions.
Purchases to cover a short position and stabilizing
transactions, as well as other purchases by the underwriters for
their own accounts, may have the effect of preventing or
retarding a decline in the market price of our stock, and
together with the imposition of the penalty bid, may stabilize,
maintain or otherwise affect the market price of the common
stock. As a result, the price of the common stock may be higher
than the price that otherwise might exist in the open market. If
these activities are commenced, they may be discontinued at any
time. These transactions may be effected on the NYSE, in the
over-the-counter
market or otherwise.
European Economic Area. In relation to
each Member State of the European Economic Area which has
implemented the Prospectus Directive (each, a Relevant
Member State) an offer to the public of any shares of our
common stock may not be made in that Relevant Member State,
except that an offer to the public in that Relevant Member State
of any shares of our common stock may be made at any time under
the following exemptions under the Prospectus Directive, if they
have been implemented in that Relevant Member State:
(a) to any legal entity which is a qualified investor as
defined in the Prospectus Directive;
(b) to fewer than 100 or, if the Relevant Member State has
implemented the relevant provision of the 2010 PD Amending
Directive, 150, natural or legal persons (other than qualified
164
investors as defined in the Prospectus Directive), as permitted
under the Prospectus Directive, subject to obtaining the prior
consent of the representatives for any such offer; or
(c) in any other circumstances falling within
Article 3(2) of the Prospectus Directive, provided that no
such offer of shares of our common stock shall result in a
requirement for the publication by us or any underwriter of a
prospectus pursuant to Article 3 of the Prospectus
Directive.
For the purposes of this provision, the expression an
offer to the public in relation to any shares of our
common stock in any Relevant Member State means the
communication in any form and by any means of sufficient
information on the terms of the offer and any shares of our
common stock to be offered so as to enable an investor to decide
to purchase any shares of our common stock, as the same may be
varied in that Member State by any measure implementing the
Prospectus Directive in that Member State, the expression
Prospectus Directive means Directive 2003/71/EC (and
amendments thereto, including the 2010 PD Amending Directive, to
the extent implemented in the Relevant Member State), and
includes any relevant implementing measure in the Relevant
Member State, and the expression 2010 PD Amending
Directive means Directive 2010/73/EU.
United Kingdom. Each underwriter has
represented and agreed that:
(a) it has only communicated or caused to be communicated
and will only communicate or cause to be communicated an
invitation or inducement to engage in investment activity
(within the meaning of Section 21 of the FSMA) received by
it in connection with the issue or sale of the shares of our
common stock in circumstances in which Section 21(1) of the
FSMA does not apply to us; and
(b) it has complied and will comply with all applicable
provisions of the FSMA with respect to anything done by it in
relation to the shares of our common stock in, from or otherwise
involving the United Kingdom.
Hong Kong. The shares may not be
offered or sold by means of any document other than (i) in
circumstances which do not constitute an offer to the public
within the meaning of the Companies Ordinance (Cap.32, Laws of
Hong Kong), or (ii) to professional investors
within the meaning of the Securities and Futures Ordinance
(Cap.571, Laws of Hong Kong) and any rules made thereunder, or
(iii) in other circumstances which do not result in the
document being a prospectus within the meaning of
the Companies Ordinance (Cap.32, Laws of Hong Kong), and no
advertisement, invitation or document relating to the shares may
be issued or may be in the possession of any person for the
purpose of issue (in each case whether in Hong Kong or
elsewhere), which is directed at, or the contents of which are
likely to be accessed or read by, the public in Hong Kong
(except if permitted to do so under the laws of Hong Kong) other
than with respect to shares which are or are intended to be
disposed of only to persons outside Hong Kong or only to
professional investors within the meaning of the
Securities and Futures Ordinance (Cap. 571, Laws of Hong Kong)
and any rules made thereunder.
Singapore. This prospectus has not been
registered as a prospectus with the Monetary Authority of
Singapore. Accordingly, this prospectus and any other document
or material in connection with the offer or sale, or invitation
for subscription or purchase, of the shares may not be
circulated or distributed, nor may the shares be offered or
sold, or be made the subject of an invitation for subscription
or purchase, whether directly or indirectly, to persons in
Singapore other than (i) to an institutional investor under
Section 274 of the Securities and Futures Act,
Chapter 289 of Singapore (the SFA),
(ii) to a relevant person, or any person pursuant to
Section 275(1A), and in accordance with the conditions,
specified in Section 275 of the SFA or (iii) otherwise
pursuant to, and in accordance with the conditions of, any other
applicable provision of the SFA.
Where the shares are subscribed or purchased under
Section 275 by a relevant person which is: (a) a
corporation (which is not an accredited investor) the sole
business of which is to hold investments and the entire share
capital of which is owned by one or more individuals, each of
whom
165
is an accredited investor; or (b) a trust (where the
trustee is not an accredited investor) whose sole purpose is to
hold investments and each beneficiary is an accredited investor,
shares, debentures and units of shares and debentures of that
corporation or the beneficiaries rights and interest in
that trust shall not be transferable for six months after that
corporation or that trust has acquired the shares under
Section 275 except: (1) to an institutional investor
under Section 274 of the SFA or to a relevant person, or
any person pursuant to Section 275(1A), and in accordance
with the conditions, specified in Section 275 of the SFA;
(2) where no consideration is given for the transfer; or
(3) by operation of law.
Japan. The securities have not been and
will not be registered under the Financial Instruments and
Exchange Law of Japan (the Financial Instruments and Exchange
Law) and each underwriter has agreed that it will not offer or
sell any securities, directly or indirectly, in Japan or to, or
for the benefit of, any resident of Japan (which term as used
herein means any person resident in Japan, including any
corporation or other entity organized under the laws of Japan),
or to others for re-offering or resale, directly or indirectly,
in Japan or to a resident of Japan, except pursuant to an
exemption from the registration requirements of, and otherwise
in compliance with, the Financial Instruments and Exchange Law
and any other applicable laws, regulations and ministerial
guidelines of Japan.
We have agreed to indemnify the several underwriters against
certain liabilities, including liabilities under the Securities
Act.
Certain underwriters and their respective affiliates have, from
time to time, performed, and may in the future perform, various
financial advisory and investment banking services for us, for
which they received or will receive customary fees and expenses.
166
LEGAL
MATTERS
The validity of the common stock being offered will be passed
upon for us by Mintz, Levin, Cohn, Ferris, Glovsky and
Popeo, P.C., Boston, Massachusetts. The underwriters are
represented by Simpson Thacher & Bartlett LLP, New
York, New York, in connection with certain legal matters related
to this offering.
EXPERTS
The consolidated financial statements of Aspen Aerogels, Inc. as
of December 31, 2010 and 2009, and for the years ended
December 31, 2008, 2009 and 2010, have been included herein
and in the registration statement in reliance upon the report of
KPMG LLP, independent registered public accounting firm,
appearing elsewhere herein, and upon the authority of said firm
as experts in accounting and auditing.
WHERE YOU CAN
FIND MORE INFORMATION
We have filed with the SEC a registration statement on
Form S-1
under the Securities Act with respect to the shares of our
common stock to be sold in this offering. This prospectus, which
constitutes part of the registration statement, does not include
all of the information contained in the registration statement
and the exhibits, schedules and amendments to the registration
statement. Some items are omitted in accordance with the rules
and regulations of the SEC. For further information with respect
to us and our common stock, we refer you to the registration
statement and to the exhibits and schedules to the registration
statement filed as part of the registration statement.
Statements contained in this prospectus about the contents of
any contract or any other document filed as an exhibit are not
necessarily complete and in each instance we refer you to the
copy of the contract or other documents filed as an exhibit to
the registration statement. Each of these statements is
qualified in all respects by this reference.
You may read and copy the registration statement of which this
prospectus is a part at the SECs public reference room,
which is located at 100 F Street, N.E.,
Room 1580, Washington, D.C. 20549. You can request
copies of the registration statement by writing to the SEC and
paying a fee for the copying cost. Please call the SEC at
1-800-SEC-0330
for more information about the operation of the SECs
public reference room. In addition, the SEC maintains an
Internet website, located at www.sec.gov, which contains
reports, proxy and information statements and other information
regarding issuers that file electronically with the SEC. You may
access the registration statement of which this prospectus is a
part at the SECs Internet website.
Upon the closing of the offering, we will become subject to the
full informational and periodic reporting requirements of the
Exchange Act. We will fulfill our obligations with respect to
such requirements by filing periodic reports and other
information with the SEC. These documents will also be publicly
available, free of charge, on our website, www.aerogel.com. We
intend to furnish our stockholders with annual reports
containing consolidated financial statements certified by an
independent registered public accounting firm.
167
Aspen Aerogels,
Inc.
|
|
|
|
|
|
|
|
F-2
|
|
Financial Statements:
|
|
|
|
|
|
|
|
F-3
|
|
|
|
|
F-4
|
|
|
|
|
F-5
|
|
|
|
|
F-6
|
|
|
|
|
F-7
|
|
|
|
|
|
|
Index To Consolidated Financial Statements
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
F-33
|
|
|
|
|
F-34
|
|
|
|
|
F-35
|
|
|
|
|
F-36
|
|
F-1
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Aspen Aerogels, Inc.:
We have audited the accompanying consolidated balance sheets of
Aspen Aerogels, Inc. and subsidiaries (the Company) as of
December 31, 2009 and 2010, and the related consolidated
statements of operations, stockholders (deficit) equity
and comprehensive income (loss), and cash flows for each of the
years in the three-year period ended December 31, 2010.
These consolidated financial statements are the responsibility
of the Companys management. Our responsibility is to
express an opinion on these consolidated financial statements
based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial
position of Aspen Aerogels, Inc. and subsidiaries at
December 31, 2009 and 2010, and the results of their
operations and their cash flows for each of the years in the
three-year period ended December 31, 2010, in conformity
with U.S. generally accepted accounting principles.
/s/ KPMG LLP
Boston, Massachusetts
June 24, 2011
F-2
|
|
|
|
|
|
|
|
|
|
|
December 31
|
|
|
|
2009
|
|
|
2010
|
|
|
|
(In thousands, except
|
|
|
|
share and per share data)
|
|
|
Assets
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
27,502
|
|
|
$
|
26,800
|
|
Marketable securities
|
|
|
|
|
|
|
4,020
|
|
Accounts receivable, net of allowance for doubtful accounts
|
|
|
4,234
|
|
|
|
10,205
|
|
Costs in excess of billings
|
|
|
100
|
|
|
|
124
|
|
Inventories
|
|
|
1,601
|
|
|
|
2,253
|
|
Prepaid expenses and other current assets
|
|
|
354
|
|
|
|
419
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
33,791
|
|
|
|
43,821
|
|
Restricted cash
|
|
|
556
|
|
|
|
857
|
|
Property, plant, and equipment, net
|
|
|
29,763
|
|
|
|
42,622
|
|
Other assets
|
|
|
625
|
|
|
|
1,495
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
64,735
|
|
|
$
|
88,795
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities, Redeemable Convertible Preferred Stock and
Stockholders (Deficit) Equity
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Long-term debt, current portion
|
|
$
|
262
|
|
|
$
|
247
|
|
Capital leases, current portion
|
|
|
15
|
|
|
|
20
|
|
Accounts payable
|
|
|
2,927
|
|
|
|
5,597
|
|
Accrued expenses
|
|
|
791
|
|
|
|
5,987
|
|
Deferred revenue
|
|
|
630
|
|
|
|
447
|
|
Other current liabilities
|
|
|
7,400
|
|
|
|
6,800
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
12,025
|
|
|
|
19,098
|
|
Long-term debt, excluding current portion
|
|
|
247
|
|
|
|
7,820
|
|
Capital leases, excluding current portion
|
|
|
51
|
|
|
|
52
|
|
Other long-term liabilities
|
|
|
14,578
|
|
|
|
10,142
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
26,901
|
|
|
|
37,112
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (Note 14)
|
|
|
|
|
|
|
|
|
Series B redeemable convertible preferred stock,
$0.001 par value; authorized 17,000,000 shares; issued
and outstanding 0 and 16,010,292 shares at
December 31, 2009 and 2010, at redemption and liquidation
value
|
|
|
|
|
|
|
28,799
|
|
Series A redeemable convertible preferred stock,
$0.001 par value; authorized, issued and outstanding
52,843,201 shares at December 31, 2009 and 2010, at
redemption and liquidation value
|
|
|
31,681
|
|
|
|
80,987
|
|
Stockholders (deficit) equity:
|
|
|
|
|
|
|
|
|
Common stock, $0.001 par value; authorized
114,000,000 shares; issued and outstanding 25,567,499 and
25,574,570 shares at December 31, 2009 and 2010
|
|
|
26
|
|
|
|
26
|
|
Additional paid-in capital
|
|
|
192,392
|
|
|
|
138,038
|
|
Accumulated deficit
|
|
|
(186,265
|
)
|
|
|
(196,175
|
)
|
Accumulated other comprehensive income
|
|
|
|
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
Total stockholders (deficit) equity
|
|
|
6,153
|
|
|
|
(58,103
|
)
|
|
|
|
|
|
|
|
|
|
Total liabilities, redeemable convertible preferred stock and
stockholders (deficit) equity
|
|
$
|
64,735
|
|
|
$
|
88,795
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
|
(In thousands, except share and per share data)
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
|
|
$
|
17,202
|
|
|
$
|
24,752
|
|
|
$
|
38,690
|
|
Research services
|
|
|
2,868
|
|
|
|
3,864
|
|
|
|
4,519
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
20,070
|
|
|
|
28,616
|
|
|
|
43,209
|
|
Cost of revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
|
|
|
32,160
|
|
|
|
30,462
|
|
|
|
35,399
|
|
Research services
|
|
|
1,169
|
|
|
|
1,788
|
|
|
|
2,119
|
|
Impairment charge
|
|
|
2,524
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit (loss)
|
|
|
(15,783
|
)
|
|
|
(3,634
|
)
|
|
|
5,691
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
2,134
|
|
|
|
2,524
|
|
|
|
2,985
|
|
Sales and marketing
|
|
|
4,034
|
|
|
|
3,994
|
|
|
|
4,526
|
|
General and administrative
|
|
|
6,180
|
|
|
|
5,430
|
|
|
|
5,675
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
12,348
|
|
|
|
11,948
|
|
|
|
13,186
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
(28,131
|
)
|
|
|
(15,582
|
)
|
|
|
(7,495
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
287
|
|
|
|
18
|
|
|
|
170
|
|
Interest expense
|
|
|
(7,400
|
)
|
|
|
(3,075
|
)
|
|
|
(2,585
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other expense, net
|
|
|
(7,113
|
)
|
|
|
(3,057
|
)
|
|
|
(2,415
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
(35,244
|
)
|
|
|
(18,639
|
)
|
|
|
(9,910
|
)
|
Dividends and accretion of redeemable convertible preferred stock
|
|
|
(2,351
|
)
|
|
|
(2,984
|
)
|
|
|
(57,007
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to common stockholders
|
|
$
|
(37,595
|
)
|
|
$
|
(21,623
|
)
|
|
$
|
(66,917
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per common share attributable to common
stockholders, basic and diluted
|
|
$
|
(3,389.12
|
)
|
|
$
|
(2.21
|
)
|
|
$
|
(2.62
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding, basic and diluted
|
|
|
11,093
|
|
|
|
9,751,616
|
|
|
|
25,574,286
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
Common Stock
|
|
|
Additional
|
|
|
|
|
|
Other
|
|
|
Total
|
|
|
|
$0.001 Par Value
|
|
|
Paid-in
|
|
|
Accumulated
|
|
|
Comprehensive
|
|
|
Stockholders
|
|
|
|
Shares
|
|
|
Value
|
|
|
Capital
|
|
|
Deficit
|
|
|
Income
|
|
|
(Deficit)/Equity
|
|
|
|
(In thousands, except share and per share data)
|
|
|
Balance at December 31, 2007
|
|
|
9,408
|
|
|
$
|
|
|
|
$
|
9,327
|
|
|
$
|
(132,382
|
)
|
|
$
|
|
|
|
$
|
(123,055
|
)
|
Net income (loss) and total comprehensive income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(35,244
|
)
|
|
|
|
|
|
|
(35,244
|
)
|
Issuance of common stock warrants
|
|
|
|
|
|
|
|
|
|
|
73
|
|
|
|
|
|
|
|
|
|
|
|
73
|
|
Stock compensation expense
|
|
|
|
|
|
|
|
|
|
|
927
|
|
|
|
|
|
|
|
|
|
|
|
927
|
|
Dividends on redeemable convertible preferred stock
|
|
|
|
|
|
|
|
|
|
|
(2,512
|
)
|
|
|
|
|
|
|
|
|
|
|
(2,512
|
)
|
Exercise of common stock warrants
|
|
|
14,287
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exchange of redeemable convertible preferred stock
|
|
|
|
|
|
|
|
|
|
|
55,968
|
|
|
|
|
|
|
|
|
|
|
|
55,968
|
|
Accretion of redeemable convertible preferred stock to
redemption value
|
|
|
|
|
|
|
|
|
|
|
(55,807
|
)
|
|
|
|
|
|
|
|
|
|
|
(55,807
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2008
|
|
|
23,695
|
|
|
|
|
|
|
|
7,976
|
|
|
|
(167,626
|
)
|
|
|
|
|
|
|
(159,650
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) and total comprehensive income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(18,639
|
)
|
|
|
|
|
|
|
(18,639
|
)
|
Issuance of common stock
|
|
|
2,272
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock compensation expense
|
|
|
|
|
|
|
|
|
|
|
831
|
|
|
|
|
|
|
|
|
|
|
|
831
|
|
Dividends on redeemable convertible preferred stock
|
|
|
|
|
|
|
|
|
|
|
(2,682
|
)
|
|
|
|
|
|
|
|
|
|
|
(2,682
|
)
|
Conversion of preferred stock and related dividends to
|
|
|
25,541,532
|
|
|
|
26
|
|
|
|
186,084
|
|
|
|
|
|
|
|
|
|
|
|
186,110
|
|
common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cancellation of warrant liability
|
|
|
|
|
|
|
|
|
|
|
485
|
|
|
|
|
|
|
|
|
|
|
|
485
|
|
Accretion of redeemable convertible preferred stock to
redemption value
|
|
|
|
|
|
|
|
|
|
|
(302
|
)
|
|
|
|
|
|
|
|
|
|
|
(302
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2009
|
|
|
25,567,499
|
|
|
|
26
|
|
|
|
192,392
|
|
|
|
(186,265
|
)
|
|
|
|
|
|
|
6,153
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9,910
|
)
|
|
|
|
|
|
|
(9,910
|
)
|
Unrealized gain on
available-for-sale
securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8
|
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9,902
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock
|
|
|
7,071
|
|
|
|
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
2
|
|
Issuance of common stock warrant
|
|
|
|
|
|
|
|
|
|
|
2,183
|
|
|
|
|
|
|
|
|
|
|
|
2,183
|
|
Stock compensation expense
|
|
|
|
|
|
|
|
|
|
|
468
|
|
|
|
|
|
|
|
|
|
|
|
468
|
|
Dividends on redeemable convertible preferred stock
|
|
|
|
|
|
|
|
|
|
|
(2,928
|
)
|
|
|
|
|
|
|
|
|
|
|
(2,928
|
)
|
Accretion of redeemable convertible preferred stock to
redemption value
|
|
|
|
|
|
|
|
|
|
|
(54,079
|
)
|
|
|
|
|
|
|
|
|
|
|
(54,079
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2010
|
|
|
25,574,570
|
|
|
$
|
26
|
|
|
$
|
138,038
|
|
|
$
|
(196,175
|
)
|
|
$
|
8
|
|
|
$
|
(58,103
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
|
(In thousands)
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(35,244
|
)
|
|
$
|
(18,639
|
)
|
|
$
|
(9,910
|
)
|
Adjustments to reconcile net income (loss) to net cash used in
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
7,059
|
|
|
|
5,630
|
|
|
|
4,633
|
|
Asset impairment charge
|
|
|
2,524
|
|
|
|
|
|
|
|
|
|
Imputed interest
|
|
|
3,507
|
|
|
|
3,000
|
|
|
|
2,425
|
|
Paid-in-kind
interest
|
|
|
3,446
|
|
|
|
|
|
|
|
|
|
Loss on sale of marketable securities
|
|
|
|
|
|
|
|
|
|
|
53
|
|
Stock compensation expense
|
|
|
927
|
|
|
|
831
|
|
|
|
468
|
|
Change in fair value of preferred stock warrant liability
|
|
|
165
|
|
|
|
|
|
|
|
|
|
Settlement of asset retirement obligation
|
|
|
|
|
|
|
|
|
|
|
(40
|
)
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(1,069
|
)
|
|
|
232
|
|
|
|
(5,971
|
)
|
Costs in excess of billings
|
|
|
209
|
|
|
|
(20
|
)
|
|
|
(24
|
)
|
Inventories
|
|
|
(1,812
|
)
|
|
|
1,591
|
|
|
|
(652
|
)
|
Prepaid expenses and other assets
|
|
|
(54
|
)
|
|
|
47
|
|
|
|
(348
|
)
|
Accounts payable
|
|
|
1,931
|
|
|
|
(1,295
|
)
|
|
|
181
|
|
Accrued expenses
|
|
|
(41
|
)
|
|
|
142
|
|
|
|
1,642
|
|
Deferred revenue
|
|
|
479
|
|
|
|
(91
|
)
|
|
|
(183
|
)
|
Other long-term liabilities
|
|
|
(4,000
|
)
|
|
|
(4,400
|
)
|
|
|
(7,400
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(21,973
|
)
|
|
|
(12,972
|
)
|
|
|
(15,126
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
(1,121
|
)
|
|
|
(1,644
|
)
|
|
|
(11,341
|
)
|
Proceeds from sale of equipment
|
|
|
31
|
|
|
|
|
|
|
|
|
|
Decrease (increase) in restricted cash
|
|
|
128
|
|
|
|
(139
|
)
|
|
|
(301
|
)
|
Purchase of marketable securities
|
|
|
|
|
|
|
|
|
|
|
(15,037
|
)
|
Proceeds from maturities and sales of marketable securities
|
|
|
10
|
|
|
|
|
|
|
|
10,972
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(952
|
)
|
|
|
(1,783
|
)
|
|
|
(15,707
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of long-term debt
|
|
|
8,000
|
|
|
|
|
|
|
|
10,000
|
|
Repayment of borrowings under long-term debt
|
|
|
(483
|
)
|
|
|
(249
|
)
|
|
|
(265
|
)
|
Deferred financing costs
|
|
|
|
|
|
|
|
|
|
|
(687
|
)
|
Repayment of obligations under capital lease
|
|
|
(3
|
)
|
|
|
(20
|
)
|
|
|
(17
|
)
|
Proceeds from issuance of preferred stock
|
|
|
26,605
|
|
|
|
30,538
|
|
|
|
21,098
|
|
Proceeds from issuance of common stock
|
|
|
|
|
|
|
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
34,119
|
|
|
|
30,269
|
|
|
|
30,131
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash
|
|
|
11,194
|
|
|
|
15,514
|
|
|
|
(702
|
)
|
Cash at beginning of period
|
|
|
794
|
|
|
|
11,988
|
|
|
|
27,502
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash at end of period
|
|
$
|
11,988
|
|
|
$
|
27,502
|
|
|
$
|
26,800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
56
|
|
|
$
|
41
|
|
|
$
|
33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes paid
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of non-cash activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued dividends on preferred stock
|
|
$
|
2,512
|
|
|
$
|
2,682
|
|
|
$
|
2,928
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accretion of preferred stock
|
|
$
|
55,807
|
|
|
$
|
302
|
|
|
$
|
54,079
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock warrants
|
|
$
|
|
|
|
$
|
|
|
|
$
|
2,183
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of preferred stock warrants
|
|
$
|
321
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exchange of preferred stock and related dividends
|
|
$
|
55,968
|
|
|
$
|
186,110
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion of debt
|
|
$
|
92,771
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cancellation of preferred stock warrant liability
|
|
$
|
|
|
|
$
|
485
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued capital expenditures
|
|
$
|
|
|
|
$
|
|
|
|
$
|
6,044
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital lease
|
|
$
|
|
|
|
$
|
87
|
|
|
$
|
23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-6
ASPEN AEROGELS,
INC.
(In thousands, except share and per share data)
|
|
(1)
|
Description of
Business
|
Nature of
Business
Aspen Aerogels, Inc. (the Company) is an energy efficiency
company that designs, develops, and manufactures innovative,
high-performance aerogel insulation. The Company also conducts
research and development related to aerogel technology supported
by funding from several agencies of the U.S. government and
other institutions in the form of research and development
contracts.
The Companys predecessor was incorporated in Delaware on
May 4, 2001, and the Company maintains its corporate
offices in Northborough, Massachusetts. The Company maintains
wholly owned subsidiaries in Rhode Island, Aspen Aerogels Rhode
Island, LLC, and in Germany, Aspen Aerogels Germany, GmbH.
Liquidity
The Company has incurred operating losses and negative cash flow
since inception, has an accumulated deficit of $196,175 as of
December 31, 2010, and has significant ongoing cash flow
commitments. The Company has invested significant resources to
commercialize aerogel technology and to build a manufacturing
infrastructure capable of supplying aerogel products at the
volumes and costs required by its customers. At
December 31, 2010, the Company markets a set of
commercially viable products, serves a growing base of customers
and is experiencing rapid revenue growth.
During 2010, the Company generated sufficient revenue to produce
a positive annual gross profit. However, the Company has not yet
generated net income or positive cash flow from operations. As
more fully discussed in Note 12, the Companys Cross
License Agreement with Cabot Corporation requires payments
through 2013 in an aggregate of $18,800. In addition, as more
fully discussed in Note 11, the Company has an aggregate of
$10,000 of 12% Secured Subordinated Promissory Notes (the
Subordinated Notes) outstanding to several investors at
December 31, 2010. The Companys ability to achieve
sufficient operating cash flows to generate net income, to fully
fund operations and to meet upcoming commitments will require
continued capacity expansions and related capital investments.
Accordingly, the Company committed to expend up to $31,500 to
expand its East Providence, Rhode Island, manufacturing facility
during 2010 with completion expected during the second quarter
of 2011. This expansion includes the addition of a second
manufacturing line and is designed to double the Companys
manufacturing capacity.
Since inception, the Company has funded its operating losses,
capital investments, and other obligations principally through
equity financings, bridge loans between equity financings and
debt financings. As discussed in Note 7, the Company
completed preferred equity financings in 2009 and 2010 that
generated $30,538 and $21,098, respectively, in net proceeds. In
addition, as discussed in Note 11, in December 2010, the
Company issued the Subordinated Notes to several investors
generating net proceeds of $9,788 in cash in connection with the
funding of the second manufacturing line at its East Providence,
Rhode Island, manufacturing facility.
2011
Outlook
The Companys current financial forecast anticipates
increasing revenue levels and improving cash flow from
operations throughout 2011. Based on current revenue and expense
forecasts, the Company believes that its existing cash and cash
equivalents and the net proceeds from its recent equity and debt
financings will be sufficient to satisfy its anticipated cash
requirements at least through 2011. If the Companys
operating performance deteriorates from levels achieved during
2010,
F-7
ASPEN AEROGELS,
INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
it could have a significant effect on the Companys
liquidity and its ability to continue in the future as a going
concern.
However, the Company has continued to expand its financial
resources and sources of available credit. As more fully
described in Note 18, in March 2011, the Company entered
into a senior, revolving line of credit agreement with a bank
which provides up to $10,000 in borrowing capacity and issued
notes payable to several investors in June 2011 generating gross
proceeds of $30,000.
|
|
(2)
|
Summary of Basis
of Presentation and Significant Accounting Policies
|
Principles of
Consolidation
The accompanying consolidated financial statements, which have
been prepared in accordance with generally accepted accounting
principles in the United States of America, include the accounts
of the Company and its wholly owned subsidiaries. All
significant intercompany balances and transactions have been
eliminated in consolidation.
Reclassifications
Certain prior year amounts in the financial statements and
corresponding footnotes have been reclassified to conform to the
current years presentation.
In September 2007, the Company enacted a
1-for-10,000
reverse stock split across all equity classes; in June 2008, the
Company enacted an
18-for-1
conversion of all common stock, common stock options and common
stock warrants; and in September 2009, the Company enacted a
1-for-3
reverse stock split across all equity shares. Par value remained
unchanged as a result of these splits. All references to the
number of issued shares in this report are references to the
combined and split numbers of shares. All share, warrant, option
and related information presented in these consolidated
financial statements and accompanying notes has been
retroactively adjusted for the stock splits and conversion.
In order to comply with Securities and Exchange Commission rules
and regulations, the Company reclassified redeemable convertible
preferred stock amounting to $30,538 and $105,411 at
December 31, 2009 and 2010, respectively, and issuance
costs amounting to $302 and $606, respectively, to remove them
from permanent stockholders (deficit) equity and classify
them as temporary equity within the consolidated balance sheets.
The Company also reclassified $841 and $3,769 in accrued
dividends related to the redeemable convertible preferred stock
from accrued expenses to temporary stockholders equity
within the consolidated balance sheets as of December 31,
2009 and 2010, respectively.
Use of
Estimates
The preparation of the consolidated financial statements
requires the Company to make a number of estimates and
assumptions that affect the reported amounts of assets and
liabilities at the date of the consolidated financial statements
and the reported amounts of revenues and expenses during the
reporting period. Significant items subject to such estimates
and assumptions include the carrying amount of property and
equipment, allowances for doubtful accounts, inventory,
stock-based compensation, and deferred income taxes. These
estimates and assumptions are based on the Companys best
estimate and judgment. The Company evaluates its estimates and
assumptions on an on-going basis using historical experience and
other factors, including the current economic environment, which
it believes to be reasonable under the circumstances. Management
adjusts such estimates and assumptions when facts and
circumstances dictate. Illiquid credit markets, volatile equity
markets, and declines in consumer spending have combined to
increase the uncertainty
F-8
ASPEN AEROGELS,
INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
inherent in such estimates and assumptions. As future events and
their effects cannot be determined with precision, actual
results could differ significantly from these estimates. Changes
in these estimates resulting from continuing changes in the
economic environment will be reflected in the financial
statements in future periods.
Revenue
Recognition
The Company recognizes revenue from the sale of products and
delivery of research and development services. Revenue is
recognized when all of the following criteria are met:
persuasive evidence of an arrangement exists, the price to the
buyer is fixed or determinable, delivery has occurred or
services have been provided and, collectability is reasonably
assured.
Product
Revenue
Product revenue is generally recognized upon transfer of title
and risk of loss, which is generally upon shipment or delivery.
The Companys customary shipping terms are FOB shipping
point; however, some products are shipped using FOB destination
shipping terms. Revenue associated with products shipped FOB
destination is deferred until the products reach their specified
destination. Products are typically delivered without
significant post-sale obligations to customers other than
standard warranty obligations for product defects.
The Company provides warranties for its products and records the
estimated cost within cost of sales in the period that the
related revenue is recorded. The Companys standard
warranty period extends one to two years from the date of sale,
depending on the type of product purchased. The warranties
provide that the Companys products will be free from
defects in material and workmanship, and will, under normal use,
conform to the specifications for the product. For the years
ended December 31, 2008, 2009, and 2010, warranty claims
and charges have been insignificant.
Research
Services Revenue
The Company performs research services under contracts with
various government agencies and other institutions. The Company
records revenue earned on research services contracts using the
percentage-of-completion
method in two ways: (1) for firm-fixed-price contracts, the
Company accrues that portion of the total contract price that is
allocable, on the basis of the Companys estimates of costs
incurred to date to total contract costs; (2) for
cost-plus-fixed-fee contracts, the Company records revenue that
is equal to total payroll cost incurred times a stated factor
plus reimbursable expenses, to a stated upper limit. The primary
cost in the arrangements is the labor effort expended in
completing research and the only deliverable other than the
labor hours expended is reporting of research results to the
customer. Because the input measure of labor hours expended is
also reflective of the output measure, it is a reliable means to
measure the extent of progress towards completion. Revisions in
cost estimates and fees during the course of the contract are
reflected in the accounting period in which the facts that
require the revisions become known.
Contract costs and rates used to allocate overhead to contracts
are subject to audit by the respective contracting government
agency. Adjustments to revenue as a result of audit are recorded
in the period they become known. Provision is made for the
entire amount of future estimated losses on contracts when the
current contract estimate is a loss while claims for additional
contract compensation are not reflected in the accounts until
the year in which such claims are identifiable and receipt is
probable.
F-9
ASPEN AEROGELS,
INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Cost-Sharing
Arrangements
The Company has entered into several cost-sharing arrangements
with various agencies of the U.S. government. Funds paid to
the Company under these agreements are not reported as revenues
but are used to directly offset the Companys cost of
revenues, research and development, sales and marketing and
general and administrative expenses in support of its product
revenue.
Costs incurred and the related cost of revenues, research and
development, sales and marketing and general and administrative
expenditures offset by cost sharing funding received under these
contracts are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
Costs incurred
|
|
$
|
3,193
|
|
|
$
|
1,672
|
|
|
$
|
2,005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenditures offset by cost sharing funding received:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
|
|
|
43
|
|
|
|
20
|
|
|
|
33
|
|
Research services
|
|
|
1,227
|
|
|
|
637
|
|
|
|
1,124
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
1,214
|
|
|
|
620
|
|
|
|
475
|
|
Sales and marketing
|
|
|
342
|
|
|
|
193
|
|
|
|
170
|
|
General and administrative
|
|
|
367
|
|
|
|
202
|
|
|
|
203
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenditures offset by cost sharing
|
|
$
|
3,193
|
|
|
$
|
1,672
|
|
|
$
|
2,005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shipping and
Handling Costs
Shipping and handling costs are classified as a component of
cost of revenue. Customer payments of shipping and handling
costs are recorded as product revenue.
Research and
Development
Costs incurred in the research and development of the
Companys products are expensed as incurred and include
salaries, services provided by third-party contractors,
materials, and supplies and are classified as research and
development expenses. Research and development costs directly
associated with research services revenue are classified as
research services in cost of revenue.
Income
Taxes
Income taxes are accounted for under the asset and liability
method. Deferred tax assets and liabilities are recognized for
the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases and operating loss
and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rates
is recognized in income in the period that includes the
enactment date.
The Company recognizes the effect of income tax positions only
if those positions are more likely than not of being sustained.
The Company accounts for uncertain tax positions using a
recognition threshold and measurement attribute for the
financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return.
Differences between tax positions taken in a tax return and
amounts recognized in the financial statements are recorded as
F-10
ASPEN AEROGELS,
INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
adjustments to income taxes payable or receivable, or
adjustments to deferred taxes, or both. Changes in recognition
or measurement are reflected in the period in which the change
in judgment occurs. The Company recognizes penalties and
interest related to recognized tax positions, if any, as a
component of income tax expense.
Stock-based
Compensation
Stock-based compensation cost is measured at the grant date
based on the fair value of the award and is recognized as
expense in the consolidated financial statements on a
straight-line basis over the requisite service period. The
Company uses the Black-Scholes option-pricing model to determine
the fair value of stock-based awards, which requires a number of
complex and subjective assumptions including fair value of the
underlying security, the expected volatility of the underlying
security, a risk-free interest rate, the expected term of the
option, and the forfeiture rate for the award class. The Company
engaged a third party independent valuation specialist to assist
the Company in estimating the fair value of the underlying
securities for all stock-based awards issued in 2008, 2009, and
2010. Stock-based compensation, which is included in cost of
sales and operating expenses, consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
December 31
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
Product cost of revenue
|
|
$
|
178
|
|
|
$
|
148
|
|
|
$
|
81
|
|
Research and development expenses
|
|
|
67
|
|
|
|
96
|
|
|
|
57
|
|
Sales and marketing expenses
|
|
|
136
|
|
|
|
157
|
|
|
|
87
|
|
General and administrative expenses
|
|
|
546
|
|
|
|
430
|
|
|
|
243
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation
|
|
$
|
927
|
|
|
$
|
831
|
|
|
$
|
468
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and Cash
Equivalents and Restricted Cash
Cash equivalents include short-term, highly-liquid instruments,
which consist of money market accounts. The majority of cash and
cash equivalents are maintained with major financial
institutions in North America. Deposits with these financial
institutions may exceed the amount of insurance provided on such
deposits; however, these deposits typically may be redeemed upon
demand and, therefore, bear minimal risk.
The Company is required to maintain cash balances as collateral
for the lease of the Companys Northborough, Massachusetts,
facility and performance obligations under specific commercial
contracts. Restricted cash at December 31, 2009 and 2010
was $556 and $857, respectively.
Marketable
Securities
Marketable securities consist primarily of marketable debt
securities and U.S. government securities, which are
classified as
available-for-sale
and are carried at fair market value at December 31, 2010.
The unrealized gains and losses on
available-for-sale
securities are recorded in accumulated other comprehensive
income. The Company considers all highly liquid investments with
maturities of 90 days or less at the time of purchase to be
cash equivalents and investments with maturities of greater than
90 days at the time of purchase to be marketable
securities. When a marketable security incurs a significant
unrealized loss for a sustained period of time, the Company
reviews the instrument to determine if it is
other-than-temporarily
impaired. If it is determined that an
F-11
ASPEN AEROGELS,
INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
instrument is
other-than-temporarily
impaired, the Company records the unrealized loss in the
consolidated statement of operations.
Costs in
Excess of Billings
Costs in excess of billings represent contract costs incurred
that have not been billed to certain research services
contracts. These amounts are expected to be billed and collected
in the normal course of business.
Inventories
Inventory consists of finished products,
work-in-process,
and raw materials. Inventories are carried at lower of cost,
determined using the
first-in,
first-out (FIFO) method, or market. Cost includes materials,
labor, and manufacturing overhead. The Company includes products
that have been delivered to customers for which the related
revenue has been deferred in finished goods inventory.
The Company periodically reviews its inventories and makes
provisions as necessary for estimated obsolescence or damaged
goods to ensure values approximate lower of cost or market. The
amount of such markdowns is equal to the difference between the
cost of inventory and the estimated market value based upon
assumptions about future demand, selling prices, and market
conditions.
Fair Value of
Financial Instruments
Fair value is an exit price, representing the amount that would
be received from the sale of an asset or paid to transfer a
liability in an orderly transaction between market participants.
As such, fair value is a market-based measurement that should be
determined based on assumptions that market participants would
use in pricing an asset or liability. The Company discloses the
manner in which fair value is determined for assets and
liabilities based on a three-tiered fair value hierarchy. The
hierarchy ranks the quality and reliability of the information
used to determine the fair values. The three levels of inputs
described in the standard are:
Level 1 Quoted prices in active markets for identical
assets or liabilities.
Level 2 Observable inputs, other than Level 1 prices,
that are observable for the assets or liabilities, either
directly or indirectly, for substantially the full term of the
assets or liabilities.
Level 3 Unobservable inputs that are supported by little or
no market activity and that are significant to the fair value of
the assets or liabilities.
At December 31, 2010, the Company held marketable
securities classified as
available-for-sale
securities totaling $4,020, which were valued utilizing
Level 1 inputs.
Concentration
of Credit Risk
Financial instruments, which potentially expose the Company to
concentrations of credit risk, consist principally of accounts
receivable and cash equivalents. The Companys customers
consist primarily of insulation distributors located throughout
the world. The Company performs ongoing credit evaluations of
its customers financial condition and generally requires
no collateral to secure accounts receivable. The Company
maintains an allowance for doubtful accounts based on its
assessment of the collectability of accounts receivable. The
allowance for doubtful accounts was $10, $15, $10, and $12 at
December 31, 2007, 2008, 2009 and 2010, respectively. The
Company reviews the allowance for doubtful accounts monthly. The
Company does not have any off-balance-sheet credit exposure
related to its customers.
F-12
ASPEN AEROGELS,
INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
For the year ended December 31, 2008, one customer
represented 12% of total revenues. For the year ended
December 31, 2009, no customers represented 10% or more of
the Companys total revenues, while for the year ended
December 31, 2010, one customer represented 14% of total
revenues. At December 31, 2009, three customers accounted
for 16%, 15% and 10% of accounts receivable, while at
December 31, 2010, the Company had one customer that
accounted for 32% of accounts receivable.
Property,
Plant, and Equipment
Property, plant and equipment are stated at cost. Assets held
under capital leases are stated at the lesser of the present
value of future minimum payments, using the Companys
incremental borrowing rate or the fair value of the property at
the inception of the lease. Expenditures for maintenance and
repairs are charged to expense as incurred, whereas major
betterments are capitalized as additions to property, plant and
equipment. The Company has capitalized interest costs as part of
the historical cost of constructing manufacturing facilities.
For the years ended December 31, 2008, 2009 and 2010, the
Company did not capitalize any interest costs. Depreciation on
plant and equipment is calculated on the straight-line method
over the estimated useful lives of the assets. Capital leases
are amortized on a straight-line basis over the shorter of the
lease term or estimated useful life of the asset.
Impairment of
Long-Lived Assets
Long-lived assets are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an
asset may not be recoverable. Recoverability of assets to be
held and used is measured by a comparison of the carrying amount
of an asset to future undiscounted net cash flows expected to be
generated by the asset. If the carrying amount of an asset
exceeds its estimated undiscounted future cash flows, an
impairment charge is recognized for the amount by which the
carrying amount of the asset exceeds the fair value of the
asset. Fair value is determined through various valuation
techniques including discounted cash flows models, quoted market
values and third-party independent appraisals, as considered
necessary.
Other
Assets
Other assets primarily include long-term deposits and deferred
financing costs which were incurred in connection with the
issuance of debt. Deferred financing costs consist primarily of
legal and banking fees and are amortized into interest expense
using the effective interest rate method over the life of the
related debt.
Deferred
Revenue
The Company records deferred revenue for product sales when
(i) the Company has delivered products but other revenue
recognition criteria have not been satisfied or
(ii) payments have been received in advance of products
being delivered.
Asset
Retirement Obligations
The Company records asset retirement obligations associated with
its lease obligations and the retirement of tangible long-lived
assets. The Company reviews legal obligations associated with
the retirement of long-lived assets that result from contractual
obligations or the acquisition, construction, development,
and/or
normal use of the assets. If it is determined that a legal
obligation exists, regardless of whether the obligation is
conditional on a future event, the fair value of the liability
for an asset retirement obligation is recognized in the period
in which it is incurred, if a reasonable estimate
F-13
ASPEN AEROGELS,
INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
of fair value can be made. An amount equal to the fair value of
the liability is also recorded as a long-term asset that is
depreciated over the estimated life of the asset. The difference
between the gross expected future cash outflow and its present
value is accreted over the life of the related lease as an
operating expense.
Redeemable
Convertible Preferred Stock
The Companys redeemable convertible preferred stock is
classified as temporary equity and shown net of issuance costs.
The Company recognizes changes in the redemption value
immediately as they occur and adjusts the carrying amount of the
redeemable convertible preferred stock to equal the redemption
value at the end of each reporting period.
Accumulated
Other Comprehensive Income
Accumulated other comprehensive income consists of changes in
the fair market value of
available-for-sale
securities.
Segments
Operating segments are identified as components of an enterprise
about which separate, discrete financial information is
available for evaluation by the chief operating decision maker
in making decisions on how to allocate resources and assess
performance. The Companys chief operating decision maker
is the Chief Executive Officer. The Companys chief
operating decision maker reviews consolidated operating results
to make decisions about allocating resources and assessing
performance for the entire Company. The Company views its
operations and manages its business as one operating segment.
Information about the Companys revenues, based on shipment
destination or services location, is presented in the following
table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
|
|
|
10,427
|
|
|
|
12,668
|
|
|
|
20,056
|
|
International
|
|
|
9,643
|
|
|
|
15,948
|
|
|
|
23,153
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
20,070
|
|
|
$
|
28,616
|
|
|
$
|
43,209
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subsequent
Events
Subsequent events have been evaluated through the date these
consolidated financial statements were filed (See Note 18).
Recently
Issued Accounting Standards
In October 2009, the FASB issued ASU
No. 2009-13,
Multiple-Deliverable Revenue Arrangements (ASU
2009-13).
ASU 2009-13
supersedes certain guidance in FASB ASC Topic
605-25,
Multiple-Element Arrangements and requires an entity to
allocate arrangement consideration at the inception of an
arrangement to all of its deliverables based on their relative
selling prices (the relative-selling-price method). ASU
2009-13
eliminates the use of the residual method of allocation in which
the undelivered element is measured at its estimated selling
price and the delivered element is measured as the residual of
the arrangement consideration, and requires the
relative-selling-price
F-14
ASPEN AEROGELS,
INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
method in all circumstances in which an entity recognizes
revenue for an arrangement with multiple deliverables subject to
ASU 2009-13.
ASU 2009-13
must be adopted no later than the beginning of the first fiscal
year beginning on or after June 15, 2010, with early
adoption permitted through either prospective application for
revenue arrangements entered into, or materially modified, after
the effective date or through retrospective application to all
revenue arrangements for all periods presented. The Company has
completed its evaluation of ASU
2009-13 and
determined that it will not have a material impact on the
Companys consolidated financial statements.
|
|
(3)
|
Related Party
Transactions
|
The Company had the following transactions with related parties:
The Company sold aerogel products to one shareholder of the
Company, totaling $3,448, for the year ended December 31,
2010. The Company sold aerogel products to two shareholders of
the Company, totaling $2,444 and $1,627 for the years ended
December 31, 2008 and 2009, respectively.
The Company had trade receivables outstanding with affiliates of
approximately $440 and $0 at December 31, 2009 and 2010,
respectively.
One of the Companys principal shareholders is a director
of a company that owns an insurance broker from which the
Company purchases insurance. The Companys yearly premiums
for a comprehensive property and casualty insurance program were
$400, $367 and $347 for the years ended December 31, 2008,
2009 and 2010, respectively.
The Company paid legal fees on behalf of certain of its
principal shareholders of $40, $167 and $86 for the years ended
December 31, 2008, 2009 and 2010, respectively.
As discussed in Note 6, the Company had demand notes
payable to several of its principal shareholders through
June 10, 2008.
|
|
(4)
|
Property, Plant,
and Equipment
|
Property, plant, and equipment consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31
|
|
|
|
|
|
2009
|
|
|
2010
|
|
|
Useful life
|
|
Construction in progress
|
|
$
|
191
|
|
|
$
|
13,215
|
|
|
|
Buildings
|
|
|
12,884
|
|
|
|
12,884
|
|
|
30 years
|
Machinery and equipment
|
|
|
31,237
|
|
|
|
35,606
|
|
|
5 7 years
|
Computer equipment and software
|
|
|
1,416
|
|
|
|
1,431
|
|
|
3 years
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
45,728
|
|
|
|
63,136
|
|
|
|
Accumulated depreciation and amortization
|
|
|
(15,965
|
)
|
|
|
(20,514
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net
|
|
$
|
29,763
|
|
|
$
|
42,622
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-15
ASPEN AEROGELS,
INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Plant and equipment under capital leases consist of the
following:
|
|
|
|
|
|
|
|
|
|
|
December 31
|
|
|
|
2009
|
|
|
2010
|
|
|
Office equipment, at cost
|
|
$
|
62
|
|
|
$
|
94
|
|
Vehicles, at cost
|
|
|
84
|
|
|
|
73
|
|
|
|
|
|
|
|
|
|
|
Total capital leases
|
|
|
146
|
|
|
|
167
|
|
Accumulated amortization
|
|
|
(70
|
)
|
|
|
(88
|
)
|
|
|
|
|
|
|
|
|
|
Capital leases, net
|
|
$
|
76
|
|
|
$
|
79
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense for the years ended December 31, 2008,
2009 and 2010, was $6,479, $5,417 and $4,549, respectively.
Depreciation associated with assets under capital lease for the
years ended December 31, 2008, 2009 and 2010, was $3, $11,
and $18, respectively.
Construction in progress at December 31, 2009 and 2010,
included $191 and $13,215, respectively, related to capital
projects in the Companys manufacturing facility located in
East Providence, Rhode Island.
In an effort to reduce fixed costs and fully utilize the
Companys manufacturing facility in East Providence, Rhode
Island, during 2008 management decided to discontinue
manufacturing operations in its demonstration scale facility in
Northborough, Massachusetts. The Northborough facility ceased
operations in July 2009. This event required an impairment
analysis to be performed during 2008, and the carrying values of
the related machinery and equipment were reduced to fair value
as of December 31, 2008. This resulted in a pretax charge
of $2,524 recorded in cost of revenue in the consolidated
statement of operations for the year ended December 31,
2008.
Inventories consist of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31
|
|
|
|
2009
|
|
|
2010
|
|
|
Raw material
|
|
$
|
1,288
|
|
|
$
|
1,657
|
|
Finished goods
|
|
|
313
|
|
|
|
596
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,601
|
|
|
$
|
2,253
|
|
|
|
|
|
|
|
|
|
|
|
|
(6)
|
Recapitalization
and Reorganization
|
2009
Recapitalization and Financing
On August 14, 2009, the Company approved and initiated a
recapitalization and financing pursuant to which all outstanding
Series A-3
Redeemable Convertible Preferred Stock (Series
A-3),
Series A-2
Redeemable Convertible Preferred Stock
(Series A-2),
Series A-1
Redeemable Convertible Preferred Stock
(Series A-1),
Series B-3
Redeemable Convertible Preferred Stock
(Series B-3)
and
Series B-2
Redeemable Convertible Preferred Stock
(Series B-2)
were converted on a
1-for-1
basis, and the
Series B-1
Redeemable Convertible Preferred Stock
(Series B-1)
was converted into two shares of common stock for each share of
Series B-1,
resulting in the issuance of 25,541,532 shares of common
stock, par value $0.001. In addition, the holder of the
Series B-1
warrant agreed to its cancellation and released the Company from
all obligations with respect thereto. The Company then
F-16
ASPEN AEROGELS,
INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
issued and sold 52,843,201 shares of its newly created
Series A (2009) Redeemable Convertible Preferred Stock
(Series A (2009)) for net proceeds of $30,538.
2008
Reorganization and Financing
On June 10, 2008, the Company undertook a reorganization
pursuant to which an
18-for-1
conversion was affected for all issued common stock, common
stock options, and common stock warrants. All outstanding shares
of the Series A (2001) Redeemable Convertible
Preferred Stock (Series A (2001)), Series C Redeemable
Convertible Preferred Stock (Series C), and Series D
Redeemable Convertible Preferred Stock (Series D) were
exchanged into shares of
Series A-3,
Series A-2,
and
Series A-1
(collectively the Series A (2008)). All obligations under
the then outstanding 14% notes and demand notes were
converted into shares of
Series B-3,
Series B-2,
and
Series B-1
(collectively the Series B (2008)). The Company then issued
and sold 4,158,843 shares of
Series B-1.
The 2008 reorganization and financing resulted in the conversion
of $93,047 of then outstanding debt into redeemable convertible
preferred stock and the receipt of $26,605 of cash by the
Company at closing. The net proceeds of the 2008 financing were
used to fund the Companys ongoing operations and capital
investments.
|
|
(7)
|
Redeemable
Convertible Preferred Stock
|
At December 31, 2010, the Company had 16,010,292 shares of
Series B Redeemable Convertible Preferred Stock
(Series B (2010)) outstanding and 52,843,201 shares of
Series A Redeemable Convertible Preferred Stock
(Series A (2009)) outstanding, and no other shares of
redeemable convertible preferred stock were outstanding,
including preferred stock issued in the 2008 reorganization and
financing.
At December 31, 2007, the Company had 293.95, 1,116.18 and
1,024.74 shares of issued and outstanding Series A
(2001), Series C and Series D with redemption values
of $4,032, $23,648 and $35,183, respectively.
The following is a summary of the Companys Series A
(2001), Series C and Series D for the years ended
December 31, 2008, 2009 and 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series A (2001)
|
|
|
Series C
|
|
|
Series D
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Balance at December 31, 2007
|
|
|
293.95
|
|
|
$
|
4,032
|
|
|
|
1,116.1831
|
|
|
$
|
23,648
|
|
|
|
1,024.7362
|
|
|
$
|
35,183
|
|
Dividends
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
850
|
|
Exchange of redeemable convertible preferred stock and related
dividends
|
|
|
(293.95
|
)
|
|
|
(4,032
|
)
|
|
|
(1,116.1831
|
)
|
|
|
(23,648
|
)
|
|
|
(1,024.7362
|
)
|
|
|
(36,033
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2008, 2009 and 2010
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On June 10, 2008, in conjunction with the 2008
reorganization and financing, all of the then outstanding
Series A (2001), Series C and Series D and
related dividends were exchanged for 80,454 shares of
Series A-3,
498,303 shares of
Series A-2
and 758,795 shares of
Series A-1
with fair values at the date of exchange of $348, $2,048 and
$5,349, respectively. The carrying amount of the redeemable
convertible preferred stock exchanged exceeded the fair value of
the consideration conveyed to the same preferred stockholders by
$55,968. Holders of the
Series A-3,
Series A-2,
and
F-17
ASPEN AEROGELS,
INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Series A-1
had the right to require the Company to redeem all such
outstanding shares at a redemption price equal to the greater of
the applicable liquidation amount, plus accrued but unpaid
dividends or the fair market value, plus accrued but unpaid
dividends. Accordingly, the Company recorded accretion to
redemption value of $759, $4,456 and $12,410 relating to the
Series A-3,
Series A-2,
and
Series A-1,
respectively, during the year ended December 31, 2008.
On June 10, 2008, the Company converted $31,098 of
obligations, net of an original issue discount of $276, under
the then outstanding 14% notes into 4,786,982 shares of
Series B-2
and $61,949 of obligations under the then outstanding demand
notes into 7,971,886 shares of
Series B-3
and 1,563,681 shares of
Series B-1.
Additionally, the Company issued and sold 4,158,875 shares
of
Series B-1
to new and existing stockholders for net proceeds of $26,605. In
the aggregate, the Company received $37,177 in consideration
from investors for the issuance of 5,722,556 shares of
Series B-1.
In connection with the
Series B-1,
the Company issued a warrant to the lead investor to purchase
shares of
Series B-1
at $6.49653 per share
(Series B-1
Warrant). The
Series B-1
Warrant was exercisable upon issuance and set to expire on
December 10, 2009. The Company estimated the initial fair
value of the
Series B-1
Warrant as of the date of grant to be $321 using the
Black-Scholes option-pricing model with the following
assumptions: (i) risk free interest rate of 3.66%,
(ii) life of ten months, (iii) volatility of 33%, and
(iv) no expected dividends. The warrant was accounted for
as a liability because it was exercisable for the Companys
Series B-1,
which was redeemable, and changes in the fair value were
recorded as interest expense. The fair value of the warrant as
of December 31, 2008, was calculated to be $485 using the
Black-Scholes option pricing model.
During the year ended December 31, 2008, the Company
recorded accretion totaling $37,906 relating to the
Series B-1
consisting of closing costs of $408, discount for the fair value
of the
Series B-1
Warrants of $321 and adjustment of the carrying value to
redemption value of two times the original issuance price of
Series B-1
totaling $37,177 relating to liquidation and redemption rights.
At December 31, 2008, the redemption and liquidation value
of the
Series B-1
was $76,016, which included $1,662 in accrued but unpaid
dividends.
The following is a summary of the Companys Series A
(2008) and Series B (2008) for the years ended
December 31, 2008, 2009 and 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series A-1
|
|
|
Series A-2
|
|
|
Series A-3
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Balance at December 31, 2007
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
|
|
Exchange of redeemable convertible preferred stock and related
dividends at fair value
|
|
|
758,795
|
|
|
|
5,349
|
|
|
|
498,303
|
|
|
|
2,048
|
|
|
|
80,454
|
|
|
|
348
|
|
Accretion to redemption value
|
|
|
|
|
|
|
12,410
|
|
|
|
|
|
|
|
4,456
|
|
|
|
|
|
|
|
759
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2008
|
|
|
758,795
|
|
|
$
|
17,759
|
|
|
|
498,303
|
|
|
$
|
6,504
|
|
|
|
80,454
|
|
|
$
|
1,107
|
|
Conversion of redeemable convertible preferred stock and related
dividends
|
|
|
(758,795
|
)
|
|
|
(17,759
|
)
|
|
|
(498,303
|
)
|
|
|
(6,504
|
)
|
|
|
(80,454
|
)
|
|
|
(1,107
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2009 and 2010
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-18
ASPEN AEROGELS,
INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series B-1
|
|
|
Series B-2
|
|
|
Series B-3
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Balance at December 31, 2007
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
|
|
Conversion of debt into redeemable convertible preferred stock
|
|
|
1,563,681
|
|
|
|
10,159
|
|
|
|
4,786,982
|
|
|
|
30,822
|
|
|
|
7,971,886
|
|
|
|
51,790
|
|
Issuance of
Series B-1
|
|
|
4,158,875
|
|
|
|
26,284
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accretion to redemption value
|
|
|
|
|
|
|
37,906
|
|
|
|
|
|
|
|
276
|
|
|
|
|
|
|
|
|
|
Dividends
|
|
|
|
|
|
|
1,662
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2008
|
|
|
5,722,556
|
|
|
$
|
76,011
|
|
|
|
4,786,982
|
|
|
$
|
31,098
|
|
|
|
7,971,886
|
|
|
$
|
51,790
|
|
Dividends
|
|
|
|
|
|
|
1,841
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion of redeemable convertible preferred stock and related
dividends
|
|
|
(5,722,556
|
)
|
|
|
(77,852
|
)
|
|
|
(4,786,982
|
)
|
|
|
(31,098
|
)
|
|
|
(7,971,886
|
)
|
|
|
(51,790
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2009 and 2010
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Holders of the Series A (2008) and Series B
(2008) were entitled to receive dividends when and if
declared by the Board of Directors. In addition, holders of
Series B-1
were entitled to receive a cumulative 8% dividend payable upon
redemption of the
Series B-1,
upon liquidation, or upon conversion of the
Series B-1
into common stock. No dividends were declared or paid on the
Series A (2008) or Series B (2008).
In the event of any liquidation, dissolution, or
winding-up
of the Company, and before any distribution payments were to be
made to the holders of common stock, holders of the
Series A (2008) and Series B (2008) were
entitled to receive an amount equal to the original price paid
per share of capital stock plus any accrued but unpaid
dividends, except in the case of Series B-1 in which each holder
was entitled to receive an amount equal to two times the
original issue price paid per share plus any accrued but unpaid
dividends. At any time after June 10, 2013, the holders of
a majority of each of the Series A (2008) and
Series B (2008) had the right to require the Company
to redeem all such outstanding shares at a redemption price
equal to the greater of the applicable liquidation amount, plus
accrued but unpaid dividends or the fair market value, plus
accrued but unpaid dividends.
On August 14, 2009, in conjunction with the 2009
recapitalization, all of the Companys 14,096,420
outstanding shares of
Series A-1,
Series A-2,
Series A-3,
Series B-2
and
Series B-3
converted on a
1-for-1
basis, and each of the 5,722,556 outstanding shares of
Series B-1
were converted into two shares of common stock, resulting in the
issuance of 25,541,532 shares of common stock with
corresponding increases to additional paid-in capital of
$186,084 and common stock of $26. The
Series B-1
Warrant was canceled upon agreement with the holder effective
August 14, 2009, and the liability related to the warrant
was reclassified to additional paid-in capital, as the
cancellation of the warrant was negotiated as part of the
overall equity recapitalization. At December 31, 2009, the
Company had no Series A (2008) or Series B
(2008) shares outstanding.
F-19
ASPEN AEROGELS,
INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The following is a summary of the Companys currently
outstanding redeemable convertible preferred stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series B (2010)
|
|
|
Series A (2009)
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Balance at December 31, 2008
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
|
|
Issuance of Series A (2009)
|
|
|
|
|
|
|
|
|
|
|
52,843,201
|
|
|
|
30,538
|
|
Accretion to redemption value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
302
|
|
Dividends
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
841
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
52,843,201
|
|
|
|
31,681
|
|
Issuance of Series B (2010)
|
|
|
16,010,292
|
|
|
|
21,098
|
|
|
|
|
|
|
|
|
|
Accretion to redemption value
|
|
|
|
|
|
|
7,240
|
|
|
|
|
|
|
|
46,839
|
|
Dividends
|
|
|
|
|
|
|
461
|
|
|
|
|
|
|
|
2,467
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2010
|
|
|
16,010,292
|
|
|
$
|
28,799
|
|
|
|
52,843,201
|
|
|
$
|
80,987
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In August and September 2009, the Company issued
52,843,201 shares of its newly created Series A (2009)
at $0.583602175 per share, for net proceeds of approximately
$30,538 to a group of new and existing investors. Series A
(2009) is redeemable and convertible into common stock of
the Company.
During the year ended December 31, 2009, the Company
recorded accretion relating to the Series A
(2009) consisting of closing costs of $302 to adjust the
Series A (2009) to redemption value at December 31, 2009.
During the year ended December 31, 2010, the Company
recorded accretion totaling $46,839 consisting of the increase
in the fair market value to adjust the Series A (2009) to
redemption value at December 31, 2010.
In September and October 2010, the Company issued
16,010,292 shares of its newly created Series B (2010)
at $1.336802380 per share, for net proceeds of $21,098 to a
group of new and existing investors. Series B
(2010) is redeemable and convertible into common stock of
the Company.
During the year ended December 31, 2010, the Company
recorded accretion totaling $7,240 relating to the Series B
(2010) consisting of closing costs of $304 and the increase
in the fair market value of the Series B (2010) of
$6,936 to adjust the Series B (2010) to redemption value at
December 31, 2010.
At December 31, 2010, the Company had 16,010,292
Series B (2010) shares and 52,843,201 Series A
(2009) shares outstanding. The rights and preferences of
the Series B (2010) and Series A (2009) as
of December 31, 2010 are as follows:
Voting
Rights
Holders of Series B (2010) and Series A
(2009) shares are entitled to vote on all matters and with
a number of votes equal to the number of shares of common stock
into which each share of preferred stock is then convertible.
Dividends
Holders of Series B (2010) and Series A
(2009) shares are entitled to receive a cumulative 8%
annual dividend. Accrued dividends are convertible into common
stock or payable in cash upon redemption, liquidation or
declaration by the Board of Directors. No dividends have been
declared or paid on Series B (2010) or Series A
(2009) shares.
F-20
ASPEN AEROGELS,
INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Liquidation
Rights
In the event of any liquidation, dissolution, or
winding-up
of the Company, and before any distribution payments are made to
the holders of the Series A (2009) or common stock,
holders of the Series B (2010) are entitled to receive
an amount equal to the original price paid per share of capital
stock plus any accrued but unpaid dividends at the date of
liquidation. In addition, before any distribution payments are
made to the holders of common stock, holders of the
Series A (2009) are entitled to receive an amount
equal to the original price paid per share of capital stock plus
any accrued but unpaid dividends at the date of liquidation.
Participation
Holders of the Series B (2010) and Series A
(2009) have the right to participate in distribution
payments to the holders of common stock on an as-converted basis
up to a maximum, inclusive of payments received pursuant to
applicable liquidation rights, equal to two times the original
price paid per share.
Conversion
Each holder of Series B (2010) and Series A
(2009) has the right to convert such shares into common
stock on a one for one basis obtained by dividing the original
issuance price by the conversion price in effect at issuance, at
any time. In addition, each share of Series B
(2010) and Series A (2009) will automatically
convert into common stock, together with any accrued but unpaid
dividends, immediately upon the completion of a public stock
offering with aggregate net proceeds of at least $60,000 at a
price per share of $0.583602175, or upon an election of the
holders of a majority of the Series B (2010) and
Series A (2009) voting together as a single class. The
conversion price, which is equal to the original issuance price,
of the Series B (2010) is subject to adjustment in the
event that the IPO Equity Value, defined as the price per share
at which the Companys shares of common stock are sold in
the IPO multiplied by the number of shares of common stock
deemed outstanding immediately prior to the IPO, is less than
the IPO Target Value, defined as $250,000 prior to
January 1, 2012 or $280,000 thereafter. The adjusted price
in this circumstance is calculated by multiplying the conversion
price by an amount equal to the IPO Equity Value divided by the
IPO Target Value.
The conversion price would also be subject to adjustment
(i) if the Company issues or is deemed to have issued any
shares of common stock, other than certain excluded stock,
without consideration or for a consideration per share less than
the conversion price for the Series B (2010) or
Series A (2009) in effect immediately prior to each
such issuance; (ii) if the number of shares of common stock
outstanding is increased by a stock dividend payable in shares
of common stock or by a subdivision or
split-up of
shares of common stock, or is decreased by a combination of the
outstanding shares of common stock; (iii) in the event of
any capital reorganization of the Company, any reclassification
of the stock of the Company (other than a change in par value)
or any consolidation or merger of the Company; or (iv) if
the Company makes or fixes a record date for the determination
of holders of common stock entitled to receive a dividend or
distribution payable in property or securities of the Company
other than shares of common stock.
At the time of issuance of the Series B (2010) and
Series A (2009), there was no intrinsic value associated
with the conversion feature upon issuance. There are contingent
events that could result in an adjustment to the conversion
ratio and the accounting consequence of such adjustment, if any,
would be recorded when the contingent event occurs.
F-21
ASPEN AEROGELS,
INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Redemption
At any time on or after September 14, 2014, the holders of
a majority of the Series B (2010) and Series A
(2009), voting together as a single class, have the right to
require the Company to redeem in three annual installments all
then outstanding shares of Series B (2010) and
Series A (2009) at a redemption price equal to the sum
of i.) the greater of the applicable liquidation amount or fair
market value of the shares and ii.) accrued but unpaid
dividends. The Series B (2010) redemption payments are
to be paid in full prior to the Series A
(2009) redemption payments as part of any such annual
redemption.
|
|
(8)
|
Stockholders
(Deficit) Equity
|
Common
Stock
At December 31, 2010, the Companys Board of Directors
had the authority to issue 183,843,201 shares of stock, of
which 114,000,000 were designated as common stock and 17,000,000
were designated as Series B (2010) and 52,843,201 were
designated as Series A (2009).
Common Stock
Warrants
On December 29, 2010, in connection with the issuance of
the Subordinated Notes (see Note 11), the Company issued
warrants to purchase 1,496,107 shares of common stock at an
exercise price of $0.001 per share. The warrants are immediately
exercisable and expire on December 29, 2017. The Company
has estimated the initial fair value of the warrants and
recorded $2,183 as a debt discount using the Black-Scholes
option-pricing model and the following assumptions:
(i) risk-free interest rate of 2.75%, (ii) life of
7.5 years, (iii) volatility of 50%, and (iv) no
expected dividends.
Warrants to purchase 1,631,048 of the Companys common
stock were outstanding at December 31, 2010.
|
|
(9)
|
Employee Stock
Options
|
The Company maintains the 2001 Equity Incentive Plan, as amended
(the Plan) pursuant to which the Companys Board of
Directors may grant qualified and nonqualified common stock
options to officers, key employees, and others who provide or
have provided service to the Company. The Company may also grant
stock option performance grants to certain employees based on
the achievement of specific written financial or operational
milestones. At December 31, 2010, the Plan authorized
grants of incentive stock options and nonqualified stock options
to purchase up to 13,145,806 shares of common stock. Stock
options are granted with an exercise price not less than the
fair market value of the Companys common stock at the date
of grant. All stock options issued have a
10-year term
and generally vest over a three- to four-year period from the
date of grant. Upon exercise, the Company issues shares of
common stock. At December 31, 2008, 2009, and 2010, the
Company determined the fair value of its common stock was $0.33,
$0.22 and $1.46 per share, respectively. At December 31,
2010, there were 990,010 shares available for grant under
the Plan.
Valuation and
Amortization method
The Company does not maintain an external market for its shares.
While it has issued new equity to unrelated third parties and
uses such facts in the determination of the fair value of its
shares, the Company believes that the lack of a secondary market
for its common stock and its limited history of issuing stock to
unrelated parties makes it impracticable to estimate the
expected volatility of its common stock. Therefore, it is not
possible to reasonably estimate the grant-date fair value of the
F-22
ASPEN AEROGELS,
INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Companys options using the Companys own historical
price data. Accordingly, the Company used a peer group of
companies to determine its volatility assumptions.
The fair value of each award was estimated on the date of grant
using the Black-Scholes option pricing model. Key inputs into
this formula include expected term, expected volatility,
expected dividend yield, and the risk-free rate. Each assumption
is discussed below. This fair value is amortized on a
straight-line basis over the requisite service periods of the
awards, which is generally a three- to four-year vesting period.
Expected
term
The expected term represents the period that the Companys
stock-based awards are expected to be outstanding and is
determined using the simplified method for all grants. The
Company believes this is a better representation of the
estimated life than its actual limited historical exercise
behavior.
Expected
volatility
In 2008, 2009, and 2010, the expected volatility is based on the
weighted average volatility of up to six companies within
various industries that the Company believes are similar to its
own.
Expected
dividend
The Company uses an expected dividend yield of zero, since it
does not intend to pay cash dividends on its common stock in the
foreseeable future, nor has it paid dividends on its common
stock in the past.
Risk-free
interest rate
The risk-free interest rate is based on U.S. Treasury
zero-coupon issues with a remaining term equal to the expected
life assumed at the date of grant.
Estimated
forfeitures
As share-based compensation expense recognized is based on
awards ultimately expected to vest, it has been reduced for an
estimated forfeiture rate of 7% for 2008 and 3% for 2009 and
2010. Forfeitures are required to be estimated at the time of
grant and revised, if necessary, in subsequent periods, if
actual forfeitures differ from those estimates. Forfeitures were
estimated based on voluntary termination behavior as well as
analysis of actual option forfeitures.
The following assumptions were used to estimate the fair value
of the option awards:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
|
|
2008
|
|
2009
|
|
2010
|
|
Weighted average assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected term (in years)
|
|
|
6.08
|
|
|
|
5.60
|
|
|
|
6.04
|
|
Expected volatility
|
|
|
33.00
|
%
|
|
|
57.00
|
%
|
|
|
49.75
|
%
|
Risk free rate
|
|
|
3.65
|
%
|
|
|
2.64
|
%
|
|
|
1.90
|
%
|
Expected dividend yield
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
Weighted average grant-date fair value of options granted
|
|
$
|
0.14
|
|
|
$
|
0.09
|
|
|
$
|
0.61
|
|
Weighted average grant-date fair value of options vested
|
|
$
|
0.43
|
|
|
$
|
0.12
|
|
|
$
|
0.12
|
|
Aggregate intrinsic value of options exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
F-23
ASPEN AEROGELS,
INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Modification
On June 10, 2008, in connection with the 2008
reorganization and financing, the Company canceled the majority
of options under the 2001 equity incentive plan and granted new
options with an extended contractual life. These awards were
issued with an exercise price of $0.36, which was equal to the
fair market value of the common stock on June 10, 2008. As
a result of the cancellation and concurrent grant of options,
the Company accounted for this transaction as a modification in
determining the stock-based compensation expense to be
recognized over the remaining service period. The total
incremental compensation expense resulting from the modification
was $914 at December 31, 2008, which will be recognized
over the remaining service period.
On November 11, 2009, in connection with the 2009
recapitalization and financing, the Company canceled the
majority of options under the 2001 equity incentive plan and
granted new options with an extended contractual life. These
awards were issued with an exercise price of $0.22, which was
equal to the fair market value of the common stock on
November 11, 2009. As a result of the cancellation and
concurrent grant of options, the Company accounted for this
transaction as a modification in determining the stock-based
compensation expense to be recognized over the remaining service
period. The total incremental compensation expense resulting
from the modification was $917 at December 31, 2009, which
will be recognized over the remaining service period.
The following table summarizes information about stock options
outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Weighted
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
Number of
|
|
|
Grant Date
|
|
|
Exercise
|
|
|
Contractual
|
|
|
Intrinsic
|
|
|
|
Shares
|
|
|
Fair Value
|
|
|
Price
|
|
|
Term
|
|
|
Value
|
|
|
Options outstanding at December 31, 2009
|
|
|
10,513,805
|
|
|
$
|
0.12
|
|
|
$
|
0.26
|
|
|
|
9.86
|
|
|
|
|
|
Granted
|
|
|
1,721,163
|
|
|
$
|
0.61
|
|
|
$
|
1.25
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(79,172
|
)
|
|
$
|
0.24
|
|
|
$
|
0.48
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(7,071
|
)
|
|
$
|
0.12
|
|
|
$
|
0.22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding at December 31, 2010
|
|
|
12,148,725
|
|
|
$
|
0.19
|
|
|
$
|
0.40
|
|
|
|
8.97
|
|
|
$
|
13,288,975
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2010
|
|
|
5,473,821
|
|
|
$
|
0.12
|
|
|
$
|
0.30
|
|
|
|
8.81
|
|
|
$
|
6,730,867
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected to vest at December 31, 2010
|
|
|
6,474,669
|
|
|
$
|
0.24
|
|
|
$
|
0.48
|
|
|
|
9.10
|
|
|
$
|
6,361,370
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested options at December 31, 2009
|
|
|
7,683,662
|
|
|
$
|
0.12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
1,721,163
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested
|
|
|
(2,662,583
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,264,487
|
|
Forfeited
|
|
|
(67,338
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested options at December 31, 2010
|
|
|
6,674,904
|
|
|
$
|
0.24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2010, there was $1,723 of total
unrecognized compensation cost related to nonvested options
granted under the Plan. This compensation cost is expected to be
recognized over a weighted-average period of 3.08 years.
Cash received from common stock issued as a result of
F-24
ASPEN AEROGELS,
INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
stock options exercised during 2010 amounted to $2. No stock
options were exercised during 2008 or 2009.
|
|
(10)
|
Net Income (Loss)
Per Share
|
Basic net income (loss) per share attributable to common
stockholders is computed by dividing net income (loss)
attributable to common stockholders by the weighted-average
number of common shares outstanding during the period. Diluted
net income (loss) per share attributable to common stockholders
is computed by giving effect to all potential dilutive common
shares, including options, common stock subject to repurchase,
warrants, and redeemable convertible preferred stock. Basic and
diluted net income (loss) per share attributable to common
stockholders was the same for all periods because the Company
incurred losses, which would make potential dilutive common
shares anti-dilutive. The computation of basic and diluted net
income (loss) per share attributable to common stockholders
consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
Net income (loss)
|
|
$
|
(35,244
|
)
|
|
$
|
(18,639
|
)
|
|
$
|
(9,910
|
)
|
Deemed dividends on redeemable convertible preferred stock
(inclusive of issuance costs and accretion to redemption value):
|
|
|
|
|
|
|
|
|
|
|
|
|
Series D
|
|
|
(850
|
)
|
|
|
|
|
|
|
|
|
Exchange of Series A (2001), C and D
|
|
|
55,968
|
|
|
|
|
|
|
|
|
|
Series A-1,
A-2 and
A-3
|
|
|
(17,625
|
)
|
|
|
|
|
|
|
|
|
Series B-1
and B-2
|
|
|
(39,844
|
)
|
|
|
(1,841
|
)
|
|
|
|
|
Series A (2009)
|
|
|
|
|
|
|
(1,143
|
)
|
|
|
(49,306
|
)
|
Series B (2010)
|
|
|
|
|
|
|
|
|
|
|
(7,701
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deemed dividends
|
|
|
(2,351
|
)
|
|
|
(2,984
|
)
|
|
|
(57,007
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to common stockholders
|
|
$
|
(37,595
|
)
|
|
$
|
(21,623
|
)
|
|
$
|
(66,917
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
11,093
|
|
|
|
9,751,616
|
|
|
|
25,574,286
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share attributable to common stockholders,
basic and diluted
|
|
$
|
(3,389.12
|
)
|
|
$
|
(2.21
|
)
|
|
$
|
(2.62
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-25
ASPEN AEROGELS,
INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Potential dilutive common shares that were excluded from the
computation of diluted net income (loss) per share attributable
to common stockholders because they were anti-dilutive consist
of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
Common stock options
|
|
|
3,444,077
|
|
|
|
10,513,805
|
|
|
|
12,148,725
|
|
Common stock warrants
|
|
|
137,213
|
|
|
|
134,941
|
|
|
|
1,631,048
|
|
Preferred stock warrant
|
|
|
384,721
|
|
|
|
|
|
|
|
|
|
Series A-1
|
|
|
758,795
|
|
|
|
|
|
|
|
|
|
Series A-2
|
|
|
498,303
|
|
|
|
|
|
|
|
|
|
Series A-3
|
|
|
80,455
|
|
|
|
|
|
|
|
|
|
Series B-1
|
|
|
11,445,112
|
|
|
|
|
|
|
|
|
|
Series B-2
|
|
|
4,786,982
|
|
|
|
|
|
|
|
|
|
Series B-3
|
|
|
7,971,886
|
|
|
|
|
|
|
|
|
|
Series A (2009)
|
|
|
|
|
|
|
52,843,201
|
|
|
|
52,843,201
|
|
Series B (2010)
|
|
|
|
|
|
|
|
|
|
|
16,010,292
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
29,507,544
|
|
|
|
63,491,947
|
|
|
|
82,633,266
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt consists of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31
|
|
|
|
2009
|
|
|
2010
|
|
|
6% Term Loan
|
|
$
|
509
|
|
|
$
|
247
|
|
Subordinated Notes, net of discount
|
|
|
|
|
|
|
7,820
|
|
|
|
|
|
|
|
|
|
|
Total long-term debt
|
|
|
509
|
|
|
|
8,067
|
|
Current maturities of long-term debt
|
|
|
(262
|
)
|
|
|
(247
|
)
|
|
|
|
|
|
|
|
|
|
Long-term debt, less current maturities
|
|
$
|
247
|
|
|
$
|
7,820
|
|
|
|
|
|
|
|
|
|
|
The principal amount due for the 6% Term Loan is $247 in 2011.
The principal amount due for the Subordinated Notes is $10,000
due on March 2, 2014 (see Note 18).
6% Term
Loan
In January 2005, the Company executed a term loan with the
Massachusetts Development Finance Agency (the Term Loan) for
$1,500. The proceeds were used to build research and development
lab space at the Companys facility in Northborough,
Massachusetts. The Term Loan bears interest at 6% per annum, is
to be repaid in monthly installments of principal and interest
through January 2012 and is secured by lab equipment.
Subordinated
Notes
On December 29, 2010, the Company issued 12% Secured
Subordinated Promissory Notes (the Subordinated Notes) for
aggregate proceeds of $10,000. The proceeds were used to fund
the expansion of a second manufacturing line at the
Companys facility in East Providence, Rhode Island. The
Subordinated Notes are collateralized by certain of the
Companys assets at the East Providence manufacturing
facility. The Subordinated Notes bear interest at 12% per annum
and all accrued
F-26
ASPEN AEROGELS,
INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
interest on the Subordinated Notes is compounded by adding it to
the principal semi-annually on June 30th and
December 31st of each year, commencing June 30,
2011, and continuing until the last such date to occur prior to
the maturity of the Subordinated Notes. Upon such compounding,
the compound amount will itself bear interest. In addition,
accrued and unpaid interest on the Subordinated Notes will be
payable at maturity, which is March 2, 2014. The
Subordinated Notes are subject to mandatory prepayment
provisions, as defined. As such, the Company would be required
to pay the aggregate principal amount of the Subordinated Notes
outstanding no later than (i) the first anniversary of the
consummation of the Companys first underwritten public
offering and (ii) the last business day prior to the date
any shares of Series B (2010) or Series A (2009)
are redeemed by the Company, whichever occurs first. The
Subordinated Notes are subject to certain financial covenants,
which include a minimum tangible net worth calculation. As of
December 31, 2010, the Company was in compliance with all
financial covenants.
In conjunction with the financing, the Company issued 1,496,407
detachable stock warrants to purchase the Companys common
stock at $0.001 per share. A portion of the debt proceeds
totaling $2,183 has been allocated to the warrants based on the
estimated fair value of the warrants at the time of issuance and
has been recorded as additional paid-in capital and a debt
discount. The debt discount is being amortized to interest
expense utilizing the effective interest rate method over the
term of the Subordinated Notes. The warrants are exercisable
immediately and expire 10 years from the date of issuance.
|
|
(12)
|
Other Long-term
Liabilities
|
Other long-term liabilities consist of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31
|
|
|
|
2009
|
|
|
2010
|
|
|
ARO
|
|
$
|
964
|
|
|
$
|
953
|
|
Cross License Agreement
|
|
|
21,014
|
|
|
|
15,989
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21,978
|
|
|
|
16,942
|
|
Current maturities of other long-term liabilities
|
|
|
(7,400
|
)
|
|
|
(6,800
|
)
|
|
|
|
|
|
|
|
|
|
Other long-term liabilities, less current maturities
|
|
$
|
14,578
|
|
|
$
|
10,142
|
|
|
|
|
|
|
|
|
|
|
The Company has asset retirement obligations (ARO) arising from
requirements to perform certain asset retirement activities upon
the termination of its Northborough, Massachusetts, facility
lease and upon disposal of certain machinery and equipment. The
liability was initially measured at fair value and subsequently
is adjusted for accretion expense and changes in the amount or
timing of the estimated cash flows. The corresponding asset
retirement costs are capitalized as part of the carrying amount
of the related long-lived asset and depreciated over the
assets remaining useful life. The Company has restricted
cash of $241 to settle part of this liability.
During 2009, the Company extended its facility lease containing
the ARO. This extension resulted in a change to the assumptions
used to estimate the expected cash flows required to settle the
ARO. The change in the timing of the settlement resulted in a
reduction of estimated cash flows of
F-27
ASPEN AEROGELS,
INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
$145, which required the Company to decrease the liability by
this amount. A summary of ARO activity consists of the following:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
|
|
|
2009
|
|
|
2010
|
|
|
Balance at beginning of period
|
|
$
|
1,085
|
|
|
$
|
964
|
|
Revisions in the estimated cash flow
|
|
|
(145
|
)
|
|
|
|
|
Accretion of discount expense
|
|
|
24
|
|
|
|
29
|
|
Settlement costs
|
|
|
|
|
|
|
(40
|
)
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
964
|
|
|
$
|
953
|
|
|
|
|
|
|
|
|
|
|
On April 1, 2006, the Company and Cabot Corporation entered
into a Cross License Agreement (CLA) to license certain
intellectual property rights. Such licenses will expire on the
last day of the life of each issued patent.
On September 21, 2007, the CLA was amended to modify the
consideration payable to Cabot by the Company to $38,000 in cash
in 28 installments over a seven-year period. The Company
adjusted its obligation to Cabot to reflect a revised net
present value of the consideration payable to Cabot of $19,300.
The discount of $18,700 is being amortized to interest expense
over the term of the payment schedule.
The consideration provided to Cabot was for the value of the
licensed patents and patent applications, the avoidance of
potential claims on prior use of Cabot issued patents and
related costs. Of the total consideration, $1,000 was allocated
to the fair market value of the patents and patent applications
obtained from Cabot, $500 was allocated to the fair market value
of the patents and patent applications provided to Cabot, and
the remainder to administrative expenses.
Under the terms of the CLA, as amended, the remaining cash
payments due to Cabot as of December 31, 2010, consist of
the following:
|
|
|
|
|
Year
|
|
Payment
|
|
|
2011
|
|
$
|
6,800
|
|
2012
|
|
|
6,000
|
|
2013
|
|
|
6,000
|
|
|
|
|
|
|
Total payments
|
|
$
|
18,800
|
|
|
|
|
|
|
No provision for federal or state income taxes has been recorded
as the Company incurred net operating losses and recorded a full
valuation allowance against net deferred assets for all periods
presented. Differences between income tax expense at the
statutory federal tax rate and the Companys income tax
expense from operations are attributable to changes in the
valuation
F-28
ASPEN AEROGELS,
INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
allowance, stock option expense, and other items. The
reconciliation between the U.S. statutory income tax rate
and the Companys effective rate consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
U.S. federal income tax statutory rate
|
|
|
34
|
%
|
|
|
34
|
%
|
|
|
34
|
%
|
Changes in valuation allowance for deferred tax assets
|
|
|
15
|
%
|
|
|
(33
|
)%
|
|
|
(32
|
)%
|
Debt forgiveness income
|
|
|
(47
|
)%
|
|
|
0
|
%
|
|
|
0
|
%
|
Other
|
|
|
(2
|
)%
|
|
|
(1
|
)%
|
|
|
(2
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective tax rate
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The tax effects of temporary differences between financial
statement and tax accounting that gave rise to significant
portions of the Companys deferred tax assets and deferred
tax liabilities at December 31, 2009 and 2010, are
presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31
|
|
|
|
|
|
|
2009
|
|
|
2010
|
|
|
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards
|
|
$
|
45,165
|
|
|
$
|
41,540
|
|
|
|
|
|
Other long-term liabilities
|
|
|
4,116
|
|
|
|
3,099
|
|
|
|
|
|
Property and equipment
|
|
|
1,010
|
|
|
|
561
|
|
|
|
|
|
Tax credit carryforwards
|
|
|
437
|
|
|
|
453
|
|
|
|
|
|
Other
|
|
|
1,087
|
|
|
|
1,199
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross deferred tax assets
|
|
|
51,815
|
|
|
|
46,852
|
|
|
|
|
|
Valuation allowance
|
|
|
(51,815
|
)
|
|
|
(46,852
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax asset
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The net change in the valuation allowance for the year ended
December 31, 2010, was a decrease of $4,693. The Company
has recorded a full valuation allowance against its deferred tax
assets due to the uncertainty associated with the utilization of
the net operating loss carryforwards. In assessing the
realizability of deferred tax assets, the Company considers all
available evidence, historical and prospective, with greater
weight given to historical evidence, in determining whether it
is more likely than not that some portion or all of the deferred
tax assets will not be realized. The ultimate realization of the
Companys deferred tax assets generally is dependent upon
generation of future taxable income.
At December 31, 2010, the Company has $112,022 of net
operating losses available to offset future federal income, if
any, and which expire on various dates through December 31,
2030. The Company has performed an analysis pursuant to Internal
Revenue Code Section 382, as well as similar state
provisions, in order to determine whether any limitations might
exist on the utilization of net operating losses and other tax
attributes. Based on this analysis, the Company has 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 its net operating losses and other tax
attributes as of such date. The Company also determined that it
had certain built-in gains at the date of ownership change.
Built-in gains increase the limitation under Internal Revenue
Code Section 382 to the extent triggered during the five
year period subsequent to the date of change. Absent the
disposition of certain built-in gain assets within the five year
period subsequent to the change in ownership, approximately
$30,000 of net operating losses will expire unutilized in June
2013.
F-29
ASPEN AEROGELS,
INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
At December 31, 2010, the Company has $61,534 of
apportioned net operating losses available to offset future
state taxable income, if any, and which expire on various dates
through December 31, 2030. Similar to the federal treatment
above, absent the disposition of certain built in gains within
the five year period subsequent to the change in ownership, a
significant portion of the state net operating losses will not
be able to be utilized after June 2013.
The Company has adopted the provisions of ASC Topic 740,
Income Taxes, relating to accounting for uncertainty in
income taxes effective January 1, 2009. No adjustments have
been recognized in the Companys consolidated financial
statements as a result of the implementation. For each of the
years ended December 31, 2008 and December 31, 2009,
and as of December 31, 2010, the Company did not have any
material unrecognized tax benefits and thus no interest and
penalties related to unrecognized tax benefits were recorded. In
addition, the Company does not expect that the amount of
unrecognized tax benefits will change significantly within the
next twelve months.
The Company files a federal income tax return in the United
States and in various state jurisdictions. The Company is
subject to U.S. federal and state income tax examination by
tax authorities for tax years beginning in 2007.
|
|
(14)
|
Commitments and
Contingencies
|
Capital
Leases
The Company has entered into certain capital leases for computer
equipment and automobiles. The leases are payable in monthly
installments and expire at various dates through 2014. The
recorded balance of capital lease obligations as of
December 31, 2009 and 2010, was $66 and $72, respectively.
Future minimum payments under capital leases at
December 31, 2010, are as follows:
|
|
|
|
|
|
|
Capital Lease
|
|
Year
|
|
Obligations
|
|
|
2011
|
|
$
|
26
|
|
2012
|
|
|
26
|
|
2013
|
|
|
21
|
|
2014
|
|
|
11
|
|
2015
|
|
|
2
|
|
|
|
|
|
|
Total
|
|
|
86
|
|
Less portion representing interest
|
|
|
(14
|
)
|
|
|
|
|
|
Present value of future minimum payments
|
|
|
72
|
|
Current maturities of capital lease payments
|
|
|
(20
|
)
|
|
|
|
|
|
Long-term capital lease obligations
|
|
$
|
52
|
|
|
|
|
|
|
Operating
Leases
The Company leases facilities and office equipment under
operating leases expiring at various dates through 2013. Under
these agreements, the Company is obligated to pay annual
rentals, as noted below, plus real estate taxes, and certain
operating expenses. Some operating leases contain rent
escalation clauses whereby the rent payments increase over the
term of the lease. In such cases, rent expense is recognized on
a straight-line basis over the lease term.
F-30
ASPEN AEROGELS,
INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Future minimum lease payments under operating leases at
December 31, 2010 are as follows:
|
|
|
|
|
|
|
Operating
|
|
Year
|
|
Leases
|
|
|
2011
|
|
$
|
519
|
|
2012
|
|
|
540
|
|
2013
|
|
|
549
|
|
|
|
|
|
|
Total minimum lease payments
|
|
$
|
1,608
|
|
|
|
|
|
|
The Company incurred rent expense under all operating leases of
approximately $1,103, $1,019, and $806 for the years ended
December 31, 2008, 2009, and 2010, respectively.
Letters of
Credit
In connection with a lease, the Company has been required to
pledge cash in order to provide the lessor with a letter of
credit. As of December 31, 2009 and 2010, the Company had
total letters of credit outstanding for $416. In addition, the
Company has been required to pledge cash in order to provide
certain customers with letters of credit relating to the on-time
delivery of its products and that the products have been
manufactured according to the contractual specifications. As of
December 31, 2009 and 2010, the Company had letters of
credit outstanding for $137 and $441, respectively. All of these
amounts are included in restricted cash on the accompanying
consolidated balance sheets as of December 31, 2009 and
2010.
|
|
(15)
|
Employee Benefit
Plan
|
The Company sponsors the Aspen Aerogels, Inc. 401(k) Plan (the
Plan). Under the terms of the Plan, the Companys employees
may contribute a percentage of their pretax earnings. The
Company has not provided matching contributions nor has it made
any contributions to the Plan.
Accrued expenses consist of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31
|
|
|
|
2009
|
|
|
2010
|
|
|
Accrued capital expenditures
|
|
$
|
|
|
|
$
|
3,554
|
|
Employee compensation and related taxes
|
|
|
567
|
|
|
|
1,860
|
|
Other accrued expenses
|
|
|
224
|
|
|
|
573
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
791
|
|
|
$
|
5,987
|
|
|
|
|
|
|
|
|
|
|
|
|
(17)
|
Marketable
Securities
|
Marketable securities are
available-for-sale
securities and consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2010
|
|
|
|
|
Gross
|
|
Gross
|
|
|
|
|
Amortized
|
|
Unrealized
|
|
Unrealized
|
|
Fair
|
Description
|
|
Cost
|
|
Gain
|
|
Losses
|
|
Value
|
|
Government agency bonds
|
|
$
|
4,012
|
|
|
$
|
8
|
|
|
$
|
|
|
|
$
|
4,020
|
|
F-31
ASPEN AEROGELS,
INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Gross realized gains and losses on the sales of
available-for-sale
marketable securities were not material and have been included
in the consolidated statements of operations for the year ended
December 31, 2010. The Company held no marketable
securities at December 31, 2009.
In March 2011, the Company entered into a two-year, revolving
line of credit agreement (LOC), with a bank, to borrow up to
$10,000 secured by the then outstanding accounts receivable and
inventory of the Company. Borrowings under the line of credit
accrue interest at prime plus one half percent. The facility
also includes fees based on unused portions of the line of
credit, among others. The LOC is collateralized by all assets of
the Company, with a negative pledge on intellectual property and
fixed assets at the East Providence manufacturing facility. The
Company is required to comply with financial covenants including
minimum levels of tangible net worth and cash on hand.
In June 2011, the Company issued $30,000 in 8% subordinated
convertible notes (the Convertible Notes) to several investors.
The Convertible Notes accrue interest at 8% per annum and mature
three years from the date of issuance. In the event of an
initial public offering of the Companys common stock, the
Convertible Notes will convert into the Companys common
stock at varying discounts depending on if and when the Company
completes an initial public offering. If not converted pursuant
to the terms of the Convertible Notes, the Companys
obligation at maturity will be equal to the product of 1.375
times the balance of principal and accrued interest at
June 1, 2014. In connection with the issuance of the
Convertible Notes, the holders of the Subordinated Notes amended
the terms of their original agreement whereby the Subordinated
Notes will be due March 2, 2014, prior to the maturity of
the Convertible Notes.
F-32
ASPEN AEROGELS,
INC.
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
December 31
|
|
|
June 30
|
|
|
|
2010
|
|
|
2011
|
|
|
|
(In thousands, except share and per share data)
|
|
|
Assets
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
26,800
|
|
|
$
|
29,633
|
|
Marketable securities
|
|
|
4,020
|
|
|
|
|
|
Accounts receivable, net of allowance for doubtful accounts
|
|
|
10,205
|
|
|
|
12,844
|
|
Costs in excess of billings
|
|
|
124
|
|
|
|
279
|
|
Inventories
|
|
|
2,253
|
|
|
|
5,112
|
|
Prepaid expenses and other current assets
|
|
|
419
|
|
|
|
390
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
43,821
|
|
|
|
48,258
|
|
Restricted cash
|
|
|
857
|
|
|
|
858
|
|
Property, plant, and equipment, net
|
|
|
42,622
|
|
|
|
57,691
|
|
Other assets
|
|
|
1,495
|
|
|
|
4,064
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
88,795
|
|
|
$
|
110,871
|
|
|
|
|
|
|
|
|
|
|
Liabilities, Redeemable Convertible Preferred Stock and
Stockholders Deficit
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Long-term debt, current portion
|
|
$
|
247
|
|
|
$
|
110
|
|
Capital leases, current portion
|
|
|
20
|
|
|
|
36
|
|
Accounts payable
|
|
|
5,597
|
|
|
|
5,399
|
|
Accrued expenses
|
|
|
5,987
|
|
|
|
4,760
|
|
Deferred revenue
|
|
|
447
|
|
|
|
1,399
|
|
Other current liabilities
|
|
|
6,800
|
|
|
|
6,000
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
19,098
|
|
|
|
17,704
|
|
Convertible notes
|
|
|
|
|
|
|
30,540
|
|
Long-term debt, excluding current portion
|
|
|
7,820
|
|
|
|
8,614
|
|
Capital leases, excluding current portion
|
|
|
52
|
|
|
|
118
|
|
Other long-term liabilities
|
|
|
10,142
|
|
|
|
8,041
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
37,112
|
|
|
|
65,017
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (Note 13)
|
|
|
|
|
|
|
|
|
Series B redeemable convertible preferred stock,
$0.001 par value; authorized 17,000,000 shares; issued
and outstanding 16,010,292 shares at December 31, 2010
and June 30, 2011, at redemption and liquidation value
|
|
|
28,799
|
|
|
|
42,161
|
|
Series A redeemable convertible preferred stock,
$0.001 par value; authorized, issued and outstanding
52,843,201 shares at December 31, 2010 and
June 30, 2011, at redemption and liquidation value
|
|
|
80,987
|
|
|
|
136,229
|
|
Stockholders deficit:
|
|
|
|
|
|
|
|
|
Common stock, $0.001 par value; authorized
114,000,000 shares; issued and outstanding 25,574,570 and
26,119,304 shares at December 31, 2010 and
June 30, 2011
|
|
|
26
|
|
|
|
26
|
|
Additional paid-in capital
|
|
|
138,038
|
|
|
|
69,876
|
|
Accumulated deficit
|
|
|
(196,175
|
)
|
|
|
(202,438
|
)
|
Accumulated other comprehensive income
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders deficit
|
|
|
(58,103
|
)
|
|
|
(132,536
|
)
|
|
|
|
|
|
|
|
|
|
Total liabilities, redeemable convertible preferred stock and
stockholders deficit
|
|
$
|
88,795
|
|
|
$
|
110,871
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to unaudited consolidated financial
statements.
F-33
ASPEN AEROGELS,
INC.
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
June 30
|
|
|
|
2010
|
|
|
2011
|
|
|
|
(In thousands, except share and per share data)
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
Product
|
|
$
|
16,008
|
|
|
$
|
24,333
|
|
Research services
|
|
|
2,238
|
|
|
|
1,817
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
18,246
|
|
|
|
26,150
|
|
Cost of revenue:
|
|
|
|
|
|
|
|
|
Product
|
|
|
16,114
|
|
|
|
21,545
|
|
Research services
|
|
|
1,005
|
|
|
|
922
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
1,127
|
|
|
|
3,683
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
1,719
|
|
|
|
1,728
|
|
Selling and marketing
|
|
|
2,318
|
|
|
|
2,557
|
|
General and administrative
|
|
|
2,813
|
|
|
|
3,443
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
6,850
|
|
|
|
7,728
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
(5,723
|
)
|
|
|
(4,045
|
)
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
37
|
|
|
|
51
|
|
Interest expense
|
|
|
(1,404
|
)
|
|
|
(2,269
|
)
|
|
|
|
|
|
|
|
|
|
Total other expense, net
|
|
|
(1,367
|
)
|
|
|
(2,218
|
)
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
(7,090
|
)
|
|
|
(6,263
|
)
|
Dividends and accretion of redeemable convertible preferred stock
|
|
|
(39,264
|
)
|
|
|
(68,604
|
)
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to common stockholders
|
|
$
|
(46,354
|
)
|
|
$
|
(74,867
|
)
|
|
|
|
|
|
|
|
|
|
Net income (loss) per common share attributable to common
stockholders, basic and diluted
|
|
$
|
(1.81
|
)
|
|
$
|
(2.88
|
)
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding, basic and diluted
|
|
|
25,573,997
|
|
|
|
26,005,705
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to unaudited consolidated financial
statements.
F-34
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
June 30
|
|
|
|
2010
|
|
|
2011
|
|
|
|
(In thousands)
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(7,090
|
)
|
|
$
|
(6,263
|
)
|
Adjustments to reconcile net income (loss) to net cash used in
operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
2,276
|
|
|
|
3,365
|
|
Imputed interest
|
|
|
1,311
|
|
|
|
1,379
|
|
Accretion of convertible notes to fair value
|
|
|
|
|
|
|
540
|
|
Gain on sale of marketable securities
|
|
|
|
|
|
|
(14
|
)
|
Stock compensation expense
|
|
|
201
|
|
|
|
442
|
|
Settlement of asset retirement obligation
|
|
|
(15
|
)
|
|
|
(12
|
)
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(2,036
|
)
|
|
|
(2,639
|
)
|
Costs in excess of billings
|
|
|
(442
|
)
|
|
|
(155
|
)
|
Inventories
|
|
|
(1,183
|
)
|
|
|
(2,859
|
)
|
Other current assets
|
|
|
(38
|
)
|
|
|
252
|
|
Accounts payable
|
|
|
(9
|
)
|
|
|
664
|
|
Accrued expenses
|
|
|
1,116
|
|
|
|
906
|
|
Deferred revenue
|
|
|
183
|
|
|
|
952
|
|
Other long-term liabilities
|
|
|
(3,700
|
)
|
|
|
(3,800
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(9,426
|
)
|
|
|
(7,242
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
(1,633
|
)
|
|
|
(20,870
|
)
|
Increase in restricted cash
|
|
|
(92
|
)
|
|
|
(1
|
)
|
Purchase of marketable securities
|
|
|
(11,042
|
)
|
|
|
|
|
Proceeds from maturities and sales of marketable securities
|
|
|
|
|
|
|
4,026
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(12,767
|
)
|
|
|
(16,845
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Proceeds from issuance of convertible notes
|
|
|
|
|
|
|
30,000
|
|
Repayment of borrowings under long-term debt
|
|
|
(131
|
)
|
|
|
(139
|
)
|
Deferred financing costs
|
|
|
(276
|
)
|
|
|
(551
|
)
|
Deferred offering costs
|
|
|
|
|
|
|
(2,372
|
)
|
Repayment of obligations under capital lease
|
|
|
(19
|
)
|
|
|
(18
|
)
|
Payment of stock option exercise
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) / provided by financing activities
|
|
|
(424
|
)
|
|
|
26,920
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) / increase in cash
|
|
|
(22,617
|
)
|
|
|
2,833
|
|
Cash at beginning of period
|
|
|
27,502
|
|
|
|
26,800
|
|
|
|
|
|
|
|
|
|
|
Cash at end of period
|
|
$
|
4,885
|
|
|
$
|
29,633
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
14
|
|
|
$
|
315
|
|
|
|
|
|
|
|
|
|
|
Income taxes paid
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of non-cash activities:
|
|
|
|
|
|
|
|
|
Accrued dividends on preferred stock
|
|
$
|
1,223
|
|
|
$
|
2,074
|
|
|
|
|
|
|
|
|
|
|
Accretion of preferred stock
|
|
$
|
38,041
|
|
|
$
|
66,530
|
|
|
|
|
|
|
|
|
|
|
Change in accrued capital expenditures
|
|
$
|
2,184
|
|
|
$
|
(2,995
|
)
|
|
|
|
|
|
|
|
|
|
Capital lease
|
|
$
|
|
|
|
$
|
100
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to unaudited consolidated financial
statements.
F-35
|
|
(1)
|
Description of
Business
|
Nature of
Business
Aspen Aerogels, Inc. (the Company) is an energy efficiency
company that designs, develops, and manufactures innovative,
high-performance aerogel insulation. The Company also conducts
research and development related to aerogel technology supported
by funding from several agencies of the U.S. government and
other institutions in the form of research and development
contracts.
Liquidity
The Company has incurred operating losses and negative cash flow
since inception, has an accumulated deficit of $202,438 as of
June 30, 2011, and has significant ongoing cash flow
commitments. The Company has invested significant resources to
commercialize aerogel technology and to build a manufacturing
infrastructure capable of supplying aerogel products at the
volumes and costs required by its customers. At June 30,
2011, the Company markets a set of commercially viable products,
serves a growing base of customers and is experiencing rapid
revenue growth.
The Companys ability to achieve sufficient operating cash
flows to generate net income, to fully fund operations and to
meet upcoming commitments will require continued capacity
expansions and related capital investments. In December 2010,
the Company issued Subordinated Notes to several investors
generating net proceeds of $9,788 in cash to complete the
funding of the second manufacturing line at its East Providence,
Rhode Island, manufacturing facility, which was completed and
placed into service during the first quarter of 2011. The second
manufacturing line is designed to double the Companys
manufacturing capacity.
During the six months ended June 30, 2010 and 2011, the
Company generated sufficient revenue to produce a positive gross
profit. However, the Company has not yet generated net income or
positive cash flow from operations. In addition, the
Companys Cross License Agreement with Cabot Corporation
requires payments through 2013 in an aggregate of $15,000.
However, the Company has continued to expand its financial
resources and sources of available credit. As more fully
described in Note 7, in March 2011, the Company entered
into a senior, revolving line of credit agreement with a bank
which provides up to $10,000 in borrowing capacity. In June
2011, as more fully described in Note 7, the Company issued
Convertible Notes to several investors generating gross proceeds
of $30,000. These funds are expected to fund commitments during
2011 in connection with the Companys planned expansion of
its East Providence manufacturing facility.
The Companys current financial forecast anticipates
increasing revenue levels and improving cash flow from
operations throughout 2011. Based on current revenue and expense
forecasts, the Company believes that its existing cash and cash
equivalents and the net proceeds from its recent equity and debt
financings will be sufficient to satisfy its anticipated cash
requirements at least through 2011. If the Companys
operating performance deteriorates from levels achieved during
the year ended December 31, 2010 and the six months ended
June 30, 2011, it could have a significant effect on the
Companys liquidity and its ability to continue in the
future as a going concern.
F-36
ASPEN AEROGELS,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Unaudited)
|
|
(2)
|
Significant
Accounting Policies
|
Unaudited
Interim Financial Information
The accompanying interim consolidated balance sheet as of
June 30, 2011 and the consolidated statements of operations
and cash flows for the six months ended June 30, 2010 and
2011 are unaudited and should be read in conjunction with the
Companys most recently issued consolidated financial
statements as of and for the year ended December 31, 2010.
These unaudited interim consolidated financial statements have
been prepared in accordance with accounting principles generally
accepted in the United States of America. In the opinion of the
Companys management, the unaudited interim consolidated
financial statements have been prepared on the same basis as the
audited consolidated financial statements and include all
adjustments necessary for the fair statement of the
Companys financial position, as of June 30, 2011, and
the results of operations and cash flows for the six months
ended June 30, 2010 and 2011. The results of operations for
the six months ended June 30, 2011 are not necessarily
indicative of the results to be expected for the year ending
December 31, 2011 or for any other period.
Principles of
Consolidation
The accompanying consolidated financial statements include the
accounts of the Company and its wholly owned subsidiaries. All
significant intercompany balances and transactions have been
eliminated in consolidation.
Reclassifications
Certain prior period amounts in the financial statements and
corresponding footnotes have been reclassified to conform to the
current periods presentation.
Use of
Estimates
The preparation of consolidated financial statements in
conformity with U.S. GAAP requires the use of estimates,
judgments, and assumptions that affect the reported amounts of
assets, liabilities, revenues, expenses, and related disclosure
of contingent assets and liabilities at the date of the
financial statements and for the period then ended.
Redeemable
Convertible Preferred Stock
The Companys redeemable convertible preferred stock is
classified as temporary equity and shown net of issuance costs.
The Company recognizes changes in the redemption value as they
occur and adjusts the carrying amount of the redeemable
convertible preferred stock to equal the redemption value at the
end of each reporting period.
Fair Value
Measurements
The fair value hierarchy gives the highest priority to
unadjusted quoted prices in active markets for identical assets
(Level 1), and the lowest priority to unobservable inputs
(Level 3). The Companys financial assets are
classified within the fair value hierarchy based on the lowest
level of input that is significant to the fair value
measurement. The three levels of the fair value hierarchy, and
its applicability to the Companys financial assets, are
described below:
Level 1 Unadjusted quoted prices in
active markets that are accessible at the measurement date of
identical, unrestricted assets.
F-37
ASPEN AEROGELS,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Unaudited)
Level 2 Quoted prices for similar
assets, or inputs that are observable, either directly or
indirectly, for substantially the full term through
corroboration with observable market data. Level 2 includes
investments valued at quoted prices adjusted for legal or
contractual restrictions specific to the security.
Level 3 Pricing inputs are unobservable
for the asset, that is, inputs that reflect the reporting
entitys own assumptions about the assumptions market
participants would use in pricing the asset. Level 3
includes private investments that are supported by little or no
market activity.
Fair Value
Option
Under the Fair Value Option Subsections of FASB ASC Subtopic
825-10,
Financial Instruments Overall, the Company
has the irrevocable option to report most financial assets and
financial liabilities at fair value on an instrument by
instrument basis, with changes in fair value reported in
earnings. See Note 8 to the interim consolidated financial
statements for a discussion of the Companys use of the
fair value option for its Convertible Notes.
Subsequent
Events
Subsequent events have been evaluated through the date these
interim consolidated financial statements were filed.
Recently
Issued Accounting Standards
In October 2009, the FASB issued ASU
No. 2009-13,
Multiple-Deliverable Revenue Arrangements (ASU
2009-13).
ASU 2009-13
supersedes certain guidance in FASB ASC
Topic 605-25,
Multiple-Element
Arrangements and requires an entity to allocate arrangement
consideration at the inception of an arrangement to all of its
deliverables based on their relative selling prices (the
relative-selling-price method). ASU
2009-13
eliminates the use of the residual method of allocation in which
the undelivered element is measured at its estimated selling
price and the delivered element is measured as the residual of
the arrangement consideration, and requires the
relative-selling-price method in all circumstances in which an
entity recognizes revenue for an arrangement with multiple
deliverables subject to ASU
2009-13. ASU
2009-13 must
be adopted no later than the beginning of the first fiscal year
beginning on or after June 15, 2010, with early adoption
permitted through either prospective application for revenue
arrangements entered into, or materially modified, after the
effective date or through retrospective application to all
revenue arrangements for all periods presented. The Company has
adopted ASU
2009-13 and
determined that it does not have a material impact on the
Companys consolidated financial statements.
In June 2011, the FASB issued Accounting Standards Update
2011-05,
Comprehensive Income (Topic 220): Presentation of
Comprehensive Income (ASU
2011-05).
The objective of ASU
2011-05 is
to increase the prominence of items reported in other
comprehensive income. The main provisions of ASU
2011-05
provide that an entity that reports items of other comprehensive
income has the option to present comprehensive income in either
one or two consecutive financial statements. The option in
current U.S. GAAP that permits the presentation of other
comprehensive income in the statement of changes in equity has
been eliminated. ASU
2011-05 is
effective for fiscal years, or interim periods within those
years, beginning after December 15, 2011 and should be
applied retrospectively. Early adoption is permitted. The
Company believes the adoption of ASU
2011-05 will
not have a material impact on its financial position, results of
operations, cash flows, or disclosures.
F-38
ASPEN AEROGELS,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Unaudited)
|
|
(3)
|
Related Party
Transactions
|
The Company had the following transactions with related parties:
The Company sold aerogel products to one shareholder of the
Company, totaling $1,186 and $1,766 for the six months ended
June 30, 2010 and 2011, respectively.
The Company had trade receivables outstanding with affiliates of
approximately zero and $550 as of December 31, 2010 and
June 30, 2011, respectively.
Inventories consist of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31
|
|
|
June 30
|
|
|
|
2010
|
|
|
2011
|
|
|
Raw material
|
|
$
|
1,657
|
|
|
$
|
1,927
|
|
Work in Process
|
|
|
|
|
|
|
69
|
|
Finished goods
|
|
|
596
|
|
|
|
3,116
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,253
|
|
|
$
|
5,112
|
|
|
|
|
|
|
|
|
|
|
|
|
(5)
|
Redeemable
Convertible Preferred Stock
|
The following is a summary of the Companys currently
outstanding redeemable convertible preferred stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series B (2010)
|
|
|
Series A (2009)
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Balance at December 31, 2010
|
|
|
16,010,292
|
|
|
$
|
28,799
|
|
|
|
52,843,201
|
|
|
$
|
80,987
|
|
Accretion to redemption value
|
|
|
|
|
|
|
12,512
|
|
|
|
|
|
|
|
54,018
|
|
Dividends
|
|
|
|
|
|
|
850
|
|
|
|
|
|
|
|
1,224
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2011
|
|
|
16,010,292
|
|
|
$
|
42,161
|
|
|
|
52,843,201
|
|
|
$
|
136,229
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At June 30, 2011 the Company had 16,010,292 shares of
Series B Redeemable Convertible Preferred Stock
(Series B (2010)) and 52,843,201 shares of
Series A Redeemable Convertible Preferred Stock
(Series A (2009)) outstanding. The rights and preferences
of the Series B (2010) and Series A
(2009) as of June 30, 2011 are as follows:
Each holder of Series B (2010) and Series A
(2009) has the right to convert such shares into common
stock on a one for one basis at any time. In addition, each
share of Series B (2010) and Series A
(2009) will automatically convert into common stock
immediately upon the completion of an initial public offering
(IPO) with aggregate net proceeds of at least $60,000 at a price
per share of $0.583602175, or upon an election of the holders of
a majority of the Series B (2010) and Series A
(2009) voting together as a single class. The conversion
price, which is equal to the original issuance price, of the
Series B (2010), is subject to adjustment in the event that
the IPO Equity Value, defined as the price per share at which
the Companys shares of common stock are sold in an IPO
multiplied by the number of shares of common stock deemed
outstanding immediately prior to the IPO, is less than the IPO
Target Value, defined as $250,000 prior to January 1, 2012
or $280,000 thereafter. The adjusted price in this circumstance
is
F-39
ASPEN AEROGELS,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Unaudited)
calculated by multiplying the conversion price by an amount
equal to the IPO Equity Value divided by the IPO Target Value.
At any time on or after September 14, 2014, the holders of
a majority of the Series B (2010) and Series A
(2009) voting together as a single class have the right to
require the Company to redeem in three annual installments all
then outstanding shares of Series B (2010) and
Series A (2009) at a redemption price equal to the
greater of the applicable liquidation amount or fair market
value of the shares excluding accrued but unpaid dividends. The
Series B (2010) redemption payments are to be paid in
full prior to the Series A (2009) redemption payments
as part of any such annual redemption.
During the six months ended June 30, 2011, the Company
recorded accretion of the Companys Series B
(2010) and Series A (2009) shares and
corresponding decreases to additional paid in capital of $12,512
and $54,018, respectively, for the increase in the fair market
value of the Company to adjust the Series B (2010) and
Series A (2009) to redemption value at June 30,
2011.
|
|
(6)
|
Employee Stock
Options
|
The Company maintains the 2001 Equity Incentive Plan, as amended
(the Plan) pursuant to which the Companys Board of
Directors may grant qualified and nonqualified common stock
options to officers, key employees, and others who provide or
have provided service to the Company. The Company may also grant
stock option performance grants to certain employees based on
the achievement of specific written financial or operational
milestones. At June 30, 2011, the Plan authorized grants of
incentive stock options and nonqualified stock options to
purchase up to 14,110,658 shares of common stock. Stock
options are granted with an exercise price not less than the
fair market value of the Companys common stock at the date
of grant. All stock options issued have a
10-year term
and generally vest over a three- to four-year period from the
date of grant. Upon exercise, the Company issues shares of
common stock. At June 30, 2011, there were
1,687,019 shares available for grant under the Plan.
Total stock-based compensation for the six months ended
June 30, 2010 and 2011 was $201 and $442, respectively.
Long-Term
Debt
Long-term debt consists of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31
|
|
|
June 30
|
|
|
|
2010
|
|
|
2011
|
|
|
6% Term Loan
|
|
$
|
247
|
|
|
$
|
110
|
|
Subordinated Notes, net of discount
|
|
|
7,820
|
|
|
|
8,614
|
|
|
|
|
|
|
|
|
|
|
Total long-term debt
|
|
|
8,067
|
|
|
|
8,724
|
|
Current maturities of long-term debt
|
|
|
(247
|
)
|
|
|
(110
|
)
|
|
|
|
|
|
|
|
|
|
Long-term debt, less current maturities
|
|
$
|
7,820
|
|
|
$
|
8,614
|
|
|
|
|
|
|
|
|
|
|
The principal amount due for the 6% Term Loan is $110 during
2011. The principal amount due for the Subordinated Notes is
$10,610 due on March 2, 2014.
F-40
ASPEN AEROGELS,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Unaudited)
Line of
Credit
In March 2011, the Company entered into a two-year, revolving
line of credit agreement (LOC), with a bank, to borrow up to
$10,000 secured by the then outstanding accounts receivable and
inventory of the Company. Borrowings under the line of credit
would accrue interest at prime plus one half percent. The
facility also includes fees based on unused portions of the line
of credit, among others. The LOC is collateralized by all assets
of the Company, with a negative pledge on intellectual property
and fixed assets at the East Providence manufacturing facility.
The Company is required to comply with financial covenants
including minimum levels of tangible net worth and cash on hand,
and is currently in compliance and expects to maintain
compliance with said covenants. At June 30, 2011, the
Company had no amounts outstanding on the LOC.
Convertible
Notes
In June 2011, the Company issued subordinated convertible notes
(the Convertible Notes) to certain affiliates of Fidelity
Investments and BASF Venture Capital pursuant to a note purchase
agreement (the Note Purchase Agreement) that
resulted in the receipt of cash proceeds totaling $30,000. The
principal amount due for the Convertible Notes is $30,000, of
which $26,000 is due June 1, 2014 and $4,000 is due
June 14, 2014, adjusted for a repayment premium as
described below. The Convertible Notes bear interest at a rate
of 8% per annum. Interest on the Convertible Notes shall be
compounded by adding it to the principal of the Convertible
Notes annually on December 31st of each year,
commencing December 31, 2011 and continuing until the
maturity of the Convertible Notes. Upon such compounding, the
compound amount will itself bear interest at a rate of 8% per
annum. In addition, accrued and unpaid interest on the
Convertible Notes will be payable at maturity, whether by
acceleration or otherwise, and on the date of any prepayment.
The amount compounded will be treated as principal rather than
interest. Accrued interest is payable in cash at the time of
payment of principal or converted with the outstanding principal
amount into shares of the Company upon a Qualified or
Non-Qualified IPO (as defined in the Note Purchase Agreement,
and together defined as an IPO Event). Upon maturity, the
Company will be required to pay the aggregate principal amount
and accrued interest of the Convertible Notes then outstanding,
multiplied by 1.375 and totaling $45,250 on June 1, 2014
and $6,963 on June 14, 2014.
The Convertible Notes are subject to automatic conversion into
shares of the common stock upon an IPO Event. Upon an IPO Event,
the outstanding principal and accrued interest will
automatically convert at the closing date of such event, into an
amount of unregistered shares of common stock, equal to
(i) the outstanding principal and accrued interest at such
closing date, divided by (ii) the applicable conversion
price (the Conversion Price). The Conversion Price is defined as
(A) the price per share of common stock paid by purchasers
of shares of common stock in the applicable underwritten public
offering, multiplied by (B) the applicable conversion
percentage (the Conversion Percentage). The Conversion
Percentage is defined as (I) prior to the first anniversary
of the issuance of the Convertible Notes, 87.5%, (II) on or
after the first anniversary and prior to the second anniversary
of the issuance of the Convertible Notes, 75%, and (III) on
or after the second anniversary of the issuance of the
Convertible Notes, 62.5%. The Company does have the right to
prepay the Convertible Notes at any time, in whole or in part,
with the consent of lenders holding at least
662/3%
of the aggregate principal amount of the Convertible Notes then
outstanding. The Convertible Notes are not secured.
Due to the complex embedded derivative features noted herein,
the Company has elected to record the Convertible Notes at fair
value totaling $30,540 at June 30, 2011, as more fully
discussed in Note 8.
F-41
ASPEN AEROGELS,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Unaudited)
In connection with the issuance of the Convertible Notes, the
holders of the Subordinated Notes amended the terms of their
original agreement whereby the Subordinated Notes will be due
March 2, 2014, prior to the maturity of the Convertible
Notes. The Company determined that this amendment was not
substantial and did not represent an implied exchange of debt
instruments that would require extinguishment accounting on the
modification date.
|
|
(8)
|
Fair Value Option
and Fair Value Measurements
|
Fair Value
Option
ASC Subtopic
825-10
provides entities with an option to measure many financial
instruments and certain other items at fair value. Under this
guidance, unrealized gains and losses on items for which the
fair value option has been elected are reported in earnings each
reporting period. As a result of electing this option, the
Company records its Convertible Notes at fair value in order to
measure this liability at an amount that more accurately reflect
the economics of that instrument.
The following table presents the difference between the
aggregate fair value and the aggregate unpaid principal balance
of long-term debt instruments recorded at fair value as of
June 30, 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aggregate
|
|
|
|
|
Aggregate
|
|
unpaid principal
|
|
Fair value
|
|
|
fair value
|
|
balance under FVO
|
|
carrying amount
|
|
|
June 30,
|
|
June 30,
|
|
over unpaid
|
|
|
2011
|
|
2011
|
|
principal
|
|
Convertible Notes
|
|
$
|
30,540
|
|
|
$
|
30,000
|
|
|
$
|
540
|
|
The charge recognized as a result of the change in the fair
value of the Companys Convertible Notes is recorded in
interest expense on the Consolidated Statements of Operations
and amounted to $540 for the six months ended June 30, 2011.
Fair Value
Measurements
The following tables summarize the financial instruments
measured at fair value on a recurring basis in the accompanying
consolidated balance sheet as of June 30, 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2011
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
Convertible Notes
|
|
$
|
|
|
|
$
|
|
|
|
$
|
30,540
|
|
|
$
|
30,540
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
30,540
|
|
|
$
|
30,540
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The fair value of the Convertible Notes was determined by
utilizing a probability weighted discounted cash flow analysis.
This analysis determined the amount to be paid on the loan in
either cash or shares at the occurrence of certain events in
which the Convertible Notes would be converted into shares of
the Companys common stock or would be repaid to the
lenders in cash. The probability weighted discounted cash flow
analysis utilized assumptions related to the probability of the
occurrence of each of the various events and appropriate
discount rates for each of the scenarios.
F-42
ASPEN AEROGELS,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Unaudited)
Based upon the above the Company determined that the valuation
of the Convertible Notes is a Level 3 valuation as the
valuation utilized several unobservable inputs. The following
table provides a roll forward of the fair value of the
Convertible Notes, where fair value is determined by
Level 3 inputs:
|
|
|
|
|
Balance at January 1, 2011
|
|
$
|
|
|
Additions
|
|
|
30,000
|
|
Change in fair value
|
|
|
540
|
|
|
|
|
|
|
Balance at June 30, 2011
|
|
$
|
30,540
|
|
|
|
|
|
|
|
|
(9)
|
Net Income (Loss)
Per Share
|
Basic net income (loss) per share attributable to common
stockholders is computed by dividing net income (loss)
attributable to common stockholders by the weighted average
number of common shares outstanding during the period. Diluted
net income (loss) per share attributable to common stockholders
is computed by giving effect to all potential dilutive common
shares, including options, common stock subject to repurchase,
warrants, and redeemable convertible preferred stock. Basic and
diluted net income (loss) per share attributable to common
stockholders was the same for all periods because the Company
incurred losses, which would make potential dilutive common
shares anti-dilutive. The computation of basic and diluted net
income (loss) per share attributable to common stockholders
consists of the following:
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
June 30
|
|
|
|
2010
|
|
|
2011
|
|
|
Net income (loss)
|
|
$
|
(7,090
|
)
|
|
$
|
(6,263
|
)
|
Deemed dividends on participating preferred stock (inclusive of
issuance cost and accretion to redemption value):
|
|
|
|
|
|
|
|
|
Series A (2009)
|
|
|
(39,264
|
)
|
|
|
(55,242
|
)
|
Series B (2010)
|
|
|
|
|
|
|
(13,362
|
)
|
|
|
|
|
|
|
|
|
|
Total preferred stock deemed dividends
|
|
|
(39,264
|
)
|
|
|
(68,604
|
)
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to common stockholders
|
|
$
|
(46,354
|
)
|
|
$
|
(74,867
|
)
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
25,573,997
|
|
|
|
26,005,705
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share attributable to common stockholders,
basic and diluted
|
|
$
|
(1.81
|
)
|
|
$
|
(2.88
|
)
|
|
|
|
|
|
|
|
|
|
Potentially dilutive common shares that were excluded from the
computation of diluted net income (loss) per share attributable
to common stockholders because they were anti-dilutive consist
of the following:
|
|
|
|
|
|
|
|
|
|
|
June 30
|
|
|
|
2010
|
|
|
2011
|
|
|
Common stock options
|
|
|
10,579,089
|
|
|
|
14,110,658
|
|
Common stock warrants
|
|
|
134,941
|
|
|
|
1,127,324
|
|
Series A (2009)
|
|
|
52,843,201
|
|
|
|
52,843,201
|
|
Series B (2010)
|
|
|
|
|
|
|
16,010,292
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
63,557,231
|
|
|
|
84,091,475
|
|
|
|
|
|
|
|
|
|
|
F-43
ASPEN AEROGELS,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Unaudited)
|
|
(10)
|
Other Long-term
Liabilities
|
Other long-term liabilities consist of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31
|
|
|
June 30
|
|
|
|
2010
|
|
|
2011
|
|
|
ARO
|
|
$
|
953
|
|
|
$
|
956
|
|
Cross License Agreement
|
|
|
15,989
|
|
|
|
13,085
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,942
|
|
|
|
14,041
|
|
Current maturities of other long-term liabilities
|
|
|
(6,800
|
)
|
|
|
(6,000
|
)
|
|
|
|
|
|
|
|
|
|
Other long-term liabilities, less current maturities
|
|
$
|
10,142
|
|
|
$
|
8,041
|
|
|
|
|
|
|
|
|
|
|
The Company has asset retirement obligations (ARO) arising from
requirements to perform certain asset retirement activities upon
the termination of its Northborough, Massachusetts, facility
lease and upon disposal of certain machinery and equipment. The
liability was initially measured at fair value and subsequently
is adjusted for accretion expense and changes in the amount or
timing of the estimated cash flows. The corresponding asset
retirement costs are capitalized as part of the carrying amount
of the related long-lived asset and depreciated over the
assets remaining useful life. At December 31, 2010
and June 30, 2011, the Company maintains restricted cash of
$241 to settle part of this liability.
A summary of ARO activity consists of the following:
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
June 30
|
|
|
|
2010
|
|
|
2011
|
|
|
Balance at beginning of period
|
|
$
|
964
|
|
|
$
|
953
|
|
Accretion of discount expense
|
|
|
15
|
|
|
|
15
|
|
Settlement costs
|
|
|
(15
|
)
|
|
|
(12
|
)
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
964
|
|
|
$
|
956
|
|
|
|
|
|
|
|
|
|
|
(11) Income
Taxes
The Company has incurred net losses since inception and has not
recorded provisions for U.S. federal income taxes or state
income taxes since the tax benefits of its net losses have been
offset by valuation allowances.
F-44
ASPEN AEROGELS,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Unaudited)
Accrued expenses consist of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31
|
|
|
June 30
|
|
|
|
2010
|
|
|
2011
|
|
|
Accrued capital expenditures
|
|
$
|
3,554
|
|
|
$
|
1,421
|
|
Employee compensation and related taxes
|
|
|
1,860
|
|
|
|
913
|
|
Accrued professional fees
|
|
|
474
|
|
|
|
1,352
|
|
Other accrued expenses
|
|
|
99
|
|
|
|
1,074
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
5,987
|
|
|
$
|
4,760
|
|
|
|
|
|
|
|
|
|
|
|
|
(13)
|
Commitments and
Contingencies
|
As part of its normal course of business, the Company has a
supply agreement to purchase $4,708 of raw material through
December 31, 2012.
F-45
Shares
Common Stock
PROSPECTUS
|
|
Goldman,
Sachs & Co. |
Morgan Stanley |
Through and
including ,
2011 (the
25th
day after the date of this prospectus), all dealers effecting
transactions in these securities, whether or not participating
in this offering, may be required to deliver a prospectus. This
is in addition to a dealers obligation to deliver a
prospectus when acting as an underwriter and with respect to an
unsold allotment or subscription.
,
2011
PART II
INFORMATION NOT
REQUIRED IN PROSPECTUS
|
|
Item 13.
|
Other Expenses
of Issuance and Distribution.
|
The following table indicates the expenses to be incurred in
connection with the offering described in this registration
statement, other than underwriting discounts and commissions,
all of which will be paid by us. All of the amounts are
estimated except the SEC registration fee, the FINRA filing fee
and the NYSE listing fee.
|
|
|
|
|
|
|
Amount to
|
|
|
|
be paid
|
|
|
SEC registration fee
|
|
$
|
13,352
|
|
NYSE listing fee
|
|
|
*
|
|
FINRA filing fee
|
|
|
12,000
|
|
Printing and mailing
|
|
|
*
|
|
Legal fees and expenses
|
|
|
*
|
|
Accounting fees and expenses
|
|
|
*
|
|
Blue sky fees and expenses
|
|
|
*
|
|
Transfer agent and registrar
|
|
|
*
|
|
Miscellaneous
|
|
|
*
|
|
|
|
|
|
|
Total
|
|
$
|
*
|
|
|
|
|
|
|
|
|
|
* |
|
To be provided by amendment. |
|
|
Item 14.
|
Indemnification
of Directors and Officers.
|
Our restated certificate of incorporation and restated by-laws
that will be effective upon completion of the offering provide
that each person who was or is made a party or is threatened to
be made a party to or is otherwise involved (including, without
limitation, as a witness) in any action, suit or proceeding,
whether civil, criminal, administrative or investigative, by
reason of the fact that he or she is or was one of our directors
or officers or is or was serving at our request as a director,
officer, or trustee of another corporation, or of a partnership,
joint venture, trust or other enterprise, including service with
respect to an employee benefit plan, whether the basis of such
proceeding is alleged action in an official capacity as a
director, officer or trustee or in any other capacity while
serving as a director, officer or trustee, shall be indemnified
and held harmless by us to the fullest extent authorized by the
Delaware General Corporation Law against all expense, liability
and loss (including attorneys fees, judgments, fines,
ERISA excise taxes or penalties and amounts paid in settlement)
reasonably incurred or suffered by such.
Section 145 of the Delaware General Corporation Law permits
a corporation to indemnify any director or officer of the
corporation against expenses (including attorneys fees),
judgments, fines and amounts paid in settlement actually and
reasonably incurred in connection with any action, suit or
proceeding brought by reason of the fact that such person is or
was a director or officer of the corporation, if such person
acted in good faith and in a manner that he or she reasonably
believed to be in, or not opposed to, the best interests of the
corporation, and, with respect to any criminal action or
proceeding, if he or she had no reasonable cause to believe his
or her conduct was unlawful. In a derivative action (i.e., one
brought by or on behalf of the corporation), indemnification may
be provided only for expenses actually and reasonably incurred
by any director or officer in connection with the defense or
settlement of such an action or suit if such person acted in
good faith and in a manner that he or she reasonably believed to
be in, or not opposed to, the best interests of the corporation,
except that no indemnification shall be provided if such person
shall have been adjudged to be liable to the corporation, unless
and only to the extent that the Delaware Chancery Court or the
II-1
court in which the action or suit was brought shall determine
that such person is fairly and reasonably entitled to indemnity
for such expenses despite such adjudication of liability.
Pursuant to Section 102(b)(7) of the Delaware General
Corporation Law, Article VI of our restated certificate of
incorporation eliminates the liability of a director to us or
our stockholders for monetary damages for such a breach of
fiduciary duty as a director, except for liabilities arising:
|
|
|
|
|
from any breach of the directors duty of loyalty to us or
our stockholders;
|
|
|
|
from acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law;
|
|
|
|
under Section 174 of the Delaware General Corporation
Law; and
|
|
|
|
from any transaction from which the director derived an improper
personal benefit.
|
We have entered into indemnification agreements with our
non-employee directors and will enter into similar agreements
with certain officers, in addition to the indemnification
provided for in our restated certificate of incorporation and
restated by-laws, and intend to enter into indemnification
agreements with any new directors and executive officers in the
future. We have purchased and intend to maintain insurance on
behalf of any person who is or was a director or officer against
any loss arising from any claim asserted against him or her and
incurred by him or her in any such capacity, subject to certain
exclusions.
The foregoing discussion of our restated certificate of
incorporation, restated by-laws, indemnification agreements, and
Delaware law is not intended to be exhaustive and is qualified
in its entirety by such restated certificate of incorporation,
restated by-laws, indemnification agreements, or law.
Reference is made to our undertakings in Item 17 with
respect to liabilities arising under the Securities Act.
Reference is also made to the form of underwriting agreement
filed as Exhibit 1.1 to this registration statement for the
indemnification agreements between us and the underwriters.
|
|
Item 15.
|
Recent Sales
of Unregistered Securities.
|
Set forth below is information regarding shares of common stock
and preferred stock issued, and options granted, by us within
the past three years that were not registered under the
Securities Act. Also included is the consideration, if any,
received by us for such shares, options and warrants and
information relating to the section of the Securities Act, or
rule of the Securities and Exchange Commission, under which
exemption from registration was claimed.
Stock
Issuances
A. From January 30, 2008 through May 27, 2008, we
issued $8.0 million promissory notes to nine accredited
investors. The then outstanding principal amount and accrued but
unpaid interest of the promissory notes converted into shares of
our
Series B-1
preferred stock on June 10, 2008, which in turn were
converted into shares of our common stock on August 14,
2009. See Items C and I below.
B. On June 10, 2008, in connection with our
reorganization, we issued 758,795 shares of Series
A-1
preferred stock, 498,303 shares of
Series A-2
preferred stock and 80,454 shares of
Series A-3
preferred stock as a result of the conversion of our predecessor
companys Series D preferred stock, Series C
preferred stock and Series A preferred stock, respectively.
The Series A-1 preferred stock, Series A-2 preferred stock and
Series A-3 preferred stock was issued to 44, 49 and 3 existing
investors, respectively. These shares of preferred stock were
converted into common stock in connection with a
recapitalization in August 2009. See Item I below.
C. On June 10, 2008, in connection with our
reorganization, we issued 1,563,681 shares of
Series B-1
preferred stock, 4,786,982 shares of
Series B-2
preferred stock and 7,971,886 shares of
II-2
Series B-3
preferred stock as a result of the conversion of our predecessor
companys outstanding notes with aggregate accrued
obligations of $93.0 million. The Series B-1 preferred
stock, Series B-2 preferred stock and Series B-3 preferred stock
was issued to nine, 43 and 18 existing investors, respectively,
for no consideration. These shares of preferred stock were
converted into common stock in connection with a
recapitalization in August 2009. See Item I below.
D. On June 10, 2008, in connection with our
reorganization, we issued and sold 4,158,875 shares of its
Series B-1
preferred stock to 39 accredited investors for an aggregate
purchase price of approximately $27.0 million. These shares
of preferred stock were converted into common stock in
connection with a recapitalization in August 2009. See
Item I below.
E. On June 10, 2008, in connection with our
reorganization, we issued warrants to purchase
149,898 shares of our common stock to 54 accredited
investors with a weighted-average exercise price of $0.003 per
share. These warrants are exercisable for a term of eight years.
F. On October 29, 2008, as part of the warrants issued
in Item E above, we issued 42 shares of our common
stock to one accredited investor upon the exercise of a warrant
at an exercise price of $0.003 per share.
G. On November 18, 2008, as part of the warrants
issued in Item E above, we issued 14,246 shares of our
common stock to one accredited investor upon the exercise of a
warrant at an exercise price of $0.003 per share.
H. On June 25, 2009, as part of the warrants issued in
Item E above, we issued 2,272 shares of our common
stock to one accredited investor upon the exercise of a warrant
at an exercise price of $0.003 per share.
I. On August 14, 2009, we consummated a
recapitalization and issued 25,541,532 shares of common
stock, which reflects a
1-for-3
reverse stock split effected on September 25, 2009, in
exchange for all of our outstanding
Series A-1
preferred stock,
Series A-2
preferred stock,
Series A-3
preferred stock,
Series B-1
preferred stock,
Series B-2
preferred stock and
Series B-3
preferred stock held by 74 existing investors. The Series B-1
preferred stock converted at a ratio of 2-for-1 and all other
series of preferred stock converted at a ratio of 1-for-1.
J. On August 14, 2009, we issued and sold
27,415,936 shares of Series A preferred stock, which
reflects a
1-for-3
reverse stock split effected on September 25, 2009, to five
accredited investors at a price of approximately $0.58 per share
for an aggregate purchase price of approximately
$16.0 million. Each share of Series A preferred stock
will convert automatically into one share of common stock upon
the completion of this offering and any accumulated dividends
will be paid in shares of our common stock.
K. On September 10, 2009, we issued and sold
3,736,592 shares of Series A preferred stock, which
reflects a
1-for-3
reverse stock split effected on September 25, 2009, to
37 accredited investors at a price of approximately $0.58
per share for an aggregate purchase price of approximately
$2.2 million. Each share of Series A preferred stock
will convert automatically into one share of common stock upon
the completion of this offering and any accumulated dividends
will be paid in shares of our common stock.
L. On September 14, 2009, we issued and sold
21,690,673 shares of Series A preferred stock, which
reflects a
1-for-3
reverse stock split effected on September 25, 2009, to
17 accredited investors at a price of approximately $0.58
per share for an aggregate purchase price of approximately
$12.6 million. Each share of Series A preferred stock
will convert automatically into one share of common stock upon
the completion of this offering and any accumulated dividends
will be paid in shares of our common stock.
M. On September 22, 2010, we issued and sold
14,961,075 shares of Series B preferred stock to 13
accredited investors at a price of approximately $1.34 per share
for an aggregate purchase price of approximately
$20.0 million. Each share of Series B preferred stock
will convert automatically into
II-3
one share of common stock upon the completion of this offering
and any accumulated dividends will be paid in shares of our
common stock.
N. On October 20, 2010, we issued and sold
1,049,217 shares of Series B preferred stock to 33
accredited investors at a price of approximately $1.34 per share
for an aggregate purchase price of approximately
$1.4 million. Each share of Series B preferred stock
will convert automatically into one share of common stock upon
the completion of this offering and any accumulated dividends
will be paid in shares of our common stock.
O. On December 29, 2010, in connection with a note
financing, we issued warrants to purchase 1,496,107 shares
of our common stock to four accredited investors with an
exercise price of $0.001 per share. These warrants are
exercisable for a term of seven years. As of June 30, 2011,
of these warrants, warrants to purchase 502,692 shares of
our common stock had been exercised.
P. On March 17, 2011, one of our principal
stockholders exercised warrants, issued in May 2001, to purchase
984 shares of our common stock at an exercise price of
$0.003 per share.
Q. On June 1, 2011, we issued $26.0 million in
aggregate principal amount of convertible notes to nine
accredited investors. The unpaid principal amount plus accrued
interest of the convertible notes will automatically convert
upon the closing of the offering made hereby into a number of
shares of our common stock equal to the quotient obtained by
dividing the unpaid principal amount of the convertible notes
plus interest accrued but unpaid thereon, by 87.5% of the
initial public offering price. Assuming an initial public
offering price of $ per share,
which is the mid-point of the price range set forth on the cover
page of this prospectus, the $26.0 million in principal
amount of the outstanding convertible notes will convert into
approximately
shares of our common stock.
R. On June 15, 2011, we issued $4.0 million in
convertible notes to four accredited investors on the same terms
as those described above in Item Q. Assuming an initial
public offering price of
$ per share, which is the
mid-point of the price range set forth on the cover page of this
prospectus, the $4.0 million in principal amount of the
outstanding convertible notes will convert into
approximately shares
of our common stock.
Stock Option
Grants
From January 1, 2008 through June 30, 2011, we granted
stock options under our 2001 equity incentive plan, as amended,
to purchase an aggregate of 14,158,761 shares of common stock,
net of forfeitures, at a weighted-average exercise price of
$0.62 per share, to certain of our employees, consultants and
directors.
Securities Act
Exemptions
We deemed the offers, sales and issuances of the securities
described above to be exempt from registration under the
Securities Act in reliance on Section 4(2) of the
Securities Act, including Regulation S, Regulation D
and Rule 506 promulgated thereunder, relative to
transactions by an issuer not involving a public offering. For
Items A, B, C, D, E, F, G, H, J, K, L, M, N, O, P, Q and R,
we relied upon Section 4(2) of the Securities Act,
Regulation S, Regulation D and Rule 506. In these
transactions, all purchasers of securities, which included a
combination of foreign and U.S. investors, in transactions
exempt from registration pursuant to Regulation D
and/or
Regulation S represented to us that they were accredited
investors and were acquiring the shares for investment purposes
only and not with a view to, or for sale in connection with, any
distribution thereof and that they could bear the risks of the
investment and could hold the securities for an indefinite
period of time. The purchasers received written disclosures that
the securities had not been registered under the Securities Act
and that any resale must be made pursuant to a registration
statement or an available exemption from such registration. For
Item I, we relied on Section 3(a)(9) of the Securities
Act.
We deemed the grants of stock options described above under
Stock Option Grants to be exempt from
registration under the Securities Act in reliance on
Rule 701 or Regulation S of the
II-4
Securities Act as offers and sales of securities under
compensatory benefit plans and contracts relating to
compensation in compliance with Rule 701. Each of the
recipients of securities in any transaction exempt from
registration either received or had adequate access, through
employment, business or other relationships, to information
about us.
All certificates representing the securities issued in the
transactions described in this Item 15 included appropriate
legends setting forth that the securities had not been offered
or sold pursuant to a registration statement and describing the
applicable restrictions on transfer of the securities. There
were no underwriters employed in connection with any of the
transactions set forth in this Item 15.
|
|
Item 16.
|
Exhibits and
Financial Statement Schedules.
|
(a) See the Exhibit Index on the page immediately
preceding the exhibits for a list of exhibits filed as part of
this registration statement on
Form S-1,
which Exhibit Index is incorporated herein by reference.
(b) Financial Statement Schedules
All other schedules have been omitted because they are not
applicable.
Financial
Statement Schedules
All schedules have been omitted because they are not required or
are not applicable or the required information is shown in the
financial statements or notes thereto.
(a) The undersigned registrant hereby undertakes to provide
to the underwriters at the closing specified in the underwriting
agreement certificates in such denominations and registered in
such names as required by the underwriters to permit prompt
delivery to each purchaser.
(b) Insofar as indemnification for liabilities arising
under the Securities Act may be permitted to directors, officers
and controlling persons of the registrant pursuant to the
provisions described under Item 14 above, or otherwise, the
registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act and is,
therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment
by the registrant of expenses incurred or paid by a director,
officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant
will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in
the Securities Act and will be governed by the final
adjudication of such issue.
(c) The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the
Securities Act, the information omitted from the form of
prospectus filed as part of this registration statement in
reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to
Rule 424(b)(1) or (4) or 497(h) under the Securities
Act shall be deemed to be part of this registration statement as
of the time it was declared effective.
(2) For the purpose of determining any liability under the
Securities Act, each post-effective amendment that contains a
form of prospectus shall be deemed to be a new registration
statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
II-5
SIGNATURES
Pursuant to the requirements of the Securities Act, the
Registrant certifies that it has duly caused this registration
statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the city of Northborough,
Massachusetts, on September 1, 2011.
ASPEN AEROGELS, INC.
Donald R. Young
President and Chief Executive Officer
Pursuant to the requirements of the Securities Act, this
registration statement has been signed by the following persons
in the capacities and on the dates indicated.
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
/s/ Donald
R. Young
Donald
R. Young
|
|
President, Chief Executive Officer and Director (principal
executive officer)
|
|
September 1, 2011
|
|
|
|
|
|
/s/ John
F. Fairbanks
John
F. Fairbanks
|
|
Chief Financial Officer, Vice President and Treasurer (principal
financial and accounting officer)
|
|
September 1, 2011
|
|
|
|
|
|
*
Mark
L. Noetzel
|
|
Chairman of the Board
|
|
September 1, 2011
|
|
|
|
|
|
*
P.
Ramsay Battin
|
|
Director
|
|
September 1, 2011
|
|
|
|
|
|
*
Robert
M. Gervis
|
|
Director
|
|
September 1, 2011
|
|
|
|
|
|
*
Craig
A. Huff
|
|
Director
|
|
September 1, 2011
|
|
|
|
|
|
*
Steven
R. Mitchell
|
|
Director
|
|
September 1, 2011
|
|
|
|
|
|
*
William
P. Noglows
|
|
Director
|
|
September 1, 2011
|
|
|
|
|
|
*
David
J. Prend
|
|
Director
|
|
September 1, 2011
|
II-6
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
*
Richard
F. Reilly
|
|
Director
|
|
September 1, 2011
|
|
|
|
|
|
|
|
*By:
|
|
/s/ Donald
R. Young
Donald
R. Young
Attorney-in-fact
|
|
|
|
September 1, 2011
|
II-7
EXHIBIT INDEX
|
|
|
|
|
Exhibit
|
|
|
number
|
|
Description of Exhibit
|
|
|
1
|
.1*
|
|
Form of underwriting agreement.
|
|
3
|
.1.1+
|
|
Third amended and restated certificate of incorporation of the
Registrant, as amended.
|
|
3
|
.1.2*
|
|
Certificate of amendment to the third amended and restated
certificate of incorporation, as amended, of the Registrant.
|
|
3
|
.2*
|
|
Form of restated certificate of incorporation of the Registrant
to be filed with the Secretary of State of the State of Delaware
upon completion of this offering.
|
|
3
|
.3+
|
|
By-laws of the Registrant, as amended.
|
|
3
|
.4*
|
|
Form of restated by-laws of the Registrant to be effective upon
completion of this offering.
|
|
4
|
.1
|
|
Form of common stock certificate.
|
|
4
|
.2+
|
|
Form of warrant to purchase common stock issued by the
Registrant in connection with 2004 and 2005 financing
arrangements, as amended and restated.
|
|
4
|
.3+
|
|
Form of warrant to purchase common stock issued by the
Registrant in connection with the 2005 equity financing, as
amended and restated.
|
|
4
|
.4+
|
|
Form of warrant to purchase common stock issued by the
Registrant in connection with the 2008 reorganization.
|
|
4
|
.5+
|
|
Form of warrant to purchase common stock issued by the
Registrant in connection with the 2008 financing.
|
|
4
|
.6+
|
|
Form of warrant to purchase common stock issued by the
Registrant in connection with the 2010 subordinated note and
warrant financing.
|
|
5
|
.1*
|
|
Opinion of Mintz, Levin, Cohn, Ferris, Glovsky and
Popeo, P.C., counsel to the Registrant, with respect to the
legality of securities being registered.
|
|
10
|
.1.1+@
|
|
2001 equity incentive plan, as amended.
|
|
10
|
.1.2+@
|
|
Form of incentive stock option agreement granted under 2001
equity incentive plan, as amended.
|
|
10
|
.1.3+@
|
|
Form of non-qualified stock option agreement granted under 2001
equity incentive plan, as amended.
|
|
10
|
.2.1*@
|
|
2011 employee, director and consultant equity incentive plan.
|
|
10
|
.2.2*@
|
|
Form of stock option agreement granted under 2011 employee,
director and consultant equity incentive plan.
|
|
10
|
.3+
|
|
Multi-tenant industrial net lease, dated August 20, 2001,
by and between the Registrant and Cabot II MA1M03,
LLC (as successor landlord to TMT290 Industrial Park, Inc.), as
amended.
|
|
10
|
.4+
|
|
Loan and security agreement by and between the Registrant and
Silicon Valley Bank, dated as of March 31, 2011, as amended.
|
|
10
|
.5+
|
|
Form of subordinated note issued by the Registrant in the 2010
subordinated note and warrant financing.
|
|
10
|
.6+
|
|
Form of convertible note issued by the Registrant in the 2011
convertible note financing.
|
|
10
|
.7+@
|
|
Executive agreement by and between the Registrant and Donald R.
Young.
|
|
10
|
.8+@
|
|
Executive agreement by and between the Registrant and John F.
Fairbanks.
|
|
10
|
.9+@
|
|
Executive agreement by and between the Registrant and Harry R.
Walkoff.
|
|
10
|
.10+@
|
|
Executive agreement by and between the Registrant and Kevin A.
Schmidt.
|
|
10
|
.11+@
|
|
Executive agreement by and between the Registrant and George L.
Gould, Ph.D.
|
|
10
|
.12+@
|
|
Executive agreement by and between the Registrant and
Christopher L. Marlette.
|
|
10
|
.13+@
|
|
2010 Corporate Bonus Plan.
|
|
10
|
.14+@
|
|
Director compensation policy.
|
|
10
|
.15+
|
|
Fifth amended and restated registration rights agreement, dated
as of September 22, 2010, by and among the Registrant and
Investors (as defined therein), as amended.
|
|
10
|
.16#
|
|
Joint development agreement dated as of March 1, 2010 by
and between BASF Construction Chemicals GmbH and the Registrant,
as amended.
|
|
|
|
|
|
Exhibit
|
|
|
number
|
|
Description of Exhibit
|
|
|
10
|
.17#
|
|
Cross license agreement dated as of April 1, 2006 by and
between Cabot Corporation and the Registrant, as amended.
|
|
10
|
.18#
|
|
Supply agreement, dated as of January 1, 2011, by and
between Silbond Corporation and the Registrant.
|
|
10
|
.19@
|
|
2011 Corporate Bonus Plan.
|
|
21
|
.1+
|
|
Subsidiaries of the Registrant.
|
|
23
|
.1
|
|
Consent of KPMG LLP.
|
|
23
|
.2*
|
|
Consent of Mintz, Levin, Cohn, Ferris, Glovsky and
Popeo, P.C. (see Exhibit 5.1).
|
|
23
|
.3+
|
|
Consent of Freedonia Custom Research, Inc.
|
|
24
|
.1+
|
|
Powers of Attorney (see signature page to initial filing).
|
|
|
|
* |
|
To be filed by
amendment. |
|
|
|
# |
|
Confidential treatment has been
requested for portions of this exhibit. |
|
|
|
@ |
|
Denotes management compensation
plan or contract. |