As filed with the Securities and Exchange Commission on June 24, 2011

Registration No. 333-     

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

 

 

Form S-1

REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933

Aspen Aerogels, Inc.

(Exact name of Registrant as specified in its charter)

30 Forbes Road, Building B
Northborough, Massachusetts 01532
(508) 691-1111

(Address, including zip code, and telephone number, including area code, of Registrant’s principal executive offices)

Donald R. Young
President and Chief Executive Officer
Aspen Aerogels, Inc.
30 Forbes Road, Building B
Northborough, Massachusetts 01532
(508) 691-1111

(Name, address, including zip code, and telephone number, including area code, of agent for service)

Copies to:

 

Subject to Completion. Dated June 24, 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 intend to apply 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.

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.

Prospectus dated          , 2011

 

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.

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. While we believe that the information from these publications is reliable, we have not independently verified, and make no representation as to the accuracy of, such information.

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. While we believe that these publications, studies and surveys are reliable, we have not independently verified the data contained in them.

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. 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).

“Aspen Aerogels,” “Cryogel,” “Pyrogel,” “Spaceloft,” the Aspen Aerogels logo and other trademarks, service marks and trade names of Aspen Aerogels appearing in this prospectus are the property of Aspen Aerogels, Inc. Solely for convenience, the trademarks, service marks and trade names referred to in this prospectus are without the ^® and ^tm symbols, but such references are not intended to indicate, in any way, that the owner thereof will not assert, to the fullest extent under applicable law, such owner’s rights to these trademarks, service marks and trade names. This prospectus contains additional trade names, trademarks and service marks of other companies, which, to our knowledge, are the property of their respective owners.

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.

 

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 $1.7 million for the three months ended March 31, 2011. As of March 31, 2011, our accumulated deficit was $197.9 million and total stockholders’ deficit was $122.1 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.

 

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 $2.2 million for the three months ended March 31, 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 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 current generation of products. In addition, the future revenue potential of our business in the emerging market for high-performance insulation is uncertain. 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:

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.

 

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 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.

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:

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 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 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.

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. 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 revenue and will make it difficult for us to accurately evaluate and plan based on our future outlook and forecast quarterly or annual performance.

 

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 face strong competition both from established manufacturers of incumbent insulation materials and from other companies producing aerogel-based products. Large producers of incumbent insulation materials dominate the insulation market. 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 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 competitive with our products in certain market sectors and for certain applications based on price and form factor. 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.

 

A substantial majority of our revenue is generated from sales to a limited number of distributors and contractors. For the years ended December 31, 2008, 2009 and 2010, and the three months ended March 31, 2011, revenue from our top ten distributors and contractors represented 51%, 47%, 53% and 70% of our revenues, respectively. For the three months ended March 31, 2010, one customer represented 36% of our total revenue and for the three months ended March 31, 2011, two customers represented 29% and 10%, respectively, of our total revenue. In 2008, one customer represented 12% of our total revenue; in 2009, no customers represented 10% or more of our total revenue; and in 2010, one customer represented 14% of total revenue. Although the composition of our significant distributors and contractors 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 distributors and contractors. In addition, we understand from our distributors and contractors that a substantial majority of their sales of our products are to a small number of end-use customers. Our contracts with our distributors generally do not include long-term commitments or minimum volumes that ensure future sales of our products and our understanding is that our distributors’ and contractors’ contracts with end-use customers also generally do not include such commitments or minimums. Consequently, our financial results may fluctuate significantly from period-to-period based on the actions of one or more significant distributors, contractors or end-use customers. A distributor or contractor may take actions that affect us for reasons that we cannot anticipate or control, such as reasons related to an end-use customer’s financial condition, changes in business strategy or operations, the introduction of alternative competing products, or as the result of the perceived quality or cost-effectiveness of our products. Our agreements with these distributors and contractors 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 distributors and contractors 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 most significant distributors, contractors or end-use customers or several of our smaller distributors, contractors or end-use customers could have a material adverse effect on our business, financial condition and results of operations.

We understand from our distributors 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. 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.

 

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. While we believe that the available scientific literature and our own testing demonstrate the safety of our products, the scientific literature may be incorrect and our testing may be inaccurate. 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, though they may provide inferior performance attributes as compared to our aerogel blankets, still meet the technical requirements of our direct and end-use customers.

 

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.

In particular, our sales in the building and construction market are driven substantially by government policies and legislation in Europe that mandate high levels of energy efficiency in buildings. The European Union’s directive on the energy performance of buildings, Directive 2010/ 31/ EU, or EPBD, requires EU member states to pass legislation or implement regulations

requiring all new buildings as well as most major renovations to achieve minimum energy performance requirements. The EPBD significantly expands the scope of the original EU directive on building energy performance adopted in 2002, Directive 2002/91/EC. While we believe the policies established under the EPBD offer a significant opportunity for our products in the European building and construction market, this opportunity is largely dependent on faithful implementation of the directive by EU member states and continued support for national and local energy efficiency initiatives. Many EU member states have not yet fully adopted legislation implementing the original 2002 directive and it is unclear when certain EU members will pass legislation implementing the EPBD. In the event that the European Union repeals or weakens the requirements of the EPBD or that EU member states do not adopt or enforce national legislation implementing the EPBD, our business and operating results may be materially adversely impacted.

 

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 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.

After the consummation of this offering, we will be subject to the reporting requirements of the Exchange Act that require us to file, among other things, quarterly reports on Form 10-Q and annual reports on Form 10-K. Under Section 302 of the Sarbanes-Oxley Act, as a part of each of these reports, our chief executive officer and chief financial officer will be required to evaluate and report their conclusions regarding the effectiveness of our disclosure controls and procedures and to certify that they have done so. This requirement will apply to our first Form 10-Q for the quarter following effectiveness of the registration statement. Effective internal controls are necessary for us to provide reliable financial reports and prevent fraud. In addition, under Section 404 of the Sarbanes-Oxley Act, we will be required to include a report of management on our internal control over financial reporting in our Form 10-K. In addition, the independent registered public accounting firm auditing our financial statements will be required to attest to and report on the effectiveness of our internal control over financial reporting. This requirement will first apply to our Form 10-K for our fiscal year ending December 31, 2012. The process of improving our internal controls and complying with Section 404 will be expensive and time consuming, and will require significant attention of management.

Complying with these and other requirements applicable to public companies may place a strain on our personnel, information technology systems and resources and divert management’s attention from other business concerns. We may need to hire additional accounting and financial staff with appropriate public company experience and technical accounting knowledge, and we may not be able to do so without incurring material costs. These and other requirements may also make it more difficult or more costly for us to obtain certain types of insurance, including directors’ and officers’ liability insurance. We, therefore, may be forced to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. The impact of these events could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors, our board committees or as executive officers. Any one of these events could have a material adverse effect on our business, financial condition and results of operations.

We have begun the design and engineering 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. 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 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.

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 profitability from period-to-period may vary due to the mix of products that we sell in different periods. While we have sold most of our products to date into the industrial market, as we expand our business we expect to sell an increasing amount of our aerogel insulation products into the building and construction and OEM markets and for other applications. Certain of the products aimed at these markets have different cost profiles. In particular, Spaceloft and Spaceloft A2, which are targeted at the building and construction market, are relatively lower margin and lower output as compared to our Pyrogel and Cryogel products, which are targeted at the industrial and OEM markets. Consequently, sales of individual products may not necessarily be consistent across periods, which could affect product mix and cause our gross profit, net income and cash flow to vary significantly. In addition, most of our expenses are either relatively fixed in the short-term or incurred in advance of sales. Moreover, our 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 comparisons of our operating results may not necessarily be meaningful and that these comparisons cannot be relied upon as indicators of future performance. Moreover, 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.

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. Once the qualification process is complete for a direct or end-use customer, the lead time between order placement and product shipment is typically short and the insulation market is generally characterized by just-in-time delivery. These factors limit our ability to predict future sales. This limitation could result in our being unable to reduce spending quickly enough to compensate for reductions in sales. 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.

 

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. 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 yet 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 failure to 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.

 

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.

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 impair our profitability.

 

In order to develop and commercialize our products, we may enter into joint development agreements with industry leaders, 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 under such joint development 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 under these joint development 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.

 

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.

 

Although many of our end-use customers are larger, well-capitalized industrial companies, we distribute our products through a network of distributors and contractors that may not be well-capitalized and may be of a lower credit quality. This distributor and contractor 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 distributors and contractors 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 distributors or contractors, our business, financial condition and operating results could be materially adversely affected.

 

In order to fulfill the product delivery requirements of our direct and end-use customers, we plan for working capital needs in advance of customer orders. As a result, we base our funding and inventory decisions on estimates of future demand. If demand for our products does not increase as quickly as we have estimated or drops off sharply, our inventory and expenses could rise, and our business and operating results could suffer. Alternatively, if we experience sales in excess of our estimates, our working capital needs may be higher than those currently anticipated. Our ability to meet this excess customer demand depends on our ability to arrange for additional financing for any ongoing working capital shortages, since it is likely that cash flow from sales will lag behind these investment requirements. To meet any ongoing working capital shortages, we may rely on our current loan and security agreement with Silicon Valley Bank, which we refer to as our revolving credit facility, under which we are entitled to borrow up to $10.0 million. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources.” In addition, we plan to increase our inventory in order to meet our expected future demand. This would result in an increase in our working capital requirements that could harm our operating results and financial condition.

 

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

 

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.

 

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 is amortized on a quarterly basis with the total amount to be paid in full no later than December 2013. As of March 31, 2011, $16.5 million remained outstanding to Cabot. For a more detailed description of the cross license agreement with Cabot, see “Business — Intellectual Property — Cross License Agreement with Cabot Corporation” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Contractual Obligations and Commitments — Cross License Agreement.”

 

Our 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 May 31, 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.

As of May 31, 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 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.

Moreover, others may independently develop and obtain patents covering technologies that are similar or superior to the product forms, applications or manufacturing processes that we employ. If that happens, we may need to obtain licenses for these technologies and 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. Moreover, 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.

 

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.

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

We also require all employees and consultants to execute confidentiality and/or nondisclosure agreements upon the commencement of an employment or consulting arrangement with us, which agreements generally require that all confidential and proprietary information developed by the individual or made known to the individual by us during the course of the individual’s relationship with us be kept confidential and not disclosed to third parties. These agreements further generally provide

that inventions conceived by the individual in the course of rendering services to us will be our exclusive property. Nevertheless, these agreements may not be honored and our confidential and proprietary information may be disclosed, or these agreements may be unenforceable or difficult to enforce. We also require customers and vendors to execute confidentiality and/or nondisclosure agreements. However, we may not have obtained such agreements from all of our customers and vendors. Moreover, some of our customers may be subject to laws and regulations that require them to disclose information that we would otherwise seek to keep confidential. Our confidential and proprietary information may be otherwise disclosed without our authorization. For example, third parties could reverse engineer our manufacturing processes, independently develop substantially equivalent confidential and proprietary information or otherwise gain access to our trade secrets. Failure to maintain trade secret protection could enable others to produce competing products and adversely affect our competitive business position.

 

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.

Our continued commercial success will also depend in part upon not infringing the patents or violating other intellectual property rights of third parties. We are aware of patents and patent applications generally relating to aspects of our technologies filed by, and issued to, third parties, and our knowledge of the patent landscape with respect to the technologies currently embodied within our aerogel products and the processes that we practice in manufacturing those products indicates that the third-party patent rights most relevant to our business are those owned by Cabot and licensed to us under the cross license agreement with Cabot. Nevertheless, we cannot determine with certainty whether patents or patent applications of other parties may materially affect our ability to conduct our business. There may be existing patents of which we are unaware that we may inadvertently infringe, resulting in claims against us or our customers. In the event that the manufacture, use and/or sale of our products or processes is challenged, or if our product forms or processes conflict with patent rights of others, third parties could bring legal actions against us in the United States, Europe or other countries, claiming damages and seeking to enjoin the manufacturing and/or marketing of our products. Additionally, it is not possible to predict with certainty what patent claims may issue from pending patent applications. In the United States, for example, patent prosecution can proceed in secret prior to issuance of a patent, provided such application is not filed in a foreign jurisdiction. For U.S. patent applications that are also filed in foreign jurisdictions, such patent applications will not be published until 18 months from the filing date of the application. As a result, third parties may be able to obtain patents with claims relating to our product forms, applications and/or manufacturing processes which they could attempt to assert against us.

In either case, litigation may be necessary to enforce, protect or defend our intellectual property rights or to determine the validity and scope of the intellectual property rights of others. Any litigation could be unsuccessful, cause us to incur substantial costs, divert resources and the efforts of our personnel away from daily operations, harm our reputation and/or result in the impairment of our intellectual property rights. In some cases, litigation may be threatened or brought by a patent holding company or other adverse patent owner who has no relevant product revenues and against which our patents may provide little or no deterrence. If we are found to infringe any patents, we could be

required to (1) pay substantial monetary damages, including lost profits, reasonable royalties and/or treble damages if an infringement is found to be willful and/or (2) totally discontinue or substantially modify any products or processes that are found to be in violation of another party’s intellectual property rights. We also may have to seek a license to continue making and selling our products and/or using our manufacturing processes, which we may not be able to obtain on reasonable terms, if at all, which could significantly increase our operating expenses and/or decrease our revenue. If our competitors are able to use our technology without payment to us, our ability to compete effectively could be harmed. Our contracts generally indemnify our customers for third-party claims of intellectual property infringement related to our manufacture of a product up to the amount of the purchase price paid for the product. The expense of defending these claims may adversely affect our financial results.

 

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 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. 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 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 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.

 

The design, development, production and sale of our products involve an inherent risk of product liability claims and associated adverse publicity. We may be named directly in product liability suits relating to our products, even for defects resulting from errors of our distributors, third-party installers or end-use customers. These claims could be brought by various parties, including distributors and other direct customers who are purchasing products directly from us, third-party installers who are contracted by our direct and end-use customers to install our products, or end-use customers who purchase our products from our distributors. We could also be named as co-parties in product liability suits that are brought against the distributors, third-party installers and end-use customers of our products. Installation of our products is handled by third parties over which we have no control and errors or defects in their installation may also give rise to claims against us, diminish our brand or divert our resources from other purposes. The failure of our products to perform to customer expectations, whether or not because of improper installation, could give rise to warranty claims against us. Any of these claims, even if without merit, could result in costly litigation or divert management’s attention and resources. In addition, many of our products are integrated into the final 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.

 

We conduct business across the globe, with a majority 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. As a result, we are subject to a number of risks, including, but not limited to:

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.

 

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 quarter is typically lower, than in other quarters of the year. In addition, if our products’ penetration of the building and construction market grows, we may become subject to fluctuations related to commercial and residential construction cycles. As a result of these seasonal trends and fluctuations, we may occasionally experience declines in revenue or earnings as compared to the immediately

preceding quarter, and comparisons of our operating results on a period-to-period basis may not be meaningful. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Quarterly Results of Operations — Seasonality and Quarterly Results.”

 

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.

 

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:

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 credit facility, which would require us to pay all amounts outstanding. If an event of default occurs, we may not be able to cure it within any applicable cure period, if at all. If the maturity of our indebtedness is accelerated, we may not have sufficient funds available for repayment or we may not have the ability to borrow or obtain sufficient funds to replace the accelerated indebtedness on terms

acceptable to us, or at all. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources.”

 

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 operation 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.

 

Generally, a change of more than 50% in the ownership of a company’s stock, by value, over a three year period constitutes an ownership change for U.S. federal income tax purposes. An ownership change may limit a company’s ability to use its net operating loss carryforwards attributable to the period prior to such change. At December 31, 2010, we had $112 million of net operating losses available to offset future federal income, if any, which expire on various dates through December 31, 2030; however, we expect $30 million of our net operating losses will not be able to be utilized after June 2013. We performed an analysis pursuant to Internal Revenue Code Section 382, as well as similar state provisions, in order to determine whether any limitations might exist on the utilization of net operating losses and other tax attributes. Based on this analysis, we determined that it is more likely than not that an ownership change occurred on June 10, 2008, resulting in an annual limitation on the use of our net operating losses and other tax attributes as of such date. We also determined that we had certain built-in gains at the date of ownership change. Built-in gains increase the limitation under the Internal Revenue Code Section 382 to the extent triggered during the five year period subsequent to the date of change. Absent the disposition of certain built-in gain assets, which 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.

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.

 

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:

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

In the past, following periods of market volatility, stockholders have instituted securities class action litigation. If we were involved in securities litigation, it could have a substantial cost and divert

resources and the attention of our senior management team from our business regardless of the outcome of such litigation.

 

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.

 

As of March 31, 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.

 

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 may have the effect of deterring or delaying attempts by our stockholders to remove or replace management, engage in proxy contests and effect changes in control. The provisions of our charter documents include:

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

 

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.

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 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.

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:

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.

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 the net proceeds we receive from this offering for general corporate purposes, including the construction of additional manufacturing capacity. 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.

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.

The following table sets forth our cash and cash equivalents and capitalization as of March 31, 2011:

You should read this table together with our consolidated financial statements and the related notes thereto, as well as the information under “Selected Consolidated Financial Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” The unaudited pro forma information below is prepared for illustrative purposes only and our capitalization following the completion of this offering will be adjusted based on the actual initial public offering price, the closing of the offering made hereby and other terms of the offering determined at pricing.

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 March 31, 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 26,106,535, the number of common shares outstanding on March 31, 2011. Our pro forma net tangible book value as of March 31, 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 March 31, 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 March 31, 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:

If the underwriters exercise their option to purchase additional shares in full, the pro forma as adjusted net tangible book value per share after giving effect to the offering would be $      per share. This represents an increase in pro forma as adjusted net tangible book value of $      per share to existing stockholders and dilution in pro forma as adjusted net tangible book value of $      per share to new investors.

A $1.00 increase (decrease) in the assumed initial public offering price of $     , the mid-point of the price range set forth on the cover page of this prospectus, would increase (decrease) our pro forma as adjusted net tangible book value after this offering by $      million and the pro forma as

adjusted net tangible book value per share after this offering by $      per share and would increase (decrease) the dilution per share to new investors in this offering by $      per share, in each case, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and assuming the closing of the offering made hereby occurs on          , 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.

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 March 31, 2011. As of March 31, 2011, we had outstanding options to purchase a total of 12,832,208 shares of our common stock at a weighted-average exercise price of $0.46 per share and 1,127,372 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 March 31, 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.

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

We derived the consolidated statement of operations data for the years ended December 31, 2008, 2009 and 2010, and the consolidated balance sheet data as of December 31, 2009 and 2010, from our audited consolidated financial statements and the related notes thereto included elsewhere in this prospectus. We derived the consolidated statement of operations data for the fiscal years ended December 31, 2006 and 2007, and the consolidated balance sheet data as of December 31, 2006, 2007 and 2008, from our audited consolidated financial statements and the related notes thereto that are not included in this prospectus. We derived the consolidated statement of operations data for the three months ended March 31, 2010 and 2011, and the consolidated balance sheet data as of March 31, 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.

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: