imi-10q_20180331.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2018

Or

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                  to

Commission File Number 001-35348

Intermolecular, Inc.

(Exact Name of Registrant as Specified in its Charter)

 

Delaware

 

20-1616267

(State or Other Jurisdiction of
Incorporation or Organization)

 

(I.R.S. Employer
Identification No.)

 

 

 

3011 N. First Street
San Jose, California

 

95134

(Address of Principal Executive Offices)

 

(Zip Code)

 

(408) 582-5700

(Registrant’s Telephone Number, Including Area Code)

N/A

(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer

 

Accelerated filer

Non-accelerated filer

(Do not check if a smaller reporting company)

Smaller reporting company

Emerging growth company

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  

Shares outstanding of the registrant’s common stock:

 

Class

 

Outstanding as of May 04, 2018

Common stock, $0.001 par value

 

49,601,373

 

 

 

 

 


INTERMOLECULAR, INC.

FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2018

TABLE OF CONTENTS

 

 

 

 

Page

 

PART I — FINANCIAL INFORMATION

 

 

 

 

 

 

Item 1.

Financial Statements (Unaudited)

 

3

 

Condensed Consolidated Balance Sheets

 

3

 

Condensed Consolidated Statements of Operations

 

4

 

Condensed Consolidated Statements of Comprehensive Loss

 

5

 

Condensed Consolidated Statements of Cash Flows

 

6

 

Notes to Condensed Consolidated Financial Statements

 

7

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

16

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

22

Item 4.

Controls and Procedures

 

22

 

PART II — OTHER INFORMATION

 

 

Item 1.

Legal Proceedings

 

23

Item 1A.

Risk Factors

 

23

Item 6.

Exhibits

 

24

 

Signatures

 

25

 

2


PART I — FINANCIAL INFORMATION

ITEM 1.

FINANCIAL STATEMENTS

INTERMOLECULAR, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(In thousands, except share and per share data)

(Unaudited)

 

 

 

March 31, 2018

 

 

December 31, 2017

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

4,421

 

 

$

6,090

 

Short-term investments

 

 

22,822

 

 

 

18,060

 

Accounts receivable

 

 

4,199

 

 

 

5,519

 

Prepaid expenses and other current assets

 

 

959

 

 

 

1,069

 

Total current assets

 

 

32,401

 

 

 

30,738

 

Long-term investments

 

 

 

 

 

1,657

 

Materials inventory

 

 

2,814

 

 

 

2,781

 

Property and equipment, net

 

 

4,940

 

 

 

5,913

 

Intangible assets, net

 

 

2,485

 

 

 

2,620

 

Other assets

 

 

589

 

 

 

600

 

Total assets

 

$

43,229

 

 

$

44,309

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

399

 

 

$

928

 

Accrued liabilities

 

 

958

 

 

 

865

 

Accrued compensation and employee benefits

 

 

1,781

 

 

 

2,535

 

Deferred revenue

 

 

997

 

 

 

941

 

Total current liabilities

 

 

4,135

 

 

 

5,269

 

Deferred rent

 

 

2,878

 

 

 

2,939

 

Other long-term liabilities

 

 

28

 

 

 

28

 

Total liabilities

 

 

7,041

 

 

 

8,236

 

Commitments and contingencies (note 5)

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

Common stock, par value $0.001 per share—200,000,000 shares authorized;

   49,601,373 and 49,569,721 shares issued and outstanding as of March 31, 2018

   and December 31, 2017, respectively

 

 

50

 

 

 

50

 

Additional paid-in capital

 

 

215,082

 

 

 

214,796

 

Accumulated other comprehensive loss

 

 

(59

)

 

 

(35

)

Accumulated deficit

 

 

(178,885

)

 

 

(178,738

)

Total stockholders’ equity

 

 

36,188

 

 

 

36,073

 

Total liabilities and stockholders’ equity

 

$

43,229

 

 

$

44,309

 

 

See accompanying notes to unaudited Condensed Consolidated Financial Statements

 

 

3


INTERMOLECULAR, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Operations

(In thousands, except share and per share data)

(Unaudited)

 

 

 

Three Months Ended March 31,

 

 

 

2018

 

 

2017

 

Revenue:

 

 

 

 

 

 

 

 

Program revenue

 

$

9,256

 

 

$

6,812

 

Licensing and royalty revenue

 

 

419

 

 

 

3,133

 

Total revenue

 

 

9,675

 

 

 

9,945

 

Cost of revenue:

 

 

 

 

 

 

 

 

Cost of program revenue

 

 

3,375

 

 

 

2,697

 

Cost of licensing and royalty revenue

 

 

1

 

 

 

290

 

Total cost of revenue

 

 

3,376

 

 

 

2,987

 

Gross profit

 

 

6,299

 

 

 

6,958

 

Operating expenses:

 

 

 

 

 

 

 

 

Research and development

 

 

4,032

 

 

 

7,108

 

Sales and marketing

 

 

796

 

 

 

1,481

 

General and administrative

 

 

2,286

 

 

 

3,008

 

Restructuring charges

 

 

 

 

 

1,348

 

Total operating expenses

 

 

7,114

 

 

 

12,945

 

Loss from operations

 

 

(815

)

 

 

(5,987

)

Other income (expense):

 

 

 

 

 

 

 

 

Interest income (expense), net

 

 

106

 

 

 

55

 

Other income (expense), net

 

 

87

 

 

 

97

 

Total other income (expense), net

 

 

193

 

 

 

152

 

Loss before provision for income taxes

 

 

(622

)

 

 

(5,835

)

Provision for income taxes

 

 

1

 

 

 

1

 

Net loss

 

$

(623

)

 

$

(5,836

)

Net loss per share, basic and diluted

 

$

(0.01

)

 

$

(0.12

)

Weighted-average number of shares used in computing net loss

   per share, basic and diluted

 

 

49,581,927

 

 

 

49,519,251

 

 

Related Party Transactions

The Condensed Consolidated Statements of Operations include the following related party transactions:

 

 

 

Three Months Ended March 31,

 

 

 

2018

 

 

2017

 

Revenue:

 

 

 

 

 

 

 

 

Licensing and royalty revenue

 

$

 

 

$

383

 

Total revenue

 

$

 

 

$

383

 

Cost of Revenue:

 

 

 

 

 

 

 

 

Cost of licensing and royalty revenue

 

$

 

 

$

1

 

Total cost of revenue

 

$

 

 

$

1

 

 

See accompanying notes to unaudited Condensed Consolidated Financial Statements

 

 

4


Condensed Consolidated Statements of Comprehensive Loss

(In thousands)

(Unaudited)

 

 

 

Three Months Ended March 31,

 

 

 

2018

 

 

2017

 

Net loss

 

$

(623

)

 

$

(5,836

)

Change in unrealized gain (loss) on available-for-sale-

   securities, net of tax

 

 

(24

)

 

 

11

 

Other comprehensive income (loss)

 

 

(24

)

 

 

11

 

Comprehensive loss, net of income tax

 

$

(647

)

 

$

(5,825

)

 

See accompanying notes to unaudited Condensed Consolidated Financial Statements

 

 

5


INTERMOLECULAR, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

 

 

 

Three Months Ended March 31,

 

 

 

2018

 

 

2017

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(623

)

 

$

(5,836

)

Adjustments to reconcile net loss to net cash used in operating

   activities:

 

 

 

 

 

 

 

 

Depreciation, amortization, and accretion

 

 

1,423

 

 

 

1,977

 

Stock-based compensation

 

 

270

 

 

 

656

 

Gain on disposal of property and equipment

 

 

 

 

 

(4

)

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

1,796

 

 

 

1,248

 

Prepaid expenses and other assets

 

 

121

 

 

 

476

 

Materials inventory

 

 

(69

)

 

 

78

 

Accounts payable

 

 

(554

)

 

 

381

 

Accrued and other liabilities

 

 

(730

)

 

 

1,394

 

Deferred revenue

 

 

56

 

 

 

183

 

Net cash provided by operating activities

 

 

1,690

 

 

 

553

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchase of investments

 

 

(6,252

)

 

 

(2,827

)

Redemption of investments

 

 

3,070

 

 

 

4,408

 

Purchase of property and equipment

 

 

(194

)

 

 

(264

)

Proceeds from sale of equipment

 

 

 

 

 

7

 

Net cash (used in) provided by investing activities

 

 

(3,376

)

 

 

1,324

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Principal payment under capital leases obligations

 

 

 

 

 

(5

)

Proceeds from exercise of common stock options

 

 

17

 

 

 

 

Net cash (used in) provided by financing activities

 

 

17

 

 

 

(5

)

Net increase (decrease) in cash and cash equivalents

 

 

(1,669

)

 

 

1,872

 

Cash and cash equivalents at beginning of period

 

 

6,090

 

 

 

5,759

 

Cash and cash equivalents at end of period

 

$

4,421

 

 

$

7,631

 

 

 

 

 

 

 

 

 

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

 

 

 

3

 

Cash paid for income taxes, net of refunds received

 

$

1

 

 

 

1

 

Noncash investing/operating activities:

 

 

 

 

 

 

 

 

Transfer of property and equipment to materials inventory

 

$

30

 

 

$

172

 

Transfer of materials inventory to property and equipment

 

$

66

 

 

$

178

 

Additions to property, equipment and intangible assets not paid at the end of the

   period

 

$

88

 

 

$

155

 

 

See accompanying notes to unaudited Condensed Consolidated Financial Statements

 

 

6


INTERMOLECULAR, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

 

1. Summary of Significant Accounting Policies

Basis of Presentation

The accompanying Condensed Consolidated Financial Statements of Intermolecular, Inc. and subsidiaries (the Company) have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) for interim financial information, the instructions to Form 10-Q and Article 10 of Regulation S-X of the Securities and Exchange Commission (SEC). Accordingly, certain information and disclosures normally included in complete financial statements prepared in accordance with GAAP have been condensed or omitted. The information in this report should be read in conjunction with the Company’s audited Consolidated Financial Statements and notes thereto included in its Annual Report on Form 10-K for the fiscal year ended December 31, 2017, as filed with the SEC on March 2, 2018. Certain amounts in the prior year’s presentations have been reclassified to conform to the current presentation. These reclassifications had no effect on previously reported net income.

In the opinion of management, the accompanying unaudited Condensed Consolidated Financial Statements reflect all adjustments (consisting only of normal recurring adjustments) necessary to present fairly the Company’s financial position, results of operations and cash flows for the interim periods presented. The operating results for the three months ended March 31, 2018 are not necessarily indicative of the results that may be expected for any other future interim period or full year. The Condensed Consolidated Balance Sheet as of December 31, 2017 is derived from the audited Consolidated Financial Statements. 

Use of Estimates

The preparation of the accompanying Condensed Consolidated Financial Statements in conformity with GAAP requires management to make estimates and assumptions about future events. These estimates and the underlying assumptions affect the amounts of assets and liabilities reported, disclosures about contingent assets and liabilities, and reported amounts of revenue and expenses. Management uses estimates and judgments in determining recognition of revenues, valuations of accounts receivable, inventories, intangible assets, warrants and assumptions used in the calculation of income taxes and stock-based compensation, among others. These estimates and assumptions are based on management’s best estimates and judgment. Management evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors, and adjusts such estimates and assumptions when facts and circumstances dictate. As future events and their effects cannot be determined with precision, actual results could differ significantly from these estimates.

Concentration of Credit Risk

Financial instruments that potentially subject the Company to concentration of credit risk consist of cash, cash equivalents, investments and accounts receivable. The Company’s cash, cash equivalents and investments consist of demand deposits, money market accounts, certificates of deposit, corporate bonds and commercial paper maintained with high quality financial institutions. The Company's accounts receivable consists of non-interest bearing balances due from credit-worthy customers.

 

Significant Accounting Policies

Adoption of New Accounting Standard

In November 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2016-18 (ASU 2016-18), Restricted Cash, which requires amounts generally described as restricted cash and restricted cash equivalents be included with cash and cash equivalents when reconciling the total beginning and ending amounts for the periods shown on the statement of cash flows. The Company adopted ASU 2016-18 in the first quarter of 2018 and there was no impact on the Company’s Condensed Consolidated Financial Statements as the Company had no restricted cash balances as of March 31, 2018 and December 31, 2017.

 

On January 1, 2018, we adopted the new accounting standard ASC Topic 606, “Revenue from Contracts with Customers” (“ASC 606”) and all the related amendments (“the new revenue standard”) to all contracts which were not completed as of January 1, 2018 using the modified retrospective method. We recognized the cumulative effect of initially applying the new revenue standard as an adjustment to the opening balance of retained earnings. The comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods.

7


Revenue Recognition

The Company’s principal sources of revenue are from program services and to a lesser extent from royalty revenue from customers who license our intellectual property.

 

Revenue from contracts with customers is recognized using the following five steps:

a) Identify the contract(s) with a customer

b) Identify the performance obligations in the contract

c) Determine the transaction price

d) Allocate the transaction price to the performance obligations in the contract

e) Recognize revenue when (or as) the Company satisfies a performance obligation

 

A contract contains a promise (or promises) to transfer goods or services to a customer. A performance obligation is a promise (or a group of promises) that is distinct. The transaction price is the amount of consideration a Company expects to be entitled from a customer in exchange for providing the goods or services.  

 

The unit of account for revenue recognition is a performance obligation (a good or service).  A contract may contain one or more performance obligations.  Performance obligations are accounted for separately if they are distinct. A good or service is distinct if the customer can benefit from the good or service either on its own or together with other resources that are readily available to the customer, and the good or service is distinct in the context of the contract. Otherwise performance obligations are combined with other promised goods or services until the Company identifies a bundle of goods or services that is distinct.

 

The transaction price is allocated to all the separate performance obligations in an arrangement. It reflects the amount of consideration to which the Company expects to be entitled in exchange for transferring goods or services, which may include an estimate of variable consideration to the extent that it is probable of not being subject to significant reversals in the future based on the Company’s experience with similar arrangements. The transaction price also reflects the impact of the time value of money if there is a significant financing component present in an arrangement. The transaction price excludes amounts collected on behalf of third parties, such as sales taxes.

 

Revenue is recognized when the Company satisfies each performance obligation by transferring control of the promised goods or services to the customer. Goods or services can transfer at a point in time or over time depending on the nature of the arrangement.

 

A majority of our program services revenue is recognized as services are performed using percentage of completion method of contract accounting based on the output or input (i.e., units or labor hours) method, whichever is the most appropriate measure of progress towards completion of the contract

 

Input method: The use of the input method requires the Company to make reasonably dependable estimates.  We use the input method based on labor hours, where revenue is calculated based on the percentage of total hours incurred in relation to total estimated hours at completion of the contract.  The input method is reasonable because the hours best reflect the Company’s efforts toward satisfying the performance obligation over time.  As circumstances change over time, the Company updates its measure of progress to reflect any changes in the outcome of the performance obligation. Such changes to the Company’s measure of progress is accounted for as a change in accounting estimate.

 

License and royalty revenues are recognized based on estimated end-market sales of products that incorporate our intellectual property.

8


 

The cumulative effect of the changes made to our Condensed Consolidated Balance Sheet, as of January 1, 2018, as a result of the adoption of ASC 606 were as follows (in thousands):

 

 

 

Balance at December 31, 2017

 

 

Adjustment Due to ASC 606

 

 

Balance at January 1, 2018

 

Condensed Consolidated Balance Sheet

 

 

 

 

 

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

Accounts receivable

 

$

5,519

 

 

$

475

 

 

$

5,994

 

Stockholders' equity

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated deficit

 

$

(178,738

)

 

$

475

 

 

$

(178,263

)

 

The impact of ASC 606 adoption on our Condensed Consolidated Statement of Operations and Balance Sheet were as follows (in thousands):

 

 

 

For the Period ended March 31, 2018

 

 

 

As Reported

 

 

Balances Without Adoption of ASC 606

 

 

Effect of Change

Higher/(Lower)

 

Condensed Consolidated Statement of Operations

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

Licensing and royalty revenue

 

$

419

 

 

$

475

 

 

$

(56

)

Net loss

 

 

(623

)

 

 

(567

)

 

 

56

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Condensed Consolidated Balance Sheet

 

 

 

 

 

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

Accounts receivable

 

 

4,199

 

 

 

3,780

 

 

 

419

 

Stockholders' equity

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated deficit

 

$

(178,885

)

 

$

(179,304

)

 

$

(419

)

 

Contract balances

The timing of revenue recognition, billings and cash collections results in billed accounts receivable, unbilled receivables (contract assets), and deferred revenue (contract liabilities) on the Condensed Consolidated Balance Sheet. For our contracts, amounts are billed at periodic intervals, such as on monthly basis. Generally, contract assets results from revenue recognition in advance of billings, and contract liabilities results from billing in advance of revenue recognition. These assets and liabilities are reported on the Condensed Consolidated Balance Sheets at the end of each reporting period. The following table provides information about contract assets and contract liabilities from contracts with customers (in thousands):

 

 

 

Balance at March 31, 2018

 

 

Balance at December 31, 2017

 

Receivable, which are included in Accounts receivable

 

$

3,589

 

 

$

5,259

 

Contract assets

 

 

610

 

 

 

260

 

Contract liabilities

 

$

997

 

 

$

941

 

 

All of the contract liability balance at the beginning of year of $0.9 million was recognized as revenue for the three months ended March 31, 2018.

Practical Expedients and Exemptions

We generally expense sales commissions when incurred because the amortization period would have been one year or less. These costs are recorded within sales and marketing expenses.

 

We do not disclose the value of unsatisfied performance obligations for contracts with an original expected length of one year or less.

9


Materials Inventory

Materials inventory consists of raw materials in the amount of $2.8 million as of March 31, 2018 and December 31, 2017.

Accounts Receivable and Allowance for Doubtful Accounts

The Company did not have any allowance for doubtful accounts as of March 31, 2018 and December 31, 2017.

 

There have been no other significant changes to the Company’s accounting policies since it filed its audited Consolidated Financial Statements in its Annual Report on Form 10-K for the year ended December 31, 2017.

Concentration of Revenue and Accounts Receivable

Significant customers are those that represent more than 10% of the Company’s total revenue or accounts receivable. For each significant customer, including related parties, revenue as a percentage of total revenue and accounts receivable as a percentage of total accounts receivable are as follows:

 

 

 

Revenue

Accounts Receivable

 

 

 

Three Months Ended March 31,

 

 

As of  March 31,

 

 

As of December 31,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Customer A

 

58%

 

 

50%

 

 

48%

 

 

72%

 

Customer B

 

28%

 

 

*

 

 

22%

 

 

19%

 

Customer C

 

*

 

 

*

 

 

10%

 

 

*

 

Customer D

 

*

 

 

19%

 

 

*

 

 

*

 

Customer E

 

*

 

 

13%

 

 

*

 

 

*

 

 

*

less than 10%

Recent Accounting Pronouncements

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) in order to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet for those leases classified as operating leases under previous GAAP. ASU 2016-02 requires that a lessee should recognize a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term on the balance sheet. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018 (including interim periods within those periods) using a modified retrospective approach and early adoption is permitted. The Company will adopt ASU 2016-02 in the first quarter of 2019. Although the Company is in the process of evaluating the impact of adoption of ASU 2016-02 on its Consolidated Financial Statements, the Company currently believes the most significant change will be related to the recognition of right-of-use assets and lease liabilities on the Company's balance sheet for its real estate operating lease.

 

 

2. Fair Value of Financial Instruments

The Company measures and reports its cash equivalents and investments at fair value. The carrying amounts for cash equivalents and investments approximate their fair values due to their short maturities. The following tables set forth the fair value of the Company’s cash equivalents and investments by level within the fair value hierarchy (in thousands):

 

 

 

As of  March 31, 2018

 

 

 

Fair Value

 

 

Level I

 

 

Level II

 

 

Level III

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

1,172

 

 

$

1,172

 

 

$

 

 

$

 

Corporate debt securities and commercial paper

 

 

22,822

 

 

 

 

 

 

22,822

 

 

 

 

Total assets measured at fair value

 

$

23,994

 

 

$

1,172

 

 

$

22,822

 

 

$

 

 

 

 

As of December 31, 2017

 

 

 

Fair Value

 

 

Level I

 

 

Level II

 

 

Level III

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

2,279

 

 

$

2,279

 

 

$

 

 

$

 

Corporate debt securities and commercial paper

 

 

19,717

 

 

 

 

 

 

19,717

 

 

 

 

Total assets measured at fair value

 

$

21,996

 

 

$

2,279

 

 

$

19,717

 

 

$

 

10


 

Debt investments are classified as “available-for-sale” and are carried at fair value based on quoted markets or other readily available market information. The Company's investment policy requires all-investments to have a less than twenty four month maturity term and a minimum credit rating of A-. Unrealized gains and losses, net of taxes, are included in accumulated other comprehensive income (loss). Gains and losses are determined using the specific identification method. Cash, cash equivalents, and investments consisted of the following as of March 31, 2018 (in thousands):

 

 

 

As of  March 31, 2018

 

 

 

Amortized Cost

 

 

Unrealized Gains

 

 

Unrealized Losses

 

 

Estimated

Fair Value

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash

 

$

3,249

 

 

$

 

 

$

 

 

$

3,249

 

Money market funds

 

 

1,172

 

 

 

 

 

 

 

 

 

1,172

 

Corporate debt securities and commercial paper

 

 

22,882

 

 

 

 

 

 

(60

)

 

 

22,822

 

Total cash, cash equivalents and investments

 

$

27,303

 

 

$

 

 

$

(60

)

 

$

27,243

 

 

As of December 31, 2017, the Company had $36,000 of unrealized losses.

 

 

3. Property and Equipment

Property and equipment consist of the following (in thousands):

 

 

 

As of

 

 

 

March 31, 2018

 

 

December 31, 2017

 

Lab equipment and machinery

 

$

59,121

 

 

$

58,937

 

Leasehold improvements

 

 

6,330

 

 

 

6,248

 

Computer equipment and software

 

 

4,656

 

 

 

4,726

 

Furniture and fixtures

 

 

221

 

 

 

221

 

Construction in progress

 

 

226

 

 

 

282

 

Total property and equipment

 

 

70,554

 

 

 

70,414

 

Less accumulated depreciation

 

 

(65,614

)

 

 

(64,501

)

Property and equipment, net

 

$

4,940

 

 

$

5,913

 

 

The following table presents depreciation expense included in the Condensed Consolidated Statements of Operations and includes amortization of leasehold improvements (in thousands):

 

 

 

Three Months Ended March 31,

 

 

 

2018

 

 

2017

 

Depreciation expense

 

$

1,236

 

 

$

1,470

 

 

 

4. Intangible Assets

Intangible assets consist of the following (in thousands):

 

 

 

As of

 

 

 

March 31, 2018

 

 

December 31, 2017

 

Patents issued

 

$

3,742

 

 

$

3,829

 

Patents pending

 

 

124

 

 

 

128

 

Trademarks

 

 

40

 

 

 

40

 

Total intangible assets

 

 

3,906

 

 

 

3,997

 

Less patent amortization

 

 

(1,421

)

 

 

(1,377

)

Intangible assets, net

 

$

2,485

 

 

$

2,620

 

 

11


The following table presents patent amortization expense included in the Condensed Consolidated Statements of Operations (in thousands):

 

 

 

Three Months Ended March 31,

 

 

 

2018

 

 

2017

 

Amortization expense

 

$

69

 

 

$

85

 

 

 

5. Commitments and Contingencies

Leases

The Company entered into an operating lease agreement in May 2010 for its San Jose headquarters that was subsequently modified in November 2013 and May 2015.  The building lease expires in June 2025. Rent expense is being recognized on a straight-line basis over the lease term.

The following table presents rent expense included in the Condensed Consolidated Statement of Operations (in thousands):

 

 

 

Three Months Ended March 31,

 

 

 

2018

 

 

2017

 

Rent expense

 

$

563

 

 

$

561

 

 

During the first quarter of 2018, the Company made payments of $0.6 million related to this operating lease.

In December 2015, the Company signed a sublease to lease out a portion of office space. The term of the sublease is for three years and annual gross rent is approximately $0.3 million. The sublessee moved in during the second quarter of 2016. The Company received $0.1 million in rent payment under the agreement in the first quarter of 2018.

Capital Lease Obligations

During the third quarter of 2016, the Company leased a furnace under a three year lease agreement which was accounted for as a capital lease under ASC 840-30; the underlying asset was included in lab equipment and machinery. The Company terminated the lease in August 2017, recognized a loss of $29,000 and the capital lease obligation of $49,000 was cancelled. The net book value of the underlying asset as of the termination date was $79,000.      

Depreciation expense of the furnace recorded under the capital lease obligations was $0 for the three months ended March 31, 2018, and $5,000 for the three months ended March 31, 2017.

 

 

6. Stockholders’ Equity

Stock-Based Compensation

The fair value of the employee stock options granted during the period was estimated based on the respective grant date using a Black-Scholes-Merton option-pricing model with the following weighted-average assumptions: 

 

 

 

Three Months Ended March 31,

 

 

 

2018

 

 

2017

 

Expected term (in years)

 

 

6.0

 

 

 

6.0

 

Risk-free interest rate

 

 

2.6

%

 

 

2.1

%

Expected volatility

 

 

54

%

 

 

55

%

Expected dividend rate

 

 

%

 

 

%

 

12


Stock-based compensation expense, net of estimated forfeitures, was included in the following line items on the Condensed Consolidated Statements of Operations (in thousands):

 

 

 

Three Months Ended March 31,

 

 

 

2018

 

 

2017

 

Cost of revenue

 

$

53

 

 

$

65

 

Research and development

 

 

55

 

 

 

182

 

Sales and marketing

 

 

30

 

 

 

59

 

General and administrative

 

 

132

 

 

 

350

 

Total stock-based compensation

 

$

270

 

 

$

656

 

 

The following table presents stock-based compensation expense, net of estimated forfeitures, by grant type (in thousands):

 

 

 

Three Months Ended March 31,

 

 

 

2018

 

 

2017

 

Stock options

 

$

215

 

 

$

581

 

Restricted stock awards and restricted stock units (RSUs)

 

 

55

 

 

 

75

 

Total stock-based compensation

 

$

270

 

 

$

656

 

 

The following table presents unrecognized compensation expense, net of estimated forfeitures, related to the Company’s equity compensation plans as of March 31, 2018, which is expected to be recognized over the following weighted-average periods (in thousands): 

 

 

 

Unrecognized

 

 

Weighted-

 

 

 

Compensation

 

 

Average Period

 

 

 

Expense

 

 

(in years)

 

Stock options

 

$

1,404

 

 

 

2.9

 

RSUs

 

$

460

 

 

 

2.4

 

 

The following table presents details on grants made by the Company for the following periods: 

 

 

 

 

 

 

 

 

 

 

March 31, 2018

 

 

March 31, 2017

 

 

 

 

 

 

 

Weighted-

 

 

 

 

 

 

Weighted-

 

 

 

 

 

 

 

Average Grant

 

 

 

 

 

 

Average Grant

 

 

 

Shares Granted

 

 

Date Fair Value

 

 

Shares Granted

 

 

Date Fair Value

 

Stock options

 

 

395,000

 

 

$

0.72

 

 

 

1,106,500

 

 

$

0.60

 

RSUs

 

 

345,000

 

 

$

1.35

 

 

 

300,000

 

 

$

0.96

 

 

The total intrinsic value of stock options exercised during the three months ended March 31, 2018 and 2017 was $8,000 and $0, respectively.

RSUs that vested during the three months ended March 31, 2018 and 2017 had fair values of $30,000 and $75,000 , respectively, as of the vesting date.

Common Stock

As of March 31, 2018 and December 31, 2017, the Company had reserved shares of common stock for issuance as follows:

 

 

 

As of March 31, 2018

 

 

As of December 31, 2017

 

Number of stock options outstanding

 

 

8,367,253

 

 

 

8,408,228

 

Number of RSUs outstanding

 

 

848,750

 

 

 

519,015

 

Shares available for future grant

 

 

10,690,554

 

 

 

8,780,322

 

Total shares reserved

 

 

19,906,557

 

 

 

17,707,565

 

 

 

13


7. Net Loss per Share

 

The following outstanding shares of common stock equivalents were excluded from the computation of diluted net loss per share for the periods presented because including them would have been antidilutive:

 

 

 

Three Months Ended March 31,

 

 

 

2018

 

 

2017

 

Stock options to purchase common stock

 

 

8,367,253

 

 

 

10,208,689

 

RSUs

 

 

848,750

 

 

 

580,640

 

 

 

8. Income Taxes

Income tax expense for the three months ended March 31, 2018 was $800, on a pretax loss of $0.6 million. The Company maintained a valuation allowance as of March 31, 2018 against all of its deferred tax assets. The Company intends to maintain a full valuation allowance until sufficient positive evidence exists to support its reduction.

On December 22, 2017, the U.S. government enacted comprehensive tax legislation referred to as the Tax Cuts and Jobs Act (the “Tax Act”).  The Tax Act significantly revised the future ongoing U.S. corporate income tax by, among other things, lowering the U.S. corporate income tax rates and implementing a territorial tax system. The corporate tax rate was reduced from 35% to 21% for tax years beginning after December 31, 2017 and certain provisions exist on which to allow accelerated expensing of equipment for a portion of 2017 and for future years. This largely only affected the value of the Company’s deferred tax asset with a corresponding offset to valuation allowance. The Tax Act also limits the amount of net operating losses that can be used to reduce taxable income to 80% for net operating losses generated for periods beginning after December 31, 2017. Existing net operating losses, arising in years on or before December 31, 2017 are not affected by the Tax Act.

In January 2018, the SEC staff issued SAB 118, Income Tax Accounting Implications of the Tax Act to provide guidance for companies that have not completed their accounting for the income tax effects of the Tax Act in the period of enactment, which is the period that includes December 22, 2017. In issuing the guidance, the SEC staff said it was clarifying the application of ASC 740 for companies that may encounter situations where they do not have the necessary information available, prepared or analyzed (including computations) in reasonable detail to complete the accounting for one or more elements of their income tax provision under ASC 740 for the reporting period in which the Tax Act was enacted. The SEC staff said a company that hasn’t completed its accounting for the effects of the Tax Act by its financial reporting deadline may report provisional amounts based on reasonable estimates for items for which the accounting is incomplete. Those amounts will be subject to adjustment during a measurement period that begins in the reporting period that includes the Tax Act’s enactment date and ends when a company has obtained, prepared and analyzed the information needed to complete the accounting requirements under ASC 740. The measurement period should not extend beyond one year from the enactment date (i.e., the measurement period must be completed by December 22, 2018). The SEC staff said a company that cannot make a reasonable estimate for an income tax effect should not account for that effect until it can make such an estimate.

The Company completed its analysis before the end of the measurement period; no adjustments were made during Q1 2018.  The Company has considered Tax Act legislative changes that became effective in 2018. The Company does not expect the Tax Act to have a significant impact on the results of operations.

 

 

9. Related Party Transactions

In November 2006, the Company entered into an Alliance Agreement with a related party that was a beneficial owner of more than 5% of the Company’s common stock at the time. During 2016, the related party sold all its holdings of the Company’s stock and owned no Company’s common stock as of December 31, 2016. Since November 2006, the agreement has been amended numerous times with the last amendment signed in December 2013. The other party to the Alliance Agreement and the Company each had an independent board member that served on both companies’ boards of directors; however the independent board member for the other party to the Alliance Agreement did not stand for re-election as director at the other company effective May 24, 2017 and thus the other company is no longer a related party.

As of March 31, 2018 and December 31, 2017, the Company had no accounts receivable and deferred revenue balances in either period with respect to its related party relationship. The following table presents related party revenue included in the Condensed Consolidated Statement of Operations (in thousands):

 

 

 

Three Months Ended March 31,

 

 

 

2018

 

 

2017

 

Related party revenue

 

$

 

 

$

383

 

Related party cost of revenue

 

$

 

 

$

1

 

 

14


As of March 31, 2018, two representatives of an investment firm that is a beneficial owner of approximately 29.7% of the Company’s common stock, are members of the board of directors of the Company. The Company incurred director fees expenses of $21,000 and $13,000 to the investment firm for the three months ended March 31, 2018 and 2017, respectively.

 

 

10. Information about Geographic Areas

Revenue

Revenue by geography is based on the billing address of the customer. The following table sets forth revenue by geographic area (in thousands):

 

 

 

Three Months Ended March 31,

 

 

 

2018

 

 

2017

 

United States

 

$

1,232

 

 

$

4,572

 

Asia-Pacific ex Japan

 

 

8,443

 

 

 

5,373

 

Total

 

$

9,675

 

 

$

9,945

 

 

Long-Lived Assets

All of the Company’s long-lived assets are located in the U.S.

 

11. Restructuring Charges

 

In March, 2017, the Company initiated a reduction in its workforce to reduce operating costs and to achieve profitability. The reduction in its workforce constituted approximately 18% of the Company’s global workforce. As a result of the reduction in its workforce, the Company recorded expenses related to employee severance and termination benefits of approximately $1.4 million, which was recognized during the three months ended March 31, 2017. All such related expenses are recorded within “Restructuring charges” on the Condensed Consolidated Statements of Operations, and related accruals are included in accrued liabilities and accrued compensation and employee benefits on the Condensed Consolidated Balance Sheets. The following table presents accrued liabilities for severance and related expenses and payments as of March 31, 2018 (in thousands).

 

 

 

As of

 

 

 

 

 

 

 

 

 

 

As of

 

 

 

December 31, 2017

 

 

Charge

 

 

Cash Payments

 

 

March 31, 2018

 

Severance and related expenses

 

$

15

 

 

$

 

 

$

(11

)

 

$

4

 

 

 

 

15


ITEM 2.

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

Our Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is provided in addition to the accompanying Condensed Consolidated Financial Statements and notes to assist readers in understanding our results of operations, financial condition and cash flows. Our MD&A is organized as follows:

 

Overview. Discussion of our business and overall analysis of financial and other highlights affecting our company in order to provide context for the remainder of MD&A.

 

Strategy. Our overall strategy.

 

Basis of Presentation. A summary of the primary elements of our financial results.

 

Critical Accounting Estimates. Accounting estimates that we believe are most important to understanding the assumptions and judgments incorporated in our reported financial results and forecasts.

 

Results of Operations. An analysis of our financial results comparing the three months ended March 31, 2018 to the three months ended March 31, 2017.

 

Liquidity and Capital Resources. An analysis of changes in our balance sheets and cash flows, and discussion of our financial condition and sources of liquidity.

The following discussion and analysis should be read in conjunction with our Condensed Consolidated Financial Statements and related notes included elsewhere in this Quarterly Report on Form 10-Q (Form 10-Q) and our audited Consolidated Financial Statements and related notes included in our Annual Report on Form 10-K for our fiscal year ended December 31, 2017 (2017 Form 10-K), as filed with the Securities and Exchange Commission. This Form 10-Q contains forward-looking statements that involve risks and uncertainties, as well as assumptions that, if they never materialize or prove incorrect, could cause our results to differ materially from those expressed or implied by such forward-looking statements. The statements contained in this Form 10-Q that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements are often identified by the use of words such as, but not limited to, “may,” “will,” “expect,” “believe,” “anticipate,” “intend,” “could,” “should,” “estimate,” or “continue,” and similar expressions or variations intended to identify forward-looking statements. These statements are based on the beliefs and assumptions of our management based on information currently available to management. Such forward-looking statements are subject to risks, uncertainties and other important factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those identified below, and those discussed in the section titled “Risk Factors” in Part II, Item 1A of this Form 10-Q and in our 2017 Form 10-K. Furthermore, such forward-looking statements speak only as of the date of this Form 10-Q. Except as required by law, we undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements.

Overview

We are a partner for the innovation of advanced materials using high throughput experimentation.  Advanced materials are critical to sustaining and advancing many industries, including the semiconductor, consumer electronics, aerospace and automotive industries. Using traditional experimental techniques, it can take many years to discover new advanced materials and many more years to deploy them in the marketplace.  By leveraging our proprietary HPC platform and multi-disciplinary development team, we strive to enable our customers to more rapidly discover advanced materials and tailor them to suit their needs.  

We were founded in 2004 and are headquartered in San Jose, California. Our total revenue decreased to $9.7 million for the three months ended March 31, 2018 from $9.9 million for the three months ended March 31, 2017.  Our net loss decreased to $0.6 million for the three months ended March 31, 2018, compared to net loss of $5.8 million for the three months ended March 31, 2017.  Since inception, we have incurred net losses aggregating to an accumulated deficit of $178.9 million as of March 31, 2018.

16


Strategy

We currently target large markets that rely on advanced materials for differentiation.  Within these broad markets, we target customers that have track records of technological innovation, have significant materials-based research and development (R&D), and are pursuing technical advancements that are critical to their success and strategy. Generally, our approach is most relevant to industries that rely heavily upon advanced thin film materials such as those achieved using physical vapor deposition (PVD) and atomic layer deposition (ALD) processing tools; however, our approach is also relevant to discovering and understanding advanced materials more broadly, including advanced bulk materials such as metal alloys.  Historically, we have partnered most extensively in the semiconductor industry and particularly in the area of semiconductor memory such as dynamic RAM (DRAM), new non-volatile memory (NVM) and phase-change memory technologies.  Going forward, we currently plan to continue growing our footprint within semicondu