imi-10q_20180930.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 September 30, 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 every Interactive Data File required to be submitted 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 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

 

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 November 5, 2018

Common stock, $0.001 par value

 

49,752,516

 

 

 

 

 


INTERMOLECULAR, INC.

FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 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

 

17

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

24

Item 4.

Controls and Procedures

 

24

 

PART II — OTHER INFORMATION

 

 

Item 1.

Legal Proceedings

 

25

Item 1A.

Risk Factors

 

25

Item 6.

Exhibits

 

26

 

Signatures

 

27

 

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)

 

 

 

September 30, 2018

 

 

December 31, 2017

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

6,889

 

 

$

6,090

 

Short-term investments

 

 

23,759

 

 

 

18,060

 

Accounts receivable

 

 

3,330

 

 

 

5,519

 

Prepaid expenses and other current assets

 

 

949

 

 

 

1,069

 

Total current assets

 

 

34,927

 

 

 

30,738

 

Long-term investments

 

 

 

 

 

1,657

 

Materials inventory

 

 

2,752

 

 

 

2,781

 

Property and equipment, net

 

 

3,497

 

 

 

5,913

 

Intangible assets, net

 

 

2,141

 

 

 

2,620

 

Other assets

 

 

542

 

 

 

600

 

Total assets

 

$

43,859

 

 

$

44,309

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

752

 

 

$

928

 

Accrued liabilities

 

 

917

 

 

 

865

 

Accrued compensation and employee benefits

 

 

2,602

 

 

 

2,535

 

Deferred revenue

 

 

289

 

 

 

941

 

Total current liabilities

 

 

4,560

 

 

 

5,269

 

Deferred rent

 

 

2,737

 

 

 

2,939

 

Other long-term liabilities

 

 

 

 

 

28

 

Total liabilities

 

 

7,297

 

 

 

8,236

 

Commitments and contingencies (note 5)

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

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

   49,748,766 and 49,569,721 shares issued and outstanding as of September 30, 2018

   and December 31, 2017, respectively

 

 

50

 

 

 

50

 

Additional paid-in capital

 

 

215,606

 

 

 

214,796

 

Accumulated other comprehensive loss

 

 

(19

)

 

 

(35

)

Accumulated deficit

 

 

(179,075

)

 

 

(178,738

)

Total stockholders’ equity

 

 

36,562

 

 

 

36,073

 

Total liabilities and stockholders’ equity

 

$

43,859

 

 

$

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 September 30,

 

 

Nine Months Ended September 30,

 

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Program revenue

 

$

7,354

 

 

$

6,869

 

 

$

25,975

 

 

$

20,160

 

 

Licensing and royalty revenue

 

 

508

 

 

 

1,753

 

 

 

1,364

 

 

 

6,495

 

 

Total revenue

 

 

7,862

 

 

 

8,622

 

 

 

27,339

 

 

 

26,655

 

 

Cost of revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of program revenue

 

 

2,054

 

 

 

2,864

 

 

 

8,286

 

 

 

8,106

 

 

Cost of licensing and royalty revenue

 

 

4

 

 

 

11

 

 

 

8

 

 

 

303

 

 

Total cost of revenue

 

 

2,058

 

 

 

2,875

 

 

 

8,294

 

 

 

8,409

 

 

Gross profit

 

 

5,804

 

 

 

5,747

 

 

 

19,045

 

 

 

18,246

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

4,463

 

 

 

4,835

 

 

 

12,551

 

 

 

17,328

 

 

Sales and marketing

 

 

692

 

 

 

874

 

 

 

2,346

 

 

 

3,285

 

 

General and administrative

 

 

1,581

 

 

 

2,000

 

 

 

5,615

 

 

 

7,225

 

 

Restructuring charges

 

 

 

 

 

 

 

 

 

 

 

1,351

 

 

Total operating expenses

 

 

6,736

 

 

 

7,709

 

 

 

20,512

 

 

 

29,189

 

 

Loss from operations

 

 

(932

)

 

 

(1,962

)

 

 

(1,467

)

 

 

(10,943

)

 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income (expense), net

 

 

168

 

 

 

70

 

 

 

413

 

 

 

182

 

 

Other income (expense), net

 

 

78

 

 

 

64

 

 

 

241

 

 

 

243

 

 

Total other income (expense), net

 

 

246

 

 

 

134

 

 

 

654

 

 

 

425

 

 

Loss before provision for income taxes

 

 

(686

)

 

 

(1,828

)

 

 

(813

)

 

 

(10,518

)

 

Provision for income taxes

 

 

 

 

 

 

 

 

1

 

 

 

1

 

 

Net loss

 

$

(686

)

 

$

(1,828

)

 

$

(814

)

 

$

(10,519

)

 

Net loss per share, basic and diluted

 

$

(0.01

)

 

$

(0.04

)

 

$

(0.02

)

 

$

(0.21

)

 

Weighted-average number of shares used in computing net loss per share, basic and diluted

 

 

49,746,082

 

 

 

49,554,701

 

 

 

49,667,518

 

 

 

49,543,014

 

 

 

Related Party Transactions

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

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

 

2018

 

 

2017

 

 

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 September 30,

 

 

Nine Months Ended September 30,

 

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

 

Net loss

 

$

(686

)

 

$

(1,828

)

 

$

(814

)

 

$

(10,519

)

 

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

   securities, net of tax

 

 

24

 

 

 

12

 

 

 

16

 

 

 

24

 

 

Other comprehensive income

 

 

24

 

 

 

12

 

 

 

16

 

 

 

24

 

 

Comprehensive loss, net of income tax

 

$

(662

)

 

$

(1,816

)

 

$

(798

)

 

$

(10,495

)

 

 

See accompanying notes to unaudited Condensed Consolidated Financial Statements

 

 

5


INTERMOLECULAR, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

 

 

 

Nine Months Ended September 30,

 

 

 

2018

 

 

2017

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(814

)

 

$

(10,519

)

Adjustments to reconcile net loss to net cash used in operating

   activities:

 

 

 

 

 

 

 

 

Depreciation, amortization, and accretion

 

 

3,514

 

 

 

5,369

 

Stock-based compensation

 

 

624

 

 

 

1,221

 

Loss on disposal of property and equipment

 

 

 

 

 

70

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

2,666

 

 

 

1,587

 

Prepaid expenses and other assets

 

 

177

 

 

 

663

 

Materials inventory

 

 

57

 

 

 

391

 

Accounts payable

 

 

(304

)

 

 

688

 

Accrued and other liabilities

 

 

(220

)

 

 

370

 

Deferred revenue

 

 

(652

)

 

 

485

 

Net cash provided by operating activities

 

 

5,048

 

 

 

325

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchase of investments

 

 

(21,968

)

 

 

(15,505

)

Redemption of investments

 

 

18,151

 

 

 

20,014

 

Purchase of property and equipment

 

 

(620

)

 

 

(705

)

Proceeds from sale of equipment

 

 

1

 

 

 

12

 

Net cash (used in) provided by investing activities

 

 

(4,436

)

 

 

3,816

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Principal payment under capital leases obligations

 

 

 

 

 

(13

)

Proceeds from exercise of common stock options

 

 

187

 

 

 

 

Net cash (used in) provided by financing activities

 

 

187

 

 

 

(13

)

Net increase in cash and cash equivalents

 

 

799

 

 

 

4,128

 

Cash and cash equivalents at beginning of period

 

 

6,090

 

 

 

5,759

 

Cash and cash equivalents at end of period

 

$

6,889

 

 

$

9,887

 

 

 

 

 

 

 

 

 

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

 

 

 

6

 

Cash paid for income taxes, net of refunds received

 

$

1

 

 

 

1

 

Noncash investing/operating activities:

 

 

 

 

 

 

 

 

Transfer of property and equipment to materials inventory

 

$

98

 

 

$

380

 

Transfer of materials inventory to property and equipment

 

$

79

 

 

$

351

 

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

   period

 

$

158

 

 

$

49

 

 

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 and nine months ended September 30, 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 September 30, 2018 and December 31, 2017.

 

On January 1, 2018, the Company 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. The Company 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:

1) Identify the contract(s) with a customer;

2) Identify the performance obligations in the contract;

3) Determine the transaction price;

4) Allocate the transaction price to the performance obligations in the contract; and

5) 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 Company believes the input method is reasonable because labor 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 impact of ASC 606 adoption on our Condensed Consolidated Statement of Operations and Balance Sheet were as follows (in thousands):

 

 

 

For the three months ended

September 30, 2018

 

 

For the nine months ended

September 30, 2018

 

 

 

As Reported

 

 

Without Adoption of ASC 606

 

 

Effect of Change

Higher/(Lower)

 

 

As Reported

 

 

Without Adoption of ASC 606

 

 

Effect of Change

Higher/(Lower)

 

Condensed Consolidated Statement of Operations

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Licensing and royalty revenue

 

$

508

 

 

$

485

 

 

$

23

 

 

$

1,364

 

 

$

1,382

 

 

$

(18

)

Net loss

 

 

(686

)

 

 

(709

)

 

 

(23

)

 

 

(814

)

 

 

(796

)

 

 

18

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Condensed Consolidated Balance Sheet

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts receivable

 

 

3,330

 

 

 

2,873

 

 

 

457

 

 

 

3,330

 

 

 

2,873

 

 

 

457

 

Stockholders' equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated deficit

 

$

(179,075

)

 

$

(179,532

)

 

$

(457

)

 

$

(179,075

)

 

$

(179,532

)

 

$

(457

)

 

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 September 30, 2018

 

 

Balance at

June 30, 2018

 

Receivables, which are included in Accounts receivable

 

$

2,546

 

 

$

1,194

 

Contract assets

 

 

784

 

 

 

726

 

Contract liabilities

 

$

289

 

 

$

309

 

 

All of the contract liability balance of $0.3 million as of June 30, 2018 was recognized as revenue for the three months ended September 30, 2018.

Practical Expedients and Exemptions

The Company generally expenses sales commissions when incurred if the amortization period is one year or less. These costs are recorded within sales and marketing expenses.

 

The Company does not disclose the value of unsatisfied performance obligations for contracts with an original expected length of one year or less. For contracts with an original expected length of more than one year, the Company had $1.9 million of unsatisfied performance obligations as of September 30, 2018. The Company expects to recognize approximately 24% of this amount as revenue in 2018, and the remaining balance in 2019.

Materials Inventory

Materials inventory consists of raw materials in the amount of $2.8 million as of September 30, 2018 and December 31, 2017.

Accounts Receivable and Allowance for Doubtful Accounts

The Company did not have any allowance for doubtful accounts as of September 30, 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.

9


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

September 30,

 

 

Nine Months Ended

September 30,

 

 

As of  September 30,

 

 

As of December 31,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Customer A

 

63%

 

 

55%

 

 

62%

 

 

57%

 

 

36%

 

 

72%

 

Customer B

 

11%

 

 

12%

 

 

19%

 

 

*

 

 

10%

 

 

19%

 

Customer C

 

*

 

 

*

 

 

*

 

 

*

 

 

14%

 

 

*

 

Customer D

 

*

 

 

14%

 

 

*

 

 

14%

 

 

*

 

 

*

 

Customer E

 

*

 

 

*

 

 

*

 

 

*

 

 

11%

 

 

*

 

Customer F

 

*

 

 

*

 

 

*

 

 

*

 

 

21%

 

 

*

 

 

*

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 using the modified retrospective approach. The Company expects to elect the package of practical expedients allowed under the new standard upon transition. 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 estimates 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. The adoption of the lease standard will not have a material impact on our results of operations, equity, and cash flows.

 

 

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  September 30, 2018

 

 

 

Fair Value

 

 

Level I

 

 

Level II

 

 

Level III

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

3,513

 

 

$

3,513

 

 

$

 

 

$

 

Corporate debt securities and commercial paper

 

 

23,759

 

 

 

 

 

 

23,759

 

 

 

 

Total assets measured at fair value

 

$

27,272

 

 

$

3,513

 

 

$

23,759

 

 

$

 

 

 

 

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 September 30, 2018 (in thousands):

 

 

 

As of  September 30, 2018

 

 

 

Amortized Cost

 

 

Unrealized Gains

 

 

Unrealized Losses

 

 

Estimated

Fair Value

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash

 

$

3,376

 

 

$

 

 

$

 

 

$

3,376

 

Money market funds

 

 

3,513

 

 

 

 

 

 

 

 

 

3,513

 

Corporate debt securities and commercial paper

 

 

23,778

 

 

 

 

 

 

(19

)

 

 

23,759

 

Total cash, cash equivalents and investments

 

$

30,667

 

 

$

 

 

$

(19

)

 

$

30,648

 

 

As of December 31, 2017, the Company had $35,000 of unrealized losses.

 

 

3. Property and Equipment

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

 

 

As of

 

 

 

September 30, 2018

 

 

December 31, 2017

 

Lab equipment and machinery

 

$

59,413

 

 

$

58,937

 

Leasehold improvements

 

 

6,351

 

 

 

6,248

 

Computer equipment and software

 

 

4,514

 

 

 

4,726

 

Furniture and fixtures

 

 

221

 

 

 

221

 

Construction in progress

 

 

444

 

 

 

282

 

Total property and equipment

 

 

70,943

 

 

 

70,414

 

Less accumulated depreciation

 

 

(67,446

)

 

 

(64,501

)

Property and equipment, net

 

$

3,497

 

 

$

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 September 30,

 

 

Nine Months Ended September 30,

 

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

 

Depreciation expense

 

$

910

 

 

$

1,561

 

 

$

3,244

 

 

$

4,426

 

 

 

During the third quarter of 2018, the Company determined that it identified indicators of impairment relating to certain lab equipment and machinery. Based on this determination, the Company recorded an impairment charge of $65,000 in the third quarter of 2018. Fair value was based on the expected future cash flows using Level 3 inputs under ASC 820, which are cash flows expected to be generated by the market participants, discounted at the risk-free rate of interest. Because of changing market conditions, such as declining usage and rising interest rates, it is reasonably possible that the estimate of expected future cash flows may change in the near term resulting in the need to further adjust the Company’s determination of fair value.

 

11


4. Intangible Assets

Intangible assets, net, consist of the following (in thousands):

 

 

As of

 

 

 

September 30, 2018

 

 

December 31, 2017

 

Patents issued

 

$

2,866

 

 

$

3,829

 

Patents pending

 

 

97

 

 

 

128

 

Trademarks

 

 

40

 

 

 

40

 

Total intangible assets

 

 

3,003

 

 

 

3,997

 

Less patent amortization

 

 

(862

)

 

 

(1,377

)

Intangible assets, net

 

$

2,141

 

 

$

2,620

 

 

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

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

 

Amortization expense

 

$

46

 

 

$

79

 

 

$

171

 

 

$

245

 

 

 

          During third quarter of 2018, the Company identified certain patents with carrying values deemed to not be recoverable. Based on this determination, the Company recorded an impairment charge of $171,000 related to these patents. Fair value was based on expected future cash flows using Level 3 inputs under ASC 820, which are cash flows expected to be generated by the market participants, discounted at the risk-free rate of interest. Because of changing market conditions such as decreased demand and rising interest rates, it is reasonably possible that the estimate of expected future cash flows may change in the near term resulting in the need to further adjust the Company’s determination of fair value.

 

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 September 30,

 

 

Nine Months Ended September 30,

 

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

 

Rent expense

 

$

563

 

 

$

567

 

 

$

1,688

 

 

$

1,685

 

 

 

During the three months ended September 30, 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 payments under the agreement for the three months ended September 30, 2018 and 2017, respectively.

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 obligation was $0 for the three months ended September 30, 2018 compared to $2,000 for the three months ended September 30, 2017.

 

 

12


6. Stockholders’ Equity

 

          The following represents the activities in the Company’s Stockholders’ Equity, by quarter, for the nine months ended September 30, 2018 and 2017 (in thousands, except share data):

 

 

Nine Months Ended September 30, 2018