imi-10q_20190331.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, 2019

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.

 

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  

 

Securities registered pursuant to Section 12(b) of the Act.

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, $0.001 par value per share

IMI

The Nasdaq Global Select Market

 

As of May 10, 2019, the registrant had 49,758,224 shares of common stock outstanding.

 

 

 

 


INTERMOLECULAR, INC.

FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2019

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

 

27

 

Signatures

 

28

 

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, 2019

 

 

December 31, 2018

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

3,816

 

 

$

8,351

 

Short-term investments

 

 

23,613

 

 

 

22,098

 

Accounts receivable

 

 

2,451

 

 

 

3,349

 

Prepaid expenses and other current assets

 

 

952

 

 

 

936

 

Total current assets

 

 

30,832

 

 

 

34,734

 

Materials inventory

 

 

2,561

 

 

 

2,638

 

Property and equipment, net

 

 

3,125

 

 

 

3,432

 

Intangible assets, net

 

 

1,979

 

 

 

2,075

 

Right-of-use lease assets - operating

 

 

11,201

 

 

 

 

Other assets

 

 

509

 

 

 

514

 

Total assets

 

$

50,207

 

 

$

43,393

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

193

 

 

$

760

 

Accrued liabilities

 

 

1,338

 

 

 

1,234

 

Accrued compensation and employee benefits

 

 

1,639

 

 

 

3,431

 

Current portion of lease obligation - operating

 

 

1,772

 

 

 

 

Deferred revenue

 

 

333

 

 

 

917

 

Total current liabilities

 

 

5,275

 

 

 

6,342

 

Deferred rent

 

 

 

 

 

2,667

 

Long term lease obligation - operating

 

 

12,307

 

 

 

 

Total liabilities

 

 

17,582

 

 

 

9,009

 

Commitments and contingencies (note 5)

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

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

   49,758,224 and 49,752,516 shares issued and outstanding as of March 31, 2019

   and December 31, 2018, respectively

 

 

50

 

 

 

50

 

Additional paid-in capital

 

 

216,502

 

 

 

216,034

 

Accumulated other comprehensive income (loss)

 

 

7

 

 

 

(27

)

Accumulated deficit

 

 

(183,934

)

 

 

(181,673

)

Total stockholders’ equity

 

 

32,625

 

 

 

34,384

 

Total liabilities and stockholders’ equity

 

$

50,207

 

 

$

43,393

 

 

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,

 

 

 

 

2019

 

 

2018

 

 

Revenue:

 

 

 

 

 

 

 

 

 

Program revenue

 

$

6,385

 

 

$

9,256

 

 

Licensing and royalty revenue

 

 

266

 

 

 

419

 

 

Total revenue

 

 

6,651

 

 

 

9,675

 

 

Cost of revenue:

 

 

 

 

 

 

 

 

 

Cost of program revenue

 

 

1,818

 

 

 

3,375

 

 

Cost of licensing and royalty revenue

 

 

 

 

 

1

 

 

Total cost of revenue

 

 

1,818

 

 

 

3,376

 

 

Gross profit

 

 

4,833

 

 

 

6,299

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Research and development

 

 

4,146

 

 

 

4,032

 

 

Sales and marketing

 

 

890

 

 

 

796

 

 

General and administrative

 

 

2,338

 

 

 

2,286

 

 

Total operating expenses

 

 

7,374

 

 

 

7,114

 

 

Loss from operations

 

 

(2,541

)

 

 

(815

)

 

Other income (expense):

 

 

 

 

 

 

 

 

 

Interest income (expense), net

 

 

183

 

 

 

106

 

 

Other income (expense), net

 

 

96

 

 

 

87

 

 

Total other income (expense), net

 

 

279

 

 

 

193

 

 

Loss before provision for income taxes

 

 

(2,262

)

 

 

(622

)

 

Provision for income taxes

 

 

 

 

 

1

 

 

Net loss

 

$

(2,262

)

 

$

(623

)

 

Net loss per share, basic and diluted

 

$

(0.05

)

 

$

(0.01

)

 

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

 

 

49,757,606

 

 

 

49,581,927

 

 

 

 

See accompanying notes to unaudited Condensed Consolidated Financial Statements

 

4


Condensed Consolidated Statements of Comprehensive Loss

(In thousands)

(Unaudited)

 

 

 

Three Months Ended March 31,

 

 

 

 

2019

 

 

2018

 

 

Net loss

 

$

(2,262

)

 

$

(623

)

 

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

   securities, net of tax

 

 

35

 

 

 

(24

)

 

Comprehensive loss, net of income tax

 

$

(2,227

)

 

$

(647

)

 

 

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,

 

 

 

2019

 

 

2018

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(2,262

)

 

$

(623

)

Adjustments to reconcile net loss to net cash used in operating

   activities:

 

 

 

 

 

 

 

 

Depreciation, amortization, and accretion

 

 

664

 

 

 

1,423

 

Amortization expense - Right of use lease assets operating

 

 

426

 

 

 

 

 

Stock-based compensation

 

 

463

 

 

 

270

 

Loss on disposal of property and equipment

 

 

2

 

 

 

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

898

 

 

 

1,796

 

Prepaid expenses and other assets

 

 

(10

)

 

 

121

 

Materials inventory

 

 

76

 

 

 

(69

)

Accounts payable

 

 

(489

)

 

 

(554

)

Accrued and other liabilities

 

 

(2,099

)

 

 

(730

)

Deferred revenue

 

 

(584

)

 

 

56

 

Net cash (used in) provided by operating activities

 

 

(2,915

)

 

 

1,690

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchase of investments

 

 

(7,613

)

 

 

(6,252

)

Redemption of investments

 

 

6,122

 

 

 

3,070

 

Purchase of property and equipment

 

 

(134

)

 

 

(194

)

Net cash used in investing activities

 

 

(1,625

)

 

 

(3,376

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds from exercise of common stock options

 

 

5

 

 

 

17

 

Net cash provided by financing activities

 

 

5

 

 

 

17

 

Net decrease in cash and cash equivalents

 

 

(4,535

)

 

 

(1,669

)

Cash and cash equivalents at beginning of period

 

 

8,351

 

 

 

6,090

 

Cash and cash equivalents at end of period

 

$

3,816

 

 

$

4,421

 

 

 

 

 

 

 

 

 

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

 

Cash paid for income taxes, net of refunds received

 

$

1

 

 

 

1

 

Noncash investing/operating activities:

 

 

 

 

 

 

 

 

Transfer of property and equipment to materials inventory

 

$

23

 

 

$

30

 

Transfer of materials inventory to property and equipment

 

$

19

 

 

$

66

 

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

   period

 

$

205

 

 

$

88

 

 

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, 2018, as filed with the SEC on March 8, 2019. 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, 2019 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, 2018 is derived from the audited Consolidated Financial Statements. 

Agreement and Plan of Merger

On May 6, 2019, the Company, entered into an Agreement and Plan of Merger (the Merger Agreement) with EMD Group Holding II, Inc., a Delaware corporation and an indirect wholly owned subsidiary of Merck KGaA, Darmstadt, Germany (Parent) and EMD Performance Materials Semiconductor Services Corp., a Delaware corporation and a wholly owned subsidiary of Parent (Merger Sub), providing for the merger of Merger Sub with and into the Company (the Merger), with the Company surviving the Merger as a wholly owned subsidiary of Parent (the Surviving Corporation). The Merger Agreement was unanimously approved by the Company’s Board of Directors and the Executive Board of Merck KGaA, Darmstadt, Germany.

Pursuant to the terms and subject to the conditions of the Merger Agreement, at the effective time of the Merger (the Effective Time), each share of the Company’s common stock, par value $0.001 per share (each such share, a Company Share and collectively the Company Shares), that is outstanding immediately prior to the Effective Time (excluding (i) any shares owned by the Company, Parent or Merger Sub or any direct or indirect wholly owned subsidiary of the Company, Parent or Merger Sub (which will be canceled) and (ii) any shares with respect to which appraisal rights have been properly exercised under Delaware law (Dissenting Company Shares)) will be canceled and automatically converted into the right to receive $1.20 in cash, without interest thereon (the Merger Consideration).

Pursuant to the terms and subject to the conditions of the Merger Agreement, effective as of immediately prior to the Effective Time, (i) the vesting of each option to purchase Company Shares (each a Company Option) that remains outstanding and unvested as of immediately prior to the Effective Time shall be accelerated in full, (ii) each Company Option that remains outstanding as of immediately prior to the Effective Time shall be canceled and terminated as of the Effective Time and (iii) the holder of each such Company Option shall be paid an amount in cash (without interest), if any, equal to the product obtained by multiplying (x) the aggregate number of Company Shares underlying such Company Option immediately prior to the Effective Time, by (y) the amount, if any, by which the Merger Consideration exceeds the per share exercise price of such Company Option.

Pursuant to the terms and subject to the conditions of the Merger Agreement, effective as of immediately prior to the Effective Time, (i) the vesting of each award of restricted stock units or performance stock units (each a Company RSU Award) that remains outstanding as of immediately prior to the Effective Time shall be accelerated in full (with any applicable performance criteria being deemed achieved at the maximum possible level of achievement for such performance criteria), (ii) each Company RSU Award that remains outstanding as of immediately prior to the Effective Time shall be canceled and terminated as of the Effective Time and (iii) the holder of each such Company RSU Award shall be entitled to be paid an amount in cash (without interest) equal to the product obtained by multiplying (x) the aggregate number of Company Shares underlying such Company RSU Award immediately prior to the Effective Time, by (y) the Merger Consideration.

7


The total Merger Consideration represents an equity value of approximately $62.3 million and an enterprise value of approximately $34.9 million, after accounting for the acceleration of equity awards and the Company’s net cash of approximately $27.4 million at the end of the first quarter of 2019

The consummation of the Merger is also subject to the satisfaction (or waiver, if applicable) of various customary conditions, including (i) adoption of the Merger Agreement by the requisite vote of the Company’s stockholders (the Company Stockholder Approval), (ii) review and clearance by the Committee on Foreign Investment in the United States, (iii) the absence of any law or governmental order making illegal or prohibiting the Merger, (iv) the accuracy of the representations and warranties of each party contained in the Merger Agreement (subject to certain materiality qualifications), (v) each party’s compliance with or performance of the covenants and agreements in the Merger Agreement in all material respects and (vi) other customary closing conditions.

In connection with the Merger Agreement, certain executive officers, directors and stockholders of the Company (solely in their respective capacities as stockholders of the Company) holding approximately 31.0% of the outstanding Company Shares as of the date of the Merger Agreement have entered into support agreements with Parent to vote all of their Company Shares in favor of the adoption of the Merger Agreement and approval of the Merger (the Support Agreements). The Support Agreements include covenants with respect to the voting of such Company Shares in favor of approving the Merger and against any competing acquisition proposals and place certain restrictions on the transfer of the Company Shares held by the respective signatories thereto.

The Merger Agreement contains certain termination rights for the Company and Parent. Upon termination of the Merger Agreement under specified circumstances, including in connection with the Company’s entry into a definitive agreement providing for the consummation of a superior proposal as permitted under the Merger Agreement, the Company will be required to pay Parent a termination fee of $2.3 million.

The foregoing description of the Merger Agreement and the Support Agreements does not purport to be complete and is qualified in its entirety by reference to the Merger Agreement, which was filed as Exhibit 2.1 to the Company’s Current Report on Form 8-K filed on May 6, 2019, and the Support Agreements, executed in substantially the form which was filed as Exhibit 2.2 to the Company’s Current Report on Form 8-K filed on May 6, 2019.

During the three months ended March 31, 2019, the Company recorded acquisition-related costs of $0.4 million within its condensed consolidated statements of operations.

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

 

Adoption of ASC 842

 

On January 1, 2019, the Company adopted FASB Accounting Standards Codification (ASC) Topic 842, Leases (ASC 842), which requires the recognition of the right-of-use assets and related operating and finance lease liabilities on the balance sheet. As permitted by ASC 842, the Company elected the adoption date of January 1, 2019, which is the date of initial application. As a result, the

8


consolidated balance sheet prior to January 1, 2019 was not restated, continues to be reported under ASC Topic 840, Leases (ASC 840), which did not require the recognition of operating lease liabilities on the balance sheet, and is not comparative. Under ASC 842, all leases are required to be recorded on the balance sheet and are classified as either operating leases or finance leases. The lease classification affects the expense recognition in the income statement. Operating lease charges are recorded entirely in operating expenses. Finance lease charges are split, where amortization of the right-of-use asset is recorded in operating expenses and an implied interest component is recorded in interest expense. The expense recognition for operating leases and finance leases under ASC 842 is substantially consistent with ASC 840. As a result, there is no significant difference in the Company’s results of operations presented in its consolidated income statement and consolidated statement of comprehensive income for each period presented.

 

The Company adopted ASC 842 using a modified retrospective approach for all leases existing at January 1, 2019. The adoption of ASC 842 had a substantial impact on the Company’s balance sheet. The most significant impact was the recognition of the operating lease right-of-use assets and the liability for operating leases. The Company did not have any finance leases as December 31, 2018 and March 31, 2019. Accordingly, upon adoption, leases that were classified as operating leases under ASC 840 were classified as operating leases under ASC 842, and the Company recorded an adjustment of $11.6 million to operating lease right-of-use assets and the related lease liability. The lease liability is based on the present value of the remaining minimum lease payments, determined under ASC 840, discounted using the Company’s secured incremental borrowing rate at the effective date of January 1, 2019, using the original lease term as the tenor. As permitted under ASC 842, the Company elected several practical expedients that permit us to not reassess (1) whether a contract is or contains a lease, (2) the classification of existing leases, and (3) whether previously capitalized costs continue to qualify as initial indirect costs. The application of the practical expedients did not have a significant impact on the measurement of the operating lease liability.

 

The impact of the adoption of ASC 842 on the balance sheet at December 31, 2018 was (in thousands):

 

 

 

 

 

As Reported December 31, 2018

 

 

Adoption of ASC 842 Increase (Decrease)

 

 

Balance at January 1, 2019

 

Condensed Consolidated Balance Sheet

 

 

 

 

 

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

Right-of-use lease assets - operating

 

$

 

 

$

11,628

 

 

$

11,628

 

Total assets

 

$

43,393

 

 

$

11,628

 

 

$

55,021

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

Accrued liabilities

 

$

1,234

 

 

$

(271

)

 

$

963

 

Current portion of lease obligation - operating

 

 

 

 

 

1,801

 

 

 

1,801

 

Total current liabilities

 

 

6,342

 

 

 

1,530

 

 

 

7,872

 

Deferred rent, net of current portion

 

 

2,667

 

 

 

(2,667

)

 

 

 

Long term lease obligation - operating

 

 

 

 

 

12,765

 

 

 

12,765

 

Total liabilities

 

 

9,009

 

 

 

11,628

 

 

 

20,637

 

Total liabilities and stockholders' equity

 

$

43,393

 

 

$

11,628

 

 

$

55,021

 

 

Revenue Recognition

The Company derives its revenue from two principal sources: 1) program services and 2) licensing and royalty revenues, which consist of technology licensing and royalty fees. Product sales have been made historically, but are not a principal source of revenue.

Program revenue - The Company enters into development programs and other research and development service agreements with customers under which the Company conducts research and development activities with customers. The agreements specify minimum levels of research effort required to be performed by the Company. Payments received under the agreements are not refundable if the research effort is not successful. In some contracts, the Company retains rights to certain elements of technology developed in the course of its performance, which the customer has an option to license in the future under the terms defined in the agreement. The Company generates a significant portion of its program revenue from certain research and development service contracts delivered over a specific period of time. These contracts require reliable estimation of costs to perform obligations and the overall scope of each engagement. Revenue from contracts is recognized using the following five steps:

 

a) Identify the contract(s) with a customer

9


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 the Company 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.  The Company uses 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 when 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.

 

Output method: The Company uses the output method based on results achieved and delivered to the customer, where revenue is calculated based on the deliverables transferred to the customers as a percentage of total deliverables to be transferred to the customer at completion of the contract.  The output method is reasonable when the deliverables best reflect the Company’s efforts toward satisfying the performance obligation over time.

 

Licensing and royalty revenue - The Company recognizes revenue for licenses to intellectual property when earned pursuant to the terms of the agreements. Time-based license revenue is recognized ratably over the license term. Licensing and royalty revenue that becomes triggered by specific customer actions, such as exercise of a license option or by sales volume, is based on estimated end-market sales of products that incorporate the Company’s intellectual property. Revenue on the sale of intellectual property is recognized in full when title transfers if there are no remaining deliverables related to the intellectual property purchase.

 

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 the Company’s contracts, amounts are billed at periodic intervals, such as on monthly basis. Generally, contract assets results from revenue

10


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, 2019

 

 

Balance at

December 31, 2018

 

Receivables, which are included in Accounts receivable

 

$

1,723

 

 

$

2,258

 

Contract assets

 

 

728

 

 

 

1,091

 

Contract liabilities

 

$

333

 

 

$

917

 

 

All of the contract liability balance of $0.9 million as of December 31, 2018 was recognized as revenue for the three months ended March 31, 2019.

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. As of March 31, 2019 there are no outstanding contracts with an original expected length of more than one year.

Materials Inventory

Materials inventory consists of raw materials in the amount of $2.6 million as of March 31, 2019 and December 31, 2018.

Accounts Receivable and Allowance for Doubtful Accounts

The Company did not have any allowance for doubtful accounts as of March 31, 2019 and December 31, 2018.

 

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, 2018.

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,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Customer A

 

49%

 

 

*

 

 

37%

 

 

26%

 

Customer B

 

18%

 

 

58%

 

 

*

 

 

*

 

Customer C

 

13%

 

 

28%

 

 

12%

 

 

10%

 

Customer D

 

12%

 

 

*

 

 

16%

 

 

26%

 

Customer E

 

*

 

 

*

 

 

11%

 

 

12%

 

Customer F

 

*

 

 

*

 

 

*

 

 

17%

 

 

*

less than 10%

Recent Accounting Pronouncements

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments (ASU 2016-13), which changes the impairment model for most financial assets. The new model uses a forward-looking expected loss method, which will generally result in earlier recognition of allowances for losses. ASU 2016-13 is effective for annual and interim periods beginning after December 15, 2019 and early adoption is permitted for annual and interim periods beginning after December 15, 2018. The Company will adopt ASU 2016-13 on January 1, 2020. The Company doesn’t expect material impact on its results of operations or financial position due to adaption of the standard.

11


In June 2018, the FASB issued ASU 2018-07 Compensation-Stock Compensation (Topic 718), to simplify the accounting for share–based payments granted to nonemployees by aligning the accounting with the requirements for employee share–based compensation. ASU 2018-07 is effective for the Company beginning in fiscal 2019, including interim periods within that fiscal year. Early adoption is permitted but no earlier than a company's adoption of ASC 606. The Company does not expect the adoption of ASU 2018-07 to have any impact on its consolidated financial statements and associated disclosures.

 

 

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, 2019

 

 

 

Fair Value

 

 

Level I

 

 

Level II

 

 

Level III

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

2,035

 

 

$

2,035

 

 

$

 

 

$

 

Corporate debt securities and commercial paper

 

 

23,613

 

 

 

 

 

 

23,613

 

 

 

 

Total assets measured at fair value

 

$

25,648

 

 

$

2,035

 

 

$

23,613

 

 

$

 

 

 

 

As of December 31, 2018

 

 

 

Fair Value

 

 

Level I

 

 

Level II

 

 

Level III

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

5,383

 

 

$

5,383

 

 

$

 

 

$

 

Corporate debt securities and commercial paper

 

 

22,098

 

 

 

 

 

 

22,098

 

 

 

 

Total assets measured at fair value

 

$

27,481

 

 

$

5,383

 

 

$

22,098

 

 

$

 

 

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  March 31, 2019

 

 

 

Amortized Cost

 

 

Unrealized Gains

 

 

Unrealized Losses

 

 

Estimated

Fair Value

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash

 

$

1,781

 

 

$

 

 

$

 

 

$

1,781

 

Money market funds

 

 

2,035

 

 

 

 

 

 

 

 

 

2,035

 

Corporate debt securities and commercial paper

 

 

23,620

 

 

 

7

 

 

 

 

 

 

23,613

 

Total cash, cash equivalents and investments

 

$

27,436

 

 

$

7

 

 

$

 

 

$

27,429

 

 

As of December 31, 2018, the Company had $28,000 of unrealized losses.

 

 

3. Property and Equipment

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

 

 

As of

 

 

 

March 31, 2019

 

 

December 31, 2018

 

Lab equipment and machinery

 

$

59,645

 

 

$

59,413

 

Leasehold improvements

 

 

6,429

 

 

 

6,420

 

Computer equipment and software

 

 

4,516

 

 

 

4,512

 

Furniture and fixtures

 

 

221

 

 

 

221

 

Construction in progress

 

 

1,030

 

 

 

1,025

 

Total property and equipment

 

 

71,841

 

 

 

71,591

 

Less accumulated depreciation

 

 

(68,716

)

 

 

(68,159

)

Property and equipment, net

 

$

3,125

 

 

$

3,432

 

 

12


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,

 

 

 

 

2019

 

 

2018

 

 

Depreciation expense

 

$

557

 

 

$

1,236

 

 

 

4. Intangible Assets

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

 

 

As of

 

 

 

March 31, 2019

 

 

December 31, 2018

 

Patents issued

 

$

2,791

 

 

$

2,847

 

Patents pending

 

 

47

 

 

 

89

 

Trademarks

 

 

40

 

 

 

40

 

Total intangible assets

 

 

2,878

 

 

 

2,976

 

Less patent amortization

 

 

(899

)

 

 

(901

)

Intangible assets, net

 

$

1,979

 

 

$

2,075

 

 

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

 

 

 

Three Months Ended March 31,

 

 

 

 

2019

 

 

2018

 

 

Amortization expense

 

$

43

 

 

$

69

 

 

 

 

5. Commitments and Contingencies

Leases

The Company has operating leases for real estate and certain office equipment. Operating lease expense was $0.6 million for the three months ended March 31, 2019.

Supplemental cash flow information, as of March 31, 2019, related to operating leases was as follows (in thousands):

 

 

Three Months Ended March 31, 2019

 

Cash paid within operating cash flows

 

$

572

 

Right-of-use assets recognized in exchange for new obligations

 

$

 

 

Supplemental balance sheet information, as of March 31, 2019, related to operating leases was as follow:

 

Weighted average remaining lease term

 

3.9 Years

 

Weighted average discount rate

 

 

6.1

%

 

As of March 31, 2019, the maturities of the Company’s operating lease liabilities are as follow (in thousands):

 

Fiscal Year

 

Amount

 

2019

 

$

1,928

 

2020

 

 

2,620

 

2021

 

 

2,648

 

2022

 

 

2,714

 

2023

 

 

2,782

 

2024 and thereafter

 

 

4,308

 

Total lease payments

 

$

17,000

 

Less imputed interest

 

 

(2,921

)

Present value of operating lease liabilities

 

$

14,079

 

13


 

 

In December 2015, the Company signed a sublease to lease out a portion of its office space. The term of the sublease was three years and annual gross rent was approximately $0.3 million. The sublease commenced during the second quarter of 2016 and terminated during the first quarter of 2019. The Company received $0.1 million in rent payments under the agreement for the three months ended March 31, 2019 and 2018, respectively.

 

 

6. Stockholders’ Equity

 

          The following represents the activities in the Company’s Stockholders’ Equity, by quarter, for the three months ended March 31, 2019 and 2018 (in thousands, except share data):

 

 

Three Months Ended March 31, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

other

 

 

Total

 

 

 

Common stock

 

 

 

 

 

 

Additional

 

 

Accumulated

 

 

comprehensive

 

 

stockholders'

 

 

 

Shares

 

 

Amount

 

 

paid-in capital

 

 

deficit

 

 

loss

 

 

equity

 

Balances as of December 31, 2018

 

 

49,752,516

 

 

 

50

 

 

 

216,034

 

 

 

(181,672

)

 

 

(28

)

 

 

34,384

 

Issuance of common stock from

   option exercises

 

 

5,708

 

 

 

 

 

 

5

 

 

 

 

 

 

 

 

 

5

 

Vesting of restricted stock units

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation

 

 

 

 

 

 

 

 

463

 

 

 

 

 

 

 

 

 

463

 

Other comprehensive income (loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

35

 

 

 

35

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

(2,262

)

 

 

 

 

 

(2,262

)

Balances as of March 31, 2019

 

 

49,758,224

 

 

$

50

 

 

$

216,502

 

 

$

(183,934

)

 

$

7

 

 

$

32,625

 

 

 

 

Three Months Ended March 31, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

other

 

 

Total

 

 

 

Common stock

 

 

 

 

 

 

Additional

 

 

Accumulated

 

 

comprehensive

 

 

stockholders'

 

 

 

Shares

 

 

Amount

 

 

paid-in capital

 

 

deficit

 

 

loss

 

 

equity

 

Balances as of December 31, 2017

 

 

49,569,721

 

 

 

50

 

 

 

214,796

 

 

 

(178,738

)

 

 

(35

)

 

 

36,073

 

Issuance of common stock from option exercises

 

 

16,387

 

 

 

 

 

 

16

 

 

 

 

 

 

 

 

 

16

 

Vesting of restricted stock units

 

 

15,265

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation

 

 

 

 

 

 

 

 

270

 

 

 

 

 

 

 

 

 

270

 

Other comprehensive income (loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(24

)

 

 

(24

)

ASC 606 Adjustment

 

 

 

 

 

 

 

 

 

 

 

476

 

 

 

 

 

 

476

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

(623

)

 

 

 

 

 

(623

)

Balances as of March 31, 2018

 

 

49,601,373

 

 

$