Intermolecular, Inc.
INTERMOLECULAR INC (Form: 10-Q, Received: 11/08/2012 16:15:18)

Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

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

 

For the quarterly period ended September 30, 2012.

 

Or

 

o          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  x   No  o

 

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  x    No  o

 

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

 

Large accelerated filer  o

 

Accelerated filer  o

 

 

 

Non-accelerated filer  x

 

Smaller reporting company  o

(Do not check if a smaller reporting company)

 

 

 

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

 

Shares outstanding of the registrant’s common stock:

 

Class

 

Outstanding as of October 31, 2012

Common stock, $0.001 par value

 

43,667,052

 

 

 



Table of Contents

 

INTERMOLECULAR, INC.

 

FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2012

 

TABLE OF CONTENTS

 

 

 

Page

 

PART I — FINANCIAL INFORMATION

 

 

 

 

Item 1.

Financial Statements

3

 

 

 

 

Condensed Consolidated Balance Sheets (Unaudited)

3

 

 

 

 

Condensed Consolidated Statements of Operations (Unaudited)

4

 

 

 

 

Condensed Consolidated Statements of Cash Flows (Unaudited)

5

 

 

 

 

Notes to Unaudited Condensed Consolidated Financial Statements

6

 

 

 

Item 2.

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

16

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

25

 

 

 

Item 4.

Controls and Procedures

25

 

 

 

 

PART II — OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

26

 

 

 

Item 1A.

Risk Factors

26

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

43

 

 

 

Item 6.

Exhibits

44

 

 

 

 

Signatures

45

 

2



Table of Contents

 

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,

 

December 31,

 

 

 

2012

 

2011

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

 78,715

 

$

 81,002

 

Short-term investments

 

1,701

 

 

Accounts receivable, net of allowance for doubtful accounts of zero as of September 30, 2012 and December 31, 2011

 

4,789

 

10,227

 

Accounts receivable, due from related parties

 

803

 

935

 

Inventory, current portion

 

1,561

 

 

Prepaid expenses and other current assets

 

858

 

1,763

 

Total current assets

 

88,427

 

93,927

 

Inventory, net of current portion

 

3,004

 

2,532

 

Property and equipment, net

 

23,131

 

25,128

 

Intangible assets, net

 

6,214

 

6,067

 

Other assets

 

162

 

160

 

Total assets

 

$

 120,938

 

$

 127,814

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

 1,185

 

$

 1,079

 

Accrued liabilities

 

2,981

 

3,759

 

Accrued compensation and employee benefits

 

2,853

 

2,452

 

Deferred revenue

 

262

 

1,575

 

Related party deferred revenue, current portion

 

2,664

 

9,593

 

Note payable, current portion

 

945

 

804

 

Total current liabilities

 

10,890

 

19,262

 

Related party deferred revenue, net of current portion

 

 

716

 

Deferred rent, net of current portion

 

721

 

1,004

 

Note payable, net of current portion

 

25,800

 

26,514

 

Other long-term liabilities

 

168

 

145

 

Total liabilities

 

37,579

 

47,641

 

 

 

 

 

 

 

Commitments and contingencies (note 5)

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

Preferred stock, $0.001 par value, 5,000,000 shares authorized, no shares issued and outstanding

 

 

 

Common stock, par value $0.001 per share — 200,000,000 shares authorized as of September 30, 2012 and December 31, 2011; 43,581,185 and 42,218,906 shares issued and outstanding, respectively

 

44

 

42

 

Additional paid-in capital

 

185,122

 

180,680

 

Accumulated deficit

 

(101,807

)

(100,549

)

Total stockholders’ equity

 

83,359

 

80,173

 

Total liabilities and stockholders’ equity

 

$

 120,938

 

$

 127,814

 

 

See accompanying notes to unaudited condensed consolidated financial statements

 

3



Table of Contents

 

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,

 

 

 

2012

 

2011

 

2012

 

2011

 

Revenue:

 

 

 

 

 

 

 

 

 

Collaborative development program and services revenue

 

$

12,481

 

$

10,349

 

$

35,836

 

$

26,169

 

Product revenue

 

760

 

678

 

3,495

 

2,038

 

Licensing and royalty revenue

 

3,248

 

3,847

 

10,053

 

10,491

 

Total revenue

 

16,489

 

14,874

 

49,384

 

38,698

 

Cost of revenue:

 

 

 

 

 

 

 

 

 

Cost of collaborative development program and services revenue

 

6,595

 

6,216

 

20,031

 

16,749

 

Cost of product revenue

 

554

 

241

 

1,635

 

710

 

Cost of licensing and royalty revenue

 

55

 

219

 

200

 

540

 

Total cost of revenue

 

7,204

 

6,676

 

21,866

 

17,999

 

Gross profit

 

9,285

 

8,198

 

27,518

 

20,699

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Research and development

 

5,174

 

5,113

 

16,002

 

14,601

 

Sales and marketing

 

1,322

 

1,249

 

3,834

 

3,229

 

General and administrative

 

2,650

 

2,231

 

8,190

 

6,156

 

Total operating expenses

 

9,146

 

8,593

 

28,026

 

23,986

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from operations

 

139

 

(395

)

(508

)

(3,287

)

Other income (expense):

 

 

 

 

 

 

 

 

 

Interest (expense) income, net

 

(255

)

6

 

(754

)

16

 

Other income (expense), net

 

10

 

(839

)

16

 

(1,174

)

Total other income (expense), net

 

(245

)

(833

)

(738

)

(1,158

)

 

 

 

 

 

 

 

 

 

 

Loss before provision for income taxes

 

(106

)

(1,228

)

(1,246

)

(4,445

)

Income tax provision

 

6

 

6

 

12

 

19

 

Net loss

 

(112

)

(1,234

)

(1,258

)

(4,464

)

Accretion on redeemable convertible preferred stock

 

 

(1,565

)

 

(8,660

)

Net loss attributable to common stockholders

 

$

(112

)

$

(2,799

)

$

(1,258

)

$

(13,124

)

Net loss per share of common stock, basic and diluted

 

$

(0.00

)

$

(0.49

)

$

(0.03

)

$

(2.30

)

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

 

43,278,588

 

5,750,979

 

42,725,466

 

5,716,511

 

 

Related Party Transactions

 

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

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

 

 

 

 

 

 

 

 

 

 

Revenue:

 

 

 

 

 

 

 

 

 

Collaborative development program and services revenue

 

$

3,529

 

$

2,715

 

$

9,277

 

$

8,299

 

Product revenue

 

760

 

6

 

2,139

 

10

 

Licensing and royalty revenue

 

1,768

 

2,422

 

5,332

 

7,266

 

Total revenue

 

$

6,057

 

$

5,143

 

$

16,748

 

$

15,575

 

 

 

 

 

 

 

 

 

 

 

Cost of Revenue:

 

 

 

 

 

 

 

 

 

Cost of collaborative development program and services revenue

 

$

10

 

$

525

 

$

40

 

$

824

 

Cost of product revenue

 

 

57

 

 

102

 

Cost of licensing and royalty revenue

 

 

307

 

 

527

 

Total cost of revenue

 

$

10

 

$

889

 

$

40

 

$

1,453

 

 

See accompanying notes to unaudited condensed consolidated financial statements

 

4



Table of Contents

 

INTERMOLECULAR, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)  

 

 

 

Nine Months Ended September 30,

 

 

 

2012

 

2011

 

Cash flows from operating activities:

 

 

 

 

 

Net loss

 

$

(1,258

)

$

(4,464

)

Adjustments to reconcile net loss to net cash provided by (used in) operating activities:

 

 

 

 

 

Depreciation and amortization

 

5,865

 

5,239

 

Stock-based compensation

 

2,687

 

1,803

 

Revaluation of preferred stock warrant liability

 

 

694

 

Revaluation of derivative liability

 

 

609

 

Common stock warrant charge (contra revenue)

 

 

312

 

Impairment of long-lived assets

 

949

 

 

Loss on disposal of property and equipment

 

 

65

 

Changes in operating assets and liabilities:

 

 

 

 

 

Prepaid expenses and other assets

 

912

 

(4,682

)

Inventory

 

(1,233

)

36

 

Accounts receivable

 

5,526

 

(3,024

)

Accounts payable

 

(364

)

(468

)

Accrued and other liabilities

 

(580

)

5,393

 

Deferred revenue

 

(1,313

)

(4,257

)

Related party deferred revenue

 

(8,401

)

(7,555

)

Net cash provided by (used in) operating activities

 

2,790

 

(10,299

)

Cash flows from investing activities:

 

 

 

 

 

Purchase of short-term investments

 

(2,201

)

(750

)

Redemption of short-term investments

 

500

 

 

Purchase of property and equipment

 

(3,760

)

(8,026

)

Capitalized intangible assets

 

(776

)

(472

)

Net cash used in investing activities

 

(6,237

)

(9,248

)

Cash flows from financing activities:

 

 

 

 

 

Payment of long-term debt

 

(573

)

 

Proceeds from exercise of common stock options

 

1,733

 

362

 

Proceeds from issuance of redeemable convertible preferred stock, net of issuance costs

 

 

24,882

 

Net cash provided by financing activities

 

1,160

 

25,244

 

Net (decrease) increase in cash and cash equivalents

 

(2,287

)

5,697

 

Cash and cash equivalents at beginning of period

 

81,002

 

23,064

 

Cash and cash equivalents at end of period

 

$

78,715

 

$

28,761

 

 

 

 

 

 

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

Cash paid for interest

 

$

927

 

$

 

Cash paid for income taxes, net of refunds received

 

$

42

 

$

20

 

Noncash investing and financing activities

 

 

 

 

 

Accretion of redeemable convertible preferred stock

 

$

 

$

8,660

 

Contract intangible obtained under a derivative liability

 

$

 

$

2,842

 

 

See accompanying notes to unaudited condensed consolidated financial statements

 

5



Table of Contents

 

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 without audit in accordance with the rules and regulations of the Securities and Exchange Commission (SEC). Certain information and disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States (GAAP) have been condensed or omitted in accordance with these rules and regulations. 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, 2011, as filed with the SEC on March 16, 2012.

 

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, 2012 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, 2011 is derived from the audited consolidated financial statements as of the year then ended.

 

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. Such estimates include the valuations of accounts receivable, inventories, intangible assets, debt, capital stock, 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 and short-term investments. The Company’s cash, cash equivalents and short-term investments consist of demand deposits, money market accounts and certificates of deposit maintained with high quality financial institutions.

 

Cash and Cash Equivalents

 

The Company considers all highly liquid investments purchased with a maturity of three months or less to be cash equivalents. The Company’s cash equivalents are comprised of money market funds and are maintained with high quality financial institutions.

 

Short-Term Investments

 

The Company considers all highly liquid investments purchased with a maturity between three and twelve months to be short-term investments. The Company has short-term investments consisting of certificates of deposit maintained with high quality credit institutions. The carrying value of these investments approximates their fair value due to the short term of their maturities.

 

Inventory

 

Inventories are stated at the lower of cost or market value, with cost determined on an average cost basis. Current inventories consist of work-in-process for products that are expected to be sold in the next twelve months.  Noncurrent inventories consist of raw materials in the amount of $2.2 million and $2.5 million as of September 30, 2012 and December 31, 2011, respectively, and work-in-process for products that are not expected to be sold during the next twelve months in the amount of $0.8 million as of September 30, 2012. Inventories in excess of salable amounts and spare parts inventories that are considered obsolete are recorded as a cost of revenue in the period in which they occur. The Company did not experience any material inventory impairments during the nine months ended September 30, 2012 and 2011.

 

6



Table of Contents

 

Impairment of Long-Lived Assets

 

The Company evaluates its long-lived assets, which consist of property and equipment and intangible assets, for indicators of possible impairment when events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. Impairment exists if the carrying amounts of such assets exceed the estimates of future net undiscounted cash flows expected to be generated by such assets. Should impairment exist, the impairment loss would be measured based on the excess carrying value of the asset over the estimated fair value of the asset. During the nine months ended September 30, 2012, the Company recorded impairment expenses in the amount of $0.9 million related to retired assets previously supporting a customer collaborative development program and platform prototypes for new application development. The Company did not record any impairment expenses during the nine months ended September 30, 2011.

 

Revenue Recognition

 

The Company derives its revenue from three principal sources: collaborative development programs and other services; product sales; and technology licensing and royalty fees.

 

Collaborative development programs and other services —The Company enters into collaborative development programs (CDPs) and other research and development service agreements with customers under which the Company conducts research and development activities jointly with the customer. 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. 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. Most arrangements with customers have fixed monthly fees and requirements to provide regular reporting of research and development activities performed and revenue is recognized in a manner consistent with the fixed monthly fee. Payments received prior to performance are deferred and recognized as revenue when earned over future performance periods.

 

The Company considers arrangements that include specifically identified, dedicated equipment to contain a lease provision, as these arrangements convey the right to the customer to use specific equipment and provide the ability to the customer to direct the use of the equipment as well as control more than a minor amount of the output of the equipment. To date the Company has determined these arrangements to contain operating leases, with a lease term that corresponds to the term of the CDP arrangement. The amount of revenue allocated for the lease element is based on its relative fair value, but the impact of the allocation does not change the amount of revenue recognized for the total arrangement as the lease term is consistent with the CDP term. Operating lease income recorded in CDP and services revenue during the three months ended September 30, 2012 and 2011 was $2.3 million and $1.6 million, respectively, and during the nine months ended September 30, 2012 and 2011 was $7.3 million and $3.8 million, respectively.

 

Future minimum operating lease payments associated with CDP arrangements that contain operating leases were $10.8 million and $11.3 million as of September 30, 2012 and December 31, 2011, respectively.

 

Product maintenance and support services —Included in collaborative development programs and other services revenue, these services entitle customers to receive product updates and enhancements or technical support and maintenance, depending on the offering. The related revenue is recognized ratably over the period the services are delivered.

 

Product revenue —The Company recognizes revenue from the sale of products once delivery has occurred (title and risk of loss have passed to the customer), and customer acceptance, if required, has been achieved. The Company has determined that the software included with its equipment products is more than incidental to the product as a whole.

 

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 recognized when it occurs based on royalty reports or other information received from the licensee. Minimum and prepaid royalties and license fees are recognized ratably over the related periods.

 

Multiple-element arrangements —Certain of the Company’s customer arrangements involve the delivery or performance of multiple products, services or licenses. Product sale arrangements include product maintenance and support. Collaborative development programs and other research and development services include licenses of technology and may also include sales of products.

 

7



Table of Contents

 

In 2009, the Financial Accounting Standards Board (FASB) issued ASU 2009-13 Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements—a consensus of the FASB Emerging Issues Task Force (ASU 2009-13) and ASU 2009-14 Software (Topic 985): Certain Revenue Arrangements That Include Software Elements—a consensus of the FASB Emerging Issues Task Force (ASU 2009-14). ASU 2009-13 and 14 are amendments to the accounting standards for revenue recognition to remove tangible products containing software components and non-software components that function together to deliver the product’s essential functionality from the scope of industry-specific software revenue recognition guidance, and also:

 

·                                           provide updated guidance on whether multiple deliverables exist, how the deliverables in an arrangement should be separated, and how the consideration should be allocated;

 

·                                           require an entity to allocate revenue in an arrangement using estimated selling prices (ESP) of deliverables if the Company does not have vendor-specific objective evidence of selling price (VSOE) or third-party evidence of selling price (TPE); and

 

·                                           eliminate the use of the residual method and require an entity to allocate revenue using the relative selling price method.

 

For all transactions entered into after December 31, 2010, the Company recognizes revenue using estimated selling prices of the delivered goods and services based on a hierarchy of methods contained in ASU 2009-13. The Company uses VSOE for determination of estimated selling price of elements in each arrangement if available, and since third-party evidence is not available for those elements where vendor-specific objective evidence of selling price cannot be determined, the Company evaluates factors to determine its ESP for all other elements. In multiple-element arrangements where hardware and software are sold as part of the solution, revenue is allocated to the hardware and software as a group using the relative selling prices of each of the deliverables in the arrangement based upon the aforementioned selling price hierarchy.

 

Deferred Revenue

 

Deferred revenue represents amounts collected from customers for which the related revenue has not been recognized, because one or more of the revenue recognition criteria have not been met. The current portion of deferred revenue represents the amount that is expected to be recognized as revenue within one year from the balance sheet date.

 

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,

 

 

 

2012

 

2011

 

2012

 

2011

 

2012

 

2011

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Customer A

 

30

%

26

%

27

%

30

%

*

 

*

 

Customer B

 

*

 

*

 

*

 

10

%

*

 

*

 

Customer C

 

 

*

 

*

 

*

 

 

 

Customer D (1)

 

14

%

17

%

14

%

19

%

*

 

*

 

Customer E

 

*

 

*

 

*

 

10

%

*

 

*

 

Customer F

 

*

 

*

 

*

 

*

 

19

%

*

 

Customer G

 

27

%

24

%

29

%

13

%

40

%

78

%

Customer H

 

*

 

 

*

 

 

14

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


*                                          less than 10%

 

(1) In February 2012, Customer D filed for protection under the Corporate Reorganization Act (Act) in Japan. As part of any restructuring under this Act, Customer D may either voluntarily or involuntarily reduce or eliminate payments owed to the Company or shipments of products that include the Company’s technology, which would lead to a reduction in revenue from Customer D.

 

8



Table of Contents

 

Share-Based Compensation

 

The Company applies the fair value recognition and measurement provisions of ASC 718 Compensation — Stock Compensation. Stock-based compensation is recorded at fair value as of the grant date, determined using the Black-Scholes option-pricing model, and recognized as an expense over the employee’s requisite service period (generally the vesting period), which the Company has elected to amortize on a straight-line basis.

 

The Company accounts for stock options issued to nonemployees based on the fair value of the options determined using the Black-Scholes option-pricing model. The fair value of stock options granted to nonemployees is remeasured each reporting period as the stock options vest and the resulting change in value, if any, is recognized in the Company’s consolidated statements of operations during the period the related services are rendered.

 

Recent Accounting Pronouncements

 

In June 2011, the FASB issued ASU 2011-05, Comprehensive Income (Topic 220),  Presentation of Comprehensive Income , which requires companies to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. This update eliminates the option to present the components of other comprehensive income as part of the statement of equity. In December 2011, the FASB issued ASU 2011-12, Comprehensive Income (Topic 220),  Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in ASU 2011-05 , to defer the effective date of the specific requirement to present items that are reclassified out of accumulated other comprehensive income to net income alongside their respective components of net income and other comprehensive income. We adopted the guidance in 2012 with no significant impact on our consolidated financial statements or related footnotes, as comprehensive loss consists of the same components as net loss and therefore the Company does not separately disclose a statement of comprehensive loss.

 

2. Fair Value of Financial Instruments

 

The following financial instruments are not measured at fair value on the Company’s Condensed Consolidated Balance Sheet at September 30, 2012, but require disclosure of their fair values: cash, accounts receivable and accounts payable. The estimated fair value of such instruments at September 30, 2012 approximates their carrying value as reported on the Condensed Consolidated Balance Sheet. The Company measures and reports its cash equivalents and short-term investments at fair value. The following tables set forth the fair value of the Company’s financial assets and liabilities by level within the fair value hierarchy (in thousands):

 

 

 

Fair Value Measurements Using

 

 

 

Balance as of
September 30,
2012

 

Quoted Prices in
Active Markets
For Identical
Instruments
(Level I)

 

Significant
Other
Observable
Inputs
(Level II)

 

Significant
Unobservable
Inputs
(Level III)

 

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

Money market funds

 

$

74,018

 

$

74,018

 

$

 

$

 

Certificates of deposit

 

1,701

 

 

1,701

 

 

Total assets measured at fair value

 

$

75,719

 

$

74,018

 

$

1,701

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements Using

 

 

 

Balance as of
December 31,
2011

 

Quoted Prices in
Active Markets
For Identical
Instruments
(Level I)

 

Significant
Other
Observable
Inputs
(Level II)

 

Significant
Unobservable
Inputs
(Level III)

 

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

Money market funds

 

$

75,660

 

$

75,660

 

$

 

$

 

Certificates of deposit

 

100

 

100

 

 

 

Total assets measured at fair value

 

$

75,760

 

$

75,760

 

$

 

$

 

 

9



Table of Contents

 

3. Property and Equipment

 

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

 

 

 

As of

 

As of

 

 

 

September 30, 2012

 

December 31, 2011

 

 

 

 

 

 

 

Lab equipment and machinery

 

$

37,204

 

$

33,515

 

Leasehold improvements

 

2,573

 

2,086

 

Computer equipment and software

 

3,397

 

3,016

 

Furniture and fixtures

 

160

 

146

 

Construction in progress

 

4,902

 

5,088

 

Total property and equipment

 

48,236

 

43,851

 

Less accumulated depreciation

 

(25,105

)

(18,723

)

Property and equipment, net

 

$

23,131

 

$

25,128

 

 

As of September 30, 2012 and December 31, 2011 all tangible property and equipment were pledged as collateral against the note payable issued in connection with the closing of the asset purchase transaction with Symyx Technologies, Inc. (Symyx). Amortization of leasehold improvements is included in depreciation expense.

 

As discussed in Note 1, Impairment of Long-Lived Assets, during the nine months ended September 30, 2012, the Company recorded impairment-related expenses in the amount of $0.9 million related to retired assets previously supporting a customer collaborative development program and platform prototypes for new application development. These impairment expenses are included in accumulated depreciation.

 

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

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

 

 

 

 

 

 

 

 

 

 

Depreciation expense

 

$

1,868

 

$

1,728

 

$

5,433

 

$

5,222

 

 

The Company maintained dedicated equipment to support contractual customer capacity requirements as part of certain collaborative development programs that are classified as lab equipment and machinery and had a net book value of $6.2 million and $7.0 million as of September 30, 2012 and December 31, 2011, respectively.

 

4. Intangible Assets

 

Intangible assets consist of the following (in thousands):

 

 

 

As of

 

As of

 

 

 

September 30, 2012

 

December 31, 2011

 

 

 

 

 

 

 

Patents issued

 

$

3,839

 

$

3,562

 

Patents pending

 

2,866

 

2,566

 

Trademarks

 

40

 

38

 

Total intangible assets

 

6,745

 

6,166

 

Less patent amortization

 

(531

)

(99

)

Intangible assets, net

 

$

6,214

 

$

6,067

 

 

Amortization commences upon patent issuance. The useful life of the patents, once approved, will not exceed 20 years, and will depend on the nature of the patent. The average estimated amortization period of our current portfolio is approximately 17 years from the date of patent issuance. The average estimated remaining amortization period of patents acquired as part of the Symyx asset purchase transaction is approximately 5 years.

 

10



Table of Contents

 

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

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

 

 

 

 

 

 

 

 

 

 

Amortization expense

 

$

145

 

$

7

 

$

432

 

$

17

 

 

5. Commitments and Contingencies

 

Leases

 

The Company entered into an operating lease agreement in May 2010 that expires in May 2015. 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,

 

 

 

2012

 

2011

 

2012

 

2011

 

 

 

 

 

 

 

 

 

 

 

Rent expense

 

$

324

 

$

524

 

$

972

 

$

1,571

 

 

Future commitments and obligations under this operating lease to be satisfied as they become due over the term are as follows (in thousands):

 

As of September 30, 2012:

 

 

 

Three months ending December 31, 2012

 

$

404

 

The years ending December 31,

 

 

 

2013

 

1,657

 

2014

 

1,707

 

2015

 

728

 

Total

 

$

4,496

 

 

During 2012, the Company has made payments in the amount of $1.2 million related to this operating lease.

 

Symyx Asset Purchase and Note Payable

 

In connection with the consummation of the Symyx asset purchase transaction in November 2011, the Company issued Symyx a secured promissory note in a principal amount equal to $27.3 million with a term of 24 months and an interest rate equal to 4%. The note is payable in quarterly installments, each in an amount equal to the greater of $0.5 million that quarter or the amount of accrued interest, with a balloon payment at maturity, if applicable. The note is also pre-payable by the Company at any time without penalty or premium, and is secured by tangible personal property, excluding intellectual property.

 

The following table presents payments made in connection with the note payable to Symyx (in thousands):

 

 

 

Three Months Ended September 30, 2012

 

Nine Months Ended September 30, 2012

 

 

 

Principal

 

Interest

 

Total

 

Principal

 

Interest

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Symyx payments

 

$

229

 

$

271

 

$

500

 

$

573

 

$

927

 

$

1,500

 

 

11



Table of Contents

 

6. Stockholders’ Equity

 

Stock-Based Compensation

 

The fair value of the employee stock options was estimated on the grant dates using a Black-Scholes option-pricing model with the following weighted-average assumptions: 

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

 

 

 

 

 

 

 

 

 

 

Expected term (in years)

 

6.0

 

6.0

 

6.0

 

6.0

 

Risk-free interest rate

 

0.9

%

1.3

%

1.2

%

2.3

%

Expected volatility

 

60

%

58

%

60

%

57

%

Expected dividend rate

 

0

%

0

%

0

%

0

%

 

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

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

 

 

 

 

 

 

 

 

 

 

Cost of revenue

 

$

250

 

$

185

 

$

780

 

$

418

 

Research and development

 

212

 

136

 

642

 

327

 

Sales and marketing

 

199

 

324

 

550

 

627

 

General and administrative

 

272

 

176

 

715

 

431

 

Total stock-based compensation

 

$

933

 

$

821

 

$

2,687

 

$

1,803

 

 

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

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

Stock options

 

$

851

 

$

821

 

$

2,489

 

$

1,803

 

Restricted stock awards and restricted stock units (“RSUs”)

 

82

 

 

198

 

 

Total stock-based compensation

 

$

933

 

$

821

 

$

2,687

 

$

1,803

 

 

The following table presents unrecognized compensation expense, net of estimated forfeitures, related to the Company’s equity compensation plans as of September 30, 2012, which is expected to be recognized over the following weighted-average periods, (in thousands, except for weighted-average period):

 

 

 

Unrecognized
Compensation
Expense

 

Weighted-
Average Period
(in years)

 

Stock options

 

$

6,739

 

2.9

 

RSUs

 

$

1,158

 

3.4

 

 

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

 

 

 

Nine Months Ended

 

Nine Months Ended

 

 

 

September 30, 2012

 

September 30, 2011

 

 

 

Shares Granted

 

Weighted-
Average Grant
Date Fair Value

 

Shares Granted

 

Weighted-
Average Grant
 Date Fair Value

 

Stock options

 

1,192,679

 

$

4.57

 

1,393,999

 

$

3.84

 

RSU

 

274,070

 

$

6.48

 

 

$

 

 

12



Table of Contents

 

The total intrinsic value of stock options exercised for the nine months ended September 30, 2012 and 2011 was $6.9 million and $2.1 million, respectively.

 

Common Stock Warrants

 

As of September 30, 2012 and December 31, 2011 the Company had 912,368 outstanding warrants to purchase shares of common stock. Of these outstanding warrants, 90,000 and 78,750 were exercisable as of September 30, 2012 and December 31, 2011, respectively.

 

During the nine months ended September 30, 2011, the Company recognized a reduction to revenue in the amount of $312,000 related to the issuance and vesting of a warrant granted to a customer in connection with a collaborative development agreement.

 

Common Stock

 

As of September 30, 2012 and December 31, 2011, the Company had reserved shares of common stock for issuance as follows:

 

 

 

As of September 30, 2012

 

As of December 31, 2011

 

 

 

 

 

 

 

Issuances under equity incentive plan

 

13,068,171

 

12,530,593

 

Issuances upon exercise of warrants

 

912,368

 

912,368

 

 

 

13,980,539

 

13,442,961

 

 

7. Net Loss per Share of Common Stock

 

The following table sets forth the computation of the Company’s basic and diluted net loss per share of common stock during the three and nine months ended September 30, 2012 and 2011 (in thousands, except for share and per share amounts):

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

 

 

 

 

 

 

 

 

 

 

Net loss attributable to common stockholders

 

$

(112

)

$

(2,799

)

$

(1,258

)

$

(13,124

)

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

 

43,278,588

 

5,750,979

 

42,725,466

 

5,716,511

 

Net loss per share of common stock, basic and diluted

 

$

(0.00

)

$

(0.49

)

$

(0.03

)

$

(2.30

)

 

 

 

 

 

 

 

 

 

 

Antidilutive potential common shares in the form of (1):

 

 

 

 

 

 

 

 

 

Redeemable convertible preferred stock

 

 

29,230,708

 

 

29,230,708

 

Stock options to purchase common stock

 

7,763,639

 

8,201,805

 

7,763,639

 

8,201,805

 

Stock awards

 

256,513

 

 

256,513

 

 

Common stock subject to repurchase

 

7,500

 

15,000

 

7,500

 

15,000

 

Common and preferred stock warrants

 

912,368

 

2,223,360

 

912,368

 

2,223,360

 

 


(1)          These amounts are excluded from the computation of diluted net loss per share.

 

13



Table of Contents

 

8. Income Taxes

 

Income tax expense for the nine months ended September 30, 2012 was $12,000 or 1.0% on a pre-tax loss of $1.2 million. The difference between the Company’s effective tax rate and the federal statutory rate of 35% is primarily attributable to the differential in foreign taxes, non-deductible stock compensation expense, other currently non-deductible items and movement in its valuation allowance. The Company maintained a valuation allowance as of September 30, 2012 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.

 

9. Related Party Transactions

 

In March 2012, the Company amended the CDP agreement that it had entered into in March 2010 with a related party. Under the agreements, the two companies will work together to conduct research and development and other activities. Depending on the output of the research and development, the primary rightholder will be the Company or the other party. However, if the other party is not the primary rightholder, it will be able to license the developed technology from the Company. The other party’s vice chairman of the board of directors is a director of the Company and is also a managing member of a significant shareholder of the Company. As of September 30, 2012, this shareholder was a beneficial owner of approximately 9.8% of the Company’s common stock. As of September 30, 2012 and December 31, 2011 the Company had accounts receivable in the amount of $0.3 million and $0.5 million, respectively, and had a deferred revenue balance in the amount of $0.2 million and $0.1 million, respectively, related to these agreements. The following table presents related party revenue included in the Condensed Consolidated Statement of Operations from these agreements (in thousands):

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

 

 

 

 

 

 

 

 

 

 

Related party revenue

 

$

1,050

 

$

1,266

 

$

3,437

 

$

3,909

 

 

In November 2006, the Company entered into an Alliance Agreement with a related party that was a beneficial owner of approximately 8.9% of the Company’s common stock as of September 30, 2012. The other party and the Company each have an independent board member that serves on both companies’ boards of directors. Under the agreement, the two companies will work together to conduct research and development and other activities with respect to materials and high productivity combinatorial technology for use in semiconductor applications. Depending on the output of the research and development, the primary rightholder could be either company. However, the party that is not the primary rightholder will be assigned the right to use the output property. Under the agreement, the other party will pay the Company fees for services and both parties may provide royalties to the other for licensed technology sold to third parties. Since November 2006, the agreement has been amended numerous times with the last amendment signed in October 2011. As of September 30, 2012 and December 31, 2011 the Company had accounts receivable in the amount of $0.5 million and $0.5 million, respectively, and had a deferred revenue balance in the amount of $2.4 million and $10.2 million, respectively, related to these agreements. The following table presents related party revenue and cost of revenue included in the Condensed Consolidated Statement of Operations from these agreements (in thousands):

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

 

 

 

 

 

 

 

 

 

 

Related party revenue

 

$

5,007

 

$

3,877

 

$

13,309

 

$

11,666

 

Related cost of revenue

 

$

10

 

$

 

$

40

 

$

 

 

14



Table of Contents

 

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 September 30,

 

Nine Months Ended September 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

 

 

Revenue

 

Revenue

 

Revenue

 

Revenue

 

 

 

 

 

 

 

 

 

 

 

United States

 

$

12,890

 

$

10,332

 

$

37,289

 

$

25,218

 

Japan

 

3,321

 

3,763

 

10,202

 

11,231

 

APAC other

 

243

 

729

 

1,795

 

2,199

 

Europe and Middle East

 

36

 

50

 

98

 

50

 

Total

 

$

16,489

 

$

14,874

 

$

49,384

 

$

38,698

 

 

Long-Lived Assets

 

Substantially all of the Company’s long-lived assets are located in the U.S. An insignificant amount of long-lived assets reside in the Company’s foreign subsidiaries and branches in Hong Kong, Japan and Taiwan.

 

15



Table of Contents

 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANA LYSIS 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 consolidated condensed 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 the 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 and nine months ended September 30, 2012 to the three and nine months ended September 30, 2011.

·                   Liquidity and Capital Resources . An analysis of changes in our balance sheets and cash flows, and discussion of our financial condition and potential 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 in our Annual Report on Form 10-K (the “2011 Form 10-K”) and subsequent 2012 quarterly reports on Form 10-Q, 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, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. 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 2011 Form 10-K and subsequent 2012 quarterly filings on Form 10-Q. 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 have pioneered a proprietary approach to accelerate research and development, innovation and time-to-market for the semiconductor and clean energy industries. Using our approach, we develop technology and intellectual property (“IP”) focused on advanced materials, processes, integration and device architectures in collaboration with our customers. This technology enables our customers to bring optimized, high-volume manufacturing ready integrated devices to market faster and with less risk than traditional approaches to research and development (“R&D”). We provide our customers with proprietary technology through various fee arrangements and grant them rights to associated IP, primarily through royalty-bearing licenses. Our proprietary approach is broadly applicable to high-volume integrated device markets, which include semiconductors, flat glass coatings and glass based devices, solar cells, light emitting diodes (“LEDs”), flat-panel displays, advanced batteries and other energy-efficient technologies.

 

We were founded in 2004 and are headquartered in San Jose, California. Our total revenue increased to $16.5 million and $49.4 million for the three and nine months ended September 30, 2012, respectively, from $14.9 million and $38.7 million for the three and nine months ended September 30, 2011. Our net loss decreased to $0.1 million and $1.3 million for the three and nine months ended September 30, 2012, from a net loss before accretion on redeemable convertible preferred stock of $1.2 million and $4.5 million for the three and nine months ended September 30, 2011. Since inception, we have incurred net losses leading to an accumulated deficit of $101.8 million as of September 30, 2012.

 

16



Table of Contents

 

In February 2012, one of our significant customers, Elpida, filed for protection under the Corporate Reorganization Act in Japan. This created uncertainty relating to future revenue (including amounts in backlog) from our collaborative development program (“CDP”) with Elpida, which runs through March 2013. In July 2012, Micron Technology, Inc. (“Micron”) and Elpida’s trustees jointly announced that they signed a definitive sponsor agreement for Micron to acquire and support Elpida. On October 31, 2012, the Tokyo District Court issued an order to refer Elpida’s reorganization plan, which includes the proposed Micron acquisition, to Elpida’s creditors for approval. Creditors have until February 26, 2013 to submit their votes. The transactions, which are subject to certain conditions, including approval by Elpida’s creditors, are scheduled to close in the first half of 2013. However, there can be no assurance that these transactions will close in a timely manner or at all. As of September 30, 2012 we had $11.3 million in backlog from Elpida, of which $2.2 million is scheduled to be recognized as revenue during the remainder of 2012 with the balance scheduled to be recognized as revenue in periods beyond 2012. Of the $2.2 million in backlog to be recognized as revenue during the remainder of 2012 that is attributable to Elpida, we received payment in the amount of $2.2 million in October 2012 for CDP services and license fees for the three months ending December 31, 2012.

 

Strategy

 

Our mission is to drive our customers’ success by transforming R&D and accelerating innovation in markets that derive competitive advantage from the interaction of materials science, processes, integration and device architecture. We currently target high-volume semiconductor and high-growth emerging clean energy markets, including DRAM, stand-alone non-volatile memory, embedded memory, complex logic, flat glass, solar cells, LEDs, displays and energy-efficient technologies. Within these broad markets, we target customers that have track records of technological innovation, deploy significant resources and are pursuing technical advancements that are critical to their success and strategy, including ATMI, Elpida, First Solar, GLOBALFOUNDRIES, Guardian Industries, SanDisk, Taiwan Semiconductor Manufacturing Company (“TSMC”) and Toshiba. ATMI and Elpida have commenced shipping products incorporating technology developed through our CDPs and pay us licensing and royalty fees. To date, we have received the majority of our revenue from customers in DRAM, stand-alone non-volatile memory, complex logic and energy-efficient applications in flat glass coatings and glass-based devices, and we have not yet received a material amount of revenue from customers in embedded memory, solar cells, LEDs, displays and other energy-efficient technologies.

 

Basis of Presentation

 

How We Generate Revenue

 

Our customer engagement process generates revenue in three ways: CDP and services revenue; product revenue; and licensing and royalty revenue. CDPs are our primary engagement model with customers and are structured to result in licensing and royalty revenue. When we initially engage with a customer, we generate revenue from micro-CDPs, CDPs and licensing of our high productivity combinatorial (“HPC”) platform. Our micro-CDPs are smaller, customer-paid programs that require significantly less investment from our team but allow us to demonstrate the capabilities of our HPC platform to a customer without requiring a customer to commit to a multi-year agreement. We use these micro-CDPs to demonstrate the capabilities and value of our HPC platform to these new customers, with the objective of engaging with these customers in a full CDP. When technology developed through CDPs is incorporated in our customers’ commercialized products, we generate licensing and royalty revenue. In certain cases, we sell HPC processing tools to our customers who pay a recurring license fee to operate those tools with our combinatorial processing capabilities.

 

·                   CDP and services revenue . CDP revenue may include payments for full time equivalent employees, milestone payments, subscription payments for dedicated and shared workflow tools used in the CDP and reimbursed payments for consumables and outside services from third parties. Individual CDPs typically range from one to three years. Services revenue outside of CDPs is substantially comprised of support and maintenance fees and extended warranty agreements. CDP and services revenue is recognized in a manner consistent with activities performed.

 

·                   Product revenue . Product revenue consists of sales of our workflow hardware and embedded software. In support of our business strategy, we selectively sell our proprietary tools to increase opportunities for CDPs and licensing fees and royalties. Historically, we have not sold a significant number of our workflow products and we do not anticipate selling a significant number in the future. As our other revenue streams increase we expect our product revenue to decrease as a percentage of our overall revenue. Product revenue has been recognized upon shipment since January 1, 2011. Product sales that originated prior to January 1, 2011 were generally recognized on a straight-line basis over the maintenance period once delivery occurred (title and risk of loss passed to the customer), and customer acceptance, if required, was achieved.

 

·                   Licensing and royalty revenue . Licensing and royalty revenue consists of licensing fees and royalties for granting our customers rights to our proprietary technology and IP. Specifically, this includes licensing the HPC capabilities of our workflows, licensing our informatics and analysis software, and licensing fees and royalties on products commercialized by our customers that incorporate technology developed through our CDPs. In certain instances, minimum license fees and royalties may be guaranteed by customer contracts and are recognized as revenue ratably over the related periods. In the last three years, licensing and royalty revenue has generally been the fastest growing element of our revenue. Over the long term, we expect licensing and royalty revenue to be an increasing and significant component of our revenue.

 

17



Table of Contents

 

Cost of Revenue

 

Our cost of revenue is variable and depends on the product mix and type of revenue earned in each period relating to our customer programs. As customers commercialize products that incorporate technology developed through our CDPs, we expect our cost of revenue to decrease as a percentage of total revenue as licensing and royalty revenue become an increasing component of our revenue. As a result of our asset purchase transaction with Symyx Technologies, Inc. (“Symyx”), the amortization of acquired patents is being recorded in cost of revenue.

 

·                   Cost of CDP and services revenue . Our cost of CDP and services revenue is primarily comprised of salaries and other personnel-related expenses (including stock-based compensation) for our collaborative research and development scientists, engineers and development fab process operations employees. Additionally, our cost of revenue includes costs of wafers, targets, materials, program-related supplies, third-party professional fees and depreciation of equipment used in CDPs.

 

·                   Cost of product revenue . Our cost of product revenue primarily includes our cost of products sold. Our cost of product revenue will fluctuate based on the type of product and configuration sold. Historically, we have not sold a significant number of our workflow products and we do not anticipate selling a significant number in the future. Cost of product revenue has been recognized upon product shipment since January 1, 2011. For product sales that originated prior to January 1, 2011, our cost of product revenue was recognized in a similar manner as the corresponding product revenue and was generally recognized on a straight-line basis over the maintenance period.. The variability in cost of product revenue as a percentage of revenue is related to the quantity and configuration of products sold during the period and the corresponding maintenance period over which product revenue and cost of product revenue is being recognized.

 

·                   Cost of licensing and royalty revenue . Our cost of licensing and royalty revenue prior to January 1, 2012 included license fees paid to Symyx. As part of our completion of the Symyx asset purchase transaction in November 2011, in connection with our initial public offering, we no longer have an obligation to pay licensing fees to Symyx for any period on or after January 1, 2012. In 2012, our cost of licensing and royalty revenue has been, and we expect will continue to be, primarily comprised of the amortization of acquired patents and a licensing obligation payable to the Lawrence Berkeley Laboratories.

 

Research and Development

 

Our R&D expenses consist of costs incurred for development and continuous improvement of our HPC platform, expansion of software capabilities and application research and development that are not associated with customer programs. R&D costs include personnel-related expenses (including stock-based compensation expenses) for our technical staff as well as consultant costs, parts and prototypes, wafers, chemicals, supply costs, facilities costs, utilities costs related to laboratories and offices occupied by technical staff, depreciation on equipment used by technical staff, and outside services, such as machining and third-party R&D costs. Overhead costs that are not allocated to a customer program are recognized as expenses within R&D. We expect our R&D expenses will continue to increase for the foreseeable future as we continue to devote substantial internal resources to develop and improve our HPC platform and extend the applicability of our platform to a broader set of applications within the industries we serve.

 

Sales and Marketing

 

Our sales and marketing expenses consist primarily of personnel-related costs (including stock-based compensation) for our sales and marketing employees, as well as payments of commissions to our sales employees, facility costs and professional expenses. Professional expenses consist of external website and marketing communication consulting costs and market research. We expect that our sales and marketing expenses will continue to increase for the foreseeable future as we increase the number of our sales and marketing employees to support the growth in our business and as we incur increasing external marketing communication costs.

 

General and Administrative

 

General and administrative expenses consist primarily of personnel-related costs (including stock-based compensation) as well as professional services and facilities costs related to our executive, finance, legal, human resources, management information systems and information technology functions. Professional services consist of outside accounting, information technology, consulting and legal costs. We also incur significant accounting and legal costs related to compliance with rules and regulations enacted by the Securities and Exchange Commission, including the additional costs of achieving and maintaining compliance with Section 404 of the Sarbanes-Oxley Act, as well as additional insurance, investor relations and other costs associated with being a public company. In addition to these expenses, we expect that our general and administrative expenses will continue to increase for the foreseeable future.

 

18



Table of Contents

 

Interest (Expense) Income, net

 

Interest income represents interest earned on our cash, cash equivalents and short-term investments. We expect interest income will vary each reporting period depending on our average investment balances during the period and market interest rates. Interest expense primarily consists of interest accrued on our note payable to Symyx in connection with the Symyx asset purchase transaction that closed in November 2011.

 

Critical Accounting Estimates

 

Our consolidated financial statements have been prepared in conformity with generally accepted accounting principles in the United States and include our accounts and the accounts of our wholly-owned subsidiaries. The preparation of our consolidated financial statements requires our management to make estimates, assumptions and judgments that affect the reported amounts of assets and liabilities and disclosures for contingent assets and liabilities as of the date of the financial statements, and the reported amounts of revenue and expenses during the applicable periods. Management bases its estimates, assumptions and judgments on historical experience and on various other factors that management believed were reasonable under the circumstances. Different assumptions and judgments would change the estimates used in the preparation of our consolidated financial statements which, in turn, could change the results from those reported. Our management evaluates its estimates, assumptions and judgments on an ongoing basis.

 

There have been no material changes in the matters for which we make critical accounting estimates in the preparation of our condensed consolidated financial statements during the three and nine months ended September 30, 2012 as compared to those disclosed in our 2011 Form 10-K. For further information on our critical and other significant accounting policies, see our 2011 Form 10-K.

 

Recent Accounting Pronouncements

 

See Note 1 of the Notes to Condensed Consolidated Financial Statements included in this Form 10-Q for recent accounting pronouncements that could have an effect on us.

 

Results of Operations

 

Comparison of the Three and Nine Months Ended September 30, 2012 and 2011

 

 

 

Three Months Ended September 30,

 

 

 

 

 

Nine Months Ended September 30,

 

 

 

 

 

 

 

2012

 

2011

 

$ Change

 

% Change

 

2012

 

2011

 

$ Change

 

% Change

 

 

 

 

 

(in thousands)

 

 

 

 

 

 

 

(in thousands)

 

 

 

 

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CDP and services revenue

 

$

12,481

 

$

10,349

 

2,132

 

21%

 

$

35,836

 

$

26,169

 

$

9,667

 

37%

 

Product revenue

 

760

 

678

 

82

 

12%

 

3,495

 

2,038

 

1,457

 

71%

 

Licensing and royalty revenue

 

3,248

 

3,847

 

(599

)

-16%

 

10,053

 

10,491

 

(438

)

-4%

 

Total revenue

 

16,489

 

14,874

 

1,615

 

11%

 

49,384

 

38,698

 

10,686

 

28%

 

Cost of revenue

 

7,204

 

6,676

 

528

 

8%

 

21,866

 

17,999

 

3,867

 

21%

 

Gross profit

 

9,285

 

8,198

 

1,087

 

13%

 

27,518

 

20,699

 

6,819

 

33%

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

5,174

 

5,113

 

61

 

1%

 

16,002

 

14,601

 

1,401

 

10%

 

Sales and marketing

 

1,322

 

1,249

 

73

 

6%

 

3,834

 

3,229

 

605

 

19%

 

General and administrative

 

2,650

 

2,231

 

419

 

19%

 

8,190

 

6,156

 

2,034

 

33%

 

Total operating expenses

 

9,146

 

8,593

 

553

 

6%

 

28,026

 

23,986

 

4,040

 

17%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from operations

 

139

 

(395

)

534

 

 

 

(508

)

(3,287

)

2,779

 

 

 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest (expense) income, net

 

(255

)

6

 

(261

)

 

 

(754

)

16

 

(770

)

 

 

Other income (expense), net

 

10

 

(839

)

849

 

 

 

16

 

(1,174

)

1,190

 

 

 

Total other income (expense), net

 

(245

)

(833

)

588

 

 

 

(738

)

(1,158

)

420

 

 

 

Loss before provision for income taxes

 

(106

)

(1,228

)

1,122

 

 

 

(1,246

)

(4,445

)

3,199

 

 

 

Income tax provision

 

6

 

6

 

 

 

 

12

 

19

 

(7

)

 

 

Net loss

 

$

(112

)

$

(1,234

)

1,122

 

 

 

$

(1,258

)

$

(4,464

)

$

3,206

 

 

 

 

19



Table of Contents

 

Revenue

 

Our revenue increased by $1.6 million, or 11%, to $16.5 million during the three months ended September 30, 2012 from $14.9 million during the three months ended September 30, 2011 due to increases in CDP and services revenue and product revenue, partially offset by a decrease in licensing and royalty revenue.

 

Our revenue increased by $10.7 million, or 28%, to $49.4 million during the nine months ended September 30, 2012 from $38.7 million during the nine months ended September 30, 2011 due to increases in CDP and services revenue and product revenue, partially offset by a decrease in licensing and royalty revenue.

 

CDP and services revenue increased by $2.1 million, or 21%, to $12.5 million during the three months ended September 30, 2012 from $10.3 million during the three months ended September 30, 2011. This increase was primarily attributable to $1.5 million in revenue derived from the extension and expansion of existing customer engagements, combined with $2.0 million in revenue derived from new customer engagements that included a performance incentive in the amount of $0.8 million, partially offset by a $1.4 million decrease in revenue primarily due to the scheduled completion and reduction of government service contracts and CDP and service agreements. The growth from the expansion of existing customer engagements was primarily derived from two CDPs.

 

CDP and services revenue increased by $9.7 million, or 37%, to $35.8 million during the nine months ended September 30, 2012 from $26.2 million during the nine months ended September 30, 2011. This increase was primarily attributable to $9.6 million in revenue derived from the extension and expansion of existing customer engagements, combined with $3.3 million in revenue derived from new customer engagements that included a performance incentive in the amount of $0.8 million, partially offset by a $3.2 million decrease in revenue primarily due to the scheduled completion and reduction of government service contracts and CDP and service agreements. The growth from the expansion of existing customer engagements was primarily derived from two CDPs.

 

Product revenue increased by $0.1 million, or 12%, to $0.8 million during the three months ended September 30, 2012 from $0.7 million during the three months ended September 30, 2011. This increase was attributable to the shipment of the last elements of workflow hardware and embedded software that was completed during the three months ended September 30, 2012.

 

Product revenue increased by $1.5 million, or 71%, to $3.5 million during the nine months ended September 30, 2012 from $2.0 million during the nine months ended September 30, 2011. This increase was attributable to the shipment of the last elements of workflow hardware and embedded software that was completed during the nine months ended September 30, 2012.

 

Licensing and royalty revenue decreased by $0.6 million, or 16%, to $3.2 million during the three months ended September 30, 2012 from $3.8 million during the three months ended September 30, 2011. This decrease was primarily attributable to a scheduled reduction in certain minimum license fees guaranteed by certain customer contracts, which was partially offset by an increase in scheduled minimum license fees guaranteed by other customer contracts.

 

Licensing and royalty revenue decreased by $0.4 million, or 4%, to $10.1 million during the nine months ended September 30, 2012 from $10.5 million during the nine months ended September 30, 2011. This decrease was primarily attributable to a decrease in minimum license fees guaranteed by certain customer contracts, which was partially offset by an increase in scheduled minimum license fees guaranteed by other customer contracts.

 

The following table presents revenue by geographic region (based on invoiced locations) during the three and nine months ended September 30, 2012 and 2011 in dollars (in thousands) and as a percentage of revenue for the periods presented:

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

 

 

Revenue

 

% of Revenue

 

Revenue

 

% of Revenue

 

Revenue

 

% of Revenue

 

Revenue

 

% of Revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

United States

 

$

12,890

 

79%

 

$

10,332

 

70%

 

$

37,289

 

75%

 

$

25,218

 

65%

 

Japan

 

3,321

 

20%

 

3,763

 

25%

 

10,202

 

21%

 

11,231

 

29%

 

APAC other

 

243

 

1%

 

729

 

5%

 

1,795

 

4%

 

2,199

 

6%

 

Europe and Middle East

 

36

 

0%

 

50

 

0%

 

98

 

0%

 

50

 

0%

 

Total

 

$

16,489

 

100%

 

$

14,874

 

100%

 

$

49,384

 

100%

 

$

38,698

 

100%

 

 

Cost of Revenue

 

Cost of revenue increased by $0.5 million, or 8%, to $7.2 million during the three months ended September 30, 2012 from $6.7 million during the three months ended September 30, 2011. This change is directly attributable to increased CDP and services revenue and product revenue recognized from new and ongoing customer engagements, which resulted in a $0.4 million increase in direct labor, materials and other costs associated with these programs and a $0.3 million increase in product costs attributable to the shipment of elements of workflow hardware that was completed during the three months ended September 30, 2012. These increases were partially offset by a decrease in cost of licensing and royalty revenue due to the elimination of royalty payments to Symyx in connection with the Symyx asset purchase transaction that closed in November 2011. The elimination of the royalty obligation was partially offset by the amortization of Symyx-acquired IP and licensing obligations payable to the Lawrence Berkeley Laboratories that collectively approximated $0.2 million during the three months ended September 30, 2012.

 

20



Table of Contents

 

Cost of revenue increased by $3.9 million, or 21%, to $21.9 million during the nine months ended September 30, 2012 from $18.0 million during the nine months ended September 30, 2011. This change is directly attributable to increased CDP and services revenue and product revenue recognized from new and ongoing customer engagements, which resulted in a $3.3 million increase in direct labor, materials and other costs associated with these programs, including a $0.3 million asset impairment expense related to retired assets previously supporting a customer CDP program, and a $0.9 million increase in direct product costs consistent with increased product revenue. This increase was partially offset by a decrease in cost of licensing and royalty revenue due to the elimination of royalty payments to Symyx in connection with the Symyx asset purchase transaction that closed in November 2011. The elimination of the royalty obligation was partially offset by the amortization of Symyx-acquired IP and licensing obligations payable to Lawrence Berkeley Laboratories that collectively approximated $0.6 million during the nine months ended September 30, 2012.

 

Cost of revenue as a percentage of revenue decreased from 45% and 47% during the three and nine months ended September 30, 2011 to 44% during the three and nine months ended September 30, 2012. To the extent we are successful in growing our revenue and increasing licensing and royalty revenue as a percentage of revenue we expect our cost of revenue as a percentage of total revenue to decline.

 

Research and Development

 

Research and development (“R&D”) expenses increased by $0.1 million, or 1%, to $5.2 million during the three months ended September 30, 2012 from $5.1 million during the three months ended September 30, 2011. The change is primarily attributable to $0.5 million in higher personnel costs as a result of increased headcount and higher stock-based compensation expense. These costs were partially offset by increased allocation and support from R&D resources to customer programs and a $0.2 million decrease in facility and occupancy-related costs due in part to the elimination of costs from our prior facility, which ended in October 2011.

 

R&D expenses increased by $1.4 million, or 10%, to $16.0 million during the nine months ended September 30, 2012 from $14.6 million during the nine months ended September 30, 2011. The change is primarily attributable to $2.2 million in higher personnel costs as a result of increased headcount and higher stock-based compensation expense. These costs were partially offset by a $0.8 million decrease in facility and occupancy-related costs due in part to the elimination of costs from our prior facility, which ended in October 2011.

 

Sales and Marketing

 

Sales and marketing expenses increased by $0.1 million, or 6%, to $1.3 million during the three months ended September 30, 2012 from $1.2 million during the three months ended September 30, 2011. The change is primarily due to increased headcount and associated personnel costs related to wages, stock-based compensation and other related benefits.

 

Sales and marketing expenses increased by $0.6 million, or 19%, to $3.8 million during the nine months ended September 30, 2012 from $3.2 million during the nine months ended September 30, 2011. The change is primarily due to increased headcount and associated personnel costs related to wages, stock-based compensation and other related benefits.

 

General and Administrative

 

General and administrative expenses increased by $0.4 million, or 19%, to $2.7 million during the three months ended September 30, 2012 from $2.2 million during the three months ended September 30, 2011. The increase is primarily attributable to $0.3 million in higher professional fees that include legal and accounting services associated with being a public company, and $0.3 million in higher personnel costs as a result of increased headcount. The increase was partially offset due to the elimination of $0.2 million in costs from our prior facility, which ended in October 2011.

 

General and administrative expenses increased by $2.0 million, or 33%, to $8.2 million during the nine months ended September 30, 2012 from $6.2 million during the nine months ended September 30, 2011. The increase is primarily attributable to $1.3 million in higher professional fees that include legal and accounting services associated with being a public company, and $1.2 million in higher personnel costs as a result of increased headcount. The increase was partially offset due to the elimination of $0.7 million in costs from our prior facility, which ended in October 2011.

 

21



Table of Contents

 

Income (Loss) from Operations

 

Our operating loss decreased by $0.5 million, to an operating income of $0.1 million during the three months ended September 30, 2012 from an operating loss of $0.4 million during the three months ended September 30, 2011. To the extent we are successful in growing our revenue and increasing licensing and royalty revenue as a percentage of our total revenue, and if our expenses increase at a slower rate than our revenue, we expect that our income from operations will increase in the future. Our operating expenses increased by $0.6 million to $9.1 million during the three months ended September 30, 2012 from $8.6 million during the three months ended September 30, 2011. We expect our operating expenses to continue to increase as we expand and invest in our business, making investments in both personnel and in capital resources, which will lead to increased depreciation expense.

 

Our operating loss decreased by $2.8 million, to an operating loss of $0.5 million during the nine months ended September 30, 2012 from an operating loss of $3.3 million during the nine months ended September 30, 2011. To the extent we are successful in growing our revenue and increasing licensing and royalty revenue as a percentage of our total revenue, and if our expenses increase at a slower rate than our revenue, we expect that our income from operations will increase in the future. Our operating expenses increased by $4.0 million to $28.0 million during the nine months ended September 30, 2012 from $24.0 million during the nine months ended September 30, 2011. We expect our operating expenses to continue to increase as we expand and invest in our business, making investments in both personnel and in capital resources, which will lead to increased depreciation expense.

 

Interest (Expense) Income, net

 

Interest (expense) income, net decreased by $0.3 million to an expense of $0.3 million during the three months ended September 30, 2012 from income of $6,000 during the three months ended September 30, 2011. The decrease is primarily attributable to interest expense associated with our note payable to Symyx.

 

Interest (expense) income, net decreased by $0.8 million to an expense of $0.8 million during the nine months ended September 30, 2012 from income of $16,000 during the nine months ended September 30, 2011. The decrease is primarily attributable to interest expense associated with our note payable to Symyx.

 

Other Income (Expense), net

 

Other income (expense), net increased by $0.8 million to an income of $10,000 during the three months ended September 30, 2012 from an expense of $0.8 million during the three months ended September 30, 2011. This change was primarily due to the prior year change in value of the Symyx purchase right derivative that was finalized as part of the closing of the Symyx asset purchase transaction in November 2011 and to a lesser extent the conversion and subsequent exercise of our outstanding preferred stock warrant in connection with our initial public offering in November 2011. Both were no longer outstanding or subject to remeasurement during the three months ended September 30, 2012

 

Other income (expense), net increased by $1.2 million to an income of $16,000 during the nine months ended September 30, 2012 from an expense of $1.2 million during the nine months ended September 30, 2011. This change was primarily due to the prior year change in value of the Symyx purchase right derivative that was finalized as part of the closing of the Symyx asset purchase transaction in November 2011 and to a lesser extent the conversion and subsequent exercise of our outstanding preferred stock warrant in connection with our initial public offering in November 2011. Both were no longer outstanding or subject to remeasurement during the nine months ended September 30, 2012

 

Income Tax Provision

 

Provision for income taxes for the three and nine months ended September 30, 2012 and 2011 consisted of income taxes on our foreign entities and were not significant during these periods.

 

Net Loss

 

Our net loss decreased by $1.1 million, to a net loss of $0.1 million during the three months ended September 30, 2012 from a net loss of $1.2 million during the three months ended September 30, 2011. The difference between income from operations and net loss during the three months ended September 30, 2012 was primarily related to interest expense associated with our note payable to Symyx.

 

Our net loss decreased by $3.2 million, to a net loss of $1.3 million during the nine months ended September 30, 2012 from a net loss of $4.5 million during the nine months ended September 30, 2011. The difference between loss from operations and net loss during the nine months ended September 30, 2012 was primarily related to interest expense associated with our note payable to Symyx.

 

22



Table of Contents

 

Liquidity and Capital Resources

 

Since inception, we have substantially financed our operations through private and public sale of equity securities and, to a lesser extent, cash flow from operations. As of September 30, 2012, we had $80.4 million of cash, cash equivalents and short-term investments, $77.5 million of net working capital, and debt outstanding of $26.7 million.

 

To date, we have incurred significant losses. During the nine months ended September 30, 2012 and 2011, we incurred net losses of $1.3 million and $4.5 million, respectively. As of September 30, 2012, our accumulated deficit was $101.8 million.

 

We believe that we have the financial resources needed to meet business requirements for the next 12 months. Our future capital requirements will depend on many factors, including our rate of revenue growth, our expansion of our sales and marketing activities and overhead expenses, the timing and extent of our spending to support our R&D efforts and our ability to expand CDPs in the semiconductor and clean energy industries, whether we are successful in obtaining payments from customers, the financial stability of our customers, whether we can enter into additional collaborations in our target industries, the progress and scope of collaborative R&D projects performed by us and our customers, the effect of any acquisitions of other businesses or technologies that we may make in the future, the filing, prosecution and enforcement of patent claims, how much we need to develop or enhance our solutions or HPC platform and any necessary responses to competitive pressures. To the extent that existing cash and cash equivalents and cash from operations are insufficient to fund our operations, we may need to raise additional funds through public or private equity or debt financing. We may also seek to invest in or acquire complementary businesses, applications or technologies, any of which could also require us to seek additional equity or debt financing. Additional funds may not be available on terms favorable to us or at all. We maintain almost all of our cash in the United States and therefore are not subject to restrictions or tax obligations as we access the cash.

 

In February 2012, one of our significant customers, Elpida, filed for protection under the Corporate Reorganization Act in Japan. This created uncertainty relating to future revenue (including amounts in backlog) from our CDP with Elpida, which runs through March 2013. In July 2012, Micron Technology, Inc. (“Micron”) and Elpida’s trustees jointly announced that they signed a definitive sponsor agreement for Micron to acquire and support Elpida. On October 31, 2012, the Tokyo District Court issued an order to refer Elpida’s reorganization plan, which includes the proposed Micron acquisition, to Elpida’s creditors for approval. Creditors have until February 26, 2013 to submit their votes. The transactions, which are subject to certain conditions, including approval by Elpida’s creditors, are scheduled to close in the first half of 2013. However, there can be no assurance that these transactions will close in a timely manner or at all. During the nine months ended September 30, 2012 we recognized $6.8 million in revenue from Elpida and as of September 30, 2012 we had outstanding accounts receivable in the amount of $0.2 million and backlog in the amount of $11.3 million, of which $2.2 million is scheduled to be recognized as revenue during the remainder of 2012 with the balance scheduled to be recognized as revenue in periods beyond 2012. We received payment in the amount of $2.2 million in October 2012 for CDP services and license fees for the three months ending December 31, 2012.

 

Cash Flows

 

The following summary of our cash flows for the periods indicated has been derived from our condensed consolidated financial statements included elsewhere in this filing (in thousands):

 

 

 

Nine Months Ended
September 30,

 

 

 

2012

 

2011

 

 

 

 

 

 

 

Net cash provided by (used in) operating activities

 

$

2,790

 

$

(10,299

)

Net cash used in investing activities

 

$

(6,237

)

$

(9,248

)

Net cash provided by financing activities

 

$

1,160

 

$

25,244

 

 

Cash Flows from Operating Activities

 

We experienced positive cash flows from operating activities during the nine months ended September 30, 2012, and experienced negative cash flows from operating activities during the nine months ended September 30, 2011.

 

Net cash provided by operating activities during the nine months ended September 30, 2012 of $2.8 million reflects a net loss of $1.3 million and non-cash charges of $5.9 million for depreciation and amortization, $2.7 million for stock-based compensation, and $0.9 million related to impairment of long-lived assets. The net decrease in our operating assets and liabilities of $5.5 million was primarily the result of $1.2 million in inventory related to a workflow hardware build and the shipment to a customer of elements of workflow hardware and embedded software, a $0.9 million decrease in accounts payable and accrued liabilities and a $9.7 million decline in deferred revenue related to the earn-out of customer prepayments. This decline was partially offset by increased cash collections resulting in a net decrease in accounts receivable of $5.5 million and utilization of prepaid and other assets of $0.9 million.

 

23



Table of Contents

 

As of September 30, 2012 we had $2.9 million in deferred revenue for which we have already received payment, of which $2.0 million will be recognized as revenue during 2012 and $0.9 million will be recognized as revenue during 2013.

 

Cash Flows from Investing Activities

 

Our investing activities consist primarily of purchases and maturities of short-term investments, capital expenditures to purchase property and equipment and our investments in intangible assets relating to our patents and trademarks. In the future, we expect we will continue to make significant capital expenditures to support our expanding operations and incur costs to protect our investment in our developed technology and IP.

 

During the nine months ended September 30, 2012, cash used in investing activities was $6.2 million as a result of the purchase of $2.2 million in certificates of deposit classified as short-term investments, $3.8 million in capital expenditures and $0.8 million in capitalized patent and trademark costs. The decline in capital expenditures compared to the prior year is primarily attributable to the completion of our clean room facility build-out as we completed our move to our new office location during 2011. During the first nine months of 2011 we also had a significant investment in equipment and facilities to support the expansion of our new facility and new and expanding CDP programs. These declines were partially offset by cash from maturities of short-term investments of $0.5 million.

 

Cash Flows from Financing Activities

 

To date, we have financed our operations primarily with proceeds from the sale of our redeemable convertible preferred stock and proceeds received from our initial public offering.

 

During the nine months ended September 30, 2012, cash provided by financing activities was related to the issuance of common stock as a result of employee option exercises in the amount of $1.7 million, which was partially offset by a principal payment related to our note payable to Symyx in the amount of $0.6 million. The decrease in financing cash flows year over year is primarily due to the $24.9 million Series E redeemable convertible preferred stock financing that occurred during the nine months ended September 30, 2011.

 

Contractual Obligations and Commitments

 

The following summarizes our contractual obligations as of September 30, 2012 (in thousands):

 

 

 

Payments Due by Period

 

 

 

Total

 

Less Than
One Year

 

1 - 3 Years

 

3 - 5 Years

 

More Than
5 Years

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating lease obligations

 

$

4,496

 

$

404

 

$

4,092

 

$

 

$

 

Note payable

 

26,745

 

231

 

26,514

 

 

 

Contractual interest payments on note payable

 

1,205

 

269

 

936

 

 

 

Purchase obligations(1) 

 

3,332

 

3,332

 

 

 

 

Total

 

$

35,778

 

$

4,236

 

$

31,542

 

$

 

$

 

 


(1) Purchase obligations consist of firm, non-cancelable agreements to purchase property and equipment and inventory related items.

 

Operating lease agreements represent our obligations to make payments under our non-cancelable lease agreement for our facility in San Jose, California. During the nine months ended September 30, 2012, we made regular lease payments of $1.2 million under this operating lease agreement.

 

In connection with the consummation of the Symyx asset purchase transaction, which occurred in connection with the consummation of our initial public offering, we issued a promissory note payable to Symyx. As of September 30, 2012, the note had a remaining principal amount equal to $26.7 million and a remaining term of approximately 14 months and an interest rate of 4% and is payable in quarterly installments, each in an amount equal to the greater of $0.5 million that quarter or the amount of accrued interest, with a balloon payment at maturity on November 23, 2013, if applicable.

 

24



Table of Contents

 

Off-Balance Sheet Arrangements

 

As of September 30, 2012, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which are established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

 

ITEM 3.                                                      QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

We are exposed to market risks in the ordinary course of our business. Market risk represents the risk of loss that may impact our financial position due to adverse changes in financial market prices and rates. Our market risk exposure is primarily a result of fluctuations in interest rates and foreign currency exchange rates. We do not hold or issue financial instruments for trading purposes.

 

Interest Rate Sensitivity

 

Our exposure to market risk for changes in interest rates relates primarily to our investment portfolio and our outstanding debt obligations. Our cash, cash equivalents and short-term investment accounts as of September 30, 2012 totaled $80.4 million, consisting of $78.7 million in cash and money market funds with maturities of less than three months from the date of purchase and $1.7 million in certificates of deposit with maturities of less than twelve months from the date of purchase. Our primary exposure to market risk is interest income sensitivity, which is affected by changes in the general level of the interest rates in the United States. However, because of the short-term nature of the instruments in our portfolio, a sudden change in market interest rates would not be expected to have a material impact on our consolidated financial condition or our results of operation.

 

In connection with the consummation of the Symyx asset purchase transaction, which occurred in connection with the completion of our initial public offering, we issued a promissory note payable to Symyx. The note has an initial principal amount equal to $27.3 million and an initial term of 24 months at a fixed interest rate of 4% and is payable in quarterly installments, each in an amount equal to the greater of $0.5 million that quarter or the amount of accrued interest, with a balloon payment at maturity, if applicable. As of September 30, 2012, $26.7 million in principal remained outstanding on the note payable to Symyx. The interest rate on our debt is fixed; however, in the event we enter into other long-term debt arrangements, we could be subject to fluctuations in interest rates which could have a material impact on our future financial condition and results of operation.

 

Foreign Currency Exchange Risk

 

As we expand internationally, our consolidated results of operations and cash flows will become increasingly subject to fluctuations due to changes in foreign currency exchange rates. Our revenue is denominated in U.S. dollars. Our expenses are generally denominated in the currencies in which our operations are located, which is primarily in the United States, with an insignificant portion of expenses incurred in our wholly-owned subsidiaries in Hong Kong and Japan and our wholly-owned branch in Taiwan in their local currencies. The effect of a hypothetical 10% change in foreign currency exchange rates applicable to our business would not have a material impact on our consolidated financial statements. To date, we have not entered into any material foreign currency hedging contracts although we may do so in the future.

 

ITEM 4.                                                      CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2012. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Based on the evaluation of our disclosure controls and procedures as of September 30, 2012, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.

 

25



Table of Contents

 

Changes in Internal Control over Financial Reporting

 

There were no changes to our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

Inherent Limitations on Effectiveness of Controls

 

Our management, including our Chief Executive Officer and Chief Financial Officer, believes that our disclosure controls and procedures and internal control over financial reporting are designed to provide reasonable assurance of achieving their objectives and are effective at the reasonable assurance level. However, our management does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of the controls. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Because of the inherent limitations in a cost effective control system, misstatements due to error or fraud may occur and not be detected.

 

PART II — OTHER INFORMATION

 

ITEM 1.                 LEGAL PROCEEDINGS

 

From time to time, we may become involved in other legal proceedings and claims arising in the ordinary course of our business, including but not limited to legal proceedings and claims brought by employees or former employees relating to working conditions or other issues. We are not currently a party to any legal proceedings the outcome of which, if determined adversely to us, we believe would individually or in the aggregate have a material adverse effect on our business, operating results, financial condition or cash flows.

 

ITEM 1A.                 RISK FACTORS

 

We describe our business risk factors below. This description includes any material changes to and supersedes the description of the risk factors disclosed in Part I, Item 1A of our 2011 Form 10-K and our Form 10-Q for the second quarter of 2012. You should carefully consider the risks described below together with the other information set forth in this Form 10-Q, which could materially affect our business, financial condition or future results. The risks described below are not the only risks facing our company. Risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

 

We have marked with an asterisk (*) those risks described below that reflect substantive changes from the risks described under “Risk Factors” included in our Form 10-Q for the second quarter of 2012.

 

Risks Related to Our Financial Condition and Business

 

We have a limited operating history, which makes it difficult for investors to evaluate our current business and future prospects.*

 

We do not have a long history of operating results on which you can base your evaluation of our business. We are still proving our business model, and we have not yet demonstrated our ability to generate significant revenue, particularly licensing and royalty revenue. As a result, it may be difficult for analysts and investors to evaluate our future prospects. If we do not generate significant licensing and royalty revenue, we may never be profitable. Furthermore, because of our limited operating history and because the semiconductor and clean energy industries are rapidly evolving, we have limited experience in analyzing and understanding the trends that may emerge and affect our business. If we are unable to obtain significant licensing and royalty revenue from products that incorporate technology developed through our collaborative development programs (CDPs), we will have expended a significant amount of time and resources without obtaining the benefits we anticipated, and our financial condition and results of operations would be materially and adversely affected.

 

26



Table of Contents

 

Our operating results may fluctuate from quarter to quarter, which may make it difficult to predict our future performance and may result in volatility in the market price of our common stock if we fail to meet the expectations of public market analysts and investors in these periods.

 

Our revenue, expenses and operating results have fluctuated, and may in the future continue to fluctuate significantly from quarter to quarter due to a number of factors, many of which are outside our control. Factors that may contribute to these fluctuations include the following, as well as other factors described elsewhere in this Form 10-Q:

 

·                  our dependence on a limited number of customers;

 

·                  our ability to manage our growth, including an increasing number of employees, customers and CDPs;

 

·                  the length of our sales and development cycles, and our ability to generate material revenue after we have devoted significant resources to developing a project;

 

·                  our ability to evolve existing products, anticipate trends in technology development and introduce new developments in a timely manner in the rapidly changing semiconductor and clean energy industries;

 

·                  our customers’ ability to manufacture, market and sell products that incorporate technology developed through the CDPs;

 

·                  the financial stability of any of our customers (including but not limited to the impact of our customer Elpida’s filing for  protection under the Corporate Reorganization Act in Japan in February 2012);

 

·                  fluctuations in the number and price of products sold by our customers that incorporate technology developed through the CDPs, and the shortening life cycles of those products, in each case impacting our licensing and royalty revenue;

 

·                  our ability to scale our dev