Intermolecular, Inc.
INTERMOLECULAR INC (Form: 10-Q, Received: 08/06/2015 17:42:52)

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended June 30 , 2015

Or

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

For the transition period from                  to

Commission File Number 001-35348

Intermolecular, Inc.

(Exact Name of Registrant as Specified in its Charter)

 

 

 

 

Delaware

 

20-1616267

(State or Other Jurisdiction of
Incorporation or Organization)

 

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

 

 

 

3011 N. First Street
San Jose, California

 

95134

(Address of Principal Executive Offices)

 

(Zip Code)

 

(408) 582-5700

(Registrant’s Telephone Number, Including Area Code)

N/A

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

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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 

 

Accelerated filer 

 

 

 

Non-accelerated filer 

 

Smaller reporting company 

(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    No 

Shares outstanding of the registrant’s common stock:

 

 

 

 

 

 

 

Class

 

Outstanding as of  August 3 , 2015

Common stock, $0.001 par value

 

48 ,763 , 423

 

 

 

 

 


 

Table of Contents

INTERMOLECULAR, INC.

FORM 10-Q FOR THE QUARTER ENDED JUNE 30 , 2015

TABLE OF CONTE NTS

 

 

 

Page

 

PART I — FINANCIAL INFORMATION

 

 

 

 

 

 

Item 1.  

Financial Statements

 

 

Condensed Consolidated Balance Sheets (Unaudited)

 

 

Condensed Consolidated Statements of Operations (Unaudited)

 

 

Condensed Consolidated Statements of Comprehensive Loss (Unaudited)

 

 

Condensed Consolidated Statements of Cash Flows (Unaudited)

 

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

Item 2.  

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

 

19 

Item 3.  

Quantitative and Qualitative Disclosures About Market Risk

 

29 

Item 4.  

Controls and Procedures

 

30 

 

PART II — OTHER INFORMATION

 

 

Item 1.  

Legal Proceedings

 

32 

Item 1A.  

Risk Factors

 

32 

Item 2.  

Unregistered Sales of Equity Securities and Use of Proceeds

 

32 

Item 6.  

Exhibits

 

33 

 

Signatures

 

34 

 

 

 

 

2


 

Table of Contents

PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENT S

INTERMOLECULAR, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheet s

(In thousands, except share and per share data)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2015

 

December 31, 2014

 

ASSETS

    

 

 

    

 

 

    

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

14,376

 

$

21,765

 

Short-term investments

 

 

44,445

 

 

43,304

 

Accounts receivable, net of allowance for doubtful accounts of $0 as of June 30, 2015 and December 31, 2014

 

 

6,056

 

 

5,321

 

Inventory, current portion

 

 

 —

 

 

34

 

Prepaid expenses and other current assets

 

 

1,772

 

 

1,784

 

Total current assets

 

 

66,649

 

 

72,208

 

Inventory, net of current portion

 

 

5,343

 

 

5,894

 

Property and equipment, net

 

 

16,459

 

 

19,106

 

Intangible assets, net

 

 

7,474

 

 

7,941

 

Other assets

 

 

287

 

 

288

 

Total assets

 

$

96,212

 

$

105,437

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

 

$

1,129

 

$

862

 

Accrued liabilities

 

 

2,285

 

 

2,101

 

Accrued compensation and employee benefits

 

 

2,873

 

 

1,628

 

Deferred revenue

 

 

1,884

 

 

2,709

 

Related party deferred revenue

 

 

416

 

 

831

 

Note payable

 

 

2,000

 

 

2,000

 

Total current liabilities

 

 

10,587

 

 

10,131

 

Deferred revenue, net of current portion

 

 

559

 

 

1,103

 

Deferred rent, net of current portion

 

 

3,062

 

 

2,810

 

Note payable, net of current portion

 

 

20,000

 

 

21,000

 

Other long-term liabilities

 

 

176

 

 

128

 

Total liabilities

 

 

34,384

 

 

35,172

 

Commitments and contingencies (note 5)

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

Preferred stock, $0.001 par value, 5,000,000 shares authorized, no shares issued and outstanding as of June 30, 2015 and December 31, 2014

 

 

 —

 

 

 —

 

Common stock, par value $0.001 per share— 200,000,000 shares authorized; 48,770,623 and 47,614,150 shares issued and outstanding as of June 30, 2015 and December 31, 2014, respectively

 

 

49

 

 

48

 

Additional paid-in capital

 

 

206,387

 

 

202,139

 

Accumulated other comprehensive loss

 

 

(50)

 

 

(37)

 

Accumulated deficit

 

 

(144,558)

 

 

(131,885)

 

Total stockholders’ equity

 

 

61,828

 

 

70,265

 

Total liabilities and stockholders’ equity

 

$

96,212

 

$

105,437

 

See accompanying notes to unaudited condensed consolidated financial statements

 

 

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Table of Contents

INTERMOLECULAR, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Operation s

(In thousands, except share and per share data)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30, 

 

Six Months Ended June 30, 

 

 

2015

    

2014

 

2015

    

2014

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

Collaborative development program and services revenue

$

7,176

 

$

6,865

 

$

14,274

 

$

15,751

 

Product revenue

 

75

 

 

 —

 

 

75

 

 

 —

 

Licensing and royalty revenue

 

3,743

 

 

3,069

 

 

6,490

 

 

10,088

 

Total revenue

 

10,994

 

 

9,934

 

 

20,839

 

 

25,839

 

Cost of revenue:

 

 

 

 

 

 

 

 

 

 

 

 

Cost of collaborative development program and services revenue

 

4,489

 

 

5,484

 

 

9,900

 

 

11,954

 

Cost of product revenue

 

55

 

 

 —

 

 

55

 

 

 —

 

Cost of licensing and royalty revenue

 

76

 

 

152

 

 

152

 

 

250

 

Total cost of revenue

 

4,620

 

 

5,636

 

 

10,107

 

 

12,204

 

Gross profit

 

6,374

 

 

4,298

 

 

10,732

 

 

13,635

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

7,160

 

 

6,212

 

 

13,660

 

 

13,168

 

Sales and marketing

 

1,587

 

 

1,379

 

 

2,896

 

 

3,027

 

General and administrative

 

3,186

 

 

3,097

 

 

6,596

 

 

6,410

 

Restructuring charges

 

 —

 

 

293

 

 

 —

 

 

1,361

 

Total operating expenses

 

11,933

 

 

10,981

 

 

23,152

 

 

23,966

 

Loss from operations

 

(5,559)

 

 

(6,683)

 

 

(12,420)

 

 

(10,331)

 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense, net

 

(121)

 

 

(179)

 

 

(255)

 

 

(373)

 

Other income (expense), net

 

2

 

 

5

 

 

7

 

 

 —

 

Total other income (expense), net

 

(119)

 

 

(174)

 

 

(248)

 

 

(373)

 

Loss before provision for income taxes

 

(5,678)

 

 

(6,857)

 

 

(12,668)

 

 

(10,704)

 

Provision for income taxes

 

2

 

 

2

 

 

5

 

 

6

 

Net loss

$

(5,680)

 

$

(6,859)

 

$

(12,673)

 

$

(10,710)

 

Net loss per share of common stock, basic and diluted

$

(0.12)

 

$

(0.15)

 

$

(0.27)

 

$

(0.23)

 

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

 

47,935,399

 

 

47,192,882

 

 

47,767,508

 

 

46,560,205

 

 

Related Party Transactions

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30, 

 

Six Months Ended June 30, 

 

 

2015

    

2014

    

2015

    

2014

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

Collaborative development program and services revenue

$

3

 

$

171

 

$

6

 

$

1,108

 

Licensing and royalty revenue

 

910

 

 

1,059

 

 

1,427

 

 

1,500

 

Total revenue

$

913

 

$

1,230

 

$

1,433

 

$

2,608

 

 

See accompanying notes to unaudited condensed consolidated financial statements

 

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Condensed Consolidated Statements of Comprehensive Loss

(In thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30, 

 

Six Months Ended June 30, 

 

 

2015

    

2014

    

2015

    

2014

 

Net loss

$

(5,680)

 

$

(6,859)

 

$

(12,673)

 

$

(10,710)

 

Unrealized losses on available-for-sale-securities

 

(43)

 

 

(18)

 

 

(13)

 

 

(18)

 

Other comprehensive loss

 

(43)

 

 

(18)

 

 

(13)

 

 

(18)

 

Comprehensive loss, net of income tax

$

(5,723)

 

$

(6,877)

 

$

(12,686)

 

$

(10,728)

 

See accompanying notes to unaudited condensed consolidated financial statements

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INTERMOLECULAR, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 30, 

 

 

    

2015

    

2014

 

Cash flows from operating activities:

 

 

 

 

 

 

 

Net loss

 

$

(12,673)

 

$

(10,710)

 

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

 

 

 

 

 

 

 

Depreciation, amortization, and accretion

 

 

5,240

 

 

5,164

 

Stock-based compensation

 

 

3,643

 

 

2,793

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Prepaid expenses and other assets

 

 

(311)

 

 

845

 

Inventory

 

 

585

 

 

(497)

 

Accounts receivable

 

 

(735)

 

 

2,398

 

Accounts payable

 

 

144

 

 

(492)

 

Accrued and other liabilities

 

 

1,925

 

 

(525)

 

Deferred revenue

 

 

(1,369)

 

 

1,125

 

Related party deferred revenue

 

 

(415)

 

 

558

 

Net cash (used in) provided by operating activities

 

 

(3,966)

 

 

659

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Purchase of short-term investments

 

 

(31,047)

 

 

(28,214)

 

Redemption of short-term investments

 

 

29,753

 

 

 —

 

Purchase of property and equipment

 

 

(1,299)

 

 

(1,958)

 

Purchased and capitalized intangible assets

 

 

(435)

 

 

(948)

 

Net cash used in investing activities

 

 

(3,028)

 

 

(31,120)

 

Cash flows from financing activities:

 

 

 

 

 

 

 

Payment of debt

 

 

(1,000)

 

 

(1,000)

 

Proceeds from exercise of common stock options

 

 

605

 

 

1,163

 

Net cash (used in) provided by financing activities

 

 

(395)

 

 

163

 

Net decrease in cash and cash equivalents

 

 

(7,389)

 

 

(30,298)

 

Cash and cash equivalents at beginning of period

 

 

21,765

 

 

72,083

 

Cash and cash equivalents at end of period

 

$

14,376

 

$

41,785

 

 

 

 

 

 

 

 

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

Cash paid for interest

 

$

374

 

$

272

 

Cash paid for income taxes, net of refunds received

 

$

1

 

$

23

 

Noncash investing/operating activities:

 

 

 

 

 

 

 

Transfer of property and equipment to inventory

 

$

 —

 

$

324

 

See accompanying notes to unaudited condensed consolidated financial statements

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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 in accordance with accounting principles generally accepted in the United States of America (GAAP) for interim financial information, the instructions to Form 10-Q and Article 10 of Regulation S-X of the Securities and Exchange Commission (SEC). Accordingly, certain information and disclosures normally included in complete financial statements prepared in accordance with GAAP have been condensed or omitted. The information in this report should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto included in its Annual Report on Form 10-K for the fiscal year ended December 31, 2014, as filed with the SEC on February 27, 2015.

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 six months ended June  3 0 , 2015 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, 2014 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. Management uses estimates and judgments in determining recognition of revenues, valuations of accounts receivable, inventories, intangible assets, warrants and assumptions used in the calculation of income taxes and stock-based compensation, among others. These estimates and assumptions are based on management’s best estimates and judgment. Management evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors, and adjusts such estimates and assumptions when facts and circumstances dictate. As future events and their effects cannot be determined with precision, actual results could differ significantly from these estimates.

Concentration of Credit Risk

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

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Cash, Cash Equivalents and Short-Term Investments

The Company holds its cash and cash equivalents in checking, money market and investment accounts with high credit quality financial institutions. The Company considers all highly liquid investments with original maturities of three months or less when purchased to be cash equivalents.

 

Short-term investments consist principally of corporate debt securities and commercial paper. If applicable, the Company considers marketable securities with remaining time to maturity greater than one year and that are expected to be held to maturity to be classified as long-term , as it expects to hold them to maturity . As of June 30 , 2015, the Company did not have any such securities. The Company considers all other marketable securities to be short-term marketable securities. The short-term marketable securities are classified as current assets because they can be readily converted into securities with a shorter remaining time to maturity or into cash. The Company determines the appropriate classification of its marketable securities at the time of purchase and re-evaluates such designations as of each balance sheet date. All marketable securities and cash equivalents in the portfolio are classified as available-for-sale and are stated at fair value, with all the associated unrealized gains and losses reported as a component of accumulated other comprehensive income (loss). Fair value is based on quoted market rates or direct and indirect observable markets for these investments. The amortized cost of debt securities is adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization and accretion are included in interest income. The cost of securities sold and any gains and losses on sales are based on the specific identification method.

 

The Company reviews its investment portfolio periodically to assess for other-than-temporary impairment in order to determine the classification of the impairment as temporary or other-than-temporary, which involves considerable judgment regarding factors such as the length of the time and the extent to which the market value has been lower than the amortized cost, the nature of underlying assets, and the financial condition, credit rating, market liquidity conditions and near-term prospects of the issuer. If the fair value of a debt security is less than its amortized cost basis at the balance sheet date, an assessment would have to be made as to whether the impairment is other-than-temporary. If the Company considers it more likely than not that it will sell the security before it will recover its amortized cost basis, an other-than-temporary impairment will be considered to have occurred. An other-than - temporary impairment will also be considered to have occurred if the Company does not expect to recover the entire amortized cost basis of the security, even if it does not intend to sell the security. The Company has recognized no other-than-temporary impairments for its marketable securities.

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 $5. 3 million and $5.9 million as of June 30 , 2015 and December 31, 2014, respectively. 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 have any material impairments during the six months ended June 30 , 2015 and recorded inventory impairments of $0.3 million during the six months ended June 30, 2014.

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. The Company had no impairment of long-lived assets during the six months ended June 30 , 2015 and 2014.

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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. Revenue is recognized when all of the following criteria are met:

·

Persuasive evidence of an arrangement exists;

·

Delivery has occurred or services have been rendered ;

·

The fee is fixed or determinable; and

·

Collectability of the fee is probable.

 

Persuasive evidence of the arrangement represents a written contract signed by both the Company and the customer, or a customer purchase order. The Company assesses whether a price is fixed or determinable by, among other things, reviewing contractual terms and conditions related to payment terms. The Company assesses collectability based on factors such as the customer's creditworthiness and past collection history, if applicable. If collection is not probable, revenue recognition is deferred until receipt of payment.

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.

Product maintenance and support services - Included in CDP 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.

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. Revenue on the sale of intellectual property is recognized in full when title transfers if there are no remaining deliverables related to the intellectual property purchase.

Software - The Company includes software with product sales that is considered essential to the product's functionality. The Company also sells software with advanced features that can be used independent of products sold or in conjunction with products sold, which is considered non-essential to the product's functionality. Software related revenue is included in licensing and royalty revenue and is recognized ratably over the license period once delivered.

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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. For multiple-element arrangements that include hardware products containing software essential to the hardware product’s functionality, undelivered software elements that relate to the hardware product’s essential software, and undelivered non-software services, the Company allocates revenue to all deliverables based on their relative selling prices.

The Company evaluates whether a delivered element has value to the customer without the remaining undelivered elements by determining whether the delivered element could be sold by the Company, or resold by the customer, on a stand-alone basis. The Company concluded that all of its products and services deliverables have value to the customers on a stand-alone basis, as all these deliverables have been or could be sold and used by customers on a stand-alone basis. Intellectual property license arrangements have value on a stand-alone basis if the customer could purchase and use them without the remaining elements of the arrangement. Essential and non-essential software deliverables used in conjunction with products are evaluated as to whether industry specific software accounting guidance applies to the product as well as the related software. In instances where software is considered non-essential to the functionality of the product, only the software portion and post contract support is evaluated under industry specific software accounting guidance. For purposes of classification in the consolidated statements of operations, revenue is allocated between collaborative development programs and services revenue, product revenue and licensing and royalty revenue based on objective and reliable evidence of fair value for any elements for which it exists or based on the relative stated invoice amount for elements for which objective and reliable evidence of fair value does not exist.

The Company recognizes revenue using estimated selling prices of the delivered goods and services based on a hierarchy of methods as required by GAAP. The Company has not established vendor-specific objective evidence for the determination of estimated selling price of elements, 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 estimated selling prices 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, net of the associated costs. 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. When deferred revenues are recognized as revenues, the associated deferred costs are also recognized as cost of revenues.  

Accounts Receivable and Allowance for Doubtful Accounts

Trade accounts receivable are recorded at invoiced amounts and unbilled contractually obligated amounts. Trade accounts receivable are presented net of allowances for doubtful accounts, if applicable, and do not bear interest. The allowance for doubtful accounts is based on the Company's assessment of the collectability of its customer accounts. The Company reviews the allowance by considering certain factors such as historical experience, industry data, credit quality, age of balances and current economic conditions that may affect customers' ability to pay.

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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

 

Six Months Ended

 

 

As of

 

 

As of

 

 

 

June 30, 

 

June 30, 

 

 

June 30, 

 

 

December 31, 

 

 

    

2015

    

2014

    

2015

    

2014

    

 

2015

    

 

2014

 

Customer A

 

41

%

42

%

41

%

32

%

 

54

%

 

54

%

Customer B

 

11

%

20

%

12

%

14

%

 

*

 

 

14

%

Customer D

 

-

 

10

%

*

 

*

 

 

-

 

 

11

%

Customer E

 

-

 

-

%

-

 

20

%

 

-

 

 

-

 

Customer G

 

23

%

-

 

18

%

-

 

 

27

%

 

-

 


*   less than 10%

Stock-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 May 2014, the Financial Accounting Standards Board ( FASB ) issued Accounting Standards Update No. 2014-09 (ASU 2014-09) "Revenue from Contracts with Customers." ASU 2014-09 supersedes the revenue recognition requirements in “Revenue Recognition (Topic 605)”, and requires entities to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. As currently issued, the standard is effective beginning in the first quarter of fiscal year 2018. The Company is currently in the process of evaluating the impact of the adoption of ASU 2014-09 on the consolidated financial statements.  

In July 2015, the FASB issued Accounting Standards Update No. 2015-11 (ASU 2015-11) “Simplifying the Measurement of Inventory.” ASU 2015-11 changes the measurement principle for inventory from the lower of cost or market to the lower of cost and net realizable value and will be effective for annual reporting periods beginning after December 15, 2016. Early adoption is permitted and the Company is currently in the process of evaluati ng the impact of the adoption of ASU 2015-11 on the consolidated financial statements.

2. Fair Value of Financial Instruments

The Company measures and reports its cash equivalents and short-term investments at fair value on a recurring basis. There have been no transfers between fair values during the six months ended June 30 , 2015 and 2014. The Company does not have any financial liabilities that are measured and reported at fair value.

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The following tables set forth the fair value of the Company’s cash equivalents by level within the fair value hierarchy (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of June 30, 2015

 

 

 

Fair Value

 

Level I

 

Level II

 

Level III

 

Assets:

    

 

 

    

 

 

    

 

 

    

 

 

 

Money market funds

 

$

11,362

 

$

11,362

 

$

 

$

 

Corporate debt securities and commercial paper

 

 

44,445

 

 

 

 

44,445

 

 

 

Total assets measured at fair value

 

$

55,807

 

$

11,362

 

$

44,445

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2014

 

 

    

Fair Value

    

Level I

    

Level II

    

Level III

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 Money market funds

 

$

16,376

 

$

16,376

 

$

 —

 

$

 —

 

 Corporate debt securities and commercial paper

 

 

43,304

 

 

 —

 

 

43,304

 

 

 —

 

Total assets measured at fair value

 

$

59,680

 

$

16,376

 

$

43,304

 

$

 —

 

Short -term investments are classified as "available-for-sale" and are carried at fair value based on quoted markets or other readily available market information. The Company's investment policy requires investments less than twenty four months and a minimum credit rating of A-. Unrealized gains and losses, net of taxes, are included in accumulated other comprehensive loss. Gains and losses are determined using the specific identification method. Cash, cash equivalents, and short-term investments consisted of the following as of June 30 , 2015 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of June 30, 2015

 

 

    

Amortized Cost

    

Unrealized Gains

    

Unrealized Losses

    

Estimated Fair Value

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash

 

$

3,015

 

$

 

$

 

$

3,015

 

Money market funds

 

 

11,362

 

 

 

 

 

 

11,362

 

Corporate debt securities and commercial paper

 

 

44,495

 

 

 

 

(50)

 

 

44,445

 

Total cash, cash equivalents and short-term investments

 

$

58,872

 

$

 

$

(50)

 

$

58,822

 

As of December 31, 2014 the Company had $37,000 of unrealized losses.

 

 

 

 

 

 

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3. Property and Equipment

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

 

 

 

 

 

 

 

 

 

 

    

As of

    

As of

 

 

 

June 30, 2015

 

December 31, 2014

 

Lab equipment and machinery

 

$

54,877

 

$

53,412

 

Leasehold improvements

 

 

6,116

 

 

5,892

 

Computer equipment and software

 

 

3,943

 

 

3,774

 

Furniture and fixtures

 

 

199

 

 

197

 

Construction in progress

 

 

212

 

 

847

 

Total property and equipment

 

 

65,347

 

 

64,122

 

Less accumulated depreciation

 

 

(48,888)

 

 

(45,016)

 

Property and equipment, net

 

$

16,459

 

$

19,106

 

 

During 2013, the Company entered into a loan and security agreement (Loan Agreement) with Silicon Valley Bank (SVB ) pursuant to which SVB made a term loan to the Company in the principal amount of $25.0 million. Under the Loan Agreement, and as of both June 30 , 2015 and December 31, 2014, SVB held a security interest in substantially all of the Company's assets, excluding all intellectual property. 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30, 

 

Six Months Ended June 30, 

 

 

2015

    

2014

    

2015

    

2014

 

Depreciation expense

$

1,946

 

$

2,550

 

$

3,990

 

$

4,834

 

 

 

 

4. Intangible Assets

Intangible assets consist of the following (in thousands):

 

 

 

 

 

 

 

 

 

 

    

As of

    

As of

    

 

 

June 30, 2015

 

December 31, 2014

 

Patents issued

 

$

7,205

 

$

6,518

 

Patents pending

 

 

2,582

 

 

3,373

 

Trademarks

 

 

40

 

 

40

 

Total intangible assets

 

 

9,827

 

 

9,931

 

Less patent amortization

 

 

(2,353)

 

 

(1,990)

 

Intangible assets, net

 

$

7,474

 

$

7,941

 

Amortization commences upon patent issuance. The useful life of the patents, once issued, will not exceed 20 years, and will depend on the nature of the patent. The average estimated amortization period of the Company's current portfolio is approximately 17 years from the date of patent issuance. The average estimated remaining amortization period of patents acquired as part of an asset purchase from Symyx Technologies, Inc. (Symyx) in 2011 is approximately 3 years.

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30, 

 

Six Months Ended June 30, 

 

 

    

2015

    

2014

    

2015

    

2014

 

Amortization expense

 

$

178

 

$

164

 

$

363

 

$

330

 

 

 

 

 

 

5. Commitments and Contingencies

Leases

The Company entered into an operating lease agreement in October 2013 that expires in June 2025. Rent expense is being recognized on a straight-line basis over the lease term.

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30, 

 

Six Months Ended June 30, 

 

 

2015

    

2014

    

2015

    

2014

 

Rent expense

$

567

 

$

567

 

$

1,134

 

$

1,134

 

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 June 30, 2015:

    

 

 

 

Six months ending December 31, 2015

 

$

786

 

The years ending December 31,

 

 

 

 

2016

 

 

2,350

 

2017

 

 

2,400

 

2018

 

 

2,459

 

2019

 

 

2,521

 

Thereafter

 

 

15,036

 

Total

 

$

25,552

 

During 2015, the Company has made payments of $0.9 million related to this operating lease.

Silicon Valley Bank Loan Agreement

During 2013, the Company entered into the Loan Agreement with SVB in the amount of $25.0 million that bears interest at a fixed rate equal to 3.25% . The Company is obligated to pay interest at the applicable rate and $0.5 million of principal on a quarterly basis. The Loan Agreement has a financial covenant that requires the Company to maintain a certain level of liquidity, and, as of June 30, 2015, the Company was compliant with the terms of that loan covenant. The term loan matures on November 30, 2016 and the Company is obligated to pay all outstanding principal and accrued and unpaid interest on that date.

 

 

 

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The following table presents payments made during 2015 for interest and principal owed under the terms of the Loan Agreement (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30, 2015

 

Six Months Ended June 30, 2015

 

 

Principal

 

Interest

 

Total

 

Principal

 

Interest

 

Total

  

SVB payments

$

500

    

$

183

    

$

683

    

$

1,000

    

$

374

    

$

1,374

 

 

 

 

 

6. Stockholders’ Equity

Stock-Based Compensation

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

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30, 

 

Six Months Ended June 30, 

 

 

2015

    

2014

    

2015

    

2014

 

Expected term (in years)

6.0

 

5.7

 

5.8

 

5.8

 

Risk-free interest rate

1.5

%  

1.9

%  

1.5

%  

1.9

%  

Expected volatility

51

%  

56

%  

50

%  

57

%  

Expected dividend rate

 —

%  

 —

%  

 —

%  

 —

%  

 

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 June 30, 

 

Six Months Ended June 30, 

 

 

2015

    

2014

    

2015

    

2014

 

Cost of revenue

$

312

 

$

243

 

$

784

 

$

548

 

Research and development

 

511

 

 

257

 

 

1,018

 

 

580

 

Sales and marketing

 

312

 

 

315

 

 

523

 

 

660

 

General and administrative

 

612

 

 

490

 

 

1,318

 

 

1,005

 

Total stock-based compensation

$

1,747

 

$

1,305

 

$

3,643

 

$

2,793

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30, 

 

Six Months Ended June 30, 

 

 

2015

    

2014

    

2015

    

2014

 

Stock options

$

1,124

 

$

818

 

$

2,461

 

$

1,798

 

Restricted stock awards and restricted stock units (RSUs)

 

623

 

 

487

 

 

1,182

 

 

995

 

Total stock-based compensation

$

1,747

 

$

1,305

 

$

3,643

 

$

2,793

 

 

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The following table presents unrecognized compensation expense, net of estimated forfeitures, related to the Company’s equity compensation plans as of June 30, 2015, which is expected to be recognized over the following weighted-average periods (in thousands, except for weighted-average period): 

 

 

 

 

 

 

 

 

 

    

Unrecognized

    

Weighted-

 

 

 

Compensation 

 

Average Period 

 

 

 

Expense

 

(in years)

 

Stock options

 

$

6,990

 

2.9

 

RSUs

 

$

1,464

 

2.4

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended

 

Six Months Ended

 

 

June 30, 2015

 

June 30, 2014

 

 

 

    

Weighted-

    

 

    

Weighted-

 

 

 

 

 Average Grant 

 

 

 

Average Grant

 

 

Shares Granted

 

 Date Fair Value

 

Shares Granted

 

Date Fair Value

 

Stock options

2,686,763

 

$

0.82

 

1,888,100

 

$

1.48

 

RSUs

40,000

 

$

1.66

 

1,410,450

 

$

2.78

 

The total intrinsic value of stock options exercised during the six months ended June 30, 2015 and 2014 was $0.7 million and $0. 7 million, respectively.

RSUs that vested during the six months ended June 30, 2015 and 2014 had fair values of $2.8 million and $1.5 million, respectively, as of the vesting date.

Common Stock Warrants

As of June 30, 2015 and December 31, 2014, the Company had 90,000 outstanding warrants to purchase shares of common stock. All of these warrants were exercisable as of June 30, 2015 and December 31, 2014, respectively.

Common Stock

As of June 30, 2015 and December 31, 2014, the Company had reserved shares of common stock for issuance as follows:

 

 

 

 

 

 

 

 

    

As of June 30, 2015

    

As of December 31, 2014

 

Number of stock options outstanding

 

10,928,886

 

10,441,562

 

Number of RSUs outstanding

 

539,410

 

1,583,801

 

Shares available for future grant

 

3,586,279

 

1,770,411

 

Number of warrants outstanding

 

90,000

 

90,000

 

Total shares reserved

 

15,144,575

 

13,885,774

 

 

 

 

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 six months ended June 30, 2015 and 2014 (in thousands, except for share and per share amounts):

 

 

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Three Months Ended June 30, 

 

Six Months Ended June 30, 

 

 

2015

    

2014

    

2015

    

2014

 

Net loss attributable to common stockholders

$

(5,680)

 

$

(6,859)

 

$

(12,673)

 

$

(10,710)

 

Shares used in computing net loss per share of common stock, basic and diluted

 

47,935,399

 

 

47,192,882

 

 

47,767,508

 

 

46,560,205

 

Net loss per share of common stock, basic and diluted

$

(0.12)

 

$

(0.15)

 

$

(0.27)

 

$

(0.23)

 

 

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

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30, 

 

Six Months Ended June 30, 

 

 

2015

    

2014

    

2015

    

2014

 

Stock options to purchase common stock

10,928,886

 

6,901,291

 

10,928,886

 

6,901,291

 

RSUs

539,410

 

1,909,980

 

539,410

 

1,909,980

 

Common stock warrants

90,000

 

912,368

 

90,000

 

912,368

 

 

 

 

 

8. Income Taxes

Income tax expense for the six months ended June 30, 2015 was $5,000, or 0.0%, on a pre-tax loss of $12.7 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-based compensation expense, other currently non-deductible items and movement in its valuation allowance. The Company maintained a valuation allowance as of June 30, 2015 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 2013, the Company amended the CDP agreement that it had entered into in March 2010 with a related party and that it and the related party had amended in March 2012. Under the amended agreement, the two companies agreed to work together to conduct research and development and other activities. The CDP development program between the parties ended during the year ended December 31, 2014, although certain licensing and royalty elements continue. The other party and the Company each have an independent board member that serves on both companies’ boards of directors and the independent board member is also a managing member of a significant stockholder of the Company. As of June 30, 2015, this stockholder was a beneficial owner of approximately 8 . 9 %   of the Company’s common stock. The following table presents related party revenue included in the Condensed Consolidated Statement of Operations from this amended agreement (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30, 

 

Six Months Ended June 30, 

 

 

2015

    

2014

    

2015

    

2014

 

Related party revenue

$

313

 

$

354

 

$

625

 

$

1,257

 

 

In November 2006, the Company entered into an Alliance Agreement with a related party that was a beneficial owner of less than 5% of the Company’s common stock as of June 30, 2015. The other party and the Company each have  

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a n independent board member that serves on both companies’ boards of directors. Since November 2006, the agreement has been amended numerous times with the last amendment signed in December 2013.

As of June 30, 2015 and December 31, 2014, the Company did not have an accounts receivable balance, and had a deferred revenue balance in the amount of $0.4 million and $0.8 million, respectively, related to the amended agreement. The following table presents related party revenue included in the Condensed Consolidated Statement of Operations from the amended agreement (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30, 

 

Six Months Ended June 30, 

 

 

2015

    

2014

    

2015

    

2014

 

Related party revenue

$

601

 

$

876

 

$

809

 

$

1,351

 

 

 

 

 

 

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 June 30, 

 

Six Months Ended June 30, 

 

 

2015

    

2014

    

2015

    

2014

 

United States

$

7,519

 

$

9,054

 

$

14,629

 

$

23,271

 

Japan

 

313

 

 

354

 

 

1,295

 

 

1,257

 

APAC other

 

2,917

 

 

389

 

 

4,484

 

 

931

 

Europe and Middle East

 

245

 

 

137

 

 

431

 

 

380

 

Total

$

10,994

 

$

9,934

 

$

20,839

 

$

25,839

 

 

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.

 

 

 

 

 

 

 

 

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ITEM 2. MANAGEMENT’S DISCUSSIO N AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Our Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is provided in addition to the accompanying 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 six months ended June 30, 2015 to the three and six months ended June 30, 2014.

·

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 (2014 Form 10-K), as filed with the Securities and Exchange Commission. This Form 10-Q contains forward-looking statements that involve risks and uncertainties, as well as assumptions that, if they never materialize or prove incorrect, could cause our results to differ materially from those expressed or implied by such forward-looking statements. The statements contained in this Form 10-Q that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, 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 2014 Form 10-K. Furthermore, such forward-looking statements speak only as of the date of this Form 10-Q. Except as required by law, we undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements.

Overview

We provide thin film solutions to advanced technological problems facing multiple industries, including, for example, the semiconductor and clean energy industries. These industries manufacture products by depositing thin films of advanced materials using customized processes to create structures that must meet increasingly rigorous optical, mechanical or electrical specifications. Developing advanced thin film structures capable of addressing the specifications of particular applications increasingly requires the evaluation of a wider range of materials, as well as the development of a broader range of processes. Due to our flexibility, speed and materials focus, we are able to assist our customers by more quickly evaluating candidate materials and combining them into thin film solutions that meet their specific needs.

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We were founded in 2004 and are headquartered in San Jose, California. Our total revenue increased to $11.0 million for the three months ended June 30, 2015 and decreased to $20.8 million for the six months ended June 30, 2015 from $9.9 million and $25.8 million for the three and six months ended June 30, 2014. Our net loss decreased to $5.7 million for the three months ended June 30, 2015 and increased to $12.7 million for the six months ended June 30, 2015, from a net loss of $6.9 million and $10.7 million for the three and six months ended June 30, 2014. Since inception, we have incurred net losses leading to an accumulated deficit of $144.6 million as of June 30, 2015.

Strategy

Our mission is to drive our customers' success by transforming research and development (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 coatings and glass-based devices, light-emitting diodes (LEDs), displays and other applications and markets that rely on thin films for differentiation. 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, Inc. (ATMI; a wholly owned subsidiary of Entegris, Inc.), Elpida Memory, Inc. (Elpida; a wholly owned subsidiary of Micron Technology, Inc.), First Solar, Inc. (First Solar), Guardian Industries, Corp. (Guardian), Micron Technology, Inc. (Micron), SanDisk Corporation (SanDisk), Toshiba Corporation (Toshiba) and Ulyanovsk Center for Technology Transfer of the Russian Federation (UCTT). 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, solar cells, and energy-efficiency 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, LEDs, displays and other energy-efficiency 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/or 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 customers but allow us to demonstrate the capabilities of our HPC platform to a customer without requiring them 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/or royalty revenue. In certain cases, we sell HPC processing tools to our customers, who pay us a recurring license fee for the right to operate those tools using our combinatorial processing methodology.

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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. As we engage new customers and negotiate extensions for existing customer

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agreements that are nearing completion, we expect CDP and services revenue to continue to fluctuate.

 

 

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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. As our other revenue streams increase we expect our product revenue to decrease as a percentage of our overall revenue. Product revenue is recognized upon shipment (when title and risk of loss have passed to the customer), and customer acceptance, if required, is achieved.

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Licensing and royalty revenue.    Licensing and royalty revenue consists of licensing fees and royalties for granting our customers rights to our proprietary technology and intellectual property (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. We anticipate our licensing and royalty revenue to continue to fluctuate based on the timing and amount of minimum license fees guaranteed by certain customer contracts and the timing of customer reported volume-based royalties.

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.

 

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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. Inventory obsolescence and customer related asset impairments are included in cost of CDP and services revenue.

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Cost of product revenue.   Our cost of product revenue primarily includes our cost of products sold and will fluctuate based on the type of product and configuration sold. Cost of product revenue is recognized upon product shipment (when title and risk of loss transfer) and customer acceptance, if required. 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.

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Cost of licensing and royalty revenue.   Our cost of licensing and royalty revenue has been, and we expect will continue to be, primarily comprised of the amortization of acquired patents, which were acquired as part of our completion of the Symyx asset purchase transaction in November 2011, and licensing obligations.

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

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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. R&D overhead costs that are not allocated to a customer program are recognized as expenses within R&D. We expect our R&D expense to increase modestly in absolute dollars in the near-term periods as resources are reallocated from customer CDPs to R&D and as we continue 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 sales and marketing expense to increase in the near-term periods as we develop new business opportunities.

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 costs maintaining compliance with Section 404 of the Sarbanes-Oxley Act, as well as insurance, investor relations and other costs associated with being a public company. We expect that general and administrative expense will increase modestly in absolute dollars in the near-term periods.

Restructuring Expenses

In 2014, after experiencing a reduced level of CDP activity, we initiated reductions in force in February 2014 and May 2014 with respect to approximately 18% and 10% of our workforce at such times, respectively. These reductions in force were part of an overall plan to reduce our cost structure and were completed during 2014. Restructuring expenses consisted of personnel-related costs.

Interest Expense, net

Interest expense consists primarily of interest accrued on our three year note payable with Silicon Valley Bank. 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.

Critical Accounting Estimates

Our condensed 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 condensed 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

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the results from those reported. Our management evaluates its estimates, assumptions and judgments on an ongoing basis.