Intermolecular, Inc.
INTERMOLECULAR INC (Form: 10-Q, Received: 11/06/2015 17:07:52)

`

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 September 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  November   2 , 2015

Common stock, $0.001 par value

 

48 , 920 , 754

 

 

 

 

 


 

Table of Contents

INTERMOLECULAR, INC.

FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 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

 

31 

Item 1A.  

Risk Factors

 

31 

Item 2.  

Unregistered Sales of Equity Securities and Use of Proceeds

 

31 

Item 6.  

Exhibits

 

32 

 

Signatures

 

33 

 

 

 

 

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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)

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2015

 

December 31, 2014

 

ASSETS

    

 

 

    

 

 

    

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

3,301

 

$

21,765

 

Short-term investments

 

 

31,193

 

 

43,304

 

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

 

 

7,841

 

 

5,321

 

Accounts receivable, due from related parties

 

 

23

 

 

 —

 

Inventory, current portion

 

 

 —

 

 

34

 

Prepaid expenses and other current assets

 

 

1,177

 

 

1,784

 

Total current assets

 

 

43,535

 

 

72,208

 

Inventory, net of current portion

 

 

4,180

 

 

5,894

 

Property and equipment, net

 

 

16,088

 

 

19,106

 

Intangible assets, net

 

 

7,316

 

 

7,941

 

Other assets

 

 

513

 

 

288

 

Total assets

 

$

71,632

 

$

105,437

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

 

$

1,764

 

$

862

 

Accrued liabilities

 

 

2,320

 

 

2,101

 

Accrued compensation and employee benefits

 

 

4,342

 

 

1,628

 

Deferred revenue

 

 

1,864

 

 

2,709

 

Related party deferred revenue

 

 

208

 

 

831

 

Note payable

 

 

 —

 

 

2,000

 

Total current liabilities

 

 

10,498

 

 

10,131

 

Deferred revenue, net of current portion

 

 

130

 

 

1,103

 

Deferred rent, net of current portion

 

 

3,324

 

 

2,810

 

Note payable, net of current portion

 

 

 —

 

 

21,000

 

Other long-term liabilities

 

 

234

 

 

128

 

Total liabilities

 

 

14,186

 

 

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 September 30, 2015 and December 31, 2014

 

 

 —

 

 

 —

 

Common stock, par value $0.001 per share— 200,000,000 shares authorized; 48,851,166 and 47,614,150 shares issued and outstanding as of September 30, 2015 and December 31, 2014, respectively

 

 

49

 

 

48

 

Additional paid-in capital

 

 

207,788

 

 

202,139

 

Accumulated other comprehensive loss

 

 

(9)

 

 

(37)

 

Accumulated deficit

 

 

(150,382)

 

 

(131,885)

 

Total stockholders’ equity

 

 

57,446

 

 

70,265

 

Total liabilities and stockholders’ equity

 

$

71,632

 

$

105,437

 

See accompanying notes to unaudited condensed consolidated financial statements

 

 

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INTERMOLECULAR, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Operation s

(In thousands, except share and per share data)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30, 

 

Nine Months Ended September 30, 

 

 

2015

    

2014

 

2015

    

2014

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

Program revenue

$

8,684

 

$

7,699

 

$

22,958

 

$

23,450

 

Product revenue

 

 —

 

 

 —

 

 

75

 

 

 —

 

Licensing and royalty revenue

 

2,844

 

 

3,156

 

 

9,334

 

 

13,244

 

Total revenue

 

11,528

 

 

10,855

 

 

32,367

 

 

36,694

 

Cost of revenue:

 

 

 

 

 

 

 

 

 

 

 

 

Cost of development program and services revenue

 

4,984

 

 

6,090

 

 

14,884

 

 

18,044

 

Cost of product revenue

 

 —

 

 

 —

 

 

55

 

 

 —

 

Cost of licensing and royalty revenue

 

64

 

 

77

 

 

216

 

 

327

 

Total cost of revenue

 

5,048

 

 

6,167

 

 

15,155

 

 

18,371

 

Gross profit

 

6,480

 

 

4,688

 

 

17,212

 

 

18,323

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

7,422

 

 

5,023

 

 

21,082

 

 

18,191

 

Sales and marketing

 

1,639

 

 

1,321

 

 

4,535

 

 

4,348

 

General and administrative

 

3,171

 

 

3,134

 

 

9,767

 

 

9,544

 

Restructuring charges

 

 —

 

 

 —

 

 

 —

 

 

1,361

 

Total operating expenses

 

12,232

 

 

9,478

 

 

35,384

 

 

33,444

 

Loss from operations

 

(5,752)

 

 

(4,790)

 

 

(18,172)

 

 

(15,121)

 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense, net

 

(52)

 

 

(159)

 

 

(307)

 

 

(532)

 

Other income (expense), net

 

(18)

 

 

(13)

 

 

(11)

 

 

(13)

 

Total other income (expense), net

 

(70)

 

 

(172)

 

 

(318)

 

 

(545)

 

Loss before provision for income taxes

 

(5,822)

 

 

(4,962)

 

 

(18,490)

 

 

(15,666)

 

Provision for income taxes

 

2

 

 

1

 

 

7

 

 

7

 

Net loss

$

(5,824)

 

$

(4,963)

 

$

(18,497)

 

$

(15,673)

 

Net loss per share of common stock, basic and diluted

$

(0.12)

 

$

(0.11)

 

$

(0.38)

 

$

(0.34)

 

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

 

48,620,503

 

 

46,842,055

 

 

48,055,409

 

 

46,655,187

 

 

Related Party Transactions

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30, 

 

Nine Months Ended September 30, 

 

 

2015

    

2014

    

2015

    

2014

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

Program revenue

$

26

 

$

3

 

$

32

 

$

1,111

 

Licensing and royalty revenue

 

915

 

 

1,147

 

 

2,343

 

 

2,647

 

Total revenue

$

941

 

$

1,150

 

$

2,375

 

$

3,758

 

 

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 September 30, 

 

Nine Months Ended September 30, 

 

 

2015

    

2014

    

2015

    

2014

 

Net loss

$

(5,824)

 

$

(4,963)

 

$

(18,497)

 

$

(15,673)

 

Unrealized losses on available-for-sale-securities

 

41

 

 

(12)

 

 

28

 

 

(30)

 

Other comprehensive loss

 

41

 

 

(12)

 

 

28

 

 

(30)

 

Comprehensive loss, net of income tax

$

(5,783)

 

$

(4,975)

 

$

(18,469)

 

$

(15,703)

 

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)

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 

 

 

    

2015

    

2014

 

Cash flows from operating activities:

 

 

 

 

 

 

 

Net loss

 

$

(18,497)

 

$

(15,673)

 

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

 

 

 

 

 

 

 

Depreciation, amortization, and accretion

 

 

7,468

 

 

8,149

 

Stock-based compensation

 

 

4,788

 

 

4,529

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Prepaid expenses and other assets

 

 

(136)

 

 

656

 

Inventory

 

 

263

 

 

50

 

Accounts receivable

 

 

(2,543)

 

 

770

 

Accounts payable

 

 

745

 

 

(1,231)

 

Accrued and other liabilities

 

 

3,542

 

 

(440)

 

Deferred revenue

 

 

(1,818)

 

 

1,166

 

Related party deferred revenue

 

 

(623)

 

 

430

 

Net cash (used in) provided by operating activities

 

 

(6,811)

 

 

(1,594)

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Purchase of short-term investments

 

 

(32,118)

 

 

(45,171)

 

Redemption of short-term investments

 

 

44,114

 

 

785

 

Purchase of property and equipment

 

 

(933)

 

 

(2,568)

 

Purchased and capitalized intangible assets

 

 

(577)

 

 

(1,160)

 

Net cash (used in) provided by investing activities

 

 

10,486

 

 

(48,114)

 

Cash flows from financing activities:

 

 

 

 

 

 

 

Payment of debt

 

 

(23,000)

 

 

(1,500)

 

Proceeds from exercise of common stock options

 

 

861

 

 

1,175

 

Net cash (used in) provided by financing activities

 

 

(22,139)

 

 

(325)

 

Net decrease in cash and cash equivalents

 

 

(18,464)

 

 

(50,033)

 

Cash and cash equivalents at beginning of period

 

 

21,765

 

 

72,083

 

Cash and cash equivalents at end of period

 

$

3,301

 

$

22,050

 

 

 

 

 

 

 

 

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

Cash paid for interest

 

$

652

 

$

471

 

Cash paid for income taxes, net of refunds received

 

$

5

 

$

33

 

Noncash investing/operating activities:

 

 

 

 

 

 

 

Transfer of property and equipment to inventory

 

$

1,252

 

$

999

 

Transfer of inventory to property and equipment

 

$

2,737

 

$

 —

 

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

 

$

528

 

$

284

 

See accompanying notes to unaudited condensed consolidated financial statements

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INTERMOLECULAR, INC. AND SUBSIDIARI ES

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 nine months ended September 30, 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 September 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 $4.2 million and $5.9 million as of September 30, 2015 and December 31, 2014, respectively. Inventories in excess of salable or usable 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 recorded inventory impairments of $0.9 million and $0.3 million during the nine months ended September 30, 2015 and September 30, 2014, respectively.

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

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impairment of property and equipment during the nine months ended September 30, 2015 and 2014.  The company did write off $0.6 million and $0.2 million of pending patents in the nine months ending September 30, 2015 and 2014.

Revenue Recognition

The Company derives its revenue from two principal sources: research and development programs and other services, and technology licensing and royalty fees. Product sales have been made historically, but are not a principal source of revenue. 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.

Programs and other services - The Company enters into development programs and other research and development service agreements with customers under which the Company conducts research and development activities with customers. The agreements specify minimum levels of research effort required to be performed by the Company. Payments received under the agreements are not refundable if the research effort is not successful. In some contracts, the Company retains rights to certain elements of technology developed in the course of its performance, which the customer has an option to license in the future under the terms defined in the agreement. 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 program 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.

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. 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

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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 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

 

Nine Months Ended

 

 

As of

 

 

As of

 

 

 

September 30, 

 

September 30, 

 

 

September 30, 

 

 

December 31, 

 

 

    

2015

    

2014

    

2015

    

2014

    

 

2015

    

 

2014

 

Customer A

 

34

%

38

%

39

%

34

%

 

46

%

 

54

%

Customer B

 

10

%

22

%

11

%

16

%

 

*

 

 

14

%

Customer D

 

-

 

*

 

*

 

*

 

 

-

 

 

11

%

Customer E

 

-

 

-

 

-

 

14

%

 

-

 

 

-

 

Customer G

 

12

%

-

 

16

%

-

 

 

17

%

 

-

 

Customer H

 

12

%

-

 

*

 

-

 

 

18

%

 

-

 


*   less than 10%

Stock-Based Compensation

The Company applies the fair value recognition and measurement provisions of ASC 718 Compensation — Stock Compensation. The Company measures and recognizes compensation expense for all stock-based payment awards issued to employees and directors including employee stock options and restricted stock units based on estimated fair values. The Company uses the grant-date fair value of its common stock to determine the fair value of restricted stock units. The Company uses the Black-Scholes option pricing model to determine the fair value of stock options. Stock-based compensation cost is recorded net of estimated forfeitures on a straight-line basis over the requisite service period (generally the vesting period).

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 does not expect the adoption of ASU 2015-11 to have a material effect on the consolidated financial statements.

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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 nine months ended September 30 , 2015 and 2014. The Company does not have any financial liabilities that are measured and reported at fair value.

 

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 September 30, 2015

 

 

 

Fair Value

 

Level I

 

Level II

 

Level III

 

Assets:

    

 

 

    

 

 

    

 

 

    

 

 

 

Money market funds

 

$

234

 

$

234

 

$

 

$

 

Corporate debt securities and commercial paper

 

 

31,193

 

 

 

 

31,193

 

 

 

Total assets measured at fair value

 

$

31,427

 

$

234

 

$

31,193

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 September 30 , 2015 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of September 30, 2015

 

 

    

Amortized Cost

    

Unrealized Gains

    

Unrealized Losses

    

Estimated Fair Value

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash

 

$

3,067

 

$

 

$

 

$

3,067

 

Money market funds

 

 

234

 

 

 

 

 

 

234

 

Corporate debt securities and commercial paper

 

 

31,202

 

 

 

 

(9)

 

 

31,193

 

Total cash, cash equivalents and short-term investments

 

$

34,503

 

$

 

$

(9)

 

$

34,494

 

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

 

 

 

September 30, 2015

 

December 31, 2014

 

Lab equipment and machinery

 

$

55,077

 

$

53,412

 

Leasehold improvements

 

 

6,116

 

 

5,892

 

Computer equipment and software

 

 

4,270

 

 

3,774

 

Furniture and fixtures

 

 

203

 

 

197

 

Construction in progress

 

 

984

 

 

847

 

Total property and equipment

 

 

66,650

 

 

64,122

 

Less accumulated depreciation

 

 

(50,562)

 

 

(45,016)

 

Property and equipment, net

 

$

16,088

 

$

19,106

 

 

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 September 30, 

 

Nine Months Ended September 30, 

 

 

2015

    

2014

    

2015

    

2014

 

Depreciation expense

$

1,674

 

$

2,433

 

$

5,664

 

$

7,267

 

 

 

 

4. Intangible Assets

Intangible assets consist of the following (in thousands):

 

 

 

 

 

 

 

 

 

 

    

As of

    

As of

    

 

 

September 30, 2015

 

December 31, 2014

 

Patents issued

 

$

7,460

 

$

6,518

 

Patents pending

 

 

2,351

 

 

3,373

 

Trademarks

 

 

40

 

 

40

 

Total intangible assets

 

 

9,851

 

 

9,931

 

Less patent amortization

 

 

(2,535)

 

 

(1,990)

 

Intangible assets, net

 

$

7,316

 

$

7,941

 

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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.

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, 

 

 

    

2015

    

2014

    

2015

    

2014

 

Amortization expense

 

$

182

 

$

175

 

$

545

 

$

505

 

 

 

 

 

 

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 September 30, 

 

Nine Months Ended September 30, 

 

 

2015

    

2014

    

2015

    

2014

 

Rent expense

$

567

 

$

567

 

$

1,701

 

$

1,701

 

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, 2015:

    

 

 

 

Three months ending December 31, 2015

 

$

490

 

The years ending December 31,

 

 

 

 

2016

 

 

2,350

 

2017

 

 

2,399

 

2018

 

 

2,459

 

2019

 

 

2,521

 

Thereafter

 

 

15,037

 

Total

 

$

25,256

 

During 2015, the Company has made payments of $1.2 million related to this operating lease.

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 September 30, 2015

 

Nine Months Ended September 30, 2015

 

 

Principal

 

Interest

 

Total

 

Principal

 

Interest

 

Total

  

SVB payments

$

22,000

    

$

278

    

$

22,278

    

$

23,000

    

$

652

    

$

23,652

 

 

 

 

 

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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 September 30, 

 

Nine Months Ended September 30, 

 

 

2015

    

2014

    

2015

    

2014

 

Expected term (in years)

6.1

 

6.1

 

5.9

 

5.8

 

Risk-free interest rate

1.8

%  

1.9

%  

1.6

%  

1.9

%  

Expected volatility

49

%  

57

%  

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 September 30, 

 

Nine Months Ended September 30, 

 

 

2015

    

2014

    

2015

    

2014

 

Cost of revenue

$

172

 

$

407

 

$

956

 

$

955

 

Research and development

 

320

 

 

296

 

 

1,338

 

 

876

 

Sales and marketing

 

157

 

 

412

 

 

680

 

 

1,072

 

General and administrative

 

496

 

 

621

 

 

1,814

 

 

1,626

 

Total stock-based compensation

$

1,145

 

$

1,736

 

$

4,788

 

$

4,529

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30, 

 

Nine Months Ended September 30, 

 

 

2015

    

2014

    

2015

    

2014

 

Stock options

$

1,052

 

$

874

 

$

3,513

 

$

2,672

 

Restricted stock awards and restricted stock units (RSUs)

 

93

 

 

862

 

 

1,275

 

 

1,857

 

Total stock-based compensation

$

1,145

 

$

1,736

 

$

4,788

 

$

4,529

 

 

The following table presents unrecognized compensation expense, net of estimated forfeitures, related to the Company’s equity compensation plans as of September 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

 

$

6,522

 

2.8

 

RSUs

 

$

1,124

 

2.2

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

Nine Months Ended

 

 

September 30, 2015

 

September 30, 2014

 

 

 

    

Weighted-

    

 

    

Weighted-

 

 

 

 

 Average Grant 

 

 

 

Average Grant

 

 

Shares Granted

 

 Date Fair Value

 

Shares Granted

 

Date Fair Value

 

Stock options

3,479,313

 

$

0.86

 

1,922,600

 

$

1.47

 

RSUs

40,000

 

$

1.66

 

1,410,450

 

$

2.78

 

The total intrinsic value of stock options exercised during the nine months ended September 30, 2015 and 2014 was $0. 8 million and $0.7 million, respectively.

RSUs that vested during the nine months ended September 30, 2015 and 2014 had fair values of $2.8 million and $ 1 . 7 million, respectively, as of the vesting date.

Common Stock Warrants

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

Common Stock

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

 

 

 

 

 

 

 

 

    

As of September 30, 2015

    

As of December 31, 2014

 

Number of stock options outstanding

 

11,667,660

 

10,441,562

 

Number of RSUs outstanding

 

415,241

 

1,583,801

 

Shares available for future grant

 

2,799,694

 

1,770,411

 

Number of warrants outstanding

 

 —

 

90,000

 

Total shares reserved

 

14,882,595

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30, 

 

Nine Months Ended September 30, 

 

 

2015

    

2014

    

2015

    

2014

 

Net loss attributable to common stockholders

$

(5,824)

 

$

(4,963)

 

$

(18,497)

 

$

(15,673)

 

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

 

48,620,503

 

 

46,842,055

 

 

48,055,409

 

 

46,655,187

 

Net loss per share of common stock, basic and diluted

$

(0.12)

 

$

(0.11)

 

$

(0.38)

 

$

(0.34)

 

 

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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 September 30, 

 

Nine Months Ended September 30, 

 

 

2015

    

2014

    

2015

    

2014

 

Stock options to purchase common stock

11,667,660

 

6,699,670

 

11,667,660

 

6,699,670

 

RSUs

415,241

 

1,830,805

 

415,241

 

1,830,805

 

Common stock warrants

 —

 

90,000

 

 —

 

90,000

 

 

 

 

 

8. Income Taxes

Income tax expense for the nine months ended September 30, 2015 was $ 7 , 0 00 , or 0.0% , on a pre-tax loss of $18.5 million. The difference between the Company's effect ive 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 September 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 program 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 program development 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 September 30, 2015, this stockholder was a beneficial owner of approximately 8. 8 % 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 September 30, 

 

Nine Months Ended September 30, 

 

 

2015

    

2014

    

2015

    

2014

 

Related party revenue

$

336

 

$

313

 

$

961

 

$

1,570

 

 

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 September 30, 2015. The other party and the Company each have  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.

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As of September 30, 2015 and December 31, 2014, the Company had an immaterial accounts receivable balance, and had a deferred revenue balance in the amount of $0. 2 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 September 30, 

 

Nine Months Ended September 30, 

 

 

2015

    

2014

    

2015

    

2014

 

Related party revenue

$

605

 

$

837

 

$

1,414

 

$

2,188

 

 

 

 

 

 

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, 

 

 

2015

    

2014

    

2015

    

2014

 

United States

$

7,206

 

$

9,626

 

$

21,835

 

$

32,897

 

Japan

 

913

 

 

685

 

 

2,208

 

 

1,942

 

APAC other

 

3,115

 

 

407

 

 

7,599

 

 

1,338

 

Europe and Middle East

 

294

 

 

137

 

 

725

 

 

517

 

Total

$

11,528

 

$

10,855

 

$

32,367

 

$

36,694

 

 

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 nine months ended September 30, 2015 to the three and nine months ended September 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 solutions for the evaluation and development of engineered thin-film materials for next generation technology products .   Our customers 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. Intermolecular utilizes proprietary methods to accelerate a broad and deep understanding of the characteristics of thin-film engineered materials .   Due to our flexibility, speed and materials focus, we are able to assist

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our customers by more quickly evaluating candidate materials and combining them into thin film solutions that meet their specific needs.

We were founded in 2004 and are headquartered in San Jose, California. Our total revenue increased to $11.5 million for the three months ended September 30, 2015 and decreased to $ 3 2 . 4 million for the nine months ended September 30, 2015 from $10.9 million and $36.7 million for the three and nine months ended September 30, 2014 . Our net loss in creased to $5. 8 million for the three months ended September 30, 2015 and $1 8 . 5 million for the nine months ended September 30, 2015, from a net loss of $5.0 million and $15.7 million for the three and nine months ended September 30, 2014 . Since inception, we have incurred net losses leading to an accumulated deficit of $1 50 . 4 million as of September 30, 2015.

Strategy

             Our mission is to become the leader in engineered materials solutions for complex technologies that differentiate our customers' products, allowing them to derive a competitive advantage from the interaction of materials science, processes, integration and device architecture that Intermolecular brings to bear. The company’s products and services consist of information products, tools, and materials formulations that enable its customers’ R&D departments to efficiently evaluate, develop and integrate materials that are critical to their next generation products.   Intermolecular s product solutions create significant economic value for its customers by enabling them to rapidly discover and create new options for mission-critical materials decisions. We currently target semiconductor markets, including memory, logic and embedded memory, flat glass coatings and glass-based devices, light-emitting diodes (LEDs), displays, advanced alloys and other applications and markets that rely on multinary thin films for differentiation. 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 technologies .

Basis of Presentation

How We Generate Revenue

Our customer engagement process generates revenue in three ways: program revenue; licensing and royalty revenue, and product revenue. Programs are our primary engagement model with customers and are structured to result in program fees, and in some cases licensing and/or royalty revenue arrangements. Program revenue may include payments for research services, milestone payments, and subscription payments for dedicated and shared workflow tools used in the programs and reimbursed payments for consumables and outside services from third parties. Individual programs typically range from six months up to three years. Services revenue outside of programs are substantially comprised of support and maintenance fees and extended warranty agreements. Program revenue is recognized in a manner consistent with activities performed. As we engage new customers and negotiate extensions for existing customer agreements that are nearing completion, we expect program revenue to continue to fluctuate .

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Program revenue.    P rogram revenue may include payments for research services , milestone payments, and subscription payments for dedicated and shared workflow tools used in the programs and reimbursed payments for consumables and outside services from third parties. Individual programs typically range from six months up to three years. Services revenue outside of programs   are substantially comprised of support and maintenance fees and extended warranty agreements. Program revenue is recognized in a manner consistent with activities performed. As we engage new customers and negotiate extensions for existing customer agreements that are nearing completion, we expect program revenue to continue to fluctuate.

 

 

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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 programs . 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.

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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 programs and licensing fees and royalties. As our other revenue streams increase we expect our product revenue to continue 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.

 

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.