Intermolecular, Inc.
INTERMOLECULAR INC (Form: 10-Q, Received: 11/02/2016 16:34:51)

 

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, 2016

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

(Do not check if a smaller reporting company)

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 October 28, 2016

Common stock, $0.001 par value

 

49,531,028

 

 

 

 

 


INTERMOLECULAR, INC.

FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2016

TABLE OF CONTENTS

 

 

 

 

Page

 

PART I — FINANCIAL INFORMATION

 

 

 

 

 

 

Item 1.

Financial Statements

 

3

 

Condensed Consolidated Balance Sheets (Unaudited)

 

3

 

Condensed Consolidated Statements of Operations (Unaudited)

 

4

 

Condensed Consolidated Statements of Comprehensive Loss (Unaudited)

 

5

 

Condensed Consolidated Statements of Cash Flows (Unaudited)

 

6

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

7

Item 2.

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

 

17

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

24

Item 4.

Controls and Procedures

 

25

 

PART II — OTHER INFORMATION

 

 

Item 1.

Legal Proceedings

 

26

Item 1A.

Risk Factors

 

26

Item 5.

Other Information

 

26

Item 6.

Exhibits

 

27

 

Signatures

 

28

 

2


PART I — FINANCI AL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

INTERMOLECULAR, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(In thousands, except share and per share data)

(Unaudited)

 

 

 

September 30, 2016

 

 

December 31, 2015

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

9,695

 

 

$

11,676

 

Short-term investments

 

 

19,698

 

 

 

23,656

 

Accounts receivable, net of allowance for doubtful accounts of $0 as of September 30,

   2016 and December 31, 2015

 

 

3,590

 

 

 

6,114

 

Prepaid expenses and other current assets

 

 

1,508

 

 

 

1,608

 

Total current assets

 

 

34,491

 

 

 

43,054

 

Long-term investments

 

 

2,481

 

 

 

 

Materials inventory

 

 

3,342

 

 

 

4,413

 

Property and equipment, net

 

 

12,031

 

 

 

15,735

 

Intangible assets, net

 

 

4,217

 

 

 

5,969

 

Other assets

 

 

527

 

 

 

506

 

Total assets

 

$

57,089

 

 

$

69,677

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

327

 

 

$

848

 

Accrued liabilities

 

 

2,345

 

 

 

2,385

 

Accrued compensation and employee benefits

 

 

1,685

 

 

 

4,416

 

Deferred revenue

 

 

2,124

 

 

 

2,595

 

Total current liabilities

 

 

6,481

 

 

 

10,244

 

Deferred rent, net of current portion

 

 

3,188

 

 

 

3,299

 

Other long-term liabilities

 

 

109

 

 

 

35

 

Total liabilities

 

 

9,778

 

 

 

13,578

 

Commitments and contingencies (note 5)

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

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

   49,521,028 and 49,092,260 shares issued and outstanding as of September 30, 2016

   and December 31, 2015, respectively

 

 

50

 

 

 

49

 

Additional paid-in capital

 

 

212,622

 

 

 

208,972

 

Accumulated other comprehensive loss

 

 

(19

)

 

 

(24

)

Accumulated deficit

 

 

(165,342

)

 

 

(152,898

)

Total stockholders’ equity

 

 

47,311

 

 

 

56,099

 

Total liabilities and stockholders’ equity

 

$

57,089

 

 

$

69,677

 

 

See accompanying notes to unaudited condensed consolidated financial statements

 

 

3


INTERMOLECULAR, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Operations

(In thousands, except share and per share data)

(Unaudited)

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Program revenue

 

$

8,844

 

 

$

8,684

 

 

$

30,857

 

 

$

23,033

 

Licensing and royalty revenue

 

 

1,730

 

 

 

2,844

 

 

 

5,964

 

 

 

9,334

 

Total revenue

 

 

10,574

 

 

 

11,528

 

 

 

36,821

 

 

 

32,367

 

Cost of revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of program revenue

 

 

3,431

 

 

 

4,984

 

 

 

12,284

 

 

 

14,939

 

Cost of licensing and royalty revenue

 

 

25

 

 

 

64

 

 

 

100

 

 

 

216

 

Total cost of revenue

 

 

3,456

 

 

 

5,048

 

 

 

12,384

 

 

 

15,155

 

Gross profit

 

 

7,118

 

 

 

6,480

 

 

 

24,437

 

 

 

17,212

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

8,451

 

 

 

7,422

 

 

 

22,279

 

 

 

21,082

 

Sales and marketing

 

 

1,792

 

 

 

1,639

 

 

 

5,866

 

 

 

4,535

 

General and administrative

 

 

2,667

 

 

 

3,171

 

 

 

7,936

 

 

 

9,767

 

Restructuring charges

 

 

1,120

 

 

 

 

 

 

1,120

 

 

 

 

Total operating expenses

 

 

14,030

 

 

 

12,232

 

 

 

37,201

 

 

 

35,384

 

Loss from operations

 

 

(6,912

)

 

 

(5,752

)

 

 

(12,764

)

 

 

(18,172

)

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income (expense), net

 

 

51

 

 

 

(52

)

 

 

123

 

 

 

(307

)

Other income (expense), net

 

 

89

 

 

 

(18

)

 

 

204

 

 

 

(11

)

Total other income (expense), net

 

 

140

 

 

 

(70

)

 

 

327

 

 

 

(318

)

Loss before provision for income taxes

 

 

(6,772

)

 

 

(5,822

)

 

 

(12,437

)

 

 

(18,490

)

Provision for income taxes

 

 

3

 

 

 

2

 

 

 

7

 

 

 

7

 

Net loss

 

$

(6,775

)

 

$

(5,824

)

 

$

(12,444

)

 

$

(18,497

)

Net loss per share, basic and diluted

 

$

(0.14

)

 

$

(0.12

)

 

$

(0.25

)

 

$

(0.38

)

Weighted-average number of shares used in computing net

   loss per share, basic and diluted

 

 

49,466,137

 

 

 

48,620,503

 

 

 

49,366,982

 

 

 

48,055,409

 

 

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,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Program revenue

 

$

 

 

$

26

 

 

$

267

 

 

$

32

 

Licensing and royalty revenue

 

 

359

 

 

 

915

 

 

 

1,379

 

 

 

2,343

 

Total revenue

 

$

359

 

 

$

941

 

 

$

1,646

 

 

$

2,375

 

Cost of Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of program revenue

 

$

 

 

$

 

 

$

102

 

 

$

 

Cost of licensing and royalty revenue

 

 

2

 

 

 

 

 

 

27

 

 

 

 

Total cost of revenue

 

$

2

 

 

$

 

 

$

129

 

 

$

 

 

See accompanying notes to unaudited condensed consolidated financial statements

 

 

4


Condensed Consolidated State ments of Comprehensive Loss

(In thousands)

(Unaudited)

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Net loss

 

$

(6,775

)

 

$

(5,824

)

 

$

(12,444

)

 

$

(18,497

)

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

   securities, net of tax

 

 

(24

)

 

 

41

 

 

 

5

 

 

 

28

 

Other comprehensive income (loss)

 

 

(24

)

 

 

41

 

 

 

5

 

 

 

28

 

Comprehensive loss, net of income tax

 

$

(6,799

)

 

$

(5,783

)

 

$

(12,439

)

 

$

(18,469

)

 

See accompanying notes to unaudited condensed consolidated financial statements

 

 

5


INTERMOLECULAR, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

 

 

 

Nine Months Ended September 30,

 

 

 

2016

 

 

2015

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(12,444

)

 

$

(18,497

)

Adjustments to reconcile net loss to net cash used in operating

   activities:

 

 

 

 

 

 

 

 

Depreciation, amortization, and accretion

 

 

7,708

 

 

 

7,468

 

Stock-based compensation

 

 

2,936

 

 

 

4,788

 

Gain on disposal of property and equipment

 

 

(19

)

 

 

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Prepaid expenses and other assets

 

 

118

 

 

 

(136

)

Materials inventory

 

 

489

 

 

 

263

 

Accounts receivable

 

 

2,524

 

 

 

(2,543

)

Accounts payable

 

 

(453

)

 

 

745

 

Accrued and other liabilities

 

 

(2,088

)

 

 

3,542

 

Deferred revenue

 

 

(471

)

 

 

(1,818

)

Related party deferred revenue

 

 

 

 

 

(623

)

Net cash used in operating activities

 

 

(1,700

)

 

 

(6,811

)

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchase of investments

 

 

(22,361

)

 

 

(32,118

)

Redemption of investments

 

 

23,526

 

 

 

44,114

 

Purchase of property and equipment

 

 

(2,130

)

 

 

(933

)

Proceeds from sale of equipment

 

 

22

 

 

 

 

Purchased and capitalized intangible assets

 

 

(45

)

 

 

(577

)

Net cash (used in) provided by investing activities

 

 

(988

)

 

 

10,486

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Payment of debt

 

 

 

 

 

(23,000

)

Payment of capital leases

 

 

(7

)

 

 

 

Proceeds from exercise of common stock options

 

 

714

 

 

 

861

 

Net cash (used in) provided by financing activities

 

 

707

 

 

 

(22,139

)

Net decrease in cash and cash equivalents

 

 

(1,981

)

 

 

(18,464

)

Cash and cash equivalents at beginning of period

 

 

11,676

 

 

 

21,765

 

Cash and cash equivalents at end of period

 

$

9,695

 

 

$

3,301

 

 

 

 

 

 

 

 

 

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

5

 

 

$

652

 

Cash paid for income taxes, net of refunds received

 

$

7

 

 

$

5

 

Noncash investing/operating activities:

 

 

 

 

 

 

 

 

Transfer of property and equipment to materials inventory

 

$

752

 

 

$

1,252

 

Transfer of materials inventory to property and equipment

 

$

1,335

 

 

$

2,737

 

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

   period

 

$

72

 

 

$

528

 

 

See accompanying notes to unaudited condensed consolidated financial statements

 

 

6


INTERMOLECULAR, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

 

1. Summary of Significant Accounting Policies

Basis of Presentation

The accompanying condensed consolidated financial statements of Intermolecular, Inc. and subsidiaries (the Company) have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) for interim financial information, the instructions to Form 10-Q and Article 10 of Regulation S-X of the Securities and Exchange Commission (SEC). Accordingly, certain information and disclosures normally included in complete financial statements prepared in accordance with GAAP have been condensed or omitted. The information in this report should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto included in its Annual Report on Form 10-K for the fiscal year ended December 31, 2015, as filed with the SEC on March 28, 2016. Certain amounts in the prior year’s presentations have been reclassified to conform to the current presentation. These reclassifications had no effect on previously reported net income.

In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments (consisting only of normal recurring adjustments) necessary to present fairly the Company’s financial position, results of operations and cash flows for the interim periods presented. The operating results for the three and nine months ended September 30, 2016 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, 2015 is derived from the audited consolidated financial statements. 

Use of Estimates

The preparation of the accompanying condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions about future events. These estimates and the underlying assumptions affect the amounts of assets and liabilities reported, disclosures about contingent assets and liabilities, and reported amounts of revenue and expenses. Management uses estimates and judgments in determining recognition of revenues, valuations of accounts receivable, inventories, intangible assets, warrants and assumptions used in the calculation of income taxes and stock-based compensation, among others. These estimates and assumptions are based on management’s best estimates and judgment. Management evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors, and adjusts such estimates and assumptions when facts and circumstances dictate. As future events and their effects cannot be determined with precision, actual results could differ significantly from these estimates.

Concentration of Credit Risk

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

Cash, Cash Equivalents and 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. 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.

7


The Company reviews its investment portfolio periodically to assess for other-than-temporary i mpairment 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 th e 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 shee t 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 impai rment 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 securit y. The Company has recognized no other-than-temporary impairments for its marketable securities.

Materials Inventory

Materials inventories are stated at the lower of cost or market value, with cost determined on an average cost basis. Materials inventories consist of raw materials in the amount of $3.3 million and $4.4 million as of September 30, 2016 and December 31, 2015, respectively. Materials inventory is used to build and as replacement parts for repairs and maintenance on property plant and equipment. Inventory is no longer purchased for resale as in prior years. Materials inventory that are determined to be in excess of the company requirements or are considered obsolete, are recorded as a cost of revenue.  The Company recorded inventory impairment charges of $0.8 million and $0.9 million for the nine months ended September 30, 2016 and 2015, 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. In addition, the company reviews and tests its long-lived assets for impairment at least annually.  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 generally records impairment of long-lived assets in research and development expense on the Condensed Consolidated Statements of Operations. The Company recorded a $0.9 million impairment loss on property and equipment and a $1.0 million impairment loss on intangible assets during the nine months ended September 30, 2016 and zero in the nine months ended September 30, 2015. See Note 3, Property and Equipment, and Note 4, Intangible Assets, for detailed information.

Revenue Recognition

The Company derives its revenue from two principal sources: research and development programs; and other services, which consist of 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.

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

8


under project–based contracts for those programs is recognized as services are performed using percentage of completion method of contract accounting based on costs or labor-hours input method, whichever is the most appr opriate measure of the progress towards completion of the contract. Losses on the contracts are recognized in the period when they become probable. Revisions in profit estimates are reflected in the period in which the conditions that require the revisions become known and can be estimated. Payments received prior to performance are deferred and recognized as revenue when earned over future performance periods.

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 essential software, and undelivered non-software services, the Company allocates revenue to all deliverables based on their relative selling prices.

We evaluate each element in a multiple-element arrangement to determine whether it represents a separate unit of accounting. An element constitutes a separate unit of accounting when it has standalone value and delivery of an undelivered element is both probable and within our control. When these criteria are not met, the delivered and undelivered elements are combined and the arrangement fees are allocated to this combined single unit.  If the unit separation criteria are met, we account for each element within a multiple-element arrangement separately, whereby the total arrangement fees are allocated to each element based on its relative selling price, which we establish using a selling price hierarchy. We determine the selling price of each element based on its vendor-specific objective evidence (VSOE), if available, third party evidence (TPE), if VSOE is not available, or estimate of selling price (ESP) if neither VSOE nor TPE is available. We do not recognize revenue that is contingent upon the future delivery of products or services or upon future performance obligations.  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 program revenue, 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. 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. The Company did not have any allowance for doubtful accounts as of September 30, 2016 and December 31, 2015.

9


Concentration of Revenue and Accounts Receivable

Significant customers are those that represent more than 10% of the Company’s total revenue or accounts receivable. For each significant customer, including related parties, revenue as a percentage of total revenue and accounts receivable as a percentage of total accounts receivable are as follows:

 

 

 

Revenue

 

 

Accounts Receivable

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

As of  September 30,

 

 

As of December 31,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Customer A

 

 

12

%

 

 

34

%

 

 

19

%

 

 

39

%

 

 

 

 

 

48

%

Customer B

 

 

11

%

 

 

10

%

 

*

 

 

 

11

%

 

 

11

%

 

*

 

Customer C

 

*

 

 

 

12

%

 

 

13

%

 

 

16

%

 

 

 

 

 

16

%

Customer D

 

 

49

%

 

 

12

%

 

 

35

%

 

*

 

 

 

64

%

 

 

13

%

Customer E

 

*

 

 

 

 

 

*

 

 

 

 

 

 

18

%

 

 

 

 

*

less than 10%

Stock-Based Compensation

The Company applies the fair value recognition and measurement provisions of Accounting Standard Codification (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 January 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. The new guidance enhances the reporting model for financial instruments, which includes amendments to address aspects of recognition, measurement, presentation and disclosure. The update to the standard is effective for the Company in the first quarter of fiscal 2018, with early adoption permitted under limited circumstances. The Company is currently evaluating the effect the Standard will have on its consolidated financial statements.

In February 2016, the FASB issued ASU No. 2016-02, Leases. ASU 2016-02 requires that lease arrangements longer than 12 months result in an entity recognizing an asset and liability. The updated guidance is effective for interim and annual periods beginning after December 15, 2018, and early adoption is permitted. The Company is currently evaluating the effect the Standard will have on its consolidated financial statements.

In March 2016, the FASB issued ASU No. 2016-09, Improvements to Employee Share-Based Payment Accounting, which simplifies the accounting for share-based payment transactions, including income tax consequences, classification of awards as either equity or liabilities and classification on the cash flow statements. The ASU will be effective for the Company in the first quarter of fiscal 2017. The Company is currently evaluating the effect the Standard will have on its consolidated financial statements.

 

 

10


2. Fair Value of Fina ncial Instruments

The Company measures and reports its cash equivalents and investments at fair value. The carrying amounts for cash equivalents and investments approximate their fair values due. The following tables set forth the fair value of the Company’s cash equivalents and investments by level within the fair value hierarchy (in thousands):

 

 

 

As of  September 30, 2016

 

 

 

Fair Value

 

 

Level I

 

 

Level II

 

 

Level III

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

4,494

 

 

$

4,494

 

 

$

 

 

$

 

Corporate debt securities and commercial paper

 

 

22,179

 

 

 

 

 

 

22,179

 

 

 

 

Total assets measured at fair value

 

$

26,673

 

 

$

4,494

 

 

$

22,179

 

 

$

 

 

 

 

As of December 31, 2015

 

 

 

Fair Value

 

 

Level I

 

 

Level II

 

 

Level III

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

98

 

 

$

98

 

 

$

 

 

$

 

Corporate debt securities and commercial paper

 

 

23,656

 

 

 

 

 

 

23,656

 

 

 

 

Total assets measured at fair value

 

$

23,754

 

 

$

98

 

 

$

23,656

 

 

$

 

 

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 to have a less than twenty four month maturity term and a minimum credit rating of A-. Unrealized gains and losses, net of taxes, are included in accumulated other comprehensive income (loss). Gains and losses are determined using the specific identification method.  Cash, cash equivalents, and investments consisted of the following as of September 30, 2016 (in thousands):

 

 

 

As of  September 30, 2016

 

 

 

Amortized Cost

 

 

Unrealized Gains

 

 

Unrealized Losses

 

 

Estimated

Fair Value

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash

 

$

5,201

 

 

$

 

 

$

 

 

$

5,201

 

Money market funds

 

 

4,494

 

 

 

 

 

 

 

 

 

4,494

 

Corporate debt securities and commercial paper

 

 

22,198

 

 

 

 

 

 

(19

)

 

 

22,179

 

Total cash, cash equivalents and investments

 

$

31,893

 

 

$

 

 

$

(19

)

 

$

31,874

 

 

As of December 31, 2015, the Company had $24,000 of unrealized losses.

 

 

3. Property and Equipment

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

 

 

 

As of

 

 

 

September 30, 2016

 

 

December 31, 2015

 

Lab equipment and machinery (1)

 

$

57,940

 

 

$

55,649

 

Leasehold improvements

 

 

6,235

 

 

 

6,116

 

Computer equipment and software

 

 

4,560

 

 

 

4,263

 

Furniture and fixtures

 

 

218

 

 

 

207

 

Construction in progress

 

 

628

 

 

 

1,625

 

Total property and equipment

 

 

69,581

 

 

 

67,860

 

Less accumulated depreciation

 

 

(57,550

)

 

 

(52,125

)

Property and equipment, net

 

$

12,031

 

 

$

15,735

 

 

(1)

Included $95,000 and $0 of  lab equipment and machinery acquired under capital leases, as of September 30, 2016 and December 31, 2015, respectively. See Note 5 for detailed lease information.

11


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

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Depreciation expense

 

$

2,415

 

 

$

1,674

 

 

$

5,639

 

 

$

5,664

 

 

During the third quarter of 2016, the Company determined that it identified indicators of impairment relating to certain lab equipment. Based on this evaluation, the Company recorded an impairment charge of $0.9 million in the third quarter of 2016.  Fair value was based on expected future cash flows using Level 3 inputs under ASC 820. The cash flows are those expected to be generated by the market participants, discounted at the risk-free rate of interest. Because of changing market conditions (i.e., declining usage and rising interest rates), it is reasonably possible that the estimate of expected future cash flows may change in the near term resulting in the need to further adjust our determination of fair value.

 

 

4. Intangible Assets

Intangible assets consist of the following (in thousands):

 

 

 

As of

 

 

 

September 30, 2016

 

 

December 31, 2015

 

Patents issued

 

$

5,081

 

 

$

6,180

 

Patents pending

 

 

445

 

 

 

1,156

 

Trademarks

 

 

40

 

 

 

40

 

Total intangible assets

 

 

5,566

 

 

 

7,376

 

Less patent amortization

 

 

(1,349

)

 

 

(1,407

)

Intangible assets, net

 

$

4,217

 

 

$

5,969

 

 

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 from Symyx Technologies, Inc. (Symyx) in 2011 is approximately 2 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,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Amortization expense

 

$

130

 

 

$

182

 

 

$

394

 

 

$

545

 

 

During the third quarter of 2016, the Company identified certain patents with carrying values deemed to not be recoverable.  Based on this evaluation, the Company recorded an impairment charge of $1.0 million related to these patents. Fair value was based on expected future cash flows using Level 3 inputs under ASC 820. The cash flows are those expected to be generated by the market participants, discounted at the risk-free rate of interest. Because of changing market conditions (i.e., less marketplace demand and rising interest rates), it is reasonably possible that the estimate of expected future cash flows may change in the near term resulting in the need to further adjust our determination of fair value.

 

 

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.

12


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

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Rent expense

 

$

566

 

 

$

567

 

 

$

1,695

 

 

$

1,701

 

 

During the third quarter of 2016, the Company made payments of $0.6 million related to this operating lease.

In December 2015, the Company signed a sublease to lease out a portion of office space. The term of the lease is for three years and annual gross rent is approximately $0.3 million. The sublessee moved in during the second quarter of 2016. The Company received $0.1 million in rent payment under the agreement in the third quarter of 2016.

Capital Lease Obligations

During the third quarter of 2016, the Company leased a Camco Furnace under a three year lease agreement which was accounted for as a capital lease under ASC 840-30; the underlying asset is included in lab equipment and machinery. The current portion of the capital lease obligations of $22 thousand is included in accrued liabilities and the non-current portion of $45 thousand is included in other long-term liabilities in the accompanying Condensed Consolidated Balance Sheets as of September 30, 2016. The capital lease is discounted using an annual rate of 16.7%.  The lease agreement requires annual payments of $31 thousand, contains a cancellation option after 12 months and automatically transfers ownership of the property to the Company, the lessee, at the end of the lease term.

Depreciation expense of the Camco Furnace recorded under the capital lease obligations was $3 thousand for the three and nine months ended September 30, 2016, compared to none for the three and nine months ended September 30, 2015.

 

 

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,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Expected term (in years)

 

 

6.1

 

 

 

6.1

 

 

 

6.0

 

 

 

5.9

 

Risk-free interest rate

 

 

1.3

%

 

 

1.8

%

 

 

1.3

%

 

 

1.6

%

Expected volatility

 

 

55

%

 

 

49

%

 

 

54

%

 

 

50

%

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,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Cost of revenue

 

$

101

 

 

$

172

 

 

$

408

 

 

$

956

 

Research and development

 

 

223

 

 

 

320

 

 

 

759

 

 

 

1,338

 

Sales and marketing

 

 

178

 

 

 

157

 

 

 

568

 

 

 

680

 

General and administrative

 

 

384

 

 

 

496

 

 

 

1,201

 

 

 

1,814

 

Total stock-based compensation

 

$

886

 

 

$

1,145

 

 

$

2,936

 

 

$

4,788

 

 

13


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,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Stock options

 

$

770