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IMI > SEC Filings for IMI > Form 10-Q on 8-Nov-2012All Recent SEC Filings

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Form 10-Q for INTERMOLECULAR INC


8-Nov-2012

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION 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, 2012 to the three and nine months ended September 30, 2011.

Liquidity and Capital Resources. An analysis of changes in our balance sheets and cash flows, and discussion of our financial condition and potential sources of liquidity.

The following discussion and analysis should be read in conjunction with our condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q ("Form 10-Q") and in our Annual Report on Form 10-K (the "2011 Form 10-K") and subsequent 2012 quarterly reports on Form 10-Q, as filed with the Securities and Exchange Commission. This Form 10-Q contains forward-looking statements that involve risks and uncertainties, as well as assumptions that, if they never materialize or prove incorrect, could cause our results to differ materially from those expressed or implied by such forward-looking statements. The statements contained in this Form 10-Q that are not purely historical are forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements are often identified by the use of words such as, but not limited to, "may," "will," "expect," "believe," "anticipate," "intend," "could," "should," "estimate," or "continue," and similar expressions or variations intended to identify forward-looking statements. These statements are based on the beliefs and assumptions of our management based on information currently available to management. Such forward-looking statements are subject to risks, uncertainties and other important factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those identified below, and those discussed in the section titled "Risk Factors" in Part II, Item 1A of this Form 10-Q and in our 2011 Form 10-K and subsequent 2012 quarterly filings on Form 10-Q. Furthermore, such forward-looking statements speak only as of the date of this Form 10-Q. Except as required by law, we undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements.

Overview

We have pioneered a proprietary approach to accelerate research and development, innovation and time-to-market for the semiconductor and clean energy industries. Using our approach, we develop technology and intellectual property ("IP") focused on advanced materials, processes, integration and device architectures in collaboration with our customers. This technology enables our customers to bring optimized, high-volume manufacturing ready integrated devices to market faster and with less risk than traditional approaches to research and development ("R&D"). We provide our customers with proprietary technology through various fee arrangements and grant them rights to associated IP, primarily through royalty-bearing licenses. Our proprietary approach is broadly applicable to high-volume integrated device markets, which include semiconductors, flat glass coatings and glass based devices, solar cells, light emitting diodes ("LEDs"), flat-panel displays, advanced batteries and other energy-efficient technologies.

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


Table of Contents

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

Strategy

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

Basis of Presentation

How We Generate Revenue

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

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

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

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


Table of Contents

Cost of Revenue

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

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

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

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

Research and Development

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

Sales and Marketing

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

General and Administrative

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


Table of Contents

Interest (Expense) Income, net

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

Critical Accounting Estimates

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

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

Recent Accounting Pronouncements

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

Results of Operations



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



                          Three Months Ended September 30,                                    Nine Months Ended September 30,
                             2012                  2011           $ Change    % Change          2012                  2011           $ Change     % Change
                                              (in thousands)                                                     (in thousands)
Revenue:
CDP and services
revenue                $          12,481     $          10,349       2,132      21%       $          35,836     $          26,169   $    9,667      37%
Product revenue                      760                   678          82      12%                   3,495                 2,038        1,457      71%
Licensing and
royalty revenue                    3,248                 3,847        (599 )    -16%                 10,053                10,491         (438 )    -4%
Total revenue                     16,489                14,874       1,615      11%                  49,384                38,698       10,686      28%
Cost of revenue                    7,204                 6,676         528       8%                  21,866                17,999        3,867      21%
Gross profit                       9,285                 8,198       1,087      13%                  27,518                20,699        6,819      33%
Operating expenses:
Research and
development                        5,174                 5,113          61       1%                  16,002                14,601        1,401      10%
Sales and marketing                1,322                 1,249          73       6%                   3,834                 3,229          605      19%
General and
administrative                     2,650                 2,231         419      19%                   8,190                 6,156        2,034      33%
Total operating
expenses                           9,146                 8,593         553       6%                  28,026                23,986        4,040      17%

Income (loss) from
operations                           139                  (395 )       534                             (508 )              (3,287 )      2,779
Other income
(expense):
Interest (expense)
income, net                         (255 )                   6        (261 )                           (754 )                  16         (770 )
Other income
(expense), net                        10                  (839 )       849                               16                (1,174 )      1,190
Total other income
(expense), net                      (245 )                (833 )       588                             (738 )              (1,158 )        420
Loss before
provision for income
taxes                               (106 )              (1,228 )     1,122                           (1,246 )              (4,445 )      3,199
Income tax provision                   6                     6           -                               12                    19           (7 )
Net loss               $            (112 )   $          (1,234 )     1,122                $          (1,258 )   $          (4,464 ) $    3,206


Table of Contents

Revenue

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

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

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

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

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

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

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

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

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

                     Three Months Ended September 30,                     Nine Months Ended September 30,
                      2012                      2011                      2012                      2011
             Revenue    % of Revenue   Revenue    % of Revenue   Revenue    % of Revenue   Revenue    % of Revenue

United
States       $ 12,890       79%        $ 10,332       70%        $ 37,289       75%        $ 25,218       65%
Japan           3,321       20%           3,763       25%          10,202       21%          11,231       29%
APAC other        243        1%             729        5%           1,795        4%           2,199        6%
Europe and
Middle
East               36        0%              50        0%              98        0%              50        0%
Total        $ 16,489       100%       $ 14,874       100%       $ 49,384       100%       $ 38,698       100%

Cost of Revenue

Cost of revenue increased by $0.5 million, or 8%, to $7.2 million during the three months ended September 30, 2012 from $6.7 million during the three months ended September 30, 2011. This change is directly attributable to increased CDP and services revenue and product revenue recognized from new and ongoing customer engagements, which resulted in a $0.4 million increase in direct labor, materials and other costs associated with these programs and a $0.3 million increase in product costs attributable to the shipment of elements of workflow hardware that was completed during the three months ended September 30, 2012. . . .

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