•         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 year ended December 31, 2012 to the year ended December 31, 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

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 $66.8 million for the year ended December 31, 2012 from $53.8 million for the year ended December 31, 2011. Our net loss decreased to $0.8 million for the year ended December 31, 2012 from a net loss before accretion on redeemable convertible preferred stock

of $30.0 million for the year ended December 31, 2011. Our backlog as of December 31, 2012 was $77.2 million, of which $44.6 million is scheduled to be recognized as revenue during 2013 and $32.6 million is scheduled to be recognized as revenue in periods beyond 2013. As of December 31, 2011, we had backlog of approximately $85.6 million, which contributed approximately $47.2 million in revenue during the year ended December 31, 2012. Our net loss in 2011 included a mark-to-market related charge recorded in other income (expense), net in the amount of $25.9 million related to our purchase of intellectual property from Symyx. Since inception, we have incurred net losses leading to an accumulated deficit of $101.3 million as of December 31, 2012.

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 had until February 26, 2013 to submit their votes. On February 28, 2013, Elpida announced that the reorganization plan was approved by the statutorily required majority of the creditors and was also approved by the Tokyo District Court. The transactions, which are subject to certain other conditions, are scheduled to close in the first half of 2013. However, there can be no assurance that these transactions will close in a timely manner or at all. During the year ended December 31, 2012 we recognized $9.1 million in revenue and recorded bad debt expense related to pre-bankruptcy accounts receivable in the amount of $0.2 million from Elpida. As of December 31, 2012 we had outstanding accounts receivable, net of allowance for doubtful accounts, in the amount of $0.1 million and had $26.6 million in backlog from Elpida, of which $4.1 million is scheduled to be recognized as revenue during 2013 with the balance scheduled to be recognized as revenue in periods beyond 2013. Of the $4.1 million in backlog to be recognized as revenue during 2013 that is attributable to Elpida, we received payment in the amount of $2.2 million in December 2012 for CDP services and license fees for the three months ending March 31, 2013.

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 coatings and glass-based devices, 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/or royalty revenue. When we initially engage with a customer, we generate revenue from micro-CDPs, CDPs and licensing of our high productivity combinatorial ("HPC") platform. Our micro-CDPs are smaller, customer-paid programs that require significantly less investment from our 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/or 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.

                                   Years Ended December 31,
                                 2012        2011        2010
                                        (in thousands)
Revenue:
CDP and services revenue      $  47,468    $ 36,733    $ 27,705
Product revenue                   3,495       2,717       6,959
Licensing and royalty revenue    15,864      14,380       8,010
Total revenue                 $  66,827    $ 53,830    $ 42,674



•         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. During 2012, in
          connection with a CDP, we recognized revenue on the sale of
          intellectual property that was developed during the term of the CDP. 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.

Our revenue growth has been primarily driven by the adoption of our collaboration model and HPC platform leading to both new CDPs and the ramp of licensing and royalty revenue from products commercialized by our customers that incorporate technology developed through our CDPs. Successful CDPs result in the commercialization of products whereby we receive licensing fees and royalties over the course of the respective product cycles. Certain of our semiconductor customers have already commenced shipping products incorporating technology developed through our CDPs, which generate associated licensing and royalty revenue. Our revenue mix may vary from quarter to quarter as we enter into new CDPs and related customer arrangements, existing CDPs are completed or expanded and licensing and royalty arrangements generate revenue.
Prior to entering into a new CDP, we negotiate licensing fees and royalty rates for technology to be developed in CDPs. The fees and rates are negotiated with each customer on the basis of multiple factors including the size of the servable market of the technology to be developed, the value contribution of the technology to the customer's product, and the anticipated overall margin structure of the customer's product. Licensing fees and royalty rates are set for each CDP-developed technology. While royalty rates vary, when working with device manufacturers, we typically target 1-2% of their projected end-product revenue for each CDP-developed technology. When working with suppliers to device manufacturers, we typically target higher royalty rates depending on the anticipated value contribution of the technology to their product. Licensing fees and royalty rates are structured in a variety of ways including fixed quarterly fees, percentage of revenue and fee per product.
Our proprietary platform was initially created to address critical development challenges in the semiconductor industry and we began generating revenue in 2006. The applicability of our platform to address similar challenges in adjacent vertical markets such as clean energy markets has created, and we believe will continue to create, new market opportunities for us. We began generating revenue from customers in the clean energy industry during the year ended December 31, 2010, and continued to generate revenue from customers in the clean energy industry through 2012. We believe collaborating with

companies in the clean energy industry will accelerate the long-term growth of our business. The following table sets forth our revenue by customer end market:

Years Ended December 31,

                 2012        2011        2010
                        (in thousands)
Semiconductor $  55,181    $ 49,655    $ 40,678
Clean energy     11,646       4,175       1,996
Total         $  66,827    $ 53,830    $ 42,674

Key Financial Metrics
We monitor the key financial metrics set forth below to help us evaluate growth trends, establish budgets, measure the effectiveness of our sales and marketing efforts, manage our human resources and assess operational efficiencies. Revenue growth and mix. We monitor revenue from CDPs for existing and new customers, applications and the resulting licensing fees and royalties. As our customer engagements progress, we expect licensing and royalty revenue to be an increasing and significant component of our revenue. We are broadening our development and sales efforts by expanding CDPs in the semiconductor industry resulting from the adoption of our HPC platform for technology development and engaging in CDPs with companies in the clean energy industry as we believe this will accelerate the future growth of our business.
Backlog. We monitor our backlog as it represents the aggregate value of contracted business not yet recognized. Our backlog consists of future revenue that our customers are contractually committed to pay in our CDPs and guaranteed licensing and royalty revenue for our developed technology and intellectual property. Our backlog as of December 31, 2012 was $77.2 million, of which $44.6 million is scheduled to be recognized as revenue during 2013, and $32.6 million is scheduled to be recognized as revenue in future periods beyond 2013. Adjusted EBITDA. We monitor our adjusted EBITDA to measure the profitability of our business. We use adjusted EBITDA as a key performance measure because we believe it facilitates operating performance comparisons from period to period by excluding potential differences caused by variations in capital structures, tax positions (such as the impact of changes in effective tax rates or fluctuations in permanent differences or discrete quarterly items), interest expense or the cash requirements necessary to service interest or principal payments on our indebtedness, the impact of depreciation and amortization expense, the non-cash impact of the mark-to-market of our derivative liability as a result of the Symyx asset purchase transaction and common stock warrants issued to customers and the impact of stock-based compensation expense. See "Selected Consolidated Financial Data-Non-GAAP Financial Measure" for a reconciliation of adjusted EBITDA to our net income (loss), the most comparable GAAP measure.
Adjusted earnings. We monitor our adjusted earnings to measure the profitability of our business. We use adjusted earnings as a performance measure because we believe it facilitates operating performance comparisons from period to period by excluding potential differences caused by variations in capital structures, the non-cash impact of the mark-to-market of our derivative liability as a result of the Symyx asset purchase transaction and common stock warrants issued to customers and the impact of stock-based compensation expense. See "Selected Consolidated Financial Data-Non-GAAP Financial Measure" for a reconciliation of our adjusted earnings to our net income (loss), the most comparable GAAP measure.
Factors Affecting our Performance
Reliance on our customers' success. Our success is tied to our customers' ability to successfully commercialize the products that incorporate technology developed through CDPs. We believe that we significantly improve our customers' ability to succeed in their end markets, but if they are unable to do so, the longer-term licensing and royalty revenue that we expect may be delayed or may not materialize. We attempt to manage this risk by carefully selecting projects and only participating in opportunities that we deem to have significant potential for long-term success.
Exposure to semiconductor memory and solar power end markets. Our performance is linked to the end markets in which our customers operate. Certain of these markets, such as the semiconductor memory markets and the solar panel market, have historically shown significant price volatility as a result of imbalances in supply and demand. As such, these markets have been traditionally challenging for participants. We attempt to manage this end market risk by participating in multiple end markets and by selecting customers that we believe will be successful in those markets.
Revenue mix and royalty rates. Our revenue from CDPs and product sales vary from contract to contract depending on the customer's requirements and the scope of the collaboration. The gross profit from CDPs and product sales may vary

based on the size and scope of the contract. Our royalty rates vary from contract to contract depending on multiple factors, including the industry, the scope of our collaboration, and the degree to which our IP is central to the development of a given product. Individual royalty opportunities vary depending on the end market size and the duration of the specific end product life cycle. The gross profit from licensing and royalty revenue may vary based on the size and scope of the contract. We target an average gross margin contribution that is consistent across the industries and end markets we serve. Long sales cycles. Our sales cycles are long, and we commit significant resources to and incur significant expenses for a project before a potential customer commits to use our HPC platform or CDPs. To be successful, we must establish contact with potential customers, often with senior management or executive officers, and educate them about the benefits of our HPC platform. Our sales cycles to date have typically ranged from 9 to 24 months and may be even longer in the future. Investment of time and resources in a particular customer engagement that does not ultimately result in material revenue will adversely affect our revenue and results of operations.
Customer concentration. Due to the concentrated nature of manufacturers in the DRAM, flash memory and complex logic markets, our revenue is and may continue to be concentrated to key high-volume customers. For example, our five largest customers in the year ended December 31, 2012, four of which are in the semiconductor industry, accounted for 83% of our revenue. We believe there is an opportunity to expand our engagements with these customers into new applications over time. In addition, because our platform is broadly applicable to semiconductors, flat glass coatings and glass-based devices, solar cells, LEDs, flat-panel displays, advanced batteries and other energy-efficient technologies, we believe we have significant opportunities to engage with a broad range of customers.
Related Party Transactions. Some of our customers and other business partners hold a significant stake in our capital stock. Related party transactions disclosed in our financial statements accounted for $21.1 million and $21.0 million, or 31.6% and 39.0%, respectively, of our revenue for the years ended December 31, 2012 and 2011. ATMI, which beneficially owns approximately 8.8% of our capital stock as of December 31, 2012, accounted for $16.5 million and $15.8 million, or 24.7% and 29.3%, respectively, of our revenue for the years ended December 31, 2012 and 2011. We believe that the transactions and agreements that we have entered into with related parties are on terms that are at least as favorable as could reasonably have been obtained at such time from third parties. However, these relationships could create, or appear to create, potential conflicts of interest when our board of directors is faced with decisions that could have different implications for us and our related parties or their affiliates. In addition, conflicts of interest may arise between us and our related parties and their affiliates. The appearance of conflicts, even if such conflicts do not materialize, might adversely affect the public's perception of us, as well as our relationship with other companies and our ability to enter into new relationships in the future, including new CDPs with competitors of such related parties, which could have a material adverse effect on our ability to do business.
Warrants Issued in Connection with a CDP In March 2010, in connection with a CDP, we issued contingent warrants to two customers to purchase an aggregate of up to 822,368 shares of our common stock at a cash exercise price of $6.08288 per share. The exercise price was equal to the price of the then-most recent sale of preferred stock. These warrants become exercisable for four months after an election by the holders to license technology developed through the associated CDP. If either of the customers elect to license this technology, we will record a one-time, non-cash charge based on the fair value of these warrants as measured on the date of election against any revenue derived from these agreements. The fair value will be determined using the Black-Scholes option pricing model and may be significant. This election is available to the customers initially through May 2013, but the election period may be extended if the customers extend the CDP. Had the election been made on December 31, 2012 the fair value of these warrants would have been $2.3 million.
In June 2011, in connection with a CDP, we issued a fully vested and exercisable warrant to a customer to purchase 411,000 shares of our common stock at a cash exercise price of $8.30824 per share. The exercise price was equal to the price of the then-most recent sale of preferred stock. This warrant was fully exercised in connection with our initial public offering in November 2011. The fair value of the warrant as measured on the date of grant using the Black-Scholes options pricing model was $312,000 and was recognized as a reduction of revenue derived from the agreement during the year ended December 31, 2011.

Cost of Revenue and Operating Expenses
Cost of Revenue
The following table sets forth our cost of revenue by revenue category:
                                           Years Ended December 31,
                                         2012        2011        2010
                                                (in thousands)
Cost of revenues:
Cost of CDP and services revenue      $  26,492    $ 23,761    $ 16,855
Cost of product revenue                   1,635         953       3,665
Cost of licensing and royalty revenue       276         755         406
Total cost of revenues                $  28,403    $ 25,469    $ 20,926

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 when 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
. . .