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IMI > SEC Filings for IMI > Form 10-Q on 2-May-2013All Recent SEC Filings

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Form 10-Q for INTERMOLECULAR INC


2-May-2013

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 months ended March 31, 2013 to the three months ended March 31, 2012.

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


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We have pioneered a proprietary approach to accelerate research and development, innovation and time-to-market for the semiconductor and clean energy industries. Through paid collaborative development programs (CDPs) with our customers, we develop proprietary technology and intellectual property (IP) for our customers focused on advanced materials, processes, integration and device architectures. This technology enables our customers to bring optimized, high-volume manufacturing-ready integrated devices to market faster and with less risk than conventional 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. Through paid CDPs and our own development, we have established a portfolio of greater than 1,000 patents and patent applications. Our proprietary approach is broadly applicable to high-volume integrated device markets, which include the markets for semiconductors, flat glass coatings and glass-based devices, solar cells, light-emitting diodes (LEDs), flat-panel displays, advanced batteries and other energy efficiency applications.
We were founded in 2004 and are headquartered in San Jose, California. Our total revenue increased to $17.4 million for the three months ended March 31, 2013 from $16.4 million for the three months ended March 31, 2012. Our net loss increased to $1.5 million for the three months ended March 31, 2013, from a net loss of $0.2 million for the three months ended March 31, 2012. Since inception, we have incurred net losses leading to an accumulated deficit of $102.8 million as of March 31, 2013.
In February 2012, one of our significant customers, Elpida, filed for protection under the Corporate Reorganization Act in Japan and is now subject to a proposed acquisition by Micron Technology, Inc. ("Micron"), a leading provider of memory chips. As of March 31, 2013 we had $23.8 million in backlog from Elpida, of which $3.8 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 $3.8 million in backlog to be recognized as revenue during 2013 that is attributable to Elpida, we received payment in the amount of $1.3 million in March 2013 for license fees for the three months ending June 30, 2013. Failure to convert all or part of the remaining backlog to revenue could have a material adverse impact on our business, financial condition and results of operations. In April 2013 we amended our agreement with Elpida to extend our existing CDP through September 30, 2013 and entered into a CDP and IP licensing agreement with Micron to develop and improve certain advanced memory products. In the event that Elpida issues all of its equity to, and becomes a wholly-owned of subsidiary of, Micron, we have agreed to terminate our activities under our CDP agreement with Elpida at Elpida's request, and effectively to transfer to Micron the exclusive licenses that we previously granted to Elpida for certain technology and IP arising out of the Elpida CDP. If the acquisition of Elpida by Micron were not completed, we may not be able to convert all or part of our remaining backlog with Elpida to revenue and we may lose Elpida as a customer, which could adversely affect our business, financial condition and results of operations.
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-efficiency 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, Epistar, First Solar, GLOBALFOUNDRIES, Guardian Industries, Micron Technology, 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-efficiency applications in flat glass coatings and glass-based devices, and we have not yet received a material amount of revenue from customers in embedded memory, solar cells, LEDs, displays and other energy-efficiency technologies. Basis of Presentation
How We Generate Revenue
Our customer engagement process generates revenue in three ways: CDP and services revenue; product revenue; and licensing and royalty revenue. CDPs are our primary engagement model with customers and are structured to result in licensing and/or royalty revenue. When we initially engage with a customer, we generate revenue from micro-CDPs, CDPs and licensing of our high productivity combinatorial ("HPC") platform. Our micro-CDPs are smaller, customer-paid programs that require significantly less investment from our 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.


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When technology developed through CDPs is incorporated in 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.
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 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.

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 products are
commercialized 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) in 2011,
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 is primarily comprised of the amortization of acquired
          patents and licensing obligations.

Research and Development
Our R&D expenses consist of costs incurred for development and continuous improvement of our HPC platform, expansion of software capabilities and application research and development that are not associated with customer programs. R&D costs include personnel-related expenses (including stock-based compensation expenses) for our technical staff as well as consultant costs, parts and prototypes, wafers, chemicals, supply costs, facilities costs, utilities costs related to laboratories


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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 costs maintaining compliance with Section 404 of the Sarbanes-Oxley Act, as well as insurance, investor relations and other costs associated with being a public company. In addition to these expenses, we expect that our general and administrative expenses will continue to increase for the foreseeable future.
Interest (Expense) Income, net
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. Interest income represents interest earned on our cash, cash equivalents and short-term investments. We expect interest income will vary each reporting period depending on our average investment balances during the period and market interest rates.

Critical Accounting Estimates
Our 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 months ended March 31, 2013 as compared to those disclosed in our 2012 Form 10-K. For further information on our critical and other significant accounting policies, see our 2012 Form 10-K. Recent Accounting Pronouncements
There are no recent accounting pronouncements that have not yet been adopted that are expected to have any impact on our financial position, results of operations or cash flows.


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Results of Operations
Comparison of the Three Months Ended March 31, 2013 and 2012
                                            Three Months Ended March 31,
                                              2013                2012          $ Change      % Change
                                                             (in thousands)
Revenue:
CDP and services revenue                $      10,903       $       12,195     $ (1,292 )        (11 )%
Product revenue                                 3,104                  678        2,426          358  %
Licensing and royalty revenue                   3,426                3,509          (83 )         (2 )%
Total revenue                                  17,433               16,382        1,051            6  %
Cost of revenue                                 7,843                7,188          655            9  %
Gross profit                                    9,590                9,194          396            4  %
Operating expenses:
Research and development                        6,172                5,068        1,104           22  %
Sales and marketing                             1,637                1,240          397           32  %
General and administrative                      2,992                2,818          174            6  %
Total operating expenses                       10,801                9,126        1,675           18  %
(Loss) income from operations                  (1,211 )                 68       (1,279 )
Other income (expense):
Interest expense, net                            (250 )               (249 )         (1 )
Other expense, net                                (19 )                 (6 )        (13 )
Total other income (expense), net                (269 )               (255 )        (14 )
Loss before provision (benefit) for
income taxes                                   (1,480 )               (187 )     (1,293 )
Provision (benefit) for income taxes                6                   (1 )          7
Net loss                                $      (1,486 )     $         (186 )   $ (1,300 )

Revenue
Our revenue increased by $1.1 million, or 6%, to $17.4 million during the three months ended March 31, 2013 from $16.4 million during the three months ended March 31, 2012. This increase was due to an increase in product revenues of $2.4 million, offset by decreases in both CDP and services revenue of $1.3 million and licensing and royalty revenue of $0.1 million.
CDP and services revenue decreased by $1.3 million, or 11%, to $10.9 million during the three months ended March 31, 2013 from $12.2 million during the three months ended March 31, 2012. This decrease was primarily attributable to a $1.8 million decrease in revenue during the current year period from the reduction in scope and scheduled completion of certain existing customer agreements and the recognition of $0.8 million of revenue in the prior year period upon the expiration of a customer's purchase option that did not recur in the three months ended March 31, 2013. Of the reduction in scope of existing customer engagements, $1.3 million was derived from two CDPs that related to greater than 10% customers during the three months ended March 31, 2013 and 2012. These decreases were partially offset by a $1.2 million increase in revenue derived from the expansion of existing customer engagements, and a $0.1 million increase in revenue from a new customer engagement. Of the growth from the expansion of existing customer engagements, $1.0 million in revenue was derived from one CDP. Product revenue increased by $2.4 million to $3.1 million during the three months ended March 31, 2013 from $0.7 million during the three months ended March 31, 2012. This increase was attributable to the sale of workflow hardware and embedded software that was completed during the three months ended March 31, 2013.
Licensing and royalty revenue decreased by $0.1 million, or 2%, to $3.4 million during the three months ended March 31, 2013 from $3.5 million during the three months ended March 31, 2012. This decrease was primarily attributable to a scheduled reduction in minimum license fees for the sales of products subject to licensing fees and royalties as guaranteed by customer contracts, which was partially offset by an increase in minimum license fees for the sales of products subject to licensing fees and royalties as guaranteed by customer contracts.


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The following table presents revenue by geographic region (based on invoiced locations) during the three months ended March 31, 2013 and 2012 in dollars (in thousands) and as a percentage of revenue for the periods presented:

                                                          Three Months Ended March 31,
                                                  2013                                   2012
                                       Revenues         % of Revenues         Revenues         % of Revenues
                                    (in thousands)                         (in thousands)
United States                      $      13,022               75 %      $         12,048              74 %
Japan                                      4,061               23 %                 3,565              22 %
APAC other                                   241                1 %                   735               4 %
Europe and Middle East                       109                1 %                    34               - %
Total                              $      17,433              100 %      $         16,382             100 %

Cost of Revenue
Cost of revenue increased by $0.7 million, or 9%, to $7.8 million during the three months ended March 31, 2013 from $7.2 million during the three months ended March 31, 2012. This change is primarily attributable to a $0.8 million increase in direct product cost consistent with increased product revenue. This increase was partially offset by decreased CDP and services revenue from ongoing customer engagements, which resulted in a $0.1 million decrease in direct labor, materials, and other costs associated with these programs. Cost of revenue included stock-based compensation of $0.4 million and $0.3 million during the three months ended March 31, 2013 and 2012, respectively. Gross Margin
Our gross profit as a percentage of net revenues, or gross margin, has been and will continue to be affected by a variety of factors, including the mix of CDP and services revenue, product revenue and licensing and royalty revenue recognized during the period. We achieve a higher gross margin on licensing and royalty revenue as compared to CDP and services and product revenue. Gross margin for the three months ended March 31, 2013 was 55.0% compared to 56.1% for the three months ended March 31, 2012. This decrease is primarily attributable to reductions in CDP and services revenue related to one CDP whose resources are scheduled to be reduced at a slower rate than the corresponding reduction in revenue. To the extent we are successful in growing our revenue and increasing licensing and royalty revenue as a percentage of revenue we expect our gross margins to increase as a percentage of total revenue. Research and Development
R&D expenses increased by $1.1 million, or 22%, to $6.2 million during the three months ended March 31, 2013 from $5.1 million during the three months ended March 31, 2012. The change is primarily attributable to $0.9 million in higher personnel costs as a result of increased wages, headcount growth and higher stock-based compensation and a $0.2 million increase in facility and other costs associated with new application development. Research and development expense included stock-based compensation of $0.4 million and $0.2 million during the three months ended March 31, 2013 and 2012, respectively. Sales and Marketing
Sales and marketing expenses increased by $0.4 million, or 32%, to $1.6 million during the three months ended March 31, 2013 from $1.2 million during the three months ended March 31, 2012. The change is primarily due to higher personnel costs related to increased wages and stock-based compensation expense, and approximately $0.1 million of costs associated with the resignation and separation of a company officer in March 2013. Sales and marketing expense included stock-based compensation of $0.3 million and $0.1 million during the three months ended March 31, 2013 and 2012, respectively. General and Administrative
General and administrative expenses increased by $0.2 million, or 6%, to $3.0 million during the three months ended March 31, 2013 from $2.8 million during . . .

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