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IMI > SEC Filings for IMI > Form 10-Q on 7-Aug-2013All Recent SEC Filings

Show all filings for INTERMOLECULAR INC

Form 10-Q for INTERMOLECULAR INC


7-Aug-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 and six months ended June 30, 2013 to the three and six months ended June 30, 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") and subsequent 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 2012 Form 10-K and subsequent quarterly reports 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. 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 $16.6 million and $34.0 million for the three and six months ended June 30, 2013 from $16.5 million and $32.9 million for the three and six months ended June 30, 2012. Our net loss decreased to $0.7 million for the three months ended June 30, 2013, from a net loss of $1.0 million for the three months ended June 30, 2012 and increased to a net loss of $2.2 million during the six months ended June 30, 2013 from a net loss of $1.1 million during the six months ended June 30, 2012. Since inception, we have incurred net losses leading to an accumulated deficit of $103.5 million as of June 30, 2013. In August 2013, one of our significant customers, Elpida Memory, Inc. ("Elpida"), was acquired by Micron Technology, Inc. ("Micron"), a leading provider of memory chips. As of June 30, 2013 we had $22.5 million in backlog from


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Elpida, of which $2.5 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 $2.5 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 June 2013 for license fees for the three months ending September 30, 2013. Following the acquisition of Elpida by Micron, Elpida issued all of its equity to, and became a wholly-owned of subsidiary of, Micron. Our backlog from Elpida following the acquisition by Micron remains unchanged at $22.5 million as of June 30, 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-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, solar cells, and energy-efficiency applications in flat glass coatings and glass-based devices, and we have not yet received a material amount of revenue from customers in embedded memory, LEDs, displays and other 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. 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.


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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 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.


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Interest Expense, 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 and the refinancing of the note payable to Symyx that was paid in full during the three months ended June 30, 2013 with a line of credit from Silicon Valley Bank. 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 and six months ended June 30, 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 and Six Months Ended June 30, 2013 and 2012
                     Three Months Ended June 30,                                    Six Months Ended June 30,
                       2013               2012          $ Change    % Change         2013               2012         $ Change     % Change
                           (in thousands)                                                (in thousands)
Revenue:
Collaborative
development
program and
services revenue $      12,799       $      11,160     $  1,639         15  %   $     23,702       $     23,355     $    347          1 %
Product revenue              -               2,057       (2,057 )     (100 )%          3,104              2,735          369         13 %
Licensing and
royalty revenue          3,809               3,296          513         16  %          7,235              6,805          430          6 %
Total revenue           16,608              16,513           95          1  %         34,041             32,895        1,146          3 %
Cost of revenue:         7,140               7,474         (334 )       (4 )%         14,983             14,662          321          2 %
Gross profit             9,468               9,039          429          5  %         19,058             18,233          825          5 %
Operating
expenses:
Research and
development              5,448               5,760         (312 )       (5 )%         11,620             10,828          792          7 %
Sales and
marketing                1,578               1,272          306         24  %          3,215              2,512          703         28 %
General and
administrative           3,042               2,722          320         12  %          6,034              5,540          494          9 %
Total operating
expenses                10,068               9,754          314          3  %         20,869             18,880        1,989         11 %
Loss from
operations                (600 )              (715 )        115                       (1,811 )             (647 )     (1,164 )
Other income
(expense):
Interest
expense, net              (231 )              (250 )         19                         (481 )             (499 )         18
Other income,
net                         87                  12           75                           68                  6           62
Total other
income
(expense), net            (144 )              (238 )         94                         (413 )             (493 )         80
Loss before
provision for
income taxes              (744 )              (953 )        209                       (2,224 )           (1,140 )     (1,084 )
Provision for
income taxes                 -                   7           (7 )                          6                  6            -
Net loss         $        (744 )     $        (960 )   $    216                 $     (2,230 )     $     (1,146 )   $ (1,084 )

Revenue
Our revenue increased by $0.1 million, or 1%, to $16.6 million during the three months ended June 30, 2013 from $16.5 million during the three months ended June 30, 2012 due to increases in CDP and services revenue and licensing and royalty revenue offset by a decrease in product revenue.

Our revenue increased by $1.1 million, or 3%, to $34.0 million during the six months ended June 30, 2013 from $32.9 million during the six months ended June 30, 2012 due to increases in CDP and services revenue, product revenue and licensing and royalty revenue.

CDP and services revenue increased by $1.6 million, or 15%, to $12.8 million during the three months ended June 30, 2013 from $11.2 million during the three months ended June 30, 2012. This increase was primarily attributable to $1.6 million in revenue derived from the expansion of existing customer engagements, combined with $2.1 million in revenue derived from new customer engagements, including a government service contract, offset by a $2.1 million decrease in revenue from the scheduled completion and reduction of CDPs. Of the growth from the expansion of existing customer engagements, $2.1 million in revenue was derived from three CDPs.

CDP and services revenue increased by $0.3 million, or 1%, to $23.7 million during the six months ended June 30, 2013 from $23.4 million during the six months ended June 30, 2012. This increase was primarily attributable to $1.8 million in revenue derived from the expansion of existing customer engagements, combined with $2.2 million in revenue derived from new customer engagements, including a government service contract, offset by a $3.7 million decrease in revenue from the scheduled completion and reduction of certain CDPs. Of the growth from the expansion of existing customer engagements, $2.2 million in revenue was derived from four CDPs.

Product revenue decreased by $2.1 million during the three months ended June 30, 2013 from $2.1 million during the three months ended June 30, 2012 as there were no product sales during the three months ended June 30, 2013.


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Product revenue increased by $0.4 million, or 13%, to $3.1 million during the six months ended June 30, 2013 from $2.7 million during the six months ended June 30, 2012. This increase was attributable to the sale of elements of a product workflow and embedded software.

Licensing and royalty revenue increased by $0.5 million, or 16%, to $3.8 million during the three months ended June 30, 2013 from $3.3 million during the three months ended June 30, 2012. This increase was primarily attributable to an increase in minimum license fees for the sales of products subject to licensing fees and royalties as guaranteed by customer contracts offset by a scheduled reduction in minimum license fee revenues.

Licensing and royalty revenue increased by $0.4 million, or 6%, to $7.2 million during the six months ended June 30, 2013 from $6.8 million during the six months ended June 30, 2012. This increase was primarily attributable to an increase in minimum license fees for the sales of products subject to licensing fees and royalties as guaranteed by customer contracts offset by a scheduled reduction in minimum license fee revenues.

The following table presents revenue by geographic region (based on invoiced locations) during the three and six months ended June 30, 2013 and 2012 in dollars (in thousands) and as a percentage of revenue for the periods presented:

                                    Three Months Ended June 30,                                                    Six Months Ended June 30,
                            2013                                   2012                                   2013                                   2012
                 Revenues         % of Revenues         Revenues         % of Revenues         Revenues         % of Revenues         Revenues         % of Revenues
              (in thousands)                         (in thousands)                         (in thousands)                         (in thousands)
United
States      $         11,822             71 %      $         12,351             75 %      $         24,844             73 %      $         24,399             74 %
Japan                  3,746             23 %                 3,317             20 %                 7,807             23 %                 6,882             21 %
APAC other             1,040              6 %                   817              5 %                 1,281              4 %                 1,552              5 %
Europe and
Middle East                -              - %                    28              - %                   109              - %                    62              - %
Total       $         16,608            100 %      $         16,513            100 %      $         34,041            100 %      $         32,895            100 %

Cost of Revenue

Cost of revenue decreased by $0.3 million, or 4%, to $7.1 million during the three months ended June 30, 2013 from $7.5 million during the three months ended June 30, 2012. This change is primarily attributable to a $0.8 million decrease in direct product cost consistent with product revenue from the three months ended June 30, 2012. This decrease was partially offset by an increase in CDP and services revenue from new and ongoing customer engagements, which resulted in a $0.5 million increase in direct labor, materials and other costs associated with these programs.

Cost of revenue increased by $0.3 million, or 2%, to $15.0 million during the six months ended June 30, 2013 from $14.7 million during the six months ended June 30, 2012. This change is primarily attributable to increased CDP and services revenue and product revenue recognized from new and ongoing customer engagements, which resulted in a $0.3 million increase in direct labor, materials and other costs associated with these programs. . . .

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