TMCnet News
INTERMOLECULAR INC - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS(Edgar Glimpses Via Acquire Media NewsEdge) 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, 2014 to the three and six months ended June 30, 2013. • 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 "2013 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 2013 Form 10-K and subsequent quarterly reports on Form10-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 ("R&D"), 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, volume manufacturing-ready integrated devices to market faster and with less risk than conventional approaches to 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 1,200 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 decreased to $9.9 million and $25.8 million for the three and six months ended June 30, 2014 from $16.6 million and $34.0 million for the three and six months ended June 30, 2013. Our net loss increased to $6.9 million for the three months ended June 30, 2014, from a net loss of $0.7 million for the three months ended June 30, 2013 and increased to a net loss of $10.7 million during the six months ended June 30, 2014 from a net loss of $2.2 million during the six months ended June 30, 2013. Since inception, we have incurred net losses leading to an accumulated deficit of $120.8 million as of June 30, 2014. Strategy Our mission is to drive our customers' success by transforming R&D and accelerating innovation in markets that 18-------------------------------------------------------------------------------- Table of Contents derive competitive advantage from the interaction of materials science, processes, integration and device architecture. We currently target 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, advanced batteries 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 (a wholly owned subsidiary of Micron Technology), First Solar, GLOBALFOUNDRIES, Guardian Industries, Micron Technology, SanDisk, Taiwan Semiconductor Manufacturing Company ("TSMC"), Toshiba, and the Ulyanovsk Center for Technology Transfer of the Russian Federation ("UCTT"). 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 customers but allow us to demonstrate the capabilities of our HPC platform to a customer without requiring them 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. • 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. During the year ending December 31, 2014, as a result of certain CDPs being completed in 2014, we expect a decrease in CDP and services revenue. • 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 increaseopportunities for CDPs and licensing fees and royalties. As our other revenue streams increase we expect our product revenue to decrease as a percentage of our overall revenue. Product revenue is recognized upon shipment (title and risk of loss passed to the customer), and customer acceptance, if required, is 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 beguaranteed by customer contracts and are recognized as revenue ratably over the related periods. Over the long term, we expect licensing and royalty revenue to be an increasing and significant component of our revenue. During the three months ended March 31, 2014, we experienced an increase in licensing and royalty revenue attributable to an accelerated payment from a customer in connection with an amended CDP agreement. 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 when licensing and royalty revenue become an increasing component of our 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 19-------------------------------------------------------------------------------- Table of Contents 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. Cost of product revenue is recognized upon product shipment and customer acceptance, if required. 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. • 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 R&D 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 expense to increase modestly in absolute dollars in the near-term periods as resources are reallocated from customer CDPs to R&D and as we continue 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 sales and marketing expense to remain relatively flat in absolute dollars in the near-term periods. 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. Restructuring Expenses After experiencing a reduced level of CDP activity, we initiated reductions in force in February 2014 and May 2014 with respect to approximately 18% and 10% of our workforce at such times, respectively. These reductions in force were part of an overall plan to reduce our cost structure and were completed during the six months ended June 30, 2014. Restructuring expenses consist of personnel-related costs. Interest Expense, net Interest expense historically consisted of interest accrued on our note payable to Symyx in connection with the Symyx asset purchase transaction that closed in November 2011, which was paid in full in May 2013 with a credit facility from SVB. Interest expense after May 2013 consists primarily of interest accrued on our credit facility, which was converted in November 2013 to a three year note payable to SVB. 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, 20-------------------------------------------------------------------------------- Table of Contents 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, 2014 as compared to those disclosed in our 2013 Form 10-K. For further information on our critical and other significant accounting policies, see our 2013 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 Six Months Ended June 30, 2014 and 2013 Three Months Ended June 30, Six Months Ended June 30, 2014 2013 $ Change % Change 2014 2013 $ Change % Change (in thousands) (in thousands)Revenue: Collaborative development program and services revenue $ 6,865 $ 12,799 $ (5,934 ) (46 )% $ 15,751 $ 23,702 $ (7,951 ) (34 )% Product revenue - - - - % - 3,104 (3,104 ) (100 )% Licensing and royalty revenue 3,069 3,809 (740 ) (19 )% 10,088 7,235 2,853 39 % Total revenue 9,934 16,608 (6,674 ) (40 )% 25,839 34,041 (8,202 ) (24 )% Cost of revenue: 5,636 7,140 (1,504 ) (21 )% 12,204 14,983 (2,779 ) (19 )% Gross profit 4,298 9,468 (5,170 ) (55 )% 13,635 19,058 (5,423 ) (28 )% Operating expenses: Research and development 6,212 5,448 764 14 % 13,168 11,620 1,548 13 % Sales and marketing 1,379 1,578 (199 ) (13 )% 3,027 3,215 (188 ) (6 )% General and administrative 3,097 3,042 55 2 % 6,410 6,034 376 6 % Restructuring charges 293 - 293 100 % 1,361 - 1,361 100 % Total operating expenses 10,981 10,068 913 9 % 23,966 20,869 3,097 15 % Loss from operations (6,683 ) (600 ) (6,083 ) (10,331 ) (1,811 ) (8,520 ) Other income (expense): Interest expense, net (179 ) (231 ) 52 (373 ) (481 ) 108 Other income, net 5 87 (82 ) - 68 (68 ) Total other income (expense), net (174 ) (144 ) (30 ) (373 ) (413 ) 40 Loss before provision for income taxes (6,857 ) (744 ) (6,113 ) (10,704 ) (2,224 ) (8,480 ) Provision for income taxes 2 - 2 6 6 - Net loss $ (6,859 ) $ (744 ) $ (6,115 ) $ (10,710 ) $ (2,230 ) $ (8,480 ) Revenue Our revenue decreased by $6.7 million, or 40%, to $9.9 million during the three months ended June 30, 2014, from $16.6 million during the three months ended June 30, 2013, due to decreases in CDP and services revenue and licensing and royalty revenue primarily as a result of CDPs that ended during 2014, including our engagements with GLOBALFOUNDRIES and SanDisk and Toshiba. Our revenue decreased by $8.2 million, or 24%, to $25.8 million during the six months ended June 30, 2014, from $34.0 million during the six months ended June 30, 2013, due to decreases in CDP and services revenue and product revenue offset by an increase in licensing and royalty revenue. 21-------------------------------------------------------------------------------- Table of Contents CDP and services revenue decreased by $5.9 million, or 46%, to $6.9 million during the three months ended June 30, 2014, from $12.8 million during the three months ended June 30, 2013. This decrease was primarily attributable to $6.7 million in revenue from the scheduled completion and reduction of CDP and service agreements. This was partially offset by $0.6 million in revenue derived from the expansion of existing customer engagements and $0.2 million in revenue derived from new customer engagements. CDP and services revenue decreased by $8.0 million, or 34%, to $15.8 million during the six months ended June 30, 2014, from $23.7 million during the six months ended June 30, 2013. This decrease was primarily attributable to $11.2 million decrease in revenue from the scheduled completion and reduction of CDP and service agreements. This was partially offset by $2.6 million in revenue derived from the expansion of existing customer engagements and $0.7 million in revenue derived from new customer engagements. Of the growth from new customer engagements, $0.6 million in revenue was derived from three CDPs. There was no change to product revenue during the three months ended June 30, 2014 from the three months ended June 30, 2013, as there were no workflow sales in either period. Product revenue decreased by $3.1 million during the six months ended June 30, 2014, as there were no workflow sales during the six months ended June 30, 2014. Licensing and royalty revenue decreased by $0.7 million, or 19%, to $3.1 million during the three months ended June 30, 2014, from $3.8 million during the three months ended June 30, 2013. This decrease was primarily attributable to a $0.9 million decrease in scheduled minimum license fees guaranteed by customer contracts. This was partially offset by a $0.1 million increase in scheduled minimum license fees from existing customer contracts. Licensing and royalty revenue increased by $2.9 million, or 39%, to $10.1 million during the six months ended June 30, 2014, from $7.2 million during the six months ended June 30, 2013. This increase was primarily attributable to a $4.2 million accelerated payment from a customer in connection with the suspension of CDP activities with them, and to a lesser extent a $0.2 million increase in scheduled minimum license fees from existing customer contracts. This was partially offset by a $1.1 million decrease 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 six months ended June 30, 2014 and 2013 in dollars (in thousands) and as a percentage of revenue for the periods presented: Three Months Ended June 30, Six Months Ended June 30, 2014 2013 2014 2013 Revenues % of Revenues Revenues % of Revenues Revenues % of Revenues Revenues % of Revenues United States $ 9,054 91 % $ 11,822 71 % $ 23,271 90 % $ 24,844 73 % Japan 354 4 % 3,746 23 % 1,257 5 % 7,807 23 % APAC other 389 4 % 1,040 6 % 931 4 % 1,281 4 % Europe and Middle East 137 1 % - - % 380 1 % 109 - % Total $ 9,934 100 % $ 16,608 100 % $ 25,839 100 % $ 34,041 100 % Cost of Revenue Cost of revenue decreased by $1.5 million, or 21%, to $5.6 million during the three months ended June 30, 2014, from $7.1 million during the three months ended June 30, 2013. This change was a result of a $1.6 million decrease in direct labor, materials and other costs associated with the scheduled completion and reduction of certain CDP and service agreements. This decrease is partially offset by a $0.1 million increase in licensing and royalty cost. Cost of revenue decreased by $2.8 million, or 19%, to $12.2 million during the six months ended June 30, 2014, from $15.0 million during the six months ended June 30, 2013. This change is a result of a $1.1 million decrease in direct product costs consistent with decreased product revenue and a $1.7 million decrease in direct labor, materials and other costs associated with the scheduled completion and reduction of certain CDP and service agreements. 22-------------------------------------------------------------------------------- Table of Contents 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 was 43.3% during the three months ended June 30, 2014 compared to 57.0% for the three months ended June 30, 2013. This decrease was primarily attributable to the decreases in licensing and royalty revenue, which are typically higher margin, and due to increased investments in customer CDPs. Gross margin was 52.8% during the six months ended June 30, 2014 compared to 56.0% for the six months ended June 30, 2013. This decrease was primarily attributable to increased investments in customer CDPs. Research and Development R&D expenses increased by $0.8 million, or 14%, to $6.2 million during the three months ended June 30, 2014, from $5.4 million during the three months ended June 30, 2013. The change was primarily attributable to an increase of $0.9 million in facility and depreciation expense due to assets utilized for R&D development previously assigned to customer CDPs and increased rent expense and $0.3 million increase in engineering parts and other expenses associated with application development, offset by decreases in employee and professional services related costs of $0.4 million. Research and development expense included stock-based compensation of $0.3 million during the three months ended June 30, 2014 and 2013. R&D expenses increased by $1.5 million, or 13%, to $13.2 million during the six months ended June 30, 2014, from $11.6 million during the six months ended June 30, 2013. The change was primarily attributable to an increase of $1.2 million in facility and depreciation expense due to assets utilized for R&D development previously assigned to customer CDPs and increased rent expense and $0.4 million increase in engineering parts and other expenses associated with new application development, offset by decreases in employee related costs of $0.1 million. Research and development expense included stock-based compensation of $0.6 million and $0.7 million during the six months ended June 30, 2014 and 2013, respectively. Sales and Marketing Sales and marketing expenses decreased by $0.2 million, or 13%, to $1.4 million during the three months ended June 30, 2014, from $1.6 million during the three months ended June 30, 2013. This decrease is primarily related to decreases in employee and professional services related costs. Sales and marketing expense included stock-based compensation of $0.3 million during the three months ended June 30, 2014 and 2013. Sales and marketing expenses decreased by $0.2 million, or 6%, to $3.0 million during the six months ended June 30, 2014, from $3.2 million during the six months ended June 30, 2013. This decrease is primarily related to decreases in employee and professional services related costs. Sales and marketing expense included stock-based compensation of $0.7 million and $0.6 million during the six months ended June 30, 2014 and 2013, respectively. General and Administrative General and administrative expenses increased by $0.1 million, or 2%, to $3.1 million during the three months ended June 30, 2014, from $3.0 million during the three months ended June 30, 2013. This increase is primarily attributable to $0.1 million in higher personnel costs related to increased wages, stock-based compensation and other related benefits. General and administrative expense included stock-based compensation of $0.5 million and $0.4 million during the three months ended June 30, 2014 and 2013, respectively. General and administrative expenses increased by $0.4 million, or 6%, to $6.4 million during the six months ended June 30, 2014, from $6.0 million during the six months ended June 30, 2013. This increase is primarily attributable to $0.4 million in higher personnel costs related to increased wages, stock-based compensation and other related benefits. General and administrative expense included stock-based compensation of $1.0 million and $0.8 million during the six months ended June 30, 2014 and 2013, respectively. 23-------------------------------------------------------------------------------- Table of Contents Restructuring Charges Restructuring expenses were $0.3 million during the three months ended June 30, 2014, compared to zero for the three months ended June 30, 2013. In May 2014, our Board of Directors authorized a restructuring plan to reduce our workforce by 10%, pursuant to which charges of $0.3 million were incurred for severance and other personnel related costs. Restructuring expenses were $1.4 million during the six months ended June 30, 2014, compared to none for the six months ended June 30, 2013. In January and May 2014, our Board of Directors authorized restructuring plans to reduce our workforce by 18% and 10%, respectively, pursuant to which charges of $1.1 million and $0.3 million were incurred for severance and other personnel related costs. Loss from Operations Our operating loss increased by $6.1 million, to an operating loss of $6.7 million during the three months ended June 30, 2014, from an operating loss of $0.6 million during the three months ended June 30, 2013. Our operating expenses increased by $0.9 million to $11.0 million, which includes $0.3 million in restructuring related expenses, during the three months ended June 30, 2014, from $10.1 million during the three months ended June 30, 2013. Our operating loss increased by $8.5 million, to an operating loss of $10.3 million during the six months ended June 30, 2014, from an operating loss of $1.8 million during the six months ended June 30, 2013. Our operating expenses increased by $3.1 million to $24.0 million, which includes $1.4 million in restructuring related expenses, during the six months ended June 30, 2014, from $20.9 million during the six months ended June 30, 2013. Interest Expense, net On May 31, 2013, we entered into a loan and security agreement (the "Loan Agreement") with Silicon Valley Bank ("SVB") and repaid the remaining principal and accrued interest under the secured promissory note that we issued to Symyx in November 2011. Interest expense, net, remained unchanged at $0.2 million during the three months ended June 30, 2014 and 2013. Interest expense, net, decreased by $0.1 million to $0.4 million during the six months ended June 30, 2014, from $0.5 million during the six months ended June 30, 2013 and is primarily comprised of interest expense associated with the Loan Agreement with SVB during the six months ended June 30, 2014 and interest on our note payable to Symyx during the six months ended June 30, 2013. Other Income, net Other income, net, for the three and six months ended June 30, 2014 and 2013 consisted of municipal development grant proceeds and foreign exchange gains and losses that were not significant during these periods. Provision for Income Taxes Provision for income taxes during the three and six months ended June 30, 2014 and 2013 consisted of income taxes on our foreign entities and were not significant during these periods. Net Loss Our net loss increased by $6.1 million, to a net loss of $6.9 million during the three months ended June 30, 2014, from a net loss of $0.7 million during the three months ended June 30, 2013. The difference between operating loss and net loss during the three months ended June 30, 2014 and 2013 was primarily related to interest expense associated with the Loan Agreement with SVB and interest expense associated with our note payable to Symyx, respectively. Our net loss increased by $8.5 million, to a net loss of $10.7 million during the six months ended June 30, 2014, from a net loss of $2.2 million during the six months ended June 30, 2013. The difference between operating loss and net loss during the six months ended June 30, 2014 and 2013 was primarily related to interest expense associated with the Loan Agreement with SVB and interest expense associated with our note payable to Symyx, respectively. 24-------------------------------------------------------------------------------- Table of Contents Liquidity and Capital Resources Prior to our initial public offering in November 2011, we substantially satisfied our capital and liquidity needs through private placements of redeemable convertible preferred stock and, to a lesser extent, cash flow from operations. As of June 30, 2014 we had $70.0 million of cash, cash equivalents and short-term investments and $64.5 million of net working capital. As of June 30, 2014, we had debt outstanding of $24.0 million related to the Loan Agreement with SVB. We are obligated to pay interest at a fixed rate of 3.25% and $0.5 million of principal on a quarterly basis. The term loan matures on November 30, 2016 and we are obligated to pay all outstanding principal and accrued and unpaid interest on that date. At our option, we may prepay the outstanding principal balance of the term loan in full or in part, subject to a pre-payment fee of 0.25% of the outstanding principal balance of the term loan if the term loan is repaid prior to November 30, 2014. Our obligations under the term loan require us to dedicate a substantial portion of our cash flow from operations to payments on interest and principal at or prior to maturity, thus reducing the availability of our cash flow to fund working capital, capital expenditures, research and development efforts, execution of our business strategy and other general corporate purposes. Such limitations increase our vulnerability to adverse general economic and industry conditions and limit our flexibility in planning for, or reacting to, changes in the economy, our industry and new opportunities that may arise. In addition, our obligations under the term loan and the security interests granted in favor of SVB may make it more difficult for us to borrow funds in the future to fund working capital, capital expenditures and other purposes, which could materially and adversely affect our business, financial condition and results of operations. To date, we have incurred significant losses. During the six months ended June 30, 2014 and 2013, we incurred net losses of $10.7 million and $2.2 million, respectively. As of June 30, 2014, our accumulated deficit was $120.8 million. We believe that we have the financial resources needed to meet business requirements for the next 12 months. However, our forecast of the period of time through which our financial resources will be adequate to meet business requirements are forward-looking statements and involve risks and uncertainties. Our future capital requirements will depend on many factors, many of which are set forth in greater detail under the caption "Risk Factors," but generally include without limitation our rate of revenue growth, our expansion of our sales and marketing activities and overhead expenses, the timing and extent of our spending to support our R&D efforts and our ability to expand CDPs in the semiconductor and clean energy industries, whether we are successful in obtaining payments from customers, the financial stability of our customers, whether we can enter into additional collaborations in our target industries, the progress and scope of collaborative R&D projects performed by us and our customers, the effect of any acquisitions of other businesses or technologies that we may make in the future, the filing, prosecution and enforcement of patent claims, how much funding we may need to develop or enhance our solutions or HPC platform and any necessary responses to competitive pressures. To the extent that existing cash, cash equivalents, short-term investments and cash from operations are insufficient to fund our operations and repay our outstanding debt when it may become due, we may need to raise additional funds through public or private equity or debt financing. We may also seek to invest in or acquire complementary businesses, applications or technologies, any of which could also require us to seek additional equity or debt financing. Additional funds may not be available on terms favorable to us or at all. We maintain almost all of our cash and investments in the United States and therefore are not subject to restrictions or tax obligations as we access the cash. Cash Flows The following summary of our cash flows for the periods indicated has been derived from our condensed consolidated financial statements included elsewhere in this filing (in thousands): Six Months Ended June 30, 2014 2013 Net cash provided by operating activities $ 659 $ 10,065 Net cash used in investing activities $ (31,120 ) $ (8,290 ) Net cash provided by (used in) financing activities $ 163 $ (246 ) Cash Flows from Operating Activities We experienced positive cash flows from operating activities during the six months ended June 30, 2014 and 2013 of $0.7 million and $10.1 million, respectively. 25-------------------------------------------------------------------------------- Table of Contents Net cash provided by operating activities during the six months ended June 30, 2014 of $0.7 million reflects a net loss of $10.7 million, non-cash charges of $5.2 million for depreciation and amortization, and $2.8 million for stock-based compensation. Depreciation and amortization increased by $0.6 million from the year ago period due to a larger fixed asset install base. Net operating assets and liabilities cash flow increased by $3.4 million primarily due to a $2.4 million increase of collections in accounts receivable as a result of timing of payments and an increase in deferred revenue of $1.7 million due to customer payments. Operating cash flow related to accounts payable and accrued liabilities decreased by $1.0 million due to declines in purchasing activity and employee related liabilities and cash flows related to inventory decreased by $0.5 million due to procurement of components of workflow elements to be used in future builds. Cash Flows from Investing Activities Our investing activities consist primarily of purchases and maturities of short-term investments, capital expenditures to purchase property and equipment, and our investments in intangible assets relating to our patents and trademarks. In the future, we expect we will continue to make modest capital expenditures to support our operations, and to incur costs to protect our investment in our developed technology and IP. During the six months ended June 30, 2014, cash used in investing activities was $31.1 million, primarily as a result of $28.2 million of purchased short-term investments. We also incurred $2.0 million in capital expenditures and $0.9 million in capitalized patent and trademark costs. Cash Flows from Financing Activities To date, we have financed our operations primarily with proceeds from the sale of our redeemable convertible preferred stock and proceeds received from our initial public offering. We have a term loan pursuant to the Loan Agreement with SVB with a remaining principal balance of $24 million as of June 30, 2014. During the six months ended June 30, 2014, cash provided by financing activities of $0.2 million was primarily related to positive cash flow related to the issuance of common stock as a result of option exercises in the amount of $1.2 million, which was partially offset by cash used in financing activities of $1.0 million for scheduled principal payments on our SVB term loan. Contractual Obligations and Commitments The following summarizes our contractual obligations as of June 30, 2014 (in thousands): Payments Due by Period Less Than More Than Total One Year 1 - 3 Years 3 - 5 Years 5 Years Operating lease obligations $ 27,279 $ 854 $ 6,409 $ 4,980 $ 15,036 Term loan 24,000 1,000 23,000 - - Contractual interest payments on term loan 1,897 392 1,505 - - Purchase obligations(1) 308 308 - - - Total $ 53,484 $ 2,554 $ 30,914 $ 4,980 $ 15,036 (1) Purchase obligations consist of firm, non-cancelable agreements to purchase property and equipment and inventory related items. Operating lease agreements represent our obligations to make payments under our non-cancelable lease agreement for our facility in San Jose, California. During the six months ended June 30, 2014, we made regular lease payments of $0.4 million under this operating lease agreement following a period of free rent from December 2013 through March 2014 in connection with the execution of the agreement in October 2013. During 2013 we entered into a term loan pursuant to the Loan Agreement with SVB in the amount of $25.0 million that bears interest at a fixed rate equal to 3.25%. We are obligated to pay interest at the applicable rate and $0.5 million of principal on a quarterly basis. The term loan matures on November 30, 2016, and we are obligated to pay all outstanding principal and accrued and unpaid interest on that date. At our option, we may pre-pay the outstanding principal balance of the term loan in full or in part, subject to a pre-payment fee of 0.25% of the outstanding principal balance of the term loan if the term loan is repaid prior to November 30, 2014. As of June 30, 2014, the remaining principal on the term loan was $24.0 million, with remaining interest payments of $1.9 million due over the term of the loan. 26-------------------------------------------------------------------------------- Table of Contents Off-Balance Sheet Arrangements As of June 30, 2014, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which are established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. |