UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended ~~September~~March 3031, ~~2018~~2019

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number 001-35348

Intermolecular, Inc.

(Exact Name of Registrant as Specified in its Charter)

Delaware		20-1616267
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)

3011 N. First Street San Jose, California		95134
(Address of Principal Executive Offices)		(Zip Code)

(408) 582-5700

(Registrant’s Telephone Number, Including Area Code)

N/A

(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. ~~(Check one):~~

Large accelerated filer ☐ Accelerated filer ☐ Non-accelerated filer ☐☒ Smaller reporting company ☒ Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

~~Shares~~Securities ~~outstanding~~registered ofpursuant ~~the~~to ~~registrant’s~~Section ~~common~~12(b) ~~stock:~~of the Act.

Class		Outstanding as of November 5, 2018
Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common stock, $0.001 par value		49,752,516
Common Stock, $0.001 par value per share	IMI	The Nasdaq Global Select Market

As of May 10, 2019, the registrant had 49,758,224 shares of common stock outstanding.

INTERMOLECULAR, INC.

FORM 10-Q FOR THE QUARTER ENDED ~~SEPTEMBER~~MARCH 3031, ~~2018~~2019

TABLE OF CONTENTS

		Page
	PART I — FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited)	3
	Condensed Consolidated Balance Sheets	3
	Condensed Consolidated Statements of Operations	4
	Condensed Consolidated Statements of Comprehensive Loss	5
	Condensed Consolidated Statements of Cash Flows	6
	Notes to Condensed Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	17
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	24
Item 4.	Controls and Procedures	24
	PART II — OTHER INFORMATION
Item 1.	Legal Proceedings	25
Item 1A.	Risk Factors	25
Item 6.	Exhibits	2627
	Signatures	2728

PART I — FINANCIAL INFORMATION

ITEM 1.

FINANCIAL STATEMENTS

INTERMOLECULAR, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(In thousands, except share and per share data)

(Unaudited)

	September 30, 2018			December 31, 2017
	March 31, 2019			December 31, 2018
ASSETS
Current assets:
Cash and cash equivalents	$	63,~~889~~816		$	68,~~090~~351
Short-term investments		23,~~759~~613			1822,~~060~~098
Accounts receivable		32,~~330~~451			53,~~519~~349
Prepaid expenses and other current assets		~~949~~952			~~1,069~~936
Total current assets		3430,~~927~~832			3034,~~738~~734
Long-term investments		—			1,657
Materials inventory		2,561			2,638
Materials inventory		2,752			2,781
Property and equipment, net		3,125			3,432
Property and equipment, net		3,497			5,913
Intangible assets, net		1,979			2,075
Intangible assets, net		2,141			2,620
Right-of-use lease assets - operating		11,201			—
Other assets		~~542~~509			~~600~~514
Total assets	$	4350,~~859~~207		$	4443,~~309~~393
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	~~752~~193		$	~~928~~760
Accrued liabilities		~~917~~1,338			~~865~~1,234
Accrued compensation and employee benefits		21,~~602~~639			23,~~535~~431
Deferred revenue		289			941
Current portion of lease obligation - operating		1,772			—
Total current liabilities		4,560			5,269
Deferred revenue		333			917
Deferred rent		2,737			2,939
Total current liabilities		5,275			6,342
Other long-term liabilities		—			28
Deferred rent		—			2,667
Total liabilities		7,297			8,236
Long term lease obligation - operating		12,307			—
Total liabilities		17,582			9,009
Commitments and contingencies (note 5)
Stockholders’ equity:
Common stock, par value $0.001 per share—200,000,000 shares authorized; 49,748,766 and 49,569,721 shares issued and outstanding as of September 30, 2018 and December 31, 2017, respectively		50			50
Common stock, par value $0.001 per share—200,000,000 shares authorized; 49,758,224 and 49,752,516 shares issued and outstanding as of March 31, 2019 and December 31, 2018, respectively		50			50
Additional paid-in capital		~~215~~216,~~606~~502			~~214~~216,~~796~~034
Accumulated other comprehensive loss		(19	)		(35	)
Accumulated other comprehensive income (loss)		7			(27	)
Accumulated deficit		(~~179~~183,~~075~~934	)		(~~178~~181,~~738~~673	)
Total stockholders’ equity		3632,~~562~~625			3634,~~073~~384
Total liabilities and stockholders’ equity	$	4350,~~859~~207		$	4443,~~309~~393

See accompanying notes to unaudited Condensed Consolidated Financial Statements

INTERMOLECULAR, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Operations

(In thousands, except share and per share data)

(Unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,
	Three Months Ended March 31,
	2018			2017			2018			2017
	2019			2018
Revenue:
Program revenue	$	76,~~354~~385		$	69,~~869~~256		$	~~25,975~~		$	~~20,160~~
Licensing and royalty revenue		~~508~~266			~~1,753~~419			~~1,364~~			~~6,495~~
Total revenue		76,~~862~~651			89,~~622~~675			~~27,339~~			~~26,655~~
Cost of revenue:
Cost of program revenue		21,~~054~~818			23,~~864~~375			~~8,286~~			~~8,106~~
Cost of licensing and royalty revenue		4—			111			8			~~303~~
Total cost of revenue		21,~~058~~818			23,~~875~~376			~~8,294~~			~~8,409~~
Gross profit		54,~~804~~833			56,~~747~~299			~~19,045~~			~~18,246~~
Operating expenses:
Research and development		4,~~463~~146			4,~~835~~032			~~12,551~~			~~17,328~~
Sales and marketing		~~692~~890			~~874~~796			~~2,346~~			~~3,285~~
General and administrative		12,~~581~~338			2,~~000~~286			~~5,615~~			~~7,225~~
Restructuring charges		—			—			—			1,351
Total operating expenses		7,374			7,114
Total operating expenses		6,736			7,709			20,512			29,189
Loss from operations		(2,541	)		(815	)
Loss from operations		(932	)		(1,962	)		(1,467	)		(10,943	)
Other income (expense):
Other income (expense):
Interest income (expense), net		183			106
Interest income (expense), net		168			70			413			182
Other income (expense), net		96			87
Other income (expense), net		78			64			241			243
Total other income (expense), net		279			193
Total other income (expense), net		246			134			654			425
Loss before provision for income taxes		(2,262	)		(622	)
Loss before provision for income taxes		(686	)		(1,828	)		(813	)		(10,518	)
Provision for income taxes		—			1
Provision for income taxes		—			—			1			1
Net loss	$	(2,262	)	$	(623	)
Net loss	$	(686	)	$	(1,828	)	$	(814	)	$	(10,519	)
Net loss per share, basic and diluted	$	(0.05	)	$	(0.01	)
Net loss per share, basic and diluted	$	(0.01	)	$	(0.04	)	$	(0.02	)	$	(0.21	)
Weighted-average number of shares used in computing net loss per share, basic and diluted		49,757,606			49,581,927
Weighted-average number of shares used in computing net loss per share, basic and diluted		49,746,082			49,554,701			49,667,518			49,543,014

Related Party Transactions

The Condensed Consolidated Statements of Operations include the following related party transactions:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2018		2017		2018		2017
Revenue:
Licensing and royalty revenue	$	—	$	—	$	—	$	383
Total revenue	$	—	$	—	$	—	$	383
Cost of Revenue:
Cost of licensing and royalty revenue	$	—	$	—	$	—	$	1
Total cost of revenue	$	—	$	—	$	—	$	1

See accompanying notes to unaudited Condensed Consolidated Financial Statements

Condensed Consolidated Statements of Comprehensive Loss

(In thousands)

(Unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,
	Three Months Ended March 31,
	2018			2017			2018			2017
	2019			2018
Net loss	$	(~~686~~2,262	)	$	(~~1,828~~623	)	$	~~(814~~	)	$	~~(10,519~~	)
Change in unrealized gain (loss) on available-for-sale- securities, net of tax		2435			12(24	)		16			24
Other comprehensive income		24			12			16			24
Comprehensive loss, net of income tax	$	(2,227	)	$	(647	)
Comprehensive loss, net of income tax	$	(662	)	$	(1,816	)	$	(798	)	$	(10,495	)

See accompanying notes to unaudited Condensed Consolidated Financial Statements

INTERMOLECULAR, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

	Nine Months Ended September 30,
	Three Months Ended March 31,
	2018			2017
	2019			2018
Cash flows from operating activities:
Net loss	$	(~~814~~2,262	)	$	(~~10,519~~623	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation, amortization, and accretion		~~3,514~~664			51,~~369~~423
Stock-based compensation		624			1,221
Amortization expense - Right of use lease assets operating		426
Loss on disposal of property and equipment		—			70
Stock-based compensation		463			270
Loss on disposal of property and equipment		2			—
Changes in operating assets and liabilities:
Accounts receivable		~~2,666~~898			1,~~587~~796
Prepaid expenses and other assets		~~177~~(10	)		~~663~~121
Materials inventory		5776			~~391~~(69	)
Accounts payable		(~~304~~489	)		~~688~~(554	)
Accrued and other liabilities		(~~220~~2,099	)		~~370~~(730	)
Deferred revenue		(~~652~~584	)		~~485~~56
Net cash provided by operating activities		5,048			325
Net cash (used in) provided by operating activities		(2,915	)		1,690
Cash flows from investing activities:
Purchase of investments		(217,~~968~~613	)		(156,~~505~~252	)
Redemption of investments		186,~~151~~122			203,~~014~~070
Purchase of property and equipment		(~~620~~134	)		(~~705~~194	)
Proceeds from sale of equipment		1			12
Net cash used in investing activities		(1,625	)		(3,376	)
Net cash (used in) provided by investing activities		(4,436	)		3,816
Cash flows from financing activities:
Principal payment under capital leases obligations		—			(13	)
Proceeds from exercise of common stock options		5			17
Proceeds from exercise of common stock options		187			—
Net cash provided by financing activities		5			17
Net cash (used in) provided by financing activities		187			(13	)
Net decrease in cash and cash equivalents		(4,535	)		(1,669	)
Net increase in cash and cash equivalents		799			4,128
Cash and cash equivalents at beginning of period		8,351			6,090
Cash and cash equivalents at beginning of period		6,090			5,759
Cash and cash equivalents at end of period	$	3,816		$	4,421
Cash and cash equivalents at end of period	$	6,889		$	9,887
Supplemental disclosure of cash flow information:
Cash paid for interest	$	—			6
Cash paid for income taxes, net of refunds received	$	1			1
Noncash investing/operating activities:
Transfer of property and equipment to materials inventory	$	9823		$	~~380~~30
Transfer of materials inventory to property and equipment	$	7919		$	~~351~~66
Additions to property, equipment and intangible assets not paid at the end of the period	$	~~158~~205		$	4988

See accompanying notes to unaudited Condensed Consolidated Financial Statements

INTERMOLECULAR, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

1. Summary of Significant Accounting Policies

Basis of Presentation

The accompanying Condensed Consolidated Financial Statements of Intermolecular, Inc. and subsidiaries (the Company) have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) for interim financial information, the instructions to Form 10-Q and Article 10 of Regulation S-X of the Securities and Exchange Commission (SEC). Accordingly, certain information and disclosures normally included in complete financial statements prepared in accordance with GAAP have been condensed or omitted. The information in this report should be read in conjunction with the Company’s audited Consolidated Financial Statements and notes thereto included in its Annual Report on Form 10-K for the fiscal year ended December 31, ~~2017~~2018, as filed with the SEC on March 28, ~~2018~~2019. Certain amounts in the prior year’s presentations have been reclassified to conform to the current presentation. These reclassifications had no effect on previously reported net income.

In the opinion of management, the accompanying unaudited Condensed Consolidated Financial Statements reflect all adjustments (consisting only of normal recurring adjustments) necessary to present fairly the Company’s financial position, results of operations and cash flows for the interim periods presented. The operating results for the three ~~and nine~~ months ended ~~September~~March 3031, ~~2018~~2019 are not necessarily indicative of the results that may be expected for any other future interim period or full year. The Condensed Consolidated Balance Sheet as of December 31, ~~2017~~2018 is derived from the audited Consolidated Financial Statements.

Agreement and Plan of Merger

On May 6, 2019, the Company, entered into an Agreement and Plan of Merger (the Merger Agreement) with EMD Group Holding II, Inc., a Delaware corporation and an indirect wholly owned subsidiary of Merck KGaA, Darmstadt, Germany (Parent) and EMD Performance Materials Semiconductor Services Corp., a Delaware corporation and a wholly owned subsidiary of Parent (Merger Sub), providing for the merger of Merger Sub with and into the Company (the Merger), with the Company surviving the Merger as a wholly owned subsidiary of Parent (the Surviving Corporation). The Merger Agreement was unanimously approved by the Company’s Board of Directors and the Executive Board of Merck KGaA, Darmstadt, Germany.

Pursuant to the terms and subject to the conditions of the Merger Agreement, at the effective time of the Merger (the Effective Time), each share of the Company’s common stock, par value $0.001 per share (each such share, a Company Share and collectively the Company Shares), that is outstanding immediately prior to the Effective Time (excluding (i) any shares owned by the Company, Parent or Merger Sub or any direct or indirect wholly owned subsidiary of the Company, Parent or Merger Sub (which will be canceled) and (ii) any shares with respect to which appraisal rights have been properly exercised under Delaware law (Dissenting Company Shares)) will be canceled and automatically converted into the right to receive $1.20 in cash, without interest thereon (the Merger Consideration).

Pursuant to the terms and subject to the conditions of the Merger Agreement, effective as of immediately prior to the Effective Time, (i) the vesting of each option to purchase Company Shares (each a Company Option) that remains outstanding and unvested as of immediately prior to the Effective Time shall be accelerated in full, (ii) each Company Option that remains outstanding as of immediately prior to the Effective Time shall be canceled and terminated as of the Effective Time and (iii) the holder of each such Company Option shall be paid an amount in cash (without interest), if any, equal to the product obtained by multiplying (x) the aggregate number of Company Shares underlying such Company Option immediately prior to the Effective Time, by (y) the amount, if any, by which the Merger Consideration exceeds the per share exercise price of such Company Option.

Pursuant to the terms and subject to the conditions of the Merger Agreement, effective as of immediately prior to the Effective Time, (i) the vesting of each award of restricted stock units or performance stock units (each a Company RSU Award) that remains outstanding as of immediately prior to the Effective Time shall be accelerated in full (with any applicable performance criteria being deemed achieved at the maximum possible level of achievement for such performance criteria), (ii) each Company RSU Award that remains outstanding as of immediately prior to the Effective Time shall be canceled and terminated as of the Effective Time and (iii) the holder of each such Company RSU Award shall be entitled to be paid an amount in cash (without interest) equal to the product obtained by multiplying (x) the aggregate number of Company Shares underlying such Company RSU Award immediately prior to the Effective Time, by (y) the Merger Consideration.

The total Merger Consideration represents an equity value of approximately $62.3 million and an enterprise value of approximately $34.9 million, after accounting for the acceleration of equity awards and the Company’s net cash of approximately $27.4 million at the end of the first quarter of 2019

The consummation of the Merger is also subject to the satisfaction (or waiver, if applicable) of various customary conditions, including (i) adoption of the Merger Agreement by the requisite vote of the Company’s stockholders (the Company Stockholder Approval), (ii) review and clearance by the Committee on Foreign Investment in the United States, (iii) the absence of any law or governmental order making illegal or prohibiting the Merger, (iv) the accuracy of the representations and warranties of each party contained in the Merger Agreement (subject to certain materiality qualifications), (v) each party’s compliance with or performance of the covenants and agreements in the Merger Agreement in all material respects and (vi) other customary closing conditions.

In connection with the Merger Agreement, certain executive officers, directors and stockholders of the Company (solely in their respective capacities as stockholders of the Company) holding approximately 31.0% of the outstanding Company Shares as of the date of the Merger Agreement have entered into support agreements with Parent to vote all of their Company Shares in favor of the adoption of the Merger Agreement and approval of the Merger (the Support Agreements). The Support Agreements include covenants with respect to the voting of such Company Shares in favor of approving the Merger and against any competing acquisition proposals and place certain restrictions on the transfer of the Company Shares held by the respective signatories thereto.

The Merger Agreement contains certain termination rights for the Company and Parent. Upon termination of the Merger Agreement under specified circumstances, including in connection with the Company’s entry into a definitive agreement providing for the consummation of a superior proposal as permitted under the Merger Agreement, the Company will be required to pay Parent a termination fee of $2.3 million.

The foregoing description of the Merger Agreement and the Support Agreements does not purport to be complete and is qualified in its entirety by reference to the Merger Agreement, which was filed as Exhibit 2.1 to the Company’s Current Report on Form 8-K filed on May 6, 2019, and the Support Agreements, executed in substantially the form which was filed as Exhibit 2.2 to the Company’s Current Report on Form 8-K filed on May 6, 2019.

During the three months ended March 31, 2019, the Company recorded acquisition-related costs of $0.4 million within its condensed consolidated statements of operations.

Use of Estimates

The preparation of the accompanying Condensed Consolidated Financial Statements in conformity with GAAP requires management to make estimates and assumptions about future events. These estimates and the underlying assumptions affect the amounts of assets and liabilities reported, disclosures about contingent assets and liabilities, and reported amounts of revenue and expenses. Management uses estimates and judgments in determining recognition of revenues, valuations of accounts receivable, inventories, intangible assets, warrants and assumptions used in the calculation of income taxes and stock-based compensation, among others. These estimates and assumptions are based on management’s best estimates and judgment. Management evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors, and adjusts such estimates and assumptions when facts and circumstances dictate. As future events and their effects cannot be determined with precision, actual results could differ significantly from these estimates.

Concentration of Credit Risk

Financial instruments that potentially subject the Company to concentration of credit risk consist of cash, cash equivalents, investments and accounts receivable. The Company’s cash, cash equivalents and investments consist of demand deposits, money market accounts, certificates of deposit, corporate bonds and commercial paper maintained with high quality financial institutions. The Company's accounts receivable consists of non-interest bearing balances due from credit-worthy customers.

Significant Accounting Policies

Adoption of New Accounting Standard

InAdoption November 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2016-18 (ASU 2016-18), Restricted Cash, which requires amounts generally described as restricted cash and restricted cash equivalents be included with cash and cash equivalents when reconciling the total beginning and ending amounts for the periods shown on the statement of ~~cash~~ASC flows. The Company adopted ASU 2016-18 in the first quarter of 2018 and there was no impact on the Company’s Condensed Consolidated Financial Statements as the Company had no restricted cash balances as of September 30, 2018 and December 31, 2017.842

On January 1, ~~2018~~2019, the Company adopted ~~the~~FASB ~~new~~Accounting ~~accounting~~Standards ~~standard~~Codification (ASC) Topic ~~606~~842, Leases ~~“Revenue from Contracts with Customers”~~ (ASC ~~606~~842), ~~and~~ ~~all~~which requires the ~~related~~recognition ~~amendments~~of (the ~~new~~right-of-use ~~revenue~~assets ~~standard)~~and torelated ~~all~~operating ~~contracts~~and ~~which~~finance ~~were~~lease ~~not~~liabilities ~~completed~~on asthe ofbalance ~~January~~sheet. 1,As ~~2018~~permitted ~~using~~by ~~the~~ASC ~~modified~~842, ~~retrospective~~the ~~method. The~~ Company ~~recognized~~elected the ~~cumulative~~adoption ~~effect~~date of ~~initially~~January ~~applying~~1, ~~the~~2019, ~~new~~which ~~revenue~~is ~~standard as an adjustment to~~ the ~~opening~~date ~~balance~~ of ~~retained~~initial ~~earnings~~application. ~~The~~As ~~comparative~~a ~~information~~result, ~~has not been restated and continues to be reported under~~ the ~~accounting standards in effect for those periods.~~

consolidated balance sheet prior to January 1, 2019 was not restated, continues to be reported under ASC Topic 840, Leases (ASC 840), which did not require the recognition of operating lease liabilities on the balance sheet, and is not comparative. Under ASC 842, all leases are required to be recorded on the balance sheet and are classified as either operating leases or finance leases. The lease classification affects the expense recognition in the income statement. Operating lease charges are recorded entirely in operating expenses. Finance lease charges are split, where amortization of the right-of-use asset is recorded in operating expenses and an implied interest component is recorded in interest expense. The expense recognition for operating leases and finance leases under ASC 842 is substantially consistent with ASC 840. As a result, there is no significant difference in the Company’s results of operations presented in its consolidated income statement and consolidated statement of comprehensive income for each period presented.

The Company adopted ASC 842 using a modified retrospective approach for all leases existing at January 1, 2019. The adoption of ASC 842 had a substantial impact on the Company’s balance sheet. The most significant impact was the recognition of the operating lease right-of-use assets and the liability for operating leases. The Company did not have any finance leases as December 31, 2018 and March 31, 2019. Accordingly, upon adoption, leases that were classified as operating leases under ASC 840 were classified as operating leases under ASC 842, and the Company recorded an adjustment of $11.6 million to operating lease right-of-use assets and the related lease liability. The lease liability is based on the present value of the remaining minimum lease payments, determined under ASC 840, discounted using the Company’s secured incremental borrowing rate at the effective date of January 1, 2019, using the original lease term as the tenor. As permitted under ASC 842, the Company elected several practical expedients that permit us to not reassess (1) whether a contract is or contains a lease, (2) the classification of existing leases, and (3) whether previously capitalized costs continue to qualify as initial indirect costs. The application of the practical expedients did not have a significant impact on the measurement of the operating lease liability.

The impact of the adoption of ASC 842 on the balance sheet at December 31, 2018 was (in thousands):

	As Reported December 31, 2018		Adoption of ASC 842 Increase (Decrease)			Balance at January 1, 2019
Condensed Consolidated Balance Sheet
ASSETS
Right-of-use lease assets - operating	$	—	$	11,628		$	11,628
Total assets	$	43,393	$	11,628		$	55,021
LIABILITIES AND STOCKHOLDERS' EQUITY
Accrued liabilities	$	1,234	$	(271	)	$	963
Current portion of lease obligation - operating		—		1,801			1,801
Total current liabilities		6,342		1,530			7,872
Deferred rent, net of current portion		2,667		(2,667	)		—
Long term lease obligation - operating		—		12,765			12,765
Total liabilities		9,009		11,628			20,637
Total liabilities and stockholders' equity	$	43,393	$	11,628		$	55,021

Revenue Recognition

The Company’s ~~principal~~derives ~~sources~~its of revenue ~~are~~ from two principal sources: 1) program services and to2) alicensing ~~lesser~~and ~~extent~~royalty ~~from~~revenues, which consist of technology licensing and royalty ~~revenue~~fees. ~~from~~Product ~~customers~~sales ~~who~~have ~~license~~been ~~our~~made ~~intellectual~~historically, ~~property~~but are not a principal source of revenue.

~~Revenue~~Program ~~from~~revenue ~~contracts~~- The Company enters into development programs and other research and development service agreements with customers under which the Company conducts research and development activities with customers. The agreements specify minimum levels of research effort required to be performed by the Company. Payments received under the agreements are not refundable if the research effort is not successful. In some contracts, the Company retains rights to certain elements of technology developed in the course of its performance, which the customer has an option to license in the future under the terms defined in the agreement. The Company generates a significant portion of its program revenue from certain research and development service contracts delivered over a specific period of time. These contracts require reliable estimation of costs to perform obligations and the overall scope of each engagement. Revenue from contracts is recognized using the following five steps:

1a) Identify the contract(s) with a customer;

~~2) Identify the performance obligations in the contract;~~9

3b) ~~Determine~~Identify the ~~transaction~~performance ~~price;~~obligations in the contract

4c) ~~Allocate~~Determine the transaction price ~~to the performance obligations in the contract; and~~

5d) ~~Recognize~~Allocate ~~revenue~~the ~~when~~transaction ~~(or~~price ~~as)~~to the ~~Company~~performance ~~satisfies~~obligations ain ~~performance~~the ~~obligation.~~contract

e) Recognize revenue when (or as) the Company satisfies a performance obligation

A contract contains a promise (or promises) to transfer goods or services to a customer. A performance obligation is a promise (or a group of promises) that is distinct. The transaction price is the amount of consideration a Company expects to be entitled from a customer in exchange for providing the goods or services.

The unit of account for revenue recognition is a performance obligation (a good or service). A contract may contain one or more performance obligations. Performance obligations are accounted for separately if they are distinct. A good or service is distinct if the customer can benefit from the good or service either on its own or together with other resources that are readily available to the customer, and the good or service is distinct in the context of the contract. Otherwise performance obligations are combined with other promised goods or services until the Company identifies a bundle of goods or services that is distinct.

The transaction price is allocated to all the separate performance obligations in an arrangement. It reflects the amount of consideration to which the Company expects to be entitled in exchange for transferring goods or services, which may include an estimate of variable consideration to the extent that it is probable of not being subject to significant reversals in the future based on the Company’s experience with similar arrangements. The transaction price also reflects the impact of the time value of money if there is a significant financing component present in an arrangement. The transaction price excludes amounts collected on behalf of third parties, such as sales taxes.

Revenue is recognized when the Company satisfies each performance obligation by transferring control of the promised goods or services to the customer. Goods or services can transfer at a point in time or over time depending on the nature of the arrangement.

A majority of ~~our~~the Company program services revenue is recognized as services are performed using percentage of completion method of contract accounting based on the output or input (i.e., units or labor hours) method, whichever is the most appropriate measure of progress towards completion of the contract .

Input method: The use of the input method requires the Company to make reasonably dependable estimates. WeThe ~~use~~Company uses the input method based on labor hours, where revenue is calculated based on the percentage of total hours incurred in relation to total estimated hours at completion of the contract. The ~~Company believes the~~ input method is reasonable ~~because~~when ~~labor~~the hours best reflect the Company’s efforts toward satisfying the performance obligation over time. As circumstances change over time, the Company updates its measure of progress to reflect any changes in the outcome of the performance obligation. Such changes to the Company’s measure of progress is accounted for as a change in accounting estimate.

~~License~~Output method: The Company uses the output method based on results achieved and ~~royalty~~delivered ~~revenues~~to ~~are~~the ~~recognized~~customer, where revenue is calculated based on ~~estimated~~the ~~end-market~~deliverables ~~sales~~transferred to the customers as a percentage of ~~products~~total ~~that~~deliverables ~~incorporate~~to ~~our~~be ~~intellectual~~transferred ~~property~~to the customer at completion of the contract. The output method is reasonable when the deliverables best reflect the Company’s efforts toward satisfying the performance obligation over time.

8Licensing and royalty revenue - The Company recognizes revenue for licenses to intellectual property when earned pursuant to the terms of the agreements. Time-based license revenue is recognized ratably over the license term. Licensing and royalty revenue that becomes triggered by specific customer actions, such as exercise of a license option or by sales volume, is based on estimated end-market sales of products that incorporate the Company’s intellectual property. Revenue on the sale of intellectual property is recognized in full when title transfers if there are no remaining deliverables related to the intellectual property purchase.

~~The~~Contract ~~impact of ASC 606 adoption on our Condensed Consolidated Statement of Operations and Balance Sheet were as follows (in thousands):~~Balances

	For the three months ended September 30, 2018									For the nine months ended September 30, 2018
	As Reported			Without Adoption of ASC 606			Effect of Change Higher/(Lower)			As Reported			Without Adoption of ASC 606			Effect of Change Higher/(Lower)
Condensed Consolidated Statement of Operations
Revenues
Licensing and royalty revenue	$	508		$	485		$	23		$	1,364		$	1,382		$	(18	)
Net loss		(686	)		(709	)		(23	)		(814	)		(796	)		18
Condensed Consolidated Balance Sheet
Assets
Accounts receivable		3,330			2,873			457			3,330			2,873			457
Stockholders' equity
Accumulated deficit	$	(179,075	)	$	(179,532	)	$	(457	)	$	(179,075	)	$	(179,532	)	$	(457	)

The timing of revenue recognition, billings and cash collections results in billed accounts receivable, unbilled receivables (contract assets), and deferred revenue (contract liabilities) on the Condensed Consolidated Balance Sheet. For the Company’s contracts, amounts are billed at periodic intervals, such as on monthly basis. Generally, contract assets results from revenue

~~Contract balances~~10

~~The timing of revenue~~ recognition, ~~billings and cash collections results~~ in billed accounts receivable, unbilled receivables (contract assets), and deferred revenue (contract liabilities) on the Condensed Consolidated Balance Sheet. For our contracts, amounts are billed at periodic intervals, such as on monthly basis. Generally, contract assets results from revenue recognition in advance of billings, and contract liabilities results from billing in advance of revenue recognition. These assets and liabilities are reported on the Condensed Consolidated Balance Sheets at the end of each reporting period. The following table provides information about contract assets and contract liabilities from contracts with customers (in thousands):

	Balance at September 30, 2018		Balance at June 30, 2018
	Balance at March 31, 2019		Balance at December 31, 2018
Receivables, which are included in Accounts receivable	$	21,~~546~~723	$	12,~~194~~258
Contract assets		~~784~~728		~~726~~1,091
Contract liabilities	$	~~289~~333	$	~~309~~917

All of the contract liability balance of $0.39 million as of ~~June~~December 3031, 2018 was recognized as revenue for the three months ended ~~September~~March 3031, ~~2018~~2019.

Practical Expedients and Exemptions

The Company generally expenses sales commissions when incurred if the amortization period is one year or less. These costs are recorded within sales and marketing expenses.

The Company does not disclose the value of unsatisfied performance obligations for contracts with an original expected length of one year or less. ~~For~~As of March 31, 2019 there are no outstanding contracts with an original expected length of more than one year~~, the Company had $1~~.~~9 million of unsatisfied performance obligations as of September 30, 2018. The Company expects to recognize approximately 24% of this amount as revenue in 2018, and the remaining balance in 2019.~~

Materials Inventory

Materials inventory consists of raw materials in the amount of $2.86 million as of ~~September~~March 3031, ~~2018~~2019 and December 31, ~~2017~~2018.

Accounts Receivable and Allowance for Doubtful Accounts

The Company did not have any allowance for doubtful accounts as of ~~September~~March 3031, ~~2018~~2019 and December 31, ~~2017~~2018.

There have been no other significant changes to the Company’s accounting policies since it filed its audited Consolidated Financial Statements in its Annual Report on Form 10-K for the year ended December 31, ~~2017~~2018.

Concentration of Revenue and Accounts Receivable

Significant customers are those that represent more than 10% of the Company’s total revenue or accounts receivable. For each significant customer, including related parties, revenue as a percentage of total revenue and accounts receivable as a percentage of total accounts receivable are as follows:

Revenue

Accounts Receivable

~~Accounts Receivable~~

Three Months Ended September 30,

Nine Months Ended September 30,

As of September 30,

As of December 31,

Three Months Ended March 31,

As of March 31,

As of December 31,

2018

2017

2018

2017

2018

2017

2019

2018

2019

2018

Customer A

6349%

~~55%~~*

6237%

5726%

~~36%~~

~~72%~~

Customer B

1118%

1258%

~~19%~~*

~~10%~~

~~19%~~

Customer C

*13%

*28%

*12%

*10%

~~14%~~

Customer D

*12%

~~14%~~*

*16%

1426%

Customer E

*11%

*12%

~~11%~~

Customer F

*17%

~~21%~~

*	less than 10%

Recent Accounting Pronouncements

In ~~February~~June 2016, the FASB issued ASU 2016-0213, ~~Leases~~Financial ~~(Topic~~Instruments ~~842) in~~- ~~order~~Credit toLosses: ~~increase~~Measurement ~~transparency~~of ~~and~~Credit ~~comparability~~Losses ~~among~~on ~~organizations~~Financial byInstruments ~~recognizing~~(ASU ~~lease~~2016-13), ~~assets~~which ~~and~~changes ~~lease liabilities on~~ the ~~balance~~impairment ~~sheet~~model for ~~those~~most ~~leases~~financial ~~classified as operating leases under previous GAAP~~assets. ~~ASU~~The ~~2016-02~~new ~~requires~~model ~~that~~uses a ~~lessee~~forward-looking ~~should~~expected ~~recognize~~loss amethod, ~~liability~~which towill ~~make~~generally ~~lease~~result ~~payments~~in ~~(the~~earlier ~~lease~~recognition ~~liability) and a right-~~of~~-use~~ ~~asset~~allowances ~~representing its right to use the underlying asset~~ for ~~the lease term on the balance sheet~~losses. ASU 2016-0213 is effective for ~~fiscal~~annual ~~years~~and interim periods beginning after December 15, ~~2018~~2019 ~~(including~~and ~~interim~~early ~~periods~~adoption ~~within~~is ~~those~~permitted ~~periods)~~for ~~using~~annual aand ~~modified~~interim ~~retrospective~~periods ~~approach~~beginning ~~and~~after ~~early~~December ~~adoption~~15, ~~is permitted~~2018. The Company will adopt ASU 2016-0213 inon ~~the~~January ~~first~~1, ~~quarter of 2019 using the modified retrospective approach~~2020. The Company ~~expects~~doesn’t toexpect ~~elect~~material ~~the package of practical expedients allowed under the new standard upon transition. Although the Company is in the process of evaluating the~~ impact ~~of adoption of ASU 2016-02~~ on its ~~Consolidated~~results ~~Financial~~of ~~Statements,~~operations ~~the~~or ~~Company~~financial ~~currently~~position ~~estimates~~due ~~the most significant change will be related~~ to ~~the~~adaption ~~recognition~~ of ~~right-of-use assets and lease liabilities on~~ the ~~Company's balance sheet for its real estate operating lease. The adoption of the lease~~ standard ~~will not have a material impact on our results of operations, equity, and cash flows~~.

In June 2018, the FASB issued ASU 2018-07 Compensation-Stock Compensation (Topic 718), to simplify the accounting for share–based payments granted to nonemployees by aligning the accounting with the requirements for employee share–based compensation. ASU 2018-07 is effective for the Company beginning in fiscal 2019, including interim periods within that fiscal year. Early adoption is permitted but no earlier than a company's adoption of ASC 606. The Company does not expect the adoption of ASU 2018-07 to have any impact on its consolidated financial statements and associated disclosures.

2. Fair Value of Financial Instruments

The Company measures and reports its cash equivalents and investments at fair value. The carrying amounts for cash equivalents and investments approximate their fair values due to their short maturities. The following tables set forth the fair value of the Company’s cash equivalents and investments by level within the fair value hierarchy (in thousands):

As of September 30, 2018

As of March 31, 2019

Fair Value

Level I

Level II

Level III

Assets:

Money market funds

32,~~513~~035

—

Corporate debt securities and commercial paper

23,~~759~~613

—

23,~~759~~613

—

Total assets measured at fair value

2725,~~272~~648

32,~~513~~035

23,~~759~~613

—

As of December 31, 2017

As of December 31, 2018

Fair Value

Level I

Level II

Level III

Assets:

Money market funds

25,~~279~~383

—

Corporate debt securities and commercial paper

1922,~~717~~098

—

1922,~~717~~098

—

Total assets measured at fair value

2127,~~996~~481

25,~~279~~383

1922,~~717~~098

—

Debt investments are classified as “available-for-sale” and are carried at fair value based on quoted markets or other readily available market information. The Company's investment policy requires all investments to have a less than twenty four month maturity term and a minimum credit rating of A-. Unrealized gains and losses, net of taxes, are included in accumulated other comprehensive income (loss). Gains and losses are determined using the specific identification method. Cash, cash equivalents, and investments consisted of the following as of September 30, 2018 (in thousands):

	As of September 30, 2018
	As of March 31, 2019
	Amortized Cost		Unrealized Gains		Unrealized Losses			Estimated Fair Value
Assets:
Cash	$	31,~~376~~781	$	—	$	—		$	31,~~376~~781
Money market funds		32,~~513~~035		—		—			32,~~513~~035
Corporate debt securities and commercial paper		23,~~778~~620		—7		~~(19~~—	)		23,~~759~~613
Total cash, cash equivalents and investments	$	3027,~~667~~436	$	—7	$	~~(19~~—	)	$	3027,~~648~~429

As of December 31, ~~2017~~2018, the Company had $3528,000 of unrealized losses.

3. Property and Equipment

Property and equipment, net, consist of the following (in thousands):

	As of
	September 30, 2018			December 31, 2017
	March 31, 2019			December 31, 2018
Lab equipment and machinery	$	59,~~413~~645		$	5859,~~937~~413
Leasehold improvements		6,~~351~~429			6,~~248~~420
Computer equipment and software		4,~~514~~516			4,~~726~~512
Furniture and fixtures		221			221
Construction in progress		~~444~~1,030			~~282~~1,025
Total property and equipment		7071,~~943~~841			7071,~~414~~591
Less accumulated depreciation		(6768,~~446~~716	)		(6468,~~501~~159	)
Property and equipment, net	$	3,~~497~~125		$	53,~~913~~432

The following table presents depreciation expense included in the Condensed Consolidated Statements of Operations and includes amortization of leasehold improvements (in thousands):

	Three Months Ended September 30,				Nine Months Ended September 30,
	Three Months Ended March 31,
	2018		2017		2018		2017
	2019		2018
Depreciation expense	$	~~910~~557	$	1,~~561~~236	$	~~3,244~~	$	~~4,426~~

During the third quarter of 2018, the Company determined that it identified indicators of impairment relating to certain lab equipment and machinery. Based on this determination, the Company recorded an impairment charge of $65,000 in the third quarter of 2018. Fair value was based on the expected future cash flows using Level 3 inputs under ASC 820, which are cash flows expected to be generated by the market participants, discounted at the risk-free rate of interest. Because of changing market conditions, such as declining usage and rising interest rates, it is reasonably possible that the estimate of expected future cash flows may change in the near term resulting in the need to further adjust the Company’s determination of fair value.

4. Intangible Assets

Intangible assets, net, consist of the following (in thousands):

	As of
	September 30, 2018			December 31, 2017
	March 31, 2019			December 31, 2018
Patents issued	$	2,~~866~~791		$	32,~~829~~847
Patents pending		9747			~~128~~89
Trademarks		40			40
Total intangible assets		32,~~003~~878			32,~~997~~976
Less patent amortization		(~~862~~899	)		(~~1,377~~901	)
Intangible assets, net	$	21,~~141~~979		$	2,~~620~~075

The following table presents patent amortization expense included in the Condensed Consolidated Statements of Operations (in thousands):

	Three Months Ended September 30,				Nine Months Ended September 30,
	Three Months Ended March 31,
	2018		2017		2018		2017
	2019		2018
Amortization expense	$	4643	$	7969	$	~~171~~	$	~~245~~

During third quarter of 2018, the Company identified certain patents with carrying values deemed to not be recoverable. Based on this determination, the Company recorded an impairment charge of $171,000 related to these patents. Fair value was based on expected future cash flows using Level 3 inputs under ASC 820, which are cash flows expected to be generated by the market participants, discounted at the risk-free rate of interest. Because of changing market conditions such as decreased demand and rising interest rates, it is reasonably possible that the estimate of expected future cash flows may change in the near term resulting in the need to further adjust the Company’s determination of fair value.

5. Commitments and Contingencies

Leases

The Company ~~entered~~has ~~into an~~ operating ~~lease~~leases ~~agreement in May 2010~~ for ~~its~~real ~~San~~estate ~~Jose headquarters that was subsequently modified in November 2013~~ and ~~May~~certain ~~2015~~office equipment. ~~The~~ ~~building~~Operating lease ~~expires~~expense inwas ~~June 2025~~$0.6 ~~Rent~~million ~~expense~~for isthe ~~being~~three ~~recognized~~months onended aMarch ~~straight-line~~31, ~~basis over the lease term~~2019.

~~The~~Supplemental ~~following~~cash ~~table~~flow ~~presents~~information, ~~rent~~as ~~expense~~of ~~included~~March in31, ~~the~~2019, ~~Condensed~~related ~~Consolidated~~to ~~Statement~~operating ofleases ~~Operations~~was as follows (in thousands):

	Three Months Ended September 30,				Nine Months Ended September 30,
	Three Months Ended March 31, 2019
	2018		2017		2018		2017
Cash paid within operating cash flows	$	572
Rent expense	$	563	$	567	$	1,688	$	1,685
Right-of-use assets recognized in exchange for new obligations	$	—

~~During~~Supplemental ~~the~~balance ~~three~~sheet ~~months ended September 30~~information, ~~2018,~~as ~~the Company made payments~~ of ~~$0.6~~March ~~million~~31, 2019, related to ~~this~~ operating ~~lease.~~leases was as follow:

In December 2015, the Company signed a sublease to lease out a portion of office space. The term of the sublease is for three years and annual gross rent is approximately $0.3 million. The sublessee moved in during the second quarter of 2016. The Company received $0.1 million in rent payments under the agreement for the three months ended September 30, 2018 and 2017, respectively.

Weighted average remaining lease term		3.9 Years
Weighted average discount rate			6.1	%

~~Capital~~As ~~Lease~~of ~~Obligations~~March 31, 2019, the maturities of the Company’s operating lease liabilities are as follow (in thousands):

During the third quarter of 2016, the Company leased a furnace under a three year lease agreement which was accounted for as a capital lease under ASC 840-30; the underlying asset was included in lab equipment and machinery. The Company terminated the lease in August 2017, recognized a loss of $29,000 and the capital lease obligation of $49,000 was cancelled. The net book value of the underlying asset as of the termination date was $79,000.

Fiscal Year	Amount
2019	$	1,928
2020		2,620
2021		2,648
2022		2,714
2023		2,782
2024 and thereafter		4,308
Total lease payments	$	17,000
Less imputed interest		(2,921	)
Present value of operating lease liabilities	$	14,079

Depreciation expense of the furnace recorded under the capital lease obligation was $0 for the three months ended September 30, 2018 compared to $2,000 for the three months ended September 30, 2017.

6. Stockholders’ Equity

The following represents the activities in the Company’s Stockholders’ Equity, by quarter, for the nine months ended September 30, 2018 and 2017 (in thousands, except share data):

	Nine Months Ended September 30, 2018
										Accumulated
										other			Total
	Common stock				Additional		Accumulated			comprehensive			stockholders'
	Shares		Amount		paid-in capital		deficit			loss			equity
Balances as of December 31, 2017		49,569,721		50		214,796		(178,738	)		(35	)		36,073
Issuance of common stock from option exercises		16,387		—		16		—			—			16
Vesting of restricted stock units		15,265		—		—		—			—			—
Stock-based compensation		—		—		270		—			—			270
Other comprehensive income (loss)		—		—		—		—			(24	)		(24	)
ASC 606 Adjustment		—		—		—		476			—			476
Net loss		—		—		—		(623	)		—			(623	)
Balances as of March 31, 2018		49,601,373		50		215,082		(178,885	)		(59	)		36,188
Issuance of common stock from option exercises		135,332		—		155		—			—			155
Stock-based compensation		—		—		212		—			—			212
Other comprehensive income (loss)		—		—		—		—			16			16
Net income		—		—		—		496			—			496
Balances as of June 30, 2018		49,736,705		50		215,449		(178,389	)		(43	)		37,067
Issuance of common stock from option exercises		12,061		—		15		—			—			15
Stock-based compensation		—		—		142		—			—			142
Other comprehensive income (loss)		—		—		—		—			24			24
Net loss		—		—		—		(686	)		—			(686	)
Balances as of September 30, 2018		49,748,766	$	50	$	215,606	$	(179,075	)	$	(19	)	$	36,562

	Nine Months Ended September 30, 2017
											Accumulated
											other			Total
	Common stock					Additional		Accumulated			comprehensive			stockholders'
	Shares			Amount		paid-in capital		deficit			loss			equity
Balances as of December 31, 2016		49,513,528			50		213,313		(168,335	)		(32	)		44,996
Vesting of restricted stock units		58,673			—		—		—			—			—
Stock-based compensation		—			—		660		—			—			660
Other comprehensive income (loss)		—			—		—		—			11			11
Net loss		—			—		—		(5,835	)		—			(5,835	)
Balances as of March 31, 2017		49,572,201			50		213,973		(174,170	)		(21	)		39,832
Forfeiture of restricted stock awards, net		(12,500	)		—		—		—			—			—
Stock-based compensation		—			—		322		—			—			322
Net loss		—			—		—		(2,854	)		—			(2,854	)
Balances as of June 30, 2017		49,559,701			50		214,295		(177,024	)		(21	)		37,300
Stock-based compensation		—			—		242		—			—			242
Other comprehensive income (loss)		—			—		—		—			12			12
Net loss		—			—		—		(1,828	)		—			(1,828	)
Balances as of September 30, 2017		49,559,701		$	50	$	214,537	$	(178,852	)	$	(9	)	$	35,726

In December 2015, the Company signed a sublease to lease out a portion of its office space. The term of the sublease was three years and annual gross rent was approximately $0.3 million. The sublease commenced during the second quarter of 2016 and terminated during the first quarter of 2019. The Company received $0.1 million in rent payments under the agreement for the three months ended March 31, 2019 and 2018, respectively.

6. Stockholders’ Equity

The following represents the activities in the Company’s Stockholders’ Equity, by quarter, for the three months ended March 31, 2019 and 2018 (in thousands, except share data):

	Three Months Ended March 31, 2019
										Accumulated
										other			Total
	Common stock				Additional		Accumulated			comprehensive			stockholders'
	Shares		Amount		paid-in capital		deficit			loss			equity
Balances as of December 31, 2018		49,752,516		50		216,034		(181,672	)		(28	)		34,384
Issuance of common stock from option exercises		5,708		—		5		—			—			5
Vesting of restricted stock units		—		—		—		—			—			—
Stock-based compensation		—		—		463		—			—			463
Other comprehensive income (loss)		—		—		—		—			35			35
Net loss		—		—		—		(2,262	)		—			(2,262	)
Balances as of March 31, 2019		49,758,224	$	50	$	216,502	$	(183,934	)	$	7		$	32,625

	Three Months Ended March 31, 2018
										Accumulated
										other			Total
	Common stock				Additional		Accumulated			comprehensive			stockholders'
	Shares		Amount		paid-in capital		deficit			loss			equity
Balances as of December 31, 2017		49,569,721		50		214,796		(178,738	)		(35	)		36,073
Issuance of common stock from option exercises		16,387		—		16		—			—			16
Vesting of restricted stock units		15,265		—		—								—
Stock-based compensation		—		—		270		—			—			270
Other comprehensive income (loss)		—		—		—		—			(24	)		(24	)
ASC 606 Adjustment		—		—		—		476			—			476
Net loss		—		—		—		(623	)		—			(623	)
Balances as of March 31, 2018		49,601,373	$	50	$	215,082	$	(178,885	)	$	(59	)	$	36,188

Stock-Based Compensation

The fair value of the employee stock options granted during the period was estimated based on the respective grant date using a Black-Scholes-Merton option-pricing model with the following weighted-average assumptions:

	Three Months Ended September 30,						Nine Months Ended September 30,
	Three Months Ended March 31,
	2018			2017			2018			2017
	2019			2018
Expected term (in years)		6.01			6.10			~~6.0~~			~~6.0~~
Risk-free interest rate		32.03	%		2.06	%		~~2.8~~	%		~~2.1~~	%
Expected volatility		5557.4	%		54.2	%		54	%		55	%
Expected dividend rate		—	%		—	%		—	%		—	%

Stock-based compensation expense, net of estimated forfeitures, was included in the following line items on the Condensed Consolidated Statements of Operations (in thousands):

	Three Months Ended September 30,				Nine Months Ended September 30,
	Three Months Ended March 31,
	2018		2017		2018		2017
	2019		2018
Cost of revenue	$	3346	$	3853	$	~~125~~	$	~~144~~
Research and development		69113		6155		~~183~~		~~306~~
Sales and marketing		2253		2830		73		97
General and administrative		18251		~~115~~132		~~243~~		~~674~~
Total stock-based compensation	$	~~142~~463	$	~~242~~270	$	~~624~~	$	~~1,221~~

The following table presents stock-based compensation expense, net of estimated forfeitures, by grant type (in thousands):

	Three Months Ended September 30,					Nine Months Ended September 30,
	Three Months Ended March 31,
	2018			2017		2018			2017
	2019			2018
Stock options	$	~~218~~230		$	~~197~~215	$	~~641~~		$	~~1,095~~
Restricted stock awards and restricted stock units (RSUs)		~~(76~~233	)		4555		~~(17~~	)		~~126~~
Total stock-based compensation	$	~~142~~463		$	~~242~~270	$	~~624~~		$	~~1,221~~

The following table presents unrecognized compensation expense, net of estimated forfeitures, related to the Company’s equity compensation plans as of ~~September~~March 3031, ~~2018~~2019, which is expected to be recognized over the following weighted-average periods (in thousands):

	Unrecognized		Weighted-
	Compensation		Average Period
	Expense		(in years)
Stock options	$	1,~~693~~304		2.94
RSUs	$	~~218~~1,241		21.46

The following table presents details on grants made by the Company for the following periods:

Nine Months Ended

March 31, 2019

March 31, 2018

September 30, 2018

September 30, 2017

Weighted-

Average Grant

Shares Granted

Date Fair Value

Shares Granted

Date Fair Value

Stock options

136,~~614,400~~000

10.3795

1395,~~893,500~~000

10.0372

RSUs

~~345,000~~—

~~1.35~~—

~~300~~345,000

01.9635

The total intrinsic value of stock options exercised during the three months ended ~~September~~March 3031, ~~2018~~2019 and ~~2017~~2018 was $51,000 and $08, ~~respectively. The total intrinsic value of stock options exercised during the nine months ended September 30, 2018 and 2017 was $33,~~000 ~~and $0~~, respectively.

14 RSUs that vested during the three months ended March 31, 2019 and 2018 had fair values of $0 and $30,000, respectively, as of the applicable vesting date.

RSUs that vested during the three months ended September 30, 2018 and 2017 had fair values of $0 as of the applicable vesting date. RSUs that vested during the nine months ended September 30, 2018 and 2017 had fair values of $29,000 and $75,000, respectively, as of the applicable vesting date.

Common Stock

As of ~~September~~March 3031, ~~2018~~2019 and December 31, ~~2017~~2018, the Company had reserved shares of common stock for issuance as follows:

	As of September 30, 2018		As of December 31, 2017
	As of March 31, 2019		As of December 31, 2018
Number of stock options outstanding		6,~~527~~156,~~080~~932		86,~~408~~329,~~228~~737
Number of RSUs outstanding		~~648~~1,~~750~~845,000		~~519~~1,~~015~~845,000
Shares available for future grant		1213,~~583~~686,~~334~~637		811,~~780~~280,~~322~~677
Total shares reserved		1921,~~759~~688,~~164~~569		1719,~~707~~455,~~565~~414

7. Net Earnings (Loss) per Share

The following outstanding shares of common stock equivalents were excluded from the computation of diluted net earnings (loss) per share for the periods presented due to their antidilutive effect:

Three Months Ended September 30,

Nine Months Ended September 30,

Three Months Ended March 31,

2018

2017

2018

2017

2019

2018

Stock options to purchase common stock

6,~~527~~156,~~080~~932

78,~~635~~367,~~846~~253

~~6,527,080~~

~~7,635,846~~

RSUs

~~648~~1,~~750~~845,000

~~524~~848,~~765~~750

~~648,750~~

~~524,765~~

8. Income Taxes

~~Income~~The Company incurred no income tax expense for the ~~nine~~first ~~months~~quarter ~~ended~~operations ~~September 30, 2018 was $800, on a pretax loss~~ of $02019.8 ~~million.~~ The Company maintained a valuation allowance as of ~~September~~March 3031, ~~2018~~2019, against all of its deferred tax assets. The Company intends to maintain a full valuation allowance until sufficient positive evidence exists to support its reduction.

On December 22, 2017, the U.S. government enacted comprehensive tax legislation referred to as the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act significantly revised the future ongoing U.S. corporate income tax by, among other things, lowering the U.S. corporate income tax rates and implementing a territorial tax system. The corporate tax rate was reduced from 35% to 21% for tax years beginning after December 31, 2017 and certain provisions exist on which to allow accelerated expensing of equipment for a portion of 2017 and for future years. This largely only affected the value of the Company’s deferred tax asset with a corresponding offset to valuation allowance. The Tax Act also limits the amount of net operating losses that can be used to reduce taxable income to 80% for net operating losses generated for periods beginning after December 31, 2017. Existing net operating losses, arising in years on or before December 31, 2017 are not affected by the Tax Act.

In January 2018, the SEC staff issued SAB 118, Income Tax Accounting Implications of the Tax Act to provide guidance for companies that have not completed their accounting for the income tax effects of the Tax Act in the period of enactment, which is the period that includes December 22, 2017. In issuing the guidance, the SEC staff said it was clarifying the application of ASC 740 for companies that may encounter situations where they do not have the necessary information available, prepared or analyzed (including computations) in reasonable detail to complete the accounting for one or more elements of their income tax provision under ASC 740 for the reporting period in which the Tax Act was enacted. The SEC staff said a company that hasn’t completed its accounting for the effects of the Tax Act by its financial reporting deadline may report provisional amounts based on reasonable estimates for items for which the accounting is incomplete. Those amounts will be subject to adjustment during a measurement period that begins in the reporting period that includes the Tax Act’s enactment date and ends when a company has obtained, prepared and analyzed the information needed to complete the accounting requirements under ASC 740. The measurement period should not extend beyond one year from the enactment date (i.e., the measurement period must be completed by December 22, 2018). The SEC staff said a company that cannot make a reasonable estimate for an income tax effect should not account for that effect until it can make such an estimate.

The Company completed its analysis before the end of the measurement period; no adjustments were made during the nine months ended September 30, 2018. The Company has considered Tax Act legislative changes that became effective in 2018. The Company does not expect the Tax Act to have a significant impact on the results of operations.

9. Related Party Transactions

InDuring ~~November 2006~~the quarter ended March 31, ~~the~~2019, ~~Company~~two ~~entered~~of ~~into~~our anboard ~~Alliance~~members ~~Agreement~~ceased employment with aan ~~related~~investment ~~party~~firm that ~~was~~is a beneficial owner of ~~more~~approximately ~~than 5~~29.6% of the Company’s common stock ~~at the time~~. ~~During~~The ~~2016, the related party sold all its holdings of the~~ Company’s ~~stock~~incurred ~~and~~director ~~owned~~fees ~~no Company’s common stock as~~ of ~~December 31, 2016. Since November~~ ~~2006~~$11,000 ~~the agreement has been amended numerous times with the last amendment signed in December 2013. The other party to the Alliance Agreement~~ and ~~the~~$21,000 ~~Company each had an independent board member that served on both companies’ boards of directors; however the independent board member for the other party~~ to the ~~Alliance~~investment ~~Agreement~~firm ~~did not stand~~ for ~~re-election as director at~~ the ~~other~~three ~~company~~months ~~effective~~ended ~~May~~March 2431, ~~2017~~2019 and ~~thus~~2018, ~~the other company is no longer a related party~~respectively.

As of September 30, 2018 and December 31, 2017, the Company had no accounts receivable and deferred revenue balances in either period with respect to its related party relationship. The following table presents related party revenue included in the Condensed Consolidated Statement of Operations (in thousands):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2018		2017		2018		2017
Related party revenue	$	—	$	—	$	—	$	383
Related party cost of revenue	$	—	$	—	$	—	$	1

As of September 30, 2018, two representatives of an investment firm that is a beneficial owner of approximately 29.7% of the Company’s common stock, are members of the board of directors of the Company. The Company incurred director fees of $26,000 and $23,000 to the investment firm for the three months ended September 30, 2018 and 2017, respectively.

10. Information about Geographic Areas

Revenue

Revenue by geography is based on the billing address of the customer. The following table sets forth revenue by geographic area (in thousands):

	Three Months Ended September 30,				Nine Months Ended September 30,
	Three Months Ended March 31,
	2018		2017		2018		2017
	2019		2018
United States	$	14,~~878~~502	$	21,~~473~~232	$	~~4,895~~	$	~~9,582~~
Japan		144	$	330		144	$	330
Asia-Pacific (excluding Japan)		2,149		8,443
Asia-Pacific (excluding Japan)		5,840		5,770		22,300		16,593
Total	$	6,651	$	9,675
Europe and Middle East		—		49		—		150
Total	$	7,862	$	8,622	$	27,339	$	26,655

Long-Lived Assets

All of the Company’s long-lived assets are located in the U.S.

11. Restructuring Charges

In March 2017, the Company initiated a reduction in its workforce to reduce operating costs and to achieve profitability. The reduction in its workforce constituted approximately 18% of the Company’s global workforce. As a result of the reduction in its workforce, the Company recorded expenses related to employee severance and termination benefits of approximately $1.4 million, which was recognized during the nine months ended September 30, 2017. All such related expenses are recorded within “Restructuring charges” on the Condensed Consolidated Statements of Operations, and related accruals are included in accrued liabilities and accrued compensation and employee benefits on the Condensed Consolidated Balance Sheets. The following table presents accrued liabilities for severance and related expenses and payments as of September 30, 2018 (in thousands).

		As of December 31, 2017				Charge				Cash Payments				As of September 30, 2018
Severance and related expenses		$	15			$	—			$	(15	)		$	—

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 Condensed Consolidated 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 our company in order to provide context for the remainder of MD&A.

•

Strategy. Our overall strategy.

•

Basis of Presentation. A summary of the primary elements of our financial results.

•

Critical Accounting Estimates. Accounting estimates that we believe are most important to understanding the assumptions and judgments incorporated in our reported financial results and forecasts.

• Results of Operations. An analysis of our financial results comparing the three ~~and nine~~ months ended ~~September~~March 3031, ~~2018~~2019 to the three ~~and nine~~ months ended ~~September~~March 3031, ~~2017~~2018.

•

Liquidity and Capital Resources. An analysis of changes in our balance sheets and cash flows, and discussion of our financial condition and 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 our audited Consolidated Financial Statements and related notes included in our Annual Report on Form 10-K for our fiscal year ended December 31, ~~2017~~2018 (~~2017~~2018 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 and Section 21E of the Securities Exchange Act of 1934. 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 ~~2017~~2018 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

We are a trusted partner for the innovation of advanced materials using high throughput experimentation. Advanced materials are critical to sustaining and advancing many industries, including semiconductor and semiconductor related industries. Using traditional experimental techniques, it can take many years to discover new advanced materials and many more years to deploy them in the marketplace. By leveraging our proprietary high productivity combinatorial (HPC™) equipment platform, advanced characterization abilities and multi-disciplinary development team, we strive to enable our customers to more rapidly discover advanced materials and tailor them to suit their needs.

We were founded in 2004 and are headquartered in San Jose, California. Our total revenue decreased to $76.97 million for the three months ended ~~September~~March 3031, ~~2018~~2019, from $89.67 million for the three months ended ~~September~~March 3031, ~~2017. Our total revenue increased to $27.3 million for the nine months ended September 30,~~ 2018~~, from $26~~.7 ~~million for the nine months ended September 30, 2017.~~ For the three months ended ~~September~~March 3031, ~~2018~~2019, our net loss ~~decreased~~increased to $02.73 million compared to a net loss of $~~1.8 million in the same period last year. For the nine months ended September 30, 2018, our net loss decreased to $~~0.86 million ~~compared to net loss of $10.5 million~~ in the same period last year. Since inception, we have incurred net losses leading to an accumulated deficit of $~~179~~183.19 million as of ~~September~~March 3031, ~~2018~~2019.

Strategy

We currently target large markets that rely on advanced materials for differentiation. Within these broad markets, we target customers that have track records of technological innovation, have significant materials-based research and development (R&D), and are pursuing technical advancements that are critical to their success and strategy. Generally, our approach is most relevant to industries that rely heavily upon advanced thin film materials such as those achieved using physical vapor deposition (PVD) and atomic layer deposition (ALD) processing tools; however, our approach is also relevant to discovering and understanding advanced materials more broadly, including advanced bulk materials such as metal alloys. Historically, we have partnered most extensively in the semiconductor industry and particularly in the area of semiconductor memory such as dynamic RAM (DRAM), new non-volatile memory (NVM) and phase-change memory technologies. Going forward, we currently plan to continue growing our footprint within semiconductors, while expanding our engagement with semiconductor materials and equipment makers.

Agreement and Plan of Merger

On May 6, 2019, we entered into an Agreement and Plan of Merger (the Merger Agreement) with EMD Group Holding II, Inc., a Delaware corporation and an indirect wholly owned subsidiary of Merck KGaA, Darmstadt, Germany (Parent) and EMD Performance Materials Semiconductor Services Corp., a Delaware corporation and a wholly owned subsidiary of Parent (Merger Sub), providing for the merger of Merger Sub with and into the Intermolecular, Inc. (the Merger), with Intermolecular, Inc. surviving the Merger as a wholly owned subsidiary of Parent. The Merger Agreement was unanimously approved by our board of directors and the Executive Board of Merck KGaA, Darmstadt, Germany.

Pursuant to the terms and subject to the conditions of the Merger Agreement, at the effective time of the Merger (the Effective Time), each share of our common stock, par value $0.001 per share, that is outstanding immediately prior to the Effective Time (excluding (i) any shares owned by us, Parent or Merger Sub or any of our direct or indirect wholly owned subsidiaries, or the direct or indirect wholly owned subsidiaries of Parent or Merger Sub (which will be canceled) and (ii) any shares with respect to which appraisal rights have been properly exercised under Delaware law), will be canceled and automatically converted into the right to receive $1.20 in cash, without interest thereon.

The consummation of the Merger is also subject to the satisfaction (or waiver, if applicable) of various customary conditions, including (i) adoption of the Merger Agreement by the requisite vote of our stockholders, (ii) review and clearance by the Committee on Foreign Investment in the United States, (iii) the absence of any law or governmental order making illegal or prohibiting the Merger, (iv) the accuracy of the representations and warranties of each party contained in the Merger Agreement (subject to certain materiality qualifications), (v) each party’s compliance with or performance of the covenants and agreements in the Merger Agreement in all material respects and (vi) other customary closing conditions.

The foregoing description of the Merger Agreement does not purport to be complete and is qualified in its entirety by reference to the Merger Agreement, which was filed as Exhibit 2.1 to our Current Report on Form 8-K filed on May 6, 2019.

See Note 1 of the Notes to Condensed Consolidated Financial Statements included in this Form 10-Q for additional details regarding the Merger.

Basis of Presentation

How We Generate Revenue

Our customer engagement process primarily generates revenue in two ways: program revenue; and licensing and royalty revenue. Programs are our primary engagement model with customers and are structured to result in program fees, and in some cases licensing and/or royalty revenue arrangements.

• Program revenue. Program revenue may include service-based fees such as payments for research services, milestone payments, and subscription payments for dedicated and shared workflow tools used in the programs and reimbursed payments for consumables and outside services from third parties. Individual programs typically range from six months up to ~~three~~twelve ~~years~~months. We recognize program revenue in a manner consistent with activities performed. As we engage new customers and negotiate extensions for existing customer agreements that are nearing completion, we expect program revenue to continue to fluctuate.

• Licensing and royalty revenue. Licensing and royalty revenue consists of licensing fees and royalties for granting our customers rights to our proprietary technology and intellectual property (IP). ~~Specifically,~~This ~~this~~primarily 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 programs. 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~~ addition, licensing and royalty revenue may include sale of intellectual property when title transfers if there are no remaining performance obligations related to the intellectual property transfer. ~~During the first quarter of 2017, in connection with a CDP, we recognized revenue on the sale of intellectual property that was developed during the term of the CDP.~~ We anticipate our licensing and royalty revenue to continue to ~~fluctuate~~represent ~~based~~a onlow ~~the~~percentage ~~timing and amount~~ of ~~minimum~~overall ~~license~~revenue ~~fees~~in ~~guaranteed~~the byfuture ~~certain~~as ~~customer~~we ~~contracts~~transition ~~and~~to ~~the~~a ~~timing~~purely ofprogram ~~customer~~services ~~reported volume-based royalties~~model.

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.

•

Cost of program revenue. Our cost of program revenue primarily consists of salaries and other personnel-related expenses, including stock-based compensation, for our 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 programs. We include inventory obsolescence and customer related asset impairments in cost of program revenue.

• Cost of licensing and royalty revenue. Our cost of licensing and royalty revenue ~~has, and we expect will continue to,~~ primarily ~~consist~~consisted of the amortization of acquired patents, which were acquired as part of our Symyx asset purchase in November 2011, and licensing obligations. The Symyx patents were fully amortized as of September 30, 2018.

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 research and development that is 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, long-lived R&D assets impairment, and outside services, such as machining and third-party R&D costs. We recognize R&D overhead costs that are not allocated to a customer program as expenses within R&D.

Sales and Marketing

Our sales and marketing expenses consist primarily of personnel-related costs, including stock-based compensation, for our sales and marketing employees, facility costs and professional expenses. Professional expenses consist of external website, marketing communication consulting costs and market research.

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, as well as insurance, investor relations and other costs associated with being a public company.

Interest income (expense), net

Interest income represents interest earned on our cash, cash equivalents and investments. ~~Interest expense consists primarily of interest on a capital lease for a furnace initiated in July 2016, which was terminated in August 2017.~~ We expect interest income will vary each reporting period depending on our average investment balances during the period and market interest rates.

Restructuring Expense

Restructuring expense consists of personnel-related costs associated with workforce reductions we completed during 2017. In March 2017, the Company initiated a reduction in its workforce to reduce operating costs and to achieve profitability. The reduction in its workforce constituted approximately 18% of the Company’s global workforce. As a result of the reduction in its workforce, the Company recorded expenses related to employee severance and termination benefits of approximately $1.4 million, which was recognized during the nine months ended September 30, 2017.

Other Income, net

Other income primarily consists of income that we receive from subleasing a portion of our office space under an agreement entered into in December 2015. The term of the lease is for three years and annual gross rent is approximately $0.3 million. The ~~sublessee~~sublease ~~moved~~commenced induring ~~and~~the ~~occupied~~second ~~the~~quarter ~~space~~of 2016 and terminated during the ~~second~~first quarter of ~~2016~~2019. Other income (expense) also includes foreign exchange gains and losses that have not been significant.

Critical Accounting Estimates

Our Condensed 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 Condensed 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 are believed to be reasonable under the circumstances. Different assumptions and judgments would change the estimates used in the preparation of our Condensed Consolidated Financial Statements which, in turn, could change the results from those reported. Our management evaluates its estimates, assumptions and judgments on an ongoing basis.

There have been no material changes in the matters for which we make critical accounting estimates in the preparation of our Condensed Consolidated Financial Statements during the three ~~and nine~~ months ended ~~September~~March 3031, ~~2018~~2019 as compared to those disclosed in our ~~2017~~2018 Form 10-K. For further information on our critical and other significant accounting policies, see our ~~2017~~2018 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.

1920

Results of Operations

Comparison of the Three ~~and Nine~~ Months Ended ~~September~~March 3031, ~~2018~~2019 and ~~2017~~2018

	Three Months Ended September 30,												Nine Months Ended September 30,
	Three Months Ended March 31,
	2018			2017			$ Change			% Change			2018			2017			$ Change			% Change
	2019			2018			$ Change			% Change
	(in thousands)												~~(in thousands)~~
Revenue:
Program revenue	$	76,~~354~~385		$	69,~~869~~256		$	~~485~~(2,871	)		7-31	%	$	~~25,975~~		$	~~20,160~~		$	~~5,815~~			29	%
Licensing and royalty revenue		~~508~~266			~~1,753~~419			(~~1,245~~153	)		-7137	%		~~1,364~~			~~6,495~~			~~(5,131~~	)		~~-79~~	%
Total revenue		76,~~862~~651			89,~~622~~675			(~~760~~3,024	)		-931	%		~~27,339~~			~~26,655~~			~~684~~			3	%
Cost of revenue:		21,~~058~~818			23,~~875~~376			(~~817~~1,558	)		-2846	%		~~8,294~~			~~8,409~~			~~(115~~	)		-1	%
Gross profit		54,~~804~~833			56,~~747~~299			57(1,466	)		1-23	%		~~19,045~~			~~18,246~~			~~799~~			4	%
Operating expenses:
Research and development		4,~~463~~146			4,~~835~~032			~~(372~~114	)		-83	%		~~12,551~~			~~17,328~~			~~(4,777~~	)		~~-28~~	%
Sales and marketing		~~692~~890			~~874~~796			~~(182~~94	)		~~-21~~12	%		~~2,346~~			~~3,285~~			~~(939~~	)		~~-29~~	%
General and administrative		12,~~581~~338			2,~~000~~286			~~(419~~52	)		~~-21~~2	%		~~5,615~~			~~7,225~~			~~(1,610~~	)		~~-22~~	%
Restructuring charges		—			—			—						—			1,351			(1,351	)
Total operating expenses		7,374			7,114			260			4	%
Total operating expenses		6,736			7,709			(973	)		-13	%		20,512			29,189			(8,677	)		-30	%
Loss from operations		(2,541	)		(815	)		(1,726	)
Loss from operations		(932	)		(1,962	)		1,030						(1,467	)		(10,943	)		9,476
Other income (expense):
Other income (expense):
Interest income (expense), net		183			106			77
Interest income (expense), net		168			70			98						413			182			231
Other income (expense), net		96			87			9
Other income (expense), net		78			64			14						241			243			(2	)
Total other income (expense), net		279			193			86
Total other income (expense), net		246			134			112						654			425			229
Loss before provision for income taxes		(2,262	)		(622	)		(1,640	)
Loss before provision for income taxes		(686	)		(1,828	)		1,142						(813	)		(10,518	)		9,705
Provision for income taxes		—			1			(1	)
Provision for income taxes		—			—			—						1			1			—
Net loss	$	(2,262	)	$	(623	)	$	(1,639	)
Net loss	$	(686	)	$	(1,828	)	$	1,142					$	(814	)	$	(10,519	)	$	9,705

Revenue

Our revenue decreased by 931%, or $03.80 million, during the three months ended ~~September~~March 3031, ~~2018~~2019 compared to the three months ended ~~September~~March 3031, ~~2017~~2018, with a 7137% decrease in licensing and royalty revenue ~~which~~and ~~was partially offset by~~ a 731% ~~increase~~decrease in program revenue. The decrease in licensing and royalty revenue was primarily due to ~~the~~lower ~~discontinuance of $1.3 million in~~ royalty ~~revenue from a US~~-~~based customer, which was partially offset by higher royalty-~~related end-market sales from ~~another~~a customer. The ~~increase~~decrease in program revenue was primarily due to ~~expanded~~the ~~engagements~~scheduled ~~with~~completion ~~both~~of $6.3 million in of existing ~~and~~programs which was partially offset by a $3.3 million increase in revenue from a new ~~customers~~customer engagement.

Our revenue increased by 3%, or $0.7 million, during the nine months ended September 30, 2018 compared to the nine months ended September 30, 2017, with a 29% increase in program revenue which was partially offset by a 79% decrease in licensing and royalty revenue. The increase in program services revenue was primarily due to expanded engagements with both existing and new customers. The decrease in licensing and royalty revenue was primarily due to the discontinuance of $3.8 million in royalty revenue from a US-based customer and the 2017 sale of certain patents to a US-based customer for $1.5 million which did not recur during the nine months ended September 30, 2018, which were partially offset by higher royalty-related end-market sales from another customer.

We expect our revenue to fluctuate from period to period based on demand for, and our resources to fulfill, our services, project completion schedules and end-market sales.

20The following table presents revenue by geographic region, based on invoiced locations, during the three months ended March 31, 2019 and 2018 in dollars (in thousands) and as a percentage of revenue for the periods presented:

The following table presents revenue by geographic region, based on invoiced locations, during the three and nine months ended September 30, 2018 and 2017 in dollars (in thousands) and as a percentage of revenue for the periods presented:

	Three Months Ended March 31,
	2019					2018
	Revenues		% of Revenues			Revenues		% of Revenues
United States	$	4,502		68	%	$	1,232		13	%
APAC (excluding Japan)		2,149		32	%		8,443		87	%
Total	$	6,651		100	%	$	9,675		100	%

	Three Months Ended September 30,										Nine Months Ended September 30,
	2018					2017					2018					2017
	Revenues		% of Revenues			Revenues		% of Revenues			Revenues		% of Revenues			Revenues		% of Revenues
United States	$	1,878		24	%	$	2,473		29	%	$	4,895		18	%	$	9,582		36	%
Japan		144		2	%		330		4	%		144		1	%		330		1	%
APAC (excluding Japan)		5,840		74	%		5,770		67	%		22,300		81	%		16,593		62	%
Europe and Middle East		—		—	%		49		0	%		—		—	%		150		1	%
Total	$	7,862		100	%	$	8,622		100	%	$	27,339		100	%	$	26,655		100	%

Cost of Revenue

Cost of revenue decreased by 2846%, or $01.86 million, during the three ~~month~~months ~~period~~ ended ~~September~~March 3031, ~~2018~~2019 compared to the ~~same~~three ~~period~~months ~~in the prior year and 1%, or $0.1 million, during the nine month period~~ ended ~~September~~March 3031, 2018 ~~compared to the same period in the prior year~~ primarily due to decreases in labor and personnel-related expenses, depreciation, materials and other costs associated with the scheduled completion of existing programs.

Gross Margin

Our gross profit as a percentage of revenue, or gross margin, has been and will continue to be affected by a variety of factors, including the mix of program revenue and licensing and royalty revenue recognized during the period. We achieve a higher gross margin on licensing and royalty revenue as compared to program revenue.

Gross margin was 7473% ~~and 70%~~ for the three ~~and nine~~ months ended ~~September~~March 3031, ~~2018,~~2019 ~~respectively,~~ compared to 6765% ~~and 68%~~ for the three ~~and nine~~ months ended ~~September~~March 3031, ~~2017, respectively~~2018. The increase for the three ~~and nine~~ months ended ~~September~~March 3031, ~~2018~~2019 was primarily due to a decrease in ~~depreciation~~labor and ~~amortization~~personnel-related ~~expense,~~expenses ~~along~~and ~~with~~depreciation ~~other~~and ~~costs~~amortization ~~associated with programs~~expenses.

Research and Development

R&D expenses ~~decreased~~increased by 83%, or $0.41 million, during the three months ended ~~September~~March 3031, ~~2018~~2019 compared to the three months ended ~~September~~March 3031, ~~2017~~2018. The decrease was primarily attributable to a $0.~~3 million reduction in depreciation expense and a $0.~~1 million ~~decrease~~increase in labor and personnel-related expenses.

R&D expenses decreased by 28%, or $4.8 million, during the nine months ended September 30, 2018 compared to the nine months ended September 30, 2017. The decrease was primarily attributable to a $2.3 million decrease in labor and personnel-related expenses as a result of our restructuring in March 2017, a $0.8 million decrease in professional fees, a $0.8 million decrease in depreciation expense, a $0.7 million decrease in other R&D related expenses, and a $0.2 million decrease in facilities expense.

Sales and Marketing

Sales and marketing expenses ~~decreased~~increased by 2112%, or $0.21 million, during the three months ended ~~September~~March 3031, ~~2018~~2019 compared to the three months ended ~~September~~March 3031, ~~2017~~2018. The ~~decrease~~increase was primarily attributable to a $0.1 million ~~decrease~~increase in labor and personnel-related expenses ~~as a result of reduced headcount and a $0~~.~~1 million decrease in professional fees.~~

Sales and marketing expenses decreased by 29%, or $0.9 million, during the nine months ended September 30, 2018 compared to the nine months ended September 30, 2017. The decrease was primarily attributable to a $0.7 million decrease in labor and personnel-related expenses as a result of reduced headcount, a $0.1 million decrease in professional fees, and a $0.1 million decrease in facilities expense.

General and Administrative

General and administrative expenses ~~decreased~~increased by 212%, or $0.41 million, during the three months ended ~~September~~March 3031, ~~2018~~2019 compared to the three months ended ~~September~~March 3031, ~~2017~~2018. The ~~decrease~~increase was primarily attributable to a $0.~~3 million decrease in personnel-related expenses as a result of reduced headcount and a $0.~~1 million ~~decrease~~increase in professional fees.

General and administrative expenses decreased by 22%, or $1.6 million, during the nine months ended September 30, 2018 compared to the nine months ended September 30, 2017. The decrease was primarily attributable to a $1.0 million decrease in

personnel-related expenses as a result of reduced headcount, a $0.5 million decrease in professional fees, and a $0.1 million decrease in facilities expense.

Restructuring Charges

Restructuring expenses were $0 during the three and nine months ended September 30, 2018 compared to $0 and $1.4 million during the three and nine months ended September 30, 2017, respectively.

Income (Loss) from Operations

Our operating loss ~~decreased~~increased by $1.07 million during the three months ended ~~September~~March 3031, ~~2018~~2019 compared to the three months ended ~~September~~March 3031, ~~2017~~2018, primarily due to a$1.5 ~~decrease~~million reduction in gross profit on account of lower revenues and $0.3 million increase in operating expenses ~~following~~which ~~our~~was ~~restructuring~~offset ~~that~~by ~~was~~$0.1 ~~completed~~million ~~during~~increase ~~first~~in ~~quarter~~other ~~2017~~income.

Our operating loss decreased by $9.5 million during the nine months ended September 30, 2018 compared to the nine months ended September 30, 2017, primarily due to non-recurring restructuring charges during the three months ended March 31, 2017 and a decrease in labor and personnel-related expenses as a result of the restructuring completed during the first quarter of 2017.

Interest Income (Expense), net

The increase in interest income during the three ~~and nine~~ months ended ~~September~~March 3031, ~~2018~~2019, compared to the three ~~and nine~~ months ended ~~September~~March 3031, ~~2017~~2018, was primarily related to higher interest rates ~~and balances in our investment accounts~~.

Other Income (Expense), net

Other income, net, for the three ~~and nine~~ months ended ~~September~~March 3031, ~~2018~~2019 consisted principally of sublease income that we received from subleasing a portion of our office space under an agreement entered into in December 2015. The ~~sublessee~~sublease ~~moved~~commenced induring ~~and~~the ~~occupied~~second ~~the~~quarter ~~space~~of 2016 and terminated during the ~~second~~first quarter of ~~2016~~2019.

Provision for Income Taxes

Provision for income taxes during the three ~~and nine~~ months ended ~~September~~March 3031, ~~2018~~2019 and ~~2017~~2018 consisted of income taxes on our US and foreign entities and were not significant during these periods.

Net Income (Loss)

Our net loss ~~decreased~~increased by $1.16 million to $(02.7)3 million during the three months ended ~~September~~March 3031, ~~2018~~2019 compared to a net loss of $10.86 million during the three months ended ~~September~~March 3031, ~~2017~~2018, primarily due to lower ~~operating~~revenue ~~expenses~~on ~~following~~account ~~our~~of ~~restructuring~~scheduled ~~that~~completion ~~was~~of ~~completed~~programs during the first quarter ~~2017~~of 2019.

Our net loss decreased by $9.7 million to $(0.8) million during the nine months ended September 30, 2018 compared to a net loss of $10.5 million during the nine months ended September 30, 2017, primarily due to non-recurring restructuring charges during the three months ended March 31, 2017 and a decrease in labor and personnel-related expenses as a result of the restructuring completed during first quarter 2017.

Liquidity and Capital Resources

As of ~~September~~March 3031, ~~2018~~2019, we had $3027.64 million of cash, cash equivalents and investments and $3025.49 million of net working capital.

During the three months ended ~~September~~March 3031, ~~2018~~2019, we incurred net losses of $02.73 million compared to a net loss of $10.86 million in the same period last year. ~~During the nine months ended September 30, 2018 and 2017, we incurred net losses of $0.8 million and $10.5 million, respectively.~~ As of ~~September~~March 3031, ~~2018~~2019, our accumulated deficit was $~~179~~183.19 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; our ability to expand customer programs in the semiconductor industry; whether we are successful in obtaining payments from customers; the financial stability of our customers; whether we can enter into additional contracts 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 we 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, investments and cash from operations are insufficient to fund our operations, 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 generally 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):

	Three Months Ended March 31,
	2019			2018
Net cash (used in) provided by operating activities	$	(2,915	)	$	1,690
Net cash used in investing activities	$	(1,625	)	$	(3,376	)
Net cash provided by financing activities	$	5		$	17

	Nine Months Ended September 30,
	2018			2017
Net cash provided by operating activities	$	5,048		$	325
Net cash (used in) provided by investing activities	$	(4,436	)	$	3,816
Net cash (used in) provided by financing activities	$	187		$	(13	)

Cash Flows from Operating Activities

We ~~had~~experienced ~~higher~~negative ~~positive~~ cash flows from operating activities during the ~~nine~~three months ended ~~September~~March 3031, ~~2018,~~2019 ~~compared~~primarily ~~to the nine months ended September 30, 2017,~~ due to ~~improved~~ operating results.

Net cash ~~provided~~of by$2.9 million used in operating activities during the ~~nine~~three months ended ~~September~~March 3031, ~~2018~~2019 was primarily attributable to ~~the~~$2.3 ~~non-cash~~million ~~charges~~in ofnet loss, $32.51 million ~~for~~reduction ~~depreciation,~~in ~~amortization,~~accrued ~~and accretion~~liabilities, $0.65 million ~~for~~reduction ~~stock-based~~in ~~compensation,~~accounts payable and $20.76 million ~~decrease~~reduction in ~~accounts~~deferred ~~receivables~~revenue, which were offset by ~~our~~non-cash charges of $01.81 million ~~net~~of ~~loss~~depreciation, amortization and accretion, a $0.75 million ~~reduction~~of instock ~~deferred~~compensation ~~revenue,~~expense and a $0.39 million reduction in accounts ~~payable~~receivables and $0.1 million decrease in materials inventory.

Net cash provided by operating activities during the ~~nine~~three months ended ~~September~~March 3031, ~~2017~~2018 was primarily attributable to the non-cash charges of $51.4 million for depreciation, amortization, and accretion, $10.23 million for stock-based compensation, and a $1.68 million reduction in accounts receivables, aoffset ~~$0.7~~by ~~million~~our ~~decrease~~net inloss ~~prepaid~~of ~~and other assets, a~~ $0.46 million ~~decrease~~and ~~in materials inventory, a~~ $0.75 million ~~increase~~reduction in accounts payable, ~~a $0.5 million increase in deferred revenue,~~ and a $0.47 million ~~increase~~reduction in accrued ~~liabilities,~~and ~~which~~other ~~were offset by our net loss of $10~~liabilities.5 ~~million.~~

We expect that cash flows from operating activities will fluctuate in future periods due to a number of factors, including our operating results, amounts of non-cash charges, the timing of our billings, collections and disbursements.

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 the sale of intangible assets. In the future, we expect to continue making certain capital expenditures to support our operations, and to incur costs to protect our investment in our developed technology and IP.

During the ~~nine~~three months ended ~~September~~March 3031, ~~2018~~2019, cash used by investing activities was $41.46 million as a result of $31.85 million in net purchases of investments and $0.61 million in purchases of property, plant and equipment.

During the ~~nine~~three months ended ~~September~~March 3031, ~~2017~~2018, cash ~~provided~~used by investing activities was $3.84 million as a result of $43.52 million ~~received~~ in net ~~redemption~~purchases of ~~our~~ investments, ~~partially~~and ~~offset~~a ~~by purchase of~~ $0.72 million in purchases of property, plant and equipment.

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.

During the nine months ended September 30, 2018, cash provided by financing activities was $0.2 million, primarily from the proceeds of common stock option exercises, compared to cash used of $13,000 for the nine months ended September 30, 2017, which was for capital lease payments.

During the three months ended March 31, 2019, cash provided by financing activities was $5,000, compared to $17,000 for the three months ended March 31, 2018, which was from the proceeds of common stock option exercises.

Contractual Obligations and Commitments

The following summarizes our contractual obligations as of ~~September~~March 3031, ~~2018~~2019 (in thousands):

Payments Due by Period

Less Than

More Than

Total

One Year

1 - 3 Years

3 - 5 Years

5 Years

Operating lease obligations

1817,~~174~~000

2,~~294~~576

5,~~411~~290

5,~~463~~531

53,~~006~~603

Purchase obligations

~~596~~408

—

Total

1817,~~770~~408

2,~~890~~984

5,~~411~~290

5,~~463~~531

53,~~006~~603

Operating lease agreements represent our obligations to make payments under our non-cancelable lease agreement for our facility in San Jose, California and office equipment. During the ~~nine~~three months ended ~~September~~March 3031, ~~2018~~2019, we made regular lease payments of $10.86 million under our operating lease ~~agreement~~agreements. Purchase obligations consist of firm, non-cancelable agreements to purchase property and equipment and inventory items.

Off-Balance Sheet Arrangements

As of ~~September~~March 3031, ~~2018~~2019, 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.

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are a “smaller reporting company” as defined by Regulation S-K and as such, are not required to provide the information contained in this item pursuant to Regulation S-K.

ITEM 4.

CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures, as such term is defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended, as of ~~September~~March 3031, ~~2018~~2019.

The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), means controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms and (ii) accumulated and communicated to our management, including the Chief Executive Officer and Chief Financial Officer, as the principal executive and financial officers, respectively, to allow timely decisions regarding required disclosures.

Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report.

Changes in internal control over financial reporting

We made no changes to our internal control over financial reporting during the quarterly period ended ~~September~~March 3031, ~~2018~~2019 that has materially affected, or that is reasonably likely to materially affect, our internal control over financial reporting.

Inherent Limitations on Effectiveness of Controls

Our management, including our Chief Executive Officer and our Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent or detect all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of internal control will be met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of the controls must be considered relative to their costs. While our disclosure controls and procedures and internal control over financial reporting are designed to provide reasonable assurance of their effectiveness, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, will be detected. These inherent limitations include the realities that judgments in decision making can be faulty and that breakdowns can occur because of

reporting are designed to provide reasonable assurance of their effectiveness, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, will be detected. These inherent limitations include the realities that judgments in decision making can be faulty and that breakdowns can occur because of simple errors or mistakes. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of the controls. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and may not be detected. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

PART II — OTHER INFORMATION

ITEM 1.

LEGAL PROCEEDINGS

From time to time, we may become involved in legal proceedings and claims arising in the ordinary course of our business, including but not limited to legal proceedings and claims brought by employees or former employees relating to working conditions or other issues. We are not currently a party to any legal proceedings the outcome of which, if determined adversely to us, we believe would individually or in the aggregate have a material adverse effect on our business, operating results, financial condition or cash flows.

ITEM 1A.

RISK FACTORS

~~The~~In ~~risks~~addition ~~described~~to the risk factors set forth below and other information contained elsewhere in this Quarterly Report on Form 10-Q, you should carefully consider how the risk factors discussed in Part I, Item 1A, “Risk Factors,” in our Annual Report on Form 10-K for the year ended December 31, ~~2017~~2018, could materially and adversely affect our business, financial condition or future results. These risk factors and the risk factors set forth below are not the only risks facing our company. Risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and operating results. The Risk ~~Factors~~factors listed below should be read in conjunction with the Risk Factor section ofin our ~~2017~~ 2018 Annual Report on Form 10-K ~~remains current in all material respects~~.

Risks Related to the Proposed Merger

On May 6, 2019, we entered into an Agreement and Plan of Merger (the Merger Agreement) with EMD Group Holding II, Inc., a Delaware corporation (Parent) and EMD Performance Materials Semiconductor Services Corp., a Delaware corporation and a wholly owned subsidiary of Parent (Merger Sub), providing for the merger of Merger Sub with and into the Intermolecular, Inc. (the Merger), with Intermolecular, Inc. surviving the Merger as a wholly owned subsidiary of Parent. The Merger Agreement was unanimously approved by our board of directors. The description of the Merger Agreement in these Risk Factors does not purport to be complete and is qualified in its entirety by reference to the Merger Agreement, which was filed as Exhibit 2.1 to our Current Report on Form 8-K filed on May 6, 2019.

We may fail to consummate the Merger, and uncertainties related to the consummation of the Merger may have a material adverse effect on our business, results of operations and financial condition and negatively impact the price of our common stock.

The Merger is subject to the satisfaction of a number of conditions beyond our control, including receiving stockholder approval, review and clearance by the Committee on Foreign Investment in the United States and other customary closing conditions. Failure to satisfy the conditions to the Merger could prevent or delay the completion of the Merger. Further, regulators may impose conditions, obligations or restrictions on the Merger that may have the effect of delaying or preventing its completion.

The efforts and costs to satisfy the closing conditions of the Merger, may place a significant burden on management and internal resources, and the Merger and related transactions, whether or not consummated, may result in a diversion of management’s attention from day-to-day operations. Any significant diversion of management’s attention away from ongoing business and difficulties encountered in the Merger process could have a material adverse effect on our business, results of operations and financial condition.

There also is no assurance that the Merger and the other transactions contemplated by the Merger Agreement will occur on the terms and timeline currently contemplated or at all.

If the proposed Merger is not completed or the Merger Agreement is terminated, the price of our common stock may decline, including to the extent that the current market price of our common stock reflects an assumption that the Merger and the other transactions contemplated by the Merger Agreement will be consummated without further delays, which could have a material adverse effect on our business, results of operations and financial condition.

If the Merger Agreement is terminated and we determine to seek another business combination, we may not be able to negotiate a transaction with another party on terms comparable to, or better than, the terms of the Merger.

If the Merger Agreement is terminated, we may, under certain circumstances, be obligated to pay a termination fee to Parent. These costs could require us to use available cash that would have otherwise been available for other uses.

If the Merger is not completed, in certain circumstances, we could be required to pay a termination fee of $2.3 million to Parent. If the Merger Agreement is terminated, the termination fee we may be required to pay, if any, under the Merger Agreement may require us to use available cash that would have otherwise been available for general corporate purposes or other uses. For these and other reasons, termination of the Merger Agreement could materially and adversely affect our business, results of operations or financial condition, which in turn would materially and adversely affect the price of our common stock.

We are subject to various uncertainties and restrictions on the conduct of our business while the Merger is pending, which could have a material adverse effect on our business, results of operations and financial condition.

Uncertainty about the pendency of the Merger and the effect of the Merger on employees, customers, vendors, communities and other third parties who deal with us may have a material adverse effect on our business, results of operations and financial condition. These uncertainties may impair our ability to attract, retain and motivate key personnel pending the consummation of the Merger, as such personnel may experience uncertainty about their future roles following the consummation of the Merger. Additionally, these uncertainties could cause customers, distributors, vendors and other third parties who deal with us to seek to change existing business relationships with us or fail to extend an existing relationship with us, all of which could have a material adverse effect on our business, results of operations, financial condition and market price of our common stock. In addition, the Merger Agreement restricts us from taking certain actions without Parent’s consent while the Merger is pending. These restrictions may, among other matters, prevent us from pursuing otherwise attractive business opportunities, buying or selling certain assets, making certain capital expenditures, refinancing or incurring additional indebtedness in an amount exceeding $500,000, entering into certain transactions, or making other changes to our business prior to consummation of the Merger or termination of the Merger Agreement. These restrictions and uncertainties could have a material adverse effect on our business, results of operations and financial condition.

We and our directors and officers may be subject to lawsuits relating to the Merger.

Litigation is very common in connection with the sale of public companies, regardless of whether the claims have any merit. One of the conditions to consummating the Merger is that no order preventing or otherwise prohibiting the consummation of the Merger shall have been issued by any court. Consequently, if any lawsuit challenging the Merger is successful in obtaining an order preventing the consummation of the Merger, that order may delay or prevent the Merger from being completed. While we will evaluate and defend against any lawsuits, the time and costs of defending against litigation relating to the Merger may adversely affect our business.

We will continue to incur substantial transaction-related costs in connection with the Merger.

We have incurred significant legal, advisory and financial services fees in connection with Merger. We have incurred, and expect to continue to incur, additional costs in connection with the satisfaction of the various conditions to closing of the Merger, including seeking approval from our stockholders and from applicable regulatory agencies. If there is any delay in the consummation of the Merger, these costs could increase significantly.

ITEM 6.

EXHIBITS

Exhibit		Incorporated by Reference			Filed
Number	Exhibit Description	Form	Date	Number	Herewith
31.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.				X
31.2	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.				X
32.1	Certification of Chief Executive Officer pursuant to 18 U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.				X
32.2	Certification of Chief Financial Officer pursuant to 18 U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.				X
101.INS	XBRL Instance Document				X
101.SCH	XBRL Taxonomy Extension Schema Document				X
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document				X
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document				X
101.LAB	XBRL Taxonomy Extension Label Linkbase Document				X
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document				X

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	INTERMOLECULAR, INC.
	(Registrant)
Date: November 6, 2018	By:	/s/ Bill Roeschlein
Date: May 14, 2019	By:	/s/ Bill Roeschlein
		Bill Roeschlein
		Chief Financial Officer

2728

Filing Compare · INTERMOLECULAR INC