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TABLE OF CONTENTS
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Table of Contents

As filed with the Securities and Exchange Commission on July 29, 2011

Registration No. 333-          

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549



FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933



INTERMOLECULAR, INC.
(Exact name of registrant as specified in its charter)



Delaware
(State or other jurisdiction of
incorporation or organization)
  3674
(Primary Standard Industrial
Classification Code Number)
  20-1616267
(I.R.S. Employer
Identification Number)

3011 N. First Street
San Jose, CA 95134
(408) 582-5700
(Address, including zip code, and telephone number, including area code, of Registrant's principal executive offices)



David Lazovsky
President and Chief Executive Officer
Intermolecular, Inc.
3011 N. First Street
San Jose, CA 95134
(408) 582-5700
(Name, address, including zip code, and telephone number, including area code, of agent for service)



Copies to:

Patrick A. Pohlen
Latham & Watkins LLP

140 Scott Drive
Menlo Park, CA 94025
Telephone: (650) 328-4600
Facsimile: (650) 463-2600

 

Alan F. Denenberg
Davis Polk & Wardwell LLP

1600 El Camino Real
Menlo Park, CA 94025
Telephone: (650) 752-2000
Facsimile: (650) 752-2111



Approximate date of commencement of proposed sale to the public:
As soon as practicable after the effective date of this Registration Statement.

         If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. o

         If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

         If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

         If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

         Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer o   Accelerated filer o   Non-accelerated filer ý
(Do not check if a
smaller reporting company)
  Smaller reporting company o



CALCULATION OF REGISTRATION FEE

       
 
Title of Each Class of Securities
to be Registered

  Proposed Maximum
Aggregate Offering Price(1)

  Amount of
Registration Fee

 

Common Stock, $0.001 per share par value

  $200,000,000   $23,220

 

(1)
Estimated solely for the purpose of computing the amount of the registration fee pursuant to Rule 457(o) under the Securities Act of 1933. Includes the offering price of shares that the underwriters have the option to purchase to cover over-allotments, if any.

         The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.


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The information in this prospectus is not complete and may be changed. We and the selling stockholder may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and we and the selling stockholder are not soliciting offers to buy these securities in any jurisdiction where the offer or sale is not permitted.

SUBJECT TO COMPLETION, DATED JULY 28, 2011

                  Shares

GRAPHIC

Common Stock

        Intermolecular, Inc. is offering                        shares of its common stock, and the selling stockholder identified in this prospectus, an entity affiliated with one of the directors of our company, is offering an additional                        shares. We will not receive any proceeds from the sale of the shares of common stock to be offered by the selling stockholder. This is our initial public offering and no public market currently exists for our shares. We anticipate that the initial public offering price of our common stock will be between $            and $            per share.

        We intend to apply to list our common stock on either the Nasdaq Global Market or the New York Stock Exchange under the symbol "IMI."



        Investing in our common stock involves risks. See "Risk Factors" beginning on page 11.



PRICE $            A SHARE



 
  Price to Public   Underwriting
Discounts and
Commissions
  Proceeds to
Intermolecular
  Proceeds to
the Selling
Stockholder
 

Per Share

  $                $                $                $               

Total

  $                $                $                $               

        We have granted the underwriters the right to purchase up to an additional                        shares of common stock to cover over-allotments.

        The Securities and Exchange Commission and state securities regulators have not approved or disapproved these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

        The underwriters expect to deliver the shares of common stock to purchasers on                        , 2011.



Morgan Stanley   J.P. Morgan

Barclays Capital



Pacific Crest Securities   Needham & Company, LLC



The date of this prospectus is                        , 2011.


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TABLE OF CONTENTS

        Neither we, the selling stockholder nor the underwriters have authorized anyone to provide you with information different from that contained in this prospectus. We take no responsibility for, and can provide no assurance as to the reliability of, any information that others may give you. We, the underwriters and the selling stockholder are offering to sell, and seeking offers to buy, shares of common stock only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is accurate only as of the date on the front cover of this prospectus, or such other dates as are stated in this prospectus, regardless of the time of delivery of this prospectus or of any sale of our common stock.


Dealer Prospectus Delivery Obligation

        Until                            , 2011 (25 days after commencement of this offering), all dealers that buy, sell, or trade shares of our common stock, whether or not participating in this offering, may be required to deliver a prospectus. This delivery requirement is in addition to the obligation of dealers to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.

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PROSPECTUS SUMMARY

        This summary highlights information contained elsewhere in this prospectus and does not contain all of the information you should consider in making your investment decision. You should read the following summary together with the more detailed information appearing elsewhere in this prospectus, including "Selected Consolidated Financial Data," "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Risk Factors," "Business" and our consolidated financial statements and related notes, before deciding whether to purchase shares of our capital stock. Unless otherwise indicated herein, "Intermolecular, Inc.," "Intermolecular," "the Company," "we," "us" and "our" refer to Intermolecular, Inc. and its subsidiaries.

Our Company

        We have pioneered a proprietary approach to accelerate research and development, innovation and time-to-market for the semiconductor and clean-energy industries. Our approach consists of our proprietary high productivity combinatorial (HPC) platform, coupled with our multi-disciplinary team. Through paid collaborative development programs (CDPs) with our customers, we develop proprietary technology and intellectual property (IP) for our customers focused on advanced materials, processes, integration and device architectures. This developed technology enables our customers to bring application-specific, customized, high-volume manufacturing-ready integrated devices to market faster and with less risk than traditional approaches to R&D. We provide our customers with the developed proprietary technology through various fee arrangements and grant them rights to associated IP, primarily through royalty-bearing licenses.

        We currently target large, high-volume semiconductor and high-growth emerging clean-energy markets, including DRAM, flash memory, complex logic, flat glass, solar cells, LEDs and other energy-efficient technologies with our HPC platform. Within these broad markets, we have engaged in paid programs for 17 customers, including ATMI, Elpida Memory, GLOBALFOUNDRIES, Guardian Industries, SanDisk, Taiwan Semiconductor Manufacturing Company (TSMC) and Toshiba. ATMI and Elpida have commenced shipping products incorporating technology developed through our CDPs and pay us licensing and royalty fees.

        Our HPC platform consists of our Tempus HPC processing tools, automated characterization and informatics and analysis software. Our platform is purpose-built for R&D using combinatorial process systems, a methodology for discovery and development that employs parallel and other high-throughput experimentation and allows R&D to be performed at speeds 10 to 100 times faster than traditional methods. Our processing tools allow us to perform up to 192 experiments on a single substrate as compared to traditional methods, which typically allow only a single experiment at a time. Our multi-disciplinary team of approximately 130 scientists and engineers, of whom approximately 50 have Ph.D.s, designs customized workflows for our customers' specific applications using the HPC platform and applies the workflows in collaboration with our customers.

        Our business model aligns our interests with those of our customers as we collaborate to develop differentiated proprietary technology and IP for high-volume integrated devices through CDPs. Customers pay us development service fees during multi-year CDPs. Our customers also receive rights to the technology and IP developed during the CDPs, and once our customers commercialize products using this technology and IP, they pay us primarily through royalty fees. In certain cases, we sell HPC processing tools to our customers who pay a recurring license fee to operate those tools with our combinatorial processing capabilities. By aligning our interests with those of our customers, we facilitate collaboration and open communication that is more likely to result in innovative, differentiated products and future CDPs with those customers.

        We were founded in 2004 and are headquartered in San Jose, California. Our total revenue increased to $11.7 million for the three months ended March 31, 2011 from $5.8 million for the three

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months ended March 31, 2010. Our total revenue increased to $42.7 million for the year ended December 31, 2010 from $26.9 million for the year ended December 31, 2009. Our backlog as of March 31, 2011 was $67.5 million, of which $30.7 million is scheduled to be recognized as revenue during the remainder of the year ending December 31, 2011. Our adjusted EBITDA for the three months ended March 31, 2011 was $0.9 million, and our adjusted EBITDA for the year ended December 31, 2010 was $4.6 million. Our net loss decreased to $1.2 million for the three months ended March 31, 2011 from $3.4 million for the three months ended March 31, 2010. Our net loss decreased to $1.8 million for the year ended December 31, 2010 from $5.3 million for the year ended December 31, 2009.

Industry

        High-volume integrated devices serve large and growing markets, including the markets for semiconductors, clean energy (which includes flat glass, solar cells, LEDs, advanced batteries and other energy-efficient technologies) and flat-panel displays. According to IHS iSuppli, the semiconductor market had $304 billion in sales in 2010 and is expected to grow at a compound annual growth rate (CAGR) of 5.7% from 2010 to 2015. Also, based on data from Freedonia Group, GlobalData, IHS iSuppli and MarketsandMarkets, the clean-energy markets had $166 billion in sales in 2010 and are collectively expected to grow at a CAGR of 10.8% from 2010 to 2015.

        Success in these markets requires rapid and cost-effective product innovation, fast time-to-market, competitive pricing, production scalability and the ability to achieve application-specific requirements. Devices in these markets are typically manufactured using thin-film deposition of advanced materials through customized processes that create a specific device architecture. To deliver performance and cost improvements, it is increasingly necessary to evaluate elements in the periodic table that have previously not been used in high-volume manufacturing, and to develop advanced device structures capable of addressing particular application requirements. These device structures must then be scaled and integrated into cost-effective manufacturing processes. In addition, innovation in these markets and control of the resulting IP are critical to enable competitive differentiation.

        Existing approaches used to explore new materials, processes, integration and device architectures are complex and time-consuming. Traditionally, device manufacturers have conducted R&D using expensive high-volume manufacturing tools that are not specifically built for that purpose. Production tools can typically only run one process at a time and are required to be taken off high-volume manufacturing lines to perform and evaluate experiments. These high-volume manufacturing environments are not conducive to R&D because these environments require stability to minimize risk and to reduce contamination that the research-based introduction of new materials, tools or processes may cause. In addition to some of the challenges above, certain clean-energy device manufacturers use laboratory-scale tools for R&D, which do not address the scale-up requirements critical to high-volume manufacturing. These factors combine to increase development risks due to long learning cycles, limited data sets, narrow exploration capabilities and slow time-to-market. Moreover, third-party approaches to complement internal R&D typically are not tailored for customer-specific applications, do not offer proprietary IP or competitive differentiation and do not provide high-volume manufacturing-ready technology.

        Traditional R&D approaches are increasingly challenged by the market need to accelerate innovation and time-to-market for the semiconductor and clean-energy industries. Substantially improved methodologies are required to generate the learning cycles necessary to accelerate innovation, improve product development and ensure manufacturing scalability of high-volume integrated devices in these markets. Further, companies require new ways to develop proprietary technology and obtain IP rights to support competitive advantage for their new products.

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Our Solution and Benefits to Our Customers

        We develop technology and IP rights focused on advanced materials, processes, integration and device architectures in collaboration with our customers. This technology enables our customers to bring application-specific, customized, high-volume manufacturing-ready integrated devices to market faster and with less risk than traditional approaches to R&D. Our HPC platform increases R&D productivity because it is purpose-built for R&D and utilizes advanced combinatorial processing systems, thereby allowing experiments to be performed at speeds 10 to 100 times faster than traditional methods.

        The key elements of our HPC platform include the following:

    Tempus HPC processing.  We use our Tempus HPC processing tools to rapidly process different experiments consisting of various combinations of materials, processing parameters, sequencing and device structures.

    Automated characterization.  We use automated characterization systems to characterize the substrates processed by our Tempus HPC processing tools, thereby rapidly generating experimental data while matching our processing throughput.

    Informatics and analysis software.  We use our informatics and analysis software to automate experiment generation, characterization, data analysis and reporting, in each case while matching our processing throughput, and to create an aggregated and searchable database of information that includes the experimental results we generate.

        Our differentiated platform solution and approach to collaborative engagements are designed to deliver the following significant benefits to our customers:

    Accelerated time-to-market with better, lower-cost products.  Faster processing of experiments, throughput-matched characterization and real-time data management and analysis allow additional learning cycles and broader exploration of materials and process solution combinations.

    Development of customer-specific and application-specific, manufacturing-ready IP.  We use our HPC platform and customized workflows to develop IP-protected, proprietary technology that is tailored to our customers' applications and ready for high-volume manufacturing.

    Increased R&D productivity and reduced technology risk.  We narrow the potential combinations of advanced materials, processes and device architecture solutions through a series of increasingly rigorous screening stages to guide the selection of solutions, which mitigates our customers' technology risk earlier in the development cycle.

Strengths

        We have pioneered, developed and patented a proprietary platform and methodology for accelerating R&D in the semiconductor and clean-energy markets. Our strengths include:

    Proprietary and patented HPC platform.  Our HPC platform employs proprietary and patented combinatorial methods to parallel process up to 192 experiments on a single substrate as compared to traditional methods, which typically allow only a single experiment at a time. As of July 15, 2011, we owned or had exclusive rights within our field of use to 577 U.S. patents and patent applications (most of which also have foreign counterparts), which provide us with a competitive advantage in the use of combinatorial methods and systems in our target markets.

    Flexible technology platform configurable for and extendable to multiple markets.  Our HPC platform can be configured for many applications and extended to address a broad set of integrated device markets.

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    Seasoned engineering team with multi-disciplinary expertise.  We have assembled a multi-disciplinary team of approximately 130 scientists and engineers, of whom approximately 50 have Ph.D.s, with expertise across various disciplines, fields and technologies, including engineering, materials science, process development and integration, equipment, device process technologies and device integration.

    Collaborative customer engagements leading to IP generation and strategic alignment.  Our business model aligns our financial interests with those of our customers, to whom we grant rights to proprietary technology and IP developed during our collaborations. This alignment of interests facilitates collaboration and open communication that improves development efficiencies and is more likely to result in innovative, differentiated products and future CDPs with those customers.

    Attractive business model with contracted CDP revenue and recurring high-margin royalties. Our multi-year CDPs generate predictable CDP and services revenue from our customers. Our CDPs also establish the terms upon which we will receive recurring licensing and royalty revenue from the sale of our customers' products that incorporate technology developed through our CDPs.

Our Strategy

        Our mission is to drive our customers' success by transforming R&D and accelerating innovation in markets that derive competitive advantage from the interaction of materials science, processes, integration and device architecture. To accomplish this, we intend to continue to execute on our strategy, the key elements of which are:

    Target large, high-volume semiconductor markets;

    Target large, high-growth, emerging clean-energy markets;

    Engage with existing and potential market leaders in our target markets;

    Create proprietary IP with our customers;

    Enhance our HPC platform and multi-disciplinary team; and

    Explore and develop new technologies in high-volume integrated devices.

Risks Related to Our Financial Condition and Business

        Our business is subject to a number of risks and uncertainties that you should understand before making an investment decision. These risks are discussed more fully in the section of this prospectus entitled "Risk Factors" and include:

    We have a limited operating history, which makes it difficult for investors to evaluate our current business and future prospects;

    Our operating results may fluctuate from quarter to quarter, which may make it difficult to predict our future performance and may result in volatility in the market price of our common stock if we fail to meet the expectations of public market analysts and investors in these periods;

    We have incurred operating losses since our inception and may not be able to achieve or maintain profitability;

    We depend on a limited number of customers, which have historically been in the semiconductor industry, and a loss of any of them would adversely affect our business and operating results;

    Our rapid growth has presented significant challenges to our management and administrative systems and resources, and we may experience difficulties managing our growth, particularly as

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      we handle the additional responsibilities of becoming a public company, which could adversely affect our business and operating results;

    We may face market resistance to the royalty element of our business model;

    Our sales cycles are long, and we commit significant resources to a project before we have any commitment that a potential customer may agree to use our platform. One or more failures to enter into a CDP after we have devoted significant resources to a project could adversely affect our business and operating results;

    The semiconductor industry is rapidly changing and an inability to evolve existing products in a timely manner, anticipate trends in technology development and introduce new technologies could adversely affect our business and operating results;

    The clean-energy industry is in a very early stage of development, and we may not earn significant revenue from our initiatives in this industry for an extended period, if ever;

    If a project to which we have devoted technology and significant resources fails to produce any measurable success or value to our customers in the form of differentiated technology and intellectual property, we may not earn licensing and royalty revenue sufficient to recover the upfront costs and cash invested in the CDP, which could adversely affect our results of operations;

    A decline in sales in the end markets for products incorporating technology developed through our CDPs could adversely affect our business and results of operations;

    If we are unable to scale our development efforts and secure new CDPs, our growth prospects would be limited and our business and operating results could be adversely affected; and

    We may not be successful in maintaining and managing CDPs, which would adversely affect our ability to develop successful products and our financial condition and operating results.

Corporate Information

        We were originally incorporated as The BEP Group, Inc. in Delaware in June 2004. In November 2004, we changed our name to Intermolecular, Inc. Our principal executive offices are located at 3011 N. First Street, San Jose, California 95134, and our telephone number is (408) 582-5700. Our website address is www.intermolecular.com. Information contained on or accessible through our website is not incorporated by reference into this prospectus, and you should not consider information contained on or accessible through our website to be part of this prospectus.

        Our logo, "Intermolecular," "Tempus" and other trademarks or service marks of Intermolecular, Inc. appearing in this prospectus are the property of Intermolecular, Inc. This prospectus contains additional trade names, trademarks and service marks of other companies. We do not intend our use or display of other companies' trade names, trademarks or service marks to imply relationships with, or endorsement or sponsorship of us by, these other companies. Use of such trademarks and service marks in this prospectus may occur without their respective superscript symbols (TM or SM) to facilitate readability only and does not constitute a waiver of any rights that might be associated with the respective trademarks or service marks.

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The Offering

Common stock offered by us

              shares (or            shares if the underwriters exercise their over-allotment option in full).

Common stock offered by the selling stockholder

 

            shares.

Common stock to be outstanding after this offering

 

            shares (or            shares if the underwriters exercise their over-allotment option in full).

Proposed                    symbol

 

"IMI"

Use of proceeds

 

We intend to use the net proceeds received by us from this offering for working capital and other general corporate purposes, including the costs associated with being a public company. If and to the extent the gross proceeds from the sale by Symyx Technologies, Inc. (Symyx) of shares in this offering are less than $67 million, we will use a portion of our net proceeds to satisfy an obligation to Symyx in connection with an agreement for the purchase of IP from Symyx and the termination of related royalty obligations. We have also agreed to reimburse Symyx for 50% of their underwriting discounts and commissions. We may also use a portion of the net proceeds to expand our current business through acquisitions of other businesses, products, intellectual property or technologies. Other than as set forth above, we do not have agreements or commitments for any specific acquisitions at this time. We will not receive any proceeds from the sale of the shares of common stock to be offered by the selling stockholder. Please see "Use of Proceeds."

Risk factors

 

See "Risk Factors" starting on page 11 of this prospectus for a discussion of factors you should carefully consider before deciding to invest in our common stock.

        The number of shares of common stock to be outstanding after this offering is based on 69,157,622 shares outstanding as of March 31, 2011 and excludes:

    15,484,753 shares of common stock issuable upon the exercise of options outstanding, at a weighted average exercise price of $0.93 per share;

    1,825,361 shares of common stock issuable upon the exercise of warrants outstanding (not including those to be exercised in connection with the completion of this offering), at a weighted average exercise price of $2.84 per share;

    1,396,906 shares of common stock reserved for future issuance under our 2004 Equity Incentive Plan, which will become available for issuance under our 2011 Equity Incentive Award Plan after completion of this offering; and

                    shares of common stock that will be reserved for future issuance under our 2011 Equity Incentive Award Plan, as well as any automatic increases in the number of shares of our common stock reserved for future issuance under this benefit plan, which will become effective immediately prior to the consummation of this offering.

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        Except as otherwise indicated, all information in this prospectus assumes:

    the automatic conversion of all outstanding shares of our redeemable convertible preferred stock into 56,054,198 shares of common stock in connection with the consummation of this offering and the related conversion of an outstanding warrant exercisable for our redeemable convertible preferred stock into a warrant exercisable for common stock;

    the cash exercise of certain warrants outstanding to purchase shares of our common stock as of March 31, 2011, which will expire upon completion of this offering if unexercised, resulting in the issuance of 1,799,360 shares of common stock for an aggregate exercise price of approximately $3.0 million; and

    no exercise of the underwriters' over-allotment option.

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Summary Consolidated Financial Data

        The following table sets forth a summary of our historical consolidated financial data for the periods ended or as of the dates indicated. You should read this table together with our consolidated financial statements and the accompanying notes, "Selected Consolidated Financial Data" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" appearing elsewhere in this prospectus. The summary consolidated financial data in this section is not intended to replace our consolidated financial statements and the accompanying notes. Our historical results are not necessarily indicative of our future results.

 
  Years Ended December 31,   Three Months Ended
March 31,
 
 
  2008   2009   2010   2010   2011  
 
   
   
   
  (unaudited)
 
 
  (in thousands, except share and per share amounts)
 

Consolidated Statement of Operations Data:

                               

Revenue:

                               
 

CDP and services revenue

  $ 14,647   $ 14,182   $ 27,705   $ 2,549   $ 7,793  
 

Product revenue

    6,206     9,065     6,959     1,665     678  
 

Licensing and royalty revenue

    2,276     3,663     8,010     1,589     3,217  
                       
   

Total revenue

    23,129     26,910     42,674     5,803     11,688  

Cost of revenue

    12,625     13,018     20,926     3,635     5,516  
                       
     

Gross profit

    10,504     13,892     21,748     2,168     6,172  

Operating expenses:

                               
 

Research and development

    11,849     10,983     13,917     3,073     4,519  
 

Sales and marketing

    3,849     3,211     4,074     896     905  
 

General and administrative

    4,300     4,867     5,761     1,606     1,799  
                       
   

Total operating expenses

    19,998     19,061     23,752     5,575     7,223  
                       

Loss from operations

    (9,494 )   (5,169 )   (2,004 )   (3,407 )   (1,051 )

Other income (expense):

                               
 

Interest income, net

    174     (6 )   43     11     4  
 

Other income (expense), net

    6     (62 )   202     (4 )   (178 )
                       
   

Total other income (expense), net

    180     (68 )   245     7     (174 )

Loss before provision for income taxes

    (9,314 )   (5,237 )   (1,759 )   (3,400 )   (1,225 )

Provision for income taxes

    186     17     19         1  
                       

Net loss

    (9,500 )   (5,254 )   (1,778 )   (3,400 )   (1,226 )

Accretion on redeemable convertible preferred stock

    (5,436 )   (9,170 )   (14,162 )   (3,004 )   (4,041 )
                       

Net loss attributable to common stockholders

  $ (14,936 ) $ (14,424 ) $ (15,940 ) $ (6,404 ) $ (5,267 )
                       

Net loss per share of common stock, basic and diluted

  $ (1.39 ) $ (1.31 ) $ (1.43 ) $ (0.58 ) $ (0.47 )
                       

Weighted-average number of shares used in computing net loss per share of common stock, basic and diluted(1)

    10,716,462     11,023,779     11,134,573     11,093,119     11,266,383  
                       

Pro forma net loss per share of common stock, basic and diluted(1)

              $ (0.03 )       $ (0.01 )
                             

Weighted-average number of shares used in computing pro forma net loss per share of common stock, basic and diluted(1)

                65,376,321           66,592,330  
                             

Other Data:

                               

Adjusted EBITDA(2)(unaudited)

  $ (5,062 ) $ 272   $ 4,589   $ (1,831 ) $ 920  

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  As of March 31, 2011  
 
  Actual   Pro Forma(3)   Pro Forma as
Adjusted(4)
 
 
  (unaudited)
 
 
  (in thousands)
 

Consolidated Balance Sheet Data:

                   

Cash, cash equivalents and short-term investments

  $ 30,137   $ 33,097   $               

Working capital

    16,430     19,840                   

Total assets

    63,626     66,596                   

Preferred stock warrant liability

    450                       

Redeemable convertible preferred stock

    70,560                       

Accumulated accretion of redeemable convertible preferred stock to redemption values

    38,467                       

Total stockholders' (deficit) equity

    (69,202 )   43,235                   

(1)
Please see Note 9 to our audited consolidated financial statements for an explanation of the calculations of our basic and diluted net loss per share of common stock and pro forma net loss per share of common stock.

(2)
The following table presents a reconciliation of adjusted EBITDA to our net loss, the most comparable GAAP measure, for each of the periods indicated:

 
  Years Ended December 31,   Three Months Ended March 31,  
 
  2008   2009   2010   2010   2011  
 
   
   
   
  (unaudited)
 
 
  (in thousands)
 

Net loss

  $ (9,500 ) $ (5,254 ) $ (1,778 ) $ (3,400 ) $ (1,226 )

Non-GAAP adjustments:

                               

Revenue(a)

                     

Interest, net

    (94 )   48     13     (11 )   231  

Provision for taxes

    186     17     19         1  

Depreciation and amortization

    3,430     4,380     4,971     1,234     1,508  

Stock-based compensation expense(b)

    916     1,081     1,364     346     406  
                       
 

Adjusted EBITDA (unaudited)

  $ (5,062 ) $ 272   $ 4,589   $ (1,831 ) $ 920  
                       

(a)
Reduction in revenue as a result of common stock warrants issued in connection with a customer agreement

(b)
Includes stock-based compensation as follows:

 
  Years Ended December 31,   Three Months
Ended March 31,
 
 
  2008   2009   2010   2010   2011  
 
   
   
   
  (unaudited)
 
 
  (in thousands)
 

Cost of revenue

  $ 71   $ 134   $ 285   $ 57   $ 95  

Research and development

    170     222     204     61     67  

Sales and marketing

    408     378     422     122     131  

General and administrative

    267     347     453     106     113  
                       
 

Total stock-based compensation

  $ 916   $ 1,081   $ 1,364   $ 346   $ 406  
                       
(3)
The pro forma column in the consolidated balance sheet data table above reflects (i) the conversion of all outstanding shares of our redeemable convertible preferred stock into 56,054,198 shares of common stock immediately before the completion of this offering, (ii) the resulting reclassification of accumulated accretion of redeemable convertible preferred stock and preferred stock warrant liability to additional paid-in capital, (iii) the conversion of a warrant for redeemable convertible preferred stock into a warrant to purchase 168,747 shares of our common stock at an exercise price of $0.44 per share immediately before the completion of this offering and the resulting reclassification of the preferred stock warrant liability to additional paid-in capital and (iv) the cash exercise of certain warrants outstanding to purchase shares of our common stock as of March 31, 2011, which will expire upon completion of this offering if unexercised, and the resulting receipt of approximately $3.0 million in net proceeds and issuance of 1,799,360 shares of common stock.

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(4)
The pro forma as adjusted column in the consolidated balance sheet data table above reflects (i) the conversion of all outstanding shares of our redeemable convertible preferred stock into 56,054,198 shares of common stock immediately before the completion of this offering, (ii) the resulting reclassification of accumulated accretion of redeemable convertible preferred stock and preferred stock warrant liability to additional paid-in capital, (iii) the conversion of a warrant for redeemable convertible preferred stock into a warrant to purchase 168,747 shares of our common stock at an exercise price of $0.44 per share immediately before the completion of this offering and the resulting reclassification of the preferred stock warrant liability to additional paid-in capital, (iv) the cash exercise of certain warrants outstanding to purchase shares of our common stock as of March 31, 2011, which will expire upon completion of this offering if unexercised, and the resulting receipt of approximately $3.0 million in net proceeds and issuance of 1,799,360 shares of common stock, and (v) the issuance of the shares offered by us in this offering and the net proceeds therefrom at an assumed initial public offering price of $          (the midpoint of the price range set forth on the cover page of this prospectus).

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RISK FACTORS

        Investing in our common stock involves a high degree of risk. You should carefully consider the following risk factors, as well as the other information in this prospectus, before deciding whether to invest in shares of our common stock. The occurrence of any of the events or circumstances described below or other adverse events could harm our business, financial condition, results of operations and growth prospects. If such an event or circumstance were to occur, the trading price of our common stock may decline and you may lose all or part of your investment. Additional risks or uncertainties not presently known to us or that we currently deem immaterial may also harm our business.

Risks Related to Our Financial Condition and Business

We have a limited operating history, which makes it difficult for investors to evaluate our current business and future prospects.

        We were incorporated in June 2004 and do not have a long history of operating results on which you can base your evaluation of our business. We are still proving our business model, and we have not yet demonstrated our ability to generate significant revenue, particularly licensing and royalty revenue. As a result, it may be difficult for public market analysts and investors to evaluate our future prospects. If we do not generate significant licensing and royalty revenue, we may never be profitable. Furthermore, because of our limited operating history and because the semiconductor and clean-energy industries are rapidly evolving, we have limited experience in analyzing and understanding the trends that may emerge and affect our business. If we are unable to obtain significant licensing and royalty revenue from products that incorporate technology developed through our collaborative development programs (CDPs), we will have expended a significant amount of time and resources without obtaining the benefits we anticipated, and our financial condition and results of operations would be materially and adversely affected.

Our operating results may fluctuate from quarter to quarter, which may make it difficult to predict our future performance and may result in volatility in the market price of our common stock if we fail to meet the expectations of public market analysts and investors in these periods.

        Our revenue, expenses and operating results have fluctuated, and may in the future fluctuate significantly from quarter to quarter due to a number of factors, many of which are outside our control. Factors that may contribute to these fluctuations include the following, as well as other factors described elsewhere in this prospectus:

    our dependence on a limited number of customers;

    our ability to manage our growth, including an increasing number of employees, customers and CDPs;

    the length of our sales and development cycles, and our ability to generate material revenue after we have devoted significant resources to developing a project;

    our ability to evolve existing products, anticipate trends in technology development and introduce new developments in a timely manner in the rapidly changing semiconductor and clean-energy industries;

    our customers' ability to manufacture, market and sell products that incorporate technology developed through the CDPs;

    fluctuations in the number and price of products sold by our customers that incorporate technology developed through the CDPs, and the shortening life cycles of those products, in each case impacting our licensing and royalty revenue;

    our ability to scale our development efforts, our ability to secure new CDPs with new or existing customers and the timing of those CDPs;

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    the degree to which existing CDPs are completed or expanded;

    one-time, non-cash charges to revenue associated with the vesting of contingent warrants issued to two of our customers that are currently outstanding;

    our ability to maintain existing commercial terms or enter into new licensing arrangements with our customers once they begin to sell their end products;

    our ability to make the substantial research and development (R&D) investments required to stay competitive in our business;

    our ability to develop our high productivity combinatorial (HPC) platform and expertise to support our future growth plans in adjacent vertical markets such as clean-energy markets;

    any potential involvement in intellectual property litigation;

    any potential payments to our customers resulting from our intellectual property indemnification policies and obligations;

    our reliance on our customers to deliver timely and accurate information to accurately report our financial results from licensing and royalty revenue;

    our potential need for additional capital to finance our business;

    any delay in shipments caused by shortages of components incorporated in our customers' products, design errors or other manufacturing problems associated with our customers' products;

    the highly cyclical nature of and price volatility in the semiconductor industry;

    the emerging and uncertain nature of the clean-energy industry;

    potential warranty claims, product recalls and product liability for our HPC tools and for our customers' products that incorporate technology developed through our CDPs;

    global or regional economic, political and social conditions; and

    business interruptions such as earthquakes and other natural disasters.

        Due to these factors and other risks discussed in this section, you should not rely on quarter-to-quarter comparisons to predict our future performance. Our revenue mix may also vary from quarter to quarter as we enter into new CDPs and related customer arrangements, existing CDPs are completed or expanded and licensing and royalty arrangements take effect. Unfavorable changes in any of these factors may adversely affect our business and operating results. Additionally, our common stock could be subject to significant price volatility should our actual or projected revenue or earnings fail to meet the expectations of the investment community. Furthermore, stocks of high technology companies are subject to extreme price and volume fluctuations that are often unrelated or disproportionate to the operating performance of those companies.

We have incurred operating losses since our inception and may not be able to achieve or maintain profitability.

        We have generated net losses each year since our inception, including $1.2 million for the three months ended March 31, 2011 and $1.8 million and $5.3 million for the years ended December 31, 2010 and 2009, respectively. Our accumulated deficit as of March 31, 2011 was $69.2 million. We will need to significantly increase revenue to achieve profitability and we may not achieve or subsequently maintain profitability if our revenue increases more slowly than we expect or not at all. Our ability to achieve our objectives and achieve or maintain the profitability of our business will depend, in large part, on potential customers accepting our HPC platform and methodology as effective tools in the development of new products; and on our success in helping our customers develop products that are

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successful in the marketplace. Historically, semiconductor companies have conducted R&D activities internally using traditional research methods. In order for us to achieve our business objectives, we must convince these companies that our technology and capabilities justify collaborating with us on their basic R&D programs. We must also convince potential customers in the clean-energy industry that our HPC platform and approach are useful tools in an emerging industry. We cannot assure you we will achieve the levels of customer acceptance necessary for us to maintain and grow a profitable business. Our ability to achieve profitability also depends upon many other factors, including many that are beyond our control. These factors include, without limitation:

    changes in the demand for our products and services;

    the introduction of competitive technologies;

    our ability to engage with new customers that would use our technology and expertise to further develop and commercialize their products;

    our ability to enter into CDPs with customers who are or become market leaders;

    the competitiveness and financial strength of our existing and potential customers;

    changes in the R&D budgets of our customers and potential customers;

    our ability to develop our technology for and secure customers in the clean-energy industry; and

    our participation in the development of products that our customers choose to commercialize that generate a substantial stream of licensing and royalty revenue for us.

In addition, we expect to continue to incur significant expenses or revenue adjustments in connection with, among other things:

    increased R&D spending, including expansion of our R&D teams and workflow platforms;

    expansion of our sales and marketing efforts;

    additional non-cash charges relating to amortization of intangibles and deferred stock compensation; and

    one-time, non-cash charges to revenue associated with the vesting of contingent warrants issued to two of our customers that are currently outstanding.

        We cannot assure you we will achieve the levels of customer acceptance necessary for us to maintain and grow a profitable business, or that any of these other factors will be satisfactory. Also, we cannot assure you that customers, even those that accept our HPC platform as a valid tool for R&D, will be satisfied with the integrated devices developed through our CDPs or will be able to successfully commercialize end products incorporating the developed technology. Failure to achieve the necessary customer acceptance or extend or add current or new customer relationships, as well as difficulty with any of these other factors would adversely affect our revenue and profitability and our financial condition and results of operations would be materially and adversely affected.

We depend on a limited number of customers, which have historically been in the semiconductor industry, and a loss of any of them would adversely affect our business and operating results.

        Our customer base is highly concentrated. Revenue has historically come from a few customers, and we expect that revenue from a small number of customers will continue to account for a high percentage of our revenue for the foreseeable future. Due to the concentrated nature of manufacturers in the DRAM, flash memory and complex logic markets, our revenue is and may continue to be concentrated among and reliant upon key high-volume customers. For example, our four largest customers in the quarter ended March 31, 2011, all of which are in the semiconductor industry, accounted for 75% of our revenue, and our two largest customers for the years ended December 31, 2010 and 2009, both of which are in the semiconductor industry, accounted for 72% and 88% of our

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revenue, respectively. Our largest customer accounted for 33%, 52% and 59% of our revenue in each of these periods, respectively. The loss of any of these customers or a decrease in the manufacturing or sales volumes of their products, and the related impact on our future anticipated licensing and royalty revenue, would materially and adversely affect our business, financial condition or results of operations, and we may not be able to replace the business from these customers. In addition, this type of loss could cause significant fluctuations in our results of operations because our expenses are fixed in the short term and our sales and development cycle to obtain new customers is long.

Our rapid growth has presented significant challenges to our management and administrative systems and resources, and we may experience difficulties managing our growth, particularly as we handle the additional responsibilities of becoming a public company, which could adversely affect our business and operating results.

        We will need to continue to grow in all operational areas and to successfully integrate and support our existing and new employees, which may make it difficult to implement our business strategy in the time frame we anticipate, if at all. Our business has grown rapidly, and we expect this growth to continue as we expand our R&D capacity for current and additional CDPs. For example, we had 167 full-time employees as of March 31, 2011 and 107 employees at the end of 2008. The rapid expansion of our business and addition of new personnel has placed a strain on our management, operational systems and facilities and may continue to do so. To effectively manage our operations and growth as well as our new obligations as a public company, we must continue to expend funds to enhance our operational, financial and management controls, reporting systems and procedures and to attract and retain sufficient numbers of talented employees. If we are unable to expand our R&D capacity and implement improvements to our control systems efficiently and quickly, or if we encounter deficiencies in existing systems and controls, then we will not be able to successfully grow our business as planned. Our future operating results will also depend on our management's ability to:

    implement and improve our sales, marketing and customer support programs and our R&D efforts;

    enhance our operational and financial control systems;

    expand, train and manage our employee base;

    integrate any acquired businesses; and

    effectively address new issues related to our growth as they arise.

We may not manage our expansion successfully, which could adversely affect our business, financial condition or results of operations.

We may face market resistance to the royalty element of our business model.

        We believe that our royalty-bearing licenses with our customers lay the framework for ongoing, royalty revenue from our customers' products that incorporate technology developed through the CDPs and that this revenue stream will increase as revenue from products developed using our platform increases. Unless we adequately demonstrate the value of our platform to our existing and potential customers, we may face resistance to the royalty element of our business model. Existing customers may attempt to reduce or eliminate royalties and potential customers may not agree to enter into royalty-bearing licenses. If we are unable to maintain the royalty-bearing license aspect of our business model, our operating results would suffer and we may not achieve profitability.

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Our sales cycles are long, and we commit significant resources to a project before we have any commitment that a potential customer may agree to use our platform or service. One or more failures to enter into a CDP after we have devoted significant resources to a project could adversely affect our business and operating results.

        Our sales efforts require us to educate our potential customers about the benefits of our solutions, which often requires significant time and expense, including a significant amount of our senior management's time and effort. Our sales cycles to date have typically ranged from 9 to 24 months and may be even longer in the future. Furthermore, we need to target those individuals within a customer's organization who have overall responsibility for the profitability of their products. These individuals tend to be senior management or executive officers. We may face difficulty identifying and establishing contact with these individuals. In addition, our customers' technology and product pipeline are highly confidential and they may choose to withhold certain information from us during the sales cycle to protect their own proprietary technology. Our ability to implement our HPC platform and methodology is heavily dependent upon the information provided to us by our customers. If our customers reveal the complexities of their specifications after we enter into a CDP with them, that complexity may cause delays unanticipated at the time we entered into the program. During our sales cycles, we incur significant expenses and, in many cases, may begin to build, configure or expand new systems, develop software and design workflows to meet our customers' requirements prior to obtaining contractual commitments, without any assurance of resulting revenue. Where a potential customer engagement requires a new dedicated HPC platform, we may invest in new HPC capacity ahead of a customer commitment. Our HPC platform build, configuration and customization cycles to date have ranged from three to nine months and may be even longer in the future. Investment of time and expense in a particular customer engagement that does not ultimately result in material revenue will adversely affect our revenue and results of operations. Other factors impacting sales and the length of our sales and development cycles include, but are not limited to, the following:

    the complexity and cost of our HPC platform and difficulties we may encounter in meeting individual customer specifications and commitments;

    our ability to build, configure or expand new systems, develop software and design workflows to meet our customers' requirements;

    the limited number of customers that are appropriate sales targets for our platform and that are willing to enter into licensing agreements with us;

    our customers' budgetary constraints and internal review procedures that must be completed to begin collaboration with us; and

    the cultural transition required for a customer's internal R&D team to embrace us as a collaborative partner.

The semiconductor industry is rapidly changing and an inability to evolve existing products in a timely manner, anticipate trends in technology development and introduce new technologies could adversely affect our business and operating results.

        We must continually devote significant engineering resources to keep up with the rapidly evolving technologies, materials and equipment used in semiconductor design and manufacturing processes. These innovations are inherently complex and require long development cycles. The semiconductor industry is subject to a number of evolving trends, including:

    the growing varieties of semiconductor architecture, applications and processes;

    differing market growth rates and capital requirements for different applications, such as flash memory, DRAM, logic and foundry, and the resulting effect on customers' spending patterns and on our ability to compete in these market segments;

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    the importance of growing market positions in larger market segments;

    the increasing consolidation of semiconductor manufacturing towards foundries and large scale manufacturers and subsequent concentration of research and innovation in manufacturing process development; and

    the cost, technical complexity and timing of a proposed industry transition from 300mm to 450mm wafers.

        These and other changes could have a material impact on our business. Not only do we need the technical expertise to implement the changes necessary to keep our technologies current, but we also rely heavily on the judgment of our management and advisors to anticipate future market trends. Our customers expect us to stay ahead of the technology curve in their sectors and expect that the technology developed through our CDPs will help them develop new products that keep pace with or push the limits of technological innovation. If we are not able to accurately predict industry changes, or if we are unable to apply our HPC platform to our customers' needs on a timely basis, our existing solutions will be rendered obsolete and we may lose customers. If we do not keep pace with technology, our existing and potential customers may choose to develop their own solutions internally as an alternative to ours, and we could lose market share to competitors, which could adversely affect our operating results.

The clean-energy industry is in a very early stage of development, and we may not earn significant revenue from our initiatives in this industry for an extended period, if ever.

        Most sectors of the clean-energy industry are in the very early stages of development. Many of the associated technologies have not yet achieved commercial viability in comparison to available alternatives, and may never achieve market adoption. Many of the associated technologies will require substantial investments of capital to achieve scale, which may not be available on attractive terms, if at all. Companies within the clean-energy industry may also be hesitant to enter into CDPs with us given our recent entry into the clean-energy industry. Certain technologies may depend on government subsidies to be commercially viable, and those subsidies may not be available from federal and state governments facing increasing financial constraints. If sectors of the clean-energy industry take an extended period to achieve market acceptance and to garner significant revenue, we may not earn material revenue from our initiatives in this area until such time, if ever. Furthermore, it may be difficult for us to predict which clean-energy companies may become market leaders, and we may invest time and resources in collaborations with companies who are ultimately unsuccessful in the clean-energy industry, which could adversely affect our operating results.

If a project to which we have devoted technology and significant resources fails to produce any measurable success or value to our customers in the form of differentiated technology and intellectual property, we may not earn licensing and royalty revenue sufficient to recover the upfront costs and cash invested in the CDP, which could adversely affect our results of operations.

        In some cases, the revenue we receive from our customers during the development stage is not sufficient for us to fully recover our costs and cash invested in HPC platforms dedicated to customer engagement, and our business model relies on licensing and royalty revenue based on the sales by our customers in the end-markets of products incorporating the technology developed through our CDPs. Our CDPs involve complex R&D, and our ability to develop the differentiated technology and intellectual property sought by our customers is inherently uncertain and difficult to predict. In addition, there are a limited number of CDPs to which we can commit our resources at any given time. If a project to which we have devoted technology and significant resources fails to produce any measurable success or value to our customers in the form of differentiated technology and intellectual property that they may use in their products, we may not receive meaningful amounts of, or any, licensing and royalty revenue. In this case, we may not recover the upfront costs and cash invested in

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the CDP, which could adversely affect our results of operations. In addition, even if we successfully develop differentiated technology and intellectual property through a CDP that our customer is able to commercialize, there may be a significant delay before we receive any licensing or royalty revenue due to the complexities inherent in production and manufacturing in our target markets.

A decline in sales in the end markets for products incorporating technology developed through our CDPs could adversely affect our business and results of operations.

        Our success is tied to our customers' ability to successfully commercialize the products that incorporate technology developed through our CDPs. The markets for our customers' products are intensely competitive and are characterized by rapid technological change. These changes result in frequent product introductions, short product life cycles and increased product capabilities. Competition is based on a variety of factors including price, performance, product quality, software availability, marketing and distribution capability, customer support, name recognition and financial strength. Products incorporating the technology developed through our CDPs may not achieve market success or may become obsolete. We cannot assure you that our customers will dedicate the resources necessary to promote and commercialize products developed through our CDPs, successfully execute their business strategies for such products, be able to manufacture such products in quantities sufficient to meet demand or cost-effectively manufacture products at high volume. Our customers are not contractually obliged to manufacture, distribute or sell any products incorporating our CDP-developed technology. Our customers may develop internally or in collaboration with others technology that they might utilize instead of technology developed through our CDPs. Any of these factors, as well as more general market or industry issues, could result in a decline in sales of the products incorporating our technology, which would result in a decrease in any associated licensing and royalty revenue or the failure of any licensing and royalty revenue to materialize at all, and could adversely affect our business and results of operations. Any failure of a customer to achieve market success for products developed through our CDPs could also negatively affect such customer's willingness to work with us on other collaborations and could more generally harm our reputation and business prospects.

If we are unable to scale our development services and secure new CDPs, our growth prospects would be limited and our business and operating results could be adversely affected.

        Our customers require a significant amount of individualized attention as well as dedicated lab space for CDPs. We have limited space and internal capacity, both in terms of personnel as well as capital equipment resources, to meet these types of demands for our customers. In addition, because of the significant confidentiality concerns associated with the projects and products we work on and the restrictions on resource and information sharing we have implemented in response, we are not able to fully capitalize upon economies of scale. If the demand for our services and products exceeds our capacity to meet such demand, we may be required to turn down potential opportunities, which would cause us to lose potential revenue, and our potential customers may take their business to a competitor or decide to develop or expand internal R&D capabilities. If we are unable to scale our development services to meet demand, our growth may be hindered and our business and operating results could be adversely affected.

We may not be successful in maintaining and managing CDPs, which would adversely affect our ability to develop successful products and our financial condition and operating results.

        CDPs are complex and time-consuming to implement and they may require substantial resources to maintain. We may not be successful in all of our collaboration efforts and may fail to achieve the technological innovations sought by our customers in a reasonable amount of time or at all. When we collaborate with a customer, we rely to some degree on the efforts and resources of that customer. Our customers may not devote sufficient resources to collaborations or may otherwise fail in the aspects of the collaboration for which they are responsible. Disagreements over the implementation and

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management of the program may occur, which could lead to material delays and/or a failure to achieve the successful development of technology through the CDP. If we fail to achieve successful collaborations, or if our customers are dissatisfied with the results of or the way we design and manage a CDP, our operating results and financial condition would be materially and adversely affected.

We may be unable to make the substantial R&D investments required to remain competitive in our business.

        The semiconductor and clean-energy industries require substantial investment in R&D to develop and bring to market new and enhanced technologies and products. To remain competitive, we anticipate that we will need to maintain or increase our levels of R&D expenditures to keep pace with the development efforts of our customers. We expect R&D expenses to increase in absolute dollars for the foreseeable future, due to the increasing complexity and number of solutions we plan to develop both for our customers and internally, the expansion of our customer base and any associated increase in upfront R&D costs. In addition, the ultimate success of products incorporating our technology will depend in part on significant continued investment in R&D by our customers. We do not know whether we or our customers will have sufficient resources to maintain or increase the level of investment in R&D required to remain competitive. In addition, we cannot assure you that the technologies, products and applications on which we and our customers have focused our R&D expenditures will become commercially successful. If we are required to invest significantly greater resources than anticipated in our R&D efforts without a corresponding increase in revenue, our operating results could be materially and adversely affected.

If we are unable to develop our platform and expertise to support our future growth plans, our business and operating results could be adversely affected.

        We intend to further develop and broaden our HPC platform, including our software and informatics capabilities, to address a wider range of markets and customers for multiple applications within semiconductors, flat glass, solar cells, light emitting diodes (LEDs), flat-panel displays, advanced batteries and other energy-efficient technologies. However, we have limited expertise and experience in certain of these fields, and if we are unable to develop our platform and expertise to support these fields our business growth might be limited, and our business and operating results could be adversely affected.

If we lose one or more of our key personnel without obtaining adequate replacements in a timely manner or if we are unable to retain and recruit skilled personnel, our operations could become disrupted and the growth of our business could be delayed or restricted.

        Our success depends, in large part, on the continued contributions of our senior management team, in particular, the services of Mr. David Lazovsky, our President and Chief Executive Officer, and Dr. Tony Chiang, our Chief Technology Officer. If we lose the services of Mr. Lazovsky or Dr. Chiang, it could slow the execution of our business plan, hinder our development processes and impair our sales efforts, and searching for a replacement could divert our other senior management's time and increase our operating expenses. In addition, our customers could become concerned about our future operations, which could harm our reputation.

        None of our senior management is bound by written employment contracts to remain with us for a specified period. The loss of any of our senior management could harm our ability to implement our business strategy and respond to the rapidly changing market conditions in which we operate. Upon hiring or promotion, new senior management personnel must spend a significant amount of time learning our technology, business model and management systems and their new roles, in addition to performing their regular duties. Accordingly, until new senior personnel become familiar with our technology, business model and systems or with their new roles, we may experience some disruption to our ongoing operations. Moreover, the loss of a member of our senior management or our professional staff would require the remaining management to divert attention to seeking a replacement.

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        Our future success and competitiveness depends on our ability to retain and motivate our unique team of highly skilled scientists and engineers, who have expertise across various disciplines, fields and technologies, including engineering, materials science, process development and integration, equipment, device process technologies and device integration. In addition, as we grow, we will have to continue to retain, attract and motivate qualified and talented personnel, including our scientists and engineers, management, sales and marketing and legal and finance personnel. Because our CDPs are customer-specific and project-specific and last for a significant period of time, the loss of key scientists or engineers or other personnel could have an adverse effect on a particular development program and on our ability to deliver results to a customer in a timely manner or at all. We do not know whether we will be able to retain all of these employees as we continue to pursue our business strategy. Competition for personnel is intense in the semiconductor and clean-energy industries.

        We may encounter difficulties in hiring qualified scientists and engineers because there is a limited pool of scientists and engineers with the specialized expertise required to understand and implement our platform in conjunction with our customers. Further, we may have difficulty in obtaining visas permitting entry for some of our employees who are foreign nationals into the United States, and delays in obtaining visas permitting entry into other key countries for several of our key personnel, which could disrupt our ability to strategically locate our personnel. The loss of the services of key employees or our inability to retain, attract and motivate qualified scientists and engineers could have a material adverse effect on our business, financial condition and results of operations.

Following the completion of this offering, we may have a financial obligation to Symyx Technologies, Inc.

        In connection with an agreement for the purchase of intellectual property and the termination of our royalty obligations under an existing license agreement, we have an obligation to issue a promissory note to Symyx Technologies, Inc. (Symyx), a wholly-owned subsidiary of Accelrys, Inc., upon the consummation of this offering to the extent the gross proceeds from Symyx's sale of                        shares in this offering (before deducting underwriting discounts and commissions and estimated offering expenses) are less than $67 million. At an assumed initial public offering price of $        per share (the midpoint of the price range set forth on the cover page of this prospectus) the gross proceeds from the sale of Symyx's shares would be $             million, and we would have a $            obligation to Symyx. A $1.00 increase (decrease) in the assumed initial public offering price of $        per share would increase (decrease) the gross proceeds to Symyx by $             million. Such note, if issued, would have a term of 24 months and an interest rate equal to 4%. Such note would be payable in an amount equal to the lesser of the principal amount and the greater of $500,000 per quarter or the amount of accrued interest, with a balloon payment at maturity if applicable. Such note would also be pre-payable by us at any time without penalty or premium, and would be secured by tangible personal property, excluding intellectual property. If we issue such note, a portion of the net proceeds of this offering received by us would be used to make payments of scheduled interest and payment of principal at any time at or prior to maturity. Such financial obligation would limit our ability to use the net proceeds of this offering for other purposes.

We may be unable to effectively protect our intellectual property, which would negatively affect our ability to compete.

        We depend on our proprietary HPC platform for our success and ability to compete. If others are able to reproduce our technology, our business will suffer significantly unless we can prevent them from competing with us. As of July 15, 2011, we owned 102 U.S. patents and patent applications (most of which also have foreign counterparts), which we believe protect our rights in our HPC platform, and we continue to file patent applications to seek protection for the further evolution of our HPC platform. Patent laws provide only limited protection, however. We cannot assure you that all maintenance fees have been paid or that all filings have been made with the appropriate regulatory or governmental authorities with respect to any IP registered or applied for outside of the U.S. that we purchase. Also, patent protection in foreign countries may be limited or unavailable where we need this type of protection. A more detailed description of how we protect our IP is set forth in the section entitled "Business—Intellectual Property."

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        The patent positions of technology companies, including ours, are often uncertain and involve complex legal and factual questions. We will be able to protect our proprietary rights from unauthorized use by third parties only to the extent that our proprietary technologies are covered by valid and enforceable patents or are effectively maintained as trade secrets. We apply for patents covering our HPC platform and further advancements of our HPC platform as we deem appropriate. However, we may not obtain patents on all inventions for which we seek patents, and any patents we obtain may be challenged (both before and after any such patents issue) and may be narrowed in scope or extinguished as a result of these challenges. Additional uncertainty may result from potential passage of patent reform legislation by the United States Congress, legal precedent as handed down by the United States Federal Circuit and Supreme Court as they determine legal issues concerning the scope and construction of patent claims and inconsistent interpretation of patent laws by the lower courts. For these reasons, among others, our existing patents and any future patents we obtain may not be sufficiently broad to prevent others from practicing our technologies or from developing similar or superior products. In that case, our revenue and operating results could decline.

        Our strategy includes obtaining patent protection for technology developed in collaboration with our customers. A portion of our revenue from our customers derives from the licenses granted to our customers under these patents. If we are unable to obtain this type of protection, we would not be able to enforce exclusive rights to the technologies in question, and our revenue and operating results could decline.

        We have in the past, and may in the future, develop patented technology with U.S. federal government funding. When new technologies are developed with U.S. government funding, the government obtains certain rights in any resulting patents, including a nonexclusive license authorizing the government to use the invention for non-commercial purposes. These rights may permit the government to disclose our confidential information to third parties and to exercise "march-in" rights to use or allow third parties to use our patented technology. The government can exercise its march-in rights if it determines that action is necessary because we fail to achieve practical application of the U.S. government-funded technology, because action is necessary to alleviate health or safety needs, to meet requirements of federal regulations, or to give preference to U.S. industry. In addition, U.S. government-funded technology may be subject to restrictions on transfer to foreign entities, and some U.S. government-funded data may be subject to public disclosure under the Freedom of Information Act.

        Many of our customers and competitors have significant operations outside the United States. Foreign laws may not afford us sufficient protections for our intellectual property, however, and we may not always seek patent protection outside the United States. We believe that our success depends, in part, upon our ability to obtain international protection for our IP. However, the laws of some foreign countries may not be as comprehensive as those of the United States and may not be sufficient to protect our proprietary rights abroad. Accordingly, our international competitors could obtain foreign patent protection for, and market overseas, products and technologies for which we are seeking patent protection in the United States.

Confidentiality agreements with employees and others may not adequately prevent disclosures of trade secrets and other proprietary information.

        We rely in part on trade secret protection to protect our confidential and proprietary information and processes. However, trade secrets are difficult to protect. We have taken measures to protect our trade secrets and proprietary information, but these measures may not be effective. We require new employees and consultants to execute confidentiality agreements upon the commencement of an employment or consulting arrangement with us. These agreements generally require that all confidential information developed by the individual or made known to the individual by us during the course of the individual's relationship with us be kept confidential and not disclosed to third parties.

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These agreements also generally provide that inventions conceived by the individual in the course of rendering services to us shall be our exclusive property. Nevertheless, employees, collaborators or consultants may still disclose or misuse our confidential information, and we may not be able to meaningfully protect our trade secrets. In addition, others may independently develop substantially equivalent information or techniques or otherwise lawfully gain access to our trade secrets, and thereafter communicate this information to others without maintaining its confidentiality. Costly and time-consuming litigation could be necessary to enforce and determine the scope of our proprietary rights, and failure to obtain or maintain trade secret protection could adversely affect our competitive business position.

Significant litigation over intellectual property in the industry may cause us to become involved in costly and lengthy litigation, which could subject us to liability, require us to stop licensing our developed technology or force us to develop new technology.

        Whether or not patents are granted to us, litigation may be necessary to enforce our IP rights, to defend against a claim of infringement of IP rights of others or to determine the validity and scope of the proprietary rights of others. Because infringement is a fact-intensive inquiry, and because patent applications in the United States and many foreign jurisdictions are typically not published until eighteen months after filing (or, in some cases, are not published until they issue as patents), we cannot be certain that we do not now, and will not in the future, infringe a third party's patent rights. We may also become party to claims by our customers to IP rights developed by us in connection with a CDP.

        Any claim, even if without merit, could be time consuming to defend, result in costly litigation, or require us to enter into licensing agreements, resulting in unexpected operating costs. Moreover, our opponents in any litigation may have significantly more resources with which to defend against or assert claims in the litigation. A successful claim of infringement against us in connection with the use of our technologies could force us to stop using our technologies that incorporate the infringed IP; pay substantial monetary damages or royalties; grant cross-licenses to third parties relating to our own IP; obtain a license from the owner of the infringed IP, which may not be available to us on acceptable terms or at all; or re-engineer our platform or products to avoid further IP infringement, which may be technically impossible or commercially infeasible. The occurrence of any of these eventualities could adversely affect our business Even if we are successful in defending such a claim, litigation could also divert our resources, including our managerial and engineering resources. Any infringement claim or other litigation against or by us could have a material negative effect on our business.

Our strategy includes conducting proprietary R&D efforts in collaboration with and on behalf of multiple customers. Failure to adequately protect against potential conflicts of interest and breaches of confidentiality would harm our reputation and our relationships with our customers, and our business prospects and operating results would be adversely affected.

        Our strategy includes conducting proprietary R&D efforts in collaboration with and on behalf of customers who in some cases may have overlapping interests and technologies. We seek to structure our collaborative agreements and business practices to minimize any potential conflicts and the possibility of any breaches of confidentiality. Even if we make significant efforts to isolate each development activity, we may fail to meet the contractual confidentiality commitments as to one or more customers. Moreover, even if we meet these commitments, conflicts between a customer and us, or between or among customers, could nevertheless arise. In either event, we may become involved in a dispute with our customers regarding the solutions developed during the collaboration or the rights to these solutions, including possible litigation. Disputes of this nature could harm the relationship between us and our collaborators, and concerns regarding our CDPs could also affect our ability to enter into new collaborative relationships and cause our revenue and operating results to decline.

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Our intellectual property indemnification policies and obligations may adversely impact our business and operating results.

        Any assertion by a third party asserting ownership or other rights to technology developed through our CDPs could result in our customers becoming the target of litigation and we may be bound to indemnify our customers under the terms of our license agreements. These obligations could result in substantial expenses to us, which could have a material adverse effect on our business, financial condition and results of operations. In addition to the time and expense required for us to satisfy our support and indemnification obligations to our customers, any litigation could severely disrupt or shut down the business of our customers, which in turn could damage our relations with them and have a material adverse effect on our reputation, business, financial condition and results of operations.

We will need to rely on our customers to deliver timely and accurate information to accurately report our financial results from licensing and royalty revenue in the time frame and manner required by law.

        We will need to receive timely, accurate and complete information from our customers to accurately report our financial results on a timely basis. Licensing and royalty revenue we may receive in the future may be based on the revenue from the sale of our customers' products that incorporate technology developed through our CDPs, and we will need to rely on our customers to provide us with complete and accurate information regarding revenue and payments owed to us on a timely basis. If the information that we receive is not accurate, we may not receive the full amount of revenue that we are entitled to under these arrangements on a timely basis, which could result in adjustments to our financial results in a future period. Although we typically have audit rights with these parties, performing this type of audit could be harmful to our collaborative relationships, expensive and time-consuming and may not be sufficient to reveal any discrepancies in a timeframe consistent with our reporting requirements.

We may need additional capital in the future to finance our business.

        Our future capital requirements may be substantial, particularly as we continue to develop our business and expand our collaborative development efforts. Although we believe that, based on our current level of operations and anticipated growth, our existing cash, cash equivalents and marketable securities, combined with the net proceeds from this offering, will provide adequate funds for ongoing operations, planned capital expenditures and working capital requirements for at least the next 12 months, we may need additional capital if our current plans and assumptions change. Our need for additional capital will depend on many factors, including the financial success of our business, whether we are successful in obtaining payments from customers, whether we can enter into additional collaborations, 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 quickly we expand, how much we need to develop or enhance our solutions or HPC platform and any necessary responses to competitive pressures.

        If our capital resources are insufficient to meet our capital requirements, and our revenue is insufficient to support any of these activities, then we will have to raise additional funds. If future financings involve the issuance of equity securities, our then-existing stockholders would suffer dilution. If we raised additional debt financing, we may be subject to restrictive covenants that limit our ability to conduct our business. We may not be able to raise sufficient additional funds on terms that are favorable to us, if at all. If we fail to raise sufficient funds and continue to incur losses, our ability to fund our operations, take advantage of strategic opportunities, develop products or technologies or otherwise respond to competitive pressures could be significantly limited. If this happens, we may be forced to delay or terminate R&D programs, curtail or cease operations, obtain funds through collaborative and licensing arrangements that may require us to relinquish commercial rights, or grant

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licenses on terms that are not favorable to us. If adequate funds are not available, we may not be able to successfully execute our business plan or continue our business.

Failure of suppliers to timely deliver sufficient quantities of the components, materials or software used in our collaborations, may result in delays or other disruptions in executing our CDPs, which could adversely affect our business and operating results.

        We have historically relied on a small number of contract manufacturing companies for the manufacture and assembly of a majority of our HPC tools. While we are not dependent on any single contract manufacturing company, key parts of our tools are currently available only from a limited number of sources. In addition, components of our capital equipment are available from only a few suppliers. If supplies from these vendors are delayed or interrupted for any reason, we may not be able to get equipment or components for our tools or our own research efforts in a timely fashion or in sufficient quantities or under acceptable terms, if at all. Even though alternative sources of supply would be available, it could be time-consuming and expensive for us to qualify new vendors and work with them to integrate our designs into the tools they manufacture for us. In addition, we depend upon our vendors to provide components of appropriate quality and reliability. Consequently, if supplies from these vendors were delayed or interrupted for any reason, it could materially and adversely affect our business.

Our business strategy requires us to evaluate, integrate and develop elements of our customers' value chains, including development and manufacturing processes. Our ability to evaluate these effectively may sometimes depend on the cooperation from our customers' materials suppliers and equipment manufacturers as well as access to their data and tools. If these third parties do not cooperate with us or provide us access to the necessary materials, tools or equipment we may not be able to deliver effective solutions to our customers, which would adversely affect our business and results of operations.

        We have to evaluate multiple elements of our customers' value chains to help them test and develop end products that meet their specifications, including the materials, tools and equipment used by them during the manufacturing process. Our ability to evaluate a customer's value chain effectively may sometimes depend on cooperation from such customer's materials suppliers and equipment manufacturers and on access to their data and tools. Our evaluation of the materials and equipment in the value chain must be unbiased to maintain credibility with our customers, and our evaluation sometimes results in recommendations that our customers change materials, tools or equipment. Our recommendations may negatively impact our relationships with materials and tool providers and equipment manufacturers. Tensions in our relationships with these providers and manufacturers may cause these parties to limit or deny our access to their newest materials and equipment, which would in turn limit our ability to complete our development activities with our customers or control the quality of the combinatorial methods applied to their development efforts, which would adversely affect our business and operations.

If we cannot compete successfully in our industry, our results of operations and financial condition would be adversely affected.

        Competition in our market may intensify in the future, which could slow our ability to grow or execute our strategy and could lead to increased pricing pressure, negatively impacting our revenue. Our current and potential customers may choose to develop their own combinatorial development methods internally, particularly if we are slow in deploying our solutions or improving them to meet market needs. We currently face indirect competition from the internal R&D groups at integrated circuit (IC) companies, particularly those of our customers who work with us to develop knowledge of combinatorial methods and who may then use our methods independently. Our customers do not license our technology exclusively, and several of them also design, develop, manufacture and market

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semiconductor projects based on their own or other architectures and develop their own intellectual property internally. They often compete with each other and with us in various applications. Our customers are generally much larger and have significantly greater resources than us. We also face indirect competition from university collaborations, consortia and alliance partnerships. In addition, there may be other providers of high-throughput empirical solutions for the design of and R&D relating to integrated devices of which we are not aware and there may be new entrants to the industry in the future, particularly if acceptance of these solutions grows. In addition, we believe that the demand for solutions that address the need for better integration between the design and manufacturing processes may encourage direct competitors to enter into our market. Other potential competitors include fabrication facilities that may decide to offer solutions competitive with ours as part of their value proposition to their customers. If these potential competitors change the pricing environment or are able to attract industry partners or customers faster than we can, we may not be able to grow and execute our strategy as quickly or at all.

The semiconductor industry is highly cyclical, subject to price volatility, difficult to predict and subject to significant downturns.

        Currently, the substantial majority of our revenue is dependent upon the overall condition of the semiconductor industry, especially in light of the licensing component of our revenue. The semiconductor industry is highly cyclical and subject to rapid technological change and has been subject to significant economic downturns at various times, such as the recent economic downturn, characterized by diminished product demand, accelerated erosion of average selling prices and production overcapacity. The semiconductor industry also periodically experiences increased demand and production capacity constraints. In addition, the semiconductor industry has historically experienced price volatility. As a result, we may experience significant fluctuations in operating results due to general semiconductor industry conditions and overall economic conditions.

        In 2008 and 2009, the semiconductor industry experienced significant challenges as a result of the severe tightening of the credit markets, turmoil in the financial markets, and weakened global economy. While the semiconductor market recovered somewhat in 2010 and the first part of 2011, the recovery may not continue, which limits our ability to forecast our business. There may be sudden changes in our customers' manufacturing capacity requirements and spending, which depend in part on capacity utilization, demand for our customers' IC products by consumers, inventory levels relative to demand, and access to affordable capital. In addition, the semiconductor industry has experienced significant consolidation in the past and may continue to see high levels of consolidation in the future. If any of our customers are acquired, the acquiror may not continue to engage in a CDP with us. Alternatively, our customers may opt to acquire companies or technologies that decrease their need for our services or otherwise divert their R&D resources. As a result of these and other potential changes, the timing and length of any cycles can be difficult to predict. Further, uncertainty about future global economic conditions and any effect on the semiconductor industry could make it challenging for us to forecast our operating results, make business decisions and identify the risks that may affect our business, financial condition and results of operations. If we are not able to timely and appropriately adapt to changes resulting from the difficult macroeconomic environment, our business, financial condition and results of operations may be significantly negatively affected.

We are subject to warranty claims, product recalls and product liability.

        We may, from time to time, be subject to warranty or product liability claims for our HPC tools and for our customers' products that incorporate technology developed through our CDPs that may in the future lead to significant expenses as we compensate affected customers for costs incurred related to product quality issues. Although we maintain product liability insurance, such insurance is subject to significant deductibles and there is no guarantee that such insurance will be available or adequate to

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protect against all such claims. Alternatively, we may elect to self-insure with respect to certain matters. We may incur costs and expenses in the event of any recall of a HPC tool sold to our customers. We may incur replacement costs, contract damage claims from our customers and reputational harm. Costs or payments made in connection with warranty and product liability claims and product recalls could materially affect our financial condition and results of operations.

Compliance with environmental, health and safety laws and regulations could increase costs or cause us to incur substantial liabilities.

        We are subject to various foreign, federal, state and local environmental laws and regulations governing, among other matters, emissions and discharges of hazardous materials into the air and water, the use, generation, storage, handling, transportation and disposal of, and exposure to, hazardous materials and wastes, remediation of contamination and employee health and safety. In addition, under certain of these environmental laws, liability can be joint and several and without regard to comparative fault. Our operations involve the use of hazardous materials and produce hazardous waste, and we could become liable for any injury or contamination that could arise due to such use or disposal of these materials. Failure to comply with environmental laws and regulations could result in the imposition of substantial civil and criminal fines and sanctions, could require operational changes or limits or the installation of costly equipment or otherwise lead to third party claims. Future environmental laws and regulations, stricter enforcement of existing laws and regulations, or the discovery of previously unknown contamination or violations of such laws and regulations could require us to incur costs or become the basis for new or increased liabilities, which could impair our operations and adversely affect our business and results of operations.

Acquisitions may harm our business and operating results, cause us to incur debt or assume contingent liabilities or dilute our shareholders.

        We have made and may in the future make strategic investments or acquisitions where there is an opportunity to expand the potential applications and reach of our HPC platform. Exploring and implementing any investments or acquisitions may place strain upon our ability to manage our future growth and may divert management attention from our core development and licensing business. There are also other risks associated with this strategy. We cannot assure you that we will be able to make investments or acquire businesses on satisfactory terms, that any business acquired by us or in which we invest will be integrated successfully into our operations or be able to operate profitably, or that we will be able to realize any expected synergies or benefits from such investments or acquisitions. Our relative inexperience in effecting such transactions heightens these risks. In addition, to finance any acquisitions or investments, we may utilize our existing funds, or might need to raise additional funds through public or private equity or debt financings. Prolonged tightening of the financial markets may impact our ability to obtain financing to fund future acquisitions and we could be forced to obtain financing on less than favorable terms. Additionally, equity financings may result in dilution to our stockholders. We cannot predict the number, timing or size of investments or acquisitions, or the effect that any such transactions might have on our operating results.

Global or regional economic, political and social conditions could adversely affect our business and operating results.

        We operate in multiple jurisdictions throughout the world and are subject to foreign business, political and economic risks. In particular, we are subject to risks arising from adverse changes in global economic conditions. Global economic uncertainties in the key markets of many of our customers may cause our customers to delay or reduce technology purchases and investments. The impact of this on us is difficult to predict, but if businesses defer licensing our technology, require fewer CDPs or development tools, or if consumers defer purchases of new products that incorporate technology

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developed through our CDPs, our revenue could decline. A decline in revenue would have an adverse effect on our results of operations and our financial condition.

        In addition, some of our largest customers are located outside of the United States, primarily in Asia, which further exposes us to foreign risks. Also, a substantial portion of the consumer products market that serves as the end-market for the products we help our customers to develop is located in Asia. As a result, our operations are subject to substantial influence by political and economic conditions in Asia, as well as natural disasters such as the recent earthquake and tsunami and related nuclear power plant crisis in Japan. Reduced end user demand as well as disruptions to the supply chain for our customers resulting from these events could lead to a reduction in our revenue and an adverse impact on our financial condition.

        We are also subject to general geopolitical risks in connection with international operations, such as political, social and economic instability, terrorism, interference with information or communication of networks or systems, potential hostilities, changes in diplomatic and trade relationships, and disease outbreaks, and any disruptive effect these events would have on our business operations. Although to date we have not experienced any material adverse effect on our operations as a result of these types of regulatory, geopolitical, and other factors, we cannot assure investors that these factors will not have a material adverse effect on our business, financial condition, and operating results or require us to modify our current business practices. Inconsistencies among, and unexpected changes in, a wide variety of foreign laws and regulatory environments with which we are not familiar, including, among other issues, with respect to employees, protection of our intellectual property, and a wide variety of operational regulations and trade and export controls under domestic, foreign, and international law may also have unexpected, adverse impacts on our operations and financial condition.

In the future, exchange rate fluctuations could affect our revenue, which could adversely affect our business and operating results.

        Our licensing and royalty revenue is derived from sales of our customers' products that incorporate technology developed through our CDPs. To the extent that sales for these customer products are denominated in a foreign currency, an increase in the value of the U.S. dollar relative to such foreign currencies could adversely affect our licensing and royalty revenue irrespective of the volume of such products sold, which could adversely affect our business and operating results.

        In addition, we derive a significant portion of our revenue from customers in foreign countries, particularly those based in Japan. Revenue generated from customers in Japan accounted for 29%, 30% and 27% of total revenue for the years ended December 31, 2010, 2009 and 2008, respectively. We expect that a significant portion of our total future revenue will continue to be derived from companies based in Japan and other foreign countries. If the U.S. dollar increases in value relative to the currencies in any of these countries, the cost of our CDPs, which have historically been billed in U.S. dollars, will be more expensive to existing and potential customers in those countries, which could adversely affect our ability to generate new or expand existing CDPs.

Business interruptions could delay us in the process of developing our products and could disrupt our sales.

        Our headquarters are located in the San Francisco Bay Area near known earthquake fault zones and are vulnerable to significant damage from earthquakes. We are also vulnerable to other types of natural disasters and other events that could disrupt our operations, such as terrorist acts and other events beyond our control. We do not carry insurance for earthquakes and we may not carry sufficient business interruption insurance to compensate us for losses that may occur. Any losses or damages we incur could have a material adverse effect on our cash flows and success as an overall business.

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Our ability to use our net operating loss carryforwards to offset future taxable income, and our ability to use our tax credit carryforwards, may be subject to certain limitations.

        In general, a corporation that undergoes an "ownership change" under Section 382 of the Internal Revenue Code is subject to limitations on its ability to utilize its pre-change net operating loss carryforwards (NOLs) to offset future taxable income and its ability to utilize tax credit carryforwards. We have not determined whether an ownership change has occurred in the past. If we have experienced an ownership change in the past, or if we undergo an ownership change in connection with or after this offering, our ability to utilize NOLs and tax credit carryforwards could be limited. Future changes in our stock ownership, some of which are outside of our control, could result in an ownership change under Section 382 of the Internal Revenue Code. For these reasons, we may not be able to utilize a material portion of our NOLs and tax credit carryforwards, even if we attain profitability.

Risks Relating to this Offering and Ownership of Our Common Stock

An active trading market for our common stock may not develop, and you may not be able to resell your shares at or above the initial public offering price.

        Prior to this offering, there has been no public market for shares of our common stock. Although we will apply to have our common stock approved for quotation on a stock exchange, an active trading market for our shares may never develop or be sustained following this offering. The initial public offering price of our common stock will be determined through negotiations between us and the underwriters. This initial public offering price may not be indicative of the market price of our common stock after this offering. In the absence of an active trading market for our common stock, investors may not be able to sell their common stock at or above the initial public offering price or at the time that they would like to sell.

Our stock price may be volatile, and the market price of our common stock after this offering may drop below the price you pay.

        The market price of our common stock could be subject to significant fluctuations after this offering and it may decline below the initial public offering price. Market prices for securities of early stage companies have historically been particularly volatile. As a result of this volatility, you may not be able to sell your common stock at or above the initial public offering price. These fluctuations could be in response to, among other things, the factors described in this "Risk Factors" section or elsewhere in this registration statement, or other factors, some of which are beyond our control, such as:

    fluctuations in our financial results or outlook or those of companies perceived to be similar to us;

    changes in estimates of our financial results or recommendations by securities analysts;

    changes in market valuations of similar companies;

    changes in our capital structure, such as future issuances of securities or the incurrence of debt;

    announcements by us or our competitors of significant contracts, acquisitions or strategic alliances;

    litigation involving us, our general industry or both;

    additions or departures of key personnel;

    regulatory developments in the U.S., countries in Asia, and/or other foreign countries;

    investors' general perception of us; and

    changes in general economic, industry and market conditions.

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        Furthermore, the stock markets have experienced price and volume fluctuations that have affected, and continue to affect, the market prices of equity securities of many companies. These fluctuations often have been unrelated or disproportionate to the operating performance of those companies. These broad market fluctuations, as well as general economic, political and market conditions, such as recessions, interest rate changes and international currency fluctuations, may negatively affect the market price of our common stock.

        In the past, many companies that have experienced volatility in the market price of their stock have become subject to securities class action litigation. We may be the target of this type of litigation in the future. Securities litigation against us could result in substantial costs and divert our management's attention from other business concerns, which could seriously harm our business.

We will incur increased costs and demands upon management as a result of complying with the laws and regulations affecting public companies, which could harm our results of operations.

        As a public company, we will incur significant additional accounting, legal and other expenses that we did not incur as a private company, including costs associated with public company reporting requirements. We have incurred and will continue to incur costs associated with corporate governance requirements, including requirements under Section 404 and other provisions of the Sarbanes-Oxley Act, as well as rules implemented by the Securities Exchange Commission, or SEC, and the exchange on which we list our common stock. The expenses incurred by public companies for reporting and corporate governance purposes have increased dramatically in recent years. We expect these rules and regulations to substantially increase our financial and legal compliance costs. In addition, these rules and regulations are subject to change from time to time, and we may incur additional financial and legal compliance costs as we seek to understand and comply with changes in these rules and regulations. We also expect that as we become a public company it will be more difficult and more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage previously available. As a result, it may be more difficult for us to attract and retain qualified individuals to serve on our board of directors or as our executive officers.

If we experience material weaknesses or otherwise fail to maintain an effective system of internal controls in the future, we may not be able to accurately report our financial condition or results of operations, which may adversely affect investor confidence in our company and, as a result, the value of our common stock.

        As a result of becoming a public company, we will be required, under Section 404 of the Sarbanes-Oxley Act, to furnish a report by management on, among other things, the effectiveness of our internal control over financial reporting for the first fiscal year beginning after the effective date of this offering. This assessment will need to include disclosure of any material weaknesses identified by our management in our internal control over financial reporting, as well as an opinion from our independent registered public accounting firm on the effectiveness of our internal control over financial reporting. A material weakness is a control deficiency or combination of control deficiencies that results in more than a remote likelihood that a material misstatement of annual or interim financial statements will not be prevented or detected.

        We are in the very early stages of the costly and challenging process of hiring personnel and compiling the system and processing documentation necessary to perform the evaluation needed to comply with Section 404. We may not be able to complete our evaluation, testing and any required remediation in a timely fashion. During the evaluation and testing process, if we identify one or more material weaknesses in our internal control over financial reporting, we will be unable to assert that our internal controls are effective. We cannot assure you that there will not be material weaknesses and significant deficiencies in our internal controls in the future. If we are unable to conclude that our internal control over financial reporting is effective, or if our independent registered public accounting

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firm were to issue an adverse opinion on the effectiveness of our internal control over financial reporting, we could lose investor confidence in the accuracy and completeness of our financial reports, which would cause the price of our common stock to decline.

        We have not completed a testing cycle under Section 404 of the Sarbanes-Oxley Act and cannot assure you that we will be able to implement and maintain an effective internal control over financial reporting in the future. Any failure to maintain such controls could severely inhibit our ability to accurately report our financial condition or results of operations.

The concentration of our capital stock ownership with insiders upon the completion of this offering will limit your ability to influence corporate matters.

        We anticipate that our executive officers, directors, current five percent or greater stockholders and entities affiliated with them will together beneficially own approximately        % of our common stock outstanding after this offering. Entities affiliated with Redpoint Ventures, entities affiliated with CMEA Ventures and entities affiliated with U.S. Venture Partners will beneficially own approximately      %,      % and      % of our common stock outstanding after this offering. This significant concentration of share ownership may adversely affect the trading price for our common stock because investors often perceive disadvantages in owning stock in companies with concentrated stock ownership. Also, these stockholders, acting together, will be able to influence our management and affairs and matters requiring stockholder approval, including the election of directors and the approval of significant corporate transactions, such as mergers, consolidations or the sale of substantially all of our assets. Consequently, this concentration of ownership may have the effect of delaying or preventing a change of control, including a merger, consolidation or other business combination involving us, or discouraging a potential acquirer from making a tender offer or otherwise attempting to obtain control, even if that change of control would benefit our other stockholders.

A significant portion of our total outstanding shares may be sold into the public market in the near future, which could cause the market price of our common stock to drop significantly, even if our business is doing well.

        Sales of a substantial number of shares of our common stock in the public market could occur at any time after the expiration of the lock-up agreements described in the "Underwriting" and "Shares Eligible for Future Sale—Lock-up Agreements" sections of this prospectus. These sales, or the market perception that the holders of a large number of shares intend to sell shares, could reduce the market price of our common stock. After this offering, we will have          shares of common stock outstanding based on the number of shares outstanding as of March 31, 2011 and assuming the conversion of all shares of preferred stock into shares of our common stock and no exercise of outstanding options or warrants after March 31, 2011. This includes the          shares that we are selling in this offering, which may be resold in the public market immediately after this offering. The remaining                        shares, or      % of our outstanding shares after this offering, are currently restricted as a result of securities laws or lock-up agreements but will be able to be sold, subject to any applicable volume limitations under federal securities laws, in the near future as set forth below:

    shares will be eligible for sale immediately upon completion of this offering; and

    shares will be eligible for sale upon the expiration of 180-day lock-up and/or market standoff agreements, subject in some cases to the volume and other restrictions of Rule 144 and Rule 701 promulgated under the Securities Act of 1933, as amended, or the Securities Act, and upon the lapse of our right of repurchase with respect to any unvested shares.

        The lock-up agreements expire 180 days after the date of this prospectus, except that the 180-day period may be extended in certain cases for up to 34 additional days under certain circumstances where

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we announce or pre-announce earnings or a material event occurs within approximately 17 days prior to, or approximately 16 days after, the termination of the 180-day period. The representatives of the underwriters may, in their sole discretion and at any time without notice, release all or any portion of the securities subject to lock-up agreements.

        Following this offering, holders of              shares of our common stock (including shares issuable upon exercise of certain stock options) not sold in this offering will be entitled to rights with respect to the registration of these shares under the Securities Act. See "Description of Capital Stock—Registration Rights." If we register their shares of common stock following the expiration of the lock-up agreements, these stockholders could sell those shares in the public market without being subject to the volume and other restrictions of Rule 144 and Rule 701.

        After the closing of this offering, we intend to register approximately              shares of common stock that have been reserved for issuance under our stock incentive plans. Of these shares, approximately              shares will be eligible for sale upon the exercise of outstanding options after the expiration of the lock-up agreements.

Purchasers in this offering will experience immediate and substantial dilution in the book value of their investment.

        The initial public offering price of our common stock is substantially higher than the net tangible book value per share of our outstanding common stock immediately after this offering. Therefore, if you purchase our common stock in this offering, you will incur immediate dilution of approximately $      in net tangible book value per share from the price you paid, based on an assumed initial offering price of $      per share, the midpoint of the range set forth on the cover of this prospectus. In addition, investors purchasing common stock in this offering will own only approximately      % of our shares outstanding after this offering even though they will have contributed       % of the total consideration received by us in connection with our sales of common stock. Moreover, we issued options and warrants in the past to acquire our stock at prices significantly below the initial public offering price. As of March 31, 2011, 15,484,753 shares of common stock were issuable upon exercise of outstanding stock options with a weighted average exercise price of $0.93 per share. As of March 31, 2011, warrants to purchase 3,624,721 shares of common stock (assuming conversion of all shares of preferred stock into common stock as of March 31, 2011) were issuable upon exercise of outstanding warrants with a weighted average exercise price of $2.25 per share. To the extent that these outstanding options and warrants are ultimately exercised, you will incur further dilution. For a further description of the dilution that you will experience immediately after this offering, see the "Dilution" section of this prospectus.

If securities or industry analysts do not publish or cease publishing research or reports about us, our business or our market, or if they change their recommendations regarding our stock adversely, our stock price and trading volume could decline.

        The trading market for our common stock will be influenced by the research and reports that industry or securities analysts may publish about us, our business, our market or our competitors. If any of the analysts who may cover us change their recommendation regarding our stock adversely, or provide more favorable relative recommendations about our competitors, our stock price would likely decline. If any analyst who may cover us were to cease coverage of our company or fail to regularly publish reports on us, we could lose visibility in the financial markets, which in turn could cause our stock price or trading volume to decline.

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Our management will have broad discretion over the use of the proceeds we receive in this offering and might not apply the proceeds in ways that increase the value of your investment.

        Our management will have broad discretion in the application of the net proceeds from this offering, and you will be relying on the judgment of our management regarding the application of these proceeds. Our management might not apply our net proceeds of this offering in ways that increase the value of your investment. We expect to use the net proceeds to us from this offering for working capital and other general corporate purposes, which may in the future include expansion of production facilities and HPC platform and equipment, investments in, or acquisitions of, complementary businesses, joint ventures, partnerships, services, intellectual property or technologies. Our management might not be able to yield a significant return, if any, on any investment of these net proceeds. You will not have the opportunity to influence our decisions on how to use our net proceeds from this offering.

After the completion of this offering, we do not expect to declare any dividends in the foreseeable future.

        After the completion of this offering, we do not anticipate declaring any cash dividends to holders of our common stock in the foreseeable future. Consequently, investors may need to rely on sales of their common stock after price appreciation, which may never occur, as the only way to realize any future gains on their investment. Investors seeking cash dividends should not purchase our common stock.

Anti-takeover provisions contained in our certificate of incorporation and bylaws, as well as provisions of Delaware law, could impair a takeover attempt.

        Our amended and restated certificate of incorporation and our amended and restated bylaws to be effective upon the completion of this offering will contain provisions that could delay or prevent a change in control of our company. These provisions could also make it more difficult for stockholders to elect directors and take other corporate actions. These provisions include:

    staggered board of directors;

    authorizing the board to issue, without stockholder approval, preferred stock with rights senior to those of our common stock;

    authorizing the board to amend our bylaws and to fill board vacancies until the next annual meeting of the stockholders;

    prohibiting stockholder action by written consent;

    limiting the liability of, and providing indemnification to, our directors and officers;

    eliminating the ability of our stockholders to call special meetings; and

    requiring advance notification of stockholder nominations and proposals.

        Section 203 of the Delaware General Corporation Law prohibits, subject to some exceptions, "business combinations" between a Delaware corporation and an "interested stockholder," which is generally defined as a stockholder who becomes a beneficial owner of 15% or more of a Delaware corporation's voting stock, for a three-year period following the date that the stockholder became an interested stockholder.

        These and other provisions in our amended and restated certificate of incorporation and our amended and restated bylaws to be effective upon the completion of this offering under Delaware law could discourage potential takeover attempts, reduce the price that investors might be willing to pay in the future for shares of our common stock and result in the market price of our common stock being lower than it would be without these provisions. See "Description of Capital Stock—Preferred Stock" and "Description of Capital Stock—Anti-Takeover Provisions."

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FORWARD-LOOKING STATEMENTS

        This prospectus contains forward-looking statements that involve risks and uncertainties. The forward-looking statements are contained principally in the sections entitled "Prospectus Summary," "Risk Factors," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business." These statements relate to future events or our future financial or operational performance and involve known and unknown risks, uncertainties and other factors that could cause our actual results, levels of activity, performance or achievement to differ materially from those expressed or implied by these forward-looking statements. These risks and uncertainties are contained principally in the section entitled "Risk Factors."

        Forward-looking statements include all statements that are not historical facts. In some cases, you can identify forward-looking statements by terms such as "may," "will," "should," "could," "would," "expects," "plans," "anticipates," "believes," "estimates," "projects," "predicts," "potential," or the negative of those terms, and similar expressions and comparable terminology intended to identify forward-looking statements. These statements reflect our current views with respect to future events and are based on assumptions and subject to risks and uncertainties. Given these uncertainties, you should not place undue reliance on these forward-looking statements. These forward-looking statements represent our estimates and assumptions only as of the date of this prospectus and, except as required by law, we undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise after the date of this prospectus.


MARKET, INDUSTRY AND OTHER DATA

        Unless otherwise indicated, information contained in this prospectus concerning our industry and the markets in which we operate, including our general expectations and market position, market opportunity and market size, is based on information from various sources, on assumptions that we have made that are based on those data and other similar sources and on our knowledge of the markets for our services. These data involve a number of assumptions and limitations, and you are cautioned not to give undue weight to such estimates. We have not independently verified any third party information and cannot assure you of its accuracy or completeness. While we believe the market position, market opportunity and market size information included in this prospectus is generally reliable, such information is inherently imprecise. In addition, projections, assumptions and estimates of our future performance and the future performance of the industry in which we operate is necessarily subject to a high degree of uncertainty and risk due to a variety of factors, including those described in "Risk Factors" and elsewhere in this prospectus. These and other factors could cause results to differ materially from those expressed in the estimates made by the independent parties and by us.

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USE OF PROCEEDS

        We estimate that we will receive net proceeds of approximately $           million from the sale of                shares of common stock offered by us in this offering, based on an assumed initial public offering price of $          per share (the midpoint of the price range set forth on the cover page of this prospectus) and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us. A $1.00 increase (decrease) in the assumed initial public offering price of $          per share would increase (decrease) the net proceeds to us from this offering by $           million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us. If the underwriters' over-allotment option to purchase additional shares from us is exercised in full, we estimate that we will receive additional net proceeds of $           million. We will not receive any proceeds from the sale of the shares of common stock to be offered by the selling stockholder.

        We intend to use the net proceeds received by us from this offering for working capital and other general corporate purposes.

        In connection with an agreement for the purchase of intellectual property and the termination of our royalty obligations under an existing license agreement, we have an obligation to issue a promissory note to Symyx Technologies, Inc. (Symyx), a wholly-owned subsidiary of Accelrys, Inc., upon the consummation of this offering to the extent the gross proceeds from Symyx's sale of                    shares in this offering (before deducting underwriting discounts and commissions and estimated offering expenses) are less than $67 million. At an assumed initial public offering price of $          per share (the midpoint of the price range set forth on the cover page of this prospectus), the gross proceeds from the sale of Symyx's shares would be $             million, and we would have a $                obligation to Symyx. A $1.00 increase (decrease) in the assumed initial public offering price of $          per share would increase (decrease) the gross proceeds to Symyx by $                 million. Such note, if issued, would have a term of 24 months and an interest rate equal to 4%. Such note would be payable in an amount equal to the lesser of the principal amount and the greater of $500,000 per quarter or the amount of accrued interest, with a balloon payment at maturity if applicable. Such note would also be pre-payable by us at any time without penalty or premium, and would be secured by tangible personal property, excluding intellectual property. If we issue such note, a portion of the net proceeds of this offering would be used to make payments of scheduled interest and payment of principal at any time at or prior to maturity. We have also agreed to reimburse Symyx for 50% of their underwriting discounts and commissions.

        We may also use a portion of the net proceeds to expand our current business through acquisitions of other businesses, products, intellectual property or technologies. Other than as set forth above, we do not have agreements or commitments for any specific acquisitions at this time.

        Pending the use of the net proceeds from this offering, we plan to invest the net proceeds in short- and intermediate-term, interest-bearing obligations, investment-grade instruments, certificates of deposit or director or guaranteed obligations of the U.S. government. We cannot predict whether the proceeds invested will yield a favorable return, if any.


DIVIDEND POLICY

        We have never declared or paid any cash dividends on our common stock. We currently intend to retain any future earnings for use in the operation and expansion of our business, and currently do not plan to declare or pay any dividends on shares of our common stock in the foreseeable future. Subject to the foregoing, the payment of cash dividends in the future, if any, will be at the discretion of our board of directors and will depend upon a number of factors, including our earnings, capital requirements, requirements under the Delaware General Corporation Law, restrictions and covenants pursuant to any credit facilities we may enter into, our overall financial condition and any other factors deemed relevant by our board of directors.

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CAPITALIZATION

        The following table sets forth our cash, cash equivalents and capitalization as of March 31, 2011 as follows:

    on an actual basis;

    on a pro forma basis to reflect:

    the conversion of all outstanding shares of our redeemable convertible preferred stock into 56,054,198 shares of common stock in connection with the consummation of this offering;

    the resulting reclassification of accumulated accretion of redeemable convertible preferred stock and preferred stock warrant liability to additional paid-in capital;

    the conversion of a warrant for redeemable convertible preferred stock into a warrant to purchase 168,747 shares of our common stock at an exercise price of $0.44 per share immediately before the consummation of this offering, and the resulting reclassification of the preferred stock warrant liability to additional paid-in capital; and

    the cash exercise of certain warrants outstanding to purchase shares of our common stock as of March 31, 2011, which will expire upon completion of this offering if unexercised, resulting in the issuance of 1,799,360 shares of common stock for an aggregate exercise price of approximately $3.0 million.

    on a pro forma as adjusted basis after further giving effect to the filing of our amended and restated certificate of incorporation, which will occur in connection with the consummation of this offering, and the receipt of the net proceeds from the sale of                    shares of common stock offered by us in this offering at an assumed initial public offering price of $          per share (the midpoint of the price range set forth on the cover page of this prospectus), after deducting the underwriting discounts and commissions and estimated offering expenses payable by us.

        The pro forma and pro forma as adjusted information below is illustrative only and our capitalization following the completion of this offering will be adjusted based on the actual initial public offering price and other terms of this offering determined at pricing. You should read this table in conjunction with the sections titled "Selected Consolidated Financial Data" and "Management's

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Discussion and Analysis of Financial Condition and Results of Operations" and our consolidated financial statements and related notes included elsewhere in this prospectus.

 
  As of March 31, 2011  
 
  Actual   Pro Forma   Pro Forma as
Adjusted
 
 
  (unaudited)
 
 
  (in thousands, except share and
per share amounts)

 

Cash, cash equivalents and short-term investments

  $ 30,137   $ 33,097   $               
               

Preferred stock warrant liability

    450            

Redeemable convertible preferred stock, par value $0.001 per share: 59,230,199 shares authorized, 56,054,198 shares issued and outstanding, actual; no shares authorized, no shares issued and outstanding, pro forma and pro forma as adjusted

    70,560                       

Accumulated accretion of redeemable convertible preferred stock to redemption values

    38,467                       

Stockholders' equity (deficit):

                   
 

Common stock, par value $0.001 per share: 105,000,000 shares authorized, 11,304,064 shares issued and outstanding, actual; 105,000,000 shares authorized, 69,157,622 shares issued and outstanding, pro forma;                    shares issued and outstanding, pro forma as adjusted

    11     69                   
 

Additional paid-in capital

        112,379                   
 

Accumulated deficit

    (69,213 )   (69,213 )                 
               
   

Total stockholders' equity (deficit)

    (69,202 )   43,235                   
               
     

Total capitalization

  $ 40,275   $ 43,235   $               
               

        If the underwriters' over-allotment option were exercised in full, pro forma as adjusted cash and cash equivalents, common stock and additional paid-in capital, stockholders' equity (deficit) and shares issued and outstanding as of March 31, 2011 would be $           million, $           million, $           million and                    shares, respectively.

        A $1.00 increase (decrease) in the assumed initial public offering price of $          per share (the midpoint of the price range set forth on the cover page of this prospectus) would increase (decrease) each of pro forma as adjusted additional paid-in capital, stockholders' equity (deficit) and total capitalization by approximately $           million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same. We may also increase or decrease the number of shares we are offering. An increase (decrease) of 1,000,000 in the number of shares we are offering would increase (decrease) each of pro forma as adjusted additional paid-in capital, stockholders' equity (deficit) and total capitalization by approximately $           million, assuming the assumed initial public offering price per share (the midpoint of the price range set forth on the cover page of this prospectus) remains the same. An increase of 1,000,000 in the number of shares we are offering, together with a $1.00 increase in the assumed initial public offering price per share, would increase each of pro forma as adjusted additional paid-in capital, stockholders' equity (deficit) and total capitalization by approximately $           million. A decrease of 1,000,000 in the number of shares we are offering, together with a $1.00 decrease in the assumed initial public offering price per share, would decrease each of pro forma as adjusted additional paid-in capital, stockholders' equity (deficit) and total capitalization by approximately $           million. The pro forma as adjusted information is illustrative only, and we will adjust this information based on the actual initial public offering price and other terms of this offering determined at pricing.

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        The number of actual, pro forma and pro forma as adjusted shares of common stock issued and outstanding in the table above each excludes the following shares as of March 31, 2011:

    15,484,753 shares of common stock issuable upon the exercise of options outstanding, at a weighted average exercise price of $0.93 per share;

    1,825,361 shares of common stock issuable upon the exercise of warrants outstanding (not including those to be exercised in connection with the completion of this offering), at a weighted average exercise price of $2.84 per share;

    1,396,906 shares of common stock reserved for future issuance under our 2004 Equity Incentive Plan, which will become available for issuance under our 2011 Equity Incentive Award Plan after completion of this offering; and

    shares of common stock that will be reserved for future issuance under our 2011 Equity Incentive Award Plan, as well as any automatic increases in the number of shares of our common stock reserved for future issuance under this benefit plan, which will become effective immediately prior to the consummation of this offering.

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DILUTION

        If you invest in our common stock in this offering, your interest will be diluted to the extent of the difference between the initial public offering price per share of our common stock and the pro forma as adjusted net tangible book value per share of our common stock immediately after this offering.

        Net tangible book value per share is determined by dividing our total tangible assets less our total liabilities by the number of shares of common stock outstanding. Our historical net tangible book value (deficit) as of March 31, 2011 was $(71.7) million, or $(6.34) per share.

        Our pro forma net tangible book value (deficit) as of March 31, 2011 was $           million, or $          per share, after giving effect to the following:

    the conversion of all outstanding shares of our redeemable convertible preferred stock into 56,054,198 shares of common stock in connection with the consummation of this offering;

    the resulting reclassification of accumulated accretion of redeemable convertible preferred stock and preferred stock warrant liability to additional paid-in capital;

    the conversion of a warrant for redeemable convertible preferred stock into a warrant to purchase 168,477 shares of our common stock at an exercise price of $0.44 per share immediately before the consummation of this offering, and the resulting reclassification of the preferred stock warrant liability to additional paid-in capital;

    the cash exercise of certain warrants outstanding to purchase shares of our common stock as of March 31, 2011, which will expire upon completion of this offering if unexercised, resulting in the issuance of 1,799,360 shares of common stock for an aggregate exercise price of approximately $3.0 million; and

    no exercise of the underwriters' over-allotment option.

        After further giving effect to the filing of our amended and restated certificate of incorporation, which will occur in connection with the consummation of this offering, and our receipt of the net proceeds from the sale of                    shares of common stock offered by us in this offering at an assumed initial public offering price of $          per share (the midpoint of the price range set forth on the cover page of this prospectus), after deducting the underwriting discounts and commissions and estimated offering expenses payable by us, our pro forma as adjusted net tangible book value as of March 31, 2011 would have been $           million, or $          per share. This represents an immediate increase in net tangible book value of $          per share to existing stockholders and an immediate dilution in net tangible book value of $          per share to purchasers of common stock in this offering, as illustrated in the following table:

Assumed initial public offering price per share, based on the midpoint of the price range set forth on the cover page of this prospectus. 

                   $               
 

Pro forma net tangible book value (deficit) per share as of March 31, 2011

  $                                
 

Increase in pro forma net tangible book value (deficit) per share attributable to new investors

             
             

Pro forma as adjusted net tangible book value per share after this offering

                                   
             

Dilution per share to investors in this offering

                   $               
             

        If the underwriters' over-allotment option to purchase additional shares from us is exercised in full, the pro forma as adjusted net tangible book value per share after this offering would be $          per

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share, the increase in pro forma as adjusted net tangible book value per share to existing stockholders would be $          per share and the dilution to new investors purchasing shares in this offering would be $          per share.

        A $1.00 increase (decrease) in the assumed initial public offering price of $          per share (the midpoint of the price range set forth on the cover page of this prospectus) would increase (decrease) our pro forma as adjusted net tangible book value by $           million, the pro forma as adjusted net tangible book value per share by $          per share and the dilution in the pro forma net tangible book value to new investors in this offering by $          per share and the dilution in the pro forma net tangible book value to new investors purchasing shares in this offering by $          per share, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us.

        The following table presents on a pro forma as adjusted basis as of March 31, 2011, after giving effect to the pro forma adjustments described above, the differences between the existing stockholders and the new investors purchasing shares in this offering with respect to the number of shares purchased from us, the total consideration paid, which includes net proceeds received from the issuance of common and redeemable convertible preferred stock, cash received from the exercise of stock options and the value of any stock issued for services and the average price paid per share:

 
   
   
  Total
Consideration
   
 
 
  Shares Purchased    
 
 
  Average Price
per Share
 
 
  Number   Percent   Amount   Percent  
 
   
   
  (in
thousands)

   
   
 

Existing stockholders

                   % $                    % $               

New investors

                               
                         
 

Totals

                 100.0 % $                  100.0 %                 
                         

        The sale by the selling stockholder in this offering will cause the number of shares held by existing stockholders to be reduced to            shares or        % of the total number of shares of our common stock outstanding after this offering. If the underwriters exercise their over-allotment option in full, our existing stockholders would own        % and our new investors would own        % of the total number of shares of our common stock outstanding after this offering.

        The foregoing calculations are based on 69,157,622 shares of common stock outstanding as of March 31, 2011, assuming the conversion of all outstanding shares of our redeemable convertible preferred stock into 56,054,198 shares of common stock in connection with the consummation of this offering and the cash exercise of certain warrants outstanding to purchase shares of our common stock as of March 31, 2011, which will expire upon completion of this offering if unexercised, resulting in the issuance of 1,799,360 shares of common stock for an aggregate exercise price of approximately $3.0 million, and exclude the following:

    15,484,753 shares of common stock issuable upon the exercise of options outstanding, at a weighted average exercise price of $0.93 per share;

    1,825,361 shares of common stock issuable upon the exercise of warrants outstanding (not including those to be exercised in connection with the completion of this offering), at a weighted average exercise price of $2.84 per share;

    1,396,906 shares of common stock reserved for future issuance under our 2004 Equity Incentive Plan, which will become available for issuance under our 2011 Equity Incentive Award Plan after completion of this offering; and

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    shares of common stock that will be reserved for future issuance under our 2011 Equity Incentive Award Plan, as well as any automatic increases in the number of shares of our common stock reserved for future issuance under this benefit plan, which will become effective immediately prior to the consummation of this offering.

        To the extent that outstanding options or warrants are exercised, you will experience further dilution. If all of our outstanding options and warrants were exercised, our pro forma net tangible book value as of March 31, 2011 would have been $         million, or $        per share, and the pro forma, as adjusted net tangible book value after this offering would have been $         million, or $        per share, causing dilution to new investors of $        per share.

        In addition, we may choose to raise additional capital due to market conditions or strategic considerations even if we believe we have sufficient funds for our current or future operating plans. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the issuance of these securities could result in further dilution to our stockholders.

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SELECTED CONSOLIDATED FINANCIAL DATA

        The selected consolidated statement of operations data for the years ended December 31, 2008, 2009 and 2010 and the consolidated balance sheet data as of December 31, 2009 and 2010 are derived from our audited consolidated financial statements included elsewhere in this prospectus. The selected consolidated statement of operations data for the three months ended March 31, 2010 and 2011 and the consolidated balance sheet data as of March 31, 2011 are derived from our unaudited consolidated financial statements included elsewhere in this prospectus. The selected consolidated statement of operations data for the years ended December 31, 2006 and 2007 and the consolidated balance sheet data as of December 31, 2006, 2007 and 2008 are derived from our audited consolidated financial statements which are not included in this prospectus. The unaudited interim consolidated financial statements include, in the opinion of management, all adjustments, which consist only of normal recurring adjustments, that management considers necessary for the fair statement of the financial information set forth in those statements. Our historical results are not necessarily indicative of the results that may be expected in the future. You should read the following selected consolidated historical financial data below in conjunction with the section titled "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the consolidated financial statements and related notes included elsewhere in this prospectus.

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  Years Ended December 31,   Three Months Ended March 31,  
 
  2006   2007   2008   2009   2010   2010   2011  
 
   
   
   
   
   
  (unaudited)
 
 
  (in thousands, except share and per share amounts)
 

Consolidated Statement of Operations Data:

                                           

Revenue:

                                           
 

CDP and services revenue

  $ 3,628   $ 8,594   $ 14,647   $ 14,182   $ 27,705   $ 2,549   $ 7,793  
 

Product revenue

            6,206     9,065     6,959     1,665     678  
 

Licensing and royalty revenue

            2,276     3,663     8,010     1,589     3,217  
                               
   

Total revenue

    3,628     8,594     23,129     26,910     42,674     5,803     11,688  

Cost of revenue

    1,992     4,873     12,625     13,018     20,926     3,635     5,516  
                               
     

Gross profit

    1,636     3,721     10,504     13,892     21,748     2,168     6,172  

Operating expenses:

                                           
 

Research and development

    5,175     9,415     11,849     10,983     13,917     3,073     4,519  
 

Sales and marketing

    773     1,541     3,849     3,211     4,074     896     905  
 

General and administrative

    3,647     3,837     4,300     4,867     5,761     1,606     1,799  
                               
   

Total operating expenses

    9,595     14,793     19,998     19,061     23,752     5,575     7,223  
                               

Loss from operations

    (7,959 )   (11,072 )   (9,494 )   (5,169 )   (2,004 )   (3,407 )   (1,051 )

Other income (expense):

                                           
 

Interest income, net

    448     850     174     (6 )   43     11     4  
 

Other income (expense), net

            6     (62 )   202     (4 )   (178 )
                               
   

Total other income (expense), net

    448     850     180     (68 )   245     7     (174 )

Loss before provision for income taxes

    (7,511 )   (10,222 )   (9,314 )   (5,237 )   (1,759 )   (3,400 )   (1,225 )

Provision for income taxes

    1     1     186     17     19         1  
                               

Net loss

    (7,512 )   (10,223 )   (9,500 )   (5,254 )   (1,778 )   (3,400 )   (1,226 )

Accretion on redeemable convertible preferred stock

    (1,351 )   (4,168 )   (5,436 )   (9,170 )   (14,162 )   (3,004 )   (4,041 )
                               

Net loss attributable to common stockholders

  $ (8,863 ) $ (14,391 ) $ (14,936 ) $ (14,424 ) $ (15,940 ) $ (6,404 ) $ (5,267 )
                               

Net loss per share of common stock, basic and diluted

  $ (0.91 ) $ (1.40 ) $ (1.39 ) $ (1.31 ) $ (1.43 ) $ (0.58 ) $ (0.47 )
                               

Weighted-average number of shares used in computing net loss per share of common stock, basic and diluted(1)

    9,730,679     10,246,738     10,716,462     11,023,779     11,134,573     11,093,119     11,266,383  
                               

Pro forma net loss per share of common stock, basic and diluted(1)

                          $ (0.03 )       $ (0.01 )
                                         

Weighted-average number of shares used in computing pro forma net loss per share of common stock, basic and diluted(1)

                            65,376,321           66,592,330  
                                         

Other Data:

                                           

Adjusted EBITDA (unaudited)

  $ (5,238 ) $ (7,737 ) $ (5,062 ) $ 272   $ 4,589   $ (1,831 ) $ 920  

 

 
  Years Ended December 31,    
 
 
  As of March 31,
2011
 
 
  2006   2007   2008   2009   2010  
 
   
   
   
   
   
  (unaudited)
 
 
  (in thousands)
 

Consolidated Balance Sheet Data:

                                     

Cash, cash equivalents and short-term investments

  $ 20,698   $ 26,744   $ 40,902   $ 32,620   $ 23,064   $ 30,137  

Working capital

    22,519     18,552     26,663     16,389     4,825     16,430  

Total assets

    28,906     40,877     62,190     54,469     55,571     63,626  

Long-term debt, including current portion

        3,194     4,445              

Preferred stock warrant liability

                159     215     450  

Redeemable convertible preferred stock

    35,738     35,738     55,633     55,633     55,633     70,560  

Accumulated accretion of redeemable convertible preferred stock to redemption values

    1,490     5,658     11,094     20,264     34,426     38,467  

Total stockholders' deficit

    (9,629 )   (22,706 )   (36,579 )   (49,889 )   (64,356 )   (69,202 )

(1)
Please see Note 9 to our audited consolidated financial statements for an explanation of the calculations of our basic and diluted net loss per share of common stock and pro forma net loss per share of common stock.

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Non-GAAP Financial Measure

        We believe that the use of adjusted EBITDA, a non-GAAP financial measure, is helpful for an investor in determining whether to invest in our common stock. We include adjusted EBITDA in this prospectus because (i) we seek to manage our business to a consistent level of adjusted EBITDA, (ii) it is a key basis upon which our management assesses our operating performance, (iii) it is one of the primary metrics investors use in evaluating companies' performance in our industry and (iv) it is a factor in the evaluation of the performance of our management in determining compensation. We define adjusted EBITDA as net income (loss) less interest, provision for income taxes, depreciation and amortization expense, non-cash revenue adjustments as a result of common stock warrants issued to customers and stock-based compensation expense.

        We use adjusted EBITDA as a key performance measure because we believe it facilitates operating performance comparisons from period to period by excluding potential differences caused by variations in capital structures, tax positions (such as the impact of changes in effective tax rates or fluctuations in permanent differences or discrete quarterly items), the impact of depreciation and amortization expense, the non-cash impact of common stock warrants issued to customers and the impact of stock-based compensation expense.

        In addition, we believe adjusted EBITDA and similar measures are widely used by investors, securities analysts, ratings agencies and other interested parties in our industry as a measure of financial performance and debt-service capabilities. Our use of adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are:

    Adjusted EBITDA does not reflect our cash expenditures for capital equipment or other contractual commitments;

    Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future, and adjusted EBITDA does not reflect cash capital expenditure requirements for such replacements;

    Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs;

    Adjusted EBITDA does not reflect the significant interest expense or the cash requirements necessary to service interest or principal payments on our indebtedness;

    Adjusted EBITDA does not reflect certain tax payments that may represent a reduction in cash available to us; and

    Other companies, including companies in our industry, may calculate adjusted EBITDA measures differently, which reduces their usefulness as a comparative measure.

        Because of these limitations, adjusted EBITDA should not be considered as a measure of discretionary cash available to us to invest in the growth of our business. When evaluating our performance, you should consider adjusted EBITDA alongside other financial performance measures, including our net loss and other GAAP results.

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        The following table presents a reconciliation of adjusted EBITDA to our net income (loss), the most comparable GAAP measure, for each of the periods indicated:

 
  Years Ended December 31,   Three Months Ended March 31,  
 
  2006   2007   2008   2009   2010   2010   2011  
 
   
   
   
   
   
  (unaudited)
 
 
  (in thousands)
 

Net loss

  $ (7,512 ) $ (10,223 ) $ (9,500 ) $ (5,254 ) $ (1,778 ) $ (3,400 ) $ (1,226 )

Non-GAAP adjustments:

                                           

Revenue(1)

        519                      

Interest, net

    (448 )   (850 )   (94 )   48     13     (11 )   231  

Provision for taxes

    1     1     186     17     19         1  

Depreciation and amortization

    872     2,105     3,430     4,380     4,971     1,234     1,508  

Stock-based compensation expense(2)

    1,849     711     916     1,081     1,364     346     406  
                               
 

Adjusted EBITDA (unaudited)

  $ (5,238 ) $ (7,737 ) $ (5,062 ) $ 272   $ 4,589   $ (1,831 ) $ 920  
                               

(1)
Reduction in revenue as a result of common stock warrants issued in connection with a customer agreement

(2)
Includes stock-based compensation as follows:

 
  Years Ended December 31,   Three Months Ended March 31,  
 
  2006   2007   2008   2009   2010   2010   2011  
 
   
   
   
   
   
  (unaudited)
 
 
  (in thousands)
 

Cost of revenue

  $ 19   $ 81   $ 71   $ 134   $ 285   $ 57   $ 95  

Research and development

    179     192     170     222     204     61     67  

Sales and marketing

    108     256     408     378     422     122     131  

General and administrative

    1,543     182     267     347     453     106     113  
                               
 

Total stock-based compensation

  $ 1,849   $ 711   $ 916   $ 1,081   $ 1,364   $ 346   $ 406  
                               

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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

        The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this prospectus. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those discussed below. Factors that could cause or contribute to such differences include, but are not limited to, those identified below and those discussed in the section entitled "Risk Factors" included elsewhere in this prospectus.

Overview

        We have pioneered a proprietary approach to accelerate research and development, innovation and time-to-market for the semiconductor and clean-energy industries. Using our approach, we develop technology and intellectual property (IP) focused on advanced materials, processes, integration and device architectures in collaboration with our customers. This technology enables our customers to bring application-specific, customized, high-volume manufacturing-ready integrated devices to market faster and with less risk than traditional approaches to research and development (R&D). We provide our customers with proprietary technology through various fee arrangements and grant them rights to associated IP, primarily through royalty-bearing licenses. Our proprietary approach is broadly applicable to high-volume integrated device markets, which include semiconductors, flat glass, solar cells, light-emitting diodes (LEDs), flat-panel displays, advanced batteries and other energy-efficient technologies.

        We currently target large, high-volume semiconductor and high-growth emerging clean-energy markets, including DRAM, flash memory, complex logic, flat glass, solar cells, LEDs and energy-efficient technologies. Within these broad markets, we target customers that have track records of technological innovation, deploy significant resources and are pursuing technical advancements that are critical to their success and strategy. We have engaged in paid programs with 17 customers, including ATMI, Elpida Memory, GLOBALFOUNDRIES, Guardian Industries, SanDisk, Taiwan Semiconductor Manufacturing Company (TSMC) and Toshiba. ATMI and Elpida have commenced shipping products incorporating technology developed through our collaborative development programs (CDPs) and pay us licensing and royalty fees.

        We were founded in 2004 and are headquartered in San Jose, California. Our total revenue increased to $11.7 million for the three months ended March 31, 2011 from $5.8 million for the three months ended March 31, 2010. Our total revenue increased to $42.7 million for the year ended December 31, 2010 from $26.9 million for the year ended December 31, 2009. Our backlog as of March 31, 2011 was $67.5 million, of which $30.7 million is scheduled to be recognized as revenue during the remainder of the year ending December 31, 2011. Our adjusted EBITDA for the three months ended March 31, 2011 was $0.9 million, and our adjusted EBITDA for the year ended December 31, 2010 was $4.6 million. Our net loss decreased to $1.2 million for the three months ended March 31, 2011 from $3.4 million for the three months ended March 31, 2010. Our net loss decreased to $1.8 million for the year ended December 31, 2010 from $5.3 million from the year ended December 31, 2009. Since inception, we have incurred net losses leading to an accumulated deficit of $69.2 million as of March 31, 2011.

How We Generate Revenue

        Our business model aligns our interests with those of our customers as we collaborate to develop proprietary technology and IP for high-volume integrated devices through CDPs. As such, our customer engagement process generates revenue in three ways: CDP and services revenue; product revenue; and licensing and royalty revenue. CDPs are our primary engagement model with customers and are structured to result in licensing and royalty revenue. When we initially engage with a customer, we generate revenue from micro-CDPs, CDPs and licensing of our HPC platform. When technology

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developed through CDPs is incorporated in our customers' commercialized products, we generate licensing and royalty revenue. In certain cases, we sell HPC processing tools to our customers who pay a recurring license fee to operate those tools with our combinatorial processing capabilities.

 
  Years Ended December 31,   Three Months Ended March 31,  
 
  2008   2009   2010   2010   2011  
 
   
   
   
  (unaudited)
 
 
  (in thousands)
 

Revenue:

                               
 

CDP and services revenue

  $ 14,647   $ 14,182   $ 27,705   $ 2,549   $ 7,793  
 

Product revenue

    6,206     9,065     6,959     1,665     678  
 

Licensing and royalty revenue

    2,276     3,663     8,010     1,589     3,217  
                       
   

Total revenue

  $ 23,129   $ 26,910   $ 42,674   $ 5,803   $ 11,688  
                       
    CDP and services revenue.  CDP revenue includes payments for full time equivalent (FTE) employees, milestone payments, subscription payments for dedicated workflow tools used in the CDP, reimbursed payments for consumables and outside services from third parties. Individual CDPs typically range from one to three years. Services revenue outside of CDPs is substantially comprised of support and maintenance fees and extended warranty agreements.

    Product revenue.  Product revenue consists of sales of our workflow hardware and embedded software. In support of our business strategy, we selectively sell our proprietary tools to increase opportunities for CDPs and licensing fees and royalties.

    Licensing and royalty revenue.  Licensing and royalty revenue consists of licensing fees and royalties for granting our customers rights to our proprietary technology and IP. Specifically, this includes licensing the HPC capabilities of our workflows, licensing our informatics and analysis software and licensing fees and royalties on products commercialized by our customers that incorporate technology developed through our CDPs. In the last three years, licensing and royalty revenue has been the fastest growing element of our revenue. Over the long term, we expect licensing and royalty revenue to be an increasing and significant component of our revenue.

        Our revenue growth has been primarily driven by the adoption of our collaboration model and HPC platform leading to both new CDPs and the ramp of licensing and royalty revenue from products commercialized by our customers that incorporate technology developed through our CDPs. Successful CDPs result in the commercialization of products whereby we receive licensing fees and royalties over the course of the respective product cycles. Certain of our semiconductor customers have already commenced shipping products incorporating technology developed through our CDPs, which generate associated licensing and royalty revenue. Our revenue mix may vary from quarter to quarter as we enter into new CDPs and related customer arrangements, existing CDPs are completed or expanded and licensing and royalty arrangements generate revenue.

        Prior to entering into a new CDP, we negotiate licensing fees and royalty rates for technology to be developed in CDPs. The fees and rates are negotiated with each customer on the basis of multiple factors including the size of the servable market of the technology to be developed, the value contribution of the technology to the customer's product, and the overall margin structure of the customer's product. Licensing fees and royalty rates are set for each CDP-developed technology. While royalty rates vary, when working with device manufacturers, we typically target 1-2% of their projected end-product revenue for each CDP-developed technology. When working with suppliers to device manufacturers, we typically target higher royalty rates depending on the value contribution of the technology to their product. Licensing fees and royalty rates are structured in a variety of ways including fixed quarterly fees, percentage of revenue and fee per product.

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        Our proprietary platform was initially created to address critical development challenges in the semiconductor industry and we began generating revenue in 2006. The applicability of our platform to address similar challenges in adjacent vertical markets such as clean-energy markets has created, and we believe will continue to create, new market opportunities for us. During the year ended December 31, 2010, we began generating revenue from customers in the clean-energy industry. We believe collaborating with companies in the clean-energy industry will accelerate the long-term growth of our business. The following table sets forth our revenue by customer end market:

 
  Years Ended December 31,   Three Months Ended March 31,  
 
  2008   2009   2010   2010   2011  
 
   
   
   
  (unaudited)
 
 
  (in thousands)
 

Semiconductor

  $ 23,129   $ 26,910   $ 40,678   $ 5,641   $ 10,736  

Clean energy

            1,996     162     952  
                       
 

Total

  $ 23,129   $ 26,910   $ 42,674   $ 5,803   $ 11,688  
                       

Key Financial Metrics

        We monitor the key financial metrics set forth below to help us evaluate growth trends, establish budgets, measure the effectiveness of our sales and marketing efforts, manage our human resources and assess operational efficiencies.

        Revenue growth and mix.    We monitor revenue from CDPs for existing and new customers, applications and the resulting licensing fees and royalties. As our customer engagements progress, we expect licensing and royalty revenue to be an increasing and significant component of our revenue. We are broadening our development and sales efforts by expanding CDPs in the semiconductor industry resulting from the adoption of our HPC platform for technology development and engaging in CDPs with companies in the clean-energy industry as we believe this will accelerate the future growth of our business.

        Backlog.    We monitor our backlog as it represents the aggregate value of contracted business not yet recognized. Our backlog consists of future revenue that our customers are contractually committed to pay in our CDPs and guaranteed licensing and royalty revenue for our developed technology and intellectual property. Our backlog as of March 31, 2011, December 31, 2010 and 2009 was $67.5 million, $78.2 million and $34.5 million, respectively. As of March 31, 2011, our backlog for customers in the semiconductor industry was $64.2 million, of which $28.7 million is scheduled to be recognized as revenue during the remainder of the year ending December 31, 2011 and $35.5 million in future periods beyond this year. As of March 31, 2011, our backlog for customers in the clean-energy industry was $3.3 million, of which $2.0 million is scheduled to be recognized as revenue during the remainder of the year ending December 31, 2011 and $1.3 million in future periods beyond this period.

        Adjusted EBITDA.    We monitor our adjusted EBITDA to measure the profitability of our business. We use adjusted EBITDA as a key performance measure because we believe it facilitates operating performance comparisons from period to period by excluding potential differences caused by variations in capital structures, tax positions (such as the impact of changes in effective tax rates or fluctuations in permanent differences or discrete quarterly items), the impact of depreciation and amortization expense, the non-cash impact of common stock warrants issued to customers and the impact of stock-based compensation expense. See "Selected Consolidated Financial Data—Non-GAAP Financial Measure" for a reconciliation of adjusted EBITDA to our net income (loss), the most comparable GAAP measure.

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Factors Affecting our Performance

        Reliance on our customers' success.    Our success is tied to our customers' ability to successfully commercialize the products that incorporate technology developed through CDPs. We believe that we significantly improve our customers' ability to succeed in their end markets, but if they are unable to do so, the longer-term licensing and royalty revenue that we expect may be delayed or may not materialize. We attempt to manage this risk by carefully selecting projects and only participating in opportunities that we deem to have significant potential for long-term success.

        Exposure to semiconductor memory and solar power end markets.    Our performance is linked to the end markets in which our customers operate. Certain of these markets, such as the semiconductor memory markets and the solar panel market, have historically shown significant price volatility as a result of imbalances in supply and demand. As such, these markets have been traditionally challenging for participants. We believe that we manage this end market risk by participating in multiple end markets and by selecting customers that we believe will be successful in those markets.

        Revenue mix and royalty rates.    Our compensation and royalty rates vary from contract to contract depending on multiple factors, including the industry, the scope of our collaboration, and the degree to which our IP is central to the development of a given product. Further, different elements of our revenue have different gross margin contributions and individual royalty opportunities vary depending on the end market size and the duration of the specific end product life cycle.

        Long sales cycles.    Our sales cycles are long, and we commit significant resources to and incur significant expenses for a project before a potential customer commits to use our HPC platform or CDPs. To be successful, we must establish contact with potential customers, often with senior management or executive officers, and educate them about the benefits of our HPC platform. Our sales cycles to date have typically ranged from 9 to 24 months and may be even longer in the future. Investment of time and resources in a particular customer engagement that does not ultimately result in material revenue will adversely affect our revenue and results of operations.

        Customer concentration.    Due to the concentrated nature of manufacturers in the DRAM, flash memory and complex logic markets, our revenue is and may continue to be concentrated to key high-volume customers. For example, our four largest customers in the quarter ended March 31, 2011, all of which are in the semiconductor industry, accounted for 75% of our revenue. These customers collectively reported $25 billion of semiconductor revenue in 2010, and we believe there is an opportunity to expand our engagements with these customers into new applications over time. In addition, because our platform is broadly applicable to semiconductors, flat glass, solar cells, LEDs, flat-panel displays, advanced batteries and other energy-efficient technologies, we believe we have significant opportunities to engage with a broad range of customers.

Warrants Issued in Connection with a CDP

        In March 2010, in connection with a CDP, we issued contingent warrants to two customers to purchase an aggregate of up to 1,644,736 shares of our common stock at a cash exercise price of $3.04144 per share. The exercise price was equal to the price of the then-most recent sale of preferred stock. These warrants become exercisable for four months after an election by the holders to license technology developed through the associated CDP. If either of the customers elect to license this technology, we will record a one-time, non-cash charge based on the fair value of these warrants as measured on the date of election against any revenue derived from these agreements. The fair value will be determined using the Black-Scholes option pricing model and may be significant. This election is available to the customers through May 2012 and may be extended for up to an additional two years if the customers extend the CDP.

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Cost of Revenue and Operating Expenses

Cost of Revenue

        The following table sets forth our cost of revenue by revenue category:

 
  Years Ended December 31,   Three Months Ended March 31,  
 
  2008   2009   2010   2010   2011  
 
   
   
   
  (unaudited)
 
 
  (in thousands)
 

Cost of revenue:

                               
 

Cost of CDP and services revenue

  $ 9,141   $ 8,849   $ 16,855   $ 2,731   $ 5,112  
 

Cost of product revenue

    3,370     3,972     3,665     825     234  
 

Cost of licensing and royalty revenue

    114     197     406     79     170  
                       
   

Total cost of revenue

  $ 12,625   $ 13,018   $ 20,926   $ 3,635   $ 5,516  
                       

        Our cost of revenue is variable and depends on the product mix and type of revenue earned in each period relating to our customer programs. As customers commercialize products that incorporate technology developed through our CDPs, we expect our cost of revenue to decrease as a percentage of total revenue as licensing and royalty revenue become an increasing component of our revenue.

    Cost of CDP and services revenue.  Our cost of CDP and services revenue is primarily comprised of salaries and other personnel-related expenses (including stock-based compensation) for our collaborative research and development scientists, engineers and development fab process operations employees. Additionally, our cost of revenue includes costs of wafers, targets, materials, program-related supplies and depreciation of equipment used in CDPs.

    Cost of product revenue.  Our cost of product revenue primarily includes our cost of products sold.

    Cost of licensing and royalty revenue.  Our cost of licensing and royalty revenue includes license fees paid to Symyx.

Research and Development

        Our R&D expenses consist of costs incurred for development and continuous improvement of our HPC platform, expansion of software capabilities and application research and development that are not associated with customer programs. R&D costs include personnel-related expenses (including stock-based compensation expenses), for our technical staff as well as consultant costs, parts and prototypes, wafers, chemicals, supply costs, facilities costs, utilities costs related to laboratories and offices occupied by technical staff, depreciation on equipment used by technical staff, and outside services, such as machining and third-party R&D costs. Overhead costs that are not allocated to a customer program are recognized as expenses within R&D. We expect our R&D expenses will continue to increase for the foreseeable future as we continue to devote substantial internal resources to develop and improve our HPC platform and extend the applicability of our platform to a broader set of applications within the industries we serve.

Sales and Marketing

        Our sales and marketing expenses consist primarily of personnel-related costs (including stock-based compensation) for our sales and marketing employees, as well as payments of commissions to our sales employees, facility costs and professional expenses. Professional expenses consist of external website and marketing communication consulting costs and market research. We expect that our sales and marketing expenses will continue to increase for the foreseeable future as we increase the number

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of our sales and marketing employees to support the growth in our business and as we incur external marketing communication costs.

General and Administrative

        General and administrative expenses consist primarily of personnel-related costs (including stock-based compensation) as well as professional services and facilities costs related to our executive, finance, legal, human resources, management information systems and information technology functions. Professional services consist of outside accounting, information technology, consulting and legal costs.

        Following the completion of this offering, we expect to incur significant additional accounting and legal costs related to compliance with rules and regulations enacted by the Securities and Exchange Commission, including the additional costs of achieving and maintaining compliance with Section 404 of the Sarbanes-Oxley Act, as well as additional insurance, investor relations and other costs associated with being a public company. In addition to these expenses, we expect that our general and administrative expenses will continue to increase for the foreseeable future.

Interest Income, net

        Interest income represents interest earned on our cash, cash equivalents and short-term investments. We expect interest income will vary each reporting period depending on our average investment balances during the period and market interest rates.

        Interest expense consists of interest accrued or paid on lines of credit outstanding. We expect interest expense to fluctuate in the future with changes in obligations and market interest rates.

Other Income (Expense), net

        Other income consists of municipal economic development grant proceeds received during the year ended December 31, 2010. Other income (expense), net also consists of the change in fair value of our preferred stock warrants and other income. Our outstanding preferred stock warrant, which was issued in connection with a line of credit, is classified as a liability and is remeasured to fair value at each balance sheet date with the corresponding gain or loss from the adjustment recorded as other income (expense), net. We will continue to record adjustments to the fair value of the preferred stock warrant until it is exercised, automatically converted into a warrant to purchase common stock or expires, at which time the warrant will no longer be remeasured at each balance sheet date.

Provision for Income Taxes

        We are subject to taxes in the United States as well as other tax jurisdictions or countries in which we conduct business. Earnings from our non-U.S. activities are subject to local country income tax and may be subject to current U.S. income tax. To date, we have incurred net losses and have not recorded any U.S. federal income tax benefits as these losses have been offset by valuation allowances. As of December 31, 2010, we had net operating loss carryforwards for federal and state income tax purposes of approximately $17.4 million and $18.5 million, respectively, to offset future taxable income. In addition, we had $2.5 million in U.S. federal R&D credit and $2.5 million in California R&D credit carryforwards to offset future income tax liabilities. Our ability to use our net operating loss carryforwards to offset future taxable income and our ability to use our tax credit carryforwards to offset future income tax liabilities may be subject to certain limitations arising from "ownership changes" within the meaning of Section 382 of the Internal Revenue Code.

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Results of Operations

Comparison of the Three Months Ended March 31, 2010 and 2011

 
  Three Months Ended March 31,    
   
 
 
  2010   2011   $ Change   % Change  
 
  (unaudited)
   
   
 
 
  (in thousands)
   
 

Revenue:

                         
 

CDP and services revenue

  $ 2,549   $ 7,793   $ 5,244     206 %
 

Product revenue

    1,665     678     (987 )   (59 )%
 

Licensing and royalty revenue

    1,589     3,217     1,628     102 %
                     
   

Total revenue

    5,803     11,688     5,885     101 %

Cost of revenue

    3,635     5,516     1,881     52 %
                     
     

Gross profit

    2,168     6,172     4,004     185 %

Operating expenses:

                         
 

Research and development

    3,073     4,519     1,446     47 %
 

Sales and marketing

    896     905     9     1 %
 

General and administrative

    1,606     1,799     193     12 %
                     
   

Total operating expenses

    5,575     7,223     1,648     30 %
                     

Loss from operations

    (3,407 )   (1,051 )   2,356        

Other income (expense):

                         
 

Interest income, net

    11     4     (7 )      
 

Other income (expense), net

    (4 )   (178 )   (174 )      
                     
   

Total other income (expense), net

    7     (174 )   (181 )      

Loss before provision for income taxes

    (3,400 )   (1,225 )   2,175        

Provision for income taxes

        1     1        
                     

Net loss

  $ (3,400 ) $ (1,226 ) $ 2,174        
                     

    Revenue

        Our revenue increased by $5.9 million, or 101%, to $11.7 million during the three months ended March 31, 2011 from $5.8 million during the three months ended March 31, 2010. This increase was due to increases in CDP and services revenue and licensing and royalty revenue of $6.9 million which were partially offset by decreases in product revenue of $1.0 million.

        CDP and services revenue increased by $5.2 million, or 206%, to $7.8 million during the three months ended March 31, 2011 from $2.5 million during the three months ended March 31, 2010. This increase was primarily attributable to $3.0 million in revenue derived from two new customer engagements, combined with $2.2 million from the expansion of existing customer engagements. Of the two new customer engagements, $2.4 million in revenue was derived from one new CDP.

        Licensing and royalty revenue increased by $1.6 million, or 102%, to $3.2 million during the three months ended March 31, 2011 from $1.6 million during the three months ended March 31, 2010. This increase was primarily attributable to an increase in sales of products subject to licensing fees and royalties.

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        The following table presents revenue by geographic region (based on invoiced locations) during the three months ended March 31, 2011 and 2010 in dollars (in thousands) and as a percentage of revenue for the periods presented:

 
  Three Months Ended March 31,  
 
  2010   2011  
 
  Revenue   % of Revenue   Revenue   % of Revenue  
 
  (unaudited)
 
 
  (in thousands)
   
  (in thousands)
   
 

United States

  $ 4,109     71 % $ 7,253     62 %

Japan

    1,584     27 %   3,700     32 %

Taiwan

        0 %   735     6 %

Europe

    110     2 %       0 %
                   
 

Total

  $ 5,803     100 % $ 11,688     100 %
                   

    Cost of Revenue

        Cost of revenue increased by $1.9 million, or 52%, to $5.5 million during the three months ended March 31, 2011 from $3.6 million during the three months ended March 31, 2010. This change is directly attributable to the increased CDP and services revenue we recognized from our new and ongoing customer engagements, which resulted in a $2.4 million increase in direct labor, materials and other costs associated with these programs, including an increase in licensing fees payable to Symyx in the amount of $0.1 million. Additionally, cost of licensing and royalty revenue increased by $0.1 million directly attributable to increased licensing and royalty revenue. This increase was partially offset by a $0.6 million decrease in cost of product revenue associated with the decrease in product revenue recognized during the period.

    Research and Development

        R&D expenses increased by $1.4 million, or 47%, to $4.5 million during the three months ended March 31, 2011 from $3.1 million during the three months ended March 31, 2010. The change is attributable to $0.3 million in higher personnel costs as a result of increased headcount, $0.7 million increase in facility and occupancy-related costs due to clean room expansion, $0.1 million in parts costs for internal R&D projects, $0.4 million increase in depreciation expense and $0.1 million of higher consulting and professional service fees.

    Sales and Marketing

        Sales and marketing expenses were essentially flat for the three months ended March 31, 2011 compared to the three months ended March 31, 2010.

    General and Administrative

        General and administrative expenses increased by $0.2 million, or 12%, to $1.8 million during the three months ended March 31, 2011 from $1.6 million during the three months ended March 31, 2010. The increase is primarily attributable to $0.2 million in higher professional fees associated with legal and accounting services.

    Interest Income, net

        Interest income, net was essentially flat for the three months ended March 31, 2011 compared to the three months ended March 31, 2010.

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    Other Income (Expense), net

        Other income (expense) decreased by $0.2 million to $(0.2) million during the three months ended March 31, 2011 from an expense of $4,000 during the three months ended March 31, 2010. This increase was due to the remeasurement of our preferred stock warrant liability to its current fair value.

    Provision for Income Taxes

        Provision for income taxes as of March 31, 2011 and 2010 consisted of income taxes on our foreign entities and were not significant during either period.

Comparison of the Years Ended December 31, 2009 and 2010

 
  Years Ended
December 31,
   
   
 
 
  2009   2010   $ Change   % Change  
 
  (in thousands)
   
 

Revenue:

                         
 

CDP and services revenue

  $ 14,182   $ 27,705   $ 13,523     95 %
 

Product revenue

    9,065     6,959     (2,106 )   (23 )%
 

Licensing and royalty revenue

    3,663     8,010     4,347     119 %
                     
   

Total revenue

    26,910     42,674     15,764     59 %

Cost of revenue

    13,018     20,926     7,908     61 %
                     
     

Gross profit

    13,892     21,748     7,856     57 %

Operating expenses:

                         
 

Research and development

    10,983     13,917     2,934     27 %
 

Sales and marketing

    3,211     4,074     863     27 %
 

General and administrative

    4,867     5,761     894     18 %
                     
   

Total operating expenses

    19,061     23,752     4,691     25 %
                     

Loss from operations

    (5,169 )   (2,004 )   3,165        

Other income (expense):

                         
 

Interest income, net

    (6 )   43     49        
 

Other income (expense), net

    (62 )   202     264        
                     
   

Total other income (expense), net

    (68 )   245     313        

Loss before provision for income taxes

    (5,237 )   (1,759 )   3,478        

Provision for income taxes

    17     19     2        
                     

Net loss

  $ (5,254 ) $ (1,778 ) $ 3,476        
                     

    Revenue

        Our revenue increased by $15.8 million, or 59%, to $42.7 million during the year ended December 31, 2010 from $26.9 million during the year ended December 31, 2009, primarily due to increases in revenue from CDPs and licensing arrangements partially offset by reductions in revenue from product revenue.

        CDP and services revenue increased by $13.5 million, or 95%, to $27.7 million during the year ended December 31, 2010 from $14.2 million during the year ended December 31, 2009. This change is attributable to $10.2 million in revenue derived from three customer engagements, including one for a customer in the clean-energy industry, that commenced during the year ended December 31, 2010. The remaining $3.3 million increase is due to the net effect of expansions of existing CDPs, partially offset by reductions from the scheduled completion of two CDPs.

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        Product revenue decreased by $2.1 million, or 23%, to $7.0 million during the year ended December 31, 2010 from $9.1 million during the year ended December 31, 2009. This decrease is primarily attributable to the recognition of revenue during the year ended December 31, 2009 from four workflow platform sales as compared to recognition of revenue during the year ended December 31, 2010 from two workflow platform sales.

        Licensing and royalty revenue increased by $4.3 million, or 119%, to $8.0 million during the year ended December 31, 2010 from $3.7 million during the year ended December 31, 2009. This change is primarily attributable to a $2.5 million increase in licensing fees and royalties from commercialized products and a $1.8 million increase in licensing fees from licenses to the HPC capabilities of our workflows and other technology.

        Revenue to customers in the various geographic regions remained relatively unchanged. The following table presents revenue by geographic region (based on invoiced locations) during the years ended December 31, 2010 and 2009 in dollars and as a percentage of revenue for the periods presented:

 
  Years Ended December 31,  
 
  2009   2010  
 
  Revenue   % of Revenue   Revenue   % of Revenue  
 
  (in thousands)
   
  (in thousands)
   
 

United States

  $ 18,894     70 % $ 29,526     70 %

Japan

    7,906     30 %   12,449     29 %

Taiwan

        0 %   489     1 %

Europe

    110     0 %   210     0 %
                   
 

Total

  $ 26,910     100 % $ 42,674     100 %
                   

    Cost of Revenue

        Cost of revenue increased by $7.9 million, or 61%, to $20.9 million during the year ended December 31, 2010 from $13.0 million during the year ended December 31, 2009. This change is directly attributable to the increased CDP and services revenue during the year ended December 31, 2010 that we recognized from our new and ongoing CDPs, which resulted in a $8.0 million increase in direct labor, materials and other costs associated with these programs, including an increase in licensing fees payable to Symyx in the amount of $0.9 million. Additionally, cost of licensing and royalty revenue increased by $0.2 million directly attributable to increased licensing and royalty revenue. These increases were partially offset by a $0.3 million decrease in direct workflow platform costs due to fewer workflow platform sales during the year ended December 31, 2010.

    Research and Development

        R&D expenses increased by $2.9 million, or 27%, to $13.9 million during the year ended December 31, 2010 from $11.0 million during the year ended December 31, 2009. The change is attributable to $2.1 million in higher personnel costs as a result of increased headcount, a $1.6 million increase in facility and occupancy-related costs due to clean room expansion, $0.8 million in parts costs for internal R&D projects and $0.3 million of higher consulting and professional service fees. These increases were partially offset by a decrease in R&D expenses due to an increase in the use of equipment for CDPs resulting in an increase in the allocation of expenses to cost of revenue during the year ended December 31, 2010 as compared to the year ended December 31, 2009.

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    Sales and Marketing

        Sales and marketing expenses increased by $0.9 million, or 27%, to $4.1 million during the year ended December 31, 2010 from $3.2 million during the year ended December 31, 2009. The change is primarily attributable to $0.5 million in higher personnel costs related to commissions earned on 2010 bookings and collections combined with $0.2 million in higher travel, entertainment and marketing expenses attributable to increased sales and marketing efforts during the year ended December 31, 2010.

    General and Administrative

        General and administrative expenses increased by $0.9 million, or 18%, to $5.8 million during the year ended December 31, 2010 from $4.9 million during the year ended December 31, 2009. The increase is primarily attributable to $0.5 million in higher personnel costs as a result of increased headcount, $0.2 million in higher professional fees, $0.1 million in higher facility and occupancy-related costs and $0.1 million in higher travel and entertainment costs.

    Interest Income, net

        Interest income, net changed by $49,000 to income of $43,000 during the year ended December 31, 2010 from an expense of $6,000 during the year ended December 31, 2009. The change is due primarily to the $0.1 million reduction in interest expense during the year ended December 31, 2010 due to the repayment of our obligations under our amended loan and security agreement which were partially offset by $44,000 of interest income earned on our cash, cash equivalents and short-term investments.

    Other Income (Expense), net

        Other income (expense) increased by $0.3 million to income of $0.2 million during the year ended December 31, 2010 from an expense of $0.1 million during the year ended December 31, 2009. The change was directly attributable to municipal economic development grant proceeds we received during the year ended December 31, 2010.

    Provision for Income Taxes

        The income tax provision for the year ended December 31, 2010 was $19,000 compared to $17,000 for the year ended December 31, 2009. Both amounts consisted of income taxes on our foreign entities and were not significant in either period.

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Comparison of the Years Ended December 31, 2008 and 2009

 
  Years Ended
December 31,
   
   
 
 
  2008   2009   $ Change   % Change  
 
  (in thousands)
   
 

Revenue:

                         
 

CDP and services revenue

  $ 14,647   $ 14,182   $ (465 )   (3 )%
 

Product revenue

    6,206     9,065     2,859     46 %
 

Licensing and royalty revenue

    2,276     3,663     1,387     61 %
                     
   

Total revenue

    23,129     26,910     3,781     16 %

Cost of revenue

    12,625     13,018     393     3 %
                     
     

Gross profit

    10,504     13,892     3,388     32 %

Operating expenses:

                         
 

Research and development

    11,849     10,983     (866 )   (7 )%
 

Sales and marketing

    3,849     3,211     (638 )   (17 )%
 

General and administrative

    4,300     4,867     567     13 %
                     
   

Total operating expenses

    19,998     19,061     (937 )   (5 )%
                     

Loss from operations

    (9,494 )   (5,169 )   4,325        

Other income (expense):

                         
 

Interest income, net

    174     (6 )   (180 )      
 

Other income (expense), net

    6     (62 )   (68 )      
                     
   

Total other income (expense), net

    180     (68 )   (248 )      

Loss before provision for income taxes

    (9,314 )   (5,237 )   4,077        

Provision for income taxes

    186     17     (169 )      
                     

Net loss

  $ (9,500 ) $ (5,254 ) $ 4,246        
                     

    Revenue

        Our revenue increased by $3.8 million, or 16%, to $26.9 million during the year ended December 31, 2009 from $23.1 million during the year ended December 31, 2008 primarily due to increases in product revenue and licensing and royalty revenue offset by a reduction in revenue from ongoing CDPs.

        CDP and services revenue decreased by $0.5 million, or 3%, to $14.2 million during the year ended December 31, 2009 from $14.6 million during the year ended December 31, 2008. The change is primarily due to a decrease in revenue of $4.0 million from the scheduled completion of CDPs, offset by a $3.5 million increase in revenue from the expansion of existing CDPs.

        Product revenue increased by $2.9 million, or 46%, to $9.1 million during the year ended December 31, 2009 from $6.2 million during the year ended December 31, 2008. The increase in revenue during the year ended December 31, 2009 is primarily attributable to the recognition of revenue during the year ended December 31, 2008 from two workflow platform sales as compared to the recognition of revenue during the year ended December 31, 2009 from two previous and two additional workflow platform sales.

        Licensing and royalty revenue increased by $1.4 million, or 61%, to $3.7 million during the year ended December 31, 2009 from $2.3 million during the year ended December 31, 2008. This change is primarily attributable to a $0.5 million increase in licensing and royalty fees from commercialized products and a $0.9 million increase in licensing fees from licenses to the HPC capabilities of our workflows. Revenue from customers in the various geographic regions (based on invoiced locations)

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remained relatively unchanged. The following table presents revenue by geographic region during the years ended December 31, 2008 and 2009 in dollars and as a percentage of revenue for the periods presented:

 
  Years Ended December 31,  
 
  2008   2009  
 
  Revenue   % of Revenue   Revenue   % of Revenue  
 
  (in thousands)
   
  (in thousands)
   
 

United States

  $ 16,522     72 % $ 18,894     70 %

Japan

    6,267     27 %   7,906     30 %

Taiwan

    90     0 %       0 %

Europe

    250     1 %   110     0 %
                   
 

Total

  $ 23,129     100 % $ 26,910     100 %
                   

    Cost of Revenue

        Cost of revenue increased by $0.4 million, or 3%, to $13.0 million during the year ended December 31, 2009 from $12.6 million during the year ended December 31, 2008. The increase is directly attributable to the increase in product revenue during the year ended December 31, 2009, which resulted in a $0.6 million increase in direct workflow platform costs, including an increase in licensing fees payable to Symyx in the amount of $0.1 million. Additionally, cost of licensing and royalty revenue increased by $0.1 million directly attributable to increased licensing and royalty revenue. These increases were partially offset by a $0.3 million reduction in direct labor, materials and other costs associated with our ongoing CDPs due to the reduction in services revenue during the year ended December 31, 2009.

    Research and Development

        R&D expenses decreased by $0.9 million, or 7%, to $11.0 million during the year ended December 31, 2009 from $11.8 million during the year ended December 31, 2008. The decrease is attributable to a $1.1 million decrease in personnel costs, $0.7 million reduction in parts costs for internal R&D programs and $0.3 million reduction in consulting and professional service fees due to R&D personnel being used for ongoing CDPs during the year ended December 31, 2009 as compared to being used during the year ended December 31, 2008 for internal R&D projects. These decreases were partially offset by an increase in facility and occupancy-related expenses and an increase in R&D expenses due to a reduction in the use of equipment for CDPs resulting in a decrease in the allocation of expenses to cost of revenue during the year ended December 31, 2009 as compared to the year ended December 31, 2008.

    Sales and Marketing

        Sales and marketing expenses decreased by $0.6 million, or 17%, to $3.2 million during the year ended December 31, 2009 from $3.8 million during the year ended December 31, 2008. The decrease is attributable to a $0.3 million decrease in personnel costs related to staff turnover and reduced commission expense and $0.3 million decrease in travel, entertainment and marketing expenses.

    General and Administrative

        General and administrative expenses increased by $0.6 million, or 13%, to $4.9 million during the year ended December 31, 2009 from $4.3 million during the year ended December 31, 2008. The increase is attributable to $0.3 million in higher facility and occupancy-related costs, $0.2 million in

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higher personnel costs due to changes in headcount and $0.1 million in higher consulting and professional services costs.

    Interest Income, net

        Interest income, net decreased by $0.2 million to an expense of $6,000 during the year ended December 31, 2009 from $0.2 million during the year ended December 31, 2008. The change is attributable to a $0.5 million reduction in interest income combined with a $0.3 million reduction in interest expense. The decrease in interest income is attributable to lower average cash, cash equivalents and short-term investments on hand during the year ended December 31, 2009 compared to the year ended December 31, 2008 as we used the proceeds received from our Series D convertible preferred stock financing during the year ended December 31, 2008 for capital expenditures and principal repayments on our debt obligations during the year ended December 31, 2009. The decrease in interest expense is attributable to the repayment of our obligations under our amended loan and security agreement in February 2009.

    Other Income (Expense), net

        Other income (expense) decreased by $0.1 million to an expense of $0.1 million during the year ended December 31, 2009 from income of $6,000 during the year ended December 31, 2008. The change is not significant.

    Provision for Income Taxes

        The tax provision for the year ended December 31, 2009 of $17,000 consisted of $13,000 in foreign income taxes on our foreign entities and $4,000 in state income taxes. The tax provision for the year ended December 31, 2008 of $186,000 consisted of $11,000 in income taxes on our foreign entities and $175,000 in state income taxes.

Liquidity and Capital Resources

        To date, we have substantially satisfied our capital and liquidity needs through private placements of redeemable convertible preferred stock and, to a lesser extent, cash flow from operations. As of March 31, 2011, we had $30.1 million of cash, cash equivalents and short-term investments and $16.4 million of net working capital. During the three months ended March 31, 2011, we closed a private placement of our Series E redeemable convertible preferred stock for $14.9 million in net proceeds. As of March 31, 2011, we had no debt outstanding under our amended loan and security agreement or any other debt instruments and had access to advances of $10.0 million under the amended loan and security agreement.

        To date, we have incurred significant losses. During the three months ended March 31, 2011 and 2010 and the years ended December 31, 2010, 2009, 2008, we incurred net losses of $1.2 million, $3.4 million, $1.8 million, $5.3 million and $9.5 million. As of March 31, 2011, our accumulated deficit was $69.2 million.

        We have experienced positive cash flows from operations during the years ended December 31, 2010, 2009 and 2008. We may continue to generate positive cash flows from operations on an annual basis, although this may fluctuate significantly on a quarterly basis. As such, we believe that our existing sources of liquidity will be sufficient to fund our operations for at least the next 12 months. Our future capital requirements will depend on many factors, including our rate of revenue growth, the expansion of our sales and marketing activities, the timing and extent of our spending to support our R&D efforts and our ability to expand CDPs in the semiconductor industry, resulting from the adoption of our HPC platform for technology development, and our ability to engage in CDPs with companies in the clean-energy industry. To the extent that existing cash and cash equivalents and cash from operations are insufficient to fund our future activities, 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.

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Cash Flows

        The following summary of our cash flows for the periods indicated has been derived from our consolidated financial statements included elsewhere in this prospectus:

 
  Years Ended December 31,   Three Months Ended
March 31,
 
 
  2008   2009   2010   2010   2011  
 
   
   
   
  (unaudited)
 
 
  (in thousands)
 

Net cash provided by (used in) operating activities

  $ 981   $ 1,088   $ 1,175   $ (3,627 ) $ (4,369 )

Net cash (used in) provided by investing activities

  $ (8,162 ) $ (16,708 ) $ 924   $ 3,514   $ (3,500 )

Net cash provided by (used in) financing activities

  $ 21,339   $ (4,426 ) $ 109   $ 55   $ 14,942  

Cash Flows from Operating Activities

        We have experienced positive cash flows from operating activities during each of the years ended December 31, 2010, 2009 and 2008 including the receipt of advance payments from CDPs, product sales and licensing and royalty fees.

        Net cash used in operating activities during the three months ended March 31, 2011 was primarily attributable to our net loss of $1.2 million and non-cash charges of $1.5 million of depreciation and amortization and $0.4 million in stock-based compensation. The net decline in cash flow from our operating assets and liabilities of $(5.3) million was primarily as a result of a $4.1 million reduction in deferred revenue, a $0.4 million increase in accounts receivable and a $0.7 million decrease in accounts payable.

        Net cash provided by operating activities during the year ended December 31, 2010 of $1.2 million reflects the net loss of $1.8 million and non-cash charges of $5.0 million for depreciation and amortization and $1.4 million for stock-based compensation. The net change in our operating assets and liabilities of $(3.4) million was primarily a result of a $0.8 million increase in inventory, a $2.9 million increase in accounts receivable and a $4.5 million decrease in deferred revenue which were partially offset by a $3.3 million increase in accounts payable and accrued expenses.

        Net cash provided by operating activities during the year ended December 31, 2009 of $1.1 million reflects the net loss of $5.3 million and non-cash charges of $4.4 million for depreciation and amortization and $1.1 million for stock-based compensation. The net change in our operating assets and liabilities of $0.8 million was primarily the result of a $0.5 million decrease in deferred revenue which was partially offset by $1.6 million in our prepaid expenses and other assets, inventory and accounts receivable balances.

        Net cash provided by operating activities during the year ended December 31, 2008 of $1.0 million reflects the net loss of $9.5 million and non-cash charges which consist of $3.4 million for depreciation and amortization and $0.9 million for stock-based compensation. The net change in our operating assets and liabilities of $6.1 million was primarily due to an advance royalty payment in the amount of $10.0 million that will be earned through 2012 that resulted in a net increase in deferred revenue of $9.5 million, which was partially offset by a $3.9 million increase in prepaid expenses and other assets, inventory and accounts receivable balances.

Cash Flows from Investing Activities

        Our investing activities consist primarily of purchases and sales of short-term investments, capital expenditures to purchase property and equipment and our investments in intangible assets relating to our patents and trademarks. In the future, we expect we will continue to make significant capital

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expenditures to support our expanding operations and incur costs to protect our investment in our developed technology and IP.

        During the three months ended March 31, 2011, cash used in investing activities was $3.5 million primarily the result of $3.3 million in capital expenditures and $0.2 million in capitalized patent and trademark costs.

        During the year ended December 31, 2010, cash provided by investing activities of $0.9 million was primarily attributable to the $11.8 million in net proceeds received from the sale of our investments which were partially offset by $10.5 million of capital expenditures and $0.3 million in capitalized intangible asset costs. These capital expenditures were incurred as a result of us relocating our operations during the year ended December 31, 2010 to a new facility to support our expanding operations, as well as to prepare for new business programs requiring additional equipment.

        During the year ended December 31, 2009, cash used in investing activities of $16.7 million was due to $11.8 million for the purchase of investments, $4.8 million in capital expenditures relating to the acquisition of lab equipment and machinery and $0.1 million in capitalized intangible asset costs.

        During the year ended December 31, 2008, cash used in investing activities of $8.2 million was attributable to $7.6 million in capital expenditures and $0.5 million in capitalized intangible asset costs.

Cash Flows from Financing Activities

        To date, we have financed our operations primarily with proceeds from the sale of our redeemable convertible preferred stock.

        During the three months ended March 31, 2011, cash provided by financing activities was $14.9 million, primarily as a result of the receipt of $14.9 million in net proceeds from the sale of our Series E redeemable convertible preferred stock in March 2011.

        During the year ended December 31, 2010, cash provided by financing activities was $0.1 million which consisted of proceeds received from the exercise of stock options.

        During the year ended December 31, 2009, cash used in financing activities was $4.4 million, primarily as a result of us paying off our outstanding loan balances under our amended loan and security agreement.

        During the year ended December 31, 2008, cash provided by financing activities was $21.3 million primarily due to the receipt of $19.9 million in net proceeds from the sale of our Series D redeemable convertible preferred stock combined with $3.0 million in proceeds from borrowings under our amended loan and security agreement in May 2008 which were partially offset by principal repayments on our debt obligations of $1.7 million.

Contractual Obligations

        The following summarizes our contractual obligations as of December 31, 2010:

 
  Payments Due by Period  
 
  2011   2012   2013   2014   2015   Total  
 
  (in thousands)
 

Contractual Obligations:

                                     

Operating lease obligations

  $ 1,550   $ 1,573   $ 1,657   $ 1,707   $ 728   $ 7,215  
                           

Total

  $ 1,550   $ 1,573   $ 1,657   $ 1,707   $ 728   $ 7,215  
                           

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        Operating lease agreements represent our obligations to make payments under our non-cancelable lease agreements for our facilities in San Jose, California. During the three months ended March 31, 2011, we made regular lease payments of $285,000 under the operating lease agreements.

Off-Balance Sheet Arrangements

        Through March 31, 2011, 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 would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

Segment Information

        We have one business activity, which is to develop and apply high productivity combinatorial R&D technologies. Although we track revenue earned from customers in the semiconductor and clean-energy industries, we do not currently track and maintain discrete financial information, including operating margins for these industry sectors. As such, we are a single reporting and operating unit structure.

Quantitative and Qualitative Disclosures about Market Risk

        We are exposed to market risks in the ordinary course of our business. Market risk represents the risk of loss that may impact our financial position due to adverse changes in financial market prices and rates. Our market risk exposure is primarily a result of fluctuations in interest rates and foreign currency exchange rates. We do not hold or issue financial instruments for trading purposes.

Interest Rate Sensitivity

        Our exposure to market risk for changes in interest rates relates primarily to our investment portfolio and our outstanding debt obligations. Our cash, cash equivalents and investment accounts as of March 31, 2011 total $30.1 million, consisting primarily of cash, money market funds and certificates of deposit with maturities of less than one year from the date of purchase. Our primary exposure to market risk is interest income sensitivity, which is affected by changes in the general level of the interest rates in the United States. However, because of the short-term nature of the instruments in our portfolio, a sudden change in market interest rates would not be expected to have a material impact on our consolidated financial condition or our results of operation.

        We have no long-term debt outstanding as of March 31, 2011 under our amended loan and security agreement. Our obligations under this debt agreement carry interest rates that are fixed and are not subject to fluctuations. However, in the future, to the extent we enter into other long-term debt arrangements, we would be subject to fluctuations in interest rates which could have a material impact on our future financial condition and results of operation.

Foreign Currency Exchange Risk

        As we expand internationally, our consolidated results of operations and cash flows will become increasingly subject to fluctuations due to changes in foreign currency exchange rates. Our revenue is denominated in U.S. dollars. Our expenses are generally denominated in the currencies in which our operations are located, which is primarily in the United States, with an insignificant portion of expenses incurred in our wholly-owned subsidiaries in Hong Kong and Japan and our wholly-owned branch in Taiwan in their local currencies. The effect of a hypothetical 10% change in foreign currency exchanges rates applicable to our business would not have a material impact on our consolidated financial statements. To date, we have not entered into any material foreign currency hedging contracts although we may do so in the future.

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Critical Accounting Policies and Estimates

        Our consolidated financial statements have been prepared in conformity with generally accepted accounting principles in the United States and include our accounts and the accounts of our wholly-owned subsidiaries. The preparation of our consolidated financial statements requires our management to make estimates, assumptions and judgments that affect the reported amounts of assets and liabilities and disclosures for contingent assets and liabilities as of the date of the financial statements, and the reported amounts of revenue and expenses during the applicable periods. Management bases its estimates, assumptions and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances. Different assumptions and judgments would change the estimates used in the preparation of our consolidated financial statements which, in turn, could change the results from those reported. Our management evaluates its estimates, assumptions and judgments on an ongoing basis.

        The critical accounting policies requiring estimates, assumptions and judgments that we believe have the most significant impact on our consolidated financial statements are described below.

Revenue Recognition

        We generate revenue from three principal sources: CDPs and other services, which also includes other R&D services and product maintenance and support; product sales; and technology licensing and royalty fees. It is possible for our customers to work with us across multiple areas of our business, and certain of our customer arrangements involve the delivery or performance of multiple products, services or licenses. For example, product sale arrangements include product maintenance and support, and CDPs and other R&D services include licensing of technology and may also include sales of products. When there are multiple elements of deliverables in a contract entered into or modified on or prior to December 31, 2010, we identify all deliverables and allocate revenue among all of the undelivered elements, which might include CDP and other services revenue, product revenue and licensing and royalty revenue, based on objective and reliable evidence of fair value for any such element. In the event that vendor-specific objective evidence does not exist, revenue will be recognized over the term of the agreement and will be allocated among the deliverables based on the relative stated invoice price for the elements. In an arrangement that includes software that is more than incidental to the products or services as a whole, we recognize revenue from the software and software-related elements, as well as any non-software deliverable(s) for which a software deliverable is essential to its functionality, in accordance with the authoritative guidance on software revenue recognition.

        CDP and services revenue.    We enter into CDPs with customers under which we conduct R&D activities jointly with the customer. These agreements specify minimum levels of research effort required to be performed by us. Payments received under the agreements are not refundable if the research effort is not successful. Historically, we have not provided any refunds under these arrangements.

        We retain rights to certain elements of technology developed during the course of performance, which the customer has an option to license in the future under the terms defined in the agreement. We typically recognize revenue from these arrangements on a time and materials basis. Most arrangements with customers have fixed monthly fees and requirements to provide regular reporting of R&D activities performed. Payments received prior to performance are deferred and recognized as revenue when earned over future performance periods.

        Product maintenance and support services revenue is included in CDP and services revenue. These services entitle customers to receive product updates and enhancements or technical support and maintenance, depending on the offering. The related revenue is recognized ratably over the period the services are delivered. We do not have vendor-specific objective evidence of selling price for our product maintenance and support services.

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        Product revenue.    We recognize revenue from the sale of products once delivery has occurred (title and risk of loss have passed to the customer), and customer acceptance, if required, has been achieved. We have determined that the software included with its equipment products is more than incidental to the product as a whole. We do not have vendor-specific objective evidence of selling price for our products.

        Licensing and royalty revenue.    We recognize revenue for licenses to IP when earned pursuant to the terms of the agreements. Time-based license revenue is recognized ratably over the license term. License and royalty revenue that becomes triggered by specific customer actions, such as exercise of a license option or by sales volume, is recognized when they occur based on royalty reports or other information received from the licensee, generally one quarter in arrears. Minimum and prepaid royalties and license fees are recognized ratably over the related periods.

        In October 2009, the Financial Accounting Standards Board (FASB) issued a new accounting standard which excludes from the scope of software revenue guidance the revenue arrangements which include tangible products that contain software components and non-software components that function together to deliver the tangible product's essential functionality. At the same time, the FASB also issued another accounting standard which changes the requirements for establishing separate units of accounting in a multiple-element arrangement and requires the allocation of arrangement consideration to each deliverable to be based on its relative selling price. The new standards are effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. We adopted the new standards commencing on January 1, 2011 and therefore will apply such standards against all arrangements entered into or modified on or after January 1, 2011. The adoption did not have an impact on our consolidated financial condition, operating revenue, results of operations or cash flows for the three month period ended March 31, 2011 as there were no multiple-element arrangements that originated during the period. The adoption of this standard may impact future revenue recognition for multiple-element arrangements where product maintenance and support and time-based licenses are the only undelivered elements. The impact of adopting these provisions will result in more product revenue recognized in earlier periods than would otherwise have been the case prior to adoption, as we allocate revenue using the relative selling price method as opposed to recognizing all revenue from the arrangement ratably over the longer of the product maintenance and support term or license period.

Stock-Based Compensation

        We recognize compensation costs related to stock options and shares of restricted stock granted to employees based on the estimated fair value of the awards on the date of grant, net of estimated forfeitures. We estimate the grant date fair value, and the resulting stock-based compensation expense, using the Black-Scholes option-pricing model. The grant date fair value of the stock-based awards is generally recognized on a straight-line basis over the requisite service period, which is generally the vesting period of the respective awards.

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        The fair value of the awards granted during the three months ended March 31, 2011 and 2010 and the years ended December 31, 2010, 2009 and 2008 was calculated using the Black-Scholes option valuation model with the following weighted-average assumptions:

 
  Years Ended
December 31,
  Three Months
Ended
March 31,
 
 
  2008   2009   2010   2010   2011  
 
   
   
   
  (unaudited)
 

Expected term (in years)

    6.0     6.0     6.0     6.0     6.0  

Risk-free interest rate

    3.3 %   2.5 %   2.2 %   2.7 %   2.6 %

Expected volatility

    55 %   55 %   55 %   55 %   57 %

Expected dividend rate

    0 %   0 %   0 %   0 %   0 %

        The Black-Scholes model requires the use of highly subjective and complex assumptions which determine the fair value of share-based awards, including the expected term and the price volatility of the underlying stock. These assumptions include:

    Expected Term.    The expected term represents the period that the stock-based awards are expected to be outstanding. For option grants that are considered to be "plain vanilla," we used the simplified method to determine the expected term as provided by the SEC. The simplified method calculates the expected term as the average of the time-to-vesting and the contractual life of the options.

    Expected Volatility.    The expected volatility is derived from historical volatilities of several unrelated, publicly listed peer companies over a period approximately equal to the expected term of the award because we have limited information on the volatility of our common stock since we have no trading history. When making the selections of our industry peer companies to be used in the volatility calculation, we considered the size, operational and economic similarities to our principal business operations.

    Expected Dividend Rate.    The expected dividend rate was assumed to be zero as we have never paid dividends and have no current plans to do so.

    Risk-Free Interest Rate.    The risk-free interest rate is based on the U.S. Treasury yield in effect at the time of grant for zero coupon U.S. Treasury notes with maturities approximately equal to the expected term of the awards.

        In addition to the assumptions used in the Black-Scholes option-pricing model, we must also estimate a forfeiture rate to calculate the stock-based compensation for our awards. Our forfeiture rate is based on an analysis of our actual forfeitures. We will continue to evaluate the appropriateness of the forfeiture rate based on actual forfeiture experience, analysis of employee turnover and other factors. Quarterly changes in the estimated forfeiture rate can have a significant impact on our stock-based compensation expense as the cumulative effect of adjusting the rate is recognized in the period the forfeiture estimate is changed. If a revised forfeiture rate is higher than the previously estimated forfeiture rate, an adjustment is made that will result in a decrease to the stock-based compensation expense recognized in the financial statements. If a revised forfeiture rate is lower than the previously estimated forfeiture rate, an adjustment is made that will result in an increase to the stock-based compensation expense recognized in the financial statements.

        We will continue to use judgment in evaluating the expected volatility, expected terms and forfeiture rates utilized for our stock-based compensation calculations on a prospective basis. As we continue to accumulate additional data related to our common stock and stock option exercises, we may have refinements to the estimates of our expected volatility, expected terms and forfeiture rates, which could materially impact our future stock-based compensation expense.

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        We are also required to estimate the fair value of the common stock underlying our stock-based awards when performing the fair value calculations with the Black-Scholes option-pricing model. The fair value of the common stock underlying our stock-based awards was estimated on each grant date by our board of directors, with input from management. Our board of directors is comprised of a majority of non-employee directors with significant experience in the semiconductor industry. We believe that our board of directors has the relevant experience and expertise to determine a fair value of our common stock on each respective grant date. Given the absence of a public trading market of our common stock, and in accordance with the American Institute of Certified Public Accountants Practice Guide, Valuation of Privately-Held-Company Equity Securities Issued as Compensation, our board of directors exercised reasonable judgment and considered numerous objective and subjective factors to determine the best estimate of the fair value of our common stock including:

    contemporaneous valuations performed by unrelated third party specialists;

    prices for our convertible preferred stock sold to outside investors in arm's-length transactions;

    the rights, preferences and privileges of our convertible preferred stock relative to those of our common stock;

    actual operating and financial performance;

    the likelihood of achieving a liquidity event, such as an initial public offering or a sale of our company given prevailing market conditions and the nature and history of our business;

    illiquidity of stock-based awards involving securities in a private company;

    industry information such as market size and growth; and

    macroeconomic conditions.

        In valuing our common stock, the board of directors considered contemporaneous valuations, which determined the equity value of our business by taking a weighted combination of the value indications under two valuation approaches, an income approach and a market approach. The income approach estimates the present value of future estimated cash flows, based upon forecasted revenue and costs. These future cash flows are discounted to their present values using a discount rate which is derived from an analysis of the cost of capital of comparable publicly traded companies in the same industry or similar lines of business as of each valuation date and is adjusted to reflect the risks inherent in the projected cash flows. The market approach estimates the fair value of a company by applying market multiples of comparable publicly traded companies in the same industry or similar lines of business which are based on key metrics implied by the enterprise values or acquisition values of the comparable publicly traded companies.

        The results of the income approach and the market approach were then weighted evenly to determine the fair value of our business. This fair value was then allocated to each of our classes of stock using the Probability Weighted Expected Return Method (PWERM).

        The PWERM involves a forward-looking analysis of the possible future outcomes of the business. This method is particularly useful when discrete future outcomes can be predicted at a high confidence level with a probability distribution. Discrete future outcomes considered under the PWERM included non-initial public offering (IPO) market-based outcomes as well as IPO scenarios. In the non-IPO scenarios, a large portion of the equity value is allocated to the convertible preferred stock to incorporate higher aggregate liquidation preferences. In the IPO scenarios, the equity value is allocated pro rata among the shares of common stock and each series of convertible preferred stock, which causes the common stock to have a higher relative value per share than under the non-IPO scenario. The fair value of the enterprise determined using the IPO and non-IPO scenarios will be weighted according to the board of directors' estimate of the probability of each scenario. The Black-Scholes

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option-pricing model incorporates various subjective assumptions, including expected volatility, expected term, and the risk-free interest rates, as well as the fair value of the common stock on the grant date as determined by management. These input factors are subjective and are determined using management's judgment. If a difference arises between the assumptions used in determining stock-based compensation expense and the actual factors that become known over time, we may change the input factors used in determining future stock-based compensation expense. Any such changes could materially impact our results of operations in the period in which the changes are made and in periods thereafter.

        Information regarding stock option grants to our employees since January 1, 2010 is summarized as follows:

Grant Date
  Number of
Options Granted
  Exercise Price   Fair Value Per
Share of Common
Stock
 

February 4, 2010

    1,986,250   $ 1.33   $ 1.33  

March 2, 2010

    52,000     1.33     1.33  

May 4, 2010

    67,500     1.33     1.33  

June 25, 2010

    43,500     1.33     1.33  

August 19, 2010

    594,000     1.33     1.33  

December 14, 2010

    416,500     1.70     1.70  

March 31, 2011

    1,236,500     3.10     3.10  

        No single event caused the valuation of our common stock to increase or decrease through March 31, 2011. Instead, a combination of the factors described below in each period led to the changes in the fair value of the underlying common stock.

    Grants Made between February 4, 2010 and August 19, 2010

        On February 4, 2010, the board determined the fair value of the common stock to be between $1.30 and $1.35 per share based on a number of factors, including its review of a contemporaneous valuation analysis conducted as of December 31, 2009. This contemporaneous valuation was prepared on a minority, non-marketable interest basis assuming we were in the Expansion stage of our development. The contemporaneous valuation weighted the income approach and market approach equally to determine the fair value of our business.

        The weightings assigned to each scenario in the PWERM analysis contained in the contemporaneous valuation analysis as of December 31, 2009 were as follows:

IPO

  25.0 - 30.0%

Strategic Merger or Sale

  25.0 - 30.0%

Remain Private Company

  45.0 - 37.5%

Liquidation

  5.0 -    2.5%

        The IPO, Sale and Remaining Private scenarios were discounted to present value using a discount rate of 30% and a holding period between two and four years. The liquidation scenario assumes the business was dissolved and, therefore, no value was assigned to this scenario.

        During the period between the February 2010 and August 2010 valuations, we granted 1,986,250 options on February 4, 2010, 52,000 options on March 2, 2010, 67,500 options on May 4, 2010, 43,500 options on June 25, 2010 and 594,000 options on August 19, 2010. All of the options granted during this period were assigned an exercise price of $1.33 per share, which the board determined to be the fair value based on many factors, including its review of the contemporaneous valuation conducted as of December 31, 2009, which valued the common stock at a range of fair values of $1.30 to $1.35 per share, and based on its determination that there were no events in the period between the date of each

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of the option grants and the date of the contemporaneous valuation that would result in a change to the fair value of the underlying common stock.

    Grants Made on December 14, 2010

        On December 14, 2010, the board determined a fair value of the common stock to be between $1.65 and $1.75 per share based on a number of factors, including its review of a contemporaneous valuation analysis conducted as of October 31, 2010. This contemporaneous valuation was prepared on a minority, non-marketable interest basis assuming we were in the Expansion stage of our development. The contemporaneous valuation weighted the income approach and market approach equally to determine the fair value of our business.

        The weightings assigned to each scenario in the PWERM analysis contained in the contemporaneous valuation analysis as of October 31, 2010 were as follows:

IPO

  30.0 - 35.0%

Strategic Merger or Sale

  30.0 - 35.0%

Remain Private Company

  35.0 - 27.5%

Liquidation

  5.0 -    2.5%

        The IPO, Sale and Remaining Private scenarios were discounted to present value using a discount rate of 28% and a holding period between two and three years. The liquidation scenario assumes the business was dissolved and, therefore, no value was assigned to this scenario.

        We granted 416,500 options on December 14, 2010 with an exercise price of $1.70, which the board determined to be the fair value based on many factors, including its review of the contemporaneous valuation conducted as of October 31, 2010, which valued the common stock at a range of fair values of $1.65 to $1.75 per share, and based on its determination that there were no events in the period between the date of the option grant and the date of the contemporaneous valuation that would result in a change to the fair value of the underlying common stock.

        No single event caused the valuation of the common stock to increase from August 2010 to December 2010; rather it was a combination of factors. This increase in value reflects a number of milestones attained between valuation dates related to new CDPs entered into during the period or the extension of existing CDPs. The increase is also consistent with the stock price movement associated with the guideline companies as well as various market indices from December 31, 2009 to October 31, 2010.

    Grants Made on March 31, 2011

        On March 31, 2011, the board determined a fair value of the common stock to be between $3.00 and $3.20 per share based on a number of factors, including its review of a contemporaneous valuation analysis conducted as of March 4, 2011. This contemporaneous valuation was prepared on a minority, non-marketable interest basis assuming we were in the Expansion stage of our development. The contemporaneous valuation weighted the income approach and market approach equally to determine the fair value of our business.

        The weightings assigned to each scenario in the PWERM analysis contained in the contemporaneous valuation as of March 4, 2011 were as follows:

IPO

  50.0 - 55.0%

Strategic Merger or Sale

  25.0 - 30.0%

Remain Private Company

  22.5 - 15.0%

Liquidation

  2.5 -    0.0%

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        The IPO, Sale and Remaining Private scenarios were discounted to present value using a discount rate of 40% and an 18-month holding period. The liquidation scenario assumes the business was dissolved and, therefore, no value was assigned to this scenario. The discount rate is derived from an analysis of the cost of capital of comparable publicly-traded companies in the same industry or similar lines of business and is adjusted to reflect the risks inherent in the projected cash flows. The increase in the discount rate from the October 2010 valuation to the March 2011 valuation reflects the increased risk of achieving our updated projected financial results which, in the March 2011 valuation, assumed a much greater success rate for certain developed technology to move into customer manufacturing on existing and prospective projects, thereby, increasing the projected financial results and the related risk of achieving the higher results. Accordingly, the discount rate was increased to reflect these increased risks.

        We granted 1,236,500 options on March 31, 2011 with an exercise price of $3.10 per share, which the board determined to be the fair value based on many factors, including its review of the contemporaneous valuation conducted as of March 4, 2011, which valued the common stock at a range of fair values of $3.00 to $3.20 per share, and based on its determination that there were no events in the period between the date of the option grant and the date of the contemporaneous valuation that would result in a change to the fair value of the underlying common stock.

        Similar to the change in fair value between the August 2010 and December 2010 valuations, no single event caused the valuation of the common stock to increase; rather it was a combination of factors. This increase in value reflects the much higher growth and profit potential of our business. In addition, our board substantially increased the probability of an IPO exit from 30-35% to 50-55%, which assumes a conversion of the preferred stock and minimizes the value of the preferred stock liquidation preferences, and thus, increases the common stock value and its relative value to the preferred stock. The IPO probability was increased given higher revenue forecast and greater visibility of future earnings. As of the date of this valuation, we had not yet had any formal meetings with potential underwriters about an IPO but were beginning to have preliminary and other informal discussions on the matter.

        The value increase also reflects the newly extended CDPs, the raising of the Series E preferred stock financing in March 2011 in which we raised $15.0 million through the sale of 3,610,873 preferred shares for $4.15 per share, as well as our boards' optimism with respect to the royalty element with each customer engagement. As a result, our board increased its projected net cash flows, revenue and operating profits during the later years of our projections. In addition, the revenue multiples used in the market approach were increased from 3.5x to 4.0x. The increase in value is also consistent with the stock price movement associated with the guideline companies as well as various market indices from October 31, 2010 to March 4, 2011.

        As of March 31, 2011 we had $4.9 million of unrecognized stock-based compensation expense, net of estimated forfeitures, that is expected to be recognized over a weighted average period of 3.2 years. In future periods, our stock-based compensation expense is expected to increase as a result of our existing unrecognized stock-based compensation to be recognized as these awards vest and as we issue additional stock-based awards to attract and retain employees.

        The intrinsic value of all outstanding options as of March 31, 2011 was $33.6 million based on the estimated fair value for our common stock of $3.10 per share.

        Determining the fair value of our common stock requires making complex and subjective judgments. Our approach to valuation is based on a discounted future cash flow approach that uses our estimates of revenue, driven by assumed market growth rates and estimated costs, as well as appropriate discount rates. These estimates are consistent with the plans and estimates that we use to manage the business. There is inherent uncertainty in making these estimates.

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        Although it is reasonable to expect that the completion of the IPO will add value to the shares because they will have increased liquidity and marketability, the amount of additional value cannot be measured with precision or certainty.

Recent Accounting Pronouncements

        In January 2010, the FASB issued an amendment to an accounting standard which requires new disclosures for fair value measurements and provides clarification for existing fair value disclosure requirements. The amendment will require an entity to disclose separately the amounts of significant transfers in and out of Levels I and II fair value measurements and to describe the reasons for the transfers; and to disclose information about purchases, sales, issuances and settlements separately in the reconciliation for fair value measurements using significant unobservable inputs, or Level III inputs. This amendment clarifies existing disclosure requirements for the level of disaggregation used for classes of assets and liabilities measured at fair value and requires disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements using Level II and Level III inputs. This guidance is effective for interim and annual reporting periods beginning after December 15, 2009, except for certain Level III activity disclosure requirements that will be effective for reporting periods beginning after December 15, 2010. Accordingly, we have adopted this amendment as of January 1, 2010, except for the additional Level III requirements which we will adopt during the year ending December 31, 2011.

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BUSINESS

Overview

        We have pioneered a proprietary approach to accelerate research and development, innovation and time-to-market for the semiconductor and clean-energy industries. Through paid collaborative development programs (CDPs) with our customers, we develop proprietary technology and intellectual property (IP) for our customers focused on advanced materials, processes, integration and device architectures. This technology enables our customers to bring application-specific, customized, high-volume manufacturing-ready integrated devices to market faster and with less risk than traditional approaches to research and development (R&D). We provide our customers with proprietary technology through various fee arrangements and grant them rights to associated IP, primarily through royalty-bearing licenses. Our proprietary approach is broadly applicable to high-volume integrated device markets, which include the markets for semiconductors, flat glass, solar cells, light-emitting diodes (LEDs), flat-panel displays, advanced batteries and other energy-efficient technologies.

        Our approach consists of our proprietary high productivity combinatorial (HPC) platform, coupled with our multi-disciplinary team. Our HPC platform consists of our Tempus HPC processing tools, automated characterization and informatics and analysis software. Our platform is purpose-built for R&D using combinatorial process systems, a methodology for discovery and development that employs parallel and other high-throughput experimentation and allows R&D to be performed at speeds 10 to 100 times faster than traditional methods. Our processing tools allow us to perform up to 192 experiments on a single substrate as compared to traditional methods, which typically allow only a single experiment at a time. Our automated characterization systems and proprietary informatics and analytics match the high throughput of our processing tools. Our multi-disciplinary team of approximately 130 scientists and engineers, of whom approximately 50 have Ph.D.s, designs customized workflows for our customers' specific applications using the HPC platform and applies the workflows in collaboration with our customers. The combination of the HPC platform and our team generates significant competitive advantages for our customers. By accelerating innovation and enabling our customers to commercialize higher-performance and lower-cost integrated devices faster than through traditional methods of R&D, we provide them an opportunity to gain market share and generate higher margins, often through a first-mover advantage.

        Our business model aligns our interests with those of our customers as we collaborate to develop differentiated proprietary technology and IP for high-volume integrated devices through collaborative development programs. Customers pay us development services fees during multi-year CDPs. Our customers receive rights to the technology and IP developed during the CDPs, and once our customers commercialize products using this technology and IP, they pay us primarily through royalties. In certain cases, we sell HPC processing tools to our customers who pay a recurring license to operate those tools with our combinatorial processing capabilities. By aligning our interests with those of our customers, we facilitate collaboration and open communication that is more likely to result in innovative, differentiated products and future CDPs with those customers.

        We currently target large, high-volume semiconductor and high-growth emerging clean-energy markets, including DRAM, flash memory, complex logic, flat glass, solar cells, LEDs and other energy-efficient technologies. According to IHS iSuppli, the semiconductor market had $304 billion in sales in 2010 and is expected to grow at a compound annual growth rate (CAGR) of 5.7% from 2010 to 2015. Based on data from Freedonia Group, GlobalData, IHS iSuppli and MarketsandMarkets, the clean-energy markets had $166 billion in sales in 2010 and are collectively expected to grow at a CAGR of 10.8% from 2010 to 2015. Within these broad markets, we target customers that have track records of technological innovation, deploy significant resources and are pursuing technical advancements that are critical to their success and strategy. We have engaged in paid programs with 17 customers. Our largest customers are ATMI, Elpida Memory, GLOBALFOUNDRIES, Guardian Industries, SanDisk, Taiwan

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Semiconductor Manufacturing Company (TSMC) and Toshiba, which collectively recorded $46 billion in revenue in 2010 associated with the semiconductor and clean-energy markets. ATMI and Elpida have commenced shipping products incorporating technology developed through our CDPs and pay us licensing and royalty fees.

        We were founded in 2004 and are headquartered in San Jose, California. Our total revenue increased to $42.7 million for the year ended December 31, 2010 from $26.9 million for the year ended December 31, 2009. Our total revenue increased to $11.7 million for the three months ended March 31, 2011 from $5.8 million for the three months ended March 31, 2010. Our backlog as of March 31, 2011 was $67.5 million, of which $30.7 million is scheduled to be recognized as revenue during the remainder of the year ending December 31, 2011. Our adjusted EBITDA for the three months ended March 31, 2011 was $0.9 million, and our adjusted EBITDA for the year ended December 31, 2010 was $4.6 million. Our net loss decreased to $1.8 million for the year ended December 31, 2010 from $5.3 million for the year ended December 31, 2009. Our net loss decreased to $1.2 million for the three months ended March 31, 2011 from $3.4 million for the three months ended March 31, 2010. Since inception, we have incurred net losses leading to an accumulated deficit of $69.2 million as of March 31, 2011.

Industry Background

        High-volume integrated devices serve large and growing markets, including the markets for semiconductors, flat glass, solar cells, LEDs, flat-panel displays, advanced batteries and other energy-efficient technologies. Success in these markets requires rapid and cost-effective product innovation, fast time-to-market, competitive pricing, production scalability and the ability to achieve application-specific requirements. These devices are typically manufactured using thin-film deposition of advanced materials through customized processes that create a specific device architecture. It is increasingly necessary to evaluate elements in the periodic table that have previously not been used in high-volume manufacturing to deliver performance and cost improvements, and to develop advanced device structures capable of addressing particular application requirements. These device structures must then be scaled and integrated into cost-effective manufacturing processes to serve high-volume integrated device markets. Traditional R&D approaches are increasingly challenged by the market need to accelerate innovation and time-to-market for the semiconductor and clean-energy industries.

Semiconductor Industry

        Since the inception of the semiconductor industry more than 50 years ago, innovation has been continually driven by consumer demands for smaller, higher-performance, more power-efficient and less expensive electronic products. Recently, this innovation has been driven by broad end-market demand for smartphones, PCs, tablet computers, cloud computing, high-definition media, and advanced aerospace and industrial applications. The semiconductor industry is characterized by intense competition, with many semiconductor companies seeking to gain market advantage over competitors by expanding their broad product portfolios, using their deep design and/or process capabilities and leveraging their IP libraries. Increasingly, these companies are relying on combinations of advanced materials, processes, integration and device architectures to compete and differentiate their products.

        Historically, the pace of semiconductor innovation has been enabled by device scaling, in which, according to Moore's Law, the number of transistors in a design generally doubles every two years. This increasing density has reduced costs and improved capabilities over time, thereby driving market demand and growth. However, semiconductors are approaching the limitations of device scaling with the current set of materials and manufacturing processes. Consequently, semiconductor manufacturers are turning to advanced materials, processes, integration and new device architectures to enable continued device scaling and to deliver improved product performance and cost competitiveness. The reliance on advanced materials, processes, integration and new device architectures has in turn made

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advancements in semiconductor technology increasingly complex and expensive. Each new process node requires experimentation with more elements in the periodic table and more material combinations to deliver the desired physical and electrical characteristics for device performance and manufacturability. For example, the broad adoption of copper interconnects enabled the industry to continue device scaling in the microprocessor field, but as this advancement required changes not only in materials, but also in processes, integration and device architectures to achieve high-volume, cost-effective manufacturing, the transition was challenging and slow.

        Semiconductor manufacturing companies have used device scaling to shrink transistors and develop new process technology nodes to address customer requirements for lower cost and higher performance ICs. However, advanced R&D and new fabrication facility costs have increased significantly over time, especially as the use of advanced materials and processes have become increasingly important to the development and introduction of the latest generation process technology nodes. According to data compiled by a leading manufacturer in the semiconductor industry and presented at a 2009 industry conference, the industry average for logic process R&D has reached between $600 million and $900 million for nodes between 45nm and 32nm. This represents more than an 80% increase from 65nm and older nodes, and expectations are for process R&D to reach $1.3 billion for 22nm and 12nm nodes, an additional 70% increase in process R&D costs. In addition, according to IC Knowledge, costs of semiconductor fabrication facilities have increased from approximately $50 million in 1975 to the approximately $3.5 billion required to open a new 32nm facility currently, with the expectation that costs for a leading edge facility will reach $8 billion by 2015. The greater expertise and higher costs required to explore advanced materials, processes, integration and new device architectures have led to increased specialization among materials, capital equipment, semiconductor manufacturing and IC design companies. However, this specialization has left gaps in the industry knowledge base with respect to the complexities of the interaction between materials science, process technology, device integration and the scale-up to high-volume IC production.

        To succeed in the market and deliver an appropriate financial return, semiconductor companies are under intense pressure to rapidly develop optimized ICs and efficiently scale them to cost-effective production. Using advanced semiconductor materials, processes, integration and new device architectures requires intensive, time-consuming experimentation because advanced materials are not well understood and accurate, robust models do not exist. As a result, semiconductor companies must increasingly rely on time and resource-intensive, empirical R&D to develop innovative solutions and enable manufacturability at lower costs.

Clean-Energy Industry

        The emerging clean-energy markets also depend on improvements in advanced materials, processes, integration and new device architectures. Clean-energy markets, which include the markets for flat glass, solar, LEDs, advanced batteries and other energy-efficient technologies, remain in early stages of technological evolution. Companies in the fast-evolving clean-energy markets are in the early stages of understanding materials, processes, integration, device architectures and manufacturing methodologies. As a result, those companies that successfully develop relevant, scalable proprietary materials and device technologies will likely have a competitive advantage over their peers in both time-to-market and price.

        Decreasing prices, government policies and social awareness are driving growth in the clean-energy markets and certain sectors have entered high-volume production. Reduced prices and improved performance relative to traditional alternatives generally catalyze widespread adoption of new technologies. For example, LEDs are currently more expensive to purchase than incandescent and fluorescent lighting. To increase penetration of the general lighting market, price reductions and improvements in performance, such as brightness, color, form factor and features like dimming, will be critical. New advanced materials, improved process technologies and new device architectures will

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enable larger wafer sizes, higher-volume production and improved yields for lower-cost and higher-performing LEDs.

        Because of the early stages of technology development in the clean-energy markets, there are significant opportunities for cost savings and potential competitive advantage. Market participants who resolve the price-performance challenges ahead of their competitors through advanced materials, processes, integration and new device architectures may greatly accelerate market adoption and establish themselves as market leaders. These opportunities amplify the importance of empirical R&D to develop low-cost, high-performance solutions in these early-stage markets.

Current Challenges with Innovation in High-Volume Integrated Device Markets

        Advanced materials and device integration are driving forces behind technology advancement in the high-volume integrated device markets. In addition, innovation in these markets and control of the resulting IP are critical to enable competitive differentiation. However, the existing approach used to explore new materials, processes, integration and device architectures is complex, time-consuming and requires empirical R&D. For example, Intel, an industry leader, has stated at technology conferences that while the Tri-Gate advanced transistor technology was invented in 2002, it was not optimized for high-volume manufacturing until 2011.

        Traditionally, device manufacturers have conducted R&D using expensive high-volume manufacturing tools that are not specifically built for that purpose. Production tools typically can only run one process at a time, which leads to limited cycles of learning. Furthermore, using tools deployed in a production environment for R&D requires reserving tool time on high-volume manufacturing lines to evaluate each experiment, resulting in substantial opportunity costs for existing product manufacturing. High-volume manufacturing environments are also not conducive to R&D because these environments require stability to minimize risk and to reduce contamination that the research-based introduction of new materials, tools or processes may cause. Additionally, high-volume manufacturing is conducted by operators focused on repetitive, mistake-free processing, not on many cycles of trial and error. In addition to some of the challenges above, certain clean-energy device manufacturers use laboratory-scale tools for R&D, which do not address the scale-up requirements critical to high-volume manufacturing. These factors combine to increase development risks due to long learning cycles, limited data sets, narrow exploration capabilities and slow time-to-market.

        Successful R&D programs require flexibility around experimentation and the introduction of new materials, chemicals, processes and tools to derive the most efficient high-volume integrated device solutions. Furthermore, we believe they are best administered by scientists and engineers with experience across various disciplines of equipment, materials, device architectures and processes to conduct successful experiments and derive optimized solutions.

        The following existing approaches have been used to complement internal R&D, but each has specific limitations:

    Equipment suppliers. Equipment suppliers provide solutions that are not tailored to specific customer applications. Additionally, they provide high-volume manufacturing solutions that are not purpose-built for researching the interaction of advanced materials, processes, integration and device architectures.

    Industry consortia. Industry consortia provide solutions that offer no competitive differentiation because the customer must share the IP with all consortium participants, including competitors.

    Alliance partnerships. Alliance partnerships impose limitations on the overall outcome, as they are typically structured to find generic solutions rather than the solutions for a particular application. Additionally, these generic solutions are offered to a small set of competitors and are not customer-specific or application-specific.

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    University research. University research provides theoretical solutions requiring additional work and time to commercialize, since this work typically does not address manufacturing or commercialization challenges.

    Third-party IP licensing. Third-party IP licensing is primarily used for defensive purposes or market access. Those who cross-license IP do not receive a solution that is specific to the customer, manufacturing process or application, and the received solution is not differentiated from what their competitors receive through the same license.

        Substantially improved methodologies are required to generate the learning cycles necessary to accelerate innovation, improve product development and ensure manufacturing scalability of high-volume integrated devices. Further, companies require new ways to develop proprietary technology and obtain IP rights to support competitive advantage for their new products.

Our Solution

        We have pioneered a proprietary approach to accelerate research and development, innovation and time-to-market for the semiconductor and clean-energy industries. Using our approach, we develop technology and IP rights focused on advanced materials, processes, integration and device architectures in collaboration with our customers. This technology enables our customers to bring application-specific, customized, high-volume manufacturing-ready integrated devices to market faster and with less risk than traditional approaches to R&D. Our proprietary HPC platform consists of our Tempus HPC processing tools, automated characterization and informatics and analysis software. Our HPC platform increases R&D productivity because it is purpose-built for R&D and utilizes advanced combinatorial processing systems, thereby allowing for experiments to be performed at speeds 10 to 100 times faster than traditional methods. We provide our customers with proprietary technology through various fee arrangements and grant them rights to IP developed during the collaboration, primarily through royalty-bearing licenses. Our multi-disciplinary team of approximately 130 scientists and engineers, of whom approximately 50 have Ph.D.s, designs customized workflows for our customers' specific applications using our HPC platform and applies the workflows in collaboration with our customers to develop proprietary technology for them.

        The key elements of our HPC platform include the following:

    Tempus HPC processing.  We use our Tempus HPC processing tools to rapidly process different experiments consisting of various combinations of materials, processing parameters, sequencing and device structures. We are able to perform up to 192 experiments on a single substrate, as compared to traditional methods, which typically allow only a single experiment at a time.

    Automated characterization.  We use automated characterization systems to characterize the substrates processed by our Tempus HPC processing tools, thereby rapidly generating experimental data while matching our processing throughput.

    Informatics and analysis software.  We use our informatics and analysis software to automate experiment generation, characterization, data analysis and reporting, in each case while matching our processing throughput, and to create an aggregated and searchable database of information that includes the experimental results we generate.

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        The following graphic illustrates how these elements combine to form our HPC platform:

GRAPHIC

Benefits to Our Customers

        Our business model aligns our interests with those of our customers as we collaborate to develop application-specific, customized, manufacturing-ready IP for high-volume integrated devices. We provide our customers with proprietary technology through various fee arrangements and grant them rights to IP developed during our CDPs, primarily through royalty-bearing licenses. Our differentiated platform solution and approach to collaborative engagements are designed to deliver the following significant benefits to our customers:

    Accelerated time-to-market with better, lower-cost products.  Faster processing of experiments, throughput-matched characterization and real-time data management and analysis allow additional learning cycles and broader exploration of materials and process solution combinations. In highly competitive markets, the resulting speed to market with improved, lower-cost products enables our customers to gain market share and improve profitability. For example, during our engagement with Elpida to introduce their next generation DRAM, we were able to accelerate time-to-market by reducing experimentation cycle times from weeks to hours, thereby increasing learning cycles by 100 times per month. The increased volume of experimental data evaluated during the R&D process enabled a lower-cost and more power-efficient solution to enter high-volume manufacturing in the fourth quarter of 2010.

    Development of customer-specific and application-specific, manufacturing-ready IP.  When we engage in a CDP with our customers, we use our HPC platform and customized workflows to develop IP-protected, proprietary technology that is tailored to our customers' applications and ready for high-volume manufacturing. We provide our customers rights to the IP for their applications primarily through royalty-bearing licenses.

    Increased R&D productivity and reduced technology risk.  Using our combinatorial processes, we narrow the potential combinations of advanced materials, processes and device architecture solutions through a series of increasingly rigorous screening stages to guide the selection of solutions that meet device performance requirements and that are cost-efficient and ready for high-volume manufacturing. The combinatorial process of screening and evaluating these solutions and their manufacturability mitigates our customers' technology risk earlier in the development cycle. For example, during our engagement with Guardian to develop anti-reflective glass coatings for solar panels, we were able to customize a workflow that allowed our HPC platform to evaluate a broad range of materials and process conditions to quickly identify combinations resulting in coatings with desired optical and durability characteristics. With our

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      extensive screening process, we were able to develop multiple formulations meeting Guardian's desired performance criteria that Guardian believes will both facilitate their transition to large scale manufacturing and reduce their commercialization risk.

Strengths

        We have pioneered, developed and patented a proprietary platform and methodology for accelerating R&D in the semiconductor and clean-energy markets. Our strengths include:

    Proprietary and patented HPC platform.  Our HPC platform employs proprietary and patented combinatorial methods to parallel process up to 192 experiments on a single substrate as compared to traditional methods, which typically allow only a single experiment at a time. As of July 15, 2011, we owned or had exclusive rights within our field of use to 577 U.S. patents and patent applications (most of which also have foreign counterparts), which provide us with a competitive advantage in the use of combinatorial methods and systems in our target markets.

    Flexible technology platform configurable for and extendable to multiple markets.  Our HPC platform can be configured for many applications and extended to address the broad set of integrated device markets. Because of the similarities in materials deposition, manufacturing processes and device integration complexities across markets, our platform allows us to create customized workflows and support innovation across multiple markets.

    Seasoned engineering team with multi-disciplinary expertise.  We have assembled a multi-disciplinary team of approximately 130 scientists and engineers, of whom approximately 50 have Ph.D.s, with expertise across various disciplines, fields and technologies, including engineering, materials science, process development and integration, equipment, device process technologies and device integration.

    Collaborative customer engagements leading to IP generation and strategic alignment.  Our business model aligns our financial interests with those of our customers, to whom we grant rights to proprietary technology and IP developed during our collaborations. Customers pay us development service and HPC platform subscription fees during multi-year CDPs. As they commercialize products incorporating technology developed through the CDPs, our customers then pay licensing fees and/or royalties, including fixed fees and fees based on percentages of revenue and/or fee per product. In certain cases, we sell HPC processing tools to our customers and receive recurring license fees. This alignment of interests facilitates collaboration and open communication that improves development efficiencies and is more likely to result in innovative, differentiated products, which in turn creates a cycle of success that leads to future CDPs with those customers.

    Attractive business model with contracted CDP revenue and recurring high-margin royalties.  Our multi-year CDPs generate predictable CDP and services revenue from our customers. Our CDPs also establish the terms upon which we will receive licensing and royalty revenue from the sale of our customers' products that incorporate technology developed through our CDPs. These royalty arrangements create a business model with attractive margins and a high degree of near-term visibility. We expect to generate more revenue through royalty-based licenses as more of our customers commercialize and ramp production of products incorporating technology developed through the CDPs.

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Our Strategy

        Our mission is to drive our customers' success by transforming R&D and accelerating innovation in markets that derive competitive advantage from the interaction of materials science, processes, integration and device architecture. To accomplish this, we:

    Target large, high-volume semiconductor markets.  We target large, high-volume semiconductor markets, including DRAM, flash memory and complex logic. Success in these markets requires semiconductor companies to consistently remain at the leading edge of cost and performance, which demands innovation around materials science, processes, integration and device architectures.

    Target large, high-growth, emerging clean-energy markets.  We target large, high growth, emerging clean-energy markets, including the markets for flat glass, thin film and crystalline solar, LEDs, advanced batteries and other energy-efficient technologies. We believe we can deliver significant improvements in cost, performance and manufacturability in these markets with our HPC platform.

    Engage with existing and potential market leaders in our target markets.  We enter into CDPs with companies that are well-positioned to lead their markets. We engage with customers that have track records of technological innovation, deploy significant resources and are pursuing advancements that are critical to their success and strategy.

    Create proprietary IP with our customers.  We develop differentiated, IP-protected technologies with our customers, and we grant them rights to these technologies and IP, primarily through royalty-bearing licenses. We structure our customer engagements so that our business interests align with their market success.

    Enhance our HPC platform and multi-disciplinary team.  We continue to develop, broaden and protect our processing, characterization, data analysis and workflow capabilities. To enhance our existing platform, we will expand our existing multi-disciplinary team by continuing to recruit personnel with broad skill sets.

    Explore and develop new technologies in high-volume integrated devices.  We will continue to explore and internally develop new technologies and expertise to serve future customers in our targeted markets, including, in particular, clean energy. We will focus these efforts in markets which are in the early stages of development to speed innovation, capture value and facilitate success for customers.

Our Platform

HPC Workflows

        We begin the development and discovery process by working with our customers to define the specific requirements a new solution should have to meet the needs of a given application. Generally, these criteria are well beyond the performance attributes of currently available solution sets. We then apply the components of our HPC platform to develop and discover solution sets that match these criteria.

        Once an experiment is processed, the data sets of each experiment are stored in a secure database and analyzed for desired properties. As with processing, our clean room labs include a broad array of characterization and metrology instruments and software to evaluate different properties under a wide variety of process conditions. These properties include physical, electrical, mechanical, thermal, chemical, and optical properties. In general, we are able to design, process and characterize tens to hundreds of experiments in a single day.

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        To reach the point of commercialization or transfer to our customers' manufacturing process qualification, a solution set must progress through an extensive series of screening stages. Below is an illustration of the screening process of the HPC platform for use in evaluating materials, unit processes, and process sequences.

GRAPHIC

    Primary Screening.  Primary screening incorporates and focuses on materials discovery. Materials are screened for certain properties to select possible candidates for a next level of screening. In the initial primary screening there may be thousands of candidates that are subsequently reduced to hundreds of candidates.

    Secondary Screening.  Solution candidate materials from primary screening are advanced to secondary screening processes that will examine materials and unit process development. In this secondary screening, processes and integration may be additionally considered to narrow the candidates from hundreds of candidates to tens of candidates.

    Tertiary Screening.  Solution candidate materials and process conditions that continue to meet or exceed the defined criteria through the secondary screening stage are then either transferred to our customer or processed internally for additional characterization and scale up. These candidates are then characterized on a larger scale, and correlation of the desired process is developed to allow the transfer of the developed technology in a manufacturing scale process.

    Manufacturing and Commercialization.  Once a candidate has passed this development scale analysis, it is ready for commercialization and the customer will decide whether to commercialize the developed technology.

        Secondary screening begins while primary screening is still ongoing, and while we are still generating additional primary screening candidates. Tertiary screening begins once we have identified a

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reasonable set of options from secondary screening, and while we are still generating additional secondary screening candidates. As these stages overlap, there may be feedback from later stages that is then incorporated back into an earlier stage to further optimize the selection of materials, unit processes and process sequences.

Wet Processing Tools

        We offer a series of wet processing tools which apply HPC methods to fluids-based applications such as cleans, deposition and wet etch, self-assembly, and surface treatment processes. These tools, which can be used alone or in combination, include:

    Tempus F-10.  A stand-alone system used for primary screening through the automatic creation of formulations, especially those involving powders and viscous liquids.

    Tempus F-20.  A stand-alone system for materials and process screening, which is used for library creation as well as processing of wafer coupons. This product can be used for primary or secondary screening, depending on the reactor block design and the substrate type.

    Tempus F-30.  A stand-alone system for integration and tertiary scale up screening, which is used to scale up the most promising results from primary and secondary screening to full-size patterned wafers (200 or 300mm).

Dry Processing Tools

        In addition, we offer dry processing tools which apply HPC methods to vapor-based applications. Each of these tools can be used in primary, secondary and tertiary screening. These tools, which can be used alone or in combination, include:

    Tempus P-30-HPC-Physical Vapor Deposition (PVD).  A 300mm chamber with the ability to use up to four PVD sources and three optional deposition methods (including DC, RF and pulse DC) on a vast range of film thicknesses and/or compositions and/or film stacks within each site-isolated region of a substrate.

    Tempus A-30-HPC-Atomic Layer Deposition (ALD).  A 300mm chamber capable of site isolation of both metal and dielectric films across quadrants of the wafer, with the ability to introduce variation of film thickness and/or composition and/or film stacks within each quadrant.

    Tempus AP-30.  A configurable platform with multiple A-30 or P-30 chambers and common support modules to facilitate both ALD and PVD for rapid screening of thin-film metal alloys, dielectrics and multilayer stacks. Processes can be scaled to facilitate high-volume manufacturing.

Automated Characterization

        Immediately after processing substrates on our Tempus HPC processing tools, we use automated and customized characterization instruments to rapidly generate physical and electrical data from the experiments. The aggregated data is automatically loaded into our informatics data warehouse. As with processing, our clean room labs include a broad array of characterization and metrology instruments and software to evaluate different properties under a wide variety of process conditions. Our characterization instruments match the throughput of our processing tools to maximize experimental learning cycles.

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Informatics Software, Analysis and Services

        Our informatics software has the ability to automate the capture, entry and storage of HPC processing and automated characterization and metrology data and then to evaluate, summarize and securely distribute in real time this data to the appropriate parties. Additionally, we use our informatics software to leverage experiments processed and characterized in the past for a customer to increase the speed and effectiveness of the engagement. The key components of our informatics software include:

    Workflow management software.  Manages the design and process of experiments, metrology and collection of data and summarizes aggregated data to the various working teams in the form of status reports; provides our customers with real-time access to results of our experiments and analysis;

    Analysis and reporting software.  Provides data and analysis tools to evaluate process distributions, correlate electrical distributions, map defectivity distributions, perform spectral analysis and facilitate interactive creation of summary reporting;

    Security and collaboration management software.  Provides secure communication between geographically dispersed working teams, ensures the security of created documentation and presentations, manages the minutes for meetings, provides programs and project plans to coordinate working teams, shares summary reports across the working team and provides reviews of finished processes and status of ongoing processes; and

    Integration services.  Facilitate collaboration between our tools and the customer's process and metrology tools, automate the recipe loading, automate data collection and leverage software to customize reports.

Our Technology

        Embedded throughout our hardware and software, our technology is based upon the parallel and/or rapid serial experimentation capabilities of combinatorial methods. High-productivity combinatorial methods generally refer to techniques that vary materials, unit processes, process, and device integration sequences across multiple regions of one or more substrates, the output of which can then be evaluated in parallel. Our informatics software and analytical methods characterize and analyze these combinations of materials, unit processes, process, and device integration sequences for the most promising solutions in a structured, automated and throughput-matched fashion. The relationship between materials, processes, integration and device output are established earlier in the development process, so that performance and manufacturability considerations are taken into account from the outset, instead of late in the R&D process.

        Although our approach is unique in the semiconductor and clean-energy industries, combinatorial technology has been widely used in other industries, especially where new materials function as primary enablers of product innovation. Examples include the pharmaceutical, biotechnology, and energy sectors, where combinatorial techniques have been accelerating development since the early 1990s.

        We are able to deploy and benefit from our proprietary combinatorial methods because of our multi-disciplinary team of approximately 130 scientists and engineers, of whom approximately 50 have

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Ph.D.s. Our team has expertise in a wide range of disciplines, fields and technologies, including the following:

Disciplines   Applications   Equipments
(Hardware & Process)
  Devices
(Processes and Integration)
Chemistry
Physics
Materials science
Engineering

•       Chemical

•       Electrical

•       Mechanical

•       Software

•       Controls

•       Systems

  Equipment development

•       Systems engineering

•       Semiconductor tools

•       Flat panel display tools

•       Software
Design, qualification, manufacturing

•       Modeling / TCAD

•       Development / integration

•       Yield management

•       Statistical methods

•       Test structures

•       Inspection, review & characterization

•       Electrical test

  Deposition

•       ALD

•       PVD

•       PECVD

•       CVD (metals/dielectrics)

•       ECD / electroless

•       CBD / curtain coating
Wet processing
Laser annealing
Defect detection

•       Optical, e-beam, laser

•       High-speed voltage contrast

  Process, equipment, integration

•       DRAM / Non-Volatile Memory

•       Microprocessors

•       Solar cells (CIGS, thin film Si, cSi)

•       Low e glass coatings

•       LED
Process technologies

•       Selenization / absorber formation

•       Shallow trench isolation gapfill

•       High-k / metal gate

•       Contact & advanced silicide

•       Advanced Cu—interconnect (Cu, Al)

•       Advanced packaging

Our Collaborative Development Programs

        Our CDPs allow our customers to collaborate with our multi-disciplinary team on specific technical problems. We establish processes and procedures to protect our customers' confidential information during these CDPs. Our CDP work is primarily carried out at our facility in close collaboration with our customers. In addition, we support device qualification for pilot manufacturing at our customers' manufacturing and development sites. Customer teams and our teams collaborate on development of new materials, unit processes, process modules and integration sequences, and qualify the supply chain for high-volume manufacturing. Our multi-disciplinary team can rapidly adapt our Tempus HPC platform to meet customer application requirements and develop and optimize device and product technologies to ensure success with customer programs.

        We typically initiate new customer engagements with smaller, customer-paid programs called micro-CDPs. Our micro-CDPs precede the full CDP. These are smaller programs that require significantly less investment from our team but allow us to demonstrate the capabilities of our HPC platform to a customer without requiring a customer to commit to a multi-year agreement. We use these micro-CDPs to demonstrate the capabilities and value of our HPC platform to these new customers, with the objective of engaging with these customers in a full CDP.

        Our CDPs are designed to result in the development of proprietary technology and IP for new devices, manufacturing process technology and materials, which we license to our customers for use in volume production. We provide our customers with proprietary technology through various fee arrangements and grant them rights to associated IP primarily through royalty-bearing licenses.

Our Customers

        Our customers include semiconductor device, semiconductor materials and equipment and clean-energy market leaders, including ATMI, Elpida, GLOBALFOUNDRIES, Guardian, SanDisk, Toshiba and TSMC. Typically, our customers engage in CDPs with our team leveraging our HPC platform to develop and commercialize high-volume integrated devices using collaboratively developed technology. To date, ATMI and Elpida have already successfully developed products through their CDPs and we

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have granted them rights to the associated technology and IP rights through royalty-bearing licenses. Successes in our initial CDPs have led to expanded relationships and follow-on programs with existing customers for new products and applications.

        One example of a customer who has successfully developed and commercialized products through a CDP and expanded upon initial CDPs through follow-on programs is Elpida. We initially began working with Elpida through a micro-CDP in November 2007, resulting in a full CDP in May 2008. In this resulting CDP, we were able to accelerate time-to-market by reducing experimentation cycle times from weeks to hours, thereby increasing learning cycles by over 100 times per month. The increased volume of experimental data evaluated during the collaboration enabled the development of a lower-cost and more power-efficient solution through innovations in materials, processes and integration. As a result of our engagement success, Elpida subsequently engaged us in follow-on programs for new products. Elpida incorporated technology developed through this CDP in their next generation DRAM products which entered high-volume manufacturing in the fourth quarter of 2010.

        The majority of our revenue comes from ATMI and Elpida, which represented a combined 53%, 72%, 88% and 81% of our total revenue for the three months ended March 31, 2011 and the fiscal years ended December 31, 2010, 2009 and 2008, respectively. We believe that the revenue concentration associated with these two customers will likely continue to decline as our other customers begin to transition technology developed through CDPs into licensing and royalty revenue and as we continue to enter into new CDPs with new and existing customers in the semiconductor and clean-energy markets.

Intellectual Property

        Our success depends in large part on our IP. We have patented and continue to seek patent protection for combinatorial methods and systems included in our HPC platform. We have also patented and continue to seek patent protection of innovations that result from applying our HPC platform to design, develop and manufacture ICs, photovoltaic cells, glass coatings, LEDs, organic light-emitting diodes (OLEDs) and thin films for electronics, optical and energy applications (Fields). As of July 15, 2011, we owned 193 U.S. patents and patent applications (most of which also have foreign counterparts), of which 102 are related to the HPC platform and 91 are related to innovations in the Fields. We also have a license to approximately 384 U.S. patents and patent applications granted to us by Symyx Technologies, Inc. (Symyx), a wholly-owned subsidiary of Accelrys, Inc., that exclusively provides us the right to use combinatorial methods and systems in the Fields.

        As of July 15, 2011, we owned 11 patents and 91 patent applications related to our HPC platform in the United States, and two patents and 44 patent applications in other jurisdictions. We continue to file patent applications to seek protection for further advancements of our HPC platform. We own all rights to such patents and generally do not grant licenses to third parties under these patents other than in connection with the use of our HPC platform. Our patents and patent applications cover the following aspects of the HPC platform:

    Combinatorial systems and methods related to fluids-based processing;

    Combinatorial systems and methods related to vacuum-based processes, including deposition and etch;

    Systems and methods for site-isolated processing;

    Combinatorial systems and methods related to high-volume manufacturing; and

    Processing techniques using combinatorial and non-combinatorial methods.

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        In addition to the patents we own, we have rights to approximately 384 U.S. patents and patent applications pursuant to licenses and sublicenses granted to us by Symyx to use combinatorial methods and to make, use and sell combinatorial systems. These rights are exclusive to us in the Fields. On July 28, 2011, we entered an asset purchase agreement with Symyx, pursuant to which Symyx will transfer to us all the patents for combinatorial methods and systems owned by them, effective upon the consummation of this offering. See "Certain Relationships and Related Party Transactions—Symyx" for further details about this transaction.

        We also have and seek patent protection for application-specific innovations developed using our HPC Platform (applications IP). Such innovations cover advancements in new materials, processes, process conditions, process sequences and device architectures in applications such as semiconductor memory, semiconductor complex logic, glass coatings, solar cells and LEDs. As of July 15, 2011, we owned 20 patents and 71 patent applications in the U.S. covering applications IP, as well as one patent and 28 patent applications in other countries. We may develop applications IP either on our own or in collaboration with our customers through CDPs.

        In most cases, we maintain an ownership interest in the applications IP that results from CDPs and we grant licenses under this applications IP to the CDP customer. Such licenses generally allow the CDP customer to have exclusivity for a limited term in a particular field. We keep the right to grant licenses under the CDP patents outside that field. Furthermore, if the CDP customer elects to not extend the term of exclusivity beyond the limited term, we have the right to grant licenses to third parties within the field.

        We may also develop applications IP internally where we believe such IP may have broad applicability in the relevant market. We are able to leverage this IP to begin CDPs with new customers. In addition, our ability to own the applications IP in these situations allows us to leverage learning and patent protection across industries and applications while providing our existing customers with the IP rights they desire to gain competitive advantage in their fields for the markets they serve.

Sales and Marketing

        We sell and market our solutions worldwide through our own sales force by developing direct relationships with our customers. We have sales personnel located in Japan, Taiwan, Europe and the United States, including account managers, who are responsible for specific customer accounts, and product marketing personnel, who provide business development support and application and workflow platform expertise. We often base customer support personnel at or near the offices of our major customers to improve our level of service and expand our sales.

        Our business development and product marketing group focuses on our strategy, platform and technology roadmap, new platform introduction process, demand assessment and competitive analysis. The group coordinates new application evaluation and development both internally with our engineering teams and externally with new and existing customers. We intend to increase our sales and marketing efforts and further expand our business development and product marketing organization.

Manufacturing

        We manufacture our HPC tools through partnerships with experienced contract manufacturers that manufacture and assemble sub assemblies incorporating our designs. We believe that partnering with contract manufacturers provides us with access to the most current facilities and processes without significant capital outlay on our part, allowing us to focus our resources on R&D, product design and collaboration program support. Although we have historically relied on a small number of contract manufacturers for the manufacture and assembly of a majority of our workflow platforms, we have relationships with a variety of contract manufacturers and are not dependent on any single contract manufacturer.

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Research and Development

        We conduct R&D activities for CDPs and for internal research and development on both workflow platform development and application R&D. We employ a research and development team of approximately 140 full-time employees. This R&D team includes many experienced semiconductor engineers with advanced degrees from leading universities around the world and managers with experience from leading chip manufacturers, solar PV companies and equipment suppliers. We believe these R&D professionals on our team have enabled us to develop our HPC platform, support customer CDPs, implement our technology roadmap rapidly and provide us with the foundation for our technology advancement in the future.

        Our customer-sponsored R&D expenses included in cost of revenue were $9.1 million in 2008, $8.8 million in 2009 and $16.9 million in 2010, which represented approximately 39%, 33% and 40%, respectively, of our revenue in those years.

        We devote a substantial portion of our resources to engineering next generation platforms by integrating future generations of technology and developing a standardized software and informatics platform. We work closely with multiple vendors during the development of new workflows or workflow modifications for use in our future platforms. We work with our software and component vendors to establish integration standards. To that end, we are developing scalable software architectures that will allow us to integrate new processes requested by our customers to further expand the opportunities with new and existing customers, accelerate time-to-market, and allow our workflow platforms to operate with adjacent vertical technologies such as clean-energy markets. Our internal R&D expenses were $11.8 million, $11.0 million and $13.9 million for the fiscal years ended December 31, 2008, 2009 and 2010, respectively, which represented approximately 51%, 41% and 33%, respectively, of our revenue in those years.

Competition

        The principal capabilities required to be competitive in our market include technical expertise, processes and integration capabilities, diversity of platform offerings, development speed and performance, quality and reliability of field engineers, depth of collaboration with customers and technical support. We believe we compete favorably with respect to these factors because of the breadth of capabilities of our HPC platform, the depth of multi-disciplinary expertise of our internal research team and external engineering teams who collaborate with customers and our use of combinatorial processing and throughput matched characterization and analysis. These differentiating factors allow us to explore more comprehensive solution sets and provide faster solutions to our customers. We compete for the R&D resources of our customers with equipment suppliers, industry consortia, alliance partnership, university research and third-party IP licensing. In addition, many of our customers design, develop, manufacture and market solutions based on their own unique device architectures and develop their own intellectual property in-house.

        A portion of our revenue is generated from the sales of end products by our customers, and our competitive position therefore is dependent on their competitive positions. The markets for our customers' products that incorporate technology developed through our CDPs are intensely competitive and characterized by rapid technological change. These changes result in frequent product introductions, short product development cycles and increased product capabilities typically representing significant price and performance improvements.

Environmental Regulation

        We are subject to various foreign, federal, state and local environmental laws and regulations governing, among other matters, emissions and discharges of hazardous materials into the air and water, the use, generation, storage, handling, transportation and disposal of, and exposure to, hazardous

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materials and wastes, remediation of contamination and employee health and safety. In addition, under certain of these environmental laws, liability can be joint and several and without regard to comparative fault. Our operations involve the use of hazardous materials and produce hazardous waste, and we could become liable for any injury or contamination that could arise due to such use or disposal of these materials. Failure to comply with environmental laws and regulations or to obtain or maintain required environmental permits could result in the imposition of substantial civil and criminal fines and sanctions, could require operational changes or limits or the installation of costly equipment or otherwise lead to third party claims. Future environmental laws and regulations, stricter enforcement of existing laws and regulations, or the discovery of previously unknown contamination or violations of such laws and regulations could require us to incur costs, or become the basis for new or increased liabilities or subject us to fines or other sanctions.

Employees

        As of March 31, 2011, we had a total of 167 full-time employees, consisting of 140 people engaged in CDPs and R&D activities and 27 people in sales and marketing, legal and general and administrative roles. None of our employees are represented by a labor union, and we consider our employee relations to be good.

Facilities

        Our facilities currently consist of an aggregate of approximately 146,000 square feet of office, research and development clean room space in San Jose, California, pursuant to a lease that expires in 2015. We have no reason to believe that additional space that we may need in the future will not be available on commercially reasonable terms.

Legal Proceedings

        We are not currently a party to any material pending legal proceedings.

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MANAGEMENT

Executive Officers, Directors and Key Employees

        The following table sets forth certain information about our executive officers, key employees and directors, as of July 15, 2011.

Name
  Age   Position

Executive Officers

         

David E. Lazovsky

    39   President, Chief Executive Officer and Director

Peter L. Eidelman

    45   Chief Financial Officer

Tony P. Chiang, Ph.D. 

    41   Chief Technology Officer

John R. Behnke

    50   Senior Vice President and General Manager, Semiconductor Group

James Craig Hunter

    42   Senior Vice President and General Manager, Clean Energy Group

Sandeep Jaggi, J.D., Ph.D. 

    48   General Counsel and Senior Vice President of Intellectual Property

Zia Malik

    59   Senior Vice President, Global Sales and Marketing

Directors

         

Thomas R. Baruch(1)(3)

    72   Chairman of the Board

Marvin D. Burkett(2)

    68   Director

Irwin B. Federman(1)

    75   Director

Isy Goldwasser

    41   Director

Bruce M. McWilliams(2)(3)

    55   Director

George M. Scalise(2)(3)

    77   Director

John L. Walecka(1)

    51   Director

(1)
Member of the Compensation Committee.

(2)
Member of the Audit Committee.

(3)
Member of the Nominating and Corporate Governance Committee.

Executive Officers

        David E. Lazovsky is our founder and has served as our President and Chief Executive Officer and as a member of our board of directors since September 2004. Mr. Lazovsky brings an in-depth knowledge of semiconductor manufacturing operations and our business and operations to our board of directors. He previously held several senior management positions at Applied Materials Inc. (Applied Materials) from 1995 until August 2004, and was responsible for managing more than $1 billion in Applied Materials' semiconductor manufacturing equipment business. As director of business management in the thin-films group, he worked closely with leading integrated circuit manufacturers to develop cutting-edge technology solutions. Mr. Lazovsky also served as director of business management for Applied Materials' European operations and as technology program manager for Applied Materials' flagship 300mm metallization platform. Mr. Lazovsky holds a B.S. in mechanical engineering from Ohio University and, as of July 15, 2011, held 27 pending or issued U.S. patents.

        Peter L. Eidelman has served as our Chief Financial Officer since February 2006. Prior to joining Intermolecular, Mr. Eidelman served as Senior Vice President and Chief Financial Officer at Cellon International from October 2002 to February 2006, where he led the company through several financings, acquisitions, restructurings and divestitures. Mr. Eidelman also served as Chief Financial Officer and Treasurer of Sunrise Telecom Inc. from July 1997 to October 2002, which he helped guide

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through an initial public offering. Earlier in his career he was the manager of tax, accounting and compliance for Amdahl Corporation from 1994 to July 1997 and a manager at the public accounting firm of Coopers & Lybrand (now part of PricewaterhouseCoopers) from 1988 to 1993. Mr. Eidelman holds a B.S. in accounting from the University of Massachusetts at Amherst and studied business and taxation at Bentley College in Waltham, Massachusetts. He also completed an executive management program at the Wharton School, University of Pennsylvania. Mr. Eidelman is a certified public accountant and a member of the American Institute of Certified Public Accountants, Financial Executives International and the Tax Executives Institute.

        Tony P. Chiang, Ph.D. has served as our Chief Technology Officer since May 2005 and is responsible for our technology strategy and direction, HPC platform development, core technology and applications development and informatics and operations. Prior to joining Intermolecular, in August 2000, Dr. Chiang founded Angstron Systems Inc. (Angstron), a venture-backed atomic layer deposition start-up company that was acquired by Novellus Systems Inc. (Novellus) in April 2004. Following the acquisition, Dr. Chiang then served as Director of Technology for Novellus until April 2005. From February 1996 until he founded Angstron, Dr. Chiang worked in technology development, product, program and account management roles at Applied Materials, where he led the development, productization and qualification of several generations of enabling thin film deposition technologies used in high-volume manufacturing. Dr. Chiang holds a B.S. in materials science and engineering from Cornell University and a Ph.D. in materials science and engineering from the Massachusetts Institute of Technology. As of July 15, 2011, he held 179 pending or issued U.S. patents spanning advanced materials, process, device and device integration technologies, as well as combinatorial systems and methods.

        John R. Behnke has served as our Senior Vice President and General Manager of our Semiconductor Group since July 2011 and had previously served as our Vice President, Worldwide Sales and Marketing since October 2009. Mr. Behnke has more than 27 years of semiconductor industry experience. Most recently he served as Corporate Vice President, Initial Manufacturing Operations & Silicon Technology at Spansion, Inc. (Spansion), with responsibility for all wafer fabrication and its Submicron Development Center. His responsibilities included development of Spansion's proprietary Charge Trapping NOR and NAND process technologies. Mr. Behnke's previous responsibilities at Spansion included product deployment for its Wireless Business Unit. Mr. Behnke worked at Spansion from the time of its initial public offering and spin-off from Advanced Micro Devices, Inc. (AMD)/ Fujitsu in December 2005 until August 2009. Prior to Spansion's spin-off from AMD/Fujitsu, he held various positions in AMD, including as Director of Operations and Technology in its Fab 25 wafer fabrication facility in Austin, Texas from 2000 to 2005, where he was involved in the development of AMD's APC/APM technologies. Prior to Spansion and AMD, Mr. Behnke worked at the Hughes Research Lab in Malibu, California from 1985 to 1992 on the development of InP/GaAs HEMT low noise amplifiers and radiation-hardened SOS. Mr. Behnke holds a B.S. in mechanical engineering with an industrial engineering minor from Marquette University and completed a Clean Energy program at the University of Texas at Austin. As of July 15, 2011, he held five pending or issued U.S. patents.

        J. Craig Hunter has served as Senior Vice President and General Manager of our Clean Energy Group since July 2011 and had previously served as Vice President and General Manager of our Clean Energy Technologies Group since January 2009. From June 2008 to December 2008, he was an Entrepreneur in Residence at Sequoia Capital, with a focus on the photovoltaic industry. Mr. Hunter previously held several management positions at Applied Materials, including the Managing Director of Channel Development from March 2008 to May 2008, the General Manager of their thin-film solar business from 2005 through March 2008, during which time he oversaw the development of that business from conception of the SunFab Thin Film Line to manufacturing the first solar panels, and Senior Manager of product management of the PVD and e-beam inspection tools used in LCD

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manufacturing from 2003 through 2005. Prior to joining Applied Materials, Mr. Hunter served in a variety of senior management roles, including Chief Financial Officer of Evercare Corporation, a manufacturer of consumer products, from 1999 to 2001, and Director of Mergers and Acquisitions at The Beacon Group in New York from 1997 to 1999. Mr. Hunter holds a B.A. in East Asian Studies from Harvard College and graduated with high distinction from Harvard Business School. As of July 15, 2011, he held six pending or issued U.S. patents.

        Sandeep Jaggi, J.D., Ph.D. has served as our General Counsel and Senior Vice President of Intellectual Property since July 2011, and had previously served as our Vice President, Legal Affairs, Licensing and Intellectual Property since July 2010. Prior to joining Intermolecular, he was General Counsel and Senior Vice President of Intellectual Property at Robert Bosch Healthcare Inc. (formerly known as Health Hero Network Inc.) from January 2006 to July 2010. Prior to Robert Bosch Healthcare Inc., he held several senior management positions at LSI Logic, Inc. from August 1995 to January 2006, including Vice President, Chief IP Counsel, Assistant Corporate Secretary and Assistant General Counsel. From October 1989 to August 1995, Dr. Jaggi worked for Lockheed Martin at NASA's Stennis Space Center in Mississippi and NASA's Johnson Space Center in Houston, Texas, where he held several positions including Project Leader, Principal Engineer and Senior Scientist. During his time in Houston, he founded ETS Inc., which commercialized space based-technologies for NASA and the U.S. Navy. He obtained a J.D. with a specialization in intellectual property law from Santa Clara University and also holds a B.Tech. in Electrical Engineering from the Indian Institute of Technology, New Delhi, and an M.S. and Ph.D. in Electrical Engineering from Tulane University. As of July 15, 2011, he held 13 pending or issued U.S. patents and is licensed to practice law in the state of California and before the United States Patent and Trademark Office.

        Zia Malik has served as our Senior Vice President, Global Sales and Marketing since May 2011. Prior to joining Intermolecular, he was the founder and Chief Executive Officer of Princely Solar LLC (Princely Solar) from July 2007 to May 2011, and remains a member of Princely Solar's board of directors. Prior to Princely Solar, Mr. Malik held the position of Vice President of Worldwide Sales at PDF Solutions, Inc. from December 2003 to June 2007, where he executed that company's strategy to expand sales into Singapore, Korea and China. Mr. Malik also served as Vice President of Operations at Ishoni Networks from September 2003 to December 2003, and as the Director, Foundry and Contracts Management Group at National Semiconductor Corporation from February 1997 to September 2000. While at National Semiconductor Corporation, Mr. Malik managed the company's diverse contract manufacturing portfolio and was responsible for all technical functions associated with the technology transfer agreements for the company's domestic and international foundries. Mr. Malik obtained a M.S. in Chemistry from the University of Karachi and a master's degree in business administration from the University of Phoenix.

Directors

        Thomas R. Baruch has served as a member of our board of directors since November 2004. Mr. Baruch is the founder and a partner emeritus of CMEA Ventures, a venture capital firm that was established in 1989 as an affiliated fund of New Enterprise Associates. Mr. Baruch brings to our board of directors an extensive knowledge of the clean technology industry and experience he has gained working closely with entrepreneurs to build industry-leading companies in the clean-energy industry, as well as years of public company governance experience. Mr. Baruch currently works with various clean technology companies, including serving as a member of the board of directors for FORO Energy, a company developing a new hybrid thermal mechanical drilling technology for geothermal energy wells, as the Chairman of the board of directors of Cnano Technology Limited, a leading nanomaterial company that manufactures and develops carbon nanotubes for advanced energy and other applications, and as the Chairman of the board of directors of Wildcat Discovery Technologies, Inc., a company focused on the discovery of advanced materials for clean-energy technology applications. In

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addition, Mr. Baruch is currently on the board of directors of Codexis, Inc., where he is Chairman and also serves on the audit, compensation and nominating and corporate governance committees of the board of directors, and Entropic Communications, Inc., where he serves on the compensation and nominating and corporate governance committees of the board of directors. Before starting CMEA Ventures, Mr. Baruch was a founder and Chief Executive Officer of Microwave Technology, Inc., a supplier of gallium arsenide integrated circuits. Prior to his employment with Microwave Technology, Inc., Mr. Baruch managed a dedicated venture fund at Exxon Corporation, and was president of the Exxon Materials Division. Earlier in his career, Mr. Baruch worked as a patent attorney and remains a registered patent attorney. He is also both a member of the Executive Committee of the Council of Competitiveness and a member of the Steering Committee of the ESIS Initiative (Energy, Security, Innovation and Sustainability) of the Council of Competitiveness. Mr. Baruch is a member of the board of trustees of Rensselaer Polytechnic Institute, the National Advisory Council on Innovation and Entrepreneurship and the Sierra's Club Climate Recovery Cabinet. Mr. Baruch holds a B.S. in engineering from Rensselaer Polytechnic Institute and a J.D. from Capital University.

        Marvin D. Burkett has served as a member of our board of directors since June 2011. A 40-year veteran of the semiconductor industry, Mr. Burkett brings to our board of directors years of experience with global semiconductor and personal computing companies, as well as in-depth knowledge of public company financial and accounting principles. Mr. Burkett served as Senior Advisor to NVIDIA Corporation (NVIDIA) from February 2009 until January 2011. Previously, he began at NVIDIA in August 2002 and served as its Chief Financial Officer from September 2002 to February 2009. Prior to NVIDIA, Mr. Burkett served as the Chief Financial Officer of Arcot Systems, Inc., and also as its Financial Consultant from February 2000 to September 2002. Mr. Burkett also served as an Executive Vice President and Chief Financial Officer of Packard Bell NEC (PBNEC) from 1998 to 1999. Prior to PBNEC, he spent 26 years at AMD from 1972 to 1998, where he served in a variety of positions, including Chief Financial Officer, Senior Vice President, Chief Administrative Officer and Corporate Controller. Mr. Burkett also worked in the Semiconductor Division of Raytheon Company. Mr. Burkett has served as a member of the board of directors and the chair for the audit committee of the board of directors for each of Audience, Inc., since September 2010, G2 Holdings Corporation since January 2011 and NetLogic Microsystems, Inc., since December 2010. Mr. Burket has also served as a member of the board of directors for Entegris, Inc., since May 2010, where he is also the chair for the audit committee and a member of the compensation committee. Mr. Burkett holds a master's degree in business administration and a BS degree in applied mathematics and business administration, both from the University of Arizona.

        Irwin B. Federman has served as a member of our board of directors since June 2005. Mr. Federman brings to our board of directors an extensive knowledge of the semiconductor industry as well as public company governance experience. Mr. Federman has been a managing member at U.S. Venture Partners, a venture capital firm, since April 1990. Mr. Federman was President and Chief Executive Officer of Monolithic Memories, Inc., a semiconductor company, from 1979 to 1987, where he also served as the Chief Financial Officer from 1970 to 1979. Mr. Federman also serves on the board of directors and as a member of the audit and compensation committees of the board of directors for each of SanDisk Corporation, Check Point Software Technologies Ltd., a security software company, and Mellanox Technologies, Ltd., a semiconductor company. Mr. Federman also serves on the board of directors for various private corporations, including Neoconix, Inc., ON24, Inc., Silego Technology, Inc. and Supply Frame, Inc., as well as charitable trusts, including the San Francisco Ballet, the Brooklyn College Foundation and the San Francisco Museum of Modern Art. Previously, Mr. Federman served as a director of Centillium Communications, Inc., a developer and supplier of communications integrated circuits, and Nuance Communications, Inc., a speech recognition software company. Mr. Federman holds a B.S. in Economics from Brooklyn College and was awarded an Honorary Doctorate of Engineering from Santa Clara University.

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        Isy Goldwasser has served as a member of our board of directors since August 2008. Mr. Goldwasser has been an entrepreneur-in-residence at Khosla Ventures since April 2011 and is an investor in the life sciences and energy industries. Mr. Goldwasser has also been an independent consultant providing technical and business advisory services for Accelyrs, Inc. (Accelrys) since April 2011. Mr. Goldwasser brings to our board of directors an in-depth knowledge of and years of investment experience in the life sciences and energy industries. Mr. Goldwasser served as advisor to the Chief Executive Officer of Accelrys from July 2010 to April 2011, following the merger of Symyx Technologies, Inc. (Symyx) and Accelrys. He was the first employee of Symyx at its founding in 1995, and became its President in 1998 and its Chief Executive Officer in June 2007. Mr. Goldwasser also serves on the board of directors of Kalypsys, Inc. Mr. Goldwasser holds a B.S. in chemical engineering from the Massachusetts Institute of Technology and an M.S. degree in chemical engineering from Stanford University.

        Bruce M. McWilliams has served as a member of our board of directors since March 2005. Dr. McWilliams brings to our board of directors broad experience in the electronics manufacturing and clean technology sectors as well as extensive management experience. Dr. McWilliams has served as Chief Executive Officer of SuVolta, Inc., a developer of low-power, high-performance integrated circuit technology, since June 2009. Dr. McWilliams also served as a director of Tessera Technologies, Inc. from 1999 to January 2011, where he previously served as its Chief Executive Officer from June 1999 to September 2008 and Chief Strategic Officer from September 2008 to March 2009. Dr. McWilliams also founded and served as Chief Executive Officer of SVision LLC, a silicon chip-based display company, from 1996 to 1999. His management experience also includes serving as Senior Vice President at Flextronics International, or Flextronics, from 1995 to 1996, a position he assumed upon Flextronics' acquisition of nCHIP, Inc., a multi-chip module packaging company that he co-founded and led as Chief Executive Officer from 1989 to 1995. He currently serves on the board of directors of NemoTEK Technologies, a mobile phone camera manufacturing company, REEL Solar, Inc., a solar heating technology company, and NovaTorque, Inc., a magnet motor design company, and is also a trustee of Carnegie Mellon University and a member of its advisory boards for Physics and Human and Computer Interaction. He holds B.S., M.S. and Ph.D. degrees in physics from Carnegie Mellon University.

        George M. Scalise has served as a member of our board of directors since December 2004. Mr. Scalise brings to our board of directors extensive knowledge of the semiconductor industry and market analysis. Mr. Scalise served as President Emeritus of the Semiconductor Industry Association, or SIA, an association of semiconductor manufacturers and suppliers, from July 2010 to December 2010. Mr. Scalise previously worked at Apple Computer, Inc., where he served as Executive Vice President and Chief Administrative Officer from March 1997 to May 1998, and has also held executive management positions at National Semiconductor Corporation, Maxtor Corporation, AMD, Fairchild Semiconductor Corporation and Motorola Semiconductor. Mr. Scalise was Chairman of the Board of the Federal Reserve Bank of San Francisco from May 2003 to December 2005, and also served on President George W. Bush's Council of Advisors on Science and Technology. He currently serves on the boards of directors of MindTree Limited and Cadence Design Systems. He served on the California Council on Science and Technology and was a member of the Joint High-Level Advisory Panel of the United States-Israel Science and Technology Commission, and chaired the Secretary of Energy Advisory Board at the US Department of Energy. Mr. Scalise holds a B.S. in mechanical engineering from Purdue University.

        John L. Walecka has served as a member of our board of directors since January 2005. Mr. Walecka is a founding partner and has served as a general partner of Redpoint Ventures since its founding in 1999, and brings to our board of directors the extensive experience he has gained working closely with entrepreneurs to build industry-leading companies in emerging cleantech and technology sectors. Prior to founding Redpoint, he was a general partner with Brentwood Venture Capital from

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1984 to 1999. Mr. Walecka currently works with Entropic Communications, Inc., where he serves as a member of the board of directors, as well as Fortinet, Inc., where he serves as a member of the board of directors as well as a member of the audit, compensation and nominating and corporate governance committees. Mr. Walecka also serves as a member of the boards of directors of Avnera Corporation, Envia Systems, Inc., Schooner Information Technology, Inc., and Datameer Inc. Mr. Walecka also works with software infrastructure and security products for the enterprise market as well as enabling products for the cable, consumer and broadband markets. Mr. Walecka served as director of the Western Association of Venture Capitalists and is currently a director of the Stanford Business School Venture Capital Trust and an advisor to the Stanford Engineering School. Earlier in his career, he worked for Hewlett Packard Corporation and the Stanford University Smart Product Design Laboratory. He holds B.S. and M.S. degrees in engineering from Stanford, and an MBA from Stanford's Graduate School of Business.

Scientific Advisory Board

        We maintain a scientific advisory board consisting of members with experience and expertise in the field of molecular engineering electronics who provide us with consulting services. Our scientific advisory board consists of the following members:

        Georges Belfort, Ph.D., is the Russell Sage Endowed Professor of Chemical Engineering in the Howard P. Isermann Department of Chemical and Biological Engineering at Rensselaer Polytechnic Institute. Prior to joining Rensselaer, he spent four years on the faculty of the School of Applied Science at Hebrew University in Jerusalem. Dr. Belfort received his B.S. degree in chemical engineering from the University of Cape Town, and his M.S. and Ph.D. in engineering from the University of California, Irvine. He has won several major awards in separation science, and has made important contributions to the field of surface and interfacial science. He was elected to the National Academy of Engineering in 2003.

        James R. Engstrom, Ph.D., is currently the BP Amoco/H. Laurance Fuller Professor in the School of Chemical and Biomolecular Engineering at Cornell University. Since 2002 he has also been a member of the Graduate Field of Chemistry and Chemical Biology. Dr. Engstrom is the recipient of numerous awards, including a 1991 NSF Presidential Young Investigator Award, the Lilly Endowment Teaching Fellowship in 1995, and two College of Engineering Teaching Awards. In 2005 he was made a Fellow of the American Vacuum Society. From 1998 to 2001, he worked for Symyx Technologies, Inc., where he was vice president of high-throughput screening and electronic materials. Presently, Dr. Engstrom's research is focused on inorganic-organic interfaces, and organic thin-film electronics. He earned a B.S. in chemical engineering from the University of Minnesota, and a Ph.D. in chemical engineering from the California Institute of Technology.

        J.M.J. Fréchet, Ph.D., is currently Vice President for Research at King Abdullah University of Science and Technology, where he has served since June 2010. Previously, Dr. Fréchet served as the Henry Rapoport Endowed Chair in Organic Chemistry at the Department of Chemistry, University of California, Berkeley. He also serves as scientific director for the Molecular Foundry at Lawrence Berkeley National Laboratory. His research, reported in nearly 1,000 scientific publications and patents, focuses mainly on organic and polymer chemistry applied to nanoscience and nanotechnology, with emphasis on the design, synthesis, fundamental understanding and applications of functional macromolecules. Dr. Fréchet is a member of the National Academy of Sciences and the National Academy of Engineering. In addition to a B.S. in chemical engineering from the Institut de Chimie et Physique Industrielles in Lyon, France, he holds M.S. and Ph.D. degrees in chemistry from Syracuse University and the State University of New York, respectively.

        Craig J. Hawker, Ph.D., is director of the Materials Research Laboratory and professor of Materials and Chemistry at the University of California, Santa Barbara. Prior to joining the university, he was a

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research staff member at the IBM Almaden Research Center in San Jose. Dr. Hawker is editor of the Journal of Polymer Science-Polymer Chemistry, and is an honorary Professor of Chemistry at the University of Queensland. He serves on the scientific advisory boards of Relypsa, Inc., and Warwick Effect Polymers Ltd. He is the recipient of numerous awards, most notably election to the Royal Society, the 2010 MacroUK Award for Outstanding Achievement, and the 2008 DSM International Performance Materials Award. Dr. Hawker's research has focused on the interface between organic and polymer chemistry, with emphasis on the design, synthesis and application of well-defined macromolecular structures in biotechnology, microelectronics, and surface science.

        Yoshio Nishi, Ph.D., has been professor of electrical engineering at Stanford University since 2002, and serves as director of research at the Center for Integrated Systems and director of Stanford Site at National Nanotechnology Infrastructure Network. With a Ph.D. in electronics engineering from the University of Tokyo, Dr. Nishi has worked at the senior level with Toshiba R&D for VLSI memory technology and Si-SiO2 interface physics, Hewlett-Packard Laboratories ULSI Research Lab, and Texas Instruments, Inc. R&D. He has contributed to more than 250 publications, co-authored or edited 11 books, and has been responsible for over 70 Japan and U.S. patents. A fellow of the Institute of Electrical and Electronics Engineers (IEEE) and a member of the Japan Society of Applied Physics and The Electrochemical Society, he has received numerous awards over the past 15 years.

        Ralph G. Nuzzo, Ph.D., a recognized leader in the chemistry of materials, is director of the Frederick Seitz Materials Research Laboratory and the Center for Microanalysis of Materials at the University of Illinois Urbana-Champaign. He also serves as the William H. and Janet Lycan Professor of Chemistry and a Professor of Materials Science and Engineering at the university. Dr. Nuzzo received his B.S. in chemistry from Rutgers University and his Ph.D. in organic chemistry from MIT. After completing his graduate studies, he was a distinguished member of the technical staff in materials research at Bell Laboratories.

        J. George Shanthikumar, Ph.D., is Professor of Industrial Engineering and Operations Research at the University of California, Berkeley. He has authored or coauthored more than 250 papers and has coauthored three books, "Stochastic Models of Manufacturing Systems," "Stochastic Orders And Their Applications" and "Stochastic Orders." He is a co-editor of Flexible Services and Manufacturing Journal, and has served on numerous technical journal editorial boards. As a consultant for KLA-Tencor Corp., he worked on joint development projects with semiconductor companies such as AMD, IBM, Intel, LSI Logic, Motorola, Texas Instruments, Toshiba, Fujitsu, TSMC and UMC. He received a B.S. in mechanical engineering from the University of Sri Lanka, and an M.S. and Ph.D. in industrial engineering from the University of Toronto.

        Anthony J. Tether, Ph.D., was director of the Defense Advanced Research Projects Agency (DARPA) from 2001 to 2009. Prior to this, Dr. Tether founded The Sequoia Group and served as its Chief Executive Officer and President; he also served as Chief Executive Officer of Dynamics Technology Inc. and in top-level management roles at Science Applications International Corporation and Ford Aerospace Corp. He has also held other positions in the Department of Defense, serving as Director of DARPA's Strategic Technology Office, and as the Director of National Intelligence in the Office of the Secretary of Defense. Dr. Tether has served on Army, Navy and Defense Science Boards, and on the Office of National Drug Control Policy Research and Development Committee. He is a Life Member of IEEE. Dr. Tether received his B.S. in electrical engineering from Rensselaer Polytechnic Institute, and his M.S. and Ph.D. in electrical engineering from Stanford University.

        W. Henry Weinberg, Ph.D., is an award-winning scientist and advisor to start-ups and venture firms in the chemical space. He currently serves as general editor of the prestigious review journal Surface Science Reports. Previously, he was Chief Technical Officer at Draths Corporation and Chief Technology Officer at Symyx. For more than 24 years, he was on the faculty of both the California Institute of Technology and the University of California, Santa Barbara. Dr. Weinberg was also

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principal investigator in the US-USSR Exchange Program in Chemical Catalysis between 1974 and 1980, and has served on many review panels for industrial, academic and governmental organizations. He holds a B.S. degree in chemical engineering from the University of South Carolina, and a Ph.D. in chemical engineering from the University of California, Berkeley.

Board Composition

        In accordance with our amended and restated certificate of incorporation to take effect following the completion of this offering, our board of directors will be divided into three classes with staggered three-year terms. At each annual meeting of stockholders, the successors to directors whose terms then expire will be elected to serve from the time of election and qualification until the third annual meeting following their election. After the completion of this offering, our directors will be divided among the three classes as follows:

    the Class I directors will be            ,             and            , and their terms will expire at the annual meeting of stockholders to be held in                        2012;

    the Class II directors will be            ,             and            , and their terms will expire at the annual meeting of stockholders to be held in                        2013; and

    the Class III directors will be            ,             and            , and their terms will expire at the annual meeting of stockholders to be held in                        2014.

        Our amended and restated certificate of incorporation will provide that the authorized number of directors may be changed only by resolution of the board of directors. Any additional directorships resulting from an increase in the number of directors will be distributed among the three classes so that, as nearly as possible, each class will consist of one-third of the directors. The division of our board of directors into three classes with staggered three-year terms may delay or prevent a change of our management or a change of control at our company.

Voting Arrangements

        Pursuant to a voting agreement that we entered into with certain holders of our common stock and certain holders of our redeemable convertible preferred stock:

    CMEA Ventures VI, L.P. (or its affiliates) has the right to nominate a director to our board of directors;

    Redpoint Ventures II, L.P. (or its affiliates) has the right to nominate a director to our board of directors;

    U.S. Venture Partners IX, L.P. (or its affiliates) has the right to nominate a director to our board of directors;

    Symyx Technologies, Inc. (or its affiliates) (Symyx) has the right to nominate a director to our board of directors, subject to approval by our board of directors in the event such nominee is not the then-current Chairman, Chief Executive Officer, President or Chief Operating Officer of Symyx;

    our then-incumbent Chief Executive Officer has the right to be nominated to serve on our board of directors; and

    the holders of a majority of our common stock and the holders of a majority of our redeemable convertible preferred stock, in each case voting as a separate class, have the right to nominate two directors to our board of directors,

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and the holders of our common stock and redeemable convertible preferred stock who are parties to the voting agreement are obligated to vote for such nominee. The provisions of this voting agreement will terminate upon the completion of this offering and there will be no further contractual obligations regarding the election of our directors. Our directors hold office until their successors have been elected and qualified or appointed, or the earlier of their death, resignation or removal.

Director Independence

        Upon the completion of this offering, our common stock will be listed on either the Nasdaq Global Market or the New York Stock Exchange. Under the rules of The Nasdaq Stock Market and the New York Stock Exchange, independent directors must comprise a majority of a listed company's board of directors within a specified period of the completion of this offering. In addition, the rules of The Nasdaq Stock Market and the New York Stock Exchange require that, subject to specified exceptions, each member of a listed company's audit, compensation and nominating and governance committees be independent. Audit committee members must also satisfy the independence criteria set forth in Rule 10A-3 under the Securities Exchange Act of 1934, as amended. Under the rules of The Nasdaq Stock Market and the New York Stock Exchange, a director will only qualify as an "independent director" if, in the opinion of that company's board of directors, that person does not have a relationship that would interfere with the exercise of independent judgment in carrying out the responsibilities of a director.

        To be considered independent for purposes of Rule 10A-3, a member of an audit committee of a listed company may not, other than in his or her capacity as a member of the audit committee, the board of directors, or any other board committee: (1) accept, directly or indirectly, any consulting, advisory, or other compensatory fee from the listed company or any of its subsidiaries; or (2) be an affiliated person of the listed company or any of its subsidiaries.

        In                        , our board of directors undertook a review of its composition, the composition of its committees and the independence of each director. Based upon information requested from and provided by each director concerning his background, employment and affiliations, including family relationships, our board of directors has determined that none of Messrs. Baruch, Burkett, Federman, Scalise and Walecka or Dr. McWilliams, representing six of our eight directors, has a relationship that would interfere with the exercise of independent judgment in carrying out the responsibilities of a director and that each of these directors is "independent" as that term is defined under the rules of The Nasdaq Stock Market or the New York Stock Exchange. Our board of directors also determined that Messrs. Burkett and Scalise and Dr. McWilliams, who comprise our audit committee, Messrs. Baruch, Federman and Walecka, who comprise our compensation committee, and Messrs. Baruch and Scalise and Dr. McWilliams, who comprise our nominating and governance committee, satisfy the independence standards for those committees established by applicable SEC rules and the rules of The Nasdaq Stock Market and the New York Stock Exchange. In making this determination, our board of directors considered the relationships that each non-employee director has with our company and all other facts and circumstances our board of directors deemed relevant in determining their independence, including the beneficial ownership of our capital stock by each non-employee director.

Board Committees

        Our board of directors has the following committees: an audit committee, a compensation committee and a nominating and corporate governance committee. The composition and responsibilities of each committee are described below. Members serve on these committees until their resignation or until otherwise determined by our board of directors.

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Audit Committee

        Our audit committee oversees our corporate accounting and financial reporting process. Among other matters, the audit committee: appoints the independent registered public accounting firm; evaluates the independent registered public accounting firm's qualifications, independence and performance; determines the engagement of the independent registered public accounting firm; reviews and approves the scope of the annual audit and the audit fee; discusses with management and the independent registered public accounting firm the results of the annual audit and the review of our quarterly consolidated financial statements; approves the retention of the independent registered public accounting firm to perform any proposed permissible non-audit services; monitors the rotation of partners of the independent registered public accounting firm on our engagement team as required by law; reviews our consolidated financial statements and our management's discussion and analysis of financial condition and results of operations to be included in our annual and quarterly reports to be filed with the SEC; reviews our critical accounting policies and estimates; and annually reviews the audit committee charter and the committee's performance. The current members of our audit committee are Messrs. Burkett and Scalise and Dr. McWilliams. Mr. Burkett serves as the chairman of the committee. All members of our audit committee meet the requirements for financial literacy under the applicable rules and regulations of the SEC, The Nasdaq Stock Market and the New York Stock Exchange. Our board of directors has determined that Mr. Burkett is an audit committee financial expert as defined under the applicable rules of the SEC and has the requisite financial sophistication as defined under the applicable rules and regulations of The Nasdaq Stock Market and the New York Stock Exchange. Each of the members of our audit committee qualifies as an independent director under the applicable rules and regulations of the SEC, The Nasdaq Stock Market and the New York Stock Exchange relating to audit committee independence. The audit committee operates under a written charter that satisfies the applicable standards of the SEC, The Nasdaq Stock Market and the New York Stock Exchange.

Compensation Committee

        Our compensation committee reviews and recommends policies relating to compensation and benefits of our officers and employees. The compensation committee reviews and approves corporate goals and objectives relevant to compensation of our Chief Executive Officer and other executive officers, evaluates the performance of these officers in light of those goals and objectives, and sets the compensation of these officers based on such evaluations. The compensation committee also approves grants of stock options and other awards under our stock plans. The compensation committee will review and evaluate, at least annually, the performance of the compensation committee and its members, including compliance of the compensation committee with its charter. The current members of our compensation committee are Messrs. Baruch, Federman and Walecka. Mr. Baruch serves as the chairman of the committee. Each of the members of our compensation committee is an independent or outside director under the applicable rules and regulations of the SEC, The Nasdaq Stock Market, the New York Stock Exchange and the Internal Revenue Code of 1986, as amended relating to compensation committee independence. The compensation committee operates under a written charter.

Nominating and Corporate Governance Committee

        The nominating and corporate governance committee is responsible for making recommendations to our board of directors regarding candidates for directorships and the size and composition of our board of directors. In addition, the nominating and corporate governance committee is responsible for overseeing our corporate governance policies and reporting and making recommendations to our board of directors concerning governance matters. The current members of our nominating and corporate governance committee are Messrs. Baruch and Scalise and Dr. McWilliams. Mr. Baruch serves as the chairman of the committee. Each of the members of our nominating and corporate governance

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committee is an independent director under the applicable rules and regulations of the SEC, The Nasdaq Stock Market and the New York Stock Exchange relating to nominating and corporate governance committee independence. The nominating and corporate governance committee operates under a written charter.

        There are no family relationships among any of our directors or executive officers.

Compensation Committee Interlocks and Insider Participation

        None of the members of our compensation committee has at any time during the prior three years been an officer or employee of ours. None of our executive officers currently serves or in the prior three years has served as a member of the board of directors or compensation committee of any entity that has one or more executive officers serving on our board of directors or compensation committee.

Code of Business Conduct and Ethics

        We will adopt a code of business conduct and ethics that applies to all of our employees, officers and directors, including those officers responsible for financial reporting. The code of business conduct and ethics will be available on our website at www.intermolecular.com. Any amendments to the code, or any waivers of its requirements, will be disclosed on our website. Information contained on or accessible through our website is not incorporated by reference into this prospectus, and you should not consider information contained on or accessible through our website to be part of this prospectus.

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EXECUTIVE COMPENSATION

Compensation Discussion and Analysis

        This section discusses the principles underlying our policies and decisions with respect to the compensation of our executive officers who are named in the "2010 Summary Compensation Table" and the most important factors relevant to an analysis of these policies and decisions. In 2010, our "named executive officers" were as follows:

    David. E. Lazovsky, Chief Executive Officer and President;

    Peter L. Eidelman, Chief Financial Officer;

    Tony P. Chiang, Chief Technology Officer;

    J. Craig Hunter, Senior Vice President and General Manager, Clean Energy Group; and

    Sandeep Jaggi, General Counsel and Senior Vice President of Intellectual Property.

        The titles above reflect promotions received by Mr. Hunter and Dr. Jaggi in July 2011. In 2010, Mr. Hunter's principal position was Vice President and General Manager, Clean Energy Technologies, and Dr. Jaggi's position was Vice President, Legal Affairs, Licensing and Intellectual Property.

        The following discussion and analysis of compensation arrangements of our named executive officers should be read together with the compensation tables and related disclosures set forth below. This discussion may contain forward-looking statements that are based on our current plans, considerations, expectations and determinations regarding future compensation programs. Actual compensation programs that we adopt following the completion of this offering may differ materially from the currently-planned programs summarized in this discussion.

Determination of Compensation

    Roles of Our Compensation Committee and Chief Executive Officer in Compensation Decisions

        Our compensation committee is responsible for overseeing our executive compensation program, as well as determining and approving the ongoing compensation arrangements for our Chief Executive Officer and other named executive officers. The compensation committee meets periodically throughout the year to review and determine adjustments, if any, to the compensation, including base salary, annual bonus and long-term equity awards, for our named executive officers, including our Chief Executive Officer. For 2010, the compensation committee determined each individual component of compensation for our named executive officers. Following the completion of this offering, the compensation committee will continue to oversee the review process for all named executive officers.

        Our Chief Executive Officer evaluates the individual performance and contributions of each other named executive officer and, at least annually, reports to the compensation committee his recommendations regarding each element of the other named executive officers' compensation. Our Chief Executive Officer does not participate in any formal discussion with the compensation committee regarding decisions on his own compensation and recuses himself from meetings when his compensation is discussed.

        We do not generally rely on formulaic guidelines for determining the mix or levels of cash and equity-based compensation, but rather maintain a flexible compensation program that allows us to adapt components and levels of compensation to motivate and reward individual named executive officers within the context of our desire to attain financial and operational goals. Subjective factors considered in compensation determinations include a named executive officer's skills and capabilities, contributions as a member of the executive management team, contributions to our overall performance and whether the total compensation potential and structure is sufficient to ensure the

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retention of a named executive officer when considering the compensation potential that may be available elsewhere.

    Competitive Market Data and Engagement of Compensation Consultants

        The market for experienced management is highly competitive in our industry. Our goal is to attract and retain the most highly qualified executives to manage each of our business functions. In doing so, we draw upon a pool of talent that is highly sought after both by large and established technology companies in our geographic area and by other competitive companies in development or early stage phases. Established organizations in our industry seek to recruit top talent from emerging companies in the sector just as smaller organizations look to attract and retain the best talent from the industry as a whole. The competition for technical and non-technical skills is aggressive across the sector and we expect it to remain aggressive for the foreseeable future.

        Our compensation committee determines compensation for our named executive officers, in large part based upon our financial resources, but also considering competitive market data. Prior to 2010, in making compensation determinations the compensation committee relied on the recommendations from our Chief Executive Officer and the experience of its members in similar companies. In setting both cash and equity compensation for 2010, our compensation committee conducted a review of our named executive officer compensation, as well as the mix of elements used to compensate our named executive officers, and compared this compensation information with data contained in third-party surveys produced by Thelander and Radford. The surveys compiled executive compensation data primarily from private technology and life sciences companies and reported such data on an aggregate basis. The surveys reported compensation, position and responsibilities of executives. While our compensation committee reviewed compensation levels and elements derived from this supplemental industry data, our compensation committee was not aware of the identity of any of the surveyed companies and, as such, did not rely on data for any single company.

        Historically, our compensation committee has not engaged the services of a compensation consultant; however, in connection with this offering, our compensation committee has engaged a compensation consultant directly to assist the committee in designing programs and setting compensation levels that are appropriate for a public company.

Executive Compensation Philosophy and Objectives

        We operate in the highly competitive and dynamic technology industry, which is characterized by frequent technological advances and rapidly changing market requirements. To succeed in this environment, we must continuously develop and refine new and existing products and services, and to achieve these objectives, we need a highly talented and seasoned team of technical, sales, marketing, operations, financial and other business professionals. Our executive compensation philosophy recognizes that, given that the market for experienced management is highly competitive in our industry, key and core to our success is our ability to attract and retain the most highly-qualified executives to manage each of our business functions. We regard as fundamental that executive officer compensation be structured to provide competitive base salaries and benefits to attract and retain superior employees, and to provide incentive compensation to motivate executive officers to attain, and to reward executive officers for attaining, established financial, operational and other goals that are consistent with increasing stockholder value.

        In determining the form and amount of compensation payable to the named executive officers, we are guided by the following objectives and principles:

    Compensation levels should be competitive to attract and retain key executives.  We aim to provide an executive compensation program that attracts, motivates and retains high performance individuals and rewards them for our achieving and maintaining a competitive position in our

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      industry. Total compensation (i.e., maximum achievable compensation) should increase with position and responsibility.

    Compensation should relate directly to performance, and incentive compensation should constitute a significant portion of total compensation. We aim to foster a pay-for-performance culture, with a significant portion of total compensation being "at risk." Accordingly, a significant portion of total compensation should be tied to and vary with our financial, operational and strategic performance, as well as individual performance. Executives with greater roles and the ability to directly impact our strategic goals and long-term results should bear a greater proportion of the risk that these goals and results are not achieved. The amount of "at risk pay" is determined accordingly.

    Long-term incentive compensation should align executives' interests with our stockholders' interests. Awards of long-term incentives, including equity-based compensation, encourage executives to focus on our long-term growth and prospects and incentivize executives to manage the company from the perspective of stockholders with a meaningful stake in our success, as well as to focus on long-term career orientation.

        We design the principal components of our executive compensation program to fulfill one or more of the principles and objectives described above. Compensation for our named executive officers consists of the elements identified in the following table:

Compensation Element                                  
  Primary Objective

Base salary

  To recognize ongoing performance of job responsibilities and as a necessary tool in attracting and retaining employees

Annual performance-based cash compensation (bonuses)

 

To emphasize corporate and individual objectives and provide reward opportunities for our named executive officers (and employees generally) when key business and individual objectives are met

Long-term equity incentive compensation

 

To incentivize and reward increases in stockholder value, to emphasize and reinforce our focus on team success and to attract and retain key employees

Retirement savings (401(k)) plan

 

To provide retirement savings in a tax-efficient manner

Health and welfare benefits

 

To provide a basic level of protection from health, dental, life and disability risks

        We view the components of our executive compensation program as related but distinct, an