UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended March 31, 2012
OR
¨
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period from
to
Commission File Number: 0-27188
ACCELRYS, INC.
(Exact name of registrant as specified in its charter)
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Delaware
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33-0557266
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(State or other jurisdiction of
incorporation or organization)
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(I.R.S. Employer Identification No.)
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10188 Telesis Court, Suite 100, San Diego, California
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92121-4779
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(Address of principal executive offices)
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(Zip Code)
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(858) 799-5000
(Registrants telephone number, including area code)
Indicate by
check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes
x
No
¨
Indicate by check mark whether the registrant has submitted electronically and
posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes
x
No
¨
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. (Check one):
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Large accelerated filer
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¨
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Accelerated filer
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x
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Non-accelerated filer
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¨
(Do not check if smaller reporting company)
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Smaller reporting company
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¨
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes
¨
No
x
The number of outstanding shares of the registrants common stock, par value $0.0001 per share, as of April 20, 2012, was 55,563,955 net of treasury shares.
ACCELRYS, INC.
FORM 10-Q QUARTERLY REPORT
For The Quarterly Period Ended March 31, 2012
Table of Contents
2
PART I FINANCIAL INFORMATION
Item 1.
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Condensed Consolidated Financial Statements
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Accelrys, Inc.
Condensed Consolidated Balance Sheets
(In thousands)
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March 31,
2012
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December 31,
2011
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(Unaudited)
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Assets
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Current assets:
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Cash and cash equivalents
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$
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94,501
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$
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69,610
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Marketable securities
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50,894
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52,976
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Trade receivables, net of allowance for doubtful accounts of $143 as of March 31, 2012 and December 31,
2011
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28,387
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40,706
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Promissory note receivable
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921
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921
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Prepaid expenses, deferred tax assets and other current assets
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14,783
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11,090
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Total current assets
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189,486
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175,303
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Marketable securities, net of current portion
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16,627
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17,224
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Restricted cash
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3,745
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3,814
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Property and equipment, net
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7,808
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12,108
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Goodwill
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100,762
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100,429
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Purchased intangible assets, net
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55,776
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60,361
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Long-term investments
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1,010
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1,010
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Promissory note receivable, net of current portion
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33,838
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33,799
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Other assets
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3,731
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3,838
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Total assets
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$
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412,783
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$
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407,886
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Liabilities and stockholders equity
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Current liabilities:
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Accounts payable
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$
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2,643
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$
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3,527
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Accrued liabilities
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14,168
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19,361
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Accrued compensation and benefits
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9,214
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12,372
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Current portion of accrued restructuring charges
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678
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1,322
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Current portion of deferred gain on sale of intellectual property
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921
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921
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Current portion of deferred revenue
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95,217
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81,151
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Total current liabilities
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122,841
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118,654
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Deferred revenue, net of current portion
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5,175
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4,861
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Accrued income tax
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8,815
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8,095
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Deferred gain on sale of intellectual property, net of current portion
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25,053
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25,053
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Accrued restructuring charges, net of current portion
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385
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388
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Lease-related liabilities, net of current portion
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1,922
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2,151
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Stockholders equity:
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Preferred stock, $.0001 par value; 2,000 shares authorized; no shares issued and outstanding
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Common stock, $.0001 par value; 100,000 shares authorized; 57,966 and 57,588 shares issued and outstanding at March 31, 2012
and December 31, 2011, respectively
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6
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6
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Additional paid-in capital
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469,555
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465,701
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Lease guarantee
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(257
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)
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(273
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)
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Treasury stock; 2,196 and 1,875 shares at March 31, 2012 and December 31, 2011, respectively
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(20,908
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)
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(18,340
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)
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Accumulated deficit
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(200,462
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)
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(198,208
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)
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Accumulated other comprehensive income (loss)
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658
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(202
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)
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Total stockholders equity
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248,592
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248,684
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Total liabilities and stockholders equity
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$
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412,783
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$
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407,886
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See accompanying notes to these condensed consolidated financial statements.
3
Accelrys, Inc.
Condensed Consolidated Statements of Operations
(In thousands, except per share amounts)
(Unaudited)
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Three Months Ended March 31,
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2012
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2011
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Revenue:
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License and subscription revenue
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$
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21,697
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$
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19,480
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Maintenance on perpetual licenses
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9,491
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7,814
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Content
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3,543
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4,048
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Professional services and other
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4,708
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3,258
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Total revenue
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39,439
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34,600
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Cost of revenue:
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Cost of revenue
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9,878
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9,649
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Amortization of completed technology
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2,081
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2,037
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Total cost of revenue
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11,959
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11,686
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Gross profit
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27,480
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22,914
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Operating expenses:
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Product development
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9,552
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8,535
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Sales and marketing
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13,865
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13,489
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General and administrative
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4,526
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4,381
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Business consolidation, transaction and restructuring costs
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630
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1,602
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Purchased intangible asset amortization
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2,095
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2,394
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Total operating expenses
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30,668
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30,401
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Operating loss
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(3,188
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)
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(7,487
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)
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Royalty and other income, net
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1,631
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2,280
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Loss before taxes
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(1,557
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)
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(5,207
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Income tax expense
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697
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507
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Net loss
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$
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(2,254
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)
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$
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(5,714
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)
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Basic and diluted net loss per share
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$
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(0.04
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)
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$
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(0.10
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)
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Weighted average shares used to compute net loss per share
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55,783
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55,525
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See accompanying notes to these condensed consolidated financial statements.
4
Accelrys, Inc.
Condensed Consolidated Statements of Comprehensive Income
(In thousands)
(Unaudited)
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Three Months Ended March 31,
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2012
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2011
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Net loss
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$
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(2,254
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)
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$
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(5,714
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)
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Other comprehensive loss:
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Foreign currency translation adjustment
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814
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(401
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)
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Unrealized gain on marketable securities
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46
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15
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Total other comprehensive income (loss)
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860
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(386
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)
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Comprehensive loss
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$
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(1,394
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)
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$
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(6,100
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)
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See accompanying notes to these condensed consolidated financial statements.
5
Accelrys, Inc.
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
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Three Months Ended March 31,
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2012
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2011
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Cash flows from operating activities:
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Net loss
|
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$
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(2,254
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)
|
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$
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(5,714
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)
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Adjustments to reconcile net loss to net cash provided by operating activities:
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Depreciation and amortization
|
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5,507
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6,054
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Share-based compensation
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1,791
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1,280
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Prepaid contingent compensation amortization
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208
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Amortization of premium on marketable debt securities
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328
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395
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Deferred income taxes
|
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228
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|
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187
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Other
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(308
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)
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41
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Changes in operating assets and liabilities:
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Trade receivables
|
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12,340
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(6,171
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)
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Prepaid expense and other current assets
|
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|
482
|
|
|
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1,187
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Other assets
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(89
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)
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|
3
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Accounts payable
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(888
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)
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(1,464
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)
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Accrued liabilities, compensation and benefits
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(8,649
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)
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(5,733
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)
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Deferred revenue
|
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14,756
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|
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24,047
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Net cash provided by operating activities
|
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23,452
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14,112
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Cash flows from investing activities:
|
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Purchases of property and equipment, net
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(771
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)
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(857
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)
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Purchases of marketable securities
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(18,571
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)
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(61,397
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)
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Proceeds from maturities and sales of marketable securities
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20,968
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|
|
|
8,073
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Proceeds from promissory notes receivable
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120
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|
|
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Net decrease in restricted cash
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79
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Net cash provided by (used in) investing activities
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1,825
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(54,181
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)
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Cash flows from financing activities:
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|
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Proceeds from issuance of common stock
|
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2,132
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|
|
|
842
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Common stock tendered for payment of withholding taxes
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(69
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)
|
|
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(85
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)
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Repurchases of common stock
|
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|
(2,568
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)
|
|
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(3,000
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)
|
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|
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Net cash used in financing activities
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(505
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)
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(2,243
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)
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Effect of changes in exchange rates on cash and cash equivalents
|
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119
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|
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(72
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)
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Increase (decrease) in cash and cash equivalents
|
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24,891
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|
|
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(42,384
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)
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Cash and cash equivalents at beginning of period
|
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69,610
|
|
|
|
86,316
|
|
|
|
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|
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Cash and cash equivalents at end of period
|
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$
|
94,501
|
|
|
$
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43,932
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to these condensed consolidated financial statements.
6
Accelrys, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
1. Basis of Presentation and Significant Accounting Policies
Financial Statement Preparation
The condensed consolidated financial statements of Accelrys, Inc. (Accelrys, we, our or us) as of March 31, 2012 and for the three months ended
March 31, 2012 and 2011 are unaudited. We have condensed or omitted certain information and disclosures normally included in financial statements presented in accordance with accounting principles generally accepted in the United States
(GAAP). We believe the disclosures made are adequate to make the information presented not misleading. However, you should read these condensed consolidated financial statements in conjunction with the consolidated financial statements
and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2011, filed with the Securities and Exchange Commission (the SEC) on March 13, 2012 (the Form 10-K).
On July 1, 2010, Alto Merger Sub, Inc., our wholly owned subsidiary (Merger Sub), merged with and into Symyx
Technologies, Inc. (Symyx), with Symyx surviving as our wholly owned subsidiary (the Symyx Merger). Symyxs results of operations are included in our consolidated financial statements beginning July 1, 2010. On
May 19, 2011, we completed the acquisition of Contur Software AB (Contur), whereby Contur became our wholly owned subsidiary (the Contur Acquisition). Conturs operating results are included in our consolidated
financial statements and results of operations beginning May 19, 2011. On December 30, 2011 we completed the acquisition of VelQuest Corporation (VelQuest), whereby VelQuest became our wholly owned subsidiary (the
VelQuest Acquisition and, together with the Symyx Merger and the Contur Acquisition, the Acquisitions). VelQuests operating results are included in our consolidated financial statements and results of operations
beginning December 30, 2011.
In the opinion of management, these condensed consolidated financial statements include all
adjustments, consisting solely of normal recurring adjustments, necessary for a fair presentation of results for the interim periods presented.
Our business is subject to seasonal variations. Historically, we have received approximately two-thirds of our annual customer orders in the fiscal quarters ended December 31 and March 31. In
accordance with our revenue recognition policies, the revenue associated with these orders is generally recognized over the contractual license term. Therefore, because our policy is to accrue and expense sales commissions and royalties upon the
invoicing of customer orders, we have historically experienced an increase in operating costs and expenses and a decrease in income during the fiscal quarters ended December 31 and March 31. As a result of these and other seasonal variations, we
believe that sequential quarter-to-quarter comparisons of our operating results are not indicative of our future performance and that the interim financial results for the periods presented in this quarterly report are not necessarily indicative of
results for a full year or for any subsequent interim period.
Principles of Consolidation
These consolidated financial statements include our accounts and those of our wholly-owned subsidiaries. All intercompany balances and
transactions have been eliminated in consolidation.
Prior Period Reclassifications
Certain prior period amounts have been reclassified to conform to the current period presentation.
Use of Estimates
The
preparation of financial statements in conformity with accounting principles generally accepted in the U.S. (GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues
and expenses, and the disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to share-based compensation, income taxes, contingent consideration, and the valuation of goodwill,
intangibles and other long-lived assets. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual future results could differ from those estimates.
Revenue Recognition
We generate revenue from the following primary sources:
|
|
|
post-contract customer support and maintenance services on licensed software (collectively referred to as PCS),
|
7
Customer billings issued in connection with our revenue-generating activities are initially recorded as deferred revenue. We then recognize the revenue from these customer billings as set forth below and
when all of the following criteria are met:
|
|
|
a fully executed written contract or purchase order has been obtained from the customer (i.e., persuasive evidence of an arrangement exists),
|
|
|
|
the contractual price of the product or services has been defined and agreed to in the contract or purchase order (i.e., price is fixed or
determinable),
|
|
|
|
delivery of the product or service has occurred and no material uncertainties regarding customer acceptance of the delivered product or service exist,
and
|
|
|
|
collection of the purchase price from the customer is considered probable.
|
Software Licenses.
We license software on a term and perpetual basis. When sold perpetually, our standard perpetual software
licensing arrangements generally include twelve months of bundled PCS, while our standard term-based software licensing arrangements typically include PCS for the full duration of the term license. Because we do not have vendor-specific objective
evidence (VSOE) of the fair value of these undelivered elements, we recognize as revenue the entire fee for such perpetual and term-based licenses ratably over the term of the bundled PCS.
Renewal of PCS Under Perpetual Software Licenses
. Our PCS includes the right to receive unspecified upgrades or enhancements and
technical support. Fees from customer renewals of PCS related to previously purchased perpetual licenses are recognized ratably over the term of the PCS.
Content
. Content is licensed on a term basis and provides customers with access to the licensed content over the term of the agreement. Revenue from these licensing arrangements is recognized
ratably over the term of the agreement, which is typically twelve months.
Professional Services.
We provide certain
services to our customers, including non-complex product training, installation, implementation and other professional services which are non-essential to the operation of the software. We also perform professional services for our customers
designed to enhance the value of our software products by creating extensions to functionality to address a clients specific business needs. When sold separately, revenue from these services is generally recognized as the services are
delivered under the proportional performance method when we can reasonably estimate the level of effort required to complete our performance obligations under an arrangement and such performance obligations are provided on a best-efforts basis. For
service arrangements that include provisions that create significant uncertainties (e.g. customer acceptance) or service deliverables wherein the level of effort to complete the services cannot be reasonably estimated, the associated revenue is
recognized using the completed performance method.
Multi-Element Arrangements.
For multi-element arrangements which
include software licenses, PCS and non-complex training, installation and implementation services which are non-essential to the operation of the software, the entire fee for such arrangements is recognized as revenue ratably over the term of the
PCS or delivery of the services, whichever is longer. For multi-element arrangements which also include services that are essential to the operation of the software, the fee for such arrangements is generally deferred until the services essential to
the operation of the software have been performed, at which point the entire fee for such arrangements is recognized as revenue ratably over the remaining term of the PCS or the delivery of the non-essential services, whichever is longer.
Deferred Costs
Occasionally, we enter into professional service arrangements under which resulting revenue is deferred until certain elements of the arrangements are delivered. As a result, if deemed material, we defer
the direct variable expense, not exceeding the revenue deferred, in other current assets on the balance sheet until the period when revenue is recognized. Direct and incremental variable expenses include direct labor costs and direct services
contracts with third parties working on the software service arrangements. As of March 31, 2012 and December 31, 2011, we deferred approximately $1.2 million and $0.9 million, respectively, of direct and incremental variable costs related
to software service arrangements where the revenue is deferred until future periods.
Share Based Compensation
We account for our share-based awards in accordance with ASC Topic 718,
CompensationStock Compensation
(ASC Topic
718). We estimate the fair value of our share-based stock awards on the date of grant using the Black-Scholes option-pricing model. The Black-Scholes option-pricing model requires the use of certain input variables, as follows:
8
Expected Volatility.
Volatility is a measure of the amount the stock price will
fluctuate during the expected life of an award. We determine volatility based on our historical stock price volatility over the most recent period equivalent to the expected life of the award, giving consideration to company-specific events
impacting our historical volatility that are unlikely to occur in the future, as well as anticipated future events that may impact volatility. We also consider the historical stock price volatilities of comparable publicly traded companies.
Risk-Free Interest Rate.
Our assumption of the risk-free interest rate is based on the interest rates on U.S. constant
rate treasury securities with contractual terms approximately equal to the expected life of the award.
Expected Dividend
Yield.
Because we have not paid any cash dividends since our inception and do not anticipate paying dividends in the foreseeable future, we assume a dividend yield of zero.
Expected Award Life.
We determine the expected life of an award by considering various relevant factors, including the vesting
period and contractual term of the award, our employees historical exercise patterns and length of service and employee characteristics. We also consider the expected award lives of comparable publicly traded companies. For stock purchase plan
purchase rights, the expected life is equal to the current offering period under the stock purchase plan.
Under ASC Topic
718, we are also required to estimate at grant the likelihood that the award will ultimately vest (the pre-vesting forfeiture rate), and to revise the estimate, if necessary, in future periods if the actual forfeiture rate differs. We
determine the pre-vesting forfeiture rate of an award based on our historical pre-vesting award forfeiture experience, giving consideration to company-specific events impacting historical pre-vesting award forfeiture experience that are unlikely to
occur in the future as well as anticipated future events that may impact forfeiture rates.
Our determination of the input
variables used in the Black-Scholes option pricing model as well as the pre-vesting forfeiture rate is based on various underlying estimates and assumptions that are highly subjective and are affected by our stock price, among other factors. Changes
in these underlying estimates and assumptions could materially affect the fair value of our share-based awards and, therefore, the amount of share-based compensation expense to be recognized in our results of operations.
Income Taxes
We account
for income taxes in accordance with ASC Topic 740
, Income Taxes
. Deferred tax assets and liabilities are recognized for the tax consequences of temporary differences between the financial carrying amounts and the tax basis of existing assets
and liabilities by applying enacted statutory tax rates applicable to future years. The provision for income taxes is based on our estimates for taxable income of the various legal entities and jurisdictions in which we operate. As such, income tax
expense may vary from the customary relationship between income tax expense and pre-tax income. We establish a valuation allowance against our net deferred tax assets to reduce them to the amount expected to be realized.
We assess the recoverability of our deferred tax assets on an ongoing basis. In making this assessment we are required to consider all
available positive and negative evidence to determine whether, based on such evidence, it is more likely than not that some portion or all of our net deferred assets will be realized in future periods. This assessment requires significant judgment.
We do not recognize current and future tax benefits until it is more likely than not that our tax positions will be sustained. In general, any realization of our net deferred tax assets will reduce our effective rate in future periods. However, the
realization of deferred tax assets that are related to net operating losses (NOLs) that were generated by tax deductions resulting from the exercise of non-qualified stock options will be a direct increase to stockholders equity.
We determine whether the benefits of our tax positions are more-likely-than-not to be sustained upon audit based on the
technical merits of the tax position. We recognize the impact of an uncertain income tax position taken on our income tax return at the largest amount that is more-likely-than-not to be sustained upon audit by the relevant taxing authority. An
uncertain income tax position is not recognized if it has less than a 50% likelihood of being sustained.
Interest and
penalties related to income tax matters are recognized in income tax expense. During the three months ended March 31, 2012 and March 31, 2011 we incurred approximately $56,000 and $37,000, respectively, in interest and penalties.
2. Business Combinations
VelQuest Acquisition
On December 30, 2011, we entered into an Agreement and Plan of Merger pursuant to which VelQuest became our wholly owned subsidiary. We acquired VelQuest as part of our strategy to expand our product
portfolio to complement our current software
9
offerings. Based in Hopkinton, Massachusetts, VelQuest extends our software portfolio into pharmaceutical development quality assurance and quality control, offering significant productivity
improvements, faster cycle times, lower operational costs and reduced compliance risks for regulated life sciences organizations.
The total consideration for the net assets acquired was $35.0 million, consisting of an initial cash payment of $29.8 million, which was paid in connection with the signing and simultaneous closing of the
acquisition, and additional consideration of $5.3 million which was deposited into an escrow account in the name of the selling shareholders on the acquisition date. The escrowed funds will be released upon satisfaction of certain representations
and warranties for a period of 15 months following the acquisition date, if, and to the extent that, no breaches of the representations and warranties have occurred.
We funded the purchase price with cash on hand. All acquisition costs related to the transaction were expensed as incurred. The total acquisition date fair value of the consideration was $35.0 million.
The preliminary allocation of the purchase price is as follows:
|
|
|
|
|
|
|
(in thousands)
|
|
Fair Value of Consideration Transferred
|
|
$
|
35,000
|
|
Less: Recognized amounts of identifiable assets acquired and liabilities assumed:
|
|
|
|
|
Cash and cash equivalents
|
|
|
299
|
|
Accounts receivable
|
|
|
4,336
|
|
Other assets
|
|
|
23
|
|
Property, plant and equipment
|
|
|
14
|
|
Intangible assets
|
|
|
10,880
|
|
Other current liabilities
|
|
|
(1,081
|
)
|
Deferred revenue
|
|
|
(3,430
|
)
|
|
|
|
|
|
Goodwill
|
|
$
|
23,959
|
|
|
|
|
|
|
The above purchase price allocation is considered preliminary and is subject to revision during the
measurement period. We may adjust the preliminary purchase price allocation after obtaining more information regarding preliminary estimates of acquired intangible assets and net deferred tax assets (due to potential limitations on their use).
During the three months ended March 31, 2012, we made measurement period adjustments totaling $0.1 million to accrued liabilities. We did not recast the December 31, 2011 balance sheet as a result of these measurement period adjustments as
we did not consider them to be material. There is no tax deductible goodwill as a result of the VelQuest acquisition.
We have
determined that the acquisition of VelQuest was a non-material business combination. As such, pro forma disclosures are not required and are not presented in this Quarterly Report on Form 10-Q. The consolidated financial statements include the
operating results of VelQuest from the date of acquisition.
Contur Acquisition
On May 19, 2011, by and through our subsidiary, Accelrys Software Inc., we entered into a Sale and Purchase Agreement (the
Purchase Agreement) pursuant to which we acquired all outstanding equity interests in Contur. We acquired Contur as part of our strategy to expand our product portfolio to complement our current software offerings. Based in Stockholm,
Sweden, Contur licenses electronic laboratory notebook software solutions which enable scientific organizations to document their research and development processes and to capture their intellectual property. Contur is a provider of electronic lab
notebook capabilities via a software-as-a-service model.
The total consideration for the net assets acquired is up to $11.1
million, consisting of an initial cash payment of $10.6 million, which was paid in connection with the signing and simultaneous closing of the acquisition, and additional consideration of up to $0.5 million upon the achievement of certain
agreed-upon performance milestones, payable in equal increments upon each of the first and second anniversaries of the date of the acquisition. In accordance with the term of the Purchase Agreement, we deposited $0.5 million in an escrow account in
our name on the acquisition date for the potential payments for the contingent consideration obligation. These funds are included in the restricted cash line item in the consolidated balance sheet as of March 31, 2012 and December 31,
2011. During the quarter ended March 31, 2012 the first year performance milestone was met. Accordingly, $0.3 million will be released in accordance with the escrow agreement during the quarter ended June 30, 2012.
10
We funded the purchase price with cash on hand. All acquisition costs related to the
transaction were expensed as incurred. The total acquisition date fair value of the consideration was estimated at approximately $11.0 million as follows (in thousands):
|
|
|
|
|
Initial cash payment to Contur
|
|
$
|
10,624
|
|
Estimated fair value of contingent milestone consideration
|
|
|
335
|
|
|
|
|
|
|
Total consideration
|
|
$
|
10,959
|
|
|
|
|
|
|
As of the acquisition date, a liability of $0.3 million was recognized for the estimated fair value of
the contingent milestone consideration. Changes in the fair value of the liability subsequent to the acquisition date are recognized in earnings. We have determined the fair value of the contingent consideration obligation based on a discounted
probability-weighted income approach derived from revenue estimates and a probability assessment with respect to the likelihood of achieving the milestone criteria.
The allocation of the purchase price is as follows:
|
|
|
|
|
|
|
(in thousands)
|
|
Fair Value of Consideration Transferred
|
|
$
|
10,959
|
|
Less: Recognized amounts of identifiable assets acquired and liabilities assumed:
|
|
|
|
|
Cash and cash equivalents
|
|
|
761
|
|
Accounts receivable
|
|
|
641
|
|
Other current assets
|
|
|
240
|
|
Property, plant and equipment
|
|
|
51
|
|
Intangible assets
|
|
|
4,410
|
|
Other current liabilities
|
|
|
(698
|
)
|
Deferred tax liabilities
|
|
|
(1,582
|
)
|
Deferred revenue
|
|
|
(353
|
)
|
|
|
|
|
|
Goodwill
|
|
$
|
7,489
|
|
|
|
|
|
|
We may adjust the purchase price allocation after obtaining more information regarding preliminary
estimates of net deferred tax assets and potential limitations on their use. During the three months ended March 31, 2012, we made measurement period adjustments totaling $29,000 to accrued income tax balances. We did not recast the
December 31, 2011 balance sheet as a result of these measurement period adjustments as we did not consider them to be material.
In addition to the initial purchase price, we have deposited $2.0 million in an escrow account in the name of the six former equity holders of Contur. The escrowed funds will be released upon satisfaction
of certain representations and warranties for a period of two years following the acquisition date, in $1.0 million increments upon each of the first and second anniversaries of the date of the acquisition if, and to the extent that, no breaches of
the representations and warranties have occurred. The $2.0 million is also subject to forfeiture in equal amounts by each of the former equity holders if employment is terminated prior to a two-year retention period. Accordingly, the payment was
determined to be compensation for post-acquisition service, the cost of which will be recognized as compensation expense over the two-year retention period.
We have determined that the acquisition of Contur was a non-material business combination. As such, pro forma disclosures are not required and are not presented in this Quarterly Report on Form 10-Q. The
consolidated financial statements include the operating results of Contur from the date of acquisition.
3. Net Loss Per Share
We compute net loss per share pursuant to FASB ASC Topic 260,
Earnings Per Share
. Accordingly, basic and diluted
net loss per share is computed by dividing the net loss for the period by the weighted average number of common shares outstanding during the period, without consideration for common stock equivalents.
As we reported a net loss for the three months ended March 31, 2012 and March 31, 2011, basic and diluted net loss per share
were the same. Potentially dilutive securities outstanding totaling 6.9 million shares and 6.4 million shares were not included in the computation of diluted net loss per share for the three months ended March 31, 2012 and
March 31, 2011, respectively, because to do so would have been anti-dilutive.
11
4. Share-Based Payments
2011 Stock Incentive Plan
On August 3, 2011, our stockholders approved the adoption of our 2011 Stock Incentive Plan (the 2011 Plan). The total number of shares of our common stock that are reserved for issuance under
the 2011 Plan is 17.75 million shares. The 2011 Plan also provides that the following shares of our common stock will not be returned to the 2011 Plan or otherwise become available for issuance under the 2011 Plan: (i) shares of common stock
tendered by participants as full or partial payment to the Company upon exercise of options granted under the 2011 Plan; (ii) shares of common stock withheld by, or otherwise remitted to, the Company to satisfy a participants tax withholding
obligations; and (iii) shares of common stock covered by the portion of any SAR that is exercised (whether or not such shares of common stock are actually issued to a participant upon exercise of the SAR).
Notwithstanding the foregoing, any shares of common stock issued in connection with awards other than stock options and SARs will be
counted against the total share limit reserved under the 2011 Plan by applying the Multiplier (as defined below) to the shares of common stock covered by each such award; conversely, shares of common stock returned to or deemed not to have been
issued from the 2011 Plan under awards other than stock options and SARs will return to the share reserve at a rate determined by multiplying such number of shares by the Multiplier. The Multiplier for awards other than stock options and
SARs will be 2.22 shares of common stock for every 1.0 share of common stock issued in connection with such award. For example, a grant of a restricted stock award for 1,000 shares would count as 2,220 shares against the reserve, and if returned to
the 2011 Plan, would count as 2,220 shares returned to the 2011 Plan. As of March 31, 2012, there are approximately 15,254,074 shares of our common stock available for issuance under the 2011 Plan.
Share-Based Award Activity
Our stock options generally vest over four years and have a contractual term of seven to ten years. A summary of stock option activity under our share-based compensation plans is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Shares
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Aggregate
Intrinsic
Value
|
|
|
Weighted
Average
Remaining
Contractual
Life
|
|
|
|
(In thousands, except per share amounts)
|
|
Outstanding at December 31, 2011
|
|
|
6,021
|
|
|
$
|
7.64
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
106
|
|
|
|
8.01
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(355
|
)
|
|
|
6.0
|
|
|
|
|
|
|
|
|
|
Expired/Forfeited
|
|
|
(306
|
)
|
|
|
11.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2012
|
|
|
5,466
|
|
|
|
7.52
|
|
|
|
7,798
|
|
|
|
6.08
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at March 31, 2012
|
|
|
2,942
|
|
|
|
8.23
|
|
|
|
4,558
|
|
|
|
4.19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The aggregate intrinsic value of stock options outstanding and exercisable at March 31, 2012 was
based on the closing price of our common stock on March 31, 2012 of $7.98 per share. The total intrinsic value of stock options exercised during the three months ended March 31, 2012 and 2011 was $0.6 million and $0.5, respectively.
Restricted stock units (RSUs) granted under our Amended and Restated 2004 Stock Incentive Plan, as amended (the
2004 Plan), the 2007 Plan and the 2011 Plan generally vest annually over three years and, once vested, do not expire. Upon vesting of an RSU, employees are generally issued an equivalent number of shares of our common stock. A summary of
RSU activity under our share-based compensation plans is as follows:
12
|
|
|
|
|
|
|
|
|
|
|
Number of
Shares
|
|
|
Weighted
Average
Grant Date
Fair Value Per Share
|
|
|
|
(In thousands, except per share amounts)
|
|
Unvested at December 31, 2011
|
|
|
1,432
|
|
|
$
|
6.82
|
|
Granted
|
|
|
51
|
|
|
|
8.01
|
|
Vested
|
|
|
(33
|
)
|
|
|
7.04
|
|
Forfeited
|
|
|
(54
|
)
|
|
|
6.86
|
|
|
|
|
|
|
|
|
|
|
Unvested at March 31, 2012
|
|
|
1,396
|
|
|
$
|
6.79
|
|
|
|
|
|
|
|
|
|
|
Included in the vested shares for the period are approximately 11,000 shares tendered to us by employees
for payment of minimum income tax obligations upon vesting of RSUs.
Share-Based Compensation Expense
The estimated fair value of our share-based awards is recognized as a charge against income on a straight-line basis over the requisite
service period, which is typically the vesting period of the award. Total share-based compensation expense recognized in our consolidated statements of operations for the three months ended March 31, 2012 and 2011 was as follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
(in thousands)
|
|
Cost of revenue
|
|
$
|
142
|
|
|
$
|
84
|
|
Product development
|
|
|
382
|
|
|
|
233
|
|
Sales and marketing
|
|
|
589
|
|
|
|
420
|
|
General and administrative
|
|
|
687
|
|
|
|
586
|
|
Business consolidation, transaction and restructuring costs
|
|
|
(9
|
)
|
|
|
(43
|
)
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation expense
|
|
$
|
1,791
|
|
|
$
|
1,280
|
|
|
|
|
|
|
|
|
|
|
No share-based compensation expense was capitalized in the periods presented. At March 31, 2012, the
gross amount of unrecognized share-based compensation expense relating to unvested share-based awards was approximately $14.2 million, which we anticipate recognizing as a charge against operations over a weighted average period of 2.3 years. The
total fair value of RSUs vested was $0.2 million for both the three months ended March 31, 2012 and 2011, respectively.
Stock
Repurchases
On November 10, 2010, we entered into a stock repurchase plan with a broker (the Repurchase
Plan), in accordance with Rule 10b5-1 of the Securities Exchange Act of 1934, as amended (the Exchange Act). Pursuant to the Repurchase Plan, and subject to the conditions set forth therein and the provisions of Rule 10b-18 of the
Exchange Act, we instructed the broker to purchase for our account up to $6.0 million worth of our common stock by March 31, 2011. As of December 31, 2010, we had repurchased 353,955 shares of our common stock for approximately $3.0
million at an average cost of $8.40 per share. We completed the repurchase of the remaining $3.0 million of our common stock by purchasing 350,553 shares at an average cost of $8.50 per share, during the quarter ended March 31, 2011.
On March 11, 2011, we entered into a second stock repurchase plan (the Second Repurchase Plan) in accordance
with Rule 10b5-1 of Exchange Act. Pursuant to the Second Repurchase Plan, and subject to the conditions set forth therein and the provisions of Rule 10b-18 of the Exchange Act, we instructed the broker to purchase for our account up to an
additional $4.0 million worth of our common stock by September 30, 2011. We repurchased 253,624 shares of our common stock for $2.0 million at an average cost of $7.86 during the quarter ended June 30, 2011, and we completed the repurchase
of the remaining $2.0 million of our common stock by purchasing 273,141 shares at an average cost of $7.29 per share during the quarter ended September 30, 2011. As of December 31, 2011, we had repurchased a total of 1,231,273 shares for
$10.0 million under the November 10, 2010 and the March 11, 2011 repurchase plans. All of the shares repurchased have been recorded as treasury stock.
On March 14, 2012, we entered into a third stock repurchase plan (the Third Repurchase Plan and, together with the Repurchase Plan and the Second Repurchase Plan, the Repurchase
Plans) in accordance with Rule 10b5-1 of Exchange Act.
13
Pursuant to the Third Repurchase Plan, and subject to the conditions set forth therein and the provisions of Rule 10b-18 of the Exchange Act, we instructed the broker to purchase for our account
up to an additional $10.0 million worth of our common stock by December 31, 2012. During the quarter ended March 31, 2012, we repurchased 320,860 shares of our common stock for approximately $2.6 million at an average cost of $7.98 per
share.
5. Marketable Securities
Our marketable securities consist of debt securities with original maturities of greater than three months and include
obligations of U.S. government sponsored enterprises, commercial paper, certificates of deposits, corporate and municipal debt. We account for our investments in marketable securities in accordance with Financial Accounting Standards Board
(FASB) Accounting Standards Codification (ASC) Topic 320,
InvestmentsDebt and Equity Securities
(ASC Topic 320). Accordingly, our marketable securities have been classified as available-for-sale and
are recorded at their estimated fair value, with unrealized gains and losses recorded in stockholders equity and included in accumulated other comprehensive income. Realized gains and losses on the sale of available-for-sale marketable securities
are recorded in royalty and other income, net. Available-for-sale marketable securities with original maturities greater than three months and remaining maturities of one year or less are classified as short-term available-for-sale marketable
securities. Available-for-sale marketable securities with remaining maturities of greater than one year are classified as long-term available-for-sale marketable securities, as we intend to hold these securities until maturity. Unrealized losses
which are not considered other than temporary and unrealized gains are included in accumulated other comprehensive income in stockholders equity. Unrealized losses which are determined to be other than temporary are recorded as a charge
against income. The cost of marketable securities sold is determined based on the specific identification method.
Marketable
securities as of March 31, 2012 and December 31, 2011 consisted of the following:
14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized
Cost
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Fair Value
|
|
|
|
(In thousands)
|
|
March 31, 2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-Term Marketable Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury securities
|
|
$
|
3,202
|
|
|
$
|
9
|
|
|
$
|
|
|
|
$
|
3,211
|
|
U.S. government and agency securities
|
|
|
6,409
|
|
|
|
6
|
|
|
|
|
|
|
|
6,415
|
|
Commercial paper and certificate of deposits
|
|
|
9,993
|
|
|
|
6
|
|
|
|
|
|
|
|
9,999
|
|
Corporate debt securities
|
|
|
28,641
|
|
|
|
38
|
|
|
|
(5
|
)
|
|
|
28,674
|
|
Municipal debt securities
|
|
|
2,595
|
|
|
|
|
|
|
|
|
|
|
|
2,595
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Short-Term Marketable Securities
|
|
$
|
50,840
|
|
|
$
|
59
|
|
|
$
|
(5
|
)
|
|
$
|
50,894
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-Term Marketable Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury securities
|
|
$
|
2,608
|
|
|
$
|
36
|
|
|
$
|
|
|
|
$
|
2,644
|
|
U.S. government and agency securities
|
|
|
1,745
|
|
|
|
29
|
|
|
|
|
|
|
|
1,774
|
|
Corporate debt securities
|
|
|
12,193
|
|
|
|
24
|
|
|
|
(8
|
)
|
|
|
12,209
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Long-Term Marketable Securities
|
|
$
|
16,546
|
|
|
$
|
89
|
|
|
$
|
(8
|
)
|
|
$
|
16,627
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized
Cost
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Fair Value
|
|
|
|
(In thousands)
|
|
December 31, 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-Term Marketable Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury securities
|
|
$
|
2,505
|
|
|
$
|
8
|
|
|
$
|
|
|
|
$
|
2,513
|
|
U.S. government and agency securities
|
|
|
9,516
|
|
|
|
10
|
|
|
|
|
|
|
|
9,526
|
|
Commercial paper and certificates of deposit
|
|
|
3,449
|
|
|
|
|
|
|
|
|
|
|
|
3,449
|
|
Corporate debt securities
|
|
|
33,780
|
|
|
|
35
|
|
|
|
(22
|
)
|
|
|
33,793
|
|
Municipal debt securities
|
|
|
3,695
|
|
|
|
|
|
|
|
|
|
|
|
3,695
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Short-Term Marketable Securities
|
|
$
|
52,945
|
|
|
$
|
53
|
|
|
$
|
(22
|
)
|
|
$
|
52,976
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-Term Marketable Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury securities
|
|
$
|
3,307
|
|
|
$
|
49
|
|
|
$
|
|
|
|
$
|
3,356
|
|
U.S. government and agency securities
|
|
|
1,759
|
|
|
|
25
|
|
|
|
|
|
|
|
1,784
|
|
Corporate debt securities
|
|
|
12,100
|
|
|
|
13
|
|
|
|
(29
|
)
|
|
|
12,084
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Long-Term Marketable Securities
|
|
$
|
17,166
|
|
|
$
|
87
|
|
|
$
|
(29
|
)
|
|
$
|
17,224
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2012 and December 31, 2011, we did not have any investments in marketable
securities that were in an unrealized loss position for twelve months or greater.
We assess our marketable securities for
impairment under the guidance provided by ASC Topic 320. Accordingly, we review the fair value of our marketable securities at least quarterly to determine if declines in the fair value of individual securities are other-than-temporary in nature. If
we believe the decline in the fair value of an individual security is other-than-temporary, we write-down the carrying value of the security to its estimated fair value, with a corresponding charge against income. To determine if a decline in the
fair value of an investment is other-than-temporary, we consider several factors including, among others, the period of time and extent to which the estimated fair value has been less than cost, overall market conditions, the historical and
projected future financial condition of the issuer of the security and our ability and intent to hold the security for a period of time sufficient to allow for a recovery of the market value. The unrealized losses related to our marketable
securities held as of March 31, 2012 and December 31, 2011 were primarily caused by recent fluctuations in market interest rates, and not the credit quality of the issuer, and we have the ability and intent to hold these securities until a
recovery of fair value, which may be at maturity. As a result, we do not believe these securities to be other-than-temporarily impaired as of March 31, 2012.
15
6. Long Term Investments and Promissory Notes Receivable
Our long term investments consist of equity investments in privately held companies. We determine the accounting method
used to account for investments in equity securities of other business entities in which we do not have a controlling interest primarily based on our ownership of each such business entity and whether we have the ability to exercise significant
influence over the strategic, operating, investing, and financing activities of each such business entity. As we do not have a controlling interest or have the ability to exercise significant influence over the companies, we account for our
investments using the cost method of accounting. We monitor these investments for impairment by considering current factors including economic environment, market conditions and operational performance and other specific factors relating to the
business underlying the investment.
Freeslate
We have determined that one of the entities, Freeslate Inc. (Freeslate), in which we carry an approximately 19.5% equity interest, is a variable interest entity in which we are not the primary
beneficiary. The key factors in our assessment were that Freeslates management team and board of directors were solely responsible for all economic aspects of the entity, including key business decisions that impact Freeslates economic
performance and we do not have power, through our variable interest, to direct the activities that most significantly impact the economic performance of Freeslate. We also do not hold any seats on Freeslates board of directors. Accordingly, we
account for our investment in Freeslate as a cost method investment. The carrying value of our investment in Freeslate was $1.0 million as of both March 31, 2012 and December 31, 2011. In addition to our equity interest, we have a warrant
allowing us to retain our 19.5% interest in the event of dilution through future stock issuances under Freeslates existing stock plans. We have determined that as of March 31, 2012, our investment in Freeslate is not impaired.
We also hold an unsecured promissory note receivable with a face value of $10.0 million from Freeslate, which bears interest at
8% per annum payable annually in arrears. The note requires principal payments in the amount of $1.0 million starting on March 1, 2014 and continuing annually until March 1, 2019, with the final principal payment of $4.0 million
due on March 1, 2020. As the note receivable was acquired in the Symyx Merger, it was revalued in purchase accounting to its then fair value of $8.8 million. The note receivable is not measured at fair value on a recurring basis, but is
periodically reviewed for possible impairment. The note receivable had a carrying amount of $8.7 million as of both March 31, 2012 and December 31, 2011.
Our maximum exposure to loss as a result of our interests in Freeslate is limited to the aggregate of the carrying value of our equity investment and promissory note receivable. There were no future
funding commitments as of March 31, 2012 related to Freeslate.
Intermolecular
On July 28, 2011, Symyx entered into an agreement (the IM Agreement) with Intermolecular, Inc. (IM). Symyx
was a stockholder of IM, holding 3,968,204 shares of IM common stock (on an as-converted to common stock basis), after giving effect to a 1-for-2 reverse stock split on November 15, 2011). By virtue of its stock ownership, pursuant to a voting
agreement, Symyx was also entitled to appoint one member of the IM board of directors.
Pursuant to the terms of the IM
Agreement, subject to the transactions contemplated thereby, Symyx agreed to: (i) terminate all royalty obligations of IM accruing after December 31, 2011 pursuant to an existing Alliance Agreement and an existing Collaborative Development
and License Agreement between Symyx and IM; and (ii) transfer to IM, subject to a license grant back to Symyx, certain patents relating to Symyxs legacy high-throughput research business.
As consideration for the foregoing, IM agreed to: (i) use its commercially reasonable efforts to allow Symyx to be included as a
selling stockholder in IMs initial public offering (the IPO) with respect to not less than all of the IM shares held by Symyx (and Symyx is obligated to sell such shares); (ii) to the extent the gross proceeds from
Symyxs sale of all of its IM shares in the IPO are less than $67 million, issue a secured promissory note to Symyx upon the consummation of the IPO in an amount equal to such shortfall; and (iii) reimburse Symyx for 50% of the
underwriting discounts and commission payable by Symyx with respect to the sale of such shares in the IPO. In addition, pursuant to the IM Agreement, IM agreed to continue to sublicense from Symyx its rights to certain patents and to assume certain
royalty and license fee obligations relating thereto.
On November 18, 2011, IM filed its final prospectus relating to
the IPO and began trading on the NASDAQ Global Select Market. As disclosed in the final prospectus, Symyx participated as a selling stockholder in the IPO by selling 3,968,204 shares of IM common stock at price per share equal to $10.00, resulting
in aggregate proceeds of $39.7 million. In addition, IM reimbursed Symyx $1.4 million of the underwriting discounts and commissions payable by Symyx in connection with the IPO, representing 50% of such fees.
16
As a result of the sale of Symyxs equity interest in IM in the IPO and the cash
proceeds of $39.7 million, during the quarter ended December 31, 2011 we recognized a gain on sale of approximately $19.0 million, net of transaction costs and commissions of $1.4 million related to the IPO and consulting costs of $1.0 million
we incurred in connection with the IM Agreement.
Pursuant to the terms of the IM Agreement, IM issued to Symyx a secured
promissory note receivable in a principal amount equal to $27.3 million, representing the difference between $67 million and the aggregate gross proceeds from Symyxs sale of its IM common stock in the IPO. The note receivable has a term of 24
months and an interest rate equal to 4% and is payable in quarterly installments such that an amount equal to the greater of $500,000 per quarter or the amount of accrued interest for such quarter would be payable at the end of each such quarter,
with a balloon payment due at maturity. The note is pre-payable by IM at any time without penalty or premium and is secured by a proportionate amount of IMs tangible fixed assets, excluding intellectual property.
The note receivable was discounted to fair value of $26.0 million, representing the consideration for the patents transferred to IM, for
which we carried a purchased technology intangible assets acquired in the Symyx Merger, and the termination of IMs royalty obligations to Symyx. In connection with the sale of the intellectual property we wrote off intangible assets sold to IM
with a net book value of $4.3 million in the fourth quarter of fiscal 2011 and based on our assessment of the relevant revenue recognition guidance and other factors we deferred the recognition of the portion of the net gain equal to the fair value
of the note receivable of $26.0 million. We will recognize this gain when payments become due on the note receivable to the extent they exceed interest due and the amortization of the discount on the note receivable. During the quarter ended
March 31, 2012, we received the first quarterly installment due on the note of $500,000 which was applied to interest and discount and as such no gain on sale was recognized. In addition, based on our evaluation of the contractual terms of the
promissory note receivable and its collectability as of March 31, 2012, we believe the promissory note receivable meets the definition of a financial asset, therefore we have recorded the note receivable at expected net realizable value on our
consolidated balance sheet with a current and a long term portion of $0.9 million and $25.1 million, respectively. The fair value of the note was based on comparable market interest rate of 6.89% for comparable instruments.
7. Fair Value
Financial Assets and Liabilities
We carry our cash equivalents, marketable securities, restricted marketable securities and foreign currency forward contracts at market value. Cash equivalents are comprised of short-term, highly liquid
investments including money market funds and other investment grade securities such as certificates of deposits, commercial paper, corporate and municipal bonds and obligations of U.S. government sponsored enterprises. Our marketable securities
consist of debt securities with original maturities of greater than three months and include obligations of U.S. government sponsored enterprises, commercial paper, certificates of deposits and corporate and municipal debt. The fair value of our
foreign currency contracts is estimated based on the prevailing exchange rates of the various hedged currencies as of the end of the period.
Fair value accounting provides a definition of fair value, establishes acceptable methods of measuring fair value and expands disclosures for fair value measurements. The principles apply under accounting
pronouncements which require measurement of fair value and do not require any new fair value measurements in accounting pronouncements where fair value is the relevant measurement attribute. Fair value accounting also specifies a fair value
hierarchy based upon the observability of inputs used in valuation techniques. Observable inputs (highest level) reflect market data obtained from independent sources, while unobservable inputs (lowest level) reflect internally developed market
assumptions.
In accordance with fair value accounting, fair value measurements are classified under the following hierarchy:
Level 1Quoted prices for identical instruments in active markets.
Level 2Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or
indirectly. These might include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for
the asset or liability (such as interest rates, volatilities, prepayment speeds, credit risks, etc.) or inputs that are derived principally from or corroborated by market data by correlation or other means.
Level 3Model-derived valuations in which one or more significant inputs or significant value-drivers are unobservable.
Fair value measurements are classified according to the lowest level input or value-driver that is significant to the valuation. A
measurement may therefore be classified within Level 3 even though there may be significant inputs that are readily observable.
Where applicable, the determination of fair values is based on unadjusted quoted prices that are available in active markets for the
identical assets or liabilities at the measurement date. This pricing methodology applies to our Level 1 investments. To the extent quoted prices in active markets are not available at the measurement date, fair values can be based on usage of
observable market prices in less active markets, use of broker/dealer quotes and alternative pricing sources with reasonable levels of price transparency.
17
Because many fixed income securities do not trade on a daily basis or have market prices from multiple sources, the pricing applications may apply available information as applicable to determine
the fair value as of the measurement date. This methodology applies to our Level 2 investments. Currently we do not hold any Level 3 investments.
We recorded an acquisition-related liability for contingent consideration representing the amounts payable to former Contur equity holders, as outlined under the terms of the Purchase Agreement, upon the
achievement of certain agreed-upon performance milestones. The fair value of this Level 3 liability is estimated based on a discounted probability-weighted income approach derived from revenue estimates and a probability assessment with respect to
the likelihood of achieving the milestone criteria. Subsequent changes in the fair value of the contingent consideration liability are recorded in the statement of operations and result from updates to assumed probability of achievement of
milestones and adjustments to the discount periods and rates. Since the May 19, 2011 acquisition date we have recognized a $0.1 million increase to the $0.3 million acquisition date liability for contingent consideration to a balance of $0.4
million as of March 31, 2012.
The following table summarizes our assets and liabilities that require fair value
measurements on a recurring basis and their respective input levels based on the fair value hierarchy:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying
Value at
March 31,
2012
|
|
|
Quoted
Market
Prices for
Identical
Assets
(Level 1)
|
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
|
|
(In thousands)
|
|
March 31, 2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents (1)
|
|
$
|
33,459
|
|
|
$
|
1,700
|
|
|
$
|
31,759
|
|
|
$
|
|
|
Short-Term Marketable Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury securities
|
|
|
3,211
|
|
|
|
3,211
|
|
|
|
|
|
|
|
|
|
U.S. government and agency securities
|
|
|
6,415
|
|
|
|
|
|
|
|
6,415
|
|
|
|
|
|
Commercial paper and certificates of deposit
|
|
|
9,999
|
|
|
|
|
|
|
|
9,999
|
|
|
|
|
|
Corporate debt securities
|
|
|
28,674
|
|
|
|
|
|
|
|
28,674
|
|
|
|
|
|
Municipal debt securities
|
|
|
2,595
|
|
|
|
|
|
|
|
2,595
|
|
|
|
|
|
Long-Term Marketable Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury securities
|
|
|
2,644
|
|
|
|
2,644
|
|
|
|
|
|
|
|
|
|
U.S. government and agency securities
|
|
|
1,774
|
|
|
|
|
|
|
|
1,774
|
|
|
|
|
|
Corporate debt securities
|
|
|
12,209
|
|
|
|
|
|
|
|
12,209
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets at fair value
|
|
$
|
100,980
|
|
|
$
|
7,555
|
|
|
$
|
93,425
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition related contingent consideration
|
|
$
|
419
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
419
|
|
Foreign currency forward contracts not designated as hedges
|
|
|
126
|
|
|
|
|
|
|
|
126
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities at fair value
|
|
$
|
545
|
|
|
$
|
|
|
|
$
|
126
|
|
|
$
|
419
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Cash equivalents are included in the Cash and cash equivalents line in the consolidated balance sheet
|
18
There were no transfers between Level 1 and Level 2 securities during the three months ended
March 31, 2012.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying
Value
at
December 31,
2011
|
|
|
Quoted
Market
Prices for
Identical
Assets
(Level 1)
|
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
|
|
(In thousands)
|
|
December 31, 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents (1)
|
|
$
|
30,541
|
|
|
$
|
27,440
|
|
|
$
|
3,101
|
|
|
$
|
|
|
Short-Term Marketable Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury securities
|
|
|
2,513
|
|
|
|
2,513
|
|
|
|
|
|
|
|
|
|
U.S. government and agency securities
|
|
|
9,526
|
|
|
|
|
|
|
|
9,526
|
|
|
|
|
|
Commercial paper and certificates of deposit
|
|
|
3,449
|
|
|
|
|
|
|
|
3,449
|
|
|
|
|
|
Corporate debt securities
|
|
|
33,793
|
|
|
|
|
|
|
|
33,793
|
|
|
|
|
|
Municipal debt securities
|
|
|
3,695
|
|
|
|
|
|
|
|
3,695
|
|
|
|
|
|
Long-Term Marketable Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury securities
|
|
|
3,356
|
|
|
|
3,356
|
|
|
|
|
|
|
|
|
|
U.S. government and agency securities
|
|
|
1,784
|
|
|
|
|
|
|
|
1,784
|
|
|
|
|
|
Corporate debt securities
|
|
|
12,084
|
|
|
|
|
|
|
|
12,084
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets at fair value
|
|
$
|
100,741
|
|
|
$
|
33,309
|
|
|
$
|
67,432
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition related contingent consideration
|
|
$
|
413
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
413
|
|
Foreign currency forward contracts not designated as hedges
|
|
|
117
|
|
|
|
|
|
|
|
117
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities at fair value
|
|
$
|
530
|
|
|
$
|
|
|
|
$
|
117
|
|
|
$
|
413
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Cash equivalents are included in the Cash and cash equivalents line in the consolidated balance sheet
|
19
The following table includes a summary of the contingent consideration measured at fair
value using significant unobservable inputs (Level 3) during the three months ended March 31, 2012 (in thousands):
|
|
|
|
|
Balance at December 31, 2011
|
|
$
|
413
|
|
Expenses recorded due to changes in fair value
|
|
|
6
|
|
|
|
|
|
|
Balance at March 31, 2012
|
|
$
|
419
|
|
|
|
|
|
|
The carrying amount of accounts receivable, accounts payable and accrued liabilities are considered to be
representative of their respective fair values due to their short-term nature. Our investments in privately-held companies are carried at cost. Our notes receivable are carried at the expected net realizable value. It is impracticable for us to
estimate the fair value of these instruments on a recurring basis if there are no identified events or changes in circumstances that may have a significant adverse effect on their fair value.
Non-Financial Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
The non-financial assets and liabilities are recognized at fair value subsequent to initial recognition when they are deemed to be other-than-temporarily impaired. There were no non-financial assets and
liabilities deemed to be other-than-temporarily impaired and measured at fair value on a nonrecurring basis for the periods presented.
8. Goodwill and Purchased Intangible Assets
Intangible assets consist of the following as of March 31, 2012 and December 31, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2012
|
|
|
December 31, 2011
|
|
|
|
Weighted
Average
Life
(yrs)
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Weighted
Average
Life
(yrs)
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
(In thousands)
|
|
Intangible assets subject to amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchased technology
|
|
|
8
|
|
|
$
|
53,573
|
|
|
$
|
24,632
|
|
|
|
8
|
|
|
$
|
53,509
|
|
|
$
|
22,160
|
|
Purchased customer relationships
|
|
|
7
|
|
|
|
25,970
|
|
|
|
9,503
|
|
|
|
7
|
|
|
|
25,906
|
|
|
|
8,158
|
|
Purchased backlog
|
|
|
3
|
|
|
|
7,740
|
|
|
|
4,878
|
|
|
|
3
|
|
|
|
7,740
|
|
|
|
4,390
|
|
Purchased contract base
|
|
|
5
|
|
|
|
50
|
|
|
|
50
|
|
|
|
5
|
|
|
|
50
|
|
|
|
50
|
|
Purchased intellectual property
|
|
|
5
|
|
|
|
1,998
|
|
|
|
1,552
|
|
|
|
5
|
|
|
|
1,998
|
|
|
|
1,448
|
|
Purchased trademark/tradename
|
|
|
5
|
|
|
|
6,722
|
|
|
|
2,162
|
|
|
|
5
|
|
|
|
6,712
|
|
|
|
1,848
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
96,053
|
|
|
$
|
42,777
|
|
|
|
|
|
|
$
|
95,915
|
|
|
$
|
38,054
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets not subject to amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchased trademark/tradename
|
|
|
|
|
|
$
|
2,500
|
|
|
|
|
|
|
|
|
|
|
$
|
2,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As discussed in Note 2, intangible assets related to the VelQuest acquisitions are included in our
preliminary purchase price allocation and are subject to change during the measurement period. Intangible assets are amortized over their estimated useful lives either on a straight-line or accelerated basis that reflects the pattern in which the
economic benefits of the intangible assets are expected to be realized, which range from two to fifteen years, with no residual value. Intangible asset amortization expense was $4.7 million and $5.1 million for the three months ended
March 31, 2012 and March 31, 2011, respectively.
Future estimated amortization expense for intangible assets as of
March 31, 2012 is as follows and is subject to change as a result of measurement period adjustments (in thousands):
20
|
|
|
|
|
2012
|
|
$
|
14,150
|
|
2013
|
|
|
14,620
|
|
2014
|
|
|
10,146
|
|
2015
|
|
|
5,990
|
|
2016
|
|
|
3,355
|
|
Thereafter
|
|
|
5,015
|
|
|
|
|
|
|
Total
|
|
$
|
53,276
|
|
|
|
|
|
|
The changes to the carrying amount of goodwill for the three months ended March 31, 2012, are as follows (in
thousands):
|
|
|
|
|
Balance at December 31, 2011
|
|
$
|
100,429
|
|
Goodwill measurement period adjustments
|
|
|
97
|
(1)
|
Effect of foreign exchange
|
|
|
236
|
|
|
|
|
|
|
Balance at March 31, 2012
|
|
$
|
100,762
|
|
|
|
|
|
|
(1) As discussed in Note 2, we made measurement period adjustments related to the VelQuest
acquisition totaling $0.1 million to accrued liabilities offset by measurement period adjustment of $29,000 to accrued tax liability balances related to the Contur acquisition.
9. Guarantees
Guarantee of Lease Obligation of Others
On April 30, 2004, we spun-off our drug discovery subsidiary, Pharmacopeia Drug Discovery, Inc. (PDD), into an independent, separately traded, publicly held company through the
distribution to our stockholders of a dividend of one share of PDD common stock for every two shares of our common stock. The landlords of our New Jersey facilities, which were used by our PDD operations, consented to the assignment of the leases to
PDD. Despite the assignment, the landlords required us to guarantee the remaining lease obligations, which totaled approximately $10.2 million as of March 31, 2012. In the event that PDD defaults on its lease commitment, we are permitted under
the guarantee to sublease the facility in order to mitigate our lease obligation. In fiscal year 2005, we recognized a liability and corresponding charge to stockholders equity for the probability-weighted fair market value of the guarantee.
Changes to the fair market value of the liability are recognized in stockholders equity. The liability for our guarantee of the lease obligation was $0.3 million at March 31, 2012 and December 31, 2011.
Other Guarantees and Indemnifications
We provide indemnifications of varying scope and size to certain customers against claims of intellectual property infringement made by third parties arising from the use of our products. We have also
entered into indemnification agreements with our officers and directors. Although the maximum potential amount of future payments we could be required to make under these indemnifications is unlimited, to date we have not incurred material costs to
defend lawsuits or settle claims related to these indemnification provisions. Additionally, we have insurance policies that, in most cases, would limit our exposure and enable us to recover a portion of any amounts paid. Therefore, we believe the
estimated fair value of these agreements is minimal and the likelihood of incurring an obligation is remote. Accordingly, we have not accrued any liabilities in connection with these indemnification obligations as of March 31, 2012.
10. Restructuring Activities
The following summarizes the changes in our accrued restructuring charges liability:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance and
Related Costs
|
|
|
Lease
Obligation Exit
and Facility
Closure Costs
|
|
|
Total
|
|
|
|
(In thousands)
|
|
Balance at March 31, 2011
|
|
$
|
|
|
|
$
|
640
|
|
|
$
|
640
|
|
Additional severance and lease abandonment charges
|
|
|
1,765
|
|
|
|
187
|
|
|
|
1,952
|
|
Adjustments to liability
|
|
|
(36
|
)
|
|
|
(155
|
)
|
|
|
(191
|
)
|
Cash payments
|
|
|
(3,563
|
)
|
|
|
(600
|
)
|
|
|
(4,163
|
)
|
Effect of foreign exchange
|
|
|
5
|
|
|
|
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2011
|
|
$
|
1,037
|
|
|
$
|
673
|
|
|
$
|
1,710
|
|
Additional severance and lease abandonment charges
|
|
|
22
|
|
|
|
|
|
|
|
22
|
|
Adjustments to liability
|
|
|
|
|
|
|
39
|
|
|
|
39
|
|
Cash payments
|
|
|
(667
|
)
|
|
|
(48
|
)
|
|
|
(715
|
)
|
Effect of foreign exchange
|
|
|
(11
|
)
|
|
|
18
|
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2012
|
|
$
|
381
|
|
|
$
|
682
|
|
|
$
|
1,063
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21
On April 28, 2011, we renegotiated a sublease for a facility in the UK that was
abandoned in 2006 and for which the tenant had exercised a break clause, whereby the tenant reduced the amount of floor space sublet. Additionally, we negotiated the sublease of the remaining floor space with another party. As a result of the change
in estimate of sublease income for this facility, we recorded a net additional $0.2 million in restructuring expense during the year ended December 31, 2011.
On April 28, 2011, we committed to the implementation of a reduction in force of approximately ten to fifteen employees, in connection with the streamlining of our operations and the integration of
our Content business. As a result, we incurred total severance charges of approximately $1.0 million during the year ended December 31, 2011, of which $0.6 million was paid during fiscal 2011 and $0.3 million was paid during the three
months ended March 31, 2012. The remaining balance is expected to be paid during the second and third quarters of fiscal year 2012.
In July 2010, as a result of the Symyx Merger, we implemented a plan to terminate the employment of approximately 80 employees in the U.S., Europe and Asia-Pacific region. As a result of such
terminations, we have incurred total severance charges of approximately $5.3 million, with $0.8 million incurred during the year ended December 31, 2011 and $4.5 million incurred during the year ended December 31, 2010. As of
March 31, 2012, approximately $5.0 million in cash payments had been made with the remaining balance of $0.3 million to be paid during the second quarter of fiscal 2012.
Prior to the Symyx Merger, Symyx had implemented various restructuring plans under which lease obligations of approximately $0.1 million
remain as of March 31, 2012, and terminate in 2016. Additionally, prior to 2007, we had implemented a restructuring plan under which we have remaining lease obligations of approximately $0.6 million as of March 31, 2012. These lease
obligations terminate in 2022.
All amounts incurred in connection with the above activities are recorded in the
Business consolidation, transaction and restructuring costs line in the accompanying condensed consolidated statements of operations.
11. Royalty and Other Income, Net
Royalty and other income, net includes non-operating items such as interest income, amortization of discount on
promissory notes receivable realized investment gains and losses, unrealized investment gains and losses related to securities determined to be other-than-temporarily impaired and foreign currency exchange gains and losses. It also includes royalty
income (net of royalty expense) and amortization of purchased intangible assets related to products that are not part of current operations. As part of the Symyx Merger, we have retained the rights to receive royalty income related to the
divestiture of the High Productivity Research business unit previously divested by Symyx.
Royalty and other income, net
consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
2012
|
|
|
March 31,
2011
|
|
|
|
(In thousands)
|
|
Royalty income, net
|
|
$
|
1,551
|
|
|
$
|
1,944
|
|
Interest income
|
|
|
560
|
|
|
|
279
|
|
Amortization of discount on promissory notes receivable
|
|
|
159
|
|
|
|
39
|
|
Foreign currency transaction (loss) gain
|
|
|
(347
|
)
|
|
|
609
|
|
Net rental income
|
|
|
175
|
|
|
|
|
|
Purchased intangible assets amortization
|
|
|
(424
|
)
|
|
|
(591
|
)
|
Other
|
|
|
(43
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total royalty and other income, net
|
|
$
|
1,631
|
|
|
$
|
2,280
|
|
|
|
|
|
|
|
|
|
|
22
12. Legal Proceedings
We are subject to various claims and legal proceedings arising in the ordinary course of our business. While any legal
proceeding has an element of uncertainty, management believes that the disposition of such matters, in the aggregate, will not have a material effect on our results of operations.
13. Recent Accounting Pronouncements
In December 2011, the FASB issued Accounting Standards Update (ASU) No. 2011-12,
Comprehensive
Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05
(ASU 2011-12). In June 2011,
the FASB issued ASU No. 2011-05,
Comprehensive Income (Topic 220): Presentation of Comprehensive Income
(ASU 2011-05). ASU 2011-05 requires retrospective application, and both ASUs are effective for annual reporting
periods beginning after December 15, 2011 and the interim reporting periods within those years. ASU 2011-05 eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders
equity. Instead, ASU 2011-05 requires entities to report all non-owner changes in stockholders equity in either a single continuous statement of comprehensive income, or in two separate, but consecutive statements. In addition, items of other
comprehensive income that are reclassified to profit or loss are required to be presented separately on the face of the financial statements. ASU 2011-05 does not change the items that must be reported in other comprehensive income, or when an item
must be reclassified to net income. ASU 2011-12 defers the changes in ASU 2011-05 that pertain to how, when and where reclassification adjustments are presented. We adopted these standards in the first quarter of fiscal 2012 and presented a separate
statement of comprehensive income. The adoption of these standards did not affect our financial position or results of operations.
In September 2011, the FASB issued ASU No. 2011-08,
Testing Goodwill for Impairment
(ASU 2011-08), which gives an entity the option of performing a qualitative assessment to
determine whether it is necessary to perform step 1 of the annual goodwill impairment test. An entity is required to perform step 1 only if it concludes that it is more likely than not that a reporting units fair value is less than its
carrying amount. An entity may choose to perform the qualitative assessment on none, some or all of its reporting units or an entity may bypass the qualitative assessment for any reporting unit in any period and proceed directly to step 1 of the
impairment test. This new guidance is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption is permitted. We do not expect the adoption of this accounting
pronouncement to have a material impact on our consolidated financial statements.
In December of 2010, the FASB issued ASU
No. 2010-28,
When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts
(ASU 2010-28)., which amends ASC Topic 350 and clarifies the requirement to test for impairment of
goodwill. ASC Topic 350 requires that goodwill be tested for impairment if the carrying amount of a reporting unit exceeds its fair value. Under ASU 2010-28, when the carrying amount of a reporting unit is zero or negative an entity must assume that
it is more likely than not that a goodwill impairment exists, perform an additional test to determine whether goodwill has been impaired and calculate the amount of that impairment. The modifications to ASC Topic 350 resulting from the issuance of
ASU 2010-28 are effective for fiscal years beginning after December 15, 2010 and interim periods within those years. Early adoption is not permitted. This new guidance is not expected to have a material impact on our consolidated financial
statements.
14. Subsequent events
During April 2012, we repurchased 427,528 shares of our common stock for approximately $3.4 million at an average cost
of $8.05 per share, pursuant to the Third Repurchase Plan. All of the shares repurchased have been recorded as treasury stock.
On April 27, 2012, our board of directors authorized the Company to commit up to an additional $2.5 million for the repurchase of the
Companys common stock pursuant to a program to be executed in accordance with a Rule 10b5-1 trading plan during fiscal 2012.
Item 2.
|
Managements Discussion and Analysis of Financial Condition and Results of Operations
|
Forward-Looking Statements
This Quarterly Report on Form 10-Q (this Report) contains forward-looking statements that involve risks and uncertainties, as well as assumptions that, if they never materialize or
prove incorrect, could cause our results to differ materially and adversely from those expressed or implied by such forward-looking statements. These statements are often identified by the use of words such as expect,
believe, anticipate, estimate, intend, plan and similar expressions and variations or negatives of these words These forward-looking statements may include statements addressing our future
financial and operating results. We have based these forward-looking statements on our current expectations about future events. Such statements are subject to certain risks and uncertainties including those related to the execution of our strategic
plans, the successful release and acceptance of new products, the demand for new and existing products, additional competition, changes in economic conditions and those described in documents we have filed with the Securities and Exchange Commission
(the SEC), including this Report in Managements Discussion and Analysis of Financial Condition and Results of Operations and Risk Factors and subsequent reports on Form 10-Q and Form 10-K. All
forward-looking statements in this document are qualified entirely by the cautionary statements included in this Report and such other filings. These forward-looking statements speak only as of the date of this Report. We disclaim any undertaking to
publicly update or revise any forward-looking statements contained herein to reflect any change in our expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based.
Unless the context requires otherwise, in this Report the terms we, us and our refer to
Accelrys, Inc. and its wholly owned or indirect subsidiaries, and their respective predecessors.
23
The following discussion and analysis of our financial condition and results of operations
should be read in conjunction with our condensed consolidated financial statements and related notes thereto included elsewhere in this Report.
Overview
On
July 1, 2010, pursuant to the terms of the Agreement and Plan of Merger and Reorganization, dated April 5, 2010 (the Merger Agreement), by and among us, Alto Merger Sub, Inc., our wholly-owned subsidiary (Merger
Sub), and Symyx Technologies, Inc. (Symyx), Merger Sub merged with and into Symyx, with Symyx surviving as our wholly-owned subsidiary (the Symyx Merger). Symyxs operating results are included in our consolidated
financial statements and results of operations beginning July 1, 2010.
On May 19, 2011, we completed the
acquisition of Contur Software AB (Contur), whereby Contur became our wholly owned subsidiary (the Contur Acquisition). Conturs operating results are included in our consolidated financial statements and results of
operations beginning May 19, 2011.
On December 30, 2011 we completed the acquisition of VelQuest Corporation
(VelQuest), whereby VelQuest became our wholly owned subsidiary (the VelQuest Acquisition and, together with the Symyx Merger and the Contur Acquisition, the Acquisitions). VelQuests operating results are
included in our consolidated financial statements and results of operations beginning December 30, 2011.
Our Business
We develop and commercialize scientific informatics software products and services for industries and organizations
that rely on scientific innovation to differentiate themselves in the marketplace. Historically, our products were primarily utilized by our customers research organizations. As a result of the Acquisitions, we increased the breadth and depth
of our scientific product portfolio by adding a set of complementary scientific applications, content databases, technologies and domain expertise. In addition, we have expanded our focus to include products that are utilized by our customers
development and early manufacturing organizations. In particular, the addition of the VelQuest suite of products gives us even greater capability downstream, extending our solutions into the quality assurance and quality control areas in large
pharmaceutical companies. Collectively, our products and services are intended to optimize our customers research and development value chain, from early research through development into early manufacturing. Our software is used by our
customers scientists, biologists, chemists and information technology professionals to design, execute and manage scientific experiments in-silico or in the lab and to aggregate, mine, manage, analyze and interactively report on the scientific
data from those experiments. Our solutions also enable the development process to scale more effectively and bring increased automation to the transition from development to early manufacturing. The ability to integrate and access data from diverse
data sources and to make that information accessible throughout the scientific value chain enables our customers to reduce costs, enhance productivity and more efficiently provide innovative and effective products to their customers.
Our customers include leaders from a variety of industries, including pharmaceutical, biotechnology, agricultural, energy, chemicals,
aerospace, consumer packaged goods and industrial products, as well as various government and academic entities. We market our software products and services worldwide, principally through our direct sales force, augmented by the use of third party
distributors. We are headquartered in San Diego, California and were incorporated in Delaware in 1993.
Description of Our Markets and
Business
Our customers differentiate themselves through scientific innovation. As a result, innovation in the discovery
and development of new products, compliance with applicable regulations, rapid, cost-effective commercialization of such products and the ability to protect the intellectual property therein is crucial to our customers success. Therefore, they
invest considerable resources in technologies that help identify productive new pathways for research projects, help develop new materials, increase the efficiency of discovery and development processes, and otherwise enable them to maximize the use
of scientific data, information and knowledge. Our software solutions allow our customers to effectively design, plan and execute scientific experiments in a repeatable process and in compliance with regulations; leverage the vast amounts of
information stored in both corporate databases and public data sources to optimize their processes and accelerate innovation; model, predict and analyze potential scientific outcomes; and access comprehensive, integrated and cross-referenced
databases and reference works.
The pharmaceutical and biotechnology industries are a very important part of our business. Our
products have been widely adopted within the research functions of businesses in these industries, but less widely adopted by the development functions of such businesses. In addition, these markets present challenges due to industry consolidation,
the maturity of these markets, patent expirations, reduction in the level of discovery research activity, increased competition, including competition from open source software and outsourcing of research to other entities. The other industries to
which we market our products, including energy, material, agricultural, aerospace and consumer packaged goods, are earlier in the adoption curve for such scientific software products, which we view as both a challenge and an opportunity.
24
Business Strategy
Scientific research and development organizations face several challenges that impact their ability to comply with applicable regulations, protect their intellectual property and rapidly and
cost-effectively bring products to market. Among these challenges is the fact that scientific data is often found in disparate databases and that research, development and early manufacturing processes are disconnected, manually intensive,
inefficient and repetitive.
Our overall strategy is to extend beyond our historically strong presence in research downstream
into development and early manufacturing, covering the entire research and development value chain; to move into new scientific domains, including biology; and to expand our presence outside of the pharmaceutical and biotech industries into other
key industries such as food and beverage, fine and specialty chemicals and aerospace. We do this by addressing the core challenges faced by research and development organizations, offering them an open enterprise-scale scientific software platform
and a broad portfolio of scientific software applications leveraging our deep domain expertise in chemistry, biology and the materials sciences. We believe the combination of our enterprise R&D platform and associated set of applications,
including the Electronic Lab Notebook (ELN), computer aided design modeling and simulation software, data management and informatics software, content and professional services, help optimize our customers scientific value chain.
We believe that the combination of Accelrys products with the products and domain expertise we acquired as a result of the
Acquisitions (most significantly the ELN and the VelQuest product suite) enables us to provide greater value to the development and early manufacturing functions of our customers organizations. Our plan is to continue to integrate and augment
our offerings in order to further enhance the value of the products we acquired and the value of our products collective portfolio to these organizations, thus enabling us to expand upon our presence in the research and development
organizations of our existing customers. The VelQuest acquisition extended our software portfolio into pharmaceutical development quality assurance and quality control, offering significant productivity improvements, faster cycle times, lower
operational costs and reduced compliance risks for regulated life sciences organizations. We also intend to continue to develop advanced analysis, scientific and reporting component collections in order to extend our platforms value to and use
by our customers
Our strategy also includes offering professional services to further tailor our enterprise R&D platform
to our customers individual business needs, thereby increasing its utility and value. Because our enterprise R&D platform is the underlying operating platform for many products in our broad portfolio, and integration with the applications
obtained as part of our Acquisitions continues to be a development priority, we expect the use of these products to expand as the use of our platform grows, thus further increasing our sales and value to our customers.
Our enterprise R&D platform is an open platform. We partner with third party organizations and academic institutions which develop
scientific software and services, and we enable and encourage these companies to develop applications that operate on our platform, further proliferating its utility and value to our customers.
We also focus on industries in markets where scientific innovation is a key differentiator, but the use of scientific software solutions
has not been widely adopted. As we develop a greater presence in these markets, we believe our ability to attract additional customers will increase.
Critical Accounting Policies
Our discussion and analysis of our financial
condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of the consolidated financial statements requires us to make estimates and judgments that
affect the reported amounts of assets, liabilities, revenues and expenses and the related disclosure of contingent assets and liabilities. We review our estimates on an on-going basis, including those related to income taxes and the valuation of
goodwill, intangibles and other long-lived assets. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments
about the carrying values of assets and liabilities. Actual results may differ from these estimates under different assumptions or conditions. The critical accounting policies and estimates used in the preparation of our condensed consolidated
financial statements are described in Item 7, Managements Discussion and Analysis of Financial Condition and Results of Operations, of the Form 10-K. Except for the changes to our critical accounting policies and estimates
discussed below, we believe that there were no significant changes in our critical accounting policies and estimates since December 31, 2011.
Results of Operations
Historically, we have received approximately
two-thirds of our annual customer orders in the quarters ended December 31 and March 31. In accordance with our revenue recognition policies, the revenue associated with these orders is generally recognized over the contractual license
term. Therefore, because we accrue sales commissions and royalties upon the receipt of customer orders, we have generally experienced an increase in operating costs and expenses during the quarters ended December 31 and March 31 with
25
only a minimal corresponding incremental increase in revenue. As a result of these seasonal variations, we believe that quarter-to-quarter comparisons of our operating results are not a good
indication of our future performance and that our interim financial results are not necessarily indicative of results for a full year or for any subsequent interim period.
Comparison of the Three Months Ended March 31, 2012 and 2011
The
following table summarizes our results of operations as a percentage of revenue for the respective periods:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
|
2012
|
|
|
2011
|
|
Revenue:
|
|
|
|
|
|
|
|
|
License and subscription revenue
|
|
|
55
|
%
|
|
|
56
|
%
|
Maintenance on perpetual licenses
|
|
|
24
|
%
|
|
|
23
|
%
|
Content
|
|
|
9
|
%
|
|
|
12
|
%
|
Professional services and other
|
|
|
12
|
%
|
|
|
9
|
%
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
Cost of revenue:
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
|
25
|
%
|
|
|
28
|
%
|
Amortization of completed technology
|
|
|
5
|
%
|
|
|
6
|
%
|
|
|
|
|
|
|
|
|
|
Total cost of revenue
|
|
|
30
|
%
|
|
|
34
|
%
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
70
|
%
|
|
|
66
|
%
|
Operating expenses:
|
|
|
|
|
|
|
|
|
Product development
|
|
|
24
|
%
|
|
|
25
|
%
|
Sales and marketing
|
|
|
35
|
%
|
|
|
39
|
%
|
General and administrative
|
|
|
11
|
%
|
|
|
13
|
%
|
Business consolidation, transaction and restructuring costs
|
|
|
2
|
%
|
|
|
5
|
%
|
Purchased intangible asset amortization
|
|
|
5
|
%
|
|
|
7
|
%
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
78
|
%
|
|
|
88
|
%
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(8
|
)%
|
|
|
(22
|
)%
|
Royalty and other income, net
|
|
|
4
|
%
|
|
|
7
|
%
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
|
(4
|
)%
|
|
|
(15
|
)%
|
Income tax expense
|
|
|
2
|
%
|
|
|
1
|
%
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(6
|
)%
|
|
|
(17
|
)%
|
|
|
|
|
|
|
|
|
|
Due to rounding to the nearest percent, totals may not equal the sum of the line items in the table
above.
Revenue
Total revenue increased to $39.4 million for the three months ended March 31, 2012, as compared to $34.6 million for the three months ended March 31, 2011. The increase in revenue during the
quarter ended March 31, 2012 was attributable to a decrease in revenue impacted by acquisition related valuation adjustments related to the Symyx Merger.
License and subscription revenue.
License and subscription revenue increased to $21.7 million for the three months ended March 31, 2012, as compared to $19.5 for the three months ended
March 31, 2011. As a percentage of total revenue, license and subscription revenue was 55% for the three months ended March 31, 2012 as compared to 56% for the three months ended March 31, 2011. The increase in license and
subscription revenue during the quarter ended March 31, 2012 was primarily related to the decrease in revenue impacted by acquisition related valuation adjustments related to the Symyx Merger.
Maintenance on perpetual licenses.
Maintenance on perpetual licenses revenue increased to $9.5 million for the three months ended
March 31, 2012, as compared to $7.8 million for the three months ended March 31, 2011. As a percentage of total revenue, revenue from maintenance on perpetual licenses increased to 24% for the three months ended March 31, 2012 as
compared to 23% for the three months ended March 31, 2011. The increase in revenue from maintenance on perpetual licenses was primarily related to the decrease in revenue impacted by acquisition related valuation adjustments related to the
Symyx Merger.
Content.
Content revenue decreased to $3.5 million for the three months ended March 31, 2012, as
compared to $4.0 million for the three months ended March 31, 2011. As a percentage of total revenue, content revenue decreased to 9% for the three months ended March 31, 2012 as compared to 12% for the three months ended March 31,
2011. The decrease in content revenue is attributable to the previously announced phase-out of the content product lines .
26
Professional services and other.
Professional services and other revenue increased to
$4.7 million for the three months ended March 31, 2012, as compared to $3.3 for the three months ended March 31, 2011. As a percentage of total revenue, professional services and other revenue increased to 12% for the three months ended
March 31, 2012 as compared to 9% for the three months ended March 31, 2011. The increase in revenue from professional services and other was primarily attributable to increase in solution consulting engagements as well as a decrease in
revenue impacted by acquisition related valuation adjustments related to the Symyx Merger.
Total Cost of Revenue
Cost of Revenue.
Cost of revenue increased slightly to $9.9 million for the three months ended March 31, 2012, as compared to
$9.6 million for the three months ended March 31, 2011. As a percentage of revenue, cost of revenue decreased slightly to 25% for the three months ended March 31, 2012 as compared to 28% for the three months ended March 31, 2011. The
increase in cost of revenue during the quarter ended March 31, 2012 was primarily attributable to an increase in personnel and related expenses in our services department of approximately $0.8 million from higher headcount and an increase in
professional fees of approximately $0.1 million consisting primarily of consulting costs, partially offset by a decrease in software and content royalties of approximately $0.3 million, a decrease in capitalized labor costs of 0.2 million
and a decrease in overhead expense of approximately $0.1 million.
Amortization of Completed Technology.
Amortization
of completed technology increased slightly to $2.1 for the three months ended March 31, 2012, as compared to $2.0 for the three months ended March 31, 2011. As a percentage of revenue, amortization of completed technology decreased to 5%
for the three months ended March 31, 2012 as compared to 6% for the three months ended March 31, 2011.
Operating Expenses
Product Development Expenses.
Product development expenses increased to $9.6 million for the three months ended
March 31, 2012, as compared to $8.5 million for the three months ended March 31, 2011. As a percentage of revenue, product development expenses decreases slightly to 24% for the three months ended March 31, 2012 as compared to
25% for the three months ended March 31, 2011. The increase in product development expenses during the quarter ended March 31, 2012 was primarily attributable to an increase in personnel and related expenses of approximately $1.1 million
as a result of higher headcount and an increase in professional fees of approximately $0.1 million, offset by a decrease in overhead expense of approximately $0.1 million.
Sales and Marketing Expenses.
Sales and marketing expenses increased to $13.9 million for the three months ended March 31, 2012, as compared to $13.5 million for the three months ended
March 31, 2011. As a percentage of revenue, sales and marketing expenses were 35% for the three months ended March 31, 2012 as compared to 39% for the three months ended March 31, 2011. The increase in sales and marketing expenses
during the quarter ended March 31, 2012 was primarily attributable to an increase in personnel and related expenses of approximately $0.3 million and an increase in professional fees of approximately $0.1 million.
General and Administrative Expenses.
General and administrative expenses increased slightly to $4.5 million for the three
months ended March 31, 2012, as compared to $4.4 million for the three months ended March 31, 2011. As a percentage of revenue, general and administrative expenses were 11% for the three months ended March 31, 2012 as compared to
13% for the three months ended March 31, 2011. The increase in general and administrative expenses during the quarter ended March 31, 2012 was primarily attributable to an increase in personnel and related expenses.
Business Consolidation, Transaction and Restructuring Costs.
Business consolidation, transaction and restructuring costs of $0.6
million for the three months ended March 31, 2012 consisted primarily of business consolidation costs related to recent acquisitions. As a percentage of revenue, business consolidation and restructuring costs were 2% for the three months ended
March 31, 2012. We have classified all transaction and integration related costs to business consolidation costs, which include personnel costs of $0.3 million related to employees who have been notified they are being terminated from the
Company and professional service and other costs of $0.3 million directly related to integrating acquisitions into our Company.
Business consolidation, transaction and restructuring costs of $1.6 million for the three months ended March 31, 2011, consisted of
$1.1 million in business consolidation costs and $0.5 million in restructuring costs. As a percentage of revenue, business consolidation and restructuring costs were 5% for the three months ended March 31, 2011. Transaction and integration
related included personnel costs of $0.5 million related to employees who have been notified they are being terminated from the Company, and professional service and other costs of $0.6 million directly related to the Merger and integrating Symyx
into the Company.
Purchased Intangible Asset Amortization.
Purchased intangibles assets amortization was $2.1 million
for the three months ended March 31, 2012 compared to $2.4 million for the three months ended March 31, 2011. As a percentage of revenue, amortization of
27
purchased intangible assets was 5% for the three months ended March 31, 2012 compared to 7% for the three months ended March 31, 2011 and was related solely to the amortization of
backlog, customer relationship and trademark intangible assets acquired in the Symyx Merger and the acquisitions of Contur and VelQuest.
Net Royalty and Other Income
Net royalty and other income was $1.6 million for the three months ended March 31, 2012 as compared to $2.3 million for the three months ended March 31, 2011. Significant components of net
royalty and other income for the three months ended March 31, 2012 included royalty revenue of $1.6 million, interest income of $0.6 million, amortization of discount on promissory notes receivable of $0.2 million, partially offset by a
foreign currency exchange loss of $0.3 million and amortization of purchased intangible assets of $0.4 million. Significant components of net royalty and other income for the three months ended March 31, 2011 included interest income
of $0.3 million, royalty revenue of $2.1 million, and a foreign currency exchange gain of $0.6 million, partially offset by royalty expense of $0.1 million and amortization of purchased intangible assets of $0.6 million.
Income Tax Expense
Income tax expense was $0.7 million for the three months ended March 31, 2012 as compared to income tax expense of $0.5 million for
the three months ended March 31, 2011.
Liquidity and Capital Resources
We had cash, cash equivalents, marketable securities, and restricted cash of $165.8 million as of March 31, 2012, as compared to
$143.6 million as of December 31, 2011, an increase of $22.1 million. The increase in cash, cash equivalents, marketable securities and restricted cash during the three months ended March 31, 2012 was primarily attributable to cash
provided by operations of $23.5 million, and proceeds from the sale of common stock of $2.1 million, net of shares tendered for payment of withholding tax, partially offset by purchases of capital equipment of $0.8 million and repurchases of
our common stock of $2.6 million.
The following table sets forth a summary of our cash flows for the periods indicated
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
(Unaudited)
|
|
Net cash provided by operating activities
|
|
$
|
23,452
|
|
|
$
|
14,112
|
|
Net cash provided by (used in) investing activities
|
|
|
1,825
|
|
|
|
(54,181
|
)
|
Net cash used in financing activities
|
|
|
(505
|
)
|
|
|
(2,243
|
)
|
Net cash provided by operating activities was $23.5 million for the three months ended March 31,
2012, as compared to $14.1 million for the three months ended March 31, 2011. The increase in cash provided by operating activities was primarily attributable to a decrease in our net loss, as well as changes in working capital for the three
months ended March 31, 2012.
Net cash provided by investing activities was $1.8 million for the three months ended
March 31, 2012, as compared to net cash used in investing activities of $54.2 million for the three months ended March 31, 2011. Significant components of cash flows from investing activities for the three months ended March 31, 2012
included net purchases of property and equipment of $0.8 million and purchases of marketable securities of approximately $18.6 million, partially offset by proceeds from maturities of marketable securities of approximately $21.0 million. Significant
components of cash flows from investing activities for the three months ended March 31, 2011 included net purchases of property and equipment of $0.9 million and purchases of marketable securities of approximately $61.4 million, partially
offset by proceeds from maturities of marketable securities of approximately $8.1 million.
Net cash used in financing
activities was $0.5 million for the three months ended March 31, 2012 as compared to net cash used in financing activities of $2.2 million for the three months ended March 31, 2011. Significant components of cash flows from financing
activities for the three months ended March 31, 2012 included repurchases of our common stock of $2.6 million, partially offset by $2.1 million of proceeds from the issuance of common stock under our equity incentive plans, reduced by payments
made to taxing authorities on behalf of our employees when tendering stock to us for settlement of minimum income tax liability upon vesting of restricted stock units (RSUs). Significant components of cash flows from financing activities
for the three months ended March 31, 2011 included repurchases of our common stock of $3.0 million, partially offset by $0.8 million of proceeds from the issuance of common stock under our equity incentive plans, reduced by payments made to
taxing authorities on behalf of our employees when tendering stock to us for settlement of minimum income tax liability upon vesting of RSUs.
We have funded our activities to date primarily through the sales of software licenses and related services and the issuance of equity securities.
28
We anticipate that our capital requirements may increase in future periods as a result of
seasonal sales trends, additional product development activities and the acquisition of additional equipment. Our capital requirements may also increase in future periods as we seek to expand our technology platform through investments, licensing
arrangements, technology alliances or acquisitions.
On March 14, 2012, we entered into a Third Repurchase Plan in
accordance with Rule 10b5-1 of the Exchange Act. Pursuant to the Third Repurchase Plan, and subject to the conditions set forth therein and the provisions of Rule 10b-18 of the Exchange Act, we instructed our broker to purchase for our account
up to $10.0 million worth of our common stock by December 31, 2012. On April 27, 2012, our board of directors authorized the Company to commit up to an additional $2.5 million for the repurchase of the Companys common stock during fiscal
2012.
During the quarter ended March 31, 2012, we repurchased 320,860 shares of our common stock for approximately $2.6
million at an average cost of $8.40 per share. During April 2012, we repurchased 427,528 shares of our common stock for approximately $3.4 million at an average cost of $8.05 per share.
We anticipate that our existing capital resources will be adequate to fund our operations for at least the next twelve months. However,
there can be no assurance that changes will not occur that would consume our available capital resources before that time. Our capital requirements depend on numerous factors, including our ability to continue to generate software sales, the
purchase of additional capital equipment and acquisitions of other businesses or technologies. There can be no assurance that additional funding, if necessary, will be available to us on favorable terms, if at all. Our forecast for the period of
time through which our financial resources will be adequate to support our operations is forward-looking information, and actual results could vary.
Item 3.
|
Quantitative and Qualitative Disclosures About Market Risk
|
The information called for by this item is provided in Item 7A, Quantitative and Qualitative Disclosures About Market Risk, of the Form 10-K. Our exposures to market risk have not changed
materially since December 31, 2011.
Item 4.
|
Controls and Procedures
|
Conclusion
Regarding the Effectiveness of Disclosure Controls and Procedures
We maintain disclosure controls and procedures, as such
term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, that are designed to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in the SEC rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer,
as appropriate, to allow timely decisions regarding required financial disclosures.
As of the end of the period covered by
this Report, we conducted an evaluation, under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, of the effectiveness of the design and operation of our
disclosure controls and procedures pursuant to Exchange Act Rules 13a-15(b) and 15d-15(b). Based on this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective
as of March 31, 2012.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting during the three months ended March 31, 2012 that materially
affected, or are reasonably likely to materially affect, such controls.
PART II OTHER
INFORMATION
Item 1.
|
Legal Proceedings
|
29
We are subject to various claims and legal proceedings arising in the ordinary course of our
business. While any legal proceeding has an element of uncertainty, management believes that the disposition of such matters, in the aggregate, will not have a material effect on our results of operations.
You
should carefully consider the risks described below before investing in our publicly traded securities. The risks described below are not the only ones facing us. Our business is also subject to the risks that affect many other companies, such as
competition, technological obsolescence, labor relations, general economic conditions, geopolitical changes and international operations. Additional risks not currently known to us or that we currently believe are immaterial also may impair our
business operations and our liquidity. The risks described below could cause our actual results to differ materially from those contained in the forward-looking statements we have made in this Report, the information incorporated herein by reference
and those forward-looking statements we may make from time to time.
Certain Risks Related to Our Marketplace and Environment
Our revenue from the sale of computer aided design modeling and simulation software to the life science discovery
research marketplace, which has historically constituted a significant portion of our overall revenue, has been declining over the past several years and may continue to decline in future years.
Historically we have derived a significant
portion of our revenue from the sale of computer aided design modeling and simulation software to the discovery research departments in pharmaceutical and biotechnology companies. Based on recurring analyses of incoming orders typically conducted by
our sales and marketing departments, we estimate that orders for our computer aided design modeling and simulation software for the life science industry declined approximately 18% between fiscal year 2008 and 2009, approximately 16% between fiscal
year 2009 and 2010, approximately 21% during the nine months ended December 31, 2010 . While there is not a linear correlation between product orders and resulting revenue, we believe that our estimates of decreased product orders ultimately
reflect a decline in revenue attributable to sales of our computer aided design modeling and simulation software products. We believe this decline is due to several factors, including industry consolidation, a general reduction in the level of
discovery research activity by our customers, increased competition, including competition from open source software, and reductions in profit and related information technology spending by our customers. If such declines continue and we do not
increase the revenue we derive from our other product and service offerings, our business could be adversely impacted.
Our ability to sustain or increase revenues will depend upon our success in entering new markets and in deriving additional
revenues from our existing customers.
Our products are currently used primarily by molecular modeling and simulation specialists in discovery research organizations. One component of our overall business strategy is to derive more revenues
from our existing customers by expanding their usage of our products and services. Such strategy would have our customers utilize our scientific informatics platform and our tools and components to leverage vast amounts of information stored in both
corporate databases and public data sources in order to make informed scientific and business decisions during the research and development process. In addition, we seek to expand into new markets and new areas within our existing markets by
acquiring businesses in these markets, attracting and retaining personnel knowledgeable in these markets, identifying the needs of these markets and developing marketing programs to address these needs. If successfully implemented, these strategies
would increase the usage of our software and services by biologists, chemists, engineers and informaticians operating within our existing pharmaceutical and biotechnology customers, as well as by new customers in other industries. However, if our
strategies are not successfully implemented, our products and services may not achieve market acceptance or penetration in targeted new departments within our existing customers or in new industries. As a result, we may incur additional costs and
expend additional resources without being able to sustain or increase revenue.
Our focus on offering scientific
business intelligence solutions to both existing and new customers and markets may make it more difficult for us to sustain our revenue from the sale of computer aided design modeling and simulation products to the life science discovery research
marketplace.
Our strategy involves transforming our product and service offerings by utilizing our scientific informatics platform and our tools and components in order to enable our customers to more effectively utilize the vast
30
amounts of information stored in both their databases and public data sources in order to make informed scientific and business decisions during the research and development process. This
strategy is intended to lead us to new and different markets and customers, as well as increase the usage of our offerings by existing customers. Executing this strategy will require significant management focus and utilization of resources. Though
we intend to continue to dedicate sufficient resources and management focus to our life science computer aided design modeling and simulation products, it is possible that the strategy will result in loss of management focus and resources relating
to these existing products and markets, thereby resulting in decreasing revenues from these markets. If these revenues are not offset by increasing revenues from new markets and/or customers, our overall revenues will suffer.
We may be unable to develop strategic relationships with our customers.
Our overall business strategy is to expand usage of
our products and services by expanding our current customers usage of our products and by marketing and distributing our solutions to a broader, more diversified group of biologists, chemists, engineers and informaticians operating throughout
our customers research and development organizations. A key component of this strategy is to become a preferred provider of scientific software and solutions. Becoming a preferred provider will require substantial re-training and new skills
development within our sales and service personnel and deployment of a successful account-management sales model. We believe that developing strategic relationships with our customers may lead to additional revenue opportunities. However, executing
this strategy may require significant expense, and there can be no assurance that any such relationships will develop or that such relationships will produce additional revenue or profit opportunities.
Consolidation within the pharmaceutical and biotechnology industries may continue to lead to fewer potential customers for our
products and services
.
A significant portion of our customer base consists of pharmaceutical and biotechnology companies. Continued consolidation within the pharmaceutical and biotechnology industries may result in fewer customers
for our products and services. If one of the parties to a consolidation uses the products or services of our competitors, we may lose existing customers as a result of such consolidation.
Increasing competition and increasing costs within the pharmaceutical and biotechnology industries may affect the demand for our
products and services, which may affect our results of operations and financial condition
.
Our pharmaceutical and biotechnology customers demand for our products is impacted by continued demand for their products and by our
customers research and development costs. Demand for our customers products could decline, and prices charged by our customers for their products may decline, as a result of increasing competition, including competition from companies
manufacturing generic drugs. In addition, our customers expenses could continue to increase as a result of increasing costs of complying with government regulations and other factors. A decrease in demand for our customers products,
pricing pressures associated with the sales of these products and additional costs associated with product development could cause our customers to reduce research and development expenditures. Because our products and services depend on such
research and development expenditures, our revenues may be significantly reduced.
Health care reform and restrictions
on reimbursement may affect the pharmaceutical, biotechnology and industrial chemical companies that purchase or license our products or services, which may affect our results of operations and financial condition
.
The continuing
efforts of government and third party payers in the markets we serve to contain or reduce the cost of health care may reduce the profitability of pharmaceutical, biotechnology and industrial chemical companies causing them to reduce research and
development expenditures. Because some of our products and services depend on such research and development expenditures, our revenues may be significantly reduced. We cannot predict what actions federal, state or private payers for health care
goods and services may take in response to any health care reform proposals or legislation.
We face strong competition
in the life science market for computer aided design modeling and simulation software and for cheminformatics products.
The market for our computer aided design modeling and simulation software products for the life science market is
intensely competitive. We currently face competition from other scientific software providers, larger technology and solutions companies, in-house development by our customers and academic and government institutions and the open source community.
Some of our competitors and potential competitors in this sector have longer operating histories than we do and could have
greater financial, technical, marketing, research and development and other resources. Many of our competitors offer products and services directed at more specific markets than those we target, enabling these competitors to focus a greater
proportion of their efforts and resources on these markets. Some offerings that compete with our products are developed and made available at lower cost by government organizations and academic institutions, and these entities may be able to devote
substantial resources to product development and also offer their products to users for little or no charge. We also face competition from open source software initiatives, in which developers provide software and intellectual property free over the
Internet. In addition, many of our customers spend significant internal resources in order to develop their own software. Moreover, we intend to leverage our scientific informatics platform in order to enable our customers to more effectively
utilize the vast amounts of information stored in both their databases and public data sources in order to make informed scientific and business decisions during the research and development process. This strategy could lead to competition from much
larger companies which provide general data storage and management software.
31
There can be no assurance that our current or potential competitors will not develop
products, services or technologies that are comparable to, superior to or render obsolete, the products, services and technologies we offer. There can be no assurance that our competitors will not adapt more quickly than us to technological advances
and customer demands, thereby increasing such competitors market share relative to ours. Any material decrease in demand for our technologies or services may have a material adverse effect on our business, financial condition and results of
operations.
We are subject to pricing pressures in some of the markets we serve.
The market for computer aided
design modeling and simulation products for the life science industry is intensely competitive, which has led to significant pricing pressure and declines in average selling price over the past several years. Based on recurring analyses of incoming
orders typically conducted by our sales and marketing departments, we estimate that the average sales price of our computer aided design modeling and simulation products for the life science industry declined approximately 10% between fiscal year
2008 and 2009, approximately 14% between fiscal year 2009 and 2010. While there is not a linear correlation between our product pricing and competition in the marketplace, we believe that our estimates of decreased prices ultimately reflect
increased competition that has led and may continue to lead to pricing pressure with respect to sales of these products. In response to such increased competition and general adverse economic conditions in this market, we may be required to further
modify our pricing practices. Changes in our pricing model could adversely affect our revenue and earnings.
Revenue from our database
content business has been declining and may continue to decline.
As a result of the Symyx Merger, we have acquired a database content business. This business faces intense competition from both third parties and the increasing availability
of freely-available content databases. As a result, revenue from this database content business has been declining. If we are unable to reverse the decline in this business or to increase revenues from our other businesses in order to offset the
decline, our revenues and results of operations may suffer.
Our operations may be interrupted by the occurrence of a
natural disaster or other catastrophic event at our primary facilities.
Our research and development operations and administrative functions are primarily conducted at our facilities in San Diego, California, San Ramon, California, Bend,
Oregon, and Cambridge, United Kingdom. We also conduct sales and customer support activities at our facilities in Bedminster, New Jersey, Burlington, Massachusetts, Paris, France, Basel, Switzerland, and Tokyo, Japan. Although we have contingency
plans in effect for natural disasters or other catastrophic events, the occurrence of such events could still disrupt our operations. For example, our San Diego, San Ramon, Santa Clara and Tokyo facilities are located in areas that are particularly
susceptible to earthquakes. Any natural disaster or catastrophic event in our facilities or the areas in which they are located could have a significant negative impact on our operations.
Our insurance coverage may not be sufficient to avoid material impact on our financial position or results of operations resulting
from claims or liabilities against us, and we may not be able to obtain insurance coverage in the future.
We maintain insurance coverage for protection against many risks of liability. The extent of our insurance coverage is under continuous
review and is modified as we deem it necessary. Despite this insurance, it is possible that claims or liabilities against us may have a material adverse impact on our financial position or results of operations. In addition, we may not be able to
obtain any insurance coverage, or adequate insurance coverage, when our existing insurance coverage expires. For example, we do not carry earthquake insurance for our facilities in Tokyo, Japan, San Ramon, California, Santa Clara, California or San
Diego, California, because we do not believe the costs of such insurance are reasonable in relation to the potential risk.
Certain Risks
Related to Our Operations
Defects or malfunctions in our products could hurt our reputation among our customers,
result in delayed or lost revenue and expose us to liability.
Our business and the level of customer acceptance of our products depend upon the continuous, effective and reliable operation of our software and related tools and functions. To
the extent that defects cause our software to malfunction and our customers use of our products is interrupted, our reputation could suffer and our revenue could decline or be delayed while such defects are remedied. We may also be subject to
liability for the defects and malfunctions of third party technology partners and others with whom our products and services are integrated.
Delays in the release of new or enhanced products or services or undetected errors in our products or services may result in increased cost to us, delayed market acceptance of our products and
delayed or lost revenue.
To achieve market acceptance, new or enhanced products or services can require long development and testing periods, which may result in delays in scheduled introduction. Any delays in the release schedule for new or
enhanced products or services may delay market acceptance of these products or services and may result in delays in new customer orders for these new or enhanced products or services or the loss of customer orders. In addition, new or enhanced
products or services may contain a number of undetected errors or bugs when they are first released. Although we test each new or enhanced software product or service before it is released to the market, there can be no assurance that
significant errors will not be found in existing or future releases. As a result, in the months following the introduction of certain releases, we may need to devote significant resources to correct these errors. There can be no assurance, however,
that all of these errors can be corrected.
32
We are subject to risks associated with the operation of a global business.
We
derive a significant portion of our total revenue from our operations in international markets. During the year ended December 31, 2011, nine months ended December 31, 2010 and in fiscal years 2010 and 2009, 53%, 51%,54% and 52%,
respectively, of our total revenue was derived from our international operations. Our global business may be affected by local economic conditions, including inflation, recession and currency exchange rate fluctuations. In addition, political and
economic changes throughout the world may interfere with our or our customers activities in particular locations and result in a material adverse effect on our business, financial condition and operating results. We anticipate that revenue
from operations in international markets will continue to account for a significant percentage of future revenue. The following table depicts our region-specific revenue as a percentage of total revenue for the periods referenced:
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Year Ended
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Nine Months
Ended
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|
Years Ended
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Region
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|
December 31,
2011
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December 31,
2010
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|
March 31,
2010
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March 31,
2009
|
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U.S.
|
|
|
47
|
%
|
|
|
49
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%
|
|
|
46
|
%
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|
|
48
|
%
|
Europe
|
|
|
29
|
%
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|
|
28
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%
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30
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%
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28
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%
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Asia-Pacific
|
|
|
24
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%
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|
|
23
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%
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|
|
24
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%
|
|
|
24
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%
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Other potential risks inherent in our international business include:
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unexpected changes in regulatory requirements;
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currency exchange rate fluctuations;
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import and export license requirements;
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tariffs and other barriers;
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political unrest, terrorism and economic instability;
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disruption of our operations due to local labor conditions;
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limited intellectual property protection;
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difficulties in collecting trade receivables;
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difficulties in managing distributors or representatives;
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difficulties in managing an organization spread over various countries;
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difficulties in staffing foreign subsidiary or joint venture operations; and
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potentially adverse tax consequences.
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Our success depends, in part, on our ability to anticipate and address these risks. There can be no assurance that we will do so effectively, or that these or other factors relating to our international
operations will not adversely affect our business or operating results.
In order to improve our financial position, we
have reduced our headcount, both prior to and as a result of the Symyx Merger, which could negatively impact our business.
We have undergone several reductions-in-force over the past several years, and our workforce has declined
approximately 25% from March 31, 2006 to July 1, 2010 when we completed the Symyx Merger. In addition, as a result of the Symyx Merger, we implemented a reduction in force of approximately 15% of the combined employee workforce after the
Symyx Merger. We do not believe that these reductions have had a material adverse effect on our operations or our ability to generate revenue to date. However, while we believe we have sufficient staff to operate our business, we do not have
duplicative or redundant resources in many of our functions or operations. As a result, there can be no assurance that further attrition will not impact our ability to operate our business, or adversely impact our revenues.
Failure to attract and retain skilled personnel, could have a material adverse effect on us.
Our success depends in part on
the continued service of key scientific, sales, business development, marketing, engineering, management and accounting personnel and our ability to identify, hire and retain additional personnel. There is intense competition for qualified
personnel. Immigration laws may further restrict our ability to attract or hire qualified personnel. We may not be able to continue to attract and retain the personnel necessary for the development of our business. Failure to attract and retain key
personnel could have a material adverse effect on our business, financial condition and results of operations. Further, we are highly dependent on the principal members of our technical, scientific and management staff and certain groups of
consultants. One or more of these key employees or consultants could retire or otherwise leave our employ within the foreseeable future, and the loss of any of these people could have a material adverse effect on our business, financial condition or
results of operations. We do not intend to maintain key person life insurance on the life of any employee.
33
Continued turmoil in the worldwide financial markets may negatively impact our
business, results of operations, and financial condition.
As widely reported, financial markets in the U.S., Europe and Asia have been experiencing disruption in recent years, including, among other things, volatility in security prices,
declining valuations of certain investments, severely diminished liquidity and credit availability, the failure or sale of various financial institutions and an unprecedented level of government intervention. Many economists believe that the U.S.
economy, and possibly the global economy, is in the midst of a prolonged recession. This protracted downturn may hurt our business in a number of ways, including through general decreases in spending and the adverse impact on our customers
ability to obtain financing, which may lead to delays or failures in our signing customer agreements or signing customer agreements at reduced purchase levels. While we are unable to predict the likely duration and severity of the current disruption
in the financial markets and the adverse economic conditions in the U.S. and other countries, any of the circumstances mentioned above could have a material adverse effect on our revenues, financial condition and results of operations.
Recent acquisitions and potential future acquisitions could prove difficult to integrate, disrupt our business, dilute stockholder
value and strain our resources.
Since July 2010, we have acquired three companies: Symyx, Contur and VelQuest. We continually evaluate opportunities to acquire new businesses as part of our ongoing strategy and we may in the future acquire
additional businesses that we believe could complement or expand our business or increase our customer base. We do not know if we will be able to complete any future acquisitions, or whether we will be able to successfully integrate any acquired
businesses, operate them profitably or retain their key employees. Integrating the operations of acquired businesses successfully or otherwise realizing any of the anticipated benefits of any acquisitions, including anticipated cost savings and
additional revenue opportunities, involves a number of potential challenges. The failure to meet these integration challenges could seriously harm our financial condition and results of operations. Realizing the benefits of the Acquisitions or any
future acquisitions depends in part on the integration of operations and personnel. These integration activities are complex, expensive and time-consuming and we may encounter unexpected difficulties or incur unexpected costs, including:
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our inability to achieve the operating synergies anticipated in the acquisitions;
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lost sales and customers as a result of our customers or customers of any acquired company deciding not to do business us;
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complexities associated with managing the larger, more complex, combined business;
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integrating personnel from acquired companies while maintaining focus on providing consistent, high quality products;
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potential unknown liabilities and unforeseen expenses, delays or regulatory conditions associated with acquisitions; and
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diversion of management attention from ongoing business concerns to integration matters.
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Acquired businesses may have liabilities or adverse operating issues that we fail to discover through due diligence prior to the
acquisition. In particular, to the extent that prior owners of any acquired businesses or properties failed to comply with or otherwise violated applicable laws or regulations, or failed to fulfill their contractual obligations, we, as the successor
owner, may be financially responsible for these violations and failures and may suffer reputational harm or otherwise be adversely affected. Acquisitions also frequently result in the recording of goodwill and other intangible assets which are
subject to potential impairment in the future that could harm our financial results. As a result, if we fail to properly evaluate acquisitions or investments, we may not achieve the anticipated benefits of any such acquisitions, and we may incur
costs in excess of what we anticipate.
In addition, in order to finance any acquisition, we may utilize our existing funds,
thereby lowering the amount of funds we currently have, 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, which could affect the market price of our stock.
Our ability to utilize our net operating loss (NOL) and tax credit carryforwards in the future is limited by Sections
382 and 383 of the Internal Revenue Code of 1986, as amended (the Code).
In general, under Sections 382 and 383 of the Code, a corporation that undergoes an ownership change is subject to limitations on its ability to
utilize its pre-change NOL and tax credit carryforwards to offset future taxable income. In general, an ownership change occurs if the aggregate stock ownership of certain stockholders increases by more than 50 percentage points over such
stockholders lowest percentage ownership during the testing
34
period (which is generally three years). The amount of the annual limitation is generally equal to the value of the stock of the corporation immediately prior to the ownership change, multiplied
by the adjusted federal tax-exempt rate set by the Internal Revenue Service.
As a result of the Symyx Merger, Accelrys and
Symyx have undergone an ownership change for purposes of Section 382 of the Code. Accordingly, the combined companys ability to utilize Accelryss and Symyxs NOLs and tax credit carryforwards will be limited as
described in the preceding paragraph. These limitations could in turn result in increased future tax payments for the combined company, which could have a material adverse effect on the business, financial condition or results of operations of the
combined company.
Certain Risks Related To Our Financial Performance
We have a history of losses and our future profitability is uncertain.
We generated net losses for the nine months ended
December 31, 2010, and the years ended March 31, 2007 and 2006. Although we generated net income for the years ended December 31, 2011, March 31, 2010, 2009 and 2008, we may experience future net losses which may limit our
ability to fund our operations and we may not generate income from operations in the future. Our future profitability depends upon many factors, including several that are beyond our control. These factors include without limitation:
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changes in the demand for our products and services;
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the introduction of competitive software;
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our ability to license desirable technologies;
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changes in the research and development budgets of our customers and potential customers;
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|
our ability to successfully, cost effectively and timely develop, introduce and market new products, services and product enhancements; and
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the acquisition of any new entities or businesses which may have a dilutive effect upon our earnings.
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Our sales forecast and/or revenue projections may not be accurate.
We use a pipeline system, a common industry
practice, to forecast sales and trends in our business. Our sales personnel monitor the status of proposals, including the date when they estimate a customer will make a purchase decision and the potential size of the order. We aggregate these
estimates on a quarterly basis in order to generate a sales pipeline. While the pipeline process provides us with some guidance in business planning and forecasting, it is based on estimates only and is therefore subject to risks and uncertainties.
Any variation in the conversion of the pipeline into revenue or the pipeline itself could cause us to improperly plan or budget and thereby adversely affect our business, results of operations and financial condition.
If we are unable to license software to, or collect receivables from, our customers, our operating results may be adversely
affected.
While the majority of our current customers are well-established, large companies and universities, we also provide products and services to smaller companies. Our financial success depends upon the creditworthiness and ultimate
collection of amounts due from our customers, including our smaller customers with fewer financial resources. While we have not experienced significant customer defaults during the 2009, 2010 and 2011 fiscal years and the nine months ended
December 31, 2010, if we are not able to collect from our customers, we may be required to write-off significant accounts receivable and recognize bad debt expenses which could materially and adversely affect our operating results.
Our quarterly operating results, particularly our quarterly cash flows, may fluctuate.
Quarterly operating results may
fluctuate as a result of a number of factors, including lengthy sales cycles, market acceptance of new products and upgrades, timing of new product introductions, changes in pricing policies, changes in general economic and competitive conditions,
and the timing and integration of acquisitions. We may also experience fluctuations in quarterly operating results due to general and industry specific economic conditions that may affect the research and development expenditures of pharmaceutical
and biotechnology companies. In particular, historically we have received approximately two-thirds of our annual customer orders in the quarters ended December 31 and March 31. In accordance with our revenue recognition policies, the
revenue associated with these orders is generally recognized over the contractual license term. Therefore, because we accrue sales commissions and royalties upon the receipt of customer orders, we have generally experienced an increase in operating
costs and expenses during the quarters ended December 31 and March 31 with only a minimal corresponding incremental increase in revenue. Additionally, our cash flows from operations have historically been positive in the fiscal quarter
ended March 31 as we collect the accounts receivable generated from these customer orders, while we have historically experienced negative cash flows from operations in the other three fiscal quarters. As a result of these seasonal variations,
we believe that quarter-to-quarter comparisons of our operating results are not a good indication of our future performance and that our interim financial results are not necessarily indicative of results for a full year or for any subsequent
interim period.
We may be required to indemnify Pharmacopeia Drug Discovery, Inc. (PDD), or may not be
able to collect on indemnification rights from PDD.
On April 30, 2004, we spun-off our drug discovery subsidiary, PDD, into an independent,
35
separately traded, publicly held company through the distribution to our stockholders of a dividend of one share of PDD common stock for every two shares of our common stock. As part of the
spin-off, we agreed to indemnify the indebtedness, liabilities and obligations of PDD. One such obligation includes a guarantee by us to the landlord of PDDs obligations under certain facility leases, with respect to which PDD will indemnify
us should we be required to make any payment under the guarantee. These indemnification obligations could be as significant as the remaining future minimum lease payments, which totaled approximately $10.2 million as of March 31, 2012.
PDDs ability to satisfy any such indemnification obligations (including, without limitation, PDDs commitment to indemnify us in the event of our payment under our guarantee of its leases) will depend upon PDDs future financial
strength. We cannot assure you that, if PDD becomes obligated to indemnify us for any substantial obligations, PDD will have the ability to do so. There also can be no assurance that we will be able to satisfy any indemnification obligations to PDD.
Any failure by PDD to satisfy its obligations and any required payment by us could have a material adverse effect on our business.
Enacted and proposed changes in securities laws and regulations have increased our costs and may continue to increase our costs in the future.
In recent years, there have been several
changes in laws, rules, regulations and standards relating to corporate governance and public disclosure, including the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act), the Sarbanes-Oxley Act of 2002
(Sarbanes-Oxley) and various other new regulations promulgated by the SEC and rules promulgated by the national securities exchanges.
The Dodd-Frank Act, enacted in July 2010, expands federal regulation of corporate governance matters and imposes requirements on publicly-held companies, including us, to, among other things, provide
stockholders with a periodic advisory vote on executive compensation and also adds compensation committee reforms and enhanced pay-for-performance disclosures. While some provisions of the Dodd-Frank Act are effective upon enactment, others will be
implemented upon the SECs adoption of related rules and regulations. The scope and timing of the adoption of such rules and regulations is uncertain and accordingly, the cost of compliance with the Dodd-Frank Act is also uncertain.
Sarbanes-Oxley required changes in some of our corporate governance and securities disclosure and compliance practices. Under
Sarbanes-Oxley, publicly-held companies, including us, are required to, among other things, furnish independent annual audit reports regarding the existence and reliability of their internal control over financial reporting and have their chief
executive officer and chief financial officer certify as to the accuracy and completeness of their financial reports.
These
and other new or changed laws, rules, regulations and standards are, or will be, subject to varying interpretations in many cases due to their lack of specificity. As a result, their application in practice may evolve over time as new guidance is
provided by regulatory and governing bodies, which could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices. Our efforts to comply with evolving
laws, regulations and standards are likely to continue to result in increased general and administrative expenses and a diversion of management time and attention from revenue-generating activities to compliance activities. Further, compliance with
new and existing laws, rules, regulations and standards may make it more difficult and expensive for us to maintain director and officer liability insurance, and we may be required to accept reduced coverage or incur substantially higher costs
to obtain coverage. Members of our board of directors and our principal executive officer and principal financial officer could face an increased risk of personal liability in connection with the performance of their duties. As a result, we may
have difficulty attracting and retaining qualified directors and executive officers, which could harm our business. We continually evaluate and monitor regulatory developments and cannot estimate the timing or magnitude of additional costs we may
incur as a result.
Our business, financial condition and results of operations may be adversely impacted by
fluctuations in foreign currency exchange rates.
Our international sales generally are denominated in local currencies. Fluctuations in the value of currencies in which we conduct business relative to the U.S. dollar result in currency
transaction gains and losses, and the impact of future exchange rate fluctuations cannot be accurately predicted. Future fluctuations in currency exchange rates may have a material adverse impact on revenue from international sales, and thus on our
business, financial condition and results of operations. When deemed appropriate, we may engage in currency exchange rate hedging transactions in an attempt to mitigate the impact of adverse exchange rate fluctuations. However, currency hedging
policies may not be successful, and they may increase the negative impact of exchange rate fluctuations.
If we consume
cash more quickly than expected, we may be unable to raise additional capital and we may be forced to curtail operations.
We anticipate that our existing capital resources will be adequate to fund our operations for at least the next twelve
months. However, our capital requirements will depend on many factors, including potential acquisitions of other businesses or technologies. If we determine that we must raise additional capital, we may attempt to do so through public or private
financings involving debt or equity. However, additional capital may not be available on favorable terms, or at all. If adequate funds are not available, we may be required to curtail operations significantly or to obtain funds by entering into
arrangements with collaborative partners or others that may require us to relinquish rights to certain of our technologies, products or potential markets that we would not otherwise relinquish.
36
Certain Risks Related to Owning Our Stock
We expect that our stock price will fluctuate significantly, and as a result, our stockholders may not be able to resell their
shares at or above their original investment price.
The stock market, historically and in recent years, has experienced significant volatility particularly with technology company stocks. The volatility of technology company stock prices
often does not relate to the operating performance of the companies represented by the stock. Factors that could cause volatility in the price of our common stock include without limitation:
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actual and anticipated fluctuations in our quarterly financial and operating results;
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|
market conditions in the technology and software sectors;
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|
issuance of new or changed securities analysts reports or recommendations;
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|
developments or disputes concerning our intellectual property or other proprietary rights or other legal claims;
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|
introduction of technological innovations or new commercial products by us or our competitors;
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|
market acceptance of our products and services;
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|
additions or departures of key personnel; and
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|
|
the acquisition of new businesses or technologies
|
These and other external factors may cause the market price and demand for our common stock to fluctuate substantially, which may limit or prevent investors from readily selling their shares of common
stock and may otherwise negatively affect the liquidity of our common stock.
As institutions hold the majority of our
common stock in large blocks, substantial sales by these stockholders could depress the market price for our shares.
As of April 20, 2012, the top ten institutional holders of our common stock held approximately 57.2% of our outstanding
common stock. As a result, if one or more of these major stockholders were to sell all or a portion of their holdings, or if the market were to perceive that such sale or sales may occur, the market price of our common stock may fall significantly.
Because we do not intend to pay dividends, our stockholders will benefit from an investment in our common stock only if
our stock price appreciates in value.
We have never declared or paid any cash dividends on our common stock. We currently intend to retain our future earnings, if any, to finance the expansion of our business and do not expect to pay any
cash dividends in the foreseeable future. As a result, the success of an investment in our common stock will depend entirely upon any future appreciation in its value. There is no guarantee that our common stock will appreciate in value or even
maintain the price at which it was purchased.
Anti-takeover provisions under the Delaware General Corporation Law,
provisions in our certificate of incorporation and bylaws, and our adoption of a stockholder rights plan may make the accomplishment of mergers or the assumption of control by a principal stockholder more difficult, thereby making the removal of
management more difficult.
Certain provisions of the Delaware General Corporation Law may delay or deter attempts to secure control of our company without the consent of our management. Also, our governing documents provide for a staggered
board of directors, which will make it more difficult for a potential acquirer to gain control of our board of directors. In 2002, we adopted a stockholder rights plan, which is triggered upon commencement or announcement of a hostile tender offer
or when any one person or group acquires 15% or more of our common stock. The rights plan, once triggered, enables our stockholders (other than the stockholder responsible for triggering the rights plan) to purchase our common stock at reduced
prices. These provisions of our governing documents and stockholder rights plan, and of Delaware law, could have the effect of delaying, deferring or preventing a change of control, including without limitation a proxy contest, making the
acquisition of a substantial block of our common stock more difficult. The provisions could also limit the price that investors might be willing to pay in the future for shares of our common stock. Further, the existence of these anti-takeover
measures may cause potential bidders to look elsewhere, rather than initiating acquisition discussions with us.
Certain Risks Related to
Intellectual Property
We may not be able to protect adequately the trade secrets and confidential information that
we disclose to our employees.
We rely upon trade secrets, technical know-how and continuing technological innovation to develop and maintain our competitive position. Competitors through their independent discovery (or improper means, such
as unauthorized disclosure or industrial espionage) may come to know our proprietary information. We generally require employees and consultants to execute confidentiality and assignment-of-inventions agreements. These agreements typically provide
that all materials and confidential information developed by or made known to the employee or consultant during his, her or its relationship with us are to be kept confidential, and that all inventions arising out of the employees or
consultants relationship with us are our exclusive property. Our employees and
37
+++consultants may breach these agreements, and in some instances we may not have an adequate remedy. Additionally, in some instances, we may have failed to require that employees and consultants
execute confidentiality and assignment-of-inventions agreements.
Foreign laws may not afford us sufficient protections
for our intellectual property, and we may not seek patent protection outside the U.S.
We believe that our success depends, in part, upon our ability to protect our intellectual property throughout the world. However, the laws of some foreign
countries may not be as comprehensive as those of the U.S. and may not be sufficient to protect our proprietary rights abroad. In addition, we generally do not pursue patent protection outside the U.S. because of cost and confidentiality concerns.
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 U.S.
A patent issued to us may not be sufficiently broad to protect adequately our rights in intellectual property to which the patent
relates.
Due to cost and other considerations, we generally do not rely on patent protection to enforce our intellectual property rights, and have filed only a limited number of patent applications. Even if patents are issued to us, these
patents may not sufficiently protect our interest in our software or other technologies because the scope of protection provided by any patents issued to or licensed by us are subject to the uncertainty inherent in patent law. Third parties may be
able to design around these patents or develop unique products providing effects similar to our products. In addition, others may discover uses for our software or technologies other than those uses covered in our patents, and these other uses may
be separately patentable. A number of pharmaceutical and biotechnology companies, software organizations and research and academic institutions, have developed technologies, filed patent applications or received patents on various technologies that
may be related to our business. Some of these technologies, patent applications or patents may conflict with our technologies, patent applications or patents. These conflicts could also limit the scope of patents, if any, that we may be able to
obtain, or result in the denial of our patent applications.
We may be subject to claims of infringement by third
parties.
A number of patents may have been issued or may be issued in the future that could cover certain aspects of our technology or functionality of our products and could prevent us from using technology that we use or expect to use, or
making or selling certain of our products. In addition, to the extent our employees are involved in research areas similar to those areas in which they were involved at their former employers, we may inadvertently use or disclose alleged trade
secrets or other proprietary information of their former employer. Thus, our products may infringe patent or other intellectual property rights of third parties, and we may be subject to infringement claims by third parties. Any such claims, with or
without merit, could be time consuming to defend, result in costly litigation, divert managements attention and resources, cause product shipment delays or require us to enter into royalty or licensing agreements. Such licenses may not be
available on terms acceptable to us, if at all. In the event of a successful claim of product infringement against us, our failure or inability to license or design around the infringed technology could have a material adverse effect on our
business, financial condition and results of operations.
Third party software codes incorporated into our products
could subject us to liability or limit our ability to sell such products.
Some of our products include software codes licensed from third parties, including the open source community. Some of these licenses impose certain obligations upon
us, including royalty and indemnification obligations. In the case of codes licensed from the open source community, the licenses may also limit our ability to sell products containing such code. Though we generally review the applicable licenses
prior to incorporating third party code into our software products, there can be no assurance that such third party codes incorporated into our products would not subject us to liability or limit our ability to sell the products containing such
code, thereby having a material adverse affect upon our business.
Item 2.
|
Unregistered Sales of Equity Securities and Use of Proceeds
|
On March 14, 2012, we entered into the Third Repurchase Plan in accordance with Rule 10b5-1 of the Exchange Act. Pursuant to the Third Repurchase Plan, and subject to the conditions set forth
therein and the provisions of Rule 10b-18 of the Exchange Act, we instructed our broker to purchase for our account up to $10.0 million worth of our common stock by December 31, 2012.
The following table sets forth information concerning purchases of our common stock during the quarter ended March 31, 2012, which
upon repurchase are classified as treasury shares available for general corporate purposes:
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|
|
|
|
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|
|
|
Total number of
shares purchased
|
|
|
Average price
paid per share
|
|
|
Total number of shares
purchased as part of
publicly
announced
plans or programs
|
|
|
Approximate
dollar value of
shares that may
yet be purchased
under
the plan
or programs
|
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|
|
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|
(In thousands)
|
|
1/1/2012- 1/31/2012
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|
2/1/2012- 2/28/2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
10,000
|
|
3/14/2012- 3/31/2012
|
|
|
320,860
|
|
|
$
|
7.98
|
|
|
|
320,860
|
|
|
$
|
7,432
|
|
38
|
|
|
Exhibit
Number
|
|
Description
|
2.1
|
|
Agreement and Plan of Merger and Reorganization, dated April 5, 2010, by and among Accelrys, Inc., Alto Merger Sub, Inc. and Symyx Technologies, Inc. (incorporated by reference to
Exhibit 2.1 of Accelrys, Inc.s Current Report on Form 8-K filed on April 6, 2010).
|
|
|
2.2
|
|
Sale and Purchase Agreement Regarding All Shares in Contur Industry Holding AB and Warrants in Contur Software AB, dated 19 May 2011 (incorporated by reference to Exhibit 10.1 to
Accelrys, Inc.s Current Report on Form 8-K filed on May 24, 2011).
|
|
|
2.3
|
|
Asset Purchase Agreement, dated as of July 28, 2011, by and between Intermolecular, Inc. and Symyx Technologies, Inc. (incorporated by reference to Exhibit 10.1 to Accelrys,
Inc.s Current Report on Form 8-K filed on July 29, 2011).
|
|
|
2.4
|
|
Agreement and Plan of Merger, dated as of December 30, 2011, by and among Accelrys, Inc., Velocity Acquisition Corp., VelQuest Corporation and Laurel Services, LLC (incorporated by
reference to Exhibit 2.1 to Accelrys, Inc.s Current Report on Form 8-K filed on January 3, 2012).
|
|
|
3.1
|
|
Restated Certificate of Incorporation of Pharmacopeia, Inc., as amended (including a Certificate of Designation, Preferences and Rights of Series A Junior Participating Preferred
Stock) (incorporated by reference to Exhibit 3.2 to Accelrys, Inc.s Annual Report on Form 10-K for the year ended March 31, 2005).
|
|
|
3.2
|
|
Certificate of Amendment of the Amended and Restated Certificate of Incorporation of Accelrys, Inc. (incorporated by reference to Exhibit 3.4 to Accelrys, Inc.s Quarterly
Report on Form 10-Q for the quarter ended September 30, 2007).
|
|
|
3.3
|
|
Certificate of Amendment of the Restated Certificate of Incorporation of Accelrys, Inc. (incorporated by reference to Exhibit 3.1 to Accelrys, Inc.s Current Report on Form 8-K
filed on July 2, 2010).
|
|
|
3.4
|
|
Amended and Restated Bylaws of Accelrys, Inc. (incorporated by reference to Exhibit 3.3 to Accelrys, Inc.s Annual Report on Form 10-K for the year ended March 31,
2005).
|
|
|
4.1
|
|
Rights Agreement, dated as of September 6, 2002, between Pharmacopeia, Inc. and American Stock Transfer & Trust Company, as Rights Agent, which includes as Exhibit A thereto the
Certificate of Designation, Preferences and Rights of Series A Junior Participating Preferred Stock and Exhibit B thereto the Form of Right Certificate (incorporated by reference to Exhibit 4.1 to Accelrys, Inc.s Current Report on Form 8-K
filed on September 4, 2002).
|
|
|
4.2
|
|
First Amendment to Rights Agreement, dated as of April 5, 2010, by and between Accelrys, Inc. and American Stock Transfer & Trust Company, as Rights Agent (incorporated by
reference to Exhibit 4.1 to Accelrys, Inc.s Current Report on Form 8-K filed on April 6, 2010).
|
|
|
10.1
|
|
2012 Management Incentive Plan for the Calendar Year Ending December 31, 2012 (incorporated by reference to Exhibit 10.1 to Accelrys, Inc.s Current Report on Form 8-K filed on
March 6, 2012).
|
|
|
31.1*
|
|
Section 302 Certification of the Principal Executive Officer
|
|
|
31.2*
|
|
Section 302 Certification of the Principal Financial Officer
|
|
|
32.1*
|
|
Section 906 Certification of the Chief Executive Officer and Chief Financial Officer
|
|
|
101.INS**
|
|
XBRL Instance Document.
|
|
|
101.SCH**
|
|
XBRL Taxonomy Extension Schema Document.
|
|
|
101.CAL**
|
|
XBRL Taxonomy Extension Calculation Linkbase Document.
|
|
|
101.LAB**
|
|
XBRL Taxonomy Extension Label Linkbase Document.
|
|
|
101.PRE**
|
|
XBRL Taxonomy Extension Presentation Linkbase Database.
|
#
|
Represents a management contract or compensatory plan or arrangement.
|
**
|
Pursuant to Rule 406T of Regulation S-T, this interactive data file is deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or
12 of the Securities Act of 1933, is deemed not filed for purposes of section 18 of the Exchange Act of 1934, and otherwise is not subject to liability under these sections.
|
39
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
ACCELRYS, INC.
|
|
|
By:
|
|
/s/ MICHAEL A. PIRAINO
|
|
|
Michael A. Piraino
|
|
|
Executive Vice President and Chief Financial
|
|
|
Officer (Duly Authorized Officer, Principal
|
|
|
Financial Officer and Principal Accounting
|
|
|
Officer)
|
|
|
Date: May 4,
2012
|
40
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