|
|
|
Item 1.
|
Condensed Consolidated Financial Statements
|
Accelrys, Inc.
Condensed Consolidated Balance Sheets
(In thousands)
|
|
|
|
|
|
|
|
|
|
September 30,
2012
|
|
December 31, 2011
|
|
(Unaudited)
|
|
|
Assets
|
|
|
|
Current assets:
|
|
|
|
Cash and cash equivalents
|
$
|
92,653
|
|
|
$
|
69,610
|
|
Marketable securities
|
48,292
|
|
|
52,976
|
|
Trade receivables, net of allowance for doubtful accounts of $143 as of September 30, 2012 and December 31, 2011
|
16,694
|
|
|
40,706
|
|
Promissory note receivable
|
930
|
|
|
921
|
|
Prepaid expenses, deferred tax assets and other current assets
|
10,251
|
|
|
11,090
|
|
Total current assets
|
168,820
|
|
|
175,303
|
|
Marketable securities, net of current portion
|
15,670
|
|
|
17,224
|
|
Restricted cash
|
3,499
|
|
|
3,814
|
|
Property and equipment, net
|
8,735
|
|
|
12,108
|
|
Goodwill
|
104,711
|
|
|
100,429
|
|
Purchased intangible assets, net
|
47,095
|
|
|
60,361
|
|
Promissory notes receivable, net of current portion
|
33,906
|
|
|
33,799
|
|
Other assets
|
4,596
|
|
|
4,848
|
|
Total assets
|
$
|
387,032
|
|
|
$
|
407,886
|
|
Liabilities and stockholders’ equity
|
|
|
|
Current liabilities:
|
|
|
|
Accounts payable
|
$
|
1,176
|
|
|
$
|
3,527
|
|
Accrued liabilities
|
10,391
|
|
|
19,361
|
|
Accrued compensation and benefits
|
10,881
|
|
|
12,372
|
|
Current portion of accrued restructuring charges
|
487
|
|
|
1,322
|
|
Current portion of deferred gain on sale of intellectual property
|
930
|
|
|
921
|
|
Current portion of deferred revenue
|
77,026
|
|
|
81,151
|
|
Total current liabilities
|
100,891
|
|
|
118,654
|
|
Deferred revenue, net of current portion
|
2,760
|
|
|
4,861
|
|
Accrued income tax
|
8,892
|
|
|
8,095
|
|
Deferred gain on sale of intellectual property, net of current portion
|
25,044
|
|
|
25,053
|
|
Accrued restructuring charges, net of current portion
|
373
|
|
|
388
|
|
Lease-related liabilities, net of current portion
|
1,465
|
|
|
2,151
|
|
Stockholders’ equity:
|
|
|
|
Preferred stock, $.0001 par value; 2,000 shares authorized; no shares issued and outstanding
|
—
|
|
|
—
|
|
Common stock, $.0001 par value; 100,000 shares authorized; 55,711 and 57,588 shares issued and outstanding at September 30, 2012 and December 31, 2011, respectively
|
6
|
|
|
6
|
|
Additional paid-in capital
|
475,517
|
|
|
465,701
|
|
Lease guarantee
|
(226
|
)
|
|
(273
|
)
|
Treasury stock; zero and 1,875 shares at September 30, 2012 and December 31, 2011, respectively
|
—
|
|
|
(18,340
|
)
|
Accumulated deficit
|
(228,005
|
)
|
|
(198,208
|
)
|
Accumulated other comprehensive income (loss)
|
315
|
|
|
(202
|
)
|
Total stockholders’ equity
|
247,607
|
|
|
248,684
|
|
Total liabilities and stockholders’ equity
|
$
|
387,032
|
|
|
$
|
407,886
|
|
See accompanying notes to these condensed consolidated financial statements.
Accelrys, Inc.
Condensed Consolidated Statements of Operations
(In thousands, except per share amounts)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
2012
|
|
2011
|
|
2012
|
|
2011
|
Revenue:
|
|
|
|
|
|
|
|
License and subscription revenue
|
$
|
23,195
|
|
|
$
|
20,127
|
|
|
$
|
66,291
|
|
|
$
|
58,194
|
|
Maintenance on perpetual licenses
|
9,600
|
|
|
9,166
|
|
|
28,219
|
|
|
25,561
|
|
Content
|
2,919
|
|
|
4,248
|
|
|
9,494
|
|
|
12,568
|
|
Professional services and other
|
4,785
|
|
|
2,710
|
|
|
14,328
|
|
|
8,254
|
|
Total revenue
|
40,499
|
|
|
36,251
|
|
|
118,332
|
|
|
104,577
|
|
Cost of revenue:
|
|
|
|
|
|
|
|
Cost of revenue
|
9,839
|
|
|
8,349
|
|
|
29,734
|
|
|
26,564
|
|
Amortization of completed technology
|
2,108
|
|
|
2,184
|
|
|
6,263
|
|
|
6,258
|
|
Total cost of revenue
|
11,947
|
|
|
10,533
|
|
|
35,997
|
|
|
32,822
|
|
Gross profit
|
28,552
|
|
|
25,718
|
|
|
82,335
|
|
|
71,755
|
|
Operating expenses:
|
|
|
|
|
|
|
|
Product development
|
9,658
|
|
|
8,261
|
|
|
28,957
|
|
|
25,198
|
|
Sales and marketing
|
12,765
|
|
|
11,516
|
|
|
40,443
|
|
|
37,344
|
|
General and administrative
|
4,358
|
|
|
4,079
|
|
|
13,251
|
|
|
12,420
|
|
Business consolidation, transaction and restructuring costs
|
606
|
|
|
2,205
|
|
|
1,215
|
|
|
6,225
|
|
Purchased intangible asset amortization
|
2,107
|
|
|
2,555
|
|
|
6,320
|
|
|
7,343
|
|
Total operating expenses
|
29,494
|
|
|
28,616
|
|
|
90,186
|
|
|
88,530
|
|
Operating loss
|
(942
|
)
|
|
(2,898
|
)
|
|
(7,851
|
)
|
|
(16,775
|
)
|
Royalty and other income, net
|
1,863
|
|
|
882
|
|
|
7,107
|
|
|
4,999
|
|
Income (loss) before income taxes
|
921
|
|
|
(2,016
|
)
|
|
(744
|
)
|
|
(11,776
|
)
|
Income tax expense
|
320
|
|
|
190
|
|
|
1,429
|
|
|
664
|
|
Net income (loss)
|
$
|
601
|
|
|
$
|
(2,206
|
)
|
|
$
|
(2,173
|
)
|
|
$
|
(12,440
|
)
|
|
|
|
|
|
|
|
|
Net income (loss) per share amounts:
|
|
|
|
|
|
|
|
Basic
|
$
|
0.01
|
|
|
$
|
(0.04
|
)
|
|
$
|
(0.04
|
)
|
|
$
|
(0.22
|
)
|
Diluted
|
$
|
0.01
|
|
|
$
|
(0.04
|
)
|
|
$
|
(0.04
|
)
|
|
$
|
(0.22
|
)
|
Weighted average shares used to compute net income (loss) per share:
|
|
|
|
|
|
|
|
Basic
|
55,690
|
|
|
55,373
|
|
|
55,767
|
|
|
55,420
|
|
Diluted
|
56,396
|
|
|
55,373
|
|
|
55,767
|
|
|
55,420
|
|
See accompanying notes to these condensed consolidated financial statements.
Accelrys, Inc.
Condensed Consolidated Statements of Comprehensive Income
(In thousands)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
2012
|
|
2011
|
|
2012
|
|
2011
|
Net income (loss)
|
$
|
601
|
|
|
$
|
(2,206
|
)
|
|
$
|
(2,173
|
)
|
|
$
|
(12,440
|
)
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
295
|
|
|
(1,159
|
)
|
|
502
|
|
|
(1,879
|
)
|
Unrealized gain (loss) on marketable securities, net of tax
|
19
|
|
|
(98
|
)
|
|
15
|
|
|
67
|
|
Total other comprehensive income (loss)
|
314
|
|
|
(1,257
|
)
|
|
517
|
|
|
(1,812
|
)
|
Comprehensive income (loss)
|
$
|
915
|
|
|
$
|
(3,463
|
)
|
|
$
|
(1,656
|
)
|
|
$
|
(14,252
|
)
|
See accompanying notes to these condensed consolidated financial statements.
Accelrys, Inc.
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
2012
|
|
2011
|
Cash flows from operating activities:
|
|
|
|
Net loss
|
$
|
(2,173
|
)
|
|
$
|
(12,440
|
)
|
Adjustments to reconcile net loss to net cash provided by operating activities:
|
|
|
|
Depreciation
|
2,453
|
|
|
2,877
|
|
Amortization
|
14,162
|
|
|
15,679
|
|
Gain on sale of real estate
|
(2,744
|
)
|
|
—
|
|
Share-based compensation
|
5,610
|
|
|
4,148
|
|
Prepaid contingent compensation amortization
|
730
|
|
|
637
|
|
Amortization of premium on marketable debt securities
|
1,011
|
|
|
1,325
|
|
Amortization of discount on promissory notes receivable
|
(701
|
)
|
|
(117
|
)
|
Deferred income taxes
|
718
|
|
|
270
|
|
Other
|
(451
|
)
|
|
(189
|
)
|
Changes in operating assets and liabilities:
|
|
|
|
Trade receivables
|
24,145
|
|
|
18,025
|
|
Prepaid expense and other current assets
|
(67
|
)
|
|
525
|
|
Other assets
|
(61
|
)
|
|
(174
|
)
|
Accounts payable
|
(2,359
|
)
|
|
(1,473
|
)
|
Accrued liabilities, compensation and benefits
|
(10,680
|
)
|
|
(10,353
|
)
|
Deferred revenue
|
(6,804
|
)
|
|
7,511
|
|
Net cash provided by operating activities
|
22,789
|
|
|
26,251
|
|
Cash flows from investing activities:
|
|
|
|
Cash paid for acquisitions, net of cash acquired
|
(4,500
|
)
|
|
(9,863
|
)
|
Acquisition-related prepaid contingent compensation
|
—
|
|
|
(2,000
|
)
|
Purchases of property and equipment, net
|
(3,289
|
)
|
|
(2,974
|
)
|
Net proceeds from sale of real estate
|
6,800
|
|
|
—
|
|
Purchases of marketable securities
|
(51,033
|
)
|
|
(94,289
|
)
|
Proceeds from maturities and sales of marketable securities
|
56,319
|
|
|
61,315
|
|
Proceeds from promissory notes receivable
|
585
|
|
|
—
|
|
Net decrease in restricted cash
|
329
|
|
|
414
|
|
Net cash provided by (used) in investing activities
|
5,211
|
|
|
(47,397
|
)
|
Cash flows from financing activities:
|
|
|
|
Payment of contingent consideration liabilities
|
(250
|
)
|
|
—
|
|
Proceeds from issuance of common stock
|
5,153
|
|
|
2,048
|
|
Common stock tendered for payment of withholding taxes
|
(948
|
)
|
|
(893
|
)
|
Repurchases of common stock
|
(9,284
|
)
|
|
(7,000
|
)
|
Net cash used in financing activities
|
(5,329
|
)
|
|
(5,845
|
)
|
Effect of changes in exchange rates on cash and cash equivalents
|
372
|
|
|
50
|
|
Increase (decrease) in cash and cash equivalents
|
23,043
|
|
|
(26,941
|
)
|
Cash and cash equivalents at beginning of period
|
69,610
|
|
|
86,316
|
|
Cash and cash equivalents at end of period
|
$
|
92,653
|
|
|
$
|
59,375
|
|
See accompanying notes to these condensed consolidated financial statements.
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
September 30, 2012
and for the
three and nine
months ended
September 30, 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 U.S. (“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”). Symyx’s 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”). Contur’s 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”). VelQuest’s operating results are included in our consolidated financial statements and results of operations beginning December 30, 2011. On May 17, 2012, we acquired a proprietary web-based Hit Explorer Operating System (“HEOS”) software from Scynexis, Inc. The operating results of HEOS are included in our consolidated financial statements and results of operations beginning May 17, 2012.
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 a good indication 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.
Use of Estimates
The preparation of financial statements in conformity with 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”),
|
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 client’s 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 that 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 that 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 services 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 both
September 30, 2012
and
December 31, 2011
, we deferred approximately
$0.9 million
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 Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 718,
Compensation—Stock Compensation
(“ASC Topic 718”). We estimate the fair
value of our share-based 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:
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 FASB 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 we operate and the various 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 on-going 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. In the fourth quarter of fiscal 2012, we may release
$1.5 million
of our liability for unrecognized tax benefits due to the expiration of the statute of limitations applicable to the 2007 tax year.
Interest and penalties related to income tax matters are recognized in income tax expense. During each of the three months ended
September 30, 2012
and
September 30, 2011
, we incurred approximately
$20,000
in interest and penalties. During each of the nine months ended
September 30, 2012
and
September 30, 2011
, we incurred approximately
$0.1 million
in interest and penalties.
2. Business Combinations
HEOS Acquisition
On May 17, 2012, we acquired HEOS software from Scynexis, Inc. as part of our strategy to expand our product portfolio to complement our current software offerings. Enabled by our applications, HEOS is a proven Software-as-a-Service ("SaaS") workspace that accelerates and streamlines collaborative drug discovery by providing secure, real-time access to chemical registration, biological assay results, computational and visual analytics, safety assessment and pharmacokinetics data, and other project information in the Cloud with minimal IT overhead and effort.
The total consideration for the net assets acquired was
$4.5 million
, of which, based on our preliminary determination of fair value completed during the third quarter of fiscal 2012,
$3.8 million
was allocated to goodwill and
$0.7 million
was allocated to purchased technology intangible assets. This fair value determination is considered preliminary and is subject to revision during the measurement period after obtaining more information regarding preliminary estimates of acquired intangible assets and deferred revenue. We funded the purchase price with cash on hand. All acquisition costs related to the transaction were expensed as incurred.
The goodwill related to the HEOS acquisition is deductible over a 15-year period for U.S. income tax purposes.
We have determined that the acquisition of HEOS 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 HEOS from the date of acquisition.
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 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
15 months
following the acquisition date if, and to the extent that, certain breaches of the representations and warranties have not 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 determination of fair value 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
|
(1,087
|
)
|
Deferred revenue
|
(3,515
|
)
|
Goodwill
|
$
|
24,050
|
|
The above purchase price determination is considered preliminary and is subject to revision during the measurement period. We may adjust the fair value assumptions after obtaining more information regarding preliminary estimates of deferred tax assets and deferred tax liabilities (due to potential limitations on their use). During the
nine
months ended
September 30, 2012
, we made measurement period adjustments totaling
$0.2 million
consisting of
$0.1 million
to accrued liabilities and
$0.1 million
to deferred revenue. 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 SaaS 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 terms 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. During the quarter ended June 30, 2012 the first year performance milestone was met. Accordingly,
$0.3 million
was released in accordance with the escrow agreement during the quarter ended June 30, 2012. As of
September 30, 2012
and
December 31, 2011
, we had cash balances of
$0.3 million
and
$0.5
million, respectively, related to the escrow account, which are included in the restricted cash line item in the consolidated balance sheets.
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):
|
|
|
|
|
|
(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 determination of fair value 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 made measurement period adjustments totaling
$29,000
to accrued income tax balances in the first quarter of fiscal 2012. 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 Contur Acquisition.
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
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. During the quarter ended June 30, 2012,
$1.0 million
of the escrowed funds were released in accordance with the escrow agreement. The unrecognized contingent compensation expense was
$0.4 million
as of
September 30, 2012
, of which
$0.2 million
is expected to be recognized in each of the fourth quarter of fiscal 2012 and the first half of fiscal 2013.
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 Income (Loss) Per Share
We compute net income (loss) per share pursuant to FASB ASC Topic 260,
Earnings Per Share
. Accordingly, basic net income (loss) per share and diluted net income (loss) per share are computed by dividing the net income (loss) for the period by the weighted average number of common shares outstanding during the period, without consideration for common stock equivalents. Diluted net income per share is computed by dividing the net income for the period by the weighted average number of common stock and common stock equivalents outstanding during the period. Potentially dilutive common stock equivalents consist of common stock options and unvested restricted stock units (“RSUs”).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
2012
|
|
2011
|
|
2012
|
|
2011
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
Net income (loss)
|
601
|
|
|
(2,206
|
)
|
|
(2,173
|
)
|
|
(12,440
|
)
|
Denominator for basic and diluted net income (loss) per share:
|
|
|
|
|
|
|
|
Weighted average common shares outstanding for basic
|
55,690
|
|
|
55,373
|
|
|
55,767
|
|
|
55,420
|
|
Dilutive potential common stock outstanding:
|
|
|
|
|
|
|
|
Stock options
|
492
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Restricted stock
|
214
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Weighted average common shares outstanding for diluted
|
56,396
|
|
|
55,373
|
|
|
55,767
|
|
|
55,420
|
|
Basic net income (loss) per share
|
$
|
0.01
|
|
|
$
|
(0.04
|
)
|
|
$
|
(0.04
|
)
|
|
$
|
(0.22
|
)
|
Diluted net income (loss) per share
|
$
|
0.01
|
|
|
$
|
(0.04
|
)
|
|
$
|
(0.04
|
)
|
|
$
|
(0.22
|
)
|
As we reported a net loss for the
nine
months ended
September 30, 2012
and the
three and nine
months ended
September 30, 2011
, basic and diluted net loss per share were the same. Potentially dilutive common stock equivalents that were excluded from the diluted net income per share calculation for the three months ended September 30, 2012 since their effect would be anti-dilutive totaled approximately
3.1 million
shares. Potentially dilutive common stock equivalents that were excluded from the diluted net loss per share calculation totaled approximately
$7.4 million
for the nine months ended
September 30, 2012
and
$7.1 million
for both the three and nine months ended
September 30, 2011
.
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
17.8 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 participant’s tax withholding obligations; and (iii) shares of common stock covered by the portion of any stock appreciation right (“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
September 30, 2012
, there are approximately
13,355,563
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
|
1,446
|
|
|
8.04
|
|
|
|
|
|
Exercised
|
(769
|
)
|
|
5.96
|
|
|
|
|
|
Expired/Forfeited
|
(894
|
)
|
|
13.34
|
|
|
|
|
|
Outstanding at September 30, 2012
|
5,804
|
|
|
$
|
7.08
|
|
|
$
|
10,461
|
|
|
7.28
|
|
Exercisable at September 30, 2012
|
2,666
|
|
|
$
|
6.84
|
|
|
$
|
6,155
|
|
|
5.39
|
|
The aggregate intrinsic value of stock options outstanding and exercisable at
September 30, 2012
was based on the closing price of our common stock on
September 28, 2012
of
$8.66
per share.
Options granted during the
three and nine
months ended
September 30, 2012
had a weighted average grant-date fair value per share of
$3.50
and
$3.51
, respectively. The total intrinsic value of stock options exercised during the
three and nine
months ended
September 30, 2012
was
$0.2 million
and
$1.4 million
, respectively. The total intrinsic value of stock options exercised during the
three and nine
months ended
September 30, 2011
was
$28,000
and
$0.6 million
, respectively.
RSUs granted under our Amended and Restated 2004 Stock Incentive Plan, as amended (the “2004 Plan”), the Symyx 2007 Stock Incentive Plan (the “2007 Plan”), as amended, and the 2011 Plan generally vest annually over
three years
and, once vested, do not expire. A limited number of RSUs granted under the 2011 Plan vest over one year 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:
|
|
|
|
|
|
|
|
|
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
|
662
|
|
|
8.01
|
|
Vested
|
(398
|
)
|
|
6.55
|
|
Forfeited
|
(150
|
)
|
|
6.98
|
|
Unvested at September 30, 2012
|
1,546
|
|
|
$
|
7.32
|
|
Included in the vested shares for the period are approximately
121,905
shares tendered to us by employees for payment of minimum income tax obligations upon vesting of RSUs.
The total fair value of RSUs vested was
$2.4 million
and
$3.1 million
for each of the
three and nine
months ended
September 30, 2012
, respectively. The total fair value of RSUs vested was
$1.8 million
and
$2.7 million
for each of the
three and nine
months ended
September 30, 2011
, respectively.
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 and nine
months ended
September 30, 2012
and
2011
was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
2012
|
|
2011
|
|
2012
|
|
2011
|
|
(in thousands)
|
Cost of revenue
|
$
|
204
|
|
|
$
|
79
|
|
|
$
|
493
|
|
|
$
|
216
|
|
Product development
|
490
|
|
|
356
|
|
|
1,246
|
|
|
823
|
|
Sales and marketing
|
438
|
|
|
425
|
|
|
1,692
|
|
|
1,310
|
|
General and administrative
|
891
|
|
|
665
|
|
|
2,226
|
|
|
1,808
|
|
Business consolidation, transaction and restructuring costs
|
(52
|
)
|
|
(61
|
)
|
|
(47
|
)
|
|
(9
|
)
|
Total stock-based compensation expense
|
$
|
1,971
|
|
|
$
|
1,464
|
|
|
$
|
5,610
|
|
|
$
|
4,148
|
|
No share-based compensation expense was capitalized in the periods presented. At
September 30, 2012
, the gross amount of unrecognized share-based compensation expense relating to unvested share-based stock options, restricted stock units and ESPP shares was approximately
$19.0 million
, which we anticipate recognizing as a charge against operations over a weighted average period of
2.5
years.
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. We repurchased
353,955
shares of our common stock for approximately
$3.0 million
at a weighted-average cost of
$8.40
per share during the year ended December 31, 2010 and completed the repurchase of the remaining
$3.0 million
of our common stock by purchasing
350,553
shares at a weighted-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 a weighted-average cost of
$7.86
per share during the quarter ended June 30, 2011, and completed the repurchase of the remaining
$2.0 million
of our common stock by purchasing
273,141
shares at a weighted-average cost of
$7.29
per share during the quarter ended September 30, 2011. All of the shares repurchased were recorded as treasury stock upon repurchase.
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 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 the broker to purchase for our account up to an additional
$10.0 million
worth of our common stock by December 31, 2012. On April 27, 2012, our board of directors authorized us to commit up to an additional
$2.5 million
for the repurchase of our common stock pursuant to a program to be executed in accordance with a Rule 10b5-1 trading plan 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 a weighted-average cost of
$7.98
per share. During the quarter ended June 30, 2012, we repurchased
427,527
shares of our common stock for approximately
$3.4 million
at a weighted-average cost of
$8.05
per share.
During the quarter ended September 30, 2012, we repurchased
394,925
shares of our common stock for approximately
$3.3 million
at a weighted-average cost of
$8.23
per share, pursuant to the Third Repurchase Plan. We have made cumulative repurchases of
2,374,585
shares, at a cost of approximately
$19.3 million
since we began our repurchase program in November 2010.
Retirement of Treasury Stock
During the nine months ended September 30, 2012, we retired
3.0 million
shares of our treasury stock. These shares remain as authorized shares; however they are now considered unissued. In accordance with FASB ASC Topic 505,
Equity
, the retirement of our treasury stock resulted in a reduction in our treasury stock and a corresponding increase in our accumulated deficit of
$27.6 million
. There was no effect on the total stockholders' equity position as a result of the retirement.
5. Marketable Securities
Our marketable securities consist of fixed income securities with original maturities of greater than three months and include obligations of U.S. government sponsored enterprises, commercial paper, certificates of deposit, corporate and municipal debt. We account for our investments in marketable securities in accordance with FASB ASC Topic 320,
Investments—Debt 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 that are not considered other than temporary and unrealized gains are included in accumulated other comprehensive income in stockholders’ equity. Unrealized losses that 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
September 30, 2012
and
December 31, 2011
consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Fair Value
|
|
(In thousands)
|
September 30, 2012:
|
|
|
|
|
|
|
|
Short-Term Marketable Securities:
|
|
|
|
|
|
|
|
U.S. Treasury securities
|
$
|
3,101
|
|
|
$
|
8
|
|
|
$
|
—
|
|
|
$
|
3,109
|
|
U.S. government and agency securities
|
5,402
|
|
|
2
|
|
|
—
|
|
|
5,404
|
|
Commercial paper and certificates of deposit
|
11,046
|
|
|
3
|
|
|
—
|
|
|
11,049
|
|
Corporate debt securities
|
28,708
|
|
|
24
|
|
|
(2
|
)
|
|
28,730
|
|
Municipal debt securities
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total Short-Term Marketable Securities
|
$
|
48,257
|
|
|
$
|
37
|
|
|
$
|
(2
|
)
|
|
$
|
48,292
|
|
Long-Term Marketable Securities:
|
|
|
|
|
|
|
|
U.S. Treasury securities
|
$
|
1,503
|
|
|
$
|
22
|
|
|
$
|
—
|
|
|
$
|
1,525
|
|
U.S. government and agency securities
|
679
|
|
|
6
|
|
|
—
|
|
|
685
|
|
Corporate debt securities
|
13,410
|
|
|
50
|
|
|
—
|
|
|
13,460
|
|
Total Long-Term Marketable Securities
|
$
|
15,592
|
|
|
$
|
78
|
|
|
$
|
—
|
|
|
$
|
15,670
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
September 30, 2012
and
December 31, 2011
, we did not have any investments in marketable securities with material 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
September 30, 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
September 30, 2012
.
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 Freeslate’s management team and board of directors were solely responsible for all economic aspects of the entity, including key business decisions that impact Freeslate’s 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 Freeslate’s 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
September 30, 2012
and
December 31, 2011
and is included in the other assets line on our consolidated balance sheet. 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 Freeslate’s existing stock plans. We have determined that as of
September 30, 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
$8.9 million
as of both
September 30, 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
September 30, 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 Symyx’s 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 IM’s initial public offering (the “IPO”) with respect to not less than all of the IM shares held by Symyx (with Symyx being obligated to sell such shares); (ii) to the extent the gross proceeds from Symyx’s sale of all of its IM shares in the IPO were less than
$67.0 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.
As a result of the sale of Symyx’s 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
$67.0 million
and the aggregate gross proceeds from Symyx’s 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 IM’s tangible fixed assets, excluding intellectual property.
The note receivable was discounted to a fair value of
$26.0 million
, representing the consideration for the patents transferred to IM, which we carried as purchased technology intangible assets acquired in the Symyx Merger, and the termination of IM’s 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
nine
months ended September 30, 2012, we received the first
three
quarterly installments due on the note of
$500,000
each, which were 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
September 30, 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
$25.0 million
, respectively. The fair value of the note was based on a 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 deposit, 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 deposit 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 that 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 1—Quoted prices for identical instruments in active markets.
Level 2—Inputs 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 3—Model-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.
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
$0.2 million
as of
September 30, 2012
, after the payment of the first year milestone as discussed in Note 2.
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
September 30,
2012
|
|
Quoted
Market
Prices for
Identical
Assets
(Level 1)
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
(In thousands)
|
September 30, 2012:
|
|
|
|
|
|
|
|
Cash equivalents (1)
|
$
|
42,242
|
|
|
$
|
42,223
|
|
|
$
|
19
|
|
|
$
|
—
|
|
Short-Term Marketable Securities:
|
|
|
|
|
|
|
|
U.S. Treasury securities
|
3,109
|
|
|
3,109
|
|
|
—
|
|
|
—
|
|
U.S. government and agency securities
|
5,404
|
|
|
—
|
|
|
5,404
|
|
|
—
|
|
Commercial paper and certificates of deposit
|
11,049
|
|
|
—
|
|
|
11,049
|
|
|
—
|
|
Corporate debt securities
|
28,730
|
|
|
—
|
|
|
28,730
|
|
|
—
|
|
Municipal debt securities
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Long-Term Marketable Securities:
|
|
|
|
|
|
|
|
U.S. Treasury securities
|
1,525
|
|
|
1,525
|
|
|
—
|
|
|
—
|
|
U.S. government and agency securities
|
685
|
|
|
—
|
|
|
685
|
|
|
—
|
|
Corporate debt securities
|
13,460
|
|
|
—
|
|
|
13,460
|
|
|
—
|
|
Foreign currency forward contracts not designated as hedges
|
54
|
|
|
—
|
|
|
54
|
|
|
—
|
|
Total assets at fair value
|
$
|
106,258
|
|
|
$
|
46,857
|
|
|
$
|
59,401
|
|
|
$
|
—
|
|
Liabilities:
|
|
|
|
|
|
|
|
Acquisition-related contingent consideration
|
$
|
180
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
180
|
|
Total liabilities at fair value
|
$
|
180
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
180
|
|
|
|
(1)
|
Cash equivalents are included in the Cash and cash equivalents line in the consolidated balance sheet
|
There were no transfers between Level 1 and Level 2 securities during the
three and nine
months ended
September 30, 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
|
The following table includes a summary of the contingent consideration measured at fair value using significant unobservable inputs (Level 3) during the
nine months ended September 30, 2012
(in thousands):
|
|
|
|
|
Balance at December 31, 2011
|
$
|
413
|
|
Expenses recorded due to changes in fair value
|
17
|
|
Payments
|
(250
|
)
|
Balance at September 30, 2012
|
$
|
180
|
|
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
September 30, 2012
and
December 31, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 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
|
|
$
|
54,341
|
|
|
$
|
29,597
|
|
|
8
|
|
$
|
53,509
|
|
|
$
|
22,160
|
|
Purchased customer relationships
|
7
|
|
26,000
|
|
|
12,182
|
|
|
7
|
|
25,906
|
|
|
8,158
|
|
Purchased backlog
|
3
|
|
7,740
|
|
|
5,854
|
|
|
3
|
|
7,740
|
|
|
4,390
|
|
Purchased contract base
|
5
|
|
50
|
|
|
50
|
|
|
5
|
|
50
|
|
|
50
|
|
Purchased intellectual property
|
5
|
|
1,998
|
|
|
1,756
|
|
|
5
|
|
1,998
|
|
|
1,448
|
|
Purchased trademark/tradename
|
5
|
|
6,737
|
|
|
2,832
|
|
|
5
|
|
6,712
|
|
|
1,848
|
|
|
|
|
$
|
96,866
|
|
|
$
|
52,271
|
|
|
|
|
$
|
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 acquisition of HEOS are included based on our preliminary purchase price determination 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
$14.2 million
for the
three and nine
months ended
September 30, 2012
, respectively. Intangible asset amortization expense was
$5.4 million
and
$15.7 million
for the
three and nine
months ended
September 30, 2011
, respectively.
Future estimated amortization expense for intangible assets as of
September 30, 2012
is as follows and is subject to change as a result of measurement period adjustments (in thousands):
|
|
|
|
|
2012 (remaining three months)
|
$
|
4,755
|
|
2013
|
14,860
|
|
2014
|
10,365
|
|
2015
|
6,157
|
|
2016
|
3,452
|
|
Thereafter
|
5,006
|
|
Total
|
$
|
44,595
|
|
The changes to the carrying amount of goodwill for the
nine
months ended
September 30, 2012
, are as follows (in thousands):
|
|
|
|
|
|
Balance at December 31, 2011
|
$
|
100,429
|
|
|
Goodwill acquired in the HEOS Acquisition
|
3,750
|
|
|
Goodwill measurement period adjustments
|
220
|
|
(1)
|
Effect of foreign exchange
|
312
|
|
|
Balance at September 30, 2012
|
$
|
104,711
|
|
|
(1) As discussed in Note 2, we made total measurement period adjustments related to the VelQuest Acquisition of
$0.2 million
consisting of $
0.1 million
to accrued liabilities and
$0.1 million
to deferred revenue offset by a measurement period adjustment of
$29,000
to accrued income tax 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
$9.1 million
as of
September 30, 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 2005, we recognized a liability and corresponding charge to stockholders’ equity for the probability-weighted fair value of the guarantee. Changes to the fair value of the liability are recognized in stockholders’ equity. The liability for our guarantee of the lease obligation was
$0.2 million
and
$0.3 million
at
September 30, 2012
and
December 31, 2011
, respectively.
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
September 30, 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
|
$
|
2,866
|
|
|
$
|
1,241
|
|
|
$
|
4,107
|
|
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
|
—
|
|
|
117
|
|
|
117
|
|
Cash payments
|
(836
|
)
|
|
(176
|
)
|
|
(1,012
|
)
|
Effect of foreign exchange
|
(2
|
)
|
|
25
|
|
|
23
|
|
Balance at September 30, 2012
|
$
|
221
|
|
|
$
|
639
|
|
|
$
|
860
|
|
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
$0.4 million
was paid during the
nine
months ended
September 30, 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 the 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
September 30, 2012
, approximately
$5.1 million
in cash payments had been made with the remaining balance of
$0.2 million
expected to be paid during the fourth 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
September 30, 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
September 30, 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, foreign currency exchange gains and losses, non-operating gain on real estate and other non-operating 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
|
|
Nine Months Ended
|
|
September 30
2012
|
|
September 30,
2011
|
|
September 30
2012
|
|
September 30,
2011
|
|
(In thousands)
|
Royalty income, net
|
$
|
1,199
|
|
|
$
|
1,183
|
|
|
$
|
3,962
|
|
|
$
|
4,638
|
|
Net interest income
|
601
|
|
|
237
|
|
|
1,767
|
|
|
908
|
|
Amortization of discount on promissory notes receivable
|
274
|
|
|
38
|
|
|
701
|
|
|
114
|
|
Foreign currency transaction gain (loss)
|
157
|
|
|
(128
|
)
|
|
(449
|
)
|
|
900
|
|
Purchased intangible assets amortization
|
(424
|
)
|
|
(591
|
)
|
|
(1,272
|
)
|
|
(1,773
|
)
|
Net gain on sale of real estate
|
—
|
|
|
—
|
|
|
2,744
|
|
|
—
|
|
Net income (loss) from rental activities
|
—
|
|
|
158
|
|
|
(338
|
)
|
|
158
|
|
Other
|
56
|
|
|
(15
|
)
|
|
(8
|
)
|
|
54
|
|
Total royalty and other income, net
|
$
|
1,863
|
|
|
$
|
882
|
|
|
$
|
7,107
|
|
|
$
|
4,999
|
|
In June 2012, we sold real property comprised of land and an office building located in Santa Clara, California, for a net sales price of
$6.8 million
. We recorded a pre-tax gain of approximately
$2.7 million
on the sale in royalty and other income, net, as this property was not utilized in our ongoing operations since its acquisition in the Symyx Merger.
12. Legal Proceedings
In July 2012, a customer of one of our subsidiaries provided us with a request for arbitration, and on October 5, 2012, served us with its Statement of Case in connection with the arbitration, which is pending before the London Court of International Arbitration. The dispute relates to certain software and professional services arrangements that the customer claims were not completed pursuant to the terms of the underlying agreements. We intend to vigorously defend against such claims and to assert counterclaims for payments owed to us. Because of the uncertainties related to this arbitration, we are currently unable to predict the ultimate outcome or make a meaningful estimate of the reasonably possible loss that could result from an unfavorable outcome. However, we believe that it is possible that an unfavorable outcome could result in a material adverse effect on our results of operations, liquidity or financial position.
We are also subject to various other claims and legal proceedings arising in the ordinary course of our business. In connection with our regular assessments of such other claims and legal proceedings, we accrue an estimated loss contingency in our financial statements if it is probable that a liability has been incurred and the amount of the loss can be reasonably
estimated. However, a determination as to the amount of the accrual required for such contingencies is highly subjective and requires judgments about future events. As a result, the amount of ultimate loss, if any, may differ from our estimates. Nevertheless, management believes that the disposition of such matters, in the aggregate, will not have a material adverse effect on our results of operations, liquidity or financial position.
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 ASU’s 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 unit’s 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. The adoption of this accounting pronouncement did not have a material impact on our consolidated financial statements.
In December 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 FASB ASC Topic 350,
Intangibles-Goodwill and Other
(“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 did not have a material impact on our consolidated financial statements.
14. Subsequent events
On October 23, 2012, we acquired Aegis Analytical Corp. (“Aegis”) for total cash consideration of
$30.0 million
. We acquired Aegis as part of our strategy to expand our product portfolio to complement our current software offerings, expand our footprint in downstream operations and reinforce our position as a leader in scientific innovation lifecycle management software. We funded the purchase price with cash on hand.
On October 26, 2012, our board of directors authorized us to commit up to
$15.0 million
for the repurchase of our common stock pursuant to a program to be executed in accordance with a Rule 10b5-1 trading plan during fiscal 2013.
|
|
|
Item 2.
|
Management’s 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 “Management’s 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.
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”). Symyx’s 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”). Contur’s 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”). VelQuest’s operating results are included in our consolidated financial statements and results of operations beginning December 30, 2011.
On May 17, 2012, we acquired a proprietary web-based Hit Explorer Operating System (“HEOS”) software from Scynexis, Inc. The operating results of HEOS are included in our consolidated financial statements and results of operations beginning May 17, 2012.
On October 23, 2012, pursuant to the terms of the Agreement and Plan of Merger, dated as of such date, by among us, Aardvark Acquisition Corp., our wholly owned subsidiary (“Aegis Merger Sub”), Aegis Analytical Corporation (“Aegis”) and Shareholder Representative Services LLC, Aegis Merger Sub merged with and into Aegis, with Aegis surviving as our wholly owned subsidiary (the “Aegis Merger”). The information presented in this Report does not give effect to the Aegis Merger.
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, manage quality control with external collaborators and reduce compliance risk. 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.
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 our 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 platform’s 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 the 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, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” of our annual report on Form 10-K for the fiscal year ended December 31, 2011, filed with the SEC on March 13, 2012 (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 only a minimal corresponding incremental increase in revenue. As a result of these seasonal variations, we believe that sequential 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 September 30,
2012 and 2011
The following table summarizes our results of operations as a percentage of revenue for the respective periods:
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
2012
|
|
2011
|
Revenue:
|
|
|
|
License and subscription revenue
|
57
|
%
|
|
56
|
%
|
Maintenance on perpetual licenses
|
24
|
%
|
|
25
|
%
|
Content
|
7
|
%
|
|
12
|
%
|
Professional services and other
|
12
|
%
|
|
7
|
%
|
Total revenue
|
100
|
%
|
|
100
|
%
|
Cost of revenue:
|
|
|
|
Cost of revenue
|
24
|
%
|
|
23
|
%
|
Amortization of completed technology
|
5
|
%
|
|
6
|
%
|
Total cost of revenue
|
29
|
%
|
|
29
|
%
|
Gross profit
|
71
|
%
|
|
71
|
%
|
Operating expenses:
|
|
|
|
Product development
|
24
|
%
|
|
23
|
%
|
Sales and marketing
|
32
|
%
|
|
32
|
%
|
General and administrative
|
11
|
%
|
|
11
|
%
|
Business consolidation, transaction and restructuring costs
|
1
|
%
|
|
6
|
%
|
Purchased intangible asset amortization
|
5
|
%
|
|
7
|
%
|
Total operating expenses
|
73
|
%
|
|
79
|
%
|
Operating loss
|
(2
|
)%
|
|
(8
|
)%
|
Royalty and other income, net
|
5
|
%
|
|
2
|
%
|
Income (loss) before income taxes
|
2
|
%
|
|
(6
|
)%
|
Income tax expense
|
1
|
%
|
|
1
|
%
|
Net income (loss)
|
1
|
%
|
|
(6
|
)%
|
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
$40.5 million
for the
three months ended September 30, 2012
, as compared to
$36.3 million
for the
three months ended September 30, 2011
. The increase in revenue during the quarter ended September 30, 2012 was attributable to incremental revenue from the Contur and VelQuest acquisitions, combined with a decrease in the impact of acquisition-related valuation adjustments on revenue recognition related to the Symyx Merger and the Contur Acquisition. Total revenue generated in the U.S. accounted for $19.8 million, or 49% of revenue for the
three months ended September 30, 2012
, compared with $16.7 million, or 46% of revenues for the
three months ended September 30, 2011
. International revenues accounted for $20.7 million, or 51% of revenue for the
three months ended September 30, 2012
, compared with $19.6 million, or 54% of revenues for the
three months ended September 30, 2011
.
License and subscription revenue.
License and subscription revenue
increased
to
$23.2 million
for the
three months ended September 30, 2012
, as compared to
$20.1 million
for the
three months ended September 30, 2011
. As a percentage of total revenue, license and subscription revenue increased to
57%
for the
three months ended September 30, 2012
, as compared to
56%
for the
three months ended September 30, 2011
. The increase in license and subscription revenue during the quarter ended
September 30, 2012
was primarily attributable to additional revenue resulting from the Contur and the VelQuest acquisitions, combined with an incremental increase as a result of a 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
$9.6 million
for the
three months ended September 30, 2012
, as compared to
$9.2 million
for the
three months ended September 30, 2011
. As a percentage of total revenue, revenue from maintenance on perpetual licenses decreased slightly to
24%
for the
three months ended September 30, 2012
, as compared to
25%
for the
three months ended September 30, 2011
. The increase in revenue from
maintenance on perpetual licenses during the quarter ended
September 30, 2012
was primarily related to incremental revenue from the VelQuest Acquisition.
Content.
Content revenue
decreased
to
$2.9 million
for the
three months ended September 30, 2012
, as compared to
$4.2 million
for the
three months ended September 30, 2011
. As a percentage of total revenue, content revenue decreased to
7%
for the
three months ended September 30, 2012
, as compared to
12%
for the
three months ended September 30, 2011
. The decrease in content revenue during the quarter ended
September 30, 2012
was attributable to the previously announced phase-out of certain content product lines.
Professional services and other.
Professional services and other revenue
increased
to
$4.8 million
for the
three months ended September 30, 2012
, as compared to
$2.7 million
for the
three months ended September 30, 2011
. As a percentage of total revenue, professional services and other revenue increased to
12%
for the
three months ended September 30, 2012
, as compared to
7%
for the
three months ended September 30, 2011
. The increase in revenue from professional services and other during the quarter ended
September 30, 2012
was primarily attributable to an increase in revenue from contract research engagements.
Total Cost of Revenue
Cost of Revenue.
Cost of revenue
increased
to
$9.8 million
for the
three months ended September 30, 2012
, as compared to
$8.3 million
for the
three months ended September 30, 2011
. As a percentage of revenue, cost of revenue increased slightly to
24%
for the
three months ended September 30, 2012
, as compared to
23%
for the
three months ended September 30, 2011
. The increase in cost of revenue during the quarter ended September 30, 2012 was primarily attributable to an increase in personnel and related expenses in our services department of approximately $0.9 million from higher headcount, combined with an increase in consulting and professional fees of approximately $0.4 million and an increase in overhead expense of approximately $0.3 million, partially offset by a decrease in distributor commission expense of approximately $0.1 million.
Amortization of Completed Technology.
Amortization of completed technology
decreased
slightly to $2.1 million for the
three months ended September 30, 2012
, as compared to $2.2 million for the
three months ended September 30, 2011
. As a percentage of revenue, amortization of completed technology decreased to
5%
for the
three months ended September 30, 2012
, as compared to
6%
for the
three months ended September 30, 2011
.
Operating Expenses
Product Development Expenses.
Product development expenses
increased
to
$9.7 million
for the
three months ended September 30, 2012
, as compared to
$8.3 million
for the
three months ended September 30, 2011
. As a percentage of revenue, product development expenses increased slightly to
24%
for the
three months ended September 30, 2012
, as compared to
23%
for the
three months ended September 30, 2011
. The increase in product development expenses during the quarter ended September 30, 2012 was primarily attributable to an increase in personnel and related expenses of approximately $1.3 million as a result of higher headcount and an increase in professional fees of approximately $0.1 million.
Sales and Marketing Expenses.
Sales and marketing expenses
increased
to
$12.8 million
for the
three months ended September 30, 2012
, as compared to
$11.5 million
for the
three months ended September 30, 2011
. As a percentage of revenue, sales and marketing expenses were consistent at
32%
for both the
three months ended September 30, 2012
and the
three months ended September 30, 2011
. The increase in sales and marketing expenses during the quarter ended September 30, 2012 was primarily attributable to an increase in personnel and related expenses of approximately $1.1 million and an increase in professional fees of $0.2 million, partially offset by a decrease in overhead expense of approximately $0.1 million.
General and Administrative Expenses.
General and administrative expenses
increased
to
$4.4 million
for the
three months ended September 30, 2012
, as compared to
$4.1 million
for the
three months ended September 30, 2011
. As a percentage of revenue, general and administrative expenses remained consistent at
11%
for both the
three months ended September 30, 2012
and the
three months ended September 30, 2011
. The increase in general and administrative expenses during the quarter ended September 30, 2012 was primarily attributable to an increase in personnel-related expenses of $0.6 million, partially offset by a decrease in professional services and other costs of $0.2 million and a decrease in overhead expense of $0.1 million.
Business Consolidation, Transaction and Restructuring Costs.
Net business consolidation, transaction and restructuring costs of
$0.6 million
for the
three months ended September 30, 2012
consisted primarily of costs related to recent acquisitions. As a percentage of revenue, net business consolidation and restructuring costs were
1%
for the
three months ended September 30, 2012
, as compared to
6%
for the
three months ended September 30, 2011
. We have classified all transaction and integration-related costs to business consolidation costs, transaction and restructuring costs, which for the
three months ended September 30, 2012
included personnel costs of $0.2 million consisting mainly of acquisition-related contingent compensation
and professional services costs of $0.4 million.
Business consolidation, transaction and restructuring costs of $2.2 million for the three months ended September 30, 2011, consisted of $1.9 million in business consolidation costs and $0.3 million in restructuring costs. We have classified all transaction and integration related costs to business consolidation costs, which include personnel costs of $0.6 million related to employees who were notified that their employment with us was being terminated, $0.5 million of acquisition related contingent compensation related to the Contur acquisition and professional service and other costs of $0.8 million directly related to our acquisition activities, including the integration of Symyx’s and Contur’s businesses into ours.
Purchased Intangible Asset Amortization.
Purchased intangibles asset amortization decreased to
$2.1 million
for the
three months ended September 30, 2012
, as compared to
$2.6 million
for the
three months ended September 30, 2011
. As a percentage of revenue, purchased intangible assets amortization decreased to
5%
for the
three months ended September 30, 2012
, as compared to
7%
for the
three months ended September 30, 2011
and was related solely to the amortization of backlog, customer relationship and trademark intangible assets acquired in the Acquisitions.
Royalty and Other Income, net
Royalty and other income, net increased to
$1.9 million
for the
three months ended September 30, 2012
as compared to
$0.9 million
for the
three months ended September 30, 2011
. Significant components of royalty and other income, net for the
three months ended September 30, 2012
included net royalty income of $1.2 million, interest income of $0.6 million, amortization of the discount on promissory notes receivable of $0.3 million and foreign currency exchange gain of $0.2 million, partially offset by amortization of purchased intangible assets of $0.4 million. Significant components of royalty and other income, net for the three months ended September 30, 2011 included net interest income of $0.3 million, royalty revenue of $1.3 million and rental income of $0.2 million, partially offset by a foreign currency exchange loss of $0.1 million, royalty expense of $0.1 million and amortization of purchased intangible assets of $0.6 million.
Income Tax Expense
Income tax expense was
$0.3 million
for the
three months ended September 30, 2012
as compared to income tax expense of
$0.2 million
for the
three months ended September 30, 2011
. Income tax expense consists of provision for income taxes for federal and state income taxes in the U. S. and income taxes in certain foreign tax jurisdictions. Income tax expense related to U.S. and foreign jurisdictions for the
three months ended September 30, 2012
was $0.1 million and $0.2 million, respectively. Income tax expense for the
three months ended September 30, 2011
was primarily related to U.S. jurisdictions.
Comparison of the
Nine Months Ended September 30,
2012 and 2011
The following table summarizes our results of operations as a percentage of revenue for the respective periods:
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
2012
|
|
2011
|
Revenue:
|
|
|
|
License and subscription revenue
|
56
|
%
|
|
56
|
%
|
Maintenance on perpetual licenses
|
24
|
%
|
|
24
|
%
|
Content
|
8
|
%
|
|
12
|
%
|
Professional services and other
|
12
|
%
|
|
8
|
%
|
Total revenue
|
100
|
%
|
|
100
|
%
|
Cost of revenue:
|
|
|
|
Cost of revenue
|
25
|
%
|
|
25
|
%
|
Amortization of completed technology
|
5
|
%
|
|
6
|
%
|
Total cost of revenue
|
30
|
%
|
|
31
|
%
|
Gross profit
|
70
|
%
|
|
69
|
%
|
Operating expenses:
|
|
|
|
Product development
|
24
|
%
|
|
24
|
%
|
Sales and marketing
|
34
|
%
|
|
36
|
%
|
General and administrative
|
11
|
%
|
|
12
|
%
|
Business consolidation, transaction and restructuring costs
|
1
|
%
|
|
6
|
%
|
Purchased intangible asset amortization
|
5
|
%
|
|
7
|
%
|
Total operating expenses
|
76
|
%
|
|
85
|
%
|
Operating loss
|
(7
|
)%
|
|
(16
|
)%
|
Royalty and other income, net
|
6
|
%
|
|
5
|
%
|
Loss before income taxes
|
(1
|
)%
|
|
(11
|
)%
|
Income tax expense
|
1
|
%
|
|
1
|
%
|
Net loss
|
(2
|
)%
|
|
(12
|
)%
|
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
$118.3 million
for the
nine months ended September 30, 2012
, as compared to
$104.6 million
for the
nine months ended September 30, 2011
. The increase in revenue during the
nine months ended September 30, 2012
was attributable to a decrease in the impact of acquisition-related valuation adjustments on revenue recognition related to the Symyx Merger, combined with incremental revenue from the VelQuest and Contur acquisitions. Total revenue generated in the U.S. accounted for $57.9 million, or 49% of revenue for the
nine months ended September 30, 2012
, compared with $48.6 million, or 47% of revenues for the
nine months ended September 30, 2011
. International revenues accounted for $60.4 million, or 51% of revenue for the
nine months ended September 30, 2012
, compared with $56.0 million, or 53% of revenues for the
nine months ended September 30, 2011
.
License and subscription revenue.
License and subscription revenue
increased
to
$66.3 million
for the
nine months ended September 30, 2012
, as compared to
$58.2 million
for the
nine months ended September 30, 2011
. As a percentage of total revenue, license and subscription revenue was consistent at
56%
for both the
nine months ended September 30, 2012
and 2011. The increase in license and subscription revenue during the
nine months ended September 30, 2012
was primarily attributable to additional revenue resulting from the Contur Acquisition, combined with an incremental increase as a result of a 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
$28.2 million
for the
nine months ended September 30, 2012
, as compared to
$25.6 million
for the
nine months ended September 30, 2011
. As a percentage of total revenue, revenue from maintenance on perpetual licenses was consistent at
24%
for both the
nine months ended September 30, 2012
and 2011. The increase in revenue from maintenance on perpetual licenses during the
nine months ended September 30, 2012
was primarily attributable to incremental revenue from the VelQuest Acquisition, combined with an
incremental increase as a result of a decrease in revenue impacted by acquisition-related valuation adjustments related to the Symyx Merger.
Content.
Content revenue
decreased
to
$9.5 million
for the
nine months ended September 30, 2012
, as compared to
$12.6 million
for the
nine months ended September 30, 2011
. As a percentage of total revenue, content revenue decreased to
8%
for the
nine months ended September 30, 2012
, as compared to
12%
for the
nine months ended September 30, 2011
. The decrease in content revenue during the
nine months ended September 30, 2012
is attributable to the previously announced phase-out of certain content product lines.
Professional services and other.
Professional services and other revenue
increased
to
$14.3 million
for the
nine months ended September 30, 2012
, as compared to
$8.3 million
for the
nine months ended September 30, 2011
. As a percentage of total revenue, professional services and other revenue increased to
12%
for the
nine months ended September 30, 2012
, as compared to
8%
for the
nine months ended September 30, 2011
. The increase in revenue from professional services and other during the
nine months ended September 30, 2012
was primarily attributable to an increase in revenue from solution consulting and contract research engagements.
Total Cost of Revenue
Cost of Revenue.
Cost of revenue
increased
to
$29.7 million
for the
nine months ended September 30, 2012
, as compared to
$26.6 million
for the
nine months ended September 30, 2011
. As a percentage of revenue, cost of revenue remained consistent at
25%
for both the
nine months ended September 30, 2012
and the
nine months ended September 30, 2011
. The increase in cost of revenue during the
nine months ended September 30, 2012
was primarily attributable to increases in personnel and related expenses in our services department of approximately $2.9 million from higher headcount, consulting and professional fees of approximately $0.5 million, overhead expense of approximately $0.2 and capitalized labor costs of $0.3 million, partially offset by a decrease in software and content royalties of approximately $0.5 million and a decrease in distributor commissions of approximately $0.1 million.
Amortization of Completed Technology.
Amortization of completed technology was
$6.3 million
for both the
nine months ended September 30, 2012
and the
nine months ended September 30, 2011
. As a percentage of revenue, amortization of completed technology decreased slightly to
5%
for the
nine months ended September 30, 2012
, as compared to
6%
for the
nine months ended September 30, 2011
.
Operating Expenses
Product Development Expenses.
Product development expenses
increased
to
$29.0 million
for the
nine months ended September 30, 2012
, as compared to
$25.2 million
for the
nine months ended September 30, 2011
. As a percentage of revenue, product development expenses remained consistent at
24%
for each of the
nine months ended September 30, 2012
and September 30, 2011. The increase in product development expenses during the
nine months ended September 30, 2012
was primarily attributable to an increase in personnel and related expenses of approximately $3.6 million as a result of higher headcount and an increase in professional fees of approximately $0.4 million, partially offset by a decrease in overhead expense of approximately $0.2 million.
Sales and Marketing Expenses.
Sales and marketing expenses
increased
to
$40.4 million
for the
nine months ended September 30, 2012
, as compared to
$37.3 million
for the
nine months ended September 30, 2011
. As a percentage of revenue, sales and marketing expenses decreased to
34%
for the
nine months ended September 30, 2012
, as compared to
36%
for the
nine months ended September 30, 2011
. The increase in sales and marketing expenses for the
nine months ended September 30, 2012
was primarily attributable to an increase in personnel and related expenses of approximately $3.1 million and an increase in professional fees of approximately $0.3 million, partially offset by a decrease in overhead expense of approximately $0.4 million.
General and Administrative Expenses.
General and administrative expenses
increased
to
$13.3 million
for the
nine months ended September 30, 2012
, as compared to
$12.4 million
for the
nine months ended September 30, 2011
. As a percentage of revenue, general and administrative expenses decreased slightly to
11%
for the
nine months ended September 30, 2012
as compared to
12%
for the
nine months ended September 30, 2011
. The increase in general and administrative expenses during the
nine months ended September 30, 2012
was primarily attributable to an increase in personnel-related expenses of $1.3 million, partially offset by a decrease in professional fees of approximately $0.5 million.
Business Consolidation, Transaction and Restructuring Costs.
Business consolidation, transaction and restructuring costs of
$1.2 million
for the
nine months ended September 30, 2012
consisted primarily of business consolidation costs related to recent acquisitions. As a percentage of revenue, business consolidation, transaction and restructuring costs decreased to
1%
for the
nine months ended September 30, 2012
, as compared to
6%
for the
nine months ended September 30, 2011
. We have
classified all transaction and integration-related costs to business consolidation costs, transaction and restructuring costs, which for the
nine months ended September 30, 2012
include $0.7 million of acquisition-related contingent compensation and professional services and other costs of $0.8 million directly related to integrating acquisitions into our company, partially offset by a write off of lease-related obligations of $0.4 million. Business consolidation, transaction and restructuring costs of $6.2 million for the nine months ended September 30, 2011 consisted of $4.5 million in business consolidation costs and $1.7 million in restructuring costs. We have classified all transaction and integration-related costs to business consolidation costs, which include personnel costs of $1.7 million related to employees who were notified that their employment with us was being terminated, $0.6 million of acquisition-related contingent compensation and professional services and other costs of $2.2 million directly related to our acquisition activities, including the Symyx Merger and the integration of Symyx’s business into ours.
Purchased Intangible Asset Amortization.
Purchased intangibles asset amortization decreased to
$6.3 million
for the
nine months ended September 30, 2012
, as compared to
$7.3 million
for the
nine months ended September 30, 2011
. As a percentage of revenue, amortization of purchased intangible assets decreased to
5%
for the
nine months ended September 30, 2012
, as compared to
7%
for the
nine months ended September 30, 2011
and is related solely to the amortization of backlog, customer relationship and trademark intangible assets acquired in the Acquisitions.
Royalty and Other Income, net
Royalty and other income, net increased to
$7.1 million
for the
nine months ended September 30, 2012
, as compared to
$5.0 million
for the
nine months ended September 30, 2011
. Significant components of royalty and other income, net for the
nine months ended September 30, 2012
included net royalty revenue of $4.0 million, interest income of $1.8 million, amortization of the discount on promissory notes receivable of $0.7 million and the net gain on the sale of real estate of $2.7 million, partially offset by a foreign currency exchange loss of $0.4 million, amortization of purchased intangible assets of $1.3 million and $0.3 million net loss from rental activities primarily related to write off of certain lease-related assets. Significant components of royalty and other income, net for the nine months ended September 30, 2011 included interest income of $0.9 million, amortization of the discount on promissory notes receivable of $0.1 million, royalty revenue of $5.1 million and a foreign currency exchange gain of $0.9 million, partially offset by royalty expense of $0.4 million and amortization of purchased intangible assets of $1.8 million. The decrease in net royalty income during the nine months ended September 30, 2012 was primarily attributable to the termination of IM’s royalty obligations to Symyx pursuant to the terms of the July 28, 2011 IM Agreement.
Income Tax Expense
Income tax expense increased to
$1.4 million
for the
nine months ended September 30, 2012
, as compared to income tax expense of
$0.7 million
for the
nine months ended September 30, 2011
. Income tax expense consists of provision for income taxes for federal and state income taxes in the U.S. and income taxes in certain foreign tax jurisdictions. Income tax expense related to U.S. and foreign jurisdictions for the
nine months ended September 30, 2012
was $0.8 million and $0.6 million, respectively. Income tax expense related to U.S. and foreign jurisdictions for the
nine months ended September 30, 2011
was $0.3 million and $0.4 million, respectively.
Liquidity and Capital Resources
We had cash, cash equivalents, marketable securities, and restricted cash of
$160.1 million
as of
September 30, 2012
, as compared to
$143.6 million
as of December 31, 2011, an increase of $16.5 million. Of these amounts, $22.7 million and $21.8 million as of
September 30, 2012
and December 31, 2011, respectively, were held by our foreign subsidiaries. If such funds are needed for our U.S. operations, the repatriation of cash balances from our foreign subsidiaries would result in the recognition and payment of U.S. income taxes. We generally invest our cash and cash equivalents in investment grade, highly liquid fixed income securities. Our marketable securities portfolio is denominated in U.S. Dollars and consists of investment grade, highly liquid securities of various holdings including obligations of U.S. government sponsored enterprises, commercial paper, certificates of deposit, corporate and municipal debt. Our primary objective for holding fixed income securities is to achieve an appropriate investment return consistent with preserving principal and managing risk.
The increase in cash, cash equivalents, marketable securities and restricted cash during the
nine
months ended
September 30, 2012
was primarily attributable to cash provided by operations of
$22.8 million
, net proceeds from the sale of real estate of
$6.8 million
and proceeds from the sale of common stock of
$4.2 million
, net of shares tendered for payment of withholding tax, partially offset by
$4.5 million
in cash paid for the acquisition of HEOS, purchases of property and equipment of
$3.3 million
, payment of contingent consideration liabilities related to the Contur acquisition of
$0.3 million
and repurchases of our common stock of
$9.3 million
.
The following table sets forth a summary of our cash flows for the periods indicated (in thousands):
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
2012
|
|
2011
|
|
(Unaudited)
|
Net cash provided by operating activities
|
$
|
22,789
|
|
|
$
|
26,251
|
|
Net cash provided by (used) in investing activities
|
5,211
|
|
|
(47,397
|
)
|
Net cash used in financing activities
|
(5,329
|
)
|
|
(5,845
|
)
|
Net cash
provided by
operating activities was
$22.8 million
for the
nine months ended September 30, 2012
, as compared to
$26.3 million
for the
nine months ended September 30, 2011
. The decrease in cash provided by operating activities during the
nine months ended September 30, 2012
was primarily attributable to changes in working capital, partially offset by a decrease in our net loss for the
nine months ended September 30, 2012
.
Net cash
provided by
investing activities was
$5.2 million
for the
nine months ended September 30, 2012
, as compared to net cash
used in
investing activities of
$47.4 million
for the
nine months ended September 30, 2011
. Significant components of cash flows from investing activities for the
nine months ended September 30, 2012
included
$4.5 million
in cash paid for the acquisition of HEOS, net purchases of property and equipment of
$3.3 million
and purchases of marketable securities of approximately
$51.0 million
, partially offset by proceeds from maturities of marketable securities of approximately
$56.3 million
, net proceeds from the sale of real estate of
$6.8 million
and payments on promissory notes receivable of
$0.6 million
. Significant components of cash flows from investing activities for the nine months ended September 30, 2011 included cash paid for the Contur Acquisition of $9.9 million, funding of acquisition-related restricted cash of $0.5 million and acquisition- related prepaid contingent compensation of $2.0 million, net purchases of property and equipment of $3.0 million and purchases of marketable securities of approximately $94.3 million, partially offset by proceeds from maturities of marketable securities of approximately $61.3 million and a decrease of restricted cash of $0.9 million.
Net cash
used in
financing activities was
$5.3 million
for the
nine months ended September 30, 2012
, as compared to net cash
used in
financing activities of
$5.8 million
for the
nine months ended September 30, 2011
. Significant components of cash
used in
financing activities for the
nine months ended September 30, 2012
included repurchases of our common stock of
$9.3 million
, payment of contingent consideration liabilities related to the Contur acquisition of
$0.3 million
, partially offset by
$4.2 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 nine months ended September 30, 2011 included repurchases of our common stock of $7.0 million, offset by $1.2 million of proceeds from the issuance of our common stock under our employee stock 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.
We anticipate that our capital requirements may increase in future periods as a result of seasonal sales trends, additional product development activities and infrastructure investments. 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 (the “Third Repurchase Plan”). 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 us to commit up to an additional $2.5 million for the repurchase of our 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 a weighted-average cost of
$7.98
per share. During the quarter ended June 30, 2012, we repurchased
427,527
shares of our common stock for approximately
$3.4 million
at a weighted-average cost of
$8.05
per share.
During the quarter ended September 30, 2012, we repurchased
394,925
shares of our common stock for approximately
$3.3 million
at a weighted average cost of
$8.23
per share, pursuant to the Third Repurchase Plan. We have made cumulative repurchases of
2,374,585
shares, at a cost of approximately
$19.3 million
since we began our repurchase program in November 2010.
On October 23, 2012, we acquired Aegis Analytical Corp. (“Aegis”) for total cash consideration of
$30.0 million
. We acquired Aegis as part of our strategy to expand our product portfolio to complement our current software offerings, expand our footprint in downstream operations and reinforce our position as a leader in scientific innovation lifecycle management software. We funded the purchase price with cash on hand.
On October 26, 2012, our board of directors authorized us to commit up to
$15.0 million
for the repurchase of our common stock pursuant to a program to be executed in accordance with a Rule 10b5-1 trading plan during fiscal 2013.
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.