Document/ExhibitDescriptionPagesSize 1: 10-Q Quarterly Report HTML 598K
2: EX-31.1 Certification -- §302 - SOA'02 HTML 26K
3: EX-31.2 Certification -- §302 - SOA'02 HTML 26K
4: EX-32.1 Certification -- §906 - SOA'02 HTML 23K
60: R1 Document And Entity Information HTML 39K
41: R2 Condensed Consolidated Balance Sheets HTML 158K
38: R3 Condensed Consolidated Balance Sheets HTML 47K
(Parenthetical)
13: R4 Condensed Consolidated Statements Of Operations HTML 109K
40: R5 Condensed Consolidated Statements Of Comprehensive HTML 45K
Loss
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53: R7 Basis of Presentation and Significant Accounting HTML 58K
Policies
27: R8 Business Combinations HTML 83K
29: R9 Net Loss Per Share HTML 53K
14: R10 Stockholders' Equity and Share-Based Compensation HTML 143K
Stockholders' Equity and Share-Based Compensation
(Notes)
28: R11 Marketable Securities HTML 102K
52: R12 Long Term Investments and Promissory Notes HTML 38K
Receivable
48: R13 Fair Value HTML 143K
39: R14 Goodwill and Purchased Intangible Assets HTML 84K
57: R15 Guarantees and Committments HTML 32K
51: R16 Restructuring Activities HTML 49K
11: R17 Royalty and Other Income, Net HTML 50K
16: R18 Legal Proceedings HTML 24K
56: R19 Recent Accounting Pronouncements HTML 28K
59: R20 Subsequent events HTML 22K
61: R21 Basis of Presentation and Significant Accounting HTML 97K
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58: R22 Business Combinations Business Combinations HTML 47K
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- Allocation of Stock Compensation Expense
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46: R35 Stockholders' Equity and Share-Based Compensation HTML 39K
Stock Repurchases (Details)
47: R36 Schedule of Changes in Accumulated Other HTML 39K
Comprehensive Income (Details)
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Receivable Long Term Investments and Promissory
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Liabilities Measured on a Recurring Basis
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(Registrant’s telephone number, including area code)
Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,”“accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
o
Accelerated filer
x
Non-accelerated
filer
o
(Do not check if smaller reporting company)
Smaller reporting company
o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
The number of outstanding shares of the registrant’s common stock, par value $0.0001 per share, as of October 25, 2013,
was 55,665,444 net of treasury shares.
Prepaid expenses, deferred tax assets and other current assets
11,621
10,492
Total current assets
139,650
186,408
Marketable
securities, net of current portion
19,027
12,548
Restricted cash, net of current portion
272
273
Property and equipment, net
18,714
10,888
Goodwill
131,091
123,670
Purchased
intangible assets, net
52,585
53,223
Promissory notes receivable, net of current portion
8,017
8,901
Other assets
3,960
9,931
Total
assets
$
373,316
$
405,842
Liabilities and stockholders’ equity
Current liabilities:
Accounts
payable
$
2,833
$
3,279
Accrued liabilities
21,836
19,760
Accrued
compensation and benefits
9,674
14,514
Current portion of accrued restructuring charges
1,163
324
Deferred gain on sale of intellectual property
—
25,895
Current
portion of deferred revenue
72,210
86,340
Total current liabilities
107,716
150,112
Deferred revenue, net of current portion
1,137
2,811
Accrued
income tax
10,493
8,710
Accrued restructuring charges, net of current portion
363
367
Lease-related liabilities, net of current portion
5,418
1,021
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; 55,776 and 55,879 shares issued and outstanding at September 30,
2013 and December 31, 2012, respectively
6
6
Additional paid-in capital
490,179
480,001
Lease
guarantee
(163
)
(210
)
Accumulated deficit
(243,760
)
(238,240
)
Accumulated other comprehensive income
1,927
1,264
Total
stockholders’ equity
248,189
242,821
Total liabilities and stockholders’ equity
$
373,316
$
405,842
See
accompanying notes to these condensed consolidated financial statements.
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, 2013 and for the three and nine months ended September 30, 2013 and 2012 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, 2012, filed with the Securities and Exchange Commission (the “SEC”) on March 6, 2013 (the “Form 10-K”).
We have completed the following acquisitions since 2010:
•
On July 1, 2010, Alto Merger Sub, Inc., our wholly owned subsidiary merged with and into Symyx Technologies, Inc. (“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”). 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 platform from Scynexis, Inc. The operating results of the HEOS platform are included in our consolidated financial statements and results of operations beginning May
17, 2012.
•
On October 23, 2012, we completed the acquisition of Aegis Analytical Corporation (“Aegis”), whereby Aegis became our wholly owned subsidiary (the “Aegis Acquisition”). Aegis' operating results are included in our consolidated financial statements and results of operations beginning October 23, 2012.
•
On January 11, 2013,
we completed the acquisition of all of the outstanding shares of Vialis AG (“Vialis”), a joint stock company organized under the laws of Switzerland (the “Vialis Acquisition”). Vialis' operating results are included in our consolidated financial statements and results of operations beginning January 11, 2013.
•
On September 3, 2013, we completed the acquisition of all of the outstanding shares of ChemSW, Inc. (“ChemSW”) (the “ChemSW Acquisition” and together with the Symyx Merger, the Contur Acquisition, the VelQuest Acquisition, the Aegis Acquisition, the acquisition of the HEOS platform and
the Vialis Acquisition, the “Acquisitions”). ChemSW’s operating results are included in our consolidated financial statements and results of operations beginning September 3, 2013.
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 condensed consolidated financial statements include our accounts and those of our wholly owned subsidiaries. All intercompany balances and transactions have been eliminated
in consolidation.
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, loss contingencies related to legal proceedings 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:
•
software licenses,
•
post-contract customer support and maintenance services on licensed software (collectively referred to as “PCS”),
•
content,
and
•
professional services.
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 service 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 selling price 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 when sold as a multiple element arrangement.
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 and coincides with the term of the PCS and/or licensed software.
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 time and materials service engagements are generally recognized as the services are performed. Revenue from fixed fee service engagements is recognized as the services are performed using the percentage-of-completion 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.
Hosting Services. We are
an application service provider (“ASP”), meaning we provide hosting services that give customers access to software that resides on our servers. The ASP model typically includes an up-front fee and a monthly
commitment from the customer that commences upon completion of the implementation through the remainder of the customer life. The up-front fee is the initial setup fee, or the implementation fee. The monthly commitment includes, but is not limited to, a fixed monthly fee or a transactional fee based on system usage that exceeds monthly minimums. We do not view the signing of the contract
or the provision of initial setup services as discrete earnings events. Revenue is typically deferred until the date the customer commences use of our services, at which point the up-front fees are recognized ratably over the life of the customer arrangement.
Multi-Element Arrangements. For multi-element arrangements that include software licenses, PCS, and non-essential installation and implementation services, 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. We allocate the arrangement fee to the software-related elements and the non-software-related elements based upon the relative standard list price of the products and/or services that comprise each element, which is our best estimate of selling price.
Deferred Costs
Occasionally, we enter into professional service arrangements under which resulting revenue is deferred until certain elements of the arrangements are delivered. As a result, if deemed material, we defer the direct variable expense, not exceeding the revenue deferred, in other current assets on the balance sheet until the period when revenue is recognized. Direct and incremental variable expenses include direct labor costs and direct services contracts
with third parties working on the software service arrangements. As of September 30, 2013 and December 31, 2012, we deferred approximately $1.7 million and $0.8 million, respectively, of direct and incremental variable costs related to software service arrangements where the revenue is deferred until future periods.
Share Based Compensation
We use the Black-Scholes-Merton option-pricing model to estimate the fair value of stock options granted and stock purchases under our 2005 Employee Stock Purchase Plan (the “ESPP”). This model incorporates various assumptions, including expected volatility,
risk-free interest rates, expected dividend yield and expected award life, each discussed below. The fair value of restricted stock units (“RSUs”) granted is based on the market price of our common stock on the date of grant. We recognize the fair value of share-based compensation on a straight-line basis over the requisite service periods of the awards.
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 Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 718, Compensation-Stock Compensation, 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-Merton 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 ongoing basis. In making this assessment, we are required to consider all available
positive and negative evidence to determine whether, based on such evidence, it is more-likely-than-not that all or some portion of our net deferred tax 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 net deferred tax assets that are related to net operating losses that were generated by tax deductions resulting from the exercise of non-qualified stock options will be a direct increase to stockholders’ equity.
We determine whether the benefits of our tax positions are more-likely-than-not to be sustained upon audit based on the technical merits of the tax position. We recognize the impact of an uncertain income tax position
taken on our income tax return at the largest amount that is more-likely-than-not to be sustained upon audit by the relevant taxing authority. An uncertain income tax position is not recognized if it has less than a 50% likelihood of being sustained.
Interest and penalties related to income tax matters are recognized in income tax expense. Interest and penalties incurred during the three and nine months ended September 30, 2013 were not material. During the three and nine months ended September 30, 2012 we incurred interest and penalties of approximately $20,000
and $0.1 million, respectively. Interest and penalties of $0.1 million remained accrued as of September 30, 2013.
2. Business Combinations
ChemSW Acquisition
On September 3, 2013, we completed the acquisition of 100% of the outstanding shares of ChemSW, Inc. ChemSW is an environmental health & safety compliance solutions provider. We acquired ChemSW to further our scientific innovation lifecycle management strategy by providing solutions
for managing and tracking the source, use and disposal of chemicals along the entire lab-to-plant value chain.
We purchased each outstanding share of capital stock of ChemSW for a price per share representing an applicable portion of $15.3 million in cash, subject to working capital and other adjustments for total estimated consideration of $16.0 million. We deposited $2.125 million of the purchase price into an escrow account to support certain indemnification obligations of the ChemSW stockholders and to serve as collateral and partial security against any damages arising from breaches of the representations, warranties and covenants made by ChemSW pursuant to the Securities Purchase Agreement. The escrow fund will be maintained for a period of 18
months following the acquisition date or until such earlier time as the escrow fund is exhausted. We funded the purchase price with cash on hand.
The preliminary determination of fair value is as follows:
(in thousands)
Fair Value of Consideration Transferred
$
15,992
Less:
Recognized amounts of identifiable assets acquired and liabilities assumed:
Cash and cash equivalents
1,076
Accounts receivable
522
Other assets
19
Property, plant and equipment
12
Intangible
assets
10,110
Other current liabilities
(414
)
Deferred revenue
(1,390
)
Goodwill
$
6,057
The
above purchase price determination is considered preliminary and is subject to revision during the measurement period. We are reviewing the preliminary valuation of acquired intangible assets and deferred revenue. We may adjust the fair value assumptions after obtaining more information regarding preliminary determination of assets acquired and liabilities assumed, including deferred tax assets and deferred tax liabilities (due to potential limitations on their use). ChemSW was acquired in a transaction where we and the ChemSW shareholders made a joint election under Section 338(h)(10) of the Internal Revenue Code of 1986, as amended (the “Code”), the effect of which is to treat the transaction as an asset acquisition for tax purposes. Accordingly, goodwill will be deductible over a 15-year period for U.S. income tax purposes.
In addition, certain executives of ChemSW are
entitled to receive additional contingent earn-out consideration of up to$2.0 million based upon the achievement by ChemSW of certain agreed-upon orders-related performance milestones during the first two years following the acquisition date. These payments are subject to forfeiture in equal amounts by each of the executives if such executive’s employment is terminated prior to the second anniversary of the closing of the ChemSW Acquisition. Accordingly, such payments were determined to be compensation for post-acquisition service, the estimated cost of which is being recognized as compensation expense over the two -year retention period based upon the expected achievement of the orders-related milestones. During both the three and nine months ended September 30, 2013, we recognized
$0.1 million of compensation expense related to the earn-out consideration, which is included in the “Business consolidation, restructuring and headquarter-relocation costs” line in our consolidated statement of operations.
We have determined that the ChemSW Acquisition 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 condensed consolidated financial statements include the operating results of ChemSW from the date of acquisition.
Vialis Acquisition
On January 11, 2013, we acquired 100% of the outstanding shares of Vialis. Vialis is a systems integrator
based in Liestal, Switzerland that serves the pharmaceutical, biotechnology, chemicals and agro-science industries. We acquired Vialis as part of our strategy to expand our professional services offerings internationally.
The total consideration for the Vialis Acquisition was $6.5 million, consisting of (i) an upfront payment in an amount equal to five million Swiss francs (or approximately $5.2 million) made on December 31, 2012, prior to the closing date of the acquisition, of which $0.8 million was deposited into an escrow account in the name of the selling shareholders on the acquisition date and will be released 12- months following the
acquisition date if and to the extent that certain breaches of the representations and warranties have not occurred, and (ii) a $1.3 million cash payment, which was paid in connection with the signing and simultaneous closing of the acquisition. We funded the purchase price with cash on hand.
The preliminary determination of fair value is as follows:
Less: Recognized amounts of identifiable assets acquired and liabilities assumed:
Cash and cash equivalents
1,839
Accounts receivable
1,304
Other
assets
365
Property, plant and equipment
63
Intangible assets
4,510
Other current liabilities
(1,399
)
Deferred tax liabilities
(1,132
)
Deferred
revenue
(288
)
Goodwill
$
1,246
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 deferred tax assets and deferred tax liabilities (due to potential limitations on their use). There is no tax deductible goodwill as a result of the Vialis Acquisition.
During
the nine months ended September 30, 2013, we made measurement period adjustments totaling $1.3 million consisting of $0.9 million related to intangible assets, $0.2 million to accounts receivable and other assets and $0.2 million to accrued liabilities.
In addition to the initial purchase price, pursuant to the terms of the purchase agreement, the selling shareholders can earn certain contingent earn-out consideration of up to five million Swiss francs payable during the next three fiscal years, subject to the satisfaction by Vialis of certain orders-related milestones. The contingent earn-out consideration is subject to forfeiture in equal amounts
by each of the selling shareholders if employment is terminated prior to a three-year retention period. Accordingly, the payment was determined to be compensation for post-acquisition service, the estimated cost of which is being recognized as compensation expense over the three-year retention period based upon the expected achievement of the orders-related milestones. During the three and nine months ended September 30, 2013, we recognized $0.6 million and $1.6 million, respectively, of compensation expense related to the earn-out consideration, which is included in the “Business consolidation, restructuring and headquarter-relocation
costs” line in our consolidated statement of operations.
We have determined that the Vialis Acquisition 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 condensed consolidated financial statements include the operating results of Vialis from the date of acquisition.
Aegis Acquisition
On October 23, 2012, 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.
The total consideration for the Aegis Acquisition was $30.7
million, consisting of (i) an initial cash payment of $26.1 million, which was paid in connection with the signing and simultaneous closing of the acquisition, and (ii) additional consideration of $4.6 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 to the selling shareholders on December 27, 2013 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 $30.7 million.
The
preliminary determination of fair value is as follows:
Less:
Recognized amounts of identifiable assets acquired and liabilities assumed:
Accounts receivable
661
Other assets
311
Property, plant and equipment
79
Intangible assets
11,830
Other
current liabilities
(602
)
Deferred revenue
(510
)
Goodwill
$
18,960
The above purchase price determination is considered preliminary and is subject to revision during the measurement period. We are in the process of obtaining support for the net present value of assets and liabilities related
to income taxes which will be completed in the fourth quarter of fiscal 2013. There is no tax deductible goodwill as a result of the Aegis Acquisition.
We have determined that the Aegis Acquisition 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 condensed consolidated financial statements include the operating results of Aegis from the date of acquisition.
Acquisition of the HEOS Platform
On May 17, 2012, we acquired the HEOS software platform 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 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. 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 acquisition of the HEOS platform is
deductible over a 15-year period for U.S. income tax purposes.
We have determined that the acquisition of the HEOS platform 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 condensed consolidated financial statements include the operating results of the HEOS platform 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. 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 VelQuest Acquisition was $35.0 million, consisting of (i) an initial cash payment of $29.8 million, which was paid in connection with the signing and simultaneous closing of the acquisition, and (ii) additional consideration of $5.3 million, which was deposited into an escrow account in the name of the selling shareholders on the acquisition date to cover indemnification claims under the acquisition agreement, if any, for a period of 15 months
following the acquisition date. The remaining escrowed funds will be released to the selling shareholders beyond the initial 15-month period subject to the resolution of claims by certain selling shareholders.
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. In allocating the purchase price based on estimated fair values, we recorded approximately $24.0 million of goodwill and $10.9 million of identifiable intangible assets. There is no tax deductible goodwill as a result of the VelQuest Acquisition.
On May 19, 2011, by and through our subsidiary, Accelrys Software Inc., we entered into a Sale and Purchase Agreement (the “Contur 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 Contur Acquisition was to be up to $11.1
million, consisting of (i) an initial cash payment of $10.6 million, which was paid in connection with the signing and simultaneous closing of the acquisition, and (ii) additional consideration of up to $0.5 million upon the achievement by Contur 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 Contur 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. The first and second year performance milestones were met during the three months ended June 30, 2012 and 2013,
respectively, and accordingly, $0.25 million was released in accordance with the escrow agreement in each of the three months ended June 30, 2012 and 2013.
In allocating the purchase price based on estimated fair values, we recorded approximately $7.5 million of goodwill and $4.4 million of identifiable intangible assets.
In addition to the initial purchase price, we deposited $2.0 million in an escrow account in the name of the six former equity holders of Contur. The escrowed funds were 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. The $2.0 million was also subject to forfeiture in equal amounts by each of the former equity holders if employment was terminated prior to a two-year retention period. Accordingly, the payment was determined to be compensation for post-acquisition service, the cost of which was recognized as compensation expense over the two-year retention period. During the three months ended June 30, 2012, $1.0 million of the escrowed funds were released in accordance with the escrow agreement, and the remaining $1.0 million
were released during the three months ended June 30, 2013.
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 is 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 (loss) per share is computed by dividing the net income (loss) 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 RSUs.
Denominator
for basic and diluted net income (loss) per share:
Weighted average common shares outstanding for basic
55,660
55,690
55,683
55,767
Dilutive
potential common stock outstanding:
Stock options and restricted stock units
—
706
1,267
—
Weighted
average common shares outstanding for diluted
55,660
56,396
56,950
55,767
Basic net income (loss) per share
$
(0.15
)
$
0.01
$
0.10
$
(0.04
)
Diluted
net income (loss) per share
$
(0.15
)
$
0.01
$
0.10
$
(0.04
)
As
we reported a net loss for each of the three months ended September 30, 2013 and the nine months ended September 30, 2012, basic and diluted net loss per share were the same. Potentially dilutive common stock equivalents that were excluded from the diluted net income (loss) per share calculation since their effect would be anti-dilutive totaled approximately 7.9 million and 3.0 million shares for the three and nine months ended September 30, 2013, respectively, and 3.1 million and 7.4
million shares for the three and nine months ended September 30, 2012, respectively.
4. Stockholders' Equity and Share-Based Compensation
2011 Stock Incentive Plan
On August 3, 2011, our stockholders approved the adoption of our 2011 Stock Incentive Plan (the “2011 Plan”). The total number of shares
of our common stock that are reserved for issuance under the 2011 Plan is 17.75 million shares. The 2011 Plan also provides that the following shares of our common stock will not be returned to the 2011 Plan or otherwise become available for issuance under the 2011 Plan: (i) shares of common stock tendered by participants as full or partial payment to the Company upon exercise of options granted under the 2011 Plan; (ii) shares of common stock withheld by, or otherwise remitted to, the Company to satisfy a 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, 2013, there are approximately 10,371,434 shares of our common stock available for issuance under the 2011 Plan.
On August 3, 2011, our stockholders also approved an amendment to the ESPP, to increase the number of shares available for future grant under the ESPP to 2,500,000. Under the ESPP, employees may defer up to 10% of their base salary to purchase shares of our common stock, up to
a maximum of 1,000 shares per offering period. The purchase price of the common stock is equal to 85% of the lower of the fair market value per share of our common stock on the commencement date of the applicable offering period or the applicable purchase date. To date, we have issued 1,170,840 shares under the ESPP and 1,329,160 shares remain available for future issuance under the ESPP as of September 30, 2013.
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:
The aggregate intrinsic value
of stock options outstanding and exercisable at September 30, 2013 was based on the closing price of our common stock on September 30, 2013 of $9.84 per share.
RSUs granted under our Amended and Restated 2004 Stock Incentive Plan, as amended, the Symyx 2007 Stock Incentive 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:
Included in the vested shares for the period are approximately 169,123 shares tendered to us by employees for payment of minimum income tax obligations upon vesting of RSUs.
The following table summarizes additional information pertaining to our stock-based compensation:
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, 2013 and 2012 was as follows:
Business consolidation, restructuring and headquarter-relocation costs
20
(52
)
30
(47
)
Total
stock-based compensation expense
$
2,282
$
1,971
$
6,821
$
5,610
No
share-based compensation expense was capitalized in the periods presented. At September 30, 2013, the gross amount of unrecognized share-based compensation expense relating to unvested stock options, RSUs and ESPP shares was approximately $21.9 million, which we anticipate recognizing as a charge against operations over a weighted average period of 2.5 years.
Stock Repurchases
Our Board of Directors from time to time approves common stock repurchase programs authorizing management to repurchase shares of our common stock in open market transactions in accordance with Rule 10b-18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). We repurchase shares primarily to
offset dilution caused by ongoing stock issuances from existing equity compensation plans and to improve stockholders’ returns. Repurchased shares are recorded as treasury stock upon repurchase and are subsequently retired.
On December 13, 2012, we entered into a stock repurchase plan (the “Repurchase Plan”) in accordance with Rule 10b5-1 of 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 our broker to purchase for our account up to $15.0
million worth of our common stock by December 31, 2013.
We have made cumulative repurchases of 3,852,432 shares, at a cost of approximately $32.6 million (including commissions), since we began our stock repurchase program in November 2010. All repurchased shares of common stock have been retired.
The following table provides a summary of the repurchase activity for the periods indicated under our stock repurchase program:
During the nine months ended September 30, 2013, we retired 1,247,804 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 $11.3 million. There was no effect on the total stockholders' equity position as a result of the retirement.
Accumulated Other Comprehensive Income
The
changes in accumulated other comprehensive income for the nine months ended September 30, 2013 consisted of the following:
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, and 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.
As of September 30, 2013 and December 31, 2012, we did not have any investments in marketable securities with a 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, 2013 and December 31, 2012 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, 2013.
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 a non-controlling minority equity interest of approximately 19.5% in Freeslate Inc. (“Freeslate”), a privately held company headquartered in Sunnyvale, California that designs, develops and deploys integrated workflows for research and development labs. We have determined that Freeslate 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, 2013 and December 31, 2012 and is included in the “Other assets” line in the 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, 2013, 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 on July 1, 2010, 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 $9.0 million and $8.9 million as of September 30, 2013 and December 31, 2012, respectively.
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 the promissory note receivable. There were no future funding commitments as of September 30, 2013 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 commissions 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 (the “IM Note”), 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 IM Note had a term of 24 months
and an interest rate equal to 4% and was 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 was pre-payable by IM at any time without penalty or premium and was secured by a proportionate amount of IM’s tangible fixed assets, excluding intellectual property.
The IM Note 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 IM Note of $26.0 million. The fair value of the IM Note was based on a market interest rate of 6.89% for comparable instruments. Historically, we recognized a gain when the payments became due on the IM Note to the extent they exceeded interest due and the amortization of the discount on the IM Note. Based on our evaluation of the contractual terms of the IM Note and its collectability, we believe the IM Note met the definition of a financial asset; therefore, we recorded the IM Note at expected net realizable value on our consolidated balance
sheet. On May 31, 2013, IM paid off the IM Note in full pursuant to the penalty-free pre-payment option. Accordingly, we recognized a $25.9 million gain on sale of intellectual property in the three months ended June 30, 2013.
7. Fair Value
Financial Assets and Liabilities
We carry our cash equivalents, 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 Contur Purchase Agreement, upon the achievement by Contur 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 were recorded in the statement of operations through final payment in the second quarter of 2013 and resulted from updates to assumed probability of achievement of milestones and adjustments to the discount periods and rates.
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:
Foreign
currency forward contracts not designated as hedges
99
—
99
—
Total
liabilities at fair value
$
340
$
—
$
99
$
241
(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, 2013 (in thousands):
Additional Disclosures Regarding Fair Value Measurements
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 cost-method 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
Our non-financial assets and liabilities (e.g., goodwill, intangible assets, property and equipment and nonfinancial assets and liabilities initially measured at fair value in a business combination) are re-measured at fair value subsequent to initial recognition
only 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.
As
discussed in Note 2, intangible assets related to the ChemSW Acquisition are included in our preliminary purchase price allocation and are subject to change during the measurement period. Intangible assets are amortized over their estimated useful lives either on a straight-line or accelerated basis that reflects the pattern in which the economic benefits of the intangible assets are expected to be realized, which range from one to fifteen years, with no residual value.
Intangible asset amortization expense was $5.0 million and $15.3 million for the three and nine months ended September 30,
2013, respectively. Intangible asset amortization expense was $4.7 million and $14.2 million for the three and nine months ended September 30, 2012, respectively.
Future estimated amortization expense for intangible assets as of September 30, 2013 is as follows and is subject to change as a result of measurement period adjustments (in thousands):
2013
(remaining three months)
$
5,456
2014
15,754
2015
10,115
2016
6,486
2017
4,616
Thereafter
7,658
Total
$
50,085
Goodwill
represents the excess of cost over fair value of net assets acquired. The change in the carrying value of goodwill during the nine months ended September 30, 2013 was due to goodwill recorded in connection with the ChemSW Acquisition and the Vialis Acquisition. We believe the factors that contributed to goodwill include expected synergies of the combined operations of the newly acquired entities as well as intangibles that do not qualify for separate recognition such as the acquired workforce. The changes to the carrying amount of goodwill for the nine months ended September 30, 2013 are as follows (in thousands):
On April 30, 2004, we spun-off our drug discovery subsidiary,
Pharmacopeia Drug Discovery, Inc. (“PDD”), into an independent, separately traded, and 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 are used by our PDD operations, consented to the assignment of the leases to PDD. Despite the assignment, the landlords have required us to guarantee the remaining lease obligations, which totaled approximately $6.7 million as of September 30, 2013. 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 $0.1 million and $0.2 million at September 30, 2013 and December 31, 2012, 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, 2013.
Operating Leases
We lease office space in several facilities under operating leases that expire
through 2023. Certain of our lease agreements contain renewal options, rent holidays or rent escalation clauses. In accordance with FASB ASC Topic 840, Leases, we recognize rent expense on a straight-line basis over the term of the related operating leases, accounting for scheduled rent escalation clauses during the lease terms or for rental payments commencing at a date other than the date of initial occupancy and including any cancelable option periods where failure to exercise such options would result in economic penalty.
In December 2012, we entered into a lease agreement for a facility with 61,460 square feet of office space, which will serve as our new corporate headquarters in San Diego, California. The lease commenced on July 1, 2013 and has a 10-year
term (with an option to terminate after five years, as discussed below). The annual base rent for the first year of the lease is $1.6 million and is subject to annual increases of approximately three to four percent per year, with the rent in the first and sixth years subject to partial abatement. Pursuant to the terms of the lease, we will have: (i) two five-year options to renew the lease (with the base rent subject to adjustment based on certain comparable metrics set forth in the lease); and (ii) a one-time right to terminate the lease effective as of June 30, 2018 upon written notice to the
landlord on or before January 1, 2018. In the event that we exercise our right to terminate the lease in accordance with the foregoing, we will be obligated to pay to the landlord a termination fee of $2.3 million.
In addition, the lease provides that if our cash on hand, earnings before interest, taxes, depreciation and amortization, or market capitalization fall below certain thresholds, we will be required to deposit with the landlord a letter of credit equal to 12 times the then-current monthly installment of base rent, subject to certain adjustments and exceptions. The landlord will have the right to draw down on the letter of credit upon the occurrence of certain events, including, among other things, in connection with: (i) the bankruptcy of Accelrys (whether voluntary or involuntary);
(ii) the landlord's receipt of notice that the bank extending the letter of credit will not renew or extend such letter of credit as provided for under the lease; or (iii) a material adverse change in the financial condition of the bank extending the letter of credit.
Additionally, under the terms of the lease for our former San Diego, California corporate office, we were required to obtain an irrevocable letter of credit for $6.6 million to ensure our performance under the lease agreement. The letter of credit requirement decreased to $3.5 million
on September 1, 2011 and expired upon termination of the lease on September 1, 2013. The letter of credit was fully secured by cash and cash equivalents, which are included in restricted cash in the accompanying condensed consolidated balance sheets. We expect the cash and cash equivalents used to secure the letter of credit to be released in the fourth quarter of fiscal 2013.
10. Restructuring Activities
Historically, restructuring charges have included costs associated with reductions in workforce and exits of idle facilities.
The following summarizes the changes in our accrued restructuring charges liability:
On July 26, 2013, we committed to a plan (the "July
2013 Restructuring Plan") for the restructuring of approximately 80 employees primarily in the U.S., or about 12% of our total workforce. Approximately 40 positions are expected to be filled in the future in different capacities or locations to rebalance the skillset of our employee base as part of this realignment. In connection with this plan, we expect to incur total charges of approximately $2.7 million through the first quarter of fiscal 2014 consisting of severance, retention and relocation costs, with approximately $2.0 incurred during the quarter ended September 30, 2013 and approximately $0.5 million
and $0.2 million expected to be incurred during the quarters ended December 31, 2013 and March 31, 2014, respectively. As of September 30, 2013, approximately $1.1 in cash payments had been made with the remaining balance of 1.6 million expected to be paid during the fourth quarter of fiscal 2013 and the first quarter of fiscal 2014.
In addition, on July 26, 2013, we committed to a plan to exit a portion of our facility in San Ramon, California by April 1, 2014. We are contractually obligated
under this operating lease through 2015. In connection with the exit of the facility, we anticipate incurring facility closure costs between $1.2 million and $1.5 million through April 1, 2014. As of September 30, 2013 we have not reached a cease-use date and accordingly have not incurred any facility closure liabilities related to this facility.
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 fiscal 2011 and $4.5 million incurred during fiscal 2010. As of September 30, 2013, approximately $5.2 million in cash payments had been made, with the remaining balance of $35,000 expected to be paid during the fourth quarter of fiscal 2013.
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, 2013. These obligations terminate in
2016. Additionally, prior to 2007, we had implemented a restructuring plan under which we have remaining lease obligations of approximately $0.5 million as of September 30, 2013. These lease obligations terminate in 2022.
All amounts incurred in connection with the above activities are recorded in the “Business consolidation, restructuring and headquarter-relocation 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 associated with products that are not part of our 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:
Amortization of discount on promissory notes receivable
39
274
724
701
Foreign
currency transaction (gain) loss
(38
)
157
(371
)
(449
)
Purchased intangible assets amortization
(405
)
(424
)
(1,215
)
(1,272
)
Net
gain on sale of real estate
—
—
—
2,744
Net income from rental activities
—
—
—
(338
)
Other
2
56
(19
)
(8
)
Total
royalty and other income, net
$
1,456
$
1,863
$
4,852
$
7,107
12.
Legal Proceedings
In July 2012, a customer of a subsidiary company we acquired in 2010 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 by the acquired subsidiary during periods prior to our acquisition of such company. Our subsidiary intends to vigorously defend against such claims and has asserted counterclaims for payments owed to it. Because of the uncertainties related to this arbitration, we are currently unable to predict the ultimate 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. As of September 30, 2013 we have accrued a provision for losses from legal matters of approximately
$10 million in the aggregate. As no amount within our range of estimable losses is a better estimate than any other amount, the amount accrued represents the low end of the range of possible losses related to these matters. This amount is included in the "Accrued Liabilities" line in the accompanying condensed consolidated balance sheet. Some of the loss is expected to be covered, in part by insurance. All amounts incurred in connection with these matters have been recorded in the “Business consolidation, restructuring and headquarter-relocation costs” line in the accompanying condensed consolidated statements of operations. Management believes that the disposition of other claims and legal proceedings arising in the ordinary course of our business, in the aggregate, will not have a material adverse effect on our results
of operations, liquidity or financial position.
13. Recent Accounting Pronouncements
On March 4, 2013, the FASB issued ASU 2013-05, Foreign Currency Matters (Topic 830) Parent's Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity (“ASU 2013-05”). ASU 2013-05 updates accounting guidance related to the application of consolidation guidance and foreign currency matters. This guidance resolves the diversity in practice about what guidance applies to the
release of the cumulative translation adjustment into net income. This guidance is effective for interim and annual periods beginning after December 15, 2013. We do not anticipate that these changes will have a material impact on our consolidated financial statements or disclosures.
In July 2013, the FASB issued ASU 2013-11, Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists (“ASU 2013-11”). ASU 2013-11 provides guidance on the financial statement presentation
of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. The intent is to better reflect the manner in which an entity would settle at the reporting date any additional income taxes that would result from the disallowance of a tax position when net operating loss carryforwards, similar tax losses, or tax credit carryforwards exist. This pronouncement is effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. We are evaluating the impact that the adoption of this standard may have on our consolidated financial statements.
14. Subsequent Events
Between October
1, 2013 and October 28, 2013, we have repurchased 125,421 shares of our common stock for approximately $1.2 million, at a weighted average cost of $9.53 per share, pursuant to the Repurchase Plan.
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 the sections entitled “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 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, 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”). 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 platform from Scynexis, Inc. The operating results of the HEOS platform are included in our consolidated financial statements and results of operations beginning May 17, 2012.
On October 23, 2012, we completed the acquisition of Aegis Analytical Corporation (“Aegis”), whereby Aegis became our wholly owned subsidiary (the “Aegis Acquisition”). Aegis' operating results are included in our consolidated financial statements and results of operations beginning October 23, 2012.
On January 11, 2013, we completed the acquisition of all of the outstanding shares of Vialis AG (“Vialis”), a joint stock company organized under the laws of Switzerland (the “Vialis Acquisition”). Vialis’ operating results are included in our consolidated financial statements and results of operations beginning January 11, 2013.
On
September 3, 2013, we completed the acquisition of all of the outstanding shares of ChemSW, Inc. (“ChemSW”) (the “ChemSW Acquisition” and together with the Symyx Merger, the Contur Acquisition, the VelQuest Acquisition, the acquisition of the HEOS platform, the Aegis Acquisition and the Vialis Acquisition, the “Acquisitions”). ChemSW’s operating results are included in our consolidated financial statements and results of operations beginning September 3, 2013.
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 extending our offerings beyond research and into development and manufacturing. 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. The Aegis Acquisition further expands our portfolio into downstream operations with new solutions for enterprise manufacturing process intelligence. In addition, we added systems integration capabilities with the Vialis Acquisition, which strengthened our position in the laboratory informatics software market and added capabilities in the downstream analytical development, quality control, and quality assurance and manufacturing areas. The ChemSW Acquisition enables us to provide solutions for managing and tracking the source, use and disposal of chemicals along the entire
lab-to-plant value chain.
The acquisition of the HEOS platform brought a cloud-based offering that enables more efficient and streamlined drug delivery collaborations, particularly with organizations leveraging contract research organizations and other groups for externalized R&D projects.
Collectively, our products and services are intended to optimize our customers' lab-to-commercialization value chains, from early research through development into manufacturing. Our software is used by our customers' scientists, biologists, chemists, engineers 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 manufacturing, manage quality control and quality assurance operations, and monitor process and product quality, thereby reducing compliance risk. The ability to integrate and access data from diverse data sources and to make that information accessible throughout the scientific innovation value chain enables our customers to reduce costs, enhance productivity and more efficiently provide effective products to their customers that meet quality and compliance standards.
Today, we are the leading provider of scientific innovation lifecycle management software. We support industries and organizations that rely on scientific innovation to differentiate themselves. The industry-leading Accelrys Enterprise Platform provides a broad, flexible scientific solution optimized to integrate the diversity of
science, experimental processes and information requirements across the research, development, process scale-up and early manufacturing phases of product development. By incorporating capabilities in applications for modeling and simulation, enterprise lab management, workflow and automation, and data management and informatics, Accelrys enables scientific innovators to access, organize, analyze and share data in unprecedented ways, ultimately enhancing innovation, improving productivity and compliance, reducing costs and improving the time from lab to market.
Our customers include leaders from a variety of industries, including the pharmaceutical, biotechnology, energy, chemicals, aerospace, consumer packaged goods and industrial products industries, 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.
Our customers differentiate themselves through scientific innovation. As a result, innovation in the discovery, development and manufacturing 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, development and manufacturing 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; improve product and process understanding throughout development lifecycles; 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, quality assurance/quality control (“QA/QC”) and manufacturing 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, chemicals, 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. Scientific data is often found in disparate databases and research, development and manufacturing processes are disconnected, manually intensive, inefficient and repetitive. These challenges have made it incredibly difficult for organizations to manage their scientific innovation lifecycles in order to bring novel products to market faster, more efficiently and with lower compliance risk.
Our overall strategy is to deliver solutions that help organizations manage and optimize their scientific innovation lifecycles. Consequently, we are extending beyond our historically strong presence in research downstream into development and manufacturing, covering the entire lab-to-commercialization value chain; moving into new scientific
domains, including biology; and expanding our presence outside of the pharmaceutical and biotech industries into other key industries such as food and beverage, fine and specialty chemicals, oil and gas and aerospace. We do this by addressing the core challenges faced by research and development and quality 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 platform and associated set of applications and services, such as electronic lab notebooks, the laboratory execution system (“LES”), process management informatics software, design modeling and simulation software, data management and informatics software, content and professional services, help optimize our customers' scientific innovation lifecycle.
We
believe that the combination of our products with the products and domain expertise we gained as a result of the Acquisitions (most significantly the VelQuest product suite, and the Aegis process management informatics software) enables us to provide greater value to the development, QA/QC and 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, development, quality control and quality assurance organizations of our existing customers. The VelQuest Acquisition extended our software portfolio into pharmaceutical development, QA/QC, and manufacturing, offering significant productivity improvements, faster cycle times, lower operational costs and reduced compliance risks for regulated life sciences organizations.
The Aegis Acquisition brought products that complement the Velquest product line by expanding our footprint in downstream operations with solutions for process intelligence. 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 platform to our customers' individual business needs, thereby increasing its utility and value. Because our enterprise 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 acquisition of Vialis, a leading
systems integrator based in Liestal,
Switzerland, added new services capabilities to our portfolio and further strengthened our position in the laboratory informatics software market
Our enterprise platform is an open, scientifically aware 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 ongoing 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 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, 2012, filed with the SEC on March 6, 2013 (the “Form 10-K”). We believe that there were no significant changes in our critical accounting policies and estimates since December 31, 2012.
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.
Total
revenue for the quarter ended September 30, 2013 increased to $40.9 million, or 1%, compared to the same period last year. Total revenue for the nine months ended September 30, 2013 increased to $122.1 million, or 3% , compared to the same period last year. The increase in total revenue during both periods was attributable to incremental revenue from the Aegis Acquisition, the Vialis Acquisition and the ChemSW Acquisition, an increase in professional services revenue attributable to growth in services
engagement orders, offset by the impact of a decrease in orders in the first quarter of fiscal 2013. Foreign currency also unfavorably impacted total revenue by $1.9 million and $5.1 million for the quarter ended September 30, 2013 and the nine months ended September 30, 2013, respectively, primarily from the Japanese Yen.
Total revenue generated in the U.S. accounted for $19.6 million, or 48%
of revenue, for the quarter ended September 30, 2013, as compared to $19.8 million, or 49% of revenue for the same period last year. International revenue accounted for $21.3 million, or 52% of revenue for the quarter ended September 30, 2013, as compared to $20.7 million, or 51% of revenue for the same period last year.
Total revenue generated in the U.S. accounted for $60.4 million, or 49%
of revenue for the nine months ended September 30, 2013, as compared to $57.9 million, or 49% of revenue, for the same period last year. International revenue accounted for $61.7 million, or 51% of revenue, for the nine months ended September 30, 2013, as compared to $60.5 million, or 51% of revenue, for the same period last year.
License and Subscription Revenue. License and subscription revenue for the quarter
ended September 30, 2013 decreased to $20.7 million, or 11%, compared to the same period last year. License and subscription revenue for the nine months ended September 30, 2013 decreased to $63.5 million, or 4%, compared to the same period last year. The decrease in license and subscription revenue during both periods was primarily attributable to a decrease in orders in the first quarter of fiscal 2013 combined with unfavorable foreign currency impact primarily in Japan.
Maintenance
on Perpetual Licenses. Maintenance on perpetual licenses for the quarter ended September 30, 2013 increased to $9.9 million, or 3%, compared to the same period last year. Maintenance on perpetual licenses for the nine months ended September 30, 2013 increased to $29.5 million, or 4%, compared to the same period last year. The increase in revenue from maintenance on perpetual licenses during both periods was primarily related to incremental revenue from the Aegis Acquisition and
the Contur Acquisition, offset by the impact of a decrease in orders in the first quarter of fiscal 2013 and unfavorable foreign currency impact primarily in Japan.
Content. Content revenue for the quarter ended September 30, 2013 decreased to $2.4 million, or 19% , compared to the same period last year. Content revenue for the nine months ended September 30, 2013 decreased to $7.4 million, or 22%, compared to the same period last
year. The decrease in content revenue during both periods was attributable to the previously announced phase-out of certain content product lines.
Professional Services and Other. Professional services and other revenue for the quarter ended September 30, 2013 increased to $7.9 million, or 64% , compared to the same period last year. Professional services and other revenue for the nine months ended September 30, 2013 increased to $21.7 million, or 52%
, compared to the same period last year. The increase in revenue from professional services and other during both periods was primarily attributable to an increase in revenue from services engagement orders.
Cost
of Revenue. Cost of revenue for the quarter ended September 30, 2013 decreased to $9.7 million, or 2%, compared to the same period last year. The decrease in cost of revenue during the quarter ended September 30, 2013 and was primarily attributable to a decrease in software and content royalties of approximately $0.3 million resulting from a decrease in orders with royalty bearing products, an increase in capitalized labor costs of $0.5 million associated with professional services
engagements, partially offset by an increase in personnel and related expenses in our services department of approximately $0.1 million from higher headcount associated with the Aegis Acquisition and the Vialis Acquisition, and an increase in consulting and professional fees of approximately $0.2 million and distributor commissions of approximately $0.2 million.
Cost of revenue for the nine months ended September 30, 2013 increased to $32.1 million, or 8% , compared to the same period last year. The increase in cost of revenue during the nine
months ended September 30, 2013 was primarily attributable to an increase in personnel and related expenses in our services department of approximately $1.8 million from higher headcount associated with the Aegis Acquisition and the Vialis Acquisition, consulting and professional fees of approximately $0.8 million, overhead expense of approximately $0.4 million and distributor commissions of approximately $0.5 million, partially offset by a an increase in capitalized labor costs of $1.1 million associated with professional services engagements.
Amortization of Completed Technology. Amortization of completed
technology for the quarter ended September 30, 2013 increased to $2.3 million, or 9%, compared to $2.1 million for the same period last year. Amortization of completed technology for the nine months ended September 30, 2013 increased to $6.7 million, or 7% , as compared to the same period last year. The
increase in amortization of completed technology during both periods was attributable to an increase in intangible assets acquired in the Acquisitions.
Business
consolidation, restructuring and headquarter-relocation costs
9,776
606
*%
13,998
1,215
*%
Purchased
intangible asset amortization
2,415
2,107
15
%
7,259
6,320
15
%
*
Percentage change has been excluded as it is not meaningful for comparison purposes.
Product Development Expenses. Product development expenses for the quarter ended September 30, 2013 decreased to $8.6 million, or by11%, as compared to the same period last year. The decrease in product development expenses during the quarter ended September 30, 2013 was primarily attributable to a decrease in personnel and related expenses of approximately $0.9 million
as a result of the July 2013 Restructuring Plan, partially offset by the impact of higher headcount resulting primarily from the Aegis Acquisition and the Vialis Acquisition, a decrease in overhead expense of approximately 0.2 million, partially offset by an increase in professional fees of approximately $0.1 million.
Product development expenses for the nine months ended September 30, 2013 decreased to $28.7 million, or by 1%, as compared to the same period last year. The decrease
in product development expenses during the nine months ended September 30, 2013 was primarily attributable to a decrease in personnel and related expenses of approximately $0.3 million as a result of the July 2013 Restructuring Plan, partially offset by the impact of higher headcount resulting primarily from the Aegis Acquisition and the Vialis Acquisition, a decrease in overhead expense of approximately $0.1 million, partially offset by an increase in professional fees of approximately $0.2 million.
Sales and Marketing Expenses.
Sales and marketing expenses for the quarter ended September 30, 2013 increased to $13.4 million, or by 5% , as compared to the same period last year. The increase in sales and marketing expenses during the quarter ended September 30, 2013 was primarily attributable to an an increase in personnel and related expenses of approximately $0.3 million and an increase in overhead expense of approximately $0.3 million
as a result of higher headcount resulting primarily from the Aegis Acquisition and the Vialis Acquisition.
Sales and marketing expenses for the nine months ended September 30, 2013 increased to $43.9 million , or by 8%, as compared to the same period last year. The increase in sales and marketing expenses during the nine months ended September 30, 2013 was primarily attributable to an increase in personnel and related expenses of approximately $2.4 million as a result of higher headcount resulting primarily
from the Aegis Acquisition and the Vialis Acquisition, an increase in professional fees of $0.7 million and an increase in overhead expense of approximately $0.4 million.
General and Administrative Expenses. General and administrative expenses for the quarter ended September 30, 2013 decreased to $3.7 million, or by 16%, as compared to the same period last year. General and administrative expenses for the nine months ended September 30, 2013 decreased
to $12.1 million, or by 8%, as compared to the same period last year. The decrease in general and administrative expenses during both periods was primarily attributable to a decrease in personnel and related expenses as a result of the July 2013 Restructuring Plan and a decrease in incentive compensation.
Business Consolidation, Restructuring and Headquarter-Relocation Costs. Business consolidation, restructuring and headquarter-relocation costs for the three and nine months ended September 30, 2013 increased to $9.8 million and $14.0
million, respectively. The increase in business consolidation, restructuring and headquarter-relocation costs for both periods was primarily attributable to an increase in personnel and overhead related costs of $3.7 million and $4.1 million for the three and nine months ended September 30, 2013, respectively, related to employees who were notified that their employment with us was being terminated as a result of our restructuring activities including severance and normal compensation costs during transition periods from notification to termination, an increase in acquisition-related contingent compensation primarily due to the Vialis Acquisition and the ChemSW Acquisition of $0.4 million and $1.2
million for the three and nine months ended September 30, 2013, respectively, an increase in legal, estimated litigation and other professional costs attributable to the Acquisitions of $4.7 million and $5.7 million for the three and nine months ended September 30, 2013, respectively, and an increase in costs associated with our headquarter relocation in July 2013 of $0.4 million and $1.8 million for the three and nine
months ended September 30, 2012, respectively. Our headquarter relocation costs include additional rent expense during the transition to the new facility of $0.2 million and $0.8 million for the three and nine months ended September 30, 2013, respectively.
Purchased Intangible Asset Amortization. Purchased intangible asset amortization for the quarter ended September 30, 2013 increased to $2.4 million, or 15%, as compared to the same
period last year. Purchased intangible asset amortization for the nine months ended September 30, 2013 increased to $7.3 million, or 15% , as compared to the same period last year. The increase in purchased intangible asset amortization during both periods was attributable to an increase in intangible assets acquired in the Acquisitions and relates to the amortization of backlog, customer relationship and trademark intangible assets acquired in the Acquisitions.
Royalty
and other income, net for the quarter ended September 30, 2013 decreased to $1.5 million, or 22%, as compared to the same period last year. Significant components of royalty and other income, net for the quarter ended September 30, 2013 included net royalty income of $1.6 million and interest income of $0.3 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, 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.
Royalty and other income, net for the nine months ended September 30, 2013 decreased to $4.9 million, or 32%, as compared to the same period last year. Significant components of royalty and other income, net for the nine months ended September 30, 2013 included net royalty income of $4.4
million, interest income of $1.3 million, amortization of the discount on promissory notes receivable of $0.7 million, partially offset by foreign currency exchange loss of $0.4 million and amortization of purchased intangible assets of $1.2 million. 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. These items were 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.
Gain on Sale of Intellectual Property
Pursuant to the terms of the agreement between Symyx and Intermolecular, Inc. (“IM”), dated July 28, 2011 (the “IM Agreement”), we sold to IM certain patents relating to Symyx's legacy high-throughput research business in consideration for a secured promissory note receivable in a principal amount equal to $27.3 million due in November 2013 (the “IM Note”). 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 recognition of the portion of the net gain equal to the fair value of the IM Note of $26.0 million. On May 31, 2013, IM paid off the IM Note in full pursuant the penalty-free pre-payment option. As a result, we recognized a $25.9 million gain on sale of intellectual property in the second quarter of fiscal 2013.
Income
tax expense consists of provision for income taxes for federal and state income taxes in the U.S. and in certain foreign tax jurisdictions. Income tax expense for the quarter ended September 30, 2013 increased to $0.8 million, or 158%, as compared to the same period last year. Income tax expense for the nine months ended September 30, 2013 increased to $2.2 million, or 53%, as compared to the same period last year. The increase during the nine month period was primarily attributable to the receipt of cash and consequently, recognition of an installment sale relating to the IM Note in 2013. The
increase during the quarter was primarily due to a return to provision benefit recognized in 2012, and the change in earnings mix around the world.
Liquidity and Capital Resources
We had cash, cash equivalents, marketable securities, and restricted cash of $125.7 million as of September 30, 2013, as compared to $115.6 million as of December 31,
2012, an increase of $10.1 million. Of these amounts, $13.9 million and $16.1 million as of September 30, 2013 and December 31, 2012, 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 could 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, and 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, 2013 was primarily attributable to cash from operations of $18.1 million, proceeds from the IM Note of $26.5 million, net cash acquired from the Vialis Acquisition of $0.5 million
and proceeds from the sale of common stock of $3.4 million, net of shares tendered for payment of withholding tax, partially offset by net cash paid in the ChemSW Acquisition of $14.9 million, purchases of property and equipment of $10.8 million, repurchases of our common stock of $11.3 million and $1.1 million of unfavorable effect of changes in exchange rates on cash and cash equivalents primarily in Japan.
The following table sets forth a summary of our cash flows for the periods indicated (in thousands):
Net
cash provided by (used) in investing activities
(4,493
)
5,211
Net cash used in financing activities
(8,179
)
(5,329
)
Net cash provided
by operating activities was $18.9 million for the nine months ended September 30, 2013, as compared to $22.8 million for the nine months ended September 30, 2012. Cash provided by operating activities for the nine months ended September 30, 2013 was primarily attributable to net income of $5.8 million, net cash inflow from changes in operating assets and liabilities of $10.9 million and non-cash charges of $28.1 million. These
items were offset by the $25.9 million of gain on sale of intellectual property resulting from the collection of the IM note in May 2013, the proceeds of which are included in cash provided by investing activities discussed below. Cash provided by operating activities for the nine months ended September 30, 2012 was primarily attributable to net cash inflow from changes in operating assets and liabilities of $4.2 million and non-cash charges of $20.8 million, offset by net loss of $2.2 million. The non-cash charges in both periods were primarily related to depreciation, amortization, stock-based compensation, contingent compensation expense, amortization of net premium on marketable securities
and discount on promissory notes receivable, deferred taxes and other non-cash adjustments.
Net cash used in investing activities was $4.5 million for the nine months ended September 30, 2013, as compared to net cash provided by investing activities of $5.2 million for the nine months ended September 30, 2012. Significant components of cash flows from investing activities for the nine months ended September 30, 2013 included proceeds from the IM Note of $26.5
million, proceeds from maturities of marketable securities of approximately $26.4 million and $0.5 million in net cash acquired in the Vialis Acquisition, partially offset by net cash paid in the ChemSW Acquisition of $14.9 million, purchases of marketable securities of approximately $32.4 million and net purchases of property and equipment of $10.8 million. 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.
Net cash used in financing activities was $8.2 million for the nine months ended September 30, 2013, as compared to $5.3 million for the nine months ended September
30, 2012. Significant components of cash used in financing activities for the nine months ended September 30, 2013 included repurchases of our common stock of $11.3 million and payment of contingent consideration liabilities related to the Contur Acquisition of $0.25 million, partially offset by $3.4 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 used in financing activities for the nine months ended September 30, 2012 included repurchases of our common stock of $9.3 million and payment of contingent consideration liabilities related to the Contur Acquisition of $0.25 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 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.
We anticipate that our existing capital resources will be adequate to fund our operations for at least the next twelve months. However, there can be no assurance that changes will not occur that would consume our available capital resources before that time.
Our capital requirements depend on numerous factors, including our ability to continue to generate software sales, the purchase of additional capital equipment and acquisitions of other businesses or technologies. There can be no assurance that additional funding, if necessary, will be available to us on favorable terms, if at all. Our forecast for the period of time through which our financial resources will be adequate to support our operations is forward-looking information, and actual results could vary.
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
The
information called for by this item is provided in Item 7A, “Quantitative and Qualitative Disclosures About Market Risk,” of the Form 10-K. Our exposures to market risk have not changed materially since December 31, 2012.
Item 4.
Controls and Procedures
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
We maintain disclosure controls and procedures, as such term is defined in Rules 13a-15(e)
and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that are designed to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required financial disclosures.
As of the end of the period covered by this Report, we conducted an evaluation, under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act
Rules 13a-15(b) and 15d-15(b). Based on this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective as of September 30, 2013.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting during the three months ended September 30, 2013 that materially affected, or are reasonably likely to materially affect, such controls.
PART II — OTHER INFORMATION
Item 1.
Legal
Proceedings
In July 2012, a customer of a subsidiary company we acquired in 2010 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 by the acquired subsidiary during periods prior to our acquisition of such company. Our subsidiary intends to vigorously defend against such claims and has asserted counterclaims for payments owed to it. Because of the uncertainties related to this arbitration, we are currently unable to predict the ultimate 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. As of September 30, 2013 we have accrued a provision for losses from legal matters of approximately $10 million in the aggregate. As no amount within our range of estimable losses is a better estimate than any other amount, the amount accrued represents the low end of the range of possible losses related to these matters. This amount is included in the "Accrued Liabilities" line in the accompanying condensed consolidated balance sheet. Some of the loss is expected to be covered, in part by insurance. All amounts incurred in connection with these matters have been recorded in the “Business consolidation, restructuring and headquarter-relocation costs”
line in the accompanying condensed consolidated statements of operations. Management believes that the disposition of other claims and legal proceedings arising in the ordinary course of our business, in the aggregate, will not have a material adverse effect on our results of operations, liquidity or financial position.
Item 1A.
Risk Factors
You should carefully consider the risks described below before investing in our publicly traded securities. The risks described below are not the only ones facing us. Our business is also subject to the risks that affect
many other companies, such as competition, technological obsolescence, labor relations, general economic conditions, geopolitical changes and international operations. Additional risks not currently known to us or that we currently believe are immaterial also may impair our business operations and our liquidity. The risks described below could cause our actual results to differ materially from those contained in the forward-looking statements we have made in this Report, the information incorporated herein by reference and those forward-looking statements we may make from time to time.
Certain Risks Related to Our Marketplace and Environment
Our revenue from the sale of computer aided design modeling and simulation software to the life science discovery research marketplace, which has historically constituted a significant portion
of our overall revenue, has been declining over the past several years and may continue to decline in future years. Historically we have derived a significant portion of our revenue from the sale of computer aided design modeling and simulation software to the discovery research departments in pharmaceutical and biotechnology companies. Based on recurring analyses of incoming orders typically conducted by our sales and marketing departments, we estimate that orders for our computer aided design modeling and simulation software for the life science industry declined approximately 18% between fiscal 2008 and 2009, approximately 16% between fiscal 2009 and 2010, approximately 21% during the nine months ended December 31, 2010. Although revenues remained relatively constant for the years ended December 31, 2011 and December
31, 2012, and during the nine months ended September 30, 2013, in the future we may experience a decline in revenues. While there is not a linear correlation between product orders and resulting revenue, we believe that our estimates of decreased product orders ultimately reflect a decline in revenue attributable to sales of our computer aided design modeling and simulation software products. We believe this decline is due to several factors, including industry consolidation, a general reduction in the level of discovery research activity by our customers, increased competition, including competition from open source software, and reductions in profit and related information technology spending by our customers. If such declines continue and we do not increase the revenue we derive from our other product and service offerings, our business could be adversely impacted.
Our
ability to sustain or increase revenues will depend upon our success in entering new markets and in deriving additional revenues from our existing customers. Our products are currently used primarily by molecular modeling and simulation specialists in discovery research organizations. One component of our overall business strategy is to derive more revenues from our existing customers by expanding their usage of our products and services. Such strategy would have our customers utilize our scientific informatics platform and our tools and components to leverage vast amounts of information stored in both corporate databases and public data sources in order to make informed scientific and business decisions during the research and development process. In addition, we seek to expand into new markets and new areas within our existing markets by acquiring businesses in these markets, attracting and retaining personnel knowledgeable in these markets,
identifying the needs of these markets and developing marketing programs to address these needs. If successfully implemented, these strategies would increase the usage of our software and services by biologists, chemists, engineers and informaticians operating within our existing pharmaceutical and biotechnology customers, as well as by new customers in other industries. However, if our strategies are not successfully implemented, our products and services may not achieve market acceptance or penetration in targeted new departments within our existing customers or in new industries. As a result, we may incur additional costs and expend additional resources without being able to sustain or increase revenue.
Our focus on offering scientific business intelligence solutions to both existing and new customers and markets may make it more difficult for us to sustain our revenue from the sale of computer aided design modeling and
simulation products to the life science discovery research marketplace. Our strategy involves transforming our product and service
offerings by utilizing our scientific informatics platform and our tools and components in order to enable our customers to more effectively utilize the vast amounts of information stored in both their databases and public data sources in order to make informed scientific and business decisions during the research and development process. This strategy is intended to lead us to new and different markets and customers, as well as increase the usage of our offerings by existing customers. Executing this strategy will require
significant management focus and utilization of resources. Though we intend to continue to dedicate sufficient resources and management focus to our life science computer aided design modeling and simulation products, it is possible that the strategy will result in loss of management focus and resources relating to these existing products and markets, thereby resulting in decreasing revenues from these markets. If these revenues are not offset by increasing revenues from new markets and/or customers, our overall revenues will suffer.
We may be unable to develop strategic relationships with our customers. Our overall business strategy is to expand usage of our products and services by expanding our current customers' usage of our products and by marketing and distributing our solutions to a broader, more diversified group of biologists, chemists, engineers and informaticians operating throughout our customers'
research and development organizations. A key component of this strategy is to become a preferred provider of scientific software and solutions. Becoming a preferred provider will require substantial re-training and new skills development within our sales and service personnel and deployment of a successful account-management sales model. We believe that developing strategic relationships with our customers may lead to additional revenue opportunities. However, executing this strategy may require significant expense, and there can be no assurance that any such relationships will develop or that such relationships will produce additional revenue or profit opportunities.
Consolidation within the pharmaceutical and biotechnology industries may continue to lead to fewer potential customers for our products and services. A significant portion of our customer base consists of pharmaceutical
and biotechnology companies. Continued consolidation within the pharmaceutical and biotechnology industries may result in fewer customers for our products and services. If one of the parties to a consolidation uses the products or services of our competitors, we may lose existing customers as a result of such consolidation.
Increasing competition and increasing costs within the pharmaceutical and biotechnology industries may affect the demand for our products and services, which may affect our results of operations and financial condition. Our pharmaceutical and biotechnology customers' demand for our products is impacted by continued demand for their products and by our customers' research and development costs. Demand for our customers' products could decline, and prices charged by our customers for their products may decline, as a result of increasing competition, including
competition from companies manufacturing generic drugs. In addition, our customers' expenses could continue to increase as a result of increasing costs of complying with government regulations and other factors. A decrease in demand for our customers' products, pricing pressures associated with the sales of these products and additional costs associated with product development could cause our customers to reduce research and development expenditures. Because our products and services depend on such research and development expenditures, our revenues may be significantly reduced.
Health care reform and restrictions on reimbursement may affect the pharmaceutical, biotechnology and industrial chemical companies that purchase or license our products or services, which may affect our results of operations and financial condition. The continuing efforts of government and third party
payers in the markets we serve to contain or reduce the cost of health care may reduce the profitability of pharmaceutical, biotechnology and industrial chemical companies causing them to reduce research and development expenditures. Because some of our products and services depend on such research and development expenditures, our revenues may be significantly reduced. We cannot predict what actions federal, state or private payers for health care goods and services may take in response to any health care reform proposals or legislation.
We face strong competition in the life science market for computer aided design modeling and simulation software and for cheminformatics products. The market for our computer aided design modeling and simulation software products for the life science market is intensely competitive. We currently face competition from other scientific software providers, larger technology
and solutions companies, in-house development by our customers and academic and government institutions and the open source community.
Some of our competitors and potential competitors in this sector have longer operating histories than we do and could have greater financial, technical, marketing, research and development and other resources. Many of our competitors offer products and services directed at more specific markets than those we target, enabling these competitors to focus a greater proportion of their efforts and resources on these markets. Some offerings that compete with our products are developed and made available at lower cost by government organizations and academic institutions, and these entities may be able to devote substantial resources to product development and also offer their products to users for little or no charge. We also face competition from open source software initiatives, in which developers
provide software and intellectual property free over the Internet. In addition, many of our customers spend significant internal resources in order to develop their own software.
Moreover, we intend to leverage our scientific informatics platform in order to enable our customers to more effectively utilize the vast amounts of information stored in both their databases and public data sources in order to make informed scientific and business decisions during the research and development process. This strategy could lead to competition from much larger companies which provide general data storage and management software.
There can
be no assurance that our current or potential competitors will not develop products, services or technologies that are comparable to, superior to or render obsolete, the products, services and technologies we offer. There can be no assurance that our competitors will not adapt more quickly than us to technological advances and customer demands, thereby increasing such competitors' market share relative to ours. Any material decrease in demand for our technologies or services may have a material adverse effect on our business, financial condition and results of operations.
We are subject to pricing pressures in some of the markets we serve. The market for computer aided design modeling and simulation products for the life science industry is intensely competitive, which has led to significant pricing pressure and declines in average selling price over the past several years. Based on recurring analyses
of incoming orders typically conducted by our sales and marketing departments, we estimate that the average sales price of our computer aided design modeling and simulation products for the life science industry declined approximately 10% between fiscal 2008 and 2009 and approximately 14% between fiscal 2009 and 2010. Although the average price remained relatively constant for fiscal 2011 and 2012, we may experience a decline in the future. While there is not a linear correlation between our product pricing and competition in the marketplace, we believe that our estimates of decreased prices ultimately reflect increased competition that has led and may continue to lead to pricing pressure with respect to sales of these products. In response to such increased competition and general adverse economic conditions in this market, we may be required to further modify our pricing practices. Changes in our pricing model could adversely affect our revenue and earnings.
Revenue from our database content business has been declining and may continue to decline. As a result of the Symyx Merger, we have acquired a database content business. This business faces intense competition from both third parties and the increasing availability of freely-available content databases. As a result, revenue from this database content business has been declining. If we are unable to reverse the decline in this business or to increase revenues from our other businesses in order to offset the decline, our revenues and results of operations may suffer.
Our operations may be interrupted by the occurrence of a natural disaster or other catastrophic event at our primary facilities. Our research and development operations and administrative functions are primarily conducted at our facilities in San Diego, California, San Ramon, California, Bend, Oregon, Milford,
Massachusetts, Lafayette, Colorado, Durham, North Carolina and Cambridge, United Kingdom. We also conduct sales and customer support activities at our facilities in Santa Clara, California, Bedminster, New Jersey, Burlington, Massachusetts, Paris, France, Basel, Switzerland, Cologne, Germany, Stockholm, Sweden Bangalore, India and Tokyo, Japan. Although we have contingency plans in effect for natural disasters or other catastrophic events, the occurrence of such events could still disrupt our operations. For example, our San Diego, San Ramon, and Tokyo facilities are located in areas that are particularly susceptible to earthquakes. Any natural disaster or catastrophic event in our facilities or the areas in which they are located could have a significant negative impact on our operations.
Our insurance coverage may not be sufficient to avoid material impact on our financial position or results of operations resulting from
claims or liabilities against us, and we may not be able to obtain insurance coverage in the future. We maintain insurance coverage for protection against many risks of liability. The extent of our insurance coverage is under continuous review and is modified as we deem it necessary. Despite this insurance, it is possible that claims or liabilities against us may have a material adverse impact on our financial position or results of operations. In addition, we may not be able to obtain any insurance coverage, or adequate insurance coverage, when our existing insurance coverage expires. For example, we do not carry earthquake insurance for our facilities in Tokyo, Japan, San Ramon, California, or San Diego, California, because we do not believe the costs of such insurance are reasonable in relation to the potential risk.
Certain Risks Related to Our Operations
Defects
or malfunctions in our products could hurt our reputation among our customers, result in delayed or lost revenue and expose us to liability. Our business and the level of customer acceptance of our products depend upon the continuous, effective and reliable operation of our software and related tools and functions. To the extent that defects cause our software to malfunction and our customers' use of our products is interrupted, our reputation could suffer and our revenue could decline or be delayed while such defects are remedied. We may also be subject to liability for the defects and malfunctions of third party technology partners and others with whom our products and services are integrated.
Delays in the release of new or enhanced products or services or undetected errors in our products or services may result in increased cost to us, delayed market acceptance of our products and delayed or lost
revenue. To achieve market acceptance, new or enhanced products or services can require long development and testing periods, which may result in delays
in scheduled introduction. Any delays in the release schedule for new or enhanced products or services may delay market acceptance of these products or services and may result in delays in new customer orders for these new or enhanced products or services or the loss of customer orders. In addition, new or enhanced products or services may contain a number of undetected errors or “bugs” when they are first released. Although we test each new or enhanced software product or service before it is
released to the market, there can be no assurance that significant errors will not be found in existing or future releases. As a result, in the months following the introduction of certain releases, we may need to devote significant resources to correct these errors. There can be no assurance, however, that all of these errors can be corrected.
We are subject to risks associated with the operation of a global business. We derive a significant portion of our total revenue from our operations in international markets. During the years ended December 31, 2012 and 2011, and the nine months ended December 31, 2010, 51%, 53% and 51% respectively, of our total revenue was derived from our international operations. Our global business may be affected by local economic
conditions, including inflation, recession and currency exchange rate fluctuations. In addition, political and economic changes throughout the world may interfere with our or our customers' activities in particular locations and result in a material adverse effect on our business, financial condition and operating results. We anticipate that revenue from operations in international markets will continue to account for a significant percentage of future revenue. The following table depicts our region-specific revenue as a percentage of total revenue for the periods referenced:
Other
potential risks inherent in our international business include:
•
unexpected changes in regulatory requirements;
•
longer payment cycles;
•
currency exchange rate fluctuations;
•
import
and export license requirements;
•
tariffs and other barriers;
•
political unrest, terrorism and economic instability;
•
disruption of our operations due to local labor conditions;
•
limited
intellectual property protection;
•
difficulties in collecting trade receivables;
•
difficulties in managing distributors or representatives;
•
difficulties in managing an organization spread over various countries;
•
difficulties
in staffing foreign subsidiary or joint venture operations; and
•
potentially adverse tax consequences.
Our success depends, in part, on our ability to anticipate and address these risks. There can be no assurance that we will do so effectively, or that these or other factors relating to our international operations will not adversely affect our business or operating results.
In order to improve our financial position, we have implemented reduction-in-force plans, which could negatively impact our business. As a result of the Symyx Merger, we implemented a reduction-in-force of approximately 15% of the combined employee
workforce after the Symyx Merger. In addition, in July 2013, we implemented a reduction-in-force of approximately 12% of our combined employee workforce. We do not believe that these reductions have had a material adverse
effect on our operations or our ability to generate revenue to date. However, while we believe we have sufficient staff to operate our business, we do not have duplicative or redundant resources in many of our functions or operations. As a result, there can be no assurance that further attrition will not impact our ability to operate our business, or adversely impact our revenues.
Failure to attract and retain
skilled personnel could have a material adverse effect on us. Our success depends in part on the continued service of key scientific, sales, business development, marketing, engineering, management and accounting personnel and our ability to identify, hire and retain additional personnel. There is intense competition for qualified personnel. Immigration laws may further restrict our ability to attract or hire qualified personnel. We may not be able to continue to attract and retain the personnel necessary for the development of our business. Failure to attract and retain key personnel could have a material adverse effect on our business, financial condition and results of operations. Further, we are highly dependent on the principal members of our technical, scientific and management staff and certain groups of consultants. One or more of these key employees or consultants could retire or otherwise leave our employ within the foreseeable future,
and the loss of any of these people could have a material adverse effect on our business, financial condition or results of operations. We do not intend to maintain key person life insurance on the life of any employee.
Continued turmoil in the worldwide financial markets may negatively impact our business, results of operations, and financial condition. As widely reported, financial markets in the U.S., Europe and Asia have been experiencing disruption in recent years, including, among other things, volatility in security prices, declining valuations of certain investments, severely diminished liquidity and credit availability, the failure or sale of various financial institutions and an unprecedented level of government intervention. Many economists believe that the U.S. economy, and possibly the global economy, is in the midst of a prolonged recession. This protracted downturn may hurt our business
in a number of ways, including through general decreases in spending and the adverse impact on our customers' ability to obtain financing, which may lead to delays or failures in our signing customer agreements or signing customer agreements at reduced purchase levels. While we are unable to predict the likely duration and severity of the current disruption in the financial markets and the adverse economic conditions in the U.S. and other countries, any of the circumstances mentioned above could have a material adverse effect on our revenues, financial condition and results of operations.
Recent acquisitions and potential future acquisitions could prove difficult to integrate, disrupt our business, dilute stockholder value and strain our resources. Since July 2010, we have acquired six companies: Symyx, Contur , VelQuest, Aegis, Vialis and ChemSW. We continually evaluate opportunities to acquire new
businesses as part of our ongoing strategy and we may in the future acquire additional businesses that we believe could complement or expand our business or increase our customer base. We do not know if we will be able to complete any future acquisitions, or whether we will be able to successfully integrate any acquired businesses, operate them profitably or retain their key employees. Integrating the operations of acquired businesses successfully or otherwise realizing any of the anticipated benefits of any acquisitions, including anticipated cost savings and additional revenue opportunities, involves a number of potential challenges. The failure to meet these integration challenges could seriously harm our financial condition and results of operations. Realizing the benefits of our acquisitions or any future acquisitions depends in part on the integration of operations and personnel. These integration activities are complex, expensive and time-consuming and we may
encounter unexpected difficulties or incur unexpected costs, including:
•
our inability to achieve the operating synergies anticipated in the acquisitions;
•
lost sales and customers as a result of our customers or customers of any acquired company deciding not to do business with us;
•
complexities associated
with managing the larger, more complex, combined business;
•
integrating personnel from acquired companies while maintaining focus on providing consistent, high quality products;
•
potential unknown liabilities and unforeseen expenses, delays or regulatory conditions associated with acquisitions; and
•
diversion
of management attention from ongoing business concerns to integration matters.
Acquired businesses may have liabilities or adverse operating issues that we fail to discover through due diligence prior to the acquisition. In particular, to the extent that prior owners of any acquired businesses or properties failed to comply with or otherwise violated applicable laws or regulations, or failed to fulfill their contractual obligations, we, as the successor owner, may be financially responsible for these violations and failures and may suffer reputational harm or otherwise be adversely affected. Acquisitions also frequently result in the recording of goodwill and other intangible assets which are subject to potential impairment in the future that could harm our financial results. As a result, if we fail to properly evaluate acquisitions
or investments, we may not achieve the anticipated benefits of any such acquisitions, and we may incur costs in excess of what we anticipate.
In addition, in order to finance any acquisition, we may utilize our existing funds, thereby lowering the amount of funds we currently have, or might need to raise additional funds through public or private equity or debt financings. Prolonged tightening of the financial markets may impact our ability to obtain financing to fund future acquisitions and we could be forced to obtain financing on less than favorable terms. Additionally, equity financings may result in dilution to our stockholders, which could affect the market price of our stock.
Our ability to utilize our net operating loss (“NOL”) and tax credit carryforwards in the future is limited by Sections 382 and
383 of the Internal Revenue Code of 1986, as amended (the “Code”). In general, under Sections 382 and 383 of the Code, a corporation that undergoes an “ownership change” is subject to limitations on its ability to utilize its pre-change NOL and tax credit carryforwards to offset future taxable income. In general, an ownership change occurs if the aggregate stock ownership of certain stockholders increases by more than 50 percentage points over such stockholders' lowest percentage ownership during the testing period (which is generally three years). The amount of the annual limitation is generally equal to the value of the stock of the corporation immediately prior to the ownership change, multiplied by the adjusted federal tax-exempt rate set by the Internal Revenue Service.
As a result of the Symyx Merger, Accelrys and Symyx have undergone an “ownership change” for purposes of Section 382
of the Code. Accordingly, the combined company's ability to utilize Accelrys' and Symyx's NOLs and tax credit carryforwards will be limited as described in the preceding paragraph. These limitations could in turn result in increased future tax payments for the combined company, which could have a material adverse effect on the business, financial condition or results of operations of the combined company.
Adverse resolution of litigation and other legal proceedings may harm our operating results or financial position. We are a party to lawsuits and other legal proceedings, most of which occur in the normal course of our business. Litigation and other legal proceedings can be expensive, lengthy and disruptive to normal business operations. Moreover, the results of complex legal proceedings are difficult to predict. An unfavorable resolution of a particular
legal proceeding could have a material adverse effect on our business, operating results, financial position, and in some cases, on our reputation or our ability to obtain projects from customers, including governmental entities. See Item 1. Legal Proceedings and Note 12 of the notes to consolidated financial statements for more information regarding legal proceedings in which we are involved.
Certain Risks Related To Our Financial Performance
We have a history of losses and our future profitability is uncertain. We generated net losses for the year ended December 31, 2012, the nine months ended December 31, 2010, and the years ended March 31, 2007 and 2006.
Although we generated net income for the years ended December 31, 2011, March 31, 2010, 2009 and 2008, we may experience future net losses which may limit our ability to fund our operations and we may not generate income from operations in the future. Our future profitability depends upon many factors, including several that are beyond our control. These factors include without limitation:
•
changes in the demand for our products and services;
•
the
introduction of competitive software;
•
our ability to license desirable technologies;
•
changes in the research and development budgets of our customers and potential customers;
•
our ability to successfully, cost effectively and timely develop, introduce and market new products, services and
product enhancements; and
•
the acquisition of any new entities or businesses which may have a dilutive effect upon our earnings.
Our sales forecast and/or revenue projections may not be accurate. We use a “pipeline” system, a common industry practice, to forecast sales and trends in our business. Our sales personnel monitor the status of proposals, including the date when they estimate a customer will make a purchase decision and the potential size of the order. We aggregate these estimates on a quarterly basis in order to generate a sales pipeline. While the pipeline process provides us with some guidance in business planning and forecasting, it is
based on estimates only and is therefore subject to risks and uncertainties. Any variation in the conversion of the pipeline into revenue or the pipeline itself could cause us to improperly plan or budget and thereby adversely affect our business, results of operations and financial condition.
If we are unable to license software to, or collect receivables from, our customers, our operating results may be adversely affected. While the majority of our current customers are well-established, large companies and universities, we also provide products and services to smaller companies. Our financial success depends upon the creditworthiness and ultimate
collection of amounts due from our customers, including our smaller customers with fewer financial resources. While we have not experienced significant customer defaults during the 2009, 2011 and 2012 fiscal years and the nine months ended December 31, 2010, if we are not able to collect from our customers, we may be required to write-off significant accounts receivable and recognize bad debt expenses which could materially and adversely affect our operating results.
Our quarterly operating results, particularly our quarterly cash flows, may fluctuate. Quarterly operating results may fluctuate as a result of a number of factors, including lengthy sales cycles, market acceptance of new products and upgrades, timing of new product introductions, changes in pricing policies, changes in general economic and competitive conditions, and the timing and integration
of acquisitions. We may also experience fluctuations in quarterly operating results due to general and industry specific economic conditions that may affect the research and development expenditures of pharmaceutical and biotechnology companies. In particular, historically we have received approximately two-thirds of our annual customer orders in the quarters ended December 31 and March 31. In accordance with our revenue recognition policies, the revenue associated with these orders is generally recognized over the contractual license term. Therefore, because we accrue sales commissions and royalties upon the receipt of customer orders, we have generally experienced an increase in operating costs and expenses during the quarters ended December 31 and March 31 with only a minimal corresponding incremental increase in revenue. Additionally, our cash flows from operations have historically been positive in the fiscal quarter ended March 31 as we collect the accounts receivable
generated from these customer orders, while we have historically experienced negative cash flows from operations in the other three fiscal quarters. As a result of these seasonal variations, we believe that quarter-to-quarter comparisons of our operating results are not a good indication of our future performance and that our interim financial results are not necessarily indicative of results for a full year or for any subsequent interim period.
We may be required to indemnify Pharmacopeia Drug Discovery, Inc. (“PDD”), or may not be able to collect on indemnification rights from PDD. On April 30, 2004, we spun-off our drug discovery subsidiary, PDD, into an independent,
separately traded, publicly held company through the distribution to our stockholders of a dividend of one share of PDD common stock for
every two shares of our common stock. As part of the spin-off, we agreed to indemnify the indebtedness, liabilities and obligations of PDD. One such obligation includes a guarantee by us to the landlord of PDD’s obligations under certain facility leases, with respect to which PDD will indemnify us should we be required to make any payment under the guarantee. These indemnification obligations could be as significant as the remaining future minimum lease payments, which totaled approximately $6.7 million as of September 30, 2013. PDD’s ability to satisfy any such indemnification obligations (including, without limitation, PDD’s commitment to indemnify us in the event of our payment under our guarantee of its leases) will depend upon PDD’s future financial strength. We cannot assure you that, if PDD becomes obligated to indemnify
us for any substantial obligations, PDD will have the ability to do so. There also can be no assurance that we will be able to satisfy any indemnification obligations to PDD. Any failure by PDD to satisfy its obligations and any required payment by us could have a material adverse effect on our business.
Enacted and proposed changes in securities laws and regulations have increased our costs and may continue to increase our costs in the future. In recent years, there have been several changes in laws, rules, regulations and standards relating to corporate governance and public disclosure, including the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), the Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley”) and various other new regulations promulgated by the SEC and rules promulgated by the national securities exchanges.
The
Dodd-Frank Act, enacted in July 2010, expands federal regulation of corporate governance matters and imposes requirements on publicly-held companies, including us, to, among other things, provide stockholders with a periodic advisory vote on executive compensation and also adds compensation committee reforms and enhanced pay-for-performance disclosures. While some provisions of the Dodd-Frank Act are effective upon enactment, others will be implemented upon the SEC's adoption of related rules and regulations. The scope and timing of the adoption of such rules and regulations is uncertain and accordingly, the cost of compliance with the Dodd-Frank Act is also uncertain.
Sarbanes-Oxley required changes in some of our corporate governance and securities disclosure and compliance practices. Under Sarbanes-Oxley, publicly-held companies, including us, are required to, among other things, furnish independent annual audit reports
regarding the existence and reliability of their internal control over financial reporting and have their chief executive officer and chief financial officer certify as to the accuracy and completeness of their financial reports.
These and other new or changed laws, rules, regulations and standards are, or will be, subject to varying interpretations in many cases due to their lack of specificity. As a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies, which could result in continuing uncertainty regarding compliance matters and
higher costs necessitated by ongoing
revisions to disclosure and governance practices. Our efforts to comply with evolving laws, regulations and standards are likely to continue to result in increased general and administrative expenses and a diversion of management time and attention from revenue-generating activities to compliance activities. Further, compliance with new and existing laws, rules, regulations and standards may make it more difficult and expensive for us to maintain director and officer liability insurance, and we may be required to accept reduced coverage or incur substantially higher costs to obtain coverage. Members of our board of directors and our principal executive officer and principal financial officer could face an increased risk of personal liability in connection with the performance of their duties. As a result, we may have difficulty attracting and retaining qualified directors and executive officers, which could harm our business. We continually evaluate and monitor regulatory
developments and cannot estimate the timing or magnitude of additional costs we may incur as a result.
Our business, financial condition and results of operations may be adversely impacted by fluctuations in foreign currency exchange rates. Our international sales generally are denominated in local currencies. Fluctuations in the value of currencies in which we conduct business relative to the U.S. dollar result in currency transaction gains and losses, and the impact of future exchange rate fluctuations cannot be accurately predicted. Future fluctuations in currency exchange rates may have a material adverse impact on revenue from international sales, and thus on our business, financial condition and results of operations. When deemed appropriate, we may engage in currency exchange rate hedging transactions in an attempt to mitigate the impact of adverse exchange rate fluctuations. However, currency
hedging policies may not be successful, and they may increase the negative impact of exchange rate fluctuations.
If we consume cash more quickly than expected, we may be unable to raise additional capital and we may be forced to curtail operations. We anticipate that our existing capital resources will be adequate to fund our operations for at least the next twelve months. However, our capital requirements will depend on many factors, including potential acquisitions of other businesses or technologies. If we determine that we must raise additional capital, we may attempt to do so through public or private financings involving debt or equity. However, additional capital may not be available on favorable terms, or at all. If adequate funds are not available, we may be required to curtail operations significantly or to obtain funds by entering into arrangements with collaborative partners or others that
may require us to relinquish rights to certain of our technologies, products or potential markets that we would not otherwise relinquish.
Certain Risks Related to Owning Our Stock
We expect that our stock price will fluctuate significantly, and as a result, our stockholders may not be able to resell their shares at or above their original investment price. The stock market, historically and in recent years, has experienced significant volatility particularly with technology company stocks. The volatility of technology company stock prices often does not relate to the operating performance of the companies represented by the stock. Factors that could cause volatility in the price of our common stock include without limitation:
•
actual
and anticipated fluctuations in our quarterly financial and operating results;
•
market conditions in the technology and software sectors;
•
issuance of new or changed securities analysts’ reports or recommendations;
•
developments or disputes concerning our intellectual property or other proprietary
rights or other legal claims;
•
introduction of technological innovations or new commercial products by us or our competitors;
•
market acceptance of our products and services;
•
additions or departures of key personnel; and
•
the
acquisition of new businesses or technologies
These and other external factors may cause the market price and demand for our common stock to fluctuate substantially, which may limit or prevent investors from readily selling their shares of common stock and may otherwise negatively affect the liquidity of our common stock.
As institutions hold the majority of our common stock in large blocks, substantial sales by these stockholders could depress the market price for our shares. As of October 25, 2013, the top ten institutional holders of our common stock held approximately 55.0% of our outstanding common stock. As a result, if one or more of these major stockholders were to sell all or a portion of their
holdings, or if the market were to perceive that such sale or sales may occur, the market price of our common stock may fall significantly.
Because we do not intend to pay dividends, our stockholders will benefit from an investment in our common stock only if our stock price appreciates in value. We have never declared or paid any cash dividends on our common stock. We currently intend to retain our future earnings, if any, to finance the expansion of our business and do not expect to pay any cash dividends in the foreseeable future. As a result, the success of an investment in our common stock will depend entirely upon any future appreciation in its
value. There is no guarantee that our common stock will appreciate in value or even maintain the price at which it was purchased.
Anti-takeover provisions under the Delaware General Corporation Law and provisions in our certificate of incorporation and bylaws may make the accomplishment of mergers or the assumption of control by a principal stockholder more difficult, thereby making the removal of management more difficult. Certain provisions of the Delaware General Corporation Law may delay or deter attempts to secure control of our company without the consent of our management. Also, our governing documents provide for a staggered board
of directors, which will make it more difficult for a potential acquirer to gain control of our board of directors. These provisions of our governing documents and those of Delaware law could have the effect of delaying, deferring or preventing a change of control, including without limitation a proxy contest, making the acquisition of a substantial block of our common stock more difficult. The provisions could also limit the price that investors might be willing to pay in the future for shares of our common stock. Further, the existence of these anti-takeover measures may cause potential bidders to look elsewhere, rather than initiating acquisition discussions with us.
Certain Risks Related to Intellectual Property
We may not be able to protect adequately the trade secrets and confidential information that we disclose to our employees. We rely upon trade
secrets, technical know-how and continuing technological innovation to develop and maintain our competitive position. Competitors through their independent discovery (or improper means, such as unauthorized disclosure or industrial espionage) may come to know our proprietary information. We generally require employees and consultants to execute confidentiality and assignment-of-inventions agreements. These agreements typically provide that all materials and confidential information developed by or made known to the employee or consultant during his, her or its relationship with us are to be kept confidential, and that all inventions arising out of the employee's or consultant's relationship with us are our exclusive property. Our employees and consultants may breach these agreements, and in some instances we may not have an adequate remedy. Additionally, in some instances, we may have failed to require that employees and consultants execute confidentiality and assignment-of-inventions
agreements.
Foreign laws may not afford us sufficient protections for our intellectual property, and we may not seek patent protection outside the U.S. We believe that our success depends, in part, upon our ability to protect our intellectual property throughout the world. However, the laws of some foreign countries may not be as comprehensive as those of the U.S. and may not be sufficient to protect our proprietary rights abroad. In addition, we generally do not pursue patent protection outside the U.S. because of cost and confidentiality concerns. Accordingly, our international competitors could obtain foreign patent protection for, and market overseas, products and technologies for which we are seeking patent protection in the U.S.
A patent issued to us may not be
sufficiently broad to protect adequately our rights in intellectual property to which the patent relates. Due to cost and other considerations, we generally do not rely on patent protection to enforce our intellectual property rights, and have filed only a limited number of patent applications. Even if patents are issued to us, these patents may not sufficiently protect our interest in our software or other technologies because the scope of protection provided by any patents issued to or licensed by us are subject to the uncertainty inherent in patent law. Third parties may be able to design around these patents or develop unique products providing effects similar to our products. In addition, others may discover uses for our software or technologies other than those uses covered in our patents, and these other uses may be separately patentable. A number of pharmaceutical and biotechnology companies, software organizations and research and academic
institutions, have developed technologies, filed patent applications or received patents on various technologies that may be related to our business. Some of these technologies, patent applications or patents may conflict with our technologies, patent applications or patents. These conflicts could also limit the scope of patents, if any, that we may be able to obtain, or result in the denial of our patent applications.
We may be subject to claims of infringement by third parties. A number of patents may have been issued or may be issued in the future that could cover certain aspects of our technology or functionality of our products and could prevent us from using technology that we use or expect to use, or making or selling certain of our products. In addition, to the extent our employees are involved in research areas similar to those areas in which they were involved at their former employers, we
may inadvertently use or disclose alleged trade secrets or other proprietary information of their former employer. Thus, our products may infringe patent or other intellectual property rights of third parties, and we may be subject to infringement claims by third parties. Any such claims, with or without merit, could be time consuming to defend, result in costly litigation, divert management's attention and resources, cause product shipment delays or require us to enter into royalty or licensing agreements. Such licenses may not be available on terms acceptable to us, if at all. In the event of a successful claim of product
infringement against us, our failure or inability
to license or design around the infringed technology could have a material adverse effect on our business, financial condition and results of operations.
Third party software codes incorporated into our products could subject us to liability or limit our ability to sell such products. Some of our products include software codes licensed from third parties, including the open source community. Some of these licenses impose certain obligations upon us, including royalty and indemnification obligations. In the case of codes licensed from the open source community, the licenses may also limit our ability to sell products containing such code. Though we generally review the applicable licenses prior to incorporating third party code into our software products, there can be no assurance that such third party codes incorporated into our products would not subject us to liability or limit our ability to sell
the products containing such code, thereby having a material adverse effect upon our business.
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
The following table sets forth information concerning purchases of our common stock during the quarter ended September 30, 2013, which upon repurchase are classified as treasury shares available for general corporate purposes:
Period
(1)
Total number of
shares purchased
Average price
paid per share
Total number of shares
purchased as part of
publicly announced
plans or programs
Approximate
dollar value of
shares that may
yet be purchased
under
the plans
or programs
(In thousands)
7/1/2013- 7/31/2013
159,500
8.83
159,500
$
6,067
8/1/2013-
8/31/2013
96,194
9.19
96,194
$
5,183
9/1/2013- 9/30/2013
158,000
9.30
158,000
$
3,714
(1)
On December 13, 2012, we entered into a stock repurchase plan in accordance with Rule 10b5-1 of the Exchange Act, instructing our broker, subject to the conditions set forth therein and the provisions of Rule 10b-18 of the Exchange Act, to purchase for our account up to $15.0 million worth of our common stock by December 31, 2013.
Agreement
and Plan of Merger and Reorganization, dated April 5, 2010, by and among Accelrys, Inc., Alto Merger Sub, Inc. and Symyx Technologies, Inc. (incorporated by reference to Exhibit 2.1 of Accelrys, Inc.’s Current Report on Form 8-K filed on April 6, 2010).
2.2
Sale and Purchase Agreement Regarding All Shares in Contur Industry Holding AB and Warrants
in Contur Software AB, dated 19 May 2011 (incorporated by reference to Exhibit 10.1 to Accelrys, Inc.’s Current Report on Form 8-K filed on May 24, 2011).
2.3
Asset Purchase Agreement, dated as of July 28, 2011, by and between Intermolecular, Inc. and Symyx Technologies, Inc. (incorporated by reference to Exhibit 10.1 to Accelrys, Inc.’s Current Report on Form 8-K filed on July
29, 2011).
Agreement
and Plan of Merger, dated as of October 23, 2012, by and among Accelrys, Inc., Aardvark Acquisition Corp., Aegis Analytical Corporation and Shareholder Representative Services LLC (incorporated by reference to Exhibit 2.1 to Accelrys, Inc.’s Current Report on Form 8-K filed on October 29, 2012).
2.6
Securities Purchase Agreement, dated as of
September 3, 2013, by and among Accelrys, Inc. and the parties listed therein (incorporated by reference to Exhibit 2.1 to Accelrys, Inc.’s Current Report on Form 8-K filed on September 4, 2013).
3.1
Restated Certificate of Incorporation of Pharmacopeia, Inc., as amended (including a Certificate of Designation, Preferences and Rights of Series
A Junior Participating Preferred Stock) (incorporated by reference to Exhibit 3.2 to Accelrys, Inc.’s Annual Report on Form 10-K for the year ended March 31, 2005).
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
