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Symyx Technologies 10-Q 2008 Documents found in this filing:UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
DC 20549
Form
10-Q
(Mark
One)
For the
quarterly period ended June 30,
2008
or
For the
transition period from _________ to _________
Commission
File Number: 000-27765
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 ý 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
definitions of “large accelerated filer,” “accelerated filer” and
“smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check
one).
o Large accelerated
filer ý Accelerated
filer
o Non-accelerated filer
(Do not check if a smaller reporting
company) o Smaller reporting
company
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
oYes ý No
As of
July 31, 2008, Registrant had outstanding 33,785,079 shares of Common Stock,
$0.001 par value.
TABLE OF CONTENTS
PART I: FINANCIAL INFORMATION
ITEM
1. FINANCIAL STATEMENTS
SYMYX
TECHNOLOGIES, INC.
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
(In
thousands, except per share amounts)
(Unaudited)
See
accompanying notes to condensed consolidated financial
statements SYMYX TECHNOLOGIES, INC.
CONDENSED
CONSOLIDATED BALANCE SHEETS
(In
thousands, except per share amounts)
See
accompanying notes to condensed consolidated financial statements
SYMYX TECHNOLOGIES, INC.
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In
thousands)
(Unaudited)
See
accompanying notes to condensed consolidated financial statements
SYMYX TECHNOLOGIES, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. Summary
of Significant Accounting Policies
Business
and Basis of Presentation
Symyx
Technologies, Inc. (together with its wholly-owned subsidiaries, the Company or
Symyx) is a global provider of research and development (R&D) execution and
innovation for the chemicals, energy, life science, consumer product and other
industries. Symyx performs research for customers using proprietary technologies
to discover new and innovative materials, sells automated high-throughput
instrumentation, licenses software for use in customers’ own laboratories, and
licenses discovered materials and intellectual property.
Symyx
incorporated in California on September 20, 1994 and reincorporated in Delaware
in February 1999. Symyx’s headquarters are in Sunnyvale,
California.
Management
has prepared the accompanying unaudited condensed consolidated balance sheet as
of June 30, 2008, the condensed consolidated statements of operations for the
three and six month periods ended June 30, 2008 and 2007, respectively, and the
condensed consolidated statements of cash flows for the six month periods ended
June 30, 2008 and 2007, respectively, in accordance with U.S. generally accepted
accounting principles (GAAP) for interim financial information and pursuant to
the instructions to Form 10-Q and Article 10 of Regulation S-X. Certain
information and footnote disclosures normally included in consolidated financial
statements prepared in accordance with U.S. GAAP have been condensed or omitted
pursuant to the rules and regulations of the Securities Exchange Commission
(SEC). In management’s opinion, all adjustments (which include only normal
recurring adjustments) necessary to present fairly the consolidated financial
position of Symyx at June 30, 2008 and the results of operations and cash flows
for all periods presented have been made. The condensed consolidated balance
sheet at December 31, 2007 was derived from the audited financial statements at
that date, but does not include all of the disclosures required by U.S. GAAP for
complete financial statements.
Because
all of the disclosures required by U.S. GAAP in complete financial statements
are not included herein, these condensed consolidated financial statements and
the notes accompanying them should be read in conjunction with the Company's
audited financial statements and the notes thereto included in the Company's
2007 Annual Report on Form 10-K for the fiscal year ended December 31, 2007
filed with the SEC. The consolidated results of operations for the three and six
months ended June 30, 2008 are not necessarily indicative of the results to be
expected for any subsequent quarter or for the entire fiscal year ending
December 31, 2008.
Principles
of Consolidation
These
condensed consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. Symyx accounts for equity investments in
companies over which Symyx has the ability to exercise significant influence,
but does not hold a controlling interest, under the equity
method. Accordingly, Symyx records its proportionate share of income
or losses in the condensed consolidated statements of operations. Symyx has
eliminated all significant intercompany accounts and transactions.
Use
of Estimates
Preparing
financial statements in accordance with U.S. GAAP requires management to make
estimates and assumptions that affect the reported amounts in Symyx’s
consolidated financial statements and accompanying notes. Estimates include the
forfeiture rates for stock-based awards, future warranty expenditures and
product life cycles, and assumptions such as the elements comprising a revenue
arrangement, including the distinction between software upgrades/enhancements
and new products, when the Company’s products achieve technological feasibility,
and the potential outcome of future tax consequences of events recognized in the
Company’s financial statements or tax returns. Actual results and outcomes may
differ from management’s estimates and assumptions. For example, if system
failures or the cost to repair systems are significantly greater than
the rates used in estimating the accrued warranty, the additional charges could
have a material unfavorable impact on the Company's financial results in the
relevant period(s).
SYMYX
TECHNOLOGIES, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Customer
Indemnification
From time
to time, the Company agrees to indemnify its customers against certain third
party liabilities, including liability if its products infringe a third party’s
intellectual property rights. The Company accounts for such indemnification
provisions in accordance with the Financial Accounting Standards Board (FASB)
Interpretation No. 45, Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others. The Company’s indemnification obligation in these
arrangements is typically limited to no more than the amount paid by the
customer. As of June 30, 2008, the Company was not subject to any pending
intellectual property-related litigation. The Company has not received any
requests for and has not been required to make any payments under these
indemnification provisions.
Contingencies
In July
2006, the Company acquired all of the outstanding shares of Autodose SA
(Autodose). Pursuant to the terms of the merger agreement the Company
entered into with Autodose, the former stockholders of Autodose are eligible to
receive additional purchase price consideration of up to 7,100,000 Swiss Franc
(equivalent to $6,968,000 using the foreign currency exchange rate in effect on
June 30, 2008) upon achievement of certain 2008 and 2009 revenue targets with
respect to the Company’s Autodose product line. The Company evaluates the
likelihood of achieving these targets from time to time. If any of the revenue
targets are met, the Company would record the fair value of any additional
consideration as an additional cost of the acquisition. No additional
consideration was recorded as of June 30, 2008.
Revenue
Concentration
For the
three and six months ended June 30, 2008 and 2007, the following customers
contributed more than 10% of the Company’s total revenue (in
thousands):
The
revenue from these customers has been included in the following reportable
segments (Note 6) for the three and six months ended June 30, 2008 and 2007 (in
thousands):
The
revenue from these customers has been included in the Condensed Consolidated
Statements of Operations as follows (in thousands):
SYMYX
TECHNOLOGIES, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Inventories
Raw
materials inventory consists of purchased parts. Work-in-process inventory
consists of purchased parts and fabricated sub-assemblies for Symyx Tools in the
process of being built. Finished goods inventory consists of completed systems
ready for shipment to customers. At each balance sheet date, the Company
examines its ending inventories for possible excess quantities and obsolescence.
This evaluation includes analysis of sales levels by product and projections of
future demand. The Company writes down inventories on hand in excess of
forecasted demand and writes off inventories that it considers obsolete.
Additionally inventories are carried at the lower of cost or market, with cost
determined on a specific identification basis. The Company’s inventory balances
at June 30, 2008 and December 31, 2007 were as follows (in
thousands):
Accrued
Warranty
The
Company offers a warranty on each Symyx Tools system sold to a customer.
Warranty terms vary depending upon the product sold and country in
which the transaction occurs. However, warranties typically include
parts and labor and software bug fixes for a specified period (typically one
year). The Company estimates warranty costs to be incurred under its basic
limited warranty and records a liability in the amount of such costs at the time
product revenue is recognized. Factors that affect the Company’s warranty
liability include the number of installed units, historical and anticipated
rates of warranty claims, and cost per claim. The Company periodically assesses
the adequacy of its recorded warranty liabilities and adjusts the amounts, as
necessary. Changes in the Company’s product warranty expense accrual during the
six months ended June 30, 2008 and 2007 were as follows (in
thousands):
Goodwill
and Intangible Assets
The
Company’s goodwill at June 30, 2008 and December 31, 2007 is reported under two
reporting units as follows (in thousands):
The
Company’s goodwill balance increased $2,191,000 during the six months ended June
30, 2008 primarily due to the effect of foreign currency exchange rate
fluctuation on the goodwill recorded by the Company’s subsidiaries in foreign
currencies.
Intangible
assets are amortized using the straight-line method over their estimated periods
of benefit, ranging from one to eight years.
SYMYX
TECHNOLOGIES, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The
impairment review process for other intangible assets under SFAS 144 is based on
an undiscounted future cash flow approach that uses the Company’s estimates of
revenue and estimated costs.
No
impairments of goodwill or intangible assets have been identified during any of
the periods presented.
Effect
of New Accounting Pronouncements
In
September 2006, the FASB issued SFAS No. 157 (SFAS 157), Fair Value Measurements.
SFAS 157 provides guidance for using fair value to measure assets and
liabilities. It also responds to investors' requests for expanded information
about the extent to which companies measure assets and liabilities at fair
value, the information used to measure fair value, and the effect of fair value
measurements on earnings. SFAS 157 applies whenever other
standards require (or permit) assets or liabilities to be measured at fair
value, and does not expand the use of fair value in any new
circumstances. SFAS 157 is effective for financial statements
issued for fiscal years beginning after November 15, 2007. In February
2008, the FASB issued Staff Position 157-2 (FSP 157-2), Effective Date of FASB Statement No.
157, which delays the effective date of SFAS 157 for all nonfinancial
assets and nonfinancial liabilities, except for items that are recognized or
disclosed at fair value in the financial statements on a recurring basis (at
least annually), to fiscal years beginning after November 15,
2008. Accordingly, the Company adopted certain provisions of SFAS 157
on January 1, 2008 on a prospective basis for its financial assets and
liabilities, which require that the Company determine the fair value of
financial assets and liabilities using the fair value hierarchy established in
SFAS 157. The Company also elected to delay the adoption of SFAS 157 for its
nonfinancial assets/liabilities under FSP 157-2 until January 1,
2009.
SFAS 157
describes three levels of inputs that may be used to measure fair value, as
follows:
In
accordance with SFAS 157, at June 30, 2008, the Company measures its cash
equivalents at fair value using Level 1 inputs. The adoption of SFAS 157
had no material effect on the Company’s consolidated results of operations and
financial condition.
In
December 2007, the FASB issued SFAS No. 141(R) (revised 2007) (SFAS 141(R)),
Business Combinations.
Under SFAS No. 141(R), an entity is required to recognize the assets
acquired, liabilities assumed, contractual contingencies, and contingent
consideration in connection with an acquired business at their fair value on the
acquisition date. It further requires that: acquisition-related costs be
recognized separately from the acquisition and expensed as incurred,
restructuring costs generally be expensed in periods subsequent to the
acquisition date, and changes in accounting for deferred tax asset valuation
allowances and acquired income tax uncertainties after the measurement period
impact income tax expense. In addition, acquired in-process research and
development (IPR&D) is capitalized as an intangible asset and amortized over
its estimated useful life. The adoption of SFAS 141(R) will change the Company’s
accounting treatment for business combinations taking place after January 1,
2009.
In
December 2007, the FASB issued SFAS No. 160 (SFAS 160), Noncontrolling interests in
Consolidated Financial Statements, an amendment of ARB No. 51. SFAS 160
is based on the economic entity concept of consolidated financial statements,
under which all residual economic interest holders in an entity have an equity
interest in the consolidated entity, even if the residual interest is relative
to only a portion of the entity. SFAS 160 requires that a noncontrolling
interest in a consolidated subsidiary be displayed in the consolidated statement
of financial position as a separate component of equity because the FASB
concluded that noncontrolling interests meet the definition of equity of the
consolidated entity. In addition, net income attributable to the noncontrolling
interest will be included in consolidated net income on the face of the income
statement. SFAS 160 is effective for the first annual reporting
period on or after December 15, 2008. Earlier adoption is prohibited. The
Company does not have any noncontrolling interest as of June 30,
2008.
SYMYX
TECHNOLOGIES, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In March
2008, the FASB issued SFAS No. 161 (SFAS 161), Disclosures about Derivative
Instruments and Hedging Activities. SFAS 161 is intended to improve
financial reporting of derivative instruments and hedging activities by
requiring enhanced disclosures to enable financial statement users to better
understand the effects of derivatives and hedging on an entity’s financial
position, financial performance and cash flows. The provisions of SFAS 161 are
effective for interim periods and fiscal years beginning after November 15,
2008. The Company anticipates no impact upon the adoption of SFAS 161 on its
condensed consolidated financial statements.
In April
2008, the FASB issued FSP FAS 142-3, Determination of the Useful Life of
Intangible Assets (“FAS 142-3”). This guidance is intended to improve the
consistency between the useful life of a recognized intangible asset under
SFAS No. 142, Goodwill and Other Intangible Assets
(“SFAS 142”), and the period of expected cash flows used to measure the
fair value of the asset under SFAS 141R when the underlying arrangement
includes renewal or extension of terms that would require substantial costs or
result in a material modification to the asset upon renewal or extension.
Companies estimating the useful life of a recognized intangible asset must now
consider their historical experience in renewing or extending similar
arrangements or, in the absence of historical experience, must consider
assumptions that market participants would use about renewal or extension as
adjusted for SFAS 142’s entity-specific factors. FAS 142-3 is effective for the
Company beginning January 1, 2009 and will impact future business
combinations.
2. Stock-Based
Benefit Plans
The
Company has an Employee Stock Purchase Plan (ESPP) that permits eligible
employees to purchase Symyx common stock at a discount, but only through payroll
deductions, during concurrent 12-month offering periods. Each offering period is
divided into two consecutive six-month purchase periods. On the last day of each
purchase period, eligible employees can purchase shares under the plan at 85% of
the fair market value of Symyx’s common stock on the first day of the offering
period or the last day of the purchase period, whichever was lower. The two
purchase dates per year under the ESPP are April 30 and October 31. A total of
127,856 and 99,058 shares were purchased during the six months ended June 30,
2008 and 2007, respectively. As of June 30, 2008, there were 1,442,514 shares of
common stock available for future purchase under the ESPP.
The
Company also has adopted various stock plans that provide for the grant to
employees of stock-based awards, including stock options, restricted stock
units, and restricted stock. Certain of these plans permit the grant of
nonstatutory stock-based awards to outside consultants and members of its Board
of Directors. During the three and six months ended June 30, 2008, the Company
granted options to purchase 20,000 and 77,500 shares of common stock,
respectively, under its stock option plans. No options were granted during the
three and six months ended June 30, 2007. During the three and six months ended
June 30, 2008, the Company granted 30,240 and 33,422 shares of restricted stock
units, respectively. During the three and six months ended June 30, 2007, the
Company granted 31,414 and 560,543 shares of restricted stock units,
respectively. At the Company’s annual stockholder meeting on June 16, 2008, the
Company’s stockholders approved, among other things, a proposal to amend the
Company’s 2007 Stock Incentive Plan to increase the total authorized shares
available for grant under such plan by 4,700,000 shares and reduce the number of
shares available for issuance under the 2007 Plan (i) by one share for each
share of common stock subject to a stock option or stock appreciation right; and
(ii) by one and sixty-five hundredths (1.65) shares for each share of common
stock subject to any other type of award issued under the 2007 Plan. As of June
30, 2008, 6,547,569 shares were available for issuance under the Company’s
various stock plans.
The
Company valued options granted in the three and six months ended June 30, 2008
using the Black-Scholes method with the following valuation
assumptions:
SYMYX
TECHNOLOGIES, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
On June
16, 2008, the Company’s stockholders also approved a voluntary stock option
exchange program at the 2008 annual meeting of stockholders. The purpose of the
stock option exchange program is to allow eligible employees holding stock
options with exercise prices significantly higher than the current trading price
of Symyx common stock the opportunity to exchange eligible stock options for new
stock options with a lower exercise price but covering fewer shares. The
Company’s directors, executive officers, consultants and non-U.S. employees will
not be able to participate. The Company plans to complete the stock option
exchange in the third quarter of 2008.
The
Company recognized stock-based compensation expense of $1,016,000 and $1,141,000
during the three months ended June 30, 2008 and 2007, respectively. The Company
recognized stock-based compensation expense of $2,161,000 and $3,581,000 during
the six months ended June 30, 2008 and 2007, respectively. Stock-based
compensation expense recognized in the Company’s results of operations for these
periods was as follows (in thousands):
3. Earnings
per Share
Basic and
diluted net loss per share has been computed by dividing the net loss for the
period by the weighted-average number of shares of common stock outstanding
during the period. The computation of the weighted-average number of shares
outstanding for the three and six months ended June 30, 2008 and 2007 is as
follows (in thousands):
The
following shares were excluded from the calculation of basic and diluted net
loss per share for the three and six months ended June 30, 2008 and 2007,
respectively, because all were anti-dilutive for the respective periods (in
thousands):
SYMYX
TECHNOLOGIES, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. Related
Party Transactions
The
Company entered into a Collaborative Development and License Agreement with
Intermolecular, Inc. (Intermolecular) in March 2005, and an Alliance Agreement
in December 2005. Under these agreements, the two companies work together to
conduct research and development and other activities with respect to materials
and high-throughput technology for use in semiconductor applications. Each
party bears its own expenses. These agreements were amended in November 2007.
Under the amended agreements, the Company committed to fund an aggregate of
$2,057,000 in research and capital equipment expenditures. The Company expects
to satisfy the remaining $537,000 of this commitment in 2008. Furthermore, in
August 2006, the Company invested $13,500,000 in exchange for approximately 13%
of Intermolecular’s outstanding shares. The Company accounts for its ownership
interest in Intermolecular using the cost method, because the Company does not
have the ability to exercise significant influence over Intermolecular’s
strategic, operating, investing and financing activities. Steven D. Goldby,
executive chairman of the Company’s Board of Directors, is a director of
Intermolecular. For the three months ended June 30, 2008 and 2007, the Company
recognized royalty revenue from Intermolecular of $587,000 and $72,000,
respectively. For the six months ended June 30, 2008 and 2007, the Company
recognized royalty revenue from Intermolecular of $639,000 and $128,000,
respectively. As of June 30, 2008 and December 31, 2007, the Company recorded
$84,000 of deferred revenue from Intermolecular.
In
November 2006, the Company invested $400,000 in cash plus certain intellectual
property with no cost basis related to sensor technology in exchange for
approximately 38% of the outstanding shares of Visyx Technologies Inc. (Visyx).
The Company had a 45% voting right in relation to its shareholding. Isy
Goldwasser, the Company’s chief executive officer, is a Visyx board member.
During the three and six months ended June 30, 2007, the Company reported a $0
and $214,000 equity loss based on its share of the loss reported by Visyx, in
accordance with the equity method of accounting. In November 2007, Visyx sold
all its assets to MeasurementSpecialties, Inc. The Company will share in future
distributions, if any, subject to certain preferred stock liquidation
preferences. The Company does not have any commitments to fund this entity. As
of June 30, 2008, the Company had a $0 carrying value of this
investment.
5. Comprehensive
Loss
The
components of comprehensive loss for the three and six months ended June 30,
2008 and 2007 were as follows (in thousands):
SYMYX
TECHNOLOGIES, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. Segment
Disclosure>
SFAS No.
131 (SFAS 131), Disclosures
about Segments of an Enterprise and Related Information, requires
disclosures of certain information regarding operating segments, products and
services, geographic areas of operation and major customers. The method for
determining what information to report under SFAS 131 is based upon the
"management approach," or the way that management organizes the operating
segments within a company for which separate financial information is available
and evaluated regularly by the Chief Operating Decision Maker (CODM) when
deciding how to allocate resources and in assessing performance. The Company’s
Chief Executive Officer is its CODM. Historically, the CODM allocated resources
to and assessed the performance of each business unit using information about
the business unit’s revenue.
Revenue
is defined as revenue from external customers and is disaggregated
into:
Beginning
in 2008, the Company reported its revenue from licensing materials and
intellectual property in the Symyx Research segment. Prior year presentation has
been conformed to this change.
The
disaggregated financial information regarding revenue reviewed by the CODM is as
follows (in thousands):
SYMYX
TECHNOLOGIES, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Geographic
Area Data
The table
below shows revenue by physical location of the Company’s customers based on the
ship-to address (in thousands).
The
Company acquired certain patent rights and know-how from third parties. It also
obtained certain intangible assets in various business acquisitions. These
intangible assets are being amortized on a straight-line basis over the
estimated useful lives of the assets. Because some of the intangible assets
related to the Autodose acquisition were recorded in foreign currencies, the
balance of these intangible assets may be affected by foreign currency exchange
rate fluctuations when converted to U.S. dollars at each reporting period. The
estimated weighted-average useful lives and carrying amounts of these intangible
assets at June 30, 2008 and December 31, 2007 were as follows (in thousands,
except for useful lives):
SYMYX
TECHNOLOGIES, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In the
three months ended June 30, 2008 and 2007, the Company recorded amortization
expenses of intangible assets of $3,329,000 and $1,033,000, respectively. In the
six months ended June 30, 2008 and 2007, the Company recorded amortization
expenses of intangible assets of $6,666,000 and $2,064,000, respectively.
Assuming no subsequent impairment of the underlying assets, the amortization
expense of total intangible assets is expected to be as follows (in
thousands):
SYMYX
TECHNOLOGIES, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
During
the six months ended June 30, 2007, the Company incurred an ordinary loss
greater than its anticipated annual ordinary loss. The Company recorded income
tax benefits for the six months ended June 30, 2007 up to the limit determined
in accordance with FASB Interpretation No. 18, Accounting for Income Taxes for
Interim Periods. The reconciliation of the federal statutory income tax
rate to the Company’s effective income tax rate is as follows:
* Less
than 1%.
U.S.
income taxes were not provided on undistributed earnings from investments in
certain non-U.S. subsidiaries. Determination of the amount of unrecognized
deferred tax liability for temporary differences related to investments in these
non-U.S. subsidiaries that are essentially permanent in duration is not
practicable. The Company intends to reinvest these earnings in operations
outside the U.S.
9. Bank
Credit Facility
On
September 28, 2007, the Company entered into a Credit Agreement (Credit
Agreement) with Bank of America, N.A., as Administrative Agent and L/C Issuer
(the “Agent”), and each lender from time to time a party thereto. Under the
Credit Agreement, the Agent provided a $25 million aggregate commitment for a
two-year revolving credit facility (Facility) and issuances of letters of credit
for the Company’s account, secured by substantially all of the Company’s assets,
other than intellectual property.
Loans
under the Credit Agreement will bear interest at either (i) for Eurodollar rate
loans, the rate per annum equal to the British Bankers Association LIBOR plus a
margin ranging from 0.25 percent to 0.50 percent or (ii) for U.S. dollar loans,
a formula based on the Agent’s prime rate and the federal funds effective
rate. Subject to certain conditions stated in the Credit Agreement,
the Company may borrow, pre-pay and re-borrow amounts under the Facility at any
time during the term of the Credit Agreement. The Credit Agreement
will terminate and all amounts owing thereunder will be due and payable on
September 28, 2009, unless the commitments are earlier terminated, either at the
Company’s request or, if an event of default occurs, by the lenders. The Company
may also, upon the agreement of either the Agent or additional banks not
currently a party to the Credit Agreement, increase the commitments under the
Facility up to an additional $50 million. The Credit Agreement contains
customary representations, warranties, affirmative and negative covenants,
including financial covenants and events of default. The negative
covenants set forth in the Credit Agreement include restrictions on additional
indebtedness and liens, fundamental changes and entering into burdensome
agreements. The financial covenants require the Company to meet quarterly
financial tests with respect to consolidated net worth and consolidated interest
coverage ratio, and financial tests with respect to a consolidated leverage
ratio. As of June 30, 2008, the Company had no outstanding borrowings under the
Facility and was in compliance with all financial covenants related
to the Facility.
10. Business
Combination
On
October 1, 2007, the Company acquired MDL Information Systems, Inc. (MDL) for
$123,000,000 in cash. Of the cash paid, the Company and the seller placed
$10,000,000 in escrow pending their determination of any detriments suffered or
benefits enjoyed by MDL as a result of certain pre-closing intercompany
transactions. The escrow account was subsequently reduced to $1,735,000 after a
March 2008 net working capital adjustment payment of $4,954,000 to the
Company, and June 2008 distributions of $1,626,000 to the Company for
withholding tax and professional fee reimbursement and $1,735,000 to the seller.
The remaining amount in the escrow account will be settled by June
2009. SYMYX TECHNOLOGIES, INC. NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The total
preliminary purchase price for this acquisition was $121,474,000, consisting of
approximately $118,046,000 in cash ($123,000,000 cash paid, net of $4,954,000
working capital adjustments received), and $3,428,000 in transaction costs,
consisting of legal and other professional service fees (net of $325,000
reimbursement of transaction costs from the escrow account received in June
2008). During the six months ended June 30, 2008, the change in restructuring
charges associated with the MDL acquisition and additional legal and other
professional service fees net of the $325,000 reimbursement mentioned above
resulted in a net decrease of goodwill of $262,000.
The
purchase price was preliminary primarily because the parties had not determined
the final amount to be released to the seller from the escrow
account.
11. Restructuring
Charges
On
October 2, 2007, in connection with the MDL acquisition, the Company announced a
restructuring plan to terminate approximately 120 Company employees, comprised
of approximately 100 positions in the United States and approximately 20
positions internationally. Total estimated restructuring termination benefits
were $7,040,000, consisting primarily of involuntary employee termination
benefits. Of the total restructuring charges, $6,823,000 was associated with
former MDL employees and therefore was accrued as part of the liabilities
assumed at the time of MDL acquisition according to FASB Statement No. 141,
Accounting for Business
Combinations, as well as EITF Consensus No. 95-3, Recognition of Liabilities in
Connection with a Purchase Business Combination. The remaining balance,
which was associated with the termination of employees of the acquiring company,
was recorded as part of the Company’s operating expenses according to FASB
Statement No. 146, Accounting
for Costs Associated with Exit or Disposal Activities. As of June 30,
2008, the Company had completed the majority of the restructuring plan.
Estimated costs to complete the restructuring plan in the amount of $632,000 are
expected to be paid out in the remainder of 2008. The following table
illustrated the change in accrued restructuring costs during the six months
ended June 30, 2008 (in thousands):
12. Subsequent
Event
On July
23, 2008, the Company received an additional payment of $4,778,000 from the sale
of Ilypsa, Inc., representing the Company’s portion of the 10% holdback in the
original transaction the buyer retained as security against certain
representations, warranties and covenants contained in the acquisition
agreements.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Cautionary
Statements
This
Quarterly Report on Form 10-Q (”Report”) contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934, as amended, (the “Exchange Act”),
including statements regarding our expectations, objectives, anticipations,
plans, hopes, beliefs, intentions or strategies regarding the future. Typically,
words such as “may,” “will,” “should,” “could,” “expect,” “plan,” “anticipate,”
“believe,” “estimate,” “predict,” “intend,” “potential,” “continue” or the
negative of these terms or other comparable terminology are used to identify
these forward-looking statements. These forward-looking statements are
inherently subject to risks and uncertainties, some of which cannot be predicted
or quantified. These statements appear throughout this Report and are statements
regarding the Company’s current expectation, belief or intent, primarily with
respect to its operations and related industry developments. There
can be no assurance that these statements will prove to be correct.
You
should not place undue reliance on these forward-looking statements. A variety
of factors could cause actual results and experience to differ materially from
the anticipated results or other expectations expressed in such forward-looking
statements. Among the factors that could cause actual results to differ
materially are the factors detailed in Part II, Item 1A of this Report under the
heading “Risk Factors.” All forward-looking statements speak as of the date on
which they were made, based on information available to the Company at such
date. The Company assumes no obligation to update any forward-looking statement
to reflect events or circumstances after the date on which the statement is made
or to reflect the occurrence of unanticipated events. New factors
emerge from time to time, and it is not possible for the Company to predict
which factors will arise. In addition, the Company cannot assess the
impact of each factor on our business or the extent to which any factor, or
combination of factors, may cause actual results to differ materially from those
contained in any forward-looking statements.
The
following discussion and analysis should be read in conjunction with the
condensed consolidated financial statements and the notes thereto included in
this Report and the audited consolidated financial statements and accompanying
notes included in our Annual Report on Form 10-K for the year ended
December 31, 2007, filed with the SEC on March 17, 2008 (SEC File No.
000-27765).
All
percentage amounts and ratios were calculated using the underlying data in
thousands. Operating results for the three and six months ended June 30, 2008
are not necessarily indicative of the results that may be expected for any
subsequent quarter or for the full fiscal year.
Overview
Symyx
Technologies, Inc. (Symyx or the Company) is a scientific research and
development (R&D) integration partner to leading companies in the life
sciences, chemical, energy, consumer products and electronics industries. With
scientific R&D under tremendous economic and technical pressure, we help
companies reduce R&D risk and enhance R&D productivity and enable
them to bring more and better products to market quickly and cost-effectively.
Our technology platform combines Symyx Software (which includes electronic lab
notebooks, lab execution and analysis, logistics and decision support software,
and scientific content), Symyx Tools (which includes modular and integrated
workflows that can be enhanced by Symyx Software) and Symyx Research (which
includes collaborative research and directed services) to support the R&D
process.
We work
with customers through our Symyx Software, Symyx Tools and Symyx Research
businesses. With Symyx Software, we help address customer needs for greater data
access and integration across the enterprise, improving their ability to search,
manage, manipulate and store internal and external research data as well as to
manage their intellectual property. On October 1, 2007, we acquired MDL
Information Systems, Inc. (MDL), a leading provider of innovative informatics
software, databases and services that accelerate successful scientific R&D
by improving the speed and quality of scientists’ decision making. With this
acquisition, Symyx Software became the largest of our three business
segments.
Our Symyx
Tools and Symyx Research products provide different ways for customers to access
our proprietary high-throughput technologies for parallel (versus serial)
experimentation, enabling greater speed and breadth of research. We develop and
apply high-throughput technologies that enable our customers to engage in faster
and broader experimentation by working with small amounts of materials in an
automated fashion and utilizing parallel or array-based testing. Our
Symyx Tools products enable customers to bring some of our laboratory
capabilities into their own organizations by purchasing instruments that
integrate and automate laboratory experimentation, resulting in increased
research productivity. Customers leverage our expertise and infrastructure
through our Symyx Research offerings, with programs that range from directed
research to strategic collaborative relationships. A portion of our resident
expertise and resources within Symyx Research is also allocated toward the
development of intellectual property assets where we partner with a strategic or
financial investor to develop materials science solutions in areas where we have
expertise.
Through
software licensing, automated workflow sales and research services, we provide
customers multiple ways to begin working with us. Our goal is to leverage and
integrate all of our offerings so that, over time, our customers can easily
access our entire technology platform to improve their R&D productivity and
reduce program risk.
We
generate revenue and cash flows from operations from the following
activities:
Highlights
for the quarter ended June 30, 2008 include:
Our net
loss for the six months ended June 30, 2008 was $8.3 million, compared to a net
loss of $2.4 million for the six months ended June 30, 2007. The increase in net
loss was due primarily to significantly higher expenses related to amortization
of intangible assets arising from business combinations, which increased from
$1.9 million in the six months ended June 30, 2007 to $6.5 million in the six
months ended June 30, 2008 due to our acquisition of MDL in October 2007. We
have also significantly increased our investments in sales and marketing in
2008.
Stock-based
compensation expense recognized in our results of operations for the three and
six month periods ended June 30, 2008 was as follows (in
thousands):
On June
16, 2008, our stockholders approved a voluntary stock option exchange program at
the 2008 annual meeting of stockholders. The purpose of the stock option
exchange program is to allow eligible employees holding stock options with
exercise prices significantly higher than the current trading price of our
common stock the opportunity to exchange eligible stock options for new stock
options with a lower exercise price but covering fewer shares. Our
directors, executive officers, consultants and non-U.S. employees will not be
able to participate. We plan to complete the stock option exchange in the third
quarter of 2008. The incremental stock-based compensation resulted from this
program will be amortized on a straight-line basis over the vesting period of
the replacement options.
Critical
Accounting Policies and Use of Estimates
We
prepare our financial statements and accompanying notes in accordance with
generally accepted accounting principles in the United States. Preparing
financial statements and related disclosures requires management to exercise
judgment in making estimates and assumptions that affect the reported amounts of
assets, liabilities, revenue and expenses. These estimates and assumptions are
affected by management’s application of accounting policies. Estimates include
the forfeiture rates for stock-based awards, future warranty expenditures and
product life cycles; assumptions such as the elements comprising a revenue
arrangement, including the distinction between software upgrades/enhancements
and new products, when our products achieve technological feasibility, and the
potential outcome of future tax consequences of events recognized in the our
financial statements or tax returns. We evaluate our
estimates, including those mentioned above, on an ongoing basis. 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 our
basis for making judgments about the carrying value of assets and liabilities
that are not readily apparent from other sources. Actual results may
differ from those estimates under different assumptions or
conditions. Our critical accounting policies and estimates are
discussed in detail in our Annual Report on Form 10-K for the fiscal year ended
December 31, 2007. We have not materially changed these policies except for the
accounting policy related to foreign currency translations as noted
below.
Foreign
Currency Translation
We
account for foreign currency translation in accordance with Statement of
Financial Accounting Standard No. 52, Foreign Currency Translation,
as amended. We translate the assets and liabilities of our international
non-U.S. dollar functional currency subsidiaries into dollars at the rates of
exchange in effect at the balance sheet date. Revenue and expenses are
translated using rates that approximate those in effect during the period.
Translation adjustments are included in stockholders’ equity in the Consolidated
Balance Sheet caption “Accumulated other comprehensive income.” Currency
transaction gains derived from monetary assets and liabilities stated
in a currency other than the functional currency and recognized in results of
operations were $960,000 and $29,000 for the three-month periods ended June 30,
2008 and 2007, respectively, and $338,000 and $5,000 for the six-month periods
ended June 30, 2008 and 2007, respectively. The effect of foreign currency rate
changes on cash and cash equivalents was a decrease of $435,000 and $498,000 as
of June 30, 2008 and December 31, 2007.
Results
of Operations
Revenue
The
predominant driver of our revenue increase in the three and six months ended
June 30, 2008 over the same periods of 2007 was increased content revenue and
software license, consulting and maintenance revenue in our Symyx Software
business segment as a result of the MDL acquisition.
Concentration
of Revenue
ExxonMobil
and The Dow Chemical Company (Dow) are the only two major customers that
contributed more than 10% of our quarterly revenue, accounting for $6.2 million
and $6.6 million of total revenue, respectively, for the three months ended June
30, 2008, and for $8.6 million and $7.0 million of total revenue, respectively,
for the same period in 2007. ExxonMobil and Dow accounted for $13.9 million and
$12.5 million of total revenue, respectively, for the six months ended June 30,
2008, and for $19.6 million and $12.5 million of total revenue, respectively,
for the same period in 2007. We expect a significant portion of our total
revenue will continue to be generated from a few key customers in fiscal 2008.
However, with the MDL acquisition in October 2007, we have significantly reduced
the concentration of our revenue.
The
revenue, and corresponding percent of revenue by each revenue component, from
ExxonMobil and Dow is as follows (in thousands, except
percentages):
Revenue
by Segment
We
segregate revenue into the following business units (in thousands, except
percentages):
The Symyx
Research segment generates revenue primarily from providing directed and
collaborative research services, and from licensing materials and intellectual
property. The decrease in Symyx Research revenue for the three and six months
ended June 31, 2008 from the same periods in 2007 resulted primarily from
reduced collaboration research revenue from ExxonMobil and, to a lesser degree,
Dow. The collaborative research component of our alliance with ExxonMobil
terminated on May 31, 2008. In January 2008, we entered into a Research and
License Agreement with ExxonMobil which partially replaces or extends certain
projects. However, with the net decline in Symyx Research revenue from
ExxonMobil, we expect research revenue from ExxonMobil and Dow to decline up to
50% in the second half of 2008 as compared to the first half of 2008. Symyx
Research has launched initiatives in the chemical, energy and life science
industries, and is actively seeking partnerships or new ventures, and
negotiating a potential new venture in these areas intended to offset some, or
all, of this decline, but we can provide no assurances these initiatives will be
successful. If they are not successful, our financial condition and results of
operations will be materially and adversely affected.
The Symyx
Tools segment generates revenue primarily from the sale and support of our Symyx
Tools systems. We sold the same number of Symyx Tools systems in the three and
six months ended June 30, 2008 we sold in the corresponding periods in 2007.
Symyx Tools revenue decreased in the three and six months ended June 30, 2008
from the comparative periods in 2007 due to the lower average Symyx Tools value
in the period, partially offset by increased Symyx Tools service
revenue.
Beginning
in the second half of 2007, we significantly increased our investments in sales
and marketing in an effort to broaden our sales opportunities for all of our
business units. While we have successfully expanded our pipeline of
opportunities for Symyx Tools, we cannot yet predict with accuracy the sales
cycles or the success rates we can expect in this business segment. We generally
expect that our Symyx Tools service revenue will grow along with growth of our
Symyx Tools installed base.
The Symyx
Software segment generates revenue primarily from the licensing of software,
including the Isentris platform and our Laboratory Execution and Analysis (LEA)
and Electronic Laboratory Notebook (ELN) products, content subscriptions, and
providing associated support, maintenance and consulting services. Symyx
Software revenue increased 355% and 328% in the three and six months ended June
30, 2008, respectively, when compared with the same periods in 2007. We
attributed the majority of the $18.8 million and $33.8 million increase in Symyx
Software revenue for the three and six months ended June 30, 2008, respectively,
to products we acquired through the MDL acquisition and related services. We
expect Symyx Software revenue to continue to increase for the remainder of 2008
as compared to comparable periods in 2007.
Cost
of Revenue
The MDL
acquisition significantly increased our software consulting and maintenance
revenue and the costs associated with these revenue streams. Starting in the
fourth quarter of 2007, we reclassified certain operating expenses related to
software consulting and software and hardware maintenance as a cost of service.
We also reclassified to costs of revenue certain operating expenses and
amortization of intangible assets arising from business combinations that were
related to software licensed or product sold. Costs associated with providing
collaborative research services are included with research and development
expenses and are not included as a cost of revenue.
The
increase of $4.6 million and $10.8 million, respectively, in cost of revenue for
the three and six month periods ended June 30, 2008 compared to the same periods
ended June 30, 2007 was primarily due to costs associated with the increased
software revenue driven by the MDL acquisition.
The cost
of products sold is driven by product mix and sales volume in each period. We
expect the cost of products sold as a percentage of product sales to fluctuate
from period to period because the majority of Symyx Tools are built to order or
to particular specifications. For systems that include a significant development
component prior to their commercial build, or systems delivered to customers as
prototypes, we expense development costs incurred prior to the commercial build,
which results in a lower cost of products sold and higher margin in the quarter
in which we deliver such a system to the customer.
Cost of
products sold was approximately $2.1 million, or 42% of product sales revenue
for the three months ended June 30, 2008, compared to $3.2 million, or 55% of
product sales revenue for the same period in 2007. Cost of products sold was
approximately $4.3 million, or 45% of product sales revenue for the six months
ended June 30, 2008, compared to $4.9 million, or 47% of product sales revenue
for the same period in 2007. The decrease in the cost of products sold as a
percentage of product sales revenue was primarily due to the change of product
mix and partially due to cost reduction from volume discount and standardizing
certain manufacturing processes. Certain tools sold in 2007 also had a higher
degree of third-party components, which typically causes our margins to be lower
on these systems.
Other
Operating Expenses
Research
and Development (“R&D”) Expenses
Our
R&D expenses consist primarily of:
Total
R&D expenses for the three and six months ended June 30, 2008 increased from
the same periods in 2007 due to an increase in salaries and other
personnel-related expenses for the additional headcount added as a result of the
MDL acquisition, partially offset by lower stock-based
compensation.
The
innovations and advances generated by our research laboratories support our
Symyx Research services, Symyx Tools and Symyx Software operations, and generate
intellectual property and discovered materials. We believe our market
opportunity is significant and that continued investment across our business
segments is necessary for long-term success. Accordingly, we expect to continue
to devote significant resources to R&D. However, we would expect our R&D
expenses to grow at a lesser percentage rate than revenue as our businesses
scale.
We do not
track fully burdened R&D costs or capital expenditures by project. However,
based on hours spent on each project, we estimate the R&D efforts undertaken
for various projects were as follows:
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