| SYMYX TECHNOLOGIES INC Item 1A Risk Factors Set forth below and elsewhere in this Annual Report on Form 10 K and in other documents we file with the SEC are risks and uncertainties that could cause actual results to differ materially from the results contemplated by the forward-looking statements contained in this Annual Report on Form 10 K These are not the only risks and uncertainties facing us |
| Additional risks and uncertainties not presently known to us or that we currently deem immaterial also may impair our business operations |
| Most of our revenue is generated from a small number of key customers and the loss of a key customer could substantially reduce our revenues and be perceived as a loss of momentum in our business Over time we have expanded our base of customers and collaborative partners, however, substantial portions of our revenues are generated from a small number of companies |
| In particular, ExxonMobil and The Dow Chemical Company accounted for 39prca and 25prca, respectively, of our total revenue in 2005 |
| We expect that ExxonMobil, The Dow Chemical Company, and a select list of other companies will in the aggregate continue to account for a substantial portion of our revenues for the foreseeable future and the loss of one or more of these customers or collaborative partners would harm our business and operating results |
| The cancellation of the ExxonMobil or The Dow Chemical Company strategic alliance or loss of another significant customer or collaborative partner could also be perceived as a loss of momentum in our business and have an adverse impact on our financial results, which may cause the market price of our common stock to fall |
| Failure to integrate our various software products and achieve customer acceptance of the electronic laboratory notebook technology would harm our revenue and operating results We recently acquired IntelliChem, Inc |
| and Synthematix, Inc, providers of electronic lab notebook software |
| Our success is partially dependent on our ability to successfully integrate the software we acquired in these acquisitions with our existing software and with each other |
| If this integration is not successful or if the integrated software products do not achieve substantial market acceptance among new and existing customers, due to factors such as technological problems, competition, pricing, sales execution or market shifts, it will have a material adverse effect on our revenues and operating results |
| Business activities such as the development of a new line of business or the acquisition of a company or technology could disrupt our business, affect our operating results and distract our management team We have recently completed two acquisitions, and in the future, we may engage in additional acquisitions and expand our business focus in order to exploit technology or market opportunities |
| In the event of any future acquisitions, we may issue stock that would dilute our current stockholders’ percentage ownership, pay cash, incur debts, or assume liabilities |
| We may not be able to successfully integrate our recently acquired business, IntelliChem, Inc |
| and Synthematix, Inc, or any future acquired business, into our existing business in a timely and non-disruptive manner or at all |
| In addition, acquisitions may adversely affect our operating results and could result in, among other things, large one-time charges associated with acquired in-process research and development, future write-offs of goodwill that is deemed to be impaired, restructuring charges related to consolidation of operations, charges associated with 14 ______________________________________________________________________ unknown or unforeseen liabilities of acquired businesses, increased general and administrative expenses, and the loss of key employees |
| In the event that we develop a new line of business, our management’s attention may be diverted from normal daily operations of the business |
| Furthermore, an acquisition or business expansion may not produce the revenues, earnings or business synergies that we anticipate |
| The time, capital management and other resources spent on an acquisition or business expansion that fails to meet our expectations could cause our business and financial condition to be materially and adversely affected |
| We may not be able to maintain and grow a profitable business Our ability to maintain or increase our rate of profitability and grow our business is dependent on our ability to: · make discoveries that our customers choose to commercialize that generate a substantial stream of royalties and other revenue; · extend current collaboration research and development arrangements and add new ones; · secure new Symyx Tools customers; and · add additional licensees of both our software and intellectual property |
| Our ability to achieve our objectives and maintain or increase the profitability of our business will depend in large part on acceptance by potential customers of our high-throughput screening technology and methodology as an effective tool in the discovery of new materials |
| Historically, pharmaceutical and chemical companies have conducted materials research and discovery activities internally using traditional manual discovery methods |
| In order for us to achieve our business objectives, we must convince these companies that our technology and capabilities justify outsourcing part of their basic research and discovery programs |
| We cannot assure you that we will achieve the levels of customer acceptance that will be necessary for us to maintain and grow a profitable business |
| A failure to achieve the necessary customer acceptance and extend current collaborations and add new ones, secure new Symyx Tools customers, and add additional licensees of our software and intellectual property would adversely affect our revenue and profitability and may cause our stock price to decrease |
| Failure to successfully commercialize our discoveries would reduce our revenues and profitability and harm our business For us to achieve and sustain a significant level of profitability, we must continuously make discoveries with significant commercial potential |
| If we license our discovered materials, sensor technologies, or methodologies to other companies, we typically do not receive royalties on sales of products by our partners until they have commenced commercial sales of products containing our materials or produced using our methods |
| The commercialization of discovered materials can be a long and expensive process and we cannot control our partners’ activities in this regard |
| The failure of our partners to commercialize development candidates resulting from our research efforts would reduce our future revenue and would harm our business and operating results |
| In addition, our partners may delay or cancel commercialization of development candidates which may harm our business and operating results |
| In order for us to commercialize development candidates ourselves, we would need to develop, or obtain through outsourcing arrangements, the capability to manufacture, market, and sell products |
| We do not have this capability, and we may not be able to develop or otherwise obtain the requisite manufacturing, marketing, and sales capabilities |
| If we are unable to successfully commercialize products resulting from our proprietary research efforts, our revenues and operating results would decline |
| 15 ______________________________________________________________________ We are dependent on the research and development activities of companies in the chemical, energy, pharmaceutical, electronics, consumer goods, and automotive industries, and declines or reductions in research and development activities in these industries could harm our business The market for our discovery services, instrumentation, and software within the chemical, energy, pharmaceutical, electronics, consumer goods, and automotive industries depends on our customers’ ability and willingness to invest in research and development |
| A majority of our revenues are attributable to our collaborative arrangements with chemical, pharmaceutical, electronics, consumer goods, and automotive companies |
| These contracts generally expire after a fixed period of time |
| If we cannot renew existing contracts or enter into new collaborative arrangements, our business and operating results may be harmed |
| In particular, many companies in the chemical and pharmaceutical industries have, in the past several years, experienced declining profitability or even losses |
| As a result, some chemical and pharmaceutical companies have reduced their research and development activities |
| In addition, many chemical products have become commodity products that compete primarily on the basis of price |
| If commoditization of chemical products and other pressures affecting the industry, including governmental regulations and governmental spending, continue in the future, more companies could adopt strategies that involve significant reductions in their research and development programs |
| Although we believe that our approach can help chemical, energy, pharmaceutical, electronics, consumer goods, and automotive companies increase the efficiency of their research and development activities, our efforts to convince them of this value may be unsuccessful |
| To the extent that these companies reduce their research and development activities, they would be less likely to do business with us |
| As a result of current negative economic conditions, a number of these companies have recently both reduced the size of their research and development budgets as well as the size of their workforces |
| Decisions by these companies to reduce their research and development activities could result in fewer or smaller scale collaborations with us, fewer or smaller scale intellectual property and software licenses, fewer sales of our Symyx Tools systems and related licenses and products, or choosing not to work with Symyx, any of which could reduce our revenues and harm our business and operating results |
| We cannot predict the pace, quality or number of discoveries we may generate, and any inability of ours to generate a significant number of discoveries would reduce our revenues and harm our business Our future revenues and profitability are dependent upon our ability to achieve discoveries, whether through collaborations with customers or through our own proprietary research, which our partners or we choose to commercialize |
| Because of the inherently uncertain nature of research activities, we cannot predict with a high level of precision the pace with which we may generate discoveries or the quality of any discoveries that we may generate |
| Due to the uncertain nature of materials discovery, in which several hundred thousand compounds must often be screened to identify a single development candidate, we may not generate the number of discoveries that we would expect to generate from a given number of experiments, or any discoveries at all |
| In addition, our development candidates may not result in products having the commercial potential our collaborators or we anticipate |
| If this happens, our existing and potential new customers may not renew or enter into new agreements with us |
| Consequently, our future revenues from our research collaborations and from commercialization of our discovered materials would likely decline and harm our business and operating results |
| Difficulties we may encounter managing our growth may divert resources and limit our ability to successfully expand our operations We have experienced a period of rapid and substantial growth that has placed, and our anticipated growth in the future will continue to place, a strain on our research, administrative, and operational infrastructure |
| As our operations expand domestically and internationally, we will need to continue to manage multiple locations and additional relationships with various collaborative partners, suppliers, and 16 ______________________________________________________________________ other third parties |
| Our ability to manage our operations and growth effectively requires us to continue to improve our reporting systems and procedures as well as our operational, financial and management controls |
| In addition, recent SEC rules and regulations have increased the internal control and regulatory requirements under which we operate |
| We may not be able to successfully improve our management information and control systems to a level necessary to manage our growth and we may discover deficiencies in existing systems and controls that we may not be able to remediate in an efficient or timely manner |
| We conduct research programs for our own account and for a number of collaborative partners, and any conflicts between these programs would harm our business Our strategy includes conducting research programs for our own account as well as for collaborative partners |
| We believe that our collaborative agreements are structured in a manner to enable us to minimize conflicts with our collaborators relating to rights to potentially overlapping leads developed through programs for our own account and through programs funded by a collaborator, or through programs funded by different collaborators |
| However, conflicts between a collaborator and us, or between collaborators, could potentially arise |
| In this event, we may become involved in a dispute with our collaborators regarding the material |
| Disputes of this nature could harm the relationship between us and our collaborators, and concerns regarding our proprietary research programs could also affect our ability to enter into new collaborative relationships and cause our revenues and operating results to decline |
| We have a limited number of contracts for the sale of Symyx Tools systems and for the licensing of intellectual property, software, technologies, and materials to date, and we cannot assure you that we will be able to build a sustainable business related to either the sale of additional systems or the licensing of intellectual property, software, technologies, and materials To date, we have entered a growing but still limited number of contracts for our Symyx Tools systems |
| Because of the high cost and complexity of these systems, the sales cycle for them has been and is likely to continue to be long |
| Sales of these systems will require us to educate our potential customers about the full benefits of these systems, which may require significant time |
| Sales of Symyx Tools systems and licensing of intellectual property, software, technologies, and materials will be subject to a number of significant risks over which we have little or no control, including: · customers’ budgetary constraints and internal acceptance review procedures; · customers’ willingness to acknowledge the validity of our patent portfolio and their need to obtain a license to our intellectual property in order to undertake research using high-throughput combinatorial chemistry methods; · complexity of our systems and difficulties we may encounter in meeting individual customer specifications and commitments on a timely basis; · our ability to build new systems and design software and workflows to meet the demands of our customers; · customers’ willingness to renew annual right to use software licenses; · the fact that there may be only a limited number of customers that are willing to purchase our larger systems or enter into licensing agreements with us; · a long sales cycle that involves substantial human and capital resources; and · potential downturns in general or in industry specific economic conditions |
| 17 ______________________________________________________________________ If we are unable to continue to build the infrastructure to support Symyx Tools and intellectual property and software licensing, or if the sales or build cycles for Symyx Tools systems lengthen unexpectedly, our revenues may decline or not grow as anticipated and our results from operations may be harmed |
| The loss of key personnel or the inability to attract and retain additional personnel could have a material adverse effect on our results of operations We believe our future success will depend upon our ability to attract and retain highly skilled personnel, including key scientific and managerial personnel |
| As we seek to expand our operations, the hiring of qualified scientific and technical personnel will be difficult, as the number of people with experience in high-throughput materials science is limited and we may face competition for qualified professionals, especially in the San Francisco Bay Area, where we are headquartered |
| Further, as we form new alliances with other collaboration partners, we may need personnel with specific skill sets that may be difficult to locate or attract |
| Failure to attract and retain personnel, particularly scientific and technical personnel, would impair our ability to grow our business and pursue new discovery initiatives and collaborative arrangements |
| Competition could increase, and competitive developments could render our technologies obsolete or noncompetitive, which would reduce our revenues and harm our business The field of high-throughput materials science is increasingly competitive |
| We are aware of companies that may apply their expertise in high-throughput chemistry to their internal materials research and development programs |
| In addition, there are companies focusing on aspects of high-throughput chemistry for the discovery of materials |
| In addition, academic and research institutions may seek to develop technologies that would be competitive with our technologies for materials discovery |
| Because high-throughput materials science is an emerging field, competition from additional entrants may increase |
| Our Symyx Tools and Symyx Software business groups are facing increasing competition from a number of instrument manufacturing and software companies |
| To the extent these companies develop competing technologies, our own technologies, methodologies, systems and workflows, and software could be rendered obsolete or noncompetitive |
| Our inability to adequately protect our proprietary technologies could harm our competitive position and have a material adverse effect on our business The success of our business depends, in part, on our ability to obtain patents and maintain adequate protection of our intellectual property for our technologies and products in the US and other countries |
| The laws of some foreign countries do not protect proprietary rights to the same extent as the laws of the US, and many companies have encountered significant problems in protecting their proprietary rights in these foreign countries |
| If we do not adequately protect our intellectual property, competitors may be able to practice our technologies and erode our competitive advantage, and our business and operating results could be harmed |
| The patent positions of technology companies, including our patent positions, are often uncertain and involve complex legal and factual questions |
| We will be able to protect our proprietary rights from unauthorized use by third parties only to the extent that our proprietary technologies are covered by valid and enforceable patents or are effectively maintained as trade secrets |
| We apply for patents covering our technologies and products as we deem appropriate |
| However, we may not obtain patents on all inventions for which we seek patents, and any patents we obtain may be challenged and may be narrowed in scope or extinguished as a result of such challenges |
| Our existing patents and any future patents we obtain may not 18 ______________________________________________________________________ be sufficiently broad to prevent others from practicing our technologies or from developing competing products |
| Others may independently develop similar or alternative technologies or design around our patented technologies or products |
| These companies would then be able to offer research services and develop, manufacture and sell products that compete directly with our research services and products |
| In that case, our revenues and operating results would decline |
| We rely upon trade secret protection for certain of our confidential information |
| We have taken measures to protect our confidential information |
| These measures may not provide adequate protection for our trade secrets or other confidential information |
| We seek to protect our confidential information by entering into confidentiality agreements with employees, collaborators, and consultants |
| Nevertheless, employees, collaborators or consultants may still disclose or misuse our confidential information, and we may not be able to meaningfully protect our trade secrets |
| In addition, others may independently develop substantially equivalent information or techniques or otherwise gain access to our trade secrets |
| Disclosure or misuse of our confidential information would harm our competitive position and could cause our revenues and operating results to decline |
| Failure to adequately enforce our intellectual property rights could harm our competitive position and have a material adverse effect on our business Our success depends on our ability to enforce our intellectual property rights through either litigation or licensing |
| To be successful in enforcing our intellectual property through litigation or licensing there are several aspects to consider, including maintaining the validity of our intellectual property, proving that others are infringing and obtaining a commercially significant outcome as a result of such infringement |
| Intellectual property litigation can be successful if our intellectual property withstands close scrutiny |
| If it does not withstand this scrutiny, we can lose part or all of our intellectual property position |
| If we lose part or all of our intellectual property position, whether through litigation or opposition proceedings, our business and operating results may be harmed |
| With regard to proving infringement of our intellectual property, our success depends in part on obtaining useable knowledge of what technologies others are practicing |
| If others do not publish or disclose the technologies that they are using, our ability to discover infringing uses and enforce our intellectual property rights will diminish |
| If we are unable to enforce our intellectual property rights or if the ability to enforce such rights diminishes, our revenues from intellectual property licensing and our operating results may decline |
| Our intellectual property must protect our overall business structure by allowing us to obtain commercially significant results from litigation, including compensation and/or relevant injunctions, without resulting in undue cost and expense |
| Enforcement of our intellectual property through litigation can result in significant expenses, distractions and risks that might cause us to lose focus or may otherwise harm our profitability and weaken our intellectual property position |
| Enforcement proceedings can adversely affect our intellectual property while causing us to spend resources on the enforcement proceedings |
| As our licensing activities have matured, we have become involved in arbitration and litigation to assert and defend our intellectual property |
| These matters may become material and more such matters may arise |
| Successful conclusion of these matters will assist our business, while unsuccessful conclusion of these matters will cost us time and money and possibly loss of rights |
| Our ability to manage the costs of these proceedings to obtain a successful result cannot be predicted |
| 19 ______________________________________________________________________ Our business may be harmed if we are found to infringe proprietary rights of others Our commercial success also depends in part on ensuring we do not infringe patents or other proprietary rights of third parties |
| Others have filed, and in the future are likely to file, patent applications covering technologies that we may wish to utilize with our proprietary technologies, or products that are similar to products developed with the use of our technologies |
| If these patent applications result in issued patents and we wish to use the claimed technology, we would need to obtain a license from the third party and this would increase our costs of operations and harm our operating results |
| Third parties may assert that we are employing their proprietary technology without authorization |
| In addition, third parties may obtain patents in the future and claim that use of our technologies infringes these patents |
| We could incur substantial costs and diversion of the time and attention of management and technical personnel in defending ourselves against any such claims |
| Furthermore, parties making claims against us may be able to obtain injunctive or other equitable relief that could effectively block our ability to further develop, commercialize, and sell products, and such claims could result in the award of substantial damages against us |
| In the event of a successful claim of infringement against us, we may be required to pay damages and obtain one or more licenses from third parties |
| We may not be able to obtain these licenses at a reasonable cost, if at all |
| In that event, we could encounter delays in product introductions while we attempt to develop alternative methods or products, or be required to cease commercializing affected products, which would harm our operating results |
| We expect that our quarterly results of operations will fluctuate, and this fluctuation could cause our stock price to decline, causing investor losses Our quarterly operating results have fluctuated in the past and are likely to do so in the future |
| These fluctuations could cause our stock price to fluctuate significantly or decline |
| Revenues in future fiscal periods may be greater or less than revenues in the immediately preceding period or in the comparable period of the prior year |
| Some of the factors that could cause our operating results to fluctuate include: · expiration of research contracts with major collaborative partners, which may not be renewed or replaced with contracts with other companies; · the success rate of our discovery efforts associated with milestones and royalties; · the timing and willingness of partners to commercialize our discoveries that would result in royalties; · developments or disputes concerning patent or other proprietary rights; · special charges related to acquisitions; · the size and timing of customer orders for shipments of, and payments related to, Symyx Tools instrumentation; · the size and timing of royalties we receive from third parties, including those who license our laboratory instruments and software for resale; · the size and timing of internal research and development programs we undertake on an un-funded basis; · the size and timing of both software and intellectual property licensing agreements we may enter into; · changes in estimates and underlying assumptions related to our warranty expense accrual, inventory valuation reserve, and income tax valuation allowance; 20 ______________________________________________________________________ · inaccurate assessment of demand for our products and services, including our software; · fluctuations in the market values of our cash equivalents and short and long-term investments and in interest rates, including any gains or losses arising on the sale of these investments; · changes in accounting rules and regulations, including those related to revenue recognition and accounting for stock options granted to employees; and · general and industry specific economic conditions, which may affect our customers’ capital investment levels and research and development investment decisions |
| A large portion of our expenses, including expenses for facilities, equipment, and personnel, are relatively fixed in nature |
| Accordingly, in the event revenues decline or do not grow as anticipated due to expiration of research contracts, failure to obtain new contracts or other factors, we may not be able to correspondingly reduce our operating expenses |
| Failure to achieve anticipated levels of revenues could therefore significantly harm our operating results |
| Due to the possibility of fluctuations in our revenues and expenses, we believe that quarter-to-quarter comparisons of our operating results are not a good indication of our future performance |
| As a result of these possible fluctuations, it is difficult for our management to predict or estimate our quarterly or annual operating results and to give accurate guidance |
| Our operating results in some quarters may not meet the expectations of stock market analysts and investors |
| In that case, our stock price would probably decline, and investors would experience a decline in the value of their investment |
| Our stock price has been and may continue to be volatile The market price of our common stock since our initial public offering has been highly volatile |
| Volatility in the market price for our common stock will be affected by a number of factors, including the following: · decisions by significant stockholders to acquire or divest their stock holdings, given the relatively low average daily trading volumes we have historically experienced; · the announcement of new products or services by us or our competitors; · quarterly variations in our or our competitors’ results of operations; · failure to achieve operating results projected by securities analysts; · failure to achieve operating results within guidance provided by our senior management; · changes in earnings estimates or recommendations by securities analysts; · changes in management; · changes in investors’ beliefs as to the appropriate valuation ratios for us and our competitors; · investors’ perception that we have not validated parts of our business model; · changes in investors’ levels of risk aversion; · speculation in the press or analyst community; · developments in our industry; · changes in our growth rates; and · general market conditions, political influences and other factors, including factors unrelated to our operating performance or the operating performance of our competitors |
| 21 ______________________________________________________________________ These factors and fluctuations, as well as general economic, political, and market conditions, may materially adversely affect the market price of our common stock |
| Securities class action litigation is often brought against a company following periods of volatility in the market price of its securities |
| We may in the future be the target of similar litigation |
| Securities litigation, whether with or without merit, could result in substantial costs and divert management’s attention and resources, which could harm our business and financial condition, as well as the market price of our common stock |
| Additionally, volatility or a lack of positive performance in our stock price may adversely affect our ability to retain key employees, most of whom have been granted stock options |
| We depend on a limited number of suppliers and will be delayed in our manufacture or unable to manufacture our Symyx Tools if shipments from these suppliers are delayed or interrupted Key parts of our Symyx Tools systems are currently available only from a single source or a limited number of sources |
| In addition, components of our capital equipment are available from one or only a few suppliers |
| In the event that supplies from these vendors are delayed or interrupted for any reason, we may not be able to get equipment or components for Symyx Tools systems or our own research efforts in a timely fashion or in sufficient quantities or under acceptable terms |
| Even if alternative sources of supply are available, it could be time-consuming and expensive for us to qualify new vendors and integrate their components into our Symyx Tools systems |
| In addition, we are dependent on our vendors to provide components of appropriate quality and reliability |
| Consequently, in the event that supplies from these vendors were delayed or interrupted for any reason, we could be delayed in our ability to develop and deliver products |
| Our investments could lose market value and consequently harm our ability to fund continuing operations The primary objective of our investment activities is to preserve principal while at the same time maximizing yields without significantly increasing risk |
| To achieve this objective, we maintain our portfolio of cash equivalents, short-term and long-term investments in a variety of securities, including government and corporate obligations and money market funds |
| These securities are generally classified as available-for-sale and consequently are recorded on the balance sheet at fair value with unrealized gains or losses reported as a separate component of accumulated other comprehensive income (loss), net of estimated tax |
| The market values of these investments may fluctuate due to market conditions and other conditions over which we have no control |
| Fluctuations in the market price and valuations of these securities may require us to record losses due to impairment in the value of the securities underlying our investment |
| This could result in future charges on our earnings |
| Investments in both fixed rate and floating rate interest earning instruments carry varying degrees of interest rate risk |
| Fixed rate securities may have their fair market value adversely impacted due to a rise in interest rates |
| In general, securities with longer maturities are subject to greater interest rate risk than those with shorter maturities |
| Although floating rate securities generally are subject to less interest rate risk than fixed rate securities, floating rate securities may produce less income than expected if interest rates decrease |
| Due in part to these factors, our investment income may fall short of expectations or we may suffer losses in principal if securities are sold that have declined in market value due to changes in interest rates |
| Changes in accounting standards regarding stock option plans have limited the desirability of granting stock options, which may harm our ability to attract and retain employees, reduce our profitability and may affect our stock price We are required to adopt SFAS Nodtta 123(R), Share-Based Payment, on January 1, 2006 |
| This statement requires us to treat the value of stock options granted to employees as an expense |
| The adoption of this 22 ______________________________________________________________________ statement will reduce the attractiveness of granting stock options because the additional expense associated with these grants will reduce our profitability |
| However, stock-based compensation is an important employee recruitment and retention tool, and we may not be able to attract and retain key personnel if we reduce the scope of our employee stock programs |
| We may need to limit the use of stock-based compensation and continue to explore other compensation plans to assist in employee recruitment and retention |
| We cannot determine how investors will view the change in accounting treatment of stock-based compensation and the change in our practices and how these changes may impact our stock price and perception of the value of our company |
| Failure to maintain effective internal controls in accordance with Section 404 of the Sarbanes-Oxley Act could have a material adverse effect on our business and stock price Each year we are required to document and test our internal control procedures in order to satisfy the requirements of Section 404 of the Sarbanes-Oxley Act, which requires annual management assessments of the effectiveness of our internal controls over financial reporting and a report by our Independent Registered Public Accounting Firm addressing these assessments and the effectiveness of internal control over financial reporting |
| During the course of our testing we may identify deficiencies that we are required to remediate in order to comply with the requirements of Section 404 |
| In addition, if we fail to maintain the adequacy of our internal controls, as such standards are modified, supplemented or amended from time to time, we may not be able to ensure that we can conclude on an ongoing basis that we have effective internal controls over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act |
| Furthermore, there are certain areas of accounting such as income tax that involve extremely complex rules that vary by country, where an innocent error, not misconduct, could be deemed to be a significant deficiency or a material weakness in our internal controls |
| Failure to maintain an effective internal control environment could have a material adverse effect on our stock price |
| If our products contain defects, it could harm our revenues and expose us to litigation The products we offer are internally complex and, despite extensive testing and quality control, may contain errors or defects, especially when we first introduce them |
| We may need to issue corrective releases of our software products to fix any defects or errors |
| Any defects or errors could also cause injury to personnel and/or damage to our reputation and result in increased costs, loss of revenues, product returns or order cancellations, or lack of market acceptance of our products |
| Accordingly, any defects or errors could have a material and adverse effect on our business, results of operations and financial condition |
| Our license agreements with our customers typically contain provisions designed to limit our exposure to potential product liability claims |
| It is possible, however, that the limitation of liability provisions contained in our license agreements may not be effective as a result of existing or future federal, state or local laws or ordinances or unfavorable judicial decisions |
| Although we have not experienced any product liability claims to date, sale and support of our products entails the risk of such claims, which could be substantial in light of our customers’ use of such products in mission-critical applications |
| If a claimant brings a product liability claim against us, it could have a material adverse effect on our business, results of operations and financial condition |
| Our products interoperate with many parts of complicated computer systems, such as mainframes, servers, personal computers, application software, databases, operating systems and data transformation software |
| Failure of any one of these parts could cause all or large parts of computer systems to fail |
| In such circumstances, it may be difficult to determine which part failed, and it is likely that customers will bring a lawsuit against several suppliers |
| Even if our software is not at fault, we could suffer material expense and material diversion of management time in defending any such lawsuits |
| 23 ______________________________________________________________________ We are exposed to general global economic and market conditions Our business is subject to the effects of general economic conditions in the United States, Europe, Asia, and globally, and, in particular, market conditions in the pharmaceutical and chemical industries |
| In recent quarters, our ability to conclude Symyx Tools sale agreements and research and development collaborative arrangements have been adversely affected as a result of unfavorable economic conditions and reduced capital spending in the United States, Europe, and Asia |
| If the economic conditions in the United States and globally do not improve, or if we experience a worsening in the global economic slowdown, we may experience material adverse impacts on our business, operating results, and financial condition |
| We are exposed to risks associated with export sales and operations that may limit our ability to generate revenue from our products and intellectual property We have recently established operations in certain parts of Europe and Asia |
| We intend to continue to expand our international presence in order to increase our export sales |
| Export sales to international customers and operating in foreign countries entail a number of risks, including: · obtaining and enforcing intellectual property rights under a variety of foreign laws; · unexpected changes in, or impositions of, legislative or regulatory requirements; · delays resulting from difficulty in obtaining export licenses for certain technology, and tariffs, quotas, and other trade barriers and restrictions; · longer payment cycles and greater difficulty in accounts receivable collection; · potentially adverse taxes; · currency exchange fluctuations; · greater difficulties in maintaining and enforcing US accounting and public reporting standards; · greater difficulties in staffing and managing foreign operations; · the burdens of complying with a variety of foreign laws; and · other factors beyond our control |
| We are also subject to general geopolitical risks in connection with international operations, such as political, social and economic instability, terrorism, potential hostilities, changes in diplomatic and trade relationships, and disease outbreaks |
| Although to date we have not experienced any material adverse effect on our operations as a result of such regulatory, geopolitical and other factors, we cannot assure investors that such factors will not have a material adverse effect on our business, financial condition and operating results or require us to modify our current business practices |
| Any inability of ours to keep pace with technological advances and evolving industry standards would harm our business The market for our products is characterized by continuing technological development, evolving industry standards and changing customer requirements |
| Due to increasing competition in our field, it is likely that the pace of innovation and technological change will increase |
| Our success depends upon our ability to enhance existing products and services and to respond to changing customer requirements |
| Failure to develop and introduce new products and services, or enhancements to existing products, in a timely manner in response to changing market conditions, industry standards or other customer requirements would harm our future revenues and our business and operating results |
| 24 ______________________________________________________________________ We use hazardous materials in our business, and any claims relating to improper handling, storage or disposal of these materials could subject us to significant liabilities Our business involves the use of a broad range of hazardous chemicals and materials |
| Environmental laws impose stringent civil and criminal penalties for improper handling, disposal and storage of these materials |
| In addition, in the event of an improper or unauthorized release of, or exposure of individuals to, hazardous materials, we could be subject to civil damages due to personal injury or property damage caused by the release or exposure |
| A failure to comply with environmental laws could result in fines and the revocation of environmental permits, which could prevent us from conducting our business |
| Accordingly, any violation of environmental laws or failure to properly handle, store or dispose of hazardous materials could result in restrictions on our ability to operate our business and could require us to incur potentially significant costs for personal injuries, property damage and environmental cleanup and remediation |
| Our facilities are located near known earthquake fault zones, and the occurrence of an earthquake or other disaster could cause damage to our facilities and equipment and harm our business Our facilities are located in the Silicon Valley near known earthquake fault zones and are vulnerable to damage from earthquakes |
| In October 1989, a major earthquake that caused significant property damage and a number of fatalities struck this area |
| We are also vulnerable to damage from other types of disasters, including fire, floods, power outages or losses, communications failures and similar events |
| If any disaster were to occur, our ability to operate our business at our facilities would be seriously, or potentially completely, impaired |
| In addition, the unique nature of our research activities and of much of our equipment could make it difficult for us to recover from a disaster |
| We do not carry earthquake insurance on the property that we own and the insurance we do maintain may not be adequate to cover our losses resulting from disasters or other business interruptions |
| Accordingly, an earthquake or other disaster could harm our business and operating results |
| Some of our existing stockholders can exert control over us, and may not make decisions that are in the best interests of all stockholders Our officers, directors and principal stockholders (greater than 5prca stockholders) together control approximately 37prca of our outstanding common stock |
| As a result, these stockholders, if they act together, will be able to exert a significant degree of influence over our management and affairs and over matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions |
| This concentration of ownership may have the effect of delaying or preventing a change in control of Symyx and might affect the market price of our common stock, even when such a change may be in the best interests of all stockholders |
| Provisions of our charter documents may have anti-takeover effects that could prevent a change in our control, even if this would be beneficial to stockholders Provisions of our amended and restated certificate of incorporation, bylaws and Delaware law could make it more difficult for a third party to acquire us, even if doing so would be beneficial to our stockholders |
| These provisions include: · a classified Board of Directors, in which our board is divided into three classes with three-year terms with only one class elected at each annual meeting of stockholders, which means that a holder of a majority of our common stock will need two annual meetings of stockholders to gain control of the Board; · a provision which prohibits our stockholders from acting by written consent without a meeting; 25 ______________________________________________________________________ · a provision which permits only the Board of Directors, the President or the Chairman to call special meetings of stockholders; and · a provision which requires advance notice of items of business to be brought before stockholders meetings |
| These provisions can be amended only with the vote of the holders of 66 2/3prca of our outstanding capital stock |