

	1. Organization and Summary of Significant Accounting Policies

Organization and Business

Accelrys, Inc. (“we”, “our”, or “us”) develops and commercializes scientific business intelligence software and solutions that enable our customers to accelerate the discovery, development and manufacturing of new products and materials. Our customers include pharmaceutical, biotechnology and other life science companies, as well as companies that are in the energy, chemicals, aerospace and consumer packaged goods markets. Our software and service solutions are used by our customers’ scientists, biologists, chemists and information technology professionals in order to aggregate, mine, integrate, analyze, simulate, manage and interactively report scientific data.

We have completed the following acquisitions since 2010:


•	On July 1, 2010, Alto Merger Sub, Inc., our wholly owned subsidiary merged with and into Symyx Technologies, Inc. (“Symyx”), with Symyx surviving as our wholly owned subsidiary (the “Symyx Merger”). Symyx's operating results are included in our consolidated financial statements and results of operations beginning July 1, 2010.


•	On May 19, 2011, we completed the acquisition of Contur Software AB (“Contur”), whereby Contur became our wholly owned subsidiary (the “Contur Acquisition”). Contur's operating results are included in our consolidated financial statements and results of operations beginning May 19, 2011.


•	On December 30, 2011, we completed the acquisition of VelQuest Corporation (“VelQuest”), whereby VelQuest became our wholly owned subsidiary (the “VelQuest Acquisition”). VelQuest's operating results are included in our consolidated financial statements and results of operations beginning December 30, 2011.


•	On May 17, 2012, we acquired a proprietary web-based Hit Explorer Operating System (“HEOS”) software platform from Scynexis, Inc. The operating results of the HEOS platform are included in our consolidated financial statements and results of operations beginning May 17, 2012.


•	On October 23, 2012, we completed the acquisition of Aegis Analytical Corporation (“Aegis”), whereby Aegis became our wholly owned subsidiary (the “Aegis Acquisition”). Aegis' operating results are included in our consolidated financial statements and results of operations beginning October 23, 2012.


•	On January 11, 2013, we completed the acquisition of all of the outstanding shares of Vialis AG (“Vialis”), a joint stock company organized under the laws of Switzerland (the “Vialis Acquisition”). Vialis' operating results are included in our consolidated financial statements and results of operations beginning January 11, 2013.


•	On September 3, 2013, we completed the acquisition of all of the outstanding shares of ChemSW, Inc. (“ChemSW”), a California corporation (the “ChemSW Acquisition”). ChemSW’s operating results are included in our consolidated financial statements and results of operations beginning September 3, 2013.

•

On December 9, 2013, we completed the acquisition of all of the outstanding shares of Qumas Limited (“Qumas”), a company incorporated and registered in Ireland (the “Qumas Acquisition” and together with the Symyx Merger, the Contur Acquisition, the VelQuest Acquisition, the Aegis Acquisition, the acquisition of the HEOS platform, the Vialis Acquisition and the ChemSW Acquisition, the “Acquisitions”). Qumas’ operating results are included in our consolidated financial statements and results of operations beginning December 9, 2013.

Principles of Consolidation

These consolidated financial statements include our accounts and those of our wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the U.S. (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and the disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to share-based compensation, income taxes, contingent consideration, loss contingencies related to legal proceedings and the valuation of goodwill, intangibles and other long-lived assets. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual future results could differ from those estimates.

Cash, Cash Equivalents and Marketable Securities

We consider all highly liquid investments with an original maturity of three months or less to be cash equivalents. We invest our cash with financial institutions in money market funds and other investment grade securities such as certificates of deposits, commercial paper, corporate and municipal bonds and obligations of U.S. government sponsored enterprises.

Our marketable securities consist of fixed income securities with original maturities of greater than three months and include obligations of U.S. government sponsored enterprises, commercial paper, certificates of deposit, corporate and municipal debt. We account for our investments in marketable securities in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 320, Investments-Debt and Equity Securities (“ASC Topic 320”). Accordingly, our marketable securities have been classified as available-for-sale and are recorded at their estimated fair value, with unrealized gains and losses recorded in stockholders equity and included in accumulated other comprehensive income. Realized gains and losses on the sale of available-for-sale marketable securities are recorded in royalty and other income, net. Available-for-sale marketable securities with original maturities greater than three months and remaining maturities of one year or less are classified as short-term available-for-sale marketable securities. Available-for-sale marketable securities with remaining maturities of greater than one year are classified as long-term available-for-sale marketable securities. Unrealized losses that are not considered other than temporary and unrealized gains are included in accumulated other comprehensive income in stockholders’ equity. Unrealized losses that are determined to be other-than-temporary are recorded as a charge against income. The cost of marketable securities sold is determined based on the specific identification method.

Fair Value of Financial Instruments

We carry our cash equivalents, marketable securities and foreign currency forward contracts at market value. The carrying amount of accounts receivable, accounts payable and accrued liabilities are considered to be representative of their respective fair values due to their short-term nature. The fair value of our foreign currency contracts is estimated based on the prevailing exchange rates of the various hedged currencies as of the end of the period. Our investments in privately-held companies are carried at cost. Our notes receivable are carried at net realizable value. It is impracticable for us to estimate the fair value of these instruments on a recurring basis if there are no identified events or changes in circumstances that may have a significant adverse effect on their fair value.

Fair value accounting provides a definition of fair value, establishes acceptable methods of measuring fair value and expands disclosures for fair value measurements. The principles apply under accounting pronouncements that require measurement of fair value and do not require any new fair value measurements in accounting pronouncements where fair value is the relevant measurement attribute. Fair value accounting also specifies a fair value hierarchy based upon the observability of inputs used in valuation techniques. Observable inputs (highest level) reflect market data obtained from independent sources, while unobservable inputs (lowest level) reflect internally developed market assumptions.

In accordance with fair value accounting, fair value measurements are classified under the following hierarchy:

Level 1—Quoted prices for identical instruments in active markets.

Level 2—Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These might include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (such as interest rates, volatilities, prepayment speeds, credit risks, etc.) or inputs that are derived principally from or corroborated by market data by correlation or other means.

Level 3—Model-derived valuations in which one or more significant inputs or significant value-drivers are unobservable.

Fair value measurements are classified according to the lowest level input or value-driver that is significant to the valuation. A measurement may therefore be classified within Level 3 even though there may be significant inputs that are readily observable.

Concentrations of Risk

We maintain deposits in federally insured financial institutions in excess of federally insured limits. We do not believe we are exposed to significant credit risk due to the financial position of the depository institutions in which those deposits are held. Additionally, we have established guidelines regarding diversification of our investment portfolio, credit quality of issuers and maturities of investments, which are designed to maintain the safety and liquidity of our deposits and investments.

In addition to our U.S. operations, we conduct business in Europe and in the Asia/Pacific region, primarily in Japan. Any significant decline in the economies or the value of the currencies in these regions could have a material adverse impact on us.

Allowance for Doubtful Accounts

We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments on accounts receivable. This estimate is based on a specific customer analysis and an analysis of our historical write-offs as a percent of outstanding accounts receivable balances. If the financial condition of a customer were to deteriorate, resulting in an impairment of its ability to make payments against outstanding balances owed to us, an additional allowance may be required.

Property and Equipment

Property and equipment consists of the following:



	Useful Life (Yrs)	December 31, 2013			December 31, 2012
		(In thousands)
Computers and software	1-3	18,175			18,244
Furniture and fixtures	1-3	2,654			1,637
Leasehold improvements	1-5	9,964			6,533
Total property and equipment, gross		30,793			26,414
Less accumulated depreciation and amortization		(12,344		)	(15,526		)
Total property and equipment, net		$	18,449		$	10,888

In June 2012, we sold real property comprised of land and an office building located in Santa Clara, California, which we reclassified as “held for sale” during the year ended December 31, 2012, for a net sales price of $6.8 million. We recorded a pre-tax gain of approximately $2.7 million on the sale, which is included in royalty and other income, net, as this property was not utilized in our ongoing operations since its acquisition in the Symyx Merger.

During the year ended December 31, 2013, we wrote off fixed assets which were no longer in use with a total cost of $7.1 million and associated accumulated depreciation of $7.0 million, resulting in a loss of $0.1 million. During the year ended December 31, 2012, we wrote off fixed assets which were no longer in use with a total cost of $1.8 million and associated accumulated depreciation of $1.7 million, resulting in a loss of $0.1 million. During the year ended December 31, 2011, we wrote off fixed assets which were no longer in use with a total cost of $1.2 million and associated accumulated depreciation of $1.1 million, resulting in a loss of $0.1 million.

Depreciation is recorded on the straight-line method over the estimated useful lives of the related assets. Leasehold improvements are amortized over the shorter of their estimated useful lives or the remaining lease term. Repair and maintenance costs are charged to expense as incurred. Depreciation expense was $4.2 million, $3.3 million and $3.8 million for the years ended December 31, 2013, 2012 and 2011, respectively.

Software Development Costs

We account for costs incurred for computer software to be sold in accordance with ASC Topic 985, Software. Accordingly, costs incurred internally in the research and development of new software products and significant enhancements to existing software products are expensed as incurred until the technological feasibility of the product has been established. Technological feasibility occurs shortly before our internally developed software products are available for general release. We have determined that the internal costs eligible for capitalization are not material. Costs paid to third parties for products in which technological feasibility has been established are capitalized upon purchase of the software.

As of December 31, 2013 we had no capitalized software purchased from third parties. Capitalized software purchased from third parties as of December 31, 2012, was $0.1 million and is included in purchased intangible assets, net, in the accompanying consolidated balance sheet. These costs are being amortized to cost of revenue on a straight-line basis over their estimated useful life of five years. Amortization expense was $0.1 million for the year ended December 31, 2013. Amortization expense was $0.4 million for each of the years ended December 31, 2012 and 2011.

Goodwill and Purchased Intangible Assets

Our goodwill resulted from acquisitions in fiscal years 1999 through 2013. Goodwill and intangible assets with indefinite useful lives are not amortized, but are tested for impairment at least annually or as circumstances indicate that their value may no longer be recoverable. In accordance with ASC Topic 350, Intangibles—Goodwill and Other (“ASC Topic 350”), we review our goodwill and indefinite-lived intangible asset for impairment at least annually in our fiscal fourth quarter and more frequently if events or changes in circumstances occur that indicate a potential reduction in the fair value of our reporting unit and/or our indefinite-lived intangible asset below their respective carrying values. Examples of such events or circumstances include: a significant adverse change in legal factors or in the business climate, a significant decline in our stock price, a significant decline in our projected revenue or cash flows, an adverse action or assessment by a regulator, unanticipated competition, a loss of key personnel, or the presence of other indicators that would indicate a reduction in the fair value of a reporting unit.

Our goodwill is considered to be impaired if we determine that the carrying value of the reporting unit to which the goodwill has been assigned exceeds management’s estimate of its fair value. Based on the guidance provided by ASC Topic 350 and ASC Topic 280, Segment Reporting, (“ASC Topic 280”) management has determined that our company operates in one segment and consists of one reporting unit given the similarities in economic characteristics between our operations and the common nature of our products, services and customers. Because we have only one reporting unit, and because we are publicly traded, we determine the fair value of the reporting unit based on our market capitalization as we believe this represents the best evidence of fair value. In the fourth quarter of fiscal 2013, we completed our annual goodwill impairment test as of December 31, 2013 and concluded that our goodwill was not impaired. Our conclusion that goodwill was not impaired was based on a comparison of our net assets as of December 31, 2013 to our market capitalization.

Valuation of Indefinite-Lived Intangible Asset

In connection with our acquisition of SciTegic in September 2004, we acquired the SciTegic trade name which was determined to be indefinitely lived. In accordance with ASC Topic 350, we review our indefinite-lived intangible asset for impairment at least annually in our fiscal fourth quarter as of December 31 and more frequently if events or changes in circumstances occur that indicate a potential reduction in the fair value of the asset below its carrying value. Examples of such events or circumstances include: a significant adverse change in legal factors or in the business climate, a significant decline in our stock price, a significant decline in our projected revenue or cash flows, an adverse action or assessment by a regulator, unanticipated competition, a loss of key personnel, or the presence of other indicators that would indicate a reduction in the fair value of an asset.

Our indefinite-lived intangible asset is considered to be impaired if we determine that the carrying value of the asset exceeds its estimated fair value. In the quarter ended December 31, 2013 we completed our annual indefinite-lived intangible asset impairment test as of December 31, 2013 and concluded that our indefinite-lived intangible asset was not impaired. We estimated the fair value of our indefinite-lived intangible asset utilizing a discounted cash flow analysis which considers the estimated future customer orders for our scientific informatics platform product line and the associated direct and incremental selling, marketing and development costs. Key assumptions included in the discounted cash flow analysis include projections of future customer order growth for our scientific informatics platform product line and developing an appropriate discount rate.

Impairment of Long-Lived Assets

We review long-lived assets to be held and used, including acquired intangible assets subject to amortization and property and equipment, for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be fully recoverable. Conditions that would necessitate an impairment assessment include a significant decline in the market price of an asset or asset group, a significant adverse change in the extent or manner in which an asset or asset group is being used, the loss of legal ownership or title to the asset, significant negative industry or economic trends or the presence of other indicators that would indicate that the carrying amount of an asset or asset group is not recoverable. A long-lived asset is considered to be impaired if management’s estimate of the undiscounted future cash flows anticipated to result from the use of the asset and its eventual disposition are not sufficient to recover the carrying value of the asset.

Long-Term Investments and Promissory Notes Receivable

Our long-term investments consist of equity investments in privately held companies. We determine the accounting method used to account for investments in equity securities of other business entities in which we do not have a controlling interest primarily based on our ownership of each such business entity and whether we have the ability to exercise significant influence over the strategic, operating, investing and financing activities of each such business entity. As we do not have a controlling interest or have the ability to exercise significant influence over the companies in which we invest, we account for such investments using the cost method of accounting. We evaluate our investments for impairment in the quarter ended December 31 or whenever there are any events or circumstances that are likely to have a significant adverse effect on the fair value of the investment. In our impairment assessment we consider current factors, including economic environment, market conditions and operational performance, and other specific factors relating to the business underlying the investment. If the fair value of the investment is less than its carrying value we recognize an impairment loss equal to the difference between an investment’s carrying value and its fair value.

Promissory notes receivable are recorded at stated principal amount net of any discount or premium and allowance for uncollectibility. The related discounts or premiums are accreted or amortized over the life of the related note receivable and recorded in the "Royalty and other income" line in our consolidated statement of operations. Promissory notes receivable are not measured at fair value on a recurring basis, but are reviewed for possible impairment in the quarter ended December 31 or whenever events or changes in circumstances indicate that the carrying amount of the notes receivable may not be fully recoverable. In our evaluation of possible impairment, we determine the expected cash flow for the notes receivable based on the financial performance of the note holder, including consideration of estimated proceeds from the disposition of any collateral, and calculate an estimate of the potential loss and the probability of loss. For notes receivable where a loss is probable, we record a specific reserve.

We asses impairment of our long term investments and promissory notes receivable based on a discounted cash flow model using relevant assumptions for risk adjusted future financial performance and discount rate. We perform a sensitivity analysis which includes several combinations of reasonably possible scenarios with regard to these assumptions.

Acquisitions

Under the accounting guidance for business combinations we recognize separately from goodwill the assets acquired and the liabilities assumed, at their fair values as of the date of the acquisition. Goodwill as of the acquisition date is measured as the excess of consideration transferred and the net of the acquisition date fair values of the assets acquired and the liabilities assumed.

While we use our best estimates and assumptions as a part of the purchase price allocation process to accurately value assets acquired and liabilities assumed at the business combination date, our estimates and assumptions are inherently uncertain and subject to refinement. As a result, during the preliminary purchase price allocation period, which may be up to one year from the business combination date, we record adjustments to the assets acquired and liabilities assumed, with the corresponding offset to goodwill. After the preliminary purchase price allocation period, we record adjustments to assets acquired or liabilities assumed subsequent to the purchase price allocation period in our operating results in the period in which the adjustments were determined.

Revenue Recognition

We generate revenue from the following primary sources:


•	software licenses,


•	post-contract customer support and maintenance services on licensed software (collectively referred to as “PCS”),


•	content, and


•	professional services.

Customer billings issued in connection with our revenue-generating activities are initially recorded as deferred revenue. We then recognize the revenue from these customer billings as set forth below and when all of the following criteria are met:


•	a fully executed written contract or purchase order has been obtained from the customer (i.e., persuasive evidence of an arrangement exists),


•	the contractual price of the product or service has been defined and agreed to in the contract or purchase order (i.e., price is fixed or determinable),


•	delivery of the product or service has occurred and no material uncertainties regarding customer acceptance of the delivered product or service exist, and


•	collection of the purchase price from the customer is considered probable.

Software Licenses. We license software on a term and perpetual basis. When sold perpetually, our standard perpetual software licensing arrangements generally include twelve months of bundled PCS, while our standard term-based software licensing arrangements typically include PCS for the full duration of the term license. In limited cases, multi-year term licenses (generally ranging from two to three years) are sold in conjunction with twelve months of maintenance. In relation to arrangements including products for which we have established vendor-specific objective evidence (“VSOE”) of selling price of the related undelivered elements, we recognize the software licensing revenue upon delivery, after any required re-allocation, assuming all other revenue recognition criteria have been satisfied. For the majority of the license revenues we sell we have concluded that we do not have VSOE. For the products where VSOE of selling price does not exist, the entire fee for perpetual and term-based licenses are generally recognized ratably over the contractual term of the bundled PCS. In addition, certain provisions, such as mandatory PCS or product remix rights that do not qualify as exchange accounting, preclude upfront recognition of the software license revenue. In such cases, the arrangements are considered in substance subscriptions and all contractual fees are recognized over the contractually stated PCS period.

Renewal of PCS Under Perpetual Software Licenses. Our PCS includes the right to receive unspecified upgrades or enhancements and technical support. Fees from customer renewals of PCS related to previously purchased perpetual licenses are recognized ratably over the term of the PCS when sold as a multiple element arrangement.

Content. Content is licensed on a term basis and provides customers with access to the licensed content over the term of the agreement. Revenue from these licensing arrangements is recognized ratably over the term of the agreement, which is typically twelve months and coincides with the term of the PCS and/or licensed software.

Professional Services. We provide certain services to our customers, including non-complex product training, installation, implementation and other professional services which are non-essential to the operation of the software. We also perform professional services for our customers designed to enhance the value of our software products by creating extensions to functionality to address a client's specific business needs. When sold separately, revenue from time and materials service engagements are generally recognized as the services are performed. Revenue from fixed fee service engagements is recognized as the services are performed using the percentage-of-completion method when we can reasonably estimate the level of effort required to complete our performance obligations under an arrangement and such performance obligations are provided on a best-efforts basis. For service arrangements that include provisions that create significant uncertainties (e.g., customer acceptance) or service deliverables wherein the level of effort to complete the services cannot be reasonably estimated, the associated revenue is recognized using the completed performance method.

Hosting Services. We are an application service provider (“ASP”), meaning we provide hosting services that give customers access to software that resides on our servers. The ASP model typically includes an up-front fee and a monthly commitment from the customer that commences upon completion of the implementation through the remainder of the customer life. The up-front fee is the initial setup fee, or the implementation fee. The monthly commitment includes, but is not limited to, a fixed monthly fee or a transactional fee based on system usage that exceeds monthly minimums. We do not view the signing of the contract or the provision of initial setup services as discrete earnings events that have stand-alone value. Revenue is typically deferred until the date the customer commences use of our services, at which point the up-front fees are recognized ratably over the life of the customer arrangement.

Multi-Element Arrangements. For multi-element arrangements that include software licenses, PCS, and non-essential installation and implementation services, the entire fee for such arrangements is recognized as revenue ratably over the term of the PCS or delivery of the services, whichever is longer. For multi-element arrangements that also include services that are essential to the operation of the software, the fee for such arrangements is generally deferred until the services essential to the operation of the software have been performed, at which point the entire fee for such arrangements is recognized as revenue ratably over the remaining term of the PCS or the delivery of the non-essential services, whichever is longer. For financial statement presentation purposes, we allocate the arrangement fee to the software-related elements and the non-software-related elements based upon the relative standard list price of the products and/or services that comprise each element, which is our best estimate of selling price.

Restructuring Charges

In July 2013, we announced and executed a restructuring plan to reduce our workforce and consolidate certain facilities. We measured and accrued the liabilities associated with employee separation costs at fair value as of the date the plan was announced and terminations were communicated to employees, which primarily included severance pay, retention and relocation costs. If a terminated employee was retained for a period of time beyond the announcement date, any retention related costs are accrued over the retention period and included in “Business consolidation, restructuring and headquarter-relocation costs” line in our consolidated statement of operations. We measure and accrue the facilities exit costs at fair value upon its exit. Facilities exit costs primarily consist of cease-use losses to be recorded upon vacating the facilities. The fair value measurement of restructuring related liabilities requires certain assumptions and estimates to be made by us, such as the retention period of certain employees, the timing and amount of sublease income on properties to be vacated, and the operating costs to be paid until lease termination. It is our policy to use the best estimates based on facts and circumstances available at the time of measurement, review the assumptions and estimates periodically, and adjust the liabilities when necessary.

Sales Taxes Collected

Sales taxes collected from customers and remitted to various governmental agencies are excluded from revenues in our consolidated statements of operations.

Shipping Costs

The costs of shipping products to our customers are expensed as incurred and are included in cost of revenue in our consolidated statements of operations. We incurred shipping costs of $0.0 million during the year ended December 31, 2013. We incurred shipping costs of $0.4 million for each of the years ended December 31, 2012 and 2011.

Royalty Income

We recognize royalty income based on reported sales by third party licensees of products containing the applicable licensed materials and intellectual property. Royalty revenue is recognized as these payments become due. Non-refundable royalties, for which there are no further performance obligations, are recognized when due under the terms of the applicable agreements. Royalty income is included in the royalty and other income, net line on the consolidated statements of operations.

Advertising Costs

The costs of advertising are expensed as incurred and are included in sales and marketing expenses in our consolidated statements of operations. We incurred advertising costs of $0.0 million, $0.1 million and $0.2 million during the years ended December 31, 2013, 2012 and 2011, respectively.

Deferred Costs

Occasionally, we enter into professional service arrangements under which resulting revenue is deferred until certain elements of the arrangements are delivered. As a result, if deemed material, we defer the direct variable expense, not exceeding the revenue deferred, in other current assets on the balance sheet until the period when revenue is recognized. Direct and incremental variable expenses include direct labor costs and direct services contracts with third parties working on the software service arrangements. As of December 31, 2013 and 2012, we deferred approximately $2.2 million and $0.8 million, respectively, of direct and incremental variable costs related to software service arrangements where the revenue is deferred until future periods.

Income Taxes

We account for income taxes in accordance with ASC Topic 740, Income Taxes. Deferred tax assets and liabilities are recognized for the tax consequences of temporary differences between the financial carrying amounts and the tax basis of existing assets and liabilities by applying enacted statutory tax rates applicable to future years. The provision for income taxes is based on our estimates for taxable income of the various legal entities we operate and the various jurisdictions in which we operate. As such, income tax expense may vary from the customary relationship between income tax expense and pre-tax income. We establish a valuation allowance against our net deferred tax assets to reduce them to the amount expected to be realized.

We assess the recoverability of our deferred tax assets on an on-going basis. In making this assessment we are required to consider all available positive and negative evidence to determine whether, based on such evidence, it is more-likely-than-not that some portion or all of our net deferred assets will be realized in future periods. This assessment requires significant judgment. We do not recognize current and future tax benefits until it is more-likely-than-not that our tax positions will be sustained. In general, any realization of our net deferred tax assets will reduce our effective rate in future periods. However, the realization of deferred tax assets that are related to NOLs that were generated by tax deductions resulting from the exercise of non-qualified stock options will be a direct increase to stockholders’ equity.

We determine whether the benefits of our tax positions are more-likely-than-not to be sustained upon audit based on the technical merits of the tax position. We recognize the impact of an uncertain income tax position taken on our income tax return at the largest amount that is more-likely-than-not to be sustained upon audit by the relevant taxing authority. An uncertain income tax position is not recognized if it has less than a 50% likelihood of being sustained.

Foreign Currency Translation

In accordance with ASC Topic 830, Foreign Currency Matters, we translate the financial statements of our foreign subsidiaries into U.S. dollars using period-end exchange rates for assets and liabilities and average exchange rates during each reporting period for results of operations. Gains and losses resulting from foreign currency translation are excluded from results of operations and recorded as accumulated other comprehensive income in stockholders’ equity.

Gains and losses resulting from the cash settlement of certain intercompany transactions as well as transactions with customers and vendors that are denominated in currencies other than the functional currency of each entity give rise to foreign exchange gains or losses. We realized foreign exchange loss of $0.5 million and $0.6 million during the years ended December 31, 2013 and 2012, respectively and foreign exchange gain of $0.5 million during the year ended December 31, 2011. These amounts are included in royalty and other income, net in our consolidated statements of operations.

Foreign Currency Forward Contracts Not Designated as Hedges

We transact business in various currencies other than the U.S. dollar and have significant international sales, expenses and intercompany transactions denominated in currencies other than the U.S. dollar, subjecting us to currency exchange rate risks. To mitigate our risk from foreign currency fluctuations, we launched a foreign currency hedging program in November 2011, whereby we will periodically enter into currency derivative contracts, principally forward contracts with-short term maturities. Our intent is to offset gains and losses that occur from the underlying exposure with gains and losses on the derivative contracts used to offset them. We do not hold or purchase any foreign currency contracts for trading or speculative purposes and we do not designate these forward contracts or swaps as hedging instruments. Accordingly, we report the fair value of these contracts in the consolidated balance sheet with changes in fair value recorded in royalty and other income, net in the consolidated statement of operations. The fair value of foreign currency contracts is estimated based on the prevailing exchange rates of the various hedged currencies as of the end of the period.

Share Based Compensation

We use the Black-Scholes-Merton option-pricing model to estimate the fair value of stock options granted and stock purchases under our 2005 Employee Stock Purchase Plan (the “ESPP”). This model incorporates various assumptions, including expected volatility, risk-free interest rates, expected dividend yield and expected award life, each discussed below. The fair value of restricted stock units (“RSUs”) granted is based on the market price of our common stock on the date of grant. We recognize the fair value of share-based compensation on a straight-line basis over the requisite service periods of the awards.

Expected Volatility. Volatility is a measure of the amount the stock price will fluctuate during the expected life of an award. We determine volatility based on our historical stock price volatility over the most recent period equivalent to the expected life of the award, giving consideration to company-specific events impacting our historical volatility that are unlikely to occur in the future, as well as anticipated future events that may impact volatility. We also consider the historical stock price volatilities of comparable publicly traded companies.

Risk-Free Interest Rate. Our assumption of the risk-free interest rate is based on the interest rates on U.S. constant rate treasury securities with contractual terms approximately equal to the expected life of the award.

Expected Dividend Yield. Because we have not paid any cash dividends since our inception and do not anticipate paying dividends in the foreseeable future, we assume a dividend yield of zero.

Expected Award Life. We determine the expected life of an award by considering various relevant factors, including the vesting period and contractual term of the award, our employees’ historical exercise patterns and length of service and employee characteristics. We also consider the expected award lives of comparable publicly traded companies. For stock purchase plan purchase rights, the expected life is equal to the current offering period under the stock purchase plan.

Under FASB ASC Topic 718, Compensation-Stock Compensation, we are also required to estimate at grant the likelihood that the award will ultimately vest (the “pre-vesting forfeiture rate”), and to revise the estimate, if necessary, in future periods if the actual forfeiture rate differs. We determine the pre-vesting forfeiture rate of an award based on our historical pre-vesting award forfeiture experience, giving consideration to company-specific events impacting historical pre-vesting award forfeiture experience that are unlikely to occur in the future as well as anticipated future events that may impact forfeiture rates.

Our determination of the input variables used in the Black-Scholes-Merton option-pricing model as well as the pre-vesting forfeiture rate is based on various underlying estimates and assumptions that are highly subjective and are affected by our stock price, among other factors. Changes in these underlying estimates and assumptions could materially affect the fair value of our share-based awards and, therefore, the amount of share-based compensation expense to be recognized in our results of operations.

Segment and Geographic Information

In accordance with ASC Topic 280, our operations have been aggregated into one reportable segment given the similarities in economic characteristics between our operations and the common nature of our products, services and customers.

Financial information by geographic region is as follows:



	For the Years Ended
	December 31, 2013				December 31, 2012				December 31, 2011
	Amount		% of Total		Amount		% of Total		Amount		% of Total
	(In thousands, except percentages)
									(unaudited)
Revenues:
U.S.	$	83,086	49	%	$	79,635	49	%	$	67,756	47	%
Europe	52,687		31	%	46,005		28	%	42,339		29	%
Asia-Pacific	32,753		19	%	36,886		23	%	34,244		24	%
Total	$	168,526	99	%	$	162,526	100	%	$	144,339	100	%

Revenues are attributable to geographic areas based on the region of destination.



	December 31, 2013				December 31, 2012
	Amount		Percentage of Total		Amount		Percentage of Total
	(In thousands, except percentages)
Long-lived assets:
U.S.	$	184,974	75	%	$	176,611	93	%
Europe	60,853		25	%	11,234		6	%
Asia-Pacific	942		—	%	1,361		1	%
Total	$	246,769	100	%	$	189,206	100	%

Guarantees

We account for guarantees in accordance with ASC Topic 460, Guarantees (“ASC Topic 460”). ASC Topic 460 requires that a guarantor recognize, at the inception of a guarantee, a liability for the fair value of certain guarantees and requires certain disclosures to be made by a guarantor about its obligations under certain guarantees that it has issued.

Effect of New Accounting Standards

On March 4, 2013, the FASB issued ASU 2013-05, Foreign Currency Matters (Topic 830) Parent's Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity (“ASU 2013-05”). ASU 2013-05 updates accounting guidance related to the application of consolidation guidance and foreign currency matters. This guidance resolves the diversity in practice about what guidance applies to the release of the cumulative translation adjustment into net income. This guidance is effective for interim and annual periods beginning after December 15, 2013. We do not anticipate that these changes will have a material impact on our consolidated financial statements or disclosures.

In July 2013, the FASB issued ASU 2013-11, Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists (“ASU 2013-11”). ASU 2013-11 provides guidance on the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. The intent is to better reflect the manner in which an entity would settle at the reporting date any additional income taxes that would result from the disallowance of a tax position when net operating loss carryforwards, similar tax losses, or tax credit carryforwards exist. This pronouncement is effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. We are evaluating the impact that the adoption of this standard may have on our consolidated financial statements.