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EX-32.2 - EX-32.2 - EXA CORPexa-ex322_9.htm
EX-32.1 - EX-32.1 - EXA CORPexa-ex321_6.htm
EX-31.2 - EX-31.2 - EXA CORPexa-ex312_7.htm
EX-31.1 - EX-31.1 - EXA CORPexa-ex311_8.htm
EX-10.2 - EX-10.2 - EXA CORPexa-ex102_507.htm
EX-10.1 - EX-10.1 - EXA CORPexa-ex101_477.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended October 31, 2016

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 001-35584

 

EXA CORPORATION

(Exact Name of Registrant as Specified in Its Charter)

 

 

Delaware

 

04-3139906

(State or Other Jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification No.)

55 Network Drive

Burlington, MA 01803

(Address of Principal Executive Offices, Including Zip Code)

(781) 564-0200

(Registrant’s Telephone Number, Including Area Code)

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).     Yes      No  

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):

 

Large accelerated filer

Accelerated filer

Non-accelerated filer

  (Do not check if a smaller reporting company)

Smaller reporting company

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  

As of November 28, 2016, 14,851,501 shares of the registrant’s outstanding common stock, $0.001 par value per share, were outstanding.

 

 

 

 


 

EXA CORPORATION

FORM 10-Q

FOR THE QUARTER ENDED October 31, 2016

TABLE OF CONTENTS

 

 

Pages

 

 

PART I. FINANCIAL INFORMATION

 

 

 

ITEM 1. FINANCIAL STATEMENTS

3

 

 

Condensed Consolidated Balance Sheets (Unaudited) as of October 31, 2016 and January 31, 2016

3

 

 

Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) (Unaudited) for the three and nine months ended October 31, 2016 and 2015

4

 

 

Condensed Consolidated Statements of Cash Flows (Unaudited) for the nine months ended October 31, 2016 and 2015

5

 

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

6

 

 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

14

 

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

27

 

 

ITEM 4. CONTROLS AND PROCEDURES

28

 

 

PART II. OTHER INFORMATION

 

 

 

ITEM 1. LEGAL PROCEEDINGS

29

 

 

ITEM 1A. RISK FACTORS

29

 

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

29

 

 

ITEM 6. EXHIBITS

30

 

 

SIGNATURES

31

2


 

PART I. FINANCIAL INFORMATION

ITEM 1.

FINANCIAL STATEMENTS

EXA CORPORATION

Condensed Consolidated Balance Sheets

(Unaudited)

(in thousands, except share and per share data)

 

 

 

October 31,

 

January 31,

 

 

 

2016

 

 

2016

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

25,033

 

 

$

27,649

 

Accounts receivable

 

 

16,663

 

 

 

32,072

 

Prepaid expenses and other current assets

 

 

2,862

 

 

 

3,707

 

Total current assets

 

 

44,558

 

 

 

63,428

 

Property and equipment, net

 

 

10,897

 

 

 

12,032

 

Intangible assets, net

 

 

1,782

 

 

 

2,044

 

Deferred tax assets

 

 

432

 

 

 

428

 

Restricted cash

 

 

352

 

 

 

352

 

Other assets

 

 

744

 

 

 

737

 

Total assets

 

$

58,765

 

 

$

79,021

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

1,218

 

 

$

3,462

 

Accrued expenses

 

 

8,739

 

 

 

12,199

 

Current portion of deferred revenue

 

 

23,421

 

 

 

32,849

 

Current portion of capital lease obligations

 

 

1,997

 

 

 

2,823

 

Total current liabilities

 

 

35,375

 

 

 

51,333

 

Deferred revenue

 

 

699

 

 

 

4,484

 

Capital lease obligations

 

 

1,286

 

 

 

2,549

 

Deferred rent

 

 

2,537

 

 

 

2,490

 

Other long-term liabilities

 

 

719

 

 

 

678

 

Total liabilities

 

 

40,616

 

 

 

61,534

 

Commitments and contingencies (Note 9)

 

 

 

 

 

 

 

 

Stockholders’ equity :

 

 

 

 

 

 

 

 

Preferred stock, $0.001 par value; 5,000,000 shares authorized; no shares issued

   and outstanding

 

 

 

 

 

 

Common stock, $0.001 par value; 30,000,000 shares authorized; 14,882,446 and

   14,663,621 shares issued, respectively; 14,849,944 and 14,631,119 shares

   outstanding, respectively

 

 

15

 

 

 

15

 

Additional paid-in capital

 

 

93,767

 

 

 

91,626

 

Accumulated deficit

 

 

(75,151

)

 

 

(73,685

)

Treasury stock (32,502 common shares, at cost)

 

0

 

 

 

0

 

Accumulated other comprehensive loss

 

 

(482

)

 

 

(469

)

Total stockholders’ equity

 

 

18,149

 

 

 

17,487

 

Total liabilities and stockholders’ equity

 

$

58,765

 

 

$

79,021

 

 

The accompanying notes are an integral part of the consolidated financial statements

 

3


 

EXA CORPORATION

Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)

(Unaudited)

(in thousands, except share and per share data)

 

 

 

Three Months Ended October 31,

 

 

Nine Months Ended October 31,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

License revenue

 

$

15,967

 

 

$

13,966

 

 

$

44,836

 

 

$

39,185

 

Project revenue

 

 

3,191

 

 

 

2,998

 

 

 

8,219

 

 

 

8,002

 

Total revenue

 

 

19,158

 

 

 

16,964

 

 

 

53,055

 

 

 

47,187

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of revenues

 

 

4,904

 

 

 

5,118

 

 

 

14,340

 

 

 

14,516

 

Sales and marketing

 

 

3,357

 

 

 

2,336

 

 

 

10,080

 

 

 

7,264

 

Research and development

 

 

6,234

 

 

 

6,143

 

 

 

18,468

 

 

 

18,265

 

General and administrative

 

 

3,952

 

 

 

3,456

 

 

 

10,858

 

 

 

9,849

 

Total operating expenses

 

 

18,447

 

 

 

17,053

 

 

 

53,746

 

 

 

49,894

 

Income (loss) from operations

 

 

711

 

 

 

(89

)

 

 

(691

)

 

 

(2,707

)

Other (expense) income, net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange (loss) gain

 

 

(99

)

 

 

51

 

 

 

94

 

 

 

(172

)

Interest expense

 

 

(30

)

 

 

(60

)

 

 

(116

)

 

 

(179

)

Interest income

 

 

12

 

 

 

3

 

 

 

33

 

 

 

8

 

Other (expense) income, net

 

 

(3

)

 

 

6

 

 

 

9

 

 

 

6

 

Total other (expense) income, net

 

 

(120

)

 

 

0

 

 

 

20

 

 

 

(337

)

Income (loss) before income taxes

 

 

591

 

 

 

(89

)

 

 

(671

)

 

 

(3,044

)

Provision for income taxes

 

 

(436

)

 

 

(344

)

 

 

(795

)

 

 

(472

)

Net income (loss)

 

$

155

 

 

$

(433

)

 

$

(1,466

)

 

$

(3,516

)

Net income (loss) per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.01

 

 

$

(0.03

)

 

$

(0.10

)

 

$

(0.24

)

Diluted

 

$

0.01

 

 

$

(0.03

)

 

$

(0.10

)

 

$

(0.24

)

Weighted average shares outstanding used in computing net

   income (loss) per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

14,826,758

 

 

 

14,610,479

 

 

 

14,750,153

 

 

 

14,484,563

 

Diluted

 

 

15,261,996

 

 

 

14,610,479

 

 

 

14,750,153

 

 

 

14,484,563

 

Comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

155

 

 

$

(433

)

 

$

(1,466

)

 

$

(3,516

)

Foreign currency translation adjustment

 

 

(55

)

 

 

6

 

 

 

(13

)

 

 

34

 

Comprehensive income (loss)

 

$

100

 

 

$

(427

)

 

$

(1,479

)

 

$

(3,482

)

 

The accompanying notes are an integral part of the consolidated financial statements

 

 

4


 

EXA CORPORATION

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(in thousands)

 

 

 

Nine Months Ended October 31,

 

 

 

2016

 

 

2015

 

Cash flows provided by operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(1,466

)

 

$

(3,516

)

Adjustments to reconcile net loss to net cash provided by operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

2,987

 

 

 

2,487

 

Stock-based compensation expense

 

 

1,458

 

 

 

1,766

 

Deferred rent expense

 

 

286

 

 

 

472

 

Deferred income taxes

 

 

(4

)

 

 

4

 

Net change in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

15,201

 

 

 

15,948

 

Prepaid expenses and other current assets

 

 

1,044

 

 

 

54

 

Other assets

 

 

(7

)

 

 

11

 

Accounts payable

 

 

(1,865

)

 

 

694

 

Accrued expenses

 

 

(3,755

)

 

 

(2,946

)

Other liabilities

 

 

40

 

 

 

(69

)

Deferred revenue

 

 

(13,392

)

 

 

(11,007

)

Net cash provided by operating activities

 

 

527

 

 

 

3,898

 

Cash flows used in investing activities:

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(1,881

)

 

 

(1,571

)

Change in restricted cash

 

 

 

 

 

173

 

Net cash used in investing activities

 

 

(1,881

)

 

 

(1,398

)

Cash flows used in financing activities:

 

 

 

 

 

 

 

 

Proceeds from stock option and warrant exercises

 

 

453

 

 

 

1,168

 

Payments of capital lease obligations

 

 

(2,151

)

 

 

(2,131

)

Net cash used in financing activities

 

 

(1,698

)

 

 

(963

)

Effect of exchange rate changes on cash

 

 

436

 

 

 

(136

)

Net (decrease) increase in cash and cash equivalents

 

 

(2,616

)

 

 

1,401

 

Cash and cash equivalents, beginning of period

 

 

27,649

 

 

 

21,785

 

Cash and cash equivalents, end of period

 

$

25,033

 

 

$

23,186

 

Supplemental cash flow disclosures:

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

116

 

 

$

179

 

Cash paid for income taxes

 

$

1,367

 

 

$

1,214

 

Supplemental disclosure of non-cash investing activities:

 

 

 

 

 

 

 

 

Acquisition of equipment through capital leases

 

$

62

 

 

$

4,351

 

     Construction costs funded by landlord tenant improvement allowance

 

$

 

 

$

554

 

Decrease in unpaid purchases of property and equipment

 

$

(381

)

 

$

 

 

The accompanying notes are an integral part of the consolidated financial statements

 

 

 

5


EXA CORPORATION

Notes to Condensed Consolidated Financial Statements (Unaudited)

(Dollars in thousands except per share amounts)

 

1. Description of Business

Exa Corporation (the “Company” or “Exa”), a Delaware corporation, develops, sells and supports simulation software and services used primarily by vehicle manufacturers to enhance the performance of their products, reduce product development costs and improve the efficiency of their design and engineering processes. The Company’s solutions enable engineers and designers to augment or replace conventional methods of evaluating designs that rely on expensive and inefficient physical prototypes and test facilities with accurate digital simulations that are more useful, cost effective and timely. The Company’s simulation solutions enable customers to gain crucial insights about design performance early in the design cycle, reducing the likelihood of expensive redesigns and late-stage engineering changes, which results in cost savings and fundamental improvements in the development process. The Company is primarily focused on the ground transportation market, but is also exploring the application of its capabilities in the aerospace, oil and gas production, chemical processing, architecture, engineering and construction, power generation, biomedical and electronics industries.

Exa has offices and sells directly in the United States and through subsidiaries in France, Germany, Italy, Japan, Korea, China, and the United Kingdom. The Company also conducts business in Sweden, India, Brazil, Russia, Canada, Finland, Spain and Australia.

 

 

2. Summary of Significant Accounting Policies

Applicable Accounting Guidance

Any reference in these notes to applicable accounting guidance is meant to refer to the authoritative United States generally accepted accounting principles (“GAAP”) as found in the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”).

Basis of Presentation

The interim financial data as of October 31, 2016 and for the three and nine months ended October 31, 2016 and 2015 are unaudited; however, in the opinion of the Company’s management, the interim data includes all adjustments, consisting of normal recurring adjustments, necessary for a fair statement of the results for the interim periods presented. The condensed consolidated balance sheet presented as of January 31, 2016 has been derived from the audited consolidated financial statements as of that date. The unaudited condensed consolidated financial statements presented herein have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission regarding interim financial reporting. Accordingly, they do not include all of the information and note disclosures required by GAAP for complete financial statements and should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Exa annual report on Form 10-K for the year ended January 31, 2016 filed with the Securities and Exchange Commission on March 21, 2016.

Reclassification

Certain prior year amounts have been reclassified to be consistent with current year classifications.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make significant estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Changes in estimates are recorded in the period in which they become known. The Company bases its estimates on historical experience and various other assumptions that it believes to be reasonable under the circumstances. Actual results could differ from management’s estimates if future events differ substantially from past experience, or other assumptions, which reasonable when made, do not turn out to be substantially accurate.

Recent Accounting Pronouncements

In May 2014, the FASB issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers, which supersedes nearly all existing revenue recognition guidance under GAAP. The core principle of ASU 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods or services. ASU 2014-09 defines a five-step process to achieve this core principle, as a result of which more judgment and estimates may be required within the revenue recognition process than are required under existing GAAP. The

6


EXA CORPORATION

Notes to Condensed Consolidated Financial Statements (Unaudited)(Continued)

(Dollars in thousands except per share amounts)

 

standard is effective for annual periods beginning after December 15, 2018, and interim periods therein. The two permitted transition methods under the new standard are: (i) a full retrospective approach reflecting the application of the standard in each prior reporting period with the option to elect certain practical expedients, or (ii) a retrospective approach with the cumulative effect of initially adopting ASU 2014-09 recognized at the date of adoption (which includes additional footnote disclosures). The Company is currently evaluating the impact of its pending adoption of ASU 2014-09 on its consolidated financial statements and has not yet determined the method by which it will adopt the standard when it becomes effective.

In August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements – Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. Under the new guidance, management will be required to assess an entity’s ability to continue as a going concern, and to provide related footnote disclosures in certain circumstances. The provisions of this ASU are effective for annual periods beginning after December 15, 2016, and for interim periods therein. This ASU is not expected to have a material impact on the Company’s financial statements or disclosures.

In April 2015, the FASB issued ASU No. 2015-05, Intangibles – Goodwill and Other – Internal-Use Software: Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement. The guidance clarifies the circumstances under which a cloud computing customer would account for the arrangement as a license of internal-use software. The standard will be effective for annual reporting periods beginning after December 15, 2016, and for interim periods therein. Early adoption is permitted. This ASU is not expected to have an impact on the Company’s financial statements or disclosures.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). This standard requires the recognition of lease assets and liabilities for all leases, with certain exceptions, on the balance sheet. In transition, lessees and lessors are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. This ASU is effective for annual periods beginning after December 15, 2018, and for interim periods therein. The Company is currently evaluating the requirements of this ASU and has not yet determined its impact on the Company’s consolidated financial statements.

In March 2016, the FASB issued ASU 2016-09, Compensation - Stock Compensation (Topic 718)—Improvements to Employee Share-Based Payment Accounting. This standard simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The provisions of this ASU are effective for annual periods beginning after December 15, 2016, and for interim periods therein. Early adoption is permitted. The Company is currently evaluating the requirements of this ASU and has not yet determined its impact on the Company’s consolidated financial statements.

 

 

3. Computation of Net Income (Loss) Per Share

Basic earnings per share (“EPS”) is computed by dividing income available to common stockholders by the weighted-average number of shares of common stock outstanding during the period. The computation of diluted EPS is similar to the computation of basic EPS except that the denominator is increased to include the number of additional shares of common stock that would have been outstanding (using the treasury stock method) if securities convertible into or exercisable for potentially dilutive shares of common stock (stock options, restricted stock units and warrants) had been converted into or exercisable for such shares of common stock, and if such assumed conversion or exercise would have been dilutive. Exercises or conversions that would have been anti-dilutive are excluded from the calculation of diluted EPS.

7


EXA CORPORATION

Notes to Condensed Consolidated Financial Statements (Unaudited)(Continued)

(Dollars in thousands except per share amounts)

 

The following summarizes the calculation of basic and diluted net income (loss) per share:

 

 

 

Three Months Ended October 31,

 

 

Nine Months Ended October 31,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

155

 

 

$

(433

)

 

$

(1,466

)

 

$

(3,516

)

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding, basic

 

 

14,826,758

 

 

 

14,610,479

 

 

 

14,750,153

 

 

 

14,484,563

 

Dilutive effect of:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Options to purchase common stock

 

 

413,275

 

 

 

 

 

 

 

 

 

 

Options to purchase preferred stock

 

 

21,963

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding, fully

   diluted

 

 

15,261,996

 

 

 

14,610,479

 

 

 

14,750,153

 

 

 

14,484,563

 

Basic net income (loss) per share

 

$

0.01

 

 

$

(0.03

)

 

$

(0.10

)

 

$

(0.24

)

Diluted net income (loss) per share

 

$

0.01

 

 

$

(0.03

)

 

$

(0.10

)

 

$

(0.24

)

 

The table below represents outstanding options, restricted stock unit awards and warrants that were excluded from the computation of diluted net income (loss) per share for the periods indicated because including them would have had an anti-dilutive effect. All of the Company’s outstanding stock options, unvested restricted stock units and warrants were anti-dilutive for the three months ended October 31, 2015 and for the nine months ended October 31, 2016 and 2015, respectively, due to the net loss incurred by the Company.

 

 

 

Three Months Ended October 31,

 

 

Nine Months Ended October 31,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Options, restricted stock unit awards and warrants to

   purchase common and preferred stock

 

 

543,276

 

 

 

2,514,955

 

 

 

1,951,713

 

 

 

2,514,955

 

 

 

4. Property and Equipment, net

Property and equipment, net consists of the following:

 

 

 

October 31,

2016

 

 

January 31,

2016

 

Computer software and equipment

 

$

19,407

 

 

$

17,964

 

Office equipment and furniture

 

 

1,554

 

 

 

1,349

 

Leasehold improvements

 

 

1,630

 

 

 

1,562

 

Construction-in-process

 

 

110

 

 

 

169

 

Total property and equipment

 

 

22,701

 

 

 

21,044

 

Less accumulated depreciation

 

 

(11,804

)

 

 

(9,012

)

Property and equipment, net

 

$

10,897

 

 

$

12,032

 

 

For the three and nine months ended October 31, 2016, depreciation expense was $908 and $2,724, respectively. For the three and nine months ended October 31, 2015, depreciation expense was $871 and $2,224, respectively. Included in computer software and equipment and office equipment and furniture is equipment held pursuant to capital leases with costs of $14,883 and $14,809 and accumulated depreciation of $8,712 and $6,808 as of October 31, 2016 and January 31, 2016, respectively.

 

 

8


EXA CORPORATION

Notes to Condensed Consolidated Financial Statements (Unaudited)(Continued)

(Dollars in thousands except per share amounts)

 

5. Accrued Expenses

Accrued expenses consist of the following:

 

 

 

October 31,

2016

 

 

January 31,

2016

 

Accrued payroll

 

$

1,958

 

 

$

1,828

 

Sales and value added taxes

 

 

1,763

 

 

 

4,075

 

Accrued commissions and bonuses

 

 

1,996

 

 

 

3,900

 

Accrued income taxes payable

 

 

833

 

 

 

541

 

Deferred rent, current portion

 

 

429

 

 

 

186

 

Legal and professional

 

 

651

 

 

 

805

 

Other

 

 

1,109

 

 

 

864

 

Total accrued expenses

 

$

8,739

 

 

$

12,199

 

 

 

6. Deferred Rent

Payment escalations, rent holidays and lease incentives specified in the Company’s non-cancelable operating lease and hosting agreements are recognized on a straight-line basis over the terms of the agreements. For purposes of recognizing incentives and minimum rental expenses on a straight-line basis, the Company uses the date it obtains the legal right to use and control the leased space to begin amortization. The differences arising from straight-line expense recognition and cash payments are recorded as deferred rent in the accompanying consolidated balance sheets. Tenant leasehold improvement allowances received from landlords are recorded as deferred rent and are amortized to operating expenses over the applicable lease terms.

Deferred rent consists of the following:

 

 

 

October 31,

2016

 

 

January 31,

2016

 

Leasehold improvement incentive

 

$

1,646

 

 

$

1,839

 

Non-cash rent expense

 

 

1,320

 

 

 

837

 

Total deferred rent

 

 

2,966

 

 

 

2,676

 

Less current portion included in accrued expenses

 

 

(429

)

 

 

(186

)

Deferred rent, net of current portion

 

$

2,537

 

 

$

2,490

 

 

 

7. Fair Value Measurements

Financial instruments consist primarily of cash and cash equivalents, accounts receivable and capital lease obligations. As of October 31, 2016 and January 31, 2016, the carrying amounts of these instruments approximate their fair values. The estimated fair values have been determined from information obtained from market sources and management estimates.

In determining the fair value of its financial assets and liabilities, the Company uses various valuation approaches. ASC 820, Fair Value Measurements and Disclosures, establishes a hierarchy of inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing the asset or liability based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions about the inputs that market participants would use in pricing the asset or liability, and are developed based on the best information available in the circumstances. The fair value hierarchy is broken down into three levels based on the source of inputs as follows:

Level 1 – Valuations based on unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access.

Level 2 – Valuations based on 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 and models for which all significant inputs are observable, either directly or indirectly.

9


EXA CORPORATION

Notes to Condensed Consolidated Financial Statements (Unaudited)(Continued)

(Dollars in thousands except per share amounts)

 

Level 3 – Valuations based on inputs that are unobservable and significant to the overall fair value measurement and that are based on management’s best estimate of inputs market participants would use for pricing the asset or liability at the measurement date, including assumptions about risk.

The following table summarizes the Company’s fair value hierarchy for its financial assets and liabilities measured at fair value as of October 31, 2016:

 

 

 

Total

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

10,048

 

 

$

10,048

 

 

$

 

 

$

 

 

The following table summarizes the Company’s fair value hierarchy for its financial assets and liabilities measured at fair value as of January 31, 2016:

 

 

 

Total

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

11,019

 

 

$

11,019

 

 

$

 

 

$

 

 

The availability of observable inputs can vary among the various types of financial assets and liabilities. To the extent that the valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for financial statement disclosure purposes, the level in the fair value hierarchy within which the fair value measurement is categorized is based on the lowest level input that is significant to the overall fair value measurement.

 

 

8. Acquired Intangible Assets

Intangible assets acquired in a business combination are recorded under the purchase method of accounting at their estimated fair values at the date of acquisition. The Company amortizes acquired intangible assets over their estimated useful lives.

The following table reflects the carrying value of intangible assets as of October 31, 2016: 

 

 

 

Cost

 

 

Accumulated

Amortization

 

 

Net Book

Value

 

Intellectual property

 

$

3,505

 

 

$

(1,723

)

 

$

1,782

 

Access to facilities contract

 

 

38

 

 

 

(38

)

 

 

 

Total

 

$

3,543

 

 

$

(1,761

)

 

$

1,782

 

 

The following table reflects the carrying value of intangible assets as of January 31, 2016:

 

 

 

Cost

 

 

Accumulated

Amortization

 

 

Net Book

Value

 

Intellectual property

 

$

3,505

 

 

$

(1,461

)

 

$

2,044

 

Access to facilities contract

 

 

38

 

 

 

(38

)

 

 

 

Total

 

$

3,543

 

 

$

(1,499

)

 

$

2,044

 

 

For each of the three months ended October 31, 2016 and 2015, amortization expense of intangible assets was $88. For each of the nine months ended October 31, 2016 and 2015, amortization expense of intangible assets was $263.

 

 

9. Commitments and Contingencies

Legal Contingencies

From time to time the Company is involved in legal proceedings arising in the ordinary course of business. There is no litigation pending that could, individually or in the aggregate, reasonably be expected to have a material adverse effect on the Company’s financial position, results of operations, or cash flows.

10


EXA CORPORATION

Notes to Condensed Consolidated Financial Statements (Unaudited)(Continued)

(Dollars in thousands except per share amounts)

 

Indemnification Obligations

The Company enters into standard indemnification agreements in the ordinary course of business. Pursuant to these agreements, the Company indemnifies, holds harmless, and agrees to reimburse the indemnified party for losses suffered or incurred by the indemnified party, generally the Company’s business partners or customers, in connection with any United States patent, or any copyright or other intellectual property infringement claim by any third party with respect to the Company’s products. The term of these indemnification provisions is generally perpetual after execution of the agreement. The maximum potential amount of future payments the Company could be required to make under these agreements is unlimited.

Based on historical experience and information known as of October 31, 2016 and January 31, 2016, the Company has not recorded any liabilities for these indemnities.

Operating Leases

During the second quarter of fiscal year 2017, the Company entered into an agreement to lease space and high performance computing capacity at a data center located in Virginia. The three-year agreement will provide access to up to 300 KW hours of computing capacity, which the Company believes will be suitable and adequate to meet the growing demands of its customers.

As of October 31, 2016, after taking into consideration the above agreement, total future minimum lease payments under non-cancelable lease arrangements are as follows:

 

 

Year ended January 31,

 

 

 

 

2017 (Remainder as of October 31, 2016)

 

$

1,588

 

2018

 

 

6,061

 

2019

 

 

5,503

 

2020

 

 

3,916

 

2021

 

 

2,062

 

Thereafter

 

 

4,898

 

 

 

$

24,028

 

 

 

 

 

10. Stock-Based Compensation

The fair value of common stock service-based options for employees is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used: 

 

 

 

Nine Months Ended

October 31,

 

 

 

2016

 

 

2015

 

Expected life (years)

 

 

6.25

 

 

 

6.23

 

Risk-free interest rate

 

 

1.4%

 

 

 

2.0%

 

Expected volatility

 

 

35.0%

 

 

 

36.8%

 

Expected dividend yield

 

 

0.0%

 

 

 

0.0%

 

 

The weighted-average grant date fair value per share for service-based stock options granted in the three and nine months ended October 31, 2016 was $5.24 and $5.12, respectively. The weighted-average grant date fair value per share for service-based stock options granted in the three and nine months ended October 31, 2015 was $4.14 and $4.21, respectively.

For standard service-based stock options and restricted stock units, the Company records stock-based compensation expense over the estimated service/vesting period. The amount of stock-based compensation expense recognized during a period is based on the value of the portion of the awards that is ultimately expected to vest.

Performance-based stock options are recognized as expense over the requisite service period when it becomes probable that performance measures triggering vesting will be met. Certain grants vested during the first quarter of fiscal year 2017 based on achieved performance metrics. As of October 31, 2016, the Company has concluded that it is not probable that the required metrics for vesting of the remaining unvested options will be achieved. As such, the Company has not recognized any additional share-based compensation expense associated with the unvested portion of these performance-based options.

11


EXA CORPORATION

Notes to Condensed Consolidated Financial Statements (Unaudited)(Continued)

(Dollars in thousands except per share amounts)

 

During the first quarter of fiscal year 2017, the Company granted performance-based restricted stock units (“PSUs”). PSUs are recognized as expense when it becomes probable that performance measures triggering vesting will be achieved. As of October 31, 2016, the Company has concluded that it is not probable that any of the required metrics for vesting of the PSUs will be achieved. As a result, the Company has not recognized any share-based compensation expense associated with these awards.

Total stock-based compensation expense related to stock options and restricted stock units issued by the Company is as follows: 

 

 

 

Three Months Ended

October 31,

 

 

Nine Months Ended

October 31,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Cost of revenues

 

$

41

 

 

$

64

 

 

$

124

 

 

$

186

 

Sales and marketing

 

 

54

 

 

 

117

 

 

 

202

 

 

 

317

 

Research and development

 

 

222

 

 

 

265

 

 

 

567

 

 

 

691

 

General and administrative

 

 

215

 

 

 

215

 

 

 

565

 

 

 

572

 

Total

 

$

532

 

 

$

661

 

 

$

1,458

 

 

$

1,766

 

 

The total unrecognized compensation cost related to all outstanding stock options and restricted stock units is $10,637 at October 31, 2016. This amount is expected to be recognized over a weighted-average period of 1.65 years.

 

 

11. Income Taxes

For the three and nine months ended October 31, 2016, the Company’s income tax provision was $436 and $795, respectively. For the three and nine months ended October 31, 2015, the income tax provision was $344 and $472, respectively. The provision for all periods primarily consists of the tax effects of foreign operating results and foreign withholding taxes.

In determining the realizability of the net United States federal and state deferred tax assets, the Company considers numerous factors including historical profitability, estimated future taxable income, prudent and feasible tax planning strategies and the industry in which it operates. Management reassesses the realization of the deferred tax assets each reporting period, which resulted in a valuation allowance against the full amount of the Company’s United States deferred tax assets in the first quarter of fiscal year 2015. To the extent that the financial results of the United States operations improve in the future and the deferred tax assets become realizable, the Company will reduce the valuation allowance through earnings.

The Company and one or more of its subsidiaries file United States federal income tax returns and tax returns in various state and foreign jurisdictions. With limited exceptions, the Company is no longer subject to federal, state, local or foreign examinations for years ending prior to January 31, 2011. However, carryforward attributes that were generated in tax years ending prior to January 31, 2012 may still be adjusted upon examination by state or local tax authorities if they either have been or will be used in a future period.

Under Section 382 of the Internal Revenue Code of 1986, as amended, substantial changes in the Company’s ownership may limit the amount of net operating loss carryforwards that could be utilized annually in the future to offset its taxable income. Specifically, this limitation may arise in the event of a cumulative change in ownership of the Company of more than 50% within a three-year period. During the first quarter of fiscal year 2015, management determined that the Company had experienced an ownership change for purposes of Section 382. This ownership change resulted in annual limitations to the amount of net operating loss carryforwards that can be utilized to offset future taxable income, if any, at the federal level. The Company’s management has determined that, as of October 31, 2016, it had not experienced another ownership change for purposes of Section 382. However, future transactions in the Company’s common stock could trigger an ownership change for purposes of Section 382, which could further limit the amount of net operating loss carryforwards that could be utilized annually in the future to offset the Company’s taxable income, if any. Any such limitation, whether as the result of sales of common stock by the Company’s existing stockholders or sales of common stock by the Company, could have a material adverse effect on the Company’s results of operations in future years.

 

 

12


EXA CORPORATION

Notes to Condensed Consolidated Financial Statements (Unaudited)(Continued)

(Dollars in thousands except per share amounts)

 

12. Geographic Information

Revenue by geographic area, attributed to individual countries based upon location of the external customer, is as follows:

 

 

 

Three Months Ended

October 31,

 

 

Nine Months Ended

October 31,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

United States

 

$

4,805

 

 

$

5,320

 

 

$

13,526

 

 

$

13,462

 

Germany

 

 

2,797

 

 

 

2,431

 

 

 

8,089

 

 

 

7,081

 

Japan

 

 

4,045

 

 

 

2,917

 

 

 

10,367

 

 

 

7,396

 

France

 

 

2,199

 

 

 

1,768

 

 

 

6,111

 

 

 

5,387

 

Korea

 

 

1,465

 

 

 

1,464

 

 

 

4,257

 

 

 

4,170

 

United Kingdom

 

 

1,839

 

 

 

1,700

 

 

 

5,220

 

 

 

5,403

 

China

 

 

960

 

 

 

520

 

 

 

2,530

 

 

 

1,544

 

Sweden

 

 

428

 

 

 

420

 

 

 

1,275

 

 

 

1,377

 

Italy

 

 

427

 

 

 

294

 

 

 

1,159

 

 

 

996

 

Other

 

 

193

 

 

 

130

 

 

 

521

 

 

 

371

 

 

 

$

19,158

 

 

$

16,964

 

 

$

53,055

 

 

$

47,187

 

 

Net long-lived assets, consisting of net property and equipment, are subject to geographic risks because they are generally difficult to move and to effectively utilize in another geographic area in a reasonable time period and because they are relatively illiquid. Net long-lived assets by principal geographic areas were as follows:

 

 

 

October 31,

 

 

January 31,

 

 

 

2016

 

 

2016

 

United States

 

$

10,284

 

 

$

11,346

 

France

 

 

242

 

 

 

388

 

Germany

 

 

101

 

 

 

110

 

Japan

 

 

144

 

 

 

116

 

Other

 

 

126

 

 

 

72

 

 

 

$

10,897

 

 

$

12,032

 

 

 

 

13


 

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our financial statements and related notes and Management’s Discussion and Analysis of Financial Condition and Result of Operations appearing in our Annual Report on Form 10-K, filed with the SEC on March 21, 2016. In addition to historical financial information, the following discussion contains forward-looking statements that reflect our plans, estimates, assumptions and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this report. Forward-looking statements include information concerning our possible or assumed future results of operations, business strategies and operations, financing plans, potential growth opportunities, potential market opportunities and the effects of competition. Forward-looking statements include all statements that are not historical facts and can be identified by terms such as “anticipates,” “believes,” “could,” “seeks,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts,” “projects,” “should,” “will,” “would” or similar expressions and the negatives of those terms. Given these uncertainties, you should not place undue reliance on these forward-looking statements. Also, forward-looking statements represent our management’s plans, estimates, assumptions and beliefs only as of the date of this report. Except as required by law, we assume no obligation to update these forward-looking statements publicly or to update the reasons actual results could differ materially from those anticipated in these forward-looking statements, even if new information becomes available in the future.

As used herein, except as otherwise indicated by context, references to “we,” “us,” “our,” or the “Company” refer to Exa Corporation.

Overview

We develop, sell and support simulation software and services that manufacturers use to enhance the performance of their products, reduce product development costs and improve the efficiency of their design and engineering processes. Our solutions enable engineers and designers to augment or replace conventional methods of evaluating design alternatives that rely on expensive and inefficient physical prototypes and test facilities, such as wind tunnels used in vehicle design, with accurate digital simulations that are more useful and timely. Our simulation solutions enable our customers to gain crucial insights about design performance early in the design cycle, reducing the likelihood of expensive redesigns and late-stage engineering changes. As a result, our customers realize significant cost savings and fundamental improvements in their vehicle development process.

We currently focus primarily on the ground transportation market, including manufacturers in the passenger vehicle, highway truck, off-highway vehicle and train markets, as well as their suppliers. Over 150 manufacturers currently utilize our products and services, including 14 of the global top 15 passenger vehicle manufacturer groups such as BMW, Ford, Hyundai, Jaguar Land Rover, Nissan, Porsche, Renault, Toyota and Volkswagen; truck and off-highway vehicle manufacturers such as Hyundai, Kenworth, Kobelco, MAN, Peterbilt, Scania and Volvo Truck; and suppliers to these manufacturers, such as Cummins, Denso and Delphi. We are also exploring other markets in which we believe the capabilities of PowerFLOW have broad application, such as the aerospace, oil and gas production, chemical processing, architecture, engineering and construction, power generation, biomedical and electronics industries.

One of the most critical challenges for our customers in their vehicle development processes is measuring or predicting how a vehicle feature or a mechanical system will interact with air, water or other fluids. For example, developing vehicles with reduced aerodynamic drag is critical to achieving the improvements in fuel efficiency that are increasingly desired by customers and mandated by government regulations. Our core product, PowerFLOW, is an innovative software solution for simulating complex fluid flow problems, including aerodynamics, thermal management, and aeroacoustics, or wind noise. PowerFLOW relies upon proprietary technology that enables it to predict complex fluid flows with a level of reliability comparable to or better than physical testing. The combination of PowerFLOW’s accuracy and timeliness provides results that are superior to those of alternative computational fluid dynamics, or CFD, methods.

We derive our revenue primarily from the sale of our simulation software, using an annual capacity-based licensing model. Our customers usually purchase PowerFLOW simulation capacity under one-year term licenses, with a minority utilizing multi-year arrangements or a “pay as you go” model. Simulation capacity may be purchased as software-only, to be run on the customer’s own computer hardware, or provided in the form of software-as-a-service, via our hosted PowerFLOW ExaCLOUD offering. To introduce new customers to our simulation solutions, we typically perform fixed-price projects that include simulation services, along with engineering and consulting services. ExaCLOUD continues to play an increasingly important role in our new customer acquisition go-to-market model, as virtually all of our projects are now being delivered using that facility, thereby familiarizing our customers with its capabilities. Customers typically license our products for one application, such as aerodynamics, and over time expand to other applications such as thermal management or aeroacoustics.

14


 

During the nine months ended October 31, 2016, revenue growth was driven by continued deployment of our simulation solutions in the installed base as well as by the addition of new customers. Investments made in field resources in prior fiscal years are yielding growth in both project and license revenue. The weakening U.S. dollar, particularly against the Euro and yen, had a material positive impact on revenue performance as compared to the same period last year. The geographic mix of revenue outside of the Americas is consistent with historical trends and reflects the impact of the stronger Euro and yen. During the nine months ended October 31, 2016 and 2015, 75% and 73% of our revenue, respectively, came from outside of the Americas. Revenue for the nine months ended October 31, 2016 was $53.1 million, with growth of 12.4% over the same period a year ago and 10.1% when measured on a constant currency basis. See “— Non-GAAP Measures” below for information about how we calculate and use revenue on a constant currency basis.

As a percent of revenue, our total operating expenses for the nine months ended October 31, 2016 decreased approximately 4.4% when compared to the same period last year. This decrease is a result of our prior investments in resources to drive top line growth, including sales, marketing and research and development. While the majority of our expense base is in the United States, we have field resources based in our international offices, which provide some natural foreign exchange hedge. As a result, the weakening dollar had the effect of increasing total operating expenses when compared to the same period last year. For the nine months ended October 31, 2016, total operating expenses were $53.7 million, with growth of 7.7% over the same period a year ago and 7.3% when measured on a constant currency basis. See “— Non-GAAP Measures” below for information about how we calculate and use operating expenses on a constant currency basis.

As a percent of revenue, our loss from operations for the nine months ended October 31, 2016 was 4.4% lower than the same period last year, primarily as a result of the impacts described above. Adjusted EBITDA for the nine months ended October 31, 2016, as described in “Non-GAAP Measures” below, was improved at $3.8 million when compared to $1.5 million in the same period last year.

We ended the quarter with cash and cash equivalents of $25.0 million compared to $27.6 million as of January 31, 2016. This reflects strong accounts receivable collections activity and normal seasonal cash flows. Capital expenditures increased during the nine months ended October 31, 2016 over the same period last year, primarily due to investments related to renovations to our headquarters office in Burlington, Massachusetts and expansion of our high performance computing capacity with our new data center in Virginia.

Results of operations for the three months ended October 31, 2016 and 2015

The following table sets forth, for the periods presented, data from our consolidated statements of operations:

 

 

 

Three Months Ended October 31,

 

(in thousands)

 

2016

 

 

2015

 

Revenue:

 

 

 

 

 

 

 

 

License revenue

 

$

15,967

 

 

$

13,966

 

Project revenue

 

 

3,191

 

 

 

2,998

 

Total revenues

 

 

19,158

 

 

 

16,964

 

Operating expenses: (1)

 

 

 

 

 

 

 

 

Cost of revenues

 

 

4,904

 

 

 

5,118

 

Sales and marketing

 

 

3,357

 

 

 

2,336

 

Research and development

 

 

6,234

 

 

 

6,143

 

General and administrative (2)

 

 

3,952

 

 

 

3,456

 

Total operating expenses

 

 

18,447

 

 

 

17,053

 

Income (loss) from operations

 

 

711

 

 

 

(89

)

Other expense, net

 

 

 

 

 

 

 

 

Foreign exchange (loss) gain

 

 

(99

)

 

 

51

 

Interest expense

 

 

(30

)

 

 

(60

)

Interest income

 

 

12

 

 

 

3

 

Other (expense) income, net

 

 

(3

)

 

 

6

 

Total other expense, net

 

 

(120

)

 

 

0

 

Income (loss) before income taxes

 

 

591

 

 

 

(89

)

Provision for income taxes

 

 

(436

)

 

 

(344

)

Net income (loss)

 

$

155

 

 

$

(433

)

 

(1)

Amounts include stock-based compensation expense as follows:

15


 

 

 

 

Three Months Ended October 31,

 

(in thousands)

 

2016

 

 

2015

 

Cost of revenues

 

$

41

 

 

$

64

 

Sales and marketing

 

 

54

 

 

 

117

 

Research and development

 

 

222

 

 

 

265

 

General and administrative

 

 

215

 

 

 

215

 

Total stock-based compensation expense

 

$

532

 

 

$

661

 

 

(2)

Includes amortization expense related to intangible assets as follows:

 

 

 

Three Months Ended October 31,

 

(in thousands)

 

2016

 

 

2015

 

General and administrative

 

$

88

 

 

$

88

 

 

The following table sets forth, for the periods presented, data from our consolidated statements of operations as a percentage of total revenues:

 

 

 

Three Months Ended October 31,

 

(as a percent of total revenue)

 

2016

 

 

2015

 

Revenue:

 

 

 

 

 

 

 

 

License revenue

 

 

83.3

%

 

 

82.3

%

Project revenue

 

 

16.7

 

 

 

17.7

 

Total revenues

 

 

100.0

 

 

 

100.0

 

Operating expenses:

 

 

 

 

 

 

 

 

Cost of revenues

 

 

25.6

 

 

 

30.2

 

Sales and marketing

 

 

17.5

 

 

 

13.8

 

Research and development

 

 

32.5

 

 

 

36.2

 

General and administrative

 

 

20.6

 

 

 

20.4

 

Total operating expenses

 

 

96.3

 

 

 

100.5

 

Income (loss) from operations

 

 

3.7

 

 

 

(0.5

)

Other expense, net

 

 

 

 

 

 

 

 

Foreign exchange (loss) gain

 

 

(0.5

)

 

 

0.3

 

Interest expense

 

 

(0.2

)

 

 

(0.4

)

Interest income

 

 

0.1

 

 

 

0.0

 

Other (expense) income, net

 

 

(0.0

)

 

 

0.0

 

Total other expense, net

 

 

(0.6

)

 

 

0.0

 

Income (loss) before income taxes

 

 

3.1

 

 

 

(0.5

)

Provision for income taxes

 

 

(2.3

)

 

 

(2.0

)

Net income (loss)

 

 

0.8

%

 

 

(2.6

)%

 

Due to rounding, totals may not equal the sum of line items in the table above.

Comparison of three months ended October 31, 2016 and 2015

Revenue

 

 

 

Three Months Ended October 31,

 

 

 

 

 

 

 

 

 

(in thousands, except percentages)

 

2016

 

 

2015

 

 

Change

 

 

% Change

 

License revenue

 

$

15,967

 

 

$

13,966

 

 

$

2,001

 

 

 

14.3

%

Project revenue

 

 

3,191

 

 

 

2,998

 

 

 

193

 

 

 

6.4

%

Total revenues

 

$

19,158

 

 

$

16,964

 

 

$

2,194

 

 

 

12.9

%

 

License revenue increased 14.3% from $14.0 million for the three months ended October 31, 2015 to $16.0 million for the three months ended October 31, 2016. The $2.0 million increase was driven almost entirely by increased consumption of simulation capacity by existing customers and the addition of new license customers during the quarter compared with the same period last year. Deployment continues to expand in our core customer base across our portfolio of applications. We experienced particularly strong

16


 

demand in our Asian markets. Project revenue for the three months ended October 31, 2016 increased by approximately $0.2 million, which reflects stronger demand in the quarter as well as the completion of projects that had been expected to be delivered in the quarter ended July 31, 2016. We expect our project revenue growth will continue to fluctuate from quarter to quarter, and our capacity to deliver projects will continue to support new opportunities to drive license growth. Both license and project revenue, particularly new customer opportunities, are leveraging the capabilities of our ExaCLOUD platform. Virtually all of our projects are now being delivered using ExaCLOUD, exposing our customers to its capabilities. ExaCLOUD continues to play an increasingly important role in our new customer acquisition go-to-market model.

Foreign exchange fluctuations, particularly the strengthening of the Japanese yen against the U.S. dollar, positively impacted total revenue in the three months ended October 31, 2016 by $0.6 million as compared to the three months ended October 31, 2015. On a constant currency basis, our total revenues in the three months ended October 31, 2016 increased 9.7% compared with the three months ended October 31, 2015.

Cost of revenues

 

 

 

Three Months Ended October 31,

 

 

 

 

 

 

 

 

 

(in thousands, except percentages)

 

2016

 

 

2015

 

 

Change

 

 

% Change

 

Cost of revenues

 

$

4,904

 

 

$

5,118

 

 

$

(214

)

 

 

(4.2

)%

 

Cost of revenues for the three months ended October 31, 2016 was $4.9 million, a decrease of approximately $0.2 million, or 4.2%, compared with $5.1 million during the three months ended October 31, 2015. As a percentage of revenues, cost of revenues decreased to 25.6% for the three months ended October 31, 2016 compared to 30.2% for the three months ended October 31, 2015. The decrease is attributable to approximately $0.5 million of decreased personnel-related costs, which was driven by a change in the headcount mix, and partially offset by increased costs of approximately $0.2 million related to software consulting fees and royalty expenses and $0.1 million related to increased depreciation expense associated with equipment purchases.

Sales and marketing

 

 

 

Three Months Ended October 31,

 

 

 

 

 

 

 

 

 

(in thousands, except percentages)

 

2016

 

 

2015

 

 

Change

 

 

% Change

 

Sales and marketing

 

$

3,357

 

 

$

2,336

 

 

$

1,021

 

 

 

43.7

%

 

Sales and marketing expenses for the three months ended October 31, 2016 were $3.4 million, an increase of $1.0 million, or 43.7%, compared with $2.3 million during the three months ended October 31, 2015. As a percentage of revenues, sales and marketing expenses increased to 17.5% for the three months ended October 31, 2016 compared to 13.8% for the three months ended October 31, 2015. The period-over-period increase is attributable to increased personnel-related costs of approximately $0.8 million driven by a higher headcount, primarily due to the reassignment of certain application engineers into dedicated customer-facing sales roles, along with increased travel costs of approximately $0.2 million associated with expanded customer sales initiatives and a global meeting at our company headquarters.

Research and development

 

 

 

Three Months Ended October 31,

 

 

 

 

 

 

 

 

 

(in thousands, except percentages)

 

2016

 

 

2015

 

 

Change

 

 

% Change

 

Research and development

 

$

6,234

 

 

$

6,143

 

 

$

91

 

 

 

1.5

%

 

Research and development expenses for the three months ended October 31, 2016 were $6.2 million, an increase of $0.1 million, or 1.5%, compared with $6.1 million during the three months ended October 31, 2015. As a percentage of revenues, research and development expense decreased to 32.5% for the three months ended October 31, 2016 compared to 36.2% for the three months ended October 31, 2015. The period-over-period increase in expense is attributable to increased personnel-related costs of $0.3 million due to the net addition of seven full-time employees and annual merit increases, which were partially offset by a $0.2 million reduction in costs, primarily driven by savings from an amended hosting agreement at our high performance computing data center in New Jersey.

17


 

General and administrative

 

 

 

Three Months Ended October 31,

 

 

 

 

 

 

 

 

 

(in thousands, except percentages)

 

2016

 

 

2015

 

 

Change

 

 

% Change

 

General and administrative

 

$

3,952

 

 

$

3,456

 

 

$

496

 

 

 

14.4

%

 

General and administrative expenses for the three months ended October 31, 2016 were $4.0 million, an increase of $0.5 million, or 14.4%, compared to $3.5 million for the three months ended October 31, 2015. As a percentage of revenues, general and administrative expenses increased to 20.6% for the three months ended October 31, 2016 compared to 20.4% the three months ended October 31, 2015. The increase in general and administrative expenses is primarily attributable to a $0.3 million increase in employee-related expenses due to newly-hired full-time employees, annual merit increases and increased stock-based compensation expense, along with a $0.3 million increase in other pre-launch hosting costs associated with the commencement of a new agreement at our new high performance computing data center in Virginia. These increases were partially offset by a decrease of $0.1 million in recruiting fees due to the hiring of a full-time recruiter.

Total other expense, net

 

 

 

Three Months Ended October 31,

 

 

 

 

 

 

 

 

 

(in thousands, except percentages)

 

2016

 

 

2015

 

 

Change

 

 

% Change

 

Total other expense, net

 

$

(120

)

 

$

0

 

 

$

(120

)

 

 

100.0

%

 

Total other expense, net for the three months ended October 31, 2016 was $(0.1) million compared to total other expense, net of $0 for the three months ended October 31, 2015. Total other expense, net consists primarily of foreign exchange gains and losses and interest expense associated with our capital lease obligations. The period-over-period change in total other expense, net is primarily attributed to foreign exchange fluctuations in the Euro and Japanese yen.

Provision for income taxes

 

 

 

Three Months Ended October 31,

 

 

 

 

 

 

 

 

 

(in thousands, except percentages)

 

2016

 

 

2015

 

 

Change

 

 

% Change

 

Provision for income taxes

 

$

(436

)

 

$

(344

)

 

$

(92

)

 

 

26.7

%

 

For the three months ended October 31, 2016, our income tax provision was $0.4 million. For the three months ended October 31, 2015, our income tax provision was $0.3 million. The provision for both periods primarily consists of the tax effects of foreign operating results and foreign withholding taxes.

In determining the realizability of the net United States federal and state deferred tax assets, we consider numerous factors including historical profitability, estimated future taxable income, prudent and feasible tax planning strategies and the industry in which we operate. Management reassesses the realization of the deferred tax assets each reporting period, which resulted in a valuation allowance against the full amount of our United States deferred tax assets in the first quarter of fiscal year 2015. To the extent that the financial results of the United States operations improve in the future and the deferred tax assets become realizable, we will reduce the valuation allowance through earnings.

We and one or more of our subsidiaries file United States federal income tax returns and tax returns in various state and foreign jurisdictions. With limited exceptions, we are no longer subject to federal, state, local or foreign examinations for years ending prior to January 31, 2011. However, carryforward attributes that were generated in tax years ending prior to January 31, 2012 may still be adjusted upon examination by state or local tax authorities if they either have been or will be used in a future period.

18


 

Under Section 382 of the Internal Revenue Code of 1986, as amended, substantial changes in our ownership may limit the amount of net operating loss carryforwards that could be utilized annually in the future to offset its taxable income. Specifically, this limitation may arise in the event we undergo a cumulative change in ownership of more than 50% within a three-year period. During the first quarter of fiscal year 2015, our management determined that the Company had experienced an ownership change for purposes of Section 382. This ownership change resulted in annual limitations to the amount of net operating loss carryforwards that can be utilized to offset future taxable income, if any, at the federal level. Our management has determined that, as of October 31, 2016, we have not experienced another ownership change for purposes of Section 382. However, future transactions in our common stock could trigger an ownership change for purposes of Section 382, which could further limit the amount of net operating loss carryforwards that could be utilized annually in the future to offset our taxable income, if any. Any such limitation, whether as the result of sales of common stock by our existing stockholders or sales of common stock by us, could have a material adverse effect on our results of operations in future years.

Results of operations for the nine months ended October 31, 2016 and 2015

The following table sets forth, for the periods presented, data from our consolidated statements of operations:

 

 

 

Nine Months Ended October 31,

 

(in thousands)

 

2016

 

 

2015

 

Revenue:

 

 

 

 

 

 

 

 

License revenue

 

$

44,836

 

 

$

39,185

 

Project revenue

 

 

8,219

 

 

 

8,002

 

Total revenues

 

 

53,055

 

 

 

47,187

 

Operating expenses: (1)

 

 

 

 

 

 

 

 

Cost of revenues

 

 

14,340

 

 

 

14,516

 

Sales and marketing

 

 

10,080

 

 

 

7,264

 

Research and development

 

 

18,468

 

 

 

18,265

 

General and administrative (2)

 

 

10,858

 

 

 

9,849

 

Total operating expenses

 

 

53,746

 

 

 

49,894

 

Loss from operations

 

 

(691

)

 

 

(2,707

)

Other income (expense), net

 

 

 

 

 

 

 

 

Foreign exchange gain (loss)

 

 

94

 

 

 

(172

)

Interest expense

 

 

(116

)

 

 

(179

)

Interest income

 

 

33

 

 

 

8

 

Other income, net

 

 

9

 

 

 

6

 

Total other income (expense), net

 

 

20

 

 

 

(337

)

Loss before income taxes

 

 

(671

)

 

 

(3,044

)

Provision for income taxes

 

 

(795

)

 

 

(472

)

Net loss

 

$

(1,466

)

 

$

(3,516

)

 

(1)

Amounts include stock-based compensation expense as follows:

 

 

 

Nine Months Ended October 31,

 

(in thousands)

 

2016

 

 

2015

 

Cost of revenues

 

$

124

 

 

$

186

 

Sales and marketing

 

 

202

 

 

 

317

 

Research and development

 

 

567

 

 

 

691

 

General and administrative

 

 

565

 

 

 

572

 

Total stock-based compensation expense

 

$

1,458

 

 

$

1,766

 

 

(2)

Includes amortization expense related to intangible assets as follows:

 

 

 

Nine Months Ended October 31,

 

(in thousands)

 

2016

 

 

2015

 

General and administrative

 

$

263

 

 

$

263

 

 

19


 

The following table sets forth, for the periods presented, data from our consolidated statements of operations as a percentage of total revenues:

 

 

 

Nine Months Ended October 31,

 

(as a percent of total revenue)

 

2016

 

 

2015

 

Revenue:

 

 

 

 

 

 

 

 

License revenue

 

 

84.5

%

 

 

83.0

%

Project revenue

 

 

15.5

 

 

 

17.0

 

Total revenues

 

 

100.0

 

 

 

100.0

 

Operating expenses:

 

 

 

 

 

 

 

 

Cost of revenues

 

 

27.0

 

 

 

30.8

 

Sales and marketing

 

 

19.0

 

 

 

15.4

 

Research and development

 

 

34.8

 

 

 

38.7

 

General and administrative

 

 

20.5

 

 

 

20.9

 

Total operating expenses

 

 

101.3

 

 

 

105.7

 

Loss from operations

 

 

(1.3

)

 

 

(5.7

)

Other income (expense), net

 

 

 

 

 

 

 

 

Foreign exchange gain (loss)

 

 

0.2

 

 

 

(0.4

)

Interest expense

 

 

(0.2

)

 

 

(0.4

)

Interest income

 

 

0.1

 

 

 

0.0

 

Other income, net

 

 

0.0

 

 

 

0.0

 

Total other income (expense), net

 

 

0.0

 

 

 

(0.7

)

Loss before income taxes

 

 

(1.3

)

 

 

(6.5

)

Provision for income taxes

 

 

(1.5

)

 

 

(1.0

)

Net loss

 

 

(2.8

)%

 

 

(7.5

)%

 

Due to rounding, totals may not equal the sum of line items in the table above.

Comparison of nine months ended October 31, 2016 and 2015

Revenue

 

 

 

Nine Months Ended October 31,

 

 

 

 

 

 

 

 

 

(in thousands, except percentages)

 

2016

 

 

2015

 

 

Change

 

 

% Change

 

License revenue

 

$

44,836

 

 

$

39,185

 

 

$

5,651

 

 

 

14.4

%

Project revenue

 

 

8,219

 

 

 

8,002

 

 

 

217

 

 

 

2.7

%

Total revenues

 

$

53,055

 

 

$

47,187

 

 

$

5,868

 

 

 

12.4

%

 

License revenue increased 14.4% from $39.2 million for the nine months ended October 31, 2015 to $44.8 million for the nine months ended October 31, 2016. The $5.7 million increase was driven almost entirely by increased consumption of simulation capacity by existing customers and the addition of new license customers during the period. Deployment continues to expand in our core customer base across our portfolio of applications. We experienced particularly strong demand in our Asian markets. Project revenue for the nine months ended October 31, 2016 increased 2.7% from $8.0 million to $8.2 million as compared with the nine months ended October 31, 2015. Project revenue growth reflects stronger demand in the current quarter as well as the completion of projects that had been expected to be delivered during the quarter ended July 31,2016. We expect our project revenue growth will continue to fluctuate from quarter to quarter as our investment in project capacity has slowed, but our capacity to deliver projects will continue to support new opportunities to drive license growth. Both license and project revenue, particularly new customer opportunities, are leveraging the capabilities of our ExaCLOUD platform. Virtually all of our projects are now being delivered using ExaCLOUD exposing our customers to its capabilities. ExaCLOUD continues to play an increasingly important role in our new customer acquisition go-to-market model.

Foreign exchange fluctuations, particularly the strengthening of the Euro and the Japanese yen against the U.S. dollar, positively impacted total revenue in the nine months ended October 31, 2016 by $1.1 million as compared to the nine months ended October 31, 2015. On a constant currency basis, our total revenues in the nine months ended October 31, 2016 increased 10.1% compared with the nine months ended October 31, 2015.

20


 

Cost of revenues

 

 

 

Nine Months Ended October 31,

 

 

 

 

 

 

 

 

 

(in thousands, except percentages)

 

2016

 

 

2015

 

 

Change

 

 

% Change

 

Cost of revenues

 

$

14,340

 

 

$

14,516

 

 

$

(176

)

 

 

-1.2

%

 

Cost of revenues for the nine months ended October 31, 2016 was $14.3 million, a decrease of approximately $0.2 million, or 1.2%, compared with $14.5 million during the nine months ended October 31, 2015. As a percentage of revenues, cost of revenues decreased to 27.0% for the nine months ended October 31, 2016 compared to 30.8% for the nine months ended October 31, 2015. The period-over-period decrease is primarily attributable to a decrease of $0.8 million in personnel-related costs driven by a change in the headcount mix and $0.1 million of savings from an amended hosting agreement at our high performance computing data center in New Jersey. These decreases were partially offset by increases in depreciation expense of $0.3 million attributable to additional computing equipment for our high performance computing data center in New Jersey and increases in royalty costs of $0.4 million.

Sales and marketing

 

 

 

Nine Months Ended October 31,

 

 

 

 

 

 

 

 

 

(in thousands, except percentages)

 

2016

 

 

2015

 

 

Change

 

 

% Change

 

Sales and marketing

 

$

10,080

 

 

$

7,264

 

 

$

2,816

 

 

 

38.8

%

 

Sales and marketing expenses for the nine months ended October 31, 2016 were $10.1 million, an increase of $2.8 million, or 38.8%, compared with $7.3 million during the nine months ended October 31, 2015. As a percentage of revenues, sales and marketing expenses increased to 19.0% for the nine months ended October 31, 2016 compared to 15.4% for the nine months ended October 31, 2015. The period-over-period increase in cost was driven by an increase of $2.3 million in personnel-related costs due to merit increases and the reassignment of certain application engineers into dedicated customer-facing sales roles and a $0.5 million increase in travel costs associated with expanded customer sales initiatives, higher headcount and a global meeting hosted at our headquarters.

Research and development

 

 

 

Nine Months Ended October 31,

 

 

 

 

 

 

 

 

 

(in thousands, except percentages)

 

2016

 

 

2015

 

 

Change

 

 

% Change

 

Research and development

 

$

18,468

 

 

$

18,265

 

 

$

203

 

 

 

1.1

%

 

Research and development expenses for the nine months ended October 31, 2016 were $18.5 million, an increase of $0.2 million, or 1.1%, compared with $18.3 million during the nine months ended October 31, 2015. As a percentage of revenues, research and development expenses decreased to 34.8% for the nine months ended October 31, 2016 compared to 38.7% for the nine months ended October 31, 2015. The period-over-period increase in cost was primarily attributable to an increase of $0.2 million in personnel-related costs due to the net addition of seven full-time employees and annual merit increases, along with $0.2 million in increased consulting costs. These increases were partially offset by a $0.2 million reduction in costs, primarily driven by savings from an amended hosting agreement at our high performance computing data center in New Jersey.

General and administrative

 

 

 

Nine Months Ended October 31,

 

 

 

 

 

 

 

 

 

(in thousands, except percentages)

 

2016

 

 

2015

 

 

Change

 

 

% Change

 

General and administrative

 

$

10,858

 

 

$

9,849

 

 

$

1,009

 

 

 

10.2

%

 

General and administrative expenses for the nine months ended October 31, 2016 were $10.9 million, an increase of $1.0 million, or 10.2%, compared to $9.8 million for the nine months ended October 31, 2015. As a percentage of revenues, general and administrative expenses decreased to 20.5% for the nine months ended October 31, 2016 compared to 20.9% for the nine months ended October 31, 2015. The period-over-period increase in cost is primarily attributable to an increase of $0.5 million in employee-related costs due to new full-time employees, including one executive, and annual merit increases, an increase of $0.3 million in network and facility costs primarily driven by pre-launch hosting costs associated with the commencement of a new agreement at our new data center in Virginia, an increase of $0.1 million in information technology support costs, and $0.1 million of increased professional fees associated with patent procurement and other legal matters.

21


 

Total other income (expense), net

 

 

 

Nine Months Ended October 31,

 

 

 

 

 

 

 

 

 

(in thousands, except percentages)

 

2016

 

 

2015

 

 

Change

 

 

% Change

 

Total other income (expense), net

 

$

20

 

 

$

(337

)

 

$

357

 

 

 

(105.9

)%

 

Total other income (expense), net for the nine months ended October 31, 2016 was less than $0.1 million compared to total other income (expense), net of $(0.3) million for the nine months ended October 31, 2015. Total other income (expense), net consists primarily of foreign exchange gains and losses offset by interest expense associated with our capital lease obligations. The period-over-period change in total other income (expense), net is primarily attributed to foreign exchange fluctuations in the Euro and Japanese yen.

Provision for income taxes

 

 

 

Nine Months Ended October 31,

 

 

 

 

 

 

 

 

 

(in thousands, except percentages)

 

2016

 

 

2015

 

 

Change

 

 

% Change

 

Provision for income taxes

 

$

(795

)

 

$

(472

)

 

$

(323

)

 

 

68.4

%

 

For the nine months ended October 31, 2016, our income tax provision was $0.8 million. For the nine months ended October 31, 2015, our income tax provision was $0.5 million. The provision for both periods primarily consists of the tax effects of foreign operating results and foreign withholding taxes.

In determining the realizability of the net United States federal and state deferred tax assets, we consider numerous factors including historical profitability, estimated future taxable income, prudent and feasible tax planning strategies and the industry in which we operate. Management reassesses the realization of the deferred tax assets each reporting period, which resulted in a valuation allowance against the full amount of our United States deferred tax assets in the first quarter of fiscal year 2015. To the extent that the financial results of the United States operations improve in the future and the deferred tax assets become realizable, we will reduce the valuation allowance through earnings.

We and one or more of our subsidiaries file United States federal income tax returns and tax returns in various state and foreign jurisdictions. With limited exceptions, we are no longer subject to federal, state, local or foreign examinations for years ending prior to January 31, 2011. However, carryforward attributes that were generated in tax years ending prior to January 31, 2012 may still be adjusted upon examination by state or local tax authorities if they either have been or will be used in a future period.

Under Section 382 of the Internal Revenue Code of 1986, as amended, substantial changes in our ownership may limit the amount of net operating loss carryforwards that could be utilized annually in the future to offset its taxable income. Specifically, this limitation may arise in the event we undergo a cumulative change in ownership of more than 50% within a three-year period. During the first quarter of fiscal year 2015, our management determined that the Company had experienced an ownership change for purposes of Section 382. This ownership change resulted in annual limitations to the amount of net operating loss carryforwards that can be utilized to offset future taxable income, if any, at the federal level. Our management has determined that, as of October 31, 2016, we have not experienced another ownership change for purposes of Section 382. However, future transactions in our common stock could trigger an ownership change for purposes of Section 382, which could limit the amount of net operating loss carryforwards that could be utilized annually in the future to offset our taxable income, if any. Any such limitation, whether as the result of sales of common stock by our existing stockholders or sales of common stock by us, could have a material adverse effect on our results of operations in future years.

Non-GAAP Measures

We provide certain non-GAAP financial measures to investors as additional information in order to supplement our consolidated financial statements, which are presented in accordance with accounting principles generally accepted in the United States, or GAAP. The non-GAAP financial information presented here should be considered in conjunction with, and not as a substitute for, or superior to, the financial information presented in accordance with GAAP and should not be considered a measure of our liquidity. There are significant limitations associated with the use of non-GAAP financial measures. Further, these measures may differ from the non-GAAP information, even where similarly titled or used by other companies and therefore should not be used to compare our performance to that of other companies.

Revenue and total operating expenses on a constant currency basis. Our international operations generate revenue and incur expenses that are denominated in foreign currencies, and changes in currency exchange rates can materially affect our consolidated results of operations. Our principal exposures are to fluctuations in exchange rates for the United States dollar versus the British pound, Chinese

22


 

yuan, Euro, Japanese yen, and Korean won. To provide investors with information concerning underlying trends in our business, we disclose revenue and total operating expenses on a constant currency basis, which we define as GAAP revenue or operating expenses, adjusted to reverse the impact of changes in the exchange rates of the principal currencies in which our international operations generated revenue and incurred expenses. We calculate revenue and total operating expenses on a constant currency basis by converting revenue or operating expenses that were generated in the currencies specified above during the three and nine months ended October 31, 2016 to United States dollars at assumed exchange rates equal to the exchange rates in effect for such currencies during the corresponding period of the previous fiscal period, rather than the exchange rates actually in effect during the current fiscal period.

Adjusted EBITDA. We define Adjusted EBITDA as EBITDA, excluding non-cash, stock-based compensation expense. We define EBITDA as net income (loss), excluding depreciation and amortization, interest expense, net, other income, net, foreign exchange (loss) gain and provision for income taxes. The GAAP measure most comparable to Adjusted EBITDA is net income (loss).

Non-GAAP operating income (loss). We define non-GAAP operating income (loss) as GAAP operating income (loss) excluding non-cash, stock-based compensation expense and amortization of acquired intangible assets. The GAAP measure most comparable to non-GAAP operating income (loss) is operating income (loss).

Non-GAAP net income (loss). We define non-GAAP net income (loss) as GAAP net income (loss) excluding the after tax impact of non-cash, stock-based compensation expense and amortization of acquired intangible assets. The GAAP measure most comparable to non-GAAP net income (loss) is net income (loss).

Non-GAAP net income (loss) per diluted share. We define non-GAAP net income (loss) per diluted share as GAAP net income (loss) per diluted share excluding the after tax impact of non-cash, stock-based compensation expense and amortization of acquired intangible assets. The GAAP measure most comparable to non-GAAP net income (loss) per diluted share is net income (loss) per diluted share.

23


 

Our management uses these non-GAAP financial measures to evaluate our operating performance and for internal planning and forecasting purposes. By excluding material non-cash expenses related to stock-based compensation and depreciation, we believe that these measures more clearly reflect the underlying trends in our business, are useful for comparing current results with prior period results, and are helpful to investors and financial analysts in assessing our operating performance. For example, our management considers Adjusted EBITDA to be an important indicator of our operational strength and the performance of our business and a good measure of our historical operating trends. However, each of these non-GAAP financial measures may have limitations as an analytical tool. In considering our Adjusted EBITDA, non-GAAP operating income (loss), non-GAAP net income (loss) and non-GAAP net income (loss) per diluted share, investors should take into account the following reconciliations of these non-GAAP financial measures to the comparable GAAP financial measures:

 

Adjusted EBITDA:

 

Three Months Ended October 31,

 

 

Nine Months Ended October 31,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

155

 

 

$

(433

)

 

$

(1,466

)

 

$

(3,516

)

Add back:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

996

 

 

 

959

 

 

 

2,987

 

 

 

2,487

 

Interest expense, net

 

 

18

 

 

 

57

 

 

 

83

 

 

 

171

 

Other income, net

 

 

3

 

 

 

(6

)

 

 

(9

)

 

 

(6

)

Foreign exchange loss (gain)

 

 

99

 

 

 

(51

)

 

 

(94

)

 

 

172

 

Provision for income taxes

 

 

436

 

 

 

344

 

 

 

795

 

 

 

472

 

EBITDA

 

 

1,707

 

 

 

870

 

 

 

2,296

 

 

 

(220

)

Stock-based compensation expense

 

 

532

 

 

 

661

 

 

 

1,458

 

 

 

1,766

 

Adjusted EBITDA

 

$

2,239

 

 

$

1,531

 

 

$

3,754

 

 

$

1,546

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-GAAP operating income (loss):

 

Three Months Ended October 31,

 

 

Nine Months Ended October 31,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income (loss)

 

$

711

 

 

$

(89

)

 

$

(691

)

 

$

(2,707

)

Add back:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation expense

 

 

532

 

 

 

661

 

 

 

1,458

 

 

 

1,766

 

Amortization of acquired intangible assets

 

88

 

 

88

 

 

263

 

 

263

 

Non-GAAP operating income (loss)

 

$

1,331

 

 

$

660

 

 

$

1,030

 

 

$

(678

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-GAAP net income (loss):

 

Three Months Ended October 31,

 

 

Nine Months Ended October 31,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

 

155

 

 

 

(433

)

 

 

(1,466

)

 

 

(3,516

)

Add back:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation expense

 

 

532

 

 

 

661

 

 

 

1,458

 

 

 

1,766

 

Amortization of acquired intangible assets

 

 

88

 

 

 

88

 

 

 

263

 

 

 

263

 

Income tax effect (1)

 

 

(217

)

 

 

(265

)

 

 

(602

)

 

 

(710

)

Non-GAAP net income (loss)

 

$

558

 

 

$

51

 

 

$

(347

)

 

$

(2,197

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-GAAP net income (loss), per diluted share:

 

Three Months Ended October 31,

 

 

Nine Months Ended October 31,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Net income (loss), per diluted share (2)

 

$

0.01

 

 

$

(0.03

)

 

$

(0.10

)

 

$

(0.24

)

Add back:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation expense

 

 

0.03

 

 

 

0.05

 

 

 

0.10

 

 

 

0.12

 

Amortization of acquired intangible assets

 

 

0.01

 

 

 

0.01

 

 

 

0.02

 

 

 

0.02

 

Income tax effect (1)

 

 

(0.01

)

 

 

(0.02

)

 

 

(0.04

)

 

 

(0.05

)

Non-GAAP net income (loss), per diluted share (2)(3):

 

$

0.04

 

 

$

 

 

$

(0.02

)

 

$

(0.15

)

 

(1)

The tax effect of non-cash stock-based compensation expense and non-cash amortization of acquired intangibles is estimated using a blended rate equivalent to our annual statutory United States federal tax rate and our estimated state tax rate. The tax effect is exclusive of any impact from valuation allowances established against our United States net deferred tax assets and

24


 

other discrete items. Due to the differences in the tax treatment of items excluded from non-GAAP earnings, as well as the methodology applied to our estimated annual tax rates as described above, our estimated tax rate on non-GAAP income may differ from our GAAP tax rate and from our actual tax liabilities.

(2)

Share amounts utilized on a fully diluted basis were approximately 15.3 million and 14.6 million for the three months ended October 31, 2016 and 2015, respectively, and 14.8 million and 14.5 million for the nine months ended October 31, 2016 and 2015, respectively.

(3)

Due to rounding, totals may not equal the sum of line items in the table above.

Liquidity

Overview

Our primary sources of liquidity during the nine months ended October 31, 2016 were cash and cash equivalents on hand, cash flows provided by operating activities and cash proceeds from stock option exercises. Our primary uses of cash during the nine months ended October 31, 2016 were capital expenditures and payments of capital lease obligations. As of October 31, 2016, we had $25.0 million in cash and cash equivalents.

On December 10, 2013, we filed a shelf registration statement on Form S-3, which included a base prospectus relating to, among other things, the registration of $75 million of our common stock that may be offered and sold by us from time to time pursuant to Rule 415 promulgated under the Securities Act of 1933, in amounts, at prices and on terms to be determined at the time of the offering. We may sell shares of our common stock pursuant to this registration statement at any time through December 27, 2016, the third anniversary of the effective date of the registration statement.

Net Cash Flows from Operating Activities

Variations in the amount of our net cash provided or used by operating activities are primarily the result of changes in the amount of our working capital accounts, mainly accounts receivable and deferred revenue, the timing of cash payments from our customers and of our cash expenditures, principally employee salaries, accounts payable and payments of value added taxes and consumption taxes on the receivables of our foreign subsidiaries.

Cash payments from our customers fluctuate due to timing of new and renewal license sales, which typically coincide with our customers’ budget cycles. The fourth quarter of each fiscal year generally has the highest license sales, with payment of the license fee typically becoming due at the commencement of the license term. As a result, our cash flows from operations are typically highest in the first quarter of each fiscal year. Generally, customers are invoiced in advance for their annual subscription fee and the invoices are recorded in accounts receivable and deferred revenue, with deferred revenues being recognized ratably over the term of the subscription agreement.

Net cash provided by operating activities for the nine months ended October 31, 2016 and 2015 was $0.5 million and $3.9 million, respectively. The decrease during the current year period is primarily the result of decreases in accounts payable and deferred revenue, and partially offset by increases in prepaid expenses and other current assets.

Net Cash Flows from Investing Activities

Net cash used in investing activities for the nine months ended October 31, 2016 and 2015 was $1.9 million and $1.4 million, respectively. Capitalized renovations to our Burlington, Massachusetts headquarters office and capital expenditures for our new data center in Virginia accounted for the majority of the increase in purchases of property and equipment during the current year period.

Net Cash Flows from Financing Activities

Net cash used in financing activities for the nine months ended October 31, 2016 was $1.7 million, which consisted of payments on our capital lease obligations of $2.2 million, partially offset by proceeds from stock option exercises of $0.5 million. Net cash used in financing activities for the nine months ended October 31, 2015 was $1.0 million, which consisted of $2.1 million of payments on our capital lease obligations, partially offset by proceeds from stock options and warrant exercises of $1.2 million.

Off-Balance Sheet Arrangements

We did not have any off-balance sheet arrangements as of either October 31, 2016 or January 31, 2016.

25


 

 

Contractual Commitments

Operating Leases

 

Effective July 1, 2016, we entered into an agreement to lease space and high performance computing capacity at a data center located in Virginia. The three-year agreement will provide access to up to 300 KW hours of computing capacity, which we believe will be suitable and adequate to meet the growing demands of our customers.

 

As of October 31, 2016, after taking into consideration the above agreement, total future minimum lease payments under non-cancelable lease arrangements are as follows (in millions):

 

Year ended January 31,

 

 

 

 

2017 (Remainder as of October 31, 2016)

 

$

1.6

 

2018

 

 

6.1

 

2019

 

 

5.5

 

2020

 

 

3.9

 

2021

 

 

2.1

 

Thereafter

 

 

4.8

 

 

 

$

24.0

 

 

Recently Issued Accounting Pronouncements

In May 2014, the FASB issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers, which supersedes nearly all existing revenue recognition guidance under GAAP. The core principle of ASU 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods or services. ASU 2014-09 defines a five-step process to achieve this core principle, as a result of which more judgment and estimates may be required within the revenue recognition process than are required under existing GAAP. The standard is effective for annual periods beginning after December 15, 2018, and interim periods therein. The two permitted transition methods under the new standard are: (i) a full retrospective approach reflecting the application of the standard in each prior reporting period with the option to elect certain practical expedients, or (ii) a retrospective approach with the cumulative effect of initially adopting ASU 2014-09 recognized at the date of adoption (which includes additional footnote disclosures). We are currently evaluating the impact of our pending adoption of ASU 2014-09 on our consolidated financial statements and have not yet determined the method by which we will adopt the standard when it becomes effective.

In August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements – Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. Under the new guidance, we will be required to assess an entity’s ability to continue as a going concern, and to provide related footnote disclosures in certain circumstances. The provisions of this ASU are effective for annual periods beginning after December 15, 2016, and for interim periods therein. This ASU is not expected to have a material impact on our financial statements or disclosures.

In April 2015, the FASB issued ASU No. 2015-05, Intangibles – Goodwill and Other – Internal-Use Software: Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement. The guidance clarifies the circumstances under which a cloud computing customer would account for the arrangement as a license of internal-use software. The standard will be effective for annual reporting periods beginning after December 15, 2016, and for interim periods therein. Early adoption is permitted. This ASU is not expected to have an impact on our financial statements or disclosures.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). This standard requires the recognition of lease assets and liabilities for all leases, with certain exceptions, on the balance sheet. In transition, lessees and lessors are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. This ASU is effective for annual periods beginning after December 15, 2018, and for interim periods therein. We are currently evaluating the requirements of this ASU and have not yet determined its impact on our consolidated financial statements.

In March 2016, the FASB issued ASU 2016-09, Compensation - Stock Compensation (Topic 718)—Improvements to Employee Share-Based Payment Accounting. This standard simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The provisions of this ASU are effective for annual periods beginning after December 15, 2016, and for interim periods therein. Early adoption is permitted. We are currently evaluating the requirements of this ASU and have not yet determined its impact on our consolidated financial statements.

26


 

Capital Resources

Our future capital requirements may vary materially from those now planned and will depend on many factors, including the costs to develop and implement new solutions and applications, the sales and marketing resources needed to further penetrate our market and gain acceptance of new solutions and applications we develop, the expansion of our operations in the United States and internationally and the response of competitors to our solutions and applications. Historically, we have experienced increases in our expenditures consistent with the growth in our operations and personnel, and we anticipate that our expenditures will continue to increase as we grow our business. Our practice has been to reinvest the undistributed earnings of our foreign subsidiaries in their local jurisdictions, and we currently do not intend to repatriate such earnings. As of October 31, 2016 and January 31, 2016, $7.7 million and $12.8 million, respectively, of our cash is held in bank accounts outside the United States and may not be available to fund our domestic operations and obligations without paying taxes upon repatriation.

We expect to be able to meet the funding needs of our United States operations and do not currently intend to repatriate undistributed earnings that have been indefinitely reinvested in our international subsidiaries.

We believe our cash on hand and cash flows from our operations will be sufficient to meet our working capital and capital expenditure requirements for the foreseeable future, including at least the next twelve months.

Seasonality

We have experienced and expect to continue to experience seasonal variations in the timing of customers’ purchases of our software products. Many customers make purchase decisions based on their budget cycles, which typically coincide with the calendar year, except in Japan, where our customer budget cycles typically begin on April 1. Because our software products are sold pursuant to annual subscription agreements and we recognize revenue from these subscriptions over the term of the agreement, downturns or upturns in invoices may not be immediately reflected in our operating results. However, these seasonal trends materially affect the timing of our cash flows, as we generally receive the annual license fee at the time the license term commences. As a result, our cash flows from operations are typically highest in the first quarter of each fiscal year.

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Foreign Currency Exchange Risk

As we conduct business in multiple international currencies throughout the world, our international operations generate and incur expenses that are denominated in foreign currencies. These amounts could be materially affected by currency fluctuations. Our principal exposures are to fluctuations in exchange rates for the United States dollar versus the British pound, Chinese yuan, Euro, Japanese yen, and Korean won. Changes in currency exchange rates could adversely affect our consolidated results of operations or financial position. Additionally, our international operations maintain cash balances denominated in foreign currencies. To reduce the risk associated with translation of foreign cash balances into our reporting currency, we typically avoid maintaining excess cash balances in foreign currencies. To date, we have not hedged our exposure to changes in foreign currency exchange rates and, as a result, we could incur unanticipated translation gains and losses.

The Euro was approximately 0.1% stronger against the United States dollar, on average, for the nine months ended October 31, 2016, when compared with the nine months ended October 31, 2015. The resulting net overall impact to both revenue and operating expense was an increase of $0.1 million during the nine months ended October 31, 2016.

The exchange rate impact of other currencies for the nine months ended October 31, 2016, primarily driven by a stronger Japanese yen, was an increase to revenue and operating expense of approximately $1.0 million and $0.2 million, respectively.

For the nine months ended October 31, 2016, a 10% change in the exchange rates for the United States dollar versus the British pound, Chinese yuan, Euro, Japanese yen, and Korean won would have resulted in a $1.1 million change in revenue.

Interest Rate Sensitivity

Our interest expense consists solely of fixed-rate interest under our outstanding capital lease obligations. As a result, we do not believe that we are exposed to material interest rate risk at this time. Interest income is sensitive to changes in the general level of United States and international interest rates. The primary objective of our investment activities is to preserve principal while maximizing income without significantly increasing risk. Our cash and cash equivalents are relatively insensitive to interest rate changes. In future periods, we will continue to evaluate our investment policy in order to ensure that we continue to meet our overall objectives.

We do not believe that a 10% change in interest rates would have a material impact on our financial position or results of operations.

27


 

ITEM  4.

CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the rules and forms, and that such information is accumulated and communicated to us, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, we recognize that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, as ours are designed to do, and we necessarily were required to apply our judgment in evaluating whether the benefits of the controls and procedures that we adopt outweigh their costs.

As required by Rule 13a-15(b) under the Exchange Act, an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) as of October 31, 2016 was conducted under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of October 31, 2016.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting during the fiscal quarter ended October 31, 2016 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

 

28


 

PART II. OTHER INFORMATION

ITEM  1.

LEGAL PROCEEDINGS

We are not a party to any pending material legal proceedings. However, because of the nature of our business, we may be subject at any particular time to lawsuits or other claims arising in the ordinary course of our business, and we expect that this will continue to be the case in the future.

ITEM 1A.

RISK FACTORS

In addition to the other information set forth in this Quarterly Report on Form 10-Q, you should carefully consider the risks and uncertainties described in our Annual Report on Form 10-K for the fiscal year ended January 31, 2016, filed with the SEC on March 21, 2016 and other documents we file with the SEC. The risks and uncertainties described are those that we have identified as material, but are not the only risks and uncertainties facing us. Our business is also subject to general risks and uncertainties that affect many other companies, such as overall U.S. and non-U.S. economic and industry conditions including a global economic slowdown, geopolitical events, changes in laws or accounting rules, fluctuations in interest and exchange rates, terrorism, international conflicts, major health concerns, natural disasters or other disruptions of expected economic and business conditions. Additional risks and uncertainties not currently known to us or that we currently believe are immaterial also may impair our business operations and liquidity.

Our business could be negatively impacted by the United Kingdom’s vote to exit the European Union.

On June 23, 2016, voters in the U.K. approved an advisory vote calling for that country’s exit from the E.U., commonly referred to as “Brexit”. As a result of the referendum, it is expected that the British government will begin negotiating the terms of the U.K.’s future relationship with the E.U. Although it is unknown what those terms will be, the effects of Brexit will depend on any agreements the U.K. makes to retain access to E.U. markets either during a transitional period or more permanently. The measures could potentially disrupt the markets we serve and the jurisdictions in which we operate and adversely change tax benefits or liabilities in these or other jurisdictions, and may cause us to lose customers and employees. In addition, Brexit could lead to legal uncertainty and potentially divergent national laws and regulations as the U.K. determines which E.U. laws to replace or replicate.

The announcement of Brexit has created, and terms of the U.K.’s relationship with the E.U. may continue to create, global economic uncertainty, which may cause our customers to closely monitor their costs and reduce their spending budget on our offerings. Any of these effects of Brexit, among others, could adversely affect our business, business opportunities, results of operations, financial condition and cash flows.

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

(b) Use of Proceeds

On July 3, 2012, we completed the initial public offering of our common stock pursuant to our Registration Statement on Form S-1 (File No. 333-176019), which was declared effective by the Securities and Exchange Commission on June 27, 2012. The underwriters for the offering were Stifel Nicolaus & Company, Incorporated, Robert W. Baird & Co. Incorporated, Canaccord Genuity Inc. and Needham & Company, LLC. We did not use any of the net proceeds from this offering during the three months ended October 31, 2016.

 

 

29


 

ITEM 6.

EXHIBITS

 

Exhibit
Number

 

Description

 

 

 

3.1

 

Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K, event date June 27, 2012, filed on July 3, 2012).

 

 

 

3.2

 

Amended and Restated By-laws (incorporated by reference to Exhibit 3.2 to the Company’s Current Report on Form 8-K, event date June 27, 2012, filed on July 3, 2012).

 

 

 

3.3

 

Amendment to Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.3 to the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended July 31, 2013).

 

 

 

10.1*

 

Employment Agreement dated August 1, 2016 between Exa Corporation and Joel Dube.

 

 

 

10.2*

 

Employment Agreement dated August 8, 2016 between Exa Corporation and Suresh Sundaram.

 

 

 

31.1*

 

Rule 13a-14(a)/15d-14(a) Certification, executed by Stephen A. Remondi, President and Chief Executive Officer of Exa Corporation.

 

 

 

31.2*

 

Rule 13a-14(a)/15d-14(a) Certification, executed by Richard F. Gilbody, Chief Financial Officer of Exa Corporation.

 

 

 

32.1**

 

Section 1350 Certification, executed by Stephen A. Remondi, President and Chief Executive Officer of Exa Corporation.

 

 

 

32.2**

 

Section 1350 Certification, executed by Richard F. Gilbody, Chief Financial Officer of Exa Corporation.

 

 

 

101*

 

Interactive Data Files pursuant to Rule 405 of Regulation S-T (XBRL)

 

*

Filed herewith.

**

Furnished herewith.

 

 

30


 

EXA CORPORATION

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

EXA CORPORATION

(Registrant)

 

 

By:

/s/ Richard F. Gilbody

 

Richard F. Gilbody

 

Chief Financial Officer

 

 

 

Date: November 30, 2016

 

 

31